​Strong financial performance for Discovery, with significant investment in future growth

Strong financial performance for Discovery, with significant investment in future growth

Performance highlights for the period include:

• New business up by 51% to R17 532 million, boosted by Discovery Health being awarded the business of Bankmed Medical Scheme. Core new business grew by 15%.
• Normalised profit from operations up 17% to R5 789 million
• Normalised headline earnings increased by 16% to R4 027 million
• Embedded value grew by 21% to R52 billion
• Return on average equity measured at 18%.

10 September 2015 – Discovery today announced an outstanding set of financial results for the year ending 30 June 2015. Adrian Gore, Discovery Chief Executive, commented that apart from the strong financial performance, Discovery made important headway in paving the way for future growth, “The past six months was significant for Discovery, not only in terms of an excellent financial performance, but also for the sizeable investment made in new initiatives that in our view, positions the Group well for future growth.”

One of the key developments for Discovery during the past financial year, was a hugely successful capital raising aimed at funding growth opportunities in the UK and other local market opportunities. Gore continued, “Discovery announced a rights issue in February to ensure our business in the UK is well capitalised for further growth and to fund further opportunities in adjacent industries in South Africa. The response was overwhelmingly positive with the rights issue notably oversubscribed.”

Discovery invests further in its unique shared value business model

The year under review has been seminal for Discovery in terms of defining its business model in a disciplined way, and by building and globalising it. A core development in this regard has been Discovery’s collaboration with Apple to launch Vitality Active Rewards with Apple Watch, for use by Vitality and the Vitality Network.

Gore explains, “As context, the global insurance landscape is subject to a number of accelerating trends. First, the nature of risk continues to change, becoming increasingly behavioural and complex in nature. Second, technology is becoming foundational to risk management, with the ubiquity of wearable devices providing the opportunity for insurers to better influence and price risk. Third, health promotion and disease prevention continue to be personalised – moving away from one-size-fits-all interventions to individualised treatment and dynamic advice. For insurers to succeed in this environment, there is a growing pressure to build the appropriate assets – from an insurance, behaviour and technology perspective.”

Discovery’s shared value business model – which incentivises healthier behaviour for the benefit of both members and insurers – is now visibly a global leader in the behavioural-insurance space. In August 2015, Discovery ranked at 17^th position in Fortune’s new index of 51 companies “changing the world” – a curation of organisations which have made a sizable impact on major global problems as part of their competitive strategy. This has validated Discovery’s strategy to invest in the Vitality chassis to make it excellent and as such, globally relevant.

Discovery accelerated this investment with work in the areas of nutrition, preventive screening, and most significantly - physical activity. With the growing evidence of physical inactivity’s impact on sickness and death, and the ability of wearable devices to enable better risk management – the case for technology-enabled physical activity in insurance is well made. On the back of this, the team in the UK pioneered Active Rewards – the next frontier in the science of Vitality – where physical activity is rewarded through a real-time rewards chassis, with Starbucks as a reward partner. The results of the UK prototype have been compelling, in terms of Active Rewards being a paradigm for driving significant member engagement and behaviour change.

This informed the intent for Active Rewards to become a chassis that underpins Vitality in all Discovery’s markets, as a means of creating a scalable, global capability of benefit to all Discovery’s insurance partners and members. During the period, Discovery collaborated with Apple on the development of Vitality Active Rewards with Apple Watch, which is designed to enable Vitality members around the world to be motivated and encouraged to get more active and by achieving their goals, earn their Apple Watch and pay less for their health or life insurance. Vitality Active Rewards with Apple Watch is made possible by the innovative health and fitness features of Apple Watch and Vitality's clinical, actuarial and behavioural economics capability which have delivered demonstrable and sustainable health improvements within its client base over the past 15 years; and the actuarial surplus generated by the insurance products using Vitality at their core.

Aligned to this, Discovery continued to build out its Vitality Network of global insurers. Progress over the year included the launch of AIA Vitality in Hong Kong; the launch of Vitality-integrated insurance through John Hancock Vitality in the United States, and plans to expand into Europe through Generali.

Discovery’s South African business driven by strong new business

In Discovery’s primary market of South Africa, Discovery Health, Discovery Life, Discovery Invest and Discovery Insure, all posted robust performances. Discovery Health exceeded expectation with operating profit increasing 10% to R2 031 million, with significant investment in new initiatives; and new business growing 92% to R9 598 million with the award of the administration and managed care contract for the Bankmed Medical Scheme. Excluding Bankmed, new business increased 8% to R5 398 million. Lives under management achieved the milestone of three million, just after the reporting period. Discovery Health continues to create a highly-competitive healthcare system for the Discovery Health Medical Scheme and its 16 other schemes under management, through investment and innovation in its core assets.

Discovery Life demonstrated excellent operating profit growth of 15% to R2 968 million over the period (+18% gross of FinRe), driven by new business growth of 11% to R2 231 million, competitive products and innovations in the servicing space. Experience variances were positive at R236 million and the business generated R1 073 million in cash over the period. Discovery Life’s strong performance is a testament to the efficacy of the shared value model, with members gaining access to competitive products and exceptional policyholder returns. To date, members have received over R1.3 billion in PayBacks, while the business benefits from a healthier, more integrated base and a lower lapse rate.

