Discovery CEO Adrian Gore: Disrupting to sustainable 25%pa growth

As the years have gone by, Discovery's growth has been reflected in a mushrooming market cap and, more visibly, an expanding complex of offices in its Sandton base. The group Adrian Gore and Barry Swartzberg started after Liberty showed them the door, is now worth R60bn. And by January 2018, its new 87 000 sq/m (21 acre) global head office will house 5 000 head office staff within walking distance of the Gautrain station. Much ground was covered in our post-results interview today, highlighted by CEO Gore's assertion that the past year's 24% growth is sustainable for some years into the future through a combination of maturing existing business operations and through the launch of new, disruptive ones. As always, one of the more interesting interviews of results season. – AH

ALEC HOGG: One of South Africa's champions, Discovery, reported its full-year results today. Shares in the stock have been rising faster than other Blue Chip members of the JSE'S All Share Index are. The Chief Executive, Adrian Gore, is just around the corner, but highly technology-efficient are Discovery… Adrian, it's nice to have you on the program here with us, with a satellite link from the Hilton, which I think is probably 500 metres away from us, but it's a big day for you. Presumably, you're talking to analysts and investors from not just South Africa, but other parts of the world, too.

ADRIAN GORE: Alec, that's right. I think it's been a very good day for us – trying to get across quite a complicated set of messages – but it has been very good.

ALEC HOGG: Those complications: you've never really shied away from the fact that it is a complex industry and a complex business, but that you are driven by incentivising people to do (in your case as in some cases) the right thing.

ADRIAN GORE: The central message we've tried to get across in the evolution of our business has been a much more disciplined approach to using behavioural incentives to drive every aspect, whether it's health insurance, life insurance, motor insurance, or spending a holiday overseas. Our fundamental hypothesis is that behaviour is a fundamental piece of risk and therefore, the insurance industries really are disruptable. I think the Discovery model we're seeing is working well in every industry and in other countries. While it is complex that has been the central message of a shared value model – what's good for us is good for our customers and good for society – and trying to get that across.

ALEC HOGG: In the last six months since we last spoke on this program at your interim results, could you take us through some of the achievements/progress you've made in those disruptions? Not necessarily in South Africa, but where you seem to be making headway again in the United States and particularly, in the U.K.

ADRIAN GORE: Well, in the U.K. probably the most notable thing was really taking the Discovery Life model in a much more profound way into the U.K. market. In these particular six months, it has had a tremendous effect on new business and receptivity and I think it has transformed the business somewhat. In the case of Discovery Insure here in South Africa, we are really getting a sense of the power of behavioural science in driving and what that means for short-term insurance. The growth there was over 70 percent year-on-year. That, in addition, is a high point. In China, it's a much more embryonic kind of product but the truth is health insurance in China seems to be a real, untapped potential. We're cautiously optimistic, but the traction we received towards the end of the year has been tremendous.

There've been flashpoints of real growth in our new businesses, but the existing businesses are really, more about the power of managing and improving people's lives. Generally, while it is complex, I think it's been a uniform performance.

ALEC HOGG: Is there an approach here, where you test things in the South African market and then export them internationally? Clearly, you're currently very much still a South African-focused business, but is that the long-term strategy?

ADRIAN GORE: Yes and no. I say it selectively because I think the South African market is off scale and we remain optimistic about it. We don't see it as a laboratory, so to speak, but I think the learning here is highly applicable. This is a complex market and a competitive one. You have elements of a developed market, a very sophisticated financial services industry with the challenges of emerging markets. When you approach an AA in Asia or some of the stuff you're dealing with in the U.K., those learnings are relevant. In the most technical sense, many of the statistical learnings (we call it 'bending the QX/bending the mortality rates by status – by Vitality status): those actual bent rates…we are moving around the world with our reinsurers. It's not even a laboratory. We're actually taking many of these mathematical curves and using them in other markets, so the answer is yes, but not in a laboratory sense – just in an experience sense, maybe.

ALEC HOGG: So it's almost as though we can teach other parts of the world the learnings that you're having here.

ADRIAN GORE: I think we can. I think South Africa has proud heritage of innovation in insurance – things like 'dread disease'. A lot of unitised, universal life insurance came primarily out of this country and I think we have a very proud history of innovation and leadership. I do think that it is the combination of the complexities of a market, where you don't have a social safety net, so to speak, but you do have expectations and so the markets are highly sophisticated. It's a long answer, but my answer is yes, we should be proud of it and I think we should do it to the benefit of our country and our customers.

ALEC HOGG: Adrian, what about Africa? You have been aggressive, into China. Is Discovery looking into Africa at all?

ADRIAN GORE: Yes, we are. We've looked at certain countries in Africa and there are opportunities emerging. I think that if you look at Discovery's evolution, it's interesting. We are primarily a disruptor. We are not a pioneer and to an extent, we're finding ourselves going to markets that are almost post-modern, such as the U.K. in terms of its insurance industry – trying to shake it up a bit. In the case of Africa, I think the need to have hospital groups' private coding structures etcetera and the ability to see viable profit pools is something we're excited about, but I still think it's a bit early for us.

ALEC HOGG: Talking about hospital groups, we recently had a fascinating conversation on this program with the Board of Healthcare Funders, – which presumably, you're very involved in there as well – concerned at the profit pools being achieved by hospital groups here in South Africa. Is this an area of great focus for you at the moment – to try to unravel that?

ADRIAN GORE: Yes and no. We are a fierce buyer of hospital services on behalf of our members in the Discovery Health Medical Scheme and other Schemes that we manage. It's our role to work with them and fight hard to make sure tariffs are affordable. I'm not sure if we're fixated on their profit margins. I think we have to focus on value for money for our customers and I think the hospital groups are very capital-intensive complex businesses, so our role is as a buyer trying to bid those prices down.

ALEC HOGG: Back to the numbers themselves: shareholders will be delighted to see 24 percent growth. I keep asking you this question. How sustainable is that level?

ADRIAN GORE: I think it is sustainable. If you look at Discovery, it's the combination of a number of large, existing businesses like Discovery Health. It has a number of star-ups with Blue Sky potential, I would argue, like China or Discovery Insure. I think we're one of the very few institutional businesses that keep starting up new businesses. If you can successfully start businesses up at scale, you can achieve – mathematically – a higher than expected rate of growth and I think we've managed to do that over 20 years. The answer to that is 'can we continue to grow things like Discovery Insure, and some of the other stuff we're doing and bring more of it on stream'. I tend to think we can.

Mathematically, I don't think you can grow at 25 percent per year forever, but I do believe we can outstrip inflation substantially as long as we're excellent, and that's the idea. As long as we're meeting customer needs at the end of the day: that is ultimately, what we're here to do.

ALEC HOGG: Do you have something else up your sleeve? Clearly, you wouldn't tell us now because that would spoil the launch, but Discovery Insure has been a fantastic success. Do you have something similar to that that you're working on?

ADRIAN GORE: What we've found is each of these pathways you open up, creates another pathway. There are many opportunities. The truth is that the partner models like AIA…and if that works in the right way, I think that has potential to grow. We remain very bullish about South Africa and its potential, so we are growing in adjacent industries such as motor insurance, and I think there are other opportunities for us. The truth of it is I think we're limited more by bandwidth and focus now, but I can quite clearly see a number of opportunities.

ALEC HOGG: Adrian Gore is the Chief Executive of Discovery, one of the great entrepreneurs that has been brought out of the South African soil. Discovery today, achieving a 24 percent headline earnings per share growth. According to the CEO, he can keep that going for some time yet.