Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Good morning, everyone, and happy Friday. I'd like to acknowledge the traditional owners of the land on which our business operates, and of course, we pay our respects to all elders past, present and emerging. And before I start, I'd like to recognize that this has been an incredibly challenging 12 months for Australia, for New Zealand and for all the communities Suncorp is part of. And today, those challenges are most acute in Victoria, and our thoughts have been with our people and our customers and all of those dialing in today from that state. COVID has changed so much about the way we live and the way we work. So it shouldn't come as a surprise, the format of today's presentation is slightly different to take account of the current restrictions that are in place. So today, I join you from Brisbane, while our group CFO, Jeremy Robson, joins from Sydney, and the SLT are also joining us from their respective home states. With us for the first time are Adam Bennett, our Chief Information Officer; and Clive van Horen, who recently joined as our CEO of Banking & Wealth. And I'd like to congratulate Adam and Clive and, of course, welcome them to the team. I'd also like to welcome Paul Smeaton back to Australia after a successful 5-year stint in New Zealand. Paul and Lisa Harrison commenced their new roles on the 20th of July. It's great to have Paul back in Australia and back in Brisbane. The agenda for today follows our usual format, and of course, we'll have ample time to answer your questions at the end of the presentation. So turning to the result first, and this slide shows the high-level financial metrics for the FY '20 year for the group. In what can only be described as a very challenging year, we've reported net profit after tax of $913 million, cash earnings of $749 million and pre dividend excess CET1 capital of $941 million. Pleasingly, based on the strength of the balance sheet and that excess capital position, the Board has declared a modest final dividend of $0.10 per share, resulting in a full year payout of just below 50% of statutory NPAT or 61% of cash earnings, which I believe to be appropriately in the circumstance at the bottom end of our usual payout ratio range. We'll retain a healthy $823 million of excess common equity tier 1 capital after the payment of that dividend. Now needless to say that comparisons between the FY '20 and FY '19 reporting periods are difficult, given the divestments of Life and S.M.A.R.T, a number of other one-offs and, of course, the impacts of COVID-19. So our focus today will be to give you a sense of our operational and underlying financial performance for the year, to outline the work that we've done through COVID to further strengthen our business and to foreshadow the program of work for the year ahead. Now in a year like no other, financial metrics don't always tell the full story. In normal times, things like the capability of your people, the robustness of your core operations and processes, your underlying technology and core systems and your ability to adapt are all differentiators of performance. In FY '20, they became the ingredients of survival. In this slide, I'll summarize some of the key operational metrics that have guided our business over the past 12 months and the recognition that's been afforded to our team over the course of the year. Now it's true that our business is well versed in dealing with the uncertainties associated with fires, floods, storms and drought. We have established processes, and we usually respond very well. Of course, there's no handbook or textbook to pull off the shelf when you're confronted with a global pandemic. So we quickly established a 5-point framework to guide our prioritization and decision-making through the pandemic. Now I've talked to this in our previous updates, but in essence, it is: Firstly, to ensure the health and safety of our team, this has got to be and always is our #1 priority; making sure we continue to meet the needs of our customers, the second priority; thirdly, keeping our business strong, maintaining appropriate capital, funding and liquidity; fourthly, to evolve our ways of working so that we emerge strong and more efficient from the pandemic; and finally, being open and honest in our communications with our team and with you, our shareholders and our customers, and the advocacy we apply. We also significantly stepped up our dialogue and reporting to the Board to ensure we were focused on the right things at the right time and with the right intensity, and this framework that we put in place is continuing to serve us well. Now to the result highlights, and I'll start with the balance sheet. Of course, we entered COVID in a strong position with a buffer of excess capital and the retained proceeds from the sale of S.M.A.R.T. We've built on that over the course of the year, providing flexibility and allowing us to deliver on our commitment to shareholders by paying a modest final dividend. In an extraordinary year, we landed natural hazards in line with our allowance, with our reinsurance purchases protecting shareholders from almost $1 billion in claims costs. We finished the year with positive unit count in our Australian consumer insurance portfolio, something that didn't look possible back in April. Our sales run into financial year-end was particularly strong, most notably in digital, giving us good momentum into the new year. We continue to see good momentum in commercial insurance premium, making it the third consecutive year of underlying margin recovery in that portfolio. The New Zealand business continues to stand out with premium growth above expectations and stable loss ratios. The bank has delivered net interest margin of 1.94%, up 4 basis points and at the top of our expected range, driven by growth in digitally originated at-call deposits. We've also seen the early signs of improvement in lending lodgement volumes as our remediation work in that portfolio begins to take effect. And finally, we've remained disciplined around costs, albeit recognizing that there's more we need to do. So with that brief overview, let me hand over to Jeremy to run through the details.

