Good morning, and welcome, everyone, and thank you for joining us at the rather unfamiliar territory at the back end of the reporting season. I really appreciate everyone's patience as we've juggled IFRS 17, the Australian Competition Tribunal, and Taylor Swift to put us in a position to report today. So for those joining us in the office, I'd ask if you could put your mobile phones on silent. If there's a need to evacuate, please follow the instructions of our team. And as always, I'll begin by acknowledging the traditional owners of the lands upon which we meet, and to pay our respects to all elders, past and present.
So today, Jeremy and I will present our financial results for the first half of FY 2024, and we'll run through the presentation, and we've got other members of the leadership team here to join us for the Q&A session that follows. Now, as usual, I'll start with a brief overview of how we believe long-term value is created at Suncorp. We are a purpose-driven organization. We deliver our purpose through capable, engaged, diverse and innovative people. This, in turn, delivers valued outcomes for our customers and the communities in which they live. The financial outcomes we achieve for all, for our shareholders reflects the sum of us getting all of this right.
So turning to the headline result, at the outset, I would acknowledge that this has been a challenging half for our customers, with cost of living pressures and the devastating weather events towards the end of the last calendar year. Now, I've been on the ground in Far North Queensland and across Southeast, the Southeast of Queensland, attending community forums and meeting with our customers, and I've seen firsthand the great work our teams are doing to support customers in the aftermath of these terrible events. In the half year, the group has delivered net profit after tax of AUD 582 million. This reflects strong growth across the group and positive investment performance from higher running yields and mark-to-market gains. Our New Zealand business has benefited from a relatively benign weather period, with no natural hazard events over the half.
While in Australia, we've managed six significant weather events, which occurred through November and December, and that resulted in around 45,000 claims, an estimated cost of AUD 568 million, and that's AUD 112 million below the allowance for the half year. Based on cash earnings of AUD 660 million, the board has declared an interim, fully franked dividend of AUD 0.34 per share. That's a 1-cent improvement on the prior corresponding period and represents a payout ratio of 65% of cash earnings. Now, on this slide, I've called out some of the key metrics embedded in the result. Our consumer business has achieved gross written premium growth of 12% in home and 18% in motor, with growth in average written premium and customer numbers in both portfolios.
Now, it's pleasing to see the consumer portfolios are performing strongly, particularly given the significant pricing that has been required to address input cost inflation and rising reinsurance costs. In commercial and personal, personal injury, GWP growth was achieved across all portfolios, but it was particularly strong across our commercial portfolio, which was up by 16%. In New Zealand, the GI business has reported premium growth of 20% through pricing uplift to offset the inflationary pressures on claims and, importantly, the increased reinsurance costs that have flowed from the weather events in early calendar year 2023. In the bank, home lending growth, our home lending portfolio delivered modest lending growth of 2.2%, as we deliberately balance growth with margin outcomes in a highly competitive market. We've maintained median application turnaround times, averaging below four days.
Asset quality has remained sound, and the collective provision has remained flat on its June position. The group achieved an underlying ITR of 10.2% for the half, and that's supported by improved investment yields and the ongoing improvements that we're making to the business. Now, as you already know, the first half result has featured prior period strengthening across most of the insurance portfolios. As Jeremy will step you through in a moment, the adjustments in each of the portfolios are individually understandable, given the extent of inflation and supply chain disruption. I do acknowledge, however, that the sum of a number of smaller adjustments has led to a material net strengthening. This is at odds with the benchmark that we, as a management team, set for ourselves, and that is to deliver consistent, clean, no surprises results.
I remain confident that the majority of the adjustments are one-off in nature, and with inflation moderating, we will return to our usual pattern of reserving adequacy in the second half. And lastly, on this slide, it's important to highlight the progress that we've made in finalizing the large number of claims that we received during the FY 2022 events in Australia, which are the subject of current parliamentary review. Pleasingly, in Australia, we've finalized more than 98% of the 124,000 event claims we received in FY 2022, while in New Zealand, we have settled over 90% of the 32,000 claims that we received following the Auckland floods and Cyclone Gabrielle in FY 2023.
Turning now to the sale of the bank, which I'm sure is a key topic of interest to you, and we were pleased with the Australian Competition Tribunal's decision on February 20 to grant merger authorization for the proposed transaction. Now, I don't need to restate the strategic rationale for the transaction to this audience, other than to say the factors we took into account in reaching our decision in July 2022 continue to apply, underscoring the need to work at pace to complete the transaction as soon as possible. Now, this slide outlines the pathway to completion, and then following completion, the indicative timeframe for returning capital.... While the tribunal's positive decision is an important milestone, the transaction is still subject to the amendment of the Metway Merger Act and approval from the federal treasurer under the Financial Sector (Shareholdings) Act.
Subject to all approvals being received, we expect completion to be around the middle of this calendar year. In order to return capital to investors, we need approval from the ATO and from shareholders, and subject to receiving these, our current expectation is that we should be in a position to return capital to shareholders later this calendar year or early next year. With that, let me hand over to Jeremy.
All right. Thanks, Steve, and good morning, everyone. Well, I'd like to start by also acknowledging the very welcome news delivered last Tuesday by the Australian Competition Tribunal. But of course, the focus this morning is gonna be on the first half 2024 results, so let's get into them. We've seen strong top-line growth across general insurance as we priced for inflationary and hazard cost pressures. The composition of our group underlying margin improved, with better consumer margins in Australia, with the price response to higher reinsurance costs in New Zealand still to be earned through, and less reliance on prior year reserve releases. It was also pleasing to see natural hazard costs coming in below the allowance. In banking, we saw industry-wide margin pressures impact on profit.
The group continues to have a strong capital position, with capital held a group of AUD 237 million, supporting a first half dividend of AUD 0.34 per share. Then, of course, these results are the first to be reported under AASB 17, which was effective the 1st of July. I'll now take you through the results in more detail, noting that we've enhanced our presentation to provide additional focus on the general insurance operating divisions, including more detail on underlying profit. The general insurance business delivered an underlying profit of AUD 492 million, slightly below the reported profit of AUD 510 million, and the walk on the slide outlines the difference. Underlying profit increased 28% as the pricing response to inflationary pressures and reinsurance earned through.
GWP growth of just over 16% was across all divisions, and with good growth in our key consumer portfolios, good unit growth. The underlying ITR improved by 20 basis points to 10.2%. But I do note that this allows for a lower prior year reserve release, which we think effectively improves the quality of the underlying margins. And on that note, I'd like to remind you of the growing resilience of our margin targets over the past few years. The underlying ITR target range of 10%-12% now has a more robust natural hazard allowance, less reliance on prior year reserve releases, and a more sustainable level of investment in growth, all included within the targets. I'll now touch on reserves, with the position the same as the ASX released last month.
Prior year reserves were strengthened across most portfolios in the half by a total of AUD 107 million, and that's net of the impact of loss component movements. The strengthening was driven by a combination of a broad series of challenges: higher repair costs in motor, especially in relation to third-party settlements, water damage and large fire claims in home, updated losses across a number of natural hazard events, and historical regulation changes impacting workers' comp in Western Australia. The release in CTP of AUD 24 million was largely driven out of New South Wales, with some superimposed inflation evident in the Queensland scheme. We've now adjusted the expected reserve release in our underlying margins to 70 basis points, thereby reducing reliance on this item in our underlying margin targets.
