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Operator: Thank you for standing by, and welcome to the Medibank Half Year Results 2026. [Operator Instructions] I would now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.
David Koczkar: Thanks, and good morning, everyone. Thanks for joining us today. I'm coming to you from Naarm, the home of the Wurundjeri Woi-wurrung people, and I pay my respects to their Elders, past, present and emerging. I'm joined by our executive leadership team, including our CFO, Mark Rogers. This morning, we'll talk to Medibank's results for half year '26. So first to the highlights on Slide 5. This is another good result for the Medibank Group. Our performance reflects improving customer engagement and our progress in driving the health transition. We've delivered on our growth commitments, with improved momentum in our health insurance business and strong growth in Medibank Health. Medibank Health's continued positive performance is enabling us to reinvest with confidence to support its future growth. And we recently took our next important step in health, finalizing our acquisition of Better Medical, establishing one of the largest primary care networks in the country. So let's turn to Slide 6 for customer highlights. As the cost of living remains challenging for many, we've continued to provide more value to our 4.3 million customers. We saved our customers around $105 million in out-of-pocket costs, another $3.3 million by using our no gap network and $23 million in rewards was earned by Live Better members. And importantly, we're seeing our Medibank and ahm customers accessing more of the health services we deliver through Medibank Health. 55% of Medibank resident policyholders are now engaged with our health and well-being services, which reflects our differentiation, but also how we're able to bring the best of Medibank Group to support our customers' health. Amplar Health delivered 70,000 virtual health interactions to Medibank customers and saved 100,000 hospital bed days through its home care services. And as we meet more health needs of more customers, customer relationships strengthen, which further improves our retention performance and supports our growth in health. So now to Slide 7, which shows an overview of our key financial outcomes. Look, I won't go through all of them, but a particular highlight for me is the resident policyholder growth of 1.9%, with growth in the last half, more than double that of last year, including improving momentum in the Medibank brand. And while we've seen slightly lower policyholder growth rates in our nonresident business for a few years ago, our performance remains better than market, especially in segments where we are focusing our efforts to grow. And it's very pleasing to see Medibank Health having another very strong half of growth. In line with our healthy capital position, we are delivering to shareholders an interim fully franked ordinary dividend of $0.083 per share. So now to Slide 8. As we progress our strategy, we continue to take important steps to deliver our 2030 aspirations. Our improving experiences are really resonating with our customers, patients and our people as we continue localizing services and empowering our teams to better support our customers. We've continued to build momentum in our health insurance business, growing both brands and expanding in our priority segments, including families, mid-tier, covers and those new to the industry. This includes a 67% increase in corporate joins year-on-year and a record number of nonresident workers now as customers. Key to our strategy is to change the way people experience health and wellbeing, like our expansion of our 24/7 Amplar Health Online Doctor service to our resident customers and our Detox at Home program in the community. And having now established a national network of 168 clinics, we've continued to prioritize our expansion in primary care, investing in the experience of GPs to support early intervention and multichannel delivery. And we're improving how we work, embedding AI tools and processes throughout our business. And our adoption is accelerating. For example, in 2025, we had twice the rate of adoption of AI that we had in '24. And next year, it might be more than 5x that amount. We're able to drive value from this space due to our strong customer relationships, our data and our capabilities. And we continue to strengthen our foundations, maturing our risk culture and approach to support our people's decision-making, enhancing security and our technology platforms and improving productivity. Also we can continue to deliver better outcomes for our customers. So now over to Slide 9. We're very conscious that many consumers are doing it tough, including with the recent interest rate increase and recently announced increases to premiums. However, despite the challenging environment, the resident health insurance market remains buoyant, including continued strong growth in younger customers choosing to go private. Recent research showed a continued increase in the number of people who see health insurance as offering value for money. And with increased waiting list for elective surgery in the public system and the benefits of adult dependent reform to continue, we expect resident growth rates to remain well above pre-pandemic levels. Consumers continue to seek greater value and are switching brands and products together, including choosing lower levels of cover. With this changing mix and more people preferring treatment outside traditional settings, growth in private hospital claims utilization is decreasing. And while some of the unsustainable commercial behavior from other funds has eased, pockets of heightened competition remain, including aggregator practices that could drive up the cost of insurance for consumers. In response to all this, our disciplined approach to growth and differentiation across our 2 brands remains unchanged. We are driving momentum by growing in our target segments, prioritizing growth in direct channels and focusing on retention, which for us has improved by 21 basis points year-on-year to September despite industry lapse rates actually going up by 70 basis points. We're continuing to work constructively with hospitals, shaping partnership agreements to incentivize shared outcomes to drive the health transition, which pleasingly is continuing to gain momentum. In FY '25, we gave hospitals around $37 million to support this shift. And in the first half of this financial year, we've already provided around $20 million. The nonresident market has adjusted to recent migration reforms with worker numbers increasing. Student numbers have stabilized, but we expect the market to continue to grow. We're also seeing more students and workers become residents. Transitions, we are well placed to support through our life cycle management investments. And with the strength of the health and well-being support we offer and the extensive university partnerships we have, we remain an insurer of choice in the student market. Now to Slide 10. Australia has never spent more on health care, and yet in some parts, the system is failing the community. As productivity in health care remains sluggish, and health care costs continue to outpace inflation, the call to action for reform could not be more urgent. Out-of-pocket costs are rising, patients are waiting longer for care, clinicians are under pressure and avoidable hospitalizations are around 30% above the OECD average. Not only does this impact the quality of life of millions of people, the recent data also shows it drained around $7.7 billion from the system. Governments, operators, clinicians and patients know the system is under strain. But despite the shared understanding, the pace of reform is far too slow. So we will continue to advocate the change because it is in the national interest. But efficacy alone won't fix a system that is deteriorating faster than many decision makers are responding. International experience shows us that when this happens, the private sector must lead. And in the absence of meaningful system-wide reform, as we have done for several years, we will continue to take the lead in driving the health transition that is needed to sustain our system. And in the last few months, pleasingly, others are recognizing the needs of this action, too. For example, St. Vincent is committed to delivering half its care in homes or through virtual and digital platforms by 2030. Our work with the South Australian government has seen their continued commitment to expand care options for public patients outside traditional hospital settings. And we are seeing many others now embracing the change that's needed. And in the private system, the federal government is supporting this approach given their ask of the sector to design, lead and implement the changes needed through the CEO Forum. So we will keep working with hospitals, health professionals, corporates and other funders to accelerate the change needed. Investing in well-being, in prevention, in primary care and accelerating the shift to virtual community and home-based treatment settings. And as you know, this is not new for us. It's out of this desire to change the system to keep it one of the best in the world, but we are growing our health business. And now Slide 11. Primary care is one of the most critical areas that need change. As the front door to Australia's health system, it needs to adapt to the changing health needs of the country. Patients are waiting longer, paying more and too often entering the system once health problems are already entrenched. These outcomes are the result of a traditional model designed around reactive, episodic care rather than proactive, connected and comprehensive support. The sector is just not set up to support the future health needs of the community. Through our majority interest in Myhealth and recent acquisition of Better Medical, combined with our existing Amplar Health GP nursing and our health offerings, we now bring together one of the largest primary care networks in the country. And working with our partners, we provide the tools, the technology and the time, clinicians need to focus on prevention, reduce low-value activities and better support their patients. We are investing to grow virtual channels to improve access, to support better continuity care and to meet the changing expectations and preferences of patients. And these investments matter for patients and they matter for clinicians. And as we have seen in other countries around the world, a focus on proactive and planned care supported by technology and an integrated care team is a more sustainable business model and one that can better address the challenges of the health system under strain. I'll now turn to Mark to ask him to run through the details of the results.
Mark Rogers: Thanks, Dave. Good morning, everyone. This result demonstrates how we're balancing resident policyholder growth and gross margin. It shows continued earnings diversification and includes reinvestment for growth. The key financial highlights include group operating profit up 6% to $381.7 million, with solid growth in resident health insurance an important contribution from nonresident and continued strong momentum in Medibank Health. Investment income was impacted by the lower RBA cash rate and the increase in other income and expenses includes higher M&A costs. Nonrecurring cyber costs were lower, and we expect FY '26 costs to be around $35 million and that the IT security program will largely be embedded. And underlying EPS, which normalizes investment returns was $0.108 per share, which is in line with last year. Slide 14 covers the health insurance results. Despite the challenging economic environment, the business remained resilient, we continue to see benefits from our disciplined approach to running our business, including lower hospital utilization growth and an improved risk equalization outcome. We are also seeing policyholder growth skewed to lower tier products with impacts to revenue and claims largely offsetting. Gross profit was 4.4% higher with 4.3% revenue growth and gross margin stable at 16.2%. Operating profit increased 3.5% to $361.5 million and the operating margin remains at 8.5%. Our expenses were up 5.4% to $329.4 million and the expense ratio was 10 basis points higher at 7.7%. The increase in operating expenses reflects inflation, volume impacts and ongoing investment, partially offset by $3 million of productivity savings. And nonresident commissions were up in line with premium increases with the resident commissions broadly in line with last year despite higher ahm aggregator joins. We expect expenses in FY '26 of between $690 million and $695 million, including $10 million of productivity savings. We continue to target a stable to modestly improving expense ratio, but balances with investing in growth where this makes commercial sense. Moving to Slide 15. The resident health insurance market remains buoyant, with policy shareholder growth in the 12 months to 31 December is expected to be slightly lower than the 2.1% growth we saw in the 12 months to 30 September. Cost of living pressures continue to impact the industry, with switching rates remaining elevated, customer growth skewed to lower tier products and aggregators increasing their share of industry joins. Whilst the unsustainable competitive environment is moderating, pockets of heightened competition remain. Pleasingly, we're seeing increasing momentum in the business. Over the last 12 months, policyholder numbers increased 1.9% with Medibank and ahm growing 0.8% and 4.9%, respectively. This includes 0.9% growth in the last 6 months, which is more than double the growth in the prior period. The acquisition rate of 5.6% is 40 basis points higher, with improvement in the Medibank brand from investing in differentiation and an enhanced digital experience in ahm. Despite the higher industry switching rate, retention improved 10 basis points with the improvement in ahm particularly important. Key areas of focus for the remainder of FY '26 include further improving retention, deepening brand differentiation and increasing focus on acquisition in priority segments and channels. Now turning to Slide 16. Resident claims expense increased at 4.9%, and risk equalization provided a 50 basis point benefit to net claims growth, with some of this benefit expected to be timing related. Resident claims growth per policy unit increased 20 basis points to 2.5%, with the 310 basis point increase in extras, partially offset by 120 basis point decrease in hospital. In hospital, the increase in inflation reflects private hospital indexation investment in product benefits and the increase in New South Wales private room charges. The negative hospital utilization growth reflects prior period claims favorability due to COVID impacts and customer growth due to lower tier products. And the increase in extras includes the ahm limit rollover and utilization and inflation increasing following a period of subdued demand due to economic and COVID impacts. And in the second half, we expect private hospital indexation to remain elevated and negative hospital utilization growth to continue. Whilst the risk equalization timing benefit will unwind, we expect this