Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank Private Half Year '24 Results Investor and Analyst Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to the Medibank 2024 Half Year Results Presentation. I begin by acknowledging the traditional owners and custodians of country throughout Australia and their long-standing connections to land, sea and community. I joined today from Naarm, the home Wurundjeri Woi Wurrung peoples. I pay my respect to the elders past, present and emerging, and I extend my respect to all elders on the lands on which we work and live. Today, I'm joined by our executive leadership team, including our group lead, Chief Financial Officer and Group strategy, Mark Rogers. Starting on Slide 5. So this is a new slide for our investor presentation. In my mind, these are the key themes that I'm keen for you to take away from our presentation this morning. I hope you find this as a useful guide. Today, we delivered solid first half results, which reflects our focus on our customers and our disciplined approach to growth. Our Health Insurance business remained resilient despite the inflationary environment, and we delivered a strong performance in Medibank Health. We've also made some substantial steps in our expansion in health. Our aim to invest between $150 million and $250 million in our target health markets further supports our growing role in health, as we look at scale, capability and geographic coverage. We made solid progress this half. We're a strong business with a constant focus on our customers, and we are making disciplined choices, a combination that supports our sustainable growth into the future. Despite ongoing cost-of-living pressures, our customers continue to prioritize their health and wellbeing, and we remain focused on delivering greater value to them. And while the industry in Medibank continue to grow, we have remained disciplined in the way we grow, and that won't change. We continue to manage our own costs and are targeting $10 million of productivity savings for the full FY '24 year with $3.5 million of productivity savings delivered in the first half. And while Health Insurance has been our core business for 48 years, our growth in health is what differentiates us. And more broadly, the health transition is underway from overnight stays and expensive acute hospital care to virtual short-stay and home care, from treatment to prevention and from generalized care to personalized health. We have been at the forefront of this transition, making targeted investments in these emerging and growing health markets that are expanding our business and have also improved the way health care is delivered to Australia. So I will take you through our first half performance and provide an update on our strategy. I'll then hand over to Mark, who will talk about our financial performance and share his financial priorities for the rest of the year. I will then provide an update on our outlook and then happy to take your questions. Let's go to Slide 6 for our customer highlights. Cost of living pressures are leading customers to make deliberate spending cuts, cutting back on eating out, buying coffee, entertainment and travel. But health remains high on the priority list as people continue to hold on to their health cover. However, customers are increasingly seeking more value and shopping around to get it, which is why we've been finding more ways to deliver value. Through the unique combination of our 2 brands, our products and services and network of partners and the service provided by our amazing team, we have a differentiated offer that is delivering key product savings to our customers. We know that value starts with premiums, which is why we worked hard to keep premium increases as low as we can despite rising health costs in the private system. We also just announced a further $200 million cash back to Medibank customers as part of our COVID Support packaging giveback program and ahm customers will have another year to use their unused extras limits valued at up to $15 million. This announcement will bring the total amount of support Medibank has provided to our customers since the start of the pandemic to a record $1.37 billion, and we remain focused on reducing out-of-pocket costs for customers. While out-of-pocket costs for hip and knee replacement are up 35% over the past 5 years, our no gap program as well as our new products have helped thousands of our customers save an average of $1,600 per procedure. Our customers have also saved more than $12 million over the past 6 months through our Members' Choice Advantage network. And this month, we launched a $50 voucher for all Live Better awards members with extras to further help with out-of-pocket costs at the dentists. Our Live Better program has delivered more than $10 million in rewards to our customers, including $3 million of savings on premiums or top-up for limits. The program is a real differentiator in the market, especially for younger customers. For our Amplar Health business, we're making it easier for our customers to access health and well-being services. Over the half, this team delivered 136,000 virtual advice and navigation interactions for our private health insurance customers, up from 87,000 the same time last year. We also introduced complementary health checks for customers to help them get the most out of our health programs, completing 14,000 checks over the half. And our ongoing focus on streamlining our customers' experience is reflected in the increasing service Net Promoter Score for both brands. Now Slide 7 and an overview of our financial results, which Mark will talk to in more detail shortly. People continue to choose private health insurance in record numbers. Despite the strong growth in the resident market, the market dynamics continue to change. And in the last 6 months, we have seen some significant competitor intensity in some parts of the market with some competitors increasing their discounts and offers substantially. As a result, switching across the market is up around 11%, which has driven up market lapse rates and acquisition costs in some customer segments. Our while our goal is to get back to growing market share in the resident business, we won't be chasing growth at all costs, and we won't be following some of the practices we are seeing in some parts of the market. We're managing Medibank for the long term, and growth at all costs only undermines affordability for customers and the strength of our business. In our resident business, first half growth came from families and those taking out cover for the first time with policyholders up 3,400. This increase is somewhat less than we had set out to achieve at the start of the financial year given the competitive dynamics. But importantly, the quality of our new join is improving, with more combined hospital and extras policies than in the same period last year. In the second half, we ought to increase our resident policyholder growth by investing further in differentiating our brands and growing in our priority customer segments. Our aim for the second half is to get the Medibank brand back to growth and improve retention in both brands, particularly in the second half of the year is seasonally stronger than the first half. In our non-resident business, we've been very pleased with our continued strong performance. growing 33,800 policy units in the half and 34% over the last 12 months, with particularly strong growth in the student market. Our business is strong and resilient, demonstrated in our Health Insurance operating profit, which was up 4.3% to $317 million. In Medibank Health, segment operating profit was up a pleasing 8.5% to $26.7 million, led by growth in health and well-being and travel insurance. Over the half, management expenses were up 10.9%, reflecting higher sales commissions and what we believe to be the peak of inflation. However, we continue to have one of the lowest management expense ratios in the market and remain committed to delivering our productivity program. At a group level, underlying NPAT was up 16.3% to $262.5 million, including net investment income of $83.6 million. And in line with our strong capital position, we have delivered shareholders an interim fully franked ordinary dividend of $0.072 per share. Now to Slide 8. Our strategy to grow as a health company is enabling us to differentiate our patch offering and improve the health and well-being of our customers, our people and the community. Our customers are experiencing the benefits as we reinvent the way we work. We're seeing promising initial results from our 4-day work week pilot, including greater health and well-being for our people. Among the front line teams taking part in the pilot, average sick leave has dropped 2/3 and we've seen no reduction in outcomes. As I mentioned before, we have continued to provide our customers with more value, focusing on ways to deliver long-term benefits. This includes our no gap program, which is the largest in the industry, and we've expanded both the procedures covered and the network of acute and day hospitals where it's available to save customers around $2.4 million to date. Meanwhile, we've seen a 14% increase in the take-up of our Silver Health Insurance cover amongst Medibank customers. And our investment in our diversified insurance products have seen a number of customers taking out additional policies increased 39% in the half. And our focus on prevention is providing more health and well-being support. Around 57,000 people enrolled in our Live Better Back Smart Challenge while enrollments in our 9 preventative programs are up by more than 48% year-on-year. And our current health investments and partnerships have also reached some significant milestones. In addition to our increased investment in Myhealth, the world-class Orthopedic Institute at Macquarie University Hospital has just opened as well as our second hospital as part of our iMH joint venture with Aurora Health care. And in April, East Sydney Private Hospital will open 2 new operating theaters and a new floor. And later this year, at a Adeney Private Hospital