Steadfast Group Limited (SDF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Steadfast Group 1H '21 Financial Results. [Operator Instructions] I would now like to hand the conference over to Mr. Robert Kelly, Managing Director and CEO. Please go ahead.

Thank you very much. And welcome, everybody, to the half year call. It's interesting, we're in a slightly different position than what we were at this time last year. This time last year, everybody was wondering whether it was going to be a strong flu, whether it was going to come through and then all of a sudden, the paranoia hit over the next 10 days, about 150,000 people dying in Australia, unemployment shooting plus 20% and really Armageddon hitting. I'm pleased to say that Australia has reacted extremely well to this. And we're in a much different position today than what we were this time circa 2020. So on to the results, okay? Obviously, the results have been outstanding. And this is the situation we found in March last year when we pulled guidance that we were uncertain about what the future would look like. And when we pulled guidance, we went on to quarterly updates. And through the whole of 2020, our business thrived. And we're pleased to report the position we're in today, which is absolutely outstanding from the point of view of the sector we operate in. And I note some of the other listed brokers in our sector have reported, and I congratulate them for proving that the sector that Steadfast and others operate in is a robust sector. It's a sustainable sector. That the people we act for are clever in business and can survive anything that they want to get through. So let's look at Page 4 of the pack at this particular time. Obviously, increase in underlying NPAT of 19.3% is fantastic from our own point of view. The EBITA and the NPAT are both up 19.3%. NPATA is up 16.5%. And our diluted EPS NPAT, up 17.1%. And our interim dividend, which is something that we treat with a great deal of respect in this organization and that is what we pay the people who invest the money, is up 22.2% to $0.044. So we give you a wheel there of the business that we do. And we give -- that gives you some perspective about where we earn our revenue from. And as you can see, the Strata sector still becomes extremely important, followed by Biz Pack and Machinery. And you can read as the wheel goes from right to left about where we go for. So statutory earnings are back in line. You remember last year, we had a statutory loss because we took to the P&L the expenditures we did on IBNA and buying out the PSF [ force fee ]. I noticed somebody reported that this morning is a dramatic turnaround. Obviously, the person who reported that don't actually have an accounting background and understood what that statement meant. But we put up with some people in the press who languish a little behind some of their peers in regarding to understanding what statutory accounting is as opposed to the real accounting. Okay. The broker and underwriting agencies. Equity brokers and network aggregate is up -- the EBITA up 22.9%. Underwriting agencies up 15.6%. There are more details on Slides 15 and 16. And the majority of our Australian and New Zealand businesses are now actively using our client trading platform. Our acquisition growth. We completed $162 million worth of EPS accretive acquisitions. And of course, additional broker acquisitions is in the course of our ordinary business. And if you refer back to 2013 and you look at our prospectus, we said that we would be an acquirer of the Steadfast Network, and we continue to do that acquisition growth. Still, to do that, we still need cash and Stephen is very clear, [ debt facility that's unutilized ] just under the $100 million mark, $97 million, of available free cash flow at this particular time. As you know, this business converts to cash 100%, and we are able to use that free cash flow to do some acquisitions. Just on Page 5, just a bit of a review of our business model and I think the strategic initiatives. We've been able to convert all our major strategic partners into the new model of professional services fees, backed up by the services that we do into the network, which would save us a lot of time, effort and in our technology for our strategic service partners. It's interesting because the -- we stopped being a strategic partner of a very small insurer who made a statement to me that said, "We don't see the value too much of being associated with Steadfast." So just to prove that we are -- we're not -- we are not taking professional service fees for nothing. They offered to pay this professional services fee, but I canceled our strategic partnership with them because I said, "If we're not adding value to you, we don't want any value. We want to not take anything away from you." So if that -- I wouldn't name that insurer. But it was a small insurer. And they've right to their opinion. But it's not our view and all the other of our strategic partners absolutely value what we did for the network. The interesting second bullet point there is trapped capital. And what we've done in recent time is we've looked at the network in terms of what people have, by way of asset value, still sitting contained in their businesses that we don't own and said to them, "In just recent times, would you like us to review the trapped capital contained in your business?" We had 154 in our first iteration of this on a call the other day, where we explained what we would do. These are