Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, and thank you for joining us at the rather unfamiliar territory at the back end of the reporting season. I really appreciate everyone's patience as we've juggled FY '17, the Australian Competition Tribunal and Taylor Swift to put us in a position to report today. So for those joining us in the office, I'd ask if you could put your mobile phones on silent. If there's a need to evacuate, please follow the instructions of our team. And as always, I'll begin by acknowledging the traditional owners of the lands upon which we meet and to pay our respects to all elders past and present. So today, Jeremy and I will present our financial results for the first half of FY '24, and we'll run through the presentation, and we've got other members of the leadership team here to join us for the Q&A session that follows. Now as usual, I'll start with a brief overview of how we believe long-term value is created at Suncorp. We are a purpose-driven organization. We deliver our purpose through capable, engaged, diverse and innovative people. This in turn delivers valued outcomes for our customers and the communities in which they live. The financial outcomes we achieved for all -- for our shareholders reflects the sum of us getting all of this right. Now turning to the headline result at the outset, I would acknowledge that this has been a challenging half for our customers with cost of living pressures, and the devastating weather events towards the end of the last calendar year. Now, I have been on the ground in Far North Queensland and across Southeast -- the Southeast of Queensland attending community forums and meeting with our customers. And I've seen firsthand the great work our teams are doing to support customers in the aftermath of these terrible events. In the half year, the group has delivered net profit after tax of $582 million. This reflects strong growth across the group and positive investment performance from higher running yields and mark-to-market gains. Our New Zealand business has benefited from a relatively benign weather period with no natural hazard events over the half. While in Australia, we manage 6 significant weather events, which occurred through November and December, and that resulted in around 45,000 claims at an estimated cost of $568 million, and that's $112 million below the allowance for the half year. Based on cash earnings of $660 million, the Board has declared an interim fully franked dividend of $0.34 per share. That's a $0.01 improvement on the prior corresponding period and represents a payout ratio of 65% of cash earnings. Now on this slide, I've called out some of the key metrics embedded in the result. Our consumer business has achieved gross written premium growth of 12% in home and 18% in motor, with growth in average written premium and customer numbers in both portfolios. Now it's pleasing to see the consumer portfolios are performing strongly, particularly given the significant pricing that has been required to address input cost inflation and rising reinsurance costs. In commercial and personal injury, GWP growth was achieved across all portfolios, but it was particularly strong across our commercial portfolio, which was up by 16%. In New Zealand, the GI business has reported premium growth of 20% through pricing uplift to offset the inflationary pressures on claims and importantly, the increased reinsurance costs that have flowed from the weather events in early calendar year 2023. In the bank, home lending growth -- our home lending portfolio delivered modest lending growth of 2.2% as we deliberately balance growth with margin outcomes in a highly competitive market. We've maintained median application turnaround times, averaging below 4 days, asset quality has remained sound and the collective provision has remained flat on its June position. The group achieved an underlying ITR of 10.2% for the half, and that's supported by improved investment yields, and the ongoing improvements that we're making to the business. Now as you already know, the first half result has featured prior period strengthening across most of the insurance portfolios. As Jeremy will step you through in a moment, the adjustments in each of the portfolios are individually understandable given the extent of inflation and supply chain disruption. I do acknowledge, however, that the sum of a number of smaller adjustments has led to a material net strengthening. This is at odds with the benchmark that we as a management team set for ourselves, and that is to deliver consistent, clean, no surprises results. I remain confident that the majority of the adjustments are one-off in nature and with inflation moderating, we will return to our usual pattern of reserving adequacy in the second half. And lastly, on this slide, it's important to highlight the progress that we've made in finalizing the large number of claims that we received during the FY '22 events in Australia, which are the subject of current parliamentary review. Pleasingly, in Australia, we've finalized more than 98% of the 124,000 event claims we received in FY '22, while in New Zealand, we have settled over 90% of the 32,000 claims that we received following the Auckland floods and Cyclone Gabriel in FY '23. Turning now to the sale of the bank, which I'm sure is a key topic of interest to you, and we were pleased with the Australian Competition Tribunal decision on 20th February, to grant merger authorization for the proposed transaction. Now I don't need to restate the strategic rationale for the transaction to this audience other than to say the factors we took into account in reaching our decision in July 2022 continue to apply, underscoring the need to work at pace to complete the transaction as soon as possible. Now this slide outlines the pathway to completion and then following completion, the indicative time frame for returning capital. While the Tribunal's positive decision is an important milestone, the transaction is still subject to the amendment of the Metway Merger Act and approval from the Federal Treasurer under the Financial Sector (Shareholdings) Act. Subject to all approvals being received, we expect completion to be around the middle of this calendar year. In order to return capital to investors, we need approval from the ATO and from shareholders. And subject to receiving these, our current expectation is that we should be in a position to return capital to shareholders later this calendar year or early next year. So with that, let me hand over to Jeremy.

