Good morning everyone, and welcome to our 2025 Financial Results Presentation. I'm joined here by our Chief Financial Officer, William McDonnell, and we're holding this briefing in our Sydney offices on the lands of the Gadigal people. We acknowledge the traditional owners of country throughout Australia, and we recognize their continuing connection to lands, waters, and communities. I pay my respects to their elders past, present, and emerging. I'm really proud of the results that we're presenting today. They reflect our success in delivering the strategy we set five years ago to create a stronger and a more resilient Insurance Australia Group. We're delivering for our customers and our communities. We paid out over $10 billion in claims and retained strong Net Promoter Score and retention metrics. We've delivered strong financial outcomes which have met or exceeded our expectations.
We've set the business up for growth with over 66,000 net new customers in our retail businesses. Of course, we've delivered a technology platform for our retail business that is scalable. Because of that, and our strong balance sheet, we've acquired Royal Automobile Club of Queensland and Royal Automobile Club of Western Australia, and we've funded these acquisitions from organic capital generation. Stepping through the financials, we've achieved a strong outcome here. Our reported insurance profit of $1.7 billion delivers a margin of 17.5%, which does benefit from favorable payrolls experience, and that was primarily within our New Zealand business. Our reported ROE was assisted by a BI release, but importantly, at an underlying level, we are delivering the through-the-cycle target of 15%, which we upgraded in May when we announced the Royal Automobile Club of Queensland strategic alliance.
At an underlying margin level, we've delivered a 15.5% margin, and that's ahead of our through-the-cycle target of 15%. This margin includes the additional investments we've made this year to improve operational efficiency and growth, together with the cost of the additional volatility reinsurance protection that we have in place. For shareholders, we've declared a final dividend of $0.19 per share, which brings our total FY 2025 dividends to $0.31 per share. We continue to maintain a strong balance sheet. Stepping through the results in a bit more detail and starting with our customer growth. Across our retail businesses, we're focused on growth, and I'm pleased with the progress that we're delivering. We've seen our retail customer growth across Australia and New Zealand, with the vast majority of that growth in the second half, and you can see that on the slide.
The growth we are seeing is built on the strong customer metrics and our trusted brands. Our customer experience measures are high in both Australia and New Zealand, with our renewal rates showing signs of improving from their already high levels. If we take a step back, you know, we've invested heavily in the retail enterprise platform. We've got the majority of our entire Trans-Tasman retail business on this platform, and we can see the capability that this platform is delivering to the business. That means we are starting the new financial year with some real growth momentum in our retail businesses. Dropping in a bit further into each of our businesses, I'll start with the Australian retail. Our headline growth here was around 5%, but that was impacted by the exit of the Coles portfolio.
If we exclude this, the underlying growth was 7.3%, with good contributions from all the portfolios here. Motor was up 6.7%, and Home was up 8.7%, with retention rates above 90% for the majority of states. As I mentioned, in Australia, we've migrated over 4 million policies onto the retail enterprise platform. What this does is deliver best-in-class technology for underwriting expertise, policies, pricing, claims, and significantly improving our customer experience. Julie and the team are also delivering improved claims experience and efficiency within the supply chain that we're managing. We also celebrated a significant milestone this year with NRMA Insurance celebrating 100 years of helping Australia. Our New Zealand retail business achieved premium growth of 3.8% or 5.3% in local currency. Within that, we had 9.3% growth in home that reflects strong retention rates and improved customer satisfaction.
Within our bank partner, local currency premium grew by 6.9%, with strong growth in all our key personal lines portfolios. Against that, within our New Zealand retail business, our motor portfolio was relatively flat. Our retail business in New Zealand now has over a million policies on the retail enterprise platform. The business has further improved customer satisfaction levels by expanding the AMI motor hub to 10 sites and increasing the percentage of claims lodged digitally. AMI home and motor products are now being offered direct to Aeon customers that provide further growth opportunities for our New Zealand retail business. Looking into our intermediated businesses, I'll start here in Australia. Here we've delivered another solid result in a transitioning commercial market. After we exceeded the original $250 million profit target in FY 2024, Jarrod and the team have contributed $328 million this year.
When you consider this covers the cost of the additional reinsurance protection we've also put in place, the result demonstrates continuing improvement in the underlying profitability of this business. The business has maintained its pricing discipline with a headline growth of 6.3%. That was boosted, though, by some multi-year workers' compensation policies. On an underlying basis, growth in this business was around 5%, which includes pricing for inflation. Our key segments here are performing well, particularly WFI, where our close customer connections in regional Australia are providing us with additional growth opportunities. We've invested in this business as well during the year, and we'll continue to make considerable improvements to technology platforms for the next couple of years. We've launched the CGU Padlock product on our commercial enterprise platform. It has been a real success.
In the first month after launch, it delivered an 80% straight-through processing and has enabled us to double new business premiums for the month of June compared to the same period 12 months ago. Now we have a raft of brokers that are lined up to trade with us through here. We're going to continue to deliver capability to this business over the next couple of years. The equivalent business in New Zealand has been managing ongoing softening in commercial markets. Its premiums were down 4% or 2.6% in local currency. The actual margins here, though, have been strong with the business at 24%, just over 24%, and underlying just under 16%. We've seen some positive outcomes here. For example, at our June renewals, we retained most of our large accounts within our New Zealand business, and we've entered into a partnership with AgCarE to expand across rural markets.
Importantly here, we'll continue to manage the business with a focus on discipline, underwriting, and margin outcomes. I'll now hand over to William, who's going to run through the financials in a bit more detail.
Thanks, Nick, and good morning everyone. Starting with GWP, we've recorded growth of 4.3%, which is in line with our revised expectation announced on the 1st of July. This includes the impact of some non-recurring items, most notably the exit of the Coles portfolio, and therefore on an underlying basis, we recorded GWP growth of over 5%. This included the strong growth of 7.7% in IAG's direct business, which saw positive customer and unit momentum. As we've mentioned, softer macroeconomic conditions in New Zealand have resulted in a softening in premium growth, most notably in NZI, where our focus is on maintaining strong underwriting discipline. Lastly, GEP and NEP both recorded strong growth from prior rate increases at 8.7% and 8.0% respectively, which benefited our earnings in the year.
