nib holdings limited (NHF) Earnings Call Transcript & Summary

Good morning, everybody, and thanks for joining us today. I'm here with Nick Freeman, our group's CFO; and Ros Toms, our group's Head of Legal, Risk and do other things to us on sustainability of course. Look, we should start this one by acknowledging we're presenting the day on the traditional lands of the Gadigal people, who for tens of thousands of years, literally, enjoy the lands as we do today. And we look forward to a successful resolution of the Uluru Statement from the Heart, which we support very much as a company. Okay. I always like to start with this slide. I know many of you are looking forward to talking about the numbers, but nevertheless, this captures our vision, if you like, for the company, one of being as much about the good health and wellness of our members as we've been for more than 70 years now, the sickness and it's a metamorphic, if you like, that we're seeing around the world with many other companies who have their past in traditional health insurance. That remains very important, of course. Of course, unfortunately, people will continue to age and get sick and injured. But nevertheless, we are making investments that are very deliberately aimed at helping them and their doctors have a much deeper insight into their health and risk profile and a much broader universe of products and services, which support I think good health, would help to complement the significant support provided by way of financial protection. Look, there's lots of highlights in the results. These are very much purpose orientated, notwithstanding the limitations of COVID-19, and you probably all heard about the restrictions on surgery and activity. It hasn't stopped us and, of course, right across the industry, continuing to support people in need in the event of their hospitalization or need for allied treatment such as dental and optical. Probably our priorities at the moment is the success we're having with the investment in Honeysuckle Health and identifying the risk in people and preventing that risk. Our hospital support program, for example, is designed to identify and target those people most at risk of an unplanned hospital readmission, and based upon the success we've had so far, we believe we're reduced unplanned readmission amongst our cohort by somewhere between 16% and 20%. So, that's just the beginnings of what we imagine will be a future where we're much more precise and targeted in identifying people at risk and supporting them, not just with financial protection, but with the types of products and services and programs designed to mitigate that risk. You can also see in the first half, travel claims have begun to pick up with the resurgence of travel, but we'll talk more about that further on. And just a final point I made there is, consistent with our emphasis on our purpose as a company, we are developing, it's taken a while, but we want to get this as right as we can. A series of purpose KPIs or measures. And so for example, we have an industry, which seeks to measure the total population health, and we're also measuring more or obvious things such as the rate of hospital admission of the prevalence of chronic disease across our population, et cetera. So expect to see that evolve and develop as we move forward. As I mentioned, lots of highlights in this year's results, and we'll talk in more detail about each of these as we progress. Look, clearly, we're seeing very strong organic growth across the business, not only in our traditional arhi, Australian Residents Health Insurance business, but also in international workers and students, business in New Zealand, we expect that momentum to continue. The system as a whole is put on 750,000 additional people since 2020. We're very much part of that story. And in fact, are leading that story with our growth rate relative to the industry. Nick will talk a little bit more further on about our 4.2% for the year. Now we can't say with any certainty how that compares to the industry, but I expect it will be about double the industry growth rate. And I expect our first half growth rate of 2.3% will be maybe a little bit more than double the industry growth rate. Our margin is declining very deliberately. We've said throughout COVID-19 that we don't believe margin is around 10% and are high sustainable or fair or reasonable. So we're very deliberately pricing to bring that margin down towards our 6% to 7% target range. We're not quite there yet. And the plan has always been is that, that margin, declines back to more sustainable levels. The profitability of those other adjacencies would improve, and that's exactly what we're seeing as we indicated would be the case throughout COVID. But again, we'll talk to those -- the recovery and profitability in those adjacencies as the presentation proceeds. Our investment income has improved. We see ourselves more of custodians of the capital we hold rather than active fund managers. But nevertheless, it's good to see a turnaround in investment returns. The positive commercial performance of the business and cash flow is certainly supporting the kind of new investments we're making across the group, whether it be acquisitions in the NDIS or additional investment in companies like Midnight Health, which we now fully control, new IT systems that we're developing will touch a little bit upon IT a bit further on, and of course, just the pure investment we're making in marketing, acquisition and retention. The NDIS strategy is off to a very, very good start. I think it's fair to say it's exceeded my expectations. We raised that money, when was it, late last year and set off on this journey, pardon the cliche, but the work our team has done in assembling and consolidating a number of businesses. Very, very impressive and we're really excited about the prospects of the NDIS and the role we can play in helping to 600,000 or so participants soon to go to a million participants in achieving their goals and bringing a level of efficiency to the business, which is desperately needed given the trajectory of spending. Earnings per share grew for the half on the back of good commercial performance and represented a very solid return on invested capital. It's a little bit off what it was last half, Nick. But anything plus 15% with regard is an outstanding result in what is a very competitive sector. And our Net Promoter Score across the group pleasingly improved to 37%. And staff engagement is particularly impressive, especially against the backdrop of the initiatives we're taking around hybrid or distributed working whichever you defer because there's still some skepticism as to whether or not that's the future. We believe it is. And so far, the results are positive in terms of engagement, productivity, and commercial performance, lost time injury ratios, absentees, et cetera. Look, this slide is just trying to make the point that our bug system growth for the half and the full year is no fluke. Our story with the arhi business at least has been one of very sustainable system growth. There's no special recipe to that. It's just a tail of constant experimentation and innovation; and the kind of pioneering we've done over many years, whether it be an early adopter of retail brokers, companies like Choosewell, Compare the Market and iSelect being pioneers and developing a white labeling or private labeling capability, whatever description [ we refer ] with the likes of Qantas and Suncorp and ING and others. And I suppose it's fair to characterize our P2P initiatives as our latest brand new innovation initiative designed to provide the kind of momentum that has created this above system growth for so long. We regard the only form of long-term competitive advantage is constant short-term competitive advantage. Just restating some of these highlights. Nick will go into the detail on all of these, so I won't labor. The point, earnings strong. They're up good ROI, good EPS, as I mentioned, an attractive interim dividend and a strong NPS results. So with that, I'll pause and hand it over to Nick, who will take you through some of the more detailed financial results.

