Since its inception Discovery management has said it will not enter a market unless it can disrupt that market and add value in a meaningful way.
Discovery Health with its Vitality platform is the standout example, but the same can also be said of Discovery Life, Invest, Insure and Card. Now the company, which operates in 16 countries and serves 10 million clients, has announced it will enter the banking market next year.
CEO Adrian Gore made the announcement during the presentation of the group’s annual results, which provided tangible evidence that this is a group on the move.
In the year ended June 30 2017, core new business annualised premium income of the group increased by 16% to R16.9 billion, while normalised profit from operations increased by 10% to R7.0 billion. Diluted earnings per share rose 20% to 683.6c.
With innovation at its core, Discovery invested 8% of earnings, or R577 million in new initiatives. This is over and above the R2 billion invested in the establishment of the banking platform, as well as the launch of long-term investment products in the UK market; the use of the Vitalitydrive model to disrupt the commercial insurance industry and the establishment of a platform from which to extend Discovery Invest’s retirement offering, all of which will launch in 2018.
“If I was in banking I would be nervous,” says independent analyst Chris Gilmour. “Their track record shows that when they disrupt, they do so profoundly. Just look at Discovery Invest. That started eight years ago and it now has R69 billion in assets under management, without a single portfolio manager in sight. And the same goes for Discovery Life where they have a marketshare of 29% of the retail affluent protection segment.
“A lot [of Discovery’s success] is due to Vitality,” he adds. “They use the information Vitality generates to truly understand their members. They know their customers and understand their lifestyles. The next logical step is to open a bank.”
Discovery has always placed an emphasis on science, technology and data. Specifically its Global Vitality Network – the central insurance platform that advances the Vitality Shared-Value Insurance model – has developed new IP in product, programme, and partnership constructs. For example, work is underway with Columbia University to promote healthy longevity at older ages by developing age-specific preventive recommendations.
Further, the Global Vitality Network has invested in a centralised data capability that houses the richest set of mortality, morbidity, and engagement data globally (40 million life years of behaviour-linked data), which is used to optimise value-creation in pricing and product design.
“This is key to the growth of the business model,” adds Gilmour. “This is not a company that grows by acquisition, the focus is on organic growth and partnerships.”
Discovery’s mature businesses (Health, Life, Invest and Vitality) grew operating profits by about 10% and in the case of Vitality by 89%. However the emerging businesses of Discovery Insure, Vitality Group (which expanded into four new markets) and Ping An Health in China showed extraordinary growth in operating profit of 86%, 39% and 66% respectively.
By far the most impressive growth was from the Ping An Health joint venture. Its membership grew by 428% to 3.7 million; its annualised new business net premium increased 103% to R800 million, year-on-year, with operating profit in rand terms increasing by 66%. “The private health insurance market in China is just starting to emerge,” says Gore. “And Ping An Health has more members than Discovery Health. We think private health insurance is going to be big in the Chinese financial services industry, but we are trying not to create ridiculous expectations.”
Overall this is a very good result, says Gilmour. “There are always people trying to find chinks in the armour. If I had to do that I would point to Vitality in the UK, where performance was sluggish. But even there, where people do not change easily, they are gaining traction.”
A dividend of 98c was declared, brining the total dividend for the year to 186c.
Click below to listen to Ryk van Niekerk and Adrian Gore discuss the company’s annual results: