Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Good morning, everyone. And on behalf of all present, I'd like to begin by acknowledging the Gadigal people of the Eora nation, the traditional custodians of this land, and pay my respects to all elders past, present and emerging. Now today, I'm joined on stage by our CFO, Jeremy Robson. Jeremy's appointment as CFO was confirmed in December and followed a selection process that included a strong field of both internal and external candidates. I congratulate him on his appointment, and I look forward to continuing to work with him in this important role. We're also joined on -- in the front row here by members of the SLT. Now as you know, David Carter left Suncorp last month. I thank David for his service for Suncorp and wish him well for the future. I'm delighted that Lee Hatton, most recently the CEO of UBank, will be joining us next week, and I'm sure there'll be plenty of opportunities for you to catch up with Lee over the course of 2020 and beyond. While we await Lee's arrival, Bruce Rush, who heads our deposits and transactions team, has been acting in the Banking and Wealth CEO role, and Bruce joins us for today's presentation. Now the agenda for today follows our usual format. And of course, we're keen to take your questions at the end of the presentation. However, before we move to the numbers, I think it's important we just take a few moments to reflect on the broader implications of an extraordinary summer in Australia. Now it's understandable in the context of results presentation that we'll narrow our focus to a discussion around claims costs, reinsurance and profit. However, such a narrow discussion seems out of place against a backdrop of loss of life and property, the widespread destruction of wildlife and a drought that seemingly never ends. So I'd like to take a brief moment just to widen the conversation. Just as Suncorp exists to be there in the moments that matter, the fundamental obligation of any government has to be the protection of its citizens at home and ensuring our communities are both safe and resilient. Against a scorecard of lives lost, properties destroyed and saved, and communities that have been torn apart, it continues to be abundantly clear that more needs to be done. Now for some time, our company has been arguing for a national response to improve the robustness of our private infrastructure and incentives to make our communities more resilient in the face of a changing climate. We've been arguing it's wiser to mitigate risk than to pay out substantial and increasing cost of repair and rebuild. We know that 97% of disaster funding is spent on repairs and only 3% is spent on prevention. And these figures don't take into account the community devastation and the incalculable impact on the psychological wellbeing of those involved. So let's not allow the passage of time to distract us from acting on an issue that has for too long been placed in the too-hard basket. We believe it's now time for a well-funded, multiyear resilience-building campaign and program. Now at Suncorp, our focus has been on supporting our customers through what will be a protracted process of rebuild and repair. In times like these, quality franchises differentiate themselves and long-term value can be won or lost. We saw this in Queensland following the 2011 floods, where our coverage and the discretionary efforts of our team created a point of difference. The enormity of the events, as I've outlined on this slide, have required a similar commitment from our team, and my thanks go to them. Now it's easy to describe financial services products as commodities, and they may well be perceived that way at the point of purchase. But it can be far from that at claims time or when a customer seeks a credit extension to maintain their livestock. I'm confident that the caliber of our team and the quality of the products that we offer will again come to the fore, enhancing the long-term value of our franchise. And finally, beyond lives saved, the financial outcomes that we report today would indeed be worse had it not been for the heroic efforts of our volunteer firefighters and the emergency services personnel. We admire and thank them for their extraordinary efforts and sacrifice. Now to the numbers. And on this slide, I've shown the high-level P&L for the group. We've reported net profit after tax of $642 million, cash earnings of $365 million and an interim ordinary dividend of $0.26 per share, which is fully franked. Now on the left-hand side of the slide, I've called out the key factors that have contributed to the result and the movements versus the prior period. Most of these should be familiar to you, and Jeremy will cover them off in more detail later in the presentation. There are, however, some key highlights I think I need to call out upfront. First, after years of market share losses, our Australian Home and Motor portfolios have returned to growth. Digital, which is our future, is starting to deliver. New Zealand posted yet another impressive result. The Bank result includes net interest margin improvement, growth in at-call deposits and a negligible credit charge. We completed the sale of S.M.A.R.T and ACM and posted a gain on sale of just under $300 million. And again, we've ended the half with a very strong capital position. Now this slide is a reminder of the key priorities that I outlined at our full year result in August. Our focus then and on -- and now is on delivering improved performance in each of our 3 businesses, leveraging our investments in digital and data, embracing regulatory change and driving operational excellence. To achieve these priorities, we needed to make some adjustments to the structure of our business. These changes were designed to improve accountability to reduce duplication and create better alignment across the group. We also needed to lift engagement and reenergize the