Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Suncorp Group Update conference call. [Operator Instructions] I must advise you that this conference today is being recorded, Wednesday, 1st of July. I would now like to hand the conference over to Mr. Steve Johnston, Suncorp Group CEO. Please go ahead, sir.

Good morning, everyone, and happy new financial year to everyone on the call. I'd like to begin today, obviously, by acknowledging the traditional owners of the land on which our business operates. We pay our respect to elders past, present and emerging. I'm joined today by our group's CFO, Jeremy Robson; and Jeremy and I'll work through the presentation and then both be available to Q&A afterwards. I hope by now you've seen our announcement, which outlines changes to our operating model and structure. We're also going to today provide an update on our FY '21 reinsurance renewal to make the point that we concluded this during the course of yesterday afternoon and into the evening. So it is hot off the press, so to speak. We thought it was very important to get to you with the update as soon as we could into the financial year -- approximate to the financial year commencing. So I hope you bear that in mind. We're also going to provide today a brief update on the impacts of COVID-19 on our broader portfolio and again, remembering, of course, that we are still in the process of finalizing the closing of the ledger of the FY '20 year. Okay. So I'll move to the first slide, which is titled key priorities. And I just want to rewind back to the full year result last August, where you will recall, I outlined my key priorities for Suncorp. And just to recap the things I thought we needed to do then were very much to improve the performance of our core businesses and to make sure that everyone at Suncorp was aligned to their role in improving the performance of our core businesses in insurance in Australia, New Zealand and in banking; and secondly, to improve the operational efficiency of the business; thirdly, to leverage the investments we've made across multiple years in terms of data and digital and leverage them better; and finally, to in a post Royal Commission era to implement the regulatory program of work. And in turn build trust and improve customer outcomes, again, our key priorities for the business at the time. At the time, I also indicated that we needed to make changes to the way we organize ourselves. And you'll recall, the first step in that was to move our contact center, stores, intermediary division -- distribution teams back into the insurance and banking divisions. They were sitting at that time in the customer marketplace unit. And while a lot has happened over the past 12 months, I feel those changes have assisted us in making good progress against those priorities that I've outlined, but it also meant that we're really well placed to deal with the anomaly of COVID-19 and the impacts on our customers and on our business. We've also dealt -- we've dealt with the dual challenges over the course of the last 9 months or so of natural hazards and COVID-19. And we've done that by ensuring our business remains strong. Our funding, liquidity, claims reserves and provisioning are all conservatively set and our balance sheet remains robust. Operationally, I believe our brands have more focus, our people are definitely more engaged, our customers more satisfied, and our digital investments are starting to pay dividends. And through COVID, you've seen us taking steps to further strengthen our business with the conversion to equity of around $170 million of our recently matured convertible preference shares, again, taking every opportunity to improve the strength of our balance sheet where that is available. In recent times we've been turning our mind to the opportunity that COVID-19 has created at Suncorp. Already you've seen us change the way we work. We are more agile, more innovative. We've broken down silos and hierarchy within the organization. It's seen us change the way our customers interact with us and with our products. It's exponentially ramping up the rate of digital adoption as we see through both banking, which has been well entrenched in banking digital adoption, but more so now in insurance. Internally, it's seen us cycle times improve, cost to deliver reduce. And most fundamentally, it's changed our perspective within the organization of what is possible. Of course, it will all come to nothing if we allow ourselves to return to pre-COVID business as usual, and we don't intend for that to happen. We need to capitalize on the opportunity. And most importantly, we need to speed up the execution against those priorities that I outlined in August. Now as I said back then to the key priority around improving the performance of the business lines. We need to ensure all our people and programs are aligned to the way we improve the service and delivery to our insurance and banking products to our customers. Again, I recap to the next slide, a slide I used last August, which defines a reasonably straightforward set of priorities for both our insurance and banking businesses. Fundamentally in insurance across Australia and New Zealand, means we need to reinvigorate and refine our multi-brand strategy, improve our underwriting, simplify our products and provide new and innovative product offering, have best-in-class claims and explore innovative approaches to reinsurance so that we can reduce earnings volatility. In banking, it simply means adopting of digital-first approach to products and functionality, winning in our home state, improving the way we service brokers, exploiting open banking as that comes into effect and, of course, remaining low-risk in these uncertain times. Now in a normal course, we'd have been able to address these priorities by laying our programs of work stretching across multiple financial years. The reality is that we don't have that luxury any longer post COVID. While we've made good progress, the pace of change needs to speed up and that requires changes to our operating model, to the accountability that sits within our business and most importantly, to the way we work and building some of the ways of working that we've seen through COVID and through our BAU activities. I'll move to the next slide, and changing the model represents more than just to change the structure. It is a critical first step, which will be combined with clear accountability at all levels of the organization and an across-the-board shift to more agile ways of working. This slide summarizes at the highest level how the new model will work with the most fundamental change being the consolidation of insurance and group head offices. This essentially combines the layer of the organization, which will improve decision making, reduce duplication and establish greater efficiency. Along with other significant changes to the organization structure, this will accelerate our efforts to driving sustainable change across all aspects of the organization from customer experience through to distributions and operations. So I'll turn to the next slide, which outlines