Good morning, and welcome, everyone, and for those joining us here in the office, if you could put your mobile phones on silent, and of course, if there's any need to evacuate, follow the instructions of the team. Let me begin by acknowledging the traditional owners of the lands upon which we meet, and pay our respects to all elders, past and present. As you would've seen, on our, in our ASX on Friday, unfortunately, our CFO, Jeremy, has had a minor surgical procedure last week, and on the instructions of his doctor, he's reluctantly not with us today. I thought of asking Dougal Maple-Brown to help me deliver the result, but he thought he might have had a bit of time up his sleeve, but he doesn't.
I'm sure I speak for everyone in wishing Jeremy a speedy recovery, and understand he'll be back at work later in the week, so hopefully he will be back on the roadshow. What that means is I'll incorporate the usual CFO results overview into my presentation, and following that, we'll ask the key P&L CEOs to join me to answer your questions. I also plan to give you a high-level overv iew of our go-forward strategy and the financial settings, noting that we're also planning an investor day on the 6th of November, where we can explore the strategy in far greater detail.
So let me start with the headline result, and the group has delivered an increase in earnings for the 2024 financial year, with cash earnings of AUD 1,372 million and net profit after tax of AUD 1,197 million. Now, this year we've also included a new disclosure on page 14 of the investor pack, and that reconciles the headline GI NPAT with an underlying profit calculation, and what we believe this does is provide you with the best description of how the business is performing year on year. And it shows an underlying profit after tax of AUD 1,104 million in the GI business, which is an increase of 29% on the prior year.
The underlying ITR improved to 11.1% for the full year and 12% in the second half. Now, the improvement in margin reflects the earn through of the premium rises that were necessary, given the higher input costs, in particular from reinsurance, natural hazards, and inflation. During the year, we managed over 100,000 claims, including from 12 separate weather events in Australia and one event in New Zealand. This resulted in estimated cost of $1.2 billion, which was $125 million, or 9% below our allowance, the third time in ten years that we've come in under our allowance.
Investment income, which is a significant contributor to the result, benefited from high underlying yields and strong equity markets. To the dividend, and the board has declared a final, fully franked dividend of AUD 0.44 per share, and that represents a payout ratio of 72% of cash earnings for the full year. Now, on this slide, I've called out some of the highlights that are embedded within the result. The consumer business has again achieved growth of 10% in home and 16% in motor, with growth in units and average written premium in both of those portfolios.
Now, it's pleasing to see unit growth, with customers still seeing the value of the insurance in the products that we offer, despite the increase in pricing that has been required to address higher input costs. Commercial and personal injury, GWP growth was achieved across all the portfolios but was particularly strong across commercial, especially in fleet and commercial property. In New Zealand, the GI business reported premium growth of 17%.
Both our intermediated and direct channels recorded strong growth through pricing increases in response to the higher input costs, including the reinsurance costs, and achieved solid unit growth, particularly in the consumer portfolio and particularly in our AAI joint venture. Now, this slide will be familiar to you from our half-year result presentation in February, and I continue to remind everyone that there are a number of insurance-specific factors driving premiums beyond the CPI.
On this slide, I've provided a five-year time series across natural hazard claims numbers and gross natural hazard claims costs, which are on the top of the slide, and their consequent impact on allowances and reinsurance costs, which are on the bottom left of the slide. I've also included here the dollar value cost per policy for home and motor over the past three years, reflecting the elevated level of inflation across both those portfolios.
Now, as I've outlined previously, the impacts of climate change, a reassessment and repricing of risk by global reinsurers, the town planning mistakes of the past, and stubborn inflation have converged to put significant multi-year upward pressure on insurance pricing. This has also had a material impact on profitability in the home insurance returns on capital. Now, I continue to reiterate that the best way of reducing the price of insurance is to reduce the risk of a claim.
We remain committed to working alongside government and the wider industry to respond to these challenges, recognizing that it has been a challenging period for our customers. And lastly, on this slide, I've called out at the bottom right, the significant progress we have made in finalizing our claims from the major events that we experienced in 2022, the majority of which were subject to the parliamentary review.
Pleasingly, of the more than 51,000 claims we received from these events, we only have around 500 active but very complex claims remaining. Now, I thought up front I should address the bank sale, the bank FY24 performance, and importantly, capturing where to now in respect of the transaction from a shareholder perspective.
Now, it's no surprise to anyone in this room or those listening in that Suncorp's ongoing ownership of the bank and the rationale underpinning the conglomerate financial services model have been perennial questions that have overhung the group's valuation since at least the GFC, and when I came into the CEO role, I committed to the board that alongside the ongoing simplification agenda, we would resolve the bank ownership question once and for all. This involved testing the sale option against all other viable alternatives, but with the orga nic plan as the benchmark.
Now, fundamental to all of this was improving the operational and financial performance of the bank, such that its value would be recognized under the continued ownership of Suncorp, if a sale was not viable, or alternatively, by an acquirer, if a sale could be successfully executed. Now, this slide captures the extent of the turnaround that has occurred over the past four years under both Bruce and Clive's leadership, and the 3,000-strong team that make up Suncorp Bank. But perhaps the metric that we are most proud of is the sustained top-quartile employee engagement over the protracted sale period.
Now, I draw your attention to the top right of the slide. In the face of the various hurdles that were put in our path, some loss of engagement would have been understood, if not expected. That it didn't occur, and that the team continued to deliver in line with the acquisition premium, suggests that the business should go from strength to strength under ANZ's ownership.
Turning to the bank result for FY24 , and the decline in profit reflected competitive pressures on NIM that were experienced across the industry. NIM contracted to 182 basis points for the year, driven by deposit mix and lending competition, although it recovered in the second half to exit the year at the bottom end of our usual range. The result was also impacted by lower other operating income due to higher broker trail commissions in home lending and lower gains on derivatives, and higher expenses, primarily from an increase in technology costs and inflation.
The home lending book continued to grow, albeit at a lower rate, as we balance growth with margin outcomes. Credit quality remained strong through the year, with ninety-plus days past due loans continuing to track below long-term trends. The ECL was increased by AUD 10 million, largely driven by credit downgrades on a small number of business banking customers. Now, turning to the timeline on the bank's sale proceeds, which I'm sure is a topic of keen interest.
W e still expect the net proceeds to be materially unchanged at around AUD 4.1 billion, and we remain committed to returning these proceeds to shareholders, of course, subject to the needs of the business at the time. We believe this is a great result, especially considering the significant delays in obtaining approvals for the sale and the inevitable complexity in separating the bank and insurance entities from a technology perspective.
As previously flagged, the majority of the return is likely to be in the form of return of capital, with a pro-rata share consolidation and a smaller, fully franked special dividend component. We continue to expect this return to be around the end of the first quarter of calendar 2025, following the finalization of the completion accounts, receipt of a ruling from the Australian Taxation Office, approval from APRA. Shareholders will also be asked to approve resolutions relating to the completion of the sale of the bank at our annual general meeting in October.
As also previously announced, we've entered into a transitional service agreement with ANZ to provide a range of services to Suncorp Bank. The majority of transition services and technology services are planned to be exited within two years, and the remainder exited no later than five years post-completion. So with that, I'll move on to more detail of the financial results. So we'll start with the GI underlying ITR. As expected, it improved by 50 basis points to 11.1%, with the second half margin now at the top of our target range at 12%.