team. Inevitably, there's more that needs to be done, but I'm comfortable with the progress that's been made to date, and I remain confident that delivering against these priorities will lead to better outcomes for all our stakeholders, in particular our shareholders. Over the next couple of slides, I'll provide an update on our progress against each of these priority areas. So starting with insurance, and the areas of focus are outlined on the left of the slide. Reinvigorating our multi-brand strategy is critical to our long-term success. Suncorp has at its disposal a suite of brands that are well segmented by market, geography and customer need. Efficiently deploying these brands allows us to access a larger share of the insurance market. The virtual brand teams that we put in place last year have assisted us in clarifying the propositions underpinning our main brands and have significantly improved our tactical execution. This has contributed to the meaningful uptick in volumes you can see in the numbers that we're reporting today. Underwriting discipline is at the core of any insurance business. That has been evident in the leadership position we have taken in commercial insurance pricing in Australia, while in New Zealand, the team has resisted the temptation to cede margin as competition has intensified. The most material growth opportunity for our insurance business over the coming decade will be to embed digital and data into product design and, in doing so, offer our customers more modern, personalized products to meet their evolving needs. Bingle Go and the Car Next Door are examples of this new approach. But I readily admit we've got plenty more to do to capitalize on this opportunity. Turning to claims, and this is where our purpose really comes to life. You can see it in the bushfire response, where our people are leaning in, supporting customers and making a difference. Yet it still remains an area of material opportunity for us. Achieving best-in-class claims, which is our objective, requires continuing investments in automation and process redesign, alongside digital, data and AI, and it requires us to leverage our scale more efficiently. And finally, we continue to seek ways of reducing earnings volatility, especially through the use of reinsurance. I expect our purchase of additional cover this year will serve us well. And moving through the renewal, we'll continue to explore alternative means of protecting our balance sheet and reducing P&L volatility. Now moving to the Bank. And the challenges facing the sector are well-known and have been widely discussed. Our focus remains on 4 key priorities that play to our strength and help further differentiate us from our competitors. Leveraging our strong brand, distribution reach and the community presence we have to win Queensland is an area of focus. And to support this, we've recently introduced targeted local campaigns as well as expanded our footprint in key areas in Brisbane. Improving the Bank's performance in the broker market is a key priority. We have in place a comprehensive program of work to improve the speed, the quality and the consistency of our service to brokers. This includes a more targeted and relationship-based approach. Forging deeper relationships with a smaller universe of brokers leads to less rework and faster approvals. We're also providing more flexibility at the point of loan assessment, effectively going back to basics and allowing bankers to apply expertise and judgment in the approval process. We will automate and reduce the number of processes from lodgement to settlement, and we're using digital to improve the broker online application process. Now I know that across the broker market there is goodwill towards our brand and a continuing desire to do business with us. We know we need to do better and we will. Equally, I know it will take some time to reestablish and win back support of this important distribution channel. Now in digital, in the bank, particularly, the story is a very positive one. Over the past 6 months, our digital assets have helped us drive a transformation in our liability funding mix. And this has flowed through to margin. A digital-first mindset is now well entrenched in the day-to-day operations of the bank, and open banking, alongside Lee's imminent arrival, will serve to further speed up that progress. Now as I said in August, it is essential that all of our people and all of our programs of work are aligned to improve the performance of our core businesses. It also means that regulatory, digital and operational excellence programs need to be designed and delivered to improve customer and better business outcomes. I've already touched on areas where we've successfully leveraged our digital investments across our insurance and banking businesses. The number of digital users across the group has increased by 19% over the period. Digital sales in the Australian insurance business are up 13% on this time last year. Similarly, AAMI home insurance digital sales are up by 33%, while nearly 60% of the growth in new at-call deposit accounts was originated online. Our regulatory program of work is extensive. And while the pace of implementation is somewhat dependent on regulators or the passage of new and amended legislation, we are pushing ahead with change where it makes sense to do so. We've included more details on the program -- the regulatory program in the data pack, and it remains a key priority for our business. And while the first half operating expense outcome underscores the progress we've made in driving efficiencies through the business, we know there's more that we can do, especially as we continue to address our operating model and streamline appropriately. I'll now hand over to Jeremy, who will run through the details of the financials in more detail. And then I'll return to provide some commentary on the outlook for the remainder of the financial year.