the new organization structure, the key executives and their responsibility areas. Now the insurance Australia business, as you know, is such a large part of the group, it really does require greater focus on the transformation of both revenues and costs. The program of work across insurance is both large and complex, and in order to speed up its delivery, I believe it's best tackled by 2 executives rather than 1. A new insurance Product & Portfolio role will be accountable for brands, marketing, product, underwriting and all forms of distribution, be that contact centers, digital and intermediaries, again, bringing those activities very close to the P&L and very close to the operating business. Lisa Harrison has been appointed to this role now. Lisa has been with Suncorp, is well-known to many of you on the call, been with Suncorp for 15 years. Most of that time spent in insurance and has led teams in brand, marketing, product and pricing over that period, a very capable, very experienced insurance executive. Our second role of insurance Chief Customer Officer -- Chief Operating Officer, sorry, will have accountability for all aspects of claims, both long and short tail. And will also have responsibility for insurance operations and projects, all Group property requirements, claims and non-claims procurement as well. Paul Smeaton will return to Australia after a successful stint as New Zealand's CEO to run this portfolio. And many of you will know, Paul, he's been with Suncorp for 25 years. Prior to his New Zealand role, he led claims, operations and property teams in our Australian business, a very experienced, very capable executive with runs on the Board. So, in Lisa and Paul, we have 2 executives with greater than 30 years insurance experience and deep capability across the breadth of their portfolio areas. Of course, these changes mean that Gary Dransfield will leave Suncorp. Gary has been instrumental in leading Suncorp's response to disaster events in New Zealand, in Queensland, prior to that, and in Australia, more recently. He's been dealing with earthquakes, floods, cyclones and bushfires and has been very strong advocate for our customers. He has been a very strong advocate for the insurance industry. I am pleased to say, he will stay with us for a couple of weeks as we work through our transition to the new operating model. I wish him all the best, obviously. On the banking side, over recent years, we've done a reasonable job addressing the direct cost base. While there's more that can be done on direct expenses, the key to an improved cost-to-income ratio is in getting our revenues firing and reducing the costs that are allocated to the bank from the Group. So we are hard wiring more of our support teams directly to the bank, including brand and marketing, customer strategy and digital distribution and where this can't be done directly, allocations will be agreed. These changes are aimed at improving the competitiveness of the bank with benefits including faster decision-making, greater digital capability and reestablish the bank expense profile more aligned to that of a regional bank. Greater end-to-end accountability will also provide a platform for revenue growth to drive improvements in the cost-to-income ratio. Now I'd make the point that the changes do not signal any shift of intent regarding the role of the bank within the group. The bank remains core to the group and the changes today -- announced today provide further clarity around accountabilities and they're very consistent with BEAR regulatory regime. The bank's priorities that I outlined almost 12 months ago also remain the same. I'm extremely pleased to announce that Clive van Horen has been appointed to the Banking & Wealth CEO role and will join Suncorp from CBA in early August. Clive has held senior roles in retail and business banking in consulting and in public policy in Australia and internationally. And I really do welcome Clive to the group. Clive will start in early August. And similarly, in New Zealand, we will be hard wiring more of the support functions into that business and its priorities, again, will remain the same. Successful priorities that have been implemented in New Zealand will continue. And Jimmy Higgins, who's the current New Zealand CFO, will act in that CEO role while we undertake an external and internal search for a successor to Paul. Another opportunity that I've seen is available through this change of structure is to align reinsurance with the group balance sheet. I see reinsurance is yet another capital management tool available to the group rather than exclusively a tactical annual purchase, and hence, aligning our group capital -- aligning reinsurance with our group capital team makes perfect sense in my mind. The priority will be to leverage this group perspective to drive innovation through the design of the program and to better utilize the skills of our reinsurance partners in areas like climate risk and capital management. And as Jeremy remains, obviously, Group CFO, and he will take on those additional responsibilities. Transformation at Suncorp will obviously be customer lead but will be technology enabled. I think that's the case in most financial service organizations. In addition to maintaining the availability and security of our multiple core systems, the CIO, Suncorp's CIO as leader of the technology and transformation function will drive the digital-first program of work across all businesses. This function will leverage our new ways of working and guide our digital and automation programs, working alongside our product and distribution teams in insurance, bank and New Zealand. Adam Bennett, who we announced a couple of weeks ago, joined Suncorp today as CIO. And he'll lead the newly created technology and transformation function. I really do welcome Adam to Suncorp. Changes will also be made in People Experience function, which currently has a broad mandate including activities such as real estate and partnering. These activities will be repointed to enable the people function to focus exclusively on our people strategy, facilitate new ways of working and ensuring our purpose is embedded in every part of the organization. Again, as a result of the changes, Amanda Revis will leave Suncorp. Amanda, as you know, has played a huge role in the evolution of Suncorp over the past decade. Amongst a number of achievements, she has led our approach to flexible working which has set us up so well as we move to the remote working environment during COVID-19. I'm very pleased that Amanda's agreed to stay into the second half of 2020 to assist the SLT and myself, the transition to the new operating model. And finally, the customer digital function will be disbanded with the existing teams transitioned into the operating businesses and our risk and legal functions remain largely unchanged. These changes will enable a stronger focus on our core insurance and banking businesses, but importantly, they will speed up our execution against our priorities. And so at that point, I will like hand over to Jeremy to run through the remainder of the presentation.

