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The Market
NIB Holdings
In recent missives, we have discussed our portfolio investments in businesses which have leveraged to the rising influence of Government spending. In part, this spending by Government reflects a need to support the infrastructure requirements of a rising population level in Australia.
In turn, in a related impact of this thematic, we have more recently added positions in pathology stocks (Healius and ACL) as well as a small position in the portfolio in NIB, one of Australia’s largest health insurers.
NIB’s Group Revenue growth – benefiting from a rising population base
Source: Company reports
A significant share of the cost of providing healthcare in Australia is for people aged over 65 years. As people age, their need for hospitalisation along with extended recovery times, means that the cost of providing healthcare (and therefore health insurance claims) becomes increasingly expensive.
Health costs rise steeply with age
Source: Productivity Commission, “Health Costs and Policy in an Ageing Australia”
Ageing and costs are a potent combination
Source: Productivity Commission, “Health Costs and Policy in an Ageing Australia”
And as improved healthcare outcomes emerge and age expectancy gradually rises, the age demographics of the population steadily shifts. To that, Australia faces a marked shift in the profile of its population towards an older demographic.
The destiny of our demography: from pyramid….to coffin
Source: Productivity Commission
Australia’s above-average population growth
OECD Population Growth
Non-resident health policies in focus
What is interesting about students from overseas and ~1.8m of temporary immigrants is that it is a condition of entry that each to take out a health insurance policy. This policy, in effect, provides access to the Medicare system that is otherwise set up to support the health needs of Australian residents.
These policies are different in structure to the typical health insurance cover that residents are encouraged to take out (primarily via tax penalties) in that notably these policies:
- are cheaper to purchase; and
- are also not participants in the risk equalisation and Community Rating principle, which is a mechanism that provides for younger, healthier insured persons to subsidise the costs of older, less healthy insured persons’ claims across the system.
For health insurers, these policies are a profitable source of business, with low claims given the average age demographic of the people taking out this cover.
Superior revenue growth is being generated from students/immigration policies…
Source: NIB
… with superior underwriting margins
Source: NIB
Why invest in NIB?
1. Greater growth in policy holder numbers
NIB has a demonstrable track record of outperformance over the past 2 decades. The company has steadily grown policy holder numbers at a rate far exceeding that of the system.
In addition to effective marketing and competitively priced policies, NIB has also been more innovative than its peers. Progressively, it’s product and service offering has extended beyond paying for healthcare services, into NDIS plan management, travel as well as adopting a customer-centric, preventative approach to customer health and welfare.
Long run outperformance of policyholder numbers versus peers
Source: Company reports
- Investment in technology, and data-driven, customer-centric health outcomes
We appreciate the investment NIB has made in businesses such as Honeysuckle Health, which uses health data to better identify individual’s health needs and assist with improved preventative approaches to health such as the delivery of weight loss programs.
In turn, NIB has made an investment in Midnight Health, a digital healthcare initiative. This has been developed to improve access to healthcare in regional and remote areas, has a specialised health insurance business for women (‘Youly’) and has established Hub.health as an online personalised healthcare service.
We believe that health insurance companies that are better able to identify potential health problems and can assist with the adoption of healthier lifestyles will see a benefit in lower medical claims and therefore improved outcomes for shareholders and consumers alike.
- Valuation appeal – a big discount to the stock’s own history and the market on a PE basis
With any investment decision we take, and irrespective of how good the investment narrative may seem, all portfolio additions are subject to our valuation screens and must offer good value relative to fundamental valuation criteria.
In the case of NIB, the stock has significantly underperformed the ASX200 in the past year and the stock is trading well below its historic levels on a Price Earnings multiple basis.
NHF Premium/discount to ASX200 (12mth fwd) and (24mth fwd)
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.