Well, good morning everyone, and welcome to IAG's half year results to 31 December, 2022. My name is Mark Ley. I'm Head of Investor Relations. This morning we have presentations from our Group CEO, Nick Hawkins, and our CFO, Michelle McPherson. They've put aside plenty of time to answer your questions. If you'd like to ask a question and you're watching on the webcast, the details are on our website. For those in the room, can you make sure your phones are on silent? I'll hand over to Nick. Thank you.
Thanks, Mark, good morning to everybody. Just wanna firstly acknowledge that we're holding this meeting today on the land of the Gadigal people, and so I pay my respects to elders past, present, and emerging. As Mark mentioned, with me today is our Chief Financial Officer, Michelle McPherson, who's gonna join me on stage shortly, together with members of the IAG executive room, team that are sitting in the front row here in the room today. I thought I'd just start with a snapshot of our financials that we've released today. Of course, we did have a preliminary release on the third of February, and most of this was contained within that material already.
Really what Michelle and I wanna do today is step you through in a bit more detail around where we're at, and also importantly, you know, what the prospects of where the organization is going over the next six, 12, 18 months. If I start then with premiums, in relation to growth of the organization over the six-month period, we had a headline number there of 7.5% growth for the six-month period. If you sort of unpack that, and I will in a moment, you know, the underlying growth of the company for the six-month period was around about 10%. We acknowledge we've definitely had pressure on the underlying and reported margins for the period, and the primary driver there has been around inflation, and there's some comments I'll make on that as well.
The headline profit or net profit after tax was high, at AUD 468 million for the 6-month period. Of course, that number has benefited from the significant BI release that we announced earlier in the half, and that's that is part of that number. Finally, we're declaring a AUD 0.06 per share dividend. Let's quickly look at the three businesses around of IAG, and the themes that we've delivered there are very similar. Firstly, within our direct business, at Julie's Business Direct, our premiums have grown by 8% in our motor portfolio and around just over 13% in our home book.
What we've seen is that there's been an acceleration of premium and rate changes flowing through that portfolio over the last six months, and we expect that to continue into 2023. Retention rates still remain very, very strong within our direct business here in Australia. I think home is something like 95% and motor is 91%. We continue to have very strong retention rates within our direct business here in Australia. Our intermediated business has delivered a slightly improved underlying margin, and that improvement of underlying margin was in the environment of the inflation of where we've experienced inflation. It's probably even better than the headline number there that we've delivered.
Importantly, Jarrod and the team are very focused on delivery of the AUD 250 million insurance profit by 2024. There's many things that you'll see that are evidencing that we're on track to deliver against that. With Amanda's business in New Zealand, the themes there are similar to what we've experienced in Australia. Headline premium growth in New Zealand currency was just over 9%. If I sort of adjust out some of the EQC changes, it's sort of around about 10%. Underlying margins are impacted similar to what we've had within our direct business and intermediated business here in Australia.
Right now, the second half of our New Zealand businesses is gonna have the impacts of the last couple of weeks of perils that Auckland and other surrounding areas have experienced. Our thoughts are with our team right now who are working with our customers and sort of managing through these events. I was there last week and I saw sort of firsthand the devastating impact that those perils have had on the communities of Auckland and its surrounding areas. What I'd do at a macro level, and certainly in a bit more detail than I normally would of, is sort of talk about what's happening within IAG.
I'm gonna use some of the sort of key financial metrics as a way of sort of evidencing and sort of telling the story of the last six months and really sort of setting up therefore where to from here. The themes are really similar across our businesses, You'll see in all the detailed packs that we're providing, that the themes of sort of inflation and pricing and the impact and timing differences are really quite similar. What this slide is really showing is the half-on-half comparison of our business, and you can see that there's been around about a 300 basis point reduction in the sort of underlying earnings, compared to 12 months ago. Of course, the drivers there are we have increased our perils allowance, so that's had a bit of strain in the P&L.
Against that, we are realizing some benefits from expenses, and that's sort of seen as a positive. We've also obviously got some benefit of higher investment returns, and that's in the P&L as well. The middle bucket is really where I wanna spend the time today, and that's around the 400 basis point reduction or worsening of our loss ratio over the period. Of course, the driver there has been inflation and the consequential impact of inflation then on our average claims cost. Really what I wanna do today is talk about what's driving that and sort of the themes that sit behind that, but then importantly, what our response has been and continues to be going forward. I'll give you some evidence points around that as well.
Start with the impact of inflation that we've had across our business over the last six months. What I've done here is just provide you with what's happened with the inflationary environment, and in fact, average claims costs within our direct business for our motor and our home portfolios. This is essentially half the company. The themes are similar everywhere, but we sort of dropped it into our largest business unit to sort of illustrate what's been happening with inflation. We've had a go as well of sort of normalizing this for mix and a few other things, so we're getting some sort of comparison and themes that are flowing through. What this graph is doing is showing average claims costs for our motor and our home portfolio in our direct business.
I'll start with the purple line, which is our motor inflation that we've actually experienced, or average claims costs that we've actually experienced in a six-month period. In a way, you can see the such sharp increase in that purple line, sort of August, September, October of 2022. In a way, it was a bit of a perfect storm. We had sort of a fairly significant increase in labor, increase in parts. We had a delay in those parts being delivered into our country, which actually extended out our average time it took to repair a motor vehicle. Time costs money for us, for example, additional hire car costs and things like that. We also have had an increase in the average claims cost for total losses.
We've had a higher secondhand car market, Therefore average cost of a total loss has gone up a little bit, and that's been impacted in those numbers as well. Just on that last point, we're definitely seeing that come down now, as we know secondhand car values are coming down. We've definitely seen inflation in the. The other line then is the blue line, the, which is our home portfolio within Direct. You can see that we've definitely had an increase, particularly you see in July, sort of, May, June, but that's mostly driven by the comparative period for June, sort of May, June 2021, when we had COVID impacts, mix impacts, and that's distorted it a little bit.