In terms of our underlying margin, the full-year result of 15.5% was at the top end of our initial reported margin guidance range and showed a strong improvement compared to the 14.5% in FY 2024. Last year, we had a 17% increase in our natural perils allowance for the full year to $1,283 million, which resulted in a 100 basis point drag on margin, and this was more than offset by the 260 basis point improvement in the underlying claims ratio. There was also a 40 basis point increase in the expense ratio, and the investment yield, while solid, saw a slight decline from the very strong performance achieved last year. Overall, this is a high-quality result, and we've continued to adopt conservatism in the balance sheet, both in reserving, including for perils, and in booking of our additional reinsurance protections.
We continue to enjoy the strong downside protection from these reinsurance protections, and with an underlying margin slightly ahead of our through-the-cycle target of 15%, we are well positioned in the event of claims or investment market volatility. I'll now talk to some of these individual movements in more detail. In terms of natural perils experience, FY 2025 net claims of $1,088 million was $195 million below our allowance and in line with the position that we indicated on the 1st of July. This was largely due to benign conditions in the first half, while the second half saw perils broadly in line with expectations. Delving further into this, the second half saw continued benign conditions in New Zealand being offset by adverse experience in Australia, including a number of storms and floods in New South Wales. I also thought it would be useful to unpack our reinsurance expense.
For FY 2025 , our underlying expense, which excludes any amount related to quota shares, increased by 18.8% due to the impact of the long-term perils volatility cover and a full 12 months recognition of the adverse development cover and cyclone reinsurance pool. However, on a net basis, the increase was only around 10% after reflecting the profit commission related to the perils volatility cover. I want to highlight, though, that for accounting, this profit commission sits together with claims. Overall, the net additional costs of the adverse development cover and the perils protections are within the 50 - 100 basis points impact on group margin that I outlined when we announced the deals back in June 2024.
This long-term perils cover provides significant downside protection and has resulted in the FY 2025, sorry, the FY 2026 perils allowance increasing by only 2.6% to $1,316 million, which is significantly lower than the material double-digit increases that we've seen in the last few years. I also want to highlight that we retain upside in all cases where perils are less than $1,316 million, as we saw in . Turning to underlying claims, which exclude all perils reserving and discount rate effects, the ratio has improved to 52.1%. We're pleased with the trend, showing a year-on-year improvement of 260 basis points. The underlying claims ratio was sustained in IIA, and we saw a strong improvement in RIA and New Zealand. All three operating divisions benefited from solid NEP growth, and in addition to this, RIA saw ongoing benefits from supply chain management and fraud optimization.
This is helping offset some issues being seen, such as higher theft claims, most notably in Victoria, and higher third-party claims driven by credit hire activities. IIA has seen improvement in long-tail experience, with the liability books' enhanced risk profile driven by pricing and underwriting initiatives. Short-tail classes have been in line with expectation, and the team is seeing continued realization of claims initiative benefits, including reduced leakage and improved claims finalization rates. In New Zealand, the division has seen benefits from claims handling and supply chain initiatives. During the year, the division also saw reduced frequency levels across home and motor portfolios, albeit this is starting to moderate. Finally, as I mentioned earlier, the improvement in the claims ratio was also assisted by profit commission from our reinsurance arrangements, and we believe that these will tend to be a recurring feature of our result.
On expenses, admin costs on an ex-levies basis have increased 8.6% compared to FY 2024. This is a function of the broader inflationary environment, but also includes higher technology and system investment, including associated amortization. Taking into account earned premium growth, the admin ratio on an ex-levies basis increased 30 basis points to 12.2% compared to 11.9% in FY 2024. I want to highlight that this increase reflects proportionally greater costs to grow and transform the business relative to ongoing costs to maintain. During FY 2025, we migrated over 4 million customer policies onto our retail enterprise platform as we pursue our ongoing program to transform our capacity to meet the needs of customers. We also made good progress with the commercial enterprise platform with our first product now live, as Nick Hawkins mentioned.
Our transform costs also include investment in engineering to activate artificial intelligence use cases across the company and also a number of one-off elements, including around $50 million of costs associated with operating model changes, which we took above the line. These initiatives are forecast to drive ongoing expense benefits over the next couple of years. At our investor day last December, we outlined an efficiency target and granular tracking of benefits to reduce the admin ex-levies ratio to under 11%, and I'm confident in the work the team is doing to achieve this target in FY 2027. We achieved a strong investment performance across our technical reserves and shareholders' funds portfolios, which has been a key contributor to our result this year. While the underlying yields declined slightly in FY 2025, the technical reserves portfolio contributed a similar income of $464 million.
In our shareholders' funds portfolio, we delivered a strong contribution of $403 million with positive performance across growth and defensive assets. The overall shareholders' funds portfolio continues to remain conservatively positioned with a growth asset weighting of around 25%. Finally, on capital, we finished the year in a strong position, and I've shown some of the material movements in this waterfall. Our strong earnings are the largest component of capital generation during the second half, and this has been partially offset by the capital impact from paying the FY 2025 interim dividend. Other callouts in the waterfall include the capitalized impact from our investment in technology and other impacts, including higher risk charges. This includes the impact of lower yields expanding asset and liability balances and associated risk charges.
As Nick mentioned, we're declaring a final dividend of $0.19 per share, bringing total dividends to $0.31, up around 12% on last year. The payout ratio is 65%, which is appropriate in the context of net capital generation to fund the club transactions, and a 40% franking rate on the final dividend. On the next slide, I'll just update on the pro forma position following anticipated completion of those recently announced acquisitions. This waterfall is similar to the one that we presented at the announcement of our acquisition of Royal Automobile Club of Western Australia Insurance. As then, this demonstrates another benefit of the extent of the downside protection that we enjoy from our reinsurance program, which is the added confidence it gives us in our strong, stable organic capital generation. That means that together with our existing capital surplus, we're well placed to fund these two large transactions internally.
Although we're not providing FY 2026 end payout dividend guidance, you can see we've included an indicative 26 points of capital reflecting earnings in line with our through-the-cycle 15% margin target, less the interim dividend. We've also included a net positive 5 to 10 points of other expected capital benefits as we continue to develop strategies around capital light, as we set out at our investor day in December. As a result, we expect our capital position at June 30, 2026 to be around 1.4 times, and this positions us well for the 40-point capital impact of the Royal Automobile Club of Western Australia Insurance deal, arising primarily from recognizing intangible assets as well as the additional regulatory capital charges. After both deals, this results in an indicative pro forma CET1 position of 1.0 times our PCA.
