nib holdings limited (NHF) Earnings Call Transcript & Summary

Good morning, and thank you for joining today's presentation. My name is Amber Jackson, and I'm the Head of Investor Relations for nib. I'm speaking to you today from nib's Newcastle office, which is on Awabakal land. nib acknowledges aboriginal and Torres Strait Islander peoples as the first Australians and pays respects to elders past and present across all the lands on which we operate. We acknowledge the rich and meaningful contribution they make to life and culture in Australia, and we aim to be a partner in improving the quality of life and health of aboriginal and Torres Strait Islander peoples. The purpose of today's presentation is to provide an overview of the impact of the new accounting standard, AASB 17, which nib will implement for group reporting from 1 July 2023. The first reporting period under this standard will be the FY '24 interim results. I would like to note that we will not be providing any trading update or indications of our FY '23 result, which is yet to be finalized. Therefore, we will not be answering any questions in relation to the FY '23 result. Nick Freeman, Group Chief Financial Officer; and Ciara Wasley, Head of Finance for Financial Control and Shared Services are here today to take you through the presentation, and we'll respond to any questions at the end. I will now hand over to Nick Freeman. Nick, please go ahead.

Thanks very much, Amber, and welcome to everyone. I think we've got 30 or 40 people on the line. So thank you very much for joining us. We just thought we'd schedule this meeting so to separate really what are accounting impacts from the full year result, which we'll report later in August. And it just looked to us like there was quite a busy day in August when we're reporting. So just an opportunity to focus on the result in August and to let you know about what impacts we're seeing in regard to AASB 17. We've lodged the presentation on the ASX website and also ours, and so I expect that a lot of you will have already seen this. So I'll go through relatively quickly and then we can go to questions. But key messages. So I think that we all know that a new insurance accounting standard is commencing from next year or this year, I should say now, we're in the financial year. Amber has already said that we'll be implementing it on 1 July for the first half of next year. Some of the key messages. So no impact on cash flow and no material impact to capital. That's a really important aspect to call out. The main impacts we do want to call out is just around the timing for recognition of COVID-related adjustments. And by those, we're really talking about the accruals for the price increase deferrals that the industry has done. And also, we have done and any DCL that may be residual at 30 June. So again, going through those, so in terms of the DCL, any residual DCL at 30 June, as I think most of you are already aware, will shift to equity. It won't remain in the provisions area or the liabilities area and the balance sheet, and so then won't be free to offset, if I could put it, any catch-up in terms of a P&L impact. However, because it shifts to equity from a capital perspective, there will be an additional capital that will then offset any losses that occur as a result of the increase in claims if a catch-up should occur. In terms of the price increase deferral, this is probably the main one. We've got a slide that will take you through it. But essentially, reported revenue will be $26.6 million lower in FY '24, and that's not an impact that's actually new. That's actually just a difference in the timing of recognition of when the revenue was occur. So we've announced our price increase deferral until 1 October that under AASB 1023 has -- will have an accrual for it at 30 June. That 30 June accrual will not be retained on 1 July under AASB 17. So we'll revert to the new accounting stand there. And in that regard, we'll have to recognize the amount of revenue or a reduction in revenue as it's incurred across July, August, September. Important again to understand that any impact is offset by an increase in the opening equity. So again, that accrual will go down into equity and will increase equity. So just that P&L versus equity mismatch occurring. If you look at the total cumulative UOP across FY 2024, then there's no material difference. And the reason we say material is there is actually no difference in regard to the price increase deferral, but there's some other smaller elements that will have a small effect but not material. Again, then going forward into FY '25, once the COVID-related adjustments are no longer there, we're not expecting any material differences between UOP and NPAT between the 2 accounting standards. The final thing just to highlight is that we're not intending to treat the DAC differently. So we're going to be retaining a DAC, and so that will occur under AASB 17. You have the ability to continue it. You could also not continue it as well, and then any write-off would have occurred to equity. We've elected to retain it, given the positioning our business that we have in regard to third-party distribution and also in regard to our focus on lifetime value of customers. We think that there's a better reflection in our accounts between having a DAC and how we look at customer acquisition. So I might then continue on. Again, a quick summary. A lot of this is repetitive, so I'll go through this relatively quickly. So we've talked about the price increase deferral. We've told you before that the impact of the price increase deferral was $35.5 million. We would normally have recognized that all in FY '23 under 1023, which we will be in our accounts. And so that will manifest itself in terms of 3 months that we'll have a reduction in revenue in the last quarter of the FY '23 year and then would accrue for the coming months apart from that. We've therefore now going to look at it over the new concept of the contract boundary, which will mean that we've got to spread that recognition between FY '23 and FY '24. We are using the PAA approach. And again, a simplified PAA for health, life and living benefits in New Zealand. I've just talked about we're intending to retain the DAC, and so there's no change there. Again, the DCL, they're not recognized on the 1st of July. So anything at 30 June will transition down to equity. We're not expecting a material difference between the risk adjustment concept under AASB 17 and the risk margin under 1023. And then in the onerous contracts, we're not anticipating a recognition of any onerous contracts on implementation. But as you know, there's a continuation of the need to review facts and circumstances on an ongoing basis. Now if I could just jump to the next slide, and we'll take you through the price increase deferral. We've allowed that. We expect that you'll sort of have a look at this in your own time. So we'll go through, and what we've done is we've set out the -- how it's accounted for under 1023 and 10 -- and AASB 17. I might just go to the first part, the first point that we're looking to make, if we could, Amber. So the first point is that there's no change to cash flow between the two. So you can see that the cash flow impact in FY '23 is the same under 1023 and 17, and it's also the same in FY '24. Going to the next page, Amber. Again, there's the same impact in total across the 2 years on UOP and NPAT under the two. So there's the $35.5 million before tax and the $24.8 million after tax. So again, no impact between the two. The final impact on the balance sheet will be the same. So again, when we look at what the closing equity on the impact on the balance sheet, it will be a negative $24.8 million because we are reducing our revenue by after-tax $24.8 million. So the final impact on the balance sheet, also the same. And then the last one. So really, this comes to the number bit is the difference in recognition and what you can see in the green, the darker green box is that under 1023, we recognized $35.5 million all in FY '23 and nothing in FY '24. Under AASB 17, we would have recognized $8.9 million in FY '23, and then we'll recognize the $26.6 million in FY '24. So again, just coming back, no cash flow. The NPAT and UOP, different. UOP is the same, but there's that difference in the recognition. What I might do now is I might just -- I think we've already covered this, so I'll just quickly sort of go through. I think we've talked about that, so I will leave that one for you to read at your own leisure. We've just -- really, it just says what we've already covered in the numbers. And I might now hand across to Ciara to talk about some of the accounting positions and accounting impacts.

