Well, good morning, everyone, and welcome to IAG's financial results for the year ended 30th June 2022. My name is Mark Ley, I'm Head of Investor Relations. This morning we'll have presentations from our CEO, Nick Hawkins, and our CFO, Michelle McPherson. We've set aside plenty of time to answer your questions. If you're watching on the webcast and you'd like to ask your questions, the details of the teleconference are listed on our website. For those of you in the room, I'd ask that you now please ensure that your phones are on silent, and I'll hand over to Nick. Thank you.
Thanks, Mark, and good morning to everybody, and welcome again to our results presentation. I just wanna start by acknowledging that we're holding this meeting today on the land of the Gadigal people of the Eora Nation. I pay my respects to elders past, present, and emerging. With me today is our Chief Financial Officer, Michelle McPherson, who's gonna join me on stage in a moment, together with Julie, Jarrod, and Amanda, and other members of the IAG executive team, and they'll all be available for questions at the end of the presentation.
I want to start with this slide really around the headline financials that we announced on the 22nd of July, and really sort of make sure we have three key themes that we're gonna talk through today, we wanna leave you with as well, which is around we've got some really positive underlying momentum in the results of IAG, and we're gonna demonstrate through that to you today, and that we finished the year strongly, importantly. Secondly, of course, we are experiencing inflation throughout our organization, but we are managing that, and we are on top of that, and we'll talk you through why that's the case. Because of that, you know, we're comfortable with the outlook and the prospects of our company and the guidance that we're providing you for FY2023.
Behind that, what you're gonna see is delivery against our strategy and where we're gonna talk you through in some of the details of what we are delivering, as well as some of those sort of key measures that are giving us confidence on the outlook. In particular, things like customer retention, where some of our retention rates are as high as I can remember. You'll see within our expense ratios that we're managing the cost base of the company well, and of course back to that sort of underlying performance and the momentum that we can see in our business that really gives us the confidence for FY2023.
Sort of before Michelle and I sort of go through the things in a bit more detail, I just wanna sort of start with a couple of really big headline numbers about our performance for FY2022. They are around premiums and what's happening with margins. You'll see with our premiums that we've grown the business in a 12-month period by 5.7%, in gross written premium. Of course, that's consistent with the mid-single digit guidance that we provided the market with, in February.
If we sort of adjust that for some of our business exits, in particular in the IAL portfolio within Jarrod's businesses where we exited a relationship there, together with some adjustments for COVID, as well as some changes that have happened with some of the levies that we collected, particularly here in New South Wales. The underlying run rate of our company is 7.4%. That's the underlying growth of IAG right now. Of course, behind that is predominantly price that's flowing through our portfolios everywhere, but we're also seeing volume growth, particularly within Julie's business here in Australia, within the direct business, where we are increasing the number of customers that business has. We expect that to be a theme going forward. Continued premium type rate increases flowing through right throughout our portfolio.
We also expect to continue to see volume and customer growth, particularly within our direct businesses. That's what gives us confidence around guidance of that mid- to high-single-digit premium growth in FY2023. The other side of that graph is around what's happening with our margins. Our reported margin today is 7.4%, and that's down year-on-year compared to our reported margin for FY2021. There's a few stories there obviously. We know the reported margin for this year has been heavily impacted by perils, what's happening with credit spreads and investment markets. Also, what's happening with the strengthening of the back book of particularly within our liability portfolios had an impact on that reported margin.
We also know there's been a COVID frequency benefit, but in both years, in the lockdown periods, particularly with motor accidents, and that there's been some benefits that are in both years. We also with these sort of pretty significant movements in interest rates, there is some mismatch that impacts that margin. If we look behind that, and then this is what we're showing on this slide, in my view, sort of the run rate of IAG as we start FY2023 is 14.4%. That's on a normalized basis, that's the run rate of our company today, 14.4%, and that compares to sort of twelve months ago, where that number on the same basis was 13.8%.
There's detail in the packs about the specifics of all those numbers. You can see year-on-year an improvement in sort of what I would say is the underlying margins of IAG. In fact, Michelle will step you through that as well, half-on-half, we're also seeing an improvement. We're seeing half-on-half improvement as well as year-on-year improvement. Of course, that's what's really giving, and that's really how we're exiting FY2022. That's what's giving us the confidence on the guidance that we're providing today around FY2023 of between 14%-16% insurance margin.
We'll unpack all of that more, either in the presentations today and or in all the materials that you've got. Just quickly around the divisions of IAG and the three business units. Firstly, within our direct business here in Australia, you know, premiums have grown within our motor book by just over 6%, and premiums have grown in our home book by just over 8%. Predominantly rate, although we are seeing, as I've mentioned a couple of times, customer growth in those businesses. You know, really pleasingly sort of for me, for Julie and the team, our retention rates across motor and home, across every state in Australia are holding or improving. You know, we're really proud of the way, you know, our brands show up when we're needed.
It's been a tough sort of 12-24 months for our business around perils and for our customers. The way we're showing up and the relationship we have with our customers and how we're meeting their needs is really demonstrated through those high retention rates, which are, I think for home and above 95%, they're more like 96%. For motor, they're in the low 90s, which I said before, is very high from my experience in our company over the last 20 years. You know, within Jarrod's business, within our Australian intermediated business, you know, we really are enhancing and building out a stronger operating model. We've made changes to underwriting and pricing and the way we're coming to market, as well as how we're interacting with our brokers.
We've really got a stronger proposition in place than we've had in the past. Average rate across our entire intermediated business is up 9%. You'll see in the packs that the underlying performance of our intermediated business here in Australia has improved year-over-year, and it's got some of that momentum that I've talked about. We know we've strengthened reserves there, so the headline numbers are impacted by that. We've gone back and looked at some of the prior accident years, particularly 2017, 2018, and 2019, in the liability classes. We talked about that a couple of weeks ago, and we flowed that through into the more recent years. Behind that, we're really seeing momentum in this business.
What that's doing, of course, is giving us confidence for Jarrod and his team on delivering on the AUD quarter billion dollar insurance profit by FY2024. We're on track against that, as we're delivering out our plans next 12-24 months. Of course, in our New Zealand business, Amanda and her team, they continue to deliver really strong result for us. Like Australia, New Zealand has been impacted by higher perils in the last 12 months and of course, has been impacted by investment markets. There has been an impact on reported margins. If you look behind that reported margin was 12.8% in FY2022.
