Australia's biggest publicly-listed health insurer, Medibank Private Ltd (ASX: MPL) reported its interim results to the market today. While last month's profit upgrade told investors what to expect, today's results are still an impressive uplift from last year's performance.
Here's what you need to know:
- Revenue rose 3.4% to $3,380m
- Health insurance premium revenue rose 4.6% to $3,080m (from legislated premium increase of 6.59%)
- Net Profit After Tax rose 58.3% to $227.6m, including a one-off tax benefit of $23.2m
- Dividends of 5 cents per share
- Operating margin increased from 5.8% to 8.8%
- Number of policyholders declined by 0.6% as a result of slower growth and loss of market share
- Net investment income fell from $43.4m to $18.6m on lower interest rates and weaker equity markets
- Cash and cash equivalents of $456m, financial assets of $1,702m
- Claims liability of $381m, Unearned Premium liability of $557m
So What?
Revenue growth was slack, and loss of market share was a concern. When legislation permits you to increase your premiums by 6.59%, but your premium revenue only goes up by 4.6%, there's something not quite right. Medibank has been up-front in acknowledging this and believes the slight loss of market share is due to under-investment in the brand, which will be rectified in the next half.
However, a look through Medibank's consolidated income statement shows that marketing expense was actually 16% higher in this half compared to the prior period.
Profit growth was substantially better, thanks to an increased focus on reducing claim expenses. Medibank has stated previously that there are further savings to be made in this area, although the situation is prickly as a number of competing interests – healthcare provider partners, customers, the government, and professional organisations – aren't well disposed to Medibank cutting costs and claim expenses.
Medibank has successfully been able to use its market power to demand better terms from its providers, and I also consider it likely the company will be able to make incremental improvements to its claim expenses in future periods.
Now What?
On the downside, Medibank shareholders should expect substantially lower premium increases in this year. The government has asked health insurers to justify any further increases, and Medibank itself has been quoted as stating that affordability of health insurance is 'becoming critical' for customers.
While this year reflected a significant improvement in the fortunes of shareholders, higher revenues contributed very little to the result. Future premium increases are under a cloud, and investors should not expect much top line growth in the next few years. Yet there is some room for Medibank to improve its operations, and a fair chance that legislative changes will result in a better operating environment for health insurers. As a result, I would call Medibank shares a 'Hold' today.
