Business Maverick


Discovery rolls with the punches and starts bouncing back post-Covid

Discovery rolls with the punches and starts bouncing back post-Covid
The Discovery building in Johannesburg, South Africa. (Photo: Flickr / Raphael de Kadt)

‘It was the best of times, it was the worst of times.’ Dickens’ words have never rang more true than when Discovery hit the market on Wednesday morning with both good and bad news regarding its annual results for the year to June 2022.

Group chief executive Adrian Gore noted the positive operating performance from Discovery’s established businesses despite a complex operating environment during the past year, as conditions started to normalise in most markets post-Covid. But the market really didn’t like it: Discovery’s share price got thumped more than 10%.

However, Discovery said operating profit increased by 45% to R9.4-billion and new business initiatives grew strongly, led by Discovery Bank and initiatives within Vitality Group, such as Amplify Health. Profit for the year almost doubled, climbing 70% to R5.4-billion.

Normalised headline earnings (adjusted to remove the effects of seasonality, revenue and expenses that are unusual or once-off) climbed 71% to R5.8-billion, while basic headline earnings per share increased 74% to 792.4 cents.

“We accelerated investment in new businesses, specifically with Discovery Bank over the last four years – the pandemic has lasted two years and the real macro complexity has been over the last two years and is likely to intensify,” Gore said.

As at June this year, the robust and well-oiled machine that is the Vitality shared-value model was able to boast more than 30 million customers in 39 markets, and gross income of R77-billion.

In the face of a high-inflation environment where consumers are facing some form of recession in many markets, management has decided to continue its more prudent policy of not paying a dividend.

Focus areas going forward, and following a cycle of intense organic investment into new initiatives, include driving new initiatives such as Discovery Bank and Vitality Group to scale, streamlining certain initiatives to position them for future growth, and ensuring capital and business discipline with high levels of liquidity and solvency.

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Discovery Bank has certainly made significant inroads since launch, with more than 510,000 clients, retail deposits up 30% to R10.6-billion and advances up 14% to R4.3-billion. However, the youngest child in the Discovery stable dragged on operating profits with a loss of R990-million. Gore says growth has been strong, noting that more than 50% of new clients to Discovery Bank are not Discovery clients in other facets of the business either.

In South Africa alone, the last year witnessed a strong recovery from Discovery Life, with normalised operating profit soaring 200% to R4-billion, while market share inched up to just more than 30% in the life insurance space. 

As the country has seen a decrease in the severity of Covid cases, Discovery Life has noted a significant decrease in morbidity, with Gore noting that the Covid death rate is now lower than that of the common flu.

Post-Covid, the net cash position was a negative R245-million, despite paying out R3.7-billion in claims. “There’s been careful management to ensure that the business remains strong from a liquidity perspective,” Gore says.

During the period, Discovery Insure was knocked by severe weather events in KZN and an increase in power surge-related claims, combined with considerable supply side inflation in motor vehicle repairs and parts. 

The division also took a hit with a 165% drop in normalised operating profit to a loss of R162-million. “A few clear factors included adverse weather, the KZN floods and supply side inflation with motor spare costs climbing at a rapid rate. We are also seeing the effect of load shedding, with continued power surge claims.”

Looking to other shores, Discovery saw normalised operating profit in the UK go up 28% to £98.7-million, while new business increased 22% to £148-million, excluding new initiatives. 

In China, Ping An Health Insurance is delivering faster premium growth than the overall industry, with the business insuring more than 28 million lives.

On Discovery’s global expansion, Gore said, “There has been significant investment within new initiatives in Vitality Health International, with a focus on expanding the global health solutions business and maintaining global leadership in behaviourally led solutions. 

“The largest investment over the period was in the Amplify Health joint venture with AIA, offering digital health solutions across Asia-Pacific.”

During the period, Discovery made a strategic decision to exit the UK investment market given the structural change in market conditions, mainly driven by significant margin compression. 

Gore says despite Vitality Invest making good progress over the period, the decision was taken based on the time and resources needed to accumulate the necessary assets under management for the business to turn to profitability and generate material, long-term value. BM/DM


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