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Edited Transcript of NHF.AX earnings conference call or presentation 19-Aug-19 12:00am GMT

Full Year 2019 NIB Holdings Ltd Earnings Call

New Castle, New South Wales Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of NIB Holdings Ltd earnings conference call or presentation Monday, August 19, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Anthony Fitzgibbon

nib holdings limited - MD, CEO & Executive Director

* Matthew Neat

nib holdings limited - Head of Corporate Affairs & IR

* Michelle McPherson

nib holdings limited - CFO & Deputy CEO

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Conference Call Participants

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* Ashley Dalziell

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Daniel P. Toohey

Morgan Stanley, Research Division - Executive Director

* David Ellis

Morningstar Inc., Research Division - Senior Equity Analyst

* David Spotswood

Airlie Funds Management Pty Ltd - Senior Research Analyst

* Matthew Dunger

BofA Merrill Lynch, Research Division - Research Analyst

* Nigel Pittaway

Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

* Siddharth Parameswaran

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [1]

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Okay. Well, good morning all, and thanks for those who're attending today. And welcome to those joining us online. As per usual, I'll start off with some highlights. Michelle will get into some detail, and I'll come back and talk after Michelle about probably what you're most interested in, the outlook for the business.

Okay. Just I'd like to start off with 3 key points this morning. The first point to be made, and it's not a platitude, but I think our results continue to be evidence of why we're here. Our fundamental purpose is to improve the health of our members. And the data -- I won't take you through each of these points, of course, but this just clearly demonstrates the role we are playing as a business, and indeed, the role PHI generally is playing in supporting our health care system. Today, private health insurers fund 40% of total hospital admissions and 6% (sic) [60%] of full elective surgery.

But the other point I'd like to make is that we're broadening that role. We're broadening our role beyond we're here just to help you pay for the bills of the doctor and hospital once you're sick. We're here to actually improve your health literacy and to help in your decision-making about the choice of treatment and the choice of procedures. We have, for example, an online platform these days, a digital platform called The Check-Up, and we had over 1.3 million visits to The Check-Up last year. And we're presently about 130,000 hits a month, where we're engaging more deeply with our members to improve their health literacy and as I mentioned, help them make better health care decisions.

And that's been supported by a range of other new services, including -- we're the first in the industry to allow people to search for a provider online via Alexa. We have a Going to Hospital tool these days, which helps our members understand what to expect around a hospital admission and whether or not they're likely to encounter a gap. And just this week or last week, we announced our partnership with HealthShare, where we're helping our members at the front end, where it needs to happen with their GPs, make an informed choice about their choice of a specialist or surgeon.

So as important as this ongoing role we have in helping people access and afford private health insurance through the financial protection we provide, we're actually thinking about a world in which we can more broadly assist them in broadly living healthier lives, and not just individuals, but the entire populations like the population we're servicing today in New Zealand, Ngati Whatua.

The third point I want to make is that we believe that if we're really good at fulfilling that purpose as a business, the commercial results will follow, that there's a very strong correlation between how well we serve our purpose and our financial and commercial results.

We're also increasingly recognizing our value, I would suggest as a business, and our business has been for quite a while, almost 70 years. We've always recognized that the sustainability of our business is only as good as the sustainability of the communities in which we operate, be they Newcastle, Sydney, Melbourne, San Francisco, the Philippines, Europe. And so we think deeply about, look, how can we make a broader contribution to the societies, to the communities we serve? We have set this out in 5 different elements, and again, I won't go through each element. The information is there for you to examine.

Probably -- I'm very excited about, as the relationship we have with the iwi group in New Zealand, Ngati Whatua, I think that's potentially the genesis for our much greater involvement in helping communities manage their population health and helping governments do that as well. A lot of activity in terms of our responsibilities around the natural environment. We think we're an industry leader in terms of diversity. And again, the data supports that. Our foundation continues to make a prodigious contribution to various health care purposes across various communities. And of course, we're very focused, as you'd expect on the BRC implications, the APRA CBA review. And just generally, our approach to risk management, improving our culture around the management and control of risk.

Okay. Well, Michelle will break this down in detail. And again, I won't go through each point. Naturally, we're quite happy with the results. In very difficult market circumstances, we managed to grow the top line quite nicely. We grew our margins. But I won't say, no -- well, certainly in arhi, we grew our margin, our core business. Our net income, investment income was powerful. And again, you can see the data there and all the results.

So I'll hand you over to Michelle as promised, and I'll be back to talk about the outlook and forecast. Thanks, Michelle.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [2]

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Thanks, Mark. Good morning, everyone. We should move on quickly from that slide.

What I would like to do is to provide you with a little more granularity around the financial results we achieved in FY '19 as we focused on delivering our purpose of your better health. Our 8.3% increase in group underlying revenue to $2.4 billion was underpinned by revenue growth in all of our operations, with the 17% increase in our International (Inbound) Health Insurance business delivering the strongest revenue growth.

Group UOP at $201.8 million was up 9.2% with strong increases in Australian Residents Health Insurance Business and International (Inbound) Health Insurance, partially offset by declines in our New Zealand and travel businesses that I'll expand on in later slides.

Rather than talk to management expenses at each business segment slide, I thought it useful to discuss at a group level because we do take a group approach to how we service all of the operations across our organization.

Group underlying expenses have increased almost $52 million, and the reasons for this can be grouped into 3 areas: The impact of our M&A and our new business initiatives as we build economies of scale and scope have added about $13 million to our cost base and are totally consistent with our strategy. Investment inorganic growth of about $16.3 million more than FY '18 delivered 5.7% growth across our private health insurance businesses and was a good investment. And then we've spent a further $22 million above FY '18 in improving our operational capability and capacity.

And so if I talk in little more detail around that, employee costs have been increased in areas such as benefits and provider relations, IT, risk management as we do things like invest in the personalization journey that Mark will talk about a little further on as part of our strategic plan; as we delivered the private health insurance reforms that I'll touch on in more detail later on; and as we strengthen our risk and compliance capability across the organization. We're investing in IT capability, moving more and more of our operations into the cloud and strengthening our security. And we also delivered a workplace strategy that did see an increase in our occupancy costs of about $3.3 million, but vital to ensure that our employees, who are the bedrock of delivering on our strategic plan, have the right operating environment as we move forward.