You can see that we definitely have had higher inflation in home, but it hasn't sort of stepped up again during the period. That's the themes of what we've actually experienced within our motor and our home portfolio within direct, which is sort of similar right across the organization. It's really now about how we responded to that, and that's been very focused on price. If I start with headline here on overall growth, and remembering most of our growth is price, and I'll drop this down another level in a moment. As I mentioned, our headline number was 7.5% growth.
If I adjust out for things like portfolio exit within Jarrod's business here in Intermediated, where we've exited some business, there's quite a material currency impact in the half between Aussie and Kiwi, and well, there's a reconciliation we'll show you later around that, and there's been a small positive from ESL. Underlying is just under 10%. The company's underlying growth rate right now is around about 10%. We've delivered 10% for the half, and we're probably accelerating beyond that at the moment. That's happening everywhere. We've sort of done a similar graph to the inflation than for pricing. This is the price changes or what's actually flowing into our premiums now for our direct business, for our motor and our home portfolios.
We didn't, we've just used one of our businesses, but this is illustrative of all three about what's actually happening. Of course, we are responding to pricing driven by inflation, driven by what's happening with our reinsurance costs, and driven by what's happening with our allowances around perils. Remember, that's particularly relevant for property. In addition to the property inflation that we showed on the average claims cost, we need to add in perils and reinsurance to sort of work out the overall picture. What this graph is showing, and it's the same for motor and for home, is at the beginning of the half, we were talking about mid to high single-digit type rate increases when we released our numbers here in August.
That's what sort of our outlook was for the period, and you can see how that has accelerated during the half. In fact, as we're exiting calendar 2022, we've got double-digit rate increases flowing through these portfolios, but flowing right throughout our entire organization. And in fact, we're expecting more of that for the balance of 2023. That's the direct business. If I just make some comments on the others, I mean, the short tail business of Australian Intermediated is almost identical, so the themes are very similar. A slight difference with our long tail classes here in Australia, where we have had double-digit rate increases been flowing through for the last couple of years.
They might be slightly lower than what's happening in short tail, but the themes there around repricing are similar. I made comment on Amanda's business before in New Zealand, which is when I look at sort of the underlying pricing that's flowing through that portfolio, there's a bit of noise with EQC, as I mentioned, but the headlines are very similar. There is significant price flowing through everywhere in our organization. Of course, what that means. In relation to guidance, you can see what we've done. We've delivered 7.5. The run rate of the company is well beyond that, for at, you know, at the end of calendar 2022, and we've evidenced that, more of that again in what we've seen in January.
We've changed our guidance on growth from mid to high single-digit growth to 10%. Of course, what that's really saying is we delivered 7.5 actual, but it's more likely enterprise-wide 12% or thereabout in the second half. That's gonna be pretty much everywhere across our organization is where that growth is occurring. Of course, that's what's giving us the confidence around the prospects of the company. I'll come back and make some comments on guidance at the end. Obviously, the vast majority of that slide and the increases beyond our original expectation haven't been earned. That's what's gonna be flowing through in the earnings pattern in the company over the next six, 12 months, the earnings profile of those significantly higher premiums than we originally anticipated.
On that, I'll hand you back over to Michelle, who's gonna step us through in a bit more detail, and I'll come back at the end.
Thank you, Nick. Good morning, everyone. It's great to see so many faces here in the room with us. I'll start with the financial summary slide and note that at a high level, there are a lot of green arrows on this slide. We're reporting strong top-line growth, as Nick's just talked about, and an improved reported margin. Our net profit after tax was boosted by the AUD 252 million post-tax release from the business interruption provision, and this also contributed to our strong capital position. These are all pleasing outcomes.
Building on Nick's comments, I will focus my comments today on the drivers of the decline in our underlying margin from 15.1% in the first half 2022 to 10.7% in this half, and provide some key call-outs, which when combined with the management actions that are well in train, will deliver a strong improvement in the second half. Nick has shared some color on why our top-line growth of 7.5% understates the strength at the front of our business. To provide some further detail, in Intermediated Insurance Australia, the exit of a small number of unprofitable personal lines, the most material being IAL personal lines, had a 1.4% impact in this half. This is now largely played through, and we would expect a much smaller factor in the second half of FY 2023.
In New Zealand, as Nick noted, in local currency terms, top-line growth has increased over 9% due to the New Zealand dollar depreciation that we saw. This reduces to 3.9% in AUD terms. The New Zealand dollar has reappreciated in January, which supports our top-line growth, noting that this is not factored into the guidance that we've provided. Finally, we reversed a small benefit from the Emergency Services Levy collections. Our underlying GWP growth of 9.8% is primarily rate driven and includes some positive volume growth in both Direct Insurance Australia and in New Zealand. I've shown on the left-hand side of this slide the gross earned premium growth of 5.2%.
The difference between this and the 7.5% GWP growth is an indicator of the earnings lag that will flow through in the second half that Nick talked you through earlier. Turning to claims. The inflationary impacts that we've been discussing were the key driver of the short tail reserve strengthening in both our direct and intermediated insurance business in Australia, partially on the natural perils that we saw off the back of the events early in calendar year 2022. We had some releases from New Zealand and DIA's CTP portfolio, which are also shown on this slide. At this stage, there's no evidence that we'll need to see further movements in reserving in the second half of the year, and this is factored into our guidance. To bring all of the claims elements together, we've split our reported loss ratio into its various components.
A little bit of a busy slide, hopefully helpful. Perils, discount rate, and COVID impacts are shown. You can see the impact of the larger perils allowance, which is now 11% of net earned premium, up from 9.6% just one year ago. I thought it worthwhile to focus on the largest component of our reported loss ratio, the underlying claims ratio, which was 58.2% in the half. In the prior comparative period, this was 52%. This did include a 2% benefit from COVID lower motor frequency. Adjusting for that, the 4.2% deterioration in this ratio was primarily driven by the inflationary factors that Nick talked you through earlier. When you're thinking about our second half results, I thought it worthwhile to call out some notable impacts that we've seen in the first half.
