Suncorp Group Limited (SUN) Earnings Call Transcript

Good morning, and welcome, everyone. And for those joining us here at our Shelley Street office, could I ask if you could to put your mobiles on silent. And of course, if there is any need to evacuate, we're not anticipating there will be, but if there is any need, please follow the instructions of the team that are in the room today. Let me as always begin the presentation by acknowledging the traditional owners of the lands upon which we meet and pay our respects to all Elders, past, present and emerging. So today, I'm joined by our CFO, Jeremy Robson; and the other members of our executive leadership team in the room here today. Jeremy and I will run through the presentation and the team and Jerry and I will obviously be available for the Q&A that will follow. Now as usual, I'll start today with a presentation -- start today's presentation with an overview of how we believe value is created at Suncorp. As we reflect on another challenging period for our business, we are again reminded of our purpose and how delivering to that purpose translates to the financial results that we report today. Our priority will always be and should always be to support our customers, whether they are impacted by these events or just dealing with the uncertainties that life throws at them. And of course, provide the peace of mind for those fortunate enough not to have needed to call upon us. The long-term value and the long-term financial outcomes that we achieve and the value that we create for our shareholders reflects the sum of us getting all of this right. So turning to the result. And the group has delivered cash earnings of $588 million, which is a significant increase on the prior period. Statutory NPAT was $560 million. The result confirms the underlying momentum we have across all of our businesses, and it proves the FY '23 plan is delivering. Now I'll reference our performance against the FY '23 plan variously through the presentation. The prevailing La Nina weather pattern has seen us managing 8 significant events in the 6 months to December with a total of 53,000 natural hazard-related claims at an estimated cost of $679 million, which, as you know, is $99 million above the allowance for the first half of the year. Now while investment markets remain volatile over the period, our fixed interest and our inflation-linked bonds portfolios have benefited from enhanced underlying yield, and this has seen investment return step up materially from the pcp. The Board has declared a net term dividend of $0.33 per share, which is a 43% increase on the prior year. And this represents a payout ratio of 71% of cash earnings, which those of you who are familiar with us will know that's usual practice for this time of the year. Now this slide calls out some of the highlights that are within the result. And at the bottom of the slide, what I've done is included the key metrics that are embedded in the FY '23 plan, just so you can see the actual performance and how we're tracking towards those targets that we set back in FY '20, '21. Insurance Australia has again achieved strong growth in both premium and units. When adjusted for portfolio exits, gross written premium is up by 12.1% in Home and 11.7% in Motor. Now while we prioritize margin to ensure pricing adequately reflects the natural hazard-related costs and inflationary pressures that are coming through our business, it is pleasing, very pleasing that we have continued to see unit growth across the consumer portfolio. In New Zealand, gross written premium increased by 12.2% on the prior period, largely driven by the pricing response in the current inflationary environment. As we expected, unit growth has started to moderate across some portfolios in the New Zealand business. In the bank, the Home Lending portfolio grew by $2.6 billion or 5.2% over the half year. Customer deposits grew by 6% and, of course, weighted in the current environment towards term deposits, which is not unusual in a rising interest rate environment. When you exclude the positive impacts from COVID-19 in the pcp, the general insurance underlying ITR expanded to 10%, which is up from 8%. And the underlying ITR was supported by higher pricing and improved underlying yield offsetting the known headwinds of natural -- higher natural hazard allowances, increased reinsurance costs and inflation on claims and operating expenses. And finally, it's incredibly pleasing to report the bank's cost-to-income ratio of 49.9%. This has been a long-term, long-standing ambition and target that we've achieved through a combination of revenue growth and disciplined cost management. It's worthwhile considering all of these results in the context of the headwinds that we stayed into over the past 3 years, the most material of which have been the La Nina weather cycle and, of course, the global inflation. Now I'll briefly outline our approach to managing these 2 issues in the next couple of slides. Now first, to hazards on the top left-hand side of the slide, you can see the impact of 3 consecutive La Nina weather cycles on natural hazard costs -- natural hazard claims relative to allowances. Now while you can continue to see us reporting actuals ahead of allowance, you can also see the pace at which we've increased the allowance over the past 3 years. This alongside the material step-up in reinsurance costs have amounted to significant headwinds, which we have absorbed within the targets that we remain committed to. I'd make the point that I do acknowledge these increased costs have required us to continually adjust the premiums that we charge our customers, particularly those in high-risk areas. While this is adding to the current cost of living pressures, the value ascribed to insurance products has never been greater, and particularly amongst those whose lives have been put back together after the rain clears or the water recedes. At our recent investor update, we talked through in detail our approach to natural hazard modeling and the increased sophistication we are applying to this crucial area of insurance pricing. Now I won't recap that other than to say that we are confident that our reset allowances will serve us well when weather patterns revert to a more neutral setting, which appears to be the consensus amongst weather scientists. A somewhat underappreciated impact of our natural hazard experience is the operational pressure of managing such elevated claims volumes. This has been amplified by the current supply side constraints and of course, inflation. At the bottom left of the slide, we plotted aggregate claims numbers by year. And what it shows is that the rolling nature of these events have provided little respite for our teams on the ground and make the point, if you cumulatively add up those natural hazard claims cost, it's a total of around 0.5 million claims in natural hazards over the past just over 3 years. Now this is where our Best-in-Class claims program has really delivered. The digitization of our claims processes, the reach and depth of our building panel and our enhanced disaster response capabilities are crucial to the operating resilience that we need to manage a change in climate. And finally, our advocacy agenda, which is best summarized by our 4-point plan, should be well known, and I'm pleased to say, finally, gaining traction. To the next slide, and like all of our financial service peers, we continue to steer into the considerable headwind of inflation, which is, as we all know, a 30-year high and has impacted every aspect of the group's operations. Now for insurance companies, inflation has manifested itself in hardening global reinsurance prices, supply chain disruption, higher loss ratios and the increased cost of long-tail claims settlement. In addition, across both insurance and banking, there remains broad inflationary pressure across operating expenditure and wages. Now in response, we put through the necessary price increases that will be earned through fully in coming periods. And Jeremy will talk through this phenomenon in this aspect in a moment. But pricing can't be expected to do all the heavy lifting. In inflationary times, scale matters. And here, our best-in-class claims program has allowed us to be more disciplined in leveraging scale to deliver lower aggregate inflation outcomes when compared to peers. This has been most obvious across home working claims where we have recently renegotiated our builder panel arrangements at a significant discount to the current inflationary trends. The dynamics in motor are more complex. While our relationship with SMART provides us with a benefit on drivable repairs, it's worth remembering this accounts for roughly 15% of total motor claims costs. Beyond that, inflationary trends in motor are more industry-wide and, of course, global in nature. These include elevated average claims cost from higher secondhand vehicle prices, a greater proportion of non-drive repairs versus drive, increased hire car durations and restricted capacity within the repair supply chain. In response, we've added additional repair capability and capacity across both drive and non-drive. We've maximized fixed price arrangements where we can with volume incentives. We've leveraged our current technology platforms and new technology platforms, and we've established dedicated teams to manage ancillary costs such as towing, hire car and, of course, recoveries. In long-tail, inflation is assumed in both pricing and reserving, and it's proving to be adequate. But as expected, we've seen some moderation of prior year reserve releases as those buffers are utilized. Now offsetting the transitory effects of peak inflation has been our investment portfolio, where we continue to retain a substantial holding in inflation-linked bonds or ILBs. At a recap, ILBs have been a feature of our portfolio for over a decade and are designed to protect both profit and margin during inflationary times. The benefits of ILBs are amplified in times where there is a material disconnect between actual CPI and breakeven inflation, which obviously we are observing at the moment. In summary, the ILBs have worked exactly as anticipated, providing a shock absorber during this period of peak inflation and supporting both the P&L as pricing and our ongoing operational improvements earn their way through the book. Turning briefly now to the sale of the bank. And as you know, the ACCC published ANZ's merger authorization application in December and expect -- we expect they will announce the determination by June this year. This, of course, is the first step in the approval process with the sale also subject to approval from the Queensland government and the federal Treasurer. We will continue to work constructively with ANZ and the relevant regulatory and government authorities to achieve the approvals within our previously disclosed time line. In the meantime, we remain intensely focused on delivering on our bank strategy and the priorities that we outlined in that FY '23 plan remain unchanged. So at this point, let me hand over to Jeremy.

