Spike in death claims hurts Discovery

Discovery’s share price fell as much as 5.8% to R136.63 on Friday morning after warning shareholders that an increase in high-value life insurance claims contributed to its interim headline earnings per share (HEPS) decreasing by about 18%.

These claims were for people who had been insured for large amounts.

The insurance group said it expected to report on February 21 that its HEPS 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 experienced a spike in high-value mortality claims, which will reduce its operating profit by 18% and is expected to negatively impact group earnings by approximately 8%,” the trading statement said.

“While the cost of claims was within premium loadings, they exceeded expectation. The skewness is demonstrated by the largest 4.5% of death claims amounting to 38% of the total claims cost.”

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.

laingr@businesslive.co.za