Insurance Australia Group Limited (IAG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us at IAG's results presentation for the half year ending 31 December 2020. Today, I'm presenting these results on traditional owned -- traditional land owned by the Gadigal people of the Eora Nation. And I'd like to pay my respects to elders, past, present and emerging. I'm joined today by our Chief Financial Officer, Michelle McPherson. I thought I'd start with some high-level comments on where we're at. I'll then hand over to Michelle, who's going to talk us through the financials in a lot more detail, including our capital position and our dividends. Then I'll come back and cover what we are going to do over the next 3 to 5 years around our medium-term strategies. I'll start by making some high-level comments on where we're at. Today, we're delivering a strong result with a very solid underlying margin. I've reset our strategy and our operating model already. We are well advanced in separating out our Australian division into our direct and our intermediated businesses to ensure we face into the market and our customers in the way our customers want to deal with us. We've also dealt with business interruption and raised capital to support a provision. And you'll see today that there have been no changes to that provision to what we communicated to with you in November of last year. And lastly, I'm going to finish off with more detail about how we're going to deliver a stronger, more resilient IAG over the next 3 to 5 years. I'll step you through some foundation pillars that we've organized our strategy around and then talk you through the progress that we've made against those already. I'll start by making some high-level comments on where we're at. Our premiums have grown in the 6-month period by just under 4%. Our view is that's a strong result considering the economic uncertainty that we've had across Australia and New Zealand during calendar '20. It's a good result for IAG. Our margin performance has also been strong. We do acknowledge the lower perils and lower claims frequency in the 6-month period just gone that had been a benefit to our reported margins. But our underlying performance of our company has also been strong and importantly, stable. There's definitely a bit more momentum in our business today than there was 6 or 12 months ago. My view is we've adopted a conservative position in our provisioning for business interruption and the way our overall balance sheet is positioned at 31 December. On capital, the group's capital position remains strong, and we are above, you'll see in the packs, our targeted capital ratios. And with the confidence that we have in our capital and the momentum that we have in our business, we have declared an interim dividend today of $0.07 per share. Before handing over to Michelle, I want to provide some overall thoughts on our Australian and New Zealand businesses. As you've heard from other companies, the environment we are operating in, in the last 6 months has been probably more favorable than we would have anticipated. You'll see that we've seen double-digit new car sales in the last quarter. We've seen significant increase in building approvals, and we've seen unemployment rates reducing. All of these, of course, are key inputs into the operating environment to which we're facing into at IAG and all a little bit more favorable. Our direct personal lines business in Australia continues to operate strongly. And we've seen growth in both rate and volume in customers in our business here. Our intermediated personal lines business in Australia has shrunk a little bit over the period as a result of some of the rate that have been flowing through that portfolio as well as some deliberate actions that we've taken across certain portfolios there. Our commercial business in Australia has had rate flowing through that portfolio. And pleasingly, volumes and customer numbers have held up in the 6-month period. And of course, our New Zealand business continues to deliver a very strong result, and we're very pleased with the performance of our business there. Overall, you can see that our businesses are in good shape, and they're being set up well to deliver on our strategy going forward. On that note, I'll hand you over to Michelle who's going to step through some of the financials in a bit more detail. Michelle?

