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

Good morning, everyone, and welcome to our First Half Results Presentation. I'm joined here by our Chief Financial Officer, William McDonnell, and we're holding this briefing in IAG Sydney offices on the lands of the Gadigal people. IAG acknowledges traditional owners of country throughout Australia, and we recognize their continuing connection to lands, waters and communities. I pay my respects to their elders, past, present and emerging. You've seen from our ASX announced statement this morning that we finished the first half of '25 in a strong position. We're focused on supporting our customers in Australia and New Zealand and, importantly, on our strategic priorities. Our quality result reflected favorable weather over the half, a real contrast to past periods, as well as the benefit of the $200 million release from the COVID BI provision that we announced in January. Before we talk more about the result in detail, I just want to spend a few minutes reflecting on the important role of insurance and how we're running IAG to support our customers and communities. I regularly refer to insurance as a shock absorber. That means we have to remain financially strong and sustainable to pay claims and help Australian and New Zealanders be safe. While we have experienced a relatively benign first half, recent severe storms in New South Wales, extreme rainfall that we've seen in Queensland and the terrible wildfires in L.A., of course, are a stark reminder of the need to be prepared and the importance of having a strong insurance sector. I was in Townsville on Friday, and I saw firsthand the devastating impact that weather is having on our communities. And of course, this event is still unfolding, so our thoughts are with everyone who is in that challenging environment and, of course, importantly, all the wonderful people that are helping with recovery efforts. We know the shocking images of floods and the January L.A. wildfires have had an impact on how people think about risk. Our research shows heightened awareness and concern across Australia and New Zealand around preparing for and responding to natural disasters. 48% of people are now more concerned about their safety and protection needs. 86% are more inclined to take proactive action, and 46% are more likely to seek information on actions they can take to prepare for and respond to a bushfire. As an industry, we have a critical role to play in helping people address these needs. At IAG, we've been doing our bit to build resilience for our customers and communities and make our countries safe. Over the first half, we paid over $5 billion in claims to help our customers recover from loss. We introduced more ways for customers to receive pricing benefits by taking positive actions to reduce risk. We know people are experiencing stress from cost-of-living pressures and we're working to minimize the impact of those premium increases. Many people are doing it tough, and we're here to help. In the last 6 months, we have offered tailored assistance to support over 10,000 customers who have experienced financial hardship. We're helping educate our customers on their risks and provide the information they need to make their world a safer place. Inside IAG, we're improving customer experiences and outcomes by driving efficiency, managing our costs, delivering major technology programs and enhancing the products and services that we offer. And the results are positive. Our customer experience measures are high in both Australia and New Zealand, and our renewal rates remain strong. These measures reflect the confidence our customers have in our brands and the quality of the services that we're delivering to them. Our focus on offering retail insurance products through some of the most trusted brands in financial services will be further boosted in Australia by the new strategic alliance that we have with RACQ we announced in November. That's now in the process of regulatory approvals. Our investments in people and technology are delivering benefits. For example, improvements to our claims management capability means that unresolved claims are at the lowest levels since the 2022 floods. Our retail enterprise platform continues to significantly improve customer experience, including elevating our pricing capability with clear evidence of improved risk selection and clear evidence of new business volumes growing. We have now migrated more than 3 million policies to this platform and are scaling this by around 300,000 each month. NRMA Insurance will have fully migrated onto the Retail Enterprise Platform by April of this year. Importantly, the platform provides us with the capability and capacity to support future growth. Now let's turn to the financial results for the half. And what you see here is the quality of our business with consistent and reliable performance across our portfolios and steady progress against our strategic priorities. Within these numbers, we have disclosed the impact of natural perils, $215 million below allowances for the half, and the $200 million release from BI. At an operational level, our underlying margin, which has adjusted for the perils impact for the half, was in line with our through-the-cycle