New ventures, locally and abroad, look good

Discovery operates in SA in health insurance (Discovery), life insurance (Discovery Life), wellness (Discovery Vitality) and financial services (Discovery Invest and Discovery Bank). It has operations in the UK, US, China, Singapore, the Philippines, Australia, Hong Kong, Thailand and Malaysia. In Canada and Germany as well as France, a similar successful pattern has emerged.

The December 2017 interim results showed normalised profit from operations up 19%, core new business annualised premium income (API) up 16% and embedded value up 13%.

Discovery Health earnings increased 12%, with initiatives for specialist medical care insurance in the offing. Further investments in technology seek to preclude fraudulent claims and improve risk management. Innovative changes to estab- lished products are to be launched this year. Being awarded a contract to administer the BP Medical Aid Society, as of July 1 2018, will also be earnings-accretive.

For Discovery Life and Discovery Vitality, owing to increased claims, earnings increased by 4% and value of new business grew by 11%. The launch of the new Global Education Protector, Vitality Purple and the Purple Plan range already has annual premiums collected exceeding R10bn.

Discovery Invest’s new business fell by 5%, due to lower inflows. Net flows grew by 20% to R3.3bn and operating profit by 29% to R419m, driven by 22% growth in assets under administration and new investment offerings tailored to specific clients.

Discovery Card’s profits grew 16% and revenue rose 7%. The credit loss ratio to

advances was 1.5% against the average of 6% for tier 1 credit providers.

Discovery Bank received its banking licence on October 16 2017, subject to certain conditions. The incorporation of the Discovery Card business (coowned with FirstRand) is subject to competition commission approval. Negotiations are under way with the authorities on how to accomplish this and establish the bank.

Vitality UK had new business sales up 6% and operating profit up 55%. Enhancements to the Vitality brand, coupled with regulatory approval for the launch of a long-term savings business during 2018, will leverage UK consumer behaviour, as well as the experience of Discovery Invest.

Generali had strong sales in Germany, France and Austria, with total membership up 45%. There are great expectations for growth from the launch of Vitality to the 6m clients of Deutsche Vermögensberatung network in Germany.

In China, Ping An Health membership grew by 60% over the six months from July 1 2017, with operating profit of R36m. This trend is seen as continuing. Other initiatives include partnerships with insurers in Europe, Asia and Latin America, via Vitality Group’s partnership with Hannover Re.

The main growth is seen as arising from the new overseas ventures. In addition, growth is seen as coming from Discovery Bank and Discovery Invest.

The company is trading at an 84% premium to its embedded value of 9,366c/share (previously 8,265c), which makes the share quite expensive. This flows from continued good earnings growth and implies strong growth is expected from the group’s new ventures.