Business Maverick: Discovery’s red flags

Of all of the listed companies likely to be impacted by the arrival of NHI, medical scheme administrator Discovery appears to have been hit the hardest.and lays the groundwork for the establishment of a central fund that will purchase medical services for all in South Africa. While much about the Bill is not clear, what seems apparent is that the role of medical schemes will be limited to providingIn addition, the bill makes no provision for private scheme administrators.

As it turns out, some investors are concerned about Discovery’s balance sheet, and its accounting practices, which are said to be more ‘aggressive’ than the likes of Sanlam and others in the insurance sector. In this frazzled investment climate, investors are exceedingly cautious and any warning signs are enough to send them skittering out of the share.

In the first, Discovery changed its assumption relating to the length and cash flow profile of its in-force SA Life policies. It extended the duration of the contracts from 20 to 40 years and significantly increased the cash flow stream from year 20 onwards. Considering the Life business was only launched in 2001, this was definitely not conservative accounting – particularly as Discovery had seen a number of policies lapse closer to the ten-year mark.

“The inflation rate has not been this high in any of the past 120 months,” says Craig. “This is also well above the target ofHowever, this change added R5-billion to the value of these existing contracts, which means that Discovery shows a higher, growing stream of net cash flows relative to the lower flat stream of net cash flows from SA Life policies it would have shown before the assumption changes.

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