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FIFI PETERS: We finish by taking you back to the markets, and a particular stock that did pretty well [and] outperformed what the main index, the JSE, did. At one stage the shares of Discovery were up over 3%, and this was shortly after it dropped its results for the first six months to December earlier on this morning.
I spoke to CEO Adrian Gore of Discovery about how the year has been, or the six months under review. I also asked whether the market was right in being optimistic about what the road ahead could look like for Discovery. Listen to what he had to say.
ADRIAN GORE: I think the period was for us particularly strong. We had operating profits up 22%, and new business was very strong. I think most important, as well, is new initiatives like the bank are really coming on stream, and spend on new initiatives has come down. I think what we illustrated in the period was a very, very disciplined performance around our shared-value models. So all the stuff we said we’d do, I think has really come forward over the period.
I think as well that the environment is particularly complex and every market we’re in has different challenges. In SA it’s load shedding, in the UK stagflation. Wherever we are there are difficulties, but I think our business is well positioned.
So I do believe the performance was strong and good. At the same time my sense is that the potential for growth is very strong going forward. So it has been a very good period.
Read:
Discovery reports double-digit HY profits, but withholds dividend again
Top-end Discovery medical aid plans to increase by 10%
FIFI PETERS: Just on the new business, I see you even indicate in the health, the medical scheme division, that new business there was higher than your own expectations. So just some colour on what drove the strength in new business, and further detail on whether you expect the same level of growth in the period ahead, or whether we could be in for some slight moderation?
ADRIAN GORE: …Interestingly, Discovery Health and Vitality Health in the UK have been very strong. To an extent there is a real concern about healthcare systems, there is a real concern on kind of a flight to quality. So I think on the back of that, both of our health companies really attracted considerable new business. Whether we can continue at that level? You can’t write 20% [every] year, you know what I’m saying?
But I do think that there are different dynamics driving the different markets. The NHS in the UK is having a fairly tough time, so there’s a strong buying of private medical insurance. And here I think just the quality of the Discovery Health Medical Scheme, the offering, has been really good. So it has been a good period for us.
I think we can continue to grow strongly. I’m not convinced [however that we can at those kind of levels] obviously going forward at 20%-plus.
Listen: Complex Discovery results require trust in management’s vision
FIFI PETERS: Sure. Just in terms of the investments that you are saying individuals are making in their health, a lot more than in the previous reporting period, do you reckon that the Covid-19 pandemic also influenced that? And do you reckon that the pandemic has perhaps structurally changed how we view our health and how we invest in our health, based on what your numbers are saying?
ADRIAN GORE: Yes, I do. I think that people are concerned about health and resilience and wellness, and I think [they] have experienced potential danger in the pandemic. The other point is I think they’ve seen the data; the kinds of things that made you vulnerable to things like Covid were things that you can avoid – lifestyle choices about being fit, etc. So I think that’s one issue.
I think people are concerned about death, and therefore life insurance and other coverages are important. It’s not a negative message. I just think that Covid creates a different lens on where the risk may be. So whether it’s structural, I don’t know. I think it is, I think it is quite profound. We are seeing the benefits of that. The level of engagement in Vitality, in physical activity and those kinds of things, has been really, really strong.
So these, I think, are all good developments, frankly. I think we can make people healthier.
FIFI PETERS: Are you excited about developments over in China, the recent reopening of that economy? What do you reckon that could mean for your Chinese operations at Ping An going forward?
ADRIAN GORE: Well, Ping An Health is today a massive company, and it has done really well. I think the concept of China in the six months, was really, really difficult. You had all the lockdowns and the easing of the lockdowns, and the lifting of Covid Zero – then a massive wave coming through. So it’s been a difficult six months.
But our estimation is that the second half, from now till June and long into the end of the calendar year, is likely to see much more economic growth in China, the opening up, etc. So I do think we’ll see growth.
It’s a huge market. As well, my sense is Covid there is making people dramatically more focused on health, and the research we’ve done is that people are concerned about health, health insurance. So all the dynamics seem to be good. Our business is big, it’s exceptionally well run so we’re optimistic about what we can do.
FIFI PETERS: Circling back to the dividend, you are holding it right now, waiting for more favourable conditions, as it were. But you are spending in the business, you’re spending on new initiatives and you’re also supporting the bank further, Discovery Bank. Talk to us about Discovery Bank and whether it is performing to expectations in the environment.
ADRIAN GORE: Discovery Bank has been absolutely remarkable. I think it’s has been the standout performance for us. It’s operating within its capital plan, within its budgets; its growth is ahead of budget. The actual usage by customers is kind of dramatically better. And then I think just the narrative, anecdotal narrative by people using the bank, the experience, the travel platform – all that stuff happening. So if you look at the data, it’s compelling. When you look at the kind of anecdotal stuff coming through from our customers, it’s incredible. So the bank is really something we are very proud about. I think it’s remarkably special.
FIFI PETERS: So the profitability targets are on track then?
ADRIAN GORE: Yes, I think so. We said we’d get the operational break-even during this year. We’ll get full break-even in the next calendar year. The potential to really create real economic value I think is there and the benefit to the customers is really, really strong. So I think the bank’s performance on every metric is good. We tried our best in the presentation this morning to kind of cut the data in some kind of coherent form so you can really get a sense of how it’s playing out, and we are very optimistic about the bank.
FIFI PETERS: Even in this environment. Perhaps you can give us a bit of colour on how Discovery Bank clients are showing up. Interest rates are on the up, inflation is still sticky, everything else has gone up. Most people are in a cost-of-living crisis right now. How are you seeing that translate to the resiliency, or perhaps lack thereof, of the Discovery banking client?
