Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

[Presentation] Well, good morning, and welcome. I'm Steve Johnston, and let me begin, as always, by acknowledging the traditional owners of the lands on which we meet and to pay our respects to all elders, past, present and emerging. Now at our interim results presentation in February, I introduced our 3-year business plan. That plan is focused on delivering returns above the group's cost of capital by FY '23. And we indicated then that we'd provide you with greater visibility of the key initiatives over the planned period and fundamentally how they will translate to improvements in the key financial metrics and our return on capital aspirations. So in today's session, we'll focus on our general insurance businesses and present the program of work that will help deliver the required improvement in the underlying ITR. Now the agenda for today is outlined on this slide. We're going to spend about 45 minutes talking through our presentation and the plan and follow that with Q&A. Now next Monday, in Brisbane, we'll provide a similar presentation and detail the progress we're making towards the bank's key initiatives, and we'll also release the APS 330 quarterly returns. So to the next slide. And as you know, last year, we reset our business model and made structure and personnel changes right across the group. In the bank, this meant providing more end-to-end accountability under the CEO, Clive van Horen. In insurance, it meant speeding up the process of transformation by allocating the key operational responsibilities across a number of executives. So I'm joined today by 5 members of the executive leadership group, and I've included a brief profile of each on this slide. All 5 play important roles in driving improved performance across general insurance. But first, it's inevitable in a presentation like this that we'll spend the bulk of our time considering the financial implications of our initiatives and our plans. Now without diminishing the importance of the numbers we'll discuss today, I want to briefly describe a framework for how we see those outcomes being achieved at Suncorp. The Financial Services Royal Commission was a wake-up call for the industry, amplifying the need for a stronger alignment between what we do and how we do it. COVID has reinforced this alignment. At Suncorp, we have put purpose at the core of our business. In 6 simple words, we have defined what we stand for and the role we play in society. Our purpose comes to life through our people, capable, engaged, and diverse. With an innovative mindset, we deliver valued outcomes for customers and the communities we live and work in. The end result of all that are the financial outcomes we'll talk to today and a sustainable, investable and, importantly, a growing business. Now in addition to defining our purpose and resetting our business model, structure and team, we have continued to work on simplifying Suncorp. For our 13,000-plus people, a simpler Suncorp means everyone knows their role in improving the way we deliver products and services to our insurance and banking customers. For you, shareholders, it means an easier-to-understand Suncorp with our effort focused exclusively on those businesses, portfolios and products where we can leverage our scale and expertise to deliver improved returns. Now most recently, this has included the sale of our Wealth business to LGIAsuper, a transaction I'll allow Clive and the team to focus exclusively on the initiatives that we'll talk to in next week's presentation. Now to give you confidence that what we are doing is working, I want to briefly recap our interim result and update you on the continued underlying momentum we have seen through Q3. In February, we reported improved earnings in all divisions and cash earnings up by over 40%. Our Australian insurance business delivered written premium growth of 4.4% on an underlying basis. In Consumer, we grew GWP by over 5% with positive unit count. In the blue-ribbon motor portfolio, we saw both unit and AWP growth, and that's a key barometer of the health of their multibrand portfolio. New Zealand delivered GWP growth of 5.4%, driven by strong performance in the direct channel. We saw releases well above 1.5%, improved investment returns, and claims benefits were starting to be realized. The bank results showed a continuation of low-cost deposit growth, record net interest margin and continuing strong credit quality. In the result, we appropriately provided for business interruption claims and through-the-cycle bad debts while reporting almost $1 billion of excess capital. And unlike many of our competitors, we avoided deeply discounted dilutionary capital raising through the COVID period. Now I'm pleased to say that while the weather has continued to be challenging, this underlying momentum has continued into the second half. The rate and unit trends across GI, both in Australia and New Zealand, have continued. Our Q3 valuations across insurance point to continuing favorable experience in the long-tail portfolio and the overall adequacy of our BI reserving. We've also made good progress on our '22 reinsurance renewal. In the bank, I'm pleased to say we now have had positive balance sheet growth through February, March and April, while deposit growth has continued and margin remains well above our target range. And importantly, for the strategy, digital interactions continue to increase across both insurance and bank as our program of work starts to kick in. So as we move into this presentation, let me recap. Everything you hear today is grounded in our purpose. Everyone at Suncorp understands their role in improving the way we deliver for our insurance and banking customers. And we have continued to simplify the business. Our program is underway. It's in flight, and it is working. But we know we've got a lot more to do, so I'm going to hand over to Adam first and then to Lisa, Paul, Jimmy and, finally, Jeremy to tell you how we're going to do it. Over to you, Adam.

Thanks, Steve, and good morning, everyone. My name is Adam Bennett, and I'm Suncorp's Chief Information Officer. I joined Steve's team in July 2020 with over 25 years' experience leading teams at Commonwealth Bank of Australia, EY and Kearney. At CBA, I was CIO for the Retail and Business Banking divisions, then Group Executive Business and Private Banking. I was directly involved in CBA's technology modernization and led multiple transformational programs, including delivery of new innovative customer propositions and digitization of end-to-end processes. My remit at Suncorp covered our technology, data, automation, partnering, group strategy and transformation teams. These areas go hand-in-hand as our key strategic initiatives are all underpinned, to a large degree, by technology. Since I've joined Suncorp, I've been impressed with the strong technology foundations that Suncorp has in place. The marketplace investment included the development of new digital assets and an adaptable API integration layer. This allows us to deliver ongoing customer experience and efficiency benefits through incremental investment in our existing technology assets, while at the same time, we are progressing targeted modernization of our core banking and insurance technology platforms. You saw this slide showing our strategy on a page at our interim results in February. To Steve's earlier point, our purpose sits at the top and is the key driver of sustainability of the organization. The plan is customer-led, enabled by technology and, of course, will be brought to life by our people. This plan was developed in the second half of calendar year 2020 where the experiences of COVID-19 showed us that we could adapt quickly and accelerate the next phase of changes all aimed at delivering sustainable growth. I have a high degree of confidence in the plan based on a number of key ingredients. Firstly, we have developed this plan in full consultation with key business line leaders who have a deep understanding of what needs to be done to enhance our market competitiveness. Second, we are confident in the returns we can deliver from our investments because they are enhancing our existing core insurance and banking businesses, which already delivers strong incremental return on capital. And thirdly, we've taken an end-to-end view of delivery to accelerate the pace and the efficiency of our change execution, be it funding for persistent cross-functional teams, uplifting our agile delivery capabilities, or creating clear and effective governance. Our ability to enable the strategy from a technology perspective is also critical to our success. We have a clear program of work underway. And as I mentioned earlier, we are building on strong foundations. In the past 12 months, we have successfully upgraded and replaced our contact center technology with a new state-of-the-art telephony platform. We've rolled out a modern desktop and collaboration platform for all of our staff, scaled out an automation center of excellence and continue to migrate technology services to the cloud with over 60% of systems already hosted externally by market-leading cloud providers. Work is also well progressed in modernizing our core customer, analytics and AI, and data platforms. Steve has highlighted how some of the early tactical changes we have made are driving momentum in the core businesses. To continue this momentum and deliver on our aspirations, the investments we make must translate to improvement in our key financial metrics: growth, loss ratios and expense ratios. Ultimately, we want to create a virtuous cycle where we reduce our costs, enabling us to reinvest for growth. To achieve this, all the initiatives you'll hear about today are line led and form a key component of the respective executives' accountabilities and remuneration scorecard. I'm now going to hand over to Lisa to take you through some of these initiatives in more detail. Lisa?

