Good morning, and thank you for joining us at IRG's results presentation for the half year ending thirty one December twenty twenty. Today, I'm presenting these results on traditional owned traditional land owned by the Gadigal people of the Eora nation. And I'd like to pay my respects to elders past, present and emerging. I'm joined today by our Chief Financial Officer, Michelle Macpherson. I thought I'd start with some high level comments on where we're at.
I'll then hand over to Michelle, who's going to talk us through the financials in a lot more detail, including our capital position and our dividends. Then I'll come back and cover what we are going to do over the next three to five years around our medium term strategies. I'll start by making some high level comments on where we're at. Today, we're delivering a strong result with a very solid underlying margin. I've reset our strategy and our operating model already.
We are well advanced in separating our Australian division into our direct and our intermediated businesses to ensure we face into the market and our customers in the way our customers want to deal with us. We've also dealt with business interruption and raised capital to support a provision. And you'll see today that there have been no changes to that provision to what we communicated to with you in November of last year. And lastly, I'm going to finish off with more detail about how we're going to deliver a stronger, more resilient IAG over the next three to five years. I'll step you through some foundation pillars that we've organized our strategy around and then talk you through the progress that we've made against those already.
I'll start by making some high level comments on where we're at. Our premiums have grown in the six month period by just under 4%. Our view is that's a strong result considering the economic uncertainty that we've had across Australia and New Zealand during calendar twenty twenty. It's a good result for IAG. Our margin performance has also been strong.
We do acknowledge the lower perils and lower claims frequency in the six month period just gone that have been a benefit to our reported margins, but our underlying performance of our company has also been strong and importantly stable. There's definitely a bit more momentum in our business today than there was six or twelve months ago. My view is we've adopted a conservative position in our provisioning for business interruption and the way our overall balance sheet is positioned at thirty one December. On capital, the group's capital position remains strong, and we are above, you'll see in the packs, our targeted capital ratios. And with the confidence that we have in our capital and the momentum that we have in our business, we've declared an interim dividend today of $07 per share.
Before handing over to Michelle, I want to provide some overall thoughts on our Australian and New Zealand businesses. As you've heard from other companies, the environment we are operating in, in the last six months has been probably more favorable than we would have anticipated. You'll see that we've seen double digit new car sales in the last quarter. We've seen significant increase in building approvals, and we've seen unemployment rates reducing. All of these, of course, are key inputs into the operating environment to which we're facing into at IAG and all a little bit more favorable.
Our direct personal lines business in Australia continues to operate strongly, and we've seen growth in both rate and volume and customers in our business here. Our Intermediated Personal Lines business in Australia has shrunk a little bit over the period as a result of some of the rate that have been flowing through that portfolio as well as some deliberate actions that we've taken across certain portfolios there. Our commercial business in Australia has had rate flowing through that portfolio, and pleasingly, volumes and customer numbers have held up in the six month period. And of course, our New Zealand business continues to deliver a very strong result, and we're very pleased with the performance of our business there. Overall, you can see that our businesses are in good shape, and they're being set up well to deliver on our strategy going forward.
On that note, I'll hand you over to Michelle, who's going to step through some of the financials in a bit more detail. Michelle?
Thanks, Nick. Good morning, everyone. As Nick has outlined, we're encouraged by the stability of our underlying insurance profitability and premium growth, especially in the second quarter. I'd say we're cautiously optimistic cautiously. Importantly, I have no further significant developments to report since the last update we provided our capital raising in November.
There are a few callouts in the headline numbers you can see on this slide. The $460,000,000 net loss after tax has been driven by our business interruption provision, the increase in which has been recorded in net corporate expense, along with some other unusual items that I'll discuss later. In line with our usual practice, we have excluded these items from cash earnings, which was $462,000,000 for the period. I will also provide some more detail on the approach followed by the Board in declaring a $07 interim dividend later in the presentation. Consistent with Nick's earlier comments, I'm pleased to report some positive GWP momentum with growth of 3.8% during the half, notwithstanding that we estimated COVID constrained our premium growth by around $50,000,000 Growth momentum was a bit stronger in the second quarter as COVID-nineteen pressure eased.
Most of the growth was rate driven with some pockets of volume growth. A few of the highlights for us are: in Australia, we lifted motor rates by 3% and home by 6%. This is in line with what we require for underlying claims inflation and upward pressure on our perils allowance. And we experienced some volume growth in our direct personal lines, offset by reductions in intermediated personal lines. The average rate increase across our commercial portfolios was 7%, which is a pleasing outcome and in line with our targets.
Also pleasing is that in contrast to recent periods, we observed high and stable retention rates in this element of our portfolio. Our New Zealand business achieved low single digit rate increases and 2.8% overall GWP growth in New Zealand dollars. Also highlighted by Nick earlier, but worth calling out is we recorded improved underlying profitability over the half, and we observed broadly stable trends if we adjust for the estimated COVID-nineteen influences. As you can see, our underlying margin was a solid 15.9%. In line with our disclosures in FY 'twenty, we have wanted to provide you with our best estimate of how changes in the COVID-nineteen operating environment have impacted this half.
Many of you will recall that we estimated net neutral impact from COVID-nineteen in second half 'twenty. This half, we've estimated an approximate sixty million to $70,000,000 positive impact or around 1.7% of net earned premium. The dominant driver of this positive impact has been lower motor claims frequency during the lockdown periods that you're all aware of. Two other differences in our approach in first half 'twenty one are worth calling out. Given the significance of the BI provision, and we'll talk some more about that in a little while, that we announced in November, we have excluded this from our underwriting result in first half twenty twenty one.
