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

Thank you for standing by, and welcome to the IAG update conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Hawkins, Managing Director and CEO. Please go ahead.

Welcome, everybody, and thanks for making time to join us. I'm also here with Michelle McPherson, our Chief Financial Officer. And today, I'm joining you from Camargo land. I want to pay my respects to elders past, present and emerging. I'm going to talk through today the key elements from the announcement that we made this morning, and then we can move to Q&A. We have scheduled 45 minutes for this call, acknowledging that some of you may need to leave earlier. For sort of context, as we've moved closer to finalizing our year-end financials, we've taken a view on strengthening some of our long-tail reserves and also increasing certain provisions that we wanted to update the market on. So that you then have context around those movements. We also want to provide our preliminary numbers for the full financials as they stand at the moment. And the key themes that are in the announcement are around the underlying performance of IAG is sound, continues to go well. We have had some increases in reserve strengthening in our long-tail classes within our Australian commercial business. And we've also increased some provisions around pricing and payroll in the second half of $200 million, and that will be reflected as a corporate expense. Since becoming Chief Executive, we've faced into a range of issues. And to be blunt, some of these have been frustrating to deal with. But I'm encouraged with where we're at and the solid underlying performance that our businesses delivered for FY '21. And so because of that and the general confidence we have in outlook, we are reintroducing guidance for FY '22 of a reported margin of 13.5% to 15.5%. And I'll cover that in a bit more detail in a moment. Attached to the announcement is also a preview of our new reporting segments, and we talked about this before that we are now going to be reporting the way we run the organization, separating out the Australian Direct and Australian Intermediated business. So we have 3 business units: Australian Direct, Australian Intermediated and New Zealand. And that's the way we're going to be reporting in August and then going forward. So let me start with the financials and a few insights. Our direct business in Australia and our New Zealand operations continue to perform well overall. And our Australian Intermediated business continues to have some challenges across certain portfolios, although we are seeing encouraging signs here. Overall, we expect the group to report a loss in FY '21 of $427 million, but that's mainly driven by the significant business interruption provision that we advised at the first half, of which there's no change in the full year, along with the additional $200 million provision that we're talking about today. Those additional provisions will be recorded as net corporate expenses, similar to what we did at the half, and trade it as nonrecurring and, therefore, haven't impacted our cash earnings, where we expect to report cash earnings for FY '21 of $747 million. We'll then -- we then intend following our usual policy of applying our target payout ratio of 60% to 80% of our cash earnings when determining our final dividend. So the $747 million is how we're going to be determining our dividends for FY '21. In relation to growth, we've seen growth for the year of 3.8% of GWP growth, with similar growth rates half-on-half. The underlying margin for the year is 14.7%, with a softer second half margin. But I'll step you through that and the movements half-on-half at the moment because we're comfortable that the underlying run rate of our company is roughly stable half-on-half and just under 14%. Our reported insurance margin is 13.5%, and that's up from 10% in FY '20 we carried much higher level of perils. For FY '21, our perils' costs are in line with the update we provided on the 16th of June, and the credit spread movements for the year have been positive. However, against that, we've strengthened reserves in our Intermediated businesses, and I'll talk through that. So in summary, at a high level the underlying performance of the business is sound and within our expectations of the year in what has been a bit of a challenging year for both the company and our industry. On reserve strengthening, the second -- we've had second half reserve strengthening across the group of $66 million, which will be recognized. Behind that, this outcome reflects some adverse claim development across a number of our long-tail classes than we've observed in recent years, mainly due to a deterioration in average claim sizes. The main impact has been felt in our liability classes in Intermediated. And we've also called out professional risk and workers' compensation where we've had to address reserve adequacy as well. These trends that we're seeing reflect some broader systemic issues with some