nib holdings limited (NHF) Earnings Call Transcript & Summary

Good morning, everybody, and we're coming to you today from sunny Newcastle and the traditional lands of the Awabakal People. We pay our respects to the elders past, present and future. So thanks for joining us. This morning, we have the usual conventional presentation. I'll kick off with just some high-level thoughts. Nick, who will be joined by Ed. We will spend time on going through the accounts and results in some more details, and I'll come back at the end to summarize. And of course, we'll have Ros in between talking about the efforts we're making around sustainability. So, look, for a number of years now, we've been promising to convert the company into being as much a health management company as we have for about 75 years, a health insurance company and the evidence of that progress is quite pronounced, as you can see from the results. Next slide, please. What we're attempting here, not losing sight of the fact that health insurance will for the foreseeable future be the core economic engine. We see an opportunity to be more than health insurance per se. We see an opportunity to expand the value proposition for people by giving them access to a much broader range of health care products and services. We see the opportunity to provide them and their doctors with much deeper insight into their health risk and how those health risks might be better managed. So that's our vision for the company. As this slide demonstrates, I won't go through every element of this, but events is real progress. We now have a large corpus of members and customers using our app. You can see the -- how popular the use of telehealth consultations, how popular the use of prescriptions, functions and even new applications like the symptom checkers. And I like the brag that today, my nib app, on my device, I can not -- I can still do all my traditional health insurance stuff like make a claim, check my annual limits, find a provider and so forth. But much more than that today, I can consult a doctor, I can have a prescription home delivered. I can check a symptom. I can access a wide range of health management programs most relevant to my health risk. So we feel as though we're making terrific progress in this quest of becoming, as I say, a health management company. Next slide, please. Nick and Ed will go through the details of all of this. Look, we've had a good year. We have grown earnings. Nick will go into the details. If you think about the disruption of what has been easily the most profound event, certainly in my lifetime, across that period, we've grown earnings, underlying earnings by about 5.2% over that period. So we're pleased with that outcome. Last year's result accommodated some one-off variations such as the premium deferral we made as a compensation measure for COVID-19. In very tough market conditions, especially in the second half, we still grew the arhi business, 2.5% by our lofty standards isn't that spectacular, but nevertheless, it's well ahead of systems growth. And importantly, the system continues to grow. And as we predicted, margins are moving back to our target range of 6% to 7%. We indicated throughout COVID-19 that those elevated margins weren't sustainable nor did we intend them to be sustainable. And we're now back within range. And obviously, that has some impact on our earnings relative to previous periods. Well, no doubt, get lots of questions about claims experience. We still believe that the long range experience for us in arhi will be somewhere between 4% and 6%. We believe that only for the reason that it's been that way for so many decades. And what we're seeing at the moment is the funnel, if you like, of hospital activity refilling back to pre-COVID levels. And just how quickly that filling was going to revert to whatever the new normal mean becomes, so it's always going to be problematic for us in terms of forecasting our margins. So it's happened a little bit faster than what we may have imagined in the second half and certainly in New Zealand, but it's entirely consistent with our original expectations. We've seen a good recovery in international workers and students. We now sit with about 216,000 international workers and students. That's as high as it's ever been before. And margins, particularly in our students business are improving. The New Zealand result was slightly disappointing. But as I mentioned, that was mainly a factor of claims inflation returning to this new normal at a slightly faster rate than we predicted. We've seen terrific performance in our new fledgling in NDIS business, nib Thrive, who contributed meaningfully to the year's profit. And Travel, which was obviously hard hit throughout COVID-19 is starting to recover as well. So we're very pleased with where the business is at. The new health businesses, as I've touched upon, are growing. Our major investment in Midnight Health and Honeysuckle Health, our joint venture with Cigna, while loss-making is showing real progress, not only in terms of improving health outcomes and improving the value proposition across the business, but also in terms of reduced loss-making. And we expect -- I'll come back to this when we talk about the outlook, but we expect those businesses to be -- both be profitable, cash flow positive within the few years. So overall, it's a story of ongoing growth, notwithstanding weaknesses in the market. It's a story of claims inflation, particularly in arhi and New Zealand, returning to -- reverting to a new normal as we thoroughly expected. And I suppose our challenge is large to make sure that we predict in pricing that risk. And it's the story of the other adjacent businesses recovering in this post-COVID world. Next slide, please. Well, I won't go through all of this. I've touched upon much of it. Strong top line revenue growth, growth in our underlying operating profit under AASB23, and Nick will go into some detail about how we reconcile AASB23 with AASB17. A good investment income performance. NPAT up 2.8%. The ROIC in the business, our return on invested capital is still very strong. The cash flow results last year were equally strong. EPS, we're comfortable with, and we have slightly increased the full year dividend as you put -- as you can see from this slide. Next slide, please. Nick?

