Insurance has certainly been in the news recently, with QBE Insurance (ASX: QBE) feeling the wrath of investors who are getting impatient with the company’s seemingly endless earnings downgrades.
Private health insurers are also under the microscope as the impacts of the federal government’s changes are being assessed.
Making insurance more expensive
First we saw a means test introduced for the 30 per cent private health insurance rebate, and then the government announced they were going to index the income level at which the rebate ceases to be available. The indexation will be based on the lesser of the premium increase or the CPI.
Those changes have increased the uncertainty for private health insurers, as consumers reassess their need for insurance or their level of insurance, with some likely to reduce their level of cover.
One publicly listed insurer in the firing line is NIB Holdings (ASX: NHF).
From strength to strength
NIB began operations in 1952, covering steelworkers at BHP in Newcastle. It’s gone from strength to strength since then, demutualising and listing on the ASX in 2007.
The company is now worth $850 million based on its market capitalisation, and has grown profits strongly since listing.
Premium revenue grew 11.5 per cent in the 2012 financial year, with a 4.7 per cent growth in policyholders and an average premium increase of 12.8 per cent.
NIB also continues to diligently reduce management expenses as a percentage of revenue.
The good news for current shareholders is that NIB shares have gone from strength to strength over the past 12 months, despite the potentially bad regulatory news. In fact, the share price has risen almost 25 per cent in that time.
Much ado about nothing?
NIB’s own modelling, released by the company, suggest there isn’t too much to worry about from the changes to the private health insurance rebate. It believes policy non-renewals will be around 0.6 per cent and policy downgrades (to lower levels of cover with cheaper premiums) to be around 2.2 per cent of its policies in force. While not ideal, those numbers are eminently manageable.
NIB has shown an interest in acquisitions to drive economies of scale, this month announcing the acquisition of the New Zealand business of Tower insurance, after being unsuccessful in a late-2010 takeover offer for Geelong-based GMHBA.
It has also looked to expand into new product lines, being active in the health insurance market for companies recruiting overseas workers on temporary work visas, and has taken a similar approach to international students.
Small can be beautiful
While the industry will likely experience relatively slow growth (likely broadly in line with population growth), small innovative players have the opportunity to grow market share in the “traditional” health insurance industry as well as pursue the type of expansion that NIB is undertaking. It also has plans to pursue international expansion.
NIB currently trades at a trailing price earnings ratio of 13.9 and a dividend yield of 4.9 per cent, fully franked.
NIB is a well-run, shareholder-friendly business that is putting its best foot forward in a category that could otherwise be assumed to be somewhat sleepy and slow-growing.
While there are still questions about the impact of the changes to the private health insurance rebate and its success in diversifying its business, NIB is continuing to deliver, and wouldn’t be out of place in many portfolios.
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Scott Phillips is a Motley Fool investment analyst. You can follow Scott on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors.
This article contains general investment advice only (under AFSL 400691).
This story Administrator ready to work first appeared on Nanjing Night Net.