of the mixed economic conditions have enhanced focus on personal injury compensation, and we are seeing inflationary pressure there, which is also being reflected in our pricing, I'll say. In addition to that, as I indicated, there's a $200 million increase in pretax charges that will be included in our net corporate expenses for the half -- in the second half. But behind that, there are, as I said, there is no changes to the central estimate or the overall business interruption provision that we booked in the first half. So there's no change around business interruption. The major component of the additional provisions in the second half relates to customer refunds. As previously advised, we've been conducting a proactive review of our pricing systems, which required a provision for customer refunds and charges. We've updated that to reflect our latest position of that program and whole of life administration costs of completing it. This has resulted in an additional charge of around $160 million in the second half. And that $160 million, and Michelle can talk more to this in Q&A, includes a significant allowance for uncertainty as we try to get ahead of it. We've also previously flagged the payroll compliance review, which is similar to many other large Australian corporates. Following the review, we've recognized a pretax charge of $51 million for remediation payments and related costs. Just on the go forward and sort of before I provide detail on the FY '22 guidance that we're announcing also today, I just wanted to make some comments on the underlying margin of our company. So the underlying margin of 13.5% in the second half, that compares to 15.9% in the first. So just to be clear, we had 15.9% in the first half, and that's come down to 13.5%. But it's important to highlight that, that first half number included some net benefits of COVID of $60 million to $70 million, mainly due to lower claims frequency, particularly driven by some of the lockdowns in Australia, particularly in Melbourne. We talked at the time at the half year results in February, but if you excluded this benefit that appeared in our first half numbers, the underlying first half run rate of that business was 14.2%, so just around about 14%. In the second half, the net impact of COVID has been neutral across the business without ups and downs, but net neutral. So there's a small reduction in the second half of 13.5% just really reflects some additional expenses that was incurred across Australia and New Zealand as significant restructuring has occurred as we've been putting in place the new operating model and we don't expect those to reoccur. We've also had a small number of larger claims in our New Zealand business in second half versus first half, and that's impacted us a little bit. What that's really saying is that -- what we're seeing with the business and the confidence that we see in the underlying performance. Because of that, we're reintroducing guidance for FY '22. And that guidance will be around expectations of low single-digit premium growth over the next 12 months, a reported insurance margin of 13.5% to 15.5% in FY '22. But importantly, behind that, we have assumed that we've added $100 million to our natural perils allowance. So a natural perils allowance, that's a key assumption of that, that margin of 13.5% to 15.5%, stepped up by $100 million to $765 million for FY '22. So the quality of that guidance, in my view, has also improved a lot as we are factoring in a much higher perils allowance. Moving to capital. Our overall financial position continues to remain strong. We expect our common equity Tier 1 ratio at the end of June to be the upper half of our target range at around 1.06. This has reduced slightly from December, mainly driven by the sort of the blend of the interim dividend and the earnings from the half. When we finalized the sale of our Malaysia business, which we announced on Monday, our capital position will, as we also announced this on Monday, our capital position will improve further by around $150 million, which has about a 6-point improvement in the common equity Tier 1 ratio. And that will be reflected once we settle that. So to sort of sum up where we're at, the underlying business has been resilient and continues to deliver strong results for us. This -- and our outlook generally has provided us confidence to reintroduce guidance for our company for FY '22. Many of the challenges we have addressed relate to legacy problems that we've identified and provisioned for in this financial year. We've worked hard and acted decisively to put in place changes that address these challenges so that we don't repeat them. And finally, I'm confident in the strong leadership team that I've established and in the new organizational structure that we've put in place that more clearly aligns the business with our customers. We look forward to speaking to you all again at our results presentation in August. And with that, Michelle and I would be happy to take any questions.

