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

Well, good morning, everyone, and welcome to IAG's financial results for the year ended 30 June 2022. My name is Mark Ley, I'm the Head of Investor Relations. This morning we'll have presentations from our CEO, Nick Hawkins; and our CFO, Michelle McPherson. And then we've set aside plenty of time to answer your questions. [Operator Instructions] For those of you in the room, I'd ask that you now please ensure that your phones are on silent, and I'll hand over to Nick. Thank you.

Thanks, Mark, and good morning to everybody, and welcome again to our results presentation. I just want to start by acknowledging that we're holding this meeting today on the land of the Gadigal people of the Eora Nation. And so I pay my respects to elders past, present and emerging. With me today is our Chief Financial Officer, Michelle McPherson, who's joined -- will join me on stage in a moment, together with Julie, Jarrod and Amanda and other members of the IAG executive team, and they'll be all available for questions at the end of the presentation. I want to start with this slide really around the headline financials that we announced on the 22nd of July, and really sort of make sure we sort of have sort of 3 key themes that we're going to talk through today, we want to leave you with as well, which is around -- we've got some really positive underlying momentum in the results of IAG, and we're going to demonstrate through -- that to you today and that we finished the year strongly, importantly. Secondly, of course, we are experiencing inflation right throughout our organization. But we are managing that, and we are on top of that, and we'll talk you through why that's the case. And because of that, we're comfortable with the outlook and the prospects of our company and the guidance that we're providing you for FY '23. Behind that, what you're going to see is delivery against our strategy and when -- we're going to talk you through in some of the details of what we are delivering as well as some of those sort of key measures that are giving us confidence on the outlook, in particular, things like customer retention, where some of our retention rates are high as I can remember. You'll see within our expense ratio that we're managing the cost base of the company well. And of course, back to that sort of underlying performance and the momentum that we can see in our business, it really gives us the confidence for FY '23. So before Michelle and I sort of go through the things in a bit more detail, I just want to sort of start with a couple of really big headline numbers about our performance for FY '22. And they are around premiums and what's happening with margins. So you'll see with our premiums that we've grown the business in a 12-month period by 5.7% in gross written premium. And of course, that's consistent with the mid-single-digit guidance that we provided the market with in February. But if we sort of adjust that for some of our business exits, in particular, the -- in the IAL portfolio within Jarrod's businesses, where we exited a relationship there, together with some adjustments for COVID as well as some changes that have happened with some of the levies that we collected, particularly here in New South Wales. So the underlying run rate of our company is 7.4%. Now that -- so that's the underlying growth of IAG right now. Of course, behind that is predominantly price that's flowing through our portfolios everywhere. But we're also seeing volume growth, particularly within Julie's business here in Australia within the Direct business, where we are increasing the number of customers that business has. And we expect that to be a theme going forward, continued premium type rate increases flowing through right throughout our portfolio. We also expect to continue to see volume and customer growth, particularly within our Direct businesses. That's what gives us confidence around guidance of that mid- to high single-digit premium growth in FY '23. So the other side of that graph is around what's happening with our margins. And our reported margin today is 7.4%, and that's down year-on-year compared to our reported margin for FY '21. But there's a few stories there, obviously. We know the reported margin for this year has been heavily impacted by perils, what's happening with the credit spreads and investment markets. Also, what's happening with the strengthening of the back book of -- particularly within our liability portfolio has had an impact on that reported margin. We also know there's been a COVID frequency benefit but -- in both years, in the lockdown period, particularly with motor accidents, and that there's been some benefits that are in both years. And we're also with this sort of pretty significant movements in interest rates. So there's some mismatch that impacts that margin. So if we look behind that, and this is what we're showing on this slide, sort of the -- in my view, sort of the run rate of IAG as we start FY '23 is 14.4%. So that's -- on a normalized basis, that's the run rate of our company today, 14.4%. And that compares to sort of 12 months ago where that number on the same basis was 13.8%. And there's detail in the packs about the specifics of all those numbers. So you can see year-on-year, an improvement in sort of what I would say is the underlying margins of IAG. And in fact, Michelle will step you through that -- step you through as well. Half-on-half, we're also seeing an improvement. We're seeing half-on-half improvement as well as year-on-year improvement. And of course, that's what's really given -- and that's really how we're exiting FY '22. That's what's giving us the confidence on the guidance that we're providing today around FY '23 of between 14% to 16% insurance margin. And we'll unpack all of that more either in presentations today or in all the materials that you've got. Just quickly around the divisions of IAG and the 3 business units. So firstly, within our Direct business here in Australia, premiums have grown within our motor book by just over 6%. And premiums have grown in our home book by just over 8%. Predominantly rate, although we are seeing, as I've mentioned a couple of times, customer growth in those businesses. Really pleasingly, sort of, for me, for Julie and the team, our retention rates across motor and home across every state in Australia are holding or improving. And we're really proud of the way our brands show up when we're needed. And it's been a tough sort of 12 to 24 months for our business around perils and for our customers. And the way we're showing up and the relationship we have with our customers and how we're meeting their needs is really being -- is really demonstrated through those high retention rates, which are, I think, for home and above 95% or more like 96%. And for motor, they're in the low 90s, which I've said before is very high from my experience in our company over the last 20 years. Within Jarrod's business, within our Australian Intermediated business, we really are enhancing and building out a stronger operating model. We've made changes to underwriting and pricing and the way we're coming to market as well as how we're interacting with our brokers. And we've really got a stronger proposition in place than we've had in the past. Average rate across our entire Intermediated business is up 9%. And you'll see in the packs that the underlying performance of our Intermediated business here in Australia has improved year-on-year, and it's got some of that momentum that I've talked about. We know we've strengthened reserves there. So the headline numbers are impacted by that. We've gone back and looked at some of the prior accident years, particularly '17, '18 and '19 and the liability classes. We talked about that a couple of weeks ago, and we flowed that through into more recent years. But behind that, we're really seeing momentum in this business. And what that's doing, of course, is giving us confidence for Jarrod and his team on delivering on $0.25 billion insurance profit by FY '24. And we are on track against that as we're delivering out our plans next 12 to 24 months. And of course, in our New Zealand business, Amanda and her team, they continue to deliver a really strong result for us. Like Australia, New Zealand has been impacted by higher perils in the last 12 months and, of course, has been impacted by investment market. So we do -- there has been an impact on reported margins. But if you look behind that, that reported margin was 12.8% for -- in FY '22. Look behind that, what you can see is growth of around 7% throughout that business, and an improved underlying margin at 16.8% for the year. So that's an improvement year-on-year. And we really see another great result out of our New Zealand business from Amanda and the team. If I just turn to strategy. And we just want to be consistent with how we talk about our strategy with our stakeholders, both internally and externally. We use this slide everywhere. We have the 4 pillars. We really want to make sure we have a clear report card of what we've delivered, and what we're focusing on around those sort of 4 key themes that our company is being set up against. Just to highlight a few of those, within our Direct business, we've got 100,000 new customers within Julie's business over the last 12 months. And we're really proud of how we've rolled out NRMA across WA and South Australia as well as the launch of ROLLiN', a new brand that's sort of meeting an element of the market in a segment that we weren't delivering potentially as strongly as before. We're building out better businesses. It's not just the improvements that we're making in Jarrod's business. We've -- we're expanding out our MotorServe business here in Australia, and we're launching more -- we've got more sites around -- with Repairhub. And that's really helping us with sort of managing some of the inflationary impacts and our customers' experience with a mode of repair through the Repairhub businesses in Australia and New Zealand. Now Jarrod continues to focus his operating model, really clarity of distribution, pricing, underwriting, claims and clarity of accountability in that team as we're driving towards that improved result in that business over the next couple of years. We've launched a lot of new digital initiatives over the last 12 months, and we're really sort of proud of a few things. We've got an online motor claims tracker, so more than 170,000 -- we only launched it in May. 170,000 customers have had an experience with us around motor claims tracker. And we also have significantly improved our claims -- online claims lodgment process. And that was really important in sort of March, April of this year, where we had significant perils experience up and down the East Coast of Australia. We had a lot of our customers impacted by that. And we saw something like 60% of all of our claims being lodged through this online claims lodgment. And what they're doing, of course, is creating a better experience for our customers when they're interacting with our company. One of the core things we are delivering is our Enterprise Platform. There's a couple of parts to that. We've delivered out a standard claims model all the way through IAG, Trans-Tasman, and we are in the process of the second part of that. And we're more than halfway through that second part of the build of what we're calling our personal -- of our Enterprise Platform. We are operating that in WA and South Australia on our NRMA business, and we're having a migration over the next 12 to 24 months across to the East -- all of our personal lines in the East Coast of Australia as well as personal lines in New Zealand. We have around 70% of our business on that in the next couple of years. And we're really sort of -- that's -- what they're doing is really creating some consistency of our systems and processes within IAG. In managing our risks, this has been a big focus for IAG over the last couple of years. We've significantly strengthened sort of the risk environment of our company. The systems and processes we have established as well as a real focus on accountability and clarity of roles and responsibility across our organization, both in my leadership group and how that then is distributed across how we run our company. And we significantly enhanced that over the last 12 months. The package of those initiatives really are building being out a stronger and a more resilient IAG. And we're really pleased with the progress that we've made. And of course, what that's doing is giving us the confidence on the outlook that we're talking about today. So on that note, I'll hand you over to Michelle, who's just going to step us through a bit more detail on some of the financials.

