nib holdings limited (NHF) Earnings Call Transcript & Summary

[Presentation] Good morning, everybody. I think that video, I hope you agree, neatly captures much of what we're on about as a company today, and that is a integrated end-to-end experience and total solution for peoples' health care needs, which, of course, features private health insurance, but contains so much more. I want to start this morning by acknowledging, we're presenting today from Newcastle, the traditional lands of Awabakal people and the Worimi people, just over the harbor there, and we acknowledge their stewardship of the land for literally tens and tens of thousands of years and pay respect to their elders, past and present. So, normal approach today. I'll start off with a brief overview. Nick will go on some of the more detailed financial analysis. Ros will follow with her report on sustainability and related matters, and I'll come back towards the end and talk a -- look a little bit more forward in terms of our business strategy, what -- again, what we're trying to do with our P2P strategy and finish with an outlook, but allowing you to draw your own conclusions. So, a lot of slides here this morning. We won't go through every one, of course. There's simply too many, but try and highlight some of the key and more salient points. This is our purpose today, redefining ourselves as not just somebody who's here for your financial protection and security and access to private hospitals. That will remain important in the future, but as I started off by describing this morning, being here to help you stay healthy and well in the first place and provide you with a much greater universe of healthcare products and services. And how you stitch that all together into the seamless experience I mentioned, is one of the great challenges of the company. We were becoming more and more accustomed to talking about purpose, not that it's new to the company, but making it more a highlight in our narrative because that's why we're here, and we acknowledge measuring purposes is problematic. I think [ Microsoft's ] perfect purpose is helping people and organizations achieve everything they need to achieve and making the world a better place. I'm not sure how you measure that being -- and certainly try and focus on some of the outcomes that are consistent with this -- with that vision. Again, we're working methodically through what's the best way to measure our progress or lack thereof. We've landed on these 5 measures. We can talk more about this in the future. Today is not about going through all of this. Maybe if I just highlight that one in the middle there, at the top ,around our Hospital Support Program which has been delivered by Honeysuckle Health, [ where ] almost 60% of participants reported that they've achieved their health goals as a result of the kind of support we're delivering them mainly through nurse-based telephonic service. And as we've previously mentioned, we've reduced the rate of unplanned hospital admission by almost 30% since program first kicked off just a couple of years ago. So, as company, very focused on our purpose and very determined to ensure that everyone in the company, the 2000 people or so we have, are aware of that purpose, and as we hope our stakeholders at. Lots to highlight in these results. Our core Australian residents health insurance business, what [ we're ] affectionately known as arhi, had [ another ] fantastic year, growing more than double what we expect will be the industry average. The net margin was strong in the business. It's moving back towards our target of 6% to 7%. We think that is a more sustainable target to aspire to. I think it was 8.9% last year, down from 10.2% previous year, and Nick will talk more about that. We paid a lot of money out in claims notwithstanding COVID and the compensation we delivered to our members. Claims totals $2.2 billion, up 6.6% on the previous year. Our international insurance for workers and students roared back to life last year, grew 15.7%, and most importantly, with our travel business sharply reversed the loss making of the previous 2 years, which I think Nick amounted to what $80 million or thereabout. So it's been quite a dramatic turnaround in the fortunes of particularly international students and travel. And our international workers business continues the power run, driven by some major thematics and government initiatives such as the Pacific Labor's employment scheme. Another strong result in New Zealand, fairly typical of New Zealand. It just continues its steady growth and progress as company -- travel recorded its largest gross written premium revenue in its history. And certainly since our ownership and underlying profitability, obviously, it's returning on the back of travel [ revenge ]. NIB Thrive is going strongly. We'll talk more about that further on, as we will our Payer to Payer strategy and the ecosystem. And look, attribution, as I've dated here, is difficult. If you ask yourself, well, why is NIB continuing to grow at such a rate compared to the industry average, no doubt, the offering we have in the marketplace today, our Payer to Payer strategy and ecosystem is having some impact. Honeysuckle Health, likewise, continues to gather momentum and support our membership, but also other people and other sectors of the insurance industry. And only in June, nib was displaced as the largest client measured by revenue in that month by the general insurers and the support that Honeysuckle Health is providing around injury support management. The group Net Promoter Score was very positive, up 4%. We had great employee engagement last year, and that was particularly important, given the challenges associated with COVID in our own, what we believe progressive approach to hybrid working. And of course, we're now in a very strong capital position, and Nick will talk more about that further on. Again, just some headline numbers here. We'll go through this in more detail as we progress this morning. And, Nick?

