nib holdings limited (NHF) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for nib's FY '26 Full Year Results. I'm Ed Close, nib Group CEO and Managing Director, and I'm joined here in Newcastle by our Group Chief Financial Officer, Nick Freeman. Before we begin, I'd like to acknowledge the Awabakal people, the traditional custodians of the land we are joining you from today. I pay my respects to elders past and present. We are pleased to report a solid FY '26 group result with pleasing strategic progress, positive customer outcomes, a strong capital position and a more balanced contribution across our businesses. Our purpose of your better health and well-being continues to shape our strategy and guide our people to deliver sustainable value for our customers, shareholders and the communities we operate within. nib is now a simpler, more focused and more efficient business with a clear emphasis on private health insurance and related services, supported by leading digital and AI capability, strong customer advocacy, our high-performing people and a disciplined approach to risk and capital management. This morning, I'll cover the highlights, segment performance and strategic progress. Nick will then take you through the financial results in more detail before I return to discuss strategy and outlook. So if we head across to Slide 6, our FY '26 highlights. It was a year of disciplined execution and meaningful strategic progress across the group. Group underlying operating profit increased 9.1% to $260.9 million, supported by strong revenue growth and improved operating efficiency. Net profit after tax was $186.9 million, ahead of expectations. Our balance sheet and cash generation strengthened and this supported the Board's decision to increase the targeted dividend payout ratio to 65% to 75% and declared a final dividend of $0.21 per share, including a $0.05 special dividend. A major feature of the year was the conclusion of the strategic review of nib Travel. Both sales transactions are expected to complete in the first half of FY '27, simplifying the portfolio, sharpening our focus and providing further capital management flexibility as sales proceeds are received. Productivity was another key highlight. Our digital and AI program continues to scale, delivering $61 million of value. In Australian residents, we delivered record sales, strong customer advocacy and the net margin was managed in the 6% to 7% target range, while absorbing elevated risk equalization volatility and higher acquisition offer costs. We are also repositioning policyholder growth towards higher-value, more sustainable segments. Our related businesses delivered a substantial improvement in strategically important adjacent markets. Underlying operating profit increased by $41.9 million to $86.1 million in these important segments, lifting their contribution from around 1/5 to around 1/3 of total group earnings. The results reflect another strong international performance, a rapid recovery in New Zealand and Health Services reaching profitability for the full year. If we turn to Slide 7 and the group performance metrics. Top line revenue growth was strong, increasing 6.2% to $3.8 billion. And as the fourth largest health insurer in Australia and the second largest in New Zealand, we now cover more than 1.95 million health insurance lives across our core PHI segments. Pleasingly, the operating expense ratio reduced to 16.6%, down 110 basis points on FY '25. And this is particularly important within the result. It shows that productivity is now structurally embedded and flowing through to the P&L. Across to Slide 8, to our Australian residents portfolio. The industry remains attractive and continues to grow. Industry hospital coverage increased by around 308,000 lives in the 12 months to March '26, reaching a record 12.8 million Australians. And with more than 15 million Australians holding an extras policy, this demonstrates the strong appeal of maintaining private health cover. Our value proposition continues to attract customers. We achieved more than 147,000 sales, up 4.3% and net switching remained beneficial to nib. Our policyholder growth was 1.9% and is expected to be broadly in line with the industry. We're now deliberately shifting growth towards higher value and more sustainable segments. 85% of net growth came through our target silver category, compared with 46% last year. Our FY '26 policyholder growth outcomes reflect deliberate choices on pricing, product design and portfolio quality, including exiting uneconomic corporate groups and shifting away from lower-value cohorts. These actions have some impact on short-term lapse and churn, impacting net growth by approximately 60 basis points, but they're the right decisions to support sustainable growth, long-term affordability and margin quality. We also see increased customer churn through broker channels, elevated by high promotional activity from competitors. Retention and lifetime value in our higher value segments are clear priorities for nib in FY '27. We continue to refine our channel mix, targeting acquisition investment more deliberately and reviewing partner economics alongside investment in the nib brand and direct capability. Our customer proposition remains strong. Net promoter score was plus 32 and more than 70% of members are now digitally connected. Our First Choice network helped customers save $57 million in out-of-pocket costs. Our hospital payout ratio was almost 89%, well above pre-COVID levels and reflects the support that we continue to provide to members and the private hospital sector. Disciplined pricing and productivity absorbed claims inflation and mix. Our gross margin is now at a sustainable level