Insurance Australia Group Limited (IAG) Earnings Call Transcript & Summary

Well, good morning, and thank you for joining us for IAG's results presentation for the year ended 30th of June 2020. Today, we're presenting from the land traditionally owned by the Gadigal people of the Eora Nation, and I'd like to pay my respects to the elders past and present. As usual, joining me today is Nick Hawkins, our Deputy CEO. I'm very pleased to be introducing Michelle McPherson, our acting CFO. No doubt many of you are familiar with Michelle from her time at nib. While we presented to you a fairly detailed P&L a fortnight ago, this morning, we would like to give you a high-level overview of the results upfront, provide some fresh detail on aspects of our performance and address some of the issues that you have asked us about following our previous announcement. And this will include some detail on our divisional performances in Australia and New Zealand, a greater explanation of the COVID-19 impacts in our full year numbers, an expansion on the features driving the prior period reserve strengthening in the second half, an outline of our reinsurance position heading into FY '21 and a dissection of our shareholders' funds investment portfolio. As we said a couple of weeks ago, we think this is a commendable result in the circumstances. Our top line growth was in line with the guidance we gave you at the outset of the year, despite incurring a slight negative effect from COVID in the second half. We also outlined a broadly neutral insurance margin impact from COVID-19, and Nick will dig into the elements here in more detail. We saw a slightly softer second half underlying margin, owing to higher reinsurance costs, lower interest rates continuing to impact investment income and a poor performance from our commercial long-tail classes in Australia. And at a reported margin level, the difference versus preexisting guidance was essentially down to adverse perils, reserving and credit spread effects. The year also saw us successfully exit our investment in India, realizing a post-tax profit of $326 million in the process. Unfortunately, partially offsetting that has been the customer refunds provision, which we set up at the half and have increased for 2 further pricing issues identified in the second 6 months. These issues stem from our review of pricing systems and processes, which is well advanced. As we reported a couple of weeks ago, we are not aware of any other matters requiring remediation of this nature. However, our review is ongoing. The year also included a relatively severe hit to our investment income, particularly at the shareholders' funds line, reflecting the volatile market conditions enveloping us all in the second half. And finally, we are in a strong capital position. And Michelle will address our thinking on the dividend where application of our long-established dividend policy means we have not declared a final dividend for the year. The other week, Nick spoke to our operational response to COVID-19. And this slide gives an indication of the breadth of activities involved. I don't propose to go through it in detail, but we quickly set up a COVID-19 response team to coordinate our response to prioritize the health and well-being of our people, our customers, our business partners as well as the communities in which we operate. We had 98% of our people across Australia and New Zealand working from home at the heart of the pandemic, and I'm particularly proud that customer service levels held steady across the business. This has been a comprehensive response, and it's ongoing. And also I want to impress upon you that we are actively addressing the challenges and opportunities that this current operating environment is creating for our core insurance business. And with that, I'll now hand you over to Nick who will go through the financials in more detail.

