With healthcare spending continuing to rise, we have an opportunity to play an important role in helping people manage their healthcare needs. This, coupled with our appetite for expansion into adjacent businesses, provides us with a platform for continued growth and future financial success.
The Australian private health insurance market remains robust with around 13 million people covered at the end of the 2014 financial year, up more than 15% from five years ago. The ongoing growth defies recent predictions that various policy changes to the Australian Government Rebate and Medicare Levy Surcharge would see private health insurance participation decline and damage the sector. While the support of Government is welcome and much appreciated, it cannot be the very basis of a prosperous and sustainable industry. Rather, the industry should expect and pursue growth based upon the proposition that it delivers superior choice, access and quality compared to the public system. The fact that this takes pressure off an already stressed public system is an important by-product.
Against that backdrop and our own above-system policyholder growth, the 2014 financial year was still a little disappointing for us. While operating profit grew slightly to $72.3 million (up 4.3%) and EPS to 15.9cps (up 3.9%), our Australian Residents Health Insurance (arhi) operating profit was $57.0 million, compared to $59.0 million the previous year. This reflects a net underwriting margin of 4.2% in the 2014 financial year, which is below nib’s target range of 5.0% to 5.5%. It’s a position explained by higher than expected claims experience. Claims costs grew 11.5% to $961.7 million, compared to 10.7% growth in premium income. Once again, one of our primary exposures was risk equalisation, which grew 13.8% to $190.6 million. It is effectively an nib subsidy to all other health insurers and is much less about protecting community rating than it is other insurers. But it is what it is.
We’ve already taken a number of measures in arhi designed to move us back towards our target margin range of 5.0% to 5.5% such as our average premium increase in April of 7.99%. Yet, we well understand profitability can’t just be about passing on inflation to policyholders without a more concerted effort to reduce unwarranted or inefficient spending across the spectrum of healthcare treatments. It is estimated that Australia-wide, about 700,000 hospital admissions each year are potentially avoidable. And the likelihood of us having surgery for a hip replacement can vary five-fold depending upon where we live. nib, other insurers and indeed the public system need to get much more interventional about tackling inappropriate and unnecessary care and spending.
The challenges in arhi didn’t prevent some very solid performance in other parts of the Group. The Chairman has already described improvement in iwhi, ishi and nib nz, which I won’t repeat here. I will observe, however, that each have in common strong potential to grow market share and we’re still in the early stages of business building.
Business diversification is not without some risk, but we have a rational and disciplined approach to assessing new business possibilities and healthcare is a sector so rich in opportunities. All initiatives to date and those in planning rely upon us being able to demonstrate there is sufficient market potential, whether we can use our existing brand, distribution or some other key competency to create value and, on a risk adjusted basis, cover our cost of capital. nib Options, launched in March 2014, is a terrific example. Demand for medical treatment across international borders is growing exponentially. Our brand brings a level of trust not common in the market and we have significant expertise in partnering with doctors, dentists and hospitals.
The 2014 financial year was another year of building. Disappointingly, the double-digit top line growth we saw in arhi didn’t translate into a more meaningful Group bottom line but we’re correcting that and all of our businesses are performing well. arhi will remain our primary economic engine for some time to come and can be expected to grow earnings after a sluggish 12 months. Mooted Government policy changes around private health insurance having an expanded role in our healthcare system is a very positive thematic.