Look behind that, what you can see is growth of around 7% throughout that business, and an improved underlying margin at 16.8 for the year. That's an improvement year-on-year. We really see another great result out of our New Zealand business from Amanda and the team. If I just turn to strategy, we just wanna be consistent with how we talk about our strategy with our stakeholders, both internally and externally. We use this slide everywhere. We have the four pillars. We really wanna make sure we have a clear report card of what we've delivered and what we're focusing on around those sort of four key themes that our company is being set up against.
Just to highlight a few of those, you know, within our direct business, we've got 100,000 new customers within Julie's business over the last 12 months. We're really proud of how we've rolled out NRMA across WA and South Australia, as well as the launch of Rollin', a new brand that's sort of meeting an element of the market and a segment that we weren't delivering potentially as strongly as before. We're building out better businesses. You know, it's not just the improvements that we're making in Jarrod's business. You know, we're expanding out our MotorServe business here in Australia, and we're launching more.
We've got more sites around with RepairHub, and that's really helping us with sort of managing some of the inflationary impacts and our customers' experience with a motor repair through the RepairHub businesses in Australia and New Zealand. You know, Jarrod continues to focus his operating model, you know, really clarity of distribution, pricing, underwriting, claims and clarity of accountability in that team as we're driving towards that improved result in that business over the next couple of years. You know, we've launched a lot of new digital initiatives over the last 12 months, and we're really sort of proud of a few things. We've got an online motor claims tracker, so more than 170,000. We only launched it in May.
170,000 customers have had an experience with us around motor claims tracker. We also have significantly improved our claims online claims lodgment process, and that was really important in sort of March, April of this year, where, you know, we had significant perils experience up and down the East Coast of Australia. We had, you know, a lot of our customers impacted by that. We saw something like 60% of all of our claims being lodged through this online claims lodgment. You know, what that's doing, of course, is creating a better experience for our customers when they're interacting with our company. You know, one of the core things we are delivering is our Enterprise Platform. There's a couple of parts to that.
You know, we've delivered out a standard claims model all the way through IAG, Trans-Tasman, and we are in the process of a second part of that. We're more than halfway through that second part of the build of what we're calling of our enterprise platform. We are operating that in WA and South Australia on our NRMA business, and we're having a migration over the next 12- 24 months across to the East, all of our personal lines on the East Coast of Australia, as well as our personal lines in New Zealand. We'll have around 70% of our business on that in the next couple of years. We're really that's what that's doing, is really creating some consistency of our systems and processes within IAG.
In managing our risks, you know, this has been a big focus for IAG over the last couple of years. You know, we've significantly strengthened sort of the risk environment of our company. You know, the systems and processes we've established, as well as a real focus on accountability and clarity of roles and responsibility across our organization, both in my leadership group but how that then is distributed across how we run our company. We've significantly enhanced that over the last 12 months. You know, the package of those initiatives, you know, it really are building out a stronger and a more resilient IAG, and we're really pleased with the progress that we've made. Of course, what that's doing is giving us the confidence on the outlook that we're talking about today.
On that note, I'll hand you over to Michelle McPherson, who's just gonna step us through a bit more detail, some of the financials.
Thank you, Nick, and good morning, everyone. On the slides you can see on the screens now, we've set out our headline numbers. As Nick has outlined, we are really encouraged by the strong premium growth and the underlying insurance profitability for the year. Our insurance profit of AUD 586 million was down just under 42%, impacted by significant natural perils, reserve strengthening, and volatile investment markets. Our underlying margin of 14.6% was slightly below what we recorded in first half in FY 2021, but as Nick mentioned, improved on an adjusted basis, and I'll go into the details of that shortly. That said, I'll pause now. I know many of you hear adjusted and worry what we're doing. We have included Appendix two in the pack that actually sets out the details of that calculation.
Our net profit after tax of AUD 347 million included a AUD 140 million post-tax benefit of the partial release of the BI provision of AUD 200 million. While this provision release is excluded from our cash earnings, we have included it for the purposes of the dividend determination in this financial year. The combination of the factors I've just touched on, together with a AUD 105 million loss on our shareholder funds portfolio, all resulted in the NPAT of AUD 347 million. Off the back of that, the board declared a final dividend of AUD 0.05 per share, taking our full year dividend to AUD 0.11 per share.
Moving forward, I'd expect our dividend payout ratio to be 60%-80% of net profit after tax, excluding, if they come to fruition, any potential releases from the BI provision as we move forward. Future business interruption provision releases, should they occur, are likely to be utilized for some form of capital management, for example, on-market share buybacks or something like that. Taking us to premium, at the risk of being repetitive, I do think it's worthwhile if I spend some time unpacking the growth in our GWP and why it gives us confidence moving forward. GWP growth reflects favorable industry conditions and our proactive initiatives to reprice for the anticipated increases in reinsurance costs, inflation, and our expectation of natural perils.
As we saw in FY2021, there was a modest COVID impact, but this was isolated, in our view, to the first half of the year. We also saw approximately AUD 140 million reduction in GWP from the exit of the IAL personal lines portfolio commencing in November last year, and more modest impacts from the lower Emergency Services Levy and foreign exchange. Most of the underlying growth we achieved was rate-driven, but we have seen some pockets of volume growth. If I turn to our divisions, in Direct Insurance Australia, we lifted premium rates by 5%-6% on average across the year in both our motor and home portfolio, and we delivered short tail personal lines growth of over 1%. Our intermediated business achieved strong rate increases averaging 9% for the year, and retentions have remained solid at 85%.
The business division in New Zealand achieved 11% local currency GWP growth from a combination of high rate increases and broadly flat volume, supporting the overall New Zealand GWP growth of 7%. If I turn now to our underlying margin trends, as Nick explained, we have kept our underlying margin definition consistent and based on this, FY2022 delivered a 14.6% margin compared with 14.7% in FY2021. Both years had a broadly similar COVID benefit. To explain some of the key changes that we've set out in the margin waterfall bridging the two periods, in our results, we did absorb a significant increase in our natural perils allowance, about 140 basis points drag. The sharp move up in interest rates impacted the margin by around 50 basis points.