The divisional movements in the underlying ITR are shown on the top right of the slide and should be broadly as expected, bearing in mind the impacts of the lower reserve release assumption in personal injury and the internal reinsurance arrangements between Australia and New Zealand. At the bottom left, you've got Jeremy's usual headwind/tailwind analysis, which is probably best summarized in our view of FY 25 underlying margins remaining at the top end of the 10%-12% range. I'd also like to remind you of the growing resilience that's built into these margins, which is at the bottom right-hand side of the slide.
With the underlying ITR range of 10%-12% now featuring a more robust natural hazard allowance, which is more than 100% increase on FY 17. Less reliance on reserve releases from 1.5% of NEP to 0.7% of NEP in 2024, and down to 0.4% of NEP in FY 25. Importantly, increased investment in the growth of the business, enabled by our disciplined management of the expense base. Turning now to hazards, hazard costs for the year were AUD 125 million below the allowance, with relatively benign weather in the second half.
Now, we did see some strengthening of reserves on first-half events, primarily the large event in Southeast Queensland in late December. The multi-peril, multi-geography nature of this event and its proximity to December thirty-one balance date made our central reserving estimate very challenging. Pleasingly, we have successfully placed our FY 2025 reinsurance program with some stability, returning to the global reinsurance market after three years of disruption.
Following a comprehensive review and the implementation of the federal government cyclone reinsurance pool, we decided not to renew our Queensland quota share arrangement. Accordingly, the FY 25 natural hazard allowance has increased by AUD 200 million to AUD 1.56 billion, reflecting unit growth, continued inflationary pressure, and the removal of the QQS. Now, with the bank sale complete and the FY 25 program in place, we are now well-placed to explore other covers on structure, other covers or structures that may make sense given the evolution of our strategy.
But I add a very important caveat: Any proposal would need to be in the long-term best interests of our shareholders, therefore, value accretive and be consistent with our strategic priorities. Turning to investment performance, and investment income increased significantly across both the tech reserves and the shareholder funds portfolios in both Australia and New Zealand. The average underlying yield on tech reserves in Australia was 5.3%, with improved risk-free returns and very strong manager performances.
And in New Zealand, underlying yield has increased to 4.9%. Those ILBs again produced strong results, albeit down from previous periods, as CPI inflation began to reduce. The average return on shareholder funds in Australia was 7.2%, with higher running yields and strong equity market performance. And lastly, on investments, I note that we're not currently expecting any major changes to our asset allocation, although we will continue to monitor investment market outlooks closely. So let's swing now to the divisional results and start with consumer, where overall GWP grew by 13.8%.
The home portfolio grew by over 10% as we continued to price for the increased reinsurance costs and the persistent inflation, particularly in relation to water claims. Unit growth in home eased slightly in the second half, but at 1.4% for the year, was a strong result. Motor GWP increased by over 16%, with premium increases reflecting continued inflation, albeit with some signs of the pressure easing in the second half.
Unit growth in motor of 1.8% reflected a slight easing in the second half as the portfolio focused on improving margins. In terms of inflation, we saw a cost per policy increase of around 8% in home and around 10% in motor. Earned premium is at least 2% ahead of those rates in each portfolio, as the earn through of the prolonged pricing response in each portfolio has now moved ahead of inflation. The increase in motor working claims costs reflected ongoing industry-wide inflationary pressures, including supply chain constraints and higher third-party settlements.
But pleasingly, the rate of inflation has continued to ease over the second half, and the written response has adjusted accordingly. Home claims continue to be impacted by elevated water claims and some volatility around fire claims. In terms of underlying profit, the consumer portfolio was up just over 60% for the year, with improved margins on higher levels of premium. Turning now to the commercial and personal injury portfolio, and the strong top-line growth continued to be a feature of the result, with the increase in underlying profit reflecting the growth in the portfolio.
GWP increased by over 11%, with growth across all portfolios, with the individually underwritten or tailored lines portfolio, the key driver of growth of around 15%, which is a combination of both rate and improved new business retention. Pleasingly, our continued investment in the platforms business saw growth continue to accelerate, reaching just under 9%. Now, growth in the CTP business was primarily driven by the allocation of the RACQ book in Queensland, with the transfer of the book to being completed by October.
I'll come back to this in a moment. The underlying margin decreased slightly due to the reduction in reserve release assumptions. As expected, FY 24 reserve release assumptions declined to 0.7% for the CTP portfolios as we reduced margin reliance on this component. Now, I'd like to briefly comment on the Queensland CTP portfolio and, in particular, the AUD 39 million onerous contract provision that is included in this result. Now, as you know, Suncorp has always had a significant position in the scheme, with market shares as high as 55%.
At present, we are the largest participant in the scheme, with over 50% market share, but we expect this to continue to grow as we inherit RACQ risk at a higher rate than the two insurers that are remaining in the scheme. Now, on this slide, I've included some data points which I feel adequately points to a scheme in need of reform. At its core, insurers receive the same price for most policies, even though their mix of business and the way they acquire business differs markedly. This leads to the wide disparity of margins that are described on the top right-hand side of the slide.
An outworking of this is there have been no new market entrants for over 20 years, and the number of scheme participants has reduced to just three, with the exits of NRMA and RACQ. Additionally, all scheme participants have filed at the regulator-imposed price ceiling in each of the past thirty quarterly filings.
Now, I'm encouraged by the constructive discussions that we've had with the Queensland Government on a range of sensible reforms, which will have the effect of creating a more sustainable and competitive scheme, while not adding to the cost of living burden for Queensland motorists or reducing their ability to receive benefits from the scheme. So across to New Zealand, where, again, we've had a strong recovery in the reported result following the two large weather events in early 2023.
The underlying result, however, was impacted by the significant increase in reinsurance costs post those events, although there was a strong recovery in the second half as the pricing response began to earn through. This dynamic was reflected in the underlying ISR, which fell nearly 3%- 11.2% for the year, despite a recovery to 13.1% in the second half. The pricing response to this has led to GWP growth of over 17%, with the home and motor portfolios particularly strong across all channels.
T hat incurred claims increased by just under 10% on an underlying basis, driven by a higher natural hazard allowance and inflationary pressures in home and motor, but they moderated, as in Australia, as the year progressed. The life result decreased by 27%, driven by an increase in planned profit margins, offset by unfavorable experience. Regarding the sale of the New Zealand life business, we expect net proceeds of around AUD 270 million. The sale remains on track to complete around the end of January 2025.
Now, briefly to group expenses and operating expenses increased by 8.5%, driven by planned growth-related investment in the GI business and higher bank expenses. Growth-related costs in GI are now fully allowed for within our margin targets, and this year included investment in customer and broker connectivity, the upgrade of core systems, and some additional marketing spend. GI run the business expenses were broadly flat as we continue to offset wage and technology inflation and increase system costs with productivity savings.
As a result of this, the GI operating expense ratio improved by eighty basis points to 13.9%. Finally, to capital, the capital position at 30 June remains strong, with Common Equity Tier 1 held at Group of AUD 203 million. I've included on the chart the usual capital waterfall, and I'd like to note a few points. Firstly, the GI CET1 ratio has reduced from 1.22x to 1.15x PCA, largely a result of changes to our capital targets at the GI holding company level that aim to increase capital efficiency in the division.
The benefit of the target change was partially offset by Bank not distributing its usual final dividend to the group. Capital usage in the general insurance business was largely driven by growth and inflation, as well as an increase in the natural hazard allowance and investment market movements, and the movement in the net DTA is partially driven by the unwind of IFRS 17 tax benefits, which was expected. The final dividend of AUD 0.44 per share is up on FY 23, which I remind you, included the benefit to cash earnings of the business interruption reserve releases.
