I'd now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.
Good morning, everyone, and thanks for joining us. I'm coming to you from Naarm, the home of the Wurundjeri Woi Wurrung peoples. On behalf of Medibank, I acknowledge the traditional owners and custodians of country throughout Australia and their connections to land, sea, and community. I pay my respects to their elders past, present, and emerging. I'm joined this morning by our executive leadership team, including our Group Lead, Chief Financial Officer, and Group Strategy, Mark Rogers. I'll first make some comments on our key highlights and strategy, and then Mark will take you through the financials. I'll wrap up with our outlook, and then we'll take your questions. Starting on slide five, the highlights. Our strong result demonstrates our focus on our customers and the benefits of our disciplined approach.
It shows our momentum, the deep relationships we have with our customers, and our strength as a health company. We continue to provide our customers with more value, investing in their experience and providing them with greater support in their health. People continue to choose private health insurance in record numbers despite cost-of-living pressures, with PHI market growth remaining resilient and with strong growth in younger customers in particular. But there are challenges. Many Australians are doing it tough. Some private hospitals continue to face challenges, and our health system desperately needs innovation. In the community, concern is growing around cost of living, health system capacity, and mental health, and we are helping to address all three.
Being a strong business means we have the capacity to invest in our customers by providing more value, to continue to support health providers, and to invest in the health transition this country needs, including investing more in prevention, primary care, and mental health, and this ability to invest is how we can provide extra value to Medibank customers. Today, we announced returning AUD 160 million as part of our COVID-19 support package and give-back program. It's how we can afford to pay private hospitals more for their services. Indexation we pay to hospitals is at the highest level in quite some time, and it's how we can provide one-off financial support to private hospitals of more than AUD 67 million over the past two years, including AUD 5 million this half.
It's how we take pressure off the health system by investing in the health transition, with AUD 59 million of investment in the past 18 months of inorganic growth, including in primary care, which is also driving our growth. And it's how we can take on our responsibility to be a leader in mental health. It is well understood that the Australian mental health system is at breaking point, which is why we are doing more for our customers and more for all people in Australia. Medibank is a resilient business, and we have a long-track record of navigating competitive and economic challenges while managing for the long term. And you can see we remain well capitalised, and the work we have done to further strengthen our business sets us up well for the future.
Our strategy continues to build our sources of competitive advantage and allows us to target multiple avenues of growth, which is currently focused in our insurance, primary and virtual care, and corporate health and wellbeing sectors. And while each of these sectors where we operate is undergoing change, we have the right capability to navigate these shifts. So let's turn to slide six for customer highlights for the result. Today, as I mentioned, we announced an additional COVID Give-Back of AUD 160 million, bringing our total customer support to a record AUD 1.62 billion, the largest of any insurer in Australia. We're making everyday healthcare more affordable for our customers, helping them save more, like when they visit the dentist or get new glasses, and expanding our no-gap program to cover more procedures and more hospitals.
Through our Members' Choice Advantage network, customers have already saved more than AUD 14 million in out-of-pocket costs this half, and customers are loving the rewards they can access through Live Better. Around AUD 15 million this half, including more than AUD 4.6 million in cover rewards. This program continues to grow and now boasts around 890,000 members, and it continues to be a compelling reason for customers to be with Medibank. Every Medibank health insurance customer also has unlimited access to our 24x7 nurse and mental health support lines and web chat services, with web chat proving particularly popular, especially among younger customers. As well as delivering more value, these initiatives are helping expand our connection with customers to a deeper, broader relationship in health. This half, we saw around 9% growth in virtual health interactions provided to Medibank customers by our Amplar team and their partners.
Amplar also delivered over 100,000 home care visits throughout the community. And our focus on these relationships is evident through improving retention and continued strong advocacy scores, with AHM achieving its strongest half for service net promoter score on record and Medibank's upward trend continuing. Now to slide seven and a brief overview of our key financial highlights. In this half, we achieved a strong result. We saw continued growth in both the resident and non-resident health insurance businesses. Net resident policyholder growth was up by more than 18,500 policies, or 0.9%, over the 12 months, including the additional 7,500 policyholders this half, which is double the growth of first half 2024. In our non-resident business, we grew 38,900 policy units from last year, up 12.6%. Our management expense ratio was flat. And as a result, health insurance operating profit was up 10.2% to AUD 349.2 million.
In Medibank Health, our segment profit was up 40.8% to AUD 37.6 million, including Myhealth, which is tracking well with increasing consultation numbers. Net investment income was up 37% to AUD 114.5 million, and underlying net profit after tax was up 13.8% to AUD 298.7 million. And in line with our strong capital position, we are delivering shareholders an interim fully franked ordinary dividend of AUD 0.078 per share. Now to slide eight. As we've continued progressing our strategy in line with our 2030 vision, our growth as a health company is accelerating. By delivering more of what our customers and patients want, we're building a greater customer engagement and growing our customer base in our priority segments. This is enabling us to invest further so we can increase value for both customers and the broader health system.