to be largely offset by higher New South Wales private room charges now being fully embedded. Slide 17 details health insurance performance, which shows continued growth in both resident and nonresident. In resident, our disciplined approach to growth resulted in gross margin being maintained at 15.5% with revenue and claims growth per policy unit of 2.5%. Growth in revenue per policy unit was down 30 basis points, with a high average premium increase offset by higher revenue mix impacts. The revenue mix impact of 150 basis points is similar to 2H '25 and reflects increased investment in Live Better, customer growth skewed to lower tier products and strong growth in ahm policies. And subject to no material change in the economic environment, we expect revenue mix impact for the full year to be better than 1H '26. Solid nonresident revenue growth has continued with average policy units 1.4% higher and revenue per policy increasing 3.1%. Policy unit growth was lower than in the prior period, with lower student visa approvals and modestly higher lapse. However, we expect the recently announced increased student visa approvals and new opportunities in the workers segment support acquisition into the second half. Gross profit increased 6.9% to $55.6 million, and gross margin was up 80 basis points to 35.6%, with an improved worker margin, partially offset by tenure impacts on student margin. Nonresident remains an attractive market and in the second half, we'll build on emerging opportunities in the student and worker segments and continue to invest and differentiate our offering to grow market share. Turning to Slide 18. Medibank Health segment profit increased 28.5% to $48.3 million and operating margin was up 10 basis points to 17.7%. Revenue grew 27.5% with the increase in community and acute, reflecting strong volume growth and increased ownership of Amplar Health Home Hospital and good strong customer growth in wellbeing. Gross profit was up 21.6%, with the reduction in gross margin due to additional investment in Live Better and mix impacts, partially offset by efficiency benefits in community and acute. And whilst expenses increased with growing scale, the expense ratio was 250 basis points lower with improvement across all 3 segments. We continue to see strong organic growth potential in the business with focus areas for the remainder of FY '26, including meeting more health needs at more customers, scaling existing services with a broader set of payers and realizing synergy benefits across our primary care network. We aim to augment this organic growth with further M&A that scales and expand geographic coverage in primary care and adds capability in well-being and virtual care. Now on Slide 19, we've shown a more granular breakdown with the financial results for our 3 Medibank Health segments and the key customer metrics driving performance. In the well-being segment, Live Better members increased 13.6% following investment in the proposition and reward points give back offer. In primary care, consultations increased by 2.8%, with an increased proportion of these being undertaken virtually. And in community and acute home health admissions were supported by strong volume growth in publicly funded programs and increased capacity in our transition care service. Moving to Slide 20. Investment income was down $19.6 million, with a $5.7 million and $5.8 million reduction in the growth and defensive portfolios, respectively. The decrease in the growth portfolio reflects lower income from all asset classes other than property and the lower RBA cash rate was a driver of the reduction in the defensive portfolio. Other investment income was also lower, following the payment of the final customer giveback in September last year. We expect further impact in the second half with lower cash holdings due to funding the Better Medical acquisition, we'll adjust credit, duration, and liquidity settings in the defensive portfolio to help offset this impact. And of course, the recent increase in the RBA cash rate will also be helpful. With lower earnings on cash, underlying net investment income was down $11 million. The underlying net investment return decreased 26 basis points to 2.74%. And the annualized spread to the average RBA cash rate increased to 184 basis points. Moving to Slide 21. The health insurance business continues to be well capitalized. Capital is at 1.9x PCA and the capital ratio is 13.8% of premium revenue. We continue to hold additional capital to offset the $250 million APRA supervisory adjustment, and this is why the capital ratio is above the target range of 10% to 12%. The Better Medical acquisition was the main driver of the change in the capital position in this period. The increase in Medibank Health capital employed includes $163.5 million cost of this acquisition. The acquisition was funded from our unallocated capital, with this partially offset by strong capital generation. We are also well placed to fund further inorganic growth. The unallocated capital position supports our FY '30 Medibank Health earnings aspiration of at least $200 million. And we have capacity to raise Tier 2 debt to support growth above this level if further attractive opportunities arise. And given the strong capital position, the Board has declared an interim dividend of $0.083 per share, which is a 6.4% increase and 76.8% payout of underlying net profit after tax. And to finish, a few comments on our outlook for FY '26. Our resident health insurance outlook is unchanged. We aim to grow resident market share in a disciplined way, including further growth in the Medibank brand. We continue to expect growth in resident claims per policy unit of between 2.6% and 2.9%, and expected our proactive approach to claims management will differentiate us from the rest of the industry. Our nonresident outlook is also unchanged. And finally, we've updated our Medibank Health outlook. We expect FY '26 organic operating profit growth to be similar to 1H '26 plus an additional circa $6 million contribution from Better Medical in the second half. And our M&A pipeline remains strong, and we have both the appetite and financial capacity to pursue further strategic opportunities. I'll pass back to David to make some closing remarks.
David Koczkar: Thanks, Mark. Now over to Slide 24, just for us to wrap up. We're a resilient company, and we're a growing company with strong customer relationships, positive momentum and a clear vision for the future. We remain focused on the needs of our customers and patients. This shapes our strategy and drives our performance. As we continue to strengthen our foundations and deliver greater value, choice and control in health. We are seeing this reflected in our growing health insurance momentum and Medibank Health going from strength to strength. Despite the economic challenges, the health insurance market remains buoyant. And through our work across both private and public systems, investing in prevention and delivering more innovative care models, we are driving the health transition. While this change is emerging more broadly, more must be done to accelerate it. So we will continue to champion this and work with governments to advocate for the reform needed to keep health care in Australia affordable, accessible and among the world's best. We are on track to meet our FY '26 outlook and continue delivering value for customers and shareholders. And finally, our achievements are only possible because of the amazing people at Medibank. And I thank them for their ongoing commitment to creating the best health and wellbeing for Australia. So now it's -- over to you for any questions you may have.
