Medibank Private Ltd
Annual Report 2021

Plain-text annual report

no overlap of red spine allowed for fold crease spine set up as 7 mm Annual Report 2021 Better health for better lives Medibank Private Limited ABN 47 080 890 259 Contents About Medibank 2021 highlights Chairman’s message CEO’s message Our strategy Creating value for our stakeholders Better for customers Better for health Better for people and communities Our sustainability highlights Operating and financial review Directors Executive leadership team Corporate governance statement Directors’ report Remuneration report Financial report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Auditor’s independence declaration Independent auditor’s report Shareholder information Financial calendar Corporate directory 1 2 4 5 6 7 8 12 16 20 22 30 33 35 47 50 75 76 77 78 79 80 121 122 123 131 133 133 Sustainability Report 2021 Building a healthier future This report is part of our suite of reporting for the 2021 financial year. You can find more information about our performance in our Full Year Results Investor Presentation & Sustainability Report 2021 full year results Investor presentation David Koczkar – Chief Executive Officer Mark Rogers – Chief Financial Officer Medibank Private Limited ABN 47 080 890 259 25 August 2021 Annual Report 2021 Better health for better lives Cover – Shelley and family enjoy a day in the park together Financial calendar Key dates Full year results announcement 25 August 2021 Ex-dividend share trading commences 8 September 2021 Record date for final dividend 9 September 2021 Payment date for final dividend 30 September 2021 Annual general meeting 18 November 2021 Half year results announcement February 2022 Payment date for interim dividend March 2022 The above dates and payments are subject to confirmation. Any change will be notified to the Australian Securities Exchange (ASX). Corporate directory Company Share registry Medibank Private Limited Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Telephone: 1800 998 778 (within Australia) +61 3 9415 4011 (outside Australia) 132 331 (within Australia) computershare.com.au +61 3 8622 5780 (outside Australia) Registered Office 720 Bourke Street Docklands Vic 3008 GPO Box 9999 Melbourne VIC 3001 Telephone: medibank.com.au Annual Report 2021 133 About Medibank At Medibank, we believe in Better Health for Better Lives. For 45 years, we’ve been supporting millions of people in Australia as one of the leading private health insurers. We’re also changing into a health company as we provide people with greater support to manage their health and wellbeing. We’re doing this by offering more choice to customers about where they can receive their care, more control over what they pay for it and innovating to provide greater access to preventative healthcare. We’re partnering with leaders in the health sector – doctors, hospitals and research institutes – building new care options that deliver quality care, and we’re helping to reform Australia’s healthcare system so it can continue supporting all Australians. We also offer other insurance, including travel, pet and life, to make things easier for our customers – because everyone deserves to live their best quality of life. Purpose Better Health for Better Lives Vision Everyone in Australia deserves to live their best quality of life – for themselves, their communities and future generations Focus on our customers and people Strategic pillars Grow our core business Transform into a health company Health Insurance Diversified Insurance Health Services Our business Health, Support, Value Simple, Easy, Affordable Travel Pet Life Health and wellbeing and preventative programs Clinical homecare Primary care investment and health system navigation support Car and home Fund short-stay, no-gap programs Customers First Show Heart One Team Own It, Do It Values Annual Report 2021 1 2021 highlights Customer 3.7m total customers at 30 June 2021 c. $300m total COVID financial support to date – includes $103 million customer give back 82,500 (+4.6%) reported net resident policyholder growth 27.3% market share (up 37 basis points in FY21) 37.137.1 (+5.3) Medibank 43.043.0 (+1.8) ahm customer advocacy (average Service NPS) c. 760k interactions with Live Better Rewards and Activities $5.6b (+2%) in claims paid to customers Services supported 1.11.1m+m+ 25.925.9m+m+ 430430k+k+ hospital admissions extras services surgical procedures Health services $63m c. 77,650650 (+32%) preventative health investment customers used Medibank at Home c.133133k k (+51%) 9595 900900++ customers engaged with Member Health Services Myhealth GP clinics patients used My Home Hospital since January 2021 launch All data is presented on a statutory basis 2 Medibank Our performance $441.2m (+39.8%) Group net profit after tax 6.9 cents per share 12.7 cents per share final ordinary dividend total ordinary dividend from continuing operations fully franked fully franked $6,680.3m Health Insurance segment revenue $283.8m Medibank Health segment revenue $120.0m net investment income Composition of 2021 segment operating profit 94.594.5% $538.6m Health Insurance 5.55.5% $31.4m Medibank Health c. $20m in productivity savings 83% including around 33,866866 11,400400 employee engagement employees health professionals Headcount at 30 June 2021 Annual Report 2021 3 Chairman’s message Mike Wilkins AO This year has again been challenging for people, with the COVID pandemic continuing to make an impact through a wide range of health, economic and social factors. I am proud of how Medibank and our people have supported our customers, community and each other through these uncertain times. This demonstrates the strength of the Medibank team and their steadfast commitment to our Better Health for Better Lives purpose. During the year we published our first Modern Slavery Statement which details our approach to preventing modern slavery and human trafficking within Medibank’s business operations and supply chain. We also shared our progress in supporting greater health equity and better health outcomes for Australia’s First Peoples. We are taking this momentum and our strong partnerships with Aboriginal and Torres Strait Islander communities to inform the development of Medibank’s 5th Reconciliation Action Plan. With this purpose driving our actions and decisions, Medibank saw above market policyholder growth, achieved record customer advocacy and maintained strong employee engagement. We also made progress in driving broader health system change to support its sustainability for the future. This focus helped us deliver a net profit after tax of $441.2 million for the 2021 financial year. The Board has determined a final ordinary dividend of 6.9 cents per share, bringing the total fully franked dividend for the year to 12.7 cents per share. Our capital position remains strong, with the Board maintaining a prudent approach to capital management. At Medibank we believe that delivering on our business goals and contributing in a positive way to society do not need to be mutually exclusive. We’ve demonstrated this through the record level of financial support for customers in response to COVID, through the leadership we have shown in getting behind the nation’s vaccination drive, and through the ways we seek to address the sustainability issues we can impact that are most important to our customers, people and community. We listen to a diverse range of voices to guide our actions in areas such as the environment, modern slavery, and diversity and inclusion. This year we undertook our first climate scenario analysis to understand the risks and opportunities of climate change. On top of our ongoing commitment to carbon neutrality within our operations, we are now working towards Net Zero by 2050, setting short, medium and long-term science-based targets to reduce our environmental footprint. We also recognise the vital role that carers play in providing unpaid support for family and friends who are aged or living with an illness or disability. With a significant number of our people providing such care in the community, we are developing a comprehensive support package to help them balance their work and caring commitments. What we have achieved this year is not only the result of staying true to our purpose, but is also due to the efforts of our leadership team and our people. Our leadership team changed this year, with David Koczkar appointed as Chief Executive Officer in May, following the retirement of Craig Drummond. On behalf of the Board, I’d like to thank Craig for his outstanding contribution during his five years at the helm. The Board and I look forward to working with David as he and the leadership team take Medibank on the next stage of its journey. I also want to acknowledge former Chairman Elizabeth Alexander who retired from the Board in October 2020. Elizabeth has been instrumental in making Medibank the company it is today and it is a privilege to succeed her as Chair. While some of the uncertainty of the past year is set to continue for a time, I am pleased that Medibank’s ongoing transformation to a health company positions us strongly to deliver for our customers, our community and our shareholders. To my Board colleagues, the Executive Leadership Team and everyone at Medibank, thank you all for making this possible. And to our shareholders, thank you for your continued support of our company this year and into the future. 4 Medibank CEO’s message David Koczkar For many of us, the 2021 financial year has not been the year we anticipated, with COVID defying expectations and with restrictions and lockdowns continuing. Yet despite this, our team has risen above the challenges of the past 12 months to continue to deliver for our customers, our community, and you – our shareholders. We grew more in the past 12 months than we have in over 10 years, our Medibank and ahm brands both achieved their highest ever levels of customer advocacy and we saw customers engaging with our broader health offerings in record numbers. We were disciplined in how we ran our business, continuing to manage our costs. We saw more and more people continuing to prioritise their health and wellbeing and see more value in private health, given the uncertainty around COVID and heightened pressure on the public health system. Our investments over the last few years have enabled us to step up and provide broader support to our customers during this period, while accelerating our growth at the same time. Our COVID financial support package for customers is the largest in our 45 year history. To date we’ve provided around $300 million, including $103 million in COVID permanent net claims savings we are currently returning through premium relief. We stand by our commitment not to profit from COVID and will continue to return any related permanent net claims savings to our customers. We're also supporting the government’s 80% vaccination target, working towards this with our employees and rewarding eligible customers who are fully vaccinated with 1,000 Live Better points. This year we evolved our strategy to reflect our ongoing transformation to a health company and prioritised our efforts to more broadly support the health of our customers, while growing our business and driving broader system change. We worked hard to give our customers more value from our products and services, investing in technology to simplify and personalise our customers’ experience. We delivered our lowest average premium increase in 20 years and helped customers save more than $20.5 million in out-of-pocket costs through our Members’ Choice Advantage network. Our customers are trusting us to help them with their broader health needs – whether it be through enrolling in our preventative health programs, participating in our health and wellbeing activities or accessing our in-home care or telehealth services. We partnered with doctors, hospitals and governments to develop new models of care that offer people greater choice about where to receive their care and how much they pay for it; such as the short-stay, no-gap program which expanded to seven hospitals this year. We continued to advocate for the changes needed to ensure the sustainability of our health system – reforms to improve choice, value and patient outcomes. At the heart of each of these achievements is the incredible team of people we have at Medibank, who once again have proved themselves to be adaptable, resilient and committed to our purpose of Better Health for Better Lives. This purpose has also seen us evolve our environmental, social and governance responsibilities, as we continued working to become a more sustainable business. We introduced new ways of working that have helped us to collaborate more effectively, but it is the way that our people have looked out for each other – the support that is integral to our culture – that has helped us through this year. This is my first year as CEO and I am indebted to the many people who have supported me in my first few months including Mike Wilkins and the Board. In particular, I want to recognise former CEO Craig Drummond who has been essential to our company’s transformation over the past five years. Thank you for supporting us. I believe we have an exciting future ahead as we continue to grow and broaden our business and transition into a health company, committed to helping more people in Australia access the care they need and supporting them on their health journey. Annual Report 2021 5 Our strategy As we continue changing into a health company, we’ve refined our strategy to better reflect our approach to helping our customers manage their health and wellbeing. It prioritises the work we are doing to provide customers and patients with greater choice, support and value. It acknowledges the importance of empowering our people to deliver improved customer experiences. And it marks our shift to preventative health and innovative approaches to patient-centred care, highlighting our role to help transform and sustain health in Australia. It is by succeeding in these areas that we will grow the business and help people in Australia to have Better Health for Better Lives. Building a strong and connected business to drive broader system change and sustainability Focus on our customers and people Grow our core business Transform into a health company Deliver leading customer experiences Further differentiate our customer offerings Empower our people Deliver more value Be a partner of choice Maintain cost discipline  Invest in prevention, choice and better care Build successful standalone businesses Bring benefits back to our core business Better Health for Better Lives 6 Medibank Creating value for our stakeholders We’re focused on creating sustainable long-term value for our customers, our people, our shareholders and the broader community. Customers Employees We’re supporting our customers to manage their health and wellbeing. We’re delivering affordable healthcare, providing more choice in where people can receive their care and investing in preventative healthcare. We’re helping customers better navigate the health system and make more informed healthcare choices. We’re building an employee experience that ensures our people can be at their best, challenge and improve how things are done and feel more empowered. We’re enabling them to enhance their knowledge and skills and supporting them to reach their health and wellbeing goals. GOALS WORK LIFE Shareholders Community We’re committed to delivering sustainable shareholder returns in a way that also meets the expectations of our customers and the community. We’re delivering this through our purpose-led culture supported by a focus on performance, sustainability, governance and risk management. We’re targeting some of Australia’s biggest health issues, prioritising mental health support and preventative health, and providing access to health and wellbeing activities. We’re also working to help close the gap that exists for First Nations people and playing our part in tackling the impact of climate change on human health. CO2 Government Health system We’re working with government to support Australia’s world-class dual public private health system and ensure its ongoing sustainability for future generations. We’re also advocating for our customers, contributing to public policy and helping deliver reform. We’re working to reshape Australia’s health system, partnering with hospitals and doctors on innovative ways of providing healthcare in the home and community, targeting chronic disease with prevention programs and sharing information with hospitals to help them improve patient experiences. Annual Report 2021 7 c. 760k interactions with Live Better Rewards and Activities Better for customers Through our Live Better program, we’re encouraging people to make better health choices every day; rewarding eligible customers for healthy actions through our Live Better Rewards app, supporting community events and sharing online content. This year, we integrated Live Better Rewards into our My Medibank app. Customers can now join the program, find and earn points at their nearest Members’ Choice Advantage providers, be rewarded for a weekly step goal and view their points and rewards all within the one app. Rewards can be redeemed for savings on health cover or boosts to extras, alongside other rewards. We had around 760,000 interactions with our Live Better program, either through people joining our rewards program or taking part in activities, and there is so much more ahead as we continue personalising the app experience and expanding our partnerships to provide greater health and wellbeing support. 8 Medibank Better for customers $$5.65.6bb in claims paid to customers 3.7m customers at 30 June 2021 37.1 (+5.3) Medibank 43.0 (+1.8) ahm customer advocacy (average Service NPS) c. $$300300mm total COVID financial support to date – includes $103 million customer give back There are reasons we grew more over the past 12 months than we have in over 10 years. We listened to our customers and worked hard to do things better, improving our services and delivering greater value for both new and existing customers. With Medibank offering more health and wellbeing support for customers and ahm building upon its premise of simple, straightforward and affordable health insurance, our dual brands are giving people in Australia real choice. Together they have grown our market share to 27.3%. We’ve paid $5.6 billion in claims this year. We’re also returning $103 million in COVID permanent net claims savings to our customers through premium relief, in recognition of the impact COVID restrictions had on people’s ability to use their health insurance. We’ve now provided around $300 million in COVID customer support since March last year and we will continue to assess known claims savings and return any COVID related permanent net claims savings back to our customers through additional support in the future. Stronger relationships, simplified services We’re working to better support our customers, investing in our digital capabilities so we can provide a more personalised experience, tailored to their individual healthcare needs. We’re spending more time talking with our customers about their health, connecting them to relevant prevention programs or general health support. We checked in with almost 540,000 customers to ensure they were on the cover best suited to their needs. And we provided more support to those who needed hospital treatment, assisting 20% of these customers through our Health Concierge program this year. We have big digital ambitions and this year delivered a more seamless digital experience, putting tools and information into our customers’ hands so they could make more informed decisions about their healthcare. Annual Report 2021 9 c. 1.31.3mm Medibank customers registered for a digital account 20% of customers going to hospital supported through Health Concierge c. 540540,000000 customer check-ins We upgraded our My Medibank app making it easier for customers to manage their cover, book and claim for more services, access our Live Better Rewards program and get health information – all from the palm of their hand. We were among the first health insurers worldwide to launch a digital membership card in Apple Wallet so customers could claim on-the-spot through HICAPS terminals at 20,000 healthcare practices nationwide, without having to carry their membership card; complementing our Android phone offering. We enhanced self-service options and digital support tools, with online chat and messaging options. And we’ve seen our customers respond positively to these changes with around 1.3 million Medibank and ahm customers registered for a digital account. We gave our people more autonomy and greater accountability to improve our customer experience, changing the way our people worked and improving the systems they used. We were able to quickly manage retail shutdowns due to COVID restrictions, moving retail team members to supporting customers through our phone and digital channels. We launched a new program to make it easier for our customer team to tell us what needed fixing, and then we fixed the issues that they raised. While there’s more to be done, we're pleased our customer advocacy is at record levels, and for the fifth year running, our share of industry complaints is well below our market share. And for the second year running, ahm was named Major Private Health Insurer of the Year as part of the Roy Morgan Customer Satisfaction Awards. #jabdone Paid community leave and charity gift voucher donations to support employees to get COVID vaccinations 10 Medibank We improved the claims and payments experience for the thousands of healthcare providers that we work with. Through our payment integrity program, we’re working to ensure we pay all customer and provider claims correctly, implementing a new case management approach this year. We’re now developing a new self-service portal for providers to make it easier to exchange information and resolve any incorrect payments quickly. Providing greater value We delivered our lowest average health insurance premium increase in 20 years, after postponing increases for six months earlier in 2020 as part of our COVID support package. We built stronger partnerships with organisations like Amcal and Velocity, along with hospitals, health professionals, corporates and university partners to provide greater value for our customers. We also added to our range of life, pet and travel insurance options, with ahm introducing car and home insurance this year. Through our productivity program we’ve delivered around $20 million in cost savings this year and remain committed to managing our own costs, targeting a further $40 million in savings over the next three years. 1.81.8mm customers are using Members’ Choice Advantage which has delivered c. $20.5m in out-of-pocket savings c. $$2020mm in productivity savings Annual Report 2021 11 900900++ patients used My Home Hospital since January 2021 launch Better for health My Home Hospital is a window into the future of healthcare. It’s delivering hospital-level care to patients in the comfort of their own home, by bringing together innovative remote monitoring technologies and a team of in-home care professionals. A Wellbeing SA service delivered by a joint venture between Calvary and Medibank, it has now treated more than 900 public patients in Adelaide and Gawler for a range of conditions such as infections requiring IV antibiotics, deep vein thrombosis, post- operative care and supportive cancer treatment, delivering positive patient experiences. It illustrates our approach to improving the experience and the affordability of the care people receive when they enter the private and public health systems. We’re collaborating with governments, doctors and hospitals and harnessing new technologies and innovations to build a new style of care centred around the needs of patients. We’re connecting our customers with more treatment options and focussing on preventative health opportunities. And in doing so, we’re helping to change healthcare for the better in Australia. 12 Medibank Better for health c. 77,650650 (+32%) customers used Medibank at Home 347347 virtual hospital beds c. 2.52.5mm contacts supported by our telehealth services Annual Report 2021 13 More choice in affordable care Healthcare where you want it We’re supporting doctors and hospitals to offer patients a short-stay experience which allows people to recuperate at home with support from a multi-disciplinary care team, reducing time spent in hospital – with no medical out-of- pocket costs for our customers. This doctor-led approach has seen patients in our no-gap joint replacement program save more than $1,500 in out-of-pocket costs on average and is now being offered by hospitals in Melbourne, Sydney, Brisbane, Adelaide, Canberra and Perth. We also announced a joint venture with 45 specialist doctors and surgeons to build a new private hospital in Melbourne that will expand the short-stay, no-gap model to additional surgical procedures. The 30-bed hospital will offer services in orthopaedics, ENT, vascular, plastics, urology, general surgery, gastroenterology, anaesthetics, oncology, and radiology when it opens in 2023. We’re investing in this approach so we can provide our customers with greater choice and control when it comes to how and where they access healthcare and what it will cost. Our Homecare business has continued to grow, with more than 20,000 customers having now received support from our Medibank at Home program since launch. COVID continued to drive demand, particularly for our Chemotherapy at Home and Dialysis at Home programs, and our Rehab at Home program is available to eligible customers across the country. Telehealth has kept up its momentum from last year. Not only is it proving popular with younger people, but it’s improving healthcare accessibility for rural and regional customers. We’ve made a major investment in upgrading the technology platforms we use to provide telehealth services so we can expand our support across digital channels, including video and online chat. We managed around 2.5 million phone and digital contacts this year. In addition to our 24/7 general health and mental health services for our customers, we delivered telehealth services for 1800RESPECT, Beyond Blue, Victoria’s Nurse on Call, and the NSW Mental Health Line. We also supported the COVID health response with helplines, contact tracing services, welfare checks and mental health counselling. No-gap joint replacement program $$11,500500++ average out-of-pockets saved by customers 44 average nights in hospital saved 77,000000++ customers enrolled in preventative health programs in FY21 1,385 kg weight lost by customers Getting in early – preventative health Based on Australian public health data, around 3.3 million Medibank and ahm customers are likely to have some health risk. We know they want support to improve their health and wellbeing, which is why we’re focused on preventative care and embedding more health expertise across our customer-facing teams. Since 2015, we’ve supported more than 40,000 customers through nine preventative health programs. This year our Better Knee, Better Me program became a permanent program after a successful trial partnership with the University of Melbourne, which saw participants losing 10.6 kgs on average. We launched our Healthier Weight, Healthier Me: Type 2 Diabetes pilot to examine whether type 2 diabetes can be better managed through a personalised weight loss and exercise program; and saw referrals increase to Heart Health at Home, with 31% of participants from regional and remote areas. c.133133k k (+51%) customers engaged with Member Health Services Almost 88kk people got their blood pressure checked 14 Medibank We’re now integrating preventative health activities into our Live Better Rewards app and for the first time took a challenge to customers, rewarding them for getting their blood pressure checked. Our ahm business is reimagining what a simplified approach to health support for customers can look like, this year experimenting with ways to engage new customers in managing their health and wellbeing, launching a program offering lower priced access to health and lifestyle services. We’re also working with some of our corporate customers to develop customised health support programs to address the specific needs of their employees. We’re serious about our commitment in preventative healthcare, which is why we invested in the Myhealth Medical Group this year. This national group of GP clinics already has a strong focus on prevention and the wellbeing of patients, and our goal is to help accelerate the business, supporting their vision for a future of general practice that better addresses the needs of Australia in 2021 and beyond. Driving system reform We know the challenges our health system faces – an ageing population, increasing chronic disease, rising demand for mental health support and private health insurance affordability concerns. We believe we have a critical role to play in driving change in Australia’s healthcare system to help address these issues. It’s why we’re transforming into a health company. We’re working to influence change by engaging with governments and the sector on system reform. We’ve continued pursuing prostheses pricing reform. As one of the largest drivers of health insurance premium increases, reforms could deliver up to $500 million in value back to customers. We welcomed this year’s Federal Budget announcement of potentially significant changes to lower the costs of these medical devices. We expect to see the impact of these changes flow through over the next four years and remain committed to returning prostheses reform savings to our customers through lower premium increases. We’re actively engaging with the Federal Government on reforms to private health insurance designed to improve affordability and value – supporting proposed changes like the expansion of home and community- based rehabilitation and mental health care, and increasing the age of dependents to encourage younger people and people with a disability to maintain private health insurance. As the longer-term impacts of the ongoing COVID pandemic are felt with already long elective surgery wait times extending even further in the public system, more can and should be done to improve healthcare delivery and affordability. Encouraging more care in homes and community settings especially for those with chronic conditions, and accelerating value-based funding to deliver better health outcomes for patients can help achieve meaningful industry change. As will incentivising employers to fund private healthcare for their employees and promoting greater cost and quality transparency in the health system. While we advocate on behalf of our millions of customers, we do so knowing these reforms will positively impact all Australians. Our healthcare system is built upon the public and private systems working together. It’s in everyone’s interests to ensure both sides are strengthened to support our healthcare needs now and in the future. Challenges facing our health system Getting older Chronic disease Mental health Affordability Prostheses costs are around 3030% higher than in NZ, France or the UK Private Healthcare Australia Annual Report 2021 15  83% employee engagement Better for people and communities Last year when the COVID outbreak started, Mike and partner Colin realised it was the right time for their family to pack up and make a tree change. Together with 8-year-old daughter Maple and 18-year-old son Jack, they moved from the hustle and bustle of Sydney’s inner west to a small farm on the South Coast of NSW, closer to Mike’s parents, sister and brother. Instead of tackling a 40 minute commute into the office, Mike helps with homework, school drop-off and pick-ups, as well as spending time outdoors landscaping and attending to the farm. Mike has enjoyed a better work/life balance since the move and is even more productive. He makes time to build strong connections with his team with daily calls to touch base and check-in, balancing screen time with walking meetings and organising face-to-face time together outside of the office. Our pursuit of health and wellbeing is at the heart of our business. We know when our people feel good, they do their best work for our customers and community. Our world has changed and so has the way we work and connect with our community. 16 Medibank and communities 5151% Group and senior executives are women 4444% of Board (including CEO) are women 6464% employees worked flexibly ++2626 employee advocacy 0.00.0% gender pay gap 33 Aboriginal and Torres Strait Islander employees We’re strengthening our focus around our purpose, people and performance, to ensure our people can be at their best, challenge and improve how things are done and feel more empowered. Our latest employee engagement survey shows our people are engaged, inspired by our vision and purpose and are optimistic about our future. An employee experience fit for the future We’re building an employee experience that is best in class. We’re focussing on how we better connect and collaborate across the business, embedding our new Future Fit way of working that draws upon the lessons learnt in 2020 and the success of our progressive support of flexible working. We continued to prioritise our people’s health and wellbeing, with many of our initiatives focused on mental health support and staying connected to one another. We moved our learning and development programs to a virtual model, which opened up programs to people regardless of role or location. Our Customer Obsessed program, which connects employees to our customers so they can better understand their needs, also took a more digital focus due to COVID this year. Instead of the usual range of activities that employees, including Board members undertake, we utilised calls and immersion sessions as face-to-face opportunities were restricted. We’re a diverse and inclusive business with a team that reflects the customers and community we support. We are a leading voice on gender equality, and keeping ourselves accountable by setting targets on pay equity and representation. 44% of our Board and more than half of our Group and senior executives are women. We’ve been working towards increasing the number of First Nations people in our business and now have 33 Aboriginal and Torres Strait Islander team members. We’re also working to develop a package to help a group of employees we know need more support – those caring for elderly parents or a family member with a disability or chronic condition – a responsibility held by 17% of our team members. Our cultural pillars Feel good We know that fulfilling our purpose starts with our people. We are dedicated to their health and wellbeing; that they feel heard and valued for who they are. Impact bigger We create a culture that is rewarding and challenging so that our people are inspired to do meaningful work that makes a real difference to our customers and communities. Step in step up We innovate to find better ways of working for our people so they feel empowered to be at their best. We are committed to strengthening our performance edge in striving to deliver our purpose. Annual Report 2021 17 Building healthier communities A big part of bringing our purpose to life is helping all Australians feel healthy, both physically and mentally. Through our support of community partners and events and investment in research, we’re targeting some of the most prominent health issues facing Australians so we can make a bigger impact. Mental health doesn’t discriminate. It continues to impact millions of Australians every day. In response, we’re providing support through accessible channels, using the knowledge and expertise we’ve developed through our delivery of telehealth counselling, including Beyond Blue, the NSW Mental Health Line and 1800RESPECT. We launched an online mental health portal with information and resources connecting people to support services and integrated Smiling Mind into our Live Better app. We created tailored support programs, including a workplace resilience program for corporate partners and a wellbeing initiative for international high school students in partnership with DE International (which is part of the NSW Department of Education), and continue to develop our plan to help address loneliness. Employee volunteering 2.3% We’re using our voice to call out issues of domestic, family and sexual violence. We’ve been delivering 1800RESPECT for more than 10 years and this year we launched our Disability Pathways Project to improve the support we provide people with disability experiencing violence. We’re now exploring how to play a bigger role with employees who use domestic and family violence against others, developing a sensitive response that prioritises the safety of the person experiencing the violence. We released our fourth Reconciliation Action Plan progress report detailing our work to help achieve equity in health and wellbeing outcomes for Aboriginal and Torres Strait Islander people. This year marks a decade of our relationship with the Wadeye Indigenous community and we got behind the Thamarrurr Youth Indigenous Corporation’s 6,000km bike ride to spread health and wellbeing messages to Indigenous communities. We also worked to support our health services teams and others to provide culturally safe care, in partnership with the Australian Indigenous Doctors’ Association. 64% of our employees participated in our Cultural Awareness program, with the online training module developed as part of the Climate 3.3% program, the most popular course of FY21. 286286k+k+ 1800RESPECT phone and web chats answered 6464% of employees participated in our Cultural Awareness program Mental health 5.8% Indigenous health equity 6.5% Health & medical research/training 36.1% Climate 3.3% Mental health 5.8% Indigenous health equity 6.5% Health & medical research/training 36.1% $$1.11.1mm invested in 11 research projects with 35 organisations Workplace giving 2.2% Community investment Community health sponsorships 19.6% Employee volunteering 2.3% Workplace giving 2.2% Loneliness 14.8% Community health sponsorships 19.6% Community donations 9.4% Loneliness 14.8% Community donations 9.4% 18 Medibank Through our Medibank Better Health Foundation, we collaborated with world-class research teams and university partners on research projects to improve the quality of life and health outcomes for people in Australia. New projects this year include working with La Trobe University and the AFLW on ways to reduce serious knee injuries among female AFL players and exploring the relationship between out-of-pocket costs and healthcare outcomes, affordability and experience, in partnership with Macquarie University. With COVID impacting many of the community- based events we support, we looked to online channels to provide health and wellbeing activities to inspire and engage all Australians. We created our Live Better at Home program in response to the first COVID restrictions, but over the past year we’ve used the program to deliver live interactive events through social channels, including our Heavy Metal Mindfulness, Sleep Better Live with Michael Mosley and the World’s Fittest Dance Move with Sydney Dance Company. We continued to support our community partners even when events couldn’t occur, and were then raring to go when parkrun and Feel Good events resumed around the country. Carbon neutral certified under the Australian Government’s Climate Active program Sustainable business practices We choose to partner with suppliers and organisations that share our approach to ethical conduct, environmental performance and diversity and inclusion. We published our first Modern Slavery Statement in 2020, highlighting our work to address modern slavery and human trafficking in our business operations and supply chain. We also launched a new employee training program focused on sustainability when purchasing goods and services, and continued our partnerships with Supply Nation and Indigenous Defence and Infrastructure Consortium (iDiC) to help grow our Aboriginal and Torres Strait Islander procurement opportunities. We believe the environment plays a vital role in the health and wellbeing of our people, our customers and our community and we recognise the science of climate change. We remain committed to being environmentally responsible, working to minimise our impact, maintain our carbon neutral status and positively influence our employees’ behaviour. To better understand the risks and opportunities that climate change presents, we conducted our first climate scenario analysis as part of our alignment to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. We’re now working to enhance our reporting and analysis and over the next 12 months will be setting science-based short, medium and long-term targets for our business, as we work towards Net Zero by 2050. Learn more about our progress on TCFD and our journey towards sustainability in our Sustainability Report 2021 100100k+k+ people engaged with Smiling Mind's Families program Annual Report 2021 19 Our sustainability highlights Ensure healthy lives and promote wellbeing for all ages Material topics – Affordable healthcare – Trusted healthcare, customer- centred products and services – Healthcare innovation, personalisation and choice – Healthy and engaged communities – Supporting mental health FY21 highlights Provided c. $300m COVID financial support for customers including returning $103m in COVID permanent net claims savings to customers through premium relief c. 760k Live Better Rewards and Activities interactions Lowest average premium increase in 20 years Extended the short-stay, no-gap model of care to 7 hospitals across the country Launched Healthy Mind website to connect people to mental health information and support Partnered with 45 doctors to develop a new private hospital in Melbourne to extend short-stay, no-gap procedures c. 7,650 customers used Medibank at Home Invested $63m in Myhealth medical group of GP clinics Managed c. 2.5m telephone and digital health interactions Supported 20% of customers going to hospital through Health Concierge 133k+ customers engaged with a Member Health Service (+51% on FY20) 370,197 COVID-related telehealth interactions 100k+ people utilised the Smiling Mind Families program Targets / next steps Engage around 480k customers in our Live Better Rewards and Activities, preventative health programs and any new care offerings developed Expand support for the no-gap surgery program to new surgery types and new locations Deliver our telehealth services through more digital channels and our customer apps and integrate them with other health services like primary care Build new health and wellbeing offering for the next generation of health consumers Achieve gender equality and empower all women and girls Material topic – Diverse and inclusive workforce Women represent 51% of Group and senior leaders and 44% of our Board 0.0% gender pay gap 27% of parental leave taken by men More than 70% of STEM roles in Medibank are held by women Employer of choice by WGEA, 6th year in a row Recognised in the top 3 Best Australian Workplaces for New Dads Targets / next steps Ensure at least 40% of senior leaders and Board members are women Maintain at least 40% women across our manager workforce Improve the representation of men in our non-manager workforce Review the gender pay gap annually to ensure it is no greater that 1% Deliver online domestic and family violence training for our people and corporate partners 83% employee engagement Targets / next steps 64% of employees worked flexibly 25% increase in employees attending personal development courses Published 1st Modern Slavery Statement Paid community leave and charity gift voucher donations to support employees to get COVID vaccinations Launched our Carers Support Network Employee advocacy benchmark +24 place to work +19 products and services Deliver $15m in productivity savings in FY22 Expand our preventative healthcare programs to employees Provide a market leading comprehensive and targeted support carers package to improve the engagement of employees with caring responsibility for elderly parents, or a person with a disability or chronic condition Promote sustained, inclusive and sustainable growth, full and productive employment and decent work for all Material topics – Sustainable supply chains – Engaged purpose-led culture, attract and retain talent – Healthy and safe workers – Privacy and data security – Corporate governance 20 Medibank FY21 highlights Increased to 33 the number of employees who identify as Aboriginal and Torres Strait Islander, 1% of all Medibank employees 64% of employees participated in Cultural Awareness program Launched our Aboriginal Employee Network Published our interim RAP report 10 years partnering with the Wadeye community in the NT Made 1800RESPECT information available in 37 languages Improved access to 1800RESPECT for people with a disability Ranked joint 2nd on the Australian Network on Disability Access and Inclusion index Targets / next steps Deliver our 5th Reconciliation Action Plan Cultivate a disability confident culture leading to an increase in the representation and improved self-reported engagement of employees with a disability Develop our 2nd Accessibility and Inclusion Plan Reduce inequality within and among countries Material topics – Indigenous engagement – Disability access and inclusion Take urgent action to combat climate change and its impacts Material topics – Address climate change through environmental sustainability 1st climate scenario analysis Maintained our carbon neutral status for our scope 1, 2 and 3 emissions Launched sustainable procurement training module $24.5m invested in green bonds Launched 1st environmental Live Better Rewards challenge for customers Targets / next steps Set short, medium and long-term science-based targets Establish Net Zero targets and pathways Maintain carbon neutral status for our scope 1, 2 and 3 emissions Ongoing commitment to low carbon domestic and international equity investments Embed environmental sustainability into plans for our new Melbourne workspace Strengthen the means of implementation and revitalise the global partnership for sustainable development Material topics – Contribute to public policy – Ethical business $1.1m invested in 11 health research projects with 35 organisations Advocated for healthcare system reform Partnered with University of Melbourne to research impact of out-of-pocket cost transparency on patients and doctors 5 years of partnering with the Grattan Institute Worked with La Trobe University and the AFLW to help reduce knee injury among female footballers Supported the Continuity of Care Collaboration #dontwaitmate campaign Community partnerships • parkrun Australia • Smiling Mind • Feel Good Program, Brisbane • Dr Michael Mosley and The Fast 800 Program • Beyond Blue Aboriginal and Torres Strait Islander partnerships • Wadeye community, Northern Territory • Adam Goodes’ iDiC (Indigenous Defence and Infrastructure Consortium) • Supply Nation • Australian Indigenous Doctors’ Association • Thamarrurr Indigenous Youth Corporation Targets / next steps Increase investment on research that improves health experiences, outcomes and affordability for all Australians For the full list of highlights view our Sustainability Report 2021 Annual Report 2021 21 Operating and financial review 1. About Medibank Medibank Private Limited (Medibank) is a leading private health insurer in Australia. Our core business is Health Insurance, whereby we underwrite and distribute private health insurance policies under the Medibank and ahm brands. Medibank Health complements our Health Insurance business by leveraging our experience and expertise to provide and coordinate health services to support our customers and the community. Medibank Health also includes diversified insurance products such as travel, life and pet. As we maintain assets to satisfy our regulatory reserves, we also generate investment income from our portfolio of investment assets. Medibank was founded in 1976 as a private health insurer owned and operated by the Australian Government. We have operated on a for-profit basis since 2009, and on 25 November 2014, Medibank was sold by the Australian Government by way of an initial public offering (IPO) and listed on the Australian Securities Exchange. As at 30 June 2021, we had 3,409 full-time equivalent (FTE) employees, including 1,094 health professionals (excluding employees in associates and joint ventures). 2.1 Group summary income statement Year ended 30 June ($m) Group revenue from external customers1 Health Insurance operating profit Medibank Health segment profit1 Segment operating profit Corporate overheads Group operating profit – continuing operations Net investment income Amortisation of intangibles AASB 16 Leases transition adjustment Other income/(expenses) Profit before tax Income tax expense Group net profit after tax (NPAT) – continuing operations Effective tax rate2 Earnings per share (EPS) (cents)2 Underlying NPAT3 Underlying EPS (cents)3 Dividend per share (cents) Dividend payout ratio4 1. Excludes discontinued operations. 