All right. Thanks, Steve, and good morning, everyone. Well, it's been very pleasing for us to see the continuation of the strong top line growth, along with underlying margin momentum feature in our results for this half. In GI, the challenging operating conditions continued with ongoing inflationary pressures and elevated natural hazard costs. We've responded with price increases and good management of the cost base. The result was also supported by improved investment returns and the release of BI provisioning. In banking, the strong performance has continued with the achievement of the cost-to-income ratio target of 50%. We're also pleased to be able to reaffirm our FY '23 targets today. And the overall bank sale financials set to sale-related costs, stranded costs and the return of capital, all remain in line with previous estimates. So I'll now unpack the results a little further, starting as usual with the Insurance Australia and top line growth. Overall, GWP grew by 9%, excluding portfolio exits. The home portfolio grew by over 12%, driven by strong premium increases in response to the natural hazard and reinsurance costs. Motor also increased nearly 12% with premium increases reflecting underlying claims inflation and higher sums insured. Pleasingly, as Steve said, we're also able to grow units in both portfolios despite our focus on margins, albeit motor units have slowed on a half-on-half basis. Now I'd like to remind you that the premium rate increases can be different to overall average written premium outcomes due to a variety of factors. These include new business renewal mix, brand mix and changes to accesses and nonrenewals. In regards to earned premium, there's also the timing gap between renewal rate increases and the earn through in the P&L. We are confident that the price increases we're putting through are sufficient to reflect the inflation and natural hazard costs. Moving on, in commercial, growth was driven by the NTI, Property and Fleet portfolios with retention and new business both strong despite good rate increases and the remediation in our packages portfolio is continuing. CTP decreased by 1.3%, driven by increasing price competition across the schemes, and growth in workers' compensation reflected both higher wages as well as rate increases. Moving now on to claims. As Steve touched on earlier, the deterioration in consumer was driven by the motor portfolio, largely due to higher average claim sizes with increasing secondhand car prices and supply chain disruptions. Our key responses have included pricing and repair capacity increases. Home was broadly flat with stable frequency, inflation moderated by strong cost management and favorable mix outcomes, along with some increase in liability claims. Commercial was also broadly flat as several large fire claims and higher cost in fleet offset the benefits of ongoing pricing and underwriting actions. CTP saw an increase largely due to the inflationary environment, whilst Workers' improved slightly with benign experience on our runoff portfolios. Prior reserve releases at 1.6% of NEP, that's excluding the TEPL adjustments, were broadly in line with our expectation, albeit with some favorability in consumer, partially offset by a modest strengthening in commercial. Turning on to investment performance. Whilst still volatile, investment markets stabilized somewhat from the extreme movements we experienced towards the latter half of last year. The mark-to-market losses on risk-free and breakeven rates were more than offset by significantly higher running yields, including inflation link bond carry. So the average yield on insurance funds was around 5% on an annualized basis with improved returns across all components. The inflation-linked bond carry contribution comes from the persistently higher CPI prints, well above breakeven inflation rates. And whilst this is expected to be largely neutral over a cycle, the recent performance has provided some expected offset to inflation seen in claims. As always, we continue to assess the profile of our investment portfolio, and we're maintaining a prudent bias. Approximately 90% of the portfolio is allocated to investment-grade fixed income securities. We continued with our reduced exposure to equities during the half, albeit this has since been reassessed, given the more recent market developments. And we've increased our investment in property and infrastructure as part of our ongoing adjustments to our strategic asset allocation. Moving on to New Zealand. We continued to experience strong growth and increasing market share with targeted price increases across all channels, driving GWP growth of over 12%. Natural hazard costs were lower than last year, but still $21 million above the allowance with one large weather event in August. And I'll say a little bit more on the recent flooding event shortly. Higher working claims cost in New Zealand were driven by unit growth, large property fire losses, particularly in the first quarter and inflationary pressures. The prior year period was also impacted by -- positively impacted, that is by COVID related motor frequency benefits, as you'd be aware. Prior year reserve releases in New Zealand was strengthened by $12 million to reflect development on both earthquake claims and property claims. And as with Australia, we're confident that current pricing increases are appropriate and reflect underlying claims inflation. We've got a close watch, of course, on that following the recent flood events. Investment income in New Zealand improved with similar dynamics to the Australian portfolio. And pleasingly, the Life business saw an increase in profit after tax with improved planned profit margins and favorable experience. Turning then to the group underlying ITR. We recorded an increase in the half to 10%, a good result given the headwinds of increased natural hazards and reinsurance costs and claims inflation. The 3 key factors that offset these impacts were: firstly, significant increases in premiums in response to these headwinds. I also note our roll-out of CAPE in both Home and now Motor, has helped with retention and underwriting. Secondly, increased investment income with higher underlying yields, noting the relationship between inflationary pressures and the benefits of the inflation-linked bond portfolio; and thirdly, a reduction in expenses driven by operational efficiencies. The outlook for the full year is in line with previous guidance, i.e., around the midpoint of the 10% to 12% range. So whilst achieving this result