Medibank Private Limited (MPL) Earnings Call Transcript

Thank you for standing by, and welcome to the Medibank Full Year Results 2025. [Operator Instructions] I would now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.

Well, good morning, everyone, and thanks for joining us. I'm coming to you from Naarm, the home of the Wurundjeri Wurrung peoples, to pay my respects to their elders, past and present. I'm joined by our executive leadership team, including our CFO, Mark Rogers. I'll first make some comments on our key highlights and strategy, and then Mark will take you through the financials and outlook. I'll then wrap up and of course, very happy to then take your questions. We're proud of our role as a leader in health, and I want to start by sharing how we think about our contribution. And to me, this is the scorecard that every insurer should be measured against. It's what good looks like. First, it's about providing more value for customers, given cost of living pressures remain a challenge for many. For us, our premium increase was significantly lower than our major competitors this year, which is important as household budgets remain under pressure. We saved our customers $28 million in out-of-pocket costs, and they earned another $33 million in Live Better rewards. And we've kept our promise to not profit from COVID, returning more than $1.7 billion to customers. Second, it's about having a constructive relationship with partners. We've continued to support our hospital partners, providing $87 million of one-off support to private hospitals over the last 3 years, and our payout ratio remains above the industry average. Third, it's about investing in the health transition. This year, we paid $37 million to hospitals to fund strategic initiatives to support this shift. We doubled enrollments in our prevention programs through our primary care business and expanded our virtual health capabilities so we can scale our proactive care approach. And we are investing $50 million over the next 5 years in mental health. And lastly, it's about running the business well. We remain disciplined in how we have grown with positive momentum in our core business. Over the past 8 years, we've taken out more than $122 million in expenses to keep our own costs down. This has meant our management expense ratio remains 1 of the lowest in the market, and it's been that way for a decade and we've maintained a strong capital position to support our ambitions. As you know, productivity is on the agenda at the moment. So I wanted to make a few comments on that now. I believe it won't be a productive country if we're not a healthy one. The general talk about productivity is mostly in underscale but in health, better health outcomes is the true measure of productivity. Quality care should be the most rewarded in the system, but sadly today, it is not. While we are starting to see good progress on the health transition, we do remain behind this internationally. But what is clear is that at a time we were being asked to find productivity gains for the country, we have to challenge current settings, they're constraining progress. While some of our systems are holding on to the old ways, there are others like us who are up for the challenge of meeting the changing needs of the community. The leaders are clear. Our focus on prevention is needed to improve health outcomes and reduce health costs over time to prevent conditions from a rising or worsening. And health isn't just in traditional and expensive hospitals is in fit-for-purpose facilities in homes, in workplaces and in communities. In short, we need to move faster to keep up with the needs of the population, and we remain committed to doing that. On the result, it's a good result. You can see some of the numbers and highlights on Slide 5, but I won't talk to all of these. At a high level, our results demonstrates the greater role we have in the health of our customers. our continued strong growth momentum and our disciplined approach to running the business for the long term. And we're really pleased to see the performance of the Medibank Health segment continuing to become more meaningful to our overall results. now contributing around 10% of group operating profit. Let's turn to Slide 6 for our customer highlights. We're delivering where it counts for our customers, improving value meeting -- health needs and supporting our health systems future. We're making everyday well being more manageable for our customers, giving them access to a wider range of prevention programs and virtual services delivering where customers want help to be delivered. And because we're giving customers more of the support they want, we are seeing engagement with these services increase, and our customer advocacy is at a 3-year high. Now to Slide 7 and a brief overview of our key financial highlights. We saw continued growth in both the resident and nonresident health insurance businesses. Net resident policyholder growth was up 27,900 or 1.4%, which is double the rate of growth of last year. with Medibank brand returning to positive growth of 0.3% and ahm up 4.1%. And importantly, we saw positive momentum in the second half. In our nonresident business, we grew 10,500 policy units, up 3.1%. Health Insurance operating profit was up 7.1% to $741.5 million. In Medibank Health, our segment profit was up 27% to $76.7 million, helped by growth in Myhealth. Net investment income was up 14.1%, and Underlying net profit after tax was up 8.5% to $618.7 million. And in line with our healthy capital position, we are delivering shareholders a final fully faced ordinary dividend of $0.102 per share. Now to Slide 8. At Medibank, everything we do led us up to our purpose, better health for better lives and it's supported by our ongoing focus on risk culture and the strong foundations that enable our growth. And more and more, it is our teams driving this, managing their days to maximize the impact for our customers. They are harnessing AI to address customer pain points, which has a complaint resolution time by 60% and now growing the number of no-gap inpatient diagnostic agreements keeping an extra $400,000 in Medibank customers' pockets each month. Our team is looking to create points of difference in both big and small ways. Like our commitment to be a leader in mental health which means a customer can chat with a mental health professional any time of the day or list. It's why we are growing our no gap program with more than 10,000 customers saving $7 million in out-of-pocket costs since we started the program. And by an international student with the flu can call a virtual GP instead of having no other option than going to Ed. And we're not just expanding in health, we're driving change