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 2023. My name is Mark Ley. I am Head of Investor Relations. This morning, we'll run through our usual format. Nick will outline our strategic and financial highlights. Michelle will run through the financial details. And then Nick is going to close with some of our outlook and FY '24 guidance statements. We set aside plenty of time for Q&A. If you're watching online, the teleconference details are listed on our website. If you're here in the room, can I ask that you please ensure your phones are on silent. And I'll hand over to Nick. Thanks.

Thanks, Mark, and good morning to everyone. To begin today, I just want to acknowledge that we're holding this meeting today in the land of the Gadigal people, and so I pay my respects to elders past, present and emerging. In IAG, we acknowledge the traditional owners of country throughout Australia and recognize the continuing connection to lands, waters and the communities of our country. What I thought I'd do today is start by discussing the progress we've made against our strategy and some of the evidence points that are coming through in our 2023 results. As you know, for the past 3 years, our strategy, organizational structure and our leadership team have been focused on simplifying and driving performance of our core general insurance business. We've made some deliberate decisions to simplify our business and to resolve some of our legacy issues. Our strategy is to build out a stronger and a more resilient IAG and to deliver, of course, on our purpose around making your world a safer place. As we outlined in our Investor Day in June, we have evidence that delivery of our strategy is setting us up for success. We are seeing progress against all 4 of our strategic pillars. First, in relation to growth, we are growing with our customers. This year, we've added over 132,000 new customers into our direct business here in Australia. And of course, what that does is reflect the strong retention rates that we're seeing across that business as well as the rollout of the most trusted brand in financial services, being the NRMA Insurance brand into WA and in South Australia. In terms of building out better businesses, we are seeing material improvements coming through in our intermediated insurance business here in Australia, We've been global for too long, the CGU WFI business here in Australia has underperformed. And it's been a drag, as we know, on our overall group financial returns. We've set it up as a separate division. We've an experienced leadership team in place focused on turning that business around. And it's moved from loss-making in '21 and '22 to deliver in excess of a $200 million profit this year. We've also been disciplined in how we manage our own cost base of IAG, importantly, helping limit some of the premium increases that have been flowing through. In FY '23, we've had our costs relatively flat at $2.5 billion, just down a little bit. And that's for the third consecutive year that we've managed costs in that structure. We've also seen our expense ratios decline with our admin ratio down 90 basis points in the 12 months. And we expect to see the admin ratio continue to reduce or decline over the next couple of years. In terms of creating value through digital, we've now have an enterprise-wide claims management system that allow -- what that does allow us to capitalize on running that business across the Trans-Tasman. Building on that, we're also rolling out technology that delivers on a common pricing and administration system for our personal lines products across Australia and New Zealand. And of course, what that does is fix up 25 years of convexity that we've created within that business. Through our enterprise platform, we've deployed more digital capabilities in FY '23 than ever before. We've got over 100 new mobile automation and online features that have been introduced across our 3 businesses. And then finally, we have made significant progress around how we're managing the risks of our enterprise. Of course, it's been a challenging reinsurance market, but we renewed our drop-down in aggregate covers for the current financial year. Earlier this year, and we've announced this earlier, we have renewed our long-term quota share arrangements for the rest of the decade on similar commercial terms. We've taken a prudent approach to liabilities from COVID-19 in relation to our business interruption exposure, and we're going to continue to review that provision over time. During '23, FY '23, based on the court decisions and the way we've communicated with impacted customers, we have reduced that provision by $560 million during the year, and we continue to hold a prudent provision there of around $400 million. Our company and our industry have also faced issues around pricing. And for IAG, our remediation around pricing is largely complete. And our priority, of course, has been to make our customers right. Resolution of the issue and the penalty that we've incurred as part of that is all within our existing provisions. To ensure we aren't confronted with similar issues in the future, we have been implementing company-wide risk management systems and building out an improved risk culture that significantly improves the operating environment of IAG. And then just finally, in relation to trade credit and Greensill, this is progressing as expected through the courts, and there's no change to our overall position where we have no net insurance liability. In the financial statements, though, you'll see we have updated the note to reflect what's occurred over the last 6 months. If I turn now to some of the headline financials for the year. In the second half, in particular, showed significant improvement in the performance of our business. We have been responding to the operating environment with appropriate premium increases, and our reported premium growth for the 12 months is above 10% and for the second half was 13.7%. Our reported insurance margin of 9.6% has been impacted by the second and third largest insurance events in New Zealand's history. The underlying margin was also impacted by the unexpected inflation that hit us particularly hard in the first half of this financial year. Looking at the underlying margin, that did improve by nearly 400 basis points in the second half as we started to see the earn-through of the rate increases were implied in response to inflation and other costs, including reinsurance and the estimated cost of perils, which we're increasing our expectations. Our headline profit of $832 million is up 140%. But obviously, that does take into account an after-tax impact of $392 million from business interruption release. We have declared today a dividend of $0.09 per share, and that reflects the strength of our capital position. That brings our total dividend for FY '23 up to $0.15 per share and a 36% increase on our dividends from the last financial year. And of course, we're paying out just above the top of our range of that 60% to 80% dividend payout ratio. And then finally, just in relation to guidance for FY '24. Our guidance for FY '24 is low double-digit premium growth and a margin of 13.5% to 15.5%. And I'll talk more about that later in the presentation. In terms of our divisions, so a quick snapshot. Direct insurance business here in Australia, that is the business that was most impacted by the short-tail claims inflation in the first half. And the underlying margin, you'll see in all the materials has materially rebounded in the second half. Top line growth in our direct business has accelerated as the years progressed. Second half premium growth was 10.9% in total for that business and that's double-digit sort of growth across the short-tail personal lines businesses. Just remembering that business also has CTP in it with growth in CTP was 2.7% for the year. And in the final quarter of the year, Julie and the team have delivered motor premium growth of over 12%, and home growth was sort of around about 15% in the last quarter. Our intermediated business here in Australia is demonstrating progress towards the target that we set of delivering at least a $250 million insurance profit in FY '24. Jarrod and the team, of course, have been focused on pricing, underwriting discipline and it's really starting to flow through into the underlying margin. And you'll see that, that business delivered a margin of 9.8% in the second half. New Zealand -- has been a really tough year for our team in New Zealand. On top of the inflationary challenges that country has seen, Amanda and the team has been managing through the second and third largest event in New Zealand's history. Growth has been in the teens in New Zealand dollar terms. And we expect this to continue as an underlying margins, which have stabilized in the second half of around about 13%. Before handing over to Michelle to run through the financials in a bit more detail, I thought it was important just to outline how IAG is living our purpose around making your world a safer place. And we definitely understand it's been a tough year for our customers over the last 12 to 24 months. We know that we at IAG, we play a critical role of supporting them and are proud of the role that we play and the people that work for us, the way they perform that over the period. This last 12 months, we paid out over $10 billion of claims to around 650,000 customers. And we've been supporting the communities of Australia and New Zealand when those big events and disasters strike. Essentially, we play -- we act as a shock absorber helping our customers out at their time of need. As a company, we're also focused on making it easier and simpler for our customers to engage with us. In a challenging year with multiple weather events and significant premium increases, our Net Promoter Scores have remained strong, with Australia at 45 and New Zealand just over 50. And really, what that is a testament to the quality of what we do and the care our people have for our customers when they need us. With that, I'll now hand over to Michelle.

