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

Well, good morning, everyone, and welcome to our 2025 Financial Results Presentation. I'm joined here by our Chief Financial Officer, William McDonnell, and we're holding this briefing in our IAG Sydney offices, on the lands of the Gadigal people. We acknowledge the traditional owners of country throughout Australia and we recognize their continuing connection to lands, waters and communities. And I pay my respects to their Elders past, present and emerging. I'm really proud of the results that we're presenting today. They reflect our success in delivering the strategy we set 5 years ago to create a stronger and a more resilient IAG. We're delivering for our customers and our communities. We paid out over $10 billion in claims, and we've retained strong NPS and retention metrics. We have delivered strong financial outcomes, which have met or exceeded our expectations. And we've set the business up for growth with over 66,000 net new customers in our retail businesses. And of course, we've delivered a technology platform for our retail business that is scalable. And because of that and our strong balance sheet, we've acquired RACQ and RAC in WA, and we have funded these acquisitions from organic capital generation. So stepping through the financials. And of course, we've achieved a strong outcome here. Our reported insurance profit of $1.7 billion delivers a margin of 17.5%, which does though benefit from favorable perils experience, and that was primarily within our New Zealand business. Our reported ROE was assisted by a BI release, but importantly, at an underlying level, we are delivering the through-the-cycle target of 15%, which we upgraded in May when we announced the RAC strategic alliance. At an underlying margin level, we've delivered a 15.5% margin, and that's ahead of our through-the-cycle target of 15%. This margin includes the additional investments we've made this year to improve operational efficiency and growth, together with the cost of the additional volatility reinsurance protection that we have in place. For shareholders, we have declared a final dividend of $0.19 per share, which brings our total FY '25 dividends to $0.31 per share. And we continue to maintain a strong balance sheet. Stepping through the results in a bit more detail and starting with our customer growth. Across our retail businesses, we're focused on growth, and I'm pleased with the progress that we are delivering. We've seen our retail customer growth across Australia and New Zealand with the vast majority of that growth in the second half, and you can see that on the slide. The growth we are seeing is built on the strong customer metrics and our trusted brands. Our customer experience measures are high in both Australia and New Zealand with our renewal rates showing signs of improving from their already high levels. And if we take a step back, we've invested heavily in the Retail Enterprise Platform. We've got the majority of our entire Trans-Tasman retail business on this platform, and we can see the capability that this platform is delivering to the business. That means we are starting the new financial year with some real growth momentum in our retail businesses. Dropping a bit further into each of our businesses, and I'll start with the Australian retail. Our headline growth here was around 5%, but that was impacted by the exit of the Coles portfolio. If we exclude this, the underlying growth was 7.3%, with good contributions from all the portfolios here. Motor was up 6.7% and Home was up 8.7% with retention rates above 90% for the majority of states. As I mentioned, in Australia, we've migrated over 4 million policies onto the Retail Enterprise Platform. What this does is deliver best-in-class technology for underwriting expertise, policies, pricing, claims, and significantly improving our customer experience. Julie and the team are also delivering improved claims experience and efficiency within the supply chain that we're managing. We also celebrated a significant milestone this year with NRMA Insurance celebrating 100 years of helping Australia. Our New Zealand retail business achieved premium growth of 3.8% or 5.3% in local currency. Within that, we had 9.3% growth in Home. That reflects strong retention rates and improved customer satisfaction. Within our bank partner, local currency premium grew by 6.9% with strong growth in all our key personal lines portfolios. Against that, within our New Zealand retail business, our Motor portfolio was relatively flat. Our retail business in New Zealand now has over 1 million policies on the Retail Enterprise Platform. The business has further improved customer satisfaction levels by expanding the AMI motor hub to 10 sites, an increasing percentage of claims lodged digitally. And AMI Home and Motor products are now being offered direct to Aon customers that provides further growth opportunities for our New Zealand retail business. Looking into our intermediated businesses, and I'll start here in Australia. And here, we have delivered another solid result in a transitioning commercial market. After we exceeded the original $250 million profit target in FY '24, Jarrod and the team have contributed $328 million this year. When you consider this covers the cost of the additional reinsurance protection we've also put in place, the result demonstrates continuing improvement in the underlying profitability of this business. And the business has maintained its pricing discipline with a headline growth of 6.3%. That was boosted though, by some multiyear workers' comp policies. On an underlying basis, growth in this business was around 5%, which includes pricing for inflation. Our key segments here are performing well, particularly WFI, where our close customer connections in regional Australia are providing us with additional growth opportunities. We've invested in this business as well during the year, and we'll continue to make considerable improvements to technology platforms for the next couple of years. We've launched CGU Padlock product on our Commercial Enterprise Platform has been a real success. In the first month after launch, it delivered an 80% straight-through processing and has enabled us to double new business premiums for the month of June compared to the same period 12 months ago. And now we have a raft of brokers that are lined up to trade with us through here. And we're going to continue to deliver capability to this business over the next couple of years. The equivalent business in New Zealand has been managing ongoing softening in commercial markets. Its premiums were down 4% or 2.6% in local currency. The actual margins here, though, have been strong with the business at just over 24% and underlying just under 16%. And we've seen some positive outcomes here. For example, at our June renewals, we retained most of our large accounts within our New Zealand business, and we have entered into a partnership with Ag Guard to expand across rural markets. Importantly here, we'll continue to manage the business with a focus on disciplined underwriting and margin outcomes. I'll now hand over to William, who's going to run through the financials in a bit more detail.

