Innovative Discovery looks as if it is in rude health
ADiscovery results report-back is an event to savour. CEO Adrian Gore is a master at presenting, takes consummate care with his content and message and is probably SA’s best corporate entrepreneur.
In the 1990s, Gore and his team hit on the idea of transforming traditional medical aids. Their business has metamorphosed into one of the leading financial services providers in the country.
He makes the point that is at the heart of the Discovery strategy — the group does not acquire companies. It rather carefully nurtures nascent ideas and, over time, allows them to blossom into mature and profitable businesses.
The latest and logical step in Discovery’s evolution is the establishment of a full-service bank, said to open its doors by the second quarter of 2018.
If Discovery can apply the tried-and-tested disruptive methodology that has worked so well in health, insurance and investment to the banking sector, the chiefs of existing South African banking institutions will be having sleepless nights.
In the investment community, we have two camps for the Discovery share: those who have been solidly converted to appreciate the group’s obvious virtues; and those who try to find chinks in its armour.
The first group are zealots and no amount of constructive criticism of their darling Discovery will sway them. They worship its exemplary track record, which has few blips.
The critical camp relies on spurious arguments such as “we don’t concur with their calculation of embedded value” and other, usually highly technical, fault finding. Ten years ago, it was saying that the group had “run out of road”. And yet it continued to innovate, confounding its decriers.
Discovery is a home-grown phenomenon that is slowly but surely persuading insurance and insurance-related industries in many other countries of the numerous and interconnected virtues of healthier lifestyles. One failure in this regard was its venture into the notoriously difficult US market with Destiny Health. This didn’t work out as planned, and I would say a key reason for this was the antiforeign sentiment of the US towards disruptive corporate intruders from other shores.
The group still has a presence in the US via John Hancock Vitality — and, in total, Discovery now has a presence in 16 countries via its Vitality offering.
For the year to end-June 2017, diluted headline earnings per share increased 20%, to 682.5c. Discovery Health is at the core of the South African businesses and had another strong year. New business annualised premium income rose 18% and lives under management reached 3.39-million. Discovery Health is by far the largest medical aid scheme in SA, with a market share of 55%.
Discovery Invest had a relatively slow year, with new business growing only 3%.
But assets under administration grew 14%, to R69.5bn and operating profit grew 12%, to R744m. Not bad for an investment company that started from scratch less than a decade ago and doesn’t employ a single portfolio manager. There are many investment outfits in the banking and insurance arena that would love to have a track record like this.
The newer Discovery Insure made an operating profit in the second half of the year.
The UK had mixed fortunes — Vitality Health enjoyed an 89% growth in operating profit, while Vitality Life’s operating profit declined 11%.
And while Vitality Group and Ping An in China are still in a loss-making situation, the upwards growth trajectory is exponential.
An in-depth analysis of Discovery’s mathematics and methodologies will be indecipherable to those who are not actuarial nerds. But pragmatically, the business model hinges on two simple principles — amass as much personal lifestyle data as you can and then incentivise people to lead healthy, safe and secure lives.
THE LATEST AND LOGICAL STEP IN DISCOVERY’S EVOLUTION IS THE ESTABLISHMENT OF A FULL-SERVICE BANK