Thanks, Nick, and good morning, everyone. As you've heard from Nick, we've reported strong top line growth and an improved reported margin. And net profit after tax was boosted by the $392 million post-tax release from the business interruption provision, which also contributed to our capital position. While the underlying margin declined 200 basis points, there was a strong rebound in the second half as we started to earn the premium increases we implemented in response to the inflation we saw in the first half. I'll use the next few slides to take you through some more color on this underlying results. As we said, GWP growth was in line with our guidance of around 10% and was driven by rate increases and some growth within our direct insurance Australia business. Underlying GWP growth, which removes the impact of multiyear policies, portfolio exits and the depreciation of the New Zealand dollar, was 11.1% for the year. I wanted to focus on gross earned premium, which for the year was 6.7%, with a step-up from 5.2% in the first half to 8.2% in the second half as we're starting to earn through the rate increases implemented during the year. I've included the chart on this slide, which highlights the delta between GWP and GEP growth over the last 5 years by half and provides an indicator of our gross earned premium momentum into FY '24. Turning to our underlying margin performance. We have kept our underlying margin definition consistent. And based on this, FY '23 delivered 12.6% compared with 14.6% in FY '22. I would note that FY '22 did include a COVID benefit of around 0.7%. We have also presented an adjusted FY '23 margin of 13.4%, which excludes the $67 million in reinsurance reinstatement premiums we incurred during the financial year in response to the major perils events. Our FY '23 result did include a significant increase in our natural perils allowance, which was a 120 basis point impact, and the underlying claims ratio deteriorated by 250 basis points due to elevated inflationary pressures. Largely offsetting this claims headwind was a 240 basis points improvement from higher investment yields and an improvement in our expense ratio. Pleasingly, as Nick touched on, we have recorded an improvement in the underlying margin in second half '23 to 14.6% compared with 10.7% in the first half. So if I dig a little deeper into the underlying claims ratio, the graph on this slide presents the ratio over the past 4 halves and excludes perils, reserving and discount rate effects as per the reconciliation shown in the table. At the half, we called out the 4.2% deterioration in this ratio was primarily driven by inflationary factors and supply chain challenges that resulted in things like the increased duration of motor claims, which also caused additional higher car and towing costs. What you can see from the graph on this slide is that there has been an improvement of 2.9% in the second half. I also in the first half results presentation touched on the risk margin strain we experienced during the first half due to the greater balance of outstanding claims that we had at 31 December. This has effectively reversed in the second half, where we've seen material reductions in the open claims volumes across our businesses, as we've worked to settle the claims for our customers, and this has contributed towards a risk margin release in the second half. To our cost base. As I indicated at our recent Investor Day in June, we were on track to be at approximately $2.5 billion again in FY '23. Pleasingly, this has been the case with our FY '23 cost down 1.5%, and this does include an uplift in the amortization rate -- the amortization expense associated with the investment that we've been making in technology. The lower cost base, combined with the growth in our earned premium, has seen our administration ratio, excluding levies, show a solid improvement. However, as we head into FY '24, we will see some impact from wage and other inflationary pressures, combined with increasing amortization expense off the back of the investments we're making. We are, as you would expect, working very hard to minimize the impact of these inflationary pressures on our expense base, and we continue to see opportunities to realize benefits over the next few years from our investments. Administration ratio is expected to fall further in FY '24 and FY '25 as our earned premium continues to grow. A key contributor to our margin improvement, as you saw on the earlier slide, has been the increase in investment yields. The higher investment returns have provided some shelter as we manage the impact of this high inflation, perils and reinsurance cost environment on our customers. At the start of the year, our technical reserves portfolio was expected to deliver an underlying yield of around 3.5% in FY '23, double that of FY '22. The 2-year government bond rate continued to increase across the year, which resulted in us delivering an underlying yield of around 4.3% for FY '23. Based on the rate as we exited the year, we can expect a further improvement in FY '24 with an estimated yield of around 5%. Our shareholders' funds portfolio delivered a strong $212 million contribution this year with positive performance across growth and defensive assets. The shareholders' funds portfolio continues to remain more defensively positioned, and we saw our exit from hedge fund component of the portfolio at 31 December. I thought it was worth calling out this graph. It highlights the elements that in addition to the $217 million improvement, insurance profit contributed to the 140% increase in our FY '23 net profit after tax. Details of items grouped as Other have also been included in the table on this slide. Key call-outs that we haven't covered earlier in the presentation. Our income tax was $289 million higher than FY '22, reflecting higher taxable income and an effective tax rate of 31.6%, driven by nondeductible items, primarily the $40 million ASIC civil penalty and a lower contribution from our New Zealand business given the significant impact of the perils during the year. Interest expense increased by around $50 million. The loss from associates was $13 million and will not recur into the future as we exited our 50% investment in Home Trades Hub, which was the driver of this loss. Finally, as I flagged at the Investor Day in June, there was a $20 million impairment as we work to optimize our property footprint. To reinsurance, as you know, we have now renewed all 4 of our whole-of-account quota share arrangements with leading global reinsurers. The 32.5% whole-of-account quota share arrangements are an important part of IAG's capital structure and as Nick flagged earlier, provide us certainty for the next 5 to 7 years. They have been renewed, providing materially consistent financial outcomes and are particularly valuable in a hard reinsurance market. These arrangements cover 32.5% of all gross claims costs, meaning we're only required to purchase 67.5% of our main catastrophe program in global reinsurance markets. In July, we also announced that we're able to place third and fourth event covers and an aggregate cover for FY '24. A good outcome in challenging market conditions. On capital, we are above the top end of our target capital range and have up to $227 million to go in our on-market share buyback announced in October last year. A few call-outs on the waterfall graph shown on this slide. You'll see the benefit of FY '23 earnings and the deferred tax asset reduction, which is driven by the BI provision release. In terms of continued investment in technology, we have commenced amortization of the enterprise platform with the net increase on the balance sheet having a 9-point impact on our capital ratio. Finally, I wanted to highlight the increase in risk charges in FY '23. This included an increase in our insurance concentration risk charge from $211 million at 30th of June last year to $365 million at December with a faulted $276 million at 30th of June. This 30 June number is driven by the reinsurance we have been able to put in place for the next 6 months. And I would flag that we would expect to see the insurance concentration risk charge increase again at 31 December as we place the 1/1 cat program. Lastly, from me, some brief comments on AASB 17. My presentation in this reporting season from insurer wouldn't be complete without AASB 17. So FY '24 is when our statutory reporting moves to a AASB 17 basis. On transition, we expect to apply the full retrospective approach, to all insurance contracts issued and reinsurance contracts held. Based on this approach and the work performed to date, the impact of AASB 17 adoption on the group's reported net assets at 30th of June 2022 is currently expected to be in the range of plus $20 million to plus $110 million benefit to the net asset position, less than 2% of our net assets at 30th of June last year. The opening net asset impact is driven by increases to net assets from the measurement of the AASB 17 risk adjustment and higher discount rates, reflecting the inclusion of an illiquidity premium, partly offset by decreases to net assets as a result of the recognition of onerous contracts. I would like to reiterate that AASB 17 is not expected to change the underlying economics or cash flows of our business or our strategic direction. On that, I'll hand back to Nick.

