SHAREHOLDER REVIEW 2016 CONTENTS Group Performance Highlights .............................................................. 2 Board of Directors ..............................................................................................................20 Chairman’s Report ................................................................................................................. 4 Board and Executive Remuneration...................................24 Managing Director’s Report ........................................................................... 6 Financial Summary Consolidated Income Statement ...........................................26 Year in Review Australian Residents Health Insurance ........................ 8 Consolidated Balance Sheet ............................................................26 nib New Zealand ...............................................................................................................12 Consolidated Statement of Cash Flows .............27 International and New Business ..............................................14 Five-Year Performance Summary ........................................28 Profitability and Shareholder Returns .........................16 Information for Shareholders..................................................................29 Our Community ...................................................................................................................18 WE EXIST TO HELP PEOPLE ACCESS AND AFFORD HEALTHCARE WHEN AND WHERE NEEDED. OUR VISION IS TO BE A LEADING FINANCIER AND FACILITATOR OF HEALTHCARE WITH A REPUTATION FOR INNOVATIVE PRODUCTS, VALUE FOR MONEY, OUTSTANDING CUSTOMER SERVICE, BEING A GOOD CORPORATE CITIZEN AND DELIVERING STRONG SHAREHOLDER RETURNS. nib holdings limited shareholder review 2016 1 GROUP PERFORMANCE HIGHLIGHTS TOTAL GROUP REVENUE UNDERLYING OPERATING PROFIT $m ~ 14.3% $m ~ 49.9% 1,873.1* 132.0 1,639.3 1,497.3 1,293.5 88.0 1,127.4 71.0 75.5 77.3 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 * Excludes non-recurring profit from sale of Newcastle office building DIVIDENDS RETURN ON EQUITY cps % ~ 28.3% ~ 11.7% 25.8 23.1 16.07 21.7 21.6 20.8 9.0 14.75 11.5 10.0 11.0 9.25 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Ordinary Special Capital Return All figures quoted are in Australian dollars unless otherwise stated. 2 nib holdings limited NET INVESTMENT RETURN ~ NET PROFIT AFTER TAX $m $m 46.2% ~ 22.0% 31.4* 28.8 29.7 91.8 25.6 75.3 67.6 67.2 69.8 16.9 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 * Includes profit on sale of PSG shares of $5.4m in FY15 EARNINGS PER SHARE (STATUTORY) NET PROMOTER SCORE (ARHI*) cps % ~ ~ 22.5% 3.0% 21.2 20.7 18.7 17.7 17.3 16.9 15.9 14.8 15.3 12.4 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 * Australian Residents Health Insurance shareholder review 2016 3 CHAIRMAN’S REPORT Strong customer, revenue and earnings An evolving Group growth in financial year 2016 reflected how nib’s mainstay Australian Residents Health well the nib Group is meeting customer Insurance (arhi) business produced a pleasing needs across the various markets in which result in terms of both top line and earnings we operate and with that, delivered solid growth. arhi contributed $94.5 million or 72% returns for nib shareholders. They are results to Group UOP in FY16. We’re really proud that consistent with the company’s performance we’ve been able to grow this business well ahead since listing on the ASX in 2007. I believe of the market average for so long. we have created a good balance between Importantly, our adjacent businesses are steadily building upon nib’s traditional capabilities increasing their earnings contribution with a and strengths in the private health insurance combined UOP of $37.5 million in the year market and leveraging these to expand into under review. These businesses demonstrate new businesses and markets. a preparedness to deploy existing Group As will be observed from our operating and capabilities and assets to explore new market financial review, FY16 produced impressive opportunities. They also reflect a disciplined revenue and earnings growth. Total Group approach to investment. The acquisition during revenue was up 14.3% to $1.9 billion* and FY16 of specialist travel insurance provider our underlying operating profit (UOP) up World Nomads Group (WNG) and the medical almost 50% to $132.0 million. Net Profit After insurance book of New Zealand insurer, OnePath Tax (NPAT) improved by 22.0% to $91.8 million Life (NZ) Limited (OnePath NZ), were both or 21.2 cents per share. aligned with our Group strategy and investment framework. Both acquisitions have settled well Our underlying financial performance for FY16 under nib ownership and are performing in line has allowed the Board to declare dividends with expectations. totalling 14.75 cents per share (fully franked). This represents a payout ratio of 70% of after tax Shareholders can expect continued and earnings in keeping with our stated policy range measured amplification of investment in arhi of 60% to 70%. and adjacent businesses as circumstances, our company strategy and our internal ‘hurdle’ rates of return dictate. * Excludes non-recurring profit from sale of Newcastle office building. 