All right. Thanks, Steve. Well, as Steve said being the 1st of July, I'd like to start off by confirming we expect to land the natural hazard costs for FY '20, in line with our allowance of $820 million. Moving then on to FY '21, and we've just completed as Steve said, the placement of the main catastrophe covers and drop-downs with a similar structure to previous years. The vertical limit on the main CAT program, which covers home, motor and commercial portfolios across Australia and New Zealand has reduced from $7.2 billion to $6.5 billion. The lower modeled vertical limit reflects a combination of reduced exposure, particularly in commercial, where we have exited unprofitable portfolios. And in New Zealand, where changes to the Earthquake Commission coverage has reduced the retained exposure. The maximum event retention under the new main CAT program remains unchanged at $250 million, and there's been no change to the drop-down covers, which provide an additional $450 million of protection against medium to large natural hazard events. As we said on the call in May, we expected the aggregate P&L volatility covers to be the most challenging part of the program to replace. The global reinsurance market has been hardening with reinsurer capital to be impacted by core global loss experience, investment asset performance arising from COVID-19 and a hardening of the retro insurance market. The Australian insurance industry, as you know, has also had materially worse than expected natural hazard event experience over the last 3 or 4 years, including the hail and bushfire experienced from last summer. For FY '21, we have restructured our aggregate reinsurance protection and replaced the NHAP and the ASL with a new Aggregate Excess of Loss cover. This provides $400 million to cover, for natural hazard events, in excess of $5 million, once the total retained cost of these events reaches $650 million. We retain the first $5 million of each event. As this does reflect a lower level of P&L volatility covered in FY '20, we expect the FY '21 natural hazard allowance to increase by between $90 million and $130 million, and we'll provide further detail on the final natural hazard allowance at the full year results as we work through what they need to be. At the same time, retaining more risk under the new reinsurance program will result in an increase to the general insurance CET1 target. We believe the FY '21 program does strike the right balance of natural hazard volatility protection and the increasing reinsurance costs. We will look to reprice for this increase over time as well as improving performance in other core areas of the business, including claims and costs, which are enabled by the changes to the operating model Steve has just spoken to. Turning then to the next slide and an update on the impacts of COVID-19. First, to the Australian insurance business, where we have seen mark-to-market gains on the investment portfolios over Q4 due to improvement in markets, following the mark-to-market losses in Q3. Motor vehicle frequency in the consumer portfolio fell as much as 40% in April, but has subsequently been increasing as restrictions have eased. This trend has also been evident in the commercial motor portfolio, albeit more muted. On landlord insurance, we still expect an increase in loss of rent claims, although we note that this is likely to be more evident in FY '21 due to ongoing unemployment. We do, however, expect to include an appropriate amount of IBNR in FY '20. On business interruption, while there's been significant focus on the insurer policy wordings relating to the now repealed Quarantine Act, we believe the intent of our policies remains clear. Prior to COVID, we had updated the majority of our policy wordings to reflect the current legislation. And while we do still have policies that refer to the Quarantine Act, we remain confident in the underwriting intention. We note that there is currently an industry test case, which is expected to be presented to the court in August to consider this matter further. On GWP, we now expect total consumer units to be at least flat for the year, in line with our original expectations, with a strong rebound in motor new business units in May and June. Overall, excluding the impact of investment markets and after allowing for an appropriate amount of risk margins to reflect the COVID-19 uncertainties, we continue to expect the overall P&L impact of COVID-19 across insurance Australia to be broadly neutral for FY '20. Moving to New Zealand, where the tighter restrictions led to a significant reduction in motor claim frequency. And we expect these frequency benefits to be largely passed through to customers and will provide for an amount for this in FY '20, we expect to. Finally, on the Bank, while we have seen some improvement in our base case economic scenario that we spoke to in May, we continue to adopt an appropriate level of conservatism given the ongoing economic uncertainties with no material changes currently expected to the ECL for June 30. And with that, I'll hand back to Steve.

