Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Well, good morning, and welcome, everyone. Now before we kick off, I thought it would be appropriate to explain the slightly different format for today's presentation. Now unfortunately for me, I injured myself exercising over the break. And I have what is in medical terminology called a slipped disc in the neck, which I've discovered over time can be quite uncomfortable. I'm pleased to report, however, that I'm doing well on the mend. I'm deep in the rehabilitation phase, which involves a lot of exercise, but it does limit my ability to travel and unfortunately, to participate in today's presentation. I was determined to be here, of course, and so doing it in Brisbane, and I'll also be unable to travel for some of the road shows. So I do apologize for that, but I'm sure we'll be in a good position to handle everything today. I'm in Brisbane, obviously. The rest of the team are in Sydney. What I'll do is I'll kick off with an intro. I'll hand over to JR, Jeremy. And from a logistics point of view, I'll let him sort of manage the Q&A, and I'll try and constrain myself from jumping in too much, but I will inevitably want to do that. So let's get on to it and into it and acknowledge, obviously, the traditional owners upon -- the lands upon which we join you from and pay our respects to elders past and present. I'm going to start today where we usually start, which is a slide that describes how we believe value is created at Suncorp. Our purpose, delivered through our people to support our customers and the community will always deliver good financial outcomes for our shareholders. This is a slide we talk about all the time within the company, and I think it has guided us to the outcomes that we're delivering today. So to the next slide and pleasingly, 5 years ago, when we reset our strategy, we committed to deliver a simplified and a resilient Suncorp with the capacity to invest without compromising shareholder returns. Now 5 years on, and I believe we have delivered on that commitment. The sale of our New Zealand Life business earlier this month means we have completed our simplification journey. And now as we emerge as a pure-play insurer, every single moment of our time is dedicated to delivering better products and services for our customers on both sides of the Tasman. The timing for us is perfect. We're also now a resilient business. We're consistently achieving our targeted margins and returns on capital with an appropriate allowance for natural hazard events, and we've got less reliance on prior year reserve releases, and we've captured that in the middle elements of the slide. But importantly, from my perspective, we now have the capacity to invest in new initiatives, which will address the key challenges facing the insurance industry and the customers that we serve. But we can do that without compromising shareholder returns. And I'll just come back to that in a moment. But first to the group result and the headline NPAT of $1.1 billion obviously includes the gain on sale of Suncorp Bank. It also includes a more benign first half natural hazard experience and nonrecurrence of prior year reserve releases -- reserve strengthening, sorry, from the prior period and continued positivity in global investment markets. Now this obviously generates significant headline increases on the prior period. But I make the point, and I emphasize the point that the gain on sale is a one-off. And the hazard allowance and investment market performance should always be considered on a full year basis. The position in December can change markedly in the second half with 1 or 2 hazard events and the utterances of a global leader anywhere in the world can adjust risk appetite in investment markets. So I've been around for a long time and very few of the periods that I've been around in this business, we had positive first half experience, but I do know that the natural hazard allowance is a full year allowance, and we should consider it accordingly. But while the headline result has benefited from those 4 factors, the underlying business, which is the important point, continues to perform strongly. Margins and GWP expectations have landed in line with our guidance, and our customer engagement via digital channels continues to increase. Now I hope that over time, you've got more comfortable with what we say, we deliver. And that's, I think, one of the key strengths of the performance of Suncorp over the past few years. The balance sheet and capital position are both very strong. Now that the various post-bank sale activities are complete, we are pleasingly able to confirm the timing of the capital return. Now Jeremy will talk you through the details in a moment. But the point I really want to make is that to be able to deliver to the capital return commitment that we made with announcing the transaction, the bank sale transaction, just under 1,000 days ago, in my view, is a very significant achievement. Now taking into account the strength of the business, the Board has determined an interim ordinary dividend of $0.41 per share, and that's a payout ratio of around 61%. And this is consistent with the way that we stated approach of managing to a full year payout of roughly 70%. We've talked about that to the market before. And the way we're thinking about it is we'll end the first half at the bottom end of the range and true it up at the full year. And we think that's appropriate given where we are in hazard season, et cetera, et cetera. Now and finally, as previously flagged, the residual excess capital position and the first tranche of proceeds from the divestment of New Zealand Life mean we expect to have capacity for further capital management initiatives to manage those excesses to an appropriate level. We obviously remain committed to returning capital as excess to the needs of the business to shareholders, but we will have more to say on this once the bank sale proceeds have been returned to shareholders. So to the next slide and some of the highlights. And while GWP growth remains within our expectations, we have seen some moderation, particularly in New Zealand and in some pockets of Australian Commercial. In Consumer, where growth remains strong, moderation of inflation will be reflected ultimately in lower price increases, particularly in Motor. Now all of this is to be expected, and I think necessary in the context of the premium cycle and our approach to being disciplined and focused on margin, first and foremost, margin and returns for both retention and new business. Now this disciplined approach has seen some moderation in our volume growth across the portfolio, but particularly in Home, and I'll call out Home. Now I'd make the point in Home, in particular, that we are now very focused on the quality of our underwriting. And we've talked previously at our Investor Day and other engagements about the ability we now have to price risk across the 7 key natural hazard perils. Now this granularity in underwriting is seeing the quality of our Home book improve even though the net volumes may remain the same. And I think that's a key sort of sub area of discussion in the Home volume story. So the next slide, and here, I've captured one of that objectives of the strategy, which has been to establish the capacity to invest in initiatives that will modernize the way insurance products are delivered. In the short term, that means additional claims management resourcing, the state-of-the-art disaster management center that many of you have seen, our mobile claims hubs, and the ongoing progress we are making in meeting our customers' desire to interact with us on sales, service and claims lodgment through digital channels. But as you saw at our investor session in November, we are now making considerable investments in modernizing our core systems while using AI and other automation initiatives to improve the way that we deliver products and claims services to our customers. Now to recap, we've already moved our data to the cloud, got a modern pricing engine into which we feed multiple proprietary and external models, and we're now embarking on the core policy administration system replacement via Duck Creek. All of this means we'll be the leading -- we'll be leading the industry in the development of modern personalized insurance products supported by best-in-class claims capability. And make no mistake, the insurance industry is going to modernize materially, and it is going to change materially over the next decade, and we want to be at the forefront of that change. But to be at the forefront of that change, you have to invest in core systems, and we're doing that, and we talked you through that at the recent Investor Day. Importantly, however, these investments are now built into our margin return expectations and the way we run the business. The hard work of the past 5 years, coupled with the focus that we can now direct to insurance as a pure play, means we are delivering for our customers, our people and, of course, our shareholders. So before I hand to Jeremy, I do want to briefly talk about the issue of insurance affordability and the challenge that our consumers and customers are having in the current cost of living environment. Now you're familiar with this slide. I've used at the last 2 result presentations, and it captures the key inputs into insurance pricing and the elevation in both the number and the cost of natural hazard events over the past 5 or 6 years. Now I'm not going to go through it in detail again, but in summary, the frequency and severity of natural hazard events has been increasing over the past decade. It's been recognized by global reinsurers who have reset their pricing and the amount of capacity that they deploy into Australia and New Zealand. Now that, alongside inflation, is putting extreme pressure on our customers and it's exacerbating the cost-of-living pressures that they already face. Now as you know, there's no silver bullets when it comes to these complex issues. In the short term, in my view, the current stability in reinsurance markets and the transference of risk from the reinsurers to the primary insurers globally should bode well for constructive renewals in the short to medium term. Now supply chains are freeing up and headline inflation is falling. In a competitive market that we've got in Australia and New Zealand, this will inevitably flow through to pricing. However, beyond these short-term pricing dynamics, the key issue remains risk reduction. The most effective way to reduce the cost of insurance is to reduce the risk of a claim. And that means mitigation at both the community and the individual level with insurers like Suncorp having the responsibility to pass on those benefits in the form of personalized premium reductions. And while we've seen some positive movement over the past couple of years, the fact is we still spend too much money, taxpayer money, mopping up after events and insurance money mopping up after events and not enough in preparing for them. What is also lost in the insurance pricing and affordability debate is the continuing imposition of regressive taxes and charges on insurance products. The imposition of taxes, duties and levies serves to discourage insurance uptake, and it disproportionately impacts those more exposed to risk. We also know there's a high correlation and a high overlap between risk and socioeconomic status. So the answer to this challenge, in my view, is threefold. Firstly, we must embark on a nation building resilience program, such that by the end of the decade, for every $0.50 spent on disaster recovery, we spend $0.50 on disaster mitigation. Secondly, we must remove taxes and charges from insurance products and in fact, use the taxation system proactively to encourage insurance uptake and in-home mitigation activities. And finally, we need to see a modernized contemporary insurance industry using product innovation and personalized premiums to incentivize the country's resilience program. So with that brief intro, let me now hand over to Jeremy to take you through the results in more detail. Jeremy?