This impact reflects timing differences related to undiscounted insurance liabilities, our unearned premium liability, and will unwind in FY2023. Largely offsetting these was approximately 190 basis points improvement from other factors, mainly the earning of premium increases, which during the year was higher than underlying claims inflation, supported by higher investment yields and an improvement in our expense ratios. On the right of this slide, you can see our adjusted underlying margin, which removes the impact of the COVID benefits and the discount rate timing impacts. You can see an improvement from 14% in the first half to 14.8% in the second half, averaging the 14.4, which Nick called out earlier. Moving now to our underlying claims. This ratio excludes our perils costs and prior year reserving changes and focuses on our working claims.
The chart also backs out the COVID-19 influences half by half, allowing you to see the trends more clearly. As you can see, these underlying loss ratios have been steadily improving until the slight increase in second half 2022 to 54.5%, reflecting the impact of claims inflation that we've seen across the year. We have responded with higher rate increases, noting there'll always be a delay in the earn through of those rate increases. We're also mitigating the impact of inflation with a range of claims initiatives that are leading to improved customer outcomes, particularly in terms of quality. For example, we now in Australia have 17 repair hub sites, which have improved customer experience through getting cars back to people in a faster turnaround time.
In March 2022, IAG New Zealand acquired full ownership of First Rescue, a nationwide network of over 500 providers and assessors offering 24/7 roadside assistance, accident towing, and vehicle assessments. These initiatives are going some way to helping us mitigate the impact of claims inflation, and will continue to be a major focus for us. To expenses. As we've talked about previously, we're targeting a broadly flat cost base of approximately AUD 2.5 billion and declining expense ratios over the next couple of years. At the business update last December, we shared with you some detail on the dynamic approach we're taking to managing cost growth. We continue to drive efficiency and maintain discipline across costs, and you'll have seen our costs required to manage the group have declined 2.1% in FY2022.
We are investing heavily to transform the business across technology, digital capability, automation, artificial intelligence, with some of these costs being expensed and some being capitalized in accordance with our accounting policies. One of the most material areas of investment is the acceleration of IAG's Enterprise Platform, which plays a critical role in transforming our customer's experience and allowing us to drive operational excellence across the group. You will see the impact of the capitalized technology spend classified as an intangible asset in our capital calculations. We have commenced amortization of the Enterprise Platform costs, and I factored this into our expectation of achieving approximately AUD 2.5 billion cost base in our FY2023 guidance.
Going forward, macroeconomic conditions, including the potential for higher than expected wages inflation, have the potential to present us some challenges in the medium term and reinforces our focus on driving efficiency across the group. The investments we're making in automation, artificial intelligence, and other areas are critical to unlocking these efficiencies and reducing expenses. I'll touch briefly on our peril costs and reinsurance. We finished the year with natural perils of a little over AUD 1.1 billion, which was AUD 354 million above our allowance for the year. The overrun is broadly in line with the market announcement we made in March. Last month, we announced our FY2023 aggregate program, including the purchase of additional financial year drop-down covers to supplement the calendar year drop-downs, which will now apply to event that occurs between now and 31 December.
This sees our current maximum event retention at AUD 135 million post quota share. A combination of market conditions and the additional drop-down protections have seen us increase the FY2023 aggregate deductible from AUD 400 million to AUD 500 million. We're well protected against major events heading into FY2023, or we're in FY2023, given our recent experience, and we've materially strengthened our perils allowance to AUD 909 million, up 19% from the 765 in FY2022. If I move now to reserving. As we announced on the 22nd of July, we ended the year with total prior year reserve strengthening of AUD 172 million.
This has been driven by our commercial liability portfolio, which takes into consideration a range of industry-wide issues that are outside our previous expectations, including a revision of our silicosis average claim size, an increase in worker to worker claims, both late reported and at a higher cost, an increase in implicit inflation allowance on the average claims of 10%-12%. It's important to note that we've taken significant steps to refine our pricing and underwriting decisions to mitigate future impacts for a range of issues, including silicosis and worker injury. It's a key area of focus for Jarrod and his team. We've strengthened some of our assumptions by extrapolating the trends that we've seen in the 2017 and 2018 accident years into the more recent years, and this has driven the step up in our prior period reserving in second half 2022.
We've released a new pricing model, which will reflect the learnings from our reserving actions we've taken to date, together with the work that Jarrod and his team are doing. In recent years, we have ceased underwriting specific high exposure accounts. Further, we've also imposed exclusionary wording on directly impacted industries and trades with potential exposure to silicosis. We believe these steps are prudent to address the increasingly inflationary environment that we're experiencing in the commercial liability market. Moving now to our investment portfolio, where movements in fixed interest rate markets had a significant impact on our FY 2022 results. In terms of our technical reserves portfolio, we aim to match duration with that of our liabilities, which is approximately two years. I've said before the portfolio should be expected to deliver over the long term, the risk-free rate plus approximately 50-100 basis points.
Current market conditions see us at the upper end of that range. In FY2022, in addition to the credit spreads movement impact, we also had discount rate timing impact that I touched on earlier. This is because all of our investment assets are adjusted for risk-free rate movements, but not all of our liabilities are discounted, our unearned premium liability is not. In previous years, this impact has been negligible. However, in FY2022, when the 2-year government bond rate moved from basically nothing at the start of the year to finishing around almost 3%, the impact was around AUD 42 million, which we've called out. It's a timing impact because the unearned premium liabilities will ultimately become discounted in the future as claims liabilities.
So far this year, yields have fallen slightly during July and August with the two-year government bond rate at currently 2.5%. Assuming this remains stable for the remainder of the year with the additional benefit of elevated credit spreads, it's not unreasonable to assume the portfolio will generate around 3.5% in FY2023. This is double the underlying yield we saw in FY2022, about 1.75%. To our shareholder funds portfolio of just over AUD 4 billion, we made a loss of AUD 105 million for FY2022, reflecting negative returns from equity markets, rising bond yields, and credit spread widening. The results for the year did benefit from its defensive characteristics, including our low volatility international equity portfolio, low volatility characteristics of our alternatives portfolio, and the short duration of our fixed interest portfolio.
Finally, to capital. Our capital position remains solid. The CET1 ratio at 30th of June was 0.97x before dividends compared to 1.02x at 31st December. The main positive movement this half has been earnings in the period, which did include the partial release of the BI provision. This has been offset by payment of the interim dividend, an increase in capital deductions, primarily from capitalized technology costs as we progress the acceleration of our investments in technology, the Enterprise Platform in particular. Our insurance concentration risk charge increased at the end of the year despite the reduction in the maximum event retention, which is at AUD 135 million at the moment that I mentioned earlier.
