nib holdings limited (NHF) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to what I think is our 14th half year presentation of annual results. nib celebrates 70 years this year. So we're there with the Queen celebrating her platinum anniversary. More about that later. Let's first start with what's become a very welcome practice within our business and so many others by acknowledging, today we're presenting from Newcastle, the traditional land of the Awabakal people, or just over the harbor the Worimi people. And we like to pay our respects to their elders, past, present and future. And we see ourselves particularly having some role to play in the future improvement in health access and outcomes for indigenous communities right across Australia and New Zealand. So welcome again, and thanks for your time this morning. We always start with this slide, just to emphasize the importance of our purpose ahead of anything else, a purpose we're -- which we're seeing -- increasingly seeing as broader than our more traditional role of purely paying for access to health care, paying the doctors and hospitals' bills, and I'll talk more about that later when we talk about the outlook and our business strategy. Next slide, please. Look, I won't gauge for all of this. Sufficient. I suppose, 3 points. Notwithstanding COVID-19 and the obvious deferral in so much treatment, we are still seeing a lot of treatment. In fact, it's very mixed. For example, hip and knee replacements comparing first half of fiscal '22 with first half of fiscal '20, so I think pre-COVID. We're actually up between 3% and 4%. Other parts of the case mix like colonoscopies, which I suppose are more discretionary than things like major joint replacement were down a bit. But while we have seen loss of activity, of course of COVID, with pretty negative consequences for a lot of people, it's not down as much as some might at first suspect. The second issue there I want to highlight is how we have been very focused during this period in looking after our members as best we can. We have taken a number of initiatives designed to mitigate the impact of COVID-19 and compensate them for -- in many cases, a denial of service that include things like premium rebates, deferral of premium increases, additional cover for COVID-related treatment at no additional cost, even though their policy may not specifically cover the -- that part of the case mix. So we work very hard to demonstrate that with the rest of the community we're here to support people through this dreaded pandemic. Third point I'd make is the very concerted effort as part of this new vision, if you like, of the company, on keeping people healthy and to invest in our abilities out of hospital. And so that number there on the left-hand -- bottom left-hand, is very important to us. These are the active interventions we're making across our membership, based upon the guidance in the right direction of our data science, to, as I mentioned, improve their health outcomes and mitigate the risk of disease and sickness and the hospitalization and other treatment that comes with that. So I thought I'd just highlight those points in talking about our purpose. Next slide, please. Look, lots to highlight here. On the surface, the results look quite spectacularly good I suppose. Of course, the strong result does need to be treated with some caution. There's an obvious COVID impact on that. And I've just described, notwithstanding our best efforts, we have very sophisticated actuarial science in the business. We're seeing it to provide for that level of deferred activity, and provision for what will be some level of catch-up. What level of catch-up will actually occur is frankly -- and in exact science is probably the best way to describe it. Just a few other highlights. We always focus on arhi. It had a good year, half-on-half, beating the previous half by 2.8%, even after adjusting for the confounding effect of suspensions, and people -- so people suspending cover and resuming their cover. The growth was still about 2.7% half-on-half. The year-to-date growth is at 1.3%, is reasonable, in my view, and we're working hard to make sure that we hit that 3% target for the full year. New Zealand had a strong year. International workers and students -- a poor result in terms of measure of profitability. But one of the really interesting things there is the success we've had with our international workers, particularly in winning business through the Pacific and Australia mobility labor scheme. It grew its membership 42% during the half. So quite an impressive result there. We've provided -- we've increased the provision for COVID across the business at 31 December. We're continuing to review that provision. In fact, just in January, we increased that provision slightly. Nick can talk to that. So we're still allowing for the fact that the Omicron variant has had a continued impact on the level of hospital utilization, treatment and the like. And as I mentioned earlier, doing our best to forecast what level of catch-up we might anticipate in the future. And finally, I'll just give a shout out to Honeysuckle Health. I'll come back to this point later on. But Honeysuckle Health is going great guns. It's putting exactly the kind of science and capability that we need to refill this expanded vision of the company. So with that, I'll pause and hand it over to Nick, who, as is customary, will go through some more details of the financial results.