all people that -- who don't have equity in the network. We've still got another chance to do it. And I'm pleased to say that 74 of those people made contact with us to investigate the position of how they may release travel -- trapped capital out of their businesses. So our M&A team is going to have a pretty busy 12 months over the next 12 months. Because when I finish the other roughly 160, and we use the same percentages, we could end up with a fairly substantial amount of our network saying, "How much trapped capital do I have in the business?" So that's just an interesting position we've been in. We've never done that before in the 8 years we've run. And so really, what we did is we rewound the system that we used in 2013. And 2 of our most senior people will work at the frontline and filter this through, and the M&A team, [ sitting in ways, looking to do all of it ]. So that's interesting. The other 2 bullet points relate to our joint venture in London with the Howden Group and our joint venture in Australia with the Howden Group. David Howden and I go back some 28 years in terms of doing business together. We understand our business model. We understand how both of us think. And the footprint we have over Asia Pacific is very appealing to the -- Lloyd's market. And so we put roughly through the group $250 million into Lloyd's market. The Howden Group put USD 4.6 billion into it. So that's the reason why it's not too bad to align ourselves with somebody with that sort of buying power, particularly with somebody that you understand and they understand you. So we'll do the same in Australia with some of the niche product lines that Howden's have developed, particularly some of the stuff that came out of the people from JLT, who joined the Howden Group. And so you might ask what sort of niche product lines will we do in joint venture? Well, we'll certainly look at employee benefits. We'll look at risk mitigation in the workers' compensation area, and we'll look at parts of our business, which is the risk services and also the management of business interruption and also the management of our view on making sure that the insured values of the businesses are done by third party. So if you look at their model and our model, our model in some of those areas is light and their model is completely light in Australia in those areas. So bringing their capacity to do stuff and our capacity together makes a lot of sense. Okay. And then the last bullet point under the strategic point is our acquisition of the Goal Seal business. This is a business that we've used as an ancillary supplier to the group, really going back 25 years. And it was a process to buy them, to get them in. They will work exclusively for the Steadfast Network now. They'll be our client advocate. In other words, we will put them out -- we will put them out there as a place to go to if you deal with a Steadfast broker or underwriting agency and you don't think you've received the service or the product line that you wanted to do. So their operational expertise in compliance, customer experience, HR and generally, knowledge of the legislative requirements of the broker and/or an underwriting agency is first-class and well-respected in the industry. So we're treating the customer as the prime objective of why we operate and go forward, okay? So we get asked a lot, and then you see the first half '21 COVID impact. It did provide a lot of opportunities for us to look at things. Firstly, taking people off-site but running efficiently. And secondly, it allowed our technology division to actually accelerate some of the robotic processes that we had in place. And in fact, we're running now pre COVID-19. So it was an ideal opportunity, and necessity is the mother of invention, we felt that this particular time is great to do it. So COVID accelerated our ability to take people out of the business and to run in the business and also the ability for the technical side to start automating more of the processes where people involved. I don't think that the automation of process necessarily means a reduction in staff, but it means a great ability to do more volume without including more expenses. And we continually are working at cost across the business. And candidly, we were able to see a whole series of costs, which had stopped and relinquished. And then what happened was, again, necessity is the mother of invention, the businesses still ran, the functionality still occurred, the sales are still made. The consumers were kept happy without a whole lot of cost that were -- what seemed to be essential but in fact proved, through COVID-19, to actually be ancillary rather than essential. So I think there'll be a bit of clawback and Stephen certainly put that into his latter part of the FY '21 financial year numbers from -- as a precautionary point of view. But we're never going to go back to what it was before. The interesting part in COVID-19, there was no impact on cash collection, contrary to all the doomsday people who said it was going to be a disaster. It was never a disaster, it never became an issue. And insurance broking continues to benefit from the premium rises and people are still paying them and the volumes are consistent with what we had last year. The underwriting agencies, our growth in there has been purely organic over the last 6 months. We did no acquisitions in those, but the organic growth is predicated on 2 factors. Firstly, there are price rises going through the whole