All right. Thanks, Steve, and good morning, everyone. Well, I'd like to start by also acknowledging the very welcome news delivered last Tuesday by the Competition Tribunal. But of course, the focus this morning is going to be on the first half '24 results. So let's get into them. We've seen strong top line growth across General Insurance as we priced for inflationary and hazard cost pressures. The composition of our group underlying margin improved with better consumer margins in Australia with the price response to higher reinsurance costs in New Zealand still to be earned through and less reliance on prior year reserve releases. It was also pleasing to see natural hazard costs coming in below the allowance. In banking, we saw industry-wide margin pressures impact on profit. The group continues to have a strong capital position with capital held a group of $237 million, supporting a first half dividend of $0.34 per share. And then, of course, these results are the first to be reported under AASB 17, which was effective the first of July. So I'll now take you through the results in more detail, noting that we've enhanced our presentation to provide additional focus on the general insurance operating divisions, including more detail on underlying profit. The General Insurance business delivered an underlying profit of $492 million, slightly below the reported profit of $510 million, and the walk on the slide outlines the difference. Underlying profit increased 28% as the pricing response to inflationary pressures and reinsurance earned through. GWP growth of just over 16% was across all divisions and with good growth in our key consumer portfolios, good unit growth. The underlying ITR improved by 20 basis points to 10.2%. But I do note that this allows for a lower prior year reserve release, which we think effectively improves the quality of the underlying margins. And on that note, I'd like to remind you of the growing resilience of our margin targets over the past few years. The underlying ITR target range of 10% to 12% now has a more robust natural hazard allowance, less reliance on prior year reserve releases and a more sustainable level of investment in growth, all included within the targets. I'll now touch on reserves with the position the same as the ASX released last month. Prior year reserves were strengthened across most portfolios in the half by a total of $107 million and that's net of the impact of loss component movement. The strengthening was driven by a combination of a broad series of challenges, higher repair costs in motor, especially in relation to third-party settlements, water damage and large fire claims in home, updated losses across a number of natural hazard events and historical regulation changes impacting workers' comp in Western Australia. The release in CTP of $24 million was largely driven out of New South Wales with some superimposed inflation evident in the Queensland scheme. We've now adjusted the expected reserve release in our underlying margins to 70 basis points, thereby reducing reliance on this item in our underlying margin targets. I note that the release expectation is based on the reserving assumption across the CTP portfolios, and we do not extraordinarily expect to see any net release or strengthening across the other portfolios. For clarity, we do not expect the first half strengthening on the non-CTP portfolios to be reversed in the second half. Movements in the loss component balance relate to improved profitability in the motor portfolio, and then the remaining loss component balance of $44 million largely relates to Queensland CTP, and we continue to liaise with the regulator on this portfolio. Moving to natural hazards. Our natural hazard costs for the half were below the allowance by $112 million with a series of events in late November and December. Pleasingly, while we continue to experience some event activity in January, we remained in line with our allowance for that month. And the natural hazard allowance for the year remains unchanged at $1.36 billion. Following the 2 large weather events in New Zealand last year and changes to the reinsurers approach to New Zealand risk, we did put in place higher levels of internal reinsurance with New Zealand. These arrangements are P&L neutral and capital efficient at the group level. As expected, following a period of some reset, reinsurance markets appear to have stabilized as evidenced by the 1 January renewals. We're currently assessing our FY '25 program, and we'll update you once the renewal has been finalized. Turning to investment performance. Investment income increased significantly across both tech reserves and shareholders' funds in both Australia and New Zealand. The average underlying yield on tech reserves in Australia was 5.5% with improved risk-free returns. Our investment managers also continue to deliver a strong performance and good returns from the inflation-linked bonds also continued, albeit down from previous periods as CPI began to reduce. The average return on shareholders' funds was 8.4%, with higher running yields and strong equity market performance. And finally, on investments, I note that we're not currently expecting any major changes to our investment portfolios. So I'll now take you through the divisional results, starting with Consumer in GI. Overall, GWP grew by 15.6%. The home portfolio grew by 12% as we continue to price for the increases in reinsurance costs and inflation. Unit growth in home of 2.1% was the fastest growth -- rate of growth we've seen in at least a decade. Motor GWP increased by over 18%, with premium increases reflecting the persistent inflationary pressure and unit growth in motor of 2.3% was broadly in line with the prior year. Now on the topic of inflation, we saw a cost per policy increase of around 7% in Home and around 13% in Motor. AWP for the half is ahead of these rates by approximately 3% in each portfolio. In Home, earned premium is now ahead of the cost per policy increases as the earn-through of the prolonged pricing response begins to catch up. In motor, it was pleasing to see earned premium in line with cost per policy increases. And we expect the gap between the 2 to widen as rate continues to earn through and inflation continues to moderate. Turning then to underlying profit for Consumer, which was up by over 50%. We're seeing an improved margin on a higher level of premium. The result reflects the dynamics of our prolonged pricing response to escalating inflation and reinsurance costs over the past few years. The increase in working claims was driven by a continuation of inflationary pressures in motor with constraints across the supply chain and elevated third-party demands. Now as I said previously, the rate of inflation in motor has already started to moderate this half. Home was impacted by an increase in water claims and fire severity as well as a higher natural hazard allowance. Together, these drivers translated into an improvement in the underlying ISR from 3.1% to 4.9%. Now whilst this margin is an improvement on prior periods, it's not yet at target levels, and we expect further improvements as the premium and claims dynamics continue to emerge. Turning then to commercial and personal injury. Strong top line growth was again a key feature of the result with underlying profit up over 20%. GWP increased by 14% with growth across all portfolios. Tailored lines and workers' comp were especially strong, with increases of 18% and 20%, respectively. It was also really pleasing to see our investment in platforms delivering with growth of 8%, the strongest we've seen in that portfolio for quite some time. The underlying margin was in line with the PCP, but was impacted by the reduction in the expected prior year reserve release assumption. Now it's not shown on the page, but I also note the improved result for the managed schemes business as we drive for returns across all of our portfolios. Moving on to New Zealand. The result was impacted by a significant increase in reinsurance costs following the 2 large events in early 2023. You can see on this slide that reinsurance and natural hazard costs combined for New Zealand increased by $134 million in the half. Now this is a very significant increase for our New Zealand business and drove the underlying ISR margin decline of around 5%. The premium response to this saw GWP growth of 20% across the impacted commercial, consumer and AA portfolios. We do expect to see margin improvement in the second half as this earns through, noting that it takes 24 months for pricing to be fully reflected. Net incurred claims in New Zealand increased by 11%, which was primarily driven by continued inflation in motor, also with some moderation in the first half. And then the New Zealand Life result was broadly in line with the prior period. Turning then to the bank. The decline in profit reflected industry-wide pressure on margins. Whilst we continue to grow in home lending in line with system at 2.2%, the rate of growth slowed as we balanced growth with margin outcomes. Importantly, we continue to maintain a portfolio with good credit quality, which I'll touch on briefly on the next slide. We've also maintained strong liquidity levels in the bank with the LCR averaging 140% for the half. Deposits grew 3% with the continued shift in mix from transaction accounts to term deposits, savings and offset accounts as customers take advantage of the higher rates. The NIM of 180 basis points in first half was below our target range as we expected, impacted by intense competition in both lending and particularly term deposit pricing. Importantly, though, we have, however, seen a reduction in both the amount and rate of back book discounting, as well as improved new business mortgage pricing. And we still expect that NIM will be around the bottom of our range for the full year. Expenses in the bank increased by 5.5%, primarily due to higher technology costs, inflationary pressures, including wages as well as some depreciation. On the bank's credit quality, it remains well positioned and strong on all key metrics. I'll give you a couple of examples. 95% of new home lending business was originated at an LVR below 80%. The dynamic LVR of the home lending portfolio is 56% and the commercial watch lists and arrears remain low. 90-plus days past due increased slightly to 62 basis points but remain well within tolerance and at the lower end of longer-term trends. We continue to review and update the economic assumptions underpinning the collective provision. The balance of $190 million remains unchanged and we consider it to remain prudently set for the environment. Turning then to group expenses. Operating expenses increased by 7%, driven by the planned increased investment in growing the general insurance businesses and higher bank expenses. Growth-related costs in general insurance include investment in customer and broker connectivity, the upgrade of core systems as well as some higher marketing spend. This increased but appropriate level of investment is now fully allowed for within our target margins. General Insurance to run the business expenses were up just 2% as we offset much of the wage and technology inflation and an increase in system maintenance costs with ongoing productivity savings. And this saw the general insurance operating ratio -- expense ratio improved by 60 basis points. In terms of the outlook, we expect the general insurance expense ratio to remain in line with the first half, and the bank cost-to-income ratio is also expected to remain in line with the first half, largely reflecting that challenging revenue environment. Regarding bank separation costs, we expect to incur a further $70 million post tax in the second half with the remainder in FY '25. I'd also like to give an update on bank stranded costs. And we now expect to have dealt with the majority of the previously flagged day 1 stranded costs of $40 million per annum as we go into completion. Finally then on to capital. The capital position at 31 December remains strong with CET1 held a group of $237 million. Now I've set out on the chart, the usual capital waterfall, I'd like to make a few points on it. Firstly, the capital held a group is after allowing for an improved GI CET1 ratio of 1.22x PCA, which we think compares pretty favorably to peers, as you can see on the slide. Capital usage, you can see in the general insurance business was largely driven by growth and inflation with a higher insurance risk charge for larger outstanding claims and unearned premium balances. And lastly, you'll see on the chart that there are 2 offsetting capital impacts of around $100 million each. The left hand of the waterfall, 1 relating to the AASB 17 transition as previously flagged and in the bank transaction costs incurred in the first half. We continue to manage our capital position prudently given the environment. As Steve said, the interim dividend of $0.34 per share is up on the first half of '23 which included the benefit of BR reserve releases. Regarding the expected bank sale proceeds, we still expect the net proceeds to be materially unchanged at around $4.1 billion. We also remain committed to returning these proceeds to shareholders, subject to the capital needs of the business at the time. The majority of the return is likely to be in the form of a return of capital and associated share consolidation and the timing of the return will depend on a number of factors that Steve outlined and is expected to be later in calendar year '24 or early calendar year '25. And with that, I'll now hand back to Steve.

