Medibank Private Limited

Thank you for standing by and welcome to the Medibank Half Year Results 2026. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you would like to ask a question via the phone, you'll need to press the star key followed by the number one on your telephone keypad. I'd now like to hand the conference over to Mr David Koskar, Chief Executive Officer. Please go ahead.

Thanks and good morning everyone. Thanks for joining us today. I'm coming to you from NAMM. the home of the Wurundjeri Woiwurrung peoples, and I pay my respects to their elders past, present and emerging. I'm joined by our executive leadership team, including our CFO, Mark Rogers. This morning we'll talk to Medibank's results for half year 26. So first to the highlights on slide five. This is another good result for the Medibank group. Our performance reflects improving customer engagement and our progress in driving the health transition. We've delivered on our growth commitments. We've improved momentum in our health insurance business and strong growth in Medibank Health. Medibank Health's continued positive performance is enabling us to reinvest with confidence to support its future growth. And we recently took our next important step in health, finalising our acquisition of Better Medical, establishing one of the largest primary care networks in the country. So let's turn to slide six for customer highlights. As the cost of living remains challenging for many, we continue to provide more value to our 4.3 million customers. We saved our customers around $105 million in out-of-pocket costs, another $3.3 million by using our no-gap network, and $23 million in rewards was earned by Live Better members. And importantly, we're seeing our Medibank and AHM customers accessing more of the health services we deliver through Medibank Health. 55% of Medibank resident policyholders are now engaged with our health and wellbeing services, which reflects our differentiation, but also how we're able to bring the best of Medibank Group to support our customers' health. AmpliHealth delivered 70,000 virtual health interactions to Medibank customers, and saved 100,000 hospital bed days through its home care services. And as we meet more health needs of more customers, customer relationships strengthen, which further improves our retention performance and supports our growth in health. So now to slide seven, which shows an overview of our key financial outcomes. Look, I won't go through all of them, but a particular highlight for me is the resident policyholder growth of 1.9%, with growth in the last half more than double that of last year, including improving momentum in the Medibank brand. And while we're seeing slightly lower policyholder growth rates in our non-resident business from a few years ago, our performance remains better than market, especially in segments where we are focusing our efforts to grow. And it's very pleasing to see Medibank Health having another very strong half of growth. In line with our healthy capital position, we are delivering shareholders an interim fully franked ordinary dividend of 8.3 cents per share. So now to slide eight. As we progress our strategy, we continue to take important steps to deliver our 2030 aspirations. Our improving experiences are really resonating with our customers. patients and our people as we continue localising services and empowering our teams to better support our customers. We continue to build momentum in our health insurance business, growing both brands and expanding in our priority segments, including families, mid-tier covers and those new to the industry. This includes a 67% increase in corporate joins year on year and a record number of non-resident workers now as customers. The key to our strategy is to change the way people experience health and wellbeing, like our expansion of our 24 by 7 AmpliHealth online doctor service to our resident customers and our Detox at Home program in the community. And having now established a national network of 168 clinics, we've continued to prioritise our expansion in primary care, investing in the experience of GPs to support early intervention and multi-channel delivery. And we're improving how we work, embedding AI tools and processes throughout our business. And our adoption is accelerating. For example, in 2025, we had twice the rate of adoption of AI than we had in 2024. And next year, it might be more than five times that amount. We're able to drive value from this space due to our strong customer relationships, our data and our capabilities. And we continue to strengthen our foundations, maturing our risk culture and approach to support our people's decision making, enhancing security and our technology platforms and improving productivity. All so we can continue to deliver better outcomes for our customers. So now over to slide nine. We're very conscious that many consumers are doing it tough, including with the recent interest rate increase and recently announced increases to premiums. However, despite the challenging environment, the resident health insurance market remains buoyant, including continued strong growth in younger customers choosing to go private. Recent research showed that a continued increase in the number of people who see health insurance as offering value for money. And with increased waiting lists for elective surgery in the public system and the benefits of adult dependent reform to continue, we expect resident growth rates to remain well above pre-pandemic levels. Consumers continue to seek greater value and are switching brands and products to get it, including choosing lower levels of cover. With this changing mix and more people preferring treatment outside traditional settings, Growth in private hospital claims utilisation is decreasing. And while some of the unsustainable commercial behaviour from other funds has eased, pockets of heightened competition remain, including aggregated practices that could drive up the cost of insurance for consumers. In response to all this, our disciplined approach to growth and differentiation across our two brands remains unchanged. We are driving momentum by growing in our target segments, prioritising growth in direct channels and focusing on retention, which for us has improved by 21 basis points year on year this September, despite industry lapse rates actually going up by 70 basis points. We're continuing to work constructively with hospitals, shaping partnership agreements that incentivise shared outcomes to drive the health transition. which pleasingly is continuing to gain momentum. In FY25, we gave hospitals around $37 million to support this shift. And in the first half of this financial year, we've already provided around $20 million. The non-resident market has adjusted to recent migration reforms with worker numbers increasing. Student numbers have stabilised, but we expect the market to continue to grow. We're also seeing more students and workers become residents. Transitions we are well placed to support through our lifecycle management investments. And with the strength of the health and wellbeing support we offer and the extensive university partnerships we have, we remain an insurer of choice in the student market. Now to slide 10. Australia has never spent more on health care and yet in some parts the system is failing the community. As productivity in healthcare remains sluggish and healthcare costs continue to outpace inflation, the call to action for reform could not be more urgent. Out-of-pocket costs are rising, patients are waiting longer for care, clinicians are under pressure and avoidable hospitalisations are around 30% above the OECD average. Not only does this impact the quality of life of millions of people, the recent data also shows it drained around $7.7 billion from the system. Governments, operators, clinicians and patients know the system is under strain. But despite the shared understanding, the pace of reform is far too slow. So we will continue to advocate for change because it is in the national interest. But advocacy alone won't fix a system that is deteriorating faster than many decision makers are responding. International experience shows us that when this happens, the private sector must lead. And in the absence of meaningful system-wide reform, as we have done for several years, we will continue to take the lead in driving the health transition that is needed to sustain our system. And in the last few months, pleasingly, others are recognising the need for this action too. For example, St Vincent's has committed to delivering half its care in homes or through virtual and digital platforms by 2030. Our work with the South Australian Government has seen their continued commitment to expand care options for public patients outside traditional hospital settings. And we are seeing many others now embracing the change that's needed. And in the private system, The federal government is supporting this approach, given their ask of the sector to design, lead and implement the changes needed through the CEO forum. So we will keep working with hospitals, health professionals, corporates and other funders to accelerate the change needed. Investing in wellbeing, in prevention, in primary care and accelerating the shift to virtual community and home based treatment settings. And as you know, this is not new for us. It's out of this desire to change the system to keep it one of the best in the world that we are growing our health business. And now to slide 11. Primary care is one of the most critical areas that need change. As the front door to Australia's health system, it needs to adapt to the changing health needs of the country. Patients are waiting longer. paying more and too often entering the system once health problems are already entrenched. These outcomes are the result of a traditional model designed around reactive, episodic care rather than proactive, connected and comprehensive support. The sector is just not set up to support the future health needs of the community. Through our majority interest in My Health and recent acquisition of Better Medical, Combined with our existing AmpliHealth GP nursing and our health offerings, we now bring together one of the largest primary care networks in the country. And working with our partners, we provide the tools, the technology and the time clinicians need to focus on prevention, reduce low-value activities and better support their patients. We are investing to grow virtual channels to improve access, to support better continuity of care and to meet the changing expectations and preferences of patients. And these investments matter for patients and they matter for clinicians. And as we have seen in other countries around the world, a focus on proactive and planned care supported by technology and an integrated care team is a more sustainable business model and one that can better address the challenges of the health system under strain. Now I'll turn it back to ask him to run through the details of the result.

