Nib Grows Corporate Health, Yet Risks Prevail

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Brokers are positive about the acquisition of GU Corporate Health as it expands coverage in a growing segment, yet nib Holdings still faces an uncertain outlook in mainstream private health insurance.

-GU has grown premium revenue considerably but net margin has come down significantly
-Could grow materially if employer-funded health care increases in Australia
-Yet, private health insurance margins are peaking and policy numbers declining
 

By Eva Brocklehurst

Nib Holdings ((NHF)) will acquire specialist corporate health insurer Grand United Corporate Health for $155.5m. Brokers are positive about the acquisition as it expands coverage in a growing segment, yet nib still faces an uncertain outlook in mainstream private health insurance.

The company will issue up to $75m in equity and the remainder will be funded from a new debt facility. Underlying operating profit has been upgraded for FY18 as a result of the acquisition to "at least $155m".

Morgans upgrades estimates slightly on the back of the acquisition and believes it makes strategic sense to add to core business and accelerate growth in the corporate segment.  Moreover, the broker asserts the acquisition diversifies the distribution mix through another channel outside of the direct business, although remains somewhat cautious because of cyclically-high health insurance industry margins.

Credit Suisse supports the strategy of diversifying away from mainstream private health insurance, but cautions that acquisitions are not without risk, as was the case with the company's recent acquisition in travel insurance. While deeming such acquisitions are still worth exploring, the broker does not ascribe significant growth or value in their initial stages.

The transaction is one of the best M&A deals Deutsche Bank has witnessed in recent years. It is in-market and a product the company knows. The transaction size is large enough to be meaningful, without being so large as to overwhelm management's ability to execute, and nib has a strong record of delivering.

The broker also notes corporate health insurance is rapidly growing as, while the number of general policies in Australia is falling, GU Health has grown by 4.4% over the past four years. Deutsche Bank suggests alternative products such as employer-funded health care could become increasingly important in the Australian landscape.

GU Health

GU Health is the only established specialist corporate health insurer in Australia and services over 34,000 policy holders across 260 corporate clients. This is a logical strategic fit, in Morgans' view, and should broadly double nib's corporate member numbers, providing a stronger platform for future growth.

Credit Suisse believes earnings accretion will be dependent on what becomes a sustainable level of earnings. GU Health has grown its premium revenue considerably in recent years, but during this period the net margin has also come down significantly, now sitting below the industry level, at 4.1% versus 5.4%.

Goldman Sachs notes GU has built a strong presence in the fully-funded employee health insurance segment in Australia. These policy holders represent around 35% of the GU space. Such policy holders are attractive for insurers, as the insurer obtains a proportion of policies from people who would not normally be buying health insurance. The remainder are required from voluntary corporate health plans.

Relative to the retail market, this type of insurance is typically characterised by a younger working age demographic and there are lower levels of policy churn. Nevertheless, the bargaining power lies with the corporate client and contracts are generally negotiated on an annual basis. Goldman Sachs, not one of the eight stockbrokers monitored daily on the FNArena database, has a Neutral rating and $5.33 target.

Macquarie believes an Outperform rating is supported by nib's operating performance. The acquisition leverages the combined business to around 20% market share by policy count in the growing corporate channel, where the broker observes customers are "rusted on". The acquisition also provides options for a channel that could grow materially if more corporates start providing health payments to employees as affordability becomes an issue.

Deutsche Bank also lauds nib for its embrace of technology and efficiencies, albeit some headwinds are on the horizon regarding margins from the expected increases in utilisation and the normalisation of reinsurance costs. Hence, the broker retains a Hold rating.

Risks Prevail

The price may be attractive and the portfolio provide a platform to expand in the corporate segment but, given elevated margin and growth risks, Morgan Stanley does not change its view. The broker recently downgraded the stock because of elevated trading multiples, against a backdrop of peaking margins and declining growth.

A structurally challenged market that is shrinking, in which adverse risk selection is rising and competition increasing, is considered a valid reason to stick with an Underweight rating.

Citi approves the expansion into lower-margin but more stable channels and suspects there may be some longer-term capital benefits from merging the health funds that are not yet in view. The company, consistent with Citi's industry feedback, now expects little more in terms of favourable health industry reforms, other than additional prosthesis savings.

The broker suggests even these reforms are probably going to be offset by lower premium rate increases. Citi considers the upgraded guidance still conservative. Nevertheless, the stock appears expensive from a valuation perspective and a Sell call is retained.

FNArena's database shows three Sell ratings, two Hold and two Buy. The consensus target is $5.71, signalling -1.0% downside to the last share price. This compares with $5.58 ahead of the announcement. Targets range from $4.95 (Morgan Stanley) to $6.50 (Macquarie).
 

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