Thanks, Mark. If I could just take you through the Group statement and then just a bit on AASB1023 versus AASB17, and then I'll hand across to Ed on the Residents business. So you can see here, if I look sort of towards the middle, the underlying operating profit on a AASB17 basis up 77%. What you'll see in the next slide is that there's a bit more of a volatile nature with this accounting standard and a bit more of a sawtooth nature versus AASB1023, but it actually all ends up in the same spot. So we're not saying that our profit has gone up 77%. We're saying it's more like about the 5% to 6%, which has been in line with the CAGR since pre-COVID. The pleasing elements of it were the growth in revenue, up 9.9%, which is strong. As Mark mentioned, we did see some claims inflation come back in the second half, in particular, and we'll have a bit of a talk about that when we come to the arhi slides. As we go down, I think a good part of the result was the non-marketing expenses, which declined overall. It was actually if we adjust because we had some asset write-offs last year, if we adjust it was a 1.3% growth, which is a good result given the growth in our business and also the inflation that's been in the economy. And in particular, the second half non-marketing expenses in some of our more established businesses, such as arhi and New Zealand did decline. So we were pleased about that, and we'll continue to manage that strongly into FY '25. It's worthwhile highlighting the one-off transactions, especially the Thrive integration. The integration is on track, and it's actually a bit ahead of schedule. And so we've put in the investor presentation at the back, a list of all of those integration costs, but they were higher, which has impacted the EPS. Investment income strong along with the markets. And again, just this slightly elevated tax rate because of the non-deductible Midnight Health losses. Just quickly -- just having a quick look between AASB17 and AASB1023. And I've just tried to very much simplify a slide, which is around the underlying operating profit on the left of 77%. But if you look on the right, it's more like 5.9%. And then the difference really is just the COVID provision. If you look at all the rest of the numbers, they're all either exactly similar or quite similar. There's a few little impacts in revenue because of AASB17, but they're not that material. So what we're just trying to highlight here is that in our view, the growth is more in that 6% range rather than the headline number. Also worth noting that again in that COVID provision last year, from our perspective, we brought it back because we didn't see the potential to carry it forward. Some of that did go up into the old OSC, which is now called the liability for incurred claims. And you saw that, that was relatively elevated in FY '23. It still remains reasonably high in FY '24. It's only a little bit lower, and that's a result of what we are seeing in the market in the second half in terms of the claims inflation. I'll now hand over, I think to -- one more page. Just again, what we're just trying to highlight here is if you look on the bottom left, the revenue between AASB1023 and AASB17 is really very similar. On the right-hand side, what you can see is the volatile nature of the dark green line, which is under AASB17 and the smoother nature under AASB1023. But then the top left table actually shows you that if you accumulate the UOP across all of the years, it actually comes to the same position. So a little more volatile under the new accounting standard, but ultimately ending up in the same position. I might hand over now to Ed to have a talk about the Residents business.

Thanks, Nick, and good morning, everybody. If we jump to the next slide, please. So you're diving a bit deeper into the Residents Health Insurance business. You'll see we delivered a strong underlying operating profit result of $220.1 million, which is up 8.2% on the AASB1023 basis. Contributing to that result was a good sustainable policyholder growth of 2.5%. And in particular, we saw pleasing outcomes in our nib brand. Our direct-to-consumer business and broker channels performed favorably as did our white label partnerships. And we're off to a great start in July as well. So early days. We appreciate that, but we are seeing some continued buoyancy in the market and nib and the arhi business is capitalizing nicely on that. This translated into an insurance revenue increase of 8.5%, driven by that growth, but also our premium increases of 4.1% and continued low downgrading of 0.3%. On an incurred claims basis, we did see some elevated claiming activity coming off that artificially lower claims base. So incurred claims were up 4.9% and paid claims per policy growing at 5.7%, predominantly driven by hospital indexation, but also increasing utilization post that COVID period. So this is at the higher end of our long-term outlook, but we are anticipating this to be a shorter-term risk as we start to normalize back to the 4% to 5% long-term average. We had a pleasing result around our management expense discipline, and we can see there that the arhi other MER reduced 100 basis points down to 6.4%, and we're expecting further productivity savings on a look-forward basis. And our NPS did have a modest decrease off the back of the 2 premium increases across the course of the year. Turning to Slide 15. So what we've done here on a half year trend basis is just show that like-for-like on the AASB17 versus AASB1023 basis and importantly, drawing your attention to the second half of '24, what you will see is that gradual return back to our target net margin ranges of 6% to 7%. You can see we're still at the upper end there. And our gross margin and our management expense ratio is starting to work back into that composition that we're more familiar with in terms of our pre-COVID experience. Pleasingly, we have seen some relatively flat non-marketing expense reductions and that discipline and control around management expenses, but also a shift as part of our digital-first strategy to increasing levels of digital adoption. And you'll see there that our app usage was up 21% on the full year. And we're also seeing ongoing investment and automation across our claims activity with improvements around our straight-through processing. If we turn to the next slide, please. Diving a little deeper into policyholder growth. What you will see on the left-hand side there is that nib's compound annual growth rate continues to outperform industry but both industry and nib have had a sustainable track record driving growth at positive margins. On the right-hand side, what we've done is just to dive a little deeper around that growth is really occurring in both our combined and hospital product mix, and we're seeing favorable outcomes there, in particular, leading towards our attractive target segments in those bronze and silver hospital tiers rather than the stand-alone ancillary at lower revenue. And as I mentioned earlier, we are seeing some good growth in the first part of the fiscal year '25 with net growth up 42% on same time last year. Jumping to the next slide. Just breaking out that policy trend in a little bit more detail. And you can see here the composition over a 3-year period has been favorable, in particular skewing towards the hospital and extras combined policies, which we generally see deliver lifetime value and stronger tenure mix. So we're now seeing that start to play through. And still seeing some pleasing outcomes on an ancillary basis, but not at the same growth levels of combined and hospital. We'll move through to the next slide. So this is just taking a bit of a look at the claims growth in FY '24. As Mark and Nick have mentioned, we did see some elevated claims activity, both for nib and the industry, and this is looking at the APRA data on a rolling 4-quarter basis up to the end of March. And you'll see that the shape is consistent both with nib and hospital coming off that lower artificially COVID-affected base throughout the COVID period. This just steps out in a little bit more detail. You can see here at the table is just showing the pre-COVID experience back to our long-term inflation trend of 4%. We do see some shorter-term risk towards the 6% and nib's or arhi's paid claims inclusive of risk equalization on a policyholder basis is at 5.7%. But we believe that if we jump to the next slide, the pleasing thing is that the industry and nib on a consistent basis has been able to price in that inflationary impact over the long term. And certainly, you can see here that, that delta between revenue, compound annual growth rate and claims CAGR has tracked at that 30 basis points differential. So we're confident on a forward-looking basis that we will continue to be able to price in any elevated claims activity we might experience in the short term. I'll pass back to Nick to go through the rest of the divisions.

