South African Narrative 'A Lot Worse Than Reality,' Discovery CEO Says

Summary

Adrian Gore, CEO of Discovery Ltd., discusses the company's half-year earnings, addressing concerns about negative cash flow and declining return on equity. He highlights the company's strong operating performance and growth potential, particularly in the UK and South Africa. Gore also comments on South Africa's economic situation and the challenges of implementing universal healthcare, emphasizing the need for private sector collaboration. He expresses optimism about Discovery's vitality model and its potential in the US market, focusing on demonstrating the model's effectiveness rather than acquisitions.

Takeaways

• 😎 Discovery Ltd. CEO Adrian Gore is confident in the company's business model, despite facing a challenging economic environment and complex accounting standard changes.
• 📈 Despite negative cash flow earnings and a slight decline in return on equity, Discovery saw a 28% growth in new business, indicating strong expansion and market acceptance.
• 🔥 Growth is being fueled globally, not just in South Africa, but also in the UK and other regions, leveraging the Vitality model across its business segments.
• 🛠️ Adrian Gore remains optimistic about South Africa's economic prospects despite concerns over inflation and economic growth, citing efforts to improve infrastructure and potential for growth.
• 🏆 The upcoming South African election could be pivotal, with the possibility of the ANC falling below 50% and leading to a new political dynamic through coalitions.
• 😷 Concerns around the universal health care bill highlight challenges in funding and the need for private sector collaboration to achieve universal coverage goals.
• 💻 Discovery is actively involved in health care discussions and collaborations, emphasizing the importance of private sector involvement in successful health care delivery.
• 🇪🇺 In the UK, the demand for private health insurance is rising amidst NHS challenges, suggesting potential growth for Discovery's private health insurance products.
• 👨‍💻 Adrian Gore discusses Discovery's focus on the US market, highlighting a strategy based on data and behavior change rather than acquisitions to penetrate the health care market.
• 💡 The interview concludes with Gore expressing optimism for Discovery's growth model and its ability to navigate complexity and ambiguity in the global market.

Q & A

What was the main concern raised about Discovery Ltd.'s financial performance?

The main concern was the negative cash flow and the decline in return on equity from 14% to 12%, despite relatively positive half-year earnings.

How did Adrian Gore respond to concerns about Discovery's profitability?

Adrian Gore expressed confidence in Discovery's business model, highlighting the 28% growth in new business and the strong underlying operating performance, including operating income and profit.

What accounting standard change did Adrian Gore mention, and how did it affect comparisons?

Adrian Gore referred to a complex accounting standard change labeled as '17', which made comparisons difficult due to its impact on financial reporting.

Where is Discovery Ltd. seeing growth in its business?

Discovery Ltd. is seeing growth across various regions, with strong performance in the UK and consistent growth worldwide using the Vitality model.

What is Adrian Gore's outlook on South Africa's economy and the upcoming election?

Adrian Gore sees potential for growth due to improvements in energy, transport, and logistics infrastructure. He also mentions the possibility of the ANC falling below 50% for the first time, leading to coalition governments and a new political dynamic.

How does Adrian Gore view the universal health care bill in South Africa?

While Adrian Gore acknowledges the laudable goal of universal health care coverage, he points out the lack of funding and the challenges in implementing such a large-scale program, suggesting it may take a decade or more to become fully funded.

Is the private sector involved in negotiations regarding the universal health care bill?

Yes, the private sector, including Discovery Ltd., is involved in negotiations and is committed to making the universal health care system work, recognizing the need for collaboration and the lack of funding.

What is Discovery's strategy in the U.S. health care market?

Discovery is focusing on offering its vitality shared value model to U.S. health plans, emphasizing personalized wellness and disease management. Adrian Gore does not foresee any acquisitions but believes in the potential of their model to create significant impact.

How does Adrian Gore address the competitive nature of the U.S. health care market?

Adrian Gore plans to use Discovery's extensive data and sophisticated capabilities to demonstrate the benefits of their model to U.S. health plans and employers, focusing on the positive impact on health care costs.

What is Discovery's approach to dealing with premium inflation in the insurance market?

Discovery's approach is to improve the efficiency of the insurance model by addressing behavioral issues that drive both deaths and sickness. They aim to offer lower premiums and cover more people, believing that their model will eventually lead to better financial results and less need for premium inflation.

How does Adrian Gore believe the market will react to Discovery's business model over time?

Adrian Gore is confident that the market will recognize the value of Discovery's business model as it continues to demonstrate strong underlying earnings and global leadership in shared value creation.

