Grave outlook: Death claims spike a blow to Discovery
Increase in high-value mortality claims at Discovery Life will reduce operating profit by 18%
Discovery posted a downbeat trading update on Friday, indicating that its interim earnings will feel the brunt of its continued investment in new businesses and the effect of a spike in life insurance claims.
Discovery’s share price fell as much as 5.8% to R136.63 on Friday morning after informing investors that it expects interim headline earnings per share (HEPS) to decrease by about 18% when it reports results on Thursday.
HEPS Headline earnings per share for the six months to end-December would be about R3.47, down from R4.26 in the matching period.
Discovery said in Friday morning’s trading statement that normalised profit from operations is expected to decrease by about 4% to R3.8bn. Reasons for the fall in profit included finance costs increasing by R128m due to higher borrowing.
A change in accounting rules resulted in fair value losses of R116m on equity and bond market movements. The accounting treatment of the finance lease relating to its head office reduced profit by a further R55m.
Discovery Life’s earnings will fall by 13% versus the same period a year ago.
All other units have registered an increase in earnings. In addition, all units have reported growth in new business premiums.
The trading statement said the spike in high-value mortality claims at Discovery Life would reduce that unit’s operating profit by 18%. This is expected to negatively affect group earnings by about 8%, it said.
The implication is that an abnormal number of well-insured clients died during the second half of 2018, far in excess of what the company’s actuarial models had indicated. “While the cost of claims was within premium loadings, they exceeded expectation.”
Discovery said the largest 4.5% of death claims amounted to 38% of the total claims cost.
The earnings are also being negatively affected by the ongoing investments into new businesses, the most notable of which is Discovery Bank. The bank launched in beta phase in 2018 as part of a trial ahead of its official launch in March this year. This, together with investments into Vitality Invest, Vitality1 and the umbrella funds business, accounted for 21% of earnings in the period.
Richard Hasson, a portfolio manager with Electus Fund Managers, said the trading update – with the exception of the Life result – was more or less in line with expectations and what the company had previously guided. “We were expecting a weak set of earnings numbers as Discovery are spending closer to two times their historic run rate on growth investments into new businesses such as Discovery Bank. The SA life numbers were, however, worse than our expectations due to very weak mortality experience, which is negative.”
Hasson expects the Discovery Life result to be a one-off event. “It seems [the negative effect on earnings] was from a few specific large claims [rather] than a general variance in expectations, but they have amended their re-insurance structures to mitigate these risks going forward,” he said. This would indicate that a higher percentage of the large claims’ risk will be placed with Discovery’s reinsurer.