DSY/DSBP - Discovery Holdings Limited - Unaudited interim results and cash
DSY DSBP
DSY
DSY/DSBP - Discovery Holdings Limited - Unaudited interim results and cash
dividend declarations for the six months ended 31 December 2011
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
Ordinary share code: DSY ISIN: ZAE000022331
Preference share code: DSBP ISIN: ZAE000158564
("Discovery")
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATIONS
FOR THE SIX MONTHS ENDED 31 DECEMBER 2011
Normalised headline earnings increase to R1125 million up 20%
Embedded value per share increase to R51.20 up 18%
Normalised profit from operations increase to R1 629 million up 22%
Interim dividend 50 cents per share
Overview
Discovery posted an excellent performance over the first six months of the
financial year to 31 December 2011. The results for the period reflect a
continuation of the Group`s strategy to make a profound impact on the lives
of those it serves and to bring about positive societal change. A commitment
to making people healthier and enhancing and protecting their lives is the
underpin of this strategy. Following from this core purpose is the Discovery
integrated business model of health insurance, life insurance, financial
services and Vitality: this allows superior products and solutions to be
offered to Discovery`s members in a way that is affordable, sustainable, and
provides unique value for money. Leading from this, Discovery has developed
a powerful ambition to become a multinational organisation, based on a
number of important principles: a disruptive, positive force in the markets
in which it operates; the ability to command substantial market share;
products that are superior and that people want to buy; and an overall
presence that is inspiring and transformative for society.
The cumulative effect of this model and approach has created two virtuous
cycles: the first, a strong and unique set of technology, product and
intellectual property capabilities that are appealing to other markets and
attract best-of-breed local partners; the second, a capital-light model
wherein Discovery`s significant international expansion can leverage the
capital strength, brand and presence of these partners. In addition, the
high dividend cover enables further reinvestment into building out existing
Discovery businesses, coupled with the commitment to allocate between 5% and
7% of the organisation`s operating profit towards the development of new
businesses, such as Discovery Insure. During the period under review, the
Group continued to drive this strategy, with the approach validated by the
ability to build businesses in different markets and geographies, with
minimal capital strain and with phased implementation.
Discovery`s businesses can therefore be characterised into three distinct
groupings: first, established businesses that typically exceed five years;
second, developing businesses with a maturity of between three to five
years; and third, new businesses with less than three years since inception.
It is within this context that the results should be considered: new
business increased by 21% from R3 747 million to R4 535 million, and
notably, established businesses increased by 6% from R2 876 million to R3
055 million; developing businesses by 14% from R854 million to R977 million;
and new businesses increased substantially from R17 million to R503
million. Similarly, operating profit increased by 22% from R1 332 million to
R1 629 million, with established businesses increasing by 11% from R1 388
million to R1 544 million; developing businesses by 523% from R39 million to
R243 million; and the amount spent on new businesses increasing from R95
million to R158 million.
It is also important to note that the Group generated R1.8 billion in cash
and reinvested R1.1 billion into new business and distribution capabilities
for Discovery Life and Discovery Invest. The organisation as a whole has
generated a return on capital of 60% per annum since inception, using the
market capitalisation as a measure of value, and serves a sizeable global
client base of over 5.5 million unique members across its businesses.
Established businesses
* New business:
R3.1 billion
* Operating profit:
R1.5 billion
* Unique members:
3.0 million
1. Discovery Health (South Africa)
Discovery Health`s performance over the period was excellent and exceeded
expectation. In combination, the significant growth of the Discovery Health
Medical Scheme and the other medical schemes that Discovery Health
administers, together with the efficiencies achieved within Discovery
Health, enabled the company to explicitly reduce the administration fees
charged to the Discovery Health Medical Scheme by R100 million (including
VAT) for the 2011 calendar year, whilst maintaining an increase in profits
of 10%. This strategy will facilitate continued growth of reserves in the
Discovery Health Medical Scheme and will support growth. The company
believes that this is a well-balanced result and is a continuation of a
process of achieving efficiencies of scale, and passing these on to members
of the Discovery Health Medical Scheme. In fact, when considering the
drivers of medical inflation over the past five years, administration
expenditure is the only component of the medical scheme`s expenditure which
has been reducing consistently in real terms; in this regard, while medical
inflation has averaged 10,5%, administration fees have had a deflationary
effect of 4% for the past five years.