Thanks, David. Good morning, everyone. This result demonstrates how we're balancing resident policyholder growth and gross margin. It shows continued earnings diversification and includes reinvestment for growth. The key financial highlights include group operating profit up 6% to $381.7 million with solid growth in resident health insurance an important contribution from non-resident and continued strong momentum in Medibank Health. Investment income was impacted by the lower RBA cash rate, and the increase in other income and expenses includes higher M&A costs. Non-recurring cyber costs were lower, and we expect FY26 costs to be around $35 million, and that the IT security program will largely be embedded. And underlying EPS, which normalises investment returns was 10.8 cents per share, which is in line with last year. Slide 14 covers the health insurance results. Despite the challenging economic environment, the business remained resilient. We continue to see benefits from our disciplined approach to running a business, including lower hospital utilisation growth and an improved risk equalisation outcome. We are also seeing policyholder growth skewed to lower tier products with impacts to revenue and claims largely offsetting. Gross profit was 4.4% higher with 4.3% revenue growth and gross margin stable at 16.2%. Operating profit increased 3.5% to $361.5 million and the operating margin remains at 8.5%. Our expenses were up 5.4% to $329.4 million and the expense ratio is 10 basis points higher at 7.7%. The increase in operating expenses reflects inflation, volume impacts and ongoing investment partially offset by $3 million of productivity savings. And non-resident commissions were up in line with premium increases with the resident commissions broadly in line with last year, despite higher AHM agri-badge amounts. We expect expense in FY26 of between 690 and 695 million, including 10 million of productivity savings. We continue to target a stable to modestly improving expense ratio, but balance this with investing in growth where this makes commercial sense. Moving to slide 15. The recent health insurance market remains buoyant, with policyholder growth in the 12 months to 31 December expected to be slightly lower than the 2.1% growth we saw in the 12 months to 30 September. Cost of living pressures continue to impact the industry, with switching rates remaining elevated, customer growth skewed to lower tier products and aggregators increasing their share of industry joins. Whilst the unsustainable competitive environment is moderating, pockets of heightened competition remain. Pleasingly, we're seeing increasing momentum in the business. Over the last 12 months, policyholder numbers increased 1.9%, with Medibank and AHM growing 0.8% and 4.9% respectively. This includes 0.9% growth in the last six months, which is more than double the growth in the prior period. The acquisition rate of 5.6% is 40 basis points higher, with improvement in the Medibank brand from investing in differentiation and an enhanced digital experience in AHM. Despite the higher industry switching rate, retention improved 10 basis points, with the improvement in AHM particularly important. Key areas of focus for the remainder of FY26 include further improving retention, deepening brand differentiation and increasing focus on acquisition in priority segments and channels. Now turning to slide 16. Resident claims expense increased 4.9%, and risk equalisation provided a 50 basis point benefit to net claims growth, with some of this benefit expected to be timing-related. Resident claims growth per policy unit increased 20 basis points to 2.5%, with the 310 basis point increase in extras partially offset by 120 basis point decrease in hospital. In hospital, the increase in inflation reflects private hospital indexation, investment in product benefits and the increase in New South Wales private room charges. The negative hospital utilisation growth reflects prior period claims favourability due to COVID impacts and customer growth due to lower tier products. And the increase in extras includes the AHM limit rollover and utilisation and inflation increasing, following a period of subdued demand due to economic and COVID impacts. And in the second half, we expect private hospital indexation to remain elevated and negative hospital utilisation growth continue. Whilst the risk equalisation timing benefit will unwind, we expect this to be largely offset by higher NSW private room charges now being fully embedded. Slide 17 details health insurance performance, which shows continued growth in both resident and non-resident. In resident, our disciplined approach to growth resulted in gross margin being maintained at 15.5%, with revenue and claims growth per policy unit of 2.5%. Growth in revenue per policy unit was down 30 basis points, with a high average premium increase offset by higher revenue mix impacts. The revenue mix impact of 150 basis points is similar to 2H25 and reflects increased investment in the better customer growth due to lower tier products and strong growth in AHM policies. And subject to no material change in the economic environment, we expect revenue mix impacts for the full year to be better than 1H26. Solid non-resident revenue growth has continued with average policy units 1.4% higher and revenue per policy