Taking NIB's pulse
Australia’s $5 billion health insurance fund Medibank Private may or may not list in the next few years, but in the meantime the only listed view of the sector comes through Newcastle-based NIB.
On Monday, NIB reported 12% growth in revenue in the first half primarily due to a 6% increase in policyholder numbers. NIB is typically growing policyholder numbers at twice the industry average.
Net profit was down 2% to $38.3 million, in large part due to a fall in investment earnings attributed to lower yields and a reduction in investment assets associated with a $75 million return of capital last August.
NIB’s return on equity: boosted by capital initiatives
NIB has flagged further capital market initiatives, including a possible on-market buy-back, special dividends or capital return. A special dividend has been flagged with the release of the company’s full-year results in August.
However, the flagged capital initiatives need to be seen in the context of an estimated surplus capital of $57.4 million at the end of December, compared with a $145.4 million surplus estimated a year earlier and ahead of the $75 million capital return.
What separates the private health insurance sector from most other industries is the regulated nature of its revenues.
The federal government should be close to unveiling a maximum 6% increase in average premiums for the industry for the coming year – just ahead of claims inflation of between 4% and 6%. It is not a recipe for double-digit top line growth or margin expansion over the medium term.
A snapshot of the private health insurance market
FY06
|
FY07
|
FY08
|
FY09
|
FY10
|
FY11
|
|
Total policyholders |
4,806,754
|
5,008,329
|
5,219,567
|
5,390,739
|
5,549,338
|
5,727,566
|
Policyholder growth |
2.1%
|
4.2%
|
4.2%
|
3.3%
|
2.9%
|
3.2%
|
Persons covered |
10,189,552
|
10,561,848
|
10,942,616
|
11,257,885
|
11,561,299
|
11,901,915
|
Average age of hospital persons (yrs) |
39.8
|
39.9
|
39.8
|
40
|
40.1
|
40.2
|
Total hospital persons '20-39' |
2,047,020
|
2,159,587
|
2,309,302
|
2,359,022
|
2,407,852
|
2,477,256
|
Growth in hospital persons '20-39' |
2.5%
|
5.5%
|
6.9%
|
2.2%
|
2.1%
|
2.9%
|
Then there is the anticipated impact of the introduction of means testing to the federal government’s 30% private health insurance rebate.
The means testing of the rebate will mean that singles on at least $83,000 will see the rebate cut to 20 per cent. Above $93,000, it will be slashed to 10 per cent. At about $129,000, the rebate disappears. For families, the rebate is means tested from $166,000.
NIB is sticking with its estimate that 0.6% of its customer base might lapse as a result of the changes. A bigger issue will be the likelihood that policyholders will downgrade their level of cover – for instance, dropping ancillary cover or lifting excess – as a result of the changes, which come into effect from July. NIB is predicting a further 2.3% of its policyholders could make such adjustments.
The reality is that no one can accurately predict the response to the changes. Some old timers in the industry are predicting widespread policy lapses but as the Health Minister Tanya Plibersek noted yesterday, member numbers have been rising, up 50,000 in the last quarter alone.
NIB trades at a forward multiple of just over 9 times and a yield of just over 6%. Having listed in November 2007, its shares have more than doubled since then.
Despite a market capitalisation of less than $700 million, three major stockbroking houses cover the stock. Cynics suggest brokers are doing this to prove their credentials ahead of the mandate pitch for Medibank Private.
It is stated Liberal Party policy for Medibank Private to be privatised.
The Australian private health insurance industry is appallingly structured with more than 20 mutual funds competing in the market that can only be described as sub-scale.
Market share of private health insurers in the Australian market at June 2011
Source: Private Health Insurance Administration Council (PHIAC)
The only certainty for the private health insurance industry in the next few years is that its prospects are going to be heavily influenced by whichever political party rules Canberra. And that makes it difficult for prospective investors.
Stewart Oldfield is a research analyst at InvestorFirst Securities.