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Edited Transcript of SUN.AX earnings conference call or presentation 8-Feb-21 11:45pm GMT

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Half Year 2021 Suncorp Group Ltd Earnings Presentation Brisbane, Queensland Feb 9, 2021 (Thomson StreetEvents) -- Edited Transcript of Suncorp Group Ltd earnings conference call or presentation Monday, February 8, 2021 at 11:45:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Clive van Horen Suncorp Group Limited - CEO of Banking & Wealth * Jeremy John Robson Suncorp Group Limited - Group CFO * Lisa Harrison Suncorp Group Limited - CEO of Insurance Product & Portfolio * Steve Johnston Suncorp Group Limited - Group CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Andrei Stadnik Morgan Stanley, Research Division - VP * Andrew Buncombe Macquarie Research - Insurance and Diversified Financials Analyst * Ashley Dalziell Goldman Sachs Group, Inc., Research Division - Equity Analyst * Kieren Chidgey Jarden Limited, Research Division - Analyst * Matt Ingram * Matthew Dunger BofA Securities, Research Division - Research Analyst * Nigel Pittaway Citigroup Inc., Research Division - MD & Head of Pan-Asia Diversified Financials and Insurance * Siddharth Parameswaran JPMorgan Chase & Co, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [1] -------------------------------------------------------------------------------- (presentation) Well, good morning, and welcome, everyone. Let me begin, as usual, by acknowledging the traditional owners of the lands on which we meet and to pay our respects to all elders, past, present and emerging. Now I'm joined on the call today by members of our executive leadership team. And as there are a few new faces on the team, let me take a moment to briefly introduce them. In Sydney, we've got Jeremy Robson, our CFO; Lisa Harrison, who is the CEO of Insurance Products and Portfolio; Paul Smeaton, COO of Insurance; Clive van Horen, the CEO of Suncorp Bank; and Clive joined us in August last year; Adam Bennett's here, our CIO; Adam joined us in July last year; Fiona Thompson, our CRO; and Fiona is also currently leading our people and culture team as we finalize the appointment of that role; and finally, Belinda Speirs, our Group General Counsel. Joining us from Auckland is Jimmy Higgins, who was appointed CEO of the New Zealand business in October, having previously been CFO and the Head of Claims. Now today's presentation will follow our usual format. And of course, we'll leave plenty of time to answer your questions. So turning to the result. And the key metrics captured on this slide show the pleasing increase in earnings for all 3 businesses and cash profit for the group up by 40%. When I first presented to you was -- as the CEO of Suncorp, I said our focus was on aligning everyone at Suncorp around improved performance in our core insurance and banking businesses. In August 2019, we said we would refocus our strategy, implement the regulatory program of work, improve our customer service, reinvigorate our brands, further digitize our business and become more efficient. Now, of course, we've had a lot thrown at us over the past 18 months: natural hazards and, of course, a pandemic. But for our business to emerge from this period stronger than we entered is a testament to the strength of our brands, the value of our products and the hard work of all Suncorp people, and I do want to thank them on behalf of the Board and the ELT present here today. Now those of you who have followed us for some time would know the importance that we place on our balance sheet and our capital surplus. That strong balance sheet has allowed the Board to declare an interim ordinary dividend of $0.26 per share and, of course, fully franked. To be able to match the prior year dividend payment, given everything that has happened over the past 12 months, everything that's been thrown at us, is a very pleasing outcome. So in today's presentation, Jeremy and I will discuss the key factors that are driving the result and also outline our aspiration for the business over the next 3 years and tell you how we aim to deliver sustainable through the cycle returns that are above our cost of equity. But first, to the next slide, and I'd like to call out a number of result highlights. I believe they underscore the strong progress we have made since we refocused our attention on the core business. Our Australian insurance business has delivered headline premium growth of 4%, which increases to 4.4% when you take into account the landlord embargoes, the portfolio remediation and the product exits. In consumer, GWP growth of over 5% has been achieved alongside positive unit count. Brand consideration metrics across the mass market portfolio continue to improve. Digital sales continue to track higher as our tools and capabilities improve and as customer behavior changes through COVID. For example, sales of AAMI motor policies through digital channels were 17% higher than the prior period. Prior year reserve releases, excluding business interruption provisions, were above our long-run expectation, reversing the trend of previous results, most recent results. New Zealand delivered a record first half result with both GI and Life contributing to the outperformance. In the Bank, we reported a very strong margin of 2.04%, up 8 basis points over the half. Credit quality remains sound. And in recent months, we've seen our lodgement volumes steadily improve. Group expenses were in line with the prior period. And we've adjusted our structures. We've reduced duplication, and we absorbed the residual stranded costs from the sale of the Life business. And as I mentioned previously, our capital position has continued to strengthen with over $1 billion of excess capital after the payment of the interim dividend. Now in our view, these results demonstrate that our strategy is delivering. Now what is less obvious in the financials, but of course no less important, is the work we have done to reshape and simplify our business. We've put in place a new operating model and structure, one that is better aligned to the areas of greatest opportunity. We've improved accountability, removed duplication and added new talent to our senior team. Further simplification was also required. Following the sale of the Life and Capital S.M.A.R.T. businesses, we have continued to review our portfolio, and this has led us to taking the tough decisions to exit intermediated Vero Australian consumer and construction, the underwritten travel portfolio, and we'll now no longer offer personal loans in the Bank. We're also well advanced in our strategic review of the Wealth business. With a new operating model, structure and team in place, we set about defining a program of work through to 2023, a program designed to build on the opportunity you see in this result and to capitalize on the opportunity we see as we emerge from COVID. And I'll talk about this more later in the presentation. So at this point, I'll hand over to Jeremy to run through the financials in a bit more detail. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [2] -------------------------------------------------------------------------------- Thank you. All right. Thanks, Steve, and good morning, everyone. Well, Steve has already given an overview of the group results. So I'll now run through each business in more detail. Starting with insurance Australia and GWP waterfall. Pleasingly, consumer GWP grew over 5% with positive unit count. In Home, we continue to price for the higher natural hazard costs, with average written premium up 7.6%. Normalizing for the ongoing remediation of the broker book and embargo on landlord insurance, average written premium was up 7%, with units slightly down. I note we have announced today that we plan to exit the Vero broker consumer channel over the next 12 months. Motor GWP was up 5.3%, supported by good rate and unit growth. New business units were up strongly, benefiting from an improvement in new car sales as well as targeted sales and marketing initiatives. With the realignment of the commercial portfolio largely finished last year, Commercial GWP grew 3.2% from good ongoing premium rate momentum, partially offset by lower retention in SME packages. The strong growth in workers' compensation has been driven by large multiyear account renewals and strong retention. And the reduction in CTP was primarily due to the accounting change we made last year. On a like-for-like basis, GWP was broadly flat, reflecting market pricing dynamics following scheme reform and good unit growth. Turning to the next slide and claims. The impact of COVID was broadly neutral, with lower Motor frequency offset by additional reserves for potential business interruption claims, which I'll cover on the next slide. Motor claims costs were higher, reflecting underlying inflation in the book, but we continue to benefit from the Suncorp preferred repairer network with inflation contained to below industry levels. Home claims were up marginally, reflecting underlying inflation and general claims volatility. But pleasingly, we continue to see a stabilization in water claims. The improvement in Commercial reflects the impacts of portfolio exits and relatively benign large loss experience. Workers' compensation claims increased in line with premium growth. And CTP claims were broadly flat, reflecting lower claims in the New South Wales scheme and portfolio growth. Prior year reserve releases were above our long-run expectation at 3.1% of group NEP, excluding the impact of business interruption reserves. We saw continued releases in CTP and workers' compensation, but also across the Motor and Commercial fleet portfolios, in part as a result of prior year COVID frequency benefits. Natural hazard experience was higher and resulted in an increase in claims handling expenses and risk margin, noting that events in the first half did not trigger any reinsurance recoveries. So to the next slide, I wanted to provide a bit more color on our business interruption provision, which has increased modestly