Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank Full Year Results 2026. [Operator Instructions] I would now like to hand the conference over to Mr. David Koczkar, Chief Executive Officer. Please go ahead.

Thanks, and good morning, everyone. It's great to be here with you today. I'm coming to you from Nam, the home of the Wurundjeri Wurrung peoples, and I pay my respects to their elders, past and present. I'm joined today by our executive leadership team, including our CFO, Mark Rogers. This morning, we'll talk to Medibank's results for FY '26. The first opening thoughts from me. We continue to deliver value to the 6 million people who trust us with their health and well-being. Despite cost of living pressures, people continue to prioritize their health and private health cover has remained nondiscretionary. People are looking for greater value and better access to care. And the health system is increasingly struggling to meet those expectations. 1 in 4 people in Australia say they have delayed or avoided seeing a GP because of costs. while at the same time, public hospitals are dealing with growing elective surgery waiting list. So that's why accelerating the health transition has never been more important. Now turning to our results. What stands out to me is the strong growth across the business with improved momentum in the Medibank brand, AHM continuing to grow above the market and Medibank Health delivering another record result. This combination sets us apart, helping us build a more resilient and growing health company. As you'd expect, given our strategy and the external environment, we're controlling the controllables and managing for the long term, balancing customer growth and profitability while investing for the future. Now let's turn to Slide 6. Aside from our financial outcomes, we think about our impact in 3 areas: First, customer value. Customers saved around $250 million through our Members' Choice and NGA networks and claimed nearly $49 million in Live Better rewards. Second, customer health. More customers are using our health services. Amplar Health alone supported more than 5.3 million patient interactions. We also know that engaged Live Better members are more active and report healthier behaviors. It's also a reason 1 in 3 people choose Medibank. And third, system innovation. We expanded care in the home and provided private hospitals with a further $40 million to help accelerate the health transition. So these are practical examples of how we're creating value for customers and patients, supporting their health outcomes and helping improve the sustainability of the health system. Now to Slide 7. I won't go through all of these areas of results, but for me, the highlights are resident policyholder growth of 1.1%, with Medibank growth doubling to 0.6% and AHM growing 2.4%, including strong growth in our priority segments. This is a pleasing outcome given an increasingly competitive environment and reflects our disciplined approach to growth. In PHI, we continue to balance margin and costs as we grew and importantly, achieved a stable PHI gross margin and expense ratio. Medibank Health had another record result, up 31.3%. And in line with our healthy capital position, we are delivering shareholders a fully franked final ordinary dividend of $0.109 per share. To Slide 8 now. Our strategy is driven by the needs of our customers and patients and the greater role Medibank is playing in supporting their health and well-being. As you know, our growth focus remains across 5 segments in health from insurance to care delivery. In each segment, we have built strong foundations, and they all provide attractive growth opportunities. And together, importantly, they are driving our growth and diversification, creating long-term value and allowing us to make a positive impact to the health system. Now turn to Slide 9. This year, we made some important steps in building a stronger, more diversified health company. And again, some highlights for me were customer advocacy remains strong, health engagement improved and our teams remained highly engaged, supported by investment in technology and AI. Across Medibank and AM, we broadened our product offering, we strengthened our primary care footprint and achieved strong growth in our community and acute business. And we also further strengthened our foundation through risk fit and technology modernization while delivering another year of productivity improvements. Now to Slide 10. Growth in the resident health insurance market continues at healthy levels, including strong growth in customers under 30. We did see an increasingly competitive environment, especially in Q4 with some competitors using aggressive growth tactics alongside increased aggregator marketing. These tactics are not in line with our strategy. And across both brands, we remain disciplined in our approach with a focus on our target segments and deepening customer engagement. Pleasingly, 57% of Medibank policyholders are now engaging with our health and well-being offerings, up on last year. But with consumers looking to us for more value and for the rest of the industry, we will continue to tackle unnecessary costs across the health system, including the growing cost of aggregators. Upfront commissions paid to aggregators by insurers are opaque to the consumer. In just 2 years, aggregator sales have grown by 44% and industry commissions have almost doubled, reaching about $200 million. So the numbers for the industry are significant. In FY '25, about 3/4 of aggregator sales involved switching from one fund to the other and only 1/4 of these sales were new entrants to the private health system. Aggregators do play a role, especially when consumers are looking for a good deal, but they don't represent every fund or every product. The only generally comprehensive comparison is available through the government's website, and there is a risk of commission-driven churn. In December, we removed AHM from one of the aggregator panels rather than signing up to terms that were unacceptable. While we expect this decision to have some volume impact in the short term, we cannot support channels that add cost without a corresponding uplift in customer value and industry participation. Escalating commissions and lack of transparency are not in the long-term interest of consumers or the industry. And that's why we've also championed reform on this issue through the CEO forum. In nonresident PHI, the market growth remains strong with growth in workers accelerating and student numbers normalizing with lower visa approvals than expected in the last quarter. But pleasingly, we saw a strong improvement in our life cycle approach with students, workers and visitors contributing meaningfully to our resident policyholder growth. To support our nonresident growth into next year, we launched 3 new visitor health covers with average daily joins doubling since launch. And in the workers sector, we were appointed as 1 of 2 preferred health insurance providers for the Pacific Australia Labor Mobility scheme, creating a new growth pathway. In FY '27, we expect the student portfolio to stabilize and the nonresident business to deliver solid gross profit growth. Now to Slide 11. In the resident business, our disciplined approach to growth has seen us prioritize quality over quantity, focusing acquisition in our target segments, strengthening direct relationships and building customer loyalty. This has seen our retention outperform the industry. Our join mix continue to skew towards customers new to the industry rather than switches and growth in our direct channels. We've also continued to deliver productivity savings with around $130 million delivered in under a decade. The results of these actions are clear with our cost per policy remaining materially lower than the industry average and our stable margins supporting a claims payout ratio above the industry average. These outcomes are increasingly important as insurers are asked each year during the premium review process to meet the minister's statement of expectations. Now on to Slide 12. The health transition remains central to both our growth strategy and system sustainability. Having invested more than $500 million over the past decade, we are seeing increased momentum across prevention, primary care and care in the home. We're seeing a significant shift towards preventative health with individuals and employers increasingly investing in physical, mental and financial well-being. We remain very well positioned to grow in this sector through our leading Live Better program, our breadth of financial well-being products and our corporate health and well-being programs. Primary care reform remains critical to a sustainable health system. And that's why with our acquisition of Better Medical, we have now created one of Australia's largest multidisciplinary primary care networks. We delivered more than 4 million GP consults through 169 GP and medical clinics and have ambitious plans to bring more care to more people. And the number of these clinics charging no out-of-pockets jumped 56% following the government's bulk billing reforms, a win for patients access and affordability. With growth in virtual GP consults outpacing face-to-face consults in the market and in support of our multichannel differentiation, we recently launched the My Amplar Health app, giving patients one place to book and manage appointments. And as health and aging needs increase, more care will shift into home and communities. In FY '26, our community-based services supported more than 27,000 acute home health visits and saved 194,000 hospital bed days. And our virtual nursing pilot is now operating in 25 aged care homes. Our contract to run My Home Hospital in South Australia was also extended for a further 3 years, and our transition care services has just recently doubled in capacity to around 100 beds. Together, these initiatives demonstrate our role across the care continuum whilst advancing the health transition. I'll now hand over to Mark to take you through the financials and outlook.