So to Australian Residents Health Insurance Business, or as we talk about, our flagship. Our arhi business delivered double-digit earnings growth with UOP up to $149.5 million, 14% increase over FY '18. The result did benefit from a full 12-month ownership of our GU Health business that we acquired in October 2017 and some releases from our FY '18 claims provision that I'll talk about in a bit more detail.

So during FY '19, we saw premium revenue growth up 7.6% as a function of policyholder growth, premium adjustments and the GU Health contribution. If we normalize for the GU Health impact and the OSC restatement, premium revenue increased about 4.8%, and claims increased about the same, 4.75%.

And I sound like I'm trying to adjust for lots of things, but if we adjust just for the outstanding claims provision release, I think it's worth noting that our FY '19 gross margin would have been 17.8% versus an FY '18 equivalent measure of 17.7%, translating to a net margin of 6.5% versus what would have been 7.2% last year. This will make more sense as we talk about the claims inflation a little further on.

It's fair to say our constant focus is on the member and how we enhance the value proposition, and it's pleasing to see that our NPS has continued to improve, up from 28.7% to 32.5% for FY '19.

I've added a couple of extra slides, some of it based upon feedback that we've had in the past, but also to help you better understand the result. This slide provides you with a view of the drivers of our reported gross profit for our Australian Residents Health Insurance business.

In summary, our gross profit increased $47.5 million, and it can be grouped into the following areas: favorable policyholder growth impacts of $7.4 million net; product mix impacts of $10.6 million; rate increases, largely in line with inflation, and there's about $1.2 million; and the restatement of prior period incurred claims, as we now know based upon payments experience, had an $18.9 million positive impact in improving the reported gross profit for the year for arhi.

So to claims inflation. What does that look like? This next explanation could get me lots of questions, but I think it's important to do. We've prepared the claims inflation slide on an actuarial incurred basis. What do I mean by that and why is it different from a financial reporting period basis? Actuarial incurred is our latest estimate of claims by service month, taking into consideration all of the payments that we have up to the end of July and determining our view of what is incurred but not reported OSC at 30th of June. And I think this graph tells a really interesting story. Bottom line is that our favorable claims environment that we talked a lot about for FY '18 was even more favorable, but we have seen some signs, as you can see from this graph, that, that trend has been changing.

So if we talk about hospital, which is a key contributor to our total claims costs, it's driven by a number of top hospital procedures. And we've tried to give you some color on that on this slide. For example, hospital psychiatric services were up 24.8% on prior year, driven by the mental health waiver that was introduced from 1 April 2018 as part of the PHI reforms.

Again, going back to our purpose, the utilization of these psychiatric services highlights the importance of us understanding the needs of our member and helping direct them to the right services and the right location.

Our current projections for FY '20, and Mark will talk to you later on about guidance, we're assuming claims inflation has peaked, if you like, and that the levers we are pursuing to mitigate claims inflation, we will continue to pursue into FY '20 and beyond. Some of those include provider contracting focused on quality and reducing low-value care. A great example is our Clinical Partners program that we have operating in the Hunter region, which provides our arhi members with a guaranteed, no out-of-pocket expenses episode, if you like, for knee and hip replacements.

Population health management initiatives, Mark touched on the sustainability slide, we saw over 10,000 of our members enrolled in health management programs during FY '19 and improved rules engines embedded into our technology as we focused on reducing claims leakage are all areas that go into our thinking around what claims inflation looks like going forward.

PHI Reforms. The recent PHI Reforms driven by Federal Health Minister, Greg Hunt, are making health insurance even better and easier to understand for our members. Nib was one of the first funds to adopt most of the PHI Reforms, with all policyholders on compliant products from 1 April 2019. As set out on the slide, we now have over 15,500 policies that are providing coverage with the $750 front-end deductible. Almost 54,500 young members receiving an age-based discount with an FY '19 premium revenue impact of $1.3 million, in FY '20, that revenue impact will be more in the order for a full year of 5 to 6.

Approximately 1,300 member admissions made use of the mental health waiver at an estimated cost of $9.3 million for the year, and about 17.6% of our hospital policies are on a gold-tiered product.

To switch gears now. Our International (Inbound) Health Insurance business delivered an impressive result with improvement across key performance metrics. Net policyholder growth was up 19.5%, with almost 190,000 international students and workers now covered. Ongoing sales growth, particularly in international workers, reflects our ability to pivot our sales distribution to the shifting visa intake mix that we see across the category.

Policyholder growth, premium adjustments and acquisition of GU Health continues to drive top line growth, which increased 18%; and earnings growth, which increased almost 18% to $34.9 million. Claims and management expenses are in line with our expectations and a function of the growth we see, and margins continue to remain stable.

To New Zealand. With a UOP of $19.8 million, our New Zealand business delivered a solid result, with margin and earnings consistent with our strategy. And I think it's important to note that. Premium revenue was up 8.8% and is a function of normal premium adjustments, policyholder growth and the new business development that Rob and his team continue to pursue. FY '19 saw policyholder growth of 7.2%, which was up from FY '18's 2.8%. This strong growth included the results of a new partnership with the travel insurer, Uni-Care, to provide health insurance to international students.

The international student market in New Zealand does have some differences to the Australian market. For example, students don't need to take out insurance for the term of their visa, and so they can move around. And this results in a shorter tenure for that group of about 7%, which we report that, that transition has lapse, and so that will contribute to higher reported lapse but a really positive new part of our New Zealand offering.

Claims were up 10.7%, driven largely by high utilization, which was 9 point -- up 9.4%, and again, totally consistent with our purpose of delivering more value to our members. Low service cost inflation of 1.3% continued into FY '19 compared to an average of 2.3% over the last 5 years, and it reflects our focus on efficiently managing provider costs. And so our First Choice Network in New Zealand is starting to deliver some positive results.

Mark has touched on our celebration of the first anniversary of our population health management initiative with Ngati Whatua Orakei. We have more than 3,300 members currently enrolled in a preventative health program, which is fantastic.

And I think one of the things that is just a huge credit to Rob and his team is the significant improvement in NPS that we continue to see in our New Zealand business, with our FY '19 result of 34. It's the highest ever result since we first implemented measuring it in August 2013, following our November 2012 acquisition. And at that point in time, the measure was negative 29. So you can see the progress the team have made.

