Good morning, everybody, and welcome to IRG's results presentation for the six months ended the 12/31/2019. I can tell by the number of people in the room that it's a pretty busy day today. So, again, I appreciate those that have joined by webcast and by telephone, but a special thank you to those of you who are attending person calls. It's easier to talk to people alive. It is customary when we have meetings or events at IAG to acknowledge the traditional owners of the land.
And today, we're meeting on the land traditionally owned by the Gadigal people of the Eora Nation. More specifically, we're moving at a place that we now know as Starling Park, but traditionally was called Tumbawan, and it was a place where we know that indigenous people have gathered gathered for thousands of years to collect shellfish and and share an essential community. So in this period of reconciliation, I'd like to acknowledge the results past and present. So this morning, I'll give you a high level overview of our results as well as a summary of some of the key activities in the last six months and those plans for the balance of the financial year. Then Nick will talk, as usual, to the detailed numbers before I return and summarize, and then Nick and I will be happy to take any questions that you may have.
So as we released our headline numbers towards the January, some of today's news should come as no surprise. However, the new news is, of course, the weather event of last weekend. And what's clearly the bushfires have significantly impacted our first half headline result. The important message that I'd like to emphasize is that our underlying performance has been strong and it came in line with our expectations that we held at the beginning of the year. The foundations that we've built over the last few years leave us in a strong position to increase our focus on customer engagement and growth without compromising our underwriting and pricing disciplines.
And I'm still sure that there some of the operational changes that we've made recently to further drive this. GDP growth in the half was consistent with our full year guidance of low single digit growth, taking into account the exit of certain businesses and product lines and lower CETP pricing effects, all of which we highlighted last August. And our underlying margin was well ahead of this time last year and similar to the preceding six months. At a country level, we've seen a solid underlying performance here in Australia and another very strong result in New Zealand, although client costs were impacted by a large hailstorm event. Perils were again a big picture of the half and have, as we all know, been very prominent since balance date, particularly here in Australia.
Today, we announced a further downgrade to our reported margin guidance for the full year, line it by a further 200 basis points to reflect the heavy rain event, which we expect will capture a cost to us of $135,000,000 And Nick will talk in more detail to this shortly. The large events that we've been dealing with do, however, bring out the best in our organization as time and again, we respond to the needs of our customers in a compassionate and timely manner. As ever, I wanna call out the fantastic passion and commitment of our people who look after our customers through these events, often across key holiday periods, which serves, of course, to reinforce the strength and the quality of our brands. One item that I was less happy to announce at the January was the provision we set aside for customer refunds, which the post tax level announced to $82,000,000 This relates to a specific multiyear pricing issue, which we identified where eligible customers did not always receive the full discounts that they are entitled to. We have now addressed the underlying cause of this particular issue, and we are now focused on identifying effective customers, providing refunds to them as quickly as possible.
The issue was picked up as part of a broader review of our pricing systems and processes, which we initiated and which is ongoing. On more pleasing note, in October, we announced an agreed sale of our interest in SBI General in India. The associated transactions remain on track to complete in the present half once regulatory and other approvals are in place, and we expect to recognize a significant profit on sale and a large positive regulatory capital effect once concluded. In the last half, we also completed a sale of our Indonesian business, but the agreed sale of Vietnam failed to proceed, and we're now examining alternative exit options. We're in a strong capital position and have declared an interim dividend of $0.10 per share, which represents nearly 61% of cash earnings for the half.
The dividend is flat to 70%, which is identical to the franking on preceding dividend paid last September. Now looking at some of the key operational activities of the past half and some of those planned for the balance of the financial year. Investing bushfires were all too often in the headlines. And aside from meeting the needs of our customers, we were very pleased to be able to help the rural fire service through the use of the NRMA insurance helicopter. The helicopter is equipped with a fire retardant gel, but also participated in more standard water bottling activities, racking up rather two hundred hours of service before we even got to Christmas.
It goes without saying that one of our top priorities in the second half is supporting our customers to recover from these difficult fires, not to mention the more recent large events. We've also been busy progressing initiatives in the smash repair and new business areas. We have repair hubs up and running in both Australia and New Zealand now, and these are comprehensive motor vehicle repair benches to improve the consistency and the quality of repairs, but also to improve the customer experience through reduced repair time lines and a more efficient process. And of course, that will also reduce the cost of our own claims expenses. There will be further expansion of these in the second half.
Our associated venture is the not recent MotorServe acquisition from Aramey Motoring and Servicing, offering a one stop mobility shop for our customers, including a car servicing option. Integration of Motorserve into our offerings will be a priority in the second half. And in the new business space, we've just completed the first six months of ownership of a controlling stake in Tarbar, the vehicle car trading platform, which will undergo further expansion in the second half as we cater the growing customer appetite for alternative forms of vehicle ownership and mobility more broadly. With the simplification of our claim systems largely done, the emphasis continues to switch to consolidation of our quality and processing systems, and the first major release of this program of work is expected in the opening half of FY 'twenty one. In our risk management, our new risk to target operating model has been introduced across the organization as we progressively raise our risk capability and capacity.
You have also seen some recent refinements to our operating model with the appointment of Julie Vetsch to head our newly created strategy and innovation division, which combines ING's existing strategy function with some of customer wins and an expansion of Neil Morgan's role to lead the technology and digital division, which adds all the digital change to his previous group technology responsibilities. Big changes were marked in the planning, and we see them as a logical step as we transition to the next phase of our strategy with a greater emphasis on future growth from our core insurance business as well as adjacent business opportunities. We plan to outline our longer term plan brand strategy in more detail at an Investor Day here in Sydney on the May 14, and we hope that you'll be able to join us then. In the meantime, let me hand over to Nick, who's going to run through the numbers in more detail. Thanks, Tate, and good morning to everyone.
I'll start with our scorecard, which, as Tate said, is sort of delivering a strong underlying performance for the group in the six month period. So the quick highlights here that we have on the slide are that we've had some modest premium growth, but kind of in line with expectations. And the key drivers there have been some of the things that have occurred around CTP pricing as well as some of the business exits. The underlying story is slightly different, and I'll come back to that. At the margin level, the underlying margin that we delivered in the first half 'twenty is consistent with what we delivered in second half 'nineteen.