Well, good morning, everyone. This result demonstrates our ability to manage through the cycle, balance growth and profitability and invest to build a more sustainable and diverse business. Key financial highlights include group operating profit up 6.7% to $813.5 million with solid growth in resident health insurance, continued strong momentum in Medibank Health and well-controlled corporate costs. Investment income was impacted by the lower RBA cash rate and the increase in other income and expenses includes costs associated with acquiring Better Medical. Nonrecurring cyber costs were lower and with the IT security uplift program now largely embedded, we expect FY '27 costs to be less than $20 million and primarily related to ongoing litigation. And underlying EPS, which normalizes investment returns, was $0.231 per share, which is up 2.9% on last year. Now moving to Slide 15. Despite the challenging economic environment, the business remained resilient, reflecting our disciplined approach to managing growth, margins and expenses. Revenue grew 4.6% and gross profit increased to $1.46 billion. Gross margin was stable at 17% with a 10 basis point increase in resident gross margin and 210 basis point decrease in nonresident. Operating profit increased 3.8% to $769.8 million and the operating margin remains at 9%. Expenses were up 5.4% to $690.2 million, and the expense ratio was stable at 8%. D&A increased in line with higher investment in digital assets. Resident commissions reduced due to lower AM aggregator joins. The increase in operating expenses includes inflation of approximately 4%, volume-related increases and investment in our foundations. There was also additional marketing investment, including reinvesting $5 million of the lower spend on resident commissions. And these were partially offset by $10 million of productivity savings. The major drivers of expense growth in FY '27 will be inflation and volume-related increases, additional investment to support resident policyholder growth, including AI uplift, and we are targeting a further $10 million of productivity savings. We continue to target a stable to modestly improving expense ratio over time through disciplined cost management and productivity initiatives, but balance this with investing in growth where this makes commercial sense. Now moving to Slide 16. The resident PHI industry continues to grow with the nondiscretionary nature of health care underpinning future demand. Cost of living pressures have impacted the industry with policyholder growth skewed to lower-tier products, higher switching and aggregators increasing their share of joins. As a result, the competitive environment intensified in the fourth quarter with some competitors pursuing aggressive growth tactics alongside increased aggregator marketing. We have chosen to prioritize the quality of growth over quantity. And pleasingly, we've grown in our priority segments, maintained the revenue mix impact at the 1H '26 level and increased the percentage of AHN joins through our direct channels. number of policyholders increased 1.1%, with Medibank growth doubling to 0.6% and AHM growing 2.4% despite lower aggregator joints. The acquisition rate was 10 basis points higher with the increase in Medibank reflecting continued investment in brand, customer value and differentiation and direct sales in AHM partially offsetting lower aggregator activity. Whilst LAPS increased 40 basis points, we expect that we performed better than the industry, reflecting the value customers place on our differentiated products and broader health proposition. In FY '27, we aim to increase growth in a disciplined way through continued brand and proposition differentiation, targeted investment in priority segments, and building stronger direct customer relationships that support retention. Now moving to Slide 17. Resident claims expense increased 4.6% and risk equalization provided a 20 basis point benefit to net claims growth with the timing benefit we saw in the first half unwinding as expected. Resident claims growth for poles unit increased 40 basis points to 2.6%. In hospital, the decrease in inflation reflects higher private hospital indexation, offset by reduced additional investment in product benefits and lower public and medical indexation. Hospital utilization growth remained negative, reflecting prior period COVID impacts and policyholder growth skewed to lower tier products and extras utilization increased as demand normalized following a period of subdued activity. In FY '27, we expect hospital claims growth per policy unit to increase, reflecting the $74.8 million COVID utilization benefit in FY '26 not recurring, continued negative utilization growth driven by mix impacts, broadly stable private hospital indexation and benefit from more procedures happening outside of traditional higher cost settings. We expect extras claims growth per policy unit to reduce, reflecting lower indexation and benefit investment. We are also monitoring utilization trends given historic customer behavior and current economic conditions. Slide 18 details health insurance performance, which shows continued solid gross profit growth of 4.6%. In resident, our disciplined approach to growth resulted in gross margin increasing 10 basis points to 16.3%, with revenue and claims growth per policy unit of 2.7% and 2.6%, respectively. Policyholder growth was skewed to lower tier products with largely offsetting impacts to review and claims. Growth in revenue per policy unit was up 10 basis points with the higher average premium increase, partially offset by a higher revenue mix impact. This higher revenue mix impact reflects customer growth skewed to lower tier products, an increase in office spend and investment in Live Better and we