will welcome its first patients. These investments are driving our growth as a health company while helping capitalize the innovation needed to advance the health transition our country needs. Now turning to Slide 9. The fundamentals of the resident and non-resident PHI market remains strong, but there is no doubt that cost pressures are driving a change in consumer behavior. The resident market has seen continued strong growth with 2.3% growth in people with hospital cover over the last 12 months and even higher among those under 30. The latest APRA data shows the percentage of Australian's holding hospital cover is at the highest rate it's been since March 2018. While in the non-resident market, these number growth remains strong. And Australia remains an attractive destination for students, workers and visitors. The number of Australians to see private health insurance is essential is at the highest it's been in 9 years, particularly as confidence in the public hospital system is declining. We remain committed to a disciplined approach to profitable growth and continue to differentiate in the market with our 2 brands and our offering in health. We remain focused on growth in key segments, including families and those new to the industry, corporate and non-resident customers. You heard us talk before about the significant challenges facing our overall health system as our population ages, which is projected to increase health spending by 40% over the next 40 years. And because of our current reliance on expensive acute overnight hospitals, unless we change our approach to delivering care, particularly for people with chronic conditions. Deloitte modeling estimates Australia would need to build a hospital a month for the next 15 years to keep up with demand. This is clearly unstable, which is why we need to change. As we know, hospitals play an integral role in our health system and will remain vital for providing expert acute care in the future. And we do know the past few years have been challenging for the sector. Cost of workforce pressures have impacted the sector, hospital admissions are still recovering and new COVID variants and community infections have caused spikes in hospitalization. So these challenges have also prompted different discussions with our private hospital partners on how we can ensure our customers' access to corporate health care remain sustainable now and in the future, and this too is part of the health transition. Through our recently formulated partnership approach with private hospitals, we can better align incentives, encourage innovation in patient care outcomes and experience and support the adoption of new care settings that take unnecessary costs out of the system. Now these new arrangements cover almost 2/3 of the private hospital episodes experienced by our customers. In addition to our partnerships and investments, we continue to invest in further innovation in payment integrity at our health engagement and prevention programs, all supported by continued investment in digital and analytics platforms. Now turn to Slide 10. We understand what our customers want and what drives value for our business. We also know that more than 8 out of 10 of our customers want us to support their health and well-being. And that's why we're investing in improving value, choice and control for our customers to both differentiate our PHI brands and to grow our business. This strategy is enabling us to expand in health, which is focused on growth in our 3 target health sectors and driving our long-term sustainable growth as a company. In pursuing this strategy, we are scaling our prevention programs and rewarding healthy behaviors, differentiating our Health Insurance products with personalized health and well-being offerings to support our customers to be better. And we are providing more support when our customers need to get better, building a growing network of community care and short-stay hospitals investing in virtual health and primary care and accelerate the take-up of new care models in partnerships with health providers, a broader uptake of which could deliver savings of around $1.3 billion to the private system. People want access to the benefits of these innovative models of care offer. More than 4 out of 5 Australians are seeing care at home as appealing, particularly women and families. And telehealth continues to be well utilized, now making up around 15% of all GP visits, and our health system needs this innovation. We know these new care models can save billings and free up much needed hospital beds and importantly, avoid beds being built in the future, yet Australia still lags behind other countries in adopting these new models of care. And our customers are embracing this change with around 44% of Medibank policyholders already engaging with our health and well-being support, up 19% on last year. And just last week, we heard from a customer taking part in our virtual Type 2 diabetes program. He told us he's lost 17 kilos in 12 weeks so far and couldn't be more positive of his experience and his relationship with Medibank. This strategy is key to differentiating our health insurance offering to strengthen our core business and help us grow our business by expanding in health and drive change that everyone benefits from. Now on to Slide 11, looking at the health and well-being market. As people spend more on the health well-being, the approximately $35 billion health and well-being in prevention sector is thriving in Australia and is expected to grow to more than $57 billion by 2030. Our investments in this industry have been all about actively encouraging and supporting our customers to look after the health or well-being, such as inspiring them through our Live Better program or supporting them through our prevention programs. As an example, Live Better is one of the largest and fastest-growing health and well-being programs in Australia. In just 5 years, it is growing from 0 to 800,000 members. With around 40% of Medibank policyholders now members, it's a key point of difference for the brand. It is attracting new customers to our PHI business, particularly younger people. It's building loyalty with lapse rates 13% lower amongst those using Live Better. It helps strengthen our partnerships with providers as we reward customers for using their services. And most importantly, we are deepening our relationships with our customers, whether that be as simple as encouraging to drill well water through to connecting them to the health care they need, including their mental health needs. But we're only just getting started. And as we scale and grow our prevention programs, Live Better will play a bigger role in connecting our customers to the support and services we offer and enable us to grow in this sector. Slide 12 now. As we lead through the health transition, we are growing as a health company. And with our increased investment in Myhealth together with Medibank and Amplar Health, we've now created one of Australia's largest multi-disciplinary primary care networks. From GPs to nurses, from psychologists to physios and other health -- our health specialists, we are delivering care in clinics, in homes and virtually. With primary care being at the heart of the health system, this investment will help us support and improve the health of millions of people in Australia, including those with chronic conditions. This is also another differentiator for our insurance business, enabling us to grow our health offerings for Medibank and ahm customers. We've already been working with Myhealth team to develop programs such as our virtual psychology offering, which has been rolled out across all 106, Myhealth clinics and a virtual GP service for our overseas students. We know the current challenges faced in primary care. Australia spends more than $38 billion a year on care for people with chronic health conditions, yet almost half of all adults have held conditions that could be better supported. But for many patients in the fall, the health system is neither connected nor coordinated, and this has flow-on effects as evidenced by long surgery waitlists and pressure in emergency departments. And we know that GPs want to do more for their patients and keep them out of hospital, but also what I'm hearing from GPs is that they are spending an increasing amount of time around 2 hours a day on administration. We've been working with 3 Myhealth clinics in Western Sydney to desire a change in the way that GP lead care is organized and delivered. Together, we are looking at having intervene earlier to support patients with chronic conditions, such as type 2 diabetes and cardiovascular disease. And on top of better patient experiences, that we benefit for doctors and our health care professionals, who will be able to work better together and where they can make the biggest impact. We're also implementing recommendations from the government strengthening Medicare task force report working with Health Minister's office and the Department of Health, and we'll share what we learn with the Australian government along the way to help them perform their own work. However, current regulations limit how and where we can support our customers as they move through the health system, such as restrictions on supporting out-of-hospital medical services, often required by our customers, especially with chronic conditions. There will be many benefits if we could expand our coverage to include things like GP led care for chronic disease management programs, and hospital substitution. So as an industry, we can have a stronger focus on prevention and community-based care. As we look ahead, we will continue to grow in our selected high-growth sectors in health, including an increased focus on connecting our primary care offering to better support the health needs of our customers and the community virtually and in person, and a continued investment in, Myhealth provides additional pathways to support this growth, whether by expanding its clinic footprint, increasing its efficiencies or building our technology and data capabilities. I'll now hand over to Mark.