means we expect to see a second half underlying ITR towards the higher end of the range. I would remind you that the medium-term outlook will be -- will reflect the dynamics of the hardening reinsurance market, potential volatility in investment income, but with ongoing strong premium rate momentum. Moving then to natural hazards. Our natural hazard costs for the half exceeded the allowance by $99 million with a third consecutive La Nina weather cycle. Pleasingly, we saw a relatively benign November and December, and note the ENSO cycle is expected to return to neutral this half. So whilst January was -- weather was relatively benign in Australia, there has been a very significant flooding event in New Zealand. Now I'll remind you that the group's maximum retention for this event is AUD 50 million given the New Zealand drop-down covers in place. We're still assessing the expected gross cost of this event but do expect it to be significant. Notwithstanding, we remain well protected in New Zealand with a prepaid second drop-down cover remaining, and we're working through our approach to any reinstatements that may be deemed appropriate. On the topic of reinsurance, I note the market is continuing to experience ongoing change with further hardening evidence in the One January renewals, and that's both in terms of pricing and capacity for the lower layers of programs. And we'll have more certainty on this once we go through the process of finalizing our June renewal. Turning then to the bank, and we're very pleased with the progress against our FY '23 targets. I'd particularly like to highlight, as Steve has done already, the achievement of the long-standing target for the bank, and that's the cost-to-income ratio of 50% and credit to Clive and the team for delivering that. This was ahead of schedule, and reflects the continued above-system home lending growth as well as a disciplined focus on cost management. We also benefited from the rate environment and improved margins. The NIM of 203 basis points has been elevated by deposit margins in particular, but is expected to fall back within our target range in the second half as competitive pressures are expected to increase, again, particularly in the deposit space. Home lending continued to grow at an annualized rate of 10.4%, with the key drivers being significant improvements in both turnaround times and NPS for brokers and consumers. Deposits grew 6% on a half-on-half basis with a clear shift in mix from transaction accounts to term deposits as customers take advantage of the rising rates. Now I'll quickly touch on the bank's credit quality. It remains well positioned and strong on all key metrics with 91% of new home lending originated at an LVR below 80% and 90 days past due continuing to reduce. Notwithstanding, we do remain alert to signs of stress given the economic environment and the runoff of the fixed rate loan portfolio is a key watch item for industry. Now an example of the resilience in the Home Lending portfolio is that over 60% of our customers are ahead on their mortgage repayments and over 30% are ahead on their mortgage repayments by a year or more. We continue to monitor and review the economic assumptions underpinning the collective provision and consider it to be prudently set for the environment, noting it hasn't changed from the $180 million balance despite the improving credit quality of our loan portfolio. Turning then to group expenses. We've been subject to the same inflationary pressures that most businesses have faced with inflation across all key elements of our cost base. Pleasingly, though, we've been able to more than offset these increases efficiency benefits, including the steps we've taken to simplify our business and improve our operational efficiency. As expected, there's also been a reduction in regulatory and maintenance project spend. So supported by this cost management, the expense ratios in both Australia and New Zealand have reduced. And as we've said, the bank cost-to-income ratio reduced to 49.9%. Now I can also reaffirm the group is on track to achieve our target of around $2.7 billion in operating expenses for FY '23, albeit with a modest increase in the second half, largely from growth related and restructuring costs. I'd also like to point out here the results in the managed funds business. We've seen lower revenues from portfolio runoff as well as higher expenses, which are likely to continue into the second half. Regarding the bank separation and transaction costs, whilst the overall expected quantum has remained unchanged, as I said earlier, we now expect to incur approximately 25% in FY '23 following the finalization of the joint transition planning. And then finally, moving on to capital. The capital position at 31 December has seen net capital generation of around $110 million since 30 June, and I'll run through some of the key dynamics. Firstly, the reversal of around $100 million of deferred tax assets. This is consistent with the unwind that we flagged at the full year results and further unwind is expected as the investment book continues to reach maturity. Secondly, the reversal of around $70 million of the impact from the higher natural hazards that we flagged at the full year as we put the pricing response through, particularly in the Home portfolio. This has been offset by normal seasonality and deterioration in motor claims that we've taken you through and capital usage from business growth. Now importantly, the seasonality and motor claims impacts are expected to reverse in future periods. And then thirdly and finally, the capital applied to the strong home lending growth in the bank. Now I'd note here that the capital position that we've presented today reflects Basel III, which was effective on the 1st of January. You'll see from the chart that CET1 Group has increased to $290 million, but we've also improved the capital position of the GI business with CET1 now above the midpoint of the target range. This was partly driven by changes to our conditions, which enabled us to realize diversification benefit between Australia and New Zealand and to fund that diversification with hybrid capital rather than CET1. Following these changes, we'll look to optimize our capital structure into the second half, subject, of course, to market conditions. As Steve said, the interim dividend of $0.33 per share at a 71% payout ratio reflects a robust balance sheet and our normal approach of a lower payout ratio in the first half of the year. And on that, I'd now like to pass back to Steve.

