nib holdings limited (NHF) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to today's presentations. I should start by acknowledging we're presenting today on the traditional land of the Awabakal people, a nation of about 1,800 square kilometers, mainly focused around Lake Macquarie, which used to be known as Awaba, and Awaba, meaning a very flat place. We pay our respects to the elders, both past, present, and future. I want to start today, as I always do, with concentrating first on our purpose as a business. It sounds a bit cliche these days, but we're great believers that commercial success only follows fulfilment of our purpose. Our purpose has been developing over the years. Today we talk about being much more than just somebody who's there for you once you're already sick and injured, and somebody who's there today to help you and your doctors have deeper insight into your underlying health risk, particularly the risk of a disease, to connect you then with a broad ecosystem of clinical and other providers relevant to your particular risk profile or condition, and thirdly to make that access to the provider networks all the more affordable and accessible through the financial protection we provide, principally in the form of health insurance, of course. And the highlights of our purpose are many. We could have easily added to this list, but worth mentioning, we celebrate 70 years of being a health insurer this year. It's quite a seminal event in the history of the company, notwithstanding the limitations and restrictions imposed by COVID-19. And contrary to some public discourse, we're actually providing a lot of health care still through COVID. We funded over 375,000 hospital admissions last year, notwithstanding Omicron. We funded over AUD 3.6 million ancillary treatments. We put over 10,000 people through health management programs, largely courtesy of our partnership, our joint venture with Honeysuckle Health. And I'll talk a little bit about progress we're making with Honeysuckle Health and health management generally a bit further on. We achieved carbon neutrality this year with a very firm commitment to be net carbon zero by 2040 and Ros will talk more about that further on. And we continued to provide a lot of support for our members and the community at large throughout the pandemic, through premium deferrals, through cash rebates, through providing additional cover at no additional cost, through grants to the community. So I could have also mentioned we put 8,000 members through health checks this year. Those health checks are designed to provide the kind of insight and guidance for helping them and their doctors better understand their underlying risk factors and mitigate the risk of disease. We're pleased with financial results. They're sullied somewhat by investment returns, unrealized losses across the portfolio, but essentially performance was very strong. You'll see we grew top line revenue by 7.2%, notwithstanding those premium deferrals, and Nick will talk more about that further on. The underlying growth in profitability was quite prodigious, largely driven by our success in arhi but also in New Zealand. And later in the year we saw good recovery in some of the more troubled areas, particularly international students and travel. And that recovery is accelerating into this current financial year. Investment income, as I mentioned, was disappointing, but aligned with what we've seen generally in the marketplace, and Nick will talk further on about what we've experienced in July, which is quite a positive return in those investment income. Our return on invested capital remains as strong as ever. And our dividend still remains attractive. It's a little bit less than last year because of the poor investment returns. And I think importantly, it's a little bit less than our full year dividend of fiscal '19, which was AUD 0.23, which I think makes good our promise not to be profiting from COVID and the impacts that it had on the business. So I'll hand over to Nick now who'll take you through more detail of the P&L and balance sheet, and I'll come back a bit further on to talk about our business strategy and outlook for the company.

