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

Well, good morning, everyone, and welcome to IAG's financial results for the 6 months ended 31 December 2023. My name is Mark Ley, I'm Head of Investor Relations. This morning we have presentations from our CEO, Nick Hawkins; and our CFO, William McDonnell. We've left aside plenty of time for your questions. If you're watching on the webcast and you'd like to ask a question, the teleconference details are on our website. On that note, I'll hand over to Nick.

Thanks, Mark, and good morning to everybody. So to begin, we're meeting today on the lands of the Gadigal people, and I pay my respects to their elders, past, present and emerging. IAG acknowledges the traditional owners of country throughout Australia and recognizes their continuing connection to lands, waters and, of course, the communities. Welcome to all of you here in the room with us today and all of you also on the phones. We know it's a busy day, and we appreciate you taking the time to come along or dial in. I'm joined here today by our new Chief Financial Officer, William McDonnell, who will talk to us all shortly as well, as other members of the leadership team who are all seated here today in the front row. Before I start on the financial results and the key messages that we're going to be delivering today is that IAG is on track. I'll make some comments about our current environment. At recent results announcements, I've talked a lot about inflation, reinsurance and payrolls and the impact this has had on us and importantly, on our customers. We're well aware that customers are feeling pressures from premium increases. I want to spend a bit of time talking about how we're responding to that at IAG. Despite the high levels of customer retention, we know it's tough. We offer a promise to our customers to protect them in times of need and pay claims, and, of course, we need to be financially strong to deliver on that promise. And paying claims is core to what we do here at IAG. In the first half of this year alone, we settled more than $6 billion in claims following another period of severe and damaging weather events. That's 730,000 claims in Australia and New Zealand. This shows how we really do act as a shock absorber for consumers and businesses throughout Australia and New Zealand. We have worked hard to manage the business to help minimize premium increases. But of course, there are some factors that are outside of our control. That's why we're working with government, businesses and communities to increase community resilience and to help reduce risks. You'll all recall the devastating floods in 2022 that profoundly impacted many of our communities in Australia. The government is rightly looking at that and how the industry and in fact, the country responded at a House of Representatives Economics Committee inquiry that's underway right now. We were disappointed to hear about the experience of some of our customers they had with us in the aftermath of those floods, and I acknowledge that when I appeared in front of the inquiry over 1 week ago. And of course, I apologize to those customers again. We play a critical role in protecting our communities and businesses. So of course, we welcome feedback that helps us improve and making sure we're delivering better customer outcomes. At the time of the floods, we experienced an unprecedented number of weather events. Well, of course, we are still grappling with COVID impacts to supply chain, skills and labor shortages. We received 64,000 claims from those events, and over 96% of those claims have been finalized. Since 2022, we've reviewed the way we prepare for and respond to these large events. And we know, of course, there are areas where we need to improve around claims handling, vulnerable customers, dispute resolution and of course, how we're communicating. Fixing and improving these really is a top priority for the leadership group of IAG. As an example, within Julie's business in direct, we have employed extra claims teams, and we've scaled up our partner workforce. We've improved the way we have oversight of claims to make sure we really are identifying vulnerable customers -- more of those vulnerable customers. And we've expanded our network of tradespeople in regional areas, so we can access the importantly skilled labor when we need it at short notice. And we revitalize what we call internally our all hands-on deck program so we can scale up at pace. Unfortunately, we will continue to face major events in Australia and New Zealand. And it is critical that we have a strong insurance industry ready and able to support customers and pay claims when that happens. We want to continue to be able to play this important role for our country. So sort of in that environment, how have we been going here at IAG. And I'll just start with the progress we've made against our strategic priorities over the last 6 months. Our strategy is focused on our core insurance business to build out a stronger and a more resilient IAG and, of course, importantly, delivering on our purpose to make your world a safer place. As you know, we've got 4 pillars. First year and growing with our customers. Over the last 6 months, we have increased numbers of customers in our Australian direct business. We've also continued to see strong retention rates in our direct businesses both in Australia and New Zealand. Even though we have continued to reprice to cover the ongoing impact of inflation and increases in perils and reinsurance costs. These retention rates speak to the high regard our customers have for our brands. And of course, a key factor here is trust. We know our customers and the communities of Australia and New Zealand trust us. We saw further evidence of this last month when NRMA Insurance was named the second overall -- second strongest overall brand in the Brand Finance Australia report. And in New Zealand, AMI was Canstar's Car Insurer of the Year for 2023. During last financial year, we completed 320,000 repair assessments in Australia, more than 70,000 motor repair quality inspections and over 3,200 property repair quality inspections. Our overall quality score was 97.7%, reflecting the priority we place on delivering safety and quality to our customers. But of course, we're not settling for that. As an organization, our focus is all about the 2.3% of times. We did not quite achieve the quality outcomes that we aspire to. We've also seen improvements in our transactional net promoter scores over the half. These increased from 46.8 to 49.5 within our Australian businesses and from 44.9 to 49 in New Zealand. In terms of building better businesses, our intermediated business here in Australia continues to make solid progress. We set a target of achieving the insurance profit