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Edited Transcript of SUN.AX earnings conference call or presentation 7-Aug-19 10:59am GMT

Full Year 2019 Suncorp Group Ltd Earnings Presentation

Brisbane, Queensland Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Suncorp Group Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 10:59:00am 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

* Jeremy John Robson

Suncorp Group Limited - Acting CFO

* Paul W. Smeaton

Suncorp Group Limited - CEO of New Zealand

* 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

* Daniel P. Toohey

Morgan Stanley, Research Division - Executive Director

* David Ellis

Morningstar Inc., Research Division - Senior Equity Analyst

* Kieren Chidgey

UBS Investment Bank, Research Division - Executive Director & Research 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

* Siddharth Parameswaran

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Steve Johnston, Suncorp Group Limited - Acting CEO [1]

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Well, good morning. Good morning, everyone, and welcome to the Suncorp FY '19 Results Presentation. And today, I'm joined on stage by our acting CFO, Jeremy Robson, and in the front row, right across the front row here, we have our members of the senior leadership team. Now in behalf of all of those present today, I'd like to begin by acknowledging the Gadigal people of the Eora nation, the traditional custodians of the land and pay our respects to all elders, past, present and emerging.

Now for the agenda for today, and I'll provide, at the outset, an overview of the FY '19 result. I'll tell you about the work we're doing to focus the business, and I'll give you a sense of our priorities for FY '20. Jeremy will then provide a more detailed run-through of the numbers, including our year-end capital position. And then I'll come back to talk about the outlook for the group and our 3 operational businesses. Now we came to take questions after that. And I'll be asking my SLT colleagues to participate in that session.

So we start with the result, and we've reported net profit after tax of $175 million, a cash profit of $1.115 billion and a final ordinary dividend of $0.44 per share fully franked. As you can see on the left-hand side of the slide, there are a number of factors that impacted the result. The most material are the loss on the sale of the Life business and increased cost from natural hazards, regulation and compliance. Now these landed largely as flagged at the half year in February, and that means that 67% of the full year cash profit was delivered in the second half. Underscoring the back-ended protection is provided by our reinsurance covers as well as some result highlights that I'll call out on the next slide. The first of these relates to our key portfolios of Home, Motor and mortgage lending, and while their performance is not as strong as we had hoped, we exited FY '19 with a solid platform and solid base to build on into FY '20. We achieved significant improvement in margin across Commercial Insurance. The New Zealand result has been a stand-out with premium growth, claims improvement and benign natural hazards contributing to a record profit. We've also made good progress on our big programs of work. The Business Improvement Program exceeded target, and we've increase the numbers of customers that are interacting with us digitally. And investment in digital has been particularly successful in the Bank with at-call deposit growth of 10.9%. And finally, in a difficult market, we've completed the Life sale and ended up in a slightly better than expected position from a capital return perspective. So subject to shareholder approval at the forthcoming AGM, we expect to return the remaining proceeds for our $0.39 per share capital return on October 24. Now importantly, this means we'll be returning over $1 billion of capital to shareholders, which is equivalent to $0.83 per share over the next 10 weeks. Now I want to spend a few minutes outlining the priorities of the business from here. When the Chairman asked me to step in as acting CEO, she gave me and the SLT a mandate to make the necessary decisions to keep this business moving forward. We have a fantastic business. We have market-leading brands, we have a committed team, we've got a culture that drives us to support our customers when we need them most. But clearly, there are areas where we haven't got it 100% right, or we haven't clearly explained our intent.

Now I acknowledge and we acknowledge that there are more aspirational elements of the marketplace component of our strategy, and the associated third-party revenues that were assumed to flow from those activities have been too ambitious relative to where our business is at and the funds that we have available to invest. But [digitalizing] our business and improving the way we collect and then use data is absolutely our right strategy, the right strategy for this business. The changes we're announcing today bring an increased focus to delivering value from the digital assets that have been built over the past 2 years. And I'm confident that they will prove to be of lasting benefit to the Group, to its customers and its shareholders.

We set ourselves 4 clear priorities for FY '20. Number one is an absolute focus on delivering improvement performance in each of the 3 businesses. Two, we are embracing regulatory change. Strengthening trust has become even more important in the post-Royal Commission era, and we'll continue to make significant investments to improve customer outcomes. Three, we are leveraging the investments that we have made and the capability we've built in both digital and data in support of our 3 businesses. And four, we are focused on delivering efficiencies by reducing duplication and keeping the group cost base aligned with revenues. The sum of all this work will be a more resilient Suncorp, with an investment thesis built around high yield and system plus growth.

Now I'll now provide a brief summary of these 3 -- these priorities and the actions we're taking to bring about change. Now our first priority is to ensure all of our people and all the programs of work are aligned to improve the performance of our core businesses. In particular, in insurance, this means reinvigorating the multi-brand strategy, maintaining a disciplined approach to underwriting, embedding digital and data and product design and distribution. We'll focus on being best-in-class for clients' management across both short and long tail classes and through innovative use of reinsurance, we'll continue to reduce earnings volatility. In Banking, we're focused on a digital-first approach to products and functionality; fast tracking -- fast tracking our preparation to be open-banking ready; winning Queensland in direct; improving broker servicing and fulfillment; and maintaining a low-risk, high-quality credit book.

To our next priority, our response to the Royal Commission and other regulatory reviews. The commission identified industry-wide deficiencies, and it has forced all of us to review our businesses from top to bottom. This has resulted in large remediation and system investments right across financial services. To avoid or defer action or to categorize these costs as either a burden or an imposition is to reinforce the very reason the industry got itself into this situation. Our priority, therefore, is to embrace these changes. We are remediating where necessary and investing in a range of projects, which in aggregate, will strengthen trust and lead to better customer outcomes. Jeremy will run through in more granular detail a program of work through FY '20 and the expected cost profile through to FY '21. Turning to Slide 10. Investing in digital and data is both essential and uncontroversial. For Suncorp, it allows us to more effectively meet the needs of existing insurance and Banking customers; provides a convenient and cost-effective means of reaching new customers; creates a platform for us to meet more customer needs by connecting products from right across our business; and finally, it drives down the cost to serve. The accelerated marketplace spend included investments in digital infrastructure, including application program interfaces or APIs that currently support the Suncorp App and our customer center contact workbench. Digitals have enabled a single customer view, a new identity management system and a scalable rewards platform. Data science and digitals supported 0 touch claims, a capability that we've used to great effect in the Sydney hailstorm. But what is not well understood is the extent to which the digital foundations we have in place today provide both flexibility and optionality, allowing us to drive significant long-term value from what we have built. To their credit, Sarah and the technology team have future-proofed this investment, building a network of APIs connected straight through to core systems that were digitally enabled and consolidated over the past 10 years. Our task now is to capitalize on this work, meet the needs of our customers and deliver on the digital business case. And I want to talk a little bit to that on the next slide. Our progress here is most obvious in the Bank, where our customers have shown a high propensity to interact with us digitally and where a series of incremental investments in FY '20 will provide us with full digital Banking capability. Further demonstrating the flexibility of what we've built, in FY '20, we'll be focused on digitizing the Insurance business. We will [reskin] the Suncorp App with AAMI livery, simplify quote-to-buy capability and in doing so, create a leading insurance app for our AAMI customer base. We'll also develop a new technology platform to increase digital interactions across CTP. In turn, driving growth and improving the customer experience. With the foundations now in place, all these enhancements can be delivered with only a modest additional investment.