All right. Thanks very much, Steve, and good morning, everyone. I'd like to start off then with an overview of the group results. Net profit was up 89%. And as Steve touched on, beyond the strong underlying business performance, there were several key contributors to this result. Natural hazard experience was $277 million below the allowance with relatively benign first half weather. Prior year reserve releases overall were in line with expectations compared to the significant strengthening of $161 million in the prior period. And then, of course, the gain on the sale of the bank added a further $252 million to our profit. Importantly, we're delivering on the investment proposition we outlined to you in the November strategy update. The underlying GI profit was up 33%. We continue to grow profitably with GWP increasing around 9% and margins at the top end of our target range. We're delivering strong and resilient risk-adjusted returns, and Steve has already made a few comments on this topic. We're maintaining a strong and well-managed balance sheet with a comprehensive reinsurance program and a high-quality investment portfolio. And then, of course, we're now in a position to return significant capital to shareholders, $4.1 billion or $3.22 per share from the sale of the bank, as well as an interim ordinary dividend of $0.41 per share. We also have a very strong residual capital position, which provides the capacity for further capital management initiatives. I'll now take you through the results in a little more detail. The underlying GI profit, as I've said, was up 33% as the pricing response to inflationary pressures and reinsurance in recent periods earned through. We've seen strong top line growth of around 9%, albeit with rates moderating as inflationary pressures eased across most of our portfolios. The underlying ITR improved by 160 basis points to 11.8%, with the earn-through of pricing, moderating inflation and a lower expense ratio all contributing. On a portfolio basis, the increase was driven by Motor and New Zealand, where inflation has eased significantly from the recent levels and then offset by deteriorating claims experience in both Queensland and New South Wales CTP. Now I'd just like to reinforce what Steve said about the resilience we've built into this margin, a more robust natural hazard allowance, a reduced reliance on reserve releases and increased investment in growth, all absorbed into the margin. Looking ahead, we expect the overall margin to remain at a similar level in the second half with CTP and Home improving, offset by New Zealand and Motor moderating towards their target levels. I'll now take you through the divisional results, and we'll kick off with Consumer. The Home portfolio grew by 10% as we continued to price for the increased natural hazard allowance and then some elevated fire experience. In line with our strategy, we also continued to see an improved risk mix in the Home portfolio. Motor GWP increased by over 10%, ahead of growing confidence that the inflationary pressures are moderating. Now actions are underway to target higher levels of unit growth across both Home and Motor in the second half, albeit maintaining our focus on profitable growth. Underlying ITR for Consumer improved from 7% to 9.4% with the earn-through of price increases. In Home claims, we saw elevated fire severity, noting that fire claims are inherently volatile. But pleasingly, water damage is now performing in line with expectations. In Motor claims, inflation continued to moderate with easing supply chain constraints improving capacity. Looking forward, we expect margins in Home to increase and Motor to moderate, both towards their respective target levels. Turning then next to Commercial and Personal Injury. The strong top line growth continued, with GWP up around 10% with growth across most portfolios. We saw very strong growth in platforms with an increase of 15%, and it's really pleasing to see the investment we've made in this portfolio starting to pay off. We also saw very strong growth in fleet motor and also Queensland CTP from the RACQ portfolio, but then with lower growth in property, reflecting the market conditions. Underlying ITR decreased in Commercial and Personal Injury, driven by deterioration in loss ratios in CTP in Queensland and New South Wales, noting that we've increased pricing in both of those portfolios in January. Now Queensland was impacted by the poorer quality of the RACQ book, and we continue to engage constructively with the Queensland government to find solutions. New South Wales CTP was impacted by an industry-wide increase in claims frequency with actions, including pricing, already in place to address. Moving then on to New Zealand, and the result was supported by the significant earn-through of the pricing response to the large increase in reinsurance costs and inflation that we've seen in New Zealand in recent periods. This drove a material increase in the underlying ITR to 19.8%. GWP was up 6% with strong growth in the Consumer portfolio, offset by a moderation in Commercial as a result of the softer market conditions, but as well as domestic economic pressures in New Zealand. Net incurred claims increased by 5%, which was primarily driven by unit growth in Consumer with inflation stabilizing. And rate increases have now moderated as inflationary pressures have eased, and we expect margins to begin to normalize in the second half. Now as previously announced, the sale of the New Zealand Life business to Resolution was completed on the 31st of January. The total sale price was NZD 410 million plus excess capital, and that's then expected to result in net proceeds of around AUD 270 million. Moving next to natural hazards, reinsurance and reserves. Our natural hazard costs for the half were below the allowance by $277 million with 6 events. This reflects a relatively benign weather period, but also noting we increased the natural hazard allowance by 15% to $1.56 billion in FY '25. Our result for January, will be interesting to many, is