Discovery Limited today presented its annual financial results for the period ended 30 June 2016. Performance highlights include:
- New business was up 22% to R16.2 billion
- Normalised profit increased 11% to R6.4 billion
- Profit from existing business increased 15% to R7.2 billion
- The Group’s investment in new initiatives increased by 73% to R823 million.
- Normalised headline earnings were up 7% to R4.3 billion, with normalised headline earnings per share up 1%, diluted through the additional capital raised in the rights issue.
Adrian Gore, Group Chief Executive, said Discovery posted a robust performance over the period, and highlighted three distinct aspects around the Group’s performance. “Discovery’s established businesses showed a solid performance, despite a volatile economic environment characterised by currency and interest rate fluctuations. At the same time, we accelerated our strategy of investing for future growth, with a 73% increase in spend on new initiatives, to R823 million.” Gore continued to explain that despite the dampening effect on short-term profits, the Group’s investment in building the business is expected to be profit-enhancing over the medium to long term.
In the Group’s presentation to the analyst community, Gore explained the rollout of the Vitality Shared-Value Insurance model globally, highlighting that Discovery now has a presence in 14 markets around the world. Recently, Vitality launched in Germany with Generali, and a number of product launches are planned elsewhere in Europe. Discovery’s latest venture into Japan with Fortune 500 partner, Sumitomo Life, was announced a few weeks ago.
“Discovery made significant strides in refining and replicating the Vitality Shared Value Insurance model into other markets in the last year, including franchising our proprietary methodology in structuring incentives to optimise behaviour change, and providing insights on the behavioural impact on insurance risk to leading insurers around the world,” said Gore.
Discovery will also continue the rollout of Vitality Active Rewards with Apple Watch, a global collaboration with Apple, into partner markets. The success of Vitality Active Rewards with Apple Watch in changing behaviour and segmenting insurance risk in South Africa and the United States has advanced the science underpinning the Vitality Shared Value Insurance model. The programme has showed dramatic and sustained behaviour change in South Africa, with an increase over 20% in physical activity for those who engaged in the benefit, and 81% for those who also took the Apple Watch.
Gore explained, “Vitality Active Rewards is Discovery’s most successful benefit to date, as measured by take-up and engagement, and shows strong initial insurance applications, with engaged members demonstrating significantly lower morbidity and mortality experience than other Vitality members.” The benefit was also launched in China through Ping An Health and will be attached to Ping An Life’s flagship life insurance product, presenting a meaningful opportunity to elevate the Vitality brand and the health of people in China. Vitality Active Rewards will be rolled out globally over the next 12 months.
Discovery’s established businesses in the UK and South Africa performed strongly
Established businesses in Discovery’s Primary Markets of South Africa and the UK continued to show a solid performance with substantial increases in new business and operating profit. The performance of the medical scheme administrator, Discovery Health, exceeded expectations in a period plagued by high healthcare inflation. Normalised operating profit increased by 12% to R2 265 million. The open medical scheme under Discovery Health’s management, Discovery Health Medical Scheme, continued to grow and the solvency ratio remained above the statutory requirement of 25% of gross annual contributions. The Scheme also remains the only one to have maintained its AA+ rating for 15 years in a row for its claims paying ability.
In the restricted medical scheme environment, Discovery Health has also made progress and now has 17 leading corporate medical schemes under management. Discovery Health continued to invest in digital assets to develop the healthcare system and to attract a younger demographic to medical scheme membership.
Discovery Life accelerated new business activations in the second half to grow normalised operating profit by 14% to R3 373 million for the full-year period. Discovery Life is well capitalised and geared for further strong new business acquisition with a current market share of 28.8% in the retail affluent segment. This is a product of the strong adviser force and clear cost efficiencies in the direct channel. In Discovery Life the Vitality Shared-Value Insurance model continued to show positive results with lapse rates significantly lower than expected and clients benefiting from an actuarial surplus of 18% as PayBack – highlighting the value for healthy clients.