Well, thank you, Jeremy. And before we finish, I did want to briefly talk to the issue of insurance affordability. It's a privilege that's afforded to me as a leader in the insurance industry to meet with customers at their most vulnerable following a life-changing event and then be able to return some months later and hand back the keys to their home. Now during these visits, the conversation is all about the value of insurance, not about the cost of insurance. It's therefore, in everyone's interest that we have a viable insurance industry and that we collectively find ways to ensure that all of our citizens have access to the sorts of covers they need to provide them with peace of mind. But the issue of insurance affordability cannot be sold by any 1 party alone. Now on this slide, I have provided a 5-year time series across natural hazard claims numbers, which are at the top left of the slide. Gross natural hazard claims costs at the top right of the slide and the consequent impact on allowances and reinsurance costs. These are the stacked yellow and green bars, respectively. I've also included here the dollar value cost per policy for Home and Motor over the past 2 years, reflecting the elevated level of inflation across both portfolios. Now all this data relates to Suncorp but I expect the trends would be similar for other insurers. If you look at the top left-hand side, over my 20 years at Suncorp, I've always come to believe that around 100,000 claims per year and natural hazard claims for a year is a bad year. And you can see that we've had 5 years where we've been ahead of that level and sometimes comfortably ahead of that level. On the top right-hand side of this slide, you can see that the aggregate gross natural hazard costs over the past 5 years for Suncorp alone to today are around $10 billion. The bottom left of the slide, you can see that the cost of natural hazards and reinsurance, which are material inputs into pricing and insurance have increased by $1 billion, that's 54%. And on the bottom right of the slide, you can see the cost per policy over the last 2 years for Home and Motor has increased substantially. Put simply, the impacts of climate change, a reassessment of Australia and New Zealand risk by our global insurance partners, the planning mistakes of the past and now inflation have converged to put the upward pressure on insurance pricing that we are currently experiencing. So having identified the problem, how do we go about solving it. In our view, the best way of reducing the price is to reduce the risk. Now this next slide picks up our 4-point plan to address natural hazard resilience. It's been part of our presentations for the past 4 years and includes improved public infrastructure, subsidies to improve private dwellings and overhaul of planning laws and a national tax reform agenda to remove inefficient taxes and charges from insurance products. I will spend a moment on the last point because it does tend to get lost in the affordability debate. On this slide, I've included experts from our soon-to-be published 2023 tax transparency report, not a widely read document, but a good document nonetheless. What it shows is that Suncorp alone collects over $1 billion in insurance duties and levies across Australia and New Zealand. On top of that, we collect over $300 million in net GST on behalf of the Australian and New Zealand governments. Now I'd make the point that these taxes and levies are calculated off the base premium, so they are growing proportionately to the increased assessment of risk. In effect, it's a double hit for those unfortunate enough to have built or purchased a home in an area that proper planning laws should never have allowed homes to be built in. Now solving these problems should not sit with government alone. Insurers have a huge role to play. We need to continually modernize our approach to underwriting to product design, to claims management, and we need to be as efficient as possible with our own operating expenses. This is at the heart of our strategic decision to sell the bank and it's the centerpiece of our FY '24 to '26 strategy, which I've captured on this next slide. At the top, as you know, simplification has been the overarching theme of the Suncorp story over the past 5 years. The sale of the bank will allow a singular focus on improving the way we deliver insurance products across Australia and New Zealand. Our FY '24 to '26 plan will further enhance our core capabilities through investments in a market-leading platform across pricing data, policy administration, claims and enterprise. And we can do all of this without compromising shareholder returns because we have been disciplined in the way that we have simplified the group, remediated underperforming portfolios and by leveraging our operational transformation program. Automation digitization and the emergence of integrated AI are creating the headroom for us to invest for the long term, in turn driving growth and creating sustainable customer and shareholder value. And of course, we'll provide further details of our FY '24 to '26 plan as we move to the completion of the bank sale process. So finally, to the outlook for the remainder of '24, where I will reiterate most of our guidance. GWP growth is now expected to be in the low to mid-teens for FY '24 as we price the natural hazard and increased input costs. An underlying ITR around the midpoint of the 10% to 12% range remains the target as premium increases earned through and its inflation moderates. Investment yields are expected to moderate as the market adjusts its expectations for interest rates. Prior year reserve releases in the CTP portfolio are expected to be around 0.7% of group net insurance revenue releases in the other portfolios are expected to be neutral in the second half of '24. In the bank, we continue to target home lending growth in line with system. Competition in both lending and deposits is keeping net interest margin under pressure, and we expect the FY '24 NIM to be around the bottom of the 185% to 195% range. Given the margin pressures and slowing credit growth, the bank's cost-to-income ratio is expected to be in line with the first half '24 results. At the group level, we continue to target a cash return on equity above the through-the-cycle cost of equity, alongside our target payout ratio of 60% to 80% of cash earnings, we remain committed to returning any capital to the shareholders that is in excess of the needs of the business. And so with that, let's move to questions.

Let's start in the room. So with Scotty here, we'll move.

Scott Russell at UBS. Can I start with a question about the sustainable margins by division? You've given some really nice disclosure there breaking out underlying margins across your 3 GI divisions. And I'd just like to confirm with you that you're running the 3 divisions within the swim lanes, the 10% to 12%. In the first half, New Zealand fell below the 10%, which was a bit of a surprise to some. Consumer, I think you said you still got a ways to go, commercial is still setting up in the teens, but realize more on reserve releases, which I think you're guiding them down. So just be interested in some comments for each of the 3 divisions, how you see them fitting into the 10% to 12% over the next few years?

I might give you a more contemporary up-to-date view of how the portfolios, I'll get Jeremy to talk through. And I've previously gone through this build bottom-up, build that gets you to the 10% to 12%. So broadly, home insurance, which we think should be delivering margins between 11% and 13%. Motor insurance, given the highly competitive nature of it, given the lower capital consumption that's embedded in that portfolio, margins of sort of 7% to 8%, we think is acceptable and that translates to a sufficient return on capital. Commercial in the 11% to 13% range as well in terms of our expectation. CTP, 11% to 13% would be our long-term view of what CTP margins should look like. And then New Zealand, obviously should be ahead of that 15% plus. And of course, there's always an emerging discussion in New Zealand, which we have had earthquake risk embedded in that margin assumption. Now we've seen significant weather events around the North Island of New Zealand, which we'll continue to refine that. So that, when you put it all into the mixer, sort of comes to margins of between 10% to 12% for the group. Jeremy, do you want to talk where we are today?

