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Edited Transcript of SUN.AX earnings conference call or presentation 13-Feb-19 10:30pm GMT

Half Year 2019 Suncorp Group Ltd Earnings Presentation

Brisbane, Queensland Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Suncorp Group Ltd earnings conference call or presentation Wednesday, February 13, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Carter

Suncorp Group Limited - CEO of Banking & Wealth

* Gary Charles Dransfield

Suncorp Group Limited - CEO of Insurance

* Kelly Hibbins

Suncorp-Metway Limited - Head of IR

* Michael Andrew Cameron

Suncorp Group Limited - Advisor

* Steve Johnston

Suncorp Group Limited - Acting CEO

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Conference Call Participants

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* Andrew Buncombe

Macquarie Research - Insurance and Diversified Financials Analyst

* Ashley Dalziell

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Brett Le Mesurier

Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance

* Daniel P. Toohey

Morgan Stanley, Research Division - Executive Director

* David Ellis

Morningstar Inc., Research Division - Senior Equity Analyst

* James Coghill

UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst

* Matthew Dunger

BofA Merrill Lynch, Research Division - Research Analyst

* Nigel Pittaway

Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

* Ross Curran

Deutsche Bank AG, Research Division - Research Analyst

* Siddharth Parameswaran

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [1]

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Good morning, everyone, and welcome to Suncorp's FY '19 Half Year Results Presentation. I would like to begin by acknowledging the Gadigal people of the Eora nation, the traditional custodians of this land, and pay my respects to all elders, past, present and emerging.

I will now hand over to Michael to start the presentation.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [2]

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Thanks, Kelly. And good morning, everybody, and thank you for joining us today. I'll first provide an overview of the results, Steve will take you through the details of the financials. And then before we take your questions, I'll make some comments on the outlook.

The interim result includes natural hazard costs that are significantly above our allowance as well as the impact of volatile investment markets. These, together with increasing regulatory costs, will impact our ability to deliver the full year Cash ROE target.

In addition, the result shows that we're making good progress on executing our strategy. We've achieved solid top line growth, operating expenses are well under control, and the Business Improvement Program has again exceeded targets.

The financial services industry today faces a great deal of change. This includes future policy settings, shifts in regulation and material impacts on business and distribution models.

I acknowledge the importance of the Royal Commission process, and I accept that Suncorp has, at times, fallen short of community expectations.

The work we've done on our business model and our strategy will allow us to navigate the changes ahead. I believe we have the right foundations for sustainable growth. We've given a great deal of thought to how we will manage the business through this period. We are stepping up our regulatory investment to better serve our customers and to maintain our license to operate. We will explain our plans for an increase in next year's natural hazard allowance later in the presentation.

So let's now turn to the result highlights.

Net profit after tax for the half of $250 million includes the previously announced write-off of the Life Company goodwill, higher natural hazard costs, lower investment returns and a doubling of regulatory project costs.

Reserve releases are up in the half, benefiting from low inflation.

The dividend of $0.26 represents an 81% payout ratio, supported by a robust capital position.

The core of our insurance portfolios are performing well. GWP growth was 3.4%, and operating expenses were 1.6% lower.

In Banking, strong deposit growth and very low losses helped to counter the abrupt slowdown in lending across the industry.

Our Business Improvement Program has outperformed in the first half. It is on track to exceed the targets for the full year as well.

Following the investment made in technology foundations and digital capability, our focus has shifted to strengthening relationships with our customers and attracting new business.

Performance against our key metrics shows that our underlying business remains resilient.

Consumer GWP has grown 3% in Australia and 8% in New Zealand. This was achieved through premium increases with some loss of units. Retention remained stable, with increases in margins across almost all parts of the business.

We continue to be successful in reducing operating and claims costs while improving customer experience.

There have been 4 major natural hazard events declared in Australia in the first half, followed by the more recent North Queensland floods. The Sydney hailstorm on the 20th of December has generated 31,000 claims and currently has a gross loss of approximately $370 million. And as you know, our exposure is capped to $250 million.

Around 40% of the claims were lodged electronically, using our zero touch digital capability, delivering efficiency and meaningful customer benefits.

In January, I visited one of our specialist assessment centers, where up to 600 vehicles were being processed every day. This is a world-class response capability. And I was very impressed with the pride and the dedication shown by our people.

The Banking & Wealth business produced stable earnings.

The slowdown in system growth and our early adoption of tighter responsible lending controls have resulted in a further moderation in home lending growth. This has impacted our cost-to-income ratio, despite a reduction in Bank expenses that we achieved.

Competition and higher funding costs have put pressure on our net interest margin, but we remain disciplined. We are prioritizing margin over volume.

Deposits on the other hand have grown well above system, reflecting improved digital capabilities. Our customers responded strongly to the new Growth Saver deposit account. Over 50% of these were opened online.

We are concentrating on maintaining a profitable, low-risk home loan book. We have a bias towards Owner Occupied, Principal & Interest and lower LVR loans.

Business Improvement Program is delivering operational efficiencies and improved customer experiences.

For the first 6 months of the year, the net P&L benefit was $95 million, which is $30 million above our target.

As at December 2018, we have locked in gross annualized benefits of $296 million. We now expect to deliver at least $225 million of net benefits for the full year.

With BIP embedded and delivering, we are far better placed to address the increased investment in regulatory compliance that's facing the industry.

We also now have the opportunity to convert better customer experiences into improved metrics and higher revenue. This includes maximizing the returns on our previous digital investments.

The Marketplace component of our strategy increases customers' awareness of our products, services and brands and makes them easy to access and to use.

We are continually refining elements of our strategy in response to feedback. Our customers are responding positively to new functionality. Digital users are up 17% since June. And as I said earlier, 40% of the December hailstorm claims were made digitally. 500,000 customers are registered to use the Reward and Recognition program, with active users seeing retention up 2% and early signs of an uplift in products purchased. The Suncorp App has been downloaded 300,000 times since August, and the take-up rate is high for new customers of the Group.

Against the prior comparative period, our key performance metrics reflect the resilience of our business.

Top line growth remains solid and within our target range of 3% to 5%.

Expenses were $1.3 billion, and this reflects our commitment to fund growth and absorb regulatory costs and inflation while maintaining a flat expense base.

The trajectory of the underlying ITR is positive.

And while expenses in the Bank are well managed, industry slowdown in lending and higher funding costs have impacted our progress on achieving our cost-to-income ratio. And this has also put pressure on our net interest margin.

