Discovery’s spending spree eats into profit

The new Discovery head office in Sandton. Picture: Masi Losi
The new Discovery head office in Sandton. Picture: Masi Losi

The spending spree on its new building, the launch of a commercial bank and other new business initiatives left a dent in Discovery’s bottom line in the six months to end-December 2018.

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

The 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 R128m in finance costs. Discovery said that if it were to adjust its financial statement, removing the impact of the new head office lease, its normalised headline earnings would be R102m higher than reported.

“Discovery planned to increase investment in new strategic initiatives significantly, most notably the building and launch of Discovery Bank, creating an expected reduction in group earnings,” the company said in a statement on Thursday.

The group said its financial performance was a result of planned investments and Discovery Life’s spike in death claims. 

Discovery Life experienced a spike in death claims, which trimmed 8% off the group’s earnings. The insurer said Discovery Life has since altered its reinsurance structures to reduce large-claim volatility in future.

The biggest business unit, Discovery Health, increased its new business annualised premium income by 2.9% to R3.4bn and posted operating profit of R1.4bn as the business unit's lives under administration.

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.

The investment business grew assets under administration to R83.1bn after receiving net inflows of R3.6bn over the period. Vitality businesses in the UK and the US, Vitality Health and Vitality Life all posted double-digit increases in operating profit. Vitality Invest, which the company launched in the UK in June 2018, has launched a direct-to-consumer offering and now has assets of £10.6m on the platform.

∗The article has been corrected to reflect that the 3.5 million beneficiaries are individuals under Discovery Health's administration not members of Discovery Health Medical Scheme. The medical scheme only has 2.8 million beneficiaries.

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