We've maintained our CET1 target range of 0.9x-1 .1 x, and given the quality of earnings we're delivering and our comprehensive reinsurance protections, we have increasing comfort to operate in the lower end of that range. With that, I'll now hand over back to Nick.
Thanks, William. We finished the year with some really good momentum within Insurance Australia Group. Our confidence of that is reflected in our FY 2026 guidance, where we expect our existing businesses to grow at or around low to mid-single digit. Within that, and within the divisions, we expect our retail business in Australia to grow at sort of mid-single digits, intermediated business here in Australia to grow at low single digits, and New Zealand business in total to be relatively flat. We expect our reported profit will be in the range of $1.45 billion- $1.65 billion, roughly equating to a reported insurance margin of 14% - 16%. Of course, that's in line with our through-the-cycle target of 15% and does include the benefits of the reinsurance arrangement, which provides strong downside protection.
Importantly, the FY 2026 guidance does not include any of the benefits of the Royal Automobile Club of Queensland and Royal Automobile Club of Western Australia acquisitions. We expect Royal Automobile Club of Queensland to be completed on or around September 1, 2025, so in a couple of weeks. That's going to add over $1.3 billion on an annualized gross written premium basis, at least $1.3 billion. With the additional 10 months of that Royal Automobile Club of Queensland premium within our business, we expect that will cause Insurance Australia Group to grow more like 10% plus over the next 12 months. We also look forward to providing general insurance products and services to Royal Automobile Club of Queensland's 1.7 million members, of course. Here we're setting out. We're well progressed with our integration plans here, with a strong track record of migrating customers onto our retail enterprise platform.
What that does, of course, is give us confidence in our ability to successfully integrate these businesses into Insurance Australia Group. Together, we expect the Royal Automobile Club of Queensland and the Royal Automobile Club of Western Australia business to add in total around $3 billion of premium to Insurance Australia Group. We expect those two businesses to increase our insurance profits by at least $300 million and to deliver, of course, double-digit earnings per share accretion on a full synergy run rate basis. What that does is we'll deliver an improved return on equity target of 15% on a through-the-cycle basis. Both associations and their members will, of course, benefit from the financial stability, our technology platforms, and our global reinsurance arrangements, and, importantly, our customer-centric claims processes. These transactions, combined with our strong existing businesses, mean we're well placed to deliver strong shareholder returns into the future.
Now, if you step back, we've made material changes to the way we operate Insurance Australia Group, and we've structured the businesses around our retail businesses and our intermediated businesses, and importantly, our capital platform. We've got some of the best consumer insurance brands in the world, and Julie and Amanda are well positioned to grow these businesses. We've got a modern, leading, scalable technology that supports our brands and our partners' brands, with insurance products that meet the needs of their customers. We're investing in our commercial businesses so they can build on the underwriting and claims improvements that we've delivered and continue to improve the financial contribution of these businesses into Insurance Australia Group.
Together, in combination with Royal Automobile Club of Queensland and Royal Automobile Club of Western Australia, we'll be supporting over 10 million Australian and New Zealanders, and we'll be writing over $21 billion in premiums on an annualized basis. At the same time, we'll be delivering strong, sustainable shareholder returns driven by a stable margin with low volatility, capital efficiency that improves our ROE, providing organic capital generation that's funding our growth. William and I, of course, are happy to answer any questions. I think we're going to start in the room.
Nick, it's Joe here from Jefferies. Just wanted to unpack the GWP guidance a little bit, just given what we're coming off at a four-year basis, particularly the IIA at +6% now looking for sort of low single digit, and also the New Zealand, just wanting a bit of extra color between commercial and retail. At that low end of the guidance, what's the chance that we might see New Zealand actually negative?
Yeah, I'll break that down and William McDonnell might come in and help me with some of this as well. We've purposely provided divisional. We probably also should have just dealt with New Zealand first, maybe. We expect the retail business in New Zealand to continue to grow. We've said net flat. We expect retail business. Commercial's definitely got some headwinds, and we were minus a couple of % there in the last 12 months and probably something similar again in 2026, something in that order. The net of that, we're saying flat, but we would expect retail to grow, both volume and price coming through on the retail business in New Zealand, and then almost equal and opposite within commercial, giving a net flat.
On the Australian intermediated business, a few important points to make are remembering our portfolios for a start, and we're at the small to medium size. Typical customer of CGU and WFI is a small to medium size business or commercial business within Australia. The run rate of that business in the second half and what we expect in 2026 is that low single digit type rate flowing through with a little bit of volume growth as well. We can see that's happening. The headline number in the second half was lower, but if we normalize that and we've guided you to this, you can see that low single digit coming through, and I would expect to see more of that in 2026. I don't know if you want to add anything more.
I don't think I've had anything to add. Thanks, Nick.
Second question, just on the perils allowance, the increase to $1.3 billion. Can I ask whether there's an equal increase in the long-term perils program maximum payout, or does this represent just exposure growth and it's being taken on the allowance only?
Thanks for the question. The attachment point continues to be at our allowance. This gives us really solid downside protection worse than the allowance. The good thing, as you point to, is that it's increased by only 2.6%, so it indexes with exposure, and actually that's slightly slower than NEP. There's a slight benefit in there. We continue to have around $1 billion pre-quota share each year of downside from that. The aggregate across the full five years of the protection in a way is stronger this year because we actually didn't use any of it in FY 2024. Sorry, . That's right.
You mentioned before you still get the maximum benefit if you come in less than that in terms of the payback.
Yes.
Yes.
In the third question, the decision to leave Royal Automobile Club of Queensland out of the guidance, can you sort of mention whether you're still comfortable with the $50 million of savings that you expect to get from reorganizing the reinsurance program? Does that have anything to do with the fact that they might be on a different timeframe than your own?
Yeah, at a high level, maybe I'll deal with a high-level question on, we didn't put it, we debated this point, we didn't put it in guidance partly because we haven't actually transacted the deal there. We are anticipating that on the 1st of September, so it's very soon. If we had already done that, we would have included it, but we just thought we'd just leave it. Things can get delayed, although at the moment we don't expect that. We expect that will occur on the 1st of September. Pretty much the regulatory approvals are all done, and then we have guided you to sort of top line. We've said this, when we announced the deal, we said this business wrote $1.3 billion of premium. It's going to be probably slightly more than that. Just 10 months of that sort of gives you that 10%+ for Insurance Australia Group.