Well, thanks, Jeremy. And let me quickly turn briefly turn to our FY '23 plan, which, of course, we presented to our Board in 2020 and first outlined to you in February '21. The plan included an ambition to drive growth and deliver by FY '23, a sustainable return on equity above the through-the-cycle cost of equity. The plan is centered around 12 strategic initiatives, which are outlined in this slide, and we've had on all of our regular updates to the market. But it also relied on everyone at Suncorp around improving the way we deliver insurance and banking products for our customers. On this slide, I'll summarize the targets that we set for FY '23. And again, they'll all be very familiar to you. What we didn't know at the time of building the plan and setting those targets were the considerable headwinds that we would face into over the plan period. The dislocation of the pandemic, geopolitical shocks in Europe, record inflation, of course, those 3 sequential La Ninas have obviously tested our results. But despite the challenges, the business -- our business has emerged in great shape, and we remain confident in achieving those FY '23 targets. Now to the next slide and here are some of the more operational proof points underscoring our progress across the insurance business. Over the plan period, growth momentum has continued to build as our efforts to reinvigorate our brands to refine our customer value proposition and to improve our marketing and simplify our product portfolio have taken effect. Our new pricing engine, CaPE, has been rolled out in Australia to our mass brands across our home portfolio. With deployment underway in motor, in fact, overnight, we're able to deploy it into our mass brands in Motor, which is a big game changer for us in terms of pricing and was a key part of our strategic initiatives that we outlined to the market a couple of years ago. The first phase of our new SME broker platform has also been rolled out, providing enhanced pricing and risk selection, improving the broker experience for new business and will assist us in our ongoing remediation of the packages business. In distribution, digital sales for mass brands have increased by 14 percentage points since the first half of FY '21 to 65%. And digital service transactions have increased by 12 percentage points to 42%. We continue to focus on making digital purchasing easier through our use of geospatial imagery, artificial intelligence and removing barriers to online self-service to meet customers' increased appetite to interact with us online. Within the Best-in-Class claims program, I put it out before the successful renegotiation of our repair panel arrangements in Home was supported by ongoing efforts to leverage scale to expand bulk buy benefits and drive improved repair quality, capacity and cost outcomes, making claims tracking simpler and easier for customers is our key focus in the second half. In New Zealand, a single claims platform has been introduced, providing seamless connectivity to our partners across the claims value supply chain. Work has also commenced to simplify and rationalize the consumer product portfolio. At the bottom left-hand side of the slide, you can see our underlying ITR progress puts us on track to deliver that FY '23 target. The strategic initiatives that we have delivered and that we continue to deliver set the group up well for our future, particularly as we emerge as a pure-play insurer. Turning to the bank, which continues to grow in home lending with the top left of the slide highlighting the improvements over the planned period. Growth has been supported by improvements in customer and broker NPS stunning turnarounds in broker NPS in particular. But importantly, it hasn't come at the cost of credit quality. Median application turnaround times have improved to 3 working days, which is down from 12% in the prior period and positions the bank in the top quartile for application turnaround times. Business lending also continues to benefit from targeted expansion across the multiple portfolios in the business bank. We've also seen growth in Everyday Banking supported by a compelling digital offering with digital transaction account openings now accounting for 80% of new deposit accounts. And of course, there's revenue growth, when you couple it with the disciplined cost management that we've had in place for a number of years has supported the achievement of that CTI ratio. Now I'll turn to the outlook briefly. And in insurance growth for the remainder of the year, we expect will remain strong, albeit will be driven primarily by AWP as we continue to prioritize margin over volume. The momentum of GWP will translate in turn into NEP and will support underlying margin trajectory. The group underlying ITR continues to steadily improve, and we remain on track to achieve the 10% to 12% target. And we'll continue to adjust pricing to take account of claims frequency and increased inflationary input costs, but with a particular focus on our June 30 reinsurance renewal. We expect current inflation trends to steadily moderate as monetary policy changes impact on aggregate demand and the supply chains continue to free up. Our reinsurance provides protection into the second half, and we are confident that our natural hazard allowances are appropriately set. In the bank, the cost-to-income ratio is expected to be around 50% for FY '23. However, I point out the slower system growth and competition in deposit pricing could have an impact on income in the second half. At the group level, we continue to target a cash return on equity above that through the cycle cost of equity. And alongside our target payout ratio of 60% to 80% of cash earnings, we, of course, remain committed to returning any capital to shareholders that is in excess of the needs of the business. The sale of the bank remains on track and sort of regulatory and government approvals, we plan to complete in the second half of calendar year 2023. We will, of course, continue to update you on progress of the transaction, and we'll also look to provide more information on the shape of Suncorp as we emerge as a pure-play insurance company. Now this is a slide we used at the Investor Day, investor update back in November. It's a snapshot of our future strategy and the ambitious agenda that we have for the 5 portfolios that will shape our future. Our future strategy will also importantly be supported by the key enablers that are outlined on this slide and be informed by us continually evolving our risk appetite, the financial settings underpinning our business, the reinsurance strategies that we have and, of course, how we address ESG. It's now 8 months since we announced the sale of the bank, and we outlined the strategic rationale that underpin what was a difficult decision. In our view, the passage of time has reinforced the logic. The need for continued investment in a vibrant private insurance sector has never been more important to meet the changing needs of our customers, of communities and for our broader economies, most evident also in the last couple of weeks in New Zealand. As a leading Trans-Tasman insurer, natural hazard resilience, climate change and the affordability and accessibility of insurance will continue to be the most material issues for our industry to address. Our focus, Suncorp's focus, advocacy and meaningful action on these issues will be at the heart of our future. With that, why don't we adjourn to take some questions.