To our travel business. With a UOP of $6.6 million for the year, down from $8.1 million in FY '18, to quote Mark, our travel business remains a work-in-progress. That said, we did see an improved second half result. Our first half UOP was just $2.3 million with global sales showing a positive trajectory. Overall, our sales result was pleasing, up 6.8%, driving improved gross written premium of 7.5%.

The domestic market is showing some stabilization, although there are still some near and present competitor and distribution challenges that we are actively working to mitigate. The acquisition of QBE Travel completed in May and has certainly bolstered our domestic market presence and cements our #3 position in the marketplace.

International sales continue to be strong, accounting for more than half. If you do the calcs, it's 50.1%, but it is still more than half of our sales for the year. UOP was down, as I touched on, the 18.5%, and reflects increase in acquisition costs, which do include the impact of the QBE acquisition in the fourth quarter as well as our investment in both the domestic and international markets.

We're excited about the appointment of our new nib Travel CEO, Anna Gladman, who's due to start in early September as we look to move the business forward.

Another new slide. With $17.2 million of acquired intangibles, M&A and one-off costs, I felt it was important to highlight for you what the make-up of those. The amortization of acquired intangibles reflects our M&A journey with the October 2017 acquisition of GU Health having a full year impact in FY '19, and we'll see nib Travel amortization of intangibles increased in FY '20, reflecting a full year of ownership of the QBE Travel business.

Our one-off costs for FY '19 of $2 million include an insurance recovery, more than offset by some GU integration costs. And I will highlight it because those of you who go through the accounts will find it. And a $1 million impairment of the Travel Insurance Direct brand, down to $5.2 million from the previously reported 6.2%.

It's critical to emphasize this in no way reflects a move away from how important it is as part of our distribution strategy within the domestic business. It reflects a change in the underlying assumptions as we look at the measures we do around that.

So this slide has a lot of detail, and I promise not to try and cover it all. Some key takeouts to highlight. After a very poor start to the year in terms of net investment income, it was more than made up for in the second half of the year with net investment income of $36.1 million, up 22% from FY '18 to 29.6%.

We continue to work with APRA on the review of the PHI capital standards and understand that a further discussion paper will be issued shortly. Most up-to-date understanding is that any changes will be implemented, at the earliest, in December 2021. And we're continuing to work on our internal approach to capital management around the assumptions we're currently aware of such as LAGIC-like standards. And we are accumulating our internal capital above our target, growing that from $25.5 million to $95.7 million across the year. We're also on track to complete the nib/GU fund merge in FY '20.

And so with that, I'll hand you back to Mark, and happy to take questions later on.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [3]

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Thanks, Michelle. Okay. Moving right along. Okay. So as I touched upon earlier there's enormous emphasis in the business, as you'd expect, upon our risk culture and governance both across Australia and New Zealand. Again, I won't go into any detail. I'll leave that to any questions you may have.

We were one of the regulated entities that undertook the APRA-requested -- required review of the CBA report. And I was reasonably happy as the Board was with our results. Not to say they didn't point to 2 areas for improvement, but by and large, it was a good result. And in New Zealand, we've done some very fine work, I think, in meeting the Reserve Bank and FMA requirements there. And in both jurisdictions, we have very definitive road maps about how we can even further improve our risk management culture.

Just a simple example of a change we have made in the last 12 months, we now have an Executive Risk Management Committee, which is a prelude to the information and reporting we do to our Board Risk Committee. So happy to take any questions about any of that towards the end.

Our business strategy remains as it has really now for quite a few years, with perhaps the only real change being the increased emphasis we're putting on this notion around personalized health care. And most of you would have heard the story by now. We see a future in which unless you're actually doing as much about helping your members identify, predict the risk of disease and threats to their health risk profile and actively assisting them in preventing or mitigating, or more precisely, treating that risk, yes, I don't think you'll have a future as a health insurer. That's the world we see coming at us very quickly, and it's a world being accelerated by the dramatic improvements in data science and our ability to take your information -- your biological, psychological, genetic information and help you and your doctors make much more informed choices about your behavior and your health care decisions.

So we're very invested in this notion that if we get this right and get the technology in place and get the right partnerships in place, I mentioned one earlier, our role in society, our -- the problem we're solving for our members will be as much about prevention and better health as it is today about cure and paying for the doctor's bill.

Affordability and sustainability, as you'd expect, remains in focus. Even though our expenses are growing, it's part of our story of growth and expansion. We are very disciplined about the investments we are making. You will never hear, as I've said before, about nib announcing a $500 million investment in some new IT end-to-end, monolithic technology stack. We're going about it much more -- with great -- much greater agility and sensitivity to the expenses and the cost-benefit associated with any of those investments.

arhi remains our flagship, as Michelle described it.

Economies of scope. Look, all of our businesses are doing nicely. Like workers and students, for example, are knocking it out of the park. Admittedly, we still have some challenges associated with nib Travel, and how do we actually convert this fundamental thesis that really travel insurance is as much about medical care and health care as it is the iPhone.

And we continue to make investments. The global business is going very powerfully. The domestic business has had some challenges, and Michelle singled out TID, the slight impairment there. But when you look at the impairment testing, the value of the business as a whole is very attractive relative to the investment we have made today. So we're still very confident about that business.

The new JV in China is going well. We have almost -- we haven't yet had our license yet to sell insurance. The Chinese process is quite protracted, but it hasn't stopped our team signing up. I think we have 7 or 8 clients today in various parts of China, particularly in Shanghai where most of the team are. And those clients are already producing about $5 million -- RMB 5 million, I'm sorry, which is a bit short of $1 million of revenue. It's only small, but it's a start and at least we have to frame a setup cost associated with what is essentially going to be the insurance business with these services we're providing the companies. And the services typically are doing a health risk assessment for all of their staff and giving them some guidance upon how they might improve the wellness and well-being of the people.

And Red Queen Racing, this is this characterization we use of the importance of innovation and the recognition that doing the same thing week in, week out is a recipe for death. And so expect to see us continue to innovate and look for new opportunities in the marketplaces that we play within.

Key focus areas for us. I've touched upon data science and capability. How do you actually build this capability? We suspect -- well, there's a number of -- there's so many challenges associated with it from collecting the data that we need to better understanding who Daniel is, Daniel is sitting in the audience here, so we can provide him with the predictive science and guidance that he requires.