So turning to priority 4 on Slide 12. And over the past decade, I'm sure you'll be familiar that we've used a series of programs to improve the operational efficiency of our business. You're familiar with building blocks, simplification, optimization, and most recently, the Business Improvement Program. All these programs have been successful in their own right and in aggregate, I feel costs have been well-managed over that time. Jeremy will run through the BIP outcome for FY '19 and the plan for FY '20 in a moment. But moving forward, our focus will be on embedding process improvement, operational excellence, digital and AI into business as usual. And then as a team, be held accountable for our management of the overall cost base and the expense ratios in our 3 lines of business. The sum of all of our efforts under the priorities that we set out for FY '20 is to restore and reinforce Suncorp as an attractive investment for those seeking reasonable growth, high yield and maximum franking capacity. What's historically held us back has been our management of the volatility associated with weather, investment markets, credit quality and subscale businesses. We've taken a number of steps in the past 12 months to address these issues. We've increased our natural hazard allowance, and we purchased the reinsurance stop-loss. We've reinforced our high quality investment book. Our credit quality continues to be reflective of a low-risk bank, and we have a very strong balance sheet and a disciplined approach to portfolio performance. And more recently, there've been some concerns around loss of market share and our explanation of our strategy and our direction. I'm very confident that the priorities that we've laid out today will go a long way to addressing those issues. But to deliver, we need to be focused, have clear accountabilities and be biased to execution. And we need to make changes to the way we organize ourselves. Accordingly today, we're announcing the following structure changes: a new enabling function bringing together digital, marketing, customer and strategy will be established. Working alongside the technology team, this function will develop innovative digital first-customer propositions for both our Insurance and Banking businesses. Our contact center, stores and intermediary distribution functions and teams that currently sit in the customer marketplace function will be moved to Insurance and Bank. These changes have 3 immediate benefits. First, it allows the new function to be totally focused on the customer and digital programs of work, it will remove duplication, and it will clarify accountabilities. These changes and the clarification of our go-forward strategy will align all of our efforts behind improving the outcomes in our core businesses and in turn, build a more resilient Suncorp. Now organization change is often a catalyst for senior executives to consider their future. And I'm personally disappointed that the changes we're announcing today will see Pip Marlow leave Suncorp, a decision that she has taken. Pip has played an instrumental role in building the customer-centric culture that defines the Suncorp of today. We are fortunate, however, that within our ranks, we have an executive of Lisa Harrison's capability and deep domain experience to step into this new role. So at that point, I'm going to hand over to Jeremy to go through the numbers in detail.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [2]

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All right. Thanks, Steve, and good morning, everyone. Before I step you through the usual results commentary, I just wanted to provide a brief update on the completion of the Australian Life sale. We successfully completed the sale on the 28th of February and paid a fully franked $0.08 per share special dividend to shareholders in May. This represented the first component of the return of excess capital from the sale. I'm pleased to say the completion process has now been finalized, resulting in total consideration of $746 million, slightly higher than our original forecast of $725 million. Whilst this is pleasing, I do note the noncash loss on sale is now slightly higher than the original forecasted $910 million, reflecting a more prudent approach to provisioning for separation costs. As Steve said, we propose to distribute the balance of the sale proceeds via a $506 million pro rata capital return, equivalent to $0.39 per share combined with a related share consolidation, subject to approval at the AGM. This takes the total capital return from the sale of Life to $610 million or $0.47 per share. I also draw your attention to our approach to stranded costs, as we've outlined on the slide, which will continue to impact into FY '20.

Turning to the results and starting with the Australian Insurance business, where the second half benefited from the reinsurance protection we had in place and improved investment market conditions. While the FY '19 result is lower than the prior period, this was largely driven by higher natural hazard costs in the first half and weaker investment markets. However, we have seen an improvement in underlying margins driven by the continued benefits of the BIP program and the realignment of the Commercial portfolio. Over the next few slides, I will cover the key drivers of the Insurance Australia result. I've shown here a waterfall breaking down our GWP growth for the year. In consumer, unit growth continues to be impacted by lower new business opportunities as a result of the economic environment, with reduced turnover in dwellings as well as a reduction in new car sales. Overall, lower new business has been partially offset by pleasingly strong and stable retention. We took further actions in the second half to drive growth. This included increased marketing spend, pricing changes in some segments and increased call center resourcing. Together with the initiatives that Steve outlined earlier, we would expect unit growth to improve into FY '20. Commercial GWP increased 2.2% after taking into account the impacts of portfolio exits. This reflects our disciplined portfolio realignment with strong premium rate increases, partially offset by the selective nonrenewal of poorer risks. We are very pleased with the overall margin improvement in Commercial and expect this to continue into FY '20. It is worth noting that the strategic decision to exit some portfolios will continue to impact into FY '20 and in particular, the exit of the Longitude strata business equivalent to about $70 million of GWP. Overall, CTP GWP decreased by $70 million, driven mainly by scheme reform in New South Wales effective 1st of December 2017. The fall in Queensland GWP reflected reductions in the ceiling price over the course of the year of $18, but I note we saw a $9 increase in ceiling price effective 1st of July and expect to further $8 increase 1st of October. Whilst this is positive, we do expect to see continued pricing pressure in other states going forwards.

Turning to claims. And I've included the usual undiscounted view of net-incurred claims in the waterfall. This clearly shows the impact of significant natural hazard events as well as the ongoing positive impact of BIP, which is helping to offset underlying inflation. The overall improvement in CTP and Commercial claims costs reflects the impact of scheme reforms in CTP and the benefits from the realignment of the Commercial portfolio. Both Home and Motor have benefited from lower claims volumes. In Home, this is evenly split between exposure and frequency and in Motor, the principal driver is lower frequency. In Home, large loss fire claims [though] in excess of $100,000 and elevated water claims explain the increase. In Motor, high average repair costs, including the effect of regulatory changes on total loss claims were the key drivers of the movement.

Moving to the investment portfolio. The headline insurance fund results reflects the mark-to-market gains from significant fall in risk-free rates and the narrowing of credit spreads, partially offset by the relative underperformance of inflation-linked bonds. The underlying yield on the portfolio is 2.3%, slightly down on the first half and at the bottom end of our expected range above risk-free as we see the impact of reduced credit spreads and lower yields. Looking ahead, persistent low interest rates translating into lower running yields and mark-to-market gains are potentially reversing, and it will put pressure on the investment income and in turn, margins, particularly in the long-tail book. Next to New Zealand, which delivered a pleasing result driven by strong GWP growth across all portfolios and a relatively benign weather environment. Net incurred claims were down 5.7%, reflecting favorable natural hazards and improved working claims. The increase in operating expenses was mainly due to higher commissions as a function of the strong premium growth. The New Zealand Life result of $44 million was slightly higher than the prior period, driven by continued solid enforce premium growth supported by strong policy retention. Looking ahead, we do expect New Zealand GWP growth to moderate into FY '20, following the very strong premium increases we have seen over the past 2 years. And we also anticipate working claims to return to more normalized levels. Moving to the Group Underlying ITR, which has improved significantly since FY '18. As the waterfall shows, the higher natural hazard allowance in FY '19 and higher operating expenses were more than offset by the net claims and expense benefits emerging from BIP. The margin improvement was driven by continued expansion in New Zealand and the benefits from the ongoing realignment of the Commercial portfolio. As Steve mentioned earlier, we have increased the natural hazard allowance and purchased an aggregate stop-loss cover. While we remain committed to repricing for these changes over the medium term, when combined with the lower interest rate environment and increased regulatory costs, this will make the Group Underlying ITR target of at least 12% harder to achieve over the medium term. I also wanted to cover off the impact from natural hazard events and how our Reinsurance program has protected us in the second half of the year. As you can see from the chart, our natural hazard costs for the second half was $269 million, despite a number of events, including the Townsville floods, as the benefits of both the NHAP and the drop-down covers kicked in. I'd also like to outline the key features of the FY '20 Reinsurance program and natural hazard allowance. Firstly, the main CAT program and drop-down covers remain in place, and the NHAP also remains in place with a slightly higher deductible of $515 million. Secondly, the natural hazard allowance has been increased by $100 million to $820 million. And finally, we've also purchased a new aggregate stop-loss protection. This provides an additional $200 million of ground up cover for all retained natural hazard losses in excess of the natural hazard allowance, in effect, moving the allowance to just over $1 billion. While the additional allowance and stop-loss cover do create a headwind for underlying ITR in FY '20, they improve both the quality and predictability of our earnings going forward.