The full year payout ratio of 72% is around the middle of the target range. Now I'd like to briefly take you through a high level of our three-year business plan and some of the key financial metrics that are embedded in that plan, and then we'll move to the Q&A. Now, the bank sale, the completion of the bank sale brings to an end a program of portfolio simplification, which I've captured on the top of this slide. Suncorp has emerged as a far simpler, easier to understand, pure-play Trans-Tasman general insurance company.
Every moment of our time, from the board through to each and every member of our team, is focused on a program of work which we believe will create significant value for all our stakeholders. What's less well understood, though, is the program of platform modernization that we have been executing alongside the sale of the bank. Our FY 23 strategy prioritized the modernization of our data, pricing, and digital assets. Over the past three years, we have migrated all of our data to the cloud. We've separated bank and insurance data, and we've transitioned to contemporary customer platforms.
We have modern pricing infrastructure via Earnix. We've established commercial broker connectivity via ISME, and we're well advanced in upgrading all our internal IT and telephony infrastructure. The material investments have been delivered alongside the operational and financial improvements that I've highlighted at the bottom of the slide, and they create the platform upon which we will launch the next chapter of the Suncorp story. On the next slide, I've captured a very simple picture of what's next.
From the top down, everything we do is grounded in our purpose. Now, you've heard me talk about this at all of our results presentations. The inverted triangle best describes how we believe long-term value is created at Suncorp. Our purpose, delivered through our people to the benefit of our customers and the community, in that order, should always lead to a sustainable and growing business for shareholders. Our ambition is both near term to FY 27, but aspirational to FY 30, which recognizes that we're making investments today that set up the long-term future of Suncorp.
Our five portfolios will be familiar to you. What's changed is that our organization structure now reflects the end-to-end accountability for delivery of the financial, operational, and customer metrics in each of those five portfolios. I'll run you through these in a minute. I mentioned the work we've already completed in modernizing our core platforms. Having built the foundations in data and pricing, we now move to the multi-year program to replace our policy administration system, or our PAS.
Put simply, a modern insurance company would not survive on technology that was built before 80% of the people that work on it were born.... While there is a big technology component to a PAS replacement, think of it more as a root and branch re-rewiring of a general insurance business, reducing complexity, improving speed to market, enabling innovation, and importantly, allowing us to develop better customer propositions. We're already underway in AAI in New Zealand before we move back to AAMI in Australia, and then progressively through the remaining portfolios.
This, and the ultimate reconfiguration of claims to the cloud, will create a true digital insurer. Importantly, the hard work we've done to remediate margin means we can do all of this within the financial guide rails of the business. The other key enabler of our strategy is operational transformation. In the FY 20-FY 23 strategy, the focus was on digitization and best-in-class claims. While these programs are ongoing, our attention will now turn to the deployment of new generation AI capabilities.
Without any prompting, our team have already developed 100-plus use cases, the most attractive of which we have prioritized for funding in FY 25. We see GI as a leading candidate for reaping the benefits of AI. However, we favor a measured deployment, recognizing the pace of change will inevitably throw up a number of questions and concerns that will need to be worked through.
The elongated bank sale process has allowed us to thoroughly review the core foundations of our business, including our brand strategy, our risk appetite as a pure play insurer, our financial guide rails, and on balance sheet positioning, including reinsurance. Recognizing our role as an ongoing provider of transitional services to ANZ, we've also established a dedicated team within Adam's accountabilities and group-wide governance to oversee the successful delivery of these TSAs. Finally, the key to strategy execution is always our people.
With the recently announced changes, I'm confident we have the most efficient and accountable structure and the leading insurance team to deliver to this strategy. I'll now briefly run you through how we think about the financial settings of the business and how that translates through to an attractive investment proposition. The underpinnings of these settings are, firstly, that we aim to deliver a risk-adjusted RITE in the top quartile of the ASX 200.
The volatility of the RITE is reviewed annually, considering variables such as changes in reinsurance structures, updated views on natural hazards and working claims risk, and investment strategy. We then allocate this expected RITE to the products based on their contribution to the group's return requirements. For the FY 25 to 2027 plan period, this resulted in an ROE target of around 10%, which obviously translates to a higher return on incremental capital and underlying ITR target range of 10%-12% across the business.
In positioning Suncorp for this next phase, we reviewed the risk appetite of the organization going forward in the context of an appropriate probability of sufficiency and peer targets, and we reassessed the capital settings to better align with our assessment of risk and the return expectations. The new CET1 target, capital target range is between 1.025 and 1.325 PCA, and we expect to operate in the top half of this range. This will allow, still allow Suncorp to have a conservative setting in keeping with our prudent approach to capital management.
These guide rails are then applied to each of the divisions, taking into account the capital consumption and the volatility within each. I'll run through how this translates to divisional underlying ITR in a moment. We believe these settings allow us to deliver an investment proposition that promotes investment in growing our business, delivers strong risk-adjusted returns, allows for a consistent dividend paid at the midpoint of the 60%-80% of cash earnings range, allocates capital efficiently, which will be enabled by an active capital management policy that includes systematic on-market buybacks, and it's all supported by a strong and well-managed balance sheet with an optimized reinsurance structure and investment asset allocation strategy.
Now, I want to emphasize the point on buybacks. It is our intention to return surplus capital to shareholders through regular on-market buybacks, including the proceeds from the divestment of the New Zealand life business. On to the divisional strategies, and on this slide, you will see how the financial settings translate to the underlying ITR targets for each division. Now, at one end of the continuum is motor, which has relatively low capital consumption and stable earnings.
The home portfolio is impacted by its exposure to natural hazard events, which impacts both volatility and the level of capital that the portfolio requires. The commercial business sits in between these portfolios, with exposure including elements of both motor and property, amongst other risks. The personal injury portfolio is impacted by the inherent risk of longer duration claims, increasing exposure to factors such as inflation. Risk in New Zealand is primarily impacted by its exposure to earthquake risk, which increases volatility and consequently, capital consumption.
You'll also see on the slide some of the specifics of the divisional strategies that are aligned to the five priorities in the FY 25 to FY27 strategy. Now to the outlook for FY 25, and GWP growth is expected to be in the mid to high single digits as we price for increased input costs and inflationary pressures, as those inflationary pressures ease slightly in some portfolios. Our underlying ITR target is towards the top of the 10%-12% range, which is supported by the continued earn through of elevated premium rates as inflation moderates.
We expect investment income to moderate as the market adjusts its expectations of interest rates. Prior year reserve releases in CTP are expected to be around 0.4% of group net insurance revenue, while releases in other portfolios are expected to be neutral in FY 25. Our expense ratios are expected to be broadly flat, and this takes into account the investments required to support strategic investments and to continue to grow our business.
We continue to target a sustainable return on equity above the through-the-cycle cost of equity. Lastly, before we move to Q&A, we plan to provide a lot more detail on our portfolios, on our priorities, and the key enabling programs at work at our planned Investor Day on November 6th. With that, why don't I ask Lisa, Michael, and Jimmy to come up, and we will take your questions? Why don't we start in the room? Hello.
Good morning. Good morning. Matt Tomlin, Suncorp. Couple of questions for you. With the stabilization in reinsurance pricing and the moderation of inflation, has the premium cycle peaked?
Look, I think inevitably, we've been through a very hardening cycle that's impacted on the premiums that we apply to our customers, and that's been across consumer portfolios and the commercial portfolio, slightly different factors. No doubt inflation has moderated. Some of the supply chain challenges are still there. And I'd call out, particularly on the home side, where we spent a lot of time focused on managing the externalities, i.e., reinsurance costs that are flowing from elevated frequency and severity of weather.
