nib holdings limited (NHF) Earnings Call Transcript & Summary

Hi. Good morning, everybody, and welcome to our results presentation. We appreciate your time. We know it's a busy time of year. I want to start today by acknowledging -- I'm presenting on the land of the traditional owners of the land of traditional owners here, or what we call People, and as I look across the harbor, also the land and river of the Worimi People, and we pay their respects to their Elders, past, present and in the future. Okay. We've got a fair bit to go through today. I'd like to -- I have 4 quick points to make, and then we'll hand over to Nick for some -- a further -- a deeper dive into the results, and I'll come back, as I normally do, to talk a little bit about the forward outlook. Okay. 4 brief points for me to get started. First, I want to make the point, as we always do, that notwithstanding the pandemic, fiscal '21 was another year in meeting the needs and solving problems for a lot of people in Australia and New Zealand, now China and in travel insurance globally. Health systems, buckling under the pressure of COVID-19, didn't stop, as you can see on the screen, us attending to a lot of treatment in almost 400,000 hospital admissions. And benefit outlays were actually up 14.5% over the course of financial year '21. So yes, we have encountered significant levels of deferred activity, but at the same time, we continue to provide that level of service and support for many, many members, almost 1.5 million across Australia and New Zealand. Secondly, increasingly, we're active placing members in health management programs targeted to mitigate their health risk and improved outcomes. 6,500 of -- with 6,500, as you see -- sorry, I meant to click on the next screen. I should. Yes. 6,500 members, we put through our health management programs this year across about 8 different parts of the case mix. And in respect of our hospitals readmission program, we have reduced the rate of readmissions by as much as 10%. Yes. This is really important to our future ambitions. Third, helping our members and the community at large throughout COVID-19 has been a top priority for us, as you would expect. From purchasing surgical masks way back in the -- towards the end of financial year '20 from China through our partnership with China for the local area health system here through to premium relief, suspensions, expanded cover for our members at no additional costs for COVID-related treatment, that's all been part of our broad packaging at an estimated cost of about $45 million. And today, we're announcing a further $15 million rebate for our members, recognizing savings that we have made to date in claims outlays, savings in addition to the provision that we made but also recognizing that COVID-19 isn't past as yet, and we can still expect further noise in the system. Fourth, we're all very pleased with the growth in overall commercial results in what were particularly difficult market conditions. And underneath all of that has been significant levels of innovation and productivity improvement, not to mention the development -- or further development of Honeysuckle Health in partnership with Cigna. So it's been a busy year with lots of progress, and so I mean, in our view, impressive financial results. Before I go much further, I just want to give emphasis that underneath our progress is our conviction around principles of ESG, not simply because of regulatory requirements or investor expectations, but of course, we generally believe our sustainability as a business relies upon our contribution, however small, to making the world a better place. And we're sure we have a special opportunity -- when you think about the gamut of how we can contribute to our ESG sustainability obligations, yes, we have important contribution to make in terms of reducing carbon emissions. Sure, we have an important contribution to make in terms of leadership and diversity and inclusion and improving a lot of our Aboriginals and Torres Strait Islanders. But easily the areas where, in the future, we'll have the most impact is around population health, and I'll talk a bit about that today. It is, by far and away, the most significant element of our ESG sustainability agenda, particularly in addressing some of the egregious outcomes in access to care and health outcomes themselves amongst the indigenous population. Look, I think the numbers speak for their self, and Nick will expand on each shortly. Some quick thoughts. Well, firstly, comparisons with last year are, of course, slightly confounded by the provisioning last year for deferred claims, the DCL, and their part release this year. Nevertheless, underneath this year's results are some terrific results, arhi and New Zealand growth and profitability; cost reductions across the group; minimizing losses in those businesses most impacted by COVID-19, international students and travel in particular; and powerful investment returns. It's the confounding nature of COVID and the DCL, which has caused us this year, in Nick's presentation, to break out the fiscal '19 results, just so you can make some comparisons between '21 and '20. Look, it's a little bit simplistic, but perhaps the best way to think about the numbers is to average fiscal '20 and fiscal '21. While emphasizing it that still doesn't properly represent underlying business performance, given the pandemic-related troubles we have encountered with international students, workers and travel. It's a $60 million swing in our earnings between fiscal '19 and fiscal '21 because of COVID-19. But we're very confident, and I'll talk about this a bit further on, that those earnings will recover as things improve under the pandemic. Probably the only weakness in our results there, and I'd like to think there's some systemic factors around all the noise with private health insurance at premiums, is the drop-off in NPS. But we're already this year seeing that recover quite quickly. So look, we do need to pull our socks up in that respect based upon the data, but we recognize that, and we've got our heads down pursuing improvement. So with that all said, I'll hand it over to Nick, who can take you through the details of the financial results, and I'll come back a bit further on to talk about our business strategy and outlook from here. Over to you, Nick.

