Nib Holdings May Need To Tread Carefully

Australia | Apr 27 2021

Health insurance claims trends remain benign, suggesting nib Holdings will need to carefully manage expectations around a potential windfall from the pandemic

-Margin trends could surprise to the upside in FY22
-Difficult to ascertain how quickly claims return to normal
-May need to tread carefully asking for a price rise in 2022


By Eva Brocklehurst

A healthy end to the financial year looms for nib Holdings ((NHF)), which has advised its underlying operating profit in FY21 will be around $200-225m, well ahead of most broker estimates. Policyholder growth was 3.7% for the nine months to March and this compares with prior guidance of growth of 3-4% for the year to June 2021.

UBS cautions that the company's definition of policyholder growth includes a resumption of policies suspended as a result of covid-19, and actual new policyholder growth is much lower. The broker lifts FY22 and outer year underlying operating profit estimates by 3% to allow for the flow-through of higher policy growth and a continuation of the elevated net margins.

Ord Minnett suspects margin trends could surprise to the upside in FY22, particularly given the strong rate increases (4.36%) the company was able to put through this April. Claims provisions stemming from the pandemic are reduced to $59m, from $71 in the first half, and a further unwinding of provisions is expected in the fourth quarter.

The number of claims by Australian residents continues to be well below expectations and the catch-up in accessing healthcare treatment, anticipated after mobility restrictions imposed by the pandemic were lifted, is returning at a slower pace than assumed at the December quarter update.

Citi is sanguine about claims trends, continuing to believe this is essentially a one-off benefit and likely to dissipate in FY22. The broker highlights the risk equalisation benefit, as the older cohort continues to defer claims, is the main reason for the better outcome.

Ultimately, the issue is how quickly claims trends normalise and this is a difficult call, Morgans suggests. It is difficult to know how long claims tailwinds will support profits in Australian resident health insurance, with the broker noting some of the company's other divisions are struggling.

To date, a strong performance in Australasia is offsetting weakness in the international inbound health insurance segment as well as in travel insurance. Goldman Sachs takes the opportunity to push out the assumed recovery in health insurance dependent on international borders re-opening.

Returns To Whom?

Ord Minnett finds it unclear from the update as to whether nib Holdings will give some benefit back to customers, noting favourable claims trends have meant Medibank Private ((MPL)) signalled a return of benefits to policyholders.

UBS asserts that most health insurers have provided some sort of commitment to return savings generated during the pandemic to customers but it appears nib Holdings is looking to distribute this back to shareholders, which explains the large beat to forecasts.

While recent share price weakness has opened up some valuation appeal, the broker finds the near-term outlook is unclear and also suspects when policymakers witness the record margins health insurers are enjoying they may be less inclined to provide supportive policy in the upcoming federal budget.

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