Stocks In Focus: Medibank Private, July 16 2025

0:28A listener production. Falls Director of Research. G'day, Rona. G'day, Scott. Thanks for having me. Mate, thank you for being here. We're going to talk about Medibank, but before we do, I'm going to share with our audience my usual disclaimers. I know I do it all the time. I know if you're listening to this or watching this regularly, you get it. I get it too, but it's important, right? So two things. Firstly, this is general advice, not personal advice. Ryan's views on Medibank will be his views. Whether they're right for you and your portfolio is up to you to determine that's the difference between general and personal advice.

0:55Secondly, this is at a point in time. We're recording this in the middle of June 2025. Anything could change, will change between now and whenever you might be watching, re-watching, listening or re-listening to this particular episode. So just keep that in mind as well. We are long-term investors, our views don't change too frequently, but when the circumstances change, as John Mayer-Kane said, I change my mind. What do you do? I think that's probably good advice for all of us. Right now, with that out of the way, mate, Medibank. I can't think most people know what it roughly is, but give us the more detailed version.

1:26What is Medibank? Yeah, Scott, you said it. It's a very well-known brand. It's a private health insurance business at its core. And what some people may not be fully aware of, though, is it also trades under the lower cost AGM brand. So those two are actually under the one umbrella, both Medibank and AGM. Together, they cover There are approximately 4 million Australians, and that's a very large chunk of the Australian market in terms of health insurance. It's about 27 % of the market, which is well ahead of the majority of the competition. The only one that comes close to it is Bupa, with about 25 % market share thereabouts.

2:07HCF follows with about 12.5%. So, as I said, quite a way behind Medibank and Bupa, followed by also NIB with around 10 % or thereabouts. Look, as a health insurance business, the company literally provides health insurance. It provides insurance coverage in return for a premium. And essentially what insurance companies do, not just health insurance businesses, but virtually every insurance business, what they do is they invest these premiums into what they call a float. Now, that float is basically like a pool of money that they just put together. They invested in assets of various durations. So we're thinking long-term bonds, short-term bonds, maybe some equities in there as well.

2:51That's called the float. Now, I guess at its core, Medibank will have its team of mathematicians, actuaries, they're called. They run the complex maths to price those premiums, to understand where their risks and where their opportunities are. The ultimate goal, of course, is to generate a profit, bring in more premiums and outgoings, but also to generate a positive return on that float. What I just described then was the health insurance business. That accounts for about 90 % of Medibank's business. The other 10 % is a smaller health segment, and that's really health management, telehealth services, those other things.

3:29So, two segments to Medibank, that's the smaller one. Nice. Thank you, mate. Who'd have thought Australia, a country of oligopolies. We've got two big insurers with half the market, but there you go. Surprise, surprise. Mate, let's take our attention from the... By the way, nice description of the insurance model. Thank you. Let's take our attention from the company to the investment. I say regularly, in the best companies aren't always the best investments unless you get them at an attractive price. So we're going to think about the future and the price and the business when it comes to looking at investment rather than just a business.

4:01Let's go to the pros and the cons, the potential pros and cons anyway, of an investment in Medibank Private. MPL is the code if you're playing along at home on the ASX. Let's do the pros first, mate. What are some of the reasons that our listeners and viewers might want to consider investing in Medibank Private? Look, as I said, Scott, Medibank, it is a very mature brand. Most people know it. One of the reasons for that is because it's been around for a very long time. It's well-established. It's got a strong enough balance sheet. It's profitable. It also generates a ton of cash. And that's partly because premiums tend to be paid regularly by policyholders.

4:38And as well, what most people are probably aware of is that both banks and insurance companies, they are required to keep a portion of their cash as capital, basically in reserve, regulatory capital, we call it. And it's actually lighter for a lot of insurance companies compared to the bank. So it is cash generative and does have that stronger backing behind it as a foundation. I think one of the reasons why I would suggest this is, I guess, one of the reasons why investors would want to invest in this company, demographic trends. We know that the population is getting older. People do obviously tend to have more health issues and incidents, I suppose, as they get older.

5:23And those are the sort of things that would generally benefit from having health insurance. So, I would expect that a lot of people would want to be insuring themselves against that risk to keep demand there. There has also been, I guess, an increase in people taking on health insurance since COVID and particularly among younger Australians as well. And that's a really positive thing for insurance businesses like Medibank. In particular, though, the point that I would really like to highlight here is, as I mentioned a minute ago, Medibank is the company with the largest market sharing this market, 27 % market cap.