All right. Thanks, Steve, and welcome. Good morning, everyone. Steve has already given a brief overview of the group results, so I'm now going to run through each of the business lines in a little bit more detail. I'll start by covering off the insurance businesses, including an update on natural hazards and the group underlying ITR, followed by Banking and Wealth results and then, finally, the group expenses and capital. So starting with the Australian insurance business, which delivered a profit of $123 million, broadly in line with the prior period. The key features of the results include positive units and premium growth in consumer; natural hazard costs were $104 million higher than the allowance; prior year reserve releases were somewhat subdued; and underlying ITR has decreased, as expected, in line with the impact of the key items we flagged last year. I'll now cover the key drivers in more detail over the next few slides. I've shown here the usual waterfall breaking down our GWP growth for the year. Pleasingly, we saw solid growth in the Home and Motor portfolios, supported by both rate and units, with new business growth being a key driver, along with stable retention rates. In Home, we continue to remediate our broker-introduced book, and excluding this impact, units were up 1.7% and GWP up 3.3%. Commercial GWP increased 2.5% at a headline level and 7.7% taking into account the effect of the deliberate portfolio exits. This was driven by continued strong premium increases as well as volume growth in our Commercial fleet business and our NTI joint venture. The growth in workers' compensation has been driven by a combination of strong retention and salary pool increases. Overall CTP decreased $51 million, driven primarily by market pricing dynamics in ACT, South Australia and New South Wales, and we do expect ongoing heightened competition across the portfolio during this period of scheme reform. Turning to claims. The increase in consumer reflects pressure from water damage and large fire losses in the Home book. However, we have seen a stabilization in water claims costs relative to last half following actions taken to improve our claims processes. Motor claims costs continue to benefit from BIP and the Suncorp preferred repairer network. The improvement in CTP mainly reflects the impact of scheme reform, and the improvement in Commercial reflects the impact of the portfolio exits and improved claims performance. Workers' compensation claims have increased in line with premium growth. And natural hazard costs, albeit above our allowance, was significantly lower than the prior period. However, this has been partially offset by an increase in claims handling expense and risk margins as events in the first half were under our reinsurance deductibles unlike in the prior period. I'll cover reserve releases in more detail in the next slide. And finally, the lower PV adjustment of $48 million reflects the reduced benefit from the impact of lower yields when discounting new claims. As flagged, prior year reserve releases for the half were subdued. Prior year releases in the personal injury book were 2.3% of NEP compared to 3.2% in the prior period. We saw lower CTP releases across most of the schemes in line with reforms aimed at lowering premiums and driving more certainty in claims outcomes. The Commercial long-tail strengthening was driven by a circa $20 million one-off valuation adjustment following a review of long-dated cases within the bodily injury portfolio as well as a single large liability claim. In the short-tail portfolio, the first half of 2019 benefited from favorable experience within the Commercial portfolio. Looking forward, we expect FY '20 reserve releases to be above 1.5%, provided inflation continues to remain relatively benign. Moving on to the investment portfolio. The underlying yield on insurance funds was 1.5%, down significantly on the PCP but in line with our expected range above risk-free rates. The shareholders' funds returned a positive $37 million, supported by narrowing credit spreads and positive returns on equities and infrastructure assets. Given the ongoing low yield environment and outlook, I've also outlined the overall net impact of yields and investment markets on both the investment income and claims lines in the P&L. The net income on insurance funds of $64 million, as you can see on the slide, it represents income from credits spreads and breakeven inflation, a risk-free component on the assets backing unearned premium liabilities and a small mismatch component. And we put further details on this in a new table in the investor pack. Next to New Zealand, which delivered a profit of NZD 108 million, reflecting a more normalized claims experience. As flagged at the FY '19 results, GWP growth, while still strong, is lower than the increases seen over the last 2 years. 1H '20 also includes remediation provisions of NZD 8 million, relating to the incorrect application of customer discounts. Excluding this impact, GWP growth was 6.4%, driven by premium increases across all portfolios and unit growth in the direct business. Following a relatively benign weather environment last year, net incurred claims were up 16.8%, largely reflecting unit growth and the higher natural hazard costs. The increase in operating expenses was driven by higher commissions as a function of the strong premium growth, combined with an increase in technology and regulatory compliance costs. The New Zealand Life result was driven -- was lower primarily due to some adverse claims experience. Turning to natural hazards, and we've already provided an update on the impact of natural hazards in January. In addition, the East Coast of Australia is currently being impacted by a significant weather event. Whilst it's still relatively early to quantify the gross costs of these subsequent events, we expect the net retained cost for them to be capped at $300 million. Given the reinsurance program in place for FY '20, we currently expect our natural hazard costs should remain within the allowance of $820 million. Now this includes significant capacity remaining on drop-down covers, noting we have a prepaid reinstallment on drop-downs 2 and 3; we have residual cover on the NHAP of approximately $150 million to $170 million, post the 3 events in January; and the remaining $200 million of capacity under the new ASL, which provides ground-up cover in excess of the natural hazard allowance. Now to the group underlying ITR, which, as expected, is lower than 2H '19. The higher natural hazard allowance and the additional ASL cost impacted underlying ITR by nearly 150 basis points. Lower yields have driven a further 80 basis point reduction primarily driven by the lower present value adjustment on the discounting of new claims, which I referred to earlier. We've also seen an increase in claims handling expenses as a result of the natural hazard experience in the first half and the impact of higher regulatory costs. However, this has been partially offset by lower expenses as a proportion of NEP. The margin compression you see in the last bar reflects a slight decrease in Commercial, albeit still within our targeted range, while CTP margins continue to see downward pressure as a result of scheme reform and increased competition. Pleasingly, both Australian Consumer and New Zealand margins remained broadly in line with last half. Turning now to Banking and Wealth, which delivered a profit of $171 million. Home lending contracted 1.4% over the half, principally reflecting lower system growth and elevated processing times, particularly in our broker channel. As Steve said, improving our performance in the broker channel is a key priority for us. The strong momentum in at-call deposit growth continued and had a positive impact on NIM, which was up 2 basis points for the half. Noninterest fee income was lower, reflecting the impact of a one-off historical GST adjustment as well as normal volatility in the bank's trading portfolios. Operating costs increased 5.9% reflecting higher regulatory and compliance costs as well as an increase in technology spend. We continue to prioritize the credit quality of the portfolio with virtually no impairment losses for the half. And we've reduced our through-the-cycle target range for impairment losses to 5 to 15 basis points, reflecting the changing composition and risk profile of the lending portfolio. Now to group expenses, where I've shown the cost base over the last 2 halves adjusting for the sale of the Australian Life business. As flagged in the FY '19 results, expenses increased $46 million in the second half of last year. And just a reminder on those drivers, there's an increase in regulatory project costs, higher commissions, predominantly in New Zealand, and an increase in marketing to drive the growth we've seen. Moving into 1H '20, expenses were up $14 million mainly due to higher spend on systems and growth projects as well as continued elevation in regulatory project spend as expected. The FY '20 spend on regulatory project costs is expected to be $155 million, in line with our forecast. However, we do expect these costs to decline more gradually than originally expected, reflecting the ongoing regulatory change. Incremental net BIP benefits were $16 million, while the reduction in marketing spend you see in the first half is timing related and expected to revert in the second half as we continue to drive growth. I expect the overall group cost base for FY '20 to be around $2.7 billion, excluding FSL, and that's in line with our previous guidance. But I do note costs will be skewed to the second half with an expected increase in both regulatory project and BAU costs and some other timing impacts, including marketing spend. Lastly, I confirm that the customer remediation program of work remains largely on track, noting the new provisions in New Zealand. And I confirm that we also remain on track to remove the Life stranded costs for FY '21. And finally, moving on to capital, where we continue to maintain a very strong capital position. As Steve said, the Board has declared a fully franked interim dividend of $0.26 per share, equivalent to a payout of about 90%. Now whilst this is above our target range, it reflects our confidence in the reinsurance protection we have in place for FY '20. Looking at the waterfall, the reduction in GI excess mainly reflects the impact of normal seasonality and the higher outstanding claims liabilities. And in the Bank, the reduction reflects the final 25 basis point increase to meet APRA's unquestionably strong benchmarks. The excess CET1 position has also benefited from the profit on the sale of Capital S.M.A.R.T and ACM Parts, which takes the group's excess CET1 to just over $690 million. And with that, I'll hand back to Steve. Thank you.