Thanks, Pete, and good morning to everybody. As Pete said, we have experienced a tough second half to the financial year. But it's also, from our point of view, been a period where we really have demonstrated the role that we play in the community and the important role that insurance plays. We're really -- and we just talked to our teams about this today, we're really proud of the way we've delivered on our customer service levels over this period and also just the resilience of our business here at IAG in a tough time. This first page I'd normally sort of talk to, but these are the same numbers that we presented a couple of weeks ago. So what I thought I'd do, rather than sort of going back through these, is sort of give a bit more color on certain aspects of our performance. And I'll just start with the 2 big businesses, Australia and New Zealand. So firstly, with Australia where we saw modest premium growth, which did, though, within that, include lower CTP pricing and some agency business exits, was right about $90 million whilst year-on-year is absent. Within that, within the Australian performance, short-tail personal lines has delivered growth of over 3%, which has been predominantly rate-driven growth, although we did see a little bit of volume growth within our Victorian businesses. We've had lower commercial premiums, and that's really been characterized by some volume loss on one side. And that volume loss has largely been offset by some rate that's flown through that portfolio. Encouragingly also, within that commercial class -- within our commercial classes in Australia, we have seen a reduction in that sort of volume loss in the second half. So half-on-half, the amount of business that we've lost has slowed down. And we're sort of pleased with where we're getting to there. The underwriting result for our Australian business has won a small net negative from COVID-19 effects, and I'll come back to that and just give a bit more color. The Australian direct personal lines business continued to remain very strong profitability during the 6- and 12-month period. Although we have within the intermediated personal lines business in Australia some challenges. The Australian commercial portfolios continues to have some challenges around profitability, particularly in our agri and rural books, and we've talked about that before, as well as more recently in some of our long-tail classes within our commercial portfolios, really driven by some of the changes of the economic conditions of Australia. And we are applying pricing to all of our underperforming portfolios within our commercial book. The drop in the reported margin in the second half really reflects the combination that we're seeing here in Australia around higher perils events, some additional long-tail reserving that we talked to a couple of weeks ago as well as some adverse credit effects -- credit spread effects, sorry. The combination of those 3 have driven that outcome. And sort of the story here really is the direct personal lines business continues to perform soundly within the Australian business, and we know we've got some work to do around our commercial portfolios. New Zealand is a good story for IAG and continues to deliver strong results. If you're looking into that, the premium story is the premium growth has tapered off a little bit, although that did include a roughly $20 million impact in the second half really -- from lower new business volumes, and that's a theme across our company, with lower new business volumes in the lockdown periods really driven from the COVID-19 effects. If I look at the year as a whole, though, for New Zealand, we've had strong business growth within the NZI portfolio there of over 5% that's been delivered for the year. And that's really from a combination of both volume and pricing that's flowing through that portfolio and that pricing, particularly in the property and the liability classes of NZI. Our consumer part of our New Zealand business has had overall premiums relatively flat, although we have seen a little bit of growth within the AMI brand from a mixture of both rate and volume. If we're looking at the underlying margins for New Zealand on this page, you can see a very strong result. And that's -- really, that underlying margin has been assisted by a small net positive from COVID-19 effects. The reported margin year-on-year is down a little bit, and that's really driven by perils. So we had -- I mean we had some terrible perils on the East Coast of Australia. But let's not forget, within New Zealand, we also had a very significant hailstorm just south of Canterbury in November, and that's impacted the perils number for New Zealand. So reported numbers year-on-year are down a little bit. But overall, we're really pleased with the result from our New Zealand business. If I just look at premiums in total across IAG, and that's what this slide is presenting. Overall, our growth in FY '20 was in line with what we sort of said at the beginning of the year and the guidance that we provided of that low single digit. Within that, we think there's an estimated adverse impact of around $80 million from COVID-19 in our top line premium and that's really been driven by the lower new business volumes that we saw particularly in the months of April and May when we had Australia and New Zealand predominantly in lockdown. We're happy to see, though, that new business levels have sort of gone back to more normal over the last couple of months across most of our portfolios and regions. And our retention levels, pleasingly, across our entire portfolio, have held up during this period. The COVID-19 impacts, though, was roughly 1% impact on growth in the second half. Just some thoughts and comments on pricing and what we're seeing today and what we have been seeing. What we're seeing is some rate increases have been broadly matching underlying claims inflation within our short-tail personal lines portfolios across our portfolios; that we are seeing ongoing rate growth in our New Zealand commercial lines portfolios, although that rate -- the speed of rate increases is slowing down, really driven by the level of profitability that we have within that book in New Zealand; we are seeing continued rate increases within our Australian commercial lines and, of course, that varies depending on the segment that we're talking to within those portfolios; and we are still putting price increases through to counter cost and investment income pressures that we're seeing and to address any of our underperforming portfolios; at the same time, of course, we continue to support any of our vulnerable customers in that story. On the underwriting result of the company and impact of COVID-19, I thought I'd just sort of step through the main elements that are here. So firstly, we have -- and we talked about this a couple of weeks ago, we have had a net claims benefit flow through the group's P&L of around $150 million. And the main driver here has been the drop in motor vehicle frequency driven by the lockdowns that we saw within the months, particularly of April and May. As we had talked about the other day, motor claims volumes have rebounded up, as in we're getting more claims coming in now, as lockdown conditions have eased across the different geographies that we operate. But clearly, Victoria will be an exception to this now as they've gone back into lockdown. Offsetting that motor vehicle frequency, and within the net $150 million, has been some negative impacts from landlords' insurance, particularly here in Australia, from travel insurance where we've got a relatively small portfolio, and we do have some very small amount of business interruption exposure in New Zealand. But the package of that has been a net positive in the P&L of around about $150 million. Offsetting that benefit has been -- there's been 2 things. Firstly, $100 million -- or just over $100 million provision that we put in place to cover potential COVID-19 claims impacts, and we talked about this. This provision that we've put in place is in line with accounting requirements and takes a top-down view across our entire portfolio around potential adverse conditions driven by COVID-19. On this subject, and -- sorry, an element of that provision does relate to potential exposure under business interruption insurance. Just on that topic of business interruption. We are confident that the policy wordings we have across our portfolios for business interruption exclude exposure under a pandemic situation, which is a situation that we have. There are 2 issues that are within this that are industry issues. The firstly is around some of the wording that references an old act, being the Quarantine Act. The second issue is the application of the prevention of access extensions that are contained within those policies. You will have seen that the ICA has announced a test case on the Quarantine Act issue. And we do anticipate one or more test cases will be initiated on the other matters in the coming weeks. And we expect a decision on these to occur later in this calendar year. In addition to the provision of around $100 million, we've also allowed for a further $160 million when calculating our regulatory capital position. You'll see that in the pack around capital. And what that $160 million reflects, the estimated future cash flows that may attach to the unearned premium, and that is not reflected in our balance sheet today, but it's based on the same methodology as the $100 million. The second part of that COVID-19 negative impact of about $150 million. On one side, $100 million negative on the provision. In addition to that, there's an additional $50 million of costs that we've incurred in the second half driven by COVID-19. A portion of that $50 million can be, though, considered one-off. In particular, you'll see there's about a $20 million net cost within the New Zealand business from the closure of our AMI branch network within New Zealand. We believe there's a degree of conservatism in our accounting for COVID-19 impacts that were put in place. But we feel that's appropriate to approach it this way in this uncertain environment. On reserving, and we spoke to prior period reserving before, and I thought I'd just provide a bit more color here. The reserving decisions that we have taken at year-end were in response to a range of factors. We have seen some stronger claims development than we originally expected. And so this is all in the Australian long-tail classes. We are seeing an increasing number of larger claims. And we have taken a view, a degree of conservatism across the portfolio when thinking about potential economic conditions going forward. The reserve strengthenings that were put in place affects all of our major commercial long-tail classes in Australia to varying degrees. Against that, though, we have had CTP releases, have provided some -- have provided an offset within the net number. But these are down on prior years, owing to the increased impact of scheme reform that we've had from here in New South Wales and are likely to be lower going forward. On 24th of July, we did provide guidance to around negligible level of prior period reserve movements in FY '21. And it makes sense, in our view, to remove any allowance for reoccurring reserve releases in our underlying margin definitions going forward. Looking at perils and what's happening there. The level of attritional claims that we experienced in the final quarter was definitely higher than we originally anticipated, and that's what's driven the $50 million overrun from our revised allowance from $850 million up to $900 million, which is a number we've delivered today. The last year, as we all know, has been a period of extreme perils activity, but it's also been one in which we've seen the strength of our reinsurance program has been truly demonstrated. Overall reinsurance recoveries in the year, in addition to what we have won, the net $900 million, we've recovered an additional $700 million, and that's before any quota share considerations as well. You'll see we have disclosed a higher natural perils allowance for FY '21 of $658 million, so that's above our FY '20 allowance. However, this is lower than we indicated earlier in the year, but that's really a reflection of the strength of the reinsurance position we're in for the FY '21 year. So I thought I'd just touch briefly on where our reinsurance protection currently sits. So as we indicated before, we have strengthened our reinsurance protection over the course of the year. And then you can see there's more color in this slide than there was this time last year. The latest step is -- what we've done is we have transitioned our aggregate cover to a financial year basis -- or we're in the year of transitioning this to a financial year basis to avoid some of the peak catastrophe activity that we see over the Australian summer that can disrupt that process a little bit. We're also aligning that aggregate cover, and this is a year of transition, to be on a financial year than a calendar. And I think that probably makes things a bit easier as well. We've also purchased some further stop-loss protection that sits above that perils allowance, but it's at a higher attachment point with a gap of $84 million. So we have our perils allowance, we have a gap of $84 million and then we have a stop-loss that sits on top of that. And we had that in the past where we haven't exactly had it sitting on top of that perils allowance. And collectively, we have a strong reinsurance position as we enter FY '21. We have $290 million of gross protection available under the 2020 aggregate cover and an MER of $41 million post quota shares, and we have some additional aggregate cover in place as well. Just on reinsurance costs, and I may have briefly mentioned this before. We have had an increase in nonquota share reinsurance costs of approximately $30 million that are in the second half P&L of FY '20. Some of that does stem from the 2020 calendar cat renewal process. So we did pay a little bit more for that and we bought -- we paid a little bit more and we bought a little bit more cover as part of that. And then the balance of that $30 million reflects the purchase of some additional replacement covers, including a second event drop-down, which was taken out post the February East Coast low event that we incurred. I think it's really important here to sort of say, as we consistently demonstrate, we pursue reinsurance initiatives that strengthen our capital position in what we believe is a cost-effective manner, and we'll continue to look for ways to do that going forward. I'll now hand you over to Michelle who's going to talk about investments, capital and dividends. Michelle?