Yes. I'll just add to that, Steve. When we think about the margins by portfolio, it will get driven in part of the capital consumptiveness of each of the portfolios and also the volatility -- relative volatility of each of those portfolios. So those are a couple of things that we bring into back from the return on equity, they all have a similar return on equity but back through to the margin targets. In terms of where we're at, in consumer, as I said, we're not quite at our target levels for consumer. So home is actually not too bad, but motor is not where we want it to be. But we can see motor accelerating quite swiftly into the swim lane in the second half. We can see that through the premium momentum that is effectively already in the system in terms of what's going to earn through. And then we've seen, as you can see on the chart, I showed on repair cost part of motor inflation. We can see that inflation in motor starting to moderate as well. So that will drive the improvement motor back in the swim lanes in the second half. We're probably getting a little bit -- we're getting good margin at the moment out of the commercial portfolios, and New Zealand is also off the pace a bit in terms of where we wanted to be within those streamlines at the moment. With New Zealand, the 1 thing to remember is, as I flagged, we've got elevated levels of internal reinsurance with New Zealand now. And you'll see in the analyst pack that there's actually an internal reinsurance column. So we have New Zealand, which has got the internal reinsurance in it. And then as an internal reinsurance column, which is effectively the contra side for the group. And so you've got to think about that in the context of that margin outcome as well.

Can I just pick up on New Zealand given the underlying ITR did fall sub-10%, yet you've upheld the guidance for the group. So clearly looking for a step up there in the near term and your comments around the claims moderation -- claims moderating in New Zealand. Perhaps you can give a bit more granularity around that, the sort of persistence of bottlenecks in maybe the New Zealand motor book that's driven down that ITR?

So just to be clear, the New Zealand ITR was driven down by the reinsurance cost. That $130 million increase in reinsurance natural hazard costs in New Zealand, which impacts [ Taiwan ] and then needs to get price through. So that 20% GWP we're seeing in New Zealand will earn through, tends to take 18, 24 months to get fully reflected. That's going to be the key driver to margin improvement in New Zealand. We saw motor inflation in New Zealand was 11%, which is sort of roughly in line with where the net number was in Australia. So in fact, New Zealand is probably -- motor inflation in New Zealand has probably moderated a little bit quicker than it has in Australia. So the driver in New Zealand is the reinsurance and it will be the pricing against that reinsurance to learn through over the next few halves.

Can I just ask 1 more sort of bigger picture question about the Aussie consumer book. You talk about the affordability challenges, Steve. Perhaps -- and given that your unit volumes are actually quite strong in the half, be interested in observations around customers taking on accesses, higher accesses at this point?

Yes, I think we'd be somewhat surprised over most recent history that we haven't seen those accesses move. We anticipate they will and they are starting to I think the average access across the book -- home insurance book now is a bit over $1,000, but certainly hasn't been moving at the same pace that written premium has been increasing. And I suspect over the next little while, consumers will start to look at accesses as being a means by which they can adjust the headline premium they receive. It's not overly surprising to us because if you think about insurance as an ecosystem, the reinsurers have been passing risk to us as a primary insurer and that's reflected in higher attachment points. So we're taking on more risk. And some of that ultimately will be passed to consumers. So I think that dynamic is working through. I think generally, the other thing to think about both the home and motor books is we have put a new pricing engine in those books over the last 2 years, first in the home and then into motor. And that has been -- it's a very contemporary pricing engine. I think that's been helping us get more granular -- it certainly has been helping us get more granular around risk selection. And so while you might have seen a small drop in retention, as you would expect in this environment anyway, we're getting more of our better class of risk in both the Home and Motor book. So look, I don't step back from the affordability challenge. I don't step back from the need for us as an insurer alongside the rest of the industry to get more innovative around product design and get more contemporary in the way we think about the challenges of insurance affordability. But at the moment, I think the book, the business and the portfolios are holding up quite well.

Thanks, Steve. First of all, I think I heard Jeremy right, you've dealt with the stranded costs product completion. So congratulations. That's no mans written, frankly, a $40 million upgrade to my numbers. Two questions. Just back on this New Zealand reinsurance. I think [indiscernible] gave us profit useful to the group. So who benefits from the contracts, is it being taken through leases? Is it been taken through commercial, has been taken through a head office. Who's...

There's a line in the detailed P&L that's got internal reinsurance in it. So you take New Zealand, which has effectively got the reinsurance premium cost, if you like, and then this internal reinsurance contract, which sits between New Zealand and the group has the premium in it. So we haven't put it into leases or Michael's P&L. It sits separately at a group account, if you like.

Page 14.

Page 14. And then sorry, Jeremy, question was asked about 3 periods in a row now. The bank earnings second half, how will they be treated in terms of the second half [ debit ]?

Yes, so we will factor those into the [ debit ] side will be usual payout ratio, 6% to 8% on the group cash earnings.

Can I ask my first question just around the volume versus margin management. Like, this looked to be a particularly strong half. You've got -- you had record levels of both price increases and unit growth. And some of your competitors, I think, struggled to deliver that combination. So what is allowing you to drive good volume and margin outcomes. Like what combination internal and external factors helping you to drive that?

Well, I think I mentioned Cape, which is our new pricing engine. That's -- that was a priority investment for us. And I think it's certainly helping us manage this transition quite effectively. I think our multi-brand strategy is helpful. And so we've obviously got Amy running as a national mass market brand, and we've got our niche brands, Shannon's particularly performing incredibly strongly. Suncorp and GIA, the regional champions and the other niche brands, I think, continuing to allow us to address the market in different ways across different states and geographies and through different customer segmentation approaches. So I think that's probably been the major hall. Maybe Lisa, if you want to come up and add anything to that.

So if we go back when under Steve's leadership, we've reset the strategy, there were a couple of key pillars that helped us in the -- certainly the current environment. So as Steve touched on reinvigorating the brands, so the multibrands, we uplifted our marketing by performance marketing but our investment in the brands, also investing in pricing reselection so the delivery of Cape. And thirdly, I'll touch on digital. So you would have seen in the pack, we've continued to increase our digital sales which is certainly something our customers want but helping us in this current environment.

And my second question, just around the reserve top-ups. Just noting there was a Flexihose ruling by, I think, AFCA versus Suncorp recently. Was that a substantial contributor to some of the reserve top-ups during the half?

Yes. Tommy. welcome back.

Could it be, on the bank, [ new bank of ] guidance seems a bit ambitious given current market conditions. I think you're going to grow the mortgage book around market, are you going to become less competitive on deposits in order to hit that margin target?