Thanks, Jeremy. So in conclusion, before we go to question times, while we do face headwinds from the increased natural hazard costs and the continuing low interest rate environment, I firmly believe the priorities I set 12 months ago will remain relevant and they should continue to guide our programs of work. In this context, we see COVID as an opportunity to speed up the pace of transformation and our new operating model is designed to facilitate this. We spent a lot of time thinking it through and lot of time working it through. We have the right priorities I feel and we got the right structure and the right team. And as a group, we remain committed to delivering returns above our cost of capital. And we look forward now to getting on with the job. So let me pause there and open to questions on any of those topics.

[Operator Instructions] Your first question comes from Andrew Buncombe with Macquarie.

Just a couple of quick ones, please. Just my first one, what sort of level of cost savings are you expecting from the new structure?

Thanks, Andrew. Look, I think there's a couple of things to make on savings more generally. This is more around the realignment of the team and a refocusing the operating model to allow us to fast -- quicken up the pace of transformation. So I'd expect that obviously, there will be some savings there. And some of that, we have got provisions sitting there in the FY '20 accounts that we'll be able to deploy to those changes. So I think that's well covered in FY '20. As we come through the next part of the story, I see material opportunities opening up for us. But not necessarily huge, big programs of work like we've seen in Suncorp over the past decade. Through simplification, optimization, differentiation, we've been through all of these big programs alongside BIP. One of the benefits that we have of doing that over the last decade is we've got all the tools within the organization we need to deliver these benefits. We have good digital capability. We got good automation capability. We've got good process improvement capability, and we've got established offshore partners sitting with us. So what we need to do now is apply all of that skill -- all the skills we have in the organization, all the assets we have in the organization to a program of work to automate manual processes, to digitize our sales and service capability on distribution and claims lodgement. And to drive material changes to the profile of our organization over the next 2 to 3 years. And what I want to do is keep the market materially updated on that. I don't want to launch a massive big program of work and have people sort of distracted by that. I want to embed this all in the organization, and I want it to be reflected improved expense ratios, improve loss ratios as we move forward with better pricing, better analytics, better cost-to-income ratio, so that you can see absolutely how we're delivering to the bottom line.

Excellent. Just on the second question, again on the new structure. Are there still going to be divisional CFOs?

Probably one for Jeremy. So Jeremy will have a CFO for insurance sitting in his infrastructure, there'll be a CFO for bank and New Zealand. The CFO for insurance will report to Jeremy, the CFO for bank will report into the bank CEO, CFO for New Zealand will report into the New Zealand's CEO as it has for the past 5 or 6 years.

Perfect. And just the last 1 from me was on the reinsurance program, please. Is the deductible on the aggregate -- the new aggregate cover a franchise or a traditional structure? It seems from the way it's written, it's traditional, whereas previously it was franchise, is that right?

That's correct, Andrew. Yes. The prior iteration of the aggregate cover was a ground-up franchise-type arrangement. Everything above zero dollars contributing to the arrangement is deductible and recoveries were from zero up. Again, as we worked our way through the renewal, that wasn't available to us in terms of our ability to secure a program with that feature. Therefore, the attachment point for both the erosion of the deductible and the recovery is $5 million point that we outlined in the presentation.

Our next question comes from Nigel Pittaway with Citi.

Just first of all, a question, if I could, on the new reinsurance. I mean, you've been a bit silent on obviously, the ag covers you used to have, obviously, with the Queensland home -- sorry, quota share covers you used to have with the Queensland home and also the prepaid reinstatements. Can you just sort of make some comments about those? Presumably, the prepaid reinstatements are the same, but what about the quota shares?

Quota shares are the same. It's been renegotiated as part of the June 30 review, Nigel. The attachment points for the CAT cover, as Jeremy pointed out, is the $250 million attachment point. We've obviously reduced the top end exposure, which is reflective of the improved profile that we have around risk, particularly the runoff of some of those larger portfolios on the commercial book. We have all the prepaid reinstatements to protect the balance sheet that we've had in prior years. So, a very traditional cover, very traditional structure, slightly different pricing, which is unfortunate, but a reflection of the external environment at the moment. But everything that you have come to expect in terms of the quality of the program has been pretty much retained in its novel form.

And there's just a little bit more color on that in the ASX, Nigel.

Right. Okay. So you did reinstate the Queensland home quota share?

Correct.

Okay. Just -- I mean, are you able to give any more color as to sort of the sort of various impacts? I mean, obviously, you've obviously flagged the volatility covers as being the most difficult part to renegotiate. I mean, was the price rise on that sort of 30%-ish? Is that a realistic sort of assumption or?