So I'll talk about the Cash ROE after Steve takes you through the details of the financials. Thank you.

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Steve Johnston, Suncorp Group Limited - Acting CEO [3]

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Well, thank you, Michael, and good morning, everyone.

Before I step through the usual results commentary, let me provide a brief update on the sale of the Australian Life insurance business. The transaction remains on track with all internal work streams nearing completion. Both the Suncorp and TAL teams are working together to ensure a smooth day 1 transition. We continue to target a completion on the 28th of February, however, this assumes receipt of all relevant regulatory approvals, and I'm sure you'd understand that the timing of these is largely out of our control. But I do reiterate, we're very satisfied with the progress we've made in managing a very complex transition.

As previously disclosed, consideration is made up of $640 million in cash payable on completion, and completion adjustments to net worth that are based on mechanisms and time lines that were agreed under the share sale deed.

Based on our latest forecast of adjusted net worth, total consideration remains unchanged at approximately $725 million. And after taking into account separation and transaction costs, hybrid capital and other provisions, we anticipate returning approximately $600 million to shareholders.

Our preferred means of distributing this capital is via a pro-rata return of share capital and share consolidation. However, we may combine this with a small special dividend as this will utilize some of our franking credit balance.

As previously disclosed, as the business is classified as held for sale under the accounting standards, we've included the $145 million goodwill write-down in the first half result, with the remaining $735 million noncash loss on sale to be recognized in the second half.

The stranded costs as a result of the transition to TAL amount to approximately $30 million on an annualized basis and largely comprise personnel, real estate and supplier costs. These costs will form part of the 2020 Business Improvement Program, with work currently underway to neutralize them on a run-rate basis by the end of the '20 year.

Other costs covered by the various Transition Service Agreements will be removed following the completion of each of the service agreements.

Turning to the results now and starting with the Australian Insurance business, which delivered a net profit after tax of $133 million.

While a reduction on the prior period, the underlying margin trend was positive with GI continuing to benefit from the investments that we've made in BIP.

The Australian Life business delivered an after-tax profit of $23 million, reflecting reduced experience profits that's partially offset by a one-off tax adjustment in the participating book.

Over the next few slides, I'll cover premium, claims and investments. And later in the presentation, I'll touch on the underlying ITR.

So first to premium and the positive momentum in our consumer portfolios has continued into the first half of the year, albeit with a slightly different volume/rate mix.

You can see in the motor portfolio, we've continued to achieve strong premium rate increases, although units have contracted by 2% in the half.

The premium rate increases across the home portfolio were less pronounced and in line with the last half, with units down by just over 1%.

Now the contraction in units reflects a moderation of premium increases across the industry. And as a result, new business volumes are lower, although I'd point out, this being offset by continuing strong retention.

We'd expect to see improved customer unit growth over the second half of the year and into 2020 on the back of a number of customer initiatives and our ongoing investment in digital.

The growth in the Home and Motor portfolios was the largest contributor to the overall increase in gross written premium, which I've demonstrated on this waterfall.

Commercial GWP increased by $42 million, or 3.6% after taking into account the impact of portfolio exits. Again, this reflects our disciplined approach to growth in this market with premium rate increases supported by the retention of high-quality accounts.

The headline GWP result has been impacted by a number of regulatory changes in our CTP portfolios. In New South Wales, the scheme reforms, which came into effect on 1 December 2017, have driven a $42 million reduction in gross written premium. This reflects the combination of lower average premiums across the scheme and a reduction in units due to Suncorp's active strategy to move away from a price-led position while we monitor the performance of the scheme over this crucial transition period.

In Queensland CTP, GWP growth was flat with reductions in the ceiling price offset by an increase in units.

Modest growth in both premium rates and units has been seen in both South Australia and ACT.

So turning to claims, on the left I have included the usual undiscounted view of net incurred claims. This clearly shows the impact of the significant natural hazard events seen in the half as well as the ongoing positive effect of BIP, which is helping offset claims inflation in underlying claims costs.

The improvement in CTP and Commercial claims costs reflects the impact of scheme reforms in CTP, particularly in New South Wales, and the benefits from realignment of the Commercial portfolio. The higher level of reserve releases were driven by favorable claims experience in the short-tail portfolio and the continuance of lower than assumed average weekly earnings inflation and little or no superimposed inflation being evidenced across the CTP schemes.

On the right of the slide, you can see that working claims volumes have remained fairly stable with the natural hazards that we've seen in the last 3 months of the half, responsible for driving up the uplift in overall volumes.

So moving to the investment portfolio, and investment income on the insurance funds was $125 million.

The headline result was supported by mark-to-market gains from a decrease in risk-free rates, which has been partially offset by the relative underperformance of the inflation-linked bonds.

Now I'd remind you again that we hold the ILBs to enhance capital efficiency and as an economic hedge against inflation. As a result, the performance of these bonds is inversely correlated to reserve releases, where the current benign inflation environment is delivering gains well above our usual expectation of 1.5% of net earned premium.

The underlying yield on the portfolio was 2.5%, which is slightly below our expectation of 60 to 80 basis points above risk-free.

The shareholders' funds returned a negative $3 million. Weak returns from equity markets and alternative asset classes combined with a degree of relative manager underperformance were the main drivers of this result.

Now obviously, the results reflect the 31 December position across the key market indicators that drive the mark-to-market outcome. I've summarized these in the table on the top right of the slide and you can see that there's been some improvement in the first 6 weeks of calendar 2019.

So turning now to Banking & Wealth, which delivered net profit after tax of $183 million, broadly in line with the prior period.

Total lending grew by 1.5% annualized, principally reflecting a moderation in home lending within a highly competitive and slowing mortgage market as well as Suncorp's early adoption of increased serviceability and verification requirements.

Net interest margin compressed by 3 basis points to 1.79%, with the positive impact from strong growth in at-call deposits more than offset by the sustained elevation of BBSW and intense price-driven competition across mortgages.

As I explained at the full year '18 results, the Bank has sought to reduce and remove a range of customer fees in line with customer demand for low fee banking, with the full effect to these actions seen in the noninterest income line in this half year period.

We continue to prioritize the credit quality of the portfolio, with impairment losses representing just 2 basis points of GLAs, well below the through the cycle operating range of 10 to 20 basis points.