[ All right ]. Thanks very much, Mark. Go through a few of these quite quickly, and I'm sure there'll be the questions at the end. So we might dip through these. So a few key things in the overall group result. Good, strong revenue growth. We've given you the growth rate adjusted for givebacks. They're obviously givebacks in both years. And also on the claims, you'll see that we did release the entire DCL. I think the whole industry has been reducing -- from our perspective, we looked at it and tried to come up with the reasons why the DCL should be retained, and on balance released the DCL. In terms of underwriting expenses, they have increased, and we acknowledged they've increased to some degree. There's investment in marketing and also IT capability. But there's also, we've highlighted, an almost $15 million of asset impairments, mainly around software, but also building leases, as well as we've moved to our distributed work strategy. You can see, again, the net income and expense, very, very large, or other income and expense, very, very large increases, and that's the travel rebound. But just want to also highlight, and we have in the investor pack -- let you know what the Midnight Health impact is, because we now consolidate Midnight Health fully into our results and then it comes out as -- or some comes out as a minority interest. So just that's one to look to. Quickly on the finance costs, is increase, which has occurred across the reporting season. No different to us in regard to the base rates and then the effective tax rate, is because currently, we're not deducting the Midnight Health losses given the pattern, but we would expect to be able to do so as it becomes profitable in the future. If I go to the next slide. We give you this slide, or we started giving you this slide at the start of COVID to try and give you some indication. This will probably be the last time we do. We'll replace it with something else because I just need to highlight to everyone that the base of this slide is back what we thought would occur in February 2020. So it's starting to become quite dated. But directionally, it still kind of works, and I think is still helpful. So the first bit I'd like to draw your attention to is the policyholder growth and then the product and scale mix, which are both really positive numbers. So good, strong policy growth and also quite limited downgrading. So that's a positive. Then as we come into the OSC development and the rate, just unpack this a little bit. In hindsight, it looked like our OSC had been a little bit low, both in June last year and also December this year. And so, there's a bit of movement in the OSC this year. A reasonable increase, but part of that is around some of the historical claims development that's occurred. And if you look at the rate variances, again, it looks like it's a negative rate variance, but you've got to see that in light of the COVID savings, which actually occurred over the 3 years. So back in 2020 we had a view on where rates would be and where claims would be and so forth. And of course, that's really quite substantially different now. Industry risk equalization, or risk equalization continues to assist us, and we're seeing that sort of flatten out a little and then you can see the net COVID impacts coming to a relatively small number. So happy to answer any questions as they come through in the afternoon. But again, really -- what I just really wanted to highlight is, firstly, the impact of the growth and the downgrading, and then just letting you know about the rate variances that, again, sort of, if you take into account the COVID savings. On the next page, please. We highlighted this at the half, and again, it's followed through for the full year, and that's really that we are seeing the arhi net margin come down towards its target levels. We have guided that, that will continue to do so over time. But replacing that are the substantial increased earnings in the other developed adjacencies, and you can see where Mark is talking about how much travel -- and the international students and workers have come back. Just highlighting again, the investment that we're making in Honeysuckle Health and Midnight Health, these are our developing adjacencies and the contribution from NIB Thrive, which will get the full year into FY '24. Going through most of this. I'm sure there'll be some questions on that. Again, highlighting the sales and the downgrading and then the COVID DCL impact with the OSC as well. [ Ros ]. This is just again highlighting the continued above system growth that our business has managed to achieve. And we've put in the 9 months to March '23, I think the APRA data comes out next week for the 12 months, but again, a good, strong growth against industry. I won't go through that. We might move on to that one. So on the international business, a really good turnaround from that. We saw that in the first half. It's continued into the second half. What we are seeing is that overall -- the measures that we're using, overall volumes at about 83% of pre-COVID volume. So perhaps still a little more to come, judging by pre-COVID, but our sales are higher than that. So we're getting our share, which is good, but again, a very pleasing growth to come through. New Zealand -- just wanted to highlight New Zealand -- I call New Zealand, just a very consistent performer. That's continued. And although this performance looks extremely strong, we just need to remember the impact that we had with the liability adequacy test last year. So again, we had a $4.7 million impact, which was negative in the last year and been positive into this year. So if we adjust between those 2, then the growth rate goes down to 8%. So still a really, really good result, but the 36.8% growth was impacted by that one-off. We've talked about travel. One little thing I would highlight down the bottom left of this page is the operating expenses as a proportion of gross written premium. And I think we did talk -- I first joined in June 2020, and we did talk about a more sustainable shape of the P&L. And you can see that as we've grown, the operating expense ratios have come down, which is allowing that profitability to come through. Particularly pleasing is nib Thrive. We raised some money in October, you all know that. And we've managed to secure 5 acquisitions, with another 2 in the pipeline. It's contributing positively, and we will get the full year coming into FY '24. Capital. We gave you the capital under the new standards, which take effect from 1st of July this year. You can see the PCA ratio is equal to where we were. Good, strong capital position. We were just highlighting a little bit on the net tangible assets in those graphs that are relatively high in December as we've just raised the money from the capital raise and then we've converted that effectively into intangible assets with the Thrive acquisition. So that's the reason for that coming down. Cash flow. Cash flow was a really good result. Good, strong free cash flow. It did go down on last year, but we've highlighted in the bottom right that the FY '22 cash flow result was obviously a very strong result, come back to more normal levels and a good result there. I'll hand over to Ros.

Thanks, Nick, and good morning, everyone. Before I talk to some of our key highlights and sustainability for FY '23, I thought it's worthwhile reflecting on our sustainability pillars and the approach that we take to sustainability at nib, and it is very much tied to what we're seeking to achieve as a company, and in particular in the population health space, which is where we really see we can have the biggest impact. And you'll see with some of the highlights here, we've had 25,000 members do health checks, and that's really allowing us as a company to further understand our members and ensuring that our members are on the right programs. And you'll see there that we've had 19,000 members enrolled in health management programs, which is well beyond our original target of 12,000. And as Mark mentioned at the outset, our program with Hospital Support. We're seeing members have a gap closed in care of 60% of the people going through the program. So we're having some fantastic outcomes in that space. In terms of -- on the home front, with our employees, life at NIB, as Mark mentioned, continues to be embraced by our employees, and in particular, our engagement score 81% is well above the global benchmark of 73%. And that allows us not only to offer our employees flexibility, but allows us as a company to source talent from a much broader pool, because effectively, we can employ anyone from anywhere around the world. And just finally, there, if we look at the prevention partnerships, and this is really building on our capability in the company and moving it to the community. And the prevention partnerships leverage our IT technology to work with partners in the community to build out programs that are really aimed at preventing chronic diseases like diabetes and mental health. And in particular, for example, we worked with the Black Dog Institute, and we launched the Sleep Ninja app, which is free to anyone through Apple. And we've seen the people who participate in that app have had a 60% improvement in the way in which they're sleeping. And just finally on the FY '23 targets, I will call out that we remain committed to sustainability, and that's clearly illustrated by the fact that a sustainability metric is now included in all of the executive STI scorecards. Moving on to our FY '24 targets. We will obviously continue to build out the work we're doing in terms of health management programs and better understanding our members. And in particular, we've been working for a number of years with the community in Bourke, which is about 10 hours out of Sydney. It's very remote community and has a high proportion of Aboriginal and Torres Strait Islander Peoples. And we've developed a care navigation model pathway with them, which we're looking to launch later in the year, which will really enable people to be able to navigate the system and access better health care in what is, as we all know, a very fragmented system. In terms of the natural environment, we're very much committed to maintaining our carbon-neutral certification, particularly as we bring on a number of companies through the nib Thrive acquisitions, and we work towards our 2014 goal of our net carbon 0. And just finally, in terms of our RAP, we launched our Innovate RAP last year, and we're very much committed to closing out those deliverables in the coming year as we work towards and with Aboriginal and Torres Strait Islander peoples to close the gap in health, which we know is quite significant. And just finally, we will be launching our Sustainability Report in the coming months. So happy to meet in the following months to take any further questions in relation to what we're doing in that space. And Mark, over to you.