Now, some of those challenges have moved from sort of outside the home to inside the home, when you look at the issues around escape of liquids, flexi pipes, and other sort of damages within the home, and also the elevated severity of fire claims. So look, I think, you know, the general direction of inflation is that it is moderating across the portfolio at different paces between consumer... in the consumer portfolios, through commercial, and some different dynamics in New Zealand as well. And of course, on the written side, we need to adjust our premium rates accordingly.
I make the point, as we pointed out in the presentation, that we are earning above the earn of the premiums, above the current level of inflation. That's important, and we continue to target that as we work our way through the cycle. Lisa, did you want to?
I think that's been a pretty good summary, Steve. Across both home and motor, we are starting to see some moderation on inflation, which is good. From a home perspective, as Steve touched on, we've done a lot of heavy lifting to address the inflation we saw through natural hazards as well as reinsurance, but there's still a little bit of work. We've got some sticky inflation on the working claims book that we still need to address, and in particular, we are very focused in terms of our claims management practices to help address that. Jimmy?
Yeah, look, likewise, New Zealand, similar, similar story. We've seen a bit of resilience in the consumer book. We've seen a little bit of pressure coming into the commercial book in terms of the rates that we have put through, but likewise moderating through the cycle through the last twelve months. We did have the shift in the OCR last week, you know, with the Reserve Bank predicting back within that sort of inflationary range, 1%-3%, by sort of this around about September this year.
And look, you know, our customers have done it hard over the last twelve months, and so we want to be cautious on that as well. But we sort of look at where the input costs are in our premium and try to adjust for that. But as I said in the presentation, so that's sort of mid- to high-single sort of rate for the next year. Mike?
Similar themes. I think for commercial in Australia, there's three factors: one is competition, two, where we are in terms of pricing to technical rate, and three, your input costs. So I think the team have covered off on input costs. Yeah, they are coming back. I think for commercial in Australia, rate was about 9% for 2024, and probably about 12% for 2023. So you can see it definitely coming back. In terms of technical pricing, which is effectively the price that we need to get rate adequacy at, we're sitting at about 80% for most of our portfolios.
So 80% of portfolios are at technical or thereabouts. 20%, we still have some work to do in terms of pricing. And competition, really interesting. Lots of chat at the market about new entrants coming in, underwriting agencies, and so we'll have to watch that very carefully. But to date, it's been really stable and rational, is how I'd describe it.
Great. And, picking up on that sort of sticky inflation, superimposed inflation, with that having picked up in Queensland CTP, do you expect it to be elevated? And are there any notable court decisions you want to call out, or is it more reflective of the broader problems in Queensland CTP?
Yeah, I think that there's a number of individual factors. There's one or two court cases that have been of interest in the last period of time. But generally, I think our challenge with Queensland CTP is that in any long tail scheme, we think it's prudent to have a you know an allowance for superimposed inflation. That's typically been in the way that we think about the scheme. Unfortunately, the regulator in Queensland has no allowance for superimposed inflation.
So I think that's one of the discrepancies between our view of the scheme performance and the regulator's view of the scheme performance. Some of the challenges have been in the smaller represented part of that market. But generally, you know, I think we are seeing some superimposed inflation. And again, that's fundamental to why we've allowed for that reserve release, reset at 0.4% of NEP, as opposed to the 0.7% or the 1.5% that we've had previously. Michael, is there anything?
Yeah, no, it's not a core case per se. I think if you look at the stats we put up there and look at the CTP profitability that's been published, yeah, CTP profitability is there, thereabouts. So as a whole, it's probably, you know, directionally correct, but it's the disparity between returns for the participants. So some, you know, I would say, are earning super profits, and some haven't been, which led to RACQ exiting.
And so our view is that, you know, for the motorist point of view, we can hold registration at the current prices, but from a portfolio equalization measure, how do you get better risk mixes between the participants, which allows it to be healthy? So that's how I think about it.
Anything more?
That's it. Great, thanks.
Okay. I think we have one over here.
Thank you. I'm Anthony Hoo at CLSA. First question, just a little bit more specific around input costs. You know, if I look at the home portfolio, it looks like the cost per policy has actually increased versus if I look at the first half, it was around 7%, today you told us 8% for the year.
Mm-hmm.
Just wondering if you could talk a bit more around that. What's driving that?
Yeah. I'll get Lisa to provide more color, but effectively, it is what we call escape of liquids, which is water damage inside the home. And it's not so much a frequency issue, or we are seeing, you know, a gradual increase in frequency, and it's, you know, flexi pipes, et cetera, et cetera, that, you know, were put in 10, 12, 15 years ago, failing at a greater rate. It's more the impacts of the damage across, you know, the broader footprint of the home. We talked previously about more open plan homes, so when the water damage does come, it does tend to impact a broader footprint of the home, which means the severity increases.
I think there's also a factor there, that's somewhat COVID-related, and as more people get out of the home and come back to work, and get out of the home and do other things, some of that damage has been left, for periods of time, which means mold sets in, which means severity kicks up. So I think that's one of the key drivers of the first half, second half dynamic, and obviously one that I call out being an element of the stickiness of inflation in home. The other one is fire. And it's not, again, not so much a frequency issue, it's more a severity issue, and there's two causal factors that we're looking into.
One is lithium batteries, which are prevalent in homes now at a far greater rate than they've ever been, and that acts as an accelerant for fire damage, and that's, I think, impacting on severity, and then, the other factor that we've seen across the last sort of eighteen months or so is houses are built closer together. As blocks get split and house eaves are pretty close together, then there is the ability for damage in one home to impact damage on a number of houses in the street, and we've seen some evidence of that in the last six months, so they're the two things I think that I'd call out.
There's been pinch points in the construction market. You know, labor costs have been quite stubborn, not only within our panel, but for the whole industry. I think they're the, Lisa, they're the sort of key drivers of the second half, first half performance.
Yeah. So as Steve touched on, we did see a little bit more severity on the water claims in the second half. And also, we had a bit more severity on the fire claims than we did in the first half. So what are we doing about it? In terms of for water, we've done some work with our supply chain. We've introduced some new builders into the panel, and importantly, what we find with a lot of the water claims, as soon as you get liquid through the house, it's really important to get to those claims quickly. So you get to the claims quickly, you dry out the house, and it reduces the amount of resultant damage.
So we're really focused in terms of a lot of our claims management practices to help reduce some of the severity of those claims. It's good for us, but importantly, it's good for customers in terms of getting them back into their homes sooner with less damage.
Thank you. Can I just ask a second question, just around the reinsurance piece? You talked about potentially looking at other options. You know, as it stands at the moment, if I look at reinsurance program, you know, you haven't renewed your aggregate cover. You also haven't renewed the Queensland quota share.
So your approach, you know, as you emphasized before, you're backing your own risk selection and pricing, I guess, you know, relative to some of your competitors. Can you talk about how you think that should translate into returns and ROE? You know, given that theoretically, at a high level anyway, if you're taking more risk or retaining more risk, then that should translate into a higher ROE.
Mm-hmm.
Can you talk about that dynamic, please?
Yeah. So look, I think the dynamics around the renewal of the reinsurance program this year were. I'd describe it as generally constructive. You know, I think we have seen stability return to the global reinsurance markets. We saw significant additional capacity come in, and, you know, we managed to secure the program, what I'd call constructively. Aggregate covers haven't been in the market for two or three years. Now, they may come back, but we're not contemplating that in the short term.