2. Calculated on total operations. 2. Financial and operating performance References to “2020”, “2021” and “2022” are to the financial years ended on 30 June 2020, 30 June 2021 and 30 June 2022 respectively, unless otherwise stated. The “Group” refers to the consolidated entity, consisting of Medibank and its subsidiaries. Despite the challenging environment of the last year, our business has proved resilient. Our people remain engaged, our balance sheet remains strong, we have made good progress in growing policyholder numbers, managing our own expenses and setting up Medibank Health for growth. 2021 6,910.4 538.6 31.4 570.0 (41.7) 528.3 120.0 (4.6) - (11.4) 632.3 (191.1) 441.2 30.2% 16.0 398.7 14.5 12.7 87.7% 2020 6,769.6 470.6 27.8 498.4 (37.4) 461.0 2.4 (9.0) 3.3 (7.5) 450.2 (134.6) 315.6 29.9% 11.4 367.3 13.3 12.0 90.1% Change 2.1% 14.4% 12.9% 14.4% 11.5% 14.6% n.m. (48.9%) n.m. 52.0% 40.4% 42.0% 39.8% 30bps 39.8% 8.5% 8.5% 5.8% (2.7%) 3. Underlying NPAT, which adjusts for the normalisation of investment income, is from continuing operations. 4. Dividend payout ratio based on underlying NPAT from total operations. 22 Medibank Group operating profit from continuing operations increased by $67.3 million or 14.6%, largely due to Health Insurance operating profit, which increased by $68.0 million. Net investment income was significantly higher than 2020 when investment markets were impacted by COVID-19, increasing by $117.6 million to $120.0 million. The combination of the above factors resulted in a $125.6 million, or 39.8% increase in NPAT to $441.2 million on a continuing basis. Underlying NPAT, which adjusts for the normalisation of investment returns, increased 8.5% or $31.4 million to $398.7 million. The key reasons for the movements in the Health Insurance and Medibank Health results, as well as net investment income, are outlined in this report. Health Insurance Year ended 30 June ($m) Premium revenue Net claims expense (including risk equalisation) Gross profit Management expenses Operating profit Gross margin Management expense ratio Operating margin The solid result in our Health Insurance business demonstrates the benefit of the customer-led journey we have been on for the last five years. During the year we saw strong policyholder growth, improved retention, and we continued our focus on managing our costs. Health Insurance revenue grew 2.1% to $6,680.3 million alongside strong policyholder growth. When adjusted for our COVID-19 customer support measures of $226.0 million in 2021 and $80.0 million in 2020, underlying revenue grew 4.2% to $6,906.3 million. There has been encouraging hospital participation growth in the private health insurance market, with the Australian Prudential Regulation Authority (APRA) data for the 12 months ending 30 June 2021 indicating an increase of 95 basis points to 44.53%, and the number of people with hospital cover increasing by approximately 245,000. Customers are more focused on their health and wellbeing and are less likely to switch providers which has impacted favourably on our policyholder trajectory. Our reported net resident policyholders increased by 82,500 or 4.6%. Adjusting for COVID-19 related suspensions, policyholder growth was 3.5% with the Medibank and ahm brands growing 1.3% and 10.9% respectively. Our ahm brand continues to attract younger customers which will have positive impacts on the overall sustainability of the health system. The acquisition rate was up 110 basis points, largely driven by strong growth in the new to industry segment, particularly in the Medibank brand. There was a significant improvement in customer retention which improved 130 basis points, reflecting improving customer advocacy across both brands and the benefit of increasing product value and differentiation in the Medibank brand. Our market share grew by 37 basis points over the year and stands at 27.3% as at 30 June 2021. 4.6% 0.6% 0.8% 0.3% 2020 2021 6,545.6 6,680.3 Reported net resident policyholder growth (5,531.6) (5,610.8) 2021 1,014.0 1,069.5 2020 2019 (543.4) (530.9) 2018 470.6 538.6 15.5% 16.0% 8.3% 7.9% 7.2% 8.1% Change 2.1% 1.4% 5.5% (2.3%) 14.4% 50bps (40bps) 90bps Reported net resident policyholder growth FY21 FY20 FY19 FY18 4.6% 0.6% 0.8% 0.3% 0 1 2 3 4 5 Medibank’s net claims increased 1.4% and gross claims expense increased 0.8%. This includes a $223.0 million reduction in claims expense due to lower than expected hospital and ancillary claims as a result of COVID-19, and a decrease in the COVID-19 deferred claims liability. Risk equalisation changed from a $7.9 million receivable in 2020 to a $24.6 million payable in 2021, reflecting our claims growth continuing to be below industry growth and strong policyholder growth in ahm which has a younger customer demographic. Underlying claims per policy unit which adjusts for both outstanding claims provision movements and COVID-19 impacts grew 3.1%. Resident underlying claims growth per policy unit was 2.5% with stable extras claims growth and lower hospital claims growth of 2.5% reflecting lower public hospital utilisation. Our COVID-19 claims liability, which is in recognition of claims that have likely been deferred during the pandemic, decreased to $223.8 million (30 June 2020: $297.1 million), largely due to hospital deferral assumptions moving from 100% to 59%. Annual Report 2021 23 Operating and financial review Health Insurance management expense ratio 2021 2020 2019 2018 2017 7.9% 8.3% 8.7% 8.8% 9.1% Health Insurance management expense ratio 2021 2020 2019 2018 2017 7.9% 8.3% 8.7% 8.8% 9.1% 0 2 4 6 8 10 Our productivity agenda and increasing scale resulted in our management expense ratio falling 40 basis points to 7.9%. Management expenses reduced by 2.3% due to lower overseas sales commissions and operating costs. Overseas sales commissions reduced by 41.2%, or $5.4 million, with the closed borders reducing the number of new overseas customers. Operating expenses were down 1.4% and reflect productivity savings of approximately $20 million, partially offset by cost inflation and volume impacts. We are targeting productivity savings of approximately $40 million over the next three years, including $15 million in 2022. Our Health Insurance operating profit of $538.6 million was 14.4% higher than 2020, and the operating margin improved 90 basis points to 8.1%. Underlying operating profit increased 6.6% to $541.6 million and the underlying profit margin was 7.8%. Medibank Health The role of Medibank Health is to strengthen and complement our core Health Insurance business, support long-term customer retention and to build successful standalone businesses. We build smarter healthcare models that focus on giving patients choice, making care more affordable and improving the health and wellbeing of all Australians. It includes the provision of health management, telehealth services for government and corporate customers, hospital care in the home, wellbeing programs and diversified insurance products. Our investments in associates and joint ventures also form part of this segment. They include our non-controlling investments in Myhealth (a leading operator of primary care clinics), East Sydney Private Hospital and a Medibank-Calvary joint venture to deliver My Home Hospital, a Wellbeing SA service. The external environment remains favourable to the long- term prospects of Medibank Health, with increasing take up of care delivery in the home, focus in the community on health and wellbeing, and heightened pressure on the public health system. Revenue increased 5.1% with increased demand for in-home care and telehealth services, partly offset by significantly lower travel insurance sales. Medibank Health gross margin was stable at 41.2%. 24 Medibank Management expenses increased 1.7% largely due to inflation, however the management expense ratio improved 100 basis points to 29.9% as a result of the strong revenue growth. Operating profit improved 15.8% to $32.2 million and Medibank Health segment profit, which includes our share of the results of Myhealth and other investments, improved 12.9% to $31.4 million. Myhealth contributed $0.7 million, while there was a loss (including interest income) of $1.5 million in relation to the other investments. We expect these losses to largely unwind in 2022. Net investment income Medibank’s investment portfolio was $3.0 billion as at 30 June 2021. This investment portfolio, which includes $2.8 billion relating to the fund portfolio, provides liquidity to cover insurance liabilities related to the Health Insurance business and satisfies Medibank’s obligations to maintain regulatory reserves to meet health claims and to fund ongoing operations. It includes an elevated defensive allocation of $326.8 million of assets to fund claims deferred due to COVID-19, which sits outside our target allocation of growth and defensive assets of 20% and 80% respectively. Net investment income in 2021 was significantly higher than 2020, increasing by $117.6 million to $120.0 million. The increased income in the growth portfolio reflects strong equity markets, and in the defensive portfolio the benefit of narrowing credit spreads was offset by the lower interest rate environment. Our investment portfolio is subject to and compliant with our Responsible Investment Policy. Domestic and international equity investment portfolios remain aligned with socially responsible investment principles. 2.2 Group financial position Medibank’s net asset position increased by $108.3 million or 6.0% to $1,906.1 million as at 30 June 2021. Some of the major movements in the consolidated statement of financial position include: • A decrease in cash and cash equivalents driven by the shift to longer duration financial assets. • An increase in financial assets as a result of the shift from cash and stronger returns. • An increase in equity accounted investments due to the acquisition of new associates and joint ventures during the year. Refer to section 3 “Strategy and future prospects” for further details about associates and joint ventures. • An increase in provisions due to the recognition of the $103.0 million customer give back provision relating to the return of permanent COVID-19 net claims savings to customers through premium relief announced by the Group on 29 June 2021. As at 30 June 2021, Medibank’s consolidated statement of financial position remained debt free. 2.3 Capital management and dividends Medibank’s capital management objective is to maintain a strong financial risk profile and capacity to meet financial commitments. As at 30 June 2021: • Our total Health Insurance business-related capital was $942.0 million; equivalent to 13.0% of premium revenue after the allowance for determined but unpaid dividends. This was at the top end of Medibank’s target range of 11%-13%. • Non-fund required capital was $147.6 million. • Unallocated capital surplus was $170.7 million. above the outlook statement provided in our half year results announcement, where we advised the market that the dividend payout ratio was expected to be towards the top end of our annual payout ratio range of between 75% and 85% of underlying NPAT, and reflects our strong capital position. 2.4 Management changes On 24 February 2021, Chief Executive Officer Craig Drummond announced his retirement. Our Group Executive – Chief Customer Officer David Koczkar was appointed as Managing Director and Chief Executive Officer effective 17 May 2021. In November 2018, APRA announced its intention to harmonise the health insurance capital framework with Life and General Insurance Capital (LAGIC) standards. Since then, APRA has consulted with the industry and undertaken a partial Quantitative Impact Study (QIS). APRA is expected to release draft capital standards and a full QIS by December 2021. Final standards are then due in mid- 2022 and planned to be effective from 1 July 2023. We are well placed to implement this framework as our Capital Management Policy is already closely aligned with LAGIC. Dividends paid or payable in respect of profits from the financial year totalled 12.7 cents per share fully franked, amounting to $349.8 million comprising: • An interim ordinary dividend of 5.8 cents per share fully franked, amounting to $159.7 million paid on 25 March 2021 in respect of the six-month period ended 31 December 2020. • A final ordinary dividend of 6.9 cents per share fully franked, amounting to $190.0 million to be paid on 30 September 2021 in respect of the six-month period ended 30 June 2021. The full year 2021 ordinary dividend of 12.7 cents per share represents a 87.7% payout ratio of underlying NPAT, normalising for investment market returns. This is slightly Subsequent management changes were: • Dr Andrew Wilson was appointed to the role of Group Executive – CEO Health Services. • Mark Rogers took on expanded accountability as Group Executive – Chief Financial Officer & Group Strategy. • Milosh Milisavljevic was appointed Group Executive – Customer Portfolios, responsible for the Group’s consumer products and services and provider partnerships. • Rob Deeming was appointed Group Executive – Customer & Brands, responsible for the Medibank and ahm brands and customer channels as well as digital platforms and capabilities. 3. Strategy and future prospects Medibank’s purpose is Better Health for Better Lives. As an organisation, we are committed to improving the health and wellbeing of Australians and helping them lead better quality lives. By working to provide affordable and quality health outcomes, we seek to sustainably build our customer base and grow shareholder value. With David Koczkar’s appointment to CEO in May, our strategy has evolved but our customers and people remain at the centre of everything we do. Our strategy Building a strong and connected business to drive broader system change and sustainability Focus on our customers and people Grow our core business Transform into a health company Deliver leading customer experiences Empower our people Be a partner of choice Further differentiate our customer offerings Deliver more value Maintain cost discipline  Better Health for Better Lives Invest in prevention, choice and better care Build successful standalone businesses Bring benefits back to our core business Annual Report 2021 25 Operating and financial review During 2021 we saw a shift in Australians prioritising their health and wellbeing given COVID-19 and heightened pressure on the public system. This has resulted in private health insurance becoming more compelling for many Australians, including those who were previously uninsured. We have continued to focus on differentiating and growing our private health insurance business by leveraging our dual brand strategy to create a competitive advantage. We are also continuing our transformation into a health company. We know that affordability continues to be an issue for consumers and have worked hard to deliver our lowest average premium increase in 20 years, with premiums rising by an average of 3.25% from 1 April. Our focus has been on making our business more efficient and to reduce and eliminate unnecessary costs in the health system, so that we can deliver greater value and choice for our customers. We maintained strong cost discipline and have delivered approximately $60 million of productivity savings over the past three years. We will also target a further $40 million in productivity across the next three financial years, including $15 million in 2022. We supported our customers during the COVID-19 pandemic with a package of approximately $300 million to date, including $195 million in support measures and $103 million of permanent COVID-19 net claims savings we are returning to customers through premium relief. We are committed to returning all permanent net claims savings due to COVID-19 to our customers once they are known. Customers are at the heart of what we do and we are working to better support their healthcare needs by providing greater choice, more personalised advice and helping to reduce out- of-pocket medical costs. My Home Hospital, a Wellbeing SA service delivered by a joint venture between Calvary and Medibank, was launched in January. It is a public hospital-level service that delivers care to patients in the comfort and privacy of their own homes. Since launch, the service has had more than 900 admissions, reducing pressure on the wider health system while still providing the hospital-level care patients need. We see an opportunity to utilise the market leading technology platform behind My Home Hospital across both public and private settings. In March, Medibank and 45 specialist doctors formed an entity to develop a new private hospital in Melbourne that will provide short-stay surgical procedures. The investment is aimed at supporting our doctor partners to deliver a short-stay model of care that is already widely available at scale in other health systems internationally and for which there is a strong body of evidence. The entity will give patients more choice in where their care is delivered, reduce out-of- pocket medical costs, and most importantly deliver a great customer experience. The facility is due to open in 2023. 26 Medibank This investment follows our 49% investment in East Sydney Private Hospital in August 2020 which provided funding to the hospital and doctors to scale its short-stay model of care. It also complements Medibank’s no-gap joint replacement pilot that is underway in seven hospitals across Australia. We have strengthened our focus on preventative and doctor- led partnerships through the acquisition of a non-controlling interest in the Myhealth Medical Group, a leading operator of primary care clinics. Our investment will support GPs to enhance the health and quality of life of their patients which helps reduce high-cost hospital admissions and alleviate pressure on the health system. The investment will also give the GPs access to additional capabilities to improve data analytics and information management and enable Myhealth to continue its rapid growth. There were 95 Myhealth clinics at the end of 2021 and further growth will be supported by investment in greenfield practices and acquisition of existing practices. These investments all demonstrate Medibank’s commitment to putting patients at the centre of treatment, and supporting healthcare providers to improve patient experience. We will continue to invest and partner to evolve new models of care in Australia, accessible to patients in both private and public systems. We also continue to deepen relationships with our customers through other avenues. More customers are engaging with our health offerings. Approximately 133,000 Medibank customers engaged with a Member Health Service, representing a 51% increase on 2020. Around 20% of Medibank customers admitted to hospital were supported by our Health Concierge program in 2021, while there was a 32% increase in the number of customers receiving a Medibank at Home service. Our Live Better program continues to scale, with more than 760,000 people joining our Live Better Rewards program or taking part in Live Better activities, a 51% increase since last year. In 2022 we will finish integrating the Live Better app into the My Medibank app to provide a single digital health experience across health insurance and health and wellbeing – transforming our customer relationship from ‘one day’ to ‘every day’. We see further opportunities for Live Better in the broader health and wellbeing market through new partnerships and tapping into other market segments. 7,183 Medibank customers engaged in a preventative health program in 2021, an increase of 23% from 2020. Our Healthier Weight, Healthier Me: Type 2 Diabetes pilot is supporting customers with this condition, which is one of the fastest growing chronic diseases in Australia. The program offers an evidence-based weight management program and aims to improve management of the condition. Better Knee, Better Me was made a permanent national program for all eligible customers this year following the success of our two-year pilot program combining personalised plans for exercise, weight loss and pain management. Our people have responded well under difficult circumstances this year, navigating through lockdowns and other challenges that COVID-19 has created. When retail stores were closed, our team members were upskilled and redeployed to other customer support channels. We introduced our new Future Fit way of working that focuses on how employees connect and collaborate across the business, drawing upon the lessons learnt in 2020 and the success of our progressive support of flexible working. We continued to prioritise our people’s health and wellbeing, with many of our initiatives focused on mental health support and staying connected to one another. The impact of COVID-19 in 2022 cannot be predicted with any certainty; however, Medibank remains positioned for growth. Our investment in our people, technology, and digitisation has been critical to our business resilience, and stood us apart from many of our competitors. In the year ahead, our focus will shift more towards embedding and scaling our existing health and wellbeing offers into our customers’ experience. We will have an even sharper focus on enhancing value by moderating health system cost growth, particularly in a post- COVID-19 environment. Continuing to offer more choice to our customers and reducing out-of-pocket costs remains a priority, with clinically led, alternative ways of delivering care a key part of the solution. To achieve this, we will continue to strengthen and broaden our partnerships with healthcare providers and corporates. Our strategy is the right strategy for our business and will continue to inform our decisions. Aligned with our evolved strategy, some of the milestones have been revised and are detailed below. FY21 milestone scorecard Pillars Milestones Focus on our customers and people Grow the core business Customer advocacy: Service NPS (average) FY21 FY22 benchmark1 Medibank 37.1 43.0 ahm >35 >35 Employee advocacy: eNPS FY21 Place to work +30 Products & services +26 FY22 benchmark2 ≥24 ≥19 Net policyholder growth FY213 +3.5% / +64.3k FY22⁴ c. 3%, including continued growth in the Medibank brand Market share Health Insurance productivity delivered FY24 aspiration FY21 27.3% Up 25-75 bps FY21 c. $20m FY22-FY24 target $40m including $15m in FY22 Transform into a health company Health and wellbeing Medibank Health operating profit (excluding Myhealth and other investments) Customers engaged with Live Better5 FY21 c. 366k FY22 c. 480k FY21 $32.2m FY22 Organically replace the reported FY18 $30m operating profit of Garrison by FY22 (tracking broadly in line on an underlying basis) 1. Benchmark reflects sustaining service levels while continuing to digitise the service delivery model. 2. FY22 benchmarks are based on the global average adjusted for Australian healthcare and financial insurance industry context. 3. Adjusted for suspensions and reactivations occurring as a result of COVID-19. 4. Assumes slowing participation growth compared to FY21. 5. Includes total customers who have engaged with our preventative health offering, including Live Better Rewards, Live Better activities, preventative health programs and any new offerings developed. Annual Report 2021 27 Operating and financial review 4. Material business risks The material business risks which could affect Medibank’s operations, business strategies and financial prospects are summarised below. The COVID-19 pandemic has, and will continue to have in 2022, the potential to impact Medibank’s material and strategic business risks. Medibank continuously monitors the uncertainty introduced by COVID-19 and its impact on its risk profile, both on financial and non-financial risks. Ongoing and emerging risks related to the pandemic include the demand for clinical services and therefore pressures on resourcing, attraction, retention and cost, and expectations regarding employee vaccination. Where appropriate, Medibank has strengthened its governance, monitoring and internal control system to address increased risk exposures caused by the pandemic in relation to its operational, financial and strategic risks. Risk description Risk management strategy Material sustainability categories Strategic The risk that we are unable to identify and execute the right strategic initiatives and projects on target and on time that deliver measurable and agreed outcomes to support our goals Operational The risk of financial loss resulting from inadequate or failed internal processes, people and systems or from external events Medibank’s strategic risks are identified and assessed as part of our annual strategic planning process and endorsed by the Board. Key strategic risks identified include loss of private health insurance customers, healthcare costs and utilisation, regulatory risk, and execution of non- private health insurance growth. These risks influence the prioritisation of investments and resources in the Corporate Plan, which is approved by the Board. To effectively understand and assess some key strategic risks that are broad in nature (e.g. regulatory and customer risks), we undertake detailed analysis on threats or opportunities that specific scenarios may pose to our business. We have established risk management policies and procedures for identifying, assessing, monitoring and reporting operational risks and controls. This includes the important areas of information security, technology, business continuity, outsourcing, fraud, people, and health and safety risks. Management of operational risk is overseen by divisional risk committees, the Executive Risk Committee and the Board’s Risk Management Committee. Credit The risk of financial loss due to counterparties failing to meet all or part of their contractual obligations Exposure to this risk is primarily through Medibank’s investment portfolio. This risk is managed through the application of the Investment Management Policy. The effective implementation of this policy is overseen by the Board’s Investment and Capital Committee to ensure that credit risk is managed in line with the risk appetite set by the Board. Capital & liquidity The risk of not being able to meet financial commitments as and when they are due and in complying with APRA prudential standards on solvency and liquidity Medibank has a Board-approved Liquidity Management Policy and a Board-endorsed plan designed to ensure it meets or exceeds regulatory solvency requirements and is able to meet all payments as and when they fall due. Liquidity risk is managed by our treasury function through daily cash management of cash flows and liquid asset positions and projected future cash flows, supported by actuarial forecasts that take into account anticipated seasonality as well as stressed market conditions. 28 Medibank Risk description Risk management strategy Material sustainability categories Market & investment The risk of adverse financial impact market factors e.g. foreign exchange rates, interest rates and equity prices Insurance The risk of misestimation of incurred and expected costs, frequency and severity of insured events Clinical The risk of unexpected, adverse clinical outcomes from a health service provided by Medibank, or a third party acting on behalf of Medibank Regulatory compliance Failure to comply with regulatory requirements We have a Board-approved Investment Management Policy. The Board’s Investment and Capital Committee oversees the investment process and compliance with investment mandates, performance against benchmarks and asset allocation. Our strategic asset allocation is weighted largely towards defensive assets and with limits applied to illiquid assets. The Board approves the Pricing Policy, which includes pricing and profitability objectives and forms a key part of the Capital Management Plan. Our objective is to support customer growth through balancing the offer of competitive value to all customers with profitability objectives and the need to meet capital management and regulatory requirements. Insurance risk is a key part of regular portfolio monitoring and treatment plans are formulated and implemented in response to any potential for deviation from target measures. Clinical risk arises from clinical services that Medibank provides and procures, the provision of health-related information, and customer health initiatives. We have implemented a clinical governance and quality management framework that defines the principles, structures and processes that underpin service quality, continuous improvement and patient safety. Our Chief Medical Officer, supported by a clinical governance team, provides oversight and assurance. The Risk Management Committee and Board receive regular reporting on the performance of clinical risk management. We have established compliance management policies and procedures for identifying and managing Medibank’s regulatory obligations and incidents that may arise. Management of compliance risk is overseen by divisional risk committees, the Executive Risk Committee and the Board’s Risk Management Committee. Customer health Employee health Community health Environmental health Governance For further information about our material categories please see our Sustainability Report 2021. Annual Report 2021 29 Directors 44% are women 38% were born overseas Top L to R: Mike Wilkins, David Koczkar, Tracey Batten. Middle L to R: Anna Bligh, Gerard Dalbosco, David Fagan. Bottom L to R: Peter Hodgett, Linda Bardo Nicholls, Christine O'Reilly. Name and title Biography Mike Wilkins AO Chairman and Independent Non-executive Director BCom, MBA, FAICD, FCA Age: 64 Mike was appointed a director in May 2017 and Chairman effective 1 October 2020. He is Chairman of the Nomination Committee and a member of the Investment and Capital Committee and the People and Remuneration Committee. Mike is the Chairman (since March 2020) and a director (since November 2016) of QBE Insurance Group Limited. He is also a director of Scentre Group Limited (since April 2020). Mike has more than 30 years of experience in financial services, predominantly in Australia and Asia. He served as Managing Director and Chief Executive Officer at Insurance Australia Group (November 2007 to November 2015), Managing Director and Chief Executive Officer at Promina Group Limited and Managing Director at Tyndall Australia Limited. He also served as Acting Chief Executive Officer (April 2018 to December 2018), Executive Chairman (April 2018 to June 2018) and a director (September 2016 to February 2020) of AMP Limited. He was previously a director of Maple-Brown Abbott Limited, Alinta Limited, The Geneva Association and the Australian Business and Community Network. David Koczkar David was appointed Chief Executive Officer in May 2021. Chief Executive Officer BCom, PG Dip Finance, MAICD Age: 48 He commenced at Medibank in 2014, holding the roles of Chief Operating Officer from March 2014 and then Group Executive – Chief Customer Officer from September 2016, where he was responsible for the Health Insurance and Diversified portfolios, Live Better and the ahm business. David was also appointed Acting Chief Executive Officer between April 2016 and June 2016. Prior to joining Medibank, David was the Group Chief Commercial Officer at Jetstar where he was responsible for the airline group’s network management, sales and marketing, customer channels and commercial operations, including as a director of Jetstar Pacific (Vietnam), Jetstar Hong Kong and NewStar (Singapore) JV businesses. David has more than 25 years of strategy, customer and commercial experience, including previous work in the strategy consulting and financial services industries. 30 Medibank Top L to R: Mike Wilkins, David Koczkar, Tracey Batten. Middle L to R: Anna Bligh, Gerard Dalbosco, David Fagan. Bottom L to R: Peter Hodgett, Linda Bardo Nicholls, Christine O'Reilly. Name and title Biography Dr Tracey Batten Independent Non-executive Director MBBS, MHA, MBA, FAICD, FRACMA Age: 55 Tracey was appointed a director in August 2017. She is a member of the Risk Management Committee and the People and Remuneration Committee. Tracey has extensive experience in the health services sector, with strong commercial, business and change leadership skills. Tracey is currently a director of EBOS Group Limited (since July 2021), the National Institute of Water and Atmospheric Research in New Zealand and the New Zealand Accident Compensation Corporation, and a former director of Abano Healthcare Group. Anna Bligh AC Independent Non-executive Director BA (QLD) Age: 61 Gerard Dalbosco Independent Non-executive Director M.AppFin, B.Comm, FCA, FFIN, GAICD Age: 58 David Fagan Independent Non-executive Director LLB, LLM, GAICD Age: 64 Tracey was previously the Chief Executive of the Imperial College Healthcare NHS Trust in the United Kingdom. In that role, Tracey focused on change leadership, in particular improving organisational culture and strengthening patient safety and experience. Tracey also oversaw the implementation of a range of digital initiatives as Chief Executive. Tracey is a former Chief Executive of St Vincent’s Health Australia, which runs a group of public hospitals, private hospitals and aged care facilities. Anna was appointed a director in December 2012. She is a member of the Investment and Capital Committee and the People and Remuneration Committee. Anna is currently the Chief Executive Officer of the Australian Banking Association and a director of the International Banking Federation (IBFed). Anna has extensive experience in leadership and public policy, including in the fields of healthcare, finance, infrastructure and project management. She has held several roles in the Queensland Government, including Premier, Treasurer, Minister for Finance, Minister for State Development, Minister for Trade and Innovation and Minister for Education. She was also a member of the Queensland Cabinet Budget Review Committee for 11 years. Anna was a director of Bangarra Dance Theatre Australia (2012-2020) and is currently a non-executive director of Australian Plays Transform. Gerard was appointed a director in May 2021. He is a member of the Audit Committee and the Risk Management Committee. Gerard held a number of senior leadership roles as a Partner of EY until September 2020. His most recent role was Melbourne Managing Partner where he led a large team responsible for EY’s go-to-market and client service strategies. Prior to this, Gerard held other roles at EY including Asia Pacific Managing Partner – Markets and Co-Deputy CEO where he led EY’s client-serving activities across the Asia Pacific market. He was also Oceania Managing Partner and CEO, and Oceania Managing Partner of Transaction Advisory Services where he was responsible for EY’s Transaction Advisory Services business across Oceania. Gerard is currently Chair of Melbourne Archdiocese Catholic Schools and Co-Deputy Chair and Chair of the Finance Committee of the Committee for Melbourne. He has previously held roles as a director and Chair of the Finance & Audit Committee of Mercy Health & Aged Care, director and member of the Finance Committee of Berry Street Victoria, and Chair of the National Gallery of Victoria’s Business Council. David was appointed a director in March 2014. He is Chairman of the Risk Management Committee and a member of the Investment and Capital Committee and the Nomination Committee. David is a highly experienced commercial lawyer. He held a variety of leadership positions at Clayton Utz culminating in the role of Chief Executive Partner for nine years. In this role, David had responsibility and accountability for leadership and transformation, strategy, finance, stakeholder engagement, and governance, including risk management. During David’s tenure as Chief Executive Partner, Clayton Utz entrenched itself as a first class top tier commercial law firm. David also chaired the Medibank Privatisation Committee which operated during 2014 in preparation for the privatisation process. David is a former director and Chair of the Audit Committee of The Global Foundation, a former director of Grocon Funds Management Group, the Hilco Group and UBS Grocon Real Estate Investment Management Australia Pty Limited and a former member of the advisory board of Chase Corporate Advisory. David is currently a director of PayGroup Limited (since November 2017). He is Chair of BDO Group Holdings Limited and a member of the ASIC Corporate Governance Consultative Panel. Annual Report 2021 31 Directors Name and title Biography Peter Hodgett Independent Non-executive Director BSc (Hons) Age: 66 Peter was appointed a director in June 2013. He is Chairman of the Investment and Capital Committee and a member of the Audit Committee and the Nomination Committee. He held a number of other non-executive directorships from 2008 and is currently a director of the Leukaemia Foundation of Australia. Previously, Peter worked for AMP for more than 20 years in a wide variety of business and functional roles, including Chief Actuary during its demutualisation, General Manager of Human Resources and Strategy, and as Global Director of Finance and Operations for Henderson Global Investors in the United Kingdom. Linda Bardo Nicholls AO Linda was appointed a director in March 2014. She is Chairman of the People and Remuneration Committee and a member of the Nomination Committee. Independent Non-executive Director BA, MBA (Harvard), FAICD Age: 73 Linda has more than 30 years of experience as a senior executive and director in banking, insurance and funds management in Australia, New Zealand and the United States. She is currently Chairman of Japara Healthcare Limited (since March 2014) and a director of Inghams Group Limited (since November 2016). Linda is also Chairman of the Board of Melbourne Health and a member of the Museums Board of Victoria. Christine O’Reilly Independent Non-executive Director BBus Age: 60 Linda’s previous directorships include Fairfax Media Limited (February 2010 to December 2018), Pacific Brands Limited (October 2013 to July 2016), Sigma Pharmaceuticals Limited (December 2005 to December 2015) and Healthscope Limited, as Chairman (October 2008 to October 2010) and a director (January 2000 to October 2010). Christine was appointed a director in March 2014. She is Chairman of the Audit Committee and a member of the Risk Management Committee and the Nomination Committee. Christine is currently a director of Stockland (since August 2018), BHP Group Limited (since October 2020), and the Baker Institute. Christine has more than 30 years of financial and infrastructure experience both in Australia and internationally in various roles including as Co-head of Unlisted Infrastructure at Colonial First State Global Asset Management and Chief Executive and Managing Director of GasNet Australia Group. Christine’s early career includes eight years in investment banking and audit experience with Price Waterhouse, where she qualified as a chartered accountant. Her previous directorships include CSL Limited (February 2011 to October 2020) and the Transurban Group (April 2012 to October 2020). Company Secretary Name and title Biography Mei Ramsay Group Executive – Legal, Governance & Compliance and Company Secretary BA, LLB, LLM 32 Medibank Mei was appointed Group Executive – Legal, Governance & Compliance (previously Legal, Governance & Regulatory Affairs) in September 2016 and has been the Company Secretary for Medibank Private Limited since 2014. Mei previously held the position of Group General Counsel from 2011. She is responsible for leading the legal and governance functions, including compliance, regulatory affairs and company secretariat, and providing legal and corporate governance advice to Medibank’s Board, Chief Executive Officer and senior management. Mei has more than 25 years of experience in the legal profession, both as a senior in-house legal adviser for multinational and international companies, as well as a private practitioner. Prior to joining Medibank, Mei was the General Counsel and Company Secretary for the Asia Pacific region at Cummins Inc, and before that held various senior legal positions at Coles Myer Ltd and Southcorp Limited. Mei started her legal career at Arnold Bloch Leibler and also worked as a Senior Associate at Minter Ellison. Mei is currently the Vice President of the Association of Corporate Counsel (ACC) Australia, a member of the Executive of the ACC GC100 and former Chair of the ACC GC100, and a member of Chief Executive Women. Executive Leadership Team 25% are women 50% were born overseas Top L to R: David Koczkar, Kylie Bishop, Rob Deeming. Middle L to R: John Goodall. Milosh Milisavljevic, Mei Ramsay. Bottom L to R: Mark Rogers, Andrew Wilson. Name and title Biography Kylie Bishop Group Executive – People & Culture Kylie has held the position of Group Executive – People & Culture with Medibank since 2013. She is a registered psychologist, specialising in organisational psychology and is responsible for leading the key people functions, as well as Environment, Social and Governance (ESG) across Medibank. This includes culture, talent and capability, performance and rewards, shared services, talent acquisition, workplace relations, health, safety and wellbeing, employee experience and community. Rob Deeming Group Executive – Customer & Brands Kylie is responsible for leading Medibank’s culture and new ways of working program focused on purpose and inclusion, customer first and health & wellbeing. This includes leading the design and build of a new Melbourne workspace to be delivered in 2024. Kylie began her career in human resource consulting and prior to joining Medibank in 2010, held senior positions with National Australia Bank (NAB). Kylie is also currently a non-executive director of Melbourne Health and Basketball Victoria, and was previously a director with Rugby Victoria. Rob was appointed Group Executive – Customer & Brands in June 2021. He is responsible for the Medibank and ahm brands and our customer channels, as well as our digital platforms and capabilities. He is accountable for growing and sustaining Medibank’s consumer businesses, and creating leading customer experiences to improve the advocacy, engagement and experience for our customers. Prior to this role, Rob held the role of Senior Executive within Medibank since August 2020 where he was responsible for leading ahm, Australia’s fastest growing private health insurance brand. Rob has extensive experience in entrepreneurial leadership, leading consumer brands and growing digital-led businesses. Before joining Medibank Rob was the CEO of Billy, a multi award-winning hardware/software business supporting older people living independently at home across Australia and the US. In this role he built and led the vision, strategy and team for the business alongside the two technical founders. Rob also spent several years in commercial leadership roles at Jetstar and Qantas. At Jetstar, he led the commercial teams that looked after the digital channels, as well as the ancillary products and hotels businesses. Prior to this he was the CEO of the travel booking engine, Jetsetter, with teams based in New York, Boston and London. Rob led the sale of Jetsetter to TripAdvisor in 2013. Annual Report 2021 33 Executive Leadership Team Name and title Biography John Goodall Group Executive – Technology & Operations John was appointed Group Executive – Technology & Operations in December 2016. He is responsible for Medibank’s core IT platforms, property, procurement and operations with a focus on leveraging our systems, processes and information to deliver improved, personalised digital experiences for Medibank’s customers. John has more than 25 years of experience working in and leading IT functions across the retail and financial services industries and utilising technology to drive business growth and align business systems and processes to customer needs. Prior to joining Medibank, John held the role of General Manager Enterprise Technology at Sportsbet, and before his time at Sportsbet he spent 20 years at GE Capital Australia and New Zealand where he held a number of roles, including Chief Information Officer. Milosh Milisavljevic Group Executive – Customer Portfolios Milosh was appointed Group Executive – Customer Portfolios in June 2021. He is responsible for Medibank‘s customer portfolios, including member health programs, Live Better and diversified insurance portfolios. He is also accountable for growing and sustaining Medibank’s consumer, corporate and overseas portfolios, managing our relationship with our provider network and diversifying our propositions to improve the quality of life and health of our customers. Milosh joined Medibank in 2016 and has held a number of roles, most recently as the Senior Executive Customer Strategy & Portfolio. In these roles he led Medibank’s customer strategy, commercial transformation, product innovation and portfolio management, strategic partnerships and data science. Milosh has extensive experience leading customer focused and data driven transformations across health, media and telecommunications industries, including proposition, innovation and new business growth. Prior to joining Medibank, Milosh held senior roles at SEEK and McKinsey & Company. Mark Rogers Group Executive – Chief Financial Officer & Group Strategy Mark was appointed Group Executive – Chief Financial Officer & Group Strategy in May 2021. Previous to this, he held the role of Group Executive – Chief Financial Officer since January 2017. Mark is responsible for the finance, actuarial, treasury, internal audit and investor relations functions across Medibank as well as strategy development and M&A. He has more than 20 years of global experience across the healthcare, pharmaceuticals and financial services sectors. Before joining Medibank, Mark held the role of General Manager, Group Performance and Planning at National Australia Bank (NAB) since 2013, where he was responsible for management reporting, performance management, planning and forecasting, and capital allocation. Preceding this, Mark was General Manager, Group Development. Prior to this, Mark was responsible for Group Strategy and Development for the Mayne Group, a diversified healthcare, pharmaceuticals and pharmacy business, where he was accountable for the management of the Group’s strategy, capital management and mergers and acquisitions. Prior to that role, Mark led Group Investor Relations at Mayne Group. Mark is a director of Private Healthcare Australia Limited and East Sydney Private Hospital, and Chairman of Myhealth Medical Group. Andrew was appointed Group Executive – CEO Health Services in May 2021. Previous to this, he held the roles of Group Executive – Healthcare & Strategy since September 2016 and Executive General Manager – Provider Networks & Integrated Care since 2013. He is responsible for Medibank’s growing role as a broader health services provider. This includes responsibility for the health services we deliver on behalf of business and government, including telehealth, virtual healthcare, in-home care, and services into residential aged care. Andrew is also responsible for Medibank’s hospital and healthcare investments and joint venture healthcare partnerships, which support both Medibank customers and other Australians in acute care and community settings. Andrew has 25 years of experience in the health system, and remains a practising clinician and lecturer. He was a founder and Co-president of McKesson Asia-Pacific, which was acquired by Medibank in 2010. Andrew is a director of Calvary MHIH JV Pty Ltd, East Sydney Private Hospital and Myhealth Medical Group. He is also a director of a joint venture between Medibank and specialists to develop a private hospital facility in Kew, Melbourne. Dr Andrew Wilson Group Executive – CEO Health Services 34 Medibank Corporate governance statement Medibank was founded in 1976 as a private health insurer and was operated by the Australian Government. In 1998, Medibank Private Limited became the operating entity with the Commonwealth of Australia as the sole shareholder. In 2014 the Australian Government sold Medibank by way of an initial public offering, and divested all its shares in Medibank. Medibank listed on the Australian Securities Exchange (ASX) on 25 November 2014. The Medibank Board is committed to improving our customers’ experience and providing them with greater value. In line with this, the Board seeks to ensure that Medibank is properly managed to protect and enhance shareholder interests, and that Medibank, its directors, officers and employees operate in an appropriate environment of corporate governance. Governance structure The Board has a framework in place for governing Medibank. This includes adopting internal controls, risk management processes and corporate governance policies and practices, designed to promote responsible management and ethical conduct. During the year, Medibank had in place policies and practices which comply with the recommendations in the ASX Corporate Governance Council Corporate Governance Principles and Recommendations (CGPRs), 4th edition. As a registered private health insurer, Medibank also complies with a governance standard issued by the Australian Prudential Regulation Authority (APRA). The key corporate governance practices applied at Medibank are described in this statement and the key corporate governance policies are available on the corporate governance section of our website at medibank.com.au. The governance and performance of Medibank is overseen by the Board elected by the shareholders. Medibank Private Limited Board Oversees management of Medibank on behalf of shareholders Audit Committee Oversees financial reporting Risk Management Committee Oversees current and future risk management Investment and Capital Committee Oversees investment and capital management activities People and Remuneration Committee Oversees key remuneration and people policies and practices Nomination Committee Oversees board and committee membership and succession planning Chief Executive Officer Responsible for the day-to-day management of Medibank and implementation of the strategic objectives Executive Leadership Team Supports the Chief Executive Officer with running the business and delivering on the strategic objectives Roles and responsibilities of the Board and management The Board provides overall strategic guidance for Medibank and effective oversight of management. Responsibility for the governance of Medibank, including establishing and monitoring key performance goals, rests with the Board. The Board monitors the operational performance and financial position of Medibank, as well as overseeing the business strategy and approving strategic goals. In performing its role, the Board is committed to ensuring sound corporate governance practices. The Board Charter, which is available on our website, articulates the Board’s roles and responsibilities, its membership and operation, and which responsibilities may be delegated to committees or to management. Specific responsibilities have been reserved by the Board in key areas of: strategy (including approval and monitoring of the corporate strategy and performance objectives); governance (including disclosure); appointment, performance evaluation and remuneration of the CEO and other senior executives, including the Company Secretary; approving the Code of Conduct and overseeing Medibank’s purpose, culture and values; financial approvals and reporting; risk management, compliance and workplace health and safety; and culture (including diversity and inclusion). The Board has established standing committees to assist in performing its responsibilities. These committees examine particular issues in detail and make recommendations to the Board. A description of these committees can be found on pages 39 to 40. Annual Report 2021 35 Corporate governance statement The Chief Executive Officer (CEO) has responsibility for managing the day-to-day affairs of Medibank. The CEO, with the support of the Executive Leadership Team (ELT), manages Medibank in accordance with the Board-approved Corporate Plan, the corporate strategy and Medibank’s policies within the risk appetite set by the Board. A detailed delegation of authority framework defines the decision making and expenditure limits that apply at various levels of management. Key areas of focus for the Board in 2021 Corporate governance (including COVID-19) • Oversight of COVID-19 impacts and response, including: – Ensuring the health and wellbeing of our customers, people and the community. – Customer give backs and hardship policies. – Accounting and regulatory responses, including in relation to claims liability and capital stress testing. – Business continuity management. – Managing retail stores and offices in a safe manner. • Oversight of the enhancement of the enterprise risk and compliance management framework and risk and compliance culture, including review and monitoring of financial and non-financial material risks and emerging risks and the coordination of the first independent comprehensive review required by APRA Prudential Standard CPS220. • Oversight of environmental, social and governance (ESG) strategy and the governance framework, including implementing policies and processes to comply with the 4th edition of the CGPRs. Strategy and execution • Review of strategy, including transformation into a health company and evaluation of opportunities to  execute on our strategic pillars and key objectives. • Oversight of investments, partnerships and organic growth initiatives to support execution of the strategy. • Review and approval of the Corporate Plan, budget and performance targets and oversight of business performance against these targets. People, remuneration and culture • Selection of new Chairman and CEO and oversight of transition. • Review of Board composition and consideration of succession planning, including selection of new non-executive director. • Oversight of our people and our culture, including monitoring of the remuneration framework and ensuring we have a strong people agenda focused on skills development. • Oversight of succession planning for the Executive Leadership Team. • Undertaking an external independent evaluation of the Board, committees and non-executive directors. 