Thanks, Ros. Well, as many of you know already, as a company, we're very focused on this idea that we can harness technology, the data science and predictive analytics that we're all becoming more and more familiar with, to make the value proposition for being a member or a traveler or an NDIS participant [ with ] NDIS more -- as much about giving them deeper insight into their health and well-being and how they may achieve their goals. That's our mission as a company today. It's not to dismiss or downright the importance of private health insurance as part of the value proposition. It will remain an important part of the value proposition, but that's just not how we're thinking as a company today. We think this company -- more and more about how do we keep you well and healthy. When we think about the marketplace, we lean into this concept of value pools and where are the places in the marketplace, particularly around health care and travel and disability services where we have a license to play and can create enterprise value for the company and our shareholders. Of course, that starts with the traditional private health insurance markets that we navigate, arhi, and in particularly in New Zealand, and we still see enormous opportunity there for the company. We sit there in Australia with 10% of the marketplace, probably less than 20% in New Zealand, and with a superior value proposition. We think we can not only grow the marketplace, but have a share of that marketplace. In the way of economies of scope, we have long been pursuing new market opportunities around the core PHI businesses. That explains our entry into workers -- international workers and students. It explains our entry into travel, it explains our entry into the NDIS, and so far, so good, which is not to say they haven't been far years in the past, but we learned from them and we [ solved ] our own. Naturally, very focused on our cost containment and affordability, given the pressures on household budgets and the fact that health insurance is for many is still largely a grudge purpose. What are we doing about that? Well, first of all, we're trying to expand the value proposition in a way to describe. And secondly, if you're happy to tune into our latest marketing campaign, we're kind of acknowledging private health insurance is a bit of a commodity, but we're different. Honeysuckle Health is now the area where we're trying to capture value, and you can add Midnight Health to that, I suppose. This is recognizing that -- taking Australia as an example of the $220 billion we spend each year in our health care, private health insurance captures a relatively small part. So we think constantly in the business about, look, in these other areas of the health care economy, is there a role for us to play. Can we develop businesses in these particular parts of the economy and, as I say, capture value. And the last one, it's described as government and third-party programs. I suppose that's the ultimate value capture of the opportunity, but it's really about population health and just building on Ros's earlier observation. We think this is a profound opportunity for a company like ours, and indeed, the entire private health insurance industry, to play a more concerted role in addressing some of the egregious gaps and access to care and health outcomes across the community, particularly in First Nation communities, whether they be in Australia, New Zealand or anywhere else for that matter, where we may choose to apply a skill and capability. So that's the basis of our business strategy. The next slide is simply another way of expressing this. This is our P2P ecosystem. It highlights those we've covered this morning. The importances of value proposition of financial protection and support, the importance of providing people and their doctors with much deeper insight in the risks of their health and well-being and how those risks may be better managed. And we include in that today when we think about populations, this notion of social prescribing, this recognition that social factors, social determinants of care, as we like to call them, is every bit as important as clinical and medical factors in producing better health outcomes for people and the communities in which they live. Beneath that is our recognition that we want to connect people with a much broader universal network of health care services, be they physical, virtual or increasingly at home, that we want to complement that with more everyday health care products, the kind that we're now delivering through our majority stake in the -- in our health, sorry. And of course, underneath that is a whole stack of the enabling capabilities necessary to make this vision and mission a reality. So -- and a good part of the additional spending you've seen in the company, which Nick alluded to, is the investment we're making in growing these kind of capabilities, whether they be the new app, which we started [ today ], right through to the application of Generative AI right across our business and not only identifying and understanding health risk, but actually improving day-to-day operations. Look, some detail here about the progress both Honeysuckle Health and Midnight Health are making. Honeysuckle Health is just so mission critical to fulfilling our ambition of being a genuine health care company and capturing value in other parts of health care system, as indeed Midnight Health is. And so, while we're losing money at the moment in both of these businesses, we merely see that as an investment in the future. And as I started off by saying, while attributing is difficult, we're very confident both businesses are already adding to the value proposition and the above system growth we see right across our PHI insurance lines. So this was quite a novel part of our strategy, which we embraced a couple of years ago. Now it came to fruition last -- or during the last financial year in November when we raised capital to fund our acquisition program. We've been very successful with the acquisitions. But while acknowledging that's just to start with so much more to do now in terms of integrating these businesses, putting in place the necessary technology and growing those businesses, and most importantly, taking a new view about what -- how we're actually supporting the 600,000 or so NDIS participants. So while we had entered the marketplace largely around pure plan management, we see a much greater role for our -- for the company and the value proposition for the NDIS participants and helping them design plans, procure the services and then manage those services on ongoing basis. So, plan management is a widely important starting point for us, but we have a much greater vision for the role we can play in the NDIS, and not only for participants themselves, but ensuring a more sustainable NDIS system, because there are certain levels of inefficiency, both allocated and technical, that we've identified today and we think we can help the government address some of those inefficiencies, and as I say, make for a better, more sustainable system. Look, just a few supporting thematics I jotted down on paper. With due respect for thermal coal producers, and here we are in Hunter, this is not a thermal coal sector. We are increasingly spending more on our health care as a society. I've often sided the figure that since World War 2 we've spent the equivalent of GDP plus 2% more in our health care each year. That's not going to change. And in fact, COVID-19, while it may induce some efficiency in health care system, is actually going to increase demand for health care. Unfortunately, there's low confidence in the public system [ and ] waiting times. Now we don't celebrate that. We don't celebrate the fact that we may wait 3 years for a joint replacement in the public system, but it's clearly a factor driving the level of increased participation in private health insurance, both in Australia and New Zealand. We're seeing that, which is the next point, and immigration is adding to that growth, and will continue to add to that growth. Our appetite for foreign workers is becoming almost insatiable. Demand for both skilled and unskilled workers is well known to most. And we're very confident about return of foreign students. Australia is still a very attractive destination for foreign students in terms of its geography, its safety, the quality of our tertiary institutions, and the fact that students can stay here and work, which our research indicated is a real driver of demand for Australia as a destination for study. There's renewed enthusiasm for domestic and international travel. Long may that continue. Of course, we're going to see increased NDIS participation. We know that, and heightening expectations about the quality of service, but also the affordability of services. And there's even more and more potential to support our business ambitions through the application of technology and the power of the kind of vision we have for P2P that I've outlined. I've also added to that, I was just thinking about over the weekend reading an article out of the U.S. about increased level of consumerism in health care. More and more people are demanding the kind of everyday health care products and services that we're now providing through the likes of Midnight Health. So I think that's an important thematic to that I could have well added to this summary. Okay. This slide everyone has been waiting on, I guess. Again, I won't get through every bit. We expect arhi will continue to grow well ahead of system. It's just a question of how well system does and macroeconomic -- notwithstanding the thematics I've outlined, clearly, macroeconomic factors, interest rates, mortgages, et cetera, will have some bearing on the level of PHI participation in Australia and New Zealand. We will see some efficiency gains out of COVID-19. For example, we're seeing -- we've seen quite a significant drop off in hospital treatment for psychiatric care [ and ] hospital treatment for rehabilitation after major joint replacement. Now whether or not those efficiency gains are gobbled up by other forms of spending, time would tell. But just looking at it at the moment, it's looking rather positive. And we'll gradually return to our net margin target of 6% to 7%. We're still well above the 7%. It's -- only time will tell just how quickly that margin moves back towards that 7% top end. International workers and students recovery is continuing. Student numbers are rebounding. There's still some challenges around the loss ratio in the students business because the loss ratio increases with tenure, and we still have an aged pool of international students. But sales are strong at the moment. So that's rapidly changing. I've mentioned the continued growth we expect in workers, courtesy of the demand for skilled and unskilled labor. And, of course, we've just integrated a new international workers and students business based in Christchurch into this mainstream business. New Zealand growth prospects are very similar to Australia. The net margins, we've just quoted there -- cited there, that's consistent with what you've seen in the past. And we're putting a lot of faith in this idea that would do better in the New Zealand market, particularly with the advisor channel, if we can sell life and health together. And that explains, of course, our acquisition of Kiwibank's life insurance business last year -- last financial year, and gradually, that's being integrated into a more seamless integrated offering for advisors to make. Nib travel, the resurgence continues. We've touched upon that. Nothing really to add there. Nib Thrive, we set ourselves a goal at the fund -- at the capital raise of $50,000 by financial year '25. We're confident we'll do that very easily. In fact, most likely we do better. Our priorities at the moment are to consolidate businesses with the appropriate technology, infrastructure and to realize some of the cost synergies. Nick mentioned that our margins was a little bit lower than what these businesses were operating in the past, but that simply reflects the investment and the effort we're making. And as those cost synergies materialize, we'll move back to higher margins. And we -- as I mentioned, we want to expand the value proposition. We want to be -- we want for NDIS participants and maybe even non-NDIS participants who, while they don't get government funding on the NDIS, still have a need. We think we can have a value proposition -- craft the value proposition that in one place enables participants to help design their plan, procure their support services and manage that relationship on an ongoing basis. And finally, we just report that we mentioned the impact of AASB 17. It means -- and Nick will speak to this further on, I'm sure, our reported underlying operating profit we expect will be almost $27 million, what it would otherwise be, purely because of ABSS 17, with no impact on the cash flows. And that, of course, is tied up with the -- with our decision to defer premiums. The 1st of April increase due this year to the 1st of October. And our dividend policy will be based on that. What would have been the impact if not for AASB… Did you want to add to that in any shape or form?