Okay. Well, thanks, Jeremy. And let's now turn to the outlook. And firstly, from an operational perspective, our priority is to leverage our scale and address the large volume of natural hazard claims that we talked about during the course of the presentation. And while dealing with those events, we'll not lose sight of our working claims book, and we'll continue to focus on our 4 key priorities that I've talked about today. Now on this slide, I've summarized the key financial metrics for the second half, and they're all well-articulated in the investor pack. So I'll highlight just a few that I know will be of interest. Firstly, with momentum restored across Home and Motor, we're now in a position to balance price and volume to improve margin. It's a similar story in Commercial, with further pricing required to consolidate profitability within our target range. Now I know the outlook for reinsurance rates has been a topic of keen interest off the back of the recent events. But I'll just make the following high-level points: capacity is still there, our program is well supported, and this region remains attractive to reinsurers from a diversification perspective. I've already outlined the priorities in the Bank, and I acknowledge that we've got more work to do. To make a meaningful improvement in the cost-to-income ratio, we need to return the portfolio to growth, and our strong margin performance gives us a solid base to do this. And finally, I know there's a lot of interest in our capital position and, in particular, what we will do with the proceeds from the sale of S.M.A.R.T. I accept that some would like to see that money returned to shareholders as quickly as possible. And while I completely respect that view, I feel we'll be better informed about the medium-term investment needs of the business at the conclusion of our annual planning process, which is in May. And I think it also makes sense for us to retain maximum capital flexibility as we negotiate our FY '21 reinsurance renewal. We do, however, reiterate our long-standing policy of returning to shareholders any capital that is not required by the business. That policy has seen us return around $1.8 billion of capital over the past 8 years while we've continued to maintain a very strong balance sheet. I remain committed to updating the market on this topic by the end of the financial year. So in conclusion, I'm very comfortable with the progress that we've made over the past 6 months. We recognize that we've pushed into some pretty strong headwinds, and we've got more work to do. But I believe we've demonstrated that, by aligning the whole of Suncorp around our 3 businesses, by restoring energy and enthusiasm across the group, and fundamentally, by putting customers at the core of all of our activities, we're on the pathway to improved performance and that, over time, that improved performance will be recognized in improved outcomes for the owners of our business. So thank you, and now it's an opportunity for us to turn to questions. And we'll start here in Sydney.

