I would now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.
Thanks, and good morning, everyone. It's great to be here with you today. I'm coming to you from Naarm, the home of the Wurundjeri Woi-wurrung peoples, and I pay my respects to their elders, past and present. I'm joined today by our executive leadership team, including our CFO, Mark Rogers. This morning we'll talk to Medibank's results for FY 2026. First, some opening thoughts from me. We continue to deliver value for the 6 million people who trust us with their health and wellbeing. Despite cost of living pressures, people continue to prioritize their health, and private health cover has remained non-discretionary. People are looking for greater value and better access to care. The health system is increasingly struggling to meet those expectations.
One in four people in Australia say they have delayed or avoided seeing a GP because of costs, while at the same time, public hospitals are dealing with growing elective surgery waiting lists. That's why accelerating the health transition has never been more important. Turning to our results. What stands out for me is the strong growth across the business. With improved momentum in the Medibank brand, ahm continuing to grow above the market, and Medibank Health delivering another record result. This combination sets us apart, helping us build a more resilient and growing health company. As you'd expect, given our strategy and the external environment, we're controlling the controllables and managing for the long term, balancing customer growth and profitability while investing for the future.
Let's turn to slide six. Aside from our financial outcomes, we think about our impact in three areas. First, customer value. Customers saved around AUD 250 million through our Members' Choice and No Gap networks and claimed nearly AUD 49 million in Live Better rewards. Second, customer health. More customers are using our health services. Amplar Health alone supported more than 5.3 million patient interactions. We also know that engaged Live Better members are more active and report healthier behaviors. It's also a reason one in three people choose Medibank. Third, system innovation. We expanded care in the home and provided private hospitals with a further AUD 40 million to help accelerate the health transition.
These are practical examples of how we're creating value for customers and patients, supporting their health outcomes, and helping them improve the sustainability of the health system. Now to slide seven. I won't go through all of these areas of the results, but for me, the highlights are resident policyholder growth of 1.1%, with Medibank growth doubling to 0.6% and ahm growing 2.4%, including strong growth in our priority segments. This is a pleasing outcome, given an increasingly competitive environment, and reflects our disciplined appr oach to growth. In PHI, we continue to balance margin and costs as we grew, and importantly, achieved a stable PHI gross margin and expense ratio. Medibank Health had another record result, up 31.3%.
In line with our healthy capital position, we are delivering shareholders a fully franked final ordinary dividend of AUD 10.9 cents per share. To slide eight now. Our strategy is driven by the needs of our customers and patients and the greater role Medibank is playing in supporting their health and wellbeing. As you know, our growth focus remains across five segments in health, from insurance to care delivery. In each segment, we have built strong foundations, and they all provide attractive growth opportunities. Together, importantly, they are driving our growth and diversification, creating long-term value, and allowing us to make a positive impact to the health system. Now turning to slide 9. This year we made some important steps in building a stronger, more diversified health company.
Again, some highlights for me were customer advocacy remained strong, health engagement improved, and our teams remained highly engaged, supported by investment in technology and AI. Across Medibank and ahm, we broadened our product offering, we strengthened our primary care footprint, and achieved strong growth in our community and acute business. We also further strengthened our foundations through risk fit and technology modernization while delivering another year of productivity improvements. Now to slide 10. Growth in the resident health insurance market continues at healthy levels, including strong growth in customers under 30. We did see an increasingly competitive environment, especially in Q4, with some competitors using aggressive growth tactics alongside increased aggregated marketing. These tactics are not in line with our strategy.
Across both brands, we remain disciplined in our approach, with a focus on our target segments and deepening customer engagement. Pleasingly, 57% of Medibank policyholders are now engaging with our health and wellbeing offerings, up on last year. With consumers looking to us for more value and for the rest of the industry, we will continue to tackle unnecessary costs across the health system, including the growing cost of aggregators. Upfront commissions paid to aggregators by insurers are opaque to the consumer. In just two years, aggregator sales have grown by 44% and industry commissions have almost doubled, reaching about AUD 200 million. The numbers for the industry are significant. In FY 2025, about three-quarters of aggregator sales involve switching from one fund to the other.
Only one-quarter of these sales were new entrants to the private health system. Aggregators do play a role, especially when consumers are looking for a good deal. But they don't represent every fund or every product. The only generally comprehensive comparison is available through the government's website, and there is a risk of commission-driven churn. In December, we removed ahm from one of the aggregator panels rather than signing up to terms that were unacceptable. While we expect this decision to have some volume impact in the short term, we cannot support channels that add costs without a corr esponding uplift in customer value and industry participation. Escalating commissions and lack of transparency are not in the long-term interests of consumers or the industry, and that's why we've also championed reform on this issue through the CEO Forum.
In non-resident PHI, the market growth remains strong, with growth in workers accelerating and student numbers normalizing, with lower visa approvals than expected in the last quarter. But pleasingly, we saw a strong improvement in our life cycle approach, with students, workers, and visitors contributing meaningfully to our resident policyholder growth. To support our non-resident growth into next year, we launched three new visitor health covers, with average daily joins doubling since launch. In the workers sector, we were appointed as one of two preferred health insurance providers for the Pacific Australia Labour Mobility scheme, creating a new growth pathway. In FY 2027, we expect the student portfolio to stabilize and the non-resident business to deliver solid gross profit growth.
Now over to slide 11. In the resident business, our disciplined approach to growth has seen us prioritize quality over quantity, focusing acquisition in our target segments, strengthening direct relationships, and building customer loyalty. This has seen our retention outperform the industry. Our join mix continued to skew towards customers new to the industry rather than switchers and growth in our direct channels. We've also continued to deliver productivity savings, with around AUD 130 million delivered in under a decade. The results of these actions are clear. With our cost per policy remaining materially lower than the industry average and our stable margins supporting a claims payout ratio above the industry average. These outcomes are increasingly important as insurers are asked each year during the premium review process to meet the minister's statement of expectations.