Look, Nigel, I think, obviously, we've just sort of concluded a negotiation, which has sort of stretched in its initial stages from last November right through to last evening. So I don't really want to get into the commercial to-ing and fro-ing around various elements of the covers. Obviously, the balance sheet set of covers that are just there, and you can go back through prior years to see the extent to with we have sort of recovered against those programs. Typically in the 250 to 350, 400 layer has been traditionally where we have had some recoveries. But generally, other than that, no significant recoveries on the CAT cover. We have had recoveries against the drop-downs. And we definitely have had recoveries against the ag cover, this year some recoveries against the stock loss that put in place. So again, I don't want to sort of break it down into price movements between the 3 of them, but you know the way the market works and how that would be priced. So, I always said that the ag covers will be, the P&L covers, volatility covers will be the hardest negotiation point and that's probably how it played out.

Okay. And maybe just finally, I mean you've obviously said you're going to try and reprice for this over time, but it looks like that's not going to be done in 12 months. So do you think 2 years is a realistic assumption? Or will it take longer than that?

I would always say that, firstly, our priority is to reflect increased input costs in terms of pricing. But to do that in a manner that's consistent with making sure that we don't do anything that sort of allows us to exponentially cede market share. So we have to be very conscious of that. It's very hard to take 1 year's price increases and roll it through in the way the insurance business is accounted for in 1 year. So I think your assumption around the timeframe is probably more correct. But again, if I come back to what we talked about today around the things that we need to do in our organization. When you have increased input costs, you can't automatically always revert to pricing. We know that there is opportunity in this business. We know that our brands can be aligned better and become more efficient. We know that our products can be simplified, and we can take costs out. We know our loss ratios could improve with better pricing, better underwriting. We know that there's a huge opportunity available to us in claims. So you should think about these increased costs and our response to them across the range of dynamics, but not only just pricing. If we exclusively were just to say that we're going to address this repricing, we would be making the wrong call. We are looking at this right across the business and the opportunities that exist right across both revenue and costs as we move forward across expense ratio and the loss ratio.

Our next question comes from Ashley Dalziell with Goldman Sachs.

Just another question to begin with on the reinsurance program. Are you able to help us quantify the capital headwinds from the '21 program?

Ashley, it's Jeremy here. Look, we're still going through the details having just landed it, but probably the order of about 60, we expect in terms of the additional capital impost. But what we haven't put in the pack here, because obviously, we're still working through that as well as the overall capital position. And I should add that notwithstanding that adjustment for the -- where we land on reinsurance, the capital position of the group is expected to be still very strong. And in fact, somewhat reasonably strongly improved from where we reported the position at the end of March in the May update. So, it obviously does have some impact with the higher levels of retained risk, but we believe it's quite manageable and considering the economics of that cover versus retention, we believe, it's absolutely the right outcome.

And again, it gets back to what we talked about as we came through the half year result, retaining that capital on the balance sheet gives us flexibility through this renewal to allow us to make pragmatic commercial decisions has given us a huge amount of flexibility as we've landed the program. And again, the magnitude of capital impost that Jeremy is talking about is eminently manageable on the balance sheet that we're sitting with today.

Okay. Just a couple of questions on the expense outlook. Just firstly, Steve, your comments around the bank and hoping to sort of readjust the expense profile more towards perhaps some of your regional bank peers. Are you able to give us any color as to kind of time frame and steps you need to take to get there?

Yes. Look, I think -- and I have been openly talking about this for some time now. I mean, the steps to improving the cost-to-income ratio are, well, two-fold. One is not exclusively about cost, it's about getting our revenues firing again. And some of that is around, obviously, the steps that we've taken over the past 6 months to improve the way we service our intermediated or broker distributed part of that business. And obviously, COVID-19 has got in the way of that a little bit and created a bit of noise around system levels of growth and performance of various institutions through that period of time. But I'm very comfortable with the steps that we've taken to approve the way we service brokers are starting to take effect. Our turnaround times, I think they're not at industry-leading levels, but they have improved significantly. And the feedback that we're getting from brokers is significantly more positive than it might have been 6 to 12 months ago. We do have an opportunity still in Queensland over time to grow in the market where our brand is strongest. So it's not all about cost. There's a big piece of the cost-to-income ratio story that comes through improved revenue performance. On the cost side, I think the bank has done a good job over the past 3 or 4 years in managing its direct cost base, but I've made the point very clearly over time. That for a bank of our size, it cannot absorb the level of allocated costs that has been asked to absorb over the past 2 or 3 years. That's a function of history, and it's a function of activity that I've outlined today. And so what I'd like to do, Jeremy and I would like to do over the next 3 to 6 months to be able to define very clearly what the bank's cost base is. It's direct cost, any allocated costs it takes from the group or any other costs around shared platforms and infrastructure so that we can absolutely level set the market around its cost base. And then we can get on with the job of improving our revenues, which will go to an improved cost-to-income ratio. So I can't give you a sense of what that looks like at the moment, Ash, but over the next 3 to 6 months, we'll be very clear about what the bank's cost base looks like. And what an aspirational cost-to-income ratio should be for a bank of our size in a post COVID world.