Thanks, Mark. I'll just actually sort of maybe linger on a couple of items around the result that Mark's already touched on and starting off with the overall group result. In the first area to highlight the premium revenue up 5.8%, a little lower because of the impact of the giveback. So we gave back $35.5 million this half against the prior comparable of $13.6 million -- so again, that premium revenue would have grown a little bit more in that regard. Also, the claims number of 4.9%, again, quite subdued claims. What you'll see coming through there is a few things, and we'll unpack them in a little while. But essentially, we're seeing a fairly subdued claiming environment in the hospital area, ancillary returning back to more normal levels, and also the risk equalization is relatively favorable as well. So all of those into playing. Then the last part is that we did see an increase in the DCL of up from 110 to $124 million. The amount we deferred, the percentage actually declined from June, but we had further savings. So where that trends across the course of the next 6 months or so, again, at some stage, the sort of COVID normal needs to set in, but clearly, that had an impact on high margins, which is worth taking into account. So we're just considering that as we go forward. Just jumping down on a couple of on one last point, which is on the return on invested capital, you can see that there was a decline, but that's really just the inclusion of the second half '22 investment losses. Essentially, we use the last 12 months of earnings in calculating that. So really what you're seeing is a calendar year '21 versus calendar year '22 earnings and one includes the second half '22 investment losses. So as that goes forward, this year, provided that we don't have a similar level of investment losses as last year, then you'll see the return go up again. We then always go to this gross profit drivers page. It's a little complex, but I find it's quite useful to answer some of the investor questions towards the end of the days. A few things that we're looking for here. The first is with the policyholder growth, again, $21.9 million contribution against the scale and mix of only minus 1.3%. We like to try and see those things at least offset, and in this case, it's really quite favorable. The favorability again, due to the strong policyholder growth and also quite benign downgrading, and that's really due to strong combined cover sales. So again, our hospital sales have been quite strong, which is another pleasing aspect of the policyholder growth that we've encountered. As we go through the rate variances, continued favorability, we've taken out the risk equalization element of that. And then you can come down and see on the risk equalization impact sort of halfway down, although it's only a $4.4 million increase, you can see that it's still a fairly favorable number as a gross number. So in the first half of '22 was $32 million. This year, it's $36.8 million. So still seeing favorability against our expectations on risk equalization. Then in terms of claiming level, I think I've already talked about this. But as you went over the last 2 years, what we saw is that there have been, in general, lower than expected, which is no news, but originally, it was driven across the board. We've continued to see those claim savings, but they're now more skewed towards the hospital and the risk equalization area. Just highlighting another piece that Mark talked about in terms of the earnings symmetry returning. I thought I'd just put this slide in just to highlight a couple of the trends. So the first is on arhi. So you can see across the course of the last halves, the arhi margin popped up to 11%, 10.6%. It's now coming down to the 8.6% level. Again, that's deliberate. And as Mark said, if you look at the first half '22 and what I call other developed operating segments, which is the students and workers business, New Zealand and travel, you can see that the prior comparable period that lost $6 million combined, and in this period, it made $31 million. So again, a strong turnaround in those businesses, driven largely by travel and also the students and workers. We then got another segment that I've just sort of pulled out here for transparency, which I'm calling other developing operating segments. And that's essentially Honeysuckle Health, Midnight Health in nib Thrive. And you can see that the losses jumped up from $1.7 billion up to $3.8 billion up to $8 million. Now a piece of that is actually the Midnight Health. So when we moved to majority ownership of Midnight Health, which wasn't present in the last halves, we have to now consolidate the full P&L into Midnight Health, and then we deduct it below NPAT as a minority interest. So again, there's a slide in the appendices, which show those numbers, but in fact, we're consolidating 100% of the loss, and then we don't deduct it until the below the NPAT. So that's having a magnified impact on UOP. Okay. If I turn now to arhi. I think most of this has been covered, but I'll just highlight a couple of areas. The first premium revenue, 4.3% growth, but it would have been 6.2% without the impact of the givebacks. So a good, strong premium growth driven by policyholder growth of that 4.2%. We put in the downgrading, it's not something we follow closely, but I know it's something that interests a lot of the people on this call. So again, you can see a strong result in downgrading only minus 0.2% versus minus 1.4% before. Just working through a little bit on the claims. You can see that the claims are up overall 5.4%, but there's some really quite big numbers beneath that $5.4 million. So the first is what I call raw claims, up 9%. -- again, driven by policyholder growth, 4.2%, plus or minus a bit with mix. And then you've also got the impact of inflation there, and then the actual utilization was relatively little. So that hopefully gives you some indication of inflation, although we'll leave it up to others to sort of try and bring that out specifically. You can then see that the major offset was in risk equalization and also the impact of the provisioning. So you can see there that risk equalization benefit down 10%, and then we've also got the provisioning as well. So that hopefully gives you a little bit of an idea about how the claims expense moved in that regard. Again, just highlighting, DCL increasing up to $124 million. That's a reasonable impact on the arhi margin. So just worth highlighting that to take that into account when you look at the margin impacts. Just a couple of sort of key drivers. This is a slide we've shown you before. This is our estimation of above or below pre-Covid trends on claiming. So you can see in the first wave, dramatic reduction below what we'd consider normal, then as the lockdown eased, you could see a little bit of catch up relatively benign than we had last year, the Delta/Omicron strain, again, reduction, and what you're seeing now is that we really haven't seen that much catch up. Now it's not to say it won't occur, but it's just highlighting again the difference between what's happened when we came out of Wave 1 versus out of the Delta versus Omicron. On our students and workers business, really a tremendous turnaround in this business. The workers are driving this. The workers have been growing dramatically. We've been doing very well in that segment. It's also very beneficial on the mix higher revenue, higher margin products. So that's been driving that. But also, if you look at the bottom right-hand side, you can see the students. So the students are standing to bounce back, and we are starting to see students returning and the understanding is that's across the industry. So it's good to see that the students are returning back into the country, and we see that as one of a tailwind for that business. So a good strong turnaround there. In terms of New Zealand, this is just a business that's performing tremendously for us. It's actually had a very strong result, but that strong result has been helped by a one-off. If you look about 4 lines down, we've got this DAC write-off credit -- so at the end of the year last year, we did write off some DAC. So that's now coming into a benefit because we don't have to amortize that back into the first half. So there's a $4.7 million benefit there. But having said that, it's still a very strong result from New Zealand. You'll also see that we are investing in New Zealand, and that's mainly in the Oasis program in that regard. Travel, Mark said falls in and out in love with travel. I think he's officially back in love. So that's good news. It's really been a terrific period for travel. I think there's been a lot of work done during cohort in order to get travel ready for the bounce back. We've done a lot of work on the product side in working through the products. We've done a lot of work also on the claims and automation side, although still a bit of work on that to be done. But you can see now that, that turnaround that $6.4 million UOP is actually the strongest ever half we've had since we entered the travel business. So again, a good strong result in travel driven by the increase in numbers and also there is some price rises in there as well. Just on capital management, again, in the accounts, we've provided the capital on the old version of the APRA standards, the new versions coming in on 1st of July this year. That's when we'll start reporting in the accounts, but we're providing these numbers for your benefit on our estimation. So the last time that we provided these numbers was at the time of the capital raise. We had a PCA ratio of 1.7. That's now increased up to 2x. So we're in a good, strong capital position in the fund and also the NIB group is in a good strong capital position, which is not surprising given that we raised some capital and we haven't spent all of that on the NDIS assets yet, but the group remains in a very healthy shape. On cash flow, probably the thing worth noting on this just the reduction in operating cash flow between the halves. We've seen this occur actually each time in the first half as we come out of waves, and that's pretty much because of the deferral. So we actually had very strong cash flows the last couple of halves, and now we are seeing those claims catch up, although not to normal levels or not to expected levels there. So fundamentally, that's driving. We also had a large tax payment because we didn't end up spending the DCL. So we were our paying installments on a lower estimate and so we had a tax catch-up in there and also the impact of the giveback. So those were the main things impacting operating cash, again, not particularly unusual. We'll go down. We've highlighted there just a few things for you. The business combination. So that's the acquisitions of Maple Plan and also the business that we acquired in New Zealand, OrbitProtect, which is the students and workers business over in New Zealand. And then you can see the proceeds from the issue of shares. And with that, I might hand back to Mark.