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

Just 2 for me, please. The first one, just in the deck, you made a comment about anticipating an increase in capital risk charges. Can you just give us a bit more color around what that means, please?

Nick, you happy for me to take that? Andrew, it's Michelle. Thanks. There are a couple of elements to that, so higher provisioning. And also, we've seen a little tick up in the growth assets within our investment portfolio to about 29%, 27% at 31 December. So there are elements that go to that. But the key drivers, as Nick called out in his comments, were the dividend payment for the half and the small profit in the second half.

Andrew, I think it's pretty modest, that impact.

Sure. Okay. That makes sense. And then the only other question that I had was, you made the comments about the portfolio remediation in the Intermediated business. Can you just give us an idea of how broad-based that could be? Or is it just focused on the long-tail portfolios that you've been strengthening the reserves?

Yes. Thanks, Andrew. I mean, no, it's not. I mean we've got a -- this has been a real challenge for us the Intermediated business for a number of years. And we're looking at a significant change in that over the next couple of years to really return the profitability there. Yes, we are repricing certainly our long-tail classes, reflective of the experience that I've just been talking about. But if I look across some of the other parts of the business, we know the rule on every book has been challenging, and we've had some significant portfolio remediation there as well. Within what -- remember, within what we're calling Intermediated, we also include those intermediated personal lines businesses, particular things like Coles -- and we have a facility with steadfast where we're seeing significant portfolio remediation and pricing in that as well. So it's not just on our long-tail classes. There's some significant action in a number of the portfolio asset.

Your next question comes from Kieren Chidgey with Jarden.

A couple of questions, if I could, starting on reserves. I'm just interested in your comments around it sort of being fairly systemic, Nick. I mean, that definitely seems a bit at odds with some of the peer commentary in the market. So just wondering if you can give us a bit more color on sort of any external/internal views you've taken there. And secondly, related to that, obviously, sort of those are prior year top-ups, but sort of what confidence you've got in sort of the new accident year provisioning. Are you trying to get ahead of these trends? Does the underlying margin you're talking to sort of encompass much more conservative allowances around provisioning for these classes going forward?

Yes, Kieren. Sure. I mean on the -- I mean, we are definitely seeing increased sort of costs attached to anything to do with any of those long-tail classes, any sort of personal injury, bodily injury type experiences. And we're seeing that not just -- I mean, we've seen that, and that would be an interesting thing, so I don't believe that others wouldn't have some similar challenges. We're actually seeing that -- in issues around cost of insurance for elements of businesses where we're seeing significant increases in liability-type classes of coverage. And there's sort of issues we've got around affordability because of . So I don't -- I mean, in my comment that this was sort of systemic, is this is not just an IAG issue. We are seeing average claims cost of sort of compensation bodily injury-type claims going up across Australia. In relation to your question around what does this mean going forward, I mean, we obviously have -- we've done a few things here. We've strengthened the balance sheet the way we've described. We factored in -- we're repricing to factor in these additional costs into our expectations for next year. And then also, we've obviously adjusted our expected loss ratio in both current year and going forward, driven by what we're seeing. So we're -- in relation to how we deal with it, we sort of factored it into our thinking going forward. Of course, we'd like to think that our balance sheet, we've taken a conservative view on this, and we'll try to get ahead of it, and I think those are your words. But there's always some uncertainty there, but that's definitely our approach the way we describe it.

Okay. And just a second question on the underlying margin, to clarify the various levels of adjusted and underlying that are creeping into the terminology. So I guess sort of ex COVID you're at 14.2% in first half '21. Are you sort of suggesting, excluding the one-off expenses in second half, that you're at a similar level to that or slightly below?

I mean I think -- we call the run rate of our company being as we're leaving FY '21 of just below 14%, sort of roughly that. And that's why, in my mind, guidance of 13.5% to 15.5% is, I expect, our company to deliver a bit an improved performance in FY '22 than FY '21. I do -- Kieren, we do sort of apologize for these -- some of these new terminology, but we think we kind of have to look through the COVID frequency benefits. That's why we're really focused on that because we -- in my mind, when I think of outlook, I'm looking at a more normal motor vehicle frequency, more -- we've had some additional costs that we've incurred as we've had lots of restructuring happened in the last 6 months, which we booked all -- we've won the cost of that through the margin. And we're sort of starting FY '22, I'd call it, but I'd say the run rate just below 14%. And that's really -- that's really the trajectory which we're entering into next financial year.

