Discovery takes action to lessen Brexit impact

Discovery has taken “strong remedial action” to mitigate the impact of Brexit on its United Kingdom life insurance business.

A combination of currency depreciation and record low interest rates in the UK, saw Vitality Life register a 10% decline in operating profit to £14.5 million for the six months to December 31 2016.

In reported currency terms, normalised profit from operations fell by 25% to R258 million as the rand strengthened by 16.42% against the pound sterling during the period under review.

“Discovery is a patriotic organisation. We long for a strong rand, obviously it is difficult for us in terms of us our business but we must navigate it. There’s no hope here that the rand gets weak,” chief executive officer Adrian Gore told analysts.

Low interest rates, which resulted in a release of second tier margins and reduced future profits by £63 million, effectively wiped out 22% of Vitality Life’s interim profit.

Although low interest rates in the UK pre-dated the referendum, the sharp decline in interest rates in the aftermath of the vote was akin to a “one in 200-year decline” and a very substantive shock, said Richard Farber, chief financial officer of Discovery.

Farber went on to explain that the group has implemented a number of changes to mitigate the impact of Brexit and low long-term interest rates on the business.

Vitality Life is now selling more integrated and less long-term products in the UK. It has also started to sell more escalating products and increased the prices of products, especially those sold to young people.

In some cases, the prices of Vitality Life’s most extreme products or products with the longest term offered to people between the ages of 25 and 35, have been raised by as much as 70%.

“Over time, that will return the margins and the profitably back up,” Farber said of the combination of measures implemented over the last six months.

Vestact’s Bright Khumalo said the strong capital position and defensive strategy employed by Vitality Life suggest that the worst is over.

The headwinds experienced by the UK business reduced group earnings by 4%.

The group reported a 3% increase in normalised headline earnings to R2.18 billion and a 13% increase in operating profit to R3.41 billion.

The group attributed the difference in the growth rate of headline earnings and operating profit to the fact that capital raised in a rights issue in April 2015 was only deployed in December 2015. As such it benefited from higher interest income and lower finance charges during the prior interim period. The difference in the growth rates is expected to narrow going forward.

Investment in new initiatives – including its intent to enter banking, commercial insurance, a UK invest initiative, umbrella fund and Global Vitality Network – accounted for 7% of earnings.

Discovery would not share details about the progress being made in developing its intended banking business but expects to launch the offering during the course of 2018.

In its home market, Discovery Health reported a 12% increase in operating profit R1.19 billion. Discovery Life’s operating profit increased by 13% to R1.77 billion. Discovery Invest’s operating profit grew by 21% to R326 million. Discovery Insure’s operating loss narrowed from R69 million to R30 million.

Among its emerging businesses, Ping An Health’s performance continued to stand out. New business annualised premium income grew by 55% to R1.17 billion. For the first time, its equity stake in the business was also profitable.

According to analysts the group’s track record thus far is supportive of its share price. Shares in Discovery closed 4.35% higher at R124.70 following the results.

“Discovery performed extraordinarily well but it hasn’t got the momentum that it initially had when it was a purely local organisation. But that it is to be expected, it is far more competitive out there,” said Ian Cruickshanks of the SAIRR.

Khumalo lauded Discovery’s growth ambitions in an environment in which other businesses in the same sector “are going backwards”.

“For a business of this scale to say ‘we still have ambitions to grow by double digits every year beyond 2020’ is remarkable,” he said.

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