If we go back twelve months, you can see sort of over that period an uplift in an underlying margin. And that's really despite the sort of 70 basis point headwind we had in our results driven by lower interest rates. So we've absorbed that and sort of from twelve months ago, underlying margins are up. The quarter has obviously been impacted by the PRRS, particularly the bushfires up to 31 as well as those lower reserve releases that were already flagged. Shareholders' funds income has turned around from twelve months ago, really driven by what's happening in equity markets.
And sort of the bottom line of the group compared to twelve months is down, but that's really driven by the fact that in first half 'nineteen, we had a $200,000,000 profit from sale of the tire business that occurred in this result. In fact, we have an $82,000,000 after tax provision for customer refunds that Pete mentioned as a negative. So compared to twelve months ago, that's one of the big drivers. What I'm going to do now is sort of unpack of the numbers that are on this chart and give you a bit more detail on some of them. So starting with top line, as I sort of as we said, our premium growth has been modest for the half, and that's sort of in line with our expectations.
So what we've delivered on premium is what we thought. I look at what like for like is though. It's around about underlying growth of about two and a half percent. That's really the run rate of why I do it at moment. The growth profile of about of about two and a half percent.
So within our numbers, there's a $50,000,000 drag from some of the commercial agency businesses that were sold that were in our results 12 ago that were absent in in these numbers, as well as lower PPP pricing that's that's affected both New South Wales, ATT and South Australia, so the three markets that we operate in, has driven lower TTP pricing throughout the portfolio. As a positive in the story, we do have some currency gains between New Zealand and Aussie, but they're lifting that number a little bit. So the real story for us is that within our short tail personal lines businesses, and you'll see all the detail in the pack, so our motor and home books, we're seeing a rate flow through our portfolio. It's in line with claims inflation. Pleasingly, we are seeing a little bit of volume growth within the RACV and the AMI businesses in New Zealand in the motor portfolio.
We see a bit of volume growth there. We've got high commercial rates flowing through our portfolios in Australia and New Zealand. That's sort of flowing through both. Although in Australia, you'll see that our volumes are down a little bit within our commercial book, where in New Zealand, we've had both rate and volume growth. So it's a slightly different story there between Australia and New Zealand.
CTP flagged. In total, our CTP premiums compared to twelve months ago are down 9%, and that's really driven by the changes in schemes that I mentioned before. We would expect underlying growth and sort of our top line to be similar second half to what we've just delivered first half. So sort of the guidance that we've got in the market, we're reconfirming of that low single digit growth for IG for FY 'twenty. On the margin side, the story is that compared to twelve months ago, underlying margins were up.
And really, that story is all about the delivery of some of those optimization simplification benefits that's flowing through to our P and L. There is an offset, though, as you're aware, around increased regulatory and compliance costs that is that's all within these numbers, but the net of those is still a positive that are flowing through to our through to our results. The Australian Commercial Lines and New Zealand Commercial Lines businesses have improved in profitability, so that's a positive. Against that, though, is this sort of 70 basis point drag from interest rates. So net of all that is driving that underlying performance up even after absorbing the interest rates.
As reported, I think we know the story. Reported margins are driven by two big themes around payrolls for the six month and lower reserve releases are driving the reported outcome for the half. Just in a bit more detail on those two topics. On releases, we probably should have shown some of these in slides in previous half to sort of understand what's really been happening. So the first comment on releases is we we definitely had an expectation at August that's different than what we delivered for the half.
You know, we we delivered a a reserve release for the 05% of our own premium. That's lower than we thought we were delivering for the six month period. So behind that is kind of a few different stories. So within our TTP, ACT, South Australia, in our workers' comp business and in our professional risk business, we've just had a little bit more claims development, some of them individual cases than they than they expected, but are driving a bit of a negative there. Some some development across some of those portfolios.
We're not seeing I'll just say this, sorry. We're not seeing signs of sort of superimposed inflation. So this is not a systemic problem we're seeing across our long term portfolios. We see this as an outside of examples in those portfolios where we're seeing a bit of development. Against that, as a positive, we are seeing reserve releases continue to flow out of our New South Wales CPP scheme.
The net of all of that story is a small number of point 1%. And and if you look at the quantum, and of course, that reserve release out of CTP in New South Wales has come down as that scheme has changed. Now what we really want to show you was was what's really happening with our outstanding claims reserves over a five year period. So we go back five years. We have roughly $9,000,000,000 of outstanding claims reserves sitting on our balance sheet.
If look at that number today, that number is closer to five. If you look within that, our long tail classes have come down by 55%. CPP outstanding claims reserves on our balance sheet are down 60% compared to five years ago. So I think you know the story there. But sort of unpacking that is impact of quota shares are really have really had a material impact on the amount of liabilities that we have on the balance sheet.
The fact that we have had large reserve alerts in the past has just brought that something down, so we're just not sitting there anymore. And, of course, the changes of these schemes, where average premium is coming down, the risk profile is coming down, that ends up falling down to the reserves flowing down. It's getting smaller, and the duration has come back as well. So the duration is is eject than it used to be five years ago. The combination of all of that has driven our our balance sheet number to come down significantly.
And of course, in the quantum of our reserve releases are also coming back. That's kind of the real story that's happening at IRG. What we're guiding you to for the second half is reserve releases of sort of 1%. So the math of that is pretty modest for first half, one percent second. So for the full year guidance, we're guiding with 0.5% reserve releases for FY 'twenty.
But also what we're also saying is that over the medium term, we're you should still assume around about 1% of earned premium being in the form of reserve release as part of our ongoing results. On Carols, and I thought I'd divide this into two, sort of what's in the numbers at thirty one December just so we're all clear, and then what we're saying about guidance to June 20 because we're kind of there's been a lot happening in the last five weeks. So just on the on the numbers that are booked for thirty one December, we're about a 100 over our payroll assumptions for the half. You see that number in the pack is 419 units, about a 100 over our expectations for the half. Within that, there's about a 180,000,000 net cost that we've we've had through to thirty one December from the bushfires.
That that's the major contributor to our payrolls cost for the half. And what that that payroll has done is triggered it did trigger our calendar 2019 aggregate protection. So that's kind of the the '31 in December. With the event that we then had post December, we then revised our peril assumption for the full year up to $850,000,000 So we've significantly increased that from our original assumption in August, which was $641,000,000 So we've won $641,000,000 for an interim step, as you were in the January. Now we're saying today, we're issuing eight fifty I'll just go through the elements of that so we can sort of see where we're at.
