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Annual Report 2014
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THE
NUMBERS
INSURANCE AUSTRALIA GROUP LIMITED
ABN 60 090 739 923
CONTENTS
Five year financial summary
Corporate governance
Directors’ report
Remuneration report
Lead auditor’s independence declaration
KEY DATES
2014 financial year end
Full year results and dividend announcement
Notice of meeting mailed to shareholders
Final dividend for ordinary shares
Record date
Payment date
Annual General Meeting
Half year end
Half year results and dividend announcement
Interim dividend for ordinary shares
Record date
Payment date
2015 financial year end
Full year results and dividend announcement
1
2
12
26
48
Financial statements
Directors’ declaration
Independent auditor’s report
Shareholder information
Corporate directory
49
117
118
120
124
30 June 2014
19 August 2014
8 September 2014
10 September 2014
8 October 2014
30 October 2014
31 December 2014
20 February 2015*
4 March 2015*
1 April 2015*
30 June 2015
21 August 2015*
* Please note: dates are subject to change. Any changes will be published via a notice to the Australian Securities Exchange
2014 ANNUAL
GENERAL MEETING
IAG’s 2014 annual general meeting
will be held on Thursday, 30 October
2014, at the Wesley Conference Centre,
220 Pitt Street, Sydney NSW 2000,
commencing at 10.00am. Details of the
meeting, including information about how
to vote, will be contained in our notice of
meeting, which will be mailed to shareholders,
and available online at www.iag.com.au,
from Monday, 8 September 2014.
RECYCLED
PAPER CHOICE
This report is printed on Nordset an
environmentally responsible paper produced
from FSC® Mixed Sources Chain of Custody
(CoC) certified pulp from well managed
forests, is Elemental Chlorine Free (ECF)
and is made Carbon Neutral. Nordset
is manufactured by Nordland Papier, a
company certified with environmental
management systems ISO14001 and
EMAS, the EU Eco-Management and
Audit Scheme (Reg.No.D-162-00007)
Nordset has also been awarded the
EU “Flower” eco-label certification.
2014 ANNUAL
REPORT SUITE
The 2014 annual report of Insurance
Australia Group Limited (IAG, or the Group)
includes IAG’s full statutory accounts,
along with the Directors’, remuneration
and corporate governance reports for the
financial year 2014.
Please read this report together with the
2014 annual review, which provides a
summary of IAG’s operational performance,
including the Chairman’s and CEO’s reviews.
If you do not receive a copy of the annual
review, you can access an interactive version
online from the home page of our website at
www.iag.com.au.
As with last year, this year’s annual
review includes information about the
sustainability performance of the business.
Detailed information about IAG’s business
sustainability performance is available
from www.iag.com.au.
To have a copy of the annual report mailed
to you, contact IAG’s Share Registry using
the contact details on page 124.
All figures are in Australian dollars unless
otherwise stated.
FIVE YEAR FINANCIAL
SUMMARY
Gross written premium
Premium revenue
Outward reinsurance premium expense
Net premium revenue
Net claims expense
Underwriting expenses
Underwriting profit/(loss)
Net investment income on assets backing insurance liabilities
Insurance profit/(loss)
Net investment income from shareholders' funds(b)
Other income
Share of net profit/(loss) of associates
Finance costs
Corporate and administration expenses
Amortisation expense and impairment charges of acquired
intangible assets and goodwill(c)
Profit/(loss) before income tax
Income tax expense
Profit/(loss) after tax from continuing operations
Profit/(loss) after tax from discontinued operation
Net profit attributable to non-controlling interests
Net profit/(loss) attributable to shareholders of Insurance
Australia Group Limited
Ordinary shareholders' equity ($ million)
Total assets ($ million)
PREMIUM GROWTH
Gross written premium
KEY RATIOS
Loss ratio(d)
Expense ratio(e)
Combined ratio(f)
Insurance margin(g)
SHARE INFORMATION
Dividends per ordinary share - fully franked (cents)
Basic earnings per ordinary share (cents)
Diluted earnings per ordinary share (cents)
Ordinary share price at 30 June ($) (ASX: IAG)
Convertible preference share price at 30 June ($) (ASX: IAGPC)
Reset exchangeable securities price at 30 June ($) (ASX: IANG)
Issued ordinary shares (million)
Issued convertible preference shares (million)
Market capitalisation (ordinary shares) at 30 June ($ million)
Net tangible asset backing per ordinary share ($)
2014
$m
9,779
9,721
(1,077)
8,644
(5,201)
(2,303)
1,140
439
1,579
396
199
(8)
(98)
(255)
(11)
1,802
(472)
1,330
-
(97)
2013
$m
9,498
9,135
(817)
8,318
(4,982)
(2,178)
1,158
270
1,428
347
175
(29)
(95)
(208)
(25)
1,593
(424)
1,169
(287)
(106)
2012(a)
$m
8,495
8,046
(700)
7,346
(5,421)
(1,994)
(69)
914
845
89
164
(13)
(97)
(205)
(20)
763
(177)
586
(321)
(58)
2011(a)
$m
8,050
7,858
(620)
7,238
(5,089)
(1,978)
171
489
660
213
264
(8)
(86)
(259)
(170)
614
(276)
338
-
(88)
2010(a)
$m
7,782
7,621
(556)
7,065
(5,072)
(2,054)
(61)
554
493
96
256
3
(88)
(245)
(113)
402
(212)
190
-
(99)
1,233
6,568
29,657
776
4,786
24,859
207
4,343
25,132
250
4,417
23,029
91
4,486
20,442
%3.0
11.8
%
n/a
%3.4
(0.8)
%
60.2
26.7
86.9
18.3
%
%
%
%
39.00
56.09
53.62
5.84
106.44
107.00
2,341
4
13,671
1.29
59.9
26.2
86.1
17.2
%
%
%
%
73.8
27.1
100.9
11.5
%
%
%
%
70.3
27.3
97.6
%
%
%
%9.1
71.8
29.1
100.9
%
%
%
%7.0
36.00
37.57
36.44
5.44
101.88
102.80
2,079
4
11,310
1.38
17.00
10.01
9.96
3.48
98.10
99.30
2,079
4
7,235
1.20
16.00
12.08
12.01
3.40
-
103.00
2,079
-
7,069
1.23
13.00
4.39
4.36
3.41
-
100.00
2,079
-
7,089
1.16
(a)
(b)
(c)
(d)
(e)
(f)
(g)
The financial information for 2012 has been re-presented to reflect the treatment of the United Kingdom business as a discontinued operation. Financial information for
2011 and 2010 is not re-presented.
This included an unrealised loss on embedded derivatives of $96 million for 2010.
This included impairment charges for acquired identifiable intangible assets and goodwill of $150 million for 2011 and $87 million for 2010.
The loss ratio refers to the net claims expense as a percentage of net premium revenue.
The expense ratio refers to the underwriting expenses as a percentage of net premium revenue.
The combined ratio refers to the sum of the loss ratio and expense ratio.
Insurance margin is a ratio of insurance profit over net premium revenue.
1
CORPORATE GOVERNANCE
INSURANCE AUSTRALIA GROUP LIMITED'S APPROACH TO CORPORATE GOVERNANCE
Insurance Australia Group Limited (IAG, the Group, or the Company) is committed to attaining the highest level of corporate
governance to help ensure the future sustainability of the organisation and to create long term value for its shareholders. To achieve
this, IAG promotes a culture that rewards performance, integrity, respect and a considered sense of urgency.
The regulatory environments in which IAG conducts its businesses continue to have a major influence on the Group's corporate
governance practices. Sound regulatory regimes are required to assist with the stability and sustainability of the general insurance
sector in the countries in which IAG operates or intends to operate.
IAG believes that active engagement with governments, regulators and industry and professional groups helps ensure that the
interests of IAG and its stakeholders are properly considered in the formulation of proposals to improve corporate governance, the
general insurance regulatory and prudential regimes and insurance industry practices. In this context, IAG strives for regulation that
enhances rather than stifles competition, protects consumers, encourages efficiency and promotes and sustains public confidence in
general insurers and their products.
IAG is a member of The Australian Business Roundtable for Disaster Resilience & Safer Communities (Roundtable), which released a
White Paper in June 2013 that details a more sustainable and comprehensive approach to managing natural disasters that could
ultimately save lives, reduce damage to property and vital national infrastructure and free taxpayer money to spend on essential public
services.
In July 2014, the Roundtable released a report highlighting that the Australian Government could save up to $15 billion by 2050, if it
invested in natural disaster mitigation and created a national platform to share critical information about catastrophes.
Both the White Paper and the report on creating a national platform can be found on the IAG website at www.iag.com.au/sustainable.
Roundtable member organisations - Australian Red Cross, IAG, Investa Property Group, Munich Re, Optus and Westpac - have come
together to champion safer and more resilient communities. Each organisation plays a crucial role in either community planning or
disaster recovery and believes there is an opportunity to develop a national, long term approach to managing natural disasters through
a co-ordinated resilience response that focuses on prevention.
IAG actively participates in the debate to improve Australia’s corporate governance regime, making submissions to Federal and State
government committees, reviews and inquiries, and regulators in relation to new legislation, particularly regulation affecting the
general insurance industry. As part of IAG’s commitment to open and transparent communication, all Australian public government
submissions are available in the News Centre on IAG's website at www.iag.com.au. IAG has also contributed to changes to the New
Zealand regulatory and legislative framework.
IAG representatives participate in forums, working parties and committees of domestic and overseas insurance industry associations,
as well as accounting, actuarial and legal professional bodies, to help formulate responses to proposals to improve corporate
governance, prudential and financial reporting standards and practices that particularly apply to the general insurance industry.
Consistent with this and our purpose, IAG became a founding signatory to the United Nations Principles for Sustainable Insurance (UN
PSI) in June 2012, and IAG’s Chief Transformation Officer, Leona Murphy is Co-Chair of the UN PSI Board.
The key corporate governance practices followed by IAG and its people are summarised below. They are not an exhaustive list of all
corporate governance practices in place at IAG. Copies of IAG’s Board and Board Committee Charters and key corporate governance
policies are on IAG’s website at www.iag.com.au/about/governance.
For the financial year ended 30 June 2014, IAG has complied with the Australian Securities Exchange Corporate Governance Council
(ASXCGC) Principles and Recommendations (2nd edition). IAG has been an early adopter of the ASXCGC Principles and
Recommendations (3rd edition) and is compliant from 19 August 2014.
PRINCIPLE 1. LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT
1.1 THE BOARD
The Board is responsible for protecting the interests of policyholders and to shareholders for the performance, operation and affairs of
IAG. The Board’s principal roles are to provide leadership and to govern, rather than manage, IAG. The Board represents and serves
the interests of the shareholders, collectively overseeing and appraising strategies, policies and performance of IAG.
2 IAG ANNUAL REPORT 2014
The Board is responsible for oversight of IAG, including:
driving and monitoring the strategic direction of IAG and approving Group strategies;
approving significant corporate initiatives including major acquisitions, divestments and capital management transactions;
setting IAG’s risk appetite;
selecting appropriate candidates and recommending to IAG shareholders the election, re-election or removal of Non-Executive
Directors;
appointing the Chairman, evaluating Board processes and performance of the Board as a whole, as well as contributions by
individual Non-Executive Directors;
the integrity of IAG’s accounting and reporting systems, including the external audit process;
review and approval of IAG’s remuneration policies and framework;
monitoring management’s performance and the exercise of the Board’s delegated authority;
evaluating regularly and, if necessary, replacing the Chief Executive Officer (CEO);
reviewing CEO, Chief Financial Officer (CFO) and senior management succession planning; and
setting standards for and ensuring that proper governance practices (including appropriate standards of ethical behaviour,
corporate governance, workplace health & safety, social and environmental responsibility) are adhered to at all times.
Find out more about the Board’s responsibilities in the Board Charter on IAG's website at www.iag.com.au/about/governance.
THE CEO
The Board has delegated responsibility for the overall management and profit performance of IAG, including all day-to-day operations
and administration, to the CEO, who is responsible for:
the efficient and effective operation of IAG;
fostering a culture of performance, integrity, respect and a considered sense of urgency;
ensuring the ongoing development, implementation and monitoring of IAG's risk management and internal controls framework;
ensuring the Board is provided with accurate and clear information in a timely manner to promote effective decision making by
the Board; and
ensuring all material matters affecting IAG are brought to the Board's attention.
The CEO manages IAG in accordance with the policies, budget, corporate plan, strategies and risk appetite approved by the Board, and
has the power to manage IAG, subject to the limits set out in the Charter of CEO Delegated Authority Limits attached to the Board
Charter which is available at www.iag.com.au/about/governance.
1.2 APPOINTMENT OF DIRECTORS
The Board assesses the skills required to discharge competently its duties, having regard to IAG's performance, financial position and
strategic direction, including the specific knowledge, skills and experience that the Board determines one or more of the Non-Executive
Directors must possess.
The Board assesses candidates for appointment to the Board, either when a vacancy arises or if it considers that the Board would
benefit from the services of a new Director. Particular attention is given to the mix of skills, experience, diversity and expertise of
existing Directors and how the candidate's competencies will complement and balance these qualities. All new candidates for Board
positions undergo IAG's Fit & Proper assessment before being appointed to the Board. Any Director appointed during the year to fill a
casual vacancy or as an addition to the existing Directors must stand for election at the next annual general meeting (AGM).
The notice of AGM includes the appointment date and biographical details, including the relevant qualifications and experience and
details of any other directorships held, of any new Non-Executive Directors and Non-Executive Directors seeking re-election. The Board
advises shareholders of whether it supports the election or re-election of each Non-Executive Director by including a statement in the
notice of AGM.
1.3 APPOINTMENT TERMS
Formal appointment letters have been issued to and signed by each Non-Executive Director, including the Chairman, to assist Non-
Executive Directors in understanding the role of the Board and the corporate governance principles and practices it has adopted. The
letters formally document the basis of each Non-Executive Director’s appointment including:
the role of the Board and of Non-Executive Directors;
corporate governance principles followed by IAG;
the Chairman and the majority of the Non-Executive Directors are independent of the management of IAG;
the right of Non-Executive Directors to obtain independent professional financial and legal advice, at the Company’s expense, to
assist with discharging their duties efficiently;
the right of access to management and IAG records;
the indemnity and insurance arrangements available;
the measures used, and the processes to be applied, by the Board to assess the individual performance of Non-Executive
Directors, details of which are set out in section 1.6 below;
the term of appointment and remuneration including superannuation rights;
the circumstances that would cause a Non-Executive Director’s position to become vacant;
the confidentiality of Board papers and presentations to the Board; and
the requirement that Non-Executive Directors abide by IAG's Code of Ethics and comply with its Continuous Disclosure and
Security Trading Policies.
3
Employment agreements for the CEO and Executive team are for unlimited terms but may be terminated by written notice by either
party. Details of these employment agreements are outlined in the Remuneration Report.
1.4 COMPANY SECRETARY
The Company Secretary is responsible to the Board for ensuring Board and Board Committee procedures are complied with and also
providing advice and counsel to the Board in relation to the Company’s constitution, corporate governance and other matters.
The Company Secretary is also responsible for the timely dispatch of Board and Board Committee papers and the accurate recording of
business discussed at the Board and Board Committee meetings in the minutes.
The Company Secretary also assists in the induction and ongoing professional development of Directors. The qualifications and
experience of IAG’s Company Secretary are set out in the Directors' Report.
All Directors have access to the Company Secretary and the appointment and removal of the Company Secretary is decided by the
Board.
1.5 DIVERSITY
Diversity is a key aspect of IAG's strategy. IAG's diversity ambition is to respect and value the different experiences of its people and
harness the opportunity and business benefits that diverse ideas and perspectives bring to IAG and its stakeholders.
Diverse thinking is key to create a culture of inclusion, ultimately increasing innovation and IAG's ability to service its customers and
improve its business performance. Our approach is supported by an ongoing focus on diversity demographics such as age, ethnicity
and gender. IAG's diversity policy statement can be found on IAG's website at www.iag.com.au/about/governance/codes.shtml.
Diversity activity
During the financial year, IAG took further steps towards fulfilling its diversity ambition, including:
launching divisional Diversity and Inclusion Action Groups, designed to support IAG's focus areas of gender, age and ethnicity
while targeting initiatives that most support the needs of each division in IAG;
continuing IAG's family support program to provide support for people caring for children or the elderly;
partnering with the University of Sydney in an Australian Research Council project exploring the management of age;
providing personal accident insurance for employees aged 65 years and over, not covered by workers' compensation;
piloting an Experience Matters program across the CGU and NZI businesses, to provide mature workforce transition planning
support for employees aged 50 years and over;
increasing IAG leaders' awareness of and commitment to creating a diverse and inclusive workplace, by including awareness of
unconscious bias and diversity of thought modules in senior leader programs;
holding flexible work forums for managers and employees looking to overcome barriers to implementing flexible work practices
and identify areas of opportunity;
continuing to provide one of the most generous and accessible parental leave programs in the financial services industry,
including 14-weeks paid parental leave and an additional six week welcome back lump sum payment to Australian-based
employees who are primary carers returning to work after having a child;
continuing to hold a series of Inspiring Women Lunches, providing an opportunity for all employees to network; and
in December 2013, renewing its commitment to support indigenous communities, with the launch of the 500th Reconciliation
Action Plan (RAP) approved by Reconciliation Australia. IAG's RAP is also the first signed by a general insurance company. More
information on the RAP and IAG's other social commitments and activities are found in the IAG 2014 Annual Review.
The IAG Diversity and Inclusion Action Group includes senior representatives from each of the key businesses and its progress is
actively monitored by the People and Remuneration Committee (PARC).
Diversity targets
IAG has publicly committed to a target of increasing the number of women in senior management positions to 33% by end of the 2015
financial year. Management is provided with quarterly diversity scorecards to track and monitor target progress.
A summary of the percentage of women in IAG's workforce is provided below:
DIVERSITY OBJECTIVES
Women in workforce
Board positions
Executive positions
Senior management positions
ACTUAL
2014*
%59
%33
%25
%32
ACTUAL
2013*
%60
%25
%29
%29
*
These figures cover the workforce in Australia, New Zealand and Asia for the current year and Australia and New Zealand only in the prior year, with both excluding
employees of the Wesfarmers insurance underwriting business.
The role of senior management positions at IAG is generally identified as the internal HR position code CEO-3 and above, however
there are exceptions to this rule.
4 IAG ANNUAL REPORT 2014
1.6 MEASURING THE PERFORMANCE OF NON-EXECUTIVE DIRECTORS
The Board conducts a formal review of its performance, composition, size and succession planning at least every three years with
assistance from external experts. A formal review of the Board and each Non-Executive Director (including the Chairman) was
conducted during the year, with assistance and input from an independent board performance expert. The review process involved the
completion of questionnaires by Non-Executive Directors and Group Executives; interviews with the independent expert; the collation of
results; and discussion with individual Non-Executive Directors and the Board as a whole led by the Chairman.
Each Non-Executive Director's performance is subject to annual evaluation by the Chairman, by discussion between the Chairman and
the Director.
Measures of a Non-Executive Director's performance include:
contribution to Board teamwork;
contribution to debates on significant issues and proposals;
advice and assistance given to management;
input regarding regulatory, industry and social developments surrounding the business; and
in the case of the Chairman's performance, fulfilment of the additional role as Chairman.
Individual Non-Executive Directors also evaluate the Chairman’s performance annually. The Boards and Committees of key operating
subsidiaries also regularly review their own performance.
1.7 PERFORMANCE ASSESSMENT – CEO AND GROUP EXECUTIVES
Financial and non-financial goals are set through the completion of an individual balanced scorecard for each Group Executive in
conjunction with the CEO at the commencement of each financial year. The goals are stretch goals and are designed to encourage
Group Executives to strive for exceptional performance while ensuring IAG’s long term financial soundness. Achievement against
these goals is the basis for assessing an individual Group Executive’s performance. The methods of assessment have been selected
so that performance can be objectively measured and verified. At the end of each financial year the CEO completes a formal review of
each Group Executive’s performance against the balanced scorecard goals set at the commencement of the year. These assessments
are the basis for determining any short term incentive payments and for allocating long term incentives to Group Executives; they are
reviewed by the PARC and approved by the Board.
Financial and non-financial goals and the performance of the CEO are determined and assessed by the Board using the same
approach. Further detail on the CEO’s and Group Executives’ short and long term incentives is set out in the Remuneration Report.
Newly appointed Group Executives have access to an orientation program which includes meetings with other members of the Group
Executive team and select senior managers to explain the details of IAG’s operations, financial position, strategies and risk
management framework.
PRINCIPLE 2. STRUCTURE THE BOARD TO ADD VALUE
2.1 NOMINATION COMMITTEE
On 1 July 2014 the Nomination Committee (NC) was established and comprises Non-Executive Directors Brian Schwartz (Chairman),
Yasmin Allen, and Philip Twyman. All members of the NC have the skills and experience necessary to fulfil this role as shown in their
biographies within the Directors' Report.
Prior to the establishment of the NC, the Board constituted the committee and had responsibility for the appointment of new Directors
and the re-election of existing Directors.
The role of the NC is to support and advise the Board in fulfilling its statutory and fiduciary responsibilities by reviewing and
recommending future Board candidates.
The NC assesses candidates and recommends to the Board the appointment, either when a vacancy arises or if it considers that the
Board would benefit from the services of a new Director. The Board has adopted a framework for effective Director selection and
Board succession to help ensure that the Board’s skills, competencies and knowledge match IAG’s strategic objectives. Some key
tenets of the framework are:
determining the skills, competencies, behaviours and experience required for an effective Board and the nature and
measurement of these competencies;
the Board should demonstrate diversity in age, personality, gender, work and life experience and comprise people who think
differently and have different backgrounds; and
the adoption of a formal approach to Director selection and a systematic and strategic approach for Board succession.
As the NC was formed on 1 July 2014 there were no meetings held in the year ended 30 June 2014. The NC Charter, which provides
details of the NC’s responsibilities, is available on IAG’s website at www.iag.com.au/about/governance.
5
2.2 BOARD SKILLS
The Board currently comprises eight independent Non-Executive Directors, and Executive Director, Mr Michael Wilkins, IAG's Managing
Director and CEO.
The Board’s policy is to help ensure that the Board comprises Directors who collectively have the relevant experience, knowledge,
diversity and skills required for IAG. This takes into account IAG’s current size, market position, complexity and strategic focus. In
reviewing its composition, skills and requirements for Director succession, the Board is also mindful of the corporate governance
practices and requirements for Directors.
A review of Board skills was undertaken in August 2013 and during 2014, and the collective skills of the current Board are in the areas
of, but not limited to:
risk and finance;
asset and investment management;
legal;
business development;
strategy;
international experience;
Asia/emerging markets;
business/commercial acumen;
general management;
experienced CEO (listed company);
experienced Board/Committee chairperson (listed company);
marketing and customers;
strategic HR; and
strategic IT.
2.3 BOARD OF DIRECTORS
Directors are expected to continue as Directors only for so long as they have the confidence of their fellow Board members and the
confidence of IAG's shareholders.
The Board has a tenure policy for Non-Executive Directors to help ensure the Board comprises Directors who collectively have the
relevant experience and skills required and assist in maintaining the independence of the Board. The policy, among other things,
provides a standard tenure for a Non-Executive Director of up to 10 years, although the Board has the discretion to invite Non-
Executive Directors to stand for an additional term which may take their total tenure beyond 10 years. Details of the current Non-
Executive Directors' tenure are shown below:
INDEPENDENT NON-EXECUTIVE DIRECTORS
Brian Schwartz (Chairman)
Yasmin Allen
Hugh Fletcher
Philip Twyman
Peter Bush
Alison Deans
Raymond Lim
Nora Scheinkestel
TERM IN OFFICE AT IAG (AT THE DATE OF THIS STATEMENT)
9 years and 7 months
9 years and 9 months
6 years and 11 months
6 years and 1 month
3 years and 6 months
1 year and 7 months
1 year and 7 months
1 year and 2 months
The names of Directors in office at the date of this report, their year of appointment, experience, expertise and biographical details are
set out in the Directors' Report.
Potential conflicts of interests
Where the Board is required to approve a transaction or arrangement with an organisation in which a Director has an interest, the
relevant Director must disclose his or her interest and abstain from voting. Directors with potential conflicts do not serve on any Board
Committees that are appointed to oversee the implementation of transactions or arrangements with which the Directors' interests may
conflict.
2.4 DIRECTOR INDEPENDENCE
The Board has determined that it must comprise a majority of independent Non-Executive Directors and that the Chairman must be an
independent Non-Executive Director. The Non-Executive Directors are free of any business or other relationship that could materially
interfere with the independent exercise of their judgement. All current Non-Executive Directors have confirmed their continued
independence.
The Board will determine whether each Non-Executive Director is independent, using the principles outlined in its Charter. Find out
more about this at www.iag.com.au/about/governance.
6 IAG ANNUAL REPORT 2014
2.5 THE CHAIRMAN
The Chairman is an independent Non-Executive Director and is responsible for ensuring the Board fulfils its responsibilities to IAG and
stakeholders. The Chairman provides leadership to the Board and promotes constructive and respectful relations between Directors
and between the Board and management. The Chairman presides at Board and general meetings of IAG.
2.6 NON-EXECUTIVE DIRECTOR INDUCTION, EDUCATION AND TRAINING
IAG encourages continuing professional education for each of its Directors. All Directors are expected to remain up-to-date in relation
to issues affecting IAG, the general insurance industry and their duties as Directors. A letter of appointment notes the right of Non-
Executive Directors to obtain independent professional financial and legal advice, at the Company’s expense, to assist with the
efficient discharging of their duties.
New Non-Executive Directors have access to an induction program to introduce the Group Executives and the detail of IAG’s
businesses. Induction includes individual meetings with the CEO, Group Executives and senior management.
Workshops are conducted, as required, to further Non-Executive Directors’ education on topics which include reinsurance, capital, risk
management and investment management. Directors have unfettered access to Group Executives and the external auditor and are
encouraged to meet with these Group Executives to further their knowledge and understanding of the organisation.
Executive Directors appointed to subsidiary and associated company boards are offered and encouraged to undertake training to help
ensure they can continue to effectively and competently perform their roles as Executive Directors.
PRINCIPLE 3. PROMOTE ETHICAL AND RESPONSIBLE DECISION MAKING
IAG takes ethical and responsible decision making very seriously. It expects its employees and Directors to do the same, as they are
all accountable for ensuring that their behaviours, decisions and choices are:
in accordance with all laws and regulations of the countries in which IAG operates; and
consistent with the Group's ethical principles as set out in IAG’s Code of Ethics (the Code) and the IAG policies and standards that
relate directly to their duties.
The Code has been developed to provide all Group officers, employees and contractors with a framework to make good, informed
business decisions and to act on them with integrity. The Code sets out the principles to guide the behaviours of every officer,
employee and contractor in IAG. This means that when IAG’s stakeholders interact with IAG, they should feel assured that IAG will act
in a responsible, ethical, transparent and honest way, wherever IAG operates.
The Code applies to all Non-Executive Directors, Group officers, employees and contractors for all entities where IAG has majority
ownership or which are otherwise to be considered IAG subsidiaries.
In some regions the Code is also supported by a Code of Conduct, which provides more specific guidance for operating in the local
legal and regulatory environments.
Find out more about the IAG Code of Ethics, Codes of Conduct for Australia and New Zealand and The Way We Choose To Do Business
on IAG's website at www.iag.com.au/about/governance.
PRINCIPLE 4. SAFEGUARD INTEGRITY IN FINANCIAL REPORTING
4.1 AUDIT COMMITTEE
In February 2014, in line with Australian Prudential Regulatory Authority (APRA) requirements, the Audit, Risk Management and
Compliance Committee (ARMCC) was replaced by the Audit Committee (AC) and the Risk Committee (RC).
The AC comprises five Non-Executive Directors: Nora Scheinkestel (Chairman), Yasmin Allen, Alison Deans, Hugh Fletcher and Philip
Twyman. All members of the AC have financial management experience as shown in their biographies in the Directors' Report.
The main role of the AC is to assist the Board in fulfilling its statutory and fiduciary responsibilities by monitoring:
the integrity of IAG and subsidiary external and internal financial reporting, including compliance with applicable laws, regulations
and other requirements in relation to external financial reporting;
the provision of high quality financial and non-financial information to Directors and management that reflects a true and fair view
of the Company performance and can be relied on by them to make informed judgements;
tax and financial risks; and
that the independence of the Auditor, Group General Manager Internal Audit, Group Actuary and the Global External Peer Review
Actuary is safeguarded.
The AC will provide prior endorsement to the Board on the appointment, reappointment and rotation of the audit engagement partner,
removal and remuneration of the Auditor and will assess total fees paid for all non-auditor services provided by the Auditor.
The AC is also empowered as the AC of IAG's insurance subsidiaries, except for Insurance Manufacturers of Australia Pty Limited and
those entities which have established their own ACs. In addition, the AC acts as the Audit Committee for IAG Finance (New Zealand)
Limited, a company with securities listed on the ASX.
The AC (including the previous ARMCC) met five times during the reporting period and member attendance at each meeting is shown in
the Directors' Report.
The AC Charter, which provides details of the committee’s responsibilities, is available on IAG's website at
www.iag.com.au/about/governance.
7
4.2 ASSURANCES
The Board has received assurance from the CEO and CFO that the annual declaration provided in accordance with section 295A of the
Corporations Act 2001 is founded on a sound system of risk management and internal control and that the system is operating
effectively in all material respects in relation to financial reporting risks.
4.3 EXTERNAL AUDITOR
The external Auditor attends the AGM and is available to answer shareholders’ questions received prior to the AGM and asked at the
AGM, concerning the conduct of the audit, the preparation and content of the Auditor’s Report, the accounting policies adopted and
auditor independence.
