nib holdings limited (NHF) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the nib conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Fitzgibbon, Managing Director. Please go ahead.

Good morning, all, and thanks for your time this morning. And I hope you're all feeling well. I just want to give over 3 quick points, and then we just go straight into the Q&A. The first point to be made is, we don't think the premium freeze is the best way to distribute financial support for maximum effect for our members. So together, I don't need a premium freeze whereas there are families who might need much more support. But the encouragement out of care simply became too strong for us to resist the measure. So yesterday, we announced that we'll be deferring 1st of April increase until the 1st of October, and we'll review that situation in the lead up of 1st of October to see how things are faring. The second point is, you guys have worked through the revenue numbers yourself. We haven't given any guidance about that revenue opportunity postponed. But the number is pretty easy to calculate based on what you know about our high revenue. And of course, the cost of these measure complements the costs associated with the other measures we announced last Friday, such as financial support for those in financial hardship, allowing people to suspend their policy, extending cover to those who currently don't have COVID-19 cover. The third point -- actually there are 4 points. But the third point is, we believe we can easily accommodate yesterday's announcement about the premium freeze and as well as those measures we announced on Friday. I think that's really a really important point. These measures will be funded from anticipated savings and reduced loss ratio, something we've stated about previously. And the fourth point is that, while I don't expect any further government intervention, you can never rule these things out, particularly in this dynamic environment, and depending upon just what happens to our loss ratio. I want to assure you, we're already thinking about how those possible scenarios and how, if and when any surplus capital is accumulated, like significant surplus capital, how we'll deploy that capital, we can win in advance. So those are the 4 points to kick off. I'm happy to take any questions.

[Operator Instructions] Your first question comes from Ashley Dalziell from Goldman Sachs.

Mark, well, just wanted to pick up on the last point that you made there around looking at scenarios to work through how you might manage kind of a more material drop in the loss ratio and surplus capital, which might eventuate from that. When you said looking at ways to manage that surplus capital, are you talking about sort of more along the lines of some sort of a premium or partial premium refund facility or kind of thinking more in the lines of some sort of a special dividend?

Well, it's too early to say. And I'm thinking out loud here, which is my best and worst quality, for those of you who know me. Look, I think, just think about logically, what you all do, of course, the idea of a rebate, a targeted rebate more around means would possibly come into play. We've been looking to slowly accumulate capital as part of any potential new logic requirement of that process. That's in consideration. I don't think we'll be looking to retire any debt. Our debt-to-capital is 25%. Our times coverage is very strong and debt is still very cheap. And then there are other potential capital measures, such as buybacks or -- and again, I'm speculating here, but there's a broad range of possibilities. If and when this particular scenario arrives, because there's something more I tend to point out is confident as we are about seeing a complete drop off in elective surgery. The truth of the matter, it's very early days and we haven't really banked the set as yet. So I think you just have to use your imagination as to what possibilities we might contemplate.

Okay. I mean should we read that to say that at this stage, you are confident that if you do see a material drop off in utilization, that you may actually be able to hang on to some of that or return it to shareholders versus a complete refinance back to policyholders?

I think all options will be explored. We have to be cognizant. One of the problems with a delay is -- well, it's not -- a delay is better than having obliterated the increase in the first place. Of course, that impacts your banks. So -- but if the government likely to react differently in the lead up to October, I don't know. It's just so uncertain at the moment. But I guess my key message this morning is that we support postponement and we believe we can easily accommodate it. And we don't think it's going to really alter the economics of the next 6 to 9 months and the impact on loss ratios. And I think just to triangulate that with what friends is saying, I think that I can give some comfort around that hypothesis.

[Operator Instructions] Your next question comes from Kieren Chidgey from UBS.

Just 2 questions, if I can. Firstly, around the arhi business. I mean if we see a near-term slowdown in claims, but obviously, those claims, as you talked about, probably just being deferred or delayed, how do you think about sort of the accounting for potentially future periods where those claims cost might outweigh the premium? Is there a premium liability charge that needs to be put on the balance sheet for the unearned or future premium?

Kieren, I'll be -- I'll have to take that question on notice. I wouldn't dare try and give an authority to answer that without consulting my actuaries.

All right. And the second question...

I think just generally, where I think you're going with this, do we face a medium term where we're not being able to price in the underlying natural claims inflation which is -- which would mean we'd be making underwriting losses and then funding those losses through accumulated capital. That's certainly not a scenario we would entertain. And certainly discussions I've had in Canberra and other places is that, that is a very slippery slope, not pricing in underlying claims inflation. I think there'd be better ways, much superior ways to deploying our capital rather than just using the returns of the bank to subsidize future underlying losses. It's -- again, it's just not something we would [ contemplate ].