Okay. If I could squeeze one last one in. Another one on costs, albeit not related to what you've spoken on today. Just wondering if we could get any updated color around the reg cost budget into '21. I think there was a time where you were hoping to be able to book a fair amount of savings as you roll from '20 into '21. But as obviously COVID and the impact that it's had on some of these large regulatory projects, has that impacted those ambitions in any way?

I think we might, if you don't mind, Ash, to park that one to the results simply because a lot of it is dependent upon our view of the rate of regulatory change. Obviously, there's been a pause on a lot of the regulatory change that was included in the FY '20 expense outlook. And we need to, over the next month, 6 weeks, true-up what our expectation is of some of that regulatory change, recommencing. Some of it may lapse. And so that we can get a sense of what programs need to be reinitiated or stepped up as we come into FY '21. I don't think in a macro sense, too much has changed. But we just need to do a bit of work to form a view of what the regulatory program looks like as we come through the pause from COVID.

Your next question comes from Andrei Stadnik with MS.

I wanted to ask 2 or 3 questions if possible. The first one, you mentioned that the COVID-19 is broadly neutral to the group, excluding investments and bank impairment. But does that include like a net tailwind or net headwind on operating expenses? Like was there a material shift in operating expenses because of the COVID-19 episode?

I'll get Jeremy to top-up the answer, Andrei, but no. Look, I think obviously, we've had some benefit of the expense line through things like reduced travel, elements of the operating cost base have been able to be tightened up as a result of less activity within the group to some extent. But what is somewhat lost is the fact that there have been some increased costs we've had to absorb particularly around our partnered workforce. Where in many cases, given this is a global pandemic, our partners have been impacted to the same extent as our onshore teams. And for a period of time, we have had to roll some of the activities that otherwise would have been undertaken offshore back onshore. It has probably been the most material part of the expense base that goes to offset some of the benefits we might get from lower travel, lower activity across the Australian business.Jeremy, do you want to...

Yes, but it's not much to top up there, Steve. It's the demand. It's the impact on that net neutral, roughly neutral outcome is really on the claims line, not much at all on cost. As Steve said, this is swings and roundabouts, but it's really mostly on the netting up on the claims line.

Having said that, we do think that there will be some material changes to the way we work and our expense profile over time through COVID, and I'll give you an example. As we think about the workforce of the future and our ways of working into the future. Suncorp as an organization pre-COVID probably had sort of a real estate footprint of 10 for 8, which is 10 people for every 8 desks. And obviously, as we bring our workforce back into the physical work environment. With social distancing rules applying, that will be a significantly different ratio. Something probably like 10 for 4. Now as we get back into full run rate, as things sort of normalize over time and social distancing requirements do unwind, I don't ever anticipate we'll go back to that 10 for 8 arrangements. And we'll be able to, over time consolidate our real estate footprint around where we ultimately see our workforce distributed between working in a physical office environment versus working at home or working in potentially some suburban hubs where it may be more beneficial and more cost-effective for us to locate some of our workforce.

Thank you and I hope we'll follow the same trend. In terms of -- I mean, for our working conditions. In terms of motor claims, you mentioned they fell substantially down during the peak of the lockdown in Australia, but are now coming back. But to check kind of exiting June, were claims still lower than what they were pre COVID-19? Or do they normalize all the way?

No, Andrei, they're still lower. But the, sort of flagged that 40% April reduction, they'd come back to not quite single digits, but closer to it than the 40% we saw in April. So they've come back pretty quickly, albeit, not all the way back to pre COVID levels on the last June numbers that we've got. But the trend is certainly coming down pretty quickly.

And again, different between Australia and New Zealand. New Zealand, obviously, went through a more restrictive restrictions regime and obviously, we saw frequency benefits in New Zealand far greater than Australia during the Phase 3 lockdowns. Again, that has reverted pretty much back to its normal run-rate as those restrictions have eased.

If I could ask 1 last question. What are you seeing in terms of premium rate increases across the various lines. Because I think the last comment was that it was becoming quite challenging to push through rate increases in personal. Has that improved? And how is SME looking versus personal?

