Here's why NIB just bought travel insurance group World Nomads for $95 million

Sean Gallup/Getty Images

NIB, one of only two listed health insurance companies, today bought Australia’s third largest travel insurance group, World Nomads, for $95 million.

While there’s little connection to health insurance, other than the fact that a lot of claims for travel insurance are medical related, the target company generates about $117 million a year in revenue, or about 10% of NIB’s.

There’s little risk in the acquisition. NIB knows the company well because it has been selling plain wrapper travel insurance from World Nomads for a few years.

The buy is part of a pattern for NIB. It’s growing via acquiring businesses not directly in the health insurance industry. In this case, its bought into an industry, travel insurance, which is growing at 9% per year.

Compare that to about 5% for the health insurance sector. Industry revenue was expected to grow by 5.3% for the financial year just ended to $21.1 billion, and keep rising at that rate for the next five years. A lot of that growth is regular, regulated increases in premiums.

NIB’s earnings from business other than health insurance now represents more than 25% of the company’s earnings. This latest move will increase that proportion.

NIB, and the other listed health insurance Medibank Private, have little or no way to expand within the sector. They’ve just about exhausted opportunities in traditional private health insurance. Most of the other players are financially healthy but small not-for-profits and there’s little incentive for these to consider a merger or amalgamation.

“NIB is quite an innovative and nimble footed entity and it’s constantly trying to maximise earnings growth,” David Ellis, senior analyst at Morningstar, told Business Insider. “It’s been diversifying away from its traditional core private health insurance over several years.”

NIB has expanded into New Zealand, it’s bought an overseas student health insurance business and its announced a consultancy service for people seeking medical treatment overseas.

“It’s a sensible acquisition,” Ellis says. “It’s not too big and NIB has a pretty good track record at integration. It’s not going to shoot the lights out but it’s going to be a nice little earner. It won’t be NIB’s last acquisition. They are always on the hunt for opportunities.”

The private health insurer average net margin is about 4.1%, and falling. In 2013-14, they paid more than $16.7 billion in benefits to members, an increase of 9.1%.

The advantage, however, of being part of a heavily regulated industry is that price rises come in every year. Other industries sometimes have to skip price increases to keep market share. In 2015, the health insurance industry average premium increase is 6.18%.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.