Discovery, the Great Disruptor, again proves why it’s a cornerstone for any long term investment portfolio

It’s well known in Johannesburg that the smartest kids have a straight choice between joining Discovery, the locally-based financial services group, or Glencore, the global resources giant run by Joburger Ivan Glasenberg. Both groups put a premium on intellect and an ability to embrace complexity. But while Glencore is already established in its field as one of the world’s leaders, Discovery is still only halfway along that journey. Heading into the financial year to end June, Discovery showed that it, too, is subject to the laws of gravity when the share price lost 15% in the week after a Trading Update which CEO Adrian Gore now admits was “a bit ambiguous”. A 3.5% rebound today suggests he provided the clarity investors need. I’ve been close to Discovery for almost a decade. Seven years ago the group had the good sense (I thought so, anyway) to secure the headline sponsorship of my nightly radio show, and continued supporting it for the next five years. Over that time I got to know the group as well as any other outsider. And Gore himself, the epitome of a disciplined modern executive  – a man who follows strict regimes to ensure he remains fit in body and mind and a deep faith that underpins true humility. The South African market has a few businesses that are good enough to compete against the world’s best on any playing field at any time. Discovery is one of them. A cornerstone holding for any long-term portfolio. – AH  

Watch my full interview with Adrian Gore on CNBC Africa Power Lunch by clicking here.  

ALEC HOGG: Discovery has said  it will increase its stake in China’s Ping An Health by another 5%. This comes as the company

Adrian Gore: The 49 year old co-founder and CEO of Discovery is already one of the greatest entrepreneurs to come out of Africa
Adrian Gore: The 49 year old co-founder and CEO of Discovery is already one of the greatest entrepreneurs to come out of Africa

today reported a first half profit increase of 19%. Joining us is Adrian Gore, Chief Executive of Discovery. Adrian, when your trading update came out the market took a dim view. They knocked your share price back. In fact it’s dropped 11% overall in the last week, but today we’re seeing a bit more life  (up 3.5%). Do you think there was perhaps confusion in the communication of the trading update?

ADRIAN GORE: Alec, I think the update was a bit ambiguous. It was very short and to the point. The paradox is the better our British business does, the more the discrepancy between normalised headline earnings and headline earnings is. So without explaining it, I think it was a bit ambiguous. I hope today we gave the rationale about the value of the business and the effect it has on the accounts. Hopefully we straightened it out. It’s actually a fairly simple singular issue but we were not clear in the trading update. I would concede that.

ALEC HOGG: Your business is very clear, though, although you do embrace complexity. It looks like things are going very well in South Africa and lots of excitement internationally.

ADRIAN GORE: Yes. The performance in South Africa has been very strong across all of our businesses. Our new business, Discovery Insure, has had great success…it’s in the second full year, we’re very excited about it. Outside of South Africa is interesting. The UK business, as I’ve said, has performed absolutely brilliantly so it’s at significant scale. It’s 15% of our new business – 12% of our profit. And then the new things that we’re doing with Vitality are very, very promising. So it’s kind of a mix of new initiatives with established big business but all going well.

ALEC HOGG: We weren’t able to talk at the time that you concluded the transaction with AIA in Singapore. Is there any overlap between what you’re doing there and with Ping An in China?

ADRIAN GORE: There are lessons I think that we’re learning in both markets that are important. But AIA is a Pan-Asian insurer. We’re not doing this with AIA in China per se, so with Ping An we’re working within China. With AIA we’re working outside of China, but the idea is very powerful. With AIA it’s not about health insurance per se. It’s about using Vitality to integrate into the insurance businesses. We’ve been working with AIA on the Singapore side for a year now and there’s a lot of work going down. It’s a joint venture that I think will take time to get materiality but the potential of it I think is substantial.

ALEC HOGG: When we see directors buying shares in companies, as outsiders we like to follow that money. When you see a company upping it’s stakes as you’ve done in this period in Ping An and with Discovery Insure – which I’d like to talk about a bit more – that also sends a signal.

ADRIAN GORE: You know, I think we’re optimistic about the Chinese health insurance market. It’s the most remarkable opportunity. 50% of all spending in healthcare in China is private, and of that nearly 80% is out of pocket. Any commentator will tell you that the health insurance market is likely to grow. We have the best partner in China. We’re carefully building a very good specialist Health Insurance Company. We have a fantastic call option to expand in that market and we’ve been trying to buy up as much as we can. We’ve also been  careful. I hope in our presentation this morning we were clear. We’re being careful to make sure that expectations are clear. It’s going to take time but that market is very exciting. I think we have a lot to offer. So yes, we are optimistic about it.

ALEC HOGG: Discover Insure: if you take the price that you paid for 25% of it from Hollard, it’s already a R1.4bn business in double-quick time.  

ADRIAN GORE: Discovery Insure has had a tremendous revolution. It’s only its second full year of operation. The scale it’s getting is impressive but I’ve been more impressed, frankly, by the receptivity to the product. The kind of dynamics about getting people to drive better and responding to the incentives, I think, will create a virtual cycle of people driving better. That brings claim levels down. It makes them safer. It brings lapses down. So in a market that’s largely commoditized, we have an opportunity to build a business that has a profound impact on people and has a fantastic actuarial performance. So I do think it is early days but the scale and the performance is really good.