slightly above the allowance, including an early estimate for the North Queensland flooding, which is obviously ongoing and continues to develop. We maintain a robust reinsurance program with all covers remaining fully in place. Whilst our program strikes a good balance between retaining and ceding risk within a robust assessment framework, we continue to assess opportunities to optimize, and we'll update the market once this review has been finalized alongside our FY '26 program renewal. Overall reinsurance market conditions continue to improve with strong capital levels and risk appetite. And then finally, on this slide to reserves. Prior year reserve releases in our CTP portfolios moderated but in line with our expectations. And then reserve movements in other portfolios broadly netted off as we'd expect, unlike the unusual overall strengthening we saw in the prior period. Next then to investment performance, which remained elevated, albeit slightly lower than the prior period as a result of lower mark-to-market gains. The average underlying yield on insurance funds reflects strong risk-free returns, being partially offset with moderating inflation-linked bond carry in Australia. The average return on shareholders' funds was driven by strong yields and higher equity market returns, but also good returns from our infrastructure portfolios. Our insurance funds remain well matched to the underlying claims and the investment portfolios continue to be high quality. The majority of fixed income investments are in A-rated or better securities, and we've got good diversification across manager styles, as well as allocations in our growth assets. Turning then to group expenses. And I'll focus on general insurance expenses given the bank expenses are only incurred for 1 month this year and then obviously for the full year last year. So general insurance operating expenses increased 7% with our planned investment in growing the business. The increase in growth-related costs was largely driven by investment in strategic projects, including the policy admin upgrade -- platform upgrade as well as investments in AI capability builds and in initiative rollouts. Run-the-business expenses were up just $5 million as we continue to improve productivity to help offset wage and technology inflation. In terms of the outlook, we expect the expense ratio to increase slightly in the second half, reflecting phasing of costs across the year. We do, however, expect the full year '25 expense ratio to reduce by around 90 basis points over the course of the year, with disciplined control of operating expenses and continued investment in growing the business. I'll now run you through the details of the much-awaited upcoming bank capital return. We'll be returning the entirety of the $4.1 billion of net proceeds that we outlined on the day we announced the sale, all the way back in June '22. As expected, the return will take 2 forms: A capital return of $3.8 billion or $3 per share, with a related share consolidation, and then a fully franked special dividend of $280 million or $0.22 per share. In terms of timing, close of trading on the 14th of February, that's this Friday, is the last trading date for participation. Trading then on post-consolidation securities will begin on the 17th of February on a deferred settlement basis. The capital return will take place on the 5th of March, and then the special dividend will be paid alongside the ordinary dividend on the 14th of March. Now then to the overall capital position. And you'll see that we've refocused our key capital metric on the consolidated group excess of CET1 rather than CET1 held at group. We think this change better reflects the view of total excess capital within the business following the sale of the bank. Now we presented on this slide the usual capital walk, and I'll just make a few comments on a couple of the items in particular. Firstly, the dividend. The dividend of $0.41 per share represents a first half payout ratio of 61%. This is noting our payout range is 60% to 80% and then with a target payout for the full year of 70% -- a midpoint of 70%. And then as Steve said, with a true-up to occur in the second half. The next one is the prior year organic capital release that you can see on the waterfall. That largely reflects capital that was consumed by bank sale-related costs incurred in prior years adjusted for tax. And then the final one I'll call out is the GI capital usage of $107 million, which reflects the impact of investment market movements on the asset risk charge. The capital released from the sale of the New Zealand Life business will contribute a further $125 million upon completion in January, with the balance of $145 million to be available when the second tranche is received in July '26. Now our capital position post the return of the bank sale proceeds is evidently very strong, and this provides us with the capacity for further capital management initiatives, most likely on market buybacks, and we'll update the market once the bank capital return has been completed in March. Finally then, before we move to Q&A, I'd just like to emphasize a few of the key points on the FY '25 outlook. We'll start with GWP growth, and it's expected to be in the mid- to high single digits as pricing moderates in line with easing inflationary pressures in many of our portfolios. The underlying ITR is expected to remain towards the top end of the 10% to 12% range. The FY '25 natural hazard allowance remains the best guide for experience over the full year. The FY '25 expense ratio is expected to be around 90 basis points below the prior year, as I said. And then finally, as we just covered off, there is balance sheet capacity for further capital management initiatives. Okay. So with that, let's now then move to Q&A, and we're going to take questions from the room first. Pleasing to see a number of you in the room, then we'll go to the phones, then we'll go to the webcast. And Steve and I will be joined for the Q&A by Lisa, Jimmy and Michael, our portfolio CEOs.

