Financial services giant confirms a very good year

Gareth Stokes, FAnews Online Editor

The latest annual results from diversified financial services group, Discovery Holdings Limited, proves that healthcare, insurance and investment businesses can prosper despite trying economic times. In the year to 30 June 2011 the group improved its operating profit by 32% to R2.838bn, with normalised earnings per share 31% to the good at 365.8c. The industry buffs will welcome the 19% improvement in embedded value per share (to R48.45) and the solid 21% jump in gross inflows under management, now topping R50bn!

Cash flows in for healthcare administrator!

As the National Health Insurance (NHI) debate gathers speed we’ll kick off our discussion on Discovery’s results with a look at their healthcare administration operation, Discovery Health. The division chipped in a large slice of group operating profit (R1.357bn) thanks to continued increases in the group’s total medical scheme membership. Discovery Health now manages 2.5 million lives… The 13% decline in new business written was in line with expectations following the acquisition (and incorporation in the results) of two large restricted schemes and a large corporate scheme in FY2010!

How will the group handle NHI? The company was full of praise for government’s latest green paper. They observe: “Discovery Health strongly supports the rollout of an NHI system, as we believe that South Africa needs healthcare reform to ensure a comprehensive healthcare system for all South Africans.” They continue: “The policy proposals set out are rational, appropriate and bold!” But with so much vested in the administration of medical schemes Discovery’s tacit approval of the proposal is worrying, particularly for shareholders. There’s no doubt that private medical schemes membership will decline under NHI and unless Discovery Health somehow “shares” in the administration of NHI members – by no means guaranteed – its bottom line will suffer.

Life business profits up 16%

Discovery Life made the largest contribution to FY2011 operating profit with some R1.558bn. This improvement was on the back of a 25% surge in the value of in-force business (to R11.764bn) and a 5% increase in new business. “Given the scale of the business and its rapid growth, Discovery Life’s primary strategy during the year was to focus on the quality of the business,” observes the group. How does a life insurer improve quality? Discovery reckons there are four keys, and was happy to share these in their results statement:

One: Retain your policyholders. The rate of policy lapses reduced significantly over the period and is finally in line with the group’s long-term lapse assumption.

Two: Make your life premiums affordable. Discovery found that one of the main reasons for lapses was affordability and continues to tailor its Vitality integrated model to reduce the burden on its policyholders.

Three: Keep costs down. The company says its expense levels were significantly reduced during the period, with a drop in unit costs resulting in increasing new business margins and strong experience variances!

Four: Focus on innovation… This is the only way to meet the complex and unique needs of the Discovery Life client base!

A stunning performance from the investment outfit

The last of Discovery’s major local business operations is Discovery Invest, which reported an operating profit of R101m. The group is certainly on the fast track, with R17.2bn in assets under management in record time! “Discovery Funds performed exceptionally well with more fund choices made towards Discovery Funds, resulting in improved margins,” they say. The Vitality operation chipped in with R21m for the year.

Discovery has a number of offshore businesses that have yet to make a significant impact on the bottom line. However its stake in PruHealth and PruProtect in the UK and its share in Chinese health insurance company Ping An Health will prove tremendously profitable over time. The latter already services 1 500 group clients and administers a total of 300 000 lives in the world’s leading growth market!

Editor’s thoughts: Another year, another pleasing result from Discovery Holdings. Over the next five years we’ll be watching keenly to see how the group’s new Discovery Insure venture progresses… And we’ll be waiting in anticipation for the first big profit from its UK and Chinese endeavours. Are you surprised by Discovery Health’s stance on NHI? And do you think they will retain their 2.5 million membership post-NHI? Please add your comment below, or send it to gareth@fanews.co.za