Okay. We'll start in the room here and Nigel, I'll start with you.

So first of all, just on the premium growth. I mean, obviously, you're guiding to similar GWP growth for the full year as you got in the first half. I think that probably surprises a few people that there's no acceleration of that in the second half. Can you just make a few comments on that?

Look, I think we remain very confident with the trajectory of pricing. And obviously, the dynamics of inflation, we've been watching very closely over the past 9 months as it's continued to emerge through both Motor and Home. And I think the -- we've been able to get ahead of that to some extent with our pricing. So we've moved, I think, earlier than others in the market to adjust our pricing, and we'll continue to monitor that closely. We will continue to watch motor. We did watch it very closely through November and December and made some adjustments to pricing then. And the other point that I raised is that we've got to continue -- we have to continue to look at our home pricing relative to our forthcoming reinsurance renewal. And our disposition on those matters is always to get ahead of the game as best we can. And so if we are seeing the dynamics in that reinsurance market evolve as we come through to 30 June and into next calendar -- next financial year will make some necessary adjustments to pricing there. So I think without being absolutely specific about the pricing increases that we're putting through, we continue to think it's robust, and we'll continue to adjust it related to the cost of -- or the input cost inflation that we're seeing across both those portfolios. Jeremy, do you want to...

I think that's right. I mean, on balance, it's going to be roughly the same as the -- what we've seen in the first half. There'll be some different dynamics around it. You might see, obviously, with the in Home GWP for the first half is an average for the first half and the same with motor for that matter. So there may be a little bit of acceleration there, with noise around some of the other larger portfolios, but I think there or thereabouts.

Maybe just drilling a bit further down into that Home comment you just made there. I mean AWP at 10.7%, you seem to have been suggesting you were probably putting through price rises a bit stronger than that. So if you compare that 10.7% growth in the first half to what you've been putting through recently, is there a reasonable gap?

Yes. I mean what we've tried to do, Nigel, is in that picture as explained the difference between the price -- the individual prices that are going through, which is what we've referenced previously and then how that translates through to an AWP and then through to a gross written. So the gross written is easy timing. As the renewals go through, then it takes time to earn through, that's pretty straightforward. The gap between the front-end customer pricing, if you like, and then what comes to average written premium, the different dynamics across Home and Motor, but the new business in our mix is a big one. So new business in Motor tends to have a higher premium, so you get that mix impact. So whilst at an individual customer -- the individual customer rates going through are quite different to what you see in a GWP sense. There's excesses -- we've had customers change excesses. And yes, there is some nonrenewal in there. But having said that, retention rates of -- with this sort of level of price increase actually held up pretty well.

And the unit count numbers in Home are quite pleasing in reflection of the sort of price increases that are going through. And again, these are averages. So one of the things that we showcased through our investor update back in November and which is a game changer for us is the sophistication of CaPE in terms of pricing. It's a generational step up on GEPI. And you've seen some of the benefits that we've been able to get out of that is we've priced the book an increased pricing environment. So that's now in motor, and it allows us to get a lot more granular about putting the increased premium to the higher risk areas of our business. So elevation of CaPE into our pricing environment, alongside a continued focus on making sure that we're pricing for increases in input costs across Motor and Home, I think puts us in a good position to offset inflation and an expectation over time that peak inflation that we've seen probably in the last 6 months will begin to moderate.

Which I guess just brings me on to my final question, which is just sort of obviously, you've given us the sort of broad dynamics on the Slide 15 with respect to the underlying ITR. But maybe can we get a feel for how strong you think those various forces are. So obviously, you've got investment income moderating, claims moderating. Headwind, obviously, on natural houses reinsurance. Obviously, there's a lot of uncertainty there, but you did give at the Investor Day, you sort of said that maybe in '24, we'd be at the midpoint of 10% to 12%. So how are you feeling about that now? And presumably, that was with lower reserve releases. So how are you feeling about that now? And can you give us any clue as to how strong those forces do you think they'll be?

Yes. So I think the -- what we're trying to do with that picture, Nigel, is reminded the 2 key dynamics there, which is pricing momentum, which is very strong, and we'll definitely see that coming through. But to balance that a little bit with the potential for what we might see in the FY '24 renewal. And look, we haven't gone through that renewal yet. We've seen what some of our peers have experienced, but acknowledging that we also experienced what some of our peers experienced on our 30 June renewal. So we've got to work through that. So that's -- at this stage, we can make an estimate, a guestimate around what that's going to be. but it's pretty hard until we've gone through that renewal. And so we're not giving guidance for FY '24, but I think that, that range that we previously had is probably still a sensible sort of range level. And so the net of all of those things is, to some extent, they're probably -- we'd expect them to roughly neutralize out.

