Medibank Private (MPL): This morning, Australia’s largest health insurer reported their first half of 2023 results, a set of financial accounts that investors were nervous about due to the cyber hack in late 2022 that saw the share price fall of $2.77, wiping $1.8 billion off the company’s market cap.

Key Points:

  • Record Net Profits: Record first-half profits at $233 million, up +6% inclusive of $26M in cybercrime costs. Strong profits drove an excellent result in health insurance, where claims inflation was again muted, and hospital payments were below expectations despite no CV-19 restrictions. A much better result than listed rival NIB, whose share price fell heavily last week on a weaker insurance result.
  • Member Growth: The big positive surprise in the result. In November, the “bear case” on MPL was that the cybercrime would see policyholders flee MPL in favour of NIB or BUPA. Over the half MPL actually grew policyholders +2.6% to 4.78 million, an excellent result given management turned off marketing spend in late 2022 to fund cyber payments. While in late 2022, the newspapers were full of stories of aggrieved consumers unhappy about their health data being leaked, though it appears that this hasn’t resulted in switching. Helping defend MPL’s market share has been their deferral of regulated price increases, which has made MPL’s private health policies more competitive than their rivals.
  • Dividends:  interim dividend up +3.3% to 6.3 cents fully franked. While MPL could have boosted the dividend by more than this, it may not have been a good move politically.
  • Cyber Attack: Understandably a key focus on the analyst call, MPL expect to spend between $40-45 million in FY23 on improving IT and helping affected customers. Interestingly, management said that before the hack, they received 200 cyber attacks per month, now over 600. So MPLs systems are being tested.
  • Higher Interest Rates benefit:  Similar to SUN and QBE earlier this season, MPL benefits from higher interest rates. MPL’s $2.5 billion investment float generated $56M over the half, benefitting from higher interest rates and narrowing credit spreads, adding $20M to net profits. This benefit will increase in the second half based on the yield curve.
  • Why is the stock up? The combination of good operating performance and customer retention during a tough period for the insurer.
  • Guidance: MPL expects current favourable conditions to continue in 2023, seeing policyholder growth of around 1%, though the return of international students from China is a nice surprise (foreign students are required to obtain private health cover prior to receiving a student visa).

Medibank Private is held in several of the HNW portfolios 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.

While unpleasant for policyholders and shareholders, the cyberattack was a one-off unforeseeable event. Today’s result shows that our move not to panic and sell the position in October 2022 appears correct.

MPL finished up +6.5% at $3.28.