All right. Thanks, Steve, and good morning, everyone, and greetings from here in Sydney. Well, given the current environment, I wanted to start with briefly calling out some of the key items that have impacted the group's cash earnings before the usual run-through of the numbers. In addition to the adverse COVID-19 impact, which I'll cover on the next slide, the result was impacted by a number of one-off items, including a $60 million provision for the pay and leave entitlements review we flagged in May, New Zealand's $24 million of customer remediation provisions and a NZD 15 million one-off payment relating to the restructure of the AA Life joint venture. The 2 other key impacts I wanted to call out upfront are the lower contributions from investment markets and reserve releases, and I'll cover both of these in more detail later. So first up then, some color on the impact of COVID-19. Excluding the impact of investment markets, the net P&L impact was broadly neutral for Insurance Australia and New Zealand, in line with our previous guidance. Insurance Australia was impacted by a benefit of around $140 million from lower motor claims frequency as well as some small frequency benefits across the other portfolios; $85 million of provisions, including risk margin to cover COVID-19 uncertainties, landlord loss of rent and potential business interruption claims; additional operating expenses, such as the rollback of certain offshore processes; and lower GWP due to lower new business volumes as well as the impact of customer relief packages. The impact for New Zealand was broadly neutral with the benefit of lower motor frequency passed through to customers. The negative impact on the bank of around $160 million largely reflects the COVID-19 collective provision. Overall, we assess COVID-19 has had a negative impact on the FY '20 results, excluding the impact of investment markets, of approximately $140 million pretax. Now to the run-through of results, starting with Insurance Australia and the usual GWP waterfall. In Home, normalizing for the ongoing remediation of the broker book and the new business embargo on landlord insurance, Home units were up 0.8%, with GWP up 3.1%. Motor GWP was impacted by COVID-19 customer relief offers, and normalizing for this results in GWP growth of 3.2%, with unit growth of 0.8%. Commercial GWP grew 3.2%, excluding portfolio exits, primarily driven by strong premium rate increases, partially offset by the economic impact of COVID-19. In workers' compensation, we saw rate increases, strong retention and salary pool increases. And CTP decreased primarily due to the impact of market pricing dynamics in ACT, South Australia and New South Wales following scheme reforms but with some price and unit growth in Queensland. Overall, the aggregate estimated reduction in GWP from COVID-19 was around $55 million, reflecting a combination of lower new business opportunities, including the embargo on landlord and travel insurance and the impact of customer relief measures, and around half of this has been earned in FY '20. Turning now to claims, where I have separated out the impacts of COVID-19 in the waterfall. The increase in consumer was primarily driven by motor claims costs, reflecting underlying inflation in the book and the trend towards higher-cost repairs as cars become more technologically advanced. In Home, we saw a stabilization in water and fire claims costs. The improvement in Commercial reflects the impact of portfolio exits and relatively benign large loss experience. The reduction in personal injury claims was driven by CTP scheme reform, and growth in the workers' compensation portfolio was offset by good claims performance, particularly in WA. Now prior year reserve releases were subdued. In aggregate, releases from the statutory classes were 2.3% of NEP. We saw lower CTP releases in New South Wales, in line with scheme reform, and lower releases in Queensland, driven by historic pricing reductions. However, workers' compensation delivered higher releases following good experience and improvements in claims handling. The commercial long-tail strengthening was a result of a $25 million one-off strain in the second half for provisions for molestation claims, and this was in addition to the $20 million valuation adjustment in the first half in the bodily injury portfolio. The short-tail strengthening principally reflects an amount for customer remediation costs and a modest strengthening across a range of prior natural hazard events and some larger home liability claims. Moving on to the investment portfolio. The underlying yield on insurance funds was 1.7%, down on last year, but well ahead of our expected 60 to 80 basis point range above risk-free, driven by strong, active performance management. The shareholders' fund returned a positive $63 million, which included a $36 million benefit from the credit and equity hedges that were placed at the onset of COVID-19. And this represents an annual return of 2.1%, impacted by lower returns from equities and other growth assets. Going forward, I would expect the underlying yields to fall towards the bottom of our range from narrowing credit spreads and as the level of investment outperformance normalizes. And finally, I note our asset allocation remains relatively conservative. We modestly reduced our exposure to growth assets during the year, with around 95% of the overall portfolio now invested in cash and fixed income securities, around 80% of which are rated A or higher. So to New Zealand, which delivered another good result despite a more normalized natural hazard year and the impact of customer remediation. FY '20 GWP includes customer remediation provisions of NZD 18 million, largely relating to the incorrect application of customer discounts. Adjusting for this and the impact of COVID-19 customer refunds, GWP growth was 5%, and NEP up 8.3%, with premium increases in the commercial portfolio and growth in the direct business. Following a relatively benign weather environment last year, net incurred claims were up 5.3%, mainly driven by natural hazard costs and business growth but also reflecting the COVID-19 motor frequency benefit. Operating expenses increased with higher commissions as a function of premium growth and an increase in technology and project costs. And the New Zealand Life result was modestly lower, primarily due to adverse claims experience and lower investment returns. Turning to natural hazards. And as we confirmed at our July update, in what has been a materially worse than expected year of natural hazard events, we landed the natural hazard cost for FY '20 in line with our allowance of $820 million. Moving on to our FY '21 reinsurance program, which is also in line with our July update. The main cat and drop-down covers are similar to previous years, adjusting for exposure changes. On the P&L volatility covers, we have replaced the NHAP and the ASL with a new aggregate excess of loss cover, providing $400 million of protection for natural hazard events in excess of $5 million once the total retained cost of these events reaches $650 million. As this reflects a lower level of volatility covered in FY '20, we have increased the FY '21 natural hazard allowance by $130 million to $950 million. And given the hardening reinsurance market, we believe this program strikes an appropriate balance of natural hazard volatility protection and increasing reinsurance costs. Now to the group underlying ITR, which improved significantly over the half even after allowing for the net benefit of COVID-19, noting that risk margin is excluded from this calculation. Improved investment income over the half of 50 basis points reflects the investment outperformance I mentioned earlier, although lower yields have also resulted in a lower PV adjustment. Operating expenses reflect higher regulatory and technology costs, whilst claims handling expenses decreased due to the seasonality of natural hazard events. The 1.8% margin expansion seen in the bar on the waterfall was driven by claims improvements, rate increases and improved risk selection, with increases across all portfolios. The COVID-19 benefit of 1.8% comprises the premiums, claims and expense items I've previously called out. And looking forward and notwithstanding any further COVID-19-related impacts, the group underlying ITR in FY '21 is expected to be impacted by the higher natural hazard allowance, lower running yields on investments and more normalized working claims in New Zealand. We aim to reduce these impacts through ongoing price increases across the portfolio as well as actions to improve both the loss and expense ratios. So now to Banking & Wealth, which delivered a profit after tax of $242 million, down significantly on the prior period from the higher collective provisions in response to the expected economic impacts of COVID-19. Home lending contracted 2.8% over the year, reflecting slow system growth, strong competition for new and existing business and elevated, albeit recently improving, loan processing turnaround times. The strong momentum in at-call deposit growth, underpinned by improved digital origination capabilities, has had a positive effect on NIM, which is up 4 basis points. Noninterest fee income has trended lower and reflects a reduction in a range of banking fees in line with the bank's strategy to offer competitive everyday transactional banking products. Operating costs increased 3.4%, primarily due to an increase in regulatory and technology costs. And finally, I note that the Wealth business, which remains under strategic review, reported a loss of $6 million, reflecting reduced admin fee revenue due to COVID-19 and elevated regulatory costs. Moving now to the collective provision, and we have maintained an appropriate degree of conservatism across both our economic assumptions and our modeling methodology. While our base case economic outlook has improved slightly since March, we continue to maintain a prudent stance, particularly in light of the recent restrictions in Victoria and have included further management overlays in Q4. The estimated impact of COVID-19 within the collective provision is now at $155 million, representing 27 basis points of GLA. On customer deferrals, I've included some key data points on the slide. We've now completed 3-month check-ins with the majority of our home lending customers, with around 50% of home loan accounts returning to full repayments. We now have 5% of our home lending portfolio and deferral, down from 8% at 30 June. And while this is still early days, it is a pleasing trend. Now to group expenses. The FY '20 cost base includes $60 million of provisions associated with the pay and leave entitlements review flagged at the May update. The COVID-19 costs of $22 million reflect the net effect of both positive and negative items, the most notable of which include the rollback of some offshore processes and increased computer expenses, but we also saw some benefit from reduced travel and other discretionary spending. Overall, FY '20 operating expenses, including the unexpected costs for pay and leave entitlements review and COVID-19, were just slightly above our original expectation of $2.7 billion. Cost discipline remains a key focus, and we will continue to look for opportunities to reduce duplication, streamline processes and deliver efficiencies as we embed the new operating model. And finally, moving on to capital. We have maintained a strong capital position with group excess CET1 of $823 million after adjusting for the final dividend. The Board has declared a fully franked final dividend of $0.10 per share, and this gives an FY '20 cash earnings payout ratio of 61%, which is at the bottom end of our 60% to 80% target range and consistent with APRA's guidance to moderate dividend payout ratios. Of note on the chart, on the waterfall, is the increase in the General Insurance capital allocation, which was driven by the new reinsurance structure, an increased natural hazard allowance, the impact of ongoing low yields and an allowance for COVID-19 uncertainties. Now these items have impacted across target capital, PCA and excess tech provisions. The group has adopted a conservative approach to capital management during the year, and that's positioned us well for the uncertainty of COVID-19. And these actions have included retaining the $285 million of profit from the sale of Capital S.M.A.R.T and converting $171 million of CPS3 into equity. We've also maintained capital flexibility by holding over $600 million of capital at group whilst ensuring all regulated divisional CET1 ratios remain comfortably within our targeted operating ranges. Now this approach -- conservative approach to capital management has allowed us to not only maintain but strengthen our capital position. And with that, I'll now hand back to Steve.