Yes, look, I think again I'd sort of - we were out 1 July, we have some work to do before we consolidate the financial accounts and get a true sense of what the average risk premium and unit count numbers look like. I think in terms of some of the discussions that we had at the half year results, some of the increases that we flagged through the home portfolio, they went in as planned. And as best we can see at this point in time, given we still have probably a week of data that we have to bring online. At the last week of the financial year, our unit count in home will be flat to maybe very slightly down. So we've held units in an environment where we put through the pricing that we flagged in February across the course of the year. In motor, obviously, given it doesn't bear anywhere near the amount of costs associated with natural hazards or reinsurance costs, the price increases there have been more aligned to underlying inflation in motor claims repair, et cetera. And we had, obviously, a lower level of aggregate price increases. And there, we've seen reasonably positive unit count across the course of the year, which means on aggregate across home and motor, as Jeremy said, a flat unit count expectations for the year, but more biased to positive on motor. We obviously went through a period time through the height of COVID, where we did see new business fall away quite materially, but very pleasingly in May and June, we have seen that rebound. And we've seen a rebound with a disproportionate benefit to digital acquisition and digital procurement, which is a very, very good sign for us for the longer-term because the more that we can manage through fulfillment through digital from an overall cost of acquisition perspective, it's significantly better for us over time. So a good rebound in late May and early June across motor particularly and the increases that we've flagged in home, sort of getting into the book with no net sort of loss of units over the course of the year.

Your next question comes from T.S. Lim with Bell Potter.

Just a quick question on the bank. I noticed it is still core to the group, but what's happening in Queensland that you need to be in Queensland? Is it tough going out there?

Well, T.S., good news for you, the borders are open for people from New South Wales. So you're welcome to come up and we'll buy you lunch, if you want. So yes, look, I think obviously, we were watching the border announcements very closely. I've spent a fair bit of time in the last couple of weeks talking to some of our larger customers. On the agri side, very positive outlook there. In fact, again, the drought hasn't universally been broken in many of those areas, but there has been some good rainfall in the early part of the calendar year, which has obviously improved the outlook on the agri portfolio. I really don't have anywhere near as negative an assessment of Queensland as some people may do in the market. I think for start, we didn't see the material increase in house prices that we saw in other parts of Australia in Queensland. I think the Queensland economy will do very well out of a domestic-based tourism resurgence, obviously, in the absence of international tourism. And I think it is patchy. There are those in Far North Queensland who obviously have reliance on tourism, and that flows through accommodation and retail. But generally, I think with the borders now to some extent, open again, there's a good opportunity for the Queensland economy to pick up quite strongly over the next 3 months or so.

[Operator Instructions] The next question comes from Siddharth Parameswaran.

Steve, just a couple of questions, if I can. Firstly, just on your guidance for COVID-19 impact. Firstly, if I could just ask about business interruption. Are there any IBNR provisions that you're going to take at June 30 for that? In your statement that broadly, there's no net impact.

I think I'll let Jeremy answer it in detail, but it is a bit early in terms of finalizing all of our valuations. Typically, we will ledger it at June 30 and then go through the process of settling the valuations. I would expect there will be some IBNRs across COVID more generally. It would be prudent to do that irrespective of your assessment of business interruption. It's inevitable that there will be some legal costs that we will incur as we work our way through that process. So I expect a manageable IBNR and whether that flows through a central estimate or risk margin remains to be seen. But again, we factored that into our assessment of a net neutral outcome across the impact of COVID across the insurance business.

Yes. So Sid, we will have -- there will be a small IBNR, but it will be more in the context of how we need to approach costs on things like the test case that I referenced that's going to courts in August. And I said we believe that the wording of our policies is strong and the intent is pretty clear. So I wouldn't expect a big IBNR to be seen because that would be contrary to that sort of context. But having said that, I did reference that we've taken appropriate -- or look to take, reflect on the appropriate amount of risk margin. There is still quite a lot of uncertainty in outlook. So from an actual risk margin perspective, we may see some of that space across the breadth of COVID-19 impact. So across landlord protection, maybe reflecting on business interruption in there as well, but also into what's happening with the IBNRs around motor and cost et cetera. So, the broad range of COVID-19 related impacts that we'll reflect on in terms of broader risk margin.

Yes. Okay. And could you give us some idea, if that test case goes against you, what is the worst-case that you think that you're -- that you may face?

Good try, Sid. I don't think I really want to go down the path of what if and et cetera, et cetera. We have a very strong -- we believe we have a very strong position and being appropriate to go much further with the legal processes working their way through.

Okay. Maybe if I could just ask a couple of other questions. Just costs, firstly, I mean, Steve, you mentioned that in terms of the banks, you're hoping to allocate less group costs to the bank. Perhaps you could just give us idea whether that will mean there'll be greater group allocations to the general insurance division into New Zealand? Or whether you're actually expecting overall group costs to fall?

