Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank Full Year Results 2024. [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 Medibank's 2024 full year financial results presentation. Joining you today from [ now ], the home of the Orange [indiscernible] [ people ]. On behalf of Medibank, I'd like to acknowledge the Traditional Owners and Custodians of country throughout Australia and their connections to land, sea and community, and I pay my respects to their Elders past, present and emerging. I'm joined today by our executive leadership team, including our Group Lead - Chief Financial Officer and Group Strategy, Mark Rogers. I'll make some comments on our key highlights, and then Mark will take you through the financials. I'll then wrap up with our outlook and then really happy to take your questions. Starting on Slide 5, the highlights. By staying focused on our customers, investing in the health transition and growing as a health company, we've delivered another solid result. Despite customers feeling under pressure with the rising cost of living, people are continuing to prioritize their health and wellbeing, with the PHI market remaining with strong growth. We've remained focused on providing our customers with more value and greater support in their health, and we're [ stuck ] by our promise to not profit from the pandemic. We've continued to return these permanent net claim savings to our customers, which is the right thing to do. We delivered around $10 million in productivity savings with our PHI management expense ratio one of the lowest in the industry, and this is a very important position given the economic environment. While the PHI industry and Medibank both continue to grow, we've been deliberate in our response to the ongoing competitive environment and remain disciplined in how we are managing the business for the long-term. We've taken a big step in growth in Medibank Health this year. It's performed very strongly and our primary care investment in Myhealth is tracking well. Our growth as a health company is a key differentiator. We delivered more than 4 million health interactions through our multidisciplinary primary care network, which now incorporates Amplar Health and Myhealth services. We remained a strong and resilient business and we have a long track record of navigating competitive and economic challenges and delivering results. We remain focused on driving sustainable long-term growth and are excited about our opportunities for the future. Now let's turn to Slide 6 for some customer highlights. First and foremost, we have continued to work hard to deliver our customers more value. We announced an additional $305 million in COVID give back to our customers, bringing our total customer support to a record $1.46 billion. We are committed to keeping premium increases as low as we can and this year's increase was below inflation and wage growth. And as I mentioned before, we know that our customers are looking for more value. In the current cost of living challenges, 55% of our customers say their concerns over out-of-pocket costs are higher than they were 1 year ago. So, in response, we've expanded the procedures covered by our no gap program now at 35 hospitals and have seen a 38% increase in the number of customers going through the program. Our Live Better program has now grown to 823,000 participants and we delivered more than $25 million in rewards to our customers, including more than $8 million in cover rewards. We saw a 20% growth in the support provided to our PHI customers by our Amplar Health team and their partners. They delivered over 300,000 virtual health interactions and supported more than one in 4 eligible customers admitted to hospital through our Health Concierge offering. This shows we are making very good progress on expanding our relationship with our customers to a deeper and broader relationship in health, with now almost half of our Medibank policyholders engaging with our health and wellbeing services. And our ongoing focus on simplifying and personalizing our customers' experience is reflected in increasing service net promoter score for both ahm and Medibank brands, achieving our best result in the last 4 years. Now, [ on ] to Slide 7 and a brief overview of the key financial highlights. In FY '24, we delivered another solid result. We saw continued growth in both the resident and non-resident health insurance business. Net resident policyholder growth was up by more than 14,000 or 0.7%. Now this was not what we set out to achieve, but given the competitive market, we remain disciplined about the best way to grow for the long-term. In our non-resident business, our strong growth momentum growing by 69,000 policy units or up 25% over the last 12 months continued this result. Management expenses were up slightly by 30 basis points. Health Insurance operating profit was up 6.3% to $692.3 million. And in Medibank Health, our segment profit was up 36.7% to $60.4 million, with strong organic growth and a significant increase in contribution from Myhealth. Net investment income was up by 31.5% to $182.2 million. Our underlying net profit after tax was up by 14.1% to $570.4 million. And in line with our strong capital position, we are delivering shareholders a final fully franked ordinary dividend of $0.094 per share. Now to Slide 8. The investments we are making in our people, our products and our services and our partnerships are delivering greater value to our customers and the community, and driving our growth as a health company. We've made it simpler for people to manage their health and wellbeing needs. For the Medibank brand, our trial connecting customers to local team members has delivered fantastic results in customer satisfaction, employee engagement and in growth, and we're rolling this out nationally in FY '25. Our new range of silver and gold hospital covers are one of the only products that ensure customers going to hospital for a no gap procedure have [ no ] [ excess ] and no out-of-pocket cost, which are saving customers undergoing joint surgery around $2,400. The strength of our health and wellbeing offerings has also helped us win more corporate insurance accounts this year, which were up 9%, and we're also seeing more corporate customers engage and live better and take up our diversified insurance offerings. We extended our 24/7 nurse and mental health support lines to an additional 700,000 of our customers and continue to grow our expansive Members' Choice Advantage network, which has delivered over $23 million of savings to our customers and which continues to support better customer retention. As our customers for both Medibank and ahm brands continue to preference our digital channels, we've made these more intuitive, integrating more features, enhancing messaging functionality and continuing to harness our investments in AI to support our people and the conversations they are having with our customers. We provided more health and wellbeing support to our customers and the community. Our Amplar Health team is delivering around 1,000 home care visits today to people across Australia, and we've just extended our virtual psychology clinic to all Medibank customers, so they can access timely and affordable mental health support from registered psychologists. And our hospital investments have expanded with our iMH joint venture with Aurora, offering innovative metal health approach, opening its second hospital, with a third to open later this year in Brisbane, and the Orthopaedic Institute opened at Macquarie University Hospital in February. Now, on to Slide 9. People continue to choose private health insurance in record numbers. In fact, a number of Australians who see private health insurance as essential is the highest it's been in 7 years, particularly as confidence in the public hospital system continues to decline. We have also continued to see very strong growth in younger customers, which is important for the longer term health of the system, with last year seeing another 100,000 people under 30 now covered by hospital insurance, which is the highest rate of growth we've seen in this segment in 12 years. And despite the strong resident market growth, competitive intensity continues in some parts of the market, with some competitors continuing to offer significant discounts and offer through high-cost channels and more price-sensitive customers shopping around for shorter term deals. This competitive dynamic is lasting longer than we first thought and we expect this to continue in the medium term. We've seen similar cycles to this in other industries where short-term unsustainable activity is at [ odds ] with long-term competitive fundamentals. For us, to remain strong and resilient, we will continue to think about volume and margin and not just volume alone as we continue to differentiate our offering across both Medibank and ahm. So, while our goal is to get back to growing market share in the resident business, we won't be chasing growth at all costs. Importantly, in FY '24, we saw strong growth in our priority segments of Medibank, including the largest growth in family policies in over 6 years and strong momentum in corporate [ joins ] with double-digit acquisition growth across customer and product segments of the Medibank brand and new to industry growth being above market share. Medibank brand lapse remained well below the industry average and continues to improve