How do you -- we don't think we can build this world on our own. So how do we establish partnerships, whether they be partnerships which improve our engagement with our members or partnerships which are about the pure tech or partnerships which are about the algorithms which inform this type of effort.

A lot of activity occurring in the business around that -- how we build that ecosystem and who's involved in that ecosystem, where might we draw some of the IT and IP, so watch this space on that front.

Improved member experience, reduced out-of-pocket expenses and digital engagement. Look, I think we're doing okay on the member experience. As Michelle has touched upon, our NPS is very solid now across all our insurance businesses. Each of those businesses is growing strongly relative to our competition, which is always a good sign. Our lapse rate within arhi, I want to say, was stable year-on-year after several years of growing.

Now that's not to suggest that we don't have challenges arresting the industry-wide decline in PHI participation, but we are swimming against that tide. And part of the explanation is certainly improved customer service, improved digital engagement. I mentioned The Check-Out (sic) [The Check-Up] earlier where we had 1.3 million visits last year.

Out-of-pocket expenses remains a real issue for not only us, in the industry, this idea that, "It's a bit of a luxury. I'm not going to the doctor." And she might accept our Medicare payment, in which case, I have no out-of-pocket other than the front-end deductible, if I have one. But she might not, in which case, I could have a $4,000 and $5,000 out-of-pocket.

We think that we think that world is totally inappropriate today in an environment where people are really struggling to find value out of their private health insurance when they need it and in an environment where 18% of our total national expenditure on health care is out-of-pocket. It's only 9% in a much-maligned U.S.A. So we're quite determined to redress that. And we believe we have the technologies in place now to, as I touched upon earlier or shared, at least direct our members to those doctors who are most likely to provide a positive no out-of-pocket experience for our members. And we're taking it to another level with our Clinical Partners program, which we're piloting in Newcastle.

In this environment, if you go to one of our clinical partners, you're guaranteed to have no out-of-pocket. And we'd like to scale -- and that pilot is already proving successful. We see that ultimately being scaled across the country.

Active disease prevention and management, of course, is important as part of this future where it's much about prevention as it is paying the bill of the doctor. Michelle mentioned, we had 10,000 members actively involved in health management programs during the year, whether it be around metal health or cardiovascular health. So a wide range of programs in place today.

And as we go into these programs, we're very conscious about the need to demonstrate cost-benefit, that first of all, they're efficacious and they actually help people improve their health outcomes, but that they pay their way and that they can be scaled. The health management world in Australia and New Zealand is still very much a fragmented marketplace, if I can describe it like that. And a priority for the industry is how we aggregate some of these services to provide a better experience for our members.

Operating costs and efficiency remain in focus, as you'd expect, especially indirect costs. When I talk about indirect costs, I mean the costs associated with financial services, our legal services, our IT, et cetera.

nib Travel, I've touched upon. And risk management and accountability, I've touched upon.

Okay. The crystal ball slide. In the arhi business, we're still aiming for that 2% to 3% growth, which we achieved last year, including the contribution from GU, which is still a relatively new business but going particularly well. And it's given us a very strong capability in this particular channel now.

Across all the major sales channels, we now have critical mass and the ability to invest even further and hopefully do well. We expect our insurance margins to be circa 6%. M&A possibilities with a deliberate question mark there, who knows? Certainly, APRA is rattling the sword around what it sees as some vulnerability across the industry, I suspect among some of the smaller funds who may be -- while they may have plenty of capital, courtesy of years and years of accumulated earnings, may be struggling to meet some of APRA's expectations today around governance and risk management.

And of course, there's the outward possibilities associated with industry consolidation, overseas interest. We're seeing this in various parts of Australasia. AIA is a good example of that. We already had BUPA here. And there are other players moving within life insurance, Dai-ichi, Nippon, Cigna in New Zealand. So I think over the next couple of years, there's going to be pressures coming on consolidation both from within and from outside of Australasia.

Iihi -- I'm just going to say iwi and [issi]. The combined business continued organic growth. You would have noticed in the workers business, as we have, there's been a product mix shift when you look at the data. So we're no longer selling anywhere near the 457 visa. Well, in fact, it's gone. And there's a shift towards low-value but high-volume sales such as seasonal workers. But the business is still growing its top line and growing its earnings. The insurance margins are very strong. As you saw from Michelle's slide, this students platform is an interesting one. So we built a platform. We launched this year. We missed the intake for university last summer, but we're very -- we have made some additional student sales into the U.S.A., courtesy of the partnerships we have at the other end. And we have high expectations for this business. We have a vision where we're selling student insurance to students going wherever they go around the world, whether it be Australia and New Zealand, as it does now, or the U.S.A. or Europe.

In New Zealand, we expect continued organic growth on a number of fronts. The sales team are doing an outstanding job there, particularly in the corporate sales. The adviser book still remains strong, notwithstanding some of the shenanigans -- well, shenanigan is probably the right word, but some of the challenges surrounding the advisory industry in New Zealand, courtesy of [BRC] and the Reserve Bank and FMA now having hopped on that bus. But it's still a strong channel for us. And of course, we have this population health initiative that I've mentioned a couple of times.

So I can't overemphasize that. Ngati Whatua, our current partners, are a tribe of about 5,000 lives. We have enrolled about 3,300 of those lives, but the entire iwi opportunity in New Zealand is about 750,000 people.

nib travel. Again, touched upon that. We expect to improve our domestic performances. This is a business now which is pivoted more to international than domestic. QBE's leveling that up again. And again, our QBE book carried some important partnerships, notably the Qantas partnerships. So we now have a dual relationship with Qantas both in terms of manufacturing, travel and health insurance. I expect the international book will continue to grow. I expect we'll continue to capture more value of the premium dollar sold internationally. And that explains our European operation where we now have the MGA, and the numbers are supporting that. We just need to fix the domestic business and reduce our operating costs.

See, this is business that actually churns -- brings us a lot of cash, but we're spending too much of that cash at the moment for good reasons in terms of investment and acquisition. But there are things happening in terms of our operating efficiency, which we're onto at the moment, which is designed to cut the cloth to better fit that income collection.

And China, I've discussed.

So you've all probably had a look at our guidance already. Again, I won't go into the numbers. But if you have any questions or want to clarify any of the numbers we've thrown up here, you're more than welcome. So questions.

