JOHANNESBURG - Discovery is taking the world by storm with their Vitality programme. This shared value insurance model is emerging as a hit worldwide, and the roll-out in numerous countries is showing to be highly successful.
Vitality embedded life policies are much more valuable to insurance companies than traditional life policies - as much as four times more valuable. The reason is that Vitality can influence behaviour that causes 60percent of all deaths.
The three culprits are smoking, what you eat, and exercising. Vitality is an industry disruptor, and a good example is Hong Kong where 75percent of all policies now sold are Vitality embedded. The biggest insurer in Asia, AIA, is using Vitality. In China, the market leader Ping An’s second most products sold are Vitality co-branded products. They have a better selection, lower lapse rates and fewer claims. Ping An is a jewel in the Discovery crown.
Discovery holds 25% of the Chinese insurer, which grew its membership in the last year by 428% to 3.7million. The private health insurance market is just starting to emerge, and already Ping An Health has more members than Discovery Health in South Africa (2.76million). With a population of 1.5billion people, the potential is enormous, not something that will be easily experienced in South Africa.
Last week Discovery surprised the market with a robust set of results. This company just keep on excelling. For the full year to June 2017, they increased their headline earnings per share by 20 percent, and normalised operating profit rose 10 percent to R7bn.
By far the most impressive growth came from the Ping An Health joint venture. The annualised new business net premium increased 103 percent to R800m, and operating profit in rand terms grew by 66%.
Discovery Health, by far the biggest medical scheme in South Africa, managed to grow their new business 18percent, clearly of a high base. The normalised operating profit increased 11percent to R2.5bn. New business annualised premium income at Discovery Life increased 17percent to R2.175bn, and earnings rose 10percent to R3.588bn, despite the impact of higher than expected claims.
Operating profit at Discovery Invest grew 12% to R744m and assets under administration increased 14percent to R69.5bn. Discovery Insure delivered its maiden operating profit of R9m in the send half of the financial year.
Gross written premiums grew 32% to R2.1bn, with new business annualised premium growth of 19percent. Discovery is in discussions with global property and casualty insurers interested in adopting the Discovery Insure model, which rewards policyholders for safe driving behaviour.
The long-awaited retail bank will be operational by the second quarter of 2018 if all goes according to plan. South African banks should be fearful, Discovery is known to disrupt markets and gain market share quickly. They have always said that they will not consider entering a market if they cannot disrupt that market and add meaningful value.
Discovery places much emphasis on technology and data, just like Capitec, and look at how quickly they overturned the market. It has made significant progress in developing systems, infrastructure, operating processes and a customer value proposition. All work streams and systems are on track, and the regulatory framework is almost finalised.
With a top-end client base, the banking division opens a whole new wing of potential growth for Discovery. The share does not look cheap at R142, with a price-earnings ratio of over 20x, but future earnings power is probably underestimated. With innovation at their core, they invested R577m in new initiatives in the last year. Just from the Vitality Group the projected annual profits of R300-R500m in the next three to five years is perceived as conservative.
Not only are the established businesses doing well, but new initiatives keep on surprising on the upside.
Amelia Morgenrood is PSG Wealth regional director.