This reflected a prudent approach to capital, which does not recognize the availability of drop-down covers in the ICRC calc, along with an escalation in the ultimate cost of the recent New South Wales flooding event. Finally, I am pleased to be able to confirm that we did receive the proceeds from the sale of our Malaysian business in July, and that contributes about six points to our CET1 ratio. With that, I'll hand back to Nick for some closing comments.
Thanks, Michelle. You know, as I said at the beginning, you know, we've entered FY2023 with some strong momentum in our organization, and really the FY2023 guidance that we provided you reflects that. In terms of premiums, you know, rate is flowing through across our portfolios across Australia and New Zealand, and we also do expect our customer growth to continue in this current financial year. With margins, of course, we do have some headwinds with increased perils allowances, and managing inflation throughout our organization. But against that, we also are seeing rate flow through our portfolios, and we are getting the benefit of higher investment returns. Really the package of that gives us the confidence on our margins of that 14%-16% that we're guiding to for FY2023.
Finally, I just want to acknowledge it has been a tough time for investors in IAG over the last couple of years, but we are confident of our ability to run our business and for our people to deliver against what we've set out as our medium-term criteria of how we wanna run our organization. That's really setting our business up to deliver a margin of between 15%-17% and an ROE of between 12%-13%. In FY 2023, we're on the way to delivering against that medium-term financial proposition of IAG. We know that some of the issues we've had to deal with have been confronting for us as an organization. You know, we've had to adapt and change the way we actually run our company because of that. You know what?
You know, our strong view is that we've materially changed the risk environment within IAG, and we have much greater clarity of accountability on how we're running our business going forward. You know, I hope you can see that we are executing on our strategy, and we're delivering that now, and that's really giving us the confidence in the guidance and the momentum that we're seeing within our organization. You know, we're building out a stronger and a more resilient IAG. With that, Michelle and I and members of the management team are more than happy to take any questions. Why don't we start with those in the room, and then we'll go to the phones and the video.
Cool. Andrew from Macquarie, thanks for taking my questions. The first one is in relation to slide six, the 100,000 new customers in DIA. Can you just remind us, is that gross or net, and how much of that was from the movement of the HBF portfolio across divisions?
Thanks, Andrew. I mean, there's an element of growth which is coming as some of those customers have migrated into the NRMA brands. You know, roughly half are new customers to the IAG world. What we're seeing there is sort of through the combination of rolling out NRMA into WA and South Australia. These are new customers to the IAG Group, together with some of what we're experiencing with Rollin'. You know, that there's real momentum there in growth of our business.
The second one, I find that when people talk about claims cost inflation, it's all about the percentage, but nobody asks about the dollar starting point. For home and motor, do you have a view on how your average cost of repairs compares to industry averages? Like, are you starting from above average? Are you starting from below average? Just that context would be useful.
Yeah, sure. Of course, we have some benchmarks, obviously, between third-party repairers and personal motor and our own repair business. Typically, you know, we can see that the average cost of a repair through an IAG shop versus a third-party shop. We can see there's a cost advantage in particular type of repair, probably 10% lower. Our view would be our starting point is pretty good. There's definitely a shelter that's available to our customers through the fact that some of those supply chain arrangements we have in place through motor, but also through some of the property arrangements that we have in both Australia and New Zealand.
There are some shelter there, but then against that, we are seeing that inflationary pressure in both our property and motor classes.
The final one from me. Are there any scenarios where you bring back any of the risk from the 12.5% quota shares onto your own balance sheet? Dial that back.
I mean, of course, there are some scenarios where that could happen. I mean, as we've talked about, you know, many times before, we sort of see that as sort of a strategic part of the capital platform of our company. You know, we're sort of comfortable with the way we're funding our organization, traditional reinsurance, quota share, debt, equity, and sort of the blend of that package, which is the capital platform of our company. You know, never say never, but to any of those elements and portions, but, you know, we're comfortable with the current way we're structured.
Hi, Nick. It's Siddharth Parameswaran from J.P. Morgan. A couple of questions, if I can. Firstly, just on the trade-off between margins and volumes.
Yeah.
I mean, you're pushing for 1 million customers.
Yeah.
Between CGU and Direct and New Zealand. Obviously, as you said, got 100k to date. Just wondering how you see yourself on that journey. You know, there's been a distinct change in IAG's rhetoric over the last few years on the push for volumes. Just we're in a very high inflation environment at the moment. Things are uncertain. You know, an observation I would make just on how you're pitching things is still that volumes still matter very much. Just do you have a view as to which one you're more cautious on at the moment?
I mean, hi, Sid. I mean, it's a package. I mean, we're trying to be really clear on those medium-term. It's a bit confusing. Got people in the room and on the video now. You know, we've got, you know, we wanna be clear. We've got these medium-term financial aspirations, 15%-17%, 12%-13% ROE. You know, we're. That is the sort of the financial package that we wanna deliver against. Within that, of course, we've got to manage growth as part of that delivering on that package.
I mean, some points that we make is we've got wonderful brands that we are seeing genuine customer growth to the IAG enterprise over the last 12 months, and we have confidence in the team on continuing to deliver that. We can see, and I mentioned this at our return. Of course, when we talk about growth, that's a net number. So obviously, higher retention makes that, you know, lowers the net new customers to the group. You know, we're seeing very strong retention rates across our company, as I mentioned before, you know, higher than I can really remember. The brands are very strong across our business. All of that is very helpful.
You know, it's a thousand tactical games I think that really are being played about using the brands, using the scale that we have, some of the, you know, the financial efficiencies we have in some of the supply chain as a, you know, the tactics that Julie and Amanda and Jarrod and the teams are sort of using in how they're running their business to grow the organization. You know, we're pretty confident we can deliver both genuine customer growth as well as those medium-term financial aspirations. Really, the guidance for FY2023 is just on the way to delivering that.
Okay. Thanks. Maybe if I could just ask a question on slide 19, just on the improvement in margins that you're flagging into 2023. I mean, you kindly break up the natural perils allowance, which is quite obvious as to the drag that'll have. Just the other components, you flagged three components of the higher investment yields, the rate increases, and claims inflation. I was wondering if you could just comment on just those last two in particular, you know, what you saw on claims inflation on average through the last year and also just, you know, just the rate increases that you think you're actually gonna push through and earn through.
