Discovery reports full-year results: emphasises strategy for continued investment

Sandton, Johannesburg, 4 September 2019 – Group Chief Executive, Adrian Gore, announces the performance of the Discovery Group for the year ended 30 June 2019.

Salient features

• New business annualised premium income – up 13% to R18 299 million.
• Normalised profit from operations – down 3% to R7 747 million.
• Spend on new initiatives – increased by 114% to R1 311 million over the period (21% of Group earnings, including 3% of associated financing costs).
• Normalised headline earnings – down 7% to R5 035 million.
• Embedded value – up 9% to R71 217 million on an annualised basis.
• Normalised headline earnings per share – down 8% to 771.9 cents (undiluted).

Discovery delivered resilient annual financial results in a period of considerable complexity. Gore explains, “The accelerated investment of 21% of Group earnings over the period, which was in line with budget and provided for in the capital plan, is testament to our deep commitment to build in difficult times. The Group’s planned investments in our strategic initiatives, most notably, Discovery Bank, created an expected reduction in Group earnings but also generated pleasing growth, reflected in the 13% increase in new business annualised premium income and traction of new initiatives in both the Group’s South African and international markets.”

The Group’s embedded value grew by 9% on an annualised basis to R71 217 million and capital and cash metrics remained sturdy, with the Group holding a cash buffer of R4.4 billion. The Group’s disciplined organic growth strategy targets profit growth of CPI +10% through investment in new initiatives – these evolve into emerging businesses and ultimately scale into established businesses. Looking at businesses in their respective growth phases, performance tracked well. Discovery’s established businesses continued to show strong business fundamentals and grew operating profit by 3%. Emerging businesses scaled satisfactorily and performed excellently with an operating profit growth of 94% to R422 million.

Discovery Health, counting among the Group’s established businesses, had excellent results for the period. Operating profit increased by 10% to R3 044 million. New business annualised premium income (excluding Vitality and new closed medical schemes) grew by 1% to R6 640 million in a challenging economic environment. The business also made progress on its objective of becoming the leading provider of integrated healthcare solutions to corporate clients.

Following the recent publication of the National Health Insurance (NHI) Bill, the Group is committed to collaborating constructively with the Department of Health. “We support the NHI bill, however, we strongly believe that there is a critical role for medical schemes and for private healthcare professionals alongside the NHI, as with every other country that has a successful national healthcare system. We do not expect any material long-term impact on the Discovery Health business and are hopeful it may, in fact, provide new opportunities for growth and innovation,” said Gore.

Discovery Life continued to build on its leadership position in the retail protection market. In a complex first half, the business experienced high-value mortality claims, which reduced operating profit by 13% and affected normalised operating profit for the year – down by 9% to R3 230 million. Profits in the second half grew by 15% compared with the first half but remained pressured by the economic environment. On key metrics for the year, the business performed well due to a significant improvement in the mortality claims experience in the second half of the year, and ability to successfully reduce the effects of claims volatility. Gore commented, “During the year, we focused on strengthening and refining the model, as well as the assumptions to better align with observed long-term experience. Discovery Life is well positioned to capitalise on any improvement in economic operating conditions and to deliver against its long-term actuarial assumptions.”

Emerging businesses performed strongly, amongst them Discovery Insure which reported a full-year profit of R155 million, up 128% from the previous period. Illustrating the global relevance of Discovery Insure’s model, SoftBank Vision Fund invested US$500 million in Discovery Insure’s telematics partner, Cambridge Mobile Telematics, this resulted in a pre-tax profit recognised of approximately US$56 million.

Over the period, Discovery Bank continued to develop its compelling reward structures, including dynamic interest rates, discounts and e-money, Discovery Miles. The phased on-boarding has ensured that Discovery Bank can refine key elements of the infrastructure for a seamless client experience and value proposition. Although the testing phase ran four months longer than anticipated, the costs of the build, test and running of the bank are all largely within expectation and the rollout since June 2019 has progressed excellently.

The international businesses performed well, with the exception of VitalityLife which experienced a complex period, hampered by the lower interest rate environment. Vitality UK grew its operating profit by 21% to R1 336 million. In the first half of the year, VitalityLife introduced a world-first and unique product covering Alzheimer’s disease and dementia, which since its launch has had an average take-up of 63% on eligible policies. Vitality Group profits grew to R161 million, up 71% from the previous year. Ping An Health achieved remarkable growth in revenue of 74% to RMB8.6 billion and new business premium grew more than 67% to RMB4.9 billion (R10.1 billion). The business expanded its branch footprint and enhanced the online offering and Ping An Health app, which now has 12 million registered users.