Operator: [Operator Instructions] Your first question today comes from Nigel Pittaway from Citi.
Nigel Pittaway: I just wanted to ask about sort of what you expect for claims inflation maybe a bit beyond second half. I mean, obviously, at face value, the rate increase that was announced this week does seem quite a lot ahead of your sort of 2.6% to 2.9%, you're guiding to in the shorter term. So I was just wondering if we could get maybe a little bit more color as to what was the basis behind that level of rate increase and whether or not that is actually related to what you expect for claims moving beyond this year?
Mark Rogers: Yes. Thanks for your question, Nigel. At 10,000 feet view in terms of '26 versus '27 are probably 2 major factors to call out. The first one is we know we'll have a COVID tailwind this period, reflecting the fact that the FY '25 claims were $74.8 million below expectations. So we've had a utilization tailwind in this year. That's worth about 100 basis points on claims. We also know New South Wales private room rate will cost us 20 basis points this year, and that will then be fully embedded in our claims line. So the net of those 2 impacts, Nigel, is about 80 basis points, and that will be the single biggest difference between '27 and '26.
Nigel Pittaway: And then I mean, obviously, you're saying the revenue mix, as we're now meant to call it, will improve in second half. I mean is that sort of your ongoing assumption beyond that as well? Or...
Mark Rogers: So Nigel, the revenue mix -- the trend in revenue mix is going to depend on how fast we're growing and where we see growth. So provided we don't see any further deterioration in the economic environment or our growth rate doesn't increase significantly and the mix of that growth either, that's a reasonable assumption looking forward.
Nigel Pittaway: And then maybe just -- I mean, maybe further to that, I mean, obviously, you've been prepared in this period to pick up some, as you described, the lower-tier products. And I will see most of your growth is still coming through ahm. So I mean, is that sort of what we would expect moving forward? I mean you are still saying you want to grow the Medibank brand, but it seems although that's still reasonably tough to do in the sort of areas that you desire to grow in. Can you make just a few comments about how you're feeling about that sort of revenue growth mix moving forward.
Mark Rogers: We actually had a slightly more positive on the policyholder growth trajectory for the half, Nigel, with Medibank growing at 80 basis points, which is well on what we've seen in the prior period. In fact, Nigel, for the full year, I'd probably expect the Medibank growth rate to be slightly higher than the half and ahm to be slightly lower. So actually, we're really happy with the Medibank trajectory.
David Koczkar: Yes. I think the notion that Medibank or ahm plays in a certain tiering is not quite correct, both Medibank and ahm support a very, very different set of customers who choose -- yes, slightly different mixes. But in the current environment, people are looking for more value and particularly looking for more value in their health, and that's part and parcel of the Medibank proposition. So that's really what's driving the growth and in particular, our focus on our target segments, which are also growing and we are growing in like corporates like families, those new to the industry. As we know, the second half is always a bigger, new-to-industry in the first half. So actually, with the core brand metrics of Medibank, very strong, I think despite the economic conditions, I think the Medibank brand momentum, we feel very confident about continuing.
Nigel Pittaway: And then maybe just finally, I mean, obviously, the government in its sort of PHI premium rate increase announcement is still talking about this hospital benefits ratio climbing to sort of closer to 90%. I mean are you expecting to have to do anything moving forward to sort of encourage that development?
David Koczkar: There's a lot of talk about the ratio. We -- our benefit -- our hospital benefit ratio is higher than the industry average and is likely to slightly improve. But look, I think -- the ratio is just -- is one way of looking at health. Actually, the real question we should be asking is the absolute cost of delivering health to the 14-or-so million people that have private health insurance. We still have to ask ourselves the question, why is it 30% more expensive to have a knee replacement in the private system than the public system? Why is it twice as expensive in Australia to have a hip replacement than in Northern Europe? Why is the pacemaker 4x the price in the private system than in the public system? I think they are the questions that probably occupy more of our minds as we think about sustainability system than the ratio itself.
Nigel Pittaway: Yes. I mean, obviously, you've made those points for some time and the government is still focusing on it, but yes.
Operator: Your next question comes from Julian Braganza from Goldman Sachs.
Julian Braganza: Just a further question on downgrading. I just want to be super clear on the composition of the number. Just how material is the investment in Live Better versus growth in lower-tier products, just in that 1.5%? And also, what gives you confidence that, that downgrading will be better in the second half of '26, just given the higher premium rate increase that's coming through? So I just want to understand that a little bit better.
Mark Rogers: Julian, I might just rephrase it as revenue mix because it is important because there are 3 components that make up revenue mix. The first component is what you call downgrading, which is existing customers changing the cover. The second component is where we see policyholder growth. So the mix difference between customers that leave us and customers that join us. And the third component is where we invest. And that investment could be in Live Better, it could be in discounts, it could be in offers. If I point you to the second half of '25 and the movement in revenue mix in the second half, you'll see that coincides with us increasing our policyholder growth number, and that was the major driver of that movement. If you go to the first half of '26, revenue mix impact was 150 basis points, and it was 130 in the second half of '25. The majority of that increase was as a result of Live Better investment in offers. So you can see the bigger impact was in the second half and that related to where we saw growth and the less significant impact was relating to investment in Live Better and Offers. Why do we get comfortable? So the investment we've made is now fully embedded in our revenue line. And so unless we look to invest more to grow even more, it's unlikely that will repeat. And the impact we saw on the sales and lapse mix in the second half, again, if we don't increase our growth rate significantly or the market doesn't shift significantly, we're not expecting that number to deteriorate significantly. I would call out, it's important you can't just look at revenue mix. You've got to look at revenue mix and claims mix because those lower-tier products where we're seeing growth, they come with a lower revenue per policy and lower claims per policy. So really, going forward, it's about the jaws in the business, Julian, not just the revenue mix.