Right. Thanks, Mark. We might just have a quick page turn. I'll just -- I won't go through every bullet point. I'll just highlight a few of the key things in the result. Firstly, on the overall group income statement. Really a result driven through revenue. You can see the strong revenue growth at 8.2%, largely driven in our arhi and our New Zealand businesses, courtesy of the sort of double effect of the price increases, given that we deferred this time last year. And so we had 3 months deferral in that. Claims growth, although at 6.4%, was sort of moderate, given the COVID impacts. The really big impacts -- we'll go through them in the next slide, but the risk equalization is one to call out there, and some higher claiming also in New Zealand. Going through just one other point, our DCL, I better highlight again. So an increase in the DCL, given the Omicron strain, and we did see some deferral and savings, especially in the latter half of the half, and that's continued into January as well. And then the last thing I'd just highlight on this is, at the full year, we actually provided the last few years of the segments, and it might be worthwhile having a look back at that. But if I just take the first half of '22, if we compare that to the first half of '20, then there's a $29 million turnaround in profitability for our arhi and our travel businesses. So the COVID impact is impacting those businesses. But again, as we said at the full year, it really speaks of the opportunity. Next slide, please. So we customarily have included this slide as COVID began. It's starting to get a little old, because all of these sorts of causal type tables need a base, and the base for this one is the February 2020 forecast. So we are starting to get a couple of years out of date. But directionally, it's still okay. I would just caveat to highlight the exactness of these numbers are against, obviously, an inexact forecast. But as we go through, things I'd like to highlight in that is the policyholder growth offsetting the product scale and mix. Again, I think we've talked about that a little bit before, around the importance of the growth to offset the mix impact, which is traditionally negative. Moving through the industry risk-equalization. While the half-on-half impact is quite small at 0.6%, if you have a look at the actual halves, it's a $37 million and $36 million positive impact against that February forecast. So really what that's highlighting is that the industry calculated deficit has been less than we've been anticipating, or less than we're anticipating. And that's a factor of a couple of things. But really, there has been less claiming in that over 55 segment, and that's been across the industry. Going down to the COVID-19 impact. So we'll just go through each line because it's important. So you can see the net claims savings, a negative $15 million in the first half of last year and a positive $36 million. So we obviously had some catch-up in the prior comparable period, and then some deferral and savings this period. Our gross deficit benefit in the risk-equalization is included in that number. So we actually get 2 benefits out of the risk-equalization. Then we have what -- the movements in our DCL provision. And you can see that we released some DCL provision in the prior comparable period, and we increased it in this period. And then the last one to highlight would be the impacts on pricing that we've had. So in the first half, you can see the impact of the price deferral, and in the first half of '22, you can see the impact of the member giveback that we did provide. So a little bit in that, but I think in summary, you can see the policyholder growth offsetting the mix and then the COVID impacts coming through. Next slide, please. arhi we've largely covered. So I won't go through too much in that, because we have talked about that a bit. It's really been the main driver of the result. What I would say is that, if you back out some of those impacts that I've talked about, those COVID impacts and the risk-equalization impacts, we see our net margin in around that 6% to 7% range, which we've talked about before. Next slide, please. The iihi business, again, another challenge. It has been COVID impact with the lockdowns and the border closures. One thing that I would highlight is that some green shoots appear to be emerging. We're welcoming the relaxation of some of the border restrictions, and that will obviously help our business. And we have seen in the last couple of months a positive UOP emerging in that business. So still a way to go before we get to pre-COVID levels, but at least in the last couple of months, it hasn't been loss making anyway. Next slide. So New Zealand. New Zealand has normally been a really surely steady performer, at a slight reduction in UOP this half. And really what we're seeing is that the claims impact that's coming through on utilization -- and what we've seen here is a bit of a shift between the public waiting lists and moving across into the private, which we're now pricing for. The other bit is, again, we have seen some DCL movement there as well as some savings have occurred, and that's also been a similar case in January. Next slide, please. Travel business. Another loss, within expectations, maybe slightly at the higher end of expectations. As we highlighted before, we did have a change in underwriter. There were some delays in that, and some costs associated with that, and we were out of the market for a little while. So that did impact the performance. But again, the broader relaxations and so forth, we're looking to assist that business. And what we have seen is that when the borders do open up, we do see a good strong bounce-back. So we're looking for that this half. Capital management. Good, strong capital generation. Just put the net tangible asset growth up there. The revised capital standards from APRA were put out in draft in December, industry feedback until March, and then the timing for that is the September quarter this year. We're within our expectations, maybe a little bit at the upper end of expectations, but still within expectations. Industry feedback is ongoing, and we remain comfortable with our position. And then again, a good strong cash flow half. You see there's been some volatility in the cash flows across the halves. But most of that volatility is either because of the deferred claiming that, while we take it up from an accounting perspective, in the DCL from a cash perspective, it flows through. Also we tend to see from time to time, some claims -- delays between some of the larger hospital groups, and we had a little bit of that as well. But a good strong cash flow month. I think that's probably it, and I'll hand across to Ros.