All right. And then just to be clear on your '22 margin guidance of 13.5% to 15.5%, that we should not be expecting any of these additional one-off expenses or COVID-related sort of hits or positives in that range?

Correct.

All right. And the 15% to 17% medium- to longer-term target, I don't think it's mentioned in your release today, but can you just confirm that, that sort of is unchanged?

Definitely. We're on the path to delivery of that. And so what we've really tried to step out here is the 1-year trajectory, and that wasn't -- we didn't bid that because we're changing anything that sort of medium-term target of 15% to 17% is how we're setting the company up. And this is the FY '22 guidance that's on the path to delivering that.

Your next question comes from Matt Dunger with Bank of America.

I was just wondering if you're able to talk to the goals for Intermediated margins that you said that you've set, Nick.

Yes. Matt, I mean, a lot better than what we're currently delivering. I mean, I -- I mean, we -- my view is that we should be delivering $0.25 billion of profit out of this Intermediated business. And we're well short of that. So at sort of an insurance results, call it that. And that's sort of delivering a margin at least at sort of 10% or something in that order, and we're well short of that. So it's going to take a little while for us to get to that level. But that's the sort of expectation that I have in this business. That's sort of round goal, and I'll use a round number like $250 million. But that's what I talk about internally in the company. And we're setting ourselves up to deliver that.

Brilliant. And just on the guidance for FY '22, could I just confirm there's nothing assumed for the current lockdowns?

Correct. Yes, Matt, maybe I'll just answer a bit more than just correct. We're not -- we don't believe there'll be any additional costs around sort of business interruption or anything like that from the current lockdown. That's all included within our reserves. We haven't factored into the guidance, let's say, if there's some extensive lockdown that then has a net positive from, say, motor vehicle frequency, that's not assumed in the guidance. Is that your question?

Yes, that was my question. Yes.

Yes. So I just want numbers to be clear. I'm expecting the run rate of the company to step up from sort of just below 14% into the guidance on things that we're controlling and driving the agenda within IAG. If there are some additional outside factors, I think the one you are referring to, that would be in addition to that guidance. And I don't see a negative from outside impacting for FY '22.

Yes. And just lastly on that, Nick, can you just confirm on business interruption where you're at in terms of writing out references to the updated Biosecurity Act and if you see any risk from the current lockdown?

Yes. I mean, we are out of that, but I think it's the tail you're referring to, that is still running down over the next couple of months. I mean the vast majority of it is out. And any impact from the current lockdown is included within the existing business interruption provision that we put in place in November of last year. So we're not -- we don't believe there'll be any additional cost from the tail from business interruption over and above any of the provision we've already done.

Your next question comes from Nigel Pittaway with Citi.

Nick, a couple of questions, if I could. First of all, just in terms of those additional expenses for the new operating model, did the -- was the size of those above expectations as the sort of indications you've given before was that you weren't expecting too much of an additional cost burden, so just wondering whether they caught you by surprise. That's all.

Nigel. I mean, no, they haven't. I mean, they're not -- I mean we're in those costs within the margin. And they're modest. I think we're really calling them out more just to half-on-half sort of just making sure that we can help the market understand about what sort of is the entry point for FY '22. So they're not -- they didn't catch us by surprise.

Okay. Fair enough. And then just in terms of your sort of GWP low single-digit growth for next year, obviously, you flagged the commercial remediation. But are you allowing there for some slowing in motor pricing, given basically what has been some favorable frequency in part of the year? Is that sort of in your thinking in terms of that guidance there?

I mean it's -- Nigel, there's a whole lot of different things in that guidance. I mean, there is an element of that that's in the FY '21 premium already because we did reflect some of that in, say, Victoria and our motor vehicle premiums in FY '21. So I mean there's an element of that that's in what we've just delivered around premium growth. In FY '22, I mean, there's -- our aim is a general sort of concept is that we are sort of pricing in line with inflation across the businesses, where probably the Australian long-tail classes are quite significant. We are probably -- in fact, we've had a little bit of volume loss in Australian commercial and Australian Intermediated over the last year. There may be a little bit more of that in FY '22 in volume, but we're assuming we'll have customer growth in our direct personal lines businesses, pricing flowing through all the portfolios in line with inflation and an additional remediation in commercial.

