Investment Thesis:
- Given Australia’s growing and ageing population, there will be increased demand for health care services. This will add additional pressure on Australia’s public health care system and the Federal budget and an increased dependence on private health care insurers. NHF offers exposure to the business model of providing a funding mechanism for the high-growth health care sector. Healthcare spending is expected to grow at 5-10% per annum, so without significant tax hikes, the government cannot afford for people to shift back to the public healthcare system.
- Given underlying increases in average premium rates of around 5 – 6% p.a., some policyholder growth (especially at the 30-34-year-old segment), and exposure to upstart investments, we estimate that NHF offers close to double-digit underlying growth in the medium term.
- Solid management team.
- Cost-out strategy which improves the company’s expense ratio.
- Incentives and benefits encourage PHI take-up. They include 1. Tax benefits and penalties for Australian residents (via Lifetime Health Cover, Medicare Levy Surcharge and means tested rebate); and 2. Shorter wait times, a choice of specialist doctor/hospital and coverage of ancillary health services support.
- Growth runways through the JV with Tasly Holdings Group, and also international expansion, through product offerings like NISS
Key Risks:
- Intensifying competition between top 6 players, putting policy growth targets at risk and any Increases in expected marketing spend going forward will no doubt add further strain on earnings growth.
- Policyholders decline unexpectedly despite the encouraging incentives and the Australian Government struggling with the rapid increase in healthcare spending and health services demand.
- Registered health insurers cannot increase premium rates without approval from the Government/Minister for Health/PHIAC/APRA. This leaves NHF’s ROE and margins exposed to a political process and pressures if the company is deemed too profitable.
- Regulatory changes especially relating to any changes to tax incentives and benefits which encourage take up of PHI.
- Higher than expected lapse rates and claims inflation as a result of poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments;
- Poor negotiations with healthcare providers such as private hospital operators leading to unfavorable contractual terms;
- Lower than expected investment returns
Key highlights:
nib holdings Ltd (NHF) reported 1H22 – relative to the pcp, group underlying revenue grew +8.3% to $1.4bn; Group underlying operating profit (UOP) increased +28.5% to $109.6m; NPAT of $81.2m was up +24.7%. NHF’s Arhi (Australian Residents Health Insurance) recorded an uplift in net arhi policyholder growth of +2.8% to 653,000 new policyholders; whilst NHF’s New Zealand segment reported strong performance, with revenue growth of +13.8%, partially offset by poor but expected performance in international inbound and travel businesses, which reported a loss of $7.4m, and -$7.9m, respectively, as the Government continues to enforce measure to contain Covid. On the conference call with NHF, management did expect in the near-term, the iihi and travel segment to gradually return to normal as countries reopen international borders. Both segments are forecasted to become profitable in FY23.
- 1H22 Results Highlights. Relative to the pcp: (1) Group underlying revenue $1.4bn, up +8.3%, driven by strong premium revenue growth of +8.2% upon uplift in policyholders, and Covid related disruption to elective surgery and allied healthcare, partially offset by NHF’s international students and travel insurance businesses. (2) Group claims expense $1.1bn, up +6.4% with ongoing uncertainty around deferred treatment and future claims. (3) Group underlying operating profit $109.6m, up +28.5%. (4) NPAT of $81.2m, up +24.7%. (5) The Board declared an interim dividend of 11.0cps, fully franked (versus 10.0cps in 1H21). (5) Management does “expect and account for an inevitable ‘catch-up’ in deferred treatment now estimated at $59.2m”.
- Performance by Segments. Relative to the pcp: (1) Australian Residents Health Insurance (arhi). Premium revenue of $1,151.0 was up +7.8% driven by policyholder growth, up +2.8% to over 653k. Claims expense of $917.1m, was up +4.9%, as Covid impacts offset increase in deferred claims liability, and effect of catch up in pcp. UOP of $123.6m, was up +39.8%. Normalised net margin continues to be in the 6-7% range. (2) New Zealand. Premium revenue of $144.4m, was up +13.8% due to policyholder growth of +4.1%, price adjustments to reflect inflation and favorable FX. Claims expense increase +17.2% to $92.9m due to policyholder increase and +12.3% claims inflation. UOP of $9.2m was down -12.4%. Net margin declined to 6.3% reflecting investment in the core system. NHF noted “the outlook for our Kiwi business is positive with favorable market conditions and the acquisition of Kiwi Insurance Limited which should be completed in 2H22. We expect 3-5% growth in policyholders for FY22”. (3) International inbound health insurance (iihi). Premium revenue was up +2.7% to $59.9m on strong performance in workers business especially through the Pacific and Australia Labor Mobility (PALM) scheme, offset by NHF’s student business with restrictions on international students. Claims incurred of $47.9m was up +20.4%. Underlying operating loss of $7.4m, was weaker than the $0.3m profit in the pcp. (4) nib Travel. Operating income of $8.2m was materially stronger than the $4.4m in the pcp. Underlying operating loss of -$7.9m was -1.3% lower than the pcp. NHF’s management noted that nib Travel’s loss was as expected, with the business still heavily impacted by border closures and travel restrictions.
- Outlook. While NHF did not provide specific quantitative earnings guidance, management did note: “Strong arhi performance and New Zealand and international workers profitability are offsetting current loss making in international students and travel. Expect that support to continue while necessary”. (1) Australian Residents Health Insurance (arhi). Net policyholder growth ~3%; Claims escalation associated with “catch up” in deferred treatment fully provisioned; Return to net margin target 6-7% over time. (2) New Zealand. FY22 net policyholder growth 3-5%; Kiwi Insurance acquisition expected to complete in 2H22. (3) International inbound health insurance (iihi). Gradual return of travel domestically and internationally in CY22; Return to profitability in FY23. (4) nib Travel. Heightened demand for skilled migration to continue; Gradual return of international students as travel restrictions ease; Return to profitability in FY23.
Company Description:
nib Holdings Limited (NHF) is the Australian private health insurer. NHF operates in four divisions which are private health insurance, life insurance, travel insurance and related health care activities.
(Source: Banyantree)
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