Thanks, Nick. Look, I'm sure most of you are familiar with our 5 sustainability pillars. They're highlighted there, if people aren't familiar, they can have a look at our sustainability report on the website. nib remains committed to sustainability, and I might just talk through what we've achieved in the last 6 months and what we are planning on doing in the next 6 months. So just a couple of highlights. I won't talk through all these bullet points. But as Mark mentioned, health management programs are a really important part of our strategy going forward. And now, members across New Zealand and Australia have access to 19 health management programs, including 2 new digital programs that have been launched. If I have a look there as well, we've also launched a new partnership in New Zealand within iwi, and that's also part of our ongoing commitment to build those health partnerships across Australia and New Zealand. And we've also achieved our Rainbow, Accessibility and CQ tick in New Zealand, which nib remains committed to diversity inclusion, not just in New Zealand, obviously, but in Australia as well, and details in our diversity and inclusion plan on the website. Next slide, Amber. We'll have a look at what's to come. You'll all recall that last year we set targets for the first time in sustainability, and we're well on track to achieve the 375 members Ngati Whatua health management programs. I think we're just shy of 200 at the moment. We're also launching our digital health record risk profile and good health plan, which is a key part of our strategy, and working in conjunction with Honeysuckle Health. And finally, just one last point. We're going to close off on our reflect deliverables by the end of FY '22. Very committed to those deliverables, and reflecting and considering whether we move to the next stage of the rep. For any other details, people, please have a look on our sustainability report. I might pause there and hand over to you, Mark.