PRINCIPLE 5. MAKE TIMELY AND BALANCED DISCLOSURE
IAG’s Continuous Disclosure Policy reinforces its commitment to continuous disclosure, as well as the responsibility of all employees
regarding inside information.
The Continuous Disclosure Policy includes a protocol outlining how information is released to the public and provides examples of what
could constitute inside information. The IAG Continuous Disclosure Policy is available online at www.iag.com.au/about/governance.
IAG is committed to timely, factual and balanced disclosure to help ensure investors are informed of material developments for the
Group. Care is taken to help ensure announcements do not omit material information and are expressed in a clear and objective
manner that allows investors to assess the impact of information when making investment decisions.
All announcements are subject to a minimum of two sign-off reviews at senior levels within IAG before release to the ASX. The CEO or
CFO jointly with the Chairman or any other Director must jointly approve announcements of particular significance where time does not
permit a full Board to be convened. All IAG announcements to the ASX are available online at www.iag.com.au.
Policies have been designed and established to ensure compliance with the ASX Listing Rules' disclosure requirements and to help
ensure accountability at a senior Executive level for that compliance. In accordance with its Continuous Disclosure Policy, IAG is
committed to ensuring all investors have access to information on IAG’s financial performance. IAG posts on its website all investor
and media material released to the ASX, including:
annual and interim reports;
investor and media releases and presentations of half year and full year results;
webcasts of CEO and CFO presentations at half year and full year results announcements;
notices of general meetings and explanatory material;
the Chairman’s and CEO’s addresses to the AGM;
investor and media releases and presentations regarding divestments and acquisitions;
investor and media presentations given at investor strategy sessions and other one-off events; and
all other information released to the market.
PRINCIPLE 6. RESPECT THE RIGHTS OF SHAREHOLDERS
6.1 INFORMATION AND GOVERNANCE
IAG maintains a comprehensive website at www.iag.com.au providing shareholders with information about IAG, including links to the
Corporate Governance policies adopted by IAG. The website also provides links to the biographies of the Board members and the
Group Executives.
IAG also maintains a separate Shareholder Centre page on its website to provide shareholders with links to annual and interim reports,
a key events calendar, share price history, dividend payments made on IAG ordinary and preference shares by year and links to IAG
public announcements. Shareholders are also able to access details of their holdings of IAG securities.
These web sites are actively promoted to all shareholders on dividend payment statements and in AGM materials.
6.2 INVESTOR RELATIONS PROGRAM
Shareholders and investors can raise any issues or concerns at any time by contacting the Company by email at
investor.relations@iag.com.au. Alternatively shareholders and investors can write to the Chairman or Company Secretary at Insurance
Australia Group Limited, Level 26, 388 George Street, Sydney NSW 2000, Australia.
Shareholders are provided with a Question Form with their AGM documentation. Shareholders who are unable to attend the AGM are
encouraged to ask questions as they submit their voting intentions either online or when mailing back the voting form. Questions
received from shareholders are collated and, during the course of the AGM, the Chairman or CEO responds where possible to the most
frequently asked questions.
8 IAG ANNUAL REPORT 2014
6.3 PARTICIPATION AT GENERAL MEETINGS
Shareholders are encouraged to attend AGMs and ask questions of the Chairman and the Board. IAG is mindful of the need to adopt
best practice in the drafting of notices for general meetings and other communications to help ensure that they are honest, accurate,
informative and not misleading. All AGM material can be found on IAG's website at www.iag.com.au/shareholder/agm.
IAG shareholders and authorised intermediaries such as custodians are offered online proxy and direct voting to facilitate lodgement of
their votes on resolutions put to general meetings. The AGM is also webcast for viewing by shareholders and other interested parties
on IAG's website at www.iag.com.au/shareholder/agm.
6.4 ELECTRONIC COMMUNICATIONS
IAG actively promotes to shareholders the benefits of using electronic communications. As at 31 July 2014, 21.8% of shareholders
had registered their email address. Shareholders who use this service are advised when communications including the annual and
interim reports, annual reviews, dividend advices and holding balance statements are available to be accessed via the internet.
IAG also has an email alert system for investors, beneficial owners and other interested parties who may not be shareholders to
receive advice of important media releases, financial announcements, presentations and annual reports as they are released to the
market through the ASX.
PRINCIPLE 7. RECOGNISE AND MANAGE RISK
In February 2014, in line with APRA requirements, the Audit, Risk Management and Compliance Committee (ARMCC) was replaced by
the Audit Committee (AC) and the Risk Committee (RC).
Managing risk is central to the sustainability of IAG's business and the delivery of shareholder value. IAG’s risk management
framework is a core part of its governance structure and includes internal policies, key management processes and culture.
In October 2013, IAG appointed a Group Chief Risk Officer (CRO) reporting to the CEO. The CRO oversees risk activities across IAG and
is supported by a governance and risk function and divisional risk and compliance functions. Further details on risk management at
IAG are included in the notes to the Financial Statements.
7.1 RISK COMMITTEE
The RC comprises five Non-Executive Directors: Philip Twyman (Chairman), Yasmin Allen, Alison Deans, Hugh Fletcher and Nora
Scheinkestel. All members of the RC have relevant experience as shown in their biographies in the Directors' Report.
The RC is supported in its oversight of risk by a series of divisional Executive Risk and Governance forums.
The RC assists the Board to discharge its responsibility to exercise due care, skill and diligence regarding:
effective management of material risks to which IAG is exposed and oversight of risk management and control systems for
adequacy and effective function;
monitoring IAG's compliance with the Group Risk Management Strategy (Group RMS), Group Reinsurance Risk Management
Strategy (Group REMS) and other governance and risk related Group Policies identified in the Group RMS;
effective operation and management of compliance systems and to help ensure compliance with the requirements of applicable
laws, regulations, industry codes, listing authorities' rules and organisational policies and standards;
oversight of the Group's risk management and governance frameworks; and
safeguarding the independence of the CRO, the Group General Manager Risk and Governance and Chief Actuary.
The RC (including the previous ARMCC) met five times during the reporting period and member attendance at each meeting can be
found in the Directors' Report. The RC Charter, which provides details of the RC's responsibilities, is available at
www.iag.com.au/about/governance.
7.2 REVIEW RISK MANAGEMENT FRAMEWORK
The RC assists the Board in discharging its risk management responsibilities and has oversight of the Group’s risk management and
governance frameworks and material risks to which the Group is exposed. The RC reviews and endorses IAG's risk management policy
and is satisfied that the governance frameworks in place are effective, remain appropriate and are operationally sound. The Board
receives information on risk matters of particular significance and regular updates from the Chairman of the RC.
IAG's Group Risk and Governance function provides regular reports to the RC on the operation of IAG's risk management framework,
the status of key risks, risk and compliance incidents and risk framework changes. Divisional risk and compliance functions also
report regularly to divisional committees.
The RC considers IAG’s enterprise risk profile, risk appetite and core risk documents on an annual basis. In addition, business
Executives are required to attend and report to the RC on the effectiveness of the risk management frameworks embedded in their
respective business divisions.
9
At an Executive level, risk management is delegated to the Group CEO who is assisted in discharging risk management responsibilities
by the IAG Executive Risk Committee (ERCO) and the Asset and Liability Committee (ALCO). ERCO operates in accordance with its
Charter and with delegations from the Group CEO, who is ERCO’s Chairman. ERCO oversees the development and implementation of
IAG’s risk management framework and governance arrangements in respect of operational, insurance and strategic risk. ERCO
comprises the divisional CEOs, the Group CRO and the Group General Manager Risk and Governance. ALCO oversees financial risks
(such as reinsurance and capital) and some aspects of insurance risk. ALCO operates in accordance with its charter and comprises
the Group CEO and Group CFO and Group General Managers involved in the management of financial related risks.
IAG operates a “Three Lines of Defence” approach to risk management. The First line (risk owners) own their risks and their
management. The Second line (risk advisers) is typically the risk and associated functions and the Third line is the independent audit
functions.
As risk owners all Group Executives are responsible for:
overseeing implementation of Board-approved policies;
overseeing the ongoing implementation of, and compliance with, the Group's RMS, REMS, business insurance licences, internal
control system and monitoring IAG's risks;
authorising capital allocation to major projects within financial delegation limits approved by the CEO and Board;
conducting periodic financial performance reviews of the business divisions;
reviewing performance in the areas of health, safety, environment and community;
reviewing the effectiveness of governance practices established at the business division level;
reviewing human resource performance and reward strategies;
promoting and reinforcing IAG's risk management culture;
reviewing corporate strategies and the performance of IAG and its business divisions compared to budgets and corporate plans;
formulating recommendations to the Board concerning issues related to capital management and risk management, including
reinsurance, credit risk and asset allocation;
conducting periodic financial performance reviews of IAG's businesses; and
reviewing the effectiveness of governance practices established at the IAG level.
7.3 INTERNAL AUDIT FUNCTION
The Board has established the Group Internal Audit function as a key component of IAG's governance framework. The Group Internal
Audit function's objective is to evaluate and improve the effectiveness of internal controls, governance processes and overall risk
management, via its independent and objective review program and to:
provide assurance to the Board that IAG's financial and operational controls designed to manage the Group's risks and regulatory
obligations, and achieve its objectives, are operating in an efficient, effective and ethical manner; and
assist management in improving IAG's business performance.
The Group General Manager, Internal Audit reports functionally to the AC and administratively to the Group CRO, with direct access to
the CEO and the AC.
7.4 ECONOMIC, ENVIRONMENTAL AND SOCIAL SUSTAINABILITY RISK
IAG is the only Australian-based general insurer that is a signatory to the Principles for Sustainable Insurance (PSI) launched in June
2012 as part of the United Nations Environment Program Finance Initiative (UNEPFI). The PSI is a set of voluntary global principles to
guide insurers to:
embed in their decision-making relevant environmental, social and governance issues;
work together with clients and business partners to raise awareness of these issues;
manage risk and develop solutions; and
work together with governments, regulators and other key stakeholders to promote widespread action across society.
Part of IAG's commitment to implementing the PSI principles is ensuring that IAG has governance systems - structures, values,
principles, frameworks and policies - to define its decision-making context and the boundaries for managing operations sustainably.
Responsibility for adhering to these systems sits at every level of the organisation. IAG's Board takes overarching responsibility for
monitoring the development, implementation and reporting of IAG's approach to the proactive management of risk that drives
sustainable outcomes and how effectively IAG responds to stakeholders.
As well as actively managing sustainability risks internally, IAG believes it also has a responsibility to share its knowledge about risk to
make communities more resilient and help people live safer lives. It does this by promoting better understanding and reduction of
risks on the road, at home, in business and in the natural environment. IAG's work in the natural environment risk area includes
formation of the Roundtable with the CEOs of the Australian Red Cross, IAG, Investa Property Group, Munich Re, Optus and Westpac in
December 2012. The Roundtable was created because each member CEO believes that having resilient communities that can adapt
to extreme weather events is of national importance.
More information about how IAG shares its risk management expertise and details of other sustainability activities, including how IAG
defines and addresses the issues it faces, can be found in the 2014 Annual Review.
10 IAG ANNUAL REPORT 2014
PRINCIPLE 8. REMUNERATE FAIRLY AND RESPONSIBLY
8.1 PEOPLE AND REMUNERATION COMMITTEE
The four members of the People and Remuneration Committee (PARC) are Yasmin Allen (Chairman), Peter Bush, Raymond Lim and
Brian Schwartz.
The PARC assists the Board in fulfilling its statutory and fiduciary responsibilities by:
monitoring the development and implementation of Group and divisional people and culture strategies;
monitoring the development and implementation of IAG’s workplace, health and safety framework and strategies;
reviewing succession plans for Executives that report to the CEO and other senior Executives;
providing assurance to the Board relating to the effectiveness, integrity and compliance with IAG’s remuneration policies and
practices;
assessing whether the Group Remuneration Policy is effective and complies with regulatory requirements on remuneration
including those specified in the Corporations Act and APRA's prudential standards;
monitoring the appropriateness and relevance of the Group Reward Strategy and its approach to deliver the strategic goals of IAG;
and
overseeing Board composition of designated IAG subsidiary and associated companies.
The PARC is also empowered as the remuneration committee of IAG’s subsidiaries that are authorised general insurers in Australia,
except for Insurance Manufacturers of Australia Pty Limited, which has a separate remuneration committee.
The PARC met four times during the reporting period and member attendance at each meeting is shown in the Directors' Report.
Find out more about the PARC Charter at www.iag.com.au/about/governance.
8.2 GROUP REMUNERATION POLICY
Details of IAG’s remuneration policies for its Non-Executive Directors and senior Executives are disclosed in the Remuneration Report.
The Remuneration Report highlights the balance between fixed pay, short term incentive and long term incentive, and includes details
of the remuneration paid and the relationship to IAG's performance. IAG's minimum shareholding requirement policy for senior
Executives and Non-Executive Directors and 'clawback' policy are also outlined.
8.3 EQUITY BASED REMUNERATION
IAG Non-Executive Directors, the CEO and Group Executives are prohibited from entering into, varying or terminating transactions or
arrangements which operate to limit the economic risk of their unvested entitlements to IAG securities (such as Executive Performance
Rights, Performance Award Rights and Deferred Award Rights) and vested IAG securities which form part of their mandatory holding of
IAG ordinary shares. Details of IAG's equity based remuneration policy for the CEO and Group Executives are shown in the
Remuneration Report.
11
DIRECTORS' REPORT
The Directors present their report together with the financial report of Insurance Australia Group Limited and the consolidated financial
report of Insurance Australia Group Limited and its subsidiaries for the financial year ended 30 June 2014 and the Auditor's Report
thereon.
The following terminology is used throughout the financial report:
IAG, Parent or Company - Insurance Australia Group Limited; and
Group or Consolidated - the Consolidated entity consists of Insurance Australia Group Limited and its subsidiaries.
DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITED
The names and details of the Company's Directors in office at any time during or since the end of the financial year are as follows.
Directors were in office for the entire period unless otherwise stated.
CHAIRMAN
BRIAN (BM) SCHWARTZ AM
FCA, FAICD, age 61 - Chairman and Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Brian was appointed a Director of IAG in January 2005 and became Chairman in August 2010. He is a member and former Chairman
of IAG's People and Remuneration Committee, Chairman of IAG's Nomination Committee and Chairman of Insurance Manufacturers of
Australia Pty Limited, a general insurance underwriting joint venture with RACV.
OTHER BUSINESS AND MARKET EXPERIENCE
Brian is the Deputy Chairman of Westfield Corporation, Deputy Chairman of Scentre Group and the Deputy Chairman of the Board of
Football Federation Australia Limited.
He was the Chief Executive of Investec Bank (Australia) Ltd from 2005 to 2009. Previously he was with Ernst & Young Australia from
1979 to 2004, becoming its Chief Executive in 1998. He was a member of Ernst & Young's Global Board and Managing Partner of the
Oceania area responsible for the firm’s operations in Australia, New Zealand, Indonesia, the Philippines, Vietnam and Fiji.
Brian was appointed a member of the Order of Australia in 2004 for his services to business and the community. He was previously a
member of the Federal Government's Australian Multicultural Advisory Council and in 2001 he was named Leading CEO for the
Advancement of Women by the Equal Opportunity for Women in the Workplace Agency (now the Workplace Gender Equality Agency).
Directorships of other listed companies held in the past three years:
Westfield Group, including Westfield Management Limited (which acts as the responsible entity of Carindale Property Trust), since
6 May 2009;
IAG Finance (New Zealand) Limited (a part of the Group), since 26 August 2010;
Scentre Group, since 20 June 2014; and
Brambles Limited (2009-2014).
MANAGING DIRECTOR
MICHAEL (MJ) WILKINS
BCom, MBA, DLi, FCA, FAICD, age 57 - Managing Director and Chief Executive Officer
INSURANCE INDUSTRY EXPERIENCE
Michael was appointed Managing Director and Chief Executive Officer of IAG in May 2008.
He has more than 30 years experience in the insurance and financial services sector and is a member of the Australian Government's
Financial Sector Advisory Council.
Michael was formerly the Managing Director of Promina Group Limited (from 1999 to 2007) and Managing Director of Tyndall Australia
Limited (from 1994 to 1999). He is a former Director and President of the Insurance Council of Australia and a former Director of the
Investment and Financial Services Association (now the Financial Services Council).
OTHER BUSINESS AND MARKET EXPERIENCE
In May 2014, Michael was appointed as a Director of The Geneva Association, the leading international insurance think tank for
strategically important insurance and risk management issues.
Michael is a Non-Executive Director of Maple-Brown Abbott Limited and a former Non-Executive Director of Alinta Limited.
Directorships of other listed companies held in the past three years:
IAG Finance (New Zealand) Limited (a part of the Group), since 28 May 2008.
12 IAG ANNUAL REPORT 2014
OTHER DIRECTORS
YASMIN (YA) ALLEN
BCom, FAICD, age 50 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Yasmin Allen was appointed as a Director of IAG in November 2004. She is Chairman of the IAG People and Remuneration Committee
and a member of IAG's Audit Committee, Risk Committee and Nomination Committee. Yasmin served six years on the Board of Export
Finance and Insurance Corporation.
OTHER BUSINESS AND MARKET EXPERIENCE
Yasmin has extensive experience in investment banking as an equities analyst and in senior management. She is currently a Director
of Cochlear Limited and Chairman of its Audit Committee, Chairman of Macquarie Specialised Asset Management, a National Director
of the Australian Institute of Company Directors, a Director of the National Portrait Gallery and a member of the Salvation Army
Advisory Board. Previous Non-Executive Director roles include those with Export Finance and Insurance Corporation and Film Australia.
Yasmin was formerly a Vice President at Deutsche Bank AG, a Director at ANZ Investment Bank in Australia and an Associate Director
at James Capel UK Ltd (HSBC Group).
Directorships of other listed companies held in the past three years:
Cochlear Limited, since 2 August 2010.
PETER (PH) BUSH
BA, FAMI, age 62 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Peter Bush was appointed as a Director of IAG in December 2010. He is a member of IAG's People and Remuneration Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Peter has extensive experience in marketing, brands and consumer behaviour gained through a career spanning more than 30 years
in the fast moving consumer goods and retail industries. He was McDonald’s Australia Limited’s Managing Director & Chief Executive
Officer and President for the Pacific, Middle East and Africa (2005-2010) and Chief Operating Officer (2002-2005).
In several of his roles Peter was responsible for Asian operations and he has direct experience in developing business in Indonesia,
Japan and China. Previously he held senior roles with Arnott’s Biscuits Limited, Pioneer International Limited (Ampol/Caltex), Samuel
Taylor (Reckitt & Coleman plc), and Johnson & Johnson Australia, and was Chief Executive Officer of AGB McNair and Schwarzkopf
Australia & New Zealand.
Peter is Executive Chairman of Pacific Brands Limited and Chairman of the Mantra Group, Australia's second largest hotel chain that
listed in June 2014. He previously served on the Boards of McDonald’s Australia Limited, Lion Nathan Limited, Miranda Wines Pty
Limited (now McGuigan Wines), Frucor Beverages Group Limited (now Danone) and Nine Entertainment Holdings Pty Ltd.
Directorships of other listed companies held in the past three years:
Mantra Group Limited, since 27 February 2014 (listed June 2014).
Pacific Brands Limited, since 3 August 2010; and
ALISON (AC) DEANS
BA, MBA, GAICD, age 46 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Alison was appointed as a Director of IAG in February 2013. She is a member of IAG's Audit Committee and Risk Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Alison was formerly CEO of Netus, a technology-based investment company focused on building consumer web businesses in Australia
and acquired by Fairfax in 2012. She has over 20 years experience in general management and strategy consulting roles focused on
e-business and media/entertainment in Australia.
In December 2013, the Australian Government appointed Alison to a Panel of Experts conducting an independent cost benefit analysis
of broadband and a review of the regulatory arrangements for the National Broadband Network.
She was appointed as an Independent Non-Executive Director of Westpac Banking Corporation in April 2014. Alison has also held
Chief Executive roles at eBay Australia and New Zealand, eCorp and Hoyts Cinemas.
She is a recipient of the Centenary Medal for services to the business community.
Directorships of other listed companies held in the past three years:
Westpac Banking Corporation, since 1 April 2014.
13
HUGH (HA) FLETCHER
BSc/BCom, MCom (Hons), MBA, age 66 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Hugh was appointed as a Director of IAG in September 2007 and as a Director of IAG New Zealand Limited in July 2003. He is a
member of IAG's Audit Committee and Risk Committee.
Hugh was formerly Chairman (and independent Director since December 1998) of New Zealand Insurance Limited and CGNU
Australia.
OTHER BUSINESS AND MARKET EXPERIENCE
Hugh is a Non-Executive Director of Rubicon Limited and Vector Limited and a trustee of The University of Auckland Foundation.
Hugh was formerly Chief Executive Officer of Fletcher Challenge Limited, a New Zealand headquartered corporation with assets in the
global building, energy, forestry and paper industries. He retired from an Executive position in December 1997 after 28 years as an
Executive, 11 of which he served as Chief Executive.
Hugh is a former Deputy Chairman of the Reserve Bank of New Zealand, former member of the Asia Pacific Advisory Committee of the
New York Stock Exchange, former Non-Executive Director of Fletcher Building Limited, and has been involved as an Executive and Non-
Executive Director in many countries in Asia, including China, India, Singapore, Indonesia, Malaysia and Thailand.
Directorships of other listed companies held in the past three years:
Rubicon Limited, since 23 March 2001;
Vector Limited, since 25 May 2007;
IAG Finance (New Zealand) Limited (a part of the Group), since 31 August 2008; and
Fletcher Building Limited (2001-2012).
RAYMOND (SKR) LIM
BEcon, BA, LLM, age 55 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Raymond was appointed as a Director of IAG in February 2013. He is a member of IAG's People and Remuneration Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Raymond is Chairman of APS Asset Management and Senior Advisor to the Swire Group. He also serves on several Boards including
the Government of Singapore Investment Corporation, Hong Leong Finance and Raffles Medical Group.
Raymond is a member of the Singapore Parliament (since 2001) and held various ministerial appointments in the Singapore
Government including Foreign Affairs, Trade & Industry, Entrepreneurship, Finance and Transport from 2001 to 2011.
Prior to entering parliament in 2001, Raymond held various senior positions in the financial industry including as a Managing Director
of Temasek Holdings, Chief Executive Officer of DBS Vickers Securities and Chief Economist of ABN AMRO Asia Securities.
He is a Rhodes Scholar and has degrees in economics and law from the universities of Adelaide, Oxford and Cambridge.
Directorships of other listed companies held in the past three years:
Dart Energy Limited (2012-2013).
DR NORA (NL) SCHEINKESTEL
LLB (Hons), Ph.D, FAICD, age 54 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Nora was appointed as a Director of IAG in July 2013. She is Chairman of IAG's Audit Committee and a member of the Risk Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Nora is an experienced company Director having served on listed, private and public company Boards in sectors including financial
services, utilities, telecommunications and mining.
Nora has extensive experience in corporate transactions including equity and debt raising, corporate restructuring and mergers and
acquisitions, as well as an executive background in the development and financing of major projects in Australasia and South East
Asia. She currently consults in areas such as corporate governance, strategy and finance.
Nora is an Associate Professor at the Melbourne Business School at Melbourne University, a member of the Takeovers Panel and a
fellow of the Australian Institute of Company Directors. In 2003, she was awarded a centenary medal for services to Australian society
in business leadership.
Directorships of other listed companies held in the past three years:
Telstra Corporation Limited, since 12 August 2010;
Orica Limited, since 1 August 2006;
Pacific Brands Limited (2009-2013); and
AMP Limited (2003-2013).
14 IAG ANNUAL REPORT 2014
PHILIP (PJ) TWYMAN
BSc, MBA, FAICD, age 70 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Philip was appointed as a Director of IAG in July 2008. He is Chairman of IAG's Risk Committee and a member of IAG's Audit
Committee and Nomination Committee.
Philip was formerly Group Executive Director of Aviva plc, one of the world’s largest insurance groups, based in London. He has also
been Chairman of Morley Fund Management and Chief Financial Officer of General Accident plc, Aviva plc and AMP Group.
While at Aviva plc and its predecessor groups between 1996 and 2004, Philip had executive responsibility for the Group’s insurance
operations in Asia, Australia, Europe and North America. He was also responsible for starting and nurturing new insurance businesses
in China, India, Indonesia and Hong Kong. Overall, Philip has had over 20 years of both Board and Executive level general insurance
experience.
Philip is on the Board of Swiss Re (Australia). He was formerly an Independent Non-Executive Director of Perpetual Limited from 2004
to 2012, Medibank Private Limited from 2007 to 2012 and Insurance Manufacturers of Australia Pty Limited, a general insurance
underwriting joint venture with RACV from April 2007 to July 2008.
OTHER BUSINESS AND MARKET EXPERIENCE
Philip is also on the Board of Tokio Marine Management (Australasia) Pty Ltd.
Directorships of other listed companies held in the past three years:
Perpetual Limited (2004-2012).
SECRETARY OF INSURANCE AUSTRALIA GROUP LIMITED
CHRIS (CJ) BERTUCH
BEc, LLB, LLM
Chris Bertuch was appointed Group General Counsel & Company Secretary on 11 May 2011. Prior to joining IAG, he held the position
of Group General Counsel & Company Secretary at CSR Limited. Chris joined CSR as a corporate lawyer in 1993 and prior to that was
a partner in the law firm Gadens Lawyers in Sydney. He brings to IAG more than 28 years of experience in corporate, commercial and
trade practices law and dispute resolution. Chris has also completed the Advanced Management Program at Harvard Business
School.
MEETINGS OF DIRECTORS
The number of meetings each Director was eligible to attend and actually attended during the financial year is summarised as follows:
DIRECTOR
Total number of meetings held(a)
BOARD OF
DIRECTORS
12
PEOPLE AND
REMUNERATION
COMMITTEE
AUDIT, RISK
MANAGEMENT
& COMPLIANCE
COMMITTEE(b)
AUDIT
COMMITTEE(b)
RISK
COMMITTEE(b)
BOARD SUB
COMMITTEE
4
3
2
2
4
Eligible
to
attend
as a
member
Attended
as a
member
Eligible
to
attend
as a
member
Attended
as a
member
Eligible
to
attend
as a
member
Attended
as a
member
Eligible
to
attend
as a
member
Attended
as a
member
Eligible
to
attend
as a
member
Attended
as a
member
Eligible
to
attend
as a
member
Attended
as a
member
12
12
12
12
12
12
12
12
12
12
9
9
11
12
11
12
12
12
4
4
4
-
-
4
-
-
-
4
4
4
-
-
4
-
-
-
-
3
-
3
3
-
-
3
-
-
3
-
3
3
-
-
3
-
-
2
-
2
2
-
2
2
-
-
-
-
2
2
-
2
2
-
-
2
-
2
2
-
2
2
-
-
1
-
2
2
-
2
2
-
4
2
-
-
2
-
-
-
4
4
1
-
-
1
-
-
-
4
Brian Schwartz
Yasmin Allen
Peter Bush
Alison Deans
Hugh Fletcher
Raymond Lim
Dr Nora Scheinkestel
Philip Twyman
Michael Wilkins
(a)
(b)
There are circumstances in which Board or committee meetings are convened at short notice, meaning that Directors may be unable to attend.
The Audit, Risk Management & Compliance Committee was replaced by the Audit Committee and Risk Committee in February 2014.
On 1 July 2014 the Nomination Committee (NC) was established and comprises Non-Executive Directors Brian Schwartz (Chairman),
Yasmin Allen and Philip Twyman. The role of the NC is to support and advise the Board in fulfilling its statutory and fiduciary
responsibilities by reviewing and recommending future Board candidates.
15
PRINCIPAL ACTIVITY
The principal continuing activity of the Group is the underwriting of general insurance and related corporate services and investing
activities. On 30 June 2014 the Group completed the acquisition of the insurance underwriting business of Wesfarmers Limited in
Australia and New Zealand. Accordingly throughout this report the balance sheet of this business is consolidated as at 30 June 2014.
The Group reports its financial information under the following business division headings:
Australia Direct insurance – comprises insurance products distributed through a network of branches, franchises and country
service centres throughout Australia as well as call centres and online facilities using predominantly the NRMA Insurance, SGIO
and SGIC brands as well as via a distribution relationship and underwriting joint venture with Royal Automobile Club of Victoria
(RACV) Limited;
Australia Intermediated insurance - comprises insurance products primarily sold under the CGU and Swann Insurance brands
through insurance brokers, authorised representatives and distribution partners. From 30 June 2014, this includes the acquired
Wesfarmers Australian insurance underwriting business which operates under the WFI and Lumley Insurance brands, as well as a
10-year distribution agreement with Coles;
New Zealand insurance - comprises the general insurance business underwritten through subsidiaries in New Zealand. Insurance
products are predominantly sold directly to customers under the State and AMI brands and through intermediaries such as
brokers and agents using the NZI brand. From 30 June 2014, this includes products sold under the Lumley brand following the
acquisition of the Wesfarmers insurance underwriting business. Personal and commercial products are also distributed by
corporate partners, such as large financial institutions, using third party brands;
Asia insurance - comprises primarily the direct and intermediated insurance business underwritten through subsidiaries in
Thailand and Vietnam and the share of the operating result from the investment in associates in Malaysia, India and China. The
businesses offer personal and commercial insurance products through local brands; and
Corporate and Other - comprises other activities, including corporate services, funding costs on the Group’s interest bearing
liabilities, inwards reinsurance from associates, investment management and investment of the shareholders’ funds.