within it from investing in prevention through the primary care and to delivering personalized care options, we are continuing to partner with others who share our commitment to driving the health transition. Integral to our strategy is continuing to strengthen our foundations, so we can grow fast and safe. We are continuing to uplift our approach to risk management, investing more in flexible technology platforms and scalable resilient security capabilities. Now to Slide 9. The recent market growth continues to be buoyant, earning industry and younger people are driving the growth, which is important for long-term industry sustainability. However, we are still seeing the consequences of unsustainable competitor activity that existed over the past 2 years. Switching rates are up with many funds acquiring more customers through high-cost aggregated channels. Lapse rates have also increased, although they do remain at similar levels to what we saw before the pandemic. These higher cost acquisition tactics have pushed up management expenses and premium increases for many other funds. However, we're not surprised to see some parts of the market now start to reel in these tactics. As you know, we chose to stay disciplined. And you can see this through our better retention rates improved risk equalization results through a lower premium increase and management expense ratio. And this approach will remain with our focus on our core markets and to accelerate our differentiation offering. On the hospital side, higher indexation, growing volumes and easing cost pressures is improving hospital margins. And while there are still inflationary impacts, such as the flow on impacts of nurse EBAs. These impacts are now more known and are being built into hospital contracts. All of this has cleared the path for more constructive conversations on reform opportunities and innovation. And our financial investment in hospital partnerships to support this is more than double that of last year. Now to Slide 10. The nonresident market also remains strong. We know that migration continues to play a major role in Australia's economy, but there are some changing dynamics in the sector with many of these shifts playing to our strengths. The student segment is stabilizing. And with the student mix skewing to higher education, this favors our strong position in the university market. And the government has also recently announced an increase of student intake in 2026. Our overseas student offer, which goes beyond simply Insurance is resonating with us retaining and growing our university partnerships to support our continued market share growth. There are similar segment-specific dynamics in the workers market. The demand for skilled workers remains high as Australia grapples with critical skill shortages. Significant price-led competition in this segment carves out opportunities for differentiation. And as you know, that's a very comfortable spot for us. We are focused also on helping students stay with the right cover as they move to the workforce and then to permanent residency. We have a record number of students expected to shift to working places over the next 24 months. In fact, the graduating class of 2025 is actually our largest to date with the conversion opportunities noticeably higher than last year. We know around 4 out of 10 student arrivals will ultimately become residents. It's a big opportunity for us to grow. Let's move to Slide 11. We all agree we have 1 of the best health systems worldwide. We also agree it is under pressure. People are expecting more, and so change really can't come fast enough. While hospitals will remain an essential part of the care system for acute care, within the next decade, the home and the community will become the center of health, and we are well placed for this through our Amplar Health Network, which is delivering local care at national scale. This year, Amplar saved around 177,000 hospital bed days through its delivery of home care, equivalent to almost 3 average size private hospitals. We're also seeing good growth across our suite of prevention programs, and we're meeting growing demand for support in areas like mental health with context to our 24/7 support service, almost tripling over the last 4 months. We are also pioneering a shift to a more proactive model of primary care. Our pilot of GP led multi-disciplinary care teams in a number of Myhealth clinics applies the best practice recommendations to the sector has been calling for some time. Our investment in Myhealth shows how serious we are about growing in primary care and making health care more accessible. And we have aspirations to triple our scale in this sector by end of the decade. It's a model we're using to deliver a growing range of health services for the community in the public sector as well as our health insurance customers. This year, we've partnered in the launch of Australia's first no-gap private hospital in Melbourne, delivered an out-of-pool transition care service at a hotel for the South Australian government and expanded our IM Mental Health partnership to Brisbane. And just last month, we began holding a new virtual nursing model in residential aged care on behalf of the Australian government. We are doing this because it's what our customers and partners want and that's what Myhealth system needs. Now to Slide 12. Often get asked about our approach to artificial intelligence. Emerging technologies have underpinned our transformation to a health company for some time. We are using AI to help us simplify health journeys, expand access to services and create more personalized experiences. It's also enabling our people to be more productive and engaged in the work that matters most, using AR to assist in resolving customer queries, helping us detect and resolve payment issues more effectively. It's used by Amplar Health nurses to improve patient wound care. For clinical describing by Myhealth GPs and supporting us to offer personalized health suggestions to customers using their my Medibank app. And we have more than 15 new experiences with this type of technology, and it's used across our business. We are also working with AI innovators, particularly in the health space. to access tools and platforms to enhance our capabilities. All of this is enabling us to adopt at speed while ensuring we do so responsibly. AI will continue to fundamentally reshape all industries into the future. Importantly, for us, AI is a tool to support our people not to replace them. And with health care demand set to continue to increase the use of AI to support the care team and in fact, be part of the care team can only help us support the health needs of the community into the future. Now over to you, Mark.