Julian Braganza: That's super clear. And then just to unpack that hospital inflation number of 4.6%. Just to be super clear, just what component of that is investment in product benefits. Is it the flip of the benefit on utilization from the claims favorability? Or is it less than that? So I just want to be very clear on what is that underlying inflation number ex the product benefits that you're making -- investments you're making.
Mark Rogers: I'd probably direct you to the New South Wales private room rate cost because that had a 50 basis point inflation impact in that 4.6%, Julian. The investment and product benefits was less than that. Investment and product benefits is ongoing. Obviously, we can increase it or decrease it given where the claims trajectory is, but the New South Wales private room rate impact was the single biggest uplift that we saw across the 12 months.
Julian Braganza: That's clear. And then just the last question on hospital utilization. Even after adjusting from the claims favorability as you sort of flagged utilization is still quite benign and negative. Just want to be clear what's driving that? And how sustainable given it's consistently surprised quite positively.
Mark Rogers: Thanks for calling that out, Julian, because it's a really important feature of the result. Utilization growth was 2.8% negative. And you rightfully called out that around half of that is -- reflects the COVID tailwind that we had from the prior year, which is a one-off, but the remaining 50%. So almost 1.4% contraction in utilization is ongoing. And that's linked to a couple of factors in addition to the skew to policyholder growth in lower-tier products. We're also seeing the benefit of our risk selection. So where we grow and how we grow, through which channel at which time I think we're getting favorable selection bias in our claims, and we're seeing that come through in risk equalization. And I wouldn't underestimate the impact that hospital partnership agreements are having. So we're paying higher indexation in exchange for where we've got lower utilization growth with our partners, and that's contributing. So I wouldn't expect anything other than the COVID one-off impact to be significantly varied going into '27.
Operator: Your next question comes from Andrei Stadnik from Morgan Stanley.
Andrei Stadnik: Can I ask around the comment around resident commissions remaining in line despite the increasing aggregator presence. Can you explain a little bit about how you manage to do that?
Mark Rogers: So the commission depend on which aggregator that you're selling through, and it also is dependent on the premium per policy. So as we've seen growth due to lower tier products in bronze and silver, the revenue that we get for that policy is lower and the commission we pay as a consequence is lower, Andrei.
Andrei Stadnik: Slightly dry question. But just in terms of the tax rate, should that normalize going forward towards 30%?
Mark Rogers: That's not a dry question. I'll leave for questions on tax, Andrei. So thank you. Probably 2 components on the tax rate this half. I think one of those we've mentioned before, so the losses from our joint venture hospitals are actually after tax losses, so we don't get a tax shield on that. And then a number of the M&A expenses are nontax deductible. So you saw an uplift in M&A expenses this year in the first half. And as a consequence of that, that's at a higher nondeductible component expenses.
Operator: Your next question comes from Siddharth Parameswaran from JPMorgan.
Siddharth Parameswaran: A few questions, if I can. Firstly, Mark, I just wanted to be clear on where you're expecting that revenue mix downgrading figures to come in the second half. I mean you say it should be lower. But the first half was materially higher than my assumption, and I presume consensus as well, whilst the claims inflation was broadly in line with what you had. I was just keen if you could help us understand both those 2 metrics, the claims inflation per policy where you've held the guidance, first half is slightly better than that guidance range. Where do you think you'll end up for the second half and for the full year within that range? And also just the -- same for the revenue mix downgrading impact because it makes quite a difference to the trajectory of margins.
Mark Rogers: Yes, sure. I probably won't look to narrow that 2.6% to 2.9% guidance for you, Sid. But what I'd say is where we land in the range will depend on 2 factors from a claims perspective. Firstly, the risk equalization timing benefit that we saw in the first half. How much of that unwinds into the second half. And then secondly, where we see policyholder growth. So if we see policyholder growth toward -- in the higher-tier products, you'd expect claims inflation to be towards the top end of the range and then your revenue mix impact would be lower. And if you see it at the lower -- if you see growth in the lower-tier products and you expect claims to be lower and revenue mix impact to be higher. What we're thinking is provided we don't see any deterioration in revenue mix impacts, which is not our expectation. A flat jaws outcome in the business is very plausible. And to the extent there's any variation in that during the course of the second half, we obviously have opportunity to reinvest if claims are lower than we expect or other contingency options if claims are higher than what we expect.
Siddharth Parameswaran: Yes. Sorry. So to be clear, flat jaws is what you're saying is a reasonable possibility in terms of the second half versus the first half?
Mark Rogers: Very plausible outcome, Sid.
Siddharth Parameswaran: Yes. For the gross margin because there's a step-up in expenses, right? So just want to be clear what we're seeing.
Mark Rogers: I didn't make any comment on expenses, but I'm happy to. So...
Siddharth Parameswaran: No. Yes. But I mean your guidance second -- yes, I just want to be clear that the jaws comment was on gross margin.
