The pandemic has helped to shift attitudes on private health insurance, particularly from younger customers. Medibank Private is not wasting the opportunity to make PHI more appealing and useful to new converts.
COVID-19 has boosted the perceived utility of PHI (private health insurance) and we think this has a multi-year duration. The classic drivers of PHI are the fear of long Public waitlists, family reasons (maternity driven) and affordability. In 1H21, this helped to reverse a multi-year decline in the number of policies taken up which increased 3.3% in the period.
Management has continued to execute well by delivering market share gain, a 20bp lift in gross margin and a 30bp reduction in the Management Expense Ratio. Management also continues to be a voice for favourable industry change and reform.
MPL has embarked on a new effort to address the old problem of revenue growth versus claims growth. MPL’s dual brand strategy can be further leveraged to retain customers over a full life cycle and provide greater value with diversified products and adjacent benefits such as an expanded no-gap network that includes joint replacements, endoscopy and general surgery.
The lift in the younger cohort taking up PHI is important as it helps to offset the claims-heavy older cohort.
MPL’s reset should allow utilisation of policy benefits to increase inline with absolute policy and revenue growth. It could also avert a higher growth claims cycle.
There is a lower risk of near term claims growth despite an expectation that hospital utilisation will increase. MPL has guided to an FY22 average claim per policy growth of 2.3% implying approximately 400bp higher 2H22 claims growth on consecutive halves. But MPL’s COVID related deferral provisions grew 47% to $328.7 million or about 5% of claims. Hospital utilisation is capped by limitations on capacity (clinicians and theatres) and the COVID catchup reduces normal patient capacity.
MPL said its total hospital deferral assumption due to COVID-19 restrictions on surgery was 85% and for non-surgical was 50%.
Investment view
The macro settings still provide a tailwind for PHI policyholder growth. MPL’s pivot to making PHI much more appealing to younger customers (through AHM) has realigned utilisation to increase in line with policy and revenue growth. This will go a long way to avert any higher growth in the claims cycle.
Risks to investment view
If claims costs rise more than expected or PHI premium revenue does not reach expected growth rates, revenue and earnings could be lower than expected. Government policy on premium rate rises is an annual uncertainty.
Recommendation
We have retained our Buy recommendation.