It's both. On the margin, just to be clear on what we've said, which is around the bottom of the range. So it doesn't necessarily mean it's going to be at or above. It's around the bottom of the range. We do expect to see some improvement in margin in the second half from the first half. And that will be driven out of 2 things. One will be the benefit of the replicating rate portfolio come through as the higher rates roll on into the earnings. And the second one is just reflecting that dynamic I spoke about, which is we are seeing less volume and less rate discounting on back book, which means that, that impact on margin will be less. And we're seeing improved new business mortgage pricing. So it's a combination of those 2 things, which will see some improvement in the second half.

Great. And then thinking about the insurance division where you've got that new disclosure. You've obviously got a lot of goodwill from a prominent acquisition? And are you likely to break up that goodwill buy your divisions now under that new disclosure?

Yes. We have to break it up across consumer and commercial.

Well, if that's the case, given the margins you're making in consumer, how much headroom have you got before you potential need to write down goodwill for consumer?

Yes, we don't see -- I won't say any because you can never say any, but we know that's not a risk that we're considering at the moment. And in terms of the allocation of that goodwill, that's something we'll do for the full year accounts.

And then there's been a little bit of discussion about the pricing engine. Your major domestic competitor [ flags ] that were adopting the earnings pricing engine at their result we can [ bid ] to go. Do you anticipate that, that could act as a headwind to sort of your strong growth?

I don't think so. Mark, I don't know what they -- what division of annex or what form that's going to take. But we've got it in. It's working. You can see it's working well. And I think will lead them to implement what they need to, to put these in place. Bruce, did you want to add anything to the banks briefly? I'll just introduce Bruce. I don't think many of you will know him, but he's seamlessly stepped into the bank's CEO role, been with Suncorp for almost a decade. So very familiar with all the challenges.

Thanks, Steve. I think JR covered the NIM point. The only add I would have is service proposition is important. So we spoke about turnaround times that, in turn, means that as we think about pricing, we don't have to lead on price to continue to get that volume coming through.

Any other questions in the room?

Anthony Hoo at CLSA. Firstly, can I just ask about the motor portfolio. You talked about claims inflation, which has been moderating. And then on Slide 13, you also talk about your premium still expected to increase in the second half. Just wondering if you can talk a bit more about the outlook for that in terms of if the moderation as the chart shows in repair cost is coming down quite relatively quickly. What -- are you still expecting to be able to raise prices into FY '25? What's your outlook there?

The situation in motor has been incredibly challenging for the whole industry, and it's been quite unusual. There may be many factors that have gone into inflation as you would define it in motor, whether it be availability of parts, part supply chains, the embedment of technology in vehicles making average repair costs higher, but the biggest issue has been the availability and supply of repair services. It's very difficult when you furloughed a whole industry for a couple of years that relies on apprenticeships and training and migration to be able to turn itself back on quickly. So what we're flagging is some of those factors are starting to moderate. There's still supply constraints in repair, but they're nowhere near as acute as they were 6 to 12 months ago. They're improving availability of secondhand -- second-hand car prices, availability in new cars is improving as well. So we have seen some moderation in the inflation. We expect it to still be elevated through the second half, relative to its normal run rate. And it's a very competitive portfolio. So we do need to watch very carefully our pricing relative to the industry pricing. We do that very regularly. We look at shadow shopping. We understand what others are pricing. We look at our renewal rates, our retention rates, book retention. All range of factors we look at to make sure that we remain competitive in the market. And it will be a dynamic pricing environment for the next 12 months.

And just a second question around your hazards allowance. Your costs are quite significantly below allowance in the first half, but the full year allowance has been maintained, which implies you're allowing quite a bit of headwind in the second half almost $800 million. Is it just out of caution? Or is there anything you can talk about that's driving that cautious -- bit that caution?

As saying this is not our first day or something like that. Jeremy had made the point, this is probably the first time in a decade, maybe that we have come in under the allowance at the half year. But those of you who have been in Suncorp presentations for a number of years will know, but the minute you claim the victory around the allowance, you can expect the thunderstorm morning to happen straight after. So look, we are conservative. We think the full year allowance is well constructed. It's doubled over the past 5 or 6 years. It's got significantly more assumptions based around recent experience. So we just touch wood, and keep managing it as conservatively as we can through to the full year.

I mean yes, there's been no logic for it to change over the full year is short.

I mean, we went into this year with high hopes of a very dry environment under the El Nino weather system, and more December proved a lot of that wrong. So we just continue to be conservative.

Since you went to the trouble of putting together the long range history. What's happened in the past 5 years? Are you able to comment on whether you think that might be going -- happen going forward with the mitigation you're trying to do against those costs?

Yes. I think it's very difficult to predict. The work that we've done, which is sort of 60 years of [ bureau ] data points to a general uptick in frequency and severity of the broad category apparels, the sort of 7 apparels that are in the -- what we described as natural hazards. Some are moving at faster pace than others, bushfire, some geographies are moving at different paces. But what we see is a very high correlation between the weather pattern, the weather system that we're in and natural hazard claims costs. So understandably, when you're in a linear weather pattern, you would expect to be above average in terms of natural hazards cost. And 3 of those years that we plot in that graph are La Nina weather patterns. So that's generally the way we think about it. We think the allowance is significant what -- certainly is significantly more robust than it's been in the past. As I mentioned, it takes back -- it picks up most of those years of experience in terms of the go-forward assumption. So it's biased to a La Nina weather pattern, but just exactly what happens in the future, I mean, it's very difficult to predict. Okay, lets go to the phones.

[Operator Instructions] Your first phone question comes from Julian Braganza with Goldman Sachs.

Can you hear me clearly?

Got you, Julian.

Yes.

And my first question is just on the volume growth that you got in the period because it certainly very, very strong there. Just in particular, just around the home insurance, just wanted to understand how much of that was I guess, driven by a step change there in pricing, which appears to be quite material. And I guess, in that context, how does it compare with peers? And then 2, really just around your view around the sustainability of those volume growth, the volume growth that you've achieved over the medium term? Just any color on that.

I'll get Jeremy to fill in the gaps, but it's good, but it is just over 2%. So it's not -- it's welcome, and I think reflects the good work that the new pricing engine has been allowed us to deliver, but also the strength of the brands that we've been able to sustain that level of growth in an upward trajectory in terms of pricing.

I'd just add that -- I mean, Steve spoke about the niche brands. The Terri Scheer is another 1 that's performed very strongly for us as well, particularly in that unit growth area. And I just go back to your point around the reference to the premium, the AWP trend, that is down half-on-half, but that's not a trend down in terms of we're reducing our pricing -- renewal pricing to customers. In fact, it's been -- remains elevated over the half. The key driver there was the impact of the cyclone reinsurance pool, which had the impact of reducing premiums by something like 2% to 3%. So that's not a headline renewal rate per se, it's more reflecting the Cyclone reinsurance pool.

Okay. Great. Thanks for that clarification. In terms of just the rate increases from here and the trajectory, obviously, you're saying the earn through of the rate increase is now at or at the head of claims inflation. You are sort of saying your second half margin for motor will now be good in swim lanes, home there or thereabouts. So just wondering in terms of the longevity of the rate increases, you're sort of saying it's still holding strong, just expectations from here and when that will start to come off in your view?