Thanks, Nick, and good morning, everyone. Starting with GWP. We've recorded growth of 4.3%, which is in line with our revised expectation announced on the 1st of July. This includes the impact of some nonrecurring items, most notably the exit of the Coles portfolio. And therefore, on an underlying basis, we recorded GWP growth of over 5%. This included the strong growth of 7.7% in RIA's direct business, which saw positive customer and unit momentum. As we've mentioned, softer macroeconomic conditions in New Zealand have resulted in a softening in premium growth, most notably in NZI, where our focus is on maintaining strong underwriting discipline. Lastly, GEP and NEP both recorded strong growth from prior rate increases at 8.7% and 8.0%, respectively, which benefited our earnings in the year. In terms of our underlying margin, the full year result of 15.5% was at the top end of our initial reported margin guidance range and showed a strong improvement compared to the 14.5% in FY '24. Last year, we had a 17% increase in our natural perils allowance for the full year to $1,283 million, which resulted in a 100 basis point drag on margin, and this was more than offset by the 260 basis point improvement in the underlying claims ratio. There was also a 40 basis point increase in the expense ratio and the investment yield, while solid, saw a slight decline from the very strong performance achieved last year. Overall, this is a high-quality result, and we've continued to adopt conservatism in the balance sheet, both in reserving, including for perils and in booking of our additional reinsurance protections. We continue to enjoy the strong downside protection from these reinsurance protections. And with an underlying margin slightly ahead of our through-the-cycle target of 15%, we are well positioned in the event of claims or investment market volatility. I'll now talk to some of these individual movements in more detail. In terms of natural perils experience, FY '25 net claims of $1,088 million was $195 million below our allowance and in line with the position that we indicated on the 1st of July. This was largely due to benign conditions in the first half, while the second half saw perils broadly in line with expectations. And delving further into this, the second half saw continued benign conditions in New Zealand being offset by adverse experience in Australia, including a number of storms and floods in New South Wales. I also thought it would be useful to unpack our reinsurance expense. For FY '25, our underlying expense, which excludes any amount related to quota shares, increased by 18.8% due to the impact of the long-term perils volatility cover and a full 12 months recognition of the adverse development cover and cyclone reinsurance pool. However, on a net basis, the increase was only around 10% after reflecting the profit commission related to the perils volatility cover. I want to highlight, though, that for accounting, this profit commission sits together with claims. Overall, the net additional costs of the ADC and the perils protections is within the 50 to 100 basis points impact on group margin that I outlined when we announced the deals back in June 2024. This long-term perils cover provides significant downside protection and has resulted in the FY '25 -- sorry, the FY '26 perils allowance increasing by only 2.6% to $1,316 million, which is significantly lower than the material double-digit increases that we've seen in the last few years. I also want to highlight that we retain upside in all cases where perils are less than $1,316 million as we saw in FY '25. Turning to underlying claims, which exclude all perils reserving and discount rate effects. The ratio has improved to 52.1%. We're pleased with the trend, showing a year-on-year improvement of 260 basis points. 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 solid NEP growth. And in addition to this, RIA saw ongoing benefits from supply chain management and fraud optimization. This is helping offset some issues being seen such as higher theft claims, most notably in Victoria and higher third-party claims driven by credit hire activities. IIA has seen improvement in long-tail experience with the liability book's enhanced risk profile driven by pricing and underwriting initiatives. Short-tail classes have been in line with expectation, and the team is seeing continued realization of claims initiative benefits, including reduced leakage and improved claims finalization rates. And in New Zealand, the division has seen benefits from claims handling and supply chain initiatives. During the year, the division also saw reduced frequency levels across Home and Motor portfolios, albeit this is starting to moderate. Finally, as I mentioned earlier, the improvement in the claims ratio was also assisted by profit commission from our reinsurance arrangements, and we believe that these will tend to be a recurring feature of our result. On expenses, admin costs on an ex levies basis have increased 8.6% compared to FY '24. This is a function of the broader inflationary environment, but also includes higher technology and system investment, including associated amortization. Taking into account earned premium growth, the admin ratio on an ex levies basis increased 30 basis points to 12.2% compared to 11.9% in FY '24. I want to highlight that this increase reflects proportionately greater costs to grow and transform the business relative to ongoing costs to maintain. During FY '25, we migrated over 4 million customer policies onto our retail enterprise platform as we pursue our ongoing program to transform our capacity to meet the needs of customers. We also made good progress with commercial enterprise platform with our first product now live, as Nick mentioned. Our Transform costs also include investment in engineering to activate artificial intelligence use cases across the company and also a number of one-off elements, including around $50 million of costs associated with operating model changes, which we took above the line. And these initiatives are forecast to drive ongoing expense benefits over the next couple of years. At our Investor Day last December, we outlined an efficiency target and granular tracking of benefits to reduce the admin ex levies ratio to under 11%, and I'm confident in the work the team is doing to achieve this 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 year. While the underlying yields declined slightly in FY '25, the technical reserves portfolio contributed a similar income of $464 million. And in our shareholder funds portfolio, we delivered a strong contribution of $403 million with positive performance across growth and defensive assets. The overall shareholders' funds portfolio continues to remain conservatively positioned with a growth asset weighting of around 25%. Finally, on capital. We finished the year in a strong position, and I've shown some of the material movements in this waterfall. Our strong earnings are the largest component of capital generation during the second half, and this has been partially offset by the capital impact from paying the FY '25 interim dividend. Other call-outs in the waterfall include the capitalized impact from our investment in technology and other impacts, including higher risk charges. This includes the impact of lower yields expanding asset and liability balances and associated risk charges. As Nick mentioned, we're declaring a final dividend of $0.19 per share, bringing total dividends to $0.31, up around 12% on last year. The payout ratio is 65%, which is appropriate in the context of net capital generation to fund the club transactions and a 40% franking rate on the final dividend. And on the next slide, I'll just update on the pro forma position following anticipated completion of those recently announced acquisitions. This waterfall is similar to the one that we presented at the announcement of our acquisition of RAC Insurance in Western Australia. As then, this demonstrates another benefit of the extent of the downside protection that we enjoy from our reinsurance program, which is the added confidence it gives us in our strong, stable organic capital generation. That means that together with our existing capital surplus, we are well placed to fund these 2 large transactions internally. Although we're not providing FY '26 NPAT and dividend guidance, you can see we've included an indicative 26 points of capital, reflecting earnings in line with our through-the-cycle 15% margin target less the interim dividend. We've also included a net positive 5 to 10 points of other expected capital benefits as we continue to develop strategies around capital-light as we set out at our Investor Day in December. As a result, we expect our capital position at 30th of June '26 to be around 1.4x, and this positions us well for the 40-point capital impact of the RAC Insurance deal, arising primarily from recognizing intangible assets as well as the additional regulatory capital charges. After both deals, this results in an indicative pro forma CET1 position of 1.0x our PCA. And we've maintained our CET1 target range of 0.9 to 1.1x. And given the quality of earnings we're delivering and our comprehensive reinsurance protections, we have increasing comfort to operate in the lower end of that range. With that, I'll now hand over back to Nick.