increasing 3.1%. Policy unit growth was lower than in the prior period with lower student visa approvals and modestly higher lapse. However, we expect the recently announced increase to student visa approvals and new opportunities in the worker segment to support acquisition into the second half. Gross profit increased 6.9% to $55.6 million and gross margin was up 80 basis points to 35.6% with an improved worker margin partially offset by tenure impacts on the student margin. Non-resident remains an attractive market and in the second half will build on emerging opportunities in the student and worker segments and continue to invest and differentiate our offering to grow market share. Turning to slide 18. Medibank held segment profit increased 28.5% to 48.3 million and operating margin was up 10 basis points to 17.7%. Revenue grew 27.5% with the increase in community and acute, reflecting strong funding growth and increased ownership of Ample Health Home Hospital and good strong customer growth in wellbeing. Gross profit was up 21.6% with the reduction in gross margin due to additional investment in Live Better and mixed impacts, partially offset by efficiency benefits in community and acute. And whilst expenses increased with growing scale, the expense ratio was 250 basis points lower with improvement across all three segments. We continue to see strong organic growth potential in the business with focus areas for the remainder of FY26, including meeting more health needs of more customers, starting existing services with a broader set of payers and realising synergy benefits across our primary care network. We aim to augment this organic growth with further M&A that scales and expands geographic coverage in primary care and adds capability in wellbeing and virtual care. Now, on slide 19, we've shown a more granular breakdown of the financial results for our three Medibank Health segments and the key customer metrics driving performance. In the wellbeing segment, Live Better members increased 13.6%, following investment in the proposition and reward points give back offer. In primary care, consultations increased by 2.8%, with an increased proportion of these being undertaken virtually. And in community and acute, acute home admissions were supported by strong volume growth in publicly funded programs and increased capacity in our transition care service. Moving to slide 20. Investment income was down $19.6 million with a $5.7 and $5.8 million reduction in the growth and defensive portfolios respectively. The decrease in the growth portfolio reflects lower income from all asset classes other than property and the lower RBA cash rate was the driver of the reduction in the defensive portfolio. Other investment income was also lower following the payment of the final customer gift back in September last year. We expect further impact in the second half with lower cash holdings due to funding to better medical acquisition. We'll adjust credit duration and liquidity settings in the defensive portfolio to help offset this impact. And of course, the recent increase in the RBA's cash rate will also be helpful. With lower earnings on cash, underlying net investment income was down 11 million. The underlying net investment return decreased 26 basis points to 2.74%. and the annualised spread to the average RBA cash rate increased to 184 basis points. Moving to slide 21. The health insurance business continues to be well capitalised. Capital is at 1.9 times the PCA and the capital ratio is 13.8% of premium revenue. We continue to hold additional capital to offset the $250 million APRA supervisor adjustment This is why the capital ratio is above the target range of 10% to 12%. The better medical acquisition was the main driver of the change in the capital position this period. The increase in Medibank health capital employed includes a $163.5 billion cost of this acquisition. The acquisition was funded from unallocated capital, with this partially offset by strong capital generation. We are also well-placed to fund further inorganic growth. The unallocated capital position supports our FY30 Medibank health earnings aspiration of at least $200 million, and we have capacity to raise Tier 2 debt to support growth above this level if further attractive opportunities arise. And given the strong capital position, the Board has declared an interim dividend of $0.083 per share, which is a 6.4% increase, and 76.8% payout of underlying net profit after tax. And to finish, a few comments on our outlook for FY26. Our resident health insurance outlook is unchanged. We aim to grow resident market share in a disciplined way, including further growth in the Medibank brand. We continue to expect growth in resident claims per policy unit of between 2.6% and 2.9%, We expect that our proactive approach to claims management will differentiate us from the rest of the industry. Our non-resident outlook is also unchanged. And finally, we've updated our Medibank health outlook. We expect FY26 organic operating profit growth to be similar to 1H26, plus an additional circa $6 million contribution from Better Medical in the second half. and our M&A pipeline remains strong and we have both the appetite and financial capacity to pursue further strategic opportunities. I'll pass back to David to make some closing remarks. Thanks Mark.