ADRIAN GORE: We are not yet seeing a dramatic increase in defaults; that may be on the app. So we are being very, very careful. The bank itself is aimed at giving people access to travel, healthy foods, those kinds of things that discounts provide. They manage their money and their health well, which is in their control. So the entire orientation of the bank is trying to give people value for money. That’s the idea.
But how all of the banks play [out] in the next year will be interesting. I think we are in for not simple times in terms of potential cost-of-living issues, recession. Let’s see how it plays out. But I think we’ve seen throughout the entire business, once people engage in vitality and all the kind of triggers and structures we’ve created, they tend to be very sticky and they stay with us. That’s the purpose of the model – to help them through life.
FIFI PETERS: Circling back to your comments on load shedding, I just want to understand what the impact on load shedding has been on your business, but also what it’s done to how you’re thinking of covering for risk, or the cost of insurance premiums right now.
ADRIAN GORE: The direct effect on us as an operating set of entities – there’s a cost to it. But I think we are meticulous in how we run. We have all kinds of backups and structures. I don’t have that concern.
I think the bigger concern for us is just what it’s doing to our client base, what they go through, the affordability, the knock-on effect on the economy. I think that for us the second-order dimension is important. We are seeing power-surge claims in Discovery Insure of almost a R100 million in the last six months. It’s not insignificant. It’s illustrating the effect it’s having on people. But I’m hoping we’ll muddle through this. It’s going to take some time.
Read: Top-end Discovery medical aid plans to increase by 10%
FIFI PETERS: So you are not taking any particular position regarding what you do cover related to load-shedding related claims? Some other insurers pulled certain covers that relate to grid failure, load shedding and the like. What’s your thinking around that?
ADRIAN GORE: We are mainly focused on the personal lines. We are not covering major corporates in different ways, so it’s important to understand our segment.
The other point is that we have, over time, learned to make sure that the coverage around power surges is appropriate, that excesses payable are appropriate. So adjustments have been made, but we are not retracting that cover. No, we’re not.
FIFI PETERS: So talking about the economy then in broad. We’ve just had a message, the framework, the latest one tabled by the finance minister, the fiscal side of the economy in terms of its plans to get the engines going again. What do you make of it? Any takeaways?
ADRIAN GORE: I thought it was very responsible. I must say I thought it was sound. Nothing in it was dramatically unexpected, which I think is a good thing. We’re living through times now where every day you wake up to a new risk potentially.
I think the policy framework seems fine. The approach was very responsible to my mind. It focused on the right kind of things, not unexpectedly taking on the Eskom debt and things like relief on buying solar, etc. That may be a bit low. But directionally I think quite responsible.
I think our difficulty in South Africa is execution, not policy. I think the framework is fine for that. We’ve got to just execute on these plans, frankly.
FIFI PETERS: What about the developments that ensued after? I mentioned Eskom. I’m talking about the CEO specifically, and some of the allegations that he made relating to how government is run right now, and alluding to the ongoing corruption that he believes he saw. Did that cast any cloud on the optimistic outlook that you have for the economy? Or ‘cautiously optimistic’ I suppose is more accurate.
ADRIAN GORE: My view on South Africa is that I think there’s tremendous potential that we have to keep working on and building to liberate. It’s not a naïve optimism and has considerable challenges, but I think that we can somewhat control our destiny appropriately.
I think the Eskom situation is really, really problematic and I think it will take us time to fix and will only be fixed with public and private intervention working together.
I haven’t really studied fully yet – given the results over the day – what’s happened with the CEO. But what he says is, of course, worrying. I don’t think anyone was under any illusion that there wasn’t massive corruption at Eskom and at certain plants. I think there’s nothing new in that. I would guess some of the more substantial criticism we have to try and understand and see that that stuff has somehow surfaced, so we understand what’s going on. This is not quite standard fare, but I think that it’s just part of the Eskom saga that we’ve got to somehow get over and deal with.
FIFI PETERS: Just finally, Adrian, in terms of your dividend, you say that you’ll revisit that stance at your year-end. I’m trying to understand what conditions would make you open the taps on dividends again. Is this interest rates being at a particular level, or inflation being at a particular level of your comfort?
ADRIAN GORE: It’s a fascinating question. Just bear in mind we paid a dividend pre-Covid on a very high coverage level. We’ve never been a massive dividend-paying stock, nor that people bought Discovery only for dividends. In fact many of our shareholders pre-Covid asked: ‘Why are you paying a dividend? You invest in conserving growth, and it gets great returns. Don’t pay dividends.’
So to an extent, going into Covid, we suspended the dividend, we didn’t give it much of a thought. And we at the last results just innocently said we’re not starting yet, we’ll see – and we ran into like a wall of criticism. I don’t think it was the dividend. I don’t think it was the dividend per se. I think it was more the symbolism about ‘why aren’t you doing it?’ I’m not convinced everyone’s hankering for a dividend cover of five times. The fact is we try to show in this result, and I do think it’s been accepted, we’re not focused on the dividend, we’re focused on growth, getting the bank to scale. It’s an interim set of results; let’s visit it as we go along. I don’t think there’s any dramatic set of science that we will revisit. I think that restarting the dividend will happen. It’s not our reason for being, frankly.
FIFI PETERS: All right. Good to know. Adrian, thanks so much for your time. We’ll leave it there. Adrian Gore is the CEO of Discovery.
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