In addition to the strong growth in membership, the period is also
noteworthy for the continued efforts made by the Discovery Health Medical
Scheme to rebalance benefit structures in order to eliminate waste as well
as to increase benefits in areas of critical care such as oncology. While
this process led to public debate around the restructuring of the Allied
Health and Therapeutic Benefit, it is seen as necessary to redirect spend
towards more appropriate coverage. This strategy results in benefits that
are comparable to the best private health systems in the world, yet at the
same time provides access to superior healthcare when members are sick.
Discovery Health will continue with this process of rebalancing benefits as
required from time to time in order to ensure ongoing stability and cover
for the most critical healthcare needs.
The third prevalent theme during the period is that of building and
strengthening a sustainable healthcare system. In this regard, Discovery
Health used this period to invest significantly in a range of technological
and service innovations aimed at improving the quality and efficiency of the
healthcare system for the benefit of its members. Key innovations include
the development of a South African first iPad application which provides
doctors treating Discovery Health members with access to members` full
health records; MedXpress, a national medicine delivery service providing
Discovery Health members with home delivery of acute and chronic medicines
at no charge; and HospitalXpress, a range of services designed to facilitate
rapid and efficient authorisation and admission of Discovery Health members
to hospitals.
In terms of the above-stated strategy, the robustness of the private
healthcare system and Discovery Health`s success within it, are strongly
illustrated by the movements of members. During the period, in addition to
the strong growth achieved, the number of members leaving the scheme (the
lapse rate) reduced to 3.9% on a calendar year basis (including an allowance
for IBNR), amongst the lowest in the Scheme`s history. Furthermore, despite
the expense of private healthcare, the number of members staying with their
current benefit options or buying up to higher benefit options measured 98%.
The combination of these metrics reflects a remarkably sustainable system
and bodes well for the continued success of Discovery Health and Discovery
Health Medical Scheme.
Finally, it is important to state Discovery Health`s belief that our private
healthcare system, while having room for further improvement, is excellent,
sustainable and an important national asset. This may seem in stark contrast
to common views of waste and inevitable decline in the private healthcare
system. A rigorous analysis of the facts suggests the opposite. Access to
care for those covered by medical schemes is comparable to the best
healthcare systems found in developed markets: the quality and outcomes are
of the same order of magnitude, while the cost, adjusting for purchasing
power parity, is lower. Importantly, despite the understandable concerns
about gaps in medical scheme coverage, coverage levels in reality are
significantly comprehensive. Members of the Discovery Health Medical Scheme,
for example, had 97% of all hospital claims paid out in the 2011 year
translating into R14.1 billion from January 2011 to December 2011. It is in
light of this that Discovery Health is a strong advocate of a coordinated
effort to improve the entire South African healthcare system. The company
remains committed to a National Health Insurance system that is a conduit of
this change. In this context, a strong private sector should be seen as an
asset.
Discovery Health remains confident of its ability to grow its profitability
on a sustainable basis into the foreseeable future, through a combination of
ongoing growth in members under management and further gains in operational
efficiency.
2. Discovery Life (South Africa)
Discovery Life`s performance was excellent with new business increasing by
7%, operating profit increasing by 12% from R768 million to R862
million, and the value of in-force business increasing by 20%.
During the period under review, Discovery Life continued along a set
strategy of focusing on market leadership through product innovation, and on
quality of new business to ensure superior performance in terms of policy
lapsation and mortality and morbidity experience. The results illustrated
the success of this strategy, with lapses reducing by 1% per annum and
falling below the long-term assumptions within the embedded value basis, and
mortality and morbidity experience 15% below the embedded value basis. The
growth in new business also reflected the market`s acceptance of the
continued process of innovation. During the period, the Access Cover product
and other innovations were successfully rolled out to the market.
