Medibank: Policyholder Growth Still Expected, Booming Students and Workers a Nice Tailwind

Medibank’s MPL third-quarter update and largely unchanged fiscal 2023 outlook leave Australia’s largest private health insurer on track to meet our forecasts and our AUD 3.30 fair value estimate stands.

Retaining policyholders after the cyberincident has been a key short-term risk, but we see more evidence the worst is behind for narrow-moat Medibank. This is likely a combination of member apathy and positive perception of Medibank’s product offering compared with smaller competitors. Policyholders at the end of the quarter are flat compared with mid-February, and we assume are positive so far in the fourth quarter as management retained full-year policy holder growth guidance.

Medibank largely held its fiscal 2023 outlook unchanged. Resident policyholder growth of 0.5%-0.75%, a management expense ratio not exceeding fiscal 2022 levels, and cybercrime costs at the top end of the AUD 40 million-AUD 45 million range. Medibank continues to give back benefits of claim savings to members, in the form of deferral of premium increases mainly, and a further give is expected to be announced by June 30. We have already assumed Medibank gives back the claim savings in our margin assumptions over time, but lower claim costs are positive as it means premium increases can be lower and potentially attract more members. Growth in international students and workers was particularly strong in the quarter, with an expected doubling of gross profit in fiscal 2023. We estimate this makes up around 6% of private health insurance gross profits.

Over the medium term we assume policyholder numbers grow at around 1.5% per year out to fiscal 2027. We forecast average claims per policyholder to modestly outpace premium growth per policyholder, with price increases unable to completely offset the costly impact of an ageing population. This will bring current margins down from 8.6% currently to 7.5%, though Medibank would still generate an attractive return on equity above 25%.