Now to slide 12. The health transition remains central to both our growth strategy and systems sustainability. Having invested more than AUD 500 million over the past decade, we are seeing increased momentum across prevention, primary care, and care in the home. We're seeing a significant shift towards preventative health, with individuals and employers increasingly investing in physical, mental, and financial wellbeing. We remain very well positioned to grow in this sector through our leading Live Better program, our breadth of financial wellbeing products, and our corporate health and wellbeing programs. Primary care reform remains critical to a sustainable health system, and that's why with our acquisition of Better Medical, we have now created one of Australia's largest multidisciplinary primary care networks.
We delivered more than 4 million GP consults through 169 GP and medical clinics and have ambitious plans to bring more care to more people. The number of these clinics charging no out-of-pocket has jumped 56% following the government's bulk billing reforms, a win for patients' access and affordability. With growth in virtual GP consults outpacing face-to-face consults in the market and in support of our multichannel differentiation, we recently launched the My Amplar Health app, giving patients one place to book and manage appointments. As health and aging needs increase, more care will shift into home and communities. In FY 2026, our community-based services supported more than 27,000 acute home health visits and saved 194,000 hospital bed days. Our virtual nursing pilot is now operating in 25 aged care homes.
Our contract to run My Home Hospital in South Australia was also extended for a further three years, and our transition care services has just recently doubled in capacity to around 100 beds. Together, these initiatives demonstrate our role across the care continuum whilst advancing the health transition. I will now hand over to Mark to take you through the financials and outlook.
Well, good morning, everyone. This result demonstrates our ability to manage through the cycle, balance growth and profitability, and invest to build a more sustainable and diverse business. Key financial highlights include group operating profit up 6.7% to AUD 813.5 million, with solid growth in resident health insurance, continued strong momentum in Medibank Health, and well-controlled corporate costs. Investment income was impacted by the lower RBA cash rate, and the increase in other income expenses includes costs associated with acquiring Better Medical. Non-recurring cyber costs were lower, and with the IT security uplift program now largely embedded, we expect FY 2027 costs to be less than AUD 20 million, and primarily related to ongoing litigation. Underlying EPS, which normalizes investment returns, was AUD 0.231 per share, which is up 2.9% on last year.
Now moving to slide 15. Despite the challenging economic environment, the business remained resilient, reflecting our disciplined approach to managing growth, margins, and expenses. Revenue grew 4.6% and gross profit increased to AUD 1.46 billion. Gross margin was stable at 17%, with a 10 basis point increase in resident gross margin and 210 basis point decrease in non-resident. Operating profit increased 3.8% to AUD 769.8 million, and the operating margin remains at 9%. Expenses are up 5.4% to AUD 690.2 million, and the expense ratio was stable at 8%. D&A increased in line with higher investment in digital assets. Resident commissions reduced due to lower ahm aggregator joins. The increase in operating expenses includes inflation of approximately 4%, volume-related increases, and investment in our foundations.
There was also additional marketing investment, including reinvesting AUD 5 million of the lower spend on resident commissions. These were partially offset by AUD 10 million of productivity savings. The major drivers of expense growth in FY 2027 will be inflation and volume-related increases, additional investment to support resident policyholder growth, including AI uplift, and we are targeting a further AUD 10 million of productivity savings. We continue to target a stable to modestly improving expense ratio over time through disciplined cost management and productivity initiatives, but balance this with investing in growth where this makes commercial sense. Now moving to slide 16. The resident PHI industry continues to grow, with the non-discretionary nature of healthcare underpinning future demand.
Cost-of-living pressures have impacted the industry, with policyholder growth skewed to lower-tier products, higher switching, and aggregators increasing their share of joins. As a result, the competitive environment intensified in the fourth quarter, with some competitors pursuing aggressive growth tactics alongside increased aggregator marketing. We have chosen to prioritize the quality of growth over quantity. Pleasingly, we have grown in our priority segments, maintained the revenue mix impact at the 1H 2026 level, and increased the percentage of ahm joins through our direct channels. Our number of policyholders increased 1.1%, with Medibank growth doubling to 0.6% and ahm growing 2.4% despite lower aggregator joins. The acquisition rate was 10 basis points higher, with the increase in Medibank reflecting continued investment in brand, customer value, and differentiation, and direct sales in ahm partially offsetting lower aggregator activity.
While laps increased 40 basis points, we expect to be performed better than industry, reflecting the value customers place on our differentiated products and broader health proposition. In FY 2027, we aim to increase growth in a disciplined way through continued brand and proposition differentiation, targeted investment in priority segments, and building stronger direct customer relationships that support retention. Now moving to slide 17. Resident claims expense increased 4.6%, and risk equalization provided a 20 basis point benefit to net claims growth, with the timing benefit we saw in the first half unwinding as expected. Resident claims growth per policy unit increased 40 basis points to 2.6%. In hospital, the decrease in inflation reflects higher private hospital indexation, offset by reduced additional investment in product benefits and lower public and medical indexation.
Hospital utilization growth remained negative, reflecting prior period COVID impacts and policyholder growth skewed to lower-tier products, and extras utilization increased as demand normalized following a period of subdued activity. In FY 2027, we expect hospital claims growth per policy unit to increase reflecting the AUD 74.8 million COVID utilization benefit in FY 2026 not recurring. Continued negative utilization growth driven by mix impacts. Broadly stable private hospital indexation and benefit from more procedures happening outside of traditional higher cost settings. We expect excess claims growth per policy unit to reduce, reflecting lower indexation and benefit investment. We are also monitoring utilization trends, given historic customer behavior and current economic conditions. Slide 18 details health insurance performance, which shows continued solid gross profit growth of 4.6%.
