As we saw two weeks ago at its Annual General Meeting (AGM), Medibank Private Ltd (ASX: MPL) updated the market to expect no growth this year. As a result of competition and reinvestment in its products, management forecast a flat operating result for the current year. Shares fell at the time, although they recovered quickly.
Medibank shares are down again today following its investor presentation, which revealed both good and bad news.
This is the bad, in a nutshell. Medibank has been under-performing and competitors are taking market share. Privately-owned Bupa has been very strong recently, and we can see other listed insurer NIB Holdings Ltd (ASX: NHF), or 'nib', has a stable ~7% of the market.
Fortunately, management has a pretty comprehensive strategy for turning Medibank around, and today's presentation alongside the recent AGM slides were informative in this respect.
One key initiative is partnerships with health providers (the hospitals, etc, that perform the treatments on patients), and the degree to which Medibank is now contracting its relationships with these. This helps Medibank control outcomes for patients and costs associated with poor practice and re-admissions. The figures for future years will likely improve as we get closer to the date.
New, heavier investment in improving the customer experience should also benefit the company in terms of higher retention rates and improved customer experience, although it will be costly.
Medibank has set itself some seemingly contradictory challenges in that it wants to have better customer service and fewer complaints than competitors (which will increase costs) within three years, while simultaneously maintaining higher profit margins than competitors.
If Medibank wants to have fewer complaints (PHIO = Public Health Insurance Ombudsman) and a better Net Promoter Score (NPS) than peers, it will probably need better customer service, and simpler products. That won't come free, but some things like simpler products and better IT systems will be one-off expenses for a long term benefit.
Still, the only way Medibank can maintain better margins than competitors is either to have lower operating costs, lower claim expenses, or higher premiums.
We've already seen that higher premiums won't work, because Medibank is currently investing to give customers more bang for their buck. Better customer service and more call centre staff suggest that operating costs won't be lower, plus Medibank also has ASX listing plus share registry fees and similar that privately owned insurers don't have. That appears to put responsibility almost entirely on lower claim costs as a means of maintaining market-leading margins.
Foolish takeaway
Medibank management is going the right way about turning the company around. They're acting to address under-investment, poor customer experience, and a variety of other concerns. I have no issues here, but investors need to be realistic about whether the company can simultaneously become the most loved and the most profitable health insurer in Australia. I continue to think Medibank is a 'Hold' at today's prices.