target of 15%, and we've declared an interim dividend of $0.12 per share. After adjusting for this payment and the funding for our RACQ strategic alliance, our pro forma capital position remains strong. I thought I'd spend a moment looking back at the performance of IAG over the last 5 years. You see on this slide the average ROE in that period is just under 10%, which is below our targeted return of 14% to 15%. And of course, we have experienced volatility, predominantly driven by natural perils, which have negatively affected IAG and the broader industry. At the same time, we have to continue with a sharp increase in sustained inflation in our Motor and Home businesses over the last couple of years. Pleasingly, that's moderating in the last 6 months. We have made material changes to the way we operate IAG and we've put in place a comprehensive reinsurance protection to reduce this volatility for our customers, our partners and our shareholders. We know we've had a positive performance for the first 6 months of FY '25 driven by those favorable perils, but we think it's really important to look at our results over the medium term. We have to be strong so we can support our customers and communities and ensure that Australia and New Zealanders are well prepared for risks ahead. Moving to our Retail business here in Australia, 3 to 4 years ago, we set out some ambitious goals for this business, to help an additional 750,000 customers and delivering $400 million in savings through the transformation of claims management. And Julie and the team continue to make some great progress towards those goals. They're more than halfway towards the customer growth target and have achieved more than $160 million in savings from the evolution of our claims business. GWP growth this half in this business was around 6%, reflecting solid results in both our Home and our Motor portfolios. Customer renewals remain strong, and we've seen improving growth in recent months as premium increases have moderated. We are investing in supply chain enhancements such as Repairhub. This is helping to reduce the average number of days to repair, which is contributing to improved customer satisfaction. We're boosting our digital capability through apps and the Retail Enterprise Platform is helping us achieve higher digital conversion rates. And through our brands, we're supporting the community. And you've seen us, no doubt, with Cricket Australia over the summer. We're doing the same with the Adelaide French Festival and Surfing Australia while continuing the important work with the Australian Red Cross and others to drive grassroots preparedness. The underlying metrics of our NRMA insurance brand are very strong. It's the most trusted brand in insurance for the third -- for the third consecutive year. And this year, we celebrate 100 years of helping Australians, a great time to reflect on our wonderful heritage and, of course, our bright future. Our Intermediated Australia business achieved a great result. Premium growth was over 10%, and we expect this performance will be ongoing as the business invests in its fundamentals, quality pricing and underwriting expertise. After exceeding its $250 million profit target last year, Jarrod and the team are now delivering strong results in a transitioning market by maintaining that pricing and underwriting discipline. Our key segments are performing well, particularly workers' comp, where we're growing strongly. I'm pleased with our WFI business, which has improved its NPS by 5 points to 55% following changes that were made to its distribution structure. There's been a 50% to 70% improvement in the average closure time for simple claims, and that's a business that's been driven by AI enhancements such as CASI and property claims, which we're now expanding throughout our broader commercial claims. And in the second half, we'll [indiscernible] this further in transformation [indiscernible] to improve its efficiency for our Commercial Enablement project. Turning to our New Zealand Retail business, Amanda and team have delivered strong underlying result, but growth in New Zealand has been challenging, given the state of that overall economy. Strong margins reflect sustained efforts to improve the fundamentals of this business. For example, we've made progress on claims management, and we're passing those benefits on to our customers. The businesses have -- the business has significantly improved closure rates and claims are being paid faster. Simple claims in our New Zealand retail business can now be closed in 3 days. In the supply chain, we're seeing the benefits of our Repairhub model, and we're expanding HomeHub to Christchurch. We continue to invest in our brands, and we're boosting our digital capability through apps. Moving to our New Zealand Intermediated business, we're very pleased with the performance of NZI, which is delivered a sound result in a bit of a challenging market. In the commercial business, disciplined underwriting has reduced our large losses. Other highlights here have been strong customer retention and the uplifts in customer advocacy that we've seen in the last 6 months. And with that, I'll now hand over to William, who's going to talk through the numbers in a bit more detail.