Well, thanks, David, and good morning. This result demonstrates our disciplined approach to running the business. It highlights the benefit of continuing revenue diversification and includes investment for future growth. Group operating profit was up 8.9% to $762.4 million with solid growth in resident health insurance an important contribution from nonresident and continued strong momentum in Medibank Health. With the 14.1% increase in investment income and cyber costs and other income and expenses broadly in line with last year, profit before tax and covered impacts increased 10.8% to $911.6 million. FY '25 cyber costs were $39.7 million. And in FY '26, we expect costs to be around $35 million. and that the IT security uplift program will largely be embedded. We have reported code impacts outside of group operating profit with the $182.8 million cost this period, including our final customer giveback. And reported EPS was up 1.7% to $0.182 per share. And underlying EPS, which adjusts for the normalization of investment returns and to in tax was up 8.5% and to $0.225 per share. Slide 3 covers the health insurance results, which is mentioned, it excludes [ core ] impacts, which are reported separately and reconcile against the COVID equity reserve. Whilst the economic environment remained challenging during the year, the business was resilient, and we continue to see benefit from our disciplined approach to growth and claims management during COVID. Gross profit was up 6.8% with 3.9% revenue growth and a significantly improved risk utilization outcome, including a $7.8 million recovery in the second half. Gross margin of 17% is 50 basis points higher and includes a 20 basis point benefit from strong growth in higher-margin nonresident policies. And whilst additional investment resulted in a management expense ratio increasing, operating margin was up 20 basis points to 9% and operating profit up 7.1% to $741.5 million. Consistent with the trend we saw in the first half, hospital claims were $31.2 million below expectations in the second half with lower utilization in some nonsurgical specialties. FY '25 is the last year, we will separate our code impacts on hospital claims from the health insurance result. We've now finalized our get-back program with all remaining savings returned to customers. Now turning to Slide 16. The resident health insurance market remains buoyant with policyholder growth in the 12 months of 30 June expected to be only modestly lower than the 2.3% growth we saw in the 12 months to 31 March, with ongoing strong growth in 25 to 30 year olds. However, cost-of-living pressures continue to impact the industry with higher switching rates and aggregators increasing the share at industry joins. Over the last 12 months, our number of policyholders increased by 1.4%, with Medibank and [ AIM ] growing 0.3% and 4.3%, respectively, with improving momentum in the second half. The acquisition rate of 11.5% is 50 basis points higher with improvement in the Medibank brand from investing in differentiation and additional marketing spend in the second half. The ahm brand continues to resonate with consumers. And plusingly, the improvement in the acquisition rate was achieved without increasing the percentage of joins through aggregators. Despite the higher industry switching rate, retention was 20 basis points higher, with benefits from ahm's enhanced customer experience and additional investment in product benefits and Live Better in Medibank. Key areas of focus for FY '26 include improving retention, particularly in ahm through further personalization and integrated customer propositions, increasing focus on acquisition in priority segments, particularly the growing corporate market and deepening brand differentiation through investment in new products and services. Turning to Slide 17. President claims expense increased 3.9% and risk equalization provided a 70 basis point benefit to net claims growth this period compared to a 10 basis point benefit in the prior period. Present claims growth per pulse unit of 2.2% is in line with last year, with the 80 basis point increase in hospital offset by a 270 basis point decrease in Extras. In hospital, higher -- indexation and the increase in New South Wales private room charges from 1 January were partially offset by the improved risk utilization outcome and benefit from customer growth being skewed to lower product tiers. And the decrease in extras reflects that claims were $51.8 million below expectations in the prior period due to COVID impacts and economic conditions impacting the utilization of some services. Looking to FY '26 and whilst the cost of private hospital agreements renegotiated during FY '25 and higher extras utilization will increase claims growth. We expect this will be partially offset by negative hospital utilization growth as we exit the COVID claim regime, lower MBS and public hospital price increases and more procedures happening outside of traditional higher cost settings. We will also maintain a proactive approach to claims management by broadening our partnership approach to hospital contracting, increasing the number of Medibank customers that are supported by personalized models of care and expanding the use of AI in our payment integrity program. Slide 18 details health insurance performance, which shows continued growth in both resident and nonresident. In resident, our disciplined approach to growth resulted in gross margin improving 30 basis points to 16.2%, with revenue and claims growth per policy unit of 2.6% and 2.2%, respectively. Growth in revenue per policy unit was in line with FY '24 with the higher average premium increase offset by higher downgrading with increased investment and Live Better, customer growth skewed to lower tier products and other portfolio management impacts. And based on this trend, we expect downgrading to be modestly higher in FY '26. Strong growth in nonresident revenue has continued with average policy units increasing 11.6%, with positive momentum in work for acquisition, partly offset by lower visa approvals impacting student acquisition. Gross profit increased 22.4% to $111.6 million and gross margin was up 270 basis points to 36.9%, reflecting improved visitor and worker margins partially offset by modest tenure impacts on the student margin. Nonresident remains an attractive market and in FY '26, we will further differentiate our offering, invest to grow market share, particularly in workers and visitors and increased focus on customer life cycle management. Moving to Slide 19. Management expenses were up 6.5% to $654.9 million with higher operating expenses, increased D&A in line with our increasing investment in digital assets, partially offset by lower sales commissions. Operating expenses were up 8.2%, with inflation of approximately 4%, partially offset by [ $10 million ] of productivity savings, modest volume impacts and additional investment to support both resident and nonresident policyholder growth into FY '26. Sales commissions were $3.5 million lower with nonresident commissions impacted by lower student acquisition and resident commissions increasing in line with higher ahm acquisition. The major drivers of expense growth in FY '26 will be inflation, which we expect to be lower than in FY '25, an increase in commissions in line with higher policyholder acquisition and modest further investment in growth with these increases partially offset by a further $10 million of productivity savings. Despite the management expense ratio increased in this period, we continue to target a stable to modestly improving ratio through leveraging our investment in analytics, digitization and next horizon of productivity initiatives to improve efficiency and utilizing our direct distribution strength to manage the cost of acquisition. And whilst we will maintain our disciplined approach to cost management, we will balance this with investing in further growth where this makes commercial sense. Turning to Slide 20. Medibank Health segment profit increased 27% to $76.7 million, with a 31.2% increase in operating profit, partially offset by a higher loss from our JD hospital portfolio, which includes expected losses from 3 recently opened hospitals. These hospitals continue to make an important contribution to the health transition, and we expect performance to improve next year as the portfolio matures. The 12-month operating profit contribution from Myhealth of $19.5 million includes an additional $6 million investment in our new virtual health platform, which will enable more patients and Medibank members to have virtual health consultations in the future. The business continues to perform well with increasing consult numbers and a higher average fee, with the expectation that the recently announced changes to bulk billing incentives will favorably impact performance in FY '26. In the remainder of Medibank Health, organic growth was 23%, and resulting in operating profit of $64.7 million and a 100 basis point increase in operating margin to 19.1%. Revenue growth of 16.8% includes strong growth in health and well-being and diversified insurances, improving growth in health services and a 6-month contribution from Amplar Home Hospital. The 110 basis point reduction in gross margin includes additional investment in Live Better and was more than offset by a 200 basis point improvement in the management expense ratio with the benefit of improved efficiency and growing scale. We continue to see strong organic growth potential in the business with FY '26 focus areas, including further performance uplift and health services meeting the needs of more of our health insurance customers and scaling existing services with a broader set of payers. We are augment this organic growth with further M&A that adds scale, capability or expand our geographic coverage. With our near-term focus on expanding our priming and virtual care footprint and broadening our participation in the fast-growing corporate health and well-being sector. Moving to Slide 21 Investment income of $207.8 million was $25.6 million higher with a $17.9 million and $10.4 million increase in the growth and defensive portfolios, respectively. The increase in the growth portfolio reflects higher income from all asset classes with particularly strong performance in equities and the increase in the defensive portfolio includes the benefit of higher asset balances and improved return on international holdings partially offset by the benefit of tightening credit spreads we saw last year, not recurring. Underlying net investment income increased $10.7 million and the underlying net investment return increased 9 basis points to 5.86%, which is a 166 basis point spread to the average RBA cash rate and within our target range. In FY '26, we expect underlying net investment income to be impacted by the lower RBA cash rate, and we will consider actions, including adjusting the target asset allocation and defensive asset settings to help offset this impact. Now Slide 22 covers capital. The Health Insurance business continues to be well capitalized with capital at 1.5x the PCA and the capital ratio at 14% of premium revenue, which is above the target range of 10% to 12%, with additional capital held to offset the $250 million APRA supervisory adjustment. The increase in other capital employed in Fluids investment to acquire 100% shareholdings in the Medinet and Amplar Home Hospital JVs and funding growth in Medibank Health. And with the business' strong capital generation and performance of investment markets, unallocated capital increased to $251.9 million and supports our M&A aspiration. Given the strong capital position, the Board has declared a final dividend of $0.102 per share, bringing FY '25 dividend to $0.18 per share, which is an 8.4% increase and 80.1% payout of underlying net profit after tax. And to finish a few comments on our outlook for FY '26. In resident Health Insurance, we anticipate moderating industry growth relative to FY '25, and we aim to grow market share in a disciplined way, including further growth in the Medibank brand. We expect growth in claims per pause unit of between 2.6% and 2.9%, and that increasingly, our proactive claims management approach will differentiate us from the industry. We aim to further diversify earnings, including in nonresident health insurance. We are maintaining solid gross profit growth remains a key focus. And in Medibank cost, where we expect low double-digit organic operating profit growth. And given the strong asset pipeline this year, we aim to invest towards the top end of our $150 million to $250 million M&A target, provided this creates long-term value. I'll now pass back to David Koczkar for closing comments.

