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Discovery reports strong gains in new business, earnings and financial strength

18 February 2009 Discovery

Highlights for the six months ended 31 December 2008

Discovery today announced interim results for the six months ended 31 December 2008 with performance exceeding expectations, thanks to organic growth and innovation under tough market conditions

The highlights include:

  • The Group is in excellent financial health: no debt on the balance sheet, with Discovery Life covering its capital adequacy requirement by 6.4 times and PruHealth covering its minimum capital requirements 2.2 times
  • The Discovery Health Medical Scheme passed the solvency requirement of 25% and has over R5.2 billion in reserves
  • Operating profit from established businesses +31% to R1.1 billion
  • Including new businesses and wind-down of Destiny Health Inc.: operating profits increased 21% to R746 million
  • Diluted embedded value per share + 20% R36.17

· New business annualised premium income increased by 28% from R2.2 billion to R2.8 billion (excluding Destiny Health).

Discovery’s business model of innovation to meet clients’ needs has yielded positive results in tough economic times when consumers are cautious and looking for quality and value for money. The company focused on driving excellence in all of its businesses, resulting in increased financial solidity, continued product innovation and record levels of new business.

Adrian Gore (pictured), Discovery’s Chief Executive Officer, says Discovery’s conviction that innovation is a timeless and fundamental strategy helped determine success during the period.

“Discovery focused on its capital base, increasing its strength and flexibility and positioning it well for further growth and the pursuit of additional opportunities,” Gore says.

Performance of established businesses

Discovery Health

Discovery Health’s performance exceeded expectations. Operating profits grew by 22% to R475 million (2008: R389 million). Membership across the various schemes grew by 4% to 2.1 million lives. The lapse rate remained at less than 4%.

Says Gore: “Across every aspect of Discovery Health the results during this period indicate performance was excellent. The scale and sophistication of its assets and positioning will enable the business to assist in building a robust healthcare system, not only for its members, but for broader society.’’

Despite the difficult financial environment, new business increased to its highest level in the company’s history. An important barometer of success and a counter-intuitive result given the current economic climate, was that going into 2009, less than 3% of members reduced their benefit choices, while 97% of members opted to stay at or enhance their current benefit choice.

Discovery Health Medical Scheme crossed the 25% statutory reserve level required. This means that in excess of R5.2 billion of reserves are held within the scheme.

Discovery Life

Discovery Life’s operating profit increased by 29% to R618 million (2008: R479 million). New business (including Discovery Invest) grew by 58% to R993 million.

Gore says: “Discovery Life’s performance has been beyond expectation. We are committed to leadership in the life insurance industry by developing a business of unique quality that meets the needs of our clients. Our methodology has been one of little compromise with a strong focus on product distribution and financial excellence.”

Discovery’s unique range of new life products that was launched last year assisted in the growth of new business to record levels, while on the distribution front Discovery Life’s agency force, Discovery Financial Consultants, continued to grow with agents’ production exceeding industry standards.

PruHealth

PruHealth performed well and is on track to achieve profitability during 2009. New business increased by 9% from R248 million to R271 million, bringing the number of lives covered to 193 500 (2008: 150 341).

PruHealth continues to use the integration capabilities of Vitality to offer UK consumers more value. An important development during the period was the revision of the Vitality Gym Benefit structure. PruHealth’s gym benefit was based on a usage model, different to the South African model which is linked to Vitality status and engagement in health. Although the model encouraged more gym usage among members, it also encouraged adverse selection from members who were already high gym users.

Says Gore: “During the first part of 2008 it became clear that a considerable number of members acquired online, had joined PruHealth only for the gym benefit. And while this activity supported a low level of health claims, it created increased Vitality subsidy costs in the short term. We therefore changed the model to a status-based model to ensure products meet the right customer need and to protect the business model from adverse selection. Vitality and ultimately the integration of PruProtect and PruHealth will provide the same product, risk management and integration advantages as has been achieved in the South African market.”

Despite the particularly difficult economic environment in the UK, PruHealth wrote considerable new business and improved many of the fundamental drivers of its profitability, such as the claims loss ratio and expense levels.

Vitality

Vitality’s role within the Group is one of strategic importance as it provides the foundation for product integration across all Discovery’s businesses. The use of Vitality’s wide range of benefits increased substantially over the period, showing Discovery clients’ strong engagement in their wellness and Vitality’s products.

While operating profit increased by 10% to R23 million (2007: R21 million) and the number of families increased by 3% from 560 470 to 577 193.

A fundamental gap in the Vitality strategy has been the need to focus on nutrition. The HealthyFood™ benefit, offered in partnership with Pick n Pay, is one of the largest Vitality initiatives to date. It involves international experts in the creation of its methodology and algorithms and importantly, it will be a key product differentiator for Vitality and Discovery

Says Gore: “We believe that Vitality will attract new members because of its innovative approach of making healthy food cheaper and more accessible. Many aspects of Vitality provides an excellent foundation for Discovery’s future competitiveness, risk management and integration capabilities.”

Performance of new businesses

Discovery Invest

Discovery Invest, launched in October 2007, has performed in line with expectations under challenging market conditions. Given the current market condition, Discovery Invest’s approach of harnessing the market’s asset management sophistication and choice of open architecture, together with products that protect investors from volatility and downside, have resonated well. During this period, Discovery Invest focused on building its capabilities and products to ensure it is well positioned as market conditions improve.

Says Gore: “Distribution channels continued to grow, with more than 1 600 intermediaries writing business for Discovery Invest. The company continues to develop its product offering with a number of innovations being rolled out during the period. Given the considerable development of online functionality in this market internationally, Discovery Invest has worked on developing a consumer-friendly online functionality. This will be rolled out during the next quarter.”

PruProtect

During the period under review, PruProtect, Discovery’s UK life assurance joint venture with Prudential plc, focused on those areas of the business that were previously underperforming, especially the distribution channels and product competitiveness.

Says Gore: “We significantly increased PruProtect’s franchise distribution channel with a greater focus on incentive and management structures. By February 2009 there were 12 franchises with 91 account managers deployed across the UK.”

While many strategies are in their infancy, early signs are particularly positive. “The application count has increased from 25 applications per day at the start of the period to 75 applications per day at the end,” says Gore.

The wind-down of Destiny Health

The wind-down of Destiny Health continues in line with budget. In February 2008, Discovery announced its intention to stop transacting health insurance business in the US and as a result, Destiny Health would exit the US retail insurance market.

The membership base has decreased from 33 282 in March 2008 to 3 000 in February 2009. Discovery stated that the wind-down would cost approximately US$30 million and the company is on target to achieve this. Discovery also continues to support the existing Vitality Stand Alone business in this market and will continue to explore opportunities in this regard.

Financial strength

Overall, Discovery’s financial strength is excellent: the Group has no debt; Discovery Life covers its capital adequacy requirement by 6.4 times; the Discovery Health Medical Scheme’s solvency reserves amount to more than R5.2 billion thereby exceeding the 25% statutory level, and in the UK, PruHealth covers its minimum capital requirements 2.2 times.

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