of $250 million by the end of this financial year by reinvigorating our underperforming CGU and WFI, part of our company. With Jarrod's leadership and a team focusing on underwriting discipline, we're confident of delivering at least a $250 million result this year. In terms of creating value through digital, we continue to roll out the Enterprise Platform, delivering a common pricing policy and administration system for personal lines products across our Australian and New Zealand businesses. What this does? It fixes 25 years of complexity that's really a result of the history of acquisitions of IAG. Today, we have 600,000 policies on the Enterprise Platform. And over the next 12 months, we plan to renew approximately 5 million retail and partner personal lines policies onto the platform. And finally, we're pursuing continuous improvement and integration of our nonfinancial risk management. We head into 2024 with a strong reinsurance program. As you know, last year, we locked in a whole of account quota share arrangements with 4 of the world's largest reinsurers. Our main [ CAT ] program has been renewed, and this will limit the maximum event retention for a first and second event to $236 million for the rest of this calendar year. Our risk approach, along with our strong capital position, has led to Standard & Poor's to upgrade our credit rating in December. This took the issuer credit rating on our main operating entities from AA minus to AA. The strength of our balance sheet and our capital position means we can announce today an on-market buyback of up to a further $200 million. And so completing this, we'll take our cumulative buybacks of up to $550 million over the last couple of years. We have not adjusted our COVID-19 provision over the last 6 months, but we will continue to review that. So just some of the headline financials for the half year results. Starting with net profit, which was $407 million for the half. Now that's slightly lower than the prior corresponding period, although that prior corresponding year period did have a $360 million business interruption provision release. We have delivered a pre-tax profit -- sorry, pre-tax insurance profit of $614 million, and that's an underlying and reported margin of 13.7% for the half. The reported margin does show significant improvement, but it is towards the bottom end of our FY '24 guidance range and reflects the ongoing inflationary impacts and additional reinsurance costs that we continue to earn through. Our top line growth is strong at 12.5%, and that's consistent with our low double-digit guidance that we provided to the market in August. In addition to the buyback of up to $200 million, we've also declared an interim dividend of $0.10 per share, which is an increase on the $0.06 per share interim dividend that we declared same time last year. So turning to our divisions, and I'll start with Direct here in Australia, which delivered top line growth of 13.3%. Breaking that down, that's 14% growth in motor and 16% growth in home as we've actively repriced those portfolios for the greater perils, reinsurance costs and the cost inflation. CTP, which is the other part of that portfolio, saw low single-digit growth. Our Direct business was impacted by short-tail claims inflation, particularly affecting prior year perils events, amplified by some late notification of claims. This has been factored into our reserving estimates at 31 December. The underlying insurance profit of $333 million in this business equates to an underlying margin of 15.9%, and that's up 270 basis points on the prior corresponding period. At a strategic level, Julie and her team have deployed our earnings pricing engine across the business and what that does is significantly improve our pricing capability. In the coming months, the majority of this business is expected to be renewing onto the Enterprise Platform, allowing us to rapidly deploy and enhance our digital functionality. In our Australian Intermediated business, and we know there the focus has been all about underwriting discipline, is delivering results. Reported an insurance profit for the half of $162 million and are confident of delivering at least a $250 million insurance profit this financial year. Average premium rates are up 8% to 12% in our commercial portfolios and around 15% across our personal lines. Specific underwriting and portfolio management actions have driven though, a reduction in policies in force. And our overall growth in this business was 5.8%, which was consistent with our expectations of what we'll be delivering. Jarrod and the team have improved attritional losses. But I'll highlight the business has been impacted by some unfavorable large loss experience, which is limited, though, to some single portfolios. On an underlying basis, the 9.5% margin we've delivered continues the positive trajectory, and we expect this to increase based on the team's continued focus on pricing and underwriting discipline. We've also commenced our commercial enablement program, which will drive a material uplift in efficiency across the business as that's being delivered over the next couple of years. We've had a strong performance from New Zealand. And I think this time last year, Cyclone Gabrielle was hitting the North Island and a state of emergency had been declared. That event, along with the earlier rain bomb that hit Auckland resulted in us incurring over 52,000 claims, and the gross cost of those claims was over NZD 1 billion. In managing these claims, our teams really have played a critical role in the rebuilding process. In terms of the financials in New Zealand, our top line growth is over 20% in Aussie dollar terms. And we've delivered a reported margin that's also over 20%, although that margin has been assisted by a relatively benign perils period in the last 6 months in New Zealand. Strategically, our business has made great progress as Amanda and her team transform it into a digital first customer-focused organization. We now have distinct offerings for New Zealanders with state and AMI offering differentiated value propositions. Both brands have apps that include claims updates and roadside assistance requests and tracking. In New Zealand, we've also opened up the 8th repair hub site and the first one of the -- first one, though, that's branded entirely AMI as we continue to deliver great customer service and, of course, importantly, reduced motor repair costs. And in terms of our Enterprise Platform work, in March this year, State will be our first direct brand to go live in New Zealand, starting with new business for home contents and landlord. Then AMI is expected to follow shortly after in the fourth quarter of this financial year. I'll now hand over to William, who's going to talk more about our financials.