OPERATING AND FINANCIAL REVIEW
OPERATING RESULT FOR THE FINANCIAL YEAR
The financial year ended 30 June 2014 has been a significant year for IAG. The Group has delivered a strong financial performance,
positioning it well to deliver on the next phase of the Group’s development. A key milestone was the acquisition of the Wesfarmers
insurance underwriting business.
There is no contribution to the Group's profit or loss after tax in the current financial year from the acquired insurance business of
Wesfarmers Limited given the acquisition completed on 30 June 2014.
The Group's profit after tax for the financial year was $1,330 million (2013-$882 million). After adjusting for non-controlling interests
in the Group result, net profit attributable to the shareholders of the Company was $1,233 million (2013-$776 million), which was an
increase of nearly 60%. This outcome was assisted by the absence of the loss of $287 million recognised in the prior financial year in
respect of the discontinued United Kingdom business, which was sold in April 2013. Gross written premium (GWP) growth of 3.0%
(2013-11.8%) has been recorded in the current financial year.
For the financial year to 30 June 2014, the Group’s overall performance has been characterised by:
substantially reduced input cost pressures, resulting in minimal need for premium rate increases;
underlying volumes broadly in line with system growth in most classes;
ongoing application of underwriting disciplines;
improved underlying claim costs, aided by better than expected frequency in key business classes; and
increased investment in the business, directed towards long term efficiency and customer-oriented projects.
Reported profitability has benefited from favourable natural peril (compared to allowance), reserve release and investment market
outcomes, which have driven an insurance margin well above the guidance held at the outset of the year.
The reported insurance margin of 18.3% (2013-17.2%) incorporates:
net natural peril claim costs of $553 million, which were $87 million lower than the related allowance;
prior period reserve releases of $248 million, equivalent to 2.9% of net earned premium (NEP); and
a positive $100 million impact from the narrowing of credit spreads during the year.
The Group has delivered an improved underlying insurance margin of 14.2% (2013-12.5%).
IAG defines its underlying margin as the reported insurance margin adjusted for:
net natural peril claim costs less the related allowance for the period;
reserve releases in excess of 1% of NEP; and
credit spread movements.
16 IAG ANNUAL REPORT 2014
INSURANCE MARGIN
Reported insurance margin*
Net natural peril claim costs less allowance
Reserve releases in excess of 1% of NEP
Credit spread movements
Underlying insurance margin
$m
1,579
(87)
(162)
(100)
1,230
2014
%
18.3
(1.0)
(1.9)
(1.2)
14.2
$m
1,428
(156)
(129)
(110)
1,033
2013
%
17.2
(1.9)
(1.5)
(1.3)
12.5
*
Reported insurance margin is the insurance profit/(loss) as a percentage of NEP as disclosed in the Statement of Comprehensive Income.
Investment income on shareholders’ funds was a profit of $400 million, compared to a profit of $371 million in the prior financial year.
Contributory factors were:
continued strength in equity markets in the current financial year, with the broader Australian index (S&P ASX200 Accumulation)
delivering a positive return of 17.4% (2013-22.8%);
a strong return from alternative asset categories; and
income earned on the funds raised to finance the acquisition of the Wesfarmers insurance underwriting business, which settled
on 30 June 2014. These funds were placed in high quality fixed interest and cash investments.
A. AUSTRALIA DIRECT
I. Premiums
Australia Direct’s GWP was relatively flat, at $4,545 million in the year ended 30 June 2014 (2013-$4,584 million). This performance
is in line with the guidance provided at the Australia Direct market briefing in April 2014. It reflects the combination of:
reduced need to recover higher input costs, notably reinsurance, particularly in respect of the home portfolio;
cessation of Victorian Fire Services Levy (FSL) collection from 1 July 2013 (2013-$50 million);
slightly lower motor GWP, from a combination of volume growth and lower average rates;
a $33 million reduction in GWP in respect of Queensland CTP, following the decision to exit that market from 1 January 2014;
reduced ACT CTP market share, following the entry of competition from mid-July 2013; and
continued remediation of the Retail Business Insurance (RBI) book.
II. Reinsurance expense
Reinsurance expense of $557 million in the current financial year increased compared to the prior financial year (2013-$281 million)
as a result of the CTP quota share agreement from 1 July 2013. Excluding the CTP quota share effect, Australia Direct’s current
financial year reinsurance expense was $290 million, and of similar scale to the prior financial year.
III. Claims
The current year net claims expense of $2,654 million (2013-$2,758 million) contained:
reserve releases of $176 million which were $71 million higher than those reported in the prior year (2013-$105 million);
losses from natural perils (net of reinsurance) of $305 million, which was $100 million higher than the incidence in the prior year;
short-tail claim experience which was characterised by a larger than expected decrease in frequency compared to the prior year,
and modest inflation in underlying average claim costs;
the total net claims expense in the current year included a reduction in respect of the 30% of CTP claims covered by the quota
share agreement, entered into with effect from 1 July 2013; and
an unfavourable risk free discount rate adjustment.
The loss ratio of 65.9% is similar to that of the prior financial year (2013-66.2%).
IV. Expenses
Australia Direct’s reported expenses predominantly comprise underwriting costs, and totalled $757 million in the current financial
year, compared to $797 million in the prior financial year. The movement in expenditure is largely explained by the net effect of:
a small reduction in underwriting expense stemming from the reinsurance commission payable by the reinsurance counterparty
as part of the CTP quota share agreement;
increased reinvestment in the business, including specific projects directed at improving customer service, product design and
people development; and
lower levies from the cessation of Victorian FSL.
The reported expense ratio improved to 18.8% (2013-19.2%).
17
V. Insurance profit
Australia Direct reported an insurance profit for the year ended 30 June 2014 of $908 million, compared to $822 million in the year
ended 30 June 2013. This equates to a higher insurance margin of 22.5% (2013-19.7%). The higher margin compared to the prior
financial year reflects the combination of:
an improved underlying claims performance, incorporating supply chain cost initiatives and better than expected frequency;
an easing of the pressures experienced in NSW CTP in the prior financial year, assisted by rate increases implemented in the
second half of the prior financial year;
a modestly favourable impact from the CTP quota share agreement;
significantly higher reserve releases, of $176 million, which had a favourable margin effect of nearly 2% compared to the year
ended 30 June 2013; and
a $100 million increase in net natural peril claim costs against the prior financial year.
B. AUSTRALIA INTERMEDIATED (CGU)
I. Premiums
CGU reported modestly higher GWP of $3,058 million in the financial year ended 30 June 2014 (2013-$3,028 million).
Reported GWP growth of 1.0% in the current financial year reflects the combined effect of:
volume growth across commercial SME and some specialty line products;
continued growth in workers’ compensation, with higher volumes in both new business and renewals;
low single digit rate increases across most products;
lower personal lines volumes, owing to the termination of the Telstra mobile phone insurance relationship towards the end of the
2013 calendar year (excluding this account loss, personal lines GWP was flat);
an 11% contraction in commercial motor GWP, with action to address competitive positioning through more granular risk pricing
seeing a resumption of growth by the conclusion of the current financial year;
a continued softening of rates in the large corporate property segment, though this represented only 2% of CGU’s GWP in the
current financial year; and
the cessation (from 1 July 2013) of the Victorian FSL, which in the prior year represented $54 million of GWP.
II. Reinsurance expense
CGU’s current year reinsurance expense of $225 million is over 8% lower than in the previous financial year. This reflects a
combination of:
additional cost associated with aggregate exposure growth; and
the impact of more favourable reinsurance market conditions.
III. Claims
The current year net claims expense was $1,491 million, compared to $1,316 million in the prior year. The movement reflects the
combination of:
reserve releases of $81 million which were over 40% lower than those reported in the prior year ($141 million);
losses from natural perils of $142 million (net of reinsurance) for the current year which were $61 million lower than prior year
levels;
better than expected frequency;
further improvement in underlying claims performance; and
an unfavourable risk free discount rate adjustment.
The reported loss ratio increased to 54.1% (2013-49.8%).
IV. Expenses
Reported expenses, comprising commission and underwriting costs, totalled $962 million in the financial year ended 30 June 2014,
compared to $928 million in the financial year ended 30 June 2013. The expense ratio was slightly lower at 34.9% in the current year
(2013-35.1%), and on an ex-levies basis increased to 32.6% (2013-30.1%).
The increase in expenditure includes:
higher commission costs, predominantly driven by business growth and increased profit share payments to intermediaries as a
result of improved claims performance; and
costs incurred in the replacement of core systems and the delivery of systems innovation.
These increases have been offset by:
lower fire service levies, reflecting the cessation of the Victorian FSL from 1 July 2013; and
cost savings realised from recent business improvement initiatives, primarily from the OneCGU operating model and systems
simplification projects.
18 IAG ANNUAL REPORT 2014
V. Insurance profit
CGU reported an insurance profit of $479 million, a slightly higher outcome than the prior financial year (2013-$470 million). This
equates to an insurance margin of 17.4% (2013-17.8%).
Following several periods of claims-driven performance improvement, CGU demonstrated a sustained margin at targeted levels in the
current year, with portfolio remediation now largely complete and rate increases subsiding to more typical long term levels.
The slightly lower reported margin of 17.4% (2013-17.8%) reflects the net effect of:
a $60 million reduction in prior period reserve releases;
an offsetting reduction in net natural peril claim cost of similar quantum;
a marginally lower favourable credit spread movement of $35 million; and
further improvement in the business’ underlying performance, year-on-year.
VI. Fee based business
In the financial year ended 30 June 2014, in its role as agent in respect of the NSW and Victorian workers’ compensation schemes,
CGU generated net income from fee based operations of $9 million, compared to $19 million in the prior year.
C. NEW ZEALAND
I. Premiums
New Zealand’s current year GWP of $1,846 million increased by 17.2% compared to the prior year (2013-$1,575 million). All
distribution channels reported growth in the financial year ended 30 June 2014. GWP growth in the current financial year was driven
by:
rate increases in the domestic home owners’ portfolio across all channels to continue to recover higher reinsurance costs and
appropriately price for risk;
a continued focus on customer and sales initiatives which contributed to improved volumes compared to the prior year; and
a significantly favourable exchange rate effect compared to the previous financial year.
II. Reinsurance expense
Reinsurance expense of $257 million was 8.4% higher than the previous financial year (2013-$237 million). The increase reflects the
net effect of:
increased catastrophe cover costs as a result of the Canterbury earthquakes and regulatory requirements; and
lower costs in respect of AMI, whose previously standalone catastrophe reinsurance program was brought within the Group’s
main catastrophe program from 1 January 2014.
III. Claims
The current year reported loss ratio was 57.2% (2013-60.1%) and the net claims expense was $892 million (2013-$774 million),
which contained:
higher net natural peril costs of $106 million (2013-$56 million);
lower net reserve strengthening of $13 million, compared to the prior year (2013-$35 million); and
favourable underlying claims activity predominantly driven by lower frequency.
IAG continues to play a key role in the recovery of the Canterbury region, following the major earthquakes of 2010 and 2011. As at 30
June 2014 the Group had paid over NZ$3.3 billion of claims, with around 58% of claims by number now fully settled. While the Group
believes it has adopted a conservative reserving position, considerable uncertainty continues to attach to the ultimate cost of the
earthquake events.
IV. Expenses
Total reported expenses of $461 million in the current financial year resulted in an expense ratio of 29.6%, a slight deterioration
against the prior financial year (2013-28.8%). Within this:
reported commission expense increased by 18.3% compared to the prior year, to $168 million, broadly reflecting the foreign
exchange translation effect over the course of the year. The commission ratio of 10.8% improved slightly over the prior year
experience (2013-11.0%);
underwriting expenses of $293 million were approximately 28% higher than the prior year. This incorporated the net effect of:
the absence of the $9 million net benefit in the prior year from the introduction of deferred acquisition cost (DAC) accounting
in AMI;
increased costs driven by investment in process improvement and technology initiatives;
expenditure associated with increased regulatory requirements; and
the foreign exchange translation effect over the course of the year.
V. Insurance profit
The New Zealand business produced an insurance profit of $180 million in the year to 30 June 2014, a significant increase on the
prior year profit of $115 million. This equated to a reported insurance margin of 11.5% (2013-8.9%). The higher reported margin
reflects the combination of:
the improved underlying performance of the business;
lower net reserve strengthening;
a higher incidence of net natural peril claim costs; and
the realisation of benefits associated with the business’ continued focus on operational initiatives, including synergies from the
AMI integration.
19
D. ASIA
The development of the Group’s Asian operations is progressing to plan as the business enters a phase of driving operational
development and enhancing risk management and governance. This follows the successful establishment of an enlarged regional
footprint encompassing a presence in five out of six target markets.
I. Premiums
GWP from the Group's controlled entities was $317 million in the current financial year, which was broadly in line with the prior year
(2013-$295 million).
The Thai business (Safety Insurance Public Company Limited) reported a modest decline in GWP of 2.4% in the current year. This
reflects the combined effect of:
the significant contraction in new vehicle sales since May 2013, after the end of the government’s first-car-buyer tax incentive
scheme;
a normalisation of commercial rates following the spike experienced in the aftermath of the catastrophic flood event in the
financial year ended 30 June 2012; and
slower economic activity due to political unrest.
Following the increase in ownership of AAA Assurance Corporation (AAA Assurance), IAG has consolidated the results of AAA Assurance
with effect from July 2013. In the current year, AAA Assurance recorded GWP equivalent to $29 million, representing growth of about
20%. This reflects the net impact of remediation activity offset by stronger growth in the bancassurance channel.
II. Insurance profit
The insurance profit delivered by the controlled entities for the current financial year was $23 million (2013-$26 million), which
excludes allocated costs. The Thai business reported an improved insurance profit of $28 million, compared to $26 million in the prior
year. AAA Assurance contributed an insurance loss of $5 million in the current financial year.
III. Share of net profit/(loss) of associates
The Group's share of associates was a profit of $22 million (2013-$19 million), excluding allocated costs. In the current financial year
this includes AmGeneral Holdings Berhad (AmGeneral) in Malaysia, SBI General Insurance Company Limited (SBI General) in India, and
Bohai Property Insurance Company Ltd (Bohai Insurance) in China. AmGeneral accounts for the majority of the Group's share of net
profit from associates.
AmGeneral has continued to perform strongly during the year, with the overall result boosted by a full year contribution from Kurnia,
compared to nine months in the previous financial year. IAG’s share of AmGeneral's profit for the year was $29 million (2013-$28
million). Modest losses were recognised from the developing businesses in India and China in the current financial year.
IV. Regional support and development costs
The regional support and development costs are self-funded within the division and, for reporting purposes, are allocated between the
consolidated businesses (Thailand and Vietnam) and shares of associates (Malaysia, India and China).
Total regional support and development costs for the year increased to $31 million (2013-$25 million) owing to greater capability
support in driving an operational excellence strategy and enhancing risk management and governance in existing Asian businesses.
E. CORPORATE AND OTHER
Revenue has increased from $360 million in the prior year to $411 million in the financial year ended 30 June 2014, due to higher
investment income on shareholders’ funds net of investment fees. This resulted in a profit before tax for continuing operations of
$209 million (2013-$144 million).
Further details on the operating segments are set out in the segment reporting note within the Financial Statements.
REVIEW OF FINANCIAL CONDITION
A. FINANCIAL POSITION
The total assets of the Group as at 30 June 2014 were $29,657 million compared to $24,859 million at 30 June 2013. The significant
increase in assets of $4,798 million largely reflects the addition of the Wesfarmers insurance underwriting business ($4,364 million),
effective 30 June 2014. The movement includes:
an increase of $1,761 million in investments, with $1,724 million relating to the addition of the Wesfarmers insurance
underwriting business and the balance generated from the Group's strong operating performance;
a $1,629 million increase in goodwill and intangibles, with $1,512 million relating to the addition of the Wesfarmers insurance
underwriting business and the remainder mainly attributable to software development within Australia Direct and CGU;
an increase in other insurance assets of $738 million, which predominantly relates to the addition of the Wesfarmers insurance
underwriting business. The majority of the remaining movement relates to the commencement of the CTP quota share within
Australia Direct and deferred expense for the 2015 financial year reinsurance program for the Wesfarmers insurance underwriting
business; and
$456 million of the $604 million increase in premium receivable is from the addition of the Wesfarmers insurance underwriting
business, with the remainder being predominantly attributable to the gross written premium growth and foreign exchange
movement applicable to New Zealand.
20 IAG ANNUAL REPORT 2014
The total liabilities of the Group as at 30 June 2014 were $22,863 million compared to $19,871 million at 30 June 2013. The
increase over the current financial year is largely attributable to the addition of the Wesfarmers insurance underwriting business
($2,384 million). The notable movements are:
an increase in outstanding claims of $1,463 million, with $1,251 million attributable to the addition of the Wesfarmers insurance
underwriting business and the remainder largely reflecting the foreign exchange movement applicable to New Zealand;
increased unearned premium liability of $1,111 million, mainly attributable to the addition of the Wesfarmers insurance
underwriting business ($976 million), gross written premium growth and the foreign exchange movement applicable to New
Zealand;
a $365 million increase in reinsurance premium payable and trade and other payables, with $134 million relating to the addition
of the Wesfarmers insurance underwriting business and the balance mainly relating to the payable for the 2015 financial year
reinsurance program for the Wesfarmers insurance underwriting business; and
an increase in interest bearing liabilities of $132 million mainly due to the net effect of the issue of $350 million of subordinated
debt and the repurchase of the £157 million subordinated exchangeable term note.
IAG shareholders’ equity (excluding non-controlling interests) increased, from $4,786 million at 30 June 2013 to $6,568 million at 30
June 2014. This movement was mainly attributable to the net effect of:
$1,422 million (after transaction costs) raised in ordinary share capital through the combination of a fully underwritten
institutional placement and a Share Purchase Plan;
strong operating earnings performance and improved equity markets in the current financial year, resulting in a net
comprehensive income attributable to shareholders of $1,233 million, and
the 2013 final dividend and 2014 interim dividend payments totalling $823 million.
B. CASH FROM OPERATIONS
The net cash inflows from operating activities for the financial year ended 30 June 2014 were $1,077 million compared to $1,790
million for the prior financial year. The decrease is mainly attributable to the net effect of:
an increase in outward reinsurance premiums paid of $438 million which relates to the timing of quarterly catastrophe
reinsurance instalments and the CTP quota share arrangement within Australia Direct;
an increase in claim costs paid of $253 million;
an increase in other operating payments of $187 million mainly attributable to an increase in controllable expenses and stamp
duty from GWP growth;
a decrease in other operating receipts of $146 million;
an increase in reinsurance and other recoveries of $285 million mainly attributable to the settlement of claims; and
an increase in gross written premium receipts of $118 million.
C. INVESTMENTS
The Group’s investments totalled $15.4 billion as at 30 June 2014, excluding investments held in joint ventures and associates, with
nearly 68% represented by the technical reserves portfolio. Total investments at 30 June 2013 were $13.6 billion.
Movements of note since 30 June 2013 are:
the addition of $1.7 billion of investment assets in respect of the acquired Wesfarmers business, on 30 June 2014; and
increased funds reflecting the strong operating performance of the Group along with positive investment returns during the year.
As at 30 June 2014, the Group’s overall investment allocation remained conservatively positioned and the credit quality of the
investment book was strong, with 86% (2013-86%) of the fixed interest and cash portfolio rated in the 'AA' category or higher.
Technical reserves as at 30 June 2014 accounted for $10.4 billion (2013-$9.4 billion) of the Group's investments, and were entirely
invested in fixed interest and cash.
The Group’s allocation to growth assets was 42% of shareholders’ funds at 30 June 2014 (2013-46%). Included within the Group’s
allocation to growth assets are Australian and international equities and alternative investments.
D. INTEREST BEARING LIABILITIES
The Group’s interest bearing liabilities stood at $1,752 million at 30 June 2014, compared to $1,620 million at 30 June 2013. There
have been two largely compensatory movements since that date:
a $350 million Tier 2 subordinated debt issue completed in March 2014 and utilised to partially fund the acquisition of the
Wesfarmers insurance underwriting business; and
the repurchase of the £157 million subordinated exchangeable term note instrument in June 2014.
E. CAPITAL MIX
The Group measures its capital mix on a net tangible equity basis, i.e. after deduction of goodwill and intangibles, giving it strong
alignment with regulatory and rating agency models. It is IAG’s intention to have a capital mix in the following ranges over the longer
term:
ordinary equity (net of goodwill and intangibles) 60-70%; and
debt and hybrids 30-40%.
At 30 June 2014, the Group’s capital mix was in the middle of the targeted range, with debt and hybrids representing 35.0% (2013-
34.5%) of total tangible capitalisation.
21
F. CAPITAL MANAGEMENT
The Group remains strongly capitalised under APRA's Life and General Insurance Capital (LAGIC) standards and has set the following
related targeted benchmarks:
a total capital position equivalent to 1.4 to 1.6 times the Prescribed Capital Amount (PCA), compared to a regulatory requirement
of 1.0 times; and
a Common Equity Tier 1 (CET1) target range of 0.9 to 1.1 times the PCA, compared to a regulatory requirement of 0.6 times.
At 30 June 2014, the Group had regulatory capital of $4,981 million (2013-$4,262 million), a PCA multiple of 1.72 (2013-1.67) and a
CET1 multiple of 1.14 (2013-1.09).
Further capital management details are set out in the capital management note within the Financial Statements.
STRATEGY
A. STRATEGIC PRIORITIES
The Group’s strategy and priorities have been updated to appropriately reflect the Company’s market position following the acquisition
of the Wesfarmers insurance underwriting business.
The updated priorities are:
I. Maintain market leading position in personal and commercial insurance in Australia and New Zealand
IAG, through its range of iconic brands, is the market leader in personal insurance in Australia and New Zealand.
The acquisition of the Wesfarmers insurance underwriting business delivers market leadership in commercial insurance in Australia,
and cements IAG’s existing leadership position in New Zealand.
II. Secure and grow IAG's businesses in Asia
The Group’s business in Asia is progressing to plan, as it transitions to a phase of driving operational development and enhancing risk
management and governance. This follows the Group’s commitment of increased capability to the region to ensure the potential of the
broader Asian platform is realised over the medium to longer term.
III. Drive customer centricity
Customer centricity remains a key strategic priority for the Group. Customer expectations and behaviours continue to evolve,
particularly as technology creates new and more opportunities for them to interact with IAG.
Significant work is being undertaken to ensure Group businesses have a sharper focus on activities that directly affect the customer
experience, allowing them to lead their markets in delivering superior value.
IV. Embed shared value strategy
As part of its shared value strategy, IAG continues to explore new initiatives to improve safety on the road and in the home, and to
examine ways to improve the resilience of small-to-medium-sized businesses.
The Group has taken a leadership role in protecting customers and making communities safer through its participation in the
Australian Business Roundtable for Disaster Resilience & Safer Communities.
V. Explore long term growth opportunities
IAG continues to explore long term growth opportunities, including solutions to improve insurance affordability and ventures to
commercialise the Company’s expertise in the identification and management of risk.
B. BUSINESS RISK AND RISK MANAGEMENT
Managing risk is central to the sustainability of IAG's business and delivery of value to shareholders. IAG’s risk management
framework is a core part of the governance structure and includes internal policies, key management processes and culture. The risk
management strategy (RMS) is reviewed annually or as required by the Risk Committee (RC) before being recommended for adoption
by the Board. IAG’s risk and governance function provides regular reports to the RC on the operation of IAG’s risk management
framework, the status of key risks, risk and compliance incidents and risk framework changes. IAG’s Internal Audit Function provides
reports to the Audit Committee (AC) on significant audit findings and other audit related matters. Roles and responsibilities of the
Board and its standing committees, the AC, the RC and the PARC, are set out in the Corporate Governance section.
The Group is exposed to multiple risks relating to the conduct of its general insurance business. The following risks noted below are
not meant to represent an exhaustive list, but the risks faced by the Group that have been identified by the RMS process:
strategic risk: the risk of not achieving corporate or strategic goals;
insurance risk: the risk that the Group is exposed to financial loss, which may impact the Group’s ability to meet its liabilities;
reinsurance risk: the risk of insufficient reinsurance coverage and/or inadequate reinsurance recovery management;
financial risks:
market risk: the risk of adverse financial impact due to changes in the value or future cash flows of financial instruments;
credit risk: the risk of loss from a counterparty failing to meet their financial obligations;
liquidity risk: the risk of there being insufficient cash resources to meet payment obligations without affecting the daily
operations or the financial condition of the Group; and
capital management risk: the risk of failure to maintain adequate regulatory capital to meet the prudentially required capital
levels or the Group's internal capital target.
operational risk: the risk of loss from inadequate or failed internal processes, people, systems and/or external events.
22 IAG ANNUAL REPORT 2014
A disciplined approach to risk management has been adopted and IAG believes this approach provides the greatest long term
likelihood of being able to meet the objectives of all stakeholders, including policyholders, lenders and shareholders.
Detail of the Group's overall risk management framework, which is outlined in the RMS, is set out in the Corporate Governance section
and risk management note within the Financial Statements.
OUTLOOK
A. GWP AND INSURANCE MARGIN
The Group expects to report GWP growth of 17-20% in the financial year ending 30 June 2015. This incorporates:
the first-time consolidation of the Wesfarmers insurance underwriting business in Australia and New Zealand;
limited need for rate increases, reflecting minimal input cost pressures; and
anticipated volume growth in the existing business broadly in line with system.
The Group anticipates reporting an insurance margin within the range of 13.5-15.5%. Underlying assumptions behind this guidance
are:
net losses from natural perils in line with the allowance of $700 million;
lower prior period reserve releases equivalent to around 2% of NEP; and
no material movement in foreign exchange rates or investment markets.
B. ACQUISITION OF WESFARMERS BUSINESS / NEW OPERATING MODEL
The combined expected financial impact of the new Australian operating model and the integration of the Wesfarmers insurance
underwriting business, in terms of synergies/benefits and one-off costs, amounts to:
an annualised pre-tax synergy benefit run rate of approximately $80 million by the end of the financial year ending 30 June 2015
and $230 million by the end of the financial year ending 30 June 2016; and
the recognition of one-off pre-tax synergy costs of approximately $220 million, with $50 million being recognised in the current
financial year. The expectation is that most, if not all, of the remainder will be recognised in the financial year ending 30 June
2015.
DIVIDENDS
Details of dividends paid or determined to be paid by the Company and the dividend policy employed by the Group are set out in the
dividends note within the Financial Statements.
Cash earnings are used for the purposes of targeted return on equity (ROE) and dividend payout policy and are defined as:
net profit after tax attributable to IAG shareholders;
plus amortisation and impairment of acquired identifiable intangibles; and
excluding any unusual items.
CASH EARNINGS
Net profit after tax
Intangible amortisation and impairment
Unusual items:
Corporate expenses
Tax effect on corporate expenses
Net loss after tax from discontinued operation
Cash earnings*
Interim dividend
Final dividend
Dividend payable
Cash payout ratio*
2014
$m
1,233
21
1,254
68
(16)
-
1,306
304
609
913
2013
$m
776
55
831
54
(16)
287
1,156
229
519
748
69.9%
64.7%
*
Cash earnings and cash payout ratio represent non-IFRS financial information.
IAG’s policy is to pay dividends equivalent to approximately 50–70% of reported cash earnings in any given financial year.
The Board has determined to pay a fully franked final dividend of 26.0 cents per ordinary share (2013-25.0 cps). The final dividend is
payable on 8 October 2014 to shareholders registered as at 5pm on 10 September 2014.
The dividend reinvestment plan (DRP) will operate for the final dividend. The issue price per share for the final dividend will be the
volume weighted average price as defined in the DRP terms and there will be no discount for participants. Shares allocated under the
DRP will be purchased on-market. Information about IAG’s DRP is available at www.iag.com.au/shareholder/reinvestment/index.
23
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
During the financial year the following changes became effective:
on 30 June 2014, the Group completed the acquisition of the insurance underwriting business of Wesfarmers Limited in Australia
and New Zealand. Accordingly, the assets and liabilities of this business are consolidated from this date. The total consideration
for the acquisition was $1,980 million which includes an initial purchase price of $1,845 million and a completion payment
adjustment of $135 million. The transaction includes the Wesfarmers insurance underwriting business trading under the WFI and
Lumley Insurance brands. It also includes a 10-year distribution agreement with Coles supermarket chain. The acquisition
supports the Group’s strategic priorities of accelerating profitable growth in Australia and sustaining its market-leading position in
New Zealand.
To fund the acquisition:
the Group raised $1,422 million (after transaction costs) in ordinary share capital through the combination of a fully
underwritten institutional placement and a Share Purchase Plan, comprising the issue of approximately 262 million ordinary
shares at $5.47 per share;
in March 2014 a wholly owned subsidiary of the Group, Insurance Australia Limited (IAL), issued $350 million of wholesale
subordinated debt. The subordinated debt qualifies as Tier 2 Capital under APRA capital adequacy framework for general
insurers; and
the balance being funded by internally generated cash.
on 13 June 2014, IAL repurchased and cancelled its £157 million subordinated exchangeable loan note instrument.
EVENTS SUBSEQUENT TO REPORTING DATE
Detail of matters subsequent to the end of the financial year is set out below and in the events subsequent to reporting date note
within the Financial Statements. This includes:
on 19 August 2014, the Board determined to pay a final dividend of 26 cents per share, 100% franked. The dividend will be paid
on 8 October 2014. The dividend reinvestment plan will operate by acquiring shares on-market for participants with no discount
applied; and
on 22 May 2014 the Group announced it would implement a new operating model for its Australian operations effective from 1
July 2014, to create a more customer-focused and efficient organisation. The new model will allow IAG to better leverage its scale
and insurance expertise to deliver better outcomes for its customers, partners, people and shareholders. From 1 July 2014, in
Australia, IAG will operate under three divisions:
Personal Insurance, led by Andy Cornish, formerly Chief Executive of Australia Direct, this division provides personal
insurance products;
Commercial Insurance, led by Peter Harmer, formerly Chief Executive of CGU, this division provides insurance to business
customers; and
Enterprise Operations, led by Alex Harrison, formerly Chief Operating Officer for Australia Direct, this division provides support
services to Personal Insurance and Commercial Insurance.
