NIB Holdings - Macquarie · pricing deregulation, Potential reform to risk equalisation, Lifetime...

Please refer to page 14 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

NHF AU Neutral

Price (at 06:10, 22 Aug 2016 GMT) A$4.44

Valuation A$ 4.31 - DCF (WACC 8.0%, beta 1.0, ERP 5.0%, RFR 3.3%, TGR 2.0%)

12-month target A$ 4.50

12-month TSR % +4.8

Volatility Index Medium

GICS sector Insurance

Market cap A$m 1,949

30-day avg turnover A$m 1.5

Number shares on issue m 439.0

Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E

Reported profit m 99.6 97.6 106.1 113.4 Net Op Income m 104.0 105.6 114.1 121.4 EPS adj ¢ 23.7 24.1 26.0 27.7 PER adj x 18.7 18.5 17.1 16.1 PER rel x 0.91 1.09 1.13 1.21 DPS ¢ 14.8 15.4 16.7 17.8

Dividend yield % 3.3 3.5 3.8 4.0 Franking % 100 100 100 100 Total SH Funds m 386.1 416.0 452.8 490.7 BV/S ¢ 88.3 95.1 103.5 112.1 ROE % 28.4 26.2 26.2 25.7 ROA % 11.1 9.6 9.4 9.1 P/BV x 5.0 4.7 4.3 4.0

NHF AU vs Small Ordinaries, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2016

(all figures in AUD unless noted)

23 August 2016 Macquarie Securities (Australia) Limited

NIB Holdings Delivers FY16, nib in good health Event

FY16 Underlying Operating Profit: +49.9% to $132.0m compared to nib

upgraded FY16 earnings guidance of $125m-$135m (MRE $136.3m, FY15:

$81.7m). FY16 Underlying EPS 22.9cps vs Macquarie 23.3cps.

Impact

FY17 Outlook:

Underlying operating profit: $130m-$140m (MRE FY17e $134.7m).

Market Conditions: Soft market conditions likely to continue into FY17

however nib expect to deliver volume growth within 4%-5% target.

Claims Growth: "Difficult to predict arhi claims inflation trajectory."

Drawing rate inflation (per person) expected to be within range of 3% -

4% (FY16: 2.9%).

Profitability: arhi Net Margin, focus on achieving net margin (arhi) within

target range of 5.0%-5.5%. Macquarie forecasts are based on return to

the top of the target range by 2H18, and in the range thereafter.

FY16 Group Financial Highlights:

Premium revenue: +11.2% to $1,818.7m (Consensus: $1,823m, MRE

$1,835.4m, FY15: $1,634.9m).

Underlying Operating Profit: +49.9% to $132.0m compared to nib

upgraded FY16 earnings guidance of $125m-$135m (MRE $136.3m,

FY15: $81.7m).

Gross margin: +220bps to 18.6% (vs 16.4% in the pcp).

Net margin: +150bps to 7.1% (vs 5.6% pcp), MRE 6.9%.

Regulatory reform: nib expect PHI reforms and potential regulatory changes

to be a net positive. Reforms may include: Market pricing for prostheses/

medical devices, Improved transparency to assist consumers, Premium

pricing deregulation, Potential reform to risk equalisation, Lifetime discounts,

Second tier hospital default benefits, Public hospital cost shifting and

Healthcare homes an opportunity for better coordination and management

Earnings and target price revision

EPS Changes: FY17e -2.7%; FY18e -3.6%. TP $4.50 (from $4.40)

Price catalyst

12-month price target: A$4.50 based on a DCF methodology.

Catalyst: AGM on 2 November 2016

Action and recommendation

Neutral

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management NIB Holdings

23 August 2016 2

Fig 1 NHF FY16 result

The good The not-so-good The interesting

All segments grew and improved

Underlying Operating Profit.

Australian Resident Health Insurance

(ARHI): +9.7% premium growth to

$1,568.4m:

driven by net policyholder growth of

+3.8% YoY.

ARHI saw +100bps expansion in net

margin to 6.0% vs. FY15 5.0% and

industry 4.4%:

with the gross margin +160bps to

14.9% vs. FY15 13.3%...

…as the MER was 8.9% (up from

8.3% in FY15).

nib NZ health insurance: +15.4%

premium growth to $173.6m,

nib had the benefit of OnePath for 11

months to boost this result.