I note that the release expectation is based on the reserving assumption across the CTP portfolios, and we do not extraordinarily expect to see any net release or strengthening across the other portfolios. For clarity, we do not expect the first half strengthening on the non-CTP portfolios to be reversed in the second half. Movements in the loss component balance relate to improved profitability in the motor portfolio, and in the remaining loss component balance of AUD 44 million, largely relates to Queensland CTP, and we continue to liaise with the regulator on this portfolio. Moving to natural hazards. Our natural hazard costs for the half were below the allowance by AUD 112 million, with a series of events in late November and December.
Pleasingly, while we continued to experience some event activity in January, we remained in line with our allowance for that month, and the natural hazard allowance for the year remains unchanged at AUD 1.36 billion. Following the the two large weather events in New Zealand last year and changes to new to the reinsurer's approach to New Zealand risk, we did put in place high levels of internal reinsurance with New Zealand. These arrangements are P&L neutral and capital efficient at the group level. As expected, following a period of some reset, reinsurance markets appear to have stabilized, as evidenced by the 1 January renewals. We're currently assessing our FY 2025 program, and we'll update you once the renewal has been finalized. Turning to investment performance. Investment income increased significantly across both technical reserves and shareholders' funds in both Australia and New Zealand....
The average underlying yield on tech reserves in Australia was 5.5%, with improved risk-free returns. Our investment managers also continued to deliver a strong performance, and good returns from the inflation-linked bonds also continued, albeit down from previous periods as CPI began to reduce. The average return on shareholders' funds was 8.4%, with higher running yields and strong equity market performance. Finally, on investments, I note that we're not currently expecting any major changes to our investment portfolios. So I'll now take you through the divisional results, starting with consumer in GI. Overall, GWP grew by 15.6%. The home portfolio grew by 12% as we continued to price for the increases in reinsurance costs and inflation.
Unit growth in home of 2.1% was the fastest rate of growth we've seen in at least a decade. Motor GWP increased by over 18%, with premium increases reflecting the persistent inflationary pressure, and unit growth in motor of 2.3% was broadly in line with the prior year. Now, on the topic of inflation, we saw a cost per policy increase of around 7% in home and around 13% in motor. AWP for the half is ahead of these rates by approximately 3% in each portfolio. In home, earned premium is now ahead of the cost per policy increases, as the earn through of the prolonged pricing response begins to catch up.
In motor, it was pleasing to see earned premium in line with cost per policy increases, and we expect the gap between the two to widen as rate continues to earn through and inflation continues to moderate. Turning then to underlying profit for consumer, which was up by over 50%. We're seeing an improved margin on a higher level of premium. The result reflects the dynamics of our prolonged pricing response to escalating inflation and reinsurance costs over the past few years. The increase in working claims was driven by a continuation of inflationary pressures in motor, with constraints across the supply chain and elevated third-party demands. Now, as I said previously, the rate of inflation in motor has already started to moderate this half. Home was impacted by an increase in water claims and fire severity, as well as a higher natural hazard allowance.
Together, these drivers translated into an improvement in the underlying ITR from 3.1%-4.9%. Now, while this margin is an improvement on prior periods, it's not yet at target levels, and we expect further improvements as the premium and claims dynamics continue to emerge. Turning then to commercial and personal injury. Strong top-line growth was again a key feature of the result, with underlying profit up over 20%. GWP increased by 14%, with growth across all portfolios. Tailored lines and workers' comp were especially strong, with increases of 18% and 20% respectively. It was also really pleasing to see our investment in platforms delivering, with growth of 8%, the strongest we've seen in that portfolio for quite some time.
The underlying margin was in line with the PCP, but was impacted by the reduction in the expected prior year reserve release assumption. Now, it's not shown on the page, but I also note the improved result for the managed schemes business as we drive for returns across all of our portfolios. Moving on to New Zealand, t he result was impacted by a significant increase in reinsurance costs following the two large events in early 2023. You can see on the slide that reinsurance and natural hazard costs combined for New Zealand increased by AUD 134 million in the half. Now, this is a very significant increase for our New Zealand business and drove the underlying ISR margin decline of around 5%. The premium response to this saw GWP growth of 20% across the impacted commercial, consumer, and AA portfolios.
We do expect to see margin improvement in the second half as this earns through, noting that it takes 24 months for pricing to be fully reflected. Net incurred claims in New Zealand increased by 11%, which was primarily driven by continued inflation in motor, also with some moderation in the first half. Then the New Zealand life result was broadly in line with the prior period. Turning then to the bank. The decline in profit reflected industry-wide pressure on margins. While we continued to grow in home lending in line with system at 2.2%, the rate of growth slowed as we balanced growth with margin outcomes. Importantly, we continued to maintain a portfolio with good credit quality, which I'll touch on briefly on the next slide.
We've also maintained strong liquidity levels in the bank, with the LCR averaging 140% for the half. Deposits grew 3%, with a continued shift in mix from transaction accounts to term deposits, savings, and offset accounts as customers take advantage of the higher rates. The NIM of 180 basis points in first half was below our target range, as we expected, impacted by intense competition in both lending and particularly term deposit pricing. Importantly, though, we have, however, seen a reduction in both the amount and rate of back book discounting, as well as improved new business mortgage pricing. And we still expect that NIM will be around the bottom of our range for the full year.
Expenses in the bank increased by 5.5%, primarily due to higher technology costs, inflationary pressures, including wages, as well as some depreciation. On the bank's credit quality, it remains well-positioned and strong on all key metrics. I'll give you a couple of examples. 95% of new home lending business was originated at an LVR below 80%. The dynamic LVR of the home lending portfolio is 56%, and the commercial watch lists and arrears remain low. 90+ days past due increased slightly to 62 basis points but remain well within tolerance and at the lower end of longer-term trends. We continue to review and update the economic assumptions underpinning the collective provision. The balance of AUD 190 million remains unchanged, and we consider it to remain prudently set for the environment. Turning to group expenses.
Operating expenses increased by 7%, driven by the planned increased investment in growing the General Insurance businesses and higher bank expenses. Growth-related costs in General Insurance include investment in customer and broker connectivity, the upgrade of core systems, as well as some higher marketing spend. This increased, but appropriate level of investment, is now fully allowed for within our target margins. General Insurance run-the-business expenses were up just 2%, as we offset much of the wage and technology inflation and an increase in system maintenance costs with ongoing productivity savings. This saw the General Insurance operating ratio, expense ratio improve by 60 basis points.
Now, in terms of the outlook, we expect the general insurance expense ratio to remain in line with the first half, and the bank cost to income ratio is also expected to remain in line with the first half, largely reflecting that challenging revenue environment. Regarding bank separation costs, we expect to incur a further AUD 70 million post-tax in the second half, with a remainder in FY 2025. I'd also like to give an update on bank stranded costs, and we now expect to have dealt with the majority of the previously flagged day one stranded costs of AUD 40 million per annum as we go into completion. Finally, then, onto capital. The capital position at December 31 remains strong, with CET1 held a group of AUD 237 million. Now, I've set out on the chart the usual capital waterfall.
I'd like to make a few points on it. Firstly, the capital held at group is after allowing for an improved group CET1 ratio of 1.22 times PCA, which we think compares pretty favorably to peers, as you can see on the slide. Capital usage, you can see in the general insurance business, was largely driven by growth and inflation, with a higher insurance risk charge for larger outstanding claims and unearned premium balances. And lastly, you'll see on the chart that there are two offsetting capital impacts of around AUD 100 million each, the left-hand of the waterfall. One relating to the AASB 17 transition, as previously flagged, and in the bank transaction costs incurred in the first half. We continue to manage our capital position prudently, given the environment.
