Company Reports

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, distributes travel insurance internationally, and provides plan management for participants in Australia's National Disability Insurance Scheme.

We lower our NIB fair value estimate by 6.5% to AUD 7.20 on a weaker-than-expected fiscal 2024 result. The narrow-moat insurer's margins in private health insurance normalized more quickly than we expected, and the earnings outlook for international students is also weaker. A change in accounting standards complicates matters, but underlying net profit after tax increased by 3% to AUD 196 million, a hefty 16% miss against our forecast. Even adding back around AUD 22 million in one-off costs, mostly related to acquisitions and integration in the National Disability Insurance Scheme segment, profit disappointingly still lands 7% below our forecast. Under the new accounting standards, net profit after tax was AUD 182 million.

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, distributes travel insurance internationally, and provides plan management for participants in Australia's National Disability Insurance Scheme.

Narrow-moat NIB is looking to provide more value to its members, undertaking to partner with Pacific Smiles to have its dental clinics offer NIB members no-gap preventative dental care. Pacific Smiles owns and operates 11 NIB-branded dental clinics where NIB members pay no-gap. Both parties have entered a memorandum of understanding, which would see this no-gap offer extended to 117 Pacific Smiles dental clinics. This would be an exclusive arrangement for two years, after which time other dental operators will also be able to join the NIB network of providers offering no-gap care.

NIB Holdings' focus on building an ecosystem of health products and services is not likely to build new profit streams that transform the business. However, investments in telehealth services, in-home care, and health insights and guidance (such as checkups and health plans) help differentiate NIB’s private health insurance offering, especially compared with small health funds. Over 90% of first-half fiscal 2024 operating profit is attributable to private health insurance, and, in our view, the business underpinning the narrow economic moat is performing well.

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally.

We maintain our fair value estimate on narrow-moat NIB Holdings at AUD 7.50 per share, with a somewhat mixed trading update immaterial to our medium-term forecasts.

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally.

We increase our fair value estimate for narrow-moat NIB Holdings by 7% to AUD 7.50 per share on the time value of money and improved outlook for the travel insurance division and nonresidents private health insurance, both recording better margins than we expected. For the group, we forecast 5.5% profit growth per year over our forecast period. While we anticipate Australian health insurance earnings to be in gradual decline as margins normalise, the other divisions are benefiting from a rebound in activity postpandemic, plus growth via acquisitions in plan management for participants of the National Disability Insurance Scheme, or NDIS.

NIB Holdings reported a 17% decline in net profit after tax to AUD 134 million for fiscal 2022, with an investment loss of AUD 30 million masking the strong underlying result. Operating profit (pretax before amortisation, investment income, and finance costs) rose 15% to AUD 235 million. The investment loss caused by rising bond yields is unrealised and should reverse as holdings mature. While NPAT was in line with our forecast, ignoring volatile investment income, the underlying performance of each division was pleasingly better than we expected.

Narrow-moat NIB’s fiscal 2021 underlying operating profit guidance of AUD 220 million-225 million implies a much stronger second half than we had forecast. It implies second-half profit up 53% on first-half fiscal 2021, and up 47% on fiscal 2020. Claims deferred during the coronavirus are not being caught up, and risk equalisation payments remain lower than usual. Older age groups, more vulnerable to COVID-19, have continued to pay their insurance premiums but are reluctant to undertake elective procedures. With policyholder numbers up 3.7% and premium increases of 2.9% from October 2020 and 4.4% from April 2021, lower claims are propelling profit and margins. We forecast average claims per policyholder to fall 1% in fiscal 2021. We increase our fiscal 2021 underlying profit forecast by 15%, which implies underlying operating profit at the bottom end of guidance, and assumes lower claims do not persist. While lower claims are positive in the short term, they’re not material enough to increase our AUD 5.60 fair value estimate.

Private Health Insurers Medibank Private and NIB Holdings had an odd 2020. Hospital procedures declined materially due to lockdowns and patient fear, as did visits to the dentist, physio, optometrist and so on. Anything that could be put off was. It did not mean a massive uplift in profit for the health insurers though. Private health insurers took material provisions on the basis a large catch up would occur, assuming 85%-100% of deferred hospital procedures would be caught up in the short term, as well as 50%-70% of ancillary claims. Insurers also paused planned premium increases which had been approved to cover inflation in claims, and gave members needing assistance premium waivers and discounts.

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally.