First, there was a risk margin strain due to the greater balance of outstanding claims at 31 December, which we did not adjust for in our underlying calculation. Second, supply chain challenges resulted in increased duration of motor claims repairs, which caused additional hire car costs, and we also saw higher towing costs as well. Windscreen repair costs were above our expectations, which we believe may be related to La Niña weather patterns and the poor condition of some of our roads here in Australia. Living in rural New South Wales, I can confirm they're not in great shape at the moment. In home, we saw a greater number of unusual large fire claims.
Finally, I'll call out there was a AUD 7 million unfavorable adjustment to a recovery on a complex dispute that dates back a number of years. The other key contributor to our margin improvement in the second half of the year is forecast to come from our investment portfolio. Thanks. As at the full year results announcement in August, I indicated that the portfolio was expected to deliver an underlying yield of 3.5% in FY 2023, double the yield we saw in FY 2022. The two-year government bond rate, which is effectively our proxy for the risk-free rate, increased during the half, so that we ended up delivering an underlying yield of around 3.7%.
In terms of the spread, we have previously indicated that this would be around 50-100 basis points above the risk-free rate, and our technical reserves portfolio continues to deliver at the top end of this range. I'd also note that the yield in New Zealand, which is a denomination of about 10% of our portfolio, is around 1% higher than in Australia. All this combined means that the portfolio is well-positioned to deliver around 4.5% in the second half of the year, contributing to the improved margin. Finally, our AUD 5 billion shareholder funds portfolio continues to deliver healthy returns with a contribution of AUD 72 million in the half. The portfolio is currently more defensively positioned following the exit from hedge fund component and taking into consideration the release we had from the BI provision in October.
Having covered the key factors that we've called out as driving margin improvement in the second half, I want to touch briefly on some other areas within our results. Firstly, in terms of expenses, we remain on track to achieve our AUD 2.5 billion target for FY 2023. In this half, we have experienced a AUD 13 million reduction in expenses due to the depreciation of the New Zealand dollar. This is around 1% of the 4.4% reduction on the prior comparative period. I'd also point out that the PCP did include some additional COVID costs and some one-off costs involving major event claims. Going forward, we remain focused on our cost discipline and attempting to keep our costs around AUD 2.5 billion.
Like many organizations, one of the areas we're continuing to review is our property footprint and how we make sure we use that efficiently and effectively. Wage inflation and other inflationary factors may increase into FY 2024 and FY 2025, which will put some pressure on a AUD two and a half billion dollar target. However, I'm confident that we will continue to deliver an improvement in our expense ratio as earned premium growth will exceed any future increase in expenses. To capital. A key foundation of our capital position is our whole of account quota share arrangements, and we announced the renewal of the majority of these last month. We were very pleased that our reinsurance partners engaged so constructively and positively to renew their long-term partnerships ahead of the expiry of the original agreements.
I believe this reflects their confidence in the IAG franchise and the strength of our financial outlook. The renewed agreements provide us with materially consistent financial outcomes and support our 15%-17% medium-term reported margin target. We've reviewed the financial benefits of the quota share arrangements and can confirm on a prospective basis they deliver between 3% and 5% margin uplift, depending upon the underlying performance of the business. This margin uplift includes the material saving in our reinsurance costs from the need to only purchase 67.5% of our catastrophe program. In a constrained reinsurance market, this benefit is increasingly valuable from both a financial and capital certainty perspective.
Having locked in 30% of the 32.5% until the latter half of this decade, I can confirm we're in discussions for remaining 2.5% and expect this to complete over the coming months. In terms of our main catastrophe reinsurance program, we outlined the new structure on 9th January, it's worth highlighting some movements post the recent Auckland flooding. The diagram on this slide is on a pre-quota share basis, We have adjusted the catastrophe program chart to show the AUD 200 million impact from the Auckland flooding event on the aggregate deductible, taking the total FY 2023 year-to-date erosion to AUD 365 million of the AUD 500 million deductible.
Taking that into account as well as the attachment point for the second event drop-down cover, results in a post-quota share maximum event retention of AUD 192 million for a second event this calendar year. It's worth highlighting that we had previously purchased an additional layer of protection for New Zealand, and this results in a post-quota share maximum event retention for a New Zealand specific second event of AUD 108 million. This is not shown on the diagram on this slide, as he mentioned in the comments. Based on the aggregate cover remaining, the MER for third and subsequent events will be further reduced. Finally, on capital, we are above the top end of our target range, which makes sense given we're only 20% through the on-market share buyback process. A couple of call-outs on this waterfall chart.
You will see the benefit of first half earnings and the deferred tax asset reduction, which is driven by the BI provision release. We had the benefit of the receipt of the AmGeneral proceeds contributing six points. In terms of our continued investment in the Enterprise Platform, we have commenced amortization, but the net increase on the balance sheet in that intangible asset had a five-point impact in the half. Finally, the increase in our Insurance Concentration Risk Charge on the 2023 calendar reinsurance program had a six-point impact. There is no further deterioration in the ICRC following the Auckland event. On that note, I'll hand you back to Nick.
Thanks, Michelle. I'm just gonna touch on guidance and outlook and just some comments and then close. We're open for questions, sorry. In relation to sort of outlook, we've clearly had a tough first half, and we've stepped you through that on the outcomes. We've definitely experienced inflation, and we're seeing an acceleration of that in the half. We're not anticipating that again at the same level, so we expected that to be less in the second half than the acceleration that we saw in the first half. Clearly, our results are gonna get the benefit of the pricing that we've already put through in the portfolio and the way that's gonna be earned through in second half 2023 as well as in 2024.