and net margins were well managed in the target 6% to 7% range. I do want to spend a moment on 2 items that impacted the Australian residents margin, higher acquisition offer costs and claims inflation impacts as a result of elevated risk equalization volatility. Firstly, on risk equalization. nib's own claims inflation continued to improve in FY '26, moderating to 4.1%, excluding the New South Wales bed rate changes. Over the long term, our risk equalization outlook remains supported by the same structural drivers that we've spoken about previously. That is a younger membership base at nib progressively aging and deliberate growth in older and higher-value segments. These factors have historically improved nib's relative position in the risk equalization pool and we see no reason to believe that these long-term trends have changed. However, risk equalization volatility in FY '26 was largely driven by industry claims inflation appearing to have accelerated, potentially reflecting a combination of catch-up activity, hospital contracting cycles and faster claims processing across the sector. And this narrowed nib's historical gap to industry and increased our risk equalization costs by about 10% and was about $10 million above expectations. While we remain cautious on near-term volatility and have factored this uncertainty into FY '27 planning, the longer-term outlook remains constructive. If higher industry costs persist, then this can, of course, be considered in future pricing submissions, while a higher industry cost environment should enhance nib's overall competitiveness. On higher offer costs, a material contributor to the increase was the industry clarification on the Australian government rebate treatment, which mean offers can no longer attract the rebate. The other contributors reflected a genuine step-up in promotional intensity across the industry. We saw elevated offer use along with nib's shift to higher premium silver products, particularly late in the year. Given the environment, we intend to be far more selective in the use of acquisition offers moving forward, taking a more targeted approach, aligning channel investment with retention and lifetime value and building more sustainable partner arrangements. The use of industry offers are driving very high levels of unsustainable churn with often little benefit to consumers. From a distribution perspective, intermediaries and comparison services provide valuable choice, transparency and advice for consumers. Sustainable offers also play a role in this sector. However, we see opportunity for greater transparency and more sustainable settings across offers, discounts and broker commissions so that the market better balances new customer acquisition with consumer affordability and value towards existing loyal customers. Nick will step you through the margin drivers in a bit more detail shortly and will provide some further perspectives on reform opportunities in the strategy and outlook sections. So if we head to Slide 9, our related adjacent businesses. It was a strong year for the broader portfolio. Underlying operating profit increased to $86.1 million, up $41.9 million and now represents around 1/3 of group earnings. This gives nib greater earnings depth, diversification and strategic flexibility. International health insurance delivered another strong result with underlying operating profit up 15.1% to $35.1 million and policyholder growth of 4.4%. New Zealand delivered a decisive turnaround, returning to profitability with underlying operating profit of $27.5 million. Pricing and claims actions restored the business to a sustainable position and the focus is now on maintaining that momentum and rebuilding growth. Pleasingly, Health Services achieved full year profitability. This is an important milestone. It shows the business is moving beyond investment phase and beginning to contribute meaningfully commercially. It also strengthens the broader PHI proposition through health management, care navigation and PHI services. nib Thrive delivered a positive UOP contribution. And this was a solid result in a period of significant sector reform. The business is investing in service capability, operational excellence and remains well positioned for future claim management reforms that favor scaled, compliant and high-quality providers. And on travel, as mentioned earlier, the strategic review is now concluded. This sharpens our focus and retains the opportunity to support a capital-light, partner-led, nib-branded distribution model across Australia and New Zealand. So if we head to Slide 10. Productivity is now embedded in how we operate and a material driver of group performance. Our digital, AI and productivity agenda delivered $61 million of value in FY '26, taking cumulative savings since FY '24 to $79 million. More than 86% of Australian residents claims are processed through automation and our service contact center interactions reduced by 6.7%. More than 700 employees are now using nibGPT, our AI frontline tool, which supports around 340,000 queries and our AI-enabled tools saved more than 26,000 hours of manual effort in the Australian contact center last year. Our digital and AI agenda is now scaling quickly, delivering better service, faster decisions and a lower cost to serve. Our Australian residents nonmarketing expense ratio is now among the lowest in the industry with further opportunity ahead. Lower cost to serve gives us more flexibility to invest in customer value, improve price competitiveness, support service quality and maintain sustainable margins within our target range. So with that, I'll now hand over to Nick, who will take you through the financial results in more detail.

