Gore wants to ‘change the world ’
Long-term Benefits | A disappointing trading update notwithstanding, Discovery Limited is earning well from its South African and UK operations, and its partnerships in China and beyond give it access to a staggering two billion people
INVESTORS cannot get enough of Discovery Limited shares. They have been piling in and pushed the share price up 50% in the past year. But this week, after posting what analysts reckoned was a disappointing trading update — headline earnings a share were down to between zero and 10% for the year to June — Discovery’s share price fell nearly 10% to about R85 a share.
This hiccup, however, has not taken the gloss off a company that has created more than R17-billion in value in the past year as its market capitalisation swelled to R51-billion, making Discovery the third-largest insurance group after Old Mutual and Sanlam.
It is easy to see why. In recent years, Discovery has had substantial growth in earnings and there is more blue sky to come from its potentially massive Asian operations. Since its listing in 1999 with a market capitalisation of R3-billion, the share price has grown by a compounded 22% a year. This growth stems from its dominance in medical aid schemes — administering 2.8 million lives and 31% share of the total market.
The South African life operations have done well too and profits have surpassed that of the health business, not forgetting the UK health and life businesses that are churning out profits and cash flows from a low base.
“Looking back over the past 21 years, we have been true to our core purpose of making people healthy and enhancing and protecting their lives,” said founder and chief executive Adrian Gore.
“We aspire to be a force for social good and have a desire to make a meaningful impact on society. We are here to change the world, not just tag along,” said Gore.
It has not been without controversy. Doctors have claimed that Discovery’s immense market power has allowed it to dictate what they can charge, essentially interfering in the relationship between doctor and patient.
And the hefty R4.07-billion that Discovery Health charged the independent Discovery Health Medical Scheme last year for “administration” and “managed care” has led to claims that it has been overcharging for the services it provides.
But the medical scheme keeps growing, so its members clearly see value in the proposition.
Discovery is a global innovator and its proprietary expertise is being sought around the world.
In 2011, the Economist magazine hailed Discovery’s best-in-class wellness programme, Vitality, as a remarkable innovation to come out of emerging markets.
This put the company on the global stage, resulting in global insurers knocking on its door to partner with them. It now has an alliance with insurance giant Prudential in the UK; a health joint venture with China’s second-largest insurer, Ping An, which has a staggering 500 000 agents
Looking back, we have been true to our core purpose of making people healthy
selling the group’s products; and Asia-Pacific insurance giant AIA, which has 100 000 agents serving most of Asia, excluding China.
Discovery is now exposed to a population exceeding two billion people in Asia.
“Vitality is a manifestation of our key competence — the ability to track and change the behaviour of our clients, thus giving them better health outcomes and related individual-specific rewards that include discounted premiums,” said Gore.
His mantra is that prevention is better than cure.
“We use the Oxford Health Alliance’s 3:4:50 formula, indicating that three actions — following bad diets, not exercising and smoking — lead to the incidence of four non-commu- nicable diseases — diabetes, cancer, lung and heart diseases — that result in 50% of the deaths. Since the 3:40:50 model was established, around 60% of deaths are now attributable to noncommunicable diseases,” said Gore.
This proposition — better health in exchange for rewards — has found resonance with consumers and governments as the world battles to curb rising health costs.
Gore puts success down to four key areas of operation:
Actuarial prowess — Discovery has top-notch actuarial expertise (112 such staff just in South Africa) that can model customer behaviour and design relevant products;
Clinical team — the company has an experienced clinical medicine team;
Technology — its annual technology investments top R1-billion, allowing it to deal with large demands, such as the 736 000 calls it fields on average each month; and
Efficient and effective operations — this includes underwriting, administration and claims management, which handles one million claims a week globally.
“We have a unifying vision, culture and values that propel us forward,” said Gore.
“The culture here is intense, the pace frenetic and ambition boundless yet prudent and without hubris. You are at this company to be a change agent in the world, not to just collect a pay cheque. Work, and leaving a legacy, is an all-consuming passion.”
To understand Discovery’s success, one must examine its evolution and innovations over the years.
It is a story of unbridled entrepreneurship, organic growth and innovation coupled with a compelling, repeatable business model.
Starting in 1992 with a R10-million investment by Rand Merchant Bank (RMB) and focusing on the niche of medical insurance, Gore, Barry Swartzberg and their team rapidly built a group that competed in all the main areas of insurance.
It was tough in the first two years, but once they got RMB, Momentum Life and Nashua as their first clients, they never looked back.
