SHARES in Hunter-based private health insurer nib fell by almost 13 per cent on Monday morning after the company announced a 15 per cent profit downgrade because of increased claims costs.
In an announcement to the stock exchange, nib managing director Mark Fitzgibbon said the company's underlying operating profit for the year to June 30 was now predicted to be $170 million, a fall of 15 per cent on the $200 million it had previously told the market it expected.
An alternative measure - statutory operating profit - was likely to be $150 million, down from the previously predicted $180 million, a fall of more than 16 per cent.
By noon on Monday, nib shares were trading at $5.70, a fall of 84 cents, or 12.8 per cent, on Friday's closing price.
"We've definitely seen a tick up in claims and while we did anticipate some level of claims inflation across the group this financial year, recent experience is that it's been more widespread across a number of business lines than we had previously anticipated," Mr Fitzgibbon said.
He said claims inflation had been broadly in line with expectations and nib was still looking for a net margin of about 6 per cent.
The Australian private health system works on a "risk equalisation" model, with all insurers contributing to a fund that effectively cross-subsidises those funds with older members.
Statistics kept by the Australian Prudential Regulatory Authority (APRA), and available online, show the payments made to and from a Risk Equalisation Trust Fund, set up in 2006.
Although nib is Australia's fourth largest private insurer by size, it is clearly the largest contributor to the equalisation fund, which cost it more than $185 million in the 2017-18 financial year (the most recent year in a March 2019 APRA summary of payments).
By contrast, Australia's largest insurer, Medibank Private, received a net $53 million from the fund.
Mr Fitzgibbon said nib's net contribution for this financial year is expected to be about $250 million, an increase of $20 million, or 9 per cent, on the amount paid in the 2019 financial year.
The APRA figures show that nib has had to contribute to the fund every year since it began, with the annual costs being $100 million or more since 2010, with a steady increase since then.
Australian resident health insurance is nib's main business, but Mr Fitzgibbon said its other arms, including its international students insurance and its New Zealand operations, were also facing "headwinds".
But overall, Mr Fitzgibbon said he remained confident about the outlook despite the profit downgrade.
