Good morning everyone and thanks for joining us. I'm coming to you from Naarm, the home of the Wurundjeri Woi Wurrung peoples, and 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 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. 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 remaining 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. 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 three 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.
We are investing $50 million over the next five years in mental health. Lastly, it's about running your business well. We remain disciplined in how we've grown with positive momentum in our core business. Over the past eight 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 one of the lowest in the market and it's been that way for a decade. 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.
I believe we won't be a productive country if we're not a healthy one. The general talk about productivity is mostly an underscore, 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 others internationally. What is clear is that at a time we are being asked to find productivity gains for the country, we have to challenge current settings. They are constraining progress. While some in our system are holding onto the old ways, there are others like us who are up for the challenge of meeting the changing needs of the community. The levers are clear.
A focus on prevention is needed to improve health outcomes and reduce health costs over time to prevent conditions from arising or worsening. Health isn't just in traditional and expensive hospitals, it's 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 five, but I won't talk to all of these at a high level. Our result 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.
We're really pleased to see the performance of the Medibank Health segment continuing to become more meaningful to our overall result, now contributing around 10% of group operating profit. Let's turn to slide six for our customer highlights. We're delivering where it counts for our customers, improving value, meeting more of their health needs, and supporting our health system's future. We're making everyday wellbeing more manageable for our customers, giving them access to a wider range of prevention programs and virtual services, delivering where customers want health to be delivered. 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 three year high. Now to slide seven and a brief overview of our key financial highlights. We saw continued growth in both the resident and non-resident 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 HM up 4.1%. Importantly, we saw positive momentum in the second half. In our non-resident 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%. Underlying net profit after tax was up 8.5% to $618.7 million. In line with our healthy capital position, we are delivering shareholders a final fully franked ordinary dividend of $0.102 per share. Now onto slide eight. At Medibank, everything we do ladders up to our purpose: Better health for better lives.
It is supported by our ongoing focus on risk culture and the strong foundations that enable our growth. More and more, it is our teams driving this, managing their days to maximize the impacts for our customers. They are harnessing AI to address customer pain points, which has slashed complaint resolution time by 60%. They are 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 night. It is 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.
While an international student with the flu can call a virtual GP instead of having no other option than going to ED. We are not just expanding in health, we are driving change within it. From investing in prevention through to 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. Over now to slide nine. The resident market growth continues to be buoyant. New to 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 competitive activity that's existed over the past two 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. 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 throughout better retention rates, improved risk equalization results through our lower premium increase and management expense ratio. 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.
While there are still inflationary impacts, such as the flow-on impacts of nurse EAVs, 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. Our financial investment in hospital partnerships to support this is more than double that of last year. Now to slide 10. The non-resident market also remains strong. We know that migration continues to play a major role in Australia's economy. 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. The government has also recently announced an increased 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 skills shortages. Significant price-led competition in this segment carves out opportunities for differentiation. 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 visas 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 four 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 one of the best health systems worldwide. We also agree it's under pressure. People are expecting more, and 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. We are well placed for this through our Amplar Health network, which is delivering local care at national scale. This year, Amplar Health saved around 177,000 hospital bed days through its delivery of home care, equivalent to almost three average-sized 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 contacts to our 24x7 support service almost tripling over the last 12 months, we are also pioneering a shift to a more proactive model of primary care. Our pilot of GP-led multidisciplinary care teams in a number of Myhealth clinics applies the best practice recommendations the sector has been calling for for some time. Our investment in Myhealth shows how serious we are about growing in primary care and making healthcare more accessible. We have aspirations to triple our scale in this sector by the 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 hospital transition care service at a hotel for the South Australian government, and expanded our IMH mental health partnership to Brisbane. Just last month we began piloting a new virtual nursing model in residential aged care on behalf of the Australian government. We're doing this because of what our customers and partners want. That's what our health system needs. Now to slide 12. I 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 AI 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 scribing by Myhealth GPs, and supporting us to offer personalized health suggestions to customers using their Medibank app. We have more than 15 years' experience with this type of technology, and it's used across our business. We're 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.
With healthcare 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.