Well, thank you, Jeremy. And before I turn to the outlook and our priorities for the year ahead, I want to briefly touch on a matter that's dear to Suncorp's heart. It's hard to believe that just 6 months ago, we were locked in debate about what should be done about protecting our nation and its people from the ravages of bushfire. Now while attention since March has understandably been focused elsewhere, we shouldn't kid ourselves that the underlying problems that were so painfully brought to the surface last summer have gone away nor that they won't reemerge this summer. Arguably, our nation is no better placed heading into this summer than we were this time last year. Yet again, we'll be relying on the heroes at the front line, the fire and emergency services and the first responders to keep us safe. In our view, there's no better time than now to match economic stimulus with community resilience. Over the coming months, we will outline a series of opportunities for the government to implement that will ensure a more physically and financially resilient and stable community. We believe the time is right for a nation-building program encompassing infrastructure, incentives, improved building standards and the removal of inefficient taxes and charges, all designed to create jobs and stimulate the economy. This is about government at all levels coming together with business, big and small, to make what will be a long overdue investment in our future. So let me turn to the outlook and our priorities for the coming year. Now look, I don't tend -- I don't pretend to have a crystal ball, and around the world, we've seen the folly of getting ahead of ourselves and thinking the worst is behind us. I'm also no medical expert, so I can't predict how likely it is that science will make it all right again. In a world of increasing uncertainty, the only certainty is that we need to prepare for all possible scenarios and control what we can control. Our approach to setting up our business to manage through these difficult times remains unchanged. We have a conservative set of economic assumptions that we are reviewing regularly, funding and liquidity levels that are designed to accommodate elevated economic stress, a balance sheet with a healthy buffer of excess capital, credit provisioning levels ahead of peers and a low-risk book of banking business, a comprehensive reinsurance program and an increased natural hazard allowance and a low-risk but high-quality investment portfolio. So like most other CEOs, I'm not going to describe a range of targets and commitments for FY '21. What I will describe is the opportunity we see through the lens of COVID to materially speed up the transformation of Suncorp to continue delivering for our customers and for our shareholders. To do this, we need to fundamentally change the way we work, embed clear accountabilities and deliver results at pace. In recent updates, I've outlined the strategic priorities for the organization. Our key strategic priorities remain the same, and they're shown on this slide. In order to properly execute these priorities, we needed the right operating model, the right structure and the right team in place. The recent changes we announced were a critical first step. We're simplifying our structure to speed up decision-making and improve productivity. This will unlock the potential to access previously identified opportunities that are aligned with our strategic priorities. Our focus now is to systematically approach all components of the value chains within our core businesses and improve performance. Now this starts at the top of the Insurance business with the reinvigoration of our brand portfolio, ensuring that our brands have clear value propositions, and they're positioned to grow. We'll then review our marketing strategy and its effectiveness. Our product set needs to be simplified. We have an extensive set of products, which all require investment to maintain. Simplification here remains a huge priority. We also need to consider product coverage in light of the changing climate affordability and more demanding community expectations. Our distribution capability needs to adapt. We'll drive to an optimal balance between our distribution channels to drive down the cost to serve and to increase productivity. And lastly, for insurance, we need to be best-in-class in our delivery of claims. This is the group's largest expenditure and, therefore, our greatest area of opportunity. Our priorities for the bank are similar and consistent with those I outlined 12 months ago. We need to win in home lending, particularly in Queensland. We need to accelerate digital and everyday banking and invest in open banking; and to optimize our physical channels; and of course, simplify the portfolio, all within that existing low-risk settings that have served us well. In New Zealand, the transformation program is well underway. We're well advanced with a business-wide program of automation, digitization and end-to-end process improvement. Overall, our goal of delivering improved performance for the group will be achieved if we can show all of our people and all of our programs of work are aligned to the way we improve and deliver improved service for our insurance and banking customers. This will allow us then to be held account -- to account for improving the key ratios that are embedded in our business: The loss ratio; the expense ratio; the cost-to-income ratio; the ITR; and ultimately, return on equity and NPAT. So in conclusion, we are well set to navigate successfully through the short, medium and long term. Our focus now is to continue capitalizing on the opportunities that are emerging, opportunities from new ways of working and from new ways of interacting with our customers. We have a new operating model and a new team in place to execute the priorities that I've outlined today, and I look forward to updating you on our progress through FY '21. So that being the conclusion of the presentation, let me open up the call to questions. So we'll try and do this between Jeremy and I. We have the members of the SLT in place, and we'll triage questions as appropriate. So let's start with the first question.

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

Just the first one. Maybe if you can comment on your reserve release expectations for FY '21 as they pertain to calculating the underlying margin and why that view may be different to peers.

Thanks, Andrew. I'll start, and I'll ask Jeremy if he'd like to add to any of the comments that I make. I think if you look at the underlying ITR performance in FY '20, obviously, it fell below our 1.5% of net earned premium. But the key item there that you should take into account is the performance from the statutory classes, which continue to deliver underlying performance ahead of that 1.5% of NEP. I think it was around 2.3% for the year. There's always going to be some volatility in long-tail claims. I think we all have been around long enough to know that, that's the case. Sometimes it works favorably for you. Sometimes it works against you. And we've seen a bit of it working against us in the past 12 months through the Commercial Lines. So I think that caveat around uncertainty needs to always be there. I'm not certain that's any more elevated going forward than it's been in the last little while, but again, it has to be a caveat. The other caveats are obviously superimposed inflation. We -- the good news is we don't see any evidence of superimposed inflation in any of the schemes that we're operating, and that's a very good outcome, I think, for the future. And secondly, and on top of that, superimposed inflation, there's underlying average weekly earnings inflation, which again is very benign in the environment, I think, we'll continue to be so. So all of that, when you wrap it up and you sort of put those caveats in the mix, we remain very comfortable that our reserving positions are appropriate and that we can deliver that 1.5% of NEP going forward. And again, why is it different to others? Well, we don't have quota shares sitting across our business. So our pool of reserves is, I think, significantly greater than many of our competitors. And we have got good operating performance in each of those schemes, and it will get better. One of the things -- one of the great things about having an end-to-end focus on long-tail claims and having Paul back in Australia to do that is Paul successfully ran that long-tail portfolio at a period of time when we were running favorably to the average of the scheme performance in Queensland and New South Wales. And we are back on that path to do that even before Paul came back. But we will really focus in on that now and get our scheme performance moving in the right direction, which I think will sort of be another underpinning of why that 1.5% of NEP reserve release calculation makes good sense. Jeremy, did you want to add anything to that question? I've hopefully covered it reasonably well.

I think you've covered it, Steve. Just to reinforce that we do feel comfortable that the expected release for next year would be above that 1.5% expectation, assuming that inflation remains relatively benign, which we have no reason to doubt that it wouldn't.

Do you have another question, Andrew, or…

Yes, please. Just one more. Just if you can talk about your reinsurance contracts. Do they have follow-the-fortunes clauses in them? And maybe on the property cats and aggregates. Do they cover all perils or named perils? Just some clarity on those wordings, please.