international insurance policy cycle. And secondly, we're getting more volume because of the expertise contained in those areas. And the last bullet point under COVID-19 is contrary to what a lot of people thought that people would default on their premium funding and that people would seek out premium funding because they're invested straight. Our arrears are less than our historical arrears have been. Now it seems ludicrous to say that. But the reality is that we are not in a default situation that's any different. In fact, it's better than the prior period for the prior year. Just on the industry, we are fully supportive and -- of the NIBA discussion paper and the Insurance Brokers Code of Practice. We stand side-by-side with NIBA and all of our networks are members of NIBA. And we're supportive of the disclosure regime and we're supportive of our obligations. And indeed, if you go back to the strategic initiatives, it's the main thrust of Gold Seal to make sure that we support and that the consumer gets what we say they're going to get when they do business with us. And the second point under the industry update. The implications of the court case on the BI, it's still running. It's not clear -- it's not unequivocal. And the only thing I can say on that is that the number of clients who have made claims is miniscule as compared to the volume of business that we've got. And I think a lot of people are looking at that in terms of what is the real effect and what was the real loss. So just on the group, I'll refer to Page 6 now. We continued to get moderate price increases from our strategic partners. The GWP is up 13.9%. You can see the bar chart below, it exponentially says much more clearly and unequivocally what it stands than me saying it to you. But price increases in business pack and professional risk and home and contents and motor are running through. And the commercial lines ratio is 88% to 12%. Remember, anybody who's been with us a long time, when was the first time we did the review of our GWP, which was 30th of June '99. That was 96% commercial and 4% retail. So remember, during the period, where people said that nobody would get -- buy a house and car from brokers, they did and they have and continue to do it. So just over to the right there, GWP up from $3.9 billion to $4.5 billion for the 6-month period. Organic growth, 7.7%. Interestingly, we put in there the AR networks, of which we control well over $1 billion in AR network sales, it was up 5.7% and 0.5% on new brokers. So total growth is at 13.9%. So operational highlights. That's 454. Have a look at Page 27 in the slide pack. We've got 382 brokers in the Australian network. 53, thanks to Allan Reynolds and the crew. Allan's our EGM for New Zealand -- in New Zealand. And 19, again, Allan takes the [ credit for ] that although we've been up there for years. So a little bit more but somebody else might be doing a better job. And there's 19 brokers in the Singapore network. And just to let you know, we're active -- our investment strategy, 7 new equity holdings, including bolt-ons and 7 changes in equity holdings. Steadfast now has 59 brokers. And it's interesting to see the broker number changes. And you'll see in the chart there how it's varied from the 264 that we got in the building -- in the beginning. And remember, we have merged 37 brokers, okay? Okay. And 6 brokers have been sold within the network. So it's still a testament to the success of the network and the way it runs. The client training platform continues on its merry way. And it's up 21.3%. If you think about volumes, it's probably got 15% or 16% excluding the uplift we're getting in volume. But in reality, it's going to -- it's probably going to level at about $134 million for this financial year, which is the sensational thing from our own point of view and heading towards the numbers we expected to get. Steadfast equity brokers, assuming 100% ownership and network underlying EBIT of $106.7 million, up 22.9%. So if you look at Page 7, the underwriting agencies had a stellar performance from that point of view. Organic GWP, up 8.9%, mainly driven by almost a parallel on price and volume. So for property lines, continue to mean a very strong and robust and in fact, we're solving a lot of problems for a lot of people, both within Australia and with our access to Lloyd's market. And just the underlying EBITA is $56.8 million up 15.6%. Again, the bar chart highlights where we are from that point of view. And then over to the right, if you have a look at the blue table, it shows you the first half $733 million versus $673 million last year and 8.9% organic growth, 25 agencies. Property lines are strong. The impact of robotics across 6 of our agencies is starting to really show a pathway forward. And also in the second iteration will show a considerable amount more effectiveness in doing the mundane work of underwriting. Not doing the underwriting per se, we still think it's a personal business, but certainly getting the mundane information into a slot box that we can actually work on. The robots do it much more efficiently and much more quickly than what we could do. So excellent performance. Long-term strategy, closely aligning our capacity providers with technology and our strong service that exists there. Again, we have to make money for our cash capital providers, replacing the $1.5 billion [ U.S. market ]. We have to make sure that we make money for them because we want them to be sustainable. We want them