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 non-residential, and continued strong momentum in Medibank Health with the 14.1% increase in investment income and cyber costs and other income expenses broadly in line with last year. Profit before tax and COVID impacts increased 10.8% to $911.6 million. FY 2025 cyber costs were $39.7 million and in FY 2026 we expect costs to be around $35 million and that the IT security uplift program will largely be embedded.
We have reported COVID impacts outside of group operating profit with the $182.8 million costs this period including our final customer give back and reported EPS was up 1.7% to $0.182 per share and underlying EPS, which adjusts for the normalisation of investment returns and COVID impacts, was up 8.5% to $0.225 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. 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 equalisation 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 non-resident policies, and whilst additional investment resulted in the 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 utilisation in some non-surgical specialties. FY 2025 is the last year we will separate out COVID impacts on hospital claims from the health insurance result. We've now finalised our give back program with all remaining COVID savings returned to customers.
Now turning to slide 16, the resident health insurance market remains buoyant with policyholder growth from the 12 months to 30 June expected to be only modestly lower than the 2.3% growth you saw in the 12 months to 31 June, with ongoing strong growth in 25- 30 year olds. However, cost of living pressures continue to impact the industry with higher switching rates and aggregators increasing their share of industry joins. Over the last 12 months, our number of policyholders increased by 1.4%, with Medibank and ahm 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 pleasingly the improvement in the acquisition rate was achieved without increasing the percentage of joins through aggregators. Despite the high 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 2026 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, resident 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 policy unit, 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 private indexation and the increase in New South Wales private room charges from 1 January were partially offset by the improved risk equalization outcome and benefit from customer growth being skewed to lower product years, and the decrease in extras reflects that claims were $51.8 million below expectations in the prior period due to COVID impact and economic conditions impacting the utilization of some services.
Looking to FY 2026, and as the cost of private hospital agreements with renegotiated during FY 2025 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 claims regimes, 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 non-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 2024, with the higher average premium increase offset by higher downgrading, with increased investment in live, better customer growth skewed to lower tier products, and other portfolio management impacts. Based on this trend, we expect downgrading to be modestly higher in FY 2026. Strong growth in non-resident revenue has continued, with average policy units increasing 11.6%, with positive momentum in worker 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. Non-resident remains an attractive market, and in FY 2026 we will further differentiate our offering, invest, grow market share particularly in workers and visitors, and increase focus on customer lifecycle management.
Moving to Slide nine and 10, management expenses are up 6.5% to $654.9 million, with higher operating expenses, increased DNA in line with our increasing investment in digital assets, partially offset by lower sales commissions. Operating expenses are 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 non-resident policyholder growth into FY 2026. Sales commissions were $3.5 million lower, with non-resident commissions impacted by lower student acquisition and resident commissions increasing in line with higher ahm acquisition. The major drivers of expense growth in FY 2026 will be inflation, which we expect to be lower than in FY 2025, 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 increasing 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. 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 JV hospital portfolio, which includes expected losses from three 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 2026. In the remainder of Medibank Health, organic growth was 23%, 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 wellbeing and diversified insurances, improving growth in health services, and a six-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 2026 focus areas including further performance uplift in health services, meeting the needs of more of our health insurance customers, and scaling existing services with a broader set of payers. We aim to augment this organic growth with further M&A that adds scale capability or expands geographic coverage with our near-term focus on 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 $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 on FY 2026.
We expect underlying net investment income will 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 1.8x the PCA and the capital ratio at 14% of premium revenue, which is above the target range of 10%- 12%, with additional capital held to offset the $250 million APRA supervisory adjustment. The increase in other capital employed includes investment to acquire 100% shareholdings in the Medinet and Amplar home hospital JVs and funding growth in Medibank Health. With the business's 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 2025 dividends to $0.18 per share, which is an 8.44% increase and 18.1% payout of underlying net profit after tax. To finish, a few comments on our outlook for FY 2026: in resident health insurance, we anticipate moderating industry growth relative to FY 2025, and we aim to grow market share in a disciplined way, including further growth in the Medibank brand. We expect growth in claims per policy unit at 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 non-resident health insurance, where maintaining solid gross profit growth remains a key focus, and in Medibank Health, where we expect low double-digit organic operating profit gr owth.
