The NIB Holdings Limited (ASX:NHF) share price rose 2% to $6.60 after releasing its half year results to the market this morning. Revenue grew 8.9% to $1.1 billion, although net profit fell 0.3% to $70.9 million due to one-off costs related to the acquisition of GU Health in October 2017.
Earnings per share fell 3% to 15.9 cents per share, although the interim dividend grew 6% to 9 cents per share.
NIB reported that its organic growth of 1.1% was almost four times the industry average of 0.3%, suggesting the company is taking market share at the expense of other incumbents. NIB's revenue growth of 8.9% versus its premium increases of 3.93% last year would also tend to confirm this.
Margins in the Australian resident health insurance (arhi) business shrank, although they are likely to finish within the group's expected range of 5% to 6% across the full year. Managing director Mark Fitzgibbon's comment on the health insurance industry bears repeating here:
"The domestic Australian health insurance market is as soft as I can recall. Household incomes aren't growing and there's sure no shortage of competition in the market place." (emphasis added)
It's hard not to quote Mr Fitzgibbon extensively as he is a CEO with a sound grasp of the industry:
"Our arhi 2018 premium increase of 3.93% was our lowest in 15 years. We must however do more to hold down claims inflation and therefore premium growth. There's just way too much evidence of unnecessary hospitalisation and fee variation. While we don't want to tell doctors what to do, we do want to help our customers make more informed decisions about treatment options, choice of doctor and cost. The digital age is making it all the more possible."
Cost pressures are by far the biggest concern for the industry, as the cost of health insurance is growing way faster than stagnant wages, and demand for healthcare (the # of treatments being covered by insurers) is also increasing, making it very difficult to keep costs under control.
One of the biggest risks here is probably regulatory intervention – which could explain why health insurers are all frantically diversifying into adjacent services. 31% of NIB's operating profit – and all of its growth in operating earnings – came from 'adjacent businesses' such as travel insurance, student health insurance, and similar.
NIB has forecast underlying operating profit of at least $165 million for the full year, and expects statutory operating profit of $148 million. The company currently has $9 million in net debt and net tangible assets of 50.4 cents per share.
I like NIB a lot, and expect it will be able to keep growing its sales and market share, but its valuation is steep for a company in an industry that is being squeezed on both sides. The price and volume of healthcare treatments are going up, and the willingness of consumers to pay is already stretched to the max because wages aren't rising. As a result I think NIB is a 'Hold' at best.
