Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Okay. Well, good morning, everybody. Good morning, everyone, and welcome. Let me begin by acknowledging the Yugera, the Turrbal and the Gadigal people who are the traditional owners of the lands on which we meet today, and of course, to pay our respects to all Elders, past, present and emerging. First, the disclaimer and taking into account the current COVID restrictions are in place across much of Australia. The presentation for today is being delivered using our in-house infrastructure rather than through an external provider. And so while the production quality might not be as high as it normally is, the setup that we've got today significantly reduces the number of team members that are in the office, and I'm sure you'll understand why this is the case. And like everyone, we're all doing our best in these circumstances. So I'm joining you today from Brisbane, the home of the 2032 Olympic Games. And Jeremy Robson, who's our CFO, of course, is in our Sydney office. Jimmy Higgins, who's the CEO of Suncorp Zealand, joins us from our offices in Auckland. And reflecting the current lockdowns and the restrictions, the other Australian-based members of the leadership team will be joining us via teleconference from their respective homes in both Brisbane and Sydney. So upfront, let's turn to the results. And this slide presents the high-level P&L for the FY '21 year. The group's cash earnings are up by 42.1%, with strong underlying performance in each of our 3 businesses. The improving performance in the Australian GI business has been supported by mark-to-market gains on the investment portfolio. Along with the improved profit in the bank, this more than offsets the impact of increased natural hazard costs on our New Zealand business. And pleasingly, we finished the year with a very strong capital position, and I'll discuss this in more detail in just a moment. So turning to the next slide, and I've called out here some of the key financial highlights that are embedded in the result. But most importantly, the momentum that we have as we move into FY '22. Our Australian Insurance business has delivered headline premium growth of 5.5% for the full year, which is the best full year revenue performance in almost a decade. Importantly, growth in the second half was particularly strong, up by 7.1% versus the pcp. In a critical consumer portfolio, when you adjust for the portfolio exits, premium growth was 7% and driven by both rate and unit count. Commercial GWP increased by 5.3% when you take into account the construction portfolio exit during the course of the year. In CTP, we have improved customer numbers across Queensland, New South Wales and the ACT, the strongest growth in many years. Prior year reserve releases, which exclude the BI provisions were 2.9% of net earned premium. Again, well above our long-term assumption. In New Zealand, premium growth remains very strong at 9.2% for the full year and over 13% in the second half. In the bank, we returned to growth in the home lending portfolio. At call transactions and savings accounts, both grew by over 16%. And the net interest margin improved by 13 basis points to be 2.07% for the full year, again, well above our long-term range. All of this resulted in profit before impairments in the bank increasing by a very satisfactory 5%. And finally, group expenses increased by 1.9%, landing in line with the guidance we provided at the first half result. So now to the capital management initiatives that we've announced today. And as you know, those of you that have been following us for a long period of time would know that we have a long-held commitment to return to shareholders any capital that's surplus to the needs of the business. We entered COVID with a very strong balance sheet, giving us confidence and flexibility through the early stages of the pandemic. And I'd make the point that unlike many of our competitors, we've not had to raise discounted equity, and we've been able to maintain our dividend within our payout -- target payout ratio range. Now while there's still risk associated with the external operating environment, the outlook for the business and the economy is more positive than when we -- and that's the lens through which we reviewed the balance sheet position as we came into this period end. Our final fully franked ordinary dividend of $0.40 per share means that we have effectively delivered a payout ratio at the top end of our target range for the full year, which is the way we like to run it. In addition, we have declared a fully franked special dividend of $0.08 per share, which takes advantage of the modest amount of franking credit surpluses that we have available to us. Today, we're also announcing an on-market share buyback of up to $250 million to be completed over the next 6 months. But importantly, following these activities, we will continue to hold a robust capital buffer of almost $400 million above our conservative Board agree targets, and we're holding that at the group nonoperating holding company level. This will enable us to continue to navigate the ongoing uncertainty with confidence. Now before handing over to Jeremy, I'd like to make the point, and it's an important point to make, that today's results should be seen in the context of the group's 3-year plan, which we first outlined to the market in February and we stepped through in detail during the investor series in May. That plan builds on the work we started when I was first appointed the group's CEO. 2 years ago almost to this day, I said my priority was to align everyone at Suncorp around improving the way we deliver insurance and banking products to our customers in Australia and New Zealand. To do this, we set about simplifying our portfolio of assets and our products to enable management to focus on driving improved performance in our core businesses. Now at the top of this slide -- across the top of the slide, I've called out some of those key milestones. Following the sale of the Australian Life business and Capital SMART, we completed a strategic review of our wealth business, subsequently announcing the sale of that business to LGIAsuper. Post balance date, we've continued our progress with the sale of our 50% interest in the RACT insurance joint venture in Tasmania, again, very consistent with our strategy. Now we believe each of these divestments has made strong strategic sense, representing good outcomes for shareholders, customers and, of course, employees. We've also exited a number of underperforming portfolios. And while this will have a short-term impact on revenues, it will ultimately be accretive to margin. Now on this slide, I've also included our key strategic initiatives. These should be familiar following the investor series in May. To recap: Insurance, our priorities are revitalizing growth, optimizing pricing and risk selection, being digital first in distribution and best-in-class in claims; In New Zealand, we will grow our brands and strategic partnerships, digitize and automate our processes, and as in Australia, we'll deliver best-in-class claims outcomes for our New Zealand customers; and in bank, we are focused on winning in home lending, simplifying products and processes, optimizing distribution, accelerating digital and everyday banking and driving targeted growth in our business bank. The initiatives we have, they're clear, they're simple, and we believe the results we're presenting today confirm the good progress that we're making. I'll return to all of this later in the presentation with some proof points. But first, let me hand over to Jeremy to run through the financials in more detail.