What could potentially hinder Discovery's growth model in the future?

Adrian Gore believes that the main challenge is not external barriers but rather revealing the strength and remarkable achievements of Discovery's business model to the market.

Outlines

00:00

📈 Adrian Gore on Discovery Ltd's Financial Performance and Market Confidence

Adrian Gore, CEO of Discovery Ltd, discusses the company's recent financial performance, addressing concerns about negative cash flow and a decline in return on equity. He emphasizes the effectiveness of their business model and the challenges posed by a complex accounting standard change. Gore highlights the 28% growth in new business and expresses confidence in the company's growth potential despite current market uncertainties.

05:01

🌍 Global Growth and South African Economic Outlook

Gore talks about the growth of Discovery's businesses across different regions, with a particular focus on the strong performance in the UK and the company's global health insurance model. He then shifts to discussing South Africa's economy, noting its underperformance and the potential for growth amidst infrastructure improvements and upcoming elections. Gore also shares his views on the universal health care bill in South Africa, acknowledging the challenges in funding and the need for private sector collaboration.

10:05

🏥 Comparisons with the NHS and Private Health Insurance Trends

The conversation turns to comparisons between South Africa's health care system and the UK's National Health Service (NHS), with Gore highlighting the differences in scale and funding. He discusses the increasing demand for private health insurance in the UK due to NHS challenges and suggests a similar trend could occur in South Africa. Gore also addresses the potential for Discovery in the US market, focusing on partnerships and the company's unique health and life insurance model.

💡 Discovery's Approach to the US Market and Future Growth

Gore outlines Discovery's strategy for entering the US market, emphasizing the company's data-driven approach and its focus on demonstrating the benefits of their health insurance model to health plans and employers. He rules out acquisitions in favor of showcasing the effectiveness of their wellness and disease management model. Gore expresses confidence in Discovery's ability to succeed in the competitive US market and mentions the company's strong performance in the life insurance space.

🚀 Optimism for Discovery's Growth Model and Future Challenges

Adrian Gore concludes the discussion by reaffirming his optimism for Discovery's growth model, highlighting the company's strong underlying earnings and global leadership in shared value insurance. He believes that over time, the market will recognize the value of Discovery's approach. Gore discusses potential barriers to success, suggesting that the company needs to better reveal its data and the effectiveness of its model to overcome any challenges and maintain its growth trajectory.

Keywords

💡Earnings

Earnings refer to the profits a company makes over a certain period. In the context of the video, it is mentioned that Discovery Ltd. had a positive half-year earnings report, indicating the company's financial performance during that time. However, the cash flow was negative, which could imply that the company's liquidity or ability to generate cash was not as strong as its profit figures suggest.

💡Cash Flow

Cash flow represents the inflow and outflow of cash within a company. It is a crucial measure of a company's financial health because it shows whether a company has enough cash to cover its expenses, invest in the business, and pay its debts. In the video, Adrian Gore notes that although earnings were positive, cash flow was negative, which might raise concerns about the company's liquidity and operational efficiency.

💡Return on Equity (ROE)

Return on Equity (ROE) is a financial metric that measures the profitability of a company in relation to the money shareholders have invested in the company. It indicates how well a company is using its assets to generate profits. A decline in ROE, as mentioned in the video, suggests that the company's efficiency in generating profits from shareholder investments has decreased, which could be a point of concern for investors.

💡Mortality Model

A mortality model is a statistical model used in actuarial science and insurance to predict death rates and patterns. It is essential for insurance companies to price policies accurately and manage risk. In the video, Adrian Gore refers to the mortality model as working well, which suggests that Discovery Ltd.'s predictions and management of death risks are effective, contributing to the company's growth and expansion.

💡New Business Growth

New business growth refers to the increase in the number of new customers or clients that a company acquires. It is a critical indicator of a company's ability to expand its market presence and generate additional revenue. In the context of the video, Adrian Gore highlights a 28% growth in new business, which demonstrates the company's strong market performance and potential for future growth.

💡Vitality Model

The Vitality Model refers to a health insurance program that incentivizes healthy behavior among policyholders. It is a unique approach that integrates wellness and disease management into insurance products, aiming to improve health outcomes while reducing healthcare costs. In the video, Adrian Gore discusses the global success of the Vitality Model, which is a key driver of Discovery Ltd.'s growth and expansion.