Right. Yes, great. And thanks, Mark. Chris, I might start on Slide 9, if I could, the group income statement. And as Mark said, this has been a strong financial result. Good performances in arhi and New Zealand and a big bounce-back in investment income outweighed the COVID-related impacts on our students, workers and travel businesses, which were affected by the lockdowns and the border closures. So if we just have a quick look through the numbers. Premium revenue growth of 4.5% was driven by our arhi and New Zealand businesses, assisted by strong policy growth along with the premium increases, and worth noting that there's an increased impact from the deferred April 2020 increase in there as well. Claims incurred also grew by 2.5% but at a lower rate than policyholder and revenue growth, and this allowed the group gross profit to grow by a strong 11%, and we'll get to that in a sec. Expenses well managed. Underwriting expenses grew 2.5%, and total expenses were down almost 10% as we dramatically reduced expenses in our travel business by over 50% in response to the reduced activity from COVID. I might go to the drivers of gross profit slide, if I could, please, Chris. Look, we've included this slide the last couple of results in June '20 and also in December '20. But it's worthwhile just highlighting, because there are some big numbers here, that these causal variances are in comparison to the February 2020 forecast, which was the basis for the original COVID provision. That's now 17 months out of date, but nonetheless, we're continuing to provide this analysis as it gives some insight into the drivers of the result, and also it's consistent with that, that's been provided previously. So looking down this chart. It's a little bit busy, but I'm sure a lot of you will want to talk to us after in some more detail. Firstly, the policyholder growth. So the policyholder growth once again basically offset the negative premium mix, which is mainly product downgrading. And then the rate variances this year were a little bit negative due to the comparatively low price increase in April 2020 being less than the expected claims inflation. But again, let's just remember that the basis was back in February 2020, and when we split out both that and also risk equalization, the risk-equalization component has been highly favorable. Turning to risk equalization. We can see that, that's the largest driver of the gross profit increase with lower industry claiming and especially in the over-65 cohort providing a benefit to nib as we are the largest contributor in the risk-equalization pool. And then we've outlined a number of COVID-19-related impacts to gross profit with a negative $20 million impact on our students and workers business being partially offset by the positive $15 million in our arhi and New Zealand businesses. If I turn to each of the segments now, just giving you a little bit more color, and I'll go through these relatively quickly. arhi, you can see, rebounded strongly with UOP of up 62% on the back of the revenue growth and risk-equalization savings, as we've outlined before. Our students and workers business was impacted by the border closures, especially in students. Workers were actually holding up pretty well. The claims growth of 38% is worth noting because it's high. We see it as an industry-wide trend as students spend more time in Australia, and that both increased this utilization. Also, the lack of inflow of new students increases the tenure in the book, and there's a relationship between increased tenure and increased claiming. New Zealand, if I go to that, again, another very good year and backing up what was a very strong year in FY '20. So we're very pleased with how that business is tracking. And then going to travel. Travel clearly affected by COVID with revenue down 74%. But we're pleased that the business has been able to adapt well, dramatically cost-cutting and limiting the losses to the lower end of expectations. It's also worth noticing that in the second half and especially the fourth quarter, we did see a strong bounce-back in revenue in the U.S. but also in Australia as the Board has reopened, albeit that, that bounce-back was at much lower levels than prepandemic revenues. Moving on to the capital and investment income. So in line with markets, generally, nib had a very strong investment income, driven by the allocation to growth type assets and the strong returns across the board there. And while cash flow this year was impacted by a misalignment of profit and cash due to the COVID provision as well as the impacts of the students' prepaid premiums and also some unrealized investment gains, so there's a bit going on there, then nib's capital position strengthened as did our gearing and also the interest cover ratio. And this allowed nib to declare a $0.14 final dividend up at the higher end of the payout ratio at 68%. So with that, Mark, I'll hand back to you with some final comments.