Now over to slide 24 just for us to wrap up. We're a resilient company and we're a growing company with strong customer relationships, positive momentum and a clear vision for the future. We remain focused on the needs of our customers and patients. This shapes our strategy and drives our performance as we continue to strengthen our foundations and deliver greater value, choice and control in health. We are seeing this reflected in our growing health insurance momentum and Medibank Health going from strength to strength. Despite the economic challenges, the health insurance market remains buoyant. And through our work across both private and public systems, investing in prevention and delivering more innovative care models, we are driving the health transition. And while this change is emerging more broadly, more must be done to accelerate it. So we will continue to champion this and work with governments to advocate for the reform needed to keep health care in Australia affordable, accessible and among the world's best. We are on track to meet our FY26 outlook and continue delivering value for customers and shareholders. And finally, our achievements are only possible because of the amazing people at Medibank, and I thank them for their ongoing commitment to creating the best health and wellbeing for Australia. So now it's over to you for any questions you might have.

Thank you. If you would like to ask a question, you need to press the star key followed by the number one on your telephone keypad and wait for your name to be announced. If you would like to cancel, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Nigel Pitaway from Citi. Please go ahead.

Good morning, guys. I just wanted to ask about sort of what you expect for claims inflation, maybe a bit beyond second half. I mean, obviously, at face value, the rate increase that was announced this week does seem quite a lot ahead of your 2.6 to 2.9 you're guiding to in the shorter term. So I was just wondering if we could get maybe a little bit more colour as to what was the basis behind that level of rate increase and whether or not that is actually related to what you expect for claims moving beyond this year.

Thanks for your question, Nigel. At 10,000 feet for you in terms of 26 versus 27, there are probably two major factors to call out. The first one is we know we'll have a COVID tailwind this period, reflecting the fact that FY25 claims were $74.8 million below expectations. So we've had a utilisation tailwind in this year. That's worth about 100 basis points on claims. We also know New South Wales private room rates will cost us 20 basis points this year and that will then be fully embedded in our claims line. So the net of those two impacts Nigel's about 80 basis points and that will be the single biggest difference between sending 27 to 26.

Okay and then I mean obviously you're saying the revenue mix as we're now meant to call it will improve in second half. I mean is that sort of your ongoing assumption beyond that as well or?

So Nigel, the revenue mix, the trend in revenue mix is going to depend on how fast we're growing and where we see growth. So provided we don't see any further deterioration in the economic environment or our growth rate doesn't increase significantly in the mix of that growth either, that's a reasonable assumption looking forward.

Okay, and then maybe just, I mean, maybe further to that, I mean, obviously you've been prepared in this period to pick up some, as you described them, lower tier products, and I will see most of your growth is still coming through AHM. So, I mean, is that sort of what we would expect moving forward? I mean, you are still saying you want to grow the Medibank brand, but it seems as though that's still reasonably tough to do in the sort of areas that you desire to grow in. Can you make just a... a few comments about how you're feeling about that sort of revenue growth mix moving forward?

I actually have a slightly more positive spin on the policyholder growth trajectory for the half, Nigel, with Medibank growing at 80 basis points, which is well up on what we've seen in the prior period. In fact, Nigel, for the full year, I'd probably expect the Medibank growth rate to be slightly higher than the half and AOC to be slightly lower. So actually, we're really happy with the Medibank trajectory.

Yeah, I think the notion that Medibank or AHM plays in a certain tiering is not quite correct. Both Medibank and AHM support a very, very different set of customers who choose yes, slightly different mixes but in the current environment people are looking for more value and particularly looking for more value in their health and that's part and parcel of the Medibank proposition. So that's really what's driving the growth and in particular our focus on our target segments which are also growing and we are growing in like corporates, like families, those new to the industry. As we know, the second half is always a bigger new to industry part than the first half. So actually with the core brand metrics of Medibank, they're very strong I think despite the The economic conditions, I think the Medibank brand momentum, we feel very confident about continuing.

Okay, thanks for that. And then maybe just finally, I mean, obviously the government in its sort of PHI premium rate increase announcement is still talking about this hospital benefits ratio climbing to sort of closer to 90%. I mean, are you expecting to have to do Anything moving forward to sort of encourage that development?

There's a lot of talk about the ratio. Our hospital benefit ratio is higher than the industry average and is probably likely to slightly improve. But look, I think the ratio is one way of looking at health. Actually, the real question we should be asking is the absolute cost of delivering health to the 14 or so million people that have private health insurance. We still have to ask ourselves the question, why is it 30% more expensive to have a knee replacement in the private system than in the public system? Why is it twice as expensive in Australia to have a hip replacement than in Northern Europe? Why is a pacemaker four times the price in the private system than in the public system? I think they're the questions that probably occupy more of our minds as we think about sustainability system than the ratio itself.

Yeah, okay. I mean, obviously, you've made those points for some time and the government's still focusing on that, but yeah. All right, great. Thank you very much.

Thank you. Your next question comes from Julian Begranza from Goldman Sachs. Please go ahead.

Good morning, guys. Just a further question on downgrading. This won't be super clear on the composition of the number. Just how material is the investment in live better versus growth in lower-tier products, just in that 1.5%? And also, what gives you confidence that that downgrading will be better in the second half of 26, just given the higher premium rate increase that's coming through? Just want to understand that a little bit better. Thank you.