relative to the industry, while ahm continued to grow strongly above market with a 3.4% growth in policyholders for the year. As we move into FY '25, you should expect to see continued investment in differentiation for both brands, a continued broadening of our customer relationships to drive retention, and maintaining our focus on growth in our priority segments through our direct channels. We are aiming to grow in line with market during FY '25, including volume growth in the Medibank brand and we aim to grow market share in FY '26. In our non-resident business, our strong momentum continued with standout growth in the student market. This was driven by the enhanced health and wellbeing support and increased value we're providing to overseas students and our strong university relationships, with Medibank now the preferred provider of overseas student health cover for nearly half of Australian universities. We remain confident about the future growth prospects of our non-resident business and its meaningful contribution to our overall company results. Now to Slide 10. As we've talked about before, the health transition is well underway. We are seeing a shift from overnight stays in extensive, acute hospitals to virtual short stay and home care, from treatment to prevention and from generalized care to personalized health. Consumers are demanding these changes. For example, Medibank customers electing to have their rehab at home after a joint replacement has grown from 5% in 2018 to almost 30% in 2023. Also, the number of people electing to return home on the day of their surgery is increasing with about 5% more hospital procedures in our day cases compared with 2019 numbers. Our health system needs this innovation, and if we don't act, the government will need to spend nearly 50% more on health as a proportion of GDP in 40 years' time, with hospital spending the fastest-growing [ part ]. So, while there's positive change in some areas, we all need to move faster to respond. The past 3 years have been challenging for all parts of the health sector, including hospitals. In recent time, inflation has been driving up cost for hospitals and COVID waves have impacted staffing and operational levels of hospitals. However, despite these challenges, higher cost, acute hospital bed capacity in the private sector has been growing ahead of demand, now with only approximately 64% of beds being utilized. So, while we're seeing some hospitals closing, we also continue to see hospitals opening and new capacity being built. Now, we want the private hospital sector to be strong and we recognize the important role hospitals play in supporting our customers, which is why we continue to support our hospital partners and fund them through the health transition. Over the last 2 years, our one-off financial support for hospitals has reached a substantial $63 million. This is in addition to higher indexation in hospital agreements and in addition to incentives to accelerate the health transition, where these additional benefits are given to hospitals, where they provide our customers with greater choice, better access and more value in their health care. These new partnership agreements now cover 3 quarters of the private hospital episodes experienced by our customers. And what we continue to think about is how we support the sustainability of hospitals in a way that doesn't push up premiums to reduce affordability for customers and put increasing pressure on an already stretched public system. What we do know is that expecting consumers, insurers and governments to provide more funding for the status quo is not sustainable. Change in health is never easy, and while there are many vested interests, complex funding models and regulatory constraints navigate, these must not be cause for inaction. Instead, we must accelerate the health transition, working together to shift from a hospital system to a health system, and [ we're ] [ at ] the forefront of this transition. And alongside doctors, we will continue to make investments in the care models of the future, expanding our business and being a catalyst to change the way health care is delivered in Australia. Let's move to Slide 11. We know people want health care done differently and we know our health system needs change to remain sustainable, and we know this innovation in health is even more important given the current conditions we're seeing play out in the system, as I've described before. So our strategy remains the same. We're investing in the health transition to deliver greater value, choice and control for our customers, focusing on prevention and accelerating to take up other models of care in partnership with clinicians and health providers. And by bringing together our group's established capabilities from PHI to health, we are well positioned to both differentiate our insurance offering and grow as a result of its focus and be able to continue to support our customers, whether they need to be better or get better. Now to Slide 12. Our strategy for growth in the corporate health and wellbeing market is an example of how we're bringing together our capabilities across the group to provide more for customers and grow our business. As one of the market leaders in the corporate private health insurance market, we're now expanding our offering in physical and mental health to grow within the market that is ready for change. We know that workplaces play an important role in peoples' mental health and quality of life. There's also a greater expectation on employers to provide not just safe, but healthy workplaces. And changing regulations are increasing the obligations for organizations to minimize risk to employees' physical and psychological health. But while employees are prioritizing workplace wellbeing, there is a disconnect between their expectations and their experiences. Workers' stress and burnout is rising and this is costing businesses. So corporates are looking to us for support, and this year, we delivered around 600 health and wellbeing programs to corporate clients, including mental health support and this demand is just growing. We expect the corporate health and wellbeing market to increase by over 10% each year for the next 6 years to be around $2 billion. And while there is a spectrum of health and wellbeing services currently offered, the market is right for innovation, and with around 2,500 corporate customers, we are well positioned to drive this shift. And what's different in our approach is, we want to create the best end-to-end health experience for corporate Australia. Last month, we launched a new range of corporate hospital [ and ] extra cover options, which offer employees greater flexibility, preventative health benefits and dedicated support. Employers benefit from these too, as many of the services we offer like flu vacs, skin checks or health screenings would typically be services that need to outsource at cost for their employees. To support our overall expansion into this market, we are excited to announce earlier this week the acquisition of the Pinnacle Health Group, a leading provider of workplace wellbeing services, who brings to us a great team with strong capabilities in operations and service orchestration and establish customer relationships. You can expect to see us further invest to grow in this market, including the establishment of our workplace mental health and wellbeing program. Moving to Slide 11. This year, by bringing together Myhealth, Medibank and our existing Amplar Health Services, we've created one of Australia's largest multi-disciplinary private care networks, delivering services in clinics, virtually and in homes, [ with ] care from GPs to nurses, psychologists to physios and our telehealth specialists. Primary care in Australia is a large and growing sector, but it needs investment and innovation to better support the growing needs of patients in both physical and mental health. And we're partnering with GPs to take a more proactive, holistic approach within primary care to prioritize prevention and better manage chronic conditions. This improvement is also a crucial part of the health transition and needed to reduce unnecessary hospitalization. Speaking to our GP partners, they also want this change. They see the potential to deliver a much better experience for their patients to spend more time on care and less time on admin and to provide a more coordinated approach to supporting people with chronic conditions by bringing health professionals together as a team, supported by the latest technology. So, this is what we're trialing in Myhealth clinics in Western City and we've committed $3 million to develop prevention programs and help GPs change primary care delivery with support from other health professionals. Already 600 patients have been through the program and the feedback from both patients and the health professionals is very promising. But not only is this helping Myhealth to deliver greater value to patients, it's another differentiator for our business, enabling us to grow our health offerings for other funders and for our own customers. And alongside this, we'll also continue to grow our virtual service offering powered by our [ ventures ] team, which is enabling us to scale health and wellbeing prevention programs across the country, improving much needed access to patients, including in regional and rural areas. I'll now hand over to Mark.