No.

Because it's rather important point.

It is. No. I think you've covered it, Mark, which was just to say that next year under AASB 17 whatever our result is, it will be $26.6 million lower than -- under [ $10.23 million ]. We will make that adjustment when considering dividends. So at this stage, whatever the result would be, we would add back $26.6 million in considering our DRP ratio..

Okay. Questions and answers?

[Operator Instructions] Our first question comes from Sean Laaman with Morgan Stanley.

Mark, you provided us the policyholder growth expectations in arhi for fiscal '24 and you made some comments around the system growth. But I'm wondering if you'd hazard to give us the -- what your expectations for system growth might be in fiscal '24?

Look, it's difficult. System has grown what's the last 8 halves. So it's going particularly well. It's growing on the back of fear of COVID, and a heightened awareness of the risk to peoples' health that's going on the back of public hospital waiting times. It's [ growing ] on the back of migration. We've seen 450,000 people arrive in Australia since borders reopened. My best guess -- emphasis and guess will be somewhere around 2%. This is probably where we'll land for fiscal '23 once we see the numbers. And as we always do and always have achieved, we hope to do a lot better than that. And we'll do a lot better than that because, as I've mentioned, our value proposition is starting to differentiate ourselves in the marketplace and attract consumers who otherwise may not be interested in private health insurance. And because of the success of our distribution strategy, our partnerships with the likes of Qantas and ING and Suncorp, our partnership with the aggregators, the broker community, our burgeoning corporate business through our Grand United, or GU brand. So that's about us -- I'd be -- if we finish this year and did another 4%, I think I'd be very pleased with that outcome, given that clearly we're entering an uncertain time with people coming off their fixed term rates and the impact that's going to have on households, et cetera.