Hi, Julian. I might just rephrase it as revenue mix because it is important. It is important because there are three components that make up revenue mix. The first component is what you call downgrading, which is existing customers changing the cover. The second component is where we see policyholder growth. So the mixed difference between customers that leave us and customers that join us. And the third component is where we invest. And that investment could be in live better, it could be in discounts, it could be in offers. If it points you to the second half of 25 and the movement in revenue mix in the second half, you'll see that coincides with us increasing our policyholder growth number and that was the major driver of that movement. If you go to the first half of 26, revenue mix impact was 150 basis points and it was 130 in the second half of 25. the majority of that increase was as a result of live better investment and offers. So you can see the bigger impact within the second half and that related to where we saw growth and the less significant impact was relating to investment in live better and offers. Why do we get comfortable? So the investment we've made is now fully embedded in our revenue line. And so unless we look to invest more to grow even more, it's unlikely that will repeat. And the impact we saw on the sales and lapse mix in the second half, again, if we don't increase our growth rate significantly or the market doesn't shift significantly, we're not expecting that number to deteriorate significantly. I would like to call out, it's important, you can't just look at revenue mix, you've got to look at revenue mix and claims mix. Because those lower tier products where we're seeing growth, they come at a lower revenue per policy and lower claims per policy. So really going forward, it's about the chores and the business, Julian, not just the revenue mix.

Got it. That's super clear. And then just to unpack just that hospital inflation number of 4.6%, just to be super clear just what component of that is investment in product benefits. Is it the flip of the benefit on utilization from the claims favorability or is it less than that? So it's very clear on what is that underlying inflation number x the product benefits that you're making, investments you're making. Thanks.

I'd probably direct you to the New South Wales private room rate cost because that had a 50 basis point inflation impact in that 4.6%. Julian, the investment and product benefits was less than that. Investment and product benefits is ongoing. Obviously, we can increase it or decrease it given where the claim trajectory is, but the New South Wales private room rate impact was the single biggest uplift that we saw across the board months.

Okay, got it. That's clear. And then just the last question on hospital utilization. Even after adjusting from the claims favorability, as you sort of flagged, utilization is still quite benign and negative. Just want to be clear what's driving that and how sustainable, given it's consistently surprised quite positively. Thanks.

Yeah, thanks for calling me that, Julian, because it's a really important feature of the result. Utilisation growth was 2.8% negative, and you're rightfully called out that around half of that reflects the COVID tailwind that we had from the prior year, which is a one-off, but the remaining 50%, so almost 1.4% contraction in utilisation, is ongoing. And that's linked to a couple of factors. In addition to the skewed policy order growth in lower... to your products. We're also seeing the benefit of our risk selection. So where we grow and how we grow through which channel at which time, I think we're getting favourable selection bias in our claims and we're seeing that come through in risk equalisation. Now I wouldn't underestimate the impact our hospital partnership agreements are having. So we're paying higher indexation in exchange for where we've got lower utilisation growth with our partners and that's contributing. So I wouldn't expect anything other than the COVID one-off impact to be significantly varied going into 27.

Got it. Thanks so much for that, guys. Much appreciated.

Thank you. Your next question comes from Andre Stadnik from Morgan Stanley. Please go ahead.

Now, good morning. Can I ask around the comment around resident commissions remaining in line despite the increasing aggregator presence. Can you explain a little bit about how you managed to do that?

So the commission will depend on which aggregator that you're selling through and it also is dependent on the premium per policy. So as you've seen, gross due to lower tier products in bronze and silver, the revenue that we get for that policy is lower and the Commission will pay as a consequence as well, Andre.

Thank you. Slightly dry question, but just in terms of the tax rate, should that normalise going forward towards 30%?

That's not a dry question. I live for questions on tax, Andre, so thank you. Probably two components on the tax rate this past. One of those we've mentioned before, so the Losses from our joint venture hospitals are actually after tax losses so we don't get a tax yield on that and then a number of the M&A expenses are non-tax deductible. So you saw an uplift in M&A expenses this year in the first half and as a consequence of that, that's at a higher non-deductible component of expenses.

Thank you.

Thank you. Your next question comes from Sadaf Parameswaran from JP Morgan. Please go ahead.

Good morning, everybody. A few questions, if I can. Firstly, Mark, I just wanted to be clear on where you're expecting that revenue mix downgrading figure to come in the second half. I mean, you say it should be lower, but the first half was... materially higher than my assumptions and I presume consensus as well, whilst the claims inflation was broadly in line with what you had. I was just keen if you could help us understand both those two metrics, the claims inflation per policy where you've held a guidance. first half is slightly better than that guidance range, where do you think you'll end up for the second half and for the full year within that range? And also just the same for the revenue mix downgrading impact, because it makes quite a difference to the trajectory of margins.

Yeah, sure. I probably won't look to narrow that 2.6% to 2.9% guidance for you, Sid, but what I'd say is where we land in the range will depend on two factors from a claims perspective. Firstly, the risk equalisation timing benefit that we saw on the first half, how much of that unwinds into the second half, and then secondly, where we see policyholder growth. So if we see policyholder growth in the higher tier products, you'd expect claims inflation to be towards the top end of the range and then your revenue mix impact would be lower and if you see growth in the lower tier products then you'd expect claims to be lower and revenue mix impact to be higher. What we're thinking is provided we don't see any deterioration in revenue mix impacts which is not our expectation, a flat JAWS outcome in the business is very plausible and to Is there any variation in that during the course of the second half? We obviously have opportunity to reinvest if claims are lower than we expect or other contingency options if claims are higher than what we expect.

Yeah, sorry. So to be clear, flat jaws is what you're saying is a reasonable possibility in terms of the second half versus the first half? Very plausible outcome, Sid. Yeah, for the gross margin because there's a step up in expenses, right? So... Just want to be clear what we're saying. I didn't make any comment on expenses, but I'm happy to. No, yeah, but I mean your guidance. Yeah, I just want to be clear that the JAWS comment was on gross margin.