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Questions and Answers

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [1]

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Daniel Toohey from Morgan Stanley. Just a question on the guidance, the, I guess, reversion back to 60% net margins. Given those claims trends in the fourth quarter, are you witnessing sort of -- I guess, as much as you can see, I guess, we're now in tail end of August. Are those claims trends sort of tracking in line with the expectation of what you've said?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [2]

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Yes, they are. But they have met so many to speak of. They have certainly -- as you saw from that graph, as I touched on, we think they closed -- they've peaked or close to peaking. But it's dependent upon a number of variables working as we expect them to as we move forward and some of the initiatives that we're doing, including things like provider contracting, deliver the sorts of results that we're assuming associated with that.

So it is definitely a shift from what we saw as a really low claims inflation environment during FY '18 and part of why we've tried to provide you the actuarial incurred view so that you can see how those claims have developed.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [3]

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Yes. There's a lot of noise in the claims data, particularly the hospital data. Michelle touched upon and we had in the appendix, I think, an adjusted number. The mental health waiver has added significantly to the inflation rate during the year. And I think you mentioned a quant number, didn't you? $12 million?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [4]

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Yes, about -- no. It was just about -- it was $9 million to $10 million. The $12 million Mark is thinking about is when we thought about what the range might be of the mental health waiver. That was the upper end. So the number that we've seen is not inconsistent with what we thought it might be, but it demonstrates.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [5]

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Yes. So that's now baked in. So that jacked the inflation number up. On the other hand, the prosthetic reforms brought it down a little bit and has reset that base.

When I look at -- in the hospital negotiations we're currently undertaking, if you look at the utilization levels year-on-year for hospitals, it's still extremely low. In some cases, utilization has come down. So they're a little bit perplexing, some of the numbers we see around hospital inflation.

But look, I think -- I just always revert back to a 20-, 30-year view on this, and you have always seemed to be looking, in my judgment, at GDP plus 2%. I think in more recent years, it's been a little bit less than that. And I think they're all -- what factors actually lie beneath that is anyone's guess really, is that people just nervous about having elective care and deferring a treatment, particularly because of the risk of out-of-pockets. I think only time would tell. But certainly, I think Michelle's judgment and the judgment of actuaries, that what you're seeing in that graph, that slight peak we're moving towards is probably the top of the peak.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [6]

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Can I just dig in a little bit on the mental health claims? I'm just worried that this could be a blind spot for all of us. The diagnosis of mental health issues, particularly amongst younger members is growing -- in my understanding, is growing dramatically. Yet the big carrot for this younger cohort is sort of the reduced attempts and potential reduced loading on the premium and the waiver. Yet we need these guys to sort of fund the older people in the system.

Is there is a risk we get sort of some adverse selection in the growth of younger members being those with mental health issues?

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [7]

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Well, most of the claims we've seen are existing members who have taken the opportunity to move their cover. So you'd like to think that much of the wide-ended selection has occurred already. So that's a favorable interpretation.

I think, though, more importantly, we certainly have a lot of conviction, as I think most health insurers and even doctors have, is that institutionalizing younger people in particular with psychological -- at psychological risk, is not the answer and explains -- that thinking explains the efforts we're making around interventions such as mind space and many other programs, and we need to get even better at this to prevent that risk of hospitalization in the first place.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [8]

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Yes. I guess the risk of supply-driven demand within that equation or that field given NDIS and other...

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [9]

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Yes. Daniel, it's -- you can characterize that as a risk. But -- and without sounding sanctimonious about it, that's why we're here. If a young person has -- is at risk, that's why we're here. We're here to intervene and hopefully prevent that. So yes, okay, there's a risk associated with the cost of that.

But the upside is, hopefully, we're playing a more relevant, important role in the health care system and helping younger people, or older people for that matter, mitigate the risk.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [10]

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Okay. Just a follow-up question. Again, digging into the claims. Claims expense benefited $38.5 million from product mix. I know there was some offsetting revenues for that. So the net, I think, Michelle, you said was around 10%.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [11]

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Yes.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [12]

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Will this be harder going forward, these positive mix benefits under a gold, silver, bronze environment?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [13]

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Plans, that is, I don't think any harder than it has been in the past. I think it's ultimately around how we design and market our products to hopefully achieve more than our fair share of the better risk if you looked at it on a market share basis, which is part of what's helped us with that, and also in matching the products that we have to the needs of our members and potential future members.

So every year is harder than the year before, if you like, in terms of the value creation, but the team are very, very focused on why, I think Mark touches on, the personalization journey where we're trying to take the value proposition and how we're trying to move the category forward from just being about financial protection is so fundamental to that success going forward.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [14]

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Okay. It's Nigel Pittaway here from Citi. First of all, just a question. I think as you were going through Slide 14, you've obviously said there was about 54,500 persons receiving an age-based discount. Can you comment on how many of those are actually new to the fund as opposed to existing members getting the discount?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [15]

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So I can't give you those numbers because we haven't released them publicly. But the majority of them are existing members. So one of the things that we saw as vital to do as part of the value creation from PHI Reforms is to make it available to all of our existing members, and so we did that. So there are a lot of that 54,500.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [16]

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Okay. Can I just add to that? I -- just to really emphasize a point. We made a very deliberate decision to go early on the PHI Reforms. Quite a few of our competitors for whatever reason held back. We saw that as being a disservice to our members if we did. And it took a lot of work and effort to be ready in time for the reforms, but I think it's paid off. And sales since April have been pretty strong and just as we defied the industry trend last year. Because I expect -- we haven't seen the fallen APRA result, but others have reported that they expect an industry decline.

I expect that we'll have a pretty strong first quarter of this financial year in the arhi business. So I think that supports the strategic decision we made to go early with the reforms.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [17]

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Okay. Second question then on the claims slide. I mean you obviously continue to say you're pursuing a number of initiatives to mitigate the impact to claims inflation. Can you just comment on where you are in terms of the technology spend in order to derive those savings? Are we still sort of expecting a fairly large technology spend to help that? Or...

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [18]

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I think Mark alluded to it during his comments in the presentation, we're not big bang technology investors. You'll see from our cash flow the sort of run rate of investment that we make from a capital point of view. And these days, it's not just capital when it comes to IT. Obviously, some of the upfront development and creation is. But the ongoing with Software-as-a-Services comes through the operating cost line, and I touched on those costs going up. So we're not expecting significant uplifts in that level of investment, and it is taken into consideration in terms of the operating cost run rate going forward in the guidance that we've provided.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [19]

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Okay. Then maybe just a question on costs. I mean if you look 6 months ago, there was talk about sort of a significant expense saving program in order to sort of then, I guess, react to 2x2. Now obviously, the 2x2 threat has gone away, but it does seem as though the emphasis this time is a lot more on the investment vis-à-vis expense savings.

