Built on Organic Growth, S. African Insurer Discovery Now Weighs M&As

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South African insurer Discovery could expand through acquisitions in the future but must first work out how its innovative fluctuating premiums, based on clients’ lifestyle behaviors, could be applied to more traditional businesses.

Discovery has spent more than two decades growing from a small upstart to a global player via organic growth and partnerships. Buying another firm or insurance book would mark a significant departure from that strategy but the company’s actuaries are looking at how this could work.

“We believe there is an opportunity there, it is being worked on,” CFO Deon Viljeon told Reuters in an interview on Thursday. He later said the possibility of acquisitions was remote for now and not yet part of the company’s strategy, while the bigger opportunity was applying its model to its partner’s back books.

The pricing and set up of older insurance books differs from those of Discovery’s. The company’s dynamic premium model has shaken up traditional approaches and been adopted by insurance giants including China’s Ping An and Manulife’s John Hancock in the United States.

Viljeon said this was a key reason why the company has built businesses rather than bought them so far, but that he didn’t see the problem as impossible to solve.

Earlier on Thursday, during a presentation of Discovery’s interim results, CEO Adrian Gore said acquisitions would be risky, but presented numerous opportunities.

Growing Pains

Discovery reported a 16 percent drop in headline earnings for the first half of its financial year after plowing a fifth of its earnings for the period into new business lines. It was also hit by a spike in insurance payouts.

Its normalized, undiluted headline earnings per share — a key profit measure in South Africa that strips out one-off items — for the six-month period ended Dec. 31 stood at 366.6 cents ($0.2616), down from 438.5 cents last year.

The most significant spend was on Discovery Bank, which is due to launch next month, with money also going to its investment offering and the platform that enables partner insurers to integrate its model into their own businesses and adapt it to local markets.

Aside from Discovery Life, which had already flagged an unexpected spike in large claims, operating profits at the company’s established health and life businesses in the UK and South Africa grew by between 10 percent and 26 percent.

Newer lines Discovery Insure and Vitality Group, which expands the model in new markets via partnerships, grew operating profits by 114 percent and 179 percent respectively.

Pre-tax operating profits from its stake in Ping An rose 26 percent on the back of a 117 percent rise in new business premiums to 2.1 billion yuan ($313.33 million).

The firm’s shares were up 1.33 percent to 146 rand at 1146 GMT.

($1 = 6.7023 Chinese yuan renminbi) ($1 = 14.0283 rand) (Reporting by Emma Rumney; editing by Rashmi Aich and Kirsten Donovan)