Thanks, Ed. Okay. If we turn to our students and workers, a pleasing result, a bounce back with the students coming back into the system this year. As you know, our workers' business has been strong for a while. So this was overall a really pleasing result, really everything going in the right direction. So I won't spend too much time on this, apart from the growth was as we anticipated and look forward to questions at the end of this presentation. New Zealand had a bit more of a difficult result. The plus side was really around its revenue, again, good strong policyholder growth, good strong revenue growth, but we are seeing that claims jump up, especially in the second half. What we've just done at the bottom is just showed the CPI that's occurring in New Zealand. There has been quite a jump, especially around wages in that country. And you can see that incurred claims up 16.9% with service cost -- service cost 8.7%, utilization 6.2%. So really, this is a pricing story. What we are seeing is we are seeing industry repricing will need to do repricing as well and just normalize that particular impact. And then we will be focusing strongly on the other MER, which is relatively higher in this business than it is in our other businesses. So those are the 2 actions out of that. In Travel, Travel is a difficult one. We did lose the Qantas contract, but again, the -- what we call the GPAC, which is the gross profit after acquisition costs, which removes the Qantas commissions, didn't really sort of impact as much from the Qantas contract loss. But what you can see is that in FY '23, we had a really strong result. If you remember, the second half of '23 was a particularly strong result. That inverted commas revenge travel that occurred. It was very strong sales, a lot of pent-up demand. And what we've seen is that that's tailed off a little bit across this and become more [ stuck ] across this year and become a little more stable. The slight mismatch is that all of the claims from that pent-up demand during the COVID period, that claims activity has now pushed into this year. So our operating costs have increased a bit because the claims from FY '23 are now being processed in FY '24. So we just need to wash that through. Again, we see that as a reasonable base, and we'll be looking forward from that base. But again, it's -- in terms of the operating expenses need to ensure that they're in line with the revenue. I'll just go back -- sorry, quickly, just back to travel. In terms of going forward, we do have some new underwriting arrangements. They're a little more flexible, which is really good, and we are putting in some new products into the U.K. and Europe, in particular, what's called the annual multi-trip, which is an important product in Europe, and that allows people to pay once a year and take multiple trips. So we haven't had that product in the market. We launched it a month or 2 ago. So we're very excited about what that may bring. In terms of Thrive, going along to our expectations, now a meaningful contributor into FY '24. Participants growing up towards that 40,000, and we've now got to the scale. As I mentioned before, the integration costs, integration is on track, if anything, a little bit ahead of expectations. But we have put in here to show you that bottom, the impact of the amortization of acquired intangibles at $7.4 million. We did have a one-off catch-up from FY '23 that we had to put through this year, again, as we just did our allocations between goodwill and between customer contracts and so forth. So that will be a one-off that $1.7 million. And then the $15.9 million of the integrations against $4.8 million, again, that's the one-off. And as the integration goes, that will come off. So looking in the right direction, we're pleased with the result, meaningful contribution and we grow from here on. In terms of capital, everything going in the right place, PCA ratio of 1.94x. So again, good strong capital result. The net tangible assets just reducing a bit versus the overall assets. And that's just really us purchasing the nib Thrive entities because, again, we've paid cash for those, and they come on board with goodwill and customer contracts. So that's the reason for that. Gearing ratio strong, leverage ratio is strong. So all heading in the right direction with good strong capital position at 1.94x. And then just highlighting again what Mark was saying, just the cash flow from operating activities, up 4%, $257 million, so that's a positive result. And on the bottom right, you can see again that our UOP versus our operating cash flow is starting to become more in line after that slight sawtooth pattern that we saw going through COVID. If I look at Honeysuckle Health, key call-outs here is that continues to grow. The NPS continues to be strong and the losses continue to reduce. So we're anticipating a breakeven into FY '25 and that will be our focus. And if I just go to Midnight Health, again, a similar picture, very strong result, really going very strongly in its weight loss management programs. We're helping a lot of people around their weight management. Peak losses in this year is what we're expecting and we've put it in there. So you can see the first half at $10.4 million and the second half of $5.9 million. We're expecting now this business to break even in FY '26 as we continue to invest and continue to grow, especially around that weight management area, but also we're launching into the corporate health programs as well. I will now hand across to Ros.