And so thanks, Michelle. And I'll be finishing by bringing sort of all that detail together and really talking about sort of our confidence in outlook for FY '24. As Michelle has just talked us through, we have managed well through some sort of unprecedented and unforeseeable challenges during the last financial year. In fact, we've had a couple of years like that. Like others in the industry, we have had to raise our premiums in response to some of the inflationary costs that we've experienced. We've also seen increased volatility around weather and substantial decline, so a decline in global reinsurance markets, which has really driven up the cost of reinsurance that we're buying. We have, of course, remain mindful of a flow-on impact on what that means to our customers, who are already experiencing some tightening household budgets. We have been disciplined, as Michelle pointed out, around how we're managing the costs of running IAG. Really what that's done has, obviously, helped limit some of those premium increases that we're passing on to our customers. And also as an industry leader, of course, we're committed to addressing the impact of climate change within our own business as well as helping our customers and the communities that all of our customers live in, improve their resilience and reduce the risk that exists there. Of course, we're -- as part of that, we're actively engaging with government around mitigation solutions around building codes, around land planning and, of course, a difficult discussion around planned relocations of certain communities. We want to make sure that we're sharing our knowledge and expertise so that we can help reduce the impact of extreme weather events, which, of course, then helps with the affordability of our products to the communities of Australia and New Zealand. It's reassuring for us that our retention rates across our business have remained very strong during '23 and that we're growing, as I indicated, with our customers, particularly here in our direct business in Australia. And of course, what that does is reflect the value that our customers see in the products and services that IAG is offering them. And as a tribute also, of course, to the strength of the brands that exist within our business. Our balance sheet, our capital position and our reinsurance protection continued to be very strong at IAG. And of course, this is crucial for us as we play that critical role in supporting our customers and the communities and of course, those customers that need us most. And as I said a few times before, with the role we play, we really are the shock absorber into some of the -- into the economies of Australia and New Zealand, and we need to be strong to do that. What I've done here is just update some of the charts that I've shared over the last 6 months in relation to Julie's business, and what's happening around inflation and pricing. With inflation, what you can see here is that we still have some fluctuation month-on-month around inflation. But you can see here that motor inflation is sort of stabilizing at sort of 6% to 7% and that home inflation is slightly more than that. Our average premium increases, and this is all just within the direct business here in Australia, have grown slightly in motor in the last quarter compared to what I've shown you before. And you can see that the home premiums continued to remain high. On the other side of the graph, you can see what's happening around sort of perils and the cost of reinsurance for IAG. For FY '24, we have forecast a natural perils allowance of $1.147 billion and that's what's included in our guidance. And that's an increase of 26% or $238 million in expectations of perils in FY '24. And of course, [ gross stop ] what that number is, is around $1.7 billion before quota shares of expectations on perils. And what you can see here is that heading into this current financial year of FY '24, we're expecting that sort of 20% of every dollar of premium we collect across our entire business is covering the cost of reinsurance and the cost of our expected perils for the year. If you look back on that graph, you can see back in 2016, that figure was only 13%. And so I expect to see this continuing trend of increasing cost of reinsurance and perils as part of how we're running our business and something like a 50% increase that's occurred over the last sort of 6 or 7 years. As outlined in our Investor Day, our strategy is clear, and our leadership team is super focused on delivering against the goals that we've set out. We've made some great progress on these themes of what we're focusing on. And as we sort of head into the new financial year, we're going to continue to update the market on the metrics that are important to us that demonstrate delivery against our strategy. Firstly, as we grow with our customers, we expect our strong retention rates to continue into FY '24, and we expect to continue to see growth here within our -- particularly our direct business here in Australia. We put a mark around our intermediated business, and we should be -- we will deliver at least a $250 million profit in our CGU WFI business here in Australia in FY '24. And of course, that was an ambitious target that we set. But you can see with the run rate that we're delivering in the second half of '23 and the momentum that we've got in that business already. Within our -- Michelle mentioned this, our administration ratios will be coming down over the next couple of years as we continue to manage those costs tightly. And of course, some of the initiatives that we have in place, will continue to deliver on the $400 million of benefits through the supply chain and claims management within our claims systems. Our enterprise platform will continue to be rolling that out across our businesses. The real focus here is on our personal lines businesses in Australia and New Zealand, and we'll be bringing the NRMA Insurance business onto that enterprise platform during the current financial year as long as some of our direct businesses in Australia. We'll be delivering against that in FY '24. And of course, we'll continue to managing our risks, resolving any of the legacy issues and creating a stronger and, of course, a more resilient IAG. In terms of financial guidance for FY '24, we are expecting to grow our top line of the company by low double digits over the next 12 months. And of course, we're continuing to reprice for our expected higher perils and reinsurance costs as well as our short-tail claims inflation, which we do expect to continue in the order of 5% to 10% inflation across FY '24. In relation to our reported margin, we're guiding to a margin of 13.5% to 15.5% in FY '24, and this takes into account that increased perils allowance of $238 million, which is at a 2.5% impact within those numbers, and we've incorporated that in the guidance of 13.5% to 15.5%. And we do, though, in relation to the financial profile in FY '24, we would expect a stronger second half than first half as we get further benefit of the earn-through of premiums later in the financial year. Those margins of 13.5% to 15.5% will deliver an insurance result of $1.2 billion to $1.45 billion in FY '24, which is a substantial increase in the profits than we've delivered in '23. So on that note, Michelle and I are happy to take any of your questions, and we've got members of the management team also here sitting in the front row. Why don't we start here in the room?

