Medibank Private (MPL): This morning, Australia’s largest health insurer reported their half-year 2024 results, which were messy due to the write-back of provisions taken in 2020 relating to an expected surge in claims from the CV-19. This inflated the headline profits but will eventually flow back to customers. The HNW Equity and Income Portfolio currently holds a 2% weight in MPL.

Key Points:

  • Record Net Profits: Record half-year profits at $262 million, up +16%, including $18 million in cybercrime costs. Operating profit grew by 4%, driven by premium increases of 3.6%, outpacing claims expenses of 2.9%. A positive position for an insurer to be in.
  • Customer Growth: Over half, MPL increased its policyholders by 12,000, a great outcome with customers continuing to shop around with cost-of-living pressures and MPL being the most significant private health insurer with a 29% market share.
  • Benefits from Higher Interest Rates: Like other insurers in the Portfolio, MPL continues to benefit from the higher interest rates. MPL’s $2.6 billion investment float generated +2.61% or $84 million over the half, a 50% increase on last year. As MPL has no debt, its interest costs remain zero.
  • COVID-19 Write Backs:  MPL took a $400M provision in 2020 on the expectation that claims could grow exponentially due to the view at the time that hospital wards would be overflowing with very sick patients. Luckily, the reverse happened, and hospitalisations in general (along with claims) were significantly below expectations. MPL are returning between $50 and $360 in cash per policyholder, depending on the level of their cover.
  • Dividend Increased: Medibank provided a fully franked half-year dividend of 7 cents per share, up +14%, representing a payout ratio of 75.5%, at the lower end of the target of 75-85%.
  • Guidance: MPL updated their guidance from six months ago to have lower policyholder growth and lower claims growth.
  • Why is the stock down? MPL reached its all-time high stock price yesterday, with the market slightly negative on the guidance outlook, and some analysts were surprised that the CV-19 windfall was returned to customers and not shared with shareholders. We see that management made the correct move and one that will drive long-term policyholder growth and avoid unpleasant political scrutiny that Woolworths is currently “enjoying”.

Portfolio Strategy: We own MPL in the Portfolio as MPL’s healthcare earnings are defensive, and it is a well-run business. Despite its high market share, MPL’s gross margins and management expense ratios are higher than others in the industry, reflecting its recent past operating as a government department. However, management has been slowly taking costs and improving margins. Over the medium term, MPLs moving to improve their digital health experience and having patients treated at home rather than in private hospitals will drive profit growth, expand margins, and be a good outcome for recovering patients.

MPL finished down 5% to $3.65 but has been a solid citizen in the Portfolio, returning +23% over the last year vs the ASX 200 of 8%.