Discovery announces capital raise to purchase majority stake in credit card partnership and expansion of life protection business in the UK

Discovery Limited today announced details of the Group’s intention to raise capital to the amount of R5 billion through a fully underwritten, renounceable rights issue. Proceeds of the rights issue will be used to fund growth in adjacent financial markets in South Africa, and to drive further growth in its high-potential protection business in the UK, VitalityLife.

Adrian Gore, Group Chief Executive of Discovery Limited, explains the rationale behind the move; “Discovery has an excellent track record in expanding our behavioural insurance offering both locally and globally. Our growth opportunities are very attractive, making the timing right to invest significant capital into Discovery’s future growth strategy. We have built an excellent business in the UK with tremendous growth potential. In South Africa, we have built a high-quality credit card business through DiscoveryCard, which presents significant opportunity to pursue further interests in the financial services industry,”

To facilitate opportunities in the South African financial services market, Discovery has entered into an agreement with FirstRand Limited and FirstRand Bank Limited for Discovery to increase its economic participation in DiscoveryCard from the previous 20% to 74.99%. The increased share will be purchased for R1.35 billion on 1 July 2015 or as soon as regulatory approvals have been finalised. DiscoveryCard was initially established in 2004 as a partnership between Discovery and FirstRand Bank Ltd with 80% of the economic interest being held by FirstRand Bank Ltd and 20% by Discovery. It has since grown its customer base to over 250 000 primary cardholders with 315 000 cards in issue. Net advances totalled R3.4 billion at the end of 2014, making the DiscoveryCard a highly profitable and unique asset for Discovery. DiscoveryCard currently makes a profit of around R300 million per annum, before tax.

Gore continues, “Discovery’s unique intellectual property resulted in a credit card offering that provides our clients with highly competitive rewards that flex according to their engagement in Vitality. The rewards are geared towards encouraging a healthy lifestyle. Importantly, we are increasingly learning more about the link between health and financial behaviour, which is unique to Discovery and which will enable us to develop more innovative products in this field,” The acquisition represents less than 5% of Discovery’s market capitalisation.

Vitality is more and more becoming a key strategic and competitive differentiator for Discovery, both locally and internationally. The Group’s business model is built around the philosophy that value must be created for all stakeholders. Underpinned by Vitality, Discovery’s business model enables a far more accurate understanding of wellness, lifestyle and consumer behaviour, and its impact on insurance risk. These insights have enabled the Group to develop innovative products that encourage better health behaviour that not only help consumers lead healthier and better quality lives, but also lessen the cost of insurance for the insurer through more accurate underwriting and lower price points. This model is proving highly successful in the UK too, with Discovery planning to inject a large sum of the capital raised into growing its protection arm, VitalityLife.

“Discovery’s business in the UK forms an important part of our plans to expand our integrated Health and Protection insurance model globally. VitalityLife especially, presents a strong case for further investment, given the success of the Vitality-integrated protection product, the scale and reach of the distribution and wellness network, and attractive returns on new business,”

The performance of Discovery’s UK business has been excellent. The combined operating profit grew 20% to R432 million, with new business growing by 7% to R915 million.

The agreement to increase Discovery’s shareholding in the DiscoveryCard to 74.99%, are subject to regulatory approvals. Directors of Discovery, who hold 13.5% of issued shares, have indicated their intention to follow their rights, thereby supporting Discovery’s future growth strategy.

Notes to the editor:

• DiscoveryCard will continue to operate on the FirstRand Bank banking licence and systems, and FirstRand will continue to provide funding to DiscoveryCard.