Discovery, biggest Apple watch seller, to shake up SA banks

Entrepreneurial actuary Adrian Gore is taking another step to build the Discovery empire – this time with plans to shake up South Africa’s banking sector. Discovery, which started as a private health insurer, has expanded its network in South Africa and elsewhere across credit cards, life insurance, investments and property and casualty cover. Innovation has characterised Discovery’s marketing efforts. The company has made its mark in South Africa and the UK with the Vitality programme, which offers rewards to clients who maintain a healthy lifestyle. Its Apple watch incentive, which provides the must-have accessory to its credit card customers for a relatively modest fee, has seen Discovery become the biggest Apple watch seller in South Africa. The country’s bankers must be shaking in their boots at the prospect of Adrian Gore and his team at Discovery entering the industry. – Jackie Cameron

By Renee Bonorchis

(Bloomberg) – Discovery Ltd., the health-insurance administrator that has sold nine out of every 10 Apple Inc. watches in South Africa to encourage its members to exercise, has hired a team of bankers as it steps up efforts to create a new lender.

Adrian Gore, CEO, Discovery

“We’re flat out with the infrastructure and the regulatory process for banking,” co-founder and Chief Executive Officer Adrian Gore said in an interview in Johannesburg on Aug. 12. “We’ve got the capital, we’ve hired bankers, we’re building substantial systems. We want to make an offering that’s relevant and can win market share.”

Gore, 52, started Discovery as a private health insurer in 1992 and has since expanded into investments, credit cards, life insurance and property and casualty cover. With partnerships across the U.S., China, Europe, Singapore and Australia, Discovery has access to a network of more than 200 million customers it can tap for its Vitality loyalty program, which offers discounts to people who keep fit and eat healthily in a bid to lower claims against its policies.

Discovery’s Apple watch incentive

Discovery offers Apple watches — which sell from 6,000 rand ($453) on South Africa’s iStore website — via Vitality to members who have a credit card through the company for a one-time fee of 350 rand. Customers who maintain and increase their exercise regimes over the next two years won’t have to pay for the watches, while missing their goals means having to make monthly payments depending on how much they fall short.

Apple_Watch“We’ve distributed more than 30,000 Apple watches,” said Gore, who wears one himself and is known to walk at least five flights of stairs to his office, where a range of dumbbells lie near his desk. Discovery, which has alliances with insurers including AIA Group Ltd. and Ping An Insurance Group Co. of China Ltd., eventually plans to offer the Apple-Watch program in the U.S., Asia and the U.K., he said.

Banking may boost future earnings, the CEO said. A year ago, Discovery said it wanted to build a lender after buying control of its credit-card unit from FirstRand Ltd., Africa’s biggest lender by value. It hired former bank executive Barry Hore to head the team and has applied to the central bank for a license. 

‘Embedded Base’

Five lenders control more than 89 percent of South African banking assets and at least 16 other companies and 15 local branches of international banks offer services from private banking to wealth-management services and unsecured lending. The company’s Discovery Card unit has more than 250,000 customers.

“We’re looking at the modern and traditional structures that people need,” said Gore, declining to disclose what kind of bank the new lender will be. “We’ve got a good embedded base with Discovery Card. We’re comfortable that we’re heading in the right direction. It will take a year or two to get it into the market.”

Discovery’s 25 percent equity stake in Ping An’s health insurance unit is another of Gore’s ventures that may contribute to earnings as the demand for private-health insurance in China grows. The surge in China’s medical bills for its fast-aging population represents vast potential, the Boston Consulting Group said in June. The consultancy forecasts that payments from commercial health insurance will grow at a compounded rate of 26 percent each year through 2025.

“Private health insurance is nascent in China,” Gore said. “If there’s a hard landing that may be different, but as long as the economy is buoyant, the demand for health insurance will grow. There will be big winners in the health insurance space in China. I believe we’re on the right course.”

Not all investors are convinced about Discovery’s various initiatives. The stock is down 4.9 percent this year, which, if sustained, will mark only the fourth time the shares have declined on a yearly basis since its initial public offering in 1999. Four out of six analysts rate the stock a sell, according to data compiled by Bloomberg. 

With the company trading at 23 times historical earnings, Discovery is expensive relative to its peers on the six-member FTSE/JSE Africa Life Assurance Index, which have an average price -to-earnings ratio of 14.

Right now there’s an “earnings drag” with Discovery’s newer units having yet to contribute meaningfully to earnings while using up capital, Herman Bosman, head of Discovery’s biggest shareholder, Rand Merchant Investment Holdings Ltd., said in an interview last month. “Execution is needed” and the company needs to start delivering on some of the projects, he said.

Still, in the past decade the shares have risen almost sixfold, with Discovery growing to be the 28th largest company on the Johannesburg Stock Exchange and a market value of 83 billion rand. The top-performing analyst on Discovery is UBS Group AG’s Michael Christelis, who upgraded the stock to a buy at the end of June. 

Ventures like banking, the move into China and expanding Vitality globally will “take three to five years to get going and five to 10 years to make a profit,” Gore said. “Some of the seeds being planted now may only bear fruit by the time I have my retirement party.”