Thanks, David, and good morning. Pleasingly, the result reflects how resilient the resident Health Insurance business has been in challenging economic conditions, continued momentum in non-resident and strong growth in Medibank Health. Group operating profit was up 4.2% to $319.4 million. And with a significant increase in investment income, profit before tax, excluding COVID impacts, increased 13.9% to $376.6 million. With the implementation of AASB 17, we're reporting Health Insurance performance, excluding COVID impacts and group operating profit and showing COVID impact separately. During the last 6 months, there were $17.6 million of IT security uplift, legal and other costs associated with the cybercrime, which is lower than in the previous 2 halves, and we expect between $30 million and $35 million of costs for the full year. As a result, reported EPS was up 103.2% to $0.125 per share and underlying EPS which adjusts for the normalization of investment returns and COVID impacts, was up 16.3% to $0.095 per share. Moving to Slide 15. With improving workforce capacity and more limited COVID-related disruption to services, total claims paid have increased. However, in the 6 months to November, over still $74 million or 2% below expectations. Whilst a number of private surgical admissions are now modestly above expectations, claims paid continue to be favorably impacted by a higher proportion of admissions happening on a same day or short-stay basis. Softness continues across all other hospital claim types, particularly private non-surgical claims, including rehab referral rates not increasing in the last 6 months as expected. Importantly, prosthesis reform continues to favorably impact claims. The most public hospital claims growth has increased, it remains below private hospital claims growth. And extras claims are also below expectations, which is increasingly appearing to be linked economic conditions impacting customer demand for services. Slide 16 covers the Health Insurance result, which is mentioned, excludes COVID impacts, which are reported separately and reconciled against the COVID equity reserve. At 31 December, the reserve was $286.3 million, and this will be used to offset the cost of customer givebacks and preferred hospital procedures. Revenue increased to 3.6% and gross profit was 7.4% higher, including the benefit of a $5.7 million lower risk equalization payment. Whilst this improved risk equalization outcome is partly driven by impacts do we expect to unwind, but also reflects favorable changes to age claim patterns that we will monitor in the second half. Gross margin improved 60 basis points to 15.7%, including 20 basis points from the strong growth in higher-margin non-resident policies. And whilst the management expense ratio was 50 basis points higher at 7.6%, operating margin was up 10 basis points to 8.1%. And operating profit up 4.3% to $317 million. Now turning to Slide 17. The resident Health Insurance market remains buoyant, with policyholder growth in the 12 months to 31 December expected to be similar to the 1.9% growth be still in the 12 months to 30 June, and this is despite the implementation of adult dependent reform, which has increased the number of 25- to 30-year olds staying on family policies. The market continues to be competitive, with customers seeking to offset cost of living pressures, resulting in a modest increase in the number of customers, both switching funds and lapsing at a higher cost of acquisition. Over the last 12 months, our number of policyholders increased by almost 13,000, including 3,400 policies in the last 6 months, which is a typically seasonally weaker period for industry growth across the industry. The acquisition rate increased 30 basis points to 5.3%, with Medibank back in line with 3 cyber levels and ahm improvement in line with increased aggregate sales. Whilst the lapse rate increasing 20 basis points to 5.1% is indicative of high switching levels across the industry, it also reflects the timing of our premium increases relative to many of our competitors, particularly in the case of ahm, where customers are more price sensitive. Added by further benefit from adult dependent reform, growth in hospital lives of 0.8% was 20 basis points above policyholder growth and skewed to younger customers. We expect further benefit from this reform over the next 4 to 5 years, including the percentage of insured lives that are under 30 years of age increasing. For the remainder of FY '24, we will look to increase policyholder growth through improving retention rates for both brands, investing further in differentiating the Medibank brand and increasing focus in our priority segments. Turning to Slide 18. Resident gross claims increased 2.4%, and risk equalization had a 20 basis point benefit to net claims growth this period compared to a 20 basis point cost in the prior period. Resident claims growth per policy unit of 2% was 30 basis points lower with a 20 and 100 basis point decrease in hospital and excess claims growth, respectively. The decrease in hospital includes the improved risk equalization outcome with higher private hospital indexation, largely offset by the benefit of continued lower rehab claims. For extras, the reduction includes the economic impact on customer demand that I just mentioned and that the prior period included investment in additional benefits. With the favorable risk equalization outcome, continued low nonsurgical claims growth and softness in extras claims. Our expectation for FY '24 resident claims growth to policy EBIT has reduced from the 2.6% we indicated at the full year result to between 2.2% and 2.4%. However, we will continue to closely monitor key claims trends, including rehab referral rates, the mix of hospital admissions and demand for extra services. Slide 19. Details Health Insurance performance, which shows continued growth in both resident and non-resident businesses. In resident gross margin was up 40 basis points to 15.1%, with revenue and claims growth per policy unit of 2.5% and 2%, respectively. Growth in revenue per policy unit decreased 10 basis points with a lower average premium increase more than offset by a 20 basis point improvement in downgrading to 50 basis points with the impact of economic conditions on downgrading, more than offset by the benefit from adult dependent performance. For the full year, we expect downgrading of around 50 basis points with any further economic impacts largely offset by portfolio management and sales mix activities. Recently, the momentum in non-resident has continued with policy units increasing 34.3%, with particularly strong growth in the student segment. Gross profit increased 39% to $43.1 million and with stable tenure and mix, gross margin was up 20 basis points to 34.3%. And its policyholder growth has continued from 31 December, we expect gross profit to be higher in the second half. We see non-resident as an attractive market, and we will continue to invest in product value, expanding our health offering and increasing our focus in the worker and business segments to support growth in the medium term. Moving to Slide 20. Management expenses were up 10.9% to $298.9 million, reflecting the impact of higher sales commissions and what we expect is the peak of the impact of the inflation cycle. And with lower revenue growth this period, the management expense ratio was 50 basis points higher at 7.6%. As a result of strong customer growth, non-resident sales commissions increased to $5.3 million with the increase in resident sales commissions in line with higher aggregated sales this period. Operating expenses were up 7.9% with cost inflation of approximately 5%, modest volume impacts and a $4 million uplift in IT security and Victorian payroll tax costs. These increases were partially offset by $3.5 million in productivity savings, and we are targeting a total of $10 million of savings in FY '24. Based on our expectation for inflation in the second half, we expect FY '24 management expenses of between $610 million and $615 million and a modestly higher management expense ratio. Turning to Slide 21 and Medibank Health. Medibank Health returned to more normal operating conditions this period with operating profit up 16.1% to $27.4 million. However, this is partially offset by a lower contribution from our health care investments due to initial losses in our growing portfolio of short-stay hospitals. Revenue of $141.4 million was 1.4% higher with strong growth in health and well-being and diversified insurances, improving home care revenue in line with increased hospital activity, partially offset by a reduction in telehealth as we progressively optimize this business. Gross profit was up 17.1% to $73.1 million, and gross margin improved 700 basis points to 51.7%, with strong growth in high-margin businesses, improved efficiency, offsetting inflationary pressures in home care and a higher telehealth margin. The $6.9 million increase in management expenses reflects business mix, inflation and investment in future growth. And whilst the management expense ratio increased, operating margin was up 250 basis points to 19.4%. We continue to target on average organic profit growth of at least 15% per annum between FY '24 and FY '26, with key areas of focus, volume and performance uplift in health services, broadening the scale and scope of our well-being and prevention programs and meeting the needs of more Medibank and ahm customers. We also aim to invest between $150 million and $250 million over the same period in health care M&A that adds scale, capability and expand geographic coverage, including Myhealth clinical footprint and virtual health capabilities. Moving to Slide 22. Investment income of $83.6 million includes a $28.1 million increase in the defensive portfolio, partially offset by a $5.2 million decrease in the growth portfolio. The decrease in the growth portfolio reflects a lower return in all asset classes other than international equities and the increase in the defensive portfolio includes a $17.9 million benefit from the higher RBA cash rate and an improved but still below expected return on international fixed interest holdings. The $37.2 million increase in underlying net investment income to $83.6 million includes the benefit from the higher RBA cash rate and improved manager performance in the property and resulted in a 116 basis point increase in underlying net investment income to 2.61%. On an annualized basis, this is a 104 basis point spread for the average RBA cash rate. And whilst this is higher than in the prior period, it remains below the target range of 150 to 200 basis points but achieving this target more difficult in a higher interest rate environment. Slide 23 covers capital. The 31 December capital position includes the impact of AASB 17 and the new capital standards that came into effect on 1 July, which collectively had a $167 million favorable impact on capital. The business continues to be well capitalized with Health Insurance capital at 1.9x of PCA and unallocated capital of $225 million. Whilst the Health Insurance capital ratio target is between 10% and 12% of premium revenue, the current ratio of 14% sits above this range to offset the $250 million temporary adverse supervisory adjustment. The increase in other acquired capital includes the $50.8 million further investment in Myhealth. And with the level of unallocated capital, we are well placed to fund our $150 million to $250 million M&A aspiration and raise Tier 2 debt is further attractive investment opportunities become available. And in line with the strong capital position, the Board has declared a fully franked interim dividend of $0.072 per share, which is an increase of 14.3% and a 75.5% payout of underlying net profit after tax. And to finish, a few comments on our financial priorities for remainder of this year. In the Health Insurance business, revenue momentum is key, and there are immediate imperatives are to increase resident policyholder growth in a disciplined way and continue to manage downgrading, maintaining strong growth in non-resident customers and an increasing focus on customer life cycle management. We continue to take away to offset claims inflation, including through investing in and broadening our partnership approach to hospital contracting an increasing focus on prevention and chronic condition management programs and investing to support the shift in new care settings at scale. The markets at Medibank Health operating have attractive fundamentals and in addition to meeting the needs of more Medibank and ahm customers, we have the opportunity to service a broader set of customers with existing programs such as My Home Hospital, and increasingly address emerging customer needs in both corporate and virtual health. Delivering synergies between our businesses will be important as we're balancing short-term aspirations with investing for medium- to longer term growth. And finally, despite the management expense ratio being impacted this year by both higher inflation and additional costs, we believe our scale, direct distribution strength and productivity focus means we are well placed to continue targeting a stable to modestly improving management expense ratio going forward whilst balancing the need to invest for growth. I'll pass back to David to make some closing comments.