Thanks, Ed, and good morning to everyone. I'll now take you through the financial results in some more detail before I'll hand back to Ed for the outlook. If we go to Slide 12, thank you. FY '25 was a strong year financially with the group underlying operating profit increasing 9.1% to $260.9 million, which was within our guidance range. The result was supported by continued revenue growth, margins in the target range in our arhi business, strong contributions from our adjacent businesses and ongoing productivity across the group. Importantly, as Ed just said, the productivity program is continuing to translate into financial outcomes, with group operating expenses reducing by 0.7% despite inflationary pressures and the operating expense ratio improving by a further 110 basis points to 16.6%. Net profit after tax was $186.9 million, which was a 5.9% decline on last year. And while lower than the prior year, this largely reflects positive impacts in the FY '25 year normalizing. FY '25 was a relatively high investment return year. And additionally, we had a lower effective tax rate due to the recognition of Midnight Health tax losses upon gaining a consolidating interest in the company. Our balance sheet remains very strong, with gearing reducing to 15% and EBITDA leverage of very low 0.6x. That strength, combined with the expected proceeds from the sale of the travel business, has enabled the company to declare a final year dividend of $0.21 per share, which includes a $0.05 special dividend. Go to the next slide, please. The nib Group balance sheet did strengthen materially through FY '26. Net tangible assets increased almost 15% to $341 million, while EBITDA leverage reduced to 0.6 and gearing improved by nearly 500 basis points. The improvement was driven by stronger operating cash generation, lower capital expenditure, as well as reduced acquisition activity and capital optimization within the health funds. The health funds PCA ratio finished at 1.65x, above our target range of 1.5 to 1.6x. Given the strength of the capital position and cash generation, the Board has increased the target ordinary dividend payout ratio to 65% to 75% and a $0.165 ordinary dividend has been declared. Additionally, we expect to receive around $97 million in net cash after the sale of the travel business. While these proceeds are yet to be received, all CPs have been fulfilled, and we expect completion in the first half '27. As such, the Board considered it appropriate to provide a $0.05 special dividend as a result, taking the total final dividend to $0.21 per share with future capital management optionality available. We've outlined an indicative framework for the expected net proceeds from the travel transaction at the table on the bottom left. Turning to the Australian residents health insurance business. Revenue increased 6.4% to just over $3 billion, reflecting premium increases aligned to claims inflation and policyholder growth of 1.9%. Underlying operating profit was $187.9 million and net margin was 6.2% within the target 6% to 7% range. While policyholder growth moderated from FY '25, it remains within our estimate of system growth. and reflects portfolio repositioning towards higher value segments, as well as heightened competition and aggregator activity. Claims inflation moderated further to 4.1% or 4.5%, including the New South Wales bed rate changes. A key highlight was productivity, with the non-marketing expense ratio reducing to 5.3%, its lowest level since 2007, and that helped offset elevated risk equalization volatility and higher offer costs. Customer advocacy also remained strong with NPS holding at plus 32. There's a bit going on in the net margin, so I've got a couple of ways of looking at this. If we have a look at this slide, it just provides a bit of context around the margin performance. So I'll walk you through it. The key message is that our underlying margins have been stable at 6.3% across FY '25 and FY '26. Beginning from the left-hand side, the reported net margin at 7.3% needs to be reduced by 1% for LIC claims development, and this was highlighted in the FY '25 results presentation. This is mainly due to the LIC at the end of FY '24 being overstated with the benefit of hindsight. The reduction in the FY '24 LIC occurred in the first half of FY '25, elevating reporting margins due to that provision release. So then starting at the 6.3% underlying margin in FY '25, we can see that pricing largely offset the impact of mix and claims inflation, netting out to a small impact of 10 basis points. The 2 major impacts to margin were, first, the risk equalization, and we'll have more on that in the next slide; and secondly, increased offer costs as a result of clarifying the removal of the government rebate on offers and also a general increase in offer intensity during the year. Our productivity then managed to offset these impacts to allow the underlying net margin to be stable at 6.3% in FY '26. We've also highlighted the first half/second half margin profile in the table at the bottom left. Again, the LIC development is an important factor. While reported margins were 6.8% in first half '26 and 5.5% in second half '26, when we adjust for the LIC development impact and also seasonality, underlying margins remained stable in that 6.3% range. In this case, with the benefit of hindsight claims development, the LIC balance was understated at the end of the first half of '26. As a result, we had to reaccrue in the second half of '26 impacting margins with the effect being magnified because the impact is only across half the full year. Looking at the gross margin walk. This is effectively the same margin walk, but just looking at the gross margins. Again, we have reported gross margin in FY '25 at 18%, which then needs to be reduced to an underlying margin of 17% after the FY '24 claims development that impacted FY '25. With an underlying gross margin of 17%, we have the same price mix inflation impact and also the impacts from risk equalization and offer costs. However, there's no offset by the productivity, and hence, gross margin underlying declined to 16.2%. We continue to see opportunities through claims management, portfolio mix optimization and pricing discipline as we manage margins into FY '27. Importantly, across the last 2 slides, our pricing actions accommodated mix and inflationary pressures, increased hospital benefits, while productivity improvement supported net margin resilience. Into the next slide. Claims inflation continued to improve during FY '26. Underlying claims inflation moderated to 4.1% despite risk equalization contributing about 40 basis points of inflation, which was about 30 basis points in margin. A significant issue this year has been the industry-wide risk equalization volatility. You can see in the bottom 2 graphs -- in the 2 bottom graphs that risk