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

Good morning. Welcome to the IAG market update with Managing Director and CEO, Nick Hawkins; and Chief Financial Officer, William McDonnell. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Hawkins, Managing Director and Chief Executive Officer. Please go ahead.

Good morning, everyone, and thanks for joining us at short notice for today's market update. I'm joined here today by William McDonnell and we're here in our Sydney offices on the land of the Gadigal people and I pay my respects to elders past, present and emerging. We're announcing today 2 materially strategic reinsurance transactions that continue our journey to create a stronger and a more resilient IAG. We also thought it was a good opportunity to provide a financial and strategic update, particularly on the successful rollout of our enterprise platform technology. So in the pack that we also distributed today. If we go to Page or Slide 4, you can see there that we've provided an update on our year-to-date financial performance. And we'll be reporting our FY '24 results on 21st of August and with a few days left of this financial year, it's pleasing to be able to report that we're on track to deliver around the upper end of our reported insurance guidance due to some slightly favorable perils experience. This will result in the insurance profit being around the upper end of the $1.2 billion to $1.45 billion guidance range that we provided last August. And then within that, we have assumed though that our June perils costs are in line with our seasonal assumptions. If we sort of back out the favorable weather experience and our other normal adjustments, the underlying margin that we expect to report is around the midpoint of our guidance range. Although we do note that this does include some of the additional reinsurance expense for the adverse development cover that we're also announcing today. So on Slide 5, we have a normal sort of strategy page and the pillars that sit behind them. So we're just sort of stepping through that, you can see that with in relation to our customers, we've successfully rationalized and repositioned our direct bands in both Australia and New Zealand. We're continuing that journey. We're also seeing benefits from the rollout of our new Enterprise Platform technology. And these include the option for customers to set their payment frequency or allow us to apply a reduction to customers who live in high-risk areas and take reasonable steps to mitigate against the risk that they're incurring. And for an example, participating in resilience programs are installing cyclone shutters to their windows is where we're able to pass some relief. In terms of building our better businesses, 3 years ago, we set a target of an insurance profit of $250 million for our underperforming commercial business. We established Intermediated Insurance Australia as a separate division, and we've brought in a new leadership team. I think, as you know, over the past 3 years, the renewed focus on underwriting discipline and cost efficiency means we're well placed to deliver an FY '24 insurance profit for the IAA division, which we expect to be above the $250 million target that we set at the time. In terms of creating value through digital, and I'll talk to the successful Enterprise Platform rollout in the coming slides, we've now commenced our commercial enablement program, which aims to deliver an efficient technology platform for our CGU NZI and WFI businesses. And then finally, managing our risks, the reinsurance transactions we're announcing today materially reduce our financial volatility over the next five years. And the transactions underscore our long-term innovative approach to managing volatility across our business starting with the original quota share agreement with Berkshire Hathaway in 2015. They also reinforced the confidence our global reinsurance partners have in our business and in fact, in the Australian and New Zealand markets. You'll see on Slide 6, I'll just sort of set out how we're seeing IAG. And increasingly, I'm seeing IAG in 3 components. Firstly, IAG as a retail business, which has great customer relationships, engaging through some of the best insurance and partner brands in the market. To support this proposition, we have already in place a common claims technology and are now delivering a common policy admin and pricing platform that sits right across the retail business, Trans-Tasman that we internally call our Enterprise Platform. Then secondly, we have a broker intermediated business with brands that have been in Australia and New Zealand for up to 165 years. We've been turning this business to profitability over the last few years. Investment is still required on its core platform to support our broker networks and to deliver sustainable profits going forward. This is underway through the commercial enablement program. And then the third piece of this story is our capital platform, where we continue to look at innovative solutions to firm up long-term supply of reinsurance capital as well as solutions to optimize and reduce volatility for our equity capital owners. In terms of our Enterprise Platform delivery, we've got a slide there on Page 7 that shows the progress we're making. We commenced this 8 years ago, and the program simplifies our technology, reducing operational risk, creates operational efficiencies as we migrate to 1 platform across the entire retail business, Trans-Tasman, and enable improved digital functionality for our customers. We've delivered a common claims platform, as I mentioned before. And our new policy and pricing technology started rolling out in WA and South Australia in FY '22. We progressed through a full year of renewals to ensure we've derisked the implementation of this platform. We're now in the renewal process everywhere for NRMA on the East Coast, together with AMI in State in New Zealand. And what we are seeing already is improved conversion across our digital channels. This Enterprise Platform, it's also a key enabler, allow us to integrate with our partner brands. For example, when we took it on last year, we migrated our ANZ partner business directly on to the Enterprise Platform so that they'll integrate directly into ANZ's digital technology. I'll now hand over to William, who's going to discuss our strategic approach to capital management and provide some of the details of the reinsurance transactions that we're announcing today.

