Local businesses drive profit at Discovery

Gareth Stokes, FAnews Online Editor

Can a financial services provider forge ahead under today’s difficult economic conditions? The latest results from innovative local financial services provider Discovery Limited (JSE: DSY) answer in the affirmative. While banks and other financial sector companies lamented declining profits in their latest reporting periods, Discovery announced a 32% increase in operating profit (to R1.674bn) and a 33% improvement in headline earnings (to R1.238bn) for the 12 months to 30 June 2009.

Discovery reports business in four segments: health, life, vitality and investments. The health division includes local medical schemes administrator Discovery Health, PruHealth (Discovery has a 50% stake in this joint venture with Prudential UK) and the discontinued Destiny Health in the United States. The group’s life activities include Discovery Life and PruProtect (again, Discovery has a 50% stake in this venture with Prudential UK). Discovery Invest was launched with much fanfare towards the end of 2007 and manages in excess of R4bn locally and the Vitality business serves as a foundation for the group’s health and life activities across all geographic regions.

Life businesses surges 30%

New business annualised premium income surged 36%to R1.920bn in the latest period. This improvement is attributed to the company’s “product and distribution excellence.” The group revealed that “policyholders purchased life cover to the value of approximately R30 billion through the new Cover Integrator” product. Another innovation, The Lifetime Benefit technology “served to increase the take-up of the Severe Illness Benefit by 10%, Capital Disability Benefit by 5% and Income Continuation Benefit by 10%.”

Discovery remains committed to its broker distribution model. During the latest 12 months the number of brokers selling Discovery Life products grew by 650 brokers to 5 722 brokers countrywide. The company also grew its tied agency force from 149 to 206 agents over the period. A measure of life company performance through recession isn’t complete without considering the lapse of life policies. The division’s lapse rate increased over the period; but “remained below the assumptions used in the company’s reserving basis, leading to a fairly minimal impact on Discovery Life’s profitability.” The division’s embedded value increased by 8% to R8.686bn. Unfortunately the UK division couldn’t boast similar successes.

PruProtect is still in its start up phase and reported an operating loss of R154m for the period. The division is still struggling to gain a foothold in the tough UK life insurance space. Management’s focus in the latest period was on building distribution capability and aligning its product offering with the market. “While the UK life assurance market is of considerable scale, transacting business is highly capital intensive, and traditional products are commoditised with low margins,” said Discovery. Although management remains upbeat about future prospects for this division we’re sure shareholders are agitating for prospects to reflect on the bottom line.

On different tracks

Discovery Health provides an interesting snapshot of healthcare developments in South Africa and the United Kingdom. The comparison is of particular interest in light of government’s proposed National Health Insurance (NHI) implementation. Health scheme administrator, Discovery Health, which generates profit by providing services to the approximately two million beneficiaries on the Discovery Health Medical Scheme, contributed R1.028bn to total profit. And the group is sitting on almost R6bn in solvency reserves to maintain the Council for Medical Schemes 25% statutory reserve level.

FAnews Online has repeatedly commented on the private healthcare sector’s reluctance to comment on government’s radical healthcare proposals. The group acknowledges the likely change in their annual report, saying: “Due to its size and impact, Discovery Health is committed to building and improving the healthcare system – not for its members alone, but for all South Africans.” They undertake to “work with government in its pursuit of healthcare reform and the implementation of an NHI system to the benefit of all South Africans.” But analysts aren’t as sure. Commenting in an article by Adele Shevel in the Sunday Times, Stephen Meintjies (analyst at Imara SP Reid) says “it is difficult to see an outcome of NHI that is positive for Discovery.”

Is the UK, where a national health service (NHS) has been in operation for a number of years, a good proxy for South Africa? British citizens are already facing up to the realities of a ‘free healthcare for all’ policy. Discovery notes that “the UK is showing early signs of economic recovery – and as government budgets tighten – the NHS will face increasing funding pressure.” As a result private health insurers are going to play a larger role in the future. Over the past 12 months PruHealth expanded its lives insured to 212 000, or 2.5% of the UK market in terms of in-force lives for UK private medical insurance.

What makes Discovery tick?

Discovery’s Audited Group results read a bit like a marketing piece rather than a comprehensive assessment of operating activities. Their introduction focuses on the features management believes contributed to group performance. They applaud their client-centric innovation, quality and financial strength and distribution excellence. And the spend loads of time on recent innovation’s including the launch of Vitality’s HealthyFood™ Benefit in 2009, Discovery Health’s Delta Plans and Discovery Life’s Cover Integrator. But if you can’t trumpet your competitive edge in the annual financial report then where else would you?

The group reveals that “Vitality’s role of facilitating integration, driving better selection and enhancing mortality and morbidity experience was particularly important during the period under review.”

Editor’s thoughts: Critics of Discovery label the R1bn plus healthcare profits as excessive. A quick look at the Council for Medical Schemes Annual Report shows that Discovery Health Medical Schemes pays its administrator (Discovery Health) R94.50 per average beneficiary per month against the open scheme average of R74! Do you think Discovery Health Medical Scheme adequately passes its ‘critical mass’ benefit to members? Add your comments below, or send them to gareth@fanews.co.za