The private health insurance sector is becoming more competitive and with the number of comparison sites seemingly increasing every year, switching health insurers is becoming increasingly simple.
Against this backdrop, Australia's two listed private health insurers, NIB Holdings Limited (ASX: NHF) and Medibank Private Ltd (ASX: MPL) have experienced a mixed 12 months with the share prices of both companies lacking any significant direction.
Here is a head to head comparison of some of the most important aspects from their FY15 results:
Premium Revenue
NIB: 9.6% increase vs Medibank: 3.3% increase
NIB is the clear winner in premium growth with Medibank suffering from increased membership lapses and fewer sales from higher value policies. Interestingly, NIB surpassed 1 million Australian customers for the first time in FY15.
Gross Underwriting Margin
NIB: 16.4% vs Medibank: 14.2%
NIB is again the winner here with the company keeping a higher share of its premiums after claims have been paid out.
Operating Margin
NIB: 4.9% vs Medibank: 5.5%
After taking out other expenses, Medibank is the winner here. The graph below shows the operating margins of the top six private health insurers in Australia and it is interesting to note the opposing trends of NIB and Medibank over the last three years.
Source: Medibank FY15 Presentation
With Medibank's much larger size and scale, it would be expected that its operating margins would be higher than NIB and with further cost saving measures still to be implemented, Medibank's operating margin should continue to increase over the next few years. Interestingly, Medibank has been able to increase its operating margin significantly since FY14 when it was only 4.4%.
Policyholder Growth
NIB: 4.7% increase vs Medibank: 0.9% increase
NIB is the standout winner in policyholder growth, with the company growing policyholder numbers well above the industry average of 2.5%. Medibank on the other hand delivered disappointing growth in this area with the company blaming challenging industry conditions and slowing market growth for its below average growth.
Claims Expense Growth
NIB: 7.5% vs Medibank: 3.4%
Medibank is the clear winner when it comes to managing the rising costs involved with medical care. Both companies are under pressure to deal with healthcare costs that are increasing faster than inflation and faster than either company can implement increases to customers through higher premiums. NIB's claims expense growth in FY15 is concerning as it is by far the highest it has been over the last five years and appears to be trending in the wrong direction. NIB's gross underwriting margin will come under significant pressure unless the company can get claims inflation under control.
Return on Investments
NIB: 4.8% (excludes the benefits from the sale of its stake in Pacific Smiles Group (ASX: PSQ)) vs Medibank: 4.4%
Both companies produced a similar return from their investment portfolios. It is interesting to note that Medibank has 25% of its investment portfolio allocated to growth assets compared to NIB which has 17% allocated to growth.
Current Valuation
NIB: 17.5 x FY15 earnings vs Medibank: 21x FY15 earnings
Dividend Yield (FY16 Forecast)
NIB: 4.0% vs Medibank: 3.7%
Foolish takeaway
It's clear each company has its own positives and negatives and in my mind there is no standout winner. If I had to choose one company for exposure to this sector however, it would have to be NIB. Its policyholder growth is far superior to Medibank and its current valuation is also more attractive for a long-term investment.
FY16 will be an interesting year for both stocks and although both companies have provided positive earnings guidance for the year ahead, there are a number of challenges in the short term that could impact on margins moving forward.