And as we shared with you in August, from FY 2021, we are assuming no reserve releases in our underlying margin definition compared with the 100 basis points we assumed in the past. Taking all of these changes into account, the adjusted run rate for underlying profitability is around 14%, as you can see on this slide. I'm highlighting these influences as we have been operating in unusual times, and we do not believe we will continue to see net positive benefits from COVID-nineteen in the second half of FY 'twenty one. Moving to underlying claims and expenses. We recorded for the half an underlying claims ratio of 52.8%, an improvement compared to FY 'twenty.
This ratio does exclude all peril costs and prior year reserving changes and focuses on our working claims. If we back out the COVID-nineteen influences, trends have been stable, reflecting both positive and negative influences. Our Australian commercial operations are not performing at targeted levels, and long tail profitability was a drag on first half 'twenty one. The creation of the Intermediated Insurance division under our new operating model is targeted at lifting the performance of this area of our business. On the positive side, the earn through impact of higher rates has assisted profitability, particularly short tail commercial products, where some of the largest rate increases have occurred in recent periods.
We have seen higher compliance and governance costs, increases in corporate insurances and increases in annual leave provisions, which did result in some cost pressure during the half, with mid single digit growth if we remove the COVID-nineteen additional costs we've included. Nick will talk further about our strategy, which will enable continued improved outcomes in this area over time. As called out on the earlier highlight slide, our reported insurance margin for the half of 17.9% was 200 basis points higher than our underlying insurance margin, reflecting perils below allowance, a positive credit spread impact and modest net reserve strengthening. I thought with this slide, was useful to provide a little bit more color on the net reserve strengthening. We did flag the expected need to strengthen our reserves in the second quarter at our capital raising in November, and this was ultimately a charge of $15,000,000 a negative variance to reported profitability.
This reflected a deterioration across commercial long tail lines in Australia, including workers' comp, professional risks and liability classes. We saw positive releases from short tail reserves in both Australia and New Zealand to partially offset this. And overall, it's fair to say the net reserve strengthening was not as significant as we had originally expected. That said, when we take into account an additional $75,000,000 provision for customer refunds that we recognized during the half, the impact of these two factors was in line with the 70,000,000 to $90,000,000 pretax charge we flagged in November at the capital raising. To touch briefly on peril costs and reinsurance.
Pleasingly, the pattern of weather, particularly in Australia, dovetailed well with our reinsurance covers, leaving natural peril costs $39,000,000 below the allowance for the half. We also successfully renewed our main catastrophe reinsurance program at the start of the year. It's fair to say reinsurance market conditions were certainly tougher than last year as we expected, so we were pleased to ultimately achieve only a modest increase in the cost of our main cover. Since we updated you on this cover, I wanted to highlight two fifty million drop down covers for second and third catastrophic events that were finalized later in January. As we look to the balance of FY 'twenty one, our aggregate covers have now transitioned to a financial year basis.
As the deductible on the 2021 aggregate cover was not impacted in calendar year 2020, we start the second half with a $400,000,000 pre quota share deductible, which is a different starting position to first half. Clearly, the BI provision has been significant for us, and we talked a lot about that in November. I thought I should spend a little bit of time on that now. The finalization of our first half results has seen no adjustment to the BI provision to that which we disclosed on twenty November. We have done further detailed actuarial review of the assumptions, including recent COVID-nineteen developments in New South Wales, Victoria and Queensland, And we've been comfortable to form the view, our actuaries particularly have been comfortable that there's no change to the net central estimate or provision required at thirty one December twenty twenty.
To give you some context in terms of where we're at with BI, we've received around 500 claims to date. Our view that the intent of our business interruption policies is to not provide coverage for any losses related to pandemics has not changed, but court process will ultimately determine what claims we pay. I did want to take this opportunity to note that as we move through those process, we do intend to pay all valid claims, as is our responsibility and obligation to our customers. We appreciate the uncertainty that still lies ahead on this issue, and obviously, Nick and I can cover any questions you may have when when we get to the end of the formal presentation. To capital, as Nick indicated earlier, our capital position remains strong.
The CET1 ratio improved relative to the pro form a we presented at the capital raising in November, so it was at 1.19x and the pro form a was 1.15x. The high level movements shown on the waterfall on this slide are as you would expect and in line with the previous indications following the recognition of the BI provision in the capital raise in November. As a new CFO, I look at IAG's track record, and we have a strong track record of good capital CEO, did I say? Just said CFO. Sorry, Nick.
At IAG, have a definitely not. I've got a lot to do here first. At IIT, we have a strong track record of good capital management, and we will continue to be proactive and transparent in the management of the group's capital position moving forward. And I think that's really important as we demonstrated with the capital raise in November. For my final slide, and then I can get over the embarrassment of what I just did, I'll take you through the approach followed in determining our $07 per share dividend that the Board has declared today.
IAG's normal approach is to identify unusual nonrecurring items, record these in net corporate expense and exclude these items when calculating cash earnings. As you can see on this slide, there are more unusual items in this half than we've seen in recent periods, reflecting our action to address matters during the half. They include the BI provision and the pretax addition to the customer refunds provision of $75,000,000 that I touched on earlier, together with some smaller items that are set out on this slide. I'd just highlight, we are continuing to undertake an ongoing and proactive review of our pricing systems and processes, and the $75,000,000 reflects an additional four refund programs identified during the period. So having moved decisively to strengthen our balance sheet following the recognition of provision, we are able to move forward on a more business as usual basis.
Given this, the dividend represents a payout ratio of 37% of cash earnings, which is in line with the typical approach you would follow in the first half of each financial year. With that, I'll now hand you back to Nick. Thank you.