Given strong asset pipeline, this year we aim to invest towards the top end of our $150 million-250 million M&A target, provided this creates long term value. I'll now pass back to David to make some closing comments.
Thanks, Mark. Now to slide 25. We will remain clear on what opportunities we go after and what we say no 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 2026, and we use them to measure and track progress across our four strategic pillars. You can see here our key priorities for FY 2026 include growing market share in our resident and non-resident businesses by delivering leading experience and differentiated offerings.
Two, c ontinue 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 our strong M&A pipeline. 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. That appears 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, established new and diversified earnings streams, and created a more resilient business. This approach continues to drive our strategy. In summary, we're a strong, growing business and we're excited about the future. Our insurance and health businesses provide clear pathways 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 will 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 of 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. Now it's over to you for any questions you might have.
Thank you. If you wish to ask a question, please press Star, one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star, two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Vanessa Thompson with Jefferies.
Morning team, and thanks very much for taking my questions. I was interested in your hospital claims, noted that they were below expectations, and you've seen lower than expected utilization in some non-surgical specialties. I know you've discussed this in the past. I wondered if it was the non-surgical claims were lower in the same areas that you've spoken to previously.
Thank you. Hi Vanessa. The two major specialties where we continue to see softness in the per diem funded mental health and rehab, which is around 50% of our total non s urgical spend.
And also respiratory, or has that changed a bit?
A respiratory is still live, but that's only around 6% of total non-surgical claims. The favorable is largely driven by the two spend buckets.
Okay, thank you. 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. Thank you.
Yeah, as I said in my remarks, I think we're seeing higher indexation. Inflationary pressures are more known than unknown. There's quite a few new players in the sector who are more interested in looking in the forward windscreen rather than rear view mirror, should we say rear view mirror. 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 three years we spent $87 million in one-off cost to support hospitals.
As you know, we've been for some time including partnership and joint incentives on creating a pathway 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've spent $37 million on those incentive payments, which is double that of last year. I think, you know, 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? You know, those conversations are, you know, sort of positive and constructive.
Vanessa, I'd add one final comment. At a 16.2% resident gross margin, we're still 20 basis points behind where we w e're going into COVID. I feel like we've actually managed through the cycle and our gross margin hasn't increased at the expense of the hospitals. I think the challenge will be for those players in the industry where their 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.
Thank you. Sorry, Mark, I think it was David mentioned reform. Is that something that you think could be targeted in potential reform? Thank you.
Look, I think there's a lot of discussions about reform in both the public and private sector. It's an ongoing need to challenge the current settings. I think, as a participant in the CEO forum, we've got a 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. That's more about any one individual player. That's 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.
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 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. That's why we're committed to continuing those conversations.
Thanks very much. That's all.
Your next question comes from Julian Braganza with Goldman Sachs.
Good morning, guys. Thanks so much for taking our questions. Just the first one 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 and any additional bottom benefits that were made in the period, any one-off benefits to hospitals. Also, just the $30 million benefit for the half was called a $75 million benefit for the full year. Is that now captured in your claims inflation number into FY 2026 in terms of this benefit kind of evaporating in terms of that claims inflation number that the guidance has given us for next year. Thanks.
I'll start with any one-off payments during the year. We had a $36 million release from the 30 June 2024 claims reserve. By and large, that amount was actually, as David mentioned, provided to hospitals through innovation or hardship payments. That had no impact on the reported claims result. Looking across the two halves, probably in the second half, the two biggest impacts were New South Wales private room charge increases, $16 million incremental cost in the second half. You'll see extras utilization was significantly lower in the second half than the first half, and that reflects the softness we had in second half 2024. Those were the two most significant impacts in the half-on-half split . Sorry, was there a third question, Julian?
Sorry, I meant to just follow up on that. In terms of the benefit that we saw was in the expectation. Just trying to get to the bottom o f what you're seeing in terms of p aid versus incurred inflation and the guidance you've given us for next year. 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 2026?