I will get Jeremy to go in a bit more detail, but we are very minded to input cost inflation. One of the big factors that will drive a lot of that trajectory will be our reinsurance renewal on the 30th of June, the 1 July renewals. I think if you look through the 1/1 renewals, generally, there's a constructive tone to that. Our assessment is that from the global reinsurers, the attachment points are there or thereabouts. They're not materially going to go through another step change as they did last year and the pricing adequacy is broadly okay. That's what we're being told. So I'd expect that to be a constructive renewal, but very much the input costs will be very much dictated by that renewal and what the impact on the portfolio is and then what happens in the broader inflationary environment. Inflation in insurance is slightly different to the broader CPI bucket. You can see that -- you can see inflation sort of starting to stand out in terms of the CPI print now. So it is not perfectly aligned to CPI. So there's a number of supply chain factors that influence that. So our pricing will be reflective of what we're seeing in terms of input costs largely and we will keep a very close eye on them.

Yes, I'll just add that, as I said on both of those portfolios now the written premium is running ahead of cost per policy. But just remember that, that hasn't always been the case, and there's a catch-up element to this that needs to come through to get margins back to where we want them to be. Home the earned premium is now better than the cost per policy, and we expect that to actually earn is going to be better than the AWP, and we expect that to be the case for a couple of halves and motor, the earned is in line with the written, and we expect that to accelerate. So there's a bit of gap there, and that should be for a couple of halves as well. But it's really -- it's catch-up to get margins back into the target ranges.

Okay. And then lastly, just the last question, I guess, twofold. No change to your I guess, you previously provided sort of verbal comments on FY '25, no change in terms of margins into that period sort of in the upper end of the 10% to 12%? And then secondly, just on reserve releases. Is that still the expectation for that to moderate into next year results? Is that how you're thinking about it?

Yes. I don't think we've given any guidance on FY '25 other than just to say we'd still expect to be in the 10% to 12% range. And then on prior reserve releases, so we have moderated this year from 1.5% down to 70 basis points now. Just to reiterate, we actually think that's a good thing. It means that what we're seeing in the underlying margins is now less reliant on prior reserve releases. And maybe that continues to moderate. But the important thing is, we will manage whatever prior year reserve releases moderate, too, we will manage it within our underlying ITR target swim lanes.

Your next question comes from Kieren Chidgey with Jarden.

I've got a couple of questions. I'll ask them separately. But just starting where the last question finished off on the underlying margin basis, noting that change in the reserve release assumption from 1.5% down to 70 basis points. So it does imply sort of if you hadn't have made that change, you'd be probably tracking closer to 11.8% for the full year underlying rather than the 11% midpoint you're currently on trajectory for. So just wondering what else sort of has gone better than you envisaged back in August across sort of the rest of the book?

Well, I think that the important thing is, is you remember when we did the full year results, we said that we expected prior reserve releases to moderate. So we didn't expect them to be 1.5% for FY '24 to start with. So we'd already expect them to moderate. I think at the time, we said down to 1%. So it's 1% down to the 70 points not down to the down to the -- from 1.5% down to 70. And then across the rest of the book, there's just been lots of moving parts across the various other components, which haven't been overly significant in net.

Yes. And Kieren, I mean, you can certainly look at a point in time around what it might have been if we hadn't done the reserve release piece. But what we're trying to do here, and we've been trying to do it over the last 4 or 5 years is to really build strength into that underlying margin. So obviously, it's based off a significantly more robust natural hazard allowance. It's got a lower reliance on reserve releases and it includes an appropriate level of investment in the business. And I think what you can see in this result and in the last one, to some extent, is it when we have to reset the business for either a higher level of reinsurance costs of natural hazards left, we've been able to do that within the 10% to 12% range. So this 10% to 12% range that we published now in terms of underlying margin is incredibly robust and certainly more robust than it's been in the past.

And just sort of related to that, the reserve release assumption of 0.7%, which is still being driven by CTP it does seem a little adults with the $44 million loss component provision, which you flagged is also largely in regards to CTP. So just wondering if you can sort of unpack the difference there and sort of comment on your confidence in the sustainability of that release assumption into '25 and beyond.

Yes. I mean there's a bit of vagaries of accounting there, Kieren in the sense that they're different numbers. There are 2 sides of the one coin side. The loss component, the onerous contract loss component is based off an assessment of what the claims liability is relative to the premium, but including a risk margin. So obviously, we don't price the product at a 75th percentile risk margin, we price it at 50th percentile. That's the onerous contract piece. And then the reserve releases is around the level of reserving that we put on the balance sheet in the past and for CTP, New South Wales, Queensland probably to a lesser extent. The assumptions, as you know, have been relatively prudent over a long period of time, and it's that element that then we expect to get released. But with scheme reform that will -- that has reduced that level of conservatism within the reserving by necessity and with the relative growth in the consumer portfolios, that probably reserve release expectation as a percentage of NEP or net insurance revenue will naturally come down over time, and that's what we're expecting, and that's what we're building for.

Okay. But it's not at risk also in Queensland as a result of picking up perhaps a lower quality or less profitable mix with RACQ exit?

No. Because I mean, effectively, what we've done is we've added in the RACQ portfolio, what we consider to be an appropriate reserving amount. That hasn't impacted on the residual reserves across our existing Queensland CTP portfolio or of course, any of the other CTP portfolios.

I mean, Kieren, we do have -- we are having constructive discussions with the Queensland government around the CTP scheme. I'm clearly when the scheme comes down to 3 players and 1 player that's us has more than 50% and is on a trajectory to 60% of the scheme. It's not the best outcome for public policy, not the best outcome for the scheme and probably not the best outcome for Suncorp either. So we are stepping up our engagement with the government around and the regulator around the scheme performance and we're having very constructive discussions with them at the moment.

All right. So just a final question on the -- some of the motor inflation callouts you gave on Slide 13, I'm not 100% sure if I'm interpreting this correctly, but you talked about 11% repair inflation in the 6 months to December. I would have thought on top of that, that total loss costs could have even been deflationary with lower secondhand car prices. So it just seems a little bit at odds with the 13% overall cost inflation you've talked about for motor in the period. Just wondering if you can sort of unpack that and also talk about what you're seeing early into this period?

Yes. I mean the -- what we've shown on the slide there, Slide 13, on the left-hand side is motor repair cost and repair costs are about -- repair costs are probably about 50% of total repair costs. There's a big chunk of repair costs that sit in total loss. So the chart on the left-hand side is a component of motor cost per policy. Also in the cost per policy is expenses, natural hazards, et cetera. So the left-hand side is just a segment just to give you an indication of where the -- where we see inflation moderating. But if we look at what's driven that 13% cost per policy average increase in the first half, the actual gross increase in claims cost is closer to 20%. And that 20% in part, it's with repair costs in part, it's with total loss costs. But a really big driver to it actually has been third-party settlements, third-party settlements and higher car costs. Third-party settlements because, I guess, other repairs are seeing a lot of pressure on their supply chain inflation costs and higher car costs because we've had delays in repair. We've had backlogs and repair through COVID and we've had higher, therefore, higher car days and high car costs.