At the same time, we're continuing to put even more price through the portfolio. The package of that is really giving us the confidence on outlook for sort of 2023 and that 10% reported margin for the year. In addition to that, around growth, that sort of 10% growth profile because of the actions our business have already taken and continue to take, that's what we're expecting. In fact, we really do see that pricing environment being pretty constant for calendar 2023. I just wanna finish with our value proposition around IAG. Just to be clear that we've set our organization up to deliver a 15%-17% margin and a 12%-13% ROE.
Nothing-- that's unchanged, that ambition, and the plans we've put in place to deliver against that. Of course, really behind that is really building on the strengths of us, which is that we've got really widely recognized and trusted brands, and that continues to be the case today as it's been for some time. We know that we have a great reputation for customer service, and with particularly when our customer is at their time of need, when they're making a claim. We know we have an innovative capital structure that's a bit different, compared to others, and that's paying dividends at the moment in this sort of challenging, more challenging capital markets that we're in. Of course, we've got a management team that are sitting here that are super focused on delivery against that strategy.
You know, right now we're sort of delivering things. You know, you'll see in the detail that our direct business grew by around 100,000 customers during the period. We've launched NRMA, and that's now operating within WA and South Australia. We've strengthened the footprint of that wonderful brand, NRMA Insurance. We're building out better businesses. You'll see in Jarrod's in our material on intermediated, we're very focused on delivering against that AUD 250 million profit for 2024, and there's lots of things in play already that are demonstrating we're gonna deliver that.
With hindsight, you know, we have seen more inflation than what we originally anticipated. You can see the response, we've started to step you through that today, around what we've actually done against that to ensure that, you know, we improve the earnings profile of the company going forward. Around creating value through digital, this is really important. You know, we are delivering an Enterprise Platform, you know, we've now got up and running within our WA and South Australia businesses. Over the next 12-18 months, we're gonna have around all of our personal lines businesses pretty much throughout Australia and New Zealand on this platform.
70% of the group is gonna be on a common platform, takes out complexity, improves simplicity and operating efficiency within our organization, and we're well on track on that rollout over the next 12-18 months, which really is gonna be a step change. Around risk, you know, we have had a significant uplift in risk maturity at IAG over the last couple of years. We know we had some challenges, and we've sorted those, and we've significantly uplifted that maturity right across our enterprise. As Michelle has stepped you through, in relation to capital, you know, we've got a third of the company's sort of reinsurance capital locked away for the end of the decade. We've done 5-7-year big deals with some of the largest counterparties in the world to create that certainty of supply, and that's done.
Sort of my summary is then, tough six months, definitely acknowledge that, but we definitely see good things coming through, and we have confidence on how we're gonna deliver that over the next six, 12, 18 months. With that, Michelle and I are happy to take any questions. Back on stage, Michelle.
Morning. Kieren Chidgey, Jarden. Just maybe starting on the rate inflation debate, Nick, and the great charts you put up. Just wanted to go back to slide seven and nine , I think it was, and clarify on the pricing chart, is that monthly pricing? 'Cause the inflation data you're showing is rolling six months.
Yeah, I think it's point in time compared to.
For pricing?
Yeah.
Okay.
Yeah.
If that is the case, you know, and your inflation chart shows you had a pickup in rolling six-month motor inflation to 11%-12% back in September, October, are you happy with the pace of repricing, given we've only seen a pricing response exceed that level coming through in December, sort of where it got up to 12%?
Yeah. I mean, we are. I mean, that's a challenging market for our customers, obviously, all of this. Yeah, we're seeing double-digit rate increases flow through both portfolios, now. That's pretty much wide, enterprise-wide for those classes. You know, we definitely saw more inflation than we're anticipating, but I feel like we've taken a pretty strong response to that. Now we're gonna start getting some of the benefits of the earn through, as you point out.
Okay. The lag sort of between seeing a pickup in inflation and pricing sort of responding, can you, can you just maybe talk about why it took sort of presumably two to three months to respond? Or is that sort of fairly normal?
I mean, there's a lots of... I mean, there are a few different parts to this. I mean, and of course, it's the... It's not like we didn't see inflationary pressure across the business. It's the degree to which we saw it. I think it was... I mean, I try to use those words perfect storm a little bit, where we had labor, parts, supply chain disruptions. Parts coming into the country were a bit delayed, extended out, say, motor average time to settle a claim, which actually has come back already. All of those things are just adding more cost into it, and it's the sum of that that's really contributed to that spike. You know, there's a process obviously around renewals that we...
I mean, the general rhythm in our company is six weeks, is the way we do our renewals with our customers. In itself, that becomes a little bit of a challenge. I think it's probably a few of those things all coming together at the same time that's caused that. I mean, the message we're, you know, which is why we've provided the charts, is we're not just observing this, we're acting on it, and we're taking significant action. I mean, I'll use direct as the example, but certainly in Amanda and Jarrod's businesses, it's very similar theme.
Thanks. Sort of the second part of that question you just touched on there, but just wondering if you could give us a prospective view or spot view of how sort of those jaws between pricing and inflation are looking, or how you expect them to move through second half.
Yeah.
Both motor and home separately.
I mean, an important part of sort of expansion of margins in second half is just that. The fact that, you know, in fact, in reality, the sort of margin outcome for second half in the way the accounting works, not much of it's really gonna be driven by the actual rate increases we put through in the second half. Mostly, it's gonna be on the back of the earn through of what we said there. There'll be a little bit that continues through, so, you know, that we're continuing our focus, obviously. That becomes a bit more of a 2024 story at that point. As a theme, I would expect for both the portfolios to see what you said, that, starting to create margin expansion, or not starting to, will create margin expansion across both those portfolios.
Okay. Sorry. Just be clear on this. Is this a reduction in inflation in motor and home driving that, or is it more step up in that earn through pricing?
