Good morning, thank you for joining us for IAG's results presentation for the year ended 30th June 2020. Today, we're presenting from the land traditionally owned by the Gadigal people of the Eora Nation, and I'd like to pay my respects to their elders, past and present. As usual, joining me today is Nick Hawkins, our Deputy CEO. I'm very pleased to be introducing Michelle McPherson, our Acting CFO. No doubt many of you are familiar with Michelle from her time at nib. While we presented to you a fairly detailed P&L a fortnight ago, this morning we'd like to give you a high-level overview of the results up front, provide some fresh detail on aspects of our performance, and address some of the issues that you have asked us about following our previous announcement.
This will include some detail on our divisional performances in Australia and New Zealand, a greater explanation of the COVID-19 impacts in our full year numbers, an expansion on the features driving the prior period reserve strengthening in the second half, an outline of our reinsurance position heading into FY 2021, and a dissection of our shareholders' funds investment portfolio. As we said a couple of weeks ago, we think this is a commendable result in the circumstances. Our top line growth was in line with the guidance we gave you at the outset of the year, despite incurring a slight negative effect from COVID-19 in the second half. We also outlined a broadly neutral insurance margin impact from COVID-19, and Nick will dig into the elements here in more detail.
We saw a slightly softer second half underlying margin owing to higher reinsurance costs, lower interest rates continuing to impact investment income, and a poor performance from our commercial long-tail classes in Australia. At a reported margin level, the difference versus pre-existing guidance was essentially down to adverse perils, reserving, and credit spread effects. The year also saw us successfully exit our investment in India, realizing a post-tax profit of AUD 326 million in the process. Unfortunately, partially offsetting that has been the customer refunds provision, which we set up at the half, and have increased for two further pricing issues identified in the second six months. These issues stem from our review of pricing systems and processes, which is well advanced. As we reported a couple of weeks ago, we are not aware of any other matters requiring remediation of this nature. However, our review is ongoing.
The year also included a relatively severe hit to our investment income, particularly the shareholders' funds line, reflecting the volatile market conditions enveloping us all in the second half. Finally, we are in a strong capital position, and Michelle will address our thinking on the dividend, where application of our long-established dividend policy means we have not declared a final dividend for the year. The other week, Nick spoke to our operational response to COVID-19, and this slide gives an indication of the breadth of activities involved. I don't propose to go through it in detail, but we quickly set up a COVID-19 response team to coordinate our response that prioritized the health and well-being of our people, our customers, our business partners, as well as the communities in which we operate.
We had 98% of our people across Australia and New Zealand working from home at the height of the COVID-19 pandemic, and I'm particularly proud that customer service levels held steady across the business. This has been a comprehensive response, and it's ongoing. I also want to impress upon you that we are actively addressing the challenges and opportunities that this current operating environment is creating for our core insurance business. With that, I'll now hand you over to Nick, who will go through the financials in more detail.
Thanks, Peter. Good morning to everybody. As Peter said, we have experienced a tough second half to the financial year. It's also, from our point of view, been a period where we really have demonstrated the role that we play in the community and the important role that insurance plays. We just talked to our teams about this today. We're really proud of the way we've delivered on our customer service levels over this period, and also just the resilience of our business here at IAG in a tough time. This first page I'd normally sort of talk to, but these are the same numbers that we presented a couple of weeks ago. What I thought I'd do, rather than going back through these, is give a bit more color on certain aspects of our performance.
I'll just start with the two big businesses, Australia and New Zealand. Firstly, with Australia, where we saw modest premium growth, which did, though, within that, include lower CTP pricing and some agency business exits, with right about AUD 90 million year-on-year is absent. Within the Australian performance, with short tail personal lines has delivered growth of over 3%, which has been predominantly rate-driven growth. Although we did see a little bit of volume growth within our Victorian businesses. We've had lower commercial premiums, and that's really been characterized by some volume loss on one side, and that volume loss has largely been offset by some rate that's flowing through that portfolio. Encouragingly, also within our commercial classes in Australia, we have seen a reduction in that volume loss in the second half.
Half on half, the amount of business that we've lost has slowed down, and we're pleased with where we're getting to there. The underwriting result for our Australian business has worn a small net negative from COVID-19 effects, and I'll come back to that and just give a bit more color. The Australian direct personal lines business continue to remain very strong profitability during the six and 12-month period, although we have, within the intermediated personal lines business in Australia, some challenges. The Australian commercial portfolios continues to have some challenges around profitability, particularly in our agri and rural books, and we've talked about that before, as well as more recently in some of our long-tail classes within our commercial portfolios, really driven by some of the changes of the economic conditions of Australia. We are applying pricing to all of our underperforming portfolios within our commercial book.
The drop in the reported margin in the second half really reflects the combination that we're seeing here in Australia around higher perils events, some additional long-tail reserving that we talked to a couple of weeks ago, as well as some adverse credit spread effects. The combination of those three have driven that outcome. Sort of the story here really is the direct personal lines business continues to perform soundly within the Australian business. We know we've got some work to do around our commercial portfolios. New Zealand's a good story for IAG and continues to deliver strong results. If you're looking into that, the premium story is the premium growth has tapered off a little bit, although that did include a roughly AUD 20 million impact in the second half from lower new business volumes.
