Criterion: Health insurers are feeling better after posting hefty premium increases

Listed health insurers Medibank Private and NIB Holdings posted well-received profit rises, accompanied by higher than expected premium increases. But there’s a lot going on under the bonnet.

Hefty premium increases mean the health insurers have more in the piggy bank, but it's a balancing act. Pic via Getty Images

• The health insurers' allowable premium increases were higher than expected, but investors should consider other factors

• Medibank Private is reaping the benefits of a “warm and fuzzy” customer drive

• The trend to day surgery is driving down claims inflation

From April 1, private health insurance policyholders will be feeling the fools as they suck up a weighted average premium increase of 4.4%.

Many are mulling whether they need the cover, given the fall-back options of a free public system.

According to a survey by comparison house Finder, 3.3 million policyholders intend to discharge themselves from their insurer.

Combined with ever-ratcheting cost inflation, private insurance doesn’t look like a healthy proposition from a consumer – or investor – perspective.

Healthy margins

But looking under the bonnet of Medibank Private (ASX:MPL), the biggest health insurer, there’s also a lot to like.

The same can be said about NIB Holdings (ASX:NHF), the second listed health insurer, but perhaps to a lesser degree.

Medibank shares have climbed around 10% since the company last week unveiled a half-year underlying net profit of $299 million, 14% higher, on revenue of $4.27 billion (up 6%).

Claims inflation rose 0.3% to 2.3%, but below management’s guided 2.4-2.6%.

Helpfully, far more patients are admitted for day surgery for procedures that, in the recent past, would have required an expensive hospital stay.

A case of buy Medibank, sell hospital operator Ramsay Health Care (ASX:RHC)?

Customer charm offensive

Medibank is wooing customers after the devastating cyber attack in 2022 that exposed the details of 9.7 policyholders to the dark web.

Feel-good measures include an $150 million Covid bonus, compensation for the sharp drop off in claims during the pandemic.

Investors Mutual senior portfolio manager Hugh Giddy says there are commercial benefits in being “warm and fuzzy”.

“They are holding on to their customers in a sector that is losing them,” he says.

“If you lose fewer customers than your competitors you don’t have to spend money to acquire them, such as three months’ free membership and paying iSelect or Compare the Market to advertise.”

Compare the damage

Medibank policyholders got off lightly with an average 3.99% premium rise, while NIB settled for a more aggressive 5.79%

Macquarie Equities analysts are “perplexed” the government allowed big insurers including NIB and Bupa (5.1%) to get away with such steep increases.

Usually, the permitted increases reduce as federal health ministers get further into their tenure and wise up to the insurers’ tactics.

But Mark Butler is in his third year.

The insurers won't enjoy an outright gift from the premium rises, because while medical costs may be abating, they are still rising.

Some of the benefit also will be eroded because of NSW's levy on private rooms in public hospitals, expected to cost the insurers $140 million a year.

NIB nabs better margins

Relatively more exposed to NSW than Medibank, NIB reported a 20% net profit decline to $82.9 million, on a 7.7% revenue surge to $1.8 billion.

NIB shares have also bounced around 10% since its results which showed net margins of 6.7-7% meeting the top end of guidance.

Claims inflation abated to 5% from 5.9% in June 2024. As of the end of January, they had declined to 4.8%.

NIB has a higher proportion of non-resident students and working visa holders.

These folk are younger and healthier and lodge few claims than resident policyholders. This business thus enjoys higher margins.

What the brokers think

Brokers generally rate Medibank Private as a ‘hold’ or similar, with valuations at or below the current share price.

A perverse tailwind for Medibank is that it’s been spending big on IT rectification - $40 million for the half. But these costs are expected to disappear after 2026.

Broker Citi dubs NIB’s results as “well shy” of expectations, but still dubs the stock a buy with a $8.70 valuation (implying 16% of upside).

Others are happy to avoid a sector that competes against not-for-profit operators untroubled by the need to produce shareholder returns.

Macquarie opines that while the sector has been relatively safe in tough times, it is “on the precipice of a notable margin squeeze”.

Sounds unhealthy.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision

Originally published as Criterion: Health insurers are feeling better after posting hefty premium increases