Yeah, sure. I mean, Sid, it might be a good opportunity. I mean, I'll make some high-level comments, but I might ask, we've got Julie and Jared and Amanda just sort of might break that down in some of the portfolios. Probably others will have similar questions. We might sort of talk about that at a bit more specific. As a generalization, you know, we're sort of seeing inflation flow through our company at that sort of mid to high single digits everywhere, you know, in various forms, and we'll talk through the detail by each portfolio and class of business. We really are experiencing that.
We are having some shelter, as I mentioned, but we're definitely experiencing that together with perils cost, together with reinsurance costs. The flip of that is we're also seeing, you know, rate flow through the portfolio. It's happening already. It's been happening in the last 12 months, and I expect it to continue to be flowing through. Sid, it might be useful if I just sort of ask Julie to start with, and Amanda, and then Jarrod, just to make some comments specifically on each aspect of our businesses, because the story's a little bit different across the organization. Julie?
Sure. Thanks, Nick. I am gonna talk in percentages, so I apologize in advance. If we have a look at across our home and motor portfolios, just wanna be very specific about our strategy in the first half of the year. We did not chase growth in the first half of the year. We understood that it was an uncertain environment, and we worked very carefully to make sure that we secured the customers we had, such that the retention rates are high and that we got very comfortable with inflation levels in our portfolio. Up until about March, in motor, we were flowing through around between 5%-7% inflation in motor, and in home, about sort of 6%-7%-8% inflation in home.
In March, April, when we observed what was happening on the Eastern Seaboard and also reflecting on the experience that we had in 2011, 2012, when we saw similar types of events and the impact of perils costs and reinsurance costs on rates, we started moving our prices up at that time. We're now pushing through on motor, somewhere between 7%-9%, and in some states up to 11%. In home, between 8%-10%. We're very confident that that is sufficient for us to cover right now, with what we know right now, the inflation that we're experiencing and those increased costs. The most important thing for us is to be able to earn that through quickly.
The other point that I would make is that when you read sort of external indices and so on, the basket of parts and the basket of materials we use are different to the total industry benchmarks. In motor, we're obviously a big parts acquirer, and those prices are going up sort of 5-6%. Repairhub gives us really great insight into what those things actually cost. Paint we're holding at pretty low levels. Wages, we know are up 5-6% because we pay them to our Repairhub staff. In terms of property, we're the biggest acquirers in non-perils of things like, again, paint and plasterboard. Relative to steel, which is moving 35%, the costs for those materials that we acquire are much lower.
We're very confident and comfortable that we're earning through appropriately to be able to achieve the performance that we've said. We're very much around growth that is profitable. You'll hear Michelle say that all the time. It's profitable growth for us. We're confident with the systems and processes we've got in place to be able to flow additional rate through quickly if we need to.
I thought it might just be useful just to get everyone's views sort of on this topic, because I know that this is gonna be a theme of, you know, how we're going as an organization. Thought it might be useful for Amanda and Jarrod just to sort of flow it through, because we generalize, and often there is more specifics, which is I thought it'd be useful to do it this way.
Thanks, Nick. Thanks, Sid, for the question. In New Zealand, we're seeing around 6%-8% in our motor book in terms of inflation, around 8%-10% in our home. We're also seeing around 10%-15% in our commercial book. I'll just touch on things that might be slightly different to Julie. I mean, obviously we've got the benefit of Repairhub in New Zealand. We're expanding that out, and we're seeing a significant uplift in customer experience, as well as a great way for us to manage claims inflation. We're seeing around 76% of our motor claims go through either our Repairhub or our preferred suppliers, and that is giving us an advantage in terms of labor rates as well as the scale that we can apply to the parts purchasing.
In home, about 60% of our home repairs go through our contracted builders. Now, we have agreed labor rates there, and we also have that scale where we are purchasing materials at a better rate. Again, we're pretty comfortable with where we're at. We've got a very good view of what inflation's looking like, and we are able to push through rate and have done in the last 12 months. We're starting to earn through of that now.
Okay. We flip into the commercial classes because there's a slightly different story there as well. Jarrod?
Yeah. Thanks, Nick. Thanks, Sid. Yes, on inflation. We're looking at high single digits for inflation up to 10%. The way that we're addressing that is particularly around pricing, and our pricing is covering inflation, but we also have more levers in the commercial space, particularly around deductibles. We have a lot of clients that are looking to manage the cost as they're facing into inflationary pressures. We are moving deductibles quite considerably. Also then looking at the insured values that our insureds are declaring, particularly in regards to the property prices and how they're building those increased replacement costs into the declared values, and then looking at that from a premium pool perspective.
In addition to that, because we aren't as homogeneous on a claims or a risk basis as personal lines, we've established an inflation task force within our pricing division to really focus on that and ensure that we address any changes quickly in our pricing and our risk acceptance.
Thanks, Jarrod. Thanks.
Thanks. Thanks very much for that detailed response.
Well, I know this is a topic that we wanna talk about, so I thought it was useful to have each of the businesses talk about it specifically.
Absolutely. Okay, and just maybe just on some of the mitigation activities you have to actually contain inflation.
Yeah.
I mean, you talk about AUD 400 million of savings you're targeting over a few years. Just where are you on that journey, and could you give some color on what benefits you've seen to date and what's ahead? What are the key things that'll deliver those savings?
I mean, there's sort of a package of things, and that's an ongoing program of work. You know, some of the things we're definitely doing, just the supply chain and you sort of heard some examples already around the benefits that we get on managing that supply chain and being able to leverage the scale more on parts and so the insight we get from owning our repair business, and we have them in both Australia and New Zealand now. So they're quite significant in relation to our business model, and we're seeing that flow through. I think there's some real advantage in some of the digital technology in and around the claims experience that we've seen.
We've seen over the last six months that I mentioned that we had something like 60% of claim lodgements come through online, particularly when we had the surge in March, April, on the East Coast of Australia. That's, you know, really one, creating importantly a better customer experience, but, you know, sort of makes some of the systems and processes of how we run our company, together with some of the notification and the claims tracker that I mentioned as well. That's, you know, that sort of takes some of the volume out of the call centers and improves the customer experience at the same time around people just sort of being aware of where they're at with their experience with us.