I think it's a slowdown in the rate of inflation. Of the expansion, you know, in the cumulative impact of inflation together with the benefits of the earn through of the rate within our pricing. That's sort of creating that opportunity. I don't wanna miss out on reinsurance and perils assumptions too, because we've obviously had to factor that in. It's particularly relevant in the home portfolio. Even though that graph that we showed sort of shows mid-to-high single-digit type inflation in property classes, actually I've got to add perils and reinsurance, and that sort of gets up to that double, which is why we're responding, you know, quite significantly around property classes right across Australia and New Zealand.
Thanks. I just had one quick question for Michelle. The underlying margin sort of looks like it was impacted by an asset liability mismatch on risk-free rates. I think you called it out.
Yeah.
AUD 22 million on one of your slides
Yeah.
which is almost half a % to your margin. You also mentioned risk margin sort of as a, as a factor. Can you quantify sort of what impact that had on your underlying margin this period?
The risk margin strain, if I call it that, was about $30 million in the half, our go forward is assuming that we're not going to see that level of risk margin strain in the second half, and that comes off moving through the processing of claims. Obviously, those sorts of things can be impacted by significant events. It's one of the factors we've taken into consideration when we think about what we expect in our New Zealand business versus our DIA and IIA businesses here in Australia. 'Cause our New Zealand team, who are doing an amazing job at the moment, will obviously have more challenging claims processing environment in the next little while.
Thank you.
Good morning. Andrei Stadnik from Morgan Stanley. Can I ask my first question just around the reserving? Are you confident that reserving in long-term lines is, you know, now looking like it's about settled, given it was broadly neutral this result and it's really the short tail that was driving it?
Yes, I am. I mean, we've done a lot of work. It wasn't a whole lot of fun talking to this group in August or a bit earlier than August last year around the strengthening that we had in the liability portfolio. We talked through the reasons that drove that, as I called out when I talked to the reserving slide, we're not anticipating any material need for further prior period strengthening as we go into the second half. I obviously can't provide guarantees. It is an estimate, that's our best view at this point in time, Andrei.
Thank you. My second question, can I ask around the margin improvement in the Intermediated book? It was about 70 basis points, 5.7 versus about five, which whilst improvement, doesn't seem that large given W2 price increases, and that area of the business didn't really see a lot of the motor, you know, inflation headwinds. What's holding back, margin improvement in the Intermediated?
Yes.
Yeah.
There you go.
I was gonna say the themes are similar though. In a way, a little bit of margin, the way you've described it in the environment, in my mind, that's pretty good. You know, we're on an agenda here to step this business up half on half on half. We would expect a stronger second half. There is a reasonable personal lines portfolio that's part of those results. That's had a similar theme, particularly to the example we provided with direct. You know, there's this sort of positive momentum that's flowing through in the earn through of the pricing in the second half, which will see that step up.
Can I ask my third last question, just around where the volume growth is coming from in direct? Because you mentioned all in, it's a bit over 2%. But it was over 4% in RAC, NRMA home brands.
Yeah.
Is it fair to say that most of the volume growth is coming out of the two states, Victoria, New South Wales? Or is there more?
We've got WA and South Australia, remember, under the NRMA brands as well now. I think CTP's had a bit of movement down as well. It's a, sort of, it's a bit of a package there. We can, we'll, I think in some of the materials we step you through that a bit more.
Hi, Andrew from Macquarie. two questions from me, please. Just the first one, it'd be interesting to get some extra context on this year's aggregate cover. How much of that was placed on a multi-year basis, so actually helping with next year? Thanks.
I wish I could say that it's all done and dusted and we're not going to face into a challenging 1 July renewal. We will be renewing a significant component of the aggregate program. I can't go into the commercial detail of various arrangements we have in place with our reinsurers. Clearly it's a challenging reinsurance market. We're pleased that we've placed the cat program, and we've shared the detail of that with you, but we will face into some challenges with ag, just like I would expect the industry will moving forward.
We do have an element of the main. Obviously, we have a third of the main.
Yeah.
cat program on quota shares. Even within the main, what we call the cat, the non-quota share cat, there is an element of multi-year arrangements in that as well.
Cool. Excellent. Just the other question from me was in relation to the AUD 250 million earnings target in Jarrod's business. If I go back a couple of years when that was originally commented on, the intention was to get 10% margin in that business. Certain line items of that division are moving around quite significantly. Is that 10% still the intention? Thanks.
I mean, we'll try to keep the message simple about, as AUD 250 million internally. I mean, the mindset was the one you described. You know, our view is that... Also I wanna make the comment, and I've got the team in the front here, that that's just on the path to improved profitability, but we wanna put a marker down of quarter a billion dollars by 2024, which is really a galvanizing thing inside the company as much as well around. This is really important, and there's a big opportunity here. You know, nothing's changed about that. That's a prize that we're going after, and we're increasingly confident that we're gonna deliver. Any other questions from the floor? I'm getting a sign here.
There's six questions on the phone. It sounds like we're gonna go to the phones.
Thank you. If you wish to ask a question on the phone, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Siddharth Parameswaran with JP Morgan. Please go ahead.
Good morning. A couple of questions if I can. This is just on the home and motor portfolios in Direct. Were there any changes in terms and conditions and deductibles over the period, Nick and Michelle?
Hi, Sid. I mean, there's a slight increase in some of the deductibles, a little bit, but I don't think that's over, that's material to the story. Sort of broader terms and conditions, no. No material changes.
Great. If I could ask a question just on just inflation assumptions as well on long tail. Michelle, I think you mentioned that you're very comfortable around the outlook on your reserves. I was just wondering, have, can you just comment on whether you've changed your inflation assumptions at all in this higher inflationary environment or if they're still what they were before?
Sid, thank you. As we talked about when we looked at the long tail portfolios at the end of 2022, we had adjusted inflation assumptions then. That flowed into higher expectations for the loss ratio on the long tail portfolio in FY 2023, and we continue to do our reserving looking at the inflationary environment that we're currently in. This is definitely not a set and forget for us. I feel like the words very comfortable will haunt me at some point in time, but I am confident in the work of our reserving team working with particular, we're talking about long tail, Jared's, pricing and underwriting teams in the way that we're thinking about the performance of that part of our book.