Thanks, Nick. I wonder if it's just worthwhile just pausing and reflecting on the member compensation. So just by way of background, we and the industry as a whole made a very strong commitment at the start of the pandemic not to profiteer. I prefer the word profiteer to profit because we start to run a business from COVID-19, and so the total value of our -- and partly an explanation behind the declining margin, our total compensation to members now, $175 million. So we certainly believe we're being true to that commitment. And of course, COVID-19, sadly, is not quite behind this set. So the further consequences of COVID-19, both in terms of claims inflation, provisioning and then whatever further compensation we may seem warranted. And the ACCC who are obviously overseeing this position, given the commitments we made to consumers. If you look at their annual report of private health insurance as at June last year, they calculated about $2.25 billion in missing claims, I think is the expression he use, and they noted that the industry has reported about $2.1 billion in compensation. So it's fairly clear that the industry is doing the right thing, and I'm hoping that the ACCC dates will get some comfort on the efforts, the genuine efforts we've made to recompense members for the loss of activity during COVID-19 Sorry, Ross, over to you.

All good, Mark. Thank you, Mark. So on the right of the slide, you'll see there our sustainability pillars is 5 of them, which are closely aligned to our strategy as a company, our purpose of your better health, as well as our values and in particular, our value to improve to make the world a better place. I won't talk through them all, but I will just call out a few key highlights from the first half of '23. So you'll see here that we are tracking incredibly well in terms of our members enrolled in health management programs, which are programs that are specifically targeted at certain diseases and conditions, for example, Healthy Weight for Life, which we've been using for osteoarthritis for people ahead of hip and knee surgery, and we are looking at rolling that program out further in the coming months for diabetes. If you also look there under our Innovate Reconciliation Action Plan. So we have launched that last year, and that was on the back of the foundation work that we did in terms of our reflect drop. And as Mark alluded to, at the opening our full support of the Uluru Statement from the Heart. We pleasingly have increased our engagement score, as Mark also mentioned, up by 3%, and the feedback from our employees has been that, that's slightly been around life at nib and the hybrid working environment that nib has rolled out on the back of COVID, but we continue to implement and people are really enjoying the flexibility and the support that the company has provided them to work from home. So for example, people are given $1,250 a year to help them work from home as well as a $300 setup cost. In terms of our foundation, the foundation has reached over 100,000 people in terms of their prevention partnerships and the prevention partnerships are innovative IT solutions aimed at health and aimed at younger Australians. So for example, we have partnered with the Black Dog Institute, who launched Sleep Ninja last week, and we've had, a long-standing relationship with Hello Sunday Morning, which is geared towards improving the relationship the young Australians have with alcohol. So the foundation continues to work very closely with us. You'll see there that we're also including sustainability metrics for the first time in the executive STIs, and more of that will come through with our remuneration report this year. Finally, we're also very mindful of the data that we hold and that we're custodians of very sensitive information, so we have refreshed our data governance framework. And that sits in a broader framework around our ethics framework and our risk management framework. In terms of what's ahead for the next half of the year, we'll continue to invest and focus on the health management programs and general well-being support programs. These are clearly a part of the P2P strategy and important part of our overarching strategy. In terms of natural environment, we will continue to maintain our neutral carbon status. We've also applied to the SBTi for [ SPT ] certification -- validation, rather, of our net zero targets; and we're hoping to receive news on that in the coming months. We're also proposing to conduct a further climate change scenario analysis. We undertook one in 2019, but given how fast and rapidly this space is moving, we believe it's quite timely to undertake a further survey. In terms of life at nib, we will continue to monitor, as Mark said, hybrid working, the way that we're working is quite new and innovative, and we want to ensure that our employees remain fully engaged and productive as we continue to implement that strategy. And just finally, in terms of modern slavery, we have launched our third modern slavery restatement. nib at the beginning was very involved in setting up a consortium, particularly in the PHI industry, and we remain very active in that space. And Mark, I might hand back to you.