Thank you, Nick, and it's great to be joining you all on this teleconference today and discussing these transactions, which build on the strategic capital journey that IAG has been on. When I joined, Nick asked me to review our overall approach to capital and the balance sheet. As you can see on Slide 8, I'm pleased to say that these transactions that we're announcing today are an extension of our approach to accessing global capital pools to allow us to diversify our capital funding sources. The 2 transactions ensure stability against 2 of the largest sources of insurance profit volatility, natural perils and prior year reserve deterioration. On Slide 9, the major strategic transaction we're announcing today builds on our strong reinsurance partnerships. As far as we can tell, it's a unique transaction in terms of its size and the 5-year term. And it is with Berkshire Hathaway and Canada Life Reinsurance. This reflects the significance of perils to the financial stability of Australian and New Zealand insurance companies and its importance in pricing to customers. This is a long-term deal, it provides significant downside protection. In FY '25, it limits perils costs to $1,283 million in over 90% of scenarios. And in future years, the annual attachment only increases relative to underlying aggregate exposure. So with pricing fixed over the term of the arrangement, this effectively reduces the impact of perils on any potential premium increases to customers overall, as illustrated in the chart on this slide. We've also negotiated a profit commission arrangement in the event of favorable perils experience. This operates over the life of the agreement. And based on our modeling, we'll deliver a partial premium offset in the majority of the 5 years. Slide 10 presents our more simplified approach to natural perils protection. You may be familiar with the reinsurance program structure on the left that has been shown in the past. It included a variety of drop-down covers and aggregate protection that were renewed each year. From the first of July 2024, we will have a much simpler diagram that comprises the long-term quota share arrangements in orange, the annually renewed catastrophe program for 2 events over $500 million and now the new 5-year ground-up volatility protection of $680 million. The white portion of the diagram represents our retention, which after application of the quota shares is $1,283 million for FY '25. Importantly, this long-term protection covers all natural perils from the ground up without having a retention per event that would be standard in aggregate protection. The second transaction we've announced today on Slide 11 is an adverse development cover with Enstar for long-tail reserves across Australia, including liability, CTP, professional risks and workers' compensation. While we are comfortable with our reserving position, this deal provides significant protection against potential deterioration due to the inherent uncertainty of long-tail insurance risks, such as adverse judicial developments or superimposed inflation. Similar to the perils volatility transaction, the ADC results in a reduction in regulatory capital requirements, and this deal lowers earnings volatility without any material impact on financial metrics. Finally, on Slide 12. In terms of the capital implications of the 2 transactions, I've shown our pro forma CET1 position at 31st of December 2023. This shows the expected benefit on the prescribed capital amount with a reduction of around $350 million, which is subject to APRA approval. On that note, I'll hand back to Nick.

Thanks, William. And I'll just finish off with on Page 13 of the pack. So in terms of financial outcomes from the 2 transactions, we're also reconfirming today that the 15% margin through the cycle target is still the appropriate setting for our business. Additionally, given our recent top line growth, and the reduction in our capital requirements. Our ROE target has increased from 13% to 14% to 14% to 15%. And we will be providing FY '25 guidance in August, but there are a number of callouts that we'd like to make today. Firstly, the attachment point for perils volatility cover of the $1.283 billion, will be the assumption in our FY '25 guidance, and that's up 17% on this year's perils allowance. Secondly, we will have modest additional reinsurance costs from the ADC and the volatility protection. The cost of the volatility cover is flat over the 5-year agreement. So although there is a modest impact in the first year, the agreement is ROE positive over the 5 years and ROE neutral in the second year than in FY '26. So to recap, our announcement today is an important milestone in our strategy around creating a stronger and a more resilient IAG. Our long-term relationships with leading global reinsurers have allowed us to secure an innovative reinsurance arrangement that benefits our customers and our shareholders. It will help stabilize overall perils costs for our customers, provide greater earnings stability, and it does reduce our capital requirements. William and I are now happy to take any of your questions.