Thank you, Nick. Good morning, everyone. As you'd be well aware, we have seen some fairly severe investment income impacts this year. So I thought it worthwhile addressing the current composition of our respective investment portfolios. Our technical reserves continue to be wholly invested in fixed interest and cash at a duration that matches our insurance liabilities, approximately 2 years. This remains a high-quality book which continues to deliver a strong relative return but one where we expect further reduction in the running yield in FY '21, reflecting the fall in interest rates. Our shareholders' funds portfolio has undergone some compositional change this year with a much reduced growth assets weighting of around 25% at year-end. This reflects the combination of 3 things: mark-to-market valuation effects, some active reallocation to fixed interest and cash categories and the deliberate placement of the around $600 million proceeds from the sale of our interest in SBI General into fixed interest and cash. It is our present intention to retain a growth assets weighting of around 30% as opposed to the 40% to 50% weighting traditionally applied given the uncertain investment market conditions that are still prevailing. The indicated 30% weighting also allows for the shift of the IAG and NRMA superfund assets to an external manager later this calendar year. If we excluded this largely fixed interest pool of money from the 30 June position, it would reveal a growth assets weighting of around 28%. Finally, to the alternatives element of our portfolio, which presently stands at about $740 million or 17% of shareholders' funds. This is part of a diversified investment approach and contains a range of components, which were split out on this chart for you and which have delivered satisfactory returns over an extended period of time, notwithstanding the poor performance in this latest half. Alternatives do also include over $60 million in respect of our residual stake in Bohai in China and the various investments made by our Firemark Ventures Fund. Overall, we are satisfied with the present composition of our investment portfolios, which obviously remains subject to ongoing review. Moving to capital. Our closing CET1 ratio of 1.23x is comfortably above our target range of 0.9 to 1.1. And we do believe it's appropriate to retain a capital position above benchmark at this point in time given the uncertain economic environment. This is also at a time when prudential regulators on both sides of the Tasman are encouraging a conservative approach to capital preservation and are placing some restrictions on dividend flows. As reflected on this slide, there are some significant movements within our CET1 waterfall since 31 December, most notably, from the sale of SBI General and from a reduced growth asset exposure, which largely reflects market valuation movements. We have had, during the period, further use of New Zealand tax losses, but this has been countered by the deferred tax assets recognized in respect of the increased customer refund provision and the COVID-19 provision for claims. We have also separately identified on this chart all of the COVID-19 effects, which collectively have lowered our capital position at year-end by around 5 basis points. As Nick highlighted earlier, this does include around $160 million for potential COVID-19-related claims within premium liabilities, which accounts for much of the reduction in excess technical provisions. Overall, we are very comfortable with our capital position. As we indicated a couple of weeks ago, we have not declared a final dividend for the year. This simply reflects adherence to our long-standing dividend policy of distributing between 60% and 80% of cash earnings on a full year basis. This policy has served us well, adjusting for genuinely one-off items and adding back noncash amortization on acquired intangibles. It provides a disciplined approach that ensures that dividends are not paid out of capital. Application of the top end of our policy range produces a payout of roughly $0.10 per share, which is exactly what was paid out at the interim. And one final dividend related matter is our future franking capacity. The absence of taxable earnings in Australia in FY '20 means that an already reduced franking capacity will be further challenged over the short term. In calendar year 2021, we anticipate a rather lower level of franking on any dividends declared compared to the 70% applied to this year's interim payout. We do expect this to be a temporary state of affairs as Australian earnings recover from the adverse perils, reserve strengthening and investment income effects of FY '20. With that, I'm pleased to hand you back to Peter.