Mark Rogers: Yes. The jaws is on revenue claims per policy. Maybe a few comments on expenses movement in a range of $690 million to $695 million. The uncertainty within that range is where nonresident policyholder growth lands and therefore, the commissions we paid. So if it remains at the top end of that range, you'd expect stronger, particularly student joints during the course of the second half and if you at the lower end, then probably a lower growth rate. And the uncertainty is how does the opportunity on visa approval increases actually land in the portfolio in the second half.
Siddharth Parameswaran: Great. Okay. Just a second question, just on the claims inflation. I just wanted to make sure, were there any contributions from reserve adjustments or anything from the past? And also, if you can just comment on just the risk equalization benefit and what you are expecting -- what happened in the period, what you're expecting going forward?
Mark Rogers: There was a modest release out of reserve for both resident and nonresidents. Some of that's actually been reinvested into the business during the course of the year. So I think outside of the COVID benefit of $43.6 million. The result is effectively a cash claims result. So I'd just add that $43.6 million back to your claims trajectory and that should give you a pretty good view of the cash result.
Siddharth Parameswaran: Wasn't there a $19 million reserve release, I mean I thought there was...
Mark Rogers: Yes, that's what I just meant. Yes, that's what I just called out. That was spread across resident and nonresident, but we've reinvested some of that during the course of the year. We've also struck our 31 December claims provision.
Siddharth Parameswaran: So that will impact second half versus first half on claims inflation. You've reinvested so that will...
Mark Rogers: We reinvested during the half. So Siddharth, I've looked through that. And when you consider the accounting versus the cash, you should be focusing on the $43.6 million COVID benefit from the prior period is the difference between cash and accounting. Did you want to comment on -- I think you asked on risk equalization.
Siddharth Parameswaran: Yes, yes, yes. Thanks.
Mark Rogers: Sure. So really, that's linked to the Medibank brand rather than ahm. What we're seeing is a better net recovery for Medibank. So Medibank received out of the pool. Ahm pays into the pool. So what we're seeing is some of our younger and higher claiming customers being more prone to lapse. So we end up saving the risk equalization charge that accrues to every policyholder, but those customers aren't -- the claims aren't typically risk equalizable because of their age. And so that's driving that positive skew for the Medibank recovery rate. And that's a trend we've seen -- we saw it in the second half of last year and to a lesser extent, the first half of last year as well.
Siddharth Parameswaran: And just a final question for me. So if I take your 5.1% rate increase that you've got, and if I'm to look forward, I mean, you're basically saying that you don't think the downgrading should get any worse. And what I'm interpreting as well is that the inflation shouldn't get any worse either. So if I just take that 5.1% subtract let's say, 1.5%. I mean are you basically saying you can tolerate inflation per policy of -- what is that? So yes, 3.5%s that you saying to hold margins the same?
Mark Rogers: That's probably not a bad way to look at it, Siddharth. I guess the way I think about it is, we had 2.5% claims growth. We know that the COVID benefit is about 1%. And so that's the difference between cash and accounting is 1%. So that's a cash claims growth. So everything else being which is obviously provided your revenue mix impact is not above 150 basis points, then again, a stable gross margin outcome is very plausible. I think the big question is where do you land in the range for FY '26 because obviously, that sets a foundation for '27.
Siddharth Parameswaran: Got it. So yes, COVID benefit plus the -- if the inflation holds at that level, you can hold gross margins, but...
Operator: Your next question comes from Andrew Goodsall from MST Marquee.
Dan Hurren: Sorry, it's Dan Hurren. Andrew has just been pulled away on another call. Look, I ask questions. I guess it's going back to Nigel's question and the Health Minister comments around the premium increase. And I know you talked about the cost of -- the unit cost of care. But I mean, specifically, the minister wants to stop hospital closures as we understand it. So what do you think is actually -- what can you do to actually keep the minister happy there?
David Koczkar: Well, I think the statement of expectations that was published last year was very helpful to guide the market in terms of setting, their settings to meet those expectations. I think we were very happy with that clarity. In fact, I think we met all of those expectations in getting our premium proposal approved. I think through the CEO Forum, which I'm an active member of, we are talking about how do we set up a sustainable system where the system can thrive. What's very important that principle in those discussions is that it's not about any single player, it's about the system. We also know that the shift of care from acute hospitals to more fit-for-purpose settings, both short day in the community, we are far behind other countries and a lot of focus is on how do we encourage that health transition. There's a recognition that, that means that hospitals will need to change. There will need to be some either reconfigurations of current assets or growth in other regions or sectors. A part of our partnership approach that we have led the industry on is to share and incentivize that shift, which we've talked about today with an increasing number of hospitals participating in those partnership agreements. It covers about 80-plus percent of our benefit outlays, and it's an increasing investment that we're making to make that shift. So that was part of the expectations set, and that's what we're delivering against, and that's really the conversations at the CEO Forum. I mean the fact is, right now, we have too many beds in the system in the wrong spot and not enough in some spots. Utilization is too low and the Australian consumer shouldn't be paying for that. So everyone is completely aware that -- this is why it's called a transition. It's not going to happen in one day. It needs to happen more quickly. But I think, as I said before, there are many in the system who have brought fresh thinking and a more longer-term view that are saying and recognizing this change happening and now they're changing their business models to deliver against it.
Dan Hurren: David, that's helpful. Can I just ask one follow-up. Sorry, one different question, in fact. Looking at the trend in aggregators, not just in your results today, but right across the industry. And your comment that you can grow the Medibank brand in the second half. Could you just talk about the relative impact of aggregators across your 2 brands? Does it -- is it skewed to one or the other?