So let's go to the first question in the room with the mic.

Freya Kong from Bank of America. Congrats on the great update. Could we get some more color on the portfolio quality improvements that you're putting through in Home? How should we expect to see this come through, through lower loss ratios or better volatility on the portfolio?

Yes. So I mean it's been a purposeful exercise that we've been looking at for a number of years. And we can -- and the impact on the portfolio of that risk mix change is certainly evident, and it's becoming more and more material, but it's evident. And yes, we would expect to see reduced volatility is probably the key thing that we would -- we see in the portfolio. We are pricing for the risks appropriately, but we would expect to see less volatility. Lisa, would you want to add anything?

Look, I think that's -- touched on some of the key pieces. Obviously, what supported us to do that, we put in CaPE, our pricing engine a couple of years ago from a home insurance perspective. Why is that important? It allows us to price at a more granular level, update our models more frequently and really get that more segmented approach into our pricing. And importantly, I'll also touch on a lot of the work we've done in claims to really make sure that we're responding to our customers when they need us most. And certainly, there's been some pretty severe weather up north where our teams are doing a great job up on the ground up there, but also in terms of our claims supply chain to make sure we really leverage our scale efficiencies there.

One more question, if that's all right. Can you comment on the pricing that you're seeing across commercial lines, across platform, commercial tailored CTP and workers' comp? And have you seen any uptick in competition there?

Absolutely. So if I go through them one by one. So in tailored lines, we're still getting good growth through there. And if I look at the whole portfolio, there's probably 3 things I'd say. One, input costs are reducing. So inflation in Australia is reducing. Reinsurance costs are reducing. So overall, we don't need to actually put the same price through this year as we had in previous years. And so to give you a bit of a feel, pure price, if I take exposure out, it's probably sitting mid- to low single digits. Input costs have come off. Competition, there is more competition without a doubt, particularly coming in from offshore. But again, a lot of that's directed at the more corporate sector because it's easier to put capital into there and particularly in property. And so what we've seen is probably a composition shift in that portfolio, a bit more motor, a bit less property because we are trying to hold those margins coming through. So in that tailored lines, I'm really happy where that's traveling. In platforms, similar themes, but it is a very SME-based part of it. I said in the investor update last year that we weren't quite where we needed to be in terms of margin and technical price there, and that continues. So we're pricing through at the moment, getting the selection right. And so we expect better results for next year at that portfolio. Workers' compensation, again, growth coming off about 6%. The portfolio is performing really well. We're trying to just select the right clients in that portfolio. We have grown over the last 3, 4 years quite a lot. So it's really chasing margin there and a real focus on claims experience, which I'm pleased to say looks very well. And then CTP, that's probably the one area where you'll see in the chart there where margins have come off. There's 2 factors there. One is well known, and one is probably a bit new. So firstly, in Queensland, as Jeremy said, the RACQ book has rolled in. That stopped in October 2024, and that is a poorer quality book. And so that has depressed margins there. As Jeremy said, we're talking to government very constructively about how to make that scheme more sustainable because there's only 3 participants in that now, and that's probably not enough in that scheme. We're sitting at about 53% market share. That's too much for us. So I think that's probably where I'll leave that one. And in New South Wales, look, surprisingly, a spike in frequency over the last 6 months. In long tail, it takes a little time to see it. We reacted with a price increase filing in October, which came through 1 January, and we put prices up by about 12% to counteract that. So going forward in those CTP portfolios, price for New South Wales, $10 for Queensland. New South Wales are more comfortable with; Queensland, a bit more work to be done.

Thank you. Next question. Anthony -- Kieren. Okay.

Kieran Chidgey, UBS. I might ask sort of a similar question, Lisa, on the Australian Consumer portfolios. Obviously, Motor sort of you've signaled pricing likely to slow there. Just interested in sort of how we should be thinking about that on a spot basis compared to the 8% to 9% rate you were achieving last period. And then on Home, I think, Jeremy, you touched on fires sort of still contributing in terms of claims that seem to be up about 10%. Can you give us a sense of sort of how material that was and kind of how you're thinking about inflation and pricing on a forward?

Yes. Maybe just starting with the fire one and Home and then Lisa can come back to Motor. So in Home, I mean, in the overall scheme of the group result, fire is pretty modest. But obviously Home being a smaller portfolio has an impact on the margin in Home. But it is volatile. And that experience -- elevated experience we've seen over the course of the half is not consistent month-on-month. There's volatility from month to month. And so we believe 2 things. One is there's some random volatility, which you'd expect with home fires. And the second one, though, is that there is some structural change out of the increased number of lithium-ion batteries in people's homes, which is -- we've spoken about before, a fire accelerant. And so we can -- we believe there's some trend line around that. And we put pricing through the Home portfolio. We have put pricing through specific for that impact, which we believe is enough to cover the cost of it.

So in terms of Motor, Motor is in a good position. I think we've done a lot of work around the margin restoration in the portfolio from a margin perspective. They're in a good position. And importantly, what we've started to see is inflation moderating in that portfolio. And so we're in a good position to make sure that we remain competitive given the moderating inflation in the Motor portfolio, and you've seen that certainly in that first half coming through. And then also the other thing I'm really pleased about in the Motor portfolio is the fact we've got strong brands. AAMI is doing well from a brand health perspective as well as performing well in that Motor portfolio. And we've got the niches, Shannons and Bingle in that sort of that online low-cost segment. And then importantly, from a customer perspective, we're seeing improved NPS through our motor claims experience as well, customers getting their cars repaired quicker, which is really good to see. So I feel like we're in a good position from a Motor perspective, both from our ability to compete as we move forward.

The one thing I'd just add on Motor, in particular, is we have said over the last few results that we want to be quite disciplined around the way we approach pricing. And we want to be quite certain that inflation has left the portfolio before we then adjust the front-end pricing because obviously, as you know, it takes us a long time to catch up when inflation comes through. And so we've been quite considerate -- considered around the way we thought about pricing vis-a-vis claims.

Are you willing to wrap some numbers around where pricing is trending in both those portfolios currently?

Well, I think there's pricing, which is the rate we're offering customers, which is still reasonably elevated, reflecting those sort of dynamics. But in terms of AWP, both have come down to the sort of high single, low teen numbers. And we'd expect that to continue to come down in both portfolios because the -- because obviously, the inflationary environment in both is coming off. But I don't think we're going to give a specific number on what we think that's going to be for the second half. I mean, we've said that we expect GWP growth overall to be in that mid- to high teens, so -- mid- to high single digits.