And a follow-up. I appreciate this might be a bit too early to ask, but just thinking about what could happen with our system growth? And you mentioned household budgets, et cetera. Is it too early to ask how you think the government might be thinking about -- or how they frame expectations for price increases next year?

Yes. Look, I should have added to just my early observation, our NPS [ in ] arhi jumped to [ 40 ] last month, so just further evidence of the cut-through I think we're getting with this expanded value proposition and our market offering. Now price increases -- I don't want to [ pre-empt ] the ministers at the discretion on this. I think what we will -- we've just had 2 periods of extraordinarily low increases, what 2.7%, or the values for 2 years. Now that was appropriate. It reflected a lower claims environment and particularly reflected the lower level of risk equalization we incurred during COVID. But no question, health care spending will return to some new normal. My best guess is that will be somewhere between 4% or 5%. And we know the hospitals, in particular are under pressure -- economic pressure and will be looking for greater compensation. So I'd be surprised without -- again, without wanting to [ pre-empt ] any application that we or other operators may be making, but we will need to price in that level of inflation. So I think a couple of years of sub-3% increases, at least in our case. Not all insurers were sub 3%. They're behind us now, and we'll have to price rationally. Fortunately, for us, we have still some material headroom around our arhi net margin and confidence that growth, particularly growth of the right kind, we'll see a very healthy level of margin in the business.

Our next question comes from Nigel Pittaway with Citigroup.

Just wanted to sort of ask about the sort of write back of the DCL. And, I mean, are you basically saying by doing that, that you're expecting no further COVID claims catch-up, it's all done? And can you maybe just make it clear as well how that will meet your obligations to sort of not profit from COVID, please?

Well, I don't think we're saying -- well, the DCL was gone as a matter of accounting practice, and with proper actuarial science, we've made judgments in the company that DCL was [ funding ] catch-up. There will continue to be catch-up inevitably. Think about just simple terms, Mary, who didn't have that hip replacement 18 months ago because, of course, of COVID, has now had that replacement. But the question's always been, to what extent is that catch-up additive or substitutional for activity, which would otherwise happen. And it was always out there and I think time is going to describe this point, that the supply chain only -- being so large can only accommodate a level -- couldn't accommodate a level of catch-up without pushing out activity which [ one ] [ wants ] because -- the June quarter was interesting, although 1 quarter doesn't make a trend. We did see some pickup as other insurers, I'm sure, have, in the level of activity. Whether it moves out now to find a new trajectory, let's say, somewhere between 4% and 5%, and at what pace that reversion to whatever the new mean is, look, only time will tell. I just don't -- we don't have a crystal ball. Nick, do you want to...?

Yes. Nigel, I think a couple of things to unpack there. While we're not saying that claims won't increase because we're giving an indication that they will, I mean, the technical accounting question is around that of catch-up and with the hospital system opened since February '22, various governments and World Health Organization, et cetera, calling in into the pandemic or a new normal during the year, the circumstances from our perspective around the DCL meant that it was appropriate to write off or to write back. So to that extent, that's, I think, the way to navigate between reducing the DCL and you can still go into an environment where claims are increasing. In terms of the pandemic commitment report, not profiting from COVID, we'll submit that on the 30th September, and we have -- confident in our view that we have not profited from COVID. Not profit, yes.

Yes. Look, I think the industry has done an extraordinary job in compensating members and making good that commitment. We have returned in to our members in the form of cash and deferral as...

[ $100 million ] [ Maybe ]...

[ $100 million ] is going to sell almost $200 million. Now a good part of our saving was about $150 million, is then reduce risk equalization [ live ]. But [ it'll either ] -- that's not money that was needed to fund treatment of our members. It was actually funding treatment of the members of other health insurers and our former compensation there has been to reduce prices beneath the larger -- the major players, and I mentioned earlier, to sub-3% increases in '23 and '22.

But it sounds like it will be right to assume there's no further of those initiatives coming certainly as a base case. Would that be a fair assumption?

I think that's a fair assumption, yes.

And then maybe just question...

It's only for the reason we are seeing return in activity to more normal levels.

And then just slightly changing track to Midnight Health. I appreciate you're saying you're sort of already getting some benefit from that in terms of stimulating your growth, et cetera. But, I mean, obviously, the loss did go up to $8.8 million. I think second half, that's $14.9 million for the full year. Can you just remind us sort of -- the sort of timing we should be looking at and trajectory in terms of those losses moving forward?

Well, I mean, again, it's a startup. And so, I think we'll look to see a similar level of losses into this year, and then we'd be obviously reviewing every quarter to ensure it's on track to gain a profitable outcome in the timing that we were expecting when we first made the funding.

Okay. Have you -- you're not saying what that timing is?

No, Nigel. That's -- I was choosing my words carefully on that one, giving you an idea about FY '24, though.

Look, just another point on Midnight Health. The time was much closer than we realized, in which -- if I'm not feeling well, I'll have an triage device on my nib app which advise me as to whether or not I should take a pill and lie down, have a day off work, go to the pharmacy or go the GP or call an ambulance. Then I'll be able to have that consultation done virtually in real time. If there is a need for pharma, I'll have a pharma delivered -- well, fill that -- prescription filled and home delivered. I'll have a straight-through seamless process for imaging or pathology. I'll have the ability to contact a doctor very seamlessly. Again, a virtual if it's a specialist and so on. This idea, this consumerism, which has been missing from health care for so long, which we've seen in so many other industries, in streaming services at home, on TV, it's happening, and it's happening rapidly, and we need to develop the assets and capabilities to provide that solution for people. And Midnight Health is a critical part of that. Midnight Health is already providing virtual consultation, a prescription fill and home deliver and a range of other services which are critical to this value chain, if I can use the expression. So, I mentioned it earlier, but I very much -- and it's a startup. I very much see the kind of loss-making as an investment in this future. Our value proposition, our P2P ecosystem and the $40 million is no different to the $120 million we spend generally in PHI on acquisition in the form of commissions and marketing and advertising. So, obviously, we need to keep an eye on costs and be rational in our deployment of capital, but don't underestimate the importance of this company with Honeysuckle Health in the kind of world we're trying to create here for consumers.

our next question comes from Andrew Buncombe with Macquarie.