As Steve said, the interim dividend of AUD 0.34 per share is up on the first half of 2023, which included the benefit of BI reserve releases. Regarding the expected bank sale proceeds, we still expect the net proceeds to be materially unchanged at around AUD 4.1 billion. We also remain committed to returning these proceeds to shareholders, subject to the capital needs of the business at the time. The majority of the return is likely to be in the form of a return of capital and associated share consolidation, and the timing of the return will depend on a number of factors, as Steve outlined, and is expected to be later in calendar year 2024 or early calendar year 2025. With that, I'll now hand back to Steve.
Well, thank you, Jeremy, and before we finish, I did want to briefly talk to the issue of insurance affordability. It's a privilege that's afforded to me, as a leader in the insurance industry, to meet with customers at their most vulnerable following a life-changing event, and then be able to return some months later and hand back the keys to their home. Now, during these visits, the conversation is all about the value of insurance, not about the cost of insurance. It's therefore in everyone's interest that we have a viable insurance industry, and that we collectively find ways to ensure that all of our citizens have access to the sorts of covers they need to provide them with peace of mind. But the issue of insurance affordability cannot be solved by any one party alone.
Now, on this slide, I have provided a five-year time series across natural hazard claims numbers, which are the top left of the slide, gross natural hazard claims costs at the top right of the slide, and their consequent impact on allowances and reinsurance costs. These are the stacked yellow and green bars, respectively. I've also included here the dollar value cost per policy for home and motor over the past two years, reflecting the elevated level of inflation across both portfolios. Now, all this data relates to Suncorp, but I expect the trends would be similar for other insurers. If you look at the top left-hand side, over my 20 years at Suncorp, I've always come to believe that around 100,000 claims per year, and natural hazard claims for a year is a bad year.
You can see that we've hit five years where we've been ahead of that level, and sometimes comfortably ahead of that level. On the top right-hand side of the slide, you can see that the aggregate gross natural hazard costs over the past five years for Suncorp alone to today are around AUD 10 billion. The bottom left of the slide, you can see that the cost of natural hazards and reinsurance, which are material inputs into pricing and insurance, have increased by AUD 1 billion. That's 54%.... On the bottom right of the slide, you can see the cost per policy over the last two years for home and motor has increased substantially.
Put simply, the impacts of climate change, a reassessment of Australia and New Zealand risk by our global insurance partners, the planning mistakes of the past, and now inflation, have converged to put the upward pressure on insurance pricing that we are currently experiencing. So having identified the problem, how do we go about solving it? In our view, the best way of reducing the price is to reduce the risk. Now, this next slide picks up our four-point plan to address natural hazard resilience. It's been part of our presentations for the past four years, and includes improved public infrastructure, subsidies to improve private dwellings, an overhaul of planning laws, and a national tax reform agenda to remove inefficient taxes and charges from insurance products. I will spend a moment on the last point, because it does tend to get lost in the affordability debate.
On this slide, I've included excerpts from our soon-to-be-published 2023 Tax Transparency Report. Not a widely read document, but a good document nonetheless. What it shows is that Suncorp alone collects over AUD 1 billion in insurance duties and levies across Australia and New Zealand. On top of that, we collect over AUD 300 million in net GST on behalf of the Australian and New Zealand governments. Now, I make the point that these taxes and levies are calculated off the base premium, so they are growing proportionally to the increased assessment of risk. In effect, it's a double hit for those unfortunate enough to have built or purchased a home in an area that proper planning laws should never have allowed homes to be built in. Now, solving these problems should not sit with government alone. Insurers have a huge role to play.
We need to continually modernize our approach to underwriting, to product design, to claims management, and we need to be as efficient as possible with our own operating expenses. This is at the heart of our strategic decision to sell the bank, and it's the centerpiece of our FY 2024-2026 strategy, which I've captured on this next slide. At the top, as you know, simplification has been the overarching theme of the Suncorp story over the past five years. The sale of the bank will allow a singular focus on improving the way we deliver insurance products across Australia and New Zealand. Our FY 2024-2026 plan will further enhance our core capabilities through investments in a market-leading platform across pricing, data, policy administration, claims, and enterprise.
We can do all of this without compromising shareholder returns, because we have been disciplined in the way that we have simplified the group, remediated underperforming portfolios, and by leveraging our operational transformation program. Automation, digitization, and the emergence of integrated AI are creating the headroom for us to invest for the long term, in turn, driving growth and creating sustainable customer and shareholder value. Of course, we'll provide further details of our FY 2024-2026 plan as we move to the completion of the bank sale process. Finally, to the outlook for the remainder of 2024, where I will reiterate most of our guidance. GWP growth is now expected to be in the low to mid-teens for FY 2024, as we price for natural hazard and increased input costs.
An underlying ITR around the midpoint of the 10%-12% range remains the target, as premium increases earn through and as inflation moderates. Investment yields are expected to moderate as the market adjusts its expectations for interest rates. Prior year reserve releases in the CTP portfolio are expected to be around 0.7% of group net insurance revenue. Releases in the other portfolios are expected to be neutral in the second half of 2024. In the bank, we continue to target home lending growth in line with system. Competition in both lending and deposits is keeping net interest margin under pressure, and we expect the FY 2024 NIM to be around the bottom of the 1.85%-1.95% range. Given the margin pressures and slowing credit growth, the bank's cost-to-income ratio is expected to be in line with the first half 2024 result.
At the group level, we continue to target a cash return on equity above the through-the-cycle cost of equity. Alongside our target payout ratio of 60%-80% of cash earnings, we remain committed to returning any capital to shareholders that is in excess of the needs of the business. And so with that, let's move to questions. We'll start in the room. Start with Scotty here and move...
Morning, all. Scott Russell at UBS. Can I start with a question about the sustainable margins by division? You've given some really nice disclosure there, breaking out underlying margins across your three GI divisions. And I'd just like to confirm with you that you're running the three divisions within the swim lanes, the 10%-12%. In the first half, New Zealand fell below the 10%, which was a bit of a surprise to some. Consumer, I think you said, you've still got a ways to go. Commercial's still sitting up in the teens, but relies more on reserve releases, which I think you're guiding them down. So just be interested in some comments for each of the three divisions, how you see them fitting into the 10%-12% over the next few years?
I might give you a more contemporary, up-to-date view of how the portfolios, and I'll get Jeremy to talk through. And I've previously gone through this build, bottom-up build that gets you to the 10%-12%. So broadly, home insurance, which we think should be delivering margins of between 11% and 13%. Motor insurance, given the highly competitive nature of it, given the lower capital consumption that's embedded in that portfolio, margins are sort of 7%-8% we think is acceptable, and that translate to it, translates to a sufficient return on capital. Commercial, in the 11%-13% range as well, in terms of our, our expectations. CTP, 11%-13%, would be our long-term view of what CTP margins should look like.
And then New Zealand, obviously, should be ahead of that, 15% +. And of course, there's always an emerging discussion in New Zealand, which we have had earthquake risk embedded in that margin assumption. Now, we've seen significant weather events around, the North Island of New Zealand, which we'll continue to refine that. So that, when you put it all into the mixer, sort of comes to margins of between 10%-12% for the group. Jeremy, do you want to talk where we are today?