We've worked differently to improve our customer experience, expanded our local community approach, and further incorporated analytics and AI to simplify and personalize our services. A good example of this is the Tissue Analytics app, now helping our Amplar Health nurses assess and treat wounds. And we're continuing to invest in our business to further strengthen our resilience and customer trust. These improvements are helping boost the differentiation of our Medibank, AHM, and Amplar brands. Our customers want us to play a greater role in their health, and it's this demand that's propelling our expansion in health. The benefits of this work extended across the broader health system and is driving the health transition. Our prevention and home care programs alone have saved over 100,000 bed days this half. And we've made some very important investments in health services in our priority segments this half.
We've acquired corporate health and wellbeing provider Pinnacle Health Group, entered a JV with doctors to convert Adelaide's Western Hospital into a short-stay surgical center, and continued our proactive primary care pilot already across a number of our Myhealth GP clinics. Over on slide eight now. The resident market has remained buoyant as more young people take up health insurance. The competitive intensity has persisted, however, resulting in high industry switching and lapse rates and acquisition costs, now being reflected in an increased management expense ratio of other insurers. Some private hospitals also continue to grapple with rising costs and more acute bed capacity than is required as more people choose short-stay and day surgery options better suited to their needs. And underlying all these changes is growing consumer demand for affordable personalized care, with more people choosing these options where available.
This, as you know, is our focus. It's how we are strengthening our differentiation in the market, investing in the product value our customers want to see, like improved mental health support. These sorts of initiatives continue to deepen customer engagement in health, with almost 50% of Medibank policyholders now engaged with one of our health programs and services. Given the competitive environment, as you know, we've been disciplined in how we grow our business, and we're seeing the benefits of that now, doubling our policyholder growth rate from the same period last year. We've continued to target our high-value priority segments, which predominantly use lower-cost direct channels to join, including our retail network, helping us control our costs. We've also seen our retention rates improve compared to the industry average, and our claims growth remaining below our expectations.
Our approach is working, and we're well positioned to build on our momentum as we see more sustainable options to invest further for growth. Pleasingly, we've seen improvement in momentum in the Medibank brand, which, as of January, is now flat year to date, and we are well set up for the second half, and we continue to work with our health partners to improve healthcare affordability and accessibility, both now and into the future. Over the last few years, we've been supporting hospitals to deliver personalized models of care that offer more value and choice for customers. Our contractual partnerships now cover 79% of patient episodes of care, and we have paid AUD 30.5 million to private hospitals over the last two years to fund strategic initiatives as part of our partnership approach to contracting.
We're also working alongside government on PHI reforms to increase value and choice, encourage innovation and competition, and enable a thriving private health system into the future. Now to slide 10. While international migration has reduced, the non-resident market remains strong and continues to exceed pre-COVID levels. The reduction in student visa approvals has had less impact in the higher education sector, where we are strong, with a record number of students expected to move to working visas in the next one to two years. We've also seen graduate visas rebound and skilled worker visas increase by 26%. The visitor segment remains largely unaffected by government policy and is growing. The dynamics in these segments, however, are also changing. Expected reforms to oversee student health cover will encourage greater competition, which is better for consumers and aligns to our competitive strengths.
And while additional innovation is now occurring in the workers and visitors segments, reflecting the demand by customers for a broader health offering, we are well positioned to capitalize on these opportunities. Over the past five years, we've built market share and a favorable customer mix in this sector. Our growth has exceeded visa growth in every half over the last two years. And fueling this growth is the health support and greater value we offer, underpinned by the strength of our collaborative partnerships in the education and corporate sectors. As an example, virtual GP consults through our student app grew by 134% year on year, and more students are using our reward platform to redeem savings, up 15% this half. We've also seen a 700 basis points increase among non-resident workers engaging with Live Better this half.
We're currently prioritizing further growth in the skilled worker segment through enhanced health and wellbeing offers within our resident corporate offering, and in line with our broader life cycle strategy, we're also focused on retaining students as they transition to worker visas and become residents, with this contribution to our resident PHI growth continuing to increase. Let's move to slide 11 now. We have a great health system compared to others in the world, but the cracks that have emerged are getting wider. Every day we see the pressures: people unable to access a GP, overcrowded emergency departments, extensive public hospital waiting lists, and workforce fatigue and shortages. For a long time, Australia has not invested enough in prevention. We're the bottom third of OECD countries when it comes to spending on prevention, and we're now paying the price.
While change comes slowly to health, patients are demanding care personalized to their needs, care that gives them more choice and control. There's a groundswell building around better management of well-being and chronic conditions, from consumers to health professionals and from governments to employers. The need to strengthen primary care, which is the cornerstone of our health system, is driving investment in the area and encouraging new ways of working. As health costs continue to outstrip general inflation, there is acknowledgment that change has not been quick enough, but pleasingly, a reform program is now underway in this area. Despite the slow pace of change in the sector at large, we're helping people be better and stay healthier for longer by investing in prevention programs for our 4.2 million customers to encourage healthy behaviors and help them better manage their health.
We're improving access to primary care, which we are delivering in clinics, homes, and virtually, and building care teams that enable doctors and allied health professionals to work more closely together to support their patients, and we're collaborating with doctors, hospitals, and governments to provide more accessible personalized models of care better suited to patient needs and to drive the health transition. Just last week, Australia's first No Gap hospital opened its doors, a joint venture we have with a group of doctors. Adding private supports the short-stay model, which is designed to give patients more value and greater choice, and now to slide 12. I often get asked about what makes Medibank unique, and this is the way we think about it. We may operate in the same sectors as other players, but what is different about us is how the different parts of our business fit together.
