Good morning, and welcome everyone. For those joining us here at our Shelley Street office, could I ask, if you could, to put your mobiles on silent. Of course, if there is any need to evacuate, we're not anticipating there will be, but if there is any need, please follow the instructions of the team that are in the room today. Let me, as always, begin the presentation by acknowledging the traditional owners of the lands upon which we meet, and pay our respects to elders past, present, and emerging. Today I'm joined by our CFO, Jeremy Robson, and the other members of our executive leadership team in the room here today. Jeremy and I will run through the presentation and the team, and Jeremy and I will obviously be available for the Q&A that will follow.
Now, as usual, I'll start today's presentation with an overview of how we believe value is created at Suncorp. As we reflect on another challenging period for our business, we are again reminded of our purpose, and how delivering to that purpose translates to the financial results that we report today. Our priority will always be, and should always be, to support our customers, whether they are impacted by these events or just dealing with the uncertainties that life throws at them. Of course, provide the peace of mind for those fortunate enough not to have needed to call upon us. The long-term value and the long-term financial outcomes that we achieve, and the value that we create for our shareholders reflects the sum of us getting all of this right.
Turning to the result, the group has delivered cash earnings of AUD 588 million, which is a significant increase on the prior period. Statutory NPAT was AUD 560 million. The result confirms the underlying momentum we have across all of our businesses, and it proves the FY 2023 plan is delivering. I'll reference our performance against the FY 2023 plan variously through the presentation. The prevailing La Niña weather pattern has seen us managing eight significant events in the six months to December, with a total of 53,000 natural hazard related claims at an estimated cost of AUD 679 million, which, as you know, is AUD 99 million above the allowance for the first half of the year.
While investment markets remain volatile over the period, our fixed interest and our Inflation-Linked Bonds portfolios have benefited from enhanced underlying yield, this has seen investment returns step up materially from the PCP. The board's declared an interim dividend of AUD 0.33 per share, which is a 43% increase on the prior year. This represents a payout ratio of 71% of cash earnings, which those of you who are familiar with this will know that's usual practice for this time of the year. This slide calls out some of the highlights that are within the result.
At the bottom of the slide, what I've done is included the key metrics that are embedded in the FY 2023 plan, just so you can see the actual performance and how we're tracking towards those targets that we set back in FY 2021. Insurance Australia has again achieved strong growth in both premium and units. When adjusted for portfolio exits, Gross Written Premium is up by 12.1% in home and 11.7% in motor. Now, while we prioritize margin to ensure pricing adequately reflects the natural hazard related costs and inflationary pressures that are coming through our business, it is pleasing, very pleasing, that we have continued to see unit growth across the consumer portfolio.
In New Zealand, gross written premium increased by 12.2% on the prior period, largely driven by the pricing response in the current inflationary environment. As we expected, unit growth has started to moderate across some portfolios in the New Zealand business. In the bank, the home lending portfolio grew by AUD 2.6 billion or 5.2% over the half year. Customer deposits grew by 6% and of course weighted it in the current environment towards term deposits, which is not unusual in a rising interest rate environment. When you exclude the positive impacts from COVID-19 in the PCP, the general insurance underlying ITR expanded to 10%, which is up from 8%.
The underlying ITR was supported by higher pricing and improved underlying yield, offsetting the known headwinds of high natural hazard allowances, increased reinsurance costs, and inflation on claims and operating expenses. Finally, it's incredibly pleasing to report the bank's cost-to-income ratio of 49.9%. Been a long-term, long-standing ambition and target that we've achieved through a combination of revenue growth and disciplined cost management. It's worthwhile considering all of these results in the context of the headwinds that we've steered into over the past three years. The most material of which have been the La Niña weather cycle and of course, the global inflation. I'll briefly outline our approach to managing these two issues in the next couple of slides. First, the hazards.
On the top left-hand side of the slide, you can see the impact of three consecutive La Niña weather cycles on natural hazard costs and natural hazard claims relative to allowances. While you can continue to see us reporting actuals ahead of allowance, you can also see the pace at which we've increased the allowance over the past three years. This, alongside the material step up in reinsurance costs, have amounted to significant headwinds, which we have absorbed within the targets that we remain committed to. I'd make the point that I do acknowledge these increased costs have required us to continually adjust the premiums that we charge our customers, particularly those in higher risk areas.
While this is adding to the current cost of living pressures, the value ascribed to insurance products has never been greater, and particularly amongst those whose lives have been put back together after the rain clears or the water recedes. At our recent investor update, we talked through in detail our approach to natural hazard modeling and the increased sophistication we are applying to this crucial area of insurance pricing. I won't recap that other than to say that we are confident that our reset allowances will serve us well when weather patterns revert to a more neutral setting, which appears to be the consensus amongst weather scientists. A somewhat underappreciated impact of our natural hazard experience is the operational pressure of managing such elevated claims volumes. This has been amplified by the current supply side constraints and of course, inflation.
At the bottom left of the slide, we plotted aggregate claims numbers by year. What it shows is that the rolling nature of these events have provided little respite for our teams on the ground. To make the point, if you cumulatively add up those natural hazard claims costs, it's a total of around half a million claims in natural hazards over the past just over three years. Now, this is where our best in class claims program has really delivered. The digitization of our claims processes, the reach and depth of our building panel, and our enhanced disaster response capabilities are crucial to the operating resilience that we need to manage a changing climate. Finally, our advocacy agenda, which is best summarized by our four-point plan, should be well known, and I'm pleased to say, finally gaining traction.
To the next slide, like all of our financial service peers, we continue to stare into the considerable headwind of inflation, which is, as we all know, a 30-year high and has impacted every aspect of the group's operations. For insurance companies, inflation has manifested itself in hardening global reinsurance prices, supply chain disruption, higher loss ratios, and the increased costs of long tail claims settlement. In addition, across both insurance and banking, there remains broad inflationary pressure across operating expenditure and wages. In response, we've put through the necessary price increases that will be earned through fully in coming periods, and Jeremy will talk through this phenomenon, this aspect in a moment. Pricing can't be expected to do all the heavy lifting.
In inflationary times, scale matters, and here our best in class claims program has allowed us to be more disciplined in leveraging scale to deliver lower aggregate inflation outcomes when compared to peers. This has been most obvious across home working claims, where we have recently renegotiated our builder panel arrangements at a significant discount to the current inflationary trends. The dynamics in motor are more complex. While our relationship with SMART provides us with a benefit on drivable repairs, it's worth remembering this accounts for roughly 15% of total motor claims costs. Beyond that, inflationary trends in motor are more industry-wide and of course global in nature. These include elevated average claims costs from higher second-hand vehicle prices, a greater proportion of non-drive repairs versus drive, increased hire car durations, and restricted capacity within the repair supply chain.
In response, we've added additional repair capability and capacity across both drive and non-drive. We've maximized fixed price arrangements where we can with volume incentives. We've leveraged our current technology platforms and new technology platforms, and we've established dedicated teams to manage ancillary costs such as towing, hire car, and of course, recoveries. In long tail, inflation is assumed in both pricing and reserving, and it's proving to be adequate. As expected, we've seen some moderation of prior year reserve releases as those buffers are utilized. Offsetting the transitory effects of peak inflation has been our investment portfolio, where we continue to retain a substantial holding in inflation-linked bonds or ILBs. To recap, ILBs have been a feature of our portfolio for over a decade and are designed to protect both profit and margin during inflationary times.
The benefits of ILBs are amplified in times where there is a material disconnect between actual CPI and break-even inflation, which obviously we are observing at the moment. In summary, the ILBs have worked exactly as anticipated, providing a shock absorber during this period of peak inflation and supporting both the P&L as pricing and our ongoing operational improvements earn their way through the book. Turning briefly now to the sale of the bank, as you know, the ACCC published ANZ's merger authorization application in December, we expect they will announce their determination by June this year. This of course is the first step in the approvals process, with the sale also subject to approval from the Queensland Government and the Federal Treasurer.
