• Intensifying competition between top 6 players, putting policy growth targets at risk and any increases in expected marketing spend going forward will no doubt add further strain on earnings growth.
• Policyholders declines unexpectedly, despite the incentives and Australian Government struggling with the rapid increase in healthcare spending and health services demand.
• Registered health insurers cannot increase premium rates without approval from the Government/Minister for Health/PHIAC/APRA. This leaves NHF’s ROE and margins exposed to a political process and pressures if the company is deemed too profitable.
• Regulatory changes especially relating to any changes to tax incentives and benefits which encourage take up of PHI.
• Higher than expected lapse rates and claims inflation as a result of poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments;
• Poor negotiations with healthcare providers such as private hospital operators leading to unfavourable contractual terms;
• Lower than expected investment returns.

Figure 1: Population growth and Participation rate

Source: Company

• Health Insurance. Health Insurance premium revenue was up +1.2% to $6,319.5m with policyholders growing by 4,800 in FY18, compared to a 24,200 reduction in FY17. Operating profit increased by $38.1m to $535.6m, which reflects the benefits from productivity program and a higher claims provision release, partially offset by the one-off $20m investment in the launch of customer loyalty program. Health claims (excluding risk equalisation) paid on behalf of customers rose by +0.1% to $5.3bn, however Health Insurance gross margin increased by 20bps to 17.3% in FY18. Management expenses were down by -2.0% to $557.2m, with management expense ratio (MER) down to 8.8% from 9.1% in FY17 reflecting progress made on productivity program (delivering savings of ~$20m).
• Medibank Health. Medibank Health revenue rose +6.9% to $615.9m, primarily driven by contribution from newly acquired HealthStrong and growth in Diversified business which includes sale of travel, life and pet insurance products. Operating profit increased +32.5%, with a 110bps improvement in gross margin reflecting diversification of Medibank Health.
• Investment income. Net investment income fell by -31.4% to $95.6m, as both growth and defensive portfolios delivered low returns and management adopted a more conservative approach to asset allocation.
• Capital ratio at the upper end of target. Health Insurance related capital was $895.3m, equating to ~14% of premium revenue which is at the top end of the Board’s stated target range of 12% to 14%.
• FY19 outlook – no specific guidance. Management did not provide any quantitative guidance but expect flat PHI market volumes to persist with the company targeting modest market growth in FY19. Hospital utilization growth is expected to remain subdued with ancillary utilization growth expected to be marginally lower and management expenses are targeted to be modestly above FY18 numbers. Management noted that they are targeting the dividend payout ratio to be at the top end of 70%-80% range and expect to make an acquisition in FY19 which is expected to cost $70m.