Discovery delivers excellent financial results and accelerated global growth

Adrian Gore, Group Chief Executive of Discovery Limited.

• Normalised headline earnings up 20% to R1 981 million • Normalised profit from operations up 19% to R2 824 million • Growth in embedded value increased 14% to R45.5 billion • New business growth of 17% to R6 663 million

Discovery Limited today presented a strong set of interim results for the six months ended 31 December 2014. The Group’s normalised profit from operations increased 19% to R2 824 million with combined new business growth up 17% on the back of continued robust investment in the business model.

“Over the period, Discovery’s shared-value insurance model delivered continued growth in the established and emerging businesses, with over 100% growth in annualised new business.” says Adrian Gore, Group Chief Executive of Discovery Limited.

Presenting the results to the analysts and investor community in Johannesburg, Gore explained that the model uses behavioural incentives to engage members to make better health and lifestyle choices, with Discovery integrating this engagement into clients’ insurance. “This shared-value insurance model leads to lower price points, the attraction of healthier lives, positive behaviour change, and lower lapse rates.” says Gore. “This creates value for members, the insurer, and broader society.”

The success of this model has made the Discovery brand and shared-value insurance model highly attractive and applicable globally, with expansion opportunities intensifying in international markets where the Group is well positioned topursue further opportunities.

The Group announced a rights issue that will enable it to raise the additional capital required to facilitate its growing business in the UK as well as additional opportunities in South Africa.

“In order to ensure that Discovery is appropriately capitalised to pursue future growth objectives, R4 billion to R5 billion of capital will be raised by way of an underwritten, renounceable rights issue,” says Gore. The terms of the rights issue will be finalised by 10 March 2015. The capital raising will not exceed R5 billion.

South African Primary market

In the South African primary market, both established and new businesses delivered excellent results. Discovery Health, through a sophisticated healthcare system, exceeded expectations during the period, with an increase in normalised operating profit of 11% to R954 million. A newly-formed direct-to-consumer channel contributed 40% of individual new business, which increased off a significant base by 7% to R2 806 million.

Similarly, the Discovery Health Medical Scheme (DHMS), South Africa’s largest open medical scheme which is administered by Discovery Health, performed exceptionally well. The Scheme accelerated its market-leading position to 53% of the open schemes market, maintained low lapse rates at 4.6%, while reaching a solvency ratio of 25.8%, and reaching R11.6 billion in reserves for members.

In the protection market, Discovery Life delivered operating profit of R1 464 million, an increase of 17%, boosted by a sophisticated behavioural life insurance model. New business has increased 9% to R1 151 million with over R1 billion cash generated from existing business before investing in further growth.

“The integrated model in Discovery Life is the best manifestation of the Group’s shared-value insurance model, which results in better initial selection, ongoing positive behaviour change, and positive selective lapsation,” says Gore.

Discovery Invest’s operating profit experienced a 29% growth to R191 million, outperforming expectations. Driven by increased take-up of integrated products, market momentum and adviser support, assets under management increased to R45.6 billion, up 27% from the comparative period.

In the six-month period, DiscoveryCard, Discovery’s VISA credit card offering, enjoyed strong growth with cardholders now exceeding 250 000, pushing spendrate by 12.6% year-on-year while maintaining a low bad debt experience.

Discovery Insure continued its robust growth with new business growth up 57% to R403 million. During the period, Discovery Insure focused on raising brand awareness, harnessing advanced mobile tracking technology and transforming the member claims experience.

UK Primary market

In the UK primary market, performance was exceptional with normalised operating profit accelerating by 20% to R432 million and new business increasing 7% to R915 million. “The UK is a fundamental beachhead for Discovery’s strategy of internationalising our combined health and life insurance model,” says Gore. “This is especially relevant, given the UK’s lifestyle disease burden, an ageing population, a sizeable protection market, and commoditised offerings.”

Significant corporate activity also characterised the business in the six months under review, with a £155 million acquisition of Prudential’s remaining 25%shareholding in the UK JV, and subsequent restructuring of the UK business.

The UK businesses were rebranded VitalityLife and VitalityHealth. Building on an extensive network in the UK and integrating with the Discovery business model, the new brands performed well in the period under review. Normalised operating profit for VitalityLife was up 18% to R269 million and new business increased by 20% to R502 million. VitalityHealth, with a user-focused technology suite and innovative offerings, has seen normalised operating profit increase 24% to R163 million.

Partner markets

In the partner markets of China, US, Singapore, Australia and Europe, Discovery has joint ventures with leading insurers, which enables the Group to pursue global growth through the internationalisation of the business model. The strategy is to partner with leading global insurers in markets that are characterised by large life insurance industries, a high prevalence of non-communicable diseases, a strong intermediary presence, and product commoditisation. In addition, Discovery will soon announce a partnership with a large US life insurer. The Group is now in a position to serve eight out of the 10 largest protection markets globally.

Over the period, Ping An Health in China built on its leading position in the high-end market. This saw explosive growth in individual sales with a current rate of over 800 cases sold per day on the back of Ping An Life’s extensive distribution capability.

“The opportunity within the Chinese private health insurance sector remains robust,” says Gore, “This is driven by a significant proportion of out-of-pocket medical spend, a rapidly expanding middle class, the increased use of technology toprovide access to private healthcare, and government’s policy that strongly supports the development of commercial health insurance.”

In Singapore and Australia where AIA Vitality is growing its footprint, initial market roll-outs are underway with excellent market interest in the integrated products offered, which have won top industry awards. As a result, 52% and 33% of all sales of current products with integrated options in Singapore and Australia, respectively, are Vitality integrated products.

In the lucrative US market – characterised by big healthcare spend and the world’s largest wellness and protection market – The Vitality Group has bolstered its numbers to 700 000 members across 50 states. This reflects the attractiveness of the business model.

Gore says that during the period, the model’s capability was endorsed in this highly competitive market with excellent health participation rates and member engagement.