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

Good morning, and thanks for joining us for IAG's results presentation for the 6 months ending 31 December 2021. I'll start this morning by acknowledging that we're holding this briefing on the traditional lands of the Gadigal people of the Eora Nation, and I pay my respects to elders past, present and emerging. I also want to highlight that this Sunday is an important date for our First Nations people as its 14-year anniversary of our National Apology to Australia's Indigenous People. I'm joined today by our Chief Financial Officer, Michelle McPherson. I'll start with some high-level comments on the numbers and the progress we are making with our strategy. Then I'll hand over to Michelle to talk through the financials in a bit more detail. After that, I'll come back to talk about guidance before we open the session, of course, to your questions. Our 3 operating executives that I've appointed to lead Direct, Intermediated and New Zealand, Julie, Jarrod and Amanda are also joining us today for Q&A. So firstly, just some introductory remarks from me on the result. We're very pleased with a solid, all-round financial performance in the 6 months of the year that we've just delivered. As you'll see from all the detail that we're providing, we've addressed material issues, we've stabilized our business, and these results highlight the quality of the underlying business of IAG. And I think it's very important that we can see that. There is also tangible evidence of the impact we are having on the delivery of our strategy, and I'll talk you through. Julie and the team have done a great job delivering growth initiatives for our Direct businesses. And Jarrod and his team have continued to improve profits in the Intermediated business here in Australia. We're very encouraged by our strong gross written premium growth and the very stable underlying margin performance that we've delivered. The capital position, of course, remains strong, and I'm pleased to advise that we're paying an interim dividend of $0.06 per share. And what this does, of course, is it reflects the confidence in the momentum of our business into the second half. That confidence is also evident in how we're upgrading GWP guidance for the full year and reaffirmation of the overall insurance margin guidance. Some more detail on premiums and margins across the group. We've had premium growth of over 6%, with contributions being made from all businesses. This is particularly strong, you'll see, here in our Australian Intermediated business and in our New Zealand business. And we expect this momentum to continue through the year and have raised our premium growth guidance from low single digit to that mid-single-digit expectation for the 12 months. Our underlying margins have benefited from lower motor claims frequency related to the lockdowns that we've had across our countries. We're also seeing the benefit from rate increases flowing through now through the P&L. We did have -- we have had to raise estimated perils cost for the full year, and that's what we did in November after the challenging October that we've had. And these remain unchanged today at that higher level for the rest of this financial year. And reported margins have been affected by some modest reserve strengthening, which we flagged at the strategy update in December. Well, this is the first half where we've seen results delivered by the new operating model, and we're very pleased with the performance that the group is generating. Under Julie's leadership, our Direct business in Australia continues to perform very well. We have grown both rate and volume in short -- in personal short-tail classes. And although our overall volume growth was constrained by CTP and we have strengthened slightly some of the reserves in this area, part -- for reasons partly driven by COVID. Our Intermediated business in Australia that Jarrod is running continues to improve towards that $250 million insurance profit target with a 5% underlying margin being delivered for the half. And this business achieved close to double-digit type rate increases in what continues to be a fairly favorable industry environment for the commercial classes. And finally, under Amanda, our New Zealand business has also held underlying margins at very healthy levels. And we've seen our strong rate increases has been assisting profitability within our New Zealand business. I just want to revisit how we are building a stronger and a more resilient IAG. As we outlined to you in our business update in December, we're well advanced in the delivery phase of the strategy that we first shared with you a year ago. Our strategic pillars are now embedded in everyday thinking across the group, providing the right amount of focus and clarity for all of us to deliver against. Our redesigned operating model with 3 core insurance businesses is also firmly entrenched. And with each of those 3 divisions aligned to the insurance needs of specific customers and importantly, the way those customers want to engage with us at IAG. With Jarrod commencing in his role as Group Executive of Intermediated during the half, I'm confident this division now has clear accountabilities and importantly, the right amount of executive focus to deliver on our plans. And as you know, our executive team has also been strengthened by my appointment of Tim Plant as our Chief Insurance and Strategy Officer. Tim is developing and driving the implementation of our strategy, along with accountability for certain governance functions and innovation across IAG. With our considerable strength and scale and our 3 well-defined business units dedicated to the 2 markets of Australia and New Zealand, we believe we're well placed to deliver on our purpose and our strategy going forward. Last year, we committed to account for progress on our 4 strategic pillars, and these are unchanged. And as we move into the implementation phase, what we're going to do is provide periodic updates to you on what we've achieved. I'm pleased to report that we've delivered a significant number of milestones over the last 6 months. Let me just share a few of those. It was a transformational 6 months for our Direct business as we took NRMA Insurance into WA and South Australia and developed and launched ROLLiN', a digital business for younger generation. And we've been talking about that for some time, and we've delivered it in 6 -- in the last 6 months. Our Intermediated business took action to address unprofitable products and has now exited IAL Personal Lines, and we're very focused on that $250 million. And in New Zealand, we've made significant progress with our Claims Optimization program, which is driving digital capabilities and automation within our business there. 40% of digitally lodged claims are now being auto-verified, reducing our handling time from something like 15 minutes down to around about 5. And we've added a number of motor, home and niche products into this common policy pricing and claims operating platform over the half, and there's more to come there. We've also completed our risk transformation project, which internally we've called rQ and transitioned those skills into the business, so we're embedding that right across our organization. With our legacy issues further behind us, I'm spending more time focusing on the activities that are delivering against our strategy. And of course, what I'm seeing is the energy and enthusiasm growing right across our business as we're delivering against that. When we spoke to you in December, we shared an ambition to add 1 million new customers to the 8.5 million people that we already serve across Australia and New Zealand over the next 5 years. And of course, even though it's early days, taking NRMA Insurance National, launching ROLLiN', have already added a significant number of policies and customers. We've now got around 35,000 customers under the NRMA Insurance brand in WA and South Australia. And 6 months ago, that was 0. NRMA Insurance continues to be our most valuable asset. Just last week, it was ranked Australia's top financial services brand on Brand Finance list of the top 100 brands in Australia. So of course, there's lots we can do with that brand. We see a big growth opportunity in our direct SME offering and we identified 9 growth segments that we have seen emerge post-COVID. These include property and business services, IT and communications as examples. And we think these are critical for the future and are well suited to the type of products we're offering through our direct offering. We also shared that we've identified $400 million of value creation opportunities through a faster and a more efficient claims experience, predominantly in our Direct businesses here across Australia. These will contribute to the delivery of our group financial targets, but of course, also create opportunities to address affordability and help drive customer growth in our organization. And our decision to accelerate investment in our Enterprise Platform is already having an impact on the business' ability to deliver on both customer growth and value creation opportunities. Just on the subject of our Enterprise Platform. Here's a slide that we showed you -- showed the market in December around what it is. And as I've said before, operational simplification is a major focus for the management team of IAG. We've been very open about some of the complexity in our business, but we're on it. And we're making some great progress with a whole of company program of work that we're calling our Enterprise Platform. And what that does is it brings together all the work that we're doing across claims, policy, pricing, digital, mobile and really creating the capability to power our business in a way that is agile, accurate, simple and consistent right across the organization. It's a big driver. Our primary focus to date has been on the most critical experience for customers around the claims journey. And we're pleased that we now have almost all new claims across the entire company hosted on a single, market-leading, modern technology platform replacing lots. And we'll also see -- and what we're doing now, of course, is seeing the benefits of that. During major events, depending on the event, we're seeing up to 65% of claims lodged via our digital channels. We're also now able to use AI to effectively predict whether a motor vehicle is a total loss after a car accident, so customers can settle their own claim in just a few hours. And already more than 15,000 customers have self-settled their total loss claims online, and there's more of that to come. The Enterprise Platform will make it easier for our customers, brokers and partners to do business with us and will deliver significant operational efficiencies and savings to IAG. What I'd like to do now is hand over to Michelle, who's going to talk through the financials in a bit more detail.