Thanks, Nick. Good morning, everyone. As Nick has outlined, we're encouraged by the stability of our underlying insurance profitability and premium growth, especially in the second quarter. I'd say we're cautiously optimistic. Cautiously. Importantly, I have no further significant developments to report since the last update we provided our capital raising in November. There are a few callouts in the headline numbers you can see on this slide. The $460 million net loss after tax has been driven by our business interruption provision. The increase in which has been recorded in net corporate expense, along with some other unusual items that I'll discuss later. In line with our usual practice, we have excluded these items from cash earnings, which was $462 million for the period. I will also provide some more detail on the approach followed by the Board in declaring a $0.07 interim dividend later in the presentation. Consistent with Nick's earlier comments, I'm pleased to report some positive GWP momentum, with growth of 3.8% during the half, notwithstanding that we estimated COVID constrained our premium growth by around $50 million. Growth momentum was a bit stronger in the second quarter as COVID-19 pressure eased. Most of the growth was rate-driven, with some pockets of volume growth. A few of the highlights for us are: in Australia, we lifted motor rates by 3% and home by 6%. This is in line with what we require for underlying claims inflation and upward pressure on our perils allowance. And we experienced some volume growth in our direct personal lines, offset by reductions in intermediated personal lines. The average rate increase across our commercial portfolios was 7%, which is a pleasing outcome and in line with our targets. Also pleasing is that in contrast to recent periods, we observed high and stable retention rates in this element of our portfolio. Our New Zealand business achieved low single-digit rate increases and 2.8% overall GWP growth in New Zealand dollars. Also highlighted by Nick earlier but worth calling out is we recorded improved underlying profitability over the half, and we observed broadly stable trends if we adjust for the estimated COVID-19 influences. As you can see, our underlying margin was a solid 15.9%. In line with our disclosures in FY '20, we have wanted to provide you with our best estimate of how changes in the COVID-19 operating environment have impacted this half. Many of you will recall that we estimated net neutral impact from COVID-19 in second half '20. This half, we've estimated an approximate $60 million to $70 million positive impact or around 1.7% of net earned premium. The dominant driver of this positive impact has been lower motor claims frequency during the lockdown periods that you're all aware of. Two other differences in our approach in first half '21 are worth calling out. Given the significance of the BI provision, and we'll talk some more about that in a little while, that we announced in November, we have excluded this from our underwriting result in first half '21. And as we shared with you in August, from FY '21, we're assuming no reserve releases in our underlying margin definition compared with 100 basis points we assumed in the past. Taking all of these changes into account, the adjusted run rate for underlying profitability is around 14%, as you can see on this slide. I'm highlighting these influences as we have been operating in unusual times and we do not believe we will continue to see net positive benefits from COVID-19 in the second half of FY '21. Moving to underlying claims and expenses. We recorded for the half an underlying claims ratio of 52.8%, an improvement compared to FY '20. This ratio does exclude all peril costs and prior year reserving changes and focuses on our working claims. If we back out the COVID-19 influences, trends have been stable, reflecting both positive and negative influences. Our Australian commercial operations are not performing at targeted levels. And long-tail profitability was a drag on first half '21. The creation of the Intermediated Insurance division under our new operating model is targeted at lifting the performance of this area of our business. On the positive side, the earn-through impact of higher rates has assisted profitability, particularly short-tail commercial products where some of the largest rate increases have occurred in recent periods. We have seen higher compliance and governance costs, increases in corporate insurances and increases in annual leave provisions, which did result in some cost pressure during the half, with mid-single-digit growth if we remove the COVID-19 additional costs we've included. Nick will talk further about our strategy, which will enable continued improved outcomes in this area over time. As called out on the earlier highlights slide, our reported insurance margin for the half of 17.9% was 200 basis points higher than our underlying insurance margin, reflecting perils below allowance, a positive credit spread impact and modest net reserve strengthening. I thought with this slide, it was useful to provide a little bit more color on the net reserve strengthening. We did flag the expected need to strengthen our reserves in the second quarter at our capital raising in November, and this was ultimately a charge of $15 million, a negative variance to reported profitability. This reflected a deterioration across commercial long-tail lines in Australia, including workers' comp, professional risks and liability classes. We saw positive releases from short-tail reserves in both Australia and New Zealand to partially offset this. And overall, it's fair to say the net reserve strengthening was not as significant as we had originally expected. That said, when we take into account an additional $75 million provision for customer refunds that we recognized during the half, the impact of these 2 factors was in line with the $70 million to $90 million pretax charge we flagged in November at the capital raising. To touch briefly on payroll costs and reinsurance. Pleasingly, the pattern of weather, particularly in Australia, dovetailed well with our reinsurance covers, leaving natural peril costs $39 million below the allowance for the half. We also successfully renewed our main catastrophe reinsurance program at the start of the year. It's fair to say, reinsurance market conditions were certainly tougher than last year as we expected. So we were pleased to ultimately achieve only a modest increase in the cost of our main cover. Since we updated you on this cover, I wanted to highlight, 2, $50 million drop-down covers for second and third catastrophic events that were finalized later in January. As we look to the balance of FY '21, our aggregate covers held have now transitioned to a financial year basis. As the deductible on the 2021 aggregate cover was not impacted in calendar year 2020, we start the second half with a $400 million pre-quota share deductible, which is a different starting position to first half. Clearly, the BI provision has been significant for us, and we talked a lot about that in November. I thought I should spend a little bit of time on that now. The finalization of our first half results have seen no adjustment to the BI provision to that, which we disclosed on 20 November. We have done further detailed actuarial review of the assumptions, including recent COVID-19 developments in New South Wales, Victoria and Queensland. And we've been comfortable to form the view of our actuaries, particularly have been comfortable that there's no change to the net central estimate or provision required at 31 December 2020. To give you some context in terms of where we're at with BI, we've received around 500 claims to date. Our view that the intent of our business interruption policies is to not provide coverage for any losses related to pandemic has not changed. But court process will ultimately determine what claims we pay. I did want to take this opportunity to note that as we move through those process, we do intend to pay all valid claims, as is our responsibility and obligation to our customers. We appreciate the uncertainty that still lies ahead on this issue. And obviously, Nick and I can cover any questions you may have when we get to the end of the formal presentation. To capital, as Nick indicated earlier, our capital position remains strong. The CET1 ratio improved relative to the pro forma we presented at the capital raising in November. So it was at 1.19x, and the pro forma was 1.15x. The high-level movements shown on the waterfall on this slide are as you would expect and in line with the previous indications following the recognition of the BI provision and the capital raise in November. As the new CFO, I look at IAG's track record, and we have a strong track record of good capital -- CEO, did I say? I should say CFO. Sorry, Nick. [indiscernible]