Well, thanks, David, and good morning. The result reflects the continued resilience of the resident health insurance business, demonstrates the important contribution non-resident makes to health [ fund ] growth and highlights both the organic and inorganic growth potential in Medibank Health. With the implementation of AASB 17, we're reporting health insurance performance, excluding COVID impacts, in group operating profit, with COVID impact shown separately. Group operating profit was up 7.9% to $699.8 million. And with a significant increase in investment income, profit before tax in COVID impacts increased 13% to $822.5 million. This included a further $39.8 million of IT security uplift, legal and other costs associated with the cybercrime, which is lower than in the previous 12 months. And we expect similar spend in FY '25, including investment in uplifting business resilience and customer trust. And reported EPS was up 59.6% to $0.179 per share and underlying EPS, which adjusts for the normalization of investment returns and COVID impacts was up 14.1% to $0.207 per share. Moving to Slide 16. Whilst the claims environment has continued to recover, particularly in the last few months, intermittent COVID impacts, changing customer preferences and increasing economic impacts resulted in resident claims paid for the 6 months to May being $104.1 million below our expectation of 2.2% growth per policy unit. In extras, claims paid were $37.2 million below expectations, with economic conditions impacting demand for all services, other than dental. Hospital claims paid were $66.9 million lower than expected. And whilst private [ surgical ] claims have been broadly in line with expectations since January, softness continues across all other claim types, particularly private mental health, rehab and respiratory claims. FY '25 will be the last year we separate out COVID impacts from the health insurance result. In extras, this will commence from 1 July as claims favorability is now largely due to economic factors. And in hospital, where there remains ongoing monthly variability in claims, we will closely monitor trends over the next 6 months. And we expect to finalize our give back program in FY '25 with any remaining COVID savings returned to customers. Slide 17 covers the health insurance result, which as mentioned, excludes COVID impacts, which are reported separately and reconciled against the COVID equity reserve. Whilst the economic environment has impacted the resident business over the last 12 months, with inflation remaining elevated and a higher proportion of sales through aggregators, this was offset by lower growth in extras claims and resulted in largely offsetting gross margin and management expense ratio impacts. Revenue increased 4% and gross profit was 7.2% higher, with the improved risk equalization outcome reflecting continued favorable age claiming patterns and benefits emerging from our disciplined approach to growth. Gross margin was 40 basis points higher at 16.5%, including a 10 basis point benefit from strong growth in higher margin non-resident policies. And whilst the management expense ratio was 30 basis points higher at 7.8%, operating margin was up 20 basis points to 8.8% and operating profit up 6.3% to $692.3 million. Now turning to Slide 18. The resident health insurance market remains buoyant, with policyholder growth in the 12 months to 30 June expected to be similar to the 1.9% growth we saw last year. 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 lapsing and switching funds, and a higher cost of acquisition. Over the last 12 months, our number of policyholders increased by more than 14,000 with ahm growing 3.4% and Medibank down 0.2%. Importantly, growth in hospital lives of 0.9% was 20 basis points above policyholder growth and [ skewed ] to customers under 30 years of age. The acquisition rate of 11% was 50 basis points higher with improvement across both brands and Medibank back in line with [ pre-cyber ] levels. However, the cost of acquisition was higher with an increased use of offers and the percentage of ahm sales through aggregators increasing from 45% to 53%. Whilst lapse was 40 basis points higher at 10.3%, pleasingly, this increase was below the industry average, with the impact greater in ahm where customers are more price sensitive, particularly if acquired through aggregators. And we aim to grow in line with market during FY '24 with growth in the Medibank brand by further capitalizing on our dual brand strategy, increasing focus on our priority segments, including the growing corporate market, and adding additional product benefits and further customer give backs to support retention. Turning to Slide 19. Resident claims expense increased 2.8% and risk equalization provided a 10 basis point benefit to net claims growth this period. Resident claims growth per policy unit of 2.2% was 20 basis points lower with a 100 basis point decrease in extras, partially offset by a 10 basis point increase in hospital. The decrease in extras reflects the impact economic conditions had on the utilization of all services other than dental and investment in additional product benefits in the prior period. In hospital, higher private indexation was largely offset by lower utilization growth, particularly in nonsurgical claims, and the improved risk equalization outcome. Looking to FY '25, we expect claims growth per policy unit of around 2.7%, with economic conditions impacting extras claims growth, further pressure on hospital indexation being partially offset by a higher proportion of admissions happening on the same day or short stay basis and continued softness in nonsurgical claims growth. Slide 20 details health insurance performance, which shows continued growth in both the resident and non-resident businesses. In resident, gross margin was up 30 basis points to 15.9%, with revenue and claims growth per policy unit of 2.6% and 2.2%, respectively. The growth in revenue per policy unit was in line with last year and downgrading remained at 50 basis points. And whilst the economic environment is likely to [ impact ] downgrading next year, we expect this will be largely offset by ongoing portfolio management and sales mix activities. Pleasingly, the momentum in non-resident has continued with policy units and revenue increasing 25.1% and 34.9%, respectively, with strong growth in both the student and worker segments. Gross profit increased 37.3% to $91.2 million and with stable tenure and mix, gross margin was up 60 basis points to 34.2%. Notwithstanding the potential for lower visa numbers in FY '25, we've continued to see growth since 30 June and with