Good morning, and thanks for joining us at IAG's results presentation for the year ending thirty fifth June two thousand and twenty one. We're joining you today from Kamaragal and Wauramai land, and I wanna pay my respects to their elders past, present, and emerging. I'm joined today by our chief financial officer, Michelle McPherson. Michelle and I are delivering this presentation from our homes, supported by our IAG team also at their homes, recognizing the COVID nineteen restrictions that are currently in place across Australia. I'm gonna start with some high level comments on the numbers that we shared with you at the July.
I'll then hand over to Michelle, who's gonna talk through the financials in a bit more detail, including our capital position and dividends. And I'll come back at the end and just cover guidance for FY '22 in a bit more detail on our strategy being delivered over the next couple of years. I'll just start by making some high level comments. As I outlined with the preliminary results released in July, we have been encouraged by the sound underlying financial performance that IAG has delivered during the year. I'm pleased to share we're paying a final dividend of $0.13 per share, given the level of cash earnings that we've generated over the twelve month period.
And despite this performance, the company has delivered a loss, driven by a number of disappointing unusual items. But these relate to historical issues that we've identified, we're provisioned for, and we're rectified. In this regard, we've made significant investment to lift our risk and operational capabilities to help reduce the risk of these types of issues occurring again. I'm confident that the organisational changes that we've made will drive improved performance from IAG, setting ourselves up for success over the next three to five years. So just a snapshot of the numbers that we've delivered.
We grew our premiums by just under 4% over the last twelve months. This was a pleasing result, maintaining the momentum that we shared with you at the half. We've also delivered a resilient underlying margin performance, which was a bit lower than the first half when we did benefit from lower motor vehicle claims frequency relating to the lockdowns. We've made no changes to business interruption provision that we established last November, and Michelle will give you a bit more color on that. And our capital position is strong and which will be further assisted with the sale of our Malaysian business.
And finally, we've reintroduced guidance, given our confidence in how our business is performing. We've made significant progress on our new operating model, and we're pleased to be reporting two different segments for our Australian business. I'll just focus on some of these divisional highlights. Our direct business in Australia continues to operate strongly. We grew rate and volume in our direct business.
We delivered healthy underlying margins that were stable at just under 20% in both the first and the second halves, excluding COVID-nineteen adjustments. We've previously indicated that our intermediated business has been reporting unacceptable returns. While margins still remain low here, we are moving this business in the right direction, with an underlying margin of around 4% recorded across both halves, helped by high helped by high rate increases that are starting to flow through that business. And finally, we also held our normalized margins at healthy levels in our in our New Zealand business. The lower second half underlying margins of around 14% really have been driven by some slightly higher costs and some elevated large loss experience that we saw.
I'll now hand you over to Michelle, who's going to provide a bit more detail on the financials.
Thanks, Nick. Good morning, everyone. I'll start with a few key callouts from the headline numbers you can see on this slide, most of which were shared with you when we released our preliminary results in July. As Nick has outlined, we're encouraged by the resilient underlying insurance profitability and premium growth that we delivered in FY 2021. We also reported an almost 500,000,000 positive swing in the investment income line driven by the equity market recovery we saw during the year.
The $427,000,000 net loss after tax included the impact of our business interruption provision that we recognized in the first half. It also reflected additional provisions in the second half and the impairment loss we recorded on the upcoming sale of our Malaysian business. In line with our usual practice, we have excluded these unusual items from cash earnings, which was $747,000,000 for the year. Gross written premium momentum remained relatively strong with growth of 3.8% across the year. Most of the growth was rate driven with some pockets of volume growth.
A few highlights I'd like to call out. In Direct Insurance Australia, we lifted premium rates at mid single digit levels and experienced some volume growth in motor and CTP, partially offset by volume losses in home. Our Intermediated business continued to achieve solid rate increases averaging 8% across the year as a consequence of deliberate actions we've been taking across certain portfolios, and this did constrain our premium growth. Our New Zealand business delivered low single digit rate increases and 2.8% overall GWP growth in local currency terms. To our underlying margin performance.
For the full year, this was reported at 14.7%, lower than 16% in FY 2020. The first half included a net COVID-nineteen benefit of 60,000,000 to $70,000,000 mainly due to lower motor claims frequency, as Nick's touched on earlier, whereas there was no net benefit in FY 'twenty. Also, as we shared this time last year, IAG no longer assumes a 1% release from reserves in calculating the underlying margin. The COVID-nineteen difference, the change in our normalized reserve release assumption and lower interest rates explains most of the full year change in margin. Looking at the half on half change, the underlying margin reduced from 15.9% to 13.5%.