equalization has been the highest relative contributor to nib's inflation in FY '26 with risk equalization growing at 7.1% and our annual risk equalization payment growing at 10% versus a long-term average of closer to 4%. The table in the top middle part, which is entitled Risk Equalization Impacted by Gross Deficit Inflation explains why. The gross deficit is the amount of claims each submit -- each -- sorry, the gross deficit is the amount of claims each insurer submits into the risk equalization pool that is then risk equalized by other insurers. The more you submit, the more you tend to get back. As you know, nib is by far the single largest contributor at $280 million. To put this in context, the next largest contributor is around $40 million to $60 million. The reason is largely due to nib's younger age profile. However, this has meant that nib's gross deficit inflation is generally higher than industry. You can see that in the table, our gross deficit inflation has remained largely stable at 6.5% to 7%. However, the industry inflation has shifted from around 5% up to 7.5%. The normal gap to industry that we would see, which is about that 1.5%, has not been present in FY '26 and that's increased our risk equalization payment above trend. We do not have line of sight as to why the industry gross deficit grew so strongly this year. Reasons could include claims inflation or payment speeds that have accelerated faster in the industry versus nib or the timing of hospital contracting. While this created a near-term earnings headwind, a sustained increase in claiming by the industry relative to nib, should that continue, will be reflected in relative lower levels of total inflation and we believe could improve our relative competitiveness over time. But there have definitely been some unusual and volatile results in how some health funds have contributed or received this year. And we continue to support reform of the risk equalization system towards a more prospective framework that better rewards prevention, claims management and participation by younger members. Moving to international, please. International delivered a standout result. Revenue increased 7.4% and underlying operating profit grew 15% to $35.1 million. Policyholder growth accelerated to 4.4%, driven by strong growth across PALM, temporary graduates and skilled workers segments. Margins improved with gross margin up 160 basis points and net margin increasing to 15%. Customer outcomes also remained exceptional, with NPS of plus 62 and approximately 90% of interactions occurring through digital channels. Overall, this business continues to demonstrate the benefits of disciplined growth strategy, strong customer propositions and operational efficiency. New Zealand. New Zealand delivered a very pleasing outcome for the group this year, with underlying operating profit improving from a loss of $2.9 million in FY '25 to a profit of $27.5 million in FY '26. The turnaround reflects deliberate pricing actions, claims recovery initiatives and disciplined expense management. Gross margin improved by more than 600 basis points and net margin recovered to 6.5%. Importantly, customer outcomes were also a focus with NPS recovering in the second half. We deliberately prioritized sustainable margin restoration over volume growth in FY '26 and we now believe the business has returned to a stronger footing from which disciplined growth can resume. We look at the -- the next slide illustrates the mechanics of the recovery in New Zealand. You can see that significant pricing actions restored portfolio economics and enabled revenue growth to outpace claims growth. At the same time, claims recovery initiatives reduced utilization trends and improved claims discipline. With claims inflation now moderating, pricing actions are beginning to normalize. The focus from here shifts from recovery to sustainable growth while maintaining the stronger margin profile achieved over the last year. nib Health Services achieved full year profitability and continued to build momentum. Underlying operating profit improved from a loss of $5.9 million to a profit of $2.4 million. This reflects growth in Honeysuckle Health, improved operating efficiency and the benefits of full year ownership. Honeysuckle Health continues to demonstrate strong customer outcomes, while ItsMyGroup has become an increasingly valuable strategic asset. ItsMyGroup now supports 18 health insurance brands, powers 20 comparison platforms and facilitates more than 10% of industry sales. And together, these businesses strengthen our relationship across the health insurance ecosystem while creating attractive future growth opportunities. nib Thrive operating profit was $16.3 million, $600,000 lower than last year and was impacted by the removal of setup fees and lower participant numbers. However, strong productivity outcomes largely offset these impacts. Importantly, we see emerging NDIS reform agenda as a net opportunity. The proposed reforms increase compliance, governance and operational requirements for plan managers. Additionally, there is recognition that plan management is an important part of the NDIS fabric with a clear direction towards a small panel of high-quality plan managers. We believe these changes are likely to favor scaled, well-governed operators such as nib Thrive. Accordingly, our focus remains on efficiency, payment integrity, customer experience and leveraging broader group capability and we are well positioned to meet the commissioning requirements of any future panels. In terms of travel, the strategic review of travel has delivered a successful outcome. Both transactions announced during FY '26 are expected to complete in the first half of FY '27. Upon completion, we expect to receive approximately $97 million of net cash proceeds, providing additional capital flexibility. Importantly, nib will retain a long-term distribution partner with Allianz Partners, allowing us to continue offering travel insurance to customers through a capital-light model while generating future commission income. The transaction simplifies the group and further sharpens our focus on private health insurance and related services. And finally, turning to cash flow. Operating cash flow was strong, increasing 20.2% to $199 million. The improvement reflects recovery in New Zealand, productivity gains across the group and continued operating discipline. Capital expenditure reduced significantly, contributing to free cash flow, improving from an outflow of $21.7 million to an inflow of $27 million. Strong cash generation also supported a reduction in borrowings, further strengthening the balance sheet. Overall, the combination of earnings growth, strong cash generation and lower leverage positions the nib balance sheet well as we enter into FY '27. I'll now hand back to Ed to discuss the outlook.