And some are reasonably obvious, I would have thought. I mean, obviously, as inflation starts to moderate, yield should start to moderate, too. I mean it's sort of economics 101. It's hard to see inflation moderating and yields continue to increase. They may, but it's unusual to see that happen. So -- and equally, some of the carry benefits that we've had from the ILBs is the CPI starts to reverse back towards breakeven inflation will start to moderate as well. But we do have a very strong earn coming through. You can see that both in Home and Motor, and that's almost a formulaic outcome now as a lot of that book is being written. So...

The other thing I'd say on that picture, Nigel, is we've used the term medium term, which is probably around that FY '24 outlook. But of course, -- when we say, for example, in that scheme that the term reinsurance is a headwind, it's a timing, a matter of timing. So if it is a headwind, we'd still be expecting to put the right response through to offset that headwind. If it's not within FY '24, it's over that sort of 18-month time period. So there's also a time frame element around that.

Kieren?

Kieren Chidgey. Just starting on sort of a similar vein in regards to the underlying margin. Jeremy, you called out, obviously, the opposing impacts the benefit you've had on the ILB, carry sort of helping offset inflation. Can you just give us sort of a sense of where that ILB carry, which you've said average 100 bps through last half would be sitting today sort of in the expectation near term.

Yes. I mean it's sitting today, it's about 100 bps as well. The dynamic of it is where is a CPI print and that's in arrears through to the ILB carry does that sit relative to breakeven inflation. And people can form their views on that. But our view would be we don't see CPI prints coming down recklessly overnight from the 6s and the 7s down to 2% or 3%. So we'd expect that to persist for a little while yet. And the -- just to be clear on an inflation-linked bond instrument. They will earn a real yield return on the bond plus the bond gets indexed for CPI indexation that's happened to date on the bond. So the CPI indexation, it's a real return, effectively cash return sitting there on those bonds.

And sort of the other part of that question, sort of the flip side, the claims inflation. I think you've broken out in the waterfall, I think it was 700 basis point impact to your margin. Can you just go through some of the key portfolios home and motor in terms of what you're seeing both through the half and as we move into second half?

I'm going to go through obviously, Motor and Home, and then Jeremy can fill in the details there, after we might need Paul or Lisa to add to it. But I mean motor is quite a complex challenge. Obviously, we've got Smart. But again, as I pointed out, Smart is 15% of the total repair volumes in Motor. Beyond that, the factors are pretty well established sort of domestically and globally higher secondhand car prices, which is a function of higher new car prices and availability and supply of new cars. Again, that's probably peaked. Our assessment is that, that is starting to come off. Now the pace at which it comes off, yet to be seen. But I think it has peaked and it's starting to come off. Parts pricing, obviously, we think that has peaked as well but hasn't necessarily moved much, so it hasn't disinflation necessarily in parts prices availability and supplier parts has probably freed up a little bit as supply chains have loosened up a little bit. And then the broader issue is just the capacity within the repair network. And so what we've seen post COVID is a very particular pinch point in availability of labor in motor vehicle repair shops, absent the ability to bring migrants in, which is the key part of their workforce disposition for a period of time, not to get apprentices on board, which is completely understandable in the current environment. So there's a very big pinch point in labor, in motor vehicle repairs more broadly across the industry. Again, that will take a little bit of time to free up. And what that does is obviously doesn't get the throughput of our claims, particularly on the drive side, throughput of claims settlement at the pace at which we otherwise would have had it, which means longer claim durations, longer hire car utilization, et cetera, et cetera. And so they're all the dynamics. Frequency is also a factor in motor. I think we all saw particularly on drive, frequency starting to move in a downward trajectory, not a steep downward trajectory, but a moderate downward trajectory. And it was always to be determined what would happen once COVID sort of worked its way through when people became mobile again, but we've seen frequency jump back up again. If you take some reference points, FY '17, FY '19 on a slight trajectory, falls off a cliff through over, it's popped back up again. And variously through the half, we've seen it somewhere in between FY '17 and FY '19. So where that settles over time is yet to be determined. But again, we've got incredibly good line of sight to all of these factors. I think the other point to make on the smart piece is that, obviously, we had a contract in place, which obviously matures on 30th June. That was materially, I think, in our favor relative to the price that was set 5 years ago and we have made some adjustments to that to reflect current inflationary trends and also to incentivize more repairs. So that's an incentive-based contract renegotiation, which is temporary until we work through the full negotiation in June, but it's incentive based. So -- and it does still reflect volume discount that you would expect to get from putting 140,000 vehicles through 1 repair shop. On Home, look, the fact is there, I think, on the working book, we're well on top of the liquids. That's been an issue for the past decade or so as we've seen flexible piping and all those various factors drive higher frequency of escape of liquid, but also higher cost of duration in terms of average claims cost. We think we're well and truly on top of that. So a really good effort by the team to do that. And then obviously, we've gone through the renegotiation of the builder panel. We talked about that last half at the full year. And obviously, we went through in November and reset that whole panel. And the increases were significantly below what is currently observed in inflation in the market and reflects the scale we bring to our build to repair panel, the certainty of payment -- the payment cycle that we provide to them, and we are an attractive place for builders to do business with. So -- and then the hazard piece, I think, sits outside. It's got a separate line of discussion. Jeremy, do you want to add?

Yes, look, it's a motor story. Most of that sort of 700 basis points is in motor, but in Home we've seen some liability claims, which were a bit lumpy, more first quarter in Australia. And then we've seen some property fires in the first quarter in New Zealand. So that's part of it, but it's really largely motor. And then the other one is, the interesting one, is Workers' comp. So Workers' comp has improved. Workers' comp loss ratio has improved. But because it's got a higher loss ratio and we've grown workers' comp, it impacts on the mix. So there's a bit of a mix impact in there as well.

Okay. And just a final quick follow-up on Nigel's question on Home and sort of reinsurance as well. I mean it would seem pretty obvious, we've seen a pretty consistent reinsurance outcome globally at 1 Jan in terms of higher retention, higher pricing. So I just want to be clear whether or not you are accelerating pricing in Home already for that or whether or not you are actually waiting to respond to this. Because it seems definitely 1 Jan would have played out worse than most of us would have expected.