Thanks, Ros. Okay. Well, look, I won't be too long-winded on business strategy because many of you have heard our plans before. Our bid strategy is what we call P2P, pay-to-partner. It sounds a bit cheesy, I know, but it really describes as I mentioned earlier, our intent to be more than just a payer of health care bills rather be a partner with our members and travelers and other customers in supporting their good health. Look, just a few call-outs on this slide. Probably about 6 or 7 years ago now, we started to view the world as a health care system rather than just a private health insurance system. So just taking Australia as an example, a $220 billion system rather than a $30 billion pure private health insurance business. That took us down the road of identifying where is the value, where is the expenditure in this $220 billion, where is the opportunity to capture value. Of course, the obvious one being a health insurer for several years was to differentiate the nib arhi products and support that with solid marketing and distribution as we had and a superior value proposition, a value proposition of being there to support your good health with insight and guidance and access to a much broader universe of health insurance products. You can even get -- become a member, a green pass member of NIB today without buying health insurance. So #1 priority remains to grow the category and grow our share of that category. There are additional value in pool, for example, Australian spend about $35 billion a year on out-of-pocket health care expenses. And here we are in the business of helping people finance that health care. How can we be playing a role in that particular value pool that delivering a range of bends of women's health care products. So for men, about hair loss or for women, the morning-after pill just to cite a couple of the products in their portfolio. We very much hope that, that particular business will capture value in that pool of out-of-pocket spending. But equally, we hope by -- it is a company that will introduce people to nib and, hopefully, a segue into ultimate PHI membership. And just to give that some definition, for every 1,000 net new members we acquire at the company, that creates about $2.5 million in value. So the loss-making of Midnight Health, you can think of in terms of its -- not only its potential to do well in that value pool, but it's potential to drive additional participation in our arhi-PHI business. The highlight of revenue capture is the work that Honeysuckle Health is doing. So of that $220 billion, about $100 billion of spend in hospital. Clearly, our efforts, our ambitions to keep people healthier and out of hospital or the substitute them the lower cost settings of care is good for our -- in terms of our purpose, but also in terms of the potential of Honeysuckle Health being able to capture some of that value. So what we save for a company and our members in terms of an avoidable unplanned hospital readmission is saved by nib, but it's also revenue captured by Honeysuckle Health, which most of you know is a joint venture we have with the Cigna corporation. Of course, the better we are at keeping people healthy and well and hopefully, out of hospital, except where that's warranted, hospitals, of course, very important partners in this entire value chain, but we need to keep people healthier transcends that, we'll reduce our loss ratio and also give us ability to price more competitively in the marketplace. So that's another driver of value. And finally, of that $220 billion in Australia, about $130 billion is funded by government in what is becoming an increasingly difficult fiscal position for government because of a growing dependency ratio across the nation. We do see a future where the private sector plays a greater role in delivering on those government programs in much the same way as you'll see in countries like the U.S.A., where the private sector effectively delivers most of Medicaid today and most of the Medicare -- and half of the American population is down in the private sector alternative called Medicare Advantage. Now look, I might be in a nursing home by the time we see it, but small steps are important and the kind of efforts and investments we're making in New Zealand with Te ORA and our support for Maori populations and the initiative we're taking currently in New South Wales in a rural city are really important in terms of proving our capability and competency to help government deliver on its own insurance programs. Just to give some additional flavor of that. We've got a little video, short video, I promise you to share, just highlighting how we see our future relationship with consumers beyond being purely a payer of the doctors and hospitals and dentists builds, as I've described. [Presentation]

This is a good example of how we're trying to make a real difference to the value proposition of being a member of nib or even a traveler or across even part of the NDIS through the application of technology and providing a more expansive value proposition for consumers. Okay. Look, I want to move on to nib Thrive. It's obviously a very significant development in the company. It is entirely consistent with our red queen racing philosophy, pardon the characterization. We've been looking at the NDIS for a number of years. We like the fact that it's a large growing market with this very strong social purpose. We like the fact that essentially, the planned management support coordination in the NDIS scheme is connecting the buyers and sellers of disability services just as we have connected buys and sellers of health care for 70 years. We like the fact that we have a strong and trusted brand that we have operational capabilities in the business to pay claims and support the NDIS participants. And we like the fact that the industry is still in the early stages of development, call of the college industry in some parts, if you like, and we see the opportunity for us, as we mentioned, when we raised the money we did to fund our entry into the sector, we see an opportunity for color consolidation. And as to do very well, very well in terms of the experience of participants, very well in terms of the experience of the important providers of disability services and very well in terms of our commercial objectives. So that's just a little bit of a background. Martin Adlington, who's been leading our efforts and doing tremendously well. We'll take you through a little bit more detail. You're there, Marty?

Yes. Thanks very much, and good morning to everyone. Thanks for the opportunity to provide an update on our NDIS strategy, which is progressing very strongly. Building, of course, from our successful capital raise back in the first half of '23 of some $158 million. Our first acquisition, the acquisition of a Melbourne-based plan management, Maple Plan, was completed in November. The business is on track and performing to expectations. But we're very pleased today to be also announcing that agreements have been signed to purchase 2 new plan management organizations, peak plan management, a Ballarat-based plan many with over 11,000 participants and Connect Plan Management, a Brisbane-based plan manager with over 4000 participants, which are both due to complete in this second half of FY '23. We do have some further acquisitions currently under quite active progression, some 10,000 participants in all, and if successful, by the end of FY '23, we do expect an nib Thrive participant base of some 33,000 participants. And of course, on track to manage the needs of those participants, some 50,000 of them by FY '25. Thanks, Mark.