That's a theme across our company with lower new business volumes in the lockdown periods, really driven from that COVID-19 effects. If you look at the year as a whole, though, for New Zealand, we've had strong business growth in the NZI portfolio there of over 5% that's been delivered for the year, and that's really from a combination of both volume and pricing that's flowing through that portfolio, and that pricing particularly in the property and the liability classes of NZI. Our consumer part of our New Zealand business has had overall premiums relatively flat, although we have seen a little bit of growth within the AMI brand from a mixture of both rate and volume.
If you're looking at the underlying margins for New Zealand on this page, you can see a very strong result, that underlying margin has been assisted by a small net positive from COVID-19 effects. The reported margin year-on-year is down a little bit, that's really driven by perils. We had some terrible perils on the east coast of Australia, let's not forget, within New Zealand, we also had a very significant hailstorm just south of Canterbury in November, that's impacted the perils number for New Zealand. Reported numbers year-on-year are down a little bit. Overall, we're really pleased with the result from our New Zealand business. If I just look at premiums in total across IAG, that's what this slide is presenting.
Overall, our growth in FY 2020 was in line with what we sort of said at the beginning of the year and the guidance that we provided of that low single digit. Within that, we think there's an estimated adverse impact of around AUD 80 million from COVID-19 in our top-line premium, and that's really been driven by the lower new business volumes that we saw, particularly in the months of April and May when we had Australia and New Zealand predominantly in lockdown. We're happy to see, though, that new business levels have sort of gone back to more normal over the last couple of months, across most of our portfolios and regions, and our retention levels, pleasingly across our entire portfolio, have held up during this period. The COVID-19 impact, though, is roughly 1% impact on growth in the second half.
Just some thoughts and comments on pricing and what we're seeing today and what we have been seeing. What we're seeing is some rate increases have been broadly matching underlying claims inflation within our short-tail personal lines portfolios across our portfolios. We are seeing ongoing rate growth in our New Zealand commercial lines portfolios, although the speed of rate increases is slowing down, really driven by the level of profitability that we have within that book in New Zealand. We are seeing continued rate increases within our Australian commercial lines, and of course, that varies depending on the segment that we're talking to within those portfolios. We are still putting price increases through to counter cost and investment income pressures that we're seeing and to address any of our underperforming portfolios.
At the same time, of course, we continue to support any of our vulnerable customers in that story. On the underwriting result of the company and the impact of COVID-19, I thought I'd just sort of step through the main elements that are here. Firstly, we have, and we talked about this a couple of weeks ago, we have had a net claims benefit flow through the group's P&L of around AUD 150 million. The main driver here has been the drop in motor vehicle frequency driven by the lockdowns that we saw within the months, particularly of April and May. As we had talked about the other day, motor claims volumes have rebounded up, as in we're getting more claims coming in now, as lockdown conditions have eased across the different geographies that we operate.
Clearly Victoria will be an exception to this now as they've gone back into lockdown. Offsetting that motor vehicle frequency and within the net AUD 150, has been some negative impacts from landlords insurance, particularly here in Australia, from travel insurance, we've got a relatively small portfolio, and we do have some very small amount of business interruption exposure in New Zealand. The package of that has been a net positive in the P&L of around about AUD 150 million. Offsetting that benefit, there's been two things. Firstly, just over AUD 100 million provision that were put in place to cover potential COVID-19 claims impacts. We talked about this. This provision that we've put in place is in line with accounting requirements and takes a top-down view across our entire portfolio, around potential adverse conditions driven by COVID-19.
On this subject, an element of that provision does relate to potential exposure under business interruption insurance. Just on that topic of business interruption, we are confident that the policy wordings we have across our portfolios for business interruption exclude exposure under a pandemic situation, which is a situation that we have. There are two issues that are within this that are industry issues. The firstly is around some of the wording that references an old act, being the Quarantine Act. The second issue is the application of the prevention of access extensions that are contained within those policies. You will have seen that the ICA has announced a test case on the Quarantine Act issue, and we do anticipate one or more test cases will be initiated on the other matters in the coming weeks. We expect a decision on these to occur later in this calendar year.
In addition to the provision of around AUD 100 million, we've also allowed for a further AUD 160 million when calculating our regulatory capital position. You'll see that in the pack around capital. What that AUD 160 million reflects the estimated future cash flows that may attach to the unearned premium, and that is not reflected in our balance sheet today, but it's based on the same methodology as the AUD 100. The second part of that COVID-19 negative impact. We've got AUD 150 on one side, AUD 100 negative on the provision. In addition to that, there's an additional AUD 50 million of costs that we've incurred in the second half, driven by COVID-19. A portion of that AUD 50 million can be, though, considered one-off. In particular, you'll see there's about a AUD 20 million net cost within the New Zealand business from the closure of our AMI branch network within New Zealand.
