The first read through of the Discovery annual results revealed that the business is very definitely a growth oriented one. Different businesses in the core market, South Africa, continue to take market share and reinvent short term (and life) insurance, investments and bed down their core business, health insurance. There is a big gap between those that are lucky enough to afford private healthcare in South Africa and those who have to use the public health system, most will agree that the spend to outcomes ratio is not the best, to put it mildly. The Vitality program has undoubtably been a success and I think that we are only starting to scratch the surface. The potential of the existing partnerships in countries like China, with Ping An Insurance and more recently in Canada and the US (John Hancock), as well as some of the bigger economies of Europe represent exciting white labelling of the Vitality product.
One of the mums at the school asked me, why do you work to get the points, if I want a smoothie I will go buy it. I think that the business understands psychology of the human being well, the rewards system and the look-at-me points system is designed to pit yourself against yourself. And of course against your mates. There are real cash reward benefits for both the policy holders and more importantly the company over time. The better shape their policy holders are, be it life, health or short term, or a combination of all three, the less likely they are to claim. The bait of the rewards tussling with the tiger fish competitive nature of their core client is showing through in the Vitality Watch program.
The whole piece about the product launch is worth mentioning in full:
"The success of Vitality Active Rewards with Apple Watch in changing wellness behaviour and segmenting insurance risk in South Africa and the United States has advanced the science underpinning the Vitality Shared-Value Insurance model. Results over the first six months of the Vitality Active Rewards benefit showed dramatic and sustained behaviour change, with a 20% increase in physical activity for those who engaged in the benefit, and 81% for those who also took the Apple Watch. This is the most successful benefit to date, as measured by take-up and engagement, and shows strong initial insurance applications, with engaged members demonstrating significantly lower morbidity and mortality experience than other Vitality members."
Simply by undertaking to get the Apple Watch and maintain a certain fitness level, the Vitality users have gotten far healthier. There are tangible results for the business and the product is in its infancy. A significant amount of data is already being collected no doubt around the user patterns. Steps, heart rate (resting and exercising), flights climbed, and so on. The measure is not perfect, for example, my wife has a very low resting heart rate, in the forties and physically struggles to get her heart rate up. So obviously the loose calculations of 70 and then 80 percent of maximum heart rate doesn't work for all and sundry. It is no doubt work in progress.
By offering compelling and premium products that disrupt the norm, as we know it, the company has been able to grow from a standing start at the dawn of a democratic South Africa, to the dominant operator in some of their businesses. Of course the banking ramp up (branchless I guess) and roll out is going to cost a lot of money, and that is why the share price didn't react positively to the good results. At face value, like I said in the introduction, the results looked good. The spend and roll out of existing businesses will suck capital, you must know as a shareholder that the business is definitely a growth one, and not going to be priced in the same way as traditional insurers or financials. What sets the company apart is that they have a compelling product that they are able to white label globally.
We maintain our buy rating and will continue to roll out some commentary in the coming days, including observations of ours.