Thanks, Michelle. IAG is a strong business. We have a clear purpose to make your world a safer place, and we aim to do that for the 30,000,000 Australian and New Zealanders who live here. And we've been doing that for a long time, over one hundred and fifty years. In Australia, through the NRMA brand, we were there when Australians first took to the roads more than one hundred years ago providing insurance products.
Through CGU, we've been looking after Australian businesses in various forms with various brands of that for over one hundred and sixty years. In New Zealand, our personal lines businesses, AMI and State, have played a significant role in personal insurance in New Zealand since insurance began there. And our NZi business has supported New Zealand businesses for over one hundred and fifty odd years as well. You can see from that, we have a great history and a legacy in our brands and our businesses in this part of the world, and that's a very important part of our company. Today, we protect 8,500,000 businesses and people, making their worlds a safer place in Australia and New Zealand.
We touch a lot of people. Our customers, of course, are at the heart of what we do and the heart of our business. Keeping them safe with the products and services that meet their needs has built the trust in our brands and has delivered the strong financial results that we've delivered to you, our shareholders, for many years. Our supply chain helps us deliver our customer promises in the moment that matters most, providing the great service that we do when customers make a claim and really ensuring that we can deliver on some of the scale advantages that we have across our organization. Of course, we use our data and our deep understanding of risk and our specialist knowledge of the impact of extreme weather events to support mitigation to help communities better prepare for the increasing impacts of climate change that we're seeing.
And of course, within IAG, it's our people that enable us to do all the things that we do, to be nimble, to react quickly to opportunities and to make sure we look after our customers when our customers need us most. Our strong capital position, as Michelle mentioned, supported by our very important long term strategic partners, means that we can be counted on as an organization by our customers at their time of claim, at their time of greatest uncertainty. That said, when I look into IAG, we have some challenges that we are going to address. Acquisition growth for us has delivered over 20 brands across multiple product lines, multiple geographies and multiple channels. There's many good parts of that, obviously.
But behind that, we have numerous platforms and systems with variable degrees of digital capability that sits behind and across our organization. We have to solve this complexity of how we run our company. We've been working on this for a while and many things we've done already, and finishing that work of reducing that complexity is a major priority of leadership group of IAG. We've reduced some market share through some of our deliberate portfolio remediations, particularly in our intermediated businesses here in Australia. What we're doing now is ensure we create the right platform in that business to grow that business going forward, get the foundations right so we can then grow.
And we need to operate all of our businesses within our chosen risk appetite, and we will continually be looking to uplift our risk maturity so we can deliver on a strategy that we want to. At IAG, we have a great history. We have strong foundations that create significant opportunity for us, and that's what I want to step you through now. So what we're going to do is we're going to deliver a stronger, more resilient IAG over the next three years. We've built this around four pillars that is the focus of the leadership group of IAG.
What they are is that we will be an organization that grows with our customers. So in our direct business, we will grow at least in line with how the market is growing. We will build better businesses. We need to be the best in class so that we can help Australian and New Zealand businesses thrive. We will continue to invest in our pricing, our underwriting capability, driving commercial discipline across our organization and rebuild and strengthen relationships with partners and intermediaries, who are such an important part of our business.
We're going to create value through digital. We will be a digital first organization, and we will ensure that is the way our customers experience IAG, and just as importantly, that is the experience of our people who work within IAG. And lastly, we need to be an organization that manages our risk, both how we manage our overall risk profile and of course, importantly, secondly, how we allocate capital to the risk that we take on from our customers, ensuring we have an appropriate return for the risk that we take. These are the four pillars that are driving our strategy, and we're on this now. We're already making changes in the organization aligned to those four pillars.
Some examples in relation to growing with customers. You'll see that within the pack, that within our direct Personal Lines business here in Australia, we grew the number of customers that we have in the six month period, and we haven't done that for some time at IAG. So there's change already happening within our organization. We've got that focus. On building better businesses, I've already announced changes to the way we run our company, which means we have a much greater focus on our intermediated business here in Australia, and I see great opportunity to improve both profitability together with growth here.
We're going to create value through digital. We have great examples already. Within our New Zealand business, AMI, we've reduced our physical footprint over the last six months, and we've been investing heavily in digital to create a different customer experience, which is working well for us. And of course, within our digital offering, we are modernizing our back office to reduce complexity. We've done a lot here already on the claims systems front.
And over the next six months, we'll be launching and rolling out our Guidewire for our policy and admin across our Personal Lines business in Australia. So we're putting into place a single policy and admin system for Australian direct business. And managing our risk platform, we will continue to manage our risk, making sure that we operate within our risk appetite. The changes I've already made in the operating model of IAG are focused just on that, ensuring we have clarity around roles and responsibilities within the organization and importantly, accountabilities about who's responsible for what are very clear. And these four pillars will deliver a stronger, more resilient IAG.
We're on to this now, and what we will be doing is talking you through progress against those pillars over the next six to twelve months. So in closing, just a few comments from me. What this slide does is summarize our value proposition to you, our owners and shareholders. It outlines the financial outcome of the strategy that I've been discussing today and how and what the financial outcome will be against delivery aligned to those four pillars. Creating a stronger, more resilient IAG will deliver a cash ROE in the order of 12% to 13%, an insurance margin of 15% to 17% and growth over the next three to five years, and that's the financial setting that we're working on.
And that is the type of return profile you should expect from us as an owner of our stock. Michelle and I are now happy to take any questions. Thank you.
Thank
Your first you. Question comes from Andre Stadnik from NS. Please go ahead.
Morning. Can I ask two questions, please? Firstly, I want to ask about efficiencies. I think, Nick, when you became CEO late last year, one of the first media articles you mentioned, you wanna run a more efficient IG, and you've hinted more of that today. But when will that translate into actual cost efficiencies?