Thank you, Nick, and good morning, everyone. On the slide, you can see on the screens now, we've set out our headline numbers. As Nick has outlined, we are really encouraged by the strong premium growth and the underlying insurance profitability for the year. Our insurance profit of $586 million was down just under 42%, impacted by significant natural perils, reserve strengthening and volatile investment markets. Our underlying margin of 14.6% was slightly below what we recorded in first half -- in -- sorry, in FY '21. But as Nick mentioned, improved on an adjusted basis, and I'll go into the details of that shortly. That said, I'll pause now. I know many of you here adjusted and worried what we're doing. We have included Appendix 2 in the pack that actually sets out the details of that calculation. Our net profit after tax of $347 million included $140 million post-tax benefit of the partial release of the BI provision of $200 million. While this provision release is excluded from our cash earnings, we have included it for the purposes of the dividend determination in this financial year. The combination of the factors I've just touched on, together with $105 million loss on our shareholder funds portfolio, all resulted in the NPAT of $347 million. Off the back of that, the Board declared a final dividend of $0.05 per share, taking our full year dividend to $0.11 per share. Moving forward, I'd expect our dividend payout ratio to be 60% to 80% of net profit after tax, excluding if they come to fruition, any potential releases from the BI provision as we move forward. Future business interruption provisions releases, should they occur, are likely to be utilized for some form of capital management, for example, on market share buybacks or something like that. Taking us to premium, and at the risk of being repetitive, I do think it's worthwhile if I spend some time unpacking the growth in our GWP, and why it gives us confidence moving forward. GWP growth reflects favorable industry conditions and our proactive initiatives to reprice for the anticipated increases in reinsurance costs, inflation and our expectation of natural perils. As we saw in FY '21, there was a modest COVID impact, but this was isolated in our view to the first half of the year. We also saw approximately $140 million reduction in GWP from the exit of the IAL Personal Lines portfolio commencing in November last year and more modest impacts from the lower emergency services levy and foreign exchange. Most of the underlying growth we achieved was rate-driven, but we have seen some pockets of volume growth. If I turn to our divisions, in Direct Insurance Australia, we lifted premium rates by 5% to 6% on average across the year in both our motor and home portfolio. And we delivered short-tail personal lines growth of over 1%. Our Intermediated business achieved strong rate increases averaging 9% for the year and retentions remained solid at 85%. The business division in New Zealand achieved 11% local currency GWP growth from a combination of high rate increases and broadly flat volume, supporting the overall New Zealand GWP growth of 7%. If I turn now to our underlying margin trends. As Nick explained, we have kept our underlying margin definition consistent. And based on this, FY '22 delivered a 14.6% margin compared with 14.7% in FY '21. Both years had a broadly similar COVID benefit. To explain some of the key changes that we've set out in the margin waterfall bridging the 2 periods, in our results, we did absorb a significant increase in our natural perils allowance, about 140 basis points drag. The sharp move up in interest rates impacted the margin by around 50 basis points. This impact reflects timing differences related to undiscounted insurance liabilities owned in premium liability and will unwind in FY '23. Largely offsetting these was approximately 190 basis points improvement from other factors, mainly the earning of premium increases, which during the year was higher than underlying claims inflation, supported by higher investment yields and an improvement in our expense ratios. On the right of this slide, you can see our adjusted underlying margin, which removes the impact of the COVID benefits and the discount rate timing impacts. And you can see an improvement from 14% in the first half to 14.8% in the second half, averaging the 14.4%, which Nick called out earlier. Moving now to our underlying claims. This ratio excludes our perils costs and prior year reserving changes and focuses on our working claims. The chart also backs out the COVID-19 influences half by half, allowing you to see the trends more clearly. As you can see, these underlying loss ratios have been steadily improving until the slight increase in second half '22 to 54.5%, reflecting the impact of claims inflation that we've seen across the year. We have responded with higher rate increases, noting there will always be a delay in the earn-through of those rate increases. We're also mitigating the impact of inflation with a range of claims initiatives that are leading to improved customer outcomes, particularly in terms of quality. For example, we now in Australia have 17 Repairhub sites, which have improved customer experience through getting cars back to people in a faster turnaround time. In March 2022, IAG New Zealand acquired full ownership of First Rescue, a nationwide network of over 500 providers and assessors offering 24/7 roadside assistance, accident towing and vehicle assessments. These initiatives are going some way to helping us mitigate the impact of claims inflation and will continue to be a major focus for us. To expenses. As we've talked about previously, we're targeting a broadly flat cost base of approximately $2.5 billion and declining expense ratios over the next couple of years. At the business update last December, we shared with you some detail on the dynamic approach we're taking to managing cost growth. We continue to drive efficiency and maintain discipline across costs. And you'll have seen our costs required to manage the group have declined 2.1% in FY '22. We are investing heavily to transform the business across technology, digital capability, automation, artificial intelligence, with some of these costs being expensed and some being capitalized in accordance with our accounting policies. One of the most material areas of investment is the acceleration of IAG's Enterprise Platform, which plays a critical role in