International Inbound (students and

workers) health insurance: +39.7%

premium growth to $76.8m, underpinned

by +28.0% net policyholder growth.

arhi Management Expenses: +60bps

to 8.9% vs pcp.

nib changed the DAC amortisation

period from 6 to 5 years from 1

April 2016 (increasing

management expenses by $1.8m,

1.3% of ARHI management

expenses). The impact on MER is

~11bps.

arhi net promoter score of 17.7 in FY16

vs 20.7 in FY15:

…“some media coverage hostile to

the industry was unhelpful.”

Regulatory reform: nib expect PHI

reforms and potential regulatory

changes to be a net positive.

Market pricing for

prostheses/medical devices.

Improved transparency to

assist consumers

choose/compare health

insurance products.

Premium pricing deregulation.

Potential reform to risk

equalisation.

Lifetime discounts.

Second tier hospital default

benefits.

Public hospital cost shifting.

Healthcare homes an

opportunity for better

coordination and management.

Whitecoat: recent expansion of JV

to BUPA and HBF as equity

partners…

with “open invitation extended

to other insurers and

healthcare payers to

participate.”

“Ongoing diversification (World

Nomads Group), innovation

(Qantas Assure) and disruption

(Whitecoat).”

ROE: +270bps to 25.8% vs pcp.

Source: Macquarie research, Aug ‘16


23 August 2016 3

FY17 Management Outlook Statement:

Underlying operating profit: $130m-$140m (MRE FY17 $140.2m), Statutory operating profit:

$122m-$132m.

Fig 2 Underlying Operating Profit

Source: Company data, Macquarie research, Aug ‘16

Market Conditions:

Volume Growth: Soft market conditions likely to continue into FY17 however nib expect to

deliver volume growth within 4%-5% target range.

Claims Growth: "Difficult to predict arhi claims inflation trajectory." Drawing rate inflation (per

person) expected to be within range of 3% - 4% (FY16: 2.9%).

Profitability:

arhi Net Margin: Focus on achieving net margin (arhi) within target range of 5.0%-5.5%

noting competitive pressures.

Deferred Acquisition Costs amortisation: Change in arhi DAC amortisation period related

to sales from past periods will add $4.6m to FY17 acquisition expenses.

Fig 3 Impact of change in DAC Amortisation policy


Business investment: Investment in growth and expansion of WNG will result in a subdued FY17

Underlying Operating Profit for WNG business.

“Ongoing pursuit of new business opportunities and innovation to create enterprise value”.

$45m $43m

$66m $66m $67m $68m

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

$10m

$20m

$30m

$40m

$50m

$60m

$70m

$80m

1H15A 2H15A 1H16A 2H16A 1H17E 2H17E

Growth in Op. ProfitOperating Profit - Group

$1.8m

$4.6m

$1.8m

-$0.3m

-$1.4m

-$5.1m

-$1.4m

-$6m

-$4m

-$2m

$0m

$2m

$4m

$6m

2016 2017 2018 2019 2020 2021 2022


23 August 2016 4

Australian Residents Health Insurance: highlights from the FY16 result

Premium Growth: +9.7% premium growth to $1.568.4bn vs pcp.

Fig 4 Premium and premium growth - ARHI


Underlying operating profit: +31.4% to $94.5m with;

Gross Margin: +160bps to 14.9% as claims experience the key driver.

Favourable risk equalisation: -3.3% to $179.4m vs pcp as total policyholders over 55

increased +10.7% in FY16 and +16.8% in FY15 (nib has had a deliberate strategy that

includes segments with older policyholders (e.g. nib’s Virgin Silver product, APIA and Qantas).

compared to the ‘nib’ brand.

Fig 5 Risk Equalisation % of total premiums


Net policyholder growth: +3.8% or 19,501 net new policies (~3x the industry growth rate of

+1.3%) vs +4.7% in the pcp.

$541m $555m $587m $601m

$650m $665m $707m $723m

$781m $787m

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-

$100m

$200m

$300m

$400m

$500m

$600m

$700m

$800m

$900m

1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Growth in ARHI PremiumsPremium - ARHI

10.4%

11.9% 12.2% 12.3%13.2%

13.8% 14.2%13.7%

13.0%13.7%

12.8%11.8% 11.3%

10.4%9.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2H09A 1H10A 2H10A 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Risk Equalisation as % of Total Premiums


23 August 2016 5

Fig 6 Policyholders and growth: ARHI


Claims Performance:

Hospital claims: +12.4% to $782.3m vs pcp.

