Company Interview / Foreign students help Medibank meet expectations

David Koczkar, CEO of Medibank (ASX:MPL), expressed his satisfaction with the company's recent results which include a 14% net profit increase amounting to a sum exceeding $570 million. The insurer also boosted its customers' Covid relief by an additional $305 million, raising its total aid to $1.46 billion. David highlights that despite challenges, Medibank remains financially strong, delivers value to customers, and projects optimism for the future due to the multiple growth opportunities available to them.

He explains that Medibank's distinctive growth is evident in its diversification into the non-resident business, marking a 25% increase in policyholder growth. The focus areas for this growth include the corporate market, family market, and new industry entrants. Retention rates have also been positively impacted due to the avoidance of unsustainable practices. David maintains an optimistic outlook on the potential for reduced competitive conditions in the coming years, thus enhancing Medibank's market share.

Lastly, David addresses the company's strategies amid increasing cost pressures. He talks about their focus on enhancing customer value by reducing pressure on premiums. Last year, they returned around $305 million to members besides providing additional value. He concurs with the necessity to collaborate with other private health sector stakeholders to ensure sustainable premium rates. He also acknowledges the importance of investing in innovative health partnerships that can provide advanced care models for customers. He concludes by mentioning how these initiatives will contribute to the sustainability and affordability of healthcare

Full unedited transcript:

0:00

Private health insurer Medibank has seen its full year net profit rise 14% to over $570 million, its reported operating profit of 692 million, which is up 6.3% and an operating margin of 8.8%, which is up 20 basis points. The insurer says an additional $305 million in Covid relief has been given back to its customers, taking its total support to $1.46 billion. It will pay 9.4 cent per share dividend, final and fully franked, and has lifted its full year fully franked dividend to 16.6 cents. Let's get some further detail. We're joined by Medibank chief executive David. David, welcome. Thanks for joining us. Congratulations on the results. How would you sum it up?

0:45

Well, thanks for having me I think look we've worked really hard to deliver value to our customers. We've made some great strides in our expansion in health, but we've remained disciplined about how we grow. Uh if I look through to the future, um, we're a a strong and resilient business. We've been able to navigate through the current economic challenges, and we've got multiple options for growth in the future, so it's a really solid result. Uh, and you know, we're excited about those future prospects. So I see you've signed up for a permanent Australia residence for policies, but you've seen strong growth in foreign students. How do you rationalize that?

1:28

Yeah, we've seen 14,000 additional policyholders in the resident, uh, business growth. I mean, that's not quite what we set out to achieve, but we've had to make some very disciplined choices about how and where we grow that the the resident, uh, insurance market, uh, has strong fundamentals. The growth rates are around 3 or 4 times the growth rates that they were before the pandemic. And consumers are seeing private health insurance as essential. Uh, but they're looking for more value. And we've seen the competitive intensity, uh maintain through the cycle. So we want to be strong and resilient like we are now for the future. And so that means, uh, uh, being disciplined about how where we grow, uh, yeah. What we have seen is the markets that we've focused on growth, uh, the corporate market, our family market, those new to industry, we've all had very strong results in the last 12 months. Uh, and we've

2:27

also seen because we haven't gone after some of these unsustainable practices we see in the market. We've seen our retention rates, um, uh, uh, retain levels well below, uh, the market levels. So as we look forward to next year, uh, as these, um, as we expect these competitive, um, uh, conditions to diminish slightly over the next year or two, uh, we're seeing our aspiration to return to a holding share during next year and then growing share the year after. In the non-resident business, we've seen standout growth. Uh, 25% policyholder growth. And it's a very meaningful contribution to our private health insurance sector, fueled by strength in the student business, but also growth in our worker and visitor options. So the non-resident business is the standout in the core business, and we are excited by the future of that part of the sector. So just in terms of the resident policy

3:27

growth there, we obviously we she pointed to those cost of living pressures clearly biting. We know that's going on across the Australian community at the moment. So what's it going to take then. Are you looking forward to perhaps interest rate relief and therefore that environment is going to change?