transforming our customers' experience and allowing us to drive operational excellence across the group. You will see the impact of the capitalized technology spend classified as an intangible asset in our capital calculations. We have commenced amortization of the Enterprise Platform costs, and I factored this into our expectation of achieving approximately $2.5 billion cost base in our FY '23 guidance. Going forward, macroeconomic conditions, including the potential for higher-than-expected wages inflation, have the potential to present us some challenges in the medium term and reinforces our focus on driving efficiency across the group. The investments we're making in automation, artificial intelligence and other areas are critical to unlocking these efficiencies and reducing expenses. I'll touch briefly on our peril costs and reinsurance. We finished the year with natural perils of a little over $1.1 billion, which was $354 million above our allowance for the year. The overrun is broadly in line with the market announcement we made in March. Last month, we announced our FY '23 aggregate program and including the purchase of additional financial year drop-down covers to supplement the calendar year drop-downs, which will now apply to an event that occurs between now and 31 December. This sees our current maximum event retention at $135 million post quota share. A combination of market conditions and the additional drop-down protections have seen us increase the FY '23 aggregate deductible from $400 million to $500 million. So we're well protected against major events heading into FY '23, when we're in FY '23 given our recent experience. And we've materially strengthened our perils allowance to $909 million, up 19% from the $765 million in FY '22. If I move now to reserving, as we announced on the 22nd of July, we ended the year with total prior year reserve strengthening of $172 million. This has been driven by our commercial liability portfolio, which takes into consideration a range of industry-wide issues that are outside our previous expectations, including a revision of our silicosis average claims size, an increase in worker-to-worker claims, both late reported and at a higher cost, an increase in implicit inflation allowance on the average claims of 10% to 12%. It's important to note that we've taken significant steps to refine our pricing and underwriting decisions to mitigate future impacts for a range of issues, including silicosis and worker injury, this is a key area of focus for Jarrod and his team. We've strengthened some of our assumptions by extrapolating the trends that we've seen in the 2017 and '18 accident years into the more recent years, and this has driven the step up in our prior period reserving in second half '22. We've released a new pricing model, which will reflect the learnings from our reserving actions we've taken to date, together with the work that Jarrod and his team are doing. In recent years, we have ceased underwriting specific high exposure accounts. Further, we've also imposed exclusionary wording on directly impacted industries and trades with potential exposure to silicosis. We believe these steps are prudent to address the increasingly inflationary environment that we're experiencing in the commercial liability market. Moving now to our investment portfolio, where movements in fixed interest rate markets had a significant impact on our FY '22 results. In terms of our technical reserves portfolio, we aim to match duration with that of our liabilities, which is approximately 2 years. I've said before, the portfolio should be expected to deliver over the long term the risk-free rate plus approximately 50 to 100 basis points. Current market conditions see us at the upper end of that range. In FY '22, in addition to the credit spreads movement impact, we also had a discount rate timing impact that I touched on earlier. This is because all of our investment assets are adjusted for risk-free rate movements, but not all of our liabilities are discounted, our unearned premium liability is not. In previous years, this impact has been negligible. However, in FY '22, when the 2-year government bond rate moved from basically nothing at the start of the year to finish at around almost 3%, the impact was around $42 million, which we've called out. It's a timing impact because the unearned premium liabilities will ultimately become discounted in the future as claims liabilities. So far this year, yields have fallen slightly during July and August, with the 2-year government bond rate at currently 2.5%. Assuming this remains stable for the remainder of the year with the additional benefit of elevated credit spreads, it's not unreasonable to assume the portfolio will generate around 3.5% in FY '23. This is double the underlying yield we saw in FY '22, about 1.75%. To our shareholders funds portfolio of just over $4 billion, we made a loss of $105 million for FY '22, reflecting negative returns from equity markets, rising bond yields and credit spread widening. The results for the year did benefit from its defensive characteristics, including our low volatility international equity portfolio, lower volatility characteristics of our alternatives portfolio and the short duration of our fixed interest portfolio. Finally, to capital. Our capital position remains solid. The CET1 ratio at 30th of June was 0.97x before dividends compared to 1.02x at 31 December. The main positive movement this half has been earnings in the period, which did include the partial release of the BI provision. This has been offset by payment of the interim dividend, an increase in capital deductions primarily from capitalized technology costs as we progress the acceleration of our investments in technology, the Enterprise Platform, in particular. Our insurance concentration risk charge increased at the end of the year despite the reduction in the maximum event retention, which is at $135 million at the moment that I mentioned earlier. This reflected a prudent approach to capital, which does not recognize the availability of drop-down covers in the ICRC calc, along with an escalation in the ultimate cost of the recent New South Wales flooding event. Finally, I am pleased to be able to confirm that we did receive the proceeds from the sale of our Malaysian business in July, and that contributes about 6 points to our CET1 ratio. So with that, I'll hand back to Nick for some closing comments.

