Discovery delivers robust performance as it continues to build scale globally

18 September 2017 Adrian Gore, Discovery
Adrian Gore, CEO of Discovery.

Adrian Gore, CEO of Discovery.

Discovery results for year ended 30 June 2017: Highlights.

• Normalised profit from operations up 10% to R7 048 million
• Core new business annualised premium income increased by 16% to R16 993 million
• Gross inflows under management up by 10% to R115 061 million
• The Vitality Shared-Value Insurance model continues to grow in scale and impact, now operating in 16 countries, serving close to 10 million clients, with over 150 000 new members added each month

Discovery Chief Executive, Adrian Gore, today presented the Group’s annual financial results for the period ended 30 June 2017. Discovery’s performance over the year was described as robust with core new business annualised premium income growing by 22% to R17 871 million and normalised profit from operations growing by 12% to R7 190 million in constant currency terms.

Gore said, “Discovery made significant progress during the year under review towards meeting our stated targets, drawn together in our 2018 Ambition. The Group achieved an acceleration in new business growth, combined with strong operating profit gains, notwithstanding our substantial undertaking of significant new initiatives, including the global expansion of the Vitality Shared-Value Insurance model.”

Gore explained that the Group’s 2018 Ambition has three overarching criteria against which performance is measured:

• In terms of financial and social impact, the target is R10 billion in normalised profit from operations, with growth of CPI +10%, return on capital of risk-free +10%, and making 10 million people around the world healthier;
• Complemented by the foundation of a powerful and aspirational brand, as an employer of choice for critical skills, driven by sophisticated data and science capabilities;
• Powered by a portfolio of businesses that are insurgent and leading in all areas in their respective markets, underpinned by superior actuarial dynamics, delivering exceptional service to meet complex consumer needs.

Against these targets, during the period, Discovery’s earnings grew by 12% and established businesses achieved the target of CPI +5% (in constant currency terms), while emerging businesses tracked above target showing a decrease in operating losses of 61%, although not yet significantly contributing to earnings. Further, 8% of earnings were invested in new initiatives, including Discovery’s intent to enter banking, the planned UK investment business (subject to regulatory approval), a commercial offering in Discovery Insure, and Discovery Invest’s Umbrella Fund offering. The return of risk free +10% continues to serve as a guide for the organisation’s strategic decision-making and capital allocation. On an aggregate basis, the Group exceeded this target, both cumulatively to date, and for the expected return on current new business and approved initiatives.

Gore added: “The Vitality Shared-Value Insurance model continues to grow in scale and impact, now operating in 16 countries through seven insurers, serving close to 10 million clients, with over 150 000 new members added each month. The last year has seen excellent engagement levels, with most markets experiencing Vitality take-up in excess of 40%. Engaged Vitality members continue to exhibit better health outcomes, driving and savings behaviour, exhibited for instance through Vitality Active Rewards which has dramatically increased physical activity levels globally.”

In his presentation of the Group’s results, Gore also highlighted key developments and metrics for each market and business. “Both Discovery Health, the administrator of medical schemes, and Discovery Health Medical Scheme (DHMS) delivered excellent results. Discovery Health’s normalised operating profit increased by 11% to R2 505 million; new business annualised premium income increased by 18% to R6 109 million (excluding take-on of new closed schemes); and total number of lives under management reached 3.39 million.”

In addition, DHMS recently announced a highly competitive contribution increase of 7.9%, and ended the 2016 calendar year with a total surplus in excess of R1.3 billion, taking capital reserves to 26.3% of gross contributions, well above the statutory level of 25%. This excellent performance has continued into 2017, and DHMS is now in the strongest financial position in its history, with membership of 2.76 million lives at year-end. Discovery Health was also awarded contracts to administer the SAB, Glencore and Netcare Medical Aid Schemes, bringing its closed scheme client base to 18 with over 635 000 lives under management.

Discovery Health’s continued investment in its digital capabilities are reflected in the launch of DrConnect, a health information and virtual consultation app, as well as enhancements to the functionality and coverage of Discovery HealthID – the country's leading electronic health record system.