Thank you, Adam, and good morning. I was appointed CEO, Insurance Product and Portfolio when Steve implemented the new group operating model in July last year. I've been with Suncorp for over 16 years in a range of insurance roles, including product and pricing, strategy, operations, and brand and marketing. I was the group's Chief Customer and Digital Officer before taking up this role and have previously worked at both CBA and Royal & Sun Alliance Insurance. My current remit includes portfolio management, pricing, underwriting, distribution and marketing for our Australian insurance portfolios, consumer, commercial, CTP, and workers' compensation. And Paul and I share joint accountability for the insurance Australia P&L and work closely to drive the performance of the Australian insurance business. My team and I are working on 3 key streams of work to improve customer experience, drive growth, and improve our loss and expense ratios. As you can see on the slide, these are revitalizing growth, optimizing pricing and risk selection, and delivering digital-first customer experiences. Let me take you through each of these areas now in further detail. Firstly, to revitalizing growth, this includes strengthening our brands and marketing and investing in the SME intermediary channel and CTP. In terms of our consumer portfolio, we have a suite of well-recognized brands that reach 2 out of 3 Australian adults. We have, however, been losing share, so our immediate focus is arresting this decline. For a multi-brand manager model to succeed, each brand needs a clear value proposition, ensuring minimal overlap as well as the right investment in marketing and product design. Over the past 18 months, we have created virtual brand teams, completed detailed customer segmentation, reassessed our creative campaigns and developed a strategy to optimize our marketing spend. We have also addressed gaps in market for product features. As a result of this work, we now have clear brand propositions and a strategic approach to marketing and innovation. For our consumer brands, AAMI remains our leading national brand. It is already the #1 insurance brand for consideration nationally and reached a new peak in January this year. AAMI's refined creative campaign differentiates its strong product features compared to other mass market competitors. We have also added a range of new home insurance product features, which are already seeing strong take-up. Suncorp is our Queensland regional champion. Recently, we launched 2 campaigns focused on resilience, One House and Build It Back Better. These reinforce Suncorp's relevance to its home state. GIO is our regional champion in New South Wales. GIO is a premium brand, which offers comprehensive coverage and competes head-to-head with the motoring clubs. GIO continues to deliver strong retention from its highly loyal customer base. Our niche brands, Shannons, APIA, Terri Scheer, Bingle and CIL are positioned for growth in defined target markets. These brands delivered growth above system in the March quarter with Shannons delivering record new business sales in February. Now we know there's a high correlation between effective advertising and growth, which is why our 3-year plan has us spending more on advertising. We are confident our refined strategy will contribute to our target to deliver consumer unit growth in line with system. Turning to commercial. Vero remains a strong brand, and we see a range of opportunities in SME through both the broker and direct channels. We're also making considerable investment in improved connectivity with broker platforms, and we'll continue to refine our direct SME proposition with a focus on a new digital experience and product offering. And lastly, in CTP, we're investing in modernizing and digitizing sales and service capability, primarily in New South Wales, which will also continue to drive growth and enable us to leverage our national scale in the portfolio. As Steve said, our top line momentum has continued into the third quarter. And these are encouraging early signs, but we have a lot more work to do. Next, I would like to talk to pricing and reselection. And having worked in the industry for a long time, I know how fundamentally important this is to our success. Firstly, on pricing, we've increased rates across our portfolios to recover significant increases in our natural hazard allowance and reinsurance costs. Headline rate increases of around 10% have been put through the home portfolio, and unit losses remain within acceptable levels. At the first half results, we had repriced about 50% of our home portfolio with around 10% to 15% of the increases having earned through the P&L. We have maintained pricing in units over the quarter 3 and remain confident that price increases will continue to earn through the book. All else being equal, these will contribute to an increase in the underlying ITR over the planned period of around 100 basis points. Moving on to risk selection, and we are investing in a contemporary pricing engine, CaPE, which will significantly improve our risk selection. Our current pricing engine, GIPE, has served us well since 2003. However, technology has evolved, and our current systems have limited flexibility. For example, we know open plan living is a key driver of average claim size. To add this as a rating factor in our current system has been a time-consuming and costly exercise. With CaPE, this removes the current limitations and will enable us to use realtime data, utilize a full customer view and, in time, enable us to personalize products. The new pricing engine represents our largest investment in pricing and underwriting and is one of the material drivers of the planned increase to underlying ITR as it drives improvement in both our loss and expense ratios. We expect benefits to be realized for home pricing from the second half of FY '22 with rollouts to other portfolios continuing through FY '22 and FY '23. In our commercial portfolio, we're also investing, in particular, an underwriting tool to enhance our capability in property portfolio around risk analysis, natural hazard exposure and pricing. Further investments in our underwriting tools and processes will continue across other commercial portfolios. And turning to portfolio management. We will continually review the mix to ensure we have the right capabilities to successfully compete, ensure our products provide value to customers as well as appropriate returns. The portfolio exits we announced recently at the interim result are expected to deliver a slight improvement to margin, albeit reduced GWP of approximately $150 million. Finally, our program to invest in digital distribution is a significant opportunity to both improve the customer experience and, at the same time, transform our cost base. There are a range of investments we're making with this initiative. The most significant are automating and digitizing our contact center processes, implementing productivity measurement and management systems, and for our people, further leveraging our new telephony platform. Today, 70% of our transactions for mass brands are through contact centers and 30% digital. Our ambition is to reverse these percentages, and we believe this is possible while delivering a better customer experience, which will be positive for our brands' NPS. COVID has accelerated the transition to digital. Last year, we saw self-service transactions increase by 25%, and claims lodged online increased by 19%. But despite this, we still see around 73% of simple transactions, such as change of address done via our contact centers. Simplifying and digitizing our processes will free up our front-line teams to provide a better customer experience as well as maximize productivity. With over 7.6 million inbound calls annually and a contact center workforce of around 2,000, significant opportunities remain. We also recognize that at times, and especially for high-value transactions, our contact center needs to be there for our customers. And to do that well, they need the right technology. A new telephony platform was recently deployed to our contact center agents in sales, service and claims roles. The new platform delivers capability across customer experience and efficiency, such as intelligent routing, which pass the customer to the best qualified agent as well as sophisticated call analytics. These investments in digital are a key lever for reducing expenses and will deliver around half of the improvement in the expense ratios. In summary, my team and I have clear accountabilities to revitalize growth, improve our pricing and risk selection, and to drive digital first. We're already seeing results, which gives us confidence that we can continue to deliver significant further improvements in the way in which we serve our customers, which will also drive improved shareholder returns. I will now hand over to Paul to take us through best-in-class claims.

Well, thank you, Lisa, and good morning, everyone. It's a pleasure to be here today. I am the CEO of the Insurance business. I've been with Suncorp for 26 years and have worked across most aspects of the Insurance business. I was the CEO for Suncorp New Zealand before this role. My accountabilities include all claims, operations and project delivery for the Australian insurance business. I'm also accountable for group procurement and real estate. On this slide, I've outlined the key focus areas for our best-in-class claims program. Today, Suncorp offers a full end-to-end claims journey for our home, motor, commercial specialty and personal injury customers. We manage standard working claims right through to large-scale natural hazard events. We have set ourselves an extremely high benchmark. Our ambition is to be best in claims management, not just in Australia, but globally. Our research tells us certain insurers are best practice for certain components of the claims value chain, but no one is best-in-class end-to-end. Accordingly, we have 4 streams of work underway that we're confident will deliver global best practice: firstly, optimizing the outcomes and performance of the claims supply chain; secondly, end-to-end digital lodgment and tracking; thirdly, market leadership in natural hazard events management; and finally, strengthening our operational performance. I'll now run through each stream to give you a bit more color around what we are doing. So firstly, optimizing the outcomes and performance of the claims supply chain. Last financial year, we spent around $7 billion on our supply chain, so we have a huge opportunity. Starting with motor and the work we did through the business improvement project means we are really reasonably mature in how we manage motor suppliers. Capital SMART manages 45% of motor claims under a fixed-price arrangement. We also have our preferred repair network to further drive down cost benefits. We have also recently implemented [ In Part ], which is a platform that provides live pricing and availability for new and alternative parts, giving us much greater visibility and control over our costs. In personal injury, medical service providers are critical to successful claims handling and return-to-life outcomes. As a result, we are piloting innovative early intervention initiatives across all our schemes. This will imply the improved care outcomes for claimants as well as reducing claims costs. Specifically in Queensland and New South Wales CTP, our target is to get claims costs below industry average, and pleasingly, we are already seeing improvements. Next, to [ proper you ] where we have a significant opportunity. Annual spend in the property supply chain is around $1.8 billion. Compared to global best practice, our capability today lacks granular additive spend in terms of labor, materials and repair costs. We lack digital connection with these suppliers. We need to be more disciplined in how we manage the performance of our builders, and we don't fully leverage our scale. As a consequence, we're now investing in technology to improve the visibility and control over our spend. For example, we have implemented [ Info Mode ], which supports the end-to-end property claims workflow for assessment and repairs. In addition, we have also built and implemented a tool which has standardized invoice data capture across the building supply chain. This will help us better understand labor and material payments and benchmark against industry rates. We will also use this data to inform bulk buying strategies. And finally, we will be consolidating our building network with new contracts to commence in December this year. Now our second stream is end-to-end digital lodgment and tracking. Today, 80% of claims are lodged by traditional contact centers. Our long-term ambition is to flip this on its head and have 80% of claims lodged online. Now while COVID has accelerated our customers' willingness to do things digitally, this is still a major shift for our business. If customers today completed the home digital lodgment process, we would have a consistent 50% adoption rate. This gives us confidence that our 80% ambition is realistic. For customers to do this digital, the experience must be end-to-end and better than the physical experience. So we're investing in our motor, property, and personal injury lodgment and tracking capability. This includes implementing express claims management to allow customers to lodge and self-fulfill simple claims. Artificial intelligence will quantify the loss and enable the customers to cash settle or select the best alternative supply option. For more complex claims. We're making enhancements to facilitate automatic allocation to claims managers, assessors and appointments with supply chain trades. We're also investing or enhancing our web chat and co-browsing functionality to support customers through the claims process and also provide proactive SMS messaging and self-service options to keep our customers up-to-date in terms of the claims progress. Our third stream is to consolidate our market leadership in natural hazards event management. Natural hazards are not only a substantial cost at Suncorp, but the increasing frequency and severity events impacts our customers and the communities in which we operate. Obviously, the investments I've already outlined or discussed in digital lodgment and tracking and optimizing the supply chain will assist in managing natural hazard event claims. Specifically for natural hazard events, we have created a flexible working model where we have over 200 experienced permanent claims advisers who'd work normally 2 days a week but then can scale up to 5 days when an event occurs. The benefit of this model was clear during the rain and floods in New South Wales during March where we scaled up overnight and saw wait times drop from over 7 minutes on Day 1 down to 7 seconds on Day 2. This is a great outcome for our customers. We've also implemented a series of initiatives such as geospatial technology, virtual assessment and zero-touch motor hail digital lodgment capability to accelerate event response, improve the customer experience and, ultimately, reduce natural hazardous claims costs. Through this stream of work, we aim to limit the impacts of inflation on our natural hazard allowance. Now the fourth and final area to focus on is to strengthen our operational performance. Today, in claims and operation, we have a workforce of over 4,000 people. Many of our people perform manual work, which will be automated over time, enabling them to focus on more value-adding work. In parallel, we need to measure and manage more effectively the productivity of our claims and operations workforce. Accordingly, we have commenced the ride-out of our productivity tool across claims and operations. We anticipate a 10% efficiency improvement for those areas that utilize the tool. Across our claims business, we also seek to leverage our global partners, which, in turn, will supplement our capability, reduce costs and maintain high service levels. And finally, our real estate footprint. Going forward in a post-COVID environment, Suncorp is transitioning to a hybrid working model, which assumes the work-from-home dynamic continuing and the use of the office being repositioned. Our previous use of office space showed our people attending 4 days a week. Post-COVID, we are forecasting this to be 2 to 3 times a week. This reduced office usage forecast enables us to target a space reduction of circa 20% by the end of financial year 2024. So that's the 4 streams of work under best-in-class claims. I'll now hand over to Jimmy.

