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Discovery Group CEO Adrian Gore. Picture: JAY CABOZ
Discovery Group CEO Adrian Gore. Picture: JAY CABOZ

“Every area of the business delivered positively over the period. Our Shared-Value Insurance model, our growth methodology and our capital management are all working in tandem, and our prospects for future growth are extremely compelling.”

Those were the words of Discovery Group chief executive Adrian Gore on Wednesday when he shared highlights of the group’s interim earnings and performance for the six months ended December 31 2017 with analysts at the group’s new headquarters at 1 Discovery Place, Sandton.

Gore added: “There is evidence across the group of exceptional engagement in Vitality and behavioural change, giving me confidence that we are achieving what we set out to do – offer people products and services that make them healthier, while we create a sustainable organisation that adds value to clients and society.” 

Overall, the group’s performance exceeded expectations as it worked towards its stated “Ambition 2018” to be the “best insurer in the world”. Normalised operating profit increased by 19% to R4bn and normalised headline earnings increased by 30% to R2.8bn.

Annualised premium income, which excludes Discovery Health’s take-on of closed medical schemes and gross revenue of Vitality Group (responsible for the expansion of Vitality Shared-Value Insurance globally), increased by 16% to R9.3bn.

There is evidence across the group of exceptional engagement in Vitality and behavioural change, giving me confidence that we are achieving what we set out
to do

The group also reported growth in embedded value of 13% on an annualised basis to R60.4bn.

Over the period, the group surpassed its growth methodology targets. Established businesses delivered combined growth in operating profit of 15% – well above the target of CPI plus 5%. Emerging businesses were all profitable, with a combined growth rate of 151%, far exceeding their target of CPI plus 30%. 

The group invested 8% of earnings in new initiatives – including Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance – as it focused on growing internationally and extending the Shared-Value Insurance model locally.

Referring to the technology and data analytics that enable Shared-Value Insurance, Gore said the model – which creates business, client and societal value through behaviour change – continued to give the group a competitive advantage as it is applied across markets.

The Global Vitality Network, centralising the global partnership, programme, data and brand assets, continued to invest in the repeatability and scalability of the Shared-Value Insurance model. This network now has more than 7m actively engaged Vitality members and represents Shared-Value Insurance in 19 countries. 

Gore said substantive progress had been made against the Ambition 2018 criteria, which include targets in financial performance and management, brand and data capabilities, and objectives for each of the businesses.

He said Ambition 2018 had created an impetus for execution, resulting in outstanding financial outcomes and scale, and accelerating the development of a pipeline for growth.

For the group, its financial performance and progress since implementing Ambition 2018 in 2013 is a testament to its powerful framing effect. Since then, the sizeable businesses Discovery Invest, VitalityLife and VitalityHealth have become established businesses. The high-potential businesses Discovery Insure, Ping An Health and Vitality Group became emerging businesses, and there was ongoing investment in new ventures to create growth possibilities. 

Observations for the period on capital management, growth and business performance 

The group’s organic growth plan places business in three categories – established, emerging and new, each with specific performance measures. 

Gore emphasised that all businesses were cash efficient and the group did not rely on a specific business for its cash flow. Results were ahead of the stated growth methodology and capital plan.

During the period, Discovery came to market for its inaugural domestic medium-term note issuance to diversify its funding sources and this was oversubscribed. The financial leverage ratio (FLR) for the period remained below the 28% guidance at 26.5%, while the group maintained an above-guidance cash buffer of R2.5bn by December 31 2017. 

Continued growth and four new initiatives to launch in 2018

An important element of Discovery’s operating model is its cash management approach. Having generated R6.1bn in cash (before tax), the group invested R3.8bn in new business and R1.1bn in new initiatives after all payments. These meet the criteria of risk-free plus 10%, validating the group’s approach to continue to invest significantly without breaching the FLR or cash buffer. 

New initiatives Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance all remain within budget and on track for launch in 2018. 

From an architecture perspective, the Global Vitality Network made progress towards a universal behavioural platform that manifests in a simple, digital user journey based on Active Rewards. This is being powered by a configurable global technology platform, Vitality One, which is tracking more than 500m activities and 25m biometric readings.

During the period, the South African Reserve Bank granted a banking licence to Discovery Bank. The banking offering is operational and expected to launch in quarter three of 2018.

Discovery Bank will add to the group’s ability to change behaviour and disrupt industries

Gore said that business was well capitalised and that the five-year capital plan for the launch and implementation of Discovery Bank remained on track and within expectations.

“With the people, processes and systems all in place, we are very pleased that the team was able to meet every milestone along the way,” he said. “The bank will add to the group’s ability to change behaviour and disrupt industries. We are managing the pace of execution of this strategy with due care and are looking forward to bringing this new initiative to market.”

Gore and his team are motivated by the group’s overall performance and progress made against its performance measures. They remain aware of potentially volatile trading environments in both South Africa and the UK.

In conclusion, Gore stated: “I am extremely pleased with the results for the half year, considering that it has been a somewhat complex period. Under the guidance of a strong Discovery leadership team, we have made significant strides in execution towards our Ambition 2018 – which has reinforced the group’s strong performance. It is an important and exciting time for Discovery.” 

Find out more about Discovery’s financial performance.

 

This article was paid for by Discovery.