So let's open the floor to questions in Sydney. Kieren Chidgey, on the back?

Kieren Chidgey, UBS. Just starting on the Home and Motor growth and margin outcomes. It seems like you might have restated some of the GWP growth or bases around those 2 portfolios. So just wondering if there was still volume growth under the prior sort of disclosure basis around volume. And related to that, you're saying you're targeting at least flat full year volumes in those portfolios, and you're now in a position to balance price with volume of better than, I guess, what you were in the first half. So are you suggesting, as we go through second half, that you will pull back a bit on the volume and sort of try and push price a bit more actively than what you did in the first half?

Yes, look, I mean, let's deal with this question comprehensively. So I'll start and then I might hand to Gary to supplement the -- we haven't restated anything is the first point to make. I think one of the emerging -- or the key factors that came out of the full year result was the focus on and the question marks around our ability to get market share momentum back into the business after almost a decade of declining market share. Going into that discussion, I think we, as a team, fundamentally believed that it had more to do with the focus of our consumer book, the alignment of our brands, the effectiveness of our marketing and potentially some underinvestment in some of our brands. And so we've put virtual teams in place to facilitate a better focus on our 4 key brands. We've made some incremental investments in marketing, I'll acknowledge that, particularly into APIA. And we've created an end-to-end alignment right across the business, irrespective of organization structure, to focus on it. And what you see in the results today -- and we haven't adjusted pricing. Now the best place to see that is in the margin. I know that in the underlying ITR waterfall, there's been a small margin decline. But that's more around a little bit of movement in Commercial and CTP as opposed to in Consumer, which has been broadly flat over the period. Now in the context of how we've done that, I'll just make a couple of points. Our renewable book was significantly lower coming into this year from those market share declines over the past 12 to 18 months that we saw. And so we've had to pedal very hard to get new business in to get that aggregate unit position improvement. The macro headwinds that we've pushed into are also significant. So new car sales, for example, have been down by 7% to 8%. Refinancing of home loans, credit growth has been significantly lower. So the opportunity to aggregate your business growth across Home has been lower than it's been in years past. So I think in the context of the headwinds that we pushed into, the aggregate outcome that we've achieved has been pretty good. And we've demonstrated, I think, that we can reinstate growth in the portfolio. Now from our position, in terms of our strategy, we don't -- we're not out there to grow significantly ahead of system in terms of Home and Motor. I think now that we've got momentum back into the franchise, we can go back to that balance that we always have around maintaining -- balancing out price and volume to get the best profile across our book, and we recognize that there's some margin improvement that we need to push back into those Home and Motor portfolios. And so I think from our perspective, the focus in the second half and coming into -- and going into FY '21 will be to manage price and volume, to get aggregate improvement in margin and to land our book at around flat from a unit perspective. If we can do better than that, that's great. But we don't seek to grow ahead of system or multiples ahead of system. We recognize there's a margin story that needs to be rectified and need to be addressed as we come through the next 12 to 18 months. Gary, I might ask you just to supplement some of that.

Sure. Thanks, Steve. So Kieren, I guess one of the other things to add is we don't operate in a competitive void. So where we had our pricing set coming out of the last financial year and into this one, and particularly on Motor, as we've said in the past, we tend to see claims inflation a little bit earlier because of the model that we have and we've had with S.M.A.R.T, and we see the parts cost changes quicker, we see the labor cost changes quicker through that. We typically are ahead of the market in setting our prices for Motor in particular but also to a degree with Home. So I think some of what Steve's talking about is a little bit of the market starting to catch up with where we had to get to. That's a factor in the depressed unit outcomes that you saw in the prior financial year as well as the change that we're now seeing in execution capability with the virtual brand teams. But I just think, in timing terms, we had the prices set where they needed to be, particularly with Motor, to drive the margin expansion we needed to see, and the markets catching up to where we are. So to the extent that gives us the opportunity to balance where we set price in market relative to competitors, we'll do that and we'll take the opportunity to get the margins set where they need to be, and in particular, with Home.

I think the only like -- the other quick point to make, Kieren, in terms of the context of the numbers that are there is that we've -- as flagged 6 months ago, we've been seeking to reprice our intermediated personal lines book, and that has seen, obviously, in that market, growth fall away as we've repriced that book. So if you were to take that out of the Home performance, the unit count improvement's around 1.7% and the written premium improvement's around 3.3%. And the only other factor to make is that, in Home, across probably the last 2 months, we've embargoed out substantial parts of our book. And so we haven't been in a position to take new business or to adjust premium through that period of time given the bushfire embargoes that have been in place. So I think in aggregate, it's a very strong performance. And again, as Gary mentioned, we've got now flexibility now to start to really focus on the margin outcomes in that book.

And so, Steve, the other thing I'd add with Home is that, as I flagged, we've seen some elevation in claims that sort of flows through the margin on water and large fire as also flagged as opportunity for us to improve those outcomes, which also plays into margin as well.

Kieren, you had another?

Yes, just a second question, rolling that discussion into the group underlying ITR margin. If we're looking at fairly flattish outcomes there and I think, Jeremy, you're flagging sort of less of a reduction in some of those regulatory costs into next year than what you previously might have thought. Can you talk about this bridge back to a 12% underlying ITR? Or are you moving away from that medium-term target?