Another of Discovery’s key businesses, Discovery Life, performed strongly over the period. New business annualised premium income increased by 17% to R2 175 million, and earnings increased by 10% to R3 588 million, despite the impact of higher-than-expected claims. Market share increased to 29.7% in the retail affluent protection segment, while the value of new business grew by 17%.

From a new business annualised premium income perspective, Group Risk increased by 96%, facilitated by the provision of risk cover to a large employer group; and Individual Life new business increased by 12% to R1 970 million. While claims were above expectation over the period, the long-term historic claims experience remained below embedded value expectation. Lapses were at 83% of expectation on a policy count basis, emphasising the value of integration; and PayBack of R986 million was paid to policyholders – demonstrating the impact of the Vitality Shared-Value Insurance model.

Discovery Invest saw a solid performance during the period. Operating profit grew 12% to R744 million and assets under administration grew by 14% to R69.5 billion, with 76% of linked funds in Discovery funds. New business growth was 3%, in a challenging market. Discovery Balanced Fund was in the top six retail net flow takers in each quarter over the past two years and significant inroads were made in the retirement annuity, preservation, and income space. Discovery Invest has recently launched a hedge fund, share portfolio porting capabilities, as well as a more accessible offering for young professionals.

One of Discovery’s leading innovations over the past few years, Discovery Insure, posted a performance that exceeded expectation. The Insure business achieved a cumulative profit in the second half of the financial year and reduced its combined ratio by 8.4%. Gross written premium increased by 32% to R2.1 billion, driven by new business annualised premium income growth of 19%, to R895 million. This has brought the inforce annualised premium to just under R3 billion, reflecting the rapid scaling of the business, and support for mainstream adoption of telematics insurance.

The Discovery Card business exceeded expectation over the period, with the FNB Card joint venture profits growing by 16% to R355 million. Net interest income increased by 9.7%, and non-interest revenue grew by 10%. Discovery’s credit card base is less sensitive to current negative market conditions due to a substantially better risk profile.

An update on Discovery’s intent to enter banking in South Africa was provided. On 25 October 2016, Discovery received authorisation from the Registrar of Banks to establish a banking presence in South Africa, granted in terms of Section 13(1) of the Banks Act, Act No. 94 of 1990 (“the Banks Act”), subject to certain conditions.

Discovery has 12 months to fulfil the conditions set by the Registrar and to make application for final approval in terms of Section 16 of the Banks Act. The granting of a banking licence pursuant to Section 17 of the Banks Act, and the timing of such grant is subject to the approval and discretion of the Registrar of Banks. Significant progress has been made in developing the system infrastructure, operating processes, regulatory engagement and the customer value proposition, with a number of key milestones having already been reached. Discovery anticipates launching its banking offering during 2018.

Turning to the UK, Discovery’s second primary market, the business delivered a strong performance despite the challenging economic landscape. For the combined businesses, new business increased by 1% to £118 million, insured lives approached one million, and operating profit grew by 10% to £44.4 million.

VitalityHealth’s new business, loss ratio, Vitality engagement, and operating profit all recorded best-ever performance levels during the financial year. Operating profit grew by 89% to £16.4 million; and new business grew by 4% to £56.2 million with continued strong growth in the more profitable individual market (+9%) and direct channels (+13%).

From a member perspective, the value of Vitality rewards and discounts increased to £62.7 million from £48.6 million, with 46% of engaged individual members saving more than half their premium.

For VitalityLife, the UK’s decision to leave the European Union created volatility at the beginning of the financial year, with this environment of uncertainty, and low long-term interest rates, leading to a decrease of 1% in new business to £61.8 million and a decrease of 11% in normalised operating profit to £28.1 million. The prior period margin releases, driven by the fall in interest rates, led to a reduction of c.25% in the current period earnings. Consequently, over the second half of the financial year, VitalityLife re-configured its products and strategy to right-size the business for this new operating environment. The new structure is robust in the current environment, with upside should interest rates rise, which is anticipated.

Claims ratios remained significantly below expectation. The steady and continued adoption of the Vitality Shared-Value Insurance model (Vitality-linked products comprise c.63% of new business), has been a key driver of the increasing value of new business margin, which improved to 36%.