No worries.

Definitely not. I've got a lot to do here first. At IAG, we have a strong track record of good capital management, and we will continue to be proactive and transparent in the management of the group's capital position moving forward. And I think that's really important as we demonstrated at the capital raise in November. For my final slide, and then I can get over the embarrassment of what I just did, I'll take you through the approach followed in determining our $0.07 per share dividend that the Board has declared today. IAG's normal approach is to identify unusual nonrecurring items, record these in net corporate expense and exclude these items when calculating cash earnings. As you can see on this slide, there are more unusual items in this half than we've seen in recent periods, reflecting our action to address matters during the half. They include the BI provision and the pretax addition to the customer refunds provision of $75 million that I touched on earlier, together with some smaller items that are set out on this slide. I'd just highlight, we are continuing to undertake an ongoing and proactive review of our pricing systems and processes, and the $75 million reflects an additional 4 refund programs identified during the period. So having moved decisively to strengthen our balance sheet, following the recognition of the BI provision, we are able to move forward on a more business-as-usual basis. Given this, the dividend represents a payout ratio of 37% of cash earnings, which is in line with the typical approach we would follow in the first half of each financial year. With that, I'll now hand you back to Nick. Thank you.

Thanks, Michelle. IAG is a strong business. We have a clear purpose to make your world a safer place, and we aim to do that for the 30 million Australians and New Zealanders who live here. And we've been doing that for a long time, over 150 years. In Australia, through the NRMA brand, we were there when Australians first took to the roads more than 100 years ago, providing insurance products. Through CGU, we have been looking after Australian businesses in various forms with various brands of that for over 160 years. In New Zealand, our personal lines businesses, AMI and State, have played a significant role in personal insurance in New Zealand since insurance began there. And our NZI business has supported New Zealand businesses for over 150-odd years as well. You can see from that, we have a great history and a legacy in our brands and our businesses in this part of the world. And that's a very important part of our company. Today, we protect 8.5 million businesses and people making their world a safer place in Australia and New Zealand. We touch a lot of people. Our customers, of course, are at the heart of what we do and the heart of our business. Keeping them safe with the products and services that meet their needs has built the trust in our brands and has delivered the strong financial results that we've delivered to you, our shareholders, for many years. Our supply chain helps us deliver our customer promises in the moment that matters most, providing the great service that we do when customers make a claim and really ensuring that we can deliver on some of the scale advantages that we have across our organization. Of course, we can -- we use our data and our deep understanding of risk and our specialist knowledge of the impact of extreme weather events to support mitigation to help communities better prepare to the increasing impacts of climate change that we're seeing. And of course, within IAG, it's our people that enable us to do all the things that we do to be nimble, to react quickly to opportunities and to make sure we look after our customers when our customers need us most. Our strong capital position, as Michelle mentioned, supported by our very important long-term strategic partners, means that we can be counted on as an organization by our customers at their time of claim at their time of greatest uncertainty. That said, when I look into IAG, we have some challenges that we want -- we are going to address. Acquisitive growth for us has delivered over 20 brands across multiple product lines, multiple geographies and multiple channels. And there's many good parts of that, obviously. But behind that, we have numerous platforms and systems with variable degrees of digital capability that sits behind and across our organization. We have to solve this complexity of how we run our company. We've been working on this for a while and many things we've done already, and finishing that work of reducing that complexity is a major priority of the leadership group of IAG. We have reduced