Thank you, Nick, and good morning, everyone. Our headline numbers are shown on this slide. As Nick outlined, we're encouraged by the premium growth and stable underlying insurance profitability that we delivered in the first half. Our insurance profit of $282 million was impacted by significant natural perils costs of $681 million for the half, largely from severe weather events in October, along with some modest reserve strengthening. Our underlying margin of 15.1% was below what we recorded in first half '21, but it was well ahead of the 13.5% we reported in the second half of FY '21. This swing in investment income reflects a much stronger equity market performance in the prior comparable half and the effect of higher risk-free rates on our bond portfolios this half. The combination of high natural perils costs and lower investment income has therefore resulted in a significant reduction in net profit. Pleasingly, particularly from my perspective, there are no one-off events that have occurred over the half that required reporting through the net corporate expense line. This meant that cash earnings of $176 million were in line with our reported net profit. As you can see, implementing our strategy is already contributing to some growth and improved underwriting, and our investment in risk and governance has improved the stability and quality of our result. We're encouraged by the strength in our gross written premium growth, this reflects some favorable industry conditions as well as early delivery of a number of IAG's key strategic initiatives. As we saw in first half '21, lower new business opportunities did impact growth by an estimated $40 million or 0.6%. Most of the growth we achieved was rate-driven, but there were some significant areas of our business where volume growth was achieved. And I'd really like to call these out. In Direct Insurance Australia, we lifted premium rates by just over 4% in both motor and home. And we delivered short-tail personal lines volume growth of over 1%, assisted by the national rollout of NRMA Insurance. Our Intermediated business achieved solid rate increases averaging 9%. And the impact from portfolio optimization was lower than expected earlier in the year. Our business division in New Zealand achieved 10.1% local currency growth from a combination of high rate increases and volume growth, supporting overall New Zealand GWP growth of 5.9%. We've set out our underlying margin performance on this slide. This was reported at 15.1%, lower than the 15.9% in first half '21 and moderately higher than the 14.7% recorded for the full year in FY '21. Both halves included comparable COVID-19 net benefits. To explain some of the key changes in the margin waterfall bridging the 2 halves, we absorbed significant increase in high natural perils allowance in first half '22 and estimated 140 basis points drag. Largely offsetting this was an approximate 100 basis points benefit from other factors, mainly rate increases flowing through to profitability. These factors would have offset the high perils allowance, however, expense growth has eroded some of the benefit. The sharp move up in interest rates in October impacted the margin by around 40 basis points. This impact reflects timing differences related to undiscounted liabilities and should unwind in the second half. COVID-19 net benefits were around $55 million to $65 million over the half. As in first half '21, this included reduced motor claims frequency during the lockdowns. This benefit was partially offset by elevated inflationary pressure on claims and by an additional risk margin we're holding for emerging risks related to inflationary pressures in the post-lockdown environment. Excluding this net benefit, underlying margins were around 13.6%. Moving now to our underlying claims. Recorded an underlying claims ratio of 52% in the half, an improvement on 52.8% in the prior corresponding half. This ratio excludes all perils costs and prior year reserving changes and focuses on our working claims. The chart backs up the COVID-19 influences half by half, which allows you to see the trends more clearly. As you can see, these underlying loss ratios have been steadily improving, with premium rate changes flowing through ahead of some elevated claims inflation. We are mitigating the impact of inflation with a range of claims initiatives that are also leading to improved customer and quality outcomes. You will recall the new performance framework for building partners that we rolled out in FY '21 that contained claims inflation in the second half. This continues to support positive home claim experiences for our direct customers in Australia. I'm also pleased to share that Repairhub now has 15 sites locally with 5 more planned this year, leading to reduced cycle times and economies of scale through motor parts procurement. New Zealand now has 3 Repairhub sites with 5 more planned over the next 2 years. These initiatives are going some way to helping us mitigate some of the inflationary pressures we are seeing in the system, and they will continue to be a major focus as we move through 2022. To expenses. We recorded higher expenses in first half '22. And I'd like to share some more color on how we're managing this critical lever to achieve our long-term financial targets. I thought it worthwhile to provide a reminder of how expenses impact our P&L, as I appreciate there's some complexity