NIB Holdings Limited
Annual Report 2016

Plain-text annual report

A NN UA L R EP OR T 2 016 CONTENTS Group Performance Highlights Operating and Financial Review Directors’ Report Auditor’s Independence Declaration Remuneration Report Corporate Governance Statement Financial Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report to the Members Shareholder Information Corporate Directory 1 2 14 21 22 43 44 45 46 47 48 49 50 112 113 115 117 2016 ANNUAL GENERAL MEETING The Annual General Meeting of nib holdings limited will be held at The Westin, 1 Martin Place, Sydney at 11.00am (AEDT) on Wednesday, 2 November 2016. nib holdings limited ABN 51 125 633 856 GROUP PERFORMANCE HIGHLIGHTS For the year ended 30 June 2016 TOTAL GROUP REVENUE $m ~ 14.3% 1,873.1* UNDERLYING OPERATING PROFIT $m ~ 49.9% 132.0 1,639.3 1,497.3 1,293.5 1,127.4 71.0 75.5 77.3 88.0 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 * Excludes non-recurring profit from sale of Newcastle office building NET INVESTMENT RETURN $m ~ 46.2% NET PROFIT AFTER TAX $m 28.8 29.7 31.4* 25.6 67.6 67.2 69.8 75.3 16.9 ~ 22.0% 91.8 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 * Includes profit on sale of PSG shares of $5.4m in FY15 DIVIDENDS cps ~ 28.3% RETURN ON EQUITY % ~ 11.7% 25.8 16.07 9.25 9.0 11.0 10.0 14.75 11.5 21.7 21.6 20.8 23.1 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Ordinary Special Capital Return EARNINGS PER SHARE (STATUTORY) cps ~ 22.5% 21.2 14.8 15.3 15.9 17.3 NET PROMOTER SCORE (ARHI*) % 20.7 18.7 16.9 12.4 ~ 3.0% 17.7 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 All figures quoted are in Australian dollars unless otherwise stated. * Australian Residents Health Insurance 1 annual report 2016 OPERATING AND FINANCIAL REVIEW For the year ended 30 June 2016 CHAIRMAN’S REPORT Strong customer, revenue and earnings growth in financial year 2016 reflected how well the nib Group is meeting customer needs across the various markets in which we operate and with that, delivered solid returns for nib shareholders. They are results consistent with the company’s performance since listing on the ASX in 2007. I believe we have created a good balance between building upon nib’s traditional capabilities and strengths in the private health insurance market and leveraging these to expand into new businesses and markets. As will be observed from our operating and financial review, FY16 produced impressive revenue and earnings growth. Total Group revenue was up 14.3% to $1.9 billion* and our underlying operating profit (UOP) up almost 50% to $132.0 million. Net Profit After Tax (NPAT) improved by 22.0% to $91.8 million or 21.2 cents per share. Our underlying financial performance for FY16 has allowed the Board to declare dividends totalling 14.75 cents per share (fully franked). This represents a payout ratio of 70% of after tax earnings in keeping with our stated policy range of 60% to 70%. An evolving Group nib’s mainstay Australian Residents Health Insurance (arhi) business produced a pleasing result in terms of both top line and earnings growth. arhi contributed $94.5 million or 72% to Group UOP in FY16. We’re really proud that we’ve been able to grow this business well ahead of the market average for so long. Importantly, our adjacent businesses are steadily increasing their earnings contribution with a combined UOP of $37.5 million in the year under review. These businesses demonstrate a preparedness to deploy existing Group capabilities and assets to explore new market opportunities. They also reflect a disciplined approach to investment. The acquisition during FY16 of specialist travel insurance provider World Nomads Group (WNG) and the medical insurance book of New Zealand insurer, OnePath Life (NZ) Limited (OnePath NZ), were both aligned with our Group strategy and investment framework. Both acquisitions have settled well under nib ownership and are performing in line with expectations. Shareholders can expect continued and measured amplification of investment in arhi and adjacent businesses as circumstances, our company strategy and our internal ‘hurdle’ rates of return dictate. An evolving market It will be evident from media coverage during the year that many consumers are aggrieved with private health insurance and especially premium increases, out of pocket expenses and limited treatment coverage. Some of the critique has justification and we recognise there must be ongoing improvement in the industry in meeting customer needs, affordability and cost effectiveness. It’s the same recognition that explains the level of innovation for which nib has become well known, our devotion to the principles of Net Promotor Score (a widely used customer satisfaction index) and a general thrust towards reducing claims outlays without compromising customer outcomes. We also welcome many of the reforms being mooted by Government. There is an urgent need for industry regulatory reform and Mark’s report raises some real possibilities. I would however caution Government on a couple of matters which have been subject to recent attention. First has been the discussion around so called ‘junk policies’. I’ve no doubt there is a need to better inform consumers about the level of coverage they purchase and nib supports proposed initiatives in this direction. We do however, need to keep in mind the important role that product diversification and choice have played in improving consumer sovereignty and, especially, attracting younger policyholders. More than anything else, it is participation by younger people that makes premiums for everyone more affordable. Second has been the discussion about premium increases and possibly regulating premium pricing based upon a maximum return on invested capital. In an efficient market, companies are rewarded for good performance with higher returns on invested capital. I don’t believe we should ever upset this dynamic and it’s competition that should dictate market prices. With 34 players and the principle of ‘portability’ (which means a consumer can transfer insurer without any disadvantage) competition is hardly lacking in Australia. Premiums are growing circa 5% to 6% per annum because that’s how much more we are spending on our healthcare per capita. About half has been actual cost inflation (the correct comparison with CPI) and half utilisation growth (i.e. people using healthcare services more often). The real underlying problem is we’re spending more than we should be (over servicing, avoidable hospital admissions etc.) and that’s what the industry must tackle. * Excludes non-recurring profit from sale of Newcastle office building. 2 nib holdings limitedAn evolving leadership team Succession planning for both Executives and Non-Executive Directors (NED) is a priority for the Board. While we have great confidence in the calibre of our current leadership, naturally we must prepare for a range of future circumstances and market conditions. We continue to be mindful of ensuring we meet our own tests for NEDs independence and maintaining an appropriate skills mix. During the year we appointed Mr Donal O’Dwyer as a NED after conducting an extensive search through an independent recruitment firm. Donal is a highly-experienced company director with extensive executive-level experience in the global sales and marketing of healthcare products and services. The appointment of Donal follows the announcement in November last year by Dr Annette Carruthers that she would not seek re-election as a NED. I would like to take this opportunity to again sincerely thank and pay tribute to Annette for her 12 year contribution to the company and shareholders. During her time she has overseen the transition of the business from a mutual to an ASX-listed entity, the significant growth across Australia and expansion into new markets both domestic and international. I’m certain she has much yet to contribute to the Australian corporate world. I would like to thank everyone at nib for their efforts this year, including my fellow Directors and the Executive team. The success of our business is reflected in the dedication, professionalism and quality of our people and their commitment to delivering service excellence. Steve Crane Chairman 3 annual report 2016MANAGING DIRECTOR’S REPORT Another pleasing result in FY16 reflecting the strong execution of our business strategy across the Group. In just about every part of the business we grew our customer base, market share and profitability. Group underlying operating earnings increased an impressive 49.9% to $132.0 million and NPAT 22.0% to $91.8 million. Our core arhi segment was once again a ‘star’ performer. Although the policyholder growth rate of 3.8% was slightly below our sustainable growth rate target of 4% to 5%, we grew almost three times the industry average (1.3%). arhi also produced a very solid UOP up 31.4% on FY15. The ‘above system’ organic growth and improved profitability is familiar but only ever achieved with constant creativity, effort and investment. Deeply ingrained in our corporate culture is the belief that ongoing experimentation and measured risk taking is crucial to improvement and keeping ahead of competitors. Importantly, arhi achieved this growth in very ‘soft’ market conditions not made any easier by all the ‘trash talking’ in the media about private health insurance (PHI). The diatribe is doing the Australian healthcare system a real disservice given we need the private sector to play an even greater role in meeting our future healthcare needs. Every year we’re spending about 6% more per capita on healthcare and our primary reliance on taxes to fund this spending is simply unsustainable given an ever increasing dependency ratio of retirees to taxpayers. That’s not to suggest there aren’t real opportunities to improve our PHI system and nobody is thinking and working harder than nib on a better ‘deal’ for consumers and market efficiency. We’re especially excited about the possibilities in regulatory reform. We do appreciate just how supportive current Commonwealth policy settings are for PHI and we certainly don’t look to government to guarantee our future. But there are still obstacles to improved market efficiency such as the perverse system of risk equalisation and the outrageous regulated over-pricing of prosthetic devices. For several years, we’ve been very deliberately diversifying the business with a view to exploiting ‘economies of scope’ across the Group and in order to mitigate earnings concentration risk in arhi. And our efforts haven’t been without considerable progress. In FY16, ‘non-arhi’ earnings accounted for 28% of our Group UOP, compared to just over 18% in FY15 and a negligible contribution just five years ago. These are the earnings derived from our international workers and students businesses, nib New Zealand, our travel insurance business WNG and a collection of other smaller product lines such as life insurance. It’s a strategy which is clearly working for us and we have an appetite for more within the disciplined investment framework we apply. Perhaps our most exciting initiative in FY16 was to take our digital healthcare platform Whitecoat to another level. Sometimes referred to as the ‘TripAdvisor’ for healthcare, Whitecoat is designed to help people make better choices about their behaviour, treatment options and choice of doctor with the added convenience of search, booking and payments engines. As other digital platforms are doing in other markets, Whitecoat is all about producing information in order to ‘level the playing field’ between the sellers and consumers of healthcare. With the technology in place, more than 40,000 registered clinical providers and 250,000 patient reviews Whitecoat is already well-established. However, our recent announcement to form a joint venture with fellow health insurers Bupa and HBF will significantly escalate participation and the ‘network effect’. Under the collaboration Whitecoat will have direct engagement with around six million Australians. I’d like to thank my Executive team, Board of Directors and everyone in the business for their efforts and contribution throughout FY16. We remain very ambitious for the nib Group. Mark Fitzgibbon Managing Director 4 nib holdings limitedOPERATING AND FINANCIAL REVIEWCONTINUEDFor the year ended 30 June 2016AUSTRALIAN RESIDENTS HEALTH INSURANCE P R E M I U M R E V E N U E U P 9.7 % U O P U P 31. 4% $1.6b ($m) Policyholder growth Net premium revenue Net claims incurred (excluding claims handling expenses) Gross margin Management expenses Underwriting result Other income Underlying operating profit $94.5m 2016 3.8% 1,568.4 (1,334.1) 234.2 14.9% (140.1) 8.9% 94.1 6.0% 0.4 0.0% 94.5 6.0% 2015 4.7% 1,429.5 (1,238.9) 190.6 13.3% (118.9) 8.3% 71.7 5.0% 0.2 0.0% 71.9 5.0% Change $m 138.9 95.2 43.6 21.2 22.4 0.2 22.6 % 9.7 7.7 22.9 17.8 31.3 76.7 31.4 nib continues to perform strongly against the backdrop of weak industry growth and retail conditions. During the year, we added more than 19,500 policyholders at a growth rate of almost three times the industry average. Our sustained ‘above system’ growth has been achieved through ongoing innovation in our distribution model, informed by deep market insight. We continue to grow the ‘nib’ brand through investment in our own organic channels supplemented by judicious use of retail brokers. As nib’s brand positioning reflects, we intend on remaining a major force within the under 40s market segment. In recent years we have also become more focused on the over 55s age group due to the significant ongoing growth in this segment. Distribution partnerships, particularly our relationship with Apia, have been an important part of this strategic shift. In reaction to the trend of major brands looking for ways to add more value to their existing customer relationships, we have very deliberately developed a ‘whitelabelling’ capability. This investment led to the launch of the Qantas Assure partnership that we announced in November 2015. Across the business there are several initiatives underway designed to increase the value proposition and make for a better customer experience. For example, we launched the nib Rewards program during the year and we continue to invest heavily in online engagement. There’s no better example than how we are looking to better engage with our customers than Whitecoat. This success doesn’t mean we don’t face a number of business challenges. Customer lapse in particular continues to increase both as a result of customers switching funds or giving up health insurance. We are especially focused on two remedies. First, improving the customer experience when going to hospital through providing them with convenient and relevant information. Second, giving customers a reason to stay with nib beyond the benefits of our core product offering. As can be observed from the financials, the strong operating performance of arhi translated into a very solid underwriting result. Assisted by claims inflation which was low relative to previous years, our gross underwriting margin improved from 13.3% in FY15 to 14.9%. After operating expenses, we delivered an UOP of $94.5 million (net margin 6.0%) an increase of 31.4%. Slowing claims inflation benefits policyholders by relieving pressure on future health insurance premiums. While it remains to be seen if claims inflation will continue this lower trajectory, we are doing our best to keep it as low as possible. At a broader industry level, health insurance affordability and transparency have been major issues with a number of initiatives being pursued by the Government and the PHI industry. We are, and will continue to be, an active participant in these efforts. 5 annual report 2016nib NEW ZEALAND P R E M I U M R E V E N U E U P 15 . 4% $173.6m ($m) Policyholder growth1 Net premium revenue Net claims incurred (excluding claims handling expenses and movement in PPB liability) Decrease/(increase) in premium payback liability Gross margin Management expenses Underlying operating profit U O P U P 9 9. 9 % $17.3m 2016 25.8% 173.6 (121.0) 15.8 68.3 39.4% (51.0) 29.4% 17.3 10.0% 2015 5.9% 150.4 (96.8) (1.9) 51.7 34.4% (43.1) 28.6% 8.7 5.8% Change $m 23.2 24.2 17.7 16.6 7.9 8.6 % 15.4 25.1 929.5 32.0 18.4 99.9 November 2016 marks four years since we acquired our New Zealand operations*. Since then the business has been dramatically transformed to align with our ambitions in the country. Probably the most significant evidence of progress has been customer growth. Prior to our purchase of the business the portfolio had declined for nearly a decade. Our rebranding and the launch of New Zealand’s first direct-to-consumer health insurance range in 2013 was the catalyst for change. We are now growing the health insurance market and our overall share has increased to over 15%. We have made a considerable investment in the brand and the growth of our direct-to-consumer customer base, with approximately 45% of all our sales for FY16 made through this channel. Good progress was made during the year to strengthen our multi-channel distribution strategy, which included: • Maintaining our ‘best in class’ advisor product range, as well as continuing to build strong key advisor relationships. • Developing the group and employer channel by launching new products and a unique health and wellness package (healthHQ) designed to help us win new business. • Establishing a new ‘whitelabelling’ distribution capability and with that, a relationship with leading New Zealand brand, The Warehouse Group, who sell their own branded nib health and travel insurance policies. We expect to expand this ‘whitelabel’ channel during FY17 with other well-known New Zealand brands. In October we announced the acquisition of the medical insurance book of OnePath NZ for approximately AU$22.5 million. OnePath NZ was a subsidiary of ANZ Bank New Zealand Limited (ANZ) and New Zealand’s fifth largest health insurer. As a result, nib New Zealand now provides health insurance to more than 200,000 Kiwis covering more than 15% of the insured population. A key part of the transaction is the distribution agreement between nib and ANZ, where nib will distribute its health insurance products through ANZ’s network of wealth specialists. This further strengthens our position as New Zealand’s second largest health insurer. Investing in digital and automation initiatives continues to be in focus given we inherited a business that was largely paper-based and manual. Our digital initiatives are proving popular with our customers. For example: • 30% of claims are now online • More than 50% of direct-to-consumer sales are online • 90% of customer payments are electronic By focusing on a digital-first approach we are improving customer engagement and satisfaction, as well as generating operational efficiencies. Overall, New Zealand continues to deliver on the targets set when we acquired the business. For FY17 and beyond we expect profitability to further improve through organic growth and increased scale. 1. Includes policyholders from acquisition of OnePath Life NZ medical insurance business completed 1 December 2015. Excluding OnePath Life NZ, net policyholder growth for FY16 was 4.1%. * nib acquired TOWER Medical Insurance Limited, New Zealand’s second largest health insurer, in November 2012. 6 nib holdings limitedOPERATING AND FINANCIAL REVIEWCONTINUEDFor the year ended 30 June 2016INTERNATIONAL AND NEW BUSINESS I N T E R N AT I O N A L ( I N B O U N D) H E A LT H I N S U R A N C E U O P U P 41. 2 % $17.2m International (Inbound) Health Insurance ($m) Policyholder growth Net premium revenue Net claims incurred (excluding claims handling expenses) Gross margin Management expenses Underwriting result Other income Underlying operating profit W N G I N A U G U R A L U O P C O N T R I B U T I O N $9.7m 2016 2015 Change $m 28.0% 76.8 (41.7) 35.1 45.7% (18.1) 23.5% 17.0 22.2% 0.2 0.3% 17.2 22.5% 58.5% 54.9 (29.4) 25.5 46.4% (13.7) 24.9% 11.8 21.5% 0.4 0.7% 12.2 22.2% 21.9 12.3 9.6 4.4 5.2 (0.2) 5.0 % 39.7 41.6 37.5 32.2 43.7 (37.7) 41.2 Our International (Inbound) Health Insurance business continued to grow powerfully. Net policyholder growth for the year was 28% with UOP up 41.2% to $17.2 million. The result would have been better if not for higher than expected claims associated with a single business group. The relationship with this group was discontinued from March 2016. Overall, we expect that earnings will continue to grow aided by a strong pipeline of international student sales and further growth in international visitor visa classes. World Nomads Group nib’s $95 million (enterprise value basis) acquisition of WNG, was completed on 31 July 2015. WNG is Australia’s third largest travel insurer. Since then our short-term priorities have centred upon business transition, having the right people lead the business, exploring nib Group synergies and considering future investment opportunities. We have ambitions for WNG and see international markets as rich in opportunity. Investment in these opportunities may impact short term profitability but naturally will reflect a disciplined assessment about creating enterprise value. WNG is a managing general agent which performs all the functions of an insurer other than carrying the underwriting risk. This includes product design, pricing, marketing, sales, paying claims and emergency assistance. WNG is a leading Australian travel insurance company in a number of international markets including North and South America, Asia and Europe. WNG had an UOP of $9.7 million, which was in line with our expectations. Adjacent insurance lines and new business We continue to see an increase in the number of our customers looking to purchase complementary products from nib. In FY16, commissions from our adjacent insurance lines, including life and income insurance, totalled $2.3 million. Over the next 12 months we expect to launch a number of new product lines and further leverage the expertise and reach of our distribution partners, which we expect will be popular with our customers. Launched in early 2014, nib Options aims to facilitate customers receiving cosmetic and major dental treatment domestically and overseas. While the business made a loss of $2.5 million in FY16, our investment thesis is that people will increasingly travel internationally to seek treatment and that nib has capabilities that lend ourselves to competing in the market for clients. 7 annual report 2016PROFITABILITY AND SHAREHOLDER RETURN N PAT U P 2 2 .0 % $91.8m ($m) Net premium revenue Net claims incurred (excluding claims handling expenses) Gross margin Management expenses Underwriting result Other income Other expenses Underlying operating profit Amortisation of acquired intangibles One-off transactions and M&A costs Statutory operating profit Finance costs Net investment income Profit before tax Tax NPAT Statutory EPS (cps) Underlying EPS (cps) ROE (%) Operating cash flow F U L L Y E A R D I V I D E N D ( F U L LY F R A N K E D) 14.75cps 2016 1,818.7 (1,481.1) 337.6 18.6% (209.2) 11.5% 128.4 7.1% 54.4 (50.8) 132.0 7.3% (7.8) (3.4) 120.8 6.6% (5.2) 16.9 2.7% 132.4 (40.6) 91.8 21.2 22.9 25.8% 148.4 2015 1,634.9 (1,367.1) 267.8 16.4% (175.6) 10.7% 92.2 5.6% 4.4 (8.5) 88.0 5.4% (3.5) (2.8) 81.7 5.0% (3.4) 31.4 5.8% 109.6 (34.3) 75.3 17.3 18.3 23.1% 114.2 Change $m 183.8 114.0 69.8 33.6 36.2 50.0 42.3 44.0 4.3 0.6 39.1 (1.8) (14.5) 22.8 6.3 16.6 3.9 4.6 34.2 % 11.2 8.3 26.1 19.1 39.3 1,141.1 496.2 49.9 121.6 19.0 47.9 (53.1) (46.2) 20.8 18.4 22.0 22.5 25.1 29.9 The strong performance of our core arhi business, as well the continued growth and expansion of our adjacent businesses this financial year, has yielded another material improvement in performance for the nib Group. Total Group revenue1 rose by an impressive 14.3% to $1.9 billion, which included the first time contribution of WNG (11-month result) and OnePath NZ (seven-month result). Our Group UOP of $132.0 million was up 49.9% (statutory operating profit up 47.9% to $120.8 million). The difference between our UOP and statutory operating profit reflects one-off transactions and non-cash items associated with business acquisitions. Our investment portfolio delivered returns that were broadly in line with our internal benchmarks for the year, with a net investment return of $16.9 million. As a share of our overall Group after tax earnings, investment returns have continued to reduce over the past few years. This is due to a lower capital base following a range of capital management initiatives undertaken since listing on the ASX in 2007. Over the course of that period, we have returned more than $160 million to shareholders through a combination of special dividends and a Capital Return. Capital above our internal prudential requirements has also been used to partially fund a number of acquisitions, including IMAN in FY10, TOWER Medical Insurance Limited in FY13 as well as our WNG and OnePath NZ transactions this financial year. As at 30 June 2016, our total investment assets were $640.8 million. 1. Excludes non-recurring profit from sale of Newcastle office building. 8 nib holdings limitedOPERATING AND FINANCIAL REVIEWCONTINUEDFor the year ended 30 June 2016($m) Assets Cash and cash equivalents Receivables Financial assets at fair value through profit or loss Deferred acquisition costs Assets classified as held for sale Property, plant and equipment Intangible assets Other assets Total assets Liabilities Payables Borrowings Outstanding claims liability Unearned premium liability Premium payback liability Other liabilities Total liabilities Net assets Total equity 2016 2015 Change $m 89.4 51.9 580.7 83.2 – 15.5 217.4 0.9 123.7 45.1 457.2 64.1 38.7 14.5 90.2 3.7 1,039.0 837.1 141.3 151.9 112.2 176.3 27.4 43.9 652.9 124.9 63.9 97.1 143.2 40.9 22.8 492.8 386.1 344.3 386.1 344.3 (34.2) 6.7 123.6 19.1 (38.7) 1.0 127.2 (2.8) 201.9 16.4 88.0 15.0 33.0 (13.5) 21.1 160.0 41.8 41.8 % (27.7) 14.9 27.0 29.7 NA 7.1 141.1 (75.8) 24.1 13.1 137.7 15.5 23.1 (33.1) 92.6 32.5 12.1 12.1 In addition to using our capital to fund acquisitions, we have also accessed debt as a funding source. As at 30 June 2016, our gearing ratio was 28.1% (debt-to-debt plus equity). This is consistent with our long-term gearing ratio of 30%, noting that the target gearing policy allows for gearing to go above 30% for a short time, if necessary, as part of funding a significant investment. The Board will continue to assess our debt and gearing levels and targets with the view to optimise our capital structure. Our strong financial performance for FY16 has allowed the Board to declare a full year dividend of 14.75 cents per share fully franked (FY15: 11.5 cents per share), totalling $64.8 million. The full year dividend comprises an interim dividend of 5.75 cents per share fully franked (paid 1 April 2016) and a final dividend of 9.0 cents per share fully franked. The final dividend will be paid to shareholders on 7 October 2016. The full year dividend of 14.75 cents per share represents a payout ratio of 70% of full year NPAT and is consistent with our policy to pay ordinary fully franked dividends between 60% to 70% of full year NPAT. Since listing on the ASX in 2007 our financial performance has been strong and on a Total Shareholder Return (TSR) basis we have consistently outperformed the S&P/ASX200. For FY16, our TSR was 30.0% compared to negative 0.5% for the S&P/ ASX200. Our business strategy will continue to focus on delivering outstanding service to our customers, improving our operating efficiencies and growing the business to provide the foundation for ongoing earnings growth and value for shareholders. 9 annual report 2016OUR COMMUNITY nib f o u n d a t i o n F U N D I N G S I N C E 2 0 0 8 nib f o u n d a t i o n PA R T N E R S H I P S W I T H $15m 95 charities nib foundation was established in 2008 with a clear vision to improve the health and wellbeing of individuals and communities across Australia. Over the past seven years, the foundation has remained dedicated to this vision through a commitment of $15 million to 95 charity partners in support of programs that raise awareness, build resilience, increase access to information and foster social connections. In 2015, four new Multi-Year Partnerships were established that work to address significant health needs affecting the foundation’s two focal groups, young people and carers: • Australian Drug Foundation’s Good Sports Junior program will encourage sporting clubs to foster a positive and healthy environment for their young members • Hello Sunday Morning will develop technology designed to empower Australians to improve their relationship with alcohol • National Stroke Foundation will enhance and expand the My Stroke Journey program, which supports stroke survivors and their families • Disability Sport and Recreation’s Score! is Australia’s first online platform that will connect young Victorians with a disability with inclusive sporting opportunities The foundation’s ongoing commitment to the Hunter was clearly demonstrated through the support of the Upper Hunter township of Dungog. April 2016 marked the one-year anniversary of the devastating floods that tore through the region. Through the nib foundation funded, Project Bounce Forward, The Dungog Shire Community Centre has worked tirelessly since the disaster to help rebuild the town and provide services to support the wellbeing of residents. With initial funding due to end in March 2016 and much work still to be done, a renewed funding injection of $50,000 was provided to ensure the project successfully reaches all those in need of support. While the foundation continues to support many new and local causes, it has also helped existing partners to build their capacity and expand service offerings. This has been the case with long-standing partner, OzHarvest. This financial year the foundation’s ongoing support of the food rescue program enabled the service to be expanded into the Port Stephens area. Furthermore, an additional three years of funding was announced to help establish and grow OzHarvest Western Australia. Together with the foundation, we will continue to play an important role in helping meet the health and wellbeing needs of communities across Australia by funding charities that work to address significant health concerns. In addition to the work of nib foundation, we are focused on giving back to the community through a combination of fundraising initiatives, in-kind support and employee volunteering efforts. Our dedicated workplace fundraising program, has raised more than $61,000 and provided overwhelming in-kind support for 40 local and national charities since 2008. It is through the dedication of our employees and the donation of their time and skills that we are able to deliver considerable value to nib foundation partners and other community groups above and beyond agreed funding commitments. 10 nib holdings limitedOPERATING AND FINANCIAL REVIEWCONTINUEDFor the year ended 30 June 2016BUSINESS STRATEGIES AND PROSPECTS nib’s Business Strategy sets out 10 key levers which we believe will increase earnings and grow enterprise value. 1. Pursue above ‘system’ 4% to 5% net policyholder growth in the Australian Resident Health Insurance market. 2. Grow our international workers and international students market share. 3. Position and build our business in New Zealand as a ‘challenger’ and grow the market and our share. 4. Complete integration and pursue growth of World Nomads Group travel insurance business. 5. Escalate focus upon knowledge as a source of customer value, empowerment and competitive advantage. 6. Leverage core business capability to pursue adjacent business opportunities. 7. Design and manage product benefits and claims in accordance with our strategic and commercial objectives. 8. Increase customer satisfaction, productivity and efficiency. 9. Have the ‘right people on the bus’, develop a high performance organisational culture and engage our people. 