Thanks, Mark. I'll just take you through a summary of some of these pages. I'm sure there'll be a lot of questions to come after it. So we'll just take this at a fairly high level. If I had to characterize the result, it really is around strong revenue growth, subdued claims, and then the impact of investment returns. So if we just look through that, we'll go through 6% increase in premium revenue, driven largely by arhi business and also in New Zealand. We also started to get some good revenue growth coming back into the students and workers business. The claims incurred, we'll go through that in a little more detail, but again, it's relatively subdued given that the policy growth that we've had across our businesses. And then as we look into other income and other expenses, you can see some very strong growth in income and some high growth in expenses, and that's really showing the bounce back in our travel business, which has rebounded very strongly back in the second half. Looking down through the P&L, we then come to the investment income. You can see a very strong year last year at AUD 52 million and then a loss of AUD 30 million this year, broadly that's a 3% investment loss on the portfolio, and roughly that's about 2.5% to do with asset allocation where we had losses on both the defensive portfolio and the bonds because of the increasing longer-term interest rates and also in the growth assets, mainly in Australian and global equities. There's plenty of detail in the back pages of the investor deck on that. And then there's also about 0.5% impact from our sustainable investment philosophy. And we're not really overly concerned about that, because if you'd measured that last year, it would have been a positive impact. So we have a belief in sustainable investing. We had an impact on this year, mainly because of some lower carbon targets that we set in the portfolio. And of course, some of the energy stocks did extremely well this year. But again, we feel well positioned for where we are in the future. Importantly, have a look at the DCL, strong increase in the DCL, going up from AUD 34 million last year to AUD 110 million. We'll talk a lot more about that in the upcoming slides. So I might just go to the next page if I could, please. We give you this gross profit drivers table to try and give you an idea about where we're seeing things in cutting through COVID and so forth. We do always highlight that this is an estimation. Last time it was based on an FY '20 forecast back in February 2020. This time we've actually rebased the forecast, and we've done some more analytics on the savings and so forth that we think have come through on COVID. So there's a little bit of -- a little different in this table, but it's largely the same as the one that you've seen in the prior years. We'll just quickly go through it. So policyholder growth of AUD 28 million, positive contribution, again good, strong policy growth that we've got. And importantly, offsetting the product scale and mix, and that's the impact of downgrading, and you can see that we had relatively low downgrading again this year. We also saw that in the first half. The rate variance is coming through strongly. You can see a very positive on premium revenue. That's the impact of essentially 2 price rises because we got the full year impact of the FY '20 price rise, then we had also some of the '21 price rise come through. And then the claims you can see at quite a subdued level. The OSC development we talk about, it's just the estimate, and how it comes through in the actuals, it can be positive or negative. And then the ones that I really would like to talk about is the risk equalization impact. As you can see, not too much different to last year. But if you look underneath that, we had a AUD 47 million benefit from last -- in last year, increased to AUD 92 million benefit this year. So really quite a strong impact from risk equalization. If you go to the line underneath that, you can see that against that AUD 92 million benefit, we took up AUD 42 million benefit in the DCL. So again, that just reduced it. Going through in students and workers business, a modest improvement. We actually had quite a strong improvement go through in the workers and then students are just taking a little bit of time to come back. New Zealand, a favorable impact because we do believe there's some deferred claims that will come through into next year. We think that we're reasonably well provisioned against those claims because we increased our OSC against that, not so much as a DCL, we didn't take a DCL, but more because we saw the risk of -- or the double risk of having an underprovided OSC and deferred claims coming through as something that wouldn't be prudent. So we did take an increase in the risk margin this year. Then we get through to arhi, relatively small impact of a AUD 1.4 million, and I will go back to the page, please. Relatively small impact of AUD 1.4 million year-on-year, but again, underlying has is quite large impacts on that. You can see, again, that the net claims, savings and deferral impact of AUD 104 million, so very large. Then we took AUD 33 million against in the DCL, and you can also see that the member support that we provided was AUD 51 million during the year. So that dampened down that savings impact and also you'll be able to see the contribution of both the savings and also the risk equalization that increased the overall DCL up to up to AUD 110 million. Going through into iihi now. We'll go through relatively quickly through these pages. Revenue I've already talked about, again, it's the price increase plus the policyholder increase. You can see claims expense it's quite interesting here that the claims actually reduced 3% and the risk equalization reduced 7% and then offset by the increases in the DCL. We did see -- there has been commentary around where is claims inflation and so forth, and 2% to 3% has been discussed. We can see where those numbers come from. Again, it really does depend a lot on what you consider to be the impact of COVID and what you might think was the underlying. But what I would say is that if you look at our view of underlying trends, we would say that the overall utilization inflation was a bit lower this year. And then where it is next year will be a question that we can talk about. Moving forward into our students and workers business. The big story here is the rebound. So I'll just bring your attention to the bottom left tables where you can see that we've been consistently losing money second half of 2021 and then in 2022. And then we actually made a profit in the second half of 2022. So again, that business is rebounding more strongly in the workers and the students and we're pretty confident on where the students are going given where the visas are lodged, and we've just showed you that table on the -- or that graph on the right-hand side. That takes a little longer to flow through. As you know, we do recognize income for students over the lifetime of the students, which is typically about 3 years. So that will take a little while to go through. But -- and we're yet to see really those visas lodged turn into a strong uptick in numbers, but one should follow the other. Looking to the New Zealand business. Another strong result from New Zealand. This is just a business that does tremendously well since we acquired it. A little bit lower in terms of the margin, which is around the investment that we're doing in the systems platform, which will continue into next year. I'll go into the travel business. Again, the travel business is all around the rebound that's occurred in the second half of 2022. You can see the sales recovery and really it has recovered back into the pre-COVID volumes that we're seeing. So good, strong bounce back and with a lower cost base than we had in pre-COVID times. Just moving into the next page. Capital; I'll just spend a little bit of time on capital. So this capital, again, is on the old standards and our old group calculation of available capital. As you know, we'll be updating that this half in terms of when the new capital standards come out, which we understand should be in September this year. We'll wait until those standards come out before we can make any definitive comment. What we've tried to do in this table is to show you that on a like-for-like basis, our capital position did improve. And despite the net tangible assets actually reducing slightly because of the investment returns, if you look going forward, and I know there'll be questions on this, we feel comfortable about where our capital position will be into this year. Again, before we make a definitive comment, we'll wait for those standards to come out. But we would expect the available capital number to reduce given that there is an increase in capital requirement as a result of those capital standards. And to the next page. Cash flow; we're providing this because it's a very similar situation to what happened in 2020. You can see in the second half of 2022, very strong operating cash flow against the UOP number. And again, that's largely as a result of the low claims, but on a profit sense, we took up in the -- took out those claims in the DCL. So as those claims unwind or as they catch up, again, there'll be that difference between the profit and the cash flow coming in. And so we'll be looking at that going into FY '23. I'll now hand across to Ros.

