Now down at around $2.50 per share, Medibank Private Ltd (ASX: MPL) looks much more attractive than it did above $3. Its dividend has swollen to a more appealing 4.4%, fully franked and the company still carries no debt.

Yet I’m still not a buyer, for a couple of reasons. One is the company’s outlook, which it released as part of its annual report in August. This guided for reinvestment in providing value to the company’s policyholders, as well as expensive improvements to the company’s IT and customer-facing systems.

As I noted in my coverage (see above link) of the results, Medibank’s customer loss actually accelerated in the second half of last year, compared to the first half.

The second main reason I’m not a buyer is the lack of a margin of safety in the company. Although it carries no debt, Medibank also has a pretty slim balance sheet for an insurer, with just $0.46 per share in Net Tangible Assets (NTA). This means that the company is valued at 5x its Net Tangible Assets or, in other words, most of the value in the company is coming from the policies it sells customers.

By way of comparison, the much maligned  QBE Insurance Group Ltd (ASX: QBE) is valued at an estimated ~1.5x NTA. Insurance Australia Group Ltd (ASX: IAG) trades at about 5x its NTA, while NIB Holdings Limited (ASX: NHF) is even more pricey (in this sense) at more than 7 x NTA.

Since Medibank has been losing customers and must reinvest in ensuring its policies deliver better value to customers (which means higher costs or lower prices), I see that the primary generator of value for the company is under threat. I personally wouldn’t consider buying until I saw some signs of a reduction in customer losses and downgrades.

Medibank does have an attractive market though and benefits both from regulated premium increases as well as government efforts to shift healthcare demand from the public to the private health systems.

So although I’m not a buyer today, Medibank is also a long way from the top of my ‘Must Avoid’ list.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.