36 Medibank Structure and composition of the Board The Board comprises nine directors in total – eight non-executive directors, including a non-executive Chairman, and the CEO. The Chairman of the Board is responsible for providing leadership to the Board and Medibank as a whole. The Chairman’s other key responsibilities are outlined in the Board Charter. The current Chairman is Mike Wilkins AO, an independent non-executive director who has served as Chairman since 1 October 2020 and on the Board since May 2017. Prior to Mike Wilkins’ appointment, Elizabeth Alexander served as Chairman and as an independent, non-executive director until her retirement effective 1 October 2020. The current CEO is David Koczkar, who commenced in the role on 17 May 2021. Previously, Craig Drummond served as CEO until his retirement effective 17 May 2021. Biographies of the directors, including their skills, experience and year of appointment, are set out on pages 30 to 32 of the annual report. Details of directors’ attendance at Board and committee meetings during the year ended 30 June 2021 are on page 48. The length of service of the non-executive directors ranges from three months to eight years and eight months. Independence Directors are expected to bring an independent judgement to bear on all Board decisions. A director is considered independent if they are a non-executive director who is not a member of management and are free of any business or other relationship that could materially interfere with the exercise of their unfettered and independent judgement or could reasonably be perceived to do so. Each director provides periodic updates of their interests, positions, associations and relationships, and all directors must keep the Board advised on an ongoing basis of any interest that could potentially conflict with those of Medibank. Directors will be required to abstain from participating in discussions or voting on any matters in which they have, or may be perceived to have, a material personal interest. The Board regularly assesses the independence of each director in light of the interests disclosed. The Board has assessed the interests, positions, associations and relationships of each director as at the date of this statement. It has determined that all non-executive directors satisfy the independence criteria recommended by the ASX Corporate Governance Council and prescribed by APRA. To provide an opportunity for independent discussion, the non-executive directors meet without management present at the commencement of each Board meeting. Appointment and re-election of directors Medibank’s Constitution provides that a director may be appointed by the Board, and if so, is subject to election by shareholders at the annual general meeting (AGM) following their appointment if they wish to remain a director (other than the CEO). Individuals may also be nominated by shareholders to stand for election as a director at the AGM. The Constitution requires an election of directors at each AGM, and a director must retire and may stand for re-election by the third AGM following the director’s election. Gerard Dalbosco will stand for election at the upcoming AGM, having been appointed on 21 May 2021. Further information about Gerard is set out on page 31 of the annual report, and in the notice of annual general meeting. Before appointing a person as a director, the Board undertakes checks as to that person’s character, experience and background, including criminal and bankruptcy checks. Medibank has a Fit and Proper Policy that complies with APRA’s Fit and Proper Prudential Standard. This standard requires that a person in a position of responsibility, including a director, be assessed prior to appointment (or in some cases, as soon as possible after appointment) and on an ongoing basis as to whether the person meets the fit and proper requirements. The person must have the appropriate skills, experience and knowledge to perform the role and act with the requisite character, diligence, honesty, integrity and judgement. Upon appointment, each non-executive director enters into a service agreement setting out the terms of their appointment. This includes the requirement to build a shareholding in Medibank in order to align the interests of directors with those of shareholders. The Minimum Shareholding Policy requires non-executive directors to acquire shares equal to the value of one year’s base fee after tax over a period of five years. As part of the appointment process, Medibank enters into a deed of indemnity, insurance and access with each director. Each director is indemnified against liability in connection with their role as a director and Medibank is required to maintain a directors’ and officers’ insurance policy. The deed confirms and extends the director’s general law rights of access to Board papers and other records of Medibank. Remuneration policies and practices applying to non- executive directors are detailed in the remuneration report from page 50. Director induction, continuing education and access to information The Board is committed to enhancing the capabilities of each director and the performance of the Board generally. Upon joining the Board, all new non-executive directors undertake a tailored induction program. This includes meetings with the Chairman, CEO, ELT and senior leaders on Medibank’s business, strategy and operation. The Board is provided with ongoing professional development opportunities during the year to maintain the skills and knowledge needed to effectively perform their role. This involves formal briefing sessions on a range of subjects by key stakeholders, including regulators and industry experts, to provide deeper insights on industry context and trends. This also includes visits to Medibank’s retail stores, customer engagement, conference attendance, and participation in the management-led Executive Risk Committee and Divisional Risk Committees. The professional development program is periodically reviewed by the Nomination Committee to ensure it meets the needs of the directors. The directors have complete and open access to the CEO, ELT and senior management following consultation with the CEO. A director may, following consultation with and consent from the Chairman, seek independent professional advice at Medibank’s expense in respect of any matter connected with the discharge of the director’s responsibilities. Directors also have direct access to the advice and services of the Company Secretary, who is accountable to the Board through the Chairman, and advises the Board and the Chairman on all governance matters. Board skills, experience and diversity The Nomination Committee regularly reviews the balance of skills, experience, independence, knowledge and diversity of the Board, and is committed to ensuring that the directors collectively have the appropriate skills mix. The evolution of the mix of skills and diversity of the Board is a long- term process and must reflect the current and emerging challenges for the organisation. The Nomination Committee takes into account the organisation’s strategic areas of focus, customer needs and external environment, including stakeholder sentiment, and assesses these various factors to ensure that an appropriate balance of skills and diversity is achieved on the Board. • Expertise and experience in developing and implementing strategy and financial and risk management are seen as critical skills required for the Board to be able to effectively govern and oversee the organisation. As a result, these skills are widely held by the Board members. • Our core business of the provision of private health insurance products with an unwavering focus on our customers means that the Board must have skills and experience in the insurance sector as well as in customer facing businesses for Medibank to be successful. Board members have expertise in both these areas from a number of different industry sectors, including the general insurance and healthcare sectors. • Our vision to become a health company and our recent acquisitions in the healthcare delivery sector make it critical for the Board to have members with experience in the delivery of health services. This is captured in the collective experience of our directors, ranging from operational expertise through to strategic oversight. Annual Report 2021 37 Corporate governance statement • Health industry reform is not only inevitable, but also vital for the ongoing sustainability of our healthcare system. To play a role in this area, the Board must have members with experience and expertise in both building and maintaining government relations and influencing policy creation. Once again the Board has a number of highly experienced individuals in this area. • Finally, the Board has identified as critical enablers, skills in human resources and remuneration and technology, and has ensured that the Board has covered these areas of expertise in constituting the current Board. The skills and expertise that the Board has identified as relevant to the performance of its role and the success of the organisation, along with the collective strength of the Board for each skill, are summarised in the Board skills matrix. The very nature of diversity means that not all members of the Board have all the skills listed below to the same degree. However, the Board believes the current mix of expertise and experience of members of the Board creates a diverse range of views and perspectives, and results in the Board providing effective governance, oversight and strategic leadership for Medibank. During the reporting period, the Nomination Committee considered the mix of skills on the Board given the above considerations, and appointed Mr Gerard Dalbosco to the Board effective 21 May 2021. Mr Dalbosco brings a high level of financial skills and not-for-profit health experience to the Board. Board skills matrix Strategy Developing and implementing organisational strategies, and appropriately challenging management on delivery of strategic objectives Financial and capital management Proficiency in financial accounting and reporting, corporate finance, internal financial controls, corporate funding and capital management and investments, and understanding of associated risks Risk management, governance and compliance Establishing risk management frameworks, setting the risk appetite, and overseeing organisational risk culture Overseeing operations in a complex regulated environment, and demonstrating commitment to the highest governance standards Insurance and healthcare sector experience Knowledge, experience and expertise in the insurance industry and healthcare sector 38 Medibank Customer experience and marketing Developing product and/or customer management strategies, and experience in marketing Human resources and executive remuneration Understanding the link between strategy, culture, performance, long-term shareholder value creation and remuneration outcomes Government relations and public policy Interacting with government and regulators and being involved in public policy decisions Technology Understanding technology and innovation, and overseeing development and implementation of initiatives to enhance productivity and customer experiences Board performance evaluation The Nomination Committee is responsible for reporting on the evaluation of the performance of the Chairman, Board, committees and individual directors to the Board. The evaluation is conducted annually either through an internal review process or an external process. In 2021, the Board undertook an independent external review of the performance of the Board, committees and non-executive directors (including the Chairman). The evaluation was primarily conducted through in-depth one- on-one interviews with the directors and ELT members. The Board discussed the external consultancy’s report and recommendations, and identified a number of opportunities to enhance its efficiency and effectiveness, including further opportunities to improve the Board’s operating rhythm, particularly in the context of the impact of the pandemic, and continuing to focus on Board renewal and diversity as part of director succession planning. Committees of the Board The Board has established five standing committees to assist in the execution of its responsibilities – the Audit Committee, Risk Management Committee, Investment and Capital Committee, People and Remuneration Committee and Nomination Committee. Each committee is governed by a charter setting out the committee’s role, responsibilities, membership and processes. The membership, roles and responsibilities of each committee are summarised in the table below. The charters can be accessed on our website. The relevant qualifications and experience of the members of each committee can be found in the director biographies on pages 30 to 32 of the annual report. The number of meetings of each committee, and the individual attendance of their members, are provided on page 48. Committee membership as at 25 August 2021 Audit Committee • Christine O’Reilly (Chairman) • Gerard Dalbosco1 • Peter Hodgett Composition Key roles and responsibilities • At least three members, all of whom • Overseeing and reviewing the integrity of external are non-executive directors, a majority of whom are independent directors and at least one of whom is a member of the Risk Management Committee. • Structured so that members are all financially literate, and between them have accounting and financial expertise and experience and an understanding of Medibank’s industries. • The chairman must be an independent non-executive director, and must not be the chairman of the Board (but the chairman of the Board may sit on the committee). financial reporting and financial statements. • Endorsing and recommending the appointment and removal of, and reviewing the terms of engagement, performance and independence of external auditors. • Reviewing management processes for compliance with relevant laws, regulations and other accounting and external reporting requirements. • Overseeing and reviewing internal and external audit processes and the internal control framework. Risk Management Committee • David Fagan (Chairman) • Tracey Batten • Gerard Dalbosco2 • Christine O'Reilly • At least three members, all of whom are non-executive directors, a majority of whom are independent directors and at least one of whom is a member of the Audit Committee. • Structured to have the necessary knowledge and a sufficient understanding of Medibank’s industries. • Approving and recommending to the Board the adoption of policies and procedures on risk oversight and management to ensure effective risk management systems are in place. • Ensuring that Medibank has in place a robust risk management framework and procedure to support the effective identification and management of risks. • The chairman must be an independent non-executive director, and must not be the chairman of the Board (but the chairman of the Board may sit on the committee). • Evaluating the adequacy and effectiveness of the management and reporting and control systems associated with material risks. • Establishment and monitoring of Medibank’s overall risk appetite. • Monitoring and review of Medibank's risk culture. • Oversight of, and monitoring progress against, Medibank's sustainability strategy. • Oversight and prior endorsement of the appointment and replacement of the Chief Risk Officer. Investment and Capital Committee • At least three members, all of whom • Assisting and advising the Board on capital are non-executive directors. and investment related matters. • Peter Hodgett (Chairman) • Anna Bligh • David Fagan • Mike Wilkins • The chairman must be an independent non-executive director, appointed by the Board. • Overseeing the investment strategy and Capital Management Policy. • Monitoring the effectiveness of the investment process. • Authorising delegated investment decisions. 1. Gerard Dalbosco was appointed a member of the Audit Committee on 21 May 2021, following Mike Wilkins’ retirement from the committee. Mike Wilkins was a member of the committee from 1 October 2020 until his retirement effective 21 May 2021, replacing Elizabeth Alexander who was a member of the committee during the period from 1 July 2020 until her retirement effective 1 October 2020. 2. Gerard Dalbosco was appointed a member of the Risk Management Committee on 21 May 2021, following Mike Wilkins’ retirement from the committee. Mike Wilkins was a member of the committee during the period from 1 July 2020 until his retirement effective 21 May 2021. Separately, Elizabeth Alexander was a member of the committee during the period from 1 July 2020 until her retirement effective 1 October 2020. Annual Report 2021 39 Corporate governance statement Committee membership as at 25 August 2021 People and Remuneration Committee • Linda Bardo Nicholls (Chairman) • Tracey Batten • Anna Bligh • Mike Wilkins3 Nomination Committee • Mike Wilkins (Chairman)4 • David Fagan • Peter Hodgett • Linda Bardo Nicholls • Christine O'Reilly Composition Key roles and responsibilities • At least three members, all of whom • Reviewing and overseeing people and are non-executive directors, a majority of whom are independent directors and at least one of whom is a member of the Risk Management Committee. • The chairman must be an independent non-executive director, appointed by the Board. organisational culture strategies, including employee engagement, values and behaviours. • Reviewing the remuneration framework and arrangements for the non-executive directors, CEO and ELT. • Reviewing executive succession planning, talent management, industrial relations and diversity strategies. • Reviewing and overseeing key incentive schemes and equity incentive plans. • Recommending to the Board the measurable objectives for diversity. • Reviewing and monitoring Medibank’s health, safety and wellbeing performance. • At least three members, all of whom • Director selection and appointment. are independent directors. • The chairman of the Board will be the chairman of the committee. • Director induction and professional development. • Board composition. • Board succession planning and renewal. • Performance evaluation of the Board, committees and individual directors. 3. Mike Wilkins was appointed a member of the People and Remuneration Committee effective 21 May 2021. 4. Mike Wilkins was appointed Chairman of the Nomination Committee effective 1 October 2020. Elizabeth Alexander was a member and Chairman of the committee during the period from 1 July 2020 until her retirement effective 1 October 2020. Executive Leadership Team Values and ethical standards Central to the Board’s governance framework is a culture of integrity and ethical behaviour based on Medibank’s key values: Customers First; Own It, Do It; Show Heart; and One Team. These values are intended to guide the way employees work together and engage with customers, business partners, governments and the wider community, and are supported by a range of policies and procedures. Our values are further articulated on our website and in our Sustainability Report. The CEO, supported by the ELT, is responsible for the day-to-day management and performance of Medibank. ELT members have a clear understanding of their roles and responsibilities through position descriptions and a structured performance management system. Profiles and accountabilities for ELT members are set out on pages 33 to 34. Each ELT member has entered into a service agreement with Medibank which sets out the terms of their employment. Remuneration policies and practices applying to the ELT are detailed in the remuneration report from page 50. The remuneration report (from page 50) contains the performance measures applied to ELT members and the process for the annual evaluation of their performance. A performance evaluation was undertaken during 2021 in accordance with that process for each ELT member, noting that Rob Deeming and Milosh Milisavljevic had their 2021 performance evaluated against the positions they held prior to joining the ELT. 40 Medibank Key Policies Details of key policies supporting our commitment to integrity and ethical behaviour are set out below. Copies of each policy can be found on our website. Purpose Key provisions Code of Conduct Medibank employees are required to conduct their activities ethically and with integrity. The Code of Conduct sets out the ethical standards that are expected of all directors, managers, employees and contractors in their dealings with customers, suppliers and each other. Requires directors, managers, employees and contractors to behave with high standards of personal integrity, and in a manner that: • complies with applicable laws, standards and internal policies; • promotes health, safety and wellbeing; • fosters relationships of trust, accountability and transparency; • avoids conflicts of interest (including not offering or accepting inducements, secret commissions or bribes); and • respects privacy and protects confidential information. Breaches and reporting Sets out different approaches to dealing with breaches of the Code, depending on the circumstances – including raising concerns with immediate or senior managers, the People & Culture team, the CEO, or via the Whistleblower Policy. Breaches of the Code of Conduct are reported to the People and Remuneration Committee. Whistleblower Policy Anti-Bribery and Corruption Policy Medibank is committed to a culture where our people are encouraged to speak up if something doesn’t look right, and to support them when they do. The Whistleblower Policy establishes what is reportable conduct, how to contact Medibank Alert, and the protections available to whistleblowers. Medibank has zero tolerance for bribery and corruption. The Anti-Bribery and Corruption Policy describes conduct that is prohibited for directors, employees and contractors when conducting business on behalf of Medibank, and how breaches can be reported. Share Trading Policy The Share Trading Policy describes restrictions on buying and selling Medibank shares for the Board, the ELT, senior executives and other Medibank employees. Sets out the types of conduct that can be disclosed, who may make a disclosure under the policy and what to include in a report. Sets out support and protection available to whistleblowers, and the processes for managing whistleblower complaints (including key roles and responsibilities). Provides details of the Medibank Alert whistleblower service, which is available through an external provider, enabling whistleblowers to report anonymously or limit who is informed of their identity. Requires that directors, employees and contractors: • not offer, pay or accept inducements, bribes, kickbacks, secret commissions or improper payments, or engage in corrupt business practices; • not accept gifts, hospitality or anything of value which may have obligations attached; • not offer or give anything of value, or solicit any inducement, that may conflict with their work or duties to Medibank; and • ensure approved grants and donations are appropriately recorded. Prohibits directors, executives and employees from dealing in Medibank or other securities if they possess inside information. Prohibits trading by directors, executives and certain restricted employees in Medibank securities during blackout periods, which apply in the lead-up to the release of financial results and at other times as required. Breaches of the policy are reported to the Risk Management Committee. Requires requests for bribes or facilitation payments to be reported to the Chief Risk Officer. Requires other breaches or potential breaches to be reported to the Chief Risk Officer or the Whistleblower Hotline. Breaches of the policy are reported to the Risk Management Committee. Details the penalties at law for breaches of insider trading laws and the consequences as a director or employee for a breach of law and the policy. Annual Report 2021 41 Corporate governance statement Ethical conduct is also supported by a range of other corporate policies, including in the areas of conflicts of interest, health, safety and wellbeing and modern slavery. Copies of these policies are also available on our website. The Health, Safety and Wellbeing Policy underpins our objective of preventing injury and illness through a culture of health promotion, injury prevention and early intervention. Medibank has a health and safety management system in place to ensure it meets legislative requirements and proactively addresses its key risks in health and safety. Diversity and inclusion Medibank is committed to creating an inclusive culture that acknowledges and embraces difference in all its forms and ensures that every voice is heard. Medibank recognises that all employees are different, and these differences benefit our employees, shareholders, customers and the community. The Board has adopted a Diversity and Inclusion Policy that supports and facilitates an inclusive environment. The policy outlines the role of the People and Remuneration Committee in recommending to the Board measurable objectives for diversity and annually assessing progress against these. The policy is reviewed annually and is available on Medibank’s corporate website. A Diversity and Inclusion Strategy supports the policy and sets out the measurable objectives established by the Board. The Board emphasises the importance of having a gender diverse leadership team, which is supported by Medibank’s commitment to having and maintaining at least 40 percent female representation in the Group and senior executive population. As at end June 2021 the actual representation was 51%. In June 2021, Medibank completed the reporting of its gender equality indicators under the Workplace Gender Equality Act 2012 (Cth). The reports can be accessed on the corporate website. As at end June 2021, the respective proportions of men and women on the Board, in senior executive positions and across the organisation were as follows: Position Board (including CEO) Group Executives (including CEO)1 Senior executives2 Group and senior executive total Senior managers Other managers Non-managers Overall (excluding Board) Women 4 2 25 27 106 334 2,288 2,755 Men 5 6 20 26 112 305 650 1,093 Other 2 8 10 % Women 44% 25% 56% 51% 49% 52% 77% 70% 1. Group Executive positions refer to the CEO and the Executive Leadership Team (ELT). All of the ELT report directly to the CEO. 2. Senior executive positions include all roles classified as senior executives as part of Medibank’s broad based banding framework. As at 30 June 2021, they represent the 45 most senior positions in the Group outside of Group Executive roles. 42 Medibank In 2020 the Board set measurable objectives for achieving diversity at Medibank, including gender diversity, and committed to reporting progress achieved against these in the 2021 corporate governance statement. The table below shows our progress against these objectives: Measurable objective Progress towards achievement Medibank will remain committed to ensuring a representation of at least 40% women across our senior leadership population, and at least 40% of women on the Medibank Board. Medibank will aim to improve the gender balance across our manager and non-manager population by maintaining at least 40% women across our manager workforce and improving the representation of men in our non-manager workforce. Medibank will continue its focus on increasing the representation and self-reported engagement of: • Aboriginal and Torres Strait Islander employees (with a target set of at least 32 employees); and • Employees with a disability. As at June 2021, women represented 51% of Group and senior executives, with the number of women at senior executive level increasing by 3% to 56%. Female representation on the Medibank Board was still above target at 44% (including the CEO), a decrease from 56% in FY20. Women represented 50% of all manager roles (excluding Group and senior executives) and 77% of non-manager positions (compared to 78% in FY20). This was largely driven by our Healthcare & Strategy division where women made up 84% of non-manager roles (compared to other divisions where women represented 70%). This is characteristic of the broader Australian health workforce, which is comprised of 79.6% women1. In FY21, the number of employees identifying as Aboriginal and Torres Strait Islander increased to 33 people (up from 16 people in FY20), which equates to 1% of Medibank employees. Our employee survey showed the engagement score for this cohort was 6.9 which is lower than the Medibank average of 7.8. We launched a Cultural Awareness program, including online, face-to-face and immersive experiences, as well as bespoke content related to our health operations. 64% of our people participated in the program. We also launched our Aboriginal Employee Network, which aims to create a safe space for Aboriginal and Torres Strait Islander people and to help grow, develop and retain our Aboriginal and Torres Strait Islander workforce. In FY21, 4% of employees identified as having a disability, down from 6% in FY20. Engagement for this group was consistent with the Medibank average of 7.8. We continued to focus on inclusion of people with disabilities through our Accessibility and Inclusion Plan, and ranked 2nd in the 2020 Australian Network on Disability Index. We worked to improve the process for workplace adjustments for people with disability and ensured that our digital platforms and retail spaces are accessible for customers with a disability. Medibank will improve the support available to employees with caring responsibilities for elderly parents, people with a disability or chronic condition. In FY21, we launched a Carers Support Network, the first stage of a broader targeted carers support package we are developing to assist the significant proportion of employees (17%, as measured by our employee engagement survey) who have caring responsibilities; either elderly parents, or a family member with a disability or chronic condition. 1. Workplace Gender Equality Agency (2020). Australia’s gender equality scorecard. Annual Report 2021 43 Corporate governance statement For 2022, the Board has set the following measurable objectives for achieving diversity at Medibank, including gender diversity, and is committed to reporting progress achieved against these in the 2022 corporate governance statement: 1. 2. 3. 4. Medibank will remain committed to ensuring a representation of at least 40% women across our senior leadership population, and at least 40% women on the Medibank Board. Medibank will aim to improve the gender balance across our manager and non-manager population by maintaining at least 40% women across our manager workforce and improving the representation of men in our non-manager workforce. Medibank will continue to focus on the representation of Aboriginal and Torres Strait Islander employees with a target set of at least 42 employees (approx. 1.4% of our organisation) and their improved self-reported engagement through the delivery of a new Reconciliation Action Plan. Medibank will cultivate a disability confident culture leading to an increase in the representation and self-reported engagement of employees with a disability. 5. Medibank will provide a market leading comprehensive and targeted support carers package to improve the engagement of employees with caring responsibility for elderly parents, or a person with a disability or chronic condition. Market and shareholder communication Market disclosure We promote investor confidence and the rights of shareholders by ensuring the immediate disclosure of market sensitive information regarding Medibank. The measures to further these commitments are detailed in the Disclosure and Communication Policy approved by the Board, which is available on our website. This policy is designed to facilitate compliance with Medibank’s obligations under the ASX Listing Rules and the Corporations Act 2001 (Cth) by assigning authorisation processes for market announcements and reserving certain matters for approval by the Board. The policy also requires the Board to receive copies of material market announcements promptly after they have been made. Processes for engagement with analysts and investors are detailed in the policy as well as the assignment of spokespersons for market and media communications. Awareness and compliance is promoted by compulsory periodic online employee training and additional information sessions for those likely to become aware of potentially market sensitive information. 44 Medibank The Board is supported by a management Disclosure Committee responsible for considering potentially market sensitive information and monitoring Medibank’s disclosure processes and reporting framework. The Disclosure Committee Charter is available within the Disclosure and Communication Policy. Medibank’s full year financial reports are audited, and our half year financial reports reviewed, by our external auditor. For other periodic corporate reports, such as the Annual Report and Sustainability Report, relevant subject matter experts confirm the factual accuracy of relevant statements; final reports are also reviewed by senior executives who have the knowledge and skills to verify the accuracy of the information. Periodic corporate reports are reviewed and where appropriate, approved by the Board prior to publication. Information about Medibank and its governance Our website provides information about Medibank and its corporate governance, and an investor centre that provides information specifically for prospective and existing Medibank shareholders which links to Medibank’s results, investor presentations, annual reports, share price, ASX announcements and AGM materials. We also maintain a shareholder calendar of upcoming events within the investor centre, along with information to assist investors in managing their shareholdings. Medibank’s share register is managed by Computershare Investor Services Pty Limited which provides an accessible online platform for shareholders to access and manage their shareholdings. Medibank encourages shareholders to receive communications securely by email for reasons of speed, security, environmental friendliness and cost reductions. If a shareholder so elects, Medibank will communicate with them via email and other electronic channels, including providing notices of meetings and facilitating online voting on the AGM resolutions. Investor engagement We conduct briefings, meetings, telephone calls and webcasts for institutional and retail investors, analysts and proxy advisors to provide a greater understanding of the business and results. Investor briefings and ad hoc meetings with institutional and retail investors, analysts and proxy advisors provide a forum for two-way communications between Medibank and the investment community. During the year, we participated and presented at a number of conferences and investor events, including the Citi Australia and New Zealand Annual Investment Conference in October 2020, the UBS Australasia Conference in November 2020, the Morgan Stanley Private Healthcare Forum in April 2021 and the Macquarie Australia Conference in May 2021. We generally communicate with the investment community through the CEO, the Group Executive – Chief Financial Officer & Group Strategy and the Senior Executive – Investor Relations. We also communicate through the Chairman for governance and remuneration issues and the Company Secretary and Group Executive – People & Culture for environmental, social and governance issues. Feedback from engagement with the investor community is communicated to the Board at each Board meeting. In all communications with investors, analysts and media, only publicly available information and information that is not market sensitive is discussed. In order to ensure that all shareholders have equal and timely access to material information concerning Medibank, advance notification of investor and analyst results briefings is announced via the ASX. The briefing materials are released first via the ASX and then on the investor centre section of our website, together with a recording of the half and full year results briefing. We also release the materials for new and substantive investor and analyst presentations to the ASX before the presentation starts. Shareholder meetings The Board encourages shareholders to attend the AGM and to take the opportunity to ask questions. Given the health risks and government restrictions associated with the COVID-19 pandemic, the Board has decided to hold the 2021 AGM virtually. Shareholders will be able to attend, participate and vote in the AGM via an online platform. The meeting is also accessible via a live webcast, and then made available on our website. All substantive resolutions at the meeting are decided by a poll. The external auditor attends the AGM and is available at the meeting to answer questions relevant to the auditor’s report. We provide shareholders with a clear and concise notice of meeting, setting out the business to be considered, including all material information relevant to the election or re-election of directors. These materials, together with the presentations at the AGM and the voting results, are released to the ASX and then made available on our website. Integrity of financial reporting The Board has a strong commitment to the integrity and quality of its financial reporting and its systems for risk management, compliance and internal control. The role of the Audit Committee is to provide an objective, non-executive review of the effectiveness of Medibank’s internal control, financial reporting and risk management framework, to assist the Board in carrying out its accounting, auditing, and financial reporting responsibilities. Details of the composition and key roles and responsibilities of the Audit Committee are set out on page 39. In addition to the members of the Audit Committee, any director may attend Audit Committee meetings. Representatives of management and the Senior Executive – Internal Audit may attend Audit Committee meetings by standing invitation, and the Chief Actuary and external auditors are invited as required. Financial reporting assurances The preparation of the full year and half year financial statements is subject to a detailed process of review and approval by the Board supported by the Audit Committee. As required under section 295A of the Corporations Act 2001 (Cth), the Board receives a declaration from the CEO and the CFO that the financial records of the company have been properly maintained and that the financial statements and notes comply with accounting standards and give a true and fair view of the consolidated entity’s financial position and performance for the financial period. This includes a written declaration that their opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively in all material respects. This declaration was received by the Board prior to approving the financial statements for the half year ended 31 December 2020 and the full year ended 30 June 2021. Internal audit Medibank has an internal audit function. The purpose of the internal audit function is to provide the Board and Audit Committee with an independent evaluation of the adequacy and the effectiveness of Medibank’s financial and risk management framework. The rolling 12-month Internal Audit Plan, which is approved by the Audit Committee, is developed using a risk-based approach and is driven by Medibank’s strategy, risk profile and assurance priorities. The Internal Audit Charter provides the internal audit team unrestricted access to review all activities of the business. The internal audit function is supplemented by the engagement of external subject matter experts when required. The head of the internal audit function is the Senior Executive – Internal Audit. To ensure the independence of the internal audit function, the role reports directly to the Audit Committee chairman, with a direct communication line to the CEO and administrative reporting line to the Group Executive – Chief Financial Officer & Group Strategy. The Senior Executive – Internal Audit (in addition to their standing invitation to attend Audit Committee meetings) reports to each Audit Committee meeting on progress against the rolling 12 month Internal Audit Plan, audit findings and recommendations, business insights and the status of management actions. Risk management Medibank’s risk management framework encompasses the systems, structures, policies, processes and people that manage risks across the business. It guides risk management activities across the business to effectively identify, assess, manage, monitor and report risks. Annual Report 2021 45 Corporate governance statement The framework is implemented through the three lines of defence model and its effectiveness is assessed by the internal audit function on an annual basis with a full comprehensive review on a three yearly basis in accordance with the Risk Management Committee Charter and APRA Prudential Standard CPS220, with these reports being provided to and reviewed by the Risk Management Committee. Both annual and three yearly reviews of the framework were completed in 2021. The Risk Management Committee reviews the documents comprising the risk management framework at least yearly and regularly monitors the framework’s effectiveness. A key component of the framework is the definition of Medibank’s risk appetite by the Board which informs management's decision making process. The annual and three yearly reviews of the framework consider whether the framework is sound and Medibank is operating with due regard to the risk appetite set by the Board. Medibank continues to operate and strengthen enterprise risk management practices in alignment with the requirements outlined in the APRA Prudential Standard CPS220 – Risk Management. Material risks Material business risks are those risks deemed to have a significant impact on Medibank’s operations, financial prospects and business objectives. These are discussed in the operating and financial review on pages 28 to 29 of the annual report. The material risks are strategic, credit, capital and liquidity, market and investment, insurance, clinical, operational and regulatory compliance. Environmental, social and governance risks Medibank’s risk management framework also applies to environmental, social and governance (‘ESG’) risks. Medibank’s material ESG topics, as identified in our social and governance framework, have been mapped to our material categories in the operating and financial review on pages 28 to 29 of the annual report. Medibank commissioned an independent external review to assess our exposures to climate change risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The review did not identify material exposures at this time for Medibank; however, the outcomes of the review, and Medibank’s response, have been reported on page 53 of our Sustainability Report. Further detail on Medibank’s approach to sustainability and ESG issues can also be found in our Sustainability Report. Governance The Board has overall responsibility for Medibank’s risk management framework including setting the risk appetite for Medibank. The Board reviews the risk management framework at least annually and satisfies itself that management has developed and implemented a sound 46 Medibank system of risk management and internal control to effectively manage risk across the business in line with regulatory and statutory requirements. The Risk Management Committee assists the Board in overseeing the implementation of the risk management framework. Currently, the committee comprises four non-executive directors, at least one of whom is a member of the Audit Committee. The chairman of the committee is an independent non-executive director who is not the chairman of the Board. Committee members are appointed based on their qualifications and experience to ensure that the committee can adequately discharge its duties. Risk management plays an important role in remuneration outcomes. For an incentive award to be made to any employee, a risk, compliance and behaviour gateway must be achieved. Further, all employees have a risk KPI incorporated into their performance scorecard under the company-wide ‘I Perform Better’ performance framework. More information on the relationship between risk and remuneration can be found in the remuneration report on pages 58 to 59. The Board is further assisted by the Investment and Capital Committee, which oversees the implementation and monitoring of the investment strategy and Capital Management Policy approved by the Board, including monitoring the effectiveness of the investment process in achieving optimum return relative to risk. The Executive Risk Committee and Divisional Risk Committees are management committees that assist the CEO with the oversight of risk management activities across the business to ensure material risks are managed in line with the approach defined in the risk management strategy and the risk appetite set by the Board. Medibank has adopted a three lines of defence approach to define risk management roles, responsibilities and accountability: First line: Management is accountable for identifying, assessing, monitoring and managing material risks in the business. They are responsible for decision making and the execution of business activities, whilst managing risk to ensure it is in line with the Board’s risk appetite and strategy. Second line: The enterprise risk and compliance functions provide objective advice and challenge to the first line on risk and control activities and provide assurance and guidance on the design and implementation of appropriate risk management activities. Third line: The internal audit function provides independent assurance to the Audit Committee and the Board on the adequacy and effectiveness of the risk management framework, financial reporting processes and internal control and compliance systems operating in the first and second line. This corporate governance statement is accurate and up to date as at 25 August 2021 and has been approved by the Board. Directors’ report For the financial year ended 30 June 2021 The directors of Medibank Private Limited (Medibank) present their report on the consolidated entity consisting of Medibank and the entities it controlled (collectively referred to as the Group) for the year ended 30 June 2021. References to 2020 and 2021 are to the financial years ended on 30 June 2020 and 30 June 2021 respectively unless otherwise stated. Directors The names of directors in office during the year and up to the date of this directors’ report, unless stated otherwise, are as follows: Current: • Mike Wilkins AO – Chairman • David Koczkar – Chief Executive Officer (appointed effective 17 May 2021) • Dr Tracey Batten • Anna Bligh AC • Gerard Dalbosco (appointed effective 21 May 2021) • David Fagan • Peter Hodgett • Linda Bardo Nicholls AO • Christine O’Reilly Former: • Elizabeth Alexander AO (retired effective 1 October 2020) • Craig Drummond (ceased as Chief Executive Officer effective 17 May 2021) Mike Wilkins AO commenced as Chairman effective 1 October 2020, following the retirement of Elizabeth Alexander AO. Gerard Dalbosco commenced as a director effective 21 May 2021. Principal activities The principal activities of the Group during the financial year were as a private health insurer, underwriting and distributing private health insurance policies under its two brands, Medibank and ahm. Medibank is also a provider of health- related services through the Medibank Health businesses, which capitalise on Medibank’s experience and expertise, and support the Health Insurance business. There were no significant changes in the nature of those activities during the year. Operating and financial review Details of the operating and financial review of the Group including a review of operations during the year and results of those operations is included in the operating and financial review on pages 22 to 29. Significant changes in state of affairs There were no significant changes in the state of affairs of the Group during the year. Events since end of financial year No matter or circumstance has arisen since the end of the financial year that has significantly affected, or may significantly affect, Medibank’s operations, or the results of those operations, or Medibank’s state of affairs in future financial years. Details of subsequent events are set out in Note 20(d). Future developments Details of developments in Medibank’s operations in future financial years and the expected results of those operations are included in the operating and financial review on pages 25 to 27. Dividends Dividends paid or determined by Medibank during and since the end of the year are set out in Note 6 to the financial statements and further set out below: • A fully franked final ordinary dividend of 6.30 cents per share was determined in respect of the six-month period to 30 June 2020 and paid on 24 September 2020 to shareholders registered on 3 September 2020. • A fully franked interim ordinary dividend of 5.80 cents per share was determined in respect of the six-month period to 31 December 2020 and paid on 25 March 2021 to shareholders registered on 4 March 2021. • A fully franked final ordinary dividend of 6.90 cents per share has been determined in respect of the six-month period to 30 June 2021, payable on 30 September 2021 to shareholders registered on 9 September 2021. Directors’ qualifications, experience and special responsibilities Details of the qualifications, experience and special responsibilities of each director in office as at the date of this report are set out on pages 30 to 32 and form part of the directors’ report. Annual Report 2021 47 Directors’ report For the financial year ended 30 June 2021 Directors’ attendance at meetings The table below shows the number of Board and committee meetings held and the number of meetings attended by directors during the year. Director Board (scheduled) Board (unscheduled) Audit Committee Mike Wilkins Elizabeth Alexander6 Dr Tracey Batten Anna Bligh Gerard Dalbosco7 Craig Drummond8 David Fagan Peter Hodgett David Koczkar9 Linda Bardo Nicholls Christine O’Reilly A 10 3 10 10 1 8 10 10 2 10 10 B 10 3 10 10 1 8 10 10 2 10 10 A 8 8 8 6 8 8 8 8 B 8 8 8 6 8 8 8 8 A 2 2 1 5 5 B 52 2 4* 1* 1 4* 5* 5 1* 4* 5 Risk Management Committee B A 53 5 2 2 6 6 3* 5* 6 4* 1* 4* 6 6 6 5 5 5 Investment and Capital Committee A1 5 Nomination Committee B A 44 3 1 1 3* 1* 4 4 4 4 4 4 4 4 4 4 People and Remuneration Committee B A 45 1 1* 4 4 1* 3* 4* 3* 1* 4 3* 4 B 5 1* 5* 4 5* 5 5 1* 5* 4* A Indicates the number of meetings held during the time the director held office or was a member of the committee during the year. B Indicates the number of meetings attended during the period. * Indicates that the director attended committee meetings as an invitee. 