I mean, there are some examples, and I think what we're gonna do, you know, this is ongoing. We see opportunity. I mean, we've talked about AUD 400 million within the direct business, but, you know, we are looking at sort of enterprise-wide, how we can continue to look into that, our whole claims process, essentially, and supply chain, and how we can continue to deliver better experience for our customers, and how we can continue to look at the cost structure of that and really make sure we're getting that as efficient as we can. There's gonna be more coming on this, Sid.
Sorry, just a question. Where are you on that journey? Just on the 400? Are you at the start, or are you?
Yeah, I mean, at the beginning of that. You know, we're scaling up things where the financial impact of that, there's an element of that in our results at the moment. You know, over the next few years, we'll be talking about that a lot more. Any more questions in the room? No? We'll go to the teleconference.
Thank you. Your first question comes from Kieren Chidgey from Jarden. Please go ahead.
Morning, guys. A couple of questions, if I could. Maybe starting by picking up on that last discussion from particularly around the commercial business and some of Jarrod's comments around inflation sort of running very high single digits, close to 10%. You know, and you're pricing at 9% there currently. You're facing into higher reinsurance costs, higher CapEx budgets, sort of continued inflation pressures through FY2023. Just hoping you can unpack what you see as sort of the drivers to get that underlying margin up from 5% to that 10%+ range over the next two years.
Hi, Kieren. I'm just gonna throw straight to Jarrod Hill on that one, who's sitting in the front row champing at the bit to answer that.
Thanks, Kieren. I mentioned the levers we're pulling purely in regard to inflation. There's a number of strategies that we're delivering that will change the shape of the portfolio. We're talking around optimization, portfolio optimization. We're shaping that portfolio in line with our profitability targets and our risk selection. That really drives everything we do, from our budgeting process to our go-to-market strategy. We proactively shape that portfolio to deliver the result. Yes, the inflationary pressures are moving and changing. That's why we've got that task force. Then that feeds very quickly into pricing. We're really agile in pricing. Looking at deductibles, how do we move deductibles?
Just to give you an idea, one data point in regards to our liability portfolio, we've doubled deductibles over the last two years in that portfolio. Another lever to manage inflation. Then we're looking at efficiencies through our claims system as well. How do we manage claims to make sure we're getting not only best outcome for customer, but we're managing the expense there. It is more than just rate, and all of those levers come together to ensure that we make the margin improvement that we're focused on, and that is really the focus, simplicity and margin improvement. We also look at the expense side of the business as well. It's more than just rate. You know, we've indicated that nine, that will continue. That's what we've achieved on average in the last quarter.
That plan is to continue. It is more than just rate that we'll use, Kieren.
Okay. Jarrod, in the profit lens, I think from memory, the 10%+ is a 2024 target. Are you expecting sort of a gradual improvement to be shown through the 2023 year on the way to the 10%?
Yeah, certainly, Kieran. Obviously, with the strengthening of our liability portfolio, that's fed into our loss pick for this year, which is slightly above what it was in the original five-year plan. There will be a gradual improvement. We really start seeing the underwriting actions that we implemented in the 2022 year, also 2021, really starting to take traction this year, and then we'll deliver the AUD 250 in 2024.
Thanks. Second question on sort of expenses. You know, very good job this year, fairly flat cost base across the organization. We're seeing that translate into good expense ratio and leverage. Clearly, as you've articulated across a number of areas, higher wage inflation coming through. Flat around that AUD 2.5 billion mark is still achievable into the 2023 year.
Thanks, Kieren. What I tried to call out when we talked about expenses on the slide is the team have done a lot of work on our budgets for FY2023, which underpin the guidance that we've provided. Those budgets still demonstrate, even in this higher inflationary environment, that we will deliver a result for our cost base of approximately AUD 2.5 billion. As I've said before, please don't translate that to 2.500, so but in that order, you've seen this year we're at AUD 2,531 million. You know, given the commitment that I can see across the organization, given the choices that we're making, I'm comfortable with that underpinning our FY2023 guidance.
I did call out when I spoke to the slide that it'd be naive of me to say there's not pressure in the system given some of the economic forecasts that we're seeing and what that might mean for 2024 and 2025. What we're doing as a management team by having our five-year ambitions, detailed three-year plans, looking at making prioritization choices to drive the efficiency and effectiveness that give us the best possible chance there. That's probably the level of detail I can provide at the moment. I don't wanna be naive to the pressures that are in the system, but I'm confident in the plans that we have in place, and we're really taking a medium-term view at that.
Thanks. Just a final question for you, Nick. Looking further down the P&L, you know, this year we've seen AUD 37 million of cumulative losses from MotorServe and some of the strategic investments you've made over the last number of years. When we saw sort of, I guess, this issue come through a number of years ago, I think the commitment to the market at the time was those losses would moderate or otherwise those initiatives would be closed down within a reasonable timeframe. Just wondering what the update in terms of your thinking there is on the outlook for those, given that there's still clearly a fairly significant drag on the group P&L.
Yeah. Thanks, Kieren. I mean, we are integrating some of those initiatives into our business model a lot more now than we were a couple of years ago. also at the same time, we're probably also looking at some other things. as we're sort of grabbing things and sort of incorporating them into how we run our company, then we're probably also looking at other ideas about how we can where to invest and businesses that we think over time can support our core insurance business. I mean, I'm probably thinking that sort of outcome is roughly where you should expect it to be for the next year or two. some of the outcomes of that are actually probably not gonna end up appearing in that line.
They're gonna appear in some of the more insurance lines around claims and how we're procuring things and how we're thinking about relationships with partners and how we're bringing to life some of the technology investments that we've made. They're gonna end up, the benefits of them are gonna end up appearing in the insurance business. I think if you're sort of thinking about the forecast for our company, something in the order of that sort of cost I can see for the next couple of years at the moment.
I guess the question is a little bit more.
Net cost.
Yeah, a little bit more strategic if there are.
Yeah.
You know, clearly there are benefits of those businesses.
Yeah.
Coming back into the divisions. You know, those losses, you know, should we be thinking about them as above the line businesses impacting margin? Do they flow into pricing given that they're obviously adding some benefit back into those divisions?
Kieren, we're also doing is essentially moving them into the business as well. Actually they are in the insurance results, some of those businesses now. I mean, I consider this. I mean, we're very focused. You know, where we're and I mean, I know companies have to be very careful here that they sort of don't go off and have investments in things that are unrelated to their businesses. You know, we're very focused on strengthening everything we're doing is about strengthening our core insurance business, where we're only doing things that we think can strengthen the core insurance business, can strengthen our relationships that our customers have with our organization.