potential market share gains in both the student and worker segments, we expect solid policy unit growth to continue in FY '25. Non-resident is an attractive market. And we will continue to invest in differentiation through product value and expanding our health offering and increase our focus in the [ worker ] and [ visitor ] segments to support medium-term growth. Moving to Slide 21. Management expenses were up 8.1% to $614.9 million. And the management expense ratio was 30 basis points higher at 7.8%. The major driver of the expense growth was higher sales commissions, particularly in the first half, with continued strong non-resident customer growth and a higher percentage of ahm sales coming through aggregators. Operating expenses were up 6.7%, with cost inflation of approximately 5%, volume impacts particularly in non-resident and $8 million uplift in IT, security and statutory costs, with these partially offset by $10 million of productivity savings. The major drivers of expense growth in FY '25 will be inflation, albeit we expect this peaked in FY '24, a further $10 million of productivity savings, and a modest increase in sales commissions. And whilst the management expense ratio increased this period, we will continue to leverage our productivity program and benefits of scale to target a stable to modestly improving ratio, noting that achieving this will be more challenging whilst inflation remains elevated. Turning to Slide 22 and Medibank Health. Medibank Health segment profit increased 36.7% to $60.4 million, with strong organic growth and a significant uplift in the contribution from Myhealth. The Myhealth business continues to track well with [ increase in ] consult numbers, improved billing mix and better operating efficiency. In the remainder of Medibank Health, revenue of $290.4 million was 4.8% higher with strong growth in health and wellbeing and diversified insurances and home care revenue improving in line with hospital industry activity. Gross profit was up 18.9% to $156.7 million, with a 630 basis point improvement in gross margin, the result of strong growth in higher margin businesses, improved efficiency in home care and a higher telehealth margin. This was partially offset by a $16.5 million increase in management expenses, reflecting business mix, inflation and investment in future growth. And whilst the management expense ratio increased, operating margin was up 210 basis points to 18.1%. Our growing portfolio of strategically important JV short stay hospitals contributed a $4.8 million loss this period, including expected initial losses from 2 hospitals opened in the second half. However, we expect financial performance to improve as the portfolio matures. 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, performance uplift in health services, meeting the needs of more of our health insurance customers and offering existing services to a broader set of payers. We aim to augment this organic growth by investing between $150 million and $250 million over the same period in health care M&A that adds scale, capability or expands geographic coverage, including in Myhealth's [ clinic ] footprint and virtual health capabilities. Moving to Slide 23. Investment income of $182.2 million was $43.6 million higher with a $43.5 million increase in the defensive portfolio, partially offset by a $6.3 million decrease in the growth portfolio. The decrease in the growth portfolio reflects a lower return in all asset classes other than property. And the increase in the defensive portfolio includes $27.4 million from the higher RBA cash rate and an improved but still below expected return on international fixed interest holdings. The $60.5 million increase in underlying net investment income resulted in a 188 basis point increase in underlying investment return to 5.77%. This is a 150 basis point spread to the average RBA cash rate, which is at the bottom of our target range of 150 to 200 basis points. And whilst cuts to the RBA cash rate are possible in FY '25, we expect any impact will be largely offset by improved returns on international fixed interest holdings. Now Slide 24 covers capital. The business continues to be well capitalized with health insurance capital at 1.8x to PCA and unallocated capital of $186.2 million. The Health Insurance capital ratio of 14.1% is also strong and above the target range of 10% to 12% of premium revenue with additional capital held to offset the $250 million APRA supervisory adjustment. The increase in other capital employed includes the further investment in Myhealth and fit-out costs for our new Melbourne head office, and despite this, unallocated capital increased in line with the business's strong capital generation. Consistent with the strong capital position, the Board has declared a final dividend of $0.094 per share, which brings dividends for the full year to $0.166 per share, which is a 13.7% increase and an 80.1% payout of underlying net profit after tax. And with the level of unallocated capital, we are well placed to fund our M&A aspirations and raise Tier 2 debt if further attractive investment opportunities become available. And to finish, a few comments on our financial priorities for FY '25. In the resident health insurance business, our immediate imperative is to improve revenue momentum by increasing policyholder growth in a disciplined way, continuing to leverage our portfolio management capabilities to manage downgrading and increasing our focus on customer life cycle management. Balancing the need to manage margins in our business with our desire to keep premium increases as long as we can for customers remains top of mind. Our partnership approach to hospital contracting, investing in prevention and chronic condition management programs and the shift to more contemporary models of care at scale will help offset inflationary pressures. And our approach to managing claims during COVID provides capacity to invest in additional product benefits and to further support hospitals that are [ better ] embracing care models for the future. We must also maintain our disciplined approach to cost management, leverage our scale, investment in digitization and next horizon of productivity initiatives to improve efficiency and use our direct distribution strength to manage the cost of acquisition. Maintaining strong growth in non-resident customer numbers remains important to overall health and growth. And we must deliver on Medibank Health's strong organic growth potential and look to augment this with further M&A, particularly where this accelerates Australia's self-transition. I'll now pass back to David to make some closing remarks.