That was the guidance around that. On the reinsurance, we'll be merging the programs together. Obviously, we need some time to be able to do that. Our aim, assuming we can get that done on the 1st of September, the acquisition is probably trying to merge a large chunk of it into our 1 January renewal, which is the Insurance Australia Group big program, but it'll depend on the timing.
That's right. I mean, we understand, as you'd expect, with their own prudential obligations that they've renewed their program for this financial year. Once we get the keys, we can then take that over and discuss that with reinsurance partners as well.
Thank you. That's clear.
Good morning, Kieren Chidgey from UBS. Maybe just a first question. I've got a few, the first question on some of your key portfolios. Do you mind just giving us a little bit of a round the grounds on second half pricing, but also inflation trends, Nick? Obviously, you know, we're seeing, I think you've called out a moderation in inflation, but just keen on a bit of detail around motor, home, commercial.
Yeah, I mean, as a theme, we're definitely seeing, I mean, the big picture is we're seeing moderating of inflation in motor and home, still motor and home, the building costs and repair of motor vehicles. We're seeing moderation of that. We're seeing more moderation in motor than home, and we're seeing more in New Zealand than Australia. That's the cross-section of that story. The flip of that story is we are seeing some. We're definitely seeing property inflationary pressure still, more so in Australia than New Zealand, but we're still seeing that. We're seeing some of that. Within motor, we're seeing some other challenges. Victoria right now has got its own challenges around theft, and we're seeing frequency come up a little bit. We don't call that inflation, but that's a contributor to the cost of motor insurance that needs to be factored into pricing as an example.
It's never quite just one thing. How does that all play out in pricing? We're seeing low to mid-single digit probably in motor and slightly more than that in property across the portfolios. Within New Zealand, maybe slightly less on both those two themes, but the same themes. I hear that there's no pricing happening in retail personal lines in Australia or New Zealand. That's not right. We've got pricing flowing through all our businesses. The other part of that story that we're, there's a slide on today that we really want to talk more and more about is the organic, we're seeing a little bit of organic growth within our retail businesses. That you can see in the page that we've shown you around customers. This is genuine growth of the enterprise. We're seeing 66,000 more customers part of a retail business.
Importantly, we're seeing momentum in the second half. That really gives us a lot of confidence about 2026 to around growth. We just don't want to be talking inorganic growth, and it's very important. We've got these wonderful brands. We want to make sure we're talking about organic growth as well as part of our story.
Thanks. Second question, perhaps for William on reinsurance profit commissions. Thanks for the disclosure. It does imply obviously about $85 million of benefit into FY 2025 from your stop loss reinsurance profit commission, so about 85 basis points to your margin. Can you give us any color around the split, how you book that between first half and second half, or should we just think about it more from the full year perspective, I would imagine? Obviously, it's a five-year contract. I assume you're having to take a forward view on where the benefit sits today and prospectively what benefit will accrue going forward. How sustainable is that 85 basis points benefit? Should we think about that as just likely to recur in 2026 and beyond?
Thanks, Ciaran. This is an integral feature of the economics of that perils protection. Of course, that's part of our 15% margin target. It was part of the economics when we told you a year ago that the impact of that and the adverse development cover would be 50 - 100 basis points on the group margin. The other thing to say is that it's a gradual calculation that goes deep into the layer, most of the way down into the layer. It's calculated, there's an actuarial calculation of the value of it through the five-year contract. I don't expect it to be very volatile. As we mentioned, we expect that'll continue to be a feature of the result.
Okay. I mean, as Ciaran said, it's been conservatively.
I was going to add that point. I mean, clearly at the beginning of an arrangement, we're taking a pretty conservative lens. The bars will be up, not down on that.
Sorry, and you asked about the first half, second half. It was in both first and second half, but it's in the claims, the benefits in the claims line, not in the reinsurance expense line.
It's definitely an unfortunate accounting exercise that we have to book it in the claims line, not net against the cost of reinsurance, but it's essentially attached to the deal.
Okay. Should we expect a bigger seasonal benefit most years, just given you've got clarity of where you've landed on capital by the end of the year?
I think you should expect us to take a conservative view on this as this unwinds and that we're sort of booking the headline, and we don't want to be in a position where the opposite is true, that we're reversing something. That'll be a theme. As time goes on, time reduces conservatism essentially. Is that going to be part of the financial performance of Insurance Australia Group and the way you unpack our financials?
Yes. Probably, have we taken a more conservative view today than over the next two or three years?
Yes.
Okay. Just a final question, and bear with me on a bit of detail.
Right. Sounds like William.
It's around your sort of your margin outlook. Just stepping through some of the component parts, you've given us very clear expectations on your admin expense ratio down 60 basis points. Next year, your tech reserve underlying yield kind of works out to 60 basis point headwinds. Those two things look like a wash. You've said on your outlook slide and in your commentary, you expect pricing to cover inflation and your cap budget's no longer a drag. I'd suggest your underlying loss ratio is not going to deteriorate. Packing all that together, doesn't really seem to be any reason why your underlying insurance margin should deviate much from the 15.5% you've just delivered in 2025. Am I missing anything there?
You've covered the main components. I mean, we did have, of course, particularly the early part of FY 2025, we had a bit of a tailwind from coming off the higher inflation and just some earned through. The other thing that we did mention is that in our New Zealand business, we really had a benefit in FY 2025 from lower frequency in motor in particular, but also in home. We're seeing that frequency benefit, it was moderating just at the end of the year and through into July. We're not projecting that forward. The New Zealand margin would come back a little bit.
I carry on, I was going to say nice summary. This is a step back. We've got the company set up. The sort of the financial settings are sort of 15% margin, 15% ROE. We've used 14% - 16% as a way of sort of articulating that. There's unders and overs in that. We feel like the company's well set up to deliver against that return profile. As you know, the other thing we've been doing is spending a lot of time reducing the volatility of that as well. The thing about our margins is that that's bearing the cost of the reinsurance protection to manage that volatility in that margin. That becomes a bit self-fulfilling now, I think, is that we've got this margin 14% -1 6%, the setting is 15%, that's sort of our target. Yeah, we're going to operate around that, definitely acknowledge that.