We'll continue to work constructively with ANZ and the relevant regulatory and government authorities to achieve the approvals within our previously disclosed timeline. In the meantime, we remain intensely focused on delivering on our bank strategy, and the priorities that we outlined in that FY 2023 plan remain unchanged. At this point, let me hand over to Jeremy.
Right. Thanks, Steve. Good morning, everyone. Well, it's been very pleasing for us to see the continuation of the strong top-line growth, along with underlying margin momentum feature in our results for this half. In GI, the challenging operating conditions continued with ongoing inflationary pressures and elevated natural hazard costs. We've responded with price increases and good management of the cost base. The result was also supported by improved investment returns and the release of BI provisioning. In banking, the strong performance has continued with the achievement of the cost-to-income ratio target of 50%. We're also pleased to be able to reaffirm our FY 2023 targets today. The overall bank sale financials, that's the sale-related costs, stranded costs, and the return of capital all remain in line with previous estimates.
I'll now unpack the result a little further, starting as usual with the Insurance Australia top line growth. Overall GWP grew by 9% excluding portfolio exits. The home portfolio grew by over 12% driven by strong premium increases in response to the natural hazard and reinsurance costs. Motor also increased nearly 12% with premium increases reflecting underlying claims inflation and higher sums insured. Pleasingly, as Steve said, we're also able to grow units in both portfolios despite our focus on margins, albeit motor units have slowed on a half-and-half basis. Now I'd like to remind you that the premium rate increases can be different to overall average written premium outcomes due to a variety of factors. These include new business renewal mix, brand mix, and changes to excesses and non-renewals.
In regards to earned premium, there's also the timing gap between renewal rate increases and the earn through in the P&L. We're confident that the price increases we're putting through are sufficient to reflect the inflation and natural hazard costs. Moving on, in commercial, growth was driven by the NTI property and fleet portfolios, with retention and new business both strong despite good rate increases and the remediation in our packages portfolios continuing. CTP decreased by 1.3%, driven by increasing price competition across the schemes. Growth in workers' compensation reflected both higher wages as well as rate increases. Moving now on to claims. As Steve touched on earlier, the deterioration in consumer was driven by the motor portfolio, largely due to higher average claim sizes with increasing secondhand car prices and supply chain disruptions. Our key responses have included pricing and repair capacity increases.
Home was broadly flat with stable frequency, inflation moderated by strong cost management and favorable mix outcomes, along with some increase in liability claims. Commercial was also broadly flat as several large fire claims and higher costs in fleet offset the benefits of ongoing pricing and underwriting actions. CTP saw an increase largely due to the inflationary environment, whilst workers improved slightly with benign experience on our run-off portfolios. Prior reserve releases at 1.6% of NEP, that's excluding the TOFA adjustments, were broadly in line with our expectation, albeit with some favorability in consumer, partially offset by modest strengthening in commercial. Turning then to investment performance. While still volatile, investment markets stabilized somewhat from the extreme movements we experienced towards the latter half of last year.
The mark-to-market losses on risk-free and break-even rates were more than offset by significantly higher running yields, including inflation-linked bond carry. The average yield on insurance funds was around 5% on an annualized basis, with improved returns across all components. The inflation-linked bond carry contribution comes from the persistently higher CPI prints well above break-even inflation rates. Whilst this is expected to be largely neutral over a cycle, the recent performance has provided some expected offset to inflation seen in claims. As always, we continue to assess the profile of our investment portfolio, and we're maintaining a prudent bias. Approximately 90% of the portfolio is allocated to investment-grade fixed income securities. We continued with our reduced exposure to equities during the half, albeit this has since been reassessed given the more recent market developments.
We've increased our investment in property and infrastructure as part of our ongoing adjustments to our strategic asset allocation. Moving on to New Zealand. We continued to experience strong growth and increasing market share with targeted price increases across all channels, driving GWP growth of over 12%. Natural hazard costs were lower than last year, but still $21 million above the allowance with one large weather event in August. I'll say a little bit more on the recent flooding event shortly. Higher working claims costs in New Zealand were driven by unit growth, large property fire losses, particularly in the 1st quarter, and inflationary pressures. The prior year period was also impacted by, positively impacted, that is, by COVID motor frequency benefits, as you'd be aware.
Prior reserve releases in New Zealand were strengthened by AUD 12 million to reflect development on both earthquake claims and property claims. As with Australia, we're confident that current pricing increases are appropriate and reflect underlying claims inflation. We've got a close watch, of course, on that following the recent flood events. Investment income in New Zealand improved with similar dynamics to the Australian portfolio. Pleasingly, the life business saw an increase in profit after tax with improved planned profit margins and favorable experience. Turning to the group underlying ITR. We recorded an increase in the half to 10%, a good result given the headwinds of increased natural hazards and reinsurance costs and claims inflation.
The three key factors that offset these impacts were, firstly, significant increases in premiums in response to these headwinds. I also note our roll out of CAPE in both home and now motor has helped with retention and underwriting. Secondly, increased investment income with higher underlying yields, noting the relationship between inflationary pressures and the benefits of the inflation-linked bond portfolio. Thirdly, a reduction in expenses driven by operational efficiencies. The outlook for the full year is in line with previous guidance, i.e., around the midpoint of the 10%-12% range. Whilst achieving this result means we expect to see a second half underlying ITR towards the higher end of the range.
I would remind you that the medium term outlook will reflect the dynamics of the hardening reinsurance market, potential volatility in investment income, with ongoing strong premium rate momentum. Moving into natural hazards. Natural hazards for the cost for the half exceeded the allowance by AUD 99 million, with a third consecutive La Niña weather cycle. Pleasingly, we saw a relatively benign November and December, note the ENSO cycle is expected to return to neutral this half. Whilst January was weather was relatively benign in Australia, there has been the very significant flooding event in New Zealand. I'll remind you that the group's maximum retention for this event is NZD 50 million. Given the New Zealand drop-down cover's in place. We're still assessing the expected gross co-gross cost of this event, do expect it to be significant.
Notwithstanding, we remain well protected in New Zealand with a prepaid second drop-down cover remaining, and we're working through our approach to any reinstatements that may be deemed appropriate. On the topic of reinsurance, I note the market is continuing to experience ongoing change with further hardening evidence in the 1 January renewals, and that's both in terms of pricing and capacity for the lower layers of programs. We'll have more certainty on this once we go through the process of finalizing our June renewal. Turning to the bank, we're very pleased with the progress against our FY 2023 targets. I'd particularly like to highlight, as Steve has done already, the achievement of the long-standing target for the bank, and that's the cost to income ratio of 50%. Credit to Clive and the team for delivering that.
This was ahead of schedule and reflects the continued above system home lending growth, as well as a disciplined focus on cost management. We also benefited from the rate environment and improved margins. The NIM of 203 basis points has been elevated by deposit margins in particular, but is expected to fall back within our target range in the second half as competitive pressures are expected to increase, again, particularly in the deposit space. Home lending continued to grow at an annualized rate of 10.4%, with the key drivers being significant improvements in both turnaround times and NPS for brokers and consumers. Deposits grew 6% on a half on half basis, with a clear shift in mix from transaction accounts to term deposits as customers take advantage of the rising rates. Now I'll quickly touch on the bank's credit quality.
It remains well positioned and strong on all key metrics, with 91% of new home lending originated at an LVR below 80% and 90 days past due continuing to reduce. Notwithstanding, we do remain alert to signs of stress given the economic environment, and the runoff of the fixed rate loan portfolio is a key watch item for industry. An example of the resilience in the home lending portfolio is that over 60% of our customers are ahead on their mortgage repayments, and over 30% are ahead on their mortgage repayments by a year or more. We continue to monitor and review the economic assumptions underpinning the collective provision, and consider it to be prudently set for the environment. Noting, it hasn't changed from the AUD 180 million balance despite the improving credit quality of our loan portfolio.