Look, I don't think there's anything unusual in our insurance program this year relative to last year. I haven't sort of been right through each of the -- each and every one of the clauses that are embedded in each of those contracts. The structure of the program has slightly changed. We didn't do a stop-loss on cover this year. We've rolled that into an enhanced aggregate cover. And we obviously have taken more through our own natural hazard allowance. Jeremy, I don't know whether you want to comment on any of the specifics about any of those clauses. But there's nothing unusual relative to this renewal compared to previous years.

Yes -- no, I think I'd support that, Steve. Just what we have seen this time through is that, obviously, reinsurers have been a little bit more specific around the way they've approached pandemic wording in the various covers. So the exclusion of pandemic is more specific now, which effectively just backs up with the current intent of our policies anyway. So it has probably been the key change that we've seen.

Okay. So just to be clear, if you were to start incurring business interruption losses in the insurance book, is your view that they would be covered under your reinsurance contracts or not?

No, our view would be that they're not covered because, yes, the reinsurance arrangements follow the intent of our policy. So we don't believe our policies cover for pandemic, and the reinsurance wouldn't cover it either. It would follow our policies.

The next question comes from Nigel Pittaway from Citi.

So just first of all, trying to get a little bit more color about costs. You keep saying you've got more to do on costs. There's obviously been some cost variance in the half through project changes, most notably in the bank. Previously, you've guided to reg costs falling in '21. So is there anything you could help there? Are you still expecting reg costs to fall in '21? How much of the project costs was deferral? And is there any way we can sort of think more about these cost savings moving forward, even though you don't like the cost-saving program targets?

Yes. I might make some overarching comments and then get Jeremy to dig into the details. I do see an opportunity for us to continue on the program of balancing out our costs in this business and making sure that we're as efficient as we can be. I think we've done a good job of that over the years, although we've done it typically through the prism of these big programs of work, which provide big, upfront costs for longer-tail benefits and have been a bit hard, I think, for the market to track through the underlying expense ratios, which is fundamentally where I think it needs to play out. We are going through an alignment of our organization now relative to the operating model. That will mean that we will reduce some of the layers within our business. That's not necessarily being come at from a cost-out program. It's more around improving the efficiency of our business, making sure we're streamlining it better. We're getting better decision-making. We're avoiding duplication. And then there will be other opportunities through that program of work, realigning our brands, product simplification, optimizing our digital footprint. There will be some investment that we'll need to make, particularly in digitization and automation. But we need to do a better job of leveraging the investments that we've made and the things that we've already got embedded in our organization, things like operational excellence. We need one set of productivity measures right across our business. We need to get better value out of our partnering arrangements. We've typically looked at partnering. We have partnering arrangements in place. That's a great thing. They have to start from scratch. And we've typically looked at them in a bit of an incremental basis or a labor arbitrage basis. We see an opportunity to get a more strategic alliance with our partners. I might hand to Jeremy. He can go through some of the elements of reg costs and project costs, et cetera.

Thanks, Steve. So I mean, just to remind, with our cost base this year, we landed at 2.747, and that included $60 million of pay and leave review provisions and about $22 million of COVID costs. Now some of those COVID costs will probably stick a little bit into 2021, the minority of them. And so we have seen some progress on the cost base. In terms of the outlook to FY '21. Yes, we're sort of at pains to say that the investment slate, so that regulatory program of work, is part of the cost base, and we manage the cost to the overall pool of costs. We would expect the regulatory program of work to probably come down a little bit into FY '21, maybe not to the same extent that we had originally anticipated given the deferrals of some of those programs, but we would expect that to come down. We've still got maintenance programs and other programs that we need to roll through. So in terms of the underlying cost base, we do have -- we know there are opportunities, as Steve outlined, around costs. Some of those things require a little bit of upfront cost to prize out. And so I think they're probably the key dynamics that we'll see into FY '21.

Okay. Maybe I could ask a question also about then the rates in the -- particularly in the commercial, but particularly in the commercial SME book. There has been a little bit of difference between sort of your other 2 competitors as to what they think was happening and most notably in terms of the propensity for people to roll over on existing terms, expiring terms. Can you give some comments as to where you think rate rises are at in that space? And also whether or not you're seeing a prevalence of that type of behavior?

We -- and again, I'll ask Jeremy to add to this if he chooses. But I think the rate environment in Commercial Lines, I would make the point that many on the call would recognize that we led a lot of those rate movements over the past 3 years to reflect what was an unsustainably low level of margin across Commercial Insurance. Now it is absolutely the case that there's going to be some movement around that portfolio given the impacts of COVID and the deferrals, et cetera. But we've been reasonably well placed in terms of the pricing that we've put through that book in FY '20, and we expect it to continue around the sorts of levels that we've talked about for the last 2 or 3 years, which, in aggregate, is sort of lower single-digit-type increases for the package book, the SME book, somewhere between 3% and 5% potentially. The mid-market is obviously a step above that. And it does depend on whether or not we've got loss-affected renewals going through that book, but that's been typically in the high single digits. And again, our expectation is that, that will continue. And then obviously, in the top end of the market, which we have materially less exposure to, those increases are significantly higher and, again, significantly higher again if there's a loss-affected element of the renewal. So I think our view on the dynamic in Commercial Insurance, yes, there will be some dislocation through COVID as it comes through the back end of the deferrals. I think, generally, it's a hardening market, remains a hardening market. I think the benefit we've got relative to our competitors is we led. So what we're about at the moment is, yes, maintaining that margin improvement that we've built over the past 2 years and consolidating it within that target level of margin performance that drives the sorts of levels of return that we need in that portfolio. That's roughly in the 10% to 12% ITRs, generating the sorts of returns in the portfolio we're looking for. So again, we remain very confident in our underwriting in that portfolio. We remain very confident in the trajectory of margin and the pricing that we've been sort of disciplined around putting through the book to get the right level of return. Anything else, Nigel?

Okay. So you don't really see a -- well, just quickly. You're not seeing a large prevalence then of people sort of renewing on expiring terms. You don't think that's a big, big factor. Presumably, we conclude that from what you've just said.

Yes. I think there's -- look, there's evidence of that potentially in the book from time to time. But again, I think it's probably at the periphery, not necessarily the overarching thematic, Nigel.

Fine. And then maybe just finally, obviously, you took the full $130 million increase on the cat allowance. Have you calculated the probability of exceeding the $950 million now? Is that something you can share?

Look, we're working through all of that. Again, we've done it in 2 stages. Obviously, we built the reinsurance program around the natural hazard allowance upfront when we came to the market in early July, having just concluded the reinsurance program. We obviously put a range of natural hazard outcomes in there as we sort of did a bit more work on it through the course of the last month. What we put in place 12 months ago was a belts-and-braces approach. I think what we're very keen to do was take that issue off the table and substantially get it off the table so that we could get the market to focus on other elements of our operational performance and our underlying business. So I think I talked about, and it was the case that we sort of built it to a 1-in-5-type level of -- probability of exceedance, significantly ahead of what we had done previously. The new program won't be at that level of belts-and-braces approach, and it was never going to be given the increase in reinsurance. And that's one of the reasons why I talked at the half year about us having the flexibility on the balance sheet, which meant we could sort of trade off some of the elements of significantly increased reinsurance pricing and bringing a bit more risk back onto our book. So it's certainly going to be better than what it was prior to last year, Nigel, but it's not going to be as good as last year's program in terms of the likelihood of exceedance. We've really balanced it out, believe it to be the right outcome and the right balance between volatility, our balance sheet and the cost of reinsurance.

