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Discovery’s R3.3bn Covid-19 knock isn’t all bad news

But despite three bright spots, there could be bigger problems looming …
That Discovery is one of the first large insurance providers to raise this provision is telling. Image: Moneyweb

The news that Discovery would book a R3.3 billion provision for the impact of Covid-19, plus the warning that earnings would be down by as much as 90%, sent shares down nearly 6% on Monday. They ended the day down 2.8%, however, broadly in line with the market.

First, as ever with Discovery, the multitude of earnings figures come with a number of adjustments. Normalised headline earnings (excluding the impact of lower rates … more on that later) would only be down 20-30%. This includes the R3.3 billion hit.

On a profit- from-operations basis, the decline will be between 18% and 28% for the year ending June 30. It is worth remembering, however, that operating profit for the six months to end-December was R3.6 billion, down by 7%.

Rewind to last year, and operating profit was R7.7 billion. Using the upper bound of the expected decline, operating profit for this year will be, at worst, R5.5 billion. Remember, this includes the R3.3 billion provision.

Not so bad?

It’s also important to note that the provision is for the future impact of Covid-19, in other words in 2021 and 2022. It says “modelling has been done on a prudent actuarial basis, and is continually being refined by incorporating trends in actual infections and mortality”.

About two-thirds (or R2.2 billion) of the amount set aside is for mortality and morbidity impacts. The other third (about R1.1 billion) is the group’s estimate of “economic stresses, particularly on policy lapses” across its businesses. It says it is using a “central” scenario (not a worst-case one) for the provision, which is larger than most analysts were expecting.

That Discovery is one of the first large insurance providers to raise this provision is telling. If the impacts aren’t as dire, the provision will be released in future periods which will boost earnings (of course, if things get worse, the converse will occur).


New business is under strain in the South African and UK operations, with this down by 5% and 8% respectively in the 11 months to the end of May. During April and May, the UK life and health businesses (under the Vitality banner) signed new business at between 70% and 80% of the same period a year ago.

In South Africa, the Life business held up best. New business growth slowed at Discovery Health (the engine of the group), “due to minimal new employees being added by existing customers”.

Read: Discovery loses “core” health members

As the consequences of the pandemic ripple through the economy, it is highly likely that Discovery Health will see a material decline in the number of lives administered by its schemes into 2021. At minimum, well-placed estimates see 1 million job losses and an economic contraction of approximately 10%. This will not be good for any medical scheme, least of all the largest in the market.

Less bad

Across the board, it has largely seen fewer policy lapses than expected over the past two months. This was particularly pronounced in the Discovery Insure business. But it’s early days yet.

Separately, excluding the R3.3 billion provision (which is obviously not possible in a global pandemic!), the group’s operating profit will have been up somewhere between 5% and 15%.

The concern for investors is that growth is coming from everywhere but the SA businesses, albeit off much smaller bases.


The group has reported pleasing progress in other new businesses, aside from the bank. These are the umbrella funds and commercial insurance locally, and Vitality Invest in the UK. New business inflows for these are up over 150% to R751 million for the first 11 months of the year.

Its Ping An Health joint venture in China is the sole reason why group new business inflows are positive for the year (up 4% for the 11 months). Exclude this and there’s a 2% decline because of the core SA and UK businesses, despite the inflows from the new initiatives above. Ping An Health has seen an increase of nearly R1 billion in annualised premium income so far this year.

Discovery highlights that “Ping An Health saw its strongest sales throughout the Covid-19 period, to some degree benefitting from the lockdown, as the product can be completed through an online channel, enabling the sales to continue via brokers or direct-to-consumer through Ping An Health’s own app during the lockdown period”.

And what of Discovery Bank, which is a 10-percentage point drag on expected profit growth (excluding Covid-19) this year (5-15% versus 15-25%)?

Read: Discovery Bank: The first six months

It currently has over 177 000 clients and 330 000 accounts, versus 78 000 and 180 000 respectively as at February 18. Put another way, four months on it almost has as many customers now as it had accounts then. A big proportion of these will be from the migration of the Discovery Card base to the bank, which it says will finally be completed by end-July. Retail deposits are up from R1.2 billion in February to R2.1 billion now.



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You missed that they’re also treating -R3.6bn impact on earnings of interest rate changes as one-off (excluding the impact from the earnings that determine bonuses). The impact of having to provide for an extra R3.3bn (mortality, sickness, lapses) were also partially smoothed out of earnings. If the R3.3bn provisions are conservative, it’ll boost next year’s earnings (help get to bonus targets). Dividend cancelled indefinitely even though they’re spending less writing new business and barely paying car insurance claims during the lockdown – only shareholders suffer.

Yip it’s only a provision, but hey would of been a good time to buy shares at a (discount).


I am afraid that accounting has lost the plot and because of that management teams can basically do as they please. I am certain that if you give me all of Discovery’s actual transactions for a year I could present two entirely sets of auditable results that nobody would recognize as the same company. There are holes the size of an oil tanker one can drive management estimates through.

The pay committees need to focus on cashflows – nothing else really matters in business.

Anyway, not my share, not my problem

Yeah right….the reality is Discovery using CV-19 as an excuse for what was in effect the writing on the wall years ago

A declining economy factored with diminishing clients meant they’ve been bleeding money long before this

Anybody with a modicum of common sense will see that this ‘pandemic’ is being used by many big corps/governments/financial institutions as an excuse to sweep years of failed promises/over paid M&A’s/cooked books/share buybacks and just plain old general malfeasance under this CV carpet

Expect a lot more like this on the horizon my friends

If earnings are down by as much as 90%, why are shares down only 6% ???

Surely you don’t buy a share for only one year’s future earnings…

No. But you do expect analysts to price discover quicker. Excuse the pun.

This is the Due Diligence articles that should be informing stock prices but instead, day traders like myself are fast adopting the “Buy the dip” mentality often found in the USA. As such, instead of asking why the stock was down, we just bought it to make a few bucks and it has worked for now.

End of comments.





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