All right. Thanks, Steve, and good morning, everyone. Look, I do acknowledge as well with Steve, that it is a pity that we can't be doing this update in person this morning. But as Steve said, I'm sure we'll make best of the circumstances. So I'd like to start by reinforcing Steve's comments about the quality of the results we're presenting today. We're pleased with the performance of the business and the momentum this result demonstrates as we deliver on our strategy. It supports the confidence we have in achieving our plan and reflects the robust and disciplined approach to delivering each of our strategic priorities. The business is being well managed with strong prior year reserve releases and finalization of the pay and leave review in line with expectations. And as Steve said, our balance sheet and capital position remain very strong, which has allowed us to announce a range of capital management initiatives today. So I'll now run through the results in a little more detail, starting with the Insurance Australia business. As Steve said, GWP finished the year up 5.5% on a headline basis. As you'd be aware, headline GWP growth has been impacted by a number of factors, including portfolio exits and last year's embargo on landlord insurance. So to help better explain our GWP growth, the numbers in the chart adjust for these impacts. And on this basis, total GWP grew by 6.7% and which is the strongest growth we've reported since 2013. The home portfolio grew by 7% as we continued to reprice the portfolio for higher natural hazards and reinsurance costs, but with a small decline in units as we focus on margin remediation. Now motor was also up 7%, supported by both average written premium and unit growth, reflecting our targeted approach to marketing and improved customer offers. Pricing remains consistent with underlying claims inflation. The growth in commercial reflects a combination of ongoing premium rate momentum and solid retention rates, particularly in the fleet and NTI portfolios. This was partly offset though in Resilium but we did see retention rates stabilize somewhat in the second half. Our workers' compensation was up strongly across all states, driven by higher retention and wage and new business growth. The small decline in CTP reflects market pricing dynamics as the impacts of scheme reform continue to become clearer. But very pleasingly, we achieved unit growth in Queensland and New South Wales and ACT through the motor dealer channel and an improved digital experience. Turning next then to claims, and I've included the usual undiscounted claims waterfall on the slide. In consumer, motor claims costs reflect both growth in the portfolio and underlying inflation. While Suncorp continues to benefit from its preferred repairer network, cost increases were driven by higher parts prices and a higher proportion of total loss claims. And we saw some frequency benefits in the first half, but frequency largely returned to pre-COVID levels in the second half. Homeworking claims were lower with benign frequency and theft and relatively stable water claims. While some parts of home claims have experienced inflationary pressures, underlying inflation has remained around mid-single-digit levels. In commercial, the reduction in claims reflects reduced frequency and benign large loss experience. And elsewhere, claims were largely driven by the portfolio growth in workers' compensation offset by an improvement in CTP which reflects our focus on claims process improvements. Prior year reserve releases were above our long-run expectations at 2.9% of group NEP, excluding business interruption movements. We saw continued releases in CTP, and we had small releases from the consumer and commercial portfolios. But we did also see a modest strengthening in the long-tail personal injury portfolio. Natural hazard experience was slightly above the allowance and up on the prior period. Now reinsurance only recovered on one event this year, which does mean we held higher risk margins compared to the previous year. Excluding natural hazards, risk margins increased by $26 million and CHE by $74 million. The majority of this risk margin increase relates to portfolio growth and the increase in CHE reflects the costs supporting both the delivery of key projects, including best-in-class claims and ongoing compliance with our regulatory program of work. COVID-19 impacts added $72 million to net incurred claims. The key movement was the additional business interruption provisions recognized in the first half with similar working claims benefits across both years. Moving now then on to investment performance. Our portfolio delivered strong returns supported by the rebound in breakeven inflation and equities. I remind you that we have approximately 21% or $2.2 billion of our tech reserves in inflation-linked bonds which are designed to provide some hedge against inflation in our long-tail claims portfolio. We're proud of the capability of our investment team and the work we've done on both strategic asset allocation and the selection of our investment manager partners. The underlying yield on insurance funds was 66 basis points, approximately 45 basis points above risk-free. This is below our expected 60 to 80 basis points and reflects very strong manager performance, but with headwinds from lower credit spreads and ILB carry. I'd also like to update you on our recent strategic asset allocation review, where we've made some modest changes with the overall objective being to optimize ROE, but with a view on managing P&L volatility. So in insurance funds, we've increased our allocation to high-quality credit by approximately 3%, largely from cash. And in shareholders' funds, we've increased our equities portfolio back to medium-term weights by approximately 6%. We're also continuing to assess the optimal level of inflation hedging through the inflation-linked bond portfolio, as well as shareholder fund allocations to a more diversified portfolio of growth assets. And I note that these changes may result in a modestly higher asset risk charge, but I emphasize that we retain the overall quality bias in our investment portfolio that served us so well in recent times. Turning now to New Zealand. After consistently strong results over the past few years and strong top line growth this year, profit has been impacted by higher natural hazard costs and lower investment income. GWP grew over 9%, led by the direct AA insurance channel with strong new business growth and good retention. We also saw good growth in Vero Commercial. Net incurred claims were up almost 18%. Natural hazard costs were the highest in the last 5 years, driven by 6 events over $5 million following 2 years of benign experience. Working claims costs increased primarily due to unit growth as well as motor claims normalizing following the COVID lockdowns in FY '20. While we're closely watching for any evidence of inflation emerging in the supply chain, inflation overall was relatively benign through the year. The operating expense ratio improved with top line growth outpacing a modest increase in expenses. Investment income was lower with the increase in rates impacting on the fixed income portfolios, particularly in the second half. And the Life result was broadly unchanged, reflecting an improved claims experience, offset by unfavorable interest rate movements also particularly in the second half. Then to natural hazards for the group. And our natural hazard costs exceeded our allowance by $60 million. Whilst this is disappointing, it is in the context of a La Nina weather pattern with a significant number of smaller events. Only 1 event resulted in a modest reinsurance recovery this year. We announced in July that we've successfully placed our FY '22 reinsurance program with the structure unchanged from FY '21. The group's maximum event retention will remain at $250 million with an upper limit of $6.5 billion. And limits for the drop-down and AXL treaties have also been maintained. The natural hazard allowance will increase to $980 million in FY '22, as we've previously flagged, reflecting portfolio growth, inflation and a modest strengthening in assumptions, offset by the impact