Thank you, Nick. Good morning, everyone. It's great to be here with you all today, presenting my first set of results. I'll start with the financial summary. At a high level, this shows a solid set of numbers. We've reported good top line growth, improved margins and a strong capital position. While the net profit after tax has declined, this is largely due to a one-off in the prior period. In the first half of last year, we recorded the $360 million pre-tax release of the BI provision. And when we normalize for this impact, cash earnings has grown strongly, allowing for an improved dividend to shareholders. I'll now focus on the drivers of the underlying result. We've recorded strong GWP growth of 12.5%, in line with our guidance of low double-digit, which was largely driven by rate increases. We've shown previously the relative patterns of GWP growth and GEP growth to highlight how GWP gives a forward indication of earnings that will flow through into our financials from premium rate rises. For the first half, our GEP grew by 10.2% and GWP remained ahead, giving confidence in benefits to flow in the second half of this financial year. Turning to underlying margin performance. For the first half, we've delivered 13.7% compared with 10.7% in the first half of last financial year, around the lower end of our guidance range, as we indicated at our AGM last October. This does include the balance of the $65 million of reinsurance reinstatement costs, which were incurred following the New Zealand events early in the 2023 calendar year. The increased natural perils allowance after a true-up, which I'll come to, resulted in a 120 basis points drag, while the underlying claims ratio decreased 260 basis points from the elevated level in the first half of financial year '23. Although we have seen an 80 basis point increase in the expense ratio, largely driven by commission mix, higher levies and one-off effects, this has been more than offset by higher investment income from improved bond yields. I'll now talk to some of these individual movements in more detail. Delving further into the underlying claims ratio, which excludes all perils, reserving and discount rate effects. The ratio has declined to 55.6%, an improvement of 260 basis points from the level in the first half of last financial year, which saw elevated claims inflation from a variety of factors. The underlying claims performance has improved across all 3 of our operating divisions, while the individual -- which has included the benefit of earn-through of rate increases. In addition to this, DIA has benefited from expanded network capacity as well as the decline in secondhand car prices, particularly in Victoria, where a higher proportion of motor policies are on a market value basis. IIA has seen improvement in workers' compensation and professional risk through a combination of active portfolio management and claims initiatives, but there has also been slightly higher large loss experience. New Zealand is still experiencing elevated claims inflation pressures, but there are signs that this has stabilized in recent months. Repair hub in New Zealand has just opened its 8th site and for the first half accounted for 18% of private motor repair volume. On reinsurance, in January, we provided an update in relation to the placement of our calendar year [ CAT ] program. We outlined that we were able to purchase greater reinsurance protection than we originally expected, following a stabilization in global reinsurance markets over the course of 2023. As a result, we purchased an additional drop-down cover, limiting a first event retention to $350 million on a gross basis, and therefore, our maximum event retention for a next event is $236 million after quota share. A reminder that we do also purchase some protection on a financial year basis, including our aggregate cover, which provides $250 million of protection for low- to medium-size events. Following the natural perils experienced during the first half, this aggregate cover deductible has been eroded by around $250 million of the total $600 million deductible. Despite the storm and flood activity that occurred in December, the relatively benign experience over the first few months of the half ensured a perils outcome slightly below our expectations. The additional perils cover we purchased, as I explained on the previous slide as well as the impact of premiums paid for entering into the Cyclone Reinsurance Pool in October, has resulted in us revising our perils allowance. Truing up for these 2 factors has resulted in a $49 million reduction to approximately $1.1 billion for the full year or a $24 million pro rata reduction for the half. The overall greater availability of reinsurance has effectively improved our financial strength and will lower our earnings volatility. On expenses, gross admin costs have increased 8.6% year-on-year due to the increased spend we are incurring from rolling out the Enterprise Platform as well as the commercial enablement initiative across Australia and New Zealand, which will allow us to position the business for the future. Furthermore, we have absorbed additional regulatory costs in relation to a range of initiatives, including inception of the Cyclone Reinsurance Pool and around data safety. In this half result, our admin expense ratio ex-levies has shown a modest increase of 10 basis points compared to the first half of last financial year. While our top line has grown strongly, additional one-off reinsurance reinstatement costs have resulted in proportionately lower NEP growth. And adjusting for this, the first half admin expense ratio is flat compared to the same period from last year. Some of the overall spend was weighted to the first half, and we do expect a decrease in the admin ratio in the second half as NEP continues to grow. Longer term, I will be focused on the efficiency of IAG and on reducing the expense ratio further. A key contributor to our margin improvement has been the increase in investment returns. We've achieved a higher underlying yield on technical reserves due to the higher risk-free rates and active manager performance. Based on our recent view of bond yields, we can expect a return in excess of 5% for the second half of the financial year. Lastly, our shareholders' funds portfolio delivered a strong $147 million contribution this half with positive performance across growth and defensive assets. This portfolio continues to remain more defensively positioned with a growth asset weighting of around 24%. Lastly, on capital. We completed our on-market buyback in December, which resulted in a reduction of over 63 million shares in issue. And despite this, we finished the period with a strong capital position. A few other call-outs on the capital waterfall. You'll see the benefit of the first half earnings partly offset by payment of the final dividend from last financial year. The other large positive factor of 12 points is the decrease in the deferred tax asset balance arising from utilization of tax losses as well as an associated tax impact related to the change in [ APRA ] treatment on excess technical provisions. Our investment in technology has continued. However, the capitalized impact has been partially offset by increased associated amortization, leading to a net 3 points impact. Finally, following our [ CAT ] reinsurance renewal in January, the insurance concentration risk charge has increased to $343 million compared to the temporarily lower amount that we itemized at the June 2023 result. Overall, the strong position has allowed us to announce a further on-market buyback of up to $200 million. Assuming completion of this and payment of the $0.10 per share interim dividend, the pro forma capital position is in the middle of our CET1 target ratio. I'm very focused on maintaining a strong balance sheet and regulatory capital position and note that these were key drivers in S&P recently upgrading its view on our credit rating to AA. With that, I will now hand back over to Nick.