Thank you, Nick, and good morning, everyone. I'll start with the high-level financial summary shown on Slide 14. In 1H '25, IAG has delivered a strong set of numbers. We've reported solid top line growth, improved margins and have finished the half with a strong capital position. The NPAT was up 91.2%, reflecting a higher insurance profit, a strong return on shareholders' fund income, and a $140 million post-tax release from the Business Interruption provision. Our cash earnings, which excludes the Business Interruption provision, were 54.2%. Our interim dividend has increased 20% to $0.12 per share. When we adjust for the Business Interruption provision release, this represents a payout ratio of 45%, and we maintain our full year payout policy of 60% to 80% of earnings. Our reported margin of 19.4% is well above our FY '25 guidance of 13.5% to 15.5%, reflecting the benefit of $215 million in favorability of natural perils to our assumption. Excluding our usual adjustments, the underlying profit of $747 million with a margin of 15.1% is a quality result, and I'll now focus on its key drivers. We've recorded solid GWP growth of 6%, in line with our guidance of mid- to high single digit, primarily driven by rate increase. On an underlying basis, adjusting for certain impacts, such as the exit of the Coles portfolio, foreign exchange effects and the benefits of multiyear works compensation policies underlying GWP growth were around 7%. Over the half, we saw premium rates increases moderate following easing claims inflationary pressures. This has been more noticeable in New Zealand due to the economic environment where the commercial insurance market is showing signs of softening. GEP and NEP recorded strong growth at 10.8% and 9.7%, respectively, which benefited our earnings in the first half. In terms of our underlying margin, the half year results of 15.1% were towards the top end of our reported margin guidance range and showed strong growth compared to 13.7% in 1H '24. As we said in June and August, we've increased our natural perils allowance for the full year to $1,283 million, resulting in a 17% increase in the natural perils allowance to $641 million for the first half of '25, which is an 80 basis point drag on margin. This was more than offset by the 300 basis point improvement in the underlying claims ratio. There was also a 10 basis point decrease in the expense ratio. And the investment yield, while solid, saw a decline from the very strong performance achieved last year. So this is a high-quality result. And along with the added conservatism we've taken to protect any downside risks, it positions us well to deliver against our full year profit and margin guidance. I'll now talk to some of these individual movements in more detail. In terms of underlying claims, which exclude all payroll reserving and discount rate effects, the ratio has improved to 52.6%. We're pleased with the trend, with the current-period outcome representing an improvement of 300 basis points relative to this time last year. The underlying claims ratio was sustained in IIA, and we saw a strong improvement in RIA and New Zealand. All 3 operating divisions benefited from the strong net earned premium growth. And in addition to this, RIA saw lower Motor inflation as a result of the work the team has done to improve supply chain and repair network capacity. RIA also benefited from lower total loss claims and third-party costs. IIA has seen improvement in long-tail experience with short-tail classes in line with expectation. And the team is focused on the delivery of claims initiative benefits, including improved closure rates and recoveries and reduced fraud. And in New Zealand, the AMI MotorHub network has expanded to 10 sites, including a new, large center in Wellington. These sites not only deliver improved customer satisfaction, but see around 20% lower costs. In terms of natural perils experience, 1H '25 perils of $426 million was $215 million below our allowance, and we've continued to adopt a prudent approach to reserving for individual peril events. In January and February so far, we have seen events across Australia. In January, we saw East Coast storms and hail and, more recently, the North Queensland monsoon event and further storm activity unfolding across Victoria and New South Wales in the past few days. These mean that our January and February to-date perils costs could be around $100 million above seasonalized expectation. This effectively reduces the year-to-date natural perils favorability to around $100 million, although it is, of course, still early days. Given the inherent uncertainty, we've maintained the full year perils estimate of $1,283 million. This is aligned with the attachment point of the long-term perils volatility protection that we purchased from Berkshire Hathaway and Canada Life. We're well protected for any downside, and we retain upside in all cases where perils are less than $1,283 million. Our reinsurance costs for the half have increased by $125 million, primarily due to our strong additional perils and reserves protections. We've reviewed our AASB 17 modeling. And relative to our original assumptions, this has resulted in a moderate acceleration of reinsurance cost recognition in this result. On expenses, admin costs, on an ex-levies basis, have increased approximately 5% compared with 1H '24. This is a function of the broader inflationary environment but also includes proportionately greater spend on growth initiatives. It includes system investment across our retail investment -- Retail Enterprise Platform. Taking into account earned premium growth, the admin ratio on an ex-levies basis decreased 30 basis points to 11.9% compared to 12.2% in 1H '24. At our Investor Day last December, we outlined a target to reduce this ratio to under 11%. And I'm confident in the work the team is doing to achieve this efficiency target in FY '27. We achieved a strong investment performance across our technical reserves and shareholders' funds portfolios, which has been a key contributor to our result this half. While investment yields declined slightly, the 5.5% return achieved on the technical reserves portfolio contributed to an income of $227 million in the first half. In our shareholder funds portfolio, we delivered a strong $217 million contribution this half with positive performance across growth and defensive assets. The overall shareholders' funds portfolio continues to remain more defensively positioned with a growth asset weighting of around 22%. Finally, on capital, we finished the half in a strong position, and I've shown some of the material movements in this waterfall. In August, I noted that we had not yet recognized the capital benefit from the long-term perils cover, but this has now provided a benefit of approximately $150 million, or 5 points. Our strong earnings are the largest component of capital generation during the half, and this has been partially offset by the capital impact from payment of the FY '24 final dividend. Other callouts in the waterfall include the benefit from utilizing tax losses, which contributed 4 points, and the capitalized impact from our investment in technology, which, while partially offset by increased associated amortization, has led to a net 3-point impact. The CET1 position at 31st of December is well above our target. Taking into account our interim dividend of $0.12 and the impact of the RACQ acquisition of 22 points, the pro forma capital position is around the top end of our CET1 target ratio. This means we're well positioned to consider opportunities going forward. With that, I'll now hand back over to Nick.