Thanks, Mark. Turning to our outlook. Just to reiterate, any permanent net claims savings due to COVID will be returned to customers. And we expect the finalization of our customer give back program to be announced in FY '25. In resident private health insurance, we anticipate moderating industry growth in FY '25 relative to FY '24. And we will remain disciplined as we aim to grow in line with the market during FY '25, which includes volume growth in the Medibank brand and aim to grow market share in FY '26. We expect claims per policy unit growth of 2.7% in FY '25. In the resident business, we are targeting $10 million of productivity savings in FY '25. In our non-resident business, we expect solid policy unit growth to continue in FY '25. In Medibank Health, we are targeting average organic profit growth of 15% or more per annum between FY '24 and FY '26, plus a 12-month contribution from Myhealth in FY '25. And we aim to invest between $150 million and $250 million through further M&A between FY '24 and FY '26. So finally, turning to Slide 28. So, in summary, we remain a resilient and strong company with a track record of navigating competitive and economic challenges. Our unique combination of 2 brands, our products and services and our network of partners and the service provided by our amazing team is what differentiates us and positions us to deliver on our growth strategy in health insurance. We are at the forefront of the health transition in Australia. We have meaningful foundations in markets that are transforming and growing. And we'll continue to invest with our clinician and provider partners to grow our Medibank Health business to both expand in health and to support the needs of our Medibank and ahm customers. We will also continue to strengthen our foundations to build further resilience and customer trust and we will remain disciplined about the best way to grow for the long-term. And lastly, I'd just like to recognize the wonderful team of people who are the driving force behind the results we've shared today. They're inspired by our vision and they continue to work together to create the best health and wellbeing for Australia. So, thanks for listening. Now we got time for some of your questions. Over to you.

