Fewer health insurance claims have been made while elective surgery is in hiatus but Medibank Private has deflected speculation about a windfall to profits.

-Unlikely benefits from the pandemic will accrue to the Medibank Private balance sheet
-Confident second half earnings will be ahead of the prior comparable half
-Private health insurance affordability still the pressing issue
 

Medibank Private ((MPL)) will obtain some benefits from the pandemic, as fewer claims are made while elective surgery is in hiatus, but has deflected speculation about a windfall to profits.

The company has indicated it will return any "permanent" benefit from lower claims - as opposed to simple deferral of treatment - to policyholders, yet several brokers assert the amount and impact will be hard to ascertain.

Medibank Private argues it has already returned $170m to customers through delaying premium rate increases for six months, along with its customer support package worth $50m announced in late March.

Therefore, its commitment is simply to return permanent ancillary claim savings if they exceed this level. This allows the insurer time to assess the full impact of savings, in Credit Suisse's view, instead of having to refund premiums and then run the risk too much has been returned.

What appears likely is that little if any of the benefits from the pandemic will accrue to the balance sheet. UBS assesses any profit recognition will be a timing issue and there will be limited impact on valuation.

ASIC (Australian Securities and Investments Commission) has guided that health insurers will need to provision for the backlog of elective surgery claims that have been delayed because of the pandemic shutdowns. Moreover, Medibank Private believes the cessation of elective private hospital procedures is likely to be more about deferral rather than permanent cancellation, although Ord Minnett asserts this is only partially true.

Many non-essential procedures/claims may not end up being made because of concerns around infections at hospitals as well as PPE (personal protective equipment) shortages and supply constraints, so there still could be a material benefit for insurers.

Only 1% of customers have so far suspended policies, largely from the younger cohort, and Medibank Private has experienced increased ancillary claim volumes as dental practices re-open. However, Citi cautions that trends could change as the economic slowdown continues, although the overall customer demographic may be better insulated from economic fall-out.

Medibank Private remains confident second half earnings will be ahead of the prior comparable half. The dividend pay-out ratio remains at the top end of the 75%-85% target range and the company will review its capital options at the end of FY20.

The company is likely to be one of the few where its FY20 operating earnings are resilient, in Goldman Sachs' view. Beyond this, the broker, not one of the seven monitored daily on the FNArena database, believes the outlook for the industry is difficult, because a softer economic backdrop that will impact on premium growth, and retains a Sell rating with a $2.69 target.

Out-of-Hospital Care

Over the longer term, Medibank Private anticipates there is an opportunity to build out-of-hospital care as well as telehealth offerings, as the pandemic has highlighted the value of these forms of treatment and take-up is likely to accelerate.

This is a rare opportunity for the government, Credit Suisse asserts, to trial reforms before implementation, as the pandemic has provided an insight into alternative care options, and could be used to address affordability and participation in the industry.

Citi shares the view that demand for at-home and digital health care alternatives will accelerate and, providing the government supports the initiative, also believes there is potential for material cost savings on claims, albeit over the longer term.

Affordability

Ord Minnett upgrades to Hold from Lighten, assessing health insurers are defensive exposures in tough economic times. The broker's main concern centres on government constraints over the last two years.

Affordability is indeed the pressing issue, compounded by the economic impact of the pandemic, UBS assesses, as even lower participation rates remain the key risk for the sector. Hence, returning ultimate savings from the pandemic to policyholders could be key to avoiding more permanent impacts on volume.

Goldman Sachs points to the dilemma, in that rising government debt following the pandemic will limit reform options but will also add impetus to attempts to contain public health expenditure. Citi agrees reform options are also more limited, given the tougher fiscal position, and this raises the question of whether the private sector needs to shoulder a larger share of health care funding.

Hence, the proposed fringe benefits tax deduction for corporate health insurers would now appear highly unlikely. Yet, as affordability pressures are likely to become more prevalent, the broker notes with interest that Medibank Private intends to go ahead with its planned premium rate increase of 3.27% on October 1, 2020.

Citi assesses the dividend yield is likely to prove attractive, given many other stocks have sustained reductions to their dividends, but remains wary about the potential impact in the medium term from a deteriorating economy.

Amid limited downside earnings risk, a strong balance sheet and potential for favourable reforms ahead, Credit Suisse judges the stock relatively safe in the current environment.

FNArena's database has six Hold ratings and one Buy (Credit Suisse) for Medibank Private. The consensus target is $2.84, signalling 3.2% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.2% and 4.4% respectively.

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