I think you need to look across the full 12 months, which is a 70 point, $74.8 million of favorable bearings to expectations. Julianne, we don't have a COVID reserve next year. 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. That's about a 1.5% utilization uplift on hospital. What we're expecting in that claims guidance is the majority of that favorability unwind, so it's temporary rather than structural. We are expecting negative utilization growth in hospital next year as a consequence of what we saw in 2025. If you look back on what happened in FY 2025 in extras, we came off the COVID ratio. For extras in 2025 we had negative utilization growth and that more than offset slightly higher inflation. It's the same thematic for hospital going into 2026.
Got it. No, that's clear. 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 likely, like FY 2025 versus FY 2026. Can I just understand what is in your claims number for next year and the mix of downgrading across the different policies? How should we be thinking about the claims benefit and margin benefit in your guidance for next year on claims inflation from that downgrading? Thanks.
Yeah, 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 downgrading of 90 basis points. The reason for that is there is some seasonality in downgrading, the premium view goes through on the second half and that is typically the trigger for downgrading. You know that premium increases were slightly higher this year for us and significantly higher across the industry. It has had a bigger seasonality impact this year than in prior years. We also did invest in some additional benefits and it will look better during the second half. You're right. I'd look through FY 2025 at 0.9% and expect modest growth from there for the full year 2026.
I mean 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. 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 lower downgrading. Alternatively, if you have growth due to the lower tier products as we saw this year, you'd expect to land at the bottom end of the range and downgrading will be higher. I guess in a 10,000 ft view dual end and obviously subject to where the premium increase lands from 1 April, provided downgrading doesn't increase significantly, which is not our expectation, I think a flat jaws outcome is extremely possible in 2026.
Okay, now that's really good. Okay. In terms of the last question for me in terms of non-resident business, keen to understand rate and claims inflation. Claims inflation trends look like the second half has seen a little bit of a tick up in inflation from the first half and rate as well. Just what you've seen towards the close of the half and expectations into FY 2026. Just strong rate in inflation for that long mission business?
Thanks. I'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 visitors book. If you look through the full year, I think we did 36.9% gross margin for the full year that you're in, but we did 39% in the second half. That's reflective of the improved margin and therefore lower claims growth in the visitor book. In terms of premium increases, we will be going through the submission process for next year's May rate round, so I won't go into that in any detail. It's probably more important to focus on the policyholder trajectory. I think probably the most important thing for FY 2026 is whether 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 admission period? I think that for us, we may not get a stronger policyholder growth or average balance growth next year because we don't have the same momentum going into 2026 as we had in 2025. I think it's probably going to be equally important as how we manage our margin to deliver gross profit growth.
Anything to add there, Julian? As I mentioned before, our approach to 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. We know that 4 out of 10 students become residents, seven out of 10 workers become residents. That's another way that we can grow a resident book that's very different from how others can. Looking back, we're now almost 70% larger in terms of book than we were pre-COVID. The opportunity for us to drive growth in the resident business is very attractive.
Great. Thanks so much for that, guys.
Much appreciated.
Your next question comes from Siddharth Parameswaran with JP Morgan.
Good morning, gentlemen. 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, you know, three weeks or anything like that in the second half. Also, 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, Sid, thanks for your question. John, 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. In fact, 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 link better where we see a better, longer return on investment than paying commissions to AGs and offers to AGs.
Yeah, 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 when APRA releases their market results, I think it's tomorrow where we sit. We're very confident that we're growing in line with the market as we expected to in the second half. Really, it's just about continuing that momentum. I think to Mark's point about the aggregators, we've remained very disciplined. Given there's still some unsustainable practices out there, we could have short-termed the business, if you like, and grow more through aggregators. We saw aggregators in the last year take another 10% to 15% share growth of acquisitions as others on the market are desperate to spend money on acquiring customers.
Again, we've stepped away from that and ahm actually maintains its direct share of direct distribution year on year, which sort of points to the splendor. Similarly, we invested in Medibank because we thought the conditions were right. Both growth for 2026 but also support growth in 2026. 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's 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 of them pulling back. I think what gives us confidence is the market conditions will probably start to stabilize during the year. We have our give back. We've got a very strong performance on retention with more investment in differentiation and product settings.
