Bank takes a big bite out of Discovery’s profits

Discovery’s interim operating profit took a knock as the company invested in several new initiatives, including the long-awaited Discovery Bank scheduled for public rollout next month.

The financial services giant saw normalised profit from operations decrease by 4% to R3.79 billion, while headline earnings fell 18% to R2.25 billion and normalised headline earnings dropped 16% to R2.37 billion.

By the end of December 2018, R6 billion had been invested in the bank. This comprised R3.28 billion paid to FirstRand Group, R1.31 billion regulatory capital invested in the bank, and R1.42 billion incurred on build capital expenditure, test capital expenditure and hardware infrastructure.

Commenting on the concept of Discovery Bank, Richard Hasson, co-head of Electus Fund Managers, said the integrated model and incentive structures linked to Discovery’s existing product set – with the dynamic interest rate based on behaviour – are extremely innovative and likely to be attractive to the group’s existing client base.

Discovering more

Speaking at the results presentation on Wednesday, Discovery Group CEO Adrian Gore said the six months to December 2018 showed the group had taken strides in its growth strategy across the different businesses. “Our business model now touches 21.6 million lives, has a presence in 19 countries, and we are investing in technology to pursue further growth in various industries as we build the world’s largest and most sophisticated behavioural platform linked to financial services,” he said.

As part of its growth plan in the period under review, the group spent 21% of its earnings in five new businesses:

• Discovery Bank – R2.6 billion. The bank had a pilot phase launch in November last year and public rollout is scheduled for March 2019.
• Discovery Business Insurance – R92 million.
• Umbrella Funds – R140 million. Launched last year, this division gives small business employers access to Discovery’s retirement products as part of a holistic offering including business insurance and employee health benefits.
• VitalityInvest – £33.5 million (around R612 million). Launched in the UK in June 2018, this division incentivises investors to draw down less and invest for longer. It launched a direct-to-consumer offering in November and a range of protector funds this month.
• Vitality 1 – R552 million. A technology platform available to partners in the Global Vitality Network, it has grown to 800 000 active participants since its launch in August 2018.

Gore acknowledged the temporary decline in profits, saying: “We expected our planned and significant investments in new initiatives, most notably the investment in Discovery Bank, to create a reduction in group earnings. All businesses remain strongly positioned for growth and our responsive alteration of reinsurance structures will mitigate the effects of claims volatility in Discovery Life going forward for this business to regain target performance levels.”

Death spike hits Life

Hasson noted that the 13% decline in profits in Discovery Life to R1.5 billion was mainly due to a spike in death claims in a few large cases. “Discovery has subsequently restructured its reinsurance agreements to reduce the risk of these abnormally large claims going forward so Life profits should rebound strongly going forward,” he said.

The group’s flagship Discovery Health offering posted positive results, with normalised operating profit increasing by 10% to R1.46 billion, and lives under management exceeding 3.5 million. The business continues to grow its market share, currently at 40%, in both the open and restricted medical scheme markets. Discovery Health Medical Scheme (DHMS) announced an average contribution increase of 9.36% for 2019, with average contributions now 16.6% lower than those of competitors on a plan-by-plan basis. The scheme achieved a total surplus of R814 million after investment income and year-end solvency of 27.3%, which is above the statutory requirement of 25%.

Shareholders received an interim gross cash dividend of 101 cents per share.

Republished from Moneyweb