In resident, our disciplined approach to growth resulted in gross margin increasing 10 basis points to 16.3%, with revenue and claims growth per policy unit of 2.7% and 2.6% respectively. Policyholder growth was skewed to lower tier products, with largely offsetting impacts to revenue and claims. Growth in revenue per policy unit was up 10 basis points, with the higher average premium increase partially offset by a higher revenue mix impact. This higher revenue mix impact reflects customer growth skewed to lower tier products, an increase in offers spend and investment in Live Better, and we expect a similar impact in FY 2027. In nonresident, policy units declined 2.3%, with student policy units declining due to tighter migration settings and natural runoff of large cohorts acquired following borders reopening.
This was largely offset by continued strong growth in worker policies. Gross profit reduced 1.2% to AUD 110.3 million, and gross margin was down 210 basis points to 34.8% largely due to tenure and mix impacts in the student portfolio. However, we expect non-resident to deliver solid gross profit growth in FY 2027, supported by a stabilizing student portfolio, continued momentum in workers, and growth in visitors following the launch of new products. Moving to slide 19, which covers Medibank Health. Medibank Health segment profit increased 31.3% to AUD 100.7 million, with strong organic growth in all three segments and a AUD 6.2 million contribution from Better Medical. Operating margin was down 50 basis points to 16.9%, with the 180 basis point reduction in gross margin partially offset by an improving expense ratio.
Revenue grew 30.8%, supported by strong customer and patient growth, higher consult fees in primary care, and a full year contribution from 100% ownership of Amplar Health Home Hospital. Gross profit was up 26.5%, with the reduction in gross margin due to additional investment in Live Better and business mix impacts partially offset by efficiency benefits in community and acute and primary care. Whilst expenses increased, including AUD 10 million of additional investment to support future growth, with growing scale, the expense ratio was 140 basis points lower. We continue to see strong organic growth potential in the business, with focus areas for FY 2027 including meeting more health needs of more customers, scaling existing services with a broader set of payers, realizing synergy benefits across our primary care network, and further performance uplift in the JV hospital portfolio.
We aim to augment this organic growth with further M&A that scales and expands geographic coverage in primary care and adds capability in wellbeing and virtual care. On Slide 20, we show a more granular breakdown of the financial results for our three Medibank Health segments and the key customer metrics driving performance. In wellbeing, Live Better members increased 11.6%, following investment in the proposition and rewards kickback offer last year. Financial wellbeing policies increased despite subdued travel demand. In primary care, consultations increased 26.7%, reflecting a six-month contribution from Better Medical. Pleasingly, Community and Acute delivered a significant improvement in profitability, supported by ongoing growth in publicly funded programs and increased capacity within transition care services.
Now, moving to slide 21. Investment income was down AUD 28.9 million, including a AUD 7 million reduction in both the growth and defensive portfolios. The decrease in the growth portfolio reflects lower income from equities, partially offset by improved returns in both property and infrastructure. Income in the defensive portfolio was impacted by the lower RBA cash rate and widening credit spreads, with this partially offset by a higher asset balance. Other investment income was also impacted by the RBA cash rate and lower cash holdings. With the lower earnings on cash, underlying net investment income was down AUD 17.2 million. The underlying net investment return reduced 24 basis points to 5.62%. The spread to the average RBA cash rate increased to 177 basis points.
In FY 2027, we expect underlying net investment income to benefit from growth in asset balances, the higher RBA cash rate, and opportunities to increase liquidity and credit margins. Moving to slide 22 and capital. The business continues to be well-capitalized, with AUD 182.9 million of unallocated capital. This has reduced by AUD 69 million over the last 12 months due to funding the Better Medical acquisitions, but this partially offset by strong capital generation. Health insurance capital was stable, with reduced insurance and asset risk charges offset by additional capital to support growth. The PCA coverage ratio increased to 1.9 times and the capital ratio is 13.3% of premium revenue. We continue to hold additional capital to offset the AUD 250 million APRA supervisory adjustment, and this is why the capital ratio is above the target range of 10%-12%.
The AUD 163.5 million cost of acquiring Better Medical drove the increase in Medibank Health capital, with this partially offset by lower required capital. Our strong balance sheet supports our FY 2030 Medibank Health earnings aspiration of at least AUD 200 million, and we have capacity to raise Tier 2 debt to support growth beyond this if further attractive opportunities arise. Given the strong capital position, the board has declared a final dividend of AUD 0.109 per share, bringing FY 2026 dividends to AUD 0.192 per share. This is a 6.7% increase and 83% payout of underlying net profit after tax. To finish, a few comments on our FY 2027 outlook. In resident health insurance, we continue to aim to grow market share in a disciplined way, including improved volume momentum in the Medibank brand.
We expect resident health insurance gross margin to be broadly consistent with FY 2026, as we continue to manage revenue mix and claims growth in line with premium increases. In non-resident, we expect to deliver solid gross profit growth as the student portfolio stabilizes and growth in worker and visitor policy units continues. In Medibank Health, we expect segment profit growth of circa 25%, including a full-year contribution from Better Medical. Our M&A pipeline remains strong, and we have both the appetite and financial capacity to pursue further strategic opportunities. Pass back to Dave to make some final comments.
Thanks, Mark. Just now moving to slide 25. The opportunities ahead of us require us to stay focused on what matters most: building customer trust, supporting better health, growing our business sustainably, and ensuring our organization is fit for the future. These priorities guide us where we invest and how we measure success. AI is becoming an important part of how we strengthen decision-making, simplify work, enhance customer outcomes, and unlock new growth opportunities. It is also becoming the front door to health. Increasingly, people are turning to AI first for answers about their health, their care, and the cover that is right for them. Used well, AI could be one of the biggest advances in access to care we have seen. We are very aware that the risks are real.