We believe there's a degree of conservatism in our accounting for COVID-19 impacts that we've put in place, but we feel that's appropriate to approach it this way in this uncertain environment. On reserving, we spoke to prior period reserving before, I thought I'd just provide a bit more color here. The reserving decisions that we've taken at year-end were in response to a range of factors. We have seen some stronger claims development than we originally expected. This is all in the Australian long-tail classes. We are seeing an increasing number of larger claims, and we have taken a view and a degree of conservatism across the portfolio, and when thinking about potential economic conditions going forward. The reserve strengthenings that were put in place affects all of our major commercial long-tail classes in Australia to varying degrees.
Against that, though, we have had CTP releases, have provided an offset within the net number, but these are down on prior years owing to the increased impact of scheme reform that we've had from here in New South Wales and are likely to be lower going forward. On 24th of July, we did provide guidance to around negligible level of prior period reserve movements in FY 2021, and it makes sense in our view to remove any allowance for reoccurring reserve releases in our underlying margin definitions going forward. Looking at perils and what's happening there, the level of attritional claims that we experienced in the final quarter was definitely higher than we originally anticipated, and that's what's driven the AUD 50 million overrun from our revised allowance from AUD 850 million up to AUD 900 million, which is the number we've delivered today.
The last year, as we all know, has been a period of extreme perils activity, but it's also been one in which we've seen the strength of our reinsurance program has been truly demonstrated. Overall reinsurance recoveries in the year, in addition to what we have warned, the net AUD 900 million, We've recovered an additional AUD 700 million, and That's before any quota share considerations as well. You'll see we've disclosed a higher natural perils allowance for FY 2021 of AUD 658 million. That's above our FY 2020 allowance. However, this is lower than we indicated earlier in the year, That's really a reflection of the strength of the reinsurance position we're in for the FY 2021 year. I thought I'd just touch briefly on where our reinsurance protection currently sits. As we indicated before, we have strengthened our reinsurance protection over the course of the year.
You can see there's more color in this slide than there was this time last year. The latest step in what we've done is we've transitioned our aggregate cover to a financial year basis, or we're in the year of transitioning this to a financial year basis to avoid some of the peak catastrophe activity that we see over the Australian summer that can disrupt that process a little bit. We're also aligning that aggregate cover, and this is a year of transition, to be on a financial year than a calendar, and I think that probably makes things a bit easier as well. We've also purchased some further stop-loss protection that sits above that perils allowance, but it's at a higher attachment point with a gap of AUD 84 million.
We have our perils allowance, we have a gap of AUD 84 million, and then we have a stop-loss that sits on top of that, and we've had that in the past, where we haven't exactly had it sitting on top of that perils allowance. Collectively, we have a strong reinsurance position as we enter FY 2021. We have AUD 290 million of gross protection available under the 2020 aggregate cover and an MER of AUD 41 million post quota shares, and we have some additional aggregate cover in place as well. Just on reinsurance costs, and I may briefly mention this before, we have had an increase in non-quota share reinsurance costs of approximately AUD 30 million that are in the second half P&L of FY 2020. Some of that does stem from the 2020 calendar cat renewal process, so we did pay a little bit more for that.
We paid a little bit more and we bought a little bit more cover as part of that. The balance of that AUD 30 million reflects the purchase of some additional replacement covers, including a second event drop-down, which was taken out post the February East Coast Low event that we incurred. I think it's really important here to say, as we consistently demonstrate, we pursue reinsurance initiatives that strengthen our capital position in what we believe is a cost-effective manner. We'll continue to look for ways to do that going forward. I'll now hand you over to Michelle, who's going to talk about investments, capital, and dividends. Michelle.
Thank you, Nick. Good morning, everyone. As you'd be well aware, we have seen some fairly severe investment income impacts this year, so I thought it worthwhile addressing the current composition of our respective investment portfolios. Our technical reserves continue to be wholly invested in fixed interest and cash at a duration that matches our insurance liabilities, approximately two years. This remains a high-quality book, which continues to deliver a strong relative return, but one where we expect further reduction in the running yield in FY 2021, reflecting the fall in interest rates. Our shareholders' funds portfolio has undergone some compositional change this year, with a much-reduced growth assets weighting of around 25% at year-end.
This reflects the combination of three things, mark-to-market valuation effects, some active reallocation to fixed interest and cash categories, and the deliberate placement of the around AUD 600 million proceeds from the sale of our interest in SBI General into fixed interest and cash. It is our present intention to retain a growth assets weighting of around 30%, as opposed to the 40%-50% weighting traditionally applied, given the uncertain investment market conditions that are still prevailing. The indicated 30% weighting also allows for the shift of the IAG and NRMA Superannuation Plan assets to an external manager later this calendar year. If we excluded this largely fixed interest pool of money from the 30th June position, it would reveal a growth assets weighting of around 28%. Finally, to the alternatives element of our portfolio, which presently stands at about AUD 740 million or 17% of shareholders' funds.
This is part of the diversified investment approach and contains a range of components which we've split out on this chart for you and which have delivered satisfactory returns over an extended period of time, notwithstanding the poor performance in this latest half. Alternatives do also include over AUD 60 million in respect of our residual stake in Bohai in China and the various investments made by our Firemark Ventures fund. Overall, we are satisfied with the present composition of our investment portfolios, which obviously remain subject to ongoing review. Moving to capital. Our closing CET1 ratio of 1.23 times is comfortably above our target range of 0.9% - 1.1%. We do believe it's appropriate to retain a capital position above benchmark at this point in time, given the uncertain economic environment.
