It's a battle Royal! A classic grudge match between the undisputed insurance king of the past and the ex-government run private health insurance king of today! Medibank Private Ltd (ASX: MPL) vs QBE Insurance Group Ltd (ASX: QBE) and you have front row seats.
Operations
QBE is a general insurer and reinsurer (it insures insurance companies) with operations across Australia and New Zealand, North America, Latin America, Europe and the Asia-Pacific region.
Medibank Private is Australia's largest private health insurance company and listed last year at $2 per share. At 30 June 2014, the group accounted for 29.1% of Australia's $19.3 billion private health insurance sector via its flagship Medibank brand and low-cost Ahm brand.
Financial Health
At the end of 2014, QBE generated Gross Written Premiums (GWP) of over $US16 billion. About 33 per cent of this was generated in North America, with Australia and New Zealand, and Europe both providing close to 28 per cent. QBE has spent considerable effort over the last two years repairing its balance sheet after years of mismanagement and natural disasters. This has included asset sales and capital raisings to bring debt ratios to within the 30% to 50% target range.
Medibank meanwhile, operates only in Australia and is debt free, so analysts consider that the group has considerable scope to further its market share by acquiring smaller market participants.
Risks
QBE has made 135 acquisitions in 25 years, leading to a company with many working parts. The new management team has been able to reconcile some of the issues by selling off underperforming arms of the business and tightening insurance standards, however the risk remains that the group's risk management strategy again lets it down. QBE is also exposed to currency risk, with over 60% of earnings coming from overseas.
The problem for Medibank is the hype around the company and the promise of huge efficiency savings as a result of being released from the red-tape associated with being a government-owned department.
The analysts at UBS acknowledge the risk of this potential being over-hyped and rate the company a SELL because they see major risks in Medibank's high-cost business model. The group did note that claims growth moderated and margins stabilised in the most recent quarterly statistics, however they see Medibank's customer lapse rate as a serious concern.
The team at Morningstar also noted following the first-half result that "…softer than expected premium revenue growth is concerning and is likely to continue as policyholders downgrade product features and or increase churn rates."
Outlook
As far as we know, QBE remains on track to hit full-year guidance of gross written premium (GWP) between US$15.5bn and US$15.9bn, net earned premium (NEP) between US$12.6bn and US$13bn, and combined operating ratio (COR) between 94% and 95%. Analysts expect this to convert to earnings per share (EPS) of 72.5 cents and dividend per share (DPS) of 40.5 cents this year, and up to 84 and 49 cents next year. This implies a price to earnings ratio of 18.7 and dividend yield of 3%.
For Medibank, the average analyst estimate for Earnings Per Share (EPS) for this financial year is 9.7 cents and Dividend Per Share (EPS) is 4.9 cents. These numbers rise to 10.9 and 8.2 cents per share for the year ending June 30 2016, implying a price to earnings ratio of 19.8 and dividend yield of 3.8%.
The Winner?
In my opinion, without any doubt there's more upside to QBE's share price than there is for Medibank. Medibank is limited in its ability to grow meaningfully within Australia, while QBE's global network gives it room to expand further should it need to. As a result, my money's on QBE over the next five years, especially if there's a dip in the market that presents a great opportunity to stock up!