to be -- provide the service further and we want them to continue to underwrite our market segments that we want. So higher pricing. And from the strategic partners who have given us market share gains and support. Pressure on remuneration. Yes, there's been pressure on remuneration, really, for the last 3 years coming out of London. The impact for us has been negligible because we've maintained and exceeded our capital allocations for our binders, and it's been negligible in terms of we were never what we would call the fat cat sitting from the top end of the trough. We always pitched our business to -- at a usable figure that a consumer -- that the capital providers could still make money out of what we're doing. The super binder has actually proved a salvation for us. There's been a lot of movement on the super binder. If you follow the Lloyd's market, there's lots and lots of sales of syndicates. Syndicates have been coming and going. The business plans are being rejected. So we've weathered all those turns with great skill from people that work within the networks. The capacity constraints in certain lines will exist for everybody, mostly our staff. And just finally, none of our agencies are exclusive to Steadfast. We operate for the entire market, and that's been the success, I think, in many ways, of not restricting them to me. Yes. Page 8. Our insurTech Client Trading Platform forms the basis of it. It still remains focused. We continue to add more products to it and we continue to develop all our raters and to bring in auto raters product lines such as liability and professional indemnity and [ latter ] as we're doing at the moment. Motor suite, which is a huge section of our business, and we have 4 people working on that. We're live with 2 of those at the moment, and we'll likely live another 2 within the next 3 to 4 months. New Zealand starts -- continue its rollout. It's been very well received, the Client Trading Platform in New Zealand. It's almost a necessity for the smaller broker over there. They're dropping it with great gusto. So the bullet point there that says 10,425 active users, that means people in broking houses around Australia and New Zealand, there's 10,425 connected to that. Of that, interestingly, 3,619 of those 10,000, call it, access it through our INSIGHT broking system, which is fully integrated. However, okay, this is amazing, the 5,000 -- just under 5,300 access it via Winbeat, which is not connected or automated through the system. That operates in a stand-alone environment. And then other systems, we were on 1,520 users. So definitely, the Client Trading Platform produces fantastic strong outcomes for the customer and aligns ourselves clearly with the commission of Hayne's point of view in what should be -- how consumers should be served with having a genuine contestable platform, which will engender pricing competition and pricing competition coverage and marketing each time a policy is ordered, amended or renewed, [ the visibility ] with a push of a finger for that to go out as in biz pack to 9 competing insurers. And also the interest of the consumer will be protected by, it's a flat rate of commission, everybody pays the same commission. There were no [ higher go-lives ]. There were no -- you pay -- you get more if you pay more with us. If you do $1 or you do $100 million with us through that, you're paid the same commission. So in INSIGHT, we now have -- at the half year, it was 159. I think we're about heading towards 163 that are on the broking system. And over 3,500 licenses as of today. So over 3,000 [ licensed users ]. Additionally, we've got 33 brokers we're working on converting at the moment, and just under 100 who haven't signed, but that are wanting to go and be part of what we do. So just on -- there's a graph -- the bar chart on the right shows you the growth of the Client Trading Platform. And you can see it's jumping in growth areas. So Page 9, the interim dividend. Clearly up 22.2%. That's our job. We see -- if we're managing close to $3.6 billion worth of capital in the market, we've got to do a return on that, and that's part of our job to service the consumer and make sure we do that. And the DRP is at 2%. It was well received last year, provided with just under $20 million worth of capital. [ Buy back ] dividend reinvestments that people liked it last year. And then there's specific dates. Effective on the 1st of March, the record date is 2nd and the DRP 3rd and payment, 25th of March. And then to the right there -- to the right the -- and again, the chart will indicate our point of view and supporting my prognosis that we want to get -- we want to pay back more dividend. Okay. So just on Page 10, let's gets to the guidance. 8 people have said to us, your guidance is conservative. And we'd probably say that we always want to err on the side of caution, and we want to give you an expectation of what you can bank and go forward on that. We just came out and said that we're definitely pretty sure that we're going to get to -- towards the top end of guidance. So there it is. Underlying EBITA, the range is $245 million to $255 million. We're saying that it's definitely going to land at the top end, and underlying NPAT as well will end up towards the top end of $127 million, and the diluted EPS is in the range of 10% to 15%. So I think -- I hope that gives you a little bit of a summary. And now I'll hand you over to my CFO, Stephen Humphrys, to dig up from Page 12. Thank you, Stephen.