So thanks, Paul, and good morning. It's fantastic to be physically here in Sydney. My name is Jimmy Higgins, and I joined Suncorp in 2008. I was appointed the CEO of Suncorp New Zealand in October of last year. I was previously the New Zealand CFO and, before that, the AGM for claims. And during this time, I managed our Christchurch and Kaikoura earthquake recovery programs. Suncorp New Zealand is made up of 3 distinct businesses: Vero Insurance, Asteron Life and AA Insurance. These businesses are well recognized and trusted brands across the general and life insurance markets in New Zealand. We sell Vero and Asteron products through a corporate partner and intermediated channels. We also sell products directly under the AA Insurance brand. AA is an exceptional business and is the second most trusted brand in New Zealand behind the All Blacks. And our claims define our brands and set us apart from our New Zealand competitors. This is what brings our purpose to life, and it's what all our employees stand behind. And our ambition is to be the #1 choice for New Zealanders because of our digital capability and our connected intermediated model. Our portfolios have delivered very strong performance over the past 3 years with reported ITRs in the mid- to high teens and underlying ITRs that are above long-term averages. Our 3-year plan focuses firstly on driving growth by strengthening our brands and partnerships; and secondly, delivering best-in-class claims. Both of these initiatives are underpinned by a significant uplift in digital-first customer experiences. I will now take you through initiatives in more detail by starting with growth where we're investing in our strategic brands and partnerships. Firstly, for Vero, we currently have programs of work targeting GWP and customer growth across the broker and corporate partner channels. In the broker channel, we've been investing in improved digital capability to connect to broker platforms. This enables brokers to place business directly into our policy systems, which leads to both a better customer experience and a better all-round efficiency for Suncorp. Next, in the corporate partner channel, our partnership with ANZ is extremely important as they have a relationship with nearly 1 in every 2 New Zealanders. Consistent with ANZ digital strategy, their customers will soon be able to purchase our products through ANZ Internet banking and goMoney App. Motor is going live later this year, and home and contents will follow in FY '22. We're also targeting growth to our relevant market share of top brokers. We're already seeing benefits through increased participation schemes as well as unit growth in intermediate consumer lines. Next, in Asteron Life, we're driving new business growth by specifically targeting advisers with a compelling market proposition. Our renewed operating structure and relationship model is already demonstrating positive new business growth. And lastly, the AA business, which is our fastest-growing channel. AA's ambition is to provide customers with seamless and integrated access to more products and services from the AA brand and AA-branded partners, all under a well-established and trusted brand, something that no other financial service provider is able to achieve in New Zealand. The customer and GWP growth seen in AA Insurance is expected to continue into the near future, and the development of the AA ecosystem will further enhance retention of these new customers and protect the margins being achieved by AA Insurance. Now this growth is highly profitable. However, given AA's mix of business is weighted towards consumer motor, it will put some pressure on the overall loss ratio for our New Zealand business. Next, to best-in-class claims. We are developing a modern digital claims management system. By moving to a single claims platform, we will improve customer service through simplifying and automating processes and more effectively managing workflow. The updated platform will enable further improvements to our claims management and assessment process as well as adding web chat and self-service capability. This program will also aim to deliver seamless connectivity with suppliers and partners, enabling more efficient processing of claims, which will deliver faster, more consistent outcomes for our customers. And similar to Australia, a material component of our workforce engages in standardized manual work that will be automated over time. The cost efficiencies gained through further standardizing and automating this work will directly benefit our expense ratio over the plan. So summing up, we are very confident in our plan and the improvements it will deliver. We are seeing significant growth in AA Motor, and naturally, this will put some pressure on our loss ratios. However, we started this digital journey 12 months ago, and the capability we have built for our brokers and corporate partner channels are now being implemented and will drive further growth and efficiencies over the planned period. And with that, I will now hand to Jeremy to run through the financials.