Gore said the Group remains well positioned for growth. “We are well capitalised for our five-year planning horizon and for continued growth through the combination of robust established businesses, scaling emerging businesses and the new initiatives we are building. Supported by further improvement in capital metrics, we expect to return profit growth to our stated goal of CPI +10%, while making ongoing investments in our new businesses through their start-up phase. The current investment rate of 21% will, however, decrease toward the long-term goal of 10% of earnings over the next few years,” Gore concluded.

Summary of business performance

South Africa

• Discovery Health continued to perform excellently over the period. The business made significant progress on building its value-based care model. Normalised operating profit increased by 10% to R3 044 million and lives under management exceeded 3.5 million. Discovery Health Medical Scheme, the largest open medical scheme in SA administered by Discovery Health, had a 27.3% solvency rate at 31 December 2018 and savings of R469 million from fraud prevention.
• Discovery Life had a decline in normalised operating profit of 9% for the full year to R3 230 million. The business showed resilience in the second half, growing profits by 15% compared to the first half. New business annualised premium income grew strongly by 6% to R2 312 million. The business has a 31% market share in the retail affluent sector.
• Discovery Invest grew operating profit by 9% to R966 million. Assets under administration increased by 12% to R91.6 billion. The Vitality Shared-Value Insurance model is producing positive outcomes: term to retirement increased by 3.6 years, savings rates increased 1.4 times and income drawdowns decreased 13% over four years.
• Discovery Insure continued its strong growth and had a full-year profit of R155 million – 128% higher than the previous period. SoftBank Vision Fund invested US$500 million in Cambridge Mobile Telematics. Discovery Business Insurance is gaining traction in the market with a strong pipeline of new business.
• Discovery Bank continued its phased rollout and currently has more than 22 000 active clients and more than 50 000 accounts. Deposits and approved credit limits exceed R190 million and R900 million, respectively. Costs in the building, testing and running of Discovery Bank have largely been in line with expectations.

United Kingdom

• Vitality UK increased new business by 16% to R2 637 million. Operating profit grew by 21% to R1 336 million and the total lives covered now exceed 1.25 million.
• VitalityHealth continued its excellent performance, with growth in operating profit to R758 million. Insured lives increased by 11% to 643 000. The business is cash flow positive and continues to focus on service and retention strategies.
• VitalityLife operates in a difficult economic environment with consistently low interest rates, which can potentially affect performance. During the period, the business grew operating profit by 12% to R578 million and new business annualised premium income by 10% to R1 291 million. Claims experience was within expectations and Vitality engagement continued to increase.
• VitalityInvest, which launched in 2018, continues to focus on financial adviser education and is steadily gaining traction.

Vitality Group

• Vitality Group, responsible for the international expansion of the Vitality Shared-Value Insurance model, delivered excellent results. Profits grew to R161 million, up 71% from the previous year. Fee income grew by 97% to R922 million and insurance partner integrated premiums reached R11.7 billion. Vitality1, the unified, cloud-based insurtech platform, is currently available in six markets. Additional markets will move to Vitality1 in the coming months. This technology unlocks exponential growth potential in the delivery of the Shared-Value offering globally. Membership from insurance partner integrated products reached 1.4 million, an increase of 82% from the previous year.

Ping An Health

• Ping An Health had a remarkable year. Total revenue grew by 74% to RMB8.6 billion and new business premium grew more than 67% to RMB4.9 billion (R10.1 billion) – the majority from the individual internet product. The business is on track to meet its written premium target of RMB10 billion for the 2019 calendar year. The Group’s share of after tax operating profit grew by 72% to US$7.5 million (R106 million). Part of this increase is due to a regulatory change, which recognised an approximate RMB140 million in tax relief for Ping An Health in this accounting period. Ping An Health continued to expand its branch footprint to sell policies in new regions across China. The business invested in online capabilities to support its vision of becoming China’s leading tech-driven health insurer. Significant enhancements were made to the Ping An Health app, which now has 12 million registered users and grows by an average of one million users each month.

View the full commentary and financial results on www.discovery.co.za/corporate/investor-relations