Thanks, Nick, and good morning, everyone. Next slide. Thanks, [ Mattie ]. Look, earlier this year, we undertook our second double materiality assessment to consider the impact of ESG matters, but from a financial perspective as well as the impact on our stakeholders, such as our members and employees and suppliers. And it's really a foundational piece to our sustainability strategy. And you can read more about the details of that in the sustainability report that we published earlier today. But I will call out a few key highlights from FY '24. We were able to achieve almost all of our sustainability targets this year. And in terms of health checks, nib well surpassed the target of 28,000 with over 78,000 individuals undertaking health assessments. And as Mark indicated earlier, these are easily done through the nib app, where members complete a survey based on lifestyle factors, their age, their medical history, and they receive a score, which not only provides the members with a fantastic baseline around their own health but allows nib to direct members into appropriate health management programs and appropriate health literature. And pleasingly, we're seeing more of our members go through our health management programs as a result of those health assessments. And they are members with chronic conditions or members who are at risk of chronic conditions. And you'll see there that we also surpassed the target of 20,000 with over 27 -- sorry, over 22,000 members completing those programs. And a really great example of how the P2P ecosystem is coming to life is MedJourney, which is one of the programs offered through our partner, Honeysuckle Health. And this is really designed for members who are on weight loss medications such as Ozempic, and they may be obtaining Ozempic via Midnight Health. And the program provides for a wrap-around service where it works on educational and promotes behavioral change. So the outcome of these health programs is much more sustainable for our members. In terms of climate, for the third year in a row, we managed to maintain our carbon-neutral status, and we've been really turning our minds to what we can do for our members and the impacts of climate change in the longer and medium term future on the health of our members. And we've also published our climate disclosure report today, which provides more details about that matter. In terms of our people, we remain committed to keeping our people healthy and happy, and in particular, through life at nib, we want to ensure that our employees have the support that's required in that hybrid working environment, so conducting things such as psychosocial assessments and the introduction of contact compacts, which ensure that we're coming together in a very deliberate and meaningful way with our employees. And in line with our core values of free to [ BU ], we continue to focus on the importance of diversity and inclusion in our business, and we launched our first disability and inclusion action plan this year. Via the nib foundation, we continue to focus on working with those in the communities in which we operate and to partner with partners who are very much aligned to our purpose of better health. And we have some very long-standing partners such as the Black Dog Institute and through their Sleep Ninja app and Hello Sunday Morning. And in FY '24, we reached over 430,000 people through these programs. Mattie, if I could move to the next slide. Thanks, Mattie. The focus for FY '25, we will continue to focus on bringing our members through health management programs and having more members complete health check, so we can work towards improving health outcomes of our members and to harness digital innovation to personalize those health care services. In terms of climate, given our recent acquisitions, we're committed to transitioning all nib controlled locations to 100% renewable energy. And we will conduct a second climate change scenario analysis so we can really have a further look at the long-term impacts of the changes in climate on our members' health. For our people in FY '25, we will continue to focus on reducing the gender pay gap, and we will be working further towards more diversity within our workforce. In terms of the community, we continue to be committed to working with our indigenous partners and communities in both New Zealand and Australia and improving the health and well-being of First Nations people. We completed all of our deliverables in FY '24 of our wrap, and we'll be launching our next innovate wrap in FY '25. And finally, in terms of governance, we remain committed to upholding strong governance across the entire business. Significant work is already underway in relation to CPS 230, and we're working to ensure that our cybersecurity and protecting our members data remains a priority. And as we continue to use more AI, we're developing our AI policy to ensure that it is working to manage our members' data in a responsible and ethical way. Thank you. Back to you, Mark.