Despite a significant uplift in regulatory spend and continued investment in digital capabilities, costs in the Bank are lower and reflect the benefits that are emerging to the Banking & Wealth P&L from the BIP program. Taking into account the effect of slower lending growth results in a cost-to-income ratio of 56.1%, which as you know is well above our target.

Regarding the pursuit of Advanced Accreditation, further consideration will be required to quantify the impacts of both the Basel III reforms and APRA's unquestionably strong benchmarks.

And you recall that following the sale of the Australian Life business and the transitioning Wealth activities, the continuing wealth business principally reflects our superannuation customer offering known as Brighter Super. The improved return versus the prior period was largely due to the completion of the Super Simplification program in FY '18. However, the business' ability to deliver its usual run rate contribution has been impacted by the increased regulatory costs across the industry.

Now turning to New Zealand, which has delivered a very pleasing result driven by GWP growth across all portfolios and disciplined expense management.

Net incurred claims of $340 million, which is down 2.3% on the prior period and reflects favorable natural hazards experience and continuing improvements in working claims management.

Settlements continue to progress on both the Canterbury and the Kaikoura earthquakes, with 98% of Canterbury claims and 99% of Kaikoura domestic property claims now settled.

The increase in operating expenses was mainly due to higher commissions paid as a function of the strong premium growth.

The New Zealand Life result was stable with solid growth in in-force supported by strong policy retentions.

So now I'll turn to the Group operating expenses, which we present here net of FSL, which decreased to $1.34 billion, mainly due to the net benefits that we're achieving from the BIP program. The net benefit in this half was $38 million and results in improvement of $70 million on the prior period.

As we talked to at the full year results, spending on regulatory projects continues to increase with the majority of anticipated spend likely to be incurred in the second half. And I'll come back to that in a minute.

And finally, the increase in commissions should not come as a surprise. And it's mainly due to the strong GWP growth that we achieved in New Zealand.

So I'll briefly turn to the GI underlying ITR, which is presented here on a sequential half year basis. Improvements in the underlying ITR continue, and we reached 12.2% in the December half.

As the waterfall shows, the key drivers of the uplift in the ITR -- underlying ITR relate to an improvement in underwriting margin, the net benefits of BIP and continuing good expense control, despite the impact of the heightened regulatory burden.

To capital, and we continue to maintain a very strong capital position with the waterfall chart here highlighting the key movements over the half year.

As you can see, the noncash goodwill write-down from the Life sale is backed out of the excess CET1 calculation. Going forward, the Life divestment will further lighten the capital demands of the Group and reduce capital volatility. The reduction to capital from the tech provision primarily reflects normal seasonality, and the higher GI target is a result of the December natural hazard events.

Despite the effect of adverse investment markets and natural hazard costs being above our allowance, the Board has declared an interim ordinary dividend of $0.26 per share that results in a payout ratio of 81%, which is slightly above our usual payout ratio range of 60% to 80% of cash earnings. And quite a bit above our usual first half payout ratio of around 70% and further underlining the strength that we see in the underlying business. Even after accounting for the payment of the dividend, which is equivalent to $338 million, we continue to hold a robust surplus with a CET1 excess of $434 million.

It's important to point out here that this reported excess includes around $100 million of surplus capital that's held in the Australian Life business, and this will ultimately be paid out as part of the expected capital return. I've highlighted this on the right-hand side of the waterfall.

So before I hand back to Michael, I just want to cover 2 specific topics.

The first is the outlook on regulatory costs. As Michael mentioned earlier, we have seen a doubling of regulatory costs in the first half compared to the prior period. The key projects over the half include: responding to the Royal Commission hearings, addressing CTP changes and meeting new ASIC requirements in the Wealth business. I've laid some of these out on the slide.

The full year results, I indicated that we had budgeted for $90 million in regulatory project costs in the FY '19 year.

Now we do anticipate further increases in regulatory costs in FY '19 as the scope of project increases, as new projects emerge and as we implement the recommendations of the Royal Commission. Our preliminary estimate of these costs is around $50 million pretax, of which $10 million has already been expensed in the first half, bringing FY '19 regulatory project costs to around $140 million.

Now I'd point out that these costs relate to specific regulatory projects and they in no way reflect the full cost to the Group of the increased regulatory focus.

And finally, I wanted to spend some time covering off the impacts of the natural hazard events in the first half of the year and how this rolls forward into the second half in the context of our natural hazard allowance and our Reinsurance program.

As you can see from the table, we had 4 events in the first half, each with claims costs about $10 million. The total claims costs from the New South Wales and SEQ hailstorm in late December have exceeded the maximum first event retention within our Reinsurance program, which caps the financial impact of this event to $250 million pretax.

These events, along with $173 million in attritional natural hazard claims mean we've exceeded the first half allowance by $220 million. However, as we move into the second half, our natural hazards aggregate and the drop-down covers of our main CAT program provide us with significant P&L protection.

For example, while it's still too early to estimate the gross costs of the Townsville floods, we know our costs are capped at $97 million.

Now if you bear with me for a minute, I just want to further highlight this point with a worked example. If you assume second half attritional events are similar to the $173 million that we recorded in the first half and that we do not exceed the $300 million of cover under the aggregate program, then full year natural hazard costs would land $130 million over the allowance, a significant improvement on the first half outcome.

And moving into FY '20, we propose to address natural hazards protection through a combination of an increased allowance and a reinsurance stop-loss cover.

Our proposal is to increase the allowance to around $820 million and buy $200 million of cover atop that for all natural hazard costs, thereby effectively moving the allowance to $1,020 million. Obviously, an increase of this magnitude cannot be fully priced to customers in the first year, therefore, resulting in a medium-term impact to the underlying ITR.

And with that, I'll hand back to Michael.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [4]

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Thanks, Steve.

Despite extensive media and market commentary around the 76 Royal Commission recommendations, it's still early days in our detailed assessment of the practical implications to Suncorp.

On the slide, we have included what we currently believe are the top 10 issues based on their potential impact to Suncorp. Against these, we have shown relevant activity that is either already completed or we are undertaking.

Undoubtedly, it would take the industry, government and regulators time to work through, and we will engage with all groups to ensure optimum outcomes for our customers.

The bottom line of the Royal Commission recommendations is that companies need to put customers at the center of their business. And this has been exactly the core of our strategy for the past 3 years.

In the data pack, you'll see a slide that details the work we have done that will enable Suncorp to better address customer needs.

The foundations are now established to convert better customer experiences into broader and more frequent customer interactions and higher revenue.