[Operator Instructions] Your first question comes from Andrew Buncombe with Macquarie.

The first one is in relation to the 2.7% claims growth target. Can you just give us some context around whether that includes any additional charges from the proposed New South Wales private and public change?

Yes, Andrew, thanks for your question. Yes, when we struck the 2.7%, that's one of the factors that's been considered, noting that at this point in time, that's a risk rather than a certainty.

And then the other question that I had was, you've obviously changed the way that you're providing policyholder growth guidance for FY '25. What do you think FY '24 industry growth was, to give us some context around where that moderated number could get to?

Look, I think I said in the presentation, we expect growth to be broadly in line with the 1.9% we saw in the previous 12 months, Andrew.

And then the final one, if you're expecting to go to that sort of level from the 70 basis points that you did this year, how should we be thinking about the management expense ratio in residents in FY '25?

Yes. So the biggest opportunity, I think, for us as a company is growth in the Medibank brand and that largely comes through direct channels, so off a fixed cost base. And then there's also opportunity for ahm. But we'd like to see a skew in the sales back to direct channels at the expense of that rate. So I don't expect that increase in growth, Andrew, will have any material bearing on the [ ME ] expense for '25.

Your next question comes from Vanessa Thomson with Jefferies.

I just wanted to ask about hospital claims. I think in the first half, you mentioned that some 72% of admissions were same day and that was up 2% to 3%. I just wondered how that was for the full year? I'm not sure -- sorry, if you disclosed that?

Yes. Thanks, Vanessa. So that trend of shift from the acute overnight procedure to same day continues, hasn't been material in 6 months, but that trend is definitely continuing.

And so then, when you think about hospital claims, which surgical claims are now back to expectations, however, there's the lower overnight and you mentioned that the hospital indexation was part of the offset. I just wondered, given all those kind of drivers, how that informs your hospital negotiations, especially in light of the government review of private hospitals?

Well, I think, firstly, it's -- we've approached hospital discussions as we always have, which is to think about what our customers need, to preserving access to quality care, but also thinking about short-term and long-term affordability. So there's no doubt that the trends continued, as I said before, this 5% less overnight procedures done this year than 5 years ago. So that trend has continued. And look, there's no doubt, [ been ] a challenging environment coming out of COVID with inflation, but now [ as ] [ been ] immune to those pressures we've, as you've heard, delivered -- continue to deliver on our productivity program. So really, the conversations are around, well, how do we address and [ help ] support unknown and material cost increases, but also how do we help invest in the health transition. And we've outlined some -- both on one-off support, $63 million that we provided over the last 2 years, but also working with hospital partners to help them maintain access particularly where our customers need access. So the hospital [ review ] -- that's going on as a walk of review. It's good to get the facts on the table, the facts around cost effects, around capacity, the facts around locations and services. And I think all of those things factor into our hospital negotiations and what we said today is that now 75% of all of the hospital episodes that our customers experienced are now covered by these partnership agreements, which have those elements of indexation, but also invested in the future.

Your next question comes from Andrew Goodsall with MST Markey.

First one, just on the non-resident health insurance growth outlook, solid policy unit growth. I was just wondering if you could unpack that target a little bit just because -- I'm just sort of thinking through with the cap that's been put on the international students and so on?

Yes, Andrew. So I think I mentioned earlier that we're very strong in the overseas student part of the market and particularly more through first year universities and less reliant on vocational visas, so vocational courses. So we suspect that being in that particular part of the segment, obviously, student segment will be [ hopeful ], because I think the visa restrictions are [ more ] likely to be in [ that ] [ vocational ] part of the student market. And bear in mind, it's going to be a political issue and suspect us more to play out here going into the election. It's a very important -- The student market is very important. Student education is a very important part of GDP. So I think it could be problematic if that was disrupted significantly.

One thing to add to Mark, on that is that we are -- we called out we are still slightly under share in the worker segment. And there are a lot of students that become workers. So our life cycle management approach here will also help us grow in this worker market and potentially visitor market, that are new avenues for growth within that non-resident that we haven't really tapped into before. So I think, as Mark said, [ lot more ] to play out, but we have multiple avenues even in the non-resident business.

That makes sense. And then, secondly, just the private health check, the Federal review is getting a bit of [ profile ]. Just interested in any commentary you might have on that or any sort of potential outcomes you think might come from that?

As I said before, I mean, the review is good to get the facts on the table. We know the private hospitals are critical to private health. We want them to be strong and resilient. We want the sector to be strong and resilient. But we also want to maintain affordability, because if we don't, then we will put even further pressure on an already stretched public system. So we're actively involved in the review, participating, getting the facts on the table. I think it's about cost growth, but it's also about capacity growth, where locations of services need to be and how we transition from a high percentage of care delivered in acute hospitals to embracing care models for the future. I think it's hard to speculate what's going to come from it, but it's good that we can get the facts on the table.

[Operator Instructions] Your next question comes from Nigel Pittaway with Citi.

I wanted, first of all, if I could, to explore the extent to which you think your customer give backs are actually aiding your policyholder retention? Is it the sole reason why your increase in lapses is less than market? Or what dynamics do you think are at play there?

[ I ] [ might ] start and then maybe hand over to Mark. I think we've shown today that our overall fund lapse growth has been lower than the industry. And for the Medibank brand, where a significant amount of the give back was a portion and announced, is even growing by less. In fact, the Medibank brand lapse rate within the year is now significantly lower than the rest of the industry lapse rate. There are multiple drivers there, I'd say, Nigel, giving more value back as we've outlined, a broader relationship. Now almost 50% of our Medibank customers have a relationship [ in ] [ health ]. Each time we have that broader relationship, that improves retention and loyalty. But there's no doubt that give back has been one of the drivers.

Yes. And a good point, David, and I think the most important part for us is the most recently announced, give back hasn't yet [ returned ] [ $219 million ], hasn't landed in our customers' bank accounts. So I think that there is a lag between the announcement and the benefit. It's when the cash is actually received in the customers' bank account. So that will be around the September-October time frame. What I think is important to call out, though, is you can't separate the premium increases that funds are getting with the way in which they've treated their customers during COVID. So you can see a big stratification between the larger health funds and what premium increases they've got through and will probably get through in the future. The fact that we continue to meet our customer promise and return of claim savings to customers is an important contemplation as part of the premium [ round ] conversation.

Okay. Sorry, I just could add there. But yes -- I think [ I ] finished that. Next question is just on the structural savings, taking into account in the 2025 growth of 2.7%. So I guess I'm interested in particular what structural savings you still think you're seeing that you've been cautious on and not looked in your 2.7% growth?