So we're at four one nine at December. In the month of January, we had pearls. We had significant bushfires, although much of that was protected from that calendar 2019 annual protect program. So not even in the 20 program and the 19 program covered much of the bushfires in in January. And then we had a significant hail event that went into our main catastrophe program, so our net cost of that was 169.
So our position at thirty one January was that our net payrolls cost to our company is 645,000,000 at the January. We then had a significant event over the weekend, which then goes into our second event coverage under our main cap. So sort of five weeks into the calendar year, we're into our second event on our calendar cap program. And that drop down, obviously, which we flagged, it goes from 169 for first event to 135. So that we our main program comes in then.
So our net cost of the weekend, and in fact, it's still ongoing, weather event will be 135,000,000. And we believe that the clients that are coming in, we will we will be above that until that's our net net cost. So we then had to estimate based upon all that information, considering the two catastrophes in the first five weeks, what does that mean for our guidance to June? We've come up with a number of $850,000,000 Essentially, what we've done there is say, let's look at the run rate normally in February through to June. Let's go we we we you adjust that for the change of exposure and the normal things we do.
We have some additional protection as well from a $101,000,000 federal stop loss, and we've assumed that we'll get some recoveries under that, which gives us a net number of $850,000,000 within our assumptions for guidance for June. We're also saying, as you'll see in the tax, that the way our program works, we've dropped down for a hundred and sixty nine first event hail, a hundred and thirty five second event weekend weather to the New South Wales. The division as of today is at the cost of that the maximum cost of an event from today is net 50 It's the maximum payment charge that can go through our accounts. You can see the way we structured our program. It drops down.
The more events we have, the more the lower that number gets. Of course, this is not an exact site. But what we've done is come up with what we believe is a reasonable assumption for a full year pearls, condition for IRG. On reinsurance just generally, I mean, we've announced this in early January. We've we've we've renewed the program to conceptually, you know, similar structure to what we've had in calendar nineteen.
You you will be aware that we have lifted the top of that from 9,000,000,000 to 10,000,000,000, really driven by changing our growth of our exposure as well as taking some additional coverage for sort of modeling risk. And what we can say is we're well served by this program, and we continue to be in a strong place in relation to reinsurance going forward. Just on expenses, and this is a good story for iAgen. It's been a real focus of our company over the last couple of years. We're aware we set a targeted reduction of $250,000,000 of the cost base of running our company.
And you can see in this slide, which we've shown you before, that that $250,000,000 has been delivered through the P and L now. So it's in our p and l run rate for the six month ending thirty one December. You know, against that, and we've flagged this before, that we we couldn't absorb all the additional regulatory and compliance costs. So that's a that's a negative against that $2.50, but we can see the way we set up the slide, that the two fifty, the original objective, were delivered through the p and l. And we're very pleased with that.
Right? This has been the main focus of attention at AIG. What we've been trying to do is simplify our business, optimize our processes, make it a simpler place to work in. Importantly, make it a simpler place for our customers to interact with. One of the outcomes has been the cost reduction that we can see flowing through to the P and L.
So we're sort of bringing to him that optimization program, and we kind of can see that flowing through. Of course, it goes without saying we'll continue to look for efficiencies in how we run our company. At the same time, though, we'll be looking for opportunities to invest or to opportunities to build out further products and services. That's sort of what we do as the leadership team of the company. Just looking at the divisions, and I'll just sort of go off comment on some of this already.
Firstly, starting with Australia. If you look at the headline number, it's flat premium for the period. Behind that is sort of a couple of different stories around that exit of some commercial agencies, which is a drag on the commercial business. We've also got that CTP pricing flowing through all the Australian businesses. Underlying, a like for like growth is more like 2%.
It's pretty good. Within personal lines, within the short term personal lines, the Australian motor and home portfolio is more like 3% to 4%, predominantly priced. It's flowing through those businesses, matching any sort of claims inflation. So it's a good outcome there. Within commercial, we're seeing we're seeing rate flow through sort of 5% to 6%, but we're seeing something offset against that in volumes.
The net number is very modest, so we're definitely seeing some volume losses as those profits have been flowing through. Underlying margin compared to twelve months ago is up. And really, the benefits of those optimization programs, net benefits of optimization, regulatory and compliance, interest rate, the net positive that's flowing through to that business as well as we're just seeing an uplift in underlying commercial profitability within the Australian business. We expect a similar story at an underlying level for Australia in the second half. With New Zealand, our New Zealand business continues to deliver strong results.
At a growth level, we grew our business in New Zealand by around 4%. It's in currency, so you'll see it in in when we convert it to Australia, it's closer to 6%, but in New Zealand currency, it's it's it's roughly 4%. The commercial New Zealand business grew by about 8%, the combination of volume and price flowing through our through our New Zealand commercial book. Within the consumer, was more modest. As I mentioned before, we had a bit of volume growth within the AMR business.
But also within New Zealand, there's been some changes to the way the EQC scheme works and bit of risk transfer back to the scheme. So there's some some derisking of our premiums, and therefore, they've come down a little bit. It's flat throughout business and the entire market. So that there's a there's a there's of drag within the consumer premium line. Underlying profitability, that we've delivered in the first half 'twenty similar to the run rate in New Zealand last half.
I'm really just showing a couple of different stories there. It's also delivering the cost benefits of the simplification program are flowing through the P and L. We also flagged this last year, and you didn't have a good run. Had low payroll, but it's generally had a benign claims environment. We see the run rate of claims, underlying claims, in first half 'twenty more sort of normal.
And so we saw that underlying claims performance a bit. The headline claims on the New Zealand has been impacted by a fairly large hail event that occurred in Canterbury in first half 'twenty. So you'll see that at the reported line. With New Zealand, similar to Australia, we expect the New Zealand underlying performance to be sort of second half 'twenty to be similar to what we just delivered first half 'twenty. So we're going well where underlying performance is strong.
Something similar, we would expect something similar second half 'twenty. Senior income, let's get a bit of attention. So we'll just flag what's in this line. There is a small in the net number there, you can see there's a small loss of $2,000,000 that's flowed through the P and L. It's kind of two stories.