Thanks, Michelle. By way of a close, I just want to reiterate the comments we made a couple of weeks ago about guidance for the year ahead. Given the unprecedented uncertainty that COVID-19 and its economic repercussions are creating, we have determined not to provide our traditional guidance measures for FY '21. At suitable junctures, we will provide appropriate updates on how the company is traveling performance-wise. Despite this uncertainty, we do face the future with the confidence that we have a resilient business, which is in strong financial shape and which is well equipped to rise to the challenges presented by this current environment. So with that, Nick, Michelle and I will be happy to take any questions that you have.

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

Just very quick ones for me please. The first one, has there been any pressure to refund most of the customers [ with a letter driving ] like some of your peers? Any direction on that will be helpful.

Andrew, it's Peter. No, there's been no pressure. I mean I think, as you know, we have substantial customer care measures both sides of the Tasman. And our responses have been very tailored, targeted towards the individual customers and the needs that they have.

That makes sense. Second question is around the range you're in. Thanks very much, Nick, for giving us the extra color on the $30 million in the second half. But my question is around given the aggregates are jumping around a little bit, how should we be thinking about that [ expense ] ratio into FY '21?

Andrew, it's Nick. I mean probably -- I mean so is your question sort of the reinsurance expense of IAG going forward? I mean, yes, we had some additional costs, as we talked about, in second half '20. Probably by the time I look at the additional cost of the renewals, the covers we've got in place, that second half '20 is not a bad indication of the current run rate of reinsurance cost in our company for different reasons, really. Not because of the backup and other things we bought, but because of the way we've renewed at 1 July and sort of our expectations probably of 1 January 2021. So it's probably not a bad guide for you.

Excellent. That's very helpful. And just the last one for me, please. Your expense ratio has been bouncing around a little bit for obvious reasons. You're now through the back end of your cost-out program. How should we be thinking about the expense ratio in FY '21?

Yes, Andrew, it's Nick. I mean we -- I mean there's probably -- we sort of gave everyone a fair bit of color on the first half. In the second half, we have had around about $50 million of additional costs that have gone into that. I think what we said is at least half of that in the second half is kind of one-off. So if you sort of adjust back for that, that sort of gives you guidance on where we're heading on the expense ratio going forward.

So our next question comes from Matt Dunger with BofA Securities.

Yes, so I mean I wondered if I could ask on the repricing to counter the cost and investment income pressures that you've noted. Where do you push pricing in the book? And at what level of volume growth [ will -- possibly ] will increase that?

This is Nick, I'll just make a few comments here, Matt. I mean it's -- that's -- it's a big question across a lot of different portfolios of IAG. I mean maybe I'll just sort of just quickly summarize, I think, rather than sort of a macro comment because I think it's hard, across the $12 billion, to generalize. Our sense is New Zealand in personal lines, there's a little bit of price -- if I talk about what's been happening, there's a little bit of pricing that has occurred, and we're getting that sort of pricing volume trade. But profitability is pretty good. I indicated that within New Zealand commercial, we've been growing both price and volume there. Our sense is that in the second half, that repricing of the NZI commercial book has come down a little bit, as in not negative, but the amount of increase is slowing down. And I feel like that -- we've got that mix about right in New Zealand is our sense. Within Australia, we have been able to -- you'll see that there's a couple of percent pricing that's flown through in the last 6 to 12 months on motor, sort of double that in home and volumes have been relatively stable. I think commercial Australia is the one where we've sort of had volume losses of around 5% or 6%, if I adjust out the sort of the agencies that we've sold and we've had pricing of a similar order go through that portfolio. I mean the comment we've made is in the second half, we've been able to put pricing through the way I described. Our volume losses are definitely coming back, as in getting closer to 0, sort of halved in the second half. So that's sort of that story. So this is -- I don't think there's an IAG macro story here. If I just talk about what's happening across those different portfolios, that's kind of the flavor across the different parts.