Turning to Banking & Wealth, which delivered a resilient net profit after tax of $364 million, broadly in line with the prior period. Total lending grew 1%, principally reflecting moderation in mortgage lending with a highly competitive and slowing housing market as well as Suncorp's early adoption of increased serviceability and verification requirements. NIM was flat on the first half at 179 basis points but 5 points lower than FY '18. The positive impact from the strong growth in at-call deposits was more than offset by the elevated BBSW during the year and intense price-driven competition in the mortgage market. Despite the recent tightening in BBSW, our expectation is that NIM will remain under pressure in FY '20, mainly due to competition in the mortgage market and limited ability to reprice already low-rate deposits. We continue to prioritize credit quality with impairment losses representing just 2 basis points of GLA. And this credit quality is consistent across all of our lending portfolios. Operating expenses were flat, reflecting a significant uplift in regulatory costs being largely offset by benefits of the BIP program. However, the effect of slower lending growth resulted in a cost-to-income ratio of 56.2%, in line with the first half but well above our target. Based on our forecast level of regulatory and compliance spend and the current low rate environment, the Bank is unlikely to achieve its 50% cost-to-income ratio -- target ratio in the short term.

As Steve outlined, the savings from BIP have enabled us to make the necessary investments in the core areas of our businesses. We now expect to deliver at least $380 million in net benefits in FY '20, which includes the removal of life-stranded costs. This new target has been updated from $329 million previously. I note that the net incremental benefits for FY '20 will be phased into the second half as the programs of work are initiated in the first half. Cost discipline remains a key priority, and I expect the overall Group cost base for FY '20 to remain at around $2.7 billion, excluding FSL, as the benefits of BIP continue to help absorb inflation and investments in the core business and the increased regulatory spend.

Moving to regulatory spend. Total regulatory project costs for FY '19 came in at $95 million. And that's compared to the $110 million we forecast at the interim. We've also included a customer remediation provision of $60 million in the results below the line, which is higher than we anticipated in the interim, which was $30 million. This relates to the anticipated costs associated with the Royal Commission and various remediation costs in relation to the Legacy Guardian Financial Planning business, Consumer Credit Insurance and our Suncorp Wealth business.

We expect to increase our overall project slate in FY '20 to allow for additional regulatory spend, drive growth in the core businesses while making sure we continue to invest in the necessary systems, maintenance and upgrade activities.

Having peaked in FY '20, regulatory project costs are expected to step down to approximately $100 million in FY '21 but remain higher than pre-Royal Commission levels.

And finally, to capital. We continue to maintain a very strong capital position. The Board has approved a final fully franked dividend of $0.44 per share, which brings the total ordinary dividends for the year to $0.70, equivalent to a payout ratio of 81%, in line with our targeted range. Looking at the waterfall and the Bank, over half of the $144 million reduction in excess CET1 includes a 25 basis point increase to the Bank's targets for meeting APRA's unquestionably strong benchmarks and the remaining 25 basis points is expected to be reflected in the first half of '20. As I said, our capital position is strong, following payment of the proposed $0.39 capital return, our pro forma excess CET1 is over $480 million as you can see on the right-hand side of the chart.

In conclusion, with BIP on track to deliver higher-than-anticipated benefits, our actions to reduce volatility in earnings through the higher natural hazard allowance and aggregate stop-loss cover combined with the prudent uplift in the project slate to invest in regulatory projects and growth in the core businesses, we feel well placed to deliver on the strategic agenda that Steve has outlined today. And with that, I hand back to Steve.

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

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Thank you, Jeremy, and delivered far more eloquently than your predecessor. Okay. In running -- in coming to the outlook, I want to return to the framework that I introduced at the start of the presentation and the key priorities for FY '20. We have 4 key priorities to recap: becoming operationally efficient, leveraging the investments in digital and data, strengthening trust and improving the performance of our 3 businesses. To deliver this and in doing so creating a more resilient Suncorp, we are already making changes to our structure and accountabilities as I discussed at the start of the presentation. In Insurance specifically, we are looking to improve our unit count across both Australia and New Zealand, while maintaining the medium-term priority of driving the margin back to 12%. Wherever possible, we will reprice for lower yield. We are prioritizing improved non-hazard water and long-tail claims. Our expectations of continued low inflation will see releases well above our usual 1.5% of NEP guidance. In the Bank, we are targeting above system growth in both lending and deposits. As in Insurance, here we'll be conscious of margin and the quality of the business being written. And over the year, you'll see the Bank leverage its digital investments and take to market its digital banking capability. We expect impairment losses to remain below the bottom end of the 10 and 20 basis points guidance range, and we'll attack the cost-to-income ratio through improved revenue growth, discipline around margin and the group's overall operational efficiency program. Along with $155 million spend on regulatory changes, $70 million of growth-related initiatives will improve outcomes for customers. Over the medium to longer term, I expect our project envelope to be somewhere between $175 million and $225 million depending upon investment priorities.

To the overall Group cost base, we've upgraded our expectations of net BIP benefits to $380 million. We've confirmed that our total cost base will land at around $2.7 billion. We continue to remain committed to ensuring that overall returns on capital exceed the Group's cost of capital. However, in the prevailing low interest rate environment and with the increased weather allowance and elevated regulatory spend, the achievement of a 10% ROE in FY '20 is unlikely. Our immediate balance sheet priority is to achieve shareholder approval for the Life capital return and in doing so, get over $1 billion of capital back to shareholders over the course of the next 10 weeks. We expect to complete the strategic review of SMART in the first half and of course, we remain committed to returning to shareholders any capital that is in excess of the operational needs of the business.

So in closing, I'd like to reiterate that Suncorp has 3 fantastic businesses, a passionate and capable team and a unique culture. I firmly believe the priorities that we've laid out today will drive improved performance across the business. I'd like to take this opportunity to thank all the Suncorp employees who have worked hard to deliver on our purpose of creating a better today for our customers. I'm now happy to open the floor to questions here in Sydney first. And then we'll move to the webcast.

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Questions and Answers

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [1]

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Kieren, do you want to kick off?

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [2]

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Kieren Chidgey, UBS. Just coming back to this target of improved unit growth into FY '20. Can you just give us a little bit more feel for what you're talking about there? You've pointed out you had minus 1.6 or minus 1.7 sort of volume reduction in Home and Motor this year. We came to understand how that trended into second half and whether or not you're talking about flat units, positive units or just reduced volume loss into FY '20.

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

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I think we might step through that question in a bit of detail, Kieren, and I might get Gary, after I make some introductory comments, up to fill in some of the blanks.

We've talked consistently -- and I think it's important to put into context that there have been unit losses in Suncorp over the past 5 or 6 years. And again, I don't know that that's necessarily always should be jumped to a conclusion that that's a bad thing in an insurance business, particularly on the Home side, following the floods in Queensland, we took a deliberate effort to improve the risk quality of our book, particularly in Queensland. So in insurance company, there's always some element of risk-based pricing that does improve the performance of the total book but particularly on the Home side.

Another point to make this year is that system levels of growth have been lower. So -- new car sales are down materially, high single digits and dwelling approvals again have been at a very low rate. So the volume of new businesses available in the market has been significantly reduced, and all of the insurance businesses in Australia, I think, have been very much locking down their retention book. And we have seen retention levels hold up very strongly in this environment. We certainly have seen a lower level of new business opportunity coming through. I think one of the other things that we did through the course of the year, which was a deliberate element of our strategy, was to introduce a master brand strategy concept, so we introduced the Suncorp brand into New South Wales and Victoria and variously across the country, which was consistent with our strategy. And that did take some marketing resource of the direct insurance brands in those geographies. And I think over the course of the latter part of the year, we've repositioned that. And when I talk about the priorities of the business going forward, reinvigorating that multi-brand strategy is absolutely core to what we think is the -- one of the very key parts of future success. We've got a fantastic group of brands in this organization, and I've talked about that a couple of times. And we need to support them and leverage them better. So we took an investment into the market in the second half to reinvest back in some marketing capability. It's a very different market in the second half of the year to get marketing and advertising time, and there were a number of -- well, a federal election and a couple of state elections on the way through made our ability to navigate into that market a bit harder, but we did get into the market towards the latter part of the year. And I'd break it into the 2 components, certainly Motor performance towards the back end of the second half was on an improved trajectory. It wasn't where we wanted it to be or we where we forecast it to be at the half year, but certainly, there we're seeing improvements.

Home has been a bit harder to move ahead. Obviously, there's an elevated level of claims inflation in Home that we're dealing with. It's a more difficult book to get that momentum moving in, but we're pretty confident or very confident, in fact, towards the latter part of the year that we've got all the tills we need in place to do that. So if you were to look across the whole year, the investment that we made towards the latter part of the last calendar year has started to take effect. I think the things that we've done in the last sort of 6 to 8 weeks will have an impact as well, and we're already seeing that through, particularly on the Motor side. I think the actions that we've identified today, particularly around the brands, will further improve the situation into next year.