All right. Thanks, Jimmy, and good morning, everyone. I'd like to now bring together what you've heard from the team and what it means from a financial perspective. And I'd like to start with Suncorp's FY '23 aspiration, which we first showed at our half year results in February. The goal of our plan is to deliver strong shareholder returns with a core focus on growth, return on equity, great execution and strong balance sheet management, and all this to drive TSR. As Steve said, we aim to deliver both growth and sustainable returns above our through-the-cycle cost of equity, which we estimate to be around 9%. Now to deliver these sorts of returns, the general insurance business needs to have an underlying ITR in the 10% to 12% range, and the bank cost-to-income ratio needs to be around 50%. Our dividend policy to pay 60% to 80% of cash earnings to shareholders remains unchanged. And we also remain committed to returning capital surplus to business needs to our shareholders. So I'd now like to take you through the all-important underlying ITR outlook. And first up, as a reminder, underlying ITR is a metric that we use to give a sense of the trends in our underlying performance over time as opposed to an absolute measure of profitability. As you've heard from the team, we're confident that we have a compelling set of initiatives, which will enable us to deliver a 10% to 12% underlying ITR in FY '23. This implies an improvement of approximately 400 basis points from current levels, assuming the COVID frequency benefits are now nonrecurring. Lisa, Paul and Jimmy have discussed the key drivers this morning. And to summarize, we see the improvement being driven by 3 key levers. Firstly, repricing will drive an uplift of around 100 basis points. As Lisa discussed earlier, we've been putting through premium increases primarily in the home portfolio, reflecting our reset reinsurance and natural hazard allowance. These price increases will earn through progressively over the next 12 to 18 months. Secondly, the initiatives discussed today will contribute to an improvement in our loss ratio of around 150 to 200 basis points. Lisa will drive optimized risk selection, and Paul will drive end-to-end digital lodgment and tracking, supply chain optimization and improved operational performance. And when looking at our scale and claims performance relative to others in market as well as the expectation of some normalization in New Zealand, we believe this improvement in our claims ratio is quite reasonable. And lastly, to expenses, accelerating digital adoption and self-service, contact center automation and improved productivity will help drive down our cost to serve. Project costs are also planned to reduce in FY '23. And these factors, when combined with higher net earned premium, are expected to drive the operating expense ratio down by around 100 to 150 basis points. At a portfolio level, we anticipate the improvement in underlying ITR to be driven predominantly by the Australia home and motor portfolios. We are pleased with the underlying performance of commercial and workers' comp, and we look to consolidate these margins. As Jimmy talked about in his presentation, we expect New Zealand margins to normalize modestly. We expect to see our growth initiatives and the portfolio repricing delivering over the near term, continuing the trends seen in our recent results. Given the average payback period on the initiatives is around 2.5 years, underlying ITR will remain broadly flat over FY '21 and '22 but with a stronger uplift to come through in '23. I'd also like to reaffirm the sustainable nature of our FY '23 aspirations and to cover off a few of our key assumptions. Firstly, notwithstanding having materially reset our natural hazard and reinsurance costs over the past 2 years, we're still allowing for some modest increase. We're not expecting any major changes to the existing reinsurance program. And assuming no major events to 30 June, we are well on track to renew the FY '22 program. And I'll remind you that our reinsurance philosophy and the structure of our program is aimed to optimize ROE but with an eye on capital and retained P&L volatility. And of course, we'll continue to seek out opportunities to further optimize the program. Secondly, we continue to allow for prior period reserve releases at 1.5% of NEP. This is driven by the work that Paul is doing on CTP claims performance and the assumption that inflation remains benign. And I note our ILB portfolio also provides some hedge against inflation. And lastly, on investment markets. We are allowing for a continuation of a low-yield environment with a 3-year bond rate assumed to be around 50 basis points in June '23. So now I'd like to move on to the group operating expense base. And the chart I've shown here is similar to what we presented at the half year results in February but with some additional detail. The most significant driver of the expected temporal elevation in costs over FY '21 and '22 is the additional spend on the strategic initiatives to deliver the outcomes we've outlined today. As you can see, our FY '23 underlying expense base is expected to be broadly in line with FY '20. Now this means we will offset inflation and growth over the planned period with ongoing efficiency gains as we've now done successfully for several periods. In terms of the drivers of the underlying cost base ex projects, we are investing in marketing to drive growth and technology as we digitize the business. And whilst this will ultimately translate to reduced costs, there is a timing difference, which sees a slightly higher expense base in FY '22. The strategic initiatives that Lisa, Paul and Jimmy discussed earlier are the key levers helping keep our underlying expense base flat, and initiatives in the bank will also help, which Clive will discuss in more detail next week. Now I've also included, on the right-hand slide, some more color on our investment slate. Typically, we plan to spend around $200 million a year on projects be a mix of strategic investments as well as regulatory and systems maintenance. Our plan sees total project spending increase above this level in FY '21 and '22 as we invest in strategic initiatives before normalizing in FY '23. Now I've also provided a breakdown of OpEx for insurance strategic initiatives. As you can see, there's a good balance of spending across a wide range of initiatives with strong governance and clear accountability in place, as Adam said. While the majority of project spending will be expensed, we are capitalizing some costs relating to a small number of projects, including the investment in our new pricing engine, CaPE. We also expect a temporary uptick in claims handling costs as we invest in best-in-class claims. Spending on regulatory and systems maintenance remains elevated. We expect some reduction in these costs in FY '23. However, they are likely to remain above pre-commission -- pre-Royal Commission levels and to be a feature of the project slate in the near term. In aggregate, we plan for project spending to normalize in FY '23, which, in addition to expense benefits, will see improved leverage and the group total OpEx base return to $2.7 billion. And with that, I'll now hand back to Steve to wrap up.

Thank you, Jeremy and the team. Now before we move to Q&A, I want to briefly talk to a matter that's close to Suncorp's heart. And you'll know that we've long argued for -- that we must build more resilient communities in the face of a changing climate and as the growing population increasingly settles in those regions that are most exposed to risk. Now it's obvious why this should be a matter that's close to our heart and of interest to you, our shareholders. But for us, it's about more -- far more than just dollars, allowances, expenses and claims. It's fundamentally about people. Behind every uninsured large loss is a human being, most commonly a family, and far too regularly, it's a story of dislocation, depression and despair. Research we released earlier this year underscores just how vulnerable many of our communities are and the important role that insurance plays in rebuilding local economies and lives. Now for our part, we've always been prepared to play a constructive role in this debate. The One House initiative that Lisa mentioned earlier is just one good example. We've also outlined a 4-point plan for creating a more resilient Australia. Now I won't repeat it, but we've included it on this slide. At Suncorp, we stand ready to support the government's efforts to improve insurance affordability in Northern Australia through the establishment of a reinsurance pool. We're also very supportive of the disaster resilience funding that will be included in tonight's budget, and we commend the government for this good first step. In terms of the pool, it's very early days, but our discussions with the government to-date have been both constructive and well intentioned. As the region's largest insurer, we understand the issues better than anyone, and we'll be looking to take an active role in helping design the scheme. So that brings us to the end of the formal presentation, and we might now move to Q&A. For the purposes of Q&A, we might start -- we'll take questions by both online and via the phone. But given we've got some online questions that have come through already, we might just start there, and then we'll progressively move through those online questions and then move to the phone.And I might start, given the hour in London, he stayed up very late in the night to ask this question, so Rob Wydenbach, who's in London, has got 2 questions. First one is, how do we get back to -- how do we get market share back in home? And is it important? What are the key things you need to do, assuming it's not price? The second part of the question is, what further steps are required in the commercial insurance business x-CTP, to return the business to an acceptable return on capital? So maybe if we start with you, Lisa, and anyone else on the team that wants to jump in, please feel free to do so.

Thanks, Rob, and equally, thank you for staying up late to listen in and ask your questions. Let me share that I am confident in our ability to improve the unit trajectory in the home portfolio. It is an important portfolio. And why am I confident? One, this is a simple plan. It is proximate to the core, and it invests across the value chain of the insurance business with an equal weighting to invest for growth through things like revitalizing the brands. Already, we've delivered some product innovation in the home portfolio, and we're starting to see some solid take-up rates off the back of that as well as investing for margin. And so for the home portfolio, as I said, we are investing in our brands, in our propositions, in the customer experience. And then Paul and his team have a pretty significant program of work around claims. And already, we're starting to see some pleasing results in terms of the strategy starting to deliver.

Paul, do you want to add anything on the property program?

Just that, I mean, I think if it's not price, then very quickly you go to the claims experience. And obviously, with an ambition of their being best-in-class claims that'll help drive it. And if you look at the program, I've talked about digital lodgment tracking, that is key. If we can get that really, really good experience, it'll encourage claimants to lodge claims that way. And then you get to the supply chain where, if we manage that effectively, we get our cost base down, which allows at least to price with margin and obviously grow our business.

Okay. Well, the second part of Rob's question was what further steps are required in the commercial business, x-CTP, to return to acceptable returns on capital? Lisa, do you want to kick off that?

So our commercial insurance business is already delivering strong returns on capital. Want to take you back a couple of years ago where we started early repricing and some portfolio remediation. That has put us in a very strong position. And as I highlighted in the plan, we're making investments around our underwriting, risk selection and pricing activities to further strengthen that portfolio. And working alongside with Paul as well, he's got a range of initiatives in the claims space for commercial. So I'd say we're well-positioned and already, to-date, delivering acceptable returns.

I'll just add to that, Steve, that what we have seen in the commercial portfolio over the last 2 to 3 years now is good remediation on both price and the risk profile in that book. And so what we're seeing today are the benefits of that work that we've been going off the last couple of years. And to some extent, we have led the market there. So as Lisa said, we are comfortable with where the returns are on commercial now. Still a little bit of work to do, but roughly comfortable, and the key job is to maintain.

Okay. Next question online is from Matt Dunger. What are the opportunities to deliver supply chain efficiencies? What impact has the SMART sale had on motor repairs, claims inflation? And how will you ensure claims optimization benefits are not competed away? Paul?

Probably one for me.

That's one for you, right for you.