The Queensland quota share, obviously, the economics of the Queensland, commercials of the Queensland quota share changed quite materially with the cyclone reinsurance pool, so that changed the dynamics around it. We probably would've replaced it if we could find reasonable commercial terms, and they weren't available to us. So, we've made the consequent adjustments to our natural hazard allowance, which is modeled very effectively from our perspective to retain that risk and have it priced accordingly, and replicate that QQS through the natural hazard allowance.
So I think they were two decisions that we talked through the prism of the renewal. In terms of go forward, when we announced the bank sale, we did go to the market with effectively a request for proposals from the reinsurance market more broadly. Probably a smaller number of the bigger reinsurers, to see what options could be secured, that made commercial sense to us, to you know, potentially reduce some volatility or, you know, smooth through some of the earnings that the these structures typically tend to do.
We couldn't find a pathway to make that work. I was very open, very transparent, and we've got good models within the organization who understand the trade-off between return on capital and underlying margin and risk. We think it's appropriate to do that again. We think it's good time to do it again. The bank sale is now complete, the reinsurance program's been secured, and we'll do that again. Again, I think the caveats on all of that are that it has to make commercial sense to us in the short, medium, and long term.
As you can see in our balance sheet, we've got significant excess capital. We don't need the capital per se, but we will look it through the prism you talk about around volatility and returns. I guess one of the things that I talked to is the 10%-12% range. It is true that with no aggregate and with no quota share, we do assume slightly greater risk. That's some of the financial modeling I talked to. That's probably why we tend to see in the short term, while that is in play, that we'll tend to run our margin towards the top end of that range, which is where we plan to be in FY 25.
Great, thank you.
And we go onto the phones. Are there any other questions in the room while we...? Okay, we'll go to the phones.
Thank you. If you wish to ask a question, 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, and if you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Siddharth Parameswaran from JP Morgan. Please go ahead.
Good morning. A couple of questions, if I can. Firstly, I just wanted to touch on the chart that you have there on inflation in home and motor. I just wanted to clarify, it's stated slightly differently to the way it was stated six months ago. The 8% that you flagged there for the cost per policy includes a natural hazard increase of 3%.
The figure six months ago didn't include that. I just wanted to clarify whether those two charts were the same or and you just didn't split out the natural hazards allowance, because I mean, the messages would be quite different depending on whether we include it or don't include it. So I just wanted to firstly clarify what you're flagging about inflation.
In terms of what we're flagging about inflation, I don't know the answer to the first part of it as to versus the PCP. The inflation components in the portfolios are very much reflected of the input costs. Obviously, there's been some adjustments to the motor vehicle supply chain, challenges around repair, that flow through that calculation. We've also, on the home side, as I talked about, escape of liquids. So, I think we'll take that offline, Sid, but I think the basis upon the calculation is the same as we did at the half year, but we'll talk you through that.
Okay. Okay, no, no worries. Okay. So, maybe if I could just ask the question a different way. You seem to be flagging that inflation is moderating, but you're showing charts which suggest either that it's getting worse or it isn't. I'm just not sure how to interpret that. So just to be clear about the message, the message is that your outlook on inflation is for it to moderate going forward, right? Would that be fair?
Correct. Yes, correct. In motor, and I'll get Lisa to talk in a bit more detail, but certainly in motor, the only caveat I've talked about in home, as I talked about, is escape of liquids and fire. I still think the trend is moderating in both portfolios, clearer in motor than it is in home. And the home dimension is simply that it will be stickier, I think, for longer.
Yeah. So, Sid, I think where we started the year for motor, we did have high inflation. We saw that start to moderate in the second half. And so as we look forward, we would sort of expect moderate inflation in that portfolio to be around the 8%-10% mark on a claims basis. In terms of home, as we touched on earlier, we have seen sticky inflation throughout the year.
From a forward perspective, I think there's two components: One is the water one, which we've touched on, and then the second one is we do see construction costs, both labor, as well as materials, we still see sticky inflation. We do think it will moderate into FY 25, but that's what we saw in FY 24.
Just some comments on New Zealand, if possible, please, as well, on the outlook?
Yeah, Sid, similar-
Inflation.
Yeah, sorry, Sid, similar story. So we did see. So claims cost, motor and home, were up around 10% overall in last year. Some of that's volume driven because of growth we've seen through the book. If you look at sort of average claims costs are sort of around about that, sort of 7%- 8%. But we did see, inflation, particularly through the claim, the motor claims book, moderate in the second half, and particularly around the parts.
There's still a bit of stickiness in the, the labor and paint. Some of that's driven by the wage increases that have happened over the last 12 months. But certainly, outlook over the next 12 is to, for that to continue to moderate. As I mentioned earlier, ... the Reserve Bank has increased or has decreased its OCR in its latest MPS, monetary policy statement. It is predicting inflation to be within the 1%-3% range by September of this year.
In fact, I think, Sid, as we looked at the book through the course of the half year, I think we probably saw the moderation of inflation at a faster rate in New Zealand than we did in Australia, which obviously reflects the monetary policy cycle difference between both jurisdictions.
Okay, great. Okay, can I just ask on the pricing front as well, you do guide to meaningful increases again in GWP in FY 25.
Mm-hmm.
I was just wondering if you could comment on just the split between prices and units, noting that we've seen a slowing in units in the second half. Could you just comment on what you're seeing in terms of competition, whether you, you know, whether you think you'll still be able to push through some meaningful price increases and what you're seeing on retention rates?
Yep. So in terms of, I guess at a total premium level, as was touched on one of the slides, we probably think that mid to high single digits is relevant for us. In terms of from a growth perspective, I think a good result would be sort of similar unit numbers across both home and motor to what we've seen this year. For us, we do want to make sure that we continue to grow the portfolios, but importantly, make sure that we do have sustainable margins across both the home and motor portfolio.
In terms of your other question in terms of the market, I would say, I think Michael used the words before, stable and rational is what we're seeing in the consumer portfolios, but it is still a competitive market. I think if anyone switches on free-to-air television, you'll see lots of insurance brands out there in the consumer space. So it's something that we're very mindful of. We're very mindful in terms of making sure we deliver sustainable margins but continued growth, and we're also very mindful of some of the affordability challenges our customers have.
Okay, great. Thank you.
Next question on-
Thank you. Your next question comes from Nigel Pittaway from Citi. Please go ahead.
Oh, good morning, guys. First question, if I can, just maybe following up on the pricing theme. Can you maybe just detail if there's any areas where you've already moderated the rate of price increase? And if so, to what extent and where they are?
Yeah. So as I touched on earlier, from a inflation perspective in motor, we started to see some moderation in the second half. And so we have made some pricing adjustments, where appropriate, in some of those markets. Where we sort of... Our jump-off point from a motor perspective is we do have margins in the target range, and as I touched on, we are very focused in terms of trying to make sure we're growing the portfolio at sustainable margins.
So it's just in the motor portfolio at the moment?
In terms of, we started to see the moderation in the second half, so motor. There are some adjustments in the home portfolio, and there's a slight easing.
Yeah, and I think-
Right. Okay
... Nigel, it comes back to the commentary on inflation. You know, I mean, the dynamics of the book at the macro level is that the earn is coming through ahead of the inflation, but the written is gonna start to recalibrate itself around the inflation outlook and the short-term inflationary input costs. So that's why, roll it back to what's happening in each of the portfolios, why there's been some late year moderation in the motor portfolio, and why the dynamics in home are slightly more complicated given the impact of the escape of liquids and some volatility in fire claims.
