Discovery Health’s new customers are opting for cheaper medical aid plans as the cost of living bites, a trend it regards as an opportunity.
CEO Adrian Gore said on Thursday there is room for low-cost medical aid packages given the take-up of medical aid insurance products such as Discovery’s Flexicare, which has recorded spectacular growth.
Medical insurance schemes give consumers access to limited private health-care services other than hospitalisation. The schemes provide full packages although access to some services comes with co-payments.
“We would like to offer a low-cost medical aid scheme but the law is still strict on that. It’s a complex regulatory issue but if the regulator allows that, the industry can do it,” said Gore.
The government has a cap on medical aid cover. The industry wants the rules to be relaxed to allow lower-income earners to have access to private health care.
In the year to June, Discovery Health membership was 2.798-million with the company saying fewer members cancelled cover due to affordability, work resignations, death, immigration and switching to other medical aid schemes.
Discovery Health is the biggest medical aid scheme, with 57.8% market share. Most Discovery Health members — 97% — stuck to their existing medical aid cover while 3% upgraded or downgraded.
Gore said Discovery Health continued to deliver on top-line growth metrics, and non-medical scheme products — Flexicare, Gap Cover and Healthy Company — performed well. Non-scheme revenue now represents almost 15% of total Discovery Health revenue.
Barry de Kock, equity analyst at Denker Capital, said Discovery’s exposure to the more affluent and resilient consumer insulated it from possible membership attrition caused by the rising cost of living.
“The products offer significant value for members both in absolute terms and relative to other options, with comprehensive cover and good outcomes also making customers less likely to cancel,” he said.
Makwe Masilela, chief investment officer at Makwe Fund Managers, said Discovery operates mainly in the upper-middle LSM and higher LSM categories. “So that market fully understands the importance of having medical cover and they’re able to tap into their reserves to try to cope with the high cost of living.”
In the period under review, Discovery Group’s core new business annual premium income rose 12% to R22.78bn. Gore said the growth from new businesses was driven by Discovery Bank, which signed up 1,000 customers a day.
“The bank was the biggest driver of that category… Growth has been staggering. We are attracting 1,000 clients a day,” said Gore.
He said the bank’s “exceptional offering to clients is incredibly strong. We have full services offering and will soon be offering home loans.”
Gore added that the momentum is expected to continue. Personal loans will follow before the end of the year.
The bank has 1.62-million total accounts, with 702,131 primary clients. “The quality of clients is significant, 50% is super prime.”
Discovery Bank is expected to reach its operational break-even level in financial 2024. Retail deposits were up 36% to R14.3bn.
De Kock said Discovery Bank was rapidly approaching profitability as losses dropped 23% compared with the previous year. Revenue growth “exceeded cost growth handsomely, which was a positive in our view. Despite the improvement, the bank remains a drag on overall results.”
He said new business volumes in South Africa were down 1% year on year, indicating a challenging growth outlook for what is already a mature market.
For De Kock, despite Discovery’s improved financial leverage and cash generation, it still faced areas of concern especially when compared against its South African peers.
“Discovery’s emerging businesses not reaching scale is a concern given the spend already incurred. While the upside in many of these businesses is conceivable given the under-penetration and large market size (for example Asia), we are acutely aware of the regulatory and operating risks that come with doing business in these markets. Management are culling businesses they believe will not bring them the required value, which is a positive,” he said.
In keeping with companies across the spectrum, Discovery’s financial year was characterised by significant macroeconomic uncertainty, such as high interest rates, inflation and the affect on consumers of the high cost of living.
Gore said Discovery’s diversified business had helped it to be resilient. “The overriding issue is cost of living and inflation. It is a crisis for everyone.”
He said one of the main risk to business was consumers not being able to afford Discovery’s products.
De Kock expects the environment to remain challenging for Discovery given the volatile macro backdrop and the group’s sensitivity to this. this the trend.
“Further efforts on intensifying the focus on key initiatives and culling those with marginal benefits remains key at Discovery. Scaling up of the bank in particular remains key to longer-term success for the group,” he said.
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