Yeah, I'll just add to that, Steve, that when we think about the margins by portfolio, it'll get driven in part off the capital consumptiveness of each of the portfolios, and also the volatility, relative volatility of each of those portfolios. So those are a couple of things that we bring into, you know, back from the return on equity. They all have a similar return on equity, but back through to the margin, the margin targets. In terms of where we're at, in consumer, as I said, we're not quite at our target levels for consumer. So home's actually not too bad, but motor's not where we want it to be. But we can see motor accelerating quite swiftly into the swim lane in the second half.
We can see that through the premium momentum that is effectively already, you know, in the system in terms of what's got to earn through. And then we've seen, as you can see on the chart I showed on repair cost part of motor inflation, we can see that, inflation in motor starting to moderate as well. So that will drive the improvement motor back into swim lanes in the second half. We're probably getting a little bit... You know, we're getting good margin at the moment out of the commercial portfolios. And New Zealand is also off the pace a bit in terms of where we want it to be within those swim lanes at the moment.
With New Zealand, the one thing to remember is, as I flagged, we've got elevated levels of internal reinsurance with New Zealand now. And you'll see in the analyst pack that there's actually an internal reinsurance column. So we have New Zealand, which has got the internal reinsurance in it, and then there's an internal reinsurance column, which is effectively the contra side for the group. And so you've got to think about that in the context of that margin outcome as well.
Can I just pick up on, on New Zealand, given the underlying ITR did fall sub 10%, yet you've upheld the, the guidance for the group, so clearly looking for a step up there in the near term, and your comments around the claims moderation, claims moderating in New Zealand. Perhaps you'd give a bit more granularity around that, the sort of persistence of bottlenecks in the, maybe the New Zealand motor book that's driven down that, that ITR.
So just to be clear, the New Zealand ITR was driven down by, by the reinsurance cost, that, that AUD 130 million increase in reinsurance natural hazard costs in New Zealand, which impacts day one and then needs to get priced through. So that 20% GWP we're seeing in New Zealand will earn through. Tends to take 18-24 months to, to get fully reflected. That's going to be the key driver to margin improvement in New Zealand. We saw motor inflation in New Zealand was 11%, which is sort of roughly in line with where the net number was, in Australia. So in fact, New Zealand's probably motor inflation in New Zealand's probably moderated a little bit quicker than it has in Australia.
So the driver in New Zealand is the reinsurance, and it'll be the pricing against that reinsurance to earn through over the next few halves.
Can I just ask one more sort of bigger picture question?
Yeah.
- about the Aussie consumer book? You talk about the affordability challenges, Steve. Perhaps, and given that your unit volumes are actually quite strong in the half, I'd be interested in observations around customers taking on excesses, higher excesses at this point.
Yeah, I think we've been somewhat surprised over most recent history that we haven't seen those excesses move. We anticipate they will, and they are starting to. I think the average excess across the book, home insurance book now is a bit over AUD 1,000, but certainly hasn't been moving at the same pace that written premium has been increasing. And I suspect over the next little while, consumers will start to look at excesses as being a means by which they can adjust the headline premium they receive. It's not overly surprising to us, because if you think about insurance as an ecosystem, you know, the reinsurers have been passing risk to us as a primary insurer, and that's reflected in higher attachment points.
So we're taking on more risk, and some of that ultimately will be, will be passed to consumers. So, I think that dynamic is, is working through. I think generally, the other thing to think about, both the home and motor books, is we have put, a new pricing engine out in those books over the last two years. First, into home and then into motor. And, and that has been... It's a very contemporary pricing engine. I think that's been, helping us get more gran- certainly has been helping us get more granular around risk selection. And so while you might have seen a small drop in retention, as you would expect in this environment anyway, we're getting more of our better class of risk in, in both the home and, and motor books.
So, look, I don't step back from the affordability challenge. I don't step back from the need for us as an insurer, alongside the rest of the industry, to get more innovative around product design, and get more contemporary in the way we think about the challenges of insurance affordability. But at the moment, I think, you know, the book, the business, and the portfolios are holding up quite, quite well.
Dougal?
Thanks, Steve. First of all, I think if I heard Jeremy right, you've dealt with the stranded cost prior to completion, so congratulations. That's no mean feat, and frankly, affording me an upgrade to my numbers. Two questions. Justo back on this New Zealand reinsurance.... Again, Jeremy, so it's profit useful to the group. So who, who benefits from the contract? Is it being taken through leases? Is it being taken through commercial? Is it being taken through a head office? Who, who's-
There's a line in the detailed P&L that's got internal reinsurance in it. So you take New Zealand, which has effectively got the reinsurance premium cost, if you like, and then this internal reinsurance contract, which sits between New Zealand and the group, has the premium in it. So it's not—we, we haven't put it into Lisa's or Michael's P&L. It sits separately at a group account, if you like.
Page 14? Thanks, Neil.
Yeah.
And then, sorry, Jeremy, a question I've asked about three periods in a row now. The bank earnings second half, how will they be treated in terms of the, of the second half divvy?
Yes, so we will factor those into the divvy, so it'll be, you know, usual payout ratio of 60%-80% on the group Cash Earnings.
Okay. All right.
Good morning. Can I ask my first question just around the volume versus margin management? Like, this looked to be a particularly strong half. You've got you had, you know, record levels of both price increases and unit growth, and some of your competitors, I think, struggled to deliver that combination. You know, so what is allowing you to, yeah, drive, you know, good volume and margin outcomes? Like, what combination of internal and external factors are helping you to drive that?
Well, I think I mentioned CAPE, which is our new pricing engine. That's. That was a priority investment for us, and I think it's certainly helping us manage this transition quite effectively. I think our multi-brand strategy is helpful, and so we've obviously got AAMI running as a national mass market brand, and we've got our niche brands, Shannons, particularly, performing incredibly strongly. Suncorp and GIO, the regional champions, and the other niche brands, I think, continuing to allow us to address the market in different ways across different states and geographies, and through different customer segmentation approaches. So I think that's probably been the major halt. Maybe, Lisa, if you want to come up and add anything to that?
Good morning. So if we go back when, under Steve's leadership, we reset the strategy, there were a couple of key pillars that helped us in the certainly the current environment. So as Steve touched on reinvigorating the brands, so the multi-brands, we uplifted our marketing, both performance marketing, but our investment in the brands. Also, investing in pricing and risk selection, so the delivery of CAPE. And thirdly, I'll touch on digital. So you would've seen in the pack, we've continued to increase our digital sales, which is certainly something our customers want, but helping us in this current environment.
Thank you. My second question, just around the reserve top ups, just noting there was a Flexi Hose ruling by, I think, AFCA versus Suncorp recently. Was that a, you know, substantial contributor to some of the reserve top ups during the half?
Yes. Tomo, welcome back.
Thanks. Good to be here. On the bank, your main guidance seems a bit ambitious, given current market conditions. You know, if you're going to grow the mortgage book around market, are you going to become less competitive on deposits in order to hit that margin target?
So on the margin, just to be clear on what we've said, which is around the bottom of the range. So it doesn't necessarily mean it's gonna be at or above, it's around the bottom of the range. We do expect to see some improvement in margin in the second half from the first half. And that'll be driven out of two things. One will be the benefit of the replicating rate portfolio come through as the higher rates roll on into the earnings. And the second one is just reflecting that dynamic I spoke about, which is we are seeing less volume and less rate discounting on back book, which means that that impact on margin will be less. And we're seeing improved new business mortgage pricing.
So it's a combination of those two things, which we'll see some improvement in the second half.
Great. And then, thinking about the insurance division, where you've got that new disclosure, you've obviously got a lot of goodwill from the Promina acquisition, and are you likely to break up that goodwill by your divisions now under that new disclosure?
