Discovery results are good!

Yesterday we had another good set of full year numbers from Discovery Holdings Limited. "The year under review to 30 June 2012 was a pleasing one for Discovery, with solid performance across all businesses. The period saw growth in: new business API up 24% to R9.3 billion; normalised operating profit up 21% to R3.4 billion; normalised headline earnings up 14%; and embedded value growth up 12% to R30.2 billion."


Just to clarify things, this is our thesis on investing in insurers. Usually we stay away and this is why. Insurance companies are normally good profitable businesses but it is what these companies do with the premiums that determine their returns. The usual model will involve investments in all sorts of assets from property to bonds to equities. This means that their earnings often track the market. As equity investors we want exciting stocks with the potential to beat market returns, not to track it. We also back ourselves as asset managers to put our client's money into better performing assets then what the fund managers at these insurers decide on.


Discovery however is different. They are an exciting, innovative businesses who have taken advantage of the state's failure to provide affordable, quality healthcare in South Africa. Our private hospitals are quality but they are very expensive. This requires insurance. What has put Discovery above the rest has been their innovative Vitality programme which rewards clients for being healthy. This is a win-win situation for both the client who gets healthier and Discovery who can monitor the client's activities while paying out less medical claims. The nation also benefits from healthier more productive citizens. I have often emphasised how good things happen to companies who do good, well Discovery falls into that category.


Let's get back to the numbers. This is the highest number in the company's history for new business, R9.3bn coming in which is up from R7.5bn last year. That is strong sustainable growth because the company has been very successful in maintaining existing clients. Both Discovery Health and Discovery Life which are the big money spinners showed strong growth in profits, up 10% and 14% respectively. There are a lot synergies between these two businesses and have been very well integrated with the Vitality programme.


Discovery invest which deals with financial services grew nicely (50%) from a low base. PruHealth and PruProtect, the UK businesses are coming on nicely making R300 million in profits compared to a loss last year due to big capital expenditures. The uptake of Vitality has been well received there. New businesses which cost the company 331 million include Discovery insure, The Vitality Group (introducing the Vitality concept in the US) and Pingan which is the Chinese version of Discovery in South Africa using Vitality as a draw card.


Normalised headline earnings came in at 417c, the stock trades at R56 and a historic PE of 13.4. If you consider that the new business ventures sucked up a whole lot profits on top of this companies amazing growth history I would call this a very compelling price. We continue to like the stock as one of our entries into the lucrative healthcare sector.