And those third-party settlements, they typically account for around 20% of your motor costs?

Correct, yes. And then offset by receipts, third parties about 15%, receipts were about 20%. So they roughly net off.

Your next question comes from Nigel Pittaway with Citi.

Just focusing again back on motor inflation. I mean obviously, you're saying it will still be elevated second half. So the point we're at 30th of June '24, I mean do you think that a stopping point on route to more normal levels of inflation? And is that the same normal as it was before? Or is that going to be elevated compared to the old norm?

Yes. I think, Nigel, what we've called out with motor inflation is a sticky element to it. So because it's around some of that repair supply chain getting capacity back into repair shops. It's not something that the industry can fix overnight. And so we're seeing a gradual improvement in that. We are seeing some of this geopolitical tension, Middle East shipping, et cetera, is starting to impact on things like part shipping prices. So it's a bit hard to predict where we'll get to in June '24. But I suspect we won't be back to our long-term normal motor inflation rates by June '24. I suspect there'll be a little bit of more stickiness to it than that. Probably they're a bit...

I think the only other point, Nigel, is that we are building redundancy into our supply chain for repair. So at least has led a program will work to diversify particularly at the drive element with some new providers in there so that we can bring some additional capacity into the network. Now unfortunately, up until the last sort of 6 months, most of that additional labor that's gone into the repair network has come from another part of the repair network. What we're now starting to see is some incremental improvements in labor availability in repair shops. So I mean that is starting to free up the process, but it's a long -- it's not sold overnight. It probably, I think, will take another sort of 12 months to get the labor where it really needs to be to create that environment in our downstream suppliers to make a real impact.

All right. Okay. So it will take some time, but you still think the long-term norm is achievable. There's no sort of fear that the cost of repair has simply gone up, and we've seen a structural change?

Certainly seeing a structural change in so much as the nature appears. So if you think about a bumper bar, repairing a bumper bar today is materially different than repairing a bumper bar 10 years ago. It's got a lot more technology embedded. So that element is changing. But by and large, over time, that should lead to a reduction in frequency. The cars that are more technologically equipped with sensors and a lot should have less accidents. And so while you see the average repair costs go up, you see frequency come down, and over time, they should offset themselves. Look, it's hard to see where it finally settles. There's no reason why in the fullness of time, it shouldn't settle back to where it was before. But just the pace at which it gets to that level, I think, is pretty hard to predict.

And the impact of agreed value policies on yours, which was a differentiator before? Is that sort of now washed through or agreed value?

Yes. So I mean we do have more in the space of agreed value and that obviously takes longer to roll through the portfolio. But in terms of normalization, for example, we're starting to see the depreciation of that agreed value portfolio roll back to more of quite normal, but more normal levels. So that is a driver.

Yes. Okay. Maybe on the -- back to the sort of 0.7% long-term reserve assumption versus -- I think you were saying full year last year around 1%. Is the main driver of that just to build more resilience in the underlying margin? Or is there actually a genuine sort of change in trend that you've observed over the last 6 months that caused you to move from around 1% to 0.7%?

I mean the broader trends, I think, have been there for a period of time. I mean, I think the long tail schemes, by and large, are moving to a more defined benefit type approach, which obviously reduces the volume of reserves and puts more certainty into the schemes. I think just the weight of growth that we've seen in our short-tail portfolios relative to the long-tail portfolios is driving. That's been a sort of a 3- to 5-year phenomenon. It is fundamentally our view that it would not make a huge amount of sense if we would publish an underlying margin with a 1.5% adjustment for reserve releases, I don't think we get much credit for that. So it is building more redundancy into the margin. But in terms of the last 12 months, I don't know.

I'd just add, Steve, that the -- I mean, I don't think there's a world of difference between a round one and 70% because it's not -- it's not easy to 100% predict what those prior year reserve releases are going to be out of the CTP scheme in any 12-month period. There is volatility around claims, superimposed inflation, et cetera. But the landing on the 70 basis points is more to do with what we expect the FY '24 reserve release to be out of the CTP schemes. Because the important thing in terms of the way we look at it is that prior reserve release will get dealt with within the underlying margin. So if it -- whatever we expect the actual prior year reserve release to be for a given 12-month period, that's what we'll think about in terms of the underlying margin range.

Okay. And then I appreciate you said you'll give us an update on your reinsurance a bit later on, but I just wonder from the sort of broad conceptual point of view. I mean, you'll be a stand-alone general insurer moving forward that you haven't been before. Obviously, you didn't buy an aggregate last year, but potentially with pricing stabilizing, it might throw up an opportunity to revisit that. Can you give us sort of any sort of broad themes that you're actually thinking about in terms of as you head into that renewal for next year?

I mean, we'll look at everything, Nigel. Obviously, as we've always talked about, right through to a whole of account quota share. We haven't been able to make it work quite candidly, the Exchange Commission that we need to neutralize the return on capital position just hasn't been available to us. Now why that's the case relative to others that may have achieved it. I don't know. But it hasn't been available to us, but we would go again through the process. We've got a fairly well-refined model of how we should look at this now and we will go through that. And Jeremy will lead the renewal, obviously, I'm not expecting there to be a substantial change in the structure of the program. I think if you look at it historically, it has served us well. To some extent, it's driven by the logic requirements and the way that the regulator looks at reinsurance relative to capital, sort of every time we've looked at different structures, they've always hit the hurdle of the regulatory regime, the 1 in 6 type requirements that we have. Now we have had some constructive discussions. I certainly had some with Minister Jones, who's the Assistant Treasurer, around how we might sort of make some adjustments to that over time to allow us to look at alternative forms of reinsurance capital, but that's not going to be available, obviously, for this year.

I just had 2 words, Steve. We're economic rationalists when it comes to reinsurance. So as Steve said, we'll look at everything and anything and we do every year. But it's got to make economic sense to us. It's got to work. The financials on it have got to work. Of course, we keep 1 eye on that on profit volatility. But fundamentally, the economics need to work. And to date, as we look at things like aggregate covers, there's not a lot of appetite for them in the reinsurance market. It doesn't seem to have come back yet, but it's things -- it's something we'll keep a watch on.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Maybe my first one, I'll just start with the GWP growth outlook. And the low- to mid-teens guidance. Just if I back out what you have for the first half, it implies about 9.5% to 13.5% GWP growth for the second half. That's quite a sharp reduction on the first half. I just wanted to clarify, is that largely indication of what you're expecting on rate in the second half versus the first half or are there any other volume considerations, which has happened which might be distorting the trend maybe changes in portfolio exits or anything like that. I was wondering if you can just comment on that, please.

Yes. So Sid, we're probably being prudent in our assumptions around consumer unit growth. The expectation is with prices still going through at those levels, our modeling would suggest that we should be prudent around expectation around unit growth. And to date, the models have been reasonably predictive. There's been quite an acceleration, particularly in motor of that rate. So that's 1 that we need to watch, and we're mindful around. In home, the Cyclone reinsurance pool continues to impact on the written premiums as the full 12 months of the cyclone pool comes into effect. And then I think the other key one is across commercial, we're expecting not the same level of rate growth that we've seen there in the first half margins in commercial, we're in a very good spot at the moment.