Thanks, William. And so you can see from our results this half, while we're confident of delivering against our FY '25 guidance, within that, we expect our reported insurance margin to be towards the top end of our range, and that's assuming full utilization of our perils allowance. And based on improving claims trends helping to moderate premium increases, we do expect our premium growth to be towards the lower end of that mid to high single-digit range that we provided. And this moderation in premium increases we're seeing across our portfolios is, of course, a positive for our customers, and that all provides confidence in the future. We have some of the best consumer brands in the world, and Julie and Amanda are now well positioned for growth. We've built a scalable Retail Enterprise Platform that meets our current needs and our growth aspirations. We're awaiting regulatory approval on RACQ strategic alliance and our customer focus, modern technology platform and claims management capability mean we're well placed to succeed with this transaction. Our commercial businesses, under Jarrod, have been reset with renewed underwriting discipline and have contributed to a material uplift in the financial performance of IAG. And our equivalent business in New Zealand, NZI, is delivering strong results. And critically, we will retain an efficient capital platform to support our businesses, reducing volatility and ensuring we can fund future growth opportunities. William and I are now happy to answer any questions.

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

A couple of questions, if I can. Just starting on the revised GWP growth guidance, would you mind just walking through, I guess, where the change has come on a forward view by portfolio and sort of where you're expecting pricing to moderate more sharply? Obviously, New Zealand is an obvious market, given the very strong margins there, but domestically as well, I'm interested in feedback on price momentum and inflation.

Yes, sure. Kieren, I mean, really, what we're seeing is inflation coming down. So across those sort of -- if we talk about Motor and Home portfolios, what we're seeing in our pricing -- what we're seeing in our actual lift experience has been those costs are coming down, where, as we know, a year or 2 ago, they were -- sort of everything we looked at was double digits. That's not the case now. Motor is sort of -- low to mid sort of single-digit type cost increases is sort of the run rate there. Property is a little bit more than that still, sort of mid to high single digits. But because of that, now we're reflecting that more so in our pricing. And so therefore, when we looked at our overall sort of growth guidance, where that was sort of mid- to high single digit, we still sort of got the same range. We can just see that, when we look at what's happening with pricing, this is across Australia and New Zealand, in fact, some of those inflationary numbers I gave, that's probably a blend. New Zealand are at the low end of all of that from what I just said. That's now being sort of reflected in pricing. And because of that, we're sort of guiding towards the lower end of that guidance that we provided in August around growth, because margin is the other side of that story, which is sort of the opposite.

And Nick, sort of just given the fairly flat, relatively flat comment on units in Home and Motor in the half, what's sort of the design now that margins are sort of, on an underlying basis, already around the 15% level? Is it sort of trying to reinvigorate volume growth from here?

Yes. I mean, definitely, when we've got -- we want to be growing our retail businesses in particular. I'd almost divide that into 2, though. So our New Zealand Retail business, that's a pretty tough environment, New Zealand, with the economy not growing either. And we were flat or maybe even slightly negative in New Zealand in the 6 months in relation to volume. We've definitely got aspirations to grow. And some of the changes in pricing and the likes -- or some of the improvement in inflationary environment, as in the reduction of it, the flow through to pricing is obviously is going to make that a better market to achieve that. I think Australian Retail is a bit of a different story where we have got growth. So that business is growing in the half. And we really saw a bit of an uptick actually in sort of November, December, and we've just looked at January as well. We can see volume growth happening, genuine volume growth happening in the Australian Retail business. So I'd say the trajectory there is sort of more positive and it's got some evidence in the last 2 or 3 months of that volume growth occurring, so slightly different stories. Aspiration, though, to come back to that, is definitely for our Retail businesses in Australia and New Zealand to be growing in volume, at least in line with market, as we look forward.

Just sort of 1 or 2 questions on the financials. So the guidance is sort of towards the top end of the range for this year on a reported basis, but obviously, you're still allowing for your initial full year cap budget. So are you envisaging underlying margins moving from sort of low 15s% to high 15s% in the second half? Is that sort of how we should think about the trajectory on underlying from here?

I mean, Kieren, what we've said is that the run rate for the first half was sort of just over 15%. That's sort of the -- on the underlying, and we sort of look for the perils positive for the first 6 months. As you know, we've just sort of normalized that for the full 12 months. We're pretty comfortable with that run rate, which is sort of where we want to set the financial setting of the company. And that's why we've guided towards the top half of that guidance going forward. I mean the business has clearly got positive momentum.

Your next question comes from Andrew Buncombe with Macquarie.

Just 2 from me. First of all, how are you thinking about volume growth in the Australian commercial lines portfolio?

Andrew, I mean, we're seeing -- I mean, we're looking for -- I mean, we're careful. I mean we don't -- sort of with Retail, I'm saying I want our Retail businesses in Australia and New Zealand to be growing at least in line with market and maybe a little bit more. Commercial, we're way more sensitive to this topic, and we don't have such strong growth ambitions as the way that I've described retail, but definitely, where we think it makes sense to be able to grow in that market. I will say that market is -- it's a little bit tougher today than it was 6 or 12 months ago. There's still growth in that market would be my comment, but it's definitely a little tougher, the market environment in Australian Commercial, than, say, when we were standing here in August.