Just the first one is in relation to the claims experience in arhi. Can you give us some color around what you're seeing in the month of June and July? I'm just trying to compare that to your 4% to 6% guidance range for FY '24.

Yes. Sure. Yes, I mean, again, very general, so -- because sort of every month can go within its -- within a range, but we did see a tick up in the fourth quarter in terms of claims, and then July was relatively favorable. So I wouldn't read too much into either of those, but since the question has been asked, that's sort of where we're seeing it. So August -- again, I don't see anything that Q4 provided or July provided that would give me an indication of August. I think it's just a month-by-month at the moment.

And then my only other question was in relation to the DCL going from $124 million to 0 in the last 6 months. There's a couple of results on today, so apologies if this has laid out somewhere. But can you give us an idea of how that $124 million unwind was separated into claims catch-up give back compared to retained profit?

Yes, it's a good question. I think the first part I'd bring it out is that the OSC in hindsight was somewhat understated. And so, broadly, the way that I'd be looking at it is that of the $110 million for the full year rather than the half because the combination at the half when the OSC was reasonably largely understated in hindsight, sort of the full year is probably a better way. So you've got a $110 million reduction, of which $71 million is in the giveback. And then in terms of the overall balance of the $30 million, then you've got some catch-up and you've got some return to profit potentially. But our margins went down overall. And then the other thing that's worth noting is that the OSC also increased year-on-year.

Our next question comes from Julian Braganza with Goldman Sachs.

Just a first question for me. Just in terms of expectations for downgrading into FY '24, obviously, noting FY '23 was quite low. So I'm just keen to understand how you're thinking about that into FY '24?

Look, it will be modest. To be honest, Julian, I know a lot of people spend time and think about downgrading. It's not something that really captures my attention. It was low last year. We regard downgrading, as I say, to as much as a loss in revenue and activity has no impact on the margin. So there'll be some downgrading, but it's not one personally and nor the company spends a lot of time talking about.

And in terms of just the risk margin and the OSC impact, how should we be thinking about that into '24? Is that likely to be unwound into '24, particularly as trends are normalizing?

Well, I mean, yes, because it's there for a current liability. I guess the question really is then on the risk margin because there has been an increase on the risk margin and whether that will need to be retained throughout the year or all released. At this stage, we think that the risk margin's appropriate, will continue to assess it. But like I said, given where claims developed not only over the fourth quarter, but also as we look back in hindsight, the risk margin was considered appropriate. They'll -- we'll consider it over the course of this half. It probably is a source of some...

And just last question for me. Just in terms of the international business. So you've had really strong growth there over the second half. Can you just maybe comment on expectations for growth there and also just gross margin into '24?

Probably we're hesitant on gross margin. In terms of overall growth, we've seen a good kick back in those areas. But interestingly, it's still not back to pre-pandemic levels from the numbers that we're seeing. And we're also seeing students return a little bit later as well. So I'll leave you sort of to make your own conclusions on that. Yes.

Look, it's difficult to predict for the reasons Nick mentioned. If you're looking for a guide, we certainly have aspirations to get the combined businesses to back to where they were pre-COVID. So you maybe draw some sort of line through that logic. But actually, predicting growth numbers the way things are -- at margins, the way things are, particularly with students, which is going particularly well, but not making the margins that we were pre-COVID for the reasons I've mentioned, largely the aging of the risk pool. So probably the best guide is look back pre-COVID and see what we're doing and what might be a reasonable assumption.

our next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. I just wanted to be clear on whether you're calling the COVID period close? So you promised you're not profiting from COVID. I mean, I take it by dropping the DCL. You do say it's accounting related, but you're also saying unlikely to see any more impact. So I just want to be clear, from here, in the way you're looking at things, the way you're going to be acting in terms of profit margins, et cetera, do you experience -- that we see is how you're going to be pricing and there won't be any more -- we should -- there shouldn't be any allowance for any -- I suppose any other adjustments relating to that promise going forward? Would that be a fair way of looking at what you're saying?

Yes. No, that's right. So COVID from a purely accounting commercial point of view is over, as Nick mentioned. In terms of the consequences of COVID, not so over, because, as I've touched upon today, we will move back towards whatever the new normal happens to be. We'll see some efficiency improvements in the delivery of treatment. I gave some examples there today around psychiatric care and rehabilitation. However, we will see increased pressure amongst providers, particularly with hospitals who have suffered badly during COVID-19 to recover their margins. So there's quite a few moving parts said.

My question was specifically about the promise, not the [ profits ] from COVID.

Well, we're very comfortable that we have met our commitment that we made at the time around [ profiteering ], is the word I'd like to use rather than profits because we obviously have made profits during COVID. We believe we've been true to that commitment. And, again, it's -- as Nick mentioned, we have to do a return to the Department of Health in the weeks ahead, but hopefully, that will be the end of it. And in terms of pricing, I think I covered that -- said that's the enormous moving part here. We just had a period of very low price increases, and most of which were deferred as well. I think the government will be -- will accept as they always have been in the past, our rational pricing applications, which basically says we need to price products to cover the rising cost of medical inflation.

Question just on the risk equalization impacts in the period. I mean, I think you flagged quite a large benefit over the year, and that's been a consistent theme during the COVID period. I'm just keen to understand what you expect going forward?

Just quickly, Sid, on that. Remember, those risk equalization benefits are based off the expectations of February 2020. So that dollar is a trend, if I could put it that way, as opposed to actual dollars amount, because the base of what was assumed back then has changed dramatically as member behavior across the industry has changed. So from that perspective. But having said that, we clearly did get a benefit over the last few years from risk equalization, that we were then able to price in. So shifts in hospital treatment across the industry exaggerated for us because we're such a large contributor risk equalization. So we saw an exaggerating saving during COVID-19, and we'll probably see an exaggerated liability associated with the return to whatever the new normal is. But as I mentioned, it's just a factor in the overall claims experience, and we'll price it in and deal with that as we always have.