Turning to group expenses. We've been subject to the same inflationary pressures that most businesses have faced with inflation across all key elements of our cost base. Pleasingly though, we've been able to more than offset these increases with efficiency benefits, including the steps we've taken to simplify our business and improve our operational efficiency. As expected, there's also been a reduction in regulatory and maintenance project spend. Supported by this cost management, the expense ratios in both Australia and New Zealand have reduced. As we've said, the bank cost to income ratio reduced to 49.9%. I can also reaffirm the group is on track to achieve our target of around AUD 2.7 billion in operating expenses for FY 2023, albeit with a modest increase in the second half, largely from growth related and restructuring costs.
I'd also like to point out here the result in the managed funds business. We've seen lower revenues from portfolio runoff, as well as higher expenses which are likely to continue into the second half. Regarding the bank separation and transaction costs, whilst the overall expected quantum has remained unchanged, as I said earlier, we now expect to incur approximately 25% in FY 2023 following the finalization of the joint transition planning. Finally moving on to capital. The capital position at 31 December has seen net capital generation of around AUD 110 million since 30 June, and I'll run through some of the key dynamics. Firstly, the reversal of around AUD 100 million of deferred tax assets.
This is consistent with the unwind that we flagged at the full year results, and further unwind is expected as the investment book continues to reach maturity. Secondly, the reversal of around AUD 70 million of the impact from the higher natural hazards that we flagged at the full year as we put the pricing response through, particularly in the home portfolio. This has been offset by normal seasonality, a deterioration in motor claims that we've taken you through, and capital usage from business growth. Importantly, the seasonality and motor claims impacts are expected to reverse in future periods. Thirdly and finally, the capital applied to the strong home lending growth in the bank. I'd note here that the capital position that we've presented today reflects Basel III, which was effective on the 1st of January.
You'll see from the chart that CET1 at group has increased to $290 million. We've also improved the capital position of the GI business with CET1 now above the midpoint of the target range. This was partly driven by APRA changes to our NOP conditions, which enable us to realize diversification benefit between Australia and New Zealand, and to fund that diversification with hybrid capital rather than CET1. Following these changes, we'll look to optimize our capital structure into the second half, subject of course, to market conditions. As Steve said, the interim dividend of $0.33 per share at a 71% payout ratio reflects a robust balance sheet and our normal approach of a lower payout ratio in the first half of the year. On that, I'd now like to pass back to Steve.
Well, thanks, Jeremy. Now let me quickly turn and briefly turn to our FY 2023 plan, which of course we presented to our board in 2020, first outlined to you in February 21. The plan included an ambition to drive growth and deliver by FY 2023 a sustainable return on equity above the through the cycle cost of equity. The plan centered around 12 strategic initiatives, which are outlined in this slide, and we've had on all of our regular updates to the market. It also relied on aligning everyone at Suncorp around improving the way we deliver insurance and banking products for our customers. On this slide, I've summarized the targets that we set for FY 2023, and again, they'll all be very familiar to you.
What we didn't know at the time of building the plan and setting those targets were the considerable headwinds that we would face into over the plan period. The dislocation of the pandemic, geopolitical shocks in Europe, record inflation, of course, those three sequential La Niñas have obviously tested our resolve. Despite the challenges, our business has emerged in great shape, and we remain confident in achieving those FY 2023 targets. To the next slide, here are some of the more operational proof points underscoring our progress across the insurance business. Over the plan period, growth momentum has continued to build as our efforts to reinvigorate our brands, to refine our customer value propositions, and to improve our marketing and simplify our product portfolio have taken effect.
Our new pricing engine, CAPE, has been rolled out in Australia to our Mass brands across our home portfolio with deployment underway in motor. In fact, overnight, we're able to deploy it into our Mass brands in motor, which is a big game changer for us in terms of pricing and was a key part of our strategic initiatives that we outlined to the market a couple of years ago. The first phase of our new SME broker platform has also been rolled out, providing enhanced pricing and risk selection, improving the broker experience for new business, and will assist us in our ongoing remediation of the packages business. In distribution, digital sales for Mass brands have increased by 14 percentage points since the first half of FY 2021 to 65%, and digital service transactions have increased by 12 percentage points to 42%.
We continue to focus on making digital purchasing easier through our use of geospatial imagery, artificial intelligence, and removing barriers to online self-service to meet customers' increased appetite to interact with us online. Within the Best in Class Claims program, I pointed out before the successful renegotiation of our repair panel arrangements in home was supported by ongoing efforts to leverage scale to expand bulk buy benefits and drive improved repair quality, capacity, and cost outcomes. Making claims tracking simpler and easier for customers is our key focus in the second half. In New Zealand, a single claims platform has been introduced, providing seamless connectivity to our partners across the claims value supply chain. Work has also commenced to simplify and rationalize the consumer product portfolio.
At the bottom left-hand side of the slide, you can see our underlying ITR progress puts us on track to deliver that FY 2023 target. The strategic initiatives that we have delivered and that we continue to deliver set the group up well for our future, particularly as we emerge as a pure play insurer. Turning to the bank, which continues to grow in home lending, with the top left of the slide highlighting the improvements over the plan period. Growth has been supported by improvements in customer and broker NPS, stunning turnarounds in broker NPS in particular. Importantly, it hasn't come at the cost of credit quality. Median application turnaround times have improved to three working days, which is down from 12 in the prior period, and positions the bank in the top quartile for application turnaround times.
Business lending also continues to benefit from target expansion across the multiple portfolios in the business bank. We've also seen growth in everyday banking, supported by a compelling digital offering with digital transaction account openings now accounting for 80% of new deposit accounts. It's revenue growth when you couple it with the disciplined cost management that we've had in place for a number of years that supported the achievement of that CTI ratio. I'll turn to the outlook briefly. In insurance growth for the remainder of the year, we expect will remain strong, albeit will be driven primarily by AWP as we continue to prioritize margin over volume. The momentum of GWP will translate in turn into NEP and will support underlying margin trajectory. The group underlying ITR continues to steadily improve, and we remain on track to achieve the 10%-12% target.
We'll continue to adjust pricing to take account of claims frequency and increased inflationary input costs, but with a particular focus on a June 30 reinsurance renewal. We expect current inflation trends to steadily moderate as monetary policy changes impact on aggregate demand and as supply chains continue to free up. Our reinsurance coverage provides protection into the second half, and we are confident that our natural hazard allowances are appropriately set. In the bank, the cost-to-income ratio is expected to be around 50% for FY 2023. However, I point out the slower system growth and competition in deposit pricing could have an impact on income in the second half. At the group level, we continue to target a cash return on equity above that through the cycle cost of equity.
Alongside our target payout ratio of 60% to 80% of cash earnings, we of course remain committed to returning any capital to shareholders that is in excess of the needs of the business. The sale of the bank remains on track and subject to regulatory and government approvals we plan to complete in the second half of calendar year 2023. We will, of course, continue to update you on progress of the transaction, and we'll also look to provide more information on the shape of Suncorp as we emerge as a pure play insurance company. This is a slide we used at the Investor Day, Investor Update back in November. It's a snapshot of our future strategy and the ambitious agenda that we have for the five portfolios that will shape our future.
Our future strategy will also, importantly, be supported by the key enablers that are outlined on this slide and be informed by us continually evolving our risk appetite, the financial settings underpinning our business, the reinsurance strategies that we have, and of course, how we address ESG. It's now eight months since we announced the sale of the Bank, and we outlined the strategic rationale that underpinned what was a difficult decision. In our view, the passage of time has reinforced the logic. The need for continued investment in a vibrant private insurance sector has never been more important to meet the changing needs of our customers, of communities, and for our broader economies. Most evident also in the last couple of weeks in New Zealand.
As a leading trans-Tasman insurer, natural hazard resilience, climate change, and the affordability and accessibility of insurance will continue to be the most material issues for our industry to address. Our focus, Suncorp's focus, advocacy, and meaningful action on these issues will be at the heart of our future. With that, why don't we adjourn to take some questions? Okay, we'll start in the room here and Nigel, we'll start with you, eh?
Thanks, Steve. Thanks, Jeremy. First of all, just on the premium growth, I mean, obviously you're guiding to similar GWP growth for the full year as you got in the first half. I think that probably surprises a few people that there's no acceleration of that in the second half. Can you just make a few comments on that?