In short, we're now well placed to deliver a return on the investment that we made.

This slide details the 5 key areas of capability that we have built, that will facilitate growth into the future. Any further investment will be incorporated within the operational expenditure. In digital, we have delivered new and enhanced capability, including the Suncorp App. This is supported by an API layer that gives us exceptional flexibility. Our focus now is on the New Payments Platform, open banking and making it easier for our customers to buy online. The Reward and Recognition program will incorporate location-based services, tiered status and behavioral rewards.

Key to the success of all of this is our growing ability to segment and tailor propositions to suit our customers.

Turning to the outlook for the Australian Insurance business for the remainder of the year.

Our focus on retention and new businesses is expected to improve consumer units in the second half.

Operating expenses and claims will benefit from BIP initiatives.

Commercial will again improve profitability, and CTP and workers comp will seek disciplined growth.

Reserve releases are expected to remain above 1.5%, provided the current level of inflation remains stable.

Importantly, as Steve indicated, we are well protected from the impact of further natural hazard events in the second half.

The completion of the Australian Life Company sale will occur shortly, followed by a capital return to shareholders. We're confident of a long and successful partnership with TAL.

Our organizations are compatible. And the combination of our distribution capability and TAL's product manufacturing will produce good outcomes for customers. Life insurance products are a natural adjacency for our business.

The outlook for Banking & Wealth will be influenced by shifts in regulatory focus, external funding pressures and market dynamics.

The results for the first half reflects our decision to be a leader in implementing higher standards of responsible lending. We expect the industry to align in due course.

Our digital investment will see a continuation of above-system deposit growth and that will help our funding costs.

The quality of our book and the strength of our balance sheet will result in low loss rates.

Net interest margin will remain under pressure, and our cost-to-income ratio will be impacted by low mortgage growth and regulatory spend, consistent with the industry.

The Wealth business will focus on regulatory change, remediation and stabilization.

The outlook for our New Zealand business is positive, off the back of high growth in the past 6 months.

GWP is expected to be above system, and we anticipate broader benefits from our New Zealand Business Improvement Program.

Motor claims inflation is moderating in line with the industry. And at the same time, the team is implementing product and pricing changes and driving claims efficiencies, which will underpin strong margins.

The New Zealand Life business is expected to maintain its current level of profitability as we focus on sustainable levels of commissions and the maintenance of strong distribution relationships.

The recent Life Industry conduct and culture review in New Zealand will lead to positive behavior and process changes across the industry.

As I mentioned at the beginning of the presentation, natural hazards, investment performance and unforeseen regulatory costs will impact our full year ROE.

In the first half, adjusting for these, the Cash ROE would have been around 9.7%. For the full year, the business is well placed on an underlying basis to perform in line with our original expectations.

We are intensely focused on the driving the momentum of the business for the remainder of the year.

And as we said, we will adopt a more conservative natural hazards allowance for next year. And in addition to the regulatory costs being $50 million above forecast this year, it is likely we will also experience elevated levels of regulatory costs in FY '20 to better serve our customers.

We will seek to quantify these items for FY '20, together with the impact on our Cash ROE at the full year result.

And before closing, I must acknowledge the enormous effort of our teams over the past 6 months.

Suncorp remains resilient in a time of intense investment market volatility and regulatory change.

The underlying performance of the business demonstrates that we know our customers' needs. It also shows that we are improving the delivery of products and services in the way that our customers want us to. As a result, Suncorp remains well positioned to deliver strong and sustainable shareholder returns.

Thank you, again, for joining us today. I now invite your questions.

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Questions and Answers

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [1]

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Thanks, Michael. So if I can just remind people to announce where they're from and their name before they ask the questions. We'll go to the room first. Andrew?

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [2]

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Andrew Buncombe, Macquarie Securities. Two questions on the Bank please. I noticed that the cost-to-income guidance of around 50% has been removed and in this half, at least, it ticked the opposite way. Loan growth probably isn't coming through as quickly as you would have thought. How should we be thinking about the cost-to-income guidance in the Bank for the medium to longer term?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [3]

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Now we're still pursuing the 50% target. But given the increase in regulatory costs in the current period and the slow loan growth, we see the outcome that we have at the moment. If I think about the balance of this year, I would expect the second half to be similar to the first half. But over time, of course, regulatory costs will taper off. And as we continue to pursue growth in the business, we would still be targeting the 50%.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [4]

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Excellent. And then the other question was on the agriculture portfolio. I've noticed one of your big competitors in the agri lending space took a provision for that at the -- their result 1 or 2 weeks ago. Just how are you thinking about that drought on the East Coast at the moment?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [5]

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Yes, we've got a $20 million collective provision over the top. But having gone through the book, the team have done a great job at just assessing our overall exposure. We continue to be very comfortable with the level of cover. We continue to anticipate reasonably or relatively low loss rates. And of course, in recent times, the issue of the flood has become less of an issue and been replaced with some fairly severe flooding, particularly in Northern Queensland. And we are working with those farmers to help them through that process. But the headline comment to your question is we're comfortable with where the book is at the moment.

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [6]

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We might go to the phones.

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Operator [7]

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(Operator Instructions)

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James Coghill, UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst [8]

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Michael, just a question firstly on your guidance. I'm just looking at Slide 30 here and your statement in bold is that you still expect to perform on an underlying basis in line with original guidance. But I haven't heard you talk about 10% ROE at all, and I can't see 10% ROE being reiterated anywhere other than on that slide where you said 10 plus, but there are a lot of caveats and comments about past budgets, et cetera. So is 10% still a relevant number for you? And should we be thinking about 10% into financial '20 as well, the 10% ROE?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [9]

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Thanks, James. So we haven't restated any of our guidance for this year given that it's an interim result. And look, I acknowledge that natural hazards and investment performance is a core part of our business. However, we've provided this slide to assist in understanding, firstly, the strength of the underlying business and the impact of natural hazards, regulatory costs and the investment markets have had on firstly the half year result, but also indicating that clearly they will have an impact on us achieving the 10% Cash ROE on the full year. We haven't provided...

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James Coghill, UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst [10]

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Fair enough, Michael. Fair enough, but can I just -- the previous Group outlook statement, the first line is that you're targeting a 10% Cash ROE in financial '19, so -- I mean, you're saying to me now that you haven't changed any of your assumptions but you have actually taken that overarching core and assumption out. I mean I get that on an adjusted basis you did 9.7% in the first half, so I'm just struggling to understand why you're still not comfortable with an adjusted Cash ROE at 10% in the second half -- oh, sorry, for the full year.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [11]

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Well, if I'm hearing your question correctly, what you're suggesting is excluding the impact of those external factors, then underlying business is going to generate a Cash ROE of 10%. That's what you're saying. I'm happy to confirm that, that's correct.