Thanks, Michelle. As I said at the beginning, we've entered FY '23 with some strong momentum in our organization. And really, the FY '23 guidance that we provided you reflects that. In terms of premiums, rate is flowing through across our portfolios, across Australia and New Zealand. And we also do expect our customer growth to continue in our -- in this current financial year. With margins, of course, we do have some headwinds with increased perils allowances and managing inflation throughout our organization. But against that, we also are seeing rate flow through our portfolios, and we are getting the benefit of higher investment returns. And really, the package of that gives us the confidence on our margins of that 14% to 16% that we're guiding to for FY '23. Finally, I just want to acknowledge, it has been a tough time for investors in IAG over the last couple of years. But we are confident of our ability to run our business and for our people to deliver against what we've set out as our medium-term criteria of how we want to run our organization. That's really setting our business up to deliver a margin of between 15% to 17% and an ROE of between 12% and 13%. And FY '23, we're on the way to delivering against that medium-term financial proposition of IAG. We know that some of the issues we've had to deal with have been confronting for us as an organization. We've had to adapt and change the way we actually run our company because of that. What -- our strong view is, is that we've materially changed the risk environment within IAG, and we have much greater clarity of accountability on how we're running our business going forward. We're -- and I hope you can see that we are executing on our strategy, and we're delivering that now. And that's really giving us the confidence in the guidance and the momentum that we're seeing within our organization. We're building out a stronger and a more resilient IAG. With that, Michelle and I and members of the management team are more than happy to take any questions. Why don't we start with those in the room, and then we'll go to the phones and the video.