10. Continue to build and develop overall key organisational capabilities and assets. We measure our success by Group revenue and earnings growth, customer satisfaction and total shareholder returns. Principal risks and uncertainties nib has established policies for the oversight and management of material business risks. Further information regarding how nib recognises and manages risk is detailed in Principle 7 of our Corporate Governance Statement. The Corporate Governance Statement and nib’s Risk Policy are available on our website at nib.com.au Principal risks and uncertainties include: General economic conditions Claims inflation and fraud nib’s performance is impacted by Australian economic conditions such as inflation, interest rates, consumer and business spending and employment rates which are outside nib’s control. The environment in which nib operates may experience challenging conditions as a result of general uncertainty about future Australian and international economic conditions. nib is subject to significant claims inflation which may not be adequately covered by premium price increases and/or product design changes. Key sources of claims inflation risk include the renewal of key provider contracts on acceptable terms, service utilisation rates, services related to complex and costly members (usually with chronic diseases), claims leakage, provider and member fraud, public hospital claiming, as well as general provider behaviour, which results in a weakening of nib’s gross margin and overall profitability. Performance of adjacent (non-Australian Residents Health Insurance) businesses In recent years, in addition to focusing on its Australian regulated health insurance business, nib has diversified its business and identified adjacent earnings opportunities, such as International (Inbound) Health Insurance, New Zealand, nib Options and World Nomads Group. These adjacent businesses now make a meaningful contribution to nib’s operating result and as a result the performance of these businesses could significantly affect nib’s profits. Investment market performance A substantial proportion of nib’s profits are generated from its investment portfolio. Consequently, investment performance significantly affects nib’s profits and financial position. Competition in the health insurance industry Pricing risk Risk equalisation special account arrangements The industry in which nib operates is competitive. The actions of competitors could result in a reduction in the rate of growth of nib, a decline in the number of people insured by nib and/or declining profit margins. Australian health insurance premiums are currently required to be approved by the Minister for Health. Historically, nib and other health funds have only raised premiums once a year. There is a risk that nib’s application for a change in its premium rates may only receive approval at a level lower than originally requested, or may be rejected by the Minister. Such an amendment or rejection may have a negative impact on nib’s operating and financial performance. Since 1 April 2007 risk equalisation arrangements have applied to the registered health insurance industry in Australia. These arrangements replaced the previous reinsurance arrangements. Under these arrangements all registered health insurers effectively provide reinsurance support so that the industry as a whole shares the hospital costs of high risk groups irrespective of whether those claims are attributable to a policyholder of a particular fund. 11 annual report 2016BUSINESS STRATEGIES AND PROSPECTS continued Principal risks and uncertainties continued Changes in government policy or legislation The business environment in which nib operates is heavily regulated. The Australian Federal Government currently provides a number of regulatory incentives to encourage participation by the public in private health insurance including: a. Australian Government Rebate; b. Lifetime Health Cover; and c. Medicare Levy Surcharge. The Federal Government has and may in the future change these regulatory incentives from time to time through changes to such things as policy and legislation. There is a risk that such changes may have a negative impact on the private health insurance industry and nib. Merger or acquisition opportunities nib has a business strategy of pursuing merger and acquisition opportunities. The pursuit of merger and acquisition opportunities carries with it risks and there is no guarantee that such a strategy will be successful. Compliance with regulation nib is subject to a high degree of regulation concerning how private health insurers conduct their health insurance business. Private health insurers must be registered and must comply with a variety of obligations in relation to the conduct of that business including a requirement to have appointed actuaries, compliance with prudential, solvency and capital adequacy standards, exclusion of disqualified persons from management and a number of reporting and notification obligations. If nib does not comply with the regulatory requirements that apply to it, it may suffer a penalty, such as a fine or an obligation to pay compensation. In some cases, a regulator may cancel or suspend its authority to conduct business. A significant failure to comply with regulatory requirements may also give rise to adverse comment by the press and other industry commentators, negatively affecting nib’s financial performance. Operational risk nib is exposed to a variety of operational and general business risks. Exposure to unexpected financial and non financial losses arising from the way in which nib conducts its business operations may have an adverse effect on earnings and assets of nib as well as its reputation. Loss of key personnel nib’s success depends largely on its key personnel, including senior management. The inability to access and retain services of a significant number of such employees could disrupt nib’s business. Tax treatment Technology Litigation and legal action The Federal or State Governments may introduce further or increase taxes, duties (including stamp duty on insurance policies) or other imposts or introduce amendments to existing legislation which may result in an adverse impact on nib and the health insurance industry. The health insurance industry relies increasingly on technology to conduct an efficient and cost effective business. nib faces the risk, in common with other participants, that further technology changes will be required which could result in an increase in costs. In addition, information technology systems risks include complete or partial systems failure, lack of systems capacity, inadequacy to meet changing business requirements, inappropriate or unauthorised systems access and unsuccessful systems integrations. Any major failure or inadequacy in the information technology systems could materially affect nib’s business. At any time, nib could be involved in civil proceedings in courts of various jurisdictions. nib may also be exposed to litigation in the future over claims which may affect its business. To the extent that these risks are not covered by nib’s insurance policies, litigation or the costs of responding to these legal actions or suggested legal action could have a material adverse impact on nib’s financial position, earnings and share price. Future events It is not possible to predict or identify all future events which may impact adversely on nib’s profitability or financial position. 12 nib holdings limitedOPERATING AND FINANCIAL REVIEWCONTINUEDFor the year ended 30 June 20162016 $m 2015 $m 2014 $m 2013 $m 2012 $m 1,634.9 (1,367.1) 267.8 (175.6) 1,491.6 (1,255.4) 236.2 (157.9) 1,290.4 (1,089.6) 200.8 (124.4) 1,123.8 (949.2) 174.6 (102.9) FIVE YEAR SUMMARY Consolidated Income Statement Net premium revenue Net claims incurred Gross margin Management expenses Underwriting result Other income1 Other expenses1 Underlying operating profit Amortisation of acquired intangibles One-off transactions and M&A costs Statutory operating profit Finance costs Net investment income Profit before tax Tax NPAT Consolidated Balance Sheet Total assets Equity Debt Share Performance Number of shares Weighted average number of shares – basic m m Weighted average number of shares – diluted m Basic earnings per share Diluted earnings per share Underlying earnings per share Share price at year end Dividend per share – ordinary Dividend per share – special Dividend payout ratio – ordinary Dividend payout ratio – combined ordinary and special Other financial data ROE Operating cash flow cps cps cps $ cps cps % % % 1,818.7 (1,481.1) 337.6 (209.2) 128.4 54.4 (50.8) 132.0 (7.8) (3.4) 120.8 (5.2) 16.9 132.4 (40.6) 91.8 1,039.0 386.1 151.9 439.0 439.0 439.0 21.2 21.2 22.9 4.22 14.75 0.00 70.0 70.0 25.8 148.4 92.2 4.4 (8.5) 88.0 (3.5) (2.8) 81.7 (3.4) 31.4 109.6 (34.3) 75.3 837.1 344.3 63.9 439.0 439.0 439.0 17.3 17.3 18.3 3.36 11.50 0.00 66.6 66.6 23.1 114.2 78.4 5.7 (6.8) 77.3 (4.2) (0.8) 72.3 (2.7) 29.7 99.2 (29.4) 69.8 798.1 356.4 66.8 439.0 439.0 439.0 15.9 15.9 16.8 3.26 11.00 9.00 69.2 125.8 20.8 93.7 76.4 3.1 (4.0) 75.5 (2.6) (3.6) 69.3 (1.4) 28.8 96.7 (29.5) 67.2 712.3 326.2 62.4 439.0 439.0 439.0 15.3 15.3 16.3 2.13 10.00 0.00 65.0 65.0 21.6 20.0 1. Increase in Other income and Other expenses in FY16 due to the inclusion of World Nomads Group 11 month result. 71.6 3.6 (4.3) 71.0 (1.0) (0.0) 70.0 0.0 25.6 95.7 (28.0) 67.6 617.8 301.6 0.0 439.0 458.3 458.3 14.8 14.8 15.0 1.50 9.25 0.00 60.0 60.0 21.7 134.6 13 annual report 2016DIRECTORS’ REPORT For the year ended 30 June 2016 The Directors of nib holdings limited (Company) present their report on the consolidated entity (Group) consisting of nib holdings limited and the entities it controlled at the end of or during the year ended 30 June 2016. DIVIDENDS Dividends paid to shareholders during the financial year were as follows: DIRECTORS The following persons were Directors of nib holdings limited during the whole of the financial year and up to the date of this report: Steve Crane Lee Ausburn Annette Carruthers Christine McLoughlin Mark Fitzgibbon Harold Bentley Philip Gardner Donal O’Dwyer was appointed as a Non-Executive Director on 22 March 2016. Final dividend for the year ended 30 June 2015 of 6.0 cents per fully paid ordinary share, made up of 6.0 cps ordinary dividend (2014 – 14.75 cents per fully paid ordinary share, made up of 5.75 cps ordinary dividend and 9.0 cps special dividend) paid on 9 October 2015 Interim dividend for the year ended 30 June 2016 of 5.75 cents (2015 – 5.5 cents) per fully paid share paid on 1 April 2016 2016 $000 2015 $000 26,339 64,748 25,242 51,581 24,144 88,892 PRINCIPAL ACTIVITIES The principal continuing activities of the Group consisted of operating as a private health insurer for Australian residents, New Zealand residents and international visitors and students to Australia. Overall the Group insures over 1.3 million lives. In addition to these dividends, since the end of the financial year the Directors have recommended the payment of a fully franked final dividend of $39.5 million (9.0 cents per fully paid ordinary share) to be paid on 7 October 2016 out of retained profits at 30 June 2016. Our vision is to be a leading financier and facilitator of healthcare consumption with a reputation for innovative products, value for money, outstanding customer service, being a good corporate citizen and strong shareholder returns. Subject to franking credit availability, the Board’s position is that future ordinary dividends will reflect a dividend payout ratio of 60% to 70% of earnings with additional capacity to pay special dividends as part of future capital management. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR No matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect: a. the Group’s operations in future financial years; or b. the results of those operations in future financial years; or c. the Group’s state of affairs in future financial years. During the year the Group acquired World Nomads Group (WNG), the third-largest distributor of travel insurance in Australia. WNG specialises in the marketing, sale and distribution of travel insurance policies globally. Additionally, nib nz limited (a 100% owned subsidiary) acquired the medical insurance business OnePath Life (NZ) Limited (OnePath). OnePath was New Zealand’s fifth-largest health insurer with approximately 19,000 policies covering 43,000 insured persons. REVIEW OF OPERATIONS Information on the operations and financial position of the Group and its business strategies and prospects is set out in the Operating and Financial Review on pages 2 to 13 of this Annual Report. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS On 31st July 2015 nib acquired 100% of World Nomads Group Pty Limited and its controlled entities for $95 million on an enterprise value basis. There were no other significant changes in the state of affairs of the Group during the financial year. 14 nib holdings limitedINFORMATION ON DIRECTORS Details of the qualifications, experience, special responsibilities and interests in shares and performance rights of the Directors are as follows: Steve Crane BCommerce, FAICD, SF Fin Chairman Independent Non-Executive Director Experience and expertise A Director since 28 September 2010, appointed Chairman on 1 October 2011. Approximately 40 years of financial market experience, as well as an extensive background in publicly-listed companies. Previously the Chief Executive of BZW Australia and ABN AMRO. Other current directorships Director of APA Group, including APT Pipelines Limited and Chairman of the Taronga Conservation Society Australia. He is also Chairman of Global Valve Technology Limited and a consultant member of the Advisory Board with Morgans Financial Ltd. Former directorships in the last three years Chairman of IMAN Australian Health Plans Pty Limited. Director of Transfield Services Limited, Bank of Queensland Limited and formerly a member if the CIMB (Australia) Advisory Council. Subsidiary boards and special responsibilities Chairman of nib holdings limited and nib health funds limited. Steve is also Chairman of the Nomination Committee. Interests in shares and performance rights Indirect: 250,000 ordinary shares in nib holdings limited held by Depeto Pty Ltd. Mark Fitzgibbon MBA, MA, ALCA, FAICD Managing Director/Chief Executive Officer Experience and expertise Mark joined nib health funds limited in October 2002 as Chief Executive Officer (CEO) and led nib through its demutualisation and listing on the ASX in May 2007 when he was appointed Managing Director of nib holdings limited. Previously CEO of both the national and NSW peak industry bodies for licensed clubs and has held several CEO positions in local government. Other current directorships Director of Knights Rugby League Pty Limited. Former directorships in the last three years None. Subsidiary boards and special responsibilities Managing Director of nib holdings limited. Director of nib health funds limited, nib health care services pty limited, nib servicing facilities pty limited, nib Global Pty Limited, IMAN Australian Health Plans Pty Limited, nib nz holdings limited, nib nz limited, nib Options Pty Limited, RealSurgeons Pty Ltd, RealSelf Pty Ltd and World Nomads Group Pty Ltd. Mark is also a member of the Nomination Committee. Interests in shares and performance rights Direct: 1,122,656 ordinary shares in nib holdings limited. Indirect: 660,621 ordinary shares in nib holdings limited held by Fitz (NSW) Pty Ltd. 331,765 performance rights under FY13-FY16 Long Term Incentive Plan which may vest from 1 September 2016. 273,786 performance rights under FY14-FY17 Long Term Incentive Plan which may vest from 1 September 2017. 234,714 performance rights under FY15-FY18 Long Term Incentive Plan which may vest from 1 September 2018. 284,320 performance rights under FY16-FY19 Long Term Incentive Plan which may vest from 1 September 2019. 15 annual report 2016 INFORMATION ON DIRECTORS continued Philip Gardner B.Comm, CPA, CCM, FAICD, JP Independent Non-Executive Director Experience and expertise A Director since 28 May 2007. Current Chief Executive Officer of The Wests Group Australia, a position he has held for more than a decade in which time he has overseen the Group’s significant growth and expansion. Lee Ausburn MPharm, BPharm, Dip Hosp Pharm, GAICD Other current directorships Knights Rugby League Pty Limited. Former directorships in the last three years A Director of IMAN Australian Health Plans Pty Limited, Newcastle Airport Limited and Hunter Funds Management Pty Ltd. Subsidiary boards and special responsibilities A Director of nib health funds limited (since 2005). Chairman of the Investment Committee and a member of the Audit Committee, People and Remuneration Committee and Nomination Committee. Interests in shares and performance rights Indirect: 150,000 ordinary shares in nib holdings limited held by Sutton Gardner Pty Ltd. Independent Non-Executive Director Experience and expertise A Director of nib holdings limited since November 2013. With more than 30 years experience in pharmaceuticals, Lee is an experienced Non-Executive Director with a wealth of knowledge in the global health industry. Other current directorships A Director of Australian Pharmaceutical Industries Ltd and SomnoMed Ltd. President of the Pharmacy Foundation at the University of Sydney. Former directorships in the last three years Director of IMAN Australian Health Plans Pty Limited. Subsidiary boards and special responsibilities A Director of nib health funds limited. Chairman of the People and Remuneration Committee and a member of the Risk and Reputation Committee and Nomination Committee. Interests in shares and performance rights Indirect: 20,000 ordinary shares in nib holdings limited held by Leedoc Pty Ltd and 30,000 ordinary shares in nib holdings limited held by MIML Pension Consolidator (Lee Ausburn). 16 nib holdings limitedDIRECTORS’ REPORT CONTINUEDFor the year ended 30 June 2016Harold Bentley MA Hons, FCA, FCSA, FGIA Independent Non-Executive Director Experience and expertise A Director since 7 November 2007. Has over 20 years experience in the insurance sector. Formerly the Chief Financial Officer of Promina Group Ltd and an Audit Manager with PricewaterhouseCoopers specialising in finance and insurance companies. Dr Annette Carruthers MBBS (Hons), FRACGP, FAICD, GradDipAppFin TAASFA Other current directorships None. Former directorships in the last three years Director of IMAN Australian Health Plans Pty Limited. Subsidiary boards and special responsibilities Director of nib health funds limited, nib nz holdings limited and nib nz limited. Chairman of the Audit Committee and a member of the Investment Committee, Risk and Reputation Committee and Nomination Committee. Chairman of the nib nz holdings limited’s Audit Committee and Chairman of nib nz limited’s Board, Audit, Risk and Compliance Committee (BARCC). Interests in shares and performance rights Indirect: 100,000 ordinary shares in nib holdings limited held by Sushi Sake Pty Ltd. Independent Non-Executive Director Experience and expertise A Director since 20 September 2007. A general medical practitioner with financial qualifications and comprehensive experience in patient care and clinical risk management. Directorships and representative positions in a range of national, state and regional health care organisations. Other current directorships Director of Cater Care Holdings Pty Ltd, Multiple Sclerosis Research Australia and Vice President of MS Australia. Former directorships in the last three years Director of IMAN Australian Health Plans Pty Limited, Aged Care Investment Services (the Trustee for the AMP Managed Aged Care Investment Trusts), the NSW Board of the Medical Board of Australia, Hunter Primary Care Ltd, and Hunter Infrastructure and Investment Advisory Board. Subsidiary boards and special responsibilities Director of nib health funds limited (since 2003), nib health care services pty limited, nib nz holdings limited and nib nz limited. Chairman of the Risk and Reputation Committee and a member of the Audit Committee and Nomination Committee. A member of nib nz limited’s Board, Audit, Risk and Compliance Committee (BARCC) and a member of nib nz holdings limited’s Audit Committee. Interests in shares and performance rights Direct: 1,000 ordinary shares in nib holdings limited. Indirect: 71,500 ordinary shares in nib holdings limited held by Carruthers Future Fund Pty Ltd. 17 annual report 2016INFORMATION ON DIRECTORS continued Christine McLoughlin BA/LLB (Hons), FAICD Donal O’Dwyer MBA, BE Independent Non-Executive Director Experience and expertise A Director since 20 March 2011. Over 25 years experience as a financial services and legal executive with iconic brands in financial services (AMP and IAG), telecommunications (Optus) and professional services industries in Australia, the UK and Asia. Other current directorships Chairman of Stadium Australia Group, a Non-Executive Director of Suncorp Group Limited, Spark Infrastructure Group and Whitehaven Coal Limited and a member of ASIC’s Director Advisory Panel and the Minter Ellison Advisory Board. Former directorships in the last three years Director of IMAN Australian Health Plans Pty Limited, Westpac’s Insurance Businesses. Chairman of Australian Payments Council and Deputy Chairman of The Smith Family. Subsidiary boards and special responsibilities A Director of nib health funds limited. A member of the People and Remuneration Committee, Risk and Reputation Committee and Nomination Committee. Interests in shares and performance rights Indirect: 110,000 shares in nib holdings limited held by Dundas Street Investments Pty Ltd. Independent Non-Executive Director Experience and expertise Appointed as an additional Director on 22 March 2016 and will stand for election at the 2016 Annual General Meeting. Highly experienced Non-Executive Director and former executive as the former worldwide President at Cordis Cardiology and President of the Cardiovascular Group, Europe with Baxter Healthcare (now Edwards Lifesciences). Other current directorships Chairman of AtCor Medical Ltd. A Director of Cochlear Ltd, Mesoblast Ltd and Fisher & Paykel Healthcare Corporation Ltd. Former directorships in the last three years None. Subsidiary boards and special responsibilities A Director of nib health funds limited. A member of the People and Remuneration Committee, Risk and Reputation Committee and Nomination Committee. Interests in shares and performance rights Indirect: 25,600 shares in nib holdings limited held by Dundrum Investments Pty Ltd. COMPANY SECRETARIES Mrs Michelle McPherson (BBUS (Accounting) (UTS), CA) was appointed to the position of Company Secretary on 1 September 2008. She is currently the Chief Financial Officer and Deputy Chief Executive Officer of the Group. Mrs McPherson is a Director of the Hunter Valley Research Foundation and Hunter Valley Grammar School, Chairman of the Advisory Board to the Faculty of Business and Law at the University of Newcastle and a member of the University of Newcastle Foundation Advisory Board and the Council of the University of Newcastle. Mrs McPherson also serves as a Director of a number of nib Group companies. Ms Roslyn Toms (BA (Hons) (UCAN,UTS) /LLB (UNSW)) was appointed Company Secretary on 29 April 2013 and serves as joint Company Secretary. She is also General Counsel of the nib Group and Company Secretary of other nib Group companies. Ms Toms has over thirteen years’ experience as a lawyer in business, government and private practice. 18 nib holdings limitedDIRECTORS’ REPORT CONTINUEDFor the year ended 30 June 2016MEETINGS OF DIRECTORS The number of meetings of nib holdings limited’s Board of Directors and of each Board committee held during the year ended 30 June 2016, and the numbers of meetings attended by each Director were: Board2 Audit Committee Risk and Reputation Committee People and Remuneration Committee3 Investment Committee Nomination Committee Name Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended S Crane M Fitzgibbon L Ausburn H Bentley A Carruthers P Gardner C McLoughlin D O’Dwyer1 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 2 9 9 9 9 9 9 9 9 9* 9* 9* 9 9 9 6* – 4 4 4 4 4 4 4 4 4* 4* 4 4 4 4* 4 1 7 7 7 7 7 7 7 7 7* 6* 7 4* 3* 6 7 2 6 6 6 6 6 6 6 6 1* 6* – 6 – 6 – – 2 2 2 2 2 2 2 2 2 2* 2 2 2 2 2 1 * Attendance at Committee meetings in an ex-officio capacity 1. D O’Dwyer commenced on 22 March 2016 2. Unscheduled Board meeting on 24 June 2016 3. Unscheduled PARCO meeting on 7 June 2016 nib’s Non-Executive Directors participated in a number of site visits, work related functions and staff events during the course of the year in Newcastle, Sydney and Auckland. LIKELY DEVELOPMENTS AND EXPECTED RESULTS FROM OPERATIONS Additional comments on expected results on operations of the Group are included in this Annual Report under Operating and Financial Review on pages 2 to 13. Further information on likely developments in the operations of the Group have not been included in this Annual Report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. REMUNERATION REPORT The Remuneration Report is set out on pages 22 to 42 of the Annual Report and forms part of this Report. ENVIRONMENTAL REGULATION The Group is not subject to any specific environmental regulation and has not breached any legislation regarding environmental matters. SHARES UNDER PERFORMANCE RIGHTS Unissued ordinary shares of nib holdings limited under performance rights at the date of this report are as follows: Date performance rights granted Expiry date Issue price of shares Number under performance right 19 November 2012 29 November 2013 22 December 2014 13 May 2015 18 January 2016 1 September 2016 1 September 2017 1 September 2018 1 September 2018 1 September 2019 nil nil nil nil nil 553,236 559,057 473,927 22,956 628,895 Shares may be issued or acquired on-market at the election of the Company. It is anticipated the performance rights will be satisfied through on-market share purchases administered by the nib Holdings Ltd Share Ownership Plan Trust. No performance right holder has any right under the performance rights to participate in any other share issue of the Company or any other entity. 19 annual report 2016NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit services during the year are disclosed in Note 33 – Remuneration of Auditors. The Board of Directors has considered the position and, in accordance with advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out in Note 1, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit Committee to ensure that they did not impact the impartiality and objectivity of the auditor. • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. INSURANCE OF OFFICERS During the financial year, the Group paid a premium in respect of a contract insuring the Directors and Officers of the Group against liability incurred as such a Director or Officer, other than conduct involving wilful breach of duty in relation to the Group, to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. AUDITOR’S INDEPENDENCE DECLARATION A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 21. CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER DECLARATION The Chief Executive Officer and the Chief Financial Officer have given the declarations to the Board concerning the Group’s financial statements required under section 295A(2) of the Corporations Act 2001 and Recommendation 7.3 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. ROUNDING OF AMOUNTS The Company is of a kind referred to in Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial Report. Amounts in the Directors’ Report and Financial Report have been rounded off to the nearest thousand dollars in accordance with that Instrument. This report is made in accordance with a resolution of the Directors. On behalf of the Board Steve Crane Director Newcastle, NSW 19 August 2016 20 Harold Bentley Director nib holdings limitedDIRECTORS’ REPORT CONTINUEDFor the year ended 30 June 2016 AUDITOR’S INDEPENDENCE DECLARATION For the year ended 30 June 2016 Auditor’s Independence Declaration As lead auditor for the audit of nib holdings limited for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of nib holdings limited and the entities it controlled during the period. Caroline Mara Partner PricewaterhouseCoopers Newcastle 19 August 2016 PricewaterhouseCoopers, ABN 52 780 433 757 Level 3, 45 Watt Strteet, PO Box 798, NEWCASTLE NSW 2300 T: +61 2 4925 1100, F: +61 2 4925 1199, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 21 annual report 2016 REMUNERATION REPORT For the year ended 30 June 2016 MESSAGE FROM THE BOARD Dear Shareholder, We are pleased to present our Remuneration Report for the financial year to 30 June 2016. Our aim with remuneration is to retain, reward and incentivise our Executives to deliver short-and-long-term value creation that is aligned to our organisational culture, overall business strategy as well as shareholder interests. The Board has spent considerable time bedding down a remuneration philosophy and framework that is fair to our people and is reasonable in the eyes of our shareholders. It’s therefore encouraging that our remuneration approach has been readily accepted by our shareholders, proxy advisors and other shareholder representative groups. At the 2015 Annual General Meeting, our shareholders voted more than 98% in favour of our Remuneration Report. We feel feedback is important and as in previous years, nib will seek to engage with our key stakeholders prior to this year’s AGM. Like many companies we continue to face intense competition to attract and also retain Executive talent. Our remuneration structure sets a clear and meaningful link between performance and reward to ensure we continue to attract and retain the right people. We have previously explained to our shareholders that the Board’s Executive remuneration goal is to position our Executive team between the 50th and 75th percentile of benchmarked companies in terms of fixed remuneration. On a regular basis we engage an independent advisor to assist in benchmarking remuneration against a defined nib peer group which contains similar businesses of comparable size. This was done in May 2014 and again in May this year (for financial year 2017). As our shareholders have seen, the size, scope and complexity of nib has increased significantly in the last few years with the acquisition of nib New Zealand, World Nomads Group and the expansion of our international business operations. Our benchmarking in 2016 has shown that the Managing Director was below market and so TFR will be increased by 15% in 2017 to align with our targets and to remain competitive. Further information regarding Executive Remuneration, as well as total remuneration mix and performance against STI and LTI hurdles for FY16, can be found on pages 27 to 31 of the Annual Report. Due to ongoing growth and diversification of the Group, Board succession planning and renewal remains a key focus for the nib Board. Ensuring we have the right skills mix, experience, diversity, independence and capacity is integral to nib’s ongoing success. With this central to our thinking, during the year nib appointed Mr Donal O’Dwyer as an Independent Non-Executive Director of the Board of nib. The appointment of Donal follows the announcement in November last year by Dr Annette Carruthers that she would not be seeking re-election as a Non-Executive Director of nib. We will not be seeking shareholder approval to Increase nib’s Non-Executive Director fee pool with 2017 Directors fees captured under our current fee pool. Since listing on ASX in 2007, nib has continued to perform well against our stated business strategy. With that we have delivered strong returns for our shareholders, while being served by a very capable and experienced Executive team. We thank our Executives and their teams for their commitment to nib. I would like acknowledge the contribution of my fellow nib Director, Christine McLoughlin who during the year moved from Chairman of our People and Remuneration Committee and will take up the role as Chairman of Risk and Reputation Committee. Christine’s, leadership has helped embed the effective remuneration philosophy we have at nib. As Chairman of our People and Remuneration Committee I look forward to building on the strong foundations we have in place. As always, we welcome your feedback. Yours sincerely Lee Ausburn Chairman People and Remuneration Committee 22 nib holdings limitedCONTENTS KEY TERMS USED IN THIS REPORT Key terms used in this Report Who this Report covers Performance drives remuneration at nib Our remuneration governance Actual remuneration received for the financial year ended 30 June 2016 Executive reward at nib How reward was linked to performance this year Terms of Executive contracts Non-Executive Director remuneration Detailed disclosure of Executive remuneration Detailed disclosure of Non-Executive remuneration Equity instruments held by key management personnel 23 23 24 25 26 27 32 34 35 36 40 41 FY15 FY16 FY17 AGM Group KMP KPI LTI LTIP NPAT STI TFR TSR Financial year ended 30 June 2015 Financial year ended 30 June 2016 Financial year ended 30 June 2017 Annual General Meeting nib holdings limited consolidated entity Key Management Personnel (those Directors and Executives who have responsibility for planning, directing and controlling the activities of nib, either directly or indirectly) Key Performance Indicator Long-Term Incentive Long-Term Incentive Plan Net Profit After Tax Short-Term Incentive Total Fixed Remuneration Total Shareholder Return WHO THIS REPORT COVERS This Report presents the remuneration arrangements for nib’s key management personnel. Executive Director Mark Fitzgibbon Managing Director/Chief Executive Officer (MD/CEO) Other Executives Michelle McPherson Deputy Chief Executive Officer/Chief Financial Officer (CFO/DCEO) Rhod McKensey Group Executive Australian Residents Health Insurance (GEARHI) Rob Hennin Chief Executive Officer – New Zealand (CEO NZ) Brendan Mills Chief Information Officer (CIO) Justin Vaughan Group Executive Benefits and Provider Relations (GEBPR) David Kan Group Executive International and New Business (GEINB) Independent Non-Executive Directors Steve Crane Lee Ausburn Harold Bentley Chairman Member Risk and Reputation Committee , Member People and Remuneration Committee (until 29 February 2016), Chairman People and Remuneration Committee (1 March 2016 – 30 June 2016) Chairman Audit Committee, Chairman Board Audit Risk and Compliance Committee New Zealand, Director New Zealand subsidiaries, Member Investment Committee, and Risk and Reputation Committee Annette Carruthers Chairman Risk and Reputation Committee, Director New Zealand subsidiaries and Member Audit Committee and Board Audit Risk and Compliance Committee New Zealand Philip Gardner Chairman Investment Committee, Member Audit Committee and People and Remuneration Committee Christine McLoughlin Chairman People and Remuneration Committee (until 29 February 2016), Member People and Remuneration (1 March 2016 – 30 June 2016), Member Risk and Reputation Committee Donal O’Dwyer (commenced 22/3/2016) Member People and Remuneration Committee, and Risk and Reputation Committee 23 annual report 2016PERFORMANCE DRIVES REMUNERATION AT nib Over the past five years nib has continued to perform strongly against the following key performance criteria. Sustained growth in consolidated operating profit combined with effective capital management has seen strong performance in the key metrics of EPS and TSR. Earnings Per Share ) s p c ( e r a h s r e p s t n e c 22.5 21.5 20.5 19.5 18.5 17.5 16.5 15.5 14.5 13.5 12.5 21.2 14.8 15.3 17.3 15.9 FY12 FY13 FY14 FY15 FY16 Total Shareholder Return Since 1 July 2011 nib has consistently performed above the S&P ASX200. The graph below shows the value of $100 invested over the five-year period to the end to 30 June 2016 (with dividends reinvested) compared to the performance of the S&P/ASX200. 