The 14 days that saved Discovery and made it a R180 billion giant 

In a 14-day period in 1999, Discovery went from facing shutdown by South Africa’s regulators to creating the shared-value model that underpins its success to the present day. 

This part of Discovery’s history is often forgotten, with the company seemingly being on an endless march towards global financial giant status. 

Founded by a 27-year-old Adrian Gore in 1992 with backing from Rand Merchant Bank, Discovery is now valued at R180 billion on the JSE. 

The company has grown from a health insurance product with a medical savings account to a sprawling financial services giant with operations spanning banking to medical aid. 

However, in 1999, Discovery was on the verge of being shut down by regulators under the then-new Medical Schemes Act. 

At the time, the Health Department vowed to go to any lengths necessary to stop Discovery Health from marketing a new range of medical scheme products. 

These new products were based on Discovery’s innovative risk-rated health insurance model, which the Act threatened to strip away. 

The Act mandated that all open medical schemes accept any applicant who could afford the premiums, regardless of age, medical history, or risk profile. Cover could not be declined. 

It also banned risk-rated premiums, requiring schemes to charge the same premium to all members for a specific option, regardless of their health status or age. 

This meant premiums could only be differentiated by family size, plan type, and income level. 

These changes went right to the core of Discovery Health’s innovative product set and resulted in the company facing an ultimatum – change the business model or be shut down. 

At Discovery’s Sandton head office, a placard outlining the company’s story describes how it overcame this challenge on a shot clock of just 14 days. 

Discovery went through three phases of trial and error, named Apollo 1, 2, and 3, to mimic the famous NASA moon-landing project. 

While such a dramatic change would typically result in a company shutting down or offering a shell of itself to the market to comply with regulations, these 14 days were instead the making of Discovery as it is known today. 

The 14 days of trial and error produced the so-called ‘shared-value model’ that underpins the company to the present day, informing its banking operations as much as it does medical aid. 

Perhaps more notably, it would see Vitality rise to become the cornerstone of Discovery’s offerings, leveraging immense amounts of data to alter human behaviour. 

Discovery’s pivot

The regulatory ultimatum to change the business model or shut down forced Discovery to fundamentally alter how it would apply its mission to make people healthier and to enhance and protect their lives. 

Discovery could no longer do this through risk-rated health insurance premiums, as it was being forced to scrap that approach and accommodate anyone who could afford its premiums. 

In effect, the company could no longer control entry into its schemes through underwriting practices. It had to find a new competitive advantage to leverage. 

This led to Discovery pivoting towards actively incentivising the individuals who joined its schemes to become healthier. 

The company went from controlling entry through underwriting practices to managing lifestyle choices through incentives. 

This supercharged Discovery’s innovative Vitality model, which was then a clinical wellness programme, into a comprehensive behavioural incentive programme. 

By offering attractive customer rewards, such as discounts on flights and gym memberships alongside the famous free coffees, Discovery could encourage members to live healthier and reduce the coverage risk. 

These rewards also have another added benefit – they attract younger, active, and healthier individuals to Discovery’s products, reducing the overall risk of coverage. 

This shared-value model, whereby both Discovery and the client win, underpins the company’s entire operations to this day. 

By incentivising improved financial and health behaviour, Discovery fundamentally alters the risk profile of its client base, whether it be its bank’s home loan book or car insurance claims. 

A slightly more mundane shift also occurred at the same time when Discovery separated its non-profit medical scheme from the commercial administrator. 

Discovery Health Medical Scheme operates as an independent, non-profit entity owned by its members, while Discovery Health acts as the for-profit administrator and managed care provider. 

While those 14 days in 1999 were likely highly stressful, with Discovery fighting for its life, that episode is now remembered as one placard hanging on the walls of 1 Discovery Place.

Building a R180 billion giant

Over the past two years, Discovery CEO and co-founder Adrian Gore has spent some time explaining the company’s history and how that informs the plan to effectively double the size of the business in five years. 

Gore has led Discovery to immense success over the past 34 years, with its normalised annual profit growing from zero to over R15 billion at the end of the most recent financial year. 

This has come with significant investment in new businesses, with Discovery adding short-term insurance, banking, and asset management to its array of services. 

These investments, Gore explained previously to Daily Investor, ensured that the company did not fall into the “Valley of Death” where growth flatlines and it gets outcompeted. 

While a slowdown is inevitable due to the laws of compounding, Gore is adamant that a company has to avoid stagnation. 

To do this, Gore said a company has two options – grow through acquisitions or invest heavily in new products and services to grow organically. 

Choosing the latter, Discovery invested in building a bank from the ground up and expanding its Vitality model globally, while deepening its asset management capabilities. 

This slowed the company’s growth in the short term, with annual profit growth dropping to 9% in the past decade from 22% in the 2000s. 

Having completed this phase, with its bank now self-sustaining and generating a profit, Discovery is looking to reaccelerate its growth. 

This phase, termed “scaled organic growth” by Discovery, will see its spending on new initiatives decline, resulting in an improved return on equity and enhanced cash conversion. 

The prior decade of investment has positioned the company well to continue growing, with it aiming for profit growth of 15% to 20% per annum. 

Discovery’s cash conversion ratio is expected to rise between 60% and 70% during the next five years, and its debt load will come down significantly, freeing up further cash to be returned to shareholders or invested in the business.

In its first set of results following the announcement of this new strategy, Discovery revealed that it is actually exceeding these targets. 

With profit growth of 27% year-on-year, a cash conversion ratio of 75%, and a bank that is profitable ahead of schedule, the strategy appears to be paying off.

Gore admitted that profit growth of 27% is unlikely to be sustained for the full five-year period, but it does show that the company can achieve its lofty targets. 

“We think the five-year projection for this kind of growth is a good one. But having said that, as we go forward, if it plays out like we are currently seeing, it also provides optionality,” Gore said. 

“There may be opportunities that come up that we have not thought of yet. So, the default case is five years of this growth. We can achieve that. It is hard to do, but it is doable.”

Gore explained that if Discovery manages to grow at its expected rate of 15% to 20% per annum, the company will be double the size it currently is in terms of profit.

This will not result in Discovery focusing on short-term growth, Gore has made clear. To the founder, Discovery is made up of operators, not traders.