manager-iconChairman's Report

Steve Crane

Despite a challenging year for our core health insurance business, strong performances by our adjacent businesses provided positive results for the Group in the 2014 financial year.

Financial year 2014 was another year of strong top line premium growth and improved profitability for the Group, albeit below our original expectations. Operating profit grew 4.3% to $72.3 million and earnings per share by 3.9% to 15.9 cents, compared with 15.3 cents the previous fiscal year. Return on equity remained very impressive at 20.8%.

As will be evident from this report, it wasn’t entirely smooth sailing for our core Australian Residents Health Insurance (arhi) business during the 2014 financial year. High claims experience, in particular on a new extras only product which saw a gross margin loss of $8.8 million during the 2014 financial year, as well as growing policyholder lapse, were notable headwinds. Our arhi operating profit of $57.0 million was down 3.5% on the previous year and saw our net margin decline to just 4.2%, which is outside our target range of 5.0% to 5.5%. We’ve moved quickly to redress our arhi profit margin (including a 7.99% average premium increase from 1 April 2014, however our products still remain price competitive) and we are confident about arhi’s future earnings growth prospects. Rising healthcare spending and claims experience however, leave no room for complacency.

Pleasingly, our established adjacent businesses all performed well in the 2014 financial year. International workers (iwhi) grew earnings by 12.1% to $9.4 million. International students (ishi) grew revenue by more than 110% and made a profit for the first time since its inception four years ago of $1.9 million. nib New Zealand contributed $7.4 million in earnings and our life and travel insurance lines $2.2 million.

Collectively, our non-arhi businesses contributed 25.4% of our Group operating profit, compared to 24.0% in financial year 2013. The performance of these businesses reflects a real determination by the company to diversify and create enterprise value by leveraging existing assets, infrastructure and capability. We continue to explore additional adjacent business diversification opportunities.

Investment performance was also strong. We achieved a total return of $29.7 million, which represented a yield of approximately 5.6%.

The Board has declared ordinary dividends totalling 11.0 cents per share (fully franked) for the year. This represents a payout ratio of 69.2% of consolidated 2014 financial year after tax earnings. The final fully franked ordinary dividend of 5.75 cents per share will be paid to shareholders on 3 October 2014.

During the year the new Australian capital standards were announced by our industry regulator (PHIAC). As we have previously indicated to shareholders, this resulted in a new capital target for our Australian health insurance businesses and an increase in our Group available capital position. As at 30 June 2014, nib’s available capital position (after allowing for the 2014 financial year final fully franked ordinary dividend payment of $25.2 million) was $58.2 million. The Board has decided $39.5 million of this will be returned to shareholders by a 2014 financial year fully franked special dividend of 9.0 cents per share. The remaining available capital of approximately $18.7 million will be reserved for potential investments that form part of our strategic planning.

In May this year, the Federal Government released the report of its National Commission of Audit. The report was welcomed by nib as it clearly supported an enhanced future role for private health insurance in our healthcare system. How we actually pursue and commercialise the opportunity is not without its challenges, notwithstanding Government policy and regulatory change. But we are undoubtedly moving down a path of greater private health insurance involvement and funding responsibility.

I’d like to thank our leadership team and all employees for their efforts during the year and commend them on another solid result. Since listing on the ASX in 2007, nib has delivered cumulative average EPS growth of 20.5%, which actually understates performance given the significant release of capital by way of special dividends. Total shareholder return* since listing up until the end of the 2014 financial year was more than 475%, compared to approximately 9% for the S&P/ASX200.

I’d also like to thank and acknowledge the contribution our Board of Directors are making in guiding and overseeing the company’s performance. The Board has an excellent working relationship with our executive management team and engagement with business fundamentals. We’re as excited about the future prospects of the company as ever.

Steve Crane

* TSR rebased to 100 (assumes capital returns and dividends re-invested at the payout date).