And just a similar question for New Zealand. The margins are superb, 20%. The returns would no doubt be maybe double that. How quickly is that market reacting, Jimmy, to exceptional returns? I'm just interested in what you've seen transpire from a pricing momentum point of view through the half and currently as well.

Look, I mean, the expectation for the second half really is for the margin to trend towards its target levels. I mean that is -- 19% is high, and we do see it coming down in the second half. A lot of competition out there, both in the Consumer and the Commercial book. Just remind that the headline margin that you see there is a mixture of quite a breadth of portfolios. So from consumer risks to commercial, marine liability, corporate, and we do big [indiscernible] government risks as well. So every portfolio will perform differently relevant to its economic conditions and competitive challenges. And so each portfolio manager has their target margin they need to get and ensure that we manage that tension point between volume and margin. So we have seen a softening of the Commercial business in the first half. And certainly, the economic conditions that we've seen in New Zealand are persisting and the experience will be likely in the second half. But the Consumer business, as Jeremy says, we're still getting healthy unit growth through there. And the key there for us, if you look at our business model, we've got an intermediated business, and we've got a direct business with AA Insurance. And AA Insurance has -- it just goes from strength to strength, strong brand, strong NPS, and it has direct access to the NZ AA Motoring Club, 2 million members, which gives it a unique and competitive advantage in the New Zealand market.

Just one point of clarification. Can you just remind us what the target margin in New Zealand is relative to the 10% to 12% for group?

Around the 16% mark. [ Andrei ] -- sorry, I didn't see. Anthony, you've got the mic. So Anthony, you go first.

Anthony Hoo at CLSA. A couple of questions. Firstly, can I just ask around the Home portfolio. There was no unit growth. You talked about before that you are looking at some measures to increase the unit growth. So I'm just wondering if you can comment on -- are you saying that you're now in a position where you're willing to compete harder on pricing?

Yes. I think it sort of goes across the different portfolio. So I mean there is capacity for that to some extent in Motor. And it goes back to what I was saying before around that disciplined approach to making sure that the inflation was a clear path on it for us before we reacted on the price. And so I think there's some opportunity and capacity there. And then across both portfolios, we've certainly seen increased competition, particularly around from a marketing perspective and the above-the-line search marketing. Lisa, if you want to add?

Yes. So as Jeremy said, it's a competitive market, and we have seen our competitors spend more, do more on marketing. We will -- we're in a good position. We've got a portfolio of brands. We've got very good brand health metrics. And in the second half, you'll see a bit more of our marketing activity underway to help us improve our unit growth position in Home.

The other thing I'd add, Lisa, as well is it does look like there's been a little bit of a slowdown in Home system growth. So that's flat units relative to a system that we think has slowed a little bit. And in Motor, there's always a first half, second half system unit growth, particularly coming off things like the 30 June car sales. So it's not necessarily comparable to -- neither are necessarily comparable to the last half. Sorry, Steve, did you want to add a comment?

Thanks, Jeremy. I just didn't want you to think I wasn't around. I am and a very good answer from the team. Look, I think inevitably, we are seeing some moderation of the premium cycle. And I know everyone in this room understands that, and I know there's a desire to put some granularity around what that means. But as we've explained very comprehensively the factors that have driven insurance pricing cycle up equally. As they start to mitigate, we get more constructive reinsurance renewals, which I think you saw at 1/1, you're going to see again at June. This transference of risk from the primary insurers -- from the reinsurers to the primary insurers globally will drive that, and we'll be pushing hard for those constructive reinsurance renewals. Inflation, I mean, obviously, insurance inflation responds differently to CPI inflation. It's got a lot of labor, a lot of supply chain variables sitting in it, but they are freeing up. And I think it's very important for us to tell the 2 stories. One is to explain to consumers why prices have gone up, but then be very responsive to the cost-of-living issues that consumers are facing and our desire to keep as many Australians in the insurance market as we can, and that will see some premium growth moderation. Now how do you keep margins strong in that environment, which we will do and we are committed to, the quality of our brands, the work we're going to continue to do in claims. So we think there's a long runway available to us using AI automation, partnering, digitization to really make sure that our business is operating as efficiently as it can. And when we do that, we think you've seen what we've done on the expense base, we can do more and certainly more in claims. AI is a huge opportunity for us. So doubling down on the efficiency of our business, I think is good because I don't think the environment is there for us to take any input cost inflation and ram the whole lot of it through to consumers anymore. We have to make our business as efficient as it can be, and we're on the pathway to do that. So I just want to sort of put that in a broader context. It's across all of the businesses in that form. But while we will see moderation in premium growth, that will happen. That's the cycle. It's a competitive market. That will happen. It will happen at different paces in different portfolios. The key to the sustainability of our business is that we can maintain margins strong by continuing to focus on those initiatives that we've talked about back in November and we talk a bit about today.

Thanks, Steve. Anthony?

Just a second one, as well, around your guidance, underlying margin guidance. You've improved the expense ratio guidance. So I'm just wondering, are there any offsets to that, that's leading you to -- essentially your margin guidance has not changed?

Yes. Look, there are 3 key drivers to margin in terms of that short-term outlook for the second half effectively. First one is New Zealand. We don't expect margins of 20% to continue. They need to moderate towards a more sustainable level. So that's the first thing. The second thing is in the second half, whilst the expense ratio year-on-year improves, in the second half, we expect to see a little bit of an uptick in the expense ratio. We've got some phasing of costs that happen differently across the course of the year. So that will impact from the -- in the second half relative to the first half margin. And then the final one really is on investment income. So we do expect inflation-linked bond carry to come off. The difference between breakeven and CPI is now negligible. So that carry that we've benefited from will come off, we expect. And then our manager alpha has been really quite outstanding over these last few halves. Over time, we'd expect that to come back to its benchmark level. So those are the 3 big drivers. There's some things happening within the portfolio, as I've called out, we do expect Home to expand a bit, Motor to come off a little bit. We expect CTP to expand a bit off the back of the pricing increases we put through in January. But those 3 are, I think, the key ones in terms of why doesn't the margin shoot more in the second half. [ Andrei? ]

Can I ask my first question around the new operating platform rollout? How is it progressing? And how should we think about New Zealand in particular, because that's been the first one to implement and we saw perhaps lower-than-expected growth in this last half. Should we expect actually some operational efficiencies to the way you actually market and operate, in the next half? And just broadly, at a group level, how is the new operational platform roll-out going?