“The breakthrough — the great differentiator, and this is a lesson to all entrepreneurs — came through when we came up with the Medical Savings Account, a concept that allowed clients to accumulate savings in their accounts and avoided the practice of ‘use it or lose it’ that was so prevalent in medical insurance then,” Gore said.
Discovery put great emphasis on service in administration, claims processing, paying doctors and call centre management too. It also focused heavily on brokers who sold medical aid services to companies, which allowed the company to snaffle a large share of the market.
Vitality was the next innovation, and it proved to be a differentiator that gave the medical scheme widespread relevance, becoming the glue that would create integrated benefits for clients across future operations.
Life insurance was next on the agenda after the success in medical insurance. Discovery recruited Herschel Mayers from Liberty to launch this in the late 1990s and here, too, Gore did not simply want to launch “me too” products.
Discovery’s innovation was to separate risk from investment in insurance products. Since the 1980s, life companies had bundled these two into universal life policies, which was problematic for savers because of a lack of transparency. Instead, Discovery sold risk-only policies — life, disability and dread disease cover. Because they were agile, they rapidly took market share before competitors could react. This resulted in a much more competitive life insurance market in the early 2000s.
Linking life insurance with Vitality was another innovation that created a new value proposition of better health and lower premiums, which drove even more222 sales of policies.
Gore’s company listed on the Johannesburg Stock Exchange in 1999 (so that a shareholder could exit), and in 2003 it raised capital of R700-million to expand the business.
With the listing, a rapidly growing business and steely ambition, Dis- covery decided to enter the US medical insurance market — the largest of them all. This nearly became its Waterloo. From 2000 to 2007 Discovery tried hard in the US, but the competition was just too strong.
Discovery lacked partners, scale and distribution, and suffered a 30% price disadvantage because its larger competitors could purchase medical services cheaper and charge less.
After losing $100-million (R1.3-billion) in US operation Destiny Health, it exited the market.
“With lessons learnt in the US, we
The culture here is intense, the pace frenetic and ambition boundless yet prudent
successfully entered the UK medical and life insurance markets in partnership with Prudential, which offered enviable scale and distribution, whereas we offered our proprietary expertise in dynamic pricing and Vitality. We now manage our profitable joint ventures — named PruHealth and PruProtect — and hold 75% of the shares,” Gore said.
PruHealth is now the third-largest in the UK and PruProtect is fourth.
From selling risk-only life insurance products in South Africa, Discovery then decided to enter the in- vestment business: retirement annuities, endowments and unit trusts.
This caused some ructions because its sister company in the FirstRand stable, Momentum, was in that business. However, in 2008, after some tough negotiations and deft restructuring, FirstRand allowed Discovery to exit the relationship through an unbundling. The new businesses succeeded and Discovery Invest now manages more than R30-billion.
Again Discovery was innovative here. They integrated life and investments businesses as well as Vitality in ways that offer customers benefits throughout their life stages.
For instance, customers can get up to 30% reduction in the fees paid on their investment policies. The company outsources the investment management function to Investec Asset Management.
But Gore was still casting his eyes further afield and the blockbuster deal came in 2009. China is the world’s largest market and it is tricky to get into, but Discovery went into a medical insurance joint venture with Ping An.
It has a 24.9% share in this venture and is contributing its intellectual property — product design, Vitality, technology and administration — to the project.
In 2013, Discovery signed another Asian deal, this time with AIA, in a deal that is expected to roll out Discovery’s wellness-based life insur- ance model to the Asia-Pacific region. AIA operates in 17 countries. So what is still left for the future? “In South Africa, our health business is maturing, but it continues to grow due to its strength. We expect more growth in life insurance and investments. Our hugely promising short-term insurer, Discovery Insure, which uses telematics as its chassis to reward good driving, is grabbing 10% of new business in South Africa after two years of operation,” Gore said.
One of the big challenges for medical aids in South Africa is the National Health Insurance (NHI), which experts say could lead to membership losses at medical aids such as Discovery if people are forced to pay for a state-run medical aid. Although it is unclear what the final structure of the NHI will be, Gore said Discovery was “engaging well with the government” on the plan.
Although Discovery is expanding overseas, it is not doing anything much elsewhere in Africa right now — but that will come in time. “We are halfway in our journey,” said Gore, a 49-year-old actuary who runs major city marathons around the world. And the billions he and team have made? “I am not driven by money — all I think about is our legacy to the world.”
Lediga is a specialist strategy writer and businessman. He can be reached at chiefled123@gmail.com