I'm not going to any signal any pricing moves that we're doing, Kieren. I think my answer to Nigel remains intact. It's -- we're observing it. We're looking at it. And yes, I think you could look at the attachment point as one point. I mean, clearly, our main competitors attached at a higher level than we were able to attach at it at June 30. But Jeremy makes the point, which is the right one. And you look at it in the accounts, we've seen a 17% increase in reinsurance costs on pcp. Now we took that pain in the June 30 renewal. And it's a bit hard to tell what 1 January is related to in terms of 30 June. But you're right, the attachment point has lifted. And so we just need to see I mean we know what's going on there and will be, as we always have been, and I flagged that we will have an eye to that reinsurance renewal in terms of the pricing that we apply in the second half. But I'm not just going to go into the quantum of it or the timing of it other than that we will have an eye to it, and we will respond. Andrew?

Andrew from Macquarie. Maybe to ask that question in a different way. How are you thinking about the risk reward on aggregates going forward?

Yes. I mean, we go for that process every year in terms of the economic trade-off and there's a fundamental bit of economic analysis around our view of that risk versus the profit margins on it versus reinsurers view. And we'll continue to work that through -- it's hard to work through that process without any pricing on it. So once we get the pricing on the renewals, we'll work through that bit of analysis. I mean, obviously, we have an eye on volatility in the P&L as well. So that plays into it. But when we get the renewal pricing, we'll sit down and make the assessment around the trade-off of that retention versus risk transfer.

And then two questions on New Zealand. There was a slide in the deck that commented on the amount of the aggregate deductible left at 31st of December. Can you give us a bit more color around where that sits now and now that a lot of New Zealand weather has gone through?

Yes. So on that -- so New Zealand will -- is likely. We haven't assessing the cost to yet, but likely to go through the New Zealand drop-down and potentially then into the main -- the [indiscernible] program potentially. We still, as I say, going through the assessment. The deductible on that, i.e., the $50 million that we retain, would go into that aggregate -- the aggregate deductibles that we've had to date. So less than -- converted to Aussie less than $10 million. That's what we get added to it.

And then just to be clear, is that 1 event for you or 2 in the context of your reinsurance cover.

We believe it's 1.

Andrew, just what I might do is get Jimmy up just quickly. Obviously, Jimmy is over from Auckland and just give a little bit of color around the event just a couple of minutes, Jim, if you can.

Thanks, Steve. Good morning, everyone. Look, Friday, 27th of January, as people know it's a pretty significant event, torrential rain causing widespread flooding across the North Island land slips as well. The impact was widespread from Northland to the Waikato region, Bay of Plenty, Hawke's Bay and of course, Auckland. And then the CBD itself, the more impacted in damage areas was the North Shore, largely land slips, but some area of flooding. There was to the West, which is Massey, Henderson, Titirangi. And then the South was Mangere which is the -- where the airport is. And in Auckland itself, the CBD, you would have seen the photographs of the flooding in the CBD. Supermarkets, retail outlets, car dealerships. And I guess our response was swift. So we were on the ground and in the air on the Saturday morning examining the damage, speaking to the customers and understanding what our response needed to be. It's fair to say we've seen quite a few claims come through, we had about 1,000 claims so far. We expect that number to increase. And as Jeremy says, the loss -- the understanding losses is difficult at this stage, largely because on the commercial side, which we've got quite a large commercial book, the property owners. Their focus right now is cleaning up, getting the stock, making sure they can operate, making sure they can trade being an intermediate business, they then contact their broker to their broker then contact us, then we send out assessors to assess the damage. It's only in to that point to get a true understanding of what the commercial losses are. So that will take probably a couple of weeks for us to get on top of what we think the commercial losses will be on this event. But the -- what I've been reading so far from some of the commentary is that this is a one -- say, 250/300-year event. And I guess the question is, what does that mean? Well, for me, it simply means it's significant for us, for Auckland and it will be significant for New Zealand.

Sid Parameswaran from JPMorgan. A couple of questions, if I can. Firstly, just on Slide 11, you hopefully gave us just an indication of how -- what the contribution of your mix changes were on home. I just want to understand if that's to scale because that looks like you're basically saying there was a 6 percentage point improvement above and beyond rate, which came from mix and excess changes. Is that right? So roughly risk-adjusted you're pushing through closer to 17% rate increases, would that be a fair...

Sid, talk...

Sorry. Okay. The question was -- sorry, just on that home premium walk, you -- is that to scale? Is that about a 6 percentage point boost to your average rate from mix changes. So risk adjusted, is it more like a 17 percentage point change...

Even if it's not perfectly to scale, it's sort of pretty indicative of -- it's indicative of scale. And yes, I mean, the dynamic is, particularly on home. It's the inverse of motor, which is obviously where new business premiums are lower than renewal premiums. And then we also have mix. For example, we've been growing very strongly in which has a lower premium than in the mass brands. And so yes, the gap between that written premium and what's going through in terms of the customer rate increases, there's a fair gap to it.

Fair enough. And then if I could just ask about inflation in home as well. I think 6 months ago, you were saying it was low single digit. So just in the last half, I mean, could you just comment on exactly what came through the -- I mean, just going back to Kieren's question, around 700 -- the 700 basis points of pressure that you saw on inflation across the group. What -- how much of that was home.

So homes, you'll see on the loss ratio chart, probably another way of sort of talking about it, but the consumer portfolio, the change in loss ratio there for the year was largely driven out of motor, which means that home was largely neutral, flat on a loss ratio basis, putting a lot of price through home. You can see that in the GWP numbers. But home was comprised of liability claims, and average claims inflation and working claims and the inflation that we -- the cost increase, the claims cost increase in homes is probably split roughly 50-50 between those 2 components. And so the working claims cost inflation in home is still running around that low single digits.