Thanks, Marty. Okay. I'm sure there'll be some questions around that. Sufficient to say, as I've already said, we're very pleased with the start to this new adventure and very pleased with the earnings profile that we expect will follow. Okay. We'll finish off with a bit of an outlook. Look, we still feel constrained around giving guidance, given the vagaries of COVID-19 and how it's playing out in the form of claims. Look, we are seeing catch-up in lost activity during COVID. There's no question about that. The dilemma becomes to what extent does that catch up, add to existing volumes or simply push volumes down the pipeline into the future. So far, it's evident that it's more the latter phenomenon because the supply pipeline is only so large. But let's talk a little bit about arhi. Let's break it down a bit. We expect arhi to continue its momentum. Growth being as strong as I can recall it in some time. There are all sorts of theories around system growth that we've seen. Most likely, the largest factor is just the -- nobody celebrates this is, that the difficulty has been encountered in the public system and the delay is unelected surgery is improving the value proposition. But I also like to think the kind of initiatives and investments we're making is lifting our brand reputation and value proposition as well. Hospital claims will likely remain subdued for the reasons I've just mentioned. It's difficult for the system to accommodate too much catch-up at any given time, which means that, that catch-up that activity lost during the Delta and Omicron strain, they will still be playing out and catching up 3, 4, 5 years from now, which really raises some interesting questions around provisioning for that catch up, especially through the DCL. We will continue to move towards our net margin in arhi of 6% to 7% over the course of time, watching closely the recovery of profitability in other parts of the business and we make no apology for that. We think a more sustainable level of 6% to 7% and a fair result for consumers. We've been the third as part of our member compensation, as I touched upon earlier, we deferred this year's premium increase until September 2023. Look, there may be a case for further compensation. We just have to wait and see depending on how COVID continues to impact our claims experience. Unquestionably, our current premium growth levels are beyond what you'd expect will be a long run normal, and at some point, claims experience will most likely revert to some longer-term mean probably around 4%. We'll look to further expand on our P2P offerings within arhi to drive more growth. I mentioned Midnight Health earlier as being a segue to participation in PHI and high growth. New Zealand continues and will continue to go well. Strong growth, its growth rate is by almost 6% in 2022. I think that will continue. The work we're doing in New Zealand with the Maori communities through our -- Te ORA is very positive. We acquired the Kiwi Lives business, living life insurance business last year. That's adding to our value proposition. We now have this living benefits offered to complement our PHI offering. Nick mentioned, we've acquired OrbitProtect, which will add to our students and workers business in New Zealand. We're very positive about the symbiosis and synergy, if you like, between our Australian international workers and students business and our business in New Zealand. Travel is a highlight of this result. It's pretty much, we've had our best half ever. It's pretty much turned around completely, the loss-making on previous years. And just listening to Graham 'Skroo' Turner yesterday on the news, it seems that there's not going to be any abatement in travel, at least not in the near term. And so that all goes very well for our travel insurance business and its prospects are very strong. To our international workers and students businesses, which is pretty much reversed. The loss making of the last half, January was a record sales month for students, and with the government policy settings that are emerging, the increased emphasis and increased recognition on the need for foreign labor and the need for our tertiary institutes to reboot the competitive advantages that our tertiary education sector has in terms of time zone, COVID safety, being able to stay and work after a study will mean they will do very well in this post-COVID world. So we're very bullish about the prospect of both workers and students. In fact, at work is in the first half, its growth almost exceeded our high, still a bit the gave, but it's really been an amazing story with our dominance of the Pan Pacific workers scheme and other initiatives. And of course, the other big factor with students in particular, is the unwinding of the high loss ratios we experienced during COVID-19, mainly because of students -- simply because the students were unable to go home as they typically would for 3 or 4 months a year. So that concludes the presentation. Thank you for your time and attention and more than happy, as always, to field any questions. Nigel?

Nigel Pittaway here from Citi. First of all, just -- I mean, you have mentioned switching as one of the benefits you've had in terms of premium growth. I mean, obviously, the obvious question is, have you -- do you think you've picked up anything from fall out from a certain larger health insurer that had cyberattack, et cetera? And what have you seen in respect to that?

Look, it's hard -- well, we've seen a little bit. And equally, we saw a little bit from Bupa in their kerfuffle with [indiscernible]. And it's not necessarily always good switching because these are people who are self about the hospital. Although the lifetime profitability of the switches still tends to take care of that anti selection in the short term. But look, the history is that typically switching accounts for about half of our sales. It's been that way for a long time. We have historically been a net beneficiary from switching, as you know. I guess a good part of that story is if half its switching means half of it's new to category and new category is typically very attractive because of that first year waiting period and in fact, that you're just not recycling the same or folk. So to answer your question, there will be a little bit for Medibank Private. There will be a little bit from Bupa, but it doesn't explain the above system growth that we're experiencing.

Okay. Secondly, just a question on underlying operating profit. I mean when you did give the AGM guidance, you're up sort of 16.3% on for the 4 months to October. By December, that had fallen to 13.3%. So it suggests flat versus PCP in November and December. Is that all due to the accounting for the pricing deferrals? Or what else is going on in terms of more than ECL? So that was more in November, December...

Yes. The DCO remains, as you guys know, a highly subjective issue. Theoretically, it makes perfect sense in as much as we know, there has been activity loss that will return. If Jack's got that wretched knee at some point, he's going to have it replaced one would think. It's just a question of the timing. You can make a case to detail to run out another half dozen years. Now I don't think it will, of course, accounting standard, but it certainly is putting some noise into the system. Although, it's noise on the upside rather than the downside. Let's put it that way. I think the risk of it being understated is far less than it being overstated because it won't be precisely accurate at the end of the day.

Okay. So the DCL addition was basically more skewed towards the end of the half, is that what we're saying.

Yes. And also, I mean, traditionally, November is quite a large claiming month as well. So that's why we're sort of semi hesitant about month-on-month because we do have months where it can be a very large number of months where it can be low because of their large claiming months.

Okay. And then maybe just finally, I mean you've obviously said that hospital claims are still sort of behind. I mean are there any areas that have picked up in terms of being sort of back at close to pre-COVID levels? Or is it generally a comment that sort of applies evenly across the board in terms of all procedures, et cetera?

No, there is variation. There are some areas which we hope represent long-term efficiency gains. So I think in particular, rehab after major joint replacement. People are much more likely to have that rehab done outside of overnight hospital, and we think that's an efficiency game because there's huge variation in the extent of people staying in hospital after surgery. We're seeing lower levels of hospital admission for psychological conditions. People have sought alternatives to in hospital care there. We think that could be a long run efficiency. We've seen a decline in other respiratory conditions associated with COVID now because the same precautions we took around COVID have been positive for other respiratory conditions. Now whether or not that's long-term gain, only time would tell. Most of the other parts of the case mix are returning to pre-COVID levels, probably not quite there. It's only for the reason that it's mainly older and I say this with respect on 63. It's mainly older people who are hospitalized and it's mainly older people who are nervous about the ongoing risk of COVID infection. So to the extent that they can defer treatment, colonoscopies, but even major joint replacement, there seems to be a tendency to do that. So that's why we have to emphasize that, thankfully, COVID appears to be behind us, but still having a real consequence in the system, particularly for hospital workforces, which is the other supply side factor playing out here.

