According to Justin Braitling, fund manager of listed investment company (LIC) Australian Leaders Fund Limited (ASX: ALF) there are a multitude of reasons to be wary of the outlook for the leading private health insurers (PHI) such as Medibank Private Ltd (ASX: MPL).
Amongst his biggest concern is the fact that the combined market share of Medibank Private and Bupa (the two giants of the Australian PHI sector) has declined from 59.2% in 2008 to 55.8% in 2014. This stat suggests that policy holders are becoming increasingly active in changing their PHI with little brand loyalty, thanks at least partially to government regulation which makes it easy to switch PHI without being penalised.
While the government had little incentive to increase competition within the PHI industry while it owned Medibank and in the lead up to the group's initial public offering; now that the company has been privatised in the biggest float of 2014, there is nothing to hold the government back from encouraging further competition.
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While the fully priced Medibank looks set to be a loser from the above scenario, the small and nimble NIB Holdings Limited (ASX: NHF) could be set to continue its impressive run of growth as it takes market share off of the majors.
Likewise, new entrants to the sector potentially have a lot to gain by entering the PHI industry which enjoys high margins and high returns on capital. One company which already looks to be heading in that direction is Primary Health Care Limited (ASX: PRY) which recently purchased a small PHI. As Braitling highlighted in his quarterly report, The Leading Edge, it's not just health sector players like Primary that are set to find the PHI industry attractive but also general insurers and financial service firms who could be enticed by the size of the profit pool on offer.
