PODCAST: Adrian Gore on building Discovery, retaining an innovative culture, its bright future

Twenty years ago when South Africa emerged from its experiment with Apartheid, the country's leading business strategist reckoned only SA Breweries deserved the description of World Class. A few more names would be added to a similar list drawn up today, including financial services group Discovery which was just two years old when the democratic SA as born. The business created by Adrian Gore and his business partner Barry Swartzberg is now worth R46.5bn, has a one third share of the national medical aid market, is the biggest writer of new life assurance business and a cash generating partnership with Prudential in the UK. It also invests around R500m a year on new ventures  in short-term insurance, and partnerships in China, Singapore and the US. I'm a Discovery fan for all kinds of reasons. Not least my relationship with Gore, a 49 year old with energy of a twenty-something; an actuary who possesses a personality, and a man with the humility one finds in those whose lives are grounded in spirituality. He came across to our new Biznews radio studio today to talk about the financial results to end December results and lots more.  The Podcast is a treat. – AH   

ALEC HOGG:   In this Biznews special podcast Adrian Gore, Chief Executive of Discovery is with us in the studio.  Adrian, it occurred to me when we were talking a little earlier on CNBC that we never hear from your other co-founder of Discover – Barry Swartzberg.  Is he still involved with Discovery?

ADRIAN GORE:   Yes, absolutely.  He's actually driving a lot of the international stuff, so he has his head down.  He's focusing on it.  From the outset, I've been in the frontline communicating, and we work remarkably well together.

ALEC HOGG:   A bit like Steve Jobs and Steve Wozniak…

ADRIAN GORE:   I don't know if Barry would see that, but yes…

ALEC HOGG:   Well, he's not quite Steve Wozniak's size.  I met him last week – an interesting guy.  From the outset, did you decide or was there this big idea to make people healthier?

ADRIAN GORE:   What happened with that is we faced the reality when building Discovery Health, that there were too few doctors.  There was a terrible disease burden and egalitarian regulation.  When you bring it all together, the only way we could figure out how you build a sustainable health insurance model, was to focus on the demand side.  If you could make people healthier, you could bring some kind of anchor to the healthcare system.  That was really the concept, to an extent, of how it got going.  It was quite opportunistic – the idea of using incentives to change behaviour.  We didn't realise what we'd stumbled across.

ALEC HOGG:   You invested more and more time into understanding the Dan Ariely's of this world, and it has become a lot more sophisticated.

ADRIAN GORE:   Absolutely.  When we started out with Vitality, we had a lot of criticism from traditional health policy people who felt that incentives in healthcare were wrong and you're wasting healthcare rands on rewards.  It's amazing what a number of years have done.  It's actually axiomatic in healthcare.

ALEC HOGG:   Well, the numbers out today are very strong again.  I guess the place we like to look at to begin with, is imbedded value: up nearly 20 percent.  Eighteen percent growth – the same as last year: is this likely to be able to be sustained?

ADRIAN GORE:   I think it can be sustained.  If you look at the embedded value, experience variances and how it performed over the years, the real standout areas were lapses in mortality. Without performing accurate assumptions where people stayed were more sticky than we thought.  People exhibited lower mortality than we thought, which is exactly the by-product of the model that we're trying to achieve.  I think we can get it right.  Sustainably, that should recur, but I think it has been a good period.

ALEC HOGG:   So, incentivise your clients to get healthier.  They die later and they stay healthier for longer.

ADRIAN GORE:   And they stay longer, which is important.  In many of these models, keeping people in the risk pool is part of creating a sustainable pool, especially in healthcare.  You don't lose typically sick people.  They stay and you lose healthy people, so to make healthcare affordable for the sick, you have to keep the healthy in.  It's therefore one of the dynamics of the risk pool that you have to manage.

ALEC HOGG:   Dividend is up quite strongly as well: 21 percent at the interim stage.  It wasn't something you were famous for – paying dividends – in the past, but now it seems to be very much part of your culture.

ADRIAN GORE:   I don't remember how…  For a long time we didn't pay dividends.  Once we started paying, we had a fairly high dividend cover, four-and-a-half times on the view that we're really reinvesting the business, so we've really kept that cover.  The dividend has generally just followed the earnings, for us.