If I exclude the first half COVID-nineteen benefit I referred to, the first half adjusted underlying margin was around 14.2%. There was negligible net impact from COVID-nineteen in the second half. The reduction to 13.5% reflects some additional expenses in Australia and New Zealand, which are not expected to recur. We did see elevated large losses in New Zealand in the second half and changes in reinsurance costs also had an impact. I'll unpack each of these areas and our underlying result on the coming slides to make sure I'm providing a clear picture and remove any uncertainty in respect of the adjustments I've called out.
Moving to underlying claims. We record an underlying claims ratio of 53.7% in the current year, similar to 54.1% in the previous year. This ratio excludes all payroll costs and prior year reserving changes and focuses on our working clients. As reflected in the graph on this slide, we thought it would be helpful to back out the COVID-nineteen influences half by half to highlight the trends in more detail. As you can see, these underlying loss ratios have been stable with small improvements in recent halves.
This reflects both positive and negative influences, which we provide more detail on in our investor report that we've released today. The earn through impact of higher rates has been a key driver on the positive side, particularly short tail commercial products where some of the largest rate increases have occurred in recent periods. We expect this to continue into FY 2022. I understand many of you will be interested in our expense trends. This slide highlights the change in our gross expenses excluding the impact of levies, commissions and quota share effects.
FY 2021 gross underwriting expenses were 5.6% higher than FY 2020. As I highlighted in our first half twenty twenty one presentation in February, this increase includes higher compliance and governance costs and corporate insurance costs. In addition to these impacts, we incurred some one off additional expenses of approximately $30,000,000 on a pre quota share basis in the second half associated with implementing our new operating model across the group and property consolidation costs in New Zealand. I've expressed the $30,000,000 on a pre quota share basis to align with the gross expenses in the table on this slide. If I exclude the one off costs, second half gross underwriting expenses were relatively flat compared to the first half.
Nick will talk further on about our strategy, which will enable improved outcomes over in this area over time as we drive efficiencies through our cost base. We saw further reserve strengthening of $66,000,000 in the second half, taking our full year reserve strengthening to $81,000,000 which is up from reserve strengthening of $48,000,000 in FY 2020. This outcome reflects more adverse claims development across the number of long tail classes than we've observed in recent years. The main impact has been felt in our commercial liability classes in our intermediated business in Australia, which as you know, is a key area of focus for us. We have been experiencing higher average claim sizes in recent accident years driven by superimposed inflation for medium sized bodily injury claims as claims frequency has improved.
We've also called out professional risks and workers' compensation where we have also had to address reserve adequacy in both halves. We believe these trends reflect mixed economic conditions enhancing customer and their legal advisers' focus on personal injury compensation. We are watching the developments closely to keep ahead of this challenge. I'll touch briefly on peril costs and reinsurance. We finished the year with natural peril costs of $742,000,000 a touch below the attachment point at which our FY 'twenty one peril stop loss cover would have kicked in.
This was in line with the update we provided on sixteen June, however disappointing to be above our perils allowance again. As we look into FY 'twenty two, our aggregate cover has now transitioned to a financial year basis and is broadly similar to previous years. We have added over $100,000,000 to our natural perils allowance for FY 'twenty two to arrive at $765,000,000 for FY 'twenty two. This has increased significantly from $658,000,000 in FY 'twenty one, which benefited from additional reinsurance cover provided by the 2020 aggregate cover program. Our pricing has been anticipating this and has continued to reflect this step change in FY 'twenty two.
In materially stepping up our perils allowance, we have made the decision not to purchase the perils stop loss cover for FY 'twenty two on the basis that it was uneconomic, and we have improved confidence in our allowance. I thought it'd be helpful for me to take some time to walk through detail on the $200,000,000 in pretax charges that are included in our net corporate expense line in the second half. As we shared in July, there were no changes to the overall business interruption provision in the second half. To give you some more color on this, we undertook extensive scenario testing of the provision in second half twenty twenty one, taking into account the stronger economic rebound and consideration of a number of short duration lockdowns. We also ran scenarios for the current Greater Sydney and Surrounds lockdown, assuming it runs for eight weeks from the June 26, and we also included Victoria in that scenario.