from $195 million to $214 million following final valuations. The increase reflects an allowance for possibility of further legal costs and the provision covers potential exposures arising from policy wordings relating to the Quarantine Act as well as certain prevention of access wordings. While it was a complex judgment, we believe the Vanilla Lounge decision late last year strongly supports the application of the Biosecurity Act exclusion. Prior to the COVID outbreak, approximately 80% of our business interruption exposures referenced the Biosecurity Act. We have been progressively updating the remaining 20% as policies renew, with around 90% of the book now on the revised wording. In determining our provision, we applied a number of key assumptions, which have been reviewed by our external auditors and are outlined in the investor pack. We are comfortable with the methodology and assumptions, although we do acknowledge there remains some uncertainty because of the legal challenges currently being contemplated and only a small number of business interruption claims have actually been received to date. Moving on to investment performance. The underlying yield on insurance funds was 74 basis points, reflecting the lower yield environment and tighter credit spreads but with stronger management performance offsetting the reduced ILB carry above risk-free. The strong mark-to-market gains on insurance funds were primarily due to the increase in breakeven inflation and narrowing in credit spreads. And the return on shareholders' funds was driven by favorable movements in equities and credit spreads, however, tempered by lower returns from infrastructure and property assets. Next to New Zealand, which delivered another great result despite a material increase in natural hazard costs. The AA insurance direct business continues to perform strongly, which led to GWP growth of over 5%. Net incurred claims were up 6% from increased natural hazard costs and business growth. And working claims experience was higher largely due to unit growth, and normalized from last half, which included the favorable impact of reduced Motor claims frequency. The operating expense ratio reduced 120 basis points, reflecting flat costs on premium growth, with incremental investments in the business offset by reduced profit shares. The record first half New Zealand life result reflects favorable mortality experience and strong closure rates for income protection claims, along with favorable market adjustments. Turning then to natural hazards and reinsurance. And as you can see from the table, we had a series of smaller eastern states weather events in the half, along with the Queensland New South Wales hail event in late October and 2 flood events in New Zealand. This resulted in total natural hazard costs of $561 million for the half, $86 million above our allowance. As you are aware, our reinsurance protection is more responsive in the second half. There remains significant capacity with all prepaid drop-down covers remaining fully intact. In addition, the full $400 million of capacity under the new AXL also remains available, with just over half of the $650 million deductible eroded as at the end of the first half. Now to the group underlying ITR, where I have shown the key movements from first half '20, looking through some of the usual seasonality between the first and second halves. The movement in underlying ITR was largely in line with our expectations and was driven by increased natural hazard and reinsurance costs and the impact of historically low yields, which together have combined to reduce the underlying ITR by nearly 300 basis points. However, pleasingly, we achieved underlying margin expansion across all portfolios, except for a small reduction in CTP. We've seen the early benefits of pricing for natural hazard costs in Home, pricing momentum in Commercial and good experience in workers' compensation and New Zealand. Operating expenses primarily reflect normal salary inflation and higher technology and marketing costs, noting that lower commissions are included in the margin bar on the chart. Claims handling expenses reflect additional resources to support the delivery of key regulatory projects. Now, as we've said before, it will take time to fully reprice the book for the increased natural hazard costs and for those price increases to earn through to margin. Having said that, price is only one lever. Steve will cover this in more detail later. But in our plan, we have a clear focus on improving our performance across the entire value chain, including working loss and expense ratios. The COVID benefit on the chart of 1.3% comprises the claims impact from lower Motor frequency, partially offset by an increase in our business interruption provision, but noting that risk margin and prior year release impacts are excluded from the underlying ITR calculation. Now to Banking & Wealth, which delivered a profit after tax of $190 million, up 11% on the prior period. The increase was driven by very strong net interest margin, underpinned by continued momentum in at-call deposit growth, particularly in transaction accounts. Whilst home lending contracted over the half, we saw a significant improvement in lodgements and settlements, particularly towards the end of the half. And in December, we received our highest volume of new applications in over 18 months. Operating costs were flat on the prior period. And when combined with the higher net interest income, the cost-to-income ratio improved to around 56%. Impairments for the half were $8 million, equivalent to just 3 basis points of gross loans and advances. While our base economic outlook has improved since June, we have maintained the collective provision balance at $255 million. We believe this is a prudent approach given ongoing uncertainty due to COVID and the likely tapering off of government stimulus. The asset quality of the book remains strong. And by way of example, our temporary loan repayment deferrals due to COVID continue to trend lower at 1.2% of the home lending portfolio and 0.8% of the SME portfolio as at December. The Wealth result was flat, reflecting a reduction in expenses following the closure of the advice business and lower funds under administration. Now to group expenses, which have been broadly flat over the last halves. We've absorbed salary increases, invested in digital and technology capabilities, including the deployment of an enterprise-wide telephony platform and spent more on marketing and advertising as we drive growth in our brand strategy, which helped to deliver the strong growth. In addition, I note that in the first half, we incurred $36 million of restructuring costs, which have been included in our cash profit numbers. These comprise $23 million of redundancy costs following the implementation of the new operating model last year and a further $13 million of real estate and bank store optimization costs, as we seek to optimize our real estate footprint following COVID. I'd expect to see the savings come through in the second half and into FY '22. And Steve will provide more color on the outlook for group costs later in the presentation. So finally, moving on to capital, where we have maintained a very strong position with group excess CET1 of just over $1 billion, underpinned by strong organic capital generation. The Board has declared a fully franked interim dividend of $0.26 per share, in line with last year. This gives a payout ratio of around 65%, which is within our 60% to 80% target range and consistent with APRA's guidance to moderate dividend payout ratios. Of note on the chart is the movement in GI capital usage, which is mainly due to a combination of the higher business interruption provisions and natural hazards and higher investment asset values. As Steve mentioned earlier the importance we place on the strength of our balance sheet. We've further strengthened our capital flexibility by holding $789 million of capital at group after adjusting for half year dividends whilst ensuring that all regulated divisions remain comfortably within or slightly above our targeted operating ranges. Our dividend policy remains unchanged, and we are committed to returning surplus capital to shareholders. We will continue to reassess our capital position, taking into account the needs of the business, the economic outlook and any regulatory guidance. And on that, I'll now hand back to Steve. Thank you. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [3] -------------------------------------------------------------------------------- Thank you, J.R. And as I've previously talked about our 5-point framework for managing through COVID we needed to protect and support our people, be there for our customers, be open and honest in our communications and ensure our business remains strong. The final priority we set ourselves was to recognize the fundamental changes brought about by COVID and to emerge from this defining event in an even stronger position. Now as we progressively dealt with the threats, the opportunities become more apparent. As a team, we are working differently, at a faster pace and in more agile ways. Things that previously seemed impossible have become possible. Our customers are also interacting with us differently, adopting digital at an even faster pace. Now they won't return to the old ways and neither should we. So in building out our usual 3-year business plan, we saw that by leveraging what we have and making some targeted investments, we could capitalize on this opportunity and really set Suncorp up for the future. Now we've included our areas of greatest opportunity on this slide. In Insurance Australia, Lisa and Paul are focused on 4 key areas: brands, marketing and growth; underwriting and pricing; distribution; and, of course, claims. Now as a multi-brand manager, we need to ensure that each of our brands retains its own identity, is targeting the right customer segments, appropriately supported through marketing and is benefiting from a pipeline of product innovation. Now we've outlined some of those areas of focus on