Thanks, Ros. Next slide, please. I'm obviously not going to go through all the detail of the slide. We can digest it further on. Bottom line is that we're investing considerable time and effort in this potential future, have been as much about our members' health care as we are -- have been traditionally -- the sit care. And when -- I'll talk a bit more about that in a moment. When you think about nib's performance over the past 20 years, and periods are well above system growth, they generally followed significant initiatives in the business. So in the early [ '90s ], it was a marketing blitzkrieg and selling a [ 9 95 ] product in the marketplace for a number of years. In the late [ '90s ], there were, of course, early adopters of online engagement and brokers such as Compare The Market and iSelect. In the last decade, it's been the development of our white labeling capability and important partnerships such as Qantas, Suncorp, the Automobile Association in New Zealand, more recently, ING, and just even more recently, again, Priceline. So we're -- we expect this investment we're making in P2P, would be the next big initiative, which hopefully catapults us to -- above system growth. And we do that because we have an expanded value proposition. We do that because we become more and more price competitive in the marketplace and differentiate ourselves. I think what it also means is -- something our planning has focused on is, health insurers, traditionally at least, are only playing a small part of the Australia and New Zealand health care market, about $30 billion of $200 billion in Australia, and about $5 billion of $30 billion in New Zealand. We see this -- we see our P2P strategy as an opportunity to play in other parts of the health care system, as this slide articulates. It also means we're able to hopefully make a difference in terms of our important social and environmental responsibilities. So just like we've already demonstrated in New Zealand with Toi Ora, our partnership with Kiwi -- Maori community. We hope to replicate that in Australia. And so what's the space on that front? Next slide, please. Look, this is just a consumer perspective. Although it's important for doctors in their relationship with their patient, and the tools that they have at their disposal, but it demonstrates -- and just -- I'll speak to this very quickly -- demonstrates our focus on additional forms of financial protection. So for example, in New Zealand, we're integrating life products through the acquisition of Kiwi Life, with traditional health insurance products, for example, critical illness. Later on this year, we'll bring a new product concept to the market, again, in terms of financial protection, called Green Pass, as a way for people to become a member of nib and segue themselves towards full financial protection and health insurance. We want to be as much about providing our members and travelers and their doctors and other providers with deeper insight in their health care profile and risk. We made several initiatives underway in the business. For example, we're building an electronic health record piloting with a company called Snug. We're currently piloting an e-triage product, which means that members can go onto their phone before they aren't feeling well in the system. The AI-assisted system will triage them to the best next step, whether it be a pharmacy or a doctor, whatever the case may be. And we're expanding the universe of connectivity for our members. So traditionally, we're connected people with hospitals, stenters, doctors, et cetera. We have a much fuller vision of the kind of health care services that members and travelers expect today in this world of consumer sovereignty. We want to be able to deliver to our members an integrated, seamless, easy-to-access network of providers, whether it be pharmacy, GPs, hospitals, doctors, whatever the case may be. So that's what we're trying to do. The soccer balls are indicative of the progress we believe we're making, and how much more progress is -- we need to make yet. Next slide, please. Just a little bit about Honeysuckle Health here. So Honeysuckle Health -- our JV with the U.S. based but global operator as Cigna, is making giant strides. There are essentially 3 parts of business. One is -- first part is the data science company. So our clicks and ingest data and interpreters of data for the purposes of providing deeper insight into health care -- health risk, disease risk and how that risk may be prevented, or better managed, or more precisely treated. Secondly, it provides health services based upon the guidance of that risk assessment. And as Ros as mentioned, it is now providing a number of -- and as I touched upon earlier, it's providing a broad range of health care services to our membership and other clients participating in the health care sector, including a couple of digital products, which are focused on behavioral health, mental health and physiotherapy. And thirdly, it's a buying group, a collective buying group for other health care payers, to negotiate and establish provider networks, whether they be doctor or hospital or dental or physiotherapy network. So that's the 3 parts of the business. I just added this graph, just to highlight the power of this kind of science. This graph on the left is showing the incidence of people after major joint replacement being admitted to rehabilitation. So you're seeing the right-hand side there. In about 33% of the cases, people after major joint replacement are emitted to rehab -- in hospital rehab. On the left-hand side, you see the best-performing hospital there. And assuming there's no compromise of clinical quality and outcomes, which we expect there isn't, it's only admitting about 20% of patients. The worst hospital, if one used that expression, and again, this is adjusted for a risk, is admitting 94% of patients to in-hospital rebate, and the average for that particular group is 47%. Look, it just highlights the extent of what we would call unwarranted variation or inefficiency in the health care system. And the kind of science we're deploying in the business now is allowing us to make this all the more transparent for the hospitals, for the doctors, and particularly for our members. Of all the investments we're making in personalization and fulfilling the vision that we articulate today, the science and the capability in Honeysuckle Health is easily -- not the only, but easily the greatest enabler. Finish on this slide. I notice we probably should have put in a dot point about that dividend. I'll come back to that in a moment. I suppose the key takeout here is as written there. Cabinda significantly heightened consumer awareness of the need for financial -- both the risk of disease and the need for financial protection. We're not seeing it just in Australia, we're seeing in New Zealand, we're seeing in the U.S., we're seeing in Europe. That would drop off a little bit, but we expect ongoing interest in the sector, the category to grow. And as we can further differentiate our offering and improve its appeal, particularly the younger people, that augurs well for our future. It's fairly obvious that the strong arhi performance is offsetting some of the difficulties we face in other parts of the group, in particular, international students and travel. Travel, fingers crossed, recovers fairly quickly. I expect the same for students. The loss of students hasn't been as dire as I would have imagined 2 years ago. Really what's happened with students is the claims expense we've faced. So those -- and as I mentioned, the international workers business is still in very good shape. So I expect, and we expect those businesses to recover very quickly, as soon as COVID-19 is behind us. Thirdly -- and I've touched upon this already -- Honeysuckle Health is just so mission-critical to what we're trying to do across the group. And fourthly, we just stay here. It's in our ASX release, where the Board has declared a half year dividend of $0.11 a share compared to $0.10 a share last year. We're not giving any guidance as to the financial outlook for the remainder of the year, for all the reasons you understand by now. Suffice to say that we believe our provisioning for any COVID-19 catch-up is more than adequate. And we're quite confident that the future is -- we leave the pandemic hopefully behind us. So with that, I'll conclude, and as usual, invite you all for any questions.

[Operator Instructions] Our first question comes from the line of Andrew Buncombe from Macquarie.

Just a couple of questions about guidance, please. Maybe I'm being a little bit too finicky, but with some of these numbers, they're quite specific. So I just wanted to double-check. So the first one. In the announcement, it says policyholder growth for arhi at least 3% in the guidance, and in the deck, it says circa 3%. Which one of those is correct?