Adjusted for mix or because there's a huge benefit coming on mix as well.

Mix adjusted, mix adjusted, yes. Yes.

Okay. Great. Okay. If I could ask about the statutory long-tail classes as well. I think in your slide in the investor [ pack ], you showed that there's a 0.8% boost to your underlying margins. half-on-half coming from that. Could you just comment on which of the statutory classes that is? And could you comment on whether you've changed your inflation assumptions?

Yes. I mean it's -- the driver on the long tail class at the moment has been investment yield. So obviously, the investment yield, a lot of it runs through those long-tail portfolios, CTP, workers' comp. That's where most large expansion has been coming through.

Right. Okay. So there's no price there...

I mean, so we had a little bit of price increase in Queensland. There's been competitive price across all the other schemes, particularly in New South Wales and ACT, that has had a largely neutral impact on margin. The key driver to margin on the statutory classes has been yield.

And just to clear, no change on inflation in terms of -- I think...

No change to inflation. All superimposed inflation assumptions here.

Scott?

Scott at UBS. A couple more questions just on motor. It's obviously a big step up in the claims inflation there to double digit from low single digit. I think one of the surprising things as well is that you weren't seeing this 12 months ago. But now that it has arrived, what are the signs that you're seeing that are giving you confidence that this isn't persistent and that it should improve?

I think the obvious one -- I think the driver of quite a significant amount, the most material driver is secondhand car prices, which obviously flows through. And we can price to that phenomenon, and that's where we get some granularity around offsetting the inflation with pricing. So that's one key driver. And our assessment is that, that has started -- it's gone through the peak and starting to come off now. Again, you're going to have to form a view as to how quickly it comes off. It could stay reasonably high for a period of time, but it could equally with the monetary policy changes and the economy come off quicker. As I say, parts prices, I mean, they're through, I think, the peak of their inflationary impact. Availability is freed up. So repairs have access to a better supply of parts, but yet the pricing has not yet moved materially thus far. We expect it will, but not yet availability improve, which is important because that reduces the duration of the claim. The key element that's a bit harder to predict is just this labor supply within repair shops and how that flows through to productivity and allows the repair shops to throughput more vehicles, which means we can get more cars repaired quicker and the duration of the claim shrinks. So they're the key -- in aggregate, they are the key factors. I think that generally, they're heading in the right direction, but the pace at which they disinflate over the second half is a bit hard to be precise around. Jeremy, do you...

Yes. I mean nearly half of that increase in average claim size in motor is in that total loss, which is secondhand car prices. I think we can -- I think there's a weight of evidence that would say they're starting to peak and come off. But that takes time then to roll through, of course, because most of our portfolio is on the agreed value basis. And so that agreed value impact of second-hand prices takes time to come through the renewal process. There's a match between -- sort of from a margin perspective, that's not such a big driver because there's a match between putting the premium increases through to customers on the basis of that increase in agreed value. And so you get a sort of a match between the premium and the claims.

Okay. And then if we can also overlay the Smart contract that you alluded to, there was recently some adjustments made to that, but it matures in June '23. What does the glide path look like between the claims inflation just seen. And as we go into FY '24, this seems like there's going to be 2 step-up changes in motor claims inflation there, the interim...

Well, again, it's a bit like the reinsurance renewal. I think we've got good line of sight through all of those dimensions to understand how that contract might evolve over time. And again, just to make the obvious points, it will be a commercially agreed contractual arrangement, and it will -- as you would expect us to try and achieve a negotiation that reflects the volume that we are putting through as far. So we'll enter that negotiation, obviously, in good faith. There's a prescribed requirement under the agreements, how that will happen. We'd like to get onto it as quickly as we can. But again, we can full price that. So we can get ahead of the pricing dynamic there, and we'll seek to do that to the extent that, that contractual negotiation will unfold over the second half. I'd also make the point that we're not going from where we were to a new contractual rate. We have reflected some of that, obviously, in the temporary agreed repair cost contract arrangement, again, with incentives in it to encourage more repair. So it's not we're going from where we were to a new price, we have incrementally moved along the way. So it's a prescribed process. We'll enter it in good faith. We've got a good line of sight to what's going on in the industry because we do have a volume of our peers being undertaken outside of smart, both on drive and non-drive. In fact, given the challenges that we've had in drivable repairs, we have brought on board a couple of other repairs, all within the construct of our agreements to help fill some of that volume that we've needed to fill. So we've got all of the metrics in front of us. And again, to the extent that we see these factors emerging over the next 3 to 6 months, we'll try and get ahead of them in pricing.

I'll just reiterate the point, Steve, that Smart 45-ish, 50% of our repairs, but it's 14%, 15% of the repair cost. So just for context when -- because we've sort of -- I think being clear around that percentage to drive repairs, not so much on the cost. So it's a lower percentage of the cost.

Scott, the other dimension that hadn't sort of talked to -- I mean, we talked a bit about frequency and how that sort of stepped back up and that obviously goes through the claims line as well. But the mix change between drive/non-drive continues. And so generally, you've seen that mix change from drive to non-drive continue. And so what you're seeing is the embedding of technology and vehicles, centers and the like. It's taking a lot of those small things in car parks and et cetera, out of the repair chain. So what you're left with in the repair industry is a bias towards higher average claims cost type activities and a bias to non-drive versus drive, and that's inflating average claims cost, taking a lot of the traditional drive low average claims cost repairs out of the market.

Okay. Just one other quick question, if I can, on the upcoming reinsurance renewal. I understand that you're monitoring it, it's uncertain, but I'd be interested in your perspective on whether or not the majors such as an advantageous position relative to perhaps the challenges who are also looking for fresh reinsurance cover this year?