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

A couple's of questions. Just want to understand the progressive financial benefits or implications through time. So the annual cost of the cat cover, the additional cat cover, you said is flat. I presume that's in a dollar perspective, not a percentage of premium? Then you've said the cat budget will grow with exposures over the medium term. So just wondering if you can clarify sort of on the costs being flat in dollar terms? But also how we should think about that exposure growth. Is that simply sort of a percentage of short-tail gross earned premium through time?

Yes. Kieren, I mean the first one, I mean maybe we should have used the word 'fixed price'. So it's the same amount of cash every year. So that's the premium that we're paying in relation to the assumption of growth, it's around the aggregate exposure of IAG. So that's -- I mean, in theory, that will be priced into premium as well, but it's sort of similar to the way we buy reinsurance at the moment, the normal increase in aggregate exposure of the group.

And just -- that's obviously the aggregate exposures for the property [ rates ]. Yes.

Yes. So the charts you've been putting up in recent years, the gross reinsurance and perils [indiscernible] a percentage of gross and premium. I think on Slide 9, you show that going up again in '25 and then trending down over time so that we have a margin impact year 1, but then sort of that unwind gradually through time. Are you able to sort of give us some feeling for how significant the margin impact into year 1 is all else equal? I know you're still saying 15% through cycle, but just keen to understand the nearer-term implications.

Kieren, it's Nick. I mean, a couple of thoughts. One, we've also said we're increasing sort of the retained perils allowance by 17%. That will be part of the assumption in FY '25. I mean I also said that the cost of these covers is modest in relation to the impact in FY '25. I mean because it's flat, what we're also saying, yes, there's a modest impact in the first year, but the actual dollar premium number is flat over the 5-year period. So over time, that becomes -- I think we're saying, second year ROE roughly neutral and over the 5-year ROE positive to IAG. And you can sort of -- I mean, the slide that you mentioned that sort of shows that the cost of our reinsurance -- I mean, this is the key here. The cost of reinsurance and perils for us have gone from $0.13 in the dollar for every dollar of premium we collect up to about $0.20 now or just over $0.20. So you can see on that slide, that's going to cap out with this deal. We've got an increase for $25 because mainly driven by the increase in perils assumption to 17% at sort of low 20s, maybe around 21%, 22%. And then it sort of caps out. And that -- the aim of this deal is sort of take out that volatility. But you can see that's also helpful for customers because that's sort of never-ending, increasing cost of perils and reinsurance, we're providing some relief with the structure we put in place.

And final question, [indiscernible] you touched on it just then ROE neutral in the second year, you're freeing up, I think, $350 million of [ reg cap ]. So clearly -- and you've upgraded the medium-term ROE guidance. So I presume we will get capital management off the back of this to actually deliver or support that ROE upgrade?

So look you're right that there's a capital reduction. I mean that links with -- in the PCA and that links through to the volatility reduction. And our dividend policy remains the same. Our capital targets remain the same. And of course, as we work everything through the year-end balance sheet, we'll give you an update in August. The numbers we presented here at the pro forma are based on December.

Okay. Does it change your view around the target CET1 range?

No, our range remains the same.

Your next question comes from Andrew Buncombe with Macquarie.

Just the first one, can you give us some direction on the cost of the ADC, so we can think about the margin impact that, that had in FY '24?

So the guidance that we've given you today for FY '24 includes the modest upfront component of the ADC cost. And then there's -- through time, again, there's just a modest earnings impact and then there's the capital release that offsets that so it's ROE neutral.

Okay. And then how should we be thinking about the time frame for the $350 million capital benefit from the ADC? Is that all upfront? Or is that bled out over the life of the contract?

Yes, it's upfront. The $350 million is the capital relief on the PCA from both transactions and -- but it's upfront.

Yes. And then just a final one for me, please. Is the ROE flat comment that you just made, is that before or after capital management?

The capital management impact on that is quite modest, but it's after.

Your next question comes from Julian Braganza with Goldman Sachs.

Just a couple of questions from me. Just following on from the previous discussion, the cost of the ADC, is that effectively -- I mean thinking about correctly, the size of the perils budget that you're booking in FY '24 because you're maintaining just your reported margin guidance. Is that how we should be thinking about it in terms of the upfront cost?

Julian, I think we missed the beginning of that. Maybe you can have -- sorry, there was a problem with the audio at the beginning. Could you just repeat that one again?