That's the Victorian workers' comp fee based business that had a result of around $8,000,000 profit. Against that, we had we had losses of around about $10,000,000 from some of these new businesses that we're building out that we flagged in August. There's there's a range of those. For example, we have Ambarella, our data analytics business, Carbars, what Pete mentioned, we're building out a car subscription service and a car trading platform business and losses that are there. We're building another business called Safer Journeys.
And what we're going to do is step through this in a bit more detail with you at at our sort of Analyst Day in in early May. We're also flagging now that, you know, we do expect this number to be up a lot of up to 50,000,000 for the full year. So we're going to continue to invest in the business and accelerate those that we think make sense. And then we'll provide you a lot more color on exactly what that is and how we're building our products and services for our customers at the May Investor Day. Just on capital.
I mean the group's capital position continues to remain strong. What we've done on this slide is just a reconciliation of where we were at June 30 and where we're at at thirty one December. And then the big drivers here are how much money we made earnings less the dividends were paid. As always, there's a few other ups and downs within here. Just pointing out a few.
We had excess sorry, excess check provisions. There's been a there's been a bit of drag on that because we have had to exclude the impact of the terrible events of January and February, which we hadn't booked in our accounting P and L, but we've booked in our capital accounts. We kind of have to bring forward that bad news into our capital to a degree. We've got a new accounting standard around leases where everything's grossed up in the balance sheet. There's sort of a negative sort of drag on the capital from that, there's a couple of other smaller things that have flowed through.
We're tiny positive in there from the sort of the last of the quota shares flowing through the capital cap. You see, we point you to common equity Tier one the key capital ratio that we want you to look at in relation to IAG. And so even after the $0.10 dividend, that was sort of towards the top end of our targeted common equity Tier one capital ratio. And the peak life India, we do expect to settle on India in the second half of this financial year, so between now and June 30. The capital impact of that will be there'll be another approximately $4,400,000,000 of additional common equity Tier one capital generated once those proceeds are received.
That has a 16 basis point positive impact on our ratio. And I will highlight again, it remains our intent of RFG to operate our businesses within those targeted capital ratios. And if we are surface to those ratios over the medium term, our intention is to return that to shareholders. So in conclusion, sort of wrapping up, we're going to see this as a strong underlying performance of our business. We're super pleased with the simplification program, the focus that has occurred at IAG and the way we've delivered against what we set up to deliver.
So we're very proud of that at We should expect or you should expect a similar underlying performance of IRG second half to what we've just delivered for the first half. Of course, our reported has been impacted by both the payrolls we had up to '30 one December, but also over the last five weeks, the significant pearls that we've had across Australia that are impacting our reported margins for this current financial year. So on that note, I'll hand you back to Pete. So thanks, Nick. Before closing off, I'd just like to comment on broader climate and customer equity matters.
On climate, we're very pleased to see that the national dialogue has changed. It's in fact elevated in recent months, even if it has taken the awful bushfire events to to prompt this. IG has had a long commitment to addressing climate related issues through the activities of the Australian Business Roundtable for disaster resilience and safety communities, which we founded in 2012. And even well before that, as we started to look closely what was then seen as an emerging risk in the early 2000s. Today, we released the latest six monthly update against our three year Climate Action Plan, and there has been some important progress in the last half.
We launched the Severe Weather and a Changing Climate Report co authored by our natural perils team, which, using the latest data on the state of the climate, makes predictions on future extreme weather events. A key aim of the report is to establish a central source of scientific information which can be built on. It does show that climate is changing more rapidly than some predicted, and it highlights our firm view that we need a national coordinated approach from government, from businesses, from industry to build more resilient communities and reduce the impact of disasters. We're also seeing good progress against our emission targets. We're on track to deliver a 20% production by the end of FY 'twenty.
And there has been a continued shift in our equity investment portfolio to companies that have a lower exposure to climate related risks or that have a forward looking strategy to manage those risks. As at the 12/31/2019, high risk companies now represent only 0.08% of our total investment portfolio or less than $10,000,000 We also continue to roll out our customer equity framework, improving awareness and understanding of customer needs across our organization. This includes being able to respond to the needs of customers experiencing vulnerability as well as understanding how to better design products and services so we can be even more sure they deliver what is intended and what is needed. Our commitment to act fairly with care and compassion must apply to all our customers regardless of their age, gender identity, mental and physical abilities, culture, language, financial or social situation. And we test this commitment through our work with our ethics committee and our Consumer Advisory Board.
We see our focus on these areas, climate change and customer equity, as hallmarks of an organization that thinks deeply about its relevance and its sustainability. So in summary, we've had a strong underlying performance in the opening half of FY 'twenty, which matches the expectations that we had at the beginning of the year. Our FY 'twenty guidance has been revised solely for PERLS and prior period reserve release factors. This leaves us in a strong position to implement the next era of our strategy, and we look forward to sharing that with you on the May 4 here in Sydney. So with that, Nick and I will be very happy to take any questions that you might have.
And I think we'll start here in the room. Andrew? Morning. Andrew Duncan on Macquarie Securities. Three questions, if I can, please.
The first one is on the dividends. The dividend in the first half was at the bottom end of the payout ratio range. Can you just give us a bit color as to why that is and maybe more importantly, how we should be thinking about the second half dividend against that range? I mean hi, Andrew. I mean, we think about this as an annual number, not when we look at the interim.
So I really and then sort of, know, we've got a policy of paying out between 60 to 80%. You know, we'll deliver on that again. I don't I don't think we should overthink the the half payout ratio as such. We also we have we'll try to to generally sort of look at full year earnings. We have to revise down full year earnings.
And then for the interim, to sort of be somewhere between 40% or 50%. It's sort of a rule of thumb about how we approach it, not so much just on the actual half payout ratio for the first half. We definitely will rebalance for the full year that was 50% to 80% on the cash earnings on a twelve month basis. That's kind of how we look at it. Okay.
Excellent. Second question is around the topic of reinsurance reinstatements. Yeah. Can you just give us a bit of an idea of what sort of scenario you would need to see before you'd be essentially forced to buy a reinstatement and how far away are you Yeah.
I mean, it depends on I mean, so at the moment, just the ones with the two. Where we're the the events that we've had so far this calendar year, the the hail event and the weekend weather here in in New South Wales and then in Sydney in particular. They're not causing us to go and reinstate, you know, because they're they're kind of they're they're big, but then they're at at the bottom end of the the program. And then we we would need another significant event for us to then have to go back and and look at whether or we need to reinflate anything. So at the moment, let me just say that clearly.