Yes. We have to break it up across consumer and commercial. Yeah.
Okay. Well, if that's the case, given the margins you're making in consumer, how much headroom have you got before you potentially need to write down goodwill for consumer?
Yeah, we don't see. I won't say any, 'cause you can never say any, but we don't – that's not a risk that we're considering at the moment. In terms of the allocation of that goodwill, that's something we'll do for the full-year accounts.
And then, there's been a little bit of discussion about the pricing engine. Your major domestic competitor flagged that they were adopting the Earnix pricing engine at their result, a week and a bit ago. Do you anticipate that that could act as a headwind to sort of your strong growth?
I don't think so, Mark. I think... I don't know what they, what version of Earnix or what form that's gonna take, but, we've got it in. It's working. You can see it's working well. And, you know, I think, we'll leave them to implement what they need to, to put theirs in place.
Okay. Thanks.
Bruce, did you want to add anything to the bank briefly? I just introduced Bruce. I don't think many of you will know him, but-
Thanks.
He seamlessly stepped into the bank CEO, CEO role, been with Suncorp for almost a decade, so very familiar with all the challenges.
Thanks. Thanks, Steve. Morning. I think J.R. covered the NIM point. The only add I would have is service proposition is important. So we spoke about turnaround times. That in turn means that as we think about pricing, we don't have to lead on price to continue to get that volume coming through.
Thanks. Any other questions in the room?
Morning. Anthony Hu at CLSA. Firstly, can I just ask about the motor portfolio? You've talked about claims inflation, which has been moderating, and then on slide 13, you also talk about your premium still expected to increase in the second half. Just wondering if you can talk a bit more about the outlook for that in terms of, you know, if the moderation as that chart shows in repair costs is coming down quite, you know, relatively quickly. What... You know, are you still expecting to be able to raise prices into FY 2025? What's your outlook there?
The situation in motor's been incredibly challenging for the whole industry, and it's been quite unusual. There's been many factors that have gone into inflation, as you would define it in motor, whether it be, you know, availability of parts, parts supply chains, the embedment of technology in vehicles, making average repair costs higher. But the biggest issue has been the availability and supply of repair services. It's very difficult when you've furloughed a whole industry for a couple of years that relies on apprenticeships and training and migration to be able to turn itself back on quickly. So, what we're flagging is, some of those factors are starting to moderate. There's still supply constraints in repair, but they're nowhere near as acute as they were six to twelve months ago. They're improving.
Availability of secondhand car prices, availability of new cars is improving as well. So we have seen some moderation in the inflation. We expect it to still be elevated through the second half relative to its normal run rate. And it's a very competitive portfolio, so we do need to watch very carefully our pricing relative to the industry pricing. We do that, you know, very regularly. We look at shadow shopping. We understand what others are pricing. We look at our renewal rates, our retention rates, book retention. A whole range of factors we look at to make sure that we remain competitive in the market, and it'll be a dynamic pricing environment for the next 12 months.
Thanks. And just a second question around your hazards allowance. You know, your costs are quite significantly below allowance in the first half, but the full year allowance has been maintained, which implies, you know, you're allowing yourself quite a bit of headroom in the second half, almost AUD 800 million. Is it just out of caution or, you know, is there anything you can talk about that's driving that cautious bit that caution?
What's that saying? This is not our first rodeo or something like that? Generally to make the point, this is probably the first time in a decade maybe that we have come in under the allowance at the half year. But those of you who've been in Suncorp presentations for a number of years will know that the minute you claim victory around the allowance, you can expect a thunderstorm warning to happen straight after. So look, we are conservative. We think the full year allowance is well constructed. It's doubled over the past five or six years. It's got significantly more assumptions based around recent experience. So we just touch wood and keep managing it as conservatively as we can through to the full year.
I mean, yeah, there's, there's been no, there's been no logic for it to change over the full year. Is there? Yeah, short.
I mean, we went into this year with high hopes of a very dry environment under the El Niño weather system, and well, December proved a lot of that wrong, so we just continue to be conservative. Michelle?
Thank you.
Hi, Steve. Since you went to the trouble of putting together the long range history, what's happened in the past five years, are you able to comment on whether you think that might happen going forwards with the mitigation you're trying to do against those costs?
Yeah, I think very difficult to predict. The work that we've done, which is sort of 60 years of bureau data, points to a general uptick in, in frequency and severity of the broad category of perils, the sort of seven perils that are in the, you know, what we describe as natural hazards. Some are moving at a faster pace than others, bushfire. Some geographies are moving at different pace. But what we see is a very high correlation between the weather pattern, the weather system that we're in, and natural hazard claims costs. So, you know, understandably, when you're in a La Niña weather pattern, you would expect to be, you know, above average in terms of your natural hazards costs. And three of those years that we plot in that graph are La Niña weather patterns.
So that's generally the way we think about it. We think the allowance is signif- well, certainly significantly more robust than it's been in the past. As I mentioned, it takes back, it picks up most of those years of experience in terms of the go-forward assumptions, so it's biased to a La Niña weather pattern. But just exactly what happens in the future, I mean, it's very difficult to predict. Okay, let's 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. If you're on a speakerphone, please pick up the handset to ask your question. Your first phone question comes from Julian Braganza with Goldman Sachs. Please go ahead.
Good morning, guys. Can you hear me clearly?
Got you, Julian. Yep.
Okay, perfect. My first question is just on the, just the volume growth that you got over the period, which is certainly very, very strong there. Just in particular, just around home insurance, just wanted to understand how much of that was, I guess, driven by a step change there in pricing, which appears to be quite material. And I guess in that context, how does it compare with peers? And then two, really just around, you know, your view around the sustainability of those volume growth, the volume growth that you've achieved over the medium term. Just, just, just any color around that.
I'll get Jeremy to fill in the gaps, but it's good, but it is just over 2%, so it's not... It's welcome, and I think reflects, you know, the good work that the new pricing engine has been allowed us to deliver, but also the strength of the brands, that we've been able to sustain that level of growth in an upward trajectory in terms of pricing.
Yeah, I'll just add that, I mean, Steve spoke about the, niche brands. Terry Scheer is another one that's performed very strongly for us as well, particularly in that unit growth, unit growth area. I'll just go back to your point around the, the reference to the, the premium, the AWP trend that is down half on half. But that's not a trend down in terms of we're reducing our, pricing, renewal pricing to customers. In fact, it's been - remains elevated over the half. The key driver there was the impact of the, Cyclone Reinsurance Pool, which, had the impact of reducing premiums by something like 2%-3%. So that's not a, headline, you know, renewal rate per se. It's more reflecting the, Cyclone Reinsurance Pool.
Okay, great. No, thanks for that, clarification. In terms of just the rate increases from here and the trajectory, obviously, you're saying that the earn through of the rate increases now at or ahead of claims inflation. You're sort of saying, well, second half margins for motor will now be within swim lanes. Home, thereabout. So just wondering, in terms of the longevity of the rate increases, you're sort of saying it's still holding strong. Just expectations from here and when that will start to come off in your view?
I'll get Jeremy to go in a bit more detail, but, you know, we, we are very minded to input cost inflation. One of the big factors that will drive a lot of that trajectory will be our reinsurance renewal on the 30th of June, the July 1 renewals. I think if you look through the 1/1 renewals, generally, there's a constructive tone to that. Our assessment is that, from the global reinsurers, the attachment points are there or thereabouts. They're not materially gonna go through another step change as they did last year, and the pricing adequacy is broadly okay. That's what we're being told.