Thank you. So we'd say -- we've got to start with the reconciliation of the statutory profit back to the underlying profit. And it's fair to say, we're [ expecting ] change in normal translation after having those unusual items last year. In this half, we continue to remove any of the uplift in the value of Johns Lyng investment. So that took $2.8 million off the profit down to where we're at. And we also took out any profit that results from associate when it becomes a subsidiary, where we have to uplift that original interest. So effectively, we've dialed down the statutory profit from $73.4 million down to $60.4 million, which is a 19% uplift against the prior half. So going to the next slide, Slide 13. If you look at the underlying results, we've laid down another further significant uplift in earnings over 1H '20, with double-digit increases on every bottom line metric that you've got there. The revenue was up, thanks to the hard insurance market, that Rob's detailed there, and the acquisitions, of course, which, combined with various cost containment measures, have led to those very solid uplifts. So the revenue there, up 6.6%, EBITA up 19.3%, NPAT up 19.3%, the diluted NPAT up 17.1%, and we've also shown the NPATA, the cash earnings type figure, 16.5% and then EPS for that, 14.4%. We've experienced really very little downside effects from COVID-19, with volumes pretty much holding firm across the group, in particular for the broking side of things. Much of the revenue gains we got this half have really flown through -- flow through the bottom line results. Obviously, significant reductions in the travel, the entertainment, the marketing sponsorships as we traded under that virtual world dynamics of the Teams and the Zoom meetings. We recorded only a very minor increase in our expected credit loss provisions in just a couple of our businesses, just to make sure we are completely protected against any unforeseen credit losses in this COVID environment. Although as Robert suggested already, our cash collections in the core business and the premium funding certainly remain even superior to prior years. We also did have some acquisition growth starting to come through the results in the second quarter, having acquired just over $160 million of businesses in the first half. The average multiple for buying those businesses was around about circa 9x when you blended it together. The seasonality of earnings this year will be impacted by quite a few things, COVID, nonetheless. So subject to our final trading additions in the second half with the guidance range we provided, we're probably still at roughly around that 47/53 split as we stand today. Obviously, we'll keep everyone posted as we get through perhaps to that third quarter as to our trading conditions there. On the next slide, Slide 14. This dissects our EBIT growth into some of those key components that we typically break out for you. The organic growth, a very solid 16.1%. The technology headwinds was actually less than we had budgeted for at only 1.7% for the half. And then the acquisition growth starting to come through, as I said, in that second quarter, 4.9%. So all 3 of those areas are actually ahead of our original guidance expectations. And hence, we uplifted the guidance at the AGM. And now, of course, our updated expectations, we certainly expected there to be at the top end of that AGM guidance. The amount we spend on IT overall was actually less than what we anticipated. So even on the balance sheet, the amount that hit the balance sheet is actually less than in the past, and it's actually getting quite close to the amount we actually have amortized. So that is getting pretty close to being neutralized at this point in time. I think overall, it's fair to say we've -- our