Vitality Group, Discovery’s arm that drives the expansion of the Vitality Shared-Value Insurance model globally, launched the model in six new markets, bringing the total number of countries with a Vitality Shared-Value Insurance offering to 16, including the primary markets in South Africa and the United Kingdom. Vitality membership grew 20% to 1.25 million with Vitality-integrated insurance in-force premiums increasing by 226% to R2.7 billion year-on-year. Vitality Group’s operating result improved by 39% (excluding Ping An Health), with the expectation that the business will reach profitability within the next financial year.

Vitality Group’s strategy remained focused on expanding the Vitality Shared-Value Insurance model. To this end, Vitality Group partnered with Hannover Re to market Vitality Active, a mobile-only version of Vitality Shared-Value Insurance focused primarily on Vitality Active Rewards. Vitality Active is both faster and more economical to launch, making it attractive to smaller life and health insurance markets.

In addition, Vitality Shared-Value Insurance expanded to Canada, Germany, Austria and France, with standalone Vitality Active Rewards going live in Hong Kong, Malaysia, the Philippines, Singapore, Sri Lanka and Vietnam.

Vitality Group has also invested in the development of Vitality One – a cost-effective and configurable technology chassis for rolling out Vitality Shared-Value Insurance to new and existing health and life insurance markets, allowing for more rapid deployment of innovation globally.

In the US and Canada, John Hancock Vitality-linked policies grew significantly on both a policy count and premium basis, due to more US States approving the Vitality-integrated insurance product. Strengthening the term and unit-linked offerings, increased broker adoption from immersive Vitality training programmes, and resonance of the Apple Watch benefit also contributed.

Manulife anticipates accelerated growth and penetration in Canada with a broader set of insurance products linked with Vitality, and the launch of Active Rewards with Apple Watch later this year.

During the period, AIA Vitality, the most mature Vitality Group partner market, launched stand-alone Active Rewards campaigns to market Vitality and create up-sell opportunities in Hong Kong, Malaysia, the Philippines, Singapore, Sri Lanka, and Vietnam.

myOwn, a new Australian health insurer and joint venture between Discovery, AIA Australia, and GMHBA Ltd, launched in July 2017. myOwn offers health insurance integrated with AIA Vitality through various channels, and will soon also integrate with AIA Life to create a compelling product offering combining both health and life insurance with Vitality.

Generali Vitality’s launch in Germany received excellent media and market responses and has resulted in high sales volumes, large policy premium sizes and good client engagement. The product is distributed via numerous channels including the tied agency channels. Deutsche Vermögensberatung, Germany’s largest independent financial adviser network, will launch Vitality in January 2018.

Generali France’s corporate Vitality Shared-Value Insurance offering has seen a significant number of corporates activating Vitality; with exciting prospects for the Generali Austria Vitality offering, which commences sales from 1 October 2017.

In China, Ping An Health performed excellently over the period, with membership growing by 428% to 3.7 million. Its annualised new business net premium increased 103% to RMB 1.6 billion year-on-year, driven largely by the success of the Internet product, with operating profit in rand terms increasing by 66%.

As part of Ping An Health’s strategy to reach more cities in China, a new branch has opened in the Chengdu region which has a population of more than 14 million. Further provincial level branches and several smaller branches are planned to open in 2018.

Gore commented, “Growth projections for Ping An Health’s revenue remain high, largely as a result of Ping An Group’s broad distribution footprint. After receiving an "A-" credit rating from AM Best Credit Rating Company, Ping An Health qualified for a reinsurance licence from the Chinese Insurance Regulatory Commission in August 2017. This is a significant step in Ping An Health’s development plan and its continuing growth.Vitality continues to gain traction throughout Ping An. Vitality Active Rewards with Ping An Life has reached 2.4 million members in only 12 months, with high member engagement levels. In addition, Ping An Health's Vitality programme has been upgraded and is live on three products."

“Our sophisticated capital management structure supports the organic growth methodology. This ensures Discovery’s financial strength, sufficient financial flexibility through cash generation, and production of above-target returns. We foresee continued strong performance from existing businesses going forward and we are well positioned for continued growth in the future,” Gore said about prospects for further growth.

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