of the exited portfolios. Now we believe the reinsurance program and natural hazard allowance strike the right balance between ROE optimization and earnings and capital volatility protection. And pleasingly, the cost of reinsurance and the increase in natural hazard allowance for FY '22 are in line with the assumptions embedded in our 3-year plan. Moving on then to group underlying ITR. As you know, we seek to neutralize the volatility from natural hazards, investment markets and reserve releases from this metric, so we can provide you with a better sense of the underlying performance of the business over time. I do note, however, that there is still some inherent volatility, in particular in the form of timing and quantum of current year valuations and some residual investment market impacts. So the starting point for the chart is the first half '21 underlying ITR of 7.1%, excluding COVID-19 benefits. And all the numbers I talk about here exclude the COVID-19 frequency benefits. The movement in underlying ITR over the half was largely in line with our expectations with a modest improvement, driven by improved working loss ratios, partly offset by a temporary investment in strategic initiatives. This investment drove the majority of the increase in expenses, but also with some additional investment in marketing and technology as we drive for growth. The important margin bar on the right-hand side of the slide captures the movement in our working loss ratios and largely reflects 3 key elements: Firstly, that we've seen margin improvement across most of our portfolios. In particular, the home portfolio is benefiting from the repricing behind natural hazards and reinsurance costs we've previously flagged, and commercial margins have improved with ongoing pricing momentum and benign claims experience; Secondly, New Zealand margins declined due to the normalization of working loss ratios to more sustainable levels as we'd expected and includes some mix impact from the high portfolio growth in the AA Motor portfolio; and lastly, to my earlier point about inherent volatility, we also saw favorability from current year CTP releases and commercial large losses. Now importantly, looking ahead, we expect the underlying ITR in first half '22 to remain broadly in line with or better than second half '21, but with the overall margin improvement to accelerate in the second half of FY '22, as the benefits of our strategic initiatives kick in. And we believe that, that will clearly demonstrate a very clear pathway to hit our 10% to 12% target in FY '23. Now in this outlook, as I said at the start there, we haven't included the impact of the recent lockdowns on motor frequency given the level of uncertainty around this. Now to Banking & Wealth, which delivered a profit of $419 million, reflecting strong net interest margin and the release of some of our collective provision balance. Profit before impairments increased 4.6% to $550 million, again reflecting the improved net interest income and a stable cost-to-income ratio. Despite a reduction in lending over the year, one of the most pleasing elements of the group results has been the momentum and growth in mortgage lending in the second half. As Steve mentioned earlier, lodgements and settlements have increased significantly, while improvements in processing turnaround times have been maintained and are now better than most of the major banks. Lodgements over the second half of the year are up 71% on pcp, culminating mortgage growth in the month of June of $182 million. But we have continued to see high levels of loan repayments, increased property sales and elevated refinancing activity. But importantly, we remain better than market in terms of retention levels. Net interest margin increased 13 basis points over the year. This was underpinned by ongoing growth in transaction accounts and lower funding costs, including the benefit of the term funding facility. The full year NIM of 207 basis points is well above our target range of 185 to 195, and we do expect it to trend back to within the range over the next few years, reflecting industry funding and pricing dynamics. Bank operating expenses increased 3.7%, largely from the temporary increase in strategic initiatives with the cost-to-income ratio holding broadly flat at 57.1%. We continue to target a cost-to-income ratio of around 50% in FY '23 with the momentum we're seeing in Home Lending and the emerging cost efficiencies, giving us confidence we will achieve this target. On credit quality. The credit quality of the lending portfolio remains strong. Just to remind, 80% of the book is in residential mortgages, and those have now got a dynamic LVR of 61%. Past due loans have reduced over the year, but with an increase during the second half. This movement reflects typical seasonality from Christmas spending patterns, along with the transition of some COVID deferrals into hardship. And on those deferrals, the majority of customers who received COVID support last year have now returned to performing. And in respect to the current lockdowns, while it is still early days, we've only seen a relatively small number of customers apply for relief. We've reviewed the key economic assumptions, which underpin our collective provision, and this has led to a release of $60 million. This results in a year-end balance of $195 million, which continues to incorporate a prudent set of assumptions, reflecting the uncertainty around ongoing lockdowns as well as the vaccine rollout. To group expenses then, which were $2.8 billion for the year, consistent with what we flagged at the recent investor series. Project costs have increased over the year, primarily due to the temporary step-up in spending on strategic initiatives. And the majority of spending this half has been on digital-first experiences and revitalizing growth in insurance. And in the bank, our investment has been focused on winning in home lending. We also saw a modest increase in growth-related costs with increased marketing, offset by lower commissions. The technology costs increased mostly in relation to the new telephony platform, and increased cloud hosting costs as we get on and digitize the business. I'd also note that we incurred $55 million of restructuring costs, which are included within our cash profit and have been reported in the other profit after tax line. These reflect costs associated with implementing our new operating model as well as real estate and store optimization costs. I'm pleased to say we've delivered the benefits we expected from our operating model changes, and these have helped to offset inflation and other cost increases. Looking ahead, operating expenses in FY '22 are expected to remain around $2.8 billion before returning to $2.7 billion in FY '23. Finally, then moving on to capital. And I've shown in this chart, the movement in CET1 held at group over the half. As Steve has already talked to the key elements of capital management, so I won't cover them again. But just wrap it up by saying that in total, the group will have declared almost $1.2 billion in capital returns to shareholders in FY '21. The chart shows CET1 held at group of $637 million before the share buyback and the pro forma capital position after the buyback of $387 million. The capital usage you see on the chart was largely a result of an increase in targets from some adjustments to our models and changes to strategic asset allocations in GI and risk-weighted asset growth in the bank. We also saw additional dividends being returned to the group from the New Zealand and bank subsidiaries. And we plan to hold a modest buffer of franking credits to ensure we continue to fully frank our ordinary dividends, while allowing for some of the inherent volatility in the franking account balance. And our dividend policy remains unchanged. And with the group aiming to pay annual dividends based on a target payout ratio of 60% to 80% of cash earnings. We also remain committed to returning any surplus capital to shareholders which we will continually reassess taking into account the needs of the business, the economic outlook and any regulatory guidance. And with that, I'd now like to pass back to Steve.