business has actually been able to more than counter out the impacts of any struggling areas in the economy via a combination of those hardening insurance premiums and the containment of that what we call that discretionary type spend. So moving to the next slide, Slide 15, on the broking. Again, this is -- if we own the business at 100%, which we don't. So on average, we do own, of course, the network 100%, but the broking, our equity interest is weighted average is about 64%. So roughly about 3/4 of the results on this page flow through to our bottom line. So for the year, the organic growth in revenue was 4%, which given the GWP comments we had before, that's just pretty close to that 70% leverage that we have on the commission, because 30% of our revenues is from fees, which wouldn't be particularly going up in this market. But we get that 70% leverage through to the revenue. And those revenue increases really did stay dialed through the bottom line. In fact, our costs for this half organically, actually were about just short of $3 million less than the prior half. So we do have some strong healthy margin uplift in this area as well as having the acquisitions coming through. So 16.2% organic growth on the bottom line and added to that the 6.7% coming through from the acquisitions that were made. Turning to the next slide on the agencies. Agencies, we own weighted average about 93% of these earnings that we show on this page. So for the third year in a row, we really have continued to trade ahead of the expectations throughout the year with solid performances across most of our businesses in this area. So a hardened market continues to provide great opportunities to quote, which has led to further market share gains, subject only, and only, as Rob said, in very minor instances, to some capacity constraints. There were some price and volume movements across the different agencies translating into the top line organic revenue growth we show there at 8.8%. And the vast majority of that growth was secured with minimal cost increases, which meant that the bottom line has actually grown by 15.6%. If you look at our cash flow going to the next slide, we have always converted our profit into cash. This half is no different. So if you look at our cash earnings figure of an NPATA $74.6 million, we've actually collected what I would say, an adjusted figure of $86.0 million if you're really trying to compare like-for-like, not surprising when we always flex that typically strong May and June sales coming into July over September. Importantly, the debtor days are actually running at better than historic levels. And our premium funding collections have also continued on without concern on the arrears, which we think is a great litmus test for the SME business' cash flow. So they actually are better than pre-COVID-19 levels. Our $51 million free cash flow after dividends has obviously been invested back into the businesses with, as we said, around about $162 million of acquisitions that we've made during the half. Just concluding on to our balance sheet on Slide 18. No particular material changes since 30 June here other than the fact that we bought some businesses, predominantly funded by debt, apart from the DRP that we had at the -- in September. Our debt facilities have all been reset now in this last year. So that's there now in longer-dated debt. Our gearing ratio is coming in at a touch over 26%. And with facilities at the moment at $97 million and most of that cash you see on the balance sheet right now is secured. [ A portion of that ], you like, the [ mothership to pay ] the majority of the dividend. So most of this $97 million is available for acquisitions or other core activities we do as we go forward. I'm going to hand back to Rob.

