Insurance Australia Group Limited (IAG) Earnings Call Transcript

Good morning, everyone, and welcome to IAG's FY '26 results presentation. I'm joined here today by our Chief Financial Officer, William McDonnell, together with members of the executive team, we're all sitting in the front row here in our offices. We're holding today's event in IAG Sydney's office on the lands of the Gadigal people. We acknowledge the traditional owners of country throughout Australia, and we recognize their continuing connection to land, waters, and communities. And of course, I pay my respects to elders past, present and emerging. This has been a strong year for IAG, and I'm really proud of what we've delivered. We've refreshed our strategy, and we've sharpened our strategic priorities as we set out on this slide. Of course, our purpose is unchanged. We make your world a safer place. As part of this, we act as an economic shock absorber across Australia and New Zealand at an individual, at a community, and in a business level. Our growth-orientated strategy is all about helping more of Australia and New Zealand. We'll do this by leveraging the strength of and the investments we have made to help more people and more businesses across our 2 countries. This has been a year of delivery. Our financial results reflect the deliberate strategic choices we have made to grow our business, reduce our volatility and importantly, deliver sustainable, growing shareholder returns. At our top line, our premiums have grown by 7.6%. This includes strong growth momentum in our direct retail businesses in both Australia and New Zealand of around 5%. And importantly, we've seen strong quarter-on-quarter improvement that I'll touch on later in those 2 businesses. Underlying insurance profits was up 2.3% to nearly $1.6 billion, and the net profit after tax was just over $1 billion. This, combined with our strong capital position, has enabled us to increase our final dividend by 5% to $0.20 per share. And pleasingly, with our franking on that $0.20 increase to 80%. Our positive momentum provides the foundation for our FY '27 guidance of continued strong top line, combined with growing earnings. More broadly, we successfully completed the acquisition of RACQ Insurance in September last year, and we're pleased with the integration momentum and our member retention within that. Our -- that alliance contributed $1.3 billion of premium in the last -- for the 10 months that we owned it in last financial year. And as we discussed in February, the severe Queensland storms, which occurred -- before the RACQ business came under our reinsurance arrangements, did impact our first half results. Our second half performance, though, was strong, and the business is on track to meet all of our expectations we had when we purchased it. Across the whole business, we actively responded to 65 weather events in Australia and 44 in New Zealand. We paid more than $12 billion in claims to support our customers and their community to recover. And we know our customers recognize the role we play and the dedication of our teams with our NPS scores up 55 in Australia and at 63 in New Zealand. And what those scores are really our sort of top quartile performance in our industry. We continue to work through the process with Western Australia and remain confident this will be completed in FY '27. And we're excited about the prospect of welcoming the RAC Insurance team into IAG. And then finally, on this highlight slide, we flagged the acceleration of AI that is helping drive efficiency and better customer experience. At the Investor Day that we held in May, the team talked a lot about the extensive technology transformation taking place at IAG and the tangible benefits that transformation is delivering. More than 60% of our people are regular users of AI. We have more than 600 activators who have published more than 90 AI agents to improve workflows in areas like customer service, operations, and within our corporate functions. And over 2,000 employees using AI in claims, fraud, and servers and delivering significant benefits to our claims cost that we are reinvesting for growth. We've also recently signed a landmark partnership with OpenAI that will help our people deliver faster and more effective customer service, particularly within our claims teams. And our initial focus will be on where the need is greatest, scaling our claims handling capabilities during natural disasters and severe weather event. This initiative represents the next step in our AI journey, reinforcing our commitment to responsible customer-led innovation. Growth is a strategic focus for us. As you can see here, our 7.6% growth in premiums to $18.4 billion has been delivered across our key brands and channels, boosted by the 10-month contribution from RACQ. On an underlying basis, though, our premiums grew by around 2%. Importantly, though, within this, our direct retail businesses in Australia and New Zealand grew at around 5%. These are our growth engine. And including RACQ, these represent around 60% of the entire IAG business. Both of our direct businesses in Australia and New Zealand had strong momentum as a result of the strategies we've put in place, we are growing where we want to grow. You'll see on this slide, and we're showing here this, on a quarter-on-quarter growth in our businesses, what they've done is have continued to accelerate throughout the year, driven by both volume and price. You can see here combined, they delivered growth of around 7% in the final quarter of FY '26, and we expect this to continue into FY '27. In addition, we'll have a full year of RACQ premium and the potential additional benefit of RACQ and WA. In Australia, price has been the key driver with recent improvements in net volume growth in both NRMA Insurance and RACV. And in New Zealand, growth has been primarily volume-driven with strong AMI organic growth supported by the transfer of Aon into that business. Going forward, we expect New Zealand growth will be supported by a mix of both volume and by price. This is real momentum. And what that does, of course, it sets us up well. The markets we operate in are structurally growing. With general insurance premiums in both Australia and New Zealand forecast to grow at around 6% per annum through to 2030. With clear strategies and strong leadership, we have the brands, technology, and distribution to grow and protect more customers across our 2 countries. Returning now to some of the individual businesses. And let me start with the Australian Retail, which is, of course, the largest part of IAG. This business delivered strong headline premium of 17.8% or an underlying 4.5% after excluding RACQ. Retention rates are strong. And Julie and the team have done a great job to deliver home growth in line with market and really is a competitive market. In Motor, our recent trends have been very favorable, contributing to the 6.7% direct