AUSTRALIA Price Valuation A$ 2.89 Event 12-month target A$ month TSR % +8.9 Impact Volatility Index Low/Medium GICS sector Insurance

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1 AUSTRALIA MPL AU Price (at 05:10, 18 Mar 2016 GMT) Outperform A$2.74 Valuation A$ DCF (WACC 8.3%, beta 0.9, ERP 5., RFR 3.8%, TGR 3.) 12-month target A$ month TSR % +8.9 Volatility Index Low/Medium GICS sector Insurance Market cap A$m 7, day avg turnover A$m 39.4 Number shares on issue m 2,754 Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E NEP m Underwriting Result m Investment Income m Reported profit m Net Op Income m EPS adj PER adj x PER rel x DPS Dividend yield % Franking % Total SH Funds m 1, , , ,728.8 BV/S ROE % ROA % P/BV x MPL AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2016 (all figures in AUD unless noted) 21 March 2016 Macquarie Securities (Australia) Limited MPL self help pays off Event Claims review and self help payoff from improved operational performance. Impact MPL s claims growth moderation has improved gross margin and profitability in 1H16. The sector ex MPL has not seen the same positive trends. Claims Growth per policyholder (see Fig. 1): MPL +0.8% in 1H16 vs +4.4% FY13-FY15 & Sector ex MPL +5.7% 1H16 vs +5.7% FY13-FY15. Gross Margin (see Fig. 2): MPL 17.2% in 1H16 vs 13.7% average FY13- FY15 & Sector ex MPL 11.8% in 1H16 vs 12.6% FY13-FY15. MPL s outperformance vs the sector contrasts with BUPA s comments: "Looking forward, [BUPA] anticipate market conditions will remain challenging, particularly in Australia... [with] continued margin pressure in health insurance market, driven by cost of care and intensifying competition". We attribute the moderation in MPL s claims growth to a combination of: 1) increased health fund analytics re product entitlements (incl. fraud detection); 2) increased exclusions; 3) improved hospital contracting; and 4) switching of adverse risks away from MPL (note the Calvary Health Care [11 hospitals in SA, ACT, Wagga & TAS] contract dispute with MPL contributed, as BUPA holds the following market share ~38% Tas, ~53% SA and ~21% ACT). One of the criticisms of the PHI sector is the lack of incentive to invest in claims mitigation given the risk equalisation system shares the benefits across all other health funds. Premiums are community rated, with insurers not able to price for individual risk factors or refuse cover, necessitating a risk equalisation scheme across all funds. We show in this note that larger funds (MPL & BUPA) retain ~69% of savings they achieve despite risk equalisation. This provides the larger funds with greater pay off from self help initiatives. MPL is making the most of this. Earnings and target price revision No change to EPS or Target Price. Note that we upgraded EPS by FY %, FY , FY % on 2 March We upgraded to Outperform [from Neutral] on 17 March Sensitivity to further change in claims growth: +/-100bps change in claims growth with premium growth unchanged equates to EPS changes of +/-1. Price catalyst 12-month price target: A$2.88 based on a DCF methodology. Catalyst: Claims growth trends, Federal budget released in 3 May Action and recommendation Outperform as: 1) the risk to FY16 earnings are skewed to the upside (MRE forecasts for MPL are ~6% above consensus) as claims growth risk remains to the downside; and 2) regulatory risk is moderating as the time to the 2016 budget and Federal election is shortening. Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Macquarie Wealth Management Overview of trends for hospital and ancillary claims Fig 1 Medibank drove the industry wide decline in claims growth (note that we have not split out the nib Health Fund who also saw claims growth below industry at +2. per policyholder [including the benefit from risk equalisation driven by lower MPL claims growth]) Claims Growth 8% 1H16 FY % 6% 5.7% 5.3% 5.7% 5% 4.3% 4.4% 4% 3% 2% 1% 0.8% Market MPL Market Ex. MPL Market MPL Market Ex. MPL Source: Company data, APRA, PHIAC, Macquarie Research, March 16 Fig 2 Medibank drove the industry wide improvement in Gross Margins (note that we have not split out the nib Health Fund who also saw gross margin improvement +110bps versus the average FY13-15 [including the benefit to risk equalisation driven by lower MPL claims growth]) Gross Margin 24% 1H16 FY % 16% 12% 13.3% 11.8% 12.9% 13.7% 12.6% 8% 4% Market MPL Market Ex. MPL Market MPL Market Ex. MPL Source: Company data, APRA, PHIAC, Macquarie Research, March 16 Fig 3 Sector Hospital & Ancillary claims continued to contract through December 2015 driven by MPL and nib claims performance PHI Benefits growth (rolling 12m) 14% 12% 1 8% 6% 4% 2% Hospital - 12m Ancillary - 12m Source: APRA, PHIAC, Macquarie Research, March March