Okay, thanks for that. And maybe then just focusing a little bit more on this, on premium versus inflation, and maybe in the context of Jeremy's sort of headwinds and tailwinds table. I mean, obviously, you've flagged you're already at 12% in the second half, so in a way, you're flagging sort of flat margins on the second half. So effectively, you're saying that those tailwinds and headwinds match out against each other in magnitude, and, you know, where do you see the risk to that? And maybe also, do you expect the same first half, second half skew as you've had in most of the previous years?
Yeah. So, unfortunately, a headwind and a tailwind probably needs a little bit of color coding because, you know, it's a tailwind on the earn versus inflation, as I talked about 2% across the earn book relative to the current inflationary numbers. So that's a tailwind. In terms of the headwinds, the reserve releases one should be well understood. That's 0.7-0.4, so that's a headwind to the margin that's right, reasonably easily quantified. I think in terms of the investment market outlook, that's based on our view of what's gonna happen with investment markets.
They are volatile. They'll impact on the underlying yield in the portfolio and the PV on claims as well. You know, everyone will form their own view on what that looks like. The other elements of headwinds that are embedded in that slide, obviously, we had a very strong manager alpha position in 2024. Now, we'd like to see that replicated in 2025, but we don't assume it's gonna be replicated, so there'll be, you know, back to our normal expectations, some reduction there.
The other element of it is the carry that we've received over the, you know, in the mark to market between the CPI print and breakeven inflation on the ILBs, which has been a tailwind for us, you know, while that gap's been elevated and will moderate as it moves forward. So, I think the best way to sort of wrap all of that up, you know, and our best estimate of where we land for FY 25 is at the top end of the range, as we've described now. You know, most of them, I think, can be reasonably well calibrated. A couple of them are gonna be subject to your views on what's happening in investment markets.
You still expect that, so there's first half, second half skew?
I there'll be less of a first half, second half skew this year, simply because the first half, second half skew typically has been you know, in response to a reset of reinsurance actuals. So we'll do a reinsurance renewal. First of July, we'll take the actual cost incrementally through the P&L, and the pricing takes time to catch up. You know, the reinsurance broadly has been achieved on similar sort of terms as prior year, albeit that there is an increase in the natural hazard allowance. So the only timing issue I think that really is material between first half and second half will be just a step up in the natural hazard allowance.
Okay, thanks for that. And then maybe just finally, I mean, I noticed in the pack you've got an illustrative worked example on the bank sale and the capital return, and you've assumed AUD 3.7 billion of return. Is there anything we should read into that, or is that just sort of illustrative only?
No, I think we remain committed to, at this point, the 4.1 return. The 3.7 probably reflects the share consolidation elements of the capital return and the residual, which we've always flagged to be, you know, sort of around 10% or slightly less than 10% in the form of a special dividend. So those two components come together, share consolidated capital return plus a special dividend. Current expectation is AUD 4.1 billion, but of course, the caveat always is subject to the needs of the business, at the time in which we conclude the final elements of the reconciliations.
Okay, great. Thank you.
Thank you. Your next question comes from Andrei Stadnik , from Morgan Stanley. Please go ahead.
Good morning. Can I ask my first question just around catastrophe costs for the second half? They were just marginally below budget for the second half, despite kind of relatively benign period. Can you talk a little bit more about that?
Yeah, I think it was a relatively benign period, but we did see strengthening on the events in the first half. So I pointed to a couple of them, one being Cyclone Jasper, which occurred, you know, sort of 18th or 19th of December, and then the Boxing Day events, which obviously occurred proximate to the balance date. Now, those two events, well, certainly the Boxing Day event, multi-peril, multi-geography, impacted everything from Mount Tamborine through Coomera, through Helensvale, all the way through to the coast at Southport.
Different, very different geographies, different perils impacting it. So it was very difficult to get an assessment of the reserving position three days from balance date. Did our best, but obviously there's been some strengthening in that. Cyclone Jasper, again, you know, there's been some pinch points around availability of some trades in the Cairns region, but generally, that hasn't deteriorated too much. So the second half, natural hazard costs, generally benign in terms of actual weather events, but quite significant strengthening on events that occurred in the first half.
Thank you. Again, can I ask a couple of questions around capital? And maybe the first one, right, is you've given us targets around CET1 for the insurer going forward. But you haven't really given us or, you know, spoken much about how you're gonna use Tier 2 debt, you know, going forward. So what are you targeting Tier 2 debt, and, you know, what's gonna happen to the Tier 2 debt that, you know, was in the bank prior to the sale?
Yeah, obviously, I've got to go into the specifics around where the Tier 2 targets are gonna sit. But just generally, as we've come through the bank completion and the sale, we've obviously looked at the capital targets, looked at us relative to our peers, 'cause we're significantly more replicated of them, replicates of them now as we move into a pure play mode. Made some adjustments to the CET1 capital target. There's obviously a volume of AUD 1 billion out of stranded funding costs from the bank sale.
That will, I think, allow us over time to recalibrate some of those stranded costs into slightly higher gearing in the general insurance entity. We will look at that over the next couple of months and deploy some of that stranded funding cost into the GI entity. And then over time, the residual of it will be amortized in as through growth or as instruments mature over time so our gearing ratios will step up a bit. Our common equity tier one ratio will move closer to our peers, albeit still more conservatively positioned than our peers.
Look, my second question on capital, and what we can tell the excess kind of capital at this, you know, this point in time, end of 2024, was, you know, down from a year ago and down from six months ago. Could you talk a little bit more about capital? Because, you know, that slide you showed, just there was a lot to absorb, and that-
Mm-hmm
... you know, slide in capital, if you could maybe review so that it explained a little bit more just, you know, in terms of just... It seems like, you know, relative lack of, you know, capital generation last year, or is it, you know, all down to the way, you know, the bank dividend worked?
Well, certainly, the bank dividend is one element in that in the capital retaining business lines. I think the comparator capital level was based off a significantly different position for the entities relative to the midpoint of their target range. The two hundred and three that rolls forward is inclusive of that. There's a lot of swings and roundabouts, which we can take you through separately in terms of the consumption of capital within the GI entity. Obviously, higher levels of inflation, higher claims, higher premium rates, unearned premium rates, et cetera, roll through to higher capital charges.
And obviously, the reinsurance program, the natural hazard step-up has had some impact on the capital consumption in the insurance side. But look, I think the capital position remains very strong. The quality of the 203 versus the 270, I think it is, in the prior period. We've got the bank sale to complete. We've got the life transaction to flow in. I think generally in the way that we think about the capital and the balance sheet now is we look at our dividend payout ratio still being 60%-80%, whereas in the past, we used to pay at 60% the half, 80% at true it up to 80% of the full year.
We're probably gonna try, as a matter of discipline, to land somewhere in the middle, more consistently through the cycle. That's reflective of our franking credit capacity. We want to fully frank our dividend, obviously. The extent to which we have buffers and build up excess capital through our dividend policy, we will put in place that perpetual buyback facility, and we'll use that facility to repatriate capital to shareholders when we feel our excess position is beyond the needs of the business. I mean, it's an annual piece we go through.
I think it will give us flexibility. It'll give us the strength in which we can confront reinsurance markets when we need to. It gives us the strength around how we can look at our investment portfolio. I mean, the last thing you want is to have an opportunity to slightly adjust your risk settings in your investment portfolio, but not have the capital to sit against it, even though the returns are substantial relative to insurance risk.
So I think it's a stronger position that we're in today, by definition. I think there's some tailwinds to the capital position that will drop through over time, and I think we put ourselves in a very comfortable position going forward to manage the business, you know, as conservatively as we have in the past.