this slide. Underwriting and pricing is at the heart of any successful insurance company and fundamental to improving our loss ratios. Here, we will further enhance our underwriting capability through targeted investments in pricing analytics and capability. Optimizing distribution through an integrated digital-first approach is key to improving customer experience and transforming our cost base. Today, 75% of our sales and service activities are voice-based. COVID has allowed us to envisage a future where that percentage will fall significantly, but we need to invest to meet this changing customer need. Finally, our greatest opportunity is to establish global best-in-class claims capability. This includes re-engineering, digitizing and automating all our claims processes and better leveraging our scale in claims procurement. In the Bank, we've already taken steps to create greater end-to-end accountability under Clive and his team. The Bank's program includes further improvements in the home loan origination process, simplification of the product portfolio, further optimizing our distribution footprint and accelerating our digital and everyday banking capabilities. We're also looking to drive targeted growth in business banking. In New Zealand, while Jimmy and the team are already delivering strong returns, we just can't afford to be complacent. The 3 key initiatives are outlined on the slide and the themes are very familiar: digitization, automation and simplification. Technology will be a key enabler across all the businesses and is key to the successful delivery of most projects, and this will be overseen by Adam and his very capable team. Now to the next slide, and here, we've outlined the impact on OpEx from the 3-year business plan. We expect a modest increase in our forecast OpEx this year and in FY '22 to deliver material improvements to our business, and we've captured this on the left-hand side of the slide. However, you can see that by FY '23, we expect to see OpEx return to FY '20 levels of around $2.7 billion, with efficiency gains effectively offsetting inflation and the costs of investing in growth over that 3-year period. We also expect a temporary uptick in claims handling costs as we capture those best-in-class claims benefits. I want to make this point really clear. It's very important. Every dollar we spend will be spent in the core of our business. Every initiative is being built from the bottom-up and rigorously assessed and prioritized. And accountability sits in the business line with the costs and benefits embedded in the reporting ratios of the respective businesses. So the next slide, and here we've outlined our aspiration for Suncorp in 2023. For Suncorp to create value for its shareholders, we must deliver returns on equity above our cost of equity. That's fundamental, and that will be our first target. And from there, we will seek to generate a positive spread to our cost of capital. However, in order to deliver these returns, by FY '23, we expect to have a growing franchise, delivering underlying ITRs of 10% to 12%, a cost-to-income ratio of around 50% and returns of around 15% on every dollar of incremental capital invested. And we remain committed to our 60% to 80% dividend payout ratio and to improving our ROE by returning to shareholders any capital that is excess to the needs of the business. Before concluding, I'd like to again briefly mention our ongoing advocacy around natural hazard resilience and mitigation. The unfolding situation in Western Australia reminds us that it's now 12 months since bushfires wreaked havoc on our nation and its people. Now a lot's happened since then. And by and large, our industry has responded well in putting our customers' lives back together. At the start of the presentation, you saw the story of Pam Murphy. For Pam and the customers that I revisited in the Balmoral Village last December having visited them 12 months previously, the value of insurance is pretty clear. However, not everyone is as fortunate as Pam. Those who are underinsured or some that had no insurance protection at all will continue to do it tough, often displaced from their homes and facing a very uncertain future. In many cases, they opted out of insurance because the risks embedded in their premium made the cover too expensive. With this in mind, we've recently provided submissions to government arguing for a nation building program, a program designed to improve public infrastructure, addressing adequate planning laws and approval processes, to provide subsidies to improve the resilience of private dwellings and infrastructure, and to remove inefficient taxes and charges from insurance premiums. Now we want to be a constructive voice in this debate and believe that with goodwill and all sides, we can all do better. There have been enough inquiries and reviews and plenty of words that have been written on this topic. Now is the time for action. So in conclusion, we entered the second half of FY '21 in good shape. Momentum is building right across our business. Our balance sheet is very strong, and it continues to improve, providing us with significant flexibility. Our purpose, which is to build futures and protect what matters is at the heart of our culture. We have a simple strategy and a program of work, which is now underway. But most importantly, we have a refreshed team and the desire to improve our performance and deliver for our people, for our customers, our communities and for you, our shareholders. I'll now open up for questions. Okay. We got a few questions there. So... ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first phone question comes from Kieren Chidgey from Jarden. -------------------------------------------------------------------------------- Kieren Chidgey, Jarden Limited, Research Division - Analyst [2] -------------------------------------------------------------------------------- A couple of questions, if I can, perhaps starting just on pricing trends around a couple of portfolios. Home, you've obviously pushed rate up there, 7.5%, but still seeing a bit of volume decline. So interested in your thoughts around whether or not you've been running ahead of market there and sort of the future requirements you've got there to cover high reinsurance costs and cap budget coming through that book. And then secondly, on Commercial pricing, your thoughts around the outlook there, particularly in light of the potential business interruption claims costs following the court decision last year. And also, whether or not you've actually seen higher lodgements of claims come through around those BI costs. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [3] -------------------------------------------------------------------------------- Okay. Thanks, Kieren. I'll kick off, and I'll get Jeremy to jump in at the end. Firstly, it's good to have you back on the beat, Kieren. Good to hear your voice again. So on the on the trends in both Motor and Home, just want to make a couple of points on Home first because I think this is the area that the market has been most focused on. Over the past 15 to 18 months, I think we've seen probably aggregate increases in reinsurance and natural hazard costs coming through of around $350 million. And just to give you a sense of our pricing strategy, and this is consistent with what we've said all along, we do price to recover underlying inflation in Home, and that's sort of been running at around about 4%, a bit up and down depending on some of the volatility in large loss, fire and the like. So we price to that. And we set ourselves the task over the past probably 12 to 15 months of trying to recover some of those significant increases in natural hazards, which we believe are critical to improving margins in Home and then the overall underlying ITR. We said about that task. You can see that in the results coming through. We probably increased pricing to recover that ahead of 6% over that time. But I just want to make couple of points. Only about 50% of that has been written today, given the nature of an insurance business, and probably around about 20% to 25% of it has been earned. So there is more to do. There's more embedded in earned premium that's going to flow through from the changes that we've already made and more changes that need to flow through consistent with the adjustments that we've made over the past 12 months. So that will come through in our view. I think the comforting thing, which has been the question, I guess, on a lot of people's minds is how do we do this and keep our market shares where they need to be and keep our unit count where it needs to be. And it's a little bit of noise in the comparators on Home because of the landlord piece and some of the remediation that we're doing through Vero, our broker, on the consumer side. But we've had very small deterioration when you wash all of that out in the Home book. So we're really confident as a team that those pricing changes are coming through and will come through to the benefit of margin in Home and across the whole portfolio. I would make the point, however, that -- and we've made the point consistently that pricing can't do all the heavy lifting. And we see an opportunity here to improve margin through the things that I've talked about. So our best-in-class claims activity is designed to drive down the cost of claims. Our underwriting improvements are designed to improve our loss ratios. We probably never had a consolidated attack on loss ratios in this group for probably maybe 10 years or so, and we really need to get in and understand why our loss ratio is slightly higher than the rest of the market. And through the analytics we're deploying in pricing, some of the new pricing infrastructure that we're putting in place. The work Paul is doing on claims, we believe that will make a meaningful contribution to improve the ITRs over time. So that's the Home story. Motor. Look, Motor's been -- Motor is an incredibly profitable portfolio for us in the sense of high ITRs, good cost of capital -- good cost of capital returns. We've been very pragmatic. We