Okay. So in terms of the opportunities to deliver the supply chain, hopefully, you saw in the presentation, we see that as it has to be one of the largest opportunity. It's a stream of work. And then if you look at sort of that stream and you peel the onion, we probably -- we think -- we believe motor is pretty mature. But we will get some efficiencies there through how we manage parts and the supply of those. It's property where we see the main game there. And the reason I say that is you just compare ourselves to our peers, we're not where we need to be. And we just believe there's a lot of opportunities by having that granular spending and where we're spending our money, managing the performance of the bill is a lot closer and then using that understanding of the supply chain better to actually have better buying, bulk buying strategies. So we do see the opportunity quite large, followed then by personal interest, I suppose, is sort of how to look at it, but yes.

And Paul, the fixed price contracts in SMART.

Yes. Well, to the next question, yes, SMART, so obviously, we sold SMART a year ago. In that arrangement, we had a -- we put in place a 3-year fixed contract on pricing. So we have set pricing, and 45% of our claims go through SMART. And in terms of SMART today, I mean, we also still have a 10% shareholding. So we are a part of that board. So we actually, therefore, can influence strategy and also governance. So very comfortable where the SMART arrangement is at the moment. And obviously, it's helping us mitigate against any inflation that's coming through the book.

Okay. Doron Kur. The next question online is which -- with such a strong rate environment, why is Sun not more ambitious with its growth targets in Personal Lines. Lisa?

Yes. Thanks, Doron. I would say this is an ambitious but achievable plan that we had in place in terms of our personal lines business. Certainly, for us, it is about ensuring the sustainability of the business is investing in our brands to better meet our customer needs. It's investing in our products, again, to reach a large number of Australians. And at the same time, it is taking into account our history in the past of losing a little bit of share. Our first stop is to address the unit decline. And already, we're seeing some good progress that we outlined at the half, and we've spoken through today and continuing to move forward to grow in line with system and at the same time deliver an improved margin. So definitely clear momentum in place, and I think a good track record of delivery around that.

Okay. Down to Melbourne, Andrew Pak at Franklin Templeton. Again, in your domain, Paul, and you might have addressed some of these on your previous answers. But can you provide some context around the progress towards global best practice in claims that's assumed in the 150, 200 basis points improvement in the loss ratio? And how would this metric look as Sun achieves global best practice?

Okay. In terms of progress, so today, I just talked about the key initiatives. But to be honest, we have a program of work, which has 50-plus. And if you look at that program of work, we have the full governance in place, project managers, teams deployed, everyone working on it. And in actual fact, when I talked to the presentation, we've actually implemented a lot of the things. So it's now embedding it in operational assets. So progress is very good. Momentum is clearly there. In terms of how would this metric would look like if Sun achieves that, it'll go straight to loss ratios. Our loss ratio is when we compare ourselves to our Australian peers, should be better than theirs. And it's as simple as that. That's what we're driving for.

Okay. From Kieren Chidgey, GI underlying ITR margin profile is the area he wants to talk to with costs broadly flat into '22 and investment yields having bottomed, why will underlying ITRs be broadly flat in FY '22 before improving into '23? Jeremy, that's one for you.

Thanks, Steve. Thanks, Kieren, for the question. So what we see is we can see costs increasing a little bit '21 to '22, bearing in mind that we see the restructuring costs, we put those below the line. They don't go through the underlying ITR number. So there is a slight increase in costs in '22. We do see the benefits of the ongoing margin expansion, particularly in home coming through. And then we see a little bit of expectation of normalization in New Zealand, as I called out. And then we also are seeing -- expecting to see some modest increases across that natural hazard reinsurance category as well. So all of that adds up to -- there's a little bit of margin expansion expected for '22. But in the scheme of the walk from the 7% to the 10% to 12% range, whilst we see a little bit of improvement in '22, most of the improvement comes through in '23. And that's as you'd expect an insurance business. It takes time to see things like premiums earned through.

Importantly, we've got good visibility of the program and will work now, and we are seeing the program start to pick up, pick up steam, and those benefits starting to be realized, which gives us confidence that, that trajectory of margin will step up between '22 and '23 quite materially. Okay. We're going to go to the phones now, and we'll see who's got questions on the phones.

[Operator Instructions] Your first question comes from Ashley Dalziell from Goldman Sachs.

Probably a few for Jeremy here. Maybe just picking up on the last one around the margin trajectory '22 on '21. Are you talking to a flattish profile on the headline '21 margin inclusive of the COVID benefits in the first half or more of an x-COVID margin?

Yes, it would be x-COVID. So if you look at the margin trajectory, we had 7.1% in the first half of this year excluding COVID benefits. What we've said is that we would like to hold that margin for the second half, acknowledging that the second half for this year has got a reasonable step-up in those strategic investment costs. So even holding margin flat in this half actually sees some of that underlying margin improvement come through, putting the increase -- the temporal increase and strategic investment to one side. So it still leaves us around 7% to 7.1%. And it's that sort of number that we're then benching off in terms of going through to the 10% to 12% range. And what we're saying is it will be relatively flat on that baseline, a little bit of margin expansion, but we'll see the major increase in '23. But importantly, as Steve said, to some extent, that's the nature of our business. We're investing in these -- investing in it. The payback on the -- some of the stuff that Paul is doing is a little quicker at 1, 1.5 years. Some of the payback on the growth in OpEx is 3 years. It sort of averages out around 2.5 years. And therefore, you get to see more of an uptick in '23. But what I would hope through '22, and we will do is provide the markers to our shareholders in terms of how we are progressing against those initiatives and be able to demonstrate that you can see the underlying performance, notwithstanding a slightly flat underlying ITR.

Ash, one other question?

Yes, please. Maybe just coming back to some of the new disclosure on your cost targets, picking up on the regulatory systems piece. That clearly drives a big part of the saving that you're targeting. I guess, first part, how should we think about wealth dropping out of the business? I think that probably made up a decent part of your reg costs in the recent years? And then secondly, just confidence in kind of cresting the hump on those reg and system costs. It's obviously been pretty one-way traffic since the Royal Commission. Have you seen enough to suggest that those projects are going to fall away?

I might just quickly make some overarching comments and hand to Jeremy and Lisa and others that might want to comment on this particular program of work. I mean, I think, inevitably, we will see an uplift in our sort of annual spend on regulatory and systems maintenance post the Royal Commission versus pre the Royal Commission. I think it certainly -- we're sort of reaching the crest of the hill, as you say, in terms of the post-Royal Commission work. And inevitably, the quantification and the enormity of some of the changes that have gone through that program post the Royal Commission, by definition, won't happen again in, hopefully, for another 5, 10 years, at least, unfair contract terms, renewals, DDO, various big programs of work that came through the Royal Commission. They won't be ongoing. But the impact of regulatory costs will be higher in our assessment than it was pre the Royal Commission. Jeremy, do you want to-

Yes. Just maybe coming back to the wealth question first. So obviously, there are some costs in the business relative to wealth. And we'd look to -- we haven't adjusted for those yet, but we would look to adjust for those with some stranded costs, reasonably marginal amount. We'd expect to get those out over time. And with the investment slate, we've certainly seen substitution over the last few years, as you'd expect in the environment. So we have seen some of that discretionary spend being replaced by the necessary spend on both regulatory, which, by the way, is a really broad church of change going from CTP reform, all the way through to things like new accounting standards, all of the unfair contract terms, code practice changes, et cetera, in the middle. So it's a pretty broad range of change. And we've seen some substitution over the past few years where we've had to invest more in that and less in the strategic growth part of the agenda. We'd expect to see that turn around over the next few years. And to some extent, the amount of money that we spent on wealth will be part of that substitution. We think, as I called out, that we normally plan to spend around $200 million in that category. And so when you look at the chart I put up around the spend profile over the next few years on projects. It's just important to note that the strategic investment element of it is not all incremental. We will always spend some investment envelope in the business anyway. Lisa, I don't know if you want to add anything more on the regulatory program.

No, nothing really to add, but I do think important to highlight that FY '22 should see us implement most of the regulatory reforms from the Hayne Royal Commission.

Yes. I might just add quickly on the system maintenance slate. So over the last couple of years, we have had some quite significant uplifts of some of our core platforms and infrastructure. We talked about the telephony platform that's now complete. In a few weeks' time, we do a major upgrade of our core claims management platform and well underway, as I described upgrading a number of our core analytics and customer and data platform. So we do see that over FY '21 and '22 kind of feel like we have kind of got over the hump of some of those very significant technology maintenance investments. Of course, we would always expect to need to maintain the environment. But as we move more of our services to cloud, as I described, and a number of our systems that are now moving to more of a kind of as-a-service model, we would expect to see less of those big, lumpy maintenance spend projects that we might have had to invest in over the last couple years.