Siddharth Parameswaran from JPMorgan. A few questions, if I can. Firstly, just picking up on what Nigel asked around where claims are still low. You gave some comments there around areas where there maybe something more permanent; rehab, psych, and respiratory. Can you just comment on how much as a percentage of your hospital claims cost that actually is the reduction?

So well, I can, but at the top of my head. So a major joint replacement. Basically in the case mix, you've got hard conditions, a leading source of claims, major joint replacement, hips and knees. So to the extent that we can we can treat people outside the hospital for rehab and improve clinical outcomes, that's a major opportunity. Mental health, hospitalization for psychological is, I want to say, 5 or 6 down the track, but it's been growing rapidly in the past decade Unfortunately, for all the reasons we understand. But...

I just got to find a maybe final month whole...

I understand there's a lot there, but...

So there you go.

The reduction. How much is permanent and what is the current reduction...

Maybe that's... I think those -- look, I'm a back of envelope here that -- but if claims inflation has historically ran it's somewhere between 4% and 5%, I think these kind of improvements we might pull 50 bps off that's a guesstimate. They're not going to harvest the major costs associated with surgery is still the surgery rather than the rehab. Ultimately, where we do well is not only with the systemic efficiency improvements, which affect everybody. And bear in mind that when they are systemic, we also get the risk equalization benefit, but where will be the most effective in managing cost inflation and improving outcomes is around the kind of interventions we made with Honeysuckle Health. Keeping people out of hospitals through active programs like hospital support program saved serious dollars even after risk utilization.

So what I just would say is just look at the risk equalization as well because that's a big number. So we're sort of talking about lung and respiratory and so forth. But in fact, because the risk equalization pool has been or not increasing is greatly and in some cases, reducing. And for us, we've been paying less and less into the pool. That's actually been -- whether that becomes a permanent shift, that's one that I've really got my eye on. I mean I think that the last few halves, it's been $30 million to $35 million a half. That's a decent number.

Yes. I mean... But maybe just because the industry as a whole has seen a bit of claims, right? Is that...

That's the whole thing. Because the older cohorts are claiming less, everyone is seeing the benefit. But the difference is that the ones that take money out of the pool, they're seeing on the claims side. So if you ask the same question to a health fund with an older cohort, they would have an expanded benefit on the claims side, but they're beginning to reduce benefit on the risk equalization side. We're kind of the opposite. We see less of a benefit on the claims side and a bigger benefit on the risk equalization side.

I mean, Mark, you made the comment that you're seeing signs of a return to claims, but these figures don't really suggest that. I mean if you're saying that these permanent benefits are only 50 basis points, the claims trends that you're seeing here, you're giving a lot of money back. It still seems it's well below well below pre-COVID trends your own chart to show that. So just what...

Well, as I emphasized, of course, COVID is still having consequences on claims. But history on me knows that since World War II, we've spent GDP plus 2% more in our health care. So the idea that somehow health care spending is going to find this new trajectory of somewhere between 1% and 3% growth. I just don't think for a listing. Which means our challenge becomes can we manage that level of inflation? Can we price it in? And can we still grow the category at that rate of underlying inflation? And I think as we've demonstrated in the past, I go back to my early 20-year diagram, we're being able to do that. And a huge tailwind for the sector again, and I emphasize nobody celebrates the challenges faced by the public system. But there's, clearly, people just with private education, we see similar development. People see more value now in private health insurance compared to what they did pre-COVID, and I've always had a theory that PHI participation is probably less about affordability defined by price elasticity and more about income elasticity as we become wealthier and see more value in private health insurance people will we'll go to it. And so affordability in our think is a relative construct. It's about sure we need to manage prices and keep them as low as possible. But for us, the challenge is more about providing additional value through P2P and the kind of features that you've seen and services have been seen today.

Okay. Maybe...

What are you worried about let's just say, tomorrow, underlying inflation goes to 5%. Are you worried that we can't price that in and maintain...

The question was more -- is my question. My question was just how long is it going to stay at these lower levels?

Because here's kind of where next year this year is Melbourne...

Yes. I was just trying to get some feeling for what's going on...

And we ask ourselves that question constantly as the entire industry does but it's just so unpredictable. And so the best we can do is be alert to changing conditions and nimble enough to adjust. That's why we haven't -- our member compensation, for example, is being quite measured and prudent. We haven't preemptively made big announcements to give back money without some confidence that, that is appropriate given the circumstances, given the fact that we know there is a lot of activity, which hasn't occurred and will occur at some point.

Just my final question around these issues. Just that drifts back to that target range for 6% to 7% in arhi. How long do you think that will take? There seems to be a lot of discretion in how you can get there and how long you can get there. So how should we think about this trajectory back to that target level. Claims trends are still tracking well below. There's this given us guidance before that there may be volatility, particularly around givebacks and pressures around ensuring that there wasn't profit hearing from COVID, et cetera. So what's your thinking on that return to 6%...

Well, you're almost asking for guidance that said... And yes, I'd love to be able to give it. I think this -- given where we're at, this year will still be quite positive for arhi and those other PHI businesses in New Zealand, international workers and students Yes, let me leave it at that. Otherwise, I am at risk of giving some sort of guidance, which we're not -- we actually like to give guidance. We think it's important to market efficiency. But it's just not -- wouldn't be a responsible thing to do to talk too specifically about high margins in 24, 25, 26 because we just don't know...

[Operator Instructions] Our first question comes from the line of Vanessa Thomson of Jefferies.

I just wanted to perhaps continue on with some of those earlier things. I just wondered about the direct effect of inflation for nib. I mean we speak about claims inflation, but I was also thinking about hospital contracts and the cost of delivering home services and all that kind of stuff. I wonder if you could give us some color on that.