This starts and ends with the trusted relationships we have with our customers, which is why it is our focus. And this enables us to develop more personalized, connected care options that better support the health and well-being needs. This responsibility then amplifies our ability and confidence to invest in, partner on, or advocate for personalized model of care and reforms, which strengthens our core business, drives change across the system, and improves healthcare affordability and sustainability. And to complete the circle, this all enhances our relationship with a growing number of customers by giving them more choice of more of what they want. By bringing together our group's established capabilities from health to insurance in this way, we both differentiate our insurance offerings and are able to expand our health businesses, enabling us to even better support our customers, whether they want to be better or get better.
This is how we are consistently able to deliver long-term value for our shareholders, growing and diversifying our business to meet more of the health needs of our customers, proactively addressing costs and becoming a stronger and more resilient business as a result. I'll now hand over to Mark to go through our financials in more detail.
Thanks, David, and good morning. The result reflects our disciplined approach to growth in the resident health insurance business, demonstrates the important contribution non-resident makes to overall fund growth, and highlights the strong momentum in Medibank Health. Group operating profit was up 12.7% to AUD 360.1 million, and with a significant increase in investment income, profit before tax and COVID impacts increased 19.3% to AUD 449.4 million. This included AUD 17.2 million of IT security uplift, legal and other costs associated with the cybercrime.
We expect costs, including investment in uplifting business resilience and customer trust, of approximately AUD 40 million for the full year. We continue to report COVID impacts outside of group operating profit, with a AUD 43.6 million benefit this period, materially lower than in the prior period. While reported EPS was down 0.8% to 12.4 cents per share, underlying EPS, which adjusts for the normalization of investment returns and COVID impacts, was up 13.8% to 10.8 cents per share. Slide 15 covers the health insurance result, which, as mentioned, excludes COVID impacts, which are reported separately and reconciled against the COVID equity reserve. While the economic environment remains challenging, the business has remained resilient, and we are seeing the benefit of both our treatment of COVID claims trends and disciplined approach to growth.
During the period, the claims environment has largely stabilized, with private searchable claims utilization in line with expectation and softness across other claims types continuing and now largely factored into our expectations. Notwithstanding this, during the period, hospital claims were AUD 43.6 million below expectations, largely in December, and we are monitoring whether this is due to residual COVID impacts or other factors. Revenue increased 4.1%, and gross profit was 7.4% higher, with the improved risk equalisation and stable downgrading outcomes consistent with our disciplined approach to growth. Gross margin was 50 basis points higher at 16.2%, including a 10 basis point benefit from strong growth in higher margin non-resident policies. And with the management expense ratio remaining at 7.6%, operating margin was up 40 basis points to 8.5%, and operating profit up 10.2% to AUD 349.2 million.
FY25 will be the last year we separate out COVID impacts on hospital claims from the health insurance result, and we expect to finalize our Give-Back program with the remaining COVID net claim savings returned to customers. Now turning to slide 16. The resident health insurance market remains buoyant, with policyholder growth in the 12 months to 31 December expected to be only modestly below the 2.3% growth we saw in the 12 months to 30 September, with continued strong growth in 25- to 30-year-old customers. Cost of living pressures have resulted in a modest increase in the number of customers across the industry by lapsing and switching firms. And while the market continues to be competitive, a number of sensible opportunities are emerging to pursue further growth. Over the last 12 months, a number of policyholders increased by 18,500, with AHM growing 3.8% and Medibank down 0.1%.
The acquisition rate of 5.2% is 10 basis points lower, and increasing Medibank acquisition is a key area of focus for the second half and will be supported by additional marketing spend and investment in product benefits. Pleasingly, the AHM acquisition rate was stable at 8.5%, but the percentage of sales through direct channels this period increasing to 50%. That's reduced 30 basis points to 4.8%, with improvement across both brands. However, there remains further opportunity to improve retention, particularly in AHM, by improving the customer experience. With growth in the last six months doubled out in the prior period and the investments I just mentioned, we aim to grow in line with market during 2H25, including growth in the Medibank brand.
This will be supported by further capitalizing on our dual brand strategy, increasing focus on priority segments, including the growing corporate market, and supporting retention through our final customer Give-Back. Turning to slide 17. Resident claims expense increased 3.7%, and risk equalization provided a 60 basis point benefit to net claims growth this period compared to a 20 basis point benefit in the prior period. Resident claims growth per policy unit increased 30 basis points to 2.3%, with a 100 basis point increase in hospital, partially offset by a 170 basis point decrease in extras. In hospital, higher private indexation and MBS and public hospital price increases linked to the 2024 CPI were partially offset by the favorable risk equalization outcome.
The decrease in extras reflected in claims was 16.5 million below expectations in the prior period due to COVID impacts and economic conditions impacting the utilization of most services. Claims growth in the second half will be impacted by the increase in New South Wales private room rate charges from 1 January and further pressure on private hospital indexation, partially offset by additional benefit from the shift to same-day and short-stay procedures and potential for further softness in extras claims. As a result, we expect FY25 resident claims growth per policy unit of between 2.4% and 2.6%, with the range including the potential that some of the risk equalisation benefit we saw in the first half unwinds. Slide 18 details health insurance performance, which shows continued growth in both resident and non-resident.