Okay, okay. And then just on the obviously increasing cap amount, so are we presume that the sizable increase means that you haven't bought a stop-loss for FY '22? And how much of that increase do you think you've already repriced for?

On the refi, I'll let Michelle talk about the stop-loss. But on the -- we factor this all in best setting the company. And we know we've been playing catch up on perils as in the industry, and we sort of use this as a bit of an opportunity to make a bit of a step-change up. And we factored this into our pricing, which is why what we're saying, I think, the quality of our guidance is, yes, we're sort of stepping up the reported number. But within that, we're assuming $100 million more perils as well. So I think the strength of the quality of that guidance is pretty good as well. But Michelle, just on the stop-loss, can you make comment?

Yes. So Nigel, we haven't bought one at this point in time based on the increase in that loans to provide some more color around our programs that we have in place when we get to the full year results on the 11th of August.

Nigel, so it ends up being a cost issue. At some point, I mean, we like the idea of buying stop losses. But at some point, we say it's actually not worth it. And so we kind of have made that decision. We had some capacity available, but we decided we don't want to be -- we don't want to buy it no matter what. And so we said actually no. We don't want to -- we'll take that. It's not worth our shareholders' money to go and buy that again.

Okay. Fine. And then maybe just finally, on Green Slip, obviously, you previously said Nelnet exposure. You haven't said anything this time. So I presume that still stands. Is your comfort on that sort of increased of late? Or can you make any comments about sort of how you're feeling about that currently?

Yes, sure. So no, there's no change to that position. There's no disclosure to what's really BCC, which I'd say, rather than Green Slip particularly. And yes, so that sort of arrangement is unchanged. We sold that business 2.5 years ago. We -- as part of that, we sold all the risk and return of that business to the bar. And we have arrangements in place that confirm that. In relation to -- so that's in a way, that position is unchanged. And we're obviously aware of all the greenfield discussions occurring and the media interest in that. But I think, from IAG's position, if anything, it's sort of feel stronger. So that's where we are.

So you feel as if there's no sort of major risk around the reinsurance recovery for that?

No, Nigel. The more I understand it, I think there's going to be a real question about the way that exposed, but is that actually the exposure in the first place. It feels like there's all sorts of interesting business practices occurring and that potentially the exposure -- there's not that much exposure. That's my read. And if you listen to the way Tokio talk about it, it sort of seems that that's their view.

Excellent.

Yes. But from IAG's point of view, no matter what, it's the position that we've described.

Your next question comes from Siddharth Parameswaran with JPMorgan.

Nick and Michelle, a few questions, if I can. Just firstly, just on the reserve increases on the long-tail side. From my calculations, we're thinking about a $150 million increase this year on the long-tail side, $50 million in FY '20. I saw this 30% of the year's net premium. How does this situation develop? I mean, was there any signs of this before? Can you give us some idea of the increases you've taken in maybe to compose inflation assumptions? Just so that we can have some comfort that, that really a betting has been taken because, quite often, when we see reserve increases, we see them stretch for a few years. This seems like very quickly, we've had a very, very sharp increase. I wonder if you could comment on that firstly.

Yes. So I might make a few comments, and then I'll throw to Michelle. And then my first comment is that -- remember, we can't -- the reserve releases are looking at multiple -- sorry, reserve strengthening are looking at multiple accident years. So we're not just looking across 1 year's premium, obviously. So we're looking across 3, 4, 5 years of business. It has a proportion of the strengthening, you sort of same applying, the strengthening is not across 1 year, it's across multiple years. Yes, we're booking it in 1 accounting year. So it's across a much bigger premium problem than the way you described it. And we're trying to get ahead of it. But Michelle, you might want to come in and sort of give a bit more detail.