Thanks, William. So we finished the year with some really good momentum within IAG. And our confidence of that is reflected in our FY '26 guidance, where we expect our existing businesses to grow at or around low to mid-single digit. Within that, within the divisions, we expect that our retail business in Australia to grow at sort of mid-single digits, intermediated business here in Australia to grow at low single digits and New Zealand business in total to be relatively flat. We expect our reported profit will be in the range of $1.45 billion to $1.65 billion, roughly equating to a reported insurance margin of 14% to 16%. And of course, that's in line with our through-the-cycle target of 15% and does include the benefits of the reinsurance arrangements, which provides strong downside protection. Importantly, the '26 guidance does not include any of the benefits of the RACQ and RAC and WA acquisitions. And we expect RACQ to be completed on around 1st of September '25, so in a couple of weeks. And that's going to add over $1.3 billion on an annualized gross written premium basis, at least $1.3 billion. With the additional 10 months of that RACQ premium within our business, we expect that will cause IAG to grow more like 10% plus over the next 12 months. We also look forward to providing general insurance products and services to RACQ's 1.7 million members, of course. Now here we're setting out. We're well-progressed with our integration plans here. We have a strong track record of migrating customers onto our Retail Enterprise Platform. And what that does, of course, is give us confidence in our ability to successfully integrate these businesses into IAG. Together, we expect the RACQ and the RAC in WA business to add in total around $3 billion of premium to IAG. We expect those 2 businesses to increase our insurance profits by at least $300 million and to deliver, of course, double-digit earnings per share accretion on a full synergy run rate basis. And of course, what that does is it will deliver an improved return on equity target of 15% on a through-the-cycle basis. And both associations and their members will, of course, benefit from the financial stability, our technology platforms and our global reinsurance arrangements and, of course, importantly, our customer-centric claims processes. These transactions, combined with our strong existing businesses, means we're well placed to deliver strong shareholder returns into the future. Now if you step back, we've made material changes to the way we operate IAG, and we've structured the businesses around our retail businesses and our intermediated businesses and, importantly, our capital platform. We've got some of the best consumer insurance brands in the world, and Julie and Amanda are well positioned to grow these businesses. We've got a modern, leading, scalable technology that supports our brands and our partners' brands and with insurance products that meet the needs of their customers. And we're investing in our commercial businesses so they can build on the underwriting and claims improvements that we've delivered and continue to improve the financial contribution of these businesses into IAG. Together, in combination with RACQ and RAC in WA, we'll be supporting over 10 million Australian and New Zealanders and we'll be writing over $21 billion in premiums on an annualized basis. At the same time, we'll be delivering strong, sustainable shareholder returns, driven by a stable margin with low volatility, capital efficiency that improves our ROE, providing organic capital generation that's funding our growth. William and I, of course, are happy to answer any questions. I think we're going to start in the room.