to this, and we get many questions on this topic. IAG's total operating cost base was around $2.5 billion in FY '21, including all underwriting expenses, claims handling costs and the expenses in our fee-based businesses. The equivalent cost this half was around $1.3 billion, and these costs grew at 4.4% over the half. You can see the underlying contributors to these costs in the pie chart on the left hand of the slide. The drivers of the cost increase included active decisions to accelerate technology and system spending across our Enterprise Platform that Nick has talked about earlier, higher compliance and governance costs also geared to continuing to transform our risk and regulatory functions. Most of this additional cost was absorbed through underwriting expenses, which grew at around 9%. The slide also shows how commissions paid to brokers and commissions received from our quota share partners impact the headline expenses number you see on the face of our P&L, and the ratio is derived from these. I won't spend any more time on this now, but of course, very happy to take questions later or in our discussions in coming weeks. To build on this, we are targeting a broadly flat cost base and declining expense ratios over the next couple of years. At the business update in December, we shared some detail with you on the dynamic approach we're following in managing cost growth, which considers a range of important trade-offs. We continue to manage expenses tightly to maintain the group's operating capacity. We have a focus on automation, efficiency and effectiveness, and you'll see on the slide that these expenses grew at around 2.7% over the half. Costs directed to activities that are transforming IAG grew at around 20%. For example, we have made, as I said earlier, deliberate decisions to accelerate investment in our Enterprise Platform, and it's already having an impact on our business' ability to deliver both customer growth and efficiencies. We are, of course, carefully managing trade-offs in FY '22 presented by current pressure across the economy on wages growth and skill shortages in areas that are affecting both our maintenance and transformation expenses. I'll touch briefly on perils costs and reinsurance. As I flagged earlier, we finished the half with natural perils cost of $681 million, almost $300 million above the related allowance. This overrun is broadly in line with the update we provided on 2 November as perils costs in November and December were relatively benign compared to usual seasonal patterns. The perils cost estimate of $1,045 million for FY '22 that we provided in November has not changed. None of the events in first half '22 were protected by our financial year 2022 aggregate cover. At 31 December, we had $209 million of the $270 million post-quota share deductible attached to the aggregate cover had been eroded. What this means for us is total protection of $236 million is available under the cover, so we have strong reinsurance coverage for the second half. We did have further reserve strengthening of $37 million in first half '22. While this is well below our experience in FY '21, it continues to be an area we focus on. $17 million of net strengthening was required in our Intermediated business, driven by adverse development in the liability portfolio, and this was partially offset by some small releases in other classes. The professional risk and Workers' Compensation portfolio's performance was largely aligned to valuation assumptions following the strengthening we did in FY '21. We did also observe some negative claims trends in New South Wales CTP, requiring $28 million of overall strengthening in our Direct business in Australia. This included development on some old scheme claims and lengthening duration of new scheme claims related to the lockdowns that we saw in the September 2021 quarter. Pleasingly, that improved in the December quarter. I'll briefly touch on other matters affecting reserves and provisioning on the balance sheet. There have been no significant developments for the business interruption provision, reserves related to BCC Trade Credit or the customer refunds provision. We continue to await the outcome of the second test case appeal that was heard in the full federal court in November 2021. This will enable us to assess how IAG's business interruption provision might change. You will note a modest increase in the provision for BCC Trade Credit claims and a corresponding increase in reinsurance recoverables. Importantly, there is no change to our position that IAG has no net insurance exposure to claims in this regard. And finally, the customer refund provision, which we've talked about for a number of halves, has reduced since 30 June last year due to payments to customers and related program expenses of approximately $80 million. Turning now to capital. Our capital position remains strong. The CET1 ratio reduced to 1.02x before dividends compared to 1.06x at the end of June, mainly due to the payment of our final dividend for FY '21. The main movement this half has been that the payment of the dividend was only partially offset by earnings retention. When we finalize the proposed sale of our Malaysian business that we announced in July last year, our capital position will improve by around $150 million, and our CET1 ratio will increase by around 6 points. I'll hand you back now to Nick for some closing comments.