Okay. We might keep going through the phone questions? And Ash, if you got another question, please come back at the end of the proceeding. So next question on the phone?

Your next question comes from Nigel Pittaway from Citi Group.

Just on this -- I mean, if you look in the past, when you've managed to achieve such improvements in the margin, They have been pretty temporary, and those margin improvements fast dissipate. You're obviously talking about a big spike up in the margin in '23. Obviously, looking back to the 2014, '15 period is when you sort of got best margins in the past. I mean, what confidence can you give us that this improvement that happens in '23 will be more sustainable than the sort of improvements that we've seen the company deliver in the past only to be dissipated pretty fast thereafter?

Well, I might just quickly talk to a couple of the key factors that have materially moved the margin over that period of time, and Jeremy can fill in some of the gaps. The 2, I think, that are most obvious is step-change in both our natural hazard allowance and the reinsurance cost regime. Going back some time, there was always, as everyone on the call would understand a debate and discussion around the adequacy of that allowance. And over the past 2.5 years, we've made material changes to the allowance and stepped it sort of from the $600 million mark to sitting now around $950 million and incrementally moving up from there. We've also seen a material reset of reinsurance markets and the fundamental view on Australian insurance risk. And that manifests itself for all primary insurers in Australia, most particularly in our book 12 months ago. We don't anticipate resets and repricing arrangements of that magnitude in the medium term, but we have contemplated increases in the plan. The other big one is the one we've just talked about, which is the imposition of material regulatory costs post the Royal Commission, which have consumed larger amounts of our project slate. They're the 2, I think, the reasons we talked about the peak of the regulatory costs starting to come off now as the program of work post Royal Commission has implemented and our comfort around the sustainability of a natural hazard allowance and the reinsurance program going forward gives us confidence alongside this program of work, which we've planned out to 2023 but will be ongoing beyond that point that these are sorts of margins that we should be able to target within the business to deliver the appropriate returns, then ladder up to the group's return on capital obligations and ambitions. Jeremy?

I'd just add, Steve, that, obviously, yield environment is a little different, too. And when we've looked at our aspiration, the 10% to 12% for FY '23, we have assumed a continuation of the low-yield environment. So I think that's a reasonable assumption. We're not expecting a tailwind to come through from that, maybe up a little bit, not a tailwind from that. And the other point I'd make is that, in terms of what's different, is a lot of this change back to the 10% to 12% range is actually driven out of our approach to the full end-to-end value chain and thinking about the full value chain of ITR and particularly the work that Paul's doing on claims. And in terms of the sustainability of it, when we look at where our claims loss ratios are relative to peers, there's a reasonable gap. And obviously, some of it is structural but not all of it. We know there's opportunity in our claims loss ratios that Paul can capture. We are 5% different to our major competitor and sort of around 10% relative to some of the challenger brands. We're talking about a couple of percent improvement in our claims ratio. We think that's both quite reasonable and quite sustainable.

Nigel, do you have another question?

Yes, I do. And the other question was just on -- obviously, you've again reiterated that you will return any surplus capital to shareholders. Can you sort of maybe outline any factors that are sort of causing any uncertainty as to whether or not that might be sooner rather than later?

I think the macro factors are the ones that we've talked about previously and the most prevailing one would be -- not surprising, pointing out is just the macroeconomic environment, which is materially different than we contemplated 12 months ago as we entered COVID on almost every measure. So it's a very -- it's a significantly more positive outlook today than it was, obviously, 12 months ago. So that gives us a lot of confidence around that trajectory. But I guess, like everyone, we are waiting to see how the economy responds to job keeper -- job seeker runoff over time. And so far, so good. And that's encouraging parameters. So you'll always look at that macroeconomic outlook in considering your capital balance. I guess the other ones are more tactical. We talked about them. They're more on the periphery, things like maintaining a buffer of excess capital so that, as we come into a reinsurance renewal, we could be trading off the pricing that we see in the reinsurance market versus retaining some more volatility on our own P&L. Now that comes at the cost of capital. And I think we've given some very clear signals today that we're very comfortable and confident in our ability to reinstate the reinsurance program and broadly the same construct as this year. I touch -- I haven't got any wood with me, but I would always touch wood on that. And there's a bit of weather around in Australia at the moment. So I don't want to call that too early, but we're very confident of the progress we've made in renewing the program. And then there's obviously some other capital-consumptive activities that you always look at when you do a strategic asset allocation in your insurance business. We'll always look to move some of those portfolios around. And that obviously brings some capital consumption into play. The Bank is growing again, which is going to consume a little bit of capital. But look, in absolute, the quantum of capital we have, we're in a very, very comfortable position. And we will reassess it quite materially through the full year result. I think that's the right time to do it. And to the extent that we have excess capital that's beyond the needs of the business, our commitment has always been to return it to shareholders. Jeremy?

I've got nothing to add really, Steve. I think that says it all, I think, what you commented.

Okay. Keep going Andrei. Andrei, I think you're next on the line.

Your next question comes from Andrei Stadnik from Morgan Stanley.

I have 2 questions. If I can ask first question around the portfolio balance. It seems that some of the recent increase in volatility from catastrophe impact has been driven by weighting towards shorter tail lines. And is there an opportunity or an option to try to weight the portfolio back towards longer-tail lines of business given that the short-tail lines are now seeing more catastrophe impact?

Jeremy, do you...

Look, Andrei, when we look at -- I'll maybe let Lisa talk to the portfolio mix piece. But when we look at our natural hazards volatility over the last few years, really most of that volatility is less portfolio, maybe it's a little bit of it, but more to do with just natural volatility and hazards. We have seen a step-change the last 10, 15 years. We are thinking about the way we look at our natural hazard allowance and making sure that it's reflecting the more up-to-date experience. We've seen a little bit more volatility this year because of the weather patterns this year. But certainly, I think the natural hazard volatility is more a function of the weather than the portfolio shape, but Lisa, any thoughts on the portfolio.

Yes. In terms of the portfolio, I would say it is well balanced in the personal injury portfolio. We have the largest market share at a national level, and we've continued to be able to maintain that share historically. At the same time, we have seen some appropriate growth in the workers' compensation portfolio. And as well, we've been very disciplined around our commercial portfolio. So we do look at the portfolio as a whole. We do have a very good balance. And as you've seen today, what we are outlining is an investment across each of the portfolios to also make sure that we continue to deliver sustainable returns.

And Andrei, it does go without comment, I mean, but it is very obvious that if there are new opportunities for us to participate in some of the long-tail schemes as they may be privatized or otherwise or programs that work that may be taken out of the public sector into the private sector. We were always very confident in our ability to deliver a range of services to customers that are as good, if not better, than any of our competitors. So if those schemes do emerge over time, we'd obviously have a very close look at them given the leverage and scale that we've got in personal injury.

And my second question, I wanted to ask around the supply chain and operational [indiscernible] that you're targeting. How do you think about achieving those in light of some supply chain issues in the car industry globally and also anecdotal evidence of supply and chain issues in Australian building and construction industry? How do you navigate those whilst trying to deliver the efficiencies you've mentioned?

I'll take that one, Steve. Okay. So on the motor supply chain, what we are seeing is some slight inflationary impacts, particularly around the parts, but also around technology in windscreens. In terms of how we're mitigating that, as I said before, we do have fixed price arrangements with SMART, where 45% of our volume goes through there. And we also have fixed price arrangements with other suppliers. So that sort of helps mitigate the overall level. You then go specifically into parts itself, and we've rolled out this system called [in part]. And what that allows us to do is understand where parts are nationally, and it also allows us to understand whether there's alternative parts or OEM parts. And we actually share that with our repairers. So it allows them to source parts at the optimal price. That's how we mitigate that. On the home side, similar sort of position there. We've rolled out the system called [ Informa ] So we have 37 -- today, we have 37 repairers. So by rolling out [indiscernible], we can actually manage scope and allocation of work to those repairers. And then by putting in place this tool called ICBM, we can now very clearly see at the detail level how much we're spending on timber, labor, whatever the material might be. And we can actually compare that to industry benchmarks. And so therefore, very carefully manage the supply chain. And in addition to that, because we now understand at the granular level what we're spending our money on. We're now starting to think about bulk buying arrangements. So how can we go to the market nationally and use our scale to buy parts? And then the only thing I'd finally add is we are looking to renegotiate our repair panel over the next weeks and have a new panel in place by December of this year. So all those things will go to help mitigate the impacts of inflation in the Home and Motor book.

Your next question comes from Kieren Chidgey from Jarden.

