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Labor's election loss a welcome reprieve for health insurers

Glenn Freeman  |  23 May 2019Text size  Decrease  Increase  |  
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Share prices at private health insurers NIB Holdings (ASX: NHF) and Medibank Private (ASX: MPL) bounced this week as Labor's election defeat scuttled several policies that would have likely increased member outflows and slashed margins, says Morningstar's David Ellis. 

The shock defeat of the Bill Shorten-led Labor Party has reversed negative election sentiment and boosted the share price of Medibank Private and NIB Holdings, which rose between 12 and 13 per cent, respectively, in the wake of the Coalition’s upset win.

"Despite the positive political outcome, our fair value estimates are unchanged for both insurers and both stocks are broadly fairly valued at current levels,” Ellis says.

"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.”

Medibank's fair value estimate remains unchanged at $2.95, a modest discount to its $3.27 share price as of 3pm today.

NIB is trading at $6.70, versus Morningstar's $6.82 fair value estimate.

Both companies also maintain their narrow moat ratings – highlighting Morningstar's belief that they each hold strong competitive advantages.

Central to Labor’s private health insurance reform was a plan to cap premium increases to 2 per cent.

It also planned to reduce the private health insurance premium rebate – a move insurers feared would decrease the number of Australians with private health insurance.

Like many pollsters and pundits alike, private health insurers were expecting a Labor win and were accordingly cutting costs in underwriting and administration.

That hedging strategy has paid off better than expected in light of the Coalition’s unexpected win, Ellis says.

"So, margins look safe, with future premium rate increases likely reflecting growth rates in claims inflation and increased utilisation,” he says.

"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.”

Greater certainty around Australia's private health insurance rebate system after Labor's loss has benefited insurers in other ways, too.

Currently households with annual income of $180,000 or less receive rebates of about 30 per cent from the government on premiums.

According to Ellis, Labor's proposed downgrading of this rebate would have likely accelerated the decline in the number of Australians with private health insurance.

He says smaller not-for-profit insurers might have copped an additional unintended consequence of Labor's now-defunct plan to limit premium increases, as their already slim underwriting margins would be further tightened.

"Market leader Medibank’s net insurance underwriting margin is 8.7 per cent as at 31 December 2018 and the industry average is about 5 per cent.

"We maintain our view the industry regulator, Australian Prudential Regulation Authority, would likely force consolidation on funds that making underwriting losses," Ellis says.

Staunching member outflows remains a challenge

Despite the current reprieve, policyholder coverage rates continue to fall, and face political and regulatory risks in the longer-term.

For Medibank, Ellis points to the government's planned sale of its stake in Medibank as a potential problem – largely in the perceived view that this will heighten the company's risk.

"Under the current regime, premium increases are subject to approval from the federal health minister upon advice from the regulatory body, the Private Health Insurance Administration Council.

"The process leaves the health insurance industry exposed to unfavourable political agendas or decision.”

While noting the additional risk of a potential withdrawal of government support for private health insurance, Ellis sees this as unlikely.

"Currently, both federal and state governments fund approximately 70 per cent of Australia's health expenditure, and given Australia's ageing population, it is in the government's interest to support the sector.”

is senior editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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