This is also at a time when prudential regulators on both sides of the Tasman are encouraging a conservative approach to capital preservation and are placing some restrictions on dividend flows. As reflected on the slide, there are some significant movements within our CET1 waterfall since 31 December, most notably from the sale of SBI General and from a reduced growth asset exposure, which largely reflects market valuation movements. We have had, during the period, further use of New Zealand tax losses, but this has been countered by the deferred tax assets recognized in respect of the increased customer refund provision and the COVID-19 provision for claims. We have also separately identified on this chart all of the COVID-19 effects, which collectively have lowered our capital position at year-end by around five basis points.
As Nick highlighted earlier, this does include around AUD 160 million for potential COVID-19-related claims within premium liabilities, which accounts for much of the reduction in excess technical provisions. Overall, we are very comfortable with our capital position. As we indicated a couple of weeks ago, we have not declared a final dividend for the year. This simply reflects adherence to our long-standing dividend policy of distributing between 60% and 80% of cash earnings on a full-year basis. This policy has served us well, adjusting for genuinely one-off items and adding back non-cash amortization on acquired intangibles. It provides a disciplined approach that ensures that dividends are not paid out of capital. Application of the top end of our policy range produces a payout of roughly AUD 0.10 per share, which is exactly what was paid out at the interim. On one final dividend-related matter is our future franking capacity.
The absence of taxable earnings in Australia in FY 2020 means that an already reduced franking capacity will be further challenged over the short term. In calendar year 2021, we anticipate a rather lower level of franking on any dividends declared compared to the 70% applied to this year's interim payout. We do expect this to be a temporary state of affairs as Australian earnings recover from the adverse perils, reserve strengthening, and investment income effects of FY 2020. With that, I'm pleased to hand you back to Peter.
Thanks, Michelle. By way of close, I just want to reiterate the comments we made a couple of weeks ago about guidance for the year ahead. Given the unprecedented uncertainty that COVID-19 and its economic repercussions are creating, we have determined not to provide our traditional guidance measures for FY 2021. At suitable junctures, we will provide appropriate updates on how the company is traveling performance-wise. Despite this uncertainty, we do face the future with the confidence that we have a resilient business, which is in strong financial shape, and which is well equipped to rise to the challenges presented by this current environment. With that, Nick, Michelle, and I will be happy to take any questions that you have.
Thank you. To register for questions, please press star one on your phone and wait for your name to be announced. Your first question comes from Andrew Buncombe with Macquarie.
Hi. Thanks for taking my question. Just three quick ones from me, please. The first one, has there been any pressure to refund motor customers with a lesser driving, like some of your peers? Any direction on that would be helpful. Thank you.
Andrew, good morning. It's Peter. No, there's been no pressure. I think as you know, we have substantial customer care measures, both sides of the Tasman. Our responses have been very tailored, targeted towards the individual customers and the needs that they have.
That makes sense. Second question is around reinsurance. Thanks very much, Nick, for giving us the extra color on the AUD 30 million for the second half 2020. My question is around, given the aggregate for jumping around a little bit, how should we be thinking about that cession ratio into FY 2021?
Andrew, hi, it's Nick. Is your question sort of the reinsurance expense of IAG going forward?
Yeah.
We had some additional costs as we talked about in second half 2020. Probably by the time I look at the additional cost of the renewals, the covers we've got in place, that second half 2020 is not a bad indication of the current run rate of reinsurance cost in our company for different reasons, really. Not because of the backup and other things we bought, but because of the way we've renewed at 1 July and sort of our expectations probably of 1 January 2021. It's probably not a bad guide for you.
Excellent. That's very helpful. Just the last one from me, please. Your expense ratio has been bouncing around a little bit throughout this uncertain. You've now through the back end of your cost out program. How should we be thinking about the expense ratio in FY 2021? Thanks.
Yeah, Andrew, it's Nick. There's probably, we sort of gave everyone a fair bit of color on the first half. In the second half, we have had around about AUD 50 million of additional costs that have gone into that. I think what was said is at least half of that in the second half is kind of one-off. If you sort of adjust back for that sort of gives you guidance on where we're heading on the expense ratio going forward.
Excellent. That's great. Thank you.
Our next question comes from Matt Dunger with BofA Securities.
Thank you for taking my question, gentlemen. I wonder if I could ask on the repricing to counter the costs and investment income pressures that you've noted, where do you push pricing in the book, and at what level of volume growth or losses are you willing to accept?
You want me to?
Yeah.
It's Nick. I'll just make a few comments there, Matt. It's a big question across a lot of different portfolios of IAG. Maybe I'll just quickly summarize, I think, rather than sort of a macro comment, because I think it's hard to, across the AUD 12 billion, to generalize. Our sense here is New Zealand in personal lines, there's a little bit of pricing that has occurred, and we're getting that sort of pricing volume trade, but profitability is pretty good. I indicated that within New Zealand commercial, we've been growing both price and volume there. Our sense is that in the second half, that repricing of the NZI commercial book has come down a little bit, as in not negative, but the amount of increase is slowing down.