There's momentum in our business right now. It's also got all the costs associated with managing that volatility in the margin itself. That's why that's the confidence that we've got.
Thank you.
I think we're going to go to any, no other questions in the room. We're going to go to the phones or the video, I should say.
Thank you. Your first phone question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Good morning, Nick. William, can I ask my first question around the commercial business? You flagged that you make investments in the tech platform. You've also flagged, I think, previously you're thinking about maybe additional reinsurance options or some other options. Can you talk a little bit about that, how you'd see those strategies evolving from here over the next couple of years?
Yeah, maybe I'll talk about the themes and I'll hand over to William to talk about some of the specific reinsurance. The themes here are that we've got an underinvested business that we've owned for some time. You can see what we've done at Insurance Australia Group. We've got the retail enterprise platform and the technology that supports two-thirds of the company in place, operating, scalable, and now we're adding stuff to it essentially. This has been a sequencing thing, and we've really got sort of the back of the retail business strong, and we're able to scale it up. It's not the same, but it's the same sort of concept as what we're doing with the CGU and WFI and NZI businesses, where we are investing in sort of the back of that business and replacing some very old systems and platforms with some modern technology.
What that does is free our company up. We see that we're not building it and hoping like anything that works in three or four years. We are building and deploying it. I'll use an example in the way I talked about it today. That's going to be, we're going to be constantly building, deploying, building, deploying, building, deploying, and getting the value out of that as we go along. That business at the moment, we've got deployed capability people, changes in the way, a lot of people type manual processes that have improved its results. We said the next wave of opportunity for our intermediated businesses in Australia and New Zealand are really around taking the costs out, the efficiency, the productivity, and the capability that we can build out with technology.
That's going to take, we're going to be deploying that over the next couple of years in a very orderly, thoughtful way that means we're not going to have shocks in the P&L at all. We're going to continue to drive and be focused on return profile. At the same time, what we're going to do is give Jarrod and the team here in Australia and the equivalent in New Zealand and Amanda and the team in New Zealand a lot more capability to run that business. That's really been a theme. We prioritize retail enterprise platform to get that done. Now you can see as our confidence is high on that, we're doing something similar, different but similar concepts with commercial. One of the many other things we're doing is you think about our volatility.
We have perils volatility in our business, and we've got a load of stuff that we've talked to you a lot about how we're managing that. Commercial also has some additional volatility, and that's why we're thinking about other ways to manage that. William, you might comment on here.
Yeah, that's right. I mean, you all know that we've been pursuing our capital light strategy, and we think that's a good strategy. I mean, both to increasingly achieve capital efficiency, and that improves ROE and EPS, but also to reduce volatility, which I think is appreciated. The logical next step on that journey, having done what we've done on perils and the adverse development cover and the previous whole of account quota shares, is to look at bringing some additional capital reinsurance behind the commercial business. We're continuing to explore in a number of ways. If we find a good deal that meets all of our requirements, obviously we'll let you know about that. If we can do that also, I mean, it would be nice to be freeing up some capital from that business and reallocating with the retail growth that we've got, organic and inorganic.
We've done this concept before; we haven't always done whole of account things. We do have something specific on CTP. In a way, same sort of concept, we're looking at a whole lot of different ideas and structures here. What we're looking for is sort of a trans-Tasman commercial or intermediated type reinsurance cover as an idea of looking at some of the volatility, the unique volatility that business creates, and a way of managing that in the overall profile of Insurance Australia Group.
Thank you. I believe that health nationally, my second question. Just back to reinsurance, can you talk about maybe your quota share? There have been some questions around, you know, are you getting full value from your quota share? I mean, it sounds like you're pretty happy, you know, exploring further options. Can you particularly remind us, you know, about the structure of your quota share? Are there any profit shares that could, you know, could come on? Yeah, just how are you thinking, you know, about your main quota share and the performance you're getting out of that?
Hi, it's just as a concept, and I'll ask William to come in. These large reinsurance arrangements, multi-year, sort of the nature of them is that they pretty much all have elements of profit share because they're over multi-years. The ability of reinsurers to reprice those deals doesn't exist. They are set-priced arrangements. Essentially, the profit share type concept for pretty much all of them in various forms is there to manage that process through. They all have elements of them. In fact, we like that. Now remember, they all are genuine reinsurance. It's not like it can go the other way where they're sort of top-up additional premium based upon experience. They are genuine risk transfer arrangements where we are capped at, you know, that what you see is there's no subsequent losses. Quota shares are all gross.
In fact, they're uncapped even on limits, which is unusual as well. The concept of profit shares, I know it's sometimes hard to see all the workings of them in our financials, but that concept exists for all our large multi-year arrangements that we have in place. In fact, we like it because it's sort of sharing. We know what our downside is that's kept. We don't, you know, if the business outperforms our original expectations or we sort of manage it within a range, there is an element of profit share that comes back. We should be pretty much expecting profit share from all our arrangements to a degree. I mean, you might want to come in on quota shares.
Yeah, that's right. I mean, we mentioned that the profit commissions, we expect they'll tend to be a feature of our results going forward. There is a little bit of profit commission that we booked this year from whole of account quota share, low tens of millions, and we booked it conservatively. There's no anticipation of the future value of the profit commissions there. We do expect that that'll continue, and indeed it may grow from here.
The truth is, particularly with Berkshire Hathaway, which was 2015 quota share, we had some tough years after that. That's obviously a lot of that's been made good now. This topic's going to be an increasing feature over the next number of years, assuming we're delivering at that 15% margin.
Thank you.
Thank you. Your next question comes from Julian Braganza from Goldman Sachs. Please go ahead.
Good morning, guys. Thanks so much for taking our questions. Just to follow on the discussion on the profit commissions, just want to be clear, if you could sort of set out the parameters as to how we should think about what it would take for this kind of $85 million and the low tens of millions for the whole of account quota share to reverse. Like what, like just to contextualize, just the risk here that we see this unwind. Given that we're taking this benefit, we should be taking this benefit every year on an expected value basis going forward from what I understand. Thanks.