A central aspect within Discovery Life is the dynamic pricing of
policyholder premiums based on their engagement with Vitality. Policyholders
who engage with Vitality experience lower premium adjustments and higher
periodic payback benefits. Over the period, Discovery Life saw a continued
and significant increase in engagement, leading to lower levels of premium
increases, and substantially higher levels of payback benefits. The effect
on the actuarial dynamics of Discovery Life is substantial in that it prices
risk more accurately and reduces lapsation.
It is also important to state that Discovery Life is still in a strong
growth phase and is funding the growth of Discovery Invest. Although
Discovery Life generates in excess of R1.6 billion of cash per year, the
cash emerging is currently reinvested into new business and the building out
of distribution channels. Discovery has made an explicit decision that this
is an appropriate strategy, and will continue to support it into the
foreseeable future. Discovery Life provides a unique opportunity to invest
considerable amounts of capital at superior rates of return - in fact, the
return on capital invested since Discovery Life`s inception is in excess of
27%. Taking current claims experience into account, the return on capital
since inception exceeds 30%. The return per rand of capital invested into
new business comfortably exceeds target levels and is further bolstered by
financing structures.
Important also is the nature of the asset being built in Discovery Life, and
its value - this is primarily a function of future policyholder lapsation
and levels of mortality. Discovery Life is confident of its ability to
control the former and in the case of the latter, worldwide mortality levels
together with the selective effect of Vitality are likely to see mortality
experience improving. The combination of these will be to boost the returns
on capital invested in Discovery Life. In addition, the effect of motor
vehicle accidents on mortality, and Discovery`s increasing understanding of
how its members drive through VitalityDriveTrade Mark, will provide
opportunities to incentivise members toward better behaviour and further
increase Discovery Life`s ability to price risk accurately and provide value
for money.
3. Vitality
Vitality`s performance over the period was exceptional and it continues to
serve as a critical foundation across Discovery`s businesses. Most
importantly, it has a profound impact on the mortality and morbidity levels
of all Discovery`s members and provides a critical pricing and behavioural
basis for the sustainability of Discovery`s product offerings. The Vitality
model is powerful: it creates a virtuous actuarial cycle wherein rewards are
used to incentivise the appropriate behavioural change; behaviour change
leads to a reduction of mortality and morbidity, thereby reducing claims
costs; and the reduction in claims costs ensures that the system remains in
balance, and so on. The benefits of this cycle are experienced by all
stakeholders: clients, Discovery and society. It is this cycle that
Discovery aims to replicate in a number of markets.
A fundamental measure of the success of Vitality are the levels of
engagement and the underlying behavioural dynamics of the base. During the
period, engagement levels grew off an already positive base, with gym visits
increasing to more than 20 million visits for the calendar year; Kulula
flights increasing from just over 500 000 flights in 2010, to over 750 000
flights for the 2011 calendar year; and South African participation in
wellness activities increasing dramatically, with over 50% of the eligible
population completing their Health Risk Assessments, over 50% having their
glucose tested, and over 50% having their cholesterol assessed.
Furthermore, the DiscoveryCard, which on implementation was essentially a
Vitality reward structure, has continued to evolve into a substantial
business in its own right. During the period, the experience of the
DiscoveryCard was exceptional and exceeded expectation, with the number of
accounts exceeding 290 000; the level of active accounts exceeding 85%; the
bad debt levels reducing further to 0.07% of advances, and point of sale
market share averaging just under 9%. In this regard, the DiscoveryCard
provides a powerful foundation to further development of the Discovery
Group. In addition, the data emerging from the DiscoveryCard provides a
powerful understanding of the correlation between consumption behaviour and
other risk behaviours important to Discovery.
During the period, the rollout of VitalityDriveTrade Mark - the behavioural
underpin for the Discovery Insure business - also continued. Although early
in its implementation, the results are pleasing, with 98% of all Discovery
Insure members opting to purchase VitalityDriveTrade Mark.