There's no drag in the June 20, I think, is the point. There's no drag in the June 20 financials from some sort of reinstatement. It's at the best point at the moment. Let's take it straight that way. Yeah.
No. Excellent. And then the last question is on the cost out. Appreciate that the slides show that you're getting 250,000,000. Yeah.
As I reconcile that back to the expense page, I think it's on page 14 of the investor report. When you net off the gross commissions against against the gross underwriting expenses, yeah, There's no improvement there against PCP. So is it fair to assume it's going through a share your claims or Yeah. I mean how do I reconcile those two sheets? Yeah.
And it's a it's a it's a here, obviously. So we have the we have the cost when we sort of simplify it and see if prospects are running around two and a half, There's two things that are happening. Some of those are allocated to, as you said, between times handling and some of those are allocated to underwriting. Of course, within those numbers also, we have an allocation of the regulatory and compliance costs that are also being because we're putting everything above the line here into the margins, we're not differentiating that concept. So everything is in the underlying margin.
And so through the activity of that, there's probably a greater bias in in the tax handling, some of those benefits are flowing through. But we've tried to, both on the slide that we presented today and also within the tax, sort of unpack that sort of to help everyone through so you can see where those benefits are. Okay. Excellent. Thank you.
Correct. Just staying on the I'll tell you the insurance partner. It's just staying on the capital issue. I know the way you described the fee, you've you've said that the shares are likely to be bought bought back rather than it will be bought back. So it's the the uncertainty about that.
I think I think that's I think that's more common loading, but don't know the I've analyzed that point. I think our intention is to neutralize. That's been the form of IAG for the last since I've been CFO, but we've always neutralized any dividends and not issued any new script, and that's our intention. Just maybe on the claims inflation, what are you seeing in home insurance, the rate of claims inflation? I mean, to date, you know, relatively modest, you know, low single digit, and then there's gonna be a little bit of pressure in the system.
And we're and we were talking today, you know, being sort of add up across Australia and New Zealand, we've had 80,000 new clients in a hurry. So now, like, all the time we look at sort of hail events in New Zealand, hail in Australia, for other property damage bushfires in Australia. That's probably gonna put a bit of pressure on the system in both the motor and the home, the care networks. You know, we're not seeing that come through yet, but, you know, that that's gotta be a that's something that we need to be thinking about as we manage it over the next six months. But sort of answering directly, you know, low single digit type, so it's really 4% type of question.
Have you allowed some increase in that in the second half when you're talking about similar underlying performance? Yeah. Don't think it'll I don't, yes, it's probably more. I don't really flow through. I think that would if there was a risk, it's probably more like first half 'twenty one, if that's sort of the cumulative impact of all those.
What I've seen, and I'm just highlighting the potential risk that Austin industry has in Australia. Wanted to be thinking about that also in terms of pricing. Just moving on to commission insurance. You consistently had substantial rate increases, business premiums are growing now. You've recognized that you sold a business that is why premiums went backwards.
But nevertheless, you consistently don't have growth in premiums while you're increasing premium rates. Are you concerned about anti selection, which could be occurring? I mean, we we we worry about that point, and we also sort of can't shrink the growth. So we continue to lose volume. So, you know, and and we've said this a few times that that we are shrinking, of course, this way, less.
We feel like we have a more stable portfolio today than we did twelve months ago or twenty four months ago, to answer your question. We don't believe that we have been selected against in this process. And, you know, what we what we do believe is we're creating a platform for growth from the sort of rebalance book, and we feel like we're almost there. This is kind of I think we saw a little bit of increased competitor activity around package pricing in in the half. And again, we're not gonna give up our sort of underwriting or pricing discipline just to hold share.
So in the volume loss here in Australia, there's a reasonable proportion that related to packaged SME. But it's also been, as we all know, just an enormous amount of pressure in the average sector. Rural communities are doing it very tough, and that's been the other portfolio where we've seen some not insignificant shrinkage. The rate increases are resulting in higher profit, probably? Well, probably the higher margins, but of course, we're losing detail in dollar terms, and it's roughly neutral.
In margins and EBITDA, But because we're shrinking volume at the same time, we would like to think that over time, we'll start growing the dollar earnings from our commercial portfolio as we will bounce it. But that's the answer. We don't have another question in the room. I can see that we have three questions on the phone. So we might go to our first call.
Thanks, Kate.
Thank you. As a reminder, if you wish to ask a phone question, please press Your first phone question comes from Shreyas Patel with UBS Investment Bank.
It's actually Sharon Gigi here. Just a couple of questions. The commercial portfolio continues to see remediation from a volume point of view, putting aside the agency exit. How long do you envisage that sort of will continue from here? I thought sort of that had largely been completed by the
end of 'nineteen. Mean, Kieran, hi, it's Nick. I mean, we believe and this is not an exact science. We believe that that portfolio is pretty stable now. And, you know, we're we're gonna be disciplined here around price.
We believe that we now have a a platform that is that is, you lot more stable than it was twelve or twenty four months ago. And, you know, we we believe now there's opportunities to potentially even grow it a little bit. We have opportunities with this. But, you know, we're cautious on this. We don't wanna end up sort of growing the businesses and sort of coming back in margin again.
So we've been very disciplined with how we've gone about this. And we sort of feel like we've reshaped that book to where we want it to, and I'd say that's kind of now.
All right. And just a second question on underlying margins, just going back to an earlier question, this in your comments, Nick, that sort of the outlook into second half fairly flat in both Australia and New Zealand. Obviously, you've got expense efficiencies feeding through and some rate increases still coming through. So what are the offsets to that? It was early, you said sort of you're kind of cautious of inflationary trends post recent events, but you don't see that really potentially hitting to first half 'twenty one.
What else is sort of in there that's offsetting some of the the tailwinds that that should
be in assisting? Yeah. I mean, I don't I don't think there's any sort of any any big thing that was sitting around that's different now and about second half versus first half. We're cautious about that comment around any sort of inflation, post event inflation impacting our businesses in Australia or New Zealand. We're managing a cost profile and in particular sort of regulatory compliance cost profile that feels like it's going one way.
So we're managing that, and there's there's certainly some strain that we're we're we're we're looking at on on that topic. Against that, you know, there's some positives flowing through, continuing development, just continuing to deliver the simplification benefits. Pricing has been flowing through the book, and we would expect that to continue. Remember, most of our pricing, while I will say, that flowed through, in particular, for the short term, is really in line with inflation. I don't sort of see margin expansion from pricing that's occurred in first half in the second half in Personal Life.