Thanks, William. Just some final comments from me before we open it up for questions. So you can see today, our key message is that this is a good result and that importantly, IAG is on track. Our financial guidance for FY '24 remains unchanged. We continue to expect it to deliver low double-digit premium growth and a reported insurance margin in the order of 13.5% to 15.5%. In terms of insurance profit in FY '24, that's expected to deliver something in the order of $1.2 billion to $1.45 billion. Going forward, our guidance will be increasingly focused on this reported insurance profit as we further transition to the new accounting standard IFRS 17. So as you can see, we're focused on delivering against our strategy about growing with our customers, about building our better businesses, transforming the company's technology platforms and, of course, importantly, managing our risk. So on that note, William and I are happy to take any of your questions.

[Operator Instructions] Your first question comes from Kieren Chidgey with Jarden.

Nick, maybe just starting on Home and Motor, the GWP growth there around 15% in the half across those classes. Just looking back, obviously, to the end of '23 in your slide deck in August was pointing to pricing in both those classes sort of running at 20% plus. And I know there's a bit of disconnect between sort of deductibles and mix impacts. So just wondering if you can break out sort of broadly where pricing is trending from a rate point of view in both those classes at the moment as well as inflation?

Yes, sure. I mean it's -- I mean, essentially, our volumes are pretty flat. So the sort of the growth rates that we talked about there, sort of blended [ 15% ], that's roughly what's happening with pricing over the last 6 months across -- around the Australian business. And Home is probably more -- high teens and Motor slightly lower. I don't think much has really happened on those portfolios since we talked about the sort of pricing positions. To your point, it's across the whole portfolio. There's mix. There's a bit of movement in deductibles, not that much though, a couple of percent movement only probably, that's impacted a little bit. So the themes are the sort of the blended [ 15% ], probably slightly lower than that or, slightly more than that in Home. That's the current pricing environment across our Australian personal lines business. And actually, I mean, it's similar to Jarrod, so we said for Jarrod the sort of average was about 15%. That's probably the same for the partner personal lines as well.

And your expectation is for that to persist through the second half of '24? I'm just wondering if you can also talk to sort of inflation?

Yes.

[indiscernible].

I mean there's a few -- I mean, I'll break them up, if that's all right because I think there's some -- there's slightly different drivers. So I mean, even though the reinsurance renewal was better at 1 January than it was 12 months ago, we're still paying more for reinsurance per sort of unit of risk. And so the themes for property are increased cost of reinsurance. We know payrolls are up and the outlook on sort of frequency and severity of large events is sort of up. And so the driver of Home, yes, in addition to that is inflation, building product supplies. The outlook is still -- there's still unfortunately quite a lot of costs still coming through. And so the outlook on pricing will, I think, be similar because of that. I think Motor is a little bit different, less of an impact from reinsurance and perils in the way that the pricing for motor works. And we're definitely seeing new car -- sorry, secondhand car prices are coming down a little bit. And some of the parts costs, I would say, the slowing down of some of the inflationary pressure, the sum of all that over the next sort of 6 to 12 months is probably going to -- is going to provide, I think, a better outcome for customers and a better outcome, obviously, around pricing. So slowing down of some of the increases in motor pricing compared to what's just happened in the 6 months. So I think there's 2 slightly different stories there. Property, I sort of see similar. Motor over the next 6 to 12 months, probably a slight coming back a bit.

