Medibank will act as 'white knight' if rivals fall to premium caps
Medibank Group chief executive Craig Drummond says the health insurer is ready to pounce if a distressed rival falters in a "challenging environment" that is expected to see further caps on premium rises.
Speaking to analysts after the company's half-year results on Friday, Mr Drummond, a former banker, likened the potential situation to the global financial crisis, which saw smaller banks like St George and Bankwest swallowed by better capitalised rivals.
CEO Craig Drummond says Medibank would put itself forward as a "white knight" if needed.Credit:AAP
"We would be putting ourselves forward in that position, if APRA [the Australian Prudential Regulation Authority] needs a white knight," he said.
The health insurance industry operated on a profit margin of just over 5 per cent, with not-for-profits on a "very, very fine margin", which meant it would not take much for some players in the sector to end up in a situation where they were underwriting at a loss, Mr Drummond said.
The Labor opposition has promised that, if elected, it will immediately establish a Productivity Commission inquiry, as well as impose a 2 per cent cap on annual premium increases for two years.
Medibank, Australia's largest health insurer, grew both its customer base and earnings from its core insurance business in the first half but net profit dived 15.4 per cent to $207.7 million on the back of a $55.6 million fall in investment income, driven by lower sharemarket returns towards the end of 2018.
Investors focused on the core business, lifting its shares as much as 4.7 per cent to $2.89, their highest level since October last year.
Medibank said it had added 6400 new health insurance customers since June 30, compared with a loss of 4200 in the prior first half, and operating profit from its insurance business lifted 1.5 per cent to $281.5 million. Health insurance premium revenue rose 2.1 per cent to $3.24 billion and health revenue rose 9.8 per cent to $320.6 million.
"This gives us confidence that we have the right strategy and team in place to grow the core business, while continuing to transform Medibank into a broader health services company," Mr Drummond said.
Medibank told investors at its annual meeting in November that it had returned to market share growth over the past six months for the first time in a decade, "demonstrating that our core health insurance business is back on track".
But the loss a week later of a lucrative contract to provide healthcare services to the Australian Defence Force (ADF) derailed its strategy to grow services outside the highly regulated insurance sector.
Mr Drummond said the company had set a target to "organically replace" earnings from the defence contract by the 2022 financial year by growing its existing businesses and finding $8 million of cost cuts.
Operating profit from the Garrison contract, which covered 60,000 permanent and 20,000 reservist ADF personnel, last year was $30 million.
Medibank raised its interim dividend 0.2¢ to a partially franked 5.7¢.
Medibank was sold by the government in an initial public offering (IPO) in November 2014 at $2 a share.
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Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald's deputy business editor and online business editor.