I just had a question for Lisa on the rollout of the new pricing engine. Interested in your thoughts on sort of whether there are any positive or potentially negative volume consequences from that new rollout?

Yes. Thanks, Kieren, for that. As I outlined, we are rolling through a new pricing engine. We will have it in place for some of our brands for home later this year. And what I would say is I see this very much as a huge positive for the general insurance business, the rollout of this pricing engine. One, it will allow us to utilize real-time data. It will allow us to utilize customer data and update -- regularly update our risk selection factors. So that's hugely important for us to get the appropriate balance in place in terms of both pricing for risk and being disciplined in that pricing for risk and ensuring an optimal unit and customer outcome. So I'm very confident -- the team have actually been using in an off-line environment, bit of a technical term the pricing engine fought already. And already, we're starting to see some pleasing results.

Yes. I mean, I think this is a large undertaking, as Lisa said, probably the single biggest investment in the front end of the business. I think we've chunked down the work, so we've got a very confident delivery plan that allows us to incrementally deliver value across the different portfolios. We put a lot of focus on the automation across the end-to-end testing as an example and a very integrated cross-functional team between kind of Lisa's pricing team and portfolio teams and the technology team. So definitely a big undertaking, but we're well underway.

Another question, Kieren?

I just had a quick second question around, I guess, the digital allotment and sort of self-service, so both from the consumer claims side of the businesses. Just wondering if you could talk to some of the leading industry benchmarks out there at the moment. How do you think you compare today? And what gives you confidence for a more mass market brand like yourselves. You can sort of inverse those sort of relationships over a 2-year period?

It's a great question and core to what we're doing is our ability to leverage the digital investments that we've made and incrementally enhance them to turn both digital lodgment of claims but also sales and service from the sorts of ratios that we see today to the ones we aspire to in a number of years' time. But Lisa, do you want to start with sales and service, and then we'll go to Paul?

Yes. So Kieren, why I'm confident is certainly against the backdrop of COVID we saw far more demand for our customers to interact with us digitally. And at the same time, over the past couple of years, we've continued to see digital interactions grow. And to give you a sense for our mass market brands in terms of sales, already, we see over 50% of sales coming through the digital channel. And in many of the instances, what we are trying to do are really simple lower-value transactions. So obviously, we're coming into June, tax time, lots of people are asking for tax invoices and certificates of currency. We get bombarded with requests for that. And so what we're doing is just making that functionality easier for a customer to do that within 10 seconds through their device. And we know our customers want that. Increasingly, they're asking us for it -- for that. And we've just got the teams rolling out that functionality. So a lot of the things we are trying to do is just take very simple transactions and enhance the digital experience, which gives me a lot of confidence in our ability to execute and the fact that it will also lift the customer experience.

Yes. I mean, I do think our ambition of 80-20, 80% digital is achievable. And the proof points I use is, if I just take, for example, in an event scenario and safer hail event, we've seen already that we get adoption rates of over 50% in the motor space. And the same in home. It's up there as well in the 50%. So for us, it's just around making the experience as good as the physical experience. And we've done a lot of analysis around when people go in and start a digital lodgement, where do they fall out? And just by improving where they fall out, we can immediately get up to 50%. And therefore, we'll just enhance that further using AI and slowly get up to the 80% over the planned period. But we are confident people are -- the customers are asking to do things digitally. It's -- obviously, it's a result of COVID and the like, but we do think that ambition is realistic.

Your next question comes from Andy Chuk from Macquarie Group.

It's actually Andrew here. Just one question from me, please, and apologies if you addressed it at the start of the call. But you mentioned a couple of times over the course of the call you're expecting a modest increase to natural hazards allowances in FY '22. It would be really helpful if you could put some dollar or percentage numbers around that, please.

I'll hand to Jeremy in a minute. But your alias, is it, Andrew -- anyway, look, I think going into this -- I mean, again, we ought not get too far ahead of ourselves because we do have, what is it, 6 weeks or so before we end the financial year. And I think, as we sit here today, we are probably running around $50 million ahead of the allowance, give or take a few million dollars at the end of April. So I guess the way I would look at that in the construction of the allowances going to a La Niña weather pattern and to have landed about where we are today is not a bad outcome, I think, in the context of historical La Niña years. But I caveat it by saying we've got 6 weeks to go, and there's a bit of weather around at the moment. So we continue to monitor that very closely. Jeremy, do you want to go to...

Yes. Look, I mean, the point to the comment really was just to demonstrate that we've tried to think credibly around the assumptions we've got in our aspirations, sit behind the aspiration. And we felt that just having a flat outcome on natural hazards and reinsurance as a bucket because as we go through, we'll trade one-off against the other to some extent. But having a flat cost across those 2 probably felt a little bit aggressive. And so we have put into that aspiration allowance for, as I said, a modest increase. Probably, if you think about that in the context of underlying inflation in the portfolio, some were a similar amount, as said, sort of low singles. But what I would say is that, on reinsurance, as we've gone through this renewal, certainly, the front end of it, there's a lot of rhetoric in the market around the need for reinsurers to improve the sustainability of their returns. But what we've seen through the renewal program is, yes, that's true. But there's still a lot of capacity in reinsurance markets globally, and there's still very strong interest in the Australia and New Zealand region, in particular. So we, as Steve said, feel comfortable around FY '22. And we've made I think what is a sensible allowance in the aspiration -- what sits behind the aspiration.

And I think, Andrew, just to add to that, to pick up Paul's program of work, I mean, the work that Paul is doing in terms of natural hazard event response will also play very favorably through the natural hazard allowance over time as well.

Your next question comes from Siddharth Parameswaran from JPMorgan.

Just 3 questions, if I can. Firstly, just on the loss ratio improvement you're assuming of going from -- of 150 to 200 basis points. So I was intrigued with comments just around -- your observations around your claims ratio. I think you said that there seemed to be around 5% worse than your peers 10% worse than your challenger brands. And broadly, you're saying that you're happy with the performance on motor. Maybe if you could just maybe share your observations as to why you are so much worse? I mean, it seems to suggest that you must be materially worse on the home. What are your observations? I think, previously, you've made comments around excessive coverage. Maybe if you could just comment on that part first, please.

Jeremy, do you want to...

So look, I mean, the first thing, Sid, is it's often a difficult comparison to make because of mix in the portfolio. So it is a bit hard to pull out. But that's our best estimate around it. We would say that part of that difference is structural. So we don't have the motoring club brands in our portfolio. So there are some structural differences, which is why we're not proposing to suggesting that we close all of that gap down because some of it is structural. But we do think there are some elements of that gap that relate to our value chain on claims that, yes, go all the way through from risk selection, coverage, all the elements that Paul's spoken about in terms of supply chain, lodgement processes, et cetera. So we think there's an element of it that is structural and just will be there because of the different shapes of the portfolios and the books. But equally, we believe there's absolutely an element that we can deal to. And Paul, do you want to add some more.

As per the presentation that there is a lot of opportunity in the home space. And I think I've talked to what we're going to do there. I think on the personal injury side, and I just think as an example, if I think of New South Wales, CTP, where we've done a lot of work in recent, now when you compare our average claims cost to industry, we're at 105%. So our ambition is to get back to under 100%, 99%. And that's in New South Wales, and Queensland CTP will be a similar story. So there's a lot of opportunity in personal injury. I had a lot of experience in my previous work there. So I believe that's achievable as well. So that will drive a lot of that improvement.

Okay. But just a question on coverage. You previously -- I think, Steve, in your presentation, maybe at the half year result, I think you said you were looking at coverage and whether that was excessively generous as well. Is that an observation of the conclusions you've made?

I think it's a contributor to it and an area of focus for us. I mean, I think we have had -- certainly in terms of our interpretation of some of the regulatory standards and some of the covers that we have provided, I mean, we're very conscious that in many of our brands that is an essential ingredient of the differential -- or differentiator that those brands have relative to their competitors, but we have to make sure that it's going to be recognized in pricing. And so we are progressively going through the portfolio, top to bottom, to look at the coverage we provide and the extent to which it's being valued by customers, brand by brand by brand. It's the work that Lisa is doing. And we'll make adjustments where necessary, bearing in mind the nature of the brand that we're talking about. I think one of the things, Sid, on loss ratios is, as an organization over the past decade, we've done a lot of work in claims. We've gone into motor, and this is the first time we've actually laid out loss ratios end to end. There's pricing. There's capability in pricing. There's infrastructure in pricing. There's risk selection more broadly. There's managing the portfolio by geography. And then there's all the work that Paul is doing in claims. So this is an end-to-end focus on loss ratio, which I think is probably the first time in a decade that we've done this piece of work at this level of detail.

