Discovery proves there’s life in financial services
Life insurers, medical schemes administrators and investment companies endured a torrid 2008/9 as the world plunged into recession, flirted with depression and embarked on a slow economic recovery. Life and short-term insurers were unsettled as their investment accounts gyrated from billion rand profit to billion rand losses from one reporting period to the next. And stakeholders across the financial services industry struggled to lure new investors as consumers went into survival mode.
If the latest interim result from diversified financial services group Discovery Limited is anything to go by, the industry is finally emerged from the storm. “The business environment during this period remained complex and volatile, with the economy continuing to experience the recessionary effects of the global economic crisis,” said Discovery. They also commented on shifts in health policy debate and financial regulation as governments face dramatic budget deficit increases. Despite these concerns the group turned in impressive numbers for the six months to 31 December 2010. Discovery Life, Discovery Health and Discovery Invest weighed in with strong financial performances. Headline earnings surged 54% to R755m, profit from operations improved 49% to R1.184bn, and new business API expanded 16% to R3.246bn. The group declared a 33c per share interim dividend.
Maximising economies of scale
Discovery Health Medical Scheme (DHMS) remains the largest open medical scheme in South Africa. Discovery Health, which generates the bulk of its operating profit as the administrator of this scheme, enjoyed another successful period. “Discovery Health’s strong performance, when viewed against the challenges the industry faces, clearly illustrates that in the healthcare market, scale and technological sophistication are fundamental attributes for success,” said Discovery. The health business focused on more comprehensive coverage for members, developing closer ties with doctors, hospitals and healthcare providers and increased investment in operating, risk and managed care capabilities over the latest period. DHMS holds capital reserves in excess of R6bn and boasts a record-low level lapse rate of only 3.1%.
The group has yet to repeat this success offshore. Discovery’s joint venture with Prudential PLC in the UK remains unprofitable, though management is happy with the 15% improvement in lives covered, to 219 000. Discovery Health reported R405m in profit for H1 FY2010, while the UK health business reported a loss of R53m. We expect the UK losses will shrink as the group finds its feet in future periods.
Dominating the life space
Discovery is gaining market share in the domestic life space. The company said it had a 24% share of all broker business in the life assurance protection market and a 26% market share in the large policies market. This strong market position deflects slightly from the 2% decline in overall new business in the latest six months. Discovery Life’s focus in the latest half-year includes ensuring the business model is capital efficient and cash flow generative, managing policy lapses, continued product innovation, and enhancing the company’s distribution capability.
The group noted its lapse rates fell within the assumptions laid out in its embedded value. “While Discovery Life took a conservative view of lapse rates going forward and further strengthened the embedded value basis, during the period under review, lapse rates stabilised and began to drift downwards,” said Discovery. Profit after tax from the South African life division came in at R582m. The group’s 50% interest in UK-based PruProtect remains in the red, with a loss of R23m. Despite this loss the UK-life business grew impressively over the period. New business grew by 245% to R100 million and operating losses reduced by 58%! Shareholders will take heart from the fact this new business exceeded expectations, “with average premiums and the take-up of additional benefits higher than expected. The group said lapse rates and claims levels in the UK protection business should be better than expected.
The Discovery Invest operation continued to grow, attracting 74% more new business (API) than in the previous comparable period. “Discovery Invest is currently attracting approximately 8% of net industry inflows in the retail linked-product market, equivalent to those of established players such as ABSA and Investec,” said Discovery. Assets under management topped R6.5bn, with the bulk of assets housed in Discovery Invest’s higher-margin, proprietary funds. Latest group initiatives include the launch of Discovery Invest Offshore and using the group’s integration capability to develop products that are highly differentiated and offer added value. This operation posted a loss of R14m for the half-year under review.
Doing the hard miles
The group’s strong performance is a result of four strategies. The first is to ensure that each operating division creates a “sustainable competitive advantage to uniquely meet clients’ needs.” In the latest period Discovery concentrated on aligning its UK operations (PruHealth and PruProtect) more closely with its locally developed integrated business model. The second strategy is the “pursuit of new opportunities” through the pending acquisition of a 24.8% stake in Ping An Health, the health insurance subsidiary of China’s second-largest insurer. Third, Discovery leverages “innovation and product excellence to ensure that products across the group are competitive, unique and provide exceptional value for money.” And finally, the company focuses on financial prudence to ensure risks are carefully managed to significantly enhance its financial strength.
We enjoyed the ‘to the point’ comment carried in the prospects section of the interim result. “The progress made (and work done) in all of Discovery’s businesses, positions the group well for further growth.”
Editor’s thoughts: Competition in the domestic market for life, healthcare and investment remains fierce. Discovery is one of the local outfits that appreciate the importance of financial intermediaries in its product distribution channels. What factors distinguish Discovery from its local competitors? Add your comments below, or send them to gareth@fanews.co.za
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