And just a final question. Just on the -- where claims are, I mean, you -- the wording isn't very, very clear at the moment. I mean you're saying that you're expecting inflation to trend back to the previous range of 4% to 6%. But I'm just wondering, the actual cash paid versus your pricing assumptions, could you give us some idea of how that trended over the year or over the second half? So how much below are you versus that figure?

So can you help me out with that again, Sid?

So the cash payments are tracking well below your assumptions on pricing and what you might have thought pre-COVID levels were. Just wondering if you could help us understand where they are at the moment on a cash basis?

I might answer it a different way, and maybe we can take it up this afternoon. I guess, the way that I'm looking at that 4% to 6% is that, if you wanted a real -- the bear case, you'd put the -- you'd look at the incurred. If you want the bull case, you start with the base of the paid and then you add your inflation and your growth on those. So I think the answer is probably somewhere in between in terms of where to apply your growth rate assumption and the guidance we've given you on inflation. But yes, it's kind of probably somewhere between paid and incurred.

I might take that one offline.

Our next question comes from Kieren Chidgey with Jarden.

Just -- maybe just starting on a similar topic around risk equalization, [ on ] from Sid's question. Just going back to your gross profit driver slide, which I think is Slide 11, there's a number there of, I think, $154 million called out as the risk equalization benefit during the period, which is about 70% of your arhi, [ you're up ] in the full year. I'm just wondering, when you make the comment -- and I note further down that page, obviously, the premium deferral cost of $70 million broadly offset sort of the online claims benefit in the period. But when you sort of make the statements around not petering over, how does sort of the risk equalization issue feed into that?

Well, I don't think anyone has thought a lot about it, really, when the industry made the statement about not [ profiteering ] from COVID and compensating members for the loss on treatment, or the deferral treatment. I don't think anyone really contemplated. Well, how do you make sense of that when part of the savings risk equalization -- because, as I mentioned earlier, why would we compensate with cash, for example, our members for treatment not incurred by the members of other health insurers. So the way we have thought about that was, [ we'll ] -- we [ should ] and will compensate our members for their loss of treatment, but will compensate because we've got lower claim saving. Our members should naturally benefit from that and we'll compensate them through lower premium increases compared to the likes of [ any ] brand private or group [ HCF ]. So that's certainly the way I've thought about it, but there's no developed science or guidance practice notes that I've seen from the regulators on the question. At the end of the day, we're going to sit back and look ourselves in the mirror and say, look, did we do the right thing [ for our ] members, and we emphatically believe we have.

And, Kieren, you also got to remember that, that $150 million that you've referred to is not -- it's against a base of what we thought FY '23 may have been back in FY '20, back in February '20. And remember that any growth rate assumptions that you apply -- and not to the net risk equalization number, but you're applying growth you're applying percentage differences to both the calculated deficit as well as the gross deficit. So kind of 2%, 3%, 4% changes on calculated deficit and gross deficit, especially if they're going in different ways, can start to really expand the number. So again, it was just trying to give an idea, that [ slide ], as opposed to say that, that's the real dollar number.

And conceptually, pre-COVID you're obviously pricing your policies for that higher risk utilization liability you'd have to sort of pay into the industry. How has sort of that evolved? Is your pricing now updated to reflect a sort of lower risk equalization, or are you still assuming that sort of pre-COVID level within your pricing?

I mean we've got views of what we think will -- we've got a view that pricing should reflect permanent savings. And so, we've got a view on what we think permanent savings are in terms of the overall modalities in claims. And so, that will end up being reflected in pricing submissions. [indiscernible] I'd say we're keen on premium deferrals rather than lower increases per se, well, so I didn't want to erode the base, recognize at some point post-COVID things would move back to whatever the new normal is. So we've certainly thought that way there had been -- but we have reduced the base, I suppose, through the too low pricing increase of rounds we have. But we're confident that we can rebase our arhi pricing at the next round and subsequent rounds to meet whatever that additional risk utilization liability may turn out to be.

And just a second question on the -- again, on how the other expenses within that -- can you just all out exactly what the dollar benefit -- I think you mentioned a number of close to $15 million across the group? Is that all in arhi in terms of that IT write-down? And then I'm just interested in where you expect that other MER to trend over the medium term, given it's obviously lifted quite a bit over the last couple of years?

Yes. The vast majority will be in arhi. It was a combination mainly of software and then some of the -- building all the software within arhi, and most of the lease expenses end up being allocated into arhi. So pretty much all in arhi. And then going forward on other expenses in MER, we recognize that it is higher than it's been, and we are investing against the P2P.

But no sort of number you can get to in terms of what [indiscernible] historically is a more reasonable number?

[indiscernible] by the way, so, we should be able to run the business at $0.06 and [ $1 ] on day-to-day operations. We invested another 50 bps in improvements, like around P2P. And we'll pretty much spend whatever we're able to spend on marketing acquisition because the economic case is still compelling. We're investing in acquisition. The limiting factor there becomes around pricing and government scrutiny.

Our next question comes from Vanessa Thomson with Jefferies.

I just wondered if you could give us a little color around the investment income as a net turnaround in FY '23? I just wondered how that was comprised?

Yes. We usually, I mean, just check in the back of the -- very back of the investor -- We do have the investment asset allocation. So you'll be able to see it. Broadly kind of 3 things helped. If you remember last year, some of the larger losses we made was mark-to-market on our sovereign bonds, which is sort of ironic for a very safe asset class. They came back a bit. In our responsible investing policy, we do take a relatively low position in energy and a higher position in tech and the turnaround in tech assisted as well, and plus the higher cash rate.