ALEC HOGG: And the opportunities internationally on Discovery Insure have to be substantial. I just want to take you back to May. I was at the Berkshire-Hathaway Annual General Meeting and Warren Buffett was explaining some of the things that Geico – which is an insurance company that focuses mainly on cars over there – was doing. And one of the guys who works for a big American news house who has been to South Africa (Barry Wood) said to me ‘but your Discovery guys have been doing this for years’. So Adrian, are you really that far ahead?

ADRIAN GORE: Look, to be fair; I think we live in a smaller market that can serve as a laboratory so you can move fairly quickly. I think in the case of Discovery Insure there are certain dynamics about people using these devices for tracking stolen vehicles that offered us opportunities. So to an extent all variables kind of play together to offer us the ability to do this in a very sophisticated way in South Africa. In the US and elsewhere these are things that are growing very quickly – the use of telematics – so I do think we’re ahead and we can capitalise on that going forward. I feel strongly that for the next few years with Discovery Insure, we must get scale here and get excellence. So many different capabilities are  coming out of Discovery Insure. I think it can be used in different ways, going forward, but the focus now is we must get it to scale.

ALEC HOGG: The whole story of innovation and disruption is core to your DNA. Are you likely to be able to leverage this data – you must be putting together enormous amounts of data – to accelerate that? 

ADRIAN GORE: The data that we have is used carefully in the R&D process (research and development). A lot of the thinking and the structure of our products, is based on analysing our clients carefully and how they respond to incentives. It is ultimately a data and technology business.  For the first time we spent a billion rand on technology in the year under review. Ae have a huge amount of data, a huge ability to analyse that data. But that must manifest ultimately in better products for our customers. I think that’s the mission we’re on and we are making progress there.

ALEC HOGG: The core of your business is really to incentivise people to get healthier. That’s Discovery Life and Discovery Health. I’d like to get your insights into things like smoking and consumption of sugar. If you work that in or can you calculate the dis-incentive – taking the other side of the coin then – for people who smoke or people who consume vast amounts of sugar?

ADRIAN GORE: Firstly it’s important to say that the idea of making people healthy often sounds kind of flaky and soft. The truth of it is – and this is bigger than us – it’s profound. It is at the core of everything the world is facing now about understanding risk factors. I think you’re right. Sugar and its intake and the effect of that. Smoking is dramatic. It is absolutely a killer. We know that. So the ability to eradicate those kinds of things is critical. We have, I must say, opted in Vitality for an incentive rewarding system. We’re incentivising people, giving them discounts on healthy food. We’re not penalising them – so to speak – from doing it. I think that if you use a carrot and a stick you may get different results, but our view is a ‘softly, softly’ approach. Create incentives to nudge people in the right direction. These things are fashionable and kind of inter-generational. We’ve seen that with smoking. There’s very strong smoking laws. They’ve created a very different mind-set about smoking. South Africa had them a while ago, so these are battles that I think we will win but we are careful to tread lightly in the right way; guiding people, incentivising and educating them. The results you’ve seen are very, very strong so it’s encouraging. I’m scared of a very strong stick approach – I must say

ALEC HOGG: And the health food story? It was almost lost in your results that you are expanding this to Walmart in the United States. Now that would be, for most people, a very big story. What gives?

ADRIAN GORE: Well, you know healthy foods; if you look at Vitality there are a few key issues. Nutrition, physical activity, smoking prevention etc. The healthy foods benefit itself on the structure, and has been one of the repeatable aspects of Vitality. It’s not just in the discounting of healthy food. It’s in the whole physical experience of going into the store; the education and the tools, etc. It has done so well in the South African context, so we’ve rolled it out. We’re extending it to Woolworths in SA as I think people probably know. With Humana and Vitality in the US we’ve done it with Walmart. And the take-up has been very similar – a very strong take-up. The discount is only 5% there so it’s nothing like the 25% in SA. The margins in the US are less, but we’ve now taken them up to 10%. These are all parts of the Vitality process of creating a global scalable capability. We’ve taken all the learning to Singapore, where we’ve done the same with Cold Storage – the pre-eminent grocer in Singapore. I think we’ll do more in other markets. What is great about Vitality is that it’s a very repeatable scalable methodology, and at every step you’ve got to be brilliant. You can’t compromise on it at all.

ALEC HOGG: So – inventing things in South Africa, taking them to the international environment; that’s part of your strategy. It has been for some time now. Just to update us: if you were on a journey from Johannesburg to Durban, how far along that journey today is Discovery?

ADRIAN GORE: I think we are approaching Harrismith, Alec – about halfway in your analogy. I literally think that we’ve been successful in building careful businesses but I think the real ability to globalise and get scale and repeat; we are just starting to learn. The UK has been an incredible learning experience for us. I think if we get it right in China and with AIA and some of the learning elsewhere the journey will really accelerate. That’s why I’m feeling there’s a sense of a huge amount on our plate, but we are really only starting out the journey.