Thanks, Nick. So many of you would be well aware of our 5 sustainability principles that are very much aligned to nib's purpose of your better health and well-being. Mark briefly mentioned the 10,000 members in the health management programs. That also includes the work that we're doing in New Zealand with the Maori group members and close to 1,000 have participated in those programs, and we continue to work and invest with Honeysuckle Health in respect to our health management programs. Mark also mentioned the health checks. So we've completed almost 8,000 of those and also the associated good health plans that enable our members to make better decisions in relation to their health. We continue to work very closely with the nib foundation, and particularly into chronic disease, risk management and reduction. Just a couple of other callouts. We're very pleased that we've managed to deliver on our Reflect RAP this year. A lot of work has gone into that, and we've worked very closely with some external cultural advisers to ensure that we're very genuine and sincere in the work that we're doing with our First Nations' people. As Mark mentioned, we achieved carbon neutral certification this year for the first time. We worked very hard to reduce our scope 1 and scope 2 emissions, and we're working very closely with our external providers in relation to reducing our scope 3 emissions. We have also set science-based targets to achieve carbon zero by 2040. And we continue to invest in IT, and in particular, we've attained certification for our cybersecurity processes, which we consider is not only a good business, but it's also our commitment to ensuring that our members' data remains safe and secure. So if we move on to FY '23 and the areas we're focused in the year ahead. In September, we will be releasing our Sustainability Report as well as our TCFD report. They will detail the metrics that we're looking forward to achieving. But more generally, we will continue to be committed and invest in population health in our health management programs. Over the past year, we have also built out our clinical team. So as a business, we're very much committed to that and very aligned to nib's purpose. In terms of our natural environment, we will conduct a new climate change scenario analysis. We last undertook one of those in 2019. And we'll also seek validation in relation to our science-based targets in terms of our net zero target. We're very pleased to announce that we will be developing and launching our Innovate RAP and committed to working close with First Nations' peoples in respect to that. And we will also continue to invest with the nib foundation in relation with our prevention partnerships. On the employee front, we're very much committed to developing our staff, and we're engaging all of the executive successes in a leading business and strategy development program, and we will continue to work hard to improve our employee engagement score over the coming year. And now I will hand to Mark.

Thanks, Ros. Just before we talk in some detail about the slide, I won't go into too much detail. I want to share a very, very brief video with you. [Presentation]