Yes. No, sure. I was just thinking -- just following on from the previous question, the size of the ADC cost, just the upfront cost. Is that fair to think about it as it's probably the size of the perils benefit that you're booking in FY '24, given your reported margins are landing in line with guidance?

No. Because what we've indicated is assuming we have a normal June, which I think is around $70 million. We anticipate being about $1 billion for the perils cost for FY '24. That's slightly under $100 million benefit. And I mean, I think if you're saying does that sort of counter the cost of the ADC for the year. No, because of the cost of the ADC is modest. That number of $100 million, I wouldn't call modest.

Okay. So what else is -- I guess -- so there's small benefits there that are -- the other small impact and they're offsetting that allow you to maintain that reported margin guidance. So that's not perils and not ADC.

[indiscernible] I think the underlying performance of the company, we're tracking roughly in line with the midpoint of guidance, call it, 14.5%. The reason we're at the top end around the top end of guidance is because of that slightly beneficial perils number that I mentioned before. And that's the bridge between midpoint of underlying -- underlying being at midpoint and reported being around the top end. And the bridge there is driven by the favorable perils experience that we're having in FY '24.

Okay. I understand. And then just secondly, in terms of just the perils budget, just interested in any color here. There's, I mean, a fairly big drop, 17% into FY '25. Is that -- can you maybe comment just on differences and views between, I guess, the reinsurers' views of your own perils versus your perils budget? And is that something that contributed to some of the increases into FY '25 as a starting point as to when the reinsurance protection kicks in?

I mean maybe [ a stand ] back comment on that, which is what we have experienced and not just in Australia and New Zealand, but right around the world over the last couple of years, we've seen inflationary pressure, obviously, across our claims cost, and we've seen just increased frequency and severity of perils events. And what most likely driven by climate change, but are partly cyclical as well. Right around the world, reinsurers have repriced perils risk. And I think in this part of the world, that's been -- that I think we've had favorable pricing because of the correlation between -- or lack of correlation between Australia and New Zealand, and other parts of the world and reinsurers have sort of reviewed that, and there's been a structural change in the cost of reinsurance into Australia and New Zealand. And we've seen that flowing through to us, and that's been really challenging for our customers over the last 2 or 3 years. And in fact, it's been happening in many other markets. I mean, sort of your question then is from here, I mean, we still see over time, increased frequency and severity of events, I mean we've lifted our perils allowance again by 17%. But if I look over the last 3 or 4 years, we've had a material uplift in that, and we've had a material uplift in the cost of reinsurance. I would say, industry and reinsurance are pretty aligned on the outlook, which is the outlook is pretty tough. What we have done today with this transaction is try to get ahead of that. And to look at putting in place some longer-dated protection at a fixed price, where we're reducing the volatility, creating some stability around pricing, which is obviously good for shareholders, but it's importantly for us, it's good for customers because what that means is we're sort of we know where that's heading, and we can help mitigate some of the fairly material pricing that our customers have been receiving in the property classes over the last number of years. I mean that's our thinking.

Okay. I understand. And then just in terms of the pricing cycle from here. I mean, you've maintained your target there 15% through the cycle. But given the step-up in costs, just how you're thinking about the rate cycle for your portfolios from here and just the ongoing strength in some of the rate that [indiscernible]?

Yes. I mean there's 2 parts to our company, there's sort of the retail side, so the motor and home portfolio across the retail businesses in Australia and New Zealand, and then there's the sort of commercial markets. We are definitely seeing it -- on the retail side, we're seeing inflation come back. We're still seeing a bit of it in property, less so in motor. And so that sort of pricing outlook is from a customer point of view, is slightly better than it was 12, 18 months ago. And we're seeing the slowing down of increases [indiscernible] call it that, where everything was double-digit 6, 12 months ago in relation to pricing, that's definitely slowing down, and we're seeing a more moderate sort of high single-digit averages and maybe less slightly lower in motor and more on property as sort of the outlook on retail. On commercial, we are seeing sort of the -- if I sort of step back and say what's happening in the overall global commercial capital markets, reinsurance markets, that is slightly more favorable for as a buyer of reinsurance. But we're definitely also as a seller of insurance through our commercial business. We're definitely seeing a slowing down of that sort of heartening market. It's still favorable, but it's definitely just slowing down a little bit.

