Discovery operating profit up, no dividend declared

‘I think the bank’s performance in the six months was one of the standout things for us in terms of client acquisition, quality of clients, usage of the bank’: CEO Adrian Gore.

RYK VAN NIEKERK: The diversified financial services group Discovery reported interim results today for the second half of 2021. The group’s operating profit rose by 8% to R4.9 billion, and the normalised headline earnings rose by 26% to R2.9 billion. No dividend was declared.

Adrian Gore is the CEO and he is on the line. Adrian, thank you so much for joining me. The past few years have been dominated by Covid-19 and it has been a bit of a rollercoaster period for insurance companies and companies playing in the medical value chain. Of course you play in both. The headline earnings increase of 26% seems very good indeed, but how comparable is it with the last half of 2020?

ADRIAN GORE: It’s very strong, and I think we are happy with it.

Over the rest of the year, the next six months, I think the growth should continue.

We have been through a complex period, but there’s been I think in the business very good progress throughout. We’ve entered a huge phase of growth, I would expect. Obviously Covid is receding. If there are additional waves and uncertainty it creates more difficulty, but absent that I do think the group is in a different phase of growth from the previous periods.

RYK VAN NIEKERK: Your biggest exposure to Covid-19 financially was through your life-insurance business, but in your statements you state that you believe the provisions you have made were sufficient. Do you still believe Covid-19 could pose a risk to the life business?

ADRIAN GORE: Look, I think the life business navigated particularly well, ignoring the financial issue. We paid about R6 billion of life claims  – underpinning the numbers, a real tragedy, and hopefully we’ve been supportive to those families. But the provisions and I think the liquidity and capital strength of Discovery Life after have been remarkable. So it’s in a very strong position were there to be a severe wave – and I hope not. I think we are very strong in sustaining the needs of our customers. Having said that, our expectation is that Covid is hopefully receding somewhat, so we are looking forward to moving past Covid if we can. But we do have to be ready.

We must expect and hope for the best, but in our financial institution let’s be ready for very difficult times at any point in time. I think our financial strength is clear in that regard.

RYK VAN NIEKERK: You were also one of the first companies to make vaccinations mandatory within the company. You’ve also been vocal yourself about the importance of vaccination and the life business also reduced the discounts on life premiums for new customers. On that point did you see a drop off in the number of new customers?

Discovery to require all employees to be vaccinated from January
Higher life insurance premiums for the unvaccinated on the cards

ADRIAN GORE: No, we haven’t. It’s a stake and an actual view of the risk, there’s nothing more than that to it. It’s just a risk factor that we price into new business. It has actually gone down very, very well. Others have followed in different parts of the world;d I think it’s an important issue. Hopefully over time Covid becomes endemic and the issues are different, but at this stage it is a very important risk factor.

You can see our data people who have [been] vaccinated have just fared dramatically better.

We’ve seen a lot of deaths in Discovery Life and you’ve seen virtually nothing in terms of vaccinated people. So it is an important point and I think the data bears it out.

RYK VAN NIEKERK: In typical South African fashion, there is significant resistance to the vaccine and being forced to be vaccinated. How did your decision to make vaccinations mandatory within Discovery impact morale within the group, and did you get to fire anyone because they didn’t want to get vaccinated?

ADRIAN GORE: It’s quite remarkable. Of the 10 000 or so people in the South African businesses, fully 97% or more were vaccinated. So the mandate actually had a very powerful effect. We are now working with the balance and working very sensitively, trying to convince them, going through different processes. It’s been a very powerful mechanism. I’m actually proud of the fact that we’ve moved a huge amount of people into a much safer position. So I do think it’s been a powerful move.

Again, hopefully over time this danger recedes but, while it’s there, [the] vaccine is one of the only remedies we have.

RYK VAN NIEKERK: The Discovery Bank is an interesting venture. You’ve entered a very competitive market. The bank lost around R500 million during the period but the original business plan did state that you are aiming for a break-even scenario in 2024. Is this still on the cards?

ADRIAN GORE: Look, I think the bank’s performance in the six months was one of the standout things for us in terms of client acquisition, quality of clients, usage of the bank. The bank has made amazing strides. It’s ahead of plan at the moment. If we keep doing what we’re doing, we should break even in kind of a similar time, but the actual upside is much bigger. We are aiming to build a business of considerable value. So I’m feeling at this stage confident we can beat the business plan. It’s been on track and now accelerating better. So a fantastic six months for the bank.

RYK VAN NIEKERK: Since December 2020 to the end of last year, around 100 000 new clients were added to the client base. But if you compare that to the number of clients banks like TymeBank and Capitec add, it is significantly less. Of course you do target a client in a higher-income bracket. Are you seeing people in that bracket being less inclined to actually change banks?

ADRIAN GORE: We are targeting a full-service bank. We are expecting people to join our bank and bank with us, so it’s a very different model. I don’t believe – and it’s no criticism of any other business – but I don’t think you can build a bank from the ground up of huge numbers who aren’t actively using the bank. So we are targeting clients who come and use the bank. We are [dealing with] 700/800 clients a day, of which 30/40% are primary clients. It’s a very different business model. We kind of exposed that today in our presentation. If you look at the actual economics of how the bank scales on that basis, it’s quite remarkable. I hope over time that we can appeal to a broader base of clients, and I think we can. But if you can do 800 to 1 000 clients a day of considerable value, you build a business that’s huge. I haven’t seen the neobank model – where you have millions of clients a day who don’t use the bank – work well. It’s a different approach. Again, I think that the plan is working really well. [We are] very pleased with it.

RYK VAN NIEKERK: These new clients, do they also use other Discovery products?

ADRIAN GORE: That’s a great question and initially we thought that would be the case. What we see now, which is counterintuitive but very appealing, is that nearly 46% or more of new clients are not Discovery members. So we have a broad base of health members and integrated members at various parts of the business, on the Vitality chassis and so on. And that makes the bank very powerful.

Nearly half of new clients coming in are not Discovery clients. So it does talk to the ability of the bank to appeal to a broader range.

We tried this morning to show that in businesses like Discovery Health, which has been incredibly strong in growth over decades, we’ve typically [handled] 600 to 800 cases a day. The bank is bigger than that. So the scale of the bank is quite remarkable.

RYK VAN NIEKERK: That’s interesting because FNB, for example, relies heavily on their eBucks offering to incentivise people to use more than one product within the bank to drive profitability. So that is interesting.

Just lastly, you did not declare a dividend, despite a much better financial performance. When do you foresee starting to pay dividends again?

ADRIAN GORE: We’ve been fairly clear that during Covid and the pandemic, given what we do, it’s not a prudent thing to do. We … [stuck] with that view. Once we have certainty on Covid and the environment settles down, we’ll look at it again. At this stage we are sitting just after the fourth wave, and we’re not sure what the future holds. We are in an interim phase so we felt just continuing with that process must be rational.

RYK VAN NIEKERK: Adrian, thanks so much for your time tonight. That was Adrian Gore, the CEO of Discovery.



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