Thanks, Nick. That was quick. Okay. Look, I just thought I'd talk a little -- I know we're looking at the results from last year, but they need to be put in context because something that's happening in the business is we're making giant strides in a more deliberate business strategy around data science and what we call our P2P strategy. That's Payer to Partner. So I just want to talk briefly about this. At the heart of what we're trying to do is to personalize the relationship we have with our members and our travelers. What do we mean by that? We mean we get to know so much through data science, artificial intelligence, machine learning, Big Data. We get to know so much about who Mark Fitzgibbon is biologically, psychologically, physiologically, genetically, socially, that we're able to predict with some precision based upon millions and millions of records and algorithms written from those records that Mark is at risk of diseases 1, 2, 3, 4, 5, 6, 7. And if so, we know from algorithms and the data science that the best way to prevent or manage or more precisely treat that disease risk is X, Y, Z. This is the kind of science we're seeking to develop in the company, particularly in collaboration, of course, with Honeysuckle Health and all the more to make that delivery on this to make engagement with our members and travelers all the more digital. So what this diagram is demonstrating is the importance of that personalization of P2P ambition. It impacts the business in numerous ways. We think this kind of value proposition will make private health insurance all the more attractive to people. So we can play a leading role in growing the marketplace away from 50%, which seems to be the number we're stuck on in Australia. It's only 30% in New Zealand. So we can grow the marketplace and our share in our traditional payer chart. We think there's all sorts of opportunities around some new product concepts. We're toying or developing the idea of actually having an nib membership with our private health insurance, at least not to start. So part of that membership would involve with digital assets, electronic health record, a highly personalized risk profile, a good health management plan, broader connection with a universe of network providers, not just the providers of traditional sickness, hospitals, doctors, standards, et cetera, but providers of prevention and good health, dietitians, physiotherapies, therapists and so on. And none of this is intended to exclude the central role that clinicians, doctors, GPs, clinicians have in helping people make informed health care decisions. Our goal is to provide them, our members and their providers, with deeper insight and more guidance for diagnosis and treatment. So there's some new market opportunities, and we're also looking at some further adjacency, which recognize our role essentially as an agent between the buyers and sellers of health care. It has potential to create value in Honeysuckle Health itself. We own 50% of the business. That potential, that value creation will come in the form of Honeysuckle Health providing its services, which include data science and insight health delivery, direct health delivery programs that has aid in place already; and joint purchasing on behalf of health care payers, be they health insurers or other forms of health care payers like workers' compensation like, et cetera. So we have big ambitions to create value through Honeysuckle Health. It's a very symbiotic relationship. We obviously see opportunities around claims efficiency to have better containment of claims cost inflation will improve not only -- will protect not only our margins but improve the affordability of private health insurance as a product quite apart from delivering the kind of good outcomes for our members and travelers that we hope for. And