The technology that we use to engage with our customers or run our company or insight that we get. I mean, that's sort of the parameters of how we're thinking about investing there. Yes, they really are in support of the insurance group.
All right. Thank you.
Thank you. Your next question comes from Nigel Pittaway from Citi. Please go ahead.
Oh, good morning, guys. I'm afraid I'm gonna return the conversation back to inflation, but I mean, it just strikes me that we've heard all the divisional heads sort of talking about pricing being ahead of claims inflation. Nick, you said that, I think it was you that said overall for FY2022, you thought you were pricing it ahead of inflation. If we do look at the sort of underlying claims ratio trends on slide 12, it does suggest that maybe in the second half, inflation ran away a bit more than you expected, and therefore at the moment, you've gotten a little bit behind inflation. Is that a correct interpretation?
I mean, Nigel, that my only comment. We are comfortable that we're getting insight into what's happening with inflation. This is a big topic, as you can imagine, within our organization, and we are comfortable that we're using that insight to price our business. Of course, there may be some small earning timing differences associated with this, as we're seeing, you know, rise in inflation, seeing it through the coming through claims and other insights that we're getting and repricing the business. You know, there may be some timing differences associated with that. I think that's quite modest at that point, though. You know, this is I.
You know, from everything that I'm aware of, and the insight that we're getting, which is quite a lot directly from our business and the supply chain and the businesses that we own, we're getting a lot of information coming into the company. We're then reflecting that through in our pricing.
Okay. When you're looking at sort of 12 months to do your pricing, are you assuming sort of inflation stays where it is, or are you actually assuming that sort of at some stage it cools a bit and therefore you factor that in or?
I think.
Can you talk a bit about what you're doing?
Yeah, at the moment, I think we're assuming that it's fine. This is the run rate of inflation. You know, that I think to answer that directly, that the current environment persists for a bit longer. We're not assuming a drop-off of inflation over the next 12 months.
Okay. When you look at your sort of underlying margin guidance for FY2023, I mean, is claims inflation the biggest wind factor in that, do you think?
Um-
In terms of.
I mean, perils probably are in reality. You know.
Yeah
The assumptions around perils. The perils in investment markets, actually, Nigel, I think are, you know, there's more volatility in those than inflation. You know, we're you know, we've got insight, we've got a good handle on it, we're repricing. There might be some small timing differences, but I think we can manage that. I think the, you know, sort of goes back to the inherent volatility of the insurance company and, you know, we've lifted perils allowance by 20%. You know, there's still volatility around that and investment markets. You know, there's still capacity to create volatility in that reported margin from that. More on the credit spreads than the raw investment income. Sorry, on underlying. Is that your question?
Yeah.
Yeah. If I went to underlying
Yeah
I think that's right. On underlying margin, it's the volatility probably from inflation versus pricing, but I think that risk is quite modest, actually.
When you're thinking about sort of growth in GWP and moving forward, how does sort of the higher exposures from things such as higher second-hand car prices, higher new car prices, et cetera, how is that flowing through and what sort of contribution are you expecting that to make?
A little bit. Effectively, you know, the sort of sum insured, the quantum, the value of the asset has actually gone up. So that's a little bit of that's been reflected in our pricing going forward. That's an element. I mean, the core thing that we're trying to talk about, as you can tell, yes, we're talking about GWP growth, and that's pricing, and an element of that is sort of the sum insured, which is your comment then, and other inflationary experience and perils. We're also really trying to be clear around genuine customer growth as well. The you know, actually growing the network of IAG across Australia and New Zealand. That's and that is very important as well to us.
I think the other thing I'd just add to that, I know the team are very alert to and focused on affordability for customers, and so choices around things like level of deductibles and those sorts of things. You heard Jarrod touch on that, but I know it's happening in Julie and Amanda's business as well, speaks to some of what's factored into that as we look at GWP growth going forward.
Okay, thanks for that. Maybe just finally, I mean, the capital position obviously has been helped by Malaysia and, you know, there's always the chance of BI provision releases moving forward. I mean, can you talk about some of the other drivers? 'Cause, I mean, obviously activity pre-Malaysia, it was towards the low end. What do you sort of expect to drive that, the capital position moving forward? Are there any special factors other than the usual ones?
There are no special factors, but I think I did try to call out when I was talking to the capital slide, that you're starting to see the impact of the capitalization of our investment in accelerating the Enterprise Platform investment. That's software which is classified as an intangible, which we can't count for capital. Then for those of you that like to go to the detail, you'll actually see it in the intangibles note in the accounts. You can see an uplift from about AUD 140 million to a bit over AUD 200 million, from memory. I've not got the exact numbers right. But you'll see that there. That obviously then amortizes as we move forward and those systems come into use and go live.
You'll have seen the amortization charge is pretty flat from year to year. You'll see that kick up, but I have factored that in when working with the teams in coming up with the guidance around costs for FY2023. So that's into those numbers. The other thing is our ICRC is at about AUD 211 million, up from, I think it was AUD 169 at 31st December, AUD 192 last year. Couple of factors in that I called out. I know some of you have a quick rule of thumb of saying the ICRC is our maximum event retention. That's actually not quite right. Sometimes that turns out, but there are a couple of different measures that we have to use when we're calculating that. So they're probably the key call-outs on the capital, Nigel.
Nigel, the only other thing, let's not lose sight of our tax losses that are sitting in the balance sheet.
Yeah.
That, you know, that will unwind and when we'll effectively create capital as part of that unwind.
Yeah, they've remained broadly flat because while there's been earnings, we've got unrealized losses on the investment portfolio that's going the other way at the moment. They're about AUD 600 million.
Okay, that's great. Thank you very much.
Thank you. Your next question comes from Matt Dunger from Bank of America. Please go ahead.
Oh, thank you very much for taking my question. Just on the 20% higher perils allowance into the 1 January renewal on reinsurance, how confident are you that you get the AUD 250 million cat deductible away, and are you considering calendar year drop-downs as well, just to clarify?
I'm always cautious to say I'm confident, given we've got to complete negotiations with our reinsurance partners. Obviously a range of factors are taken into consideration in setting the allowance, including our thinking about that level of deductible and the drop-down coverage. We are confident in our expectations of reinsurance costs, and how that interacts with our perils allowance that we've called out in our guidance. I know I've not directly answered your question, but you know, we're not gonna negotiate until later this calendar year, so I'll just be a bit cautious there.
