Annual Report 2017 CONTENTS About Medibank 1 Financial summary 2 Business snapshot 3 Chairman’s message 4 CEO’s message 5 Operating and financial review 6 Governance 12 Directors 13 Executive Leadership Team 16 Corporate governance statement 18 Directors’ report 28 Remuneration report 32 Financial report 57 Consolidated statement of comprehensive income 58 Consolidated statement of financial position 59 Consolidated statement of changes in equity 60 Consolidated statement of cash flows 61 Notes to the consolidated financial statements 62 Directors’ declaration 110 Auditor’s independence declaration 111 Independent auditor’s report 112 Shareholder information 118 Financial calendar 120 Corporate directory 121 View Medibank’s Annual Review 2017 to find out more about our business and performance: medibank.com.au/annualreview MEDIBANK ANNUAL REPORT 2017 ABOUT MEDIBANK Purpose Better Health for Better Lives Ambition To deliver Better Health for Better Lives we will: • Broaden the offering of our Medibank and ahm brands to deliver the best combination of products, service and advice for our customers. • Build a market leading health services offering for our customers. Values “ Medibank has an increasingly important role to play in helping our customers live healthier and happier lives. To do this, we are embracing a bigger purpose – Better Health for Better Lives.” Craig Drummond, Chief Executive Officer During the year Medibank provided private health insurance under our Medibank and ahm brands, supporting customers through more than 1.3 million hospital admissions and 500,000 surgical procedures, and around 23.5 million extras services. We also distributed travel, life and pet insurance. In addition, Medibank provided a range of health services in Australia including mental health support, preventative and better integrated primary care, after-hours health support, and healthcare for the 60,000 permanent and 20,000 reservist uniformed Australian Defence Force personnel. MEDIBANK ANNUAL REPORT 2017 1 FINANCIAL SUMMARY All data is presented on a statutory basis Composition of 2017 segment operating Group net profit after tax ($m) profit (%) 6.7% 2017 $449.5m 2016 $417.6m 2015 $285.3m 12 2014 $130.8m $251.8m* cents per share 93.3% Total dividend for 2017 2013 $232.7m (interim and final) fully franked Health Insurance Medibank Health Health Insurance Health Insurance net claims expense Health Insurance premium revenue ($m) (including risk equalisation) ($m) operating profit ($m) 2017 $6,244.9m 2017 $5,179.0m 2017 $497.5m 2016 $6,172.5m 2016 $5,145.8m 2016 $510.7m 2015 $5,934.8m 2015 $5,092.9m 2015 $332.2m 2014 $5,648.7m 2014 $4,884.3m 2014 $250.8m 2013 $5,344.1m 2013 $4,630.9m 2013 $204.3m Health Insurance Health Insurance management Health Insurance gross margin (%) expense ratio (%) operating margin (%) 2017 17.1% 2017 9.1% 2017 8.0% 2016 16.6% 2016 8.4% 2016 8.3% 2015 14.2% 2015 8.6% 2015 5.6% 2014 13.5% 2014 9.1% 2014 4.4% 2013 13.3% 2013 9.5% 2013 3.8% * Excludes impairment and restructuring expenses in 2014 ($134.7 million before tax; $121.0 million after tax) in relation to the write-down of goodwill mainly associated with the Telehealth business and costs incurred in relation to the reorganisation within Medibank Health. 2 MEDIBANK ANNUAL REPORT 2017 BUSINESS SNAPSHOT 2,859 80% 3.7 million+ employees improvement Number of customers including 640 health professionals* to two minutes Number of full-time equivalent employees. Average speed of answer in our *As at 30 June 2017. Around 250 additional customer service centre (Q417 vs Q416). health professionals joined Medibank through our HealthStrong acquisition in July 2017. 475 1.6 million+ $5.2 billion Members’ Choice hospitals Number of customers receiving Benefits paid to our customers 14,000+ greater value through new and extended benefits Members’ Choice extras providers 1.3 million+ 500,000+ 23.5 million+ Hospital admissions supported Surgical procedures supported Extras services supported * Calculation based on different methodology compared to 2016. 1.7 million+ 11,614 50% Number of interactions Number of participants enrolled Proportion of senior leaders with Australians through in CareComplete to date who are women our telehealth services 81% $6.3 million 26.93% Employee engagement Community investment including Market share (up from 78%) sponsorships and partnerships MEDIBANK ANNUAL REPORT 2017 3 CHAIRMAN’S MESSAGE I am pleased to present Medibank’s annual report for the 2017 financial year. It has been a year of transition for Medibank, with Craig Drummond coming on board as Chief Executive Officer. His leadership has re-energised the business and strengthened our investment in, and focus on, our customers. Our progress in overhauling service, Mike Wilkins joined us in May 2017, launching a range of new products bringing with him more than 30 years of and providing