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Discovery announces strong half-year performance, with significant progress in growth of its new businesses

23 February 2023 Discovery

Interim results for the six months ended 31 December 2022

Discovery today announced its interim financial results for the period ended 31 December 2022 to the investor and analyst community. The Group delivered a strong operating performance demonstrating the efficacy of the Vitality shared-value model, despite specific macro-economic challenges across each of its three composites, South Africa, United Kingdom and Vitality Global. The model continued to generate value for the business through high levels of customer engagement and superior lapse and mortality experience and drove strong operating profit and new business growth.

Discovery’s new business growth was robust, and the Group made significant progress in its organic growth of new businesses, as the cost of new initiatives reduced significantly, now close to the Group’s guidance of 10% of normalised operating profit. This follows a few years where investment spend was significantly higher than guidance given the build of Discovery Bank.

Adrian Gore, Group Chief Executive commented, “Following a cycle of significant investment, Discovery is now capitalising on growth opportunities while ensuring that operational resilience across all businesses is maintained.”

Key performance highlights for the period include:

• Normalised operating profit increased by 22% to R5 930 million
• Normalised headline earnings increased by 30% to R3 747 million.
• Core new business annualised premium income (API) grew by 15% to R11 061 million, excluding products in rundown.
• The South Africa Composite (Discovery Health, Discovery Life, Discovery Invest, Discovery Insure, Discovery Bank and Discovery Vitality) grew its operating performance by 23% with core new business API increasing by 15%
• Normalised operating profit for the UK Composite (VitalityHealth and VitalityLife) increased by 15% and core new business API of these businesses increased by 34%.
• Vitality Global’s normalised operating profit grew by 33%, despite challenging operating and investment marketing conditions in China for Ping An Health.
• The spend on new initiatives reverted to be close to the long-term guidance of 10% of normalised operating profit.

Despite a complex macro-environment, Discovery continued its growth strategy through the Vitality shared-value insurance model.

The macro-environment remained challenging with several factors increasing the potential risk for businesses in general. Gore commented, “While most of the world has moved on from the COVID-19 pandemic, with some long COVID risk remaining, China experienced increased complexity as their severe lockdown was followed by the lifting of the Zero COVID-19 policy, resulting in a subsequent wave of infections. At the same time the Ukraine war dragged out, with inflationary pressures and economic volatility within some of our markets. In South Africa, the severe energy constraints have resulted in lower economic growth.”

Gore explained that within this broad operating context, Discovery’s focus has been on four key strategies – ensuring the efficacy of the Vitality shared-value insurance model, generating strong growth in quality earnings without recourse to capital, ensuring financial prudence and insulating the business against volatile interest rates, and lastly, creating a platform for strong future growth.

A conservative strategy to manage risk for the business, including a volatile interest rate environment.

Discovery employs a conservative and deliberate strategy to ensure that interest movements have little impact on the Group. In line with this strategy, Vitality Life in the UK implemented an interest rate hedge during the 2020 financial year. The UK life insurance arm continued to perform effectively in the face of significant interest rate movements.

In South Africa, interest rate movements create volatility in Discovery’s headline earnings but have little impact on solvency, liquidity, and cash flows and have no impact on the operations of the Group. Subsequently, Discovery has a stated policy of normalising for the impact of interest rate movements in the presentation of normalised headline earnings.

The effect during this reporting period was geared as interest rate movements in the prior period increased headline earnings but decreased them during the current reporting period. This predominantly explains the difference between the 9% decline in headline earnings per share (basic) to 453.6 cents, compared with the 30% growth in normalised headline earnings per share (basic) to 570.2 cents.

In terms of cash generation, this metric improved across the Group. Gore commented, “Cash generation across the Group continued to improve as expected, particularly following a reduction in Discovery Life’s COVID-19 mortality claims. Cash was used to repay debt, resulting in a commensurate reduction in Discovery’s financial leverage ratio. We previously announced that we anticipate raising a specific quantum of equity capital to fund the R1.5 billion capital contribution injected into Ping An Health in October 2021. Given its strong performance and consequent cash generation, the Group has decided that this contribution will rather be absorbed within the existing capital plan.”

Discovery remains optimistic about growth prospects.

Gore concluded the presentation with an optimistic reflection on Discovery’s future growth prospects, “Our growth strategy is based on the efficacy, repeatability, and scalability of the Vitality Shared-value Insurance model. As this is a new business model, we pursue growth via organic businesses and global partnerships. Discovery’s performance during the past period confirms the validity of our strategy,”

The Group’s capital plan and dividend policy have followed a disciplined approach to facilitate this strategy so that Discovery can deliver significant real growth in quality earnings and strong returns, without recourse to additional capital, thereby creating enduring shareholder value.

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