Market Smashes Discovery’s Growth Forecasts

It’s fair to say the market really didn’t like Discovery’s year-end results presentation – at all. Shares in the financial services group had slumped 9.5% by Thursday’s close, despite Discovery posting a 29% increase in normalised earnings per share for the 12 months ended June, and a 32% rise in its dividend, to 201c a share. Contrast that to Old Mutual’s performance the day before, and banking group FirstRand’s 6% gain on its results. Currency spoke to CEO Adrian Gore about the numbers.

What’s confusing in your results is that you’ve posted fairly chunky declines in new business in Discovery Life, Discovery Health and Discovery Insure, yet profit in all cases rose. Does the new business performance suggest things are slowing down rapidly, which might account for your share price slide?

No. First, understand the one area where I think we did underperform was Discovery Life – but I think we’ll recover that quickly and I don’t think it will affect profitability. In Insure we purposely repriced the entire book, we put through rate increases and that was a choice we made, we got rid of any bad business and priced it up, and you can see the effect of that. And in the UK in Vitality Health, 3% seems marginal but it’s a market that has gone through rapid repricing with NHS, so these are situational things. And some of the core growth factors, like Discovery Bank, are doing the opposite.  

Discovery’s compound annual growth rate on average has been 14% over the past 15 years. And your growth outlook from here on is 15%-20%. Is that reasonable for a company like Discovery that has a lot of newish businesses on its books? 

There’s very little fledgling stuff now – there are a few small bets that could be really substantial; the bet is on the bank’s ability to scale and on our Vitality Network (John Hancock, Sumitomo etc) to get from $30m to two and a half times over time, which we think we can do. And the other stuff to operate in line with what they’ve been doing. It’s not easy and this is not guidance, it’s an aspiration, but we’re in the corridor … But if you do 15% over five years, you nearly double your size, and if you go back over six years, we’ve doubled our size. If we do achieve it, it will be amazing. 

In the presentation you said ‘I don’t see us starting new businesses’; so what Discovery has now in its portfolio – is that sort of it for the foreseeable future? 

No. I think that the bank is doing unbelievably well and if it scales like it continues to do it creates a very different group in its construct in a couple of years’ time. If we do get global scale, other opportunities open up in different ways. So I’m not convinced that the future is either acquisition or as-you-are; I think there are so many different partners and opportunities emerging that we hope will open up different avenues. An acquisition generally destroys shareholder value somewhere. If you take the bank as an example, it’s taken us 10 years. The UK took us 10 years to get to anything. To build up an institutional business of scale is a decade, and it’s five years to any reasonable kind of breakeven. 

You mentioned that over Discovery’s life span you now have 1.4 petabytes of people’s data. What does that actually mean for Discovery?

I was trying to show that you’ll get a better return on capital, and one of the big issues – certainly in long-term insurance – is the ability to price the risk on assumptions. And to price the risk you need the data. For example, on the bank: every transaction is being risk-rated.  

One of the stats you mentioned was that there’s an almost 80% difference in mortality outcomes between non-Vitality members and diamond-status members … 

I think we have brought that to the world, without the credit necessarily. But the cause and effect of all these behaviours on mortality – when we started out it was a hunch that if people got more engaged [with their health] you’d get lower mortality – there was no data. But now, we’ve developed a precision ability to look at cause and effect, and that is a big advantage. I think the difference between a hyped-up wellness programme and the ability to actuarially integrate it into insurance is the data.  

You’ve found that 95% of your health members don’t actually change their medical aid plans. Does this make you pretty confident that the health business here and in the UK will be resilient in the face of weak economic growth? 

I think the bet on health-care expenditure growing over time is a one-way bet; and you see that here. It’s a tax you pay and you cannot go without it. You do want Ozempic and the best scan and you won’t compromise, and that’s what happens. I think strategically the spend on these industries is likely to go up. 

You’ve been a big proponent of the business-government partnership of the past few years; surely you must be disappointed at how the hope after last year’s elections has fizzled out with our horrible growth realities? What can we change, quickly, that would see any sort of change in our trajectory? 

You’re going to be annoyed with my response, but I think one of the biggest things is narrative. I have to say, the turnaround in electricity is a massive issue. I think the improvement in the ports and we’re starting to see it in railways … this stuff should be simple to solve and it generally is, it’s just about getting the right people to execute; but this stuff is fixable.

We are doing a lot of the reforms [that the ratings agencies want]. I agree about the crime issue, what [Ninety One CEO] Hendrik du Toit has flagged … but there’s a lot of stuff happening on the side that the narrative crowds out. If we can get some kind of belief in the potential, the economy can grow. It’s like getting 20% for maths for five years – to get 25% is not hard. So we set that 3% growth rate – it seems ridiculous but we should be able to get there.