And then my second question is just in the context of the CET1, on a pro forma basis, being at the top of the range. You've made a couple of comments around looking for other inorganic opportunities. There have been different bits and pieces in the press. Maybe in that context, an operational question, how do you think you would go operationally integrating 2 big bites at once?

Yes, thanks. I mean, so to step back. I mean, we're being really clear. Commercial -- growth in Commercial, we're looking for organic opportunities where it makes sense without any -- so this Australia [ around ] New Zealand, but organic opportunities. And we'll be very sensitive to market conditions as we think about growth in our Commercial businesses. In Retail, it's a bit of a different story. We've invested heavily, as you know, in a sort of a Retail Enterprise Platform [indiscernible]. And essentially, that's sort of at the back and it sort of sits now across pretty much all our Retail businesses in Australia and New Zealand, and we're migrating onto that at pace. And we've got 3 million customers from [indiscernible] now on that platform. Of course, within that also sits earnings pricing and some other capabilities. So we've really built this platform that's very scalable, and we can see that now coming to life. And it really creates efficiency but also some customer benefits and pricing and a whole lot of things. So within our Retail businesses, our ambition is to grow, and I talked about this with the market in December, both organically and inorganically. RACQ is obviously an example of inorganic, but organically as well, and we're certainly focused on organic growth within those 2 businesses. And we'll continue -- so I believe we've got a scalable platform built for our Australia and New Zealand Retail businesses where we can grow, including inorganic opportunities, if they're available, that make sense for us. And then we'll look at that case by case. But we want to continue to grow this business and see an opportunity with the platform we've built to do that.

Your next question comes from Julian Braganza with Goldman Sachs.

Just an initial 1 following on just from the initial question on margins, just wondering, just to get a bit of context, just from first half '25 to second half '25, is there any color on how you're thinking about margin just given your 1 Jan renewal? Any comments around that? And also just the -- you flagged 3% improvement on just the NEP versus the claims inflation. Just how you're expecting that to track currently into the next 12, those 2 particular line items, and how you're expecting that to come through?

So I mean, we're expecting the -- I mean, I think the underlying margin -- we have our 15% long-term through-the-cycle target. We're around that now. I would expect the second half to be -- to track similarly, and that kind of obviously supports the -- what we've said about reported margin guidance for the full year in the context of natural perils. I wouldn't say anything particular in relation to -- I mean, we completed the reinsurance renewal successfully. And those other moving parts going on about both claims inflation and then also how we're waiting for that in line with what Nick talked about a moment ago.

Yes, we can probably say our 1 January renewal for reinsurance was at or slightly better than we were expecting. So there's no -- there's nothing in that that sort of causes us concern in our second half margin outlook.

And then maybe just a second question on reinsurance cost increases. So the $125 million increase flag, can you just maybe just break up that number for us just in terms of -- because I know first half '24 had some one-off reinsurance reinstatements and ADC costs. So just the underlying increase in cost into this period, I guess, somewhat related to your perils volatility, how should we be thinking about that? So if you just break up that $125 million increase?

Yes, sure. So the $125 million, I mean, the largest component of that is the new peril stop-loss, the 1 we announced in June that started in -- on the 1st of July. And that's the cost of that relative to the cost of the previous underlying layers that we had below the sort of $0.5 billion cap program. So that's the largest component. And then the next component would be the first year's cost of the ADC, the 1 that we also bought in June, protecting all of our Australian long-tail liabilities. Another component in there is the ARPC for the cyclone pool. So that launched -- we went into that just before. We'd just gone into that half year last year. But this year, we've got a full 6 months of the cost of that in there as well. So those are probably the 3 most significant components of that increase.

That's clear. And then last question for me, just on competition and pricing, I'm interested, just like across the business, where you are seeing pricing pressure, particularly relative to inflation, and where you may be more concerned around underlying margin, just any classes where rates may not be keeping up with inflation.

I'll make some high-level comments on that because it's -- we've got lots of different parts of the business. I don't see us pricing below inflation in any way of any materiality, or not intentionally. So I don't think that's a theme across our portfolios. And the market continues to be rational would be my observation. I would say the market -- it's not obviously just IAG that's experiencing those reduction in inflationary pressure. I mean, that's a market factor as well. So we're seeing the market react to that. I mean, the most sort of movement in pricing is within the Commercial sectors. New Zealand is probably tougher than Australia as well in relation to that topic at the moment. So that's probably where, to your question, where -- and there's obviously other factors around that are driving that, some of those global. That's where there's sort of more pricing pressure than other parts. But as a general theme, no, we're not pricing below inflation in any way.

Your next question comes from Nigel Pittaway with Citi.

I was wondering whether, first of all, I could just ask a bit about home claims inflation, and maybe you could expand a little bit sort of where -- the components where you've seen improvement and whether there's any components that are still giving you any remaining concern?