Yes, we're definitely trying to get ahead of it, Sid, but it is challenging as we've called out. It's mainly driven by observed type of injury, average claim sizes that are coming through. And we've taken that into consideration as we set our loss ratios as we look through that. But we are in a period of superimposed inflation from what we can see around the personal injury average claim sizes. That has impacted the liability portfolio. So like you, we prefer -- and as we reflect in our guidance margins, no movement, but the central estimate is spot on, but there are always movements around that, and we have seen this trend over a couple of halves now.

But just to be clear, have you changed your superimposed inflation assumption?

So we've -- I think -- and correct me if I missed understanding, Sid. But in terms of looking at what our more recent year expected loss ratios are understanding the trends that we're seeing, yes, we've taken that into consideration. But we -- based upon observed experience we're seeing in periods sort of like 2017 in terms of where claims have settled based upon what's been happening in the court for most of things.

So the question was a specific one. Do you have a superimposed inflation assumption about -- you have your average claim size assumptions for today, but are you assuming that any payments you make in the future will grow at a certain rate?

So yes, we've assumed that this trend that we've seen around these types of claims will be ongoing at this point in time as we're looking at the elements of the portfolio. But I've not put a number out there, so if that's what you're asking for in terms of what that rating is.

Yes. Okay, okay, okay. Just a second question -- sorry...

Sid, I was just going to say. I mean, we have -- remember, there's -- we're dealing with this multiple ways. So we're significantly increasing pricing. We have assumed that this experience that we're seeing in the last 12 months or so and the increased average claims cost that is now the new world. And so we're using that as a way that we're reflecting current period loss ratios, expectations of claims going forward, pricing going forward. And I don't -- I mean, I know that was a question before. This is not just an IAG thing. We are seeing this, I mean, it's an industry thing, but there's an issue here around affordability. So we're not the only ones that's having the same -- this experience with the money.

Yes. Okay, okay. Great. Just a second question for me. Just on the business interruption scenario testing that you did. I think, in your commentary, you said that you compared it against advised claims. Could you just make some comments on why there wasn't any change at all to this assumption? What did your scenario testing show particularly against advised claims? Is it just too early to tell? What's happening? Or why was there no change at all after that? We've had another 6 months. It's a big number that you set aside. Just keen to know what your scenario testing showed.

Yes. So without going into too much detail, what I think is that effect is we've seen additional short lockdowns over the period since we first recognized the provision. We touched on that a little bit about the half year. We have countering that seeing some stronger economic recovery and those sorts of things. So we've worked through the range of scenarios associated with this. And on balance, given the estimates and given that we still were just over 700 claims received, notwithstanding the activity that's been going on through the ICA encouraging people to submit claims, there's nothing that we're seeing in that relatively small number that causes us any concern around the estimates that we've made through the modeling, which we've done, as I've called out previously, on a policy-by-policy basis.

Yes. But just to be clear, are you expecting a flood of claims after the second test case. The 700, I think your last average claim size estimate that you gave is about 15,000. So is -- that was your assumption from the update in November, 700 claims is a lot. So you've lost the first test cases, and the industry has lost the first test cases. Are you expecting several more to come in? Is that the reason why we still have a $1.2 billion provision.

So yes, that's our assumption at this point in time. But one of the things that through the industry we've been supporting is encouraging people if they think there is something to submit that claim so that once we have the results from the second test case, which are really critical in terms of ensuring that they paid out under the policies given them off of the first test case for policies that weren't designed to cover these sorts of things, that we can move as quickly as possible to support our customers and give them certainty coming out of that. So it's probably a bit too early to call given that second test case is still there. It's expected to they consider. And if in the event that it's appealed in any way, shape or form before 31 December, so I think we'll be in a better position at that first half results announcement in terms of making a change. But right now, working through with our Chief Actuary and also talking with our external auditors and those sort of things, it's just too early to make an adjustment.