We think it's a good evidence of what we're fundamentally trying to do as a company here at nib. Well, we'd say our future is being as much about health management, as we have for 70 years a health insurance company, to be there for our members and travelers and other customers to support them and their doctors manage the risk of disease or injury, rather than just be there for them once they're already sick or injured, as important as that will remain because regrettably people will continue to become sick and injured. Underneath that thinking is 4 key thematics I thought I'd just briefly touch upon today because they really give context to our overarch -- as an overarching thematic to our strategy. The first says increasingly health care is becoming more about health care rather than sick care, and that's happening because society is learning to harness the power of data science and predictive analytics to understand risk at both an individual and population level, and with that deep understanding of risk, also understand through machine learning and other data forms of data science how that risk of disease may be prevented or better managed or more precisely treated. So harnessing this kind of insight and guidance is something that we're very focused upon as a business. The second major thematic is so much future health care will occur outside of traditional settings, and in particular hospitals. It'll occur in lower distributed, more specialist settings of care, including in people's homes, and we're seeing this trend accelerate already and, of course, COVID-19 has added impetus to that shift. A third thematic is that consumers into the future we believe will increasingly look to meet all of their health care needs in one place in a seamless, integrated experience, they can not only purchase their health insurance but they can get a deeper understanding of their risk profile, how they might manage that profile, they can virtually connect with doctors and other providers, as we've just seen in that video. That connection may take the form of a physical connection. We don't think people are going to suddenly stop going to visit a doctor in person, but it will also occur in a virtual form and eventually into the metaverse. So being able to connect our members and travelers and other customers with a single seamless experience with health care system is a real priority in the business, creating that ecosystem, that platform. We don't propose to build every component of the platform ourselves, but we want to be there at the front-end orchestrating that experience for our members, travelers, and customers. And, of course, we're seeing this globally in the form of convergence across a very -- so many health care products and services. Think what CVS in USA and Amazon are attempting at the moment. So in our modest, relatively smaller, we see a similar vision for the future. And finally, the fourth thematic is we see an even increasing role for private health insurance, particular as government fiscal stress starts to become even more difficult in society. So enhancing our private health insurance offering, supplementing that with other forms of financial protection such as what we're doing in New Zealand with living benefits, income protection, critical illness, et cetera, and also some new products which allow people to again better access health care in the form of treatment packages, and I'll come back to that in a moment when I talk about Midnight Health. So those core thematics are driving this view that if we can put this enhanced value proposition together and enhanced capability, the network effect platform orchestration that I've described, we can aspire to not only pursue market growth in the traditional existing PHI market and our share of that growth, but also aspire to enter new markets. So, for example, that second point there is recognizing the fact that taking Australia, for example, we spend about AUD 200 billion a year, we spend more on out-of-pocket cost than we do on private health insurance. So how we participate in that out-of-pocket cost, that particular value pool of the health care system, is of particular interest to us, as are some other adjacent opportunities such as the NDIS, which I'll come to shortly. So if you think about the nature of our business, fundamentally, we're an intermediary or agent between the buyers and sellers of health care, as we've done for 70 years. The NDIS, for those of you who are familiar with the nature of the industry, has created this level called plan management and support coordination. It's essentially an agency role between the buyers and sellers of disability services. So we've been eyeing this opportunity off for some time, not just as commercial opportunity but recognizing the fact that for many NDIS participant, health care and disability services converge, they're just different sides of the same coin. And we've finally reached a position where we're confident about pushing a few buttons and starting to make some investments. So this is foreshadowing an entry by the company as a plan manager and support coordination -- coordinator into the NDIS, we can believe, just as we do -- just as we aspire to do for people in respect of health care, we believe using our same data science and predictive analytics and ability to network providers and arrangements and ensure, importantly, as it relates to NDIS, greater integrity in the system, we see this as a tremendous business opportunity. And so we've put some details up there in the next few slides. I won't go into the detail -- any more detail about either, except to say that we think it is a great opportunity for the business commercially, but also to improve the efficacy and effectiveness, efficiency, and also the experience of NDIS participants. So a lot going on in respect of our adjacent businesses. You can see from the slide there. Honeysuckle Health's been very busy. So just by way of background there, 4 parts to Honeysuckle Health, it is a data science company, purpose to understand a risk at an individual and population level, and then charge responsibility to identify how that risk could be best managed. We're very proud to say that Honeysuckle Health has now serviced over 10,000 nib members. In one of its leading programs, our hospital support program, it's designed to mitigate the risk of somebody having an unplanned readmission at the hospital. And without going into too much detail, the evidence so far is we're reducing unplanned hospital readmissions by as much as 16% in respect to that particular program. So already it's proving its effectiveness in mitigating risk at an individual and population level. It's also a hospital contracting -- well, a provider contracting platform, particularly for hospitals, and we recently received a ACCC support authorization to allow us to do that. And it's a company who has, as part