Thanks, Mark. Now to Slide 25. We will remain clear on what opportunities we go after and what we say to -- what I thought we'd do is share a bit of an insight on how we run our business. Across Medibank, what you see here are known as our 12 priorities for FY '26, and we use them to measure and track progress across our 4 strategic pillars. And you can see here our key priorities for FY '26 include growing market share in our resident and nonresident businesses by delivering leading experiences and differentiated offerings. Two, continue to expand into health to support both our insurance business and to diversify our earnings in Medibank Health. As Mark explains both through organic expansion, but also delivering a strong M&A pipeline. Three, largely complete our IT uplift program and expand our adoption of AI and other technologies to support our people to simplify our business and to accelerate our strategy and to continue to reinvent the way we work to empower our teams to deliver for our customers. You'll see these again in October when we have our Health Immersion Day, where we're going to share our medium-term expectations and plans. Now attention on Slide 26. I thought I'd end by restating what makes us different to others in health and how we create value. It's not just what we do for our customers. It's the way we do it. By connecting the different parts of our business, we deliver more than the sum of our parts, providing more of what our customers want, while building trust and growing as a health company. This has also delivered consistent long-term value for our shareholders, establish new and diversified earnings streams and created a more resilient business. This approach continues to drive our strategy. So in summary, we're a strong growing business, and we're excited about the future. Our insurance and health businesses provide a clear pathway for future growth and value. We have an approach that's different from others that enables us to take both sides of our business to support each other and to create value across them. We are a resilient business, and we'll remain disciplined in our approach to growth and managing costs. And we will continue to advocate for our customers and drive the health transition this country needs to improve productivity and to keep the Australian Health System, one of the best in the world. We can't do any of this without our people. They are the backbone of Medibank of ahm and at Amplar. Our people work incredibly hard every day with energy and commitment for our customers and our purpose, and I thank them for their dedication and passion. So now, it's over to you for any questions you may have.