1 Includes one unscheduled meeting of the Investment and Capital Committee. 2 Mike Wilkins was appointed a member of the Audit Committee effective 1 October 2020 and retired as a member of that committee effective 21 May 2021. He attended 2 meetings as a member and 3 as an invitee. 3 Mike Wilkins retired as a member of the Risk Management Committee effective 21 May 2021. He attended 4 meetings as a member and 1 as an invitee. 4 Mike Wilkins was appointed a member of the Nomination Committee effective 1 October 2020. He attended 3 meetings as a member and 1 as an invitee. 5 Mike Wilkins was appointed a member of the People and Remuneration Committee effective 21 May 2021. He attended 1 meeting as a member and 3 as an invitee. 6 Elizabeth Alexander retired as a director effective 1 October 2020. 7 Gerard Dalbosco was appointed as a director and a member of the Risk Management Committee and Audit Committee effective 21 May 2021. 8 Craig Drummond retired as a director effective 17 May 2021. 9 David Koczkar was appointed as a director effective 17 May 2021. In addition, ad-hoc committees were convened for special purposes, including in relation to financial reporting, selection of the new Chairman and Chief Executive Officer and other matters. Directors’ interests in securities The relevant interests of directors in Medibank securities at the date of this directors’ report were: Options and performance rights During the financial year, 3,168,794 performance rights were issued to senior executives pursuant to Medibank’s Performance Rights Plan. No performance rights have been issued since the end of the financial year up to the date of this directors’ report. During the financial year, 1,980,272 performance rights became eligible to vest and were exercised. Further information regarding performance rights is included in the remuneration report from page 50. 48 Medibank Director Mike Wilkins David Koczkar Elizabeth Alexander1 Dr Tracey Batten Anna Bligh Gerard Dalbosco Craig Drummond2 David Fagan Peter Hodgett Linda Bardo Nicholls Christine O’Reilly Performance rights 590,232 1,488,044 Ordinary shares 100,000 793,689 124,786 50,000 44,623 24,432 1,313,839 47,016 67,800 45,000 69,930 1. Elizabeth Alexander retired from the Board effective 1 October 2020, and her ordinary shareholding information is as at that date. 2. Craig Drummond retired from the Board effective 17 May 2021, and his ordinary shareholding information is as at that date. Craig Drummond’s performance rights information reflects the lapsing of performance rights in accordance with Medibank’s Performance Rights Plan as set out in the ASX announcement dated 9 July 2021. Environmental regulation The Group’s operations are not subject to any particular or significant environmental regulation under either Commonwealth or State law. Indemnification and insurance of directors and officers The Medibank Constitution permits Medibank to indemnify, to the maximum extent permitted by law, every person who is or has been a director, secretary, officer or senior manager of the Group. The indemnity applies to liabilities incurred by a person in the relevant capacity (except liability for legal costs). The indemnity may however also apply to certain legal costs incurred in obtaining advice or defending legal proceedings. Further, the Medibank Constitution permits Medibank to maintain and pay insurance premiums for a director and officer liability insurance covering every person who is or has been a director, secretary, officer or senior manager of the Group, to the extent permitted by law. Consistent with the provisions in Medibank’s Constitution, Medibank has entered into deeds of indemnity, insurance and access with current and former directors and secretaries of the Group. Under these deeds, Medibank: • Indemnifies current and former directors and secretaries against liabilities incurred as a director or secretary, as the case may be, to the maximum extent permitted by law. • Maintains a directors’ and officers’ insurance policy covering current and former directors and secretaries against liabilities incurred in their capacity as directors or secretaries, as the case may be. Disclosure of the insurance premium and the nature of the liabilities covered by the insurance are prohibited by the contract of insurance. • Grants current and former directors and secretaries access to Medibank’s records for the purpose of defending any relevant action. The amounts paid or payable for services provided by PwC were: Year ended 30 June Audit fees Assurance services fees: Audit of regulatory compliance returns Accounting and other assurance services Total Audit and other assurance services fees Non-audit service fees Total 2021 $ 1,570,108 2020 $ 1,581,094 231,830 342,264 15,530 64,260 1,817,468 199,517 2,016,985 1,987,618 - 1,987,618 Based on advice provided by the Audit Committee, the directors are satisfied that the provision of non-audit services during the year by PwC is compatible with the general standard of independence for auditors imposed by the Corporations Act, and that the provision of the non-audit services did not compromise the auditor independence requirements of the Corporations Act, for the following reasons: • All non-audit services provided were approved in accordance with the process set out in Medibank’s policies, including being reviewed by the Audit Committee Chair to ensure that provision of the services did not impact the integrity and objectivity of the auditor. • The non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board. Remuneration report The remuneration report on pages 50 to 74 forms part of the directors’ report. Auditor’s independence declaration Rounding of amounts A copy of the auditor’s independence declaration given by PricewaterhouseCoopers (PwC) in relation to its compliance with independence requirements of section 307C of the Corporations Act is set out on page 122. Non-audit services During the year, PwC, the Group’s external auditor, performed certain other services to the Group in addition to its statutory responsibilities as auditor. The amounts contained in this directors’ report and in the financial report have been rounded to the nearest hundred thousand dollars (where rounding is applicable) unless specifically stated otherwise under the relief available pursuant to ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. Medibank is an entity to which that relief applies. This report is made in accordance with a resolution of the directors. Mike Wilkins AO Chairman David Koczkar Chief Executive Officer Annual Report 2021 49 Remuneration report For the financial year ended 30 June 2021 Dear Shareholder, On behalf of the Board, I am pleased to present Medibank’s remuneration report for 2021 which describes how non- executive directors and Executive Leadership Team (ELT) members are paid. Included in this report are the variable remuneration outcomes for the ELT, which were determined after considering the Company’s results and the individual performance of our executives. Our remuneration strategy has been developed to ensure remuneration is fair and competitive, and in 2021 the Board has continued to focus on a governance framework that rewards responsible behaviours, aligns remuneration with regulatory requirements and has regard for the expectations of our customers, shareholders and the community. In his previous role as Medibank’s Chief Customer Officer, David has been a champion for our customers and has played an instrumental role in the growth and re-positioning of Medibank. The Board is now working with David to progress our strategy of becoming a broader health company. Changes to the Executive Leadership Team and key management personnel Following the CEO transition, changes were made to the structure of the ELT to ensure Medibank continues to focus on providing greater choice for our customers, as well as working with our partners to be a driver of change within the health system. The key changes are outlined below, with all appointments completed prior to 30 June 2021: As an organisation providing insurance and healthcare with a clear purpose of ‘Better Health for Better Lives’, the Board is proud of how Medibank has continued to support our customers, employees and the broader community through these challenging times. • Milosh Milisavljevic was appointed to the role of Group Executive – Customer Portfolios. Milosh’s experience leading customer transformations across various industries will be instrumental to strengthening Medibank’s products and services for our customers, and our provider relationships. Medibank has supported our customers through the pandemic with initiatives totalling around $300 million in financial support to date, the largest in our 45 year old history. This includes the return of $103 million of permanent net claims savings due to COVID-19 through premium relief. These initiatives are part of Medibank’s standing commitment to return all permanent net claims savings due to COVID-19 to our customers once they are known. Our employees showed great resilience during 2021 delivering high quality services and support throughout lockdowns and other challenges created by the pandemic. During the year we continued to prioritise our employee’s health and wellbeing, with initiatives focused on mental health support and staying connected to one another through the launch of our new Future Fit way of working. As stated last year, Medibank has been able to support our employees and customers without accessing any form of taxpayer-funded government relief. Chief Executive Officer transition In February 2021, after nearly five years as Chief Executive Officer (CEO), Craig Drummond announced his intention to retire. The significant improvement in our dual brand proposition, customer acquisition and retention, brand advocacy and the expansion into delivering a broad suite of health services, demonstrate the strength and diversity that has been created at Medibank under Craig’s leadership. Craig has left the company in a much stronger position, on a clear strategic path, with a great team and accordingly has been deemed a ‘good leaver’ by the Board. Following the announcement of Craig’s retirement, the Board was pleased to appoint David Koczkar as Medibank’s Chief Executive Officer, effective from 17 May 2021. • Rob Deeming was appointed to the role of Group Executive – Customer & Brands. Rob’s entrepreneurial spirit combined with his experience leading consumer brands and growing digital businesses will be key to continuing to grow the Medibank and ahm brands and our customer channels. • Dr Andrew Wilson took on an expanded accountability as Group Executive – CEO Health Services. Andrew’s experience and expertise within the health sector is an asset to the company and he is well placed to oversee our growth in becoming a broader health services provider. • Mark Rogers took on an expanded accountability as Group Executive – Chief Financial Officer (CFO) & Group Strategy. Mark’s knowledge of our company, our sector and the broader market, as well as his previous experience in strategy development and mergers and acquisitions will be beneficial to expanding our role in health, including through future inorganic growth. Following the changes to Medibank’s ELT composition and changes in ELT operation effective 1 July 2021, the Board assessed which ELT members had the requisite authority and responsibility within the Medibank Group to meet the definition of key management personnel (KMP) as set out in AASB 124 – Related Party Disclosures for the purposes of our remuneration reporting obligations. As a result of these changes, from 1 July 2021, Medibank’s Executive KMP will now include the following roles: CEO, Group Executive – CFO & Group Strategy, Group Executive – CEO Health Services and Group Executive – Customer Portfolios. Please note that the newly established Group Executive – Customer & Brands position is not recognised as a KMP under the accounting standard and is therefore not included in this report. 50 Medibank Changes to the Board After joining the Medibank Board in October 2008 and serving as Chairman since March 2013, Elizabeth Alexander retired from Medibank on 1 October 2020. During her tenure, Elizabeth led Medibank through its highly successful public listing in 2014 and helped reposition the company for growth as it pursues a strategy of developing into a broader health company. Following Elizabeth’s retirement, Mike Wilkins was appointed as the Chairman on 1 October 2020 and Gerard Dalbosco joined the Board as a non-executive director on 21 May 2021. These performance outcomes resulted in STI awards for ELT members that averaged 80% of their maximum opportunity. However, with consideration of the challenging social and economic environment of the pandemic and the expectations of our shareholders, customers and the broader community, the Board exercised its discretion to reduce ELT incentive outcomes resulting in STI awards for ELT members that averaged 70% of their maximum opportunity. A similar reduction was applied to the Company-wide incentive pool. In the Board’s view, final incentive awards reflect an appropriate outcome based on Medibank’s 2021 performance. Remuneration decisions at a glance Long-term incentives • All ELT members met their individual risk, compliance and behaviour gateways for 2021. • Discretion was exercised to reduce 2021 short-term incentive (STI) outcomes for ELT members from an average of 80% of their maximum opportunity, to 70%. • 32% vesting of Medibank’s 2019 long-term incentive (LTI) in line with the terms of grant. • Adjustments to ELT remuneration aligned with recent appointments – further details in section two of this report. • Non-executive director fees maintained at their current levels and within the cap approved by shareholders at the 2018 annual general meeting. Short-term incentives Despite the challenging environment, the resilience of our business and our highly engaged people have enabled Medibank to deliver a solid operational and financial performance aligned to our values and purpose of ‘Better Health for Better Lives’. In assessing Medibank’s 2021 performance against our STI measures, the Board adjusted outcomes to normalise for unbudgeted COVID-19 related impacts (both negative and positive) outside of management’s control to ensure that executives did not benefit from windfall gains. Following this assessment, Group operating profit and Brand Net Promoter Score (NPS) performance both exceeded target expectations, while Health Insurance revenue growth landed just below target expectations. Medibank’s 2019 LTI was tested following the completion of the performance period on 30 June 2021 and resulted in a vesting outcome of 32% in line with the terms of grant. This outcome reflects no vesting against the earnings per share compound annual growth rate (EPS CAGR) measure, and partial vesting against the relative total shareholder return (TSR) measure, with a performance rank at the 57th percentile against our comparator group. ELT remuneration and non-executive director fees The remuneration settings for ELT members recently appointed to new or changed positions were adjusted following a review of benchmark data, with details of these changes outlined in section two of this report. For the second consecutive year, non-executive director fees have been maintained at their current levels. The Board considered this to be an appropriate outcome with consideration of the current economic conditions and social environment of the pandemic and the positioning of non-executive directors against the benchmark data. Shareholders are encouraged to vote to adopt the report at our annual general meeting in November. Yours sincerely, Linda Bardo Nicholls AO Chairman, People and Remuneration Committee Annual Report 2021 51 Remuneration report For the financial year ended 30 June 2021 Contents 1. Key management personnel overview 8. 2021 actual remuneration 2. Summary of remuneration outcomes 3. Medibank’s remuneration strategy 4. 5. 6. 7. Remuneration governance 4.1 The role of Board in remuneration 4.2 Executive remuneration policies Risk and remuneration 5.1 Risk culture 5.2 Alignment of remuneration with prudent risk-taking 5.3 Consequence management Executive remuneration components 6.1 2021 target remuneration mix 6.2 Total fixed remuneration 6.3 Short-term incentive 6.4 Long-term incentive Linking remuneration and performance in 2021 7.1 2021 STI performance scorecard 7.2 Medibank’s 2021 financial performance 7.3 2021 STI awards 7.4 2019 LTI Plan outcomes 9. Statutory remuneration tables 9.1 Statutory remuneration table 9.2 Performance-related remuneration statutory table 10. Executive Leadership Team equity awards 10.1 ELT equity award transactions 10.2 ELT members’ ordinary shareholdings 11. Non-executive director remuneration strategy and framework 11.1 Non-executive director remuneration 11.2 Non-executive director superannuation 11.3 Shareholding policy for non-executive directors 12. Non-executive director statutory remuneration table 13. Non-executive director ordinary shareholdings 14. Medibank’s comparator groups 1. Key management personnel overview Medibank’s key management personnel (KMP) includes all non-executive directors and executives who have authority and responsibility for planning, directing and controlling the activities of Medibank. In 2021, KMP were as follows: Executive Leadership Team (ELT) member David Koczkar1 Chief Executive Officer Full-year Kylie Bishop Group Executive – People & Culture Full-year John Goodall Group Executive – Technology & Operations Full-year Milosh Milisavljevic Group Executive – Customer Portfolios From 22 June 2021 Mei Ramsay Group Executive – Legal, Governance & Compliance and Company Secretary Full-year Mark Rogers Group Executive – Chief Financial Officer & Group Strategy Full-year Andrew Wilson Group Executive – CEO Healthcare Services Full-year 1. David Koczkar was in the position of Chief Customer Officer until his appointment as Chief Executive Officer on 17 May 2021. 52 Medibank Non-executive directors Mike Wilkins2 Chairman Full-year Tracey Batten Non-executive director Full-year Anna Bligh Non-executive director Full-year Gerard Dalbosco3 Non-executive director From 21 May 2021 David Fagan Non-executive director Full-year Peter Hodgett Non-executive director Full-year Linda Bardo Nicholls Non-executive director Full-year Christine O’Reilly Non-executive director Full-year Former KMP Elizabeth Alexander4 Retired Chairman Retired 1 October 2020 Craig Drummond5 Retired Chief Executive Officer Ceased as CEO on 17 May 2021 2. Mike Wilkins was a non-executive director for the full year and was appointed Chairman on 1 October 2020. 3. Gerard Dalbosco commenced as a non-executive director on 21 May 2021. 4. Elizabeth Alexander retired from the position of Chairman on 1 October 2020. 5. Craig Drummond retired from the position of Chief Executive Officer and Managing Director on 17 May 2021, however remained employed through to 30 June 2021. Annual Report 2021 53 Remuneration report For the financial year ended 30 June 2021 2. Summary of remuneration outcomes Key remuneration outcomes for ELT members and non-executive directors during the year are summarised below, with more detailed information contained throughout the report. Executive Leadership Team (ELT) member Component Outcomes Fixed remuneration • Following a review of benchmark data the fixed remuneration for ELT members recently appointed to new or changed positions are as follows: – David Koczkar – $1,500,000 – Milosh Milisavljevic – $780,000 – Mark Rogers – $1,000,000 – Andrew Wilson – $1,000,000 Short-term incentive (STI) • STI awards for ELT members reflected Group operating profit and Brand Net Promoter Score (NPS) performance exceeding target expectations, while Health Insurance revenue growth landed just below target expectations. • Discretion was exercised to reduce the 2021 STI outcomes for ELT members from an average of 80% of their maximum opportunity, to 70%. • 50% of STI awards for ELT members deferred for 12 months in the form of performance rights. • Changes to the 2022 target and maximum STI percentages for ELT members recently appointed to new or changed positions are as follows: – David Koczkar – 100% target / 150% maximum – Milosh Milisavljevic – 65% / 100% – Mark Rogers – 65% / 120% – Andrew Wilson – 65% / 120% Long-term incentive (LTI) • Medibank’s 2019 LTI was tested following the completion of the performance period on 30 June 2021 and resulted in a vesting outcome of 32% in line with the terms of grant. • This outcome reflects no vesting against the earnings per share compound annual growth rate (EPS CAGR) measure, and partial vesting against the relative total shareholder return (TSR) measure, with a performance rank at the 57th percentile against our comparator group. • Changes to the 2022 LTI opportunity percentages for ELT members recently appointed to new positions are as follows: – David Koczkar – 150% – Milosh Milisavljevic – 65% Former Chief Executive Officer (CEO) • In line with the terms of Medibank STI and LTI plans and on the basis of being a 'good leaver', Craig Drummond’s variable remuneration was treated as follows: – Full entitlement to a 2021 STI award on the basis of being employed for the entire performance year. 50% of Craig’s STI award will be paid in cash in September 2021, and 50% awarded as deferred cash, due to vest in September 2022. – Craig’s outstanding 2019, 2020 and 2021 LTI performance rights will be retained on a pro-rata basis and remain in restriction subject to the original performance hurdles. – Craig will retain 253,972 of his 761,920 2021 LTI performance rights; 443,352 of his 665,028 2020 LTI performance rights; and all 790,720 of his 2019 LTI performance rights. Non-executive directors Component Decisions Non-executive director fees • Non-executive director base and committee fees have been maintained at current levels for the second consecutive year. • Based on this decision, Medibank’s aggregate non-executive director fee spend will remain at $1,940,000 in 2022. • The total fee pool approved by shareholders at the annual general meeting in 2018 remains unchanged. 54 Medibank 3. Medibank’s remuneration strategy At Medibank, we believe that remuneration is a key influencer of behaviour and can be used as a tool to reinforce our culture. Our people are guided by our strong set of values which are anchored to the core pillars of our culture – our purposes, our people and customers and our performance. We focus on our values every day to ensure we do the right thing by our customers, employees and the community. Our remuneration strategy has been developed to focus ELT members on responsibly executing Medibank’s strategy, role-modelling behaviours that strengthen our values-based culture and achieving business objectives that increase value for our customers and shareholders. Supporting this strategy, our remuneration framework is designed to link reward to business outcomes, individual performance and behaviour, and to support Medibank’s long-term financial soundness and risk management framework. The diagram below illustrates the relationship between Medibank’s remuneration strategy, reward framework and the timeline of when 2021 remuneration is delivered to ELT members. Medibank’s remuneration strategy Focus ELT members on responsibly executing Group strategy to increase customer and shareholder value with behaviours aligned with Medibank’s values and purpose Attract and retain key talent through competitive and fair fixed remuneration Incentivise high performance through variable, at risk payments Reward ELT members for the achievement of business outcomes aligned with Medibank’s culture Align the interests of ELT members with increasing long-term customer and shareholder value Medibank’s total target reward framework Total fixed remuneration (TFR) • Determined with reference to capability, experience, the complexity of the role, as well as median pay levels of Medibank’s comparator group • Paid on a fortnightly basis in base salary and superannuation Gateways Performance measures Delivery Short-term incentive (STI) Long-term incentive (LTI) • Individuals must pass a risk, compliance and behaviour gateway to be eligible for an STI or LTI award • Financial Gateway (STI only) – Medibank must achieve a baseline Group operating profit target for an STI to be awarded • Group operating profit • Health Insurance revenue growth • Brand Net Promoter Score (NPS) • Role-specific metrics • Earnings per share compound annual growth rate • Relative total shareholder return • Growth of Medibank’s private health insurance market share • 50% cash • 50% performance rights deferred for 12 months • Three-year deferred performance rights 2021 remuneration timeline FY21 FY22 FY23 TFR Base salary + super STI Cash Deferred Relative total shareholder return LTI Earnings per share compound annual growth rate Private Health Insurance market share growth 50% 50% 35% 35% 30% date earned date granted eligible for payment or vesting Annual Report 2021 55 Remuneration report For the financial year ended 30 June 2021 4. Remuneration governance 4.2 Executive remuneration policies Medibank has a robust governance framework in place to ensure that our remuneration and performance practices are fair, reasonable and aligned with the requirements outlined in our risk management framework. Our governance framework also considers regulatory compliance, customer outcomes, community expectations and the delivery of sustainable shareholder value. 4.1 The role of the Board in remuneration The People and Remuneration Committee (P&RC) is a committee of the Board. The diagram below outlines the role of the P&RC in assisting and advising the Board on people and culture policies and practices, including remuneration. While there are four permanent members of the P&RC, a standing invitation exists to all non-executive directors to attend meetings. The Chief Executive Officer (CEO) and Group Executive – People & Culture are also invited to attend P&RC meetings, except where matters associated with their own performance or remuneration are considered. Specific governance activities with respect to the P&RC include regular reviews of the P&RC Charter to ensure consideration of changing regulations, guidelines and best practice and an annual audit of committee minutes against the P&RC Charter. For P&RC meeting attendance information, refer to the table on page 48 of the directors’ report. 4.2.1 Performance evaluation of ELT members At the outset of each performance year, the Board determines the measures against which ELT members will be assessed. The measures are a combination of Medibank (Company) and role-specific performance measures that are aligned to the achievement of Medibank’s customer and financial milestones set out in the annual report. Aligned with Medibank’s Group-wide performance framework ‘I Perform Better’, the role-specific measures for ELT members are known as ‘Big Goals’ (an acronym for Bold, Impactful Goals). Big Goals are designed to be ambitious, aspirational and shift expectations from delivering at a base level against core job requirements to driving strong, impactful performance. The Big Goals adopted by each ELT member then form the basis for the Big Goals adopted by their leadership team members and their respective teams to ensure all employees across the Group are working towards a shared and consistent strategy. At the completion of the performance year, ELT members are individually assessed against the risk, compliance and behaviour gateway which is outlined in section 6.3. ELT members are then attributed an outcome against a 5-point rating scale (with a minimum rating of 3 required to receive a short-term incentive (STI) award) that assesses ELT member performance and behaviours against business outcomes and achievement of role-specific performance measures. The individual performance ratings of ELT members are then combined with performance against Company measures to determine STI outcomes. Reviewing and overseeing Medibank’s key people and organisational strategies, including employee engagement, values, behaviours and diversity and inclusion Ensuring that Medibank’s remuneration practices are consistent with the risk management framework and drives appropriate behaviours P&RC Reviewing employee remuneration arrangements with consideration for behaviours, regulatory compliance, customer outcomes, community expectations and shareholder value Reviewing and monitoring Medibank’s strategies for executive succession, talent acquisition and retention Reviewing and monitoring Medibank’s health, safety and wellbeing strategy and performance, workplace relations and payroll integrity Independent remuneration consultant • KPMG provides information to assist the P&RC in making remuneration decisions and recommendations to the Board • The work undertaken by KPMG in 2021 did not constitute a remuneration recommendation 56 Medibank With respect to fixed remuneration adjustments, consideration is given to role-specific performance, experience, the complexity of the role and Medibank’s market comparator group. Additional detail on STI performance measures are included in sections 6 and 7 of this report and further information on fixed remuneration levels for ELT members is outlined in section 6.2. The CEO provides his performance assessment of each ELT member to the Board for consideration. The Chairman, in consultation with the Board, assesses the performance, behaviour and conduct of the CEO. The Board has ultimate discretion over final individual performance outcomes for all ELT members to ensure alignment with Medibank performance, customer outcomes, community and shareholder expectations. 4.2.2 Clawback of executive performance-based remuneration Medibank has an Executive Remuneration Clawback Policy that provides discretion to the Board to reduce, cancel, or recover (clawback) any performance-based awards made to a senior executive employee in certain circumstances and subject to applicable laws, including the following: • Serious misconduct, fraud or dishonesty by the employee. • Any behaviour, act or omission by the employee that impacts on the Group’s reputation or long-term financial soundness. • A material misstatement of the Group’s financial statements. The Executive Remuneration Clawback Policy provides that if any of these events have occurred in the previous five financial years the Board may, in its absolute discretion, withhold an employee’s performance-based payments, require the repayment of all, or part of, previous performance-based awards, lapse previously deferred and unvested performance- based rewards, or otherwise alter an employee’s remuneration subject to applicable laws. In addition to a stand-alone policy, Medibank’s remuneration clawback provisions are outlined in executive employment contracts and employee equity offer documentation. 4.2.3 Executive shareholding requirements ELT members are subject to a Minimum Shareholding Policy that is designed to strengthen their alignment with customers and shareholders by requiring them to hold Medibank shares with a value equivalent to 100% of their annual fixed remuneration within five years of appointment to the ELT. The policy does not require an ELT member to purchase shares, however they are restricted from selling their vested employee equity holdings (other than to satisfy income tax obligations) until they meet the minimum shareholding requirement. All Medibank shares and unvested performance rights that are subject to a tenure-based hurdle held by, or on behalf of, the ELT member (for example within a family trust or self-managed superannuation fund where they are the beneficial owner) will count towards satisfaction of the minimum shareholding requirement. • The Board becomes aware of any other action or behaviour that it determines (acting in good faith) has resulted in the employee receiving an inappropriate benefit. As at 30 June 2021, progress towards the minimum shareholding requirement for each ELT member is provided below: ELT member David Koczkar Kylie Bishop John Goodall Milosh Milisavljevic Mei Ramsay Mark Rogers Andrew Wilson Minimum shareholding requirement $1 Value of eligible shareholdings as at 30 June 2021 $2 1,500,000 580,000 555,000 780,000 555,000 1,000,000 1,000,000 2,508,057 1,339,834 467,494 45,719 652,919 1,085,555 2,927,740 Minimum shareholding requirement timeline Requirement satisfied Requirement satisfied 5 December 2021 22 June 2026 Requirement satisfied Requirement satisfied Requirement satisfied 1. Minimum shareholding requirement based on ELT members’ total fixed remuneration (TFR) as at 30 June 2021. 2. Holding value is calculated with reference to the total number of eligible shares or performance rights held by each ELT member, multiplied by the closing price of Medibank’s shares on 30 June 2021 ($3.16). 3. Craig Drummond ceased to be a KMP on 17 May 2021 and was therefore no longer subject to this policy as at 30 June 2021. Annual Report 2021 57 Remuneration report For the financial year ended 30 June 2021 4.2.4 Share Trading Policy 5.1 Risk culture We have a Share Trading Policy to ensure that all employees understand their obligations in relation to dealing in Medibank shares. The Share Trading Policy describes restrictions on buying and selling Medibank shares for non-executive directors and other Medibank employees. In addition, non-executive directors, ELT members, all senior leaders and employees with potential access to inside information are deemed to be ‘Restricted Employees.’ They are required to seek approval before dealing in Medibank shares and are subject to share trading blackouts prior to financial result announcements and other times, as required. The policy also prohibits employees from entering into transactions relating to Medibank shares which limit their economic risks, including in relation to the long-term incentive (LTI) Plan and equity-based component of the STI Plan. Our Share Trading Policy can be found within the corporate governance section on our website. 4.2.5 Termination provisions in ELT member contracts All current ELT members are employed under ongoing contracts with notice periods set at three months (employee) and six months (employer), or in the case of the CEO, six months (employee) and six months (employer). Termination provisions included in ELT member contracts are limited to six months payment of fixed remuneration, in lieu of notice. If an ELT member is assessed by the Board as a ‘good leaver’ (meaning they cease employment by reason of death, serious disability, permanent incapacity, retirement, redundancy or with Board approval), the cash STI award in respect of the performance year in which they leave would be paid on a pro rata basis at the end of the STI performance period. The deferred component of the STI award will be paid in cash (rather than performance rights) on a pro rata basis with payment deferred until 12 months following the payment of the cash component. Any previously deferred STI remains restricted until the applicable vesting date, unless determined otherwise by the Board. Performance rights issued as LTI are retained on a pro rata basis by a ‘good leaver’. Retained performance rights remain unvested and subject to the same vesting conditions that will be assessed at the end of the performance period. Further details of the termination provisions that relate to the STI and LTI plans are detailed in section 6 of this report. 5. Risk and remuneration A key focus for Medibank’s Board and People and Remuneration Committee (P&RC) is ensuring our remuneration policies and practices are consistent with our risk management framework, aligned with prudent risk taking and support the effective management of financial and non-financial risks. 58 Medibank An engaged culture is contingent on alignment between purpose, values, behaviours and strategic direction. With a focus on ensuring we do the right thing for our people, customers and community, Medibank’s purpose and values provide guidance for the behaviours we expect of our employees. Our strong purpose and values focus is the cornerstone of our organisational culture and has been consistently positive over a seven-year cultural transformation. This builds on Medibank’s Code of Conduct which sets out the way we work at Medibank and outlines practical principles and standards of behaviour and conduct which are expected of all Medibank employees. As further guidance, Medibank’s risk culture framework clearly articulates the behaviours employees are expected to exhibit from a risk culture perspective. As an organisation, we are committed to not only complying with legal obligations, but also acting ethically and responsibly in relation to our people, customers and the community. The behaviours that support our risk culture include: We actively challenge risk decisions to ensure benefit for our customers, our employees, our brand and our shareholders We escalate risk issues without fear or favour We all own risk issues We expect that all our risk and reward discussions are viewed through our values and business goals We learn from our experiences and mistakes to ensure we do better 5.2 Alignment of remuneration with prudent risk taking We believe that the effective alignment of remuneration with the risk appetite set by the Board is critical to our remuneration strategy and framework. Under Medibank’s Group-wide performance framework ‘I Perform Better’, at the end of each financial year all employees are assessed against their personal scorecard, which is a combination of financial and non-financial measures, including performance against their risk, compliance and behaviour obligations. Through the performance assessment process, both positive and negative risk, compliance and behaviour outcomes are considered as part of a holistic performance assessment. Employees are then attributed an outcome against a 5-point rating scale (with a minimum rating of 3 required to receive a short-term incentive (STI) award) that focuses on behaviours, business outcomes and achievement of role-specific performance measures. This then informs remuneration and performance- based incentive outcomes for the period. The management of financial and non-financial risks by senior executives is reviewed by the Risk Management Committee (RMC). As part of this review the RMC considers the effective operation of divisional risk committees, incident identification, audit findings, remediation actions, health and safety, and feedback on risk culture from employees. In addition, the Chief Risk Officer, Group Executive – People & Culture and Group Executive – Legal, Governance & Compliance are specifically tasked with notifying the Board of any relevant risk and compliance outcomes and/or conduct which may impact performance and remuneration outcomes for ELT members (including the CEO) and other senior executives. Further, as outlined throughout this report, Medibank’s executive reward framework includes long-term deferral across both our STI Plan and long-term incentive (LTI) Plan to ensure risk outcomes are considered over extended periods. 5.3 Consequence management A well understood and consistently applied consequence management process is a key part of our risk culture and ensures risk, compliance and behaviour outcomes are aligned with remuneration outcomes. Consequences of employees breaching Medibank’s Code of Conduct are clearly articulated and may include an employee attending further training or counselling, a formal written warning being applied, or in certain circumstances, termination of employment. The issue of a final written warning automatically results in the employee being given an ‘unsatisfactory’ performance rating for the relevant performance period, meaning the individual is ineligible for any performance-based reward outcome or fixed remuneration increase. Medibank’s individual incentive plan rules also clearly articulate that failure to meet the risk, compliance and behaviour gateway in any given performance period will consequently lead to ineligibility for an incentive award for a period of 12 months and potential termination. In 2021, 19 employees were issued with final written warnings following a breach of Medibank’s Code of Conduct, or another Medibank Group policy. In all cases, each employee received a performance rating of ‘unsatisfactory’ and was ineligible for any applicable performance-based incentive or fixed remuneration increase. A further 12 individuals in 2021 had their employment terminated following an incident of misconduct. Further details on consequence management can be found in our Sustainability Report 2021. 6. Executive remuneration components Target remuneration for Executive Leadership Team (ELT) members is designed to reward sustained business performance with behaviours aligned with Medibank’s values and purpose that benefits both customers and shareholders. The Board aims to find a balance between: • Fixed and at-risk remuneration. • Short-term and long-term remuneration. • Remuneration delivered in cash and deferred equity. 6.1 2021 target remuneration mix The 2021 target remuneration mix for Medibank’s ELT members is shown below. David Koczkar1 Kylie Bishop John Goodall Mei Ramsay Mark Rogers Andrew Wilson 43.5% 14.1% 14.1% 28.3% 46.5% 12.8% 12.8% 27.9% 46.5% 12.8% 12.8% 27.9% 46.5% 12.8% 12.8% 27.9% 43.5% 14.1% 14.1% 28.3% 43.5% 14.1% 14.1% 28.3% Former ELT member Craig Drummond 28.6% 14.3% 14.3% 42.8% Fixed STI cash Deferred STI (equity) LTI (equity) 1. David Koczkar’s remuneration mix reflects his Chief Customer Officer position which is applicable to the 2021 performance period. 2. Milosh Milisavljevic has been excluded from this list as his 2021 target remuneration mix reflects his former position as Senior Executive Customer Strategy & Growth. 6.2 Total fixed remuneration (TFR) This is the fixed portion of remuneration and includes base salary and employer superannuation contributions. Fixed remuneration is determined with reference to the executive’s capabilities, experience, the complexity of the role, as well as median pay levels for similar roles at companies in the ASX 11-100 (excluding mining and energy companies). This ensures that fixed remuneration is set at competitive levels and enables Medibank to attract and retain high quality executives. Further details of Medibank’s comparator group of companies is outlined in section 14 of this report. Annual Report 2021 59 Remuneration report For the financial year ended 30 June 2021 The table below outlines the current TFR settings for ELT members as at 30 June 2021. The TFR for David Koczkar, Milosh Milisavljevic, Mark Rogers and Andrew Wilson reflect adjustments to their fixed remuneration following their recent appointments and a review of benchmark data. 6.2.1 Total fixed remuneration ELT member David Koczkar1 Kylie Bishop John Goodall Milosh Milisavljevic2 Mei Ramsay Mark Rogers3 Andrew Wilson4 Former ELT member Craig Drummond 30 June 2021 $ 1,500,000 580,000 555,000 780,000 555,000 1,000,000 1,000,000 1,534,000 1. This represents David Koczkar’s TFR as at 30 June 2021 following his appointment as Chief Executive Officer. David’s previous TFR of $960,000 was used for the purposes of calculating his 2021 short-term incentive and long-term incentive awards. 