some market share through some of our deliberate portfolio remediations, particularly in our intermediated businesses here in Australia. What we're doing now is ensure we create the right platform in that business to grow that business going forward; get the foundations right, so we can then grow. And we all -- and we need to operate all of our businesses within our chosen risk appetite, and we will continually be looking to uplift our risk maturity, so we can deliver on a strategy that we want to. At IAG, we have a great history. We have strong foundations that create significant opportunity for us. And that's what I want to step you through now. So what we're going to do is we're going to deliver a stronger, more resilient IAG over the next 3 years. We've built this around 4 pillars that is the focus of the leadership group of IAG. What they are is that we will be an organization that grows with our customers, so in our direct business, we will grow at least in line with how the market is growing. We will build better businesses. We need to be the best-in-class, so that we can help Australian and New Zealand businesses thrive. We will continue to invest in our pricing, our underwriting capability, driving commercial discipline across our organization and rebuild and strengthen relationships with partners and intermediaries who are such an important part of our business. We're going to create value through digital. We will be a digital-first organization. And we will ensure that is the way our customers experience IAG. And just as importantly, that is the experience of our people who work within IAG. And lastly, we need to be an organization that manages our risk, both how we manage our overall risk profile and, of course, importantly, secondly, how we allocate capital to the risk that we take on from our customers, ensuring we have an appropriate return for the risk that we take. These are the 4 pillars that are driving our strategy. And we're on this now. We're already making changes in the organization aligned to those 4 pillars. Some examples. In relation to growing with customers, you'll see that within the pack that within our direct personal lines business here in Australia, we grew the number of customers that we have in the 6-month period. And we haven't done that for some time at IAG. So there's change already happening within our organization. We've got that focus. On building better businesses, I've already announced changes to the way we run our company, which means we have a much greater focus on our intermediated business here in Australia. And I see great opportunity to improve both profitability together with growth here. We're going to create value through digital. We have great examples already. Within our New Zealand business, AMI, we have reduced our physical footprint over the last 6 months. And we've been investing heavily in digital to create a different customer experience, which is working well for us. And of course, within our digital offering, we are modernizing our back office to reduce complexity. We've done a lot here already on the claim systems front. And over the next 6 months, we'll be launching and rolling out our Guidewire for our policy and admin across our personal lines business in Australia. So we're putting in place a single policy and admin system for Australian direct business. And managing our risk platform, we will continue to manage our risk, making sure that we operate within our risk appetite. The changes I've already made in the operating model of IAG, are focused just on that. Ensuring we have clarity around roles and responsibilities within the organization and importantly, accountabilities about who's responsible for what are very clear. And these 4 pillars will deliver a stronger, more resilient IAG. We're on to this now. And what we will be doing is talking you through progress against those pillars over the next 6 to 12 months. So in closing, just a few comments from me. What this slide does is summarize our value proposition to you, our owners and shareholders. It outlines the financial outcome of the strategy that I've been discussing today and how -- and what the financial outcome will be against delivery aligned to those 4 pillars. Creating a stronger, more resilient IAG will deliver a cash ROE in the order of 12% to 13% and insurance margin of 15% to 17% and growth over the next 3 to 5 years. And that's the financial setting that we're working on. And that is the type of return profile you should expect from us as an owner of our stock. Michelle and I are now happy to take any questions. Thank you.

[Operator Instructions] Your first question comes from Andrei Stadnik from MS.

