Discovery business model delivers excellent financial performance

3 September 2013 - Discovery Limited today announced its annual financial results to the investor community and the media. The Group’s business model delivered excellent results and Discovery Group Chief Executive Officer, Adrian Gore, analysed Discovery’s performance against the background of macro trends that are shaping the insurance and financial industries globally. Gore said, “Discovery’s business model, which is based on the use of behavioural structures to underpin insurance systems, is proving increasingly responsive and resilient in a world where the burden of chronic diseases of lifestyle is growing, healthcare costs continue to increase and risk-averse consumers are seeking greater certainty and protection.”  

Gore believes that Discovery’s approach to insurance has resulted in innovative and sustainable products and services that not only offer increased value and protection to clients, but also significantly enhance the actuarial dynamics of the business. “Our focus on building insurance systems that integrate wellness, behaviour change and financial protection leads to strong actuarial dynamics across the business, with positive trends in both lapse rates and loss ratios.”

Key observations on Discovery’s performance during the past financial year include:

• A strong financial performance, ahead of expectations. A focus on financial strength, performance and prudence delivered a robust set of results with new business annualised premium income increasing 15% to R10 799 million and normalised profit from operations increasing 18% to R4 052 million. Return on capital exceeded 20%.
• The UK businesses’ excellent performance resulted in an upward revaluation of Prudential’s 25% shareholding and allowed for a restructuring of PruHealth’s capital portfolio in search of greater yield. This led to the further recapture of a portion of the outstanding reinsurance balance in PruHealth, resulting in a five-year interest saving of R52 million. 
• Discovery’s core businesses of Discovery Health, Discovery Life, Discovery Invest, PruHealth and PruProtect, which represent the most sophisticated manifestations of the integrated model, delivered strong results. These businesses and the potential for integration with other Discovery businesses provide the platform for Discovery’s future expansion strategy.
• Discovery invested 12% of earnings in new growth initiatives, including in Discovery Insure and in AIA Vitality, its recently announced joint venture with AIA Group, the leading insurer in pan-Asia.
• Discovery Insure continues to make progress and Discovery is optimistic about the potential of the business. To this end, Discovery decided to acquire the 25% Hollard stake in the business for R352 million. This transaction is subject to regulatory approval.

Gore commented on Discovery’s growth strategy and in particular its international expansion strategy, saying, “Based on our emerging success in replicating the Discovery business model in other markets, we continue to invest significantly in future growth initiatives and in partnering with best-of-breed international partners in their respective markets.”

Discovery’s success in the emerging behavioural insurance market is proving attractive for international insurers who are partnering with Discovery to inject an innovation and wellness approach to their product offerings. Discovery has important Joint Ventures with some of the world’s most prominent insurance companies, including Prudential plc in the UK market, Humana Inc in the USA, Ping An Group in China and AIA Group in Singapore.

Business-specific highlights of the results announcement include:

Discovery Health delivered an operating profit of R1 688 million after continued  efficiencies were passed on to the Discovery Health Medical Scheme in the form of reduced administration fees. This marks an increase of 13% from the previous financial year. New business also increased 13% to R4 820 million. Importantly, the value Discovery Health creates for the Discovery Health Medical Scheme was validated by an independent review done by Deloitte Consulting. In addition, Discovery Health was recognised as the top and only recognised consumer brand in the medical scheme category of the 2013 Sunday Times Top Brands survey.

Discovery Life demonstrated strong performance over the period with new business increasing by 8% to R1 896 million and a 16% increase in operating profit to R2 106 million. A continued focus on product innovation and a dynamic underwriting model has contributed to Discovery Life’s position as the number one insurance writer in the broker risk market.

Discovery Invest further developed its integration model, enabling the business to offer uniquely-efficient long-term savings products combined with the flexibility and attractiveness of the open architecture environment. Several product and benefit enhancements were introduced to the market, all gaining considerable traction. This resulted in Discovery Invest delivering an operating profit of R221 million, a significant increase of 46% from the previous reporting period. Assets under management are now in excess of R30 billion.

PruHealth and PruProtect delivered exceptional results. Profit grew by 57% to R472 million and new business increased by 48% to R1 573 million, with the customer base measuring 710 000 lives. PruProtect experienced a 56% increase in operating profit to R326 million; strong new business growth, up 40% to R644 million; better-than-expected claims and lapse experience; and a 40% increase in in-force policies. PruHealth’s operating profit measured R146 million, a 60% increase, with strong growth in new business, up 54% to R929 million, and excellent performance on the key drivers of loss ratio and lapse rate.

Discovery Insure has made progress across all dimensions, providing compelling evidence for the success of the behavioural insurance model. New business increased by 53% to R366 million with a simultaneous improvement in quality – decreased loss ratios; improved claims management; lower accident frequency and severity due to improved driver behaviour; as well as excellent lapse dynamics.

Ping An Health continues to make steady progress with a deliberate strategy to move away from Fund and Service product markets towards higher-margin mid-end and high-end insurance products. These markets, while embryonic, are growing rapidly and total approximately RMB1 billion of premium income – of which Ping An Health has captured in the region of 30%. Insurance business was characterised by strong new business growth levels over the period (up 58%, excluding Ping An employees) and a low loss ratio in line with expectation. Ping An Health sustained its position as the number one writer of new business in the Group high-end market.