increased value to our experience in financial services, a strong customers has delivered another good track record in transforming culture as result. This in turn has allowed us to pay well as a passion for customer service. a dividend for the year totalling 12 cents We also announced the appointment per share fully franked, comprising an of Dr Tracey Batten from August 2017, interim dividend of 5.25 cents per share who is an experienced clinician with and final dividend of 6.75 cents per share. over 25 years of experience in the health system both in Australia and overseas. Australia has a world-class health system and I am proud of the significant Tracey’s appointment follows role Medibank plays within it. During Dr Cherrell Hirst’s decision to retire the year we supported our customers from the Medibank board. On behalf through more than 1.3 million hospital of the directors, I would like to thank admissions and 500,000 surgical Cherrell for her significant contribution procedures, and around 23.5 million to Medibank over the past eight years extras services. and wish her all the best in the future. That said, rising healthcare costs I also wish to thank Craig, Medibank’s continue to put upward pressure on management team and all of our premiums. This has had a significant employees for their tireless efforts over impact on the household budgets of the last 12 months, and in particular Australians, with the participation rate for their committed focus on improving in private health insurance the lowest the experience of our customers. in four years. We continued to work closely with government to deliver Our performance in 2017, coupled with greater transparency, affordability your continued support, holds your and value for our customers and to company in good stead for the future. support the long-term sustainability of Australia’s public and private health systems. This will continue to be important in the year ahead. I am delighted to welcome two new directors to the Medibank Board who will add a great deal to Medibank as Elizabeth Alexander AM we look to further strengthen our Chairman relationship with customers, and expand our role within the health industry. 4 MEDIBANK ANNUAL REPORT 2017 CEO’S MESSAGE The 2017 financial year has seen Medibank make significant improvements to the service and experience we deliver to our customers. This was one of my top priorities when I joined the business last year, and it will continue to be a key focus in 2018. Medibank’s Group net profit after tax Medibank Health, which was previously (NPAT) increased by 7.6 percent to known as Complementary Services, $449.5 million in 2017, primarily due recorded an increase in operating profit to net investment income increasing to $35.7 million. We are on track to by $80.0 million, more than offsetting more than double the share of segment a lower operating profit for the Health operating profit this business contributes Insurance business of $497.5 million. by 2019. Medibank Health will play a bigger role in the future as we look The performance in the Health ahead to further diversify our business Insurance business in part reflected and integrate more health into our our increased investment in customer customers’ experience. initiatives and focus on strengthening our core, improving healthcare Our success this year in reorientating value and expanding Medibank’s Medibank to customers has positioned customer offering. us strongly for the year ahead. But we are not there yet. The more we do This investment is making a difference. to strengthen our relationship with During the year our share of complaints customers, the better placed we are to the Private Health Insurance to pursue strategic growth opportunities Ombudsman nearly halved and the that will benefit customers and average call wait time in our customer shareholders alike. service centre dropped significantly. We launched new products for both the Medibank and ahm brands which performed strongly, and gave value back to more than 1.6 million of our customers through new and extended benefits. We also bedded down our new IT system Craig Drummond and successfully navigated the premium Chief Executive Officer review and tax statement cycles. We paid a record $5.2 billion in benefits to our customers in 2017. Costs in the health system continued to increase and our ongoing challenge is to get the balance right between meeting these rising costs and ensuring our products remain affordable and meet customers’ needs. While our average premium increase in 2017 was the lowest in 15 years, we need greater transparency within the health system to give our customers a better deal. This will continue to be a focus for Medibank going forward. MEDIBANK ANNUAL REPORT 2017 5 OPERATING AND FINANCIAL REVIEW 1. About Medibank Medibank Private Limited (Medibank) is a leading private health insurer in Australia.