Coronavirus has some upsides for NIB, as it scraps earnings guidance

Health insurer NIB scraps forecasts amid uncertainty, but inquiries and sales are up and it expects claims costs to drop.

NIB chairman Steve Crane. Picture: AAP

Leading health insurer NIB has followed the lead of many other publicly-listed companies by withdrawing its earnings guidance for 2020 in the wake of the coronavirus pandemic.

However it has reported that private health insurance inquiries and sales are up in the current crisis and that with an expected fall in elective surgeries — as hospitals clear wards for coronavirus patients — its claims costs should also drop.

NIB said insurance sales were ahead of budget, with the company believing it was achievable to target 1 to 2 per cent growth in Australia and New Zealand.

However, there was still many unknowns and, in a letter to shareholders, NIB chairman Steven Crane warned that pandemic had created large uncertainty for the company and the private health insurance sector.

“COVID-19 threat has created profound uncertainty about NIB’s previously communicated commercial outlook and fiscal 2020 market guidance. So much so that it’s become necessary to withdraw that market guidance.

“This same uncertainty and volatility means we are not in a position to provide you with new guidance. We have however, attempted to share here some of our insights and assumptions about what the near term future might hold for the company. The near term is defined as the remainder of the calendar year, 2020,’’ Mr Crane said in his shareholders’ letter.

Mr Crane said easily the most significant near-term impact was the likely consequence of COVID-19 discouraging discretionary treatment in private hospitals. Approximately 94 per cent of all private hospital admissions in Australia are elective or planned, with private hospitals accounting for about 66 per cent of all elective surgery.

“Longer term assumptions around COVID-19 are of course, much more problematic. While we all hope the crisis will pass quickly and market conditions repair, the timing is extremely unpredictable. And macroeconomic consequences, shifts in consumer behaviour, government policy responses and a range of other factors could impact the private health insurance market and NIB permanently (including in a positive way).

“As such, we have not attempted to form any assumptions beyond the near term other than that NIB will emerge from the COVID-19 crisis in good shape and as full in ambition as we’ve ever been.

“The fundamentals in both Australia and New Zealand of an ageing population, growing healthcare spending and stress on public healthcare delivery and financing gives us confidence to assume an increased reliance on the private healthcare system in the longer term.”

Mr Crane said heightened concern about COVID-19 and disease risk currently appear to be assisting PHI sales and retention in both NIB’s Australian Residents Health Insurance (ARHI) business and New Zealand residents businesses. Net growth year to date in both businesses remains ahead of budget.

“However, there is a high risk that economic recession and increased numbers of unemployed in both Australia and New Zealand could weaken demand for ARHI and NZ. Whatever the case, we believe near term it is reasonable for us to target a growth rate of 1 per cent to 2 per cent in both the Australian and NZ markets.

Mr Crane said net membership growth in NIB’s International Inbound Health Insurance is year to date ahead of budget and it has not yet observed large scale cancellations, as many international students expect to be able to eventually take up their courses. However, NIB expects sales will be negatively impacted by new restrictions on foreign entry across Australia and New Zealand for the time being.

NIB travel insurance sales are below budget year to date and will be severely damaged in the short term by extreme travel restrictions. Travel may face an extended period of recovery post COVID-19, Mr Crane said.

Private health insurance claims in Australia and New Zealand are heavily skewed towards funding healthcare treatment that tends to be more discretionary (or elective) than that undertaken by public systems, where health issues are of higher medical acuity, more immediate and less discretionary.

But as hospital admissions fall, so too will NIB claims.

“At the time of preparing this update, there is only limited quantitative evidence to support this hypothesis. However, it is early in the COVID-19 cycle in Australia and New Zealand and there is significant anecdotal evidence to suggest elective surgery across private hospitals will decline significantly within the weeks and months ahead.

“For context, in 2019 ARHI paid $988m in claims related to 281,757 episodes of hospital care in Australia and $119.4m related to 54,782 episodes in New Zealand. In Australia NIB also paid $229.5m in net risk equalisation transfers based upon the hospital claims experience of other insurers.”

NIB calculates that for every 1 per cent drop in hospitalisation for the remainder of 2020 ARHI claims expense (including risk equalisation) would fall by $8.8m and a 1 per cent drop in dental treatment would reduce claims expense by $3.5m.

“As hospital admissions increase for COVID-19-related illness NIB does face some additional claims exposure. Subject to their cover we anticipate claims for “lung and heart” treatment. However, this is expected to be minor relative to what we anticipate occurring with the diminution of elective treatment.”

He said NIB remains well capitalised and secure.

“As at December 31, 2019, we had surplus capital of $69.2m after allowing for APRA prudential requirements, our own internal capital target and our interim dividend.

“We do not expect any issues around servicing and refinancing debt. We have total debt of $234.3m (all bank debt) with a debt to debt/equity ratio of 27.9 per cent and interest coverage of 28 times. None of NIB’s debt is due to mature before December 2021.”