[Operator Instructions] Your first question comes from Vanessa Thomson with Jefferies.

I was interested in your hospital claims, noted that they were below expectations, and you've seen lower-than-expected utilization in some nonsurgical specialties. I know you've discussed this in the past. I wondered if it was the nonsurgical claims were lower in the same areas that you've spoken to previously.

Vanessa, the 2 major specialties where we continue to see softness in the -- mental health and Rehab, which is around 50% of our total nonsurgical spend.

And also respiratory or has that changed a bit?

Respiratory is still live, but that's only around 6% of total nonsurgical claims. So the favorability is largely driven by the 2 spend buckets.

Okay. And then I also wanted to ask about hospital contracting and some of the press we've seen recently from the Private Hospital Association talking about the balance of power between insurers and hospital operators. I just wondered if you could give us some insights on that and how you think that will change contracting into the future.

Yes. As I said in my remarks, I think we're seeing higher indexation inflationary pressures are more known and unknown. There's quite a few new players in the sector who are more interested in looking in the forward wind screen rather than review measure should we say -- mirror. So I think actually that's setting up conditions for conversations on reform and innovation. We've seen -- we continue to see and have seen very constructive conversations with our hospital partners. We've made sure that we've supported hospitals in the last 3 years. We spent $87 million in one-off costs to support hospitals. But as you know, we've been, for some time, including partnership and joint incentives on creating a path for innovation with our hospital partnerships. That covers more than 80% of our contracts and has for some time. And in this last year, we spent $37 million on those incentive payments, which is double that of last year. So I think when we start our conversations, which are all very constructive, it's really how can we support affordability today and invest in innovation to sustain the system. And those conversations are sort of positive and constructive.

And Vanessa, I'd add 1 final comment. At a 16.2% resident gross margin, we're still 20 basis points behind where we were going into COVID. So I feel like we've actually managed through the cycle and our gross margin hasn't increased at the expense of the hospitals. So I think the challenge will be for those players in the industry where the gross margin is significantly higher than what it was pre-COVID, I think that's going to be putting a target on a few people's backs.

Right. And so sorry, Mark, I think it was David mentioned reform. Is that something that you think could be targeted in potential reform?