Yeah, JAWS is on revenue-based claims for policy. Maybe a few comments on expenses. We've given a range of $690 to $695 million. The uncertainty within that range is where non-resident policy holder growth lands and therefore the commissions we pay. So if you land at the top end of that range, you'd expect stronger, particularly student joints in the course of the second half, finish at the lower end, then probably a lower growth rate. And the uncertainty is how does the opportunity on visa approval increases actually land in the portfolio in the second half.

Yep. Okay, great. Okay. Just a second question. Just on the claims inflation, I just wanted to make sure, were there any contributions from reserve adjustments or anything, you know, from the past? And also, if you can just comment on, you know, just that risk equalisation benefit and, you know, what you are expecting, what happened in the period, what you're expecting going forward?

It was a modest release out of reserve for both resident and non-resident. Some of that's actually been reinvested into the business during the course of the year. So I think, Sid, outside of the COVID benefit of $43.6 million, the result is effectively a cash claims result. So I'd just add that $43.6 million back to your claims trajectory and that should give you a pretty good view of the cash result, the cash claims result.

Wasn't there a 19 mil reserve release? I mean, I thought there was.

Yeah, that's what I just called out. That was spread across resident and non-resident, but we've been reinvested during the course of the year. We've also considered that release when we struck our 31 December claims regime.

Yep, okay, so that'll impact second half versus first half on claims inflation. You'll reinvest, so that'll... No, we reinvested it during the harvest.

So Sid, I've looked through that. And when you consider the accounting versus the cash, you should be focusing on the 43.6 million COVID benefit from the prior period is the difference between cash and accounting. Okay. Okay. Okay. Thank you. Did you want to comment on, I think you asked on risk equalisation?

Oh, yes. Yes. Yes. Thanks.

Sure. So really that's linked to Medibank. the Medibank brand rather than AHM, what we're seeing is a better net recovery for Medibank. So Medibank receives out of the pool, AHM pays into the pool. So what we're seeing is some of our younger and higher claiming customers being more prone to lapse. So we end up saving the risk equalisation charge that accrues to every policyholder, but those customers aren't their claims aren't typically risk-equalisable because of their age, and so that's driving that positive skew for the Medibank recovery rate. And that's a trend we saw in the second half of last year and, to a lesser extent, the first half of last year as well.

Yeah, okay. Just a final question for me. So if I take your 5.1% rate increase that you've that you've got. And if I'm to look forward, I mean, you're basically saying that you don't think the downgrading should get any worse. And what I'm interpreting as well is that the inflation shouldn't get any worse either. So if I just take that 5.1, subtract, let's say, one and a half, I mean, are you basically saying you can tolerate inflation for policy of... What is that? So 3.5%? Do you think the whole margin is the same?

That's probably not a bad way to look at it, Sid. I guess the way I think about it is we had 3.5% claims growth. We know that the COVID benefit is about 1%, and so that's the difference between cash and accounting is 1%, so that's about a 3.5% cash claims growth. So Everything else being, which is obviously why provided your revenue mix impact is not above 150 basis points, then again, a stable gross margin outcome is very plausible. The big question is where do you land in the range for FY26? Because obviously that sets the foundation for 27.

Yeah, okay, got it. So yeah, COVID benefit plus the, if the inflation holds at that level, you can hold gross margins, but Yeah, got it. Okay, great. Thank you very much.

Thank you. Your next question comes from Andrew Goodsell from MSD Marquis. Please go ahead.

Oh, good morning. I'm sorry, it's Dan Hurren. Andrew's just been pulled away on another call. Look, can I ask you a question? I guess it's going back to Nigel's question and the health minister comments around the premium increase. And I know you talked about the cost of the unit cost of care. But I mean, specifically, the minister wants to stop hospital closures as we understand it. So what do you think is actually, what can you do to actually keep the minister happy then?

Well, I think the statement of expectations that was published last year was very helpful to guide the market in terms of setting their settings to meet those expectations. I think we were very happy with that clarity. In fact, I think we met all of those expectations in getting our premium proposal approved. I think through the CEO forum, which I'm an active member of, we are talking about how do we set up a sustainable system where the system can thrive. What's very important in that principle in those discussions is that it's not about any single player, it's about the system. We also know that the shift of care from acute hospitals to more fit-for-purpose settings, both short-stay day in the community. We are far behind other countries and a lot of focus is on how do we encourage that health transition. You know, there's a recognition that that means that hospitals will need to change. There will need to be some either reconfigurations of current assets or growth in other regions or sectors. a part of our partnership approach that we have led the industry on is to share and incentivise that shift which we've talked about today with, you know, increasing number of hospitals participating in those partnership agreements. It covers about 80 plus percent of our benefit outlays and it's an increasing investment that we're making to make that shift. So that was part of the expectations. set and that's what we're delivering against and that's really the conversations at the CEO forum. I mean the fact is right now we have too many beds in the system in the wrong spots and not enough in some spots. Utilisation is too low and the Australian consumer shouldn't be paying for that. So everyone's completely aware that this is why it's called a transition. It's not going to happen in one day. It needs to happen more quickly but I think as I said before There are many in the system who have brought fresh thinking and a more longer-term view that are saying and recognising this change is happening, and now they're changing their business models to deliver against it.

Thanks David, that's helpful. Thank you. Can I ask one follow-up? Sorry, one different question in fact. Looking at the trend in aggregators, not just in your results today but right across the industry and your comment that you can grow the Medibank brand in the second half, can you just talk about the relative impact of aggregators across your two brands? Is it skewed to one not the other?