Okay. It's Nigel Pittaway here from Citi. First question, just on the cat allowance, I mean you have increased it by a fair amount, but it is still sitting 5% below your actual experience this year. And you are running with lower reinsurance coverage and probably will be even more so from 1st of January. So how have you arrived at that number, particularly, given at the Investor Day, you sort of gave the impression that you wanted to absolutely make sure that you didn't exceed that allowance as much as you have done in the past.

Nigel, I'll make some comments and Michelle, you comment too. I mean we're obviously looking out over multiple years. Last, if I look at FY '23, we had particularly unusual events in New Zealand, where we had 2 enormous events that are sort of well beyond any of our expectations in January and February. We have tried to look at what we expect on average. We think that 26% increase is a fair increase. So that was what we were guiding to, a fair increase on our expectations of perils for the next financial year. Reinsurance, maybe make a comment as well.

Yes. No, a good question. As we flagged, we had purchased 2 $150 million drop-down covers that held our retention from 1 January this year at $350 million. But at the time we announced that, we did say we thought it would be hard to place them at that level again going forward. And so we would expect an increase. I'm not going to quantify because, obviously, we want to negotiate with our global reinsurance partners, depends upon how market conditions are. But in thinking about the guidance for the perils allowance that we've provided, we have factored in an uplift in that potentially. So it's a balance. I mean, one of the challenges that we've got is if we [ overwrite ] that and our pricing for it, particularly in the current environment, the affordability pressures on our customers are increased. So we've done a lot of work that sits behind that. As Nick said, the 2 -- the second and third largest perils events in New Zealand history had a big impact on our number for FY '23. And so on balance, we've landed at $1.147 billion post quota share.