ALEC HOGG:   So it's unlikely that you're going to adopt the policy that many other financial business services have done, and are actually paying out more.

ADRIAN GORE:   Given our potential growth there are many things we'd like to do.  I think it would be foolish now.

ALEC HOGG:   Potential…  In South Africa, you haven't run out of road.  You were telling me that earlier.  Clearly, you're investing overseas.  Just starting here in South Africa, how much more potential do you have for example in the life section, which is already your biggest profit contributor?

ADRIAN GORE:   I think life can grow quite substantially.  I think we have the biggest market share of the people protection space, but that can grow by a number of percentage points and that means significant growth, so I think there's great growth there.  On the investment side, we're scratching the surface.  We're quite focused on a specific retail part of the space.  In healthcare, as well…we are big.  We're a third of the market, but think about it.  If we grew at ten percent, that's three percent of the market.  There's a lot of room to grow.  I tend to think people underrate the scale of South African generally – of what it offers.  These are the big markets and I think there's great growth for us.

ALEC HOGG:   From the outside, it looks like you have a really good idea: keeping people healthy.  You've focused much of that into healthcare, and then you've leveraged off it by starting into other areas in financial services.  Is that accurate?

ADRIAN GORE:   It is accurate.  Interestingly, the healthcare model is much more complex in that healthcare costs have many other dimensions to them.  It's not just health status based.  There are many psychological issues.  In the case of life insurance, the predictability of the rating factors, are more powerful.  Using Vitality as a strict rating factor – a dynamic rating factor – is incredibly powerful, so the Discovery Life model is very repeatable into other markets, as we've done in the UK.  You are right.  That is what we did, but I would argue that the life model is robust and in a sense, very transportable.

ALEC HOGG:   You've gone to Davos this year.  You love going there I know, but this year there was a lot of talk about big data and how science benefits from big data.  By understanding more of the information, you can get to the conclusions quicker.  That's something that you guys have maybe not stumbled onto, but were investing in a long time ago.  Is it making you better?

ADRIAN GORE:   There's no doubt it's making us better.  Ignoring the hype of big data, we have invested in considerable processing power with the single view of the clients, so we can suck data from everywhere.  I think the ability to look at these correlations allows us to understand all of these different aspects of how people correlate their behaviour to, for example, a hailstorm.  Understanding their Vitality status and their driver status to that claim…all these things are often simple to conceive of, making big organisations difficult to suck up and really check.  The ability therefore, to have that stuff on hand all the time, is a fundamental advantage, I think.

ALEC HOGG:   How much do you know about your clients?

ADRIAN GORE:   I think we know a lot about them and we treat it very carefully.  We know stuff that's helpful to them.  There's a type of data around health behaviour and around wellness.  This is the core of what we do.  We share this data with their doctors, with their consent, to try to drive the quality of healthcare through Health ID.  Understanding behaviours in life insurance and motor insurance is crucial, and I think we do know a lot about that.  That's quite critical.

ALEC HOGG:   The benefit being that if I share with you my personal data, and I behave myself and live the right kind of lifestyle I will be incentivised through lower costs.

ADRIAN GORE:   Definitely.  There's only a benefit to you in doing that, and generally, the kind of data analytics we do when we actually do data analysis is that we get rid of names that are not really relevant to us.  We don't analyse Alec Hogg, so to speak, but we look at a cohort of data and mix it up, based on this demographics.  We're looking for statistically significant patterns, not for seeking out individual issues.  That's not our business.

ALEC HOGG:   Does it help you in marketing?

ADRIAN GORE:   It probably does in many different ways, but we're not actually a cross-selling company.  Do you know what I mean?  It's really more about building excellence of product, about pricing appropriately and really about behaviour change – trying to understand how to nudge people in the right way.

ALEC HOGG:   Excellence of product…excellence of people…as a small company, it's easier.  As you've gotten bigger and grown more, it must be more of a challenge.

ADRIAN GORE:   I'm not sure.  It's interesting.  I think often, if you're a big company with a very good brand, it is easy to attract the best people.  I think it's kind of perpetuating.  You start out and you attract really good people.  That tends to flow and that goes forever.  I haven't found it difficult to find good people.  We have unbelievably smart people.

