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Discovery's core health and life businesses deliver excellent growth

22 February 2007 Beachhead Media & Investor Relations

Discovery's core health and life businesses deliver excellent growth
Operating profit increases 40% and new businesses up 19% to record levels
 
* Discovery Health membership under management approaches 2 million

* Discovery Life operating profit up 29%

* Destiny losses reduced by 59%

* PruHealth membership rises 277%

Strong growth in Discovery's core health and life businesses helped the group lift operating profit before investment income, tax and the impact of its BEE transaction by 40% to R530 million (2005: R379 million) in the six months to 31 December 2006. Diluted headline earnings per share before the impact of the BEE transaction rose 29% to 70.1 cents (2005: 54.3 cents). New business grew to a record-breaking level of R2.5 billion.

Discovery Health continues to lead the market, as South Africa's largest health care funder. Membership under management was very close to 2 million by end 2006, or about 30% of the market. Lapse rates fell from 2.6% to 2.1%.

New business premium increased to 2% to R1.233 billion over the period (2005: R1 211 million) and operating profit rose 29% to R342 million, thanks to an intense focus on administration costs. Says Gore: "If you look at the number of staff we have per life covered, this has fallen by 33% over five and a half years, and we have also made efficiency gains through the better use of technology. At the same time our administration fee has fallen some 15% in real terms over that period, meaning our members have benefited too."

Gore says the challenge is to keep managing real costs in the system down, to the benefit of Discovery Health and its members alike. "We have the scale and size to be able to tackle the main drivers of cost in private healthcare," he says. A major drive is to improve access to primary care by encouraging visits to GPs over hospital admissions, and the control of upstream costs such as pathology and medication. Gore says there has been an excellent uptake of GPs joining Discovery's programme, while the uptake of specialists to Discovery's Premier Rate has also been encouraging. "The objective of this strategy is to work constructively with all health care professionals in order to build a robust and effective healthcare system for members of Discovery Health," says Gore.

"High costs of medication remain a major focus for us. We have already had major breakthroughs in our negotiations with pharmaceutical manufacturers, with the makers of two leading drugs agreeing to lower their prices, to the benefit of all users, not just Discovery members," he says.

Discovery Life continues to be South Africa's fastest growing major life assurer, with excellent uptake of Discovery Life's enhanced offerings. Operating profit grew by 29%, with new business rising 22% to R480 million. The value of in-force business rose strongly, by 22% to R5.068 billion (2005: R4 151 million). Gross inflows improved from R820 million in the previous period to R1.107 billion - an increase of 35%

Discovery Life has been able to integrate elements of health management into its offering, creating a more appealing offering for clients. "Last year we further enhanced this through linkages with the DiscoveryCard, positively linking premium improvements and level of cover to actual expenditure on the DiscoveryCard," says Gore. Gore says the DiscoveryCard Integrator and DiscoveryCard Protector lines - both only introduced in the period under review - were major contributors to new business in the period. The DiscoveryCard Integrator accounted for 30% of new business in the period.

"The appeal of these new products is that not only are we able to increase profitability, but we are offering far more cover for each rand the client spends - so its a real value add for policyholders," Gore points out.

Gore adds that Discovery Life is continuing to make inroads into the retirement products market through the retirement Optimiser. "We are encouraged by the uptake of the Optimiser and we look forward to further opportunities in the contractual savings market," says Gore.

In November Discovery Life entered the funeral policy market, using prepaid telephony technology in a joint venture with Vodacom's SmartCall. The product has been given the Life Offices Association's Zimele stamp of approval and Gore says he is excited about the opportunities in this market. "This is not a market segment Discovery Life has traditionally been involved in, but one we firmly believe in - we strongly support all initiatives to increase access to financial products."

Vitality, the wellness programme that underpins Discovery's other businesses, grew operating profits by 63% to R26 million. "More important though was the support Vitality provided to other parts of the business through the improved health of Vitality members and sales of new product lines such as the Card Integrator and Card Protector," says Gore. The DiscoveryCard, which offers cash back to Vitality members on sales through partner vendors, depending on Vitality status, now has 450 000 card holders, and is rated as the leader among South Africa's new generation of credit cards. "Research by Razor's Edge ranks the DiscoveryCard as the most valuable credit card for holders," says Gore.

Vitality recently launched Vitality WellPoint, an integrated wellness management programme for corporates, consolidating wellness, HIV/Aids management, absenteeism management, preventive screening and employee assistance programmes for the first time under one platform, and rewarding employers and employees alike. "We call it Vitality for corporates and it is a natural extension of the work we are doing within Vitality for individuals," says Gore.

Gore says Discovery will continue to rigorously analyse the health data and experience of Vitality to come up with life and health products that are competitive and best suit the needs of its customers.

Discovery's international businesses showed encouraging signs in the period, says Gore, with the corrective action taken in Destiny in the US starting to show benefits. The operating loss fell by 59%, as the impact of the changes started to come through. This is within the tolerance level set last year of 5% of group operating profit. A new management team was put in place, existing partnerships were realigned and new pricing policies were implemented.

New business grew by 10% to $65 million, while membership reduced by 7% to 59 181 from 63 704 - much of this decline was however related to lapses among poor-performing groups.

"The restructuring of our relationship with the Guardian and Tufts Health Plan means we can start selling our product lines off our own bat into new markets as from 1 April. At the same time our repricing strategy has led to a significant improvement in loss ratios," says Gore.

"While we are optimistic about the US market potential, we are also keenly aware of Destiny's performance in this market to date and therefore our view of Destinys future prospects remains a cautious one."

PruHealth, the joint venture with Prudential in the UK, continued to enjoy excellent take-up, with new business rising 260% to R277 million, and number of lives covered rising 277% to 89 000. However, the operating loss did rise to 9 million pounds from 6 million pounds in the previous period.

"A significant portion of our growth in the last year has been in the individual and SME market, which is traditionally associated with higher acquisition costs," says Gore. "This business has lower long-term loss ratios than the corporate market, which bodes well for the future."

"The direct consumer advertising and online capabilities to transact new business have been particularly successful," says Gore

Gore concludes that despite a challenging environment, Discovery's consumer-centric business model continues to prove its worth. "We are confident that our robust model will allow us to continue to offer value to shareholders and consumers alike."

 

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