And just a second question on the change in the catastrophe budget only. You're always going to go into the Cyclone Reinsurance Pool. So just surprised the initial budget for '24 didn't already capture that. So just to be clear on the $50 million reduction there, was that already envisaged within your reported dollar profit -- insurance profit guidance you gave at the start of '24? And also, is there a number we should be thinking about on the reinsurance side, even though sort of the cap budgets come down $650 million, presumably, there's a reinsurance payment to the government? So just wondering what the net impact from that change is?

Yes. I mean, I'll answer that. It probably happened before William started. I mean, it's on the first point, I mean we just assumed -- because weren't sure exactly when we were entering, we kind of just went for the simple option of not including it, and then we've adjusted once we did join. So that's -- we've kept it pretty simple. We haven't tried to attribute -- I think we went in end of October, so 2 months versus 6 months. We sort of just -- you can see what we've done, we've just attributed a [ 50-50 ] or into the allowance even in the half-on-half numbers. And most of that sort of approximate $50 million reduction is driven by that a little bit. We obviously have some benefit in the [ CAT ] Reinsurance purchase because an element of risk has now moved to the government pool essentially. Sort of quantifying that and all the other ups and downs is a little difficult. And then -- and the other question was, the net of all of that story, was that included in our thinking around guidance in the first place for the full financial year? I mean the answer to that is yes.

Your next question comes from Siddharth Parameswaran.

Just a couple of questions, if I can. Actually, I missed the first question from Kieren. So I don't know if he's asked this, but just on the volumes, I think to understand, it seems to me like there has been some slippage and momentum on volumes in pretty much all the divisions. I was hoping if you could just briefly comment on your commitment to volume growth? At some point in time, whether we will see a reversion to that? And maybe if you could just give us some trends on the volumes as well in each of the divisions, so DIA, IIA and New Zealand?

Yes. Sure. I mean, we've definitely seen a slowing down in that. And so we're sort of -- within our New Zealand Direct business, we went backwards a little bit in the half. Julie and the team within the direct business in Australia grew it, but I thought it was like net 20,000 customer growth. So yes, to your question, I mean, I think the pricing environment, affordability, there's a lot going on, obviously, it's pretty tough for our customers. And so that's definitely slowed down that sort of customer growth over the last 6 months. I mean importantly, our retention levels are still pretty high, sort of around [ 90% ]. So the -- sort of the customer retention is strong, but new business is really quite difficult. If I look -- and then sort of the third part of that is obviously -- so that's New Zealand Direct, the Australian Direct business, and Jarrod's business definitely has lost volume. We sort of talked about rate increases of 10% to 12% or 8% to 12% in commercial, 15% in personal lines. But the whole package of that story is about 7%, 8% growth. And that's because we've lost volume within the intermediated businesses. We're just very focused on underwriting discipline and profitability within that part of the company. And then -- so I think the last bit was then sort of the aspirations around growth. I mean we said in June that -- obviously, the environment is probably tougher than when we set some of those aspirations. New Zealand had all sorts of challenges that we've had, as has Australia. And so directionally, we want to be able to grow our company. We know we've got population growth across both Australia and New Zealand. The current economic environment is making that growth quite challenging. Medium term, though, we see opportunities to grow as our countries are growing.

And if I could just ask a second question. I think you touched on I mean inflation trends in the answer to the last question. But just -- I think just -- to get your perspective on exactly where you're seeing the movements in inflation? I think we've had different views on particularly motor inflation. I think it was -- you said it was around 6 or so -- 6 months ago as your trailing view. And now I take it's higher. I think -- I mean it's close to double-digit or something else. You're flagging you're expecting it to drop. Just keen to get some views on whether you're actually seeing that? And actually -- I mean, is it -- are there any signs of that actually happening? And also just on Home, I think you said you're expecting inflation to continue. We've seen it high for a while. Just -- we used to get charts showing that trailing number. I don't think I saw it this time. I was just keen to get your perspective on any hard data you have on what trends you're seeing?

Sure.

I'm sorry, and New Zealand as well, where I think you're flagging very high inflation -- or very high inflation before, those things have come down?