OFFICERS WHO WERE PREVIOUSLY PARTNERS OF THE AUDITORS
The following person is currently an officer of the Group and was a partner of KPMG, the Company’s auditor, at a time when KPMG was
the auditor of the Company:
Nicholas Hawkins who has been Chief Financial Officer of the Group since 29 August 2008 (left KPMG in October 2001).
NON AUDIT SERVICES
During the financial year, KPMG has performed certain other services for the Group in addition to its statutory duties.
The Directors have considered the non-audit services provided during the financial year by KPMG and, in accordance with written
advice provided by resolution of the AC, are satisfied that the provision of those non-audit services by the Group’s auditor is compatible
with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:
all non-audit assignments were approved in accordance with the process set out in the IAG framework for engaging auditors for
non-audit services; and
the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110
Code of Ethics for Professional Accountants of the Chartered Accountants Australia and New Zealand and CPA Australia, as they
did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the
Company, acting as an advocate for the Company or jointly sharing risks and rewards.
The level of fees for total non-audit services amounts to approximately $2.3 million (refer to the remuneration of auditors note for
further details of costs incurred on individual non-audit assignments).
LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT
2001
The lead auditor's independence declaration is set out on page 48 and forms part of the Directors' Report for the year ended 30 June
2014.
24 IAG ANNUAL REPORT 2014
INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
The Company’s constitution contains an indemnity in favour of every person who is or has been:
a Director of the Company or a subsidiary of the Company; or
a Secretary of the Company or of a subsidiary of the Company; or
a person making or participating in making decisions that affect the whole or a substantial part of the business of the Company or
of a subsidiary of the Company; or
a person having the capacity to affect significantly the financial standing of the Company or of a subsidiary of the Company.
The indemnity applies to liabilities incurred by the person in the relevant capacity (except a liability for legal costs). That indemnity also
applies to legal costs incurred in defending or resisting certain legal proceedings. The indemnity does not apply where the Company is
forbidden by statute or, if given, would be made void by statute.
In addition, the Company has granted deeds of indemnity to certain current and former Directors and Secretaries and members of
senior management of the Company and its subsidiaries and associated companies. Under these deeds, the Company:
indemnifies, to the maximum extent permitted by law, the former or current Directors or Secretaries or members of senior
management against liabilities incurred by the person in the relevant capacity. The indemnity does not apply where the liability is
owed to the Company or any of its subsidiaries or associated companies, or (in general terms) where the liability arises out of a
lack of good faith, wilful misconduct, gross negligence, reckless misbehaviour or fraud; and
is also required to maintain and pay the premiums on a contract of insurance covering the current or former Directors or
members of senior management against liabilities incurred in respect of the relevant office except as precluded by law. The
insurance must be maintained until the seventh anniversary after the date when the relevant person ceases to hold office.
Disclosure of the insurance premiums and the nature of liabilities covered by such insurance are prohibited by the relevant
contract of insurance.
ENVIRONMENTAL REGULATION
The Group's operations are subject to environmental regulations under either Commonwealth or State legislation. These regulations
do not have a significant impact on the Group's operations. The Board believes that the Group has adequate systems in place for the
management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to
the Group.
IAG is closely monitoring the potential impacts of the Federal Government’s plans to replace the existing carbon price mechanism with
its Direct Action Plan.
25
REMUNERATION REPORT
LETTER FROM THE PEOPLE AND REMUNERATION COMMITTEE CHAIRMAN
Dear Shareholder
IAG is pleased to present its Remuneration Report for the year ended 30 June 2014.
IAG has built on the solid foundation laid while remediating the business in 2009 and delivered a strong performance for the year
ended 30 June 2014. Gross written premium (GWP) has grown from $7.8 billion in the year ended 30 June 2009 to $9.8 billion in the
year ended 30 June 2014, including an increase of 3% during the current financial year. Our underlying margin, the true measure of
the underlying strength of the business, has doubled since 2009 and was 14.2% in the year ended 30 June 2014. We have also
recorded a strong performance in our two long term financial targets of cash return on equity (ROE) and relative total shareholder
return (TSR). Cash ROE aligns the interests of shareholders and Executives as it is used to calculate the dividend paid to shareholders
and as a measure for half of IAG’s Long Term Incentive (LTI) plan. Our cash ROE has risen from 4.9% in 2009 to 23.0% this financial
year. The ROE component of the LTI vested for the first time in the year ended 30 June 2014. Similarly, IAG’s TSR measured by our
LTI plan exceeded the top quartile of our peer group.
IAG’s executive remuneration framework has remained constant for a number of years and is strongly tied to the short and long term
performance of the business. Given IAG’s performance, the value of reward received by Executives has increased in the year ended
30 June 2014, particularly reward based on long term outcomes. The following table provides a summary of some key highlights for
the year ended 30 June 2014:
2014 HIGHLIGHTS
Fixed remuneration
movement remains
conservative
Short term performance was
strong
IAG delivers sustained long
term performance
SUMMARY
IAG continues to assess the fixed remuneration of its Executives against the market. In the year
ended 30 June 2014, IAG granted a 2% average fixed pay increase to Executives. This is in keeping
with our target of providing market competitive fixed remuneration that takes into account an
Executive's experience, skills, the internal relativities of IAG’s Executive team and comparison with
external roles.
Short term performance for the year ended 30 June 2014 included strong margins and the fulfilment
of important strategic goals, resulting in an average short term incentive (STI) payment of 79% of the
maximum achievable for the CEO and Group Executives.
IAG exceeded its ROE and relative TSR targets. Based on a number of years of solid returns, the ROE
and TSR hurdles for the LTI plan were met and the LTI for the Group CEO and Executive team tested
during the year ended 30 June 2014 vested in full. The market value of LTI that vested during the
financial year is significantly higher than that in previous years as a result of:
full vesting of the ROE hurdle, for the first time.
full vesting of the LTI tested in the financial year, including additional vesting through retesting
of the TSR portion of prior grants. Retesting was removed from grants made after July 2013.
significant share price gains, also experienced by shareholders, since the LTI was granted.
Aligning shareholder interests
through the mandatory
shareholding requirement
IAG believes strongly in aligning the interests of Non-Executive Directors (NEDs) and Executives with
those of shareholders requiring each to hold a significant number of IAG shares. All NEDs and
Executives have exceeded their requirement at 30 June 2014.
The Board will continue to ensure that IAG’s reward frameworks are effective in attracting quality people and rewarding superior
organisational performance in the interests of customers and shareholders. In the 2014 financial year, the Board engaged an external
independent advisor to review IAG’s executive remuneration framework, including the LTI. The review found that the long term targets
of ROE and TSR are appropriate for Executives and are sufficiently challenging through the insurance cycle to drive the achievement of
IAG’s strategy and deliver strong returns for shareholders. As a result, there were no significant changes made to the executive
remuneration structure.
As part of IAG's ongoing governance of reward and in line with regulations from APRA, we conducted an assessment to determine if any
clawback of unvested or unexercised equity grants was required, and the Board is satisfied that no adjustment is necessary.
The Board is committed to ensuring the Remuneration Report presents executive remuneration in a consistent, concise and simple
manner, as well as complying with the Corporations Act 2001. As in previous years, in this report we voluntarily disclose the actual
remuneration received by Executives, in addition to meeting our statutory reporting obligations. In response to feedback on last year’s
report, we have included additional details of both STI and LTI performance measures and outcomes in this year’s report.
The Board is confident that IAG’s remuneration policies support the Group’s financial and strategic goals, and meet stringent
governance requirements. We believe that the Remuneration Report demonstrates clearly the alignment between executive
remuneration, the Group's performance and shareholders' interests, and we look forward to your continued support for our policies,
and our disclosure.
On behalf of the Board, I invite you to review the full report and thank you for your continued interest.
Yours sincerely
Yasmin Allen
People and Remuneration Committee Chairman
26 IAG ANNUAL REPORT 2014
CONTENTS
A
B
C
D
E
F
G
H
I
Remuneration explained
2014 snapshot
Executive remuneration governance and risk management
Executive remuneration structure
Executive remuneration in detail
Executive employment agreements
Non-Executive Director remuneration
Other benefits
Related party interests
A. REMUNERATION EXPLAINED
I. Key terms and definitions
The key terms and definitions used throughout this report are explained below:
PAGE
27
29
32
33
42
43
44
45
46
TERM
Actual remuneration
At-risk remuneration
Base salary
Cash return on equity (ROE)
Cash STI
Corporate Office Executives
Deferred STI/Deferred Award Rights
(DAR)
Divisional Executives
Executive team
Executives
Fixed remuneration
Group CEO
Key management personnel (KMP)
Long term incentive (LTI)/Executive
Performance Rights (EPR)
People and Remuneration
Committee (PARC)
Short term incentive (STI)
Total shareholder return (TSR)
WACC
DEFINITION
The dollar value of remuneration actually received by the Executives in the financial year. This
is the sum of fixed remuneration plus the cash portion of the STI plus the value of DAR vested
during the year plus the value of LTI in the form of EPR vested during the year.
The components of remuneration that are at-risk because they depend on a combination of the
financial performance of the Group and the Executives' performance against individual financial
and non-financial measures. At-risk remuneration typically includes STI (cash and deferred
remuneration) and LTI.
Cash component of fixed remuneration.
Based on cash earnings on average total shareholders’ equity during the financial year. Cash
earnings is defined as net profit after tax attributable to IAG shareholders plus amortisation and
impairment of acquired identifiable intangible assets and adjusted for unusual items. Cash ROE
is used to calculate one half of the outcome in the LTI plan.
The two-thirds portion of STI for the year ended 30 June 2014 that is paid in the form of cash in
September 2014, following the end of year assessment and approval by the Board.
The Chief Financial Officer, Chief Risk Officer and Chief Strategy Officer.
The one-third portion of STI for the year ended 30 June 2014 that is deferred over a period of
two years and awarded in the form of DAR. At the date of vesting, the holder of DAR is eligible
to receive one IAG ordinary share per DAR, by paying the exercise price of $1 per tranche of DAR
exercised.
The Executives with responsibility for managing a division.
The Executives who report directly to the Group CEO.
The Group CEO and the Executive team.
Base salary plus superannuation. Individuals can determine the mix of base salary and
superannuation they receive in line with legislative requirements.
IAG’s Managing Director and Chief Executive Officer.
The Group CEO and the Executive team responsible for managing the Group and the Board of
Directors.
A grant of rights in the form of EPR that are exercisable for IAG ordinary shares or cash between
three and four years after the grant date if performance hurdles are achieved.
The Board committee which oversees IAG's remuneration practices.
The part of annual at-risk remuneration that is designed to motivate and reward for
performance, typically in that financial year. STI results are determined by performance against
a balanced scorecard, based on goals which reflect financial and non-financial measures.
For the Group CEO and the Executive team, one third of STI is deferred for a period of two years.
Used as one measure of Group performance over a period of time. TSR combines share price
appreciation and dividends paid to show total return to shareholders, relative to that of other
companies in the peer group. IAG uses relative TSR performance to calculate one half of the LTI
outcome.
Weighted average cost of capital.
27
II. Key management personnel covered in this report
This report sets out the remuneration details of IAG's KMP as listed below:
POSITION
NAME
Executives
Michael Wilkins
Duncan Brain
Justin Breheny (a)
Andy Cornish
Peter Harmer
Nicholas Hawkins
Jacki Johnson
Leona Murphy
Executives who ceased as key management personnel
Alex Harrison (b)
Managing Director and Chief Executive Officer
Chief Executive Officer, Asia
Chief Risk Officer
Chief Executive Officer, Australia Direct
Chief Executive Officer, CGU
Chief Financial Officer
Chief Executive Officer, New Zealand
Chief Strategy Officer
Acting Chief Executive Officer, Australia Direct
TERM AS KMP
Full year
Part year - from 1/10/2013
Full year
Full year
Full year
Full year
Full year
Full year
Part year - from 1/11/2013
to 28/01/2014
Non-Executive Directors
Brian Schwartz
Yasmin Allen
Peter Bush
Alison Deans
Hugh Fletcher
Raymond Lim
Dr Nora Scheinkestel (c)
Philip Twyman
Chairman, Independent Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
(a)
(b)
(c)
Justin Breheny ceased as Chief Executive Officer, Asia and was appointed to the role of Chief Risk Officer on 1 October 2013.
Alex Harrison was Acting Chief Executive Officer, Australia Direct from 1 November 2013 to 28 January 2014 during a period of extended leave by
Andy Cornish. Disclosure of Alex Harrison's remuneration is included in the actual and statutory remuneration tables only, and relates solely to his
role as acting CEO, Australia Direct. From 1 July 2014 Alex Harrison resumed as a KMP in the role of Chief Executive, Enterprise Operations.
Dr Nora Scheinkestel commenced as a Director on 1 July 2013.
28 IAG ANNUAL REPORT 2014
B. 2014 SNAPSHOT
I. Actual remuneration received by Executives
The actual remuneration paid to Executives during the current and previous financial years is set out below. IAG discloses actual
remuneration voluntarily for increased transparency. Actual remuneration includes fixed remuneration, other benefits and leave
accruals, termination payments and cash STI paid, as well as any deferred STI or LTI that vested in the relevant financial year. For
remuneration details provided in accordance with the Accounting Standards refer to Section E.
TABLE 1 - ACTUAL REMUNERATION RECEIVED IN 2014 AND 2013
NAME
FINANCIAL
YEAR
OTHER
BENEFITS AND
LEAVE
ACCRUALS
$000
(2)
FIXED PAY
$000
(1)
TERMINATION
PAYMENTS
$000
(3)
CASH STI
$000
(4)
DEFERRED STI
VESTED
$000
(5)
LTI VESTED
$000
(6)
TOTAL ACTUAL
REMUNERATION
RECEIVED
$000
(7)
EXECUTIVES
Michael Wilkins
2014
2013
2,077
2,039
Duncan Brain, KMP since 1 October 2013
Justin Breheny
Andy Cornish(8)
Peter Harmer
Nicholas Hawkins
Jacki Johnson(9)
Leona Murphy
2014
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
679
915
898
879
1,016
995
972
995
976
1,048
907
895
879
253
229
378
193
294
(54)
73
(26)
(1)
(11)
27
37
70
13
7
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Alex Harrison(10)
2014
218
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,796
1,679
1,243
558
347
579
577
487
632
704
659
731
662
565
542
569
575
125
-
490
230
590
280
326
84
489
229
409
194
431
198
-
6,038
1,593
-
2,222
607
2,457
557
1,672
-
2,342
624
2,222
608
2,109
496
-
11,407
6,098
1,404
4,399
2,606
4,359
2,558
3,671
1,714
4,546
2,518
4,281
2,321
4,017
2,155
342
TABLE NOTE
(1) Represents base salary plus superannuation and included an average pay increase of 2% effective October 2013.
(2)
Includes benefits such as a 30% tax rebate on car allowances and movements in annual leave and long service leave accruals
during the relevant financial year. Details are provided in table 11 in Section E.
(3) No termination payments were made to Executives in the current financial year.
(4) Represents two thirds of the STI for the relevant financial year. Details are provided in table 5 in Section D.
(5) Deferred STI that vested in the relevant financial year. Details are provided in table 6 in Section D. The five-day weighted average
share price used to value the deferred STI at vesting date is $5.47 for awards vested on 1 July 2013 and $5.78 for awards vested
on 1 September 2013. For the year ended 30 June 2013 the prices were $3.40 for awards vested on 1 July 2012 and $4.13 for
awards vested on 1 September 2012.
(6) LTI that vested in the relevant financial year. Details of the plan are provided in table 7 in Section D. The five-day weighted
average share price at vesting date is $5.83 for awards vested on 23 August 2013 and $5.88 for awards vested on 30
September 2013 (2013-$4.38).
(7) Total remuneration received in the relevant financial year (the sum of columns 1 to 6).
(8) Remuneration received by Andy Cornish was lower in the year ended 30 June 2014 than the previous financial year as he took a
three month period of unpaid leave.
(9) Remuneration for Jacki Johnson is determined in New Zealand dollars and reported in Australian dollars. Foreign exchange
movements affect the value of remuneration disclosed. The exchange rate used to report Jacki Johnson’s remuneration in the
year ended 30 June 2014 was NZD 1=AUD 0.90485 (2013–NZD 1=AUD 0.80055).
(10) Remuneration reported for Alex Harrison relates only to the three month period during which he was Acting Chief Executive Officer,
Australia Direct. Share based remuneration provided to Alex Harrison in the current financial year did not relate to his role as the
Acting CEO, Australia Direct and has not been disclosed.
29
II. Actual remuneration mix
The mix of actual remuneration components outlined in table 1 shows a significant proportion of the total reward comprising at-risk
remuneration. Given IAG’s strong performance, the value of variable reward has increased when compared to the previous financial
year. This highlights the strength of the link between the incentive outcomes for IAG’s Executives and IAG’s performance.
The following graph illustrates the increase using the Group CEO's remuneration as an example, broken down into the components of
his remuneration plan. The deferred STI and LTI plans are illustrated to reflect the increases due to a greater number of rights vesting,
as well as the increase in value of those rights since they were first granted, due to IAG’s higher share price.
The CEO received a modest fixed pay increase, while the increase in other benefits relates predominantly to annual and long service
leave accruals. The cash STI increased due to strong short term performance. The most significant factors in the growth of actual
remuneration received are the deferred STI and LTI plan. Both plans experienced an increase in the number of rights vested in the
year ended 30 June 2014, and also a significant increase in the value of IAG shares since those plans were allocated.
The LTI plan is the most significant driver of the increased actual
remuneration received by Executives. The LTI vested in full in the
year ended 30 June 2014 due to ROE outcomes that exceeded
IAG’s stated target for the first time and relative TSR in the top
quartile of the peer group. Retesting of the TSR component also
resulted in additional vesting for the LTI plan, with additional
vesting of the 2008/2009 series 2 (2%) and 2009/2010 series 3
(44%) allocations also contributing 31% to the TSR related portion
of the LTI that vested in the year ended 30 June 2014. Retesting
was removed from the LTI plan for grants made after July 2013.
30 IAG ANNUAL REPORT 2014
Two-thirds of the growth in LTI actually received in the current
financial year was due to a greater portion of rights vesting than
in previous years. The remaining growth is attributable to share
price growth. The increase in the disclosed value of the LTI
actually received is aligned to the performance experienced by
shareholders.
IAG’s performance has resulted in a steady increase in the dividend payment provided to shareholders over a number of years. IAG’s
increasingly strong ROE has been positively reflected in the dividends shareholders receive, with the dividend payable to shareholders
in respect of the year ended 30 June 2014 increasing to 39 cents. IAG continues to adhere to its dividend policy of paying
approximately 50–70% of reported cash earnings to shareholders in any given financial year.
31
REMUNERATION REPORT
C. EXECUTIVE REMUNERATION GOVERNANCE AND RISK MANAGEMENT
This report meets the remuneration reporting requirements of the Corporations Act 2001 and Accounting Standard AASB 124 Related
Party Disclosures. The term remuneration used in this report has the same meaning as compensation as prescribed in AASB 124.
I. Governance
The Board is responsible for ensuring that the Group’s remuneration framework is aligned to the short and long term interests of IAG
and its shareholders. The PARC makes recommendations to the Board regarding Group remuneration policy including remuneration
for the Executives. The Board independently considers these recommendations before making executive remuneration decisions.
a. ROLE OF THE PARC
The PARC endeavours to ensure that remuneration policies balance IAG’s objectives with performance, retention, attraction and
shareholder expectations. While maintaining stability in the remuneration structure is important, the PARC actively considers
modifications that can better align stakeholder interests and drive performance, and makes recommendations to the Board where
appropriate.
The Group CEO, Chief Strategy Officer and Group General Manager, People & Culture attend PARC meetings to assist the committee in
its deliberations. Divisional Executives and the respective heads of human resources attend PARC meetings by invitation to provide
updates on the human resources strategy and initiatives in their divisions. This process provides an open channel of communication
between the divisions and the PARC.
The Chairman of the PARC regularly presents updates to the Board on remuneration related issues and seeks approval of initiatives
and outcomes.
A copy of the PARC's charter is available on the IAG website www.iag.com.au.
The committee is comprised of Non-Executive Directors. At the date of this report, its members were:
Yasmin Allen (Chairman);
Brian Schwartz;
Raymond Lim; and
Peter Bush.
b. REMUNERATION GUIDING PRINCIPLES
IAG's remuneration practices have been designed to achieve the following objectives:
align remuneration with the interests of IAG's shareholders by actively focusing on short to long term goals;
motivate employees to achieve superior and sustainable performance and discourage underperformance;
remain market competitive to attract and retain high quality people;
be clearly communicated and valued; and
encourage constructive behaviours and prudent risk taking that support long term financial soundness.
c. USE OF REMUNERATION CONSULTANTS
The PARC engages remuneration consultants to provide advice that ultimately assists the Board in making remuneration decisions. In
2014, the Chairman of the PARC engaged 3 degrees consulting to provide advice regarding the appropriateness of the LTI plan,
additional insights on market trends and market data in relation to CEO and senior executive remuneration levels. The PARC engaged
3 degrees consulting independently and directly received advice free from undue influence by management. No formal ‘remuneration
recommendations’ (as defined in the Corporations Act 2001) were made by 3 degrees consulting during the financial year.
II. Risk management
RESTRICTIONS ON DEALING IN IAG SECURITIES
In addition to legal requirements that prevent any person from dealing in IAG securities when in possession of undisclosed price
sensitive information, the Board has a restriction policy that prohibits all Directors, Executive team members and other designated
senior managers from:
short term or speculative trading in IAG securities;
transactions that limit economic risk associated with unvested entitlements to IAG securities (including DAR and EPR); and
any trading in IAG securities without prior approval of the PARC.
A copy of IAG's Security Trading Policy is available on the IAG website.
32 IAG ANNUAL REPORT 2014
III. Mandatory shareholding requirements
As part of IAG’s philosophy of aligning the interests of Executive and Non-Executive Directors with those of shareholders, all Executives
and Non-Executive Directors are required to hold a proportion of their remuneration as IAG shares.
The Group CEO is required to accumulate and hold IAG ordinary shares with a value of two times his base salary, and the Executive
team one times their respective base salaries. Executives have four financial years from their date of appointment as an Executive to
meet their requirement. Holdings are assessed annually at the end of each financial year, using the closing share price at 30 June.
The shareholding includes Executives' directly held shares and rights vested and unexercised as at 30 June, for entities controlled,
jointly controlled or significantly influenced by the Executive. Shares held by the Executives' domestic partner and dependants are not
included in the mandatory shareholding requirement.
Executives appointed prior to 30 June 2010 were required to meet the mandatory shareholding requirement at 30 June 2014 and all
have done so.
Non-Executive Directors are required to hold IAG shares with a value equal to their annual Board fee. The Non-Executive Directors
have three years from the date of their appointment to the Board to meet their required holding. This requirement is assessed
annually at the close of each financial year.
Non-Executive Directors appointed prior to 30 June 2011 were required to meet the mandatory shareholding requirement at 30 June
2014 and all have done so.
Please refer to Section I Related Party Interests for further information.
IV. Adjustment clawback policy
From 2010, IAG introduced a discretionary clawback provision to enable awards under the DAR and EPR Plans to be adjusted to:
protect the financial soundness of IAG or an operating segment;
respond to significant unexpected or unintended consequences that were not foreseen by the Board; or
respond to other circumstances where the Board determines an adjustment is necessary to ensure that an inappropriate reward
outcome does not occur.
In the year ended 30 June 2014, the Board considered whether adjustment was required for unvested awards under the DAR and
EPR Plans. The investigation did not reveal any requirement for the Board to adjust remuneration for the purposes discussed above.
D. EXECUTIVE REMUNERATION STRUCTURE
IAG’s executive remuneration structure is designed to align an individual’s total remuneration with Company and individual
performance. It recognises that Executives have a significant influence on achieving and exceeding the Group’s financial results and is
designed to encourage sustained exceptional performance.
IAG provides market competitive fixed remuneration given the roles’ experience, skills, the internal relativities of IAG’s Executive team
and market pay levels for external comparator roles. The appropriate market benchmark is determined considering organisation size,
industry and geographic location.
I. Potential remuneration mix
Total remuneration for the Group CEO and the Executive team comprises a mix of fixed and maximum potential at-risk remuneration
(STI and LTI). The mix, shown in the graph below, is designed to pay Executives competitively based on their performance, while
providing strong governance to protect the financial soundness of the business and shareholders’ interests.
Notes:
Potential remuneration is based on current remuneration at 30 June 2014. STI and LTI are based on maximum opportunities.
Fixed remuneration consists of base salary plus superannuation and excludes other values such as long service leave accruals, relocation and accommodation
allowances, retention payments and other recurring allowances and benefits.
33
II. Remuneration components
The remuneration components for the Executives are explained below:
TABLE 2 - REMUNERATION COMPONENTS
REMUNERATION COMPONENT
Cash
Fixed remuneration
At-risk remuneration
Cash STI
Deferred STI
LTI
Base salary and superannuation.
Attract and retain high quality
people.
STRATEGIC PURPOSE
2/3 of the STI outcome paid as cash
following the end of year
assessment and approval by the
Board.
1/3 of the STI outcome is deferred
over a period of two years, subject to
ongoing employment conditions.
Provided as a grant of rights in the
form of DAR.
The actual value of shares will
depend on the future share price.
The Board has discretion to
clawback to protect the financial
soundness of the Group or to ensure
an appropriate reward outcome.
Provided as a grant of rights in the
form of EPR.
3-4 year performance period.
Subject to performance hurdles of
relative TSR and ROE being
achieved.
The Board has discretion to
clawback to protect the financial
soundness of the Group or to ensure
an appropriate reward outcome.
Motivate and reward
performance within a financial
year.
Align reward to shareholder
interests.
Strike a balance between short
and long term results and reward
for exceptional performance.
Retain high quality people.
Protection of the financial
soundness of the Group.
Align reward to shareholder
interests.
Align remuneration with longer
term financial performance.
Retain high quality people.
Protection of the financial
soundness of the Group.
a. FIXED REMUNERATION
Fixed remuneration is reviewed regularly using independent remuneration benchmarking data. For Australian based Executives,
positioning is determined by reference to a number of peer groups, including financial services companies in the S&P/ASX 50 Index
and companies that are of similar size to IAG. Relevant local market peer groups are referenced for overseas based Executives.
Fixed remuneration for the year ended 30 June 2014
The average fixed remuneration increase for the Executive team for the year ended 30 June 2014 was 2% (effective October 2013). In
August 2014, the Board approved an average 1.5% increase in annual fixed remuneration for the Executive team effective September
2014.
b. AT-RISK REMUNERATION
The Board strongly believes that the fundamental driver for executive remuneration should be long term financial performance that
generates value for IAG shareholders. The Board further recognises that executive remuneration is guided by regulation and market
forces and it benchmarks IAG’s executive remuneration to ensure IAG uses at-risk remuneration components to achieve its
remuneration and performance objectives.
To ensure that the Executives remain focused on long term outcomes, without encouraging excessive risk taking, the following
conditions apply:
50% of the STI is based on financial outcomes;
one third of the STI is deferred over a period of two years;
vesting of the LTI does not occur before three years and there is no re-testing opportunity for the TSR performance hurdle for all
post July 2013 grants of LTI; and
the Board retains the discretion to adjust any unpaid or unvested performance related remuneration (such as cash STI, deferred
STI and LTI) downwards if it decides it is appropriate to do so.
34 IAG ANNUAL REPORT 2014
i. Cash and deferred STI
Key details of the STI plan are shown below:
TABLE 3 - STI PLAN
Description
STI refers to the at-risk remuneration designed to motivate and reward for performance in a set
financial year.
Potential maximum STI
amount
The Group CEO can earn up to 150% of his annual fixed remuneration and members of the Executive
team can earn up to 120% of their annual fixed remuneration.
Performance measures
and rationale
Performance is measured against a balanced scorecard that uses goals set against financial and non-
financial measures (the balanced scorecard is discussed in more detail in table 4).
Financial measures make up 50% of the balanced scorecard objectives, with the remaining 50% based
on non-financial measures. This provides a balance between rewarding the achievement of financial
targets and non-financial objectives that drive the execution of IAG’s strategy.
The following table details the weighting of financial and non-financial performance measures for the
STI of the Group CEO and the Executive team.
ROLE
FINANCIAL MEASURES
Group financial targets
Group CEO
Divisional Executives
50%
10%
Division or business
financial targets
N/A
40%
NON-FINANCIAL
MEASURES
50%
50%
Testing of performance
measures
Corporate Office
Executives
The Group CEO’s STI is recommended by the PARC based on his balanced scorecard performance and
is approved by the Board.
50%
40%
10%
The amount of STI paid to members of the Executive team is recommended by the Group CEO to the
PARC based on the Executive team members' balanced scorecard performance and recommended by
the PARC for approval by the Board. The Board may apply discretion in determining the STI outcomes
to ensure they are appropriate.
Instrument
Two-thirds of the STI is paid as cash, with the remaining one-third deferred in the form of DAR that vest
over two years.
Key terms of the deferred
STI
Deferred STI is issued in the form of rights over IAG ordinary shares which are held by a trustee. These
rights are referred to as DAR. They are issued to Executives during the financial year at no cost, to the
value of their deferred STI amount. Executives who participate in this plan become eligible to receive
one IAG ordinary share per DAR by paying an exercise price of $1 per tranche of DAR exercised, subject
to their continuing employment with the Group for a period determined by the Board. No dividend is
paid or payable for any unvested or vested and unexercised DAR. Dividends are retained by the trustee
and reinvested in the trust.