The next question comes from Siddharth Parameswaran from JPMorgan.

Just a couple of questions, if I can. Firstly, just on the underlying margin trajectory. Those numbers have been quite volatile for a while, actually. I mean I think in the second half of 2020, the -- I think you had a number of 9.4% from memory and then -- sorry, 12.4% then down to 9.3%, now up to 12.9% underlying margin. Could you just comment on what are the moving parts in this? I mean -- and in particular, I think in your slide there, you show a 1.8% improvement, but I'm not really sure what that relates to. And you also flagged there's an improvement in the investment income. I'm surprised given that deals have been falling. I'm just -- I suppose I'm just at a loss to explain why these numbers are moving around so much.

Yes. And again, I'll hand to Jeremy in minute, Sid. But the -- one of the fundamental factors is that we've made some material readjustments to our reinsurance program, natural hazard charges. So that's obviously goes through. And when you reset your insurance program and the cost of reinsurance goes up, taking your covers or the incremental cost rate on line goes up, and you increase your natural hazard allowance, you take it through margin upfront. And the improvement comes obviously through as you improve either your pricing or the underlying performance and the loss ratio sense across your business. So I think in the last couple of years, that's been a big dynamic. The underlying performance in the investment portfolio reflects something that Jeremy and I have been working on for probably 5 years to get the panel of managers in the right position so that we could drive outperformance through our manager profile. And this year, we've been able to, on elements of that portfolio, deliver returns well above our sort of 60% to 80% sort of expected differential to risk-free. And it's been a deliberate effort over a long period of time to be able to get that outperformance. So there will always be volatility in this margin. Some of it reflects the one-off nature of some of the input costs that go through insurance. Jeremy, did you want to add to that?

Yes. Thanks, Steve. So I mean I agree in terms of the -- what the volatility components in that underlying ITR have really been around natural hazard costs, reinsurance, natural hazard costs and then investment income. On the investment income, Sid, in 2H, as Steve said, we had some very strong manager outperformance contributing to that. We also had a little bit of help along the way with some of the inflation securities we've got with the step-up in CPI at the end of the half. So that's helped a little bit as well, which we'd expect to reverse next year. And then with the margin piece, the 180 basis points on what we call margin, what that number is effectively is the contribution from NEP growth, net of working claims. So it's an underlying, excluding the things on the left-hand side of the chart effectively. And we've seen good expansion there across all of the categories. So we've seen expansion in Home. We have been putting through rate increases through Home to start to pay for that ongoing higher reinsurance natural hazard cost, which is in the other parts of the bar chart. We have seen growth in New Zealand. So I referenced that the working claims ratio in New Zealand is still, as it was last year, is unusually low. We'd probably expect that to revert. We've seen some expansion in CTP with some of the price increases there. Workers' compensations performed well for us during the year with the claims performance I called out. I mean -- and Commercial has been going well for us as well in terms of the price increases we've been putting through that portfolio. In terms of the outlook, I've called out 3 things. One is where does that number go forward. Three things. One is natural hazards. So I think the $130 million of allowance will go through underlying ITR for FY '21. We will expect yields, that underlying investment yield to be lower in the underlying ITR. We'll see some of that reversion from manager outperformance. Some of the inflation piece goes. We'll see lower yields will impact through. And then as I called out, we'll see some of that reversion to more normalized working claims loss experience in New Zealand.

Okay. Just a second question then. If I can just ask about the rate increases that you are getting. I mean they don't seem that high. I mean high enough to be calling back inflation, plus reinsurance cost. I think 3.5% in Motor and Home in the second half, I mean could you just comment on that? And also just perhaps where you are in Commercial. You mentioned you're still getting good momentum, and you're still short of that 10% to 12% ITR range. But just if you could just comment how much more there is to go to get back to the 10% to 12%.

Yes. Let's go through the portfolios one by one. So in Home, I guess we've been able to get quite substantial pricing through Home. We have been focused on doing that, given the impact of the higher natural hazard allowance and the prevalence and the frequency of weather events right across the market. So the pricing in home has probably been -- we typically think about the short-tail portfolio and pricing in the sort of 3% to 5% range. And over the last few years, Home pricing has been closer to 5%, and Motor pricing has been closer to 3%. Home pricing has probably been a little bit above that in the last 12 to 18 months, reflective of, firstly, the catch-up on the increases of the allowance and the reinsurance program from 12 months previously. And again, as we've come into this renewal, we've seen what we anticipated to be a higher reinsurance cost coming through, and we have gotten -- tried to get ahead of that a little bit with some increased pricing in the portfolio. So I'd probably say while we typically look at 3% to 5% across Home and Motor, Home has probably been at the top end of that range and maybe a little bit above that, but again, very reflective of the input costs. So we have had allowances, reinsurance and, obviously, the nonhazard water claims environment going through elevating inflation in those portfolios. In Motor, it's probably been at the lower end of that range for a whole range of obvious reasons. I mean I think in an environment where frequency has been lower, we've been very cautious about pricing into that portfolio. And again, in Motor, the factors around driving inflation there at the moment are the ones that we've talked about before around pricing, about the cost of parts, cost of repairs, sophistication of motor vehicles, et cetera. So again, I don't think things have necessarily changed in pricing in Home, top end of that 3% to 5% or above; and at the Motor end, probably closer to the bottom end of that range for the last 12 months.

But just in your chart, I mean, you quote a figure of 3.5% for Home and Motor combined for the second half. Is that a mix issue?

Yes. Look, I think it's very -- the numbers I've given you are the pricing parameters that we put into our pricing models. There's always a risk issue that goes, so I'll get Jeremy to talk briefly about the mix of the book. But obviously, new business versus renewal premiums, mix of business between landlord insurance and renewing average written premium levels for a traditional Suncorp home contents cover. So you do get mix issues going through the book. Jeremy, do you want to…

I was going to say, Sid, that when you look at the AWP growth, there's a reasonable mix impact between that AWP outcome and the headline prices that we're putting through to customers, and that is new business renewal mix. So in Home, the new business premiums tend to be lower than renewals. Motor is the other way around. New business tends to be higher. And then there's a bit of brand mix going on there as well. Terri Scheer, for example, versus AAMI; Shannons versus AAMI, et cetera. So you got to be careful looking at the AWP number as a -- reflective of the pricing we're putting through. There's a reasonable difference between the 2.

And of course, on top of all of those explanations is the -- as we lift premium in a rising rate environment, we typically see customers adjusting that premium increase through the prism of their excess. And so when they make an adjustment to their excess to offset some of the premium increase, that obviously -- the benefit to that flows through net incurred claims, which are obviously lower as a result of that excess lift.