Look, I think there's a lot of discussions about reform in both the public and private sector is an ongoing need to challenge the current settings. I think as a participant in the CEO Forum meeting next week, we're actively coming together to see what we can do to change the settings to make sure the system remains sustainable. I think it's very clear that we have a vision that the sector is sustainable and does what it needs to do to support customers into the future. But that's more about any 1 individual players at about the system itself. I think it's also likely that the reforms any reforms will be timed around the premium review cycle. But we're not relying on any reforms in the short term. I think what I was referring to is more individual bilateral changes that we are driving with our hospital partners that we've talked about before we have those arrangements with all of our major groups. And that's really creating the joint incentives to invest in the health transition, whether that be increasing the safe adoption of things like short stay, whether it's looking at prosthesis, whether it's looking at delivering care outside the hospital walls, all of those things are of interest to our hospital partners and to us. And that's why we're committed to continuing those conversations.

Your next question comes from Julian Braganza with Goldman Sachs.

Just the first 1 in terms of just the claims inflation number over the full year and also the second half, 2.2%, 2.1%. Can you maybe just provide some color on what's in that number? Are there any additional product benefits that were made in the period? Any one-off benefits to hospitals? And also just that $30 million benefit for the half, let's call it, $75 million benefit for the full year. Is that now captured in your 20 inflation number into FY '26 in terms of this benefit kind of evaporating in terms of that claims inflation number that the guidance you've given us for next year?

So I'll start with any one-off payments during the year. So we had a $36 million release from the 30 June 2024 claims reserve. And by and large, that amount was actually, as David mentioned, was provided to hospitals through innovation or hardship payment. So that had no impact on the reported claims result. Looking across the 2 halves, probably in the second half, the 2 biggest impacts were New South Wales private room charge increases, the $16 million incremental cost in the second half. And then you'll see extra utilization was significantly lower in the second half than the first half and that reflects the softness we had in second half '24. So over to most significant tax in the half on half split.I am sorry what's your third question, Julian?

Yes, sorry, just to follow up on that in terms of the benefit that we saw versus the expectation. Just trying to get to the bottom of what you're seeing in terms of paid versus incurred inflation and the guidance you've given us for next year, does that have -- how should we be thinking about that $30 million benefit that you saw in the second half in context of that claims inflation number you provided for FY '26.

I think you need to look across the full 12 months, which is a $74.8 million of favorable variance to expectations that Julian. We don't have a reserve next year. So what that means is you need to get $74.8 million of additional claims just to get back to the expected number we reported this year. So that's about a 1.5% utilization uplift in hospital. What we're expecting in that claims guidance is the majority of that favorability unwind, so it's temporary rather than structure, but we are expecting negative utilization growth in hospital next year as a consequence of what we saw in '25. So if you look back on what happened in FY '25 in Extras, so we came off the cap ratio for extras in 2025. We had negative utilization growth and that more than offset a slightly higher inflation. It's the same thematic for a hospital going into '26.

Got it. No, that's clear. And then just a second question on downgrading, which is quite high in the second half, and you're expecting that to increase into next year, which I gather is on a full year basis being higher like-for-like FY '21 versus FY '26. Can I just understand what is the -- in your claims number for next year? And the mix of downgrading across the different policies. How should we be thinking about the claims benefits and margin benefits in your guidance for next year on trans inflation from the downgrade?

Yes, that's a really good question. Let me just start with the guidance for next year. You're right. It's modestly higher based on the full year downgrade of 90 basis points. And the reason for that is there is some seasonality in downgrading the premium view goes through in the second half, and that's typically the trigger for downgrading and you know that premium increases were slightly higher this year for us and significantly higher across the industry. So it's had a biggest seasonality impact this year than in prior years. And we also did invest in some additional benefits and a Live Better during the second half. So you're right, I've looked through FY '25 at 0.9% and expect modest growth from there for the full year '26. And then in terms of the claims guidance, where we land in that range is going to be very dependent upon where we see acquisition and lapse similar to what we saw this year. So if customer growth is slightly skewed to higher tier products, you'd expect to land at the top end of the claims range. And then you expect as a consequence of lower downgrading or generally, if you have growth due to the lower tier products as we saw this year, we'd expect to land at the bottom end of the range and downgrading to be higher. But I guess in a 10,000 feet view, Julian, and obviously subject to where the premium increase lands from 1 April, provided downgrading doesn't increase significantly, which is not our expectation, but I think a flat jaws outcome is extremely possible.

Okay, that's very good. Okay. And then just in terms of the last question for me in terms of the nonresident business. Just keen to understand rate and claims inflation intralesion, trends looks like the second half seeing a little bit of a tick up in inflation from the first half and rate as well. But just what are you seeing towards the close of the half and expectations into FY '26, so just wrong rate and inflation for that online business.