Nick, Simon Fitzgerald here from Jefferies. Just wanted to unpack the GWP guidance a little bit, just given what we're coming off at a full year basis, particularly the IIA at plus 6% now looking for sort of low single digit. And also the New Zealand, just wanting a bit extra color between commercial and retail. And sort of at that low end of the guidance, what's the chance that we might see New Zealand actually negative?

Yes. I'll break that down and William might come in and help me on some of this as well. I mean our -- we've sort of purposely provided divisional. We probably also should have said just dealing with New Zealand first, maybe. We expect the retail business in New Zealand to continue to grow, which we sort of said net flat. We expect retail business. Commercial has definitely got some headwinds, and we were minus a couple of percent there in the last 12 months and probably something similar again in '26, something in that order. So the net of that is sort of saying flat. But we would expect retail to grow both volume and price coming through on the retail business in New Zealand and then sort of equal and opposite almost within commercial, giving a net flat. On the Australian Intermediated business, I think a few important points to make are remembering our portfolios for a start, and we're at the small to medium-size -- typical customer of CGU and WFI is a small to medium-sized business or commercial business within Australia. And so we -- the run rate of that business in the second half and what we expect in sort of '26 is sort of that low single-digit type rate flowing through with a little bit of volume growth as well. And we can see that's happening. We sort of -- the headline number in the second half was lower. But if we sort of normalize that, and we've guided you to this, you can sort of see that low single digit coming through. And I would expect to see more of that in '26. I don't know if you want to add any more.

I don't think I have got anything to add. Thanks, Nick.

Second question, just on the perils allowance, the increase to $1.3 billion. Can I ask whether there's an equal increase in the long-term perils program maximum payout? Or is it -- does this represent just exposure growth and it's being taken on the allowance only?

Yes. Thanks for the question. So the attachment point continues to be at our allowance. So this gives us really solid downside protection worse than the allowance. And the good thing, as you point to is that the -- it's increased by only 2.6%. So it indexes with exposure. And actually, that's slightly slower than NEP. So there's a slight benefit in there. And we continue to have around $1 billion pre-quota share each year of downside from that. Now the aggregate across the full 5 years of the protection in a way, is stronger this year because we actually didn't use any of it in FY '24 -- sorry, FY '25. That's right.