Yeah. Okay. Just a final question from me. Just on the quota shares that were being cut. Nick, you've previously said that there was a multi-year element to some of the previous, or the previous quota shares, and there was an element of-
That may be needed. Just given that the old treaties were effectively commuted and replaced, was there any impact on the results in this half from that commuting of the older contracts or the ending of those contracts versus what we might see in the future?
No, Sid. I mean, that's. Sorry. That's a simple answer. No. You broke up a little bit, but just to make sure I got the question right, was there any impact in our P&L in the half gone or in fact in the new one of any sort of changeover that sort of causes a one-off anywhere? No.
Yeah. Yeah. Okay. Thank you.
Thank you. Your next question comes from Julian Braganza with Goldman Sachs. Please go ahead.
Good morning. Morning, guys. Thanks for your time. Just a quick couple of ones from me. Obviously it's quite clear the pricing has improved. Can I just understand your own view of how your pricing compares versus peers and your expectations for retention going forward?
I mean, you know, there's sort of different parts to the business, but sort of I look at the overall package of the question is then sort of how do we compare to the market and then what's happening on retention? Our view is that we're well-placed in our pricing. Some of our premium brands are at the top end of the market. You know, that's, you know, what sort of been the history of where IAG operates with some of those. That intention will continue for the quality and the products that's delivered and the service proposition to our customers and all those great things about our enterprise. That. I think that sort of positioning is unchanged. Your question around retention, I mean, I've answered a few...
done a few media already this morning. I've sort of made the point that our home and motor portfolios, which are sort of the best places to look, are unchanged and extremely high. You know, low nineties for motor, mid-nineties for home. No real change occurring. You know, we sort of the pricing strategy, if you call it that, we sort of see plenty of evidence points that we're able to run the organization the way I've articulated around what we're currently doing with pricing.
Okay. Great. Thanks. Just in terms of the 1 July reinsurance renewal, can you just remind us what % of your non-quota share reinsurance costs are up for renewal?
I can't quote you the exact percentage. It's the ag program, so the cat is obviously the most significant component. I'm hesitating because I've got my head of reinsurance in the audience in front of me and who gave me a signal, but I can't quote the exact number, so let me come back to you on that one.
Okay. No, no worries. Sure, Michelle. Okay. Just in terms of, lastly, just in terms of business interruption, just keen to understand just what will give you comfort and what are the catalysts that are objective and tangible that you're waiting for before you finally release more of that provision? Thanks.
No, a really good question. As you know, we're carrying a business interruption provision of just over AUD 600 million. That's at the end of December. One of the things when we announced the AUD 360 million release in October that we said is there was an expectation we'd need to communicate with our customers to ensure that anyone who might have a potential claim has had the opportunity to bring forward that potential claim. Recognize at the moment we've still got less than 1,000 claims have been received to date. We have written to all of those potential customers across December and January.
We probably need to allow a couple of months to see, if anything comes out of that, and obviously we'll consider the provision in light of that as we move through to the full year results.
Okay, great. Thanks so much, Michelle.
Thank you. Your next question comes from Matt Dunger with Bank of America Securities. Please go ahead.
Yes. Thank you very much. Perhaps Michelle, could I ask you on the CET1 capital, you've talked to the ICRC, being a six points drag. Is there anything else to flow through here from higher perils expectations and reinsurance arrangements going forward?
Matt, no. Thanks for the question. No. What I hope I said from my speaker notes, but if I didn't, I'll say it now, is that we don't expect any further deterioration in the ICRC in light of the current Auckland weather event. It's at $365 million at the moment, up from a bit over $200 million at 30th of June.
Okay. Thank you very much. If I just ask on the potential to increase the quota shares potentially, Nick, you know, higher from 32.5%, is that something you're thinking about given you've touted the benefits today?
I mean, we've just gone through a big renewal on those. In fact, we've renewed 30%, and we're just finalizing the balance of that, which was sort of just a timing issue for the, our counterparty. I feel like there's availability of that in the market if we wanted to choose to go down that path. At this point, we've chosen to stick to the similar percentages, that 32.5%, and we're comfortable with that sort of blend within our overall sort of capital structure makes sense for us. It certainly wasn't really an issue of others not wanting to participate. It was really us saying that we were comfortable with that type of level.
You know, to your, to your other comment, you know, we still see these as sort of value created to, for IAG shareholders, the structures we've put in place.
Great. Thank you very much, Ivo. Just last one, final one on the intermediated business. I understand, you know, it's almost 40% of that business, coming from personal loans and fleet commercial motors. You're calling out those inflationary pressures that you're seeing elsewhere. Can you talk to how the underlying claims ratios are tracking, given you've been putting through high single digit price increases for a while now through that book in SME and specialty lines specifically?
Sure. I mean, the themes within personal loans are probably similar to direct in New Zealand. Just the starting position wasn't as good. There's been material change in that business because really our starting spot wasn't in the same as the others. We've definitely, you know. Against that, we're playing catch up with inflation and other things, barrels, reinsurance. I mean, that's the environment of the business. On the personal loans and short tail commercial, we're definitely on catch up. We're starting to, I think, tip ahead now. That feels pretty positive. If I sort of looked at some of the longer tail classes, I mean, Michelle's comment when we were talking about reserve strength.
What we did do this year after we announced that reserve strength, we also made it a bit tougher in the P&L for Jarrod and his team because we took a higher loss ratio. Not only did we value the back book, but we've immediately taken that in current period loss ratio, that higher loss ratio. There's probably a bit of strain that's in this year just from that because, you know, we've taken a more conservative view on current period there. That's sort of within the results. Over time, we'll be seeing that improve and expand out. Sort of in the mainstream SME commercial part of the portfolio, I mean, it's going pretty well, and we're seeing that market is favorable.
