Discovery banking could be up and runnning in 2018

Cape Town - Discovery [JSE:DSY] could be launching its banking offering in 2018.

Actually, Discovery banking is on track to be up and running by the middle of 2018, CEO Adrian Gore told Fin24 on Monday afternoon.

In October 2016 Discovery received authorisation from the Registrar of Banks to establish a banking presence in SA, subject to certain conditions.

"We have confidence in our shared value model. It forms part of the evolution of our Discovery Card. We have built a quality client base and a great team. We feel there are potential opportunities in banking to add value for our customers," said Gore.

Discovery's annual financial results for the period ended June 30 2017 were announced on Monday.

Gore told Fin24 he felt the latest results were "really good and solid".

"It is reflecting our progress. The environment remains tough all round, but we did well within this context," said Gore.

"Our new businesses and our Vitality Group did particularly well. Despite a tough environment we did well in the UK. Overall it has been a very good year, especially for future new growth."

Highlights for him included the performance of the three emerging businesses, while he regards the impact of Brexit as the biggest challenge.

Gore remains optimistic about the UK market.

"All the dynamics there are settling down and they have reconfigured a lot of product design, for instance. So there is a lot of optimism. It is growing nicely," said Gore.

Going forward he said the three emerging businesses still offer potential for growth and that overall Discovery is looking at a wide range of initiatives.

"We are becoming a platform to link with other partners. Our progress in this regard is staggering," said Gore.


Normalised profit from operations was up 10% to R7.048bn. Core new business annualised premium income increased by 16% to R16.993bn. Gross inflows under management were up by 10% to R115.061bn.

The results report also states that the Vitality Shared-Value Insurance model continues to grow in scale and impact. It is now operating in 16 countries - including North America, the United Kingdom, Europe, China and pan-Asia - serving close to 10 million clients, with over 150 000 new members added each month.

Core new business annualised premium income grew by 22% to R17.871bn and normalised profit from operations grew by 12% to R7.190bn in constant currency terms.

“The group has achieved an acceleration of new business growth, combined with strong operating profit gains, notwithstanding our substantial undertaking of significant new initiatives, including the global expansion of the Vitality Shared-Value Insurance model,” Gore said on Monday.
During the period, Discovery’s earnings grew by 12% and established businesses achieved it target of consumer price inflation (CPI) +5% (in constant currency terms).

Emerging businesses

Emerging businesses tracked above it set target, showing a decrease in operating losses of 61%, although not yet significantly contributing to earnings, according to Gore.

About 8% of earnings were invested in new initiatives, including Discovery’s intent to enter banking, the planned UK investment business (subject to regulatory approval), a commercial offering in Discovery Insure, and Discovery Invest’s Umbrella Fund offering.

"The return of risk free +10% continues to serve as a guide for the organisation’s strategic decision-making and capital allocation. On an aggregate basis, the group exceeded this target, both cumulatively to date, and for the expected return on current new business and approved initiatives," said Gore.
“The Vitality Shared-Value Insurance model continues to grow in scale and impact, now operating in 16 countries through seven insurers, serving close to 10 million clients, with over 150 000 new members added each month. The last year has seen excellent engagement levels, with most markets experiencing Vitality take-up in excess of 40%."

According to Gore, engaged Vitality members continue to exhibit better health outcomes, driving and savings behaviour, exhibited for instance through Vitality Active Rewards, which has dramatically increased physical activity levels globally.

“Our sophisticated capital management structure supports the organic growth methodology. This ensures Discovery’s financial strength, sufficient financial flexibility through cash generation, and production of above-target returns," said Gore.

"We foresee continued strong performance from existing businesses going forward and we are well positioned for continued growth in the future,” Gore said about prospects for further growth."

Key developments
Both Discovery Health (the administrator of medical schemes), and Discovery Health Medical Scheme (DHMS) delivered excellent results, in Gore's view.

Discovery Health’s normalised operating profit increased by 11% to R2.505bn. New business annualised premium income increased by 18% to R6.109bn (excluding take-on of new closed schemes). The total number of lives under management reached 3.39 million.
In addition, DHMS recently announced, what Gore regards as a highly competitive contribution increase of 7.9%, and ended the 2016 calendar year with a total surplus in excess of R1.3bn, taking capital reserves to 26.3% of gross contributions. This is well above the statutory level of 25%.