Finally, virtually all aspects of the Vitality capability in terms of
intellectual property, technology, online capability and actuarial models,
have been structured to be easily deployed in markets outside of South
Africa. Sophisticated and tailored Vitality models are being actively rolled
out in the US with Humana; the UK with the PruHealth and PruProtect
businesses; and will be deployed shortly in the Ping An Health joint venture
in China.
Developing businesses
* New business:
R1 billion
* Profit: all profitable;
R243 million
* Unique members:
0.7 million
4. Discovery Invest (South Africa)
During the period under review, Discovery Invest achieved an excellent
performance with assets under management growing by 50% from R13.9 billion
to R20.9 billion, and operating profit by 84% from R44 million to R81
million.
The success of Discovery Invest reflects a combination of the market`s
receptivity to Discovery Invest`s strategy to offer value-add products,
together with the exceptional performance of Discovery Invest`s portfolio of
funds. Notably, the Discovery Equity Fund continues to perform at the top of
its peer group and based on this, attracted more than double the inflows of
its nearest competitor. The value-add approach of Discovery Invest has
created an ability to generate superior profit margins in the products
provided, while an important driver of the emerging profitability is its
achievement of scale, leading to a reduction in unit costs. It is
anticipated that this trend will continue given Discovery Invest`s
considerable growth potential.
5. PruProtect (United Kingdom)
The period under review was a particularly successful one for Discovery`s UK
businesses, with their combined profitability turning from a loss of R5
million to a profit of R162 million. Both businesses made strong progress in
their respective markets and Discovery`s vision of building a Discovery-like
capability in the UK now appears realistic, with great potential for scale
and profitability. In particular, PruProtect`s performance was remarkable
and in a short space of time since its launch, it has become a major player
in the UK protection market. Importantly, while each business focused on the
unique dynamics of the markets in which they operate, over the period a
considerably more powerful Vitality capability was rolled out, taking into
account many of the South African learnings. This bodes well for both
businesses to differentiate themselves in their respective markets.
PruProtect`s performance was exceptional and significantly ahead of
expectation. Virtually every aspect of the business made outstanding
progress and manifested in profit growing from -R40 million to R115
million. In addition, PruProtect comfortably exceeded return on capital
hurdles for new business written during the six months ending 31 December
2011.
The PruProtect strategy revolved around repeating the Discovery Life model
in the UK. This has been followed closely in all aspects of the business
model, from product innovations and processes, to distribution initiatives.
Most importantly, PruProtect`s profitability is a manifestation of the
quality achieved across key dimensions of the business: levels of mortality
were lower than expected; the average premium was higher than expected; and
inflation-linking exceeded expectation.
One of the most important successes was that of the franchise distribution
model: while new business grew 51% from R144 million to R218 million, the
franchise channel itself grew by almost 100%. The implication of this was
that the make-up of new business was of a far higher quality than the
previous period under review. In addition, the combination of the product
and distribution capability has enabled PruProtect to be included on the
panels of many of the most powerful distributors, and PruProtect expects
sizeable growth from these initiatives going forward.
In just four years since its launch, the company is now capturing in excess
of 8.5% of the broker-distributed life insurance market, and generating new
business margins of around 16.5%. Discovery is optimistic about the
prospects of PruProtect going forward.
6. PruHealth (United Kingdom)
PruHealth`s performance during the period was pleasing and in line with
expectation. The period was dominated by two distinct forces: the difficult
economic environment, leading to a weakened private medical insurance market
in which there was adverse lapsation; and second, the integration of
Standard Life Healthcare and PruHealth.
Against this, PruHealth made significant progress, with its explicit
decision to focus on quality and to ensure that loss ratios were stable and
robust. This was achieved by applying careful risk and actuarial processes
to the management of the business. The results of this approach were
satisfying, with the loss ratio in the PruHealth book and the acquired
Standard Life Healthcare book drifting downward to levels better than
expectation. The concomitant effect of this was that lapse rates of
previously higher loss ratio groups escalated, as these were priced up; and
new business reduced following the decision to price at sustainable levels.
