🔒 With R250bn API targeted, China’s Ping An may be a “TenCent” for 25% owner Discovery

Discovery’s visionary co-founder and CEO Adrian Gore downplays the mere suggestion. But the hyper growth being posted by its Chinese partner Ping An offers some parallels to Naspers’ enterprise transforming investment in internet giant TenCent. Ping An is already generating over R25bn in annual premium income through providing health insurance on 16m lives, and its management is now targeting R250bn in API. While it carries the most potential, Ping An is only part of Discovery’s globalising of the Shared Value philosophy upon which its proven business model is built. With a setback in the UK dropping the share price back to 2014 levels, the obvious question is whether Mr Market has overdone the Vitality Life. I caught up with Gore this afternoon for a private session after he’d presented interim results to investment analysts. – Alec Hogg

I’m Alec Hogg and this is a rational perspective. I spent most of the morning listening to Adrian Gore give a presentation to investment analysts on the half year results for Discovery (to the end of December). Discovery’s share price has come under a lot of pressure, when the trading update told us that the operating profit for the half year was going to be lower than it was in the comparable period – the year before. The share price is now sitting at around R107 a share and it’s instructive to note that Discovery broke through R100 a share in 2014. So in effect, what you’re buying today, is the same price that you could have got Discovery in 2014. What has happened in the 6 years since – to this effect of multinational today – is chalk and cheese. But that’s the way Mr. Market is valuing it at the moment. I think very differently, even more so after listening to the results presentation today and having had this conversation with Adrian Gore which follows. Just by way of context, the problem child in the group for this six month period – and in fact it’s going to be for the full year – is Vitality Life Insurance. It’s the insurance arm of the UK operation which until recently, was run as two different units. The Vitality health unit run by Neville Koopowitz and the Vitality life Insurance arm which was run by Herschel Mayers, who was also looking after the South African arm, so he had a lot on his plate. He’s recently retired due to ill health and we wish him well after the incredible job that he’s done in building up the life arm. However, those two operations now on Herschel’s retirement have been pulled into a single operation and that company under Neville Koopowitz – as you’ll hear later in the interview – is starting to unlock quite a lot of value as you might imagine would happen bringing two separate silos together. The key thing about all of this is that Vitality Life Insurance is the laggard on the results for the 6 month period. It’s an accounting loss that was achieved. It’s not a cash loss, it is a re-evaluation of the business on a market to market basis, due to historically low interest rates in the UK. Someone like Warren Buffett would look at this and say show me the money. Is there any difference to the money? So what are we getting so excited about? Of course Mr. Market thinks very differently and as a result of that, we have the Discovery share price down at levels that were last seen in 2014. Have a listen to the interview with Adrian Gore – the Founder and Chief Executive of Discovery – I asked Adrian if there were parallels between Discovery’s experience in China with Ping An and Naspers experience in China with TenCent. Ping An has gone from nowhere to 10bn Renminbi or R25bn – in premium income in a very short period of time – and the managers are now aiming for 100bn Renminbi in premium income. What TenCent has done for Naspers shareholders, who knows, Ping An could be doing for Discovery shareholders into the future. But don’t take my word for it, have a listen to this discussion and make up your own mind.

This morning Adrian you had a packed audience – which is not always the case with investment presentations or presentations to the community – I was impressed by your presentation but of course there was the problem about Vitality UK. Afterwards, the analysts always get hold of the CEO, What was their reaction?

I think it wasn’t unwarranted. Firstly, we didn’t communicate our position clearly – that rattled them – and the actual real hit in the UK from interest rates is fairly well understood – in other words it’s formulaic – and I don’t think that’s the issue. I think the issue was the experience variances, in other words some operating performance wasn’t up to scratch frankly and we’re not pleased with it at all. So it actually wasn’t a complicated discussion. It’s not a good performance and we’ve got to fix it.

So if you take the UK Life operations out of the results, what would you have delivered today?

The operating profit would have grown quite substantially – despite building the bank organically (and that’s quite an achievement) – and if you look at the established businesses across the board, they did remarkably well. Their growth was 14% – without Vitality Life – so it really was a strong performance in a fairly complex environment. Vitality Life did damage it somewhat but it’s not fair altogether, because interest rates are an external thing – it’s a valuation loss, not operating loss. I was very pleased with the performance outside of Vitality Life, I really was.