Okay. It sounds like the volume losses in commercial you're expecting to moderate. If we're seeing 5.5% pricing across commercial lines of inflation, like decreases in personal lines, does that imply that we should look for 3% to 4% top line growth?

We're not -- I mean you can tell that we're not providing guidance for next year. And so what we're really trying to do is say this is what's happening now as a way of helping you understand the run rate of IAG. And I've kind of had a go at sort of describing what's happening now, and you can sort of see that that's what's currently baked into what's happening at IAG right now.

Okay. And if I could just ask a question on the excess capital. Above the top of the target, and you've already built in some provisions for COVID, what's the timing for addressing the capital above the top end of the target range?

I mean I think the logic at the moment is we're going to sit tight. We've got uncertain economic conditions. We think it makes sense to sit with our current capital, and we acknowledge that's sort of above our targets. And as to your point, that, that has what we believe is some conservatism in the first place around us trying to sort of look forward and bring that into the balance sheet at 30th of June. But our approach is definitely going to be conservative until we have sort of a bit more clarity on what the future looks like. So it doesn't feel like that's on the agenda at the moment if your question is around some sort of distribution to shareholders.

Nigel Pittaway from Citi.

Just first of all, I like to delve into the commercial lines, if I could, a little bit more. I mean you're saying then, Nick, you're still getting price rises, but we have heard of some companies sort of being more willing to renew on existing terms. And obviously, with the pressure that's likely to come into the SME space, can you talk a little bit more as to how sustainable you think those price rises are likely to be. And you've mentioned you need to do some work on that portfolio. Just how easy is that going to be given the likely economic conditions?

Nigel, I mean, that's a good summary, really. That -- if I just say what's been happening, we -- and as you know, we sort of generalize even commercial. That's not quite right, as you point out. Within that, there are many classes of business where we definitely have some challenges. And I think this is not an IAG issue, this is an industry issue around some of those long-tail classes where we are expecting some pressure on loss ratios driven by the sort of the economic conditions. So we know that there's been some pricing there. We know that we have some -- and we have been doing this, some challenges around our agri and rural portfolios. And that there is -- that they are not meeting the sort of the return requirements and that we are -- there's a trade there between price and volume. I think your comment on SME and some of the challenges that SME is having and the impact of pricing around that, I mean, that's what we're going to have to navigate our way through. I'll just say what we have done in the last 6 to 12 months is we have been able to address price through these portfolios. And the total of that has been the sort of 5% to 6% in total that's flowed across that portfolio in the last 12 months.

Nigel, it's Peter. Maybe if I can just add to that. I mean given that the largest area that we need to remediate is in the long-tail portfolios, we're not seeing insurers in the marketplace renew with expiring terms, far from it. We're seeing rate increases still going through somewhere in the high single-digit to low double-digit range, depending upon the actual class itself.

Okay. And then maybe just on the reserving side. I mean, as you went through the presentation, Nick, you did say that you felt you're taking a conservative approach. Can we just maybe delve into that there? I mean given what you've said about the potential change in claims environment, why are you so convinced that you've been conservative? And how conservative do you think you've been?

I mean that's hard, Nigel. That's -- I mean what we've tried to do is factor anything, the scenarios around more challenging unemployment, economic conditions and bring that forward into our current period loss ratios. So that's been the deterioration in the current period as well as factor that into the balance sheet. And then in addition -- so we've sort of done that and we tried to bring forward, and we believe that we've been conservative here, which has been our approach of how we run the balance sheet anyway. In addition to that, we sort of got that COVID-19 overlay, which we've done in addition to our normal reserving process to try to bring forward if there are challenges out there and make sure our balance sheet reflects that today. But I mean, I accept your point, Nigel. I mean we'll find out our -- this has been our view and where our lens has definitely been. If we can see any problems out there, we've tried to bring them in and apply a level of conservatism to what that problem could be in our balance sheet at 30th of June 2020. That's been our approach.

Okay. And then maybe just finally. Obviously, you've got that additional expenses at $20 million for the AMI closure, presumably that's in lieu of certain savings that are likely to flow through from that moving forward. Is there anything you can sort of tell us about that?

I mean, yes, that's in the mix of how we're running our New Zealand business. I will say, though, that we are -- we've seen a big increase in utilized -- both customers utilizing our digital channels in New Zealand. So we definitely are going to be spending more on digital within our New Zealand business as part of that story. But yes, if your question is, yes, is there some sort of financial return for that? Yes, that is. Although, we will be reinvesting that -- a fair chunk of that back into -- accelerating into a digital experience for our customers within our New Zealand business.

So our next question comes from Andrei Stadnik with Morgan Stanley.

I wanted to ask 2 questions. One on the premium liability side and a follow-up on the dividend payouts. In terms of the premium liability, the extra $160 million you flagged, could you explain that a little bit better in terms of how that could flow into next year? I mean is it really just difference in terms of high probability of adequacy or regulatory capital compared to what you take through the P&L? Or are you flagging that there is an extra $160 million of claims to come in FY '21?