Nigel, I mean, we go across our Australia and New Zealand, the themes in New Zealand are even less than Australia. So it's all coming back, but sort of coming down like this in Australia. Australia, I sort of said, well, the group's mid- to high single-digit. Australia is probably at the top end of that and New Zealand is at the lower end would be my sort of summary. What we're experiencing is just sort of more -- I mean, there are pockets where this is not true, of course. Labor costs generally are down. There are some pockets where that's not true, but labor costs are coming down. Supply costs are coming down. And so we're seeing -- I mean, I assume we'll see -- you see this in other industries that are involved in the building industry, those with that cost pressure, and insurance is just a slither of the building industry, remember. So generally, we're a repair type buyer, not a rebuild buyer. But just generally, they're coming down in both supply and labor. And that's sort of driving this lower environment. At the same time, some of the dramatic increases that we saw in cost of reinsurance, that really changed a lot in a very short period of time, almost at the same time as there's inflationary pressure. They've been mitigated a lot too, so they're sort of stabilized. So the combination of that, of reduced labor, supply costs, supply chain, together with reinsurance, obviously, that package is then taking some of the pressure off pricing in Property. And everything I said there, in New Zealand, it's even more so. So that's sort of single-digit type inflationary pressure we're seeing in property, sometimes even lower.

And then previously, you mentioned that the new enterprise system would be supportive in terms of volumes, and you did make some comments that, in Retail, you have seen a bit of improvement over the last 2 to 3 months. So I guess the question is, is that delivering what you expected? And do we expect more benefits from that moving forward?

Yes, definitely, Nigel. So I mean -- and to be fair to our teams, the Retail business in Australia and predominantly the NRMA is sort of only now just about to be fully on because we're doing this month-by-month. New Zealand is probably 6 or 7 months behind that as in New Zealand's on, but we're rolling it through now. And so that capability is obviously being deployed a month at a time on renewals and then all the new business as well. So we're in that transition at the moment, encouragingly, so NRMA insurance is at the front of this. And that will be all the way through in about April of this year. What we are seeing, sort of evidencing this point, we are seeing probably stronger growth than we've seen for a long time within that NRMA proposition in the last sort of 2 or 3 months. And so what we believe, with that enterprise platform, the capability that sits there with pricing, some of the other things that we've built around that flexibility with proposition to customers, it's a more attractive proposition and that's going to help drive that Retail growth. We've definitely got the Australian Retail business ahead of New Zealand on this. But we expect, in the next 6 to 12 months, we'll be evidencing that in both countries of the value of what we've created here.

Great. And just finally, you seem to have sold all your convertible bonds this period. But was there sort of any logic -- what's the sort of logic behind that?

Yes. Thanks, Nigel. So I mean, look, our overall investment strategy is pretty consistent. And as you know, I mean, in the shareholder funds, we're majority in defensive assets. We have 22% growth assets at the moment. Within that, there is a modest allocation to what we call alternatives. And within that, we're just rebalancing a bit and we've pulled back from convertibles just as part of that process.

Your next question comes from Andrei Stadnik with Morgan Stanley.

Can I ask my first question around the Intermediated division? I think, previously, you were talking about reviewing the operating structure, considering additional reinsurance and also, I think, implementing a new operating platform. How is that review progressing in terms of the Intermediated division?

Yes. I mean this is going to be a transition, and so we're doing all those things. We're doing all those things carefully, 1 step at a time. But the thing about what we've done here is we've sort of -- Jarrod threw his arms around this business. We have really improved underwriting discipline and pricing. We've got things going our way. And we're looking now to continue to invest in this business to ensure that we really have a sustainable, long-term, competitive business in this Australia and New Zealand markets. Part of that is going to be continue to invest in technology, and there's a multiyear program of work that we're investing in there. And that's going to take -- that's not a 6-month piece of work. That's a multiyear. We'll continue to look at capability. And then sort of the last comment around volatility almost and sort of capital, we continue to look at that. I mean the concept, which we said before, of being sort of capital-light, we like. Most of the arrangements, the big arrangements, we have in place are around volatility from natural perils, which is our main volatility driver. Obviously, the Commercial business has, in Australia and New Zealand, some additional volatility, and we continue to look at that as well around what else can we do to manage that volatility. And that's a work in progress, I would say.

And I just want to check, in terms of the currency impact of the Australian dollar moving lower just in the last few months, how should we think about that flowing through to claims inflation and in terms of how you might be hedging around that or how you might be thinking about a price response?