expect a similar impact in FY '27. In nonresident, policy units declined 2.3%, with student policy units declining due to tighter migration settings and natural runoff of large cohorts acquired following borders reopening. This was largely offset by continued strong growth in worker policies. Gross profit reduced 1.2% to $110.3 million, and gross margin was down 210 basis points to 34.8%, largely due to tenure and mix impacts in the student portfolio. However, we expect nonresident to deliver solid gross profit growth in FY '27, supported by a stabilizing student portfolio, continued momentum in workers and growth in visitors following the launch of new products. Moving to Slide 19, which covers Medibank Health. Medibank Health segment profit increased 31.3% to $100.7 million, with strong organic growth in all 3 segments and a $6.2 million contribution from Better Medical. Operating margin was down 50 basis points to 16.9%, with the 180 basis point reduction in gross margin, partially offset by an improving expense ratio. Revenue grew 30.8%, supported by strong customer and patient growth, higher consult fees in primary care and a full year contribution from 100% ownership of Amplar Health Home Hospital. Gross profit was up 26.5%, with the reduction in gross margin due to additional investment in Live Better and business mix impacts, partially offset by efficiency benefits in community and acute and primary care. And whilst expenses increased, including $10 million of additional investment to support future growth, with growing scale, the expense ratio was 140 basis points lower. We continue to see strong organic growth potential in the business with focus areas for FY '27, including meeting more health needs of more customers, scaling existing services with a broader set of payers, realizing synergy benefits across our primary care network and further performance uplift in the JV hospital portfolio. We aim to augment this organic growth with further M&A that scales and expands geographic coverage in primary care and adds capability in well-being and virtual care. On Slide 20, we show a more granular breakdown of the financial results for our 3 Medibank Health segments and the key customer metrics driving performance. In well-being, Live Better members increased 11.6% following investment in the proposition and rewards giveback offer last year and financial well-being policies increased despite subdued travel demand. In primary care, consultations increased 26.7%, reflecting a 6-month contribution from Better Medical. And pleasingly, Community and acute delivered a significant improvement in profitability, supported by ongoing growth in publicly funded programs and increased capacity within transition care services. Now moving to Slide 21. Investment income was down $28.9 million, including a $7 million reduction in both the growth and defensive portfolios. The decrease in the growth portfolio reflects lower income from equities, partially offset by improved returns in both property and infrastructure. Income in the defensive portfolio was impacted by the lower RBA cash rate and widening credit spreads with this partially offset by a higher asset balance. And other investment income was also impacted by the RBA cash rate and lower cash holdings. With the lower earnings on cash, underlying net investment income was down $17.2 million. The underlying net investment return reduced 24 basis points to 5.62% and the spread to the average RBA cash rate increased to 177 basis points. And in FY '27, we expect underlying net investment income to benefit from growth in asset balances, the higher RBA cash rate and opportunities to increase liquidity and credit margins. Moving to Slide 22 and capital. The business continues to be well capitalized with $182.9 million of unallocated capital. This has reduced by $69 million over the last 12 months due to funding the Better Medical acquisition, which is partially offset by strong capital generation. Health insurance capital was stable with reduced insurance and asset risk charges offset by additional capital to support growth. The PCA coverage ratio increased to 1.9x and the capital ratio is 13.3% of premium revenue. We continue to hold additional capital to offset the $260 million APRA supervisory adjustment, and this is why the capital ratio is above the target range of 10% to 12%. The $163.5 million cost of acquiring Better Medical drove the increase in Medibank Health capital with this partially offset by lower required capital. Our strong balance sheet supports our FY '30 Medibank Health earnings aspiration of at least $200 million, and we have capacity to raise Tier 2 debt to support growth beyond this if further attractive opportunities arise. And given the strong capital position, the Board has declared a final dividend of $0.109 per share, bringing FY '26 dividends to $0.192 per share. This is a 6.7% increase and 83% payout of underlying net profit after tax. And to finish, a few comments on our FY '27 outlook. In resident health insurance, we continue to aim to grow market share in a disciplined way, including improved volume momentum in the Medibank brand. We expect resident health insurance gross margin to be broadly consistent with FY '26 as we continue to manage revenue mix and claims growth in line with premium increases. In nonresident, we expect to deliver solid gross profit growth as the student portfolio stabilizes and growth in worker and visitor policy units continues. In Medibank Health, we expect segment profit growth of circa 25%, including a full year contribution from Better Medical. And our M&A pipeline remains strong, and we have both the appetite and financial capacity to pursue further strategic opportunities. I'll pass back to Dave to make some final comments.