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James Coghill, UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst [12]

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Okay. But that's still the number for the full year?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [13]

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Yes. And hopefully, you can see our natural hazard position. And Steve's provided, I think, a lot of the detail about the strength of the cover in the second half, that clearly $220 million over allowance for the first half is -- it has a big impact on our ability on an absolute basis to deliver that. But the underlying business is still strong, resilient, and we make the comment there that we expect the underlying business to perform in line with our original guidance.

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James Coghill, UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst [14]

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That's great. And just a quick question on this higher natural perils allowance, the $100 million listed. Could you perhaps just take us through the process that was applied to arrive at that? I mean this has been a recurring, ongoing debate for Sun for a number of years, and you've always pushed back on criticism that it was too low. What changed in the process to assess that perils budgets over the last few months that led to that $100 million increase?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [15]

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Yes. Well, ironically, last year, of course, we came in pretty close to -- or just under the allowance and that did give us some confidence. But I'd have to say, after the first half, we see a repeat of an increased level of severity, an increased level of frequency. Our calculations previously have evaluated over a reasonably long period of time. What's changed is we've now taken probably a shorter-term view of history and had a good look at expectations about the future and factored those things in to come up with what clearly is -- has been an issue for some time that we've moved up the allowance $100 million. But I think probably more importantly, the additional $200 million of cover over and above that puts us into a strong position.

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James Coghill, UBS Investment Bank, Research Division - Executive Director, Deputy Head of Research of Australia & New Zealand and Insurance Analyst [16]

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Okay. And just on that last cover that you put in place, that's likely to be a very expensive layer to fill. Are you in a position yet to comment about the 12% underlying margin into financial '20 once the new perils allowance and that reinsurance cost is absorbed?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [17]

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Sure. The cost of the $200 million of cover, we think, will be somewhere in that sort of $40 million to $50 million range. So hopefully, that's helpful. The allowance, of course, you understand the impact there. So as we go into FY '20, there's a number of other factors. We're just sort of in the business planning process at the moment. The big issue really is to get a feel over the next few months of what the sort of ongoing regulatory costs will be. Now there is a component of the $150 million that we've talked about today, which is a one-off. But clearly, we'll know a lot more once the regulators, government and the industry have gone through some of those issues that came out in the recommendations, and we'll be in a much stronger position. But the regulatory cost is probably the biggest uncertainty in forecasting what the number might be for FY '20. But the 12% is still a number that we will be working towards into the future.

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Steve Johnston, Suncorp Group Limited - Acting CEO [18]

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And James, just to follow through on the ITR question and the reinsurance issue. I think one of the ways to look at it, and I'm very familiar with your most recent research where you roll forward an allowance of around $790 million for FY '20. So it's a sort of $30 million incremental upside to that number plus the sort of $45 million of reinsurance cost on it's around sort of 75 basis points of ITR going forward based on the numbers that you've published.

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [19]

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David?

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [20]

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David Ellis from Morningstar. Michael, can I -- going back to the Royal Commission slide that you had up in the presentation. And I mean, obviously, it's very, very early days and there's a lot to come out over -- as far as the implementation of some of these recommendations. But I'm particularly interested in the Royal Commissioner's recommendation on broker remuneration. And so I've got a few questions all around that. So the first one is a simple one about what's the proportion of Suncorp Bank's mortgages that are originated through the broker channel?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [21]

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Yes, 68%.

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [22]

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68%. But the other questions are more longer term. So obviously, the recommendations cover both trail and upfront commissions. And obviously, the government has announced that a ban on trail commissions from July 2020. And then a further review in a couple of years after that on the upfront commission and whether to move towards a customer- or borrower-paid fee to the brokers away from the current lender-paid fee, or lender-paid commission. So the -- my questions are, do you think in July 2020 when trail commissions are banned that the upfront commission at that time will be increased to approximately offset the loss of trail income for trail commissions? And then the next question is after the stated review in a couple of years after that, do you think that the likely outcome is that the industry structure will move to borrower-paid upfront fees away from lender-paid commissions? Or do you think that the current system may be retained? And most importantly, what do you think is the likely impact on Suncorp from either alternative?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [23]

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Yes, of course and whilst the recommendations only come out a little over a week ago, this is not a new issue, it's been around for many years and we've given a great deal of thought. A couple of high-level comments. So I don't think it's anyone's intention to see the market power that the major banks have to see that increase. And so that's the first issue in going through a process of change. We're supportive of the general direction of reviewing this because we want to see increased transparency over the process. We also want to see any conflicted remuneration or incentives removed out of the process to create a fairer outcome for customers. But it's very, very difficult at this point to answer any further questions about how it might play out. And we're particularly concerned about churn in the industry from a removal of those trail commissions. And it's difficult to understand the impact on customers and their willingness to pay an upfront fee to brokers. It's an important distribution process for us and for the industry and for customers. I believe they are valued by customers. And we're just going to have to work with government and the industry to try to avoid any of the unintended consequences of producing an outcome and how it's implemented and what the adjustments are is really hard to make a call on at the moment, David.

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [24]

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We might go back to the phones.

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Operator [25]

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The next phone question comes from Ross Curran from Deutsche Bank.

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Ross Curran, Deutsche Bank AG, Research Division - Research Analyst [26]

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Just a couple of quick questions. First is on the volume loss in personal loans. Can you give us a bit more clarity just around where you're seeing it? And is it brand specific?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [27]

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Sure. Well, if I look at the -- that part of the business, firstly, the pleasing thing is retention has held up well. It's been very stable. The real issue has been new business opportunities. When I think of the external factors, yes, there's been a dramatic slowdown in the sale of new vehicles year-on-year, which may come as a surprise. Also, of course, the volume of new homes and sales has dropped off as well. So those external factors have an issue. But for us, we have been repricing the book right across the Motor and Home portfolio, that has definitely had an impact. We expected the rest of the industry to price in the claims inflation that's occurring, that hasn't been as evident as we thought across the industry. As we go into the second half, we will be doing targeted repricing and looking to reinforce our marketing spend in that period to turn around that unit loss which is critical. I suspect in the mass brands is probably where we've seen some of the biggest impact. A lot of that's been driven by some of our marketing choices. And we've now stepped up. You may have seen a bit of an increase in the volume of advertising around those mass brands, which we expect will deliver a better outcome in the second half. But overall, GWP growth in both the Motor and Home was quite pleasing, notwithstanding the loss of units.