David Koczkar: Yes, very much so because we don't have Medibank on the aggregator. So it's 100% only applicable to the ahm brand. Medibank, we've been very conscious to focus growth on our direct channels. And in fact, as a total group around 70%, 75% of our joins our -- for those joining are direct. So that's a real strength of ours. And we are continually investing in both retention. We've shown today our improving retention rates versus the market that is deteriorating. So that's the best way to grow is to keep the customers you've got. It's 1/3 cheaper to do that than acquiring in the open market. And the second is to work selectively where it makes sense to grow via aggregators. Aggregators share in the market has slightly increased. So we're always thinking about how we grow in a disciplined way. We'll always work with aggregators, but not where their terms and conditions are unsustainable for the long term for both us and the system.
Dan Hurren: So Medibank is more about retention in that second half. Your comments are explained more by retention and growth.
David Koczkar: So I mean, Medibank has the best retention rate of the major brands and one of the leading retention rates in the market. But Medibank is also about growing in the segments we've talked about today, those new to the industry, particularly families and particularly corporate. I think I shared our very strong momentum, for example, in the corporate market with a [ 6% to 7% ] growth year-on-year in join. So plenty of headroom for growth for Medibank, but the retention as a company is a very important source of growth that we pay much more attention to perhaps than others.
Operator: Your next question comes from Freya Kong from Bank of America. Your next question is from Vanessa Thomson from Jefferies.
Vanessa Thomson: I wanted to ask a little bit more about the hospital situation as well. I think you called out that $37 million was paid to hospitals in addition last year and $20 million in the first half, if I heard that correctly. I just wondered what your expectations were for FY '26.
David Koczkar: Yes. So just to clarify those comments, and I might maybe hand over to Milosh to also explain sort of how our partnership agreements are working. But we had -- we have 3 elements to our partnership agreements. There's the base indexation. There's the partnership investment, and there has been historically one-off hardship payments that were really designed to support hospitals in need through the COVID period. So the $37 million last year is the amount we're paying in the partnership elements, which are incentives that when we sit down in these agreements, we set objectives jointly with our hospital partners. And if they're achieved, then we pay that at-risk element. And that payment was $20 million in the first half on top of $37 million last year. I think when you look at the total -- that total amount versus the total claims line, it's quite a material part of our claims line. And so we are really putting a lot of emphasis on this transition through these partnerships, and they are working well for us. So I might hand over to Milosh just on the general hospital partnerships and how we're seeing those partnerships evolve.
Milosh Milisavljevic: Yes. Thanks, David. Vanessa. The partnerships, as David said, covering over 80% of our benefit outlays and they're growing in number and scale. So the proportion, as you can tell, is going in how much of that indexation and payment to hospitals is coming through funding for partnership initiatives. And we're obviously doing it for a number of years now, and we're starting to see those benefits come through our claims line, but also customer health outcomes. And to give you an idea, they range from shifting care models to lower length of stay and short stay, growing our no-gap network that also addresses cost to customers. It creates a proposition that's very compelling, maximizing prosthesis savings from the more recent prosthesis reform that reduces low-value care utilization in the system and also accelerating new care settings like home care, virtual care that help avoid complications and readmissions. So all of those are part of that $20 million, and it's growing in absolute terms, but also in relative terms compared to the total indexation number.
Vanessa Thomson: And just following through then, we've seen the significant challenges for the hospitals, labor availability, wage inflation, clinical care costs. I just wondered what sort of color you're getting from the private hospital ventures that you have. David mentioned before, too many beds in the wrong place. Given that you've been able to be more strategic, I just wondered how that looked from your perspective with respect to your hospitals.
David Koczkar: Yes. I think we've probably set a very different sort of relationship paradigm with hospitals over the last well -- the last 10 years. And there are challenges in the system. There's challenges in our business. We've all had to think differently about how we take pressure off premiums and how we drive the transition. So I think our conversations are data-driven. They're looking to the future, and they're all about preserving access now in the future for our customers. So really, it's enabled us to have these more forward-thinking conversations. There are some pressures in the system, and we are paying indexation rates as an industry, the highest we've paid in more than 10 years. So the industry has responded, us included, to pay more to hospitals than indexation, but we're requiring change as well. And so that's a bit of difference. And when we sit down with hospitals, it's a constructive set of conversations based -- driven on data.
Operator: Thanks very much. Thank you. Your next question comes from Freya Kong from Bank of America.
Freya Kong: I hope this works now. I just wanted to ask about the 2026 price rise again. So your 2025 adjusted cash claims inflation is around 3.5%. How do I bridge this to the 5.1% price rise you're going to get? I guess what I'm trying to ask is if utilization benefits will be shared even more with the private hospitals going forward and the claims inflation outlook is a bit higher.
Mark Rogers: Freya, so the bridge between the cash claims number and the premium increase is the revenue mix impact. And so it was 150 basis points for the half. So that's the simple bridge between the cash claims and the headline premium.
Freya Kong: Great. That's helpful. And then on growth in nonresidence business, which went backwards in the period. Is there anything that you're concerned about there? Where did the lapses come from? Or has competition picked up?
Mark Rogers: Yes. So let me start on the lapse. That was in the student portfolio, and this reflects the fact that we had coming out of COVID, 2 very high origination years. And most student courses are 3 years. So we're just seeing that natural graduation of those students. Probably the focus in the second half is really around the student visa approval numbers and if they increase, we expect the policy unit growth to increase. In fact, I think over the last 12 months, we probably went backwards in student policy somewhere between 3% and 4%, still winning share, but that overall market has been contracting. So we've got opportunities in the workers segment, which is already growing pretty strong. We had double-digit growth in the last 12 months, and then we've got the opportunity to kick off the growth again in the second half of students subject to the visa approvals.