Thanks, Mark. And just now moving to Slide 25. The opportunities ahead of us require us to stay focused on what matters most, building customer trust, supporting better health, growing our business sustainably and ensuring our organization is fit for the future. And these priorities guide us where we invest and how we measure success. AI is becoming an important part of how we strengthen decision-making, simplify work, enhance customer outcomes and unlock new growth opportunities. It's also becoming the front door to health. Increasingly, people are turning to AI first for answers about their health, their care and the cover that's right for them. Used well, AI could be one of the biggest advances in access to care we have seen. But we're very aware that the risks are real. In health, AI cannot just be fast and convenient. It has to be safe, accountable and designed around people. And being trusted by more than 6 million people with their health and well-being gives us a responsibility to shape this world. Now briefly to Slide 26. As we grow across our 5 segments, we're also focused on realizing value between our health and PHI businesses. As part of our 2030 vision, we have an ambition to deliver incremental value of around 5% to our PHI operating profit growth between FY '25 and FY '30 by increasing our role in customers' health. And for example, we're already seeing this value through Live Better, which supports PHI growth, home care by reducing hospital bed days and prevention programs, helping reduce the burden of chronic disease. So now Slide 27 to wrap up. FY '26 demonstrated the benefits of staying disciplined while continuing to invest for the future with strong customer advocacy, deeper health engagement and growth across insurance and health, strengthening the resilience of the business. With strong foundations in health, we are well positioned to continue to create long-term value for customers and shareholders. And on 1 October, Medibank marks 50 years of supporting the health and well-being of people in Australia. Few companies have the privilege of playing such an important role in people's lives. We are proud of the contribution we've made to the Australian health system. But most of all, we're proud of the trust generations of people have placed in us and the role we've played alongside our partners in helping people live healthier lives. And finally, to our people, thank you for the care, commitment and passion you brought to Medibank over the last 50 years. So now it's over to you for any questions you might have.