Yes, Nigel. I might start with what's the biggest driver in the claims guidance. I'd call out extras as being the most significant driver of FY '25. We have already reduced the utilization expectation during FY '24 but we still came in significantly below that expectation. So extras is going to be one of the major drivers of claims trajectory into FY '25. But we are still seeing -- notwithstanding the fact we've dropped our expectation for mental health, respiratory and rehab claims, we're still seeing in the last 6 months claims being about 8% below that expectation. We're taking a cautious approach to how we monetize those. That's probably more a contemplation for FY '25 in the second half and more likely FY '26.

Okay. And then just a couple of quickies. Just firstly, on policyholder growth and the system slowing, I mean do you expect that to be a slight slowing or a material slowing? And then just secondly, obviously, you are flagging the cyber costs to go on next year. So how long do you think they'll go on for?

Yes. Thanks, Nigel. Look, I'll borrow your crystal ball when I see you next time. But look, I think if you look at the fundamentals of what's going on in the market, the number of -- I mean although the consumers are under pressure with cost of living and we're doing a lot to provide more value, the number of people who see PHI was [ essentially ] the highest it's been in 7 years. And there's an increasing awareness and reducing confidence of the challenges of the public system. So that's making our PHI appeal remains very strong. The most recent premium [ round ], as you know, was below inflation and we've still got relatively low unemployment and population growth. So I think the fundamentals are still very strong, notwithstanding some of the pressures on the consumer. So whilst -- we do think it will moderate slightly. I don't think we see right now any conditions that would talk about a significant moderation. But as we move through the year, your guess is as good as mine on how the economic environment unfolds. But at this stage, we'll be saying it's a slight moderation.

And on the cyber costs, Nigel, we're expecting a similar amount in FY '25 to around $40 million as we saw in FY '24. Around 60% to 65% of that spend in FY '25 will be in the actual IT security uplift component of the program. We expect by the end of '25 the vast majority of the work we need to do in that program will have been complete. So then looking into FY '26, the cost will continue. But the majority of those costs then will be associated with the litigations. So '25 is about completing the technology uplift. There still will be some uplift costs in '26, but largely, the '26 costs will reflect the cost of defending the litigations that we've got [indiscernible].

Your next question comes from Julian Braganza with Goldman Sachs.

Just following up on the claims inflation guidance of 2.7%. Can I just clarify just what you're assuming there in terms of one-off hospital benefits? Are you expecting that to continue, just given what you've seen over the last 2 years?

Julian, yes, we have made some assumption on further benefits paid, but that's not a material contemplation in that guidance.

Okay. So it's a bit -- what you're saying that the costs are probably stable in terms of what we've seen in prior periods, not increasing?

No. No material increase.

Okay. And then, maybe just a question on your margin trajectory. Based on, I guess, your claims inflation of 2.7% and downgrading for about 50 basis points and also just the rate increases you have approved, sort of calculating margin expansion and the synergies of around 10 to 20 basis points. Just want to understand, is that the sort of margin we should be expecting to come through? Or will that be used to sort of fund elevated expenditure over FY '25?

[ The ] [ math ] is pretty good. So we've got 3.31% premium increase for the 9 months that end 1 April, we obviously don't have our FY '25 premium increase yet approved. We signaled around 2.7% of underlying construct. So providing the downgrading position doesn't deteriorate significantly, you'd expect a flat to flattish [ jaws ] outcome in the resident business. And I'd probably direct you to think about the trajectory in the non-resident business is the major driver of margin trajectory across the whole health fund next year.

And then just in terms of the growth that you're pitching into FY '25 back towards market share, I'd just be interested in how you're thinking about the competitive intensity, because you made it clear your focus is around disciplined growth and not [ over paving ] for growth? So I just wanted to understand, are you therefore anticipating a reduction in the competitive intensity into next year? Any color on that?

Yes, thanks, Julian. I think I might tend to answer that one. Look, I think what we see in these cycles is normally a sort of 2 to 3-year cycle, where given different settings in markets, some competitors can chase short-term growth. And then, the reality starts to play out with more competitive long-term fundamentals return. I think we're already seeing signs of increasing lapse in the rest of the industry compared to [ last ] -- we're [ seeing ] cost to acquire new customers is significantly higher than it was. And as the impacts of COVID sort of unwind, I think that then starts to sort of unwind over the medium term. So we expect to see that some of that will start to normalize during FY '25. But really, we're saying it might be another 1 to 2 years to we -- sort of see that fully play out. So whilst we don't really know what that will look like, what -- we are very focused and when you see these sort of markets, really important to focus on what works for the long-term. So it's really about, for us, growing particularly for Medibank in our target markets, which are generally lower lapse -- lower cost to acquire and have better retention rates and further strengthening our distribution strength for direct channels in both ahm and Medibank, as Mark had said before.

And Julian, one final point. I guess the approach we've taken to managing claims during COVID means we've got capacity to invest in additional product benefits. And that's not a capacity, I think, is available to most of the other players in the industry, given a lot of other players have actually just banked any permanent claim savings in existing gross margin. So I think that's going to be an important factor for us as we think about retention during FY '25.

Okay. But just to be clear, so your guidance to the policyholder growth, that's premised on a continuation of the current competitive intensity that you're seeing in the market?