Like, especially given, you know, IG's lagging some about four to five percentage points on the cost ratio. When do you think it's really start to see some efficiencies come through?
Thanks, Andre. I mean what we're saying is we're you can see what we've tried to outline the four pillars. And what we're looking to do is we're probably running an underlying margin of around about sort of 14% now and or just over. And we're going to lift that to sort of 15% to 17% underlying insurance margin, ROE, cash ROE of 12% to 13%. The elements of that are going to be a combination of growth, improved portfolio performance and some sort of outcomes around cost and efficiency, which I think is what is where your question is coming from.
And there'll be elements of that within each of those four pillars that we'll be delivering again. So that I would say that, that's an element of how we're going to improve our profitability or underlying profitability of IAG over the next couple of years. And we're building out we're continuing to build out those plans now, sorry. We're clear on the pillars, the strategy. We're sort of lining ourselves up.
Obviously, now what we're doing is building out the detailed plans, and we'll come back and talk to you more about that over the next six to twelve months.
Thank you. And I wanted to ask my second question around growth in vessel motor. It looked a lot lower than SunCo, so about 1.5% growth in Australian vessel motor, SunCo at about 5%. Do do you need to invest in the value perception of the brand? And and know, you know, despite the very large savings, they want no refunds offered to Motto customers unlike some of the, you know, I guess, the challenger brands.
So is there a need to invest in my perception of the brand to try
to improve the unit growth in Modern?
Andre, it's Nick. I mean there's a blend in there, of course. So there's I mean, our direct personal lines, Motor, has actually done pretty well. Within that, we have definitely been reshaping some of our intermediated personal lines businesses, and that has impacted some of those growth numbers that you're talking about, where we've had rate flow through and we've had some volume losses. So there's a bit of a blend there.
But I think to your question around sort of brand strength of sort of the flagship NRA and our partner brand with RACV, I would say we're in good shape there. And if anything, we're going to be building out more role of those brands in the running of IAG. So I'd say that, that growth number is predominantly due to some of the changes we made within Intermediate and Personal Lines.
Thank you.
Your next question comes from Andrew Buncombe from Macquarie.
Just a couple from me, please. I might start with a comment that Michelle made in your prepared remarks. Was I correct in hearing that you don't expect COVID benefits to come through in the second half 'twenty one? And have you already seen that coming through in December and January? I'm just trying to understand how conservative that assumption may be.
Andrew, why am I not surprised you're calling me out and being conservative straight away? Thank you for the question. I think when we reflect on the first half, we indicated, if I exclude the BI element, that we saw net positive 60,000,000 to $70,000,000 And most of that was driven by the motor vehicle frequency benefits linked to the lockdowns. So as we've seen our nation, particularly in the states of Victoria, move out of lockdown, we have seen that come away, and we don't think it's appropriate to suggest that you'll see further benefits, and it was 1.7% of net earned premium into the second half. So you'll have to form a view on that, Andrew, but that's the position that we've taken at this point in time.
Sure. That makes sense. And then just a second question from me. Just levies reduced a lot. It seems like it's sort of the sort of the Tepla reserves that you've built over the last couple
of years. Can you just give us a
bit of an idea of what has changed your view on the New South Wales CTP portfolio that you're able to unwind those extra earnings?
Yes. Good pickup, Andrew. That is reflected in the levies, and there's nothing unusual to particularly call out. The key driver is consistent with some of the comments that we have been making to you about the impact of economic conditions on the CTP book, and we see an increase in the level of claiming that we're seeing around that, and that's reflected through in our actuarial calculations around that for the half.
Okay. And then just a final one from me. Nick, you made the comment that you're planning on rolling out a single policy and admin system for Australian personal lines.
Can you just give us a bit
of an idea as to how much you think that will cost and where you're going to get the money from to fund that program?
Yes, Andrew, it's Nick. Mean it's across our direct business. I mean we've spent a lot of that already. So in a way, I mean I think it's the same message that we've talked about for the last couple of years. We have been investing a reasonable amount that we've been wearing through the cost structure of IAG as we were sort of putting together our various claim systems onto Guidewire Claims.
In a way, it's sort of a continuation. So if your question is do we expect a sort of a spike in the cost structure of our company or anything like that, no. We've built a lot of this because we're actually launching it in the next month or so. I'm just looking in the front here actually in the next couple of weeks. And so that system is built, and we're obviously we're trialing and cautiously rolling that out across a few small portfolios.
But in relation to sort of financial implications of what I'm just talking about, you shouldn't expect any material change in sort of the cost structure of our company. That's sort of embedded in how we run IRG now. We're not calling it out as a one off, I think, the point. That's we're in the business of continually reinvesting in our systems and processes to simplify our organization.
Your next question comes from Kieran Chichi from Jarden.
I've
got a couple of questions. Maybe just starting on the home and motor. Just interested in your comments around the competitive backdrop there. Obviously, you've been pushing ahead with rates, particularly in homes. So just interested with sort of the banks pulling back there and higher insurance and cap budgets still coming through for you guys.
How are you sort of balancing the rate volume balance over the next twelve months?
Kieran, Nick. I mean I'd say it has been a bit competitive. We've found probably home a bit tougher than voter, would be the overall our overall comment. We have been reflecting some of those, as you point out, those input cost changes around sort of average claims costs as well as reinsurance and perils allowances and the like into our pricing. So we're I mean, that's the challenge of running this company, getting the pricing volume mix.
I mean our intent, as you can tell by how I've talked about the strategy and the four pillars and growing with our customers. So our intent going forward is to be able to grow our direct personal lines business, which Holmes obviously an important element of that, in line with sort of the market at least in line with market growth across Australia and New Zealand. And so that's we'll be constantly looking at pricing and product and brand in relation to how we're competing. So I'd say we've found it a bit tougher, but there are certain things that we're doing to ensure that we continue to be competitive.