Can I ask 2 questions, please? Firstly, I want to ask about efficiencies. Sir I think, Nick, when you became CEO late last year, one of the first new articles you mentioned was to run a more efficient IAG, and you spoke more on that today. But when will that translate into actual cost efficiencies like -- especially given IAG's lag in [ some ] by 4 to 5 percentage points on the cost ratio? When do you think we really start to see some efficiencies come through?

Thanks, Andrei. I mean what we're saying is you can see what we've tried to outline in the 4 pillars. And what we're looking to do is we're probably running an underlying margin of around about sort of 14% now or just over. And we're going to lift that to sort of 15% to 17% in underlying insurance margin, ROE, cash ROE of 12% to 13%. The elements of that are going to be a combination of growth, improved portfolio performance and some sort of outcomes around cost and efficiency, which I think is what -- is where your question is coming from. And there'll be elements of that within each of those 4 pillars that we'll be delivering against. So that -- I would say that that's an element of how we're going to improve our profitability or underlying profitability of IAG over the next couple of years. And we're building out -- we're continuing to build out those plans now, sorry. We're clear on the pillars, the strategy. We're sort of lining ourselves up. Obviously, now what we're doing is building out the detailed plans, and we'll come back and talk to you more about that over the next 6 to 12 months.

And I wanted to ask my second question around growth [ in motor ]. It looked a lot lower than Suncorp's, about 1.5% growth in Australian, motor and Suncorp, at about 5%. Do you need to invest in the value perception of the brand? And I know despite a very large savings, there were no refunds offered to a lot of customers, unlike some of the, I guess, the challenger brands. But is there -- like is there a need to invest in value perception of the brand to try to improve the unit growth in motor?

Andrei, it's Nick. I mean there's a blend in there, of course. So there's -- I mean, in our direct personal lines, motor has actually done pretty well. Within that, we have definitely been reshaping some of our intermediated personal lines businesses. And that has impacted some of those growth numbers that you're talking about, where we've had rate flow through, and we've had some volume losses. So there's a bit of a blend there. But I think to your question around sort of brand strength of sort of a flagship NRMA and our partner brand with RACV, I would say we're in good shape there. And if anything, we're going to be building out more the role of those brands in the running of IAG. So I would say that, that growth number is predominantly due to some of the changes we made within intermediated personal lines.

Your next question comes from Andrew Buncombe from Macquarie.

Just a couple from me, please. I might start with a comment that Michelle made in your prepared remarks. Was I correct in hearing that you don't expect COVID benefits to come through in the second half '21? And have you already seen that coming through in December and January? I'm just trying to understand how conservative that assumption may be.

Andrew, why am I I'm not surprised you're calling me out on being conservative straightaway? Thank you for the question. I think when we reflect on the first half, we indicated, if I exclude the BI element that we saw net positive $60 million to $70 million. As -- and most of that was driven by the motor vehicle frequency benefits linked to the lockdowns. So as we've seen our nation, and particularly in the States of Victoria, move out of lockdown, we have seen that come away, and we don't think it's appropriate to suggest that you'll see further benefits, and it was 1.7% of net earned premium into the second half. So you'll have to form a view on that, Andrew, but that's the position that we've taken at this point in time.

Sure. That makes sense. And then just a second question from me. Just levies reduced a lot. It seems like it's a reversal of the [ technical ] reserves that you've built over the last couple of years. Can you just give us a bit of an idea of what has changed your view on the New South Wales CTP portfolio that you're able to unwind those extra earnings?

Yes. Good pickup, Andrew. That is reflected in the levies, and there's nothing unusual to particularly call out. The key driver is consistent with some of the comments that we have been making to you about the impact of economic conditions on the CTP book. And we see an increase in the level of claiming that we're seeing around that, and that's reflected through in our actuarial calculations around that for the half.

Okay. And then just a final one for me. Nick, you made the comment that you're planning on rolling out a single policy and admin system for Australian personal lines. Can you just give us a bit of an idea as to how much you think that will cost and where you're going to get the money from to fund that program?