Thanks, Michelle. As I flagged earlier, our confidence across the business has led us to upgrade our FY '22 premium guidance from low to mid-single-digit growth. And we anticipate a continuation of the stronger-than-expected increase in premiums that we saw in first half '22 and ongoing favorable economic conditions. As we've also said, we're also reaffirming reported insurance margin guidance of 10% to 12% as we announced in November of '21. And just lastly, here's our value proposition to you, our shareholders. What it does is it outlines the financial outcomes of the strategy that we've discussed today and how we're going to be delivering against those 4 pillars. Creating a stronger and a more resilient IAG will deliver a targeted cash ROE of 12% to 13% and an insurance margin of 15% to 17% and importantly, growth over the next 3 to 5 years. I'm confident we will continue to deliver profitable business and customer growth in FY '22 and longer-term value for our stakeholders. I'll now ask Julie, Jarrod and Amanda to join Michelle and I for Q&A.

[Operator Instructions] Your first question comes from Andrei Stadnik with MS.

I just wanted to ask a couple of questions. In terms of some of the additional features provided for your customers such as MotorServe, how do you allow for the additional cost of doing that? Like especially with claims inflation rising, how does having an additional layer of service through something like MotorServe, how can you price for that?

Hi, Andrei, I mean, I'll make some general comments. I should have also said, by the way, I've got Michelle, myself, Julie and Jarrod are appropriately distanced in our offices here in Sydney, and I've got Amanda on the video coming in from Auckland. So I apologize for that. Andrei, just to that question -- and maybe, Julie, I'll ask you to come in on it as well. I mean MotorServe is sort of a fee-for-service business, where we are providing services to our customers. Yes, we have some costs attached to that, but there's also income attached to that. And that sort of complements what we've done with our sort of repair business, which is dealing with -- specifically dealing with repairing damaged motor vehicles. So one is a service business and the other one is a repair business, but we are using MotorServe as a bit of a hub as well for the repair business. But Julie, do you want to comment on that?

I think you've covered that well, Nick, but just maybe to sort of amplify a little bit. So MotorServe does 2 things. First of all, it accepts every drivable, damaged vehicle of our customers and then triages that into our network to be able to find the appropriate place for repair. If it's a small repair, it goes to Repairhub. And if it's a larger repair, it goes to -- it goes into our partner network. In terms of the services it then provides through the MotorServe hubs, we have repair capability and so on. And again, that has its own P&L and its own pricing and services its own customers. And MotorServe, for us, is a big part of our ability to serve our customers properly, but it's also an ability to extend our business across adjacencies and also seek more customers that we can bring back into our insurance network. And we're really, really pleased with how it's performing.

And my second question, I wanted to ask around the New Zealand EQC proposed reforms. And I apologize if I've missed this in your commentary, but Suncorp earlier this week said that it will be -- the impact to them will be immaterial. But just noting that IAG does a relatively larger business in New Zealand, what do you think about the proposed doubling of the EQC cap and how do you think that could impact your premium earnings into FY '23?

Yes. I mean I'll pass to Amanda to make some comments on this one as well. But at a high level, it's like -- because, essentially, what's going to happen is the EQC is going to increase its exposure to earthquake risk, and the industry is going to slightly decrease, so it has impact on premiums. In relation to profitability, I think that's pretty modest would be my -- would be modest in New Zealand and immaterial to the group. Amanda, you might just step through exactly why -- how that's working and the timing of that introduction.

Thanks, Nick. Yes. So the timing of the introduction of the EQC changes that -- is in October next year -- or next financial year, sorry. And we're working closely with the government on the pricing strategy that we will put in place. But as Nick has highlighted, there will be an impact, a slight impact on GWP. There will also be an impact on our reinsurance requirement, so that will reduce. And so net, we're not expecting that to be either material for New Zealand or for the group.

Your next question comes from Nigel Pittaway with Citi.

Nick, Michelle, first of all, just a question on your sort of guidance waterfall. I just wanted to explore slightly the logic of increasing the -- sorry, including the extra 25 basis points net benefit of COVID less reserve strengthening. I mean it begs the question as to whether you actually need that to reach the guidance. So can you maybe just talk a bit about that?

Sure, Nigel. I mean, Michelle, you comment on that.

Okay. Sure. Nigel, I think it's partly -- Nigel, what we've done is to call out what our underlying margin would look like ex the net COVID benefit. And I think I quoted that number to about 13.6% down from the 15.1%. And that gives you an indication of where we're at for the half. And I think if you go back to our pre-perils, the guidance that we talked about of 13.5% to 15.5%, you can see that's towards the bottom end of the range, but we've called out some other factors today that give you confidence in what we'll look like for the full year around that range.

And Nigel, I mean, just a comment from me. I would -- I'd be sort of thinking the run rate of our company is sort of somewhere between that 13.6% and 14%, there's also some minor adjustment there on some of the movements of interest rates. So sort of the run rate of the company in sort of -- in a normalized perils basis is around about 14%. That's how I'm thinking for the first half. And that's really sort of on plan with our -- versus our sort of expectations if we take us back to August about -- and the trajectory of how we sort of saw this year going.

Okay. Maybe just sort of digging into that a little bit more. I mean you've obviously called out these conservative reserving assumptions you've got in terms of risk margins in the motor and home portfolio, in particular, [ which you need to recognize uncertainty ] post-lockdowns. How material was that impact on the insurance -- underlying insurance margin in the first half -- sorry, in the insurance margin, it might not have the -- underlying insurance margin in the first half? And how long do you intend to keep?

I mean, Michelle, maybe you comment on...

That's okay. Thanks, Nigel, for the question. So in terms of the net COVID benefit that we saw during the half, it was included in the 15.1% underlying insurance margin. We did indicate that we've kept on our balance sheet some element of risk margin associated with what we know from our experience during FY '21 can be elevated pressure on claims inflation for a longer period, then immediately the lockdown coming -- being -- moving away. Sorry, I'm tripping over my words here. It's not a number we've called out separately, and it will play into the mix of what we're seeing around inflation in the second half.