of its mission, the intent of providing technology, again, to help our members and doctors better understand what services are available to their patients and how their risks might be better managed. So very exciting developments in respect to Honeysuckle Health. Important to understand that Honeysuckle Health has a broad client base -- well, we hope to be a broader client base. Nib is, of course, its inaugural client but is already winning additional client outside of the nib portfolio. And so QBE, for example, we now count as one of our major clients in the business. We're departing China, unfortunately, having given it a good go for about 3 to 4 years. The reality of it is that COVID-19 just made things too difficult. China's been pretty much in shutdown during COVID. It's been very difficult for us to work with our JV partners because of that. And it just took too long to procure a health insurance license in China. So with our partners, we've made a very deliberate decision to exit that business. We don't expect any impairment. We do anticipate being able to recover a fair bit of our investment, if not most of our investment or all of our investment, through selling our license in China to sell health insurance. Midnight Health's an interesting one. As I mentioned in talking about our strategy, we've long thought about how we can participate in parts of the health care system where we're not. Midnight Health came to our attention as an opportunity to do that. So Midnight Health sells a range of treatment packages. So young Abdul might be fit and health healthy and thinks he doesn't need a health insurance, and if he gets sick, he has Medicare in any case, but he may be worried about his skin condition, his acne, or his hair loss. So Midnight Health provides treatment packages for specific conditions in men's and women's health areas. We see this as an important adjunct to our value proposition of your better health and also a way of introducing people, particularly younger people, to nib with the long-term goal of eventually converting them to full membership and private health insurance. Midnight Health counts 30,000 customers. So it's a nice starting point to have if you think about that opportunity to not only sell treatment packages and make whatever margins are possible on that, but also convert people into private health insurance when those people are ready to do that. Okay. The all-important outlook, well, again, nobody has a crystal ball here, particularly with the COVID-19 and subsequent variations continuing to have consequences. In arhi, we're still aiming to grow 3% to 4%. The industry is in pretty good shape at the moment. It's been growing quarter by quarter for the last 7 quarters now somewhere in between 30,000 and 40,000 additional policyholders. We've been getting our fair share of that, as you saw from our results. Very difficult to predict what's going to happen with the claims. Conditions look subdued. Our senses that there is a natural aversion in the community to hospitalization, unless it's really necessary. And, of course, there are all sorts of supply side issues, including workforce constraints, impacting the rate of hospitalization and all forms of treatment. So we'd expect things to remain fairly benign for the remainder of this calendar year and with maybe a reversion to whatever the new normal looks like in a new calendar year, recognizing that those supply side limitations are always going to put some constraint on the degree of catchup, which is actually possible in the system. Our margins in arhi remain inflated because of the low claims experience we've had. It's still our intent to move those margins back to our stated target range of 6% to 7%. How long that takes us remains to be seen. Certainly the recovery in other parts of the business, students and workers, allows us the opportunity, the flexibility, if you like, to take less margin pressure off arhi and to resume those past target margin ranges. We are giving consideration to further COVID-19 measures in light of the savings that have been made. It's still difficult though to opine on what are actually permanent savings, other than deferred savings. So necessarily we're being circumspect and cautious in our compensation for members for that effective denial of service during COVID-19. We've still paid out about AUD 100 million in compensation, but there'll be more to come once we're just a little bit clearer on the consequences of COVID-19 on claims and what our options are in terms of compensating our members. And as I mentioned, we expect further expansion of our actual -- well, I should have explained what P2P mean. P2P is the signature we're giving to our transformation program payer to partner. We want to be as much a partner as we have been in the past to payer in a way I've described. New Zealand will continue to perform very strongly. We're expecting policyholder growth of 3% to 4% across the business. We're investing heavily in New Zealand in new technologies. Our IT in New Zealand is somewhat dated. We see a real opportunity potential to modernize the systems there, and we're doing that with a high level of investment. Net margins we expect -- we presume they're 8% to 10% range, largely the slight drop beneath that range was associated with the IT system investments that I've mentioned, but also some P2P investment. And, of course, we're busily integrating our new life insurance business that we acquired from Kiwi Bank, based on the value proposition that we have described that we want to give our members in New Zealand a broader suite of products which help protect them in the event of disease and/or injury. Nick's also already spoken about nib Travel, and how things are racing back to normal. Travel sales are about 75% of what they were pre-COVID. We see that recovering very quickly for the rest of the calendar year and into the next calendar year. We also have some better underwriting arrangements in place for that business now, which we think are -- which is a good outcome for the business. And finally, talking about international workers and students, as Nick's mentioned already, the international workers business has been strong throughout COVID, and a real credit to those people in the business. It's been strong because we've been converting students onto workers policies and pretty much because we've dominated what limited migration -- worker migration has been in Australia, in particular the pacific laborers program. So we expect workers will continue it's very good performance. Students, as Nick mentions, is quickly recovering from the COVID-induced coma that it suffered. And if you look at the forecast for student numbers, as for immigrant workers' numbers, we're very bullish about the prospects of both businesses. So I'll end it there. And, again, thank you for your time this morning. And, as usual, we'll go to Q&A.