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Ross Curran, Deutsche Bank AG, Research Division - Research Analyst [28]

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And I assume that increased ad spend is included in the guidance?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [29]

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Okay, I just missed what you said, sorry.

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Ross Curran, Deutsche Bank AG, Research Division - Research Analyst [30]

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I'm assuming that increased advertising cost, that's all included in the guidance.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [31]

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Oh, yes. Absolutely right. And it's very much around the -- where it's directed and how it's spent and the timing of those and whether they're campaigns or sort of master brand promotions and those sorts of things. But no, it doesn't reflect an increase.

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Ross Curran, Deutsche Bank AG, Research Division - Research Analyst [32]

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Sure. The second question's around the Bank. Can you give us an update on the core banking platform migration?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [33]

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Yes. Well, just for everyone's background who doesn't know the detail, we're currently running 2 systems, Hogan for deposits and transaction and Oracle for everything else. That is inefficient because Hogan costs us about $11 million per annum to run. So it's not a great situation. The process we've been going through is to wait for an opportunity to move those deposits and transactions onto Oracle in a low-risk way with a stable system. And you can imagine, from a transactional perspective, the last thing we want to do is to create a situation where it's not stable. We've been looking to Oracle to provide evidence around the world or within Australia of a successful deployment of that module. When we see that, we will then move forward with following another bank in deploying that module, which will allow us to close down the Hogan system and get that benefit of the saving. But at the moment, I suspect most of the Australian banks are going to be very distracted in other areas and that possibly will slow down some of the implementations that may have been proposed.

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [34]

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Questions on the phone?

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Operator [35]

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The next phone question comes from Matthew Dunger from Bank of America Merrill Lynch.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [36]

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It's Matt Dunger here. Just a question on your reinsurance arrangements. What does the higher CAT allowance imply for your reinsurance renewal? Will you continue -- will you look to retain a similar program to what you have historically? Is there any potential to do quota shares to reduce some specific exposures?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [37]

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We look at the whole structure and the coverage of, firstly, the natural allowance and the NHAP and then stop-loss and then the CAT cover. So as you know, it's complex, but that additional cover shouldn't impact the level of CAT cover that we have in place. So you should anticipate a similar structure to what we've had in the past except for the addition of that additional stop-loss cover over and above the allowance.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [38]

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Okay. And on the underlying ITR, the impact from the higher reinsurance cost, to what extent do you think you can price for this into FY '20?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [39]

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Well, it certainly won't be in year 1. And it really just depends on the overall market, and how it can withstand those sorts of changes. So I would expect multiple years. We're doing a 3-year plan at the moment. I would expect towards the end of that, we would see a situation where we could fully price that in but it will depend on what happens with competitors over that period of time. I go off the back of a fairly significant hailstorm in Sydney and the devastation in Townsville, it certainly does put pressure on claims inflation generally and provides probably a little bit of a kick along for the hardening market.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [40]

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Okay. And just lastly, on the noninterest income in the Bank, are you able to take us through some of the drivers of the fee declines and lower commissions that you're talking to?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [41]

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Yes. David Carter normally has an opportunity to say at least -- one thing at least, so I'd hate to miss that opportunity today. But generally, what you'll see is when we dropped off the ATM transaction fees, that is the lion's share of that, and that had a big impact on our noninterest income. We've also been pulling back on other fees and charges just in line with community expectations and consistency with the banking industry.

But David, is there something you need to add? Have I left something out?

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [42]

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The key other one specifically would be the honor fees for overdrawn accounts (inaudible).

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Operator [43]

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The next phone question comes from Nigel Pittaway from Citigroup.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [44]

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A few questions, if I could please. Just first of all on New South Wales CTP, are you earning above the new cap there and therefore, having to provide for an amount to go back to the regulator?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [45]

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Yes. I'm might just get Gary to make a comment on that. It's probably going to be no, but...

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [46]

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Yes, now that's correct, Michael. We've kind of taken a fairly conservative view at the moment. So our position's different to the one that was reported last week by another insurer.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [47]

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All right. Okay. All right. Secondly, just on the outlook for New Zealand, you made the comment there that the outlook's positive. But presumably, the first half benefited from some benign large nonhazards, would that be fair to say, that it might be unlikely to repeat?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [48]

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Yes, that's right. The 80% uplift definitely reflects a very benign period. Having said that though, GWP growth is -- continues to remain strong at 8%, expenses under control, and we're very pleased with where New Zealand is. And fingers crossed that benign period continues into the second half.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [49]

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Okay. And then maybe just finally on the Life sale. I mean it's only 14 days to go yet you are saying that's still very much out of your hands in terms of regulatory approval. It doesn't sound as though you're totally confident. Am I reading that correctly?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [50]

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Well, let me just say, we're confident that the completion will occur by the 28th. And I can't speak for APRA and I can't speak for the treasurer, but based on what I do know, I think we can sit here with a level of confidence that, that will be completed on time.

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Operator [51]

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The next phone question comes from Daniel Toohey from Morgan Stanley.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [52]

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Just a couple of questions. Firstly, if I roll in $100 million higher allowance and $45 million higher reinsurance fee, the FY '20 underlying headwind would be around about 160 basis points. So I just wanted to get some comfort around the capacity for continuing rate increases, particularly across sort of the Home and Motor, given that you've seen some fall in unit growth in the second half on the basis that rates have sort of probably been a little -- rolling through a little too high.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [53]

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Yes. We -- you would have seen the pricing increases for us, about 6% in Motor, about 3% in Home. We sort -- as you know, Dan, we traditionally say 3% to 5% going forward. But given where claims inflation is at the moment, I think that's still supportive of those sorts of levels. And we just need to be responsible in that process and continue to monitor the reaction of the market to the situation we're in.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [54]

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And so just -- I guess just sort of calling that back, the 160 basis points, is that a medium-term -- I mean does the 12% underlying ITR then become sort of a medium-term proposition?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [55]

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We'll be working towards 12%. And I made the comment a little bit earlier that the regulatory cost, there is a component of one-off this year. And ultimately, they will taper off, but we don't know when at the moment, and that repricing will occur over time. And look, I specifically called out that when we get to the full year, we'll be in a very strong position to be able to answer some of those questions. But where we are at the moment, it's a fair period of time out. And it's just -- there's just too many moving parts at the moment to be confident in making firm commitments. But I think the underlying part of your question is how we feel about 12%, and that remains our target.