Okay. Thank you for that. Second question then is just on the top line. I mean, I think you're right to say, you said second half was 13.7% growth. So can you roll that through into your sort of low double-digit guidance for FY '24. I mean that sort of suggests some modest slowing from the second half. I mean is that what you intended to do? And is the mix pretty similar? Or how should we think about that?

Yes. I mean the mix is similar. So we're not expecting any dramatic changes in the portfolio of IAG in that sort of 12-month period. That -- I mean, we've sort of said, you can sort of see the key assumptions here, inflation, we're sort of assuming somewhere between 5% to 10%. We've just set out perils and reinsurance sort of comment on that. And that's, Nigel, like 20%, $0.20 on every dollar of premium we collect. The blend of that means that's why we've got the double digit in the first place. I mean, do I expect double-digit sort of growth of IAG on our sort of organic book for multiple years? Probably not. So you expect to see some tapering of that over time.

And if I can just add a little bit of color, a specific call-out, there was a reasonable sized impact from the multiyear premiums that we got in second half of FY '23 on the workers' comp policies. Obviously, that's earned through over the multi-years, but it has a one-off impact that we've called out when we've calculated the underlying GWP growth for the year. So that was heavily weighted to the second half. So that's influencing as well the guidance go into FY '24.

Okay. So that won't recur is basically what you're saying?

Not in FY '24, it will probably recur in FY '25. And so that's why we highlight the impact of that.

Every 2 years.

Yes.

Okay. And then maybe just finally, why do you still need $400 million of business interruption provision?

I mean we're taking a conservative view here. I mean we've written to all our customers. We've obviously had the test cases. We're still going through a process. There are still some things that are going through the courts. And we've sort of taken a conservative view, and we'll continue to review that and revise that over time.

Andrew Buncombe from Macquarie. Maybe just sticking with that topic of business interruption. If I go back in my mind to November 2020 when you did the capital raise, my understanding was that any excess of that raise would be returned to investors. So my first question is you've released $207-odd million of additional BI today. Are you committing to actually giving that back to shareholders at some point in the future? Or is that going on to the balance sheet now?

I mean we're just being a bit practical at the moment. We announced a buyback in November last year. And we're halfway through that essentially. We'll finish that. And then as part of that, we'll continue to review the capital levels of the company. We're going to operate within our capital targets as we've indicated. And we're just being practical with that.

And then the second subquestion off the back of that business interruption topic. You've got $400 million still on the balance sheet, as Nigel just mentioned. How are you planning on disclosing that into FY '24? Are you planning on trading it as BAU? Or will you continue to disclose that separately? Just trying to understand if it goes through the margin.

Yes. So Andrew, really good -- you have a really good question. One of the things that we're focused on doing for FY '24 is trying to reduce the number of things that sit below insurance margin. So we're looking at putting the balance of our fee-based business after the recent structure changes up into insurance margin. As I said, we won't have share of loss from associates. So we think we're likely to record it as -- assuming it's a release as a prior period release, but there's none of that factored into the guidance. So we've provided reported margin guidance today of 13.5% to 15.5%. That doesn't include any assumption for any further reserve releases. We're still finalizing that. Obviously, we have the transition to AASB 17. We've committed to giving you information on a consistent basis, but we're also trying to and that's partly why I included the NPAT waterfall reduce the number of things that are sitting below that insurance margin to keep it nice and clean.

You'll see it there, important. I think is the question. And we've assumed nothing in the guidance for that.

Kieren Chidgey from Jarden. Maybe just starting, Michelle, back on the cat budget question from earlier. I just want to be clear. So given you've got the change in the reinsurance program that occurs halfway through this year, how have you approached that? Have you probability-weighted sort of the various outcomes for attachments? Or can you just give us some feeling for what assumptions underpin in that cat budget?

Yes. So the simple answer is, yes, we've gone through a range of potential scenarios, taking into consideration the range of possible outcomes we would expect as part of the 1/1 renewal and on balance landed at the $1.7 billion at 100% or the $1.147 billion post quota share. It's a very significant piece of work that we do internally in terms of our perils modeling that the team are constantly looking to enhance and take into consideration expectations going forward, but also the right level of weighting to past experience. And obviously, we've been shortening that weighting given the change that we've been seeing, but we have gone through a detailed piece of work to do that.

Kieren, just to comment as well. And I think that's why we also tried to show that graph now with perils and reinsurance because in a way, the bottom end of our perils, the bottom end of our reinsurance programs are pretty expensive. So as we convert cost of reinsurance to perils, in a way, we probably should have done more of this in the past. We sort of say it's 20%. And so if we flip, let's say, we don't buy something down the bottom of reinsurance in that, sometimes we're paying $0.60, $0.70 on the dollar down the bottom for reinsurance now. So this sort of goes to perils. And so the marginal change is not as dramatic. If you sort of think of this as just a $0.20 in the dollar topic that we're attributing reinsurance and retained perils risk, and the blend of that is sort of that 20%.

And from a disclosure point of view, I imagine you'll think about first half, second half cat budget, it's just been 50-50. But in reality, with that change in retention coming through in the second half.

Yes.

How should we be thinking sort of into '25? Obviously, there's further catch-up on cat budget, I assume into the '25 year.

