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Morningstar | Private Health Insurers Relieved Following Labor’s Surprise Electoral Loss. FVEs Unchanged

The two narrow-moat private health insurers, Medibank Private and NIB Holdings are enjoying a reprieve from onerous Labor party policies following Labor’s surprise election loss on May 18, 2019. The reversal of negative election sentiment resulted in a strong increase in share prices as it became clear Labor’s policy of restricting premium rate increases to 2% per year for two years has been binned. Medibank’s share price increased 12% with NIB Holdings benefiting from a 13% increase. Despite the positive political outcome, our fair value estimates are unchanged for both insurers and both stocks are broadly fairly valued at current levels. We had not incorporated Labor’s premium rate increase limit in our forecasts so no change to near-term earnings expectations for Medibank and NIB Holdings.

Labor’s policy of limiting premium increases to 2% per year for two years would have put pressure on health insurance margins, but ironically growth rates in hospital utilisation and claims inflation have both been trending down, reducing pressure on premium increases. The most recent industrywide average increase in private health insurance premiums was 3.25%, effective April 1, 2019, the lowest increase for over a decade. We expect industry increases around 3% effective April 1 2020.

A positive impact from Labor’s now defunct policy is insurers have been aggressively working to reduce underwriting and administration cost growth to offset the expected 2% limit to premium increases. So insurers' margins look safe with future premium rate increases likely reflecting growth rates in claims inflation and increased utilisation. The insurers will benefit from a better understanding of respective cost bases and should be able to leverage this knowledge to reduce future claims cost increases and hospital utilisation rates and improve productivity. Despite the positive election outcome, the challenge remains for the industry is to halt the decline in policyholder coverage rates.

Another benefit from Labor’s electoral loss is the removal of concern a new government would reduce the attractiveness of the private health insurance premium rebate system. Currently households with annual income of AUD 180,000 or less receive rebates of approximately 30% from the government on premiums. A potential downgrading of this rebate under Labour would have likely have accelerated the trend of reducing numbers of Australians with private health insurance.

A possible unintended consequence of Labor’s now defunct policy to limit premium increases to a maximum of 2% for two years from April 2020 was the potentially for smaller not-for-profit health insurers to experience considerable financial strain as some in this cohort already operate on very slim insurance underwriting margins. Market leader Medibank’s net insurance underwriting margin is 8.7% as at Dec. 31, 2018 and the industry average is about 5%. We maintain our view the industry regulator, Australian Prudential Regulation Authority, would likely force consolidation on funds that making underwriting losses.

We continue to see both Medibank and NIB Holdings as keen participants in further industry consolidation, if opportunities presented. But increasing affordability issues do not look like easing any time soon, particularly as government endorsed annual premium rate increases continue to exert pressure on stretched household budgets.