Yes, there's a few -- there's like 5 questions in that. I said, why don't I go through that slowly. So I think with Home, we continue to see inflationary pressure in repair costs. We've got a number of event-led type inflation challenges, too, across Australia and New Zealand. The challenge with Home is, if you sort of then go to pricing, we've also got higher reinsurance costs and higher perils allowance and expectations of that continuing up. So that's sort of -- that feels quite tough, actually, Home pricing, driven by that inflationary pressure on reinsurance costs, perils allowance is -- our expectations of perils going forward as well as repair costs, building supply, things like that. So that sort of feels similar going forward. I think Motor is got a few different parts of the story. Obviously, we've made improvements, efficiency, productivity in the way we manage motor repair claims across Australia and New Zealand. So we're definitely getting the benefits of that. We've got our own businesses that we're increasingly doing more of our own repairs, and we're seeing the better financial outcomes from that. At the same time, we have seen inflation and probably to your comment, we know -- we said we continue to see inflation probably slightly more than we thought sort of the beginning of this financial year. That's got better. So we definitely had some continued motor inflation. It's probably slightly longer than we originally anticipated, although we are seeing it come down a little bit, motor inflation, motor parts, repair costs. There's a few -- unpacking that. It's sort of the utilization of the network. The efficiency, that sort of is back in the system, parts are sort of becoming more manageable, labor, things like that. Against that, though, there is a structural change that's happening in the motor fleets of Australia and New Zealand. We know that as more of the fleet has more of the collision avoidance technology on it, so that's sort of churning over the next 10 years or so, that those repairs are more expensive. So that's sort of like a structural change just in the portion of accidents that relate to motor vehicles that have more expensive stuff on the outside of those cars that are more expensive to repair. And the hypothesis that -- that's the negative that they're more expensive. And the hypothesis, obviously, that frequency is going to be better because that collision of [ voidance ] technology reduces the amount of car accidents. At the moment, maybe for other reasons, that's not evident, that's occurring. And so there's a bit of a structural change in the motor fleets of Australia and New Zealand, and in fact, all over the world. We're not getting a benefit of frequency. So those average repair costs are going up because of the change of the fleet, and that's sort of in the middle of this story as well. So I see property outlook in a double-digit. Motor are definitely coming back and that's sort of that high single-digit type inflationary environment over the next couple of years -- sorry, the next 12 months. I'll leave it at that.

Your next question comes from Nigel Pittaway with Citi.

Sorry, I'm hopping in the sort of -- same sort of topics. But just coming to the Home and Motor units again. I mean, it looks like you've had sort of flat units in Motor, some losses in Home, which probably means you've lost market share in both. I mean how happy are you about that continuing? Because it does seem to run against as you said your sort of original aspirations that you sort of set out when you took over a CEO? And is this something that you're happy to let persist on the basis you're getting price above claims inflation? Or is that something at some stage that you will be looking to address?

I mean, it's -- I mean, I would describe it as a very tough environment. We know there are all sorts of challenges with affordability. We know we've had significant change in the cost structure of the company, inflation, reinsurance, perils. We've had a difficult pricing environment to manage our way through. And sort of -- I sort of think of it as a point in time. The last 6 months has been tough. We definitely had challenges with Home the way you described. Motor, we're probably roughly held. Sort of -- it's hard to look at exactly how -- has there been a slightly -- have some insurance dropped out of the system a little bit in Motor. But the medium-term view sort of unchanged. We've got very, very strong retail brands that -- our countries have got population growth. Yes, the current economic environment is very tough. But over the medium term, we've got population growth, we've got wonderful brands. So we should be able to grow our company in line with that. And the same for New Zealand, sorry.

And then just a little bit more on the motor inflation. I mean, you said sort of high single-digit over the next 12 months, you think it will come down to that. I mean are we still talking in that late -- is that sort of a normalization of parts, but labor is still difficult? And maybe can you give us a little bit more color about just the components that you think are sort of running above normal? And is the high single-digits over the next 12 months, does that still envisage that after that it will come down to a more normal level? Or are you saying high single-digit is, in fact, the new normal?

Yes. I think unless -- Nigel, unless we get frequency benefit -- I mean, I think the structural change in amongst all these other challenges that we've been managing our business to and the impact that impacted our customers. The structural change in the fleets of the world is also important, that -- cars are more expensive -- forgetting inflation and other issues, cars are more expensive to repair. New cars are more expensive to repair because of the extensive amount of collision-avoidance technology and even windscreen technology and the cost of repairing that is materially more. And the price of lower frequency, so average repair cost goes up, frequency should come down to then impact motor pricing, is not occurring at the moment. Now, logic would be that over time, that should occur. So it's a -- that's why I'm a bit cautious about sort of multiyear forecast on motor. But at the moment, unless if we don't have a frequency benefit across the fleets of Australia and New Zealand, then that -- what I described in the next 12 months, I think there's a chance we'll remain. And that -- so that's the question at IAG, but the insurance industry, motor vehicle industry, it's happening all over the world. People are pretty focused on this. What does that long-term outlook look like? Unless we have that frequency benefit, these cars are more expensive to repair, newer vehicles.