Not just us, but the whole market is repricing. We continue to see that flow through. I'd expect margin expansion in the second half and then again in 2024 as we deliver on the AUD 250 million.
Thank you very much.
Thank you. Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Good morning, Nick and Michelle. I was hoping, first of all, to be able to delve a little bit further into the level of claims inflation improvement you're assuming in guidance to come through in second half. I mean, can you maybe just sort of tell us if what assumptions you've made about inflation improvements that you're not currently observing? I guess in other words, is all the fact you've assumed what you're already is observing, or are you factoring in more improvement than what you're currently seeing?
Hey, Nigel. Nick, I mean, I'll make some comment, and you come in too. I mean, there's a few... I mean, there's a lot of moving parts to this story. I mean, we've tried to simplify it, obviously in the, in the way we've articulated it. We're definitely not expecting an acceleration of inflation like we saw in the first half, so that we're sort of what we're currently experiencing. Behind that, there's just a load of things we're doing inside the company. In fact, I have already done that's gonna help a little bit with some of the inflationary experience that we've, that we've seen. You know, there's... You know, we know that, you know, secondhand cars have come down. We know that some of the parts and supply chain disruptions is more positive now.
We know that time is gonna be reduced a little bit on average claims time to repair a motor vehicle. That creates a little bit of benefit that we've sort of had a bit, the perfect storm the other way. I mean, there's others, aren't there?
Yeah. There's a few pieces. Nigel, I tried to talk through a little bit of it when we went through the claims slide. Things like there were some practices we had in place during COVID that added a bit of cost to the system that we're able to unwind because they're no longer required. The number of sort of large fire losses that we've seen in the direct business in the first half is unusual, and we wouldn't expect it to recur. The key to key time is improving, so we have lower hire car costs. Making sure we're getting vehicles through to the right repair location to get the most cost-effective outcome. In New Zealand, in the investor report, we say we had 5 repair hub sites. At December, we've now got 6.
We're seeing an improvement in the average claims cost there. One of the things I think we've talked about with our strategy, the slide's actually up at the moment. You know, the AUD 400 million of claims value from a range of initiatives is a key part of what we were doing to deliver improved outcomes. In what I'd call, what we think will be a moderating claims inflation environment, combined with the increasing flow through of the impact of those initiatives, is what underpins what we think we'll see in the second half.
The second part, I mean, I think we would have been talking a lot more about those initiatives-
Yeah
... except that we've had to deal with inflation. That sort of ends up becoming the bigger story. Actually behind it is just a load of things that we're doing to improve that experience for our customers, but also to create some efficiency opportunities in our business model.
Okay. With things like, you know, the assumption on secondhand car prices coming down, are you assuming they come down further, or you're basically just taking the sort of fall that you've seen so far and assuming that continues for the rest of the half?
Yeah. I think it's just the spot, Nigel. They're just like what we're seeing. What we're seeing now.
Yeah.
Yeah. Yeah. I mean, maybe I'll step back. Have we got a whole lot of big assumptions in the way we're reforecasting our business that are based on some future events? No. You know, we're not, you know, we're confident on the things we know right now and the actions we've taken. It's a bit easier with pricing because the way that the earn through of that works. On some of these other inflationary costs, we're sort of using the now and the initiatives we've already put in place, and we're factoring that in.
Great. That's what I was trying to drive at, so thanks for that. Then, just on the sort of NEP flow through, I mean, obviously, you do have that reinstatement premium, which it's a bit hard for us to know exactly how to quantify, but so, how much NEP growth do you, do you think you'll actually get in second half?
It's not a number we've put out there, which is knowing me, Nigel, you know I'm going to hesitate to quote that. I think all I can point you to is that you're expecting an acceleration in that, even taking into consideration the reinstatement premium that you've referred to that we've called out, which will be incurred across the rest of this calendar year, if you think about the accounting for that reinstatement premium. That is hopefully helpful without me giving you a number.
All right. Great. Thank you. Then just on the sort of quota share impact on the P&L. I mean, obviously, you know, it's probably no surprise, but it's the first time you've explicitly stated that's now 3%-5% versus the 5% you used to state. Can you give us any flavor as to what's caused that drop from sort of five, you know, pretty much five dead when it was first in place to three to five now as it's been renegotiated?
Nigel, really good question. What I'd say is if you think about when we put it in place, our go-forward projections, expectations around things like perils and other impacts, et cetera, would have had us at the higher end of that range, and potentially still does at this point in time going forward. In a tough operating environment where our performance is impacted by some of those factors that you have seen us impacted by, and this is when I look back over the performance, it can be a little bit lower than that because you understand, and you know I'm not in a position to go into the commercials, but it's a combination of what we think about as a fixed commission as well as some potential upside.
It's just taking both those factors into consideration in our thinking. I know we get lots of questions about how much has it been, which is why I sort of wanted to call out the range and hope that's helpful.
Okay. Thank you. Then maybe just finally, I mean, just a very quick point of clarification. The risk margin strain is $30 million. Is that net of the BI release or separate to the BI release?
It's net of the BI release.
Right. Okay. Great. Thanks very much.
Hey, no, we got that expression right. I'd say it's sort of on separate. Is that what you mean?
We've done BI, which has gone from AUD 975 million to just over AUD 600 million, I think we're at AUD 606 million at 31 December, with an AUD 360 million release offset by some discounting. In terms of risk margin strain on the rest of our insurance liabilities.
Business, yeah.
we're saying that's about AUD 30 million that we've had. If I've misunderstood your question-
You've got it.
Hopefully that's clarified it.
I think that's clear now.
Yeah.
It's separate, not net. Net of, yeah. Okay.
Maybe I misunderstood. Sorry about that.
No, no. It's probably me just... You let me provide more detail. I'm glad it helped.
Great. Thanks for that.
Thank you. Your next question comes from Doron Kur with Credit Suisse. Please go ahead.
