R3.3bn Covid-19 knock isn’t all bad
DISCOVERY: NORMALISED EARNINGS WOULD BE DOWN
Economic conditions could impact member numbers.
The news that Discovery would book a R3.3 billion provision for the impact of Covid-19, plus the warning that earnings would be down by as much as 90%, sent shares down nearly 6% on Monday. They ended the day down 2.8%, however, broadly in line with the market.
First, as ever with Discovery, the multitude of earnings figures come with a number of adjustments. Normalised headline earnings (excluding the impact of lower rates) would only be down 20-30%.
This includes the R3.3 billion hit.
On a profit from operations basis, the decline will be between 18% and 28% for the year ending June 30. It is worth remembering, however, that operating profit for the six months to end-December was R3.6 billion, down by 7%.
Rewind to last year, and operating profit was R7.7 billion. Using the upper bound of the expected decline, operating profit for this year will be, at worst, R5.5 billion. Remember, this includes the R3.3 billion provision.
It’s also important to note that the provision is for the future impact of Covid-19 – in other words, in 2021 and 2022. It says, “modelling has been done on a prudent actuarial basis, and is continually being refined by incorporating trends in actual infections and mortality”.
About two-thirds (or about R2.2 billion) of the amount set aside is for mortality and morbidity impacts. The other third (about R1.1 billion) is the group’s estimate of “economic stresses, particularly on policy lapses” across its businesses .
‘Central’ scenario
It says it is using a “central” scenario (not a worst-case one) for the provision, which is larger than most analysts were expecting.
That Discovery is one of the first large insurance providers to raise this provision is telling. If the impacts aren’t as dire, the provision will be released in future periods which will boost earnings (of course, if things get worse, the converse will occur).
New business is under strain in the SA and UK operations, with this down by 5% and 8%, respectively, in the 11 months to the end of May. During April and May, the UK life and health businesses (under the Vitality banner) signed new business at between 70% and 80% of the same period a year ago.
In SA, the Life business held up best. New business growth slowed at Discovery Health (the engine of the group), “due to minimal new employees being added by existing customers”.
As the consequences of the pandemic ripple through the economy, it is highly likely that Discovery Health will see a material decline in the number of lives administered by its schemes into 2021.
At minimum, well-placed estimates see 1 million job losses and an economic contraction of approximately 10%. This will not be good for any medical scheme, least of all the largest in the market.
Across the board, it has largely seen fewer policy lapses than expected over the past two months. This was particularly pronounced in the Discovery Insure business. But it’s early days yet.
Separately, excluding the R3.3 billion provision (which is obviously not possible in a global pandemic!), the group’s operating profit will have been up somewhere between 5% and 15%.
The concern for investors is that growth is coming from everywhere but the SA businesses, albeit off much smaller bases. – Tarrant works at YFM
Modelling is being refined by incorporating trends in infections and mortality