Yeah, I'll take that. Thanks, Julian. In terms of reversal, if I take the two separately, for the perils volatility cover, for that to reverse, we would have to think that perils are so bad in aggregate over the next four years that we're consuming most of the layer, which I remind you is pre-quota share, $1 billion per year. Obviously, in that situation, Australia and New Zealand, a lot else is happening in the industry and with pricing and so on. That's what that would take. It would need quite an extreme scenario. Actually, also on the whole of account quota share, the modest amount that we have booked, again, you'd need some quite, you'd need severe things happening. I mean, close to $1 billion of adverse variance to be unwinding that.
We've sort of, I know it's hard to measure this from your point of view. We've taken a very conservative position on this topic because we don't want to be in the situation you described of reversing it. We get that. The bars from our point of view would be more, not less, over the next five years on this topic. You know, within our sort of expectation, we haven't sort of guided that and we're not sort of forecasting that, but that would be our expectation.
Okay, got it. Thanks so much for that. Maybe just a second question in terms of the GWP growth guidance by division for next year, just to follow up on the previous discussion. If I look at the second half GWP growth trends, it doesn't look like there's much more pressure being factored into FY 2026, particularly for intermediated in Australia and also for New Zealand. Can I just understand, are you assuming the rate environment that you're getting over the second half persists into FY 2026 and no further deterioration? Is that how you're sort of pitching the guidance for FY 2026?
Yeah, I mean, maybe break that into two. You know, across our, it's a good way to talk about it, Australia and New Zealand businesses. I mean, we feel pretty good. Australia's definitely, you know, there's rate that's flowing through that market and we would continue to expect to see that. Remembering again that we're at the small end, we've got WFI within that portfolio. That is not a large scale commercial book of business. That is a well diversified, typically at the smaller end of the commercial markets with quite a large regional representation through the WFI business, just remembering what it really is. Because of that, we continue to see, you know, we expect to see rate flow through that, flow through that business in 2026.
New Zealand's, I mean, we've called it, you know, that was minus a couple of % in the last 12 months and we're sort of probably expecting something similar. That comes back to sort of a previous comment I made around how do we see New Zealand? I see New Zealand as retail volume and price growth and sort of the opposite really within our commercial business and the net of that is sort of flat. That's kind of what we've said in guidance.
Okay, got it. Just a last question for me on margins. I know we sort of addressed this point in terms of into next year, but I just want to sort of dissect it by division. Just your view where the margins might move into 2026. Obviously, news in retail is very strong because there's some pressure there perhaps, but I just want to get your view on where the pressure is coming from relative to second half 2025 from an underlying margin perspective. Yeah, thanks.
There's probably some ups and downs in there, isn't it? We're calling out a few things that New Zealand has had a very strong result. The net, you know, the run rate of the business is sort of roughly guidance, isn't it? Sort of ups and downs within that story, but it's saying that if New Zealand comes back a bit, Jarrod and Julie probably deliver a bit more and the blend of that comes out to a similar type of guidance. The real key for us is also the organic growth. That's sort of the two things, isn't it? It's hang on to margin. I think our commercial businesses, you know, it's the story that I said and hold that margin. Within the retail businesses in Australia and New Zealand, I'm expecting them to have organic growth as well as price growth.
We put that slide up there on purpose to really guide the market. We want to be able to organically grow those businesses. Of course, at the same time, we're supplementing our retail businesses in Australia with the Royal Automobile Club of Queensland and Royal Automobile Club of Western Australia acquisitions. I don't want to lose sight of this organic growth story. It's a really important part of the Insurance Australia Group story. We've got these wonderful retail brands and we should be growing them at least in line with the way the system's growing in Australia and New Zealand.
Okay, no, that's clear. Just to clarify, we should still be expecting margin expansion for intermediated and also for retail as well.
A little bit, a little bit. I mean, that's sort of the counter to the comment on New Zealand, isn't it? Proportional, remember, to the size of the business versus the size of the businesses in Australia.
Great, thanks so much for that.
Thank you. Your next question comes from Freya Kong from Bank of America. Please go ahead.
Hi, morning. Thanks for taking the question. Just on retail guidance for FY 2026, mid-single digits, should we think about this as an ambitious target, and is it consistent or higher than the exit growth run rate that you saw in FY 2025, which seemed to slow down a bit into year end? Thanks.
The first question is ambitious. What we're expecting there is price growth to flow through. Remember, this is motor, home, CTP partner business as well. We expect that business to grow a little bit of volume in line with the market, so sort of customer growth as well as price, the blend of that story being the inflationary pressure that we're seeing across our blended portfolio of the Australian retail business. I see a bit of momentum in that business in the second half. There's a bit of growth. I feel comfortable with what we're doing around pricing, and there's a theme that's coming down, inflationary pressures. I'll use one example, Victoria Motor. We know it's got some challenges, and so there's pricing reflecting not really inflation. It's actually a frequency question that we're having to think about in our portfolio.
There are always multiple stories here that are occurring within our businesses. The blend of that is that sort of mid-single digit guidance that we're providing the market on that. I don't, that's sort of a continuation of where we're at.
Okay, that's clear. Thanks. Just quickly on the drag that you had this year from Coles, it was around 2% on retail. Should we expect any more drag in FY 2026 or anything else to drag down headline growth?
I think there's one or two months, not much, I think. I'm sorry about that. I'm not sure. I think it's very, very modest impact in guidance for FY 2026, in expectation in our financials for 2026.
Okay, thank you. Finally, on the reinsurance profit commissions again, in terms of the conservatism that you're trying to reflect, how should I think? Are you booking it with a time delay or when you deliver good or inline results, so more immediately? I'm just trying to think of the timing around this.
Time delay. I think it's the, I mean, we can't help that. The only way to really do that is, you know, obviously uncertain. Time is uncertainty. Uncertainty is conservatism. I think that's the thing.
Yeah, that's right. No, what you don't want to do is advance booking. As we look at it, we're looking hard at, I mean, taking, going back to the earlier question, at risk of reversal as well.
This is a theme here on this topic. It's a positive for Insurance Australia Group in the outlook because, you know, the cost of all these protections that we have in place is factored into our 15%. The volatility on the downside, you know, we're sort of capping essentially. What we haven't done is sort of removed any of the sort of upside if we have, you know, better outcomes over the next number of years. That's sort of the way this mechanism works.