Okay. And then you've also called out the claims funding expenses as being an impact on the underlying margin in the first half, suggesting that they were growing at mid- to high single digits. Do you think -- sort of [ hard, permanent, sort of temporary ] do you think that sort of trend is?

So with the claims handling expenses, they've got a direct relationship to what we see with things like the perils events, so you can imagine that the significant perils events we saw in Australia in October, and we also saw some fairly significant perils in New Zealand, very early in the financial year impacts the claims handling expense. So we're confident as we move forward that they'll moderate a little bit, but we needed to call that out as part of explaining our expenses in the half.

Your next question comes from Andrew Buncombe with Macquarie.

The first one's for Jarrod. Just if you can give us a bit of an update on the caseloads and the broader claims trends in your liability portfolio.

Thanks, Andrew. In regards to caseloads, they've remained fairly stable through the quarter. As you'll see from the notes, we did strengthen our reserves, our prior period reserves on our -- purely on our liability portfolio. That wasn't as a result of increased volume. We saw some inflation in bodily injury claims. And furthermore, we had some one-off -- or a cluster of large, relatively late-reported property damage claims that came through. So it wasn't around increase in case numbers, it was more that inflationary on bodily and some large property damage claims that were outside the number expected.

Next one. The next question's for Julie. Can you just give us some color around IAG's approach to cash settlements of home and motor claims over the last 6 to 12 months? And in particular, maybe comments on whether that approach has changed as the borders have opened up again?

Sure. So I mean we continue to settle our claims in the same way that we always have. Our preference is making sure we're repairing and putting our customers' homes as is cars back in the same position as they were. In terms of motor total losses, that's an area where we have accelerated the way that we focus on cash settlement, and we've talked to you before about some of the technologies that we're using to deploy that. But we have the ability to service our network right the way across Australia, and that's what we're focused on.

Excellent. And then just a final one maybe for Nick or Michelle, just as we approach the new -- the renewal of the first whole-of-account quota shares, are there any scenarios where you would actually increase the size of those quota shares?

I mean -- and I'll make a comment. I mean we're -- I mean I've always said that we sort of see quota shares as just part of the capital structure of the company. And as you rightly point out, we're coming up for some of the smaller parts of renewal. I mean we'll look through those scenarios. But I think as sort of the base case to be assuming over the next number of years is that the current structure is retained, and the current percentages are retained. We may finesse that up and down a little bit. But I think it will be -- the best way to approach that, from your point of view, would just be assuming what we've got is staying on as a percentage.

Your next question comes from Kieren Chidgey with Jarden.

Just a couple of questions, starting maybe on the inflation side of things. I see ex COVID, I think you called out your attritional loss ratio has improved about 80 basis points on pcp, which clearly suggests you are getting right ahead of inflation. But just wondering if you could unpack in a little bit more detail what you are seeing in each of the key classes within Australia and New Zealand.

Yes. Sure, Kieren. And maybe what I'll do, I'll just make some very high-level comments, and then I'll see if I can orchestrate a comment from Julie, Jarrod and Amanda because they're all slightly different. I mean the overall theme is we're seeing a little bit of inflation. We've got repair models in place. And Michelle mentioned a number of those that are helping mitigate that, but we're seeing a little bit. But at a sort of a group or a portfolio basis, we're comfortable that the way pricing is flowing through our portfolios that we're adequately covering any of that. But that's sort of an IAG comment. But I think it might be useful just to hear from Julie then Jarrod and Amanda on that, we can sort of build on that in the different parts of the organization. Julie?

Sure. Thanks, Nick. So I'll just speak to home and motor in Australia, and Jarrod and Amanda can pick up the other classes. But in relation to home and -- but we're both home and motor, we're sort of seeing low to mid-single-digit inflation. And most of what we are observing, in terms of the way that we look at inflation, is an increase in the cost of repairs and parts and materials with which to rebuild. Now of course, that's not what we end up passing through to customers. Our job is to make sure that through the way that we operate our business, we're managing that most effectively. And we also have reinsurance costs as well that we add in terms of the price changes that we put through the market. But for motor and home, we're pretty well provisioned. We're keeping really close attention to it. But I would say when you compare this period, last period, you kind of get a reasonable number, but we're seeing a little bit of an uptick month-on-month, and we have -- we spent a lot of time understanding that in our business. We expect that to be there for about another 6 to 12 months before supply chain pressures ease.

And Jarrod?

Thanks. Thanks, Julie. In the commercial classes, particularly the short-tail, the property classes, it's not as clear. We do expect to see inflation running through those portfolios. But how that comes through with the way the claims are settled, the length of time, particularly on the larger claim, property damage claims take to settle, it's not as clear as what we see in personal lines, but we are keeping a very close eye on it. On the longer-tail classes, we're seeing -- we are seeing that low single-digit inflation come through on those class, particularly around bodily injury, and -- but that's within our expectation of what we set for the year. But it is an area we're keeping a very close eye on. Amanda?

Thanks, Jarrod. Yes, and it's a similar story here really. In New Zealand, obviously, motor fleet is a little older, and we have more older vehicles. So that helps us with replacing parts at a secondhand. We also have, obviously, our Repairhub and our repair network, which is fairly significant given the scale that we've got. So we're seeing a little bit of inflation come through on our motor vehicle but that's being managed through rate that's coming through as well as what Michelle alluded to around having some risk margin to manage that inflation and pressure. In property, it's a little bit more, so it's about 5%. And what we're seeing there is that we're managing that pretty well through the fact that 70% of those claims relate to labor, and we have very strong supply contracts that are fixed labor costs. So we're managing that well, but same story, the rate is coming through well, and we have got some risk margin.