In health, AI cannot just be fast and convenient. It has to be safe, accountable, and designed around people. Being trusted by more than 6 million people with their health and wellbeing gives us a responsibility to shape this well. Now briefly to slide 26. As we grow across our five segments, we are also focused on realizing value between our health and PHI businesses. As part of our 2030 vision, we have an ambition to deliver incremental value of around 5% to our PHI operating profit growth between FY 2025 and FY 2030 by increasing our role in customers' health. For example, we are already seeing this value through Live Better, which supports PHI growth, home care by reducing hospital bed days, and prevention programs, helping reduce the burden of chronic disease.
Now slide 27 to wrap up. FY 2026 demonstrated the benefits of staying disciplined while continuing to invest for the future. With strong customer advocacy, deeper health engagement, and growth across insurance and health, strengthening the resilience of the business. With strong foundations in health, we are well-positioned to continue to create long-term value for customers and shareholders. On 1 October, Medibank marks 50 years of supporting the health and wellbeing of people in Australia. Few companies have the privilege of playing such an important role in people's lives. We are proud of the contribution we have made to the Australian health system, but most of all, we are proud of the trust generations of people have placed in us and the role we have played alongside our partners in helping people live healthier lives.
Finally, to our people, thank you for the care, commitment, and passion you have brought to Medibank over the last 50 years. Now it is 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 are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Kieren Chidgey with UBS. Please go ahead.
Morning, David and Mark. Two questions, if I can. The first on policy growth and the outlook into 2027. Obviously, second half, you pulled back due to competition, very little resident growth. Just on your outlook statement, the aim to grow market share in a disciplined way, I just want to confirm if that is in aggregate across both brands and in totality, or if that is more alluding to particular segments where you are happy to grow, but maybe still below system in an aggregate level. Related to that, how are you thinking about the cost base expenses for next year? You have alluded to additional reinvestment to help from a growth point of view. Can you just unpack what you are talking about in terms of quantum?
Yeah. Thanks, Kieren. I might start with performance and then momentum, and then Mark on that last part of the question. If we look to the full year, we are very pleased with the doubling of growth for Medibank, and 2.4% growth in ahm despite taking ahm off one of the aggregator panels in December, and what was quite a significant uptick in competitive environment in Q4. Pleasingly, acquisition was up year-on-year. We saw growth in key segments. I think the corporate growth has been very strong. Growth in families, you can see that in the presentation, and also in our growth in lives. I think where we have focused, we have done very well.
You can see the benefits through our margin and cost position of that disciplined approach, which is particularly important as we look forward, as all insurers are asked to meet the statement of expectations. That has enabled us to keep our claims payout ratio higher than the industry average. I think what gives us confidence, particularly in the Medibank and ahm brands, brand health is at very strong positions. As you say, we are investing in growth, in those markets and particularly AI, which is showing some very promising improvements in both retention and acquisition performance. I think something will play out, and we have to be mindful of what happens with competition.
It will depend on what we do with aggregators, but our aim is to continue to grow at a total level, where it makes sense, but particularly calling out some strong confidence in Medibank momentum increasing.
Kieren, at the expense line, would not expect expense growth to be too dissimilar to the 5.4% growth we had in FY 2026. The build-up of that will be slightly different. Would not expect the D&A to increase. We are expecting that to be broadly stable in 2027 and would not expect the same reduction in resident commissions. We invested, in round numbers, about AUD 10 million incremental in marketing during the course of the year, including redeploying AUD 5 million of resident commission savings into the marketing line. I would not expect the reinvestment next year to be too dissimilar to that AUD 10 million number. Really from an expense ratio perspective, it is going to largely, where we land, will depend on the revenue growth equally.
Okay. A second question on claims inflation, second half handout , in my view, a little bit better than anticipated. The incurred inflation probably only 2.8% in second half. I guess more interestingly, the cash payments up only 1% on PCP in the second half of the year. Mark, maybe you can just unpack why that was a better result through the second half and how you are thinking. I guess you have provided a bit of detail, but in aggregate for next year, are we talking 3.6%, 3.7% type levels?
Thanks, Kieren. Let me start with the first part of the question. You need to go back to the first half of 2026, where I think the industry saw quite a significant increase in processing speeds and payment speeds. Cash claims paid were significantly higher across the industry than incurred claims. Whilst the payment patterns remain elevated, they weren't as fast as they were last half. As a consequence, our actual cash claims paid in the second half were less than our incurred claims. I'd expect looking forward now, we're through the CO VID regime, subject to being no further change in payment patterns that incurred and cash are going to align much more closely going forward. On inflation, which is the second part of your question.
On hospital inflation, I think the most important thing to call out is we did have New South Wales private room rate increase in the first half, and so that elevated the claims inflation in the first half, and we know that is now fully embedded in our claims line. As I think about FY 2027, Kieren, on the hospital product, by far the most material impact is that AUD 74.8 million COVID utilization benefit unwinding. So that's 150 basis points of utilization. So that would take the kind of underlying momentum in hospital claims inflation from 3.1% to 3.6%. That by far is the most notable item looking to FY 2027 for hospital claims. Then we've called out really clearly in the presentation, we expect extras claims growth to be less than the 3.4% that we reported in 2026.
I think all other factors, which there will be a whole series of other factors, Kieren, all other factors in terms of FY 2027 claims directly will be second or third order.
Okay. All right. That's clear. Thank you.
Your next question comes from Andrew Buncombe with Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Just the first one. Just interested whether you think you need to step up any of your CapEx to achieve your Medibank Health earnings targets over the medium term. Thanks.
Hi, Andrew. In fact, this year we invested an incremental AUD 10 million in the future growth prospects of that business. I feel pretty comfortable that we've invested in the OpEx base, and I wouldn't expect there to be too signifi cant an increase in the CapEx line either, Andrew. I think we're pretty well-placed. FY 2026 has been a big year of investment in the Medibank Health segment. I don't see that impacting the P&L going forward. Probably the area I'd get you to focus on would be the M&A investment. Our FY 2030 earnings aspiration, AUD 200 million, AUD 700 million capital base. We've invested AUD 560 million of capital employed now, so we've probably got another AUD 140 odd million to invest in support of our FY 2030 ambitions.
