Discovery Group has evolved from being a local health insurer to a multi-financial service provider with opportunities in global expansion.
Founder and CEO, Adrian Gore announced plans for a rights issue to raise R4-5bn. The bulk of the capital (R3-4bn) will be allocated to the group’s acquisition of Prudential, rebranded as Vitality, in the United Kingdom (UK). The remaining R1-2bn will go towards expansion in South Africa.
Gore says the group is well positioned for future growth and the past six months saw “strong, organic growth” of the businesses. Normalised earnings were up by 20%, at R1.981m and new business showed a growth of 17%. In the past 18 months, of the six tenders Discovery participated in, the group earned five, he says.
In the past Discovery would expand opportunistically, says Gore. Currently the group is more disciplined in its strategy. Discovery considers its primary markets (where it is the primary insurer) and then expands into adjacent markets, he explains. “We make sure the [business] model keeps its integrity”. The UK for example, was recognised as its second primary market and it was “critical” to take ownership of it and “build insurance equities”.
The potential in the UK was identified by Discovery’s ability to perform well as a “disruptor” in developed markets, says Gore. The UK offers a stable and commoditised market, with high prevalence of disease, an ageing population and substantial size (the third largest in the protection market with over 12m people). “The UK offers great substantial opportunity,” he told Finweek.
The biggest challenges the group had to overcome in the UK acquisition was obtaining a licence for its life insurance business, rebranding from Prudential to Vitality, and funding which calls for the rights issue.
An expansion in the United States (US) through a partnership with Life Insurer is also planned and will be finalised in April. Partner markets, where the group partners with a larger firm in another country have aided its global penetration. “I think that the partner markets where we’ve partnered with larger firms, offers us the ability to expand into markets we really wouldn’t go into alone,” says Gore. Other partner markets include AIA in Singapore and Chinese insurer, Ping An.
Factors driving Discovery’s expansion into China include the growing consumer demand. By the year 2050 it is estimated that China’s elderly population would exceed the whole US population and the middle class would reach 700m by 2020, creating demand for private health. The Chinese government is also regulating changes in tax to incentivise private health care and health insurance and technological development is set to innovate China’s insurance industry.
Gore says growth in China will be interesting to witness. It is expected the 17 branches operating currently will grow to 36 by the end of 2015. In terms of learning about the cultural differences of the market, he says it’s important to respect other people’s cultures. “Cultures are cultures. You don’t change them, you have to adapt to them”.
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 regulators. Still much more work needs to be done and funding is necessary to sustain the acquisition.
Business in the UK is promising. Vitality Health 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.
Vitality Life is also doing considerably well 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.
If I don’t add value then I would certainly think of stepping down, but at the moment I think I’m in my stride.
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 7-8 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 South Africa.
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”.
Despite the Discovery’s mass expansion the group has remained true to the core value of making people healthier, says Gore. The growth and expansion has only “intensified” the business model. He says the work done in primary and partner markets will make it possible to globalise the model. “We do have the ability to build a globally relevant, unique insurance model applicable for the times.”
Gore explains that Discovery’s approach to expansion involves repeating the business model in various markets as opposed to growing through acquisition which is risky. He acknowledges that there are future growth prospects outside of current businesses (health, life, insure, invest and card) but says there is considerable growth opportunity as it is.
As for transformation within the business, Gore says: “I think we’re doing a reasonably good job across the organisation. The board itself I think is pretty representative by gender and by race.” He says the new B-BBEEE codes provide a clear roadmap of what has to be done in industry. “We can certainly do better and we will.”
Having founded the group in 1992, Gore says he’s only halfway through the marathon. “If I don’t add value then I would certainly think of stepping down, but at the moment I think I’m in my stride”.
The CEO leads an active lifestyle and has scheduled to ride the Argus next week. “I’m not sure how well I’ll ride, probably badly. I hope I finish it.” Gore and his wife are diamond Vitality members and makes use of the travel and food Vitality benefits. “We are vitality junkies,” he admits.
* This article was featured in Finweek magazine.