In resident, gross margin was up 40 basis points to 15.5%, with revenue and claims growth per policy unit of 2.8% and 2.3% respectively. Higher growth in revenue per policy unit reflects the higher average premium increase, with downgrading remaining at 50 basis points in line with our disciplined approach to growth and portfolio management activities. Subject to no deterioration in the economic environment, we expect downgrading for the full year to be modestly higher than in the first half, in line with premiums increasing on 1 April and the expectation of increased acquisition in the second half. Pleasingly, the momentum in non-resident has continued, with policy units increasing 12.6%, with the majority of this growth in the student segment despite lower visa approvals in the last six months impacting acquisition.
Gross profit increased 20.6% to AUD 52 million, and gross margin was up 50 basis points to 34.8%, with claims growth modestly lower than in the prior period and an improved visitor margin partially offset by modest tenure impacts on the student margin. And with planned investment, including in product value and a health offering, and the targeting of market share gains in both the student and worker segments, we expect policy unit and solid gross profit growth to continue in the second half. Moving to slide 19. Management expenses were up 4.5% to AUD 312.4 million, and the management expense ratio was maintained at 7.6%. The major drivers of expense growth were an increase in DNA in line with our increasing investment in digital assets and higher operating expenses, which were partially offset by lower sales commissions.
Operating expenses were up 6.8% with inflation of approximately 4.5%, modest volume impacts, and an AUD 6 million uplift in digital and other technology delivery capability. These were partially offset by approximately AUD 4 million in productivity savings, and we're targeting a total of AUD 10 million in savings in FY25. Sales commissions were down AUD 4.2 million, with a higher percentage of AHM sales through direct channels this period, and non-resident commissions were down in line with lower sales. Based on our expectation for inflation, which appears to have peaked, and the marketing investment I just mentioned, we expect management expenses of around AUD 650 million for the full year, and whilst we continue to target a flat to modestly improving management expense ratio, we will remain disciplined as we monitor the competitive environment and financial position for further sensible opportunities to invest in growth. Now turning to slide 20 and Medibank Health.
Medibank Health segment profit increased 40.8% to AUD 37.6 million, with a 46.7% increase in operating profit, partially offset by a modest increase in losses from our growing portfolio of short-stay JV hospitals. This earnings profile is consistent with new hospital operations, and performance is expected to improve in the short term as the portfolio matures. The Myhealth business continues to track well with increasing consult numbers, improved billing mix, and better operating efficiency, with operating profit of AUD nine million after approximately AUD three million of additional investment in our new virtual health platform. In the remainder of Medibank Health, operating profit was up 13.9% to AUD 31.2 million, and operating margin up 20 basis points to 19.6%. Revenue growth of 4.3% reflects strong growth in health and wellbeing and diversified insurances, and improving growth in health services.
Gross margin was up 140 basis points, with strong growth in higher margin businesses and an improved margin in health services. This was partially offset by a AUD 7.5 million increase in management expenses, reflecting business mix, inflation, and investment in future growth. We are targeting on average organic profit growth of at least 15% per annum between FY24 and FY26, with focus areas including performance uplift in health services, meeting the needs of more of our health insurance customers, and offering existing services to a broader set of payers. We aim to augment this organic growth by investing between AUD 150 million and AUD 250 million over the same period in healthcare M&A that adds scale, capability, or expands geographic coverage. Pleasingly, the pipeline of assets is strong, and our near-term focus is expanding our primary and virtual care footprint and broadening our participation in the fast-growing corporate health and wellbeing sector.
Moving to slide 21. Investment income of AUD 114.5 million was AUD 30.9 million higher, with a AUD 16.5 and AUD 13.1 million increase in the growth and defensive portfolios respectively. The increase in the growth portfolio reflects a higher return in all asset classes other than Australian equities, with a particularly strong performance in international equities, including the benefit from the weakening Australian dollar. The increase in the defensive portfolio includes the benefit of higher asset balances, a AUD 1.8 million benefit from the higher RBA cash rate, and an improved return on international fixed interest holdings. The AUD 15 million increase in underlying net investment income resulted in a 39 basis point increase in underlying investment return to 3%, which on an annualized basis is a 164 basis point spread to the average RBA cash rate and above the bottom end of our target range.
While further cuts to the RBA cash rate are possible, we do not expect this will have any notable impact on investment income in the second half. Slide 22 covers capital. The business continues to be well capitalized, with health insurance capital at 1.9 times the PCA and unallocated capital increasing to AUD 266.3 million in line with the business's strong capital generation and performance of investment markets. The health insurance capital ratio increased 10 basis points to 14.1% and sits above the target range of 10%-12% of premium revenue, with additional capital held to offset the AUD 250 million at the supervisory adjustment. The increase in other capital employed includes further investment in Myhealth, fit-out costs for our new Melbourne head office, and funding growth in Medibank Health.
With the level of unallocated capital and ability to raise T2 debt, we are well placed to fund our M&A aspirations and will consider capital management actions if suitable M&A opportunities do not eventuate in a reasonable timeframe. Given the strong capital position, the board has declared an interim dividend of AUD 0.078 per share, which is an 8.3% increase and a 71.9% payout of underlying net profit after tax. To finish, a few comments on our financial priorities for the remainder of this year. In the resident health insurance business, our focus is improving revenue momentum through disciplined policy holder growth and continuing to leverage our portfolio management capabilities to manage downgrading. Our treatment of COVID claims trends means we are better placed to mitigate current inflationary pressures on claims and to invest in product benefits to support our differentiation strategy.