Can I just add, because I know we're getting a few questions about this. You should continue to see these reinsurance protections as something that improves the quality of earnings rather than as a worry about the volatility of the PCA. As I say, we're booking that mindful of it. As I mentioned earlier, as a result, it's pretty bad scenarios or severe scenarios where we wouldn't get that. In those scenarios, other things are happening.
Thank you. Thank you. Your next question comes from Siddharth Parameswaran from JP Morgan. Please go ahead.
Good morning, gentlemen. A couple of questions if I can. Let's see, I just wanted to check on your guidance, Nick, on GWP growth into next year. I think you mentioned that both in IAG, you're expecting a little bit of that low single-digit growth to come from units and volumes. In New Zealand, I think you're still expecting, it sounds like flat volumes there, you know, and flat rate in aggregate. Is it fair to say that you're not covering inflation in those two markets? Both of those numbers seem like it'd be hard to cover inflation.
Yeah. I mean, they're probably, as I said, they're probably just slightly different stories, I think, between Australia and New Zealand. I'll probably generalize too much. I expect the retail business in New Zealand to be able to grow volume in line with the sort of the system. You know, as a different view around the state of the New Zealand economy, it's quite tough and sort of growth generally. That does factor into Insurance Australia Group, but I expect the retail business in New Zealand to grow volume. NZI, maybe not. Maybe, I mean, flat would probably be a good outcome, I think, right now for NZI. There's downward pressure on volumes, I would have thought, a little bit. It's part of that net neutral. Within Jarrod's business, within the Australian intermediated business, that story, that's a bit different, I think.
Where we're positioned with what we're doing with WFI, some of the capability that we're deploying through the commercial platform that we're building and now deploying into the market, I would expect to see a little bit of volume growth and then in addition to that price. The combination, and there's a bit of uncertainty on that volume growth, I definitely acknowledge that. That's sort of where, you know, there's a range of outcomes that we expect, all of them positive. Your question about pricing for inflation, we definitely will be doing that. We're not expecting, I mean, I think what that's really saying is, I'm expecting margins to go back, definitely not on those businesses.
Okay. Fair enough. If I could just ask a question on Royal Automobile Club of Queensland then, obviously it looks like some of the savings you're targeted might come in from FY 2027 onwards. Do you have any visibility on the profitability of that business on an underlying basis as you would calculate it? Is that coming on similar to the group, but around 15%?
Yeah, we don't have the, you know, the transaction hasn't completed yet. We expect that on the 1st of September. There are arrangements in place that at the moment, Royal Automobile Club of Queensland is a competitor of ours in Queensland. There are certain things around that comment, obviously, that we have to be careful of. However, saying all that, all our approvals are pretty much done. We're at the business end of that process where we expect that to come into Insurance Australia Group then. The initial synergies and opportunities around reinsurance, as we've talked about, and the timing of that, we'll aim to get some of that within the Insurance Australia Group program at 1 January would be the plan. Assuming that we get 1 September, there's obviously access to information and being able to be involved in that's pretty important. Time is key there.
We've said they're going to contribute to that 15% margin. We feel pretty confident about that. I'm not aware of anything. Let me say this without sort of going into the detail. I'm not aware of anything of all the, we've obviously had a lot of contact with Royal Automobile Club of Queensland since we announced the deal that would cause us to think anything different than what we said when we announced the deal in November. We're confident about the business we're buying, the way that's being run in this interim period, in this period where we don't have ownership, the financial contribution it's going to make to Insurance Australia Group, the sort of EPS comments and ROE comments that we made in November. We're only more confident today than we were in November on all of those.
We probably shouldn't go, we won't go into any of the detail of the business because at the moment, they're still not part of the Insurance Australia Group.
Okay, understand. Just a final question for me, just around the perils allowance. I think, Will, you had said last year that the allowance was, you know, nine times out of 10, you expect it to come in at or below the allowance. I was just wondering, just where are we at on that level of conservatism for 2026?
I don't remember saying that, but no, I mean, we do set the peril allowance conservatively, but it's really, I mean, it is the budget for perils. I mean, this year you saw us consume most of the Australian allowance, although we had the benign experience in New Zealand. We have the same settings for that coming into this year. Actually, it's moved by 2.6% because that's also linked to where the attachment point is on the peril stop loss. That's also extremely close to our modeled view.
Okay. I thought you had said, I think that, you know, it was only one out of 10 years that you've reached that.
I think we might have been talking about the perils protection layer in aggregate.
Yeah.
Not the allowance, but the actual, the full layer.
Once we add, I think the point is, isn't it? Once we add the stop loss or the perils protection we put in place, the likelihood of exceeding our budget becomes quite remote. I think that's the point.
Yes, that's right.
Okay. Is it consistent or is it different to last year?
No, consistent, consistent to last year.
Different. Okay, thanks.
Thank you. Your next question comes from Andrew Buncombe from Macquarie. Please go ahead.
Hi guys, thanks for taking my questions. Just the first one is on the reserve releases. Just given the purchase, the adverse development cover for all long tail lines from January 2024, just a couple of small questions to help me think about it. I imagine all of those releases this year are actually on the front book, or am I missing something? Thanks.
No, I mean, it's a combination. Some of it's the more recent years, but some of it is older as well.
Okay, if you've got an adverse development cover for all long tail lines and passed all of those away, how are you getting releases on the old book? Sorry.
Because the adverse development cover gives us full, gives us comprehensive downside protection, but upside, a bit like with the perils volatility cover as well, upside comes to us. However, actually just as a detail in the capital calculations, there's an adjustment to the excess technical provision. Actually, it sort of neutralizes the, as it were, the benefit of that for capital. It's only modest, but that's how that works.
Yeah, that makes sense. The other question, sorry to labor the point, but how should we be thinking about the perils allowance changing for FY 2026 once Royal Automobile Club of Queensland is closed? Thanks. Should we be assuming it goes in the same ratio on GWP or any take?
We'll update you on that in more detail after it completes. As we mentioned, we do envisage RACQ coming into our existing reinsurance arrangements. We'll obviously model it properly once we have all of the exposure data. I'd expect it to be broadly proportional with our other Queensland exposures.
Yeah, I wouldn't do it as a, I mean, I wouldn't just do it as $3,900 on $79 billion as a high level because I think it will have to be much more, it'll be more complicated than that. Unfortunately, property exposure, the nature of the geography of which we're insuring, it won't just be as simple as the maths on what I just said as a high level.