3 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Macquarie Wealth Management Fig 4 Moderating utilisation, reduced penetration and lower benefits per episode are all contributing to a moderation in hospital benefits growth... Growth in Hospital Benefits (ann. ave) 14% 12% 1 8% 6% 4% 2% -2% Volume (population growth) Volume (penetration) Inflation (benefits per episode) Utilisation (episodes per insured person) Other Total Source: APRA, PHIAC, Macquarie Research, March 16 Fig 5 Under 65 year old policyholders are driving the moderation in growth of claims from policyholders (with a smaller decline in 65-79yr old benefits growth) this suggests that the change is somewhat supply induced. Also note the positive trend following the previous low in Dec Growth in Hospital Benefits (ann. ave) 14% 12% 1 8% 6% 4% 2% y.o. 30's and 40's Under 30's Total Source: APRA, PHIAC, Macquarie Research, March 16 Fig 6 Moderating growth in utilisation, reduced PHI contribution and penetration continues to drive lower in ancillary claims in December 2015 Ancillary benefits growth % % % % -5. Ancillary benefits growth % % % % -5. Population growth Utilisation Change in PHI contribution to ancillary fee Ancillary benefit growth Penetration of Ancillary cover Service Fee inflation Other Source: APRA, PHIAC, Macquarie Research, March March

4 Payoff from a focus on claims growth MPL is well placed as the leading private health insurer to improve claims outcomes. Relative to smaller health insurers, MPL has greater incentives to save hospital claims costs under the current risk equalisation regime, retaining almost half of any industry savings generated for over 65 year olds. This compares to smaller funds, which retain around one third of savings in this demographic (refer to the charts following). Rising claims cost for over 65 year olds represents the largest opportunity to reduce claims costs. MPL would retain ~48% of the benefits from any claims cost reduction among this age cohort. This is well in excess of competitors with smaller market share. Fig 7 Medibank retention of total claims costs under current retrospective risk equalisation by age category and large claim pool Age % of Hospital claims Risk Eqalisation Non-Risk Equalisation component Risk Equalisation component Total % % 89.2% % % 69.1% % % 56.9% % % 49.7% % % 45.4% % % 43.9% % Weighted average - all policyholders 57.4% % Weighted average - over 65s % 48.2% Source: Macquarie Analysis of APRA and PHIAC data, March Fig 8 Retention of total hospital claims costs under current retrospective risk equalisation Benefit - All policyholders % % % 60.2% % 2.8% 2.6% % 57.4% 57.4% 57.4% 57.4% 2 1 MPL BUPA HCF nib HBF Claims Costs (Non-Risk Equalisation component) Claims Costs (Risk Equalisation component) Source: Macquarie Analysis of APRA and PHIAC data, March March

5 Fig 9 Retention of over 65 yr olds hospital claims costs under current retrospective risk equalisation Benefit - Over 65s % 47.6% % 19.7% 37.1% 32.7% 32.4% 3 9.1% 4.7% 4.5% MPL BUPA HCF nib HBF Claims Costs (Non-Risk Equalisation component) Claims Costs (Risk Equalisation component) Source: Macquarie Analysis of APRA and PHIAC data, March March