I think we're seeing very strong growth in the corporate sector that will continue to support growth in Medibank. Really, ahm, it's about remaining disciplined and attracting the right type of customer for the group. We're very pleased that the ahm result showed an improvement in retention rates and others are going the other direction. I think that just shows what we're doing quite differently in our approach.
Sid, maybe just to close off on the downgrading point, if you look at the increase from 50 basis points to 90 basis points for the full year, slightly more than half of that reflects acquisition and lapse mix. We saw offsetting impact and benefit in our claims. We undershot our claims guidance by 20 basis points. The vast majority of that remaining difference is because of seasonality rather than any investment in offers or any other factor.
Okay, that's super helpful, thank you so much for that. If we could just ask a second question around 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 be gross margins roughly flat into next year. Obviously, one of the missing components i t's just the next rate round. I was just keen to understand. I think clearly the government is trying to p ush for more support for hospitals. I was just wondering where you think the discussion is on affordability for customers. Are they willing to accept that more being given back also may mean pressures on premium rates?
I think I'll start, Sid, and then hand over to Mark. I think, look, you know, when 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 wellbeing of our customers, giving them more value, which I think we shared today. It's about having a higher payout ratio than the industry average, which we do. It's about having one of the lowest costs in the market. I think us, apart from one other small fund, we've got the lowest cost in the market. It's about investing in the health transition, supporting hospitals as we've evidenced today through our one-off and support costs and paying 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 four or some of those four or they are sitting in a position where they have a low payout ratio. You have to sort of separate the industry from the players. That really shapes the conversations we have in the reform program with the government, but also with hospital partners. As I said, you know, when we come to conversations about supporting our hospital partners, it comes from a position of us, you know, 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, you know, keep health insurance affordable. You know, 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, 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. The conversation at the reform table is, you know, how do we reduce the, you know, the cost of insurance, you know, let's talk about payout ratios. 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 four times 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 than the public system?
I don't think the Australian private health insurance consumer should pay for, you know, what the gr ant shows is 64% of beds being utilized. We actually have to look at the core fundamentals of cost and productivity and, you know, that's what we advocate for in the reform discussions.
Sid, probably the two 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, that could provide upside to both the claims guidance and the gross margin. At a funnel level, obviously the growth rate of overseas relative to resident 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.
Okay, thank you.
Your next question comes from Freya Kong with Bank of America.
Hi, thanks for taking my questions. 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 two 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. All of those are changing competitive practices. I wouldn't say that it's uniform because there are still other competitors that are still looking to grow through acquiring on the aggregator, which for us is just not a sensible way of investing in the long term of our business, is not good for the long term support for our customers. We are still seeing some of that. I'd say that the market conditions are changing.
I think when you look at the premium increase round 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 that's lower than the industry average. That's really helped our momentum as well. I'm just interested in your perspective in the second half. Anything to add?
Yeah, I think that's spot on. The only other two are, one is the customer and brand metrics are all moving in the right direction, and so our ability to attract and retain customers is improving year on year materially. The second one is, as part of our disciplined growth, we focused on families and corporates, and we saw great trend over the year. In particular, half two acquisition of families and corporates hit numbers that we hadn't seen in almost 10 years. That momentum is building in particularly those target segments we've chosen to focus on for the last few years.
Thanks, that's really helpful. Can I just ask, on the M&A budget of $150 million- $250 million over FY 2024 to 2024, how much of this has been spent and what would you deem a reasonable time frame to consider what to do with the excess?
That's around $60 million, $60 million- $70 million spent. The date and the comment on the guidance was in respect of FY 2025 spending, 2026 spending the residual. I think the M&A pipeline is the strongest I've seen it for a long time, and we'd hope to deploy that. The capital position is strong. The strategic rationale is also strong. We'd hope to be able to deploy that during the course of this year.
Okay, great, thanks. The final one, just on the APRA supervisory charge, can you also remind us on the timeline of this release and what needs to happen for the regulators to get comfortable here? Thanks.
