I've written plenty of negative things about Medibank Private Ltd (ASX: MPL) in recent times. One of my extended family members contacted me the other day, mildly concerned, because he'd read my recent articles where I was not very optimistic on the company's prospects.
It is true that the Medibank faces several issues. However, there are also plenty of advantages to owning Medibank and peers like NIB Holdings Limited (ASX: NHF):
- Strong balance sheets
Medibank itself has no debt and a very strong balance sheet. It does not write long-tail types of policies and is exceedingly unlikely to go bankrupt in the forecastable future. NIB Holdings carries some debt, which it has used for acquisitions, but also has a strong balance sheet and has been proactive at paying down debt in the past.
- Reliable business
Typically, health insurance policies enjoy a high degree of renewal as the benefits to policyholders outweigh the risks of becoming sick and not having the cover. While renewal rates have been declining recently due to the ceaseless increase in premiums, much of the industry enjoys reliable customer demand year after year. This should allow both NIB and Medibank to maintain steady dividend payments.
- Implicit government support
Private health insurance is one of the key ways of reducing the burden on the public health system, which is a huge black hole where tax dollars go to die. The government implicitly supports the private health insurance industry by permitting the companies to raise their premiums a regulated amount each year to cover the rising cost of healthcare treatment. This should help companies maintain adequate profit margins (protecting your investment).
There are also policies like the Medicare Levy Surcharge which are designed to increase private health cover uptake. I suspect that if private health insurance participation dropped too low, we would see additional measures to encourage it.
So while there are a few reasons to be negative about Medibank in particular, there are also a lot of strengths in the industry that investors should be aware of. If I was a more passive investor looking for a 'set and forget' business that I only had to check in on occasionally, I'd consider something like Medibank or NIB Holdings. It's easy to underestimate the value of a reliable business with limited likelihood of financial difficulties.