Thanks, Mark. Let's look at Slide 26 now. We've made some strong progress in our strategy to grow as a health company and continue building our momentum into FY '25. We will always put our customers first, working to deliver greater value through our products and services and integrated health offerings and investing in our digital and analytics platforms. With our non-resident business continuing to grow share in a growing market, we are focused on returning our resident business back to growing share, but not at all costs. We will remain disciplined in how we do this. In the shorter term, we are focused on increasing resident policyholder growth through improving retention rates for both brands, investing further in differentiation, especially for the Medibank brand and we'll remain focused on growth in our priority customer segments. We have a long track record of navigating competitive and economic challenges, and we will remain focused on driving sustainable long-term growth. Our capital position remains strong, and we will continue to strengthen our business, including through our IT security uplift program. We are well positioned to continue to grow in health, investing to both differentiate our insurance offering, strengthen our core business and expand our health offering. We will continue to grow Medibank Health by supporting the needs of our Medibank and ahm customers in health. We expect to invest between $150 million and $250 million in our target health markets as we continue to innovate and invest in the health transition, empowering our customers to give them more choice and control in all parts of the health and well-being experience and to play our role to ensure the health system remains affordable and accessible into the future. We're also continuing to target organic profit growth of Medibank Health on more than 15% on average between FY '24 and '26. We are excited about the future and pleased with our progress and are committed to the work ahead as we progress our strategy. And finally, Slide 27. Turning to our FY '24 outlook. We continue to assess claims activity and remain committed to not profit from the pandemic, returning any permanent net claim savings due to COVID to customers through additional support in the future. Targeted organic and inorganic growth for Medibank Health and Health Insurance remains an area of focus. As a result of our disciplined approach to growth, we are modestly adjusting our FY '24 outlook to reflect the current market dynamics. We anticipate resident industry growth will moderate in FY '24 relative to FY '23. We're aiming to achieve between 1.2% and 1.5% resident policyholder growth for FY '24 and expect to return to market share growth in the second half of 2024. We have updated our expectations for claims per policy unit growth, reducing this from 2.6% to between 2.2% and 2.4% for FY '24 amongst resident policyholders, and we'll continue monitoring trends in rehab, hospital emission mix and extras. Our management expenses for FY '24 are expected to be $610 million to $615 million, and we are targeting $20 million of productivity savings across FY '24 and FY '25, including $10 million in FY '24. We expect cybercrime costs of between $30 million and $35 million in FY '24 for further IT security uplift and legal and other related regulatory investigations and litigation costs. This does not include the impacts of any potential findings or outcomes from regulatory investigations or litigation. Finally, I'd like to recognize the wonderful team of people we have at Medibank who are the driving force behind these results that we've shared today. Inspired by our vision, they're working to create the best health and well-being for Australia. I've now got some time for any questions that you may have.