Yeah. The final decision obviously rests with the regulator. We're in regular contact with APRA and we're well progressed through the uplift program. In fact, we're 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 the ball's in their court and we have very open and transparent conversations about that. I think there are other situations where they've provided partial release to capital. I believe there are other situations where they've held on to that capital till the very end of a program and that's really a determination for them.
What I would say is the program's going very well and we remain well capitalized to support our strategy.
For the comment we made about deployment of the capital in the M&A, there's no assumption of that capital being released. He made that statement based on the level of unallocated capital and ability to fund out of cash reserves that are surplus to the business's existing needs, rather than assuming any of that money was released from the supervisor overlay.
Okay, Right. Just to be clear, the comment around capital management actions is just in case the M&A pipeline doesn't come through, but it sounds like it's pretty strong.
Yeah, we're not going to sit on that level of unallocated capital indefinitely. If we can't deploy that capital and make an appropriate return, then we'll need to think about giving that back to shareholders.
Okay, thank you.
Your next question comes from Andrew Buncombe with Macquarie.
Hi guys. Thanks for taking my questions. Just two from me please. The first one, the probability of adequacy on the risk adjustment remains unchanged at 98%. While a number of your peers are starting to drop that. What do you need to see to drop that back to pre-COVID levels?
Thanks. It's a great question, Andrew. It's interesting. The variability in claims processing speeds is probably more volatile than I've seen in a number of years. I'm even more resolute about meeting the 98% at this moment than I was in the middle of COVID. We would need to see a more predictable pattern on paid percentages on a month-by-month basis to get comfortable on releasing that, and to be clear, that will be released and be very transparent on how that's impacting funds. We'll call that out s pecifically, given that's a one-off impact when released, Andrew.
Really interesting point. That leads into my other question. Are you seeing any structural change in the pace that claims across the market are being processed, or is it just all over the place? Thanks.
Oh, it's not starting. We saw it 12+ months ago, particularly when Healthscope started to have its financial challenges. So I think we went through a cycle where claims were lower allowed the processing teams to catch up with their billing. You have gone into a period where cash flows are challenged, which is another reason for acceleration. It is not a new phenomenon, and I am not sure it is getting any better or worse, but it is almost becoming part of BIU going forward.
That is it for me. Thank you.
Your next question comes from Dan Hurren with MST Marquee
Good morning, thanks very much. I've got the other in my ear. I've got the Ramsay earnings call going and they're suggesting or they're telling the market that they are already working with unions in anticipation of changes as recommended by Sharework to create the wage gender imbalance. Can you talk to how these wage increases are going to be considered in. The next premium round, please?
By my kick off and then maybe Milosh, you can provide some comments. Look, I think as I said before, probably in the last three years there's been a bit more unknowns from a hospital cost perspective. Certainly hospitals tell us, were telling us that there were a few things that were unexpected in their forecasts. There was a few more out of cycle conversations that we were having. I think really now, as I said before, we supported hospitals with some one-off support to the tune of $87 million over the last three years. Now I think there's more knowns. There's still inflation coming through, but we're also increasing indexation both as a fund but also as an industry. As we enter these conversations, given the settings that we've talked about today, we talk about anything that's material unknown that's going to drive cost.
We want to preserve access for our members, but we need to make sure affordability is preserved today and in the future. I think that's pretty much BAU.
Yeah, thanks David.
Yeah, please go ahead.
Sorry, no worries. Dan. I was just going to say that w ages are a part of a regular conversation, and there are different drivers for why they might go up or moderate in the balance of how we create affordability for customers, access, and continue to support innovation and strategic initiatives. A number of our conversations with our hospital partners have been working through the public EBAs flowing through and potential implications from Fair Work judgments. A lot of those then have a multi-year implementation schedule that we can then work with our hospital partners on what's going to impact when, how do we offset it with other initiatives that can improve affordability and value-based care, and in the mix, the constructive conversations that we continue to work through.