In terms of forecasting, look, I'm not going to put an absolute commitment out there about where we get back relative to market share or flat unit count, I'd be very comfortable to see that momentum improve in units. I don't think this is much about pricing, Kieren, as it is about some of the other things further up the chain around marketing, alignment of the marketing program, et cetera, but [there will] be an element of pricing that sits in our solution. Gary, do you want to come up and step through any...

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [4]

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Sure. The only probably additional bits of color I'd add to that. When you say break it down in Home and then Steve said, "Home has been a bit more challenging to try to turn around in half 2 than Motor," we've taken some deliberate decisions, and Steve referred to reselection in the book. There's been an impact of about 1% on GWP across the year and about a half a percent on units as we've priced really to diminish our exposure to the broker channel for home personal loans. So when you kind of break it down, there are some elements of demand reduction, in many cases, economically driven but some deliberate decisions in there. And then the other dynamic you see between the average written premium, particularly saying in Motor where Shannons grows. Shannons is accretive to units relative to the book as a whole. It's dilutive to average written premium, creative to margin because of the lower risk book. So within that broad portfolio brands across Motor and Home, we have got a lot of moving parts. Some quite deliberate decisions taken, some that we're grappling with in terms of market dynamics. But as Steve said, Kieren, the focus for the year ahead is to really work that portfolio brands at a state market product brand label to drive better growth.

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Steve Johnston, Suncorp Group Limited - Acting CEO [5]

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Nigel and then Dan.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [6]

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Nigel Pittaway here from Citi. Just maybe following up on that question, first of all. If you look forward to FY '20, do you think your pricing across the personal lines classes is going to be materially lower than the sort of average price rises you were putting through in FY '19?

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Steve Johnston, Suncorp Group Limited - Acting CEO [7]

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No. I don't. As I said in answering the last question, Nigel, I don't think this is a -- as big an issue from a pricing perspective. Now that's not to say we won't be adjusting our pricing through the course of the year, and you would expect us to always do that. I still think, in aggregate, we go into the year with an expectation of putting increases of 3% to 5% through both portfolios. So I don't think anything's changed there. But we'll be more tactical about how we deploy that. We will use different processes around our digital programs as well. So one of the things that we are prioritizing is using and leveraging that digital investment to try and grow digital sales in insurance, and we'll do a lot more of that in the coming year. But I don't see any reason why we shouldn't be focused on and achieving those levels of pricing increases in both of those portfolios. Because fundamentally, we do have inflation in both of them. I think inflation in Motor is somewhere between 3% to 5%, probably at the lower end for us but the higher end of that range for our competitors because of the continued benefit we get out of SMART and the work that we're doing through BIP. On the Home book, I'd say it's slightly more elevated than that. So in aggregate, across the course of the year, inflation in Home probably running a little bit ahead of 5%, somewhere in the 5% to 7% range. The -- Obviously, there's a base level of inflation in home insurance. The delta on top of that for us has been twofold. One is the continuation of the elevated levels of non-hazard water, water claims. That's a very complex problem, it's industry wide. And we've put in place a number of activities to get on top of that, including triaging the claim through into specific cells, into call centers and then through panels of builders, et cetera. And we have had a big event in Townsville that we've been managing through at the same time. So non-hazard water is a challenge in Home. On top of that, we've had an elevated level through summer of fire, total loss fire claims. Jeremy talked about that in the presentation. So the bottom line is I think we need to continue to target those levels of price increases for the portfolio, although we will be tactical. We'll be tactical by brand and by geography to work through how best we can get the outcome for the total portfolio.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [8]

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And just maybe delving slightly more into that Home claims and far. I think at the half year, you weren't sure whether or not that was just a one-off or an ongoing trend. Presumably from what you're saying now, you're more convinced that you've got a sort of more permanent trend here than you need to address. Is that...

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Steve Johnston, Suncorp Group Limited - Acting CEO [9]

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On non-hazard water, certainly. And there's an element of fundamental basis of the portfolio that drives that. So the number of bathrooms in homes today is significantly greater than it was 10 years ago. And the way homes are built now with integrated flooring between kitchens and land rooms and dining rooms means that when you have a problem in the kitchen, it typically means you've got to replace all of the flooring across the footprint of the home. So there's an element of that, that will be entrenched. There is a real delta that a good insurance company can bring to -- bring that cost down relative to the industry, and that's typically where mold has become an issue. And so if you can get in quickly, you can get the claim assessed and you can get it dried out, then you take mold off the table as an issue. And what we find is that we get into a debate around mold and where the genesis of the mold has come from, the claim that we're dealing with, the one that might have happened 5 or 10 years down the track. It becomes significantly more complex, and the average claims cost goes up. So there's an element, I think, of that, that will become entrenched and will be dealt with through pricing or terms and conditions. And I think various of insurancers are looking at solutions to that through either pricing or maybe putting caps on non-hazard water-related claims, as an example. And that will manifest itself over the course of the next 12 months. So I think that issue is more entrenched. On the fire, I think, Gary, you might like to comment on fire. I mean it's a bit harder to understand whether we're seeing a trend there or whether it's continued volatility in terms of the large losses.

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [10]

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Yes. Fire is bit more challenging to unpack, Nigel, but a couple of the things that we do say, and you can imagine we talk to, in a very transparent way, to other players in the industry and to fire brigades about what people think is going on with this elevated fire frequency. One of the things that we do know is there are cheaper internationally sourced solar systems on a lot more roofs these days, and they run a greater risk of causing a home fire. We're seeing air conditioners triggering home fires. We're very watchful for whether this rumored impact of cheap cabling in cable systems that are sourced internationally is a factor, but it's not apparent. So we would say at the moment, it's -- the electrical issues coming out of air conditioners, coming out of solar systems, rooftop solar systems that are triggering it.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [11]

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Okay. And then maybe just finally changing tech onto the customer remediation charge is $60 million. I mean are you expecting to have to make ongoing provisioning for -- or ongoing allowance for customer remediation charges going forward? Or is this sort of a one-off hit where (inaudible)

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Steve Johnston, Suncorp Group Limited - Acting CEO [12]

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Yes, I think the way that we've tried to disclose it is to -- as best we can, and we can only deal with what we know. There's obviously the two referrals that we have from the Royal Commission. The emergence of a class-action lawsuit, which we will defend. Elements of remediation that have occurred as -- like all financial services business, we've reviewed our business from top to bottom, and we've identified areas where we think we could do better. Some of that may well manifest itself in remediation. But the knob of it is, is that this is a pool of money that probably largely goes to legal costs and administrative expenses. And an example of that is that in terms of dealing with the Royal Commission referrals, we are going back through 10 to 15 years of data within this organization. And working through that to work through our submissions to APRA on that matter. So it's very labor intensive, and it's very cost intensive, both internally and externally. And so what we've tried to do in terms of the way that we've talked about it is to -- and we talk about putting it below the line, it's in our total P&L. I mean it's below the profit after tax for business lines. So identify that element with -- that we don't think is ongoing, that we think will be one-off, and we think is very much related to either the Royal Commission and its findings or the elevated nature of the Royal Commission's examination of our business. And I think that's probably the best way. But I -- look, I'd be reluctant to say I'm going to be 100% precise about it. We've done our best to identify what it might look like. And we need to see where those inquiries land.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [13]

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And Steve, I'll just add to what we haven't called out in the presentation is just the fact that we've got a higher, what we call, BAU regulatory compliance spend that sits in the BAU base. And we're not calling that out as one-off. So that certainly elevated over the last couple of years, particularly the last 12 months, and we expect that to continue. So there is within the cost base that we're calling out, the $2.7 billion, an element of continuing increased BAU.

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Steve Johnston, Suncorp Group Limited - Acting CEO [14]

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Compliance, cost risk, resources, license fees to regulators, there's a laundry list of things that go into the BAU cost base that we've been dealing with as the result of -- again, I don't want to sound defensive about it because we are embracing this change. Ultimately, we've got a creative mindset in the organization that all of the things we're doing here will add to better outcome for customers, which in turn will be a better outcome for shareholders. So I know we tend to sort of portray it a little bit defensively, we are embracing it, and we're doing it in absolute the right spirit.