And you mentioned before, you still get the maximum benefit if you come in less than that in terms of the payback?

Yes.

Yes.

And then just on the third question, the decision to leave RACQ out of the guidance, can you sort of mention whether you're still comfortable with the $50 million of savings that you expect to get from reorganizing the reinsurance program? And does that have anything to do with the fact that they might be on a different time frame than your own?

Yes. I mean at a high -- just maybe I'll deal with the high-level question on -- we didn't put -- we debated this point. We didn't put it in guidance partly because we haven't actually transacted the deal yet. We are anticipating that on the 1st of September, so it's very soon. And if we had already done that, we would have included it. But we just thought we'd just leave it. I mean things can get delayed. Although at the moment, we don't expect that. So we expect that, that will occur on the 1st of September. Pretty much the regulatory approvals are all done. And then we'll -- we have guided you to sort of top line. We sort of said this -- when we announced the deal, we said this business wrote $1.3 billion of premium. It's going to be probably slightly more than that. Just 10 months of that sort of gives you that 10% plus for IAG. That was the guidance around that. On the reinsurance, I mean, we'll be merging the programs together. Obviously, we need some time to be able to do that. Our aim, if assuming we can get that done on the 1st of September, the acquisition is probably to try to merge a large chunk of it into our 1 January renewal, which is sort of the [ IAGB ] program. But it will depend on the timing, yes.

That's right. I mean we understand, as you'd expect, with their own prudential obligations that they've renewed their program for this financial year. But then once we get the keys, we can then take that over and discuss that with reinsurance partners as well.

Kieren Chidgey from UBS. Maybe just a first question. I've got a few. The first question on some of your key portfolios. Do you mind just giving us a little bit of a round the grounds on second half pricing, but also inflation trends, Nick? Obviously, we're seeing -- I think you've called out a moderation in inflation, but just keen on a bit of detail around Motor, Home commercial.

Yes. I mean as a theme, we're definitely seeing. So the theme is, big picture, is we're seeing moderating of inflation in Motor and -- in Motor and Home, but building costs and repair of motor vehicles. We're seeing moderation of that. We're seeing more moderation in motor than home, and we're seeing more in New Zealand than Australia. That's the sort of the sort of cross-section of that story. The flip of that story is we are seeing some. So we're definitely seeing property inflationary pressure still, more so in Australia than New Zealand, but we're seeing some of that. Within motor, we're seeing some other challenges. Victoria right now has got its own challenges around theft and we're seeing frequency come up a little bit. We sort of don't call that inflation, but that's a contributor to the cost of motor insurance that needs to be factored into pricing as an example. So it's never quite just one thing. So then how does that all play out in pricing? We're seeing low to mid-single digit probably in motor and slightly more than that in property across the portfolios. And then within New Zealand, maybe slightly less on both those 2 themes, but the same themes. So there's sort of -- I hear that there's no pricing happening in retail personal lines in Australia and New Zealand. I mean that's not right. I mean we've got pricing flowing through all our businesses. I mean the other part of that story that we had a slide on today that we're really -- what we want to talk more and more about is the organic -- we're seeing a little bit of organic growth within our retail businesses. And you can see in the page that we've shown you around customers. So this is genuine growth of the enterprise. We're seeing 66,000 more customers part of that retail business. And importantly, we're seeing momentum in the second half. And so that really gives us a lot of confidence about '26 to around growth, not -- we just don't want to be talking inorganic growth and it's still very important. We've got these wonderful brands. We want to make sure we're talking about organic growth as well as part of our story.

Second question, perhaps for William on reinsurance profit commissions. Thanks for the disclosure. So it does imply obviously about $85 million of benefit into FY '25 from your stop-loss reinsurance profit commissions, so about 85 bps to your margin. Can you give us any color around the split, how you booked that between first half and second half? Or should we just think about it more from the full year perspective, I would imagine. And obviously, it's a 5-year contract. So I assume you're having to take a forward view on where the benefit sits today and prospectively, what benefit will accrue going forward. So how sustainable is that 85 basis point benefit? Should we think about that as just likely to recur in '26 and beyond?