So if I think I'm understanding the question correctly, so we obviously expense across the calendar year, the cat costs. So you saw an uplift in our cat program costs in the second half of this financial year. depending upon where the retention level lands in combination, you would potentially expect to see that. But the key thing that we would hope to avoid is a reinstatement premium. So we particularly called out the $67 million that we incurred. There is a little bit of that. That will impact FY '24 because those were reinstatement costs for covers that go through to 31 December this year.

Okay. That was actually my next question. What's sort of embedded within guidance on reinstatement premiums?

We haven't put a specific number on it, but whatever of that $67 million was -- sorry, whatever the equivalent of that $67 million for the remaining 6 months. So that $67 million had a component in first half last year of about $10 million and about $57 million in the second half this year.

Okay. And just more broadly on the guidance of 13.5% to 15.5% margin, I think you called out 14.6% as your second half margin in '23, but that obviously bore the brunt of that reinsurance reinstatement. So if we adjust for that, your high 15%, close to 16% in second half. And whilst the cat budget will knock 180 basis points off that next year, still suggests we're already sitting in the low 14% relative to the 14.5% midpoint for next year. So just -- it just seems -- is it conservative? You're talking about a lower admin expense ratio, higher investment yields, premium rates earning through ahead of inflation. What are we missing on the negative side?

So probably the one thing that -- and I touched on this in the presentation, is we had some risk margin strain in the first half and some risk margin release in the second half. And so if you think about that, we would be expecting in our guidance that to be balanced. The teams have done a huge amount of work to significantly reduce our number of open claims. So for example, in our Direct Insurance Australia business, we've seen that number of open claims come down by almost 40%. So that has a little bit of an impact in that first half, second half weighting. And then the other thing, and I'd go back to the comment we made at the Investor Day, we're trying not to be overly optimistic in terms of the guidance range. We're wanting to be really balanced around that. And obviously, there are a number of unknowns as we work through FY '24.

Anthony Hoo at CLSA. Firstly, can I just ask about claims inflation. With reference to one of your slides, Slide 21, bottom left chart around the motor portfolio. The claims inflation trend seem to be moving in the right direction, broadly speaking. Can you talk about some of the underlying drivers behind that? And also beyond that chart, for example, what are we thinking about claims frequency in more recent months, but also proportion of total loss claims as well in recent months as well?

I mean it's a package of things. And there's a bit of volatility here as well still. So I mean I think we should talk ranges rather than absolute. But we've definitely seen some of the actions we have taken in the way we're managing our supply chain and average claims costs and just the process of managing our claims. We're seeing some benefits flow through. We're also just seeing but some of the input costs stabilize a lot. We saw some real spikes in first half, where we're seeing that, that become a little bit more modest. So both the things we're controlling as well as some of the input costs that are coming in. We're sort of seeing some of that volatility being taken out of it in relation to, say, frequency, that's sort of as expected. There's nothing in frequency that's driving that of any materiality.

Second question, just around claims processing costs. One of the slides, you talked about a number of open claims in your home portfolio reducing from 70,000 to 49,000. Just wondering if you can talk about, as you go forward, the rate of claims processing, is there any increased pressure on you to hasten your efforts or increase your resourcing in that respect, given in terms of public pressure or political pressure?

I mean, our overall view, obviously, is to help our customers out as quickly as possible. I mean that's the philosophy and to act on this pace to help our customers out when they need us. So that is a real focus of Julie, Jarrod, and Amanda and all their teams is just sort of delivering against that. We've -- what we have seen, we had huge events in Australia last calendar year, particularly, and we've had that sort of replicate a little bit in New Zealand in January and February of this year. And what we're doing is sort of allocating our resources to sort of reduce that backlog and really sort of deliver against what -- deliver against the promises we make to our customers. I mean that is the focus of what we're doing.

But in terms of your resourcing efforts, there's no sort of change that you're calling out over the next period.

I think we've already made a lot of changes actually. So yes, in relation to the question is sort of financial implications of that, I don't see it. I see we have already made changes in the way we're accessed, we have dedicated teams in place. We've got additional resources in Australia and New Zealand helping us manage through this. We've got some arrangements in place with some service providers to be able to help us scale up when we really need it. So I'd say those things are already in place. I'm not expecting any sort of flow-through in the financial, not expecting sort of that to see anything obvious through our financials in FY '24.

And Nick, if I can just add. I think we're also leveraging the benefit of the investments we're making in some of the technologies to support that, which is to support the teams also. So you'd be expecting us to get some -- the ability to improve that customer experience through some of those choices we've already made.

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

Just my first one around the claims inflation. Can you comment a little bit on why claims inflation in home and motor seems to increase in the June quarter versus the March quarter?

Andrei, I mean, there's a little bit of volatility here was what I'd say. We've tried to give you the trends and the themes. And within month-on-month and week-on-week, there's a little bit of volatility. So -- but what we've tried to do on that graph is to show you the themes of it, of what's happening with sort of our -- remember, those charts are just for our direct business here in Australia, but they're kind of representative of what's happening around the enterprise.

And they're on a rolling 6-months basis, so it's not a perfectly linear experience as we move through. There's volatility, as Nick said, from month to month. And the home chart excludes large fire losses as well.

And my second question, can I ask around the conversion of written premium into earned premium? It seems like there was a big delay in FY '23 and we'll probably look at another big delay in FY '24. Does that mean you're expecting or you picked locking in some further growth and margin improvement into FY '25?