I already see pricing that's flowing through our book in Australia and New Zealand probably matching inflation instead of nothing relatively similar second half to fourth half. Is that here, am I answering that question?
Yes. No, that's fine. And then a final question just as we look forward into 'twenty one. Obviously, it's early days, but had a small sort of miss on your cap budget in '19, obviously, a bigger bigger miss this year. It is sort of shaking up, you know, likelihood that we'll see a bigger increase to the cap budget as as we head into '21, or will you sort of look through this year as as a more unusual year?
I mean, I think we'll do both. You know, we we we won't overreact to, you know, what seems like a unusually high period of payrolls. At the same time, I think that that we will need to look again at the way payrolls assumptions are flowing through to our pricing of our business. So I think it'll be both. Do do I feel like you know, if I think what's been happening in the last couple of years, we've been up looking at our payrolls assumptions by about at a sort of close 50,000,000 per year.
Do I feel like the number you know, that assumption is likely to be more than 50 in '21? Yes. Are we gonna try to reflect all of this, you know, bad run we're having in the community for our customers and financially for our company? I'm lucky. So it'll be somewhere in between.
We'll we'll we'll do my thinking at this point.
Your next question comes from Matt Dunga with Bank of America.
If I could go to the catastrophes, the $135,000,000 impact from recent activity, that's about 190 basis points. You talked of the increased frequency back on the January 24. Did you not factor some some, you know, deterioration in
back then? I mean oh, it's Nicky. Mean, what we've really done, we had a revised allowance of 715,000,000 in January. We had I mean, we said at the time, if we have events over 100,000,000, we'll have to we'll have to go back and look at that. We literally had an event over 100,000,000 within two weeks or less.
And so we've adjusted for that on the full amount, 135. So really, we've gone $715,000,000 top of $135,000,000 which is the the net cost of the week in, call it, dollars $850,000,000. Just just on the other point of the fact, the max of that 180 basis points, not 200,000,000 we're simply rounding. So there's nothing more to that story other than we just rounded to 200 basis points versus 180,000,000 when we changed guidance. So no, nothing else to that story other than that.
Okay. And how are you managing the higher cost of claims handling around regulation, both from a regulatory impact and also from a catastrophe impact?
Well, from a regulatory perspective, that's just built into the guidance that we've already given. We have some of that covered off through the provisions that we've made for what we call IQ, which is our risk transformation program. Some of the increased claims handling costs as a consequence of these catastrophe events is actually covered under our reinsurance program.
Great. And one last question, if I could just ask. On the customer refunds, which you raised in January, you just took notice you reported them to ASIC on in September 2019. Why did it come so why did it
take so long for this to
come to light? And also, does this provision draw a line in the sand on remediation?
Matt, it's Peter. It's a it's quite a complex process for us to go back and unpick all of our sort of rating algorithms. We we discovered this, reported it to us, and we've been working diligently ever since to try and sort of identify affected customers, to quantify the returns that we're going to to make to them. The review is is still ongoing. And and so at at this stage, you know, we have nothing further away beyond the the the matter that we've already drawn to your attention.
Your next question comes from Nigel Pitouwey with Citigroup.
Just first of all, if
I could, just focusing on the impact, the 70 basis point headwind you say comes to the margins from lower interest rates. The way it's written in the investor report, it does say 70 basis point headwind from lower interest rates impacting investment income. So I guess my question is why is there no offset through the claims line in terms of that 70 basis point headwind?
I mean there'll be the mark to market adjustment on interest rates. Hi, Nigel. It was Nick. Sorry. There'll be the mark to market adjustment that that's going to be trading.
We've got a lot of these in $1,000,000 discount rates, but this is really ongoing. Because of the ongoing business now, which is is we we neutralize we and sort of hedge that shock from any change of interest rates on the day, as you know. But with the ongoing business now, the income that is part of that margin is now 70 basis points lower because we're gonna have lower interest rates. Obviously, one of our challenges is is reflect that in sort of pricing or benefits going through from optimization or other stuff. But that that's real.
The the the end of the company coming down in the lower, you know, everything else being equal driven by those lower interest rates.
That's a new big picture.
Probably got a shorter part of this as well when they're not. So therefore, as we re as as in the liability profile has come back, therefore, this issue is actually going make it more relevant because of the comments you're making.
That's the new business strain impact, in effect, is what you're saying?
Yes. And the duration will come back from three point five years to two years on our liability for the amount of money that we're holding for getting that's come down. So therefore, the nature of our we're more current today than we were five years ago. Sorry about that.
Okay. Secondly, there does seem to be a little bit of a softening on the sort of underlying margin sort of guidance for the second half. So are you saying that, that's sort of because you did expect some temporary repercussions from the bushfire event, so it doesn't really sort of affect moving forward? And I guess in that context, how are you thinking about this sort of long tail target you've had of getting commercial back to 15%?
Nigel, just on so with that comment around sort of softening of underlying driven by the guidance of the max of the pearls being a 180 and the
Well, no. Just flat. You know, basically, you're saying flat in both businesses, second half versus first half. So
I mean, that's the time. So I don't read anything into the the the guidance comment between a 180 to a 100 and just us rounding. Mhmm. The time I mean, I think it's how we feel. We we feel like with everything that's going on, that we we would expect an underlying performance similar in second half.
And that I mean, that doesn't mean down. That means similar means similar in in second half of what we've just delivered in in in interest. But I don't think we're we're sort of guiding slightly negative. So I think we're saying it really is similar. It should really almost be three parts in a row where we're delivering a similar outcome.
See, the real story for us is, since we talked to all our teams around today was, because I did like to see this margin sort of deliver something in this order and create a bit more of a growth profile, carefully. And then that's sort of what we're trying to set the company up for. You'll see that in a bit of a narrative throughout our investor materials.
In terms of the commercial margin, with the terms of long tail target of 15%, do you think you're sort of on the way to that? I mean, the previous suggestion was you might not be too far away. And now if you're sort of targeting more growth and sort of compromising margin, then maybe it's further away.