We concluded that we are comfortable with the adequacy of our BI provision under most scenarios, especially given substantial risk margin established when we set the provision up in November 2020. As the outcome of the second test case becomes clearer, in coming months, we'll, of course, revisit this view. On the other provisions that impact in the second half, the customer refunds provision has been updated to reflect the latest position of our view of the refund programs and administration costs over the life of the program. This has resulted in an additional charge of around $160,000,000 in the second half and includes a significant allowance for uncertainty, now at $100,000,000 of the overall provision. To arrive at this provision, there has been a comprehensive review across our products and policies to ensure we identify any issues and make it right for our customers.
We've now finalized the identification phase of the review and are well advanced with our refund program, which we expect to complete over the next twelve to twenty four months. We've also previously flagged a payroll compliance review similar to many large Australian corporates and have recognized a pretax charge of $51,000,000 for prior period remediation payments and related program costs. Another area I know you want to understand is the potential claims that could arise from our previous ownership of BCC trade credit. As communicated in early March, we have no net insurance exposure to trade credit policies. This position has not changed.
When you have the chance to review our financial statements in detail, you will see a $437,000,000 gross provision for claims in our accounts, offset by an identical amount of reinsurance recoveries. Our financial statements and investor report provide more detail on this topic, and we can discuss further in Q and A today if that would be helpful. To capital, our capital position remains strong. The CET1 ratio reduced to 1.06x before dividends compared to 1.19x at the December, mainly due to the payment of the interim dividend. We're also calling out on this slide the increase in risk charges driven by a range of factors, including higher investment assets, increased claims reserves and a slightly higher insurance concentration risk charge.
When we finalize the proposed sale of our Malaysian business that we announced in July, our capital position will improve by around $150,000,000 and our CET1 ratio will increase by around six points. For my final slide, I'll take you through the approach followed in determining our $0.13 per share final dividend that the Board declared today. IAG's normal approach is to identify unusual nonrecurring items, record these in net corporate expense and exclude the items when calculating cash earnings. A consistent approach has been followed this year. The dividends in FY 2021 represent a payout ratio of 66% of cash earnings, close to the midpoint of the 60% to 80% payout range that we target.
I'll now hand you back to Nick. Thank you.
Thanks, Michelle. I wanna share how we're strengthening the fundamentals of our core insurance business to build a stronger and a more resilient IAG. Six months ago, we said that we would hold ourselves to account on the four strategic pillars that you'll see on the slide, and we'll share progress with you every six months on what we've done. Our redesigned operating model to create three core insurance businesses is in place. Each division is aligned to the to the insurance needs of specific customers and the way those customers want to engage with us.
Intermediating in Australia has clear accountabilities, and I've ensured appropriate executive focus on this business. I want the fundamental insurance capabilities here to be stronger so that it can continue to support our our important partners and our brokers. This business has underperformed in recent years, and we've prioritized this as a significant opportunity under our new structure. I'm also excited about the new team that we have in place at IAG. We have three high quality external appointments that have joined us, Michelle as our chief financial officer, Jared Hill, who starts in a couple of weeks as our group executive in charge of our Australian Intermediate business, and more recently, we announced Tim Plant is joining us as chief insurance and strategy officer.
Tim's role is a new one at IAG, and and he will use his deep insurance experience gained in senior roles that he's had a number of other large insurers to improve our overall underwriting discipline across the entire company. Michelle, Jared, and Tim, of course, complement the existing executive team and will play a major role in delivering a stronger and a more resilient IAG. Our four strategy pillars have provided a clear road map for us, and I'd like to I'd like to share some of the progress that we have made. It's been a pleasing year for customer growth with some tangible milestones achieved. We've added 75,000 new customers across our Australian and New Zealand business in our in our direct businesses.
This represents just over 1% growth in our customer base for our direct businesses. The highlight here has been the online rollout of NRMA Insurance across Western Australia, South Australia, and Northern Territory, alongside our new customer loyalty program, which has been piloted as part of that rollout. I've already highlighted the significance of changes to our intermediated business as part of our efforts to build out better businesses. Pricing capability initiatives will continue to support our portfolio management efforts in the intermediate business going through into FY twenty two. Our progress on digital initiatives and efforts into the future are underpinned by the creation of a single core insurance platform, which we're rolling out across IAG.
After completing stage one, we now have a single claims platform that can be used across the entire organization. Stage two, which is underway now, will consolidate and simplify multiple policy and administration systems that we have in place. When we complete this work, we'll be able to provide consistent products and services to customers wherever they are, whatever on whatever digital platform they choose to engage with us. Uplift in our risk infrastructure also give me confidence. We've implemented a $100,000,000 program of work to fundamentally improve the risk practices across IAG.
