DISCOVERY says it expects a surge in claims relating to the pandemic, and has put aside about R3.3 billion for potential claims and a probable lapse in contracts in future.     Supplied
DISCOVERY says it expects a surge in claims relating to the pandemic, and has put aside about R3.3 billion for potential claims and a probable lapse in contracts in future. Supplied

Discovery warns of big hit, drops 3% on the JSE

By Sandile Mchunu Time of article published Jun 17, 2020

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JOHANNESBURG - Discovery declined nearly 3percent on the JSE on Monday after the financial services group warned shareholders that its full-year earnings would take a massive hit as it battled the impact of Covid-19 on its operations.

The group said it expected a surge in claims relating to the pandemic, and had put aside about R3.3billion for potential claims and a probable lapse in contracts projected to emerge in future periods.

The group said it expected an avalanche of claims relating to the pandemic, warning that the entire insurance industry should be on standby for liability claims from clients.

“The Covid-19 provision has been calculated to estimate the future mortality, morbidity and economic effects of the pandemic by estimating excess mortality and excess lapses expected to arise in 2021 and 2022 on a variety of scenarios by setting a stressed, central and light scenario,” the group said.

Discovery said Covid-19 had created a uniquely complex operating and economic environment, with pressure on new business, lapse rates, and potential future claims and volatility in interest rates and investment returns for insurers.

DISCOVERY says it expects a surge in claims relating to the pandemic, and has put aside about R3.3 billion for potential claims and a probable lapse in contracts in future. Supplied


It said the potential upswing in claims would see its normalised headline earnings per share declining up to 30 percent, or between 617.52cents and 540.33c a share, from 771.9c last year. The group said earnings would fall between 70percent and 90percent after the impact of long-term interest rates in the UK.

Nesan Nair, a senior portfolio manager at Sasfin Securities, said Discovery’s outlook represented the sentiment across the entire insurance industry.

Nair said the industry was likely to experience lapses as a result of the Covid-19 outbreak.

“Insurance is perceived as a discretionary expense rather than an essential expense and is often one of the first that clients do away with when the cash flow dries up. This affects the premium, and this has a knock on effect on claims ratios and profitability. The industry will also experience higher mortality and morbidity, as people who contract the illness are at risk of dying. This means that mortality experience for insurers will be higher than what they may have provided for in their model,” Nair said.

Discovery said its headline earnings per share would slump between 70 percent and 90 percent, compared with the 789c uptick last year.

The group said basic earnings per share were expected to decline between 70percent and 90percent from last year’s 1001.50c.

It said it was unlikely to declare a dividend during the year.

“Due to the uncertain and potentially volatile economic environment caused by the Covid-19 pandemic, Discovery will not be recommending the payment of ordinary dividends. The reintroduction of dividends will be considered when appropriate,” the group said.

Discovery said normalised profit from operations, before providing for potential future Covid-19 effects, would also decline between 5percent and 15percent compared with last year, and this included the results of Discovery Bank.

Discovery closed 2.83percent lower at R105.43 on the JSE on Monday.

BUSINESS REPORT 

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