4 nib holdings limited “ Our underlying financial performance for FY16 has allowed the Board to declare dividends totalling 14.75 cents per share (fully franked).” An evolving market We continue to be mindful of ensuring we meet It will be evident from media coverage during the our own tests for NEDs independence and year that many consumers are aggrieved with maintaining an appropriate skills mix. During private health insurance and especially premium the year we appointed Mr Donal O’Dwyer as increases, out of pocket expenses and limited a NED after conducting an extensive search treatment coverage. through an independent recruitment firm. Donal is a highly-experienced company director with Some of the critique has justification and we extensive executive-level experience in the global recognise there must be ongoing improvement sales and marketing of healthcare products in the industry in meeting customer needs, and services. The appointment of Donal follows affordability and cost effectiveness. It’s the same the announcement in November last year by recognition that explains the level of innovation Dr Annette Carruthers that she would not seek for which nib has become well known, our re-election as a NED. devotion to the principles of Net Promotor Score (a widely used customer satisfaction index) and I would like to take this opportunity to again a general thrust towards reducing claims outlays sincerely thank and pay tribute to Annette for without compromising customer outcomes. We her 12 year contribution to the company and also welcome many of the reforms being mooted shareholders. During her time she has overseen by Government. the transition of the business from a mutual to an ASX-listed entity, the significant growth across There is an urgent need for industry regulatory Australia and expansion into new markets both reform and Mark’s report raises some real domestic and international. I’m certain she possibilities. has much yet to contribute to the Australian corporate world. An evolving leadership team Succession planning for both Executives and I would like to thank everyone at nib for their Non-Executive Directors (NED) is a priority for efforts this year, including my fellow Directors and the Board. While we have great confidence in the Executive team. The success of our business the calibre of our current leadership, naturally we is reflected in the dedication, professionalism and must prepare for a range of future circumstances quality of our people and their commitment to and market conditions. delivering service excellence. Steve Crane Chairman shareholder review 2016 5 MANAGING DIRECTOR’S REPORT Another pleasing result in FY16 reflecting the is simply unsustainable given an ever increasing strong execution of our business strategy dependency ratio of retirees to taxpayers. across the Group. In just about every part That's not to suggest there aren’t real of the business we grew our customer opportunities to improve our PHI system and base, market share and profitability. Group nobody is thinking and working harder than underlying operating earnings increased an nib on a better ‘deal’ for consumers and impressive 49.9% to $132.0 million and NPAT market efficiency. We’re especially excited 22.0% to $91.8 million. about the possibilities in regulatory reform. We do appreciate just how supportive current Our core arhi segment was once again a ‘star’ Commonwealth policy settings are for PHI performer. Although the policyholder growth and we certainly don't look to government rate of 3.8% was slightly below our sustainable to guarantee our future. But there are still growth rate target of 4% to 5%, we grew obstacles to improved market efficiency such almost three times the industry average (1.3%). as the perverse system of risk equalisation arhi also produced a very solid UOP up 31.4% and the outrageous regulated over-pricing of on FY15. The 'above system' organic growth prosthetic devices. and improved profitability is familiar but only ever achieved with constant creativity, effort and For several years, we’ve been very deliberately investment. Deeply ingrained in our corporate diversifying the business with a view to exploiting culture is the belief that ongoing experimentation ‘economies of scope’ across the Group