NIB : 2016 Annual Report

ANNUAL REPORT 2016 ‌‌‌‌

Operating and Financial Review 1

Directors' Report 14

Auditor's Independence Declaration 20

Remuneration Report 21

Corporate Governance Statement 42

Financial Report

Consolidated Income Statement 44

Consolidated Statement of Comprehensive Income 45

Consolidated Balance Sheet 46

Consolidated Statement of Changes in Equity 47

Consolidated Statement of Cash Flows 48

Notes to the Consolidated Financial Statements 49

Directors' Declaration 127

Independent Auditor's Report to the Members 128

Shareholder Information 130

Corporate Directory 132

nib holdings limited ABN 51 125 633 856

Operating and Financial Review

For the year ended 30 June 2016 nib holdings limited

Operating and Financial Review continued For the year ended 30 June 2016

nib holdings limited

As will be observed from our operating and financial review, FY16 produced impressive revenue and earnings growth. Total Group revenue was up 14.3% to $1.9 billion and our underlying operating profit (UOP) up almost 50% to $132.0 million. Net Profit After Tax (NPAT) improved by 22.0% to $91.8 million or 21.2 cents per share.

Our underlying financial performance for FY16 has allowed the Board to declare dividends totalling 14.75 cents per share (fully franked). This represents a payout ratio of 70% of after tax earnings in keeping with our stated policy range of 60-70%.

An evolving Group

nib's mainstay Australian Residents Health Insurance (arhi) business produced a pleasing result in terms of both top line and earnings growth. arhi contributed $94.5 million or 72% to Group UOP in FY16. We're really proud that we've been able to grow this business well ahead of the market average for so long.

Importantly, our adjacent businesses are steadily increasing their earnings contribution with a combined UOP of $37.5 million in the year under review. These businesses demonstrate a preparedness to deploy existing Group capabilities and assets to explore new market opportunities. They also reflect a disciplined approach to investment. The acquisition during FY16 of specialist travel insurance provider World Nomads Group (WNG) and the medical insurance book of New Zealand insurer, OnePath Life (NZ) Limited (OnePath NZ), were both aligned with our Group strategy and investment framework. Both acquisitions have settled well under nib ownership and are performing in line with expectations.

Shareholders can expect continued and measured amplification of investment in arhi and adjacent businesses as circumstances, our company strategy and our internal 'hurdle' rates of return dictate.

An evolving market

It will be evident from media coverage during the year that many consumers are aggrieved with private health insurance and especially premium increases, out of pocket expenses and limited treatment coverage.

Some of the critique has justification and we recognise there must be ongoing improvement in the industry in meeting customer needs, affordability and cost effectiveness. It's the same recognition that explains the level of innovation for which nib has become well known, our devotion to the principles of Net Promotor Score (a widely used customer satisfaction index) and a general thrust towards reducing claims outlays without compromising customer outcomes. We also welcome many of the reforms being mooted by Government.

There is an urgent need for industry regulatory reform and Mark's report raises some real possibilities. I would however caution Government on a couple of matters which have been subject to recent attention.

First has been the discussion around so called 'junk policies'.

I've no doubt there is a need to better inform consumers about the level of coverage they purchase and nib supports proposed initiatives in this direction. We do however, need to keep in mind the important role that product diversification and choice have played in improving consumer sovereignty and, especially, attracting younger policyholders. More than anything else, it is participation by younger people that makes premiums for everyone more affordable.

Second has been the discussion about premium increases and possibly regulating premium pricing based upon a maximum return on invested capital.

In an efficient market, companies are rewarded for good performance with higher returns on invested capital. I don't believe we should ever upset this dynamic and it's competition that should dictate market prices. With 34 players and the principle of 'portability' (which means a consumer can transfer insurer without any disadvantage) competition is hardly lacking in Australia. Premiums are growing circa 5% to 6% per annum because that's how much more we are spending on our healthcare per capita. About half has been actual cost inflation (the correct comparison with CPI) and half utilisation growth (i.e. people using healthcare services more often). The real underlying problem is we're spending more than we should be (over servicing, avoidable hospital admissions etc.) and that's what the industry must tackle.

An evolving leadership team

Succession planning for both Executives and Non-Executive Directors (NED) is a priority for the Board. While we have great confidence in the calibre of our current leadership, naturally we must prepare for a range of future circumstances and market conditions.