Yes. Andrew, it's Nick. I mean it's across our direct business. I mean we've spent a lot of that already. So in a way, I mean, I think it's the same message that we've talked about for the last couple of years. We have been investing a reasonable amount that we've been wearing through the cost structure of IAG as we were sort of putting together all our various claim systems on to Guidewire claims. In a way, it's sort of a continuation. So if your question is, do you -- do we expect a sort of a spike in the cost structure of our company or anything like that? No. We've built a lot of this because we're actually launching it in the next month or so. I'm just looking at the front here, actually, in the next couple of weeks. And so that system is built, and we're obviously -- we're trialing and cautiously rolling that out across a few small portfolios. But in relation to sort of financial implications of what I'm just talking about, no, you shouldn't expect any material change in sort of the cost structure of our company. That's sort of embedded in how we run IAG now. We're not calling it out as a one-off I think is the point. That's -- we're in the business of continually reinvesting in our systems and processes to simplify our organization.

Your next question comes from Kieren Chidgey from Jarden.

I've got a couple of questions. Maybe just starting on home and motor. Just interested in your comments around the competitive backdrop there. Obviously, you've been pushing ahead with rate, particularly in home. So just interested with sort of the banks pulling back there and higher insurance and cap budgets still coming through for you guys. How are you sort of balancing the rate volume balance over the next 12 months?

Kieren, Nick. I mean I'd say it has been a bit competitive. We have found probably home a bit tougher than motor, would be the overall -- our overall comment. We have been reflecting some of those -- as you point out, those input cost changes around sort of average claims cost as well as reinsurance and perils allowances and the like into our pricing. So we're -- I mean, that's the challenge of running this company, getting the pricing volume mix. I mean our intent, as you can tell by how I've talked about the strategy and the 4 pillars and growing with our customers, so our intent going forward is to be able to grow our direct personal lines business, which home is, obviously, an important element of that, in line with sort of the market -- at least in line with market growth across Australia and New Zealand. And so that's -- we'll be constantly looking at pricing and product and brand in relation to how we're competing. So I'd say we've found it a bit tougher, but there are certain things that we're doing to ensure that we continue to be competitive.

And commercial was sort off the back of the BI claims provisions you've put up in the half. Is there a push to lift pricing above to the current run rate you've highlighted, which I think was 6% or 7% last half.

I mean maybe I'll sort of say that in a different way. Are we comfortable with the return profile of our intermediated commercial portfolio? No, we're not. And so I mean -- or do -- are there actions that we need to take around portfolios, pricing, costs? Yes. So there's a package of things that we need to do there. And that's the way we set up the company and the way our focus -- you can tell by the way, we're talking and the focus of us that we see opportunities there. So particularly in relation to pricing, I mean, we put through a figure, 6% or 7% type rate, through that commercial portfolio; and volume was relatively flat over the 6-month period. It feels like we're not the only one that has some challenges with their commercial portfolios. And that pricing environment probably feels slightly more favorable today than it did 6 months ago.

All right. I just had 2 quick questions for Michelle. Michelle, the 500 claims you talked about for business interruption, what would be the case estimates sort of in aggregate behind those relative to the provisions you've put up?

So Kieren, it's a very small number of estimated claims relative. And some of them actually don't have business interruption coverage, but it's an indicator just that there's been a small level that have come in at this point in time. And we haven't gone into detail around the case estimates. They're complex by nature, but Nick touched on it at the start of the presentation, that the view is that our provisioning may be conservative based upon the actuarial work that we've done, the assumptions that we've used. We think it's robust and appropriate, but there's nothing in those small number of claims that would indicate that's not the case.

Okay. And finally just the -- or from a capital perspective, can you highlight how big the DTA deduction was to CET1 as a result [ that, that provision might stop ]?

Yes. So we recognized a $352 million deferred tax asset associated with the recognition of the BI provision, and you see that within the negative movements on the capital slide. And we had about a $28 million utilization of some tax losses that we had in New Zealand. So both of those factors have come through in the capital calcs.

Your next question comes from Matt Dunger from Bank of America.

If I could just ask on the aspirations for a reported margin of 15% to 17%. Your underlying margins are already there. Previously, Nick, you've guided to a 16% to 18% reported margin target pre COVID. And given the work you're doing to address the commercial returns profile, why can't you be more aggressive with this reported margin? Can you talk us through what some of the potential moving parts are?