Andrew from Macquarie. The first one is in relation to Slide 6, the 100,000 new customers in DIA. Can you just remind us, is that gross or net? And how much of that was from the movement of the HBF portfolio across divisions?

Yes, there's an element where -- thanks, Andrew. I mean there's an element of growth, which is coming as some of those customers have migrated into the NRMA brands. But roughly half are new customers to the IAG world. And what we're seeing there is the -- sort of through the combination of rolling out NRMA into WA and South Australia, there's a -- new customers to the IAG Group, together with some of -- what we're experiencing with ROLLiN' that we are -- there's real momentum there in growth of our business.

The second one, I find that when people talk about claims cost inflation, it's all about the percentage, but nobody asked about the dollar starting point. So for home and motor, do you have a view on how your average cost of repairs compares to industry averages? Like are you starting from above average? Are you starting from below average? Just that context would be useful.

Yes, sure. I mean to sort of -- what we -- and of course, we have some benchmarks, obviously, between third-party repairs and for sale motor in our own repair business, where typically we're getting -- we can see that the average cost of a repair through an IAG shop versus a third-party shop, we can see there's a cost advantage, in particular, type of repair, probably 10% lower. And so our view would be our starting point is pretty good. There's definitely a shelter that's available to our customers through the fact that some of those supply chain arrangements we have in place through motor but also through some of the property arrangements that we have in both Australia and New Zealand. So there's some -- there are some shelter there. But then against that, we are seeing that inflationary pressure in both our property and motor classes.

And then the final one for me. Are there any scenarios where you bring back any of the risk from the 12.5% quota shares on to your own balance sheet to dial that back?

I mean, of course, there are some scenarios where that could happen. But I mean as we have talked about many times before, we sort of see that as sort of a strategic part of the capital platform of our company. We're sort of comfortable with the way we're funding our organization, traditional reinsurance, quota share, debt, equity and sort of the blend of that package, which is the capital platform of our company. And never say never but -- to any of those elements and portions, but we're comfortable with the current way we're structured.

Siddharth Parameswaran from JPMorgan. A couple of questions, if I can. Firstly, just on the trade-off between margins and volumes. I mean you're pushing for 1 million customers, both in Direct and New Zealand. And obviously, as you say, you've got 100,000 to date. Just wondering how you see yourself on that journey. And there's been a distinct change in IAG's rhetoric over the last few years on the push for volumes, but just we're in a very high inflation environment at the moment, things are uncertain. An observation that I would make just on how you're pitching these is still that volumes still matter very much. Just do you have a view as to which one you're more cautious on at the moment?