It doesn't rely on any significant reduction in the competitive environment, that would be upside.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Firstly, Mark, I was wondering if I could just ask a question on Slide 16. You showed there that the cash claims on the hospital are coming back to -- basically having no difference to your assumptions. I was hoping you could just help us understand if there's any impact from those one-off payments? I think you flagged the $63 million to hospitals in any of these numbers. Where does that actually come in? And also, if there's any impact from the big changes you've flagged around contracting? So I think you said you've changed a lot of the contracting to partnership approaches. What has been the impact of that in these numbers, where the cash claims have really just tracked back to your assumptions?

Yes. Thanks, Sid. So any hospital half year payments are excluded from this, that this comes off and reduces the dollar value of the give back to customers. When I look at the chart on the top right hand of Slide 16, Sid, this is an important time [indiscernible] [ part ] playing out here. We had -- the COVID waves started in November and went through to January. There was a very soft environment for surgical claims. But whilst we're back since January to being in line with expectation, we believe some of that reflects recovery of surgeries that didn't occur November through January. And then in terms of how hospital contracting outcomes are being reflected, you'll note that our second half underlying claims is higher than the first half. That, in part, reflected the unwinding of some of the risk utilization benefit we had in the first half, but also the progressive higher indexation we're paying to hospitals as part of contract renegotiations.

Okay. I'll think through that what [ color ] it means. Can I just ask about the corporate market as well, just in terms of the growth that you're targeting there? Could you just comment on a couple of things? Firstly, what percentage of the market are you -- I think you flagged [ it's ] a $1 billion market, just what percentage of the market are you today? And I think you flagged some legislation changes which are potentially driving rapid growth. I was hoping you could just flesh that out as well?

Yes, sure. Thanks, Sid. I might start. So this is the corporate health and wellbeing market, so for us, where -- we've got about 2,500 corporate insurance accounts. So we're probably in the corporate space -- have a higher share in that space than our average resident share. In the corporate health and wellbeing market, it's quite [ desegregated ] at the moment and we've got a reasonable share of that not material. So what we're looking to do is to disrupt that market from what is a traditional sort of poorly serviced market by some traditional players into a much more proactive [ solely ] health and wellbeing platform that focuses both on mental and physical health solutions. And the second part of your question, sorry? [ Can ] You say it again?

I think it was just what share of the market you were, I think, in what -- sorry, the legislation that...?

Yes, legislation, that's right. So I think if you look at the increasing requirements of boards in corporate Australia to provide not just physical safe environments, but psychologically safe environments and some of that regulation is progressing, it's putting more and more [ onus ] on employers to create safe, both physical and mental environment for their employees. So that's one driver that's increasing in terms of regulation. I think the other is employees wanting greater support from their employers. But they want to have a workplace that their employers are providing, that's making them feel energized and balance their work and life a lot more differently and actually is part of the [ EVP ] for employers now. If you don't have a corporate health and wellbeing program, it's very hard to retain good people. So there's multiple drivers in this market in addition to the services [ that are ] already there, that are really not performing.

And just one final question. Just the outlook on pricing from here in the industry? We've heard some -- varying comments on what's happening with inflation in claims. I was wondering if you could just flag how you're seeing things now? There's quite a difference between yourself and your other listed peer in terms of calling out underlying inflation before. You've given us an outlook for this year. But as we look from here, are we likely to return to that 4% to 6% level, which has been the normal level of inflation over an extended period of time? Or are there any features of your contracting, et cetera, which you think might keep that number lower?

So let me touch on the 4% to 6%. I'm not sure that's a number we recognize. I think over time, claims inflation has been variable, but particularly driven by particular events, such as [ prostheses ] reform not working or low-value orthopaedics or the advent of a higher use of rehab referrals. So the 4% to 6% really is in the long-term average. So just be really, really clear on that. Where we go from here is going to depend on a whole series of factors, both short-term, whether it be hospital after indexation based on their inflation, but probably more importantly, the shift in new care and contemporary care models. So I think the biggest driver we saw in FY '24 in our claims line was softer utilization growth in nonsurgical claims offsetting inflation in -- the cost of inflation in surgical claims and then the more prevalent use of value versus overnight. So I don't think -- you could just look at the headline rate we're paying the private hospitals. They're only 48% of our claims. You need to look at the utilization and where that care is being delivered is really good deflationary impacts on our claims line. David, what [ did ] I [ miss ]?

Mark, I wouldn't [indiscernible] guess you've -- But I think the only other thing that may be worth contemplating is that may be different insurers approach this differently. Certainly, for example, our hospital contracting approach, we've been quite transparent here about the multiple [ limbs ] of that approach. The size of our book and the way we attract younger customers and growing in new to industry above share. All these factors actually also help different insurers have different results. So whilst we don't work for other companies, I think there may be some points of difference there.

Yes. And just to finalize the comment, Sid, so when I think across the industry, there are a number of players that actually have banked their COVID savings, not returning [ them ] to customers and elevated their gross margin. If you think about those COVID impacts starting to unwind, [ well ], those companies are actually having to grow their claims expense offer, artificially deflated expense line, claims line. So we had $219 million of permanent claim savings during the period. We didn't take that to gross margin or to profit. So we're growing off our expected claims, not our [ artificially ] deflated claims line. And I think that's really important when you think about an apples for apples comparison.

There are no further questions at this time. That does conclude today's conference. Thank you for participating. You may now disconnect.