Great. Thank you. The next one. How long or how much longer are you expecting to have to wait before APRA starts unwinding your additional capital charge related to the cyber incident? Thanks.
As we s ay every six months or so when we get asked, we remain in very close contact with APRA. We have made great progress on our uplift program. In fact, as Mark alluded to or mentioned, the cost for FY 2027 now largely embedded. We are entering into an embed phase of the program. I think we both recognize the momentum, the progress, and the milestones achieving. We are moving forward at great pace, and I think the final decision really is with APRA about that capital charge. I think there are instances where they have recognized partial relief based on milestone achievements. There are instances where they have waited to the very end of the program, including embedment.
We will keep in close contact as you would expect us to do, and that decision will remain with APRA.
Great. Then the final one from me, please. Just interested whether your gross margin targets for FY 2027 actually assume any actuarial assumption changes or any changes to the behavior of risk equalization. Thanks.
Andrew, thanks for your question. You had asked that one, it is the third year in a row. The first part of your question, no change to actuarial assumptions. We have not assumed the probability of adequacy reduces on the current 98%. Sorry, what was the second part of your question?
It was whether you are assuming any change in the risk equalization scheme inside that margin guidance.
Looking, no. If you look across the whole 12 months of FY 2026, we were a modest beneficiary from the pool over the 12 months on average, and I suspect the 12-month average should be a good indicator of what will happen in FY 2027. That is obviously subject to competitive behavior and the like, Andrew. If a competitor has an uncommercial price on a product and has adverse selection that takes higher claiming younger customers from us and our competitors, that could support our risk equalization position equally. We saw that in FY 2025.
Excellent. That is it from me. Thank you.
Your next question comes from Julian Braganza with Goldman Sachs. Please go ahead.
Good morning, guys. Just a quick one. You have a comment in there saying stable PHI indexation into FY 2027. Sounds a little bit contentious there, but how do you get comfortable with that sort of outlook? Yep, thanks.
We've got a very good view of what the current contracted arrangements provide for going into next year, and we've had a large portion of our hospital contracts that have been re-contracted in the recent time. We've got a very good view on that, Julian.
Well, just to add to that. For us, through this whole last cycle, whilst th ere have been some challenges, we have ongoing conversations with hospitals, and contracting has been an ong oing set of conversations about inflation indexation, but also partnership investment. I'd say very much back to BAU, and you can see through our partnership payments. We are working very constructively with hospitals to not just support them, to support our customers, but also to help them support the health transition. As Mark said, we've got a lot of certainty given the percentage of benefit outlays that are yet to be contracted. For hospitals, there's less unknown unknowns. We have a high degree of confidence that our partnership agreements will support our business going forward and support the health transition.
Julian, where you are in the contracting cycles with your larger hospitals will change between different providers. You'll see in FY 2026, we've called out that there was higher private hospital indexation. Maybe your assumption on what others will pay in FY 2027, we've already brought forward and paid in 2026.
Okay, got it. That's clear. Then just on the Medibank Health business, I just want to be very clear what sort of organic growth that you're seeing there in FY 2026. Also just, if you look at your accounts in terms of impairment testing for goodwill, you're kind of assuming about 2.5% growth there for Medibank Health across the divisions. I just want to get comfortable, one, what are you seeing in the numbers on an underlying basis, ex the acquisitions? Then two, the reason for the difference then in terms of the accounts. Thanks.
Let me start with the first, Julian. If you look at the 31.3% reported segment profit growth, I would just subtract AUD 6.2 million from that and you will get organic growth. You will see that is still somewhere in the 20%-25% range. I think you are referring to the impairment testing table. I think it is pretty standard industry practice to conserve the use an inflation-led 2.5% or 3% number in your CapEx multiple. That does not indicate your earnings prospects over the next few years. That is more just applying a capitalization multiple for the terminal value calculation.
Okay, got it. That is clear. Then just a last question in terms of just the outlook for the non-resident business, just in terms of pricing and inflation and margins from here. I am just wondering if you can kind of unpack that framework into FY 2027. Thanks.
Firstly, on pricing, it would depend on which segment you are talking about, given there are different claims growth and competitive dynamics. You should assume that the higher claims growth that we saw during the second half of FY 2026 has been factored into our go-forward premium increases. Those went through in May. From a margin perspective, just the way we think about FY 2026 is across the two halves of 2026, we had broadly flat gross profit and gross margin. Why we had profit decline and margin decline really relates back to the performance in the second half of 2025. We had a really strong outcome in the second half of 2025. We had a 39% gross margin.
The trajectory in 2026 is more about what happened in the second half of 2025 rather than what happened across the two halves of 2026. That is why we are comfortable with the solid profit growth guidance that we have given you. I would hope that gross margin will be more stable in 2026 compared to 2025. I would just qualify all those statements for Julian. We have three different segments in non-resident workers, students, and visitors. They have different premium increase characteristics and different gross margins. I will qualify my statement. I am saying it will depend, however, on where we see growth across those three segments.
Got it. No, that's clear. Thanks so much for that, Mark and Dave.
Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Good morning, guys. Just first of all, on the resident claims inflation, I appreciate you've given gross profit guidance, but it's the first time you sort of haven't given specific resident claims inflation guidance. It doesn't sound from what you've said about the indexation that you've any less confidence in being able to predict it. So just first of all, wondering why that is. Secondly, given what you've said, obviously, and you've said it before on COVID in New South Wales, it still sounds like you're sort of batting for that 350-360 basis point range, which I think was mentioned at the half year. So just checking that's still where you're expecting it to land.