600 500 400 300 200 100 0 NHF: 436.4 ASX200: 142.9 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Rebased to 100. Source: Bloomberg, assumes capital returns and dividends reinvested at the payout date. 24 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016 OUR REMUNERATION GOVERNANCE The role of nib’s People and Remuneration Committee (Committee) is to make recommendations to the Board on the remuneration framework, ensuring our remuneration strategy is aligned and reflects the performance of the nib Group. As part of this process the Committee seeks advice and consults with a range of external remuneration consultants, specialists, major shareholders and shareholder advisory groups. The Committee has responsibilities in the areas of remuneration and its link to nib’s culture and business strategy, diversity, human resources strategy, succession planning and employee development and engagement. The Committee Charter is available on the nib website (nib.com.au/shareholders). The Committee includes the following independent, Non-Executive Directors: Lee Ausburn Christine McLoughlin Donal O’Dywer Philip Gardner Executive remuneration arrangements are set against a comparator group of organisations or peers, which nib determines in consultation with external remuneration advisors. In May 2014 (and again in May this year for financial year 2017) Guerdon Associates completed the benchmarking analyses. The scope of this work included reviewing and benchmarking remuneration arrangements against a relevant peer group of companies and working with the Committee to ensure any proposed changes are aligned to our remuneration philosophy. The May 2014 benchmarking analysis and supplementary data was utilised for the financial year 2016 reviews. In determining nib’s peer group, companies from the following sectors and industries were considered: • Health insurance companies; • Other insurance companies; • Other finance sector companies; • Consumer discretionary; and • Healthcare companies. We have found it challenging to define a peer group in the Australian market of a similar size to nib. As a result comparator companies were chosen based on size and broad operational parameters. We also consider current market expectations within our sector in forming a view of benchmarking Executive remuneration. The primary peer group contained 20 companies, and a further 25 companies were represented in the supplementary comparator group. The primary peer group was chosen based on market capitalisation and pre-tax profit broadly being between 50% and 200% of nib, with nib positioned around the middle of the group. nib’s long-term goal is to set TFR for our Managing Director/ Chief Executive Officer and Executives competitively between the 50th and 75th percentiles of our benchmarked peer group. In FY16, adjustments were made to achieve this goal. Our increasing market capitalisation (which has increased approximately 230% over the five year period from 30 June 2011) together with the expanding scope and complexity of our business, has required us to review and change our peer group of 20 companies for FY17. This has resulted in further Executive remuneration adjustments for FY17. Our benchmarking in 2016 has shown that the Managing Director was below market and so TFR will be increased by 15% in 2017 to align with our targets and to remain competitive. The Board’s view is that our current LTI performance hurdles being Earnings Per Share (EPS) and Total Shareholder Return (TSR) relative to S&P/ASX200 group of companies remain appropriate and aligned to our remuneration philosophy. We will continue to assess the appropriateness of these performance hurdles each year and consult with shareholders, proxy advisors and other shareholder representative groups regarding any future amendments to ensure they are aligned to shareholder interests. 25 annual report 2016 ACTUAL REMUNERATION RECEIVED FOR THE FINANCIAL YEAR ENDED 30 JUNE 2016 Actual remuneration for each Executive in FY16 included a fixed component, as well as a variable component made up of an STI payment and LTI award. The STI paid is determined by the performance of each Executive against set performance targets that include financial and non-financial metrics, and in some instances, strategic milestones. FY16 included the vesting of the FY12-FY15 LTI Plan for eligible participants, based on hurdles set (Earnings Per Share and Total Shareholder Return) with 50% of the FY12-FY15 LTI Plan vesting for participants. A full breakdown of Executive remuneration details has been prepared in accordance with statutory requirements and accounting standards. This detailed disclosure is located on page 36 of this Report. The remuneration structure for each Executive for FY16 is made up of the following components. TOTAL POTENTIAL REWARD Total fixed remuneration (cash salary, superannuation, plus insurance cover) Short-term incentive (STI), being cash and deferral into shares Long-term incentive (LTI), being performance rights Total potential reward Fixed Variable The table below shows the key elements of total reward for each Executive for FY16. This includes the cash component elements paid to each Executive for the year as well as the value of equity held in escrow (not subject to forfeiture conditions), and equity from previous years that vested in FY16 and which was originally reported under accounting standards in the year they were granted. Mark Fitzgibbon Rob Hennin David Kan Rhod McKensey Michelle McPherson Brendan Mills Justin Vaughan STI applicable to the FY15 year paid in Sept 2015 (FY16)2 Cash $ 266,400 75,182 36,581 128,488 124,735 61,138 55,720 Shares held in escrow $ 266,400 82,005 36,581 128,488 124,735 61,138 55,720 Total fixed remuneration1 $ 880,000 393,592 444,919 540,001 556,001 320,301 291,201 LTI vested in FY163 $ Total reward (received or available) $ 333,629 1,746,429 – – 99,678 168,337 – – 550,780 518,080 896,655 973,808 442,577 402,641 3,426,015 748,243 755,066 601,644 5,530,967 1. Total fixed remuneration comprises Cash salaries and fees and superannuation. 2. FY15 STI paid in the FY16 year. 3. Value of shares issued during the year on exercise of performance rights. 26 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016EXECUTIVE REWARD AT nib The objective of Executive remuneration arrangements is to ensure that nib’s remuneration practices are clearly understood and appropriately aligned with shareholder value creation over the short and long term, and that these practices work to appropriately motivate, reward and retain Executives. The remuneration framework provides a mix of fixed and variable remuneration with a blend of short-term and long-term incentives. There are three components of total remuneration: • fixed remuneration, comprising base remuneration package, superannuation and insurance cover; • short-term incentives based on predetermined Key Performance Indicator (KPI) targets established by the Board and an assessment of leadership; and • longer-term incentives based on predetermined TSR and EPS performance established by the Board. Executives only receive dividends on the deferred STI and LTI (including those subject to escrow) after they have been awarded or vested. Executives are not entitled to dividends on securities or performance rights which have not vested. A significant portion of the Managing Director/Chief Executive Officer’s and Executives’ remuneration is performance based through STI and LTI arrangements. Claw-back arrangements are in place for the portion of STI deferred and LTI. If the Board becomes aware of a material misstatement of our financial accounts or statements, and nib has awarded the Executive a remuneration increase, incentive payment or award (STI and LTI) having regard to misstatement, the Board may, (in its absolute discretion) require the Executive to: • repay the Company any amount of remuneration, STI or LTI received by the Executive; or • forfeit or cancel any remuneration increase, STI or LTI award (whether vested or unvested). Our remuneration mix The graph below illustrates the FY16 remuneration mix for our Executives. Any variations in target remuneration mix between Executive roles reflect position responsibilities. y t i n u t r o p p o n o i t a r e n u m e r t e g r a t % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 33% 17% 17% 33% 24% 14% 14% 20% 15% 15% 20% 15% 15% 21% 13% 13% 21% 13% 13% 21% 13% 13% 48% 50% 50% 53% 53% 53% MD/CEO DCEO/CFO GEARHI CEO NZ CIO GEBPR GEINB Longer-term performance incentives opportunity Short-term performance incentives opportunity – deferred into shares Short-term performance incentives opportunity – cash Base remuneration package and benefits 27 annual report 2016 EXECUTIVE REWARD AT nib continued Fixed remuneration Fixed remuneration for Executives is determined with reference to a benchmarking process, external market factors, competition to attract and retain talent, as well as consideration of the expertise of the individual in the role. Fixed remuneration includes cash salary, superannuation and insurance cover. The fixed remuneration may be salary packaged at no additional cost to the Group. Short-term incentives for the financial year ended 30 June 2016 nib’s short-term incentive (STI) plan for each Executive is structured as follows. TOTAL POTENTIAL STI Cash (50%) Deferred into shares (50%) 1 year (50%) / 2 years (50%) Total potential reward Variable (Determined by a mixture of financial, non-financial and individual performance outcomes) Performance criteria for STI is based on two components: 1. Performance assessment which makes up 80% of the total STI. The performance component is assessed against predetermined performance milestones for each Executive. In some instances an Executive’s STI assessment may include strategic milestones. 2. Leadership assessment which makes up 20% of the total STI. The leadership component ensures we continue to focus and recognise the contribution of our Executives in developing a high performance organisational culture and is assessed as part of annual performance reviews. The Board is responsible for assessing the performance of the MD/CEO and the MD/CEO is responsible for assessing the performance of the other Executives (with approval of the resulting STI awards by the Board following a recommendation from the Committee). The actual level of STI paid to each Executive is determined at the end of the financial year based on the Executive’s achievement of predetermined performance milestones and an annual performance review. The cash component of the bonuses is payable on or before 15 September each year in respect of the prior financial year. Each Executive has a target STI opportunity. For FY16, 50% of the awarded STI must be deferred into shares, with half the shares vesting after one year and the second half after two years. These shares are subject to a real risk of forfeiture during the deferral period being a service condition. While nib does not set minimum shareholding requirements on our Executives, the Board’s view is that the deferral arrangements under the STI means all Executives have an appropriate minimum equity holding. FY16 Maximum potential STI as a % of TFR Proportion of actual FY16 STI to be deferred into shares 100% 60% 60% 60% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% Mark Fitzgibbon Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan 28 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016The specific KPIs and weighting for FY16 for the Managing Director/CEO and Chief Financial Officer/Deputy CEO which constitutes 80% of their total STI are below (other executives have KPIs which are relevant to their roles). KPI Weighting Growth Group premium revenue Profitability Group underlying profit WNG underlying operating profit Underlying EPS Cost control Mark Fitzgibbon (MD/CEO) Michelle McPherson (CFO/DCEO) 10% 40% 10% 20% – 40% – 20% Group management expense ratio (excluding acquisition costs) – 30% Customer satisfaction arhi customer satisfaction 20% 10% Short-term performance targets are set for achieving specific financial business and individual performance outcomes and awards are made relative to stretch performance. Actual STIs awarded and forfeited (as a percentage of total STI) are set out below. A more detailed description of performance against STI performance hurdles for the CEO and CFO/DCEO is shown on page 32. Mark Fitzgibbon Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan Group average FY16 STI Bonus FY15 STI Bonus Awarded Forfeited Awarded Forfeited % 87% 86% 87% 92% 85% 96% 82% 88% % 13% 14% 13% 8% 15% 4% 18% 12% % 83% 82% 90% 85% 79% 80% 75% 70% % 17% 18% 10% 15% 21% 20% 25% 30% 29 annual report 2016EXECUTIVE REWARD AT nib continued Long-term incentives for the financial year ended 30 June 2016 nib’s long-term incentive (LTI) plan for each Executive is structured as follows. TOTAL POTENTIAL LTI LTI Issue of Rights 4 year performance period Tranche 1 (50%): TSR Tranche 2 (50%): EPS LTI awarded With 50% of total award having 2 year escrow period The purpose of the LTI is to balance short-term performance objectives with the creation of long-term shareholder value by focusing overall Group performance over a multi-year period. The nib LTI is an incentive provided to eligible Executives if specific measures are met over a four-year period. LTI targets are set in the interests of creating long term shareholder value and to assist nib to attract, reward, motivate and retain Executives. LTIP participants are granted performance rights that enable the Executive to acquire shares in nib for nil consideration if performance conditions are met and the employees are still employed by nib at the end of the vesting period. No dividends are received on unvested rights. The vesting date may be accelerated at the Board’s discretion in the event of death of a participant, cessation of employment for other reasons; including total and permanent disablement, redundancy and retirement, on winding up, delisting, change of control and reconstruction or amalgamation. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. The performance hurdles for the nib LTI is Total Shareholder Return (TSR) relative to the S&P/ASX200 over four years and EPS growth over the performance period. The LTI is allocated in two equal tranches; 50% for TSR and 50% for EPS. A condition of acceptance for each Executive in the LTI Plan is the requirement for 50% of the LTI to have a two-year escrow period. This escrow period extends beyond employment at nib ceasing, including termination. nib LTI performance rights vest in accordance with the achievement of the following vesting conditions: Vesting Condition 1 Vesting Condition 2 50% of the performance rights (Tranche 1) 50% of the performance rights (Tranche 2) Total shareholder return targets (TSR Hurdle) for the relevant performance period are met Earnings per share growth targets (EPS Hurdle) for the relevant performance period are met TSR Hurdle (Tranche 1) The TSR Hurdle applies to half of the LTI allocation. The TSR Hurdle measures the groth in the price of nib securities plus nib cash distributions and compares this to the shareholder returns from the peer group of companies. In order for the Tranche 1 performance rights to vest, the TSR of nib will be compared to companies in the S$P/ASX 200 (the peer group) over the performance period. The percentage of Tranch 1 performance rights that vest is determined as follows: nib’s TSR performance compared to the relevant peer group Performance of Tranche 1 performance rights vesting >= 75th percentile 100% >= 50th percentile to 74th percentile Pro-rata straight line vesting between 50% and 74% < 50th percentile 0% 30 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016EPS Hurdle (Tranche 2) The EPS Hurdle applies to 50% of the LTI allocation. Vesting of performance rights is subject to nib holdings limited EPS hurdle as follows: Percentage of performance rights vesting EPS Hurdle: CAGR from base EPS FY13-FY16 LTIP EPS Hurdle: CAGR from base EPS FY14-FY17 LTIP EPS Hurdle: CAGR from base EPS FY15-FY18 LTIP EPS Hurdle: CAGR from base EPS FY16-FY19 LTIP Base EPS 14.8 cps Base EPS 15.3 cps Base EPS 15.9 cps Base EPS 100% 75% 50% 25% 0% 15% 12.5% 10% 7.5% <7.5% 25.8 cps 23.6 cps 21.6 cps 19.7 cps nil 15% 10% 7% 3% <3% 26.8 cps 22.4 cps 20.1 cps 17.2 cps nil 9% 7% 5.5% 4% <4% 22.4 cps 20.8 cps 19.7 cps 18.6 cps 9% 7% 5% 3% nil <3% 17.3 cps 24.4 cps 22.7 cps 21.0 cps 19.5 cps nil For the purpose of the calculation, 25% to 50% will be discrete thresholds, with performance above the 50% entitlement calculated on a pro rata basis to a maximum entitlement of 100%. For the FY16-FY19 LTIP nib moved to set EPS hurdles and performance levels annually, instead for the four year period at the beginning at the performance period. This allows the Board to take into account regulatory pricing re-sets and a focus on performance sustainability over a long-term period. The main reason for this, and as can be seen from the graph (below), is that for incentive schemes to be effective they need to strike the right balance of being aspirational but also achievable. As the graph highlights, our previous approach to setting EPS targets for the four year period resulted in nil award of the EPS component for FY11 and FY12. For the FY13 and FY14 grants, cumulative average growth rate targets were updated to reflect the strategy and maturity of the business. Variability in investment returns from year to year also impacts EPS, with EPS targets being set based on an assumption that on average over time investment returns will be in line with benchmark performance. If vesting conditions are met, the performance rights will vest on 1 September following the end of the performance period. On the vesting date, Executives who hold vested performance rights will be either issued or transferred shares in nib for each vested performance right. There is no re-testing of performance. One half of any shares awarded will be required to be held in escrow for a period of two years, even if termination of employment occurs during that period. The graph below shows the EPS performance of nib for the past five years and demonstrates how challenging the EPS targets are for grants of LTI made in FY11 and FY12. For the FY13 and FY14 grants cumulative average growth rate targets were updated to reflect the strategy and maturity of the business. Variability in investment returns from year to year impacts EPS, with EPS targets being set based on an assumption that on average over time investment returns will be in line with benchmark performance. 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 ) s p c ( S P E 25% EPS CAGR 25% EPS CAGR 13.7 14.8 15.3 15.9 FY11 – FY14 LTIP niil EPS vested 17.3 FY12 – FY15 LTIP nil EPS vested FY09 – FY11 LTIP 100% vested FY10 – FY12 LTIP 100% vested 15% EPS CAGR 15% EPS CAGR 9% EPS CAGR 9% EPS CAGR 21.2 FY13 – FY16 LTIP FY14 – FY17 LTIP FY15 – FY18 LTIP FY16 – FY19 LTIP FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 25% vesting range 50% – 75% vesting range on a pro-rata basis 75% – 100% vesting range on a pro-rata basis EPS There is no vesting event in respect of the FY13 result reflecting the move from three-year LTI targets to four-year LTI targets. 31 annual report 2016 HOW REWARD WAS LINKED TO PERFORMANCE THIS YEAR The components of remuneration that are linked to performance are the STI and LTI plans. Set performance indicators determine 80% of the STI award, while 20% is assessed on the leadership of each Executive. Commercially sensitive and strategic milestone targets were set for some of our Executives and these were dependent on the segment of our business they have responsibility for. The following table shows the specific key performance indicators for the Managing Director/CEO and Chief Financial Officer/ Deputy CEO over the last five years: Financial results Growth Group premium revenue Profitability nib Group underlying operating profit WNG underlying operating profit Underlying EPS Cost Control Group underlying management expense ratio excluding acquisition costs 2016 $m 2015 $m 2014 $m 2013 $m 2012 $m 1,818.7 1,634.9 1,491.6 1,290.4 1,123.8 132.0 9.7 22.9 85.2 – 18.3 77.3 – 16.8 75.5 – 16.3 70.0 – 15.0 cps % 6.3 5.9 6.0 5.6 5.9 Results against KPIs (excluding leadership component) are detailed in the table below. KPI Growth Group premium revenue Profitability nib Group underlying operating profit WNG underlying operating profit Underlying EPS Cost control nib Group underlying management expense ratio excluding acquisition costs Customer satisfaction arhi customer satisfaction Result Group premium revenue up 11% to $1.8 billion, with 100% of maximum STI awarded for this target. Group underlying operating profit up 49.9% to $132.0 million, with 100% of maximum STI awarded for this target. WNG underlying operating profit was $9.7 million (11 month result), with approximately 70% of maximum STI awarded for this target. Underlying EPS of 22.9cps up 25.1%, with 100% of maximum STI awarded for this target. Approximately 65% of maximum STI awarded for this target. A range of metrics are used to measure customer satisfaction, including lapse and NPS which resulted in approximately 50% of maximum STI awarded for this target. The graph over illustrates the relationship between the amount (as a percentage) of total STI awarded and operating profit result. Executives received a lower STI (as a percentage) as operating profit has slowed from FY12. In recognition of the role and contribution of our Executives in establishing and integrating our new business segments (including nib New Zealand, International (Inbound) Health Insurance and World Nomads Group) the STI percentage awarded has improved in recent years. 32 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016STI % awarded in respect of financial year 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Operating profit ($m) 140.0 120.0 100.0 80.0 60.0 40.0 20.0 FY11 FY12 FY13 FY14 FY15 FY16 STI % awarded Operating Profit TERMS OF EXECUTIVE CONTRACTS Executive contracts summarise employment terms and conditions, including remuneration arrangements and compensation. A significant portion of the Managing Director/Chief Executive Officer’s and Chief Financial Officer/Deputy Chief Executive Officer’s remuneration is performance based through STI and LTI arrangements. Claw-back arrangements are in place for the portion of STI deferred and LTI. The table below provides a summary of the agreements. Service agreement effective Term of agreement Termination provision Mark Fitzgibbon (MD/CEO) Michelle McPherson (CFO/DECO) Rhod McKensey (GEARHI) Rob Hennin (CEO NZ) Brendan Mills (CIO) 1 July 2010 1 July 2010 1 July 2014 6 May 2013 1 June 2012 Open contract with notice period Open contract with notice period Open contract with notice period Open contract with notice period Open contract with notice period Justin Vaughan (GEBPR) 1 August 2013 Open contract with notice period David Kan (GEINB) 19 December 2014 Open contract with notice period The agreement may be terminated early by nib health funds limited giving notice with immediate effect or by the relevant executive giving three months notice. Termination payments For our Australian Executives with open contracts effective pre August 2014, the Group may terminate the Executive’s contract with 12 months written notice and may make a payment in lieu of all or part of the notice period. For our Australian Executives with open contracts effective post August 2014, the Group may terminate the Executive’s contract with six months written notice and may make a payment in lieu of all or part of the notice period. In the case of a New Zealand Executive, the Group may terminate the Executive’s contract with nine months written notice and may make a payment in lieu of all or part of the notice period. The Executive may also receive the following benefits upon termination: • a pro-rata STI payment based on the period of the financial year during which the Executive was employed and the Board’s assessment of the Executive’s performance against the key performance indicators as at the date of termination; and/or • the Board has discretion to determine that all or a portion of unvested performance rights of a participant of the LTIP are to be vested upon termination. At the 2011 Annual General Meeting nib received shareholder approval for the payment of termination benefits which may exceed the 12 month salary limit on termination benefits under the Corporations Act 2001. In response to shareholder feedback, the Board has since determined that this approval will only be undertaken for Executives who held this position at the date of shareholder approval. The only current Executives this approval would be applicable to are Mark Fitzgibbon (MD/CEO), Michelle McPherson (Deputy CEO/CFO) and Rhod McKensey (Group Executive Australian Residents Health Insurance). 33 annual report 2016NON-EXECUTIVE DIRECTOR REMUNERATION Fees and payments to Non-Executive Directors reflect the Board role, market fee levels, and the objective of the Group to attract highly skilled and experienced Non-Executive Directors. nib requires all Non-Executive Directors to hold a minimum of 50% of their first year’s total annual base Director’s fee in shares, which is to be accumulated within three years of appointment (based on the share price at the date of joining the Board). All current Non-Executive Directors comply with this requirement as at 30 June 2016. Non-Executive Director fees Our Non-Executive Directors (NEDs) are paid a base fee, plus they also receive an additional fee for being members of other nib Board Committees. NED fees are reviewed annually by the Committee and approved by the Board. In 2014, nib engaged the services of Guerdon Associates to conduct a benchmarking and market remuneration analysis, which together with supplementary data was utilised this year. NED fees are determined within the $1.5 million aggregate nib Directors fee pool limit, which was approved by shareholders at the 2013 Annual General Meeting. Directors’ fees and superannuation are paid out of this pool. Travel allowances, non-monetary benefits and retirement benefits are not included in this pool. The following table shows the fees (inclusive of superannuation) for nib’s Australian boards and committees: Base fees Chairman Other Non-Executive Directors Additional fees* Audit committee Chairman Member Investment committee Chairman Member Risk and Reputation committee Chairman Member People and Remuneration committee Chairman Member Nomination committee Chairman Member 2016 $ 2015 $ 242,000 105,000 234,400 102,000 31,000 12,500 17,000 10,000 25,000 12,500 25,000 12,500 – – 30,000 12,000 16,700 9,900 24,100 12,000 24,100 12,000 – – * The Chairman of the Board does not receive additional fees for involvement in committees. The following fees (inclusive of superannuation) for the New Zealand boards and committees have applied: NZ Base fees Chairman* Member NZ Board, Audit, Risk and Compliance committee Chairman Member * The Chairman of the NZ Board is not a member of the nib holdings Board. 34 2016 $ 2015 $ 72,000 37,000 69,836 35,600 9,000 – 8,900 – nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016Principle 2 of nib’s Corporate Governance Statement (which is available at www.nib.com.au/shareholders/company-profile/ corporate-governance) includes the committee membership of each of nib’s NEDs. Share ownership by Non-Executive Directors nib’s NEDs are required to hold a minimum of 50% of their first year’s total annual base Director’s fee in shares, which is to be accumulated within three years of appointment (based on the share price at the date of joining the Board). All current Non-Executive Directors comply with this requirement as at 30 June 2016. Retirement allowances for Directors There are no retirement allowances for Non-Executive Directors other than for Directors appointed by nib health funds limited before 24 November 2005. Annette Carruthers is the only current Non-Executive Director that is eligible for a retirement allowance. Annette Carruthers is entitled to a lump sum retirement payment. The benefit is calculated based on 80% of the average Director’s fee (paid from any company in the Group) for the last three years multiplied by a factor based on years of service. The factor based on years of service was frozen at 24 November 2005. The factor for Annette Carruthers is 0.71. At 30 June 2016, the following retirement benefits are provided for: Annette Carruthers $90,958 35 annual report 2016l $ a t o T 2 5 6 , 8 1 3 , 2 9 7 0 , 3 1 1 , 1 7 4 7 , 6 1 0 , 1 8 5 8 , 7 9 6 3 3 6 , 7 1 5 8 0 7 , 7 7 4 0 4 9 , 9 8 6 $ s t h g i r e c n a m r o f r e P 4 $ s u n o B s t n e m y a p d e s a b - e r a h S 6 0 7 , 0 6 6 0 6 9 , 3 6 2 2 7 4 , 9 7 1 7 6 0 , 2 6 0 2 4 , 2 5 9 7 5 , 3 4 5 8 8 , 5 4 0 6 5 , 4 8 3 0 7 1 , 3 4 1 0 1 2 , 1 4 1 8 9 0 , 7 1 1 3 4 7 , 7 6 8 8 8 , 9 6 4 4 5 , 9 8 7 1 6 , 1 3 8 , 6 9 8 0 , 8 0 3 , 1 3 1 2 , 3 1 0 , 1 6 5 1 , 2 3 0 , 2 9 6 9 , 7 5 0 , 1 6 9 2 , 6 0 9 6 5 3 , 9 8 5 7 4 0 , 6 7 4 2 0 3 , 5 3 4 9 7 2 , 8 7 6 2 4 4 , 4 9 2 7 3 4 , 8 6 1 5 6 8 , 7 3 7 4 8 , 4 3 9 1 3 , 4 2 2 0 4 , 7 6 2 7 6 1 , 2 8 2 5 , 4 6 7 , 5 6 5 3 , 0 4 2 , 1 2 1 0 , 9 6 2 5 8 5 , 5 2 1 8 8 4 , 8 2 1 8 7 0 , 2 8 8 3 1 , 1 6 3 1 4 , 5 5 1 8 5 , 6 3 5 9 2 , 8 5 7 n o i t a n m r e T i s t fi e n e b m r e t - g n o L s t fi e n e b s t fi e n e b t n e m y o p m e - t s o P l l s t fi e n e b e e y o p m e m r e t - t r o h S n o i t a n m r e T i g n o L s $ t fi e n e b e $ v a e l e c i v r e s s $ t fi e n e b t n e m e r i t e R n $ o i t a u n n a r e p u S 3 $ s t fi e n e b s $ u n o b h s a C 1 $ s e e f y r a t e n o m - n o N d n a l y r a a s h s a C – – – – – – – – – – – – – – – – 7 8 2 , 9 5 1 0 , 9 9 9 6 , 4 1 – 0 5 3 , 5 – – 1 5 3 , 8 3 2 1 4 , 8 2 1 9 , 7 6 2 3 , 3 1 – 1 3 1 , 5 – – 1 8 7 , 4 3 – – – – – – – – – – – – – – – – 0 0 0 , 5 3 7 4 8 , 4 2 1 3 6 , 5 2 0 7 3 , 7 2 8 0 3 , 9 1 8 0 3 , 9 1 8 0 3 , 9 1 1 7 8 , 3 9 5 7 , 3 2 1 4 , 8 0 3 2 , 2 7 2 0 , 2 8 9 0 , 3 9 9 9 , 0 1 0 6 5 4 8 3 , 0 7 1 , 3 4 1 0 1 2 , 1 4 1 5 7 2 , 0 1 1 3 4 7 , 7 6 8 8 8 , 9 6 4 4 5 , 9 8 8 2 1 , 8 2 8 4 7 7 4 2 5 , 0 5 4 6 1 5 , 6 3 6 2 7 3 , 9 3 8 2 0 3 , 8 1 0 3 7 2 , 1 6 5 2 4 4 , 2 7 7 , 0 7 1 6 9 3 , 4 3 0 9 3 6 0 0 , , 1 6 0 4 , 0 6 2 3 , 0 0 0 , 5 3 2 2 3 , 4 2 0 0 0 , 0 3 0 0 7 , 6 2 3 8 7 , 8 1 3 8 7 , 8 1 2 1 0 , 9 0 0 6 , 2 6 1 3 7 6 , 3 5 5 4 , 3 6 6 8 , 7 0 4 2 , 2 6 8 1 , 2 2 5 3 , 1 1 5 8 3 , 1 7 5 1 , 2 3 5 9 4 , 2 7 2 7 1 7 , 6 2 1 8 8 4 , 8 2 1 1 6 6 , 5 8 8 3 1 , 1 6 3 0 0 , 5 5 1 8 5 6 3 , 3 8 0 6 6 7 , 2 9 6 2 5 7 , 8 1 8 4 7 4 , 6 1 5 9 3 4 , 6 8 1 9 4 3 , 0 7 7 2 9 2 , 8 9 5 9 7 2 , 6 7 6 , 1 8 1 6 5 2 , 0 7 7 2 , . r a e y e h t g n i r u d n e k a t t o n t u b d e u r c c a s t n e m e l t i t n e e v a e l l a u n n a s a h c u s , s e c n e s b a d e t a s n e p m o c m r e t - t r o h s d n a s e e f n o s r e h P c M e l l e h c M i n o b b g z t i F i k r a M y e s n e K c M d o h R i n n n e H b o R s e v i t u c e x E 6 1 0 2 s l l i M n a d n e r B n o s r e h P c M e l l e h c M i n o b b g z t i F i k r a M y e s n e K c M d o h R i n n n e H b o R 5 1 0 2 n a h g u a V n i t s u J n a K d v a D i 2 ) 5 1 0 2 / 1 / 2 1 m o r f ( n a K d v a D i n a h g u a V n i t s u J s l l i M n a d n e r B . x a T s t fi e n e B e g n i r F d e t a c o s s a d n a s t fi e n e b i f o t s o c d n a r e v o c e c n a r u s n i s e d u c n l i s t fi e n e b y r a t e n o m - n o N . 5 1 0 2 y r a u n a J 2 1 n o s s e n s u B w e N d n a i l a n o i t a n r e t n I e v i t u c e x E p u o r G d e t n o p p a s a w n a K d v a D i i . s t n e m y a p d e s a b - e r a h S o t f r e e R . s t h g i r e r a h s s u n o b s e d u c n l I l d n a y r a a s h s a c s e d u c n l I . 1 . 2 . 3 . 4 l . s e b a t g n w o i l l o f e h t n i t u o t e s e r a p u o r g s g n d o h b n e h t i i l f o s e v i t u c e x E e h t f o n o i t a r e n u m e r e h t f o s l i a t e D N O I T A R E N U M E R E V I T U C E X E F O E R U S O L C S I D D E L I A T E D 36 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016   9 2 6 , 3 3 3 3 7 7 , 8 0 1 a / n 8 7 7 , 0 8 3 9 1 8 , 9 8 ) 3 8 8 , 4 5 ( ) 3 8 8 , 4 5 ( i n a K d v a D g n d u c x e i l P M K r o f 4 1 0 2 c e D 2 2 l a t o T I P T L 9 1 Y F o t 6 1 Y F I P T L 8 1 Y F o t 5 1 Y F I P T L 7 1 Y F o t 4 1 Y F I P T L 6 1 Y F o t 3 1 Y F I P T L 5 1 Y F o t 2 1 Y F 1 7 0 , 8 3 2 , 2 5 9 8 , 8 2 6 / S P E r y 4 % 0 5 R S T r y 4 % 0 5 3 8 8 , 6 9 4 / S P E r y 4 % 0 5 R S T r y 4 % 0 5 7 5 0 , 9 5 5 / S P E r y 4 % 0 5 R S T r y 4 % 0 5 6 3 2 , 3 5 5 / S P E r y 4 % 0 5 R S T r y 4 % 0 5 l i n 6 4 2 0 . 3 l i n ) 4 1 0 2 c e D 2 2 ( 9 8 6 6 . 2 ) 5 1 0 2 y a M 3 1 ( 9 8 2 2 . 3 l i n 0 3 8 9 . 1 l i n 7 3 4 5 . 1 d e t s e t t e y t o n e c n a m r o f r e p d n a r u c c o o t t e y e t a d g n i t s e V d e t s e t t e y t o n e c n a m r o f r e p d n a r u c c o o t t e y e t a d g n i t s e V l i n 3 1 3 1 . 