2. This represents Milosh Milisavljevic’s TFR as at 30 June 2021 following his appointment as Group Executive – Customer Portfolios. Milosh’s 2021 short-term incentive and long-term incentive awards were calculated based on his TFR prior to his appointment as a KMP. 3. This represents Mark Rogers’ TFR as at 30 June 2021 following his expanded accountability as Group Executive – Chief Financial Officer & Group Strategy. Mark’s previous TFR of $925,000 was used for the purposes of calculating his 2021 short-term incentive and long-term incentive awards. 4. This represents Andrew Wilson’s TFR as at 30 June 2021 following his expanded accountability as Group Executive – CEO Health Services. Andrew’s previous TFR of $960,000 was used for the purposes of calculating his 2021 short-term incentive and long-term incentive awards. 6.3 Short-term incentive (STI) STI is an at-risk element of remuneration, which is designed to reward executives for the creation of customer and shareholder value during the financial year. Executives must pass two separate gateways to participate in the plan. Once both gateways are achieved, executives have the opportunity to earn a percentage of their fixed remuneration as an incentive, based on company and individual performance. 6.3.1 STI gateways For an STI award to be made to an ELT member, the following gateways must be achieved: Risk, compliance and behaviour gateway Individually assessed, the risk, compliance and behaviour gateway requires ELT members to: • Adhere to Medibank’s Code of Conduct which covers standards of behaviour and conduct which includes anti-harassment, anti-discrimination and anti-bribery and corruption obligations. Our Code of Conduct requires all employees to not only comply with our legal obligations, but also to act ethically and responsibly in relation to our customers, colleagues and the community. 60 Medibank • Complete all mandatory compliance training which includes privacy, cyber-security, health and safety, bullying and harassment, bribery and corruption and meeting our legal, ethical and governance requirements. • Ensure that the risks in respect of their position are well managed. Multiple factors are considered when assessing risk management (including environment, social and corporate governance and climate risks where relevant), which differ based on an executive’s role. Common elements include the effective operation of divisional risk committees, incident identification, audit findings, remediation actions, health and safety, and feedback on risk culture from employees. Assessment of the risk, compliance and behaviour gateway is also subject to feedback provided by the Chief Risk Officer, Group Executive – People & Culture and Group Executive – Legal, Governance & Compliance as outlined in section 5.2. Financial gateway • Assessed at the Group level, Medibank must achieve a baseline of financial performance as determined by the Board for the performance period. In 2021, this baseline financial performance was a Group operating profit target. 6.3.2 STI performance measurement The Board determines challenging levels of performance for each Medibank and role-specific STI performance measure. When setting performance expectations, the Board considers numerous factors, including Medibank’s strategic objectives, prior year performance, the external environment, customer outcomes and shareholder expectations. The Board also ensures that performance levels are set for the current year in the context of achieving longer term customer and financial strategic goals. Further detail on each performance measure is outlined in section 7.1. At the completion of the performance year, an assessment is first made on the achievement of the STI gateways. If achieved, ELT members are then assessed against the company and role-specific performance measures to determine STI award outcomes. As an example, for an ELT member to achieve a target STI award, performance against Medibank and role-specific measures must be at the target level of performance as set by the Board (for that element of the award) and delivered with behaviours aligned with Medibank’s purpose and values. For an ELT member to achieve a stretch STI award (therefore, award at maximum), performance against all Medibank and role-specific measures must be at or above stretch performance as set by the Board (for that element of the award) and delivered with behaviour aligned with Medibank’s purpose and values. This would represent exceptional performance, well above that of Medibank’s strategic plan.  6.3.3 Key features of the STI Plan Over what period is performance assessed? How are STI payments delivered? The STI performance period is the financial year 1 July to 30 June. 50% of STI awarded to ELT members is paid as cash, with the remaining 50% deferred for 12 months (deferred STI). Deferred STI is provided in the form of 12-month deferred performance rights. When are STI payments made? The cash component of STI is paid following the release of audited financial results, with performance rights for the deferred STI component granted shortly thereafter. What method is used to determine the number of performance rights granted to each participant as part of the deferred STI? Performance rights under the STI plan are granted at face value. The deferred STI value for each ELT member is divided by the volume weighted average share price (VWAP) of Medibank shares to determine the number of units granted. For the 2021 deferred STI component the VWAP will be calculated on the 10 trading days up to and including 16 September 2021. Are deferred STI performance rights entitled to receive a dividend payment? What gateways apply to the STI plan? What are the performance measures under the STI plan? Deferred STI performance rights do not attract dividends during the deferral period. To align participant outcomes with shareholders, on vesting of these performance rights additional Medibank shares are granted to ensure each participant receives a benefit equivalent to any dividends paid during the deferral period. For an STI award to be made to an ELT member, both the risk, compliance and behaviour gateway, and the financial gateway must be achieved. Further detail on these gateways is outlined in section 6.3.1. Performance measures under the STI plan are determined by the Board at the commencement of each performance period. For 2021, the performance measures were: • Group operating profit (excluding investment income). • Health Insurance premium revenue growth. • Brand Net Promoter Score (NPS). • Role-specific metrics. Further detail on each performance measure is outlined in section 7.1. Does Medibank disclose STI performance targets? Section 7.1 of this report provides a detailed description of Medibank’s STI performance measures and a description of how the organisation has performed against each measure in 2021. Actual target values are not disclosed as this is considered to be commercially sensitive information. Does Medibank have a clawback policy that applies to the STI plan? Medibank has an Executive Remuneration Clawback Policy that provides discretion to the Board to reduce, cancel, or recover (clawback) any award made under the STI plan to an ELT member in certain circumstances subject to applicable laws. Further detail on this policy is outlined in section 4.2.2. What happens to STI entitlements if an ELT member leaves Medibank? If an ELT member is a ‘good leaver’ (meaning they cease employment by reason of death, serious disability, permanent incapacity, retirement, redundancy, or with Board approval), pro rata payment of STI applies. In what circumstances are STI entitlements forfeited? Section 4.2.5 provides additional information on the treatment of STI for people deemed as ‘good leavers’ by the Board. In the event an ELT member is not considered a ‘good leaver’ (meaning they cease employment for any reason other than death, serious disability, permanent incapacity, retirement, redundancy or with Board approval), the ELT member will forfeit any payment under the STI plan, including any unvested deferred STI grants, unless otherwise determined by the Board. Annual Report 2021 61 Remuneration report For the financial year ended 30 June 2021 6.3.4 Annual STI opportunity The target and maximum annual STI opportunity as a percentage of TFR for ELT members is outlined in the table below. ELT member David Koczkar1 Kylie Bishop John Goodall Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond 2021 Target Maximum 65% 55% 55% 55% 65% 65% 100% 100% 100% 100% 100% 100% 100% 150% 1. David Koczkar’s 2021 target and maximum STI opportunity reflects his previous position as Chief Customer Officer and is applicable for the 2021 performance period. 2. Milosh Milisavljevic’s 2021 STI opportunity is based on his previous position as Senior Executive Customer Strategy & Growth prior to his appointment as a KMP and is excluded from this table. 6.4 Long-term incentive (LTI) LTI is an at-risk element of remuneration designed to reward executives for delivering sustainable business performance over the long term. Given the nature of the private health insurance industry and the fact that it is highly regulated, the Board considers it appropriate to measure long term performance over a three-year period. Each year executives are eligible to receive an LTI which is calculated as a percentage of their fixed remuneration. This incentive is subject to performance hurdles that will be tested at the end of the three-year performance period. Based on performance against these hurdles a percentage of the incentive will be retained by the executive with the remainder being forfeited. 6.4.1 Key features of the LTI Plan What is the aim of the LTI plan? The Medibank LTI Plan is designed to: • Align the interests of ELT members more closely with the interests of customers and shareholders, by providing an opportunity for those executives to receive an equity interest in Medibank through the granting of performance rights. • Assist in the motivation, retention and reward of ELT members over the three-year deferral period. What is the performance period for 2021 LTI plan? The performance period for the 2021 LTI plan is three financial years commencing 1 July 2020. A three-year performance period strikes a balance between providing a reasonable period to align reward with shareholder return and the LTI acting as a vehicle for executive motivation and retention. What are performance rights? Performance rights issued to ELT members under the LTI plan are conditional rights for the participant to subscribe for fully paid ordinary shares in Medibank. What method is used to determine the number of performance rights granted to each participant? Each performance right entitles the ELT member to subscribe for one ordinary share if the performance hurdles are met at the conclusion of the performance period. No amount is payable by the participant upon exercise of the performance rights once they have vested. Performance rights under the LTI plan are granted at face value. Each ELT member receives a percentage of their fixed remuneration in LTI (refer to section 6.4.2 for details). This amount is then divided by the face value of Medibank shares. For the 2021 LTI plan, the number of performance rights granted to each ELT member was determined using the volume weighted average price of Medibank shares on the ASX during the 10 trading days up to and including, 30 June 2020. This average price was $3.02. What gateways apply to the LTI plan? For an LTI award to be granted to an ELT member, the risk, compliance and behaviour gateway must be met prior to grant. Further detail on this gateway is outlined in section 6.3.1. 62 Medibank What are the performance hurdles under the 2021 LTI plan? Performance rights issued under the 2021 LTI plan are subject to three separate performance hurdles: • 35% of the performance rights are subject to a performance hurdle based on Medibank’s earnings per share compound annual growth rate (EPS CAGR) over the performance period. The starting point for EPS will be calculated using Medibank’s underlying profit as at 30 June 2020 and the performance period for the EPS performance hurdle will run for three years from 1 July 2020 through to 30 June 2023. Further detail on the profit measure used in the calculation of EPS is provided in section 6.4.3. • 35% of the performance rights are subject to a relative total shareholder return (TSR) performance hurdle, measured over the performance period. Medibank’s relative TSR will be compared to a comparator group comprising companies with a market capitalisation positioned within the ASX 11-100 (excluding mining and energy companies). • 30% of the performance rights are subject to a performance hurdle based on the growth of Medibank’s private health insurance market share (as reported by APRA) over the performance period. These performance hurdles were chosen by the Board as they are aligned with the interests of our customers and shareholders and represent well understood and transparent mechanisms to measure performance and provide a strong link between executive reward and shareholder wealth creation. The performance hurdles under the 2021 LTI plan have threshold levels which need to be achieved before vesting commences. Details of these thresholds are outlined in the vesting schedule in section 6.4.3. When do the performance rights vest? Performance hurdles are assessed as soon as practicable after the completion of the relevant performance period. The number of performance rights that vest (if any) will be relative to the achievement against the performance hurdles. See section 6.4.3 for the vesting schedule associated with each performance hurdle. Are the performance hurdles re-tested? No. Performance hurdles are only tested once at the end of the performance period. Any performance rights that remain unvested at the end of the performance period are immediately forfeited. Are LTI performance rights entitled to receive a dividend payment? LTI performance rights do not attract a dividend during the performance period, as they are still subject to performance hurdles that will determine the number of rights that convert to ordinary Medibank shares. Does Medibank have a clawback policy that applies to the LTI plan? Medibank has an Executive Remuneration Clawback Policy that provides discretion to the Board to reduce, cancel, or recover (clawback) any award made under the LTI Plan to an ELT member in certain circumstances subject to applicable laws. Further detail on this policy is outlined in section 4.2.2. What happens to LTI entitlements if an ELT member leaves Medibank? In what circumstances are LTI entitlements forfeited? If an ELT member is a ‘good leaver’ (meaning they cease employment by reason of death, serious disability, permanent incapacity, retirement, redundancy, or with Board approval), a portion of the performance rights held (granted, but not vested) by that participant on cessation of employment will be forfeited on a pro rata basis according to a formula which takes into account the length of time the participant has held the performance rights relative to the performance period for the grant. The retained performance rights will remain unvested and will be tested at the end of the performance period against the existing performance hurdles. LTI entitlements are forfeited if performance hurdles are not met. In the event an ELT member is not considered a ‘good leaver’ (meaning they cease employment for any reason other than death, serious disability, permanent incapacity, retirement, redundancy or with Board approval), the performance rights held (granted, but not vested) by that participant on cessation of employment will be automatically forfeited. Annual Report 2021 63 Remuneration report For the financial year ended 30 June 2021 The annual LTI allocation value as a percentage of TFR for ELT members is outlined in the table below. 6.4.2 Annual LTI allocation ELT member David Koczkar1 Kylie Bishop John Goodall Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond 2021 LTI allocation value as % of TFR 65% 60% 60% 60% 65% 65% 150% 1. David Koczkar’s 2021 LTI opportunity reflects his previous position as Chief Customer Officer and is applicable for the 2021 performance period. 2. Milosh Milisavljevic’s 2021 LTI opportunity is based on his previous position as Senior Executive Customer Strategy & Growth prior to his appointment as a KMP and is excluded from this table. 6.4.3 LTI hurdles explained 2021 TSR performance rights (35% of award) Each year, the Board reviews the LTI targets and vesting conditions in the context of Medibank’s operating environment. The Board is committed to setting targets which are appropriately challenging for management to meet while not being unattainable and which ultimately support the delivery of strong outcomes for our customers and shareholders. For the 2021 LTI offer, the Board also considered the uncertainty surrounding the economic and social impact of COVID-19 on Medibank’s operating environment and the PHI landscape more broadly. 2021 EPS performance rights (35% of award) In this context, the Board approved maintaining a threshold EPS CAGR target of 3% for the 2021 LTI grant. The number of EPS performance rights that vest on achievement of the threshold EPS CAGR target has been increased by the Board to 50% of the EPS performance rights. The EPS CAGR target that must be met for 100% of the EPS performance rights to vest has been reduced by the Board to 7%. This change was made to achieve a more appropriate balance between the goals of attainability and challenge. Details of the vesting schedule are outlined in the table below: Medibank’s EPS CAGR over the performance period Percentage of EPS performance rights that vest Less than 3% EPS CAGR At 3% EPS CAGR Between 3% and 7% EPS CAGR 7% EPS CAGR or greater Nil 50% Straight-line pro rata vesting between 50% and 100% 100% Medibank’s performance against the EPS hurdle is calculated based on the compound annual growth rate (CAGR) of Medibank’s EPS over the performance period. EPS is based on underlying profit, which adjusts statutory net profit after tax (NPAT) where appropriate, for short-term outcomes that are expected to normalise over the medium to longer term, most notably in relation to the level of gains or losses from investments, due to the limited control that management has over these outcomes. 64 Medibank Medibank’s TSR will be compared against companies within the ASX 11-100 (excluding mining and energy companies), which is the same comparator group used for executive and non-executive remuneration benchmarking. For any of the 2021 TSR performance rights to vest, Medibank must achieve the threshold TSR ranking over the performance period. The percentage of the 2021 TSR performance rights that vest, if any, will be based on Medibank’s TSR ranking at the end of the performance period, as set out in the following vesting schedule: Medibank’s TSR rank in the 2021 comparator group Percentage of TSR performance rights that vest Less than 50th percentile Equal to 50th percentile Greater than 50th and up to 75th percentile At or above 75th percentile Nil 50% Straight-line pro rata vesting between 50% and 100% 100% The TSR of Medibank and other companies within the comparator group, expressed as a compound annual rate of return, will be comprised of: a) The change in share price of each company over the performance period. The change in share price is calculated using the volume weighted average price (VWAP) of each entity over the 20 trading days leading up to and including the performance period start and end dates. The VWAP at the end of the performance period will be adjusted for any stock splits that occur during the performance period. b) The value of all dividends and other shareholder benefits paid by each company during the performance period assuming that: i. The dividends and shareholder benefits are reinvested in the relevant company at the closing price of the securities on the date the dividend or shareholder benefit was paid. ii. Franking credits are disregarded. The entities comprising the 2021 comparator group are determined at the commencement of the performance period. If the ordinary shares or stock of a member of the 2021 comparator group is not quoted on the ASX at the end of the performance period (for example if the member has been delisted for any reason), then it will be excluded from calculations of the TSR calculation, unless the Board, acting in good faith and in its absolute discretion, determine otherwise. In exercising its discretion, the Board may have regard to such matters it deems relevant including (but not limited to) the length of time that the member was quoted on the ASX during the performance period. 2021 market share performance rights (30% of award) The Board approved maintaining a threshold private health insurance (PHI) market share growth target of 25 basis points. To maintain the balance between the goals of attainability and challenge, the number of market share performance rights that vest on achievement of the threshold target has been increased to 50% of the market share performance rights. The PHI market share growth target that must be met for 100% of the market share performance rights to vest has been maintained at 75 basis points. Details of the vesting schedule are set out below: Medibank’s PHI market share growth Percentage of market share performance rights that vest Less than 25 basis points Equal to 25 basis points Greater than 25 basis points and up to 75 basis points At or above 75 basis points Nil 50% Straight-line pro rata vesting between 50% and 100% 100% 7. Linking remuneration and performance 2021 7.1 2021 short-term incentive (STI) performance scorecard The following table details the 2021 STI performance scorecard measures, weightings and assessment as applied to the Chief Executive Officer (CEO) and other Executive Leadership Team (ELT) members. Measure Description Weighting Other ELT members CEO 2021 performance assessment Risk, compliance and behaviour gateway Individually assessed, ELT members must adhere to Medibank’s Code of Conduct, ensure that the risks in respect of their position are well managed and complete all mandatory compliance training. Medibank’s Code of Conduct requires all employees to not only comply with our legal obligations, but also to act ethically and responsibly in relation to our customers, colleagues and the community. The management of risks (including environment, social and corporate governance and climate risks where relevant) is reviewed by the Risk Management Committee and considers the effective operation of divisional risk committees, incident identification, audit findings, remediation actions, health and safety, feedback on risk culture from employees, and feedback provided by the Chief Risk Office, Group Executive – People & Culture and Group Executive – Legal, Governance & Compliance as outlined in section 5.2. Gateway Gateway All achieved Financial gateway Medibank must achieve a baseline of financial performance, as determined by the Board for the performance period. In 2021, this baseline financial performance was a Group operating profit target. Gateway Gateway Met Annual Report 2021 65 Remuneration report For the financial year ended 30 June 2021 Measure Description Group operating profit Group operating profit represents the core financial measure for the annual STI Plan and reflects the Board’s belief that it is the best measure of underlying business performance and value created for customers and shareholders over the performance period. Health Insurance premium revenue growth Measured alongside the core metric of Group operating profit, the focus of this measure is sustainable and profitable revenue growth to ensure optimal value creation for customers and shareholders. Brand Net Promoter Score (NPS) Brand NPS is a key customer advocacy metric that measures the likelihood of people recommending Medibank or ahm to their families and friends. Weighting Other ELT members CEO 2021 performance assessment 45% 35% Above target 20% 25% Below target 20% 20% Above target Role-specific big goals Aligned to one or more of the following milestones: 1. Customer and employee advocacy – Continue to achieve a high level of advocacy by delivering exceptional experiences for our customers and employees. 2. Health and wellbeing differentiation – Double the uptake of Medibank’s Live Better and Health Assist programs by FY22 while ensuring every customer has at least one personalised health interaction through the year. 3. Health insurance growth – We aim to increase market share and achieve total policyholder growth in excess of 3%, including an expectation of growing the Medibank brand by c. 1% during FY21. 4. In-home care – More than 300 virtual hospital beds by the end of FY22. 5. Medibank Health – By FY22 organically replace the reported FY18 $30m operating profit of Garrison. 6. Productivity – FY21 productivity target of $20 million and additional $30 million during FY22-FY23. 15% 20% Ranging between ‘on-track’ to ‘ahead of target’ 66 Medibank 7.2 Medibank’s 2021 financial performance Medibank’s 2021 annual financial performance is provided in the table below in addition to the average 2021 STI award achieved by ELT members, as a percentage of maximum opportunity. This table illustrates the relationship between the key indicators of shareholder wealth creation and STI outcomes for ELT members Measure Health Insurance premium revenue growth Group operating profit1 Group net profit after tax (NPAT) Dividend Share price as at 1 July Share price as at 30 June Average ELT STI as a percentage of maximum opportunity 2021 2.1% $528.3m $441.2m 12.7 cents p/s $2.99 $3.16 2020 1.3% $461.0m $315.0m 12.0 cents p/s $3.49 $2.99 2019 2.4% $558.7m $458.7m 13.1 cents p/s $2.92 $3.49 2018 1.2% $548.8m $445.1m 12.7 cents p/s $2.80 $2.92 2017 1.2% $500.5m $449.5m 12.0 cents p/s $2.95 $2.80 70% 0% 56% 58% 44% 1. 2019 Group operating profit of $558.7 million includes $30.2 million of operating profit attributable to discontinued operations. 7.3 2021 STI awards The table below provides a summary of STI awards for the 2021 performance year. As outlined earlier in the report, in assessing Medibank’s 2021 performance against our STI measures, the Board adjusted outcomes to normalise for unbudgeted COVID-19 related impacts (both negative and positive) outside of management’s control to ensure that executives did not benefit from windfall gains. Further to this assessment, the Board exercised discretion to reduce the 2021 STI outcomes for ELT members from an average of 80% of their maximum opportunity, to 70%. ELT member David Koczkar Kylie Bishop John Goodall Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond1 Total STI achieved $ 729,792 395,792 353,758 353,758 670,810 662,592 STI cash (50%) $ 364,896 197,896 176,879 176,879 335,405 331,296 STI deferred (50%) $ 364,896 197,896 176,879 176,879 335,405 331,296 Total STI achieved as % of target 117.0% 124.1% 115.9% 115.9% 111.6% 106.2% Total STI achieved as % of max opportunity 76.0% 68.2% 63.7% 63.7% 72.5% 69.0% 1,742,624 871,312 871,312 113.6% 75.7% 1. The deferred component of Craig Drummond’s 2021 STI outcome will be awarded as deferred cash, due to vest in September 2022. 2. The 2021 STI outcome for Milosh Milisavljevic was based on his performance and remuneration settings prior to becoming a KMP on 22 June 2021 and has therefore not been included in this table. 7.4 2019 Long-term incentive plan outcomes The performance period for the 2019 LTI plan concluded on 30 June 2021. The table below outlines the final outcome against each performance hurdle and associated vesting percentage for each hurdle, and the plan. Performance hurdle EPS CAGR Relative TSR Total 2019 LTI vesting percentage Weighting 50% 50% Outcome -2.8% 57th percentile Vesting percentage 0% 64% 32% Medibank’s 2019 LTI was tested following the completion of the performance period on 30 June 2021. Both performance hurdles were assessed in line with the terms of the plan and the Board did not use discretion in determining the final outcome. The performance rights under the 2019 LTI Plan that did not vest as a result of the performance hurdle outcomes not being met, lapse immediately. The 2020 and 2021 LTI Plans remain in restriction and will be assessed against their performance hurdles at the completion of the 2022 and 2023 financial years respectively. Annual Report 2021 67 Remuneration report For the financial year ended 30 June 2021 8. 2021 actual remuneration (Non-IFRS disclosure) The table below represents the 2021 ‘actual’ remuneration for ELT members and includes all cash payments made in relation to 2021, in addition to deferred short-term incentive (STI) awards that vested in 2021. Statutory remuneration disclosures prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards differ to the numbers presented below, as they include (among other benefits) expensing for equity grants that are yet to realise or may never be realised. The statutory remuneration table in respect of the ELT members is presented in section 9. Base salary and superannuation $ 1,011,923 580,000 540,731 555,000 895,220 960,000 Cash STI for performance to 30 June 2021 $ 364,896 197,896 176,879 176,879 335,405 331,296 Total cash payments in relation to 2021 $ 1,376,819 777,896 717,610 731,879 1,230,625 1,291,296 Deferred equity awards that vested in 20211 $ 503,064 283,113 259,159 258,618 378,433 523,759 Total 2021 actual remuneration $ 1,879,883 1,061,009 976,769 990,497 1,609,058 1,815,055 Equity awards that lapsed in 20212 $ 283,546 170,359 162,617 162,076 213,725 315,424 1,534,000 871,312 2,405,312 1,699,960 4,105,272 1,187,878 ELT member David Koczkar Kylie Bishop John Goodall Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond 1. Deferred equity awards that vested in 2021 relate to the 2018 LTI performance rights that vested during the year and the deferred STI performance rights in respect to the 2019 performance year that vested during the year. 2. Equity awards that lapsed in 2021 relate to the portion of the 2018 long-term incentive (LTI) performance rights that lapsed following the testing of the performance hurdles in July 2020. 3. Milosh Milisavljevic’s 2021 actual remuneration was primarily based on his remuneration settings prior to becoming a KMP on 22 June 2021 and has therefore not been included in this table. 9. Statutory remuneration tables 9.1 Statutory remuneration table The following table has been prepared in accordance with Section 300A of the Corporations Act 2001 and details the statutory accounting expense of all remuneration-related items for the ELT members. In contrast to the table in section 8 that details 2021 actual remuneration, the table below includes accrual amounts for equity awards being expensed throughout 2021 that are yet to, and may never be realised by the ELT member. Short-term benefits Post-employment benefits Long-term benefits Equity-based benefits Other ELT member Financial year Salary $1 STI $ Other $ Non-monetary benefits $2 Superannuation $ Leave $3 Deferred STI $4 Performance rights $5 Termination benefits $ Total remuneration $ 2021 1,027,440 364,896 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 919,211 - 537,080 197,896 555,459 - 533,772 176,879 530,146 21,818 - - 4,772 - 503,674 176,879 503,330 - 838,236 335,405 759,523 - 963,798 331,296 935,307 - - - - - - - - - - - - - - - 18,895 19,444 13,387 13,209 18,191 12,721 212 - 14,460 14,224 17,457 13,246 22,936 16,273 22,650 174,791 21,174 58,896 25,365 40,266 25,192 40,978 25,365 17,029 25,192 15,821 740 - 8 - 25,365 40,362 25,192 50,019 21,802 191,358 21,174 84,014 25,096 33,501 25,192 25,593 - - - - - - - - - - - - - - 512,839 230,115 284,154 123,040 265,642 110,038 1,762 - 265,642 109,952 458,958 178,851 498,587 225,710 - - - - - - - - - - - - - - 2,121,511 1,248,840 1,098,148 757,878 1,036,878 693,918 29,312 - 1,026,382 702,717 1,863,216 1,056,808 1,875,214 1,228,075 David Koczkar Kylie Bishop John Goodall Milosh Milisavljevic6 Mei Ramsay Mark Rogers Andrew Wilson 68 Medibank ELT member Financial year Salary $1 Former ELT member Short-term benefits Post-employment benefits Long-term benefits Equity-based benefits Other STI $ Other $ Non-monetary benefits $2 Superannuation $ Leave $3 Deferred STI $4 Performance rights $5 Termination benefits $ Total remuneration $ Craig Drummond Total ELT remuneration 2021 1,555,477 871,312 2020 1,567,526 - 2021 5,981,295 2,459,335 2020 5,770,502 - - - - - 15,364 19,296 120,902 108,413 25,096 51,868 871,312 1,227,715 25,192 47,723 - 663,660 171,479 549,183 871,312 3,515,299 168,308 323,044 - 1,641,366 - - - - 4,618,144 2,323,397 13,668,805 8,011,633 1. Salary includes annual base salary paid on a fortnightly basis and accrued but untaken annual leave entitlements which are expected to be taken in the next 12 months. 2. Non-monetary benefits may include death, total and permanent disablement insurance, salary continuance insurance, subsidised Medibank health insurance and fringe benefits that are on the same terms and conditions that are available to all employees of the Group. 3. Long-term leave comprises an accrual for long service leave and accrued but untaken annual leave entitlements which are not expected to be taken in the next 12 months. The significant year-on-year movements in this expense for David Koczkar and Mark Rogers reflect adjustments to their fixed remuneration following their new appointments and additional untaken annual leave entitlements accrued during the year. 4. Deferred STI is in relation to Craig Drummond’s deferred component of his 2021 STI which will be awarded as deferred cash (rather than performance rights) and vest in September 2022, in accordance with Medibank’s Executive STI plan rules. 5. Performance rights include equity-based remuneration incurred during the relevant financial year. The values are based on the grant date fair value amortised on a straight-line basis over the performance period and any reversals required by AASB 2 Share-based Payments. 6. The remuneration figures disclosed for Milosh Milisavljevic reflect the period from his commencement as a KMP on 22 June 2021. 9.2 Performance-related remuneration statutory table The following table provides an analysis of the non-performance-related (fixed remuneration) and performance-related (short-term incentive (STI) and long-term incentive (LTI)) components of the 2021 remuneration mix for Medibank’s ELT members as detailed in the ‘statutory remuneration table’. Non-performance-related Performance-related remuneration Financial year Fixed remuneration1 Cash STI Deferred STI2 2021 2021 2021 2021 2021 2021 2021 58.6% 56.1% 57.3% 77.7% 56.9% 57.4% 55.7% 17.2% 18.0% 17.1% 16.3% 17.2% 18.0% 17.7% 8.6% 9.0% 8.5% 0.0% 8.6% 9.0% 8.8% LTI3 15.6% 16.9% 17.1% 6.0% 17.3% 15.6% 17.8% ELT member David Koczkar Kylie Bishop John Goodall Milosh Milisavljevic Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond 2021 35.7% 18.9% 18.9% 26.6% Total performance-related remuneration 41.4% 43.9% 42.7% 22.3% 43.1% 42.6% 44.3% 64.4% 1. Fixed remuneration includes the accounting expense from all columns of the ‘statutory remuneration table’ other than ‘cash STI’, ‘performance rights’ and ‘deferred STI’. 2. Deferred STI includes the 2021 accounting expense of the 2021 deferred STI components within the ‘performance rights’ and ‘deferred STI’ columns of the ‘statutory remuneration table’. 3. LTI includes the 2021 accounting expense of the 2019, 2020 and 2021 LTI component within the ‘performance rights’ column of the ‘statutory remuneration table’. Annual Report 2021 69 Remuneration report For the financial year ended 30 June 2021 10. Executive Leadership Team (ELT) equity awards 10.1 ELT equity award transactions Details of 2021 ELT equity award transactions and outstanding holdings granted in previous years are set out below. Units granted Grant date Vesting and exercise date1 Unit price at grant $2 Fair value at grant $3 Units % Units % $ Units Vested Lapsed Other changes Unvested balance at 30 June 20214 ELT member Award type David Koczkar 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Kylie Bishop 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights John Goodall 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Milosh Milisavljevic5 2021 LTI performance rights 2020 LTI performance rights 2019 LTI performance rights 206,622 180,346 86,766 203,264 198,284 115,230 100,578 44,567 117,524 119,132 110,264 96,242 38,159 112,370 113,718 42,980 36,814 30,154 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 06/12/2018 Mei Ramsay 2021 LTI performance rights 110,264 26/11/2020 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Mark Rogers 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Andrew Wilson 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Former ELT member Craig Drummond6 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 96,242 38,159 112,370 113,340 199,088 150,288 65,102 152,576 149,458 206,622 180,346 82,346 214,432 220,576 761,920 665,028 202,404 790,720 830,684 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 01/07/2021 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 2.91 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 86,766 100 219,518 99,142 50 283,546 99,142 50 283,546 44,567 100 112,755 59,566 50 170,359 59,566 50 170,359 38,159 100 96,542 56,859 50 162,617 56,859 50 162,617 - - - - - - - - - - - - - - - - - - - - - - - - $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 38,159 100 96,542 56,670 50 162,076 56,670 50 162,076 65,102 100 164,708 74,729 50 213,725 74,729 50 213,725 82,346 100 208,335 110,288 50 315,424 110,288 50 315,424 202,404 100 512,082 415,342 50 1,187,878 415,342 50 1,187,878 (761,920) (665,028) (790,720) 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 1.91 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 - - - - - - - - - - - - - - - - - - - - - - - - Units 206,622 180,346 $ 455,395 402,172 203,264 387,218 115,230 100,578 253,967 224,289 117,524 223,883 110,264 96,242 243,022 214,620 112,370 214,065 42,980 36,814 30,154 110,264 96,242 94,728 82,095 57,443 243,022 214,620 112,370 214,065 199,088 150,288 438,790 335,142 152,576 290,657 206,622 180,346 455,395 402,172 214,432 408,493 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1. The vesting and exercise dates represent the earliest possible date the performance rights may vest, being the end of the performance period. The actual vesting and exercise date will be at a time and manner determined by the Board, with Medibank to notify the holder at that time. Any performance rights that do not vest at this point will immediately expire. 2. The unit price at grant represents the price used to determine the number of units granted, in line with Medibank’s methodology of granting equity awards at face value. Unit prices have been rounded to the nearest cent. 3. The fair value at grant has been based on a valuation by independent external consultants in accordance with accounting standard AASB 2 Share-based Payments. The fair values for the 2019, 2020 and 2021 long-term incentive (LTI) grants are used for accounting purposes only as all LTI grants are made using the face value, as outlined in section 6.4. Unit prices have been rounded to the nearest cent. 70 Medibank 10. Executive Leadership Team (ELT) equity awards 10.1 ELT equity award transactions Details of 2021 ELT equity award transactions and outstanding holdings granted in previous years are set out below. Units granted Grant date Vesting and exercise date1 Unit price at grant $2 Fair value at grant $3 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 1.91 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 2.20 2.23 - 1.91 1.90 Milosh Milisavljevic5 2021 LTI performance rights 2020 LTI performance rights 2019 LTI performance rights Mei Ramsay 2021 LTI performance rights 110,264 26/11/2020 ELT member Award type David Koczkar 2021 LTI performance rights Kylie Bishop 2021 LTI performance rights John Goodall 2021 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights 2020 LTI performance rights 2019 deferred STI performance rights 2019 LTI performance rights 2018 LTI performance rights Mark Rogers 2021 LTI performance rights Andrew Wilson 2021 LTI performance rights Former ELT member Craig Drummond6 2021 LTI performance rights 206,622 180,346 86,766 203,264 198,284 115,230 100,578 44,567 117,524 119,132 110,264 96,242 38,159 112,370 113,718 42,980 36,814 30,154 96,242 38,159 112,370 113,340 199,088 150,288 65,102 152,576 149,458 206,622 180,346 82,346 214,432 220,576 761,920 665,028 202,404 790,720 830,684 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 06/12/2018 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 26/11/2020 28/11/2019 28/11/2019 06/12/2018 27/12/2017 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 01/07/2021 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 01/07/2023 01/07/2022 18/09/2020 01/07/2021 01/07/2020 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 2.91 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 3.02 3.46 3.41 2.91 2.77 Units - - 86,766 - 99,142 - - 44,567 - 59,566 - - 38,159 - 56,859 - - - - - 38,159 - 56,670 - - 65,102 - 74,729 - - 82,346 - 110,288 - - 202,404 - 415,342 Vested Lapsed Other changes Unvested balance at 30 June 20214 % - - $ - - 100 219,518 100 112,755 Units - - - - - - - - 283,546 99,142 Units % - - - - 50 - - - - $ - - - - 283,546 - - - - 170,359 59,566 50 170,359 - - 96,542 - - - - - - - - - - - - - 162,617 56,859 50 162,617 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 162,076 56,670 50 162,076 100 96,542 100 164,708 - - - - - - - - - - - - - 213,725 74,729 50 213,725 - - 208,335 - - - - - - - - - - - - - 315,424 110,288 50 315,424 - - 512,082 - - - - - - - - - - - - - 1,187,878 415,342 50 1,187,878 (761,920) (665,028) - (790,720) - - 50 - - - 50 - - 100 - 50 - - - - - - 50 - - - 50 - - 100 - 50 - - 100 - 50 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Units 206,622 180,346 - $ 455,395 402,172 - 203,264 387,218 - 115,230 100,578 - - 253,967 224,289 - 117,524 223,883 - 110,264 96,242 - - 243,022 214,620 - 112,370 214,065 - 42,980 36,814 30,154 110,264 96,242 - - 94,728 82,095 57,443 243,022 214,620 - 112,370 214,065 - 199,088 150,288 - - 438,790 335,142 - 152,576 290,657 - 206,622 180,346 - - 455,395 402,172 - 214,432 408,493 - - - - - - - - - - - - 1. The vesting and exercise dates represent the earliest possible date the performance rights may vest, being the end of the performance period. The actual 4. The unvested balance has been determined by multiplying the balance of short-term incentive (STI) performance rights at 30 June 2021 by the unit vesting and exercise date will be at a time and manner determined by the Board, with Medibank to notify the holder at that time. Any performance rights price at grant, and the balance of LTI performance rights at 30 June 2021 by the fair value at grant. that do not vest at this point will immediately expire. 2. The unit price at grant represents the price used to determine the number of units granted, in line with Medibank’s methodology of granting equity awards at face value. Unit prices have been rounded to the nearest cent. 3. The fair value at grant has been based on a valuation by independent external consultants in accordance with accounting standard AASB 2 Share-based Payments. The fair values for the 2019, 2020 and 2021 long-term incentive (LTI) grants are used for accounting purposes only as all LTI grants are made using the face value, as outlined in section 6.4. Unit prices have been rounded to the nearest cent. 5. Milosh Milisavljevic’s equity award transactions reflect his holdings following his commencement as a KMP on 22 June 2021. 6. Craig Drummond ceased to be a KMP on 17 May 2021 and therefore Craig’s unvested balance as at 30 June 2021 has been adjusted to reflect no further holdings as a KMP. Details of how Craig’s LTI performance rights have been treated on the basis of being a “good leaver” are detailed in section 2 of this report. Annual Report 2021 71 Remuneration report For the financial year ended 30 June 2021 10.2 ELT members’ ordinary shareholdings Details of the ordinary shareholdings of ELT members and their related parties are provided in the table below. ELT member David Koczkar Kylie Bishop John Goodall Milosh Milisavljevic3 Mei Ramsay Mark Rogers Andrew Wilson Former ELT member Craig Drummond4 Balance 30 June 2020 Shares received on vesting of performance rights1 Net movement of shares due to other changes2 Balance 30 June 2021 721,988 360,889 83,415 - 109,243 199,352 728,368 732,578 191,701 107,109 97,566 - 97,377 144,178 198,132 (120,000) (44,000) (33,040) 14,468 - - - 793,689 423,998 147,941 14,468 206,620 343,530 926,500 631,261 (1,363,839) - 1. Shares received on the vesting of deferred STI performance rights include the additional Medibank shares credited to ELT members upon the vesting of the 2019 deferred STI performance rights as a benefit equivalent to any dividends paid during the deferral period. For further information, please refer to section 6.3.3. 2. Net movement of shares relates to acquisition and disposal transactions by the ELT member and their related parties during the year. 3. Milosh Milisavljevic’s ordinary shareholdings reflect his holdings and movements following his commencement as a KMP on 22 June 2021. 4. Craig Drummond ceased to be a KMP on 17 May 2021 and therefore Craig’s balance as at 30 June 2021 has been adjusted to reflect no further holdings as a KMP. 11. Non-executive director remuneration and framework Non-executive director fees are determined by the Board and reflect the role, market benchmarks and Medibank’s objective to attract highly skilled and experienced independent non- executive directors. All non-executive directors are required to hold shares in Medibank to align with shareholder interests. 11.1 Non-executive director remuneration Component Delivered Description Base fee Cash and superannuation Committee fees Cash and superannuation The base fee represents remuneration for service on the Medibank Board. The base fee for the Chairman represents the entire remuneration for that role. Committee fees represent remuneration for chairing, or membership of, Board committees. 11.1.1 Non-executive director fee cap Under Medibank’s Constitution, the total fees paid in any financial year to all non-executive directors for their services (excluding, for these purposes, the salary of any executive director) must not exceed, in aggregate, the amount fixed at Medibank’s annual general meeting in 2018 at $2,300,000 per annum (fee cap). 72 Medibank 11.1.2 2021 and 2022 non-executive director remuneration Under Medibank’s Constitution, the Board is responsible for determining the total amount paid to each non-executive director as remuneration for their services. In making this determination, the Board has taken into account the level of work required for the role and has regard to the median remuneration paid to non-executive directors of companies positioned within the ASX 11-100 (excluding mining and energy companies). Following the annual benchmarking exercise and the position of non-executive directors against the median of the benchmark group, non-executive director base and committee fees have been maintained at their current levels for 2022. Based on the composition of the Board, non-executive director fee spend for 2022 will be $1,940,000 against the approved cap of $2,300,000. Non-executive director fees applicable throughout 2021 and 2022 are set out in the table below: Position Chairman Non-executive directors Committee chairman fees Audit Committee Risk Management Committee People and Remuneration Committee Investment and Capital Committee Committee membership fees Audit Committee Risk Management Committee People and Remuneration Committee Investment and Capital Committee 2021 & 2022 $ 445,000 165,000 40,000 40,000 40,000 40,000 20,000 20,000 20,000 20,000 11.2 Non-executive director superannuation 11.3 Shareholding policy for non-executive directors Medibank meets its obligations under the Superannuation Guarantee legislation by paying superannuation contributions in respect of non-executive directors to their nominated complying superannuation funds up to the concessional contribution limits. Superannuation contributions for non- executive directors are drawn from the overall fees paid to non-executive directors. Medibank has a Minimum Shareholding Policy that requires non-executive directors to acquire shares with a value equal to one year’s base fee after tax over a period of five years. Non-executive directors do not participate in, or receive, any performance-based remuneration as part of their role and do not participate in any equity plans that operate within Medibank. As permitted under the Superannuation Guarantee legislation, people with multiple employers can elect to be exempt from the superannuation guarantee where contributions are likely to take them over the annual concessional contribution cap. If a non-executive director applies and receives an exemption from superannuation guarantee payments, Medibank will make those payments in cash. As at 30 June 2021, all non-executive directors have either met the minimum shareholding requirement, or are on track to do so, within the five-year period. Further details of current non-executive director shareholdings are provided in section 13. 