All right. Let me just follow up, Jarrod, on the long-tail top-ups within commercial and the high inflation in bodily injury. What -- obviously, you've highlighted the reserve strengthening coming through there. But what changes have been made to accident year inflation assumptions that we don't see these ongoing reserve top-ups for the last 4 halves recur?

Yes. What we're -- we've taken that into account in our pricing. So whilst we talk to 9% across the board, across our portfolio in Intermediated, our long-tail classes, we're achieving double-digit rate increase on those portfolios. So we are also improving the underlying result and accommodating for that marginal increase over what we anticipated for inflation. So hopefully, that gets to the question you asked, but it's not a significant increase over the entire reserve base that we have for liability bodily injury claims.

And I think the point is we're trying to get ahead of it. And I think it's not just our company, the -- what we just said then is that's a market issue, and we have seen pricing along those lines in the market.

And one final question on expenses for Michelle. Just going back to this new sort of group cost target you outlined at the Investor Day of keeping the cost base sort of at that $2.5 billion or slightly below over the next couple of years. I mean looking at your disclosures that you've added to the investor report, you say first half was $1.3 billion. So off the back of that, are we to take out of that, that we should see gross expenses around $100 million lower in the second half of FY '22?

So thanks. I think the best way to think about it is the -- around the $2.5 billion, it has some timing differences in it associated, particularly with our investments to transform, so it's not a linear scenario associated with that. And so we will continue to see improvements in our expenses to run the business as we drive through the benefits of those investments, but we'll see some variability in terms of that around $2.5 billion as we make those clear decisions to invest relative to our strategy, so obviously, the customer growth but also the Enterprise Platform acceleration. So we're on track for FY '22 to be broadly in line with the targets that we called out in December.

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

Just noting the upward trend in peril. To what extent should we consider the FY '22 revised allowance the new normal? And to what extent is that being priced in across the home and motor portfolios?

Matt, we did have the worst October that I think I ever remember from a perils point of view, so I'm not sure. It's probably somewhere in between that -- we've had a pretty tough first 6 months, and so I wouldn't -- I don't think that is the new normal, if you call it that. If you're sort of looking for the question of what does '23, '24 look like, how are we thinking about pricing, definitely, from a perils point of view, we are seeing increased perils across the portfolio, so you should expect those allowances to go up. That will be reflected in pricing. I think that's just -- that's an industry comment, not just an IAG comment. But I think that the number we're using for FY '22 also does include a pretty tough October, so somewhere in between, I think.

Nick, and if I could just please confirm that the time line for business interruption and when you expect to be able to update the market after a court decision.

I mean it'll -- I mean -- sorry, let me break that into 2. The first one of time line of when do we expect to receive that, I mean, we're not sure. I'm sorry. So I'm thinking soon, though, but we don't have any more insight than anyone else on that time line. In relation to then us communicating what -- I think the question is what that means, it'll part -- as you can imagine this, I don't want to sort of sit on the fence, but I think this is the reality. It will partly depend upon what it says. And if it's simple, then that will be quick. If it's complex, that might take us some more time. I mean I'll just remind everybody that we've taken a conservative view here. So we've taken a view that we haven't changed anything from the original positioning, which means we're assuming this is unsuccessful from a balance sheet point of view. And so it will be really, the time line for us to update the market will be driven by kind of what's said and then what that -- what the flow-through is to our conservative provision that we've got on the balance sheet. I'm sorry. That's not a very direct answer, I know, but I don't know how else to phrase it. I'm sorry. I've got uncertainty on timing, and I've got uncertainty of what it says. So I'm trying to just -- but the intention would be to update the market as quickly as possible.

And Nick, I think it's fair to say, we've done a lot of work with our models in the background to be ready for multiple scenarios. The real challenge is what does the actual decision say. So we'll move as quickly as we possibly can because we know it's a matter that we'd all like to be clear on as soon as possible.

Yes.

So that mean weeks rather than months?

That's the plan. Yes, that's the plan.

[Operator Instructions] Your next question comes from Siddharth Parameswaran with JPMorgan.

Quick question, if I can, just on home. You listed [ here ], called out negative inflation in home. I was just wondering if you could just comment whether including COVID, you saw any benefits like this? Or if -- I mean it seems like you're flagging that there is actually inflationary pressures that you're seeing. So it seems like there's quite a difference in terms of observations in the market. I was hoping you could just comment on what -- or how you're coming up with the user here. Is inflation in home? And just your thoughts on, I suppose, just what's happening out there in the broader market?

Sure. I mean Sid, I'll make some high level and maybe I'll ask Julie to make a comment here, and I'll I think the themes are similar across the company. I mean we are seeing a little bit of inflation in home. I think mix is interesting here. The mix has changed a bit during COVID. And we've got all sorts of repair models in place to help address that. But I mean -- I think there's a little bit is what -- on a like-for-like claim, although mix is sort of interesting in that discussion as well that, that's changed slightly during COVID environment. But Julie, do you want to comment on just a bit more detail?