And commercial with sort of off the back of the big BI claims provisions you put up in the half, is there a push to lift pricing above sort of the current run rate you've highlighted, which I think was 6% or 7% last half?
I mean maybe I'll sort of say that in a different way. Are we comfortable with the return profile of our intermediated commercial portfolio? No, we're not. And so are there actions that we need to take around portfolios, pricing, costs? Yes.
So there's a package of things that we need to do there. And that's the way we've set up the company and the way our focus you can tell, by the way, we're talking in the focus of us that we see opportunities there. So particularly in relation to pricing, I mean we put through, I forget, 6% or seven percent type rate through that commercial portfolio, and volume was relatively flat over the six month period. It feels like we're not the only one that has some challenges with their commercial portfolios, and that pricing environment probably feels slightly more favorable today than it did six months ago.
All right. Thanks. I just had two quick questions for Michelle. Michelle, the 500 claims you talked about for business interruption, what would be the case estimates sort of in aggregate behind those relative to the provision you put up?
So, Kieran, it's a very small number of estimated claims relative, and some of them actually don't have business interruption coverage. But it's an indicator just that there's been a small level that have come in at this point in time. And we haven't gone into detail around the case estimates. They're complex by nature. But Nick touched on at the start of the presentation that the view is that our provisioning may be conservative based upon the actuarial work that we've done, the assumptions that we've used.
We think it's robust and appropriate, but there's nothing in those small number of claims that would indicate that's not the case.
Okay. And finally, just the from a capital perspective, can you highlight how big the DTA deduction was to your CET1 as a result of that provision last time?
Yes. So we recognized a $352,000,000 deferred tax asset associated with the recognition of the BI provision, and you see that within the negative movements on the capital slide. And we had about a $28,000,000 utilization of some tax losses that we had in New Zealand. So both of those factors have come through in the capital calcs.
Your next question comes from Matt Danger from Bank of America.
If I could just ask on the aspirations for a reported margin of 15% to 17%. Your underlying margins are already there. Previously, Nick, you've guided to a 16% to 18% reported margin target pre COVID. And given the work you're doing to address the commercial returns profile, why can't you be more aggressive with this reported margin? Can you talk us through what some of
the potential moving parts are?
Yes. Sure. Matt, mean, sort of a starting position, even though we sort of called it 15.5% or 15.7%, within that number is some claims frequency benefit from COVID-nineteen, essentially lockdown and motor frequency. So we're kind of guiding you down more to sort of the, call it, the one January run rate of our company, just over 14%. So we're not sort of claiming that 15.5% is the current run rate.
It's a lower one. Then sort of where to from here with that? We think with growth, portfolio remediation and sort of some efficiency gains in relation to the cost structure of our company, we can lift that. To your comment around why isn't 15% to 17% higher, I mean a few thoughts. One, we don't have reserve releases in that number.
So when we were 16% to 18%, we were 1% or 2% reserve releases. We're assuming none. And secondly, obviously, interest rates are sort of nothing. And so there's very modest contribution from investment returns in that equation as well. I mean let's hope it's conservative, but we think in sort of in the settings of the company, we sort of think moving from 14% up to that 15 to 17% type range and sort of the pillars that I described and the programs are going to come out of that.
And we're going to talk to you about how we're delivering against that every six months at least. We're confident we're to be able to do that. I wouldn't like to sort of stretch that further for the reasons I mentioned. And sorry, one last comment. We're very keen on growth.
So that's we've kind of we've had premium growth at IAG for the last number of years, and we've bought stuff, and we've created growth from that. But we want to have a blend of sort of 15% to 17% margin and a genuine growth profile, not just premium growth, but customer numbers. I mean successful companies have more customers year on year, and that's the company we want to be.
Thanks very much, Nick. And leading on from that, with the investment in digital, are there any specific opportunities you've identified? Is it an intermediate or a consumer proposition? Where's the addressable market?
I think it's everywhere. It's the reality, isn't it? I mean, think about our own experiences. We know our direct customers want to interact with us more and more digitally. We've got a great experience in New Zealand, where we effectively shut our physical footprint of 70 odd branches around New Zealand for AMI, and we've had loads of those customers now interact with us digitally.
COVID-nineteen, just generally, we've seen that uplift. So certainly, anywhere in our direct businesses, my view would be that we've underinvested in some of our intermediated connectivity, call it that, and the way that experience occurs with some of our partners, and there's got to be some opportunities for us to invest and create better experiences for end customer as well as the partner or the broker relationship. And then lastly, us. I think it's hard to claim to be a digital organization if that's not the experience within the organization. And so I'm continually looking for opportunities of how we can operate our company differently, and that's already happening over the last twelve months because we can't claim to be something unless that's what we are within.
And I see opportunities to continue to invest there, which will create culturally some changes, which will be positive, but also there will be some efficiency gains that will come out of that as well.
Great. And just one last question on the quota share and your comfort in the ability to renew given business interruption losses with reinsurance partners?
I mean, well, I've said this time and time again, and I know people know that I've been heavily involved in this from the start. But I am confident on those partners and our capacity to renew. A number of those partners have already discussed with us their interest in extending, expanding post some of the issues we've had around business interruption. So I'm not getting any signals at all that anyone wants to pull back. In fact, if anything, I think it would be the opposite.
That would be my general comment.
And I might just add, I've obviously been getting to know our quota share partners and participated in a range of discussions and meetings with them. And we've received positive feedback on our transparency and decisiveness in setting out our views on BI and taking the steps that we took. So all of the interactions I've had in this short period of time are consistent with the comments that Nick's just made.
