News: NHF Suncorp Group Ltd says Co and NIB to offer expanded health insurance range, page-5

This company has exceeded my wildest expectations.

The NHF story makes for a fascinating case study, and one that I think is worth studying.

I first came across NHF in 2008, at a time that Premium Revenue being written by the company was around $750m, from which it was generating an underwriting margin of around 4.5%, for Underwriting Profit of $33m.

The share price was something like 60c, at the time.

I did not buy the share at that stage, because of my concerns (concerns I still have today, almost a decade later) about the industry structure, being highly competitive, mature, prone to regulatory risk, and exposed to high levels of claims inflation due to the nation's demographics.

Against that industry structure, the only way NHF could grow in any meaningful way would be to take market share.  And growing market share was never going to be easy, I thought, given that NHF's major competitors, namely Medibank Private (29% market share), BUPA (27%), HCF (11%) and HBF (10%), are all well-capitalised and well-run insurers with significant brand presence. I was skeptical about NHF's ability to grow market share in an industry that is quite concentrated and where the other major players aren't exactly mugs.  

So I did nothing but monitor the company for the next few years.

By 2011, Premium Revenue had grown to over $1.0bn (CAGR of 10%pa over the previous 3 years) and, due to good expense and claims management, Underwriting Profit had almost doubled to $61m (corresponding to a near- 7% underwriting margin).

That's when it occurred to me that there was something special about this business.  

So I bought my first shares in NHF, paying $1.35 per share.

Since then, as I said, the business performed far better than I had thought possible.

In the past 5 years, NHF has continued its inexorable market share winning march, with a 24% increase in total number of policyholders.  This rate of increase is 1.7 times the 14% increase in policyholder numbers across the entire industry over that period.

Combined with regulated premium increases, as well as some very astute acquisitons, that market share gain resulted in Premium Revenue rising from $1.0bn in FY2011, to $1.87bn in FY2016.  

That's an eye-popping 13%pa CAGR.

And despite aggressive claims inflation experienced industry-wide between 2012 and 2014, NHF has been able to match its growth in total Premium Income with the same 13%pa growth in Underwriting Profits.

And all of that without recourse to shareholders for a single cent to fund that growth.


Of course, investing requires making assessments about the future, and in NHF's case, the upwards re-rating of the stock from a P/E of 12x to 13x in 2011 to 20x today suggests that the market is already, to some degree, factoring in a continuation of the precedent operating and financial performance.

With innovative deals such as the one announced today, and the ones announced earlier in the year relating to the New Zealand Automobile Association, and the Whitecoat directory with BUPA and HBF, I have little doubt that NHF will continue growing strongly for the next 5 years, just like it has done for the past 5 years.

After all, NHF has a mere 8% market share today, so there is ample headroom to continue the successful market share grab.

This is a very nimble company, with innovative and creative executives who understand their company very well, as well as the dynamics of the industry in which it operates.  

Most importantly, they understand how to create shareholder value and how to avoid destroying it.

For anyone who wants an insight into how deeply and incisively these guys think about the future of the business, and how proactively they think in a strategic sense, have a read of slides 2 to 6 of the presentation made to an investor conference on 8 November.