Look, I think we remain very confident with the trajectory of pricing and obviously the dynamics of inflation we've been watching very closely over the past nine months, as it's continued to emerge through both motor and home. I think the we've been able to get ahead of that to some extent with our pricing. We've moved, I think, earlier than others in the market to adjust our pricing, and we'll continue to monitor that closely. We will continue to watch motor. We did watch it very closely through November and December and made some adjustments to pricing then. The other point that I raised is that we have to continue to look at our home pricing relative to our forthcoming reinsurance renewal.
Our disposition on those matters is always to get ahead of the game as best we can. If we are seeing the dynamics in that reinsurance market evolve as we come through to 30 June and into next calendar, next financial year, we'll make some necessary adjustments to pricing there. I think without being absolutely specific about the pricing increases that we're putting through, we continue to think it's robust, and we'll continue to adjust it related to the cost of or the input cost inflation that we're seeing across both those portfolios. Jeremy, do you want to?
You know, I think that's right. I mean, you know, on balance, it's gonna be roughly the same as what we've seen in the first half. There'll be some different dynamics around it. You know, might see, obviously with the in home, the GWP for the first half is an average for the first half and the same with motor for that matter. There may be a little bit of acceleration there, a bit of noise around some of the other larger portfolios. But I think, you know, they're thereabouts.
Okay. Thank you for that. Maybe just drilling a bit down, further down into that home comment you just made there. I mean, AWP at 10.7, you seem to have been suggesting you were probably putting through price rises a bit stronger than that. You know, if you compare that 10.7 growth in the first half to what you've been putting through recently, is there a reasonable gap?
Yeah.
I mean, what we've tried to do, Nigel, is in that picture is explain the difference between the price, you know, the individual prices that are going through, which is what we've referenced previously, and then how that translates through to an AWP and then through to a gross earn. The gross earn's easy timing. You know, as the renewals go through, then it takes time to earn through. That's pretty straightforward. The gap between, you know, the front-end customer pricing, if you like, and then what comes through average written premium. The different dynamics across home and motor, but the new business renewal mix is a big one.
New business in motor tends to have a higher premium, so you get that mix impact. Whilst at an individual customer, the individual customer rates going through are quite different to what you see in a GWP sense. There's excesses, we've had customers change excesses, and yes, there is some non-renewal in there. Having said that, retention rates have, you know, with this sort of level of price increase, have actually held up pretty well.
The unit count numbers in Home are quite pleasing in reflection of the sort of price increases that are going through. Again, these are averages. One of the things that we showcased through our investor update back in November, and which is a game changer for us, is the sophistication of CAPE in terms of pricing. It's a generational step up on GWP. You've seen some of the benefits that we've been able to get out of that as we've priced the book in a, you know, an increased pricing environment. That's now in motor, and it allows us to get a lot more granular about putting the increased premium to the higher risk areas of our business.
I think the elevation of CAPE into our pricing environment, alongside a continued focus on making sure that we're pricing for increases in input costs across motor and home, I think puts us in a good position to offset inflation. An expectation over time that that peak inflation that we've seen probably in the last six months will begin to moderate.
I guess just brings me on to my final question, which is just sort of obviously you've given us the sort of broad dynamics on the slide 15 with respect to the underlying ITR. Maybe can we get a feel for how strong you think those various forces are? Obviously you've got, you know, investment income moderating, claims moderating, you know, headwind obviously on natural hazards reinsurance. Obviously there's a lot of uncertainty there, but you did give at the Investor Day, you sort of said that maybe in 2024 we'd be at the midpoint of 10-12. How are you feeling about that now? Presumably that was with lower reserve releases. How are you feeling about that now? Can you give us any clue as to how strong those forces you think they'll be?
Yeah. I think the, you know, what we're trying to do with that picture, Nigel, is remind of the two key dynamics there, which is pricing momentum, which is very strong. We'll definitely see that coming through. To balance that a little bit with the potential for what we might see in the FY 2024 renewal. Look, we haven't gone through that renewal yet. We've seen what some of our peers have experienced. Acknowledging that we also experienced what some of our peers experienced on our 30 June renewal. We've got to work through that. That's a, you know, at this stage, we can make an estimate, a guesstimate around what that's gonna be, but it's pretty hard until we've gone through that renewal.
We're not giving guidance for FY24, but, you know, I'd think that that range that we previously had is probably still a sensible sort of range level. The net of all of those things is to some extent they're probably, you know, we'd expect them to roughly neutralize out.
Some are reasonably obvious, I would've thought. I mean, obviously, as inflation starts to moderate, yields should start to moderate too. I mean, it's sort of economics 101. It's hard to see inflation moderating and yields continuing to increase. They may, but it's unusual to see that happen. Equally, some of the carry benefits that we've had from the ILBs as the CPI starts to, you know, reverse back towards breakeven inflation will start to moderate as well. We do have a very strong earn coming through. We can see that both in Home and Motor and that's, it's almost a formulaic outcome now as a lot of that book's been written so.
The other thing I'd state, say on that picture, Nigel, is we've used the term medium term, which is, you know, probably around that FY 2024 outlook. Of course, when we say, for example, in that scheme that reinsurance is a headwind, it's a matter of timing. You know, if it is a headwind, we'd still be expecting to put the right response through to offset that headwind. If it's not within FY 2024, it's, you know, it's over that sort of 18-month time period. There's also a timeframe element around that.
Kieren?
Thanks. Kieren Chidgey, Jarden. Just starting on sort of a similar vein in regards to the underlying margin, Jeremy, you kind of called out obviously the opposing impacts, the benefit you've had on the ILB carry, sort of helping offset inflation. Can you just give us sort of a sense of where that ILB carry, which you've said average 100 basis points through last half, would be sitting today, sort of in the expectation near term?
Yeah. I mean, it's sitting today, it's about 100 basis points as well. you know, The dynamic of it is where's the CPI print? It's in arrears, through to the ILB, carry. Where does that sit relative to breakeven inflation? People can form, you know, their views on that. Our view would be we don't see CPI prints coming down, you know, miraculously overnight from the six and 7s down to 2% or 3%. We'd expect that to persist for a little while yet. And the.
You know, just to be clear on an inflation-linked bond instrument, they will earn a real yield, you know, return on the bond, plus the bond gets indexed for CPI indexation that's happened to date on the bond. You know, the CPI indexation, it's a real return, you know, effectively cash return sitting there on those bonds.
Thanks. Sort of the other part of that question, sort of the flip side, the claims inflation, I think you've broken out in the waterfall, I think it was 700 basis point impact to your margin. Can you just go through some of the key portfolios, Home and Motor, in terms of what you're seeing?
Both through the half and as we move into second half.
I'm going to go through, obviously motor and home, and then Jeremy can fill in the details thereafter, or we might need Paul or Lisa to add to it. I mean, motor is quite a complex challenge. Obviously, we've got Smart, but again, as I pointed out, Smart's 15% of the total repair volumes in motor. Beyond that, the factors are pretty well established, sort of domestically and globally. Higher second-hand car prices, which is a function of higher new car prices and availability and supply of new cars. Again, that's probably peaked. Our assessment is that that is starting to come off. Now, the pace at which it comes off, yet to be seen, but I think it has peaked and it's starting to come off.
Parts pricing, obviously we think that has peaked as well, but hasn't necessarily moved much, so it hasn't no disinflation necessarily in parts prices. Availability and supply of parts has probably freed up a little bit as supply chains have loosened up a little bit. The broader issue is just the capacity within the repair network. What we've seen post-COVID is a very particular pinch point in availability of labor in motor vehicle repair shops. Absent the ability to bring migrants in, which is a key part of their workforce, a disposition for a period of time not to get apprentices on board, which is completely understandable in the current environment. There's a very big pinch point in labor in motor vehicle repairers more broadly across the industry.
