Discovery 6 month numbers

Discovery, that company that we had a short look at on Friday deserves a better look. Bright, our newest and best colleague, was supposed to go, time definitely got the better of him. He is young, and that is what you need in the industry, young people who understand and know the history of the stock market, yet their lived experiences don't include the big drawdowns. I suspect that as you go on, it becomes that you are more cynical, in general. That is why it is refreshing when older people become more optimistic as their lived experiences actually improve in time. Just an observation actually, I could tell through the Adrian Gore presentation of the results that they are very proud of their business and their achievements.

In this set of interim results, it became apparent that Discovery are investing hard in their business. An intent from their side to enter banking, 13 percent of earnings was spent in this last 6 months to end December. There is a banking licence application process ongoing, recruitment of quality staff and of course the building of the infrastructure for the fully-fledged retail bank. Thinking out loud here, the bank is going to possibly have the virtual branch model, not too dissimilar to Investec. I think.

The insurance business, short term that is, has flattened a little. As we pointed out Friday, Discovery chases quality business. What is also interesting is that through the broker network the quality of the business is better. i.e. they have a lower loss ratio when signed on by a broker network. Perhaps it is easier to terminate a relationship with an institution than it is with an organisation. You don't "know" the institution, you do the broker.

Discovery is a behavioural changing business, they try and take your habits and try and mend (and bend) them towards better behaviour. Better behaviour for your health, in terms of eating better and getting rewards back on your basket of healthy foods, better driving in terms of braking/acceleration/speeding/night driving, and of course the big one, exercise. The take up of the Discovery Watch is a testament to that, the fact that people are prepared to pair their health vitals with the company, that will lead to the business incentivising their members more.

The more sedentary you are, the more likely you are to have lifestyle dread diseases. If the company can (in the words of Virgin Active, a partner of theirs) make you "get off your arse today" and get you to exercise for small rewards, then it is in their interest long term. If your life insurance payouts don't happen (before they become more expensive to keep), then the company is more profitable. And all this they do by changing your behaviour, getting you to raise your heart rate 5 or so times a week, drive better and eat better. It seems so simple, and with all the data that they have collected recently, it is working. See the below image.



It is amazing at how quick they can tell that someone is changing their behaviour (12 months) and how people are being cross sold across the product lines. i.e. four-fifths of their insure products already had another Discovery product. Quite possibly the starting point is with the Health product.

I think that this is a business that hasn't even scratched the surface. The health and wellness theme is huge, I see more people buying sporting equipment than ever before, I see more people concerned about what they eat than at any other stage in history. The stock always looks perpetually expensive, it is however a growth company, and we are always prepared to pay up for quality. Discovery remains a buy in our book. At the full year stage we will have a look at the valuations in more detail.