[Operator Instructions] Your first question comes from Kieren Chidgey with Jarden.

Two questions. One on acquisition costs and one on claims inflation. Just starting on the acquisition costs, just looking at that strong pickup in the resident sort of commissions, just wondering if you can sort of unpack in a little bit more detail exactly what you're seeing in the market there, particularly given the policy growth in the period wasn't particularly strong. Just wondering sort of if that's reflecting much higher commission rates.

Yes. So Kieren, the first half '23, resident commission -- cash commission cost was pretty low. That was smacking in the cyber event, and then we had very low sales through the third-party channels. And so under AASB 17, we're actually now expensing those costs rather than capitalizing them. So the uplift year-on-year reflects a pretty big impact on the software cyber event on 1 half '23. So that's the major driver of that uplift. If you go back to what we actually reported at the half last year, we actually reported $19.5 billion of aggregated costs, but the restatement is actually about $15.2 million. So that's the big driver of the impact.

Okay. So you're not seeing any change in sort of commission practices across the market?

Kieren, in terms of that, the answer is no. What we are seeing is because of the cost that we've been pressured in the market, there is a people seeking more value. There's some challenge shifts to the aggregators in some parts of that market, but that's where we've been disciplined. We are seeing some of those segments have much lower revenue per policy at much higher lapse rates. So even at the same commission level, it's just not good practice to be growing in those parts of the market. So whilst we haven't seen much change in the absolute commission rates, we are being very clear and careful about how and where we grow.

Okay. And just secondly, on the claims inflation sort of inside of 2%, that's sort of one factor. But obviously, your revised guidance for the full year implying maybe you said that lifting to 2.6% in second half. So just wondering if you can [indiscernible] what you're assuming from a risk equalization perspective moving forward and just elaborate on sort of the age claiming patent comment you made on the call, Mark.

So I only heard part of your question, Kieren, but I'll give it a go. So you're right, we've got a 2% claims growth for the first half and we're guiding to 2.2% to 2.4% for the full year. So that would end for somewhere between 2.4% and 2.8% for the second half. But I just caution doing that simple math, because there is going to be a contribution from risk actualization, the benefit we saw in the first half unwinding. And if you look through last year, we probably had a 20 basis point cost in risk equalization in the first half, but it was 0 cost across the full year. So probably guide to the FY '23 impact from risk equalization as being more indicative of what we should see for the full year.

Okay. So is that sort of revised full year guidance, assuming no risk equalization benefit in second half?

Yes. No, it assumes the timing component unwinds. So it's a 40 basis point shift year-on-year. I'd say half of that is because of [indiscernible] and half of that is because of the age claiming patterns. And maybe on to the second part of your question, well, actually, what we're seeing is in the Medibank customer base is slightly better recovery rates, that's saying our customers that are making claims are slightly older. But the biggest impact is actually in ahm. So ahm is a big net contributor to the pool because of its younger customer base, but that contribution or the calculated deficit was down significantly this period, and that affects it now -- that reflects that we're now selling more silver and gold products than we used to, and we've got a more higher coverage policyholder mix through our sales channels.

Okay. And just one last related question. There's been some talk in the market, obviously, around hospital recontracting and you revisiting in particular with Ramsay. I'm just wondering if you can make a comment as to whether or not you have revisited some of those contracts that were struck earlier last year.

Thanks. Firstly, hospital partnerships are sort of an always-on conversation. And here we had quite a number of conversations with a number of hospital partners in the last 6 months to 12 months about how we can address their needs. But we start those conversations with, well, what's right for our customers, how can we preserve access to quality health care, but we need to make it sustainable. And so yes, we had a number of conversations. And the results of those are really as we expected. We've been able to meet some of the needs of the sector. But more importantly, for us, it's to move to much more of these partnership approach type contracts. Now around 2/3 of our customers benefit outlays are covered by these contracts. They enable us together to create incentives to invest in new models of care and invest -- continue to invest in high-quality outcomes, better experiences. And actually, that's really as we expect and is helping us to manage this in the long term. So as we sit here today going forward, I think the vast majority of -- we sort of contracts with all of our partners. And actually, there's not that many contracts now due for renewal, that it's probably less than 20% of our benefit outlays. So yes, it's been an important set of conversations, but we're happy with how that ended up.

And Kieren, we're not yet through the second half claims trajectory and then into FY '24. I'm more thinking about the structural shift in claims patterns and whether rehab referral rates are ever going to recover. I'm more thinking about the economic environment impacting extras demand. They're the things I'm thinking about more rather than whether 1 or 2 hospitals are going to turn up at the door wanting to renegotiate. It's really the structural shifting claims and the cyclical impact on -- of the economic conditions on extras demand, which are the things that are going to drive the claims trajectory into '25.

Okay. So that hasn't been a big factor driving this step-up into the second half off what is a very low first half as yes.

Well, there will be, there were some contracts that we renegotiated in the first half. So you'll get the full period impact on -- into the second half. But really, where we land in the range is going to be largely governed by the risk equalization outcome rather than hospital contracting.

Your next question comes from Sean Laaman with Morgan Stanley.

David and Mark, just a point of clarification on the first question. What do you think systemwide have grown at during the period and your expectations for the balance of the year? I know we get the upper stats next Wednesday. But any thoughts on that?

Yes, I think we're well. Sure. [indiscernible]. Thanks for asking. We don't get that question very often. Thank you very much for that. Look, we saw, as Mark said in his comments, policyholder growth up to September was 1.9% for the trailing 12 months. We think that will pretty much hold for the balance of the half year. When you look through that, though, we are still seeing that trend of -- or the impact of ADR were for the September year, it was 2.34% increase in hospital lives and a very strong increase in younger customers. So the quality of growth is still there and penetration rates in the community of hospital covers a 5-year high. So I think all of that's very strong. There is -- it is challenging out there for the consumer. They are prioritizing their health and well-being. We're certainly not taking that for granted and continue to invest in value, but we do think that the overall market growth in terms of policy numbers will modestly moderate in the second half, which is why we put our other guidance.

And with April 1 approaching, what's the latest on the government and the premium increases?

Yes, it's been a pretty normal process certainly similar to last year. We've approached our application in the same way we always do, looking at our expectation of claims and downgrading. We've had very similar interactions with the department. So probably the only thing that's slightly different is just the timing of the completion of that process. And that's really matter for the government.

And lastly, just to clarify investment in Myhealth, the $150 million or whatever it was, is that sort of targeting primary care? Or should we thinking -- should we be thinking beyond that?