Thanks, Ros. Many of you have seen this slide before. I started off today talking about how the essence of P2P were threefold really, an expanded value proposition for consumers. Secondly, that become a source of differentiation in what -- particularly in private health insurance, which has become largely commoditized over the decades. And most importantly, it'll improve health outcomes across our population consistent with our raison d'etre as a business. And so you might say, well, that's fine, Mark. But where do you actually capture value for the enterprise? And I think this diagram is a useful way to think about that. arhi expansion is obvious. We look to grow the marketplace, the attraction of private health insurance and our relative share, and we've been doing that quite nicely for many years now. So P2P is fundamental to that. But of course, if you think about the Australian health care economy, $230 billion, and you have the NDIS and Travel in New Zealand, the opportunity for a company like us is actually much, much larger. So above and beyond arhi and its expansion. We have explored adjacent markets, which are PHI related. It's really an economies of scope perspective. And that, of course, today includes international workers and students and includes New Zealand, it includes travel insurance. And as I mentioned earlier, we're doing quite well there. And that's quite a significant, all taken all together, they're very significant markets where we can capture value. Government and third-party programs, well, obviously, the best example of this is the NDIS. We're working in that $40 billion system now. Now this is a system, a value pool, if you like, as large as the entire private health insurance system in Australia. And we're very excited about our prospects. The government's policy approach around a more seamless integrated experience for participants and all people with disabilities through a navigator model is very much aligned with our vision for the business. And as Nick has touched upon, we're making great progress there. Midnight Health and Honeysuckle Health are interesting value pools. Honeysuckle Health by keeping people healthy and hopefully out of hospital because of good health while having them treated in substitutional settings of care, including their home, is obviously an opportunity to capture value in that large part of the healthcare economy, we call hospitals. It's about $100 billion of that $230 billion we mentioned. And that's going very well. Almost 30% of our major joint replacement now is conducted in our Clinical Partners program, which subject to the doctors being happy that it's clinically appropriate, we'll see rehab -- rehabilitation, for example, done at home. And Midnight Health is playing in the value pool of what we affectionately call everyday healthcare. That's about the $35 billion that Australian consumers spend on out-of-pocket expenses in meeting their everyday health requirements. And that includes things like GLP consultation, prescriptions. And as Nick touched upon, we see great opportunity around weight management and the prodigious role that we expect GLP-1 agonist, the Ozempic that we gave you some under/over the world will have. We like to think as a business, we'll be a leading facilitator of weight management into the future, led by our ability to facilitate easy access to the GLP-1 agonist. And of course, the final part of that is just providing additional value and making it all the more affordable for consumers, which feeds every element of this schema. Next slide, please. So I won't get through every element of this. But look, there are a few highlights. In New Zealand, for example, we now have a fully operational life insurance business. That's important for us in New Zealand because advisors, our principal distribution channel like to sell health and life insurance as a bundle. So expect we'll do much better there. I've touched upon the nib plan management. On the right -- top right-hand side, just calling out the significant investment we're making in digital assets, Ed touched upon this, such as our symptom checker. Our vision for our P2P ecosystem is not that we manufacture every element of the system, but there we facilitate, we orchestrate consumers being able to access a broad range of physical, virtual and home care products in a single location, maybe on our app for somebody with disability, it may be on some other form of device. Also, we're calling out here social prescribing. This will figure more and more in our ambitions to play a role in helping support government programs like the NDIS because we know how important social factors, employment, food security, home security mitigating the risk of isolation and land, but we know increasingly through data science, just how important these are to improving health outcomes, our very mission. And you can see a whole stack of enabling capabilities to support this framework below. Like every other company in the economy, we're very interested in AI and see huge potential for it right across the spectrum of our activities from predicting health risk and how that might be better managed through the processing claims or invoices as we currently do in the NDIS and other parts of the business. Next slide, please. Okay. This is probably a bit everyone is waiting for. So let's just break it down. arhi, look, we still expect good growth in the system. The system has grown for the past 17 quarters. It's grown on the back of heightened concern in the community about the risk of disease, courtesy of the pandemic. It's growing on the back of not something we celebrate, but concerns in society about public hospital system and waiting times. And I think it's growing on the back of the industry, strong competition across the industry and the industry being prepared to invest in its future through marketing and advertising and product development, just like we are. Our forecast for next year's policyholder growth of 3%. I expect that we're probably around 30% or to double what the system will grow. It's only because of difficult economic circumstances. Although as Ed highlighted in his presentation, we're off to a really good start. Our annual growth rate is now is jumped to 2.8% from just 2.5% at 30th June. So we're quite optimistic about arhi bouncing back this year. Look, absent the crystal ball, I know there's considerable discourse around what's the long-term outlook for claims inflation likely to be for arhi. The truth is nobody can predict this with any accuracy, but what we can rely upon is history. And while history doesn't repeat, it rhymes and that range of 4% to 6% is very consistent with what we've seen over the course of the past 20 years. And as I explained earlier on, the high level of inflation that we currently experience is simply the system, both in Australia and New Zealand, reverting off a very low artificial COVID base to this new normal. So we're fairly relaxed about claims inflation, notwithstanding some of the pressures we're feeling there. And ultimately, the situation with hospitals will resolve itself. It's not up to us to repair their P&Ls and balance sheets, but we're certainly sympathetic to their client and willing participants in the government's current review of the hospital system -- private hospital system and arrangements. And we're equally confident about stabilizing our net margin in that 6% to 7% range as we weather this current high inflationary environment, things return to normal. There'll be some risk around pricing, not so much in New Zealand, where we have a lot of flexibility. But in Australia, where we have an approaching federal election. But at the end of the day, we're confident government accepts supported by its regulatory institutions like APRA that we still need the price in whatever the underlying rate of inflation is just like general insurers have to do in respect of home and car insurance, et cetera. So very optimistic about arhi and its prospects as always. iihi is now, as I mentioned earlier, at record levels. We did experience difficulty during COVID, particularly with students and the fact that we didn't have new students arriving in Australia, refreshing the risk pool. And we had a larger cohort of existing students aging, because something we've learned over the years is the longer international workers and students stay, the longer their tenure, the worse it gets for the loss ratio. So staying ahead of that and pricing in that natural occurring growth in claims experience is a challenge we have in the business, but that's now stabilizing. And we're quite happy with iihi result in fiscal '24, and we expect to do even better in fiscal '25. New Zealand is interesting. New Zealand is growing nicely. It's growing on the back of an enhanced value proposition, a better experience for advisors and our particular partnership with Maori tribes or iwi, where we're assisting those tribes, identify health risk in their tribes and manage that health risk. So it's a very exciting prospect for the business with opportunities to grow even further. And as we price in the rapid rate of inflation that we've experienced in fiscal '24, margins will stabilize to that 8% to 9% range. Nick touched upon Travel. We lost the partnership with Qantas, which affected sales, but didn't necessarily affect our overall income. A lot of improvements have -- we've seen in Travel, it's much more integrated with the business today. Culturally, it's more aligned with the business. We have some improved underwriting arrangements in place that Nick touched upon, and we expect the U.S. and the Europe to really kick back in the gear in this following 12 months. So Travel will continue to grow, and it will improve upon the '24 result into '25. I've spoken a bit about Thrive, as the others have already expect ongoing growth in the business, expect ongoing improvements in profitability, expect ongoing improvement in efficiency, born out of scale, but also automation and expect that will be part of working with government and the disability community in shaping what a navigator actually looks like. We're very clear about what the purpose of this business in helping participants not just pay the invoices of their support providers but helping them design their plans, make more informed choices around their providers, better manage that relationship, but also have access to the broad range of healthcare products that we offer our members today. And as Nick touched upon, we expect to see Honeysuckle Health will continue to grow. It's already has one customer larger than nib today. At Midnight Health, as I've already mentioned, apart from providing the basic services around virtual consultation with GLPs, prescriptions and medical certificates. It's leading the way in the development the application of GLP-1 agonist in the marketplace, and also leading the way in terms of better integrating services which support weight loss, because we know that pharmacy alone is not the solution for tackling the endemic weak or obesity requires behavioral changes. And married with Honeysuckle Health, we're already delivering a number of programs, MedJourney, which is designed to understand those behavioral changes needed to complement health and pharmacy. So with that, I'll hand over to questions.

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

Congratulations, Mark and Ed. Best wishes for next steps. I just wanted to ask a question about arhi and the hospital picture that you're seeing at the moment. I wondered -- I noticed you've got 27% of joint replacements through clinical partners. Are you also seeing shorter lengths of stay in hospital? And I just wondered what you thought might be driving this.

The short length of stay is a global trend. It's improving on the back of improved clinical practice and technologies. So procedures which 30 years ago, may have required 4 nights in hospital. Today can be handled overnight or even same day. So it's just you have usual advancements in clinical practice. And I expose in some markets. I was just going to say in some markets plus Southern Australia has been delivered. Yes, it's been driven by commercial considerations as well.

And you see that accelerate more recently, perhaps with prehab and I don't know, hospital at home, that kind of stuff.

Absolutely. So something between [ 60% ] to 70% of procedures currently in long-stay hospitals are currently short stay. So it's happening within the traditional long-stay hospitals. But of course, it's also happening within the dedicated day hospital sector as well. So this is no longer a trend. That's a reality. It's more a reality these days. If we go to hospital to the extent that is clinically appropriate and the doctor makes these decisions, never us, that the shorter the stay hospital, the better.

And one more question just on the nib Thrive business. It's a great profit for this period. I wondered if you could give us some color on how you transition to the navigator function from plan management businesses, I understand you're talking with government? Just to understand -- I wanted to understand how that would happen and whether the economics would change?