So am I detecting that correctly? Are you pulling back from what you were intending to do originally? Or is there still sort of a focus to try and bring these expenses down over time?

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [20]

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Absolutely not. Can I just add to Michelle's point about the tech? Our very deliberate, I think, concise and clear technology strategy is to hollow out our legacy platform called [Wix], okay? So claims is a good example. So we're taking out the claims functionality on Wix and building a new functionality in a separate system. And so ultimately, we'll have -- our system of record may sit on Wix , although soon it goes to the cloud, too. But the various systems which support the businesses sit outside Wix and very specific to the activity. Benefits payments is one.

Now most of that development was -- not all really, we've done in-house with our own resources, which sounds a bit quaint these days. But there's been no leaks of CapEx associated with that. And that's the way we'll continue to roll, particularly as we move more and more towards Software-as-a-Service as an operating philosophy and the cloud an operating philosophy.

We certainly aren't -- so we spoke about nibx 2.0 in previous presentations. It's still running its course through the business, and there's some very significant developments emerging out of that, which I won't talk to today but you'll see in the next 12 months, which are associated largely with rationalization of operations, reducing duplication of various operations across the business with the view to utilizing common technologies, improving consistency of operations across the business and reducing costs.

Sorry, did you want to add?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [21]

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I was just say going to say that goes for Mark's comment about -- focus on indirect costs in some of his key focus area slide. And we're trying to strike the right balance between investment. If you look at the cash flow, there was -- there is CapEx associated with what we're doing from IT, but they're not big leaks of CapEx as you think about it. The cash flow indicated about $28 million of CapEx, up from -- and I am cheating, up from about $20 million in the prior year. But somewhere in that $20 million to $30 million a year is the sort of level of investment we're seeing on an ongoing basis.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [22]

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Okay. So the cost-saving program that was there before, has that changed? I guess I'll just come back to it.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [23]

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Not at all. And if you were to talk to my colleagues, they're all feeling the pressure of that. I suppose the thing that is -- some of these things take time to implement the changes, and they've got to work through the system. And so hopefully, we're having a different discussion this time next year.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [24]

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And maybe just finally then, you obviously highlight the nib/GU fund merger expected in FY '20. What's your current assessment of how material that will be for capital? Is it a relatively material thing?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [25]

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So it's certainly -- I think at the time we announced the GU acquisition, we indicated a fairly sizable number of about $30 million. What we also indicated, however, is it will go towards meeting what we expect to be the future capital requirements under any new PHI standards. That view hasn't changed. We anticipate that we'll probably, as part of the fund -- well, we don't -- we will increase some of our risk appetite measures around capital.

The third limb of our current risk appetite is around allowing for write-off of 50% of intangibles and deferred acquisition costs. You're likely to see us increase that. So in terms of what we report as excess above the target, you'll see us do both those things at the same time, if that makes sense.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [26]

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But it does contribute to raising the -- yes, capital standards growth?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [27]

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It does. It definitely does. But the money is there, as you can see from the reporting that we do at the moment, and we'll be able to have a combined view of the funds. Whereas at the moment, in the note in the financial statements, you'll see that we probably have a more conservative target for GU, if you like, because we haven't really changed it from its historical level.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [28]

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Matt Dunger from Bank of America. If I could just ask about -- presumably, you're contracting on a 2-for-2 basis prior to the election. What are you baking in claims costs? And what sort of benefit is there from any contracting that was done prior to that?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [29]

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A really easy question, and one that I can't really answer because the information is not out there.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [30]

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Well, yes, I wouldn't really -- well, yes, of course. And so our dealings with hospitals and commercial are in confidence, of course. But I wouldn't put too much weight on 2x2. Obviously, it got everyone a little bit more nervous and alert to the -- to that possibility, but we continue to push ahead with our contract besides that 2x2 was there. We still want to get the best value we possibly can.

And there are certainly signs that hospitals, with utilization being weak, you would expect we'd be looking for more -- greater price adjustments. But we don't necessarily buy that. If we can do well in driving down utilization through hospital prevention, your hospital substitution, we don't want to be paying for it in other ways sort of the prices. So that's going to be an interesting conversation more and more in the future as, I think, we and other health insurers get better at hospital substitution and prevention. So it's up to us to ensure that pricing increases stay an increasing level, probably on what they should be, in order to compensate for that utilization predicament that some, not all, but some hospitals have.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [31]

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And we know the value proposition, particularly affordability and unplanned out-of-pockets, are the key issues for our members and members across the industry more generally. So while the 2x2 is not there, I'm under no illusion about how tough the pricing approval process will be as we move forward and how important it is that we continue that trajectory of minimizing the increases that we've got a demonstrated track record of doing to support that value proposition and support the category. So those are still the key elements going into the discussions with the providers.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [32]

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And just on the government reforms implemented -- that you've implemented early, what sort of readthrough are you getting in terms of downgrading activity within gold, silver, bronze? Is that -- have you seen any movement within these categories?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [33]

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Not from the PHI Reforms. So -- and when we say implemented early, we implemented as early as we possibly could, which was the approved date of 1 April and some other funds decided. There's a 12-month window for introducing those.

But in terms of product movements, other than members taking up the opportunity to look at a higher front-end deductible and the discount for the younger policyholders, we're not seeing a significant shift in the trend around that coming out of the categorization. That said, over the past few years, we have seen downgrading impacts around that affordability challenge for members, which we've talked about in the past.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [34]

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And just following up on that. It doesn't sound like it's really kicked off with participation, these up to 10% discounts for under 30s and also the higher accesses. Has that -- is that -- have you seen an improvement in participation? Are the government reforms achieving what they were looking to do?

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [35]

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Well, I hinted earlier that our sales outlook is pretty positive at the moment. So that's some early evidence that the reforms had an impact. But equally, I know -- yes, I know the Minister is very encouraged by the results of that first round and is looking for further opportunities to increase participation without necessarily impacting government costs. And we still believe there are plenty of opportunities out there yet for a government to consider.