3:45

Well, we remain focused on uh, reducing uh, the increase on or pressure on premiums and also delivering more value so consumers can see more value for money. So last year we gave back $305 million to our members, uh, in cash Givebacks. In addition, uh, we provided around $50 million in value, uh, to our members. So we are doing everything we can to make sure that private health insurance remains value for money. Also, we need to work with others in the private health sector to ensure that we keep our pressure off premiums for the future. So we talk, uh, today about the $63 million that we've provided in one off support for private hospitals, because we want the private hospital sector to also remain sustainable, to provide care for our customers. But we've also, uh, invested in, uh, partnerships that reward innovation

4:45

in health to adopt and invest new care, new models of care for our customers, for the future that will make sure health remain sustainable and affordable, uh, for the future. So, David, you point to that one off support there for private hospitals. Is it fair to say that's almost at crisis point as far as the sustainability of the private healthcare system, particularly in terms of private hospitals which clearly the government is concerned about at the moment, what's got to change there?

5:14

Well, I think the government review, the health check that's going on is is very welcomed. I think we need to get the facts on the table. Um, yes. We've all been participating in a market that had inflationary pressures and no one's been immune, which is why we've taken out a further $10 million of our own costs and have one of the lowest, uh, management expense ratios of anyone in private health. Uh, and we expect others to do the same. Uh, so the review will actually get the facts on the table. I mean, there have been some hospitals closing, but also there's been hospitals opening. In fact, we've seen more capacity added to the private hospital sector, uh, since the start of the pandemic, uh, ahead of demand. So I think, uh, those, uh, facts, uh, as well as consumers wanting to have more choice in their health to be delivered either in the comfort of their home, uh, or reduce the time they spend in hospital. All these factors are part of what we call the health transition.

6:13

Moving from, uh, a health system that's heavily dependent on hospitals to much more of a health and wellbeing system where we not just invest in treatment, but also in prevention. So part of our investments in our Medibank Health segment are actually in that health transition. That's something that we need to all invest in, uh, to ensure that as the Australian health system remains one of the best in the world.

6:38

What have you seen with claims? I gather that they are down once again. Is that attributed to those cost of living pressures that simply your customers are not seeking treatment at the moment?

6:50

Uh, we have seen some, uh, extras climbing, uh, slightly softer than we expect. Uh, but we are seeing surgical volumes, uh, return back to expectations. The big change we've seen, uh, is that less and less care is being delivered, uh, non-surgical in hospitals. So whether that's rehab, uh, in hospitals or whether that's respiratory conditions, we continue to see softness in those in those claims line claim lines. We also have seen about 5% reduction in overnight stays uh, uh, over the last five years. So that's a really big shift in where care is delivered. And those trends have continued, which is which is why we've seen, um, you know, we're putting out an expectations of claims growth at around 2.7%, uh, for the coming year. And our resident business, David, management expense is up more than 8%, operating expenses up close to 7%. What's that attributable to?

7:51

Uh, well, we have seen, uh, some impacts of the inflationary environment, but we think that those impacts, uh, largely now, um, you know, baked into our numbers and will be behind us for next year. You know, also, uh, we have seen, um, you know, given our standout growth in the non-resident business, an increase in commission costs that, uh, we pay when we acquire, uh, new student workers and visitors But, you know, we've seen a 25% growth, uh, in a non-resident business, uh, delivering, uh, very strongly in terms of, uh, our margins. So in many ways, that's a good cost growth. Where do you see premium growth going at the moment? I guess particularly given how competitive this segment is,

8:38

we're trying to do everything we can to keep premiums as low as we can. Uh, the most recent premium announcement that we made, uh, keeps our premium increase below inflation and below wage growth. But we need to keep moving as a sector to ensure that we can keep those premiums, uh, at a, at a rate that makes sure private health insurance remains affordable for everyone and in reach, uh, for of consumers. Because if we don't, uh, then we'll put even more burden on an already stretched public system. Which is why, you know, we we need to invest in the health transition. We need to invest in prevention, and we need to invest, uh, in bringing Australia up to speed uh, with other countries around the world, uh, of care models for the future.