NIB Holdings is Australia’s fourth-largest provider of private health insurance. Covering 1.1 million people, or 4% of the Australian population, it accounts for around 9% of the market. It is one of five funds which account for 80% of the market by policy numbers, other large rivals include Medibank (27% market share), BUPA (26%), HCF (11%), and HBF (8%). Established in 1952 to provide health insurance for BHP workers in Newcastle, the insurer has since expanded nationally and amalgamated with other small funds. In 2007, NIB was demutualised and listed on the ASX. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally.

The coronavirus will have both positive and negative implications for private health insurers. We expect fiscal 2020 and 2021 earnings to be boosted by postponement of elective surgeries, resulting in a reduction in claims expenses. We believe many doctors and patients will opt for this, especially with older age groups (over 65) which face higher risk from COVID-19 and account for more than 40% of procedures. The positive benefits will likely be short-lived though, with the drop in claims costs for the next six to 12 months expected to normalise in fiscal 2022. Negatives include losses on investment portfolios, rising unemployment and policyholder numbers, and lower demand for travel and international student insurance.

Narrow-moat NIB’s first-half fiscal 2020 NPAT slumped 23% to AUD 57.1 million, and while a little weaker than expected, we don’t think it is cause for alarm. Movements in claims reserves, which boosted profits in the previous corresponding period, detracted from profits this half. Based on actual claims, the underlying operating profit result is down a less abrasive 2%. The net margin for the Australian private health insurance division fell to 5.9% from 8.7% last year, or adjusted for the reserve releases was down marginally to 6.4%. Given the insurer targets around 6%, in our view, this result is more a regression to normal levels of profitability.

In November 2019, when Medibank called out higher claims costs as a headwind to earnings, NIB Holdings maintained fiscal 2020 guidance of underlying operating profit of at least AUD 200 million. The insurer was comfortable its assumed insurance margin of 6% for the Australian health insurance division already accounted for an increase in claim expenses, down from what we considered an unsustainably high margin of 7.3% in fiscal 2019. Within months, NIB has disappointingly downgraded fiscal 2020 guidance to be at least AUD 170 million.

On the same day Medibank called out higher claims costs as a headwind to earnings, NIB Holdings maintained its fiscal 2020 guidance of underlying operating profit of at least AUD 200 million. At its fiscal 2019 results, NIB guided to a 6% fiscal 2020 insurance margin for the Australian health insurance division, which was reaffirmed. We agreed the attractive 7.3% insurance margin in fiscal 2019 was not sustainable and would likely move back toward the longer-term average of 5% to 6%. This more conservative view has been correct. Should claims inflation unexpectedly remain low for an extended period, we would expect the federal minister for health to only approve modest annual price increases, bringing margins back to historical levels.

Narrow-moat Australian health insurer, NIB Holdings recently hosted an investor day, highlighting positive industry tailwinds and issues within the business, and providing a brief financial update. The company reaffirmed new regulatory standards have led to a surplus capital position. While the quantum of the surplus was previously expected to be in the range of AUD 30 to AUD 40 million, NIB increased its estimate to between AUD 50 and AUD 60 million. Of the surplus, AUD 40 million is expected to be available for distribution to shareholders through either a special dividend or a share buyback. Guidance for fiscal 2014 operating profit will be in the lower range of the previous guidance of AUD 73 to AUD 80 million. We've reduced our operating profit forecast to AUD 74 million, from AUD 81 million previously. Fiscal 2014 earnings per share falls to AUD 16.6 cents per share from AUD 17.8. We retain our AUD 3.50 fair value estimate and at current levels the stock is attractively priced.

Narrow moat-rated NIB Holdings, or NIB, was granted an average premium increase of 7.99% by the government to cover the rising cost of healthcare services. The health insurance industry is highly regulated, with idiosyncrasies due to Australia's philosophy of affordable healthcare. Consequently, everyone is entitled to buy the same product at the same price, and the higher cost of the sick and elderly is distributed across the industry through a risk equalisation levy. Insurers with young, healthy customers such as NIB must contribute payments toward this equalisation scheme. Premium increases are largely designed to offset these payments as well as cover claims inflation, which typically runs at 5% to 7% per annum. The solid premium increases are broadly in line with our expectations, and consistent with the firm's positive outlook. There is no change to our AUD 2.70 fair value estimate. We continue to believe NIB will benefit from attractive long-term dynamics and continued government support. At current prices, NIB is fairly valued on a forward price earnings ratio of 15.8 times, considering its bright outlook.