After eighteen months, this program, which internally we call project RQ, is near complete, and as it is considerably strengthened the control environment of our company. Embedding RQ will continue to be a big focus in the year ahead. And as you can see, we've established good early momentum early momentum on the implementation of our strategy. Given our confidence in the underlying performance that we've outlined today, we've reintroduced guidance for FY 'twenty two. This will include the following key metrics: low single digit premium growth expected in FY 'twenty two and a reported insurance margin in the range of 13.5% to 15.5%.
We've provided on this slide a road map on the underlying assumptions on on around that margin improvement. We expect an improved underlying performance in FY '22, under underpinned by the changes that we've already taken. We are targeting rate increases that will continue to flow through both our personal and commercial lines portfolios. And we'll also be leveraging the efficiencies and greater focus that will flow through from our redesign operating model that we've announced and already have in place. So in closing, just a few comments.
This slide summarizes our value proposition to our shareholders. It outlines the financial outcomes of the strategy I've discussed today and how we'll be delivering against those four pillars. Creating a stronger, more resilient IAG will deliver our targeted cash ROE of 12 to 13% and an insurance margin of 15 to 17% and growth over the next three to five years. This goal encompasses organic customer growth that at least matches the market across our direct businesses. It also includes an insurance profit of at least $250,000,000 to be delivered by our Australian intermediated business.
And it includes delivering further simplification and efficiencies in the cost structure of our company as well as strong risk infrastructure. This is the type of return profile that you should expect from us. We look forward to sharing more about this in an Investor Day that we plan for November 11. Michelle and I are now happy to take any questions that you may have.
Thank you. If wish to ask a question, please press 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press 2. Your first question comes from Andre Stadnik from Morgan Stanley. Please go ahead.
Good morning. Thank you for your time. I I wanted to ask a question, firstly, on GDP growth. In this FY twenty one result, it looks like IG has lacked some corporate about two and a half percentage points in terms of cleaner underlying GDP growth. And this feels like historically, you know, record gap.
So is there anything behind that? You know, was IT distracted about having to handle business interruption issue? Because that just feels like a very high gap by history.
Andre, it's hi, mate. It's Nick. I mean, just I mean, without sort of sort of lining up the two results, I mean, our our overall sense would be within our direct personal lines businesses across Australia and New Zealand. You know, we've grown thereby over 1% in customer as well as as well as rate has flowed through. What we have seen, though, and you'll see this in the detail within our Australian intermediated business, You know, we have seen customer numbers and volume come back a bit.
We've had rate flow through as a positive, but we've seen we've seen customer numbers come back. There's still been a little bit of portfolio remediation that's occurring there. That might explain some of that. But overall, you know, we are we feel like we've got, you know, we've got the business set up the way we want. And we and as you can sort of tell by the sort of the the outlook comments that we are pretty confident on on directionally where our company is is is going and the growth opportunities that are in front of us.
Thank you. I wanted to ask another question around cost out. And I think, Nick, when you started as a CEO, in in one of your first kind of media statements, you said you want to run a more efficient IG, and you mentioned a number of different systems. And it looks like your cost out ratio sorry. Cost ratio is quite a bit hard in some peers.
So, you know, when can you move on this? Is this something we can expect to hear more about on the Investor Day?
Yeah. I mean, we are I mean, there's sort of multiple parts of this story, Andre, so that that we are looking at technology simplification across the whole company. And I mentioned that, you know, we now have one claim system across IAG, and we have built and launched and using a policy and admin system. We're we're going down a guidewire path. And now you know, that's now in place.
Now we need to migrate multiple systems onto that. That'll take the next couple of years. In addition to that, organizational design, and one of the one of the objectives of the way we've structured the company going forward is that we're a simpler, more efficient organization and, you know, greater clarity of accountabilities, and there will be some efficiency gains that come out of that as well. And some of that's even within the guidance, as I indicated, for next year. What we'll also do is is you know, what we wanna do is we're building out those plans in more detail, and and we're seeing the the benefits flow through.
We'll provide the market more color on that as things progress. And one of those opportunities, as you've said, will be at the Investor Day in November.
Thank you. And if I can sneak in one final question, please. The New Zealand earthquake commission proposal reforms are quite quite substantial at first glance, you know, trying to proposing to increase their cap from $1.50 k to 400 k, and and that would imply very substantial relocation of premiums away from private sector insurers such as yourselves. What is the latest on that, you know, and how can you, you know, mitigate any potential impacts on your New Zealand business?