So, just a very quick follow-up from that, sir. Are you implying you're expecting more returns of capital? Because the worked example on what you just said a little bit earlier in response to Nigel's question suggests AUD 4.1 billion from bank sale, and proceeds will be returned, and that's done and done. You know, that's as expected, but you're saying now, you know, and you've written about, you know, active capital management for the buybacks to be set up. Does that mean you're expecting something else to come through within the next year, potentially?
We are divesting the New Zealand life insurance business. That'll be in two tranches, so that will certainly come through. I made the point that in terms of our dividend payout ratio, which stays the same, 60%- 80%, we're gonna try and consistently land at 70%. So what that means in all the normal course is that we will accrete capital over time.
The extent to which those two factors and any other organic capital generation that we can build is reflected in an excess position that is surplus to the requirements of the business, then we'll use a perpetual buyback facility to repatriate that incrementally to shareholders. Andrew, I think that's what I'm saying.
Thank you so much.
Thank you. Your next question comes from Julian Braganza from Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for taking our questions. Maybe just an initial question on the underwriting margin. Can you just talk to just your, your expectations of that underwriting margin, just the, you know, the ITR ex investment income? So in FY 24, just on, just on my calcs, sort of 5.7% ex yield or kind of 5% ex the reserve releases.
In, in FY 19, you were sort of in the vicinity of about 8.5% ex reserve releases. Just want to understand, do, do you, do you sort of see yourself getting back to those levels, ex the investment income, into, into FY 25, FY 26, particularly as the yield curve benefits start to moderate more meaningfull y?
I'll sort of provide a high-level, and Lisa might go into a bit more detail in terms of the specifics of the portfolio. I think the way that we would tend to look at it. I know you might look at it through underwriting margin, but take it to the underlying ITR, which, you know, 10%-12% sits across the group, and then it's disaggregated into each of the portfolios and builds up to that level. I think Lisa's talked consistently about the remediation that's underway in home and in motor.
Motor's sort of sitting towards the bottom end of its target range, and will, as the earn continues to roll through relative to our assumption of inflation, will move closer to the top end of that range. Home, for all the reasons that we've talked about, you know, obviously, the remediation on underwriting has been occurring through the prism of frequency, severity, reinsurance, and hazards. That will now move to.
With that largely behind us, we'll now move to making sure that we've got appropriate rate sufficiency in terms of things like escape of liquids and fire and the volatility that's implied there. So both portfolios in slightly different territory, but generally, I think the way we'd prefer to look at it is at the underlying ITR level by portfolio.
Yeah. From a consumer perspective, you would have seen an improvement in the margin across the portfolios over the last twelve months, which has been pleasing to see. Maybe just to add to Steve's commentary, which I think gives you a good sense of how we think about the portfolios. We are still heavily investing in our pricing and underwriting. We did roll out CAPE, which is what we call our pricing engine, through the mass brand portfolio. It's now across both home and motor. We're continuing to invest in things like geospatial as well.
We've got really good underwriting insights about properties. From a motor perspective, we still are working on telematics offerings for our customers. Again, better understanding of how customers drive their cars, and importantly, any sort of interventions we can put into place to help them be better drivers, and help both on the frequency and severity of those accidents. I think that's quite early days, but we're starting to see some pleasing results from the initial work we've done in that space.
Michael, do you want to just rephrase your at pricing adequacy 80%?
Yeah. So we have intense focus on our portfolio by portfolio, what's our technical pricing? And that technical pricing then aligns to what Steve says in terms of the framework around margins. At this point in time, about 80% of the portfolio in commercial is at or about technical, which means that 20% is not. That 20%, probably the largest portfolio there is in our small business area, where we've just deployed a new pricing engine. And so it's not so much around putting rate through, it's around getting underwriting right. And that, that's the key point.
I think we're going from pricing on 300 ANZSICs now to 3,500, to give you an idea, a lot more clarity. And so I think from our point of view, comfortable with 80%, still some work to be done on the 20% side, but underwriting results are an absolute key focus for us in commercial.
Okay, great. Thank you. Thank you so much for that. Maybe just an additional question, just a follow-up on just the pricing. Just in your guidance, I just want to be very clear here. So you're still expecting pricing to be ahead of claims, to be at or ahead of claims inflation in your guidance? And just a follow-up then on that, can you just maybe talk about market share and just rationality of pricing in the market?
Do you see a risk there of pricing sort of falling below claims inflation into FY 25, particularly at your price, because you're still gonna get a huge benefit into FY 25 from the earned rate against inflation of about sort of 2%? So just interested in comments there on rationality of pricing into FY 25.
I mean, the answer to the first question is yes. I mean, we'd obviously look to be pricing ahead of inflation. And there's sort of, you know, breaking an insurance business down into the elements of inflation. There's obviously economy-wide inflation that impacts insurance businesses, and then there's processes around claims and the way you manage claims and the way you underwrite, which is very important. So, I think what we've seen in terms of all of our, you know, pricing positions and descriptions, we put a price in the market.
We look at, in particular in motor, through the renewal book, retention, we look at new business flows. We'll understand where we are competing against, you know, the relevant competitors in the market. So yes, we would be looking to price ahead of inflation, by definition, on a written basis. We have the strong earn coming through from premiums that have been reset previously for all the reasons that we know. In terms of market share, look, I think if you roll back market share by portfolio, you know, we've got high twenties market shares in motor.
We'd feel generally comfortable running at or around market share or market system rates for motor. And you know, we will sort of calibrate that portfolio. It is obviously the blue ribbon portfolio. It's got a lot of competition embedded in it, but we've seen it being rational as the supply chains have disrupted and the post-COVID dynamics have flowed through. But generally, that sort of system-type level of growth is satisfactory for us.
Home is significantly more complex in the way you think about home market shares, because we are now very sophisticated in the way that we can break the home portfolio down by peril exposure. So we've obviously mapped the seven key perils that impact on hazards for a home book, and we've categorized them as low, medium, or high. And so while our aggregate market share in home is interesting, we're more interested in the way that we move between low and increase our exposure in low and the way we manage pricing sufficiency in high.
So I think in that environment, and then the mix between mass brands and niche brands. So there's a number of different dynamics in the home portfolio. It makes it, you know, a bit high level to just simply give you a view of where we sit.
But we certainly believe that over time, the pricing engines that we've got, the work we're doing, and on digital, the geospatial work that Lisa is doing, which will help claims, but ultimately underwriting, puts us in a very strong position to be, you know, a, have a growing home insurance business and a home insurance business that grows disproportionately stronger in low to medium, peril exposure. In commercial, I mean, Michael can pick it up. We see a great opportunity in commercial. I think we've got 8% or 9% market share.
We've done all the heavy lifting around remediating that portfolio. We did that in 2015 and 2016. That's put us in a position to remediate margin and be able to get the performance of the book where it needs to be. The Vero brand is well-regarded. We've significantly invested in product into connectivity with brokers, so that's taken a big step forward.
The claims processes have been, you know, recognized as best in market for the last six years. So it's a really strong platform for us to grow, and, you know, we'll provide a bit more detail in November as to how we think about that portfolio, but there's a huge opportunity, I think, for us to reset back to a sort of a more normal market share, and then to grow over time organically. In New Zealand, Jim, do you wanna?
Yeah, look, New Zealand, certainly we've got an ambition to grow market share. Of course, market share in New Zealand is based on premium. We've got very strong brands in New Zealand, AA being one, and it's, you know, it's been growing market share quarter on quarter for the last couple of years. So, and the, you know, the, it's quite a strong, resilient brand, and we have seen new business over that brand over the last certainly the last twelve months.