Forfeiture conditions
The Board retains the discretion to adjust the unvested portion of any awards. DAR will be forfeited if
the Executive resigns before the vesting date. When an Executive ceases employment in special
circumstances, such as redundancy, any unvested rights may be retained on cessation of employment,
subject to Board discretion.
35
ii. Linking performance and STI
IAG uses a balanced scorecard approach across the organisation to set performance objectives which drive the execution of its
strategy. Executives and businesses have a strategy map, which defines their key strategic priorities and the balanced scorecard sets
out the objectives that have to be achieved to meet these priorities. All balanced scorecards use goals set against financial and non-
financial measures. The achievement of the objectives is measured and this informs the Board’s determination of STI outcomes.
The table below provides a summary of key balanced scorecard objectives and outcomes for IAG for the year ended 30 June 2014.
The objectives are agreed with the Board at the beginning of each financial year and are designed to be stretching to deliver
sustainable value for shareholders. The key measures summarised below are used to determine the STI awarded to the Group CEO. A
similar process applies for members of the Executive team.
TABLE 4 - BALANCED SCORECARD OBJECTIVES AND PERFORMANCE REQUIREMENTS
CATEGORY
Financial
WEIGHTING
20%
OBJECTIVE
ROE
OUTCOME
Exceeded target: The Group targets cash ROE of at least 1.5 times WACC
through the cycle. This return is based on net profit after tax attributable to IAG
shareholders, adjusted for amortisation and impairment of acquired identifiable
intangible assets and unusual items. Based on the Group’s historic cost of
capital and current business mix, this target equates to a cash ROE of
approximately 15%. In the year ended 30 June 2014, the Group reported a cash
ROE of 23.0%, compared to 25.3% in the prior year.
Profitable growth
20%
Capital & risk
management
10%
Non-financial Customer & partner
10%
satisfaction
Strategy
development &
execution
10%
Building the future
platform
10%
Culture & employee
development
20%
36 IAG ANNUAL REPORT 2014
Did not meet target: To grow profitably and create value for shareholders, IAG
needs to expand its products, markets and customer base. During the year
ended 30 June 2014, GWP increased by 3% to $9.8 billion (in 2013, GWP
increased by 11.8%).
Exceeded target: Managing the balance sheet to optimise the capital structure
within the context of the Group’s risk appetite is a key business objective and
vital to the stability of the Group. The Group has maintained a strong capital
position with the APRA PCA multiple at 30 June 2014 of 1.72 (compared to a
Group benchmark of 1.4 to 1.6), and a Common Equity Tier 1 multiple of 1.14
(compared to a Group benchmark of 0.9 to 1.1 times the PCA).
Met target: Customer and partner satisfaction is tracked across IAG's businesses
by measuring advocacy and/or satisfaction. IAG undertakes a range of activities
to improve those ratings based on feedback. In the year ended 30 June 2014,
customer advocacy scores improved in Australia Direct and CGU, while they were
stable in New Zealand. IAG is currently introducing customer metrics in Asia.
Exceeded target: In the year ended 30 June 2014, IAG remained committed to
its strategic priorities, focused on accelerating profitable growth in Australia;
sustaining our leading position in New Zealand, and realising the potential of our
Asian platform. IAG successfully completed the acquisition of the Australian and
New Zealand insurance underwriting business of Wesfarmers Ltd, including the
Lumley and WFI brands. Our strong market position has been further enhanced
in both Australia and New Zealand. Following the restructure of the Group’s
Australian operations, the strategic priorities have been further refined to ensure
that IAG's plans will deliver superior value for shareholders, customers and
partners.
Met target: IAG focused on a number of strategic initiatives that will help deliver
a platform for future growth. IAG developed a refreshed information technology
strategy and better leveraged its scale to improve the effectiveness of its
procurement. Investment in IAG’s information and analytical capability has been
made. IAG continues to focus on increasing the resilience and sustainability of
our communities by actively contributing to and advocating greater emphasis on
disaster resilience in our communities.
Exceeded target: IAG is committed to building a culture where employees live the
values of performance, integrity, respect and a considered sense of urgency.
The Group culture results were positive and continue to outperform those of the
financial services sector. IAG has taken further steps to build an inclusive
workplace where different perspectives are valued and biases are challenged.
IAG has developed a refreshed talent strategy and framework to better engage
talent across the Group. IAG values gender diversity and currently 32% of all
senior management roles are held by women. IAG is tracking towards a target of
33% of all senior roles held by women by 2015.
iii. STI outcomes for the year ended 30 June 2014
Cash and deferred STI payments made to the Group CEO and the Executive team for the year ended 30 June 2014 are set out below,
and were based on achievement against the balanced scorecard measures described in table 4.
Each individual Executive’s STI outcome is linked to the financial performance of the Group as well as to the execution of his or her
division’s strategic goals during the year. In line with the overall performance, the STI awarded to the Group CEO and the Executive
team are on average, similar to those for last year.
TABLE 5 - ACTUAL STI OUTCOMES FOR THE YEAR ENDED 30 JUNE 2014
MAXIMUM STI
OPPORTUNITY
(% of fixed pay)*
150 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
CASH STI
OUTCOME
DEFERRED STI
OUTCOME
ACTUAL STI OUTCOME
(% of maximum)*
86 %
64 %
79 %
75 %
88 %
91 %
68 %
79 %
(% of fixed pay)
129 %
76 %
94 %
90 %
106 %
110 %
81 %
95 %
(2/3 OF OUTCOME)
(% of fixed pay)
86 %
51 %
63 %
60 %
71 %
73 %
54 %
63 %
(1/3 OF OUTCOME)
(% of fixed pay)
43 %
25 %
31 %
30 %
35 %
37 %
27 %
32 %
Michael Wilkins
Duncan Brain
Justin Breheny
Andy Cornish
Peter Harmer
Nicholas Hawkins
Jacki Johnson
Leona Murphy
*
The proportion of STI forfeited is derived by subtracting the actual % of maximum received from the maximum STI opportunity and was 21% on average for the year
ended 30 June 2014 (compared to 19% in 2013).
Changes in each Executive’s holding of DAR during the financial year are set out below. The DAR granted during the year reflect the
deferred portion of the STI outcome for the year ended 30 June 2013. Refer to the share based remuneration note of the Financial
Statements for further DAR Plan details.
TABLE 6 - MOVEMENT IN POTENTIAL VALUE OF DAR FOR THE YEAR ENDED 30 JUNE 2014
DAR
ON ISSUE
1 JULY
DAR
GRANTED
DURING
THE YEAR(a)
DAR
EXERCISED
DURING
THE YEAR(b)
DAR
LAPSED
DURING
THE YEAR
DAR
ON ISSUE
30 JUNE
DAR
VESTED
DURING
THE YEAR
DAR
VESTED
AND EX-
ERCISABLE
30 JUNE
2014
EXECUTIVES
Michael Wilkins
Duncan Brain(c)
Justin Breheny
Andy Cornish
Peter Harmer
Nicholas Hawkins
Jacki Johnson
Leona Murphy
Number
$000
Number
$000
Number
$000
Number
$000
Number
$000
Number
$000
Number
$000
Number
$000
328,740
20,200
237,450
145,950
92,650
125,930
107,580
111,840
154,300
877
24,400
139
53,100
302
58,100
330
60,600
344
60,900
346
49,800
283
52,900
301
(216,190)
1,240
-
-
(195,250)
1,120
(102,800)
590
(56,450)
324
(85,080)
488
(10,080)
58
(75,040)
431
266,850
216,190
44,600
-
95,300
85,370
101,250
102,800
96,800
56,450
101,750
85,080
-
-
-
-
-
-
147,300
71,230
61,150
89,700
75,040
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(a) DAR that were granted on 1 November 2013, have a first exercisable date of 1 September 2014 and an expiry date of 1 November 2020. The value of DAR granted
during the year is the fair value of the DAR at grant date calculated using the Black Scholes valuation model, which was $5.68. The value of DAR granted is included in
the table above. This amount is allocated to remuneration over the vesting period (i.e. in years ending 30 June 2014 to 30 June 2016).
(b) DAR that vested on 1 September 2013 or before and were exercised in the financial year. The value of DAR exercised is based on the weighted average share price
which was $5.74 for the year ended 30 June 2014.
(c) Opening number of DAR on issue represents the balance as at the date of appointment of 1 October 2013.
37
iv. Long term incentive
Key details of the LTI plan are shown below:
TABLE 7 - LTI PLAN
Description
LTI grants are determined annually by the Board and are aligned to the Group’s strategic financial
targets. The grants are provided in the form of EPR and are based on an assessment of market
benchmarks and performance.
Potential maximum LTI
The maximum value of EPR granted to the Group CEO and Executive team under the LTI plan is 150%
and 125% of their annual fixed remuneration, respectively.
The number of EPR granted is based on the face value of IAG ordinary share price at 30 June before the
grant date.
The EPR granted during the year will not vest and have no value unless the performance hurdles are
achieved. No dividend is paid or payable for any unvested or vested and unexercised EPR.
Performance hurdles
The LTI has two performance hurdles of ROE and TSR with 50% of each allocation subject to the ROE
hurdle and 50% subject to the TSR hurdle:
ROE is measured relative to IAG’s WACC. The ROE hurdle is cash ROE to align with the reporting of
IAG’s financial performance to the external market and is used to determine the dividend. Cash
ROE is reported ROE adjusted for amortisation and impairment of acquired identifiable intangible
assets and adjusted for unusual items; and
TSR is measured against that of the top 50 industrials within the S&P/ASX 100 Index. An
averaging calculation is used for TSR over a 90-day period for start and test day values to reduce
the impact of share price volatility.
Rationale for choosing
performance hurdles
The hurdles require superior financial performance over a three to four-year period and are directly
linked to IAG’s strategy.
ROE provides evidence of company growth in profitability and is linked to shareholder return. IAG uses
ROE as a key internal measure of the efficiency of its financial performance. IAG has a strategic target
of achieving an ROE that is one and a half times greater than its weighted average cost of capital.
TSR provides a direct link between Executive reward and shareholder return by measuring the value
created for shareholders through the appreciation of the share price and the value of dividends. The
value created is compared to companies within IAG’s peer group. IAG has a strategic target of providing
total shareholder returns in the top quartile of its peer group.
ROE
The ROE portion of LTI is tested from 1 July of the grant year to 30 June three years later. The vesting
schedule is shown below:
minimum vesting at 1.2 x WACC (20% of ROE portion); and
maximum vesting at 1.6 x WACC (100% of ROE portion)
with straight line vesting in between.
no vesting below 1.2 x WACC;
TSR
The TSR portion of LTI is tested four years after the base date (being 30 September 2017 for the
September 2013 grant).
There will be no re-testing for the TSR portion of awards granted after 1 July 2013, which are subject to
a four year performance period. For EPR granted prior to 1 July 2013, the TSR portion of LTI is tested
three years after the base date (being 30 September 2013 for the September 2010 grant) and then
again at four years and five years.
The vesting schedule is shown below:
no vesting below 50th percentile of IAG’s performance measured against the top 50 industrials
within the S&P/ASX 100 Index;
minimum vesting at 50th percentile (50% of TSR portion); and
maximum vesting at or above 75th percentile (100% of TSR portion)
with straight line vesting in between.
Rights granted after 1 July 2013 may be settled with IAG ordinary shares or with cash if performance
hurdles are achieved, as determined by the Board. Rights granted prior to 1 July 2013 are settled with
IAG ordinary shares. These are exercisable for shares if performance hurdles are achieved.
Under the terms of the LTI, if an Executive ceases employment with IAG voluntarily before the
performance hurdles are tested, the unvested EPR will generally lapse. In cases where the Executive
acts fraudulently or dishonestly or is, in the Board’s opinion, in breach of his or her obligations to the
Company, the unvested EPR will lapse.
Testing of performance
hurdles
Instrument
Forfeiture conditions
38 IAG ANNUAL REPORT 2014
v. Linking IAG's long term performance and long term reward
IAG’s LTI performance measures are challenging over the long
term and require strong performance over both an internal capital
efficiency measure (ROE) and an external market measure
(relative TSR). Executives are only rewarded under the LTI plan
when the Group exceeds its challenging long term performance
targets and delivers superior financial performance over at least a
three-year period.
The LTI vested in the year ended 30 June 2014 was based
against IAG’s performance on the ROE hurdle at 30 June 2013,
and relative TSR measured at 30 September 2013. The following
two graphs illustrate how IAG’s long term performance affected
the LTI that vested in the year ended 30 June 2014.
IAG measures the ROE component of the LTI over three years
using cash ROE, which is the basis on which dividends are
calculated for shareholders. The average cash ROE for the three
years to 30 June 2013 was 1.83 times IAG’s WACC. This was a
strong result compared to historical returns and resulted in full
vesting of the ROE portion of the 2010/2011 series 4 EPR. This
is the first time the ROE portion of the LTI has vested and this
strong cash ROE performance has similarly been reflected in the
growing dividend provided to shareholders. The adjacent graph
shows IAG’s cash ROE against WACC for each of the last five
financial years with reference to the LTI vesting range, to put the
recent performance in a longer term context. The graph also
shows the three year average cash ROE over the performance
period, as measured by the LTI plan.
IAG’s LTI plan measured TSR over a three, four and five year period to 30 September 2013. IAG’s TSR has been strong over the past
five years, delivering value to shareholders and resulting in full vesting of the LTI plan for Executives. Over these periods, IAG
generated returns to shareholders in the top quartile of the market. As past allocations of the LTI plan included the potential for
retesting, each may have a proportion of the plan vesting over a number of years. In the year ended 30 June 2014, the TSR portion of
the LTI vested an additional 2% for the 2008/2009 series 2, 44% for 2009/2010 series 3 and vested in full (100%) for 2010/2011
series 4 EPR. The following graph highlights IAG’s historic share price and the vesting of the TSR component of all prior allocations of
EPR.
39
The following table shows the returns IAG delivered to its shareholders for the last five financial years for a range of measures
including TSR and ROE performance used to calculate LTI outcomes.
TABLE 8 - HISTORICAL ANALYSIS OF SHAREHOLDER RETURN ON LTI
Closing share price ($)
Dividend paid per ordinary share (cents)
Basic earnings per share (cents)
Cash ROE (%)
ROE to WACC outcome for EPR Plan
TSR (%)*
YEAR ENDED
30 JUNE 2010
3.41
13.00
4.39
8.3
0.83
(0.5)
YEAR ENDED
30 JUNE 2011
3.40
16.00
12.08
11.1
0.82
3.0
YEAR ENDED
30 JUNE 2012
3.48
17.00
10.01
13.3
1.12
5.3
YEAR ENDED
30 JUNE 2013
5.44
36.00
37.57
25.3
1.83
59.2
YEAR ENDED
30 JUNE 2014
5.84
39.00
56.09
23.0
2.34
15.6
*
This represents the TSR performance measured for the 12 months from 1 July to 30 June. This is only one indication of IAG’s performance for the relevant financial
year.
vi. LTI awarded and outstanding during the year ended 30 June 2014
Details of outstanding LTI awards made to Executives in the year ended 30 June 2014 are shown in table 9 below:
TABLE 9 - LTI AWARDS OUTSTANDING DURING THE YEAR ENDED 30 JUNE 2014
AWARD
GRANT DATE
BASE DATE
LAST TEST
DATE
PERFORMANCE
HURDLE
ACHIEVEMENT
2013/2014 Series 6 - TSR
2013/2014 Series 6 - ROE
2012/2013 Series 5 - TSR(a)
2012/2013 Series 5 - ROE(a)
2011/2012 Series 5 - TSR(a)
2011/2012 Series 5 - ROE(a)(b)
2010/2011 Series 4 - TSR
2010/2011 Series 4 - ROE
2009/2010 Series 3 - TSR
2008/2009 Series 2 - TSR
01/11/2013
01/11/2013
26/10/2012
26/10/2012
21/10/2011
21/10/2011
06/10/2010
03/03/2011
06/10/2010
03/03/2011
25/09/2009
24/11/2009
18/09/2008
27/02/2009
FIRST TEST
DATE
30/09/2017
30/06/2016
30/09/2015
30/06/2015
30/09/2014
30/06/2014
30/09/2013
30/09/2013
30/06/2013
30/09/2012
30/06/2012
30/09/2011
30/06/2011
30/09/2010
30/09/2017
30/09/2016
30/09/2015
30/06/2010
30/06/2013
30/09/2009
30/09/2012
30/09/2014
30/09/2008
30/09/2011
30/09/2013
N/A
N/A
N/A
N/A
N/A
N/A
100%
100%
100%
100%
LAST EXERCISE
DATE
01/11/2020
01/11/2020
26/10/2019
26/10/2019
21/10/2018
21/10/2018
06/10/2017
03/03/2018
06/10/2017
03/03/2018
25/09/2016
24/11/2016
18/09/2018
27/02/2019
(a)
(b)
Terms and conditions for EPR Plan 2011/2012 to 2012/2013 are the same, therefore they are both referred to as series 5.
The cash ROE portion of EPR Plan 2011/2012 has been tested and is expected to vest in full. Vesting details will be included in the Remuneration Report for the year
ending 30 June 2015.
vii. LTI awards vested during the year ended 30 June 2014
Details of LTI vested during the year are set out below.
For EPR Plan 2010/2011 – series 4, the performance results were:
TSR met the performance hurdle on 30 September 2013 and 100% of those rights vested upon the first test; and
the ROE performance hurdle was tested on 30 June 2013 and 100% of those rights vested.
For EPR Plan 2009/2010 – series 3, the performance results were:
TSR met the performance hurdle on 30 September 2013 and an additional 44% of those rights vested upon the first retest; and
the ROE performance hurdle was not met on 30 June 2012 and these rights have been forfeited and will lapse on 30 September
2014.
For EPR Plan 2008/2009 – series 2, the performance results were:
TSR met a higher performance hurdle on 30 September 2013 and an additional 2% of those rights vested upon the second
retest; and
the ROE performance hurdle was not met on 30 June 2011 and these rights have been forfeited and lapsed on 30 September
2013.
40 IAG ANNUAL REPORT 2014
viii. Previously lapsed LTI awards
EPR Plan 2007/2008, 2008/2009 and 2009/2010 – series 1, 2 and 3 – ROE information has been excluded from table 9 because
their test dates have passed, performance hurdles were not met and 0% of rights vested. For EPR Plan 2007/2008 - series 1, all
rights with an ROE performance hurdle and 18% of rights with a TSR performance hurdle lapsed on 30 September 2012.
Changes in each Executive’s holding of EPR during the financial year are set out below. The EPR granted during the year ended 30
June 2014 were in relation to the LTI plan. Refer to the share based remuneration note of the Financial Statements for further EPR
Plan details.
TABLE 10 - MOVEMENT IN POTENTIAL VALUE OF EPR FOR THE YEAR ENDED 30 JUNE 2014
EPR
ON ISSUE
1 JULY
EPR
GRANTED
DURING
THE YEAR(a)
EPR
EXERCISED
DURING
THE YEAR(b)
EPR
LAPSED
DURING
THE YEAR(c)
EPR
ON ISSUE
30 JUNE
EPR
VESTED
DURING
THE YEAR
EPR
VESTED
AND EX-
ERCISABLE
30 JUNE
EPR
FORFEITED
AND WILL
LAPSE IN
FUTURE
YEARS(d)
2014
EXECUTIVES
Michael Wilkins
Number 3,568,632
Duncan Brain(e)
$000
Number
$000
214,010
Justin Breheny
Number 1,592,285
$000
Andy Cornish
Number 1,434,324
Peter Harmer
$000
Number
$000
983,300
Nicholas Hawkins
Number 1,409,431
$000
Jacki Johnson
Number 1,475,620
$000
Leona Murphy
Number 1,245,871
$000
575,800 (1,030,432)
5,912
(47,060)
270
(647,685)
3,716
(419,374)
2,406
(285,600)
1,639
(399,681)
2,293
(326,487)
1,873
(359,871)
2,065
2,390
209,100
868
211,400
878
239,000
992
229,800
954
229,800
954
212,500
882
206,900
859
(375,000) 2,739,000 1,030,432
2,206
-
-
376,050
-
(148,750) 1,007,250
379,233
875
(125,000) 1,128,950
419,374
735
-
-
927,500
285,600
(153,250) 1,086,300
399,681
902
-
-
-
-
-
-
(148,750) 1,212,883
379,233
223,433
875
(126,250)
743
966,650
359,871
-
395,300
2,268
30,750
176
146,950
843
155,850
894
-
-
151,400
869
146,950
843
124,650
715
(a) All EPR were granted on 1 November 2013 and have an expiry date of 1 November 2020. EPR granted during the year and subject to the TSR performance hurdle have
a grant date value of $3.04, calculated using the Monte Carlo simulation. All rights granted during the year and subject to the TSR performance hurdle are first
exercisable on 30 September 2017. EPR granted during the year and subject to the ROE performance hurdle have a grant date value of $5.27, calculated using the
Black Scholes valuation model. All rights granted during the year and subject to the ROE performance hurdle are first exercisable on 30 June 2016. The total value of
EPR granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in years ended 30 June 2014 to 30 June 2018).
(b) EPR that vested on 30 September 2013 or before and were exercised in the financial year. The value of EPR exercised is based on the weighted average share price
which was $5.74 for the year ended 30 June 2014.
(c) The value of EPR lapsed during the year ended 30 June 2014 is based on the five day weighted average share price which was $5.88 to 30 September 2013.
(d) During the year ended 30 June 2014, the value of EPR forfeited is based on the weighted average share price which was $5.74 for the year ended 30 June 2014.
(e) Opening number of EPR on issue represents the balance as at the date of appointment of 1 October 2013.
41
E. EXECUTIVE REMUNERATION IN DETAIL
I. Total remuneration for Executives
Statutory remuneration details for the Group CEO and the Executive team required by the Accounting Standards are set out below:
TABLE 11 - STATUTORY REMUNERATION DETAILS (EXECUTIVES)
OTHER
LONG
TERM
EMPLOY-
MENT
BENEFITS
SHORT TERM EMPLOYMENT
BENEFITS
POST
EMPLOY-
MENT
BENEFITS
SUB-TOTAL SHARE BASED PAYMENT
TOTAL
PROPORTION OF TOTAL
REMUNERATION
Base
salary
$000
(1)
Short
term
incentive
$000
(2)
Leave
accruals
and other
benefits
$000
(3)
Superan-
nuation
$000
(4)
Long
service
leave
accruals
$000
(5)
Value of
deferred
short term
incentive
$000
(7)
Value of
rights
granted
$000
(8)
$000
(6)
AT-RISK
%
(10)
$000
(9)
SHARE
BASED
PAYMENTS
%
(11)
19
96
347
282
660
25
25
44
32
18
16
25
25
20
21
(71)
60
487
632
209
197
579
577
173
273
1,796
1,679
2,059
2,023
EXECUTIVES
Michael Wilkins
2014
2013
Duncan Brain, KMP since 1 October 2013
2014
Justin Breheny
2014
890
2013
873
Andy Cornish(12)
854
2014
2013
991
Peter Harmer
970
2014
2013
947
Nicholas Hawkins
970
2014
2013
951
Jacki Johnson(13)
1,048
2014
907
2013
Leona Murphy
2014
2013
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Alex Harrison(14)
212
2014
(35)
(8)
870
854
704
659
565
542
731
662
569
575
(34)
15
6
41
25
25
25
25
23
12
31
29
18
14
25
25
17
12
(5)
(7)
125
9
7
(3)
-
-
2
6
4,126
3,947
1,404
1,687
1,769
1,312
1,720
1,673
1,630
1,715
1,665
1,650
1,519
1,477
1,461
844
613
148
309
241
334
289
287
163
320
240
271
201
283
212
2,504
2,470
7,474
7,030
326
1,878
903
875
2,899
2,885
1,018
1,007
2,664
3,016
986
726
976
934
889
862
880
834
2,946
2,519
3,011
2,839
2,810
2,582
2,640
2,507
342
-
-
342
69
68
44
62
59
69
64
67
61
67
65
61
62
66
65
37
45
44
25
42
39
51
43
43
35
43
41
41
41
44
42
-
TABLE NOTE
(1) Base salary includes amounts paid in cash plus the portion of the Company’s superannuation contribution that is paid as cash
instead of being paid into superannuation plus salary sacrifice items such as cars and parking, as determined in accordance with
AASB 119 Employee Benefits.
(2) STI represents the amount to be settled in cash in relation to the financial year from 1 July to 30 June.
(3) This column includes leave accruals, 30% tax rebate on car allowances for certain KMP who have salary sacrifice arrangements on
cars and other short term employment benefits as agreed and provided under specific conditions. Other benefits provided under
specific conditions for various KMP are provided below:
2014:
Duncan Brain: $163,758 for accommodation allowances, airfares for home visits and other benefits;
Justin Breheny: $133,846 for other benefits, accommodation, health insurance, tax compliance, air fares for home visits and
the value of interest payable on a loan (for further details, see the Section I Related party interests in this report); and
Jacki Johnson: $18,325 (NZ$20,252) for accommodation allowances and other benefits.
Justin Breheny: $266,337 for other benefits, accommodation, health insurance, tax compliance and airfares for home visits;
Andy Cornish: a one-off payment of $55,024 as compensation for changes to living away from home allowance (LAFHA)
legislation; and
Jacki Johnson: $45,794 (NZ$57,203) for accommodation allowances and other benefits.
(4) Superannuation represents the employer’s contributions. Refer to the superannuation note of the Financial Statements for
superannuation plan details.
42 IAG ANNUAL REPORT 2014
2013:
(5) Long service leave accruals as determined in accordance with AASB 119.
(6) The sum of columns (1) to (6). The sub-total includes the value of termination payments, which is not shown as no termination
payments were made to Executives during the year ended 30 June 2014.
(7) The deferred STI is granted as DAR and is valued using the Black Scholes valuation model. An allocated portion of unvested DAR for
financial years prior to 30 June 2013 is included in the total remuneration disclosure above. The deferred STI for the year ended 30
June 2014 will be granted in the next financial year, so no value was included in the current financial year’s total remuneration.
(8) This value represents the allocated portion of unvested EPR. To determine the EPR values the Monte Carlo simulation (for TSR
performance hurdle) and Black Scholes valuation (for ROE performance hurdle) models have been applied. The valuation takes into
account the exercise price of the EPR, life of the EPR, price of IAG ordinary shares as at 30 June, expected volatility of the IAG share
price, expected dividends, risk free interest rate, performance of shares in the peer group of companies, early exercise and non-
transferability and turnover which is assumed to be zero for an individual's remuneration calculation.
(9) The sum of columns (1) to (8).
(10) At-risk remuneration received during the financial year as a percentage of total reward.
(11) Share based remuneration granted during the financial year as a percentage of total reward.
(12) Remuneration received by Andy Cornish was lower in the year ended 30 June 2014 than the previous financial year as he took a
three month period of unpaid leave.
(13) Remuneration for Jacki Johnson is determined in New Zealand dollars and reported in Australian dollars. Foreign exchange
movements affect the value of remuneration disclosed. The exchange rate used to report Jacki Johnson’s remuneration in the year
ended 30 June 2014 was NZD 1=AUD 0.90485 (2013-NZD 1=AUD 0.80055).
(14) Remuneration reported for Alex Harrison relates only to the three-month period during which he was Acting Chief Executive Officer
(CEO), Australia Direct. Share based remuneration provided to Alex Harrison in the current financial year did not relate to his role as
the Acting CEO, Australia Direct and has not been disclosed.
F. EXECUTIVE EMPLOYMENT AGREEMENTS
All employment agreements for the Group CEO and the Executive team are for unlimited terms but may be terminated by written notice
from either party or by IAG making a payment in lieu of notice. The employment agreements outline the components of remuneration
paid to each Executive and require annual review of Executives’ remuneration, although the agreements do not require IAG to increase
base salary, pay STI or offer an LTI in any given year.
TABLE 12 - EXECUTIVE EMPLOYMENT AGREEMENTS
NAME
Michael Wilkins
NOTICE PERIOD FROM
THE COMPANY
12 months
NOTICE PERIOD FROM
THE EMPLOYEE
6 months
Duncan Brain
Justin Breheny
Andy Cornish
Peter Harmer
Nicholas Hawkins
Jacki Johnson
Leona Murphy
12 months
12 months
12 months
12 months
12 months
12 months
12 months
6 months
6 months
3 months
6 months
3 months
3 months
3 months
TERMINATION PROVISIONS
12 months fixed remuneration and STI that
would have accrued for 12 months had
termination not occurred. An additional six
months fixed remuneration is payable if IAG
invokes a restraint clause.
12 months base salary
12 months base salary
12 months fixed remuneration
12 months base salary
12 months base salary
12 months fixed remuneration
12 months base salary
Subject to the relevant legislation in the various jurisdictions, termination provisions may include the payment of annual leave and/or
long service leave for the Executives.
Executives are employed by Insurance Australia Group Services Pty Limited, except for:
Jacki Johnson who is employed by IAG New Zealand Limited.
I. Retrenchment
In the event of retrenchment, the Executives listed above (except for Jacki Johnson) are entitled to the greater of:
the written notice or payment in lieu of notice as provided in their employment agreement; or
the retrenchment benefits due under the relevant Company retrenchment policy.
For Executives based in Australia, the minimum benefit under the retrenchment policy is 11 weeks of base salary and the maximum
benefit that can be received is 87 weeks of base salary. The maximum benefit is payable to employees with service of 25 years or
more.
For Jacki Johnson, the retrenchment payment is in accordance with the termination provisions specified in the table above.
43
II. Termination of employment without notice and without payment in lieu of notice
The employment of an Executive may be terminated without notice and without payment in lieu of notice in some circumstances.
