Nib is Australia’s 4th largest private health insurer (PHI), which has just celebrated its 70th year in operation. It’s primary source of income is Australian based, with some operations in New Zealand, as well as international health and travel insurance.
PHI industry growth. Pre-Covid, the PHI industry was struggling to maintain policyholder growth as premiums became increasingly costly. With more of the population becoming health conscious and the increased public surgery wait times, the downward trend has since reversed, with the industry seeing a positive return to policyholder growth, which we expect will continue.
Premiums growth. Premiums growth has historically largely outpaced inflation, albeit growth slowed pre-Covid as policyholder growth was impacted by the higher premiums. Current inflation is now racing ahead, with premiums yet to catch up, however we expect the longer-term trend of premiums to continue to grow above inflation. The annual average premium was announced to rise by 2.9% on 1 April 2023, well below the 10-year average of 4.4%.
Steady margins. Nib has maintained solid net margins over the past few years, above both the industry and that of key competitor Medibank (MPL.AX). We expect margins to remain strong, although falling back towards the 6-7% longer-term target.
NDIS opportunity. In October 2022, nib raised ~$158.1m with the intention of entering the NDIS space. It has already acquired three plan managers (at multiples below nib), Maple Plan, Peak Plan and Connect Plan, making nib a top-three plan manager.
Medibank cyber attack benefit? Our view is that competitors are unlikely to gain material benefits from the MPL scandal. Drawing from another recent cyber attack on Optus, key competitors TPG and Telstra didn’t see any significant changes to their customer numbers.
Investment View
Nib offers exposure to the defensive PHI industry and has shown consistently solid growth with well managed margins. Nib had one of the highest net margins in 2022 of 14%, well above the industry average of 7%. The CEO has been in place since 2002, providing valuable stability to the management team.
The PHI industry pre-covid was slowing into decline with the population covered by PHI falling from ~48% in 2014 to ~44% in 2019, as large premium increases deterred users from signing up. Since Covid, the population has become increasingly health conscious, with a clear recovery trend of policy holder growth, rising back to ~45%. Nib has been taking consistent market share along the way, which we expect to continue. Trading on just ~16x PER, we initiate with a Buy recommendation.
Business Overview
Nib was established in 1952 as Newcastle Industrial Benefits. It was founded by workers at BHP Steelworks, before growing both organically and through acquisitions to now cover more than 1.7m people across Australia and New Zealand. It also offers travel insurance worldwide. Nib is currently the 4th largest Private Health Insurance (PHI) provider in Australia by revenue and policyholders.
Private Health Insurance (PHI) Overview
Policy holder growth was stunted from 2014, with the broader issue of affordability, out of pocket costs, low wage inflation along with a focus on quality care all impacted consumer behaviour. This saw the industry struggle, and policyholder growth slow as providers sought to use pricing to take market share and bring consumers back to private. Since the pandemic, consumer behaviour has dramatically shifted towards becoming more health conscious, young people realising the potential benefits and extended public hospital waiting times, providing a clear trend returning to policy holder growth. Mental health benefits have also been a key contributing factor for young policyholders.
Figure 1: Population that have Private Health Insurance has steadily increased since the onset of the Pandemic, reversing the previous declining trend
The market itself is dominated by 5 major PHI’s that account for ~81% of the market in both policies and revenues: Medibank Private (MPL.AX), Bupa, HCF, nib and HBF. Nib has been steadily gaining market share over time, currently accounting for ~9.4% of the market. We expect market share gains to continue both organically and through acquisitions.
Figure 2: 2022 Market Share
Figure 3: Nib market share gains over time
Key Considerations
Margins. Nib has maintained net margins (gross profit less management expenses as percentage of net premium revenue) above the industry. In particular, a strong FY22 result saw net margins well above peers and the industry average. Nib expect a gradual return to the net margin target of 6-7% over time.