And we believe our proactive claims management strategy will increasingly differentiate us from peers as we continue to broaden our successful partnership approach to hospital contracting, further invest in prevention and chronic condition management programs, and increase the number of Medibank customers that are supported by personalized models of care. We will maintain our disciplined approach to cost management to support our MER aspirations, including leveraging our investment in digitization, analytics, and next horizon of productivity initiatives to improve efficiency, and utilizing our direct distribution strength to manage the cost of acquisition. Maintaining policy unit and solid gross profit growth in non-resident remains important to overall health fund growth, and we will continue to invest in this attractive market. Finally, we must deliver on Medibank Health's strong organic growth potential and look to augment this with further M&A activity, particularly where this gives rise to benefits between our businesses.
Now, passing back to David to make some final comments.
Thanks, Mark. Now turning to our outlook on slide 25, we will continue to return any permanent net claims savings due to COVID to customers. Following today's announcement, as I mentioned before, we expect to finalize our customer Give-Back program this financial year. In resident private health insurance, we anticipate industry growth will moderate this year relative to FY24. We will remain disciplined as we aim to grow in line with market during the second half of 2025, including volume growth in the Medibank brand in FY25 and aim to grow market share in FY26. We expect claims per policy unit growth of between 2.4% and 2.6% in FY25. This compares to our 2.7% expectation at FY24. We expect FY25 management expenses of around AUD 650 million, including AUD 10 million of productivity savings.
In a non-resident business, we expect policy unit and solid gross profit growth to continue in the second half of 2025. In Medibank Health, we are targeting average organic profit growth of more than 15% per annum between FY24 and FY26, plus a 12-month contribution from Myhealth in FY25. We aim to invest between AUD 150 million and AUD 250 million through further M&A between FY24 and 2026. Finally, slide 26. In summary, we are a strong business focused on our future, committed to our customers, and to delivering long-term sustainable growth for our shareholders. Our strategy is centered around our customers, and we have strong foundations in multiple growing segments across insurance and health. We are a resilient business with a track record of successfully navigating headwinds while remaining focused on the long term. We will remain disciplined in our approach to growth and managing costs.
There remains uncertainty in the market, but I'm confident our strength as a business will enable us to continue to support our customers and deliver our strategy as we grow, and we will continue to diversify our earnings in health, enabled by our strong and flexible balance sheet. We have the right strategy and the right focus that will enable us to achieve our long-term ambitions, and we will continue to advocate for our customers and drive the health transition this country needs to keep the Australian health system one of the best in the world. Today's result is a reflection of the incredible work of our people, and I'd like to thank them for their ongoing commitment to our customers and to our purpose: better health for better lives. Now we've got some time for any questions you may have.
Thank you.
If you would like to ask a question, please press Star one on your telephone and wait for your name to be announced. If you would like to cancel your request, 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 Siddharth from JP Morgan. Please go ahead.
Good morning, gentlemen. A couple of questions, if I can. Firstly, I just wanted to square up just the likely trajectory on gross margins from here, particularly beyond the next half. You had a rate increase which was almost 4%, and you seem to be indicating that claims inflation is tracking around 2.4%-2.6%, downgrading at 0.5%, and you did also flag that gross margins are well below FY19 levels.
So it seems like, unless I'm misunderstanding what's likely to happen with downgrading going forward, it seems like there should be a meaningful uplift here in terms of gross margins. Am I interpreting that correctly? And maybe if you just make some comments as well, Mark, just around what's actually happening on the actual claim payment side versus your assumptions. You used to give us a chart, I think, and make some comments around that. I didn't see it this time.
So it may be let me start with the second half, '25, and therefore what we expect for the full year. On the basis that we don't get any significant deterioration in downgrading, which is not our expectation, we'd expect for FY25 a flat to mildly positive draws outcome for the resident business.
Looking into 2026, there'll be a whole series of headwinds and tailwinds that will impact the claims trajectory. There's a lot of conversation about private hospital indexation, but we're also focusing on both the MBS and public hospital price increases. They're tracked to the CPI on a trailing basis, and we know that the CPI is actually dropping. But Sid, the thing we're watching most closely is that we're currently tracking in our hospital claims AUD 43.6 million below expectation. So if that trend continues, consistent with what we saw in this half on extras, we could end up with a negative utilization number in the hospital product. And to me, that's probably the most important factor on FY 2026 gross margin trajectory.
In terms of the claims experience, I think, Sid, we did actually we've dropped the cash claim slide off the presentation, but if you go to my second slide, you will see that we've provided in the reconciliation of the COVID reserve, the variance to expected claims. You will see this period we had AUD 43.6 million of favorable experience to expectations on the hospital product. And to put that in context, in a six-month period, that's about 1.75% of hospital utilization.
Thanks. That's very helpful. And then if I could just ask a second question just around expense ratios and what you're signaling is likely to happen to MERs from here. You seem to be indicating a significant uplift in marketing and, I suppose, efforts to grow policies. I was just wondering if you could perhaps quantify on an ongoing basis whether this is a step up.
