A few things you should know about the Medibank Sale (ending tomorrow)

Hello Fellow FiftyUp Club Members,

This week sees the close of the Medibank Private float (Friday November 14).

Far be it from us here at FiftyUp Club to tell you whether it’s a good deal or not … as the saying goes, “please consult your financial adviser” and read articles such as this one.

But we have looked at some of the key facts, because we do care about the increasing price of premiums, and we’d be very concerned if the privatization leads to that.

Let’s have a look at some of the indisputable facts:

You will need $2000 to participate.

The price of each share is to be capped at $2.

The shares are not government guaranteed, so their value may fluctuate depending on how the business may perform.

Once it floats, Medibank’s market capitalization will be as much as $5.5 billion, which puts it among the 70 biggest companies on the ASX.

Unlike policy holders of NIB and the NRMA when they were floated, Medibank customers will not be gifted any shares. This has been a source of some frustration and even legal threats by some Medibank customers.

Medibank is the largest private insurer with 29.1%  of market share. Revenue growth among the private insurer has been strong over the past 10 years at around 8.4% a year.

Claims have grown at about 8.3% in that time, which has kept a lid on earnings.

But a survey we at FiftyUp Club conducted earlier this year showed FiftyUps pay around 3 to 4% more than the national average increase of 6.2% on their policies each year.

So, will our premiums go up even further as a result of the sale?

The Federal Government says no because for the past ten years it has already been run as a commercial organization making returns and setting premiums at about the same rates.

According to Finance Minister Mathias Cormann, “Competition will put a natural limit on Medibank Private’s capacity to lift premiums beyond what is competitive”.

The AMA says premiums would go up because there’d be a demand on greater levels of returns and cost-cutting which would put pressure on premiums to rise.

According to AMA President Dr Steve Hambleton, “Government owning Medibank Private has kept costs down, we wonder whether it will actually decrease the amount of pressure on private health insurers to keep their prices down”.

The other possibility, of course, is that cost-cutting could lower the level of service for Medibank policyholders, as some have warned.

Of course, it’s impossible to predict what will really happen. But there is a school of thought that if you’re concerned about premiums going up, then buy into the company and get a share of the profit to offset your losses.

With a dividend of 3.5% a year, a return of 5% after the 30% tax credit for franking, as long as it holds its price that’s a better return than a term deposit.

If I’ve given you a headache with all of these facts and figures then at least you should wait until the aspirin kicks in!

Cheers,

John and the FiftyUp Club Team