I think conceptually -- and again, the issue of our targets and guidance, I mean, we will consider all of that again alongside the capital position of the group in the context of the planning round. I think it's appropriate to do that. I still believe fundamentally, at the highest level, the highest level, that as a business, we should be targeting returns on capital above our cost of capital. And when you aggregate that up through each of the businesses, it dictates underlying ITRs of around 12%, or maybe you could do that a little bit below that over time; but also our cost-to-income ratio in the Bank of around 50%; and also group cost base of around $2.7 billion. Now whichever way you cut the business, that's the aggregation that you need to -- some might be better than others. We are -- we will see, over time, I'm confident, some relief from these regulatory costs as they come back to more BAU levels. That's probably going to be not as steep a fall in '21 as we'd hoped, but it will start to fall. And I think from there, we'll return to more BAU levels. We are maintaining high levels of system operational uptime. So we are remediating and repairing and providing maintenance on all of our systems at a higher rate. But again, on the flip side of all of that, we've got very -- we've got great opportunities now to reduce the cost base of the business even further, focusing on all of the things BAU that we need to do. So again, I think the aspiration of the business still has to be in those metrics that we've talked about. Some of that will be helped by some of the pricing initiatives we need to take. Some of it will be helped if yields start to improve. Yields have been a big drag on that portfolio. And some relief there would be appreciated as well. So again, I think this is still a medium-term objective for the group. I recognize that it's not going to be an FY '20 and probably not an FY '21 issue, but we'll have an opportunity later in the year to sort of really run through that in detail with the market and give a sense of the timing and how we're going to remediate margin over the next few years.

Matt Dunger from Bank of America. If I could just start on the capital position. You talked about the potential for further investment given this strong excess capital position you've got. How are you also considering that in the terms of the reinsurance renewal coming up? Will you look to renew reinsurance on similar terms? Or is there excess capital set aside for potentially taking more on your own book?

I'm going to be a little bit cautious about how I answer this given the high volume of reinsurers that are sitting in the -- reinsurance partners that are sitting in the room. So I don't necessarily want to flag anything particularly at this point in time other than to make the high-level observations that we have got capital. We've got this very strong balance sheet, and we can deploy capital if we need to. I think our general proposition is that, with the weather outcomes that we've seen in the past 12 months, the reinsurance covers that we bought this year, I think, will serve the business very well. We recognize the process that we need to work through with our reinsurance partners around that renewal. But certainly going into the renewal with a very strong balance sheet, I think, is a better position for us to be in. And so we can trade some of these things off over time, but I think, in aggregate, we'll be looking to make sure that we've got a reduced -- as much reduced P&L volatility as we can coming into FY '21 given what we've seen in the weather this year.

And if I can just turn to the Bank. You talked about looking to improve the growth there. What sort of volume growth are you looking for in the Bank longer term?

I think our aspiration on the bank really can be summed up by sort of the 3 metrics that we talked to. And again, we haven't necessarily restated them -- or 4 metrics. We've restated one around our impairment through-the-cycle view. But my experience in the organization over 14 years has told me that the most profitable position for our bank to run is at 1 to 1.5x system. That's always been the nice, profitable part of the market that we should aspire to. Now I recognize that we're not there today, and I'm going to be a little bit cautious about giving time lines around how quickly we can get back to that level simply because, as you know, we have sort of 70% of our disbursements being originated through the broker channel. And we've got work to do. We've got work to do to improve the processing times to create the consistency and to support the relationship we have with a smaller number of brokers. So -- and that is a relationship activity as much as anything else. So we need to embed the changes that we've made. We need to make sure that they're scalable, that our turnaround times can be maintained and -- as we start to improve volume going through the book. And we need to make sure that we win back the support of the broker community. So I know we're doing the right things, but it's hard to predict how quickly we can get back to system and above system. But again, the 1.3x system -- 1.5x system. Net interest margin within the range, we've got some headroom to -- in that target range now. Cost-to-income ratio of around 50% and that impairment charge through the cycle, 5 to 15, that's the way the bank is set up. We're out of range in a few of those metrics, but that's where we aspire to be over the longer term.

And just if I can ask a final question, given the lower returns environment, the aspiration to start growing the bank a little bit more strongly, is the payout ratio at the top end of the range a medium-term target? Or should you be -- we should be looking more towards the middle of that range?

It's -- the range is there to provide flexibility. Now if -- I mean, again, if I look at the investment profile and will ask Jeremy to sort of top this up a bit if he chooses to. But I think over time, a payout ratio of 60% to 80% makes sense because if we're getting our growth through its usual profile, which is through insurance and then Bank in that order, then we certainly can aspire to pay out 80% of our earnings. I guess the one thing that we keep a close eye on are the -- is the franking credit balance. Our franking credit balance, obviously, has moved in a little bit over time. So we're -- obviously, we'll keep a very close eye on that. But given what I can see in the investment profile of the business, given what I can see in the strength of the balance sheet, given the profile of growth that we see emerging through insurance, Commercial Insurance, CTP and then the Bank and the capital consumptive nature of each of those businesses from low to high, I think we can still continue to maintain that flexibility. Typically, we'd pay out 70% at the half year, true it up to 80% at the full year. Given how strong the balance sheet is today and our outlook for the business, we were able to pay a little bit higher than that at the first half. But I still think that payout ratio is appropriate for the business. Jeremy, did you...