Yes. It's a good question, Vanessa. Look, first of all, let me say, we have a lot of empathy and sympathy for hospitals have had a really rough time during COVID-19. There's no question about that. We see our relationship with hospitals is not adversarial for a moment rather than symbiotic. We're partners in this important sector. So we are open to negotiations with hospitals, which have regard for their plight. And hopefully, beyond COVID normal reception is resumed, but with some efficiency improvements, as I've already touched upon and the hospitals know this, too. Worldwide hospitals moving outside of their own hospital gate, and at metaphor recognizing that so much health care prevention and treatment is shifting to nonhospital settings. Look, we can't talk deliberately about our actual contract negotiations with the major groups. Suffice to say, they're fair and productive, and to the extent that, that any increase in indexation with hospital needs are increased to account for their circumstances. Well, again, we'll manage that, and we'll price it in. I don't see any resurgence in pressures on hospitals or resurgence and indexation rates expected of hospitals to impact our ability to grow the sector. And as I've said a few times this morning, our share of that sector.

I had a question also just about tax -- the effective tax rate was up a little in the half, and I know that Nick spoke about an impact from the DCL assumptions. I think it was. I just wondered what we should be expecting in the second half.

Well, second half, it will still be elevated because it's been driven by the non-deductibility of the Midnight Health losses. So again, they were deductible in the PCP because they're a share of associate. This time, they're not deductible because they're not part of the tax group, and we need to wait until the profitability of the business.

And then my last question was just on the NDIS strategy. And I know you've flagged. You've got some acquisitions happening. I wondered, it seemed to focus on plan management, and I know you've spoken in the past of the coordination, I wondered whether that was part of the future strategy or the it would be determined?

Yes. No, not very much. So the focus is certainly on planned management amongst the existing businesses we've acquired, although there is some support coordination in there. We see what we offer in the marketplace in the future, and we're going to have to navigate our way to this outcome. We want to be there helping people design their plan. We want to then help them fulfill their plan by contracting with the various providers of support come service and to manage that plan for managing the contract with providers managing their budget. So that broader vision for our role in the NDIS system suggests that support coordination needs to be part of our arsenal of services. But right now, it's very much through the acquisition, it's very much focused on plan management, but we have a broader view as to where we can add value for participants and suppliers and, of course, the funders being government.

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

Maybe just starting on the arhi business. Just keen to get a sense of what drove quite strong management expense cost growth relative to PCP. I think it was about $19 million or 14%.

That was around investments. So mainly investment in IT, in P2P and also in clinical governance. So I think we highlighted the investments that we're making, but broadly, those are the main areas.

Are there any one-off costs sort of associated within that number? Or sort of is this more a recurring cost base we should think about moving forward?

No, no. There's not a lot of recurring. It's been on investments. So it will be a reduction in P2P investments.

Okay. And sort of any clarity there for how we should think about EMEA on a go-forward basis?

Well, one thing you should always think about now No, I do, is that in terms of pure marketing acquisition, it remains the case that the NPV of a new policy holder or a policy holder remains far ahead, it remains very positive NPV. In other words, the lifetime value of an arhi policyholder, I think I've stayed it already tonight. -- somewhere around $2,500 a cost of acquisition -- the cost of acquisition is about 1/4 of that. So to the extent that we'll continue to invest in organic growth, the business case is very powerful. The only thing we have to watch is the optics of having too high NPR and potentially the impact that has on pricing and affordability. Although risk equalization tends to level out the pricing right across the sector for reasons, most of you understand. So we've got no hesitation on spending more on organic growth but within any of the businesses really, but particularly arhi.

And the second question, sort of on the margin, the benefit you're seeing at the industry level from risk equalization coming through to you. Are you taking account of any of that benefit with in prospective pricing? You sort of assuming some of the lack of return of activity, particularly at all the age groups is as structural?

So Kieren, you're saying there's a risk that it bounces back and now risk equalization liability bounces back... Is that the question?

Well, I mean there's a risk that I'm just asking. Well, the question is more on your pricing. You've come through with a low industry rate rise for '23, whether or not you're allowing for some of that risk equalization benefit to be a bit more ongoing?

Well, there'll be -- just as we have discussed today, COVID-19 and its impact on claims is going to linger. 12 months, 2 years, 3 years, nobody knows for sure. And how long it takes for this catch-up to play out. Nobody knows. I think we do need to be alert to the fact that just like we have quickly benefited from risk globalization, it could turn the other way, and we're alert to that risk and our pricing makes full contemplation of that risk. And as I said earlier, we just need to be nimble and able to respond to those. But look, the history suggests that if you go back 20 years, there was 1 year there, we in the industry virtually -- well, I think we had 0 increases. It's not long after lifetime cover, and the industry got it wrong, and we recovered margins quickly. Government accepted the position. We now have APRA, who obviously are keen to ensure that profitability levels in the industry is sustainable and support growth. So look, anything that comes along such as a rebound in risk equalization we deal with, and it may be a factor in bringing our net margin next year or the year after year after that back within our target level.

Finally, just on the margin. Can I just ask the net COVID benefit, obviously, with travel and iihi having now pretty much recovered. Any further sort of cover benefits, that will they purely be recycled fully into policyholder givebacks? I know, obviously, you've been out to 5 months to [ Kearl ], but sort of on an ongoing basis from here, should we think about COVID benefits that color returned?

I think there's a range of factors on that one. That's a difficult one to kind of answer yes or no to. Yes. I think the expectations around covering compensation are an issue for arhi rather than those adjacencies. The health and...

Probably not travel.

Sorry, just to be clear on that. So that slide on sort of earnings asymmetry you kind of put up before showing travel and have rebounded. I know during COVID you were sort of holding on to some of the benefits because of weaker results in those 2 divisions. I was under the assumption that the lens being applied was at a group level from sort of whether or not you should get any claims benefit from COVID. But with those 2 divisions now back at pre-COVID levels. I guess the question is, is there any need to -- within arhi or back and you...

Thanks, Kieren. As I said, it's an ongoing thing that you're going to review across the course of the next year -- but to give you one point of clarity, it doesn't include travel. Or New Zealand.

Sorry, one other question on MDI. Can you just confirm out of sort of what you raised in capital through last year, I think it was $158 million. After the further acquisitions announced to date and in the pipe for this half, is that to see that capital fully deployed? Or is there sort of further deals still to be done into the 24 year? Just trying to get a sense of the timing.

It does depend on the timing of acquisitions, but we would be able to on our current runway, if they all came off, we'd be able to deploy all of that capital. But that does depend on things closing.

Okay. And any sort of rough is around the EBITDA margin on average across those businesses? I think you gave us Maple Plan at 46% in the '22 year.