Thanks, Nick. If we jump across to Slide 26. So our strategy has 2 clear priorities. Firstly, growing and strengthening our core private health insurance businesses and secondly, scaling in related health and insurance services. Across core PHI insurance, the focus is on leading customer and digital experiences, stronger loyalty, disciplined distribution and sustainable growth in higher value segments. Our multibrand, multichannel model is a genuine advantage. Alongside the nib brand in direct and intermediate channels as well as GU Health, our flagship corporate offering, we work with leading insurance, banking and loyalty brands as a strategic health insurance partner, extending our reach into trusted customer communities. This approach is differentiated and strategically valuable to target high-value segments. Claims excellence is equally important. Better provider contracting, benefits management, payment integrity and care navigation support affordability, customer value and better health outcomes. In health and insurance services, we have the opportunity to provide a second source of growth. Honeysuckle Health, ItsMyGroup, nib Thrive and complementary insurance partnerships are capital-light platforms that leverage capabilities close to our core. They strengthen the private health insurance proposition and create further diversified earnings potential in strategically related markets. Our digital and AI advantage supports better experiences and productivity. Disciplined capital and risk management provide flexibility and strengthen customer outcomes and our purpose-led people bring this strategy to life every day. The FY '26 result gives us confidence that this strategy is working. We've simplified the portfolio, strengthened the balance sheet, improved efficiency and delivered growth in group UOP as well as increasing the contribution from our related adjacent businesses. So if we head across to Slide 27 on focus and outlook. We expect continued group underlying operating profit growth with guidance of $265 million to $285 million, excluding nib Travel and subject to risk equalization outcomes. In Australian residents, we're targeting sustainable policyholder growth, a broadly stable gross margin subject to risk equalization and an underlying net margin within our 6% to 7% target range. Improving retention in higher value segments is central to this plan. We're strengthening the nib brand and direct channels, targeting acquisition investment more strategically and establishing partner arrangements that place greater value on customer tenure and quality. We also retain performance improvement levers through pricing and product design, claims management, provider partnerships, payment integrity and productivity. International and New Zealand are expected to continue making strong contributions and health and insurance services are targeting further positive underlying operating profit growth. At the group level, we expect further productivity gains, continued improvement in the operating expense ratio and significantly lower one-off costs. The completion of the travel transactions and receipt of the sale proceeds are expected to provide further balance sheet flexibility and capital management options. As mentioned earlier, from both Nick and I, I did want to spend a moment on industry reform opportunities because affordability remains central to participation and the overall sustainability of private health care in Australia. Firstly, on acquisition offers and incentives. Offers can attract customers to private health insurance, but the current settings significantly favor switching over loyalty. New customers can receive an effective first year discount of up to 24% compared with 12% cap benefits for existing members. Better alignment would create a fairer balance and reduce the costs ultimately shared across the broader membership base. The use of offers, gift cards and other inducements create high levels of churn and impact premium affordability over time as these costs get priced in. Offers have also become prevalent across the broker channel and this activity is driving unsustainable consumer and commercial outcomes. Secondly, on intermediary commissions, brokers and comparison services provide valuable choice, information and transparency for consumers and they have an important role to play across the sector in helping consumers find better value and the most suitable cover for their needs. However, clearer disclosure and sustainable commission guardrails would preserve those benefits, support competition and ensure additional cost is not added to the system and borne by consumers through higher premiums. Thirdly, on risk equalization. We strongly support community rating and the principle of risk equalization. But the opportunity is to modernize the current retrospective model through a carefully designed prospective approach that preserves fairness while creating stronger incentives for health funds and ultimately consumers to improve member health outcomes, invest in prevention, manage claims effectively and attract younger, healthier lives into the sector. This would support affordability for all consumers, strengthen participation and help ease the demand on the public health system. Finally, on contemporary models of care. Delivering the right care in the right setting at the right time can improve health outcomes, customer experiences and overall system sustainability. And this includes care at home and in the community settings across areas such as mental health, maternity and hospital substitution. The test should be clear. Care must be safe, high quality, genuinely substitute for hospital treatment and not cost additive and then be appropriately priced, which is fair, transparent and deliver measurable value for consumers. Taken together, these reforms can improve affordability, support participation and strengthen the value and sustainability of private health cover. We continue to engage actively and constructively with government, regulators and industry partners on these reform priorities. And more broadly, we enter FY '27 with good momentum. Our core health insurance businesses are performing well. Our adjacent businesses are contributing more meaningfully and productivity continues to improve. Supported by a strong balance sheet, a clear strategy, we are confident in the outlook and our ability to deliver sustainable long-term value for customers and shareholders. So with that, we'll open up the call to questions. Thank you.

