Discovery delivers strong half-year financial performance; accelerating its growth trajectory

Johannesburg, 24 February 2022 – Discovery today released its interim financial results for the period 31 December 2021, to the analyst and investor community. Adrian Gore, Discovery Group Chief Executive, highlighted the key characteristics of the period as being resilience, accelerated growth and continued success of the shared-value model.

“The period under review has been one of most significant for Discovery. While the past two years have been testing due to the COVID-19 pandemic, our shared-value insurance model has enabled us to navigate challenges and ensure the resilience of our business – to the benefit of all our stakeholders. At the same time, we remain committed to our long-term business strategy of pursuing a growth trajectory, accelerating our pace on a number of initiatives that position us well for the future,” he said.

Resilient operating performance

Discovery’s key financial metrics demonstrate the Group’s commitment to prudent risk, capital and cash management during the pandemic, without losing its focus on a robust growth strategy:

• Normalised operating profit increased 8% to R4 872 million, and normalised headline earnings increased by 26% to R2 876 million
• Core new business annualised premium income (API) was up 6% to R10 475 million as new business trends in SA and UK improved
• Investment in new initiatives impacting normalised operating profit was at 17% of earnings, with Discovery Bank constituting half of the investment
• Normalised headline earnings per share (basic) increased by 26% to 437.7 cents and headline earnings per share (basic) increased by 78% to 499.1 cents
• Normalised headline earnings were positively impacted by mark-to-market foreign currency gains arising from a weakening of the rand during the reporting period, compared with losses due to the rand strengthening in the previous period. This gain was partly offset by substantial support provided to the national mass vaccination campaign in SA, for which Discovery spent R137 million over the reporting period.

The operating environment over the period was complex, including the COVID-19 Delta and Omicron variants, as well as significant market volatility due to movements in exchange rates and interest rates in SA and the UK. In light of this, the Group’s strategic focus areas were the following: 1) navigating the significant impact of the COVID-19 pandemic to maintain robust financial performance; 2) building on the relevance of the business model by driving for growth, with excellent traction in Discovery Bank and the conclusion of the Amplify Health transaction with AIA Group, and 3) ensuring financial resilience through disciplined cash and capital management.

Discovery demonstrated a continued resilience to COVID-19 with provisions considered adequate

The COVID-19 pandemic continues to put pressure on businesses on a macro-level with important insights emerging from data on the long-term impact of COVID-19. Gore comments; “Discovery has navigated the COVID-19 pandemic across all global operations, with mortality risk in South Africa having the largest impact financially. This period was characterised by the Delta variant and towards the latter part of 2021, the highly infectious Omicron variant, which have been shown to be less clinically severe than the Delta variant. During the period, South Africa also ramped up its vaccination capacity and capability, and Discovery played an integral role in supporting the national drive to vaccinate South Africans.”

Gore explained that the Group is now seeing four important healthcare insights emerging from its data, which will require ongoing monitoring and analysis. “We are now seeing that healthcare utilisation is returning to pre-pandemic levels, which was expected as countries emerge from lockdown measures. Early data on the long-term impact of COVID-19 on population health and overall disease burden will still feature prominently in the immediate future and more work is needed to understand this trend.”

Gore further explains, “Our COVID-19 provision, which we announced last year, has proven more than sufficient to buffer the business against the financial impact of the pandemic. Combined with high vaccination levels and previous infection immunity among our client base, our assessment was to not raise additional provisions. The significant reduction in fatality rates during the fourth Omicron wave also gives us some comfort.” While R3.4 billion in COVID-19 claims, gross of reinsurance, were paid by Discovery Life in the reporting period (the highest throughout the pandemic), the earnings impact was limited given strong reinsurance arrangements and previously raised provisions proving adequate. The Group believes the remaining provisions are sufficient to withstand a potential fifth wave. Liquidity and solvency remained strong across the Group and the financial leverage ratio improved to 23.9%[1], well below the internally set guidance threshold of 28%.

An accelerated growth trajectory in South Africa and globally

The Group continued to see the relevance and impact of its business model given the acceleration and deepening of global trends. Gore comments; “the behavioural nature of risk means that we have ongoing opportunities to incentivise consumers, while the acceleration of digital transformation and rise of personalisation as new standards for success enables more innovation for the benefit of clients. The uniqueness and sophistication of the Vitality Shared-value Insurance model has led to a powerful platform of integrated assets and capabilities, well-positioned to respond to this global context.”