Yeah, very much so because we don't have Medibank on the aggregators so it's 100% only applicable to the ARTM brand. At Medibank we've been very conscious to focus growth on our direct channels and in fact as a total group around 70-75% of our joins are for those joining our direct. So that's a real strength of ours. You know, we are continually investing in both retention. We've shown today our improving retention rates versus the market that is deteriorating. So that's the best way to grow is to keep the customers you've got. It's a third cheaper to do that than acquiring in the open market. And the second is to work selectively where it makes sense to grow via aggregators. Aggregator share in the market has slightly increased. So we're always thinking about how we grow in a disciplined way. We'll always work with aggregators but not where their terms and conditions are unsustainable for the long term for both us and the system.

Thanks. So Medibank is more about retention in that second half. Can you explain more about retention?

So Medibank has the best retention rate for major brands. and one of the leading retention rates in the market. But Medibank's also about growing in the segments we've talked about today, those new to the industry, particularly families and particularly corporate. I think I shared our very strong momentum, for example, in the corporate market with a 67% growth year-on-year and join. So plenty of headroom for growth for Medibank. But retention as a company is a very important source of growth that we pay much more attention to perhaps than others.

Thank you very much, Dan.

Thank you. Your next question comes from Freya Kong from Bank of America. Please go ahead. Pardon me. Your next question is from Vanessa Thompson from Jefferies. Please go ahead.

Thanks very much. I wanted to ask a little bit more about the hospital situation as well. I think you called out that $37 million was paid to hospitals in addition last year and $20 million in the first half, if I heard that correctly. I just wondered what your expectations were for FY26.

Yeah, so just to clarify those comments, and I might... they may have had to mosh to also explain how our partnership agreements are working. But we have three elements to our partnership agreements. There's the base indexation, there's the partnership investment, and there has been historically one-off hardship payments that were really designed to support hospitals in need through the COVID period. So the $37 million last year is the amount we're paying in the in the partnership elements, which are incentives that when we sit down in these agreements, we set objectives jointly with our hospital partners, and if they're achieved, then we pay that at-risk element, and that payment was $20 million in the first half on top of $37 million last year. I think when you look at the total... that total amount versus the total claims line it's quite a material part of um our claims line and so we are really putting a lot of emphasis on this on this um you know transition through these partnerships and they are uh you know working well uh for us so i might hand it to moss just on the general hospital partnerships and how we're seeing those partnerships evolve yeah thanks david having it um the partnerships as david said covering over 80 percent of

benefit outlays, and they're growing in number and scale. So the proportion, as you can tell, is growing in how much of that indexation and payment to hospitals is coming through funding for partnership initiatives. And we're obviously doing it for a number of years now. We're starting to see those benefits come through our claims line, but also customer health outcomes. And to give you an idea, they range from shifting care models for lower length of stay and short stay Growing a no-gap network that also addresses cost to customers and creates a proposition that's very compelling. Maximising prosthesis saving from the more recent prosthesis reform that reduces low-value care and utilisation in the system, and also accelerating new care settings like home care, virtual care, that help avoid complications and readmissions. So all of those are part of that $20 million, and it's growing in absolute terms but also in relative terms compared to the total indexation number.

Thank you. Okay. And just following through then, we've seen the significant challenges for the hospitals, labor availability, wage inflation, clinical care costs, and just wondered what sort of color you're getting from the private hospital ventures that you have, that David mentioned before. too many beds in the wrong place, given that you've, you know, been able to be more strategic. I just wondered how that looked from your perspective with respect to your hospital. Thank you.

Yeah, I think we've probably set a very different, you know, sort of relationship paradigm with hospitals over the last, well, the last 10 years. And You know, there are challenges in the system. There's challenges in our business. We've all had to think differently about how we take pressure off premiums and how we drive the transition. So I think our conversations are data driven. They're looking to the future and they're all about preserving access now in the future for our customers. So really, it's enabled us to have these more forward thinking conversations. There are some pressures in the system and we are paying indexation rates as an industry, the highest we've paid in, you know, more than 10 years. So, you know, the industry has responded, us included, to pay more to hospitals indexation. But we're requiring change as well. And so that's a bit of difference. And when we sit down with hospitals, it's a constructive set of conversations driven on data.

Thanks very much. Thank you.

Thank you. Your next question comes from Freya Kong from Bank of America. Please go ahead.

Hi, morning. I hope this works now. I just wanted to ask about the 2026 price rise again. So your 2025 adjusted cash claims inflation is around three and a half. How do I bridge this to the 5.1% price rise you're going to get? I guess what I'm trying to ask is if utilization benefits will be shared even more with the private hospitals going forward and the claims inflation outlook is a bit higher?

Yeah, hi Fran. So the bridge between the cash claims number and the premium increase is the revenue mix impact. And so it was 150 basis points for the half. So that's the simple bridge between the cash claims and the headline premium.

Okay, great. That's helpful. And then on the growth in non-residence business, which went backwards in the period, Is there anything that you're concerned about there? Where did the lapses come from or has competition picked up? Thanks.

Yeah, so let me start on the lapses. That was in the student portfolio and it just reflects the fact that we had, coming out of COVID, two very high origination years and most student courses are three years, so we're just seeing that natural graduation of those students. Probably the focus in the second half is really around for students' visa approval numbers, and it may increase in the extent the policy unit growth can increase. In fact, I think over the last 12 months, we probably went backwards in student policy, somewhere between 3% or 4%. Still winning share, but that overall market has been contracting. So we've got opportunities in the workers' segment, which is already growing pretty strongly. We had double-digit growth in the last 12 months, and then we got the opportunity to kick off the growth again subject to advisory approvals.