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Steve Johnston, Suncorp Group Limited - Acting CEO [56]

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And I think Michael's sort of given you the ups and the downs there in terms of how that might flow through. The only other point to make is that when you report an -- as we've seen this over many years, when you look at the underlying ITR on a sequential basis, there is some seasonality, and particularly around the long-tail book. Valuations for the current year profitability in the CTP portfolios only reflect 3 months of experience when you do a valuation in September. When you do the full year valuation in March, they tend to put more weight on the current year. So historically, over the past 3 to 4 years, the first half underlying ITR has been depressed relative to the second half, and I'd expect that to continue. And there's good momentum flying through the earned line in -- across most of the portfolios, and particularly in New Zealand where -- while written premium is tapering off a bit, as you would expect, the earn of that premium is starting to flow through very strongly. So I think there's lots of variables that we have to work through in our planning process, but 12% still looks to be a reasonable target over the medium term.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [57]

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And the current accident year margin -- underlying margin headwinds in Queensland, is that from the repricing or the trend in repricing? That continues to be a headwind as well, is that right?

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Steve Johnston, Suncorp Group Limited - Acting CEO [58]

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It does on an earned basis, for sure. But pleasingly, the most recent filing from the regulator was a flat -- was flat. So there's been no further reduction for the April 1 filing, so that's good news. Although, we continue to believe that there is room for filing increases given the way the scheme's -- the scheme is performing and the generally low investment returns that we're getting off those portfolios.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [59]

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Okay. And apologies, if I may have missed this, Michael, but I'm just wondering if you had sort of more detail or specific measures on retention just across the portfolio?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [60]

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Oh, look, it's been very, very stable right across the board, actually, and so that's the -- I've got 82 as a number in my head, which is where it was 12 months ago, that's where it was 6 months ago. And line by line, it's a -- which is really pleasing in an interesting market at the moment. So if we can continue and improve that, that will be fantastic and that's our plan. And if we can see some turnaround in the units across the consumer portfolio, again, that will also be pleasing and that's also our plan.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [61]

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Okay. I mean is that tracking to where you thought things would progress in light of your strategy?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [62]

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Retention is a key part of the strategy. Ironically, we step back and look at the recommendations that come out of the Royal Commission. And I think what they do, do is they reinforce the relevance of our strategy around the customer. And they also reinforce the importance of implementing, at pace, a digital -- a large digital component in your business model going forward. And that's what we're delivering. We're seeing big improvements in customer experience. But of course, the opportunity now, as we go into the second half and into next year's to convert those improved levels of experience into better levels of retention, better levels of new business and some of the other customer metrics that we provide and then, of course, more revenue. So I'm confident we're on the right path. I know we've got a sustainable business model. The underlying performance of the business is strong. And yes, I just think it's all working well. And there's been a couple of major factors this year, of course, in this half, which weren't pleasing around the natural hazards and the investment performance. And of course, I think we're making the right decisions about the natural hazard allowance in the future, and we're being very prudent in our approach to the regulatory cost. Now we may not spend that money, we may -- but I think to call it out today as an expectation is a prudent thing to do.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [63]

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Okay. So retention's holding. What about products per -- has there been any increase in products per customer?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [64]

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We see it in our Reward and Recognition program. Against the users, there's been a very visible uplift in retention, around 3%. And also, a good increase in the amount of products that are being purchased by our customers off the platform, which is good. So the opportunity, as I said now, is to roll that experience out across our 9 million customers and really get that uplift in performance that I know you've been looking for. We only just finished the investment last year. We continue to refine elements of the program, and it's performing well, but we obviously need to deliver a lot more, which is what you want to see.

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Operator [65]

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The next phone question comes from Siddharth Parameswaran from JPMorgan.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [66]

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Just a couple of questions if I can. Firstly just on reserve releases. They were pretty strong again in this result. I was hoping you could just make a comment about the likelihood of these being sustained going forward, but also just the validity of the 1.5% normalized allowance going forward, given the New South Wales CTP presumably going forward, that won't be a source of reserve releases?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [67]

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Yes, it's a -- it's almost a standard answer, as you would expect. But 1.5% continues to be a sensible long-term level, and we will eventually get to that point. We've had a ridiculously low level of inflation in the most recent period, that has cost us from an investment perspective in relation to our portfolio. But of course, the precise reason we did that was to offset the risks. And what we see as a result of that, offsetting it, is the high level of increases. And look, as long as inflation remains low in the second half, we would expect continuation of a higher level than 1.5%. But eventually, as you know very well, we would expect that to taper back. And at the same time that, that occurs, we'd also expect to see a stronger investment performance on those inflation-linked bonds, et cetera.

So Steve, anything you want to add?

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Steve Johnston, Suncorp Group Limited - Acting CEO [68]

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No. Look, I think it's a very good summary. We would never be in a position to predict what the reserve releases do. It's an independent piece of work by the valuation actuaries. But -- and we'd never also give up on the potential to improve the claims performance. So the various factors that go into that release number or the absence or otherwise of underlying inflation, average weekly earnings inflation, superimposed inflation. But you also can improve the performance of the scheme through managing your claims as efficiently as you can. And that's one area, certainly, the BIP program in the first half of this year and certainly through the residual of the BIP will be very focused on personal injury claims cost and the extent that we can achieve better performance than the scheme averages, then we will start to see those -- the outcome of that coming through in reserve releases over time. So if we maintain lower levels of inflation, no superimposed inflation, we continue to improve the way we manage claims, then we can continue to expect releases potentially above and well -- potentially well above the 1.5%. The only caveat always is to say that at some point you will expect and can expect the reemergence of superimposed inflation. It hasn't been there for a decade or longer. But we've got to be very conscious of that at some time it could emerge. And when it does emerge, if it does emerge -- let's hope it doesn't, but if it does, it comes at a rate far greater than 1.5% in any 1 year.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [69]

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Okay. I mean I suppose you're painting quite a rosy picture even though I suppose half your sources of reserve releases may not be available going forward, so -- but I take your point. I mean there's still -- perhaps, there's still potentially something on Queensland CTP and maybe other long-tail portfolios. I might just move on. Just a question just around pricing versus claims inflation. Could you just comment on just your key classes? I think you mentioned rate increases, 6% in Motor, 3% in Home. Could you just comment also just on Commercial? What rate increases you're getting? And also how on these classes it compares with -- versus your current forecast of inflation?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [70]

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On the Commercial side, as you know, there's sort of 3 categories. We continue to get 4% or 5% increases in the small end. But in the medium to large end, we're still in that mid- to high teens from a pricing perspective. So we've been quite selective in that pricing and focus very much on rate rather than volume. And as you would see, the GWP was up 3.6%, I think. And we're very pleased with that outcome that translates to a stronger business overall. The specific question on the consumer book, I'm not sure how deep you want to go into that. I've made some comments already just on the claims inflation and the pricing on each of the books.