New business in Discovery Invest grew by 17% to R1 932 million. Assets under management increased by 21% to over R60 billion. This excellent performance has seen operating profit increase by 22% to R563 million. The business has seen strong interest in the range of retirement products underpinned by the Vitality Shared-Value Insurance model, which recognise increased needs due to longevity and incentivises responsible investment behaviour.
In the United Kingdom, Discovery continued to invest in the Vitality brand. This strong retail consumer awareness led to impressive new business growth and record-level engagement in Vitality. Despite complex changes in the environment linked to Britain’s intention to leave the European Union,VitalityLife grew normalised profit by 25% to R678 million and new business by 23% to R1 332 million. The business has an 11.7% market share in the independent financial adviser distribution channel and continues to grow. There was a high uptake of the Vitality Optimiser product making up over 60% of new business and its Interest Rate Optimiser product was recognised for innovation.
The health insurance business, VitalityHealth, also experienced high levels of new business growth, which was up 43% to R1 161 million. The profitable individual market in particular, up by 44%, and the direct channels now make up 40% of new business. The exit from the Transitional Service Agreement has started to show benefits, with service levels and claims efficiency improving over the past six-month period. Although profit was down due to expenses incurred in the first half of the period, VitalityHealth is expected to maintain business growth and for further efficiencies to emerge to support strong performance going forward.
Record investment in building out emerging businesses and new initiatives
Discovery Insure grew new business by 14% to R439 million, resulting in overall growth of 7% to R841 million over the full-year period. The business now covers over 145 000 cars, and has achieved a quality of business and scale which is expected to take the business to profitability in the next financial year. Over the year, the hybrid distribution model proved effective with a 30% increase in intermediated business. While gross written premium increased by 39% year-on-year to R1.6 billion, Discovery Insure’s expenses grew by 31% as a result of scale and increased take up of its mobile and sensor technology.
Gore commented, “Discovery Insure is seeing the positive effects of engagement in Vitalitydrive, including lowered claims frequency as policy durations increase and a 28% lower loss ratio among engaged Vitalitydrive clients.”
Discovery announced its intention to develop its banking business with progress made on the licence application. While licence approval is pending, engagement is underway with the South African Reserve Bank and regulatory bodies. Discovery has appointed senior teams to lead the delivery of the business, and is building the necessary system and infrastructure.
In terms of Discovery’s international expansion strategy, Discovery is now focusing its intentions on partnering with leading global insurers to license Vitality in their markets. Gore said, “The result of Discovery’s initial work with our international partners is the development of the Global Vitality Network, a platform that is underpinned by a repeatable business model. Over the period this model was the basis of new partnerships, launches in new territories with existing partners and impressive growth in existing territories.”
In partnership with AIA Vitality, the Vitality Shared Value Insurance model is now part of the core offering in six AIA markets: Singapore, Australia, Hong Kong, Philippines, Thailand and Malaysia.
John Hancock Vitality continues to see strong adoption rates and high initial customer engagement. The Protection Universal Life, Term, and Indexed Universal Life products are available in the majority of states, and John Hancock Vitality has received numerous awards and garnered significant media attention for its innovative and transformative approach to life insurance. Manulife Vitality is anticipated to launch in September, pioneering the Vitality Shared Value Insurance model in Canada.
Generali Vitality launched to the public in Germany in June 2016 with the first sales occurring in July. The initial market response has been exceptional, with new business doubling the run-rate leading up to launch. The business intends to launch in France on 1 January 2017, followed shortly by Austria.
Ping An Health continued with impressive new business sales with Group cover sales up 27% to RMB151 million and individual cover sales up 50% to RMB595 million. The number of health insurance lives covered increased by 33% over the period from 418 000 to 555 000 at June 2016.
Gore said, “As we consistently roll out and replicate Vitality Shared-Value Insurance and the model’s methodology, we expect our existing businesses to continue to perform strongly, and for spend on new initiatives to reduce over time, positioning us well for continued expansion and robust performance in the future.”
Gore confirmed Discovery is well capitalised to fund its growth ambitions and will continue to carefully monitor and update this growth plan.