DHMS is now in the strongest financial position in its history, with membership of 2.76 million lives at year-end. Discovery Health was also awarded contracts to administer the SAB, Glencore and Netcare Medical Aid Schemes, bringing its closed scheme client base to 18 with over 635 000 lives under management.

Discovery Life

Discovery Life, performed strongly over the period, according to Gore.

New business annualised premium income increased by 17% to R2.175bn and earnings increased by 10% to R3.588bn, despite the impact of higher-than-expected claims. Market share increased to 29.7% in the retail affluent protection segment, while the value of new business grew by 17%.

From a new business annualised premium income perspective, group risk increased by 96%, facilitated by the provision of risk cover to a large employer group; and Individual Life new business increased by 12% to R1.970bn.

While claims were above expectation over the period, the long-term historic claims experience remained below embedded value expectation.

Lapses were at 83% of expectation on a policy count basis, and PayBack of R986m was paid to policyholders. For Gore this demonstrates the impact of the Vitality Shared-Value Insurance model.
Discovery Invest operating profit grew 12% to R744m and assets under administration grew by 14% to R69.5bn, with 76% of linked funds in Discovery funds.

New business growth was 3%, in what is described as a challenging market.

Discovery Balanced Fund was in the top six retail net flow takers in each quarter over the past two years and significant inroads were made in the retirement annuity, preservation, and income space, according to Gore.

Discovery Invest has recently launched a hedge fund, share portfolio porting capabilities, as well as a more accessible offering for young professionals.

One of Discovery’s innovations over the past few years, Discovery Insure, posted a performance that exceeded expectation, according to Gore. The insure business achieved a cumulative profit in the second half of the financial year and reduced its combined ratio by 8.4%.

Gross written premium increased by 32% to R2.1bn, driven by new business annualised premium income growth of 19%, to R895m.

"This has brought the inforce annualised premium to just under R3 billion, reflecting the rapid scaling of the business, and support for mainstream adoption of telematics insurance," according to the results report.

The Discovery Card business exceeded expectation over the period, according to Gore, with the FNB Card joint venture profits growing by 16% to R355m. Net interest income increased by 9.7%, and non-interest revenue grew by 10%.

Discovery’s credit card base is less sensitive to current negative market conditions due to a substantially better risk profile, according to the results report.


The UK is Discovery’s second primary market. Here the business delivered a strong performance despite the challenging economic landscape, according to the results report.

For the combined businesses, new business increased by 1% to £118m, insured lives approached one million and operating profit grew by 10% to £44.4m.
Operating profit grew by 89% to £16.4m, while new business has grown by 4% to £56.2m, with continued strong growth in the more profitable individual market (+9%) and direct channels (+13%).

From a member perspective, the value of Vitality rewards and discounts increased to £62.7m from £48.6m, with 46% of engaged individual members saving more than half their premium.
For VitalityLife, the UK’s decision to leave the European Union created volatility at the beginning of the financial year, with this environment of uncertainty, and low long-term interest rates, leading to a decrease of 1% in new business to £61.8m and a decrease of 11% in normalised operating profit to £28.1m.

Vitality Group

Vitality Group, Discovery’s arm that drives the expansion of the Vitality Shared-Value Insurance model globally, launched the model in six new markets, bringing the total number of countries with a Vitality Shared-Value Insurance offering to 16, including the primary markets in South Africa and the United Kingdom.

Vitality membership grew 20% to 1.25 million with Vitality-integrated insurance in-force premiums increasing by 226% to R2.7bn year-on-year. Vitality Group’s operating result improved by 39% (excluding Ping An Health), with the expectation that the business will reach profitability within the next financial year.

Vitality Group’s strategy remained focused on expanding the Vitality Shared-Value Insurance model. To this end, Vitality Group partnered with Hannover Re to market Vitality Active, a mobile-only version of Vitality Shared-Value Insurance focused primarily on Vitality Active Rewards.
In addition, Vitality Shared-Value Insurance expanded to Canada, Germany, Austria and France, with standalone Vitality Active Rewards going live in Hong Kong, Malaysia, the Philippines, Singapore, Sri Lanka and Vietnam.

By late afternoon Discovery's share price was up 3.52% to R147 per share.

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