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Discovery: Covid claims peaked in July, at 15% of hospital admissions

The substantial provision at year-end created a reduction in normalised headline earnings, explains CEO Adrian Gore.

NOMPU SIZIBA: Discovery released their annual financial results today, September 16. For the 12 months ended June 2020 the group reported that gross income came in at R66.9 billion. That’s up 14% on the year prior. Headline earnings per share declined by 94% to 45 cents a share. The company says that, due to the uncertain and potentially volatile economic environment caused by the Covid-19 pandemic, ordinary shareholders would not be getting a dividend this time round.

Well, to tell us more about the results I’m joined on the line by Adrian Gore. He’s the CEO at Discovery. Thanks very much, Adrian, for joining us. Headline earnings per share were down a whopping 94% but, but for Covid-19 being a factor, your normalised headline earnings per share would have been down 26%. Just tell us about the reasons for the decline in the numbers.

ADRIAN GORE: I think three things. The actual operating performance is very good, very resilient despite Covid period. So that was up 9%.

The effect of Covid was that we set up a substantial provision at the end of the year, the philosophy being a sort of provision sufficient to take out all future affected Covid. So really trying to almost pay forward all future ……. what the pandemic might do. That created a reduction in normalised headline earnings.

The other fact is that rates of interest were very volatile during the period, very low in the UK, very high here. The effect of that is really a mathematical effect on the valuation of assets and liabilities, so that created the significant fall. But that’s really the fluctuation the market values up and down. That will reverse. So we normalised that out.

I think the real effect is a decision about our Covid provision, which I believe is the right thing to do.

NOMPU SIZIBA: Of course. That provision is about R3.4 billion. What areas of the business do you expect that to cover?

ADRIAN GORE: It’s really targeted in three areas. One is in Discovery Life, the other in Vitality Life in the UK. So the two life insurers, where you expect mortality to come through over time.

And the other is in the UK Vitality Health, where effectively people could not use private hospitals because they were essentially used by the NHS during the early part of the pandemic. So we know that there’s a backlog of claims, someone who needs a hip replacement – they are delaying it. So we’ve tried to estimate the extent of that backlog and what that might do. So those are the three main areas, with the R3.4 billion.

Read: Is Discovery’s R3.4bn Covid-19 provision enough?

NOMPU SIZIBA: So under your Discovery Health business, what sort of payouts have you had to make in covering Discovery Medical Aid Scheme members in terms of Covid-19 infections so far? And did you find, in the fourth quarter of your financial year, that you were paying out less in health insurance claims for non-Covid-19 ailments, and things like accidents, because of the lockdown?

ADRIAN GORE: That’s a very, very good point. The Covid claims obviously came through from the health insurance perspective to the Discovery Health Medical Scheme. They were quite substantial but, in the scale of total healthcare spend, they were quite small. So I think in July we peaked; Covid claims were about 15% of hospital admissions at that stage.

But the reality, which you point out, is that the rest of healthcare consumption just fell to the floor.

So people avoided the healthcare system. Our usage was down like 50, 60, 70%. …… on it were are down like 80%. So the Discovery Medical Scheme, I think, that’s about five or six billion (rand) of surplus over this time, because of the reduction in utilisation. Obviously that will be consumed going forward as we move into a normal period.

But the dynamics of increasing Covid was much less than the dynamics of the decrease in the healthcare consumption generally.

NOMPU SIZIBA: Did you see a concerning trend perhaps in things like lapses or people not being able to honour their premiums because of the kind of economic impacts that we felt?

ADRIAN GORE:

Quite the opposite. That’s obviously for fear, but I think there was kind of a tussle between affordability on one hand and, on the other hand, people seeing health insurance and life insurance as critical during this time.

Essentially that won out. So we saw lapse rates, the percentage of people leaving actually declining. So things tightened up during the period.

In addition, there was a lot of forbearance given, there were a lot of structural things that I think that our different businesses did for people – they could extend their cover, a number of options that people did. But in the main, lapse rates in the medical scheme, in Discovery Life, In Vitality Life, throughout our business have tightened up. So people are leaving at a lower rate than prior to the pandemic, which is counter-intuitive, but probably rational.

NOMPU SIZIBA: Part of the reason you incurred operating losses was because your investment in your startup businesses obviously took up a lot of capital. Presumably you think that’s worth it – but what happened in terms of your key investment in Discovery Bank? What’s the progress that you’ve made with that asset, and are you not to some extent a little bit spooked by what the big banks are having to enjoy right now, in terms of anticipated higher credit impairments?