growth that we saw in the final quarter of the financial year. So the core direct business of the NRMA Insurance and RACV are performing well, while our bank partner business has been slightly weaker over the last 12 months. Underlying profits were up 7% to $846 million. And our reported insurance profit was down slightly due to some of the perils that we had in the first half from RACQ. If we exclude that, the reported insurance profit was up 7% and significantly stronger in the second half versus the first. The business is clearly benefiting from the implementation of the enterprise platform, improved risk selection and sales and service processes that we've heavily invested in. Our NPS is strong at 55, and NRMA Insurance has continued to be the most trusted insurance brand in Australia. These provide the foundations for our positive growth going forward. In New Zealand, our retail business delivered a strong result. Premium growth was 3.7% in local currency, with our strong direct growth of 5%, reflecting market share gains. So we had 7% growth in Motor driven by strong retention rates, improved customer satisfaction, particularly within our AMI brand, where we continue to expand the AMI MotorHub sites, and we've also transitioned Aon customers. Bank and partner businesses has also shown some similar trends in New Zealand to what we've seen in Australia. So it's been slightly weaker. During the year, we've completed the migration of a core AMI and state motor and home portfolios onto our retail enterprise platform. Of course, what this does is improves underwriting, pricing, and customer experiences, providing a strong platform for continued growth of this business going forward. Underlying profits grew by 10.7% in local currency. When we've seen improved loss ratios from better risk selection and claims handling and the claims supply initiatives that were put in place. Reported margins remained strong at over 20%, but they were impacted by the increase in natural perils this year compared to last. And pleasingly, like Australian retail, our NPS score lifted by 9 points to 63. And the strong customer metrics position the business well for sustained top line growth into FY '27. If we turn now to the other side of the business, the intermediated business. I'll start first with Australia, where Jarrod and the team have delivered stable premium and underlying profits, of course, what is a challenging market. What this does, it reflects a disciplined approach to underwriting and our resilient business mix that our business has. We're focused on segments where our brands, customer relationships, and specialist capabilities create a clear source of competitive advantage. As a result, we saw growth in our short-tail commercial lines and around 10% growth in WFI, which, of course, is our rural business. Strong cost management improved the expense ratio here by 140 basis points, where prudent reserving and claims management have delivered $78 million in reserve releases here as well. Reported profits remained solid at $316 million, despite a $71 million perils impact within this business, and that's primarily from the Victorian bushfires in January. William will explain this later, but the adverse impact in CGU was more than offset by favorable of experience in other parts of our company. During the year, we delivered important commercial enterprise platform capabilities. And what we're doing now is we're accelerating those plans into FY '27. What this is, of course, is going to do improve underwriting, simplify our process to support targeted growth through WFI and some of our other priority segments. Across the Trans Tasman, the intermediated business in New Zealand, which represents around 8% of IAG, continues to navigate a soft market with premium declining 11% in local currency terms. Of course, what we've done here is we maintain our strong discipline as that New Zealand commercial market experience and suffers sort of intense competition from global capital. Our underlying profits of New Zealand, $133 million, reflects solid 14% margin after highly profitable FY '25. Reported profits were down 1/3, largely due to the impact of increased perils. Probably more importantly, we are seeing signs of the market stabilizing in New Zealand with commercial SME lines expected to be broadly flat in FY '27. And we do expect some growth within our personal lines business here within NZI. Phil and the team are responding well with disciplined targeted premium increases, strong broker service, continued focus on costs, which is serving us well in this point in the cycle. If we step back and look at our overall profitability. And the underlying insurance result of $1.58 billion was up $36 million. The reported profit was around $1.55 billion, and that's consistent with the guidance that we've provided to the market in February. And importantly, this is a quality result. It does include the settlement of a significant portion of the greenfield proceedings confirming our announcement that we made in May that this would not have a material impact on the group's financial results. The trial on the remaining claims is due to commence on the 14th of September. So we will continue to defend these proceedings. And with the potential for settlement discussions coinciding with the pricing period, what we've done is we have suspended our DRP for next month's dividend. In relation to RACQ integration and the amortization costs, we have not taken anything below the line. So all of those costs associated with RACQ are in our underlying and reported margins. Key drivers of the quality of our numbers a 50 basis point improvement in the underlying claims ratio and a 120 basis point improvement in our expense ratios. What of course, this does is gives us the confidence that we can continue investing in growth while delivering strong sustainable earnings profile. Many of you will be familiar with this slide, which we showed at our Investor Day in when we unveiled Ambition 2030 and defined our success metrics. What this slide does, it shows our winning formula and our key performance drivers, many of which are evidenced in today's results. We continue to build on our portfolio of leading brands, leveraging our data and our technology, integrating our supply chain model, which is very important in our business model. Of course, our diversified distribution model is helpful and our claims management expertise is giving us a competitive edge. Combined, of course, what these do is drive outcomes for our customers, our shareholders, and of course, importantly, for all of our people. With our capital-light balance sheet and low-vol earnings model, these underpin our growth and strong investment proposition from a shareholder perspective. Our winning formula is delivering strong growth momentum at IAG. With that, I'm going to hand over to William, who's going to run through the financials in a bit more detail.