Okay. Great. And sorry, just one last question on just the structure of the just the profit commissions. You seem to suggest that you can offset some of the premiums. Just wanted to understand how that would play out with the profit commissions, and is it annual or over 5 years, just how that's structured?

Well, look, without going into all the details, the profit commission is across the life of the transaction and yes, in the way that we described.

I mean in simple terms, it's Nick, in a good year, we'll be [ racking ] in a year where perils are below sort of where the cover comes in, we'll be receiving some form of profit commission.

Your next question comes from Nigel Pittaway with Citi.

A lot of my questions have been answered, but just sort of following up maybe from that last question, first of all, on the pricing. I mean it sounds like you're not fully pricing for that 17% increase in allowance into next year? Is that a correct assumption?

Nigel, yes, we are. Yes. So I mean that's -- remember that we're working off different numbers aren't we? That's a 17% increase on the perils allowance. What I was talking about the overall premium pool of the company across all portfolios. We are factoring in the perils allowance into our pricing assumptions for FY '25 definitely and have been for a while.

That's clear. Secondly, just -- I mean just on the cost of this ADC, you said it has actually had an impact on the '24 underlying margin. So does it have an incremental impact in '25? Or is that basically now a constant say you've taken these [indiscernible] [ hits ] in '24?

No, they're sort of accounting for it and William, you come in too here, is sort of in line with the duration of the liabilities that it's covering. That's [indiscernible] accounting work.

That's right. And actually, the FY '25 impact, which we said is modest is slightly smaller than the upfront FY '24 impact. So -- and the FY '24 impact, as we said, is already included in the numbers here -- the guidance.

Okay. That's clear, too. And then maybe just -- I mean, it's probably a pretty obvious question. I think just in terms of the -- if you get favorable weather, so basically, what you're saying is you get the benefit of both the favorable variance on the weather plus some reduction in the reinsurance premium you're having to pay in terms of that overall cover. So you're getting the full benefit of the favorable weather plus the reduction in premium. That's correct?

Yes. That's right. I mean that's how we structured the deal. I mean both just -- maybe I just make a comment here. So that both these deals sort of sit on top of either our allowance for the perils or it sits on top, the ADC sits on top of our reserves, as I said at the moment. So they sort of sit above our allowance for perils and they sit above what's in our balance sheet at the moment. And they both -- what we're aimed to do is put both covers right up against either the allowance, so dollar, the next dollar after allowance. And for the ADC on the reserves, it's sort of sitting right up against where our balance sheet is positioned as we've actually picked it that says at 31 December 2023 because we said that's where we've signed it off at and sort of right on the current reserves. So the aim, as you can tell, is to sort of remove that downside volatility and that's why we get the $350 million capital release straight away because there are no gaps between our allowances and reserves and where the cover comes in.

And Nigel, just one other comment is that it's because of the strength of the reserves that we already have for long-tail liabilities, that's the cost of the ADC that I mentioned earlier is modest.

The next question comes from Andrei Stadnik with Morgan Stanley.

Can I ask my first question. Just to check, in terms of the long-term perils cover, what types of events actually qualify? Is it anything below 500 million qualified for that protection?

Yes. All perils.

And on Slide 10, we had a list of those on the right-hand side as well. But I mean -- sort of -- to keep it simple. It's the way we've currently reported natural perils and the way our current reinsurance program works when we have a large peril, all the definitions are the same, effectively all perils of all territories.

And kind of follow-on question just staying on Slide 10. So is it fair to say that the sideways curve have been in the second, the third, fourth and end drop-downs, they are removed and they're replaced with volatility cover, which is effectively saying that you could potentially get to your catastrophe allowance faster, but once you get there, you now have almost 3x the aggregate cover that you have previously.

Yes. I mean just the way we approach that and the way we've funded that, this whole transaction is exactly what you've just said, which is what do we have -- and this is a simplified diagram that's sort of behind these diagrams, a bit more complexity in the old world. And our hypothesis was what about if we didn't have any of that, and we just went and bought something along the lines of what we've done, how does the economics of that work? And our very strong view was that we could replace all of that with what we've got for a modest cost and a lot more protection. And so that's effectively the way we've constructed this deal. And so on the right-hand side on that page, I mean, that's it. When we essentially have our perils allowance, then we have this fairly significant dollar-for-dollar cover above our perils allowance with all perils included from dollar up in the definition. And so we end up having for a modest cost, better protection in a way simplified version.