5:57It's also got one of the largest no-gap provider networks. And basically, that means no out-of-pocket costs for getting certain procedures done. That's a really positive thing for policyholders in terms of the insurer itself. It means better fee negotiations, lower member churn as well. The lapse rate in terms of people lapsing their coverage is about, I think, half of the industry from FY24. So again, it means it's retaining more of those people, more of those people with coverage. And that's a really positive thing. Nice, man. I like that. A lot of scale, some sort of network effect of sorts, not exactly the strongest one we know, but that idea of more insurers means more hospital option, or no gap options means more people get insured.

6:42So it's a nice kind of flywheel there a little bit. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

6:53So for all of those good things, people sitting there thinking, you know what, Ryan makes a good point. I might consider it. What would you caution them about before they do go ahead and make that investment? Scott, we know that most insurance companies do pump up their premiums every year. And that's one of the attractive things about owning an insurer, but obviously not so great for the policy holders themselves. And look, the government is well aware of this. We need to keep health insurance affordable. And there have been some years where it has gone up pretty significantly and pretty steeply, which does really pinch the end policyholder.

7:29So, there is the regulatory risk, of course, that governments do, I guess, undertake some sort of reform to keep healthcare affordable. There are already caps on annual premium rises. So, that does sort of, I suppose, limit the amount of growth that companies like Medibank can achieve. Of course, it can achieve growth in other ways, like through obviously attracting more customers. They have to do that better than what other competitors are doing in this part of the market as well. Also, potentially generating better profits from their float. But again, there is something of a cap on in terms of how far this company can grow.

8:08claims inflation as well. And this is really, I guess, caused by higher wages, procedural costs, which are forcing hospitals and clinics to push for higher reimbursement. So when they do that, let's say I have to have an operation on my knee, the hospital itself might say to Medibank, hey, we need you to put in more of this cost. That can start to crunch on margins or else, As I said, they might need to say, hey, we need to either increase your premiums or else potentially reduce the coverage that you're receiving so that they can actually maintain those margins. When they do that or when they undertake that kind of activity, what can actually happen is patients or customers of Medibank can trade down to the public system.

8:55So, they're no longer going through the private health market. Instead, they're relying on the public system. That's a good thing. that's obviously fantastic that we have that option as Australians as part of the Medicare system. But for companies like Medibank, not so great if a lot of people are trading down. And I think certainly with inflation high, with interest rates having been high as well, I would imagine there's a fair few families out there that have at least considered putting their private health insurance if they have it. Companies like Medibank do need to, I guess, control that risk and make sure they're getting that balance right between retaining those customers, but also making sure that they're getting the margins that they're investing for.

9:40I'll also say too, cybersecurity risk. This company did experience a pretty major breach in 2022. Look, it obviously has control of some pretty valuable information and some information that customers absolutely want to keep private. If there was another incident like this, I think it would very much damage the company's brand and reputation as well. Beautiful. So some good pros, some thoughtful cons. Haven't yet talked about price. I suspect that might come up. Mate, I'm not going to ask you for a formal recommendation. We don't do that as Stocks in Focus. What we do is try and give you a bit of a sense of the business and explain some of our thinking.

10:16Hopefully, it helps you understand these companies a little bit better and helps you do your own research. You can always join the Motley Fool if you want, but that's not an ad, but otherwise. Mate, but that being said, Ryan, I will ask you the question. As long-term investors at the Motley Fool, what do you reckon the odds are of many bank private being a market beater, I would say, the next five or so years? Look, I'll say straight out, I don't think this is a market beater. There's a couple of reasons for this. First of all, I mentioned that there are caps on how much you can grow. It's already a pretty mature market with a 27 % market share.

10:48That's pretty significant. And I do see, or I do expect that it would probably struggle to get too much higher than that. I think a lot of the other brands that are below it, I think are fighting pretty hard as well. NIB is putting up a good fight. HCF is putting up a good fight as well. So I do think it'll be pretty hard for it to grow above that market range. The other thing as well is NIB is also a publicly listed company. It trades on the ASX and HF is its ticker code. By way of comparison, Medibank shares are quite a bit more expensive than what NIBs are. As I said, I think that there is probably more growth potential from a company like NIB simply because it does have a lesser market share.

11:34Actually, the other thing I should mention too is that it is also trading on a higher price to earnings ratio Medibank compared to NIB. So generally, I would say I would probably go with the latter, NIB over Medibank. That's not to say I necessarily think either is a buy, but I would suggest that Medibank isn't a market beater and that NIB would stand a better chance of beating the market. There you go, Fools. You heard it here first. More importantly, you heard Ryan give you a really good rundown and hopefully help you think about the way to consider some of these insurers and businesses in general.

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