Dan?

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [15]

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Dan Toohey from Morgan Stanley. Firstly, just a couple points around the guidance. The 1.5% reserve releases were greater than, if you look at the last couple of years, have been sort of 3.8%. The -- is it pricing is moving around, but the inflation wages growth expectations, I know yields have come off a lot, but what are you thinking in terms of FY '20? Should it be marginally higher than the 1.5%?

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Steve Johnston, Suncorp Group Limited - Acting CEO [16]

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Let's look around and see if the appointed actuary is in the room. I don't think he is. I think the easiest way to think about the release number is the inverse of the inflation impact on the asset side of the balance sheet, insomuch as if we're reserving 6.5% for inflation, whether it be superimposed or whether it be underlying average weekly earnings, and those numbers are running below 1%, then by definition we're going to get a big release out of that portfolio relative to the 1.5%. And so to the extent that -- I mean, it's not an overly heroic statement to say it's going to be ahead of 1.5%. I think if inflation is at these levels, assuming we don't get superimposed inflation in any of the schemes, there's no evidence of that in any of the schemes that we're operating in. Or any particular issues in any of the schemes. I think there's an expectation for it to be a lot higher than the 1.5%. Whether it's as high as it is this year remains to be seen, but somewhere between 1.5% and the numbers we're reporting this year, I think, is a fair base case to move into the year.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [17]

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As Steve said, there's the relationship with the balance sheet as well. So we got the investment-linked bonds, which you need to remember is sitting on the other side of that inflation curve.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [18]

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And the 10% ROE, you sort of -- I think your guidance clearly saying it's not achievable near term. We've had 2 prior CEO's sort of hang out the 10% target as an aspiration to work towards. Do you see that as something that is still in the frame for where the business can be set to achieve?

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Steve Johnston, Suncorp Group Limited - Acting CEO [19]

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Yes. I come from a starting proposition that -- and I was supportive of that decision. So you talk about 2 CEO's, I was right beside both of them. And I firmly believe that the way we structure this business and the priorities that we outlined today and the actions that we're taking, the alignment and the accountability focus that we're driving through the business should allow us to achieve. Whether it's 10% or greater than our cost of capital, I mean, we wouldn't be a management team that anyone would be too supportive of if we were prepared to say that we're going to run this business over the longer term below our cost of capital. Now whether our cost of capital today is 10% as it might have been 3 years ago, I'd say with the yield environment sitting where it is, it's probably lower, and we've done a bit of work in recent times to suggest that our cost of capital, cost of equity across the Group is closer to 9% than 10%. So my gut tells me that we've got to be ahead of our cost of capital and that we should aspire to get a return of 10%. And I've often talked to the market about the framework that I see the business operating in, and it's consistent with the diagram that was up on the board before. I think we should be able to deliver returns on a -- ITR returns in insurance of 12%. I think the activity that we took to consolidate the insurance market in 2007, 2008 drives to that sort of outcome. We've got to be -- do all the things I talked about today, I think at 12% should be achievable. I think a cost-to-income ratio of 50% in the Bank should be achievable. Again, you would expect us to be targeting that sort of level. I think we should be able to spend $175 million to $225 million on projects in this group. Now obviously, that's higher at the moment because regulatory costs are elevated but over time, they will come down, and we'll be able to take that element of it and drive it back into growth to keep the business moving forward. I think our cost base should land somewhere between $2.6 billion and $2.7 billion. I think we should target growing the business between 3% to 5%. I think if we do that, it's not a difficult framework to work through, we should be able to deliver returns above our cost of capital and -- 10%. But I accept the fact in the short term, and I don't think anyone in this room would argue that with regulatory costs high, the reinsurance costs that we have absorbed to take that issue off the table, higher allowance, that's going to be difficult to achieve in FY '20. But from my perspective, I think we should be striving for that over the medium term.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [20]

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And just finally on GWP growth. Historically, you've put out a target, I think, north of 3, perhaps something of that magnitude. A lot of the comments on personal loans, which we've discussed, can you talk about the rest of the portfolio? Is Commercial, the momentum there, is that continuing, or is it softening? You talked about New Zealand moderating. There doesn't seem to be really any target around top line growth here.

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Steve Johnston, Suncorp Group Limited - Acting CEO [21]

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Yes. Look, again, I come back to that framework I just introduced before. And I don't know that we're precise about a target for FY -- we are not precise about a target for FY '20 because I think what we found over time, particularly in Commercial insurances where we've taken big portfolios of business out because that's the right thing to do from a risk perspective or margin perspective. That's tended to decrease the aggregate written premium growth. You've had big regulatory changes to schemes in New South Wales. Again, that's depressed total premium growth but created a far better scheme, far more certain scheme and a better scheme for customers and for shareholders over the longer term. But again, if you take all that noise out of play, and you get back to what the underlying growth of the business should be in the framework I talked about before, based on the actions we're taking, I think 3% to 5% growth of this business is where we should be on a Group basis.

Yes?

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Unidentified Analyst, [22]

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(inaudible) Oswald Investment Management. A couple of questions. First one on Commercial. Yes, you've called out higher margins. But where is the Commercial margin in comparison to the rest of the G.I. margin? And how much higher do you need to see it go before it gets to levels where you are getting the kind of risk-adjusted return on equity that you need?

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Steve Johnston, Suncorp Group Limited - Acting CEO [23]

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I think the -- and I called it out at the start of the presentation. I think the work that the team have done on remediate -- well, call it remediation portfolio returns of margins in Commercial Insurance 2.5 years ago were low single digits. And [if we have no money] we couldn't get the market to move with us. And so we seeded quite a deal of business, particularly at the top end of the commercial market, and we're starting to impact on the mid-market. And so the price increases we're putting through SME today are probably 3% to 5% in SME, mid-market could be anything to high single digits and on loss-affected mid-market and top end, well, north of 15% in some loss-affected classes of business. So I think -- and in that environment, it's very easy to take your eye off the ball there and the pressure about our total premium growth, the team have absolutely been dedicated to making sure that we focus on margin. And if we're sitting here today, I'd say margins are probably where they need to be. I think we probably need another 12 to 18 months of sort of increases that we've been putting through the book, which is similar to the ones I've just outline before to consolidate that margin. And then it's a competitive market. So we have to be disciplined about holding those margins at those levels. Because it is cyclical, and sometimes it wants for a little bit of discipline when margins get to that level. So I think we're where we need to be. I think another 12 to 18 months of these sorts of increases will consolidate it. And then I think the portfolio profitability will be acceptable from our view going forward. And again, it's not only been the work that we've done. To do that, it's been the brokers that have worked with us to help with -- explain and understand their business models, and they've had to explain -- we had to understand their business models in reverse to make sure that we work together to get these outcomes. So I think we're getting close to where we need to be. But we need to consolidate it.

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Unidentified Analyst, [24]

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But the focus will be on margin rather than on the top line?

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Steve Johnston, Suncorp Group Limited - Acting CEO [25]

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Absolutely.

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Unidentified Analyst, [26]

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And second question, which been the big delta in result, which is New Zealand. Can you kind of talk a little bit about where the rate increases are coming from? Is it from the dearth of capacity in Wellington and Commercial? Or have you seen -- [were we] seeing some Motor inflation as well in New Zealand? And then the second question is, Jeremy, you talked about seeing the long -- seeing the claims reverting to a long-term average. Can you just kind of explain to us what you mean by that?

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Steve Johnston, Suncorp Group Limited - Acting CEO [27]

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I'm going to ask the man of the moment to come up and talk to New Zealand first and then I'll hand over to Jeremy. So Paul, if you'd like to quickly talk through the New Zealand premium.

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Paul W. Smeaton, Suncorp Group Limited - CEO of New Zealand [28]

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So just in terms of New Zealand, we took a three-teeth strategy approach. So on the personal loans, we looked to put across price increases up between 5% and 8%. Then you get to the -- more of the Commercial side, where price increases went through circa 15%. And then you get to the corporate, where we incurred quite a few losses as the result of Kaikoura 30 plus. So basically, that's played out, those price increases have flowed through. And if you look at aggregate exposure into Wellington, it was actually reduced by 2.6% across the last 12 months. And so what you're seeing is we've taken capacity from the corporate side of the book, applying it to the personal loans and growing there. But overall, aggregate exposure in Wellington is good.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [29]

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And on the working claims, it's more of a view from a ratio perspective in terms of where have the working claims ratios got to in New Zealand. We feel that they've got to a level where they probably need to revert back to a more sustainable, longer-term level so it's probably more a comment from a -- looking at it from a sustainable ratio basis.