Yes, I think it's pretty modest. When we look at the parcel of goods and the fact that we've got repairs, both labor and parts, and we look at this a lot, I've never really seen a hugely material currency impact that flows directly through to us. It's sort of -- it's got -- there are so many legs to that. We're watching this point closely. It's a similar comment around tariffs. And there is sort of a reintroduction of tariffs around the world. Does that sort of put any more inflationary pressure on our supply chain that we utilize? At the moment, we're watching that. At the moment, we're not seeing that. But that's -- as you'd expect, we'll continue to monitor that very closely and ensure that pricing reflects anything that we're seeing.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. I was hoping -- Nick, I was wondering if you could just provide some color around what's happening in New South Wales CTP. Your listed peer called out some adverse trends there. I didn't see you call out anything. I was just wondering if you could just comment on whether there are any issues in the market that you're aware of?

Yes. I mean there's a -- hi, Sid. There's a few. Well, we've definitely seen a bit of an uptick in frequency. And we're priced, I think, at the top. And then we're looking to probably move again from what we're experiencing, I mean, you might come in, William?

Yes. And on CTP, I suppose, for us, we also have a -- as well as our whole of account quota share, we have a 30% quota share on CTP. So I suppose that will mute somewhat any effects from us. But we are seeing some effects there. And actually, the keen-eyed among you might have noticed that we do have a $10 million increase this period in our onerous contract provision under IFRS 17, which relates to New South Wales CTP.

I was going to say that feels like it's the same theme. I mean, we've strengthened [ something ] by about $10 million. Yes, there's some challenges there. It's not running out of control, but there are definitely some challenges, and we've reflected that in pricing going forward, too.

Okay. Maybe if I could just ask a second question, maybe just on expenses, I was hoping you could just give us an update on whether there is any -- I mean, what's actually happening on your expense ratios in the first half versus the second half? I think you're guiding to overall expense ratios being flat for the year previously. I was just wondering if you could comment on how those trends are tracking. And if you could just provide any color on the breakup, first half, second half and just the components of it, the components of the expense ratio as well, any changes?

I'll write a theme and then, William, you go into that. I mean the theme is we're trying -- we're sort of -- we've got quite a big program of work to reducing the cost structure of IAG. We're well into that. That's sort of a day-to-day. At the same time, we're investing. So we're trying to -- we have 2 things happening. Our run costs, call it that, are coming -- the outlook on that's down. At the same time, we continue to invest in the business to set ourselves up for success. So we're trying to manage the blend on that. I mean, overall, you can see that we're sort of -- our expenses were about 5% up half-on-half or 4 months halves comparison. And we've got some targets out there of getting -- of sort of delivering an outcome with a lower cost base of running IAG going forward. We're on track on all that. In relation to the elements of that, William, maybe you can comment?

Yes. And of course, the -- I mean, the headline expense ratio, including commission, I think it was down 10 basis points. Actually, levies were up a bit in the period. So the expense ratio, the admin expenses, including levies, was flat year-on-year, but then we were 30 basis points down ex-levies. And that's with the -- holding the increase at 5%, whereas NEP was up 9.7%. And I think I made a few comments about the -- how there's -- a bit more of that is the investment for growth, a little bit less is the investment to maintain. At the moment, also, we are in this period when we are -- as we're transitioning the Retail business in Australia and New Zealand onto the Enterprise Platform, we've kind of got both lots of systems. Plus, there are other things we're investing in that will be sort of accretive going forward. I mean, that's the sort of things within this program that Nick referred to. So we've got a number of those going on. So that can mean that, while we're confident that we're on track to get to the 11% or below by FY '27, that there is some cost we incur on the way there as well, which is within the numbers you see today.

Okay. Just maybe a final question for me, just the reinsurance -- the new reinsurance arrangement, I think there was a profit commission-related component if there were a favorable experience versus your -- whether insurance kicks in. I was just wondering if you could just comment on were there any of the benefits of that taken in this period? Or how is that being accounted for?

Yes, I made a comment about we've looked at our AASB 17 modeling. And so it's a 5-year contract, and that profit commission is a component of it through the 5 years. Within the actuarial modeling, there's some element of that, but we've been prudent in the assumptions we made around that, I'd say, to the tune of low tens of millions of dollars in this half year.

I mean, I said take that word away, "prudent". I mean, I think we've taken a prudent, conservative approach here.

Your next question comes from Anthony Hoo with CLSA.

Just 1 question, just around the ROE, you've got an ROE this half of just under 19% on a cash basis. And you're talking about a through-the-cycle target of 15%. Just wondering if you can give some insight into at what point do you kind of switch that and maybe be willing to become a little more aggressive. At what point do you feel like maybe you're at the top of the cycle and you're ready to go a lot harder?