For example, we believe we should be able to cover health care wherever it meets our members. We think it's crazy that we can pay for the doctor while she operates primarily in a hospital, but we can't pay for her when I see her in her Macquarie Street office. We believe there are some possibilities to increase employment -- employer incentives for providing private health insurance to their employees and as well where employers are looking at for additional ways to improve occupational, well, workplace health and safety. So I think things like looking at some sort of FBT relief for employers providing health insurance for their people is a prospect.

So I know Minister Hunt is certainly not resting on his laurels, and he's certainly engaged with the industry and exploring what other possibilities there are out there.

And look, ultimately, we're not looking for government for handouts or to do the job that we're meant to do. And I think most of our future and most of getting growth back in sector's around things like we have discussed today, being more there to help people and their doctors improve their health outcomes, not just pay the bill. But certainly, government has a significant role yet, I think, in pursuit of that quest.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [36]

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Just one last question on the dividend. Obviously, some strong growth. What went into your thinking here given you've got an APRA announcement due out? And also, you've been talking about some of the opportunities for consolidation. What -- can you talk us through what your thinking is about the dividend going forward?

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [37]

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Well, the starting point for us is we have told investors that we will pay up to 70% where we can as a dividend. We want to be true to that guidance, to that commitment. Of course, that number of 70% is grounded in a growth -- an organic growth rate above what we're experiencing today. So we are actually accumulating some additional capital at 70%.

So our thinking is our first obligation to investors is to make good our commitment to payout of dividend up to 70% if we can. The surplus capital that we're accumulating is consistent with some of the future scenarios we see around APRA requirements. And if in the event there is a major investment opportunity such as an acquisition, we'll turn to debt or equity markets to deal with that.

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [38]

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David Ellis from Morningstar. I've got a couple of questions on the travel business. Obviously, well, to me, a disappointing result. And you mentioned in your comments that the domestic business needs to be fixed. So could you elaborate on that and how that's going to be achieved?

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [39]

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Yes. Well, that's mainly -- so about half the business is domestic, and about half of that domestic businesses is this brand called Travel Insurance Direct. And because we identified it as intangible when we acquired the business, that explains the small write-down we've seen, which is purely an outworking of the sales performance of that business. So -- but it's still a business that would do over 100,000 sales this year. So rumors of its demise are grossly exaggerated.

We need to work out how we can improve the performance of that particular channel. As Michelle touched upon early, we have a new leader in the business who we have -- obviously have high hopes in terms of her improving that particular book. And in the meantime, we'll continue to invest as we have been in the international business and growing our share of wallet and in the other channels in Australia now, which include SureSave, which is the travel insurance brand which is still doing strongly; and the various partnerships we have, which now include, as I mentioned earlier, the likes of Qantas.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [40]

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And I think you did also touch on getting our operating cost base for running that business aligned with the distribution income after acquisition costs. That is a really solid story when you look at that. So there are some opportunities for us to look at the way that we support that business through everything from technology to the operating costs that we incur, and that goes to some of the early discussion about -- we haven't shifted away from that at all.

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [41]

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The underlying operating profit for the business was $6.6 million.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [42]

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Correct.

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [43]

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What would you speculate to be a satisfactory level of underlying operating profit?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [44]

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You're looking at me. I'm going to let the boss answer that one.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [45]

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Look, I -- well, it's -- in terms of our investment, it's not dissimilar to New Zealand, really, when you look at the dollars we have outlaid. So somewhere approaching $20 million, I think, is about right. Like that New Zealand result, even though it's off against last year for reasons Michelle covered, including a purely -- an interest rate factor, the premium payback liability has been shifted. It's still doing about, what, 16%, 17% return on invested capital. So I wish I could find that today as a personal investor. So somewhere approaching $20 million UOP would cut muster in my thinking. That business, the distribution -- so we talk about GD -- GWP for that business. Of course, our GWP is actually owned by the underwriters, not us. We're a distribution -- largely a distribution business. Our distribution income, I want to say, is pushing $80 million thereabouts.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [46]

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Yes.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [47]

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Now that's a lot of cash in to play with. And frankly, I'd be disappointed if we can't cut the cloth to fit to ensure that we achieve the kind of profitability. Now I don't -- and I'm not saying we'll get the $20 million tomorrow. Obviously, we won't. But we're certainly very focused on cutting that expense cloth. And some of the changes, you will see during the course of this year, which I've touched on already, such as the rationalization of back-office functions, is all about that.

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Unidentified Analyst, [48]

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This is [Varrid Martha] from Citi. I'm just going back to that claims inflation side. Are you able to tell us how much of that increase in the last few months -- there's obviously quite a tick up, how much of that is coming from IBNR increase as opposed to actual claims incurred?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [49]

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I can't give you the exact numbers, but certainly a significant component because, obviously, the most significant part of our IBNR is June estimates, if you like. So we have 2 months' development associated with the last month of the year. So we have been seeing those trends. Maybe something that is relevant -- not for you to say, are we exaggerating it in terms of the IBNR or those things? I don't think we are. If I have a look at our reported December OSC, it's understated. So we've certainly -- by about $4 million. So not a huge amount, and certainly well within the prudential margins that we have associated with that outstanding claims revision, but indicates we have been adjusting our basis of estimating the IBNR as we see the experience develop.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [50]

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Yes. And it goes without saying that, that overprovision same time last year surprised us all. I don't think anyone anticipated just how weak utilization was actually in the marketplace.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [51]

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Do we have questions?

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Matthew Neat, nib holdings limited - Head of Corporate Affairs & IR [52]

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We've got a couple of questions online.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [53]

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This is Matt telling us he hopes to have questions online.