Well, the economics will eventually change, but it's not clear exactly how. And this is something we're working with the disability sector and government and the [ NDIA ] and working out. There's probably a future, and I won't try and put a time frame to it, but let's say 5 to 10 years ago, where a navigator is paid a percentage of the planned budget because that would be simple. In the meantime, the economics for us will remain that the existing remuneration structures will stay in place. So at the moment, plan managers have paid an annual fee for a participant and support coordination -- support coordinators, where we're also playing now are paid a charge, which is part of the plan. And that charge relates upon the level of accreditation of the support coordinator. So the existing remuneration structures will remain in place until the navigator model is actually introduced. How long that will take really is difficult to predict. In the meantime, we had a plan. We've always had a vision that we would be a navigator, not just, as I mentioned earlier, somebody who'd pay the invoices and help manage the budget for participants. We entered through plan management because they were the assets that were available for sale. Support coordination is very fragmented. Well, plan management is fragmented, but there were some larger assets as we've demonstrated in our M&A program, which we've been able to acquire and accompany that with some investments in technology and support coordination business. So we now have a license as a support coordinator. And support coordination is going to be really important as a skills base to help us develop our navigator model because it's the skills of the support coordinator rather than the skills of the planned management business, which lend themselves rethink to a navigation model. Something that's really important to emphasize here, which may have gone unnoticed in the discourse is that a fundamental premise of the independent review committee and government's endeavors is to provide services to all the 3.5 million Australian to identify as having a disability, not just say, 600,000 to 700,000 who are eligible for NDIS funding. And they describe that as foundational support. We think the addressable mark for the nib Thrive will not only be the 700,000 NDIS participants but anyone across Australia and potentially in New Zealand who have a disability, we can still provide them with the service of helping them design a plan to meet their goals, procure the relevant support services they require and manage that relationship with support coordinators, with providers of support. They may self-fund or rely on other funding to purchase that support for us. But we're not looking just at the NDIS participants even though, obviously, they'll remain the -- they'll be the top priority.

Our next question comes from the line of Julian Braganza from Goldman Sachs.

Just an initial question just from the claims inflation over the period or second half '24. Can you just talk to where the pressure is coming from in claims inflation? Is it the hospital contracting have anything to do with it? And also just trying to understand, are there any one-off claims impact coming through the results in the second half '24 period? Just to understand if there's a difference between the margin you reported and just the underlying margin that you were previously disclosing?

Thanks, Julian. Yes, I mean, we've outlined in the arhi slide claims inflation of 5.7%, up towards the upper end of that 4% to 6%. And I guess it's broadly spread across the modalities. Interestingly, during the -- during COVID, we called out rehabilitation psych and also risk equalization as being low. What we're seeing is that psych and risk equalization remain relatively low, but rehabilitation actually came back a bit and was above average. So broadly across modalities, rehab a little higher, but it's not -- it's one of the bigger 5, but it's not the big 2 of joints and cardio. In terms of utilization and cost, about evenly spread, maybe a bit more on cost inflation versus utilization. And then lastly, if we look between hospital and ancillary, it would be more on the hospital side.

It's a fairly -- the 3 core components for us or any insurer for that matter, but particularly us with the third risk equalization, our service cost, utilization and risk equalization. So the growth we're seeing is fairly symmetrical. The hospitals are obviously pursuing price increases. That's well known in the marketplace. And to the extent that we think it's prudent, we're accommodating those requests, including entering into renegotiations mid-cycle. As the pipeline starts to fill again, we're seeing a growth in utilization activity, which was deferred during COVID-19 and explained the provision that we made during COVID-19. And the third one, particularly for us is risk equalization. So just as we benefited from low systems growth during COVID because we're such a large contributor to the risk equalization pool. So to -- are we experiencing greater pressure because of that same factor. But bear in mind, too, of risk equalization that to the extent that other insurers, Bupa, Medibank, Private, et cetera, improve their claims efficiency and claim less into risk equalization. That does have some benefit for us, which shouldn't be forgotten. So we're always somewhat paradoxically, we're always cheering any improvements that many of our competitors may make in improving health outcomes and our clinical efficiencies.

Okay. Great. And just a second question on reserving. Nick, can you maybe just talk to your overall reserving position just the moving part between the different buckets. It looks like the claims process but not yet paid, seems to have strengthened over the half. And I'm just trying to understand how we should be thinking about your reserving at the close for FY '24 and how you're thinking about that?

It's really that in Note 4, I think it is of the accounts. It's really that IBNR number. The claims process, but not yet paid is just a factual number in terms of what we're holding on, but we haven't yet paid and it's the IBNR, which is the one that impacts. You can see that's gone down, I think, about $20 million after going up a bit. So relatively high in comparison to claims paid. If you did a trend over that period and looked at it. So it is relatively high. But again, we have seen higher claims paid. So we sort of have had that relatively high.

Okay. And just one last question. In terms of just the lapse rate, so that has increased second half '24 quite a bit. Just interested in your sales mix going forward and how we should be thinking about that given the competitive dynamic in the industry and across different channels and whether there's expected to be any change there to improve that lapse rate?

I'll take this one, Julian. So on the lapse rate, yes, it's worth looking back around the pre-COVID lapse rate numbers to probably get a better guide of what a more sustainable long-term lapse rate is for arhi, in some ways, a byproduct of a very strong sales rate as well. So there's some relativity there around the FY '19 number that's probably worth guiding back to that 13.8% number for the full year and particularly in the second half, really compounded by the April premium increase and sort of the elevated switching market off the back of that and also people looking for better value, I think, just in the marketplace more generally. So whilst we did see that make quite a step change from FY '23, which was a very strong result for arhi, that has sort of trended back towards those pre-COVID lapse levels that we're generally expecting to see. That said, I think on the sales mix piece that we've done very well in FY '24 with record sales and sort of that multi-brand, multi-channel distribution strategy really starting to generate some good top line sales outcomes. And in particular, skewing, as I mentioned earlier to that combined and hospital mix, which is our favored sort of target segments. Looking forward, and I know we showed you a brief snapshot around the FY '25 results to date. We are still seeing continued strong growth there. So we expect lapse will remain relatively high, and we are seeing that over the course of the first 7 weeks of the year in what is a competitive marketplace. But where we're feeling that we're comfortable to play in that space around marketing, product and pricing but also our offers composition to capture growth in a sustainable way.