Sure. And I'll just focus on what's happening in our portfolio in our main, Australia. So we see quite a number of things happening. So obviously, there's a lower reported claims, lower frequency because of COVID. People are at home, they're looking after their homes in a different way. So we're seeing a little bit of that occurring in the portfolio. We also have in place really strong partner builder networks across Australia that we are able to work very closely with in order to get repairs done quickly. That comes with our scale. We've spent a lot of time over the last 6 months focused on closing down any open claims that had any sort of duration because we had some capacity in our network to be able to do that. And so the volume of claims that are open, excluding events, which, obviously, was pretty intense for us in the second half, but that's dropped by about 6%. So if we look at all of those factors, there's certainly some differences in terms of the cost of claims. When we focus on inflation, however, and when we talk about inflation, we're really focused on the cost of materials, not the operating model that goes to mitigate and minimize that, but the cost of materials. There are some figures quoted out there sort of around building standard costs of around 7. We're seeing a lot less than that as well. But there is a little uptick in what it is costing to repair in terms of buying materials and the availability of workforce despite our repair builder network to be able to do that. That said, in our home portfolios, we have been holding our premium rates consistent with those we predicted last year. We haven't moved those. And in home, our premium rates comprise [ what's happening ] in our operating model, what we're doing with inflation and the cost of reinsurances. And for us, we're really focused on making sure that our existing customer base is getting the benefits of all of those things.

Okay.

Sid, Can I -- I'll say -- I think there's a little bit in there as you can tell. There's sort of -- it feels like there's quite a lot of parts to this story. I mean on a like-for-like, materials on a repair -- on a home repair, we are seeing a little bit of inflation. There's just a lot of other parts to that story. I think that's kind of our message.

Okay. Okay. I'll try and piece that together. Maybe if I could just ask a follow-up. So just from your disclosures, it seems like on home and motor, you're getting rate increases of around about a 4% level. And Nick, you said that, obviously, perils activity is -- was higher than expected this half. It's possible there could be some inflationary views on your perils allowance into next year. Given the inflation numbers that you're calling out, I mean, it seems like if you're getting 4% rates, it doesn't sound like that's covering inflation and perils increases. And I'll just point out that it seems like Direct Insurance Australia underlying margins ex COVID have been falling. So I was just wondering if that trend is likely to continue.

I mean at a portfolio level, no. We -- across our group, as I said, we're expecting to be able to price. And it's up to us to manage what we're managing as efficiently as we can in relation to the cost structure of the company, the relationships with suppliers, et cetera, risk selection, all those things that make up the insurance company. But our intention would be that any sort of inflationary cost that's in the system that we're -- that we -- sort of the net position of that story would be reflected in pricing and won't be sort of a dilutionary impact, if that's your question, on the overall margins that we're delivering at a company level. So that's how we're thinking about this. And therefore, we need to be factoring in increased perils cost, cost of reinsurance, any other inflationary pressure into the system, running the company more efficiently, relationships with suppliers, that's all part of that package of -- but overall, as we've been pretty clear, we're expecting year-on-year improvement in margins of IAG.

Yes. Okay. Okay. Just other than the extra provision you've taken for COVID. If I could just ask about how you expect the impact of coming out of lockdown to impact your claims trends. Maybe if you could just give us some color around what happened coming out of the lockdown last year -- sorry, in 2020. And also, could you give us some comfort on -- or some ideas of what the trends have been overseas, if you've tracked what's happened over there in motor and the home in your markets to trend ahead of us and coming out lockdown.

Yes. I mean I'll make some high level and maybe I'll just ask some of the business executives that we've got here today to make a comment as well. I mean what we've seen in our business and other markets is a revert to normal pretty quick on frequency. And there's a bit of noise around -- as we've gone from, say, motor, lower frequency to that. There's been a bit of noise in how that's rebalanced. My sort of IAG group comment would be I sort of feel like we've -- that happened a little bit, and we've seen that happen in 2020, and it happened again in 2021, and I feel like we sort of got through that. And there were some spikes and some monthly changes around, but that seems to have normalized pretty quickly. And my comment around from other markets around the world is I think that's similar. So that topic, Sid, I already feel like at an enterprise level, we've sort of got normalized already. But then maybe Julie and Jarrod, Amanda, just sort of any -- just anything to add to that?

Sure. So just really quickly, a little bit different by state. So in Victoria, very quick reversion to just normal levels of frequency. So in line with our expectations. In New South Wales, a little bit slower to come back. We're sitting just a tiny little bit below long-term frequency trends in New South Wales. But again, that's very, very predicated on lockdowns and opening up the system. So it's almost back to normal pretty quickly. We're not seeing anything over and above at this stage, the trends -- long-term trends. So it's not like there's a lot of claims in the system that haven't been lodged, it's very consistent with long-term trends.

And maybe, Amanda, you've sort of -- any differences from that within New Zealand market?

Thanks, Nick. Only that obviously, lockdown's quite different here in terms of the way the country has treated COVID. So Auckland was really the only part of New Zealand that was in any lockdown, and we did have some frequency benefits from that, but that's returned pretty much to normal. And of course, we're now experiencing the Omicron variant. So we will -- we're -- we are seeing a little drop again in frequency as people are not as comfortable to move around. The other thing, of course, is behavior of customers. We saw a slight spike when we came out of lockdown because people had held off on making a claim. But in general, trending slightly beneath last year.

Just a very quick question from me. Just Nick, you indicated there's a benefit from underlying yields rising. Just -- can you just quantify what you think that is, so the exit rate we have benefit versus the -- this [ would be in ] the half?

Yes, sure. I mean, Michelle, you might just want to make a comment on that.