I expect the overall group costs will fall, Sid. That would be of limited benefit if we were to just move allocations around the group, optically. It wouldn't make much sense because that would then squeeze through our expense ratios on the -- in the insurance business. And I'm not sure our colleagues in New Zealand would be all that happy with it either. So what we'd be looking to do would be just define the cost base for the bank through direct cost base and allocated cost base, make sure that's appropriate for a bank, a regional Bank of Suncorp's size to compete in the market against other regionals and major banks. And then to the extent of those costs squeezed across the group than we would be, as we have done in the past, look to make sure that they're dealt with. And to some extent, that's driving the structural change that I've talked about today where they will be easier to identify, and we'll be able to deal with them more far faster than if they sit there in an allocated cost view.

Okay. And then just a final question for me. Just over the last few years at Suncorp, the emphasis has very much been on restoring volumes. And still with a 10% ROE targets in mind. Now in terms of your announcement around an organizational restructure, there's not much in the way of targets that is being stated here. But perhaps you could just at least qualitatively give us a view of whether the changes that you're making are designed to prioritize one over the other. In the past, the emphasis had very much been in trying to get those volumes being restored with your organizational restructure, where will the emphasis fall?

Yes. Look, I think the changes that we're making ultimately drive us to a position where we're able to demonstrate that business could deliver returns above our cost of capital first the overarching concept that we would apply. And that's obviously going to squeeze its way through the business to different assumptions around cost-to-income ratios, returns in the bank. Expense ratios, loss ratios and underlying ITRs in the insurance side. So again, we will work our way through that over the course of the next 6 months. In terms of volume, price volume, volume margins, these trade-offs are always in any business. And obviously, we see ourselves as a price leader in some of these markets. So we do need to take some action from time to time to reflect the input costs that are sitting in the business. But generally, for a business of our size with sort of 25% to 30% market share, there's no benefit for us. I think you continually losing market share over extended periods of time, because we'll be shrinking the franchise, and then we'd lose all the benefits of the scale that we've built up. Scale is important in insurance. So I sort of see a range of flat unit count to positive unit count to wherever you think system growth is. So in the range of 0% to 2% being -- 2% or 3% being an acceptable level for a business with 25% to 30% market share. That doesn't say that there won't be times where we may lose a bit of share. And we may need to do that for a whole range of different reasons that are associated with getting the appropriate return on the portfolio but again, it's no benefit to anyone if we continually shrink our business over time.

Next question is a follow-up question from Nigel Pittaway with Citi.

Just thought I'd ask, is there anything you can say about the dividend at this point as to whether or not maybe the bank earnings and GI earnings will be treated separately when that's considered? Or anything more you can say?

Thanks, Nigel. Look, obviously, there's still a bit of water to flow under the bridge in terms of dividend. Most material, which will be some guidance from the regulator around the stress testing that they want to see undertaken across all financial services companies that work their way through. And we're expecting that sort of guidance coming through in the next couple of weeks. We'll obviously go through that process of doing that stress testing. I mean our ambition would always be to pay a dividend if we could find a pathway to do it. We need to assess that from our own perspective first. Because, again, we need to make sure that our balance sheet is still conservative for the outlook that we face into. So our disposition would be to pay a dividend. We've believe our shareholders -- that would be favorably received by our shareholders. It would allow us to repatriate some of the franking credits that sit on -- sit it in our business at the moment and which are valued by shareholders. But again, we need to form that view on our own basis. And it's being formed by APRA's stress testing requirements and have dialogue with APRA around what is acceptable in this environment.

Your next question is a follow-up question from Ashley Dalziell with Goldman Sachs.

Just a follow-up on the bank. A couple of data points you've given us there today around the amount of the book that's on loan deferrals, but you also note the best-case economic outlook has improved a fair bit. Just wondering if you can give us a bit of color on how you're thinking about the overlay that you took in the March quarter and how well that set you up into '21 and just your views on provisioning from here?

Thank, Ashley, Jeremy here. So when we set that provision number in the update in May we took a conscious conservative bias to it. We did make some estimates at the time around the number of customers we thought would apply for deferrals. And then we made an estimate of the number of those customers we thought would go into stage 2 losses, which is obviously the element that drives most of that expected credit loss overlay. And as we sit here today, we probably feel on balance slightly better than the outlook we presumed in that original estimation. We're about -- having said that, we're only about 15%, 20% of the way through the 3-monthly check-in on the retail customers. And thus far, the responses we're getting to how they're tracking against getting back into performing -- fully performing, as I say, pretty much in line with the -- pretty much in line, if not better, for this stage that what we'd anticipated in that original assumption set. So look at -- on the overall economic scenario, when we said that, we have the economy opening up later. So the economy has opened up sooner, but we need to be cautious about second waves, et cetera. But the status points are that we're better off, and we'll likely retain a conservative management overlay on that management overlay as we go through 30 June.

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

Okay. Thank you very much, everyone. I know it's been a rush to get that to you this morning and to go through that. I hope that is helpful. And we'll obviously have a regroup around our August results and look forward to talking to you again then. I'll leave it there, and have a great day, everyone. Stay safe.