So I'd expect that to be a constructive renewal, but very much the input costs will be very much dictated by that renewal and what the impact on the portfolio is, and then what happens in the broader inflationary environment. Inflation in insurance is slightly different to the broader CPI bucket. You can see that inflation sort of starting to stand out in terms of the CPI print now, so it is not perfectly aligned to CPI. So there's a number of supply chain factors that influence that. So our pricing will be reflective of what we're seeing in terms of input costs largely, and we'll keep a very close eye on them.
Yeah, I'll just add that, as I said, on both those portfolios now, the written premium is running ahead of cost per policy. But just to remember that that hasn't always been the case, and there's a catch-up element to this that needs to come through to get margins back to where we, we want them to be. Home, the earned premium is now better than the cost per policy, and we expect that to... Actually, earn is gonna be better than the AWP, and we expect that to be the case for a couple of halves. And motor, the earned is in line with the written, and we expect that to accelerate so that there's a bit of gap there, and that should be for a couple of halves as well.
It's really, it's, you know, catch up to get margins back into the target ranges.
Okay, thanks. Just so then lastly, just the last question, I guess twofold: No change to your, to your, I guess, your... You previously provided sort of verbal comments on FY 2025. No change in terms of margins, into that period, sort of in the upper end of the 10%-12%. And then secondly, just on reserve, reserve releases, is that, that's still the expectation for that to moderate into next year as well? Is that how you're thinking about it?
Yeah, I don't think we've given any guidance on FY 2025, other than, you know, just to say we'd still expect to be in the 10%-12% range. And in our prior reserve releases, so we have moderated this year from 1.5% down to 70 basis points now. Just to reiterate, we actually think that's a good thing. It means that what we're seeing in the underlying margins is now less reliance on prior reserve releases, and yeah, maybe that continues to moderate. But the important thing is we will manage whatever prior reserve releases moderate to, we will manage it within our underlying ITR target swim lanes.
Great. Thanks so much for that, guys.
Next question on the phones?
Thank you. Your next question comes from Kieran Chidgey with Jarden. Please go ahead.
Good morning, guys. I've got a couple of questions. I'll ask them separately, but just starting where the last question finished off on the underlying margin basis, noting that change in the reserve release assumption from 1.5 down to 70 basis points. So, you know, it does imply, sort of, if you hadn't have made that change, you'd be probably tracking closer to 11.8% to the full year underlying, rather than the 11% midpoint you're currently on trajectory for. So just wondering what else, sort of has gone better than you envisaged back in August across sort of the rest of the book?
Well, I think that the important thing is you remember when we did the full year results, we said that we expected prior reserve releases to moderate, so we didn't expect them to be 1.5% for FY 2024 to start with. So we'd already expected them to moderate. I think at the time we said, down to 1%, so it's 1% down to the 70 points, not down to the... From 1.5 down to 70. And then across the rest of the book, there's just been, you know, lots of moving parts across the various other components, which haven't been overly significant in net.
Yeah, and Kieran, I mean, you can certainly look at a point in time around what it might have been if we hadn't have done the reserve release piece. But, what we're trying to do here, and we've been trying to do it over the last four or five years, is to really build strength into that underlying margin. So, you know, obviously, it's based off a significantly more robust natural hazard allowance. It's got a lower reliance on reserve releases, and it includes an appropriate level of investment in the business.
I think what you can see in this result, and in the last one, to some extent, is that when we have to reset the business for either a higher level of of reinsurance costs or natural hazard allowance, we've been able to do that within the 10%-12% range. This 10%-12% range that we publish now, in terms of underlying margin, is incredibly robust and certainly more robust than it's been in the past.
Yep. And just sort of related to that, the reserve release assumption at 0.7%, which is still being driven by CTP, it does seem a little at odds with the AUD 44 million loss component provision, which you've flagged is also largely in regards to CTP. So just wondering if you can sort of unpack the, the difference there and sort of comment on, you know, your confidence in the sustainability of that, that release assumption into 2025 and beyond.
Yeah, I mean, it's. There's a bit of the vagaries of accounting there, Kieran, in the sense that they're different, they're different numbers. They're two sides of the one coin. So the loss component, the onerous contract loss component, is based off an assessment of what the claims liability is relative to the premium, but including a risk margin. So obviously, we don't price the product at a 75th percentile risk margin, we price it at 50th percentile. That's the onerous contract piece. And then the reserve release is around the level of reserving that we put on the balance sheet in the past.
For CTP, New South Wales, Queensland, probably to a lesser extent, the assumptions, as you know, have been relatively prudent over a long period of time, and it's that element that then we expect to get released. But with scheme reform, that has reduced that level of conservatism within the reserving, by necessity, and with the relative growth in the consumer portfolios, that prior reserve release expectation, as a percentage of, of NEP or net insurance revenue, will naturally come down over time, and that's what we're, that's what we're, building for.
Okay. But it's not at risk also in Queensland as a result of picking up perhaps a lower quality or less profitable mix with RACQ's exit?
No, because I mean, effectively what we've done is we've added in the RACQ portfolio at what we consider to be an appropriate reserving amount. That hasn't impacted on the residual reserves across our existing Queensland CTP portfolio or, of course, any of the other CTP portfolios.
I mean, Kieran, we do have—we're having constructive discussions with the Queensland Government around the CTP scheme. Clearly, when the scheme comes down to three players, and one player, that's us, has more than 50% and is on a trajectory to 60% of the scheme, that's not the best outcome for public policy, not the best outcome for the scheme, and probably not the best outcome for Suncorp either. So, we are stepping up our engagement with the government and the regulator around the scheme performance, and we're having very constructive discussions with them at the moment.
All right, thanks. So just a final question on some of the motor inflation call-outs you gave on slide 13. I'm not 100% sure if I'm interpreting this correctly, but you talk about 11% repair inflation in the six months to December. I would've thought on top of that, that total, total loss costs could have even been deflationary with, with lower secondhand car prices. So just seems a little bit at odds with the 13% overall cost inflation you've talked about for motor in the period. Just wondering if you can sort of unpack that and also talk about what, what you're seeing early into this period?
Yeah, I mean, what we've shown on the slide there, slide 13, on the left-hand side is motor repair cost, and repair costs are about, repair costs are probably about 50% of total repair costs. There's a big chunk of repair costs that sit in total loss. So the chart on the left-hand side is a component of motor cost per policy. Also in the cost per policy is expenses, natural hazards, et cetera. So the left-hand side is just a segment, just to give you an indication of where we see inflation moderating. But if we look at what's driven that 13% cost per policy average increase in the first half, the actual gross increase in claims costs is closer to 20%.
That 20%, in part, it's with repair costs, in part it's with total loss costs. A really big driver to it actually has been third-party settlements, third-party settlements and hire car costs. Third-party settlements, because I guess other repairers are seeing a lot of pressure on their supply chain inflation costs and hire car costs, because we've had delays, you know, in in repair. We've had backlogs in repair through COVID, and we've had higher, therefore, higher hire car days and hire car costs.
All right. Thank you. Those third-party settlements, are they typically account for around 20% of your motor costs?
Correct. Yeah, and then offset by receipts. Third party is about 15%, receipts are about 20%, so they, they roughly net off.
Okay. All right, thank you.
Thank you. Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Hi, guys. Just focusing again back on motor inflation. I mean, obviously, you're saying it'll still be elevated second half. So the point we're at, 30th of June 2024, I mean, do you think that's a stopping point en route to more normal levels of inflation? And is that the same normal as it was before, or is that gonna be elevated compared to the old norm?