Okay. Well, thank you, Jeremy. And let me just briefly, before we move to Q&A, highlight some of the key proof points that demonstrate the progress against the plan, the FY '23 plan in those key 12 initiatives. In the Australian Insurance business, our activity -- the plan of attack that we've had to reinvigorate our brands to refine our customer value propositions and improve our marketing are translating to stronger growth, and you can see that in today's numbers. In pricing and risk selection, we've continued to reprice our portfolio to take account for the higher industry input costs. And we're also making good progress with the rollout of our new pricing engine. We expect the first deployment of CAPE to any pricing engine across the home portfolio by the end of the year. In distribution, we're effectively leveraging our previous investments in digital and data and we're meeting our customers' increased appetite to interact with us digitally as a result of COVID. Digital sales and service levels grew by over 13% in the past year and now account for 33% of all sales and service transactions. That means we're well on our way to our long-term target of 70% digital, 30% voice in insurance sales and service. Our best-in-class claims program has achieved a number of critical milestones in recent months with the deployment of Claims Center 10 and the implementation of several new assessment tools and automation initiatives. Our building plant panel is currently being reviewed and is expected to be settled by November. In New Zealand, we've made good progress growing our brands and partnerships. Again, that's referenced in today's numbers. Our best-in-class claims program is progressing, and we're continuing to automate to reduce manual processes and simplify our customers' claims journey. In the bank, you can see that Clive and the team are making good progress on their 5 key priorities. Now winning in home lending is the top priority. And here, we define success against 3 targets: Our first priority was to get positive home loan growth, and we've achieved that; our second target is to achieve market share growth ahead of our ultimate objective, which is to consistently match best-in-market for home loan origination; digital engagement of the bank has also increased markedly with over 600,000 digitally active customers and over 1 million Suncorp app logins recorded every week. So in summary, our priorities are simple and clear. The team and I are focused on executing these 12 initiatives, which, as you know, are the cornerstones of our FY '23 aspirations. However, I point out that achieving the financial outcomes that are embedded in the plan relies on everyone at Suncorp, understanding and living our purpose and in turn, delivering for our customers and the communities we live and work in. This slide, which we first shared with the market at our Investor Series in May, provides a framework for how we see value being created at Suncorp. It's very different to the way a financial services organization would have historically presented to a shareholder audience. We firmly believe that purpose is central to everything we do at Suncorp. We know it will ultimately be a key differentiator for our organization and that will underpin our future as a sustainable, investable and growing business, just as it does for those companies that can truly be defined as leaders in their respective fields. Now nowhere has that purpose been more apparent than in our response to multiple natural hazard events, the ones that we've managed over the last couple of years. In FY '21, we dealt with 23 separate events, around 50,000 event claims and over $1 billion in natural hazard claims costs. So on the left-hand side of the slide, I have recapped our 4-point plan for building a more resilient Australia in the face of the changing climate. Our advocacy, we've backed our advocacy and we supported it by our One House initiative and the new build it back better product feature that you saw in the video at the start of the presentation. Our purpose has also been front of mind as we're dealing with the impact of COVID. Now since the beginning of the pandemic, we prioritized the safety and well-being of our customers and our people and provided relief and support to over 85,000 insurance and banking customers. We know that short-term relief can go a long way. In light of the current lockdowns, we have reinstated the banking and insurance support packages that were a feature of the initial lockdowns. Now along with the support we provide to customers, Suncorp has a proud heritage of supporting communities. In FY '21, we contributed $9 million to a range of community organizations across Australia and New Zealand, including the Queensland and Victorian State Emergency Services, the Australian Road Safety Council and the Shine Organization in New Zealand. Now as I discussed in the last slide, supporting and advocating for customers and our communities ultimately contributes to improved outcomes for shareholders. So in conclusion, we are pleased with the results we've reported today. They reflect the hard work and the dedication of all Suncorp people. Collectively, they have rallied around our purpose and are focused on our customers. Of course, while the uncertainty from COVID is far from over, we have good momentum, we have a sensible plan and a capable underlying team. And we look forward to answering your questions. So why don't we now move to the Q&A session. And we'll open up the call to some questions.