I don't see the target growth in compromising margin. I think we're trying to sort of run the business roughly with this return profile and probably a bit more of a growth profile. On commercial, I mean, I think the strategy is probably the same as what we said multiple times. We've had it without this margin. And it's been quite a challenge for us for a whole range of reasons, partly the business our business part of the market.
Directionally, we're still only up, I think. But it's proved to be quite a challenge.
Okay. Maybe just finally, I mean, you are treating this weekend event, you said, the second event, so maximum retention of 135. Why then doesn't the next event fall to the third event? You quoted in your reinsurance program of 17 mil. Why is it a 50 mil rather than 17?
That's right. Because we we we had to pick the number of 200. And if if just talk growth, I'll just say this slowly, but I'm not gonna state. The the the way this works is we have the main catastrophe program, but we also have our calendar 2020 aggregate program in place. I'll just use the numbers at a 100%.
It's easy if you need to talk it through. We had our first event in January, which was the hail event, which which at a 100%, our retention was two fifty. After quota share, that number is a 169. But just and and the way the aggregate works, which started at zero in the deductible, we're allowed to put we we keep the first 25, and then we're allowed to put 225,000,000 to the deductible per event. So event one being the hail, gross $2.50.
The number's larger than that, but then in the main program. Gross $2.50 in in the way I've just talked about it. Net a 169. Of that $2.50, they're put 225 into the aggregate. Second event, we've assumed to be 200,000,000.
If it's at a a larger, we'll just pick the number at 200. So therefore, that a 135, which is the max. If that number is greater than 200, the 135 doesn't change. And if it's 200, we were the first 25, and we can put a 175 to the ag. So therefore, in total at a 100%, I'll be following the lesson with everybody, Now, it's 400,000,000 into our deductible of 450.
About a 100%. Okay. So therefore, we were we have to win the first 25 of every event, then we were we'd be we have another $50,000,000 of deductible under the ad, call that 75 and a 100%, 50,000,000 after quota share, and then we're into the ad for the next event. So in fact sorry, we're sorry, everybody. What that means and I'll test everybody after we'll follow it all up.
What that means is the cost of our next event is 50, but then that into the ag. So therefore, after that, it's really the bloody defensive trade manager. After that, that number then comes down to that the support. We were the first 25, which seven is and a half minute after. And I'm looking at the IG people in the room here shaking nodding their heads and like I've got that right.
And so that's sort of how that works. That's why that drop down. It's really the the way we pick the number on on the second event flows through. I'll say, if the number is greater than 200, you know, which there is some risk that could be, our net number, a 135, doesn't change. What it would do, though, is reduce down that 50 to a smaller number.
So that's why we said 50 is the max. It's only going one way, which is probably lower. Your
next question comes from Ashley Diehl with Goldman Sachs.
I just had one question just around the investments that you're taking within the fee income line up to $50,000,000 this year. Just wondering as you've kind of gone through that process over the past several months, are you now in any better place to give us some color as to, I guess, what that might look like into FY 'twenty one? Should we expect further investment by the similar quantum? Or will the dealings on some of those new business initiatives start to turn a little more positive?
Actually, it's clear. It's it's on the third and tomorrow, the Australian session will sort of unpack some of these investments for you and and give you some more color then. Well, I think the the simple answer to your question is we would love to be in a in position where the success of these investments warrants further investment. But at this stage, I think we should look at continuing our current investment profile.
Your next question comes from Daniel Tuohy with Morgan Stanley.
Just a quick first question just on growth. When we look across the portfolio, if you look at some of the words you've used in the business lines, volume slippage, lower volumes, slightly lower retention. And then and then when we look into looking the personal lines business, you know, home, you're putting through, I think, four and a half percent rate for the GDP growth is 4.1. So you are, losing volume, minus 3.3% of growth, largely driven by rate volume seeming flat. I guess, volume actually outside of Victoria, it appears.
Just just just trying to
get a sense of, you know, how,
you know, I guess, the momentum and the story around rate increases is going. You know, are we sort of at a point now where essentially, you know, inflation driven price increases? And I guess trying to get that footing and positioning around that story of growth, where does it come from? Daniel, I think I sort of wrote that question down into some components.
Firstly, our intermediated personal lines has been under quite a lot of stress for some time, both from a profitability perspective but also from a top line perspective. As we've sent to the Royal Commission, many of our particularly our financial institution, distribution partners, have had significant changes in how they, remunerate their own staff, and it's led to some slowdown in, I I think, just the the the sales, but in fact, people's willingness to engage in in in cross selling with the with the banking customers. So that's that's one issue. And, of course, the profitability issue, particularly through our our broken personal lines, means that both in New Zealand and Australia, we should expect to see some continued slippage in those portfolios until we can actually get pricing to a point where we're comfortable with the returns. Think without sort of looking too far ahead, I think Mark in particular would say that he's he's quite happy with the green shoots that we're showing in our two bands of r s
c v and r m a
on both home and motor. We've done some, I think, really good work in Victoria, and we're starting to replicate that work in in New South Wales. So, again, it's early days, but we're we're quite pleased with with the progress to that. In New Zealand, Craig has repositioned both the state and AMI brands. I think historically, we've had a little bit of cannibalization state I should say, AMI cannibalizing state.
We've now arrested that. We're starting to get just a little bit of growth. Having said that, we also have the same distribution challenge, partner challenge in New Zealand. Again, Craig has, I think, three of the four major banks as partners. And the the challenges that they've gone through since the review the review that followed the Royal Commission here in Australia as well as that pipeline just just changing a little bit.
So I think, you know, the summary would be, you know, we feel in a in a quite a a good position in terms of the base we've got. We probably will continue to see a little slippage in South Australia and Western Australia. But again, our strong brands of ROCD and MA state and AMR, we're feeling pretty positive about. Okay. So just on an underlying basis across personal lines and commercial, it feels like underlying in personal lines is getting tougher, at least a few more headwinds on your old CTP into that.
And then business has still got a few tailwinds rolling through. Is that sort of how we think about those portfolios? Look, I I think, Daniel, personal lines, you know, will be I think a good good outcome will be to hold margin, and we feel pretty confident that we can do that. Obviously, we have got the headwinds of some potential event based claims inflation, but we think the work we've done around our supply chain and our pricing position will enable us to cope with that. And yes, you're quite right.
We still had a bit of a delay to put through the commercial book. At the same time, as I think the expression that we used earlier, is we can't continue to shrink our rate of greatness in commercial. So the next six months, I think, is going be quite compelling for our commercial portfolio. Okay. Thanks.