Yes, sure. Matt, I mean, so sort of a starting position, even though we sort of called it 15.5% or 15.7%, within that number is there's some claims frequency benefit from COVID-19, essentially lockdown and motor frequency. So we're kind of guiding you down more to sort of the -- call it, the 1 January run rate of our company, just over 14%. So we're not sort of claiming that 15.5% is the current run rate. It's a lower one. Then sort of where to from here, with that, we think with growth portfolio, remediation and sort of some efficiency gains in relation to the cost structure of our company, we can lift that. To your comment around why isn't 15% to 17% higher, I mean, a few thoughts. One, we don't have reserve releases in that number. So when we were 16% to 18%, we were 1% or 2% reserve releases. We're assuming none. And secondly, obviously interest rates are sort of nothing, and so there's very modest contribution from investment returns in that equation as well. I mean let's hope it's conservative, but we think in sort of in the settings of the company we sort of think moving from 14% up to that 15% to 17% type range. And sort of the pillars that I described and the programs are going to come out of that, and we're going to talk to you about how we're delivering against that every 6 months at least. We're confident we're going to be able to do that. I wouldn't like to sort of stretch that further, for the reasons I mentioned. And sorry. One last comment: We're very keen on growth. So that's we've kind of -- we've had premium growth at IAG for the last number of years. And we've bought stuff and we've created growth from that, but we want to have a blend of sort of 15% to 17% margin and a genuine growth profile, not just premium growth but customer numbers. I mean successful companies have more customers year-on-year, and that's the company we want to be.

And leading on from that. With the investment in digital, are there any specific opportunities you've identified? Is it an intermediated or a consumer proposition? What's the addressable market?

I think it's everywhere. It's the reality, isn't it? I mean think about our own experience. As we know, our direct customers want to interact with us more and more digital. We've got a great experience in New Zealand, where we effectively shut our physical footprint of 70-odd branches around New Zealand for AMI. And we've had loads of those customers now interact with us digital. COVID-19, just generally, we've seen that uplift. So certainly, anywhere in our direct businesses, my view would be that we've under-invested in some of our intermediated connectivity, call it that, and the way that experience occurs with some of our partners. And there's got to be some opportunities for us to invest and create better experiences for end customer as well as the partner or the broker relationship; and then lastly, us. I think it's hard to claim to be a digital organization if that's not the experience within the organization. And so I'm continually looking for opportunities of how we can operate our company differently, and that's already happening over the last 12 months. Because we can't claim to be something unless that's what we are within. And I see opportunities to continue to invest there, which will create culturally some changes which will be positive, but also there will be some efficiency gains that will come out of that as well.

Great. And just one last question, on the quota share and your confidence in the ability to renew, given business interruption losses, with reinsurance partners.

I mean, well, I've said this time and time again. And I know people know that I've been heavily involved in this from the start, but I am confident on the -- on those partners and our capacity to renew. A number of those partners have already discussed with us their interest in extending, expanding post some of the issues we've had around business interruption. So I'm not getting any signals at all that anyone wants to pull back. In fact, if anything, I think it would be the opposite. That's -- that would be my general comment.

And I might just add I've obviously been getting to know our quota share partners and participated in a range of discussions and meetings with them. And we've received positive feedback on our transparency and decisiveness in setting out our views on BI and taking the steps that we took. So all of the interactions I've had in this short period of time are consistent with the comments that Nick has just made.

Your next question comes from Matt Ingram from Bloomberg.

Just a couple of clarifying questions, please. You've obviously had very good rate pretty much across the business. I just wonder how long until we see that fully reflected in the net premium earned. Obviously, there's quite a lag there depending on renewals and so on, but if you could give us some thoughts on that first, that would be great, please.

There's nothing to suggest that it'd be a different pattern, as I understand it, from what we've historically seen and the team tell me it's over the next 12 to 24 months, so we would expect it to be in line with that.

Okay, great. Look, maybe I'm a little ignorant, and I apologize if I am. You seem to take an overweight loss in your perils in last financial year. And I understand a lot of that was smaller claims that weren't covered by reinsurance, whereas this half has been pleasingly much perhaps even better than your peers. I just wonder what the nuances are that lead us to that outcome. Was it just the really unusual year last year? Was it really a big number of small events? Or was there a change in the books that you made this year? Just trying to get an understanding if that truly was unusual last year if -- or if some changes have been made to the book to fix that up.