And can I ask just a final question, just around the ADC, so you've called out $650 million protection, but it sounds like there's a sublimit of $50 million from [indiscernible] and [ silicosis ], can you give us a feel for why that sublimit is there? And in terms of the current reserving pool, like how big in [indiscernible] and silicosis as a percent of the current reserving?

Yes. So for [indiscernible] and silicosis, we already have significant risk adjustments of what used to be called risk margins. And then on top of that, we're pleased that we've got a $50 million sublimit in this transaction for them as well. In terms of the proportion of the reserves overall, I mean, it's single-digit percent.

Maybe just a comment from me on that. It was pretty common, we talked to a number of reinsurers around this transaction. There wasn't an IAG specific issue, it's very common to have sublimits around that topic. And we don't have sublimits on other topics. So that wasn't an IAG specific sublimit. I think that's just generally how these deals are constructed across the industry against that particular place or business or risk.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Firstly, just on the comment that you made about the 15% insurance margin target through the cycle. The last few years has been a reasonable amount below that. But just to clarify your comment on through the cycle would suggest upside over -- in the near term, would that be fair? If you've gone through the cycle, you average it out, it's not unreasonable to think upside on this in the 15% going forward?

Yes. I mean -- and said, obviously, part of that is what we've seen with perils volatility and the challenges we've had driven by that. So in a way, what we've done today is we've kept out the downside or substantially capped out the downside of that story. We've got pretty high perils allowance, and then we've got protection that sits above that. So the quality sort of part of this is also the quality of what we mean by 15%. We're saying 15% with the perils protection -- with apparels allowance and the perils protection in it. Obviously, in a previous question, we talked about what happens in the situation where perils are lower. I mean it's going to be the scenario that you're talking about where there's opportunity to [ earn ] greater than 15%.

I mean I was saying that through the cycle is an average over a period. So the last few years have been quite a bit below. So presumably, is the aim to do more than that in the near term?

I mean -- I think as we said, right, we've got substantially increased perils assumptions. And then we've got protection that sits above that to manage our downside, but our upside still exists there, obviously.

Okay. Fair enough. if I could just classify a couple of things on the reinsurance side as well. I think Nick you said that the cost of the ADC is substantially below $100 million. I mean what is substantially below? Like a $50 million is substantially below? The reason asking is because when we look at margins and try and calculate the impact of that one-off on the second half margins in $50 million is a significant number. So I just [indiscernible], if you could just give us a little bit more clarity on where that number might be?

I mean I'll just give a little bit, Sid, if that's all right. It's not the cost of the ADC, maybe we should say the annual -- because we're sort of amortizing it in line with the runoff of the liabilities that it support. So it's the annual cost, not the overall cost. Yes, the annual cost is below that, what we're calling modest is below that $50 million.

Okay. Fair enough. and then I just wanted to clarify the cost also of the -- just the long-term perils arrangement. Just -- I mean you make it clear, I think it's ROE beneficial from FY '27 onwards, could you give us some idea of the expected impact on insurance profit from this. So I think the words a little bit difficult to interpret, I think you said the financial benefit of this is all weighted to the upside. And I just wasn't clear exactly what that meant. So if you just talk about the expected cost of the contract versus the expected benefits from perils side from having this cover? Just what is the net cost [indiscernible]?

Yes. Okay. I mean I think we're probably slightly -- the ROE -- the $350 million capital benefit from this transaction is not that material to our ROE sort of profile. So therefore, we've talked in the language of ROE, but we could have probably also talked in the language of insurance profits. And this doesn't -- I mean, if your question is, what does this do to insurance margins in sort of '27, '28, it's sort of aligned to the ROE comment it's neutral or slightly favorable to that in those time periods and has a small modest impact in FY '25, roughly neutral in '26 and favorable '27, '28, '29. That's the profile of it.

I think the key is on this Page 10, yes, it's a very large transaction we're announcing today, but we already spent a lot of money on the left-hand side. And so that -- this is replacing something that costs a lot in the first place. And so what our hypothesis was, could we for a modest impact get more protection in a more efficient structure, put it long dated, so we have certainty of supply, helps the volatility for our shareholders, helps with affordability for our customers. And essentially, we're -- by migrating from that structure on Page 10, which, as I said, that's the simple version of it. Behind that is even a bit more complexity to what really is quite a simple structure and the way we've described it now in itself was efficient, we found. And so that's why the P&L treatment is the layer we've described because this has only been sort of a modest additional cost for what we see as quite material improvement in protection and the lowering of the volatility of our earnings profile.