Yeah, I think, Nigel, what we've called out with motor inflation is a sticky element to it. So because it's around some of that repair supply chain, getting capacity back into repair shops, it's not something that the industry can fix overnight, and so we're seeing a gradual improvement in that. We are seeing, you know, some of this geopolitical tension, Middle East shipping, et cetera, is starting to impact on things like part shipping prices. So it's a bit hard to predict where we'll get to in June 2024. But I suspect we won't be back to our long-term normal motor inflation rates by June 2024. I suspect there'll be a little bit of more stickiness to it than that. Maybe take a look.
I think the only other point, Nigel, is that we are building redundancy into our supply chain for repairs. So, Lisa's led a program of work to diversify, particularly at the drive element, with some new providers in there so that we can, you know, bring some additional capacity into the network. Now, unfortunately, up until the last sort of six months, most of that additional labor that's gone into the repair network has come from another part of the repair network. What we're now starting to see is some incremental improvements in labor availability in repair shops. So, I mean, that is starting to free up the process, but it's a long ... it's not solved overnight.
It probably, I think, will take another sort of 12 months to get, you know, the labor where it really needs to be to create that environment in our downstream suppliers, to make a, you know, a real impact.
All right. Okay, so it'll take some time, but you still think the long-term norm is achievable? You know, there's no sort of fear that, you know, the cost to repair has simply gone up, and we've seen a structural change?
You certainly-
Yeah.
You certainly see a structural change in so much as the nature of repair. So if you think about a bumper bar, repairing a bumper bar today is materially different than repairing a bumper bar 10 years ago. It's got a lot more technology embedded in it. So that, that, that element is changing. But by and large, over time, that should lead to a reduction in frequency. The cars that are more technologically equipped, you know, with sensors and the like, should have less accidents. And so while you see the average repair costs go up, you see frequency come down, and over time, they should offset themselves. Look, I, it's hard to see where it, where it finally settles.
There's no reason why, in the fullness of time, it shouldn't settle back to where it was before, but just the pace at which it gets to that level, I think, is pretty hard to predict.
Okay. The impact of agreed value policies on yours, which was a differentiator before, is that sort of now washed through or?
Agreed value.
Yeah, so I mean, we do have more in the space of agreed value, and that, that obviously takes longer to roll through the portfolio. But, you know, in terms of normalization, for example, we're starting to see the depreciation of the portfolio of that agreed value portfolio roll back to more, not quite normal, but more normal levels. But so that is a driver, yeah.
Yeah. Okay. moving on, but back to the sort of, 0.7% long-term reserve assumption versus I think you were saying, you know, full year, last year, around 1%. Is the main driver of that just to build more resilience in the underlying margin, or is there actually a genuine sort of change in trend that you've observed over the last six months that's caused you to move from around 1 to 0.7?
I mean, the broader trends I think have been there for a period of time. I mean, I think, you know, the long tail schemes, by and large, are moving to a more defined benefit type approach, which obviously reduces the volume of reserves and puts more certainty into the schemes. I think just the weight of growth that we've seen in our short tail portfolios relative to the long tail portfolios is driving. That's been a sort of a three to five-year phenomenon.... It is fundamentally our view that it would not make a huge amount of sense if we were to publish an underlying margin with a 1.5% adjustment for reserve releases.
I don't think we'd get much credit for that, so it is building more redundancy into the margin. But in terms of the last twelve months, I don't know.
I'll just add, Steve, that the, I mean, I don't think there's a world of difference between around one and 70, and it, because it's not easy to 100% predict what those prior reserve releases are gonna be out of the CTP scheme in any 12-month period. There is volatility around claims, superimposed inflation, et cetera. But the landing on the 70 basis points is more to do with what we expect the FY 2024 reserve release to be out of the CTP schemes. Because the important thing, in terms of the way we look at it, is that prior reserve release will get dealt with within the underlying margins. So if it...
Whatever we expect the actual prior year reserve release to be for a given 12-month period, that's what we'll think about in terms of the underlying margin, range.
Okay. And then, I appreciate you said you'll give us an update on your reinsurance a bit later on, but I just wondered from a sort of broad conceptual point of view, I mean, you'll be a standalone general insurer moving forward, but you haven't been before. You know, obviously, you didn't buy an aggregate last year, but, you know, potentially, you know, with pricing stabilizing, it might throw up an opportunity to revisit that. Can you give us sort of any sort of broad themes that you're actually thinking about in terms of as you head into that renewal for next year?
I mean, we will look at everything, Nigel. Obviously, as we've always talked about, right through to a whole of account quota share, we haven't been able to make it work, quite candidly. The exchange commission that we need to utilize the return on capital position just hasn't been available to us. Now, why that's the case, relative to others that may have achieved it, I don't know, but it hasn't been available to us. But we would go again through the process. We've got a fairly well-refined model of how we should look at this now, and we will go through that. I - and Jeremy will lead the renewal, obviously. I'm not expecting there to be a substantial change in the structure of the program.
I think if you look at it historically, it has served us well. To some extent, it's driven by the logic requirements and the way that the regulator looks at at reinsurance relative to capital. It sort of every time we've looked at different structures, they've always hit the hurdle of the regulatory regulatory regime, the one in six type requirements that we have. Now, we have had some constructive discussions. I've certainly had some with Minister Jones, who's the assistant treasurer, around how we might sort of make some adjustments to that over time to allow us to look at alternative forms of reinsurance capital. But that's not gonna be available, obviously, for this year.
I'll just add two words, Steve. We're economic rationalists when it comes to reinsurance. So, you know, as Steve said, we'll look at everything and anything, and we do every year, but it's got to make economic sense to us. It's got to work. The financials on it have got to work. Of course, we keep one eye on that, on profit volatility, but fundamentally, the economics need to work. And to date, as we look at things like aggregate covers, there's not a lot of appetite for them in the reinsurance market. Doesn't seem to have come back yet, but it's things, you know, it's something we'll keep a watch on.
Okay. Thank you.
Thanks, Nigel.
Thank you. Your next question comes from Siddharth Parameswaran with JP Morgan. Please go ahead.
Good, good morning, everybody. A couple of questions, if I can. Maybe my first one, I'll just start with the GWP growth outlook and, you know, the low to mid-teen guidance. Just if I back out what you have for the first half, it implies about 9.5%-13.5% GWP growth for the second half. That's quite a sharp reduction on the first half. I, I, just wanted to clarify, is that largely indication of what you're expecting on rate in the second half versus the first half? Or are there any other volume considerations which might happen, you know, which might be distorting the trends? You know, any changes in, changes in, you know, portfolio exits or anything like that?
I was wondering if you could just comment on that, please.
Yeah. So Sid, we're probably being, you know, prudent in our assumptions around consumer unit growth. The expectation is, with prices still going through at those levels, you know, our modeling would suggest that we should be prudent around expectation around unit growth. And to date, the models have been, you know, reasonably predictive. There's been quite a, you know, quite a, an acceleration, particularly in Motor of that rate. So that's one that we need to watch, and we're mindful around. In Home, the Cyclone Reinsurance Pool continues to impact on the written premiums as the, you know, full 12 months of the Cyclone Reinsurance Pool comes into effect.
I think the other key one is, across commercial, you know, we're expecting not the same level of rate growth that we've seen there in the first half. Margins in commercial are in a very good spot at the moment.
