nib (ASX:NHF) has reported growth across all business segments for the six months to the end of December 2019 but higher than expected 'claims costs' resulted in a 27.2 per cent fall in operating profit.
The company said revenue for the period grew 6.4 per cent to $1.3 billion compared to the corresponding period.
"However, higher claims inflation across nib’s insurance businesses as well as timing in the receipt and payment of claims impacted nib’s 'unpaid claims' reserves resulted in a reported Group Underlying Operating Profit (UOP) of $83.2 million, a 27.2% decline compared to 1H19," it said.
The insurer cautioned the comparison was impacted by the fact its Australian residents health insurance (arhi) and international inbound health insurance (iihi) businesses benefited from an over-reserving in 2018 and its subsequent release.
"In contrast, the 1H20 result was disadvantaged by what has turned out to be an under reserving at the end of FY19," it said.
Managing Director Mark Fitzgibbon said the first-half earnings result was disappointing even allowing for the claims provisioning effect.
“We’re not accustomed to seeing our earnings decline and it’s especially frustrating when our revenue is actually growing right across the Group, including in our principal arhi business. Nevertheless and although insurance margins have been higher in recent years, they remain strong and represent a very good return on invested capital,” he said.
Mr Fitzgibbon said the company's arhi business is growing despite what he described as challenging market conditions.
“Sales were up more than 12% compared to first half last year with nib accounting for almost 38% of total industry policyholder growth for the half. Overall we grew membership 1.4% compared to just 0.3% for the industry as a whole,” he said.
The company also described as "another frustration" its growing net contribution to the industry risk equalisation pool.
“nib indirectly paid other health insurers $126.5 million in 1H20, an incredible 10.3% increase on 1H19. We’re effectively being penalised for our success in growing the market and especially in attracting younger people who mainly foot the risk equalisation bill," said Mr Fitzgibbon.
"Plus, as a compensation scheme for hospital claims, risk equalisation in its current design is holding back investment and effort in keeping people healthy and out of hospital.”
The nib boss highlighted growth in its other segments, with the operating profit of its New Zealand business up 16.8 per cent to $11.1 million underpinned by net policyholder growth of 5.7 per cent.
"That’s not easy to do in New Zealand. We now have 225,536 people covered compared to just under 170,000 when we started in late 2012,” said Mr Fitzgibbon.
The international students and workers businesses grew but its operating profit fell 31.3 per cent to $12.3 million.
“We’ve anticipated for some time the high margins we’ve achieved in our international students and workers businesses would come under competitive pressure and we’re certainly seeing that now. Still, they’re both terrific businesses with plenty of potential for further organic growth,” added Mr Fitzgibbon.
He noted a similar situation with nib Travel, which grew sales and operating income but reported weaker profitability.
“nib Travel is now Australia’s third largest travel insurer and meaningful changes are afoot to improve commercial performance. We’ve some clear targets in the business based upon our investment criteria and we’re every bit as confident of hitting them as we were when we acquired the business,” he said.
The company reaffirmed full-year group underlying profit guidance of at least $170 million.
According to Mr Fitzgibbon, the reported first-half result "belies what is fundamentally solid ongoing business performance and progress."
“We’re thinking about FY20 as a reset of sorts. We’ve embarked upon a major transformational effort to make our future value proposition much more about people’s better health rather than just responding to sickness or accident.
“It’s a future being made real by amazing technological advances in predicting individual disease risk and then more precisely preventing, managing and treating the disease. Importantly, we’ve a well-developed strategy and we’re very clear about the capabilities necessary to fulfil the vision and create enterprise value. There’s no better evidence than our newly minted joint venture (Honeysuckle Health) with the large US health insurer Cigna. Companies with the scale and expertise of Cigna don’t invest without discipline and a big picture in mind,” he added.
Mr Fitzgibbon said there were several other important initiatives underway that would improve the attraction of private health insurance, reduce costs and member “out of pocket” expenses, as well as exploit new market opportunities.
“Increasingly we are helping members better understand treatment options and select a doctor. And they can now do it on their mobile devices. We’ve an initiative with a group of specialists that guarantees not only world class medical treatment but no out of pocket expense.
"We have several active health management programs in place to help manage risk such as heart disease and mental illness, with more to come,” he said.