Thank you, Nick, and good morning, everyone. I'll start with the financial summary shown on Slide 16. At a high level, we are pleased with our FY '26 outcomes relative to the FY '25 result, which was assisted by benign perils and the release from the business interruption provision. Nick has discussed the positive growth and profit momentum in our retail businesses and our disciplined and resilient approach to the commercial cycle. Our second half performance has been strong, and the negative movements on this slide relate to the one-off transitional impacts that we outlined at the half year results back in February. I'll run through some of the key technical aspects of the result to demonstrate the quality and stability of our earnings, the improved efficiency, the core business momentum, and the strength of our balance sheet and capital position as we enter FY '27. Starting with our reinsurance program. The increase in reinsurance expense reflects portfolio growth, the inclusion of RACQ Insurance, and the additional protection provided by our expanded quota shares from 32.5% to 35% from the 1st of January '26. Non quota share expense increased by around 15% to $1.34 billion. Most of the increase relates to our RACQ Insurance, including specific catastrophe cover costs, reinstatement premiums following the severe first half weather events, an increase in cyclone reinsurance pool costs, and incorporating RACQ Insurance into our long-term perils volatility cover. Importantly, we've achieved the targeted annual reinsurance synergies of more than $50 million, and this provides a material benefit heading into FY '27. Turning to FY '26 perils. The group recorded net payroll costs of $179 million, which was nearly $500 million higher than FY '25. We finished the year $114 million above the net peril allowance, which was primarily attributable to the RACQ severe perils experience that we had in the first half prior to it being incorporated into the IAG program. Additionally, at the half year, the rest of the group's perils was stabilized by the parallel volatility cover. The second half result was much stronger, and therefore, the parallel volatility cover stabilizer unwound, and we ended with net payroll costs $38 million below the allowance. In terms of our divisions, I've shown in the bottom right that for the full year, RIA and New Zealand came in below allowance, and you'll see that IIA finished the year $71 million above allowance with the Victorian bushfires in January having a major impact, as Nick mentioned. Overall, the net of these equate to the $38 million favorable outcome. Looking ahead to FY '27, our perils allowance increases by only 2% to $ 1.49 billion. This increase is below net earned premium growth and it includes a full year of RACQ Insurance within the group reinsurance program. Coming back to the perils upside that Nick mentioned. I'm sharing again here how our long-term perils volatility cover works to protect downside in over 95% of modeled scenarios, while importantly, the upside benefit is retained as we presented at our recent Investor Day. The top chart shows the pattern of parallel outcomes we face before taking this cover into account. For each of the 3 remaining years of the contract, the cover provides around $1 billion gross of downside protection. Applying that, the net pattern of likelihoods, the lower chart, is very different with little downside risk but with upside likely to materialize around [ 1 year in 2 ]. In a favorable year, the average upside is over $200 million, giving us the modeled net peril upside across all years of over $100 million or approximately 1% of reported insurance margin. And this is because we set our perils allowance in line with the attachment point of the payroll protection rather than having a gap and setting it lower, while the cost of the protection is already included in our insurance margin. We believe this detail further highlights the quality of our reported insurance margin guidance. In terms of the underlying claims, which exclude all perils reserving and discount rate effects, the ratio improved by 50 basis points to 51.6% and with further momentum through the year with the second half ratio improving to 51.2%. Some specific callouts for each division: in RIA, we saw a modest improvement in motor frequency. However, in home, we experienced higher claims inflation. Across long-tail lines, commercial claims in IIA and CTP, experience was broadly in line with expectations. And in New Zealand, the underlying claims showed a material improvement, including the benefit from lower frequency in the home contents portfolio. The overall improvement reflects continued benefits from our claims transformation program, which includes supply chain efficiencies. Disciplined execution of these projects are delivering claims benefits of around $350 million per year. On costs, we continue to deliver disciplined expense management and are seeing the benefits of prior investments in transforming the business. The admin expense ratio improved by 60 basis points to 11.6%, including a 100 basis point improvement in the second half compared with the prior corresponding period. We'll continue to invest in FY '27 with a focus on AI and tech modernization, improving productivity and customer outcomes and the long-term scalability of our business. Importantly, we expect the group admin expense ratio, excluding levies, to reduce to below 11% in FY '27, achieving the target that we set in 2024. This reflects both continued cost discipline and the benefits we expect to realize from our transformation program. We continue to anticipate further cost reductions in our business, allowing us to accelerate our investments, including in AI, in order to grow and transform. Investment income, while lower than FY '25, was a solid contributor, supported by underlying income from technical reserves and strong equity returns in shareholders' funds. Technical reserves reported investment income of $ 246 million, including a $136 million negative mark-to-market impact from the increase in risk-free rates. The underlying investment income remains strong at $378 million, representing an underlying yield of 4.8%. Additionally, the FY '26 exit yield of around 5.5% and provides a supportive starting point for FY '27. Shareholders' funds reported investment income of $383 million. This was driven by strong returns in our equities portfolio, while fixed interest returns were reduced by negative mark-to-market movements as risk-free rates rose. The shareholders' funds portfolio remains defensively positioned with a growth asset weighting of 28%. The year-on-year increase in growth assets primarily reflected a higher infrastructure allocation, partly offset by a reduced allocation to higher-yielding credit. We finished the year with a strong capital position, with our CET1 multiple of 1.14x above our target range of 0.9 to 1.1. Strong second half earnings were more than offset -- they more than offset returns to shareholders from the dividend and buyback. During the second half, we completed the $200 million buyback that we announced in February. This reduced the share count by approximately 27 million shares at an average price of around $7.30. In terms of other movements, the reinsurance recovery timing headwind that we recognized in the first half unwound as we expected. We also recognized a temporary capital impact of over $100 million relating to the profit commission recognition equivalent to 4 points. And there were modest headwinds from growth in the PCA charges and the weaker New Zealand dollar. Overall, we remain strongly capitalized. Our strong capital position has supported a $0.20 final dividend, up 5%, bringing the full year dividend to $0.32 per share. The full year dividend represents a payout ratio of 73% and we've also increased franking to 80% in the second half. Looking ahead, we expect dividends to be 80% to 100% franked in FY '27 and going forward. Together, the increased dividend and completed buyback demonstrate our capacity to return capital to shareholders while continuing to fund growth and invest in the business. Finally, this slide shows our indicative capital position after allowing for the announced RAC Insurance acquisition. Starting from a CET1 multiple of 1.14, the final dividend reduces this to 0.98x. We're not providing FY '27 NPAT dividend guidance, but you can see similar to our previous approach, we've included a benefit to capital that's broadly in line with consensus earnings and dividend expectations. We've also included a 10-point impact of other capital movements, and this includes potential benefits from our capital-light strategies that I've previously discussed. The RAC Insurance acquisition is expected to result in an indicative pro forma position in the middle of our target range of $0.9 billion to $1.1 billion. And we remain comfortable operating toward the lower end of the target range given the reduced volatility provided by our comprehensive reinsurance protections. With that, I will now hand over back to Nick.

