3 key issues to watch for Medibank Private Ltd shareholders

Health insurer Medibank Private Ltd (ASX: MPL) is expected to report its results to the market later this week. Although shares are up 53% for the year so far, the company is not necessarily a buy right now and there are a couple of key things that would-be investors should learn about the business in its upcoming report before considering a purchase.

Here’s what to watch for later this week:

  • Success of cost-cutting initiatives

Management’s comments on the success of its cost-cutting and efficiency initiatives will be required reading for investors, with Medibank’s share price seemingly factoring in further cost reductions in the future. I’ve been wrong about Medibank so far and maybe the company will continue to surprise me by cutting costs for years into the future. It does operate in a mature market however, and there are risks associated with paying an elevated price for a business that will struggle to grow organically.

A more insidious danger would be if Medibank had an unusually good year/s in terms of low claim expenses – this would inflate profits and the company’s share price, but leave recent buyers at risk if cost cuts or low claim expenses are unsustainable.

By definition insurers attempt to predict the occurence of unpredictable events, and this leads to lumpy revenues and share prices as they over – or underestimate the claims in a given year. This is something to keep in mind for all would-be Medibank buyers.

  • Competition, ahm, and customer numbers

Medibank’s new CEO Craig Drummond only properly took the reins last month, but I suspect he could be forced into making a quick decision about the future of ahm if the low-cost brand continues to cannibalise members from premium Medibank-branded insurance policies.

Readers will also want to keep an eye on Medibank’s customer numbers in general, as competition from the likes of Bupa and smaller players like NIB Holdings Limited (ASX: NHF) is intense. Medibank actually saw its number of policyholders decrease by 0.6% as a result of loss of market share in the six months to December 2015, so investors should watch this closely.

  • Mr Drummond’s comments, and the outlook for 2017

There are a number of other things investors might think are more important – like the Management Expense Ratio (MER), the problems with the ACCC, or something like the ‘lapse rate’ which reflects customer turnover. Yet with a new CEO and the company looking fully valued, I consider management’s comments and its outlook for 2017 to be far more valuable.

The health insurance market is competitive and in fact the total market size has been shrinking as well as downgrading its level of coverage in recent years – not good news for insurers. Furthermore, Medibank’s average revenue per policy unit rose 4.7%, less than its legislated premium increases of 6% due to changing sales mix and cover reductions (i.e., customers are choosing cheaper options) in the first half of 2016.

It’s important to know both how the company is performing as well as management’s plans for improving its performance in the future so that you can make an informed evaluation of the company’s prospects before buying shares. Look for more in our coverage of Medibank’s results later this week.

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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.

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