Andre, just to to check, there hasn't been any announcement today, has there? Because I haven't seen that. So that's so you're just saying what what what's been discussed as as the potential changes to the scheme. Is that right?
Correct. Yeah. There was a proposal come out a year and a half ago just when COVID hit, so it was a little bit hard to keep a track of everything. But I'm gonna check the proposal for now, potential proposal here.
So just making sure that I haven't missed something today. No. So the the New Zealand government has been reviewing effectively the retention that they have around earthquake. That is still being discussed, my understanding, within within government, so there hasn't been anything announced around that. And we're we're we're working with industry.
IAG New Zealand industry in New Zealand are working with the government on that around what the way that scheme is gonna work going forward. I suspect it will increase above the current level. I doubt it'll go to the level that you described, the 400,000. So I'm thinking somewhere in between is is likely, and we'll we'll just work with that as as as as that's announced. It's likely to have some sort of time line as well in relation to the implementation, I would have thought, over the next sort of twelve to eighteen months.
Thank you.
Thank you. Your next question comes from Andrew Buncombe from Macquarie. Please go ahead.
Hi, and thanks for taking my questions. I just have two, please. The first one is in relation to the new gross provision that you've incurred for BCC and Greensill. Are you able to give us a bit of color as to how much of that provision is IBNR? But also, have you put a claim to the reinsurers yet?
Thanks.
Hi, Andrew. It's Michelle. Thanks for that question. So, it's all IBNR at this point in time. Sorry.
I think there's a small amount that's been played paid, but the 437,000,000 is largely IBNR. And we have picked up the equivalent reinsurance recovery associated with that, and you'll see that in the financials. And we've been working with our reinsurers as as we work through that process and meet the requirements of all the information. So very comfortable with the recognition on both sides of that equation at this point in time.
Yep. That makes sense. And then just in terms of my second question, it's in relation to the margin targets of 15 to 17%. My understanding previously was that they were targets for FY '23, yet the documents today seem to suggest that they're medium term. Have they been pushed out?
Am I interpreting that correctly?
They haven't been pushed out, Andrew. Sorry, Nick. You go.
Oh, you go, Michelle. You go.
No. No. Andrew, there's there's been no change. It was over a three year time horizon, so the same as what we talked about in February.
Mean, Andrew, I'll just make a comment here. I mean, that's the setting. I mean, we're trying to get there as quickly as possible. That that in sort of framing the financial setting of the company, you know, we my view is sort of an ROE or, you know, sort of targeting that that sort of range that we've indicated, which is which it means an insurance margin of that 15% to 17%. That's the sort of setting that that I believe we can also be delivering a growth profile as well.
And so that we're trying to get there as quickly as possible.
Sure. And then maybe just a quick final one, please. Just interested in how the star versus chubb court ruling from last week may impact your BI provisions. Thanks.
I mean, it's quite I mean, it I think it's quite a technical finding, and so the read through to us is quite modest. And so in our view, you know, we've obviously had the first test case, which is sort of clarified the quarantine by security topic. Second test case is really what was what we need clarity from around how our policies are gonna respond. And so the answer is particular to the chart. I mean, it's a, you know, it's a small positive, but the read through for the type of policies we have and implications for IAG are quite are quite modest.
Excellent. Thank you.
Thank you. Your next question comes from Kieran Chichi from Jarden. Please go ahead.
Good morning, Nick. Good morning, Michelle. A couple of questions just starting, around growth. You've been making very strong margins in direct Australia and New Zealand and don't seem to be pushing rate as strong as sort of your largest peer in that market, but still seeing some soft volume growth. Just wondering, in your mind, what are the key catalysts to achieve sort of that medium term target in both those businesses of growing at least in line with market, given the margins sort of already sort of around target levels there?
Yeah. Hi, Karen. I mean, we're quite close. So that our Australian you know, our direct businesses were growing in customer numbers you know, by just over 1%. So we're, you know, we're starting to see some genuine organic growth of IAG, which, you know, we know in the past, a lot of that a lot of that growth profile has just been price.
We're trying to get that balance right between just increasing the number of customers that we engage with as well as price. So we're seeing some of that already. Things like having a, you know, having up being up having an NMA offering now across Australia or ex Victoria, you know, it's gonna make a little bit of a difference. We're having simplified technology platform will make a difference because it'll be easier to to put digital platforms on top of that consistently across across the way we run our company. And we're just being a bit more active in how we go to market and our brand propositions, our advertising.