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

Congratulations on the results. Just 2 from me, please. The first one, you've indicated your medium-term targets and NIMs are going to step back to within the 185 to 195 range. But it would be helpful if you could give us a bit more color on how you're thinking about them for FY '22, please?

Okay. I might get Jeremy to answer that, if you don't.

Yes. Thanks, Steve. So Andrew, I think it's fair to say that margins are elevated in FY '21. A couple of factors, one of them being the lending book in the first half of '21 where we had the cash rate reduction, which didn't all flowed through into the year given where the funding rates were. So I think what we will see out into '22 is the -- some of the ongoing dynamics of improved run rate benefits on the funding side of things. So we get a full year benefit on things like term funding facility and some of the hard work we've done on repricing the deposit portfolio. But on the other side of the equation, we'll see -- we think we'll see some market pressure coming through on the mortgage side of the book. Net-net, we think that will mean that the margin will track down from the current elevated levels, not necessarily getting -- not necessarily flagging that we'll get to within that target range in FY '22. That will be over a number of years. So we will still be elevated, but it will be below where it is today.

And Andrew, I'll just to add to that, just to -- just 2 people's minds to the sort of progress around our liability mix that we've achieved over the past 2 or 3 years. And again, that's being driven by digital and very much biased to transaction banking accounts running off expensive term deposits. So we've got now a very strong liability mix in the banking business. And again, we continue to have the comfort and security in that A+ rating that we go to the market with on the wholesale side as and when it's needed.

Yes, that makes sense. And then my second question, please. Just interested in a bit of color as to why you're changing your pricing engine for Home and Motor?

Okay. I'd like to kick off, and I'll see if Lisa wants to add anything to it. I think if you go back to 2004, 2005 with the introduction of GIPI, which was a leading pricing engine infrastructure at the time, we created -- that created a very strong competitive advantage for us. It allows us to price down to the individual home, in -- on the home portfolio and created a huge amount of data for us to be able to improve our risk selection and pricing. I guess over time, like any technology or any infrastructure, it's overtaken in the market. And I think some of the more modern and contemporary pricing engines particularly the CAPE pricing engine that we looked at first in 2015 have superseded what was a very good pricing that you can get in GIPI. And I think it's the evolution of our business, our ability to focus end-to-end on loss ratios. And loss ratios are everything from your marketing, your branding, your pricing engine right through to claims. And that end-to-end view that we have, and we felt an appropriate investment in new pricing infrastructure and capability was a necessary part of the program of work that we have in place. So it's not to disavow or talk down the infrastructure that we had previously. It's just the next generation and the sophistication of pricing that some of our competitors already are utilizing that we can now very much take off the shelf in a very de-risked environment and implement, which is driving confidence in our ability to improve loss ratios over time. Lisa, did you want to add anything to that? We can push the technology to see if we can bring you in?

Yes. Thanks, Steve, and thanks, Andrew. I think Steve summed it up well. The pricing engine CAPE that we'll be putting in is more modern engine. We've been using it for the last couple of years, as Steve said, in an off-line environment. We know that today, we have limitations on our ability to incorporate new data sets at speed and the volume of that and CAPE essentially takes away a lot of those constraints, allowing us to continue to invest in data and pricing risk selection.

Your next question comes from Kieren Chidgey with Jarden.