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Operator [54]

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The next question comes from the line of Siddharth Parameswaran from JP Morgan.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [55]

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I just had a question in a similar vein to the previous one. If you actually just -- on Slide 13, if you actually had a chart of just paid claims, are you seeing a tick up there at all? Because -- and the reason for asking it is we know that actuaries can be sort of glass half-empty kind of people. And I presume that in the past, you would have seen that as well.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [56]

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Sid, yes. We are seeing a tick up in paid claims, Sid, is the answer to that question. And certainly, that's been our experience in this second half of the year. Truly, I can honestly say because it won't surprise you, after the under -- the overprovision at the end of last year, we've invested a lot of time and energy in this, and our actuaries are very focused on a central estimate. But it just that, an estimate. So by its very nature, it's guaranteed to be wrong, but it is our best estimate at this point in time.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [57]

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Okay. And could you just give us some idea of trends, just the underlying utilization versus average increase in price of procedures? Could you give us some breakdown of what's happening on the hospital side over the last year?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [58]

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Sid, you're pushing me in terms of the level of detail that certainly we have available internally but we've not disclosed. We've tried to give you some color in terms of the split between hospital and ancillary. Mark made a comment earlier in the presentation about relatively low levels of utilization, and I'm sure you have insights from the provider organizations, hospitals in particular, around some of the activities there. I'm not sure that there's much more I can add to that.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [59]

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Well, I can just kindly reiterate my earlier observations. And it's not totally uniform across all hospitals, but certainly, utilization growth in many, many hospitals is flat. The episodes of care in '19 were the same number as the episodes of care in the previous year. And you see this in various parts of the case mix, particularly obstetrics, for example, particularly rehab as health funds become more sophisticated in managing rehab in hospital. So I describe it as flat.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [60]

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Yes. And we have drawn out things like so.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [61]

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So flat numbers, so -- sorry, that's flat numbers. So that's not flat growth. That's flat numbers. The utilization growth is around 0.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [62]

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Look, we -- I can't guide you on that number other than to say it's anemic. That's another word for flat.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [63]

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Yes. Okay. Great. I had a second question just around -- just prosthetics reforms. I think we have the last round that ended some time -- I think the benefits came in to end sometime in the last -- I can't remember exactly when the benefits came through, but I'm pretty sure that it's come through sometime in the last 12 months.

Could you give us some idea about the impacts you've actually seen from those prosthetics savings and whether they actually did come through and also whether there's anything that can be done in the future?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [64]

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So they definitely did come through. I think Mark alluded to a slide in the appendix. It is no longer in the appendix. We decided to take it out because it's too much detail. But it certainly showed that we got a favorable benefit from prostheses reform, and there were 3 tranches of it that came through. And you're right, I think the last one was about August last year.

And that was partially offset by the impact of the mental health waiver that we've particularly drawn the number out on. So it's a really positive initiative both driven by the Federal Minister, but also by the industry in putting forward the thinking around that in the first instance.

So Mark has alluded to the fact that the Minister continues to look at further opportunities for how we might enhance the value proposition for PHI. In terms of whether there are further around prostheses, I think time will tell.

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Operator [65]

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Next question is from the line of Ashley Dalziell from Goldman Sachs.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [66]

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I just had another question on Slide 13, just this time on the revenue side of the ledger. The light blue line, it's a bit hard to say by the scale, but is that your effective -- sorry, your approved rate increase? Or is that your kind of achieved revenue per unit growth, i.e., approved raising price less a gap for downgrading and mix?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [67]

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The latter.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [68]

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It's the latter. Yes.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [69]

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Thanks for asking.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [70]

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Are you actually able to tell us where that was tracking on the exit of the year at June '19?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [71]

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Look, I think the best that I can do, Ashley, is point you to the previous slide where we talked about the premium revenue rate variances. The $76.7 million were largely offset. And I think there was a gap of about $1 million between the claims expense inflation and the risk equalization inflation, which suggests to you that we were doing okay in terms of how we were pricing the products, in terms of what we expected to see.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [72]

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Sure. I guess we've only, within the year, seen a 1/4 of the lower 2019 rate increase. I mean the reason why I ask is that just by eyeballing where that likely line is tracking, it looks like there's maybe only a gap of 100 basis points to the 3.38% that you got in 2019. Is that a fair assumption?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [73]

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Look, again, I can't without having the spreadsheet in front me give you the detailed numbers. But I think what we have indicated to you is we're expecting the margins to be around 6% for FY '20 in the guidance. I think we gave you a restated margin of about 6.5% if we take out the OSC provision releases on arhi slide. So it says to you that our pricing is tracking, and we expect it to track across FY '20 in line with our target range of 5% to 6% and probably -- and at the upper end of that range, but certainly off from the reported number of 7.3% this year, recognizing that, that was overstated because of those provision releases.

So we know inflation is the biggest variable in determining our performance, but we -- at this point in time, which is why we've issued the guidance we have, we're reasonably comfortable that, that will be the outworking of the combination of the rate increases, product mix changes, policyholder growth and the claims experience we expect to see.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [74]

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Okay. Could I just round out that discussion then by just within your management expense waterfall? There's obviously a couple of one-off project cost elements to the increase we've seen this year and also a number of more sustained elements. What sort of any -- or have you factored in to the 6% net margin target? Should we be expecting much improvement in what you've delivered for '19?

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [75]

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Mark has talked about we've got to focus on costs. We don't guide you at a gross margin -- net margin -- we only guide you to net margin level. But yes, you should expect some improvement. Will I put a number on it? No, I don't think I can give that. We haven't published it.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [76]

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Yes. Certainly, that graph on 13 tells a story, doesn't it? It tells that gap between our revenue and claims in recent years, explains the higher gross margin, higher net margin. That gap right now are opening up the other ways one of our challenge as a business. That's why we see the gross margins coming back and with that net margin, which we have been predicting for some time.

How do we compensate for that loss and continue to create value? Well, it's obviously in volume, in terms of growth against what is a difficult market. But so far, we have demonstrated our ability to do that. It's about taking out expenses to improve the net margin. It's about continuing to build value around our core arhi business through our various adjacencies. So we're very, very conscious of that bit of a gap that, that graph shows and quite determined to address it.

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Operator [77]

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We have another question from the line of David Spotswood from Airlie.

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David Spotswood, Airlie Funds Management Pty Ltd - Senior Research Analyst [78]

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Thank you. My question has been answered. I was just going to ask about the cost of things.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [79]

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Okay.

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Operator [80]

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We have no more questions from the line. Please continue.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [81]

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I think that there are no more questions.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [82]

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Okay, well, if there's no more questions, we will wrap it up. Thanks again, everyone, for your time this morning and contribution, and enjoy the rest of your day.

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Michelle McPherson, nib holdings limited - CFO & Deputy CEO [83]

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Thank you very much, everyone. Appreciate it.

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Mark Anthony Fitzgibbon, nib holdings limited - MD, CEO & Executive Director [84]

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Thanks.