Obviously, you've given us guidance for the full year on total expenses. Just keen to understand whether this is likely to be an ongoing step up in light of your comment that your peers that seem to have higher expense ratios and you're seeking above-market growth next year.
So let me unpack that, Sid. I think we've given guidance on AUD 650 million of FY25 ME. That would give us around a 5.5% year-on-year growth rate, which is modestly up from the first half. And the difference there largely is the additional investment in marketing spend. We're talking in round numbers in the amount of about AUD 5 million. That spend will be ongoing, obviously subject to what happens in the market, of course. But we still have the same MER aspiration of flat to modest improvement.
That'll depend on a whole series of factors, though, in terms of the competitive environment and particularly where the revenue line grows. But we haven't actually changed our positioning or perspective on MER since the full year.
Okay, great. Thank you.
Thank you. Your next question comes from Julian from Goldman Sachs. Please go ahead.
Good morning, guys. Thanks so much for taking our questions. Just a clarification from the previous discussion on margins. Just particularly around second half 2025, just the timing difference between when the bed rate change comes through January 1 and the rate coming through in April. Just wanted to understand how we should be thinking about that impact flowing through to second half margins.
Well, at 10,000 feet, Julian, you'd know that the second half is typically lower hospital service period, lower hospital claims.
This is linked to when doctors take holidays and typically a higher gross margin. Second half, typically in the PHI industry, everything else being equal, would have the PHI margin higher in the second half than the first half. You're right, the New South Wales private room rate charge applies from 1 January. We think that'll have a 20 basis point impact on claims growth in the second half. In fact, it will be the single biggest impact on our claims trajectory in the second half. Then the rate rise obviously applies from 1 April. To put that in context, based on a 3.99% premium increase from 1 April, we'd expect around a 3.5% increase for the full 12-month period of FY25.
Okay, got it. Then just this is a very high level. You're sort of flagging higher downgrading in the second half.
And then from what I can tell, higher MERs in the second half given the investment you're making. And then also this impact from the New South Wales bed rate change. So it could be. I take it that that should offset just the impact of the rate for that period. And then the benefits from the non-resident margin, broadly speaking, is that fair?
Well, I think that's in response to Sid's question, subject to the downgrading not increasing materially, which is not our expectation. But you should expect flat to modestly positive draws in the resident business for the full year. And then for the non-resident business, I think that's going to be a story of revenue growth. So we'll take strong momentum from the second half of 2024 into the whole full year 2025. We've shown some pretty good margin management in that business.
So I think that business will be more about strong revenue growth or strong revenue momentum coming from the second half of last year in margin management rather than necessarily significant policy unit growth in the second half given the visa impacts.
Okay, excellent. And then just a second question for me, just on the policy or the growth trajectory from here, the visibility that you have. You're obviously doing a lot now versus peers just around Give-Backs, additional marketing that you're flagging, and also product benefits. Be interested just to clarify exactly what you're anticipating to do there. Just the confidence now in your medium-term market share guidance. Does it give you more confidence in some of those trends?
Yeah, I think overall market competitive intensity has sort of remained, but the nature has changed slightly.
But we take a lot of confidence from the first half growth that was double the growth from the same period last year. That's pretty much in line with what we expected. I think important to that is the growth in the Medibank brand, which, as I said, year to date now in January is flat. So a big part of our expectation was to grow the Medibank brand throughout FY25. And certainly, we feel positive momentum on that. I think, as Mark said, emerging in the market now are some positive opportunities to invest to deliver that policy holder growth and maintain momentum to meet our aspiration for next year to grow share. I think you'd call out some of them, including product benefits, new products. We've got a give-back that we know drives better retention outcomes.
And with the premium increase announced last night compared to the other major funds, we're about 25% lower. So I think there's a lot of confidence we have that the momentum we have will help us deliver the outlook we've just restated for the second half. But with all that, we will remain disciplined and focused on the key markets that we have been growing in: families, new to industry, corporates, which, as you see in our retention results, are driving a very significantly different outcome and support a much more efficient business.
Okay, excellent. That's clear. And then just a final question on just capital. Without sort of front-running any views that APRA may have, but just any sort of indication on timelines and where do you sit in terms of engagement with APRA on that capital overlay?
Yeah, well, we've got a very constructive relationship with APRA, and we have regular contacts with them. We're very well progressed in our Uplift program, as we said this morning. Well progressed, completed phase one and well into phase two activities. I think the matter around the capital overlay is a matter for APRA, but in our minds, during this year, I think we'll be able to sit down and reflect on our progress and anticipate a conversation around the next steps after that.
Great. Thanks so much for that.
Thank you. Your next question comes from Kieren from UBS. Please go ahead.
Morning, David and Mark. Look, I might just start with a more big-picture strategic question around sort of how you're thinking about resident margins over the medium term we're seeing. Further expansion sort of this year.
And obviously, you are talking to some stronger policy growth ambitions in the second half of the financial year. But is there sort of a point at which we could expect some further margin benefits to be recycled a bit more aggressively into policy holder growth going forward? Just interested in your thoughts on really how high you would let that net margin in the resident business track?