Okay. Well, Lisa is our sponsor for the program. So maybe Lisa, make a couple of comments and then over to Jimmy.

Yes. So where are we? So release 1, which is in AA, our joint venture over in New Zealand. So we're code complete. We're in the testing phase, end-to-end testing for that code complete and hoping to get the green tick from all that end-to-end testing and go live this half. So I would say there's a general sense of excitement over in New Zealand in terms of what they've seen. We've done various showcases in terms of the functionality of that new system for our staff, but also what it can deliver for our customers. So we're progressing well. At the same time, we're also spinning up a team to work on what will be the first release for Australia sometime next year. But I'll hand over to Jimmy because he probably can give you a better insight in terms of the excitement of the New Zealand team.

Yes. Look, it's -- we had a demonstration of the new platform just before Christmas. And to put it into context, a simple task that traditionally took 3 to 5 minutes, takes 30 seconds. And so you expand that out to all the tasks. And so you can just see a pure efficiency gain here being played. The other key thing to recognize as well is sort of why New Zealand is that in AA, it's a simple 3 products. It's a simple market structure, and it was a good place to test and learn, how do we implement this stuff in Consumer products with a Motor portfolio that's very similar to AAMI and a Home portfolio as well and learn from that. And we have learned. And so -- but there's a massive amount of excitement in New Zealand because of just pure efficiencies. You're going to get engagement increases, you're going to get customer NPS increases, you're going to get efficiencies probably in sort of the claims line, as well. So we're all sort of waiting for the button to be -- I think it's a button in your press, is it? That turns it on?

I think it's a couple of buttons.

A couple of buttons. Okay.

For my second question, can I -- and this one, apologies, there's a bit of a bounce of it. But my second question, so you mentioned how much you enjoy the automobile club relationship in New Zealand. There's a number of automobile clubs coming up for auction in Australia. So how are you thinking about your inorganic growth appetite?

Yes. We are always open to consider inorganic growth opportunities, and we will run the ruler over things from time to time. But they've got to make sense to us. So they've got to be a good strategic fit. And quite possibly, new books of Consumer business might be a good strategic fit. We've got to have the ability to execute on the transaction, which means the bandwidth, et cetera, to be able to execute on it properly and regulatory considerations are a really important one in that context. And we'll see what happens with RACQ in that space. And then, of course, the final one is the economics need to stack up. And so we're not averse to looking at things, but they've got to make sense. And so when things come up, we'll have a look, but they've got to make sense. [ Sid? ]

A couple of questions, if I can. Firstly, just on the change in the expense ratio guidance. So if I go back 6 months ago, you guided to that ratio being flat. November, you said the same thing. And suddenly, there's a very sharp drop in that guidance of -- sorry, 0.9%, I think, wasn't it?

Yes.

So just want to understand what has changed in the last 2 months? Where are you reallocating and why are you doing it?

Yes. I think the top line in some of the portfolios has probably come in better than we had originally expected. So that helps the ratio. We're certainly driving hard at operational efficiencies across the board using the tools that we've spoken about before around digitization. So we've seen more of our customer experience is now digitized. We've got over 60% now, up 8% on sales and service being digital. And so we're seeing more improvements there than we might have expected. But I think also when we said flat, there was probably an element of conservatism in that outlook, admitted conservatism. And obviously, now we're through the first half, we can be a little bit more specific around it.

Okay. But you said flat just 2 months ago at your Strategy Day, as well.

Yes.

So just wondering, is there any change because you've got numbers that are much worse than expected in Commercial? Or is there any change in allocation of resources?

No.

No? From where you are.

Yes.

Okay. That's clear. If I could just ask a second question just around competition at the moment in both in Australia and New Zealand. If you could just comment on what you're seeing out there in terms of -- I mean, you mentioned that you've been struggling to grow Home units. Can you just talk about the level of competition now versus where it was before? Is it still rational? Is there any change?

Maybe we go through the portfolios, just give them a quick run through quickly.

Yes. Look, I think in Consumer, it's always competitive. And as you've seen inflation sort of starting to moderate in some of the portfolios. And so they're good markets, and it is competitive. I think as [ Andrei ] touched on, I think the big change in terms of some of the Consumer segments is what's happening with the automobile clubs. I do think it puts us in a good position in terms of we are a multi-brand manager with some of the changes. And as some of those transactions take place and business gets re-underwritten, I think we've got strong footprints in some of those markets, as well. But that would be the key call out in terms of what's changed in the markets, still competitive. You still got a good number of competitors competing in each of those segments and the big change has been what's been happening with the automobile clubs.

Yes. And look, New Zealand, the way to think about New Zealand is 2 market structures for us. So there's a direct and then there's the intermediated. Direct, which is through the AA brand, yes, a lot of competition, but these guys are looking at pricing daily to see what's happening with the competitors -- local competitors in that market and responding accordingly. In the intermediate side, it's the brokers. So how do we ensure that we're supporting them and servicing them in a way that they service the various portfolios and markets in which they operate. And like Michael said earlier, in terms of competition, we are seeing foreign markets come in, foreign capital come in, in the context of Lloyd's. So that is coming in. We've seen it post Canterbury. We've seen it post Kaikoura when those have got losses to recover, some come in and take price. So we're seeing a little bit of that. The other component in New Zealand is just the economic backdrop. So the changes that the current government is making on spending and then that translates through the cost of living. And so everyone is looking to protect margin and then how do we get volumes. But think about it in those 2 context, intermediate and direct.

Okay. And just one final question for me. Just the $781 million of surplus capital to your CET1 targets, just the time frame at which you'd be looking to get back to shareholders? And maybe just if you need a buffer in that $781 million or is that...