Okay. And if I could ask just one last question. Just, Nick, for you, just on strategy. We've seen an emphasis on trying to grow with the market in personal lines at the last result. It seems like that emphasis has gone at this result -- sorry, we mean with this pre-release, it seems like the focus for FY '22 is that -- isn't being emphasized at all. So I was just wondering, has this -- I suppose some of these other issues that you've flagged, does that set you back in terms of addressing these long-term issues that you've faced in terms of losing market share in personal lines and there's something that you'll have to address further down the track again?

Sid, no. So in trying to craft the 5 pages, I didn't mean to underplay that point. So sort of the key themes for our company are all about improving profitability, particularly within the Intermediated business here in Australia and growing our direct personal lines business, at least in line with market, with those wonderful brands that we've got with NRMA and RACV and then New Zealand state and AMI. So no, that -- I didn't -- we didn't mean to deemphasize that point in any of these material from the release today. And we'll talk about that more at the -- in August. So that theme is exactly the same. And that's very much a focus of the company.

And a near and medium-term focus is the same, the income question in terms of guidance for units, it seemed like the guidance is not market growth for next year.

No, within our direct personal lines business, definitely. I mean that's how we're setting it up. We definitely want to be able to grow that business at least in line with the market. And that's how I settle the objectives for the claims.

Your next question comes from Ashley Dalziell with Goldman Sachs.

Nick and Michelle, maybe just an initial one, thinking about the FY '22 margin guidance. You seem to be sort of signaling that the best sort of exit for us to work with is around 13.8%, 13.9%. You then obviously got quite a big headwind coming through from the perils where you set perils allowance reset. Just thinking about some of the scenarios that see land in the top half of that margin guidance, can you unpack that for us a little? Particularly, are you budgeting for any improvement in the running yield? Secondly, do we see any sort of assistance from costs in '22? This is obviously being quite a headwind in '21.

Yes. So it's the things -- I think the way to think about this is, obviously, there's the variables around things like perils, but the -- I think answering your question, it's the things that we're controlling is what we're very focused on. So it's remediation, repricing within the Australian Intermediated business and the speed and pace to which we can deliver that is as I think a variable here. We will definitely see improvement year-on-year and there, but the degree to that -- and we're going at that pretty hard right now. Secondly, around costs, yes, we are looking at the -- we have looked at the cost structure. We have redesigned our organization, which we sort of mentioned that there has been some additional costs in the second half that we've incurred. It's in that margin. But one of the outcomes of that will be a lower cost structure within FY '22, and we're still working on that. But there's an element of that that's helping improve in the guidance, and we'll continue with that. So that's a real theme as well in how they're running the company. So what we're trying to do is manage those variables that we're controlling and sort of get on the front foot on that. And that's why we're comfortable with reintroducing guidance, and that's why we're working on the basis that we're going to improve profitability year on year on year. And as we sort of move the organization up to that run rate of further sort of 15% to 17% over the next couple of years is the intention.

Okay. Maybe just one on capital and we've landed for FY '21. I mean, in prior results, you seemed to want to target a level of capital probably fair way north of your 0.9:1.1 kind of comfort range on the CET1 ratio. As we think about the pathway into '22 and '23, is that still an objective for you?

I mean -- I mean, we've got a target for a reason, haven't we? So yes, we feel like we've been through a bit of uncertainty. I feel more certain today than I did 6 or 12 months ago about the outlook for our company. I feel like we've got arms around any of our issues that we are more comfortable today than we have been 6 or 12 months ago on sort of outlook prospects. Other things turning up surprising us. And so therefore, because of that, I think you should expect us to operate the company over the medium term within the sort of targets that we've indicated. I think there were special circumstances over the last sort of 6, 12 months or so that have sort of caused us to take a slightly conservative lens on that. You can tell from the tone of this that slightly more optimistic on the outlook today.

Okay. One final one, just on the shareholders' funds result in the second half. That didn't look particularly strong. Can you maybe just a couple of quick comments? Firstly, did you have a good second half on the alternatives? And then secondly, I think Michelle mentioned some very mild growth asset re-weighting. Was that sort of just a function of stronger equity returns? Or have you actually started re-weighting the portfolio through the period?