Yeah, I mean, how it aggregates with our existing exposures, concentrations.
I mean, you've got the cyclone pool.
As well, which is part of that story.
That's part of the reason why we didn't do, we thought about doing guidance. We thought we're not in the detail on this topic, and this topic we want to make sure we're really clear on. It sort of made sense that we provide you what we've provided today. Obviously, once we own the business, we'll be able to model that on exactly the portfolio that's coming in in September, and we'll be able to update the market then based upon actually having access to all that information. We've got what we did as part of due diligence from almost a year ago now, but we want to be able to update the market with the actuals. That was part of our thinking on guidance. That's why it's very high level, what we've said around sort of 10%+.
Great, that's it for me.
Just a comment though, just from talking to Royal Automobile Club of Queensland, I don't think the portfolios changed dramatically. There's a little bit of de-risking that's occurred, I know, on it, but only a little bit. The size of the business is, I've said, at least $1.3 billion. I think it's slightly more than that.
Thank you. Your next question comes from Nigel Pittaway from Citi. Please go ahead.
Good morning, guys. First of all, maybe just coming back to this impact of the acquisitions on margin. Is it still your intention to absorb all the costs of acquisition within the margin? Therefore, is it reasonable to expect that to be marginally dilutive when it comes on board?
I mean, so Nigel, hi. Yeah, that's our plan. Remember, the benefits of the reinsurance is that that sort of just becomes the new number. The cost is not, you know, that's a sort of an immediate benefit that we, you know, we bring that program in. I think you're talking more about the cost of the integration, the technology, the, you know, over the next couple of years, the sort of the integration. A feature of Royal Automobile Club of Queensland is that reinsurance is a big part of the value, the synergy values that have been created, that doesn't have that challenge. It's the cost side.
We're, you know, across our business, we intend to put all of that above the line within the margins and, you know, within the way we've looked at all this and the opportunity and the value creation, that's going to be all within that 15%.
Some of the integration cost is system investment in integration. Some of that will be capitalized. That'll come into margin, but to the extent it's capitalized, that would then be over a few years.
Consistent with what we've done with other portfolio migrations, we want to run it like that. That's sort of the expert to make sure we're really clear on how this plays out to investors.
Okay. Thank you for that. On the sort of unit momentum within Australia Direct, some of that seems to be a bit of recovery in the renewal rates or maybe a small dip down. First of all, is that correct? Secondly, you know, how confident are you that now you've got these new enterprise systems in place that you can actually sort of start taking share off some other competitors?
A few thoughts. Remember, we always talk net, net new customers. Of course, behind that is to be neutral. We've got new customers coming into Insurance Australia Group all the time because we also have, you know, 90% retention. There's 10% of the portfolio that's turning anyway. That's why we use this term net. To your point, the economics here is if we can improve retention a couple of points and acquire a couple of points of new business, you don't get two points better, you get four points better in the net position. That's a real focus, obviously. Existing customers are super important to Insurance Australia Group as well as new customers. We're working on both. The way you described it is definitely right.
The retail enterprise platform, we just sort of use that as a way of wrapping up a whole lot of stuff that we've done within Insurance Australia Group, within the retail business. This is a common platform, TransTasman, Policy Admin, the claim systems all on Guidewire as well. We've got Anix, a new pricing system that sits on top of that, that we're consistently deploying across our retail personal lines businesses everywhere. That's a big package. There's technology that's attached to that, that people can use, and it makes it easy for that customer experience. There are just sort of two parts to this, right? There's all of that, which is great, which is just enhancing the capability of Insurance Australia Group. It's also the distraction point that as we're deploying this capability across our company, we've had thousands of our people trained on it.
In a way, that's been a challenge. We're a long way through that now. What that means is not only have we got the technology deployed, but the distraction of deploying it in portfolios is significantly reduced. What that means is it frees us up to grow. I think we're going to get a multiplier. At the same time, part of the retention has been that some of the material price that has flowed through the industry, call it that, over the last couple of years, driven by inflation, perils, reinsurance costs, all of those things. That's definitely at an industry level coming down. I think that's helping with retention too. Churn in the industry is slowing down.
The sum of all of that gives us confidence on that sort of growth and momentum over the next year or so, where we sort of feel a lot more match fit to run our business, grow our retail businesses, compete in the market, at least hold, at least grow with system and potentially a little bit more. I mean, that's sort of what we're trying to set out as the plans of Insurance Australia Group, supplemented by the Royal Automobile Club of Queensland and Royal Automobile Club of Western Australia acquisitions in Queensland and WA. That's kind of the story of Insurance Australia Group.
Great. Thank you for that. Maybe just finally, on the alternative investment portfolio, I think when that was first set up, we were told to expect a return somewhere between a fixed income and an equities return, and it's obviously not really delivered that in recent times. What should we expect from this portfolio? I realize it's reasonably small, but what should we expect from this portfolio moving forward?
Yeah, thanks, Nigel. Look, I mean, you should expect some returns in probably close to some of the growth assets. There are some things there we've been winding down. For example, we've exited some convertibles that we had previously. I think there were some other alternatives that we exited. The other thing, I mean, it is quite a small portfolio, and within it, we also record there the value of our ventures fund, far mark ventures as well, which this year had a pretty small return. That sort of dilutes it there.
Okay, thank you.
I'm getting a wrap-up. I think we've got no more questions online or in the room. Let me just close with a few comments. I mean, sort of five years ago, we put in place a strategy to create a sort of a stronger and a more resilient Insurance Australia Group. What we can see now, really seeing the benefits of all of that playing through. We really feel well positioned for this next phase of our future. You know, we've got positive outcomes around sort of customer growth and real momentum there. Of course, supplemented by these two strategic alliances that are really going to help us continue to grow our business. At the same time, we've got a strong balance sheet and a really efficient capital platform that we're going to continue to work out.
We're confident about the future and our ability to deliver a targeted margin and ROE of that 15%. What that's doing in our view is balancing the interests of all of our stakeholders. Importantly for our shareholders, all of you, you know, strong, sustainable returns driven by stable margins with low volatility, a real feature of us, capital efficiency that's improving our ROE. What that does is provide organic capital generation within our business to fund our growth. Hey, thanks again for joining us here today. Thank you.