Yes. And just one final question on the loss ratio issue, just your pricing engine. Are you actually going to be collecting new data on your customers? Or are you just going to be slicing and dicing your existing data better? Because that seems like a harder way of raising margins. But if you -- are you actually going to try and collect more data, which perhaps might give you an edge where some of your competitors have been -- perhaps had an edge over the last few years.

Lisa?

Yes. Sid, it's going to be a combination of both. So already, as you know, we are data-rich, but the current pricing engine has had limitations in terms of the ability to ingest and use that data. Obviously, the new pricing engine we will put in gives us greater flexibility and agility around that but also in terms of we continue to update our models, our understanding around natural hazards as well and put that through the book.

Your next question comes from Brett Le Mesurier from Velocity Trade.

Steve, just going back to something you said before. You said you were $50 million ahead on peril. Does that mean that your perils were $50 million greater than the allowance at this stage?

Year-to-date. That's correct. And I think we've got around $60 million -- $60 million, $70 million in allowance remaining for the rest of the year. So if we have experience in line with the allowance through May and June, the essential outcome would be we'd be $50 million ahead for the year. But Brett, it's -- if you were sitting in front of me today, I'd be just saying there's a caveat, which is there's 6 weeks to go, and we don't get ahead of ourselves.

Oh, sure. I was just checking, that was all. Have you stemmed the market share losses in home? It wasn't clear, I thought, from what you said earlier. Are you still losing market share?

Lisa?

Yes, in terms of our home portfolio, our priorities at the moment very much ensure we've got a disciplined approach to price for inflation and delivering and improving trajectory on the home portfolio. I do want to note there have been a few exits that we are undertaking as we announced at the half. So obviously, Vero consumer portfolio that is largely home-based and also earlier, in FY '21, we had an embargo in certain types of product categories such as landlord, which has obviously affected the home unit position. So what we're starting to see is an improving trajectory but still in terms of a small issue unit loss in home.

Within an acceptable -- I think -- we I'd like to point that in terms of the reset of the allowances and the reinsurance costs we took very early activity to increase pricing. So in that environment, as other insurance competitors go through their reinsurance renewal and otherwise, we expected to see some market share losses or some unit count losses in the first half. We saw a bit of that. But when we look at it like-for-like, the momentum clearly has picked up on the unit count side. Now where we actually landed the full year, we'll have to wait and see over the next 6 weeks. But the momentum has certainly improved, and the reflection of that is that the rest of the market are seeing the same things around natural hazard allowances and reinsurance costs lifting up as well, and they've had to take actions in their book, which has improved our competitiveness and allowed us to recalibrate some of those market share or unit count numbers through the second half.

And how much claims inflation are you allowing for in your home insurance?

Paul, do you want to?

In terms of how much we're allowing of the claims, what we're seeing. So in terms of what we're seeing in the home book, it's anywhere between 4% and 5% is what we're seeing. And that's primarily coming through combination of labor, but also we're seeing issues around roofing and roof costs is probably the main driver of it. That's what we're seeing.

And motor?

And motor is sort of 3% to 4% and primarily driven by parts and also windscreen inflation given technology that's going into it.

And Lisa on price.

Yes. As I've mentioned earlier, in terms of from the home portfolio, we're seeing headline price increases that we've been putting through around the 10% mark. And in terms of -- from a motor perspective, probably more around the 3%, 5% mark.

And the home claims situation? What are you allowing for?

4% to 5%, underlying, yes. The reason the price increases are greater than that is because we're seeking to reprice for the material increase in natural hazard allowance and reinsurance costs from the last 2 years. So those aggregate pricing increases are far greater than underlying inflation simply because they include also our reset -- the reset of the allowances and the reinsurance costs that we're pricing for now.

I think Steve...

In your home underwriting, you're still not taking account of where the large trees are relative to houses, are you?

Well, we do a fair bit of geospatial mapping to identify if you got a big tree next to your house, Brett, is that what you're saying? Or...

No, I don't. But I know I've never been asked.

Okay.

You are looking at the satellite images?

Yes. So Brett, in terms of -- obviously, we've spoken today a lot about pricing engine, but there are a range of risk selection initiatives. We do have some work underway around geospatial. We've started, albeit it is early days, to start to use some of those insights in our pricing process. And the great thing about geospatial is often you don't have to ask the customers those specific questions. We have an ability to use that noting from the satellite imagery.

And lastly, on claims management, what do you do with builders who underquote?

Who underquote?

Well, is that the issue?

Give me a bit more clarity on your question.

So someone has a home claim builders quote on the job, you choose to build it on the quotes. And then when he comes to start the work, he goes, oh my God, I didn't realize it would cost this much. So I'm not starting unless I get paid more.

No. So what we do is we -- just to confirm those situations don't happen. A key change in our process is agreeing on scope than -- with the builder and then seeing the costs that they send through and using that tool I talked about, ICBM, we then can compare what they're quoting against what we think is a fair market value. And if they've underquoted, we would challenge them on that. And then finally agree a scope and a cost that we think is sustainable. So it's all about scope, granulated costs working with the builders to make sure it's a fair and reasonable program of work.

So you think you've got that under control, do you?

Well, that's what we're enhancing our capability. So we put [ ICDM ], which helps manage the cost side of it and [ Ithma, ] which helps manage the agreeing the scope and the workflow, managing the builders through the claims process. So that's the capability we put in place we're now operationalizing.

And then we'll reassessing our builder panel too which you do in the near future. So any systemic issues in that domain, where we're seeing underquoting and then subsequent scope changes, very thoroughly going to go through the panel process that we do on a regular basis.

I can tell you you've got more work to do. That's it from me.

So we might go online now, and here's an interesting one from a struggling value manager, Dougal Maple-Brown, who has asked -- he received his AAMI car policy last week, and the premium was up by 15%, not bad for a depreciating asset garage behind my left shoulder. I wasn't aware that Balmain was a high cat area. So is this rate increase, typical of the increases going through the motor book. Lisa?

Well, nice to see a fellow neighbor. In terms of, as I said, the headline rate increase is going through the motor portfolio, probably around more so the 3% to 5% mark. But happy to have a chat if you want to in regards to renewal. And also, thank you for renewing with AAMI.

Okay. Let's go now to Doron Kur again. In personal lines, do you have a view of what system growth is? And are your system growth targets based on a volume as opposed to GWP basis?

So in terms of our targets, obviously, for the outlook ahead, we are making sure that we have appropriate AWP as well as unit growth. And so a good way certainly to look at it is both on a volume and GWP basis. In terms of the system growth, we still think there is strong momentum in the motor market and a little bit of growth coming through in home, albeit it is somewhat harder to predict in regards to some of the impacts to some of the portfolios that we've seen throughout the year due to COVID impacts.

Okay. I might go back to the phones to see if there are any last calls on the phone? There isn't. Okay. I have a question here from Simon Mahwinney, Allan Gray, which is similar to Nigel's question, is any of your $1 billion in surplus capital excess to the needs of the business? And if so, how and when will this be returned to shareholders? So I might reiterate what I said earlier. But Jeremy, you might want to...

Yes. Look, I think just to reiterate what Steve said, there's 2 more -- there's 2 attributes to it. One is that BAU volatility that we would always tend to carry a little bit of capital to make sure we've got covered from a prudence perspective. There's the macroeconomic overlays then that we're sort of in front of us, particularly now as we go through COVID and see what comes ahead. We will reassess that when we get to the 30 June year-end. In terms of if there was to be surplus capital, excess capital to be returned, then our preference is obviously always to provide a franked dividend. But second to that then would really be frank special. Second to that really is on market buybacks are the most efficient, effective way for us to return capital. And so we'll consider those things as we get through the 30 June year-end.

Okay. Well, I don't think we've got any more questions either on the phone or coming in online. So in conclusion, I just wanted to make a couple of quick points. We have reshaped and simplified our business. I think you've seen that today very clearly. You've also seen today that our plan is customer-led. It's enabled by technology. And it's fundamentally underpinned by digital and data. We're very confident that we're on the right path to improve returns for shareholders. I think you've also seen today we've got the right team in place. We've been working together for almost 12 months. We're settled as a team, and we are accountable. But above all, this program is well underway. What we have discussed today we are doing, and we are confident that it's working. So thank you for joining us this morning. I look forward to talking again from Brisbane next week when we'll discuss the Suncorp Bank. Thank you, and have a great day.