Mark, it's Glenn here. I can have a quick go at the accounting side of that, if you like.

Sure.

In terms of the outstanding claims liability, you wouldn't provide for an event that hasn't occurred yet, so it wouldn't go into your outstanding claims liability. In terms of unearned premium, the unearned premium is basically recognized over the length of the contract according to the accounting standards. So you wouldn't see an adjustment for that given the length of that contract between sort of 1 month and 12 months. So we haven't had a look at that in a lot of detail other than considering that's the way it would play out in terms of accounting terms. I mean you've got to determine what happens in the future but -- that you wouldn't be adjusting for that now.

All right. I mean my reading of the statement is you've got -- even though a lot of the premium is monthly, that you've got to make an allowance up until the next pricing renewal date, which could be April next year, even if someone is paying monthly. Is that not correct?

Yes, I think you're talking about the liability adequacy test there?

Yes.

So -- we can -- I'll have to look at that in a bit more detail. But in terms of the way that you account for the unearned premium upfront, you wouldn't make that adjustment. So you'd have to have a look at it in terms of what you think going forward your loss ratio would look like. So it would be depending on what you're forecasting for loss-making going forward, which is obviously quite uncertain.

Yes. All right. My second question, Mark, just in regards to -- actually a different business line, travel, where revenue is obviously under a lot of pressure. Can you just talk about sort of your capacity to take costs out of that business?

Well, it's high. A lot of the direct labor force is itinerant workforce, like not young people out here on working holidays. It's a priority this week to think about what we actually do. We are still making sales in North America, but we think that won't happen for much longer. The reason we're still making sales in North America is because we just distributed all the MGA or underwrite them. Look, I think the worst-case scenario for travel in the next 12 months is that we do face direct costs, which are fixed. And loss-making, we're looking at -- certainly not more than $20 million, for example. So it's not -- it's important to us, and we're going to get our heads around out that and take action over the course of the next week or 2. But it's not -- given the backdrop of what we're seeing in other parts of the business, it's not a particular exposure.

All right. And when you say $20 million, are you talking sort of over the next 6 months? Or is that just this financial year?

I'm thinking in terms of next -- well, the next, well, further costs we stuck with. Maybe $20 million in fixed costs with virtually no revenue.

Yes, yes. All right. Perfect. Thank you.

And you can pretty much work that out from looking at our accounts for last year, the cost base, what's commissions. And obviously, there's commissions. You probably don't see the corporate overheads, but a fair bit of the cost as we've integrated this business is around our core overheads, which will just be absorbed in other parts of the business. This business is not producing any revenue.

Your next question comes from Nigel Pittaway from Citi.

Just wanted to sort of return to some of the earlier question. I mean with Medibank already saying that any further benefit from lower claims, including from the cancellation, but nonurgent elective surgery will be returned to customers, do you not think there'll be sort of pressure on you to follow suit? And how validly do you think you can offset losses in the travel business against sort of profits that you're making in arhi?

Yes. Well, on -- I can't speak for Medibank Private, of course. I guess reading between the lines in what we're saying, is that could be very -- depending what -- depending upon the level of savings, and again, this is speculation, it's hypothetical, but some of you have had a crack at this, and I think most of you have had a crack at probably pretty close to the mark. The initiatives which have been announced so far, including the postponement of the 1st of April increase, the financial support we're providing to members, additional coverage, they're not going to account for what we anticipate are the likely savings. So you have to ask Medibank Private how it's thinking about it. But certainly, we see the possibility of us continuing to accumulate capital savings. And probably a better word is to save it. And at some point, we need to think about what we do about that. So that's as much as I can say on the matter. Whatever Medibank Private is thinking, you'll have to ask them. And I go back to my earlier point, that those expected savings will more than cover, but clearly more than truly outweigh, in our thinking, in our reckoning, any exposure associated with travel.

So you think it's [ partly ] to be able to offset the 2 if you won't have industry pressure to return all of the savings to customers, which basically what you...

I think there may be government pressure. And we don't -- we came to do the right thing as well. If we -- again, pieces are dynamic. If we think that, for example, some sort of rebate to our members next year or whenever will help improve retention, for example, and preserve our base, that may be an option for us. But I think on balance, based on what we anticipate today, it's a happy problem, if you know what I'm saying. I don't fear any stress in our capital prudential position. I feel the challenge for us is going to be about how we deploy that capital in a way which maintains -- looks after our members, maintains the HR participation. And this is the right thing to do by our shareholders in the company.