6 Price: $ 2.74 Balance Date: June 30 Private Health Insurance 1H15A 2H15A 1H16A 2H16E FY14A FY15A FY16E FY17E FY18E Premium revenue 2, , , , , , , , ,840.4 Claims -2, , , , , , , , ,819.7 Gross Margin , , ,020.7 Management Expenses Operating Profit Complementary Services 1H15A 2H15A 1H16A 2H16E FY14A FY15A FY16E FY17E FY18E Revenue Cost of Sales Gross Profit Management Expenses Operating Profit Group 1H15A 2H15A 1H16A 2H16E FY14A FY15A FY16E FY17E FY18E Health Insurance premium revenue 2, , , , , , , , ,840.4 Other revenue (Complementary services) Total Revenue 3, , , , , , , , ,442.6 Net Claims -2, , , , , , , , ,819.7 Cost of Sales (Complementary services) Gross Profit , , ,132.9 Health Insurance Management Expenses Complementary services Management Expenses Segment Operating Profit Corporate Overheads Operating Profit Net Investment income Other income/expense Profit before tax Tax expense Pro-forma Net Profit After Tax Balance Sheet 1H15A 2H15A 1H16A 2H16E FY14A FY15A FY16E FY17E FY18E Cash and Equiv Financial Assets 1,426 1,972 1,702 1,588 1,491 1,972 1,588 1,669 1,755 Receivables DAC PPE Intangible assets Other Total Assets 2,645 3,141 2,924 3,015 2,974 3,141 3,015 3,135 3,264 Payables Claims Liabilities UEP Other Total Liabilities 1,346 1,699 1,399 1,451 1,580 1,699 1,451 1,472 1,535 Net Assets 1,299 1,442 1,526 1,564 1,394 1,442 1,564 1,663 1,729 Key ratios 1H15A 2H15A 1H16A 2H16E FY14A FY15A FY16E FY17E FY18E Private Health Insurance: Net Policyholder growth 0.5% 1.3% -2.5% 0.3% 1.5% 0.9% -1.1% 0.6% 0.7% PSEU growth 0.7% 0.7% -0.2% -0.7% % -0.7% 1.3% 1.3% Premium growth 5.2% 4.9% 4.6% 4.6% 5.7% 5.1% 4.6% 4.8% 5.1% Gross Margin 13.9% 14.5% 17.2% 16.2% 13.5% 14.2% 16.7% 15.9% 14.9% MER % 8.4% 8.5% % 8.4% 8.3% 8. Net Margin 5.9% 5.2% 8.8% 7.7% 4.5% 5.5% 8.3% 7.6% 6.9% Complementary Services: Revenue growth -10.1% -11.4% -9.3% % -10.7% -7.2% -0.3% 1.5% Revenue growth - ex Immigration contract % -8.4% % -1.6% -6.8% -0.3% 1.5% Gross Profit Margin 20.5% 20.5% 18.6% 18.6% 25.7% 20.5% 18.6% 18.6% 18.6% Operating Profit Margin 2.2% 2.3% 3.1% 3.2% 4.7% 2.2% 3.1% 2.9% 2.9% Operating Profit Margin - ex immigration contract % 3.1% 3.2% 1.8% 2.1% 3.1% 2.9% 2.9% Group: EPS DPS EPS growth 50.3% 29.3% % 40.2% -8.9% -4.5% PER (x) Dividend Yield % 3.6% 4.1% % 3.9% 3.6% 3.4% Franking n/a n/a ROE 23.4% 20.5% 30.7% 23.5% 15.9% 19.7% 27.2% 23.1% 21. Revenue growth 3.4% 3.1% 3.2% 3.7% 8.8% 3.3% 3.5% 4.3% 4.8% Revenue growth ex Immigration 4.7% 4.1% 3.3% 3.7% % 3.5% 4.3% 4.8% Gross Profit Margin 14.5% 15.1% 17.3% 16.4% 14.9% 14.8% 16.9% 16.2% 15.2% Operating Profit Margin 5.2% 4.5% 7.9% 6.9% % 7.4% 6.8% 6.2% Operating Profit Margin - ex immigration contract 5.2% 4.5% 7.9% 6.9% 3.7% 4.9% 7.4% 6.8% 6.2% NPAT growth 10.8% 15.2% 50.3% 29.3% % 40.2% -8.9% -4.5% Underlying NPAT growth 20.3% 26.4% 50.9% 29.4% 2.4% 26.1% 38.3% -8.9% -4.5% Valuation Valuation as at today 7,616 Capital return 5.3% PER at Current share price (1yr fwd) Valuation in 12m time 7,948 Dividend Yield 3.9% PER at Price Target (2yr fwd) Number of shares 2,754 Share price target (12m) 2.88 Total Return 9.2% Dividend Yield at Price Target (2yr fwd) 3.3% Source: Company Data, Macquarie Research, March March

7 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a strong positive view on Medibank Private. The strongest style exposure is Earnings Momentum, indicating this stock has received earnings upgrades and is well liked by sell side analysts. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 33/247 Global rank in Insurance % of BUY recommendations 27% (4/15) Number of Price Target downgrades 3 Number of Price Target upgrades 9 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Insurance) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 1.2 NIB Holdings 0.8 NIB Holdings Japara Healthcare 0.7 Japara Healthcare Ramsay Health Care 0.4 Ramsay Health Care Regis Healthcare 0.0 Regis Healthcare Insurance Australia Group -0.3 Insurance Australia Group Healthscope -1.0 Healthscope Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. NIB Holdings Japara Healthcare Ramsay Health Care Regis Healthcare Insurance Australia Group Healthscope NIB Holdings Japara Healthcare Ramsay Health Care Regis Healthcare Insurance Australia Group Healthscope Dividend Return Multiple Return Earnings Outlook 1Yr Total Return How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/247) Percentile relative to market(/393) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 21 March

8 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie South Africa Outperform expected return >+1 Neutral expected return from -1 to +1 Underperform expected return <-1 Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 6 in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 4 in a year. Low medium stock should be expected to move up or down at least 25 3 in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2015 AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% % 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients) Neutral 31.51% 24.66% 34.18% % 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients) Underperform 17.81% % 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients) MPL AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March month target price methodology MPL AU: A$2.88 based on a DCF methodology Company-specific disclosures: MPL AU: MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 24 months, for which it received compensation. MACQUARIE EQUITIES NEW ZEALAND LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 24 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 24 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 02-Mar-2016 MPL AU Neutral A$ Feb-2016 MPL AU Neutral A$ Jan-2016 MPL AU Neutral A$ Sep-2015 MPL AU Outperform A$ Aug-2015 MPL AU Outperform A$ May-2015 MPL AU Outperform A$ Feb-2015 MPL AU Outperform A$ Jan-2015 MPL AU Outperform A$2.62 Target price risk disclosures: MPL AU: The PHI sector in Australia is highly regulated. MPL does not control the enactment or content of new legislation and regulations. Product design and inadequate premium rate approvals may impact the net margin that MPL s PHI products generate. Complementary Services operations are subject to contract execution and renewal risk. IT renewal: MPL is undertaking a major IT project to replace its core policy and CRM systems. Failure to deliver the project as expected could impact performance. Analyst certification: Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. 21 March

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