Yes. And of course, there was a 2. As you mentioned earlier, the 2 premium increases always was going to give us a whack. My friend [ David Cox ], I think, subtly mentioned the other day that there was some growth behavior in the marketplace, aggressive growth behavior, which is not sustainable. And I'd agree with that. There is a level of competition out there in the market, which that's what competition is about. But I doubt the insurer leading that will have the stamina for much more.

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

Just 2 from me. Firstly, in relation to the 50,000 participants target for the NDIS, you had very slow growth in that metric in second half '24. Do you think you can get to that 50,000 target organically? Or do you need to make further acquisitions?

I think both, Andrew. Certainly, the -- one of the factors we've encountered with organic growth is our focus upon merging what 6 plan management brands has taken away. Well, obviously made it slowed down our ability to introduce the market the nib Thrive brand. But we're there now. So expect that the marketing and effort around the nib Thrive brand will contribute materially to organic growth. Similarly, as we bolt on our support coordination business, they will bring other participants, which we hope would become plan management participants as well. And I think some of the rigor and integrity that Minister Shorten and others are attempting to bring to the NDIS. We see an end to evidence of shopping around for plan managers. So there is some evidence that people will shift plan managers in an effort to secure an arrangement that they may not be able to secure with a more reputable plan manager. So we think that could be a factor as well. And then we haven't ruled to the extent that it meets our economic criteria and business case, we wouldn't rule out some further small acquisitions. We talked about 50,000. Every -- it depends on how the navigator model plays out, but there's no reason to believe that nib Thrive cab be supporting 100,000 NDIS participants inside the next 5 years. This industry -- the NDIS, if you think about that middle earth, that role of local area coordination, support coordination and claim management. There is no doubt in my mind that, that will consolidate into 4 or 5 larger players over the course of the next 5 to 10 years. And we certainly aspire to be one of those leading providers, navigators.

And then just in relation to the guidance on Slide 36. Just keen to get some clarification around the comments of breakeven for Honeysuckle in '25 and Midnight Health in '26. Is that on an exit rate basis? Or is that expected to be achieved in each of those years?

That should be achieved within the year, maybe the second half. Midnight Health is at the start of -- the first breakeven month is at the start of FY '26.

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

Wanted to return to the subject of the claims provisioning. It's probably easier if you look at it on that AASB1023 basis on the right-hand side of Slide 11. But as I understand it, the [ 2328.8 ] in '23 had $64.3 million of top-ups to the -- what was in the OSC provision. So I think what you're saying is that's largely still there, but some of it got released a bit in '24. So firstly, is that correct? And secondly, if you do then adjust for that level of provisioning, that means that, that line has gone up by easily into double digits. So can you maybe explain why?

So that's correct. I mean, largely, what we're saying is that there was a movement out of the COVID provision and into the LIC by 64% and then the next -- and then in FY '24, it reduced by about 20%. And so it's remained relatively high given the inflation that we're seeing.

So the underlying is 10% increase in that, if you adjust for those 2 numbers, 64% and the 20% well into double digit.

No, I'd say it's 9.5%. I'm not -- Nigel, probably worthwhile. I think I know where it's heading. But if we look at what I'd call the claims paid, which excludes those 2, we would agree that, that's up in that 9% to 10%, which against our average growth. And if you have a look at sort of the comparisons, you can reconcile between the average growth.

Okay. So 9.5% because of -- still seems higher, right?

So yes, I mean, if we go back and say claims paid per policy at 5.7%, it is at the higher end of our range.

All right. Okay. I'm just still not clear why that goes at 9.5%, but unless there's any further explanation, I'll move on.

We can take it off this afternoon. 3.6% average growth.

Right. Okay. Fair enough. Slide 19, then why are you so ahead of industry claims growth, do you think even sort of once you account for risk equalization?

I mean, again, I'd say that 5.7%. I mean, this is a period of just depending on where people's COVID experience occurred that you can get some volatility. And I think what we're trying to say is that over the long term, there will be some volatility as we emerge from COVID. But if you go back to the prior slide, the industry experience and nib experience is fairly similar.

Risk equalization, look, we need to see the APRA figures. But there's a product mix question as well. It's fairly evident that some of our competitors have relied heavily on lower-value products, including ancillary products for their policyholder growth. And by definition, that will lift the denominator, but without the same level of growth at the numerator that we have selling high-value products that Nick touched upon.

Okay. I mean there is a criticism in the market that this -- you're now sort of paying the price of previously growing in areas you shouldn't have. I mean, presumably, you wouldn't agree with that. So can you just maybe to say why you think that's not the case?

I don't understand what's the definition of areas a by product mix or geographic or how do you mean?

Well, you've obviously had strong growth over time. Some people say that that's inappropriate growth. So I'm just trying to -- you presumably would not agree with that. So I'm just sort of trying to sort of...

Let's unpack that as we've often observed before, we don't care what the underlying claims growth is if the revenue growth more than matches it and the margins. And so if you're selling high-value products, and we've given some emphasis to that in the last few years, particularly with our success in the likes of Silver plus, you will see higher levels of drawing rate inflation relative to others. So the challenge comes to price it in. We got a good pricing result this year relative to the industry. We've touched upon risk equalization. I don't think anyone would be critic of our efforts over many years now of attracting more younger people into the system. That supported the system as a whole, particularly through risk equalization. The other issue to think about is nib being subject to anti-selection, which is public enemy #1 in our business. And again, there's no evidence certainly in our reckoning of any anti-selection, adverse selection, whatever term you prefer. And of course, the final point to be made on this is risk equalization does exactly what the name suggests, 50% of total hospital claims are risk equalize. So any trend of any selection by a single operative will largely be offset through the process of risk equalization. We've ever really encountered, in my experience, inflation above and beyond the industry, once you allow for variance in a statistical form, that's when we were a little bit generous with an ancillary product called Top Extras 85 a few years ago. And we paid the penalty for that. We quickly corrected the situation. But one of the reasons we had to pay the penalty for that because ancillary cover is not protected underwritten by risk equalization.