1 % 0 5 % 0 5 0 / S P E r y 4 % 0 5 R S T r y 4 % 0 5 r o f 5 1 0 2 y a M 3 1 d n a 6 1 0 2 n a J 2 2 n a K d v a D i 3 1 0 2 v o N 9 2 2 1 0 2 v o N 9 1 1 1 0 2 c e D 1 2 ) 0 2 Y F ( 9 1 0 2 p e S 1 ) 9 1 Y F ( 8 1 0 2 p e S 1 ) 8 1 Y F ( 7 1 0 2 p e S 1 ) 7 1 Y F ( 6 1 0 2 p e S 1 ) 6 1 Y F ( 5 1 0 2 p e S 1 9 1 0 2 p e S 1 8 1 0 2 p e S 1 7 1 0 2 p e S 1 6 1 0 2 p e S 1 5 1 0 2 p e S 1 $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N e h t t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N e t a d t n a r g t a t h g i r e c n a m r o f r e p r e p e u a V l d e t s e v % d n a d e v e h c a e c n a m r o f r e P i d e t i e f r o f % i e t a d e s c r e x e d n a g n i t s e V 1 e t a d t n a r G e c i r p e s c r e x E i e t a d y r i p x E r a e y l i a c n a n fi e h t f o d n e ) 1 3 - 0 3 s e g a p n o l e b a t f r e e r ( l e d r u h g n i t s e V i n o b b g z t i F k r a M 9 4 7 , 5 4 7 , 4 5 8 5 , 4 2 1 , 1 0 3 8 , 9 9 1 , 1 0 2 3 , 4 8 2 3 9 4 , 0 9 9 4 1 7 , 4 3 2 7 7 3 , 5 5 1 , 1 6 8 7 , 3 7 2 8 4 0 , 0 0 4 , 1 5 6 7 , 1 3 3 – – ) 3 7 7 , 8 0 1 ( ) 3 7 7 , 8 0 1 ( – – 0 2 3 , 4 8 2 4 5 9 , 9 5 8 0 2 3 , 4 8 2 – – – – – – – – – – ) 3 7 7 , 8 0 1 ( ) 3 7 7 , 8 0 1 ( s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N 6 1 0 2 e n u J 0 3 t a t s e v o t t e y 1 1 8 , 7 5 0 , 1 – 4 1 7 , 4 3 2 6 8 7 , 3 7 2 5 6 7 , 1 3 3 6 4 5 , 7 1 2 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N : l w o e b e r a d o i r e p g n i t r o p e r i s h t n i n o i t a r e n u m e r g n i t c e f f a s t h g i r e c n a m r o f r e p e h t f o s l i a t e d e h T s n o i t a c o l l a I T L t n e r r u c f o s l i a t e D a / n a / n – a / n a / n a / n a / n a / n a / n a / n a / n a / n 9 2 6 , 3 3 3 3 7 7 , 8 0 1 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p n o s r e h P c M e l l e h c M i f i o e s c r e x e l n o e u a v d n a d e u s s i s e r a h s f o r e b m u N 5 1 0 2 p e S 2 s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 1 8 0 , 4 7 0 6 0 , 9 8 1 7 8 , 7 0 1 6 6 7 , 9 0 1 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N 7 0 7 , 2 2 5 , 1 1 3 8 , 0 6 3 6 3 0 , 9 7 3 9 1 8 , 9 8 2 2 6 , 2 1 3 1 8 0 , 4 7 3 3 8 , 5 7 3 0 6 0 , 9 8 6 1 2 , 5 5 4 1 7 8 , 7 0 1 – – 7 3 3 , 8 6 1 3 8 8 , 4 5 a / n a / n a / n a / n a / n a / n a / n a / n 7 3 3 , 8 6 1 3 8 8 , 4 5 f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p 37 a / n a / n a / n a / n 5 1 0 2 p e S 2 s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 7 6 6 , 1 7 2 9 1 8 , 9 8 – – – – – – – – – – – - ) 3 8 8 , 4 5 ( ) 3 8 8 , 4 5 ( s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N 6 1 0 2 e n u J 0 3 t a t s e v o t t e y annual report 2016     REMUNERATION REPORT CONTINUED For the year ended 30 June 2016 $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N l a t o T I P T L 9 1 Y F o t 6 1 Y F I P T L 8 1 Y F o t 5 1 Y F I P T L 7 1 Y F o t 4 1 Y F I P T L 6 1 Y F o t 3 1 Y F I P T L 5 1 Y F o t 2 1 Y F 0 2 5 , 1 8 1 , 1 1 8 9 , 9 7 2 1 0 5 , 4 9 2 7 8 7 , 9 6 0 4 2 , 5 3 2 4 4 7 , 5 5 4 2 2 , 5 3 3 7 3 4 , 9 7 5 5 5 , 6 1 3 3 1 0 , 5 7 – – 7 8 7 , 9 6 ) 8 9 4 , 2 3 ( ) 7 9 4 , 2 3 ( 8 7 0 , 1 1 2 7 8 7 , 9 6 – – – – – – – – – – – – ) 8 9 4 , 2 3 ( ) 7 9 4 , 2 3 ( s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N 6 1 0 2 e n u J 0 3 t a t s e v o t t e y 9 8 1 , 5 7 2 – 4 4 7 , 5 5 7 3 4 , 9 7 3 1 0 , 5 7 5 9 9 , 4 6 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N y e s n e K c M d o h R a / n a / n a / n a / n 5 1 0 2 p e S 2 s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D d e u n i t n o c N O I T A R E N U M E R E V I T U C E X E F O E R U S O L C S I D D E L I A T E D d e u n i t n o c s n o i t a c o l l a I T L t n e r r u c f o s l i a t e D 38 8 7 6 , 9 9 8 9 4 , 2 3 a / n 2 5 7 , 7 0 1 a / n – 5 4 1 , 6 3 0 2 0 , 3 3 7 8 5 , 8 3 a / n a / n a / n a / n a / n a / n 8 7 6 , 9 9 8 9 4 , 2 3 – – – – 4 9 3 , 1 4 0 0 2 , 5 2 1 4 9 3 , 1 4 – – – – – – – – – 6 9 3 , 9 2 6 6 4 1 , 9 4 1 3 8 6 , 4 7 1 4 9 3 , 1 4 2 3 5 , 2 5 1 5 4 1 , 6 3 4 4 3 , 9 3 1 0 2 0 , 3 3 7 3 8 , 2 6 1 7 8 5 , 8 3 – a / n a / n a / n a / n a / n a / n a / n a / n 0 0 7 , 7 9 a / n – 4 8 3 , 0 4 6 1 3 , 7 5 a / n a / n a / n a / n a / n a / n a / n a / n – – – – – – – – – 2 9 4 , 9 4 4 9 6 , 9 4 1 2 9 4 , 9 4 – – – – – – – 0 5 1 , 1 2 6 2 9 1 , 7 4 1 6 5 8 , 8 0 2 2 9 4 , 9 4 0 2 4 , 0 7 1 4 8 3 , 0 4 4 7 8 , 1 4 2 6 1 3 , 7 5 – a / n a / n a / n a / n – – – – – – – – – – a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p ) 2 1 0 2 e n u J 1 d e c n e m m o c ( s l l i M n a d n e r B s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 6 1 0 2 e n u J 0 3 t a t s e v o t t e y 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N ) 3 1 0 2 y a M 6 d e c n e m m o c ( i n n n e H b o R 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 6 1 0 2 e n u J 0 3 t a t s e v o t t e y nib holdings limited – – – – 3 3 6 , 7 3 5 2 8 , 3 1 1 3 3 6 , 7 3 – – – – – – 7 9 2 , 9 5 – 9 5 8 , 2 3 8 3 4 , 6 2 5 4 0 , 9 0 4 0 3 9 , 6 9 1 1 8 , 8 5 1 3 3 6 , 7 3 5 6 6 , 8 3 1 9 5 8 , 2 3 8 6 5 , 1 1 1 8 3 4 , 6 2 – – – – – – – – – – – – a / n a / n a / n a / n a / n $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N $ r e b m u N l a t o T I P T L 9 1 Y F o t 6 1 Y F I P T L 8 1 Y F o t 5 1 Y F I P T L 7 1 Y F o t 4 1 Y F I P T L 6 1 Y F o t 3 1 Y F I P T L 5 1 Y F o t 2 1 Y F a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n 6 5 9 , 2 2 a / n – – – – – 0 5 4 , 6 5 9 3 7 , 0 7 1 0 5 4 , 6 5 3 9 0 , 5 3 3 6 0 4 , 9 7 9 1 2 , 8 3 2 0 5 4 , 6 5 4 7 8 , 6 9 6 5 9 , 2 2 – a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n a / n – – – 6 5 9 , 2 2 – – – – – – – – – – – – – – – – – 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 6 1 0 2 e n u J 0 3 t a t s e v o t t e y 5 1 0 2 l y u J 1 t a t s e v o t t e y s t h g i r e c n a m r o f r e p f o r e b m u N s t h g i r e c n a m r o f r e p f o e t a d t n a r g t a l e u a v d n a r e b m u N 2 r a e y e h t g n i r u d d e t n a r g 3 r a e y e h t g n i r u d d e t s e v s t h g i r e c n a m r o f r e p f o r e b m u N r a e y e h t g n i r u d d e t i e f r o f s t h g i r e c n a m r o f r e p f o r e b m u N e u a v l l a t o t i m u m x a m d n a s t h g i r e c n a m r o f r e p f o r e b m u N f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p ) 6 1 0 2 y r a u n a J 2 1 d e c n e m m o c ( n a K d v a D i f o i e s c r e x e n o l e u a v d n a d e u s s i s e r a h s f o r e b m u N 3 r a e y e h t g n i r u d s t h g i r e c n a m r o f r e p s t h g i r e c n a m r o f r e p f i o e s c r e x e f o e t a D 6 1 0 2 e n u J 0 3 t a t s e v o t t e y ) 3 1 0 2 t s u g u A 1 d e c n e m m o c ( n a h g u a V n i t s u J . y n a p m o c e h t f o n o i t c e e e h t l t a t e k r a m - n o d e r i u q c a r o d e u s s i e b y a m s e r a h S i . e t a d e s c r e x e e h t r e t f a s y a d s s e n s u b 5 1 n h t i i i w s t h g i r e c n a m r o f r e p f i o e s c r e x e n o d e r r e f s n a r t r o d e u s s i e b l l i w s e r a h S . n o i t a r e n u m e r f o t r a p s a r a e y e h t g n i r u d d e t n a r g s t h g i r e c n a m r o f r e p f o t n e m y a p d e s a b - e r a h S 2 B S A A h t i w e c n a d r o c c a n i l l d e t a u c a c e t a d t n a r g t a e u a v e h T l . s t h g i r g n i t o v i i r o d n e d v d o n y r r a c n a p e h t l r e d n u d e t n a r g s t h g i r e c n a m r o f r e P . 1 . 2 . 3 39 annual report 2016 l $ a t o T s $ t h g i r e c n a m r o f r e P s $ u n o B s $ t fi e n e b n o i t a n m r e T i e $ v a e l e c i v r e s g n o L s $ t fi e n e b t n e m e r i t e R n $ o i t a u n n a r e p u S s $ t fi e n e b s $ u n o b h s a C s $ e e f y r a t e n o m - n o N d n a l y r a a s h s a C s t n e m y a p d e s a b - e r a h S s t fi e n e b n o i t a n m r e T i s t fi e n e b m r e t - g n o L s t fi e n e b t n e m y o p m e - t s o P l l s t fi e n e b e e y o p m e m r e t - t r o h S 0 0 0 , 2 4 2 7 6 1 , 4 3 1 0 0 5 , 4 0 2 0 9 8 , 4 8 1 0 0 0 , 7 4 1 4 3 3 , 8 3 1 9 6 2 , 6 3 0 6 1 , 7 8 0 , 1 0 0 4 , 4 3 2 0 0 0 , 9 2 1 0 0 4 , 8 9 1 6 5 9 , 4 8 1 0 0 7 , 2 4 1 0 0 1 , 8 3 1 6 5 5 , 7 2 0 , 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 0 9 3 , 5 – – – 0 9 3 , 5 – – – – – 6 5 2 , 7 8 0 3 , 9 1 0 4 6 , 1 1 0 0 0 , 5 3 3 7 5 , 5 1 3 5 7 , 2 1 2 0 0 , 2 1 7 4 1 , 3 3 2 4 , 9 0 1 3 8 7 , 8 1 2 9 1 , 1 1 0 0 0 , 5 3 7 1 4 , 5 1 0 8 3 , 2 1 1 8 9 , 1 1 6 5 2 , 7 3 5 7 , 4 0 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2 9 6 , 2 2 2 7 2 5 2 2 1 , 0 0 5 9 6 1 , 7 2 9 3 6 1 , 7 4 2 4 3 1 , 2 3 3 6 2 1 , 2 2 1 , 3 3 7 4 3 2 7 9 , 7 1 6 5 1 2 , 8 0 8 , 7 1 1 0 0 4 3 6 1 , 3 8 2 , 2 6 1 0 2 3 0 3 1 , 9 1 1 6 2 1 , 7 4 5 5 1 9 , s r o t c e r i D e v i t u c e x E - n o N e n a r C e v e t S n r u b s u A e e L y e l t n e B d o r a H l 6 1 0 2 s r e h t u r r a C e t t e n n A r e n d r a G p i l i h P n i l h g u o L c M e n i t s i r h C ) 6 1 0 2 / 3 / 2 2 m o r f ( r e w y D O ’ l a n o D 1 s r e h t u r r a C e t t e n n A e n a r C e v e t S 1 n r u b s u A e e L y e l t n e B d o r a H l 5 1 0 2 n i l h g u o L c M e n i t s i r h C r e n d r a G p i l i h P l . y e v i t c e p s e r 0 0 0 , 4 $ d n a 0 0 0 , 3 $ f o s g n i t e e m e e t t i m m o C y r o s v d A i l i a c d e M s n o i t p O b n r o i f s e e f e d u c n l i s r e h t u r r a C e t t e n n A d n a n r u b s u A e e L r o f 5 1 0 2 n i n o i t a u n n a r e p u s d n a s e e f d n a s e i r a a s h s a C l . 1 l . s e b a t g n w o i l l o f e h t n i t u o t e s e r a p u o r g s g n d o h b n e h t i i l f o s r o t c e r i D e h t f o n o i t a r e n u m e r e h t f o s l i a t e D N O I T A R E N U M E R E V I T U C E X E - N O N F O E R U S O L C S I D D E L I A T E D 40 nib holdings limitedREMUNERATION REPORTCONTINUEDFor the year ended 30 June 2016 EQUITY INSTRUMENTS HELD BY KEY MANAGEMENT PERSONNEL Performance rights holdings The numbers of performance rights over ordinary shares in the Company held during the financial year by each Executive of nib holdings limited are set out below. 2016 Balance at start of the year Granted as compensation Exercised Other forfeitures Balance at the end of the year Vested and exercisable Mark Fitzgibbon 1,057,811 284,320 (108,773) (108,773) 1,124,585 Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan Total 380,778 275,189 97,700 107,752 59,297 22,956 89,819 69,787 49,492 41,394 37,633 56,450 (54,883) (32,498) (54,883) (32,497) – – – – – – – – 360,831 279,981 147,192 149,146 96,930 79,406 2,001,483 628,895 (196,154) (196,153) 2,238,071 – – – – – – – – 2015 Balance at start of the year Granted as compensation Exercised Other forfeitures Balance at the end of the year Vested and exercisable Mark Fitzgibbon 1,059,049 234,714 (117,976) (117,976) 1,057,811 Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan Total 425,750 276,974 57,316 71,607 26,438 – 74,081 55,744 40,384 36,145 32,859 22,956 (59,527) (28,765) (59,526) (28,764) – – – – – – – – 380,778 275,189 97,700 107,752 59,297 22,956 1,917,134 496,883 (206,268) (206,266) 2,001,483 – – – – – – – – Unvested 1,124,585 360,831 279,981 147,192 149,146 96,930 79,406 2,238,071 Unvested 1,057,811 380,778 275,189 97,700 107,752 59,297 22,956 2,001,483 To date nib’s practice has been to source equity for remuneration awards from shares purchased on market. Accordingly, there was no dilution from Executive new issue equity awards in 2016. Share holdings The number of shares in the Company held during the financial year by each Director of nib holdings limited and other Key Management Personnel of the Group, including their personally related parties, are set out below. 2016 Ordinary shares Directors of nib group Steve Crane Lee Ausburn Harold Bentley Annette Carruthers Philip Gardner Christine McLoughlin Donal O’Dwyer Other key management personnel of the Group Mark Fitzgibbon Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan Balance at the start of the year Granted during the year as compensation Other changes during the year Balance at the end of the year 200,000 20,000 100,000 72,500 125,000 97,500 – – – – – – – – 50,000 30,000 – – 25,000 12,500 25,600 250,000 50,000 100,000 72,500 150,000 110,000 25,600 1,594,650 195,627 (7,000) 1,783,277 512,498 245,820 11,653 38,894 5,890 – 95,550 74,389 26,736 19,933 18,166 11,926 – – 274 – – – 608,048 320,209 38,663 58,827 24,056 11,926 41 annual report 2016REMUNERATION REPORT CONTINUED For the year ended 30 June 2016 EQUITY INSTRUMENTS HELD BY KEY MANAGEMENT PERSONNEL continued Share holdings continued 2015 Ordinary shares Directors of nib group Steve Crane Lee Ausburn Harold Bentley Annette Carruthers Philip Gardner Christine McLoughlin Other key management personnel of the Group Mark Fitzgibbon Michelle McPherson Rhod McKensey Rob Hennin Brendan Mills Justin Vaughan David Kan Balance at the start of the year Granted during the year as compensation Other changes during the year Balance at the end of the year 200,000 20,000 100,000 72,500 108,000 97,500 – – – – – – 1,436,045 158,605 428,455 203,945 – 31,170 – – 84,043 41,875 11,653 7,724 5,890 – – – – – 17,000 – – – – – – – – 200,000 20,000 100,000 72,500 125,000 97,500 1,594,650 512,498 245,820 11,653 38,894 5,890 – In addition to the above shareholding in nib holdings limited, David Kan during the year acquired one share in both nib Options Holdings (Thailand) Co Ltd and nib Options (Thailand) Co Ltd. Other transactions with key management personnel The wife of Philip Gardner, a Director, is a director and shareholder of XO Digital Pty Limited and Enigma Communications Pty Limited. The nib holdings limited Group has entered into contracts with XO Digital Pty Limited for software development and maintenance, and Enigma Communications Pty Limited for graphic design and creative services. In line with nib’s Procurement and Related Party Transactions Policies, these services were benchmarked against suppliers providing similar services and found to be competitive. The contracts were based on normal commercial terms and conditions. Aggregate amounts of each of the above types of other transactions with key management personnel of the Group: a) Amounts recognised as expense Software maintenance Advertising and promotions Printing and stationery b) Amounts recognised as intangible assets Software 2016 $000 – 222,701 97,382 320,083 2015 $000 54,874 115,689 – 170,563 – – 128,223 128,223 c) Amounts recognised as assets and liabilities At the end of the reporting period the following aggregate amounts were recognised in relation to the above transactions: Non-current assets 42 – – 234,943 234,943 nib holdings limitedCORPORATE GOVERNMENT STATEMENT For the year ended 30 June 2016 The nib Board and management are committed to achieving and demonstrating the highest standards of corporate governance and ensuring compliance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. The Board is dedicated to, and responsible for, actively promoting ethical and responsible decision making and practices at nib to ensure that practices are in place necessary to maintain confidence in nib’s integrity. The 2016 Corporate Governance Statement is dated as at 30 June 2016 and reflects the corporate governance practices in place throughout the 2016 financial year. The Corporate Governance Statement was approved by the board on 19 August 2016. A description of the Group’s current corporate governance practices is set out in the Group’s Corporate Governance Statement which can be viewed at www.nib.com.au/shareholders/company-profile/corporate-governance 43 annual report 2016FINANCIAL REPORT For the year ended 30 June 2016 CONTENTS Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements: 1. Summary of Significant Accounting Policies 2. Critical Accounting Judgements and Estimates 3. Risk Management 4. Fair Value Measurement 5. Segment Reporting 6. Revenue and Other Income 7. Expenses 8. Taxation 9. Cash and Cash Equivalents 10. Receivables 11. Financial Assets at Fair Value through Profit or Loss 12. Reinsurance and Other Recoveries Receivable/(Payable) 13. Deferred Acquisition Costs 14. Assets Classified as Held for Sale 15. Property, Plant and Equipment 16. Intangible Assets 45 46 47 48 49 50 52 52 58 61 64 66 67 70 71 73 73 74 75 76 78 17. Payables 18. Borrowings 19. Outstanding Claims Liability 20. Unearned Premium Liability and Unexpired Risk Liability 21. Premium Payback Liability 22. Provision for Employee Entitlements 23. Other Liabilities 24. Contributed Equity 25. Retained Profits 26. Reserves 27. Dividends 28. Earnings per Share 29. Capital Management 30. Commitments for Expenditure 31. Contingent Liabilities 32. Events Occurring after the Balance Sheet Date 33. Remuneration of Auditors 34. Business Combination 35. Controlled Entities 36. Related Party Transactions 37. Share-Based Payments 38. Parent Entity Financial Information 39. Company Details 81 81 83 86 87 90 91 91 92 93 94 95 96 98 99 99 100 101 104 106 107 110 111 44 nib holdings limitedCONSOLIDATED INCOME STATEMENT For the year ended 30 June 2016 Premium revenue Outwards reinsurance premium expense Net premium revenue Claims expense Reinsurance and other recoveries revenue RESA levy1 State levies Decrease / (increase) in premium payback liability Claims handling expenses Net claims incurred Acquisition costs Other underwriting expenses Underwriting expenses Underwriting result Other income Other expenses Operating profit Finance costs Investment income Investment expenses Profit before income tax Income tax expense Profit for the year Profit for the year is attributable to: Owners of nib holdings limited Non-controlling interests 1. RESA (Risk Equalisation Special Account) levy, formerly RETF (Risk Equalisation Trust Fund) levy. Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share Earnings per share for profit attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share Notes 2016 $000 2015 $000 6 6 7 7 7 6 7 7 6 7 8(a) 28 28 28 28 1,820,053 1,636,323 (1,349) (1,444) 1,818,704 1,634,879 (1,288,708) (1,152,016) 660 587 (179,416) (185,498) (29,402) 15,778 (16,828) (28,237) (1,902) (16,982) (1,497,916) (1,384,048) (94,584) (101,997) (196,581) (79,261) (82,922) (162,183) 124,207 88,648 55,800 (59,217) 120,790 (5,241) 18,477 (1,597) 132,429 (40,598) 91,831 5,054 (12,047) 81,655 (3,423) 32,975 (1,616) 109,591 (34,330) 75,261 92,850 (1,019) 91,831 75,798 (537) 75,261 cents cents 21.2 21.2 21.2 21.2 17.3 17.3 17.3 17.3 The above Consolidated Income Statement should be read in conjunction with the accompanying notes. 45 annual report 2016CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2016 Profit for the year 91,831 75,261 Notes 2016 $000 2015 $000 Other comprehensive income Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations Reversal on disposal of available for sale financial assets Income tax related to these items Items that will not be reclassified to profit or loss Revaluation of land and buildings Income tax related to these items Other comprehensive income for the year, net of tax 26 8(a)(iii) 26 8(a)(iii) 3,299 – (705) 117 (35) 2,676 (1,434) (2,012) 660 5,539 (1,662) 1,091 Total comprehensive income for the year 94,507 76,352 Total comprehensive income for the year is attributable to: Owners of nib holdings limited Non-controlling interests 95,526 (1,019) 94,507 76,889 (537) 76,352 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 46 nib holdings limitedCONSOLIDATED BALANCE SHEET For the year ended 30 June 2016 ASSETS Current assets Cash and cash equivalents Receivables Financial assets at fair value through profit or loss Reinsurance and other recoveries receivable Deferred acquisition costs Assets classified as held for sale Total current assets Non-current assets Deferred acquisition costs Deferred tax assets Property, plant and equipment Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Reinsurance and other recoveries payable Borrowings Outstanding claims liability Unearned premium liability Premium payback liability Provision for employee entitlements Current tax liabilities Other liabilities Total current liabilities Non-current liabilities Borrowings Unearned premium liability Premium payback liability Provision for employee entitlements Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Retained profits Reserves Capital and reserves attributable to owners of nib holdings limited Non-controlling interests Total equity Notes 2016 $000 2015 $000 9 10 11 12 13 14 13 8(b) 15 16 17 12 18 19 20 21 22 23 18 20 21 22 8(c) 23 24 25 26 89,428 51,858 580,738 79 34,060 – 123,655 45,130 457,155 – 22,059 38,726 756,163 686,725 49,135 809 15,486 217,428 282,858 1,039,021 42,069 3,677 14,458 90,179 150,383 837,108 141,289 124,902 – – 112,179 151,941 10,261 2,881 15,034 408 9 1,390 97,147 126,922 10,459 3,056 2,607 – 433,993 366,492 151,867 24,326 17,100 2,290 17,808 5,573 218,964 652,957 386,064 26,525 356,218 4,908 387,651 (1,587) 386,064 62,501 16,306 30,429 1,268 15,849 – 126,353 492,845 344,263 28,001 307,038 9,815 344,854 (591) 344,263 The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes. 47 annual report 2016CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2016 Attributable to owners of nib holdings limited Contributed Equity $000 Retained Profits $000 Notes Reserves $000 Total $000 Non- controlling interests $000 Total Equity $000 Balance at 1 July 2014 27,189 320,132 9,101 356,422 (54) 356,368 Profit for the year Revaluation of land and buildings, net of tax 26 Revaluation of available for sale financial assets, net of tax Movement in foreign currency translation, net of tax 26 Total comprehensive income for the year – – – – – 75,798 – – – 75,798 – 3,877 75,798 3,877 (1,408) (1,408) (1,378) 1,091 (1,378) 76,889 (537) 75,261 – – – 3,877 (1,408) (1,378) (537) 76,352 Transactions with owners in their capacity as owners: Shares acquired by the nib Holdings Ltd Share Ownership Plan Trust Issue of shares held by nib Holdings Ltd Share Ownership Plan Trust to employees Employee performance rights – value of employee services Dividends paid 24(c) 24(c) 26 27 (137) 949 – – – – – (88,892) – (137) (745) 368 – 204 368 (88,892) 812 (88,892) (377) (88,457) – – – – – (137) 204 368 (88,892) (88,457) Balance at 30 June 2015 28,001 307,038 9,815 344,854 (591) 344,263 Balance at 1 July 2015 28,001 307,038 9,815 344,854 (591) 344,263 Profit for the year Movement in foreign currency translation, net of tax Revaluation of land and buildings, net of tax Transfer to retained profits on sale of land and buildings, net of tax Total comprehensive income for the year 26 26 26 Transactions with owners in their capacity as owners: Transactions with non-controlling interests 35(c) – – – – – – Shares acquired by the nib Holdings Ltd Share Ownership Plan Trust Issue of shares held by nib Holdings Ltd Share Ownership Plan Trust to employees Employee performance rights – value of employee services Dividends paid 24(c) (2,902) 24(c) 1,426 26 27 – – 92,850 – 92,850 (1,019) 91,831 – – 2,594 2,594 82 82 – – – – 2,594 82 – 95,526 (1,019) 94,507 7,911 100,761 (7,911) (5,235) – – – – (51,581) – – (631) 959 – – 23 23 (2,902) 795 959 (51,581) – – – – (2,902) 795 959 (51,581) Balance at 30 June 2016 26,525 356,218 4,908 387,651 (1,587) 386,064 (1,476) (51,581) 328 (52,729) 23 (52,706) The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 48 nib holdings limited CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2016 Cash flows from operating activities Receipts from policyholders and customers (inclusive of goods and services tax) Payments to policyholders and customers Payments to suppliers and employees (inclusive of goods and services tax) Dividends received Interest received Distributions received Transaction costs relating to acquisition of business combination Interest paid Income taxes paid Notes 2016 $000 2015 $000 1,934,973 1,696,350 (1,503,099) (1,351,374) (273,792) 158,082 – 7,393 19,151 (2,763) (4,817) (28,643) (224,172) 120,804 217 8,938 12,148 – (3,227) (24,671) Net cash inflow from operating activities 9(c) 148,403 114,209 Cash flows from investing activities Proceeds from disposal of other financial assets at fair value through profit and loss Payments for other financial assets at fair value through profit and loss Proceeds from sale of available-for-sale financial assets Proceeds from sale of assets classified as held for sale Proceeds from sale of property, plant and equipment and intangibles Payments for property, plant and equipment and intangibles Payment for acquisition of business combination, net of cash acquired Net cash (outflow) inflow from investing activities Cash flows from financing activities Proceeds from borrowings Shares acquired by the nib Holdings Ltd Share Ownership Plan Trust Transactions with non-controlling interests Dividends paid to the company's shareholders Net cash inflow (outflow) from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year Reconciliation to Consolidated Balance Sheet Cash and cash equivalents Borrowings – overdraft 15,16 34 24(c) 35(c) 27 154,448 (281,829) – 46,259 27 (16,173) (114,506) (211,774) 85,000 (2,902) 23 (51,581) 30,540 (32,831) 122,265 (6) 89,428 154,234 (199,028) 6,882 – 36 (10,982) – (48,858) – (137) – (88,892) (89,029) (23,678) 146,954 (1,011) 122,265 89,428 – 89,428 123,655 (1,390) 122,265 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 49 annual report 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2016 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of nib holdings limited and its subsidiaries. Significant and other accounting policies that summarise the measurement basis used and are relevant to the understanding of financial statements are provided throughout the notes to the financial statements. a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards (and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. nib holdings limited is a for-profit entity for the purpose of preparing the financial statements. i) Compliance with IFRS The consolidated financial statements of nib holdings limited Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). ii) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss, certain classes of property, plant and equipment and investment properties. b) New and amended standards adopted by the Group The Group has not applied any new standards or amendments during the annual reporting period commencing 1 July 2015. c) New accounting standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2016 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. i) AASB 9 Financial Instruments (effective from 1 January 2018) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities and introduces new rules for hedge accounting. While the Group is yet to undertake a detailed assessment it doesn’t expect any significant impact from this standard. ii) AASB 15 Revenue from contracts with customers (effective from 1 January 2018) The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The majority of the Group’s revenue is recognised under AASB 1023 General Insurance Contracts which is not impacted by AASB 15. While the Group is yet to undertake a detailed assessment it doesn’t expect any significant impact from this standard. iii) AASB 16 Leases (effective from 1 January 2019) AASB 16 will primarily affect the accounting by lessees and will result in the recognition of almost all the leases on the balance sheet. The standard removes the current distinctions between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for almost all the lease contracts. The Group is yet to undertake a detailed assessment of this standard. The Group is currently assessing whether it should adopt these standards before their mandatory date. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. d) Principles of consolidation i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of nib holdings limited (“parent entity”) as at 30 June 2016 and the results of all subsidiaries for the year then ended. nib holdings limited and its subsidiaries together are referred to in this financial report as the Group. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. 50 nib holdings limitedThe acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to Note 34(c). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group. ii) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of nib holdings limited. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. e) Foreign currency translation i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is nib holdings limited’s functional and presentation currency. ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance costs. All other foreign exchange gains and losses are presented in the income statement on a net basis within other income or other expenses. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognised in other comprehensive income. iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. f) Assets backing private health insurance liabilities As part of the investment strategy the Group actively manages its investment portfolio to ensure that a portion of its investments mature in accordance with the expected pattern of future cash flows arising from private health insurance liabilities. With the exception of property, plant and equipment, and the investment in unlisted equity securities, the Group has determined that all financial assets of nib health funds limited and nib nz limited are held to back private health insurance liabilities. g) Rounding of amounts The company is of a kind referred to in Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Financial Report. Amounts in the Financial Report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. 51 annual report 20162. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The Group makes estimates and assumptions in respect of certain key assets and liabilities. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key areas in which critical estimates are applied are: • Estimation of deferred acquisition costs – Note 13 • Estimation of goodwill impairment and useful life of brand names and trademarks – Note 16 • Estimation of outstanding claims liability – Note 19 • Estimation for liability adequacy test – Note 20 and Note 21 • Estimation of premium payback liabilities – Note 21 3. RISK MANAGEMENT The financial condition and operations of the Group are affected by a number of key financial risks including insurance risk, interest rate risk, credit risk, market risk, liquidity risk, financial risk and fiscal risk, and non-financial risks including sovereign risk, operational risk, regulatory and compliance risk. Notes on the Group’s policies and procedures in respect of managing the financial risks are set out in this note below. a) Objectives in managing risks arising from private health insurance contracts and policies for mitigating those risks nib’s Board of Directors determines the Group’s overall risk appetite and approves the risk management strategies, policies and practices to ensure that risks are identified and managed within the context of this appetite. The Group’s risk management framework manages risks through a three lines of defence model. The three lines of defence model provides defined risk ownership responsibilities with functionally independent oversight and assurance. nib’s Group risk management framework manages risks through: • The Board of nib is ultimately responsible for the risk management framework and oversees its operation by management to operate within the approved risk appetite statement. • The establishment of the Audit Committee and the Risk and Reputation Committee to assist the Board in the execution of its responsibilities: – The Audit Committee’s responsibilities include: – reviewing the annual reports and other financial information distributed externally; – recommending the appointment and remuneration of the external auditor; – reviewing the performance and independence of the external auditor; and – reviewing the Group’s systems and procedures for compliance with legal and regulatory requirements as they relate to the integrity of the Group’s financial statements and other material regulatory documents; – reviewing the performance and independence of the Appointed Actuary; – reviewing the adequacy of nib’s corporate reporting processes and the integrity of nib’s financial statements and other material regulatory documents. – The Risk and Reputation Committee’s responsibilities include: – assisting the Board to review the effectiveness of the Group’s system of internal control; – recommending the appointment and remuneration of the internal auditor; – reviewing the performance and independence of the internal auditor; – monitoring the risk management system; and – reviewing the Group’s systems and procedures for compliance with legal and regulatory requirements other than those monitored by the Audit Committee. 