And then just one question on the NDIS strategy. We're seeing the participants increased to 37,000 in -- through '24. I just wondered if you could give us some feeling for how that will play out? I know you said EBITDA margin is a little bit lower because of investments. And you've also discussed potentially beginning support coordination. I just wondered how that would play out through FY '24?

Yes, it's a big question. Good one. Yes, [ audibly ], I wouldn't say we're limited by our funding envelope. We figure we raised $160 million in equity capital, adding maybe another $60 million in debt, and we've got $220 million to play with. We're not there yet, but we're getting closer. That's not to say that if the right economic opportunity presented itself we wouldn't invest, because we do have the level of surplus capital at the moment. But you expect that we'll land around that 50,000 to 60,000 number by '25 at the latest. At the same time, in a way that I described earlier, we're very focused on integrating these businesses, getting the right technology in place because we think technology apart from being a better experience for our participants is crucial to its efficiency and thereby long-term sustainability. We're looking at technologies, for example, which would harness Generative AI to help people design and plan electronic marketplaces, which will help people select our providers and heavy digital online engagement for participants. And as I touched upon earlier, we also see this kind of platform and value proposition is potentially attractive to those 3 million Australians to identify this having a disciple [ even ] who don't qualify for NDIS funding. So that's where our head space is. In terms of support coordination to an interesting one. Look, my own personal theory is the NDIS. One of its flows has been designed around institutional arrangement rather than the participant, the customer. So the -- hence, you have all these various silos within the scheme. So part of our thing is how can we bring these silos together. Support coordination and plan management logically come together as a service for participants. We haven't yet invested for coordination. It's fragmented. There are reported issues. If you talk to some of the operators who provide support coordination, there are issues around economic sustainability. But we're thinking through that and about how they could be integrated and we've one fee rather than separate fees for design and procurement and management, how we might be able to service the participants. [ And ] I was in Cairns -- one of the businesses where we've acquired have a very significant position in Cairns, we have several thousand participants. Some of the people out there who have now joined the company, been fantastic at servicing and supporting those people. But -- could be wrong, but I recall them saying there's 180 support coordinators in the Cairns district. So you ask yourself, well, look, is that the future, or is there a better model where we can work with those people who are so expert in helping people procure their disability services. And again, as I keep saying, make for a more seamless integrated improved experience for participants.

our next question comes from Siddharth Parameswaran with JPMorgan.

Just a question on capital. Just your -- hoping, Nick, you could you just provide some guidance around your thinking, around -- whether you're happy with current -- we should be thinking about from the usage of that capital -- that excess capital?

Sorry, Sid, you literally cut out at the critical time and then you came back.

Sorry.

Could you repeat the question, please?

Sorry, the question was just around capital. You're well above your target 1.5 to 1.6x range. I was just keen to understand whether you're happy to sit there currently or whether we -- how we might think about you getting back to your target range?

I think that, again, I look more at the group side because their capital is in the health fund side. So that just -- that gives an indication that the health fund does have surplus, but then also the overlay on relatively low group gearing and leverage. So potentially, there is some opportunities, but we haven't spent all the money we're expecting to spend on the NDIS yet. We've got a couple more -- we've indicated we've got a couple more in the pipeline. And then we've got the integration spend as well. So we'll keep those going as opportunities present. But in terms of whether that may translate into any excess dividends, I think we'll be retaining the policy, but it does give us confidence that we can take into account the -- and adjust for what will end up being lower profitability under AASB 17 in FY '24, as we said at the presentation 1 month ago. We don't expect there to be material differences in '25, but it gives us confidence in '24 to allow what will effectively be a slightly higher payout ratio. Yes. Sid, we've always [ thought of ] ourselves, as being capital light or capital efficiency -- efficient is probably a better way to describe it. But where we're sitting now, as Nick mentioned, there's still a couple of acquisitions we're confident on completing. It probably leaves -- means we have, what net $50 million, $60 million in surplus capital. So it's not that much in the scheme of things. And there are so many opportunities slating around at the moment. So we'll be setting PAT on the current position, and as Nick said, just [ tie it ] into our current dividend policy.

Just one very final question for me. Just on the -- [ this ] margin increase. It wasn't completely clear whether this was [Technical difficulty] in payments or whether this is just precautionary that came through? I mean, your actual versus expected, can I kind of be clear that actually there was [Technical difficulty] breach there which is leading you to be more cautious? I'm just trying to understand why there is an increase in the risk margin?

Sorry, Sid, it was really hard to hear that question. The increase in the risk margin…?

The increase in the risk margin just from -- just over the year, the very large increase in the second half. Just wanted to be clear what drove the increase in the risk margin? Were there any visible trends? Because I couldn't quite pick it up in the commentary as to what drove that.

I'd just maybe describe it is an abundance of caution, Sid. We did, for example, have some dramas with travel claims during the second half of the year, and we've diverted resources to address that, which we did, I'm happy to say very quickly, but it did have some impact on claims processing times in arhi. And they're largely behind us now, but there was certainly -- that was one case of the risk margin. And then there's just sort of quite -- with the DCL now gone and recognizing that there's still unknown COVID impacts, it just -- and we're certainly or actually thought it was appropriate to apply that additional level of security and confidence.

And those will go under [ IFRS ] as well, I think [ for 17 ], the risk margin?

No, the risk margin stays. It's part of the OSC.

[Operator Instructions] And I'm not showing any further questions at this time.

Okay. Look, thank you, everybody, for attending today. It's much appreciate. And hopefully, you can take from this morning's presentation that we're quite pleased and proud about last year's achievements and the results. And while there [ aren't ] challenges to be navigated, that's just usual and we remain very confident about the outlook for the company and especially us transforming the company in a way we've described to be as much a health management company in the future as we have been to so long as purely a health insurance company. So thanks for your time today, and enjoy the rest of your day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. And [indiscernible] the operator where you are back in the pre-call lobby. Was there anything else? Or were you guys going to go ahead and disconnect going to go ahead and disconnect? I'll take the silence as you guys [ are willing to ] go ahead and disconnect. You guys have a great day.