Freya Kong: Great. And just finally on your thoughts around medium-term uses of unallocated capital. I think based on your Medibank Health plans, you've got around $140 million additional capital to deploy in the next couple of years. Your unallocated capital is already sitting at around $190 million and likely to keep growing. So I'm just wondering what you think or thoughts are around that?
Mark Rogers: We spoke about Medibank Health in the presentation and the focus was on primary care and both scaling and expanding geographic coverage. I think that is the most likely in the short-term use of capital. Obviously, there'll be opportunities in the broader virtual care space and in well-being, but following the success on the Better Medical acquisition, so the probability is that the next investment will be in primary care again.
Freya Kong: I guess my question is just beyond what you've allocated for Medibank Health up to 2030. What other uses of capital do you see?
Mark Rogers: Well, I'll start with that current aspiration, which is to grow earnings to $200 million. And that would require us, as you said, to invest capital up to that $700 million level. And then that would effectively expand the unallocated capital. Then we've got opportunities to further grow your primary care network or invest in the well-being space as well. And then you can't discount that if there's capital that we can't invest it, we return it to shareholders.
David Koczkar: And look, I think in the very long term, but all these 3 segments in health, well-being, primary care, community and acute care, all of those 3 in terms of absolute revenue of the market potential are larger than private health insurance. So when we get there, well, we are already a meaningful share of those markets, but there'll be more headroom for potential growth where it makes sense.
Mark Rogers: And the one that Dave and I've been talking about quite a lot with Milosh is what happens to the PHI industry in FY '30. So we've seen one -- a reduction of one player in the PHI market, which is consolidation [indiscernible] in New South Wales and Queensland Teacher Fund consolidation. That's the first we've had since we've come out of COVID. When you -- consolidation would be most [ health funds ] are now who had been running in an environment with low claims and high capital. We know that's starting to unwind. We know we've got the new financial standard of CPS 230 that comes in on 1 July , formalized, 1 July next year. So I think the thing we're discussing is that what does the industry look like in FY '30. How do we play out, what happens to the industry through shifting market share organically versus is there a consolidation opportunity at the right price. And that could be a use of capital longer term, Freya.
Operator: [Operator Instructions] Your next question comes from Kieren Chidgey from UBS.
Kieren Chidgey: Most of my questions have been covered. But the one was -- can you just circle back on was sort of this view of cash claims inflation, Mark, you're sort of talking around the 3.5% number. But when I look in your financial statements at your cash flow, the payments on a per unit basis seem to be up around 4.8% on PCP. So it seems like we're sort of more trending in that 4% to 5% range on a payment per policy basis. Can you just help me reconcile why that's not a better guide to sort of how claims growth is going to move going forward?
Mark Rogers: Cash flow can be heavily impacted by processing speeds on claims, and we've seen a marked speed-up of lodgement of claims, and we -- as the best we can increase the speed in which we pay those claims, Kieren. So I think that's probably a better view to look at the 3.5% and just go through the cash flow. You can look at what the outstanding claims liability is at 31% versus the prior period, and you will see the claims on hand is quite a lot lower. That's a phenomenon we're seeing across the whole. I mean most PHIs have seen that. And if you listen to the [ Ramsay ] call, they will talk about that in their cash flow conversation as well.
Kieren Chidgey: Also just on the claims numbers, there seems to be some sort of risk margin sort of release in the period. Can you talk to that? And on the risk equalization, I just want to be clear on the $17 million benefit from first half. When you say that may unwind in the second half, are you talking about a neutral outcome? Or are you talking about sort of a full sort of unwind? Is it a negative 17%, so you're flat over the year?
Mark Rogers: Thanks, Kieren. You've gone through the financial statements very quickly, well done. The risk margin point, we haven't changed the probability of efficiency. What's happened is as the claims in hand has dropped and there's a consequential impact to the risk margin in hold. So claims on hand down whatever that reduction is, multiply that by 12.2%, and that's why you've had a reduction. Look, I would still expect to be a modest receiver on risk equalization for the full year. Obviously, it depends on what the other 34 funds do and how much we grow relative to the market, but I'd still expect to be a modest receiver.
Operator: Your next question comes from Andrew Buncombe from Macquarie.
Andrew Buncombe: Just one for me, dovetailing with that question that was just asked, you've retained your probability of adequacy then, I know I ask this question every half, but all of your peers have unwound that already. What do you need to state to drop that number going forward?
Mark Rogers: Yes, it's a great question, Andrew. And look, there's no basis -- there's no need to change it. It's just whether or not the claims experience supports changing it. We are seeing and why we didn't change it this half. We are seeing, I think I mentioned to one of the other questions, I think with Kieren's question, we are seeing slightly more volatility in monthly cash payments in claims because of payment speeds. And whilst that persists, I think we'll take a prudent and conservative approach to maintain the current percentile.
Operator: Your next question is a follow-up from Andrei Stadnik from Morgan Stanley.
Andrei Stadnik: Can I just ask around the health segment. So some of the bulk billing GP changes came through November last year. How are those going to be impacting the health segment given your focus on GP clinics?
Mark Rogers: Good question. So if you think about billing, we're typically receiving a higher payment on MBS and likely charging a customer a lower co-pay. So at a consultation level, don't expect a material impact, and we didn't see a material change in our average fee per contract during the half. It's probably more where you've got clinics that go to total bulk billing, you expect to get a practice incentive, and we should see some benefit of that during the course of the second half.
Operator: Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.