52 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016• The Group’s internal policies and procedures designed to mitigate such risks: – The maintenance and use of management information systems which provide up to date, reliable data on the risks which the business is exposed to at any point in time. – Actuarial models, using information from the management information systems, are used to calculate premiums and monitor claims patterns. Past experience and statistical methods are used as part of the process. – A rigorous approach to product design to mitigate the risk of the Group being exposed to adverse selection. – Maintenance of reserves in excess of solvency and capital adequacy regulatory requirements. – An investment strategy which delivers a diversified portfolio with a heavier weighting to defensive assets versus growth assets. – The maintenance of defined underwriting processes where applicable. • Internal audit which provides independent assurance to senior management and Directors regarding the adequacy of controls over activities where the risks are perceived to be high. • Regular risk and compliance reporting. • nib health funds limited is subject to the application of standards for solvency and capital adequacy. From 1 July 2015, section 92 of the Private Health Insurance (Prudential Supervision) Act 2015 (Cth) provides the Australian Prudential Regulation Authority (APRA) with the power to issue prudential standards. The relevant standards determined by APRA are the Health Insurance (Prudential Standard) Determination No. 2 of 2015 – HPS 100 Solvency Standard and the Health Insurance (Prudential Standard) Determination No 3 of 2015 – HPS 110 Capital Adequacy. – The Solvency and Capital Adequacy Standards are an integral component of the prudential reporting and management regime for registered private health insurers. – These standards impose a two tier capital requirement on private health insurers with each tier considering the capital requirements in a different set of circumstances. – The first tier – solvency – is intended to ensure the basic solvency of the fund (that is, in the unlikely event of a wind-up); at any time on a run-off, the fund’s financial position is such that the insurer will be able to meet, out of the fund’s assets, all liabilities incurred for the purposes of the fund as those liabilities become due. – The second tier – capital adequacy – is intended to secure the financial soundness of the health benefits fund on a going concern basis, in particular its ability to remain solvent for at least the next three years. It is expected that in most circumstances this second tier will provide an additional buffer of capital above the minimum solvency requirement. • The New Zealand business is subject to the application of solvency standards for non life business issued by the Reserve Bank of New Zealand which require a margin to be maintained over minimum solvency capital as a condition of nib nz limited’s insurance license. b) Insurance risk In addition to the risk management policies and procedures adopted to manage insurance risk set out in Note 3(a) the provision of private health insurance in Australia is governed by the Act. Private health insurance business (Australian Residents Health Insurance) is the primary focus of the Act which governs the provision of Complying Health Insurance Products (CHIPS). Under the Act, Registered Private Health Insurers may also provide health-related business as prescribed, and the Group provides International Students Health Insurance and International Workers Health Insurance in this respect. The industry in Australia is shaped by a number of regulatory factors: • Community Rating: The principle of community rating prevents private health insurers from improperly discriminating between people who are or who wish to become insured, on the basis of their health status, age, race, gender, religious beliefs, sexuality, frequency of need of health care, lifestyle or claims history. Community rating applies to CHIP (Australian Residents Health Insurance) and International Students Health Insurance, but not to International Workers Health Insurance. • Risk Equalisation: The risk equalisation scheme seeks to share the risks among all registered health insurers by averaging out the cost of hospital treatment across the industry. Money is then transferred from private health insurers with younger healthier policyholders with lower average claims payments (such as nib) to those insurers with older and less healthy policyholders and which have higher average claims payments. The scheme applies to all health insurance business (CHIP) but does not apply to International Students Health Insurance or International Workers Health Insurance. As of 1 July 2015, the Commonwealth Health Minister retains overall policy responsibility for the risk equalisation scheme, with APRA having a similar role administering the risk equalisation scheme as PHIAC had administrating the risk equalisation scheme prior to 1 July 2015. 53 annual report 20163. RISK MANAGEMENT continued b) Insurance risk continued • Coverage Requirements: The Act limits the types of treatments that private health insurers can offer as part of their health insurance business (CHIP). International Students Health Insurance products coverage requirements are set out in a Deed between the insurer and the Commonwealth, while the health services offered under International Workers Health Insurance cover are largely at the discretion of the insurer. • Premium Approval: Under the Act, insurers can only increase CHIP premiums with the approval of the Minister. The Minister must approve the amounts unless the Minister is satisfied that the change would be contrary to the public interest. Insurers can ordinarily only seek one premium increase per annum. International Students Health Insurance products can raise premiums in line with the requirements set out in the Deed, which is also ordinarily annually and requires notification to the Department of Health. International Workers Health Insurance product premiums are not regulated by the Act or under any Deed with the Commonwealth. In New Zealand, private health insurance is governed by the Insurance (Prudential Supervision) Act 2010 which requires an insurer to be licensed and requires a licensed insurer to: • Maintain and disclose a financial strength rating; • Maintain a fit and proper policy, which apply to Directors and other relevant officers; • Maintain a risk management program; • Have an appointed actuary and ensure the actuarial information contained in or used in the preparation of financial statements is reviewed by the appointed actuary; and • Maintain a solvency margin over the minimum solvency capital required under the solvency standards for non life business issued by the Reserve Bank of New Zealand. c) Market risk i) Fair value interest rate risk The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk if the borrowings are carried at fair value. The Group’s borrowings at variable rate were denominated in Australian and New Zealand Dollars. As at the end of the reporting period, the Group had the following variable rate borrowings outstanding: Bank loans Net exposure to cash flow interest rate risk 3.6% 151,867 151,867 4.9% 2016 2015 Weighted average interest rate % Balance $000 Weighted average interest rate % Balance $000 62,501 62,501 An analysis by maturities is provided at 3(e). The Group’s other interest rate risks arise from receivables, financial assets at fair value through profit and loss and cash and cash equivalents All other receivables are non-interest bearing. There is an interest-bearing component of financial assets at fair value through profit and loss. nib receives advice from its asset consultants, JANA Implemented Consulting and Nikko Asset Management New Zealand Limited. The Group has adopted an investment strategy that delivers a diversified portfolio with a heavier weighting to defensive assets versus growth assets. Defensive assets consist of Australian and overseas fixed interest investments and cash and cash equivalents. 54 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016The table below summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk. Interest Rate Risk -100bps +100bps -100bps +100bps 2016 2015 Carrying amount $000 Profit $000 Equity $000 Profit $000 Equity $000 Carrying amount $000 Profit $000 Equity $000 Profit $000 Equity $000 Financial assets Cash and cash equivalents Other receivables Financial assets at fair value through profit or loss Financial liabilities Bank loans 89,428 7,974 (625) (56) (625) (56) 625 56 625 123,655 (866) (866) 56 2,771 (19) (19) 866 19 866 19 580,738 6,149 6,149 (6,103) (6,103) 457,155 4,184 4,184 (4,151) (4,151) (151,867) 1,076 1,076 (1,076) (1,076) (62,501) 450 450 (450) (450) Premium payback liability (27,361) (1,044) (1,044) 919 919 (40,888) (1,414) (1,414) 1,192 1,192 Total increase / (decrease) 5,500 5,500 (5,579) (5,579) 2,335 2,335 (2,524) (2,524) ii) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from foreign currency translation risk through its subsidiaries located in Brazil, Canada, New Zealand, Thailand, United Kingdom and United States. In accordance with the policy set out in Note 1(e), foreign exchange gains or losses arising on translation of the Group’s foreign operations to the Group’s Australian dollar presentation currency are recognised directly in equity. Foreign exchange gains or losses arising on assets and liabilities denominated in foreign currencies are recognised directly in profit and loss. The Group does not hedge this risk. The table below summarises the sensitivity of the Group’s equity to a 10% strengthening and weakening of the Australian dollar against the foreign currency, with all other variables held constant. 2016 -10% +10% -10% +10% 2015 Exposure $000 Profit $000 Equity $000 Profit $000 Equity $000 Exposure $000 Profit $000 Equity $000 Profit $000 Equity $000 Foreign exchange risk Brazilian real Canadian dollar European euro Great Britain pound New Zealand dollar United States dollar Thai baht 155 36 (168) 7 55,090 618 123 – (2) 12 (11) 12 (55) – (15) (1) – 15 (5,526) 17 (12) Total increase / (decrease) 55,861 (44) (5,522) – 2 (12) 11 (12) 55 – 44 15 1 – (15) – – – 5,526 35,606 (17) 12 – – 5,522 35,606 – – – – – – – – – – – – (3,561) – – (3,561) – – – – – – – – – – – – 3,561 – – 3,561 55 annual report 20163. RISK MANAGEMENT continued c) Market risk continued iii) Price risk The Group is exposed to equity securities price risk. This arises from investments held by the Group and classified on the balance sheet as either available-for-sale or at fair value through profit or loss. The Group is not exposed to commodity price risk. To manage its price risk the Group has adopted an investment strategy which delivers a diversified portfolio with a heavier weighting to defensive assets versus growth assets. Post-tax profit for the year would increase/decrease as a result of gains/losses on equity securities classified as at fair value through profit or loss. The table below summarises the sensitivity of the Group’s financial assets to price risk. Interest Rate Risk -10% unit price +10% unit price -10% unit price +10% unit price 2016 2015 Carrying amount $000 Profit $000 Equity $000 Profit $000 Equity $000 Carrying amount $000 Profit $000 Equity $000 Profit $000 Equity $000 Financial assets Financial assets at fair value through profit or loss 580,738 (6,848) (6,848) Total increase / (decrease) (6,848) (6,848) 6,848 6,848 6,848 457,155 (4,279) (4,279) 4,279 4,279 6,848 (4,279) (4,279) 4,279 4,279 Methods and assumptions used in preparing sensitivity analysis The post-tax effect on profit and equity of movements in foreign exchange, interest rate and price have been calculated using ‘reasonably possible’ changes in the risk variables, based on recent interest rate and market movements. An interest rate change of 100 basis points will directly affect interest received on cash and cash equivalents and other receivables. An interest rate change of 100 basis points will inversely affect the unit price of fixed interest investments; this change has been calculated by multiplying the average duration of underlying investments in each portfolio by the interest rate change. All other investments are not directly affected by interest rate changes but would be revalued through profit or loss as their unit price changes. d) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, financial assets and deposits with banks and financial institutions, favourable derivative financial instruments, as well as credit exposures to policyholders and the Department of Human Services (Private Health Insurance Premiums Reduction Scheme). nib receives advice from its asset consultants, JANA Implemented Consulting, who provide a rating of investment managers to nib as part of their advice. Credit risk for premium receivables are minimal due to the diversification of policyholders. The Private Health Insurance Premiums Reduction Scheme receivable is due from a government organisation under legislation. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date is the carrying amount, net of any provisions for impairment loss, as disclosed in the balance sheet and notes to the financial statements. The Group does not have any material credit risk to any single debtor or group of debtors under financial instruments entered into. The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. Other receivables Counterparties with external credit rating Counterparties without external credit rating Group 1 – new debtors (less than 6 months) Group 2 – existing debtors (more than 6 months) with no defaults in the past Group 3 – existing debtors (more than 6 months) with some defaults in the past. All defaults were fully recovered. Total Other Receivables 2016 $000 169 434 7,277 94 7,974 2015 $000 – 71 2,515 185 2,771 56 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016Cash at Bank and short-term bank deposits A-1 A-2 Financial assets at fair value through profit or loss Short term deposits A-1 Interest-bearing securities1 AAA AA A BBB Sub Investment Grade Unclassified 2016 $000 2015 $000 89,363 123,655 65 – 89,428 123,655 60,188 35,188 156,611 126,171 97,080 39,422 3,410 26 152,664 110,825 63,373 28,130 6,747 (903) 482,908 396,024 1. The financial assets at fair value through profit and loss with credit risk are held in unit trusts, the above table summarises the underlying investments of the unit trusts. e) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close-out market positions. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and holds a high percentage of highly liquid investments. The bank overdraft within borrowings comprises the closing positive balances of the bank account, adjusted for unpresented cheques and outstanding deposits. There are no overdraft facilities. Maturities of financial liabilities The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Group at 30 June 2016 Financial Liabilities Trade creditors Other payables Borrowings Group at 30 June 2015 Financial Liabilities Trade creditors Other payables Borrowings ≤ 1 month $000 1-3 months $000 3-12 months $000 1-5 years $000 > 5 years $000 Total Contractual Cash flows $000 Carrying amount $000 11,981 68,730 713 81,424 266 7,141 1,078 8,485 242 1,171 3,820 5,233 30 412 156,347 156,789 – 381 – 381 12,519 77,835 12,519 77,835 161,958 151,867 252,312 242,221 ≤ 1 month $000 1-3 months $000 3-12 months $000 1-5 years $000 > 5 years $000 Total Contractual Cash flows $000 Carrying amount $000 6,145 61,416 1,653 69,214 214 4,126 504 4,844 30 69 2,206 2,305 – 452 66,694 67,146 – – – – 6,389 66,063 71,057 6,389 66,063 63,891 143,509 136,343 57 annual report 20164. FAIR VALUE MEASUREMENT a) Fair value hierarchy This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group classifies its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table. The following tables present the Group’s assets and liabilities measured and recognised at fair value at 30 June 2016 and 30 June 2015. Level 1 $000 Level 2 $000 Level 3 $000 Total $000 Group at 30 June 2016 Assets Cash and cash equivalents and deposits at call Financial assets at fair value through profit or loss Equity securities Interest -bearing securities Short term deposits Property, plant and equipment Land and buildings Total assets Group at 30 June 2015 Assets 89,428 97,830 410,734 60,188 – – – 11,986 – – 658,180 11,986 Level 1 $000 Level 2 $000 – – – – 1,908 1,908 Level 3 $000 – – – – 89,428 97,830 422,720 60,188 1,908 672,074 Total $000 123,655 61,131 360,836 35,188 1,815 1,815 1,815 582,625 Cash and cash equivalents and deposits at call 123,655 – Financial assets at fair value through profit or loss Equity securities Interest-bearing securities Short term deposits Property, plant and equipment Land and buildings Total assets 60,600 310,948 35,188 – 531 49,888 – – 530,391 50,419 There were no transfers between level 1 and level 2 during the year. The Group’s policy is to recognise transfers into and transfers out of the fair value hierarchy levels as at the end of the reporting period. The fair value of financial instruments traded in active markets (such as financial assets at fair value through profit and loss) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. Level 1: The fair value of financial instruments traded in active markets (such as financial assets at fair value through profit and loss) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. Level 2: The fair value of financial instruments that are not traded in active markets (for example available-for-sale financial assets) is determined using valuation techniques. The Group use a variety of methods and makes assumptions that are based on market conditions existing at each balance date. These instruments are included in level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. 58 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016b) Valuation techniques used determine fair values Specific valuation techniques used to value financial instruments include: • The use of quoted market prices or dealer quotes for similar instruments. • Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. All of the resulting fair value estimates for financial instruments are included in level 2 except for contingent consideration payable explained in c) below. The Group obtains independent valuations for its freehold land and buildings at least every three years. At the end of each reporting period, the Directors update their assessment of the fair value of each property, taking into account the most recent independent valuations. Freehold land and buildings were independently valued by a member of the Australian Property Institute as at 30 June 2016. All resulting fair value estimates for properties are included at level 3. c) Fair value measurements using significant unobservable inputs (level 3) The following table presents the changes in level 3 instruments for the year ended 30 June 2016: Opening balance 1 July 2014 Assets included in a disposal group classified as held for sale and other disposals Gains recognised in other comprehensive income Depreciation Transfers to leasehold improvements Closing balance 30 June 2015 Gains recognised in other comprehensive income Depreciation Closing balance 30 June 2016 Land and Buildings $000 40,587 (38,726) 5,539 (1,081) (4,504) 1,815 117 (24) 1,908 Total $000 40,587 (38,726) 5,539 (1,081) (4,504) 1,815 117 (24) 1,908 i) Transfers between levels 2 and 3 There were no transfers between the levels of the fair value hierarchy during the year. There were also no changes during the year to any of the valuation techniques applied as of 30 June 2015. ii) Valuation inputs and relationships to fair value The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements: Description Fair value at 30 June 2016 $000 Land and buildings 1,908 Unobservable inputs* Capitalisation rate Range of inputs (probability- weighted average) Relationship of unobservable inputs to fair value 6.75% – 8.75% (7.75%) The higher the capitalisation rate, the lower the fair value. Market rent per square metre $512 – $626 ($569) If market rent per square metre was 10% higher or lower, the fair value would increase/decrease by $200,000. * There were no significant inter-relationships between unobservable inputs that materially affect fair values. 59 annual report 20164. FAIR VALUE MEASUREMENT continued c) Fair value measurements using significant observable inputs (level 3) continued iii) Valuation process The Group engages external, independent and qualified valuers to determine the fair value of the Group’s land and buildings at least every three years. As at 30 June 2016, freehold land and buildings were independently valued by a member of the Australian Property Institute. The finance department of the Group includes a team that performs the valuations of non-property assets required for financial reporting purposes, including level 3 fair values. This team reports directly to the Chief Financial Officer (CFO) and the Audit Committee (AC). Discussions of valuation processes and results are held between the CFO, AC and the valuation team at least once every six months, in line with the Group’s half-yearly reporting dates. Changes in level 2 and 3 fair values are analysed at each reporting date during the half-yearly valuation discussion between the CFO, AC and the valuation team. As part of this discussion the team presents a report that explains the reason for the fair value movements. d) Fair values of other financial instruments The Group also had another financial instrument which was not measured at fair value in the balance sheet. This had the following fair value as at 30 June 2016: Non-current borrowings Bank loans 2016 2015 Carrying amount $000 Fair value $000 Carrying amount $000 151,867 151,878 62,501 Fair value $000 62,524 The fair values of non-current borrowings are based on discounted cash flows using a current borrowing rate. They are classified as level 3 fair values in the fair value hierarchy (see Note 4(a)) due to the use of unobservable inputs, including own credit risk. The carrying value less impairment provision of other receivables and payables are assumed to approximate their fair values due to their short-term nature. 60 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 20165. SEGMENT REPORTING a) Description of segments Operating segments are reported in a manner consistent with the internal reporting provided to Executive management. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer/Managing Director. Management has determined the operating segments based on the reports reviewed by the MD/CEO that are used to make strategic decisions. The MD/CEO considers the business from both a geographic and product perspective and has identified five reportable segments: • Australian Residents Health Insurance – nib’s core product offering within the Australian private health insurance industry • New Zealand Residents Health Insurance – nib’s core product offering within the New Zealand private health insurance Industry • International (Inbound) Health Insurance – nib’s offering of health insurance products for international students and workers • World Nomads Group – nib’s distribution of travel insurance products • nib Options – nib’s facilitation of access to cosmetic and dental treatment both overseas and here in Australia Although the nib Options segment does not meet the quantitative thresholds required by AASB 8, management has concluded that the segment should be reported, as it is closely monitored by the MD/CEO as a potential growth segment and is expected to contribute to Group revenue in the future. b) Other segment information The MD/CEO assesses the performance of the operating segments based on underlying operating profit. This measurement basis excludes from the operating segments the effects of non-recurring profit on sale of the head office building, and non- recurring expenditure such as integration costs, merger and acquisition costs, and amortisation of acquired intangibles. No information regarding assets, liabilities and income tax is provided for individual Australian Health Insurance and International (Inbound) Health Insurance segments to the MD/CEO. Furthermore, investment income and expenditure for Australia is not allocated to individual Australian segments as this type of activity is driven by the central treasury function, which manages the cash position of the Australian companies. 61 annual report 20165. SEGMENT REPORTING continued c) Segment information provided to Executive management The segment information provided to the MD/CEO for the reportable segments is as follows: For the year ending 30 June 2016 Australian Residents Health Insurance $000 International (Inbound) Health Insurance $000 New Zealand Residents Health Insurance $000 World Nomads Group $000 nib Options $000 Unallocated to segments $000 Total $000 Premium revenue 1,568,369 78,103 173,581 Outwards reinsurance premium expense – (1,344) (5) Net premium revenue 1,568,369 76,759 173,576 Claims expense (1,125,309) (42,352) (121,047) Reinsurance and other recoveries revenue – 660 RESA1 State levies (Increase) / Decrease in premium payback liability Claims handling expenses Net claims incurred (179,416) (29,402) – – – – (14,460) (897) – – – 15,778 (1,471) (1,348,587) (42,589) (106,740) Acquisition costs Other underwriting expenses Underwriting expenses (60,892) (64,779) (6,878) (10,286) (26,814) (22,694) (125,671) (17,164) (49,508) Underwriting result 94,111 17,006 17,328 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,820,053 (1,349) 1,818,704 – (1,288,708) – – – – – 660 (179,416) (29,402) 15,778 (16,828) – (1,497,916) – – – – (94,584) (97,759) (192,343) 128,445 Other income Other expenses 380 – 233 – – – Underlying operating profit / (loss) 94,491 17,239 17,328 49,973 (40,283) 9,690 26 (2,566) (2,540) 3,772 (7,976) 54,384 (50,825) (4,204) 132,004 Items not included in underlying operating profit Amortisation of acquired intangibles One-off transactions and M&A costs Finance costs Investment income Investment expenses Profit before income tax from continuing operations – – (869) (3,369) – – (3,587) (1,919) – – – (1,470) (7,825) (3,389) (5,241) 18,477 (1,597) 132,429 Inter-segment other income2 Depreciation and amortisation 1,799 6,055 – 70 – 2,004 5,594 4,349 Total assets Total liabilities 710,297 389,225 194,159 110,604 66,752 10,900 Insurance liabilities Outstanding claims liability Unearned premium liability Premium payback liability Total 96,593 159,030 – 255,623 15,586 17,237 27,361 60,184 1. RESA (Risk Equalisation Special Account) levy, formerly RETF (Risk Equalisation Trust Fund) levy. 2. Inter-segment other income is eliminated on consolidation and not included in operating profit. 62 – 191 648 460 – 1,869 236 18,429 23,313 1,039,021 185,620 652,957 112,179 176,267 27,361 315,807 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016For the year ending 30 June 2015 Australian Residents Health Insurance $000 International (Inbound) Health Insurance $000 New Zealand Residents Health Insurance $000 World Nomads Group $000 nib Options $000 Unallocated to segments $000 Total $000 Premium revenue 1,429,516 56,376 150,431 Outwards reinsurance premium expense – (1,443) (1) Net premium revenue 1,429,516 54,933 150,430 Claims expense (1,025,195) (30,025) (96,796) Reinsurance and other recoveries revenue – 587 RESA1 State levies (185,498) (28,237) (Increase) / Decrease in premium payback liability – – – – Claims handling expenses Net claims incurred (15,185) (639) (1,254,115) (30,077) (99,856) – – – (1,902) (1,158) Acquisition costs Other underwriting expenses (49,537) (54,188) (5,061) (7,958) (24,663) (17,245) Underwriting expenses (103,725) (13,019) (41,908) Underwriting result 71,676 11,837 8,666 Other income Other expenses 215 – 374 – – – Underlying operating profit / (loss) 71,891 12,211 8,666 Items not included in underlying operating profit Amortisation of acquired intangibles One-off transactions and M&A costs Finance costs Investment income Investment expenses Profit before income tax from continuing operations – – (256) (3,275) – – Inter-segment other income2 Depreciation and amortisation 2,261 6,296 5 41 1,225 4,829 Total assets Total liabilities Insurance liabilities Outstanding claims liability Unearned premium liability Premium payback liability Total 611,303 339,447 166,703 71,087 86,537 129,397 – 215,934 10,610 13,831 40,888 65,329 1. RESA (Risk Equalisation Special Account) levy, formerly RETF (Risk Equalisation Trust Fund) levy. 2. Inter-segment other income is eliminated on consolidation and not included in operating profit. – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (57) (2,970) (3,027) 3,850 (5,555) (1,705) – – (751) (2,098) – – – 1,636,323 (1,444) 1,634,879 – (1,152,016) – – – – – 587 (185,498) (28,237) (1,902) (16,982) – (1,384,048) – – – – (79,261) (79,391) (158,652) 92,179 4,382 (8,525) 88,036 (3,531) (2,849) (3,423) 32,975 (1,616) 109,592 – 168 473 143 – 55 2,307 12,573 58,629 837,108 82,168 492,845 97,147 143,228 40,888 281,263 63 annual report 20166. REVENUE AND OTHER INCOME Premium revenue Outwards reinsurance premiums Net premium revenue Other income Travel insurance commission Life and funeral insurance commission and other commissions Agency fee Profit on sale of head office building Deferred profit on sale and leaseback of head office building Rental income Fair value adjustment to contingent consideration Subscription income / (refund) Sundry income Investment income Interest Net gain on sale of available for sale financial assets1 Net realised gain on financial assets at fair value through profit or loss Net unrealised gain/(loss) on financial assets at fair value through profit or loss Dividends 1. On 21 November 2014 nib sold the 5,294,118 shares held in Pacific Smiles Group (PSG) as part of PSG’s IPO process. 2016 $000 2015 $000 1,820,053 1,636,323 (1,349) (1,444) 1,818,704 1,634,879 49,994 2,271 311 1,416 136 746 – – 926 55,800 7,361 – 18,547 (7,431) – 18,477 413 2,014 310 – – 950 672 (105) 800 5,054 9,164 5,382 16,622 1,590 217 32,975 64 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016 a) Recognition and measurement Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into account the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised for the major business activities as follows: i) Premium revenue Premium revenue comprises premiums from private health insurance contracts held by policyholders. Premium revenue is recognised when it has been earned. Premium revenue is recognised from the attachment date over the period of the contract. The attachment date is from when the insurer accepts the risk from the insured under the insurance contract. Revenue is recognised in accordance with the pattern of the incidence of risk expected over the term of the contract. The proportion of the premium received or receivable not earned in the income statement at the reporting date is recognised in the balance sheet as an unearned premium liability. Any non-current portion is discounted based on expected settlement dates. Premiums on unclosed business are brought to account using estimates based on payment cycles nominated by the policyholder. ii) Investment income Net fair value gains or losses on financial assets classified as at fair value through profit or loss are recognised in the period. Rental revenue from leasing of investment properties is recognised in the period in which it is receivable, as this represents the pattern of service rendered through the provision of the properties. Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. iii) Outwards reinsurance Premiums ceded to reinsurers under insurance contracts held by the Group are recognised as an outwards reinsurance expense and are recognised in the income statement from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of risk ceded. iv) Revenue from travel insurance commission Revenue in the form of commissions is recognised when the sale of an insurance policy to a customer occurs. Revenue is also generated on travel services activities and recognised as the service is performed. 65 annual report 20167. EXPENSES Expenses by function Claims handling expenses Acquisition costs Other underwriting expenses Other expenses Finance costs Investment expenses 2016 $000 2015 $000 16,828 94,584 101,997 59,217 5,241 1,597 16,982 79,261 82,922 12,047 3,423 1,616 Total expenses (excluding direct claims expenses) 279,464 196,251 Expenses by nature Amortisation of acquired intangibles Bank charges Consultancy fees Depreciation and amortisation Electronic claims precessing fees Employee costs Finance costs Impairment of goodwill Insurance Investment expenses Legal expenses Marketing expenses – commissions Marketing expenses – excluding commissions Merger and acquisition costs Net loss on disposal of property, plant and equipment Operating lease rental expenses Postages Share registry expenses Software maintenance Telephones Other Total expenses (excluding direct claims expenses) 7,825 3,964 8,975 10,604 3,473 104,163 5,241 – 1,673 1,597 1,201 54,894 42,501 2,886 19 5,962 2,049 1,131 6,175 1,538 13,593 279,464 3,531 2,037 3,634 9,042 3,845 77,687 3,422 1,423 1,160 1,616 1,160 661 30,195 32,726 84 3,785 1,838 1,376 5,614 1,257 9,220 196,251 66 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 20168. TAXATION a) Income tax i) Income tax expense Recognised in the income statement Current tax expense Deferred tax expense Under (over) provided in prior years Under (over) provided in prior years – research and development tax credit Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Notes 2016 $000 2015 $000 37,798 3,025 305 (530) 29,447 5,212 (3) (326) 40,598 34,330 40,598 40,598 34,330 34,330 Deferred income tax expense included in income tax expense comprises: Increase in deferred tax assets Increase in deferred tax liabilities 8(b) 8(c) (470) 3,495 3,025 (572) 5,784 5,212 ii) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense 132,429 109,591 Tax at the Australian tax rate of 30% (2015: 30%) 39,729 32,877 Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Goodwill impairment Fair value adjustment to contingent consideration Share-based payments Entertainment Merger and acquisition costs Sundry items Net assessable trust distributions Imputation credits and foreign tax credits Adjustment for current tax of prior periods Adjustment for current tax of prior periods – research and development tax credit Unrecognised tax losses and deferred tax assets Differences in foreign tax rates Income tax expense iii) Tax expense relating to items of other comprehensive income Foreign currency translations Revaluation of land and buildings Change in value of available for sale financial assets iv) Amounts recognised directly to equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Transfer from revaluation reserve on sale of land and buildings v) Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 30% – – 79 86 940 (229) 194 (648) 305 (530) 930 (258) 427 (202) (124) 92 151 11 142 (539) (3) (326) 1,941 (117) 40,598 34,330 26 26 26 26 705 35 – 740 (3,390) (3,390) 9,364 2,809 (56) 1,662 (604) 1,002 – – 6,180 1,854 67 annual report 20168. TAXATION continued b) Deferred tax assets The balance comprises temporary differences attributable to: Deferred profit on sale and leaseback of head office building Employee benefits Premium payback liabilities Unrealised losses on investments Other Doubtful debts Merger and acquisition costs Outstanding claims Provisions Tax losses Sub-total other Total deferred tax assets 2016 $000 2015 $000 1,794 4,187 7,235 592 – 2,568 11,051 – 13,808 13,619 323 175 124 2,478 1,435 4,535 247 438 – 1,186 194 2,065 18,343 15,684 Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets 8(c) (17,534) 809 (12,007) 3,677 Recovery of Total deferred tax assets: Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months Movements Note Deferred profit on sale and leaseback of head office building $000 Employee benefits $000 Premium payback liabilities $000 Unrealised losses on investments $000 At 1 July 2014 (Charged)/credited to the income statement (Charged)/credited directly to other comprehensive income At 30 June 2015 At 1 July 2015 (Charged)/credited to the income statement (Charged)/credited directly to other comprehensive income (Charged)/credited directly to equity Acquisition of businesses 34 At 30 June 2016 1,794 68 – – – – – 2,377 10,995 212 533 (21) 2,568 (477) 11,051 2,568 11,051 – – – – – 1,794 235 (4,418) 592 2,267 470 – – – 28 – 1,356 4,187 602 – – – – – 7,235 592 12 – 191 4,535 642 – 1,547 18,343 8,995 9,348 18,343 7,075 8,609 15,684 Other $000 Total $000 2,244 15,616 (173) 572 (6) 2,065 (504) 15,684 2,065 15,684 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016c) Deferred tax liabilities The balance comprises temporary differences attributable to: Brands and trademarks and customer contracts Deferred acquisition costs Depreciation and amortisation Unrealised foreign exchange gains Unrealised gains on investments Other Asset revaluation Borrowing costs Income receivables Outstanding claims Prepayments Unearned premium liability Sub-total other Total deferred tax liabilities 2016 $000 2015 $000 9,391 23,678 885 1,092 – 35,046 81 3 4 – 3 205 296 4,653 17,866 413 559 1,474 24,965 2,611 6 4 61 27 182 2,891 35,342 27,856 Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities 8(b) (17,534) 17,808 (12,007) 15,849 Recovery of Total deferred tax liabilities: Deferred tax liabilities to be settled within 12 months Deferred tax liabilities to be settled after more than 12 months 10,604 24,738 35,342 8,155 19,701 27,856 Movements Note Brands and trademarks and customer contracts $000 Deferred acquisition costs $000 Depreciation and amortisation $000 Unrealised foreign exchange losses $000 Unrealised gains on investments $000 Other $000 Total $000 At 1 July 2014 (Charged)/credited to the income statement (Charged)/credited directly to other comprehensive income At 30 June 2015 At 1 July 2015 (Charged)/credited to the income statement (Charged)/credited directly to other comprehensive income (Charged)/credited directly to equity Acquisition of businesses 34 At 30 June 2016 5,848 11,382 (994) 6,596 (201) 4,653 (112) 17,866 137 288 (12) 413 793 1,828 1,586 21,574 – (354) 248 5,784 (234) 559 – 1,474 1,057 2,891 498 27,856 4,653 17,866 413 559 1,474 2,893 27,858 (1,774) 5,550 1,268 10 (1,474) (85) 3,495 521 262 30 533 – 5,991 9,391 – – 23,678 (825) (1) 885 – (10) 1,092 – – – – 35 1,381 (2,565) 18 296 (3,390) 5,998 35,342 69 annual report 20168. TAXATION continued d) Recognition and measurement The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. nib holdings limited and its wholly-owned Australian controlled entities are a tax consolidated group. The World Nomads Group Australian entities joined this tax consolidation group during the year. Also, nib Options pty limited and its wholly-owned Australian controlled entities are a tax consolidated group. As a consequence, the entities within each group are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated financial statements. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 9. CASH AND CASH EQUIVALENTS Cash at bank and cash on hand Short term deposits and deposits at call 2016 $000 2015 $000 70,045 19,383 89,428 73,516 50,139 123,655 a) Recognition and measurement Cash and cash equivalents, and bank overdrafts are carried at face value of the amounts deposited or drawn. For the purpose of the presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. b) Risk exposure The Group’s exposure to interest rate risk is discussed in Note 3(c)(i). The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. 70 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016c) Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Net gain on sale of available for sale financial assets Profit on sale of head office building Deferred profit on sale and leaseback of head office building Net (gain)/loss on disposal of property, plant and equipment Fair value (gain)/loss on other financial assets through profit or loss Non-cash employee benefits expense – share-based payments Depreciation and amortisation Impairment of goodwill Amortisation of borrowing costs Gain on fair value adjustment to contingent consideration Net exchange differences Change in operating assets and liabilities, net of effect from purchase of controlled entity Decrease (increase) in current tax assets Decrease (increase) in receivables Decrease (increase) in reinsurance receivables Decrease (increase) in deferred acquisition costs Decrease (increase) in deferred tax assets Increase (decrease) in trade payables Increase (decrease) in unearned premium liability Increase (decrease) in premium payback liability Increase (decrease) in current tax liabilities Increase (decrease) in deferred tax liabilities Increase (decrease) in provisions Net cash flow from operating activities 2016 $000 91,831 – (1,416) (136) 19 9,501 959 18,429 – 30 – (3,573) – 1,168 (88) (19,067) (1,327) 7,572 30,795 (13,527) 12,162 1,112 13,959 2015 $000 75,261 (5,382) – – 84 (5,071) 369 12,573 1,423 59 (672) 2,434 2,876 (344) 117 (24,100) (353) 14,174 29,026 138 1,343 5,860 4,394 148,403 114,209 d) Off balance sheet arrangements World Nomads Group Pty Ltd (WNG), a wholly subsidiary of nib holdings limited, operates bank accounts held in their name on behalf of their underwriters in accordance with contractual terms governing the arrangements. These accounts are not considered part of the cash and cash equivalents of WNG as they do not have the control over the cash. At 30 June 2016 this amounted to $17,054,596. 10. RECEIVABLES Current Premium receivable Private Health Insurance Premiums Reduction Scheme receivable Other receivables Provision for impairment loss Prepayments 2016 $000 2015 $000 6,244 35,030 7,974 (1,092) 3,702 51,858 7,888 32,662 2,771 (850) 2,659 45,130 As at 30 June 2016 current receivables of the Group with a nominal value of $1.092 million (2015: $0.850 million) were impaired. The individually impaired receivables relate to premium receivables. 71 annual report 201610. RECEIVABLES continued The ageing of these impaired receivables is as follows: 1 to 3 months 3 to 6 months Over 6 months Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectible Unused amount reversed 2016 $000 626 247 219 1,092 2016 $000 850 743 (27) (474) 1,092 2015 $000 518 193 139 850 2015 $000 1,242 506 (160) (738) 850 As of 30 June 2016 and 2015 no receivables were past due but not impaired. a) Recognition and measurement Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. Collectability of trade and other receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. A provision for impairment is used where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the impairment loss is recognised in profit or loss within other expenses. When a receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the provision for impairment account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss. i) Amounts due from policyholders Amounts due from policyholders are initially recognised at fair value, being the amounts due. They are subsequently measured at fair value which is approximated by taking this initially recognised amount and reducing it for impairment as appropriate. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the value of estimated future cash flows. The impairment charge is recognised in the profit or loss. b) Interest rate risk Information about the Group’s exposure to interest rate risk in relation to other receivables is provided in Note 3. c) Fair value and credit risk Due to the short-term nature of current receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. d) Risk exposure The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivable mentioned above. Refer to Note 3 for more information on the risk management policy of the Group and the credit quality of the Group’s receivables. 72 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201611. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Equity securities Interest-bearing securities Short term deposits 2016 $000 2015 $000 97,830 422,720 60,188 580,738 61,131 360,836 35,188 457,155 Changes in fair values of financial assets at fair value through profit or loss are recorded in investment income in profit or loss in Note 6. a) Recognition and measurement i) Investments and other financial assets The Group classifies its financial assets into financial assets at fair value through profit or loss and available for sale financial assets. ii) Financial assets and liabilities Financial assets are designated at fair value through profit or loss. Initial recognition is at fair value, being acquisition cost, in the balance sheet and subsequent measurement is at fair value with any resultant fair value gains or losses recognised in the profit or loss. Shares, fixed interest securities, options and units in trusts listed on stock exchanges are initially recognised at cost and the subsequent fair value adjustment is taken as the quoted bid price of the instrument at the balance sheet date. All purchases and sales of financial assets that require delivery of the asset within the timeframe established by regulation or market convention (“regular way” transactions) are recognised at trade date, being the date on which the Group commits to buy or sell the asset. In cases where the point between trade and settlement exceeds this time frame, the transaction is recognised at settlement date. Financial assets are derecognised when the rights to receive future cash flows from the assets have expired, or have been transferred, and the Group has transferred substantially all the risks and rewards of ownership. Investments and other financial assets of nib holdings limited are also designated as at fair value through the profit or loss as they are managed and their performance is evaluated on a fair value basis, in accordance with a documented investment policy, and information is provided internally on that basis to the entity’s Key Management Personnel. b) Risk exposure Information about the Group’s exposure to price risk and interest rate risk is provided in Note 3. 12. REINSURANCE AND OTHER RECOVERIES RECEIVABLE/(PAYABLE) Expected future reinsurance recoveries undiscounted on claims paid on outstanding claims Reinsurance and other recoveries receivable on incurred claims 2016 $000 104 (25) 79 2015 $000 108 (117) (9) a) Recognition and measurement Reinsurance and other recoveries receivable on paid claims, reported claims not yet paid, incurred but not reported (IBNR), and unexpired risk liabilities are recognised as revenue. Recoveries receivable are assessed in a manner similar to the assessment of outstanding claims. Recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the liability for outstanding claims. 73 annual report 201613. DEFERRED ACQUISITION COSTS Current Deferred acquisition costs Non-current Deferred acquisition costs Movements in the deferred acquisition costs are as follows: Balance at beginning of year Acquisition costs deferred during the year Amortisation expense Exchange differences 2016 $000 2015 $000 34,060 34,060 22,059 22,059 49,135 49,135 42,069 42,069 2016 $000 2015 $000 64,128 47,447 (29,298) 918 83,195 40,028 44,078 (19,528) (450) 64,128 a) Recognition and measurement Direct acquisition costs incurred in obtaining health insurance contracts, including broker commissions, are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the consolidated income statement in subsequent reporting periods. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue. b) Critical accounting judgements and estimates i) Australian Residents Health Insurance Deferred acquisition costs are amortised on a straight line basis over a period of 5 years (2015: 6 years), in accordance with the expected pattern of the incidence of risk under the open ended insurance contracts to which they relate, which includes expectations of customers remaining insured. The Group pays an upfront commission to retail brokers on signing up new members to the business. These upfront commissions will give rise to future premium revenue beyond the current period and are able to be measured and directly associated with a particular insurance contract. The Group does not capitalise the indirect administration costs associated with acquiring new members due to the difficulty in measurement. The Group considers the duration of a health insurance contract to be an open ended agreement as the Group stands ready to continue to insure its customers under continuing policies. The Group uses average retention rates to determine the appropriate customer contract life and related amortisation period for customers who purchase insurance through these broker channels. The analysis included extrapolating historical lapse rates for broker acquired customers but truncating the data at 10 years in order to allow for the inherent distortion created by extrapolating historical data. The analysis identified the amortisation period to be 5 years. The Group re-performs this analysis at least every six months for reassessment. A decrease in the expected contract periods of one year would increase amortisation expense by $3.0m for 30 June 2016. The recoverability of the related deferred acquisition costs is also considered as part of the liability adequacy test performed. As described in Note 20, the Group has no deficiency in the unearned premium liability at 30 June 2016. 74 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016Change in critical accounting judgements and estimates On 1 April 2016, the amortisation period was revised to five years. The net effect of the changes in the current financial year was an increase in amortisation expense of $1.8 million. Assuming the deferred acquisition costs are held and amortised at a rate of five years, the amortisation in future years in relation to these deferred acquisition costs will increase by the following amounts: Year ending 30 June 2016 2017 2018 2019 2020 2021 2022 Alternative view $000 1,778 4,585 1,816 (259) (1,381) (5,146) (1,393) General insurers amortise deferred acquisition costs usually over one year, as their policies generally have a defined term of one year. With health insurance, if the contract term is considered to be only the term to which the customer has agreed to, or paid to, the deferred acquisition cost would be amortised over a period of between one and two months, which is the period paid in advance by the customer. However, the Group believes that does not reflect the open ended nature of a health insurance contract, the contract periods to which future premium revenue will arise, nor the expected pattern of the incidence of risk under the insurance contracts to which the costs relate. For these reasons the Group believes the currently adopted treatment is more appropriate. ii) nib New Zealand The Group pays commissions to retail brokers on signing up new members to the business. The majority of these commissions are trailing commissions paid to retail brokers over the contract period of one year. These are written off over the life of the contract, being one year. Consistent with the Australian Residents Health Insurance business, the Group does not capitalise the indirect administration costs associated with acquiring new members due to the difficulty in identifying and associating those indirect costs with acquiring particular insurance contracts. In addition to the above, a small remaining balance of upfront commissions are written off over the expected life of the policyholder. 14. ASSETS CLASSIFIED AS HELD FOR SALE Non-current assets held for sale Land and buildings 2016 $000 2015 $000 – – 38,726 38,726 In May 2015, the Directors of the Group decided to sell and leaseback the freehold land and buildings at 22 Honeysuckle Drive, Newcastle. The sale was completed in February 2016 and the portion of the resulting profit in relation to the leaseback is deferred and recognised over the term being 15 years. 75 annual report 201615. PROPERTY, PLANT AND EQUIPMENT At 1 July 2014 Cost Accumulated depreciation and impairment Net book amount Year ended 30 June 2015 Opening net book amount Additions Revaluations Assets included in a disposal group classified as held for sale and other disposals Transfers Depreciation charge for the year Exchange differences Closing net book amount At 30 June 2015 Cost Accumulated depreciation and impairment Net book amount Year ended 30 June 2016 Opening net book amount Additions Acquisition of subsidiary Revaluations Assets included in a disposal group classified as held for sale and other disposals Depreciation charge for the year Exchange differences Closing net book amount At 30 June 2016 Cost Accumulated amortisation and impairment Net book amount Land and Buildings $000 Plant and Equipment $000 Leasehold Improvements $000 Note Total $000 41,180 (593) 40,587 40,587 – 5,539 (38,726) (4,504) (1,081) – 1,815 1,863 (48) 1,815 1,815 – – 117 – (24) – 1,908 1,910 (2) 1,908 11,944 (6,126) 5,818 5,818 2,171 – (120) – (2,174) (86) 5,609 3,992 (2,430) 1,562 1,562 1,636 – – 4,504 (659) (9) 7,034 13,672 (8,063) 5,609 10,971 (3,937) 7,034 5,609 2,136 316 – (29) (2,613) 146 5,565 7,034 1,417 685 – (15) (1,179) 71 8,013 57,116 (9,149) 47,967 47,967 3,807 5,539 (38,846) – (3,914) (95) 14,458 26,506 (12,048) 14,458 14,458 3,553 1,001 117 (44) (3,816) 217 15,486 17,409 (11,844) 5,565 12,346 (4,333) 8,013 31,665 (16,179) 15,486 34 76 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016a) Valuations of land and buildings The valuation basis of land and buildings is fair value being the amounts for which the properties could be exchanged between willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition. Freehold land and buildings were independently valued by a member of the Australian Property Institute as at 30 June 2016. It is the opinion of the Directors that this valuation represents the fair value of the property at 30 June 2016. Carrying amounts that would have been recognised if land and buildings were stated at cost If freehold land and buildings were stated at cost on an historical cost basis, the amounts would be as follows: Cost Accumulated depreciation Net book amount 2016 $000 1,624 (611) 1,013 2015 $000 1,354 (579) 775 b) Recognition and measurement Land and buildings (except for investment properties) are shown at fair value, based on periodic, but at least triennial, valuations by external independent valuers, less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of a replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Increases in the carrying amounts arising on the revaluation of land and buildings are credited, net of tax, to other reserves in the shareholders’ equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first charged against the revaluation reserves directly in equity to the extent of the remaining reserve attributable to the asset; all other decreases are charged to profit or loss. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: – Buildings 25 to 40 years – Plant and equipment 3 to 20 years – Leasehold improvements 3 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 16(a)(v)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer the amounts included in other reserves in respect of those assets to retained earnings. 77 annual report 2016 16. INTANGIBLE ASSETS Note Goodwill $000 Software $000 Brands and Trademarks $000 Customer Contracts $000 Total $000 At 1 July 2014 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2015 Opening net book amount Additions Amortisation charge for the year Impairment charge Exchange differences Closing net book amount At 30 June 2015 Cost Accumulated amortisation and impairment Net book amount Year ended 30 June 2016 Opening net book amount Additions Acquisition of business 34 Amortisation charge for the year Exchange differences Closing net book amount At 30 June 2016 Cost Accumulated amortisation and impairment Net book amount a) Recognition and measurement 56,626 – 56,626 56,626 – – (1,423) (1,206) 53,997 55,420 (1,423) 53,997 53,997 – 72,123 – 2,503 128,623 128,623 – 128,623 6,832 (2,208) 4,624 24,667 (6,267) 18,400 131,463 (36,285) 95,178 43,338 (27,810) 15,528 15,528 7,175 (5,680) – (224) 4,624 18,400 – (701) – (14) – (2,278) – (648) 16,799 3,909 15,474 23,793 (8,319) 15,474 15,474 – 21,153 (4,785) 1,791 33,633 50,201 (33,402) 16,799 16,799 12,595 9,488 (8,989) 376 30,269 68,953 (38,684) 30,269 6,720 (2,811) 3,909 3,909 25 21,808 (839) – 24,903 28,897 (3,994) 24,903 47,221 (13,588) 33,633 273,694 (56,266) 217,428 95,178 7,175 (8,659) (1,423) (2,092) 90,179 136,134 (45,955) 90,179 90,179 12,620 124,572 (14,613) 4,670 217,428 i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, and is carried at cost less accumulated impairment losses. ii) Software Costs incurred in developing products or systems and costs incurred in acquiring software and licences that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software. Costs capitalised include external direct costs of materials and service and direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straight-line basis over periods generally ranging from two and a half years to five years. 78 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016iii) Brands and trademarks Brands and trademarks acquired with IMAN Australian Health Plans Pty Ltd have a definite useful life of five years and are carried at cost less accumulated amortisation. Brands and trademarks acquired with nib nz limited (formerly TOWER Medical Insurance Limited) in November 2012 have a useful life of two years and are carried at their fair value at the date of acquisition less accumulated amortisation. Brands and trademarks acquired with World Nomads Group in July 2015 have an indefinite useful life and are carried at fair value at the date of acquisition. iv) Customer contracts Customer contracts acquired as part of a business combination are recognised separately from goodwill. The customer contracts are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which is approximately four years for IMAN Australian Health Plans Pty Ltd, 10 years for nib nz limited and approximately 2.5 years for World Nomads Group. v) Impairment Goodwill and intangible assets that have an indefinite useful life and are not subject to amortisation are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. b) Impairment tests for goodwill and indefinite life intangibles Indefinite life intangibles such as brands and trademarks are allocated to a cash generating unit (CGU) which may be at a level lower than operating segments. Goodwill is allocated at an operating segment level to a CGU or group of CGUs. Goodwill At 30 June 2016 At 30 June 2015 Brands and trademarks At 30 June 2016 At 30 June 2015 Australian Residents Health Insurance Australia $000 International Workers Health Insurance Australia $000 New Zealand Residents Health Insurance New Zealand $000 World Nomads Group Australia $000 Total $000 7,067 7,067 18,380 18,380 World Nomads $000 12,715 – 41,964 28,550 Travel Insurance Direct $000 6,193 – 61,212 – 128,623 53,997 Suresave $000 Total $000 2,888 21,796 – – The recoverable amount of a CGU is determined based on a value-in-use calculation. The value-in-use calculation uses cash flow projections based on financial budgets and forecast forward projections approved by management covering a three-year period. The recoverable amount exceeds the carrying value of the goodwill or indefinite life intangibles. 79 annual report 2016 16. INTANGIBLE ASSETS continued c) Key assumptions used for value-in-use calculations The assumptions used for the cash flow projections for the first three years are in line with the current Board approved budget and forecast forward projections. Key assumptions include policyholder growth, claims ratio and the discount factor. Policyholder growth is calculated by forecasting the number of sales each month based on budgeted advertising and promotions spend, less the number of expected lapses each month. Claims ratios are targeted that generate price increases that maintain price competitiveness, cover expected increases in claims costs, do not adversely affect the funds capital adequacy position and enable funding of future business growth. Cash flows beyond the three-year period are extrapolated in to perpetuity assuming a growth factor of 3.0%. The Group has applied a post-tax discount rate to discount the forecast future attributable post tax cash flows. The following table sets out the key assumptions for those CGUs that have significant goodwill allocated to them: Goodwill Australian Residents Health Insurance International Workers Health Insurance New Zealand Residents Health Insurance Policyholder growth Claims ratio Long term growth rate Pre-tax discount rate 2016 % 6.2 12.9 10.9 2015 % 5.2 11.7 5.9 2016 % 85.0 32.2 63.9 2015 % 86.2 34.6 63.9 2016 % 3.0 3.0 3.0 2015 % 3.0 3.0 3.0 2016 % 11.0 11.0 15.0 2015 % 14.0 14.0 13.9 World Nomads Group Gross written premium growth rate 2016 % 11.0 2015 % N/A Long term growth rate Pre-tax discount rate 2016 % 3.0 2015 % N/A 2016 % 11.0 2015 % N/A The following table sets out the key assumptions for those CGUs that have significant indefinite life intangibles allocated to them: Brandnames and trademarks WorldNomads.com Travel Insurance Direct Suresave Gross written premium growth rate Royalty Rate Long term growth rate Pre-tax discount rate 2016 % 16.5 6.4 5.1 2015 % N/A N/A N/A 2016 % 2.5 2.0 1.5 2015 % N/A N/A N/A 2016 % 3.0 3.0 3.0 2015 % N/A N/A N/A 2016 % 11.0 11.0 11.0 2015 % N/A N/A N/A These assumptions have been used for analysis of each CGU within an operating segment. Management determined policyholder growth and claims ratios based on past performance and its expectations for the future. d) Significant estimate: Impact of possible changes in key assumptions In both 2016 and 2015 there were no reasonably possible changes in any of the key assumptions that would have resulted in an impairment write-down of goodwill in any CGU. nib Options goodwill of $1.423 million was fully written down in FY15 due to a change in the business model. 80 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201617. PAYABLES Current Outwards reinsurance expense liability – premiums payable to reinsurers Trade creditors Other payables RESA payable1 Annual leave payable 2016 $000 2015 $000 332 12,519 77,835 45,378 5,225 348 6,389 66,063 47,920 4,182 141,289 124,902 1. Risk Equalisation Special Account (RESA) levy, formerly RETF (Risk Equalisation Trust Fund) levy represents expenses incurred under RESA arrangements which are provided for within the legislation to support the principle of community rating. Annual leave payable is accrued annual leave. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not to be expected to be taken within the next 12 months. Annual leave obligation expected to be settled after 12 months 2016 $000 412 2015 $000 434 a) Recognition and measurement These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. These amounts are unsecured and are usually paid within 30 days of recognition. i) Risk equalisation special account levy The Risk Equalisation Special Account Levy is accrued based on the industry survey of eligible paid claims to be submitted to APRA (previously PHIAC). If a Private Health insurer notifies APRA of a material variation in paid claims which can be quantified, the Group adjusts the risk equalisation expense. 18. BORROWINGS Current Bank overdraft Non-current Bank loans (secured) 2016 $000 – – 2015 $000 1,390 1,390 151,867 151,867 62,501 62,501 The bank overdraft comprises the closing positive balance of the bank account, adjusted for unpresented cheques and outstanding deposits. The Group has a line-of-credit facility for corporate credit cards issued to nib employees for a total of $2.9 million. Outstanding amounts as at 30 June 2016 are included in Current Liabilities – Payables under Trade Creditors. 81 annual report 201618. BORROWINGS continued Movements in the bank loans (secured) are as follows: Balance at beginning of period Proceeds from borrowings Borrowing expenses Amortisation of borrowing expenses Exchange differences Balance at end of period 2016 $000 2015 $000 62,501 85,000 (18) 30 4,354 151,867 65,081 – – 59 (2,639) 62,501 a) Recognition and measurement Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as non-current liabilities if the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. b) Secured liabilities During the year, nib holdings limited established a $50 million variable rate loan facility with NAB and drew down $35 million of the existing $50 million loan facility with ANZ. Both loans relate to the acquisition of World Nomads Group with maturity and repayment being 18 December 2017. The covenants on these loan facilities are the same as the existing covenants on the NZD$70 million loan detailed below. Both facilities are variable rate Australian denominated loans which are carried at amortised cost. nib nz holdings limited, a wholly owned subsidiary of nib holdings limited, has an existing NZ$70 million variable rate term loan facility in relation to the acquisition of nib nz limited with maturity and repayment at the end of three years being 18 December 2017. The bank loan is secured by the shares in nib nz holdings limited and a negative pledge that imposes the following covenants on the Group. The negative pledge states that the Group will ensure that the following financial ratios are met: i. The Group Gearing Ratio will not be more than 35% ii. The Group Interest Cover Ratio will not be less than 5:1. As at 30 June 2016 the Group Gearing Ratio was 28.1% and the Group Interest Ratio Cover Ratio was 27:1. nib holdings limited has provided a guarantee and indemnity to the ANZ Bank New Zealand on behalf of nib nz holdings limited in respect of the NZD$70 million term loan facility. nib holdings limited has subordinated any amounts owing to it from nib nz holdings limited and nib nz limited in favour of all other creditors of these companies. c) Available debt facility nib holdings limited has a AUD$50 million variable rate loan facility with ANZ of which AUD$35 million was drawn down on 17 August 2015 with $15 million remaining in the facility as at 30 June 2016. d) Risk exposure Information on the sensitivity of the Group’s profit and equity to interest rate risk on borrowings is provided in Note 3. 82 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201619. OUTSTANDING CLAIMS LIABILITY Outstanding claims – central estimate of the expected future payment for claims incurred Risk margin Administration component Gross outstanding claims liability Outstanding claims – expected payment to the RESA1 in relation to the central estimate Risk margin Net outstanding claims liability 2016 $000 2015 $000 90,526 4,766 1,440 96,732 14,802 645 112,179 78,565 3,872 1,214 83,651 12,940 556 97,147 1. Risk Equalisation Special Account (RESA) Levy formerly REFT (Risk Equalisation Trust Fund) levy represents expenses incurred under RESA arrangements which are provided for within the legislation to support the principle of community rating. Movements in the gross outstanding claims are as follows: Gross outstanding claims at beginning of period Risk margin Administration component Central estimate at beginning of period Change in claims incurred for the prior year Claims paid in respect of the prior year Claims incurred during the period (expected) Claims paid during the period Acquisition of business Effect of changes in foreign exchange rates Central estimate at end of period Risk margin Administration component Gross outstanding claims at end of period Note 2016 $000 2015 $000 83,651 (3,872) (1,214) 78,565 388 (77,854) 79,319 (3,408) (1,375) 74,536 (5,559) (68,496) 1,265,429 1,146,524 (1,177,994) (1,068,031) 1,147 845 90,526 4,766 1,440 96,732 – (409) 78,565 3,872 1,214 83,651 34 a) Actuarial methods and critical accounting judgements and estimates Provision is made at the period end for the liability for outstanding claims which is measured as the central estimate of the expected payments against claims incurred but not settled at the reporting date under private health insurance contracts issued by the Group. The expected future payments include those in relation to claims reported but not yet paid and claims incurred but not yet reported. This ‘central estimate’ of outstanding claims is an estimate which is intended to contain no intentional over or under estimation. For this reason the inherent uncertainty in the central estimate must also be considered and a risk margin is added. The estimated cost of claims includes allowances for Risk Equalisation Special Account (RESA) consequences and claims handling expense. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. In calculating the estimated cost of unpaid claims the Group uses estimation techniques based upon statistical analysis of historical experience. Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims, including changes in the Group’s processes which might accelerate or slow down the development and/or recording of paid or incurred claims, compared with the statistics from previous periods. The calculation is determined taking into account one month of actual post balance date claims. The risk margin is based on an analysis of the past experience of the Group. This analysis examines the volatility of past payments that is not explained by the model adopted to determine the central estimate. This past volatility is assumed to be indicative of the future volatility. The central estimates are calculated gross of any risk equalisation recoveries. A separate estimate and risk margin is made of the amounts that will be recoverable from or payable to the RESA based upon the gross provision. 