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Unidentified Analyst, [30]

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But if we think about the sustainably, what are we talking about it? The ratio rises by 10% or 2%? I mean give me a sense of where the shift is.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [31]

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Probably be in the low single-digit percentages points.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [32]

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Matthew Dunger from Bank of America. Just on the capital generation. You've grown the excess capital position with lower unit growth and also only 1% lending growth in the Bank, can you maintain the dividend payout ratio at those 80% levels at the top of the range if we see an increase in volumes like you're expecting?

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Steve Johnston, Suncorp Group Limited - Acting CEO [33]

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Look, I'm very confident, Matt, that we can do that. We've -- I mean, one of the things that we've -- I think had some acclaim over in the last 4, 5 years has been our ability to manage the balance sheet, and we built that excess position to hold that excess buffer through a period of time to make sure that we do have flexibility. So flexibility comes in 2 parts. One is if we were to get into any sort of level of stress, then we can move capital around the Group and support any of the businesses that need capital injections, and we don't see anything on the horizon that requires us to do that. But equally, having a good excess position with a significant amount of that flexible and fungible allows us to deploy capital and take advantage of opportunities that might be in the market at any particular point in time. Because the last thing you need is if there's an environment there that's conducive to growing and growing with good margin and growing within your risk appetite, the last thing in the world you want to do is be balance-sheet constrained. And so with a buffer of high 400s, which is probably too high, and the growth profile that we're forecasting and managing through our 3-year business plan, I think there's every likelihood that we'll be able to maintain capital payout ratios of high -- into high ends of our payout ratio range and accommodate the growth that we're forecasting over the next 3 years.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [34]

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So you're happy to let some of that buffer reduce into what sort of level?

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Steve Johnston, Suncorp Group Limited - Acting CEO [35]

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I -- look, I mean, I don't want to create another set of targets. All I'd say is 480 is a pretty solid buffer for a business like ours. It hasn't, certainly in my tenure, been below 300. I'm not sure that I'd like to see it too far below 300. So you can work out somewhere in that area is where we probably try to land it over the normal course of our business.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [36]

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And that will naturally come down as we put the next 25 points unquestionably strong through the bank, for example.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [37]

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Yes, thanks. On the Bank, on that 12.5% to 15% return on CET1 target, is that still appropriate given what's happened to margins, noninterest income and costs?

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Steve Johnston, Suncorp Group Limited - Acting CEO [38]

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It's going to be challenging. Again, the number of the metrics that we've called out today in the short-to-medium term to get to those levels of return, but again, I come back to the framework I talked about before. And the Bank framework is reasonably simple as well. I think the way you should think about our Bank in a low-risk way is that we should grow at or around system. We should target the net interest margin, the 170 to 180 basis points range as we've typically reported it. 80, 20, 80% focused on mom and dad mortgages, 10 to 20 basis points of impairment. Although I think the construct of our book today sort of biases us to or through the cycle view closer to the 10 basis points as opposed to the 20. And a cost-to-income ratio of 50. Now all you need to do in that Bank is manage against those metrics consistently, and you'll get 12% to 15% return on Common Equity Tier 1 capital. And you're doing that because you're leveraging the strength of this Group. The Bank sits in this Group with an A+ rating. We've just come out of the 5-year domestic term market with a funding deal, which is the best we've ever been able to achieve in the company's history, even right back to -- through the pre-GFC days. So the macro environment for Banking is tough, it's tougher for regional banks. But the things we're talking about today and the focus that we're going to put on the digital program in the bank and all of the things that go to running the bank better in a BAU sense, I think, will get us to a point where we should be aspiring to 12% to 15% returns on Common Equity Tier 1 but delivering all those other things I talked about is the build-up to get there. David, is that fair enough? You want to -- I better let you come up and fill in anything if you like.

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [39]

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The only observation I'd make on that is, as we increase the level of CET1, the top end of the target becomes harder because it'll be a more capitalized bank for essentially the same amount of revenue. But certainly, at 12.5%, 13%, that's a fair return, and that's what we're targeting through the cycle. And just to build out the commentary on the (inaudible) or debts range, at the moment par, given the balance sheet, is about 7.5 to 8 basis points of [BDD]. Just as we look forward, the economic environment is better than par. So again, that's kind of where we're sitting. But one, interest rates are very low, the outlook for the economy is a bit negative on balance so were we to see a reasonable recession, which is probably not our base case, the housing book will have a different profile. And that's how we see 10 to 20. So we're still comfortable to be talking about 10 to 20. We still think that's a -- we'd always operate at the very low end of that in a normal environment, but the immediate outlook is for better than in that 10 to 20 range.

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Steve Johnston, Suncorp Group Limited - Acting CEO [40]

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Okay. David?

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David Ellis, Morningstar Inc., Research Division - Senior Equity Analyst [41]

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David Ellis from Morningstar. Thanks, Steve and David, on those points on the Bank, and my question really expands on those or look -- I want to go in a bit more detail. I heard what you said, of course, about where the Bank should be going and what it should be achieving. But looking at the stats, net interest margins are declining, and you pointed out that this is going to be further pressure on margins in the coming year. Cost-to-income ratio is increasing, the ROE's decreasing. The lending growth for last year was less than 1%. So how is the Bank going to -- from a detail perspective, how are you going to deliver above-system credit growth and get those other -- those key ratios going the way you want them to go?

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Steve Johnston, Suncorp Group Limited - Acting CEO [42]

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Thanks, David. And look, it is a good question. And I have to keep taking it back to what I've talked about today in terms of the priorities we set the business and what we're focused on in the Bank. We should be winning Queensland, it's a higher market, we've got a fantastic brand, we've got a big distribution network in Queensland on the direct side. Our market share there is between 7% and 8%, and some of the major banks, the smaller major banks, is sitting at between 12% and 16%. There's a great opportunity for us in Queensland through direct distribution.

On the broker intermediated servicing part of the book, we've had volume growth up. This has been a bit cyclical. I mean for a book of our nature, that's the case. We've got to get better at servicing that broker and need a mediated distribution channel so we can be more consistent in our turnaround times, reduce our turnaround times and be more definitive with those intermediaries that work with us around how we're going to service the proposition there.

The Bank has spent a lot of money, or we have spent a lot of money in supporting the Bank through digitizing the core system infrastructure but also a lot of the work that we've done in the digital program over the past 2 years has been -- put the Bank in a position now where it can leverage those investments and go-to-market as a digital Bank. And we have to reimagine the Bank as a digital bank. And we have to continue to be focused on the group program to take the expense out. The moment the Bank gets allocated too much expense for a business of its size, and we have to move out of the process -- move into the process improvement piece, get operational excellence working, take costs out and drive that through into a lower cost base of the Bank. So I can understand the skepticism given the direction. But I just have to keep taking people back to the actions that we're taking, the priorities that we're setting, which I think, with a focus that we're going to deliver, will put the Bank on a different trajectory than the one that we've recorded in the past 12 to 24 months.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [43]

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The other opportunity with the Bank's, Dave, is on the funding side of things where we've seen very strong at-call deposit growth, which has been quite a purposeful attempt to reduce the term deposit funding. We've seen the benefits of that through margin, and that remains an opportunity for us going forward as well.

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Steve Johnston, Suncorp Group Limited - Acting CEO [44]

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So we'll now go to the phones -- sorry, Andrew.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [45]

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Andrew Buncombe, Macquarie Securities. Two questions on claims if I can, please. Firstly on Motor and the continuation of that trend. Does that change the way that you think about capital SMART? I know that you've historically looked at it as a standalone investment. But actually as part of the Group, does it not add a continual benefit?