Excellent. Thank you very much.
Thank you. Your next question comes from Matt Ingram from Bloomberg.
Hi, Nick and Michelle. Thanks thanks for the presentation. Just a couple of clarifying questions, please. You've obviously had very good rate pretty much across the business. I just wonder how long until we see that fully reflected in the net premium earned.
Obviously, there's quite a lag there depending on renewals and so on. But if you could give us some thoughts on that first, that would be great, please.
There's nothing to suggest it would be a different pattern, as I understand from what we've historically seen, and the team tell me that's over the next twelve to twenty four months. So we would expect it to be in line with that.
Okay. Great. Look, Maybe I'm a little ignorant, and I apologize if I am. You seem to take an overweight loss in your perils in in last financial year. And and I understand a lot of that was smaller claims that weren't covered by reinsurance, whereas this half has been pleasingly much, perhaps even better than your peers.
I just wonder what the nuances are that led us to that outcome. Was it just a really unusual year last year with a really big number of small events? Or was there a change in the book that you made this year? Just trying to get an understanding if that truly was unusual last year or if
some changes have been made to
the book to fix that up.
Yes. I mean, I'll make some I'll provide some comments. I mean, is the the inherent volatility that we have. I'd I'd say so I'd say there's nothing material in the change of our exposures over the last twelve to twenty four months, as an example, that would drive a different outcome. Therefore, the sort of the footprint of IAG and the exposure of IAG is not that different.
I think there's a couple of different things. It's the nature of the events sometimes have an impact on us and even concentrations of customers and where we happen to be. Secondly, it's a little bit of the timing of some of our reinsurance coverage. We our big coverage, our big catastrophic coverage, sort of we know that, that's very consistent and sort of that protecting the solvency of the organization. But some of these sideways aggregate coverage and the way that we wear a little bit of cost before we trigger some recoveries can depend upon the sequencing of events and the time of the year.
And so sometimes we have volatility half on half on half that is not always lined up with some of the financial years that we have. In fact, one of the not the reason, one of the reasons we changed our aggregate program because we used to run that on a calendar year that cut across two financial years. We've kind of now got that. We've changed that now to be working on a financial year because it does create a little bit of volatility on a six month by six month basis. I don't think there's other than that, there's not much in this story.
And I would say we ended up having, in this last six months, a bit more protection from some of that aggregate cover that probably worked in our advantage. We did have some larger storms in sort of September or October that we had a bit of protection from. And last year, we just had a lot of last financial year, just had a lot of perils from lots of different places. And we that sort of ended up consuming us. So that that that's a long winded say is not much in it.
I'm sorry.
That's alright. Was hoping that that would
be the
answer. So I've time for one last quick one. Nick, you mentioned you're obviously building out plans to improve that cash ROE and bump up the margin. You didn't mention any cost impact. Is it safe to assume then that, that's going to be within your sort of already established guidance on costs?
Or when you talk about those plans later in the year, is there a chance we might actually see a bump up in costs that you're going to need to make those improvements?
I mean, I'm a fan, which is how we've been running the organization, of sort of just wearing any costs in how we run our company. And so that will be how we sort of manage this going forward. If there are sort of I think you're inferring, are there investments that we need to make to sort of drive some of these pillars? Of course, there will be. But we need to wear that within the running of our company.
We're already incurring those costs on other programs at the moment, and they will move on to other programs as we develop out these plans more. I mean our intent is to sort of overall, over the next couple of years, grow the company, improve some of our portfolios, investing in those sort of driving an agenda around those four pillars. There will be some efficiency gains that come out of this. So we will be there will be lower cost of running IAG in three or four years than it is today. And that package is really going to drive the margin from sort of 14% up to that 15% to 17%.
And driving margin and funding investment as
Yes. And the plan is that we wear that, which is what we've been doing for the last couple of years. We sort of that's just part of our business. But of course, that's already embedded in our business model today because we're already investing in things today.
Thank you. Our next question comes from Ashley Daziel from Goldman Sachs. Please go ahead.
Thanks, and good morning. Just an initial question on reinsurance. As you've gone through the the recent renewal, you were sort of steering us at the last results to kinda FY '21 underlying reinsurance expense sort of being in line with the second half twenty run rate. Is that is that still a fair guide?
Yes. Thanks, Ashley. It's a it's a simple answer, but I like those. So, yes, it's still a fair guide.
The blinds are good. Okay. Moving on to the next one. Just just around business interruption. Wondering if you could provide a bit of an update there around the proportion of policies that still reference the outdated legislation.
I think back in November, you were talking to fifty percent at the start of COVID. Just wondering, as you've been through renewals over the past twelve or so months, what we're looking at, at the moment?
I mean a significant portion down. So I think the question is in the runoff of on the twelve month policies, all of our policies are any new business or renewals happening today or in fact last towards the end of last year, that was the case. But we still have some runoff occurring in relation to policies written earlier in calendar twenty twenty that's still running off now. I mean I haven't got that number off the top of my head, but it would be a relatively small portion.
Okay. That's helpful. Thank you.
Thank you. Your next question comes from Nigel Pitoway from Citi. Please go ahead.
Good morning, Nick and Michelle.
First of all, just wanted to try and delve a little bit more into the sort of underlying margin as we look into the shorter term, particularly the second half. I mean, you take your sort of starting point pre COVID of around about 14, Thinking about the factors that could influence it from here, we've obviously got some earn through of higher premiums probably above claims inflation. We've probably got some roll through of lower investment yields. So my question, I guess, is are those factors the main two factors likely to influence margins in the second half? And what else should we be thinking about?