83 annual report 201619. OUTSTANDING CLAIMS LIABILITY continued a) Actuarial methods and critical accounting judgements and estimates continued The outstanding claims estimate for Australian segments is derived based on three valuation classes, namely hospital and prostheses services combined, medical services, and general treatment. For the New Zealand segment the outstanding claims estimate is derived based on two valuation classes, surgical and medical. This analysis is supplemented by more granular analysis within classes as appropriate. In calculating the estimated cost of unpaid claims for Australian Residents Health Insurance and New Zealand Health Insurance, two methods are used. For service months April 2016 and earlier for hospital and medical, and for all months for general treatment, a chain ladder method is used; this assumes that the development pattern of the current claims will be consistent with historical experience. For hospital and medical, for the service months of May 2016 and June 2016 the Bornhuetter-Ferguson method is given some weight, which progressively blends payment experience and prior forecasts of incurred costs. For International Workers Health Insurance and International Students Health Insurance a chain ladder method is used for all service months for the valuation of the cost of unpaid claims. As claims for health funds are generally settled within one year, no discounting of claims is usually applied as the difference between the undiscounted value of claims payments and the present value of claims payments is not likely to be material. Accordingly, reasonable changes in assumptions would not have a material impact on the outstanding claims balance. b) Actuarial assumptions The following assumptions have been made in determining the outstanding claims liability for claims incurred 12 months to the following financial years: 2016 2015 Australian Residents Health Insurance Assumed proportion paid to date Expense rate Discount rate Risk margin Risk equalisation rate Risk margin for risk equalisation International Students Health Insurance Assumed proportion paid to date Expense rate Discount rate Risk margin International Workers Health Insurance Assumed proportion paid to date Expense rate Discount rate Risk margin NZ Health Insurance Assumed proportion paid to date Expense rate Discount rate Risk margin Hospital % 92.2% 1.40% 0.0% 3.9% 23.5% 4.4% 86.4% 2.0% 0.0% 24.8% 79.1% 5.0% 0.0% 18.5% Surgical % 87.5% 2.0% 0.0% 5.8% Medical % 90.8% 1.40% 0.0% 3.9% 23.5% 4.4% 92.1% 2.0% 0.0% 24.8% 83.2% 5.0% 0.0% 18.5% Medical % 79.9% 2.0% 0.0% 5.8% General % 97.7% 1.40% 0.0% 3.9% 0.0% 0.0% 99.8% 2.0% 0.0% 24.8% 91.7% 5.0% 0.0% 18.5% Hospital % 92.6% 1.4% 0.0% 2.9% 24.1% 4.3% 69.1% 2.0% 0.0% 19.7% 80.2% 4.0% 0.0% 23.4% Surgical % 89.3% 1.8% 0.0% 8.4% Medical % 90.8% 1.4% 0.0% 2.9% 24.1% 4.3% 75.8% 2.0% 0.0% 19.7% 80.8% 4.0% 0.0% 23.4% Medical % 79.7% 1.8% 0.0% 8.4% General % 97.2% 1.4% 0.0% 2.9% 0.0% 0.0% 96.0% 2.0% 0.0% 19.7% 89.0% 4.0% 0.0% 23.4% The risk margin of 3.9% for Australian Residents Health Insurance (June 2015: 2.9%), International Students Health Insurance 24.8% (June 2015: 19.7%), 18.5% for International Workers Health Insurance (June 2015: 23.4%) and New Zealand Health Insurance 5.8% (June 2015: 8.4%) of the underlying liability has been estimated to equate to a probability of adequacy of 95% for the Group. The risk margin within each territory allows for diversification across the entity. The benefit of diversification across the Group is again allocated to the Australian Residents Health Insurance segment. 84 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016c) Process used to determine assumptions A description of the processes used to determine these assumptions is provided below: i) Chain Ladder Development Factors Chain ladder development factors were selected based on observations of historical claim payment experience. Particular attention was given to the development of the most recent 12 months. ii) Bornhuetter-Ferguson Unpaid Factors Bornhuetter-Ferguson Unpaid Factors were selected based on historical patterns of payment (by development) to ultimate incurred claims. That is, the proportion of ultimate incurred claims to be paid by development month is selected based on observations from the historical development. This “unpaid proportion” is then multiplied by a prior forecast of incurred claims for each service month to determine the outstanding claims estimate. iii) Expense rate Claims handling expenses were calculated by reference to past experience of total claims handling costs as a percentage of total past payments. iv) Discount rate As claims for health funds are generally settled within one year, no discounting of claims is applied as the difference between the undiscounted value of claims payments and the present value of claims payments is not likely to be material. v) Risk equalisation allowance In simplified terms, each organisation is required to contribute to the risk equalisation pool or is paid from the pool to equalise their hospital claims exposure to policyholders aged over 55 years of age and in respect of high cost claims. This is the allowance made in respect of the claims incurred but not yet paid. vi) Risk margin The risk margin has been based on an analysis of the past experience of the Group. This analysis examined the volatility of past payments that has not been explained by the model adopted to determine the central estimate. This past volatility has been assumed to be indicative of the future volatility and has been set at a level estimated to equate to a probability of adequacy of 95% at a consolidated level (June 2015: 95%). d) Sensitivity analysis i) Summary The Group conducts sensitivity analysis to quantify the exposure to risk of changes in the key underlying variables. The valuations included in the reported results are calculated using certain assumptions about these variables as disclosed above. The movement in any key variable will impact the performance and equity of the Group. The tables below describe how a change in each assumption will affect the insurance liabilities: Variable Impact of movement in variable Chain Ladder Development Factors An increase or decrease in the chain ladder factors would lead to a higher or lower projection of the ultimate liability and a corresponding increase or decrease in claims expense respectively. Bornhuetter-Ferguson Unpaid Factors An increase or decrease in the level of unpaid would lead to a higher or lower projection of the ultimate liability and a corresponding increase or decrease on claims expense respectively. Expense rate Risk equalisation Risk margin An estimate for the internal costs of handling claims is included in the outstanding claims liability. An increase or decrease in the expense rate assumption would have a corresponding impact on claims expense. An estimate for the risk equalisation cost is included in the outstanding claims liability. An increase or decrease in the risk equalisation allowance would have a corresponding impact on RESA Levy. An estimate of the amount of uncertainty in the determination of the central estimate. An increase or decrease in the risk margin would have a corresponding impact on claims expense. 85 annual report 201619. OUTSTANDING CLAIMS LIABILITY continued d) Sensitivity analysis continued ii) Impact of key variables Recognised amounts in the financial statements attributable to owners of nib holdings limited Variable Movement in variable Adjustments Chain Ladder Development Factors Bornhuetter-Ferguson Unpaid Factors Expense rate Risk equalisation allowance Risk margin +0.5% –0.5% +2.0% –2.0% +1.0% –1.0% +2.5% –2.5% +1.0% –1.0% $000 (8,502) 8,547 (1,488) 1,533 (672) 672 (1,151) 1,151 (750) 750 20. UNEARNED PREMIUM LIABILITY AND UNEXPIRED RISK LIABILITY a) Unearned premium liability Current Unearned premium liability Non-current Unearned premium liability Profit after tax 2016 $000 92,850 Adjusted amounts $000 84,348 101,397 91,362 94,383 92,178 93,522 91,699 94,001 92,100 93,600 Adjustments $000 (8,502) 8,547 (1,488) 1,533 (672) 672 (1,151) 1,151 (750) 750 Equity 2016 $000 387,651 Adjusted amounts $000 379,149 396,198 386,163 389,184 386,979 388,323 386,500 388,802 386,901 388,401 2016 $000 2015 $000 151,941 151,941 126,922 126,922 24,326 24,326 16,306 16,306 The unearned premium liability reflects premiums paid in advance by customers, which averages between one and two months of prepayments. Movements in the unearned premium liability are as follows: Unearned premium liability as at 1 July Acquisition of business Deferral of premiums on contracts written in the period Earning of premiums written in previous periods Unearned premium liability as at 30 June 86 Note 34 2016 $000 2015 $000 143,228 114,202 2,182 157,779 (126,922) 176,267 – 133,304 (104,278) 143,228 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016b) Unexpired risk liability No deficiency was identified as at 30 June 2016 and 2015 that resulted in an unexpired risk liability needing to be recognised. c) Critical accounting judgements and estimates A liability adequacy test is required to be performed for the period over which the insurer is “on risk” in respects of premiums paid in advance. At each reporting date, the adequacy of the unearned premium liability is assessed by considering current estimates of all expected future cash flows relating to future claims arising from the rights and obligations created. If the sum of the present value of the expected future cash flows relating to future claims plus the additional risk margin to reflect the inherent uncertainty in the central estimate exceeds the unearned premium liability, less related intangible assets and related deferred acquisition costs, then the unearned premium is deemed to be deficient, with the deficiency being recorded in the income statement and an unexpired risk liability created. The Group applies a risk margin to achieve the same probability of sufficiency for future claims as is achieved by the estimate of the outstanding claims liability, refer to Note 19(b). No deficiency was identified as at 30 June 2016 and 2015 that resulted in an unexpired risk liability needing to be recognised. This test is also extended beyond recognised unearned premium liability to include premiums renewable until the next repricing review, usually 1 April each year. 21. PREMIUM PAYBACK LIABILITY Current Premium payback liability Non-current Premium payback liability 2016 $000 2015 $000 10,261 10,261 10,459 10,459 17,100 17,100 30,429 30,429 Premium payback early settlement offer At their policy renewal, eligible premium payback customers have been offered a graduated early settlement based on the date they would become eligible for the full premium payback benefit, contingent on their claims history. Customers received the settlement offer around two months before their policy renewal. The first settlement offers were made in mid-June 2015 for August 2015 policy renewals. The last settlement offers were made in May 2016 for July 2016 policy renewals, the offer expires on 31 August 2016. 100% of the available offers have been included in the current portion of the premium payback liability on the balance sheet. As customers may or may not accept the available premium payback settlement offer and recognising that 100% acceptance is unlikely, it’s estimated for policyholders that accept the offer, $1.8 million of total premium payback liability could be settled within the next 2 months. This is in addition to $0.6 million of the premium payback liability that is expected to be settled within the next 2 months in the normal course of business. 87 annual report 201621. PREMIUM PAYBACK LIABILITY continued Movements in the premium payback liability are as follows: Gross premium payback liability at beginning of period Adjustment to ensure reserve exceeds current payout on early lapse Value of payments currently being processed Risk margin Central estimate at beginning of period Funding/new accrued Unwind discount rate Interest rate movement impact Premium payback payments Others Effect of changes in foreign exchange rates Central estimate at end of year/period Adjustment to ensure reserve exceeds current payout on early lapse Value of payments currently being processed Risk margin Total premium payback liability as at 30 June 2016 $000 2015 $000 40,888 (565) (1,000) (1,351) 37,972 2,722 1,044 1,984 (20,799) 624 2,036 25,583 34 1,025 719 40,750 (1,733) (1,033) (1,156) 36,828 6,581 1,624 1,953 (8,222) 811 (1,603) 37,972 565 1,000 1,351 27,361 40,888 a) Risk exposure Information about the Group’s exposure to interest rate risk in relation to premium payback liability is provided in Note 3(c)(i). b) Actuarial methods and critical accounting judgements and estimates The premium payback liability represents the accrued amount of premium expected to be repaid to certain New Zealand health insurance policyholders. A number of nib nz limited’s health insurance policies have a benefit whereby policyholders receive a proportion of premiums paid less claims received over the life of their policy, “premium payback”, if certain conditions are met. This liability represents a long term health insurance contract liability. The liability was determined based on the discounted value of accumulated excess of premiums over claims at an individual policy level, adjusted for GST recoveries and expected future lapses. A risk margin at 95% probability of sufficiency was estimated by assuming there are no future lapses. Most of the premium payback reserve is held in respect of a group of customers where the historical lapse rate is already very low. The following assumptions have been made in determining the premium payback liability: Lapse rate until 3 years from premium payback date Lapse rate within 3 years of premium payback date Expense rate Discount rate for succeeding and following year Risk margin The risk margin has been estimated to equate to a 95% probability of adequacy (2015: 95%). 2016 2015 2.0% – 10.0% 2.0% – 10.0% 0.0% – 1.0% 0.0% – 1.0% 0.0% 0.0% 2.0% 2.8% – 3.1% 2.7% 3.1% 88 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016c) Sensitivity analysis i) Summary Variable Lapse rate Discount rate Risk margin ii) Impact of key variables Impact of movement in variable Rate used in calculating the discounted provision to allow for expected lapses, based on historical experience. An increase or decrease in the lapse assumption would have an inverse impact on the premium payback liability and risk margin. Rate used in calculating the discounted provision to allow for expected investment income, based on the current yields on New Zealand government debt (risk free rates). An increase or decrease in the discount rate assumption would have an inverse impact on the premium payback liability. An estimate of the amount of uncertainty in the determination of the central estimate. An increase or decrease in the risk margin would have a corresponding impact on the premium payback liability. Recognised amounts in the financial statements attributable to owners of nib holdings limited Variable Lapse rate Discount rate Risk margin Profit after tax 2016 $000 92,850 Adjusted amounts $000 93,435 92,219 93,769 91,805 92,661 93,039 Adjustments $000 585 (631) 919 (1,045) (189) 189 Equity 2016 $000 387,651 Adjusted amounts $000 388,236 387,020 388,570 386,606 387,462 387,840 Movement in variable Adjustments +1.0% -1.0% +1.0% -1.0% +1.0% -1.0% $000 585 (631) 919 (1,045) (189) 189 d) Unexpired risk liability A liability adequacy test was performed allowing for the expected cash flows of each policy over the entire product life. The future cash flows include: • Reserves held at 30 June 2016 including the risk margin; • Expected future payments for claims, policy paybacks and management expenses; and • Expected future revenue from premiums and investment income. No deficiency was identified at 30 June 2016 (2015: nil) that resulted in an unexpired risk liability needing to be recognised. 89 annual report 201622. PROVISION FOR EMPLOYEE ENTITLEMENTS Current Long service leave Termination benefits Retirement benefits Non-Current Long service leave 2016 $000 2015 $000 2,544 246 91 2,881 2,290 2,290 2,557 413 86 3,056 1,268 1,268 Amounts not expected to be settled within the next 12 months The current provision for long service leave and retirement benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of the provision or require payment within the next 12 months. The following amounts reflect leave that is not to be expected to be taken or paid within the next 12 months. Long service leave obligation expected to be settled after 12 months Retirement benefit obligation expected to be settled after 12 months a) Recognition and measurement 2016 $000 2,063 – 2,063 2015 $000 2,297 86 2,383 i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave are recognised in payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. The portion not expected to be settled within 12 months is discounted based on expected settlement dates. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rate paid or payable. ii) Other long-term employee benefit obligations The liability for long service leave is the amount of the future benefit that employees have earned in return for their service in the current and prior periods. The liability is calculated using expected future increases in wage and salary rates and expected settlement dates, and is discounted using G100 treasury discount rates at the balance sheet date which have the maturity dates approximating to the terms of nib’s obligations. iii) Bonus plans A liability for employee benefits in the form of bonus plans is recognised in other creditors when at least one of the following conditions is met: • there are formal terms in the plan for determining the amount of the benefit, or • the amounts to be paid are determined before the time of completion of the financial report, or • past practice gives clear evidence of the amount of the obligation. Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. 90 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016iv) Retirement benefit obligations Directors’ retirement benefits are provided for in the financial statements. Non-Executive Directors of nib health funds limited employed before 24 November 2005 are entitled to a lump sum retirement benefit based on number of years’ service. Non-Executive Directors commencing after 24 November 2005 are not entitled to retirement benefits. v) Termination benefits Liabilities for termination benefits, not in connection with the acquisition of an entity or operation, are recognised when a detailed plan for the terminations has been developed and a valid expectation has been raised with those employees affected that the terminations will be carried out without possibility of withdrawal. The liabilities for termination benefits are recognised as current provisions, as liabilities for termination benefits are expected to be settled within 12 months of reporting date. 23. OTHER LIABILITIES Current Deferred profit on sale and leaseback of head office building Non-Current Deferred profit on sale and leaseback of head office building 2016 $000 408 408 5,573 5,573 2015 $000 – – – – a) Recognition and measurement The deferred profit relates to the sale and leaseback of the head office building at 22 Honeysuckle Drive, Newcastle in February 2016. The excess of the proceeds received over fair value relating to the leaseback portion of the building was deferred and is being amortised over the lease term of 15 years. In FY16, profit on sale of head office building of $1,416,224 and deferred profit on sale and leaseback of head office building of $135,931 was recognised in profit or loss relating to this transaction. The subsequent leasing agreement is treated as an operating lease. The non-current part of the deferred profit will be amortised between 2016 and the end of the lease term. 24. CONTRIBUTED EQUITY a) Share capital Ordinary shares Fully paid Other equity securities Treasury shares Total contributed equity b) Movements in share capital Date Details 1 July 2014 Opening balance 30 June 2015 Balance 1 July 2015 Opening balance 30 June 2016 Balance 2016 $000 2015 $000 28,106 28,106 (1,581) (105) 26,525 28,001 No. of shares Price $ 439,004,182 439,004,182 439,004,182 439,004,182 $000 28,106 28,106 28,106 28,106 91 annual report 201624. CONTRIBUTED EQUITY continued c) Treasury shares Treasury shares are shares in nib holdings limited that are held by the nib Holdings Ltd Share Ownership Plan Trust (trust) for the purpose of issuing shares under the Group’s Executive management Short-Term Incentive and Long-Term Incentive share plans. See Note 37 for more information. Date Details 1 July 2014 Opening balance Sep 2014 Employee share issue – LTIP Sep 2014 Employee share issue – STI Sep 2014 Acquisition of shares by the Trust 30 June 2015 Balance 1 July 2015 Opening balance Aug 2015 Acquisition of shares by the Trust Sep 2015 Employee share issue – LTIP Sep 2015 Employee share issue – STI Apr 2016 Acquisition of shares by the Trust May 2016 Acquisition of shares by the Trust Jun 2016 Acquisition of shares by the Trust 30 June 2016 Balance d) Recognition and measurement i) Ordinary shares Ordinary shares are classified as equity. No. of shares 301,187 (232,215) (77,576) 40,000 31,396 31,396 430,000 (196,154) (246,173) 118,482 116,123 116,722 370,396 $000 917 (745) (204) 137 105 105 1,382 (631) (795) 499 513 508 1,581 Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, for example as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental cost (net of income taxes) is recognised directly in equity. Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. ii) Employee Share Trust The Group has formed a trust to administer the Group’s executive management Short-Term Incentive and Long Term-Incentive share plans. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. Shares held by the nib Holdings Ltd Share Ownership Plan Trust are disclosed as treasury shares and deducted from contributed equity. 25. RETAINED PROFITS Balance at the beginning of the year Net profit Transfer from revaluation reserve on sale of land and buildings, net of tax Dividends Balance at the end of the financial year 2016 $000 2015 $000 307,038 92,850 7,911 (51,581) 356,218 320,132 75,798 – (88,892) 307,038 92 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201626. RESERVES Revaluation surplus – property, plant and equipment Share-based payments Share-based payments exercised Foreign currency translation Movements in reserves Revaluation surplus – property, plant and equipment Balance at the beginning of the year Property revaluation – gross Transfer to retained profits on sale of land and buildings – gross Deferred tax Balance at the end of the financial year Share-based payments Balance at the beginning of the year Performance right expense Transfer to share-based payments exercised reserve on exercise of performance rights Balance at the end of the financial year Share-based payments exercised Balance at the beginning of the year Transfer from share-based payments reserve on exercise of performance rights Issue of shares held by nib Holdings Ltd Share Ownership Plan Trust to employees Balance at the end of the financial year Foreign currency translation Balance at the beginning of the year Currency translation differences arising during the year – gross Deferred tax Balance at the end of the financial year a) Nature and purpose of reserves 2016 $000 1,081 1,683 (2,347) 4,491 4,908 2015 $000 8,910 811 (1,803) 1,897 9,815 Notes 2016 $000 2015 $000 8,910 117 (11,301) 3,355 1,081 811 959 (87) 1,683 (1,803) 87 (631) (2,347) 1,897 3,299 (705) 4,491 5,033 5,539 – (1,662) 8,910 524 368 (81) 811 (1,139) 81 (745) (1,803) 3,275 (1,434) 56 1,897 8(a)(iii) 8(a)(iii) Revaluation surplus – property, plant and equipment The property, plant and equipment revaluation surplus is used to record increments and decrements on the revaluation of non- current assets as described in Note 15(b). Share-based payments The share-based payments reserve is used to recognise the fair value of performance rights and bonus share rights issued to employees but not exercised. Share-based payments exercised The share-based payments exercised reserve is used to recognise the difference between fair value of performance rights and bonus share rights accumulated in the share based payments reserve and cost of exercising the rights. 93 annual report 201626. RESERVES continued Foreign currency translation Exchange rate differences arising on translation of foreign controlled entities are recognised in other comprehensive income as described in Note 1(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 27. DIVIDENDS a) Ordinary shares Final dividend for the year ended 30 June 2015 of 6.0 cents per fully paid ordinary share, made up of 6.0 cps ordinary dividend (2014 – 14.75 cents per fully paid ordinary share, made up of 5.75 cps ordinary dividend and 9.0 cps special dividend) paid on 9 October 2015 Fully franked based on tax paid @ 30% 26,339 64,748 Interim dividend for the year ended 30 June 2016 of 5.75 cents per fully paid ordinary share, made up of 5.75 cps ordinary dividend (2015 – 5.5 cents per fully paid ordinary share, made up of 5.5 cps ordinary dividend) paid on 1 April 2016 2016 $000 2015 $000 Fully franked based on tax paid @ 30% Total dividends provided for or paid b) Dividends not recognised at year end In addition to the above dividends, since the end of the year the Directors have recommended the payment of a final dividend of 9.0 cents per fully paid ordinary share (2015–6.0 cents per fully paid ordinary share, made up of 6.0 cps ordinary dividend), fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 7 October 2016 out of retained profits at 30 June 2016, but not recognised as a liability at the end of the year, is 25,242 51,581 24,144 88,892 2016 $000 2015 $000 39,510 26,340 c) Franked dividends The franked portion of the final dividends recommended after 30 June 2016 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2016. Franking credits available for subsequent financial years to equity holders of parent entity based on a tax rate of 30% 2016 $000 2015 $000 36,793 15,711 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: a. Franking credits that will arise from the payment of the amount of the provision for income tax; b. Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and c. Franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. d) Recognition and measurement Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date. 94 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201628. EARNINGS PER SHARE a) Basic earnings per share Profit from continuing operations attributable to the ordinary equity holders of the company Profit from discontinued operations Profit attributable to the ordinary equity holders of the company b) Diluted earnings per share Profit from continuing operations attributable to the ordinary equity holders of the company Profit from discontinued operations Profit attributable to the ordinary equity holders of the company c) Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit from continuing operations Profit attributable to the ordinary equity holders of the company used in calculating basic earnings per share 2016 Cents 21.2 – 21.2 2016 Cents 21.2 – 21.2 2015 Cents 17.3 – 17.3 2015 Cents 17.3 – 17.3 2016 $000 2015 $000 92,850 75,798 92,850 75,798 Diluted earnings per share Profit attributable to the ordinary equity holders of the company used in calculating basic earnings per share Profit attributable to the ordinary equity holders of the company used in calculating diluted earnings per share 92,850 75,798 92,850 75,798 d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 439,004,182 439,004,182 Adjustments for calculation of diluted earnings per share: Performance rights and bonus share rights – – Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 439,004,182 439,004,182 2016 Number 2015 Number e) Recognition and measurement i) Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year. ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 95 annual report 201628. EARNINGS PER SHARE continued f) Information concerning the classification of shares i) Performance rights Performance rights granted to employees under the nib holdings Long-Term Incentive Plan are considered to be potential ordinary shares and are only included in the determination of diluted earnings per share to the extent to which they are dilutive. The performance rights have not been included in the determination of basic earnings per share. Details relating to the performance rights are set out in the Remuneration Report on page 41. The total 2,238,071 performance rights granted (2015 – 2,001,483) are not included in the calculation of diluted earnings per share because they are contingently issuable ordinary shares and conditions were not satisfied at 30 June 2016. These performance rights could potentially dilute basic earnings per share in the future. 29. CAPITAL MANAGEMENT The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group has a number of levers, including adjusting the amount of dividends paid to shareholders, returning capital to shareholders, issuing new shares, selling assets, raising or reducing debt or buying back shares. nib holdings limited The Group through earnings and capital management have achieved a return on equity of 20% or greater for the last three years and continues to target return on equity in the order of 20%. The return on equity as at 30 June 2016 is 25.8% (2015: 23.1%). While improvement to return on equity can be made through increased profitability, it is also important that capital be managed appropriately, therefore, if funds are not required for strategic reasons the Group will consider a range of capital management initiatives. At 30 June 2016 the Group had available capital of $6.8 million above our internal benchmark (after allowing for the payment of a fully franked final ordinary dividend of 9.0 cents per share, totalling $39.5 million, in October 2016). Below is a reconciliation of net assets to available capital as at 30 June 2016 (after allowing for payment of a final dividend): Net assets Less: nib health fund capital required nib nz capital required Capital required looking forward 12 months nib nz intangibles iihi intangibles nib Options intangibles Digital Health Ventures intangibles World Nomads Group intangibles Borrowings Other assets and liabilities Final dividend Available capital (after allowing for payment of final dividend) 96 2016 $m 386.1 (245.7) (89.3) (0.1) (39.5) (22.1) (0.2) (0.7) (94.8) 151.9 0.7 (39.5) 6.8 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016nib health funds limited nib health funds limited, a controlled entity, is required to comply with the Solvency and Capital Adequacy Standards under Schedule 2 and 3 of the Private Health Insurance (Health Benefits Fund Administration) Rules 2007, the Rules are made for the purposes of Part 4-4 of the Private Health Insurance Act 2007. To comply with the Solvency Standard, nib health funds limited: i. must ensure that, at all times, the value of cash must be equal to or greater than a specified cash management amount, plus any solvency supervisory adjustment (Section 4.2 of the Solvency Standard), ii. must have, and comply with, a board endorsed, liquidity management plan designed to ensure compliance with the solvency requirements described above, and set minimum liquidity requirements and management action triggers (Section 4.3 of the Solvency Standard). To comply with the Capital Adequacy Standard, nib health funds limited: i. must ensure that at all times the value of its assets is not less than the amounts calculated under Section 4.2 (a) and (b) of the Capital Adequacy Standard (Capital Adequacy Requirement), ii. must have, and comply with, a written, board endorsed capital management policy. nib health funds limited has a capital management plan which establishes a target for capital held in excess of the regulatory requirement; the aim is to keep a sufficient buffer in line with the Board’s attitude to and tolerance for risk. The internal capital target ensures nib has a minimum level of capital given certain stressed capital scenarios. This currently approximates to 14.0% of total projected premiums for the next 12 months. Any capital in excess of the benchmark, taking a 12-month forward looking view, will be reduced by way of dividend to nib holdings limited. nib health funds limited paid dividends of $12.2 million in September 2015, $18.0 million in December 2015 and $13.4 million in March 2016 to nib holdings limited. The surplus assets over benchmark at 30 June 2016 and 30 June 2015 were as follows: Total Assets nib health funds limited (excluding unclosed business contributions – unearned) Capital Adequacy Requirement Surplus Assets for Capital Adequacy Net Assets nib health funds limited Internal capital target Surplus assets over internal capital target 2016 $000 2015 $000 687,529 456,574 230,955 273,600 245,736 27,864 586,971 389,187 197,784 231,162 226,105 5,057 nib nz limited nib nz limited, a controlled entity, is required to comply with the Solvency Standard for non life insurance business published by the Reserve Bank of New Zealand (RBNZ). The Solvency Standards determine the Minimum Solvency Capital required. A requirement of nib nz limited’s insurance license is that it maintains capital above the Minimum Solvency Capital. The overriding objective underpinning nib nz limited’s capital management approach is to operate with a level of capital judged to be commercially prudent and within the bounds of the Board’s risk appetite which achieves a balance between: • maintaining a buffer above the RBNZ Minimum Solvency Requirement (MSR) for nib nz limited (as defined by the IPSA Solvency Standard for Non-life Insurance Business); • maintaining a level of capital that ensures an appropriate financial strength rating; and • avoiding holding an excessive level of capital, which would otherwise act to reduce returns on capital for the Group. The benchmark capital adequacy coverage ratio is 1.75x plus $NZ10 million. Any capital in excess of the benchmark, taking a 12-month forward looking view, will be reduced by way of dividend to nib nz holdings limited, unless management decide to retain funds for strategic purposes. nib nz limited paid dividends of $NZ12.0 million in June 2016 to nib nz holdings limited. 