Few industries look riper for disruption than insurance. Imagine when sensors installed in cars provide real-time data to insurers on vehicle usage, speed and braking patterns to help them calculate driver risk with far greater precision.
Or when self-driving vehicles that rarely crash drastically reduce the need for auto insurance. Or better still, when these vehicles reduce the need to own a car – and buy insurance – as consumers order autonomous cars on demand via the cloud.
Health insurance is poised for disruption. Customers who share data from wearable fitness devices with their health insurer are already receiving policy discounts with some US insurers or loyalty-program points with Australian health insurers and airlines.
Consider when insurers, with permission, monitor your health through wearable devices, sequence your genome and adjust the policy based on real-time data. Or when insurance companies use data from “smart houses” to calculate home and contents insurance with greater precision. Or when farming and crop insurance is calculated using satellite and drone data. I could go on with examples of how the insurance industry will radically change in the next decade or two thanks to technology. Even the consumption of insurance will change as younger consumers increasingly buy policies online – a trend that is already entrenched.
The big surprise is that insurgent entrepreneurial companies have not attacked insurance-industry incumbents with greater aggression, as they are now doing in banking and other financial services. Take care holding slow-moving large insurance companies: they could go the way of print media and department stores as technological disruption quickens. Australian investors do not have a lot of choice in insurance stocks. Big names such as the underperforming QBE Insurance, Insurance Australia Group, Medibank Private and AMP, better known for its wealth-management business, dominate the industry.
Medibank is the pick of the blue-chip insurers. Its announcement this week of a contract renewal with Healthscope for another two years bodes well for other key contract renewals next year with Ramsay Healthcare and Epworth Healthcare.
These negotiations should help Medibank curtail cost growth and should aid its profit margins. Longer term, a growing, ageing population and increased healthcare expenditure are strong tailwinds for Medibank. Regulatory risks and declining health-insurance affordability are key challenges, but Medibank has plenty of scope to grow revenue and improve efficiencies now that it is privatised.
However, I prefer smaller insurers that can make life tougher for the big players – or be acquired by an industry incumbent. NIB Holdings and iSelect are longstanding selections in the Switzer Super Report takeover portfolio. iSelect received a takeover approach from Providence Equity Partners in October. As foreshadowed by this newsletter, iSelect’s strategic value as more consumers purchase insurance online would attract suitors.
Here are three favoured mid- or small-cap insurance stocks. I have recently outlined a favourable view on iSelect, an aggregator and distributor of insurance policies, so won’t add to that here.
1. NIB Holdings (NHF)
NIB’s announcement this week of a partnership with Qantas to offer its health insurance to 11 million frequent fliers is a good example of how technology is affecting the industry.
The product, Qantas Assure, rewards members with frequent-flier points for being more active. Members earn frequent-flier points for paying their health-insurance policies and meeting targets through a wellness app that syncs with mobile phones and fitness trackers.
As an aside, the deal again emphasises the latent strategic value in Qantas’ frequent-flier program – a topic I covered last year for the Switzer Super Report. With Qantas points almost like a defacto second currency, the potential to mine a database of 11 million users and attack other industries is enormous if Qantas thinks more like a technology disruptor than a traditional airline.
Qantas wants to have a 2-3% share of the $19 billion Australian private health-insurance market. The partnership should maintain and improve policyholder loyalty for NIB at a time of rising policy lapses, downgrading and switching. It should also reduce policy risks by marketing to a frequent-flier user base that is healthier and more active.
The deal, while not having a material effect on NIB’s earnings or valuation, is another example of the well-run insurer’s proactive approach. NIB has performed consistently for several years: its return on equity (ROE) has hovered around 20% for the past four financial years. That’s a good return on shareholder funds for an insurer.
The market has mixed views on NIB. Of 11 broking firms that cover the stock, three rate it a buy, five a hold and three a sell, according to consensus analyst estimates. A median price target of $3.70 is in line with the current share price and suggests NIB is fully valued.
NIB would fit nicely with a larger insurer. But even without a takeover, it has good long-term prospects and looks well placed to benefit from industry disruption.
Chart 1: NIB
Source: Yahoo!7 Finance, 25 November 2015
2. Cover-More Group (CVO)
The travel insurer listed on ASX through a $260 million Initial Public Offering (IPO) at $2 a share in December 2013. The float was heavily oversubscribed, but almost two years later, Cover-More trades at $2.14, despite its exposure to the international travel market.
The company provides travel insurance, medical-assistance policies and employee medical-assistance services such as health-risk assessment and physical health coaching. Travel insurance accounts for about three-quarters of revenue.
Cover-More has good prospects. A recent trading update confirmed it is growing faster than industry forecasts and is offsetting the effects of a weaker Australian dollar, which affects its offshore claims cost, on earrings.
It is growing strongly offshore. Asian sales now contribute 15% of group profit and sales growth is strong in the United Kingdom and India. China sales volumes for Cover-More’s medical-assistance policies are also performing strongly.
I like the long-term thematics for Cover-More. As I have outlined previously for the Super Switzer Report, tourism is set to boom, boosted by expected strong growth in Asian middle-class consumption, and as younger and retired consumers in developed nations increasingly travel overseas. For Cover-More, that means more customers buying its travel-insurance policies through an excellent distribution platform.
The threat of terrorism and rising health and safety fears when travelling overseas will surely encourage more travellers to take out travel insurance, of which Cover-More dominates.
The market is paying more attention to Cover-More at the current price. Six of seven broking firms rate it a buy and one rates it a hold. A median price target of $2.70 suggests it is undervalued at the current price – a price forecast that looks about right, given Cover-More’s potential to grow earnings.
A forecast Price Earnings (PE) multiple of about 18 times is arguably not demanding for a company with genuine global growth prospects and such a strong industry position. A 4.7% dividend yield, fully franked, is another attraction.
Chart 2: Cover-More Group
Source: Yahoo!7 Finance, 25 November 2015
3. CBL Corporation (CBL)
The recently listed insurer is worth following by investors comfortable with holding small-cap stocks. CBL listed on ASX through an $80 million IPO in October. Its $1.41 issued shares have rallied to $1.75 and some savvy small-cap fund managers have been buying the stock.
CBL sells and underwrites insurance in 25 countries. The New Zealand-based company focuses on identifying profitable, non-traditional insurance lines in local and offshore construction and property industries.
It is particularly strong in compulsory building insurance in France. Builders take out insurance to protect the homeowner when undertaking renovations, or against the risk of home defects when constructing a property.
Builder’s warranty insurance is an interesting business. CBL limits its risk by dealing with smaller builders that construct a few homes each year, and focuses on simpler properties that have few non-completion, construction or repair risks. That minimises the risk of claims against policies CBL provides.
CBL has delivered consistently strong growth in gross written premiums and operating profit since 2009-10. It has successfully acquired several businesses and this month announced plans to buy a UK tax-protection insurance provider – another example of CBL’s strategy to target non-traditional, niche insurance markets.
CBL is obviously well managed, and management owning a larger chunk of shares in a company is invariably a good sign. The $384 million stock is one to watch.
Chart 3: CBL Corporation
Source: Yahoo!7 Finance, 25 November 2015
• Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at October 21, 2015
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