Yeah. Let me start with your second question. Yeah, so consistent with the conversation at the half year, really the go forward inflation, particularly for hospital, is going to be impacted, as you say, by the utilization benefit unwind. The numbers, the maths you talk about, Nigel, well, I think they're pretty accurate in terms of how you've come up with those numbers. I think there are two factors I'll just call out that we're watching most quite closely. So in the hospital product, it's how acuity and the shift of the model of care impact inflation in the hospital product going forward. Then on extras, it's the potential economic impact on utilization of extra services and particularly, more discretionary services. To your first question and why we've gone to gross margin outlook rather than claims.
It's the way we're managing our business. We look to generate a flat to flat-ish gross margin, and we manage our revenue mix impact and our claims inflation, including how much we reinvest in benefits trying to achieve that. I think we have tried to give you sufficient information to form a view on claims, and we have indicated that we expect revenue mix impact for FY 2027 to be similar to FY 2026, the 150 basis points.
Fair enough. Just on utilization, presumably that is pointing towards favorable, is it? With what you are saying on the economics, is that what you are saying there?
Well, if you think about.
On the extra utilize, yes. Sorry. On the extra utilization.
Definitely. Yes. Definitely. The risk is to the downside utilization rather than the upside in utilization.
Yeah, fair enough. Then just on back to sort of the revenue growth and more sort of a broad question, I guess, because you've talked about the competitive behavior in the market. You thought it was temporary a while back, and yet it seems to have gone on a lot longer than you anticipated. Have you sort of got any sight now that you think that could actually alleviate at some point? Is there a trigger point, or is this just the new normal where this kind of competitive activity is likely to persist for some time?
Yeah. Obviously, the important thing we look at, but for the first nine months of the financial year, we had seen the competitive intensity reduce back to a sort of more normal level. But with what was happening, the backdrop of the economy, cost of living, and other insurers, and you can see that from our presentation, the industry average margin reducing. There were actions taken in that quarter that are just not consistent with our strategy of managing the business for the long term. That was coupled with increased aggregated marketing, which we're talking to you about before, which is a more systemic change, and particularly those costs of commissions almost doubling in the last two years. That really came together in that Q4.
That's a cycle that we do see, and we would expect that to unwind over the long term. Our settings won't change. We'll continue to manage the business over the long term, being careful to balance volume with margin. Our individual half yearly outcomes will depend a little bit on what happens in the market. If you look at the overall trajectory of the industry, we expect that competitor environment won't sustain at that high level of intensity for every quarter going forward. It does come in and out, so the important thing for us is just to manage the business over the long term.
Yeah. I think, Nigel, that's the most important point. When you see that particular competitive behavior, you've got to maintain your discipline. We saw this 12 months ago when one not-for-profit fund mispriced the Silver Plus product, won a lot of market share, then they've significantly changed the price at the most recent premium round. We're trying to run the business on a flat to flattish gross margin. I think our discipline is one of the major drivers that's allowed our gross margin in resident to increase 10 basis points, and the probability of our margin sustainability is reinforced by that disciplined approach.
Okay, thank you for that. Then maybe just quickly and finally, is there any more clarity about the likely timing on litigation, or is that still pretty unclear?
Look, all activities and litigation still are at preliminary stages. We've published some court-ordered dates that will signpost momentum in some of the proceedings during the next financial year. There's nothing much more to say on that.
Great. Okay. Thank you very much.
Your next question comes from Siddharth Parameswaran with JPMorgan. Please go ahead.
Good morning. My first question was just on the lapse rates. They increased quite sharply in the second half. I just need to understand what actually happened there. I know you flagged that there was some competitive intensity, but particularly how you think that actually led to your own lapse rates worsening and just what you are assuming in terms of your outlook on that going forward.
Well, I will hold, but then I will hand over to Mark. We have seen lapse rates increase in the industry over the last few years. You can see in our presentation, the industry lapse rate has increased by 180 basis points over the last three or four years. Ours have also increased, but by a significantly less amount. I think for FY 2026, we believe that will still be the case. Lapse rates can be driven by competitor intensity in a short-term basis as well as aggregator marketing, where there is a risk of commission-driven churn. That is why it is important for us as we balance volume and margin to manage for the long term. So it is a relative lapse rate that we pay most attention to.
Medibank still as at March, had one of the lowest or has the lowest lapse rate of the majors.
Thanks, David. Sid, I think as David mentioned, it is a combination of the aggregator marketing, the industry premium increases, and the more challenged economic environment. It has just driven the switching rate across the industry to be elevated. When we look through the most recent APRA data and looking at our own data, it is more about switching than exits. What would have been slightly more concerning is if the exit rates in the industry had gone up materially, because that is a loss of a customer versus this is an increase in the cost of doing business through the commissions that we are paying. Generally, I think it is driven by the premium increase, the economic environment, and the aggregators becoming more aggressive.
Okay. Thank you for that color. My second question is just around the non-residents guidance that you have for into 2027. You are expecting some solid growth to return. We saw some pressure in the second half. I think you flagged tenure and mix impacts. My understanding of the accounting of this is that you often, particularly on the students, you write long-term con tracts and you cannot change pricing, and there are these tenure-related impacts. I am just wondering, the turnaround that you are expecting in momentum into next year, what will drive that? Usually, when I have seen it before, it usually takes a little bit, quite a bit of effort to turn around trends. If I think back to COVID, et cetera, there was a bit of pressure on these lines.
Just keen to understand how you are expecting to turn it around quickly.
Sure. I might start with the momentum in the second half versus the first half. The first and second half performance were broadly in line, Sid, around AUD 55 million of gross profit, across each of the two halves. The decline in earnings this year reflected the fact that the gross margin was so high in the second half of last year. Last year, in the second half, we had stronger visa approvals, so positive tenure and mix impacts that unwound in th e second half of this year. Probably the biggest driver on performance was the exit rate in the student portfolio this year. When borders reopened after COVID, we had a very big visa intake. Th ose students would have joined us for two or three years, so that is a graduation, graduating year this year.