We'll start with claims, actually, we had a quite significant improvement in claims inflation in the second half. We saw a much better margin outcome for our business book. So if you look through the full, I think we did 36.9% gross margin through for the full year, Julian, but we did 39% in the second half. So that's reflective of the improved margin and therefore, lower claims growth in the visitor book. In terms of premium increases, we'll be going through the submission process for next year's may write around, so I won't go into that in any detail. It's probably more important to focus on the policy led trajectory. And I think probably the most important thing for FY '26 is without the 10% increase in student visa approvals comes through? And then when do they come through? Is it in the first half or in the February emission period. So I think that for us, we may not get a stronger policy hold price or average balance growth next year because we don't have the same momentum going into '26 as we had '25. But I think it's probably going to be equally important is how we manage our margin to deliver gross profit growth.

The only thing I add there, Julian, just as I mentioned before, our approach to the life cycle management, we've invested more in supporting students and workers who become residents to stay with Medibank or ahm. For us, it's a different business unit for them. It's just the same cover. And we know that 4 of 10 students become resident, 7 out of 10 workers become residents. And that's another way that we can grow our resident book that's very different from how others can. When I look back, we're now almost 70% larger in terms of book than we were at pre-COVID. So we have opportunity for us to drive growth in the resi business is very attractive.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Firstly, just carrying on around the question around downgrading and growth. I just wanted to understand if there was any increase in incentives 3 weeks or anything like that in the second half and also, just maybe if you could provide some help understanding your confidence in getting market share growth into next year. which segments you're hoping to get that in and whether you're expecting any of these incentives to continue if there was a step-up in those.

Yes. Okay. Thanks for your question. So on investment, there was only a very small increase in the spend on offers in the second half. We were really measured in our approach to growth. And in fact, we -- for some products, we went off aggregators between March and June as part of our kind of disciplined approach to where we grow. Our investment was more in the increased investment was more in Live Better where we see a better longer return on investment and paying commissions to [indiscernible].

Yes, just on the broader question about next year. I mean I think when I look through this year, we had a very pleasingly strong momentum in the second half I think we'll find out what when APRA releases the market results, I think it's tomorrow where we sit, but we're very confident that we're growing in line with the market, as we expected to in the second half. So really, momentum is just not continuing that momentum. I think to Mark's point about the aggregators, I mean we've remained very disciplined given there's still some unsustainable practices out there. We could have short-term the business, if you like, in grown through aggregators. We saw aggregators in the last year, take another 10% to 15% share growth of acquisitions as others in the market are desperate to spend money on acquiring customers. Again, we've stepped away from that and ahm actually maintained its direct share of direct distribution year-on-year, which sort of points to -- there. Similarly, though, we invested in Medibank because we saw the conditions were right to both growth for '26 but also support growth in '26. So I think we do expect that those practices will start to unwind. We are seeing the major funds or the larger funds having much higher premium increases that sort of expected given their approach to how they've been growing their business. Their retention rates are a lot worse than ours and we're seeing signs that they're pulling back. So I think what gives us confidence is the market conditions will probably start to stabilize during the year. We have our giveback. We've got a very strong performance on retention with more investment in differentiation and product settings. And I think we're seeing very strong growth in the corporate sector that will continue to support growth in Medibank and really ahm. It's about remaining disciplined and attracting the right to the customer for the group. We're very pleased that the ahm results showed an improvement in retention rates, and others are going in the other direction. So I think that just shows what we're doing quite differently in our approach.

And maybe just to close off on the downgrading point, if you look at the increased from 50 basis points to 90 basis points for the full year. Slightly more than half of that reflects acquisition and lapse mix, and we saw an offsetting impact and benefit in our claims. We undershot our claims guidance by 20 basis points. The vast majority of the remaining difference is because of seasonality rather than any investment in offers or any other factor.

Okay. That's super helpful. If I could just ask a second question just around just your discussions with the government and with the hospitals and how that's informing your thinking about margins. I think, Mark, you said you're expecting the outcome of all the moving parts to the gross margin roughly flat into next year. But obviously, 1 of the missing components is just the next rate round. I was just keen to understand, I think clearly, the government is trying to push for more support for hospitals, but I was just wondering where you think the discussion is on affordability for customers. Are they willing to accept that more being given back many pressures on premium rates?

