Financial Services group Discovery Holdings released results for the full-year to June 2008 to shareholders yesterday. Despite difficult economic conditions the company reported an increase of 14% in their net profit before taxation, to R1.664bn. And profit from the group’s established businesses (Discovery Health, Discovery Life, Discovery Vitality and PruHealth) were 38% higher at R1.763bn. In today’s newsletter we’ll take a look at these operations in more detail – before discussing the group’s new and discontinued ventures – which are all burning cash at an alarming rate.
The ‘established’ operations
Discovery Health weighed in with a 21% improvement, earning R891m for the 12 months. Membership of the division’s Discovery Health Medical Scheme climbed 3.2% from 896 143 families to 924 725 families… Despite difficult economic conditions the group was proud that the lapse rate (members cancelling their health cover) had remained stable at 4%. Discovery says that “efficiencies increased dramatically with the staff headcount per 1 000 lives covered, decreasing by 9%.” A number of regulatory developments pose challenges to the healthcare industry going forward. The National Health Amendment Bill and Medical Schemes Amendment Bill detail a number of changes, including the possible regulation of hospital and doctor tariffs, the ongoing discussion around the implementation of the Risk Equilisation Fund and changes to medical scheme benefit structures to name a few. And then there’s the looming National Health Insurance solution. Although aware of these challenges, “Discovery Health remains of the view that the private healthcare sector’s role is a pivotal one in the future of SA, and attention must not be diverted from ensuring its excellence and sustainability.”
The life business had an incredibly strong year. Earnings were 38% higher at R978m. Discovery admits that this performance “exceeded expectations” given the negative economic conditions prevalent in the country over the period. According to the group: “New business performance exceeded target; the distribution channels performed well with the recently established tied agency force producing significant new business, and the quality of the business transacted was pleasing.” The lapse rate disappointed slightly, moving higher in line with expectations. Part of the group’s success stems from its new distribution strategy. The company says its tied agency force (144 strong) combined with financial advisers (6 961 who support Discovery Life) were integral in achieving business growth.
The group’s Vitality operation also performed well; though it only contributed R49m to the earnings bottom line. The laggard in the ‘existing operations’ stable is PruHealth which has yet to make a profit. The operation lost R155m in the period under review.
New ventures and the ‘thorn’ in Discovery’s side
Other ventures are either in the start-up phase or in the process of being wound down. Discovery Invest, launched with much fanfare in 2007, incurred losses of R157m for 2008. “The strategy behind Invest is to harness the sophistication of an open architecture investment platform, offering a broad range of long-term savings products, but differentiating within the products and funds,” says Discovery. Volatile investment markets aside, Discovery is pleased with the unit’s performance to date. New business came in at R1.2bn, comprising R181m in recurring premium business and R984m in single premiums. With Discovery’s investment seed capital thrown in the unit has R1.4bn of assets under management. PruProtect, a joint life assurance venture with Prudential in the UK, lost R137m and performed worse than expected.
And that leaves the thorn in Discovery’s side. After spending a number of years trying to gain a foothold in the US health insurance market, Discovery finally threw in the towel last year. Destiny Health lost R192m in 2008 – on top of the R102m hit in the previous financial year. Discovery has learned two lessons the hard way. The first is that it’s not easy opening a health insurance business in the United States. And the second is that it’s not easy to wind-down such a business when things go wrong. “The extent and complexity of this is substantial: the business is underwritten on four different insurance licenses, within six different US states,” says Discovery. When they announced the decision to exit the market they expected it to cost in the region of $30m. Discovery says $10m of that is already sunk – leaving another 24 months for shareholders to soak up the remaining $20m.
Editor’s thoughts:
Almost every insurance company we’ve spoken to confirms that business conditions are tough at the moment. Yet apart from a slight increase in lapse rates, Discovery has reported a fantastic result from life insurance over the last 12 months. Does the strong performance from Discovery Life surprise you? Add your comments below, or send them to gareth@fanews.co.za
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Added by Willie Pretorius, 08 Sep 2008