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

Two questions, if I can. The first on sort of policy growth and sort of the outlook into '27. Obviously, second half, you pulled back due to competition, very little resident growth. Just on your outlook statement, sort of the aim to grow market share in a disciplined way. I just want to confirm if that is in aggregate across sort of both brands and sort of in totality or if that is sort of more alluding to particular segments where you're happy to grow. But maybe still below system in an aggregate level? And sort of related to that, how are you thinking about the cost base expenses for next year, you've alluded to additional reinvestment to sort of help from a growth point of view. Can you just unpack what you're talking about in terms of quantum?

I'll start just with performance and then momentum and then maybe Mark, on that last part of the question. So if we look to the full year, we're very pleased with the doubling of growth for Medibank and 2.4% growth in AHM despite taking AHM off one of the aggregator panels in December and that what was quite a significant uptick in competitive environment in Q4. Pleasingly, acquisition was up year-on-year. We saw growth in key segments. I think the corporate growth has been very strong. Growth in families, you can see that in the presentation and also in our growth in lives. So I think where we've focused, we've done very well. And you can see the benefits through our margin and cost position of that disciplined approach which is particularly important as we look forward as all insurers are asked to meet the statement of expectations. So that's enabled us to keep our claims payout ratio higher than the industry average. I think what gives us confidence, particularly in the Medibank and HM brands, brand health is at very strong positions. And as you say, we are investing in growth in those markets and particularly AI, which is showing some very promising improvements in both retention and acquisition performance. I think something will play out, and we have to be mindful of what happens with competition. We have to -- it will depend on what we do with aggregators, but our aim is to continue to grow at a total level where it makes sense, but particularly calling out some strong confidence in Medibank momentum increasing.

And Kieren, at the expense line, we wouldn't expect expense growth to be too dissimilar to the 5.4% growth we had in FY '26. The buildup of that will be slightly different. I wouldn't expect the D&A to increase. We're expecting it to be broadly stable in '27 and wouldn't expect the same reduction in resident commissions. We invested in round numbers, about $10 million incremental in marketing during the course of the year, including redeploying $5 million of resident commission savings into the marketing line. I wouldn't expect the reinvestment next year to be too dissimilar to that $10 million number. And really from an expense ratio perspective, it's going to largely where we land will depend on the revenue growth equally.

Second question on claims inflation sort of second half and out, in my view, a little bit better than anticipated. The incurred inflation probably only 2.8% in second half. And I guess more interestingly, the cash payments up only 1% on PCP in the second half of the year. Mark, maybe you can just unpack why that was sort of a better result through the second half and how you're thinking -- I guess you've provided a bit of detail, but in aggregate for next year, are we talking sort of 3.6%, 3.7% type levels?

Thanks. Let me start with the first part of the question. So you need to go back to the first half of '26, where I think the industry saw quite a significant increase in processing speeds and payment speeds. And so cash claims paid were significantly higher across the industry than incurred claims. Whilst the payment patterns remain elevated, they weren't as fast as they were last half. So as a consequence, our actual cash claims paid in the second half were less than our incurred claims. I'd expect looking forward now through the COVID regime, subject to be no further change in payment patterns that incurred and cash are going to align much more closely going forward.