Okay. Thanks, William. [ We ] build more resilient communities across Australia and New Zealand, which is really core to Ambition 2030 and our community pillar. What we've done is we set a clear 2030 goal to help Australia and New Zealand -- has taken more than 2 million actions to help to better understand the natural hazard risk. This includes digital tools, face-to-face community workshops, and some practical guidance. We're also continuing to share our research and our data and our insights to support national resilience. This includes our commitment to recognizing effective large-scale risk reduction activities in insurance pricing through our participation in the federal government's Hazards Insurance Partnership. It's critical that insurance remains accessible and affordable across Australia and New Zealand. So where we see resilient actions that materially reduce risk, our insurance costs need to come down. We're backing this up with our own investments, including the multi-million-dollar NRMA Insurance health fund and our new investments from our venture fund Firemark. A great example is Spacecube, modular housing that can be deployed quickly for customers after major events, adding pressure to the -- taking pressure off the country's housing and construction challenges. It was great to see this in action in regional Victoria in January during -- following the devastating bushfires, where we were keeping customers comfortably on their land during recovery. So moving to guidance. And the confidence in our underlying business is reflected in our FY '27 guidance. This includes 5% to 8% premium growth with volume growth and targeted premium increases and a full year of RACQ. We anticipate underlying growth in our retail businesses of mid-single digit, and we anticipate low single-digit growth in the intermediated businesses, Trans-Tasman. In FY '27, we expect our reported margin guidance to be between 14.5% and 16.5%. The mid-point of this is above the 15% plus margin that we outlined in the Investor Day, and really forms the basis of our 15% ROE, high single-digit EPS targets with IAG well set to deliver on this on a sustainable basis. You can see how the actions we have taken have delivered a materially improved financial profile in recent years. We are delivering more consistent, growing earnings profile. As we head into FY '27, the mid-point of our reported insurance margin guidance represents a 9% increase on results delivered this year. In addition to this, as William explained, our perils modeling shows that there is an additional extra average upside of over $100 million a year from perils. Based on momentum in our business and the perils protection we have in place, we're confident on what we'll deliver. So just let me finish with this. The past 12 months has been a period of delivery for us. I'm proud of the company, our people, and the strong positioning we have for FY '27. We will continue to be a customer-obsessed economic shock absorber, supported by our scale, our brands, and the platforms that we've built to service our customers. Ambition 2030 outlines clear goals for our customers, our communities, and our people. And importantly for our shareholders, we'll deliver an ROE of 15% or above, high single-digit earnings per share, and top quartile shareholder returns. William and I are now happy to answer any of the questions. And so why don't we start in the room? And I think Mark's got the microphone handing around to Kieren.

