Higher Claims Costs Not Catching NIB Holdings by Surprise

On the same day Medibank called out higher claims costs as a headwind to earnings, NIB Holdings maintained its fiscal 2020 guidance of underlying operating profit of at least AUD 200 million. At its fiscal 2019 results, NIB guided to a 6% fiscal 2020 insurance margin for the Australian health insurance division, which was reaffirmed. We agreed the attractive 7.3% insurance margin in fiscal 2019 was not sustainable and would likely move back toward the longer-term average of 5% to 6%. This more conservative view has been correct. Should claims inflation unexpectedly remain low for an extended period, we would expect the federal minister for health to only approve modest annual price increases, bringing margins back to historical levels.