Ancillary claims: +1.5% to $333.4m vs pcp.

Outstanding Claims: $9.6m vs $0.8m in the pcp.

Fig 7 Claims Performance


Margin Performance: The Gross Margin and MER performance sees nib deliver net margin

near record levels on a 1H and 2H basis.

Fig 8 Gross Margin, MER and Net Margin: ARHI


418k 429k 441k 452k 462k 472k 485k 487k 491k510k 519k 529k

0%

2%

4%

6%

8%

10%

0k

100k

200k

300k

400k

500k

600k

1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Policyholder GrowthTotal Policyholders - ARHI

$886m $918m $940m $967m $981m $1,043m $1,075m $1,088m $1,128m $1,144m

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-

$200m

$400m

$600m

$800m

$1,000m

$1,200m

$1,400m


Growth in average net claims expense per Policy

UnitAverage net claims expense per Policy Unit

7.4%

4.5%5.7%

4.3% 5.2%3.3%

5.3% 4.7%6.6%

5.2%

8.9%

8.5%8.4%

8.1%8.1%

8.1%

8.1% 8.6%

8.5%9.6%

16.3%

13.0%14.1%

12.4%13.3%

11.4%

13.4% 13.3%

15.1% 14.8%

0%

5%

10%

15%

20%


AHRI Gross Margin, MER and Net Margin

Operating margin MER


23 August 2016 6

Management Expenses: +60bps to 8.9% vs pcp.

nib changed the DAC amortisation period from 6 to 5 years from 1 April 2016 (increasing

management expenses by $1.8m, 1.3% of ARHI management expenses). The impact on

MER is ~11bps.

Net Margin: +100bps to 6.0% vs pcp.

Deferred Acquisition Costs: Continue to accumulate on balance sheet as the aggregators

remains a key distribution channel.

Fig 9 Deferred Acquisition Costs on Balance Sheet


Sales and Lapse trends:

Policyholder growth: +3.8% or 19,501 net new policies (~3x the industry growth rate of

+1.3%) vs +4.7% in the pcp.

Fig 10 Policyholder growth


Shift to over 55s policyholders continues, sales growth: +10.7% (FY15: +16.8%).

Sales growth in under 40s policyholders demographic continues to moderate. Sales to

under 40s declined -0.7% following a -2.6% decline in FY15.

Lapse rate: Increased to 12.6% (FY15: 12.3%).

Broker channel distribution: 40.5% vs. FY15: 41.6 and FY14: 31.0%.

$2m$11m $12m $15m $16m $19m $22m $26m

$34m

$7m

$17m $15m$21m $24m

$27m

$42m$48m

$49m

$0m

$10m

$20m

$30m

$40m

$50m

$60m

$70m

$80m

$90m

2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Deferred Acquisition Costs

DAC - ST DAC - LT

4.7%

9.1%

5.2%

6.2%

1.9%

9.5%

3.6%

7.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Policyholder growth - ARHI


23 August 2016 7

Fig 11 Channel mix


International (Inbound) Health Insurance: highlights from the FY16 result

FY16 Premium revenue growth: +39.7% to $76.8m (1H16: +84.4%, 2H16: +9.0%) impacted

by the Saudi contract which was discontinued 1 March 2016.

Policyholder growth: +28.0% (+58.5% in FY15).

Fig 12 Premium revenue growth


FY16 Gross Margin: -70bps to 45.7% (1H16: 34.0%, 2H16: 59.5%).

Gross underwriting result: +37.5% to $35.1m.

FY16 MER: -140bps to 23.5% (1H16: 21.4%, 2H16: 26.1%).

FY16 Net Margin: +70bps to 22.2% (1H16: 12.5%, 2H16: 33.4%).

18.1% 22.2%28.9% 31.8% 35.0% 31.0% 28.0%

41.6%53.5%

40.5%

81.9% 77.8%71.1% 68.2% 65.0% 69.0% 72.0%

58.4%46.5%

59.5%

0%

20%

40%

60%

80%

100%


Channel Mix

Broker % Other %

$13.5m $14.7m $15.9m $16.1m$18.2m

$19.7m$22.4m

$32.5m

$41.5m

$35.3m

0%

20%

40%

60%

80%

100%

120%

$0m

$10m

$20m

$30m

$40m

$50m


Premium Revenue GrowthPremium Revenue - IIHI


23 August 2016 8

Fig 13 Gross Margin, MER & Net Margin


FY16 Underlying Operating Profit: +41.2% to $17.2m.