I mean I see it -- I mean, it's a package. I mean we're trying to be really clear on those medium-term -- so it's a bit confusing, I've got people in the room and on the video now. But we've got -- I want to -- we want to be clear. We've got these medium-term financial aspirations, 15% to 17%, 12% to 13% ROE. So I don't -- we're -- that is the -- sort of the financial package that we want to deliver against. Within that, of course, we've got to manage growth as part of that -- delivering on that package. I mean some points that we'd make is we've got wonderful brands that we are seeing genuine customer growth to the IAG enterprise over the last 12 months. And we have confidence in the team on continuing to deliver that. We can see -- and I mentioned this, that -- of course, when we talk about growth, that's a net number. So obviously, higher retention makes that -- lowers the net new customers to the group. We're seeing very strong retention rates across our company, as I mentioned before, higher than I can really remember. And so the brands are very strong across our business. All of that is very helpful. And then it's a 1,000 tactical games, I think, that really have been played about using the brands, using the scale that we have, some of the financial efficiencies we have in some of the supply chain as the tactics that Julie and Amanda and Jarrod and the teams are sort of using in how they're running their business to as -- to grow the organization. So we're pretty confident we can deliver both genuine customer growth as well as those medium-term financial aspirations. And really, the guidance for FY '23 is just on the way to delivering that.

Okay. Okay. Maybe if I could just ask a question on Slide 19. Just on the improvement in margins that you're flagging into '23. So the -- I mean, you kindly break up the natural perils allowance, which is quite obvious as to the drag that will have. But just the other components, you flagged 3 components or the higher investment yields and through rate increases and claims inflation. I was wondering if you could just comment on just those last 2, in particular, just the -- what you saw in claims inflation on average through the last year, and also just the rate increases that you think you're actually going to push through and earn through.

Yes, sure. I mean -- so I might -- it might be a good opportunity. I'll make some high-level comments, but I might ask -- we've got Julie and Jarrod and Amanda, just sort of might break that down in some of the portfolios. Probably, others will have similar questions. We might sort of talk about that a little bit more specific. As of generalization, we're sort of seeing inflation flow through our company at that sort of mid- to high single digits everywhere in various forms, and we'll talk through the detail by each portfolio and class of business. But we -- really, we are experiencing that. We are having some shelter, as I mentioned, but we're definitely experiencing that and together with perils cost, together with reinsurance costs. The flip of that is, we're also seeing rate flow through the portfolio. It's happening already. It's been happening in the last 12 months, and I expect it to continue to be flowing through. But -- so it might be useful if I just sort of asked Julie to start with -- and Amanda and Jarrod, just to make some comments specifically on each of the -- each aspect of our businesses because the story is a little bit different across the organization. Julie?

Sure. Thanks, Nick. And I am going to talk in percentages, so I apologize in advance. But if we have a look at across our home and motor portfolios, I just want to be very specific about our strategy in the first half of the year. We did not chase growth in the first half of the year. We understood that it was an uncertain environment, and we worked very carefully to make sure that we secured the customers we had, such that we -- the retention rates are high. And we've gotten very comfortable with inflation levels in our portfolio. So up until about March in motor, we were flowing through around -- between 5% to 7% inflation in motor, and in home, about sort of 6% to 7% to 8% inflation in home. In March, April, when we observed what was happening on the Eastern seaboard and also reflecting on the experience that we had in 2011, 2012, when we saw similar types of events and the impact of perils costs and reinsurance costs on rates, we started moving our prices up at that time. And we're now pushing through on motor, somewhere between 7% to 9%, and in some states, up to 11%. And in home, between 8% to 10%. And we're very confident that, that is sufficient for us to cover right now what we know right now, the inflation that we're experiencing and those increased costs. And the most important thing for us is to be able to earn that through quickly. The other point that I would make is that when you read sort of external indices and so on, the basket of parts and the basket of materials we use are different to the total industry benchmarks. So in motor, we're obviously a big parts acquirer. And those prices are going up sort of 5%, 6%. Repairhub gives us really great insight into what those things actually cost. Paint, we're holding at pretty low levels. And wages, we know, are up 5% to 6% because we pay them to our Repairhub staff. In terms of property, we're the biggest acquirers in nonperils of things like, again, paint and plasterboard. And relative to steel, which is moving 35%, the costs for those materials that we acquire are much lower. And so we're very confident and comfortable that we're earning through appropriately to be able to achieve the performance that we've said. We're very much around growth that is profitable, and you'll hear Michelle say that all the time. It's profitable growth for us. And we're confident with the systems and processes we've got in place to be able to flow additional rate through quickly if we need to.

And I thought it might just be useful just to get everyone's view sort of on this topic. I know that this is going to be a theme of how we're going as an organization. I thought it might be useful for Amanda and Jarrod just to sort of follow through because we generalize and often, there was more specifics, which is -- I thought it would be useful to this one.