That will take a little bit of time to free up. What that does is, obviously doesn't get the throughput of our claims, particularly on the drive side, throughput of claims settlement, at the pace at which we otherwise would have had it, which means longer claim durations, longer hire car utilization, et cetera, et cetera. They're all the dynamics. Frequency is also, you know, a factor in motor. I think, you know, I think we all saw, particularly on drive, you know, frequency starting to move on a downward trajectory. Not a steep downward trajectory, but a moderate downward trajectory. It was always to be determined what would happen, you know, once COVID sort of worked its way through and people became mobile again. We've seen frequency jump back up again.
If you take some reference points, you know, FY 2017, FY 2019 on a slight trajectory falls off a cliff through COVID. It's popped back up again. Variously through the half, we've seen it somewhere in between FY 2017 and FY 2019. Where that settles over time, yet to be determined. Again, we've got incredibly good line of sight to all of these factors. I think the other point to make on the Smart piece is that obviously we had a contract in place which obviously matures on 30 June. That was materially, I think, in our favor relative to the price that was set five years ago. We have made some adjustments to that to reflect current inflationary trends and also to incentivize more repairs.
That's an incentive-based contract renegotiation, which is temporary until we work through the full negotiation in June. It is incentive based, so. It does still reflect volume discount that you would expect to get from putting 140,000 vehicles through one repair shop. On home, look, the fact is there, I think on the working book, we're well on top of escape of liquids. That's been an issue for the past decade or so as we've seen flexible piping and all those various factors drive higher frequency of escape of liquid, but also higher costs of duration in terms of average claims cost. We think we're well and truly on top of that. It's a really good effort by the team to do that.
Obviously we've gone through the renegotiation of the builder panel. We talked about that last half at the full year, and obviously we went through in November and reset that whole panel. The increases were significantly below what is currently observed in inflation in the market and reflects the scale that we bring to our builder repair panel, the certainty of payment, the payment cycle that we provide to them. We are an attractive place for builders to do business with, so. The hazard piece, I think sits outside, so a separate line of discussion. Jeremy, do you wanna add?
Yeah, I mean, look, it's a motor story. Most of that sort of 700 basis points is motor. In home, we've seen some liability claims, which were, you know, a bit lumpy, more first quarter in Australia. We've seen some property fires in the first quarter in New Zealand. That's part of it's really largely motor. The other one is interesting one is workers' comp. Workers' comp has improved. Workers' comp loss ratio has improved because it's got a higher loss ratio and we've grown workers' comp, it impacts on the mix. There's a bit of a mix impact in there as well.
Okay. Thanks. Just a final quick follow-up on Nigel's question on home and sort of reinsurance as well. I mean, it would seem pretty obvious, you know, we've seen a pretty consistent reinsurance outcome globally at one gen in terms of higher retentions, higher pricing. I just wanna be clear whether or not you are accelerating pricing in-home already for that or whether or not you are actually waiting to June to respond to this because it seems, definitely one gen would have played out worse than most of us would have expected.
I'm not gonna signal any pricing moves that we're doing, Kieren. I think, you know, to my answer to Nigel remains intact. It's we're observing it, we're looking at it. Yes, I think you can look at the attachment point as one point. I mean, our main competitor is attached at a higher level than we were able to attach at June 30. Jeremy makes the point, which is the right one, and you look at it in the accounts. We've seen a 17% increase in reinsurance costs on PCP. Now, we took that pain in the June 30 renewal, and it's a bit hard to tell what 1 January is related to in terms of 30 June. You're right, the attachment point has lifted.
We just need to see... I mean, we know what's going on there, and we'll be, as we always have been, and I flagged that we will have an eye to that reinsurance renewal in terms of the pricing that we apply in the second half. I'm not just gonna go into the quantum of it or the timing of it, other than that we will have an eye to it, and we will respond. Andrew, we'll go around here. Sorry.
Thanks for your time. Andrew from Macquarie. Maybe to ask that question in a different way, how are you thinking about the risk reward on aggregates going forward?
Yeah. I mean, we go through that process every year in terms of the economic trade-off, there's a, you know, there's a fundamental bit of economic analysis around our view of that risk versus the, you know, the profit margins on it versus reinsurers' view. We'll continue to, you know, continue to work that through. It's hard to work through that process without any pricing on it. Once we get the pricing on the renewals, we'll work through that bit of analysis. I mean, obviously, we have an eye on volatility in the P&L as well, that plays into it. You know, when we get the renewal pricing, we'll sit down and make the assessment around the trade-off of that, you know, retention versus risk transfer.
Two questions on New Zealand. There was a slide in the deck that commented on the amount of the aggregate deductible left at 31st of December. Can you give us a bit more color around where that sits now? Now that a lot of New Zealand weather has gone through.
Yeah. On that, New Zealand will is likely. We haven't finished assessing the cost of it yet, but likely to go through the New Zealand drop-down and potentially into the main the group main cap program potentially. You know, we're still, as I say, going through the assessment. The deductible on that, i.e., the NZD 50 million that we retain, would go into that aggregate the aggregate deductibles that we've had to date. You know, converted to Aussie, less the AUD 10 million, that's what would get added to it.
Just to be clear, is that one event for you or two in the context of your reinsurance cover?
We believe it's one.
Thank you.
Andrew, just what I might do is get Jimmy up just quickly. Obviously, Jimmy's over from Auckland, and just give a little bit of color around the event. Just a couple of minutes, Jim, if you can.
Thanks, Steve. Morning, everyone. Look, Friday, 27th of January, as people know, was a pretty significant event. Torrential rain causing widespread splooding, flooding across the North Island, and landslips as well. The impact was widespread from Northland to the Waikato region, Bay of Plenty, Hawke's Bay, and of course, Auckland. In the CBD itself, the more impacted and damaged areas was the North Shore, largely landslips, but some area flooding. There was to the west, which is Massey, Henderson, Titirangi, and then the south was Mangere, which is the where the airport is. In Auckland itself, the CBD, you would have seen the photographs of the flooding in the CBD. You know, supermarkets, retail outlets, car dealerships.
I guess our response was swift, so we were on the ground and in the air on the Saturday morning, examining the damage, speaking to the customers and understanding what our response needed to be. You know, it's fair to say we've seen quite a few claims come through, over 8,000 claims so far. We expect that number to increase. As Jeremy says, the loss, the understanding of the loss is difficult at this stage, largely because on the commercial side, which we've got a quite a large commercial book, the property owners, their focus right now is cleaning up, getting rid of stock, making sure they can operate, making sure they can trade, being an intermediary of the business. They contact their broker to lodge a claim.
Their broker then contacts us, then we send out assessors to assess the damage. It's only until that point you get a true understanding of what the commercial losses are. That'll take probably a couple of weeks for us to get on top of what we think the commercial losses will be on this event. You know, what I've been reading so far from some of the commentary is that this is a one in, say, 250/300 year event. I guess the question is, what does that mean? For me, it simply means it's significant. It's significant for us, for Auckland, and it'll be significant for New Zealand.
Okay. Thanks for your input, Steve. We'll go on, onto the telephones and then come back here.
Siddharth Parameswaran from JPMorgan. A couple of questions, if I can. Firstly, just on slide 11, you helpfully gave us a just an indication of how What the contribution of your mix changes were on home. I just wanna understand if that's to scale, because that looks like you're basically saying there was a 6 percentage point improvement above and beyond rate, which came from mix and excess changes. Is that right? Roughly risk adjusted, you're pushing through, you know, closer to 17% rate increases. Would that be a fair-
Steve, can you talk into your mic, please?
Sorry. Okay. The question was, sorry, just on that home premium walk, you've, is that to scale? Is that about a six percentage point boost to your average rate from mix changes? Risk adjusted, is it more like a 17 percentage point change.
I mean, even if it's not perfectly to scale, it's sort of pretty indicative of scale. Yeah, I mean the dynamic is particularly on home, it's the inverse of motor, which is obviously where new business premiums are lower than renewal premiums. Then we also have mix, for example. We've been growing very strongly in Terri Scheer, which has a lower premium than in the mass brands. Yeah, the gap between that written premium and what's going through in terms of the, you know, customer rate increases is there's a fair gap to it. Yeah.