finally, we see our medium- to longer-term goals to play a role in -- and I touched upon this earlier when I spoke about our ESG conviction, a role in helping discrete communities better understand their population risk and with the kind of data science and health programs we have to deliver, help those communities better manage that health risk and improved outcomes, and as I touched upon earlier, especially for those communities with gaps in outcomes. We have -- this is not just rhetoric. We've already demonstrated our potential in New Zealand through Ngati Whatua Orakei. We -- it's an iwi, a Maori tribe, an iwi population, and we're looking to expand our relationship with iwi in New Zealand. And we're looking very actively at the moment and very deliberately at replicating what we've done in New Zealand at some location in Australia. So more to come, but more about that later. Obviously, if we become as good as we hope to be in helping populations and communities better manage their health, there's an opportunity there to play a role with government in helping them deliver their health management programs. Okay. Well, I'd like to talk about in terms of the outlook, and this is quite a busy slide. You can digest this further on. Just briefly, we see further -- we're positive about growth in Australia and New Zealand for PHI, although I do worry about the pandemic's persistence and its possible impact on macroeconomic circumstances and household expenditures. That kind of pressure highlights for me -- and look, even the entire pandemic risk, just highlights for me and for the business just how important our personalization and P2P agenda is to not only differentiate nib in a marketplace but lead the way in terms of PHI generally becoming all the more affordable, valuable and attractive. While COVID-19 still creates a lot of noise, arhi margins will begin to move back towards our target of 6%. Our intention, our hope is to align the reduction in arhi margins with the reemergence of earnings from international workers, students and travel. New Zealand markets, we expect to remain about the same. I'm predicting the timing of the reemergence of these other business is, of course, problematic given the ongoing impact of the pandemic. While workers, international workers is holding up very nicely at the moment and is currently profitable within that combined business, recovery in students and travel is more uncertain. We're -- at this point, we're reckoning on some sort of recovery in calendar '23. Both our investment in Honeysuckle Health and China aren't really materially in a commercial sense, but sufficient for me to say here we have high hopes for both, and it was welcome to see it in our first sales in China. I won't go into details about the opportunities in China because it's too early on, but they're extraordinary. Final point to be made on the outlook is that we do see some additional opportunities in the marketplace to expand our role, as I mentioned, as an agent between buyers and sellers, but more about that as events unfold. Look, I'd just like to finish up this morning with another acknowledgment, and that's to acknowledge the retirement during the year of Chairman Steve Crane; and a nonexecutive director, Christine McLoughlin, both were long-serving directors of nib who have overseen what I can modestly say has been tremendous growth and progress over the 10 years of their stewardship. Both made a wonderful contribution to the company. And at the same time, acknowledge new Chairman, David Gordon, who's already showing a level of energy. He's got big shoes to fill, but David is going to be terrific for the company, and welcome nonexecutive director, Peter Harmer, who already, in just a few weeks, is having an impact. So with that, I'll call it quits and invite any questions.