[Operator Instructions] First question comes from the line of Julian Braganza from Goldman Sachs.

Just on New Zealand, can you maybe just comment on why your policyholder growth was so weak? Sort of seeing down about 7% annualized over the second half. And can you just maybe comment on what's being done just to address that unit growth?

Julian, thanks for the question. So as we've called out, some disciplined choices had to be made in New Zealand across the portfolio around pricing, product design and competitive positioning to ensure that we could really get back our -- on stable footing around the structural components of the portfolio. And so the choices we've made and we've been quite transparent around the pricing discipline that we've put through that market alongside some of the additional product changes that has come with some higher lapse and also did impact in the short -- first half, in particular, service levels around our ability to support some customers. And so that did come with a short-term impact to lapse and you can see that reflected in the policyholder growth. We also saw a shift in downgrading as consumers started to look for higher excess tiers and lower levels of cover. One of the things, I guess, is unique about where we moved quite quickly and decisively on some of our choices and that did mean our competitive positioning relative to peers was disadvantaged across the cycle. And so we've now pleasingly started to see that the actions we've taken puts us on strong, sustainable footing and gives us a better comfort around our pricing outlook and ultimately our competitive positioning. So a few factors there really around ensuring that we could restore margins to a sustainable level and confident in the outlook now that we are in the range that we're in. And our competitors are starting to react with similar and higher both pricing and product design changes, which gives us some confidence around our proposition moving forward.

Okay. And in terms of just the outlook for net margins, the second half was clearly very strong, above your historical target ranges for the business of 8% to 10%. So what's the outlook for margins from here, just given what you're putting through on price and what you're seeing on claims inflation?

Yes. So we talked about sustainable margins. We're not providing any specific outlook on the margin trajectory at this point, Julian, just given some of the movements that we've just touched upon. One thing that we are certainly committed to, though, is now that we have restored to a sustainable level, is that investment and focus on sustainable policyholder growth. And so the balance for us moving forward is around disciplined investment in those areas, but also ensuring that, that net margin remains stable and improving over time. But Nick, anything you want to add to?

Yes. Julian, one of the reasons that the second half was a bit stronger than everyone expected was that we had 2 months of really very low inflation that the industry is still scratching its head on, be it providers or health insurers. And so we're just -- we're not going to factor that into the inflation into the first half. It looks a bit like an anomaly at this stage. So maybe that might help a little bit.

Okay. Got it. And then maybe just on the resident business. If I look at your market share data, that's reduced now market share to about 9.7% as of March 2026. So it looks like your policyholder growth is now tracking below system. So I just want to get your view here in terms of the outlook, the strategy around how you're thinking about policyholder growth and what initiatives you have in place to improve the trends relative to the system.