Figure 4: 2022 net margins vs peers
Figure 5: Net margins above industry
Policyholder growth. Policyholder growth for nib has been driven by market share gains over time, with nib boasting well above average growth rates over the last decade. Extended public hospital wait times have largely contributed to the recent policyholder growth across the industry, as well as more young members realising the benefits, particularly in spaces like mental health which has grown in prevalence during the pandemic. We expect nib to continue to gain market share and grow policyholders above the industry, guiding to 3-4% growth in Australia, and 3-5% in New Zealand. A return of international travel and migration should also boost growth.
Figure 6: Nib has historically grown Australian policy holders well above industry
Premium growth. Whilst premium growth for the industry has fallen over the last few years, nib has continued to outperform the industry. Forecasts are for premiums revenue to continue to increase in the mid-single digits over the coming years, driven both by policyholder growth and premium increases. Price increase deferrals are set to be extended out to September 2023 in support of its members, as opposed to the 1 April 2023 overall industry premium growth rate of 2.9%. The PHI industry has done a considerable job attempting to keep premium growth as close to zero to lower the costs for Australians in a time of rising inflation. It is likely government intervention will eventually be needed to support rising healthcare inflation costs currently being borne by the industry.
Figure 7: Premium increases above industry average
Figure 8: Premium revenue growth for nib has been solid, forecast mid-single digits
Capital management. Nib recently updated its capital management policy for its PCA (prescribed capital amount) ratio to be between 1.5x-1.6x. With strong recent trading performance, the PCA ratio is currently ~2.0x, with nib retaining ~$2000m in capital above the minimum requirements. Gearing is also low at 20%. The balance sheet is in impeccable shape, especially post the capital raise in October 2022, which has driven growth in the NDIS space. We expect more acquisitions in the space, fuelling further growth avenues.
Investment portfolio. The portfolio is currently very defensively positioned, with ~84% in defensive assets and 16% in growth assets. Over the 1H23 period, the portfolio grew by $21.8m, up ~1.8%. We expect the portfolio to continue performing, providing additional value to the assets.
NDIS growth opportunity. The recent capital raise of $158.1m has helped drive nib’s venture into the NDIS. It has completed three acquisitions (Maple Plan, Peak Plan and Connect Plan), making nib a top-three NDIS plan manager. It is expected the acquisitions will be accretive in the first full year of ownership for the allocated capital deployed, given they were acquired at multiples “significantly below nib trading multiples”. We don’t expect the impact however to be material (~0-2% in FY23).
Valuation Considerations
Nib has historically traded incredibly closely with its key listed peer, MPL, apart from a slight divergence during Covid-19, where MPL’s size and scale aided it in the market drop. Nib is now currently trading at a slight discount, providing relative valuation upside.
Figure 9: Trading below key peer, MPL on a PER basis
Figure 10: Trading 1SD below 10-year average PER
Figure 11: nib has a higher EPS growth rate, yet lower PER. Slightly higher EV/EBITDA
The nib share price has strongly correlated with its share price. We expect the share price to ‘catch up’ to its forward earnings per share.
Figure 12: nib share price lagging its forward EPS
Investment Thesis
Nib offers valuable exposure to the PHI industry as well as the growing NDIS. It has grown significantly over time, taking market share both organically and through acquisitions. Nib has consistently grown its premiums and policyholders above the industry, and we expect this trend to continue. In 2022, nib boasted one of the highest net margins of 14%, well above the industry average of 7%. Whilst we expect this to gradually return to the long-term average of 6-7%, the current high margins are being converted into significant balance sheet strength.
The PHI industry is expected to continue to grow in prevalence with consumer behaviour becoming more health conscious. Further, the return of international travel will be a significant tailwind for the international business. Nib is in a prime position to take advantage of the growing market opportunity.
Nib is trading on an inexpensive forward PER multiple of 16.7x, which is 1 standard deviation below its long-term average, as well as below key listed peer Medibank (MPL.AX). We initiate coverage on nib with a Buy rating.
Risks to Investment View
