Rights issue to generate more capital for growth
Despite the 4% drop in the share price after the announcement of the rights issue, Gore says shareholders were receptive to the decision. The group is comfortable with its current position, but there are two opportunities that require the rights issue, explains Gore. One pertains to the recent acquisition of the outstanding 25% of Prudential in the UK and the other to an expansion in South Africa, for which details will be finalised by 10 March.
In 2007, Discovery acquired 50% of Prudential, and by 2010 the group owned 75%. The transition to full ownership was an “incredible amount of work”, says Gore. The Bank of England had to serve as regulator. Still much more work needs to be done and funding is necessary to sustain the acquisition.
Business in the UK is promising. VitalityHealth shows a tight margin of business with operating profit growing by 24%. New business shows growth in the last few years but recently reduced by 4%. This is related to the increase in prices, which Gore says is necessary to be well positioned in the market. VitalityLife is doing considerably well, too, with operating profit rising at 8% and new business at 2%. But like any life insurance business, there’s an upfront acquisition cost to be met, says Gore.
The UK is an exciting market to expand to, premiums are flat and insurance is low, says Gore. Capital returns are at 13% and negative reserves runs over quickly (over a period of seven to eight years), matching cash flows in a short space of time.
Responding to a question whether investment in South Africa will be reduced in favour of international opportunities, Gore says capital allocation to date has mostly been in SA. Its South African health and life insurance divisions remain the bulk of the business, contributing nearly 86% of normalised profit from operations, down slightly from 89% in 2013.
Gore says the South African business, and its business units, are well integrated and are “incredibly well positioned for growth. All of them I think have been disruptive and are in leadership positions”.