So you're going a long way ahead for me there, Andrei. But in terms of what I tried to show with the half-on-half graph, what you can see is the evidence of the strong rate increases we've been putting through in the business that stepped up again from first half FY '23 to second half. And then obviously, we earn that over the coming periods. So I think Nick touched on in his comments, we would expect a stronger second half than first half, and some of those will flow in also to FY '24. So it's not a perfect science, but we have things like multiyear policies, some of that's earned over longer term as well. So we're trying to balance, as you can imagine, affordability for our customers, but we've had to put these rate increases through given the inflationary perils and reinsurance environment, and that sets us up to have good gross earned premium in FY '24.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Michelle, I might have missed it, but just call out what the -- your reinsurance cost increase actually was expected to be in FY '24 in that chart, but you show on just the -- I think it was -- can't remember the slide number, but the one which shows the increase in perils and reinsurance costs over time. Did you call that out -- is it growth peril?

No, Sid, we didn't. The graph is an indicator, which is based upon our expectations, but we haven't called out the separate components. The only number we've called out in addition to the guidance on reported margin is our perils allowance of $1.147 billion post quota share, and we've also flagged expected investment income in the order of about 5% on technical reserves, but we haven't pulled out that number separately, but the chart gives you an indicative view. And I don't know the number off the top of my head, so I can't throw it out here at the moment.

Sure. I'll pull out the ruler and pencil...

I was thinking I said I was -- I was thinking that. You can probably have a....

That's what I thought. I don't actually have the number off the top of my head at the moment. So I can't jump in. Sorry, Sid.

Yes. No issues. Just a second question around inflation in divisions other than DIA. Just hoping you could help us understand particularly what's happening in New Zealand. We did see a pickup in margins -- underlying margins in the second half. But commentary, I think at your Investor Day was much more cautious around trends in New Zealand and obviously, reinsurance costs, I think, are going to go -- go up a lot. I was hoping you could just give us some idea of what you're expecting in the second half of the calendar year and into next year?

Yes, Sid. I mean, they are probably similar [ toned ] to Australia. There's probably a bit more event-led inflation in New Zealand right now than Australia, just a little bit more. So maybe looking across the 2 regions, there might be a little bit more in New Zealand than Australia as sort of the -- we're going through the whole process now post the January and February events. But yes, I mean the themes and tone, I would say, are quite similar. There's maybe a little bit more in New Zealand.

Right. Okay. Okay. That's on both reinsurance and inflation?

Well, I mean on reinsurance, obviously, we buy sort of all perils, all territories. So the sort of that's -- New Zealand ends up being an import into the overall cost of our reinsurance. And so that's a input into many factors that go into the cost of our reinsurance program. I think to your point, though, reinsurers are paying a lot more attention to New Zealand because of the significant events that have occurred. And that will be reflected in pricing. So yes, that will be a theme. I mean I didn't -- just to your comment on sort of the way I was positioning it in June versus now, actually, it has been a pretty tough 6 months in New Zealand. They've been sort of the combination of the overall macro of inflation, pressures on household budgets, all those things that are happening and then these very material events in a highly populated part of New Zealand, particularly the first event in Auckland. That has really had an effect on our New Zealand business. And we've got great brands, great team in place. But I think that will just take a little bit longer to recover.

Okay. Again, no problem. And just a final question from me. One of your listed peers increased their targets, their capital targets, given that they're retaining more risk. I haven't seen any commentary about you considering anything like that. I was just keen to understand if that is in your thinking, whether by keeping the same target, there is a higher probability of breach and whether you're happy to run with that.

So I'll jump in there, Sid. So at this point in time, based upon the modeling that we've done, we remain comfortable with our target CET1 of 0.9 to 1.1. But going to one of the earlier questions in terms of the $200 million release we've had from BI. At this point in time, we're cautious, let us complete the original $350 million return. I think I called out on the capital slide that once we fully completed that, there's about a 9-points impact on capital, if I completed it at 30th of June, which would have us down in the bottom half of the range. And in the current reinsurance environment, depending upon what covers we'll put in place, we want a little bit more flex. So we're looking at being in the top half of that range. We obviously review those targets on a very regular basis. So right now, we remain comfortable with both the CET1 and the PCA, but you can see us being a little cautious around not having immediately added that $200 million to the capital return.

And Sid, it slightly solves itself to that problem because we have ratio targets that actually in the calculation of the quantum of capital, if retention, say, goes up, that goes into the quantum.

Correct.

The ratio of capital. That's why I think the rate -- the way we talk about our ratios in a way would reflect any change in retentions anyway. So I'm not sure that we will be changing ratios. But I hear the point on quantum if retentions happen to lift up, but that would then be reflected in the calculation of the minimum requirements.

And that goes to the call-out I made earlier about the ICRC expected to probably go up again on 1/1.

Sorry, Nick, if you're saying there's no increase in probability breach, I thought there still would be even if you're even -- I take your point about the ratio, but I still would think that it would be -- your probability to breach would increase.

And maybe that ends up being a different discussion on volatility and likelihood of large events and if that's materially changing, does that then bring about a different view, which I think is your point. But at the moment, we're not planning to change that.

Your next question comes from Julian Braganza with Goldman Sachs.

Just I can't remember if you mentioned this, but just in terms of claims inflation assumptions into FY '24, I can't recall if you said it was 5% to 10%. I'd also be just interested in how that higher view of claims inflation is split between first half '24 and second half '24?