The model was relevant in each business, enabling the Group to organically achieve significant scale with strong foundations for growth in each market. In this period, the relevance of the business model was demonstrated in two specific areas: 1) Discovery Bank’s performance exceeded expectation across all metrics and advanced its strategic objective of forming the core of the SA composite. 2) The injection of Discovery’s health and Vitality capabilities into a new health InsurTech Joint Venture with the AIA Group in Asia, called Amplify Health. Gore says; “Amplify Health is an important manifestation of globalising Discovery’s wellness and health capabilities, extending the very successful partnership between Discovery and AIA. This positions the Group for growth across fast-expanding Asian healthcare markets, covering China through Ping An Health Insurance and the remaining Pan-Asian markets through Amplify Health.”

Uniquely disruptive banking capability

Discovery Bank’s service offering which caters for the full spectrum of the retail market, driving high levels of client engagement, utilisation and value, continues to attract high quality clients and is on track for break-even by 2024. The Bank has over 400 000 clients with 793 215 accounts and has attracted over R9.5bn retail deposits. The Bank continues to innovate and has just launched its comprehensive, real-time forex capability on the Discovery Bank app that gives access to immediate foreign currency transactions. The Bank’s travel platform and Discovery Pay accounts are also expected to launch in the coming months, establishing the Bank as the platform for the SA composite.

The period also saw progress made in the market-specific strategies and strategic objectives of the Group:

1. South Africa: To be the perfect composite model, number 1 in every industry, and the Bank pivoting to growth as the composite-maker within SA
2. United Kingdom: To have best-in-breed products across businesses and operating as a fully integrated composite business with a seamless One Vitality client journey and to have a successful entry into motor insurance
3. Vitality Global(incorporating Vitality Group and Ping An Health Insurance): To be the leading wellness and healthcare platform that provides preeminent life and health insurers globally with our Vitality Shared Value and health management capabilities to assist them in making their customers healthier, while ensuring their products are more competitive with better margins.

This resulted in strong operating profit in these respective businesses and significant investment in offshore expansion.

Gore concludes; “The Group feels extremely well positioned for growth in all our markets and we remain focused on delivering this, while at the same time ensuring continued financial discipline to facilitate it.”

ENDS

Notes to the editor

For the six months ended 31 December 2021 (“the reporting period, current period or this period”), normalised operating profit increased by 8% to R4 872 million and normalised headline earnings increased by 26% to R2 876 million. Core new business annualised premium income (API) was up 6% to R10 475 million, as new business trends in SA and the UK improved over the period while persistency has continued to exceed expectations. Investment in new initiatives impacting normalised operating profit was at 17%[2] of earnings for the six months ended 31 December 2020, compared with 18% (in the previous period), with Discovery Bank constituting half of the investment.

Normalised headline earnings per share (basic) increased by 26% to 437.7 cents and headline earnings per share (basic) increased by 78% to 499.1 cents. Normalised headline earnings was positively impacted by mark-to-market foreign currency gains arising from a weakening of the rand during the reporting period compared with losses due to the rand strengthening in the previous period. This gain was partly offset by substantial support provided to the national mass vaccination campaign in SA, for which Discovery spent R137 million over the reporting period.

Headline earnings further improved as a significant reduction in real interest rates in SA resulted in positive economic basis changes recognised in the income statement, compared with negative economic basis changes in the prior period. In addition, the rand depreciation, as explained above, had a further positive impact on reported growth in headline earnings.

Discovery generated a strong return on opening embedded value (RoEV) of 22.7% annualised, or 14% excluding the impact of COVID-19, forex, and economic changes. Strong lapse experience remains a key feature across all operations.

The following table highlights key items:

1. Refer to normalised profit from operations regional disclosure for regional composition of new initiative spend; Core API for other new initiatives includes Umbrella Fund, Discovery Insure commercial and VitalityInvest – new business was impacted by the lumpy nature of Umbrella Fund sales which had strong growth in the prior period.

2. Includes SA Vitality: normalised profit from operations includes R39 million (prior period: R46 million); core new business API includes R34 million (prior period: R24 million)