The next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask the first question about bank margins. So the margins were very strong, up 4 basis points half-on-half. And it looks like you'll be pretty much [ prefer the bank ] to see higher margins on the back of, in part, lower term deposits and high at-call deposits. Do you have the appetite to continue to push that dynamic further into FY '21? Do you have appetite to push your term deposits mix even lower? And also, what kind of headwinds should we be expecting as the replicated portfolio steps down in line with lower rates?

I'll just quickly make a couple of brief comments on the performance, margin performance, and the deposit transaction account activity, which I think is a really good story for Suncorp, and it demonstrates the alignment that we've had in that particular portfolio around leveraging our digital investments. We matched up a very innovative product, which is a growth saver account, which, at the time, was one of the first 2 and best in market alongside a cross-group collaborative view around how we digitize that portfolio and leverage the investments that we've made in things like the app and other elements of our APIs in the technology space, been a great cross-company collaboration issue. And we've taken significant impact on -- positive impact on margin through transaction account balances lifting the opening of new transaction accounts through digital and managing through that term deposit arbitrage that sits there. So Jeremy, did you want to talk to the outlook?

Yes. I mean in terms of -- just before we go to the outlook, in terms of what we've seen in FY '20. We think that deposit growth is probably a differentiator. And when we look at the residual margin outcome for FY '20, there's been a bit of an offset, as you'd expect, between what we're seeing on lending spreads with where the -- relatively the cash rate went during the year and what's happened with BBSW. And then offsetting that for us has been 2 dynamics. One has been the lower carry on the replicating portfolio, which for us is a smaller drag than for others because we have that lower level of customer -- a low rate customer funding -- low rate customer deposit funding. And then the other piece for us has been, as others have seen, is higher liquidity. We're all carrying higher liquidity, which comes at some costs and in lower yields on that liquidity. So yes, we've seen -- those 2 elements have probably offset in FY '20. We'd expect to, yes, see some of that drag continue in FY '21 on the low rates on the replicating portfolio. We'll see where the lending spread goes with BBSW, but we'd still expect to see some benefit from the ability to improve the deposit mix with the at-call versus term deposit outcomes.

I wanted kind of a -- a kind of slight follow-up question. So you've called out strong abilities in digital in the bank is helping to grow the deposit growth. And it looks like there's still about 130, 140 branches that Suncorp Bank is running. And some of your competitors have grown mortgages very strongly without any branches at all. So is there -- is 130, 140 branches the right size? Or could that be -- could you be running with 20 branches?

I think that's probably a bit of a stretch, Andrei. But we do have to really test ourselves against what we've seen post COVID, or through COVID and what is likely to occur post COVID, I guess. Banking has always been a part of our portfolio as it has been for the whole industry, which has been sort of an earlier adopter in terms of financial service, in terms of digital. It's very transactionally based. And we've now got our digital capability to where it needs to be, and you can see that evidence through what we've done on deposits. Now we need to turn that into a similar type cross-collaborative approach to the way we look at our lending portfolio and drive to a higher level of origination through our lending portfolio through digital. We obviously have had some branches that have been closed through the COVID environment. And one of the key things I talked about that Clive and the bank team will be looking at is that optimized distribution footprint, which in the bank, really revolves around contact centers, digital online and a physical store footprint. And as in insurance, where it's more contact center and digitally based, there is an opportunity for us to optimize all of that distribution footprint across both banking and insurance to make sure that we can, yes, meet customers in the manner that they want to be met and make the cost to serve for our business as low as it can possibly be to make it as efficient as it can be.

If I can ask just a quick third question. Just want to ensure, with the natural perils increase, you picked $130 million versus the prior guidance of a range of between $90 million and $130 million. What's driving picking the top end of the range? Is that coming down to having more confidence in your ability to push through price increases and recoup that?

Well, we'll always be driving to making sure that we appropriately reflect the cost -- the input cost in our pricing. I mean I would make the point that pricing can't do all the heavy lifting in this environment. We don't want to take ourselves out of market, and we want to continue to grow our franchise. So all the other things I talked about around loss ratio performance, whether branding, marketing effectiveness, products, product coverage, claims, that all sits in that prism of loss ratio. And we see huge opportunity, and with Lisa and Paul, to drive through material improvements in the way that we underwrite, the way we risk select, the way we price, the way we offer coverage, the way we simplify our products and manage our claims to drive that performance. In terms of why we landed at the top end. Look, I think, hopefully, you've seen a track record of this management team in terms of setting this business up as conservatively as it can be. We don't -- we'd prefer not to be in the environment of managing through all the elements of COVID operationally and financially. We'd rather not be having a protracted debate about the adequacy of our reinsurance program and natural hazards. So we have a bias to be conservative, and look, this year, that served us well. It's a trade-off between reinsurance costs, natural hazard costs, pricing, margin. I think we've landed at the right point, but it is at the conservative end of where we set it and talked about at the 1st -- on the 1st of July.

The next question comes from Ashley Dalziell from Goldman Sachs.

Just an initial question on the bank and the loan deferral update. The 50% of customers that you're talking to there sort of returning to normal payments or full repayments. That compares pretty favorably to some of your peers that are talking more to 15%, 20-odd percent of customers returning to normal payments. I think there's one bank saying the same 50%, but that's an expectation rather than experience at this stage. So just wondering what you think within your book is driving the better than peer outcome at this stage.

Yes. Look, I think it's sort of 3 things. One is I think we've been telling everyone that we've been driving a low-risk book of banking business. Since the GFC, we've done a lot of work to derisk our bank. I'm very confident that this is some reflection of a decade of hard work on that basis. I think the fact that we're doing 3-plus-3 check-ins, I've always had the view, and as does Jeremy and Clive, that 3-plus-3 check-in approach through this deferral piece is one of the best insights that we can get as a management team around the future outlook for provisioning. And so we spent a lot of time with our customers understanding how they're tracking the industries they're working in and their prospective views on deferral requirements and repayment requirements. And I think, look, we're benefiting at the moment from being -- having a bias to Queensland in that portfolio. I mean Queensland is not at the same level of restriction. We're seeing a really good substitution of international tourism with people that are traveling within Queensland. And I think that's potentially serving us well. Jeremy, did you want to add anything to that?

No. I think that's right, Steve. I mean the other thing that we do is a -- it's a reasonably robust, rigorous process around those check-ins. The 3-month is different to what some others are doing to start with. We risk rate customers. We call some if we think they're higher risk because we want to speak to them and understand their issues. For those that are low risk, we'll e-mail. Where customers -- and so there's a reasonably sophisticated process around that. And just to add to Steve's point around Queensland. When we look at the percentage of the book that is in deferral, it's relatively less weight in Queensland, which sort of supports that thesis that Queensland is, at the moment, at least doing a bit better than the rest of the country.

Okay. Great. Maybe just a follow-on question then around the outlook for provisioning. I mean appreciate it's a difficult one. But I mean with where you've provided for in the overlay, absent any sort of further second wave, is it pretty difficult to envisage needing to materially top up again through '21 based on what you're seeing in the book?