12. 2021 non-executive director remuneration statutory table Non-executive director Mike Wilkins Tracey Batten Anna Bligh Gerard Dalbosco2 David Fagan Peter Hodgett Linda Bardo Nicholls Christine O’Reilly Former non-executive director Elizabeth Alexander3 Total non-executive director remuneration Short-term benefits Post-employment benefits Financial year Cash salary and fees $ Non-monetary1 $ Superannuation $ Total $ 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 377,228 188,655 187,935 188,655 187,934 188,654 20,882 - 206,270 207,061 206,270 207,061 187,456 198,026 225,865 217,346 107,435 427,250 3,954 3,612 2,581 2,729 3,296 3,119 - - 2,736 2,618 3,849 3,728 3,014 2,888 2,765 2,602 9,434 - 9,352 17,922 17,854 17,923 17,854 17,922 1,984 - 19,596 19,671 19,596 19,672 18,127 8,551 - 9,385 6,112 21,174 390,534 210,189 208,370 209,307 209,084 209,695 22,866 - 228,602 229,350 229,715 230,461 208,597 209,465 228,630 229,333 122,981 448,424 1,707,275 1,822,708 31,629 21,296 110,475 132,220 1,849,379 1,976,224 1. Non-monetary benefits may include death, total and permanent disablement insurance, salary continuance insurance, subsidised Medibank health insurance and fringe benefits that are on the same terms and conditions that are available to all Medibank employees. 2. Gerard Dalbosco’s 2021 remuneration reflects his commencement date as a non-executive director of 21 May 2021. 3. Elizabeth Alexander’s 2021 remuneration reflects her retirement date from the Medibank Board of 1 October 2020. Annual Report 2021 73 Remuneration report For the financial year ended 30 June 2021 13. Non-executive director ordinary shareholdings Non-executive director Mike Wilkins Tracey Batten Anna Bligh Gerard Dalbosco3 David Fagan Peter Hodgett Linda Bardo Nicholls Christine O’Reilly Balance 30 June 2020 Acquired during the year Other changes 59,013 50,000 44,623 - 47,016 67,800 45,000 69,930 40,987 - - - - - - - - - - 24,432 - - - - Balance 30 June 2021 100,000 50,000 44,623 24,432 47,016 67,800 45,000 69,930 Minimum shareholding requirement $1 Value of eligible shareholdings as at 30 June 2021 $2 Minimum shareholding requirement timeline 222,500 82,500 82,500 82,500 82,500 82,500 82,500 82,500 316,000 Requirement satisfied 158,000 Requirement satisfied 141,009 Requirement satisfied 77,205 21 May 2026 148,571 Requirement satisfied 214,248 Requirement satisfied 142,200 Requirement satisfied 220,979 Requirement satisfied Former non-executive director Elizabeth Alexander4 124,786 - (124,786) - Not applicable - Not applicable 1. Minimum shareholding requirement based on annual non-executive director base fees for 2021 and an assumed tax rate of 50%. 2. Value has been calculated with reference to the total number of eligible shares held by each non-executive director, multiplied by the closing price of Medibank’s shares on 30 June 2021 ($3.16). 3. Gerard Dalbosco commenced as a non-executive director on 21 May 2021 and therefore his balance at the time of joining the Medibank Board is reflected in the ‘other changes’ column. 4. Elizabeth Alexander ceased to be a KMP on 1 October 2020 and therefore Elizabeth’s balance at 30 June 2021 has been adjusted to reflect no further holdings as a KMP. 14. Medibank’s comparator group As outlined throughout this report, Medibank uses a comparator group for the purposes of benchmarking executive and non-executive director remuneration and for the assessment of Medibank’s relative total shareholder return (TSR) performance under its long-term incentive (LTI) plan. Medibank’s comparator group is the ASX 11-100, excluding mining and energy companies. In any given year, there may be changes in the mining and energy companies excluded from Medibank’s comparator group due to companies either falling outside the ASX 11-100 or companies no longer being considered exclusively as a mining or energy company. 74 Medibank Financial report Consolidated financial statements Notes to the financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows page 76 page 77 page 78 page 79 Section 1 Basis of preparation page 80 1. Basis of preparation Section 2 Operating performance page 81 2. Segment information 3. Insurance underwriting result 4. Deferred acquisition costs 5. Unearned premium liability 6. Shareholder returns Section 3 Investment portfolio and capital page 92 Section 4 Other assets and liabilities page 103 Section 5 Other page 111 7. Investment portfolio 8. Financial risk management 9. Working capital 10. Contributed equity and reserves 11. Property, plant and equipment 12. Intangible assets 13. Provisions and employee entitlements 14. Leases 15. Income tax 16. Group structure 17. Related party transactions 18. Share-based payments 19. Auditor’s remuneration 20. Other Signed reports Directors’ declaration Auditor's independence declaration Independent auditor’s report page 121 page 122 page 123 Annual Report 2021 75 Consolidated statement of comprehensive income For the financial year ended 30 June 2021 Continuing operations Revenue Health Insurance premium revenue Medibank Health revenue Other income Expenses Claims expense Medical services expense Employee benefits expense Office and administration expense Marketing expense Information technology expense Professional service expense Depreciation and amortisation expense Finance expense Share of net profit/(loss) from equity accounted investments Note 2021 $m 2020 $m 2(b) 3(a) 3(a) 13(a)(ii) 16(b) 6,691.1 219.3 6,910.4 6,554.7 214.9 6,769.6 1.8 7.4 (5,557.9) (34.0) (439.9) (79.0) (81.4) (72.3) (9.6) (122.0) (2.8) (1.0) (6,399.9) (5,486.6) (27.0) (429.0) (82.6) (94.1) (72.1) (7.5) (126.9) (3.4) - (6,329.2) Profit before net investment income and income tax 512.3 447.8 Net investment income Profit for the year before income tax Income tax expense Profit for the year from continuing operations Discontinued operations Profit/(loss) after tax for the year from discontinued operations Profit for the year Other comprehensive income, net of tax Items that will not be reclassified to profit or loss Actuarial gain/(loss) on retirement benefit obligation Total comprehensive income for the year, net of tax, attributable to members of the parent arising from: Continuing operations Discontinued operations Total operations Basic and diluted earnings per share attributable to ordinary equity holders of the Company Continuing operations Total operations 6(b) 6(b) The above statement should be read in conjunction with the accompanying notes. 76 Medibank 7(a) 120.0 2.4 632.3 450.2 15(a) (191.1) 441.2 (134.6) 315.6 - (0.6) 441.2 315.0 0.4 0.4 (0.2) (0.2) 441.6 - 441.6 Cents 16.0 16.0 315.4 (0.6) 314.8 Cents 11.5 11.4 Consolidated statement of financial position As at 30 June 2021 Current assets Cash and cash equivalents Trade and other receivables Financial assets at fair value Deferred acquisition costs Tax receivable Other assets Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred acquisition costs Deferred tax assets Equity accounted investments Other assets Total non-current assets Total assets Current liabilities Trade and other payables Claims liabilities Unearned premium liability Tax liability Customer give back provision Provisions and employee entitlements Total current liabilities Non-current liabilities Trade and other payables Claims liabilities Unearned premium liability Provisions and employee entitlements Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Note 9(b) 7(b) 4 11 12 4 15(c) 16(b) 9(c) 3(b) 5 13(c) 13 9(c) 3(b) 5 13 2021 $m 2020 (restated)1 $m 671.7 215.9 2,311.9 33.6 6.2 18.8 3,258.1 101.7 345.3 47.5 85.9 77.1 8.2 665.7 871.4 207.1 1,994.7 34.5 - 22.9 3,130.6 112.2 363.7 43.6 90.2 - 7.4 617.1 3,923.8 3,747.7 338.2 622.4 697.0 - 103.0 94.7 1,855.3 70.2 9.1 60.4 22.7 162.4 320.2 628.3 671.1 57.7 - 82.9 1,760.2 84.2 10.9 75.0 19.6 189.7 2,017.7 1,949.9 1,906.1 1,797.8 10(b) 85.0 22.3 1,798.8 1,906.1 85.0 22.4 1,690.4 1,797.8 1. Restatement reflects the change in accounting policy for Software as a Service (SaaS) intangible assets detailed in Note 20(a). The above statement should be read in conjunction with the accompanying notes. Annual Report 2021 77 Consolidated statement of changes in equity For the financial year ended 30 June 2021 Balance at 1 July 2019 Restatement1 Balance at 1 July 2019 (restated) Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Acquisition and settlement of share-based payment, net of tax Share-based payment transactions Balance at 30 June 2020 6(a)(i) Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Acquisition and settlement of share-based payment, net of tax Share-based payment transactions Balance at 30 June 2021 6(a)(i) Note Contributed equity $m 85.0 - 85.0 Reserves $m 24.4 - 24.4 Retained earnings $m 1,821.3 (16.1) 1,805.2 - - - - - - 85.0 - - - - - - 85.0 - - - 315.0 (0.2) 314.8 - (3.2) 1.2 22.4 - - - - (5.3) 5.2 22.3 (429.6) - - 1,690.4 441.2 0.4 441.6 (333.2) - - 1,798.8 Total equity $m 1,930.7 (16.1) 1,914.6 315.0 (0.2) 314.8 (429.6) (3.2) 1.2 1,797.8 441.2 0.4 441.6 (333.2) (5.3) 5.2 1,906.1 1. Restatement reflects the change in accounting policy for Software as a Service (SaaS) intangible assets detailed in Note 20(a). The above statement should be read in conjunction with the accompanying notes. 78 Medibank Consolidated statement of cash flows For the financial year ended 30 June 2021 Cash flows from operating activities Premium receipts Medibank Health receipts Other receipts Payments for claims and levies Payments to suppliers and employees Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Interest received Investment expenses Proceeds from sale of financial assets Purchase of financial assets Net purchase of equity accounted investments Loan to associate Purchase of plant and equipment Purchase of intangible assets Net cash inflow/(outflow) from investing activities Cash flows from financing activities Purchase of shares to settle share-based payment Lease principal and interest payments Dividends paid Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year The above statement should be read in conjunction with the accompanying notes. Note 2021 $m 2020 $m 9(d) 16(b) 16(b) 14 6(a)(i) 6,798.8 234.9 3.8 (5,542.7) (762.5) (250.1) 482.2 16.0 (4.6) 1,081.1 (1,289.6) (71.0) (2.9) (10.9) (24.2) (306.1) 6,522.7 299.3 5.5 (5,233.2) (827.9) (194.0) 572.4 27.8 (4.6) 1,648.4 (1,533.1) - - (3.2) (26.1) 109.2 (5.6) (37.0) (333.2) (375.8) (3.8) (33.3) (429.6) (466.7) (199.7) 214.9 871.4 656.5 671.7 871.4 Annual Report 2021 79 Notes to the consolidated financial statements 30 June 2021 Section 1. Basis of preparation Overview This section outlines the basis on which the Group’s financial statements are prepared. Specific accounting policies are described in the note to which they relate. Note 1: Basis of preparation (a) Corporate information Medibank Private Limited (“Medibank”) is a for-profit company incorporated in Australia, whose shares are publicly traded on the Australian Securities Exchange (ASX). The financial statements of Medibank for the financial year ended 30 June 2021 were authorised for issue in accordance with a resolution of the directors on 25 August 2021. The directors have the power to amend and reissue the financial statements. (b) Basis of preparation The financial statements are general purpose financial statements which: • Are for the consolidated entity (“the Group”) consisting of Medibank (“parent entity”) and its subsidiaries. Refer to Note 16(a) for the full group structure. • Have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board (AASB), International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the Corporations Act 2001. • Have been prepared under the historical cost convention, with the exception of financial assets measured at fair value and claims liabilities and lease liabilities which are measured at the present value of expected future payments. • Are presented in Australian dollars, which is Medibank’s functional and presentation currency. • Have been rounded in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 to the nearest hundred thousand dollars unless otherwise stated. • Include a change in accounting policy for configuration and customisation costs incurred in implementing Software-as-a-Service (SaaS) arrangements. Refer to Note 20(a) for further information. • Adopt all new and amended accounting standards that are mandatory for 30 June 2021 reporting periods. Refer to Note 20(a) for further information. • Do not apply any pronouncements before their operative date. Refer to Note 20(b) for further information on the new standards and interpretations which have been issued but are not effective for 30 June 2021 reporting periods. • Include, where necessary, updates to prior year comparatives for changes in classification of amounts in the current reporting period. (c) Critical accounting estimates and judgements The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in the following notes: • Note 3: Insurance underwriting result. • Note 4: Deferred acquisition costs. • Note 12: Intangible assets. • Note 15: Income tax. 80 Medibank Section 2. Operating performance Overview This section explains the operating results of the Group for the year, and provides insights into the Group’s result by reference to key areas, including: • Results by operating segment. • Insurance underwriting result. • Shareholder returns. Note 2: Segment information Segment Reporting Accounting Policy Operating segments are identified based on the separate financial information that is regularly reviewed by the Chief Operating Decision Maker (CODM). The term CODM refers to the function performed by the Chief Executive Officer (CEO) in assessing performance and determining the allocation of resources across the Group. (a) Description of segments Segment information is reported on the same basis as the Group’s internal management reporting structure at the reporting date. Transactions between segments are carried out on an arm’s length basis and are eliminated on consolidation. The Group is not reliant on any one major customer. For the financial year ended 30 June 2021, the Group was organised for internal management reporting purposes into two reportable segments, Health Insurance and Medibank Health. Health Insurance Offers private health insurance products including hospital cover and ancillary cover, as stand-alone products or packaged products that combine the two. Hospital cover provides members with health cover for hospital treatments, whereas ancillary cover provides members with health cover for healthcare services such as dental, optical and physiotherapy. The segment also offers health insurance products to overseas visitors and overseas students. Medibank Health Derives its revenue from a range of activities including contracting with government and corporate customers to provide health management and in-home care services, as well as providing a range of telehealth services in Australia. In addition, the Group distributes travel, life and pet insurance products on behalf of other insurers as part of a broader strategy to retain members and leverage its distribution network. Private Health Insurance Premium Revenue Recognition Accounting Policy Premium revenue is measured at the fair value of the consideration received or receivable and is recognised on a straight-line basis between the date Medibank accepts the insurance risk and the date the premium has been paid up to. Premium revenue is classified as an unearned premium liability in the consolidated statement of financial position when it relates to future financial periods. Medibank Health Revenue Recognition Accounting Policy Medibank Health revenue is recognised when services are provided to the customer and at an amount the Group will be entitled to receive in relation to providing the services. A contract liability is recognised within trade and other payables in the consolidated statement of financial position when the Group has an obligation to transfer services to a customer for which it has already received consideration from the customer (or an amount of consideration is receivable). Contract liabilities are recognised as Medibank Health revenue when the services are provided. Annual Report 2021 81 (b) Segment information provided to the CEO The CEO measures the performance of the Group's reportable segments based on the operating profit of the segments. The segment information provided to the CEO for the year ended 30 June 2021 is as follows: Health Insurance Medibank Health $31.4m $470.6m $6,545.6m $538.6m $6,680.3m $27.8m $283.8m $270.0m 2020 2021 2020 2021 Revenue Operating profit Revenue from continuing operations Operating profit from continuing operations 30 June 2021 Revenues Total segment revenue Inter-segment revenue Note 2(c)(iii) Health Insurance $m Medibank Health $m Total $m 6,680.3 - 283.8 (53.7) 6,964.1 (53.7) Revenue from external customers from continuing operations 6,680.3 230.1 6,910.4 Operating profit from continuing operations 538.6 31.4 570.0 Items included in segment operating profit: Depreciation and amortisation Interest income from loans to associates Share of profit/(loss) from equity accounted investments 30 June 2020 Revenues Total segment revenue Inter-segment revenue (104.8) - - (8.3) 0.2 (1.0) (113.1) 0.2 (1.0) 16(b) Health Insurance $m Medibank Health $m Note Total $m 6,545.6 - 270.0 (46.0) 6,815.6 (46.0) Revenue from external customers from continuing operations 6,545.6 224.0 6,769.6 Operating profit from continuing operations 470.6 27.8 498.4 Items included in segment operating profit: Depreciation and amortisation (105.2) (7.9) (113.1) 82 Medibank Notes to the consolidated financial statements30 June 2021 (c) Other segment information (i) Segment operating profit or loss A reconciliation of the operating profit from continuing operations to the profit for the year before income tax from continuing operations of the Group is as follows: Total segment operating profit from continuing operations Unallocated to operating segments: Corporate operating expenses Group operating profit from continuing operations Net investment income Acquisition intangible amortisation Mergers and acquisitions expenses Other income/(expenses) AASB 16 Leases transition adjustment Note 2021 $m 570.0 2020 $m 498.6 7(a) (41.7) (37.4) 528.3 461.0 120.0 (4.6) (5.5) (5.9) - 2.4 (9.0) (1.3) (6.2) 3.3 Profit for the year before income tax from continuing operations 632.3 450.2 (ii) Other items (iii) Loyalty program Segment private health insurance premium revenue is after $10.8 million (2020: $9.1 million) of transfers between the Group’s other operating segments in relation to the loyalty program. (iv) Segment assets and segment liabilities No information regarding segment assets and segment liabilities has been disclosed, as these amounts are not reported to the CEO for the purpose of making strategic decisions. (v) Geographic information Segment revenue based on the geographical location of customers has not been disclosed, as the Group derives all of its revenues from its Australian operations. Segment operating profit excludes the following: • Corporate operating expenses of $41.7 million (2020: $37.4 million) relating to the Group's corporate function. • Net investment income, which comprises: – Interest and distribution income and related investment management expenses (refer to Note 7(a)), as this arises from investments which are managed by a central treasury function. – Net gains and losses on disposals of and fair value movements on financial assets and liabilities (refer to Note 7(a)), as they are not indicative of the Group's long-term performance. • Acquisition intangible amortisation of $4.6 million (2020: $9.0 million) not allocated to segments. • Expenses in relation to mergers and acquisitions which are not allocated to the operating activities of the Group’s segments. • Other income/(expenses) of $5.9 million (2020: $6.2 million) which do not relate to the current year’s trading activities of the Group’s segments, comprising primarily net sublease rent. Annual Report 2021 83 Note 3: Insurance underwriting result This note presents the Group’s insurance underwriting result and provides information on the Group’s claims liabilities, which comprise the outstanding claims liability, the COVID-19 claims liability and the provision for bonus entitlements. 2021 underwriting result after expenses $6,680.3m 100% $(5,610.8)m 84.0% $(531.1)m 8.0% $538.6m 8.1% Private health insurance premium revenue Net claims incurred Underwriting expenses Underwriting result after expenses Insurance Contracts Accounting Policy An insurance contract arises when the Group accepts significant insurance risk from another party by agreeing to compensate them from the adverse effects of a specified uncertain future event. The significance of insurance risk depends on both the probability and magnitude of an insurance event. Once insurance cover has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk significantly reduces during the period. With the exception of travel, life and pet insurance, for which the Group does not act as an underwriter, all other types of insurance cover are insurance contracts. A specific COVID-19 claims liability has been recorded for deferred claims that were a result of surgeries and other health services being restricted for policyholders during the COVID-19 pandemic period. Medibank has an obligation to settle these claims as they become known in future periods. (a) Insurance underwriting result Private health insurance premium revenue Claims expense Claims incurred (Increase)/decrease in COVID-19 claims liability State levies Net Risk Equalisation Special Account rebates/(payments) Net claims incurred excluding claims handling costs Movement in claims handling costs on outstanding claims liabilities Net claims incurred Underwriting expenses Underwriting result after expenses Note (i) (ii) (iv) (iii) 2021 $m 6,680.3 2020 $m 6,545.6 (5,606.2) 73.3 (53.3) (24.6) (5,610.8) 0.2 (5,610.6) (5,190.8) (297.1) (51.6) 7.9 (5,531.6) (0.8) (5,532.4) (531.1) (542.6) 538.6 470.6 (i) Private health insurance premium revenue is after $10.8 million (2020: $9.1 million) of transfers between the Group’s other operating segments in relation to the loyalty program and $103.0 million (2020: nil) in relation to premium relief granted as part of the customer give back. (ii) Claims incurred are prior to elimination of transactions with the Group’s other operating segments of $52.7 million (2020: $45.8 million). (iii) Net claims incurred consists of amounts paid and payable to hospital, medical and ancillary providers which consists of claims paid and payable, changes in claims liabilities, change in amounts receivable from and payable to the Risk Equalisation Special Account, applicable state levies, costs incurred in health management services and the COVID-19 claims liability. (iv) This balance relates to the COVID-19 claims liability. Refer to Note 3(b) for further information. 84 Medibank Notes to the consolidated financial statements30 June 2021 Health Insurance Premium Revenue Recognition Accounting Policy Premium revenue is recognised in the consolidated statement of comprehensive income when the amount can be reliably measured and it is probable that future economic benefits will flow to the entity. Premium revenue is measured at the fair value of the consideration received or receivable and is recognised on a straight-line basis between the date Medibank accepts the risk from the insured under the insurance contract and the date the premium has been paid up to. Premium revenue includes the movement in the premiums in arrears which is assessed based on past experience of the likelihood of collection. Premium revenue is classified as an unearned premium liability in the consolidated statement of financial position when it relates to future financial periods. The Australian Government contributes a rebate towards eligible policyholder’s premium and pays this directly to the Group. This rebate is recognised within premium revenue in the consolidated statement of comprehensive income. Rebates due from the government but not received at balance date are recognised as trade and other receivables in the consolidated statement of financial position. Net Risk Equalisation Special Account Levies and Rebates Accounting Policy Under legislation, all private health insurers must participate in the Risk Equalisation Special Account in which all private health insurers share the cost of the eligible claims of members aged 55 years and over, and claims meeting the high cost claim criteria. The Australian Prudential Regulation Authority (APRA) determines the amount payable to or receivable from the Risk Equalisation Special Account after the end of each quarter. Estimates of amounts payable or receivable are provided for periods where determinations have not yet been made. This includes an estimate of risk equalisation for unpresented and outstanding claims. (b) Gross claims liability Current Outstanding claims liability – central estimate COVID-19 claims liability Risk margin Claims handling costs Claims liability – provision for bonus entitlements Gross claims liability Non-current Outstanding claims liability – central estimate Risk margin Claims handling costs Claims liability – provision for bonus entitlements Gross claims liability Note (i,ii) (vi) (i,iii) (iv) (v) (c) (i,ii) (i,iii) (iv) (v) (c) 2021 $m 347.2 223.8 33.2 8.5 612.7 9.7 622.4 1.8 0.2 - 2.0 7.1 9.1 2020 $m 284.4 297.1 27.1 8.6 617.2 11.1 628.3 2.1 0.2 0.1 2.4 8.5 10.9 Claims Liability Accounting Policy The outstanding claims liability provides for claims received but not assessed and claims incurred but not received. It is based on an actuarial assessment that considers historical patterns of claim incidence and processing. It is measured as the central estimate of the present value of expected future payments arising from claims incurred at the end of each reporting period under insurance cover issued by the Medibank health fund, plus a risk margin reflecting the inherent uncertainty in the central estimate. The expected future payments are discounted to present value using a risk-free rate. The liability also allows for an estimate of claims handling costs, which comprise all direct expenses of the claims department and general administrative costs directly attributable to the claims function. These include internal and external costs incurred from the negotiation and settlement of claims. Annual Report 2021 85 Claims Liability Accounting Policy continued COVID-19 Claims Liability The COVID-19 claims liability is based on the best estimate, taking into account relevant risks and uncertainties, of expenditure required to settle claims deferred as a result of surgeries and other health services restricted for policyholders during the COVID-19 pandemic. Medibank has an obligation to settle these claims as they become known in future periods. The liability is calculated by comparing the difference between the actual and expected volume of insured surgical and non-surgical procedures since the commencement of restrictions in March 2020 (the COVID-19 period). The expected claims level is based on the estimated underlying claims growth per Single Equivalent Unit per policy (PSEU) that would have occurred if the COVID-19 pandemic did not eventuate, taking into account changes in the customer base during the COVID-19 period. The key judgements and inputs to determine the expected claims level are detailed in Note 3(b)(vi). Key estimate The outstanding claims liability estimate is based on the hospital, ancillary and overseas claim categories. Hospital and overseas Calculated using statistical methods adopted for all service months but with service levels for the most recent service month (hospital) or two service months (overseas) being based on the latest forecast adjusted for any observed changes in payment patterns. Ancillary Calculated using statistical methods adopted for all service months. The critical assumption in determining the outstanding claims liability is the extent to which claim incidence and development patterns are consistent with past experience. Adjustments are then applied to reflect any unusual or abnormal events that may affect the estimate of claims levels such as major variability to claims processing volumes. The process for establishing the outstanding claims liability involves consultation with internal actuaries (including the Chief Actuary), claims managers and other senior management. The process includes monthly internal claims review meetings attended by senior management. (i) Outstanding The central estimate is an estimate of the level of the outstanding claims liability. claims liability – central estimate Key estimate The central estimate is based on statistical analysis of historical experience which assumes an underlying pattern of claims development and payment. The final selected central estimate is based on a judgemental consideration of this analysis and other qualitative information, such as claims processing delays. The central estimate excludes the impact of the Risk Equalisation Special Account. A separate estimate is made of levies payable to and recoveries from the Risk Equalisation Special Account. (ii) Discounting The outstanding claims liability central estimate is discounted to present value using the three-month risk-free rate of 0.03% per annum which equates to a reduction in the central estimate of less than $0.1 million (2020: 0.10%, less than $0.1 million). (iii) Risk margin An overall risk margin considers the uncertainty surrounding the outstanding claims liability. The risk margin applied to the Group’s outstanding claims central estimate (net of risk equalisation) at 30 June 2021 is 9.4% (2020: 9.2%). Key estimate The risk margin is based on an analysis of past experience, including comparing the volatility of past payments to the adopted central estimate. The risk margin has been estimated to equate to the Group’s objective of achieving a probability of adequacy of at least 95% (2020: 95%). The risk margin is not applied to the COVID-19 claims liability. Relevant risks and uncertainties have been taken into account in determining the best estimate of the COVID-19 claims liability. (iv) Claims handling costs The allowance for claims handling costs at 30 June 2021 is 2.5% of the outstanding claims liability (2020: 3.0%). 86 Medibank Notes to the consolidated financial statements30 June 2021(v) Claims liability – provision for bonus entitlements Certain private health insurance products (Package Bonus, Ultra Bonus and Membership Bonus) include benefits that carry forward. Package Bonus carries forward unused benefit entitlements in a calendar year for five calendar years. Membership Bonus carries forward unused benefit entitlements in a calendar year for 10 calendar years. Ultra Bonus carries forward unused benefit entitlements without limit. The Group’s claims liabilities include a provision to cover expected future utilisation of these benefit entitlements of the current membership. Key estimate The bonus provision includes the total entitlement available to members under the terms of the relevant insurance policies, less any amounts utilised, with a probability of utilisation based on past experience and current claiming patterns applied. The true cost of these entitlements cannot be known with certainty until any unclaimed entitlements are processed. (vi) COVID-19 claims liability The liability relates to claims deferred as a result of surgeries and other health services restricted for policyholders during the COVID-19 pandemic. At 30 June 2020, this impacted health services for hospital, ancillary and overseas claims. At 30 June 2021, the COVID-19 liability includes hospital claims of $220.2 million, which includes surgical and non-surgical claims, and ancillary claims of $3.6 million. Key estimate – Hospital The liability is calculated by comparing the difference between the actual and expected volume of insured surgical and non-surgical procedures since the commencement of restrictions in March 2020 (the COVID-19 period). Utilisation of the liability has been assessed by geography and modality (claim type) and occurs where actual claims exceed expected claims. Risks and uncertainties have been taken into account in the measurement of the liability and are reflected in the key inputs and judgements. The key judgements and inputs into this liability include: • Statistical analysis of the expected claims level at the Single Equivalent Unit per policy (PSEU) during the COVID-19 period. • The expected claims level is based on the estimated underlying claims growth per PSEU that would have occurred if the COVID-19 pandemic did not eventuate. It has then been applied to the average actual number of PSEUs during the COVID-19 period. The extent of claims deferred has varied by geography based on the extent of COVID-19 restrictions. • The expected rate at which deferred insured surgical and non-surgical procedures will be caught up, which is based on the analysis and expert opinion of the Chief Medical Officer and internal analysis. The expected claims deferral rate is analysed based on modality and is 85% (2020: 100%) for surgical claims and 50% (2020: 100%) for non-surgical claims. (c) Reconciliation of movement in claims liabilities Balance at 1 July Claims incurred during the period Increase/(decrease) in COVID-19 claims liability Claims paid during the period Amount (over)/under provided on central estimate1 Risk margin Claims handling costs Movement in discount rate Balance at 30 June Note (i) 2021 $m 639.2 5,496.1 (73.3) (5,414.4) (22.0) 6.1 (0.2) - 631.5 2020 $m 377.6 5,120.0 297.1 (5,180.8) 22.3 1.7 0.8 0.5 639.2 Note: Movement includes both current and non-current. Claims incurred and claims settled exclude levies and rebates. 1. The over provision recognised in the current year includes $19.8 million attributable to the COVID-19 period and has been recognised within the COVID-19 liability as at 30 June 2021 at the applicable deferral rate. Refer to Note 3(c)(i). Annual Report 2021 87 (i) Reconciliation of movement in COVID-19 claims liability The table below provides a reconciliation of the movement in the COVID-19 claims liability during the year. Balance at 1 July 2020 Amount over/(under) provided from central estimate Change in expected deferral rate Net (utilisation)/deferral during the period Balance at 30 June 2021 (d) Impact of changes in key variables on the claims liabilities Outstanding claims liability The central estimate, discount rate, risk margin and weighted average term to settlement are the key outstanding claims variables. A 10% increase/decrease in the central estimate would result in a $24.4 million decrease/increase to profit after tax and equity (2020: $20.1 million). A 1% movement in other key outstanding claims variables, including discount rate, risk margin and weighted average term to settlement, would result in an insignificant decrease/increase to profit after tax and equity. COVID-19 claims liability The following describe the individual impacts of changes in the key estimate on the COVID-19 claims liability: • A 4% increase/decrease in the expected claims level would result in a $67.0 million decrease/increase to profit after tax and equity (2020: $44.8 million). Hospital $m 234.4 19.8 (73.1) 39.1 220.2 Ancillary $m 62.7 - - (59.1) 3.6 Total $m 297.1 19.8 (73.1) (20.0) 223.8 • An increase/decrease of 10 percentage points in the adopted deferral rate for COVID-19 hospital claims would result in a $26.8 million decrease/increase to profit after tax and equity (2020: $16.4 million). The reasonable possible range for the hospital deferral assumption is 75-100% for surgical claims (2020: 90-100%) and 30%-70% for non-surgical claims (2020: 90-100%). (e) Insurance risk management The Group provides private health insurance products including hospital cover and ancillary cover, as stand-alone products or packaged products that combine the two, for Australian residents, overseas students studying in Australia and overseas visitors to Australia. These services are categorised as two types of contracts: hospital and/or ancillary cover. The table below sets out the key variables upon which the cash flows of the insurance contracts are dependent. Type of contract Detail of contract workings Nature of claims Key variables that affect the timing and uncertainty of future cash flows Hospital cover Ancillary cover Defined benefits paid for hospital treatment, including accommodation, medical and prostheses costs. Hospital benefits defined by the insurance contract or relevant deed. Claims incidence and claims inflation. Defined benefits paid for ancillary treatment, such as dental, optical and physiotherapy services. Ancillary benefits defined by the insurance contract or relevant deed. Claims incidence and claims inflation. Insurance risks and the holding of capital in excess of prudential requirements are managed through the use of claims management procedures, close monitoring of experience, the ability to vary premium rates, and risk equalisation. Mechanisms to manage risk Claims management Strict claims management ensures the timely and correct payment of claims in accordance with policy conditions and provider contracts. Claims are monitored monthly to track the experience of the portfolios. Experience monitoring Monthly financial and operational results, including portfolio profitability and prudential capital requirements, are reported to management committees and the Board. Results are also monitored against industry for insurance risks and experience trends as published by the regulator, APRA. Monitoring of claims experience during the COVID-19 period included daily and weekly dashboard reports. 88 Medibank Notes to the consolidated financial statements30 June 2021Prudential capital requirements All private health insurers must comply with prudential capital requirements to provide a buffer against certain levels of adverse experience. The Board has a target level of capital which exceeds the regulatory requirement. Ability to vary premium rates Risk equalisation The Group can vary future premium rates subject to the approval of the Minister for Health. Private health insurance legislation requires resident private health insurance contracts to meet community rating requirements. This prohibits discrimination between people on the basis of their health status, gender, race, sexual orientation, religious belief, age (except as allowed under Lifetime Health Cover provisions), increased need for treatment or claims history. To support these restrictions, all private health insurers must participate in the Risk Equalisation Special Account. Concentration of health risk The Group has health insurance contracts covering hospital and ancillary cover, and private health insurance for overseas students and visitors to Australia. There is no significant exposure to concentrations of risk because contracts cover a large volume of people across Australia. COVID-19 claims liability The Group’s Capital Management Policy requires a sufficient level of capital to be held by the Group. The Group also created a sub-portfolio within the Health Fund Investment Portfolio with the express purpose of funding the COVID-19 claims liability. Note 4: Deferred acquisition costs Movements in the deferred acquisition costs are as follows: Balance at 1 July Costs deferred during the year Amortisation expense Balance at 30 June Note: Movement includes both current and non-current. 2021 $m 78.1 42.3 (39.3) 81.1 2020 $m 79.6 36.6 (38.1) 78.1 Deferred Acquisition Costs Accounting Policy Costs incurred in obtaining health insurance contracts are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the consolidated statement of comprehensive income in subsequent reporting periods. Deferred acquisition costs are amortised systematically over the average expected retention period of the insurance contracts to which they relate. This is in accordance with the expected pattern of the incidence of risk under the insurance contracts to which they relate and corresponds to the earning pattern of the corresponding actual and expected premium revenue. The Group amortises these costs on a straight-line basis over a period of four years (2020: four years). The recoverability of deferred acquisition costs is considered as part of the liability adequacy test (refer to Note 5). Deferred acquisition costs which are not included in this test are separately assessed for recoverability in accordance with the Group’s accounting policy set out in Note 20(c). Key judgement and estimate The amortisation period of four years has been determined based on the average expected retention period of members. The actual retention period of a member can be longer or shorter than four years. The straight-line method systematically follows the initial period of customer tenure with some customers remaining with Medibank over a longer period of time. The Group maintains data on the retention period of all members, and performs a retention period analysis of those who are subject to these acquisition costs to ensure the period of amortisation remains appropriate. Annual Report 2021 89 Note 5: Unearned premium liability Movement in the unearned premium liability is as follows: Balance at 1 July Deferral of premium on contracts written during the year Earnings of premiums deferred in prior years Balance at 30 June Note: Movement includes both current and non-current. 2021 $m 746.1 682.4 (671.1) 757.4 2020 $m 770.6 658.3 (682.8) 746.1 The expected cash outflows and the risk margin in the 30 June 2021 liability adequacy testing (LAT) includes the impacts of COVID-19. The LAT did not result in the identification of any deficiency as at 30 June 2021 and 2020. The LAT is not sensitive to reasonably plausible changes in key assumptions applied. Unearned Premium Liability Accounting Policy The proportion of premium received that has not been earned at the end of each reporting period is recognised in the consolidated statement of financial position as an unearned premium liability. The unearned premium liability is released to the consolidated statement of comprehensive income as revenue in accordance with Note 3(a) over the term of the insurance cover. Unexpired Risk Liability Accounting Policy A liability adequacy test is required to be performed in respect of the unearned premium liability and insurance contracts renewable before the next pricing review (constructive obligation). The purpose of the test is to determine whether the insurance liability, net of related deferred acquisition costs, is adequate to cover the present value of expected cash outflows relating to future claims arising from rights and obligations under current insurance coverage. An additional risk margin is included in the test to reflect the inherent uncertainty in the central estimate. The liability adequacy test is performed at the level of a portfolio of contracts that are subject to broadly similar risks and that are managed together as a single portfolio. The unearned premium liability is deemed to be deficient where: Present value of the expected future cash outflows relating to future claims add Additional risk margin to reflect the inherent uncertainty in the central estimate Unearned premium liability less greater than Related intangible assets = Deficiency less Related deferred acquisition costs The entire deficiency is recorded immediately in the statement of comprehensive income. The deficiency is recognised first by writing down any related intangible assets and then related deferred acquisition costs, with any excess being recorded in the consolidated statement of financial position as an unexpired risk liability. Deferred acquisition costs which are not included in this test are separately assessed for recoverability and are amortised in accordance with the Group’s accounting policy set out in Note 4. Note 6: Shareholder returns (a) Dividends (i) Dividends paid or payable 2021 2020 final fully franked dividend 2021 interim fully franked dividend 2020 2019 final fully franked dividend 2019 final fully franked special dividend 2020 interim fully franked dividend 90 Medibank Cents per fully paid share 6.30 5.80 7.40 2.50 5.70 $m Payment date 173.5 159.7 24 September 2020 25 March 2021 203.8 68.9 157.0 26 September 2019 26 September 2019 26 March 2020 Notes to the consolidated financial statements30 June 2021 (ii) Dividends not recognised at the end of the reporting period On 25 August 2021, the directors determined a final fully franked ordinary dividend for the six months ended 30 June 2021 of 6.90 cents per share. The dividend is expected to be paid on 30 September 2021 and has not been provided for as at 30 June 2021. (iii) Franking account Franking credits available at 30 June 2021 for subsequent reporting periods based on a tax rate of 30% are $324.2 million (2020: $215.7 million). (iv) Calculation of dividend paid Medibank’s target dividend payout ratio for the 2021 financial year is 75-85% (2020: 75-85%) of full year normalised net profit after tax (underlying NPAT). Normalised net profit after tax is calculated based on statutory net profit after tax adjusted for short-term outcomes that are expected to normalise over the medium to longer term, most notably in relation to the level of gains or losses from investments and movement in credit spreads, and for one-off items, especially those that are non-cash, such as impairments. Profit for the year – after tax Normalisation for growth asset returns Normalisation for defensive asset returns – credit spread movement Underlying NPAT 2021 $m 441.2 (31.2) (11.3) 398.7 2020 $m 315.0 43.2 8.5 366.7 Dividends Accounting Policy A liability is recorded for any dividends determined on or before the reporting date, but that have not been distributed at that date. (b) Earnings per share Attributable to ordinary equity holders of the Company Profit for the year attributable to ordinary equity holders of the Company ($m) Basic and diluted earnings per share attributable to ordinary equity holders of the Company (cents) 2021 2020 441.2 16.0 315.0 11.4 Attributable to continuing operations Profit for the year attributable to ordinary equity holders of the Company ($m) Basic and diluted earnings per share attributable to ordinary equity holders of the Company (cents) 441.2 16.0 315.6 11.5 Weighted average number of ordinary shares used in calculating basic and diluted earnings per share 2,754,003,240 2,754,003,240 Basic Earnings Per Share Accounting Policy Basic earnings per share (EPS) is calculated by dividing the profit attributable to equity holders of Medibank, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the reporting period, adjusted for bonus elements in ordinary shares issued during the reporting period and excluding treasury shares. Diluted Earnings Per Share Accounting Policy Diluted EPS adjusts the figures used in the determination of basic EPS to take into account: • The after income tax effect of any interest and other financing costs associated with dilutive potential ordinary shares. • The weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. Annual Report 2021 91 Section 3. Investment portfolio and capital Overview This section provides insights into the Group’s exposure to market and financial risks and outlines how these risks are managed. This section also describes how the Group’s capital is managed. Note 7: Investment portfolios This note contains information on the Group’s net investment income and the carrying amount of the Group’s investments. Medibank has established two investment portfolios for managing its investment assets, the Health Fund Investment Portfolio and the Non-Health Fund Investment Portfolio. The Chief Financial Officer (CFO) is responsible for the management of the Health Fund Investment Portfolio in accordance with the requirements of the Board approved Capital Management Policy, APRA regulatory requirements and the overall objective of achieving a capital base that is both stable and liquid. The asset allocation of Medibank’s Health Fund Investment Portfolio is skewed towards defensive assets (less risky and generally lower returning) rather than growth assets (riskier but potentially higher returning). The Board reviewed and has maintained the short-term target asset allocation for the Health Fund Investment Portfolio at 20%/80% for growth and defensive assets. The long-term target asset allocation remains at 25%/75% for growth and defensive assets. During, and because of, the COVID-19 pandemic, the Fund created a sub-portfolio of the Health Fund Investment Portfolio (the Short-term Operational Cash sub-portfolio) consisting of exclusively defensive assets with the express purpose of funding the COVID-19 liability and customer give back provision. Given its short-term nature, this sub-portfolio is managed separately from the Target Asset Allocation (TAA) framework. This portfolio is permitted to invest in bank deposits, short-term domestic money market securities with a minimum credit rating of A-1+ and Fixed Income securities with a minimum credit rating of AA-. The Non-Health Fund Investment Portfolio is designed to provide the Group with additional liquidity and financial flexibility. The CFO is responsible for the management of the Non-Health Fund Investment Portfolio in accordance with the Board’s approved Investment Management Policy, investment strategy and delegation from the Investment and Capital Committee. This portfolio resides outside of the health fund and is not subject to the same regulatory requirements as the Health Fund Investment Portfolio. The Non-Health Fund Investment Portfolio is permitted to invest in bank deposits, short-term domestic money market securities with a minimum credit rating of A-1+ and Fixed Income securities with a minimum credit rating of AA-. This note provides information on the net investment income and the carrying amounts of the investment assets residing in the Health Fund Investment Portfolio (including the sub-portfolio) and the Non-Health Fund Investment Portfolio. Health Fund Investment Portfolio Non-Health Fund Investment Portfolio Total 641.5 179.0 (37.3) 1,823.4 (179.0) 37.3 52.9 - - 111.2 - - - 164.1 488.5 2,953.4 588.6 179.0 (37.3) 1,712.2 (179.0) 37.3 488.5 2,789.3 Portfolio composition 30 June 2021 ($m) Cash portfolio Cash and cash equivalents (as reported in the statement of financial position)1, 2 Cash investments with longer maturities Less cash allocated to the Fixed income portfolio Fixed income portfolio Fixed income (as reported in the statement of financial position)3 Less cash investments with longer maturities Cash allocated to the Fixed income portfolio Growth portfolio Equities and investment trusts Total investment portfolio 92 Medibank Notes to the consolidated financial statements30 June 2021Health Fund Investment Portfolio Non-Health Fund Investment Portfolio Portfolio composition 30 June 2020 ($m) Cash portfolio Cash and cash equivalents (as reported in the statement of financial position)1, 2 Cash investments with longer maturities Fixed income portfolio Fixed income (as reported in the statement of financial position)3 Less cash investments with longer maturities Growth portfolio Equities and investment trusts Total investment portfolio 676.5 185.0 1,480.7 (185.0) 466.8 2,624.0 Total 847.0 185.0 170.5 - 47.2 - 1,527.9 (185.0) - 217.7 466.8 2,841.7 1. Cash and cash equivalents as reported in the statement of financial position also include operational cash of $30.2 million (2020: $24.4 million). 