Thanks, Kieren. And yes, I mean, this is a -- it's an integral feature of the economics of that perils protection. And of course, that's part of our 15% margin target. And it was part of the economics when we told you a year ago that the impact of that and the ADC would be 50 to 100 basis points on the group margin. And I think the other thing to say is that, I mean, it's a gradual calculation that goes deep into the layer, most of the way down into the layer. And it's calculated, there's an actuarial calculation of it -- of the value of it through the 5-year contract. So I don't expect it to be very volatile. And as we mentioned, I mean, we expect that will continue to be a feature of the results.

I mean is it fair to say it's being conservatively booked.

I was going to add that point. I mean, clearly, at the beginning of an arrangement, we've taken a pretty conservative lens. So the bias will be up, not down on that.

Sorry, and you asked about the first half segment...

Yes...

It was in both, first and second half. But it's in the claims -- the benefit's in the claims line, not in the reinsurance expense line.

It's definitely an unfortunate accounting exercise that we have to book it in the claims line, not net against the cost of reinsurance, but it's essentially attached to the deal.

Okay. Should we expect a bigger seasonal benefit most years, just given you've got clarity of where you've landed on cat by the end of the year?

I think you should expect us to take a conservative view on this as this unwinds and that we're sort of booking the headline, and we don't want to ever be in a position where the opposite is true, that we're reversing something. And so that will be a theme. So as I think time will take, time reduces conservatism essentially. So I don't -- I mean, is that going to be part of the financial performance of IAG and the way you unpack our financials? Yes. And probably is there -- are we taking a more conservative view today than over the next 2 or 3 years? Yes.

Okay. Just a final question and bear with me on a bit of detail.

Right. It sounds like William.

It's around your sort of your margin outlook. So just stepping through some of the component parts, you've given us very clear expectations on your admin expense ratio down 60 bps next year, your tech reserve underlying yield kind of works out to a 60 basis point headwind. So those 2 things look like a wash. You've said on your outlook slide and in your commentary, you expect pricing to cover inflation and your car budget is no longer a drag. So it suggests your underlying loss ratio is not going to deteriorate. So packing all that together, doesn't really seem to be any reason why your underlying insurance margin should deviate much from the 15.5% you've just delivered in '25. Am I missing anything there?

You've covered the main components. I mean we did have, of course, particularly the early part of FY '25, we had a bit of a tailwind from coming off the higher inflation and just some earn-through. And the other thing that we did mention is that in our New Zealand business, we really had a benefit in FY '25 from lower frequency in motor, in particular, but also in home. But we're seeing that frequency benefit. It was moderating just at the end of the year and through into July. So we're not projecting that forward. So the New Zealand margin would come back a little bit.

Kieren, I was going to say nice summary. And I mean, let's sort of step back. We've got the company set up. I mean the sort of the financial settings are sort of 15% margin, 15% ROE. We've used 14% to 16% as a way of sort of articulating that. I mean there's unders and overs in that. I mean we feel like the company is well set up to deliver against that return profile. As you know, the other thing we've been doing is spending a lot of time reducing the volatility of that as well. And that -- the thing about our margins is that that's bearing the cost of the reinsurance protection to manage that volatility in that margin. So that's -- that becomes a bit self-fulfilling now, I think, is that we've got this margin 14% to 16%, the setting is 15%. That's sort of our target. Yes, we're going to operate around that and definitely acknowledge that. And there's momentum in our business right now. But it's also got all the costs associated with managing that volatility in the margin itself. So that's why that's the confidence that we've got. I think we're going to go to -- no other questions in the room. We're going to go to the phones. Or the video, I should say.

Your first question comes from Andrei Stadnik from Morgan Stanley.

Can I ask my first question around the commercial business. You flagged that you're making investments in the tech platform. You've also flagged, I think previously, you're thinking about maybe additional reinsurance options or some other options. So can you talk a little bit about that, how you see those strategies evolving from here over the next couple of years?