I mean, look, a couple of things. I think we flagged as well before that we'd never, as an organization, necessarily like to run ourselves absolutely hard up against our targets. We think carrying some modest buffering around that makes sense. It put us in a good position through COVID, for example, we didn't have to go and raise capital. So we think a modest amount of buffer makes sense for us, but that's a modest amount. And obviously, $781 million is a lot more than a modest amount. I think we've got a good track record of returning excess capital to shareholders when it's there. We flagged that the likely pathway is on market buybacks. There's a natural constraint in terms of daily trading volumes and the like to the amount of buybacks that can happen. And in terms of timing, what we said, obviously is that we will -- it makes sense for us to get the bank capital return done first with all the complexity around the share consolidation and so forth. So it makes sense for us to get that cleared away, which we'll have done by mid-ish March. And at that point, we will come back to the market with what our intent is on that excess capital position. Nigel?

Nigel Pittaway from Citi. Can you make some comments on the labor component of home inflation and how that's tracking and particularly, obviously, in Queensland with the Olympics, et cetera. Is there some pressure across the market in that respect?

Yes. Look, in terms of the labor component for inflation, as we've been sort of talking about the last couple of results, we have said inflation is sticky because there is a lot of construction happening the last couple of years. Obviously, there's been a lot of reconstruction from natural disasters, and there's a lot of greater construction. In terms, though, from an insurance builder perspective, I'd say we're in a much better position than what we have been in the last couple of years. We've got a very good panel. We work really well with our panel and make sure that we've got adequate trades to support the demand that's in place. There is a little bit of inflation that still exists. I think the last couple of times I've been using the term, it's been sticky. It feels like I've used Blu Tack, it gets sticky multiple times, the more you use it, perhaps the less stickier it's becoming. But -- so I think that's probably more of a metaphor for how inflation is -- sorry, the labor market is looking. But there's no real callouts from a labor shortage perspective in terms of Home. And we've got a good panel that supports our customers.

I think Steve might just make a few comments on this one.

Yes, Nigel, I might jump in from the Queensland perspective specifically. I mean I do worry to some extent. I mean it's not been a shovel pitched in vain in Queensland yet to build Olympic infrastructure. So I suspect there will be a clamor to get a lot of infrastructure in place quickly. Obviously, Queensland has got some capacity constraints around its infrastructure spending. So there will be some inevitable, I think, winding back of some of the projects that otherwise might be sitting on the government's forward agenda. So I think there will be a natural balance there in terms of labor availability. But Lisa's point is absolutely the right one. I think if there is to be a pinch point on labor, the benefit will flow through to the bigger insurers who've got deeper supply chains, who've got established builder panels. And what we found whenever there is a supply chain challenge in Home, particularly around availability of labor is that the depth of your panel and the longevity of your panel is a big differentiator. And so that may well drive some inflation across insurance repairs, again, somewhat to the extent of how many claims we have and incidents or otherwise of Queensland-based natural hazard events. But the key point is that a big insurance company that's using its supply chain effectively and dealing with the supply chain through the cycle should always do better in terms of access and rate for repair.

Thanks, Steve.

Okay. And then just a slightly broader question. I mean I heard obviously the 3 reasons you gave Anthony for why the margin sort of guidance is flat on an underlying sense second half. But I mean, you surely are going to get sort of fairly significant earn-through of the higher rates that you've put through. And you're talking about sort of claims inflation being at least stabilizing. So why isn't that sort of coming through a bit more in sort of when you're commenting underlying margins moving forward?

Thanks, Nigel. I mean it does come through. So you see -- we see it coming through in the second half. And of course, it's nearly largely baked in, in terms of rates. So we can see it coming through in the second half, but it's offset by those other 3 factors, and which serve to offset that growth. So we can definitely see that coming through. We expect to see it coming through but offset by those other 3 factors.

Right. So the magnitude of the 3 factors are big enough to offset what surely must be quite a significant impact?

Yes, it's not -- I mean it's a good impact in terms of that improvement in claims ratio across Home -- particularly Home in the second half and to some extent, Motor, but particularly Home. But yes, I mean, the impact of -- you can do the maths on the impact on inflation-linked bond carry coming down to not much. Manager alpha has been running at 30 basis points. We target probably 20 as a benchmark for our managers on that tech reserve sort of portfolio. And then New Zealand, I mean, New Zealand is not going to fall off a cliff overnight from 20% to 16%, but it will start the trajectory down to a more sustainable level. And I mean, the maths on all of those is that's enough to offset -- serve to offset what's going on in the expansion from pricing. Back to Freya.

Just a follow-up on New Zealand and the margin moderation. Is this just pricing has overshot? Or are there elements of good luck in that jump to 20% underlying?

Yes. I don't think pricing -- I don't think it's overshot because, of course, I mean, margin last half was 9%. And if we're targeting 16%, and at some point, we've got to get above 16% to make sure that we're delivering those sustainable returns. So I don't think it's -- it's just a natural cycle of we had not recovered the inflationary impacts previous halves. We recover them this half, probably in the next half a bit just to make sure that through the cycle, we're looking to earn that target return in New Zealand. Yes. I don't think there's any more questions in the room. So then we'll go to the phone line. Darcy?

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

Just the first one, in the previous presentation deck, you used to provide a chart where you showed the earned premium versus cost per policy. And at the time, you split it up across Home and Motor, and there was about a 2% to 3% gap across the product lines. Can I just -- can you just provide some color just on where that's tracking at the moment, just the earned premium versus cost per policy?

Yes. I mean what you can see in the pack is not earned, but you can see written premium versus the cost of policy. And what I would say is that in Motor, because of the obvious profile of increases -- premium increases relative to cost of claims is that we can see the earned is running ahead of the written in Motor because obviously, pricing is coming off. And then it's not as significant as it once was though, but it's -- that's a dynamic. And then in home, it's the other way around. There's a very modest element of the written being below the earned.

Okay. And I mean just in aggregate, what would the approximate gap be there and thereabouts? Is it about the same level? Or is it moderating? Or -- the only reason I ask is because we've got a meaningful benefit on the expense ratio. I probably would have expected more expansion, but I just want to understand just -- that's the only missing piece of the puzzle there that I couldn't triangulate.