The former.

Got it. And then similar one -- yes. And then a similar one for my second question. You had previously given margin guidance in New Zealand, but I can't see it anywhere in the documents today. Does that old guidance still stand?

So the previous guidance we've given -- correct me if I'm wrong, Nick -- it's typically in the range of 8% to 10%. It's a little bit below that for the half year. Nick touched upon some of the issues impacting that lower margin. Like it's not ridiculously low. And our analysis suggests that -- and Nick touched upon this, it reflects a shift from public treatment to private treatment. The case mix in New Zealand is very much dominated by major joint replacement. So it appears there's probably a little bit of any selection there it appears people who are on the long waiting lists in the public system in New Zealand are opting to take out health insurance just in case, and that seems to be a real factor. We have to -- we don't appear to have seen the level of deferral in New Zealand that we've seen in Australia. And the catch-up has been similar to Australia.

Our next question is from the line of Nigel Pittaway of Citi.

Just -- I might just follow up on Andrew's question, first of all, on New Zealand. Would it be reasonable to expect that to get back to the target margin by the end of the year? Or are there factors that you've called out in the first half that are likely to be ongoing and prevent that?

Look, I don't think it'd be unreasonable, Nigel. But look, I think a general theme you need to take out of the days, there's still a lot of uncertainty around utilization, given the impact of COVID like Omicron is thankfully just starting to ebb. We'd like to think we might be able to do the target this full year, although clearly, it's tuned out based upon half year results. So Nick, could you...

Yes. Probably, there are a couple of things to think about. We are looking at investing in our core system. And so depending on the level of that investment and the timing of that investment, and also with the new Software-as-a-Service accounting policy, that might put some pressure on the margins. And then we've also got the impact of Kiwi Life as well, Nigel. So just a little hesitant on sort of giving guidance on that.

Okay. Just moving into arhi. The 5-month deferral that you've got in this year's premium from 1 April, you -- just to confirm your account for that as you go, there's no sort of provision in this result in respect to that deferral? Is that correct?

Yes. That's correct.

Yes. Okay. Fine. And then -- I mean, just looking at the sort of trends. I mean you put double the amount in the DCL in the December quarter than you did in the September quarter. It's almost exactly double I think. You did sort of hint that sort of the end of the year has seen more deferrals. But can you maybe just expand on why there is that significant difference between the 2 quarters?

Yes. I mean, if you look at the deferral rates, they've actually being consistent with June 2021. So the actual amount of the deferral against the savings, we've retained consistency. Again, there's a wide range of outcomes. And as our actuaries had a look at it and analyzed, we decided to go with a consistent number to June 2021. We have allowed a little bit of ancillary this time because there has been some deferral ancillary, and that did occur in the last quarter. So they are the main 2 factors.

All right. Okay. So it's more ancillary driving the December quarter than hospital?

To some degree. And yes, I mean, the level of savings, the risk-equalization was more favorable in the second quarter than the first quarter.

All right. Okay. And then I mean, generally, if you do strip out that impact, it looks like claims are up about 4.6% in the last quarter relative to what you reported at September?

I'll leave that with you.

All right. No real color on that?

I mean it's -- again, the -- you're talking about small numbers and so forth. So I think what we're trying to do is provide the gross profit driver table to allow you to come to conclusions on that.

Next question comes from the line of -- go ahead, please.

Can I just add to that question because everyone is trying to work out what does the future trajectory of claims inflation look like. Well, frankly, it's anybody's guess. That graph on unwarranted variation, as we term it, for rehab after major joint replacement, I think it says a lot. We know from research in other parts of the world that, while very regrettably, a lot of treatment has gone -- a lot of care has gone untreated, think of early stage detection of cancer. At the same time, a lot of unwarranted treatment has gone missing. So whether or not the pandemic has a longer-term effect of bringing into account some of this massive variation, it's not just a rehabilitation after major joint replacement. We've got evidence of significantly higher rates of admission to ICU across the case mix for no epidemiological or risk-based reasons. So I'm hopeful, as many in the industry are, is that, one -- nobody celebrates COVID not for a minute, but one of the positive outcomes will be more transparency and greater pressure on this reduction in unwarranted variation.

Next question from the line comes from Kieren Chidgey from Jarden.