I feel like we've got that mix about right in New Zealand, is our sense. Within Australia, we have been able to You'll see that there's a couple of percent pricing that's flown through in the last 6-12 months on motor, sort of double that in home, and volumes have been relatively stable. I think commercial Australia is the one where we've sort of had volume losses of around 5% or 6% if I adjust out the sort of the agencies that we've sold, and we've had pricing of similar order go through that portfolio. The comment we've made is in the second half, we've been able to put pricing through the way I described. Our volume losses are definitely coming back, as in getting closer to zero, they sort of halved in the second half. That's sort of that story.
I don't think there's an IAG macro story here. If I just talk about what's happening across those different portfolios, that's kind of the flavor across the different parts.
Okay, thanks. It sounds like the volume losses in commercial you're expecting to moderate. If we're seeing 5.5% pricing across commercial lines of inflation linked increases in personal lines, does that imply what we should look for 3%-4% top line growth?
Hey, you can tell that we're not providing guidance for next year. What we're really trying to do is say, this is what's happening now as a way of helping you understand the run rate of IAG. I've kind of had a go at sort of describing what's happening now, and you can sort of see that that's what's currently baked into what's happening at IAG right now.
Okay, thank you very much. If I could just ask a question on the excess capital above the top of the target, and you've already built in some provisions for COVID.
Yeah.
What's the timing for addressing the capital above the top end of the target range?
I think the logic at the moment is we're going to sit tight. We've got uncertain economic conditions that we think it makes sense to sit with our current capital, and we acknowledge that above our targets. To your point that has what we believe is some conservatism in the first place around us trying to sort of look forward and bring that into the balance sheet at 30th of June. Our approach is definitely going to be conservative, until we have sort of a bit more clarity on what the future looks like. It doesn't feel like that's on the agenda at the moment, if your question is around some sort of distribution to shareholders.
Okay, thank you.
Nigel.
Morning, guys. Just first of all, I'd like to delve into the commercial line, if I could, a little bit more. You're saying there, Nick, you're still getting price rises, but we have heard of some companies sort of being more willing to renew on existing terms. Obviously with the pressure that's likely to come into the SME space, can you talk a little bit more as to how sustainable you think those price rises are likely to be? You've mentioned you need to do some work on that portfolio. Just how easy is that going to be given the likely economic conditions?
Hi, Nigel. That's a good summary, really. If I just say what's been happening, and as you know, we sort of generalize even commercial, that's not quite right, as you point out. Within that, there are many classes of business where we definitely have some challenges, and I think this is not an IAG issue. This is an industry issue around some of those long tail classes, where we are expecting some pressure on loss ratios driven by the sort of the economic conditions. We know that there's been some pricing there. We know that we have some, and we have been doing this, some challenges around our agri and rural portfolios, and that they are not meeting the sort of the return requirements and there's a trade there between price and volume.
I think your comment on SME and some of the challenges that SME is having and the impact on pricing around that's what we're going to have to navigate our way through. I'll just say what we have done in the last 6 - 12 months is we have been able to address price through these portfolios, and the total of that has been the sort of 5% - 6% in total that's flowed across that portfolio in the last 12 months.
Nigel, it's Peter. Maybe if I can just add to that. Given that the largest area that we need to remediate is in the long tail portfolios, we're not seeing insurers in the marketplace renew at expiring terms. Far from it. We're seeing rate increases still going through somewhere in the high single digit to low double digit range, depending upon the actual class itself.
Maybe just on the reserving side, as you went through the presentation, Nick, you did say that you felt you'd taken a conservative approach. Can we just maybe delve into that there? Given what you said about the potential change in claims environment, why are you so convinced that you've been conservative, and how conservative do you think you've been?
That's hard, Nigel. What we've tried to do is factor anything, the scenarios around more challenging unemployment, economic conditions, and bring that forward into our current period loss ratios. That's been the deterioration in the current period, as well as factor that into the balance sheet. Then, we've sort of done that and we've tried to bring forward and we believe that we're being conservative here, which has been our approach to how we run the balance sheet anyway. In addition to that, we've sort of got that COVID-19 overlay, which we've done in addition to our normal reserving process to try to bring forward if there are challenges out there and make sure our balance sheet reflects that today. I accept your point, Nigel, and we'll find out.
This has been our view and our lens has definitely been, if we can see any problems out there, we've tried to bring them in and apply a level of conservatism to what that problem could be in our balance sheet at 30th of June 2020. That's been our approach.
Okay. Maybe just finally, obviously you've got that additional expense. It's AUD 20 million for the AMI closure. Presumably, that's in lieu of certain savings that are likely to flow through from that moving forward. Is there anything you can sort of tell us about that?
Yeah, that's in the mix of how we're running our New Zealand business. I will say, though, that we've seen a big increase of customers utilizing our digital channels in New Zealand. We definitely are going to be spending more on digital within our New Zealand business as part of that story. Yes, if your question is, yes, there's some sort of financial return for that. Yes, that is. Although we will be reinvesting a fair chunk of that back into accelerating into a digital experience for our customers within our New Zealand business.
Okay, thank you.
Our next question comes from Andrei Stadnik with Morgan Stanley.
