I think Medibank Private Ltd (ASX: MPL) is a good business. It has short-tail insurance liabilities usually up to one-year long, and has reasonably reliable business due to the safety net it offers customers.
Premiums receive legislated increases annually in order to cover rises in healthcare costs, and the government increasingly intends to shift more people to the private health system – this is the reasoning behind the Medicare Levy Surcharge and the government's Private Health Insurance Rebate.
On top of that, Medibank gets to invest any unclaimed premiums for its own benefit, resulting in an investment portfolio growing steadily larger. It's a good gig, but I'm not a buyer right now for three key reasons:
- The company is losing market share to competitors
- Medibank reportedly has terrible customer service, recently accounting for a major chunk of total industry complaints to the Private Health Insurance Ombudsman (PHIO)
- It is reinvesting heavily in improving the value offered to policyholders, as well as improving customer service
In my earlier article (hyperlink above) I pointed out the seeming oxymoron of simultaneously attempting to improve value for customers and investing heavily in customer service while attempting to maintain market-leading profit margins.
Medibank's strategy appears to be a solid one over the longer term, where it should result in happier and more loyal customers (and hopefully more of them), but I expect it to result in short-term pain to profits and continued problems for customers as new staff are trained and IT issues resolved.
My concern is that these issues are not reflected in the share price; in fact Medibank shares have risen in recent times as investors bank on higher interest rates (government 10-year bond yields have been rising since September). So investors are looking at a company with problems, likely flat or possibly lower profits, and with some of the potential upside from higher interest rates already built into the price.
Medibank is a good business, but I don't believe it is good value today. I continue to think it is a 'Hold'.