Just a couple of questions. Maybe back on arhi. Nick, I don't know if you can help us with some of the one-off numbers in broad terms we should be thinking about coming through for the first half. So there was around $14 million of premium sort of givebacks on that side. Can you just clarify what sort of -- how you sort of quantify what the net claims impact from COVID was during the half to arrive at that view of 6% to 7% net margin?

So the net claims saving, deferral and the gross profit driver table, was that Kieren?

Yes. What's sort of the actual dollar number? Because there's a bunch of numbers there.

So the sort of line of the net claims and saving -- net claim savings/deferral, there's a minus $15.5 million in first half of '21 and a plus $36.3 million in the first half of '22. That's the...

So the $36 million is the number we should be stripping out or adding that.

Yes. And then, obviously, the increase in the COVID provision against that. I'm just trying to see the arhi impact on that, which is most of it.

Okay. And so Mark, I appreciate sort of the difficulty in trying to sort of pin down where inflation is at the moment. But if we think forward to the year ahead -- and you've got a 2.6% price rise coming through and it does seem like your downgrading actually improved a little bit again this period to just under 100 basis points. But assuming that doesn't change on a per policy basis, I guess you would probably be expecting to collect sort of 1.5% -- sort of 1.7% net of downgrading in the year ahead. It does seem like quite a low number for underlying inflation to be at or below that level to prevent your net margins going back on an underlying basis. I mean, can you offer sort of any broad views as to whether or not you think that is achievable, or whether or not there are other offsets perhaps around how you're managing the costs, the management expenses?

I think it's, again sort of same view that we would say that we -- when we go to re-price, we forecast out for the pricing year, and we look to forecast within our target range. So to that extent that we do see an ability to balance all of those factors and come within our target range.

I was just going to say, it still remains to hit that 7% to 8% target.

6% to 7%.

6% to 7% target. To the extent that we're overshooting that to support the group as a whole, we make no apologies for that. But that we -- the current level of profitability in arhi is not sustainable or responsible. But keeping the group as a whole in good fiscal shape is -- it is responsible. It's just a question of how it plays out, how quickly those other businesses recover. And in the meantime, to the extent that the arhi result is looking inflated, we'll continue to make -- take measures which we are compensating members as we have.

Kieren, I think I'll probably look at risk equalization, and maybe the missing piece is the ongoing benefit of risk equalization and to what extent that starts to normalize. We wouldn't expect that to start to normalize next year. We'd expect that to continue -- positive trends to continue.

Just on the sales mix split in arhi. There was quite a notable uptick through the corporate channel this half. Can you just talk to what drove that? And whether or not the margins you think in terms of how business is priced through that channel relative to other channels is fairly balanced or whether not -- sort of there are margin consequences from this change in sales mix?

Yes. I mean the corporate channel benefited from a couple of things. It was a little depressed a year ago as corporates reacted to the uncertainty of COVID, and perhaps tightened their belts a little bit. So we've seen that come through. And we've then -- and general employment as well as corporates have started rehiring. Then again, that naturally flowed through. Plus we've also made some investment in that area.

So our corporate business did particularly well. We retained some major accounts this year. I won't mention the clients, but in the face of ferocious competition, we won a couple of major accounts as well. I don't recall we have historically disclosed the margins in that particular channel for obviously -- for obvious competitive reason. But it's been -- it's a part of our business really humming. We acquired the business, I want to say in 2017, and it's been a remarkable success. And as we continue to introduce the kind of data science, which is a very attractive to corporates because they want to manage the health and well-being of their workforce, it's not just a financial protection, I expect we'll do even better.

Okay. And one last question, Nick. Just on the new APRA capital standards that take effect later this year. How should we be thinking -- I mean is there any advice at this juncture around how we should be thinking about target capital for the PHI business as maybe sort of as a percentage of premium? Or is it premature?

I think it is a little premature. I mean, I know it's sort of on everyone's mind, but it's probably been just delayed a few months with standards being released in December, then the industry feedback in March, and not finalization. So it's probably just that little bit premature.

You wouldn't envisage any change to payout ratio? Is there anything as a consequence?

No.

As a business, for many years, we've prided ourselves on being -- capital efficiency and not going lazy -- money within the business. We -- as a consequence, we have spent a lot of time in understanding the new provisions and its implications for us, and we're very comfortable.