So if you mark to market – as you have to do because of the accounting laws – then what happened in the UK really made it a disappointing result. Have you learned anything from this? Could you have done anything different?

No I don’t think so. I don’t think we should be taking positions on assets, the only thing in this entire stack of results that concerns me, were lapses in the UK. There’s a £6m swing which is material in the loss of Vitality Life, but in the group it’s fairly immaterial. I was very happy.

Well you did go into some detail on how the UK is a different market. Lots of upfront commissions for these sales people, hence in tough times they might be inclined to encourage clients to give up the policy and take it somewhere else. Is there much you can do about that given the environment?

I think there is. There’s commission clawback terms, in other words you clawback back their commission. We’ve got very high level brokers but we’re working with certain sectors that are not ideal. So there is a tighter management process that I think might have avoided this. I do think that this is manageable, our team has worked hard, but I do think we can do better.

The UK – before we move on to happier climates – is now under one roof with Neville Koopowitz, have you seen any any impact of that yet?

Absolutely. He’s already put a dramatic plan in place around the capital structure. He’s collapsed a number of divisions into each other. He’s reduced the run rate, he’s done a number things around the lapse side and around the data evaluation, so even the life team, he’s moved really quickly. We have to see how this plays out and we’re very impressed with his leadership. He’s quite a unique leader.

Just to close off on this, when you spoke in the presentation about the full year impact of Vitality Life in the UK, the numbers look pretty substantial. Is that going to push your operating profit into the negative for the year as a whole as a group?

Yes it will. The interest rate effect of £45m, it’s just a formula effect of plugging in that interest rate into the same formula. The good thing is that once you’ve taken a hit with the interest rates, it’s not recurring. In other words it’s a capitalised value. So once you’ve readjusted your rate, thereafter the profit emerges again.

The Shared Value model, which we’ve watched for many years now, does seem to be catching on globally – we’ll talk about it in just a moment in China – but here in South Africa, does it gather momentum? Obviously there’s some benefits from Discovery Bank, but in the more established businesses.

There’s no doubt in all the areas it’s quite remarkable. Even in the UK. The Shared Value model has proven to be very resilient. All of it is about the Vitality behavioural model and how you create a shared value. It’s so integral to everything we do. The Discovery Life products, people are really using it, it’s a living thing. It’s not a transactional product that you pay premiums on and your beneficiaries get a claim on at death. It really is something that people are involved in. It’s been a really powerful thing. This is where the world is going – shared values – doing good by being more competitive. We have such a fantastic model, we have to scale it.

That was an interesting point maybe you could just go through that again. Capitalism has gone from, I think you said you’re in stage four and we’re in stage three at the moment. Stage One was the business of business where shareholders come first. The path thereafter?

The path I think was towards CSR where companies accepted that charity is something you give – allocated to separate departments – you give X percent of your income. It doesn’t scale at all, it’s a grudge but of course it’s a good thing to do. Now in ESQ, which is a very good thing, obviously it’s broader but it still adds to the cost of doing business and it’s still I think in the boardroom not an easy thing to do. Whereas I think the best model must be that the business model of an organisation authentically is competitive and profitable by doing good. If you can achieve that, you scale, you do it aggressively because it’s good for you. You change society. This is a concept of Michael Porter and it is something that I think is very powerful. Our business is naturally aligned to our customers, if people are healthier they’re more profitable for us. It’s actually at the core of our being. I do think the face of capitalism is changing. I think the pressure on companies being forces for good is becoming overwhelming. Unless you’re authentically doing it, funds will not flow to you.

Are you seeing other companies also adopting this concept?

In our industry I think many companies are adopting the concept, but I think tactically on the ground – in the insurance industry – there’s no doubt that that behaviour aspect and pricing them in is where companies are trying to go. We do have a considerable lead here that’s why we are pushing hard to scale.

And that really is the point when Amazon went into the cloud – into web services – it had a 7 year lead and today the whole business is built on the profits that they make from it. How much time do you feel you have before the inevitable – phasing in from competition.