On inflation, which is the second part of your question, on hospital inflation, I think the most important thing to call out is we did have New South Wales private rate increase in the first half. And so that elevated the claims inflation in the first half, and we know that is now fully embedded in our claims line. As I think about FY '27 on the hospital product, by far, the most material impact is that $74.8 million COVID utilization benefit unwinding. So that's 150 basis points of utilization. So that would take the kind of underlying momentum in hospital claims inflation from 2.1% to 3.6%. And that by far is the most notable item looking into FY '27 for hospital claims. And then we've called out clearly in the presentation, we expect extra claims growth to be less than the 3.4% that we reported in '26. I think all other factors, which there will be a whole series of other factors, Kieren, all other factors in terms of FY '27 claims trajectory will be second or third order.

Your next question comes from Andrew Buncombe with Macquarie.

Just the first one, just interested whether you think you need to step up any of your CapEx to achieve your Medibank Health earnings targets over the medium term?

This year, we invested an incremental $10 million in the future growth prospects of that business. So I feel pretty comfortable that we've invested in the OpEx base, and I wouldn't expect there to be too significant increase in the CapEx line either, Andrew. So I think we're pretty well placed. FY '26 has been a big year of investment in the Medibank Health segment. And so I don't see that impacting the P&L going forward. Probably the area I'd get you to focus on would be the M&A investment. So our FY '30 earnings aspiration, $200 million, $700 million capital base. We've invested $560 million of capital employed now. So we've probably got another $140-odd million to invest in support of our FY '30 ambitions.

Great. And then the next one, how long -- or how much longer are you expecting to have to wait before APRA starts unwinding your additional capital charge related to the cyber incident?

Look, as we say every 6 months or so when we get asked, we remain in very close contact with APRA. We've made great progress on our with program. In fact, as Mark alluded to or mentioned, the costs for FY '27 now largely embedded. So we are entering into an embed phase of the program. I think we both recognize the momentum, the progress and the milestones achieving. So we're moving forward at great pace. And I think the -- but the final decision really is with APRA about that capital charge. I think there's instances where they have recognized a partial relief based on milestone achievements or instances where they have waited to the very end of the program, including embedment. So we'll keep in close contact as you would expect us to do, and that decision will remain with APRA.

Great. And then the final one from me, please. Just interested whether your gross margin targets for FY '27 actually assume any actuarial assumption changes or any changes to the behavior of risk equalization.

Andrew, thanks for your question. You asked that one it's the third year in a row. So first, the first part of your question, no change to actuarial assumptions. So we haven't assumed the probability of adequacy reduces on the current 9%. And sorry, what was the second part of your question?

It was whether you're assuming any change in the risk equalization scheme inside that margin guidance.

So looking -- no, if you look across the whole 12 months of FY '26, we were a modest beneficiary from the pool over the 12 months on average, and I expect the 12-month average to be a good indicator of what will happen in FY '27. That's obviously subject to competitor behavior and the like, Andrew. If a competitor has a commercial price on a product that has adverse selection that takes high claiming younger customers from us and our competitors that could support our reciliation position equally. We saw that in FY '25.

Your next question comes from Julian Braganza with Goldman Sachs.

Just a quick one. So you have a comment in there saying stable PHI indexation to FY '27. It sounds a bit contentious there, but how do you get comfortable with that sort of outlook?

So we've got a very good view of what the current contracted arrangements provide for going into next year, and we've had a large proportion of our hospital contracts that have been recontracted in the recent times. So we've got a very good view on that, Julian. Yes. Well, just to add to that, for us through this whole last cycle, whilst there have been some challenges, we have ongoing conversations with hospitals and contracting has been an ongoing sort of conversations about inflation indexation, but also partnership investment. I'd say very much back to BAU. And you can see through our partnership payments we are working very constructively with hospitals to not just support them to support our customers, but also to help them support the health transition. As Mark said, we've got a lot of certainty given the percentage of benefit outlays that are yet to be contracted. And for hospitals, there's less unknown unknowns. So we have a high degree of confidence that our partnership agreements will support our business going forward and support the health transition.

And Julian, where you are in the contracting cycles with the larger hospitals will change between different providers. You'll see in FY '26, we've called out that there was higher private hospital indexation. So maybe your assumption on what others will pay in FY '27 we've already bought forward and paid in.