Okay. Fair enough. If I could just ask about inflation in home as well. I think, you know, six months ago you were saying it was low single-digit. Just in the last half, I mean could you just comment on exactly what came through. I mean, just going back to Kieren's question, around 700, the 700 basis points of pressure that you saw on inflation across the group. How much of that was home?
Homes, you know, you'll see on the loss ratio chart, probably another way of sort of talking about it, that the consumer portfolio, the change in loss ratio there for the year was largely driven out of motor. Which means that home was, you know, largely neutral, flat on a loss ratio basis, putting a lot of price through home. You can see that in the GWP numbers. Home was comprised of liability claims and average claims inflate, you know, inflation in working claims, and the cost increase, the claims cost increase in homes is probably split roughly 50/50 between those two components. The working claims costs, inflation in home is still running around. That's low single digits.
Adjusted for mix or, because there's a huge benefit coming on mix as well.
That's mix adjusted, yeah. Mix adjusted, yeah. Yeah.
Right. Okay. Okay, great. Okay, thank you. If I could ask about the statutory long tail classes as well. I think you, in your slide in the investor pack, you show that there's a 0.8% boost to your underlying margins, half on half coming from that. Could you just comment on which of the statutory classes that is? Could you comment on whether you've changed your inflation assumptions?
I mean, the driver on the long tail class at the moment has been the investment yield. Obviously with the investment yield, a lot of it runs through those long tail portfolios, CTP, workers' comp. That's where most of the margin expansion's been coming through.
Right. Okay. there's no price, there doesn't need any price-.
We've had a little bit of price increase in Queensland. There's been, you know, competitive price across all the other schemes, particularly New South Wales and ACT that, you know, has had a largely neutral impact on margin. The key driver to margin on the statutory classes has been yield.
Just to be clear, no change on inflation assumptions, because I think.
No, no change to inflation assumptions, yeah.
They've-
All superimposed, inflation assumptions, yeah.
Okay. Okay, great. Thank you.
Okay. I'll just... Scott.
Morning, everyone. A couple more questions just on motor. It's obviously a big step up in the claims inflation there to double digit from low single digit. I think one of the surprising things as well is that you weren't seeing this 12 months ago. Now that it has arrived, what are the signs that you're seeing that are giving you confidence that this isn't persistent and that it should improve?
I think the obvious one, I think the driver of quite by a significant amount, the most material driver is secondhand car prices, which obviously flow through. We can price to that phenomenon. That's where we get some granularity around offsetting the inflation with pricing. That's one key driver. Our assessment is that that has started, it's gone through the peak and starting to come off now. Again, you're gonna have to form a view as to how quickly it comes off. It could stay reasonably high for a period of time. It could equally, with the monetary policy changes in the economy, come off quicker. As I said, parts prices, I mean, they're through, I think, the peak of their inflationary impact. Availability is freed up.
Repairers have access to, you know, a better supply of parts. Yet the pricing has not yet moved materially thus far. We expect it will, but not yet, availability improve, which is important because that reduces the duration of the claim. The key element that's a bit harder to predict is just this labor supply within repair shops and how that flows through to productivity and allows the repair shops to throughput more vehicles, which means we can get more cars repaired quicker and the duration of the claim shrinks. They're the key, you know, in aggregate, they're the key factors. I think that generally they're heading in the right direction, but the pace at which they disinflate over the second half is a bit hard to be precise around. Jeremy did say.
I mean, nearly half of that increase in average claim size in motor is in that total loss, which is secondhand car prices. I think we can, you know, I think there's a weight of evidence that would say they're starting to peak and come off. That takes time then to roll through, of course, because, you know, most of our portfolio is on agreed value basis. And so that agreed value impact of secondhand car prices takes time to time to come through the renewal process. There's a match between. You know, so from a margin perspective, that's not such a big driver because there's a match between putting the premium increases through the customers on the basis of that increase in agreed value.
You get a sort of a match between the premium and the claims.
Okay. Then if we can also overlay the SMART contract that you alluded to. There was recently some adjustments made to that, but it matures in June 2023. What does the glide path look like between the claims inflation you've just seen and as we go into FY 2024? seems like there's gonna be two step-up changes in motor claims inflation there. The interim and the-
Well, again, it's a bit like the reinsurance renewal. I think we've got good line of sight through all of those dimensions to understand how that contract might evolve over time. Again, just to make the obvious points, it'll be a commercially agreed contractual arrangement, and it will, you know, as you would expect us to try and achieve a negotiation that reflects the volume that we are putting through, you know, SMART. We'll enter that negotiation, obviously in good faith. There's a prescribed requirement under the agreements, how that will happen. We'd like to get onto it as quickly as we can. Again, we can full price that so we can get ahead of the pricing dynamic there, and we'll seek to do that to the extent that that contractual negotiation will unfold over the second half.
I'd also make the point that we're not going from where we were to a new contractual arrangement. We have reflected some of that, obviously, in a temporary, agreed repair cost, contractual arrangement. Again, with incentives in it to encourage more repair. It's not we're going from where we were to a new price. We have incrementally moved along the way. There's a prescribed process. We'll enter it in good faith. We've got a good line of sight to what's going on in the industry because we do have a volume of our repairs being undertaken outside of SMART, both on drive and non-drive.
In fact, given the challenges that we're, you know, we've had in drivable repairs, we have brought on board 2 other repairers all within the construct of our agreements to help fill some of that volume that we've needed to fill. We've got all of the metrics in front of us, and again, to the extent that we see these factors emerging over the next 3-6 months, we'll try and get ahead of them in pricing.
I'll just reiterate the point, Steve, that SMART's 40, 45-ish, you know, 50% of our repairs, but it's 14, 15% of the repair cost. You know, just for context when, because we've sort of, I think, you know, been clear around that percentage of repairs, not so much on the cost. It's a lower percentage of the cost.
It's got the other dimension that I hadn't sort of talked to. I mean, talked a bit about frequency and how that sort of stepped back up, and that obviously goes through the claims line as well. The mix change between drive, non-drive, you know, continues. Generally you've seen that mix change from drive to non-drive continue. What you're seeing is the embedding of technology in vehicles, sensors and the like. It's taking a lot of those small dings in car parks and et cetera out of the repair chain. What you're left with in the repair industry is a bias towards higher average claims cost type activities and a bias to non-drive versus drive.
That's inflating average claims costs, taking a lot of the traditional drive, low average claims cost repairs out of the market.
Okay. Thanks for those comments. Just one other quick question, if I can, on the upcoming reinsurance renewal. I understand that you're monitoring it's uncertain. I'd be interested in your perspective on whether or not the majors such as Suncorp are in a advantageous position relative to perhaps the challengers who are also looking for fresh reinsurance cover this year.
Yeah. Look, well, I'm a firm believer that scale matters if you leverage it well. I'm just conscious of what I say because I think we've got a couple of our.
You've got them sitting next to Julie here, so.
... valued reinsurance partners sitting right beside you there. I know they whispered in your ear and asked for that question. Look, we've got very deep, very strong, incredibly positive relationships with our key reinsurance partners. They understand our business, which is important. We spend a lot of time with them explaining all the things that we're doing on claims management and pricing, risk selection, all the things that we're doing that are embedded in our key insurance initiatives are all monitored very carefully by our reinsurance partners. I think that matters. I think that's important.
I think we value the relationship, and I think, you know, the scale players, if they're managing those relationships well and they're managing their business well, we'll be in a better position than the smaller players who obviously have to buy significantly deeper down to protect their P&L and offset the capital impulse that they draw by lifting their retentions. Okay. Andre, then we'll go to
Can I ask a question on the bank, just to mix things up a little bit? You're being quite cautious looking at the second half on the margins. Help us kind of understand that. Can you talk a little bit more through the NIM waterfall on slide 17? Like, there was some very large moving parts there. Can you just explain a little bit in terms of the product mix? There was a maybe on the 24 basis points lending headwind. Conversely on the 43 bps deposit tailwind, like how much was replicated in portfolio versus the other movements?