[Operator Instructions] And your first question comes from the line of Andrew Buncombe.

Just the first one is on the deferred claims liability and how we should think about it into FY '22. Is your intention to continue raising provisions for the ongoing lockdowns? Or is that not a mechanism that nib will use going forward given APRA's softening of those rules?

Do you want me to go on that one, Mark?

Off you go, Nick.

Andrew, thanks for the question and one, I think, is especially pertinent. I guess as we said before, the basis for this provision was back in February 2020 forecast, and they're 17 months out of date. So as we progress, they get further and further out of date, and you start to morph into what becomes deferred then what deferred becomes deferred and so forth, and then eventually, it becomes, well, what becomes the new normal. So I would expect sometime over the course of this year that the need for that provision will be less and less. Again, everyone has to make their own decision on that. What I can say is that we're seeing limited claims catch up. The new lockdowns are having an effect, and should they continue to persist will continue to have an effect. But then I think that we'll need to start to assess in the industry as a whole will need assess in terms of what actually is now a new normal versus deferrals that were on previous deferrals.

Yes. There's a lot of debate about provisioning, the DCL provisioning at the time because it was quite unprecedented and extraordinary. Look, I'm certain it was the right thing to do over time when things were as uncertain as they were back in mid last year, but there will be a time where the DCL has run its course, as Nick has said. How long do you try and calculate that when that Jack is going to have that hip replaced that he didn't have in April last year. So we'll run out of steam. I think the other interesting thing, the other complexity about it, too, is we can put a lot of weight on the DCL. But what's happening, as Nick has just mentioned, underneath the DCL, like courtesy of the measures that have been taken, the limit COVID-19, lockdowns, restrictions on travel, social distancing, we've seen quite a significant drop-off in other parts of the case mix, other respiratory infections, influenza, for example. So I think time will show that the DCL as a factor in influencing the medical loss ratio will be just one factor that we -- a few others that become clearer. And as Nick had just mentioned, what becomes the new norm is the $64 question.

Yes. That's very helpful. Just my next question is...

I think on balance, I'll just add, on balance, and nobody celebrates the misery and suffering of COVID-19, but on balance, is this is a positive influence for the commercial -- from a commercial perspective.

Sure. The next question is in relation to the 3.1% policyholder growth that's coming in across the market. Are you able to give us a bit of color around whether that customer mix of that cohort looks different to the existing mix? Like is it skewed to older people, younger people, family, singles? Any color there would be great.

Have you had that age breakdown there, Nick?

I have. If you give me one second, I can just bring it down.

I think so the APRA data published last week will show all this, Andrew, but Nick, if you have got...

It's going to take me a little while to bring up. But I mean, I would suggest that, again, the -- probably the more interesting part around the gains and losses at the moment, the older cohorts and the claiming behavior of the older cohorts are probably the main impacts that we're seeing on the results. So if we look down through the -- what the real age breakdowns that are affecting the result, it is that sort of over-65 cohort where there's probably 2 elements to one we've described that you've got the reduced claiming in total of the over 65s. But nib's older cohort seems to be claiming a little bit more. It's still reduced, but it's reduced less, if I could put it that way. So that's feeding into the risk-equalization results. If anything, that's the major impact that's coming through on the result.

Yes. So let's come back to that. Nick, you can find the data.

Can do.

Yes. And from a high level, younger people are still quite reticent about the category, and we all know the reasons for that. They see themselves as wanted to be bulletproof and have Medicare for a life time. And again, it just point to the challenge in our mind about what is the value proposition. Is it just -- is it going to be into the future about simply being there for people ones who already seek to pay the bills and give them rapid access to doctors and hospitals? Or is it going to be much more than that? Is it going to be providing them in their hands with the kind of insight that I've described today.

And then just the final one for me is in relation to the travel business. You've called out cost cutting and also international travel sales boosting in the last few months. How should we be thinking about travel UOP in FY '22 compared to '21?

You want to catch that, Nick?

You want me to grab that one? It's certainly going to be in a loss situation. It's very hard to forecast where it will be. So we're not expecting a return to profit until -- Mark talked around, but so we'd expect FY '22 to be in that loss. But it's hard to give an estimate, really.

Yes. Well, it won't deteriorate. Let's put it that way.

And your next question comes from the line of Kieren Chidgey.

I've just got a couple of questions. Just interested in some of the disclosures sort of, I guess, relating to the COVID impacts that you discussed earlier at a group level on Slide 10 but some of the divisional breakdowns you've given on Slide 23. I'm just hoping you can sort of clarify how we should look at that and sort of what the net claims benefit in arhi was for the FY '21 year.

Well, I mean, again, I think that gears all around trying to get back to the normalized margin. And to that extent, there's a couple of things. The first is that the margins were high this year. We'd expect them to move down towards the 6% that Mark's indicated. Over time, when that actually occurs, it would be nice that it's kind of timed more in line where the students workers and travel business bounce back. The -- I mean I think that, again, a lot of people split out and determine normalized margins in their own way, which is why we provide that information. But I'd suggest that on the numbers that I'm seeing, they are towards that 6% mark. But again, sort of a lot of people determine their own inputs into that. But on our inputs, it's around that 6%.