I'll start with the $150 million to $250 million. That's across all of our markets, including health and wellbeing, primary care, virtual care and also short stay in community care. And we're just restating with our strong balance sheet and strong performance in these platform areas that we continue to target growth of -- inorganic growth in those -- all those 3 sectors. That's in addition to our aspiration to continue to grow organically by around 15% on average between '24 and '26. Within that, yes, Myhealth is $50-odd million for just recently, and Mark can go through the overall investment that, that brings us to for Myhealth, which is not up to $150 million. That's a part of that. And yes, we see further growth opportunity in Myhealth. And actually, within now as we've outlined today, that primary care network that really combines the Myhealth business with our platforms in Amplar and Medibank.

And maybe just squeak one last one if I can. And I may have missed it. Any sort of numbers of quantification on the short-stay, no gap joint replacement surgeries?

Yes. I might hand over to Milosh to give a bit more detail, but we continue to see both the number of procedures we're covering expand and also the number of hospitals that offer this program expand. We started with joints, and I think we've talked about before, in the last half, 4.6% of our Medibank members had a no-gap joint replacement experience. We then moved on to scopes and general surgeries. In fact, last half at 2.5% or so of Medibank customers had a no-gap scope. But what's really important here is that we continue to see that evolve and grow. It's part of a health transition, but it also provides value of our core business and most importantly, differentiation for the product. I Might hand over to Milosh to talk about that in a bit more detail.

Thanks, David. As you've noted that there is broadening of the services and some of our hospital partners in these surgeries. We're also looking at a few pilots in mental health. And that growth is underpinned by strong residents with consumers, evolving our partnerships -- using our hospital partners as well to create a more integrated experience for our customers. And also, we are seeing the additional benefits of our silver and gold product have no access for no gap contributing to that appeal and affordability of those partnerships and procedures. So we expect that will continue.

Your next question comes from Vanessa Thomson with Jefferies.

I just wanted to extend a bit more about the hospital partnership agreements and the contract negotiations. You mentioned the hospital admission mix that you will be looking at, reviewing. I wonder how that feeds into contract negotiation.

Well, let's start with just the approach to contracting, and then, Mark, feel free to add about the claims outlook. But progressively over the last few years, we've moved what was the industry standard with just contract based on indexation, very simplistic arrangement through to the first fund to really introduce measures that incentivized improved quality outcomes for customers. And more recently, we've extended that even further to expand the partnership arrangements to provide incentives to not just deliver affordable access for our members today but also drive change in the system and innovate. Part of the contract has some providing assurance for the possible -- part of it is providing incentives where it encourages our partners to invest in things like our no gap network, to accelerate the adoption of new settings of care to implement things like the prosthesis reform and it creates a win-win arrangement so that we can help sustain those -- that access for our customers in the future. I think what we've said today is that the number of episodes that our customers received in hospital and the partnership contracts across which they cover have gone from a very small number a few years ago to now being 2/3 of our coverage effectively. So the last 6 to 12 months have seen a very strong uptake in those sort of partnership agreements, which really sets us up for success and our partners for success in the future.

And Vanessa, as you think about how the partnership would work. So use example of a hernia. So for hernia is done with a 1-night bed stay than the cost of doing it versus 23 hours or less procedure effectively leaves the cost of 5-star hotel accommodation. That's effectively what we have to pay as an increased DRG payments. So if we can do that procedure on a same-day basis, we make more money. We can share that with the customer so they don't have to pay out of pocket to the surgeon and then we can pay to the hospital more. So that's the way we've got a claim saving will benefit and the shareholders will benefit, the customer benefits and the hospital benefit. So it's effectively that model is actually occurring anyway. The level of procedures happening without an overnight state, probably gone up 2% or 3% to 72% of all admissions currently. So the hospitals losing that bed day with accommodation day we're sharing some of the benefit with them. So that can give them an incentive to support the shift in the model of care through a kind of a more international basis where overnight procedures of the high acuity operations rather than low acuity operations.

And then just one more question. I wanted to ask about cybercrime costs, expecting $30 million to $35 million in FY '24. Any color you could give us on expectations for FY '25.

Maybe let me start with what's making up those costs. So 2/3 of those costs are actually in remediation and uplift and the balances in litigation. So we're making really good progress on the remediation and uplift. I'm not sure that necessarily will be completely finished this year. So it will go into '25, I suspect. And then the litigation will actually have a pretty long tail. So we expect the same trajectory in terms of going down, but we still will have some costs in '25.

Your next question comes from Andrew Goodsall with MST Mark.

Glad to hear you're well. So just on the premium round, obviously, following that up. We are hearing that due out next week and expected to land below inflation you've talked to the competitive landscape. Just wondering if you're expecting that next week, you'll get a positive signal just where you land versus peers. So just talking about proportionately where relative how you think you're going to land?

Thanks, Andrew. I hope you're well. That's all probably just difficult to talk about. I'm not going to speculate. I certainly don't know what everyone else has applied for nor should I. What I know is what we've done, which is to look at our forecasted claims downgrading and applied for a raise. We doing all we can to keep premium increases as low as we can for our customers, but we need to balance that with sustainability for our business. So I think we are -- we put our best foot forward, and we look forward to hearing where the -- that round completes. As I said, it's been pretty normal in terms of everything else apart from maybe the time line. So it is next week. That will be good.

We'll check the second page of the press release that normally has all 35 funds in their price increases, Andrew. So I suspect we'll find out about the same time share where we see business competitors.

Hopefully, that shows up those that are willing to pay a lot more to convert people across. Just coming back to extras, Mark, I think you mentioned you're doing a bit of work looking at what's happening there. Obviously, claims are slowing there. Just wondering whether you think that's an affordability issue? Or is there any capacity issues amongst the service providers there.

We actually think this is cyclical and linked to inflation rather than structural and probably for 3 reasons. The impact is bigger in the more discretionary modalities, so if you look at dental, dental claims are still pretty high. We're not seeing the same workforce limitations in allied health and furlough that we're seeing in the hospital market. And then we've done a few trials. We've actually encouraged customers to use their products, saying your limits are going to expire, and we've shown we can stimulate demand that way. So that tells us it's more affordability than structural. And we're taking some -- in the guidance we've given, the 2.2% to 2.4%, those are expected claims for us. We've taken about a 40 basis point reduction in consumption, but we are still running well below that level in terms of extras claims. So the question is, does it visible does not recover in the second half? There's still some potential risk that consumption falls even further in extras.

Final one for me. Just in terms of the equity reserve of DLP, I guess just trying to understand at what point do you sort of say or just call time on catch-up opportunity through that reserve?

Andrew, I'm pretty sure you called it DLP, but you mean the DLC, didn't you?

DLC, sorry. Yes. DCL, DCL.

So the giveback that we've announced today that will go against the equity reserve. Should they be -- should surgical claims growth exceed our expectations, and we have to fund those claims that will get drawn against the reserve as well. That's largely it's going to be used for further customer givebacks or funding the cost of deferred hospital stays are undertaken.