Outlook: Margins are viewed as sustainable, while nib expect earnings to continue to grow, aided

by a strong pipeline of international student sales and further growth in international visitor visa

classes.

nib New Zealand: highlights from the FY16 result

FY16 Premium revenue growth: +15.4% to $173.6m (2H16: +20.9%, 1H16: +9.6%), including

the OnePath acquisition completed 1 Dec 2015.

Policyholder growth: +25.8% (+4.1% excluding OnePath Life NZ, +5.8% in FY15)

Investment in growth continues with ~45% of new sales through the Direct (DTC) channel.

Fig 14 Policyholder numbers and growth


FY16 Gross Margin: +500bps to 39.4% (1H16: 38.5%, 2H16: 40.1%).

FY16 MER: +80bps to 29.4% (1H16: 28.8%, 2H16: 29.9%).

FY16 Net Margin: +420bps to 10.0% (1H16: 9.8%, 2H16: 10.2%).

21.0% 22.2% 22.6%29.1% 30.2% 26.9%

33.3%

12.7% 12.5%

33.4%

33.4% 27.9% 24.5%

28.6% 26.4%26.9%

27.6%

23.8% 21.4%

26.1%

54.4%50.0%

47.2%

57.7% 56.6%53.8%

60.9%

36.5%34.0%

59.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%


IIHI - Gross Margin, MER and Net Margin

Net margin % - IIHI MER % - IIHI

$67.5m$71.7m $72.9m

$77.5m $79.9m

$93.7m

0%

5%

10%

15%

20%

25%

$0m

$20m

$40m

$60m

$80m

$100m

1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

Premium Revenue GrowthPremium Revenue - NZ


23 August 2016 9

Fig 15 Gross Margin, MER & Net Margin


FY16 Underlying Operating Profit: doubled to $17.3m due to continued policyholder growth,

success of Premium Payback product (PPB) settlement campaign, lower than forecast claims and

OnePath acquisition contributed 7 months towards the result.

Other:

Premium payback liability decreased $15.8m in FY16 (1H16 decrease $7.8m).

Outlook: nib expects profitability to further improve through organic growth and increased scale.

World Nomads: highlights from the FY16 result

FY16 GWP growth: +5.6% to $112.2m (2H16: +3.4%, 1H16: +8.0%, 2H15 +9.2%, 1H15 +6.6%)

due to strong international sales (>30% in US and >25% in UK) offset by weak Australian

performance.

Growth in policies was +1.0%. Note the business was only held by nib for 11 months in FY16.

World Nomads operating revenue: $50m (11 month result).

Underlying operating profit contribution: $9.7m (2H16 $5.5m: 1H16: $4.2m) vs expectations of

~$10m.

Other:

Acquisition of this group by nib occurred on 31 July 2015 for $95m (EV basis).

Outlook: nib see international markets as an opportunity for growth of the World Nomads

business. Investment in these opportunities is expected to impact short term profitability.

Group: highlights from the FY16 result

FY16 Group Financial Performance:

Premium revenue: +11.2% to $1,818.7m (Consensus: $1,823m, MRE $1,835.4m, FY15:

$1,634.9m).

Underlying Operating Profit: +49.9% to $132.0m compared to nib upgraded FY16 earnings

guidance of $125m-$135m (MRE $136.3m, FY15: $81.7m).

Gross margin: +220bps to 18.6% (vs 16.4% in the pcp).

Net margin: +150bps to 7.1% (vs 5.6% pcp), MRE 6.9%, FY15: 5.4%, FY14: 5.0%.

Total other income: Flat at $3.8m vs pcp.

Total other expenses: +23.6% to $10.5m vs pcp.

0.7%5.0% 4.4% 5.2%

9.8% 10.2%

32.3%

33.2%29.4%

32.2%28.8% 29.9%

33.0%

38.2%

33.7%

37.4% 38.5%40.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

NZ - Gross Margin, MER and Net Margin

Net margin % - NZ MER % - NZ


23 August 2016 10

Fig 16 Cash conversion


FY16 Net investment income: -46.2% to $16.9m vs pcp of $31.4m, which included $5.4m gain

on profit on sale, was impacted by equity market performance .