Thanks, Nick. And thanks, Ed, for the question. In New Zealand, we're seeing around 6% to 8% in our motor book in terms of inflation, and around 8% to 10% in our home. We're also seeing around 10% to 15% in our commercial book. I'll just touch on things that might be slightly different to Julie. I mean obviously, we've got the benefit of Repairhub in New Zealand. We're expanding that out. And we're seeing a significant uplift in customer experience as well as a great way for us to manage claims inflation. So we're seeing around 76% of our motor claims go through either our Repairhub or our preferred supplies. And that is giving us an advantage in terms of labor rates as well as the scale that we can apply to the parts purchasing. And then in home, about 60% of our home repairs go through our contracted builders. Now we have agreed labor rates there, and we also have that scale where we are purchasing materials at a better rate. And so again, we're pretty comfortable with where we're at. We've got a very good view of what inflation is looking like. And we are able to push through rate and have done in the last 12 months, so we're starting the earn through of that now.

And might -- and then we just -- we flip into the commercial classes because there's a slightly different story there as well. So Jarrod?

Yes. Thanks, Nick. Thanks, Ed. Yes, now inflation. We're looking at high single digits for inflation up to 10%. And the way that we're addressing that is particularly around pricing and our pricing is covering inflation. But we also have more levers in the commercial space, particularly around deductibles. We have a lot of clients that are looking to manage the cost as they're facing the inflationary pressures. So we are moving deductibles quite considerably and also then looking at the insured values that our insureds are declaring, particularly in regards to the property prices and how they're building those increased replacement cost into the declared values and then looking at that from a premium pool perspective. In addition to that, because we aren't as homogenous on a claims or a risk basis as personal lines, we have established the inflation task force within our pricing division to really focus on that and ensure that we address any changes quickly in our pricing, in our risk acceptance.

Thanks very much for that detailed response.

Well, I thought it would be as -- and I know this is a topic that we want to talk about. So I thought it was useful to have each of the businesses talk about it specifically.

Yes, absolutely. Okay. Just -- maybe just some of the mitigation activities you have to actually contain inflation. I mean you talked about $400 million of savings you're targeting over a few years. Just where are you on that journey? And could you give some color on what benefits you've seen to date and what's ahead. So what are the key things that will deliver those savings?

I mean there's sort of a -- there's a package of things, and we're at the -- so that's an ongoing program of work. Some of the things we're definitely doing just the supply chain and you sort of heard of some examples already around the benefits that we get on managing that supply chain and being able to leverage the scale more on parts. And so the insight we get from owning our repair business, and we have them in both Australia and New Zealand now. So they're quite significant in relation to our business model, and we're seeing that flow through. I think there's some real advantage in some of the digital technology in and around the claims experience that we've seen. We've seen over the last 6 months that -- I mentioned that we had something like 60% of claim lodgments come through online, particularly when we had the surge in March, April on the East Coast of Australia, and that's really, one, creating importantly, a better customer experience, but some -- sort of make some of the systems and processes of how we run our company. Together with some of the notification and the claims tracker that I mentioned as well, that's -- that sort of takes some of the volume out of the call centers and to sort of improve the customer experience at the same time around people sort of being aware of where they're at with their experience with us. I mean there are some examples. And I think what we're going to do -- this is ongoing. And then we see -- we've talked about $400 million within the Direct business, but the -- we are looking at sort of enterprise-wide, how we can continue to look into that whole claims process essentially and supply chain and how we can continue to deliver better experience for our customers and how we can continue to look at the cost structure of that and really make sure we're getting that as efficient as we can. So there's going to be more coming on this, Sid.

Sorry, just a question, just where are you on that journey, just on the $400 million? Are you at the start? Or are you...

Oh, yes, I mean, at the beginning of that. We have some of the -- we're scaling up things where -- sort of the financial impact of that. There's an element of that in our results at the moment. But over the next few years, we'll be talking about that a lot more. Any more questions in the room? No? We'll go to the teleconference.

Your first question comes from Kieren Chidgey from Jarden.

A couple of questions, if I could. Maybe starting -- sort of picking up on that last discussion from -- particularly around the commercial business and some of Jarrod's comments around inflation sort of running very high single-digit price to 10%. And you're pricing at 9% currently. You're facing into higher reinsurance costs, high cap budget, sort of continued inflation pressures through FY '23. So just hoping you can unpack what you see as sort of the drivers to get that underlying margin up from 5% to that 10% plus range over the next 2 years.

Kieren, I'm just going to throw straight to Jarrod hay on that one, who's sitting in the front row, [ a champion to beat ] to answer that.

Thanks, Kieren. Yes, so I mentioned the levers we're pulling purely in regard to inflation. But there's a number of strategies that we're looking into -- oh, sorry, that we're delivering that will change the shape of the portfolio. So we're talking to around optimization, portfolio optimization. So we're shaping that portfolio in line with our profitability targets and our risk selection. So that really drives everything we do from our budgeting process to our go-to-market strategy. So we proactively shape that portfolio to deliver the result. Yes, the inflationary pressures are moving and changing, that's why we've got that task force. And then that feeds very quickly into pricing, so we're really agile in pricing. Looking at deductibles, how do we move deductible? So just to give you an idea, 1 data point in regards to our liability portfolio, we have doubled deductibles over the last 2 years in that portfolio. So another lever to manage inflation. And then we're looking at efficiencies through our claims system as well. How do we manage claims to make sure we're getting not only best outcome for customers, but we're managing the expense there? So it is more than just rate and all of those levers come together to ensure that we make the margin improvement that we're focused on. And that is really the focus, simplicity and margin improvement. So we also look at the expense side of the business as well. So it's more than just rate. We've indicated that 9%, that will continue. That's what we've achieved in -- on average in the last quarter. So that plan is to continue. So it is more than just rate that we'll use, Kieren.