Generally, this could occur where the Executive:
is charged with a criminal offence that is capable of bringing the organisation into disrepute;
is declared bankrupt;
breaches a provision of their employment agreement;
is guilty of serious and wilful misconduct; or
unreasonably fails to comply with any material and lawful direction given by the relevant company.
III. Termination of employment with notice or payment in lieu of notice
The employment of an Executive may be terminated at any time by the relevant company with notice or payment in lieu of notice. The
amount of notice the relevant company must provide or the payment in lieu of notice is specified above.
G. NON-EXECUTIVE DIRECTOR REMUNERATION
I. Remuneration policy
The principles that underpin IAG’s approach to remuneration for Non-Executive Directors are that remuneration should:
be sufficiently competitive to attract and retain a high calibre of Non-Executive Director; and
create alignment between the interests of Non-Executive Directors and shareholders through the mandatory shareholding
requirement.
II. Remuneration structure
Non-Executive Director remuneration has three components:
Board fees (paid as cash);
superannuation; and
subsidiary Board and Committee fees.
a. CHANGES TO NON-EXECUTIVE REMUNERATION DURING THE YEAR ENDED 30 JUNE 2014
On 15 August 2013, the Board approved a 2% increase in the Board and Committee fees effective from 1 July 2013.
In response to APRA’s requirement for listed organisations to operate independent Audit and Risk Committees, IAG established these
independent committees in February 2014. The previous Audit, Risk Management and Compliance Committee was discontinued at
this time.
In August 2013, the Board adopted a total fee approach to Non-Executive Director remuneration. A total fee approach is the most
common market practice, with fees being presented inclusive of superannuation contributions. To reflect this approach, the figures
shown below are inclusive of superannuation, and fees for the year ended 30 June 2013 have been restated accordingly. Directors
can elect the portion of fees contributed into their nominated superannuation fund, provided minimum legislated contribution levels
are met.
The aggregate limit of Board fees to $3,500,000 per annum was approved by shareholders at the annual general meeting in October
2013.
TABLE 13 - BOARD AND COMMITTEE FEES
BOARD/COMMITTEE
Board
Audit Committee
Risk Committee
People and Remuneration Committee
Audit, Risk Management and Compliance Committee*
ROLE
Chairman
Non-Executive Director
Chairman
Member
Chairman
Member
Chairman
Member
Chairman
Member
2014
$549,300
$183,100
$39,700
$19,850
$39,700
$19,850
$39,700
$19,850
n/a
n/a
ANNUAL FEE
2013
$538,569
$179,523
n/a
n/a
n/a
n/a
$38,913
$19,457
$60,059
$30,030
* The Audit, Risk Management & Compliance Committee was replaced by the Audit Committee and Risk Committee during February 2014.
b. SUBSIDIARY BOARD AND COMMITTEE FEES
A summary of Non-Executive Directors’ service on subsidiary Boards and the fees paid are set out below:
TABLE 14 - FEES FOR NON-EXECUTIVE DIRECTORS' SERVICE ON SUBSIDIARY BOARDS
DIRECTOR
Brian Schwartz
Hugh Fletcher*
SUBSIDIARY
Insurance Manufacturers of Australia Pty Limited
IAG New Zealand Limited
CAPACITY
Chairman
Chairman
ANNUAL FEE
$239,804
$135,728
*
This amount was paid to Hugh Fletcher in New Zealand dollars and has been converted to Australian dollars using the average exchange rate for the year.
44 IAG ANNUAL REPORT 2014
III. Board Performance
A formal external review of the performance, composition and size of the Board is conducted every three years. A formal review of the
Board and each Non-Executive Director (including the Chairman) was conducted during the year by an independent board performance
expert. The review process involved one-on-one interviews and questionnaires completed by each Non-Executive Director and the
Group Executives; the collation of results; and discussion with individual Non-Executive Directors and the Board as a whole led by the
Chairman. The resultant evaluation reports were reviewed and discussed by the Board, for action as necessary. In the years this
review is not conducted, performance is evaluated by the Chairman via discussion between the Chairman and the individual Director.
In reviewing Directors’ performance the Chairman and Board consider:
the Director's contribution to Board teamwork;
the Director's contribution to debates on significant issues and proposals;
advice and assistance given to management;
in the case of the Chairman’s performance, the fulfilment of the additional role as Chairman; and
input regarding regulatory, industry and social developments surrounding the business.
The PARC is responsible for coordinating the Board’s review of the Chairman’s performance.
IV. Total remuneration details
Details of total remuneration for Non-Executive Directors on the Board for the year ended 30 June 2014 are set out below:
TABLE 15 - STATUTORY REMUNERATION DETAILS (NON-EXECUTIVE DIRECTORS)
SHORT TERM
EMPLOYMENT BENEFITS
POST-EMPLOYMENT BENEFITS
IAG Board
fees
received as
cash
$000
Other
Boards and
Committee
fees Superannuation
$000
$000
Retirement
benefits
$000
OTHER LONG
TERM
EMPLOYMENT
BENEFITS
TERMINATION
BENEFITS
SHARE
BASED
PAYMENT
TOTAL
$000
$000
$000
$000
18
24
68
63
168
165
172
169
552
540
220
220
Brian Schwartz
2014
2013
Yasmin Allen
2014
2013
Peter Bush
2014
2013
Alison Deans
2014
2013
Hugh Fletcher
2014
2013
Raymond Lim
2014
2013
Dr Nora Scheinkestel, appointed Director on 1 July 2013
2014
Philip Twyman
2014
2013
168
69
168
69
167
112
168
165
170
168
18
7
31
11
56
55
169
21
18
19
18
16
17
17
18
7
18
17
17
7
16
18
16
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
790
779
258
248
203
206
217
87
353
294
203
83
206
244
239
H. OTHER BENEFITS
Remuneration does not include premiums paid by IAG for an insurance contract covering current and former Non-Executive Directors’
and Executives’ liabilities and legal expenses incurred in respect of the relevant office, as the insurance policies do not specify
premiums paid to individual Non-Executive Directors and Executives and the terms of contract specifically prohibit the disclosure of the
premium paid. Insurance products provided by the Group are available to all Non-Executive Directors and Executives on the same
terms and conditions available to other employees.
45
I. RELATED PARTY INTERESTS
In accordance with the Corporations Act Regulation 2M.3.03, the Remuneration Report is required to include disclosure of related
parties.
I. Movements in total number of ordinary shares held
The relevant interests of each key management personnel and their related parties in ordinary shares of IAG are disclosed in the table
below:
TABLE 16 - MOVEMENTS IN TOTAL NUMBER OF ORDINARY SHARES HELD
SHARES HELD
AT 1 JULY
Number
SHARES
RECEIVED ON
EXERCISE OF
EPR
Number
SHARES
RECEIVED ON
EXERCISE OF
DAR
Number
NET
MOVEMENT OF
SHARES DUE
TO OTHER
CHANGES(a)
Number
TOTAL
SHARES HELD
AT 30 JUNE(b)
Number
SHARES HELD
NOMINALLY AT
30 JUNE(c)
Number
-
-
-
-
-
-
-
-
216,190
-
195,250
102,800
56,450
85,080
10,080
75,040
-
-
-
-
-
-
-
-
1,030,432
47,060
647,685
419,374
285,600
399,681
326,487
359,871
101,675
39,011
-
15,000
74,208
-
-
57,780
1,549,194
87,627
204,450
391,234
20,250
396,644
379,193
371,087
2014
Brian Schwartz
Yasmin Allen
Peter Bush
Alison Deans
Hugh Fletcher
Raymond Lim
Dr Nora Scheinkestel
Philip Twyman
Michael Wilkins
Duncan Brain(d)
Justin Breheny
Andy Cornish
Peter Harmer
Nicholas Hawkins
Jacki Johnson
Leona Murphy
2013
-
Brian Schwartz
-
Yasmin Allen
-
Peter Bush
-
Alison Deans
-
Hugh Fletcher
-
Raymond Lim
-
Phillip Twyman
146,500
Michael Wilkins
72,300
Justin Breheny
72,750
Andy Cornish
20,250
Peter Harmer
60,080
Nicholas Hawkins
51,680
Jacki Johnson
Leona Murphy
51,830
DIRECTORS AND EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
99,434
39,011
-
-
73,002
-
57,780
1,038,826
132,150
191,208
-
395,371
229,338
110,597
-
-
-
-
-
-
-
363,868
-
127,276
-
142,464
98,175
196,679
Phillip Colebatch
Ian Foy
Anna Hynes
46,692
110,058
40,242
-
85,359
-
-
60,610
-
6,076
2,742
31,500
22,742
4,568
30,000
32,826
(9,758)
(747,786)
(83,000)
(807,108)
(566,377)
-
(654,258)
(75,000)
(512,596)
2,241
-
-
15,000
1,206
-
-
-
-
-
-
(201,271)
-
11,981
-
(100,000)
-
107,751
41,753
31,500
37,742
78,776
30,000
32,826
48,022
2,048,030
51,687
240,277
347,031
362,300
227,147
640,760
293,402
101,675
39,011
-
15,000
74,208
-
57,780
1,549,194
204,450
391,234
20,250
396,644
379,193
371,087
(e)
(e)
(e)
105,448
40,087
-
37,742
42,215
30,000
2,760
45,280
1,207,840
4,000
-
-
-
-
2,500
114,381
99,518
37,345
-
15,000
39,018
-
57,780
799,166
198,550
-
-
-
2,500
114,208
(e)
(e)
(e)
(a)
(b)
(c)
(d)
(e)
Net movement of shares relates to acquisition and disposal transactions by the KMP and their related parties during the year.
On 1 July after each financial year end, some DAR on issue vested and became exercisable by the KMP. Some KMP exercised those newly vested DAR post 30 June.
Nominally held shares are included in the column headed total shares held at 30 June and include those held by the KMP's related parties, inclusive of domestic
partner, dependants and entities controlled, jointly controlled or significantly influenced by the KMP.
Opening number of shares held represents the balance as at the date of appointment of 1 October 2013.
These Non-Executive Directors or Executives ceased as KMP during the prior financial year. Information on shares held is disclosed up to the date of their cessation of
service.
II. Movements in total number of convertible preference shares
Philip Twyman acquired 957 (2013-2,058) convertible preference shares during the year holding a total of 3,015 shares as at 30 June
2014. Justin Breheny held 16 (2013-16) convertible preference shares at the beginning and end of the financial year. No other key
management personnel had any interest directly or nominally in convertible preference shares at any time during the financial year
(2013-nil).
46 IAG ANNUAL REPORT 2014
III. Movements in total number of reset exchangeable securities held
No key management personnel had any interest directly or nominally in reset exchangeable securities of IAG Finance (New Zealand)
Limited at any time during the financial year (2013-nil).
IV. Other related party transactions with key management personnel
Justin Breheny was provided with an unsecured loan of $779,672 on 21 March 2014 to assist with tax obligations incurred as a result
of his move from Singapore to Australia. The balance of this loan at 30 June 2014 was $633,040, with the highest outstanding
balance during the reporting period being $779,672. The loan is an interest free loan and would have accrued an interest charge of
$13,228. A repayment of $146,632 was made during the period, with the balance to be repaid on the expiry of the loan on 29 May
2015.
RELEVANT INTEREST OF EACH DIRECTOR AND THEIR RELATED PARTIES IN LISTED SECURITIES OF THE
IAG GROUP IN ACCORDANCE WITH THE CORPORATIONS ACT 2001
A. HOLDINGS OF ORDINARY SHARES
Brian Schwartz
Yasmin Allen
Peter Bush
Alison Deans
Hugh Fletcher
Raymond Lim
Dr Nora Scheinkestel
Philip Twyman
Michael Wilkins
FOR SECTION 205G OF THE
CORPORATIONS ACT 2001
Shares held
directly (a)
2,303
1,666
31,500
-
36,561
-
30,066
2,742
840,190
Shares held
indirectly (b)
105,448
40,087
-
37,742
42,215
30,000
2,760
45,280
1,207,840
(a)
(b)
This represents the relevant interest of each Director in ordinary shares issued by the Company, as notified by the Directors to the ASX in accordance with section 205G of
the Corporations Act 2001 until the date the financial report is signed. Trading in IAG shares is covered by the restrictions which limit the ability of an IAG Director to trade
in the shares of the Group where they are in a position to be aware, or are aware, of price sensitive information.
These IAG shares are held by the Director’s related parties, inclusive of entities controlled, jointly controlled or significantly influenced by the Directors, as notified by the
Directors to the ASX in accordance with section 205G of the Corporations Act 2001.
B. HOLDING OF CONVERTIBLE PREFERENCE SHARES
Philip Twyman held 3,015 (2013-2,058) convertible preference shares as at the reporting date. No other Director and their related
parties had any interest directly or nominally in convertible preference shares at the reporting date (2013-nil).
C. HOLDING OF RESET EXCHANGEABLE SECURITIES
No Director and their related parties had any interest in reset exchangeable securities of IAG Finance (New Zealand) Limited at the
reporting date (2013-nil).
ROUNDING OF AMOUNTS
Unless otherwise stated, amounts in the financial report and Directors' Report have been rounded to the nearest million dollars. The
Company is of a kind referred to in the class order 98/100 dated 10 July 1998 issued by the Australian Securities & Investments
Commission. All rounding has been conducted in accordance with that class order.
Signed at Sydney this 19th day of August 2014 in accordance with a resolution of the Directors.
Michael Wilkins
Director
47
LEAD AUDITOR'S
INDEPENDENCE DECLARATION
UNDER SECTION 307C OF THE CORPORATIONS ACT 2001
TO THE DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITED
I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2014 there have
been:
no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
no contraventions of any applicable code of professional conduct in relation to the audit.
KPMG
Dr Andries B Terblanché
Partner
Sydney
19 August 2014
48 IAG ANNUAL REPORT 2014
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
FINANCIAL STATEMENTS
CONTENT
Statement of comprehensive income
Balance sheet
Statement of changes in equity
Cash flow statement
NOTES TO THE FINANCIAL STATEMENTS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
Summary of significant accounting policies
Critical accounting estimates and judgements
Risk management
Analysis of income
Analysis of expenses
Income tax
Segment reporting
Earnings per share
Dividends
Claims
Reinsurance and other recoveries on outstanding claims
Deferred insurance assets
Unearned premium liability
Investments
Receivables
Intangible assets
Goodwill
Trade and other payables
Restructuring provision
Interest bearing liabilities
Notes to the statement of changes in equity
Notes to the cash flow statement
Acquisitions and disposals of businesses
Details of subsidiaries
Non-controlling interests
Investment in joint venture and associates
Employee benefits
Share based remuneration
Superannuation
Commitments
Contingencies
Related party disclosures
Derivatives
Capital management
Net tangible assets
Remuneration of auditors
Parent entity disclosures
Events subsequent to reporting date
PAGE
50
52
53
54
55
64
65
75
75
76
78
80
80
82
87
88
88
89
90
91
92
93
94
94
96
96
97
99
101
101
103
103
107
110
111
111
112
113
114
115
115
116
49
STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2014
Premium revenue
Outwards reinsurance premium expense
Net premium revenue (i)
Claims expense
Reinsurance and other recoveries revenue
Net claims expense (ii)
Acquisition costs
Reinsurance commission revenue
Net acquisition costs
Other underwriting expenses
Fire services levies
Underwriting expenses (iii)
Underwriting profit/(loss) (i) + (ii) + (iii)
Investment income on assets backing insurance liabilities
Investment expenses on assets backing insurance liabilities
Insurance profit/(loss)
Investment income on shareholders' funds
Fee and other income
Share of net profit/(loss) of associates
Finance costs
Fee based, corporate and other expenses
Net income/(loss) attributable to non-controlling interests in unitholders' funds
Profit/(loss) before income tax from continuing operations
Income tax (expense)/credit
Profit/(loss) after tax from continuing operations
Profit/(loss) after tax from discontinued operation
Profit/(loss) for the year
OTHER COMPREHENSIVE INCOME AND (EXPENSE), NET OF TAX
Items that will not be reclassified to profit or loss:
Remeasurements of defined benefit plans
Income tax on items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:
Net movement in foreign currency translation reserve
Income tax on items that may be reclassified to profit or loss
Other comprehensive income and (expense), net of tax
Total comprehensive income and (expense) for the year, net of tax
PROFIT/(LOSS) FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent - continuing operations
Shareholders of the Parent - discontinued operation
Non-controlling interests
Profit/(loss) for the year
TOTAL COMPREHENSIVE INCOME AND (EXPENSE) FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent - continuing operations
Shareholders of the Parent - discontinued operation
Non-controlling interests
Total comprehensive income and (expense) for the year, net of tax
50 IAG ANNUAL REPORT 2014
NOTE
4
5
5
4
10
5
4
5
5
4
5
4
4
4
5
5
5
6
CONSOLIDATED
2013
$m
9,135
(817)
8,318
(5,800)
818
(4,982)
(1,203)
-
(1,203)
(644)
(331)
(2,178)
1,158
290
(20)
1,428
371
175
(29)
(95)
(245)
(12)
1,593
(424)
1,169
(287)
882
2014
$m
9,721
(1,077)
8,644
(7,058)
1,857
(5,201)
(1,386)
51
(1,335)
(752)
(216)
(2,303)
1,140
459
(20)
1,579
400
199
(8)
(98)
(256)
(14)
1,802
(472)
1,330
-
1,330
26
(8)
18
(31)
13
(18)
-
1,330
1,233
-
97
1,330
1,233
-
97
1,330
35
(12)
23
82
40
122
145
1,027
1,063
(287)
106
882
1,127
(206)
106
1,027
STATEMENT OF COMPREHENSIVE INCOME (CONTINUED)
EARNINGS PER SHARE - continuing and discontinued operations
Basic earnings per ordinary share
Diluted earnings per ordinary share
EARNINGS PER SHARE - continuing operations
Basic earnings per ordinary share
Diluted earnings per ordinary share
NOTE
CONSOLIDATED
2013
cents
2014
cents
8
8
8
8
56.09
53.62
56.09
53.62
37.57
36.44
51.46
49.60
The above statement of comprehensive income should be read in conjunction with the notes to the financial statements.
51
BALANCE SHEET
AS AT 30 JUNE 2014
ASSETS
Cash held for operational purposes
Investments
Premium receivable
Trade and other receivables
Assets discontinued operation
Reinsurance and other recoveries on outstanding claims
Deferred levies and charges
Deferred outwards reinsurance expense
Deferred acquisition costs
Deferred tax assets
Property and equipment
Other assets
Investment in joint venture and associates
Intangible assets
Goodwill
Total assets
LIABILITIES
Trade and other payables
Reinsurance premium payable
Restructuring provision
Current tax liabilities
Unearned premium liability
Liabilities discontinued operation
Non-controlling interests in unitholders' funds
Employee benefits provision
Outstanding claims liability
Other liabilities
Interest bearing liabilities
Total liabilities
Net assets
EQUITY
Share capital
Treasury shares held in trust
Reserves
Retained earnings
Parent interest
Non-controlling interests
Total equity
NOTE
CONSOLIDATED
2013
$m
2014
$m
22
14
15
15
11
12
12
6
26
16
17
18
19
13
27
10
20
21
447
15,377
3,316
628
9
3,231
119
706
1,028
304
249
131
572
700
2,840
29,657
1,523
556
50
203
6,256
20
190
335
11,937
41
1,752
22,863
6,794
6,775
(94)
38
(151)
6,568
226
6,794
394
13,616
2,712
526
96
2,858
151
542
795
401
257
23
577
245
1,666
24,859
1,263
451
6
253
5,145
106
210
305
10,474
38
1,620
19,871
4,988
5,353
(62)
63
(568)
4,786
202
4,988
The above balance sheet should be read in conjunction with the notes to the financial statements.
52 IAG ANNUAL REPORT 2014
STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2014
CONSOLIDATED
2014
Balance at the beginning of the financial
year
Profit/(loss) for the year
Other comprehensive income and
(expense)
Total comprehensive income/(expense)
for the year
Transactions with owners in their
capacity as owners
Shares issued under institutional
placement, net of transaction costs
Shares issued under Share Purchase
Plan, net of transaction costs
Shares acquired and held in trust
Share based payment expense
recognised
Share based remuneration vested
Non-controlling interests in acquisitions
during the year
Dividends determined and paid
Dividends received on treasury shares
held in trust
Balance at the end of the financial year
2013
Balance at the beginning of the financial
year
Profit/(loss) for the year
Other comprehensive income and
(expense)
Total comprehensive income/(expense)
for the year
Transactions with owners in their
capacity as owners
Shares acquired and held in trust
Share based payment expense
recognised
Share based remuneration vested
Dividends determined and paid
Dividends received on treasury shares
held in trust
Balance at the end of the financial year
TREASURY
SHARES
HELD IN
TRUST
$m
FOREIGN
CURRENCY
TRANSLATION
RESERVE
$m
SHARE
CAPITAL
$m
SHARE
BASED
REMUN-
ERATION
RESERVE
$m
RETAINED
EARNINGS
$m
NON-
CONTROLLING
INTERESTS
$m
TOTAL
EQUITY
$m
5,353
-
(62)
-
-
-
1,186
236
-
-
-
-
-
-
-
-
-
-
(78)
-
46
-
-
-
28
-
(18)
(18)
-
-
-
-
-
-
-
-
35
-
-
-
-
-
-
25
(32)
-
-
-
(568)
1,233
18
1,251
-
-
-
-
(14)
-
(823)
3
202
97
-
4,988
1,330
-
97
1,330
-
-
-
-
-
1,186
236
(78)
25
-
8
(81)
8
(904)
-
3
6,775
(94)
10
28
(151)
226
6,794
5,353
-
-
-
-
-
-
-
-
5,353
(55)
-
-
-
(28)
-
21
-
-
(62)
(94)
-
122
122
-
-
-
-
-
28
26
-
-
-
-
27
(18)
-
-
35
(887)
776
23
799
-
-
(3)
(478)
1
(568)
The above statement of changes in equity should be read in conjunction with the notes to the financial statements.
181
106
4,524
882
-
145
106
1,027
-
(28)
-
-
(85)
27
-
(563)
-
202
1
4,988
53
CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 JUNE 2014
NOTE
CONSOLIDATED
2013
$m
2014
$m
CASH FLOWS FROM OPERATING ACTIVITIES
Premium received
Reinsurance and other recoveries received
Claims costs paid
Outwards reinsurance premium expense paid
Dividends received
Interest and trust distributions received
Finance costs paid
Income taxes refunded
Income taxes paid
Other operating receipts
Other operating payments
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows on acquisition/capital injection to subsidiaries and associates
Net cash flows on disposal of subsidiaries
Proceeds from disposal of investments and property and equipment
Outlays for investments and property and equipment
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Outlays for purchase of treasury shares
Proceeds from issue of trust units
Outlays for redemption of trust units
Proceeds from borrowings
Repayment of borrowings
Dividends paid to IAG shareholders
Dividends paid to non-controlling interests
Proceeds from issue of shares, net of transaction costs
Dividends received on treasury shares
Net cash flows from financing activities
Net movement in cash held
Effects of exchange rate changes on balances of cash held in foreign currencies
Cash and cash equivalents at the beginning of the financial year
22
Cash and cash equivalents at the end of the financial year
22
The above cash flow statement should be read in conjunction with the notes to the financial statements.
9,661
1,778
(6,898)
(1,130)
38
533
(95)
7
(439)
736
(3,114)
1,077
(312)
-
14,543
(14,526)
(295)
(78)
163
(197)
347
(283)
(823)
(81)
1,422
3
473
1,255
39
1,716
3,010
9,543
1,493
(6,645)
(692)
33
615
(88)
3
(427)
882
(2,927)
1,790
(245)
43
14,166
(15,445)
(1,481)
(28)
169
(188)
-
(99)
(478)
(85)
-
1
(708)
(399)
49
2,066
1,716
54 IAG ANNUAL REPORT 2014
NOTES TO THE
FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Insurance Australia Group Limited (IAG, Parent or Company) is a company limited by shares, incorporated and domiciled in Australia
whose shares are publicly traded on the Australian Securities Exchange (ASX). Its registered office and principal place of business is
Level 26, 388 George Street, Sydney, NSW 2000, Australia. This financial report is for the reporting year ended 30 June 2014 and the
consolidated financial statements are for the Company and its subsidiaries (Group or Consolidated entity). The Group is a for-profit
entity.
This general purpose financial report was authorised by the Board of Directors for issue on 19 August 2014.
A. STATEMENT OF COMPLIANCE
This general purpose financial report has been prepared in accordance with the Corporations Act 2001, Australian Accounting
Standards (AASB) adopted by the Australian Accounting Standards Board, other authoritative pronouncements of the Australian
Accounting Standards Board and the ASX Listing Rules.
International Financial Reporting Standards (IFRS) refer to the overall framework of standards and pronouncements approved by the
International Accounting Standards Board (IASB). IFRS forms the basis of the AASBs. This financial report of the Consolidated entity
complies with IFRS.
The current IFRS standard for insurance contracts does not include a comprehensive set of recognition and measurement criteria. The
IASB continues to work on a project to issue a standard that does include such criteria. Until the issuance of that standard, the
financial reports of insurers in different countries that comply with IFRS may not be comparable in terms of the recognition and
measurement of insurance contracts.
B. BASIS OF PREPARATION OF THE FINANCIAL REPORT
The significant accounting policies adopted in the preparation of this financial report are set out below. The accounting policies
adopted in the preparation of this financial report have been applied consistently by all entities in the Consolidated entity and are the
same as those applied for the previous reporting year unless otherwise noted. The financial statements have been prepared on the
basis of historical cost principles, as modified by certain exceptions noted in the financial report, with the principal exceptions for the
Consolidated entity being the measurement of all investments and derivatives at fair value and the measurement of the outstanding
claims liability and related reinsurance and other recoveries at present value.
The presentation currency used for the preparation of this financial report is Australian dollars.
The balance sheet is prepared using the liquidity format in which the assets and liabilities are presented broadly in order of liquidity.
The assets and liabilities comprise both current amounts (expected to be recovered or settled within 12 months after the reporting
date) and non-current amounts (expected to be recovered or settled more than 12 months after the reporting date). For those assets
and liabilities that comprise both current and non-current amounts, information regarding the amount of the item that is expected to
be outstanding longer than 12 months is included within the relevant note to the financial statements.
I. Australian Accounting Standards issued but not yet effective
As at the date of this financial report, there are a number of new and revised accounting standards published by the Australian
Accounting Standards Board for which the mandatory application dates fall after the end of this current reporting year.
None of these standards have been early adopted and applied in the current reporting year, except for AASB 2013-3 Amendments to
AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets.
55
TITLE
AASB 9
AASB 2009-11
AASB 2010-7
AASB 2012-3
AASB 2012-6
AASB 2013-4
AASB 2013-5
AASB 2013-9
AASB 2013-9
IFRS 15
AASB 2014-1
AASB 2014-1
DESCRIPTION
Financial Instruments
Amendments to Australian Accounting Standards arising from AASB 9
Amendments to Australian Accounting Standards arising from AASB 9
Amendments to Australian Accounting Standards arising from AASB 132 -
Offsetting Financial Assets and Financial Liabilities
Amendments to Australian Accounting Standards - Mandatory Effective Date
of AASB 9 and Transition Disclosures
Amendments to Australian Accounting Standards – Novation of Derivatives
and Continuation of Hedge Accounting
Amendments to Australian Accounting Standards – Investment Entities
Amendments to Australian Accounting Standards – Conceptual Framework,
Materiality and Financial Instruments: Part B
Amendments to Australian Accounting Standards – Conceptual Framework,
Materiality and Financial Instruments: Part C
Revenue from contracts with customers
Amendments to Australian Accounting Standards: Part A - C
Amendments to Australian Accounting Standards: Part E
OPERATIVE DATE
1 January 2018
1 January 2018
1 January 2018
1 January 2014
NOTE
B
B
B
A
1 January 2015
1 January 2014
1 January 2014
1 January 2014
1 January 2018
1 January 2017
1 July 2014
1 January 2018
A
A
A
A
A
B
A
A
TABLE NOTE
A
B
These changes are not expected to have a significant, if any, financial impact.
These changes may have a financial impact. The financial impact will be determined when the standard is issued.
II. Changes in accounting policies
There were a number of new Australian Accounting Standards and Interpretations applicable for the current reporting year. These
included:
TITLE
AASB 10
AASB 11
AASB 12
AASB 13
AASB 119
AASB 127
AASB 128
AASB 2011-4
AASB 2011-7
AASB 2011-8
AASB 2011-10
AASB 2012-2
AASB 2012-5
AASB 2012-9
AASB 2012-10
AASB 2013-9
DESCRIPTION
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
Employee Benefits
Separate Financial Statements
Investments in Associates and Joint Ventures
Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure
Requirements
Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements
Standards
Amendments to Australian Accounting Standards arising from AASB 13
Amendments to Australian Accounting Standards arising from AASB 119
Amendments to Australian Accounting Standards arising from AASB 7 - Disclosures on Offsetting Financial
Assets and Financial Liabilities
Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle
Amendments to AASB 1048 arising from the Withdrawal of Australian Interpretation 1039
Amendments to Australian Accounting Standards - Transition Guidance and Other Amendments
Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial
Instruments: Part A
Under AASB 10 Consolidated Financial Statements, an investor now controls an investee if and only if the investor has power over the
investee; exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the
investee to affect the amount of the investor's returns. Accordingly, the Group revised its accounting policy. This change did not result
in a change in entities controlled by the Group during the year.
Adoption of other new and amended accounting standards had no material financial impact on the Group.
The Group has early adopted AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets.
This standard has no financial impact and impacts only disclosures.