💡Accounting Standard Change

An accounting standard change refers to updates or modifications in the rules and guidelines that companies must follow when preparing their financial statements. These changes can affect how financial information is presented and compared over time. In the video, Adrian Gore mentions a complex accounting standard change that makes comparisons difficult, highlighting the challenges in interpreting and communicating the company's financial performance to the market.

💡South African Economy

The South African economy encompasses the economic activity and market dynamics within South Africa. In the video, Adrian Gore discusses the country's economic performance, mentioning underperformance and the potential for growth despite challenges such as inflation. The economic context is relevant as it affects the business environment and the company's operations within the country.

💡Universal Health Care

Universal Health Care is a system where all citizens have access to healthcare services regardless of their ability to pay. It is a goal aimed at achieving healthcare equity and coverage for all. In the video, Adrian Gore discusses the challenges of implementing such a system in South Africa due to funding issues and the need for private sector collaboration.

💡UK NHS

The UK's National Health Service (NHS) is a publicly funded healthcare system that provides comprehensive health services to UK residents. The NHS is known for its universal coverage but faces challenges such as underfunding, complex dynamics, and infrastructure issues. In the video, Adrian Gore contrasts the NHS with the potential for a similar system in South Africa, noting the differences in scale and funding.

💡Healthcare Costs

Healthcare costs refer to the expenses associated with the delivery of healthcare services, including treatment, procedures, medications, and insurance premiums. In the video, Adrian Gore discusses the impact of healthcare costs on both the public and private sectors, emphasizing the need for efficient and sustainable funding models.

💡Market Confidence

Market confidence refers to the investor sentiment and belief in a company's ability to perform well and generate sustainable profits. It is influenced by factors such as financial performance, business models, and market conditions. In the video, Adrian Gore addresses the need to build market confidence in Discovery Ltd. amidst financial results and changing market dynamics.

Highlights

Adrian Gore, CEO of Discovery Ltd, discusses the company's half-year earnings and addresses concerns about negative cash flow and declining return on equity.

Discovery has experienced a 28% growth in new business, indicating a strong expansion of their model.

The company has gone through a complex accounting standard change, making comparisons difficult.

Gore is confident in the underlying operating performance of the business, citing strong operating income and profit.

Growth at Discovery is stemming from various regions, including the U.K. and South Africa.

South Africa's economy is a concern, but Gore sees potential for growth amidst challenges.

The upcoming South African election is considered seminal, with expectations of significant political changes.

The narrative around South Africa's economy is often worse than the reality, according to Gore.

The universal health care bill in South Africa has a negative narrative, especially from the private sector.

Gore believes that the implementation of universal health care is possible but will require significant funding and private sector collaboration.

The private sector, including Discovery, is getting involved in negotiations to potentially partner with the government on health care.

Gore does not believe South Africa is currently equipped to have a health care system of the scale of the NHS in the UK.

In the UK, more Brits are turning to private insurance due to issues with the NHS, which Gore sees as a potential model for South Africa.

Discovery is not looking for acquisitions in the US but is focusing on offering its shared value model to health insurers.

Gore is confident in Discovery's ability to penetrate the US market by demonstrating the effect of behavior change on health care costs.

Discovery's model aims to improve financial results by incentivizing healthier behavior, leading to lower premiums and covering more people.

Gore believes that the market will eventually reflect the value of Discovery's unique approach and strong underlying performance.

The main challenge for Discovery's growth model is revealing the strength of its data and the remarkable impact of its wellness programs.

Transcripts

Adrian Gore, CEO of Discovery Ltd. Thank you so much, Adrian, for joining

us. So I was just going through the

earnings, relatively positive half year earnings, but I did notice cash flow

earnings were negative. And we also saw the return on equity

declined from 14% to 12% potentially. Why we're seeing the market price action

as it is right now. How do you give the market more

confidence that discovery can can actually generate profit sustainably?

I think our model is working incredibly well and hopefully that's evident to the

market. We've also gone through a very complex

accounting standard change that it was 17.

That makes a lot of comparisons difficult.

So this is a this is a complex time. I'm pretty comfortable.

The mortality model works so well, and it's so evident on the data that the

expansion and the growth. We had a 28% growth in new business.

So the actual expansion of the model and how it's playing out is so compelling.

So these are these are understandably complex times, but I think the actual

underlying operating performance of the business has been very strong, you know,

operating income, profit, I think. And so I'm feeling confident about our

growth potential. Where where are you seeing a growth

really stemming from? Because, you know, we were just seeing

South Africa core inflation came up higher.

