The early ’90s was a good time to start a disruptive financial services business. In asset management, there was Coronation Fund Managers and the semi-autonomous Investec Asset Management (now Ninety One).
Medical aid was also ripe for disruption. If anything, it was a sleepier industry than asset management, as many of the administrators were family-owned businesses. Medical schemes themselves were mutual societies, with limited scope to underwrite their clients.
Even so, Liberty chair Donald Gordon was quite sensible when he decided to avoid medical aid, a low-margin industry, preferring — so long as the rules allowed — to opt for medical lifestyle underwritten medical insurance.
Subsequently medical aid has proved to be a graveyard for major insurers Old Mutual, Sanlam and Liberty (after Gordon’s retirement), which all tried their hand at medical scheme administration only to retreat with their tails between their legs.
It was only the two insurers that were spun out of the FirstRand stable, Momentum and Discovery, that persevered in the medical scheme market. Discovery CEO Adrian Gore was barely 27 when he started Discovery. When I first met him in 1992, I assumed he was the personal assistant to the boss — at the time there were few CEOs under 50.
Discovery was originally called Momentum Health, and was built off the back of Momentum’s first-rate distribution before breaking away. There has been something of a love/hate relationship since then.
Love it or hate it, Discovery is an unusually innovative business. While Capitec kept things simple, few would disagree that Discovery’s calling card is complexity. Clients who can navigate the web of benefits in its Vitality ecosystem do amazingly well, with all kinds of discounts and cheap flights at their disposal.
Discovery has a market share that even Capitec can only dream of — it has 58% of the open medical scheme market. Gore could see that in medical scheme administration there are enormous benefits to scale, and Discovery’s premium increases have been lower than most of the far more niched competitors.
Yet the profit pool in the sector isn’t that big. With almost
4-million lives covered, Discovery Health made a profit of R2.02bn in the six months to December 31 — so just over R4bn a year.
Discovery needed to diversify, and not just because of the limited profit pool in the sector. It was clear quite early on that there would be political threats to the private medical sector, through what eventually became known as National Health Insurance (NHI).
Discovery Life is now a considerably larger business in terms of profit, making R2.61bn in the interim period. Here Discovery could see there was potential to disrupt through simplicity. When Discovery Life was launched in 2000 universal life products were coming to the end of their shelf life. These were hybrid life cover/investment products.
Discovery came to the market with pure life cover products. This was partly out of necessity, as part of its agreement with Momentum was that it could not launch several investment products. Investment products were, and remain, at the heart of the Momentum Group.
The legacy life offices came out with its own copycat pure life products. Old Mutual even had the cheek to call its Discovery clone Greenlight “innovative”.
Gore has taken risks, and not all have paid off. Discovery started Destiny Health in Chicago, which was in business from 2000 to 2008 when Discovery cut its losses after burning more than R600m in cash.
There are superficial similarities between the SA and US health systems, as in both countries private insurance is vital given the poor state of public sector healthcare in both countries. But Gore reckoned without the powerful incumbents, such as Blue Cross Blue Shield, which made it tough to break into the US market despite Discovery’s innovative medical savings account.
The diversification into the UK, initially in a joint venture with Prudential, has been more successful, though more of a tortoise than a hare. Vitality Health and Vitality Life made R926m in the December half year.
Analysts are concerned that Discovery is now quite thinly spread. The group still makes almost 80% of its profit in its SA home market. Discovery Life alone makes almost twice as much money as the entire Vitality International composite.
Discovery has more support from international fund managers than the local community. It pays a nominal dividend, which takes it out of many of the institutional ranking tables. A notable exception is PSG Asset Management, which at times has had to be a very patient shareholder.
Many of its peers were afraid that its innovations — not least its highly ambitious local bank — would be a cash drain. But foreigners appreciate Discovery Holdings as a rare example of an innovative insurer in emerging markets — or else their quantitative black boxes think they are buying shares in the Discovery Channel.
The bank is still showing a lot of red ink, though it reported an operating profit before new business acquisitions of R69m for the six months to December. But it now has 1-million clients, and surprisingly about 60% of its clients are outside the Discovery ecosystem. The bank isn’t just attracting nerds collecting Vitality points; it has a modest credit loss ratio of 3.3%.
However, life is getting more challenging as the legacy big banks reinvent themselves and newcomers such as TymeBank get critical mass. And don’t underestimate the extent to which affluent clients, fed up with high bank charges, might move business to Capitec.
Then again, nothing quite strokes the ego like pulling out one of Discovery’s exclusive purple cards.
• Cranston is a former associate editor of the Financial Mail.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.