III. Rounding
Amounts in this financial report have been rounded to the nearest million dollars, unless otherwise stated. The Company is the kind of
company referred to in the class order 98/100 dated 10 July 1998 issued by the Australian Securities & Investments Commission. All
rounding has been conducted in accordance with that class order.
56 IAG ANNUAL REPORT 2014
C. PRINCIPLES OF CONSOLIDATION
I. Subsidiaries
Consolidation is the incorporation of the assets and liabilities of the Parent and all subsidiaries as at the reporting date and the results
of the Parent and all subsidiaries for the year then ended as if they had operated as a single entity. The balances and effects of
intragroup transactions are eliminated from the consolidation. Subsidiaries are those entities controlled by the Parent. An investor
controls an investee if and only if the investor has power over the investee; exposure, or rights, to variable returns from its involvement
with the investee; and the ability to use its power over the investee to affect the amount of the investor's returns. Where an entity
either began or ceased to be controlled during a financial reporting year, the results are included only from the date control
commenced or up to the date control ceased.
The financial information of all subsidiaries is prepared for consolidation for the same reporting year as the Parent, using consistent
accounting policies. The financial statements of entities operating outside Australia that maintain accounting records in accordance
with overseas accounting principles are adjusted where necessary to comply with the significant accounting policies of the
Consolidated entity.
Where a subsidiary is less than wholly owned, the equity interests held by external parties are presented separately as non-controlling
interests on the consolidated balance sheet, except where the subsidiary is a trust or similar entity for which the third party interest is
presented separately on the consolidated balance sheet as a liability (this is the case with the IAG Asset Management Wholesale
Trusts that are subsidiaries, refer to the details of subsidiaries note).
II. Associates
Associates, those entities over which significant influence is exercised but not joint control, and which are not intended for sale in the
near future, are accounted for using the equity accounting method. Significant influence is generally accompanying a shareholding of
between 20% and 50% of the voting rights of an entity, but can also arise where less than 20% is held through active involvement and
influence of policy decisions affecting the entity. The investment in associates is initially recognised at cost (fair value of consideration
provided plus directly attributable costs) and is subsequently adjusted for the post-acquisition change in the investor’s share of net
assets of the investee. The investor’s share of the profit or loss of the investee is included in the profit or loss of the Consolidated
entity and disclosed as a separate line in the statement of comprehensive income. Distributions received reduce the carrying amount
of the investment and are not included as dividend revenue of the Consolidated entity. Movements in the total equity of the investee
that are not recognised in the profit or loss of the investee are recognised directly in equity of the Consolidated entity and disclosed in
the statement of changes in equity. The investments are reviewed annually for impairment.
Where an entity either began or ceased to be an associate during the current financial reporting year, the investment is equity
accounted from the date significant influence commenced or up to the date significant influence ceased.
The financial statements of associates are adjusted where necessary to comply with the significant accounting policies of the
Consolidated entity.
When the investor’s share of losses exceeds its interest in the investee, the carrying amount of the investment is reduced to nil and
recognition of further losses is discontinued except to the extent that the investor has incurred obligations or made payments, on
behalf of the investee.
III. Joint arrangement
A joint arrangement (joint operation or a joint venture) exists where parties are bound by a contractual arrangement, giving two or
more of the parties joint control of the arrangement and decisions about the relevant activities require unanimous consent of the
parties that control the arrangement collectively.
Joint control is assessed by considering rights and obligations from the contractual arrangement, as well as arrangement structure,
legal form and terms agreed. The investment in joint ventures is equity accounted from the date joint control commences during a
financial period.
SIGNIFICANT ACCOUNTING POLICIES RELATED TO GENERAL INSURANCE CONTRACTS
All of the general insurance products and reinsurance products on offer, or utilised, meet the definition of an insurance contract (a
contract under which one party, the insurer, accepts significant insurance risk from another party, the policyholder, by agreeing to
compensate the policyholder if a specified uncertain future event, the insured event, adversely affects the policyholder) and none of
the contracts contain embedded derivatives or are required to be unbundled. Insurance contracts that meet the definition of a
financial guarantee contract are accounted for as insurance contracts. This means that all of the general insurance products are
accounted for in the same manner.
D. PREMIUM REVENUE
Premium revenue comprises amounts charged to policyholders (direct premium) or other insurers (inwards reinsurance premium) for
insurance contracts. Premium includes amounts collected for levies and charges for which the amount to be paid by the insurer does
not depend on the amounts collected, such as for fire services levies in Australia, but excludes stamp duties and taxes collected on
behalf of third parties, including the goods and services tax (GST) in Australia. Premium is recognised as earned from the date of
attachment of risk (generally the date a contract is agreed to but may be earlier if persuasive evidence of an arrangement exists) over
the period of the related insurance contracts in accordance with the pattern of the incidence of risk expected under the contracts. The
pattern of the risks underwritten is generally matched by the passing of time. Premium for unclosed business (business written close
to reporting date where attachment of risk is prior to reporting date and there is insufficient information to accurately identify the
business) is brought to account based on previous experience with due allowance for any changes in the pattern of new business and
renewals. The unearned portion of premium is recognised as an unearned premium liability on the balance sheet.
57
Premium receivable is recognised as the amount due and is normally settled between 30 days and 12 months. The recoverability of
premium receivable is assessed and provision is made for impairment based on objective evidence and having regard to past default
experience. Premium receivable is presented on the balance sheet net of any provision for impairment.
E. OUTWARDS REINSURANCE
Premium ceded to reinsurers is recognised as an expense in accordance with the pattern of reinsurance service received. Accordingly,
a portion of outwards reinsurance premium expense is treated as a prepayment and presented as deferred outwards reinsurance
expense on the balance sheet at the reporting date.
F. CLAIMS
The outstanding claims liability is measured as the central estimate of the present value of expected future payments relating to
claims incurred at the reporting date with an additional risk margin to allow for the inherent uncertainty in the central estimate. The
liability is measured based on the advice of/valuations performed by, or under the direction of, the Appointed Actuary. The expected
future payments include those in relation to claims reported but not yet paid or not yet paid in full, claims incurred but not enough
reported (IBNER), claims incurred but not reported (IBNR) and the anticipated direct and indirect claims handling costs. The liability is
discounted to present value using a risk free rate.
Claims expense represents claim payments adjusted for the movement in the outstanding claims liability.
The estimation of the outstanding claims liability involves a number of key assumptions and is the most critical accounting estimate.
All reasonable steps are taken to ensure that the information used regarding claims exposures is appropriate. However, given the
uncertainty in establishing the liability, it is likely that the final outcome will be different from the original liability established. Changes
in claims estimates are recognised in profit or loss in the reporting year in which the estimates are changed.
G. REINSURANCE AND OTHER RECOVERIES
Reinsurance and other recoveries received or receivable on paid claims and on outstanding claims (notified and not yet notified) are
recognised as income. Reinsurance and other recoveries receivable include the net GST receivable on outstanding claims and
recoveries. Reinsurance recoveries on paid claims are presented as part of trade and other receivables net of any provision for
impairment based on objective evidence for individual receivables. All recoveries receivable on outstanding claims are measured as
the present value of the expected future receipts calculated on the same basis as the outstanding claims liability. Reinsurance does
not relieve the originating insurer of its liabilities to policyholders and is presented separately on the balance sheet.
H. ACQUISITION COSTS
Costs associated with obtaining and recording general insurance contracts are referred to as acquisition costs. These costs include
advertising expenses, commissions or brokerage paid to agents or brokers, premium collection costs, risk assessment costs and other
administrative costs. Such costs are capitalised where they relate to the acquisition of new business or the renewal of existing
business, are presented as deferred acquisition costs, and are amortised on the same basis as the earning pattern of the premium
over the period of the related insurance contracts. The balance of the deferred acquisition costs at the reporting date represents the
capitalised acquisition costs relating to unearned premium.
I. LIABILITY ADEQUACY TEST
The liability adequacy test is an assessment of the carrying amount of the unearned premium liability and is conducted at each
reporting date. If current estimates of the present value of the expected future cash flows relating to future claims arising from the
rights and obligations under current general insurance contracts, plus an additional risk margin to reflect the inherent uncertainty in
the central estimate, exceed the unearned premium liability (net of reinsurance) less related deferred acquisition costs, then the
unearned premium liability is deemed to be deficient. The test is performed at the level of a portfolio of contracts that are subject to
broadly similar risks and that are managed together as a single portfolio. Any deficiency arising from the test is recognised in profit or
loss with the corresponding impact on the balance sheet recognised first through the write down of deferred acquisition costs for the
relevant portfolio of contracts, with any remaining balance being recognised on the balance sheet as an unexpired risk liability.
J. LEVIES AND CHARGES
Levies and charges, for which the amount paid to regulatory bodies does not depend on the amounts collected from policyholders, as
is the case with fire services levies in Australia, are expensed on the same basis as the recognition of premium revenue. The portion
relating to unearned premium is treated as a prepayment and presented as deferred levies and charges on the balance sheet. A
liability for levies and charges payable is recognised on business written to the reporting date. Other levies and charges that are
simply collected on behalf of third parties are not recognised as income or expense in profit or loss.
SIGNIFICANT ACCOUNTING POLICIES APPLICABLE TO OTHER ACTIVITIES
K. FEE AND OTHER INCOME
Fee based revenue is brought to account on an accruals basis being recognised as revenue on a straight line basis in accordance with
the passage of time as the services are provided. Other income is recognised on an accruals basis.
L. LEASES
The majority of leases entered into are operating leases, where the lessor retains substantially all the risks and benefits of ownership
of the leased items. The majority of the lease arrangements are entered into as lessee for which the lease payments are recognised
as an expense on a straight line basis over the term of the lease. Certain sublease arrangements are entered into as the lessor for
which the lease payments are recognised as revenue on a straight line basis over the term of the lease.
58 IAG ANNUAL REPORT 2014
Lease incentives relating to the agreement of a new or renewed operating lease are recognised as an integral part of the net
consideration agreed for the use of the leased asset. Operating lease incentives received are initially recognised as a liability, are
presented as trade and other payables, and are subsequently reduced through recognition in profit or loss as an integral part of the
total lease expense (lease payments are allocated between rental expense and reduction of the liability) on a straight line basis over
the period of the lease.
M. TAXATION
I. Income tax
Income tax expense for a reporting year comprises current and deferred tax. Income tax is recognised in profit or loss except to the
extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates for each jurisdiction, and any
adjustment to tax payable in respect of previous financial periods. Deferred tax expense is the change in deferred tax assets and
liabilities between the reporting years.
Deferred tax assets and liabilities are recognised using the balance sheet method for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except in the following
circumstances when no deferred tax asset or liability is recognised:
temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not
affect either accounting profit or taxable profit or loss;
temporary differences between the carrying amount and tax bases of investments in subsidiaries where it is probable that the
differences will not reverse in the foreseeable future; and
temporary differences relating to the initial recognition of goodwill.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets
and liabilities, using tax rates enacted or substantively enacted at reporting date. Deferred tax assets are recognised only to the extent
that it is probable that future taxable profits will be available against which the asset can be utilised.
II. Tax consolidation
IAG and its Australian resident wholly owned subsidiaries adopted the tax consolidation legislation with effect from 1 July 2002 and are
therefore taxed as a single entity from that date. IAG is the head entity within the tax-consolidated group.
Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the
head entity in the tax-consolidated group and are recognised as amounts receivable/(payable) from/(to) other entities in the tax-
consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by
IAG as an equity contribution or distribution.
All entities in the tax-consolidated group have entered into a tax sharing agreement which, in the opinion of the Directors, limits the
joint and several liabilities of the wholly owned entities in the case of a default by the head entity. The entities have also entered into a
tax funding agreement under which the wholly owned entities fully compensate the Company for any current tax payable assumed.
III. GST
Revenue, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable.
In these circumstances GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense.
Receivables and payables are stated inclusive of GST. Cash flows are included in the cash flow statement on a gross basis.
N. INVESTMENTS
Investments comprise assets held to back insurance liabilities (also referred to as technical reserves) and assets that represent
shareholders' funds. All investments are managed and performance evaluated on a fair value basis for both external and internal
reporting purposes in accordance with a documented risk management strategy. The carrying value of investments is considered
identical to the fair value.
All investments are designated as fair value through profit or loss upon initial recognition. They are initially recorded at fair value
(being the cost of acquisition excluding transaction costs) and are subsequently remeasured to fair value at each reporting date.
Changes in the fair value are recognised as realised or unrealised investment gains or losses in profit or loss. The Group recognises
transfers into and transfers out of fair value hierarchy levels as at the end of the reporting year. Purchases and sales of investments
are recognised on a trade date basis, being the date on which a commitment is made to purchase or sell the asset. Transaction costs
for purchases of investments are expensed as incurred. Investments are derecognised when the rights to receive future cash flows
from the assets have expired, or have been transferred, and substantially all the risks and rewards of ownership have transferred.
For securities traded in an active market, fair value is determined by reference to quoted mid market price at the current reporting
date (bid price applied in the prior reporting date). For securities traded in a market that is not active, valuation techniques are used
based on market observable inputs. In a limited number of instances, valuation techniques are based on non-market observable
inputs. The fair value of investments in unlisted managed investment schemes is determined on the basis of published redemption
prices of those managed investment schemes at the reporting date.
Investment revenue is brought to account on an accruals basis. Revenue on investments in equity securities and property trusts is
deemed to accrue on the date the dividends/distributions are declared, which for listed equity securities is deemed to be the ex-
dividend date.
59
O. INVESTMENT IN SUBSIDIARIES
Investment in subsidiaries is initially recognised at cost (fair value of consideration provided plus directly attributable costs) and is
subsequently carried at the lower of cost and recoverable amount by the Parent entity. Costs incurred in investigating and evaluating
an acquisition up to the point of formal commitment to an acquisition are expensed as incurred. Where the carrying value exceeds the
recoverable amount, an impairment charge is recognised in profit or loss which can subsequently be reversed in certain conditions.
Where an additional interest is purchased in an existing subsidiary, the acquisition is treated as a transaction between owners and has
no impact on the statement of comprehensive income. Income from these investments, comprising dividends and trust distributions,
is brought to account on an accruals basis. Dividend revenue is accrued on the date the dividends are declared.
P. INVESTMENT IN JOINT VENTURES AND ASSOCIATES
Investment in joint arrangements and associates is initially recognised at cost (fair value of consideration provided plus directly
attributable costs) by the entity holding the ownership interest, including attributed goodwill, and is subsequently carried in the entity’s
financial statements at the lower of cost and recoverable amount.
Q. DISCONTINUED OPERATION
A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished
from the rest of the Group (i.e. a cash generating unit) and which:
represents a separate major line of business or geographical area of operations;
is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
is a subsidiary acquired exclusively with a view to resale.
If an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the
operation has been discontinued from the start of the comparative year.
R. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash on hand available on demand and deposits held at call with financial institutions. Cash and
cash equivalents are measured at fair value, being the principal amount. For the purpose of the cash flow statement, cash also
includes other highly liquid investments not subject to significant risk of change in value, with short periods to maturity, net of any
bank overdraft.
S. DERIVATIVES
The Group uses a variety of derivatives to manage various risks. Derivatives are used solely to manage risk exposure and are not used
for trading or speculation.
I. Derivatives without hedge accounting applied
Derivatives are initially recognised at trade date at fair value excluding transaction costs. The fair value is determined by reference to
current market quotes or generally accepted valuation principles.
Transaction costs for purchases of derivatives are expensed as incurred.
For derivatives that do not qualify for hedge accounting, the changes in fair value are immediately recognised in profit or loss. The
derivatives in relation to the investment operations are presented together with the underlying investments while the derivatives in
relation to corporate treasury transactions are presented as receivables when the fair value is positive, or as payables when the fair
value is negative.
Where derivatives qualify for hedge accounting, the treatment is set out in section II.
II. Hedge accounting
Hedge accounting may be applied to derivatives designated as hedging instruments provided certain criteria are met. Certain
transactions have been designated as the following:
Fair value hedge: hedge of a change in fair value of an asset or liability or an unrecognised firm commitment; or
Cash flow hedge: hedge of the exposure to the variability of cash flow attributable to a particular risk associated with a recognised
asset or liability, or an unrecognised firm commitment; or
Net investment hedge: hedge of a net investment in a foreign operation.
To qualify for hedge accounting, at the inception of the hedge and throughout its life, each hedge must be expected to be highly
effective. Actual effectiveness in the range of 80% to 125% must also be demonstrated on an ongoing basis. When it is determined
that a derivative for which hedge accounting has been designated is not (or ceases to be) effective, hedge accounting is discontinued
prospectively from the date of ineffectiveness.
60 IAG ANNUAL REPORT 2014
a. FAIR VALUE HEDGE
Changes in the fair value of the hedging instrument are recognised in profit or loss, together with changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk.
b. CASH FLOW HEDGE
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in
reserves as part of equity. Any gain or loss relating to an ineffective portion is immediately recognised in profit or loss.
When the forecast transaction that is hedged results in the recognition of a financial asset or a financial liability, the associated gains
and losses that had been deferred in equity are transferred into profit or loss in the same period or periods when the hedged item
affects profit or loss. When the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial
liability, the associated gains and losses that had been deferred in equity are transferred from equity and included in the initial
measurement of the cost of the asset or liability.
c. NET INVESTMENT HEDGE
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognised in equity while the gain or loss relating to the ineffective portion
is immediately recognised in profit or loss. Gains and losses accumulated in the equity reserve are recognised in profit or loss upon
the disposal of the foreign operation.
III. Embedded derivatives
Derivatives embedded in other financial instruments or other non-financial host contracts are treated separately when their risks and
characteristics are not closely related to those of the host contract. Where an embedded derivative is required to be separated, it is
measured at fair value and change in the fair value is recognised in profit or loss.
T. TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at the amounts to be received in the future, less any impairment losses. The amounts are
discounted where the effect of the time value of money is material. The recoverability of debts is assessed on an ongoing basis and
provision for impairment is made based on objective evidence and having regard to past default experience. The impairment charge is
recognised in profit or loss. Debts which are known to be uncollectible are written off.
U. PROPERTY AND EQUIPMENT
Property and equipment is initially recorded at cost which is the fair value of consideration provided plus incidental costs directly
attributable to the acquisition.
All items of property and equipment are carried at cost less accumulated depreciation and accumulated impairment charges.
Depreciation is calculated using the straight line method to allocate the cost of assets less any residual value over the estimated
useful economic life.
The carrying amount of property and equipment is reviewed at each reporting date. If any impairment is indicated or exists, the item is
tested for impairment by comparing the recoverable amount of the asset or its cash generating unit to the carrying value. Where an
existing carrying value exceeds the recoverable amount, the difference is recognised in profit or loss.
The net gain or loss on disposal of property and equipment is recognised in profit or loss and is calculated as the difference between
the carrying amount of the asset at the time of disposal and the net proceeds.
V. BUSINESS COMBINATIONS
Business combinations are accounted for using the acquisition method. The consideration transferred for the acquisition is the fair
value of the assets transferred, the equity instruments issued and the liabilities incurred or assumed at the date of exchange. The
consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on
the acquisition date. The Group measures any non-controlling interest, on a transaction-by-transaction basis, either at fair value or at
the non-controlling interest’s proportionate share of the fair value of the identifiable assets and liabilities.
Acquisition related costs are expensed as incurred.
If the business combination is achieved in stages, the acquisition fair value of the acquirer’s previously held equity interest in the
acquiree is remeasured to fair value at the acquisition date through profit or loss.
Where settlement of any part of cash consideration is contingent upon some future event or circumstance, the estimated amounts
payable in the future are discounted to their present value at the date of exchange. When the contingent consideration is classified as
a liability, the impact on any subsequent changes in fair value is recognised as profit or loss in the statement of comprehensive
income.
Where the initial accounting for a business combination is determined only provisionally by the first reporting date after acquisition
date, the business combination is accounted for using those provisional values. Any subsequent adjustments to those provisional
values are recognised within 12 months of the acquisition date and are applied effective from the acquisition date.
61
W. INTANGIBLE ASSETS
I. Acquired intangible assets
Acquired intangible assets are initially recorded at their cost at the date of acquisition being the fair value of the consideration
provided and, for assets acquired separately, incidental costs directly attributable to the acquisition. Intangible assets with finite
useful lives are amortised on a straight line basis (unless the pattern of usage of the benefits is significantly different) over the
estimated useful lives of the assets being the period in which the related benefits are expected to be realised (shorter of legal duration
and expected economic life). Amortisation rates and residual values are reviewed annually and any changes are accounted for
prospectively.
The carrying amount of intangible assets with finite useful lives is reviewed at each reporting date by determining whether there is an
indication that the carrying value may be impaired. If any such indication exists, the item is tested for impairment by comparing the
recoverable amount of the asset or its cash generating unit to the carrying value. Where the recoverable amount is determined by the
value in use, the projected net cash flows are discounted using a pre-tax discount rate. For assets with indefinite useful lives, the
recoverability of the carrying value of the assets is reviewed for impairment at each reporting date, or more frequently if events or
changes in circumstances indicate that it might be impaired. An impairment charge is recognised when the carrying value exceeds the
calculated recoverable amount. Impairment charges are recognised in profit or loss and may be reversed where there has been a
change in the estimates used to determine the recoverable amount.
II. Software development expenditure
Software development expenditure that meets the criteria for recognition as an intangible asset is capitalised on the balance sheet
and amortised over its expected useful life, subject to impairment testing. Costs incurred in researching and evaluating a project up to
the point of formal commitment to a project are treated as research costs and are expensed as incurred.
The capitalised costs are amortised on a straight line basis over the period following completion of a project or implementation of part
of a project. The recoverability of the carrying amount of the asset is assessed in the same manner as for acquired intangible assets
with finite useful lives.
X. GOODWILL
Goodwill is initially measured as the excess of the purchase consideration over the fair value of the net identifiable assets and
liabilities acquired and subsequently presented net of any impairment charges. Goodwill arising on acquisitions prior to 1 July 2004
has been carried forward on the basis of its deemed cost being the net carrying amount as at that date.
For the purpose of impairment testing, goodwill is allocated to Cash Generating Units (CGUs). CGUs are determined principally based
on how goodwill is monitored by management. The carrying value of goodwill is tested for impairment at each reporting date.
Where the carrying value exceeds the recoverable amount, an impairment charge is recognised in profit or loss and cannot
subsequently be reversed. The recoverable amount of goodwill is determined by the present value of the estimated future cash flows
by using a pre-tax discount rate that reflects current market assessment of the risks specific to the CGUs.
At the date of disposal of a business, attributed goodwill is used to calculate the gain or loss on disposal.
Y. TRADE AND OTHER PAYABLES
Trade and other payables are carried at cost, which is the fair value of the consideration to be paid in the future for goods and services
received. The amounts are discounted where the effect of the time value of money is material.
Z. RESTRUCTURING PROVISION
A restructuring provision is recognised for the expected costs associated with restructuring where there is a detailed formal plan for
restructure and a valid expectation has been raised in those persons expected to be affected. The provision is based on the direct
expenditure to be incurred which is both directly and necessarily caused by the restructuring, including termination benefits,
decommissioning of information technology systems and exiting surplus premises and does not include costs associated with ongoing
activities. The adequacy of the provision is reviewed regularly and adjusted if required. Revisions in the estimated amount of a
restructuring provision are reported in the period in which the revision in the estimate occurs. The provision is discounted using a pre-
tax discount rate where the effect of the time value of money is material. Where discounting is applied, the increase in the provision
due to the passage of time is recognised as a finance cost.
AA. LEASE PROVISION
Certain operating leases for property require that the land and/or building be returned to the lessor in its original condition, however,
the related operating lease payments do not include an element for the cost this will involve. The present value of the estimated future
cost for the plant and equipment to be removed and the premises to be returned to the lessor in its original condition are recognised
as a lease provision when the relevant alterations are made to the premises. The costs are capitalised as part of the cost of plant and
equipment and then depreciated over the useful lives of the assets (refer to section U of the summary of significant accounting policies
note).
AB. EMPLOYEE BENEFITS
I. Wages and salaries, annual leave and sick leave
Liabilities for wages and salaries (including bonuses), annual leave and sick leave are recognised at the nominal amounts unpaid at
the reporting date using remuneration rates that are expected to be paid when these liabilities are settled, including on-costs. A
liability for sick leave is considered to exist only when it is probable that sick leave taken in the future will be greater than entitlements
that will accrue in the future.
62 IAG ANNUAL REPORT 2014
II. Long service leave
A liability for long service leave is recognised as the present value of estimated future cash outflows to be made in respect of services
provided by employees up to the reporting date. The estimated future cash outflows are discounted using risk free interest rates, best
represented by national government guaranteed securities which have terms to maturity that match, as closely as possible, the
estimated future cash outflows. Factors which affect the estimated future cash outflows such as expected future salary increases,
experience of employee departures and period of service, are incorporated in the measurement.
III. Share based incentive arrangements
Share based remuneration is provided in different forms to eligible employees and IAG Directors. All of the arrangements are equity
settled share based payments.
The fair value at grant date (the date at which the employer and the employee have a shared understanding of the terms and
conditions of the arrangement) is determined for each equity settled share based payment using a valuation model which excludes the
impact of any non-market vesting conditions. This fair value does not change over the life of the instrument. At each reporting date
during the vesting period (the period during which related employment services are provided) and upon the final vesting or expiry of the
equity instruments, the total accumulated expense is revised based on the fair value at grant date and the latest estimate of the
number of equity instruments that are expected to vest based on non-market vesting conditions only and taking into account the
expired portion of the vesting period. Changes in the total accumulated expense from the previous reporting date are recognised in
profit or loss with a corresponding movement in an equity reserve. Upon exercise of the relevant instruments, the balance of the share
based remuneration reserve relating to those instruments is transferred within equity.
The different treatment of market and non-market vesting conditions means that if an equity instrument does not vest because a
participant ceases relevant employment then the accumulated expense charged in relation to that participant is reversed, but if an
equity instrument does not vest only because a market condition is not met, the expense is not reversed.
To satisfy obligations under the various share based remuneration plans, shares are generally bought on market at or near grant date
of the relevant arrangement and held in trust. Shares held in trust that are controlled for accounting purposes are treated as treasury
shares held in trust (refer to section AH of the summary of significant accounting policies note).
IV. Superannuation
For defined contribution superannuation plans, obligations for contributions are recognised in profit or loss as they become payable.
For defined benefit superannuation plans, the net financial position of the plans is recognised on the balance sheet and the movement
in the net financial position is recognised in profit or loss, except for remeasurements of defined benefit plans (experience adjustments
and changes in actuarial assumptions), which are recognised directly in retained earnings.
AC. INTEREST BEARING LIABILITIES AND FINANCE COSTS
Interest bearing liabilities are initially recognised at fair value less transaction costs that are directly attributable to the transaction.
After initial recognition the liabilities are carried at amortised cost using the effective interest method.
Finance costs include interest, which is accrued at the contracted rate and included in payables, amortisation of transaction costs
which are capitalised, presented together with the borrowings, and amortised over the life of the borrowings or a shorter period if
appropriate, and amortisation of discounts or premiums (the difference between the original proceeds, net of transaction costs, and
the settlement or redemption value of borrowings) over the term of the liabilities. Where interest payments are subject to hedge
accounting, they are recognised as finance costs net of any effect of the hedge.
AD. FOREIGN CURRENCY
I. Functional and presentation currency
Items included in the financial records are measured using the currency of the primary economic environment in which the entity
operates (functional currency). The financial statements are presented in Australian dollars, which is the presentation currency of the
Company.
II. Translation of foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies at reporting date are translated to the functional
currency using reporting date exchange rates. Resulting exchange differences are recognised in profit or loss.
III. Translation of the financial results of foreign operations
The financial position and performance of foreign operations with a functional currency other than Australian dollars are translated into
the presentation currency for inclusion in the consolidated financial statements. The assets and liabilities are translated using
reporting date exchange rates while equity items are translated using historical rates. Items from the statement of comprehensive
income are translated using weighted average rates for the reporting year. Exchange differences arising from the translations are
recorded directly in equity in the foreign currency translation reserve. Goodwill and fair value adjustments arising on the acquisition of
a foreign operation are treated as assets and liabilities of the foreign operation and translated using reporting date exchange rates.
On the disposal of a foreign operation, the cumulative amount of the exchange differences deferred in the foreign currency translation
reserve relating to that foreign operation is recognised in profit or loss.
63
IV. Principal exchange rates used
The reporting date exchange rates for balance sheet translation and the annual average daily exchange rates for statement of
comprehensive income and cash flow statement translation to Australian dollars are provided here for selected currencies as an
indication of the rates used for the current year.
New Zealand dollar
British pound
Thai baht
United States dollar
Malaysian ringgit
BALANCE SHEET
2013
0.84740
1.66464
0.03514
1.09433
0.34636
STATEMENT OF COMPREHENSIVE
INCOME AND CASH FLOW STATEMENT
2013
0.80055
1.52763
0.03224
0.97763
0.31831
2014
0.90485
1.77299
0.03398
1.08950
0.33574
2014
0.92866
1.81505
0.03270
1.06078
0.33036
AE. PROVISION FOR DIVIDENDS
Provision for dividends is made in respect of ordinary shares where the dividends are declared on or before the reporting date but have
not yet been distributed at that date.
AF. EARNINGS PER SHARE
I. Basic earnings per share
Basic earnings per share is determined by dividing the profit or loss attributable to shareholders of the Parent by the weighted average
number of shares of the Parent on issue during the reporting year, net of treasury shares held in trust.
II. Diluted earnings per share
Diluted earnings per share is determined by dividing the profit or loss attributable to shareholders of the Parent used in the calculation
of basic earnings per share, adjusted for relevant costs associated with dilutive potential ordinary shares, by the weighted average
number of ordinary shares and dilutive potential ordinary shares.
