Discovery | Opportunity knocks
The valuation of Discovery's (DSY) life insurance business is a point of contestation for investors. Persistent policy alterations and lapse assumption changes have reduced DSY Life's embedded value by R5.3bn (12.3% of the average EV balance) since FY'08. A rise in mortality claims in H1'19 reduced DSY Life's profits by 13% y/y. Despite DSY reporting the largest absolute discounted future profits at R58bn (SLM: R41bn), representing 28% of the SA listed market at 31 Dec ‘18 (SLM: 20%), the cash generation is limited. DSY Life and Invest earned R1.48bn (FY'18: R3.6bn) in IFRS net profit in H1'19, generating c.R101m (FY'18: R539m) in shareholder free cashflow. DSY Life's profits reflect a mature business yet the intangible insurance asset has risen at 20% CAGR since FY'12, raising concerns over the quality of earnings and stability of the balance sheet. The revised draft NHI Bill has reaffirmed governments commitment to universal healthcare in South Africa, creating further uncertainty for Discovery's private medical scheme administration business.In this note we explore the risks to Discovery's valuation, business model and earnings from NHI, debt, financial reinsurance and embedded value assumptions.
Discovery is an integrated financial services organisation, focusing on health insurance, life assurance, investments and savings products, wellness and short-term insurance. Co. operates primarily through six subsidiaries which operate in South Africa: Discovery Health, Discovery Life, Discovery Collective Investments and Discovery Investment Services, Discovery Vitality and Discovery Insure. In the U.K., Co., via a subsidiary, Discovery Offshore Holdings Limited, has a joint venture with Prudential plc., the PruProtection group of companies, which provide health and life insurance products. In the U.S., The Vitality Group Inc. provides Vitality as a stand-alone product.
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