I don’t know. The partnership model is profitable and if we can get those partners to be transformational through this, if we transform their businesses with them in a positive way, I think that may give us real competitive advantage.

You mentioned John Hancock your US partner, it was highlighted in the results of its parent company that the message coming through was that half of the new business policies that they were writing were actually aligned or linked to the Vitality/Discovery platform. Did I hear correctly?

Yes. John Hancock now has Vitality in everything they sell. So they have what they call an all-in policy. Every life insurance policy you buy from John Hancock has Vitality. It could be light or heavy. The light is more conceptually there – the heavy really is where it should be. The data I showed this morning is that the integrated policies that are sold with John Hancock have grown by 80% and that makes up half of their life insurance sales. So the effect on their total sales has been quite significant. And I think at the Manulife level, my understanding is that in the results call this was cited as an important issue. So I mean it is pretty substantial. We do well out of it and we’re very grateful but they are on fire with it. They live and breathe this stuff. It’s quite remarkable.

Just going back because in the Discovery story one of the big missteps that you made was when you went into the US and you lost a lot of money. Obviously you’ve learned from that experience.

There’s no doubt we have but I mean it doesn’t immunise you from mistakes altogether. The one thing I think we did learn is the power of partnerships. I think these markets are complicated and I think if you’re completely and totally alone… even in the UK the initial partnership was predicated on having the kind of big brother who really has a local context. So it has worked for us, it really has worked for us. I think you’re right. I think those lessons did come from the US. We wouldn’t be here today with a global footprint without that experience.

And the partnership in the US with Apple Watch? I think you were running out of time in your presentation so you just touched on it, but surely that’s a game changer.

It could be. They see an opportunity, you know we brought this idea of funding the watch through behaviour change and we have done it before in a few markets with them. And they saw broader opportunity to do this with potentially health insurers in the US and now they’re working with other partners, there are few that are in a pilot at the moment, I’m not sure I can divulge their names, but really fantastic companies.

Others will follow around exactly this idea that those partners want to have people align to them and are happy to pay for behaviour change. So we’re trying to develop, almost an engagement mechanism around the Apple Watch that they can use in a generic sense. So it’s piloting out there – it could be substantial over time. It’s very interesting but I think it will take a bit of time. They are proving to be a very good partner.

How many watches have you sold through your networks?

Whew, I should know but I don’t know offhand. In the UK alone I think we’ve done 100,000.

You know you’ve got to be one of their biggest partners then…. I know Apple is a huge company but that’s a significant number of Apple Watches.

Yes it is significant and I think we’ve got more to do with our partners in Asia over time. So it does have great potential.

Do you get to talk to Tim Cook (Apple CEO) or are you ushered into the boardroom now when you go to Apple.

No. When originally the deal was done, the idea was with the CEO Jeff Williams, Tim Cook’s 2IC. I kind of pitched him the idea – could we bend mortality curves with the watch. They really are impressive guys and they were very taken by the social ability to do this. And we did a study in London last year and you know we got a lot of good stuff with them. It’s been in their C-suite and hasn’t been a local deal you know which I think is important.

Adrian China, PingAn. That is just an extraordinary story when you released some of the data today of 400% growth. It’s just crazy numbers but I guess when you talk about China the exponential reality in that market is extreme. How did you get into China in the first place?

It was almost by luck. The Vitality model in those days, the Pru was intrigued by it. And Ping An I’m not sure how that came to us. We were also intrigued and we went to see them and at that stage they were small. So we had those discussions and then it hardened over time. I wanted to build a health insurer and that’s how we got there. We were very fortunate. And it’s been a very good partnership, it’s been a really good partnership.

Are there parallels with Naspers and TenCent?

I have to say I think that’s… I mean I’m optimistic of how we could scale this thing but I think that would be really a blue sky permutation. I showed in the presentation, if you look at how they’ve have grown over the years, health can be as big, if not bigger because healthcare spend is bigger. So there’s no doubt if we can achieve that kind of growth single-minded, we could achieve that, there’s no doubt.