Part of that is insurance costs. I mean, is it South Africa that is that

is fueling that growth? Is it the U.K.?

Where is it? It's it's intriguing.

It's all over. So our businesses have grown very

strongly. Our bank has been strongly in, say, we

growing last in the U.K. this complex dynamics with the NHS.

So as a private health insurer remain very strongly a part is growing strongly

around the world using the vitality model.

So truth be seeing growth pretty consistently across across the world.

What? Let's talk about South Africa.

Let's start here because you mentioned the bank.

There's a lot of concern about the economy and the trajectory of inflation.

Thus, you know what that means for the SARB.

What's your outlook right now based on what you're seeing?

I mean, this economy has tended to consistently underperform.

We've had very little economic growth, but ironically, it's actually very

seldom gets into recession. So it's kind of like it's kind of flat

lining the the cycle of interest and inflation seems to be coming off.

So there's some there's some potential for growth.

There's a lot of work going on on the energy and transport and logistics to

fix a lot of infrastructure. So there's there is a sense of growth

that we could achieve. We're coming up for an election that I

think is quite seminal. But we're looking past I think we will

be much more of the same. But I mean, I think a business like ours

has to look through that and grow regardless, which is to an extent is

what we've done. Where do you see the election being

seminal, though? I think the expectations are that is

this there could be a dramatic change. I think for the first time the ANC may

fall below 50%. So for the first time, the country may

see coalition coalitions in a different kind of dynamic in the in the politics.

I think that's probably likely and possible, but I think it won't make a

dramatic change. So there's a lot of expectations for the

election and the country is resilient. And often I would say the narrative is a

lot worse than the reality. Hmm.

The narrative is a lot worse than reality when we talk about the

narrative. I want to talk about the narrative

around this universal health care bill, because that is something that really

has a bit of a negative narrative, especially from the private sector.

What's your expectation for this? You think it's actually going to be

implemented? I think there's there's a very strong

push for the legislation. And it's a no it's a laudable goal to

have universal coverage for sure. We just don't have the funding for it.

So if you do the numbers, you find that that that people will have to pay

dramatically more taxes, would see cash, see their health care access go down.

So it's actually a very, very difficult process to make it work.

Having said that, I think all of us all are committed to trying to make it work.

But we've been pretty clear it cannot work without private sector

collaboration. We don't have the funding.

So I think it may pass into law. I think, in truth, if it does, it will

be, you know, a decade or so or more until we see the ability to fund

something of that scale. But the goals are laudable, and I think

all of us want to try to make that work. Is the private sector getting involved

in terms of negotiating how they could potentially be a partner?

Yes, we are. I mean, I think we've done a great job

with government on things like the vaccine.

And I view that those kinds of bridges built can be used in nature by the

private sector is quite unique in that it funds and delivers healthcare

entirely. You know, for most of the employed

sector. So it's a very, very powerful asset and

it has to be used appropriately. And without it, I do not believe the NHS

as workable. I do believe government knows it and

appreciates that there is a fantastic precedent of business working with

government on a whole lot of things, and I think this will be another one of the.

Is there something potentially to be learned from from what we're seeing with

the NHS in the UK, especially given your oversight of that?

I think our problems are different. I mean, I think the NHS has complexity

and underfunding and stock shortages, but the scale of the NHS and the amount

of money that is available is so different to what we have.

You know, so you're looking at probably five x the spend per person or more even

even in line for purchasing power parity.

But I think comparisons are actually not not necessarily helpful.

Our our challenge is simply one of just lack of funding and very poor delivery

systems in certain parts of the country. So work is required to get there.

I think we'll do better and I think we will call to achieve a workable process.

But I do think it will take a lot of time.

And I was actually speaking with the CEO from Sanlam not too long ago, and he was

saying in the long term, he thinks it actually will be beneficial for South

Africans. But if we take a look at, you know, in

particularly what's happening in the UK, there's more Britain, Brits that are

turning to private insurance. Given what we're seeing with the NHS, I

mean, do you see a similar model potentially playing out here?

I think that the look, I think the NHS is a remarkable system.

It is 30 times bigger than the private system in the UK as a private health

insurance is actually quite small. We were a private health insurer in the

UK and we are seeing much demand for our products.

But I do think the gearing is so high that if the NHS comes with a couple of

percentage points in terms of receiving of it in private, taking about the scale

of the private health insurance market is, you know, is likely to grow quickly.

So anecdotally now the growth rates are very high.