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

The first one is just in relation to the broader industry participation expectations for the next 12 months, just to give us some context behind your policyholder growth thoughts. So yes, in the next 12 months, how do you think -- where do you think industry participation will be in residents?

Andrew, look, it's difficult to predict. Over the course of the last 7 quarters, as I mentioned, we've seen industry growth in the order of 30,000 to 40,000 policyholders. The numbers get a little bit difficult because we saw that period where people suspended their cover and then resumed the cover. Whether that continues for the remainder of this year into next year, nobody can say for sure. My sense is that heightened awareness in society of the risk of disease and the need for protection remains. We've even seen that amongst younger people where we've seen growth in the under 40 segment for the past 7 years. Whether greater -- whether macroeconomic factors, interest rates, mortgage stress, et cetera, come into play, perhaps. But certainly in our planning, our forecast of 3% to 4% growth in arhi for the year, we still remain optimistic.

Right. And then maybe a question about the deferred claims liability please. Can you just give us an update on how long you expect that to remain on the balance sheet?

Yes, Andrew, again that's the question that the industry faces that, given what's happened over the course of this calendar year, I guess we'd expect the industry DCLs to have increased at 30 June, they increased in March, and at some stage it needs to go. Whether that's this year or next that's a question. I'd certainly like it to go this year. I don't think it's particularly helpful. And the new normal to arrive and for us all to get ready for the new normal. But the continuation of the low claiming patterns that we currently have, that'll be the question that we go. But certainly, this year would be I think more helpful than if we kept it going for a longer period.

And then maybe just as an extension off the back of that question, can you give us some color into the discussions that you're having with APRA and ACCC around that topic? Are they putting any pressure on to set timelines or what's happening there.

Not really. Nothing certain in that regard. There is some discussion about whether it will be available under AASB 17. Still to be finalized. So I don't think there's really a lot to update in that regard.

Yes. There's no question that claims had been deferred, which don't necessarily represent permanent savings, but I guess the other big variable in the equation is, I suspect a lot of catch-up has occurred. But what happens with the activity, which would have normally happened, just gets pushed out into the future. So the logic behind having a catchup for -- having a provision for activity which has been deferred it remains sound. But the need to carry on the balance sheet a liability to account for that I think is going to become increasingly under question. And is it worth mentioning New Zealand? Sure.

In New Zealand, we didn't see the circumstances to support a DCL this year, so we we've removed the DCL this year, even though we do have activity that we believe has been deferred. Circumstances are a bit different in Australia, which continued the provision, but again, the longer this continues, I think the harder it gets to justify provision.

So we'll do, for example, the last 5 years, we do about 3,000 knee replacements every year. Sorry, when I say we do them, we pay for them. Now, during COVID-19 we saw a slight pick up after the original -- what was the original strain? I'm losing track, the Delta strain, but it was only slight. And so just emphasizing my point, those that get preferred, get done, but they substitute for activity, which would have otherwise happened. So I don't think we're going to see the kind of spike in claims experience that the DCL in its current form anticipate. Nevertheless, it is perfectly logical and reasonable provision given the fact that people talk a lot in the industry about permanent savings, logical and reasonable in the sense that they typically aren't permanent savings. They just change the nature of the supply chain.

Our next question comes from the line of Sean Laaman from Morgan Stanley.

Mark, Nick, I hope you're both well. Still on the claims outlook, first part of the question is, perhaps Mark, what do you see as potentially permanent changes of behavior as a result of pandemic? Is there any threads you can tease out on rehab in the home, for example?

Well, rehab in the home, for orthopedic activity, appears to be a very real saving, which may be a permanent saving into the future. Same with in-hospital treatment for psychological conditions. We've seen a drop-off in hospital treatment and a move towards, as I described earlier, lower-cost, more specialist settings of care. So they're 2 areas, in particular, where I think we will see a reduction into the future in hospital activity. We're also seeing some reduction in other respiratory treatment because the same precautions were taken around managing COVID-19 have had a consequence for mitigating the risk of things like the flu and pneumonia. Now just how that plays out in terms of creating a new norm, who knows. Many of you have heard me cite the amazing statistic many times that since World War II, we've spent GDP plus 2% more on our health care. Now I don't think that's going to change, in particular society ages. So if I had to have a guess, you work out GDP, and if we can create a more efficient system, that 2% may become 1%. So 1% may be lost in the form of better prevention -- prediction and prevention of disease, and the other part of that may be saved in the forms of both efficient health care, such as rehab in the home, rather than keeping somebody in hospital for 4 or 5 nights a week after a major joint replacement. I wish I could be clearer than that.

And still on claims. When we look at the service providers and the challenges -- getting back to pre-pandemic levels, the challenge has been of volumes, the challenge has been getting staff. And I personally I wonder how many staff might have permanently exited the system, i.e., nurses. So it actually becomes quite challenging to get claims back to what I currently perceive as a more normal level. So wondering your thoughts on availability of staff and then maybe how that feeds into the cost of stuff and future negotiations. I'm just wondering if there's some structural change looking forward on the cost of service providers doing business.