FY16 investment mix: ~15% growth assets, ~85% defensive

FY16 investment yield: 2.7% in FY16 vs 4.8% adjusted in the pcp and 5.6% in FY15.

Fig 17 Unearned Premium as % of Premiums


Reconciliation of Underlying Operating Profit ($132m) to Statutory Operating Profit

($120.8m): Amortisation of acquired intangibles, one-off transaction and M&A costs +75.8% to

$11.2m.

Amortisation of acquired intangibles: +121.6% to $7.8m vs pcp, comprising World Nomads

($3.6m) and nib NZ ($3.4m) and other ($0.9m).

One-off transaction and M&A costs: +19.0% to $3.4m vs pcp, comprising World Nomads

($1.9m) and unallocated ($1.5m).

Final DPS: +50% to 9.0cps vs. 2H15 and was inline with consensus 9.0cps (MRE 10.1cps).

Full year payout 70% (target 60%-70%).

Franking 100%.

$0m

$20m

$40m

$60m

$80m

$100m

$120m

$140m

$160m

FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A

Cash Conversion

Operating cashflow Underwriting Operating Profit

Intro. of income testing of Gov. Rebate

5.4%6.4%

5.3%

11.9%

9.3%

6.6%5.8%

7.6%

6.3%

7.6%7.0%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A

UEP % of Premiums


23 August 2016 11

Fig 18 Dividend and Dividend Yield


ROE: +270bps to 25.8% vs pcp.

Finance costs: +53.1% to $5.2m due to increased debt associated with the WNG acquisition.

Gearing: 28.1% versus target maximum 35% (FY15 15.6%, FY14 15.8%).

APRA capital standards: expected to be reviewed in 2018/19.

Fig 19 ROE performance


4.40

2.00

5.00 4.00

9.00

4.25 5.00 5.00 5.00 5.25

14.75

5.50 6.00 5.75

9.00

0%

2%

4%

6%

8%

10%

0cps

2cps

4cps

6cps

8cps

10cps

12cps

14cps

16cps


Dividend YieldDPS

6.6%

18.0%16.3%

14.8%16.5%

18.0%

21.7% 21.7% 21.6% 21.9%20.8% 21.4%

23.1% 22.9%

25.8%

0%

5%

10%

15%

20%

25%

30%


Reported ROE


23 August 2016 12


nib holdings Price: 4.44$

Year Ending June 30

Consolidated P&L ($m) 1H15A 2H15A 1H16A 2H16A 1H17E 2H17E FY14A FY15A FY16A FY17E FY18E

Premium revenue 802.3 832.6 902.7 916.0 960.2 1,008.1 1,491.6 1,634.9 1,818.7 1,968.4 2,143.2

Claims expense 560.6 590.8 638.8 649.2 675.1 710.3 1,040.0 1,151.4 1,288.0 1,385.4 1,515.5

Risk equalisation Levy 94.7 90.8 94.1 85.3 94.0 98.9 190.6 185.5 179.4 193.0 211.1

State levies 14.2 14.0 14.7 14.7 15.4 16.2 28.2 28.2 29.4 31.6 34.6

Increase/(Decrease) in PPB 0.6 1.3 -7.8 -7.9 -15.7 0.0 -3.3 1.9 15.7- 0.0 0.0

Net claims incurred 670.1 697.0 739.8 741.3 768.9 825.4 1,255.5 1,367.1 1,481.1 1,610.0 1,761.2

Gross underwriting result 132.2 135.6 162.8 174.8 191.4 182.7 236.2 267.8 337.6 358.4 382.1

Management expenses 84.5 94.7 98.1 111.1 108.3 113.6 162.1 179.2 209.2 221.8 239.4

Net underwriting result 47.7 40.9 64.7 63.7 83.1 69.1 74.1 88.6 128.4 136.5 142.6

