Death – and launching a new bank – stalls Discovery’s earnings

Large mortality claims within Discovery Life, along with the costs associated with opening a new digital bank, means that South Africa’s largest medical insurer, Discovery expects to report a reduction in earnings for the year ended June 2019.

For its 2019 financial year, Discovery had previously noted that it would ramp up investment into strategic initiatives significantly, most notably the build and launch of Discovery Bank, creating an expected reduction in group earnings. This, it said, necessitated a more detailed trading update.

“For the first six months to 31 December 2018, this planned increased investment together with an unexpected spike in large mortality claims within Discovery Life resulted in a substantial reduction in normalised headline earnings per share.

“As explained at the time, Discovery Life has addressed this through various actions, including reinsurance structures which reduce the exposure to large claims volatility going forward as evidenced in the second half year.

Investment in strategic initiatives during the second half of the year continued and remained in line with budget, albeit above the long term level of 10%.

For the financial year ended June 2019, Discovery said normalised headline earnings per share (diluted) are expected to decrease by between 5% and 10% to between 795 cents and 753 cents (2018: 836.9 cents), compared to the previous financial year.

Core new business annualised premium income (API) is expected to grow by approximately 13% while the group’s financial leverage ratio (FLR) is expected to improve to 23% and the cash buffer to increase to approximately R4 billion, it said.

This is as a result of the following:

  • Approximately 20% of group earnings (including associated financing costs) was spent on new businesses, most notably Discovery Bank, Vitality Invest, Vitality, Umbrella Funds and Discovery for Business. Spend in new businesses increased by 114% over the prior year.
  • Discovery Life’s performance largely affected by an unusual spike in high value mortality claims as was fully explained at the half year.
  • Other key experience metrics remain largely in line with expectation in the second half year, despite a challenging operating environment.

Discovery said that normalised profit from operations is expected to decrease by between 1% and 5% to between R7 581 million to R7 900 million (2018: R7 980 million), it said.

The difference between normalised profit from operations and normalised headline earnings was predominantly affected by an increase in borrowings which resulted in an increase in finance costs of approximately R240 million over the prior period, mainly due to funding investment in new initiatives.

The group said that headline earnings per share is expected to reduce by between 10% and 15% to between 809 cents and 764 cents compared to the prior year (2018: 899 cents), “impacted by movements in deferred tax assets and foreign currency hedges in the current and prior year”.

Basic earnings per share, however, is expected to increase by between 10% and 15% to between 963 cents and 1,007 cents compared to the prior year (2018: 875.6 cents).

This increase in basic earnings includes the previously disclosed disposal and dilution of the group’s interest in Cambridge Mobile Telematics (CMT) which resulted in a profit of US$56 million before tax as well as an accounting gain, in terms of IFRS 3, on the group’s original interest in the Discovery Card business of R761 million.

Looking ahead, Discovery said it is well positioned for growth, “through its robust established businesses, emerging businesses which are scaling and expected to grow strongly going forward, and significant new initiatives which are being built”.

“New businesses will require investment through their start up phase, however the c.20% spend on new businesses is expected to decrease over the next few years toward the long term goal of 10% of earnings. Profit growth is expected to return to its stated goal of CPI plus 10% and the group is well capitalised for its five year planning horizon,” it said.

The group pointed out that it is supportive of the aims of the recently published National Health Insurance (NHI) Bill in SA, “and will work closely with the relevant policy makers and stakeholders to ensure an optimal outcome to the legislative process”.

Discovery stressed that the bill is not expected to have a material long term impact on the Discovery Health business, “and may in fact present new opportunities for growth and product innovation”.

Discovery said that it expects to publish its financial results on 4 September.

Discovery has seen a slump in its share price in recent trading sessions as investors worry over the outlook for the medical insurance administrator under South African plans to shake up the country’s health insurance system.

The South African government earlier in August published a bill outlining a national health insurance program it intends to roll out over the next seven years.

Read: Discovery responds to the NHI: medical aids aren’t going anywhere

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Death – and launching a new bank – stalls Discovery’s earnings