Yes, I'll just add that the other thing that goes to the -- supporting the 80% as still being appropriate is we're probably in a slower credit growth environment to when we first said it, and obviously, with a 1 to 1.5x system range that is good from that perspective. And the other thing is Life. Having got rid of Life, which is probably our most capital-consumptive business, also gives us some more comfort around that range.

Okay. We might go to the phones now.

The first phone question comes from Nigel Pittaway from Citigroup.

Just first of all, coming back to this Motor and Home outlook. I mean last 6 months ago, you did say you were confident that 3% to 5% price increases on the Motor and Home book. Obviously, if we look at the AWP, and I appreciate there could be a bit of mix in that, but it's 2.6% and 1.4%. And so I mean can you comment about sort of your ability to reprice moving forward? And whether you think there's any impediments to sort of repricing for the sort of issues you've obviously had and held back prior to sort of targeting unit growth?

Yes. Again, I'll give some high-level commentary. I might ask Gary if he wants to supplement it. I think if you look at the trade-off or the typical composition of written premium in this half, a combination of unit count and average written premium is probably not reflective of a go-forward position. There's obviously a whole range of reasons why when we talk about the percentage increases that we're putting through the portfolio, that doesn't necessarily translate percent for percent into average written premium. We've had to bias a lot of our growth this year to do business, which is a reflection of the lower renewal book that was coming through from 12 months ago. There's always a mix issue, a brand issue. So some of our brands, obviously, have a higher average written premium relative to the -- some of the smaller brands. So the composition of the growth is important. And obviously, in an environment where premiums are increasing, you often see customers taking higher excesses, which reduces the aggregate written premium growth, but also, at the same time, improve your claims costs. So there's a lot of factors working through that, in terms of how you translate written premium through average written premium and unit count. In terms of going forward, I think we're confident that we can make the necessary adjustments in those portfolios. Just in the sense of inflation that we see coming through the book, which is a key metric that you look at in terms of pricing, inflation in Motor sort of running, I think, for us, around 3%, 3.5%, for the industry, we think somewhere between 4% and 5%. In Home, inflation, higher than 5%. And the key variables there are the higher volume, not so much the average repair cost of water claims, but the higher volume of frequency of water claims across the book is driving in some volatility, and fire losses is driving the inflationary numbers in Home above -- slightly above 5%. So you could see there is inflation embedded in both Home and Motor, so that has to be reflected. And again, the strong unit count performance we've had gives us a really good base to sort of move forward and start to really focus on margin improvement. Gary, did you want to add anything?

I think, Nigel, your question was around confidence as well going forward. Certainly, when we're putting out renewal notices throughout the course of this year and quoting new business prices, they are inclusive of the kind of price movements that we did talk about and guide to the last half. As Steve said, and as you acknowledged, AWP and average price increases are not necessarily a good proxy for each other. That's perhaps been, I think, decoupled even more in the last half with some of the movements. But I'm confident, given where you'd expect to see the competitors' claims inflation pressures that have all experienced the same natural hazard events as we have, that will all experience, perhaps to a greater degree because of their supply chain diminished scale relative to us, probably increased pressure than we will see that they will be in a space that they'll have to move pricing. So it gives me some confidence that we can keep putting out the renewal notices that we do and the new business quotes that we do with those sorts of ranges we've talked about on pricing.

Nigel, anything more?

Yes. You mentioned, obviously, bushfire embargo, this being a sort of headwind against unit growth? I mean how material do you think that was? Can you give us a flavor for how much you think that may have compressed your unit growth in -- towards the latter part of the first half?

I haven't necessarily done the mathematics right back through because it's a bit hard to do that, given the nature of the way the sales activity occurs. But I think we had around 140 postcodes, Gary, across the country, embargoed at particular points through December and somewhat into January. So -- and generally, in terms of in aggregate across the way insurance works, you find that given the coverage -- national coverage of this horrific event, what it does is embed in our customers and the community more generally the value of the insurance product. And we see that during the course of the events. And while they're problematic in terms of the financial costs, and they're incredibly problematic in terms of the impact on property and lives and the emotional well-being of the community, they do go to the core of why insurance is a product that's valuable and why people have seen the value in the product. And that, I think, will continue as we work our way through the claims management process. And so I think that sort of embeds it. I couldn't precisely tell you what impact it has on unit count, but it will have had an impact on unit count across the Home book, particularly.

Okay. And maybe just finally, picking up on one of your comments you made earlier on reduced P&L volatility with the reinsurance renewal. I mean obviously, this year, you were able to take out volatility, and there's been a lot of events and you've not exceeded in any way your hazards allowance. I mean how much of a priority you're going to make volatility over everything else in terms of paying up for reinsurance cover moving forward?

