DISCOVERY: A JOURNEY
OF INNOVATION AND GROWTH

Discovery, currently South Africa’s biggest health insurance provider, was born from a vision to create a health insurance model that would enhance people’s overall health. From humble beginnings, the company experienced rapid growth, quickly expanding beyond our country’s borders – it now has a presence in the UK, Asia, the US and, more recently, other African countries. Over three decades marked by growth and innovation, Discovery has transcended its origins as a South African life insurance provider and health administrator into a global financial services business.

THE VITALITY ‘GLUE’

Discovery has pioneered product innovation within the affluent risk market in South Africa. At the core of the group’s business model lies its Vitality programme – the glue binding together all the businesses in its ecosystem, underpinned by a sophisticated technology stack. This comprehensive wellness system, integrated into all the company’s offerings, monitors various aspects of an individual’s life, including health, physical activity and nutrition, as well as financial acumen.

For example, customers can accumulate points by recording their exercise sessions using fitness devices from brands such as Garmin and Apple. These devices seamlessly sync with the Vitality programme through mobile apps, and members are rewarded for consistency and better choices. When customers shop at partner grocery stores or restaurants, they can receive 25% back on the purchase of healthy foods or meal options. Similarly, through Discovery Insure, better driving earns customers better premiums over time.

The Vitality system creates shared value for customers, the company and society in general. Customers are incentivised to reduce their overall risk, leading to lower premiums, while the business benefits from improved actuarial dynamics and profitability.

Discovery has extended its reach internationally by disseminating the Vitality concept through various wellness partners. The group doesn’t have direct clients in its partner markets but instead, under the banner of Vitality Global, employs a partner composite model maintaining strategic alliances with reputable global brands.

Vitality’s adaptable structure enables entry into markets in which becoming the main insurer is challenging due to high barriers to entry. In the partner models formed with established insurers in these international markets, the Vitality system is scaled accordingly, allowing for a capital-light approach to ensure growth.

Discovery Vitality currently operates in 40 markets globally. In the UK, it initially collaborated with Prudential, but recently acquired full ownership of the health and life insurance operations. Across the Asia-Pacific region, the model has been introduced in AIA Group markets, while John Hancock is the partner in the US and Generali in Europe.

PING AN HEALTH

In a collaboration with one of China’s largest insurers, Ping An, Discovery has a 25% equity stake in Ping An Health – positioning the group to benefit from the growing demand for private healthcare in China. In 2023 Ping An Health’s contribution to group revenue grew by 22% to about R36.5 billion, and its operating profit increased by 76% to R596 million. It currently contributes around 5% to group operating earnings.

Leveraging Discovery’s product expertise and Ping An Group’s distribution network and technology in China’s expanding healthcare market, Ping An Health is poised to generate substantial returns. Consequently, Discovery’s investment is expected to accrue increasing value over time.

DISCOVERY BANK

The culmination of the group’s shared-value model – and an avenue for expanding scale and profitability – is Discovery Bank. The focus is on creating the world’s first ‘behavioural’ bank, motivating customers to achieve financial well-being and rewarding them through the Vitality Money rewards programme. The more adept customers are at maintaining robust financial health, the greater their rewards, which range from dynamic interest rates to discounts on flights and gym memberships.

South Africa’s Big Four banks (FirstRand, Standard Bank, Absa and Nedbank), alongside Capitec and Investec, account for over 90% of loans and deposits locally. Over the years, these banks have consistently generated excess returns, yielding significant shareholder value. Despite the concentrated and fiercely competitive nature of the market, however, Discovery has proven its agility in capitalising on opportunities – the group’s advantageous position as a smaller player has allowed for high growth from a modest starting point.

Moreover, with a foundation of 300 000 Discovery card customers upon launch in 2018 and 2.5 million South African Vitality members, Discovery can leverage cross-selling opportunities for its banking products. Additionally, Discovery’s reliance on technology as an app-only bank, eschewing traditional branches, results in a lower cost base and enables faster realisation of economies of scale.

VALUATION AND RISK

As an investment opportunity, Discovery does come with its own set of challenges, foremost among them being scale. While disruption may be straightforward to initiate, sustaining earnings growth necessitates a sizeable and expanding customer base. With regard to Discovery Bank, the group recently reported it was currently acquiring around 1 000 customers a day – the total figure now stands at more than 800 000. It also reported a monthly break-even ahead of expectations, after excluding acquisition costs.

Estimating the potential value of a company such as Discovery is no easy task. The incubator nature of its businesses, anticipated to turn profitable in the future without historical precedence, demands numerous assumptions extending far into the future to ascertain value, thus introducing significant valuation risk for which we require a margin of safety over the prevailing valuation of the business.

In addition, the government’s plans for National Health Insurance (NHI) will impact the group’s earnings from its health administration business, Discovery Health. A key concern revolves around the future role of private healthcare and medical schemes post-NHI implementation. In terms of the NHI Bill, once the NHI is fully implemented, medical schemes will not be permitted to provide coverage for services already covered by the NHI.

While Discovery is in favour of universal health coverage, the group believes that NHI will take at least a decade to implement and will require considerable effort to make it workable and financially sustainable. Discovery continues to engage with the government in this regard.

In a nutshell, with the Discovery narrative being one of growth and innovation, we are monitoring the group closely as a potential long-term investment for our clients’ portfolios. However, we find the current valuation uninspiring, and would prefer to wait for a more favourable entry point into the business. This would offer greater downside protection from a valuation perspective while we remain mindful of the associated risks to the investment case.