Nick, 3 questions. I'd like to start on GWP on trends you showed on Slide 8 on the quarterly progress in retail in Australia and New Zealand. Can you just unpack in a bit more detail by product and, I guess, units and rate what you saw, particularly through that fourth quarter?

Yes. I mean that's sort of a demonstration, I think, of things we've been doing over the last couple of years starting to come together and really creating some real momentum. Sort of breaking that down, we've definitely seen home volume growth as part of that, it's together with continued price that's flowing through. I think we'll start with Australia, then we moved to New Zealand. So we've got that low single-digit is 1 a bit percent volume growth as well as home as well as prices flowing through in that home portfolio. And Motor, we're probably -- I mean, that probably was a trend that we were doing well in the first half. I think the big change first half, second half has been more about Motor. We definitely had some challenges. We talked about that at the half and in the August results -- sorry, in February for the first half results. We've definitely seen a reversal in the second half. And we're seeing both price and volume growth there, we're seeing new business, we're winning new business, that's really helping us, which was sort of slightly disappointing second quarter, call it that. You can see third and fourth quarter, we're really seeing both of that flow through, that sort of 7% in total growth within the direct retail business in that last quarter, which is very positive, right? That's really a result of a lot of things we've been doing in our company. We really feel pretty excited about that. New Zealand is probably more of a volume story. There's a bit of price that's flowing through. There's also Aon that's come in and that's sort of -- it's equal quarter on quarter-on-quarter, but it's definitely amplified each of those quarters. Now that will run off, and we think we'll see, in FY '27 in New Zealand, a bit more price in there as well as continuation of volume. That's kind of the story.

All right. Second question just on margins in 2 different areas. New Zealand intermediated obviously, under significant pressure in second half, down to 8.9%. I guess I'm just surprised at the pace of decline there half-on-half from 18% in the first half. And if we look at your GWP and, I guess, the earn through of the premium into '27. I'm interested in where you see that margin headed into '27?