Other income 2.0 3.1 24.5 29.9 30.5 31.2 5.7 5.1 54.4 61.7 72.0

Other expenses -4.3 -1.2 -22.8 -28.0 -31.0 -32.6 -2.5 -5.5 -50.8 -63.6 -70.1

Operating Profit 45.4 42.8 66.4 65.6 82.6 67.7 77.3 88.2 132.0 134.7 144.6

Normalised investment income 10.4 10.0 9.3 10.4 9.3 9.5 20.1 20.4 19.7 18.7 20.9

Investment experience 9.6 1.3 -2.8 0.0 0.0 0.0 9.6 11.0 2.8- 0.0 0.0

Interest Expense -1.7 -1.8 -2.6 -2.6 -3.8 -3.8 -2.7 -3.4 5.2- -7.6 -7.6

Profit before tax 63.7 52.4 70.3 73.4 88.1 73.4 104.2 116.2 143.7 145.8 157.8

Tax 19.3 15.1 20.2 20.4 20.5 20.8 29.4 34.3 40.6 41.3 45.0

Non-controlling Interest -0.2 -0.3 -0.3 -0.7 -0.4 -0.8 -0.1 -0.5 1.0- -1.1 -1.2

One-off & intangible amort. 3.4 3.1 7.1 4.1 4.0 4.0 5.1 6.5 11.2 8.0 8.0

Reported Profit after tax 41.3 34.5 43.4 49.5 48.2 49.3 69.8 75.8 92.9 97.6 106.1

Ratio Analysis 1H15A 2H15A 1H16A 2H16A 1H17E 2H17E FY14A FY15A FY16A FY17E FY18E

Premium grow th 9.1% 10.1% 12.5% 10.0% 6.4% 10.1% 15.6% 9.6% 11.2% 8.2% 8.9%

Claims ratio 83.5% 83.7% 82.0% 80.9% 81.7% 81.9% 84.2% 83.6% 81.4% 81.8% 82.2%

Expense ratio 10.5% 11.4% 10.9% 12.1% 11.3% 11.3% 10.9% 11.0% 11.5% 11.3% 11.2%

Combined ratio 94.1% 95.1% 92.8% 93.1% 93.0% 93.1% 95.0% 94.6% 92.9% 93.1% 93.3%

Underwriting Margin 5.9% 4.9% 7.2% 6.9% 7.0% 6.9% 5.0% 5.4% 7.1% 6.9% 6.7%

Net Insurance Margin 7.2% 6.1% 8.2% 8.1% 8.0% 7.8% 6.3% 6.7% 8.1% 7.9% 7.6%

Underlying NPAT grow th 1.3% 18.3% 36.1% 46.4% 1.5% -0.4% 2.4% 9.0% 41.2% 0.5% 8.3%

ROA 8.6% 9.5% 10.0% 9.9% 8.9% 9.0% 10.6% 9.7% 9.2% 8.8% 8.6%

ROE 24.0% 20.4% 24.5% 26.4% 24.7% 24.3% 20.3% 22.0% 25.5% 24.5% 24.6%

Investment Fundamentals 1H15A 2H15A 1H16A 2H16A 1H17E 2H17E FY14A FY15A FY16A FY17E FY18E

EPS (Reported) 9.4 7.9 9.9 11.3 11.0 11.2 15.9 17.3 21.2 22.2 24.2

EPS (Adjusted) 8.4 8.1 11.5 11.9 11.6 11.9 15.2 16.6 23.4 23.5 25.4

EPS Grow th (Adjusted) 1.3% 18.3% 36.1% 46.4% 1.5% -0.4% 2.4% 9.0% 41.2% 0.5% 8.3%

PER (Adjusted) 26.4x 27.3x 19.4x 18.6x 19.1x 18.7x 29.2x 26.8x 19.0x 18.9x 17.4x

Total DPS 5.50 6.00 5.75 9.00 6.40 9.00 20.00 11.50 14.75 15.40 16.70

Dividend Yield 2.5% 2.7% 2.6% 4.1% 2.9% 4.1% 4.5% 2.6% 3.3% 3.5% 3.8%

Dividend payout ratio (adj EPS) 65% 74% 50% 75% 55% 75% 132% 69% 63% 66% 66%

Price to NAB 5.9 5.7 5.4 5.0 4.9 4.7 5.5 5.7 5.0 4.7 4.3

Price to NTA 8.2 7.7 13.3 11.6 11.0 9.8 7.5 7.7 11.6 9.8 8.3

EFPOWA 439.0 439.0 439.0 439.0 439.0 439.0 439.0 439.0 439.0 439.0 439.0

Balance Sheet ($m) FY13A FY14A FY15A FY16A FY17E FY18E

Assets

Cash & cash equivalents 143 149 124 89 169 251 Sum of distributable cash profits 558