But I do think Ping An Health will be a very big company. I’m trying to make the point, when we see R25bn of premium or RMB10bn, plus for us it looks like a kind of an end in itself. In their world that’s pretty small. We’ve agreed with them explicitly that we are not chasing profits. If you look at that analysis spend on OpEx it is like 70-80% growth related. So you know it really could be very big and we’ve been long term partners, it’s a long journey

It’s hard as a South African to get your head around an ecosystem that you have there of more than 30 million people – 16 million of which are already customers – but the thing that blew me away (and I had to really reflect on and try and understand it) is that the target that the Ping An team, their line in the sand for the future, is just again mind-blowing. They’re already at R25bn and that target of tenfold, a 10x from there. How long do they think it’s gonna take to get there?

Compound growth at those levels, like relativity, funny thing’s happen. When we saw that 10 billion number we thought that was going to be hard to do, I think 40% growth will get you there. It compounds quickly.

When you look at these international markets and then you come back home where your profits are generated primarily, do you get frustrated by operating in a small market or are there big advantages to being here in South Africa?

The bank for us is exciting and potentially it could be a very big business. When we look at the size of our banks they’re not small by any standard, so to an extent I think the expansion process of the organisation in banking provides a massively complex opportunity and at the same time one that can really be of considerable scale by any standards. Discovery Health and Discovery Life are very big in their markets and therefore I think their ability to grow ridiculously is limited, but at the same time, I think that if you look at Discovery Bank – if we get it right – could be very substantial and therefore I don’t think the size of the market really presents that sense of limitation. I tried to illustrate this morning how integrated the organisation is, so there isn’t a sense that we are stuck in any one market.

With the bank itself – and maybe that’s where the shared value model kind of resonates quite easily for people looking at it from the outside – you explain that if the depositor or the borrower, in other words your customer benefits, they get to share in the additional profits that get generated for you. So you give part of those profits back to the customer. Is that getting traction yet?

There’s no doubt. We’re very happy with the bank progress. We’re not trying to get skinny accounts across a wide range, we’re trying to get our ecosystem to move on to the bank – 180,000 accounts out of 80,000 customers that are really using it – this is very good in six months and the data I showed this morning was actual data. These are early correlations and that may change but it really is a very compelling 6 months. I think your point is right, you get really good value as you engage better, but for us we are agnostic. That’s the perfect shared value in the life insurance analogy we’ve learned this over time. If your embedded value is flat by status but the value to the client grows by engagement, then you’ve got proper shared value. Those kind of algorithms we’ve learned with our partners and we can apply that to the bank and get it to work super powerful.

You also talk about the composite model here in South Africa, where you’ve got the health, the life, the Discovery insurance for your vehicle and of course now the bank coming through as well. Is it part of your long term goal to take that composite model into the global arena?

Yes it is. It could be different partners. In other words if you look at the traditional bank insurance model, you got the insurer and the bank on a JV around the sales outcome. We’re trying to argue for a composite where Vitality and the behaviour side sits under both, in other words the client gets added value from both entities. The composite structure is something I think we can play with outside the country. I don’t think it happens in the same entity. They are just too big. Then you can own all of the verticals.

Just to close off with Adrian, there was quite a lot of philosophy in your presentation today which is great because it lets one understand, but you were looking at shared value at a time when capitalism was very much in that first block. In other words the business of business is business. What opened your eyes to it?

Frankly we kind of broke through this idea of trying to make people healthier because of the uniqueness of the South African healthcare system. The obsession with that purpose – of making people healthier – created a purpose built company. We had Michael Porter out for our summit and he explained this whole shared value world and how you can scale CSR and we had this epiphany that in fact our system is shared value, it’s a perfect example. The thing was purpose built from the start and I’m proud of the team – we were doing it when others weren’t, but I think it evolves over time and we find ourselves in the front of this purpose led shared value world. So it has been an evolution it hasn’t been just an epiphany so to speak.

And how long has it taken for it to evolve? And during that period did you ever lose faith.

No, in fact Walt Disney wanted to make people happier, at the start of discovery, we said ours is to make people healthier. We never lost faith in that. It has always been a battle cry and has resonated so well and guided us. The shared value came as we started to see how things fitted together. These profound structures – if they work – tend to answer every issue, it just works out. The profound simple idea just evolves through common sense.

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