Yes. Sure. I mean, that's a tough market. I mean, we sort of highlight it's 8% of our company, but we're not -- we're very focused on it. It's a real challenge for Phil and the team there. I mean, that -- our business is 10% down year-on-year, essentially in the NZI, in New Zealand, in local currency. What -- I mean, what we can observe now, and we saw this at June renewals because we have some of these big dates in that, sort of more lumpier that business. And we saw a continuation in July. We've definitely seen that -- what's the right expression? A slowdown in the rate of decline. And so where that was doubled, sort of run rates of minus 10, which is not great. That's definitely slowed down a lot as in sort of now sort of minus 5, all of that. And that -- and we're expecting that to continue. Although in my guidance, in our guidance, we did say low single-digit for intermediate. We probably mean a couple of percent here in Australia and probably 0 to minus a little bit, 1% or 2% in New Zealand, that's probably the blend. I can't -- 0 would be a good outcome, I think, for FY '27 and NZI. In relation to margin, we're just maintaining that discipline. I don't see it keeping -- reducing. We're not reducing the price 10% for risk. We've lost volume, too. So I don't see that trend down. I see that sort of stabilizing around where it is in FY '27.

So the second part of that margin question was RACQ's 6.3% underlying second half, still well shy where the group looks to operate. Where do you see that moving in '27? Can it hit the 15%? Or is that still more a '28 target?

Yes, it's definitely lifting up. I would expect it to be double digit and getting closer, but maybe not of the full 15% in FY '27. But we are putting all the costs in there as well, remember. So we're sort of not bearing anything below the line. And so we sort of -- it's obviously second half better than first half, we expect '27 to be a lot better than '26, maybe not at the full 15%, to your comment, and '28 we'd expect to be there.

And just a final quick question for William. Page 146 of your annual report. There's an interesting comment on reinsurance profit commissions that you can sustain the '26 run rate in less gross loss ratio deteriorates by more than 5%, which would be quite disastrous at a group level. If the gross loss ratio is sustained, how much upside is there in reinsurance profit commission?

Yes, thanks. So we booked the profit commission in a conservative way. So we do risk adjust it as we indicated in that note. So you would expect it to gradually build towards the maturity date of the respective contracts. So we -- but broadly, we're expecting in a similar amount in '27 to '26, but it will gradually build over time.

Just on the group margin outlook, again. Is 15% underlying a good starting point going into next year. Can you just walk us through the moving parts and scenarios where you might come in at the bottom end of guidance,14.5%, and where you'd be at the top end I'm just surprised because at the Investor Day, you guys said 15% plus?

Yes. We decided to stay -- well, I mean, the ambition is 15% plus. What was -- the ambition is really 15% ROE, top quartile EPS -- sorry, high single-digit EPS top quartile performance. The mass of that is we need to run the business 15% plus to deliver that. We went with a 200 basis point guidance range, so 14.5% to 16.5%. So we've sort of guided the market pretty quickly to take the mid-point, 15.5%. We have a slide there that sort of guides the market quickly there. I mean never say never in insurance, but we have to think that the lower end of that range is -- we're more likely towards the top than the bottom, would be my thinking. But we've got a 200 basis point range for uncertain that we have been running the business we have. We spent a lot of time taking the uncertainty of reinsurance, other things we've done operationally, the technology transformation. So sort of you're stepping it through within the sort of the run rate, we expect effect, to Kieren's point, that we'll see a better -- a greater contribution in the underlying level from RACQ in FY '27 compared to '26. Beint that, our commercial businesses, there are challenges, particularly in New Zealand. So we're not expecting anything -- certainly not in New Zealand, anything stronger. And that to hang on and sort of what we're trying to do and be discipline, is the better word to use probably then hang on. So that's -- we're just -- we're operating there. We don't have headwind in things like perils allowance and the like too much because we've only increased that by a couple of percent, but we're trying to -- you can see what we're doing on perils. We're leaving the $100 million outside of guidance. So we're purposely doing that. Where our guidance is our perils allowance, which is the attachment of our layer. But actually, the modeling says on average, there should be upside on that. And we're leaving that outside of those guidance numbers purposely to make it simpler, hopefully, for investors. I mean my overall tone for this releases, the business is going pretty well as well. And so we're trying to get that balance right of 5% to 8% growth which is pretty ambitious for IAG, but we've got some real evidence why -- that we're going to deliver that as well as maintain those margins in the guidance range that we set out.