And so there's some of those, there's already momentum in our place around this topic, around, you know, growing genuinely growing the company and having more customers next year than the pre than than than last year. And we're seeing that already, and I wanna try and build on that over the next couple of years. So I think the the the sort of the settings that's kind of already starting to be put in place, it's now now driving that agenda forward, and and we've got evidence of that working already.
Alright. Thanks. And just secondly, on the commercial business, you've flagged margins, underlying margins around still around the 4% level in second half twenty one. You're achieving rate rises of around 8% on average. Can you just indicate where you think inflation is in that part of your business?
And how long you believe you need to sort of maintain those positive jaws between rate and inflation to get the margin up to that 10% plus level you require to to get the group back into the 15% plus range?
Sure. I mean, it's almost there's three parts to that business. There is the intermediated personal lines business, you know, the Coles, the Steadfast Direct, and and some other partner personal lines businesses we have. There is the short tail commercial business, and there is the long tail commercial business. And this this kind of they kinda got some different themes in them.
In the in the personal lines business, you know, we we have had some challenges there around profitability. So there is just rate increases flowing through because of our starting position. We are seeing some you know, a little bit of claims inflation in some of the property classes in in home, but but relatively modest and a little bit in motor. In short tail commercial, that business is increasingly looking better, I would say, and, you know, low single digit type type inflationary pressure within that business. And then the the the call out for us is some of those long tail classes, particularly the liability, where we are seeing inflation.
That's sort of that's sort of a different issue around settlements around, you know, damages, injury, where we're seeing, you know, a 10% type plus, you know, inflationary pressure within that part of the portfolio. So I think in in relation to expectations, you'll still we'll still see certainly significant rate increases across those long term classes, less so on the sort of the the commercial and the and the personal lines portfolios as we're increasingly having those portfolios deliver a reasonable return.
That's great. And one last question, just a quick clarification. The 30,000,000 of nonrecurring sort of corporate in New Zealand costs you've called out, were they can you just give us a feeling for the split between the halves? Was that predominantly in second half?
It was all in the second half, and it's a combination of costs associated with the implementation of the new operating model that Nick announced on becoming CEO in November, together with some property consolidation costs in New Zealand as as we're looking at our ways of working as we move forward.
Okay. And the $30 pre pre quota share. Is that correct?
It is pre quota share just for the purposes of how we've shown the gross underwriting expenses on the slide in the presentation. Just see the reinsurance quota share adjustment at the bottom of that table on the slide.
Alright. Perfect. Thanks.
Thank you. Your next question comes from Nigel Pitoway from Citi. Please go ahead.
Good morning, Nick and Michelle. First question, just on the, FY 'twenty two reported margin roll forward. You obviously call out the impact of increased perils drag at 150, which is probably a bit severe as obviously there's some premium growth there as well. But nonetheless, just looking at that number, would we be right to say that's completely offset in the dotted box up top and that you've repriced for that already, or is that still sort of not completely offset?
So, Nigel, hi. As as we as I called out when we talked about the increase in the perils allowance, we've been pricing for that as as we move through, and we continue to take expectations around perils allowance into account as we're setting prices moving forward.
Yeah. Well, I'm just I guess I'm just trying to work out how far through you are, whether or not there's still more to go. You know, have you already repriced so the impact should be offset?
Well, I'm I'm comfortable in terms of, that we're getting rate increases in line with inflation taking into consideration that perils allowance. So so, yeah, I I think we're well placed as we move into FY '22 around that.
Okay. Secondly, just on the I mean, the professional risk portfolio, and we've asked questions about that before. We were told it was relatively small and a small portfolio not to worry about it. But obviously, we did have, an increase in top ups in the second half. So I mean, can you give us a little bit more sort of info as to the nature of that portfolio and give us some ability to assess whether or not we should be worried about it moving forward.
Yeah. It's it's interesting. The the reserve strengthening, Nigel, that we've seen coming through that portfolio, has been linked to, historic large claims that we've seen as we've seen them developing further, and and that's part of what's driven that strengthening. Again, you know, with some of the areas like D and O and those sorts of things as we said before, we're not at the large end of town, if if I can call it that. So it's it's a mixed portfolio.
I'd probably need to take on on notice some questions about too much more lower level detail unless Nick wants to jump in in there, but it's it's linked to, you know, some of the historic larger claims we had out of our portfolio that's seen the reserve strengthening.