And then just -- it's probably in the pack somewhere, but I haven't had the chance to look. But just -- I think it was $15 million of long tail releases [indiscernible] to offset some of the short tail topics, were those mostly New South Wales CTP or?

I'll let -- Nigel, I'll let William answer that one.

Yes. So in the long tail, yes, there's a modest net release there. I think particularly workers comp. And yes -- but obviously, that's a component in that broader PYD movements that you can see in the pack.

Your next question comes from Julian Braganza with Goldman Sachs.

Just an initial question. I think you may have touched on this but just wanted to round it out. In terms of the reported margin guidance for FY '24, I noticed it's unchanged, but the comment there just around better perils budgets, better reinsurance renewal as well than what you were forecasting. Yields also appear to be holding up over FY '24. So just trying to understand that, just given the benefits relative to initial expectations that -- when you first put the numbers out, is there any offsets there that you're factoring in or you're cautious about in the second half?

I mean plenty would be what I'd say. We're cautious. The results were just delivered at high 13s for the actual half. Our guidance of 13.5% to 15.5%. So we're at the sort of the bottom end of guidance, as I said. Now, we all understand the earn-through and the amortization of some of our reinsurance costs and things like that. So we're expecting a better margin in the second half than first half. But we're cautious too. I mean, no, there's not some big negative that we're worrying about, but we're running the business in an inflationary environment still, reinsurance cost do cost more. Perils -- we continue to have perils. And so I think we're just being cautious with our approach and how we're thinking about guidance. And no, there's not some big other negative that we're sort of worrying about within that construct.

And then just on -- I mean, putting it all together just in terms of volumes, pricing and -- so just the pressure on volumes. Just at a high level from a pricing strategy perspective, do you think in terms of your rates relative to market perhaps gone too far in terms of how far you push the pricing lever? And when -- given, I guess, the trajectory for improving margins, do you think there's scope now to refocus back more holistically towards volume over the short to medium-term? Or is this more a longer-dated sort of view from your perspective?

I mean we're super focused on sort of the affordability of what we do to the communities of Australia and New Zealand. And we've had significant change in the cost structure of our business, as you know, reinsurance, perils, inflationary pressure. We know that that's resulted in higher premiums, and we know that's put more pressure on household budget. So that's worrying us. So we're looking at lots of ways to try to ease that because that's -- we know that's difficult and -- difficult to sustain. Making sure -- we've made changes to how we run the business, supply chain, the claims models, we're building -- continuing to build out our own repair business, try to take the -- lower the cost there of motor vehicle repair costs as an example. I do think, and I've said it a few times around Motor, the outlook does look slightly better around inflationary pressure. I worry against that about property because reinsurance cost, perils, increased frequency of severity events, that outlook is pretty tough. And so I don't think we can walk past that. And that's why stakeholders engaging in those sort of medium-term issues, investment mitigation, strengthening the resilience of our country are really important because in a way, we're going to be the shock absorber until we can see some sort of structural change in our country and with property, and we need to make sure we're strong as part of that story.

And just last question, business interruption provision. Just any update on what's holding you back there from making a further release there?

Yes. So the business interruption provision, we've held at the same level, and that is pending further information. There is a class action if that gets declassified or anything, then that will be a key moment for us to review.

And we're hoping for that in the next 6 months. So hopefully, we can -- we'll update you again in August, and we're hoping that will go through the court during this period.

Your next question comes from Andrew Buncombe with Macquarie.

Just the first one on the IIA division, please. Its earnings are doing exceptionally well. Do you still think that the above $250 million target is still appropriate for this year? And I suppose, further out, how should we be thinking about the targets in this division over the medium-term?

Thanks, Andrew. I mean what we said, at least $250 million, it sort of was our thinking. And I'm going to just come back a moment to say, I set that target before Jarrod had really put together the team and the strategy. It was really a point that this business has not delivered the return profiles we want and we need to change that. And we sort of put a number out there of $250 million just to -- almost galvanized with inside the company, but externally as well, that this is an important part of the company that we can't have returning not much. And so as you can see, we're -- that -- we've gone well there. And we're confident of $250 million, at least $250 million this year. The key for me is also not just obviously, getting to $250 million, is delivering a much more sustainable return to IAG and the shareholders of IAG. And that -- there's still some more lifting that we need to do there. That's why we're investing in this commercial enablement program of work. It can take a couple of years to deliver. And that's going to create some productivity efficiency within the business as well as greater connectivity with our broker partners. And that's really the key for me. Yes, it's nice that we are delivering a much better return, and we expect to be able to take that forward over the next couple of years anyway. But the medium-term sustainable return profile needs further investment, and that's what we're doing to really ensure that we got more stable returns for shareholders going forward, and it's not just a sugar hit.

And then my second question was in relation to the workers comp portfolio which you've pulled out in the documents, is growing. Peers are calling those out for reserve strengthening at the moment. How can you give us confidence that the business you're picking up is priced correctly?