Well, I might start with just the broader market sort of dynamics, and then maybe Mark a bit more on the question. I think we've been saying for some time that given the different strategy we've had to treatment of COVID savings, that the competitive windfalls that were short-term and reinvested in uncommercial activities would unwind. And I think that unwinding would see others either being less competitive or have lower margins or even both.
I think as we move forward over the next few quarters, that's sort of playing out as we expected. I think we stick to our nitty-gritty, being focused on the target markets, managing for the longer term, and being disciplined. I think the benefits of that are emerging. So we'll stick with that strategy as we see now some pretty interesting opportunities to grow and recommit to our aspiration to grow market share for next year.
Kieren, I'd make a high-level point that we're still tracking below the gross margin, both at a resident and a fund level that we had going into COVID. So that's actually not a bad kind of watermark for you to consider. I think as the market leader, you shouldn't expect, though, that we're going to look for oversized gross margin, year-on-year gross margin increases on a year-by-year basis.
I think that puts a target on our back with a whole series of stakeholders, including hospitals. It doesn't meet our customer promise. So you should probably think about us actually getting to a margin that is sustainable. And then to the extent we can grow policy holders and revenue to get an improvement in MER, that's more likely to drive the operating margin rather than an outsized or an oversized gross margin increase. But it's an imprecise science, and it's got a whole series of variables that impact any particular year. So there may be some movement from year to year. But we're very mindful of not ending up with an oversized gross margin and creating volatility even more in that gross margin.
Okay, that's clear.
So we should expect perhaps a gross margin to potentially move back to pre-COVID levels, but any further efficiency gain on the net margin just to come from MER improvement over time. Mark,[crosstalk] maybe just to make sure I said that's your interpretation, Kieran. I don't think that's that. I thought I'd get that in. A second question, just sort of more detailed on this very short-term inflation picture you've provided for the remainder of the year. Sort of obviously, 2.3% first half on the resident business, you're guiding to mid-2s% for the full year. So about a 40 basis point step up in second half, which I think, Mark, you called out half of that 20 basis points coming from the New South Wales private room charges coming through.
But I'm just interested because I think somewhere in the pack you call out a 60 basis point benefit on PCP in the half just gone from risk equalization. And I note you have flagged that you're assuming that unwind in second half. So can you just help unpack the math? Like how much of that risk equalization benefit are you assuming is unsustainable going forward?
So let me just clarify. We had a 20 basis point benefit in the PCP and 60 basis point benefit this period. So there was a 40 basis point increment. In terms of the guidance, it's 2.4%-2.6%. So Kieren, to the extent we land at the bottom end of the range, then that would most likely mean the majority of the risk equalization benefit we had in the first half persists.
And if we land at the top end of the range, then similarly, you'd expect the majority of that risk equalization benefit we saw on the half unwind. So really, the major swing in where we land in the range is on risk equalization. We always expected, given the way we're running our business, that we would get some risk equalization improvement this half, but we didn't expect that it would go to 60 basis points.
Yep, okay. And it's just related to the inflation question. The non-resident business sort of flat on a per policy basis from a claims point of view, which has brought the overall inflation across your health insurance business down to 1.7% per policy. What is driving that claims outcome? Is it a mix of the type of policy holders you've got?
And sort of how are you thinking about both pricing and claims inflation in that part of the business moving forward?
Kieren, I might just clarify. There was a 60 basis point improvement in claims for policy units for non-resident. It went from 0.8% to 0.2% per policy unit this year versus PCP. The reason we're seeing only 1% revenue growth per policy unit is the majority of our growth is in student policies, and student policies have lower revenue and lower claims per policy unit. So there is a mixed effect impacting the outcome this period. As we focus and increase our growth in both workers and visitors, you should expect both the revenue and claims per policy units to increase. But at least in the short term, probably seeing a margin trajectory, and it's largely going to be driven by improvement in gross margin on the visitors' book.
I'd probably see a little bit of upside to the gross margin outcome on non-resident in the next six months. It will be a story of revenue growth and good margin management, gross margin management for the second half, Kieren.
That's great. Thanks.
Thank you. Your next question comes from Andrew from Macquarie. Please go ahead.
Hi guys. Thanks for taking my questions. Just the first one is in relation to the Give-Back program. Can you just give us an update on how you're thinking about when you will stop adding to that equity reserve? Thanks.
Andrew, hi. Should I match Andrew Buncombe?
Yep, hi.
Hi. So we were very clear at the FY24 result that we were stopping adding to the reserve for excess claims from 1 July 2024. And similarly, we will end the COVID regime at 30 June 2025.
Okay, that makes sense.
And then the other question that I had was I noticed in the FY24 that you didn't change the probability of adequacy on the risk adjustment. We're noticing some of your peers are starting to pull that lever. Just some of your thinking around why you don't think it's time to do that at this point now that we're so far post-COVID. Thanks.
So that probability of adequacy picked up some uncertainty as a consequence of COVID, but it also picked up the fact that we're seeing some volatility in hospital claims payment patterns. So I think there's still sufficient volatility for us to maintain that whilst we've got the COVID regime in place, but we'll definitely look at that coming into the full year.
That's it for me. Thank you.
Thank you. Your next question comes from Andre from Morgan Stanley. Please go ahead.
Good morning.
Can I ask my first question around the cyber cost outlook into FY 2026? Do you think that the AUD 40 million should largely fall away?
