With Australia's two listed health insurers, Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF) now finished reporting their interim results, it's a good opportunity for investors to consider whether they still offer an opportunity. I wouldn't race out to buy either company, primarily for reasons of price.
As we covered in their results here and here, both companies face macroeconomic challenges in the future with slower policyholder growth, cost pressures, and individuals dropping out of the private health insurance market or downgrading coverage.
Medibank
Medibank has the most work to do, and is still grappling with a new IT system as well as poor customer service that has required significant extra investment. It's been losing market share and, as the big dog in the industry, is a juicy target for every other up and comer, including NIB and Bupa. The improvements announced in Medibank's recent report happened much faster than I was expecting, although the company's market share still appears to be falling.
While Medibank's price appears reasonable in price to earnings (P/E) terms, in my opinion a continually declining market share suggests that Medibank's competitive position and/or product offering is simply not as good as competitors – a clear warning sign. I think management is moving in the right direction, but I remain wary. I'd prefer to either buy shares cheaper, or wait for market share to stabilise in order to increase the chances of getting a better investment outcome.
NIB Holdings
NIB has had a strong few years. Sharply higher profits today were good news for shareholders, as was the announcement that its premium growth accounted for approximately half of the entire industry's growth. This suggests that the company grew market share during the half. The trouble is that with a $2.2 billion market cap, NIB looks fully priced. This half's profits also appeared to benefit from unusually 'benign' (read: lower) claims expenses, which resulted in profits that were higher than would otherwise be expected.
Put it this way; NIB's first half operating profits accounted for almost two thirds of the company's forecast full year operating profits. Analysts' estimates suggest the company is priced at around 23 times its forecast full year profits, which is pricey for an insurer. As a well-run smaller player with growing market share, NIB is not the type of business I'd like to bet against. However, investors need to make equally sure they don't overpay.
Foolish takeaway
Medibank and NIB are good businesses in a good industry. They appear well run and have defensive, long-term characteristics. However, I think both companies are a bit pricey and don't offer much of a margin of safety. I'd call both Medibank and NIB a 'Hold' today.