Good morning. I want to ask two questions, one on the premium liabilities and a follow-up on the dividend payout. In terms of the premium liability, the extra AUD 160 million you flag, could you explain a little bit in terms of how that could flow into next year? I mean, is this really just difference in terms of hyper build of adequacy or regulatory capital, and whether you would take through the P&L? Or are you flagging that there is an extra AUD 160 million of claims to come in FY 2021?
Andrei, thanks, mate. What we've done is essentially it's a pretty high level assumption that we've booked in the balance sheet in the P&L at June 2020. We've applied those same assumptions to the premium liability to impact the regulatory capital. It's not in the accounting balance sheet as you highlighted. I'm expecting that in six months' time, when we do this, that we'll have a whole lot of different information available that would cause us to reflect on what then flows through to the P&L. I don't think we should just assume that that number would just go to the P&L first half 2021, which I think is your question.
That's sort of based upon the assumptions and things we know now, and my sense would be in six months' time, we'll know a lot more, and we'll have to then reflect upon what, if any, provision is appropriate at that point. I think you can see what we've done here. We've just applied the principle to the accounting and then to the prudential capital. I believe we've taken a relatively conservative view on that. I don't think we should think that should naturally flow through the P&L, and we'll have to reflect on that again with the information we have in December when we look at positioning the results for the first half 2021.
Got you. That is really helpful. My second question around the dividends. APRA has asked its written with insurance to moderate those ad ratios, and it does look at double caps year-end December half year results. When you think about the 68% payout ratio, is the full range of that still relevant into next year? Particularly given that the last few years you have been really at the very top around 80% of payout ratio, or should shareholders be thinking that actually somewhere lower in the payout ratio might be more sensible given what APRA has asked you to do?
Yeah, maybe I'll make sort of two comments on that. One, we're stuck to our dividend policy of paying out 60%-80%. Therefore, because of that, we didn't want to pay dividends out of capital. We haven't declared a final dividend, and so therefore, AUD 0.10 is roughly that fits out in that payout policy. We're aware of the fact that APRA has given the guidance that you provided. I think on this topic, we're just going to have to see how things go. APRA is guiding all financial services companies to be conservative. I think the reality here is we need to see how the next sort of three, four, five months go around that. We haven't changed our dividend policy. Our intention would be to pay 60%-80% out.
Obviously, come February, we'll have to consider into that regulatory views around that and also a level of conservatism within IAG. I think all of that will need to come into that package. At this point, I think we're not saying anything new at this point. Stating the obvious, we're going to need to have these inputs into our thinking when we come to make some calls around interim dividends in February of next year.
Thank you.
Sorry, let me start with. The concept of how we've set up the financials of our company, returns 60%- 80% to, just as a concept, 60%- 80% back to shareholders, the balance reinvested into the company, that concept is one that we like. I think we then need to say, which is your question, the now, the next six, 12 months issue, I think we need to make sure that there'll obviously be some additional inputs into that, which is around the now. The concept of the financial framework of our company, we still think that's appropriate.
Thank you.
Our next question comes from Ashley Dalziell with Goldman Sachs.
Thanks, and good morning. I just wanted to initially pick up on the expenses discussion and just confirm that of the extra AUD 50 million of COVID-related costs that you've called out, the AUD 30 million related to kind of moving staff to a work from home basis. I mean, there's sort of zero element of that AUD 30 million that's likely to recur into 2021?
Yeah, sorry, Ashley. It's Nick. I missed the last bit of that.
I was just confirming that is not going to return in any way into 2021, that AUD 30 odd million?
I think there might be an element of that. Within our overall cost base of a couple of billion AUD, we still have everybody working from home. Well, the vast majority of Australia does, sorry. New Zealand were about 20% or 30% return to the offices. We have some additional costs there. We also have some additional costs, which I think is timing, but it may appear a little bit in first half FY 2021, around some of our offshore partners have had some challenges with their staffing and lockdown and COVID-19, and we've had to put on some additional people in Australia to cover for that. There's a bit of strain in that. I think we get the materiality of this.
That might be AUD 10 million or AUD 20 million, the timing of that may be in first half FY 2021 as we sort of hopefully go back to a more normal environment towards second half FY 2021. There may be a little flow over in the first half, but I think you've got to put that in the context of the materiality of the overall expense base of the company.
Sure. Okay. Thank you. Just a second question on the lockdown within Victoria. Early days, but are you able to give us any color as to what you've been seeing over the past few weeks in terms of top line trends and also motor frequency? Then just as a second part to that question, can you confirm as to whether the COVID provision that you've booked, this is the AUD 100 million that I'm talking about, is there an assumption within that there will be second waves through the remainder of FY 2021?
Sure. I'll answer the second one. Yes, we have. Part of that sort of modeling we did was assumptions around additional sort of lockdowns, Victoria lockdowns. That was in our thinking. On the first one, it's a bit early to say, obviously, but the themes are going to be the same, I would expect that, we'll see motor vehicle frequency. We had not returned many of our people to our physical premises in Victoria. Sort of the process of getting everyone home at scale, we're not having to go through in Victoria because the vast majority of our people were still working from home in Victoria. That sort of disruption won't play out as it did the first time. The utilization of offshore partners is more stable today than it was in March. There's probably some slightly more positives.