Yes. I mean we've done -- I think we've done quite a lot of heavy lifting in that portfolio over the last couple of years and reweighted where we operate. It's predominantly a West Australian book. And we've seen -- we're seeing the benefits of that. We've spent quite a lot of time on that portfolio. I know Jarrod and the team have effectively re-underwritten a lot of it. And I feel like we're getting the results of that. I mean, it takes a few years, though. And [indiscernible] I'm confident we're not -- sorry, just to answer that last bit. I'm confident we're not going into problems, if that's the question.

Your next question comes from Andrei Stadnik with Morgan Stanley.

My first question, and apologies, around personal lines. But am I reading correctly that this time around the retentions in Australian direct modern home are around 90%? And at the FY '23 result, the comment was that they were around 90% to 95%. So is that fair to say that retentions have reduced?

Yes, a little bit. Yes, retentions have come back. I mean we're feeling the pressure of affordability that our customers are experiencing on retentions a little bit. I mean when I sort of slightly flip it the other way around is we're still maintaining very high retention rates. Of course, the point you're raising is important to us, that we don't want to see continued slippage in that. But we also recognize it's been a very challenging environment across Australia and New Zealand.

And a kind of related question then. Like what steps are you taking to help customers manage affordability investment lines? Like I think previously you hinted around changes to excess amounts or deductibles. Like what are you seeing customers do? And are you trying to be proactive in helping them to manage just the price [indiscernible] shock?

Yes. I mean we're encouraging movements in excesses, to be careful with that, that people don't take on deductibles, that they put them also in a challenging environment in the moment of a claim. But yes, we are definitely doing that. We're encouraging installment payments versus sort of 6 monthly or annual premiums, and we have a sort of package of things that are available to customers if they -- when they're feeling under pressure. And also, of course, the bigger issue is how we're running our company, how we can continue to look for opportunities to actually run more efficiently, claims cost, supply chain, purchasing reinsurance, things like that, that can -- and how we're running the cost base of the company to sort of -- to give some relief to those premium rates because we know it's very tough. And we know that we're creating a challenge for our customers on what's happening with pricing. And that's really a center of focus for us and the leadership group is how can we help ease some of that.

Your next question comes from Brett Le Mesurier with Perpetual.

Willie mentioned the reinstatement costs of $65 million for the reinsurance in respect of New Zealand that you incurred in the last half, that doesn't recur this half, does it?

Correct. Yes, that's the completion of the reinstatement cost in respect of the New Zealand events 1 year ago.

So -- And that's about 1.5% of NEP, right? Group NEP?

Yes.

And so you're really starting this half with an insurance margin of slightly over 15%. That's correct, isn't it?

Yes.

On an underlying basis?

Yes.

So the -- sorry, sorry.

Brett, I would say. I mean we've just renewed the main [ CAT ] program on 1 January. And so we are -- even though -- yes, I mean, I said just at the beginning that the renewal was -- I don't know if the word is better. But we definitely paid more for reinsurance 1 January '24 than we did where we were on 1 January '23. So there's a bit of -- I hear your point, we sort of had a portion because of the no longer paying for the backup. We do have a new program that we are paying slightly more for. So that does come against what you said around that starting position.

You must be pretty close to your aspirational target already of the 15% margin?

I mean we're trying to -- as you know, the settings of the company, we've sort of said 13% to 14% ROE, 15% margin over time. We haven't been running the company like that, as you know. And we've had a number of challenges that we've been working through, but we definitely feel more positive today than we did 6, 12, 18 months ago.

I would just add that, I mean, we did have a benefit in the margin in the first half of the year from investment results. And while we expect that the investment result in the second half would be 5% or maybe a little bit more, that level we expect may come down a bit from the first half. So there's other things moving around.

Your next question comes from Anthony Hoo with CLSA.

Just a quick one. Just in terms of capital or shareholder returns, you're announcing a buyback today. But your dividend payout ratio of 59%, just below your normal 60% to 80% range. Just wondering if you can comment around what is the indicator [indiscernible] payout ratio on an ongoing basis looking forward?

So our guidance on our dividend, I mean, it says same 60% to 80% on a full year basis and $0.10 in the first half, but we'll true up when we get to the year-end.

Yes. I don't think there's -- I think we should be clear. There's no change in dividend policy. And we're sort of 60% to 80% and then capital in excess of that range. The preferred return to shareholders is through an on-market buyback. And that's what -- that's sort of the capital model which we're operating to and there's no change in that.

There are no further questions at this time.

All right. So we'll just leave you with the messages that -- I mean, we feel pretty good with a strong set of results for the first half. But importantly, we feel like the company is on track in delivering against the plans that we've set out over the last couple of years. So thank you again for attending both in-person here in the room as well as online. I know it's a busy day, and I appreciate the time. Thank you very much.