Discovery plows more than R500 million into its commercial bank as new business initiatives eat into profits

Financial services group Discovery on Thursday (20 February), reported a big drop in earnings for the six months ended December 2019, as it continued to invest in new initiatives including Discovery Bank, which it said is “showing encouraging traction” following its launch into the market in mid 2019.

Discovery said that over the interim period, all of its established and emerging businesses, with the exception of VitalityLife, produced robust operating results.

VitalityLife was largely impacted by its previously-announced strategic decision to mitigate its exposure to further interest rate declines in the United Kingdom, it said.

Discovery said that normalised profit from operations decreased by 7% to R3.551 billion, headline earnings decreased by 9% to R2.047 billion and normalised headline earnings decreased by 11% to R2 117 million.

The group said that new business annualised premium income (API) increased by 17% to R11.116 billion.

In terms of the operating model, the established businesses delivered a robust performance, with profit of R4.301 billion, 3% higher than the prior period despite the loss in VitalityLife. The emerging businesses grew strongly, delivering a combined profit of R253 million, 50% higher than the prior period.

Discovery said it invested R1.003 billion in new strategic initiatives, an increase of 81% over the prior period. Spend on new initiatives is weighted towards the first half of the year and expected to decrease in the second half, it said.

“Of this spend, 53% was dedicated to Discovery Bank, which is expected to remain the dominant investment going forward,” it said.

Discovery achieved the following results for the period ended 31 December 2019:

  • Net asset value increased by R1.598 billion
  • Headline earnings per share decreased 10% to 311.7 cents per share
  • Earnings per share decreased 12% to 310.3 cents per share
  • Total new business API increased 17% to R11.116 billion
  • Normalised profit from operations decreased 7% to R3.551 billion
  • Profit for the year decreased 11% to R2.078 billion
  • Interim ordinary share dividends remains unchanged at 101 cents per share

Discovery Bank

As at 18 February 2020, Discovery Bank had 78,000 clients with 180,000 accounts, nearly half of which had never held a Discovery Card before. Discovery said that deposits had grown strongly to R1.2 billion; total credit card spend was R2.6 billion and total credit limits granted was R2.5 billion – with over R1 billion in credit facility used.

“Growth potential is strong with over 200,000 accounts that still need to be migrated from the FNB Joint Venture; and the activation of Discovery’s advisor channels to sell bank accounts in the second half of the year,” it said.


Discovery Health

Discovery Health (DH) delivered a resilient performance, with normalised operating profit increasing by 8% to R1.575 billion.

Total new business API (including take-on of new closed medical schemes) grew by 26% to R4.367 billion.


Discovery Life

Discovery Life (DL) grew earnings by 25% to R1.875 billion (off a low base) as a result of improving claims experience and pleasing all-round performance, the group said.

New business grew 2% to R1.240 billion in a declining market, resulting in over 31% market share in the retail affluent risk market – more than double the next largest competitor.


VitalityHealth

Discovery said that VitalityHealth continued to deliver strong results. Operating profit grew by 9% to £26.7 million (up 11% to R495 million), although new business declined by 2% to £33.1 million (0.5% to R613 million) in a challenging sales environment, characterised by economic uncertainty and aggressive competitor activity, it said.

Total lives reached 674,000, up 12%, while earned premiums grew 9% to £246.5 million (R4 569 million).

“The results reflect continued strong performance across key business metrics: the lapse rate and claims performance was stable and costs remained well managed.”


Discovery Insure

Discovery Insure (DI) saw strong growth during the period, achieving R75 million operating profit – up 21% on the prior year.

Gross Premium Income grew by 15% to R1.8 billion while gross new business API grew by 7% to R551 million.

Gross Written Premium (personal lines only) market share was estimated at 6%(DI) saw strong growth during the period, achieving R75 million operating profit – up 21% on the prior year.

Gross Premium Income grew by 15% to R1.8 billion while gross new business API grew by 7% to R551 million.


Priorities for growth

The group said it is well positioned for growth over its planning horizon to 2023, with the capital plan intact.

Key priority areas are:

  1. Execute on VitalityLife’s stated plans to manage in the low interest rate environment, stabilise experience variances and return to robust profit in FY 2021;
  2. Achieve significant traction in new initiatives, most notably Discovery Bank, and ensure short-term new business thresholds are achieved for each initiative;
  3. Ensure the established businesses retain their insurgency;
  4. Capitalise on emerging businesses’ unique attributes and positioning to achieve scale and materiality.


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Discovery plows more than R500 million into its commercial bank as new business initiatives eat into profits