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NIB share price on watch after downgrading FY20 profit expectations

The NIB Holdings Limited (ASX: NHF) share price will be on watch today after downgrading its expectations for FY20.

The private health insurer said that it now expects FY20 underlying operating profit (UOP) to now be at least $170 million, with statutory operating profit of at least $150 million. NIB had previously indicated to investors that FY20 Group UOP would be at least $200 million and that statutory operating profit would be at least $180 million.

What was the cause of the downgrade?

NIB said that the profit reduction was largely due to an increase in claims expenses across a number of the company’s underwriting business lines.

Within the Australian residents health insurance (ARHI) business, claims inflation and utilisation continued to be broadly in line with expectations and management still expect that business to deliver a net margin of around 6% this year. Further claims development in FY19 have meant the 6.5% margin reported at the time is now 6.2%.

ARHI top line premium growth is 3.8% up compared to last year, with net policyholder growth for the half year of 1.4% – this growth was 1.1% in the first half of last year.

However, NIB said that recent quarter end claims data points to higher than expected industry claims and as the largest contributor to risk equalisation it means the company is shouldering a lot of the industry’s claims growth. This has resulted in NIB’s FY20 risk equalisation net contribution expectations for around $250 million, up $20 million or 9% on FY19.

What about the other businesses?

NIB Managing Director Mark Fitzgibbon said the adjacent businesses are experiencing claims headwinds as well as a tough operating environment. Mr Fitzgibbon said this has seen some resetting of claims experience in divisions such as international students and workers as well as the New Zealand operations after several years of benign claims.

Each of these businesses are now expected to revert closer to “longer term sustainable levels going forward”. These businesses don’t generate a majority of the earnings, but they will hurt the FY20 result.

NIB Travel international sales were up 13% on last year, but the domestic sales have been tough and NIB has experienced challenges integrating the QBE travel acquisition. The FY20 result is expected to be positive but down on the $6.6 million FY19 result.

NIB’s other initiatives

Mr Fitzgibbon said: “The underlying commercial performance across our businesses is very good with attractive returns on invested capital and ongoing growth prospects. And while our NIB Travel business will require a longer time horizon, we’re still very confident of its outlook and earnings potential.

“We’ve also a pipeline of significant initiatives that will further propel long term growth such as our personalisation strategy and joint venture with Cigna, our joint venture in China, and investment in Maori population health in New Zealand.”

NIB will announce its FY20 half year result on 24 February 2020.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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