Discovery Group reports half year results: Strong operating performance during COVID-19, well-positioned for future growth

25 February 2021 Discovery Group

Discovery Limited announces results for the six months ended 31 December 2020

Discovery’s half-year results for the period ended 31 December 2020 reflect a strong operating performance across all areas of the Group, as the company continues to pursue its 2023 Ambition.

Discovery Group Chief Executive, Adrian Gore explains, “We’ve set an ambitious goal of leading financial services globally, positively influencing 100 million lives – with 10 million directly insured – and being a powerful force for social good.”

The Group has four market-specific strategies which are key to achieving this goal, all of which are grounded by the company’s core purpose, values, people and brand. In South Africa, the vision is for market-leading businesses to be driven by a disruptive composite model and be a laboratory for shared-value financial services, with Discovery Bank pivoting to growth. In the United Kingdom, the focus is on building a differentiated offering through a composite Vitality Shared-value model. The aim for Ping An Health is to be the leading health insurer in China with over 50 million clients, and for the Vitality Group to be the world’s largest and most sophisticated global behaviour-change platform linked to financial services.

Reflecting on its performance over the period, the Group highlighted a number of key aspects:

• Operating strength demonstrated with normalised operating profit increasing by 19% to R4 507 million
• Total new business rose 8% to R10 920 million and growth potential for the Group remains high, with its emerging and new businesses contributing strongly to the performance
• Headline and normalised earnings were negatively impacted by exchange rate volatility, causing normalised headline earnings to decrease 1% to R2 284 million
• Investment in new initiatives was at 22% of earnings, compared with 26% in the previous period
• Headline earnings per share (basic) decreased by 10% to 280.3 cents and normalised headline earnings per share (NHEPS) (basic) decreased by 1% to 347.9 cents
• COVID-19 provisions and reserves have proven to be appropriate and resilient and have been sustained at R3.4 billion

Gore framed the Group’s strong operating performance against the backdrop of an uncertain COVID-19 environment. “We are pleased with the strong performance from all areas of the business – established, emerging and new – during a very complicated and uncertain time. The performance of our core businesses has been incredibly robust and our global partnerships through Vitality Group and Ping An Health have delivered exceptional results. For instance, despite the COVID-19 impacts in the United States, John Hancock’s sales from Vitality integrated products outperformed 2019 by 12%, and the election rate for Vitality integrated products over non-Vitality integrated products increased to 50%.”

Gore said that Discovery is well positioned to realise future potential. “Our strategy has been to invest in growing businesses organically in those markets and areas where our Shared-value model has the biggest potential to achieve long-term growth.”

“We’ve learnt through the pandemic that Vitality has a meaningful preventative effect beyond the management of non-communicable diseases, like heart disease and diabetes, but in addressing risks related to infectious diseases too. This provides extraordinary evidence of the efficacy of the Vitality Shared-value model, which is proving itself more globally relevant. Vitality provides the unique ability to identify the most relevant demographic, health and lifestyle factors in predicting risks, to the benefit of our members. We are also seeing our global partners experiencing resilience through the Shared-value insurance model,” he said.

In anticipation of the future effects of COVID-19 claims and lapses, provisions of R3.4 billion were established at the end of the prior reporting period. While both the UK and South Africa experienced steep second waves towards the end of 2020, the reserves fared well and were conservatively sustained at R3.4 billion.

Although the challenging sales environment curtailed some of the core new business levels in the Group’s more established businesses, new business margins recovered strongly in the second half of 2020, due to diligent cost management and improvements in the product mix.

In turning to the impact of market volatility on headline and normalised earnings, Gore explained the effect in two key areas: 1) the value of assets under insurance contracts in South Africa; and 2) foreign held assets and currency hedges used to ensure predictability and prudence in the capital planning for the Group’s international expansion strategy. Gore explained, “Higher interest rates in South Africa simply reduce the present value of profits that will emerge from insurance contracts. The continued increase in rates from the previous reporting period, notably in the case of real rates, reduced the value of assets under insurance contracts by R493 million (before taxation), net of discretionary margins over this period. This has no material impact on cash flows, solvency or capital, and has been excluded from the normalised measures.”

The rand’s strength towards the end of 2020 impacted Discovery’s assets used to manage its international expansion. “Discovery manages its international expansion by ensuring future offshore capital commitments are derisked by either holding matched foreign currency assets or through appropriate currency hedges to ensure predictability and prudence in capital planning. This can result in intra-period volatility should the rand fluctuate against other currencies.” Gore said. A fair value loss of R207 million (before taxation) was incurred on a currency hedge and there were currency losses of R362 million (before taxation) on the translation of foreign currency assets.

Looking ahead, Gore said that the COVID-19 pandemic had continued to accelerate the three societal trends that contribute to the relevance of the Group’s Shared-value business model: the importance of health and wellness and the behavioural nature of risk; a rush to the online world; and the demand for purpose-based business models.

“The growth achieved during the last six months reflects the agility of the business and the enormous potential we have to drive growth, with the Group’s established businesses delivering 11% profit growth, emerging businesses 81%, and our investment in new initiatives having peaked, of which more than 60% goes into Discovery Bank. The post COVID-19 world will require businesses to evolve to remain sustainable and we will continue to invest in our core assets and our increasingly relevant behavioural expertise, to capture the growth potential of global opportunities as they arise.”

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