Yes. Thanks. Sid, so what we saw, obviously, was some sharp interest rate movements in October last year, and that had an impact on our underlying yields, if you like. And so what we've got, we've called out in the materials, so we had about a 40 basis point impact in the half. That's really a timing difference between the discount rate and how that matches up with our premium liabilities, which we're not discounting. So unwind over the second half, Sid. So when you back that out and look through to our running yield, it's a little bit down on the last 2 halves.

Your next question comes from Doron Kur with Credit Suisse.

Maybe just a follow-up on that last question with the underlying yield. Why would it be lower this half when rates have been higher? Is it due to the spread?

So thanks, Doron. It's largely due to the nature of our bond portfolio and the elements within that and how it's been impacted by the movement in interest rates during the half.

Okay. And then maybe one back to some of the comments around DIA and motor. Just to clarify, the inflation offset that you've booked in the risk margins, that's not included in the underlying margin. Is that correct?

So that's right. So our reported 15.1% margin has the net COVID benefit. And what we've called out, and we obviously had lots of questions on it today, is that we've been cautious in how much of that frequency benefit we let flow through into our results for the half, particularly given the experience that we saw in FY '21, where there's a little bit more of a lag. So we haven't called out that number, and I think we've been asked a few different ways to try and get us to call out that number. But it just allows us to be prudent as we go into the second half as we're seeing a little bit of, potentially, a lag, and it's helpful for us in the mix of managing the second half.

Great. And we chatted a little bit about motor coming out of COVID lockdowns on the frequency side. Some of what we've seen overseas is that there's actually been an increase on severity. It seems people have gotten used to driving faster and are still behaving that way even out of lockdown. Just curious if you've seen higher severity in motor claims.

I mean, Julie, you might want to make a comment.

Yes. We have not, at this stage, seen that. And to be honest, we would have expected to across the Christmas period as people are traveling around Australia on holidays. We have not seen that at this point.

And then maybe just one on the -- again, on the underlying margins. There's a figure of 1.2% other in the -- on the spreadsheet there in the waterfall. Is it right that most of that is related to higher expense growth this half?

Yes, I think so, without putting the slide up in front of me, Doron, just remembering the elements of the waterfall. But yes, we did call out that some of that was offset by higher expense growth during the half in terms of the comments I made on that bridge.

And maybe just a last one on personal lines. You mentioned a bit of growth there. Just if you could give any color on maybe what you see market growth or what's your -- how your market share has changed in the last half in Australia.

Yes, sure. Julie, do you want to make a comment?

Sure. So I think what we've -- what we observed in the total market for a couple of months of decline followed by sort of strong comeback in the last month, the NRMA market share is holding. And when you combine that with RACV in Victoria, it's a leading market position. We're expecting growth to now accelerate as population changes again, as more confidence comes back into the system. And the work that we've done over the last, really, 3 months has been setting up our platform and our brands to be able to participate in that in a really rational way. So we're actually pretty excited and focused on the next 6 months.

Sorry, maybe in New Zealand as well.

Amanda, just -- want to make a comment on New Zealand?

We have not sort of stepped into our growth phase yet. And if you recall from our strategy section, we're focusing in on Phase 1, which is building up the foundations for growth. And our big opportunity here is around optimizing our claims experience so that we can actually reinvest those efficiencies into growth. So at this point, our strategy is to hold customer numbers.

I think we've got one more question on the line. Have we?

Your next question is a follow-up from Nigel Pittaway with Citi.

Sorry, guys. Just a quick follow-up. Just wanted to come back to your comment, Nick, that you think you're running at about 14% underlying margin at the moment. I mean obviously, with your reported margin up to 15.5%, I just wondered sort of what sort of factors you would need to see to sort of hit the top end of that range.

All the -- I mean, I don't think it -- hey, Nigel, nothing different than normal. So, we've got a bit of momentum around growth. That pricing flows through obviously into earned premium in the second half. There's been -- we've got expenses that we're incurring and timing of those investments. Frequency, we're just assuming a normal frequency experience as well as with perils in the second half. So probably, I mean, nothing -- I mean, there's a bit of momentum in the business. So if your question is, what does the second half look like, I mean, I'm expecting it to be slightly better than the first half. And then we've put a range around that, just on the normal uncertainty of our business. But we feel -- I mean, I suppose the point that I'd really like to make and -- is that we feel pretty good. Like it's been a challenge for us to get our arms around it. We've had some issues, we've sort of dealt with that. And we're really focused on the go forward. And we can feel the momentum that's starting to be created within IAG. You can see it in our results, but we -- in the company, we can really sense it. I think we have no further questions. I mean kind of half done my close just then. So firstly, thank you, everyone, for joining us on the call this morning. We tried something a bit different as well by having all the team here that are running the businesses as well as Michelle. I mean you get the theme from me. I mean my view is we've had a positive start to the year, and we're really pleased with that. And what that's done is given us a more optimistic outlook in the guidance for FY '22. We're realistic about the challenges related to COVID-19 that impact us, but of course, all of us. And so everything we say is also making sure we're thinking through that. But we really do feel equipped to navigate these with a strategy that's embedded across the organization. And importantly, and I hope you're getting a real sense of that from today, a super focused and energized team that we're really deciding to deliver. We're not talking, we're delivering. We're sorting stuff out, and we're focused on the future. I mean my view is -- and I've been here 20 years. Today, IAG is a much stronger and a much more resilient company than we were in recent years. And we spent a lot of time setting it up, but we really have got the right foundations to position us well to really drive that agenda for the future. Hey, thanks, everyone, for participating this morning. I look forward to talking with many of you over the next few days or few weeks. Thanks again for your time.