Discovery sees UK as ripe for disruption

INSURER Discovery expects its now wholly owned UK health and life businesses, PruHealth and PruProtect, to start making a significant contribution to its bottom line.

Dave Marrs: Company Comment: Business Day, 12 November 2014

The group said on Monday it had bought the remaining 25 percent of its UK businesses for R2.8bn. Kagiso Asset Management investment analyst Justin Floor believes the price, more than 17 times reported earnings, looks high "at first glance" and will "require impressive management execution and earnings growth to justify it".  However, Discovery CEO Adrian Gore estimates the transaction will generate returns on capital of 15 percent-18 percent, while the business is targeting £1bn in earned premiums and £200m in new business over the next five years.

The business is expected to generate about R1bn of operating profit by 2016. The UK insurance industry is large and commoditised, offering opportunities to disrupt. Its underwriting approaches "tend to be static and based on pre-existing conditions at policy inception", Gore said, while the National Health Service creates an environment where resources are directed towards the treatment of disease rather than prevention. The UK, like most developed markets, has an ageing population, high levels of lifestyle diseases that drive up mortality rates and high medical inflation - the perfect environment for a disrupter such as Discovery.