And sorry, just a final one, just on the givebacks. Do you get any pushback at a sort of political or regulatory level, just the preference to see those in the premium round rather than givebacks? Is it just a bit of noise we were hearing?

Let me just start on the, I think you asked when. So I think I've asked the same question 6 months ago, and I said you really hope COVID going to be over the end of 2014. And we now -- sorry, 2023. We are now in 2024 and in November and December, we had a pretty severe further infection and outbreak. And so there's very clearly a big impact on claims -- hospital claims. As I say again, I really had FY '24, so last year that we're talking about, COVID. We get back to what is the new norm in FY '25 though.

Just on the department. Yes, I think we are progressively just making sure that we deliver on our commitment, which we have always done, which is to not profit pandemic. I think given we're seeing, as Mark said, still signs there of impact to claims, and we will continue to do the right thing by our customers or if claims do recover, as Mark said, we're ready to support that with the reserves. So I think that is a different issue than the premium round. And we've always been clear on our underlying expectations, we remain committed to that promise.

Your next question comes from Andrew Buncombe with Macquarie.

Just one from me. I'm just thinking about the policyholder growth targets that you've changed today. Just in the context of the market seeing higher acquisition costs and a little bit of rotation to more aggregators, but then at a company level, you've only done 20 basis points of growth in the first half. That implies that there needs to be something structural on your side of things that changes in the second half to even hit the new targets. What's that structural change that you're essentially putting in place now that's going to get you to the new numbers?

Yes. Thanks, Andrew. Look, I think when we look through the first half -- as we entered in that first half, we did see some impact of the rate change we put through in 1 June, which is the second one we've done in the last half of financial year. And the momentum actually improved quite considerably through that half, but we did see this increasing competitive intensity. Yes, when I look at the second half, it gives me comfort. The first half, we grew, continued to grow share in NTIs, and we know that NTIs are a larger part of the market in the second half than the first half. To get our target segment on to corporate, we actually have what our highest or strongest corporate acquisition rates we've had in a couple of years. And we've seen some really strong account wins in the first half. So that's a very strong momentum. And lastly, we have announced and give back today that we'll -- we know or it's the right thing to do by our customers that will improve that trajectory. I guess the other way of looking at it is you're right, we need -- to get to the outlook, we need around 20,000 or bit more policies. A couple of years ago, we grew more than 32,000 in the second half. And last year, in the first quarter, we grew 15,000 in 1 quarter. So I think all of those things give us confidence, but we will continue to invest in our differentiation and continue to grow in a disciplined way because we could always hit 2% if we wanted to, but that's not the right thing for our business, and it wouldn't be the right, ultimately, for our customers.

And so Andrew, part of the reason we've given guidance and downgrading guidance is that we're actually showing you that we intend to grow policyholder growth without overspending and offers are overspending any money. So we've actually given you all 3 metrics. So that would actually -- we're confident that we don't need to pool the office lever. We don't need to overspend on marketing and that we're actually going to grow between 1.2% and 1.5% in a sustainable way. And if you look through the MA number, you'll actually see if we land between $610 million and $615 million in MA that would infer a much lower expense growth for the full year than what we had for the half. So we're not overinvesting. We're not overpaying acquisition costs.

Your next question comes from Julian Braganza with Goldman Sachs.

Just a couple of questions from me. Firstly, just in terms of the claims savings that you're seeing continue to persist into first half '24. Just in terms of the composition, and just trying to understand, have you now assumed the full permanent benefits coming through from COVID-19 in the latest pricing round?

Thanks, Julian. Hope you're well. So we had $74 million of favorability on claims versus expectations, so 3% of our total claims. That's largely coming through in nonsurgical. And within nonsurgical, it's largely in rehab savings. We've got some of those into the guidance. In fact, we booked some of those into the 2.6% guidance we had at the full year. But largely, we are not assuming any further structural shift in these claims and benefits from that in the second half. That's probably more a contemplation for the premium round. So to the extent, we have savings backwards to the extent extras utilization growth was much lower than the 1.5%. We're expecting that could potentially be benefit to claims and pushes towards the bottom end of the range we've given or below.

Okay. Great. And just to understand, I mean, to the extent you can provide a bit of color in terms of how you've thought about claims in creation into FY '25 given that, that would be a pivotal part of your thinking in your rate addition for this front?

Discussed it before to premium rounding flames and Flash there's a whole series of headwinds and tailwinds. So we start at the top level, which is the economic environment, so what it is downgrading and extras utilization, and then we think about the ongoing hospital contracting cycle because that's an always on activity, a period of our contracts will turn every year. And then the biggest area of focus is the structural or benefit we may get from further structural claim savings as a consequence of the COVID-19 pandemic. So that's where we think about the majority of the rehab savings that we've not yet built into our underlying claims expectation. That's where that comes into our consideration really.

Okay. Great, Mark. And then maybe just a, just a question on MER. I just want to understand, gross margins continue to expand this period, MER also did expand, offsetting some of that benefit. If I think about your view on pricing and that pricing also should reflect the higher MER going forward. And also just your views on the MER, whether that will come back over time.

Yes. So maybe what typically happens, we typically think about growing our number of customers in our revenue with a flat or flattish gross margin. And then we get in the operating margin leverage through an improving MER. That's what we typically aim for over an extended period of time. We are actually in a point of inflection here, where we've got very hard inflation impacting costs but also impacting consumption. So that may mean in the short term that we end up with the same operating margin trajectory, but the shape of that result may be slightly different because you're never going to get the MER and then we're going to get the claims inflation exactly right in any one short period of time. But that is our long-term aspiration, but we are going through a period of infection, Julian. So we may see this year an uplift in resident gross margin, but an uplift in MER as well. But the thing I'd call out that hasn't got much conversation yet today is the importance of the non-resident business. So that business is growing very strongly. It's got a higher margin and it's contributing to the overall fund gross margin, and that's going to be a very important component of our full year results.

And just one last clarification for me. That COVID reserve accrual of EUR 140 million lower claims versus expectations, is that versus 2%? Is that right for the first half?

Yes, that's correct.

Your next question comes from Siddharth Parameswaran from JPMorgan.

A couple of questions, if I can. Firstly, just on the rate negotiations. Can I just clarify, have you not been told yet what your rating increases are because I'm understanding from half, so I just wanted to clarify, I think you haven't mentioned it today, does that mean you haven't yet been told what you've been -- what you're getting?

Sid, good to hear from you. Yes, I think confirm that we haven't been told. If we've been told, we would have told you.

Yes. Okay. Great Okay. Can I just also clarify a couple of questions on just recognition of the low claims environment. Mark, last year, it seemed like there's quite a bit of seasonality in terms of the gross margins between the first half and the second half when you show us your underlying margins on residents. And I think you recognized the claims benefits a bit more in the second half. I'm just wondering if the -- there's still quite a difference between your assumptions and what's actually occurring on a cash basis. I was just wondering if we should expect any similar trends here as in there might be a revisitation of some of those assumptions in the second half.