All right. Thanks, Stephen, and thanks very much. Clear and articulate. I'm happy to take questions from the moderator. So if you want to go back to that sector, and we'll see if you got any questions.

[Operator Instructions] Your first question comes from Virad Mathur of Citi.

Just a couple of questions, please for me, if I could. First of all, you seem to have had about 6.5-odd percent of inorganic growth in your broker network. I'm just wondering if you could give us a bit of a view of what this pipeline is looking like into the second half of this year as well as perhaps into next year?

Yes. So that very much relates to having the new brokers join the network. And so we have applications all the time coming through. So it depends on the size and the content that comes through. But you want to talk about recent times?

Yes. I mean, we continue to get people wanting to join the network, and we continually look to what it should be. What would we expect for the balance of the year? I can't see it waning. I think it will maintain that status. And Virad, talk to me in July and I'll tell you what I think next year is going to look like. At the moment, you would see next year's accretion in organic growth will continue at the rate it's doing, if not accelerate slightly.

Yes. All right. And you mentioned that you've paid a weighted average of about 9x. I think that seems to have crept up from prior years, but I think you used to be paying 7.5x to 8x. And maybe if you could please give us some color as to whether the hardening rate cycle is having an impact on the pricing for those businesses and whether you're still comfortable at that pricing level for the acquisitions?

We take probably a 3-year view over the businesses about what their viability is and what they're going to do. And I consider us to be pretty more expert about evaluating a business and what the risk exposure is to a business like that. So if you've got a floor business and you're going to own a small business that you can't see, that you can improve much, but you like the idea of the business operating in this sector [ of sales ] and you like the fact that it's a bit folksy and a little bit homely and that looks after stuff, then the chances of improving that business are not as great as they may be on a big business. So you may pay a smaller multiple of EBITA for that. But in reality, you can't say that the -- I mean, we equaled that at about 6.9% to just 7.5%, that range in 2013. So when we did the pitch, or Allan Reynolds did the pitch originally with great success, we leveled at about 7.5% without a publicly floated company, without a track record, without a return on equity and without a flow of dividends to go to them. So if you fast forward that to circa 2021, okay, it's been -- it's very -- it would be remiss to think that you can still hold people back to a multiple that was achieved 8 years ago, okay? So we certainly don't have a view that the multiple is getting excessive. And candidly, we think that the multiple debt, they're going to run between 9x and 10x [ throughout the moment ].

Yes, I think it's fair to say, too, that it's been obviously a hard market for a few years now. But we do believe that's got still a way to go. So in terms of our confidence and ability to keep that revenue today to continue to increase, we do see that there is momentum to carry through as well.

And you may say, well, if you're back -- if you're going at 9 of 10 in a hard market, what's going to happen in a soft market? Which I'd just say, have a look through our accounts over the last 8 years, and that will answer that question for you much quite clear and much more precise than what I could say.

Fair enough. And just perhaps moving on to cost. It does look like you had quite a strong benefit from very low cost increases in this result. And Robert, you did mention that you don't think you'll go back to a pre-COVID level of the cost base even going forward. Maybe if you could just give us a bit more detail on how you expect that to evolve going forward as things get back to normal?

Yes. Look, it's -- I'm unequivocal that won't get back to the levels it was before, okay? I can certainly -- taking it from the top down, our executives will now be able to do more work in cyberspace via virtual meetings than what they would have had to do by getting on planes and going through there. And I can assure you most people, before COVID-19 hit, were sick to death of travel and sick to death of going on a plane. So I think that's -- when you run a business, which has to go to Asia, has to go to New Zealand and to London and all around Australia, and you've got to fly probably 30 or 40 people and the only way to do stuff was seen to be doing by getting on a plane, getting there in face, that won't go back to where it was before. So there's an immediate impact of the lack of cost of transporting people around. So that won't get back to what it was from there. I'll just point to the fact that the -- Stephen, being as conservative as he is and his ability to look over the horizon all the time, has baked into our second half figures an increase in those costs, in line with what we believe they will be.

Yes. I think we've -- given that COVID effectively -- yes, the impact on some of that spending really took place from Q4 in 2020, we can expect a saving on a saving in Q4 '21. So we've got to assume that there's going to be perhaps the same level of spend or perhaps that slight increase. People will start doing a bit more entertainment, stuff like that. And some conferences will start to come back and conventions will start to come back. Not for us, unfortunately, this year. But it might be for the next year, we'll look at what we do there. But as Rob said, no way near back to the levels we've had before.

Because the benchmark of what you have to do in terms of travel to do business has been shattered completely, okay? Completely broken and thrown out. So it's a realignment of what perception is about face-to-face, and that's a huge saving.

Okay. Fair enough. And just a final one for me. You did sound fairly confident on the hardening rate cycle. I was wondering if you could tell us if you have seen any acceleration in that pricing momentum through the half or the post balance date?

