S.Africa’s Discovery warns of falling full-year profits

JOHANNESBURG (Reuters) – South African insurer Discovery said on Friday it expected its normalised profits to fall by between 5% and 10% for the full-year, after ploughing around 20% of its earnings into new business lines.

A man walks past the Discovery headquarters in Sandton, file. REUTERS/Siphiwe Sibeko

The company has been investing heavily in its new bank and other businesses as it seeks to expand and adapt a fluctuating premium model that has shaken up traditional approaches to insurance in other sectors.

In a trading statement released ahead of its annual results on Sept. 4, it said spending on new businesses had increased by 114% in the year to June 30 compared to a year earlier.

“New businesses will require investment through their start-up phase,” it said, adding that the roughly 20% spending on new businesses was expected to decrease in the next few years towards a long-term goal of 10% of earnings.

It said profit growth was also expected to return to its stated goal of consumer price inflation plus 10%, and said the group was well capitalised.

The company’s shares rose to 4.5% shortly after the statement at 1046 GMT.

Greg Davies, trader at Cratos Capital, said the statement likely gave some comfort to investors and others in the market who had been concerned after analysts had flagged accounting assumptions at Discovery that they considered optimistic.

Discovery’s share price has been hammered since the ruling African National Congress (ANC) published a bill on its proposed National Health Insurance to provide universal health cover in South Africa and restrict the role of private medical schemes, a significant part of Discovery’s business.

The insurer repeated on Friday that it would continue to engage with policymakers and others on the planned reform and said it did not anticipate any significant impact on its business.

“The bill is not expected to have a material long-term impact on the Discovery Health business and may in fact present new opportunities for growth and product innovation,” its statement said.