Yes. I mean that's not something we would necessarily talk to. But I mean that gap is moderating. Over the last 2 years, that price environment through Home and Motor with those impacts of extraordinary Motor inflation, supply chain constraints, the events we've seen around natural hazards and reinsurance costs have led to a pretty unusual pricing environment. And that obviously is going to have an impact on those dynamics. And all of that is starting to moderate. So the gap between earned and written will start to moderate, the gap between earned and cost per policy at a point will moderate as well. So I think moderating is the right term.

Okay. Great. And then just a second question. In terms of just more broadly across all your portfolios, can you just highlight which portfolios are currently seeing rate that is not ahead of inflation, just at a very high level, where is pricing falling below inflation?

Yes. I mean, look, there are always pockets of portfolios where we would like to get -- always pockets of portfolios that are underperforming relative to our expectations. But I think by and large, rate is where we want it to be across most of our portfolios. Now, I mean the obvious standout is in CTP, particularly Queensland CTP, where, as Michael and I have said, we're working constructively with the Queensland government to find solutions to get an economic scheme for Queensland. And that could include things like equalization mechanism, but there will need to be some price in there as well in order to make that scheme economic. That's probably the key one. And then there's a couple of other smaller portfolios. Michael spoke about packages in Commercial, where the pricing is not quite where we want it to be, there's some actions underway there, as well. But by and large, across most of the portfolios, pricing is there or thereabouts in line with where inflation is at.

Okay. Got it. And then last -- just a final question for me. So you haven't -- I mean, you haven't given us any targets around volumes. I'd just be interested in any commentary given margins are where they need to be, how do you see volumes tracking over the medium term? Like what are your sustainable volume targets -- volume growth targets over the medium term, just given your calibration with margins?

Julian, referring to the Consumer portfolio unit growth?

Yes. Yes, Sorry, Consumer portfolio, yes.

Look, I mean in both those portfolios, we'd like to see ourselves a system. And sometimes being clear on what system at is difficult. But as Lisa said, we've got the portfolio of brands sitting there behind us. As Steve said, we've got the investment in that customer experience layer all coming through. And so we think being at system is the right place for us in those portfolios. Potentially like to grow a little bit more in Home. But as Steve said and I've said, the risk mix in home is also an important consideration for us. So it's not just blind, want to grow at system in Home. We want to make sure that we're getting the right profile mix portfolio there. Lisa, anything to add?

No.

This will be your last question on the phone. It comes from [ Mark Tomlins ] from Hunter Green.

A couple of questions, if I may. First of all, just having far North Queensland, I know, Lisa, you've been on the ground there. Have you got any feel for what claim numbers are looking like?

Yes. So I spent the last couple of days with the team on the ground up in North Queensland. I know this is an investor call, but I know a lot of our staff are watching. And so I do want to say a lot of thank you -- a big thank you to the team. They are out in force up in North Queensland, wearing the green polos and supporting both the customers and the community up there. So as of yesterday, we had about 1,400 claims that have been lodged. We do know the most impacted areas, Ingham and Cardwell, and they've been without power in some parts and also pretty significant road closures. So we do expect over the next couple of days for those numbers to continue to climb. I did spend a bit of time up in Townsville. And certainly, we haven't seen the extent of damage that we saw in 2019. But -- as I said at the start, I want to say a big thanks to the team. We're on the ground. Our builders are up on the ground, and we hope to get that community back rebuilt and rebuilt stronger in quick time.

And pleasing to see the low move off the coast this morning.

Yes. That was a good weather update we got.

Now the other thing I wanted to ask about was you've discussed a lot the economic conditions in New Zealand, but we've seen several other companies talking about how weak the Victorian economy is. Are you seeing the same impact happening in Victoria as well?

I don't -- I mean, for us, probably less so. But it's different across the portfolios again, and we've seen a lot of competition in Victoria. But I think there's probably less -- it's a less noticeable impact for our business relative to the economic depression in -- downturn in New Zealand. Lisa, Michael, anything you'd add from your portfolios?

No. Look, I think from my point of view, I'm thinking about the business we write down there. Look, it's consistent. I can't say there's a big change year-on-year that we can see.

And then I might come at inflation from a slightly different angle. Obviously, with the fall in the Australian dollar and the New Zealand dollar, what are you seeing in terms of import inflation and that impact on Home and Motor and any potential tariff impacts?

Yes. I mean it's something that we have, as you'd expect, done quite a bit of thinking about, both in terms of where the exchange rate is today, but also in terms of what might happen to tariffs. And we think it's -- we think in terms of where it is today, we haven't really experienced a large impact from that exchange rate difference. But obviously, there's a level of uncertainty around where all that goes. We're alert to it. We've got early warning indicators in place around how that might look. I'd just remind you that the exchange rate largely impacts through -- the Motor portfolio, largely impacts through parts. The impact of things like tariffs on U.S. motor vehicles, the impact of higher cost of U.S. motor vehicles, it's a pretty small part of the car park here. And just remind that most of our Motor policies are on agreed value. So it sort of -- it hedges us from that exposure. And then with the parts, 50% there or thereabouts of our motor repair claims -- in motor claims is in repair and about half of that is in parts. And then also remember, we've got fixed price contracts with a number of large providers in that space as well. So we think it's manageable, but obviously something we're alert to.

Great. And then just a couple on capital, if I may. Slide 19, you had the pro forma position, and presumably, that excludes the capital release by the NZ Life sale, which was completed earlier in the current half. So your current real pro forma position is actually a bit higher than the $781 million.

Correct. Yes. I mean that's the -- yes, correct. That's pro forma for the return of bank capital that, come 31st of January, which is obviously now passed, that should increase everything else being equal by $145 million and then by a further similar amount once we get the deferred consideration in 2026.

And then of that $781 million in surplus capital, potentially how much might actually be locked up and unable to be released? It's surplus, but it's still just sort of restricted in the business.

Yes. Look, as I said before, the way we think about that is we're unlikely to run hard up against the targets. That's not what Suncorp has done for a long period of time, and we think that's served us pretty well, and I don't expect that changes, but that's what I'd refer to as a modest amount. It's not $781 million. All right. Well, that brings us to the end of the update this morning. So thanks very much for everyone for listening in and attending. We look forward to seeing many of you on the call on the road over the next few days. And I'm sure you'll join me in wishing Steve a very speedy recovery. Thanks very much, everyone.