Okay. And then just one last question. Just BI. You haven't made any mention about this at all. I think there was some expectation that we may get an update on that? I don't know if you could talk about that Will, business interruption?

Yes. I don't -- I mean I said I'll pass to William. I mean there is no update on that, there's no new news.

Yes. And I mean, look, there was a BI class action declassing application, but that's been adjourned for a little while. And so we continue to maintain conservativeness in the provision that we have.

Your next question comes from Andrew Adams with Barrenjoey.

I just want to clarify the impact on '25. I kind of got some mixed messages from some of those refinances. So just the 15%, I think you said [indiscernible] confusing ROE with insurance margin. Is the message we can hit that 15% through the cycle including '25. So -- but you're doing the second half '24 underlying margin of 15.5%. You've called out the perils impact in a modest reinsurance impact, so let's call it 200 bps, but then you're getting the earn through from the premium rate increases. So I've got the messaging that there's no reason we'd be much below 15% in '25. But then in the answer to other questions, I've kind of got the message that '25 was not a chance of hitting that 15%. So can I just be clear, is '25 around that 15%? Or are you thinking we're below that?

I mean we're not providing guidance today, but -- I mean the sort of the narrative is really -- let's call it the underlying margin for the full year of 14.5%. And to your point, that's sort of -- if we look at our reported also underlying margin for the first half, that sort of looks like a second half at the low 15s. We have increased allowance by another 17%. But to your point, we're starting to factor that in pricing already. We've got a little bit of headwind as well from some of these additional costs. It's going to be roughly in that order with a little bit of strain in the first year, but around what you said. And we're not providing guidance today. So we'll [indiscernible].

[indiscernible] I'm not going to argue [indiscernible] there, but there's no doubt, [indiscernible], which maybe in some of the answer to question suggested a step down, but we're on track to get 15% or slightly below '25, and then we should hold that thereafter or slightly above?

Yes.

Your next question comes from Scott Russell with UBS.

These reinsurance deals make a lot of sense. Can I ask you about the timing of them? Why now? Why for IAG? Does this reflect maybe a step change in global reinsurance appetite either globally or for Australian risk?

I mean, there's probably a few parts to it. So if I sort of step back and look at the overall thinking on reinsurance, and I'll ask William to talk about the particular transactions. I mean we are a big user of reinsurance. I like the low-vol capital-light sort of approach to thinking about how we run IAG. I also like the idea of having different structures and different counterparties that are part of how we run our company. So I think now for IAG, this is a big picture. We've got 1/3 of our reinsurance roughly on long-dated quota shares that aren't subject to any annual pricing cycle comment, and that was sort of locked away and sort of follow your fortunes. We've got a chunk that's still about the main [ cat tower ] that's predominantly renewed 1 January that is often on a 1 or a 1-year deal or some of it we have on multiyear deals, but 1 January is a pretty important day. And then -- what was sort of that sort of roughly 1/3, roughly 1/3 on quota. And then -- so something like what we're doing today. We're locking away with another group of counterparties. We're introducing Enstar in. We haven't done a lot with them in the past. Canada Life, we know have done a little bit with, and we're increasing our relationship with them and Berkshire is obviously well known. And we're sort of putting that in a 5-year deal. So we're kind of -- you can see what we're trying to do here, a profile of different structures, different counterparties, different dates to get a sort of a package of capital that allows us to sort of understand and not be subject to some of these quite dramatic changes we've seen in the market over the last couple of years and help us sort of smooth all of that and have sort of a very strategic view around how we see reinsurance on these particular deals and sort of answering the sort of the timing and the particulars of it. William, you want to make a comment?

Yes. A couple of things. So I mean, as I mentioned, when I joined, Nick asked me to take a look at the capital and reinsurance structures. And we've been looking hard at this, exactly as Nick described, rather than the range of covers that we spent quite a lot on below the main [ cat tower ] was there something more comprehensive we can do. Clearly, for that, we were very targeted on seeking to see if we could build that transaction ahead of [ 1/7 renewal ] because that would be a natural point at which to make that substitution. . And I mean the capacity here, obviously, this is very substantial capacity that we've managed to tap into with the $2.8 billion of limit over 5 years. And so that's what we've been working hard on. We're pleased to have 2 major counterparties on that part of the transaction. And then, I mean, on the ADC, Enstar [indiscernible] they are a specialist leading global player on that -- in that regard. They also have capacity for substantial transactions as well. And when I was at Royal & Sun Alliance, we -- I put together a $2 billion deal on long-tail reserves with Enstar just a few years ago.