Yes. Maybe I'll talk about the themes, and I'll hand over to William to talk about some of the specific reinsurance. I mean the themes here are that we've had -- we've got an underinvested business that we've owned for some time that -- you can see what we've done at IAG. We've got the Retail Enterprise Platform and the technology that supports 2/3 of the company in place, operating, scalable and now we're adding stuff to it essentially. And this has been a sequencing thing, and we've really got sort of the back of the retail business strong, and we're able to scale it up. It's not the same, but it's the same sort of concept as what we're doing with the CGU and WFI and NZI businesses, where we are investing in sort of the back of that business and replacing some very old systems and platforms with some modern technology. And what that does is free our company up. And we see that -- we're not sort of building it and hoping like anything that works in 3 or 4 years. We are building and deploying it. I use an example in the way I talked about it today, and that's going to be -- we're going to be sort of constantly building, deploying, building, deploying, building, deploying and getting the value out of that as we go along. So we -- that business at the moment, we've sort of got deployed capability, people, changes in the way, a lot of people-type manual processes that have improved its results. We sort of said the next wave of opportunity for our intermediated businesses in Australia and New Zealand are really around sort of taking the costs out, the efficiency, the productivity and the capability that we can build out with technology. And that's going to take -- we're going to be deploying that over the next couple of years in a very orderly, thoughtful way. That means we're not going to have shocks in the P&L at all. We're going to continue to drive and be focused on return profile. At the same time, what we're going to do is give Jarrod and the team here in Australia and the equivalent in New Zealand, and Amanda and the team in New Zealand a lot more capability to run that business. And that's really been a theme. And we prioritized Retail Enterprise Platform to get that done. And now you can see we're -- confidence is high on that. We're doing something similar, different but similar concepts with commercial. One of the many other things we're doing as you think about our volatility, we have perils volatility in our business, and we've got a load of stuff that we've talked to you a lot about how we're managing that. Commercial also has some additional volatility, and that's why we're thinking about other ways to manage that. And William, you might comment on here.

Yes, that's right. And I mean, you all know that we've been pursuing our capital-light strategy, and we think that's a good strategy. I mean, both to increasingly achieve capital efficiency and that improves ROE and EPS, but also to reduce volatility, which I think is appreciated. And so the logical next step on that journey, having done what we've done on perils and the ADC and the previous whole-of-account quota shares is to look at bringing some additional capital reinsurance behind the Commercial business. And so that we're continuing to explore in a number of ways. And if we find a good deal that meets all of our requirements, obviously, we'll let you know about that. If we can do that also, I mean, it would be nice to be freeing up some capital from that business and reallocating with the retail growth that we've got, organic and inorganic.

And remember, we've done this concept before with -- we haven't always done whole of account things. We do have something specific on CTP. So in a way, same sort of concept. We're looking at a whole lot of different ideas and structures here. But we're looking for sort of a Trans-Tasman commercial or intermediated type reinsurance cover as an idea of looking at some of the volatility, the unique volatility that business creates and a way of managing that and the overall profile of IAG.

And I believe that tails nicely to my second question. Just back to reinsurance. Can you talk about maybe your quota share because there have been some questions around are you getting full value from your quota share? But I mean, it sounds like you're pretty happy in exploring further options. But can you in particular remind us about the structure of your quota share? Are there any profit shares that could come on? And yes, just how are you thinking about your main quota share and the performance you're getting out of that?

It's just as a concept, and I'll ask William to come in. These large reinsurance arrangements, multiyear, sort of the nature of them is that they pretty much all have elements of profit share because they are over multiyears. And the ability of reinsurers to reprice those deals doesn't exist. So they are set priced arrangements. And so essentially, the profit share type concept for pretty much all of them in various forms is there -- is to manage that process through. So they all have elements of them. And in fact, we like that. Now remember, they all are genuine reinsurance. So it's not like it can go the other way where there's sort of top-up additional premium based upon experience. They are genuine risk transfer arrangements where we are capped. What you see is there's no subsequent losses, quota shares are all gross. So they are -- in fact, they're uncapped even on limit, which is unusual as well. So the concept of profit shares, I know it's sometimes hard to see all the workings of them in our financials, that concept exists for all our large multiyear arrangements that we have in place. And in fact, we like it because it's sort of sharing. We know what our downside is, that's capped. But we don't -- if the business outperforms our original expectations or we sort of manage it within a range, there is an element of profit share that comes back. So we should be pretty much expecting profit share from all our arrangements to a degree. William, you might want to comment on quota shares.

Yes, that's right. So I mean, we mentioned the profit commissions, we expect they'll tend to be a feature of our results going forward. There is a little bit of profit commission from -- that we booked this year from whole-of-account quota share, I mean, low tens of millions. And we booked it conservatively. So -- and there's no anticipation of the future value of the profit commissions there. But we do expect that, that will continue and indeed, it may grow from here.

