Results

Discovery Limited

09/16/2020 | Press release | Distributed by Public on 09/16/2020 01:18

Discovery reports resilient full year performance

16 September 2020 - The Group highlighted results for the period ended 30 June 2020 as being resilient, framed by the following key aspects:

  • Heightened relevance of the Vitality Shared-value Insurance business model and continued investment in Discovery's strategic foundation
  • A reserve of R3.4 billion created for all future COVID-19 impacts
  • Interest rate movements, which had a R4.8 billion effect on headline earnings
  • Substantial, planned investment of R2.2 billion into new businesses
  • Capital and cash management metrics that remained above target for all businesses and remain resilient into future periods under both the most stressed COVID-19 scenarios

In his presentation to the analyst community, Group Chief Executive Adrian Gore, stated that the full-year period to 30 June 2020 was uniquely complex, with the COVID-19 pandemic creating considerable economic uncertainty and market volatility, against an already challenging economic backdrop. Despite the effects of COVID-19 and volatile interest rates, the Group's operating performance was resilient, with core new business up 5% to R19 173 million, and normalised operating profit up 9% to R8 409 million, before the provision for COVID-19-related impacts, and decreasing to R6 069 million after the provision. Gore explained that the Group took a focused approach, which included protecting its people, protecting and supporting its clients, and supporting country efforts in South Africa - all underpinned by a disciplined strategy to maintain the Group's financial strength.

'During the period, it has become even more evident that our Shared-value Insurance model, applied across insurance, investment and banking, is central to delivering on our strategy and continued operational resilience, despite the challenging macro environment. Our model is positioning us well to respond to COVID-19 and the global trends currently being accelerated by the pandemic. Firstly, the behavioural nature of risk, given the emerging importance of healthy living in determining not only non-communicable disease risk but also communicable disease risk. Secondly, technology as a key enabler in the rush to a digital world. Thirdly, the heightened demand for purpose-based business models, given the need to find profitable solutions to society's challenges. These are all factors that enabled innovation and our proactive approach in the current context', said Gore.

Reflecting on the group's intense focus on meeting client needs over the period, Gore said, 'We have utilised the embedded shared-value structures of our products, combined with sophisticated data tracking and analytics capabilities, to rapidly respond to our clients' needs. We also applied our technological capabilities to enable online doctor consultations and a COVD-19 contact tracing app for all South Africans. More than R750 million was offered to individuals and employers enabling them to receive continued cover through COVID-19; and in addition, a total of R12 billion was generated in the form of shared value for clients in the 2020 financial year, spanning premium discounts, cash back, boosts and value-added benefits in managing care. All of which contributed to our strong client retention.'

Along with tailored new products and services to meet client needs in the current context, the Group made provision for the expected effects of COVID-19. Emphasising the Group's financial strength, Gore explained that the expected effects of COVID-19 have been fully recognised in the 2020 reporting year through the creation of a reserve of R3.4 billion. This has had a R2.3 billion impact on profit net of discretionary margins, however the reserve provides for future COVID-19-related impacts on claims and lapses through to December 2021.

As the Group managed the implications and economic uncertainty caused by the pandemic, there were also significant movements in interest rates during the period. These interest rate movements influence policy values of Discovery Life in South Africa and VitalityLife in the United Kingdom, and had a R4.8 billion (pre-tax) effect on the Group's headline earnings. However, Gore emphasised that these interest rate movements had no bearing on operating performance, including cash flows, solvency or capital in South Africa; and little impact in the United Kingdom since the implementation of a hedge strategy in VitalityLife. The effect of continued interest rate volatility is likely to remain a feature of the reported results of Discovery Life, however the hedge is expected to remove the volatility for VitalityLife going forward. These impacts are excluded in the presentation of Normalised Headline Earnings measures.

The following table summarises the position:

Metrics % change over prior year
Group normalised profit from operations (before allowing for COVID-19 provision) 9%
Group normalised profit from operations (after allowing for COVID-19 provision) -22%
Group normalised headline earnings -26%
Headline earnings (after economic assumption changes due to long-term interest rates) -94%

Given the macro environment, Gore said all businesses delivered pleasing new business growth and a resilient performance. Established businesses saw a 15% increase in operating profit at R9.9 billion (before the COVID-19 provisioning; reducing to -13% after). Emerging businesses experienced remarkable growth, delivering a combined profit of R736 million - 74% higher than the prior period. New initiatives demonstrated compelling progress, and investment in new businesses was at 26% of normalised operating earnings (before the COVID-19 provision), compared with 17% in the previous financial year. Mentioning the Group's biggest investment, Gore said, 'This year represented the first year of Discovery Bank's operation. All migrations onto its platform were completed and the performance was pleasing, with over 489 000 accounts and deposits of R3.7 billion (at 13 September), enabling the business to fully fund its credit book with deposits.'

Discovery's Ambition 2023 is to be a leading financial services organisation globally, positively influencing 100 million lives - with 10 million directly insured - and being a powerful force for social good. 'Our Ambition 2023 remains the strategic focus for the medium term. The businesses in the South African composite have created significant insurgency and are well positioned to continue their growth trajectory. Our actions over the period will ensure greater sustainability of the UK composite and have positioned the business to capitalise in a normalised environment. Vitality Group, through capabilities and partnerships, is well-placed to leverage the growing acceptance of Shared- value Insurance, while Ping An Health aims to invest in longer-term growth, rather than to extract profit in the short to medium term,' concluded Gore.

The per-business performance of the Group was also resilient as outlined below:

Business Operating profit before reserving for future COVID-19 impacts New business Strategic observation
Discovery Health +5% -9% Showed continued operational excellence and provided significant support to members and society
Discovery Life +25% (-8% after COVID-19 provision) -1% Rebounded after a challenging FY19 with positive operational experience variances and cash generation
Discovery Invest -14% +2% Continued strong asset gathering amid a weak market
Discovery Insure +59% +5% Continued scaling while demonstrating high quality of business
Discovery Bank +296% operating loss increase Successfully completed client migrations, fully deposit funded; rapid learnings to improve user experience and value proposition
Vitality Health +104% (+9% after COVID-19 reserve) -8% Operational excellence with a continued focus on quality of business and relevance resulting in excellent retention
Vitality Life -49% (-147% after COVID-19 reserve) -3% Executed on its turnaround plan; set up for future recovery
Vitality Group +91% +23% Resilient revenue and strong operational leverage driving growth; increasing relevance with partners adopting Shared-Value model
Ping An Health +72% +42% Exceptional growth; continuing to invest for long-term opportunity

Read more about the business-specific performance on https://www.discovery.co.za/corporate/investor-relations