Intangibles 91 95 90 217 217 217 Surplus Capital 0

Other assets 480 554 623 732 767 804 Terminal value 1,334

Total assets 714 798 837 1,039 1,154 1,273 Total valuation 1,892

Liabilities Shares on issue 439

Unearned Premiums 90 114 127 152 167 181 Value per share A$4.31

Outstanding claims 81 94 97 112 128 140 Target price A$4.50

Borrow ings 59 65 63 152 152 152

Other liabilities 157 169 206 237 290 347 Capital Return 1.4%

Total liabilities 388 442 493 653 737 820 Dividend Yield 3.5%

Retained Earnings 295 320 307 356 386 423 Total Return 4.8%

Total shareholder equity 326 356 344 386 416 453 Recommendation Neutral


23 August 2016 13

Macquarie Quant View

The quant model currently holds a strong positive view on NIB Holdings.

The strongest style exposure is Quality, indicating this stock is likely to

have a superior and more stable underlying earnings stream. The weakest

style exposure is Valuations, indicating this stock is over-priced in the

market relative to its peers.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Insurance)

32/261 Global rank in

Insurance

% of BUY recommendations 27% (3/11)

Number of Price Target downgrades 0

Number of Price Target upgrades 3

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.7

-0.3

0.6

0.9

1.1

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Healthscope

Insurance Australia Group…

Ramsay Health Care

Medibank Private

NIB Holdings

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Healthscope


Ramsay Health Care

Medibank Private

NIB Holdings

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.2

-0.4

0.3

1.0

1.3

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Healthscope


Ramsay Health Care

Medibank Private

NIB Holdings

-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

Healthscope


Ramsay Health Care

Medibank Private

NIB Holdings

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-38%

-24%

-23%

-21%

24%

28%

28%

33%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Momentum 12 Month

3M Price Target Revisions…

Momentum 6 Month

Momentum 3 Month

Price to Sales LTM

Price to Cash LTM

Price Upside

EV/EBITDA FY0

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.60 0.05

-1.13 0.06

0.79 0.56

0.72 0.36 0.05

-0.19 1.12

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/261)

0 50 100

Percentile relative

to market(/397)


23 August 2016 14

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2016

AU/NZ Asia RSA USA CA EUR

Outperform 45.17% 56.00% 36.36% 43.16% 63.39% 45.91% (for global coverage by Macquarie, 6.27% of stocks followed are investment banking clients)

Neutral 36.21% 28.59% 40.26% 50.38% 29.46% 36.96% (for global coverage by Macquarie, 6.33% of stocks followed are investment banking clients)

Underperform 18.62% 15.41% 23.38% 6.46% 7.14% 17.12% (for global coverage by Macquarie, 5.38% of stocks followed are investment banking clients)

NHF AU vs Small Ordinaries, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2016

12-month target price methodology

NHF AU: A$4.50 based on a DCF methodology

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 21-Apr-2016 NHF AU Outperform A$4.40 23-Feb-2016 NHF AU Outperform A$4.00 04-Nov-2015 NHF AU Outperform A$3.90 15-Oct-2015 NHF AU Outperform A$3.80 07-Sep-2015 NHF AU Outperform A$3.70 24-Aug-2015 NHF AU Outperform A$3.80 08-Jul-2015 NHF AU Outperform A$4.10 23-Feb-2015 NHF AU Outperform A$4.00 25-Aug-2014 NHF AU Outperform A$3.50 19-Jun-2014 NHF AU Outperform A$3.40 16-May-2014 NHF AU Outperform A$3.20 24-Feb-2014 NHF AU Outperform A$2.90 13-Jan-2014 NHF AU Outperform A$3.00 18-Nov-2013 NHF AU Outperform A$2.50 26-Aug-2013 NHF AU Outperform A$2.42

Target price risk disclosures: NHF AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.


23 August 2016 15

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 22 August 2016 at 15:40 UTC.

NIB Holdings - Macquarie · pricing deregulation, Potential reform to risk equalisation, Lifetime...

Documents

Transcript of NIB Holdings - Macquarie · pricing deregulation, Potential reform to risk equalisation, Lifetime...