2. Cash and cash equivalents in the Health Fund Investment Portfolio includes $178.2 million (2020: $236.5 million) in relation to the Short-term Operational Cash sub-portfolio. 3. Fixed income in the Health Fund Investment Portfolio includes $148.6 million (2020: $60.6 million) relating to the Short-term Operational Cash sub-portfolio. The Health Fund Investment Portfolio excluding the Short-term Operational Cash sub-portfolio comprises the following: Growth Australian equities International equities Property Infrastructure Defensive Fixed income Cash Portfolio composition 30 June 2021 Portfolio composition 30 June 2020 Target asset allocation 4.8% 6.0% 6.9% 2.1% 19.8% 6.3% 6.5% 7.0% 0.3% 20.1% 5.0% 6.0% 7.0% 2.0% 20.0% 57.8% 22.4% 80.2% 100.0% 53.0% 26.9% 79.9% 100.0% 60.0%1 20.0%1 80.0% 100.0% Health Fund Investment Portfolio Australian equities $119.3m Cash $552.1m Infrastructure $52.5m International equities $147.4m Property $169.3m Fixed income $1,421.9m 1. During the period, the target Fixed Income allocation increased to 60% (2020: 52%) and the target Cash allocation reduced to 20% (2020: 28%). Financial Assets at Fair Value Accounting Policy Investments in listed and unlisted equity securities held by Medibank’s health insurance fund are accounted for at fair value through profit or loss (FVTPL). Fixed income investments held by Medibank’s health insurance fund are also accounted for at FVTPL, as the Group applies the fair value option to eliminate an accounting mismatch. Transaction costs relating to these financial assets are expensed in the consolidated statement of comprehensive income. These assets are subsequently carried at fair value, with gains and losses recognised within net investment income in the consolidated statement of comprehensive income. Financial assets at FVTPL, consist of externally managed equity trusts and direct mandates, and an internally managed fixed income portfolio. Fixed income investments not held by Medibank’s health insurance fund are accounted for at fair value through other comprehensive income (FVOCI), as the objective of these assets is to collect contractual cash flows and to sell the assets if required, and the contractual cash flows are solely payments of principal and interest. Annual Report 2021 93 Financial Assets at Fair Value Accounting Policy continued These assets are initially and subsequently carried at fair value, with gains and losses recognised within equity in other comprehensive income until the asset is derecognised. When the assets are derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. Interest income accrues using the effective interest method and is included within net investment income in the consolidated statement of comprehensive income. For financial assets classified at FVOCI, the Group applies the general impairment approach under AASB 9, which requires recognition of a loss allowance based on either 12-month expected credit losses or lifetime expected credit losses depending on whether there has been a significant increase in credit risk since initial recognition. Expected credit losses do not reduce the carrying amount of the financial asset in the statement of financial position, which remains at fair value. Instead, a loss allowance is recognised in other comprehensive income as the accumulated impairment amount. Key judgement and estimate Fair value measurement may be subjective, and investments are categorised into a hierarchy depending on the level of subjectivity involved. The hierarchy is described in Note 7(b). The fair value of level 2 financial instruments is determined using a variety of valuation techniques, which make assumptions based on market conditions existing at the end of each reporting period. Valuation methods include quoted market prices or dealer quotes for similar instruments, yield curve calculations using the mid yield, vendor or independent developed models. The fair value of level 3 financial instruments is determined using inputs that are not based on observable market data. (a) Net investment income Net investment income is presented net of investment management fees in the consolidated statement of comprehensive income. Interest1 Trust distributions Investment management expenses Net gain/(loss) on fair value movements on financial assets Net gain/(loss) on disposal of financial assets Net investment income 2021 $m 17.7 38.0 (4.7) 47.8 21.2 120.0 2020 $m 29.7 29.5 (4.6) (53.0) 0.8 2.4 1. Includes interest income of $0.7 million (2020: $1.7 million) relating to financial assets at fair value through other comprehensive income (Non-Health Fund Investments). Net Investment Income Accounting Policy Gains or losses arising from changes in the fair value of the financial assets at FVTPL category are presented in the consolidated statement of comprehensive income within net investment income in the period in which they arise. Trust distribution income derived from financial assets at FVTPL is recognised in the consolidated statement of comprehensive income as part of net investment income when the Group’s right to receive payments is established. Interest income from financial assets accrues using the effective interest method and is also included in net investment income. (b) Fair value hierarchy The fair value of the Group’s investments is measured according to the following fair value measurement hierarchy: • Level 1: Quoted prices (unadjusted current bid price) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). • Level 3: Inputs for the asset or liability that are not based on observable market data. 94 Medibank Notes to the consolidated financial statements30 June 2021The following tables present the Group’s financial assets measured and recognised at fair value on a recurring basis. 30 June 2021 Financial assets at fair value through profit or loss Australian equities1 International equities1 Property1 Infrastructure1 Fixed income Financial assets at fair value through other comprehensive income – Fixed income Balance at 30 June 2021 30 June 2020 Financial assets at fair value through profit or loss Australian equities1 International equities1 Property1 Infrastructure1 Fixed income Financial assets at fair value through other comprehensive income – Fixed income Balance at 30 June 2020 Level 1 $m Level 2 $m Level 3 $m Total $m - - - - 82.0 119.3 147.4 - - 1,630.2 - 82.0 111.2 2,008.1 - - - - 97.9 - 97.9 146.8 151.6 162.5 - 1,382.8 47.2 1,890.9 - - 169.3 52.5 - - 221.8 - - - 5.9 - - 5.9 119.3 147.4 169.3 52.5 1,712.2 111.2 2,311.9 146.8 151.6 162.5 5.9 1,480.7 47.2 1,994.7 1. Australian equities, international equities, property and infrastructure are indirectly held through unit trusts. The following table presents the changes in level 3 financial instruments during the period. Balance at 1 July 2020 Acquisitions Net unrealised gain/(loss) on fair value movements Transfer from level 21 Balance at 30 June 2021 Infrastructure $m 5.9 44.0 Property $m - - Total $m 5.9 44.0 2.6 - 52.5 1.5 4.1 167.8 169.3 167.8 221.8 1. During the period, $167.8 million of property financial assets were transferred from level 2 into level 3 due to changes in the observability of inputs. The valuation of unlisted infrastructure and property assets is based on unit prices provided by investment managers. A 10% increase/decrease in the redemption price would decrease/increase the fair value of the financial asset by $22.2 million. The Group’s other financial instruments, being trade and other receivables and trade and other payables, are not measured at fair value. The fair value of these instruments has not been disclosed, as due to their short-term nature, their carrying amounts are assumed to approximate their fair values. The Group did not measure any financial assets or financial liabilities at fair value on a non-recurring basis at 30 June 2021. The Group recognises transfers into and transfers out of fair value hierarchy levels from the date of effect of the transfer. There were no transfers between level 1 and level 2 during the year. Fair value measurements using significant unobservable market data (level 3) As at 30 June 2021, the Group classified $52.5 million of infrastructure financial assets (2020: $5.9 million) and $169.3 million of property financial assets (2020: nil) as level 3 financial instruments. These instruments are held in unlisted unit trusts and are valued at the redemption value per unit as reported by the managers of such funds. These investments are classified within level 3 of the fair value hierarchy as they are not based on observable market data as they trade infrequently and therefore have limited price transparency. Annual Report 2021 95 Note 8: Financial risk management This note reflects risk management policies and procedures associated with financial instruments and capital and insurance contracts. The Group’s principal financial instruments comprise cash and cash equivalents, which are short-term money market instruments, fixed income (floating rate notes, asset-backed securities, syndicated loans, fixed income absolute return funds and hybrid investments), property, infrastructure, Australian equities and international equities. other than risk management be undertaken, unless explicitly approved by the Investment and Capital Committee. The Group was in compliance with this policy during the current and prior financial year. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, price risk, credit risk and liquidity risk. A strategic asset allocation is set and reviewed at least annually by the Board, which establishes the maximum and minimum exposures in each asset class. Transacting in individual instruments is subject to delegated authorities and an approval process which is also established and reviewed by the Investment and Capital Committee. At no time throughout the period will trading of derivative instruments for purposes Primary responsibility for consideration and control of financial risks rests with the Investment and Capital Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified, including the setting of limits for trading in derivatives, foreign currency contracts and other instruments. Limits are also set for credit exposure and interest rate risk. (a) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. (i) Interest rate risk Description The risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. At balance date, the Group had exposure to the risk of changes in market interest rates in respect of its cash and cash equivalents and fixed income investments. Both classes of financial assets have variable interest rates and are therefore exposed to cash flow movements if these interest rates change. Exposure At balance date, the Group’s cash and cash equivalents (2021: $671.7 million, 2020: $871.4 million) and fixed income investments (2021: $1,823.4 million, 2020: $1,527.9 million) were exposed to Australian variable interest rate risk. The Group regularly analyses its interest rate exposure and resets interest rates on longer-term investments every 90 days on average. At balance date, the Group’s fixed income investments had a modified duration of 0.5 years (2020: 0.6 years). Sensitivity 50 bps increase/decrease in interest rates for the entire reporting period, with all other variables remaining constant, would have resulted in a $4.4 million increase/decrease to profit after tax and equity (2020: $3.9 million). The sensitivity analysis has been conducted using assumptions from published economic data. (ii) Foreign currency risk Description The risk that the fair value of a financial instrument will fluctuate because of changes in foreign exchange rates. All of the Group’s investments with a non-AUD currency exposure are fully economically hedged, except for International equities which are unhedged (2020: 50% target hedge ratio). At 30 June 2021, $147.4 million (2020: $76.0 million) of the international equities portfolio, within financial assets at fair value through profit or loss, had net exposure to foreign currency movements. A 10% increase/decrease in foreign exchange rates, with all other variables remaining constant, would have resulted in a $11.5 million decrease/increase to profit after tax and equity (2020: $5.9 million) in the AUD valuation of international equities. Balance date risk exposures represent the risk exposure inherent in the financial instruments. Exposure Sensitivity 96 Medibank Notes to the consolidated financial statements30 June 2021(iii) Price risk Description The risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Group is exposed to price risk in respect of its fixed income investments primarily due to movements in credit spreads. This risk is managed through active management of credit exposures and credit spread duration. The Group’s equity price risk arises from investments in property, infrastructure, Australian equities and international equities. It is managed by setting and monitoring objectives and constraints on investments, diversification plans and limits on investments in each country, sector and market. Sensitivity These investments are exposed to short-term fluctuations in price with their fair value movements being recorded in the consolidated statement of comprehensive income. Price risk is managed by taking a longer-term view of the investment portfolio. The following sensitivity analysis is based on the equity price risk exposures on average balances at balance date. It shows the effect on profit after tax and equity if market prices had moved, with all other variables held constant. Australian equities International equities Property Infrastructure 2021 $m 2020 $m +10.0% 8.7 10.1 11.6 2.1 -10.0% (8.7) (10.1) (11.6) (2.1) +10.0% 9.5 11.1 10.9 1.1 -10.0% (9.5) (11.1) (10.9) (1.1) In relation to fixed income investments, a 25 bps increase/decrease in credit spreads, with all other variables remaining constant, would have resulted in a $5.9 million decrease/increase to profit after tax and equity (2020: $6.1 million). Balance date risk exposures represent the risk exposure inherent in the financial instruments. (b) Credit risk (i) Cash and cash equivalents and financial assets at fair value through profit or loss Description The risk of potential default of a counterparty, with a maximum exposure equal to the carrying amount of these instruments. Credit risk arises from the financial assets of the Group and credit risk exposure is measured by reference to exposures by ratings bands, country, industry and instrument type. Exposure The Investment Management Policy limits the majority of internally managed credit exposure to A- or higher rated categories for long-term investments, and A2 or higher for short-term investments (as measured by external rating agencies such as Standard & Poor’s). Departures from this policy and the appointment of external managers require Board approval. The Group does not have any financial instruments to mitigate credit risk and all investments are unsecured (except for covered bonds, asset-backed securities and mortgage-backed securities). However, the impact of counterparty default is managed through the use of Board approved limits by counterparty and rating and diversification of counterparties. Sensitivity The Group’s cash and fixed income portfolio is subject to counterparty exposure limits. These limits specify that no more than 50% (2020: 25%) of the cash portfolio can be invested in any one counterparty bank and no more than 10% (2020: 10%) in any one counterparty corporate entity. In the Group’s fixed income portfolio, the maximum amounts that can be invested in any one counterparty bank and any one counterparty corporate entity are 50% (2020: 50%) and 15% (2020: 15%) of the portfolio respectively. As at 30 June 2021 and 2020, the counterparty exposure of the Group was within these limits. Annual Report 2021 97 (ii) Trade and other receivables Description Due to the nature of the industry and value of individual policies, the Group does not request any collateral nor is it the policy to secure its premiums in arrears and trade and other receivables. The Group regularly monitors its premiums in arrears and trade and other receivables, with the result that exposure to bad debts is not significant. The credit risk in respect to premiums in arrears, incurred on non-payment of premiums, will only persist during the grace period of 63 days as specified in the Fund Rules when the policy may be terminated. The Group is not exposed to claims whilst a membership is in arrears, although a customer can settle their arrears up to the 63 day grace period and a claim for that arrears period will be paid. Trade and other receivables are monitored regularly and escalated when they fall outside of terms. The use of debt collection agencies may be used to obtain settlement. Exposure There are no significant concentrations of premium credit risk within the Group. (iii) Counterparty credit risk ratings The following tables outline the Group’s credit risk exposure at 30 June 2021 by classifying assets according to credit ratings of the counterparties. AAA is the highest possible rating. Assets that fall outside the range AAA to BBB are classified as non-investment grade. The table highlights the short-term rating as well as the equivalent long-term rating bands as per published Standard & Poor’s correlations. The Group’s maximum exposure to credit risk at balance date in relation to each class of recognised financial asset is the carrying amount of those assets in the consolidated statement of financial position. Short-term Long-term 2021 Cash and cash equivalents Premiums in arrears Trade and other receivables Financial assets Australian equities International equities Property Infrastructure Fixed income Financial assets at fair value through other comprehensive income Total 2020 Cash and cash equivalents Premiums in arrears Trade and other receivables Financial assets Australian equities International equities Property Infrastructure Fixed income Financial assets at fair value through other comprehensive income Total A-1+ AAA $m - - - - - - - 183.2 A-1+ AA $m 671.7 - - - - - - 528.4 - 183.2 111.2 1,311.3 - - - - - - - 81.1 836.4 - - - - - - 483.6 - 81.1 47.2 1,367.2 A-1 A $m - - - - - - - 293.0 - 293.0 35.0 - - - - - - 328.6 - 363.6 A-2 BBB $m - - - B & below BB & below $m - - - Not rated $m - 8.5 207.4 Total $m 671.7 8.5 207.4 - - - - 301.3 - 301.3 - - - - - - - 271.9 - 271.9 - - - - 7.9 - 7.9 119.3 147.4 169.3 52.5 398.4 119.3 147.4 169.3 52.5 1,712.2 - 1,102.8 111.2 3,199.5 - - - - - - - - - - - 10.8 196.3 146.8 151.6 162.5 5.9 315.5 871.4 10.8 196.3 146.8 151.6 162.5 5.9 1,480.7 - 989.4 47.2 3,073.2 Within the not rated fixed income portfolio, $398.4 million (2020: $290.1 million) is invested in unrated unit trusts, of which the majority of the underlying securities held are investment grade assets and Senior Loans. 98 Medibank Notes to the consolidated financial statements30 June 2021Note 9: Working capital The Group’s working capital balances are summarised in this note. (a) Capital management Medibank’s health insurance fund is required to maintain sufficient capital to comply with APRA’s solvency and capital adequacy standards. The solvency standard aims to ensure that the fund has enough cash or liquid assets to meet all of its liabilities as they become due, even if the cash flow is ‘stressed’. The standard consists of a requirement to hold a prescribed level of cash, and also mandates a Liquidity Management Plan. The capital adequacy standard aims to ensure that there is sufficient capital within a health insurance fund to enable the ongoing conduct of the business of the fund. (b) Trade and other receivables The standard consists of a requirement to hold a prescribed level of assets to be able to withstand adverse experience, and also mandates a Capital Management Policy. The Capital Management Policy includes target capital levels, capital trigger points and corrective action plans. The health insurance fund is required to comply with these standards on a continuous basis and report results to APRA on a quarterly basis. The fund has been in compliance with these standards throughout the year. The Board has established a Capital Management Policy for the health insurance fund. Capital is managed against this policy and performance is reported to the Board on a monthly basis. Premiums in arrears Allowance for impairment loss Trade receivables Allowance for impairment loss Government rebate scheme Risk Equalisation Special Account Accrued revenue Other receivables Note (i) (ii) 9(c) 2021 $m 13.2 (4.7) 8.5 59.0 (2.2) 56.8 133.8 - 13.2 3.6 150.6 2020 $m 14.9 (4.1) 10.8 51.4 (3.2) 48.2 124.2 6.5 14.7 2.7 148.1 Total trade and other receivables 215.9 207.1 Note: Government rebate scheme is non-interest bearing and generally on 15-day terms. Past due but not considered impaired (i) Premiums in arrears past due but not impaired at 30 June 2021 for the Group are $8.5 million (2020: $10.8 million). (ii) Trade receivables past due but not impaired at 30 June 2021 for the Group are $8.3 million (2020: $3.7 million). Each business unit of the Group has reviewed their individual debtors and is satisfied that payment will be received in full. Trade and Other Receivables Accounting Policy Trade and other receivables are: Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these other balances will be received when due. • Recognised initially at fair value. • Subsequently measured at amortised cost using the effective interest method, less an allowance for impairment loss. • Presented as current assets except for those with maturities greater than 12 months after the reporting period. • Non-interest bearing. • Generally due for settlement within 7 - 30 days. Annual Report 2021 99 Trade and Other Receivables Accounting Policy continued Collectability of trade receivables is reviewed on an ongoing basis. For trade receivables, the Group applies the simplified impairment approach under AASB 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. Expected lifetime losses are assessed based on historical bad and doubtful debt roll rates adjusted for forward looking information, where required. When a trade receivable for which an impairment allowance has been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Any impairment loss on trade receivables is recognised within other expenses in the consolidated statement of comprehensive income. Subsequent recoveries of previously written off trade receivables are credited against other expenses in the consolidated statement of comprehensive income. Any impairment loss on premiums in arrears is offset against premium revenue. (c) Trade and other payables Current Trade creditors1 Other creditors and accrued expenses2 Lease liabilities1 Risk Equalisation Special Account Other payables3 Total current Non-current Lease liabilities1 Other payables3 Total non-current Note 14 9(b) 14 2021 $m 239.9 55.6 28.1 7.7 6.9 338.2 65.3 4.9 70.2 2020 $m 230.2 53.8 27.9 - 8.3 320.2 81.3 2.9 84.2 Terms and conditions relating to the above financial instruments: 1. Trade creditors and lease liabilities are non-interest bearing and are normally settled up to 30 days. 2. Other creditors and accrued expenses are non-interest bearing. 3. Other payables include a contract liability in relation to the loyalty program. Refer to the accounting policy in Note 20(c). Trade and Other Payables Accounting Policy Trade and other payables, with the exception of lease liabilities, are: • Recognised initially at their fair value. • Subsequently measured at amortised cost using the effective interest method. • Unsecured. • Presented as current liabilities unless payment is not due within 12 months from the reporting date. Refer to Note 14 for the accounting policy for lease liabilities. (d) Reconciliation of profit after income tax to net cash flow from operating activities Profit for the year Depreciation Depreciation of right-of-use assets Amortisation of intangibles assets Amortisation of deferred acquisition costs Net realised loss/(gain) on financial assets Net unrealised loss/(gain) on financial assets Interest income Trust distribution reinvested Investment expenses Interest paid – leases AASB 16 transition adjustment – recognition of finance subleases Non-cash share-based payments expense Share of loss/(profit) from associates and joint ventures 100 Medibank Note 11 11,14 12 4 14 20(a)(ii) 16(b) 2021 $m 441.2 13.3 27.2 42.2 39.3 (21.2) (47.8) (17.7) (38.0) 4.7 2.8 - 5.2 1.0 2020 $m 315.0 13.2 27.0 48.6 38.1 (0.8) 53.0 (29.7) (29.5) 4.6 3.4 3.3 1.2 - Notes to the consolidated financial statements30 June 2021 Change in operating assets and liabilities – continuing operations: Decrease/(increase) in trade and other receivables Decrease/(increase) in deferred acquisition costs Decrease/(increase) in other assets Decrease/(increase) in net deferred tax liabilities/assets (Decrease)/increase in trade and other payables (Decrease)/increase in unearned premium liability (Decrease)/increase in claims liabilities (Decrease)/increase in income tax liability/receivable (Decrease)/increase in provisions and employee entitlements Change in operating assets and liabilities – discontinued operations: Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions and employee entitlements Note 2021 $m (8.8) (42.3) 6.2 4.3 15.7 11.3 (7.7) (63.9) 115.2 - - - 2020 $m 9.9 (36.7) (5.4) (95.5) (38.6) (23.5) 261.6 36.3 8.6 66.9 (47.6) (11.0) Net cash inflow from operating activities 482.2 572.4 Cash and Cash Equivalents Accounting Policy Cash and cash equivalents are stated at amortised cost which approximates fair value and include cash on hand, short-term bank bills and term deposits, commercial paper, negotiable certificate of deposit, and other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant change in value. For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents include all cash assets, net of outstanding bank overdrafts. (e) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet cash commitments associated with financial instruments. It may result from either the inability to sell financial assets quickly at their fair values; or a counterparty failing on repayment of a contractual obligation; or insurance liability falling due for payment earlier than expected; or inability to generate cash inflows as anticipated. In order to maintain appropriate levels of liquidity, the Health Fund Investment Portfolio’s target asset allocation is to hold 20% (2020: 28%) of its total investment assets in cash/ bank deposits and highly liquid short-term money market instruments and fixed income securities. The Non-Health Fund Investment Portfolio provides the Group with additional liquidity and financial flexibility over and above the Fund’s target allocation. Trade payables and other financial liabilities mainly originate from the financing of assets used in ongoing operations such as property, plant and equipment and investments in working capital. These assets are considered by the Group in the overall liquidity risk. To monitor existing financial liabilities as well as to enable an effective overall controlling of future risks, the Group has established comprehensive risk reporting that reflects expectations of management of expected settlement of financial liabilities. The tables on the following page reflect all contractually fixed pay-offs for settlement and interest resulting from recognised financial liabilities as at 30 June 2021, as well as the respective undiscounted cash flows for the respective upcoming fiscal years. Cash flows for financial liabilities without fixed amount or timing are based on the conditions existing at 30 June 2021. Annual Report 2021 101 2021 Other trade and other payables1 Lease liabilities2 Total trade and other payables Claims liabilities COVID-19 claims liability3 Total claims liabilities 2020 Other trade and other payables1 Lease liabilities2 Total trade and other payables Claims liabilities COVID-19 claims liability3 Total claims liabilities Under 6 months $m 6 to 12 months $m 309.4 16.1 325.5 376.7 63.5 440.2 292.1 15.3 307.4 310.3 145.7 456.0 0.7 15.4 16.1 21.9 160.3 182.2 0.2 14.5 14.7 20.9 151.4 172.3 1 to 2 years $m 1.1 29.7 30.8 5.5 - 5.5 0.4 27.8 28.2 6.5 - 6.5 Over 2 years $m Total contractual cash flows $m Carrying amount $m 3.8 36.4 40.2 3.6 - 3.6 2.5 58.2 60.7 4.4 - 4.4 315.0 97.6 412.6 407.7 223.8 631.5 295.2 115.8 411.0 342.1 297.1 639.2 315.0 93.4 408.4 407.7 223.8 631.5 295.2 109.2 404.4 342.1 297.1 639.2 1. Contractual cash flows greater than 6 months primarily relate to the loyalty program. 2. Refer to Note 14 for further information on lease liabilities. 3. Refer to Note 3(b) for further information on the COVID-19 claims liability. It is not possible for a company primarily transacting in insurance business to predict the requirements of funding with absolute certainty. The theory of probability is applied based on past observed practices. The amounts and maturities in respect of insurance liabilities are therefore, based on management’s best estimate which incorporates statistical techniques and past experience. It is not possible for the Group to predict the ongoing restrictions on surgeries and other health services due to COVID-19 which could result in the maturity profile of the claims liability extending beyond 12 months. Note 10: Contributed equity and reserves (a) Contributed equity Contributed equity consists of 2,754,003,240 fully paid ordinary shares at $0.03 per share. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of Medibank, and in a winding up or reduction of capital, the right to repayment of the capital paid up on the shares. Ordinary shares entitle their holders to receive dividends and, in the event of winding up Medibank or reduction of capital, entitle their holders to participate in the distribution of the surplus assets of Medibank. (b) Reserves Reserve 2021 $m 2020 $m Nature and purpose of reserve Equity reserve 17.8 17.8 During the 2009 financial year, the parent entity entered into a restructure of administrative arrangements, which gave rise to an equity reserve representing the difference between the book value of the net assets acquired from Medibank Health Solutions Pty Ltd (formerly Health Services Australia Pty Ltd) and the total purchase consideration. Share-based payments reserve 4.5 4.6 The share-based payments reserve is used to record the cumulative expense recognised in respect of performance rights issued to key management personnel. Refer to Note 18 for further information. Total 22.3 22.4 102 Medibank Notes to the consolidated financial statements30 June 2021Section 4. Other assets and liabilities Overview This section provides insights into the operating assets used and liabilities incurred to generate the Group’s operating result. Note 11: Property, plant and equipment (a) Closing net book amount Closing net book amount Plant and equipment Leasehold improvements Assets under construction Right-of-use assets Total property, plant and equipment Note 14 2021 $m 10.2 23.7 4.5 63.3 101.7 (b) Reconciliation of the net book amount at the beginning and end of the period Plant and equipment $m Leasehold improvements $m Assets under construction $m 2021 Gross carrying amount Balance at 1 July 2020 Additions Transfers in/(out) Balance at 30 June 2021 Accumulated depreciation and impairment Balance at 1 July 2020 Depreciation expense Balance at 30 June 2021 2020 Gross carrying amount Balance at 1 July 2019 Additions Transfers in/(out) Disposals Balance at 30 June 2020 Accumulated depreciation and impairment Balance at 1 July 2019 Depreciation expense Disposals Balance at 30 June 2020 Closing net book amount As at 30 June 2021 As at 30 June 2020 15.0 6.2 1.7 22.9 (8.9) (3.8) (12.7) 14.3 0.3 0.4 - 15.0 (5.5) (3.4) - (8.9) 10.2 6.1 92.8 1.0 1.2 95.0 (61.8) (9.5) (71.3) 90.2 1.3 1.7 (0.4) 92.8 (52.0) (9.8) - (61.8) 23.7 31.0 (c) Property, plant and equipment capital expenditure commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities 3.0 4.4 (2.9) 4.5 - - - 2.3 2.8 (2.1) - 3.0 - - - - 4.5 3.0 2021 $m 0.2 2020 $m 6.1 31.0 3.0 72.1 112.2 Total $m 110.8 11.6 - 122.4 (70.7) (13.3) (84.0) 106.8 4.4 - (0.4) 110.8 (57.5) (13.2) - (70.7) 38.4 40.1 2020 $m - Annual Report 2021 103 Property, Plant and Equipment Accounting Policy Refer to Note 14 for the accounting policy for right-of-use assets. Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are recognised as an asset when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the consolidated statement of comprehensive income during the reporting period in which they are incurred. Depreciation Depreciation is calculated using the straight-line method over the estimated useful life or lease term as follows Plant and equipment Leasehold improvements Assets under construction 3 – 15 years the lease term not depreciated until in use The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Disposal The gain or loss on disposal of property, plant and equipment is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal (including incidental costs). These gains or losses are included in the consolidated statement of comprehensive income. Note 12: Intangible assets 2021 Gross carrying amount Balance at 1 July 2020 Additions Transfers in/(out) Balance at 30 June 2021 Accumulated amortisation and impairment Balance at 1 July 2020 Amortisation expense Balance at 30 June 2021 2020 Gross carrying amount Balance at 1 July 2019 Restatement1 Balance at 1 July 2019 (restated) Additions Transfers in/(out) Balance at 30 June 2020 Accumulated amortisation and impairment Balance at 1 July 2019 Restatement1 Balance at 1 July 2019 (restated) Amortisation expense Balance at 30 June 2020 Closing net book amount As at 30 June 2021 As at 30 June 2020 Customer contracts and relationships $m Goodwill $m Software $m Assets under construction $m 282.9 - - 282.9 (78.4) - (78.4) 282.9 - 282.9 - - 282.9 (78.4) - (78.4) - (78.4) 204.5 204.5 89.7 - - 89.7 (81.4) (4.6) (86.0) 89.7 - 89.7 - - 89.7 (72.4) - (72.4) (9.0) (81.4) 3.7 8.3 430.7 4.1 20.7 455.5 (306.0) (37.6) (343.6) 426.4 (34.6) 391.8 2.5 36.4 430.7 (280.5) 14.1 (266.4) (39.6) (306.0) 111.9 124.7 Total $m 829.5 23.8 - 853.3 26.2 19.7 (20.7) 25.2 - - - (465.8) (42.2) (508.0) 38.2 (1.8) 36.4 26.2 (36.4) 26.2 - - - - - 837.2 (36.4) 800.8 28.7 - 829.5 (431.3) 14.1 (417.2) (48.6) (465.8) 25.2 26.2 345.3 363.7 1. Restatement reflects the change in accounting policy for Software as a Service (SaaS) intangible assets detailed in Note 20(a). 104 Medibank Notes to the consolidated financial statements30 June 2021(a) Impairment tests for goodwill – key assumptions and judgements Below is a cash generating unit (CGU) level summary of the Group’s goodwill allocation and the key assumptions made in determining the recoverable amounts. Health Insurance Medibank Health Telehealth Medibank Health Home Care Goodwill allocation $m 96.2 11.1 97.2 2021 Growth rate % 2.5 1.0 2.5 Pre-tax discount rate % 10.5 11.3 11.3 Goodwill allocation $m 96.2 11.1 97.2 2020 Growth rate % 2.5 2.5 2.5 Pre-tax discount rate % 10.7 11.3 11.3 Growth rates and discount rates The growth rate disclosed above represents the weighted average growth rate used to extrapolate cash flows beyond the budget period. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates as per industry forecasts. In performing the recoverable amount calculations for each CGU, the Group has applied post-tax discount rates to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax discount rates are disclosed above. The discount rates used reflect specific risks relating to the relevant CGU. Health Insurance CGU The recoverable amount is based on a value-in-use calculation, which uses a three year cash flow projection per the Group’s Corporate Plan approved by the Board. Cash flows beyond the Corporate Plan period are extrapolated using the estimated growth rates, with a terminal value assumed in the calculations. Key assumptions • Forecast revenue comprising estimated change in the number of members and future premium revenue rate rises. • Forecast claims and operating expenses. Medibank Health Telehealth CGU The recoverable amount is based on a value-in-use calculation, which uses a three year cash flow projection per the Group’s Corporate Plan approved by the Board. Cash flows that are beyond this period, but within the period that management can reliably estimate, are extrapolated using the estimated growth rates. No terminal value has been assumed in the calculations. Key assumptions • Forecast revenue for the market sector and specific forecasts for key customer contracts. • Forecast direct expenses and allocated corporate costs. • Period over which to assess the forecasts. The key assumption in the Medibank Health Telehealth CGU is the cash flow forecast. The ability to meet these cash flows, which are based on the Group’s Corporate Plan, could impact the recoverability of the CGU. The business model of the CGU is contract based by nature and the forecast cash flows contain assumptions around expected contract renewals, new wins and losses. This cash flow estimate assumes that current contract renewal options will be exercised by the customers. This assumption is based on management’s past experience and knowledge of the market in which the CGU operates. Medibank Health Home Care group of CGUs Home Care comprises acquired and internally developed in-home care businesses. Goodwill has been allocated to the Home Care CGUs as the Group derives strategic and operational synergies, and the Group monitors business performance at the combined Home Care level. The recoverable amount is based on a value-in-use calculation, which uses a three year cash flow projection per the Group’s Corporate Plan approved by the Board. Cash flows that are beyond this period, but within the period that management can reliably estimate, are extrapolated using the estimated growth rates with a terminal value assumed in the calculations. Key assumptions • Forecast revenue based on market sector growth, customer contracts and specific volume forecasts for geographic areas. • Forecast direct expenses and allocated corporate costs. • Continued synergies from: – Single go-to-market approach. – Integration of the chronic diseases management and rehab at home programs. – Workforce management. Annual Report 2021 105 Medibank Health Home Care group of CGUs continued The key assumption in the Medibank Health Home Care group of CGUs is the cash flow forecast. The ability to meet these cash flows, which are based on the Group’s Corporate Plan, could impact the recoverability of the CGUs. The business model of the Home Care group of CGUs is volume and contract based and the forecast cash flows contain assumptions including volumes of services performed across geographic areas and expected contract renewals, new wins and losses. The cash flow forecast assumes that service volumes will increase based on geographic growth and new contracts. This assumption is based on management’s past experience and knowledge of the market in which the CGUs operate. There are no reasonably possible changes in key assumptions that could have resulted in an impairment loss for the Health Insurance CGU, Medibank Health Telehealth CGU or the Medibank Health Home Care group of CGUs in the current or prior financial year. Impairment Accounting Policy Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value- in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets called cash-generating units (CGUs). Goodwill is allocated to the CGU, or group of CGUs, at which the goodwill is monitored and where the synergies of the combination are expected. (b) Intangible assets capital expenditure commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities Intangible Assets Accounting Policy 2021 $m 2020 $m 1.9 1.7 Accounting policy Key estimates Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Refer to Note 12(a) above for further information on the assumptions used in the recoverable amount calculations. The estimated useful lives are based on projected product lifecycles and could change significantly as a result of technical innovations and competitor actions. Software intangibles are carried at cost less accumulated amortisation and impairment losses. Costs incurred in acquiring software and licences (including external direct costs of materials and service and direct payroll-related costs of employees’ time spent on the project) are capitalised where there is control of the underlying software asset and where they will contribute to future financial benefits, through revenue generation and/or cost reduction. Amortisation is calculated on a straight-line basis over the expected useful lives of the software (1.5 to 10 years) and is recognised in depreciation and amortisation expense in the consolidated statement of comprehensive income. Goodwill Software 106 Medibank Notes to the consolidated financial statements30 June 2021 Customer contracts and relationships Customer contracts and relationships acquired as part of a business combination are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over the expected useful lives (5 to 12 years) and is recognised in depreciation and amortisation expense in the consolidated statement of comprehensive income. Customer contracts and relationships are assessed for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A key assumption in assessing customer contracts and relationships for impairment is the retention of the underlying contracts. Assumptions are made around renewal of these contracts, associated cash flows based on contracted renewal options and the Group’s commercial and strategic long-term plans. Note 13: Provisions and employee entitlements Note 13(c) 13(a) 13(b) 13(a) 13(b) Current Customer give back provision Employee entitlements Provisions Total current Non-current Employee entitlements Provisions Total non-current (a) Employee entitlements (i) Employee entitlements provision Employee entitlements Current Non-current Total employee entitlements This provision incorporates annual leave, long service leave, termination payments and bonus plans. (ii) Employee benefits expense Included in the Group’s employee benefits expense are the following: Superannuation expense Other long-term benefits expense Termination benefits expense Share-based payment expense 2021 $m 103.0 69.7 25.0 197.7 13.0 9.7 22.7 2021 $m 69.7 13.0 82.7 2021 $m 30.4 5.4 3.7 5.2 2020 $m - 52.5 30.4 82.9 12.6 7.0 19.6 2020 $m 52.5 12.6 65.1 2020 $m 29.7 5.0 2.7 1.2 Annual Report 2021 107 Employee Entitlements Accounting Policy Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefit obligations Liabilities for employee entitlements includes long service leave and annual leave which are not expected to be settled wholly within 12 months after the end of the period. The liabilities are measured at the present value of expected future payments using the projected unit credit method, taking into account: • Expected future wage and salary levels. • Experience of employee departures. • Periods of service. Expected future payments are discounted using market yields at the end of the reporting period, using corporate bonds with terms to maturity that closely match the estimated future cash outflows. The obligations are presented as current liabilities in the consolidated statement of financial position if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. Bonus plans Liabilities for bonuses are based on a formula that takes into consideration the performance of the employee against targeted and stretch objectives, the profit of the Group and other financial and non-financial key performance indicators. The Group recognises a provision when it is contractually obliged or where there is a past practice that has created a constructive obligation. Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the following dates: • When the Group can no longer withdraw the offer of those benefits. • When the Group recognises costs for a restructuring that is within the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. (b) Provisions Balance at 1 July 2020 Additional provision Amounts utilised during the year Reversal of unused provision Balance at 30 June 2021 Balance comprised of: Current Non-current Commissions $m 8.1 7.5 (6.7) - 8.9 Make good $m 4.5 0.5 - - 5.0 Workers compensation $m 4.8 1.6 (1.1) - 5.3 Corporate loyalty benefits $m 6.7 3.2 (2.0) (0.9) 7.0 Other $m 13.1 3.2 (7.7) (0.1) 8.5 Total $m 37.2 16.0 (17.5) (1.0) 34.7 8.9 - 2.2 2.8 1.4 3.9 7.0 - 5.5 3.0 25.0 9.7 108 Medibank Notes to the consolidated financial statements30 June 2021(i) Commissions provision This provision relates to estimated commissions payable to third parties in relation to the acquisition of health insurance contracts. (ii) Make good provision In accordance with certain lease agreements, the Group is obligated to restore leased premises to their original condition at the end of the lease term. Due to the long-term nature of the liability, there is uncertainty in estimating the ultimate amount of these costs. The provision has been discounted to take into account the time value of money throughout the remaining term of the lease. (iii) Workers compensation provision The Group is self-insured for workers’ compensation claims. Provisions are recognised based on claims reported and an estimate of claims incurred but not reported. These provisions are determined on a discounted basis, using an actuarial valuation performed at each reporting date. The Group has entered into $10.0 million (2020: $8.8 million) of bank guarantees in relation to its self-insured workers compensation obligations. (iv) Corporate loyalty benefits provision This provision relates to estimated incentives payable to third parties in relation to the acquisition of Corporate health insurance contracts. (c) Customer give back provision A customer give back provision of $103.0 million has been recognised at 30 June 2021 (2020: nil). This provision relates to the return of permanent COVID-19 savings to customers through premium relief announced by the Group on 29 June 2021. The provision has been recognised within Health Insurance premium revenue in the consolidated statement of comprehensive income and is expected to be utilised via a one-time cash payment to former eligible policyholders or a one-time reduction in future premiums payable by active eligible policyholders within the next 12 months. Note 14: Leases (a) Group as a lessee Leases are entered into as a means of acquiring access to corporate and retail property. Rental payments are generally fixed, with differing clauses to adjust the rental to reflect increases in market rates. These clauses include fixed incremental increases, market reviews and inflation escalation clauses during a lease on which contingent rentals are determined. No operating leases contain restrictions on financing or other leasing activities. Provisions Accounting Policy Provisions are recognised when: • The Group has a present legal or constructive obligation as a result of past events. • It is probable that an outflow of resources will be required to settle the obligation. • The amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Expected future payments are discounted using market yields at the end of the reporting period using corporate bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. The increase in the provision due to the passage of time is recognised as interest expense. (d) Contingent liabilities From time to time, the Group is exposed to contingent liabilities which arise from the ordinary course of business, including: • Losses which might arise from litigation. • Investigations from internal reviews and by regulatory bodies such as the ACCC, ASIC or APRA into past conduct on either industry-wide or Medibank specific matters. It is anticipated that the likelihood of any unprovided liabilities arising is either remote or not material. The Group leases unused office space under non-cancellable leases agreements. The leases have varying terms, escalation clauses and renewal rights. As at 30 June 2021, management have determined it is not reasonably certain that any of its leases will be extended or terminated. Annual Report 2021 109 The table below sets out the carrying amounts of the right-of-use asset and the movements during the year. Balance at 1 July Net additions Depreciation expense Balance at 30 June The table below sets out the carrying amounts of the lease liabilities and the movements during the year. Balance at 1 July Additions Accretion of interest Lease payments Balance at 30 June Balance comprised of: Current Non-current 2021 $m 72.1 18.4 (27.2) 63.3 2021 $m 109.2 18.4 2.8 (37.0) 93.4 2020 $m 88.0 11.1 (27.0) 72.1 2020 $m 132.5 6.6 3.4 (33.3) 109.2 28.1 65.3 27.9 81.3 The maturity profile of the Group's lease liabilities based on contractual undiscounted payments is provided in Note 9(e). Leases Accounting Policy As a lessee At inception of a contract, the Group assesses whether a contract is, or contains, a lease by determining whether: • The contract involves the use of an identified asset. • The Group has the right to direct the use of the asset The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use or the end of the lease term. In addition, the right-of-use is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group’s incremental borrowing rate. In determining the incremental borrowing rate, the following components are considered: • Reference rate (incorporating currency, environment, term). • Financing spread adjustment (incorporating term, indebtedness, entity, environment). • Lease specific adjustment (incorporating asset type). The interest expense recognised on the lease liability is measured at amortised cost using the effective interest method. The lease liability is remeasured when there is a change in future lease payments, with a corresponding adjustment made to the carrying amount of the right-of-use asset (or profit or loss if the carrying amount of the right- of-use asset has been reduced to zero). The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. b) Group as a Lessor Finance lease receivables of $7.0 million have been recognised by the Group at 30 June 2021 (2020: $8.9 million). These are presented within other assets in the consolidated statement of financial position. The Group recognised income of $1.1 million (2020: $2.3 million) for the year with respect to subleasing of its right-of-use assets. Leases Accounting Policy As a lessor The Group acts as an intermediate lessor for two of its four subleases. The Group’s interest in the head lease and sublease are accounted for separately. At the sublease commencement, the Group determines whether it is a finance or operating lease by assessing whether the lease transfers substantially all of the risks and rewards of ownership to the lessee, with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. 110 Medibank Notes to the consolidated financial statements30 June 2021Section 5. Other Overview This section includes additional information that must be disclosed to comply with Australian Accounting Standards, the Corporations Act 2001 and the Corporations Regulations. Note 15: Income tax Tax consolidation legislation Medibank and its wholly-owned Australian controlled entities are members of a tax consolidated group. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are offset in the consolidated financial statements. The entities in the tax consolidated group entered into a tax sharing agreement which limits the joint and several (a) Income tax expense liability of the wholly-owned entities in the case of a default by the head entity, Medibank. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Medibank for any current tax payable and are compensated by Medibank for any current tax receivable. Continuing operations Current tax Deferred tax1 Adjustment for tax of prior period Income tax expense reported in the statement of comprehensive income 2021 $m 182.2 8.6 0.3 191.1 2020 $m 226.8 (93.9) 1.7 134.6 1. Prior period includes deferred tax of $89.1 million in relation to the COVID-19 claims liability. Refer to Note 3(b) for further information on the COVID-19 claims liability. (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit for the year from continuing operations before income tax expense Tax at the Australian tax rate of 30% Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible expenses Tax offset for franked dividends Other items Adjustment for tax of prior period Income tax expense reported in the statement of comprehensive income 2021 $m 632.3 2020 $m 450.2 189.7 135.1 2.8 (1.2) (0.5) 190.8 0.3 191.1 - (1.8) (0.4) 132.9 1.7 134.6 Annual Report 2021 111 (c) Deferred tax assets and liabilities Deferred tax balances comprise temporary differences attributable to items: Recognised in the income statement Trade and other receivables Financial assets at fair value through profit or loss Deferred acquisition costs Property, plant and equipment Intangible assets Trade and other payables Employee entitlements Claims liabilities1 Provisions2 Business capital costs Other (liabilities)/assets Recognised in the income statement Recognised directly in other comprehensive income Actuarial loss on retirement benefit obligation Recognised directly in other comprehensive income Net deferred tax (liabilities)/assets 2021 $m 2020 (restated)3 $m 2.0 (28.4) (24.3) (19.6) (13.0) 30.6 24.8 72.2 40.6 0.3 0.3 85.5 0.4 0.4 85.9 2.1 (16.0) (23.4) (22.8) 10.6 34.5 19.5 95.0 11.4 0.5 (0.6) 89.6 0.6 0.6 90.2 1. Includes deferred tax of $67.1 million (2020: $89.1 million) in relation to the COVID-19 claims liability. Refer to Note 3(b) for further information on the COVID-19 claims liability. 2. Includes deferred tax of $30.9 million (2020: nil) in relation to the customer give back provision. Refer to Note 13(c) for further information. 3. Restatement reflects the change in accounting policy for Software as a Service (SaaS) intangible assets detailed in Note 20(a). Income Tax Accounting Policy Current Taxes Accounting Policy The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions where appropriate. Deferred Taxes Accounting Policy Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted at the end of each reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements, other than for the following: • Where they arise from the initial recognition of goodwill. • Where they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. • For temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax is recognised in the profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Offsetting balances Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Key judgement The deferred tax asset in relation to the COVID-19 claims liability has been recognised in the consolidated statement of financial position. Recognition is on the basis that the Group can demonstrate that: • The temporary difference will reverse when the expected deferred claims are incurred. • Sufficient profits are forecast to exist to utilise the tax asset in the future. 112 Medibank Notes to the consolidated financial statements30 June 2021Note 16: Group structure (a) Group structure The consolidated financial statements incorporate the following entities. All entities, unless otherwise stated, are 100% controlled. Medibank Private Limited Australian Health Management Group Pty Ltd Medibank Health Solutions Pty Ltd Medibank Private Employee Share Plan Trust1 Medibank Health Solutions Telehealth Pty Ltd Integrated Care Services Pty Ltd Medi Financial Services Pty Ltd Live Better Management Pty Ltd MH Investment Holdings Pty Ltd MH Solutions Investments Pty Ltd HealthStrong Pty Ltd Home Support Services Pty Ltd Calvary MHIH JV Pty Ltd (50%) East Sydney Day Hospital Pty Ltd (49%) Adeney Private Hospital Pty Ltd (49%) Myhealth Medical Holdings Pty Ltd (49%) These subsidiaries are wholly owned by Medibank Health Solutions Pty Ltd and have been granted relief from the necessity to prepare financial reports in accordance with the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. These entities are equity accounted investments. Refer to Note 16(b) for further information. 1. Refer to Note 18(a) for further information on the Employee Share Plan Trust. Consolidation Accounting Policy Subsidiaries are all those entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired, is recorded as goodwill. The acquisition method of accounting is used to account for the acquisition of subsidiaries. The consideration transferred for the acquisition of a subsidiary comprises the fair value of the assets transferred and the liabilities incurred. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries are consistent with the policies adopted by the Group. Annual Report 2021 113 (b) Equity accounted investments As at 30 June 2021 the Group held the following investments in associates and joint ventures: Name of company East Sydney Day Hospital Pty Ltd(i) Calvary MHIH JV Pty Ltd(ii) Myhealth Medical Holdings Pty Ltd(iii) Adeney Private Hospital Pty Ltd(iv) Principal activity Short-stay hospital Medical services Medical services Short-stay hospital Place of incorporation Australia Australia Australia Australia Type Associate Joint Venture Associate Associate The following table shows the Group’s aggregated interests in equity accounted investments. Balance at 1 July Net additions1 Share of net profit/(loss) for the year Balance at 30 June Ownership interest % 2021 49% 50% 49% 49% 2021 $m - 78.1 (1.0) 77.1 2020 - - - - 2020 $m - - - - 1. Net additions during the period include purchases of equity accounted investments ($82.6 million) and proceeds from sale of equity accounted investments ($11.6 million). (i) East Sydney Day Hospital Pty Ltd – Associate (iii) Myhealth Medical Holdings Pty Ltd – Associate On 6 August 2020, MH Solutions Investments Pty Ltd acquired a 49% shareholding in East Sydney Day Hospital Pty Ltd (ESPH) for $8.8 million, of which $4.4 million is recognised as a current payable and due 12 months following completion. The purchase agreement contains an additional $10.8 million contingent consideration that is subject to ESPH achieving certain earnings targets over three years. The fair value of this contingent consideration is $2.7 million at 30 June 2021 and has been recorded as a non-current provision in the consolidated statement of financial position. An interest-bearing three-year loan of $2.9 million was also advanced to ESPH on acquisition. (ii) Joint venture with Calvary Hospital On 29 September 2020, MH Investment Holdings Pty Limited acquired a 50% shareholding in Calvary MHIH JV Pty Ltd for $2.7 million. This joint venture was determined to be the successful bidder on a tender for the South Australian Government’s “My Home Hospital” program during the period. On 31 March 2021, MH Solutions Investments Pty Ltd acquired a 49% shareholding in Myhealth Medical Holdings Pty Ltd for $68.6 million. The Group subsequently reduced its shareholding to 43% on the same day for proceeds of $11.6 million, before increasing its shareholding again to 49% on 1 April for consideration of $5.9 million. The net consideration paid for the 49% investment is $62.9 million. (iv) Adeney Private Hospital Pty Ltd – Associate On 9 March 2021, MH Solutions Investments Pty Ltd acquired a 49% shareholding in Adeney Private Hospital Pty Ltd (APH) for $1.0 million, to develop a hospital in Victoria for short-stay surgical procedures. As part of the purchase agreement, the Group may make future equity purchases in APH up to $8.0 million over the next 3 years. These future equity purchases are contingent on APH achieving certain milestones in the development of the hospital and therefore will only be recognised when the milestones are achieved. Parent Entity Financial Information Accounting Policy The Group’s associates and joint ventures, which are entities over which the Group has significant influence or joint control, are accounted for using the equity method. Under this method, the investment associate or joint venture is initially recognised at cost and is increased or decreased to recognise the Group’s share of profit or loss. Equity accounting of losses is restricted to the Group’s interest in the associate or joint venture. The Group’s share of profit or loss for the period is reflected in the consolidated statement of comprehensive income. Investments in associates and joint ventures are tested for impairment if an event occurs that has an impact on the estimated future cash flows from the net investment. 114 Medibank Notes to the consolidated financial statements30 June 2021(c) Parent entity financial information (i) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Statement of financial position Current assets Total assets Current liabilities Total liabilities Shareholders' equity Issued capital Reserves Equity reserve Share-based payment reserve Retained earnings Total shareholders' equity Profit for the year Total comprehensive income 2021 $m 2020 (restated)1 $m 3,186.5 3,794.7 1,832.2 1,980.2 3,053.3 3,632.6 1,731.7 1,917.6 85.0 85.0 6.3 4.5 1,718.7 1,814.5 432.7 432.7 6.3 4.5 1,619.2 1,715.0 311.4 311.4 1. Restatement reflects the change in accounting policy for Software as a Service (SaaS) intangible assets detailed in Note 20(a). (ii) Guarantees entered into by parent entity (iii) Contingent liabilities of the parent entity Refer to Note 13(d) for details of the contingent liability of the parent entity. The parent entity has entered into $10.0 million (2020: $8.5 million) of bank guarantees in relation to its self-insured workers compensation obligations. Refer to Note 13(b)(iii) for further information on the provision for workers compensation. The parent entity also provided guarantees in respect of service obligations assumed by members of the Group. No liability has been recognised in relation to these guarantees by the parent entity or the Group as the fair value of the guarantees is not material. (iv) Parent entity capital expenditure commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities Property, plant and equipment Intangible assets 2021 $m 2020 $m 0.2 1.6 - 1.5 Parent Entity Financial Information Accounting Policy The financial information for the parent entity, Medibank, has been prepared on the same basis as the consolidated financial statements, except as set out below: • Investments in subsidiaries are accounted for at cost less accumulated impairment losses in the financial statements of Medibank. • Assets or liabilities arising under tax funding arrangements with the tax consolidated entities are recognised by Medibank as current assets or current liabilities. Annual Report 2021 115 Note 17: Related party transactions (a) Transactions with equity accounted investments Transactions with equity accounted investments Claims incurred Services provided Interest received Outstanding balances with related parties Amounts payable Amounts receivable Loan receivable 2021 $m (2.9) 1.7 0.2 - 1.5 2.9 2020 $m - - - - - - The Group has entered into the following transactions with its equity accounted investments during the year: • Payment of policyholder claims. These transactions are under normal commercial terms. • Interest-bearing three-year loan of $2.9 million advanced to ESPH on acquisition. • Reimbursement of costs incurred. (b) Key management personnel remuneration Total remuneration for key management personnel of the Group during the financial year are set out below: Short-term benefits Post-employment benefits Long-term benefits Share-based payments Total key management personnel 2021 $ 10,300,436 281,954 1,420,495 3,515,299 15,518,184 2020 $ 7,722,918 300,528 323,044 1,641,366 9,987,856 (c) Transactions with other related parties Certain key management personnel hold director positions in other entities, some of which transacted with the Group during the 2021 financial year. All transactions that occurred were in the normal course of business on terms and conditions no more favourable than those available on an arm’s length basis. 116 Medibank Notes to the consolidated financial statements30 June 2021Note 18: Share-based payments (a) Share-based payments arrangements Performance rights to acquire shares in Medibank are granted to Executive Leadership Team (ELT) and Senior Executive Group (SEG) members as part of Medibank’s short-term incentive (STI) and long-term incentive (LTI) plans. The plans are designed to: • Align the interests of employees participating in the plan more closely with the interests of customers and shareholders by providing an opportunity for those employees to receive an equity interest in Medibank through the granting of performance rights. • Assist in the motivation, retention and reward of ELT and SEG members. Performance rights granted do not carry any voting rights. Medibank has an Employee Share Plan Trust to manage its share-based payments arrangements. Shares allocated by the trust to the employees are acquired on-market prior to allocation. The Trust held nil shares at 30 June 2021. (i) LTI offer Under the LTI Plan, performance rights were granted to members of the ELT and SEG as part of their remuneration. Performance rights granted under the LTI Plan are subject to the following performance hurdles: • 35% of the performance rights will be subject to a vesting condition based on Medibank’s earnings per share compound annual growth rate (EPS CAGR) over the performance period. • 35% of the performance rights will be subject to a relative total shareholder return (TSR) vesting condition, measured over the performance period against a comparator group of companies. • 30% of the performance rights will be subject to a performance hurdle based on the growth of Medibank’s private health insurance market share (as reported by APRA) over the performance period. Each performance hurdle under the LTI Plan has a threshold level of performance which needs to be achieved before vesting commences. Details of these thresholds are outlined in the remuneration report. The vesting conditions for performance rights in grants will be tested over a three-year performance period commencing on 1 July of the relevant period. The vesting conditions must be satisfied for the performance rights to vest. On satisfaction of the vesting conditions, each performance right will convert into a fully paid ordinary share on a one-for-one basis. The number of rights granted in the 2021 grants were determined based on the monetary value of the LTI award, divided by the volume-weighted average share price of Medibank shares on the ASX during the 10 trading days up to and including 30 June 2020. This average price was $3.02. (ii) Annual STI offer Under the Group’s STI Plan, 50% of STI awarded to ELT members is paid in cash after the announcement of financial results. The remaining 50% is deferred for 12 months in the form of performance rights granted under the Performance Rights Plan. Vesting of deferred performance rights is conditional on the participant remaining employed by Medibank until the end of the 12-month deferral period. On vesting of the performance rights, each performance right will convert into a share on a one-for-one basis, subject to any adjustment required to ensure that the participant receives a benefit equivalent to any dividends paid by Medibank during the deferral period. The number of rights to be granted will be determined based on the monetary value of the STI award, divided by the volume-weighted average share price over the 10 trading days up to and including the payment date of cash STI. Share-based Payment Accounting Policy The fair value of the performance rights is recognised as an employee benefits expense, with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, which includes any market performance conditions and the impact of any non-vesting conditions, but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At the end of each reporting period, the Group revises its estimates of the number of awards that are expected to vest based on the non-market vesting conditions. The impact of the revision to original estimates, if any, is recognised in profit or loss, with a corresponding adjustment to equity. Annual Report 2021 117 (b) Performance rights – Group Outstanding at 1 July Granted Forfeited Exercised Lapsed Outstanding at 30 June Exercisable at 30 June Note (i) (ii) (iii) Number of equity instruments 2020 8,430,879 3,338,273 (594,482) (1,068,721) (1,167,876) 8,938,073 - 2021 8,938,073 3,168,794 (624,784) (1,980,272) (1,422,769) 8,079,042 - (i) Forfeited relates to instruments that lapsed on cessation of employment. (ii) Performance rights are exercised as soon as they vest. (iii) Lapsed relates to instruments that lapsed on failure to meet the performance hurdles. (c) Fair value of performance rights granted Below is a summary of the fair values of the 2020 and 2021 LTI plans and the key assumptions used in determining the valuation. The fair value was determined in consultation with the Group’s professional service advisors, KPMG including key inputs and the valuation methodology for the performance rights granted. The fair value at grant date differs for each grant primarily due to the Medibank share price on that grant date and for the TSR performance rights, the Medibank share price relative to the comparator group. Grant date Date of commencement of service and performance period Expected vesting date Fair value at grant date TSR performance rights EPS performance rights Market share performance rights 2021 1 July 2020 2020 1 July 2019 2021 1 July 2020 2020 1 July 2019 2021 1 July 2020 2020 1 July 2019 1 July 2020 1 July 2019 1 July 2020 1 July 2019 1 July 2020 1 July 2019 30 June 2023 30 June 2022 30 June 2023 30 June 2022 30 June 2023 30 June 2022 $2.80 $1.58 $2.80 $2.54 $2.54 $1.09 Share price at grant date Dividend yield (per annum effective) Franking rate Risk free discount rate (per annum) $2.97 4.0% 100.0% 0.3% $3.21 4.0% 100.0% 0.6% $2.97 4.0% 100.0% n/a $3.21 4.0% 100.0% n/a $2.97 4.0% 100.0% n/a $3.21 4.0% 100.0% n/a Valuation method Monte Carlo simulation model Monte Carlo simulation model Black-Scholes option pricing methodology Black-Scholes option pricing methodology Black-Scholes option pricing methodology Black-Scholes option pricing methodology Volatility assumptions (per annum) Medibank Comparator group average Correlation between comparator companies' TSR 28% 35% 25% 20% 23% 25% n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 118 Medibank Notes to the consolidated financial statements30 June 2021Note 19: Auditor's remuneration During the year the following fees were paid or payable for services provided by the auditor of Medibank, its related practices and non-related audit firms: PricewaterhouseCoopers Australia (PwC): Amounts received or due and receivable by the Company's auditor for: – An audit or review of the financial report of the Company and any other entity within the Group Other assurance services in relation to the Company and any other entity within the Group: – Audit of regulatory compliance returns – Accounting and other assurance services Other services in relation to the Company and any other entity within the Group: – Other non-audit services Total remuneration of PwC 2021 $ 2020 $ 1,570,108 1,581,094 231,830 15,530 342,264 64,260 199,517 - 2,016,985 1,987,618 Note 20: Other (a) New and amended standards adopted (i) Adopted in the current period During the period, the IFRS Interpretations Committee (IFRIC) issued a final agenda decision, ‘Configuration or Customisation Costs in a Cloud Computing Arrangement (IAS 38 Intangible Assets)’. The agenda decision clarifies when configuration and customisation costs incurred in implementing a Software as a Service (‘SaaS’) arrangement can be recognised as an intangible asset and if not, over what time period the expenditure is expensed. Medibank has implemented this guidance retrospectively as a change in accounting policy and has recognised the following adjustments in the prior year financial statements of the Group and Parent Entity as follows: • A decrease in intangible assets as at 1 July 2019 of $22.3 million (Parent Entity: $20.1 million). • An increase in deferred tax assets as at 1 July 2019 $6.2 million (Parent Entity: $5.9 million). • A decrease in retained earnings as at 1 July 2019 of $16.1 million (Parent Entity: $14.2 million). There are no other material impacts as a result of this change in accounting policy. The following standards became effective for the annual reporting period commencing on 1 July 2020 but did not have a material impact on the Group’s accounting policies or on the consolidated interim financial report. • AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material • Amendments to References to the Conceptual Framework in IFRS Standards • AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions (ii) Adopted in the previous period The Group adopted AASB 16 Leases on 1 July 2019 using the modified retrospective approach. The net impact after tax of initially applying AASB 16 was recognised as a decrease of $4.7 million to the opening balance of retained earnings at 1 July 2019. (b) New accounting standards and interpretations not yet adopted Certain new accounting standards have been published that are not mandatory for 30 June 2021 reporting periods, but will be applicable to the Group in future reporting periods. The Group’s assessment of the impact of these new standards is set out below. (i) AASB 17: Insurance Contracts AASB 17 Insurance Contracts is effective for reporting periods beginning on or after 1 January 2023 and will replace AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. The Group will apply AASB 17 for the annual period beginning 1 July 2023. The standard introduces a new general measurement model for accounting for insurance contracts. However, a simplified premium allocation approach, similar in nature to the Group’s existing measurement basis under AASB 1023 is permitted in certain circumstances (such as for short-duration contracts). The Group has a comprehensive project underway to assess the potential impact on its consolidated financial statements. This includes identifying changes to the Group’s accounting policies, reporting requirements, systems, processes and controls and consideration of industry interpretations and regulatory responses. Annual Report 2021 119 The final impact of AASB 17 is currently being evaluated by the Group. The Group expects to apply the simplified premium allocation approach to all of its insurance contracts and therefore the measurement basis is not expected to significantly change. The key estimates and judgements in relation to the measurement of the Group’s claim liabilities are expected to remain largely the same under the new standard, albeit with some differences in their application. However, it is expected that under AASB 17 there will be substantial changes in presentation of the financial statements and disclosures. (c) Other accounting policies (ii) Other accounting standards or amendments that will become applicable in future reporting periods Other accounting standards or amendments that will become applicable in future reporting periods are not expected to have a material impact on the Group’s accounting policies or on the consolidated financial report. Impairment of Tangible and Intangible Assets (other than Goodwill) Accounting Policy Assets other than goodwill and financial assets classified at fair value through other comprehensive income, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (CGUs). Financial Assets and Financial Liabilities Accounting Policy The Group’s financial assets consist of cash and cash equivalents, financial assets at fair value and trade and other receivables. Management determines the classification of its financial assets at initial recognition based on the business model test and cash flow characteristics. Purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred. The Group’s financial liabilities comprise trade and other payables. Financial liabilities are classified and measured at amortised cost and derecognised when the Group’s contractual obligations are discharged, cancelled or expired. Goods and Services Tax (GST) Accounting Policy Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST component of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Loyalty Program Accounting Policy Where the amount of health insurance premium revenue includes a loyalty component, revenue is allocated to this component based on the relative estimated stand-alone selling price. The component of loyalty revenue is initially deferred as a liability on the consolidated statement of financial position, and subsequently recognised in the consolidated statement of comprehensive income upon redemption when Medibank is obliged to provide the specified goods or services itself. (d) Events occurring after the reporting period There have been no events occurring after the reporting period which would have a material effect on the Group’s financial statements at 30 June 2021. 120 Medibank Notes to the consolidated financial statements30 June 2021Directors' declaration The directors declare that, in the opinion of the directors: (a) the financial statements and notes set out on pages 75 to 120 are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its performance for the financial year ended on that date; and complying with Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and Note 1(b) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. This declaration has been made after receiving the declarations required to be made to the directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the year ended 30 June 2021. This declaration is made in accordance with a resolution of the directors. (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. On behalf of the Board, Mike Wilkins AO Chairman 25 August 2021 Melbourne David Koczkar Chief Executive Officer Annual Report 2021 121 Auditor's independence declaration Auditor’s Independence Declaration As lead auditor for the audit of Medibank Private Limited for the year ended 30 June 2021, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Medibank Private Limited and the entities it controlled during the period. CJ Heath Partner PricewaterhouseCoopers Melbourne 25 August 2021 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 122 Medibank Independent auditor’s report To the members of Medibank Private Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Medibank Private Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2021 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: ● ● ● ● ● ● the consolidated statement of financial position as at 30 June 2021 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Annual Report 2021 123 Independent auditor’s report Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. We performed: • An audit of the financially Amongst other relevant topics, we communicated the following key audit matters to the Audit Committee: • Estimation of the COVID-19 claims liability • Estimation of the outstanding claims liability significant component of the Group, being the Health Insurance segment. • • Specific audit procedures over significant risks and financially significant balances of the Medibank Health segment. Impairment test of goodwill allocated to the Home Care Cash Generating Unit (CGU) • Reliance on automated processes and controls These are further described in the Key audit matters section of our report. For the purpose of our audit we used overall Group materiality of $27 million, which represents approximately 5% of the Group’s profit before tax. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. 124 Medibank Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Estimation of the COVID-19 claims liability (Refer to Note 3) $223.8m The COVID-19 claims liability relates to a constructive obligation arising from the Group’s commitments to pass back to customers unforeseen financial gains arising from the temporary closure of elective surgery and reduced access to ancillary services as a result of restrictions imposed in response to the Coronavirus pandemic (COVID-19). The COVID-19 claims liability is calculated by comparing the difference between the actual and expected volume of insured surgical and non-surgical procedures since the commencement of restrictions in March 2020 (the COVID-19 period). Utilisation of the COVID-19 claims liability is assessed by geography and modality (claim type) and occurs where actual claims exceed expected claims. The COVID-19 claims liability is included in the financial statement line item titled ‘Claims liabilities’ recognised on the consolidated statement of financial position but does not form part of the outstanding claims liability (refer to the Key Audit Matters titled ‘Estimation of outstanding claims liability’). We considered this a key audit matter due to the: ● significant uncertainties impacting the Group’s estimate of the liability, including: o the impact and variability of disruptions to planned insured surgeries and other insured procedures arising from COVID-19 restrictions and lock-downs o an absence of historical precedent on which to analyse data due to the impact of COVID-19 on claims patterns in the current and future periods o determining the proportion of claims not incurred due to COVID-19 restrictions o determining expected future claims utilisation patterns. We performed the following audit procedures, amongst others: ● Evaluated the design of the Group’s relevant key controls over the COVID-19 provisioning process. ● Developed an understanding of the Group’s public announcements and commitments to financial analysts, shareholders and policyholders during the year. ● ● ● ● Evaluated the Group’s accounting policy for the deferral of claims due to the COVID-19 pandemic against applicable Australian Accounting Standard requirements and private health insurance industry practices. Assessed, on a sample basis, significant data inputs used in the Group’s modelling and estimation of the COVID-19 claims liability (including relevance and reliability of data, appropriateness of data in the context of the applicable financial reporting framework, and potential indicators of management bias). Analysed claims patterns across key claims attributes (e.g. hospital versus ancillary claims and surgical versus non-surgical). Together with PwC actuarial experts, we: o Assessed significant assumptions applied by the Group in determining the impact of continued COVID-19 restrictions on claims deferred to future periods, including consideration of practices adopted across the private health insurance industry. o Considered the appropriateness of the Group’s methodologies used to determine claims deferred to future periods. o On a sample basis, performed recalculations over the mathematical accuracy of the Group’s COVID-19 claims liability model. Annual Report 2021 125 Independent auditor’s report Key audit matter How our audit addressed the key audit matter • reasonableness of disclosure of the COVID-19 claims liability within the financial report. o Assessed the reasonableness of disclosure of the COVID-19 claims liability in the financial report against the requirements of the applicable Australian Accounting Standards. Estimation of the outstanding claims liability (Refer to Note 3) $390.9m We performed the following audit procedures, amongst others: The liability for outstanding claims relates to claims incurred during the financial year or prior periods but either not assessed or received by the Group at year end. The liability for outstanding claims is estimated by the Group as a central estimate but, as is the case with any accounting estimate, there is a risk that the ultimate claims paid will differ from the initial estimates. There is also additional uncertainty relating to the continued impact of the COVID-19 pandemic on claims patterns. A risk margin is applied by the Group to reflect the uncertainty in the estimate. The central estimate and risk margin combined, which are estimated based on judgements and actuarial expertise, are intended to achieve an actuarially defined probability of adequacy (PoA) of 95% (2020: 95%). The estimation of the outstanding claims liability involves complex and subjective judgements about future events, both internal and external to the business. Primarily, judgement is required by the Group in order to estimate the: ● ● ● ● type and amount of claims incurred during the last two months of financial year but not received or processed by year end speed of processing claims by providers issuing claims on behalf of policyholders claims cost inflation and medical trends impacting utilisation of benefits by members impact of the COVID-19 pandemic on claims patterns. Controls design and operating effectiveness ● We evaluated the design of the Group’s relevant key controls over the claims reserving process (including data reconciliation, data inputs, data quality, and the Group’s review of the estimate) and assessed whether these controls were operating effectively throughout the year. The use of actuarial expertise Together with PwC actuarial experts, we: ● ● Assessed, on a sample basis, significant data inputs used in the Group’s modelling and measurement of the central estimate (including relevance and reliability of data, appropriateness of data in the context of the applicable financial reporting framework, and potential indicators of management bias). Considered whether the Group’s actuarial methodologies were consistent with actuarial practices and those used in the industry. ● On a sample basis, performed recalculations over the mathematical accuracy of the Group’s actuarial models. ● • Assessed the significant actuarial assumptions used by the Group in forecasting expected claims particularly those relating to the two months prior to the year end. This included comparing the significant actuarial assumptions to the Group’s historical experience, observable market trends, environmental factors, estimated payment patterns, member claiming patterns, and our industry knowledge. Considered the impact on the estimate of reasonably plausible alternative assumptions such as changes in service levels, payment history, recent claims trends, and COVID-19 environmental factors. 126 Medibank Key audit matter How our audit addressed the key audit matter We considered this a key audit matter because of the significant judgement required by the Group in estimating claims liabilities, including continued uncertainty on member claiming patterns due to impact of the COVID-19 pandemic, and because a small change in assumptions can result in a material change in the estimated liability and corresponding charge to profit for the year. Impairment test of goodwill allocated to Home Care Group of Cash Generating Unit (CGU) (Refer to Note 12) $97.2m The Group recognised goodwill of $97.2 million in respect of the acquisition of a number of in-home care businesses. This goodwill has been allocated to a Cash Generating Unit (CGU) referred to as the Home Care CGU (Home Care). An impairment test of Home Care is performed annually by the Group by comparing the carrying value of Home Care to the recoverable amount. We considered this to be a key audit matter due to the: ● ● ● financial significance of the goodwill allocated to Home Care which accounts for 48% of the goodwill balance recognised by the Group recoverable amount of Home Care is determined using a value-in-use model that requires significant judgement by the Group to estimate future cash flows based on a number of key assumptions, including revenue forecasts and expected synergies judgements and assumptions applied by the Group in performing the impairment test, including cash flows forecasts related to the realisation of planned strategic objectives for Home Care over the next three years, discount rates and growth rates. ● ● Assessed the Group’s approach to setting the risk margin in accordance with the requirements of Australian Accounting Standards, including an assessment of the reasonableness of the Group’s actuarial calculation of the PoA. Assessed the reasonableness of disclosure of the outstanding claims liability in the financial report against the requirements of the applicable Australian Accounting Standards. Claims received after the year end ● We considered whether actual claiming activity after year end supported the key assumptions used by the Group to estimate the outstanding claims liability at year end. We performed the following procedures, amongst others: ● Developed an understanding of the process by which the projected future cash flows of Home Care were developed, including consideration of expected operational, productivity and financial synergies, and realisation of planned strategic objectives. ● ● ● ● ● Considered the level of business performance monitoring by the Group and assessed whether the monitoring was performed at the Home Care level. Compared the cash flows included in the impairment assessment with the three-year business plan presented to and approved by the Board. Considered whether the cash flow forecasts were reasonable and were based on supportable assumptions, by comparing the forecasts to actual cash flows from previous years. Considered the impact on the impairment test of reasonably plausible alternative assumptions such as achieving cash flow forecasts and changes in the discount rate. Compared the growth rate assumed in the cash flow projections extrapolated beyond three years to industry research. Annual Report 2021 127 Independent auditor’s report Key audit matter How our audit addressed the key audit matter ● Assessed the reasonableness of disclosure of the impairment test for Home Care goodwill in the Group financial report against the requirements of the applicable Australian Accounting Standards. Together with PwC valuation experts, we: ● Developed an understanding of the Group’s impairment test methodology, including testing judgements and assumptions. ● ● ● Evaluated the valuation methodology supporting the Group’s impairment analysis against applicable Australian Accounting Standards. Evaluated the Group’s discount rate assumptions to market data, comparable data, and industry research. Tested the mathematical accuracy of the value-in-use model. Reliance on automated processes and controls We developed an understanding of the Group’s IT governance framework as well as the internal controls designed to mitigate the risk of fraud or error over: The Group utilises a number of complex and interdependent Information Technology (IT) systems to capture, process and report a high volume of transactions. We considered this a key audit matter because the: ● ● ● ● program development and changes access to programs and data computer operations business process. • • • operations and financial reporting processes of the Group are heavily reliant on IT systems Together with PwC IT specialists, we performed the following procedures, amongst others: underlying IT controls over business processes are significant to the financial reporting process data migration activities which occurred during the year impacted the key IT processes, systems, and controls relevant to the financial reporting process. ● Evaluated the design and tested the operating effectiveness of a sample of key IT controls that are relevant to the financial reporting process and our audit ● Considered the risks of the system implementation and data centre migration activities applicable to the financial reporting process and tested controls, where relevant. 128 Medibank Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2021, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Operating and Financial Review and the Directors' Report. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. Annual Report 2021 129 Independent auditor’s report A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 50 to 74 of the directors’ report for the year ended 30 June 2021. In our opinion, the remuneration report of Medibank Private Limited for the year ended 30 June 2021 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers CJ Heath Partner Melbourne 25 August 2021 130 Medibank Shareholder information The shareholder information below is current as at 25 August 2021. Distribution of equity securities Size of shareholding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 & over Total Unmarketable parcels Number of shareholders 44,044 140,796 14,750 6,919 192 206,701 Number of shares 39,603,488 396,285,686 101,734,221 147,081,574 2,069,298,271 2,754,003,240 There were 874 holdings of less than a marketable parcel ($500) of shares (142 shares based on a market price of $3.53 per share) and such holders held a total of 23,944 shares. 20 largest shareholdings Number of shares % of issued capital CITICORP NOMINEES PTY LIMITED 1 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 2 3 CITICORP NOMINEES PTY LIMITED 4 NATIONAL NOMINEES LIMITED 5 BNP PARIBAS NOMINEES PTY LTD 6 BNP PARIBAS NOMS PTY LTD 7 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 8 BNP PARIBAS NOMINEES PTY LTD SIX SIS LTD 9 10 NETWEALTH INVESTMENTS LIMITED 11 THE SENIOR MASTER OF THE SUPREME COURT 12 NAVIGATOR AUSTRALIA LTD 13 AUSTRALIAN EXECUTOR TRUSTEES LIMITED 14 BNP PARIBAS NOMINEES PTY LTD ACF CLEARSTREAM 15 BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD 16 NETWEALTH INVESTMENTS LIMITED 17 BNP PARIBAS NOMS PTY LTD 18 NATIONAL NOMINEES LIMITED 19 NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> 20 AMP LIFE LIMITED Total 844,196,960 515,398,135 269,831,924 144,394,624 64,160,779 52,703,501 23,213,664 20,179,643 13,969,892 6,541,236 6,500,000 6,150,413 6,054,833 5,412,538 5,267,074 3,609,344 3,433,369 3,413,056 3,322,276 3,013,952 2,000,767,213 30.65 18.71 9.80 5.24 2.33 1.91 0.84 0.73 0.51 0.24 0.24 0.22 0.22 0.20 0.19 0.13 0.12 0.12 0.12 0.11 72.65 Annual Report 2021 131 Shareholder information Substantial shareholders As at 25 August 2021, the following holders had provided a substantial shareholding notice: Number of shares % of issued capital 224,049,642 165,843,215 8.13 6.02 Name of holder BlackRock Group The Vanguard Group Voting rights At a general meeting of the Company, every shareholder present (including virtually present) or by proxy, attorney or representative has one vote on a show of hands and, on a poll, one vote for each share held. On-market purchases of shares During the financial year ended 30 June 2021, 2,017,497 Medibank ordinary shares were purchased on market at an average price of $2.76 for the purposes of Medibank’s employee incentive schemes. On-market share buy-back There is no current on-market share buy-back. 132 Medibank Contents About Medibank 2021 highlights Chairman’s message CEO’s message Our strategy Creating value for our stakeholders Better for customers Better for health Better for people and communities Our sustainability highlights Operating and financial review Directors Executive leadership team Corporate governance statement Directors’ report Remuneration report Financial report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Auditor’s independence declaration Independent auditor’s report Shareholder information Financial calendar Corporate directory 1 2 4 5 6 7 8 12 16 20 22 30 33 35 47 50 75 76 77 78 79 80 121 122 123 131 133 133 Financial calendar Key dates Full year results announcement 25 August 2021 Ex-dividend share trading commences 8 September 2021 Record date for final dividend 9 September 2021 Payment date for final dividend 30 September 2021 Annual general meeting 18 November 2021 Half year results announcement February 2022 Payment date for interim dividend March 2022 The above dates and payments are subject to confirmation. Any change will be notified to the Australian Securities Exchange (ASX). Corporate directory Company Share registry Medibank Private Limited Registered Office 720 Bourke Street Docklands Vic 3008 GPO Box 9999 Melbourne VIC 3001 Telephone: 132 331 (within Australia) +61 3 8622 5780 (outside Australia) medibank.com.au Computershare Investor Services Pty Limited GPO Box 2975 Melbourne VIC 3001 Telephone: 1800 998 778 (within Australia) +61 3 9415 4011 (outside Australia) computershare.com.au Annual Report 2021 133 no overlap of red spine allowed for fold crease spine set up as 7 mm Annual Report 2021 Better health for better lives Medibank Private Limited ABN 47 080 890 259 

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