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Morningstar | Industrywide Health Insurance Premiums Increase an Average of 3.25% - in Line With Expectations

The Minister for Health has approved an industrywide average increase in private health insurance premiums of 3.25%, effective April 1, 2019. We were expecting an increase around low 3.0% levels and welcome the lowest annual increase in decades. The slowdown in the rate of annual increase is due to lower claims inflation and lower hospital utilisation rates. Previous industrywide average premium increases were 3.95% for 2018, 4.84% for 2017, 5.59% for 2016, and 6.18% for 2015. Our AUD 2.95 per share fair value for Medibank and AUD 6.20 for NIB are unchanged.

Medibank Private received approval from the Minister for a slightly higher 3.30% average increase across all Medibank and ahm insurance products. NIB Holdings received approval for an average of 3.38% increase across all its nib-branded products and 1.8% for recently acquired GU Health. Medibank’s increase was the lowest for 18 years and NIB’s increase the lowest for 16 years. We forecast industrywide private health insurance premiums to increase an average of 3.0% per year till 2023. But we acknowledge, private health insurance affordability continues to constrain policyholder growth and political risks are increasing with government instability in Canberra. Political risks are increasing with the federal opposition party proposing to restrict the annual increase in private health insurance premiums to 2% for two years. The negative impact from limiting premium growth to 2% per year is partially offset by further expected declines in the claims costs and hospital utilisation rates.

The industry average premium increase is broadly in line with expectations and continues to underpin the attractiveness of the highly regulated and profitable private health insurance sector. NIB and Medibank Private both reported returns on equity, or ROE, above 20% in fiscal 2018. Despite the relatively low industrywide increase, private health insurance premiums continue to grow faster than average wage growth and inflation.

At Medibank’s AGM in November, CEO Craig Drummond confirmed no change to the outlook for fiscal 2019. Medibank Insurance delivered a AUD 536 million pretax operating profit in fiscal 2018 and we forecast a similar result for fiscal 2019. The Medibank Private brand has struggled to retain policyholders, suffering a 2.2% decline in fiscal 2018 and a 4.1% in fiscal 2017. Positively, Medibank’s market share has stabilised, 18 months ahead of its initial target date, with market share expanding five basis points in overall market share in the six months to June 30, 2018. Medibank is targeting modest market share growth in fiscal 2019 with approximately 8,000 new net policyholders added in the first four months of fiscal 2019. We forecast net increase in policyholder numbers of 0.5%, or 10,000 in fiscal 2019 and 1.5%, or 27,500 in fiscal 2020.

NIB increased policyholders a net 8.2% in fiscal 2018 to 595,000, nearly all due to the acquisition of GU Health, if this is excluded organic growth was 3.0%. This is below NIB’s average of 4% per year during the past five years, but still exceeded the industry average of just 0.5% for fiscal 2018. We forecast NIB increases policyholder numbers an average of 3.7% per year to end fiscal 2023, leveraging its expanding distribution capability and niche targeting to grow its policyholder base.

Previous premium increases for Medibank were 3.88% for 2018, 4.6% in 2017, 5.64% in 2016 and 6.59% in 2015. NIB’s past premium rate increases were 3.93% for 2018, 4.48% in 2017, 5.55% in 2016 and 6.55% in 2015. The major focus for Medibank and NIB going forward is on improving productivity, boosting customer service levels and reducing policyholder churn. We are confident both insurers will effectively manage the steady increase in medical and other treatment claims costs and deliver attractive earnings growth.

Following the annual premium increase for Medibank, we make no change to our earnings forecasts for Australia's largest health insurer as the increase was only modestly above our expectations. Our fiscal 2019 NPAT forecast for Medibank is unchanged at 2% growth to AUD 455 million. The stock is trading 19% below our valuation, on a fiscal 2018 P/E of 14 times. Medibank reports first-half fiscal 2019 results on Feb. 15, 2019, and we expect a profit of AUD 236 million.

Medibank’s strong market position and focus on customer retention and improved productivity is expected to underpin high health insurance operating margins of 8.3% in fiscal 2019 modestly lower than 8.5% in fiscal 2018. Similarly, we expect NIB to report healthy insurance margins of 8.2% in fiscal 2019, modestly below fiscal 2018 of 8.5%.

We make no change to our NIB earnings forecasts, retaining expectations for solid health insurance profit growth. NIB Holdings reports first-half fiscal earnings Feb. 18, 2019 and we expect a reported NPAT of AUD 74 million. Our full-year fiscal 2019 reported NPAT forecast of AUD 140 million is unchanged. A change of government, weak industry growth rates, margin pressure and increased investment across the business are short-term risks.

NIB’s consolidated group underlying operating profit (profit before amortisation, M&A costs, interest expense, investment income, and tax) guidance for fiscal 2019 is for “at least AUD 190 million.” Our fiscal 2019 underlying operating profit forecast of AUD 192 million for NIB is modestly above guidance. At current levels, NIB is trading 22% below our valuation, at around 16 times forecast fiscal 2019 earnings. We forecast strong earnings growth with EPS set to grow an average of 9% per year till fiscal 2023.