Yes. Thanks for that. I mean, the way I sort of think about the business is the headline margin was high, but underlying margin was at just over 15%, which is kind of the financial setting. If I sort of apply that to the ROE, sort of the run rate ROE, call it that, on more normalized perils, remembering that ROE that you just mentioned include the benefit of first half perils, which were lower than expectation, I think the business right now is in that run rate, sort of 14% to 15% ROE. The headline ROE, the 1 you just mentioned, has been positively impacted by the lower-than-expected perils for the first 6 months. So I mean, our view is we've sort of got IAG at the right setting there between margin and ROE. And the real focus for us is around growth, sort of holding that margin at around 15%, delivering on that 14% to 15% ROE on a normalized perils year, which I think is the only way we can think about it. But at the same time, which is we've got a little bit, but we want more of it, around growth, and particularly growth in that retail business, that's the 3 buckets that we're really focusing in on the overall financial setting of IAG.

Your next question comes from Andrew Adams with Barrenjoey.

Can you just help me reconcile those -- the premium rate and inflation comments? So we've called out Motor GWP growth of 6.3%, driven by rate increases, volume flat, Home GWP growth, 6.1%, driven by rate increases but going flat. So I'm getting right at 6% in Home and Motor. You've called out inflation high single digit. So am I not now getting rate below inflation? Or what's the disconnect there?

I mean, there's other parts of this story, obviously, with frequency as well. I mean, well, I've generalized across these numbers, as you know, which is always difficult because -- I mean, the comment I would make is we're seeing costs come down. We're reflecting that in pricing. We're seeing volumes modest for New Zealand, almost none or, in fact, slightly negative, Australia positive, but particularly in the last quarter and what I've seen in January. And we're seeing pricing come back across both those portfolios of Motor and Home in the 6-month period. When we generalize across motor inflation, claims inflation, that's quite a big macro comment. What we can see also is our businesses are not pricing below inflation. That's the comment I made before. So there's not going to be sort of margin inflation [indiscernible]

[indiscernible] you made is covering inflation costs across there.

Yes. Yes, across -- when I look at -- let's broaden that out. There's claims costs in total. There's frequency in other parts to that and timing differences as well around what we're saying. It's the theme we have.

And then just decline of the exit rate, so we were doing like 15%, 17% rate increases 6 months ago. We've now averaged 6% in the half. Is our exit rate kind of below that 6%? Or how do I think about it? That moderated really quickly. So just how do I think about that?

I mean, I've been thinking about it the way you said. So that's why -- if you think about it the other way around, guidance for the full year, sort of said mid- to high single-digit growth, and we said we're going to be at the low end of that guidance, which is really saying that sort of exit rate is towards the bottom end of that guidance.

Yes, all right. And so rate can continue to moderate from here, I guess, is the word?

Yes. I'd sort of flip that around the other way and say inflation, cost pressure, what we're experiencing is coming down. That's what we see as a positive, obviously, for affordability and what it means for customers.

All right. Great. And then just quickly on the profit commission, where is that? Is that coming through -- is that coming through my expense line and my claims line? Or where am I seeing that pop up?

Sorry, the question around the --

The reinsurance profit commission that is --

I think that's embedded in the premium, in the reinsurance cost, which, of course, would be within NEP, so in sort of bottom half of all of the fractions.

So there is some PC net reinsurance costs. So if we normalize the insurance cost, it could be a little bit higher on a non-PC group?

Yes, the trouble is the -- under AASB 17, the accounting is a little bit more complex in terms of sort of valuing the full 5-year contract, depending on how you [indiscernible].

So there's tens of millions in there.

Yes, sorry, of prudence relative to our original assumptions on that.

So for me to be clear on that, I think, Andrew, just to be clear, the reinsurance expense for the first 6 months in total is what I would call prudent. So I would say that's -- if your question is around what's the run rate of our reinsurance expense of IAG going forward, I'd be using that or more positive from that. That's a pretty prudent number that we booked for the first half.

Right. But if I did have a full -- if I did have a full period of claims in line with my allowance, the reinsurance cost would be tens of millions higher.

I don't think so, no. No.

I'll take it off-line. Maybe I misunderstood the comment there.

Your next question comes from Kieren Chidgey. Kieren Chidgey has unregistered his question. There are no further questions at this time. I'll now hand back to Mr. Hawkins for closing remarks.

Thanks, everyone. I'm going to have just some few thoughts from me to leave. We're running this company in a very targeted and efficient way, and we're really pleased with that. As I've just been talking about, premium increases have started to moderate. We're seeing more of that in Motor, but Property as well. We know that inflation is coming down, although, of course, it's not over. We're still seeing some impacts across our business. Importantly, the innovative reinsurance arrangements that we've got in place are reducing our volatility and, of course, importantly, we've got a strong balance sheet and efficient capital platform. So what that does, of course, I want to leave you with the message, we're confident about the future and our ability to deliver a targeted margin of 15%, ROE of 14% to 15%, which we believe, that sort of equation, which I stepped through before, balances the interests of all of our stakeholders. Thanks for taking the time -- I know you guys have got a busy day today -- for joining us on this call. Thank you.

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