And in the intermediated home book, again, we've been growing in that book over the last twelve months, and so those two combined will, you know, hopefully help us improve our market share. And then we look at the commercial side, a lot... A large part of that is based on the trading on price. So if you look at large corporate marine, liability, business insurance, it's trying to get the right price at the expiring terms and conditions over the next twelve months. So, and again, strong brand, strong relationships with brokers, and good products will help us retain that business and hopefully grow the market share.
Lisa, I signed you up for a lot of stuff. Do you want to add anything?
No, I'll stop there. Won't sign myself up for any more.
Do you want anything else?
Okay, yeah, great. That's, no, that's it for me. Thanks so much for that, guys.
Thank you.
Thank you. Your next question comes from Andrew Adams from Barrenjoey. Please go ahead.
Hey, Steve.
Andrew.
Just confirm, hey, firstly, the strategic enablers-
Mm-hmm
... they're funded within the operating expense base captured in that 10- 12?
Mm-hmm.
So there's no, no additional spend outside of that?
That's correct. Welcome back, Andrew. It's been a long time.
Yeah.
You've suffered the pain of a two-year bank sale process as much as we have, so yeah, good to have you back. Yes, it is. They're all funded from within the margin envelopes that we've applied, which I think is alongside the stronger natural hazard allowance, the lesser allowance and reserve releases is a very compelling part of the go forward plan. We can invest in a policy administration system, and we can invest in new pricing capabilities, but do it without taking shareholder returns below where the expectation is set.
Great. And then, just on that, I guess, same slide, slide 10, the margin outlook slide. Can I just confirm, so when we did the reinsurance updates, the guidance was for reinsurance absolute dollar cost to be flat. Is that still the case? Because I would've thought on flat reinsurance, and that hazard allowance, that reinsurance and hazards was a tailwind in 2025. Is that? Has the messaging changed around reinsurance at all?
Not so much reinsurance, but the trade-off between reinsurance and natural hazards you've seen has put another AUD 200 million dollars odd into the natural hazard allowance to offset, you know, obviously growth in the portfolio, but also elements of the Queensland quota share that we didn't renew. Your reinsurance in an absolute sense, but the hazard allowance stepped up, I think by AUD 200 million to over AUD 1.5 billion.
Yeah, so I mean, in combination, they go up about 6% on-
Yeah
... on GDP, that will go up by more than that. So technically, we've got a tailwind from the combination of those two?
I think a marginal... I mean, you know, you can sort of go through this and get very granular about it. This is a high-level summary of headwinds and tailwinds. I think the best way to think about it is, our best view of outlook is to land towards the top end of the range, based on our set assumptions, some of which are hard coded, some of which will be depending upon investment markets and other factors.
Yeah. And then just also that one bill of stranded funding costs.
Mm-hmm.
I guess the interest costs were going through the bank previously, but the investment income was coming through the other line. So I guess we've got to bring that interest cost back into the group now. Is that gonna fall into cash earnings going forward, and hence impact our dividend, or how are we thinking about bringing those stranded costs back in?
Yeah, look, I think I might be corrected. That'll be below the line in the other income. I think the line is. It's not a huge number, Andrew Adams, so I don't think it's gonna be that material to cash earnings or to dividend calculations. It's less than AUD 10 million, I think.
All right, great. And then just the comments before, I guess you made on the capital management, and I guess explicitly in the outlook, you've said, systematic on-market buybacks. Just so I understand that, I guess you made some comments, but we've got a 70% payout ratio, arguably, retained earnings should be funding some organic growth.
Mm-hmm.
So, are we kind of saying that, I guess, the cleanup of our capital position over the next couple of periods is gonna result in some buybacks, or are you expecting to do regular annual dividend and buyback?
The dividend will be the first port of call, and as I mentioned, that will be, you know, obviously retained within the 60-80% flexibility. You know, the discipline that we'll try and bring in play is to land somewhere in the middle. I guess, you know, just to dimensionalize the capital requirements of the business, they will probably fall somewhere between 15% and 20% of that cash earnings number. The franking credits are an impediment, obviously going forward, depending upon how Australian revenues move, as earnings move relative to New Zealand. And so that will be a little bit of a constraint to the payout ratio.
So I guess what we're saying is that we think in normal set of circumstances, you point out, we should be able to fund growth within the business. We should be able to pay out a 70% payout ratio, and we should accrete excess capital above and beyond some of the one-off-
Yeah
- from the New Zealand Life sale, et cetera. We think the best way to do that is to create a, you know, sort of perpetual buyback facility that we can, you know, make adjustments to each and every year as we think about the needs of the business going forward, what the reinsurance renewal does, what the investment market sort of positioning of our asset book looks like, and get that back to shareholders through that buyback facility.
All right. Great. Very clear. Thanks for that, Steve.
Thanks, Andrew.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Andrew Buncombe from Macquarie. Please go ahead.
Hi, Shane. Thanks for taking my questions. Just two from me, please. The first one, I'm just surprised to hear that your claims inflation expectations for personal motor are so high. Just out of interest, is that taking into account the roll-off of the additional AUD 50 you are paying per claim or per repair to Capital S.M.A.R.T in FY 24, or is that an underlying comment? Thanks.
So in terms of claims inflation, as we look forward, as I said, it moderated in the second half, and we expect further moderation throughout FY25 In terms of what's the driver of that, we know we still have some labor inflation and some specific parts inflation rolling through the motor portfolio. In terms of where we are seeing that roll off more steeply is obviously in regards to secondhand car prices. And in terms of our outlook on inflation, obviously, it includes our contracts with all of our suppliers, whether they be through SMART or the many other suppliers we have through the motor claims portfolio.
Okay, and then the other question that I had was, I was just interested to understand how much was being spent on the Suncorp Digital Insurer program, and is that being expensed or capitalized? Thanks.
We'll have a lot more to say about that whole program, Andrew, when we get to November. When we talk about digital insurer, we talk about not only the front-end connectivity, and you've seen, you know, sales, service, and claims lodgment move from around 20% to, you know, in terms of sales now around 70%, and in big events, lodgment ahead of 80%. We've made great progress in terms of the digital connectivity at the front of our business, similar with ISME in terms of broker connectivity. That's one element of it. We've already done the work on data.
We've got a pricing engine in place that works, you know, with ultimately the new policy administration system. There will be some capitalized costs, but they won't be, by any means, the majority of the program of work. We'll come through, go through that in a bit more detail in November.
Okay, and then maybe just one final one, please. Just in relation to the comments around trying to take your market share in commercial lines from number four to number two, is the intention to do that on platforms or in the open market? Any color around that would be great, please. Thank you.
Thanks for that. It's both. So I think we've split the business into two. So one is platforms, which is the more the automated underwriting, which is very technology dependent, and then tailored lines, the traditional way of underwriting. Still a lot of investment in technology, AI, on ingestion and the like. The big theme for us, Andrew, is around one is technology and two is our people.
You know, claims and underwriters, you know, how do we give them the tools to really do their job as well? And a real focus on our customers and advocates for our customers, which are our brokers. And so that's how we're gonna grow that market share. And so it's not one, it's a plentiful palette of initiatives we're gonna have to grow that going forward.
Plentiful palette of initiatives, that's...
Don't know where that came from.
One way to describe it.
Gonna write that one down.
That's it for me. Thank you.
Thanks, Andrew.
Thank you. There are no further signed questions at this time. I'll now hand the conference back to Mr. Johnston.
Any questions, wrap-up questions here in Sydney? Well, thank you very much, everyone. Very pleased with the result. Obviously, we'll now look forward to providing a lot more detail around the five portfolios, platform modernization, the work we're doing on AI in November. So we look forward to seeing you all then. Thank you.