ALEC HOGG:   And for everybody who joins Discovery: how many apply?

ADRIAN GORE:   I actually don't know.  I should know, but I don't.

ALEC HOGG:   Is it a multiple, though?

ADRIAN GORE:   It is a multiple and it depends on what field.  For example, in the actuarial field I would argue we're kind of the number one choice on campus.  We get the smartest people.  I think in the clinical side, we're working hard on technology so we've segmented out the different disciplines where we need people.  We're working a lot on the kind of people we need, but we attract really good people.

ALEC HOGG:   How difficult has it been to do that?  We hear the refrain from all over the place that skills are becoming increasingly difficult – not just in South Africa, but also worldwide – to secure.

ADRIAN GORE:   It's paradoxical.  I also hear that, but I don't…  Having specific skills is hard to find.  We often need leadership of a particular business like entrepreneurial skills.  You want to send someone to another country.  That is hard to find – the kind of people that you know…  However, that's not a category.  In the categories of different areas, we attract great people.  I don't think there's a shortage, but to find that individual who has the magical entrepreneurial judgement/leadership: that is…in any country it's hard to find.  We're in the UK.  Tracking good people is tough there as well.  I'm not convinced.  I think that if you have the right value proposition – there are good people out there, but there is a skill shortage, we know.  We have no jobs for unskilled people and too many jobs for the skilled.  That's one of the issues, but I think in an organisation where you have a great value proposition, there are good people out there.

ALEC HOGG:   And you're going to make it work even more there.  I was interested to read that you're going to invest in a new head office in 2018.  I thought your current head office is not too shabby at all.  What's the new one going to be like?

ADRIAN GORE:   It's nothing ostentatious.  It's simply about economics.  We've outgrown it.  We've had all kinds of issues with trying to move people around the buildings.  We're in three different buildings with overflows.  We had to look at the viability of smashing one down and rebuilding – kind of a domino approach.  It's actually just not economical.  Eventually, we settled on just moving the entire lot.  We actually believe in trying to keep one culture and value system, so to have them split out…we just didn't support it.

ALEC HOGG:   Where is the new head office?

ADRIAN GORE:   It's kind of diagonally across from Sandton City – the American Embassy/Consulate – across the road there.  I think that whole area is going to be developed.  It will be quite interesting I think – generally.

ALEC HOGG:   The same precinct.

ADRIAN GORE:   The same precinct.

ALEC HOGG:   And is it going to be much bigger than what you have at the moment?

ADRIAN GORE:   It will be bigger, but it has phase development potential, so we've grown.  Our headcount is big.

ALEC HOGG:   And you don't own it, or it didn't seem like it anyway, because you said you'd be paying two hundred and twenty-six million rand per year – wow – it's a lot of money in rentals.  It must be a lot of space and a big development.

ADRIAN GORE:   It's a big development, but we typically use our capital.  That's not our business.  We're building all kinds of optionality.  We've done it in the past, but we're not trying to get new property.  We're quite focused on where we deploy capital.

ALEC HOGG:   You'll be there for 15 years – in the new office space.  I was impressed to see seven percent escalation rates.  If inflation goes where many people think it's going, you could be sitting pretty.

ADRIAN GORE:   The new headquarters actually works out cheaper where we are, in the economic sense, so it's a fairly prudent move, I think – and necessary.

ALEC HOGG:   Outside of South Africa, the British operation is really doing well.  It's kicking in now to the bottom line.  Are you expecting it because it's a much bigger economy, that your UK operations will exceed these contributions from South Africa?

ADRIAN GORE:   South Africa is really big and growing at 15 to 20 percent, so to actually outdo South Africa is difficult, but it is getting sizeable.  I think that business – in a year or two – will be a billion rand business in terms of profit, so it's going very well.  I'm excited by the fact that I think we've done really hard work during difficult times.  When the UK economy was down, it wasn't easy to build, especially the health business.  It's very cyclical in economic times, but having said that, I think it's grown strongly and the pound's strength against the rand, so a combination of the two could mean it contributes significantly to the bottom line of Discovery.  It really is big show for much of what we can do there – early days.

ALEC HOGG:   Given that you're a disruptor presumably, there'll be a tipping point somewhere.  Are you anywhere near that yet, in the UK?