Yes, I would expect that as we sort of indicated, that the main impact would be around motor vehicle frequency.
Okay. Just a final question.
Sorry, go on, Ashley.
Sorry. Just on the shareholders funds disclosure, you sort of spoken to maintaining that more defensive position, in the near term. From where we stand today is outside of market movements on the portfolio, is there any reason to think that you'll be returning up towards sort of 40%, 50% odd growth assets over the next couple of years?
I think next couple of years might be a bit tough to answer. Next six months, unlikely. You can see what the financial setting of our company is, where we've tried to be conservative with the way we've approached our balance sheet and reserving, and we are also trying to be conservative with our asset allocation and really make sure that we maintain our strong financial position, essentially, and narrow down those variables. Does the concept of 40%-50% growth assets for our sort of risk appetite make sense for IAG? I think it does. Are we going to have a conservative setting on that for the next period? Yes. I'd say this calendar year, definitely.
It's a bit hard to make a two-year statement at this point, but we're going to try to ensure that where we can, we have a conservative setting on a range of things just to make sure that we're very focused on the financial strength of our franchise.
Fantastic. Thanks.
Our next question comes from Siddharth Parameswaran with J.P. Morgan.
Good morning, gentlemen. A couple of questions, if I can, please. The first just around the increase in perils and reinsurance costs. Nick, what timeframe are you aiming to actually seek to recoup those? Because the increases that you've been pushing through over the last six months seems to be, the rhetoric seems to be broadly covering inflation, but not what's happening on the perils side and the increased reinsurance costs. Could you just give us what your strategy is around that? Are you actually hoping to get those back in the near term?
Yeah. Siddharth, hi. Yes, we are. There is elements to pricing of which reinsurance and perils costs are in there. We have a bit of an artificial situation in FY 2021, which is the way the aggregates work and the fact that we had a whole lot of perils beginning of the calendar year, that we are well protected, and so that is why the perils allowance, as you can see, has not gone up much for FY 2021. However, we would have expected that number sort of gross to have gone up much more like AUD 100 million rather than the smaller number that it has.
That would be one of the input costs that our company should be expecting over the next sort of 12 - 18 months as that current relief comes off, and that's the environment we're operating in, and therefore we need to be reflecting that in pricing, is our view. That's how we're trying to set the company up. Assuming that perils costs are going up, which is, we know that our exposure to perils needs to go up. The position in FY 2021 is a little artificial because of the aggregate cover, and we need to reflect that in our primary policies to reflect the exposure we're taking on.
Yeah, just to be clear, you're buying more reinsurance as well, which is there. Shouldn't you be taking action right now?
Yeah.
It should be coming through with the extra reinsurance, shouldn't it?
Siddharth, I think we are, right? An element of our pricing is thinking that way as well, and that's what's been happening in the last six months.
If you've been getting, let's say, I think you mentioned 3% or so in terms of rate increases, we should be thinking that you'll be getting more than that for the next 12 months.
Not necessarily in home. Let's just look at Australia as an example. Motor was a couple of percent, but home was more like 4% or 5%. We have had rate increases flow through that portfolio, partly driven by this topic. We know, this is a discussion we've had many times before, that we need to reflect more of that perils in our primary pricing. We know that at an industry level and a company level that the exposure has been going up over the last couple of years.
Sorry, just to be completely clear then, claims inflation on an underlying basis in home without considering perils cost is less than the 4%-5% then, is it?
It's probably something in that order, right? There's a blend here that's in these numbers. I think what our intention, and there's other market factors that we need to factor in here, obviously. We've got some increasing input costs around perils, around reinsurance, around average claims costs, and parts and things like that. What our intention is, and yes, we've got to be reflective of the current conditions, but our intention would be to reflect that in our primary pricing.
Just a question on business interruption. Could you just remind us what the status is on this, the test case that the industry is putting to the, I think it's the federal court in New South Wales? Can you just tell us what actually happens if you win or if you lose? Will we see a release in provisions that you've taken up, and if you lose, will that mean a huge surge in your provision?
Siddharth, the timing of this is probably later in the calendar year. Our view is that we exclude under our business interruption policies, we exclude that coverage in a pandemic scenario, therefore, we would expect to win. I think you're referring to the AUD 100 million of COVID-19 provision. Yes, there's an element of business interruption, we have looked across all our portfolios. Also there's a couple of parts to this topic. The Quarantine Act topic, which is the one where there's currently a test case, there's likely to also be a test case around access and prevention of access, which is a common extension in many policies that we also exclude that coverage under a pandemic scenario.
I think there's likely to be a test case on that as well, talked about in the next couple of weeks, and likely, hopefully resolved by the end of this calendar year. I'm just going to have to put all of that into the mix when we look at our position at 31 December.
Okay. Are there any lessons or actions that you've found out about, just policy wordings that you have? Can you give us comfort that everything has been updated now for all policies that have been renewed? Just give us comfort that given that Victoria is going into another lockdown, that there won't be even more exposures in case you lose. I'm conscious that your position is that you'll win, but obviously it's gone to court, so nothing's ever certain in these matters. Can you just give us an idea of what you're actually doing? What action you're taking to minimize further losses from there?