I will make-
Okay, thanks. I understand. Yeah.
I mean, we'll make sense, we'll make rational economic decisions here.
Yeah.
There's a big interaction between perils allowance and cost of reinsurance, obviously, as Michelle said. You know, we don't wanna be fixated on something and do something no matter what. That doesn't sound like a good way to negotiate something. We'll just be rational in that. At the moment, you know, it feels like we'll be able to place it.
Great. Thank you very much. If I could just follow up on the target debt ratio. You moved away from the 30%-40% debt to total tangible capital ratio. Are you talking about AT1 and Tier 2 issuance? Can you talk us through the rationale of that and any flow on for capital and ROE?
Yeah, I think and I've spent a bit of time and looked at it with the team, and really given that we're not a user of senior debt, but we use debt that actually can be classified as a form of capital, and it's guided really by the expectations around component of PCA that might be reasonable. It's probably not the right metric for us to be measuring ourselves against. We're more focused on what it means in terms of things like our Standard & Poor's rating or those sorts of things. I don't think you should expect anything different other than as our PCA requirement grows, you'll potentially see some movement in the level of the Tier one debt that we may have linked to that, is probably the way to think about it.
Okay, thanks. No ROE optimization available from this move?
I'm a CFO, so I'm always looking for ROE optimization, is what I would say. You know, what we signaled there, it's not anything to do with that per se. We're obviously very focused on our capital strategy and having the right mix of capital, across our organization and thinking about the ways that we can contribute to delivery of that 12%-13% ROE target we have, or over the longer term, potentially enhance that.
It's not really a move.
No.
I think it's really more we're sort of updating a practical way of how we're running the company.
Yeah.
I don't think there's anything more into it than that.
Thank you very much.
Thank you. Your next question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Good morning. I wanted to ask my first question just around the top line guidance of mid to high single digits. Because it sounds like pricing is rising roughly at 10% across the book. Can you talk a little bit about then what is preventing top line from hitting double digits? It would seem that New Zealand EQC reform is one area, but can you talk about some of the other factors why you're not more confident of getting double digit top line?
Andrei, hi. I mean, we might. I mean, we sort of said New Zealand's growth was around 7%. Jarrod, within commercial, was sort of 9%. Julie, a range of sort of high single digits. You know, that's flowing through everywhere, and together with some additional volume growth is also what we're experiencing. We're sort of running off now the IAL. When we've gone with mid- to high-single-digit growth, you know that we're comfortable with that. But you know, it's in that order. There's nothing else that we're leaving out of that. You know, it's really the story of what you just heard from each of our businesses, and we're assuming some customer volume growth as well.
Thank you. My second question, I wanted to ask around the motor unit growth. You said you were very, you know, I guess conscious of, you know, not chasing market share, but it looks like Suncorp did about 1% in growth in motor last year. I actually did about 1%. Is that a position that you're happy with, you know, given your targets to grow customer numbers?
Yeah, Andrei. So, you know, we are. You know, our aim is to grow our business by 1 million customers over the next couple of years. We've just got to get going on that. You know, I'm a believer in momentum. We're seeing a little bit of that within Julie's business here in Australia, you know, in some of the NRMA, and we've also grown volume in our RACV partnership in Victoria. We see opportunities similar in New Zealand, and sort of we just want to get going on it. You know, we're very conscious to Siddharth Parameswaran's question around margin growth and the. You know, we've been very clear on the financial metrics that we're running the company on.
You know, we, you know, year-on-year, we wanna see more momentum around what we're doing with growth. If your question is are we comfortable? I mean, yes, we've just got to start, and we need to have net customer growth in our organization. You know, we wanna grow by 1 million over the next couple of years.
At the risk of sounding like a cautious CEO, it was a five-year target mentioned in December for 1 million new customers that I know the business is working towards. We might have just got a stretch target from the boss, but we'll see how we go.
No. An appropriate qualification. Thank you, Michelle.
Thank you. Thank you. If I can ask one of my third final question, just look around a potential La Niña for this summer. Is there any? Are there any proactive steps that, you know, IAG can do to help their customers prepare to reduce any risks? It seems like it's been very well flagged in advance. It is a risk. It's a genuine risk, and there is already, you know, of the BOM calling for a wet winter. Are there any proactive steps that you can do to manage your risks in the meanwhile?
You mean the question is around how can we work with our customers and create a greater degree of preparedness for if we end up.
Yeah
having some more wet weather over the next few months? I mean, yes, we can.
Yeah.
You know, we're trying to find greater interactions with our customers, particularly within our direct businesses. Communicating with them, making sure they're understanding you know what around things around safety. You know, things like gutters. You know, and avoiding maintenance of housing to ensure that potentially strengthening the weatherproofness of a particular property. I think there just needs to be a coordinated approach, is the reality, between us, local, state, federal governments. I mean, there's you know
I mean, I think you know that we have a very strong view around mitigation that yes, there are things we can do tactically now that we're working through with our customers, but the big strategic issue here is we need a coordinated approach across our countries around strengthening, you know, investing in mitigation, where we develop our properties, strengthening building codes. You know, investments in infrastructure like levees where it makes sense to really, you know, create the stronger resilience of our countries. That's unfortunately a medium term thing, isn't it? You can't just make that happen in the next six months. Definitely tactically, but we wanna be a very strong voice on the strategic as well, which is, you know, really important for, you know, the long-term viability of our countries.
Thank you.
Okay. I'm looking around the room and on the video. I don't think we have any more questions. I mean, just some closing remarks from me. I mean, you can tell we're pretty pleased. You know, it's been a tough year, but we can see what's happening in our organization, and we can see the momentum that we're creating, right? Of course, we understand the environment we're operating in around inflation. We've got a lot of insight coming in, and we are being very careful with how we work that through and how we run our company. That's a very important feature right now for us.
Because of that, you know, we really do have the confidence in the outlook that we've been talking to you about. You know, we can see that mid- to high-single-digit premium growth over the next 12 months. We can see margins improving into that 14%-16%. Importantly, we're on par, we're on track to deliver those medium term targets, which we've also talked to you about. You know, we've got a stronger, more resilient company today, and that's only gonna look better again in 12 months. Hey, thank you everyone for joining us in the room, which has been great, as well as also on the video. Michelle and I and others will talk to you all soon. Thank you.
Thank you.