Thanks, Nick. So as Nick outlined, we are going to be using the premium allocation approach, the simplified method for both Australia and New Zealand. So we have determined that the Australian health insurance and the nib travel contracts are eligible for the PAA. Under the PAA, a contract boundary must not extend beyond 12 months. As a result, we have determined the contract boundary for all our arhi members to be defined as the pricing year. So beginning 1 April and ending on the 31st of March. For New Zealand, the insurance contracts for both NZ health and life and living benefits are eligible for the PAA methodology. Given the complexity of the life and living benefits business, the treatment of the reinsurance arrangements is still being finalized with the intention to also apply the simplified PAA methodology. There is not expected to be a material difference for the nib Group between our PAA method and GMM. New Zealand's contract boundary is a rolling 12-month contract boundary beginning from the contract start date. We can move to the next slide. Thanks. Nick also outlined that we are not proposing to change the treatment of our acquisition costs. So under AASB 17, when using the PAA method, you can choose to either expense upfront acquisition costs if your coverage period is no more than 1 year. However, we have chosen to continue to defer recognition of upfront commissions to the balance sheet and amortize them over the life of the policy. So for our different businesses, the expected amortization over the life of the policy will remain 5 years for Australian Residents Health Insurance, 18 months for our international students health insurance and 15 years for NZ health. Our decision is based on our focus on the lifetime value of the policy and our use of brokers and white label partnerships. There is no impact to capital by continuing to defer acquisition costs as they are 100% deducted in the PCA calculations. We'll now move to questions and answers. Apologies. Nick, I'll send it back to you to do a summary.

No problem. Thanks, Ciara. So in summary, really what we're trying to say is that in total, there hasn't been an impact on or a material impact on underlying operating profit against those years. The only impact has been in regard to those COVID-related items of the DCL and the price deferral accounting. We've talked to you about how they'll adjust and especially on the price deferral around how between the FY '23 and FY '24 year they are the same impacts. From FY '25, no material difference between UOP and NPAT between the 2 accounting standards. No impact on cash flow. Closing equity position will be the same under both accounting standards. No material change to the PCA multiple or our gearing ratio and so forth. So really, the message here is just to let you know of those one-off transition impacts that are going to come through into FY '24. To highlight, again, no material differences between the standards when looked over across multiple years and also the cash position remains the same. So with that, thank you, everyone, very much and go to questions and answers.