Get Jeremy to start, and then we'll bring Clive up. He can sort of give a bit of a prospective view of, a forward-looking view of the second half.
Yeah. I mean, the each of those buckets have got a, you know, a range of categories in them. On the first one, we've got fixed rate, variable rate changes in there. We've got competition on the variable rate book, the front book, back book, discounting. There's a whole range of factors in there, but you could bucket them all into a label of competition on competition on lending. On the deposit side of things, Clive will talk to, but it really comes down to the deposit spread on some of those larger portfolios for us of TDs and growth saver, which we can see have already moderated from where they were during the half.
Anyway, on the replicating portfolio, there's certainly a benefit flowing through in, you know, period-on-period terms. Because of the time period of it's not overly significant impact in those numbers and, you know, yeah, there's some rolling benefit going into the second half, but it's not enough to, by any means, to outweigh those overall dynamics of competition lending, and where we think competition in deposits is gonna go.
Yeah. Absolutely. Just building on that, the biggest drivers looking forward are gonna be those competitive pressures on both sides of the balance sheet. You know, clearly cost of funds rising puts pressure on lending margins, but the competition for new business, especially in a refi-led market, will remain intense, we believe. Deposits, likewise. There is a very, very intense level of competition for deposits, given TFF coming off and the need for banks to refinance a lot of that. We feel we're in a good position, but that is driving a lot of competition on deposits.
Replicating portfolio, sure, as rates are going up, it's a net drag on total margin because it takes a while for that tractor nature to catch up with where rates are at any point in time. That means for the next six months, we expect the replicating portfolio to be a net drag on our NIM. As rates come down, then it'll obviously prop up NIM, which is the design of the replicating portfolio.
Okay. We'll now go to the phones, then we'll come back to you, Brett. Wouldn't wanna leave you, without a question.
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. If you're on speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Dunger from Bank of America. Please go ahead.
Yes. Thank you very much, gentlemen. On the bank again, just sticking to your timeframe around the bank sale, potentially you may have expected the ACCC approvals before June previously. When can you start to look at stranded costs and how is that progressing?
Look, I think obviously we have a very intense focus on our operating expenses, which is reflective of the current inflationary environment. You've seen the outputs that we delivered in the first half. We can get focused on stranded costs today. It's not dependent upon the transaction completing per se. We are working through that. We're understanding what the stranded costs profile might look like under the TSA agreements that we have constructed and will continue to construct, and then what the residual stranded costs will look like. We are, through the second half, we'll put in place a program of work that will address those stranded costs.
We can't do it immediately given the structural nature of some of them, but we will get on with the job of reducing and eliminating the stranded costs, with a plan in front of us over the next couple of months.
Steve, just to reiterate what we, you know, when we said there's no change, we flagged stranded costs of around net around AUD 40 million. We've said that we'll get them out within 3 years post-completion. You know, we're still working through the details around timing, et cetera, but there's no change to that general narrative on them.
Thank you very much.
Your next question comes from Anthony Hoo from CLSA. Please go ahead.
Thank you. Morning, guys. A couple of questions, please. Firstly, just an easy one, just in terms of the exit yield in the insurance funds. Wonder if you can give us or tell us what that is coming out of the half. Second question is just around how you're managing claims costs in the motor portfolio. You know, the Capital SMART agreement only covers 16% of costs. Outside of that, are you able to give us some color in terms of what you're doing to protect you from wider inflation and, you know, perhaps some insight into the pricing mechanism within that? Is it, you know, indexed to inflation or is it independent of inflation, et cetera?
I'll do the first one. The first one, first on the exit yield. The exit yield average yield for the first half was around five. The exit yield at the end of January was around 5.25, and that's the where rates have gone. The exit, the current running yield is just below five. It's sort of bouncing around that around that high 4s, 5s level at the moment. The drivers that you can see on the chart will be where do risk-free rates go, what happens with the CPI print relative to break-even inflation rates, and where do credit spreads go. At the moment, we're just a little bit below five.
Just I'll get Paul up just to quickly talk through the program of work in motor claims to address the inflationary factors.
Yeah, thanks, Steve. A lot of it's been covered. If you look at the big driver, which is average total loss costs, obviously second-hand prices are coming down, so we see relief in that over time. You get to the repair chain capacity. A lot of work's been spent around increasing the capacity. We're doing work with SMA. We've agreed a average repair cost plus an incentive scheme. They're reacting to that. We've also put on other repairers in terms of the drive sites. They'll increase capacity. On the non-drive side, we've put on 21 new repairers. Once again, it'll increase the capacity. Once you increase the capacity, you're shortening the durations.
Within the durations, we've also got people looking at towing costs, hire costs, and how we might optimize that. You then get to the other side of the equation, which is around recoveries and settlements. We're expanding our teams there to actually actively work on accelerating the recoveries and bringing them in. Certainly to help us hit our full year commitments this year, but also set us up for next year. That's pretty much a summary of what we're doing. Quite a lot of activity.
Lisa, do you want to add anything on pricing at all or are you...
I think the pricing in terms of managing for inflation has been fairly well covered with the questions. Maybe one thing, just to add a little bit more color in terms of how we're actively managing the portfolio, and Scott, maybe to your question. I think there's a couple of things. One is there's good clarity in terms of the drivers of what's happening. Then there's really strong collaboration between Paul's team and my team. One of my goals for this year, I'm sure Paul's goal is we have weekly meetings in terms of what we're seeing in the portfolio as well as the actions we're delivering. Many of the actions that Paul's put in place. Also we continue to build capability.
As Jeremy and Steve highlighted, we implemented CAPE for our Mass brands overnight. Now for our consumer portfolio, both home and motor, we've got about 80% coverage through CAPE. Obviously, motor will roll through throughout the year, as well as investing in capability in terms of the best-in-class claims program.
Thanks, Lisa. Next question.
Thank you.
Your next question comes from Matt Ingram from Bloomberg Intelligence. Please go ahead.
Hi all. Thanks for having me on and congrats on a very good result. The first question's around the dividend. You've got a pretty healthy capital surplus even after you've paid the dividend. I just wondered if you could talk us through the rationale for not paying at the upper end. It sort of sends a message that there's either something else coming or you're not as comfortable as you could be. If you could please talk us through that, and then I guess second, also related in a way to dividends, if you could talk us through the discussions that are ongoing with APRA regarding the likelihood of being able to pay out the bank sale proceeds, as you've said you'd like to do.
Look, I think on the dividend, I mean, there's always risk that we have to factor into your stress testing when you go about setting any dividend. Again, I think if you go back through them, a couple of exceptions on the way through over the last decade or so, but by and large, what we seek to do at the half year is to pay out in the midpoint of the range. At the full year, to the extent that we can do it, we true it up to the 80% for the full year. That's been our normal practice. I think for an insurance company, in the middle of hazard season, it makes appropriate sense to have a dividend payout ratio at the midpoint.
Again, if the circumstances of the second half play out as we expect, then we can work our way through the process of truing that up towards the top end of the range. That's, I think, reasonably self-explanatory. There's nothing more sinister about it, I can assure you. It is just our normal practice for this time of the year. Look, you know, I'm not gonna go into the specifics of discussions with regulators by any means, but we've got a very healthy and constructive and supportive dialogue with APRA and the other regulators and the governments around the completion of the transaction, and we'll continue to work through with them. We don't presuppose anything in terms of their consideration of these matters.
We just continue to, you know, prosecute our arguments and articulate our strategic rationale and our particular advices around things like competition law. We'll continue to do that. To the extent that there is a discussion with APRA around the proceeds of any divestment, that will be a matter that we'll engage with them in the second half.
Okay, that's great. Thanks very much.
Your next question comes from Doron Kur from Credit Suisse. Please go ahead.
Margin targets, you know, the 10%-12%, and I know the guidance has been reaffirmed for FY 2023, but just looking out to future years, given the extra risk needed to be taken on, with reinsurance ratios and the higher capital costs from that, wondering if you've had any thoughts as to whether a higher margin to reflect, the higher volatility may be appropriate in the medium term?