Yeah, Nigel. It's I mean, it's a as as we've said, it's a relatively small portfolio that, you know, what we have seen is larger claims. We've also we've also our current period loss ratio for that portfolio, we've also, you know, reflected our experience in. So there's a bit of drain in the current period around how those loss ratio picks for for sort of underlying margin for for the now as well. And we're trying to get ahead of it is our is our response and and and try to reserve for, you know, anything we know about and then set our current period loss ratios with, you know, with with that in mind.
Okay. And then maybe just finally on this sort of growth of yourselves versus Suncorp. I mean, what are the areas where it was particularly stock is in New Zealand Personal Lines, where I think you're sort of calling out some fall in retention in the direct book and obviously Suncorp is getting good growth in AI. Anything to sort of comment on there as to why you think there's such a stark difference in that market? Is that a, you know, partly a decision on your part or or, you know, what exactly is happening there?
I mean, I'll I'll I'll turn that around and say that's gonna be an opportunity because, you know, we do have very strong brands there. You know, obviously, the the AA did had a had a good period. And, you know, we've got strong brands there with AMI and Snake, and, you know, that's gotta be an opportunity for us. So I'm not a you know, I'm not I don't think there's anything structurally wrong with our business in New Zealand that means that we shouldn't be participating in that growth opportunity probably more than what we've just delivered. So I turn that into an opportunity, really.
Okay. Thank you.
Thank you. Your next question comes from Matt Ingram from Bloomberg Intelligence. Please go ahead.
Good morning, all. Thanks very much for the update this morning. Just wonder if you could please touch on this vicious cycle regarding the perils allowance. I know, Michelle, you said you're you're sort of pricing for that as much as possible, but we have seen the allowance jump substantially as a percentage of net premium earned. And and you also commented in the slides that pricing may may sort of impact your growth, written premium growth.
So I guess could you please talk me through how we're getting this this increase in the allowance? Is your is your modeling suggested an increased incidence of events? And and then I guess if you could please help me understand how you're gonna get off that sort of mouse that mouse wheel so you can actually catch up with the pricing, if those allowance keep increasing? Thank you.
Thanks, Matt. I might take the first part of that and let Nick help me out with this the the second part of of that. I think it's worth highlighting that you recall our $6.58 allowance in f y twenty sorry, in this current year f y twenty one benefited from some protection from the aggregate covers that we had in place. And so we've been calling out off the back of Peril's experience sort of, 02/2019, that we needed to have a step up. But because the Perils experience in 02/2019, early twenty had been, so significant, our aggregate covers kicked in, and so we didn't have to put that increase through into f y twenty into f y twenty one, perils allowance, but we have to do that into f y twenty two, which is why we're going to the July.
The team have have done a lot of work on perils experience and the modeling, but there's no doubt factors such as climate change and those sorts of things influence that. But we believe the journey from here won't have as many significant step changes, if I can put it that way, but it really does depend on what we see coming through and experience. Nick, did you wanna add some more to that?
Hi. I mean, hi, Matt. This is probably just a generalization, isn't it, that we know that we're expecting you know, we've got a big a big footprint. We've got a lot of property exposure, and we know we're sort of expecting, you know, increased severity and and frequency of events hitting Australia. And therefore, most likely, this perils allowance will be continued to be lifted, and and then we'll need to be reflecting that in pricing.
Pricing. So we're trying to get ahead of it. We know as an industry, say, over the last ten years, that the element of our pricing reflecting perils has probably not been there and that we've been under. And, you know, this is our attempt at sort of rebasing that up and sort of reflecting our you know, ensuring that we are reflecting our best estimate of that perils exposure on our current portfolio. But this this this topic will continue year on year, and we'll need to be continually updating that payroll's allowance and continually being able to reflect that increased risk within our pricing, particularly for the property classes.
Okay. That's great. Thank you very much.
Yeah. My my my comment there, sorry, Matt, is it's not really a one off, is it? I mean, this is gonna be a yes. We've done a bit of a catch up, and we're trying to get ahead of it, but this topic will continue, unfortunately. Sorry.
Yeah. Thanks. I guess that's sort of the clarification I was after. I mean, everybody in in the Australian market's reporting similar trends, And it does seem there's been
a step change in that incidence and severity, as you said. So that's sort of what I
wanted to clarify as well. Thank you.
Thank you. Your next question comes from Siddharth Paramuswaran from JPMorgan. Please go ahead.