Andrei, thanks, mate. I mean what we've done is essentially provide -- I mean it's a pretty high-level assumption that we've booked in the balance sheet and the P&L at June 20. We've applied those same assumptions to the premium liability to impact the regulatory capital. So it's not in the accounting balance sheet, as you highlighted. I mean I'm expecting that in 6 months' time when we do this, that we'll have a whole lot of different information available that would cause us to reflect on what then flows through to the P&L. So I don't think we should just assume that, that number would just go to the P&L first half '21, which I think is your question. That's sort of based upon the assumptions and things we know now. And my sense would be, in 6 months' time, we'll know a lot more, and we'll have to then reflect upon what, if any, provision is appropriate at that point. So I think you can see what we've done here. We just sort of applied the principal to the accounting and then to the prudential capital. I believe we've taken a relatively conservative view on that. I don't think we should think that should naturally flow through the P&L, and we'll have to reflect on that again with information we have in December when we look at sort of positioning the results for the first half '21.

Got you. That's really helpful. And my second question is around the dividend. APRA has just reiterated with insurers to moderate their payout ratios. And it does look that double [ capped ] to your December half year results. So when you think about the 60% to 80% payout ratio, is the full range of that still relevant into next year? Or should -- and then particularly given that over the last few years, IAG has been really at the very top, around 80% of the payout ratio. Or should shareholders be thinking that actually it's somewhere lower, the payout ratio may be not sensible given what APRA has asked you to do?

Yes. Maybe I'll make sort of 2 comments on that. So one, we have stuck to our dividend policy of paying out 60% to 80%. And so therefore, because of that, we didn't want to pay capital out of -- so we didn't want to pay dividends out of capital. We haven't declared a final dividend. And so therefore, we've entered the $0.10 as roughly the -- it fits out in that payout policy. I think then -- so we haven't -- we then haven't -- we're aware of the fact that APRA has given the guidance that you've provided. We -- I think on this topic, we're just going to have to see how things go. I mean APRA is guiding all financial services companies to be conservative. I think the reality here is we need to see how the next sort of 3, 4, 5 months go around that. I mean we haven't changed our dividend policy. Our intention would be to pay 60% to 80% out. Obviously, come February, we'll have to consider into that regulatory views around that and also a level of conservatism within IAG. So I think all of that will need to come into that package. But at this point, we're not -- I think we're not saying anything new at this point. But stating the obvious, we're going to need to have these inputs into our thinking when we come to sort of make some calls around interim dividends in February of next year. I think the concept -- sorry, let me say this one. The concept of how we've set up the financials of our company, returns, 60% to 80% to -- just as a concept, 60% to 80% back to shareholders, the balance reinvested into the company. That concept is one that we like. I think we then need to then say, which is your question, the now, the next 6 to 12 months' issue, I think we need to make sure that -- there will obviously be some additional inputs into that, which is around the now. But the concept of how we -- so the financial framework of our company, we still think that's appropriate.

Our next question Ashley Dalziell with Goldman Sachs.

I just wanted to initially pick up on the expenses discussion and just confirm that of the extra $50 million of COVID-related costs that you've called out, the $30 million related to converting staff to a work-from-home basis. I mean there's sort of 0 element of that $30 million that's likely to recur into '21?

Yes. Sorry, Ashley, I missed -- it's Nick. I missed the last bit of that. So that some of that...

I was just confirming that, that is not going to return any way into '21, that $30-odd million?

I think there might be an element of that within our overall cost base of a couple of billion dollars. We still have everybody working from home. The vast majority of Australia does, sorry. New Zealand, we're about 20% or 30% return to the offices. So we're having some additional costs there. We also have some additional costs, which I think is timing, but they may appear a little bit in first half '21. Around -- some of our offshore partners have had some challenges with their staffing and lockdown in COVID-19. And we've had to put on some additional people in Australia to cover for that. And so there's a bit of strain in that. But I think we get the materiality of this. That might be $10 million or $20 million. And the timing of that may be in first half '21 as we sort of hopefully go back to a more normal environment towards second half '21. So there may be a little flow over in the first half, but I think you got to put that in the context of the materiality of the overall expense base of the company.

Sure. Okay. Just a second question on the lockdown within Victoria. Early days, but are you able to give us any color as to what you're -- what you've been seeing over the past few weeks in terms of top line trends and also motor frequency? And then just as a second part to that question, can you confirm as to whether the COVID provision that you booked, so the $100 million that I'm talking about, is there an assumption within that, that there will be second waves for the remainder of FY '21?

Sure. Just I'll answer the second one. So yes, we have. I mean -- and part of that sort of modeling we did was assumptions around additional sort of lockdowns, Victoria alike. So that was in our thinking. On the first one, I mean, it's a bit early to say, obviously, but the themes are going to be the same, I would expect, that we'll see motor vehicle frequency. And probably the theme around -- I mean we had not returned many of our people to our physical premises in Victoria. So sort of the process of getting everyone home, we're not having -- at scale, we're not having to go through in Victoria because the vast majority of our people were still working from home in Victoria. So that sort of disruption won't play out as it did the first time. And the utilization of offshore partners is not -- is more stable today than it was in sort of March. So there's probably some slightly more positives. But yes, I would expect that, as we sort of indicated, that the main impact would be around frequency, motor vehicle frequency.