Look, I mean I'm not going to make any absolute statement about what may or may not happen. As I've mentioned in my commentary before, a bit of a folly to think this is all behind us, and it can manifest itself in many different ways between many different geographies. So I'm very cautious about that, and we are very cautious about that. I think when we came into settling the accounts, there's probably nothing in front of us that suggested that we needed to top up that collective provision. Our assumptions that are driving the modeling, we got -- and again, I think we've got one of the best models around in terms of being able to calculate the future losses in that portfolio, and we know the book really well. We probably saw some upside probably to our assumptions that were going through the book, but we were just steering into the imminent lockdowns in Victoria. And while we don't have a huge bias to Victoria in terms of our lending book per se, we were very conscious of the potential flow-on effects through border closures and how that might impact our book in Queensland and our book in New South Wales. So again, it's another reflection of a conservative bias. And again, I think we just have to be -- all of us in financial services to be open to the fact that this is a very fast-moving environment. We have to set a core of conservatism and prudence in our underlying business and then be prepared to accept some movement around provisioning and actual outcomes as things become clearer.

I'll just add to that, Steve, that there is this vagary of the accounting standard that -- with what they call stage 1 loans. So those that are not in default, not overdue. You have to -- you only book a 1 year's worth of losses on those loans. So every new year, you're booking another 12 months of losses on those loans. So that's probably the element that we'll keep a watch on. We've taken, as Steve said, a very conservative view around those customers who are in deferral at the moment. What we've made by way of assumptions around those going through into potential overdue hardship forward, so we've made a conservative view around it already. But there may be some stage 1 -- some increase in stage 1 loans, depending on where the economy unfolds over the next 12, 18 months.

Just a second question on the capital position. I think back at the reinsurance announcement, you were suggesting the new program might show up maybe $60-odd million of capital. Just wanted to get an update on that data point. And then beyond, are there any major sort of capital drags, I guess, that you can envisage for the business into '21?

Yes. Look, thanks, Ash. I mean, that number, I think, data point is right in terms of the reinsurance impact of it. And again, it came back to why we were keen to hold the proceeds of S.M.A.R.T on the balance sheet. I think in hindsight, that was the right decision but also gave us flexibility around the renewal, and that $16 million (sic) [ $60 million ] number is correct. I would also make the point that over many years, people have asked us why we held an excess buffer in our insurance business. And those of us who have been around insurance long enough know that when things move in insurance, they typically do move both on an actual basis and a prospective basis through your target capital, through your excess tech provisions, through your premium liability, through your outstanding claims. There's so many moving parts in capital in the insurance business that when things move, you want to have enough capital to be able to manage that process, and you could see that in that waterfall there. It's not gone. One of the other dynamics in insurance capital is that as you start to make the adjustments that you need to in pricing and improve the performance of your business and you improve the profitability of it as we expect to do, then that -- many of the factors that have driven that increase in capital in the insurance business will start to unwind, and they'll unwind to the betterment of the balance sheet in totality. Jeremy, did you want to add to that?

Yes. I mean, that's a complex number in that capital chart, that one, and it's the combination of a few things. So one of them is that impact of the FY '21 reinsurance program on slightly less P&L volatility cover, which then goes through to the target capital numbers. There's the natural hazard allowance. So as we increase the natural hazard allowance, that then impacts through to PCA and in premium liabilities in terms of a forward look around that. Lower yields impact in the form of profitability, which also impacts on PCA and excess tech premium liabilities. And then we've also, as I said, put some money into premium liabilities for COVID uncertainty. So the way that works is in terms of the premium liability outlook number, we've made some conservative assumption for a really modest amount of COVID uncertainty in there as well. So it's a pretty dynamic set of factors in there. There's DTAs and DTLs and all those sorts of good things. But as Steve said, I think the critical piece to think about is that it's not necessarily gone. As we improve the performance of the business, we'd expect to get some of that back.

Could have spent the full 30 minutes of the presentation on that matter alone if we chose to, Ash. But we avoided that for the purposes of brevity.

The next question comes from Michelle Wigglesworth from Milton Corporation.

On a very high level, and I could be wrong, I calculated that the SME book in -- on your banking side that potentially 10% of loans could be on deferral. Not sure if that's correct. And I was just wondering, is there any crossover with those customers that are on loan deferrals on your insurance side? So are you -- could you see some potential weakness for those customers on the insurance side if you do sell both insurance and also lend to them?

Jeremy, I don't know whether you want to sum it up [indiscernible]

Yes. So I mean, Michelle, we have given the numbers in the pack. So it's 11% of our business customers are in deferral at the end of July. So that's the latest number. And then obviously, the difference between them and the mortgage customers is they're on a 6-month deferral. So there is no 3-month -- 3-plus-3-month check-in with the business customers. In terms of the crossover, look, I don't think there's a significant crossover because at the end of the day, it's a relatively small book of business. But what we do, do is some reasonably sophisticated mapping across our insurance exposures by industry types, what's happening with their premium flows and through to the bank and what's happening with deferrals. So we do have all that mapping. But I don't think it's a particularly significant impact.

Okay. And just one more question on the insurance business. The commercial long-term strengthening for molestation claims, am I correct in saying that -- assuming that's sexual harassment-type claims? And how are you comfortable on your provision for that if that's what that relates to?

Yes, it is. It's outcomes of the Royal Commission more than anything else and the commentation of some legal positions from more recent times, stretching back over a number of years, have covered probably back 30 or 40 years. Look, again, that number has been reasonably stable over time. The increase is certainly not material in the context of the reserves. It does pop out a little bit when we talk to movements year-on-year. Look, we're very comfortable in the reserving position. It is well set. It doesn't mean it's not going to change over time, but I think the changes will be more incremental than substantive going forward. But again, it's one of those uncertainties in long-tail provisioning. And you see that through books over time on asbestos books, silicosis, the molestation pieces. There are these books of business that sit there that do have adjustments, sometimes up, sometimes down. So we put -- that's why I called it out as a caveat around the 1.5% because these things do occur from time to time, sometimes strengthening, sometimes releases.

The next question comes from Matt Dunger from Bank of America.

I wondered if I could ask a question on the dividend payout ratio. Paid out 61% for the full year. But this time, the second half, obviously, down at 33%. You've made a point of saying over the medium term, you're looking to 60% to 80% payout ratio. Could you just confirm that, that isn't looking at the second half payout in the short term? And also, should we consider the bottom end of the target payout range as a new benchmark?

No. No, I think the dividend policy hasn't changed, and it's really good and pleasing to see even in an environment like we've been through in the last 12 months that the dividend policy that we probably set 5 or 6 years ago has been sufficiently robust enough to see us through the last 12 months. So it's a 60% to 80% payout of our cash earnings. We've had typically, prior to this year, been at the top end of that and appropriately this year at the bottom end of that. The other element of our guidance has always been that we will return capital less as access to the needs of the business, and we remain committed to that. And as we get more comfortable with the external environment, when that will be, then that part of our policy will be obviously back on the table again. So nothing's changed in terms of dividend policy. 60% to 80% is the benchmark for this year and going forward. But I mean, obviously, we would never take a call around distribution that would compromise the longer-term health of the franchise. That's a fundamental precondition around our consideration of dividend. This year, we stressed that dividend payout to a level that's never been seen before around some of our stress testing, which has been very thorough and, obviously, in conjunct with the demand to the regulator and with the regulator well informed of the stress testing that we've done and the proposals that we've put in front of the market today.