Yes. I think we've talked before about we sustainable margin is kind of in that 35% to 40%. At the moment, the larger managers do generate above that. So again, that's an early-stage sector. So we'll see how that pans out. But yes, I mean the Maple Plan was at 46%, and the larger ones can generate above 40 to smaller ones a little -- well, in some cases, quite a bit less, but we'd see it sort of maybe up towards that 40%.

[Operator Instructions] At this time, I would now like to turn it back to management for closing remarks.

We've got a question. It's Sid.

Just on iihi. Just if you could just comment on just where we are in the bounce back in terms of the earnings trajectory. We've had lots of different comments in the last few halves around competition being in the sector that margin would drop I think it was around 8% net margin. And then obviously, there was COVID. There's a lot that's gone on in that division. Just where are we now? People are traveling again. You get some of that pickup in claims that we saw before presumably is no longer there. Is this current level sustainable? Or can it go higher? Or is that early completion competition still relevant?

Yes. Well, we can buy workers and students for post information to market sensitive. Look, workers is in rude shape. And it's kind of profitability is going to accelerate. I expect. You read the papers as much as I do. I think we're going to have almost an insatiable demand for further working age immigrants and even the Pacific Labor schemes again going to continue in popularity. So where that gets to -- I'm not quite sure we're probably R&D still 25% of the market in that category. So there's plenty of opportunity of growth. Now it's complementing nicely our GU business, our corporate channel in arhi corporations typically by iihi products. The students are growing again. We probably lost 30% of our stock during '19. There was a point there work has almost went past students in terms of the stock of policyholders, but it didn't happen in our students is restating. It's significant. It's in the combined business. The loss ratios improved materially for reasons we understand. Yes, I think it would be reasonable to expect the kind of margins that we enjoyed in the business pre COVID-19. So I'm not -- what do we make? These businesses combined contributed what Nick in -- I want to say, about $30 million in fiscal '21.

Not '21.

Not '21 was that a COVID year... Getting lost in the COVID years. Look, we'll be back to where we were pre-COVID, if not this year, I expect certainly net by next year.

Maybe just a similar comment on travel. You mentioned that the volumes bounce back to pre-COVID levels. Just how, are we now at more normal levels, just the outlook for...

Well, we're racing towards more normal levels. There is your adjective. Again, given what we're seeing, this is the best half we've had. I'd certainly like to think we're going to do better than what we were pre-COVID on the back of that growth and momentum. You know we have a better underwriting arrangement in place in the business today. There's been ups and downs in the business, as Nick ended. But right now, having had my moments over the years of travel, I've never been so positive. And the sector is just growing, and we've got such a strong brand, the World Nomads brand, Trouble Insurance Direct and our own nib brands. Yes, the outlook is positive. And that gives -- that puts us in a fortunate position to be able to, as I say, and we've said this a million times, comfortably bring back our arhi margins to target without compromising growth and increased earnings in the business.

Our next question comes from the line of Andrew Buncombe of Macquarie.

The first one is very quick. Just in relation to the arhi claims experience slide near the front of the deck. Just interested in the scale of that horizontal access. Is that to December or January? Just some clarity there would be good, please.

As in the last right-hand part of the slide. Yes, that's December.

Okay. What did that look like in January and so far in Feb?

Can't really say...

And the December 31 results.

Yes.

Yes.

Look, Andrew... January is typically a subdued month for activity because doctors like I was at off scenes forth.

Sure. And then my other question, given some of your policyholder growth is coming from difficult circumstances for peers, is there any concern that some of those switches are more likely to claim in the short term? And just how are you screening for that to make sure that you want to adversely selected against?

Andrew, I mentioned earlier that the difficulties encountered by both Medibank Private and Bupa, I think have had a very modest impact on our bug system growth. And interesting that there's always a risk in these circumstances of any selection because these people who switch are typically worried because their health fund has gone out of contract and they're planning to go to hospital. But our latest analysis suggests that why that is a factor that any selection factor. If they stay, the lifetime value more than makes up for that immediate any selection event. So we're not as worried about people switching even though they have an event in mind.

Our next question comes from the line of Doron Kur of Credit Suisse.

Just on the net margin and sorry to chat on the claims again. But would it be just the delta from last half to this half looked quite big. Would it be fair to assume that going forward, you wouldn't expect it to be as quick just because some of what we saw here was the benefit in prior period from lockdowns and if that gets left pronounced on a comparative basis, perhaps you wouldn't see that same size of margin contraction?

I think the impacts on margin are sort of dramatic because of the impacts of giveback and DCL and so forth. So kind of hard to on a half-by-half basis, to comment on that. It will depend on what happens to the DCL this half and what happens to give back this half.

Yes. Again, we're bordering on a risk of guidance here. Look, I think the big picture view is that claims still remain benign. And there's no sign of that changing anytime soon. For all the reasons we have discussed today, there's a lot of noise in terms of margin comparisons, given DCL, givebacks, et cetera. But I think you can rest assured that the arhi business and margins are in as good a shape as they've ever been, at the levels they are. And as authentic as we are in our determination to take them back to what we regard as a more sustainable rate of 6% to 7%. We just can't say whether that's the second fiscal half; or fiscal '24; or even fiscal '25, [ whether you like to think ] by '25. We're closer to where we are today, particularly the pricing increases are very low. The pricing increases of the last 2 pricing periods start to play out. I'm not losing any sleep over it.

At this time, I would now like to turn it back to management for closing remarks.

Okay. Well, look, thanks again for your time today. It's been a good discussion. I just like to finish off, I know we like to think about the second half and fiscal '24 and whatnot. But just to reassure you all about determination to be different to what we even are today. This P2P strategy we have is very real. We're making the investments to support it. I hope you saw a glimpse of that when you saw a glimpse of that in a video. The work we're doing, as small as it may seem, around population health which Ros spoke about, our support for Maori population, is setting us up for a much bigger vision for we and maybe even the rest of the industry to play a role in the funding and servicing of our entire health care system. And the opportunities around NDIS and even travel as well are now quite prodigious, so we're very confident and positive about the future. And I expect, in 6 months time or whenever it is we're sitting here reporting full year results, we'll be every bit as positive as we have been in this first half based upon the full year results. So thank you.