Bottom line: Discovery CEO Adrian Gore at the company’s results presentation in Sandton, February 21 2019. Discovery’s share price closed 0.5% higher to R145.95. Picture: FREDDY MAVUNDA
Bottom line: Discovery CEO Adrian Gore at the company’s results presentation in Sandton, February 21 2019. Discovery’s share price closed 0.5% higher to R145.95. Picture: FREDDY MAVUNDA

A spike in life insurance claims and investment into its bank and other new business initiatives made a dent in Discovery’s bottom line in the six months to end-December.

Despite collecting R18.5bn in insurance premiums after paying reinsurance costs, the financial services group reported a 14% decline in net profit to R2.3bn for the period.

The main culprit was expenditure on new initiatives, which ate up 21% of the group’s earnings. The company borrowed more to fund these initiatives, resulting in an additional R291m in finance costs.

"The results were characterised by three themes. The investment in new initiatives, strong performance in our emerging businesses, and the Discovery Life result," said Discovery CEO Adrian Gore.

The development of Discovery Bank ran slightly over budget, rising to R2.62bn from the previously indicated R2.41bn.

"We had no idea what we were going to build when we initially sought approval for the budget from the board. The end result is more powerful than we originally envisaged and we are happy with it," he said.

The bank will begin migrating Discovery card holders onto the platform from March.

"It will be a slow burn initially as we monitor and ensure everything is working, and from there we will look to speed things up in terms of client acquisition," he said.

Discovery Bank’s investment hurdle is the risk-free rate plus 10%, which equates to a return on equity of about 20%.

Gore said he would be satisfied if the bank achieved this once sufficiently established.

Discovery Life experienced a spike in death claims, which trimmed 8% off the group’s earnings. Gore said in response to the spike, Discovery Life had made some "minor" adjustments to its reinsurance policy, and management was satisfied it had removed similar volatility from future results.

The biggest business unit, Discovery Health, increased its new business annualised premium income 2.9% to R3.4bn and posted operating profit of R1.4bn as Discovery Health Medical Scheme’s beneficiaries exceeded 3.5-million.

Discovery said that the accounting treatment of its new head office lease had played a role in the decline in earnings.

It said that international financial reporting standards required it to recognise a higher charge for rental in the earlier years of the lease.

If it were to adjust its financial statement, removing the effect of the new head office lease, its normalised headline earnings would be R102m higher than reported.

The short-term business, Discovery Insure, recorded a 325% increase in profit to R51m after collecting 21% more premiums compared with the first half of the 2018 financial year, thanks to the launch of the new commercial insurance division.

Discovery’s share price closed 0.5% higher on Thursday to R145.95, reflecting a market capitalisation of R96bn. This reflects a premium of 41% above its stated embedded value of R68bn.

Warwick Bam, head of research at Avior Capital Markets, said the premium was still justified.

"There are a number of aspects to Discovery’s business that are not captured in embedded value, including Discovery Bank and Ping An for example.

"Embedded value also does not give a view of new business growth. I think the new initiatives will contribute meaningfully to future earnings."