[Operator Instructions] Our first question comes from the line of Kieren Chidgey.

Just one question on the DAC policy. If we are using the PAA method and you've got a 1 year contract boundary, I'm just interested in sort of the optionality you've got of defer -- or choosing the deferral period and sort of how you think different insurers across the market are approaching that decision.

I'll start, Kieren, in terms of the technicals, in terms of what other people may be doing across the market. I think we'll leave them to advise of their own situations. From our perspective, given our distribution channels and given our focus on lifetime value, we thought that it made the most sense for us to retain the position. Other insurers may have a different position as well on the accounting standard allows for both. Ciara, you might like to expand in terms of the optionality within the standard.

Yes. So paragraph 28 of the standard outlines that asset for insurance acquisition cash flows can be recognized. As we've outlined in our presentation, when you do -- where you are able to use the PAA method and you do have a coverage period of no more than 1 year, under paragraph 59a, you do have the option of either expensing those commissions upfront or choosing to capitalize and amortize those. And we have chosen to continue to capitalize and amortize for the reasons that Nick has outlined.

Okay. That's great. And just to be clear then, secondly, on the accounting, obviously, your FY '23 is still under 1023, so we'll see the premium deferral booked sort of as a bigger number. And then in '24, sort of you're swapping, so you've kind of had the negative impact again.

Yes. That's why it's offset by an increase in equity. And one of the reasons we decided to have this is because we know the positions, we're going to have to disclose something in our accounts. But what we have to disclose is our opening balance sheet as at FY '22. So it's -- look, when I looked at it, it sort of was a little confusing. So that's the way that I'm looking at it, Kieren, is if you think that you had an accrual there at 30 June, it essentially becomes equity at 1st of July.

Okay. And if the detail...

Ciara, why don't you provide [indiscernible]?

No, you're completely right, Nick. We will be having...

Okay. That's good.

We'll be disclosing our opening balance sheet, and we've taken you through the impact of what it will have in FY '23 and '24. But we also had a price deferral the year before, so you're going to see that impact flowing through the opening balance sheet position.

Okay. And just finally, the DCL, that doesn't -- I mean, obviously moves into equity, as you've said. And then how does that actually sort of change on a go-forward basis based on claims experience?

I mean to the extent that there's a residual there, again, it's the same kind of treatment, is that will move down to equity on the 1st of July and any loss in profitability that may occur if catch-up occurs would then -- it will manifest itself in a reduction in profit if the catch-up occurs, but it won't manifest itself in a reduction in equity against where it would have been under 1023 because you're already starting with a higher equity balance.

Okay. And is the intention to somehow release some of that equity back to policyholders on a go-forward basis, if not required?

That's beyond the scope. Let's talk about that later in August.

And our next question comes from the line of Siddharth Parameswaran with JPMorgan.

Just a few questions, if I can. So possibly, a similar question to what Kieren was asking. I just want to understand, just given that there's a promise not to profit from COVID, I just want to be clear on exactly what will happen if claims remain lower than your assumptions on a go-forward basis. And you give that back once again through a premium deferral, but you also start giving back the DCLs because they set aside in cases of bounce back in claims and at some stage, if there isn't. I just wanted to understand how that will hit the P&L. Will there then be a drag on the P&L if you are to release both those things together?

Well, I think if you -- if we take the two positions, so they're not profiting from COVID phase, is that we're aware of our commitments, and our intent is to uphold those commitments. So that's as much as I'll say on not profiting from COVID, again, because I feel that sort of meanders its way into the FY '23 result. But in terms of any residual DCL is that, again, the way that I'm looking at it is that any residual DCL at 30 June will become equity on the 1st of July. So between 30th of June and the 1st of July, your equity balance will increase. But if there's a claim to catch up, which the DCL would normally have offset in the P&L, it's now no longer available to offset in the P&L, so you'll have a lower profitability. It's not like an asset revaluation reserve where you could release it back out into P&L and offset the two and the P&L would be kept whole. You essentially got a reduction in profit being caused by any catch-up if that occurs, being offset by a higher equity balance on the 1st of July.

I'm not sure I understand. So I mean just to clarify my question. The DCL is there in case there's a bounce back in claims. That's the purpose of it. And you have made a promise not to profit from COVID, and that's why the DCL is there. And I understand that it's going to change from a liability to now -- I mean it will become aligning on owner's equity on an after-tax basis, but that was the purpose of what it was there for. If you are -- and I presume it was there with your logic of not profiting from COVID. So I just want to understand if it is released. I mean just a question on signature -- profit signature. Was my question -- was my interpretation correct? I'm not sure I understand whether you're saying it is or it isn't.