Discovery buying out PruHealth

Discovery hit the market with a huge announcement, firstly teeing us up around 7:30 in the morning with news of a conference call at 11:30, to share important developments surrounding its international business strategy. The announcement came at 11 on the dot, the release via the Stock exchange News Service that Discovery had agreed to purchase the final 25 percent of the holding company of PruHealth and PruProject from Prudential for the princely sum of 155 million Pound Sterling. This was a year ahead of an option to acquire the final amount from Prudential.

What happens from here with Prudential, and the joint ventures 800 thousand members? The current agreement provides Discovery with a favourable basis for the acquisition of the business, including a collaborative framework with Prudential for the smooth transition of members, and continued support for a period of time. The existing business will be rebranded to VitalityHealth for the private medical insurance business and VitalityLife in the life insurance market. You might have noticed if you were watching the cricket over in the UK, that although sponsored by our very own Investec, many of the background boards were Vitality with PruHealth branded.

As an existing business, the UK subsidiary as it were, generates 4.5 billion Pounds of annual revenue (80.4 billion Rand), EPS growth of 26 percent per annum since 2000. Yowsers. As Discovery says in the SENS announcement, if the business were listed it would be big enough to be in the FTSE 100. They speak about all the things that we know well with the Vitality model, getting to gold and then staying there for three years to enable all the discounts is the real goal of those Vitality enthusiasts.

The company notes the changing nature of the life and health business and the Vitality glue that sticks it all together: Discovery's model specifically takes this into account by incentivising engagement in wellness, actuarially and clinically determining the effect of engagement on mortality, morbidity and health risk, and pricing these effects dynamically into the insurance premium over time. The effect of the model is to create lower price points, attract better lives, induce behaviour change, and mitigate selective lapses over time.

Eat better foods at their food partners (If you are a Woolies and Discovery shareholder, score for you on a personal level!!), exercise more, keep up to date with all the measurements and health metrics, get rewarded. Vitality is designed to break even, you pay a little to perceptually get a lot. If you use the rewards systems properly, you certainly do get a lot back, money (real money) in your pocket and you are healthier. The added benefit for the company (this is where you get involved as a shareholder) is that they know their customer base is trying a lot harder to stay healthier. Remember that graph about the higher status (gold and diamond) on Vitality translating to a lower claim rate from the company, both in life and health.

155 million pounds is a lot of money, it will be funded from internal resources and an element of debt. 2.77 billion Rand, there is obviously a control premium there, the business as a collective is over 10 billion Rand. Discovery has a market cap total of nearly 62 billion Rand, clearly the market liked what they saw, the stock rallied 4.32 percent to settle at 104.5 ZAR, an all time high. Notwithstanding this, we agree with the companies sentiments, Vitality will continue to form a more important glue that sticks health and wellness together, enabling better profiling for life businesses.

We continue to buy Discovery, the company management and CEO Adrian Gore does not stand still, doing great deals as and when they arise as well as continuing to add onto a great business here locally.