ADRIAN GORE: Just to clarify one thing, we spent about R2.2 billion on the initiatives out of R8 billion of profit. So it’s very, very affordable. It doesn’t take us anywhere close to a loss. But the actual spend in the initiatives – the bank is more than 50% of it. I think we’re quite pleased by the performance. And obviously banking is complex and it has all kinds of issues. In a pandemic where you’ve got credit impairments it’s particularly tricky. So we’ve been very careful in the year. This is the first year of the bank trading. We’re very careful about kind of the deposit bid strategy, avoiding granting credit inappropriately. So we kind of focused on the positive growth, and we actually did a lot better than we thought. The amount of deposits gathered was about R3.7 billion to today, which is substantially higher than we had planned for. So the bank rollout I think has been very, very good. We’ve are pretty excited about where it is.

NOMPU SIZIBA: I see that in your Ping An insurance business in China you recorded an amazing performance there, recording revenues up 56% in the period. Not a bad showing.

ADRIAN GORE: Yes. The Chinese health insurance market is massive and growing at a rapid rate. This is a business that three or four years ago was tiny. It’s now a R30 billion premium business. So the scale of it is quite remarkable. It’s not a simple environment. You’ve got a lot of different competitive dynamics. You’ve got a lot of different regulation issues. But I think Ping An, which is the bluest of the blue-chip in China, has got quite a remarkable – how can I say – capability. The business is going really, really well. And we are doing a lot of innovation on Vitality around the …… development. So I think it’s a fantastic period. I think the growth should continue, but not without complexity.

NOMPU SIZIBA: And I do see you touched on Vitality – that that business is doing quite well in the United States. You grew membership by 35% in the period, and profits up nearly 20%.

ADRIAN GORE: Yes. Vitality in the US and in other markets, what’s happened is quite interesting. This idea of creating behavioural change, making people healthier and pricing that into financial services – our so-call shared-value model – is really becoming a category as we tried to make the point this morning. In a Covid world, where suddenly we shift purpose with the issue of understanding risk in different …… the importance of wellness and resilience is so critical in the insurance space. So there’s a transformation taking place in post-Covid, and I think the power of Vitality’s shared value is right at the epicentre of it.

NOMPU SIZIBA: Now, of course, in the South African context, we are worried about the economic situation and the lack of business and consumer confidence. What is it that you’d like to see as a businessman, as an entrepreneur, in terms of policies that can put South Africa on the right trajectory for growth?

ADRIAN GORE: Well, I hope I don’t sound naïve here. There are a number of policies certain to a number of things, the usual list of Eskom and so on, and it’s critical that those things are done. But I think to your earlier point, I would just like to see competence. I’m a great believer that attitude drives fundamentals, not the other way around. I think that if the average South African felt a sense of confidence. I think if we kind of jumpstart our economy by focusing on SMEs and getting them back to where they need to be, supporting and buying from them, that’s where jobs are lost, that’s where we are hurting. That’s what I’m about to see.

So I’m actually a great believer that we need leadership, not just in government – it’s untrue – I mean leaders, to be inspiring confidence, to be investing, big business to be paying SMEs on time, and so on, to actually get a sense that the future is bright. Also, things like, I hope this doesn’t sound inappropriate, expressing a reduction in one quarter’s GDP is a 50% reduction in the economy. It’s incorrect. The economy hasn’t shrunk 50%. It scares people. So we have to have a narrative that gives people a sense of confidence. I think South Africans with the right leadership have the amazing ability to kind of tackle challenges, they really do. It’s about leadership.

Read: GDP data: Stats SA has ‘magnified the irregular’

NOMPU SIZIBA: I’ve asked you what your wish list is just now but, in terms of what you see as being realistic, what’s the outlook for the balance of the year and going into 2021?

ADRIAN GORE: I think what you’re just going to see mathematically is Quarter 3 will grow on Quarter 2. And I’m hoping that the same kind of cognitive error happens if we think we’ve grown substantially. I’m trying to say to you, that happens and to an extent I’m hoping that we see some clawing back in the economy and people getting a sense of growth. And that creates confidence. I think it’s going to be hard. There’s a lot to do, but I think we need some intervention. We need interventions on that R200 billion loan scheme, we need to …… at least. If you can do that, I think we can make a difference.

NOMPU SIZIBA: That was Adrian Gore, the CEO at Discovery.

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