Nigel, Nick, I mean I'm not sure investment yields because we're kind of the run rate's come down. So as a contributing factor, if your question is sort of second half, I know we haven't got guidance, but I can sort of see where you're heading. My thinking is we've got the as you say, earn through or the beginnings of the earn through of some of the more favorable pricing that's been flowing through our portfolios, as we pointed out, everywhere. We've probably got a little bit more cost in the company in the last six months, and that will come down over time, but I don't it won't just come back straight away. We obviously had some frequency, which is an estimation, of course, of that sort of lower or COVID lockdown impact on frequency.
That's sort of an estimation of ours. So that's there's judgment from us on that number, but we've sort of tried to guide where we think that is. And one thing that we will continue to work hard on is really some of the intermediated businesses here in Australia, in personal lines and commercial, and really uplifting the profitability. That's sort of new news to that story. And that's going to be a real focus of us.
That's a drag on our earnings profile. And that some of that will play out in the next six months. But as a calendar sort of a financial year 'twenty two, 'twenty three, that will be a theme of our results. I mean, Michelle, you I can't leave anything else?
No. And I think when we get to the full year, we'll have enhanced segment reporting because we'll show you the split of Australian Direct and Australian Intermediate, which will allow you to see how we track our performance against those outcomes over the next couple of years. So I think that will be helpful as well, too.
We feel a bit of momentum in our place, though. I mean I talked to the senior team this morning. We're not going to get ahead of ourselves either, but we feel a bit of momentum in IRG.
I'm cautiously optimistic. You, Michelle.
What does it?
Okay, fine. Thanks for that. And maybe just delving a little bit more on those comments on investment yield. I mean, obviously, we're sort of, as you say, bond yield sort of very low. Obviously, spreads haven't come in a lot.
I mean, previously, you sort of guided to, you know, a fair margin above the the risk free in your ability to generate that on on fixed income investments. I mean, even does that sort of now sort of threaten your ability to do that? Is that becoming a lot harder? And should we not bake that in quite as much as maybe has happened previously?
So Nigel, obviously, there's no certainty to this. But talking to Alan, who leads our capital markets team, we still think in the range of 50 to 100 basis points is reasonable on the tech reserves in terms of the mix of assets that we have in that and the active management that the team do. But obviously, we are in very low interest rate environment, so it's a smaller number than it's been historically.
Okay. Maybe then one on capital. I mean, obviously, you flagged as you went through the presentation that you're even more above the top end of the range than you expected. You've obviously talked about maintaining a prudent capital position. I mean, how are you thinking now about sort of capital and your target range?
Is that something that we're likely to see? It's still above target range until COVID uncertainties have dissipated? Or is that the way you're thinking about it? Or maybe can you enlighten us a bit more in respect to that?
So at this point in time, we're comfortable with our target range of 0.9 to 1.1 of CET1. Yes, we're a little above that at the moment for the reasons we discussed in a lot of detail in November and I've touched on briefly today. We continue to be proactive in looking at our capital position. Obviously, IG has spent a lot of time doing that very well over many years, and we want to continue to do that and not become complacent. But there's nothing I'd call out at the moment that would suggest we'd see a change in that.
Okay. So that means you are going to stay above your range for for a while? Or
You're very good at trying to pin me down. Right at this point in time as we see the BI situation unfolding consistent with where we talked about, we've been at the top end of the range. So when you have a look at that, that's where we're at. We are appropriately prudent in decisions around things like dividends, as you see by the 37% payout ratio that's reflected. And obviously, as we see the second half unfold, we intend to respond with our normal payout ratio and those sorts of things around dividends and have the appropriate capital position around that.
Nick, am I being too Nigel,
the only thing I'd add is we will true up the cash earnings to 60,000,000 to 80,000,000 You can see we've taken a conservative view. We normally pay at a conservative interim dividend is sort of the intent. We've taken we're paying zero seven dollars The actual payout on the cash earnings number is relatively low. We will true up in our range of 60,000,000 to 80,000,000 on the full year. In itself, that will create a reduction of capital, just sort of applying that methodology.
And we're going to be conservative. But medium term, we've got capital targets. We don't think there's anything changed in the resilience of IAG. And therefore, we have those targets for a reason. That's how we want to run the company in that range.
Okay. And then maybe just finally, just looking at sort of those targets you've got in the next couple of years. I mean previously, obviously, when the company has sort of given targets, the thing that seems to have sort of let down your ability to achieve and that's been the commercial intermediated book. And I know you're sort of saying that you're targeting an uplift to profitability there. I mean are you confident that, that business is now sufficiently remediated, turned around, whatever the best description is, to sort of mean that that's no major risk to you achieving those targets as you look out in a couple of years' time?
I mean, Nigel, nothing's certain, is it? It's what I've done is try to create an organizational design to get the right amount of focus, and we're giving the right levers to deliver against that. Our business has not met sort of our that part of our business has not met our expectations. We know that. There's definitely some more stuff to be done.
So if your question is, is it are we completely good to go today and everything from today onwards going to be good news on that business? I doubt it. There's things we need to do still and remediate, investments we need to make, relationships that we need to develop and grow and deepen. So there's more stuff to be done, definitely. It's really I see a pathway, though, of success here.
We're going get the right time lines here over the next couple of years, right amount of focus. I see a pretty positive pathway here for an input for essentially onethree of our company.
Thank you. Your next question comes from Siddharth Parameswaran from JP. Please go ahead.
Thank you very much.
Afternoon and good morning, Nick and Michelle. Just a couple of questions, if I can. Firstly, just on business interruption. I just wanted to your provisions against the Biosecurity Act and just the reason for taking the provisions that you did. From memory, I think you had about $200 odd million against that.