Gary, is there something else that you think that we can add just to put some extra color on that question -- or on the answer to the question?

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [71]

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On the Consumer?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [72]

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Yes.

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [73]

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Yes, look, there are plenty of moving parts still in consumer claims between Home and Motor. We were very keen to make sure we're trying to take account of as many of those moving parts between large loss frequency, total loss frequency in Motor due to some regulatory changes. And I think we're very comfortable that we've priced appropriately for all of those inflation factors. And we think that sets us pretty well for where we're seeing inflation heading now and starting to moderate somewhat.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [74]

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So that Motor claims inflation that we've experienced, I think we were talking last half around -- that's 1% to 2%, that's kicked up a little bit. It really just -- one of the big factors in that really reflects the change in approach to payouts on total losses. And with Motor vehicle, historically, they would have been paid out at the market value, and we now pay out on the insured value. And that's had quite an impact on the overall cost of claims in the Motor portfolio. And that sort of moved up from 2% to probably more like 4%.

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Steve Johnston, Suncorp Group Limited - Acting CEO [75]

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If I just add a little bit, Michael, on the Commercial book because it does tend to get a little bit lost in -- given the portfolio exits and the like. We are seeing good momentum in terms of Commercial pricing trends, certainly, in the midmarket increases, mid-teen-type increases going through with improving levels of retention and so 3% to 5% in that SME area. And I think for the first time, we're starting to see improvement in margin, in underlying margin. It's going to be as obvious in the underlying waterfall walk this half. But going forward, we're starting to see those margins getting back to where they need to be in terms of our expected level of margin for the profitability we assume in those portfolios. So that is, I think, a story that could get lost in the commentary because of the various portfolio exits and the like.

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Operator [76]

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The next phone question comes from Ashley Dalziell from Goldman Sachs.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [77]

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I apologize if I've missed it but I just couldn't find any reference this morning in the material to the $2.7 billion cost base target for FY '19. I realize your performance in the half is well within that guidance range. But is that still officially a feature of the guidance for the full year?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [78]

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As you point out, Ashley, the $1.3 billion for the first half indicates a pretty good trajectory there. The cost associated with regulatory will increase in the second half. But we're still confident of the $2.7 billion target and achieving that.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [79]

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Okay, great. And then to the extent that you can thinking through into FY '20, I take your point that some of these reg and compliance costs are project related, which might drop out at some point. But are there enough OpEx BIP benefits coming through into FY '20 to kind of hold that $2.7 billion for another year?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [80]

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You would have seen the success we've had in the Business Improvement Program, in fact, exceeding our targets again this half, and we expect to exceed the targets on the full year. So that goes a long way. But as you'll go towards FY '20, $2.7 billion is still a goal, and we just need to wait and see where we get to on the regulatory cost, that will be the big swing. And it may be significantly less, which would be good. It may be more. It might be about the same. But we still target $2.7 billion as a goal. The concept of absorbing growth and inflation, those sorts of things into a relative flat cost base is fundamental to the strategy going forward.

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Operator [81]

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The next question comes from Brett Le Mesurier from Shaw and Partners.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [82]

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Just on the Bank, the gross impaired assets have increased by 20% over the past year, but we've only -- well, we've seen an 8% reduction in the specific provision, which had an impact on your bad debt charge presumably and one reason why it's low at $7 million. Can you comment on why you think you should be holding less specific provisions as your impaireds increase?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [83]

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I might let David make a comment. That's a lot of numbers, Brett. That's a...

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [84]

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Yes, so the composition, Brett, of the impaireds has changed over time. We've seen a fairly large reduction in the nonretail, which just tends to be a relatively high specific provisions. And then on the retail portfolio, we did actually see that moderate in the half. We actually increased the provisions on that, as we've taken into account some falling or softening market conditions coming through, and we had a couple of recoveries in this last half on some long-standing Commercial or nonretail exposures where we had a provision put aside, and we didn't need to rely upon to the extent we had expected.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [85]

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Your Commercial lending impaireds increased by 69% in the year from $39 million to $66 million. The only category that fell with agri which fell from $50 million to $37 million and retail went up from $27 million to $61 million. It doesn't sound like a great deal of mix change going on.

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [86]

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Well, we're happy with where it's at. And the outcome's the outcome on the provisions. So it's a -- those new ones come in and those old ones go out, and we're happy with where the provisioning's at.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [87]

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Yes, Brett, maybe we can take it offline and I guess related to -- it's a fair bit of detail there. And maybe we sit down separately and take you through that answer.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [88]

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I have a question on deposits as well. Deposit costs are up 5 basis points from June half to December half. You had a reasonable amount of growth out of that, about 3%. But the 5 basis point increase is a little bit more than we're seeing in some other banks. Do you have a reason as to why -- an understanding as to why your deposit costs are increasing a little bit more than the others?

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [89]

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Yes, I think it's reflective of the significant increase in the Growth Saver account, which is slightly higher interest rate, which is purely mix. But that's seen our funding ratio increased by 1.5%. So on a -- from a retail perspective, which has been a big plus.

But David, is that the right answer?

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [90]

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Yes. Again, it's -- it is the mix, as you said, Michael. We're seeing customers prefer a higher interest rate-bearing product. So I think you're seeing a mix of performances across the market, and we're observing a mix in pricing strategies across the market.

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Kelly Hibbins, Suncorp-Metway Limited - Head of IR [91]

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Okay. Great. Well, we might leave it there. Thank you all for joining us. And we will speak to you over the next few weeks.

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Michael Andrew Cameron, Suncorp Group Limited - Advisor [92]

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Great. Thanks, everyone.