Just a couple of questions, maybe starting on GWP. I think I saw $115 million flagged as the drag of portfolio exits through FY '22. Just confirming that is sort of the full number and whether or not there's sort of any additional remedial actions planned in terms of remaining portfolios? Or do you think sort of you come to the end of sort of remediation across things like intermediated personal lines and construction?

Yes, I'll get Jeremy, Kieren, to add to the answer, but there's nothing foreshadowed at the moment other than to say that I think you've seen and hopefully appreciated the discipline that we have in reassessing our portfolios and taking the difficult decisions that need to sometimes be taken when portfolios aren't delivering the necessary rate of return or aren't delivering the appropriate level of customer outcomes. And they'll be decisions that I think have been sort of wondering around the business for probably 5 or 6 years that we've taken, which I think were very appropriate. And of course, they do have a drag on revenues. They create a lot of noise around how we adjust and normalize to get a real like-for-like underlying improvement in our written premium, but they were necessarily take and ultimately will be accretive to margin. Jeremy, do you want to add anything to that?

No, just to confirm that you picked out that right number, Kieren, it's $115 million is what we're calling out as the impact in FY '22.

Okay. And Steve, just on Home. I mean you've had good unit growth in motor. Do you think with the introduction of the new pricing engine that we will move back into a unit growth outcome for home through '22?

Yes. Kieren, I think in an environment where we've had to materially readjust pricing in the home portfolio to take account of the adjustments that we've had to make to our natural hazard allowance and the increased cost of reinsurance, we have had to push unfortunately through some reasonably material increases through that portfolio. So -- And there's always going to be a disconnect between bearers of the insurers in terms of the timing of those reinsurance renewals. So I guess we probably front-end load a lot of those price increases and have to maintain a discipline through that process to get them in and get the earnings. So I guess the way we've looked at the portfolio over the last couple of years is that we don't want to see material reductions in unit count. We don't want to see a deterioration in the franchise. So we're managing it very carefully. And pushing through the appropriate limit of increases. At the same time as keeping our unit count on a like-for-like basis, sort of in the 0% to 1%, 1.5% reduction territory, which is where it's landed. I do have high hopes for CAPE and it's just not me saying that. I talk to people embedded in our business who have been doing pricing and risk selection for many, many years. And I can see the glimmer of excitement in their eyes around having this new technology and this new infrastructure available to us. It will significantly improve the sophistication of how we do price across the portfolio. and I'm very confident that it, along with the natural evolution of the pricing cycle insurance, we'll see that in accounts start to normalize back to flat and then ultimately to sort of in the 0% to 2% positive range, which I think is where we probably want to land it over the longer term.

Steve, I'll just add to that. But -- sorry, can I just add to that on the home units. I think FY '22 will be a little bit of a transition year for us in the sense that we've called out that we had to do some margin remediation on home. And so we've put through reasonably significant price increases through that portfolio ahead of what we consider to be the more sustainable margin remediation over the longer term, which is a strategic initiative benefits. And so in FY '22, what we'll see -- what we expect to see is some of that blunt of pricing coming off, and then some of the strategic initiatives benefits starting to come in towards the second half. And so with that transition, we'd also then expect to see some reversion to hopefully getting into positive unit growth territory.

And just a final question. You called out the rate increases, I think, 4.5% of motor, around 7% in home. Can you give us a feeling for what the average rate rise across the commercial portfolio was? And you've also previously in recent times said you think that portfolio is now close to targeted ITR margins. So just wondering why you're not pushing that a little bit harder on volume if you're still seeing rate and you're already at your targeted profitability levels?

Yes. Look, let me -- I mean, it's obviously, Arista mentioned that sits in that discussion as well. And we obviously were always readjusting our capacity on various lines of business that we're writing and whether we want to lead or whether we want to follow. So there's always adjustment that comes through the renewal. If I were to talk to it in the way that I traditionally talk to it, and hopefully, everyone is familiar with it in terms of the packaged SME business, rate increases through that portfolio 4% to 6%. In the mid-market, the broke mid-market, has high single-digit increases probably on non-loss-affected business and higher for loss-affected business. And then in the property portfolio, the top end, again, I'll just caveat that by saying that that's not a market that we're -- that heavily represented or represented much at all for that matter. That's sort of 15% to 20% increases across some of those portfolios. And to confirm, our margin position is pretty much where we would like it to be. So 10% to 12% in those portfolios. So I guess to the extent that you're not seeing unit count and volume increase, there's a couple of factors that obviously in the package business, that's been the part of the business that's been most impacted by some of the COVID issues and very conscious of that and the current situation there. We are investing in some digital infrastructure there, both in terms of our direct proposition and our pro proposition. And then it's an adjustment based on the risk around some of the capacity that we deploy into some of the lines of business that we're writing. But we're very -- we're very comfortable that the margins where it needs to be and that the pricing that we're getting through is holding up pretty well.

And Steve, sorry, Kieren, I'll just add on that one that when you look at the GWP growth in commercial of around that 5%, as Steve said, packages have been impacted by COVID, also by some of the changes in the broker book for us around Resilium. If you look at the more traditional short- and long-tail portfolios, we've seen GWP growth of getting on to 10% in FY '21, so 9%. And given that we, as Steve said, we're not doing too much in the large end of property, there's some pretty significant and attractive improvements in GWP portfolio growth as we called out across motor and the NTI portfolio.