97 annual report 201629. CAPITAL MANAGEMENT continued The surplus assets over benchmark at 30 June 2016 and 2015 are as follows: Actual Solvency Capital Minimum Solvency Capital Solvency Capital Net assets nib nz limited Capital Adequacy Coverage Ratio Internal benchmark Internal benchmark requirement Surplus/(deficit) assets over internal benchmark 2016 $000 19,539 9,673 9,866 82,354 2.02 2015 $000 28,469 8,284 20,185 59,116 3.44 1.75 + $NZ10m 1.75 + $NZ10m 26,482 (6,943) 23,429 5,040 As part of its role as regulator of New Zealand insurance companies, the Reserve Bank of New Zealand (RBNZ) reviews solvency returns. The RBNZ has recently queried the manner in which certain matters have been dealt with in nib nz limited’s FY15 solvency calculation. At the time of signing the Annual Report, nib nz limited is working with the RBNZ to resolve these queries. While the discussions are not yet completed, nib nz limited has made a change to its solvency calculations regarding the treatment of deferred tax. This change has been reflected in the current and prior year numbers disclosed above. While there is a possibility of further changes following the resolution of the remaining queries, the table above reflects our best estimate at the time of signing the Annual Report. Further changes (if any) are not expected to cause nib nz limited to fall below the RBNZ’s minimum solvency requirements. The change to the treatment of deferred tax has resulted in a drop below nib nz limited’s internal capital target. The internal target will be reviewed following completion of discussions with the RBNZ. 30. COMMITMENTS FOR EXPENDITURE a) Operating lease commitments Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: – not longer than one year – longer than one year and not longer than five years – longer than five years 2016 $000 2015 $000 7,586 23,891 41,972 73,449 3,435 8,498 1,125 13,058 In February 2016, the Group entered into a sale and leaseback agreement for the head office building at 22 Honeysuckle Drive, Newcastle. The term of the lease is 15 years commencing 1 March 2016. b) Capital expenditure commitments Payable: – not longer than one year 98 2016 $000 432 432 2015 $000 481 481 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201631. CONTINGENT LIABILITIES nib holdings limited has provided a guarantee and indemnity to the ANZ Bank New Zealand on behalf of nib nz holdings limited in respect of the NZD$70 million term loan facility. nib holdings limited has given an undertaking to extend financial support to nib options pty limited, Realsurgeons pty limited, Realself pty limited and Digital Health Ventures Pty Limited and by subordinating repayment of debts owed by the entities to nib holdings limited, in favour of all other creditors. This undertaking has been provided as a result of each of these subsidiaries experiencing deficiencies of capital and reserves, and is intended to enable the entities to continue their operations and fulfil all financial obligations now and in the future. The undertaking is provided for a minimum period of twelve months from 19 August 2016, or if earlier, to the date of sale of the entities should this occur. 32. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE Digital Health Ventures On 29 July 2016, nib announced that Bupa and HBF signed a heads of agreement to join nib as investors and participants in expanding the Whitecoat healthcare provider platform. There have not been any other matters or circumstances that have arisen since the end of the financial year that has significantly affected, or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 99 annual report 201633. REMUNERATION OF AUDITORS a) PricewaterhouseCoopers Australia 1. Audit services 2016 $ 2015 $ Audit and review of financial report and other audit work under the Corporations Act 2001 Total remuneration for audit services 465,660 465,660 450,089 450,089 2. Non-audit services Audit-related services Audit of regulatory returns Total remuneration for audit-related services Taxation services Tax compliance services International tax consulting and tax advice on mergers and acquisitions Total remuneration for taxation services Other services Accounting advice and support including one off transactions Review of regulatory returns Total remuneration for other services 56,515 56,515 48,400 48,400 205,574 47,700 253,274 76,220 11,577 87,797 149,966 23,332 173,298 164,545 11,554 176,099 Total remuneration for non-audit services 397,586 397,797 Total remuneration of PricewaterhouseCoopers Australia 863,246 847,886 b) Network firms of PricewaterhouseCoopers Australia 1. Audit services Audit and review of financial report Total remuneration for audit services 2. Non-audit services Audit-related services Audit of regulatory returns Total remuneration for audit-related services Taxation services Tax compliance services Tax consulting services International tax consulting and tax advice on mergers and acquisitions Total remuneration for taxation services Other services Accounting advice and support Total remuneration for other services 146,799 146,799 150,089 150,089 11,193 11,193 10,975 10,975 34,068 4,604 18,415 57,087 27,525 27,525 31,732 15,291 25,127 72,150 – – Total remuneration for non-audit services 95,805 83,125 Total remuneration of network firms of PricewaterhouseCoopers 242,604 233,214 Total auditors’ remuneration 1,105,850 1,081,100 100 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201634. BUSINESS COMBINATION a) Acquisition of World Nomads Group i) Summary of acquisition On 31 July 2015, nib holdings limited acquired 100% of the issued capital of World Nomads Group Pty Limited and its subsidiaries (WNG). WNG is the third-largest distributor of travel insurance in Australia, and specialises in the marketing, sale and distribution of travel insurance policies globally. Details of the purchase consideration are as follows: Purchase consideration Cash Total purchase consideration The fair values of the assets and liabilities recognised as a result of the acquisition are as follows: Cash and cash equivalents Receivables Prepayments Property, plant and equipment Software Brand names Customer contracts Deferred tax assets Payables Current tax liabilities Deferred tax liabilities Provision for employee entitlements Net identifiable assets acquired Add: Goodwill Net assets acquired $000 106,923 106,923 Fair value $000 14,926 4,378 344 1,001 9,488 21,808 3,452 1,547 (8,140) (265) (1,042) (1,786) 45,711 61,212 106,923 The goodwill is attributable to the future profitability of the acquired business. None of the goodwill is deductible for tax purposes. a) Acquisition related costs Total acquisition related costs are $3.2 million, of which $2.6 million has been incurred in the current period and are included in other expenses in profit or loss and in operating cash flows in the statement of cash flows. b) Revenue and profit contribution The acquired business contributed $49.9 million to Group income and $7.6 million to net profit before tax for the period 1 August 2015 to 30 June 2016. If the acquisition had occurred on 1 July 2015, consolidated operating revenue and net profit before tax for the year ended 30 June 2016 are estimated to have been $1,879.5 million and $131.9 million respectively, based on historical WNG management accounts. c) Acquired receivables The fair value of acquired receivables is $4.4 million and is expected to be fully collectable. d) Contingent assets and liabilities Prior to acquisition, WNG had identified a potential miscalculation of stamp duty that may have resulted in an underpayment of the duty they remitted to the relevant State Revenues on behalf of their underwriting partners. Although WNG believe responsibility for stamp duty lies with their underwriting partners, WNG may have an exposure for the potential miscalculation of stamp duty. The extent of this exposure, if any is unknown. WNG has notified its Professional Indemnity insurer. A condition as part of the acquisition is that $3 million is held in escrow to cover the nib holdings group from any potential loss. 101 annual report 201634. BUSINESS COMBINATION continued a) Acquisition of World Nomads Group continued ii) Purchase consideration – cash outflow Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration Less: Cash balances acquired Outflow of cash – investing activities $000 106,923 (14,926) 91,997 b) Acquisition of medical insurance book of OnePath Life (NZ) Limited i) Summary of acquisition On 1 December 2015, nib nz limited (a 100% owned subsidiary) acquired the medical insurance book of OnePath Life (NZ) Limited (OnePath), for $22.5 million. The acquisition will provide the Group with a solid platform for growing the New Zealand private health insurance market and its overall market share. Approximately 19,000 policies covering 43,000 insured persons were acquired. Details of the provisional purchase consideration are as follows: Provisional purchase consideration Cash Total provisional purchase consideration The provisional fair values of the assets and liabilities recognised as a result of the acquisition are as follows: Receivable from OnePath Life (NZ) Limited Customer contracts Deferred tax liabilities Outstanding claims liability Unearned premium liability Net identifiable assets acquired Add: Goodwill Net assets acquired $000 22,509 22,509 Fair value $000 2,182 17,701 (4,956) (1,147) (2,182) 11,598 10,911 22,509 The fair values assigned are currently provisionally determined. The fair value of assets and liabilities acquired may change upon finalisation of the purchase price allocation and alignment with Group accounting policies. The goodwill is attributable to the future profitability of the acquired business. None of the goodwill is deductible for tax purposes. a) Acquisition related costs Total acquisition related costs are $1.0 million of which $0.2 million has been incurred in the current period and are included in other expenses in profit or loss and in operating cash flows in the statement of cash flows. b) Revenue and profit contribution The acquired business contributed $16.1 million to Group revenues and $1.9 million to net profit before tax for the period 1 December 2015 to 30 June 2016. If the acquisition had occurred on 1 July 2015, consolidated operating revenue and net profit before tax for the year ended 30 June 2016 are estimated to have been $1,887.0 million and $133.8 million respectively. 102 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016ii) Provisional purchase consideration – cash outflow Outflow of cash to acquire business, net of cash acquired Cash consideration Less: Cash balances acquired Outflow of cash – investing activities There were no business acquisitions in the year ending 30 June 2015. $000 22,509 – 22,509 c) Recognition and measurement The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination, are with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. 103 annual report 201635. CONTROLLED ENTITIES a) Subsidiaries and trusts The consolidated financial statements incorporate the assets, liabilities and results of the following controlled entities in accordance with the accounting policy described in Note 1(b): Beneficial ownership by Consolidated entity nib holdings limited nib health funds limited nib servicing facilities pty limited nib health care services pty limited nib Global pty limited IMAN Australian Health Plans Pty Limited nib nz holdings limited nib nz limited nib Options pty limited RealSurgeons pty limited RealSelf pty limited nib Options Holdings (Thailand) Co Ltd nib Options (Thailand) Co Ltd Digital Health Ventures Pty Ltd nib Phillipines pty limited World Nomads Group Pty Limited WNG Services Pty Limited World Experiences Assist Pty Limited Suresave Pty Limited Sure-Save.net Pty Ltd SureSave Net Limited Travel Insurance Direct Holdings Pty Limited Travel Insurance Direct Pty Limited Travel Insurance Direct (New Zealand) Limited Cheap Travel Insurance Pty Limited Holiday Travel Insurance Pty Limited SureCan Technology Pty Ltd The World Nomads Group Holdings Pty Ltd World Nomads Pty Ltd World Nomads Inc World Nomads Limited World Nomads (Canada) Ltd WorldNomads.com Pty Ltd Cerberus Special Risks Pty Limited Get Insurance Group Pty Limited World Experiences International Holdings Pty Ltd World Experiences Seguros De Viagem Brasil LTDA Travellr Pty Limited Travel Insurance Compared Pty Limited TravelClear Pty Limited Travellers Assistance Group Pty Limited Hello Travel Insurance Pty Limited World Experiences Pty Limited World Experiences Group Pty Limited World Experiences Travel Pty Limited 104 Place of Incorporation Australia Australia Australia Australia Australia Australia New Zealand New Zealand Australia Australia Australia Thailand Thailand Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia New Zealand Australia Australia Australia Australia Australia United States of America United Kingdom Canada Australia Australia Australia Australia Brazil Australia Australia Australia Australia Australia Australia Australia Australia 2016 % 100 100 100 100 100 100 100 92.5 92.5 92.5 46.2 69.4 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2015 % 100 100 100 100 100 100 100 92.5 92.5 92.5 N/A N/A 50 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016nib holdings limited also controls the following trusts: • nib Holdings Ltd Share Ownership Plan Trust • nib salary sacrifice plan and matching plan trust • nib Salary Sacrifice (NZ) and Matching Plan (NZ) Trust • nib holdings – nib nz Employee Share Purchase Scheme Trust b) Non-controlling interests (NCI) Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations. Summarised balance sheet Current assets Current liabilities Current net assets / (liabilities) Non-current assets Non-current liabilities Non-current net assets / (liabilities) Digital Health Ventures Pty Ltd nib Options pty limited consolidated group 2016 $000 167 235 (68) 1,630 3,450 (1,820) 2015 $000 369 515 (146) 892 1,061 (169) 2016 $000 406 9,491 (9,085) 234 – 234 2015 $000 165 6,246 (6,081) 309 – 309 Net assets / liabilities (1,888) (315) (8,851) (5,772) Accumulated NCI (944) (158) (643) (433) Summarised statement of comprehensive income Profit/(loss) for the year Other comprehensive income Total comprehensive income / (loss) Profit/(loss) allocated to NCI Dividends paid to NCI Summarised cash flows Cashflows from operating activities Cashflows from investing activities Cash flows from financing activities Net increase / (decrease) in cash and cash equivalents (1,573) – (1,573) (786) – (1,845) (1,160) 3,135 130 (315) – (315) (158) – (243) (831) 1,371 297 (3,100) (5,055) – – (3,100) (5,055) (233) (379) – – (2,718) (115) 2,960 127 (3,638) (188) 3,597 (229) 105 annual report 201635. CONTROLLED ENTITIES continued c) Transactions with non-controlling interests The Group acquired: • on 11 February 2016, 49.98% of the issued capital of nib Options Holdings (Thailand) Co Ltd (incorporated 10 February 2016) • on 12 February 2016, 49.99% of the issued capital of nib Options (Thailand) Co Ltd (incorporated on 11 February 2016) The effect on equity attributable to owners of nib holdings limited during the year from all non-controlling interests is summarised as follows: Consideration paid by non-controlling interests 2016 $000 23 23 2015 $000 – – On 8 August 2014, the Group acquired 50% of the issued capital of Digital Health Ventures Pty Ltd (incorporated on 8 August 2014). 36. RELATED PARTY TRANSACTIONS a) Related party transactions with key management personnel Key management personnel are entitled to insurance policies provided at a discount dependant on length of service. These are provided under normal terms and conditions. There were no other related party transactions during the year, as there were no transactions where either party had the presence of control, joint or significant influence to affect the financial and operating policies of the other entity. b) Key management personnel compensation Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments 2016 $ 2015 $ 5,273,536 4,484,043 285,583 38,351 – 274,609 34,781 – 2,321,301 1,998,651 7,918,771 6,792,084 Detailed remuneration disclosures are provided in the Remuneration Report on pages 22 to 42. c) Transactions with other related parties i) Purchases from entities controlled by key management personnel The Group acquired the following goods and services from entities that are controlled by a close family member of one of the Group’s key management personnel: • advertising and promotions • printing and stationery • software development and maintenance Further details of the above transactions with key management personnel are disclosed in the Remuneration Report on page 42. d) Outstanding balances arising from sales/purchases of goods and services There are no outstanding balances at the end of the reporting period in relation to transactions with related parties. 106 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 201637. SHARE-BASED PAYMENTS a) Long-term incentive plan (LTIP) Performance rights to acquire shares in nib holdings limited are granted to Executives under the Long Term Incentive Plan (LTIP). Information relating to the LTIP is included in the Remuneration Report on pages 22 to 42. The nib Holdings Ltd Share Ownership Plan Trust administers the Group’s Executive management Short-Term incentive and Long-Term Incentive Share Plans. This Trust has been consolidated in accordance with Note 1(d). Set out below is a summary of performance rights granted under the plan: 2016 Grant date 21/12/2011 19/11/2012 29/11/2013 22/12/2014 13/05/2015 22/01/2016 2015 Grant date 27/05/2011 21/12/2011 19/11/2012 29/11/2013 22/12/2014 13/05/2015 Expiry date Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Forfeited during the year Number Balance at the end of the year Number Vested and exercisable at end of the year Number 1/09/2015 1/09/2016 1/09/2017 1/09/2018 1/09/2018 1/09/2019 – – – – – – 392,307 553,236 559,057 473,927 22,956 – 2,001,483 – – – – – 628,895 628,895 (196,154) (196,153) – – – – – – – – – – – 553,236 559,057 473,927 22,956 628,895 (196,154) (196,153) 2,238,071 – – – – – – – Expiry date Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Forfeited during the year Number Balance at the end of the year Number Vested and exercisable at end of the year Number 1/09/2014 1/09/2015 1/09/2016 1/09/2017 1/09/2018 1/09/2018 – – – – – – 412,534 392,307 553,236 559,057 – – – – – – 473,927 22,956 (206,267) (206,267) – – – – – – – – – – – 392,307 553,236 559,057 473,927 22,956 1,917,134 496,883 (206,267) (206,267) 2,001,483 – – – – – – – b) Employee Share Acquisition (tax exempt) Plan (ESAP) Eligible Australian employees were offered the opportunity to receive part of their salary in the form of shares. All permanent employees who were an employee at the date the offer was made were eligible to participate in the scheme. Employees may elect not to participate in the scheme. ESAP is administered by the Board. Shares granted to the employees by the Board were acquired on-market via a third party trustee plan company. Under the plan, participating employees were allocated an aggregate market value up to $1,000 worth of fully paid ordinary shares in nib holdings limited. Subsequent offers under ESAP are at the Board’s discretion. Shares issued under the scheme may not be sold until the earlier of three years after issue or cessation of employment. In all other respects shares rank equally with other fully-paid ordinary shares on issue. Number of shares purchased on market under the plan to participating employees 85,806 78,766 The shares were allocated in two tranches. The first tranche of shares were for allocated on 27 August 2015 following nib’s FY15 full year results presentation at a volume weighted average price of $3.12. The remaining tranche of shares were allocated on 24 February 2016 following nib’s FY16 half year results presentation at a volume weighted average price of $3.51. 2016 2015 107 annual report 201637. SHARE-BASED PAYMENTS continued c) nib NZ Employee Share Purchase Scheme (ESPS) The scheme rules were adopted on 7 November 2013. On 9 December 2013, eligible employees were offered the opportunity to receive part of their salary in the form of shares. All full time and permanent part-time employees who were an employee as at 9 December 2013 and the date shares were allocated to employees were eligible to participate in the scheme. Employees may elect not to participate in the scheme. ESPS is administered by the Board. Shares granted to the employees by the Board were acquired on-market via a third party trustee plan company. Under the scheme, participating employees were allocated an aggregate market value up to NZ$1,000 worth of fully paid ordinary shares in nib holdings limited. Subsequent offers under ESPS are at the Board’s discretion. Shares issued under the scheme may not be sold until the earlier of three years after issue or cessation of employment. In all other respects shares rank equally with other fully-paid ordinary shares on issue. Number of shares purchased on market under the plan to participating employees 2016 7,672 2015 4,837 The shares were allocated in two tranches. The first tranche of shares were for allocated on 27 August 2015 following nib’s FY15 full year results presentation at a volume weighted average price of $3.36. The remaining tranche of shares were allocated on 24 February 2016 following nib’s FY16 half year results presentation at a volume weighted average price of $3.51. d) nib Salary Sacrifice Plan and Matching Plan Business unit managers were offered the opportunity to receive part of their salary in the form of shares, with an additional amount of shares contributed by the Company. Employees may elect not to participate in the plan. The plan is administered by the Board. Shares granted to the employees by the Board were acquired on-market via a third party trustee plan company. Under the plan, participating employees were allocated an aggregate market value up to $10,000 worth of fully paid ordinary shares in nib holdings limited, made up of $5,000 salary sacrifice and $5,000 matching company component. Subsequent offers under the plan are at the Board’s discretion. Shares issued under the plan may not be sold until the earlier of three or seven years after issue, or cessation of employment. In all other respects shares rank equally with other fully paid ordinary shares on issue. Number of shares purchased on market under the plan to participating employees 38,952 54,080 2016 2015 e) Salary Sacrifice Plan (NZ) and Matching Plan (NZ) The plan rules were adopted on 28 October 2013. On 9 December 2013 New Zealand business unit managers were offered the opportunity to receive part of their salary in the form of shares, with an additional amount of shares contributed by the Company. Employees may elect not to participate in the plan. The plan is administered by the Board. Shares granted to the employees by the Board were acquired on-market via a third party trustee plan company. Under the plan, participating employees were allocated an aggregate market value up to NZ$10,000 worth of fully paid ordinary shares in nib holdings limited, made up of NZ$5,000 salary sacrifice and NZ$5,000 matching company component. Subsequent offers under the plan are at the Board’s discretion. Shares issued under the scheme may not be sold until the earlier of three or seven years after issue, or cessation of employment. In all other respects shares rank equally with other fully paid ordinary shares on issue. Number of shares purchased on market under the plan to participating employees 2016 2,132 2015 2,751 108 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016f) Short-Term Performance Incentive (STI) All eligible employees have a STI opportunity. For the MD/CEO the maximum target bonus opportunity is 100% of the base remuneration package with 50% of the calculated entitlement to be deferred into shares. For the CFO/DCEO and GEARHI the maximum target bonus opportunity is 60% of the base remuneration package with 50% of the calculated entitlement to be deferred into shares. For other executives the maximum entitlement is 50% of the remuneration package with 50% of the calculated entitlement deferred into shares. The nib Holdings Ltd Share Ownership Plan Trust administers the Group’s Executive management Short-Term Incentive and Long-Term Incentive Share Plans. This Trust has been consolidated in accordance with Note 1(d). Shares issued by the trust to the employees are acquired on-market prior to the issue. Shares held by the trust and not yet issued to employees at the end of the reporting period are shown as treasury shares in financial statements; see Note 24(c). Shares were purchased on market and brokerage fees are borne by nib health funds limited. g) Expenses arising from share-based payments transactions Shares purchased on market under ESAP and ESPS Shares purchased on market under nib salary sacrifice plan and matching plan and salary sacrifice (NZ) rules and matching plan (NZ) Performance rights granted under LTIP Shares purchased on market under STI 2016 $000 309 149 959 755 2015 $000 291 189 368 263 2,172 1,111 h) Recognition and measurement The fair value of performance rights granted under the nib holdings Long-Term Incentive Plan is recognised as an employee benefit expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, which includes any market performance conditions but excludes the impact of any service and non-market performance vesting conditions and the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the Group revises its estimate of the number of performance rights that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. The nib holdings Long-Term Incentive Plan is administered by the nib Holdings Ltd Share Ownership Plan Trust; see Note 24(d)(i). When the performance rights are exercised, the trust transfers the appropriate amount of shares to the employee. Under the Employee Share Acquisition (tax exempt) Plan, the nib Salary Sacrifice Plan and Matching Plan and the Short-Term Performance Incentive, shares are acquired on-market and expensed. 109 annual report 201638. PARENT ENTITY FINANCIAL INFORMATION The individual financial statements for the parent entity show the following aggregate amounts: Balance Sheet ASSETS Current assets Non-current assets Total assets LIABILITIES Current liabilities Non-current liabilities Total liabilities NET ASSETS EQUITY Share Capital Share-based payments Retained Profits Total Equity Profit or loss for the year Total comprehensive income for the year Refer to Note 31 for contingent liabilities of parent entity. 2016 $000 2015 $000 34,869 551,613 586,482 53,947 434,958 488,905 13,999 84,989 98,988 2,459 – 2,459 487,494 486,446 297,178 297,178 (665) 190,981 487,494 (991) 190,259 486,446 52,305 47,145 52,305 47,145 110 nib holdings limitedNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year ended 30 June 2016a) Recognition and measurement The financial information for the parent entity, nib holdings limited, has been prepared on the same basis as the consolidated financial statements, except as set out below. i) Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of nib holdings limited. Dividends received from associates are recognised in the parent entity’s profit or loss, rather than being deducted from the carrying amount of these investments. ii) Tax consolidation legislation nib holdings limited and its wholly-owned Australian controlled entities have implemented the tax consolidated legislation. The head entity, nib holdings limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, nib holdings limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate nib holdings limited for any current tax payable assumed and are compensated by nib holdings limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to nib holdings limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. 39. COMPANY DETAILS nib holdings limited is a company limited by shares, incorporated and domiciled in Australia. The registered office of the company is: 22 Honeysuckle Drive NEWCASTLE NSW 2300 The Financial Report was authorised for issue by the Directors on 19 August 2016. The company has the power to amend and reissue the Financial Report. 111 annual report 2016DIRECTORS’ DECLARATION For the year ended 30 June 2016 In the Directors’ opinion: a. the financial statements and notes set out on pages 44 to 111 are in accordance with the Corporations Act 2001, including: i. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and ii. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the financial year ended on that date; and b. there are reasonable grounds to believe that nib holdings limited will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. On behalf of the Board Steve Crane Director Newcastle, NSW 19 August 2016 Harold Bentley Director 112 nib holdings limitedINDEPENDENT AUDITOR’S REPORT To the members of nib holdings limited For the year ended 30 June 2016 Independent auditor’s report to the members of nib holdings limited Report on the financial report We have audited the accompanying financial report of nib holdings limited (the company), which comprises the consolidated balance sheet as at 30 June 2016, the consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for nib holdings limited (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Level 3, 45 Watt Strteet, PO Box 798, NEWCASTLE NSW 2300 T: +61 2 4925 1100, F: +61 2 4925 1199, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 113 annual report 2016Auditor’s opinion In our opinion: (a) the financial report of nib holdings limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 22 to 42 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of nib holdings limited for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Caroline Mara Partner Newcastle 19 August 2016 114 nib holdings limitedINDEPENDENT AUDITOR’S REPORTCONTINUEDTo the members of nib holdings limitedFor the year ended 30 June 2016SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 31 August 2016. A. DISTRIBUTION OF EQUITY SECURITIES Analysis of numbers of equity security holders by size of holding: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over There were 3,631 holders of less than a marketable parcel of ordinary shares. B. EQUITY SECURITY HOLDERS The 20 largest quoted equity security holders The names of the 20 largest holders of quoted equity securities are listed below: J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd National Nominees Limited RBC Investor Services Australia Nominees Pty Limited BNP Paribas Nominees Pty Ltd UBS Nominees Pty Ltd Computershare Plan Co Pty Ltd IOOF Investment Management Limited Woodross Nominees Pty Ltd Brispot Nominees Pty Ltd Fitzy (NSW) Pty Ltd Jemon Pty Ltd HSCB Custody Nominees (Australia) Limited – A/C 2 Mr Jinyue Zhang + Mrs Ting Wu Mr Mark Anthony Fitzgibbon Warbont Nominees Pty Ltd Mr John Arthur Foyle Turner CPU Share Plans Pty Ltd Unquoted equity securities Performance rights issued under the nib holdings Long-term Incentive Plan Class of equity security 63,828 76,810 10,542 932 52 152,164 Ordinary Shares Number held 44,587,633 31,347,196 19,727,883 14,960,754 6,777,163 5,775,627 2,110,894 836,717 832,401 709,566 691,664 672,430 660,621 600,000 537,989 450,000 440,649 388,573 369,619 369,070 Percentage of issued shares % 10.16 7.14 4.49 3.41 1.54 1.32 0.48 0.19 0.19 0.16 0.16 0.15 0.15 0.14 0.12 0.10 0.10 0.09 0.08 0.08 132,846,449 30.26 Number on issue 2,238,071 Number of holders 7 115 annual report 2016 C. SUBSTANTIAL HOLDERS There are no substantial holders in the Company. D. VOTING RIGHTS The voting rights attaching to each class of equity securities are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Performance rights No voting rights. 116 nib holdings limitedSHAREHOLDER INFORMATIONCONTINUEDCORPORATE DIRECTORY DIRECTORS Chairman Steve Crane Managing Director/Chief Executive Officer Mark Fitzgibbon Lee Ausburn Harold Bentley Annette Carruthers Philip Gardner Christine McLoughlin Donal O’Dwyer Company Secretaries Michelle McPherson Roslyn Toms EXECUTIVE MANAGEMENT Managing Director/Chief Executive Officer Mark Fitzgibbon Deputy Chief Executive Officer and Chief Financial Officer Michelle McPherson Group Executive Australian Residents Health Insurance Rhod McKensey Chief Information Officer Brendan Mills Chief Executive Officer – nib New Zealand Rob Hennin Group Executive Benefits and Provider Relations Justin Vaughan Group Executive International and New Business David Kan NOTICE OF ANNUAL GENERAL MEETING The Annual General Meeting of nib holdings limited will be held at The Heritage Ballroom, The Westin, 1 Martin Place, Sydney at 11am (Australian Eastern Daylight Time) on Wednesday, 2 November 2016. A formal Notice of the Meeting is being distributed with the Annual Report. SHARE REGISTER Computershare Investor Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000 1300 664 316 STOCK EXCHANGE LISTING nib holdings limited shares (nhf) are listed on the Australian Securities Exchange. PRINCIPAL REGISTERED OFFICE IN AUSTRALIA 22 Honeysuckle Drive Newcastle NSW 2300 13 14 63 AUDITOR PricewaterhouseCoopers PricewaterhouseCoopers Centre Level 3, 45 Watt Street Newcastle NSW 2300 LEGAL ADVISERS King & Wood Mallesons Level 61, Governor Philip Tower 1 Farrer Place Sydney NSW 2000 BANKERS National Australia Bank Limited 1 Old Castle Hill Road Castle Hill NSW 2154 WEBSITE ADDRESS nib.com.au 117 annual report 2016nib.com.au 

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