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Steve Johnston, Suncorp Group Limited - Acting CEO [46]

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Thanks, Andrew. It is a very good question, and we have flagged that we are doing a strategic review on the SMART business. I'd start by saying -- and I think everyone in this room would recognize and certainly, it's been something we've been very vocal about is that SMART has provided a competitive advantage for us in Motor vehicle repair. The challenge we've got with SMART and why we are undertaking a strategic review is it is constrained to Suncorp [cap] vehicles. And of course, one of the big dynamics in Motor insurance is a reduction in frequency. And so our ability to expand the SMART network and continue to make it efficient is reduced in an environment where we're getting less vehicles going into the network. That's a good thing for the Group, it's a good thing for claims cost, but it's not a great thing for SMART because it can't continue to grow and get as efficient as it needs to be to compete with a market in smash repair that's consolidating around it. And so when I think about it commercially, I think about the fact that we've had a fantastic competitive advantage that will have shrink over time. And so the purpose of the strategic review is to have a look and see whether or not there's a means by which we can create through the establishment of a multi-year Motor repair agreement. And locking the competitive advantage that we see it today in terms of service, customer service and price, average repair price and find someone who can -- who wants to pay -- values the business and pays consideration to make then it work more efficient and drive value through and grow that business. So I think the logic of it is it's sensible to do a strategic review. We haven't made a decision yet. But the dynamics around that market are changing, and we've got to sit back and have a look at that asset in the context of that changing environment.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [47]

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Yes. And then the other question was on Home claims trends, specifically non-hazard water claims trends. This isn't a new issue, it's a global issue. It's not unique to you. I remember at a Suncorp Investor Day a couple of years ago, we went around, and one of the stalls was the devices that made to send signals back to say turn off the tap, or it would do it itself. How do Suncorp think about rolling out those devices now to help their customers? Or is that still incumbent upon customers to change their risk profile themselves?

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Steve Johnston, Suncorp Group Limited - Acting CEO [48]

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We might get Gary to talk to that. I think all of those initiatives are relevant for how we get on top of this issue.

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [49]

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Yes, that technology you talk about, Andrew, in terms of pressure recognition and using a signal to an App for somebody to do something about their -- shutting off their water pressure is great. Yes, you've got to get behind the meter in a home. It's not inexpensive and perhaps more of the challenge we see in the cost we're bearing now around flexible hoses. So rather than a water pressure challenge in the home, the impact of DIY-fitted and/or poor quality flexible hose. So for us, we have a really strong focus not only on that, the mention of property claims, Commercial claims given some of the other big topics around the community at the moment on driving for national standards, improved standards. And it's conceivable we may need to do some things around underwriting in a home book to try to recognize that elevated risk that may not be easily dealt with just by the pressure measures, and they will be hard to get an install base of. So we may need to send some signals to some homeowners that they might need to do some things.

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Steve Johnston, Suncorp Group Limited - Acting CEO [50]

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I'll come back to you at the end, Brett. I'll save the best for last. Okay, to the phones.

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Operator [51]

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Your first phone question comes from Ashley Dalziell with Goldman Sachs.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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Steve, I just had a question with regard to your Slide 26, where you effectively are forecasting a $155 million reg in compliance budget for '20. Does the $60 million of remediation costs that we saw this year effectively come back up above the line into the business units to hit that $155 million in '20? And how much might we see kind of within the insurance businesses which may impact margins? And then just a follow-on to that, where you have the step-down into '21 from $155 million to a $100 million, I think, in regards to Dan's question, you said that you may reinvest those savings in the business. Just to be clear, I mean, is that a $55 million incremental benefit into '21 that drops out of the P&L? Or should we be thinking of that as something which may fund other initiatives?

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Steve Johnston, Suncorp Group Limited - Acting CEO [53]

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I think the best way to think about it -- I'll answer the second question first, then go to Jeremy. I think the best way to think about it is while it was keen to put the $175 million to $225 million project envelope in that slide is to say that, I think, that's the longer term view of what we need to be investing in this business. So not all of it -- not all of that step-down would be automatically reinvested, some of it may. But I think going forward from '21 forward, that project pool will sit somewhere between $175 million and $225 million. Jeremy?

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [54]

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And Ashley, with the $60 million and the $155 million and the $95 million, the $60 million issue is below the business unit line. So that none of that $60 million is reflected in the line of business profit numbers. What's reflected in those numbers issue is the $95 million that we see on the chart, the regulatory project cost. That $95 million in the lines of business increases to $155 million next year, which is part of the headwinds that we're calling out for both Bank and Insurance. So when you look at the line of business for FY '20, the reg project costs within those line of business P&L's will increase from $95 million to $155 million in aggregate.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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Yes. And so that $60 million going back above the line, would that be roughly 70-30 to your Bank?

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [56]

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Well the $60 million doesn't -- the $60 million is provided for in FY '19. So it's a cost in FY '19. We don't see that again FY '20.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [57]

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No, but you're effectively saying the reg and compliance budget for the business is of $155 million and then 20 steps up from $95 million, but that step-up is at a roughly 70-30...

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [58]

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Well, 70-30 is probably a reasonable goal but might confirm that later on.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [59]

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Okay. Okay. And then just a question on the Bank look with regards to the market share or the above-system growth targets. I mean does that pertain to mortgages in the current environment? And why is it the right time for you to be growing above system in mortgages? And then just within the margin guidance for the Bank, just be interested in what you've assumed for any potential additional cash right productions from here. And also funding costs with regard to the cash build spread.

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Steve Johnston, Suncorp Group Limited - Acting CEO [60]

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Well, I might answer the first one and then David, if you want to talk to the second one. I think -- yes, I think an aspiration of growing at or above system in this environment is applicable for our Bank given that we have 2% -- just over 2% market share in aggregate across the country. So I think there's an opportunity for us, and I talk about Queensland. There's opportunity for us to grow in Queensland in a jurisdiction that we understand very well, we can assess the risk very well, and we can grow well and fully within our risk appetite there. And we can selectively grow in other parts of Australia. So I don't see us wanting to entrench ourselves subsystem for an extended period of time. We have to keep the balance sheet moving, and one of the ways of getting that cost-to-income ratio down over time is to get some revenue growth back. But I always put the caveat there, if it doesn't make sense for us to grow, if the margin isn't there, or if the returns aren't there, we won't do it for the sake of just getting balance sheet growth. But the conditions, preconditions around profitability, margin, returns on capital, portfolio configuration of risk are all fundamental to the statement. Our inspiration is to grow at system or above. But if the preconditions to deliver that aren't there, then we will step out of the market and we'll do it and be open with you about why we do it. David?

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David Carter, Suncorp Group Limited - CEO of Banking & Wealth [61]

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So I might just pick up the total of it that around mortgage growth. On the broker side, obviously, there's a lot of choice for brokers, 28 fully lenders, at any point in time. It depends a little bit on what the requirements look like. There are some banks who are not doing a lot of work on verifying expenses or statements. We thought we got a fairly clear instruction from the regulator on doing that. So clearly, if there are differences in the process that people experience, we're going to see less demand or more demand depending on that issue. So we're not lowering our standards particularly. We're going to be as efficient as we can within that. But that's a harder one to predict. What we have seen in the last 12 months is the volume of applications and the market decline materially, and it's mostly in the refinance market. And typically, in the past, that's been a fairly big source of business for us where we have grown strongly. If I look at margins then on the funding side, look, it's hard to know where cash rates will end. It's certainly better to see the [90-day] Bank those operate come in much closer to cash. In fact, it's pretty much at cash at the moment. And we've got, really, 3 components to our funding, we've got variable rate transaction accounts. We have a relatively lower exposure to transaction accounts that already pay no interest. So that is somewhat helpful. The term deposit book takes 4.5 to 5 months to reprice through. So that is still repricing through from the first cut, not the second one. And then the wholesale markets, look, we've always talked to you about this diversification of the funding, options that we have, so we're in all of the funding markets. We did a 5-year deal a couple of weeks ago at 70 points over. The swap, which is far more attractive than raising term deposits, that is the lowest margin that, that market's been in for many, many years, whereas other markets are elevated. RMBS, at the moment, for example, is a tough market to get away at a good price. So managing those options, we've got plenty of capacity within all of them to take them as we need them. Margin will be tight and the -- we're just going to manage each of those levers according to it. And as Steve says, "If it doesn't make sense to grow the mortgage book, we won't grow it." We do have flexibility in the Commercial book, the ag book last year didn't really grow with drought. We'd like to see some more rain, clearly in parts of the country, but the outlook for us with ag subject to rain is positive in terms of growth. The margin characteristics of that business is a bit different to mortgages.