Seems like your peers haven't taken anything. Is there something specific that you have in your wordings around the Biosecurity Act, policies of the Biosecurity Act wording for that is different to peers, something around physical damage or the like or the lack of requirement for physical damage. Maybe if could just comment on that.
Sid, thanks for the question. Good pickup. You'll recall when we or you may recall, when we did the capital raise in November, we talked about two issues. And the second one is the one that you're referring to, which relates to some prevention of access exclusions within some of our policies. So when we set out the basis of the business interruption provision, we called out those referenced the Quarantine Act, which was the key consideration in the first test case.
And we said we also had some policies through broke channels, effectively was where it was through, that while they referenced the Biosecurity Act, there were some questions being raised over prevention of access. And without going too far into the detail, I'm looking at our group general counsel in front of me, when we're looking at a second test case and understanding the elements, will look to close out that question as well. It's really important that we have clear guardrails so we can provide confidence to our customers in terms of how we respond based upon this situation.
Hey, Sid, my understanding is the wording we have on this topic is completely consistent on this issue of biosecurity and prevention of access is consistent with industry wording. It's the various schemes from some broker partners. So there's nothing unusual about our exposure here on that particular issue. Well, I think we've taken a commitment
Thanks, Simon.
I said this in November. We've taken a conservative view on this. To be fair, we lost our confidence from the first quarantine finding, quarantine act finding. And so therefore, we sort of said, let's take a conservative view on this topic, and that's what we've done. That's how we reflected our balance sheet.
Okay. Just a follow-up question on business interruption. Just the the last provisions that you've taken, you haven't taken them through the claims line. If any of this proves to be redundant, can I assume that the releases won't come through the claims line as well?
Yes. Well, we'll have to figure out how to present all that. That's right. And I mean, you'll see in the statutory accounts that we there's there's a we have to we treat it slightly different. But yes, we'll give full transparency to our owners and investors and analysts around any reversal of that, if hopefully, day occurs, making sure that you can see how we've reflected that.
Okay. Thanks for that. Just a question on Home as well. Just you've been struggling to grow with market for a while in that class. And just some thoughts on your side, whether you need to try and get access to the bank assurance channel and also just whether your comments for growth in Personal Lines are strictly organic?
I mean we're looking we want to have a relationship, a growing relationship with sort of 30,000,000 Australian and New Zealanders. An important element of that is around protection of people's property. If they're we want to be able to grow that business in line with at least in line with how the system or the market is growing across Australia and New Zealand. If there are any inorganic opportunities that sort of make sense for us, then yes, we would look at those as well.
Okay. Thank you very much.
Thank you. Your next question comes from Brett Lemisseria from Velocity Trade. Please go ahead.
It looks like the running yield you've got in your underlying insurance margin is 1.5% on policyholder funds, 1.5% per annum. Is that correct?
That order of magnitude, but we obviously back out the credit spread impact when we're looking at the underlying margin.
Yes. So it's simply 50,000,000 times two divided by 6,500,000,000 dot 1.5%. So that's the right way to look at it. Right?
Yeah. Our technical funds are about $7,600,000,000 at the in the investment portfolio at the thirty one December.
Yes. It it was average Yeah. So that's relevant. Yep.
Okay. So then when you were talking talking about Nigel's question, you said 50 to a 100 points is what you'd make out of risk free. That doesn't get you to one and a half, does it? So there's still potential downside from that, isn't it, in the current half, the half we're nearly
Yes. Brett, this is Nick. There's probably a little bit. I mean, some of those averaging, I think the tech reserves obviously had a fair spike in November too, so of the the complete it's not a complete average. But yes, what Michelle said was 50 to 100 plus, I forget, two or three year risk free bonds are not much, are they, 10 or 15 basis points.
So yes, there may we're not claiming that, that there may be a little bit of pressure on that element of our return profile in our overall margins. You're right.
Just moving on to BI one more time. How many of those claims have you settled?
So none at this point in time, Brett, as it's been the communication to our customers, which has been important while there's the uncertainty over those. So they have been received. We've obviously communicated clearly around where we're at, and we're working as quickly as possible as an industry to get clarity over doing that so that we can meet the needs of customers where they're an eligible and valid claim.
What do you expect to be the average term to settlement of these claims?
I'm gonna get out of my depth quickly here given the complexity of some of these claims. I think it's probably a little bit too early to call that given where we're at in in the process.
How many claims are you expecting based on your reserves?
So we've not called out a number associated with that. We've given you the exposure in our portfolio and some assumptions. I think the detailed slide shows you the exposure, but we've not called out number of claims.
Brett, I mean, reality is it's very high level at the moment. And we need to go through the there's a process the industry is going through right now to try to create more certainty around this topic. And well, like we sort of we've said before, we believe we've taken a conservative view in how we're provided for in the balance sheet, and we continue to believe that today.
Would it take as long as a couple of years before we know the outcome of all this?
I mean we hope not. I mean as an industry, we're trying to bring this on as quickly as possible to create that sort of clarity for everyone on how this goes forward. So that certainly is not the intent. We're trying to bring this on as quickly as possible. Hey, I think I'm getting a wrap up comment in front of me.
So let's make some closing comments. Firstly, thanks for the questions. As you can see, we're pretty pleased with what we've delivered today and the financial results over the last six months. But we're also pleased with the momentum that we see in our business, and we sort of feel like we're heading in the right direction. And we're very clear about our strategy, about creating a stronger and a more resilient IAG.
And of course, what we we look forward to coming back and talking to you more about how we're delivering against those four pillars over the next six to twelve months. So thank you again for your time today, and we'll talk to you more.
Thank you.