Right. So just to clarify, on the rate side in particular, you didn't make any comment on rates in personal lines or New Zealand. Just, are you expecting any change then?
Yeah, I mean, rate, so rate in personal lines, Home is probably more around the Cyclone Reinsurance Pool impact on rate. So the AWP GWP is expected to come down in Home a little bit more because of the Cyclone Reinsurance Pool impact. In terms of rates, you know, the underlying renewal rates, we still expect those to remain at more elevated levels that we've seen. And then in Motor, we do expect the elevated rates to come off a little bit.
... Yeah, so I've got sort of-
Okay, thank, thanks for that. If I could just, if I could just ask about the go forward. I mean, it seems like you're a lot closer to, potentially, selling the, selling the bank. I just, I just wonder if you could comment on the, on the strategy on a go-forward basis. So two, two questions there. One is just, the business mix. I think previously you've made the comment that you're broadly happy with the mix, but probably keen to grow in the, in the commercial area. I was just wondering if, if that's, purely an organic comment or, or, whether you're... Or, well, firstly, are you happy with your mix?
One point.
Does it, does that comment still hold? And, you know, are you, would we get... When you say that, we, we'd get the, the, or all the-- I think your exact words were on capital, is that we get the, I mean, the, all, all the needs or all the capital needs of the business. Is there any reason to think that the business may need more than what you're currently advising us in?
I'll start with the business mix. I think, yes, we are comfortable. We've got a very good consumer business, home and motor. New Zealand is very strong for us. We're the second biggest player there, and we think we're in a very good position as we move through the big reset that's going on in the New Zealand market. We're a very good personal injury insurer. But I'm going to get Michael to come up. He's not going to talk about anything inorganic, because we don't talk about any of that, but you might want to talk about your organic plan. Because commercial is a real opportunity for us. If you think about our market shares in consumer, they are, you know, in the twenties.
So, you know, hard to get material growth beyond the market in those portfolios. But in commercial, there is a huge opportunity, and I think you can see the evidence of that starting to come through in this result. Mike?
Thanks, Steve. So on the organic side, very clearly, you know, growth in commercial is one of our investment areas. So the last three or four years, we have invested into commercial. So firstly, automated underwriting engines within the packages area, which came on stream in August, and so we're pleased with how that's working. And we've also replumbed and, you know, put a lot of work into the distribution and the underwriting areas. So we think both organically in those areas with further investment, what we've already done, we're in a very good place to grow that. We are looking at further products as well. You know, we did exit a number of products, three or four years ago to get the portfolio in a very good position.
So not announcing anything today, but new product entry is something that we'll look at very closely. So that's the organic, go forward position, and I think we're in a good spot today, to build on what we already have.
Thank you.
And sorry, just the question, the last of the question I asked was just any need, is there any reason we should think that the capital needs of the business would change post-separation of the bank?
No, I don't, I don't think so, but equally, it's a caveat that we've applied to any of the divestments that we've made. If you look at our track record, when we have divested businesses, we have passed that divestment proceeds back, back to shareholders. So I don't think you can ever rule anything in or anything out, but I think if our track record is to be taken as an indicator of what we plan to do, then we don't see anything on the horizon at the moment that would change our thesis.
Yeah. Thanks so much.
Thank you. Your next question comes from Simon Fitzgerald with Jefferies. Please go ahead.
Hi there, just the first question in regards to the franking credit balance. In the event of any capital returns, et cetera, I was curious, the franking credit balance should stay with the parent company? Would that be correct?
Yes.
-in which case you may have, you know, balance to distribute out.
Yeah, correct. Simon, so when I think I said the majority of the return is expected to be likely through the return of capital. We do expect to see a, you know, relatively, relative to that number, a relatively small special dividend, to make sure that we do get those franking credits generated through the sale out to shareholders.
Okay, that sounds fair. Just on investment yields as well, the 5.5% annualized yield. I was just hoping for some comments in terms of exit rates and, you know, what - how we should think about the carry on your portfolio for the second half and the outlook there.
Yeah. I mean, that is one part of the outlook that, maybe it's conservatively, but we do expect, at the moment, investment yields to reduce in the second half. So we do expect, the risk-free rate to reduce. And just on risk-free rate, you'll see the average duration of tech reserves is now two years. So as the relative mix of the portfolio has changed, it's moved down from two and a half-ish to closer to two years. So that's the curve that we think about. You know, look, the extent to which the yield curve contracts from here is open for views, but we expect that it will come down a bit.
Inflation-linked bond, the carry on that we expect will come down as the CPI print continues to move closer, closer to breakeven inflation that we've seen, so expect that to come down a bit. And then the other key driver is on Manager Alpha. So you saw we got 50 basis points in the first half. We would expect Manager Alpha to be closer to 20 basis points. So long, long may that superior return live, but it's a question of how sustainable that is over the longer term. Credit yield, credit carry, we expect to continue at around that, around that 60 basis point level. So the exit yield was a bit lower than-
And then-
Sorry, the exit yield was lower than the 5.5%, because of those that series of dynamics. But it, you know, it's open to views around where the risk-free rate goes.
... And then just a final question on New Zealand. Understanding the reinsurance costs have been a big driver there, there's also a story of, you know, GWP not sort of having enough time to earn through just yet. But maybe just an outlook specific to New Zealand in terms of GWP growth from just in the second half, from what you've already seen in renewals over the last sort of 12 months?
Yeah, I think we'd expect a similar level of written premium growth in the second half. The only dynamic that I would point out in New Zealand, it's a different book to the Australian book. It does have significantly higher end counterparties. Counterparties that from time to time, in a rising rate environment, do have an opportunity to take more risk on their own balance sheets. That's governments and other big corporates. So, that's one element of New Zealand that's slightly different. But generally, I think the premium trends that we are witnessing or have witnessed in the first half will flow largely through to the second half.
Okay. Thank you for taking my questions.
Do you want to Brian Johnson?
We have a question from Brian on the web.
So, uh,
Brian asks, "Could you explain the movement in the bank loan portfolio from stage one to stage two, and exactly what the SICR previously versus the change one now?" So you'll notice in the financial statements, the number of mortgages that are now sitting in stage two, stage two credit status has increased quite significantly. SICR is a significant indicator of credit risk. It's an unusual concept because what it says is, what is the... How has a loan migrated from when it was originally written to where it is today?
So a very, very high quality loan with a very low servicing and a very high, very low loan-to-value ratio could have a significant impairment trend on it, but still be incredibly high quality. Stage two loans doesn't mean that they're necessarily a low-quality credit. The reason for the change is that we changed the methodology, so we always knew that we had to finesse the methodology a bit. So we have done that. We've always allowed for that in the collective provision balance. We've always assumed that we would have some overlay for changes between stage one and stage two. That's included within the collective provision balance, which is why the collective provision balance hasn't changed.
So most of the change really is around just a change in practice, as opposed to a fundamental shift in credit quality in the loan portfolio. Second question from Brian: "In the fair value adjustment for the sale of bank, does Sun get a notional adjustment for the unrecognized, embedded gain in the replicating portfolio?" The bank sale process, the completion process is, we get net assets plus a fixed amount of goodwill, as we've said previously. The net asset adjustment number is relative to the original net assets at the time of the sale agreement, so it's the change in net assets.
The Replicating Portfolio net present value appears in the cash flow hedge reserve, which is a component of the net assets of the bank. So, yes, we do.
Okay. Nothing else here in Sydney. Thanks, everyone, and look forward to catching up with many or all of you over the next couple of weeks. Thank you.
Thank you.