Ashley, it's Michelle. So it was a function of good performance based upon the mix of the portfolio and a little, tiny bit of re-weighting, not a whole lot. We're talking in more detail about what our plans are over the coming period on the 11th of August results announcement. But after a challenging year in FY '20, in terms of lack of returns on shareholders' funds, you can see the mix of the portfolio has delivered good returns for us in FY '21.

Your next question comes from Andrei Stadnik with Morgan Stanley.

And apologies if my questions are previously asked, I have hopped on a bit late. But I wanted to ask 2 things, firstly to the business interruption. It seems that some percent of the book is still exposed to the current lockdowns that just started last month. Is there any information you can give us on what percent of the book mix will be exposed?

Andrei, Michelle, not sure exactly what time you joined the call, but what we called out is our view on the current lockdown that we're seeing are allowed for within the provision that we've already got. We've done some scenario testing in the lead up as we're working towards finalizing our results, and we're comfortable with that. Yes, as we said, we stopped writing these policies with the -- in correct wording sort of October, November last year. There's a little bit of a tail, but we're confident that that's within the position that we've recognized today.

Great. And another question around -- I think you've hinted a couple of times that you want to make some investment in the -- particularly in the vessel lines franchise to restore unit growth. Like what kind of investment both in terms of dollar terms and in terms of what kind of qualitative things, what are you looking to invest in to help restore growth in lines and particularly with younger customers haven't seen the price strength of the NRMA brand or RACV.

Yes, Andrei. I mean a few things. We are just sort of the back of the company, the sort of the core platforms that support our direct personal lines business. We're making significant investment in those. And we've been running a program of work for a number of years where we're transforming the platform of the company until sort of the standard guidewire. We've done all the claims. And we're now in the process of rolling out a policy and admin system, which our direct personal lines business in Australia is sort of at the front of the queue on that. So that -- what that does is sort of simplified the way that business is run, also allows us to sort of speak to market changes, things like that, will improve our capacity. It also gives us a lot more flexibility about how we might want to have an Australian proposition that is very much a state base. And as you know, with our direct personal lines, we run sort of different states, different brands. And it gives us a lot more optionality around sort of national-type campaigns, national brand propositions, things like that. So we are well progressed on that. And I see us continuing to invest in that business. I mean that is a very, very important part of our organization. We sort of had a conversation before around were we sort of downplaying the role of direct and its growth agenda. The answer is definitely no. I expect that business to be able to grow at least in line with the market and probably more. I think we've got a wonderful sort of brand group there, particularly the NRMA and the RACV brands, the flagship. I feel like there's more to be done in other states around Australia, which we've got some options and considerations there around how we might go to market. And there's an age group, I think, has indicated there, but we're also thinking heavily about how do we have a stronger proposition to sort of a demographic that may -- our RACV and NRMA sort of propositions may not be as strong, too. And we're having a bit of a think about that. So I think all those topics you mentioned are very much on our agenda about how we want to grow and really invest in what I consider a very important part of our company.

Thank you. That's all the time we have for questions today. I'll now hand back to Mr. Hawkins for closing remarks.

Thanks, Melanie. Thank you, everyone, for joining us today. I apologize for the short notice. I mean, we wanted to deliver sort of the 2 financials around reserve strengthening and corporate expenses. Because of that we've sort of gone for the rest around -- for the rest of the financials. And we thought it was also useful for you to see our guidance and expectations for FY '22. We're pretty upbeat. We see -- and I know this has been frustrating. It's been frustrating for me and for the management team, and I suspect for some of you in the last little while. But we see positive energy, positive momentum in our company. And we see outlook pretty good. And really, that's what -- and yes, we've got some financial issues, which we've had to address today, but we want to make sure that sort of proceed in balance around the performance of the company and the outlook of the organization. Thanks for the time today, and we'll talk again in results in 2 or 3 weeks' time. Thank you.