Long public hospital waiting lists are encouraging consumers to value private hospital insurance. Policy numbers are improving, particularly at the younger end of the population – a reversal of the trend for younger people to eschew PHI.
MPL’s underlying FY22 net profit of $435 million after normalising for a collapse in investment returns, was in line with market expectations.
Health Insurance operating profit grew 10% to $592.6 million while Medibank Health enjoyed a 45% increase to $45.4 million. Management continues to execute well, delivering above market share gain adding 61k net resident policyholder growth, a 3.2% increase on last year. There is momentum In this factor as July policy numbers added a further 5.8k. The efficiency of management, measured by the MER (management expense ratio) is improving with a 30bp decrease to 7.8% on an underlying basis.
Investment income fell 121% to a -$24.8 million loss as volatile markets impacted returns. This was uncharacteristic for MPL but the company expects higher interest rates will be beneficial in FY23f.
Investment view
Fear, family and affordability are the key drivers of PHI policy uptake and retention. When consumers read about long waitlists at public hospitals, the fear factor draws them towards private care, and this is particularly evident for maternity reasons. Cheaper policies, such as those offered by MPL’s ahm brand, provide the value PHI sought by younger consumers and this is driving policy numbers upwards. AHM’s acquisition rate of almost 20% is way above Medibank at 9.3% although the lapse rate of 12.7% is worse than Medibank at 8.0%. There is an element of ‘downgrading’ as customers switch to the cheaper option.
COVID boosted the perceived utility of PHI and we think this has created a multi-year tailwind for PHI. Choked public hospitals are blowing out waiting times for elective surgeries and delayed diagnoses of serious illness is understating the true level of demand. This has particularly affected Category 3 surgery which has been the classic domain of PHI and private hospitals.
Additionally, MPL has reversed the traditional ‘jaws’ of revenue growth versus claims growth. Risk Equalisation payments grew 47% in FY22 signalling a clear reset of the book. Growth in the younger cohort is rebalancing the lopsided claims from the oldies.
MPL is guiding to policy growth of +2.7% in FY23f with claims expense growth expected to be similar to FY22 at +2.3%.
A further $25 million in productivity savings over FY23-24f could also help improve the MER although inflation is hindering efforts.
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.
Figure 1: FY22 result
Figure 2: FY22 claims (extras)
Figure 3: Hospital claims FY22
Figure 4: policyholder numbers
Figure 5: Health insurance