Okay. But just to clarify, so that Slide 23, you've said arhi had $200.3 million of lower claims due to COVID-19. $68 million of that was sort of expected to catch up. So the one-off benefit over 18 months was $132 million. It's hard to read that.

I'll probably jump across on to Slide 24, and I think Slide 24 probably breaks up the impacts a bit better.

All right. Secondly, the $15 million premium refund you've called out for FY '22, just wanting to confirm that, that will be booked in the first half '22. There's nothing sort of allowed for in the '21 numbers in regards to that?

That's correct. Yes, that will be it...

And that just comes from a deduction on premium.

Yes.

And how are you thinking more generally around sort of customer support initiatives, given we are in an extended lockdown at the moment? And presumably, claims benefits will outweigh that $15 million premium refund you've highlighted if there is scope for further initiatives over the course of '22? Or sort of you are applying more of a holistic lens to the group considering what's happening in the travel business and the iwi business.

Yes. Well, we're going softly, softly. Remember way back in March, April last year, we preemptively froze premium increases without any real certainty about what impact the pandemic was likely to have on claims. We suspected that was the right thing to do with time and it was the right thing to do. And as I've already mentioned, in combination with various other initiatives, that cost in previous -- latest $15 million is about $45 million. We just have to see what develops. So just looking at the numbers from last week, for example, ancillary claims are down year-on-year, down about 25%. So we're certainly seeing an impact there. We're certainly seeing a denial of service for one of the better description in ancillary. It's not as we haven't had the same kind of reduced activity in hospitalization. You would recall last year, the state governments effectively requisitioned private hospital beds and care. We haven't seen that, although we had some -- seen some mandated deferral of nonurgent elective care, although that line seems to be moving a little bit, too, between category 2 and category 3 surgery. So our approach will be to see what actually unfolds. And to the extent that we think further compensation for members is warranted, yes, we might take that action.

Okay. And final question just on the iihi outlook. You mentioned repricing initiatives. Just wondering how significant you expect those to be and how quickly they come through, just given you have lagged you don't expect that business to return to profitability until international travel resumes. How should we think about the outlook there relative to the second half '21?

Yes. It was -- pricing in issues a slow lever to pull because you can only reprice for new sales because the students buy in advance. So it's a -- we can't result in driving high through pricing. We are increasing prices, given the predicament, as all the other insurers are. We are concentrating a lot of our energy around health management and hospital prevention, disease management in students and workers now, given the level of exposure we have. But really, we're going to be under the pump in that respect, while ever we're ensuring these international visitors for 12 months rather than, on average, 9 months. Typically -- the typical length of stay assumed in the country because they go home for Christmas and celebrations. And they often go home too to have health care like having babies.

All right. And so I mean just to be clear, should we think about sort of the profitability run rate as being -- is FY '21 being representative of more the second half run rate, which, too, deteriorated?

Well, probably it will depend upon...

The annualized level.

Yes. The combined earnings from iihi in '19, Nick is this I guess slightly in about $30 million, isn't it?

Yes.

Okay. We need to get back to there, at least, and we will. And there will be addition -- when we come back, there will be -- the book would be bigger than it is big today, which is about 170,000 students and workers. But whether it's in fiscal '22, not likely. Is it possible in '23? Maybe. It really depends upon where the pandemic takes us and how well we overcome the risk and restrictions on international travel. I think a risk to the entire tertiary education sector is the fact that a number of other countries have opened up students. So they'll be looking to gobble up that market share away from Australia, and how well government in the tertiary sector responds to that, well, only time will tell.

And your next question comes from the line of Matt Dunger.

I just wondered if I can follow-up on the international inbound business. Understanding the border reopening is out of your control, but is the 32.5% management expense ratio something you can address, given you've done something similar in the travel insurance business?