Yes, I mean I'll make some -- I'll provide some comments. I mean this is the inherent volatility that we have. I'd say there's nothing material in the change of our exposures over the last 12 to 24 months, as an example, that would drive a different outcome. Therefore, the sort of the footprint of IAG and the exposure of IAG is not that different. I think there's a couple of different things. It's the nature of the events sometimes have an impact on us, and even concentrations of customers and where we happen to be. And secondly, it's a little bit of the timing of some of our reinsurance coverage. We -- our big coverage, our big catastrophic coverage, some of you know that that's very consistent and sort of that protecting the solvency of the organization. But some of these sideways aggregate coverage, and the way that we wear a little bit of cost before we trigger some recoveries can depend upon the sequencing of events and the time of the year. And so sometimes we have volatility half-on-half-on-half that it's not always lined up with some of the financial years that we have. In fact, one of the -- not the reason, one of the reasons we changed our aggregate program -- because we used to run that on a calendar year that cut across 2 financial years. We've kind of now got that or have changed that now to be working on a financial year because it does create a little bit of volatility on a 6-month by 6-month basis. I don't think there's -- other than that, there's not much in this story. And I will say we ended up having in these last 6 months a bit more protection from some of that aggregate cover. That probably worked in our advantage. We did have some larger storms in sort of September or October that we had a bit of protection from. And last year, we just had a lot of -- last financial year, we just had a lot of perils from lots of different places, and we -- it does -- that sort of ended up consuming us. So that's a long-winded say is not much in it. I'm sorry.

No. That's all right. I was hoping that would be the answer. And so I've got time for one last quick one: Nick, you mentioned you're obviously building out plans to improve that cash ROE and bump up the margin. You didn't mention any cost impact. Is it safe to assume then that that's going to be within your sort of already established guidance on costs? Or when you talk about those plans later in the year, is there a chance we might actually see a bump-up in costs that you're going to need to make those improvements?

I mean I'm a fan, which is how we've been running the organization, of sort of just wearing any costs in how we run our company. And so that will be how we sort of manage this going forward. And if there are sort of -- or I think you're inferring other investments that we need to make to sort of drive some of these pillars. Of course, there will be, but we need to wear that within the running of our company. We're already incurring those costs in other programs at the moment, and they will move on to other programs as we develop out these plans more. I mean our intent is to sort of overall, over the next couple of years, grow the company, improve some of our portfolios, investing in those, sort of driving an agenda around those 4 pillars. There will be some efficiency gains that come out of this. So we will be -- there will be lower costs of running IAG in 3 or 4 years than it is today. And that's -- that package is really going to drive the margin from sort of 14% up to that 15% to 17%.

And driving margin and funding investment...

Yes. And the plan is that we wear that, which is what we've been doing for the last couple of years. We sort of -- that's just part of our business, but of course, that's already embedded in our business model today because we're already investing in things today.

Our next question comes from Ashley Dalziell from Goldman Sachs.

Just an initial question on reinsurance and as you've gone through the recent renewal. You were sort of steering us, at the last results, to kind of FY '21 underlying reinsurance expense sort of being in line with the second half '20 run rate. Is that still a fair guide?

Yes. Thanks, Ashley. It's a simple answer, but I like those. So yes, it's still a fair guide.

Simple answers are good. Okay, moving on to the next one, just around business interruption. Wondering if you could provide a bit of an update there around the proportion of policies that still reference the outdated legislation. I think, back in November, you were talking to sort of 50% at the start of COVID. Just wondering, as you've been through renewals over the past 12 or so months, what we're looking at, at the moment.

I mean a significant portion down. So I think the question is the -- in the runoff of -- or on the 12-month policies. I mean all of our policies are any new business or renewals happening today, or in fact, last -- towards the end of last year, that was the case. But we still have some runoff occurring in relation to policies written earlier in calendar '20 that's still running-off now. I mean I haven't got that number off the top of my head, but it would be a relatively small portion.

Your next question comes from Nigel Pittaway from Citi.