Again, I'm going to be very cautious, Nigel, because you're on the phone, so -- but I've got a lot of reinsurers sitting in the room here. So I think I'll just pause on that one, other than to say, reducing -- I mean our investors have told us very clearly over an extended period of time that the less volatile we can make our P&L in this environment, the better. We took that on board 12 months ago, and I think we dealt with it as comprehensively as we could. It remains a priority for us. How we deal with it? We're going to -- we've had a good long look at the options that sit there for us. There's a range of options that we can in terms of the traditional and the emerging reinsurance markets, how we might do that. But we're about to embark on our renewals. So I'll just be a little bit cautious there about being too precise about how we're going to go and approach it.

[Operator Instructions] The next question comes from Andrei Stadnik from Morgan Stanley.

I'd like to ask a couple of questions. And the first one on the insurance side. Just thinking about the water leakage claim frequency increasing, and this seems to have coincided with dry weather driving some cracks in buildings and just some greater public awareness of -- in building construction standards in Australia. What can Suncorp do to prevent some of these claims emerging and also to reduce some of the claims handling costs?

Yes. Look, I think there's a range of factors that we've identified as contributing to this issue. And I've talked about them. We've talked about them extensively in the market over time. We're now using AI to interrogate the claims lodgment processes and understand the causal factors for Home claims issues, particularly when they relate to water. As you know, we triage our incoming claims that are water-related -- nonhazard water-related and have done, I think, a really good job now in terms of making sure that we've got as efficient a process as we can to deal with those claims discretely from the larger working book. I think that's helping keep the average claims costs down. So in terms of frequency, the AI that we use and apply to it really does come back to the nature of houses today relative to those of 10 years ago, the open-plan nature of them. That's probably the eighth largest causal factor in terms of a home claim. The second or third largest causal factor for a home claim now is the prevalence of timber right across the property. So the interaction between timber flooring and water damage is -- obviously significantly increases the cost of the claim. There's the piping issues and the prevalence of failure of piping now 10 to 15 years into emergence of flexible piping, that's another causal factor. And so I think we're moving from an environment where we're focused on -- these are industry issues. So we've got to make sure that we can get our claims management process so that we can keep our average claims costs flat, and we've done that. And now we may well move into underwriting type areas. So getting a better understanding on origination of the policy and the writing of the premium, what's the nature of the house. How open plan it might be? What the flooring might look like? What the piping quality might be, et cetera, et cetera? Now we could do that either through the origination process, or we can use AI and other means to do that. And then over time, I think using technology more generally to put in the hands of the customer, the opportunity to be more diagnostic around the nature of water in their home and educating customers to a larger extent. So there's a range of things that are going through us, and again, I make the point, average claims costs flattened out, which means our processes are working, but frequency increasing, which is an absolute frequency, but also the mix in our book is now more biased in aggregate to higher cost water claims.

And look, my second question, I just wanted to ask about the Bank. The margin was very strong, up 2 basis points half-on-half, particularly the [ straight ] rate cuts that we've seen. I just want to kind of -- to check 2 parts from this. Firstly, how much margin benefit did you see in this 1H '20 from pulling back on mortgage growth and paying low incentives to mortgage brokers? And then kind of secondly, thinking about the next 12 months and lower replicating portfolio returns that are being locked in across many of your peers. Now what kind of headwinds should we be expecting just from your replicating portfolio coming down on the back of the RBA rate cut?

I'm going to ask Bruce to come up and to address some of those questions other than to make the -- I mean I do recognize that -- well, I think the margin improvement is a very big highlight in the result in the context of what you'll be seeing, I think, for most of the banks that are reporting. I don't sort of resolve from the fact that we're not growing the -- the asset side of the balance sheet has been helpful to that. But -- and also, I don't resolve from the fact that in a low-rate environment, there's been an opportunity for people to refinance or move out of term deposits into lower-cost transaction accounts, given the differential isn't anywhere near as great as it might be in a higher interest rate environment. And there are 2 things that have supported that. But we have done a great job on the liability side, and Bruce has been fundamental to that, to improve the quality of our liability mix, and particularly, the emergence of digital. And so Bruce, I might get you to sort of talk through that, and what you see as the headwinds going into FY -- second half and FY '21.

Thanks, Steve. Look, I think from a margin perspective, we've seen a change in the mix among the liability side. Probably the key point is, if you unpack the customer deposit portfolio, about just under 2/3 of that portfolio is now at-call, and that's up from just over half in the prior comparable period. And of course, our at-call portfolio is at a lower marginal cost. So the growth that we've seen come through has certainly given us some benefit. That growth has been driven by a very targeted digital campaign, supported as well by the work that Lisa's team have done on the marketing side. So I think the combination of really strong digital capability, good marketing has driven an uplift in our at-call deposits. And the final point, just on the liability side, of course, our treasury team has executed very well on our wholesale funding plans, which has given us an uplift. If the lending growth had been a bit quicker, our -- that uplift in margin probably would have been more nuanced.

The next question comes from Ashley Dalziell from Goldman Sachs.