Well, I think the hospitals have proven in the past because we have such high-quality hospitals and management that they're very adept at adjusting to whatever circumstances come along. So they will deal with the staffing issues, the supply side issues which were discussed this morning in their own way. How that plays out in the form of -- and how they deal with the loss of activity of the kind we have described, such as in-hospital rehab and psychology, is something for them to work through. How that plays out in the form of negotiations time will tell. We're now represented in those negotiations by Honeysuckle Health. They're our agent in dealing with hospital providers and other network providers like native system, like orthopedic surgeons. Honeysuckle Health will have more authority in the marketplace as it increases its customer base, nib, QBE, and hopefully other health insurers come along. So I do expect, because of Honeysuckle Health, our negotiation position improves. Yet I equally expect that hospitals will need to run their businesses and remain -- retain robust commercial outcomes. Where's that leader -- I know you're looking for some sort of percentage increase here, which I can't give you. Look, I don't think there'd be any major shocks one way or another. I don't think we'll confront a situation like Bupa confronted recently, were on the verge of having to go out of contracts with hospitals. At the same time, we'll be looking to pay hospitals what's reasonable for them, given that the challenges they have had around workforce and other COVID-related consequences. I think you'll find in our negotiations -- and I'll just say and maybe the recent Ramsay and Bupa [ gust up ] belie this. But there's a level of collaboration and collegiatism and sense of shared value between health insurers and hospitals today that certainly didn't exist 20 years ago. So yes, I'm expecting a future environment where both parties act maturely and reasonable and their commercial outcomes are fair. And really when you think about it, in terms of everything I've described today, around P2P and application of predictive analytics and delivery of health management programs, and I'm sure the hospitals wouldn't be offended by this. But fundamentally, we're trying to keep people healthy and out of hospital in the first place. That's our preeminent challenge as a business.

Our next question comes from the line of Vanessa Thomson from Jefferies.

I just wanted to ask for some color on the investment portfolio and the impact of rising rates. And we know credit spreads have contracted into this year and the asset allocation, whether or not that's changeable or set.

Sure, Vanessa. If you look at actually the last page of the investor deck, it has the components of the investment portfolio and the asset allocation. We're not seeing a need to change. We're mainly in defensive assets. The irony being that in this year -- of course, this year our bond portfolio and actually our sovereign bond portfolio suffered unrealized losses as a result of the increasing long-term rates. Again, hold the bonds to maturity, they will come back. So we have confidence in that. And in terms of the growth portfolio, it's a relatively small part of the portfolio. Again, you can see in the back page, the allocations between global and Australian shares, they've performed pretty much in line with market with the one exception being that the sustainable part of the portfolio has underperformed this year as a result of the low carbon selection. But if you took it 12 months back, it had actually outperformed. So we're not really seeing a need to change the investment allocations at this stage.

And just to clarify, into this year, the positions have increased, sorry, it's not the right way to say it, but has there been any improvement?

No change between June and July. And in fact, somewhere in the investor pack, I did, in anticipation of the question, have a note that the unaudited gain in July was AUD 19 million. So it offset a considerable part of the loss of the FY '22 impact.

And then just one more question. I wanted to ask about new joiners and lapsing policyholders, and whether you're seeing much change in the profile of the new joiners affecting the portfolio as a whole?

New joiners have been fairly consistent across the last couple years. For us, it's about 40% to 50% of our sales new to category. Our sales are much hard skewed towards under 40s, let's say, once for all sorts of reasons we won't go in today, but that's very deliberate. Our development of our white labeling and affiliate partnerships, for example, was always intended to catch that market outside the under 40. So no real changes there to highlight, except to restate, as we observed earlier, how well the system is performing in terms of growth, including in that under 40s market. So without getting too sanguine and bullish, I'm not seeing any danger right here and now of macroeconomic factors, ongoing industry growth, and our participation. And if you think about even -- nobody takes any joy out of this, but if you think about the dangers of, say, mortgage stress, it's largely hitting that part of the population who are less likely to have private health insurance in the first place.

Our next question comes from the line of Kieren Chidgey from Jarden.

Mark and Nick, a couple of questions if I could. Maybe just more from a top-down point of view, during COVID whilst the iihi and Travel business were weaker, we saw some bottom line P&L support through net COVID benefits. Given we're now in the second half seeing a return to profitability in those 2 businesses, as borders have reopened, does that change the way you're thinking about potential further DCL provision releases in arhi being returned to consumers or should we still expect some net benefit through the '23 year?

Yes. No, we -- as I mentioned, we're certainly talking about further initiatives to compensate members for the elements of COVID, which impacted them, particularly the denial of service, so expect that. It's something where we're currently calibrating, what do we now estimate to be the loss of value, and what is fair and reasonable in terms of a level of compensation, given the cash flows that we're generating and our outlook for the future, and how do we actually go about that compensation. We think we've probably done our dash or the industry has done this dash in further premium increased deferrals. As a further cash back is it does involve initiatives beyond premium increased deferrals and cash backs to support members in other ways. So we're giving that a lot of thought at the moment. I expect we'll have more to say about that in time for our AGM in November, if not well before.