Discovery Insure continued to grow rapidly, with new business up 25% to R789 million. Discovery Insure is now ranked in the top three insurers in personal lines new business and is attracting 12%-15% of new business volumes in South Africa. The loss ratio also continues to improve, trending towards the long-term target.

The period saw Discovery Insure’s differentiated model being further enhanced and validated, through an evolving reward proposition and measurable behaviour change. The business now covers over 120 000 cars and 7 million kilometres of data are tracked daily, with proven influence on risk and losses through the appropriate rewards. This reaffirms the power of the shared value model, as members are rewarded for safer driving, with loss ratios and lapse rates improving by duration, having a positive impact on the overall safety of South Africa’s roads.

• Further to this, Discovery announced the intention to expand its business model into banking and to establish an innovative full-service retail bank. The success of the DiscoveryCard has demonstrated the efficacy of the Discovery model which utilises the Vitality capability to leverage behavioural economic insights and incentives to encourage better behavioural choices, when combined with market-leading banking capabilities. This has resulted in a fast-growing, profitable credit card of excellent quality that offers unique value to members, and ongoing value to shareholders. It is this shared value model that Discovery intends to build on.
• From a regulatory perspective, the ambition to establish and build a bank involves a lengthy and complex process in which the outcome is not guaranteed. A two-step approval is required: firstly to obtain authorisation to establish a bank – and thereafter, post complying with all the conditions, to apply for registration as a bank. Banking business may only commence once registration as a bank has been granted. Discovery is about to embark on this process.
• From a strategic perspective, the first step in this direction was buying up Discovery’s economic interest in the DiscoveryCard to 74.99% earlier this year. FirstRand Bank will retain 25.01%. Over the next few years, Discovery will move the Card off FNB’s systems and onto Discovery’s systems and platform. Discovery will then take operational control of the asset, and eventually build additional banking products on its chassis. This is a multi-year process and Discovery will communicate its progress periodically.

A successful rebrand of UK businesses to VitalityHealth and VitalityLife cements a good financial performance for Discovery

In Discovery’s second primary market, the UK, the period was characterised by the successful rebranding of PruHealth and PruProtect to VitalityHealth and VitalityLife. This follows Discovery’s acquisition of the remaining shareholding in the joint venture. Gore commented, “The rebrand of Discovery’s business in the UK was very important for us as it reflects the integral nature of the Vitality asset to our ambition of building the best protection business in the UK.”

Following the rebrand, VitalityLife, Discovery’s protection business in this market, recorded three consecutive record sales quarters with new business up 22% to R1 079 million and normalised operating profit up 27% to R542 million.

In VitalityHealth, the health insurance business, the business saw the continuation of the excellent loss ratio and lapse rate performance of the business. It also experienced strong product resonance and member engagement with the Vitality wellness programme – particularly with the new Active Rewards benefit which was pioneered by VitalityHealth and launched at the start of the 2015 calendar year. VitalityHealth made a normalised operating profit of R223 million, up 10% from the previous period.

Further evolution of Discovery’s international expansion model to a partner market model

The past financial year saw Discovery Partner Markets restructure its traditional joint venture operating model with insurance partners in foreign markets. Discovery has now adopted a “Partner Market” model where it acts as an intellectual property and service provider, enjoying a further share in performance profits. “Discovery Partner Markets continued to show promising performance as several partner businesses head towards profitability. The performance of Discovery Partner Markets is now on par with our other local and UK businesses at a similar juncture in their respective life cycles,” says Gore.

In the United States, The Vitality Group demonstrated improvement in both new membership and engagement, increasing new adult membership by 33% to 774,518 and maintaining an excellent rate of members on the Silver or higher Statuses. “The growth in Vitality membership and engagement in the programme in the US reflects a growing realisation in the market that Vitality is changing the conversation to focus on healthy living,” Gore says. The Vitality Group is working on a re-launch of its corporate offering in September, which will align its incentives with those of its corporate members, and make the product more differentiated in an increasingly-competitive market.

Ping An Health had a successful last 12 months and continues to grow the emerging health insurance industry in China. The Chinese private healthcare insurance environment, while still in its infancy, continues to show significant long-term opportunity. The Chinese Ministries of both Health and Finance continue to put forward proposals that encourage the purchase of medical insurance by employers and individuals.

New business more than tripled over the period to R991 million, predominantly driven by individual insurance sales, with white-labelled products continuing to exhibit aggressive growth. In the group market, Ping An Health achieved a year-on-year total revenue growth of 34%, maintaining its market-leading position with 40% share in this market segment. The quality of individual and group businesses remain excellent, with loss ratio and lapse rates continuing within assumptions.

Gore concluded that the Group is well positioned for further growth.

For Media Related Enquiries Please Contact:

Thulaganyo Khensani Mthombeni

Khensanimth@Discovery.co.za

011 529 0091

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