I think I'll start -- Mark, hand over to Mark. I think look, what I get asked what good looks like and when we talk about this, it's what we are doing. It's investing in the health and well-being of our customers giving them more value, which I think we've shared today. It's about having a higher payer ratio than the industry average, which we do. It's about having 1 of the lowest cost in the market. I think us apart from 1 other small fund, we've got the lowest cost market. It's about investing in the health transition supporting hospitals as we've evidenced today through our one-off and support costs and pay indexation. I think that's the scorecard that we run our business against, and that's the sort of conversation we have. I think others have different conversations where they are not doing any of those 4 or some of those 4 or they are sitting in a position where they have a low payout ratio. So I think you've got to sort of separate the industry from the players. And that really shapes the conversations we have in the reform program with the government, but also with hospital partners. And as I said, when we come to conversations about supporting our hospital partners comes in a position of us doing all those things to keep our check on affordability and supporting our customers. I think there's more that needs to be done, though, and that's the big focus of the reform program over the next few years is how do we make keep health insurance affordable. Health is a very big priority for customers. They're taking our health insurance still in record numbers. We've seen strong growth in younger customers -- and so -- but we need to keep working hard so that we can maintain affordability in the future. We did talk about a slight moderating growth. We've been saying that for a few years now. But the conversation of the reform table is how do we reduce the cost of insurance. Let's talk about payout ratios, but I think it's quite interesting because the real conversation should be why does it cost twice as much in the private sector to have a knee replacement as it does in Northern Europe? Why is it 4x as much to deliver a baby in the private sector than it does in Europe? Why is it more expensive to have a hip replacement in the public system? We -- I don't think the Australian private health insurance consumer should pay for what the graph shows is 64% of beds being utilized. We've actually got to look at the core fundamentals of cost and productivity, and that's what we advocate for in the reform discussions.

And so probably the 2 things I'm watching closely from a gross margin perspective is we've got claims for $74.8 million below expectations in hospital this year, that's 1.5% utilization. We've assumed the majority of that will unwind. We'll need to watch that closely. If that is actually structural, not timing and there's no recovery, and that could provide upside for both the claims guidance and the gross margin. And then at a fund level, Obviously, the growth rate of overseas relative to reside. And then the margin track on overseas, I think that's going to have a very important input into what the fund gross margin delivers in 2026.

Your next question comes from Freya Kong with Bank of America.

Can I just go back to the positive momentum that you guys saw in H2 for the resident book? What's actually driven this in terms of momentum? Are you seeing pullback from competitors because they need to manage their expense ratio? Or is it something that you've done?

It's a series of factors. We have seen the early signs of competitors starting to, I guess, change strategies given the practices that we've seen in the last 2 years have been unsustainable. We've seen a reduction in offers different timing of aggregator use, and we've seen some cost-cutting initiatives emerge. So all of those are changing competitive practices. I wouldn't say that it's uniform because there's still other competitors that are still looking to grow through acquiring on the aggregator, which for us, it's just not a sensible way of investing in the long term of our business. It's not good for the long-term support for our customers. So we are still seeing some of that. But I'd say that the market conditions are changing. I think when you look at the premium increase rounds, where others have had to put very high premium increases through to support what is probably a falling margin expectation with higher costs. We've kept our settings reasonably steady and have had a premium increase, it's lower than the industry average. So that's really helped our momentum as well. I just [indiscernible] was interested in your perspective in the second half, anything to add.

Yes. I think there's a spot on. On the other 2, 1 is the customer and brand metrics all moving in the right direction. And so our ability to attract and retain customers are improving year-on-year materially. And then the second 1 is part of our disciplined growth, we've focused on families and corporates and we saw great trend over the year, but in particular, half 2 acquisition of families and corporates hit numbers that we haven't seen in over 10 years. So that momentum is building in particularly those target segments we've chosen to focus on for the last few years.

That's really helpful. And then can I just ask on the M&A budget of $150 million to $250 million over FY '24 to '26. How much of this has been spent? And what would you deem a reasonable time frame to consider what to do with the excess?

It's around $60 million spend -- $60 million to $70 million is spent to date. And the comment in your guidance was in respect to FY '25 spending at '26 being the residual. So I think the M&A pipeline is as strong as I've seen it for a long time. And so we'd hope to deploy that the capital position is strong. The strategic rationale is also strong. So we hope to be able to deploy that during the course of this year.

Okay. Great. And then final 1 just on the APRA supervisory charge. Can you also remind us on the time line of this release and what needs to happen for the regulators to get comfortable here?

Yes. The final decision obviously, rests with the regulator. We're in regular contact with APRA and we're well progressed through the uplift program that we are sharing today that we expect to put that program into the embed phase by the end of this year. We're well progressed more than halfway through, for sure, and we're in consultation and discussion with APRA about how they view progress and what that means, if anything, for the capital overlay. I think it's really the balls in their court. And we have very open and transparent conversations about that. I think there's other situations where they provided partial release to capital overlays is either situations where they've held on to that capital to the very end of a program, and that's really the termination to them. What I would say is the program is going very well, and we remain well capitalized to support our strategy.

And for the comment we made about deployment of the capital in the M&A, there's no assumption of that capital being released. It's -- you made that statement based on the level of unallocated capital and the ability to fund that is cash reserves that are surplus to the businesses existing needs rather than assuming any of that money was released from the supervisory overlay.