Dan, I just caution for reference 48% of our total claims to private hospitals. You need to think about the entirety of inflationary or deflationary impacts across the whole portfolio, not just a particular impact in the private hospital component of claims. We know in the hospital products you've got public hospital payments and MBS, which is linked to headline inflation, which is going to be deflationary year on year to the hospital product. We think there'll be a bigger drop in FY 2027 just given where headline inflation's going. Probably more important to the claims trajectory going into FY 2027 is going to be the fact that the New South Wales private room rate impact, which is for us, around $35 million for the full year, that will be fully embedded in claims. That'll provide a tailwind going into 2027.
I think you've got to think about all the inflationary and deflationary impacts in the portfolio rather than just one that may be linked to the minority of our claims.
Okay, yeah, that's a good point. Thank you very much. I'll leave it there.
Once again, if you wish to ask a question, please press Star, one on your telephone and wait for your name to be announced. Your next question comes from Andrei Stadnik with Morgan Stanley.
Good morning. Can I ask my first question around the outlook for a slow industry growth in FY 2026? What makes you make such a statement, and how much of a S lowdown could you expect?
I might start wrong. That crystal ball keeps. It doesn't compute because every time we come out with an expectation of slightly moderating industry growth, industry growth remains very buoyant, and I think the words moderating, we are saying only very slightly. We're talking about March year to date 2.35%, which is actually stronger than the previous year. Hospital growth 2.55%. Moderating to us might be, you know, somewhat shy of that by a few basis points, but I think we're comparing that to a growth rate of pre-pandemic of 50 basis points. You have to think that that will slightly moderate given premium increases at an industry level are higher than they were last year. There's going to be some moderation, but still health is a very important part of the consideration for consumers. There's real challenges in the public system, which is really the alternative offering.
Whilst we think moderating, we're not saying the growth will slow significantly.
We say that we look through the industry data and new to industry was up slightly in the 12 months to March 31, but exits were flat year on year. Given the economic cycle we've been through, you would expect exits to increase slightly and we haven't yet seen that. That is the main driver of that expectation of moderating growth. We'll see what's happened in the industry data for the fourth quarter and I may be wrong again for the fifth year in a row.
It's probably there's one thing about total growth, it's not about the quality of growth. We are seeing very strong growth in hospital lives, number 30 packets. I think a 13-year high. We've got the adult dependent reform that's coming that still has some way to play out. I think even if the growth moderates, the quality of the insurance pool and therefore the impact on claims and support in a community rated system is very positive. I think whilst we may see that growth rate moderate, we also pay very strong attention to the quality of that growth.
Thank you. If I can ask a second question, and just check in if you can hear me.
Yes, Andrei, I'm clear.
Thank you. Sorry, I actually did accidentally disconnect myself in between. If I can ask a second question around costs. Just to clarify, Slide 19, you talk about $10 million uplift in digital and other tech delivery there over on the left, did that already take place in FY 2025 or is that taking place in FY 2026?
No, that's embedded in the FY 2025 number, Andrei
Okay, so what you're saying is you've increased FY 2025 with $10 million digital, $6 million in marketing. That's already embedded in FY 2025, and FY 2026 you look in some further investments, but you have a $10 million productivity saving offset.
In totality, we invested in round numbers, $20 million, including some investment in non-resident, which you didn't mention. We always do and still will invest in FY 2026, but not to the same level we did it in FY 2025.
Sorry, it sounds like costs will be r elatively well managed in 2026?
I think I'd like to think that costs have always been relatively well managed. What I would say is from an MER perspective, I think 2026 is going to be quite a lot easier to get a flat MER or achieve that aspiration than it was in FY 2025. The reason I say that is inflation's going to be lower, but expect revenue growth to be higher and we're not investing as much. The three major drivers of where the MER goes are all going to be moving in favor of a flat MER next year rather than compared to w hat we saw this year.
Thank you. If I can ask a very quick one. Did anything change on cybercrime costs outlook? Because I thought we were under the impression that that spend would slow substantially in 2026. Instead, it looks like fairly modest slowdown in 2026 and then the big step down in 2027. Did anything change there?