[Operator Instructions] Next question comes from the line of Matt Dunger of Bank of America.

Just wondering if you could talk to the outlook for over 3% policyholder growth in FY '22 versus -- you've just delivered 1.3% year-to-date. What are you expecting in terms of momentum in the second half? Why is momentum building into the second half?

Because we're trying more resources at it basically. Why? Again, for competitive reasons, I won't go into all the details. Suffice to say, we're going to be on pedal half the rest of the year, both in terms of sales but also retention, and a few new other concepts and opportunities we see in the marketplace. So it's not in the bag, but that's what we're targeting, and confident of reaching that target. I'll just add that a good example where I think -- one of the channels, which has troubled us during the pandemic, is the loss of Qantas. It's such an important channel. So the Qantas channel dropped off with the pandemic. I'd expect that to bounce back. And I especially expect some of the new partnerships that I've mentioned, ING, Priceline, the leading examples I'll -- make a more significant contribution as well.

Great. And just wondering if I could ask a follow-up question on the capital standard. Can you talk to the DRP and how much you're expecting to raise there? Is the reason for the DRP to cover logic or to fund the new ventures? And then also why did the nib health funds capital strain reduce from Slide 15 in the first half? You had a lower capital strain from nib health funds.

So a couple of things on that. We typically get 7% to 8% back on the DRP. So it's quite minor. We kind of have it as a service to our shareholders, with the very strong retail base that we have. There's always an option if capital comes through to put a discount and increase that. But at the moment, it's just really been the historical service that we provided. In terms of the capital strain, I think that it's mainly on a cash perspective that additional cash is coming through the business at the moment. There's been no real change in terms of the business. So just really a position on the cash, maybe a little bit of the DCL as well.

Our next question comes from the line of Siddharth Parameswaran from JPMorgan.

A couple of questions, if I can. Firstly, just on the international business. Just the -- some of the comments you made about price increases coming through in the second half, just hoping you could provide us some color on how much of a benefit that would likely be. I mean these would already have been announced, I presume the public is probably looking for information. So maybe if you could comment on that? And also just, if you could give us some idea of whether students have actually come back into the country in a meaningful way and whether that -- whether we should see an improvement in that claims performance as a result in the second half of the financial year?

Well, again, I said I'm conscious of giving too much information away to our competitors. Obviously, the loss ratio in students has been hurting. Part of correcting that -- the fundamental reason for that loss ratio being so diabolical is the fact that we're now insuring these kids for 12 months rather than on average 9 to 10 months. And whereas young women went home, often they have their babies, and now, they've been having them in Australia for the past 2 years. So I think on the utilization side, the loss ratio will correct itself as the pandemic unwinds. However, that hasn't prevented us from increasing prices in the students business as an additional measure. What the competition do -- well, does, only time will tell. The students are dribbling back into Australia. I think one of the real welcome developments of course, of our mix of students and workers is that those students that are here, many of those have graduated on to -- into workers, into working bases, and that's been one of the reasons the workers business has been performing so well. I think it's very reasonable to expect, there may be more pressure on the students gross margin compared to years gone by, when things return to normal reception. But I'd expect both of those businesses will be back in full cry certainly by fiscal '23. And as Nick mentioned, if you look at our P&L, we have lost considerable earnings as a result of the pandemic and the impact it had on students, and in particular travel and hopefully that reverses and takes us back to where we were at pre-pandemic.

Just to be clear. I mean, you had provided guidance on this division, which I think from memory was a 65% loss ratio, which would not suggest to return to pre-pandemic levels of profitability. So is there some offset?

Well, that kind of -- that kind of a loss ratio I don't anticipate changes too much in the workers business. In the students business, there is a lot more pressure on prices just because of the nature of the marketplace, the young people, and every dollar counts. But we're only talking about $600 premiums on average. So time would tell what sort of loss ratio students returns to, and whatever the new normal looks like. But it will still be very attractive, and the return on invested capital in the business -- supporting the business, will still be likewise attractive. I don't -- not sure where you're going there, Sid. I don't expect the...

I'm just asking the question which guidance holds. Because you said previously, the 65% gross loss ratio was what you were targeting. But you're saying here that you expect to return to pre-pandemic margins. So I was just wondering which one holds. That's the question.

No, no, speaking of return to pre-pandemic margins, Sid, we're saying it's an attractive business. So I think it's sort of hard to predict where the margins will end up and settle. We'll probably know more over the next year or 2.