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Steve Johnston, Suncorp Group Limited - Acting CEO [62]

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Another call? One more?

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Operator [63]

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Your next question comes from Siddharth Parameswaran from JPMorgan.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [64]

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Steve, a couple of questions if I can. Just -- firstly, just on the volume trends in General Insurance, the -- can you give us an idea geographically where some of the pressures have been on the Motor and Home book? Is it more Queensland? Is it Victoria?

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Steve Johnston, Suncorp Group Limited - Acting CEO [65]

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Look, I'm not sure we could isolate any particular geography. Gary, you might want to come up and just quickly -- I don't think there's any particular geography that's been more challenging than another?

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Gary Charles Dransfield, Suncorp Group Limited - CEO of Insurance [66]

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It's probably more, I believe, isolated by brands [see] than by geography, although as Steve did mention earlier, we always take a long, hard look at Queensland and the degree of concentration risk we've got there. I mentioned in Home, the reduction in intermediated personal loans, it was quite deliberate, particularly in Home. That will have a skew to higher premium market, so it will have a skew to Queensland given that that's where those higher average premiums come from. Look, we'd have liked to have seen more traction in AAMI and APIA brands, that's been pretty much an East Coast story, none of the states any more so than each other for those brands. And then our aspiration, particularly in markets like South Australia and Western Australia, is to take advantage of a brand like AAMI that does have reasonable prominence and really take it to market quite vigorously, particularly in South Australia where we've got the opportunity with CTP competition beginning.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [67]

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Yes. Okay. Just a follow-up question from me just on underlying margins in General Insurance into FY '20. When -- you flagged quite a few pressures in your presentation. I think you flagged yields, which perhaps that could be worth about 1% into next year as a headwind. You flagged that inflation in Home was running around 6%. You flagged that you've actually been getting rate increases, which are below 3. So maybe another half a percent pressure there. The NHAP allowance, that's up -- that's a headwind of over 1%. Reinsurance costs, I'm not sure. And then you're flagging more investments into marketing. It seems like there's quite a few pressures. I mean can you just quickly fill out some of those missing gaps, reinsurance I suppose, how much of a headwind is that. And the numbers that I just flagged there are a headwind of about 2.5% or a bit more than that into next year. Am I thinking about this the right way? Are there any offsets which help the underlying margins into -- in FY '20?

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

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I think you've captured, in aggregate, the key drivers. I don't know that I necessarily agree with the quantum's that you've talked about in each of those categories. Certainly, it goes -- it stands to reason that if yields fall, our ability to reprice for them is always at a delay and at a lag because the majority of the longer-tail performance is related to scheme filing. So we're always trying to catch up with experience on the investment performance of the book. So yields are an issue. And where we can reprice, we will. But that will be a detriment to margin to some extent. I'm not sure that I totally agree with the number that you talked about there, but there will be. There's certainly the step-down in margin that relates to the reinsurance costs, the stop-loss, $45 million stop-loss that we bought last year. In a model sense, in a budgeting sense, there's obviously an impact on the natural hazard allowance, but again, I talked to -- that's a model view. Experience will be what it will be, and to the extent that we don't use up that additional $100 million of allowance that we put in, then that does flow back through to margin. But on the model view, it does have an impact. We are, I think, probably putting price increases higher than 3% through. We are putting higher -- prices higher than 3% through. Higher and probably closer to 5% and maybe, in some instances, above 5%. So it's not as material impact on margin as you talk about. And I think we are getting better margin -- we are getting better margin out of our Motor book. And then there's all of the benefits that will come through as we continue to roll BIP through, which will be positive to margin, and as we continue to drive cost efficiencies through the business, through the programs that I've talked about today. I think Jeremy, they're the key things. Is there anything else that...

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [69]

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On the cost piece we've called out, the -- that -- the question before on the regulatory project cost of the $155 million, that will obviously flow through into underlying ITR as well. But to some extent, offset by the BIP program.

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Steve Johnston, Suncorp Group Limited - Acting CEO [70]

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So the factors you talked through are legitimate, that's why I think it's unrealistic to expect that we can deliver underlying ITR's at 12% in FY '20. But I still think it's an objective for the business to achieve over the medium term.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [71]

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And a final question from me. Just on the Bank, where are we at in terms of systems and just move to the Oracle system? Is that still on hold? Is that a requirement to get to that 50% cost-to-income ratio target?

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Steve Johnston, Suncorp Group Limited - Acting CEO [72]

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No, not in an absolute sense. No material update on the deposit transaction module deployment onto Oracle's seed, I think. We are taking a very resensitive decision making process there. We'd like to see that deployed by a Bank of scale before we would go to deploy it. I don't think there's any benefit in us being the first mover on deploying a deposit and transaction module onto a new -- onto a core Banking system. That's not within our risk appetite to do that. So to some extent, we're a bit of a hostage to someone else doing it. But I think that's a better way for us to consider it. When that will be, hard to tell. But in and of itself, I think it's sort of $10 million, $11 million of additional cost that we're carrying for running the Hogan system alongside the Oracle system in the short term. That in of itself is not the explanation for why the cost-to-income ratio is above 50. It'd be great to have it out, have -- great to be operating off one system, but I don't think we could claim that's the reason why our cost-to-income ratio is elevated to where it is today. Okay. Why don't we just come back into the room in Sydney to catch any final questions that may be here? [Yan].

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Unidentified Analyst, [73]

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I apologize to everyone for asking one more question. Your engagement score is worse year-on-year. Your turnover is around about 14%, and absenteeism is running at somewhere near 7.5%. I guess it's 2 pieces to my question. The first one is where are we in the CEO transition or the CEO recruitment process? And what is the timing on that? And the second one is what is your vision for running a happier house because obviously, none of that happens without a workforce that's happy.

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Steve Johnston, Suncorp Group Limited - Acting CEO [74]

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Look, I'm not going to get into a commentary, as you would understand, on the timing of CEO transitions, et cetera. They're matters for the Board and for the Chairman to deal with. And the mandate I have, which is the one that the Board is very happy to give to me, was to work with my colleagues here to drive the business forward. And so what you're seeing today are a set of actions and a set of priorities that are consistent with what the Board is -- has appropriately asked me to do and which I'm very, very happy to do. And that process will work its way through. You're absolutely right. We won't be successful if we can't have engaged and motivated employees in this organization. And one of the things I think that we as a team and SLT and me individually -- we've worked in the company for a long time, and we've seen the organization when it's highly motivated to be successful. When it's being focused on doing what it needs to do, and we only need to go to Townsville, and Gary and I were up there the other day to hand the keys back to a couple of customers who had a meter and a half of water through their homes, and we were -- we were back in there with the keys and giving them their life back, rebuilding their life. And all of this comes back, for our organization, back to purpose. And I think as a financial services entity -- and I remember talking to you about it at one point where you asked me, "Well, why does Suncorp exist?" And I sort of struggled with that question. I'm used to dealing with ITRs and cost-to-income ratios and expense ratios, but answering the question why Suncorp existed was a pretty tough one to answer, and at that point, the methodology was to deliver value for shareholders, which was -- and I knew when I said it, it was what we needed to do, but it was not what we existed for, and as an organization, we exist to meet the needs of our customers, service them where they need to be, do it efficiently as we can, and the more efficiently we can do it, we can do it with the benefit of society in general. So I think our people always respond best when they're grounded in what the organization stands for. And I guess that's what we're trying to do as a team. We've seen an improvement in our engagement survey. We had a -- I wouldn't say horrible one, but I don't think we were terribly out of whack with financial services companies generally. We had a pulse survey a bit later on, and we saw an improvement. And as a team, what we want to do is put the sun back into Suncorp. That's what -- these people here, that's what we talk about. So that's the way we think about it, that's the way we're driving the business, and all the other process as it swirl around will be what they'll be. And we'll just keep pushing through that.

Okay. I think we're up against time. Thank you, everyone. Thank you, Jeremy. Thank you to everyone who's participated and look forward to catching up with a lot of you over the next couple of weeks. Thanks.

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Jeremy John Robson, Suncorp Group Limited - Acting CFO [75]

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Thank you.