Medibank’s George Savvides has ‘good story’ to sell

THE big swing factors in the ­performance of health insurers are the claims cost and management expenses

Medibank, as the dominant ­insurer, will increasingly be in a position to exploit its scale.

THE big swing factors in the ­performance of health insurers are the claims cost and management expenses, with premium ­adjustments subject to regulation and ministerial sign-off.

Medibank Private’s 2014 figures are under wraps until the release of its prospectus later this month.

However, in 2013, premium receipts came to $5.2 billion, with $4.6bn in claims.

Chief executive George Savvides says that, of the insurer’s $5bn-plus in total costs, about 87 per cent relates to claims, with the management expense accounting for only 9 per cent.

Since Finance Minister Mathias Cormann opened pre-registration for the Medibank share offer last Sunday, there has been a lot of talk about the company’s ability to pull the savings lever and cut its management expense ratio to the industry average, or better.

Mr Savvides is quite explicit on this. Two years ago, he says, the MER was 10.6 per cent compared to the 9.5 per cent industry average.

Since then, while the average has fallen to a tick under 9 per cent, Medibank has come down “much faster”.

“The 2014 results will be in our prospectus but it’s a good story,” Mr Savvides says.

“There won’t be any low-hanging fruit because we’ve basically addressed the comparative (MER) issue, but we’re certainly not stopping there.”

Claims, however, dwarf the management expense, and it’s dominated by the $3.8bn in hospital benefits.

The Medibank chief reckons that claims, which are growing at an annual rate of about 8 per cent a year, don’t get much attention because they are seen as fixed, with insurers mostly dealing with the same hospitals, surgeons and other healthcare providers.

But that’s about to change.

Companies such as Ramsay Health Care and Healthscope have invested in a lot of extra ­capacity, introducing some flex into a system that was struggling to cope with the growing ­demands of an ageing population.

Medibank, as the dominant ­insurer, will increasingly be in a position to exploit its scale to negotiate better terms, or switch providers when its algorithms ­detect shortcomings in performance or the quality of care.

“These are not marginal ­opportunities; they’re quite ­material,” Mr Savvides says.

At a mooted valuation of $4.1bn-$5.7bn, Medibank would trade on an earnings multiple of 17-21.

It’s better than the 17.5 ­multiple enjoyed by NIB Holdings, the closest comparable listed stock, but short of the 25-26 ­multiples accorded to Ramsay Healthcare and Healthscope. Morning star analyst David Ellis advises investors to pre-register for the Medibank prospectus, saying it’s a modest growth stock with a good dividend yield, albeit less than the major banks.