The majority of the impact in that student portfolio, particularly in terms of lodging, was driven by those students leaving after graduation rather than it being solely driven by visa numbers. We would expect the policy units to be more stable next year, and we would not expect the tenure and mix impacts to be as significant, and we have taken some pricing and portfolio actions. What gives us further confidence is we are growing really strongly in the workers portfolio. The worker portfolio would have grown policy units north of 20% in the last 12 months, and that is the actual higher margin business. You are right on students. You cannot reprice the back book. You can only reprice the front book, but we are probably 12 months through that repricing cycle already.
Sid, when we look at the total market, we have seen the overall visa market remain very strong. The growth has been very strong in the last year in workers and students has stabilized back from where it was a couple of years ago. But the total visa market remains actually very strong. The mix is changing, which really suits our strategy, moving to higher education services where we are stronger in the student market and skilled workers, which are driving significant growth in that visa approval. I think we are also excited by our launch of our new products in the visitor market, where we have been waiting for that investment, and that market also continues to grow. The total market remains very attractive and the mix is shifting towards areas of our strength.
I think the other point that we shared in the presentation is around our work on life cycle, where non-resident policyholders form a material part of our acquisition pathway for resident, and we saw a 15% improvement in acquisition there year-on-year. So that is all part of our growth story, not just for non-resident, but also how we drive value across the enterprise.
That is great color. Thank you. Just my last question is just on the reform agenda with the minister. I think he is shifting his attention now to trying to make some of the elevated, the higher product tiering products like Gold, et cetera, sustainable. Just keen to hear whether this could have any impact on margins theirselves. What are the kinds of things that they are considering? Are they considering maybe putting obstetrics, et cetera, into the risk equalization pool? Is there a risk for profit providers who generally are underweight those categories?
Well, just generally on reform, I think the large focus, well, I am not the minister, I cannot second guess, but appears to be the National Disability Insurance Scheme, aged care, and then, the rebate that was part of the budget for over 65s. I think then the second main focus is on the public sector, particularly on primary care and driving the health transition, particularly to support a more sustainable growth in the pu blic sector on hospital funding. So I think they are the top priorities. I think on the private sector, yeah, the department has just issued a consultation paper which looks at a variety of things, including driving out-of-hospital care, better match ing hospital supply and demand, and then some other areas around product review. I mean, the Gold product question has been discussed at the CEO Forum.
It is part of that consultation paper. It has become a catch-all of lots of problems in the sector, I would say. But there is some potential for some reform to make it more affordable. You would have to look at the risk equalization settings to make sure that it becomes sustainable for the system.
Sid, to your comment on whether it would impact for-profit or not-for-profit, I think the ownership status is irrelevant. It is whether you have got on sale gold products and the size of your gold back book, which for us, we are a strong player in the gold market through both of our brands. I think some of our competitors have effectively taken gold off sale and do not participate in that market. So I am not seeing that as b eing a threat for us, but it will be for others. I think the question on risk equalization is not just what happens with obstetrics and mental health and whether that is part of the risk equalization pool for a gold product. It is more do we move to prospective risk equalization, and that is what we really hope for.
I think for us as an organization, we manage our plans well. We are sharing a lot of the benefit with our competitors because of the risk equalization basis. We would love the risk equalization pool to move to a prospective basis, and I think it will over time, probably not in one go. It will move progressively. But I think that is the area of risk equalization form that the industry really needs.
Okay, thank you very much.
Your next question comes from Andrei Stadnik with RBC. Please go ahead.
Good morning. Can I ask my first question just around the mix of your distribution on healthcare policies? You mentioned that you were running about 74% for several periods, and that's picked up now from 74% up towards 81%. Can you talk a little bit about some of the flow and benefits from that in terms of potentially lower commission or acquisition costs? Also, how high do you think you can sustainably drive that?
Well, it is a stated strategy that we are very focused on the markets we're acquiring within, focusing on giving more value and better health engagement to existing members, and then driving direct distribution. As you may know, Medibank, 100% of acquisition is direct and using direct channels. For ahm, it depends on our aggregator strategy, and you see that has increased the direct share of ahm acquisition in the second half, in part because we removed ahm from one of the aggregator panels. But also we saw a stronger growth in direct acquisition for ahm. The reason we do that is to help us manage the business for the long term. We see a lower cost to acquire through direct channels. We see stronger customer relationships developed, and that leads to lower lapse.
Those three factors are the reasons in the majority why we focus on direct channels. Where it can get to, it'll depend on other channels in the market and how we make sure we balance short and long-term economics around those. But I think at 80%, that's a very, very strong result. I would suspect, although it's not published, I think that will be the strongest result of the majors across the sector.
Yeah. Andrei, I think David's point on lapse is actually really, really important. Particularly customers that switch through an aggregator in May or June after the premium increase will typically have a much higher lapse rate or switching rate in the following 12-month period. The benefit of this disciplined approach to growth doesn't just impact you in the current period, it'll have a benefit, or we expect to have a benefit to our retention rates in FY 2027.
Thanks so much. For my second question, can I ask around your corporate growth strategy? You mentioned in the health segment, you'd like to do more on corporate. You also mentioned the, I think, the Pacific Australia Labour Mobility scheme. Can you talk a little bit about maybe som e of the under the dollar or the profit growth benefits that can come from those?
Well, I think the corporate strategy is both across the resident, non-resident, and health businesses. We've talked about the In non-resident, we've talked about the strong growth in visa approvals for non-resident workers, particularly skilled workers. The PALM contract is a great win for the business to broaden out our growth. On the resident business, we have 2,500 corporate accounts, and they are looking for more support for their employees in health and wellbeing, particularly mental health. It's not just the sales of resident PHI that form part of the relationship where we have grown almost double the size of the market growth rate in corporate accounts this year. It is also the ability for us to provide more of those health services. That health and wellbeing market for corporates is growing rapidly.
We think it's about AUD 1 billion in market size by the end of the decade. With our accounts that we have and with our proposition that we can offer through Live Better and other things, we're very confident about growth. That's one of the planks of growth for Medibank Health, particularly in that wellbeing sector.