Let me start with seasonality. So second half normally has higher gross margin because there are less hospital service days. So January is a very low planning month. Over restart, there's a lot less surgery. So we typically had a higher gross margin in the second half than what we've had in the first half. So that's already contemplated in the forward view of claims that we've given you today in the outlook.

Okay. And just the revision of assumptions?

We said in the presentation, we will monitor the key claims trends. So rehab, as an example, we have referral rates drop or if extras consumption is lower than what we expect, then when we land the full year result, that could be a different outcome to 2.2% to 2.4% for the full year.

Okay. Great. Okay. And then just we touched on one of the earlier questions. I was quite sure about your answer, Mark, around the COVID promise. So this, the $250 million that you're giving back, are we to take about the last giveback? Or are you saying that it's still open and you might give back more? I just want to be categorically, because there'll still be a significant provision that's there in your -- what you call your COVID-19 equity reserve?

So we'll have somewhere around the $100 million residual amount in the equity reserve. And so if that's not used to offset the cost of hospital procedures that have been deferred due to COVID, that will also go back to customers.

Okay. Okay. Great. Okay. And then one last question, just to non-residents. I mean you touched on that earlier. Just the growth from here, I mean, we've seen very strong growth for a little while, going forward, the government seems to be cracking down on migration and students, I'm just wondering if, I mean, should we be expecting a slowdown shrinking in volumes in the market in that segment?

Yes. Thanks, I want to kick off with a deal on that. Yes. We have purposely invested in this market particularly during COVID when the borders were closed so that we could grow share in this market as a return to growth. I think we've done -- we've definitely done that and continue to see strong growth in this half, particularly in students. There's a record number of students in the country right now and still a lot of positivity there from many in the sector about forward growth. There've been some commentary on immigration, but particularly the areas that we're focused on around skilled workers and visitors. That's probably going to be less impacted. So might turn to Milosh just in terms of what you're seeing with some of our partnerships and what you're seeing in terms of the market.

Thanks, David. I think on the market, we did see a bit of a catch-up in FY '23. And so far, student volumes in country are back at pre-COVID, above pre-COVID levels. And if you look at some of the forecasts from the center of population, whilst the FY '24 student volumes and inbounds are going to be a little bit lower than FY '23, it's still higher than pre-COVID. And so the resilience of the student market and the sector is there. And then as David highlighted, we have invested in our partnerships and our proposition to serve not just private health insurance, but broader health needs of our student population and our partners. And this resulted in 100% renewal of our accounts and continuing to serve more universities and higher education institutions. So that's pleasingly progressing well and fueling both our current performance but also our positive expectations for the rest of the year.

And Sid, I think the opportunity for us, and I move said this before, is sharing workers with visitors. We're doing really well in the student segment been winning share. We still say we underwent share versus our where we are with students. So our opportunity even if the market actually starts to soften is to actually increase the share in workers and visitors. I was really happy with the trajectory we had in workers this half, but there's definitely more we can do there and still quite a bit more opportunity in the visitor segment.

Our next question comes from Nigel Pittaway with Citi.

When you were explaining lapses, you said that, that reflected the timing of the premium increases versus your competitors. And yes, it looks if I'm comparing light you lost about 1,800 policyholders in the months of November and December, which suggests that lapses spiked in those last 2 months. So I guess, firstly, is that correct? And secondly, can you, if it is correct, can you explain what went on?

Yes. Thanks, Nigel. Look, there was probably as a super for 2 thematics in the first half. One was more at the first part of the half. In that first quarter, we did see some impact -- residual impact from the premium increase that was implemented in 1 June, that followed on from the increase that we deferred from November to January. I think the second part of the half, those impacts diminished, but we did see some increasing competitor intensity, some unsustainable, quite frankly, practices in some parts of the market that we just weren't prepared to follow. That drove increased switching rates. In fact, we've seen the whole industry lapse rate, increase, which is in line with what we've seen. So very much to thematics coming through there, Nigel.

Okay. That's clear. Secondly, I mean, just briefly back to the sort of claims growth. I mean when we were sort of talking 6 months ago, you were quite firm that the 2.6% was realistic, not conservative. So I mean you probably largely covered it, but I guess what did most surprise you? And then secondly, I presume that given what you said about sort of extras and utilization, and that could see then below the bottom end of that guidance. So that guidance is on a similar basis to the first, to the $2.6 billion.

Yes, good question, Joe. So what can really change, I guess the risk factorization outcome is better than what I was expecting. And you're right, extras, we've contemplated, I think when we last met with you that extra growth could deteriorate given it's a more discretionary service, and it has eventuated. So they are largely the factors that have improved the outlook we were expecting also that rehab claims would recover more quickly than what they have. There's such a big financial incentive for hospitals to fill empty beds. There's such a lot of capital that's been invested in the rehabilitation specialty. So we expect it -- we've been expecting for a while that the rehab claims would recover, but, and it's still down somewhere between 7% and 20% compared to where they were pre-COVID. And you're right. You're right, Nigel, bias would be towards the bottom end of the range or below rather than to the top end of the bottom but I had to make that call as where we sit today. And you'd expect that given claims of 3% below that expectation, as we speak.

Yes. Okay. And then maybe just final I was just wondering, I guess, how you think the economic conditions are relative to what you assumed because I mean, another sort of assumption that's just slightly changed is obviously a downgrading assumption where you are now expecting that to be a little bit worse than you were. So is that because the economic conditions are worse than you expected or just that the way people have reacted to the economic conditions is slightly different to what you expected?

Look, it's probably in line, Nigel. From an economic impact. I think that switching conversation we've been having in the propensity for other funds to offer joint offers to switch customers that's impacting the downgrading rather than it being on customers wanting to drop cover or increase their access.

Yes. And just to add to that, I think from what we're seeing with consumers, as I said before, they are under pressure. There's no doubt and they are wanting more value from their product and looking around for offers. But they're also prioritizing the health and well-being. So the economics of the industry actually remain fundamentally pretty positive with unemployment is still relatively low with our wage growth, as was revealed yesterday, improving. I think that's certainly above historical premium increases or recent premium increases. So I think affordability equation is still strong. But we are continuing to try and drive value and support both our current customers and attract new ones to just offset that. But as we look forward, we have signaled that we think that the growth rate will moderate slightly because we expect that there will be a slight impact in this half.

And Nigel, maybe to put it in context though, a couple of years ago, we were running at 1% down writing, and we're in a very low interest rate environment. First half '23 was 70 basis points. So whilst our guidance has gone up a little bit, we're still notwithstanding the economic conditions, doing a lot better than what we were 12 months ago and demonstrate it better than what we were doing 2 or 3 years ago.

Thank you. That does conclude our question-and-answer session as well as our conference for today. Thank you for participating. You may now disconnect.