Siddharth, it's Peter. Firstly, the majority of our business interruption policies reference the Biosecurity Act. It's a smaller proportion that talk to the Quarantine Act. As those policies renew, the wordings are being updated.
Very good. Thank you.
Our next question comes from Brett Le Mesurier with Shaw and Partners.
Thanks very much. Nick, a question on the capital calculation. The technical provisions in excess of liabilities fell from AUD 425 million -AUD 342 million in the last six months. Can you tell me what that was about?
Yeah, sure, Brett. Hi. That's the second leg of the capital element of the 100. We talked about in our accounting, the COVID-19 provision that we put in our P&L and our accounting balance sheet was AUD 100 or just over AUD 100 million. In addition to that, we've looked at the unearned premium, which is what that number represents, and we've adjusted that probably conservatively, which is a conversation we had before by an amount as well. That's why that number has come down in the second half and then impacted our overall capital position. That number, just that part of it, there are other ups and downs in that, Brett, but the COVID-19 element of that was AUD 160 million pre-tax.
That's the main attribution of why that number I haven't got it in front of me, but you're talking about effectively in the unearned premium surplus or the premium liability calculation.
When I look in the unearned premium liability at the end of the financial year, it was AUD 6,776 million against the year before it was AUD 6,334 million, and the central estimate has gone up by about AUD 92 million. That is what you are referring to?
Uh-
That's where I see it in there, right?
Sorry. I think there's a few parts to that. We don't book that number in the accounting unearned premium. It's only booked for capital calculation. It's a regulatory calculation rather than accounting calculation. From accounting purposes, our unearned premium is simply the element of our premiums that we haven't come on risk on. In the APRA calculation, we have adjusted that by this COVID-19 overlay, and that's why that's reflective in the APRA calculation. Just on your comment on risk margins, and it's because there's a fair chunk of these overlays that are done, these sort of COVID-19, that's risk margin in the way we've attributed it.
Right. What I see in the unearned premium liability speaks to a decline in the profitability of the business.
Sorry, are you talking about in the accounting, in the balance sheet of IAG?
Yes, that's right. In note 2.4%.
No, I think that I haven't got that in front of me. No, that'll just be reflective of the business volumes that have been written in the company. No, that's not reflective of that point.
You've got an increase in your estimate of claims and a reduction in the unearned premium liability. That implies that there's something else that's happening, is there?
No. The unearned premium is simply a portion of the gross written premium that we haven't earned.
No, I appreciate that. I appreciate that. What I'm saying is that balance has fallen while the expected claims proportion of that, or component of that, has increased.
Yeah. Okay. Let me think through. I mean, as a comment, we can see that the second half underlying performance of our company has come back a bit, maybe that helps with that comment. I think there are some ups and downs within that unearned premium number, Brett. Actually, as a concept, we also acknowledge that the underlying performance of the company second half versus first half has come back a bit. That, in a way, that's sort of saying the same thing that you're saying.
Yes. I'm looking more at the implications for FY 2021, so it's a continuation, but there's no surprise. It's also why it's inappropriate for you to give guidance.
Well, our view on that topic is there's just a bit of uncertainty, and because of that, we think it's more sensible to talk a lot about where we're at and the current run rate. Because of the uncertainty that we see ahead of us, we sort of thought it was appropriate not to provide that guidance this year.
Okay. Thanks very much.
Your next question comes from Nigel Pittaway with Citi.
Hi, guys. Just a quick follow-up. It just struck me on that conversation on the perils. I mean, the one thing that's made noticeable is the level of perils below AUD 15 million rose from AUD 280 million last year to AUD 402 million this year. How are you thinking about that? Do you think that's sort of one-off abnormal, or is this a new normal? What's the sort of thought process behind that when it comes to thinking about pricing for that?
I mean, Nigel, we were a bit surprised by some of those smaller perils that occurred in the last quarter of the year as well. I mean, what we try to do is look at averages, as you know. We definitely had a larger number of small perils, which I think is your point, than we were originally anticipating. We'll try to factor that into our averages over time. I don't have a sense that that's a material shift in our exposure or a material change. I think we've factored some of that in our announcements for next year because by definition, we've had it, that sort of factors into our thinking. I don't have a sense, though, that this is a step change difference in our perils exposure year- on- year.
I think a little bit of this was we had a bad run of a whole lot of smaller events. I think there's a bit of that in it. I'm sorry to sit on the fence on that one, but I kind of feel like that's the answer, really.
All right. Okay. Thank you.
We have a question from the webcast. With the weakness in agri and rural portfolios, what is the risk of a goodwill write-down associated with the WFI acquisition?
I mean, that's all part of a cash-generating unit, and there's many parts of that business that are going very well. I mean, I don't think that's a risk for us, would be how I'd answer that question.
Thank you, Nick. We have no more questions. With that, I might bring the morning to a close. Thank you for joining us today. I do want to leave you with a clear message. Notwithstanding the challenges of the year just gone, the underlying business is in good shape, and we think particularly in the last five months, we've really proven the resilience of our business, and that's why we look forward to the future with a high degree of confidence. Again, thank you for joining us today.