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

Just a related question to the one that Nigel asked. Just in terms of the inflation that you are seeing, I think you're flagging you have about 6.6%, excluding risk equalization this period. The guidance that you gave for margins for next year, you must be assuming that inflation drops quite sharply, unless I'm missing something about downgrading risk, downgrading trends or the like because your claim -- I mean your premium inflation is only [ 4.1% ]. Can I just understand what assumptions are going into your guidance of 6% to 7%? And maybe if you can just confirm to that 6% to 7% is not a through-the-cycle guidance. It is actually what you're guiding for '25?

Sid, I'd have the average revenue per policy or a little higher than that. It might be something to do with closing and average policies. But yes, I mean, we're not expecting it to be up at 6.6%. We're expecting it to be within that 4% to 6% range, potentially more in the higher end of that range. But again, it's really around what the revenue is versus what that claims inflation is going to be and then what we can price in. And so I think what we're saying is that if we go to our second half margin structure, that's going to be the margin structure that we'll start to target, and we'll be focusing that on our pricing into next year. But also, it does depend on where we see claims fall out for the next few months as we go into that cycle.

It's a relevant risk...

I mean is there any reason we shouldn't use the second half as the starting point for thinking about your margins. Is there any reason in the second half, which has dropped quite precipitously from what you told us was the underlying at the first half? You're not calling out any one-off, is there any reason we should...

In that high 6s, known that sort of high -- that high 6s is that's why we provided that slide. So it has -- claims inflation was higher in the second half that we were anticipating versus our underlying margins in the first half. That first half result was strong. And so yes, but I think we've always talked about the target margin range. And so that's why we're providing that in the second half.

Yes. Interpreting your question, Sid, I think it is a starting point. And I expect the first half of this fiscal will be harder than the second half. But as we've emphasized today, we're confident we can maintain that range. We're confident that things will moderate through the course of this calendar year, notwithstanding the ongoing pressure on hospital pricing. And of course, there's always the cost lever to be pulled depending upon how things played out. And I know Nick and Ed have well-advanced plans around further cost savings, productivity improvements and targets to go with that. So we clearly entered after a very benign claims environment throughout COVID-19, as we have touched upon constantly today, we're clearly ended the period where things are reverting to whatever the new normal mean becomes, how fast that occurs and when -- how long does it take for the pipe to be full again? That's still a question for us, and everyone across the sector. But I wouldn't expect -- I think the second half -- the first half of next year will be similar to what we've seen in the second half, probably a little bit better as things moderate. And the second half of this fiscal should be back to some sort of new normal. I think the bigger issue without wanting to overstate it is going to be -- even though the next pricing round doesn't affect '25 so much. Clearly, it has an impact on '26. But as we always have in the past, we'll cut the cloth to fit whatever comes down -- whatever comes down from the Minister's office.

Yes. Okay. Fair enough. And maybe just one last question from me. Maybe to, Ed. Ed, congratulations on your appointment. I'm just keen to understand what you plan to do? What's your main focus for the business going forward, which might be different to what we've seen for the last couple of years, near-term and longer term?

Pretty consistent themes moving forward. So certainly, I guess, in the conversation today, there will be an elevated focus around strengthening our core businesses, particularly around claims cost containment and also an ongoing disciplined approach to management expenses because they are certainly levers that we can pull that are within our short-term control. continuing as we put in the outlook around the 3% growth for arhi, we're still very confident and positive around that multi-brand and distribution strategy that we've deployed. We're also looking at a potential third-party administration opportunities around working more closely with some of our health insurance partners in the marketplace, and we're excited about what those opportunities and prospects could uncover around both supporting our core arhi business, but again, growing some adjacent earnings beyond the health insurance businesses. Certainly, in the students and workers in business, we are confident around policyholder growth moving forward. And whilst there's a little discussion around some of the migration patterns, particularly in the student space, we are just seeing that start to normalize towards a pre-COVID base. And then I think the other -- the 2 other big pillars, and Mark has talked a lot about our NDIS business, Thrive. We're very excited around the future navigator model under that business, both on a short-term basis around sustained earnings in the plan management space, but equally, how do we play a more meaningful role as one of the leading brands in the NDIS sector. The third pillar really is very much around this everyday health management space, which we've sort of put into that portfolio, our Honeysuckle and our Midnight businesses. The culmination of the health services capability that they're now actively supporting in the marketplace beyond nib gives us some strong encouragement. But as Mark has alluded to earlier, just the value proposition that those 2 businesses actively support our core businesses is also what gives us confidence around a level of differentiation. I guess, underpinning those 3 areas, there's this element of digital and customer, and we've given you some reference around this digital first strategy that's starting to gain significant momentum. Mark talked a lot about the opportunity in AI and also automation. And so again, if you think about the composition of an insurance style business, it really lends itself to increasing adoption of automation also self-service. And we feel we're only really just getting started on that digital and customer agenda. So in a nutshell, that's probably the key themes as we look forward. So definitely some consistency with the existing strategy there.

[Operator Instructions] I'm showing no further questions. I'll now turn the conference back to Mark for closing remarks. Please continue, sir.

Thanks, everybody. Thanks for your time today and your questions. And no doubt we'll be seeing a few of you in the weeks ahead. So thanks, and thanks, everybody, today for organizing this session. It's much appreciated. Cheers.