Okay. Just a final question, just on the shareholders' funds disclosure. You've sort of spoken to maintaining that more defensive position in the near term. And then from where we stand today, outside of market movements on the portfolio, is there any reason to think that you'll be returning up towards sort of 40-, 50-odd percent growth assets over the next couple of years?

I think it's -- I mean I think next couple of years might be a bit tough to answer. Next 6 months, I mean, unlikely. I think you can see what the financial setting of our company is where we've tried to be conservative with the way we have approached our balance sheet and reserving. And we are also trying to be conservative with our asset allocation and really make sure that we maintain our strong financial position essentially and narrow down those variables. And so I don't -- to make a -- I mean does the concept of 40% to 50% growth assets for our sort of risk appetite make sense for IAG? I think it does. Are we going to have a conservative setting on that for the next period? Yes. I'd say this calendar year, definitely. It's a bit hard to make a 2-year statement at this point, but we're going to try to ensure that where we can, we have a conservative setting on a range of things just to make sure that we're very focused on the financial strength of our franchise.

Our next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can, please. The first just around the increase in perils and reinsurance costs. Nick, what time frame do you -- are you aiming to actually seek to recoup those? Because the increases that you've been pushing through over the last 6 months seems to be -- the rhetoric seems to be it's broadly covering inflation, but not what's happening on the perils side and the increased reinsurance cost. Could you just give us what your strategy is around that? Are you actually hoping to get those back in the near term?

Yes. I mean Siddharth -- I mean, yes, we are. I mean there's elements to pricing of which reinsurance and perils costs are in there. I mean we have a bit of an artificial situation in FY '21, which is the way the aggregates work and the fact that we had a whole lot of perils beginning of the calendar year that we are well protected. And so that's why the perils allowance, as you can see, hasn't gone up much for FY '21. However, we would have expected that number sort of gross, to have gone up much more like $100 million rather than the smaller number that it has. And so we're setting the company up in order to -- that's the -- that would be the -- one of the input costs that our company should be expecting over the next sort of 12 to 18 months as that current relief comes off and that's the environment we're operating in. And therefore, we need to be reflecting that in pricing, is our view. And so that's how we're trying to set the company up. Assuming that perils costs are going up, which is we know that. We know that our exposure to perils needs to go up. And yes, the position in FY '21 is a little artificial because of the aggregate cover, and we need to reflect that in our primary policies to reflect the exposure we're taking on.

Yes, but just to be clear, I mean, you're buying more reinsurance as well, which is -- shouldn't you be taking action right now? I mean it should be coming through -- I guess through [ the next year then ]?

And Sid, I think we are, right? So an element of our pricing is thinking that way as well. And that's what's been happening in the last 6 months.

So if you've been getting, let's say, I think 6 months is 3% just in terms of rate increases, you should -- we should be thinking that you'd be getting more than that in the next [ 12 months ]?

No, Sid, in home, you'll see -- I think motor -- I mean let's just look at Australia as an example. Motor was a couple of percent, but home was more like 4% or 5%. So we have had rate increases flow through that portfolio, partly driven by this topic. And we know -- I mean this is a discussion we've had many times before, that we need to reflect more of that perils in our primary pricing. We know that at an industry level and a company level, that the exposure has been going up over the last couple of years.

Yes. So sorry, just to be -- just to be completely clear then, claims inflation on an underlying basis in the home, without considering perils cost, is less than the 4% to 5% [ then, is it ]?

It's probably something in that order, right? There's a blend here that's in these numbers. I mean I think what our intention -- and there's other market factors that we need to factor in here, obviously. We've got some increasing input costs around perils, around reinsurance and around average claims cost and parts and things like that. And so what our intention is, is that -- and yes, we've got to be reflective of the current conditions, but our intention would be to reflect that in our primary pricing.

Okay. Okay. Just a question on business interruption. Could you just remind us what the status is on this? So I mean the test case of the industry is putting to this -- I think it's the Federal Court in New South Wales. And can you just tell us what actually happens if you win or if you lose? Will we see a release in provisions that you've taken up? And if you lose, will that mean a huge surge in your provision?

I mean we -- Sid, the timing of this is probably later in the calendar year. I mean our view is, is that we exclude -- under our business interruption policies, we exclude that coverage in a pandemic scenario. And so therefore, we would expect to win. I think we will -- remembering -- I think you're referring to the $100 million of COVID-19 provision. Yes, there's an element of business interruption. But we have factored -- we have looked across all our portfolios. And there's a -- and also, there's a couple of parts to this topic. The Quarantine Act topic, which is the one where there's currently a test case, there's likely to also be a test case around access and prevention of access, which is a common extension in many policies that we also exclude that coverage under a pandemic scenario. And I think there's likely to be a test case on that as well in the next -- sort of talked about in the next couple of weeks and likely, hopefully resolved by the end of this calendar year. So we're just going to have to put all of that into the mix when we look at our position at 31 December.

Okay. And are there any lessons or actions that you're taking as a result of what you've found out about these policy wordings that you have? Can you give us comfort that everything has been updated now for all policies that have been renewed? Just make us -- give us comfort that given that Victoria is going to another lockdown, that there won't be even more exposures in case you lose. I mean I'm conscious that your position is that you'll win. But obviously, it's going to court. So nothing is ever certain in these matters. Can you just give us an idea of what you're actually doing? I mean what actions you've taken to minimize further losses from here?