So just to clarify on the rate side in particular, you didn't make any comment on rates in personal lines or on New Zealand? And are you expecting any change then?

Yes. I mean rates -- so rate in personal lines, home is probably more around the cyclone reinsurance pool impact on rates. So the AWP [ GWP ] is expected to come down in home a little bit more because of the cyclone reinsurance pool impact. In terms of rates, the underlying renewal rates, we still expect those to remain at more elevated levels that we've seen. And then in motor we do expect the elevated rates to come off a little bit.

If I could just ask about the go forward, it seems like you're a lot closer to potentially selling the bank. Just if you could comment on the strategy on a go-forward basis. So 2 questions there. One is just business mix. I think previously, you've made the comment that you're broadly happy with your mix, but probably keen to grow in the commercial area. I was just wondering if that's purely an organic comment? Or whether you -- well, please, are you happy with the mix? Is it -- still it's coming to still hold? And are you -- would we get -- when you say that we get the few -- all the -- I think the exact words are on capital is that we get -- I mean it's still the -- all the needs -- or all the catalysts in excess of the needs of the business. Is there any reason to think that the business may need more than what we currently buy anything?

I'll start with the business mix. I think, yes, we are comfortable. We've got a very good consumer business, Home and Motor. New Zealand is very strong for us. We're the second biggest player there, and we think we're in a very good position as we move through the big reset that's going on in the New Zealand market. We're a very good personal injury insurer. But I'm going to get Michael to come up. He's not going to talk about anything inorganic because we don't talk about any of that, but you might want to talk about your organic plan because commercial is a real opportunity for us. If you think about our market shares in consumer, they are in the 20s. So hard to get material growth beyond the market in those portfolios, but in commercial there is a huge opportunity. I think you can see the evidence of that starting to come through in this result.

Thanks, Steve. So on the organic side, very clearly, growth in commercial is 1 of our investment areas over the last 3 or 4 years, we have invested into commercial. So firstly, automated underwriting engines within the packages area which came on stream in August. And so we're pleased with how that's working. And we've also replumbed and put a lot of work into the distribution and the underwriting areas. So we think both organically in those areas with further investments what we've already done. We're in a very good place to grow that. We are looking at further products as well. We did exit a number of products 3 or 4 years ago to get the portfolio in a very good position. And so not announcing anything today, but new product entry is something that we look at very closely. So that's the organic go-forward position. And I think we're in a good spot today to build on what we already have.

And sorry, just the question -- the last of the question I asked was just any -- is there any reason we should think that the capital needs of the business would change post separation of the bank?

No, I don't think so. But equally, it's a caveat that we've applied to any of the divestments that we've made. If you look at our track record, when we have divested businesses, we have passed that divestment proceeds back to shareholders. So I don't think you can ever rule anything in or anything out. But I think if our track record is to be taken as an indicator of what we plan to do, then we don't see anything on the horizon at the moment that would change our thesis.

Your next question comes from Simon Fitzgerald with Jefferies.

Just the first question in regards to the franking credit balance. In the event of any capital returns, et cetera. I was curious, the franking credit balance should stay with the parent company? Would that be correct? In which case, you may have a balance to distribute out?

Yes. Correct, Simon. So when I -- I think I said the majority of the return is expected to be likely through the return of capital. We do expect to see a relatively -- relative to that number, a relatively small special dividend to make sure that we do get those franking credits generated through the sale out to shareholders.

Okay. That sounds fair. Just on investment yields as well, the 5.5% annualized yield. I was just hoping for some comments in terms of exit rates and what the sort of -- how we should think about the carry on your portfolio for the second half and the outlook there?

Yes. I mean -- that is 1 part of the outlook that maybe it's conservatively, but we do expect, at the moment, investment yields to reduce in the second half. So we do expect the risk-free rate to reduce. And just on risk-free rate, you'll see the average duration of tech reserves is now 2 years. So it's the relative mix of the portfolio has changed. It's moved down from 2.5-ish to closer to 2 years. So that's the curve that we think about. Look, the extent to which the yield curve contracts from here is open for views, but we expect that it will come down a bit. Inflationary bond, to carry on that we expect will come down as the CPI print continues to merge closer to closer to breakeven inflation that we've seen. So expect that to come down a bit. And then the other key driver is on Manager alpha. So you saw we got 50 basis points in the first half. We would expect Manager alpha to be closer to 20 basis points. So long made that superior return live. But it's a question how sustainable that is over the longer term credit yield, credit carry, we expect to continue at around that 60 basis point level. So the exit yield was a bit lower -- sorry, the exit yield was lower than the 5.5% because of those -- that series of dynamics, but it's open to views around where the risk-free rate goes.

And then just a final question on New Zealand. I understand the reinsurance costs have been a big driver there. There's also a story of GWP not sort of having enough time to earn through just yet, but maybe just now look specific to New Zealand, in terms of GWP growth from just in the second half and what you've already seen in renewals over the last sort of 12 months?

Yes. I think we'd expect a similar level of written premium growth in the second half. The only dynamic that I would point out in New Zealand is a different book to the Australian book. It does have a significantly higher end counterparties, counterparties that from time to time, in a rising rate environment do have an opportunity to take more risk on their own balance sheets, that's governments and other big corporates. So that's 1 element of New Zealand slightly different. But generally, I think the premium trends that we are witnessing or have witnessed in the first half will flow largely through to the second half.

We have a question from Brian on the website. Brian asked, could you explain the movement in the bank loan portfolio from Stage 1 to Stage 2 and exactly what -- previously versus the changed one now. So you'll notice in the financial statements, the number of mortgages that are now sitting in Stage 2 -- Stage 2 credit status has increased quite significantly. [ Sika ] is a significant indicator of credit risk. It's an unusual concept because what it says is what is the -- how is the loan migrated from when it was originally written to where it is today. And so a very, very high-quality line with a very low servicing in a very low loan-to-value ratio could have a significant impairment trend on it, but still be incredibly high quality. So Stage 2 loans doesn't mean that they're necessarily low-quality credit. The reason for the change is that we changed the methodology. So we always knew that we had to finish the methodology a bit. So we have done that. We've always allowed for that in the collective provision balance. We've always assumed that we would have some overlay for changes between Stage 1 and Stage 2. That's included within the collective provision balance, which is why the collective provision balance hasn't changed. And so most of the change really is around just change in practice as opposed to a fundamental shift in credit quality in the loan portfolio. Second question from Brian. In the fair value adjustment for the sale of bank does some get a notional adjustment for the unrecognized embedded game in a replicating portfolio. The bank sale process, the completion process is, we get net assets plus a fixed amount of goodwill, as we've said previously. The net asset adjustment number is relative to the original net assets at the time of the sale agreement. So it's the change in net assets. And the replicating portfolio net present value appears in the cash flow hedge reserve, which is a component of the net assets of the bank. So yes, we do.

Okay. Nothing else here in Sydney. Thanks, everyone, and look forward to catching up with many or all of you over the next couple of weeks. Thank you.

Thank you.