Signs Medibank Policyholder Growth Has Turned a Corner, With Benefits of Lower Claims Persisting

Medibank MPL reported a 5.9% increase in fiscal 2023 first-half net profit after tax to AUD 233 million, with operating income from the key private health insurance division up 9% thanks to policyholder growth and average claims per policyholder rising by less than price increases. Premiums increased 2% while claims increased only 0.7%.

We think it increasingly likely that more of the claim cost savings that began during the pandemic will stick. Rehabilitation costs per policy remain 20% below pre-COVID-19 levels, with surgeons seemingly more comfortable referring fewer patients and a preference for in-home care. Medibank is doing around one third of rehabilitation on customers having treatment in the home. Less claims inflation gives private health insurers like Medibank scope to attract and retain members by restricting price increases, helping affordability, and improve the attractiveness of the offering in general. Examples include in-home care, short-stay options, a larger network of no-out-of-pocket providers, and apps that provide members with well-being checks and tips to live a healthier lifestyle as well as rewards and discounts.

Our fair value estimate is maintained at AUD 3.30 per share, and the shares appear fairly valued. We assume policyholder numbers grow at around 1.5% per year out to fiscal 2027. Premiums on average are set to rise by 2.96% from April 1, exceeding the 2.3% underlying claims growth per policy management expects for fiscal 2023. Over time we anticipate this trend to reverse, though. 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 aging population. This will bring current margins down from 8.6% currently to 7.5%, though Medibank will still generate an attractive return on equity above 25%.