Thank you.
Your next question comes from Vanessa Thomson with Jefferies. Please go ahead.
Good morning, and thank you for taking my questions. I just wondered if you could talk a little bit more about that private health sector reform paper in relation to the hospital in the home services and the minimum insurer payment. I am just curious, wanting to understand how that impacts Medibank. Thank you.
Well, as you know, we have been championing for some time, the move to support more care being done in the community. That is great, and it is fantastic to see general alignment on that as an aspiration. We are seeing many of our hospital partners embrace that. It reduces length of stay in extensive settings and is better for patients. The direction of travel is now not just us talking about, I think it is now very much an aligned objective. I think the reform paper talks about the how and the way that might happen. I think there are some trials we want to do with particular procedure types. There is a bit to play out there on exactly how that works.
It would be premature to speculate a bit any further on how the policy may shape up. We are very happy by the approach and the alignment on this move to embrace community care, which we have been championing, as you know, for many, many years.
Sorry. In relation to that, it is for registered hospitals. Would you guys fall into that basket, in terms of receiving those payments? I just could not understand, would that be you paying yourself or?
We already do. Amplar provides services to the health fund, to our health insurance business already. So we are already doing that. This is probably more a conversation about if a patient is admitted as an inpatient, and then is there a default benefit for them to be treated at home on discharge.
Right. Okay. Thank you. I also wondered, I acknowledge that the COVID benefit ending is the biggest contributor to the lower expectation for hospital claims. I just wondered if you could give us any more color on hospital claims. I think you had seen some lower surgical claims in a previous period. Just was after some more color there. Thank you.
The trends we spoke about coming out of COVID, which is softer claims growth in totality, but largely in nonsurgical, I'd say they're all now fully embedded. However, the utilization growth on an underlying basis, so underlying, looking through all the COVID impacts, is still negative. So we are probably 60 or 70 basis points negative utilization growth excluding the COVID benefit. So within that, it is slightly more negative in nonsurgical than it is surgical, but probably not surprising because a lot of those specialties, such as mental health and obstetrics, are cov ered in Gold policies, and there is a shift away from Gold policies. A couple of big call-outs I would make on surgical, and it is really important, Vanessa, because the model of care is shifting.
So we are seeing obstetrics, because of the shift in the model of care to short stay, that is having a real benefit in the cost per procedure in, sorry, in orthopedics, not obstetrics, in orthopedics. Just having a real impact. The short stay model of care is having an impact on the cost per procedure. Similarly, in rehab, we are seeing more rehab episodes of care moving into out of hospital from in-hospital, and that has a deflationary impact as well. So you are seeing three impacts on hospital claims. You are seeing the skew towards younger customers joining the industry, lower claims intensity. You are seeing a shift from Gold to more Silver and Bronze policies, which have lower utilization, lower acuity.
And you are definitely seeing the shift in the model of care having a deflationary impact on the inflation component of the hospital claims.
Thank you. Thanks. That is really interesting. Thank you. That is all I had.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Andrew Goodsall with MST Marquee. Please go ahead.
Thanks very much. My question is on exactly what Mark just spoke to. I saw that you had your hospital claims per patient unit down 110 basis points. It sounds like it is pretty much a mix of those events. Maybe just to modify my question, I guess with the rebate reforms, are you getting any early sense that you might see some more downgrading that obviously would then play into hospital claims?
The final form of the reform is still to be confirmed. You said six mo nths ago, though. If you think about the cohort of customers that we are discussing, our over 65s, I would break them into 65 to 70 and above 70. The above 70-age customers particularly are the most sticky customers we have and the least likely to change their cover. I think as a starting cohort, they are a very resilient cohort. There are two impacts that could occur as a consequence of the reform. You could have customers leaving the industry, and that would put burden on the public health system, but that would be a benefit for the private insurers because those aged 70 customers as a cohort are loss-making customers.
You may, around the edges, have some of those customers downgrading. If you have a Silver Plus product, they are more likely to downgrade to Silver Plus. If you do not ha ve a Silver Plus product, they are probably going to leave and go to someone that has a Silver Plus product. We have a Silver Plus product. Andrew, there has been a lot of noise about this reform. I think for us, it is a second or third order conversation for FY 2028. If the reform ends up being narrowed to reduce the impact on customers that are least able to play increased premiums, I think the reform impact will be even less. We get asked a lot as to whether this is a particular business opportunity.
I am not sure where that question comes from and what would drive that, given how sticky the customer cohort is, and we are already a big player in the gold market. If we are talking about this at the full year 2027, if this reform is a major thing for our FY 2027 result, then a lot has gone right for us and the industry.
I would just say on the reform itself, if you observe in the market, there is pretty universal opposition to the reform. To sort of change the goalposts for people who have spent their working life planning for their future, it is a really tough ask for those customers. If anything, to Mark's point, it might put further stress on the public system. I think we think that the better ver sion of reform is one where you look at the underlying cost of the system to drive productivity and quality and growth and not sort of tinker around the edges. As Mark said, there is a bit to play out on the actual form of this reform.
From that, I guess I take it that it is not 100% done deal, although we are sort of hearing it probably is. Maybe just to extend this a little further, I guess, is there any sort of early signals you are getting about whether this breach of trust, if you like, has had an effect on the way in which the marketplace is thinking about insurance? Is it sort of creating any sort of collateral damage in terms of the industry outlook, do you think?
Look, we haven't seen anything in our business to date, but if you just listen to the community sentiment on this issue, that is reflective of how particularly over 65s are viewing this change. We will do everything we can to support them, depending where this reform gets to.
It is an interesting question on breach of trust. We are lobbying against that on behalf of our customers, Andrew. If there is a breach of trust, I am not sure necessarily it is pointed in our direction.
Okay. Yeah. Of course. Well, that is all my questions. I really appreciate it. Thank you.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.