Okay. Jarrod, and the profile and, I think, from memory, the 10% plus is a '24 target. Are you expecting sort of a gradual improvement to be shown through the '23 year on the way to that 10%?

Yes, certainly, Kieren. Obviously, with the strengthening of our liability portfolio, so that's fed into our loss pick for this year, which is slightly above what it was in the original 5-year plan. So there will be a gradual improvement. We really start seeing the underwriting actions that we implemented in the '22 year, also '21. Really starting to take traction this year, and then we'll deliver the $250 million in '24.

Second question on sort of expenses. Very good job this year, fairly flat cost base across the organization, so we're seeing that translate into good expense ratio and leverage. But clearly, as you've articulated across a number of areas, higher wage inflation coming through. Michelle, I'm just keen to sort of understand sort of whether or not that multiyear target of holding group costs fairly flat around that $2.5 billion mark is still achievable into the '23 year.

Thanks, Kieren. And what I tried to call out when we talked about expenses on this slide is the team have done a lot of work on our budgets for FY '23, which underpin the guidance that we've provided. And those budgets still demonstrate, even in this higher inflationary environment that we would deliver a result for our cost base of approximately $2.5 billion. As I've said before, please don't translate that to [ $2,500 million ]. So -- but in that order, you've seen this year at $2,531 million. And given the commitment that I can see across the organization, given the choices that we're making, I'm comfortable in that, underpinning our FY '23 guidance. I did call out when I spoke to the slide that it would be naive of me to say there's not pressure in the system given some of the economic forecasts that we're seeing and what that might mean for '24 and '25. But what we're doing as a management team by having our 5-year ambitions detailed, 3-year plans, looking at making prioritization choices to drive the efficiency and effectiveness, that give us the best possible chance there. So that's probably the level of detail I can provide at the moment. I don't want to be naive to the pressures that are in the system, but I'm confident in the plans that we have in place, and we're really taking a medium-term view at that.

And just a final question for you, Nick. Looking further down the P&L, yes, this year, we've seen $37 million of cumulative losses from MotorServe and some of the strategic investments you've made over the last number of years. When we saw sort of -- I guess, this issue comes through a number of years ago. I think the commitment to the market at the time was those losses would moderate or otherwise those initiatives would be closed down within a reasonable time frame. So just wondering what the update in terms of your thinking there is on the outlook for those, given that there's still clearly a fairly significant drag on the group P&L.

Yes. Thanks, Kieren. I mean we're -- I mean we are integrating some of those initiatives into our business model a lot more now than we were a couple of years ago. But then also, at the same time, we're probably also looking at some other things. So as we're sort of grabbing things and sort of incorporating them into how we run our company, then we're probably also looking at other ideas about how we can -- where to invest and businesses that we think, over time, can support our core insurance business. And then I'm probably thinking that, that sort of outcome is roughly where you should expect it to be for the next year or 2. And some of the outcomes of that are actually probably not going to end up appearing in that line. They're going to appear in some of the some of the more -- insurance lines around claims and how we're procuring things and how we're thinking about relationships with partners and how we're bringing to life some of the technology investments that we've made. So they're going to end up -- the benefits of them are going to end up appearing in the insurance business. But that -- I think if you sort of think about the forecast for our company, something in the order of that sort of cost, I can see for the next couple of years at the moment.

I guess the question's on a little bit more -- yes, a little more strategic. If there are -- yes, clearly, there are benefits of those businesses going back into the divisions. Those losses, should we be thinking about them as above the line businesses impacting margin? And do they fly into pricing given they're obviously adding some benefit into those [ divisions ].

And Kieren, what we'll also do is essentially moving them into the business as well. So actually, they are in the insurance results, some of those businesses now. I mean, yes, I mean, I consider that -- I mean, we're very focused. Where we're -- and, I mean, I know companies have to be very careful here that they sort of don't go off and have investments in things that are unrelated to their businesses. We're very focused on strengthening -- everything we're doing is about strengthening our core insurance business, where we're only doing things that we think can strengthen the core insurance business, can strengthen our relationships that our customers have with our organization, the technology that we use to engage with our customers or run our company or insight that we get. I mean that's sort of -- that is the -- sort of the parameters of how we're thinking about investing there. So yes, they really are in support of the insurance group.