Yes. Thanks, Julian. We've certainly signaled a shift in our focus and intent around disciplined policyholder growth in higher value segments and we've called out a couple of factors there. Firstly, the choices we made around pricing and product design as well as the exiting of some uneconomic corporate groups and low-value cohorts has materially impacted policyholder growth in the last 12 months. And they were necessary and deliberate choices that we've made. And so this focus on high value over high top line growth is an important aspect of our proposition moving forward. I've also talked to some of the unsustainability around the use of offers, ensuring that we are not seeing high levels of churn across some of the intermediated channels are other factors that have now got us thinking around what is a sustainable pathway. The other piece we just need to remain alert to is that there are some proposed rebate changes coming later in the second half of '27. And so it is difficult for us to, with confidence, predict exactly what that will look like in terms of our book and composition. So I think we're guiding to high-quality sustainable growth moving forward and that should be a hallmark of our proposition moving forward.

Okay. And last question for me in terms of the expense ratio. So you're flagging further benefits that could come through from here. I just want to understand, what is the sort of magnitude of the opportunity that could potentially offset any further risk or downside risk to gross margins? I think you were 9.9% for arhi. How are you thinking about that in terms of flexibility that could come through into next year from your productivity focus?

We're going to see a decent reduction because of the travel business going. So depending on the timing of that, that will assist. And then I think it does depend a bit on how much simpler we can make the business as a result of travel exiting the group. So I think that at this stage, we probably outperformed everyone's expectations this year in terms of productivity. We still think there's more to go, but that'll depend on how much we can leverage the simplification and also the AI opportunities.

Next, we have Siddharth Parameswaran from JPMorgan.

A couple of questions, if I can. Just wanted to ask about claims inflation in the residents division. If I look at Slide 14, the incurred claims cost grew 8.9% and you had policyholder growth of 1.9%. I know there was a lower reserve releases this year than last year, but it still suggests that underlying incurred policy inflation as you see it, per policy, stripping out the claims inflation was roughly 6%. And that seems quite high. I know that you're flagging underlying inflation as 4%, but you're stripping out the risk equalization impact there. I'm just keen to understand exactly what is driving these numbers. It seems very high, much higher than your revenues per policy. And I'm just keen to understand whether it's likely to continue into next year. And yes, if you could give us some color around that.

I think, Sid, there's 2 things. The first one is that inflation is on a per customer basis. So there's also that exposure gap between the policyholder growth and the customer growth. And we would include all of that in mix around the net pricing, because pricing is on a per policy basis. And then the second is that the LIC had a big benefit in the prior comparable period.

And Sid just building on Nick's comments, the 4.1% that we referenced there, that includes the risk equalization impacts. So we haven't backed that out, the risk equalization [ opportunities ].

Okay. Well, maybe if you could just help me -- sorry. I was just going to ask then, I mean, maybe if you could just help me. Actually, sorry. Maybe you just finished. But I just can't reconcile the high incurred claims number that we're seeing here. If I take [ out the LIC, I stripped ] that out in the question that I asked, it still seems very, very elevated versus the 4.1%. So you're saying that includes the arhi. But maybe if you could just comment on 8.9% minus the 0.8% you had, which was the LIC development last year. There is not much contribution this year. We're still looking at sort of 8% incurred inflation. You've got roughly 2% policyholder growth. That was the 6% that I was referring to. Just keen to make sure I understand the gap between the 6% and the 4.5% or the 4.1%, whichever one you're focusing on.

So rough numbers, I think I'm seeing about 8.9% growth in incurred, less 2.2% average policy growth, less about 0.7%, 0.8% of people growth, that's about 1.1% of LIC impact gets me down to about just under 4% -- sorry, just under 5% and I'd have to sort of work through the next 40 basis points to the 4.5%. Sid, maybe we can do that this afternoon.

Okay. Okay, no worries. I'll ask it a different way then. It seems like there is gross margin pressure, which was partly offset by MER savings, which were very substantial. Just keen to make sure I understand your views on trajectory into next year on the MER versus the gross margin trajectory because can you sustain that level of improvement again next year in your view, whether there'll be any stranded costs from the travel sale, which might have to be taken up? And also just whether you think that -- I mean the 4.1% seems very low. I'm just wondering, are you suggesting that, that should be the increase that we should be factoring in for next year?