I mean the truth is particularly with Berkshire, which was 2015 quota share, we had some tough years after that. And so that's sort of -- obviously, a lot of that's been made good now. And so this topic is going to be an increasing feature over the next number of years, assuming we're sort of delivering at that 15% margin.

Your next question comes from Julian Braganza from Goldman Sachs.

Just to follow on the discussion on the profit commission. Just want to be clear, if you could sort of set out the parameters as to how we should think about the -- what it would take for this kind of $85 million and the low tens of millions for the whole-of-account quota share to reverse. Just to contextualize just the risk here that we see this unwind and given that we've taken this benefit, we should be taking this benefit every year on an expected value basis going forward from what I understand.

Yes, I'll take that. Thanks, Julian. So in terms of reversal, I mean, if I take the 2 separately, for the perils cover, for that to reverse, we would have to think that perils are so bad in aggregate over the next 4 years that we're consuming most of the layer, which I remind you is pre-quota share is $1 billion per year. Now obviously, in that situation, Australia and New Zealand, a lot else is happening in the industry and with pricing and so on. But that's what that would take. So it would -- quite an extreme scenario. And actually, also on the whole-of-account quota share, the modest amount that we have booked, again, you'd need some quite -- you'd need severe things happening. I mean, close to $1 billion of adverse variance to be unwinding that.

I mean we've sort of -- I know it's hard to measure this from your point of view, but we've taken a very conservative position on this topic because we don't want to be in the situation you described of reversing it. We get that. So the bias from our point of view would be more, not less over the next 5 years on this topic. But within our sort of -- we haven't sort of guided that, and we're not sort of forecasting that, but that would be our expectation.

Okay. Got it. And then maybe just a second question in terms of the GWP growth guidance by division for next year. Just to follow up on the previous discussion. If I look at the second half GWP growth trends, it doesn't look like there's much more pressure being factored into FY '26, particularly so for intermediated in Australia and also for New Zealand. Can I, just to understand, are you assuming like the rate environment that you're getting over the second half persists into FY '26 and no further deterioration? Is that how you're sort of pitching the guidance for FY '26?

Yes. I mean maybe back that into 2. Across our -- it's a good way to talk about it, Australia and New Zealand businesses. I mean, we feel pretty good. Australia is definitely -- there's rate that's flowing through that market, and we would continue to expect to see that. Remembering again that we're at the small end. We've got WFI within that portfolio. That is not a large-scale commercial book of business. That is a well-diversified, typically at the smaller end of the commercial markets with quite a large regional representation through the WFI business, just remember what it really is. And so because of that, we continue to see -- we expect to see rate flow through that business in '26. New Zealand, I mean, we've called it. That was minus a couple of percent in the last 12 months, and we're sort of probably expecting something similar. I mean that comes back to sort of a previous comment I made around how do we see New Zealand. I see New Zealand is retail volume and price growth and sort of the opposite really within our Commercial business. And the net of that is sort of flat. That's kind of what we've said in guidance.

Okay. Got it. And then just a last question for me on margins. And I know you sort of addressed this point in terms of into next year. But I just wanted to sort of dissect it by division. Just your view where the margins might move into '26. Obviously, New Zealand retail very strong, could see some pressure there perhaps. But I just want to get your view on where the pressure is coming from relative to second half '25 from an underlying margin perspective?

I mean there's probably some ups and downs in there, isn't it? We're calling out a few things that New Zealand has had a very strong result. I mean the net -- the run rate of the business is sort of roughly guidance, isn't it and sort of ups and downs within that story, but it's sort of saying that if New Zealand comes back a bit, Jarrod and Julie would probably deliver a bit more and the blend of that sort of comes out to a similar type of guidance. And the real key for us is also the organic growth. So that is sort of the 2 things, isn't it? It's hang on to margin. I think our commercial businesses, it's not -- it's sort of the story that I said, and hold that margin. Within the sort of the retail businesses in Australia and New Zealand, I mean, I'm expecting them to have organic growth as well as price growth. And so that's -- we put that slide up there on purpose to really guide the market. We want to be able to organically grow those businesses. And of course, at the same time, we're supplementing our retail businesses in Australia with the RACQ and RAC and WA acquisitions. But I don't want to lose sight of this organic growth story. It's a really important part of the IAG story. We've got these wonderful retail brands, and we should be growing them at least in line with the way the system is growing in Australia and New Zealand.