Hi. Thank you. just a quick one on the reserve strengthening we mentioned in IIA in Intermediated. that looks around the same size as in the Direct line. Is, even though you've got, of course, less motor and home, is the balance there just because of fleet and commercial motor?
Yeah. The reserve strengthening is on the short tail, personal lines through both of the businesses. Those businesses were impacted by the peril events that you saw in the first half of calendar 2022. In terms of our assessment of what it was ultimately going to cost us to settle those claims that came off the back of that period, it was consistent themes with direct.
Okay. Thanks. Just on New Zealand, I know you've mentioned it's similar themes, but it looks like the market there is experiencing slightly higher claims inflation. Maybe that would be even a bit higher now with the recent events. Is that consistent with what you're seeing, you know, maybe 1 or 2% higher than Australia?
Yeah, I think that's fair. I'd say it's sort of low double digit inflation and the price increases are sort of, you know, mid-teens, rate increases. I'm getting the nod from Amanda in the audience, so I think I've got that right.
Thank you for that. Then lastly, just on the growth side, you've mentioned in the results there some good growth in NRMA expanding into Western Australia and the other states. Just wondering around the pricing policy there. Some of the things we've looked at suggest that maybe the pricing's been a bit more competitive over there versus other brands. How does that compare to maybe how the pricing is in other states? Has there been a bit of a move in the beginning to gain share through price upon entry?
I mean, I, we're sort of moving. I mean, think what's happening in WA and South Australia, we have existing big brands there, SGIO and SGIC. It's a combination of migrating those customers onto an NRMA branded product as well as, and by the way, our growth is net of that, so it's sort of genuine new customers in. In addition to that, we're just the profile of these brands are pretty high in those states, and we're seeing genuine growth. In relation to sort of our pricing position, I think you'll see it drift to be more similar to what's happening on the East Coast.
Thank you.
Thank you. Your next question comes from Anthony Hoo with CLSA. Please go ahead.
Good morning, guys. Thanks. Can I just follow up on an earlier question around claims inflation? Just looking at slides seven and nine, you know, as mentioned, it looks to have been a bit of a lag between inflation and your pricing response. I'm just wondering, could you give us your thoughts around, you know, to what extent was that a market-wide issue in terms of that lag in pricing response or, you know, were there issues specific to IAG that was behind that?
Our view would be that. There's definitely a lag, so we're definitely acknowledging that. And just even the renewal cycle creates a little bit of that. We definitely did not expect the spike, particularly in motor in August, September, October that we, you know, we've got on those charts. You know, there's definitely a timing. I don't think we were the only insurance company with that. I think many of those things I mentioned were industry wide. The experience hasn't just been at IAG. I think it would be industry wide commentary. We've given a fair bit of granularity on it, as you can tell.
It's hard to compare exactly, but what we do know, and when we do our market surveys, that, you know, we see our pricing as competitive, but there's a general tone everywhere in Australia and New Zealand of significant price flowing through both retail and commercial classes everywhere. I would expect that we would be in that, and in fact leading some of that with some of our premier brands.
Okay. All right. Thank you. Thanks, John.
Trish, have we got two more?
There are no further phone questions at this time. I'll now hand back to Mr. Hawkins.
Well, I've just got one more question in the room, I think, and then-
Sorry, I'll be quick, Nick. Kieran Chidgey, Jarden. Just two follow-up questions on the reinsurance. Michelle, the 3%-5% benefit from the quota share, is that a change prospectively? Like, what do you put it at is sort of over the last year or two? Is it a drag going forward, or is it sort of already at that level?
It's not, it's not a drag going forward. It's materially consistent financial outcomes is what we said and what we would expect. I think the thing that I would look at as we move forward is at what point in time, you know, we have confidence around things like recognition of profit commission and those sorts of things, given the terms of the agreement. That's why I'm providing the range.
Okay. The second reinsurance question, I think when you did the renewal, you guided to AUD 805 of non-quota share costs this year. You've done AUD 415 in first half, so you've got lower reinsurance costs at second half.
That was pre-Auckland.
Why is that?
It was pre-Auckland. There was some timing impacts that came through associated with that. We had some backup cover that we purchased off the back of the early 2022 calendar year events that came through in the second half of 2022. I look like I'm confusing you, Kieren. Sorry.
Well, putting Auckland aside, you were still saying you'd have lower second half insurance.
Yeah.
I'm just wondering, ex-Auckland, why that would be the case?
We have some crop specific reinsurance that we recognize in the period. There is some seasonality first half to second half. We also had an impost in first half off the back of some backup cover we bought following the February, March events in 2022.
That we amortize for the rest of sort of the other nine months of the year.
Yeah.
From March 2022 it sort of appears in first half 2023 reinsurance expense.
All right. Thank you.
That's it. Hey, thanks everyone for joining us in the room. We've got a number in the room as well as obviously on the video and on the phones. As you can tell, what Michelle and I have tried to do is just give a bit more color into what's happening at IAG and, you know, we sort of tried to use going to the financials in a bit more detail just so that everyone's really clear on what's really happening at IAG. You can tell though, we're pretty confident in the outlook that, you know, we've had a tough six months. We've taken a lot of actions. A lot of those were already occurring. We've taken more in the period to set ourselves up. You know, we really do.
We're gonna see benefits of earn through in second half and into 2024. We're gonna see benefits flowing through on some of these claims initiatives and sort of the spikes we saw in inflation, we're not expecting to replicate that. Of course, we're gonna have some higher investment returns. You know, because of all that, you know, the confidence we have around the outlook on 10% margin and 10% growth. Importantly, you know, we're not running the company every six months. Importantly, you know, we're delivering on those medium term targets and the many things that are part of that as we're setting our company up to be a sort of a simpler, more resilient, stronger IAG. Hey, thanks for your time today. Thanks everyone for coming in or being on the phones and videos.
I know that I'll see many of you, or Michelle and I will see many of you on the road over the next couple of weeks. Thank you.
Thanks.