Your next question comes from Andrei Stadnik with Morgan Stanley.

I wanted to ask 2 questions. First, if I can ask on the clean underlying insurance margins, excluding the COVID benefits. Given how strong pricing has been for some time, so it should now be earned or being earned. And investment yield has already normalized at a low levels. Why wouldn't you expect the underlying margin to improve in the first half of '20? But what are some of the potential headwinds that you're keeping in mind?

Jeremy, I might get you to run through that.

Yes. Thanks, Steve. So look, we can certainly see the improved margin coming through those price increases in home. As I flagged, we'd look at '22 as a bit of a transition year. We can't continue to put through those sorts of price increases through the portfolio over the long term. So they will start to come off and start to earn through. So those 75% of those price increases that we've put through to remediate natural hazards and reinsurance costs, the historic increases there will have earned into the book in -- up to the end of 2021 and then 95% by the end of December. So they will start to come off. Still coming through, but start to come off. We will see some improvement in things like expense ratios next year. As we've said, you can see costs will be relatively flat with the elevated strategic spend still in there. But with NEP growth, that obviously improves the -- we get better leverage around expenses. Maybe a little bit on CHE. I mean these are around the margin, but maybe a little bit around CHE. The rest of the portfolios we would probably expect to be relatively flattish. And I called out in the presentation, some of that volatility, particularly thinking about CTP current year releases that we got in FY '21. They're sort of -- they're not big numbers. But I think, net-net, across all of that, we get to a relatively level outcome in first half '22. We set in line with or better than. So it's around, but hopefully a little bit better. Before they start to accelerate in the second half '22 as the benefits of these strategic initiatives really start to kick in.

Just to clarify, it's better than the 7.1 or the 7.4?

The 7.4. So where the 7.4 is the right -- exactly the right rate, that's what we're talking to as we're talking to the development from 7.1 to 7.4 to in line or better than that 4 million -- And importantly, all these numbers exclude the benefit of -- potential benefit going forward of COVID motor frequency.

And for my second question, I wanted to ask around your capital management priorities. Given you retain a very healthy backbone, you have an extreme appetite to return risk to capital shareholders. Could we be thinking from this point onwards that you want to maintain some sort of buffer, but otherwise, you would be prepared to pay 100% of earnings back to shareholders?

I think it's a good question and probably an obvious one and one that we're probably not going to answer to your satisfaction today. Because as we steer into the future, I mean, there is still uncertainty. And I think we've put ourselves in a very strong position here to be able to undertake capital management initiatives. And before that do not have discounted equity to prop up our balance sheet through the initial stages of COVID. So we're very careful and striking the right balance. Not on that in the form of the instruments that we've used, we are using to return capital to shareholders. And we do have still some uncertainty in the external outlook. So I guess the commitment that we have is that as we come through in the full year, I mean, the starting point would be to true up our ordinary dividend to 80% payout ratio for the full year. And beyond that, we will do a very pragmatic assessment of the needs of the business going forward and any uncertainty that might be sitting in the market that we might want to be prepared for, any investment that we might want to make in the business. But beyond that, our commitment after those things taken into account is to return excess surplus capital to shareholders in the most efficient form we can.

Your next question comes from Ashley Dalziell with Goldman Sachs.

Steve and Jeremy, just an initial question on the margin even you've given the first half of '22. I guess if we roll back to the Insurance Investor Day, you were talking to a flat margin FY '22 on '21. And now you're kind of suggesting a flat margin sequentially into the first half and then improvement in the second half. So I guess it's a bit nuanced, but that is a bit of an upgrade on the outlook in a relatively short amount of time. So just, I guess, a question on where is the improved confidence coming from? Is it more kind of external factors, the pricing that you're seeing, cycle benefits? Or is it more around the internal projects or your building the engine?

Well, yes, look, I mean, it is all nuanced and it's all very difficult to in the COVID world, as to sort of really get everyone level set on what the dynamics are, what we do know unequivocally. As you can see that the business is performing strongly at the written premium level. I think the first priority that I always felt we needed to do was make sure our brands were working well. And so we sort of -- we didn't have the infrastructure in place to really fix that overnight. So what we did first up was create virtual brand teams to align the whole organization around improving the way that we landed the brands in the market. I think we've done a great job on that. I think that's reflected in the overall premium outcome. But most importantly, I think the brand or the portfolio that is most leveraged to the healthy brand and the way that you're marketing and the way that you segment your customers in the motor portfolio and there's been some tremendous outcomes here in that motor portfolio. So the business is performing well, and that's giving us a huge amount of confidence. At the same time, the deeper we go into the program of work, the more committed we are to understand that these 12 things that we're focused on are the important things to drive margin improvement across both the Australian business -- Australian Insurance business, New Zealand and in the bank. So yes, we are getting more confident around the program of work. We still have a lot of execution to do. And we're monitoring that very closely. So there is an improving disposition within the business around the program of execution and the alignment of the organization, which is flowing through to increasing confidence. Jeremy, do you want to add anything to that?