Not particularly, but I think overall there's a few things to say. I mean this uplift program over the journey has been probably a bit more complicated than we had or we've also taken the view to invest in resilient, scalable, flexible solutions that are going to support us into the future. I think when you actually have an uplift program where you need not just for work, but we have an expectation of internal validation and then external validation, things just move a little slower. Not so much in the actual work, but in the evidence of the work. All those things are, you know, probably, if I look back three years ago, probably slower or two years ago, slower than we thought. I think the expectation of what we're going to deliver for next year is, you know, it's pretty reasonable.
I said we focus on the comment that we think will be largely done in the embed phase by the end of the financial year. What will be residual in that, in that cost bucket will just be the ongoing litigation activities.
Thank you.
Your next question comes from Kieren Chidgey with UBS.
Good morning guys. Most of my questions have been covered, but just a couple of follow up questions. Number one, on your growth outlook, can you just remind me what the timing is around any final givebacks from COVID, and how you kind of thinking about phasing those in over the remainder of the year, and how critical is that in terms of your above market growth outlook.
Thank you, please.
The $228 million now brings the COVID reserve down to zero. There will be no subsequent impacts given the COVID reserve has been expunged. Any favorability or unfavorability goes into the operating result. I think most customers should expect to have $228 million or their share of it in their bank accounts around end of September, early October.
Okay, all right.
And then from a retention perspective or around customer retention?
To your policies and retention.
I think it's important for retention, but we've been proactively investing in product benefits and in price and in better proposition to ensure that there's a very soft exit from the COVID ratio. I think we're really well placed, and we're not expecting any significant impact on retention as a consequence of that last customer give back. I think we've tried to time the last give back line with the inflation cycle turning and interest rates starting to come lower, Kieran. We're hoping and expecting that it'll be a very, very soft landing coming off the COVID regime.
Okay. Secondly, just on customer benefits. I know Mark, last time we talked after seeing the APRA March quarter data, which had quite low inflation prints, you were talking about the potential for maybe reinvesting any claims benefits into more customer benefits into 2026. Just wondering within that claims inflation outlook, does that actually include any change in benefits prospectively in terms of policy design for customers?
What it includes is two things. We invested progressively during the year on new customer benefits. It includes the full period, the full run rate of those benefits in FY 2026. There is also an allowance for further investment to the extent we see claims even lower. Let's say the hospital utilisation recovery effect doesn't occur and we've got further investment capacity. That's something that we look at during the course of the year as we will when we think about our premium increase.
Thank you. And anything to a dd, I mean, t here are product benefits, there's also the differentiated offering. I think when you look at the percentage of Medibank policyholders that have an experience that we provide outside their core product, it is now 52%. A couple of years ago it was 45%. That drives a differential, a material difference in their retention rates. As that grows, it's another way of retaining customers we have, which is why you see our retention rates that are the market and it's part of a differential strategy that not many other insurers have.
Yep. Okay. Final question or just clarification? I mean, from what you're saying around the jaws on the resident business, gross margins should be fairly flat. You're kind of talking to MER stable, even potentially a slight improvement. I was a bit less clear on the non-resident contribution into your margin, but in aggregate, doesn't sound like you're expecting your net margin to sort. Is that fair?
Well, your first two thematics are right, Kieran, on what you said about resident and what you said about our aspiration on management expense ratio. On non-resident, we know that it's a higher margin product and it's likely to grow more quickly than resident, and that should be accretive to gross margin at a group level.
Okay, Right.
I think the real unknown is whether the hospital claims at both 74.8 within below expectations. The real unknown is do we actually see that as being a timing impact and later recover, which is by and large what we've assumed in the claims time. The big unknown is if that's a permanent and structural shift and that could have a positive impact on the jaws for next year.
I think you've then got to think about our Medibank Health segment, which we did have a three-year expectation of a 15% organic compound growth, which actually we're almost through that in two years. We've set an outlook which is to expect low double-digit organic operating profit, which puts us well in advance of our expectations three years ago. I think when you add that plus, you know, our expectation on M&A, I think that gives you the full picture of expectations for next year.
Yep, perfect. All right, thank you.
Thank you. That does conclude our conference for today. Thank you for attending. You may now disconnect.