That's really helpful. And then just on the New Zealand margin, just drilling into the retail versus commercial as well. Would you expect retail margins to continue to moderate because pricing has been so good in that market? And then secondly, on commercial, is 10% margin sort of you earning your cost of capital there, is that your target? Or could that -- would you expect that to go higher just to be more disciplined?

I mean the New Zealand market is similar to Australia. The retail and the issues affecting NZI are really quite different in the retail. So there's not a similar comments to what happens in Australia between Australian retail and our CGU business. So just some of the challenges in NZI are not necessarily impacting the retail business, the AMI, and the state brands. No, that business continues to do very well. We -- that margins are strong. We continue -- I mean there's something in New Zealand, which is a bit unusual that every year, you don't have an earthquake that there's sort of an element of that pricing and profitability that sits there. So sort of -- there are sort of -- there are higher returns because of that. So no, I'm sort of -- that business is going very well. It's got genuine growth happening, and I expect those margins to stay roughly where they are. And as I said, with NZI, that's a different story. That's about maintaining the discipline, holding that position. As I said, if we could be flat in '27, that would be a great outcome. And I'm thinking maybe minus a little bit, but definitely not minus 10%. That's what -- that's in relation to growth.

Following up on the -- one of the quotes you got in your annual report on Page 83 in the directors' report. You mentioned that home non-perils claims inflation of around 15% was due to increasing severity of water claims, including impact of changes in building repair standards. Can I get you to maybe elaborate on that and what else you seeing the claims inflation?

Maybe on some things and I might be able to bring William in here to [indiscernible]. So theme on the inflation are Motor, a much better story. I've really seen the quarter drop. And that -- I think that's been helpful. Obviously, helpful for consumers. But in our go-to-market strategy, we've sort of feel like that's been helpful to us. Property, we continue to see property inflation challenges. And that's not really driven by the industry. It's driven by the challenges of our country, on repair cost, access to labor, building materials. This is inflationary pressure in the system.

That's right. We definitely have greater incidence of water damage. And then the standard to which we were repairing some of that, particularly anything to do with mold, has increased. And that's not just an IAG comment. That's an industry comment. So there's sort of -- and then sort of throw in just generally, we're going to see -- we're seeing more perils and more events. So we expect, over time, greater frequency of perils events, therefore, not -- adding to the challenge here. It's really the combination of those things that are driving that.

And then on your expense ratio, are we likely to see it lower in the second half of the year as you switch legacy systems off? Or should we expect to be sort of stable through the year?

Yes, you can see that we are gradually bearing down on the expense ratio. And a bit like this year, you had 11.5% in the second half, 11.7% in the first half. We expect a continued downward trend. But what's really important within that is that the cost to maintain, if you look at the sort of the shaded bars in the buildup is coming down faster. And we're giving ourselves space to continue investing in AI, in technology. There's a little bit of amortization also coming through, obviously, from all the great work we have already done. We're giving ourselves space for that. And the non-labor technology costs, we're actually allowing for that to increase at a double-digit rate. But within -- while bearing down the whole thing, but -- so we invest well for the future.

Can I ask my first question around the top line premium guidance? So between 5% and 8%, I think that's well ahead of what the market is looking for. I think the market is just below 4%. So can you step us through what is going to be driving that? That's quite a punchy number.

Yes. I mean there's a few parts. I mean that's part of the reason we showed the quarterly direct retail businesses in Australia and New Zealand because you can see why -- the evidence of why we're confident. So the elements are, there's probably 1 and a bit percent from RACQ. So last year, in '26, we only had 10 months. In '27, we got 12 months. So just that is, so they can sort of bank that. The run rate of our direct retail businesses -- I mean we sort of sit in there, mid-single digits, for retail in total and the direct element of that, which is the biggest part. Remember, our retail business is a gigantic part of the premium. The run rate, which is on those slides was sort of 7%. The banks are slightly softer than that in both Australia and New Zealand. Both of them are not growing as fast as our direct businesses, but they're still positive, I expect. So that's sort of the 1% that sort of mid-single-digit with our direct retail AMI state, [ NARCV ], more like [ 6%, 7% ]. And then within sort of Jared CGU and Phil's NZI, we have said low single-digits. But actually, behind that, the commentary I made was we'll probably do slightly better than that in CGU in Australia and if we can do 0 in NZI, I think we'd be very pleased and probably minus 1, minus 2, something in that order. But then you got to add the materiality of that to numbers. That's the rough outline of our growth for FY '27.

