Medibank (MPL) is Australia’s largest private health insurer, covering ~3.9 million people across its two brands, Medibank and the more budget-focused ahm Health Insurance. The business model is straightforward: members pay premiums, Medibank pays claims, and the profit is the margin between the two, known as the management expense ratio and claims ratio spread. Premium revenue is the overwhelming driver, supplemented by a growing health services division that includes telehealth, mental health programs and contracted healthcare services, which Medibank has been building out deliberately to reduce claims costs by keeping members healthier and out of hospital.
However, private health insurance premiums in Australia are regulated; the Federal Government approves annual increases, which gives Medibank a degree of earnings predictability, while also capping upside in strong economic environments. The real earnings lever is claims management: when Medibank can reduce the gap between premiums collected and benefits paid, through better hospital contracting, fraud detection and preventive health, margins expand materially.
MPL also holds a sizeable investment portfolio funded by the float between premiums received and claims paid, adding a secondary income stream that benefits from elevated interest rates – a useful tailwind in the current inflation environment. The stock is forecast to yield 4.2% fully franked over the next 12-months while carrying large insulation against the current economic headwinds, making it one of the most defensive income streams on the ASX.
- We can see MPL grinding back towards its 2025 high while yielding strongly along the way.
MM is bullish towards MPL around $4.60
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