Yes. So 5% to 10% of claims inflation. I'm not sure we have a view on first half versus second half. My comment on first half, second half is really about the earn-through of the premium. And we expect a stronger result in second half because we'll have more time to be earning through the rate increases that are flowing through. But I think on inflation, sort of 5% to 10%, I don't think we have a view.

Well, we do because we have by month seasonal budget, but I'm not about to share that.

Maybe on perils.

But what I would say is something like motor in Direct Insurance Australia is about 8% as we ended the year. We still expect it to be at the fairly high levels. Obviously, as things unfold across the year, some of that pressure, hopefully, for our customers may ease, but that's the 5% to 10% range at the moment, we'd be at the upper end of that as we think about it.

And just on home insurance as well, is that final?

Yes. Yes, it's slightly higher. And the other thing with home insurance that we always have to think about when we're looking at that, if we're relating it to premium increases is the increased cost of reinsurance and perils in this current environment. So it is the combination of that inflation, reinsurance and perils that we're thinking about that's driving the sort of rate increases that you're seeing at the moment in our home portfolios.

Okay. Great. And Michelle, I'm not sure if you called this out, but in terms of the quantum of the risk margin release in second half '23? And also if there was any ALM mismatch, in first half, you called that out as well. So just any color on that?

So I haven't called it out, and the risk margin release that we've seen across the year is a combination of that timing of level of volume of outstanding claims, but also there's been quite a material impact in this year because of the release from the business interruption provision. So you'll note that pretax, we released $560 million from the business interruption provision, and that was a combination of central estimate and risk margin. So, no, I haven't called out the specific impact in the second half, and so I'm not in a position to put a number on that now, but it's the combination of those 2 factors.

Okay. Great. And then just lastly, in terms of pricing and your view of claims inflation that you've articulated, just in terms of outlook, how long do you think just this pricing cycle will continue? I mean obviously, reinsurance costs are a bit of an unknown, but just given the pace of inflation coming off, are you interested in any comments of pricing going forward? Also noting just your focus -- your secondary focus on volume and in the growth.

Yes. I mean we're not sort of making outlook statements beyond '24, but I think the theme is going to be what happens with claims inflation to the non-perils non-reinsurance and at the moment, we're sort of saying 5% to 10%. When assumed over time, that's going to come down. As sort of inflationary pressures across Australia and New Zealand reduce, and so I mean that's the stated policy of our government. So I assume over time that will come down. I think differently around perils and reinsurance where I think the themes there are that, that challenge doesn't go away and that actually, we should be expecting more around that topic. And therefore, these issues around investing in mitigation, strengthening the resilience of our countries, Australia, New Zealand is just super important. I just don't see that topic on average over multiple years going away. In fact, I see the opposite where increased frequency and severity of these large events, there's going to be a theme for our countries going forward. So I think I'd almost put them in different buckets, those 2 themes.

Your next question comes from Simon Fitzgerald with Jefferies.

Maybe just the first question on the reinsurance cost. I understand you got big 1/1 renewal program, but the new covers are in place at least for the 6 months. So I was just wanting to get a little bit of a handle in terms of the working to sort of have a bit of a think about how those reinsurance expenses might look for first half '24?

So a couple of things. One, we have a full year FY '24 program in place for the aggregate low-level cover third and fourth event. The 1/1 renewals are for our main cat program. We continue to expect a hard reinsurance market, and we saw that again for some of our peers renewals at 1 July. So we're going into it thinking costs will continue to be at strong levels. We're not expecting them to come off, but we think it's manageable within the -- in the guidance range that we've provided you with. And again, what I would reiterate is we are confident that for the full cat program, the coverage is there at an acceptable price. The challenge is around the retention. So it's the lower level covers where a lot of our reinsurance partners have had significant claims experience over recent years. It is where we have a lot of the discussion. And those lower layers in the program are the more expensive. Now I know I haven't specifically given you guidance there to what our reinsurance expense is. What I would say, the package within what we've shown on the slide that's got perils and reinsurance together the guidance range that's all factored in. Sorry, I can't be more specific.

Okay. Understood. Just then maybe a question on New Zealand. Just curious to know whether you think the premium growth that you are getting through is enough. And whether you could comment on any sort of sensitivities of the New Zealand customer base themselves. I guess I'm sort of looking for, are they more sensitive to the premium growth that you're putting through or the rate increases, sorry?

Yes. I mean we're super sensitive to all of our customers across Australia and New Zealand, around what's happening with premiums. We know that's tough. And we're trying to balance making sure we understand the risk that we're taking on and sort of addressing affordability and the challenges that we see in the community right across Australia and New Zealand. So we are doing everything we can to manage that the best we can. But what I can also say is our retention, Australia and New Zealand, our retention rates continue to remain really good. And so we've got wonderful brands across both countries, and our retention rates on both our brands -- both our countries' brands continue to remain really strong. So we'll continue to be able to reprice and reflect the risk that we're taking on.

Okay. And then just final question. Apologies if you mentioned this before. With the remaining $400 million of the BI provision that's outstanding now, are you going to look to review that going forward? Or is that what you think that it should be at this point in time, is unlikely to change from here?

We'll continue to review going forward.

There are no further phone questions at this time. I'll now hand back to Mr. Hawkins.

Thanks, everyone. So thanks for joining us today on our results presentation. As you can see, we have delivered a solid result for '23. But importantly, and we've tried to give you the indicators really sets us up for FY '24. And the confidence we have in the guidance we're providing around premium and margins and delivering on sort of the strategy that we set out a number of years ago. Thanks again for joining us, and enjoy the rest of your day.