Yeah. Thanks, Doron. We've actually done quite a lot of work around that. you know, thinking about that, what we would call the efficient frontier between volatility and return. We've got a pretty robust framework that we can apply to that. Having said that, until we get through the FY 2024 renewal and we understand what the pricing is and understand that risk return, retention trade-off, et cetera, it's hard to be specific around how that might unfold. I mean. We have a framework that is pretty robust. We need to go through the renewal to have a look at it.
I think it's fair to say that, you know, pricing aside, it does look from the 1 January renewals that some of those lower layers of capacity, there is some, there is some risk around those, which also actually goes back to, you know, it's useful as you go through these sort of renewals, and negotiations to make sure that you've got enough capital on the balance sheet to, you know, to be able to go through those negotiations with a degree of flexibility. That's ahead of us. We've got a robust framework, and we've got, you know, as I say, a reasonably robust balance sheet at the same time.
Thank you. Just a quick one. If you can remind us on the portfolio exits, if there's any, what the impact is there going to second half and in the other periods?
Yeah. It should start to be reasonably modest. Most of the impact was, most of the run-off was prior to this half. The premium sitting in the portfolio from those exited portfolios in the first half is getting to be a pretty small number.
Thank you.
All right. We might come back into the room. Brett?
Thanks. Brett Le Mesurier from Perpetual. A couple of questions. Jeremy, You said that net interest margin was going to fall, you thought it would fall back towards the target range this, in this current half?
Yes.
Wouldn't that make it difficult for you to maintain your 50% cost to income ratio in the bank?
On the cost to income ratio, the journey from the 60% to the 49.9%, around half of that's come from balance sheet growth, and we're still expecting to, you know, perform on home lending, albeit system might come off a little bit. There's been an element of it from management of the cost base, there has undoubtedly been an element of it from margins. On the margins, some of that is, you know, the work we've done on margins, and some of it is the rate environment. We do expect, as Clive said, for that, particularly deposit competition to pick up.
I mean, there's many reasons why that's the case, and we can already see that's happened to some extent on, you know, where rates are being offered on TDs and growth savers relative to where they were, during the half. We can already see, some of that competition on deposits happening. We'd expect that to take the NIM back down to, you know, maybe around the midpoint, of the range, and that will put some pressure on the cost to income ratio, as Steve, you know, flagged in the in his outlook comment. We still expect to be able to deliver for the full year a cost to income ratio of around 50%.
You've referred to claims inflation as moderating. Does your current pricing reflect that view?
No. I think I've pointed out a couple of times today that the pace at which it moderates, I think, is the question that we're asking ourselves. secondhand prices in cars, I mean, you can form your own view as to how quickly. It is certainly through the peak in our mind. It's starting to moderate, but how quickly it moderates is another matter. We're holding a pretty conservative position on pricing, holding our prices where they are. There's some things that are coming, particularly reinsurance renewal on the home book and the renegotiation of the drivable repair contracts that are ahead of us, which mean we have a bias to being prudent around the way that we manage price and volume.
Again, without flagging specifics of how we're managing pricing in our book, that's a general high level, answer to the question.
That minus AUD 700 impact that you showed in that chart, that's effectively what you're expecting in your current pricing as well?
Well, I think there's, you know, when you look at most of that coming from motor, we are expecting secondhand car prices to come off. We would expect pricing to come off. In a P&L sense, as I sort of explained before, there's a correlation between the earn of the premium that we've already written for those policies and the higher agreed values that will roll, you know, take a period of time to roll off. You know, as those secondhand car prices come down, there's nearly an automatic indexation to written premium on renewal.
You know, we should expect to see, as secondhand car prices come off, re-reduction in the necessity to keep increasing those agreed values, which should then roll through AWP, and then eventually, when it all rolls through, it'll roll through NEP and claims, over the same sort of time period.
Finally, a question for you, Lisa. You talked about your weekly meetings. What's the lag between your weekly meetings and pricing decisions?
Well, one thing I would say is, I should jump up here. In terms of the weekly meetings, it gives us a good indication. We've now deployed CAPE for motor, which means we can deploy pricing changes very quickly. I think in terms of what you would have seen in terms of if you compare this half to last half, you have seen an acceleration in terms of pricing changes that have gone through the motor portfolio in line with a lot of the trends that we've been seeing. That's been deployed. We've now got a good cadence and a capability and a pricing engine, which means we can deploy them very quickly on an as needs basis.
I'd call it live rather than lag. We got a question. One more, Andre, over here, and then I've got one on the screen here.
Can I ask a question on the New Zealand EQC reform, which you've called out as being, you know, net, not an issue, you know, not materially at Group level. Can you explain a little bit about the move in the past? That seems to be that a NZD 150k increase in terms of the repair, the claims that will go to the EQC. There seems to be, you know, a potential headwind for the second half on the GWP top line. Are you getting some benefits back on the reinsurance cost? You know, this kind of reform where a government body takes some more risk, will this ultimately help you to improve earnings volatility?
Well I can see if Jimmy wants to make any comment on that too. You know, as we sort of model out the EQC, we certainly pass that premium on to on to the government. The net P&L impact, the net margin impact, is, you know, it's not zero, but it's pretty marginally neutral.
We've done quite a bit of work on the breakdown of the premium across New Zealand. If you think about, we separate earthquake premium. A large part of New Zealand, the earthquake risk is quite low, therefore the premium you collect is quite low. The differential between the NZD 150 and the NZD 300, and the savings you would pass through from a premium point of view was quite marginal for the majority of Kiwis. The increase in the levy from a maximum of NZD 300- NZD 480, plus the GST on top of that showed on a net-net basis as a % of premium, that taxes, which is EQC, FSL and GST, increased more than the premium.
On a, on an overall premium basis, I think it went from sort of 40% to sort of 45 roughly as a, as an average makeup. The majority of premiums, and this is something that we socialized. The majority of premiums, as a result of those changes, saw a net increase overall for New Zealanders rather than a net decrease. If that makes sense?
Okay. I'll go to the screen. The question is, can you give us an update on where you're at with your QS considerations? I presume that's quota share, Jeremy?
Yeah. I mean, as we've said reasonably consistently, we'll consider all things from a reinsurance perspective, you know, balance sheet management. They've got to make sense for us economically, in terms of that, you know, access to that capital. We'll work through that process, you know, as part of, or in addition to our renewal for FY 2024. We always put, get a sense around the pricing on quota shares, and we'll go through the same process and see if we can make them work economically. If we can, we'll consider it. If, if we can't, then we're probably unlikely to.
Dougal, you gonna put a dry cleaning bill in?
I spilled my coffee when I saw the cost to income ratio this morning. No divvy. I just try to think about the second half just to confirm the bank earnings in the second half will be in cash earnings, and hence they will be available for distribution in the second half divvy.
Yes.
The only thing not in cash earnings is this other line.
It's-
Which is the bank sale costs.
Correct.
Everything else goes into the divvy.
Yep.
Turning to 2024, assuming the bank sale goes through sometime, will the part period bank earnings be available for distribution for dividends or, like, you know, taken somewhere else? Is the AUD 40 million stranded cost gonna go on the other line or on the other line?
Yeah, I mean, the bank earnings should be available for divvy distribution as part of cash earnings as long as, you know, up to pre-completion, whatever date that is. You know, then available into that 60%-80% dividend mix. On the stranded costs, we'll have those in cash earnings, but there'll be another.
Have to come up with some new questions for Friday. Okay. Anything else in the room? Anything else online? One more on the phone, sorry.
Thank you. Your next question comes from Julian Braganza from Goldman Sachs. Please go ahead.
Hey, guys. Sorry, I think my question was already answered just around the quota share. I think that should be fine to be able to follow. Thanks.
Okay. Some schnapps wouldn't be too bad at the moment, would it really? Okay. Look, thank you everyone for your time and very productive session and again, appreciate those who were able to make it into the room. We will catch up over the next couple of weeks. Thanks all.