And second question, just sort of coming back to claims inflation. I know very difficult to sort of be precise around these things at the current point in time. But Nick, I thought some of your commentary seemed to suggest that maybe your experience more recently might be below the 2% to 3% type industry, underlying inflation. You talked about perhaps sub-2% through '23. Just wondering if you can clarify sort of that is what you were suggesting. And then sort of as we look through '23, whether or not there are any significant re-contracting sort of arrangements that sort of roll over during the course of the next 12 months?

And just to clarify, the commentary is in relation to some of the market notes that have been put out over the last few days on a 2% to 3% inflation for FY '22 and that being kind of a starting point for where FY '23 may be. I think what I was trying to say, is that we can see how those numbers are arrived at for FY '22. What those numbers would assume, is that your underlying rate of inflation into FY '22 has actually declined from FY '19, FY '20, FY '21. Again, this is all trying to strip out the COVID impacts. So that would indicate that in FY '22, we have seen some reduction in inflation ex-COVID. But it's a pretty sort of long bow, given the effects of COVID over that long period of time. So the question then kind of is, for where things go into the following year, and that's just a really hard part to look at. But my comments are really saying we can see in our numbers, a similar impact. But again, that really just does depend on what you ascribe as being the impact of COVID and what you ascribe as not being the impact of COVID. Overall, our claims for policy are down 6% to 7%. So that's the raw number. But then when you start stripping out the impact of the DCL and the impact of savings and risk equalization and so forth, it starts to change dramatically.

Sorry Kieren. We lost you there.

Just asking in regards to the second part of the question around sort of re-contracting, any significant sort of rollovers coming up or due in the year ahead?

Yes, we do. But we've never been in the practice of disclosing when those contracts are due, and where we're up to in negotiations. So I hope you can respect that. As I mentioned earlier, I don't think -- there's nothing that causes me any alarm. Again, maybe the Ramsay and Bupa [ gust up ] contradicts this view. But certainly, in our experience in recent years, certainly the last 10 years, our negotiations have been very mature and responsible and fair. So it's not something I spend a lot of time in worrying about. I wish we could be more specific -- can I just say -- we'd love to be more specific about the outlook for claims inflation and credit to David at Medibank Pvt. for putting a number out there the other day, but it really is that volatile still. I mentioned the simple triangulation of looking at how many knee surgeries have there been, but it bounces around that 3,000 number without any apparent -- there are more reasons. So I think the volatility, the uncertainty that attends a business, is something that's going to be with us for some time. It's probably a reason to err on the side of caution in preserving the DCO. But I think the big accounting firms and regulators will decide that issue rather than us. And of course, our own predicament is even multiplied by the fact that risk equalization such as significant element of our claims exposure. So what happens at an industry level not just at the nib level, has real implications for us for all the reasons you understand.

And just a final question on the MER, which down sort of a -- up quite significantly in second half of the year, but obviously corresponded with some very good policyholder growth. I think, you're talking through the fourth quarter. Was there any one-off aspect to that MER in our high -- in second-half our brand and marketing? And how should we think about that sort of in the year ahead of, basically your 3% to 4% growth targets?

Well, as a just general proposition, we are taking a view at the moment that -- again, I don't want people to misinterpret and they're talking about the sun shining. But we are generally -- our profitability is very strong across the business. And as I've touched upon a few times, we're looking again as to how we may square things up a little bit with members in that respect. But we are taking opportunity to invest in the business, so, both in terms of topline growth. And you've seen we had a terrific last quarter in fiscal '22. And we had a very good July as well. So we're taking the opportunity to invest in the business in terms of growth, but especially in terms of the kind of IP and technology necessary to bring P2P to life. Our transformation towards being a health management company, not just a health insurance business. And you see that right across the group, whether be in New Zealand and the acquisition of the life insurance from Kiwi Bank and the modernization of IT, true to our major stake we hold in Midnight Health, true to the investment we're making in Honeysuckle Health and of course that's all adding to our expenses and a lot of that's OpEx rather than CapEx. But in all cases, we're taking a very commercial and strategic approach to making those investment decisions. Nick, was there anything I've missed in terms of one-offs?

Probably just on the marketing side, there is the seasonality in the second half. So it does always increase in the second half, and yes, we did invest more in marketing in the second-half as well, just on top of that seasonality.

Bringing to life the kind of consumer experience you saw in that video, we're now the only -- as far as we're aware, the only health insurer now who is bringing that service to their members on their app, haven't got my phone. That requires investment, it requires effort and requires money. So, right now we're in the mood that we're doing that to improve the value proposition and expand our reach across the health care marketplace.

Thank you. Our next question comes from the line of Mark Dunger (sic) [Matthew Dunger] from Bank of America. Mark, Your line is open. Please go ahead. Sorry, Matthew, Your line is open. Please go ahead.