Yes. And what impact recent price increases have on the marketplace. There's definitely -- in this particular market, there's an element of -- the profitability varies by regions. And I think it's fair to say we're going to be a little bit more selective in where we target, based upon our long experience now in understanding those marketplaces and behavior, and with that loss ratios.

Okay. If I could just ask a second question, just around the premium givebacks. I think you flagged about $90 million. I was just wondering if you could just spell out how much of an increase in that number is expected from the -- just from the deferred rate increase and if there's anything else in that number that is there because I think from memory, I think it was $45-odd million 6 months ago, from memory. I'm just wondering what has changed in that number. If you could just spell out what is there? And also if you could be clear on whether -- in any of your filings for price increases, whether the government is asking to make sure that in the arhi division, the insurers don't profit from COVID?

So in terms of what makes up the $90 million, I think we're kind of floating around $50-odd million in terms of the initial COVID package. Then we had the member give back, which totaled $15 million. Then we've got the premium deferral. So that makes up the $90 million in round terms. In terms of the not profiting from COVID, there's a range of perspectives out there. The ACCC have indicated that they've had a look in December. They will continue to have a look next December when they report back to the Senate, and we've got one eye on that as well.

Yes. I don't think the government -- well, government certainly hasn't mandated that we're not profiting as a result of COVID-19. In fact, we said that -- right from the very beginning that it wasn't our intention at all. And I think we've acted in good faith in our respect through the many initiatives we are taking to compensate members. So I'm fairly relaxed about it. The reality of it is, nobody can objectively accuse the industry of making too much money, because we really don't know what level of deferment has occurred, and at what scale and what pace that catch-up will occur.

Okay. And just -- one other question is just around the growth that Kieren picked up on, just in the corporate division. Does that actually understate the rate increase? Because from memory, I think, when you bought that business effectively just the way that helps are done by the health department. I think that the 2.6 -- if you're growing very strongly in corporate, I think that that significantly understates the actual achieved rate increase. Is that right? Is that still the case? Or is there any change in the way those numbers are calculated?

Wouldn't say significantly. Get the details for you and talk to it on the call after this, Sid.

Yes. Look -- yes, the corporate channel is still relatively, well, I won't say minor, but it's not as material as our broker channel, as our partnership channel, or direct to consumer. It's probably -- I haven't looked at the numbers for a while, it's probably about 15%.

Okay. And just a final question, just on contracts in the hospitals. We -- how -- have we seen any negotiations in the last half? And could you give us some color on what the negotiations have been like? And what kind of increases are we getting at the moment in these COVID periods?

Well, all those contracts are commercially in confidence, of course. Sufficient to say, our relationship with the hospital groups is very harmonious. We've been very supportive of our hospital partners throughout the pandemic. We do understand the difficulties and challenges they have been encountered as a result of COVID-19. I think one of the -- again, going back to that earlier slide, something that's really emphasizing is that these negotiations in the future can't just be about price. And as important as the discussion we're having with government and hospitals and medical device companies, are around prosthetic devices. It's really important. It's still the price of the widget. The future has to be about value-based remuneration for our providers. It has to be about ensuring that utilization. The need for the widget, for example, in the first place is warranted. So I think there will be a seminal shift in our -- the nature of our commercial relationships with hospitals and providers. Honeysuckle Health, as I mentioned earlier, we have virtually outsourced our hospital contracting to Honeysuckle Health, who have the kind of data science that I've shown this morning. And the goal of navigating us away from this heavy reliance on fee-for-service more towards value-based arrangements, and as you'd imagine, Cigna is having an influence on our thinking in that respect as well.

There are no more questions from the phone line. I would like to hand the call back to the management for closing.

Okay. I'll just give it a sec. Okay. If there are no further questions, no doubt, we'll catch up with quite a few of you in the next week or 2. So look, thanks for your time this morning. We're very comfortable with today's results. We're quite positive about the remainder of the year and where we expect to land. It is very much complicated by COVID-19 and its lingering impact on things like the deferred claims liability. But we'll deal with that in due course. I'd be very surprised if the DCL is still an issue. I said that about this half year, but I'd be very surprised if the DCL is still an issue by the end of fiscal '23. And we're very confident about being able to dissolve whatever catch-up does occur over the course of next 12 months. So thanks again for your time this morning, and farewell.