Look, it won't largely fall away, but maybe if I just start by characterizing where we're spending. So two-thirds of the spend this half was in the Medibank Uplift or the IT security part of the project, and the residual one-third was in legal costs. We're making good progress on delivering on that Uplift program. So I'd like to think that some of the projects that we're delivering will be complete by the end of the year, and that'll have an impact or a positive impact on costs going into 2026. But the litigation costs, they're going to continue for a period of time, and they could even increase given when you get closer to the actual court dates that costs may be higher.
So these costs will continue into FY26, but our expectation is not at the same level as we saw or predicting for this year.
Thank you. My second question, can I ask around your M&A aspirations? Just where are you seeing areas to deploy excess capital? And perhaps the last few months were a little bit slow in that deployment. What kind of opportunities are you seeing? How strong is the pipeline?
Well, I think you take the three-year view, our aspiration is to augment the organic growth of Medibank Health by spending AUD 150 million-AUD 250 million. I think last 18 months, we spent AUD 59 million. I think the pipeline is strong and particularly focused in some areas we think we can accelerate growth and deliver value for our customers and the system, particularly in health and well-being, primary care, and our prevention programs.
But we continue to look at all opportunities in health. I think our expectation, although the pipeline is strong, is that a lot of that will probably emerge more in FY26 than the second half.
Yeah, I'd agree with that, David. And Andre, I think it's clear that we need to spend the AUD 150 million-AUD 250 million in deals that are in our target markets and areas of focus. They're going to add value for our shareholders and customers. It's relatively easy to spend the money, but from an M&A perspective, it's slightly more challenging to actually make an appropriate return. So while that's the aspiration, you shouldn't assume we'll just go and spend money off target on the wrong assets just to meet that expectation.
Thank you very much.
Thank you.
Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Nigel from Citi. Please go ahead.
Good morning, guys. I wondered if I could, first of all, just delve a bit more into that comment you made about you're seeing softness across other claims types continuing, and that's now largely factored into claims expectations. So can you maybe just comment on I think you were seeing some savings in mental health, respite, and rehab before that you weren't sure whether or not you should bake into that claim. So did you eventually sort of bake savings from all those three categories into there? And is there anything else?
Yes. And Nigel, I think it was mental health, rehab, and respiratory.
Right. Sorry.
So we definitely and they've persisted, and we're now seeing largely those trends as the way of the future. So we've largely built that from a utilization perspective into our claims expectations. However, there has been some offsetting factors. So David mentioned the partnership agreements with hospitals. So to the extent they've had lower rehab referral rates, we've been reinvesting some of that back to our partners through higher indexation. So the utilization has been partly offset by us paying higher indexation as part of our partnership contracts with a large number of hospitals.
Okay. Thanks. That's clear. And then maybe just on this AUD 43.6 million that you said you were trying to work out whether or not it was all COVID or not. At the moment, obviously, you've treated it as all COVID because you put it in your reserve.
But I mean, I guess if you suddenly sort of work out that some of that's not due to COVID, that just gets credited to profit in second half. Is that the way to think about it?
So it's more likely first half 2026 rather than second half 2025, Nigel, because we would still be running the COVID regime until 30 June. And I think the way that will come through the P&L, just as you said, will be a bit like what we saw in extras this half. So in the PCP, we had favorability of AUD 16.5 million in extras utilization. That didn't recover. This half, we came off the COVID regime for extras, and that manifested in negative utilization growth. So to the extent the existing position continues, then you're likely to see in first half 2026 negative utilization growth in the hospital product.
And maybe to put that in context, 43.6 million in a six-month period for hospital claims is about 1.75% utilization.
Yeah. Okay. Yeah. All right. And then just on a sort of kind of related question, I guess. I wondered whether you'd be prepared to just give us a bit of feel of what your latest sort of analysis of the impact of give-backs on your lapse rate has had, is having, etc., in terms of presumably it's improving the lapse rate. Do you have sort of any sort of more tangible things to say about that?
Well, I think I might start, Milosh. You'll hear perhaps to provide a bit of support. But I think we always knew in our strategy that we would be the insurer that had the last remaining cycles of Give-Backs.
We've now done this for many years, and I've got quite a lot of analysis that supports how and when Give-Backs both provide benefit to customers but also to improve retention. I think you can see through the retention rates and the gap to market for the September 12 months at 90 basis points as evidence a part of that is definitely due to the Give-Back regime. I think we know that the Live Better rollout for AHM has been a very strong program for AHM customers and the retention, which we can see through AHM results, and then the cashback for Medibank certainly improved momentum.
Yeah. Thanks, David. Milosh, the give-back did improve retention across both brands, and it's in the mix of a range of drivers that we mentioned that are supporting our growth in a disciplined way.
In addition to Give-Backs, we've invested in product value and differentiation across both brands, and that's resonating really well with customers. And as David outlined earlier, we've had an increase in participation of Medibank policyholders in a range of health services and programs, and that contributes to much better retention rates for those customers. And then our advocacy numbers for our customers across both brands are really high levels, and once again, that contributes to retention. So Give-Backs have an impact, but it's in a mix of a broader range of activities and initiatives we're doing to improve lapses. Okay. Great. Thank you.
Thank you. As there are no further questions, that does conclude our conference for today. Thank you for participating. You may now disconnect.