ADRIAN GORE:   I think that in the life insurance space…we've created a real disruption.  The deployment of the Discovery Life Vitality product there has captured a massive part of the market, so we are the third biggest writer of life insurance in the UK – the broker market in the IFA space.  The volumes are substantial, so there's no doubt that I think we are creating waves there.  In the health space, we've been more conventional, but the use of Vitality is actually giving us quite a strong competitive advantage.  It's a market that is, in a sense, much more structured…  Disruption is different.  I was amazed that the Discovery Life product with Vitality…the regulator saw value in it in terms of 'good for society'.  It's a very different product: starting out lower with engagement levels.  They've never seen this stuff before, so I think that we can and will disrupt, but it takes time there.  It does take time.

ALEC HOGG:   Your insurance product is not yet making profits or certainly, from reading the breakdown of the accounts it doesn't seem to be making profits at this stage.  Is that something that you're hoping will also travel?

ADRIAN GORE:   I think it can travel.  Excuse the pun.  I think it can travel.  The model is quite unique and the use of telematics in insurance is typically about 'pay as you drive', really measuring exposure time, and giving you cheaper premiums.  This is different.  This is about nudging you to drive better and measuring what better driving means, so it is quite a proprietary approach along the lines of Vitality.  The company is new.  It's a couple of years old, and I think it's progressing very well.  I would not want to see our guys take their eyes off the ball, or thinking about anything else in this current market.  I think it does have great potential.  There's a lot of technology there.  It's very much like we do in Vitality.  It can form a foundation to other things that we'll do, but it really has been a very exciting six months with that particular company.

ALEC HOGG:   And a lovely float…  It's a wonderful business – isn't it – short-term insurance.  You get the float and the usage of all that money.

ADRIAN GORE:   Yes, I think you do.  However, we're focusing on the bottom line of trying to get real underwriting profit…trying to really price out bad behaviour, get the right kind of risks into the model, and making sure we actually get people to drive better' – in effect, on all aspects like mortality etcetera.  One thing I've speaking about that's amazing is that the hail damage was correlated to how people drive.  It's quite remarkable.  The truth is that when people are careful about how they manage their health and how they drive, you'll find that everything else tends to follow.  The ability to predict these things and measure them gives us a very powerful ability to add value to customers, and the ability to offer better value generally.

ALEC HOGG:   We spoke earlier about the risk factors.  Perhaps the big risk factor, on reflection, has to be; you're doing so well in South Africa, you're investing heavily in the UK, and you're also involved in China and Singapore: the risk potentially being overstretching.

ADRIAN GORE:   The risk is bandwidth.  In reality, the amount of capital we invest offshore is tiny, so the UK is cash generous.  There's no investment at all.  China's light and so are the other things that we're doing, so it's really about bandwidth stretch.  In these markets, we need our best people.  The UK   They have brilliant teams in it.  It really is a great business.  The other stuff is embryonics, so we're pushing hard.  We're a big organisation with many people that are focused on this stuff.  Those are the kinds of areas where finding the entrepreneurial leadership that you need, is not easy.

ALEC HOGG:   And you…how are you feeling?  If anyone is being stretched by a fast-growing company, it has to be the CEO.

ADRIAN GORE:   Yes, there's a lot going on, but I've kind of learned to grow with the business – hopefully, in terms of my time – I know I'm actually fairly focused on the things that need to be done on the day.  I don't sweat…trying to keep control of things.  I rely on great people.  We have a very unique structure with the executive committee that has all our people in it so every week we work through virtually everything in the business.  There's nothing left out, so we actually have an approach that coalesces all the skills, and I think that has, to a large extent, been one of our big success factors.

ALEC HOGG:   Adrian, you've been growing at 20 percent per year.  Is that sustainable?

ADRIAN GORE:   Mathematically, if you grow 20 percent per year for the next 20 years, you'll be bigger than Apple.  It's mathematically difficult, but I think that for the foreseeable future, the ability to grow at a rate significantly above price inflation is real.  If we get these models to work and we deliver on the stuff we have in the pipeline, I do believe we can grow quite strongly, but it requires us delivering – good execution.

ALEC HOGG:   Adrian Gore is the Chief Executive of Discovery.