By the end of the period, all actuarial dynamics of the business were in
line with expectation and the company focused on rolling out the new product
range with a significantly-enhanced Vitality capability. It is anticipated
that levels of new business during the next period will show improvement.
With the positive foundation created, the business should generate strong
profitability going forward.
In respect of integration infrastructures, considerable progress was made in
terms of how the two businesses will be brought together from both a
technology and product perspective. Despite the profit achieved during the
period, it is anticipated that once this integration has occurred, an
additional saving of approximately R80 million to R100 million will be
achieved, with the full saving likely to emerge in the 2014 financial year.
New businesses
* New business:
R0.5 billion
* Investment:
8.8% of profit
* Unique members:
1.8 million
7. Discovery Insure (South Africa)
Discovery Insure was launched just prior to the reporting period under
consideration and its receptivity and progress have exceeded expectation.
New business since inception has exceeded R140 million API, with total in-
force policies at 31 December 2011 of 7 986. The premise on which Discovery
Insure is based is the extension of Discovery`s behavioural expertise into
affecting the way people drive, so that they pose lower insurance risk, and
more importantly - lower mortality and morbidity risk. In this way,
Discovery Insure`s purpose is completely aligned with the overall Discovery
purpose and the business has been created to disrupt the traditional short-
term insurance models that use claims experience as a proxy for risk and
reward lower risks with lower premiums. In contrast, Discovery Insure
accurately measures driving behaviour to assess risk and rewards lower risks
on a real-time basis with more tangible and immediate benefits that impact
behaviour.
Three of the key strategic barriers that required attention was ensuring
that the telematics technology could be made mainstream with relevant and
accurate data available instantaneously; overcoming policyholders`
reservations that being tracked would feel intrusive in any way; and
building a network chassis to fulfil the fuel reward benefit. All of these
barriers have been dealt with and the business is rolling out ahead of
expectation. There appears to be a real opportunity to not only build a
business of scale and quality, but also to impact society in a real and
significant way: creating better drivers and consequently, safer roads. The
early results around VitalityDriveTrade Mark have exceeded expectation, with
98% of Discovery Insure clients having VitalityDriveTrade Mark, and within
this, levels of engagement have been strong and meaningful correlations
found between how policyholders drive and their levels of risk.
In addition, early indications demonstrate that the kind of client attracted
to Discovery Insure is typically attracted to Discovery`s other products,
with over 60% of clients having three or more Discovery products, excluding
Discovery Insure. The implication of this is two-fold: the persistency and
behavioural quality of the Discovery Insure client base is superior, and the
ability to predict behavioural change from other interactions with Discovery
becomes more accurate. This is profound given Discovery`s goal of building a
business of scale with significant value based on its ability to price risk
accurately and attract quality members.
8. Ping An Health (China)
Ping An Health made significant progress during the period. During the
previous year work was done on obtaining the necessary regulatory approvals
and establishing the team in China. During the period under review, Ping An
Health invested considerably in technology and other infrastructural
aspects. In addition to this, the company focused on a number of important
product development initiatives and innovations, including a Vitality
construct, with these expected to be rolled out in the first and second
quarters of 2012.
Despite the infancy of many of the developments, progress made in the market
was strong, with new business for the six months of R211 million, the
quality of business exceeding expectation, and over 430 000 lives being
covered by the end of the period. Ping An Health is now well positioned to
capture considerable Group high-end and Individual insurance mid-market
business.
Discovery remains excited about the potential of Ping An Health and the
ability to build a leading health insurance company in China.
9. The Vitality Group (The United States)
During the period, The Vitality Group made significant progress. Discovery`s
intent is to create a scaled-up stand-alone Vitality capability in the US,
given the opportunity created by the inherent centrality of wellness to the
US healthcare system.
Discovery`s strategy in the US is to explore a number of distribution
channels and partnership opportunities. A seminal development in this regard
was the partnership with Humana, which presents Discovery with the
opportunity to apply its learnings into a large US Health insurer. During 