I do think ageing populations, increasing chronicity means that those

demands are going to get tougher. And so I see the spend in both the NHS

and private escalating. It kind of seems inevitable.

And you don't think South Africa is equipped at this point in time to be

able to to have something of that scale? No, I don't.

I don't. You know, we spend we have so much GDP,

an economy so much smaller, we spread it out across people.

It really is. That's our biggest challenge.

The funding of it, the nature of it, scale.

So I'm not I'm not downbeat at all. I think that we are remarkably creative

and there's a wonderful sense of good faith in South Africa, people working

together to solve problems. And I think we will.

But I think that the sense of creating a national health system of the scale of

the NHS is not is not possible. I think often those comparisons being

made create a very different set of expectations.

So it's a different system, different solutions.

But health care is a is a complicated thing to fund sustainably, whether you

are. Yeah.

And let's turn to the market. Maybe that has the biggest health care

market, and that is the U.S. And Discovery has talked a lot about

acquisitions, acquisitions, really helping the company.

Are you looking to the US potentially for more acquisitions, more

partnerships? You know, we have a vitality, shared

value model, effectively incentivize people to be healthier and then process

that and structures that into insurance, health and life insurance.

Our model is advancing so quickly. On top of personalization, we are now

building that in a way that we're offering it to certain U.S.

health plans, and we think that has potential.

I don't see us doing an acquisition. I think we have a massive a massive

capability. We've been in the U.S.

for a long time on the on the on the group side working with big employers.

So we think there is great potential to offer the model to health insurers.

It brings a very different dynamic of wellness, disease management into a

hyper personalized pathway. And we think this potentially I don't

see us doing acquisitions. No, but I think the potential is very,

very significant. What is the potential then, Adrian

Because it's also a very competitive market.

So. So how are you approaching this?

When you enter into what's a very complex market?

Well, I think I think the issue is that I think we have tremendous amounts of

data that illustrate just the incredible affect behavior change has on health

care costs in health. So we're using that data.

We're using really, really sophisticated capabilities to illustrate the benefits

to health plans and employers. And I don't think it's a shortcut to it.

We have to illustrate that and get it out on the road.

So we have a pretty big capability in the U.S.

that's taking it out there. The I think the the opportunities framed

by just our ability to demonstrate the effect on health care costs and have

come through. And we have a lot of data to do that.

So there's no shortcut here. I don't see it acquisition.

I see us demonstrating and trying to turn around the world very, very

successfully. We do it very well in the life insurance

space where you're dealing with mortality risk with companies like John

Hancock in the US. So there's great precedent for what

we've done. We've lit the space, we've created it in

a way, and I'm pretty confident we can penetrate in the US.

Do you think, Adrian? Because we are seeing a lot of insurance

companies having to increase their risk premium just given, you know, depending

on which type of insurance you're talking about having to increase,

especially because of declining profits? Is Discovery potentially looking at that

as well in the markets that you're in? Well, you know, quite the opposite.

I think the the the the model that we're using is for better financial results.

So quite the opposite. I think the quality and efficiency of

the model gets better results. Premiums are lower.

We cover more people. That's essentially the promise we make.

So I don't see us, I mean, are essential value propositions to make people either

live longer in a life insurance context or consume less health care and health

insurance context. And if you can achieve that, you will

always get premium inflation. There's underlying medical inflation,

etc.. But we all our basic hypothesis is the

market is inefficient in that it's not dealing with the behavioural issues,

which is a very, very big driver of both deaths and sickness.

So quite the opposite. We're trying to be a solution to a to a

market that I think is inefficient. And so you do think then the market will

catch up to that and have that reflected on the share price eventually?

I think that we have a huge amount to offer.

I think the progress of the group has been tremendous over the last five

years, and I think we have a global lead in the space of shared values showed the

country we created. And I think that over time it will it

will create value. The actual underlying performance of

earnings has been very, very strong, and that's what we need to watch.

So I think we feel good with where we've got to.

And finally, Adrian, I mean, just going forward, what gets in the way

potentially of this growth model that you have created for the business?

What would get in the way of that being successful come next year?

I actually think the opposite. I think we need to reveal more of the

data, the ability to use air to train some of the data in evidence.

And I actually don't think there should be any any barrier.

I think our issue is revealing the strength of what we're doing, which is

quite remarkable. So I'm actually feeling pretty confident

and we feel optimistic for the year ahead.

It's a complex environment globally, but I think good businesses manage

ambiguity, complexity. Adrian Gore, thank you so much for your

time. Really appreciate it.