I'll just reinforce, Steve, that it is a bit nuanced and we said broadly in line with '22, broadly in line with '21. So yes, look, on balance, we're probably -- It doesn't mean it's going to be exactly the same. But I think broadly in line with this is not a bad starting point. Maybe on balance, we've got a little bit more optimistic. But what we see is we see relatively flat '21 into '22, a little bit of early green shoots in '22, but we'll see that acceleration coming through back half of '22 and into '23.

Okay. And just a second one, partially related. In terms of thinking about the building blocks on the margin into '22. Last year, you gave us a pretty granular guidance around your reinsurance expense. Obviously, we can see where the allowance is reset to and in a phone, right? I mean, that doesn't present a huge headwind to margin. So I'm just wondering what you saw for that and whether you can give us any help in understanding the trajectory on the range of...

Yes. Look, I think I'll hand to Jeremy in a minute. He is running the reinsurance program these days alongside a really great team that have led into that renewal for us. I think that the reinsurance renewal took a potential concern off the table for us. And I guess, for the market more generally, I think there are plenty of people in doomsday predictions as we -- we're working our way through around a multiyear material reset in reinsurance margins. We hadn't contemplated that in our roll forward, our FY '23 plan and I think we're pretty open to market around that. So we were delighted that the program landed where it did. And it's a function of a couple of things. Firstly, there is still plenty of capacity in the reinsurance markets more broadly and we saw that coming through the renewal. Australia and New Zealand is still very attractive places for reinsurers to park their capital, it provides a necessary diversification benefit for them, and that's important to them because it elevates their credit ratings, which are very important for getting on programs around the world. So those 2 dimensions continue to roll through. And I think generally, I don't say this is a Suncorp-specific issue, but they do appreciate the underwriting capability and sophistication that's sitting in the Australian market. And I think very comfortable with Suncorp as a counterparty. So as macro outcomes were all positive. And so we were able to land the balance sheet outcomes. Our first up, as you would expect, in prebook -- prebind a number of them through the period from February through to May and then landed the residual balance sheet covers and also the aggregate covers as we had the drop downs as we came into the latter part of June. So I know I'm not sort of giving you a perfect set of circumstances other than to say that the combination of the reinsurance program and the increased allowances are consistent with those that we applied in the FY '23 plan. So I haven't needed for us to restate anything relative to what we've already put in the market. Jeremy, did you want to add anything to that?

I'd just also add, Steve. Of course, the recoveries against the reinsurance program was an important part of that renewal process. And as we said, this FY '21, we only had one relatively small modest recovery against the program, which also helped get us to where we need to get to. And I think when we gave the Investor Series update, I think in Q&A, we said that the expectation was that we'd land around in line with where we're pricing the portfolios for inflation, which is sort of where we've landed. So as Steve said, that it takes away one of those potential headwinds to -- took away one of those potential headwinds to margin.

Your next questioner is Nigel Pittaway with Citi.

Just first of all, if I could delve a little more into what's happening on motor. I mean you've said obviously, pricing remains consistent with underlying claims inflation. But at the same time, you have mentioned that frequency moved around a fair bit with obviously COVID-related impacts. So I mean, how have you been addressing that in terms of pricing, in terms of periods where frequency is a bit lower? And should we be factoring in any sort of adjustment moving forward for what's going on currently?

It's a good question, Nigel. Obviously, one we pay a lot of attention to because understandably, when people aren't able to use their vehicles, your ability to reprice is reduced. I mean that's just an honest reflection of where things are in the depth of lockdowns. What we saw through the course of last year. And again, we're pretty data-rich in terms of understanding mobility trends, obviously, through the prism of frequency and accident rates and severity and frequency data is very available to us. So we did see, as you move from Stage 4 restrictions all the way back down to Stage 1 movements in frequency, and I guess our assessment is that while yes, I guess when you're in lockdowns and mobility is reduced, accidents are reduced, severity moves around a little bit. But the progress out of lockdown sees a pretty rapid acceleration in mobility and a rapid acceleration in claims frequency. And in some jurisdictions, not all, but certainly some we saw frequency rates go above the 100%, bearing in mind 100% representing pre-COVID levels and so it did move around. So in terms of the portfolio, again, we have to step back from what's going on in particular week or any particular month and look at the longer-term outcomes of the portfolio. Inflation in motors are running 4% to 5%. I think on an underlying basis, we might be doing a little bit better than that given the fixed price arrangements that we have across a big part of our book and we'll maintain a consistent and disciplined approach to pricing to that. through the cycle or through the immediate cycle. Again, we need to step back from it and look at it over a longer period of time and understand what's happening with supply chains, what's happening with behavioral changes for consumers, et cetera, and the stock of vehicles on the road. But generally, in a nutshell, we'll look at a longer-run view of inflation, underlying inflation and price to that consistently through the 12-month period.

Okay. And then maybe if I could just follow up on, I think it was Kieren's question earlier. I mean it is quite interesting in the commercial space because you're saying you're sort of happy with your margins as they currently stand, which I don't think is a common refrain across the industry. So does that actually give you an opportunity to sort of target sort of slightly faster growth in that commercial space moving forward, given where you are vis-a-vis your competitors?