William, on the ADC, how comprehensive is the long-tail cover? I mean, what sort of scenarios in future might give rise to a future top-up across those Australian portfolio, as you've called out, are there any?

Okay, this is comprehensive. It's all accident years up till the end of the last year. It covers all the types of risks in the long tail subject to the comments earlier on the silicosis and molestation, which also included up to that limit and it's a very substantial amount of cover that's embedded in the transaction. So it's extremely remote that we would exhaust that.

And if there were to be a release that IAG benefit relief from any release or is that shared?

Any release is for us. So this attaches -- as Nick described, the attachment point for the ADC is at the level that our reserves are now because our reserves are strong, that is why the cost of the ADC is moderate. And then if there are over time, if the reserves run off favorably, then that benefit comes to us.

And the life of the contract, that's not the life of the liability presumably?

Yes. No, it's through to expiry of the last claim.

It's Nick here. I think common practice with these types of arrangements after sort of 5 or 6 years. There's some sort of review and often some sort of a settlement at the end of it. But in theory, it stays until the last dollar of our reserves is paid.

Next question is a follow-up question from Andrei Stadnik.

Sorry. Look, it is a very innovative [indiscernible] transaction. So I had a couple of quick follow-ups. In terms of the $350 million capital release, can you give us a sense of how that's split between the ADC and the long-term barrels protection?

Yes. Look -- similar magnitude for each.

That's helpful. And look, I think the 5-year feature is probably the highlight because it gives investors opportunity to capitalize on that for the long term perils. Can you give us a feel for -- do you have like an option to then -- guaranteed option maybe to renew this further? Or would this -- at the end of 5 years, would this be subject to completely fresh renegotiation?

So -- I mean, as you know, on the whole account quota shares that we have, which we have those previously, those have been renewed, they also -- we can then extend them by a further 3 years. This one is a 5-year deal like some of the other components we've had in our program, of course, as we get through, as we're getting through the life of this, we'll be looking at what would follow. But also it sets, we think, a good precedent for the program structure.

Next question is a follow-up question from Siddharth Parameswaran.

Just a question, Nick and Bill about the -- just about inflation. You're making points about pricing. I was just wondering if you could point on what's happening with inflation for [indiscernible] this half and also what you're expecting [indiscernible]?

Yes, Sid. I mean it's definitely getting better. So I mean, across the sort of the 2 big things that we often talk about motor and home, motors coming down. And we're that -- I mean, as you know, everything was sort of double digit for various reasons. For motor, that's coming down, parts, labor costs, some of the changes we have made. And so where that was double digit. I'm sort of thinking on outlook now sort of 12 to 18 months that sort of high single digit, let's call it 5% to 10%. Property is still there. I mean we're still -- I mean, we've still got reinsurance costs. We've got claims inflation. We've got increased frequency and severity, all those things. Obviously, the protection we're putting in place today helps with some of that story. But property is still -- is still sort of low double digit. But directionally, compared to 6, 12, 18 months ago, they're coming down. And then there's sort of slight variances between Australia and New Zealand, but that theme applies to both.

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

Thanks, everyone, for joining us at a very short notice. As you can tell, it's an important milestone in our strategy, and we're super focused on creating a sort of a stronger, more resilient IAG. As you can see, the group's financial position is strong, and we're on track to deliver our FY '24 insurance result at the top end of guidance that we set at the beginning of the year. And operationally, we didn't talk about it much. Virtually really proud of what we're delivering on our Enterprise Platform. That's actually quite a big change in how we run IAG, and it simplifies a lot of the processes as it sit within our company. And then just lastly is what we've been talking about mainly is we secured this innovative arrangement with leading global reinsurers that we genuinely believe benefit both our customers and our shareholders, help stabilize our perils cost for our customers, provide greater earnings stability and reduce our capital requirements, which really does help with increasing that sort of ROE through the cycle target that we've increased today to 14% to 15%. I thank you all for attending at short notice and enjoy the rest of your day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.