[Operator Instructions] Your next question comes from Andy Tuck (sic)[ Andrew Buncombe ] from Macquarie.

It's actually Andrew Buncombe here. Just 2 questions, if I can, please. Just the first one, was that my understanding of the industry was that, more broadly, you weren't able to propose that the pricing change quickly due to technology constraints, and that's why the annual pricing approval process was so much in advance? Yet, obviously, you've been able to turn this one around within days. Do you think nib is different to the rest of the market on the technology side? And could this be a competitive advantage going forward?

Yes. Look, I don't think -- Andrew, I don't think there's been any technological constraints associated with constructing this year's premium increase. And having to deconstruct it or postpone it is going to require some organizational effort. But we've had people working on that since Sunday, so we'll get there. We can send space probes to Mars. We can work this out. So I'm not -- I don't know where you get the theory about technological constraints somehow having implications for the approval process. I'm not familiar with that theory. Do we have a technological advantage as a company? Look, I'd like to think so. We certainly have a strategy, which is about best to bring micro systems rather than investing in some monolithic and WAN solution. And I think that's providing us with the level of agility. Certainly, the investments we're making in Honeysuckle Health, our -- you know the Honeysuckle Health, our new joint venture with Cigna, is requiring to be more and more agile around technology. So I like to think we probably have some sort of technological advantage over those insurers who's still very heavily dependent upon legacy systems. And I think we demonstrated that with the GU acquisition. That was the first financial services company regulated by APRA to have a system of record approved in the cloud. But today, I don't want to put -- that's a discussion for another time. Perhaps I don't want to put too [ fine ] a point in that.

Yes. And then the other question that I had is, should investors be anticipating higher operating costs in the arhi division as a function of getting the business working from home and pushing through the price rises and whatever else?

No. I think you should anticipate lower operating costs. Well before COVID-19 became the crisis it now is, we were pushing hard on reducing operating costs. We had an -- basically to keep costs across the group flat for fiscal '21, and you saw plenty of evidence around that. The consolidation of all of our back office operations into a single internal BPO, as I like to call it, under a new executive. Matt Paterson, who is -- by the way, is doing extraordinarily well, particularly throughout this crisis. And of course, it's all just a few weeks ago, with some executive changes we made to take out what is a significant chunk of cost at an executive level. So we're still certainly operating on a basis that in order to protect our margins, we need to take out operating costs right across the group. And nothing around what happened in COVID-19 is going to distract that.

[Operator Instructions] The next question is from Siddharth Parameswaran from JPMorgan.

Mark, 2 questions, if I can. Firstly, just on the accounting for -- just for the -- for not passing the premium rate increases through. Will that come through as an expense? Is that the way to think about it, firstly?

Glenn, do you want to comment on that?

Yes, yes. No, no, that will just -- it will come through the revenue line. Revenue will just be a bit less.

It's -- okay, it will come through the revenue. Okay.

Yes.

Okay, that's fine. Okay. And then just the second question, just -- could you just give us an idea just how much of your current claims cost actually is from electives? And the -- just wondering if you give us an idea there.

On the claims cost, well, the rough numbers are of every $1 spent, $0.50 goes to the hospitals, $0.10 to doctor, $0.10 to medical device companies, the $0.30 goes to allied providers. Now we've had to make some assumption around each of those bits, each of those components. And I'm not going to selectively, of course, share with you the details of that analysis. But I think you can form some assumptions around it. And I suppose to your point, so I'm just thinking out loud here, the vast -- again, it depends what -- how you describe elective surgery too, because we're having this debate around what is category 1 versus what is category 2, what is category 3, there's some going on there. But most of what we find in hospital is elective or planned by nature. Private health insurance, the medical component, the more urgent, immediate care component tends to be the lot of the public system.

[Operator Instructions] There are no further questions at this time. I'll now hand to Mr. Fitzgibbon for closing remarks.

Okay. Thank you. So thanks, everybody. Such short notice. As I started off by saying, what's occurred on the weekend was a bit of a surprise. But then for the hindsight, given the pressures coming out of Canberra, I don't think we're too shocked. And we're quick to react to those signals. And the costs associated with yesterday's announcement will simply be adding to the calculated costs associated with the announcements we made on Friday. I'm very confident that we're able to accommodate this type of investment, and very common, this type of investment, which is going to play a role in arresting what we expect will be a period of lower sales growth and pressures on retention. So thanks for your time this morning. And stay safe, everybody. Cheers.