Okay, great. And just finally on your thoughts around medium-term uses of unallocated capital, I think based on your Medibank health plans, you've got around $140 million additional capital to deploy in the next couple of years. Your unallocated capital is already sitting at around $190 million and likely to keep growing. So I'm just wondering what your thoughts are around that.

When we spoke about Medibank Health in the presentation, the focus was on primary care and both scaling and expanding geographic coverage. I think that is the most likely in the short term use of capital. Obviously, there'll be opportunities in the broader virtual care space and in wellbeing, but following the success and the better medical acquisition, so the probability is that the next investment will be in primary care again.

Okay, I guess my question is just beyond what you've allocated for Medibank Health up to 2030. What other uses of capital do you see?

Well, I'd start with that current aspiration, which is to grow earnings to $200 million, and that would require us, as you said, to invest capital up to that $700 million level, and then that would effectively expunge the unallocated capital. Then... you've got opportunities to further grow your property network or invest in the wellbeing space as well. And then you can't discount that if there's capital that we can't invest, that we return it to shareholders.

And look, I think in the very long term, you know, all these three segments in health, wellbeing, primary care, community care, all of those three in terms of absolute revenue of the market potential are larger than private health insurance. So When we get there, we are already a meaningful share of those markets, but there'll be more hampering for potential growth where it makes sense.

And the one that David and I have been talking about quite a lot with Milosh is what happens to the power trial industry in FY30. So we've seen a reduction of one player in the power trial market with some consolidation and the teachers, the two teachers in South Wales and Queensland Teacher Fund consolidation. That's the first we've had since we've come out of COVID. We knew consolidation would be paused because most health funds are now or had been running in an environment with low claims and high capital. We know that's starting to unwind. We know we've got the new prudential standard CPS 230 that comes in. 1 July, formalised 1 July next year. So I think the thing we're discussing is that what does the industry look like in FY30? How many players are there? What happens to the industry through a shift in market share organically versus is there a consolidation opportunity at the right price? And that would be a use of capital longer term. Freya?

Okay, thanks. Thanks very much.

Thank you. Once again, if you would like to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Kieran Chiggy from UBS. Please go ahead.

Good morning. Most of my questions have been covered, but the one I was keen to circle back on was sort of this view of cash claims inflation market, sort of talking around the 3.5% number. But when I look in your... financial statements at your cash flow, the payments on a per unit basis seem to be up around 4.8% on PCP. So it seems like we're sort of more trending in that 4% to 5% range on a payment per policy basis. Can you just help me reconcile why that's not a better guide to sort of how claims growth is going to move going forward?

Bill, cash flow can be heavily impacted by processing speeds on claims and we've seen a marked speed up of lodgement of claims and we've, as best we can, increased the speed at which we pay those claims, Kieran. So I think that's probably a better view to look at the 3.5% than just go through the cash flow. You can look at what the outstanding claims liability is at 31 December versus the prior period and you will see the claims on hand is quite a lot lower. And that's a phenomenon we're seeing across the whole... I mean, most PHIs are seeing that, and I'm sure if you listen to the Ramsey call, they will talk about that in their cash flow conversation as well.

Also, just on the claims numbers, there seems to be some sort of risk margin sort of release in the period. Can you talk to that? And on the risk equalisation, I just want to be clear on the 17 mil benefits. from first half. When you say, you know, that that may unwind in second half, are you talking about a neutral outcome or are you talking about sort of a full sort of unwind as in a negative 17 C flat over the year?

Thanks, Jim. You've gone through the financial statements very quickly. Well done. The risk margin point, we haven't changed the probability of sufficiency. What's happened is if the claims in hand has dropped, then there's a consequential impact to the risk margin you hold. So plans on hand down, whatever that reduction is, multiply that by 12.2%, and that's why you've got a reduction. Look, I would still expect to be a modest receiver on risk equalisation for the full year. Obviously, it depends on what the other 34 funds do and how much we grow relative to market, but I'd still expect to be a modest receiver.

Rod, thank you.

Thank you. Your next question comes from Andrew Buncombe from Macquarie. Please go ahead.

Hi, guys. Thanks for taking my questions. Just one from me, dovetailing with that question that was just asked. You've retained your probability of adequacy at 98%. I know I ask this question every half, but all of your peers have unwound that already. What do you need to see to drop that number going forward? Thanks.

Yeah, it's a great question, Andrew. And look, there's no basis, there's no need to change it. It's just whether or not the claims experience supports changing it. We are seeing, and why we didn't change it this half, we are seeing, because I think I mentioned to one of the other questions, I think it was Kieran's question, we are seeing slightly more volatility in monthly cash payments and claims because of payment speeds. And whilst that persists, I think we'll take a prudent and conservative approach to maintain the current 98 percentile.

Understood. That's it from me. Thank you.

Thank you. Your next question is a follow-up from Andre Stadnik from Morgan Stanley. Please go ahead.

Good morning. Can I just ask around the health segment? So some of the bulk building GP changes came through November last year. How are those going to be impacting the health segment, given your focus on GP clinics?

Good question. So if you think about bulk billing, we're typically receiving a higher payment on MBS and likely charging a customer a lower pay. So at a consultation level, don't expect a material impact and we didn't see a material change in our average fee for consult during the half. It's probably more where you've got clinics that go to total bulk billing, you'd expect to get a practice incentive and we should see some benefit of that during the course of the second half.

Thank you.

Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.