know a lot of our customers on the Motor side have been doing it tough. They haven't been able to drive. So we've provided support, encouragement for them to keep their premium on foot. And so we've been reasonably cautious in our approach to pricing in that portfolio while frequency has been artificially suppressed through COVID. But we will continue to broadly manage our pricing strategy to offset inflation. Commercial, look, we've seen some pretty positive trends in Commercial right across the board, whether that be in the package business. I mean, again, we understand that there's a lot of stress in that SME market and we provided the appropriate deferrals. But if you work your way through Commercial, from the package business, the increases there are 5% or even above in some cases, depending on loss -- whether they're loss-affected renewals or not. Mid-market sort of running at high single digits into the double digits category. And obviously, the top end markets where we have very minimal exposure running at premium increases, considerably higher than that. So I think we're very comfortable with the outlook. You asked the question on business interruption. I think we've had around 600 claims of business interruption to date and a minimal tick up after the Quarantine Act disclosures and court hearings. So we're well placed to manage that through as those court legal matters are finalized. Jeremy, did you want to... -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [4] -------------------------------------------------------------------------------- The other thing I'd add, Steve, on the Commercial portfolio, is the headline price increase is actually below the GWP outcome. So whilst GWP has grown 3%, a little over 3%, the price increases have been, particularly in the short-tail and long-tail businesses have been reasonably well ahead of that. What we've seen, however, is from an underwriting perspective, we have chosen to reduce some of our aggregates, which then takes the pricing back down to GWP outcome. So pricing in that commercial portfolio is still -- has still been strong for us now second year in a row or so. And I'm not sure we'd see a lot of reason for that to change in the shorter term. -------------------------------------------------------------------------------- Kieren Chidgey, Jarden Limited, Research Division - Analyst [5] -------------------------------------------------------------------------------- And if I can just pick up on one comment, Steve, there, which was sort of related to sort of my last question around your medium-term FY '23 underlying margin target of 10% to 12%. If we look at the midpoint of that $11 million compared to the $8.4 million you've delivered this half, you've got about some 260 basis points to make up. I presume you're not counting on bond yields picking up over that time frame. So I'm just wondering if you can talk at a high level around where the heavy lifting, what would come from within that expense management as opposed to claims initiatives relative to pricing. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [6] -------------------------------------------------------------------------------- Look, again, I don't want to get into the granularity of it all. There's 3 components to it. There'll be the earn that comes through the pricing adjustments that we've already made. We'll continue to assess the portfolio to see whether there's more pricing that's necessary to work its way through within the broad parameters of how we're trying to manage our unit count in the portfolio. And then there will be the heavy lifting that will be done by Lisa and Paul around loss ratios. Now where we are today and where we want to get to, it may well be 50-50 between those two components. But again, the pricing dynamic is one that we can prescribe in a future sense, but we really have to be conscious of the market environment. And we are very cautious around that to make sure that while we're putting pricing through, we don't want to see a deterioration in our market shares to the extent that it puts our future franchise at any risk. So we are very careful. But the point I'm making is that pricing can't do all the heavy lifting. There are performance improvements that we need to embed through underwriting, pricing, expenses and claims to lift that ITR to the targeted range. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [7] -------------------------------------------------------------------------------- Well, Steve, In the OpEx chart we've shown today, yes, we're looking for improvements in claims ratios, pricing, et cetera. We also get improvement out of the operating expense ratio because all-in cost flat at $2.7 billion on a growing business also gives us improved operational leverage, which goes to improving underlying ITR. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next question comes from Andrei Stadnik from MS. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [9] -------------------------------------------------------------------------------- I wanted to ask 2 questions, please. Firstly, in terms of how you're thinking about the excess capital, like what are some of the sign firsts that shareholders should be looking at in terms of how you're going to decide when to give back the excess capital? And what are some of the initial time frames this is June half or December half, kind of ability ? Or is it more something into next year? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [10] -------------------------------------------------------------------------------- Let me give you some high-level parameters. First one is we're usually reluctant historically. And I think it's understandable that we've historically not undertaken any capital management half year that is right in the middle of our -- typically in the middle of our natural hazard peak season. So we're usually pretty cautious, and that is the case this year as well. I think there are some things, markers that we need to take into account over the next 6 to 12 months. Probably more in the 6-month period, there'll be the unwind of some of the government support that's flowing through the economy now. And I think it's appropriate for us right across our provisioning and into our balance sheet more broadly around our excess capital for us to be reasonably cautious about that and the broader economic outlook that flows from that. Generally, our principle here is that we don't intend to be holding this level of capital, obviously, for an extended period of time. Our focus has always been to provide that consistent payout ratio between 60% and 80%. And to date, even through the depths of the pandemic, we've been able to adhere to that, which I think is something we're really proud of to be able to manage our business through this tumultuous period through the prism of our payout ratio. And then the extent to which we don't need the excess capital, the operational businesses aren't demanding it, then our intention would be to return that to shareholders. Now whether that's in the next 6 months or the next 12 months, it's a bit difficult to be precise. But that is our intent. We demonstrated before, and we'll do it again. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [11] -------------------------------------------------------------------------------- And if I can ask a second question just on the Bank, very strong outcomes in terms of margins. And on Page 35, you provided us some color. But I just wanted to ask, the 7 basis points benefit from lending funding spreads, can you expand a little bit more because, generally speaking, it seems like front book competition tends to be a bit of a drag in terms of mortgages. So where did the movement in lending fund and spreads come from for you in this half? And do you expect the benefit from the switch to low-cost deposits to continue into the second half? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [12] -------------------------------------------------------------------------------- Thanks, Andrei. So I mean, the 7 basis points is largely due to not passing on that cash rate earlier in the year or later in last year. And so we've seen mortgage rates hold up and funding costs come down effectively. That's what contributes to the 7 basis points. You're right around the front book, back book. There are dynamics there. But for this half, we've just been through that dynamic of the cash rate fall outweighed that. We'd expect to see some of that going through into next half. But on the other side of it is what's happening with the deposit portfolio. And we have seen over this half, the deposit rates have come down that will help us into next half. And look, a key part of our differentiator relative to others, we think has been our growth in the deposit accounts, particularly the transaction ones. Everyone, I assume, will have experienced the benefits from the -- what's happening to the market rates. But for us, it's been that growth in deposits, and that is still a key part of our strategy going forward. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The next question comes from Andrew Buncombe from Macquarie. -------------------------------------------------------------------------------- Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [14] -------------------------------------------------------------------------------- Just sticking with the Bank, the print has obviously been very strong this half, the NIMs. And I've noticed that you haven't included your historical 185 to 195 range in the document. How should we be thinking about second half NIMs? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [15] -------------------------------------------------------------------------------- So I think at this stage, there's obviously a lot of moving parts on the margin line. But at this stage, I don't know that we'd expect to see massive amounts of change. I think some of those dynamics will continue into the second half. We will see probably some of that back book, front book pricing play through. But equally, as I said before, we'll see some of that improved spread on deposits roll through. So I don't know that we're going to be able to maintain a 204 basis point margin. But equally, some of the dynamics are still supporting a margin that's probably a little bit above the top end of the range for the second half. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [16] -------------------------------------------------------------------------------- Yes. Andrew, don't read too much into us not including that margin metric in there. I think what we've tried to do in terms of the Bank, I mean, Bank strategy is very clear, and Clive and the team are focused on executing to it. And whichever way you look at it, whether it be through margin or expenses, the key to us to get to a bank performance that we're satisfied with is built around a cost-to-income ratio of around 50%. And that means we've got to be focused on the cost side and the expense side but also get the revenue growth that we expect to get through, both our lending and deposit work. So it's an effort to simplify it. The underlying metrics probably don't change too much below it. -------------------------------------------------------------------------------- Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [17] -------------------------------------------------------------------------------- And then just my other question was on New South Wales CTP. At a group level, your reserve releases have been very strong again this half. I understand it's broadly reflective of the Queensland and New South Wales CTP portfolio. Can you just remind us how you're accounting for those excess earnings in New South Wales and whether you're already putting aside provisions for excess returns? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [18] -------------------------------------------------------------------------------- Yes. So look, we are still taking a reasonably conservative prudent position on the new scheme in New South Wales. We are reserving to below the (inaudible) cap. So we don't need to provide for any surplus return beyond that. But obviously, that's something that we'll continue to keep a watch on. But the reserving we do apply to the New South Wales new scheme is below the (inaudible) cap. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [19] -------------------------------------------------------------------------------- And I'll just add to that, just to reinforce the strength of our reserve position across those long-tail portfolios, which sort of probably differentiates us in the market. Obviously, we've got the exposure to Queensland CTP, and the reserving position that we have there is very conservative and prudent. And the extent to which the fundamental assumptions are embedded in that reserving, whether it be underlying inflation or superimposed inflation doesn't flow through and it hasn't been, then that's the benefit of our release profile. And again, the position in New South Wales, where we have residual reserves that are sitting against the old New South Wales scheme that continue to see releases running through it, it does -- it is a big differentiator in the market. Obviously, over time, we expect those releases to come back to the 1.5% of NEP that we flagged. But at the moment, it's pleasing that we are seeing those releases continue to be elevated relative to our longer-term guidance. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- The next question comes from Siddharth Parameswaran from JPMorgan. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- A couple of questions, if I can. Firstly, just on the underlying margins. Just the 7.1% figure for this half and the drop from 11% in the second half, excluding the COVID impact, Jeremy, you mentioned that there was some seasonality, but I'd asked the question 6 months ago whether there was any seasonality, and you said, no. I was just curious, has anything changed in your thinking around that? Or is it just a drop that's made you, I suppose, attribute the drop to seasonality. Maybe you can just give us some comfort around whether there is a reason seeing now in those numbers. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [22] -------------------------------------------------------------------------------- Yes. Look, I mean it's obviously a good question, Sid, because we have seen more of a drop in that underlying margin from the second half exit point to the first half number. There are 2 or 3 key drivers to explain the difference. One is what's happened with the investment income and particularly our inflation-linked bond portfolio. So we've had terrific mark-to-markets on inflationary bonds. But the carry on an inflation-linked bond above risk free was very strong last half and has turned into the negative this half, which, as I said, has been offset by strong manager performance this half, but last half, we had both. So that's a relative negative comparing the first half last year to the half-on-half number, which gives a larger drop in terms of the exit margin to the 7.1%. And the other one is, look, there is -- when we look back at the -- particularly Home, when we look back at things like fire, we have seen a little bit of what we think is seasonality in the Home portfolio. So -- and that's accounted for some of the residual difference between the 2 pcp and half-on-half numbers. So it probably is a little bit in there around 5% and a little bit from the investment market performance. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [23] -------------------------------------------------------------------------------- I think the only other -- Sid, the only other technical seasonality element in the underlying ITR calculation is that when you're doing the first half valuations, you're doing them effectively in September and rolling them forward to December. And so for the current year, margin impact, the actuary is really only looking at 3 months of experience, whereas at the follow-on valuations in the second half, they've got 9 months to assess. Now when the business is performing well as it is at the moment, obviously, the first half versus second half can be slightly different. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Okay. Just some clarifications around what's happening with frequency on Motor. Obviously, there's a benefit in this half. Just -- and you mentioned also that you're being very careful on pricing as well, just on that portfolio. Maybe if you could just comment on whether we should expect a similar benefit in the second half. And also whether we should expect higher prices to come through now on the Motor portfolio to make up for the fact that you possibly weren't keeping up with underlying inflation. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [25] -------------------------------------------------------------------------------- Yes. Look, it's a very competitive Motor market, so I don't really want to flag our intent on pricing. But clearly, the extent to which there's a very -- obviously, very high correlation between the extent of lockdowns and frequency, I mean, that's understood. So through New Zealand and through Australia, where we've had the broader lockdowns but also the geographic regional lockdowns, we've been able to track very deliberately frequency adjustments relative to whether it's in Phase 4 restriction through to restriction level one. So we're very familiar with that. As a general principle in most jurisdictions, as the economy starts to open up again, as people become more comfortable with and the restrictions become less and lockdowns become less, we're seeing frequency revert pretty quickly back to its pre-COVID levels. And in some areas, slightly kick up above that. And the explanation for that, as you would expect, is that people are deferring to private transport as opposed to public transport during this period of time. So yes, there are quite significant movements in frequency to some extent in the second half will depend on the extent of any restrictions or lockdowns. We hope there are none. But obviously, it's very sensitive to that. And again, as I mentioned before, we're very sensitive to pricing in the period of time where people were using their vehicles less, but we do need to take account of potentially increased frequency movements going forward. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Okay. And just one final question, if I can. Just on business interruption, you flagged the $2.7 billion of exposure for the Quarantine Act and certain prevention of access clauses. Could you just comment on what percentage of your total business interruption business that actually relates to? And also just why you're confident there's no additional exposures to what's remaining? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [27] -------------------------------------------------------------------------------- Yes. Sid, look, the way it may be articulated is the way we have approached the provisioning for business interruption, if I maybe say what we haven't provided for and what's not included in those exposure numbers. And obviously, with the exposure numbers, there's complexity around making sure there's no double count between wave 1 for Victoria and -- wave 2 for Victoria and wave 1 nationally. But what we have not provided for, so what's not included are exposures policies that's got Biosecurity Hazard Act exclusion. As I said, we feel very confident with those given the Vanilla Lounge judgment late last year. So we haven't included any provisioning for those. Other than that, general $20 million of provisioning for potential legal costs that we might need to cover as we go forward. And in the other key type of policies that we haven't provided for prevention of access policies, where there is a requirement for physical damage to the property. And again, we feel quite confident around that as an exclusion that works. Other than that, we've included everything in our provisioning, Quarantine Act, as I said, those other prevention of access policies that don't limit themselves to physical damage. We've obviously made a number of assumptions around what sits in there by way of industries on each lockdown, et cetera, made assumptions around JobKeeper. But we -- based on the views and positions we've got around Biosecurity Hazard Acts and prevention of access physical damage, we feel quite confident that those reserving numbers are pretty reasonable in terms of the exposures that we've got. -------------------------------------------------------------------------------- Siddharth Parameswaran, JPMorgan Chase & Co, Research Division - Research Analyst [28] -------------------------------------------------------------------------------- And just to be clear, nothing that's been tested in the second test case actually relates to those clauses that you're confident on, right? Because the industry has lost a lot of things they're confident on before. I just want to make sure that there's nothing in the second test case that could change to your policies that you haven't been accounted for. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [29] -------------------------------------------------------------------------------- Fair question, Sid. Look, there are some things that are being tested that would have a very modest impact on the numbers. So put another way is that most of the things that are being tested wouldn't impact the number. So it's possible there would be some specific ones that we won't go into, but some specific ones that might have an impact, but they would be modest. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- The next question comes from Ashley Dalziell from Goldman Sachs. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [31] -------------------------------------------------------------------------------- First question, just coming back to the excess capital discussion and some of the catalysts, I suppose, you spoke to in and around potentially deploying that capital. I just wanted to be quite clear that we shouldn't be expecting closure or finalization of the business interruption legal process today a major catalyst for you in your decision process around that excess cap. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [32] -------------------------------------------------------------------------------- Look, Ash, I think -- no, we don't think, given the strength of our position that it will be. Obviously, a bit reluctant to be definitive about any of these things. As Sid mentioned in his previous question, the law potentially has moved in interesting ways in this consideration of these things. We are very strongly of the view that the biggest, as Jeremy just mentioned, the biggest variable for us in the business interruption piece was the Biosecurity Act and the test around that, and we're very confident in our position. So I would describe that the answer is no. But again, I just put that caveat around that we have a very strong capital position. We've proven that through the whole process of the past 12 to 18 months, and we'll always take a very cautious, prudent approach to it and make sure that we're well covered for any potential outcome as extreme as it might be. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [33] -------------------------------------------------------------------------------- Okay. Second question, just on bank asset quality. I was hoping you might give us a bit of an update on how you're thinking about the CP overlay for COVID, particularly in the context of the macro assumptions that were sort of underpinning that overlay and the trend in deferrals that you've seen through the half. Yes, so thoughts on how you're tracking there. And is that something that might be under review at the full year result? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [34] -------------------------------------------------------------------------------- I think a bit like our capital discussion, I think it's appropriate and prudent for us to maintain that collective provision in aggregate. I think there's clearly more positivity flowing through some of the economic assumptions that we embedded in that model, probably in the depths of COVID. So we have been through a process of reviewing them. We've made some adjustments to probability distributions, which has sort of landed us in about the same position. It's a bit like the capital discussion we had. Obviously, there's a couple of interesting material changes to the economy that will flow through over the next 6 months. And we'll be very conscious of them flying through, see how they -- how the economy manages through that process, how credit quality moves through that process and review it at the full year. Jeremy, do you want to... -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [35] -------------------------------------------------------------------------------- I think that makes sense, Steve. And look, we've got a prudent position. And I think we -- what we want to see is what happens after March and the government benefits come off and when the rest of the banks roll off their COVID deferral packages. I think it's sensible for us to wait and see what happens. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [36] -------------------------------------------------------------------------------- Okay. Just a final one on the Bank, if I may. Obviously, a lot of discussion today about the strong margin, but you still seem to have aspiration to be growing lending again and turning that around pretty quickly. Based on some of the early success you called out on the lodgement volumes, do you envisage a scenario where you can be growing lending in this environment without too much detrimental impact to the margin? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [37] -------------------------------------------------------------------------------- Well, thanks Ash. Great opportunity to ask Clive to jump over to the podium, and through his first results presentation, and I guess through the key elements of his winning in home lending strategy. -------------------------------------------------------------------------------- Clive van Horen, Suncorp Group Limited - CEO of Banking & Wealth [38] -------------------------------------------------------------------------------- Yes, sure. Thanks, Steve, and thanks for that question. So certainly, our goal is to be growing our home lending portfolio, and we are encouraged by the increase in the early stage of the pipeline. We're tackling it in a, as you would imagine, a very broad fronted way. There's multiple elements to how we are tackling that across the broker channels, distribution channels, our service levels and so on. The home loan book has been shrinking, so negative 1.6% in the half. And certainly, our goal would be to see that turning positive in the next 6 months, and we're working pretty hard to that. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- The next question comes from Nigel Pittaway from Citi. -------------------------------------------------------------------------------- Nigel Pittaway, Citigroup Inc., Research Division - MD & Head of Pan-Asia Diversified Financials and Insurance [40] -------------------------------------------------------------------------------- Just first of all, just trying to delve a little bit more into how we should be thinking about the underlying margin in the second half. I mean, presumably, we take the starting point at 7.1%. You might get a little bit of Motor frequency benefit, but it sounds like nothing like the $130 million that flows through in the first half. You then got obviously the flow-through into earned the rate rises, particularly in the consumer portfolio and the Commercial book. And it sounds like a bit of increased expense as well. Am I right on that last point? And is there anything else we should be thinking of in trying to sort of think through how we roll through that margin into second half? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [41] -------------------------------------------------------------------------------- Yes. Thanks, Nigel. I mean, if we look at the traditional way we've broken down that margin -- underlying margin movement, we obviously expect the natural hazard and reinsurance number to remain unchanged from the first half. Investment income, in terms of yields, obviously, yields have seem to have bottomed. But maybe there's a little bit of positivity from this inflation-linked bond carry that might come through in the second half relative to the first half. But I think the story will be on those 2 lines you've called out, which is the underlying margin. And as you've said, we should see some of that earn on Home coming through. We're not -- we're not supposing at this stage that we'll get frequency on Motor. And yes, we will have higher costs in the second half. You can see from the expense chart we put out there that costs will be higher in the second half. -------------------------------------------------------------------------------- Nigel Pittaway, Citigroup Inc., Research Division - MD & Head of Pan-Asia Diversified Financials and Insurance [42] -------------------------------------------------------------------------------- Okay. And then also on insurance. I mean, the one thing that just sort of stands out is that you're still getting reserve releases from workers' comp, when obviously, some of your competitors, industry commentary suggesting increased claims duration, psychiatric claims, et cetera. Why do you think you're able to sort of defy the industry trends so starkly in terms of that portfolio? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [43] -------------------------------------------------------------------------------- I think Nigel, in part, comes down to the portfolios, I think -- and the geographic location of those portfolios and releases. We've had some good experience in northern territory, but we also equally had some poor experience a number of years ago. So we're probably just seeing some reversion of some of that. And then we've got exposure in Western Australia, and the economy over there has been doing pretty well. And I think some of those things that you've referred to thus far have been less significant. So it's something, obviously, that we're watching, but it's definitely not something we've seen any particular trend on today's. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [44] -------------------------------------------------------------------------------- Heavily -- disproportionately exposed to Western Australia, mining, and we did a big piece of remediation work in the northern territory book 2.5 years ago. So I think that's probably had that all up is probably the reason why we're seeing different experience at the rest of the industry. -------------------------------------------------------------------------------- Nigel Pittaway, Citigroup Inc., Research Division - MD & Head of Pan-Asia Diversified Financials and Insurance [45] -------------------------------------------------------------------------------- Okay. And then maybe just finally turning to the Bank. I mean, obviously, you've got this medium-term aspirational target of cost-to-income ratio of 50%. So aspiration you've held for a substantial time now. I mean, I'll take it. Obviously, system growth is low at the moment, and you are working on the cost. But I mean, the cost-to-income ratio went up again sequential half-on-half. So I mean, I'm sure there's going to be a lot of healthy skepticism about your ability to get there. Is there anything you can sort of give us to sort of -- give us some comfort as to why it is actually achievable rather than just some aspiration that sort of you help hold for a while but never really get to? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [46] -------------------------------------------------------------------------------- Well, I think I'd add -- I understand, I accept healthy skepticism and probably understandable skepticism, Nigel, given this commitment has been around for some period of time. I come at it from a very top-down approach, which says for the Bank above its cost of capital, it has to get cost-to-income ratios around 50%. So it goes -- bit beyond an aspiration, it's a precondition for the Bank to be generating the sorts of returns that we're looking for. It's a 2-part story. Now one of the things that the organizational changes that we've made and the structure -- structural changes we have is that we are looking to stand the bank up as end-to-end as it can be. And so that between Clive and Jeremy, they can agree, this is the cost base of the Bank. And it will be as proximate as it can be to -- it's like-for-like competitors in regional banking land. And then the other key theme is focused on revenue. And we've done a good job on the deposit side of the book using digital. But we've got a lot more work to do on the lending side. Aspirationally, Suncorp Bank should be able to grow ahead of system, not multiples of system, but ahead of system. And so I think our focus on revenue growth, continuing to leverage the great work that's been done on the deposit side, utilizing the digital infrastructure that we put in place, transition that out of the -- out of deposit site into lending with a focused -- focus on revenue growth there and this determination we have to right size the Bank's cost base relative to its peers, I think, puts us in a plain sense where we need to be. Now having had this commitment for a long period of time, I understand the skepticism. We ultimately won't be supported around our ability to get it until we get it or get on the pathway to deliver it. So execution is absolutely top of the list. Clive knows that. We all know that. We're all supporting him to do that, and he's got his whole team aligned around this commitment. So I understand the skepticism, but it's where we need to get to. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- The next question comes from Matt Dunger from Bank of America. -------------------------------------------------------------------------------- Matthew Dunger, BofA Securities, Research Division - Research Analyst [48] -------------------------------------------------------------------------------- If I could please just follow-up on the last question around the cost-to-income ratio, why not look to an absolute cost target? And if you could talk to us about the improving settlements why that isn't that translating to Home loan growth? Is there a retention issue in the book? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [49] -------------------------------------------------------------------------------- Yes. I might actually get Clive back up to talk to both those points actually. I think that we are very encouraged by the improved lodgment piece. But in summary, there's been an advanced level of pay down. I think the whole industry is seeing it, and that means you've got to pedal very hard on lodgements to keep your balance sheet growing ahead of the repayment schedules. But Clive, you might like to. -------------------------------------------------------------------------------- Clive van Horen, Suncorp Group Limited - CEO of Banking & Wealth [50] -------------------------------------------------------------------------------- Yes. Spot on, Steve. So just to build on that, when we look at our runoff rates -- and runoff as a combination of a few things. It's customers repaying their loans as normal. It's customers refinancing loans away from Suncorp Bank, and it's properties being sold. When we look at the runoff rates for the last half, they were absolutely elevated. And in the last quarter, they were extremely elevated. And if we were to normalize the runoff rates to the average of the last 3 years, then our book would have been flat for the last quarter. So clearly, that's not something we just put our hands up in the air and say, wow, it's me. We've got a lot of work going on to address that runoff issue and proactively be there for customers when they do sell a property, for example, to make sure that we are in the consideration set for the next property that they may be purchasing, having sold the first one. So runoff is absolutely a big issue. And the buoyancy of the property markets, whilst it has many other benefits, it does mean that there's more churn right across the industry, and that's something that we're seeing at the moment. To the earlier question about cost to income, yes, absolutely, it's an income and it's a cost problem. And the one point I'd add to what Steve mentioned earlier is around our digital -- the big shift to digital and the store optimization that we're doing. So we've moved from 160 stores or branches 5 or 6 years ago to 93 as we stand here. We've closed 20 in the last half and doing that in a very careful way, very considered around access of those customers to other banking options, whether it's Australia Post or another Suncorp outlet. And that's a process we will continue. So we will continue to optimize that footprint as the shift to digital happens. And we've seen a massive reduction in customer transaction activity over the counter, doing very simple mundane things. We'd much rather that we're doing higher value-add activity in our stores and branches, home loans, small business and so on. -------------------------------------------------------------------------------- Matthew Dunger, BofA Securities, Research Division - Research Analyst [51] -------------------------------------------------------------------------------- And if I could just follow-up on New Zealand Life Insurance. If you could talk to the favorable mortality and income protection experience that you're seeing there, how sustainable will that be versus what's in your planned profit margins? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [52] -------------------------------------------------------------------------------- I'll hand it to Jeremy in a minute, but we're delighted to see the performance of the New Zealand Life business. As an ex-CEO and CFO of the life business in Australia, Jeremy, you might like to comment on the favorable trends. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [53] -------------------------------------------------------------------------------- Look, I -- we obviously haven't changed our planned profit margins in the numbers. But I think mortality has been a trend more broadly. And I think what we've put that down to is with COVID-19, the corollary of COVID is that people have been more distance. There's been less colds and flus, et cetera. So that has had, we think, an impact on mortality. So I wouldn't necessarily think that's a never lasting positive to our planned assumptions. And on income protection, look, maybe there is something there in the sense that we've worked hard at closing on claim policies. So that is a management action. So maybe there is some positivity there, and we'll review our planned margins going forward. But I think it has been a very strong half for us in New Zealand Life. I'm not sure we'd be expecting that to repeat to that extent again. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [54] -------------------------------------------------------------------------------- I'm just reluctant to bring Jimmy, given the technology, but that's pretty much what he would have said, I'm sure. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- The next question comes from Matt Ingram from Bloomberg. -------------------------------------------------------------------------------- Matt Ingram, [56] -------------------------------------------------------------------------------- Sorry if I'm going over a bit of old ground given I'm at the end of the queue. I just wondered if we could please circle back on the provision expenses. Obviously, it was a good normalization this half. Just 2 questions on that. The first is, you said you'd already revisited the general provision and you are happy. So just looking at the way things are rolling off from the deferred book and your expectations of how JobKeeper rolling off are going to impact that, to what extent are the overdue loans tracking better or worse than you thought as that deferred book rolls off? And to what extent are you assuming things get better rather than worse despite the JobKeeper rolling off some time potentially this year? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [57] -------------------------------------------------------------------------------- Well, I think it goes to the prudence with which we set the original assumptions. So in setting that original general provision assumption, we had presumed there was quite a lot of migration of customers into hardship that hadn't necessarily happened at the time of setting the reserve. And so from a reserving perspective, we certainly don't think that any of the migration of customers into more sustained hardship once the COVID deferrals come off is going to impact at all on that provision. Having said that, there's obviously still uncertainty head around what happens when JobKeeper, JobSeeker, et cetera, comes off. But we do feel pretty confident that we've got those sorts of future outlooks, migrations, et cetera, covered in the provision we've got. We have seen a -- quite a small number of customers who have -- who were originally on deferrals and have come off deferral and through into the hardship process and into overdues and arrears, but it's been a relatively small number. And of the residual customers we've got on deferrals, the 1%, 1.2%, yes, we would expect some of those to also go into hardship. We would expect that to be a smaller number based on the conversations we've been having with those customers. -------------------------------------------------------------------------------- Matt Ingram, [58] -------------------------------------------------------------------------------- Okay. That's great. And if I have time for one quick final one, obviously, the risk-free rate is now basically 0. I just wonder if you could clarify for us, please, what that cost of equity looks like with that risk-free rate at 0? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [59] -------------------------------------------------------------------------------- Well, so we estimate that the spot number at the moment somewhere between 8.5% and 9%, depending on how the risk margin is moving to the risk free. And look, it's worth noting that with the cost of equity, as everybody would probably know, the cost of equity certainly hasn't changed as much as the risk-free rate has changed over the last 2 or 3 years as the equity risk premium just increases to offset that lower discount rates. So important effect, the cost of equity probably hasn't changed too considerably over the last 3 years, notwithstanding a considerable drop in yields. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- The next question comes from [Daron Ku] from Crédit Suisse. -------------------------------------------------------------------------------- Unidentified Analyst, [61] -------------------------------------------------------------------------------- [Daron Ku], Crédit Suisse. Congratulations on a great set of results today. I've got a few questions on the Insurance business, please. Firstly, just on CTP. That's been coming down over the last few years. I saw that you commented that that's plateaued now. So should we expect that to be relatively flat going forward? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [62] -------------------------------------------------------------------------------- Look, I think to some extent, the aggregate CTP numbers reflect that long-standing, strong market share we've had in Queensland CTP, where we have had -- over previous periods had over 50% of those schemes. And it was inevitable, I think, that we would see some deterioration. I mean, it's very pleasing that we've grown units in Queensland CTP. We do have ongoing discussions with the regulator around profitability there and making sure the assumptions that are embedded into the ceiling pricing in the Queensland CTP scheme are appropriate. For the longer term and for us to be able to grow into that book, we need to get confidence around not only the reserving position that we take into the pricing but also the current year margins. So it is good to see that market share stabilize and start to pick up a little bit. Generally, across the board, well, in South Australia, it's very sensitive to -- your NPS for your claims performance, which is quite an interesting phenomenon in a long-tail scheme where pricing can be very similar across the 3 or 4 competitors in the market. But the fact that you might be rated #1 or 2 in NPS for claims is a big differentiator for growth. So again, very focused on making sure that our claims performance is putting us in that #1 or 2 position. And in New South Wales, it is very sensitive to your price point. It's not as prescribed a pricing regime as Queensland or South Australia are. So our aggregate position across the board is to see if we can grow. We are the #1 statutory scheme performer in those personal injury businesses. So our overall strategy there is to drive good top line growth, appropriately balancing risk with unit count. But the big challenge and the big opportunity is in Paul Smeaton's will, which is claims. And we continue to run particularly in Queensland, at above 100% of the scheme average for our claims performance. Now if we can get that down below 100%, which is our target and we're on a good path and good trajectory to do that, then you'll see improvement in current year margins and releases out of those reserves. And so growing units profitably, bringing down costs, driving our performance relative to the scheme, opening up reserve opportunities and improving margin. That's the strategy in long tail. -------------------------------------------------------------------------------- Unidentified Analyst, [63] -------------------------------------------------------------------------------- And if I could ask another one more generally on the commercial side of the business in SME, saw comments there around some lower retention. That's typically quite a competitive space. How do you see that going forward, specifically with when some of the stimulus comes off? -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [64] -------------------------------------------------------------------------------- I might invite Lisa Harrison to come up to the podium. -------------------------------------------------------------------------------- Lisa Harrison, Suncorp Group Limited - CEO of Insurance Product & Portfolio [65] -------------------------------------------------------------------------------- Thanks for that. Yes, your comment, it is a very competitive market, that one. In terms of -- from our perspective, we are making investments to strengthen the proposition help us be more competitive, appeal to both brokers and customers, which should help us arrest some of the retention challenges that we have had in this half. That being said, I still think we've got competitive pricing, a good product, and we'll continue to build on both product pricing and our underwriting capability to take us forward. -------------------------------------------------------------------------------- Unidentified Analyst, [66] -------------------------------------------------------------------------------- That's great. And do you think new business might still be challenging going forward, just given the economic environment for insurers in general? -------------------------------------------------------------------------------- Lisa Harrison, Suncorp Group Limited - CEO of Insurance Product & Portfolio [67] -------------------------------------------------------------------------------- So SME is competitive. And I can't sit here and predict what's going to happen when things like JobKeeper comes off. Obviously, the SME market was impacted quite significantly through COVID. However, we have seen still good momentum in that portfolio. We've seen a little bit of rate go through. So I'm probably cautiously optimistic. -------------------------------------------------------------------------------- Unidentified Analyst, [68] -------------------------------------------------------------------------------- Sorry, if I could ask just one more, more technical one maybe. I noticed commissions were lower. Sorry, there's more across the board for Australia and New Zealand. I'm sorry, if that's a basic question. Just wondering how you achieved lower commissions. Is it just through higher GWP? Or was there something else in there? -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [69] -------------------------------------------------------------------------------- Look, 2 key drivers. One has been the ongoing remediation, if you like, of our consumer broker portfolio. So we've seen units and growth shrink in that portfolio, which inevitably comes with lower commissions. So it's just a corollary of lower growth in the consumer channel here in Australia. And then the other element has been in New Zealand, where we have seen some commission changes to some of our corporate partner arrangements during the half. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- At this time, we're showing no further questions via the phone. -------------------------------------------------------------------------------- Steve Johnston, Suncorp Group Limited - Group CEO, MD & Director [71] -------------------------------------------------------------------------------- Okay. Well, I thank everyone has a busy day with number of reports. Again, thanks, everyone, for your participation. Thanks to the team. Again, we're very pleased with the result. We accept the fact that this is just one benchmark. We're Very consistent with what we've said we're going to do. I believe we're on the track to delivering to that, but we know that there's a lot of work to do to execute to the ambition that we have over the next 2 years. So we thank you for your time, and wish you all well. Thank you. -------------------------------------------------------------------------------- Jeremy John Robson, Suncorp Group Limited - Group CFO [72] -------------------------------------------------------------------------------- Thank you.