Sid, it's Peter. Firstly, the majority of our business interruption policies reference the Biosecurity Act. It's a smaller proportion that represent -- sorry, that talk to the Quarantine Act. And as those policies renew, the wordings are being updated.

Our next question comes from Brett Le Mesurier with Shaw and Partners.

Nick, a question on the capital calculation. The technical provisions in excess of liabilities fell from $425 million to $342 million in the last 6 months. Can you tell me what that was about?

Yes. Sure, Brett. That's the second leg of the -- that's the sort of the capital element of the $100 million. So we talked about, in our accounting, the COVID-19 provision that we put in our P&L and our accounting balance sheet was $100 million -- or just over $100 million. In addition to that, we've looked at the unearned premium, which is what that number represents. And we've adjusted that probably conservatively, which is a conversation we had before by an amount as well. And that's why that number has come down in the second half and then impacted our overall capital position. And that number -- just that part of it, there are other ups and downs in that, Brett, but the COVID-19 element of that was $160 million pretax. That's the main attribution of why that number -- I haven't got it in front of me, but that's -- you're talking about in the -- effectively the -- in the unearned premium surplus or the premium liability calculation.

Yes. So when I look in the unearned premium liability at the end of the financial year, it was $6.276 billion against the year before, it was $6.334 billion. And the central estimate has gone up by about $90 million -- $92 million. That's what you're referring to, that's why I see it in there, right?

Sorry. I think there's a few parts to that, sorry. The -- we don't book that number in the accounting unearned premium. It's only booked for capital calculation. So it's a regulatory calculation rather than an accounting calculation. So from accounting purposes, our unearned premium is simply the element of our premiums that we haven't come on risk on. In the APRA calculation, we have adjusted that by this COVID-19 overlay, and that's why that's reflective in the APRA calculation. Just on your comment on, I think, risk margins. And it's because there's a fair chunk of these overlays that are done, the sort of COVID-19, that's risk margin in the way we've attributed it.

Right. So what I see in the unearned premium liability speaks to a decline in the profitability of the business.

Sorry, are you talking about in the accounting in the balance sheet of IAG?

Yes. That's right. In Note 2.4.

No. I think that -- I haven't got that in front of me. No, that is just -- that'll just be reflective of the business volumes that have been written in the company. No, that's not reflective of that point.

So you've got an increase in your estimate of claims and a reduction in the unearned premium liability that implies that -- so there's something else that's happening, is it?

No. No. The unearned premium is simply a portion of the gross written premium that we haven't earned.

No, I appreciate that. I appreciate that. But what I'm saying is that that balance has fallen while the expected claims proportion of that or component of that has increased.

Yes. Okay. Let me just -- let me think through it. I mean, as a comment, we can see that the second half underlying performance of our company has come back a bit. So maybe that helps with that comment. I think that there are some ups and downs within that unearned premium number, Brett. But actually, as a concept, we also acknowledge that the underlying performance of the company's second half versus first half has come back a bit. And so that -- in a way, that's sort of saying the same thing that you're saying.

Yes, I'm looking more at the implications for FY '21. So it's a continuation, but there's no surprise. It's also why you don't -- why it's inappropriate for you to give guidance.

Yes. Well, I mean, our view on that topic is there's just a bit of uncertainty. And because of that, we think it's more sensible to talk a lot about where we're at in the current run rate. But because of the uncertainty that we see ahead of us, we sort of thought it was appropriate not to provide that guidance issue.

Your next question comes from Nigel Pittaway with Citi.

Just a quick follow-up. It just struck me on that conversation on the perils. I mean, the one thing that's most noticeable is the level of perils below $15 million rose from $280 million last year to $402 million this year. How are you thinking about that? Do you think that's sort of one-off, abnormal? Or is this a new normal? What's the sort of thought process behind that when it comes to thinking about pricing for that?

Yes. I mean, Nigel, we were a bit surprised by some of those smaller perils that occurred in the last quarter of the year as well. I mean we -- what we try to do is look at averages, as you know. We definitely had a larger number of -- let me say this right, a larger number of smaller perils, which I think is your point, than we were originally anticipating. We've tried to factor that into our averages over time. I don't have a sense that that's a material shift in our exposure or a material change. I think we've factored some of that in our allowances for next year because, by definition, we've had it. So that sort of factors into our thinking. I don't have a sense, though, that this is a step change difference in our perils exposure year-on-year. I think we -- I think there's -- a little bit of this was we had a bad run of a whole lot of smaller events. I think there's a bit of that. I'm sorry to sit on the fence on that one, but I kind of feel like that's the answer really.

And we have a question from the webcast. With the weakness in agri and rural portfolios, what is the risk of a goodwill write-down associated with the WFI acquisition?

I mean we -- that's all part of our cash-generating unit, and there's many parts of that business that are going very well. And so I mean I don't think that's a risk for us, would be how I'd answer that question.

Thank you, Nick. So we have no more questions. So with that, I might bring the morning to a close. Thank you for joining us today. But I do want to leave you with a clear message. Notwithstanding the challenges of the year just gone, the underlying business is in good shape. And we think, particularly in the last 5 months, we've really proven the resilience of our business, and that's why we look forward to the future with a high degree of confidence. Again, thank you for joining us today.