Sid, we've guided to -- we've given you some guidance around the gross margin in the outlook. We've given you some indication around the net margin target range and we've given you a group UOP guidance range. I guess, there's a number of variables there that we've talked in around risk equalization, volatility in particular. That can be one of the key movements there, but I thought it was important to then introduce that additional outlook statement around broadly stable Australian resident gross margins. We also feel between pricing, discounting optionality and other levers, you've called out MER as a material one as well, that we've got practical ways that we can manage that margin well in the 6% to 7% target range. So that's the outlook from our perspective and we haven't specifically given claims inflation, but you've touched on some of the key numbers there.

Okay. That's helpful. If I could ask one other, just around international. So I just want to make sure I'm clear on understanding [Audio Gap] competitors said they are now one of the providers on the PALM contract. Maybe if you could just comment on whether that's likely to have any impact on policyholder numbers at all. Yes.

Yes. We're really proud and pleased with the work that we've done in that PALM segment, in particular, Sid. So we've had a longstanding relationship with the industry and government. You're right in that there are -- it's always been a nonexclusive preferred partnership, I should stress that. And those having another competitor on panel presents an opportunity for both players to really deliver great outcomes for that seasonal worker offering in the Pacific Islands. We have really built those relationships through the employers and directly with those end customers. And so whilst it is important to have preferred provider status, ultimately, our go-to-market proposition and the strength of those relationships directly with the employers and the individuals is what is giving us confidence around continued growth in PALM market share. And we're really proud of that work that we've done in that space, also aided by some positive signs in skilled workers as well. So yes, it's been a fantastic result more generally in the international visitors segment, supported again through pricing discipline and the productivity piece and being very selective around which segments we play in because we know, particularly in the backdrop of migration settings there not all segments will behave equally. And so we feel well positioned to continue with some ongoing performance in that segment.

Next, we have Andrew Buncombe from Macquarie.

Just 2 from me, please. Apologies if I've missed it, but I seem to remember in February on the group call, you made comments about doing a holistic end-to-end review of benefits across the group, but I can't see it this time around. Maybe just an update on how that is tracking would be great.

Andrew, no, it certainly continues as a key part of our strategy and focus moving forward. I think we call it out explicitly in the strategy slide for our core business. And that extends to both our Australian business. There, you'll see through the bottom section, customer value through claims excellence. But we do see material opportunity in both Australia and New Zealand around improving and enhancing our proactive claims management. It is multifaceted, everything from partnership contracts with hospital providers through strengthening payment integrity and assurance, particularly with the role of AI and patent recognition giving us further clarity and opportunity and delivering better consumer outcomes through affordability in some of our network strategies. So certainly a fundamental part of our proposition moving forward. And the progress has been solid in the last 12 months in both businesses and you see how we are containing claims inflation in New Zealand, but equally starting to see some positive moderation in the Australian business as well.

Excellent. And then the other one from me, given some of the scheme reforms that are coming down the pipe for Thrive and NDIS, how should we be thinking about participant growth for yourselves in Thrive in FY '27?

Yes. We remain alert to modest growth in the plan management and NDIS sector more generally in '27. And that's because these reforms are still gaining traction and we're still seeking clarity as to what exactly they look to -- look like. So we -- the pleasing part has been lapse has materially stabilized over the past 12 to 18 months. We did have a significant service disruption about 18 months ago and we're now really improving customer advocacy. So our proposition has really strengthened over the past 12 months. And we actually remain quite excited about the future potential of plan management more generally. Despite some of the changes around eligibility and scheme sustainability, which we fully support, we see a really important role for plan managers, particularly those plan managers that are scaled, compliant and acting in the best interest of all participants and we certainly believe that nib Thrive is one of those. So we anticipate that off the back of these reforms, that we will see further consolidation across the plan management market. We are seeing some indications now that plan managers of varying shapes and sizes are starting to exit the system as the compliance burden is increasing, which we see as an absolutely valuable thing for overall participant outcomes. So we do see some opportunity here around market share growth that we are guiding to in the medium term. That said, these changes will take some time to bed down and we're not expecting any wholesale change in the next 6 to 12 months. Our priority focus in this business is ensuring that we ready the proposition to be well placed when these reforms take effect.

So on that basis, would you see M&A as an option for your Thrive business in FY '27 then? Or continue to focus on the organic as the sector continues to shake out?

Yes. We're very focused on maximizing the return on those existing investments, Andrew, and we do see some opportunity around organic growth. And as I mentioned, starting to see some players exit the sector. So not at this stage, not anticipating any inorganic growth in this market.

Next, we have Nigel Pittaway from Citi.