Good morning. A couple of questions, if I can. So just following on from that last question, I just wanted to clarify exactly what you have pushed through in terms of pricing increases in the home and what you're saying you you you're pushing through at the moment. And from the from the contrary,
I think you're saying
you pushed through about three to 4% in line with lost cost inflation. The total amount to go up by a 100,000,000. But, I mean, you're not really saying that you're pushing through very large increases in any of the commentary. But at the same time, Nick, you're saying that you're trying to get ahead of this increase in peril. But I'm I'm just struggling.
It feels like there's bit of a disconnect between what's happened on price and and the perils allowance. So what what am I missing here? I mean, could you just flesh out just the timing differences and, you know, how how I need to reconcile some of the statements in your pack with with the overriding comments you're making on on allowances?
Yeah. Sure. Hi, Sid. I mean, what what what I said we're trying to get ahead of it is we're trying to lift our allowance and then reflect that in pricing. I don't I don't think we meant we're trying to get ahead of the allowance, but we're really, what we've done is stepped up the allowance, and then that that has been reflected in pricing that has been occurring over the last, you know, six months or so.
And so we're not sort of starting FY '22, you know, having to now think about how we can reflect increased allowances into our pricing. So I feel like that's we've already got momentum on that. Our you know, maybe sort of step back and say, in total, you know, are we are we sort of comfortable with, say, the direct personal lines type margins? I mean, I think we are, as an example. And so one of those inputs is is perils cost.
So in total, looking at looking at that sort of profitability of our direct business, say, in Australia, that's sort of comfortable with that sort of level of profitability. And so, therefore, pricing that's been flowing through that portfolio and then particularly around property needs to be able to reflect the increased allowance and a little bit of inflation. But I don't see that as you know, we're not trying to get ahead of those allowances, but we're trying to reprice in line with our expectations of that allowance going forward is is our comment.
Okay. I think that's that's quite helpful.
Thank you for that. Just a
second question, if I can. Just on the quota shares, could you just remind us when the next ones are actually due to be renewed and whether you're expecting to see any impact on underlying margins from that?
Hi, Steve. It's Michelle. Thanks. I probably didn't need to say it's Michelle given that Nick and I are. In terms of the smallest of the 12.5% quota share elements is due for renewal at the end of FY 'twenty two.
In terms of where we're at, we're well progressed in terms of engaging with our quota share partners and understanding how they're thinking about it. And I'm not expecting to see any significant shift associated with the financial impact linked with our quota share arrangements as we move through that over the next sort of, twelve to twenty four months and beyond working with, our four partners that we have at the moment.
Okay. Thank you. And, if I could just ask, another question just on timing of some of the arrangements you have. Just, Cole's arrangement and Steadfast Direct, are there any sort of, you know, time frames as to when either of those agreements come up for renewal?
See, the Coles deal was a ten year deal, distribution deal, from the date of acquisition of the sort of Westfarmers lump in the portfolio. So that was that's the timeline there. Steadfast Direct, I think, is is not such a structured timeline type deal. That's just an arrangement that we have in place with Steadfast, which is more common with other partners. So I'm just trying to remember the the Wesfarmers deal was 2015 no.
02/2014. So, you know, three two or three three years to go.
Okay. And and just to
be clear, I mean, intention is to remediate the possibility of these books, not to to terminate these books. Is that is that right?
I mean, we've got to make not just I wouldn't just point out these two portfolios. I think across the entire business, you know, we've got to make decisions around, you know, repricing, remediation, or, you know, potentially exiting. And, you know, that's the that's sort of the the role that we're that that we need to play. In relation to Coles as an example, you know, that's been quite a strain on us for the last number of years. That's actually looking a lot better.
So there's been quite a significant improvement there over the last couple of years. The Steadfast Direct business has still got its challenges in relation to profitability, so that's that's certainly something that we're reviewing at the moment.
Okay. Thank you very much.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Hawkins for closing remarks.
Okay. Hey. Well, thanks for joining us at this busy time. I mean, as we've demonstrated here today, you know, our core insurance business continues to deliver stable underlying performance over the last twelve months. You can know, our premium growth has been encouraging, and that's really been supported by strong rate increases and some volume growth across our direct personal lines, which we, you know, which we believe will continue is sort of starting the foundation of being growing at least in line with market over the next couple of years.
And, you know, we're very confident in our plans to create a stronger and a more resilient IAG. Look forward to talking to you all again over the next six months, and enjoy the rest of your day. Thank you.
Thanks.