And for my second question, just following up on the cost side. So you mentioned you're making about $400 million of AI and technology modernization investments for '27. I mean that's on an admin cost base of the group about $1.4 billion. So that's quite a meaningful improvement. So can you talk a little bit about how -- is that going partly through CapEx line? And then also kind of what kind of improvements are you expecting because, yes, that's quite a big deliberate investment you make.

Just a comment from me before I throw it to William is that's roughly what we've been spending. So that's not new. So that sort of run rate of IAG, we've been able to manage that, and it doesn't just appear in the admin. It's sort of in claims handling and the claim system, just a few other buckets. But we don't feel like that's a sort of a surge, call it that, but that we're used to the run rate of absorbing that. And that, I think we're already starting to see the benefits.

That's exactly right. So the level of capitalized asset will be fairly stable. The -- we do capitalize some of what we invest each year, and we also expense quite a chunk in year, and you then get some amortization. But it's relatively stable. And as I mentioned, obviously, we're giving ourselves the capacity to continue investing at a strong level in that because we're bearing down on the underlying just cost to run the business.

I think Mark is telling me to go to the phones and the video.

We have Julian Braganza with Goldman Sachs.

Just the first one, I'm trying to work out where we can see the benefit of the reinsurance synergies, the $50 million within the non-quota share reinsurance costs, seems to be broadly flat half-on-half. And also just a second question on that is, what's your expectation here for this into FY '27, given some of the drop-off in those reinsurance reinstatement costs?

Yes. Thank you, Julian. So the part of it, in fact the larger part of it, was the benefit of bringing RACQI onto the group's whole of account quota share, which is better terms than the quota share that RACQI had beforehand. So that's where quite a bit of the benefit is. And then there's also just better pricing on a number of the other peril and non-peril covers that we have.

Should we expect the non-quota share reinsurance costs to reduce next year? Is that just given the drop-off of some of these one-off costs?

Yes. I think it will be fairly stable. We are also -- we are continuing to buy some drop-down cover on perils in addition to the quota share for the RACQI business.

And the next big renewal date will be 1 January. So we just sort of wait and see. There can be other factors that happen, and it's a bit hard to predict sort of out when we've got some other global factors that could may or may not be impactful over the next few months.

Julian, I can take it offline with you later. There's how -- some of the items come through the claims line as well on the commissions.

Yes, sure. Got it. And then maybe just a second question for Jarrod. Just be interested to understand thoughts where we're at today in terms of margin ROE for the intermediate business and just around a reinsurance opportunity. I know we were quite -- it was something that was seeming to be quite imminent. So just understanding where that's at and what's the time line and what's the catalyst for getting that done?

Okay. Maybe I'll comment on the reinsurance opportunity something that Jarrod and I had worked on. So yes, we have explored whether we could bring in some reinsurance behind the commercial business. We continue to think it would be a good idea. We set ourselves some financial hurdles for that. We haven't quite met those yet. So we haven't yet executed something on that, but it's something we will just continue to explore. If it meets our targets, we'll do it, but we'll stay disciplined on our targets.

And just a comment from me then on sort of ROEs and returns in commercial businesses generally. I mean we -- there's definitely around the world, that's we're in a softer cycle which returns are still relatively strong, but outlook is tougher. I think there's some uniqueness around our CGU business and WFI business in Australia that's not quite that. There's a big chunk of that business is WFI, which is a rural agency business that really doesn't have some of the similarities to global commercial businesses at all. It's more retail like. So that's a big chunk of the business. We've got personal lines in there that's not like that. And we've also got even compared to, say, our NZI business proportionally smaller, proportionally, into that sort of SME smaller commercial markets. And that's why we continue to deliver really strong returns in that business. There's definitely pressure in our intermediate business in Australia. But we're being extremely disciplined, and we would expect to continue to earn the sort of return profile we're currently delivering despite the softer market over the next couple of years. And actually, we're doubling down on investment. We're accelerating our program into that business. It will be really more match fit when I think there will be more opportunities for growth as the market sort of changes in the cycle.

And then just a follow-up, Will. In terms of the financial hurdles, what -- I just want to understand that a little bit better that you're hoping to achieve?

For that business or just generally?

In terms of the reinsurance strategy, you mentioned that you weren't getting the financial hurdles across the line up to meet them out.