The Motley Fool

Here’s why the NIB share price could be a bargain right now

As anyone watching the NIB Holdings Limited (ASX: NHF) share price would have noticed, nib shares have taken a substantial tumble this week.

After market trading closed last Friday, nib released a market update in which it flagged that its statutory operating profits would come in around $150 million for the year, down from the $180 million that the company had previously flagged.

The nib share price dived in response – going from $6.54 last week to $5.71 by Monday. nib shares got all the way down to $5.46 by yesterday before rallying slightly this morning and are going for $5.48 at the time of writing.

Should nib shareholders be worried?

The first thing to note is that nib has blamed the write down in expected earnings on higher-than-expected claims during the period. Obviously, higher claims translate into lower profits when you’re an insurance company.

However, nib managing director Mark Fitzgibbon had this to say in the ASX release: “Recent quarter end claims data points to higher than expected industry claims and as the largest contributor to risk equalisation it means we’re shouldering much of the industry’s claims growth.”

“Risk Equalisation” refers to the policy that forces insurers with more young people to cross-subsidise those funds whose memberships are dominated by older Australians. So the more younger people nib attracts, the more it must fork out to subsidise other funds.

Whilst this is less than ideal for the company, it’s also hardly a bad long-term sign for a health insurance company. If nib can maintain its edge in the younger demographics, it’s likely to pay off handsomely as a long-term investment.

Are nib shares in the buy zone?

At their current levels, nib shares are trading on an earnings multiple of 16.67 and a dividend yield of 4.19% (or 6.02% grossed-up). The company’s dividend payments have been patchy over the last few years but have generally been on an upward trajectory since 2010.

Thus, I think nib shares offer some value today. I think the health insurance industry is a good star to hitch your wagon to. If private health insurers lose too many customers, it’s the government that has to pick up the slack.

Thus, governments can continue to be relied upon (in my opinion) to change policies and legislation that encourages customers to take out private health insurance – effectively herding customers into nib’s arms. That’s a tailwind that your average ASX share doesn’t enjoy!

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Motley Fool contributor Sebastian Bowen 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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