Just a couple of quick ones. The Malaysian sale, any any comment on that? No. I mean, we're we're sort of, you know, we're a program of work here. You know, we hope to settle on India in this period.
Vietnam, for various reasons, as Pete mentioned, didn't didn't go. So we need to look at what we do there. And the license is still in that same category where we're looking at our strategy there going forward. Okay. And then just following on the reserves.
You're still making the comment you're comfortable maybe in turn 1% is achievable. But when you when you do go back and have a look, I mean, you held that 1% for some years, you know, the net claims reserves that you have have halved and in a lot of where the Fed's case game changes in New South Wales are heading or are progressing towards, yeah, just trying to get a sense of how confident you are on on that 1% medium term and is medium term sort of three three years, three to five years? Or Yeah. I mean, sort of answering that one correctly. Yeah.
As in everything I know, basically. I mean, there's slight natural correction here because our earned premium has come down over that period too as we've introduced quota shares. So the dollars in there's a bit of a natural correction that happens here anyway because we reference 1% of net earned premium. The quota shares have driven down our net earned premium. So the the dollars involved here naturally come down just because of that.
So even if 1% stays the same, it's a bit of natural correction on that on that total. But, yeah, I mean, we're I I mean, a little bit point we wanna make is that we we have had some one off negatives. We don't see that as sort of systemic to as in a deterioration of long term classes in Australia, and that's sort of causing other problems. We're really happy to, you know, some sort of one off challenges that we've had in a couple of portfolios. We expect CTP in New South Wales to continue to perform and have some modest reserve releases, and that sort of drives that guidance of 1% of net earned premium.
That's the logic of what we're saying.
Your next question comes from Siddharth Parameswaran from JPMorgan.
A couple of questions, if I can. Just carrying on with that thing about the leases. I was hoping you could just give us some idea of just where you've actually set your AWE and superimposed inflation assumptions on CTP and if you can confirm that, that is actually where you're expecting most of the releases to come if you're going to sustain this 1% going forward?
Yeah. I see. I mean, I don't think we've materially changed them, actually. I mean, we're we're sort of and I'm looking at our time sort of 2% to 4%, I think, in that order. And I'm getting signal three.
I don't think we've materially changed any of those assumptions. As you know, we don't chop and change around those. They're medium term assumptions that still embedded in most portfolios.
So is that 3% AWE plus supercomposed? Or is that 3% less?
There'll be an element of both. It'll be sort of 3% inflation and and then some additional second place on top of that. But I don't think we've materially changed those numbers from thirty thirty for June. So that that that's sort of a constant.
Okay. Okay. Okay. Fair enough. Okay.
Just a second question just around the just just your views on pricing and personal lines going forward for all these events. I mean, you touched on earlier that you'll probably look at increasing your allowances. Presumably, a lot of the business you write today will end up earning through into next year. Are you taking any action on pricing for this? Are you forward looking in terms of in terms
of what you might see? I mean, so you're thinking about it. Definitely. So if you think about what's in front of us as a company and the industry now is, you know, we've had some, you know, devastating perils that's likely to ring up. It doesn't just appear straight away in some event driven type inflation in some of the client services that we procure.
It's definitely, you know, gonna have to cause us to look at retained sort of pearls risk or, you know, what what we're pricing for for around sort of pearls risk that our customers have, and then likely to flow through to some sort of increase in the cost of our reinsurance. And, yes, you know, the bulk of our reinsurance is not renewed till January. And I think of our main cat program, sort of almost two thirds of that has already been it's a multi year pre cost arrangements. But think the tone is gonna be clear that there's likely to be an increase in in cost of reinsurance. So we've got three things going the same way, and no doubt Mark and Craig and the teams are we just can't we can't just make a decision to make some changes in pricing overnight.
We need to be factoring that into everything else that's occurring in our business and looking around what does that mean to sort of our original pricing. And I think that'll be the same issue at I o two as it is for the whole industry across Australia and New Zealand. I don't think anything I've just said is not that that the industry issue is that we would like to think at IRG, we're better equipped than most to deal with them and to be able to deliver a proposition to our customers in a in a in a better way than most because of the size and scale and sophistication of our business. I think sort of I would just add to that. I think also the quality share and the focus makes it good side of Cat Tower, ignoring our multi new deals, it will provide some level of manipulation.
Yes. Okay. And just one final question for me. The top of your cap towers has increased materially over the last few years. I think it's gone from about $5,500,000,000 from every year around 2015 to about $10,000,000,000 now.
Is that are we done with that increase? Are we likely to have more modeling changes that are likely to continue to add to these pressures on insurance costs?
I mean a lot of this now is New Zealand earthquake risk. That's that's the top end of the tower. I will say that the the property insurance at the top end of that tower is pretty modest. Remember, we're buying for one in a thousand for New Zealand earthquake risk, so that that requirement is, you know, as high as anywhere in the world. So we may be.
And then we're trying to stay ahead of this. Actually, we're trying to make sure that we've we've got it, you know, we're able to provide capacity to to the New Zealand market, in particular Wellington, which drives a lot of this. We we see we we take to us, if your question is, I mean, our cap to 10, probably not. And, you know, as as sort of aggregates grow and sort of refinements to modeling occurs, and that's the opportunities for growth. Will we continue to look for the insurance to make sure that we can provide our products and services to our customers?
Okay. Great. Thank you.
It's not I said it's not necessarily driving the cost of the insurance at IHO. This is, you know, a very modestly, finally priced capacity at the top here. I see we have no further questions on the phone or or the webcast, if there are no further questions in the room, I'll just just close with maybe two quick comments if I can. Firstly, I said this at the last half. I feel AIG has definitely finished the half in a stronger position than how we started.
The business has good trajectory and good momentum at an underlying level. And I think the second thing I'd I'd just like to call out is the incredible passion and commitment of our people. I mean, if you think about the weather events that we've had that occurred across a peak holiday period, and our ability to respond to our customers in their nonlinear need, I think, is absolutely exemplary. And so I'm going to take this opportunity to thank them on behalf of our organization, on behalf of our customers in particular. They do a fantastic job, and I couldn't be more proud of them.
Thank you for attending this morning. Thank you for joining us on the webcast and the phone. And I'm sure we'll see you again in six months' time. Thank you.