The NIB Holdings Limited (ASX: NHF) share price has grown by 53% over the last 12 months and I think it could keep growing well over the years to come.
NIB Holdings is a private health insurance company with a market capitalisation of $2.3 billion. It is a fair bit smaller than Medibank Private Ltd (ASX: MPL) but I think this just gives NIB Holdings more room to grow.
Here are three reasons why I think NIB Holdings could be a good stock to buy and hold for years to come:
Diversification with all health issues
There are some great businesses listed on the ASX that have very specific focuses. Cochlear Limited (ASX: COH) and ResMed Inc. (CHESS) (ASX: RMD) are great at what they do, but are experts in only one field. A competitor could come along and disrupt the whole business.
However, private health insurance companies are across every health issue. It would be very hard for NIB to become irrelevant due to a singular health issue. It also means that NIB can financially benefit from any health treatment today or new ones created in the future.
Growth of insurance business
The keys to NIB growing future profits will be its ability to increase the number of policyholders it has and monitor premium revenue against claims.
In the half year to 31 December 2016 NIB grew its number of Australian residents with private health insurance by 2.1%. This was actually an increase of growth, as in the prior corresponding period it grew by 1.8%.
In its most recent results it grew premium revenue by 6.2% whereas its claims expense only grew by 3.4%. The combined effect of this resulted in gross underwriting profit growing by 22.1%.
The government wants the sector to succeed
The Australian government is realising how expensive healthcare will be to the federal budget over the coming years. It needs the private health insurance sector to take on more of the burden so that the public health budget isn't too overloaded.
Although there is no easy fix to the affordability situation, the government will most likely avoid any changes that would hurt the private health insurance system.
Risks
Other than regulatory risks, I think the main risks to NIB relate to affordability. NIB could lose some of its most profitable customers (the younger generation) with how expensive premiums are becoming.
The not-for-profit private health insurance funds could take market share away from NIB and Medibank Private Ltd (ASX: MPL) because they can offer insurance at breakeven prices rather than profit-creating prices.
Foolish takeaway
NIB is trading at 20.8x FY17's estimated earnings with a grossed-up dividend yield of 4.76%. Even with NIB's strong increase in the share price it still appears to be trading at reasonable value. It's growing strongly and could be one of the best healthcare stocks to own over the next decade.