Okay. Got it. No, that's clear. And then just on the Medibank Health business, I want to be very clear what sort of organic growth that you're seeing -- organic growth that you're seeing there in FY '26. And also just -- I mean, if I look at your accounts in terms of impairment testing for goodwill, you're kind of assuming about 2.5% growth there for Medibank Health across the divisions. I just want to get comfortable, one, what are you seeing in the numbers on an underlying basis ex the acquisitions? And then two, the reason for the difference there in terms of the accounts.

Okay. So let me start with the first, Julian. If you look at the 31.3% reported segment profit growth, I just subtract $6.2 million from that and you'll get organic growth. So you'll see that's still somewhere in the 20% to 25% range. And I think you're referring to the impairment testing table. I think it's pretty standard industry practice to use -- conservatively use an inflation-led capitalized -- inflation-led 2.5% or 3% number in your cap multiple. That doesn't indicate your earnings prospects over the next few years. That's more just applying a capitalization multiple for the terminal value calculation.

Okay. Got it. So that's clear. And then just a last question in terms of just the outlook for the nonresident business, just in terms of pricing and inflation and margins from here. I'm just wondering if you kind of unpack that framework into FY '27.

So firstly, on pricing, depend on which segment you're talking about, given there are different claims growth and competitive dynamics. But you should assume that the higher claims growth that we saw during the second half of FY '26 has been factored into our go-forward premium increases those went through in May. From a margin perspective, just the way we think about FY '26 is across the 2 halves of '26, we had broadly flat gross profit and gross margin. While we had profit decline and margin decline really relates back to the performance in the second half of '25. We had a really strong outcome in the second half of '25. We had a 39% gross margin. So the trajectory in '26 is more about what happened in the second half of '25 rather than what happened across the 2 halves of '26. And that's why we're comfortable the solid profit growth guidance that we've given you. And I'd hope that gross margin will be more stable in '26 compared to '25. I would just qualify all those states, Julian. We have 3 different segments in nonresident workers, students and business. They have different premium increase characteristics and different gross margins. So I'll qualify my statement I'm saying it will depend, however, on where we see growth across those 3 segments.

Your next question comes from Nigel with Citi.

Just first of all, on the resident claims inflation. I mean I appreciate you've given gross profit guidance, but it's the first time you sort of haven't given specific resident claims inflation guidance. And it doesn't sound from what you've said about the indexation that you have any less confidence in being able to predict it. So just first of all, wondering why that is. And secondly, given what you've said, obviously, and you said it before on COVID in New South Wales, it still sounds like you're sort of batting for that 350, 360 basis point range, so -- which I think was mentioned at the half year. So just checking that's still where you're expecting it to land.

Yes. So let me start with your second question. So consistent with the conversation at the half year, really the go-forward inflation, particularly for hospital is going to be impacted, as you say, by the utilization benefit unwind. And so the numbers -- the math you talked about, Nigel, We, I think they're pretty accurate in terms of how you've come up with those numbers. I think there are 2 factors I'd just call out that we're watching most quite closely. So in the hospital product, it's how acuity and the shift in the model of care impact inflation in the hospital product going forward. And then on extras, it's the economic -- potential economic impact on utilization of extras services and particularly more discretionary services. To your first question and why we've gone to gross margin outlook rather than claims. It's the way we're managing our business. So we look to generate a flat to flattish gross margin, and we manage our revenue mix impact and our claims inflation, including how much we reinvest in benefits to try and achieve that. we've tried to give you sufficient information to form a view on claims. And we indicated that we expect revenue mix impact for FY '27 to be similar to FY '26, 150 basis points.

Fair enough. And just on utilization, presumably that's pointing towards favorable. Is it with what you're saying on the economics. Is that what you're saying there?

Yes... Downside utilization rather than the upside in utilization.

Yes. Fair enough. And then just on -- back to sort of the revenue growth and more sort of a broad question, I guess, because I mean, you've talked about the competitive behavior in the market. You thought it was temporary a while back, and yet it seems to have gone on a lot longer than you anticipated. I mean are you still -- have you sort of got any sight now that you think that could actually alleviate at some point? Is there a trigger point? Or is this just a new normal where this kind of competitive activities are likely to persist for some time?