And if I could just follow up with a question on the $85 million provision and how you've allowed for business interruption claims, how much relating to costs, to the actual claims themselves and risk margins within that $85 million.

Well, let me just precursor. As Jeremy has already said, we're comfortable with the intent, comfortable with the wording. It is appropriate, though. The majority of that $85 million is in risk margin. Those of us know -- familiar with the accounting standards and the actuarial standards, we'd know that, that risk margin is designed to true up the probability of sufficiency to the 90th percentile. I think it would be more of a concern if we hadn't made some assumptions around the broader COVID levels of uncertainty reflective in a risk margin of that magnitude. It is a COVID risk margin, so business interruption is one part of that. But it's also landlord and various other elements of uncertainty relating to COVID. So I think it's an appropriate thing to do. It doesn't, in any way, contradict the commentary we've made around our comfort around the intent of our policies, the wording that's associated with those policies. And again, our support for the test case that's going to be underway in the next couple of months.

The next question comes from T.S. Lim from Bell Potter.

Well done on the results. You just happened to mention a test case coming through. Can we get some clarity around your thinking about this again?

T.S., look, I'm going to respond on that well-worn political response, which is that given the matter is likely to be before the courts very soon, I'd probably not prejudice anything that goes on ahead of that time. So look, other than to say we fully support it, we think it's an appropriate process to go through, and we're fully supporting. And in every sense, the ICA's representations in contract with AFCA to get some clarity around these matters through the process. But I don't want to get into a running commentary ahead of the court appropriately determining the matter.

Okay. In that case, can I ask a question about the bank?

I'd be disappointed if you didn't.

But I would ask a question about selling the bank. Anyway, if you rate the bank out of 10, what would you give the bank?

Oh, dear. I'd probably not give it a rating out of 10. I'd go back to the sort of report cards that I used to get when I was at school, which is great potential and -- but could be better, and could do better.

The next question comes from Brett Le Mesurier from Shaw and Partners.

So the report card, Steve, what report card would you give yourself now? Is it same at school?

Well, I'd like to think I've improved over time. I've had -- there's a few years in the past between when I was at school and now, Brett. So I hope I've improved a little bit over that time. But I'd leave that for people like you to form views on.

Now on commercial premium rates, we can see how the average home and motor premium rates increased. But you're silent on the average commercial premium rate increase. Can you tell me what that was from 2019 to '20?

Jeremy, I might let you do that one. And again, it's a bit like the average written premium commentary on that home and motor side. It does get a little bit distorted in that absolute sense, given the portfolio remediation with -- has gone through that book over the last little while. Jeremy, do you have an average?

Look, the average would be the mid-single-digit -- mid- to high single digits, high single digits in terms of price increases over the last 12 months. As Steve said before when talking about those price increases, we're seeing mid-single digits going through SME, which is a reasonable-sized portfolio. We're seeing up into double digits going through into the higher property portfolios and a mix in between. So it's probably sort of around the high single-digit number as an average increase. And on top of that, Brett, we're seeing some pretty good retention rates, particularly up in the top end of those increases. We're seeing retention rates with 9 -- 90s in front of them. So we're pretty pleased about that as well.

And what portfolio did you exit?

We exited -- as we called out last year, the key one, I think we've named it with the Longitude Strata book as it wasn't profitable for us. That's the key one that we've exited. And then there's been a number of others as we've -- particularly in that Strata space. But the key one was Longitude.

Okay. Moving on to the bank. What's the level of security you've got for your $1.2 billion business loan deferrals?

Yes. So the 100%, they're all -- those business loans are all fully secured and most of them against -- a lot of them against residential mortgage.

Okay. And lastly, your perils allowance. What's the distribution look like? Do you have a symmetric distribution when you think about how the perils look over your range of outcomes? Or is it skewed in -- to one direction?

Well, I don't know that I can describe it as symmetric. I can tell you how we go about calculating it. We look at it in sort of 3 categories. One is events that we call attritional, which are in that sub-$10 million category. And we'll look at that back over a limited number of years and provide a distribution around our expectation of what that might look going forward. That's based primarily on our own data. When we move to events that are between the $10 million and the $150 million category, we stretch that back over a slightly longer period of time. And then when we look at events that are from that point through to our attachment point, we typically take them back over 30- and 40-year periods, and we use data that we have generated across our book looking back over that period of time but also supplement it with the data that's provided to us by our reinsurance partners and more sophisticated modeling around perils like earthquakes and cyclones, et cetera, which typically sort of fall into that sort of category that's closer to our deductible.

So you just look at averages. You don't look at a range of outcomes.

Well, I think we do look -- if you look at that as a means via which -- I mean, look, there's many ways you could calculate a natural hazard allowance, and I'm very open to the different ways of doing it. But that is -- I think that provides as good as -- as most sophisticated approach to the way that you model a book like this. And again, I think the variable that has been subject to some debate is just how far back you go. By definition, if you are of a mindset that says the weather is changing, and the more recent frequency and intensity of weather has been greater than it might have been 10 or 15 years ago, then you get a different outcome relative to how far back you take the book. And I think one of the biggest -- well, I know one of the biggest drivers of the increase in natural hazard allowance over the past 2 years is that we've taken a view that we should bring in our backward-looking view of events, particularly in that attritional bucket lower down in the claims cost pool. So again, I mean, you may have a better way of doing it, Brett, but that's -- I think that's the established pathway that we've looked at it over a number of years.

The next question is a follow-up from Siddharth Parameswaran from JPMorgan.

Sorry, gentlemen. Just one question. Just on the potential for business interruption losses. I just want to be clear about whether -- I think the regional views that were coming from Suncorp where that you had very few policies which actually had exposure to the [ incorrect act ], the Quarantine Act. I was just wondering if you could just update us whether that is still the thinking, where the most policies are actually reference the correct act. I think one of your peers gave a number that about, I think, 30% of their policies reference the wrong act. If you could just give us a comment around that.

Look, I'm not going to go into the specifics of how many reference particular acts. I think that's for a bit later down the path. And I think the comments that I've made still stand, i.e., our comfort around the intent and the wording. And the comment you made about that smaller number, I don't think anything has happened that changes that view. But again, I think we should all wait for the test case to work its way through the jurisdictional court. And we'll -- we remain very confident in our position, obviously.

Okay. So just to be 100% clear, have you taken any central estimate provisions? Or is there everything in the risk margin for potential offers at most?

Well, I think, Sid, you'd be, so again, surprised, I think if we didn't take some central estimate provision. By definition, it's a smaller number, but there will be some legal costs that will be incurred as we work our way through the next little while in terms of some of the proceedings that we will want to participate in. So that's probably the best way to describe how we look at that. But the majority of it is in risk margin.

So Steve, just to corroborate that. There is no central estimate for claims per se. There is a little bit of central estimate for potential litigation costs.

At this time, we're showing no further questions via the phones.

Well, that's fine. We've gone over time by a little bit of time. But again, I just wanted to thank everyone for coming on the call today. Obviously, just to reiterate, it's been slightly different process and format. We're all working differently, not only us, but those on the call. So we do thank you for your time. And hopefully, we will have borders release soon, restrictions coming down, and we can all get together in our normal course of roadshowing. Thank you for everyone coming on, and have a great day. Have a great weekend, and stay safe. Thank you.