Look, I think we should stop talking about the hard market. We should start talking about the market. It is the market, okay? Yes, so the market will change. It will vary. It will go up. It will go down. But I have to tell you, we -- just have a look at the Australian insurance statistics about the loss ratio, okay? 98% on professional indemnity, 107% on public liability, 115% on foreign ISR, okay? Private motor, 85%. So you'd say, gee, private motors dropped at 85%, okay? And then you'd say -- I'm sorry, your commercial motor is at 85%. You have to look at private motor and you say, well, private motor coming down again because it's now at 83%. And then you have to step back and say, well, that means that claims are down and keeps [ falling ]. People haven't been driving their cars. We are yet to see the rise from the -- the phoenix rise of people transferring around and driving cars and smashing them into one another. So whilst that looks great on paper, the commercial motor is at 85%. By the way, you can't make money at 85% loss ratio in commercial motor. You have to run commercial motor at 62.5%. If you want that verified, ask IAG what their benchmark is for private motor and personal motor. And then point out to them that they're probably running 20 points away from their benchmark at this particular time. So it's going to continue to be hard -- to get harder and harder along the line. So as I said, let's talk about the market. The market's priced at the moment and that pricing that they've got at the moment is not achieving a -- have a look at QBE, have a look at IAG, have a look at Suncorp and then have a look at -- have a look at their loss ratios and say, you know what, you're saying it's a hard market. You're saying that the wins are going to win. Well, it's going to win perhaps when they start making money out of their fundamental job, which is to use capital to make money. And so let's not talk about the hard market. Let's talk about the market as it stands today, which means the technical pricing on most of their product range is not paying what it wants. Now if you also want to then say to yourself, okay, a client -- a SCTP, the [ green slip] that used to be the money spinner. And every insurance company that wrote it wanted to write as much as they can. It's running at 94%. It used to run in the mid-50s to mid-60s, and they used that capital to -- with [ lodges ] sometimes to offset other losses. So the profit out of SCTP is not there anymore. The profit on all the standing products are not there. So this current market says, if you look back as an analyst says, you know what, you're not pricing this market to get a return on capital that's suitable to your shareholders. So the market at the moment needs to continue its current path -- it needs to increase perhaps in some sectors, the current market -- it's current pricing strategy.

Let alone the damage from business interruption.

Yes. And Stephen, seeing that account, has to point out that we haven't seen the ramifications of COVID-19 at this particular time in regard to business interruption. You've seen the reserves, you've seen the raising of capital. We haven't seen the actual finite analysis of what this will do and how it will go forward. Let alone the private lawyers with their wish to make sure the poor consumers are served well by their class action.

Your next question comes from Tim Lawson of Macquarie.

Just a few questions from me, mostly around acquisitions. Just the $52 million you invested since the AGM. Can you just talk about what particular investments they are? So if you're seeing equity partners, any deferred consideration or are they new investments?

It's all in the broking area, Tim. And there is a little bit of deferred consideration. So some of the cash is to be spent later. In this market, we have employed some earn-out arrangements to keep, obviously, everybody motivated to continue to drive the business. We think that's the right outcome for us. So there's some deferred consideration there that we've got on the balance sheet there. You'll see we split that between current and non-current, so you can see the cash outflow.

Okay. You've talked about the sort of multiple, but are they all going to start earning immediately? Or are there some that need to be sort of integrated?

No, they're all stand-alone businesses that are able to be straight on. There's no greenfield or anything like that. It's all mature businesses running away.

Yes. And with the people running them having equity.

Yes.

Yes. Okay. You talked about the release of trapped capital sort of 2013 revisited. Is that likely to be funded through cash or shares to get that done?

Well, at the moment, I'm taking a helicopter view. If the people that are talking to us all came to us through the front door, Stephen would run out of his $97 million pretty quick.

So let's get the gauge interest.

Let's gauge the interest, let's quantify that and let's bring the [ cash ] -- yes, of what it looks like.

Yes. Just remember, when -- at the time of the IPO, there was obviously a share issue to the brokers. I'm just trying to understand if that's the intention now or you think you'll pay them cash?