Discovery posts strong results
The Group invested 8% of earnings in new initiatives, including in Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance
Delivering the interim results from the Group’s new headquarters at 1 Discovery Place, Sandton, CEO Adrian Gore said, “Every area of the business delivered positively over the period. Our Shared-Value Insurance model, our growth methodology and capital management are all working in tandem, and our prospects for future growth are extremely compelling. There is evidence across the Group of exceptional engagement in Vitality and behaviour change, giving me confidence that we are achieving what we set out to do – offer people products and services that make them healthier, while we create a sustainable organisation that adds value to clients and society.”
Overall, the Group’s performance exceeded expectations, enabled by focused execution towards its stated Ambition 2018 ‘to be the best insurer in the world’. Normalised operating profit increased by 19% to R4 059 million and normalised headline earnings increased by 30% to R2 829 million. Annualised premium income, which excludes Discovery Health’s take-on of closed medical schemes and gross revenue of Vitality Group (responsible for the expansion of Vitality Shared-Value Insurance globally), increased by 16% to R9 303 million. The Group also reported growth in embedded value of 13% on an annualised basis to R60.4 billion. Over the period, the Group surpassed its growth methodology targets. Established businesses delivered combined growth in operating profit of 15% – well above the target of CPI + 5%. Emerging businesses are all profitable, with a combined growth rate of 151%, by far exceeding their target of CPI + 30%.
The Group invested 8% of earnings in new initiatives, including in Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance, as it focused on growing internationally and extending the Shared-Value Insurance model locally.
Using technology and data analytics capabilities that enable Shared-Value Insurance, Gore said the model, which creates business, client and societal value through behaviour change, continued to give the Group a competitive advantage as it gets applied across markets. The Global Vitality Network, centralising the global partnership, programme, data and brand assets, continued to invest in the repeatability and scalability of the Shared-Value Insurance model. This Network now has over seven million Vitality members who are actively engaged, and it represents Shared-Value Insurance in 19 countries.
Gore said substantive progress has been made against the Ambition 2018 criteria. Criteria include specific targets in financial performance and management, brand and data capabilities, and objectives for each of the businesses. Gore said that Ambition 2018 has created an impetus for execution, resulting in outstanding financial outcomes and scale, and accelerating development of a pipeline for future growth. For the Group, their financial performance and progress since implementing Ambition 2018 in 2013 is a testament to its powerful framing effect. Since then, sizeable businesses, Discovery Invest, VitalityLife and VitalityHealth, became established businesses. High-potential businesses, Discovery Insure, Ping An Health and Vitality Group, became emerging businesses; while there was ongoing investment in new ventures to ensure a pipeline for future growth.
Observations for the period on capital management, growth and business performance
The Group’s organic growth plan places business in three categories – established, emerging and new – each with specific performance measures.
Gore emphasised that all businesses are cash efficient and the Group is not reliant on one specific business for its cash flow. Results were ahead of the stated growth methodology and capital plan. During the period, Discovery came to market for its inaugural Domestic Medium Term Note issuance to diversify its funding sources and this was oversubscribed. The Financial Leverage Ratio (FLR) for the period remained below the 28% guidance at 26.5%, while the Group maintained an above-guidance cash buffer of R2.5 billion at 31 December 2017.
Continued growth and four new initiatives to launch in 2018
An important element of Discovery’s operating model is its cash management approach. Generating R6.1 billion in cash (before tax), the Group invested R3.8 billion in new business and R1.1 billion in new initiatives after all payments. These meet the criteria of risk-free + 10%, validating the approach to continue to invest significantly without breaching the FLR or cash buffer.
New initiatives, Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance, all remain within budget and on track for launch in 2018.
From an architecture perspective, the Global Vitality Network made progress towards a universal behavioural platform that manifests in a simple, digital user journey based on Active Rewards. This is being powered by a configurable global technology platform – Vitality One – currently tracking over 500 million activities and 25 million biometric readings.
During the period, the South African Reserve Bank granted a banking licence to Discovery Bank. The banking offering is operational, and expected to launch in quarter three of 2018. Gore said the business was well capitalised and that the five-year capital plan for the launch and implementation of Discovery Bank remained on track and within expectations. “With the people, processes and systems all in place, we are very pleased that the team was able to meet every milestone along the way. The Bank will add to the Group’s ability to change behaviour and disrupt industries. We are managing the pace of execution of this strategy with due care, and are looking forward to bringing this new initiative to market,” he said.
Gore and his team are motivated by the Group’s overall performance and the progress against the Group-set performance measures. They remain aware of potentially volatile trading environments in both South Africa and the United Kingdom. In conclusion, Gore stated, “I am extremely pleased with the results for the half year, considering that it has been a somewhat complex period. Under the guidance of a strong Discovery leadership team, we have made significant strides in execution towards our Ambition 2018 – which has reinforced the Group’s strong performance. It is an important and exciting time for Discovery.”