Discovery results positions group well for continued growth and profitability

02 September 2010 Discovery
Adrian Gore, Discovery?s Chief Executive Officer,

Adrian Gore, Discovery?s Chief Executive Officer,

Highlights for the year ended 30 June 2010

· Profit from operations +36% to R2 514 million
New business API excluding Destiny, up 32% to R7 618 million 
* Gross inflows under management exceed R41 billion
Discovery Invest turns its maiden profit

Discovery Holdings Ltd today announced strong growth underpinned by its strategy of continuous investment in innovation and infrastructure for future growth in the context of uncertain macroeconomic conditions.

Adrian Gore, Discovery’s Chief Executive Officer, said: “While effort has been invested during the period to grow the Group’s geographical footprint, Discovery’s local businesses remain central to its strategy and command the lion’s share of capital and operational investment.

“We continue to focus on an integrated approach that melds together wellness and risk management, creating highly differentiated and consumer-centric financial services offerings.”

Operating profit increased by 36% to R2.5 billion. Headline earnings increased by 25% to R1.5 billion and the group embedded value increased by 13% to R22.6 billion.

Discovery Health

Discovery Health continues to exceed expectations across all key performance indicators with new business levels at the highest in the company’s history.

Gore commented on the company’s success in attracting new members despite the current economic climate: “Discovery Health saw an increase of 95% in new business derived entirely from new members and companies.

“Discovery Health has created unique and sustainable healthcare assets that enable the company to achieve greater scale and sophistication relative to competitors. We continue to build on these assets, such as our GP Network and proprietary direct payment arrangements with specialists, which have notably increased value and lowered healthcare costs for consumers,” Gore said.

During the past year, Discovery Health invested significantly in people and infrastructure to support the company’s growth and service its growing membership base. Focus was also applied to building a better quality and more cost-effective healthcare system for members and ensuring an appropriate balance between clinical and actuarial management to lower costs for all schemes under Discovery Health’s management. Vitality continued to play its key role in maintaining an appropriate balance between cost and value for both healthy and sick members. The lapse rate reduced to 4.1%, endorsing Vitality’s role in adding value and retaining healthy lives.

Discovery Health also engaged extensively with all stakeholders in both public and private healthcare sectors to contribute to building a better, more inclusive healthcare system for all South Africans.

Discovery Life

Discovery Life grew operating profits to R1.4 billion thanks to a continued focus on the quality and efficiency of the business. Core new risk business grew by 10% to R853 million with overall new business up to 2%, reflecting the effect of reducing inflation on contribution increases (accounted for in overall new business volumes).

During the period, product innovation buoyed growth with 27% of new business secured through the Financial Integrator product. There was a reduction in lapse rates of 1.2% in the second half of the year due to lessening pressure in the economic environment as well as work done by the business to incorporate credit risk in underwriting and risk management, while enhancing and promoting integration opportunities for customers across the Discovery product range. Vitality and its integration advantages helped to reduce lapses among healthy lives.

“The combination of innovative products, competitive pricing points, lower lapse rates and better mortality experience has created a robust platform for future growth,” Gore said.

Discovery Invest

Discovery Invest turned in its maiden profit and eclipsed the R10 billion in assets under management mark in the second half of the period under review. The business reported a profit of R7m compared with an operating loss of R118 million in the previous period. New business increased by 90% to R761million on annual premium on an equivalent basis, with single premiums written during the period amounting to R4.8billion.

“Discovery Invest’s performance was exceptional and exceeded expectation, a reflection of the quality of a start-up business growing into a mature and strong contender in its space,” Gore said.

From a distribution perspective, Discovery Invest continued to gain traction with the number of supporting brokers increasing by 41% to over 2 500 brokerages. Of the top 1 000 supporting brokerages, 48% had increased their Discovery Invest business written with a further 37% writing Discovery Invest business for the first time.

Discovery Vitality and DiscoveryCard

Discovery Vitality continued to focus on Vitality’s impact on wellness and behaviour, which makes it such a unique and significant asset to Discovery’s local businesses and, increasingly, in international markets.

“Clear evidence has emerged that engagement in Vitality reduces health-related risk, lowers healthcare costs, and, as a by-product of the programme’s powerful benefits, improves customer retention,” Gore said.

Over 1, 6 million customers internationally make use of the programme’s health and lifestyle benefits.

Discovery Card’s market share increased 7%, making it the fifth largest player in the South African credit card market and the only significant non-bank competitor in this sector.

“We continue to position the DiscoveryCard as a premier card offering. Further innovation is planned to enhance value for customers,” Gore said.

PruHealth and PruProtect

Discovery’s strategy in South Africa of building quality businesses of scale with significant integration capability is increasingly mirrored by the company’s approach in the UK, where the plan is to leverage the wellness and integration foundation of Vitality to offer enhanced health and protection offerings. During the period, Discovery restructured its business and increased its shareholding in the UK joint venture with Prudential plc from 50% to 75%, thereby boosting the scale and capability of its business in the UK market.

PruHealth’s short-term performance was below expectation in terms of new business growth and operating losses. The economic recession in the UK especially impacted private medical insurance resulting in escalating medical loss ratios across the industry and a decline in growth in membership. Despite the recession, PruHealth’s membership however grew by 7% to 226 214.

“Our approach is a long-term one. Although the short-term effect of the difficult macro-economic conditions has been to decrease demand for private medical insurance, in the longer term it presents a significant opportunity. This is because increased public debt and budget deficits in the UK and the government’s austerity measures to address these problems are likely to result in less public spending on the NHS, creating a greater need for privately funded healthcare,” Gore said.

PruHealth will continue to capitalise on market opportunities through lowering the high cost of providing benefits and using Discovery Health’s risk management expertise and assets to manage risk and care. The reduction of expenses is another key focus area. The earlier acquisition of Standard Life Healthcare has to date seen a significant and substantial transformation of the PruHealth business from 226 000 lives to one exceeding 700 000 lives.

PruProtect performed exceptionally well.

“The business exceeded our expectations and reduced losses significantly. It is rapidly moving towards profitability,” Gore said.

New business increased by 116% to R227m and operating losses were cut by 70% to R40million. The average daily application for the second half of the financial year amounted to 275 compared to 200 received for the first six months and around 130 for the previous period.

Opportunities elsewhere

During the period under review, Discovery announced its acquisition of a 20% stake in Ping An Health, a health subsidiary of China’s Ping An Group.

“We are very excited about the acquisition; the joint venture will see Ping An Health deploy Discovery’s product innovation and consumer–engaged model to a potential 83 million families. Given the ability for Discovery to tap into Ping An’s brand credibility and distribution footprint, and based on the Chinese government’s regulatory support of private healthcare, the opportunity in China is compelling.”

Discovery has also maintained a small US presence over the past three years, where it markets the Vitality wellness programme as a standalone offering to corporate firms and health insurers.

“This approach of strategic partnerships, coupled with US regulatory reforms that place the emphasis on cost management through wellness and prevention, create opportunities for Discovery to deploy Vitality’s assets without requiring capital or incurring significant fixed costs,” Gore said.

Gore is positive about the Group’s prospects in all its markets, saying that the work done over the past financial year positions Discovery strongly for continued growth and profitability going forward.

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