AG. SHARE CAPITAL
Shares are classified as equity when there is no obligation to transfer cash or other assets to the holder. Transaction costs directly
attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.
AH. TREASURY SHARES HELD IN TRUST
Ordinary shares of IAG that are controlled for accounting purposes by share based remuneration trusts that are subsidiaries of the
Consolidated entity, are presented on the balance sheet as treasury shares held in trust. The shares are measured at cost (total
amount paid to acquire the shares including directly attributable costs) and are presented as a deduction from equity until they are
otherwise dealt with. No gain or loss is recognised in profit or loss on the sale, cancellation or reissue of the shares. The shares are
derecognised as treasury shares held in trust when the shares vest or are released to the participant.
NOTE 2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
In the process of applying the significant accounting policies, certain critical accounting estimates and assumptions are used, and
certain judgements are made.
The estimates and related assumptions are based on experience and other factors that are considered to be reasonable, the results of
which form the basis for judgements about the carrying values of assets and liabilities. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and future periods if relevant.
The areas where the estimates and assumptions involve a high degree of judgement or complexity and are considered significant to
the financial statements, listed together with reference to the notes to the financial statements where more information is provided,
are:
insurance contracts related:
claims, refer to note 10;
reinsurance and other recoveries on outstanding claims, refer to note 11; and
liability adequacy test, refer to note 13.B.
The estimation process of the gross cash flows for the 2011 financial year natural catastrophe events in New Zealand is
conducted in a manner consistent with the preparation of accounts as described in note 1, but is subject to a high degree of
uncertainty owing to the unique nature of the events including the allocation of costs between the events for policies
affected by multiple events, the decision process surrounding the zoning of land for rebuilding, the interaction with the EQC
and uncertainty relating to IAG's share of claim costs and the estimated cost of the event relative to the size of the New
Zealand economy.
64 IAG ANNUAL REPORT 2014
There are other amounts relating to insurance contracts that are based on allocation methodologies supported by
assumptions (e.g. deferred acquisition costs). The estimates relate to past events, do not incorporate forward looking
considerations and generally do not change from year to year.
other:
intangible assets and goodwill impairment testing, refer to notes 16 and 17;
acquired intangible assets' initial measurement and determination of useful life, refer to notes 16 and 23;
income tax and related assets and liabilities, refer to note 6;
provisional accounting of business combinations, refer note 23;
share based remuneration, refer to note 28; and
defined benefit superannuation arrangements, refer to note 29.
NOTE 3. RISK MANAGEMENT
A. RISK MANAGEMENT FRAMEWORK
The Group Chief Risk Officer oversees risk management across the Group. IAG has a Group Risk and Governance function responsible
for the development of IAG's risk management framework, policies and standards. Divisional Risk & Compliance teams deploy the risk
management framework within their division. Application of the risk management framework provides reasonable assurance the
Group’s material risks are prudently and soundly managed. IAG acknowledges all business activity entails risk. The Group mitigates
this by focusing on the management of risk, not the avoidance of risk. The framework is outlined in a written Risk Management
Strategy (RMS), which is in accordance with the prudential standards issued by APRA.
The RMS:
is a high level, strategic document that articulates the risk management framework;
references other key documents and elements of the risk management framework; and
may be a key input into how regulators understand and assess the approach to risk management.
Compliance with the RMS is incorporated into the twice yearly declarations provided by Executives and senior management to the
Board.
The RMS includes clearly defined managerial responsibilities, details of the Group level risk management related policies and the key
processes to identify, assess, monitor, report on and mitigate material risk. Group policies for the management of risk are applied by
all controlled entities (unless exempted) consistently across the Group and takes into consideration local circumstances in non-
Australian jurisdictions.
The risk management framework is regularly reviewed so it remains appropriate and effective. The Group has an internal audit
function which reviews various aspects of the risk management framework application in the business divisions. Standard & Poor’s
(S&P) currently views the Group's enterprise risk management as ‘strong’.
The RMS is updated annually or as required and is approved by the Board, and resubmitted to APRA subsequent to material change. A
three year rolling business plan is also submitted to APRA after each annual review or following material change.
The risk framework includes the following documents:
Risk Management Strategy (RMS) – IAG’s strategy for managing risk and key elements of the risk management framework.
Reinsurance Management Strategy (REMS) - comprises key elements of the reinsurance management framework, processes for
setting and monitoring the insurance concentration risk capital (ICRC), processes for selecting, implementing, monitoring and
reviewing reinsurance arrangements and identification, roles and responsibilities of those charged with managerial responsibility
for the reinsurance management framework. The REMS is in accordance with the prudential standards issued by APRA. The
REMS is updated annually and approved by the Board.
Group Risk Appetite Statement – articulates the levels, boundaries and nature of risk the Board is willing to accept in pursuit of
IAG’s strategic objectives.
Internal Capital Adequacy Assessment Process (ICAAP) – the ICAAP Summary Statement is a component of IAG’s risk
management framework summarising the Group’s risk assessment and processes for capital management, describing the
strategy for maintaining adequate capital over time. The ICAAP Annual Report is an annual report to the Board on the operation of
the ICAAP over the prior 12 months and a forward looking view. IAG’s Risk Management Framework includes a range of capital
management initiatives and documents. Refer to the capital management note for further details.
B. RISK MANAGEMENT OVERVIEW
The risk management arrangements outlined apply to Group entities except the Wesfarmers entities acquired on 30 June 2014. An
overview of IAG's risk management arrangements is included in the Directors' Report, with the governance arrangements and forums
used to manage risk detailed further in the Corporate Governance section.
As ASIC and APRA regulated entities, the acquired Wesfarmers business was required to have risk management arrangements that
were appropriate for the scope, scale and complexity of their activities. Wesfarmers' risk management arrangements will be
transitioned into IAG arrangements from 1 July 2014 as part of the integration of the Wesfarmers business.
Where appropriate, the following exposures and positions include both IAG and the acquired Wesfarmers entities' balances. As
required, IAG methodology has been applied to determine disclosed positions and exposures.
65
IAG adopts an enterprise approach to risk arrangements, with five risk categories identified as follows:
RISK CATEGORIES
Strategic risk
DEFINITION OF RISK
Strategic risk may arise from the following sub-categories:
Strategic Objectives: flawed strategy or the failure to meet strategic initiatives due to capital
constraints, divisional strategic misalignment, technology and other resource inhibitors;
Poor Business Decisions: failure to complete an appropriately detailed due diligence of the
reasonably available information before making business decisions, or failing to take the
reasonably available information into account;
Business Environment Changes: changes in the business environment or lack of
responsiveness to changes in the business environment; and
Group Contagion Risk: the potential impact of risk events, of any nature, arising in or from
membership of the Group.
Insurance risk
Insurance risk may arise from the following sub-categories:
Product Pricing: inadequate or inappropriate product pricing;
Product Design: product defects due to inadequate product design, variation, delivery or
maintenance;
Reserving: inadequate or inappropriate reserving including unforeseen, unknown or
unintended liabilities that may eventuate;
Claims Management: inadequate or inappropriate claims management including overpayment,
failure to collect recoveries, fraudulent misrepresentation or staff operating outside of their
authority;
Underwriting: inadequate or inappropriate underwriting. For example, failure to comply with
the underwriting process, including staff operating outside their authority; and
Insurance Concentration Risk: adverse concentration exposure. For example, location
catastrophe exposure, underwriting segment factor, industry or distribution channel.
Reinsurance risk
Reinsurance risk may arise from the following sub-categories:
Coverage: insufficient or inappropriate reinsurance coverage arising as a result of:
incorrect use of models used to calculate amount of cover required;
the cover provided by the reinsurance program(s) does not align with original
underwriting exposures; and
latent/emerging exposures.
Underwriting/Pricing: inadequate underwriting and/or pricing of reinsurance exposures
retained by IAG's reinsurance captives;
Claims Management: inadequate or inappropriate reinsurance recovery management;
Contract Terms: reinsurance arrangements not legally binding or poor management of
reinsurance recoveries; and
Reinsurance Concentration Risk: over-exposure to insurance risks based on factors such as
geographical location, types of cover, industry types or a high reliance on a number or
reinsurers.
The credit counterparty concentration risk to reinsurers is covered under the financial risk – credit
risk category.
Financial risk may arise from the following sub-categories:
Liquidity Management: insufficient cash resources to meet financial obligations as and when
they fall due (without affecting either the daily operations or the financial condition of the
Group);
Market Risk:
asset concentration: risk of over-exposure to a particular asset class outside the
Strategic Asset Allocation or the limits in the individual Investment Management
Agreements;
foreign exchange: adverse exchange rate movements in unhedged foreign exchange
exposures;
asset prices: the risk an asset’s value will negatively change due to a change in the
absolute level of its market price;
interest rates: the risk an investment's value will negatively change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield
curve or in any other interest rate relationship; and
derivative exposures: movements in underlying physical positions not being matched by
(opposite) movements in the value of the derivative positions.
Credit Risk: the risk arising from a counterparty’s failure to meet its obligations in accordance
with the agreed terms. These counterparties include investments, reinsurers and premium
debtors; and
Capital Management Risk: failure to maintain adequate regulatory capital to meet APRA's
capital requirements or the Group's internal capital target.
Financial risk
66 IAG ANNUAL REPORT 2014
Operational risk
Operational risk may arise from the following sub-categories:
Fraud: any act or omission, by any person, made with dishonest or potentially illegal intent, to
obtain a benefit or advantage, for one’s self or any other person.
Management, Staff Practices & Safety:
risks related to workforce planning;
behavioural risks; and
the risk of illness, injury, psychological or physical harm to persons at IAG sites
or whilst engaging in work activities.
Supply & Distribution Chain: a service provider, outsourcer, internal distribution channel
disruption, non-performance or non-adherence to service level agreements that causes an
impact on IAG's business operations or its ability to manage risk effectively;
Project & Change Management: failure to deliver the expected benefit of an initiative, or
inadequate implementation of a project initiative;
Process Management: human or system failure to deliver intended objectives;
Business Continuity Management: any event that disrupts IAG's business operations and/or
performance;
Compliance: failure to identify, interpret or comply with regulatory or legislative requirements;
and
System Integrity / Security & Information Management: inadequate system design or
capabilities to maintain business functionality, information security or information
management.
C. RISK MANAGEMENT CATEGORIES AND RISK MITIGATION
I. Strategic risk
Strategic risk is managed by the IAG Executive team with Board oversight. Key elements in management of strategy and strategic risk
include the strategic planning program and associated oversight arrangements. Progress against strategic priorities is regularly
considered. Strategic risks are included in IAG’s Enterprise Risk Profile as appropriate.
II. Insurance risk
A key risk from operating in the general insurance industry is the exposure to insurance risk arising from underwriting general
insurance contracts. The insurance contracts transfer risk to the insurer by indemnifying the policyholders against adverse effects
arising from the occurrence of specified uncertain future events. There is a risk that the actual amount of claims to be paid in relation
to contracts will be different to the amount estimated at the time a product was designed and priced. The Consolidated entity is
exposed to this risk as the price for a contract must be set before the losses relating to the product are known. As such, the insurance
business involves inherent uncertainty. The Consolidated entity also faces other risks relating to the conduct of the general insurance
business including financial risks and capital risks (refer to the capital management note).
A fundamental part of the Group's overall risk management approach is the effective governance and management of the risks that
impact the amount, timing and certainty of cash flows arising from insurance contracts.
Insurance activities primarily involve the underwriting of risks and the management of claims. A disciplined approach to risk
management is adopted rather than a premium volume or market share orientated approach. IAG believes this approach provides the
greatest long term likelihood of being able to meet the objectives of all stakeholders, including policyholders, lenders and
shareholders.
The level of risk accepted by IAG is formally documented in its Insurance Business Licences. Each operating division has an insurance
licence. The licences are reviewed annually or more frequently if required.
a. INSURANCE PROCESSES
The key processes to mitigate insurance risk include the following:
i. Acceptance and pricing of risk
The underwriting of large numbers of less than fully correlated individual risks, across a range of classes of insurance businesses in
different regions, reduces the variability in overall claims experience over time. Business divisions are set underwriting criteria
covering the types of risks they are licenced to underwrite. Maximum limits are set for the acceptance of risk both on an individual
contract basis and for classes of business and specific risk groupings. Management information systems are maintained that provide
up to date, reliable data on the risks to which the business is exposed at any point in time. Efforts are made, including plain language
policy terms, to ensure there is no misalignment between policyholders' perceived payment when a policy is initially sold and actual
payment when a claim is made.
Statistical models that combine historical and projected data are used to calculate premiums and monitor claims patterns for each
class of business. The data used includes historical pricing and claims analysis for each class of business as well as current
developments in the respective markets and classes of business. All data used is subject to rigorous verification and reconciliation
processes. The models incorporate consideration of prevailing market conditions.
67
ii. Claims management and provisioning
Initial claims determination is managed by claims officers with the requisite degree of experience and competence with the assistance,
where appropriate, of a loss adjustor or other party with specialist knowledge. It is the Group's intention to respond to and settle all
genuine claims quickly whenever possible and to pay claims fairly, based on policyholders' full entitlements.
Claims provisions are established using actuarial valuation models and include a risk margin for uncertainty (refer to the claims note).
iii. Reinsurance
Refer to reinsurance risk section III below for further details.
b. CONCENTRATIONS OF INSURANCE RISK
The exposure to concentrations of insurance risk is mitigated by a portfolio diversified into many classes of business across different
regions and by the utilisation of reinsurance.
Concentration risk is particularly relevant in the case of catastrophes, usually natural disasters, which generally result in a
concentration of affected policyholders over and above the norm and which constitutes the largest individual potential financial loss.
Catastrophe losses are an inherent risk of the general insurance industry that have contributed, and will continue to contribute, to
potentially material year-to-year fluctuations in the results of operations and financial position. Catastrophes are caused by various
natural events including earthquakes, bushfires, hailstorms, tropical storms and high winds. The Group is also exposed to certain
large human-made catastrophic events such as industrial accidents and building collapses. The nature and level of catastrophes in
any period cannot be predicted accurately but can be estimated through the utilisation of predictive models. The Group actively limits
the aggregate insurance exposure to catastrophe losses in regions that are subject to high levels of natural catastrophes.
Each year, the Group sets its tolerance for concentration risk and purchases reinsurance in excess of these tolerances. Various
models are used to estimate the impact of different potential natural disasters and other catastrophes. The tolerance for
concentration risk is used to determine the ICRC which is the maximum net exposure to insurance risk determined appropriate for any
single event with a given probability. The selected ICRC is also determined based on the cost of purchasing the reinsurance and
capital efficiency.
The tables below demonstrate the diversity of the Group’s operations by both region (noting that the insurance risks underwritten in
Australia are written in all states and territories) and product, demonstrating the limited exposure to additional risks associated with
long-tail issues of business. The table below provides an analysis of gross written premium by region for continuing operations:
Australia
New Zealand
Asia
CONSOLIDATED
2013
%
80
17
3
100
2014
%
78
19
3
100
The following table provides a percentage analysis of gross written premium by product for continuing operations:
Motor
Home
Short-tail commercial
CTP (motor liability)
Liability
Other short-tail
Workers' compensation
32
27
19
9
5
4
4
100
33
27
19
10
4
4
3
100
Specific processes for monitoring identified key concentrations are set out below.
RISK
An accumulation of risks arising from a
natural peril
A large property loss
Multiple liability retentions being
involved in the same event
SOURCE OF CONCENTRATION
Insured property concentrations
Fire or collapse affecting one building or a
group of adjacent buildings
Response by a multitude of policies to the
one event
RISK MANAGEMENT MEASURES
Accumulation risk modelling, reinsurance
protection
Maximum acceptance limits, property risk
grading, reinsurance protection
Purchase of reinsurance clash protection
68 IAG ANNUAL REPORT 2014
III. Reinsurance risk
Reinsurance is used to limit exposure to large single claims as well as an accumulation of claims that arise from the same or similar
events.
Risks underwritten are also reinsured in order to stabilise earnings and protect capital resources. Each subsidiary that is an insurer
has its own reinsurance program and determines its own risk tolerances, subject to principles set out in the REMS. To facilitate the
reinsurance process, manage counter party exposure and to create economies of scale, the Group has established a captive
reinsurance operation comprising companies located in Australia, Singapore and Labuan. This operation acts as the reinsurer for the
Group by being the main buyer of the Group’s outwards reinsurance program. A key responsibility of the reinsurance operation is to
manage reinsurance and earnings volatility and the Group's exposure to catastrophe risk. The operation retains a portion of the
intercompany business it assumes and retrocedes (passes on) the remainder to external reinsurers. The REMS outlines the Group's
reinsurance retention for catastrophe must not exceed 4% of net earned premium.
While the majority of business ceded by the Consolidated entity’s subsidiaries is reinsured with the Group's captive reinsurance
operation, individual business units do purchase additional reinsurance protection outside the Group. This generally relates to
facultative reinsurance covers.
The use of reinsurance introduces credit risk. The management of reinsurance includes the monitoring of reinsurers’ credit risk and
controls the exposure to reinsurance counterparty default. Refer to the financial risk section of this note for further details.
a. CURRENT REINSURANCE PROGRAM
The reinsurance operation purchases reinsurance on behalf of Group entities to cover a return period of at least APRA’s minimum of a
1:200 year event on a single site basis but is authorised to elect to purchase covers up to a 1:250 year event on a whole of portfolio
basis. Dynamic financial analysis modelling is used to determine the optimal level at which reinsurance should be purchased for
capital efficiency, compared with the cost and benefits of covers available in the market.
The external reinsurance programs consist of a combination of the following reinsurance protection:
a Group catastrophe cover which is placed in line with the strategy of buying to the level of a 1:250 year event on a modified
whole of portfolio basis. The catastrophe program is negotiated on an annual calendar year basis. Covers purchased are
dynamic; the ICRC changes as total requirements change and as the reinsurance purchase strategy evolves;
an aggregate cover which protects against a frequency of attritional event losses in Australia, New Zealand and Asia and operates
below the Group catastrophe cover;
a buy-down arrangement that reduces the cost of a first and second event;
specific catastrophe protection for the combined Wesfarmers insurance business in Australia and New Zealand, placed in line
with the strategy of buying to the level of a 1:250 year event on a modified whole of portfolio basis;
excess of loss reinsurances which provide 'per risk' protection for retained exposures of the commercial property and engineering
businesses in Australia, New Zealand, Thailand, Malaysia and Vietnam;
excess of loss reinsurance for all casualty portfolios including CTP, public liability, workers’ compensation and home owners
warranty products; and
excess of loss reinsurance for all marine portfolios.
b. CHANGES DURING THE YEAR
The limit of catastrophe cover purchased was increased to $5.6 billion. Should a loss event occur that is greater than $5.6 billion, the
Group could potentially incur a net loss greater than the ICRC. The Group holds capital to mitigate the impact of this possibility.
At 30 June 2014, the Group ICRC for a first event arising from a catastrophe event was $225 million.
IV. Financial Risk
Financial risk focuses on the unpredictability of financial markets and potential adverse effects on financial performance. Key aspects
of the processes established to mitigate financial risks include:
having an Asset and Liability Committee comprising key Executives with relevant oversight responsibilities that meets on a regular
basis;
monthly stress testing undertaken to determine the impact of adverse market movements and the impact of any derivative
positions;
maintenance of an approved Group Credit Risk Policy and Group Foreign Exchange Policy which are reviewed regularly;
capital management activities. For further details refer to the capital management note; and
implementation of a Derivatives Risk Management Statement that considers the controls in the use of derivatives and sets out
the permissible use of derivatives in relation to investment strategies.
MARKET RISK
Market risk is the risk of adverse financial impact due to changes in the value or future cash flows of financial instruments from
fluctuations in foreign currency exchange rates, interest rates and equity prices.
a. FOREIGN EXCHANGE RISK
i. Nature of the risk and how managed
Foreign exchange risk is the risk of loss arising from adverse exchange rate movements in unhedged foreign exchange exposures. The
Consolidated entity operates internationally and so is exposed to foreign exchange risk from various activities conducted in the normal
course of business. Foreign exchange exposure is a centrally managed risk, with hedging coordinated by the Group's Corporate Office.
Refer to the derivatives note for further details on the hedging arrangements used to manage foreign exchange risk.
69
The key foreign exchange risk exposures relate to the following:
Investment of shareholders' funds - the investment of shareholders’ funds in assets denominated in currencies different to the
functional currency. Assets held to back insurance liabilities are held in the same currency as the related insurance liabilities,
mitigating any net foreign exchange exposure.
Interest bearing liabilities - foreign currency denominated interest bearing liabilities are generally of a capital nature. Some are
designated as hedging instruments to manage the foreign exchange risk associated with investments in foreign operations.
Investment in foreign operations - net investment in foreign operations through the translation of the financial position and
performance of foreign operations that have a functional currency other than the Australian dollar with the key currencies being
New Zealand dollars, Indian rupees, Malaysian ringgit, Chinese renminbi, Vietnamese dong and Thai baht.
ii. Foreign exchange risk exposure
The financial impact from exposure to foreign exchange risk to the Group is primarily driven by:
translation of foreign currency transactions - relating mainly to investments, directly recognised in profit or loss;
translation of the financial performance of foreign operations - recognised directly in profit or loss; and
translation of the financial position of foreign operations - recognised directly in equity in the foreign currency translation reserve.
iii. Sensitivity
The following tables provide information regarding the exposure of the Consolidated entity to foreign exchange risk. The sensitivity
analysis provided in the following tables demonstrates the effect of a change in one key assumption while other assumptions remain
unchanged. In reality, there is a correlation between the assumptions and other factors. The sensitivities do not include
interdependencies among the currencies, but rather show isolated exchange rate movements. The sensitivity analysis does not take
into consideration that the assets and liabilities are actively managed and assumes no action by management in response to
movements in the factor. Additionally, the financial position may vary at the time that any actual market movement occurs.
The impact on the measurement of various financial instruments held at reporting date of an instantaneous 10% depreciation of the
Australian dollar at reporting date compared with selected currencies, on profit after tax and equity, net of related derivatives, is
provided in the table below. An appreciation of the Australian dollar would predominantly have the opposite impact.
Shareholders' funds including related derivatives
United States dollar
Net investments in foreign operations and related hedge arrangements
New Zealand dollar
Malaysian ringgit
British pounds
Other currencies where considered significant
CONSOLIDATED
2013
$m
Impact to
profit
2014
$m
Impact to
profit
2
2
4
4
CONSOLIDATED
2013
$m
Impact
directly to
equity
2014
$m
Impact
directly to
equity
74
16
-
15
105
22
15
(1)
12
48
b. INTEREST RATE RISK
i. Nature of the risks and how managed
Interest rate risk is the risk of loss arising from an unfavourable movement in market interest rates. Fixed interest rate assets and
liabilities are exposed to changes in market value derived from mark-to-market revaluations. Financial assets and liabilities with
floating interest rates create exposure to cash flow volatility.
Interest rate risk arises primarily from investments in interest bearing securities. Interest bearing liabilities are exposed to interest rate
risk but as they are measured at amortised cost and are not traded they therefore do not expose the Group to fair value interest rate
risk. In addition, interest bearing liabilities bearing fixed interest rates (subject to some reset conditions) reduce the Group's exposure
to cash flow interest rate risk. Movements in market interest rates therefore impact the price of the securities (and hence their fair
value measurement) however have a limited effect on the contractual cash flows of the securities.
Exposure to interest rate risk is monitored through several measures that include value-at-risk analysis, position limits, scenario
testing, stress testing and managed by asset and liability matching using measures such as duration. Derivatives are used to manage
interest rate risk. The interest rate risk arising from money market securities is managed using interest rate swaps and futures. For
information regarding the notional contract amounts associated with these derivative financial instruments together with a maturity
profile and reporting date fair values, refer to the derivatives note.
70 IAG ANNUAL REPORT 2014
The underwriting of general insurance contracts creates exposure to the risk that interest rate movements may materially impact the
value of the insurance liabilities. Movements in interest rates should have minimal impact on the insurance profit due to the Group’s
policy of investing in assets backing insurance liabilities principally in fixed interest securities broadly matched to the expected
payment pattern of the insurance liabilities. Movements in investment income on assets backing insurance liabilities broadly offset
the impact of movements in discount rates on the insurance liabilities.
ii. Sensitivity
The sensitivity analysis provided in the following table demonstrates the effect of a change in a key assumption while other
assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. The sensitivities do not
include interdependencies among variables, but rather show isolated interest rate movements.
The investments in interest bearing securities are recognised on the balance sheet at fair value. Movements in market interest rates
impact the price of the securities (and hence their fair value measurement) and so would impact profit or loss. The impact on the
measurement of the interest bearing securities held at reporting date of a change in interest rates by +1% or -1% on profit before tax,
net of related derivatives, is shown in the following table:
Investments - interest bearing securities and related interest rate derivatives
CONSOLIDATED
2013
$m
Impact to
profit
(339)
361
2014
$m
Impact to
profit
(328)
351
+1%
-1%
The majority of the interest bearing securities are expected to be held to maturity and so movements in the fair value are expected to
reverse upon maturity of the instruments.
c. PRICE RISK
i. Nature of the risk and how managed
Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market prices
(other than those arising from interest rate or foreign exchange risk), whether those changes are caused by factors specific to the
individual financial instrument or its issuer, or factors affecting all similar financial instruments traded on the market. The Group has
exposure to equity price risk through its investment in equities (both directly and through certain trusts) and the use of equity related
derivative contracts.
Exposure to equity price risk is monitored through several measures that include value-at-risk analysis, position limits, scenario testing
and stress testing.
For information regarding the notional amounts associated with equity related derivative contracts together with the associated
maturity profiles and reporting date fair values, refer to the derivatives note.
ii. Sensitivity
The impact on the measurement of the investments held at reporting date of a change in equity values by +10% or -10% on profit
before tax, net of related derivatives, is shown in the table below:
Investments – equity and trust securities and related equity derivatives
CONSOLIDATED
2013
$m
136
(134)
2014
$m
138
(138)
+10%
-10%
All equity investments are measured at fair value through profit or loss and so there is no direct impact to shareholders from those
movements.
CREDIT RISK
a. NATURE OF THE RISK AND HOW MANAGED
Credit risk is the risk of loss from a counterparty failing to meet their financial obligations. The Group's credit risk arises predominantly
from investment activities, reinsurance activities and dealings with intermediaries. The Group has a Credit Risk Policy which is
approved by the Board. The policy outlines the framework and procedures in place to ensure an adequate and appropriate level of
monitoring and management of credit quality throughout the Group.
IAG Group Treasury is responsible for ensuring that the policies governing the management of credit quality risk are properly
implemented. The Group’s credit risk appetite is approved by the Board and covers credit exposure and credit rating. Any new or
amended credit risk exposures must be approved in accordance with the Group’s approval authority framework.
Concentrations of credit risk exist where a number of counterparties have similar economic characteristics. At reporting date, there
are material concentrations of credit risk to the banking sector, in particular the four major banks and also securitised assets in
Australia and to reinsurers in relation to the reinsurance recoverables. The level of reinsurance cover entered into with individual
reinsurers is sufficiently diversified so as to avoid a concentration charge in the regulatory capital calculation (refer to the capital
management note).
71
b. CREDIT RISK EXPOSURE
i. Premium and reinsurance recoveries on paid claims receivable
The maximum exposure to credit risk as at reporting date is the carrying amount of the receivables on the balance sheet.
An ageing analysis for certain receivables balances is provided below. The other receivables balances have either no overdue
amounts or an insignificant portion of overdue amounts. The amounts are aged according to their original due date. Receivables for
which repayment terms have been renegotiated represent an insignificant portion of the balances.
2014
Premium receivable
Provision for impairment - specific
Provision for impairment - collective
Net balance
Reinsurance recoveries on paid claims
Net balance
2013
Premium receivable
Provision for impairment - specific
Provision for impairment - collective
Net balance
Reinsurance recoveries on paid claims
Net balance
NOT OVERDUE
$m
2,837
-
(7)
2,830
153
153
2,204
-
(7)
2,197
48
48
<30 days
$m
30-120 days
$m
OVERDUE
>120 days
$m
247
(3)
(1)
243
29
29
295
(1)
(3)
291
100
100
236
(5)
(1)
230
14
14
209
(3)
(3)
203
2
2
37
(20)
(4)
13
34
34
41
(14)
(6)
21
37
37
CONSOLIDATED
TOTAL
$m
3,357
(28)
(13)
3,316
230
230
2,749
(18)
(19)
2,712
187
187
The majority of the premium receivable balance relates to policies which are paid on a monthly instalment basis. It is important to
note that the late payment of amounts due under such arrangements allows for the cancellation of the related insurance contract
eliminating both the credit risk and insurance risk for the unpaid amounts. Upon cancellation of a policy the outstanding premium
receivable and revenue is reversed.
ii. Reinsurance recoveries receivable on outstanding claims
Reinsurance arrangements mitigate insurance risk but expose the Group to credit risk. Reinsurance is placed with companies based
on an evaluation of the financial strength of the reinsurers, terms of coverage and price. The Group has clearly defined credit policies
for the approval and management of credit risk in relation to reinsurers. The Consolidated entity monitors the financial condition of its
reinsurers on an ongoing basis and periodically reviews the reinsurers’ ability to fulfil their obligations to the Consolidated entity under
respective existing and future reinsurance contracts. Some of the reinsurers are domiciled outside of the jurisdictions in which the
Group operates and so there is the potential for additional risk such as country risk and transfer risk.
The level and quality of reinsurance protection is an important element in understanding the financial strength of an insurer. The
financial condition of a reinsurer is a critical deciding factor when entering into a reinsurance agreement. The longer the tail of the
direct insurance, the more important is the credit rating of the reinsurer.
It is Group policy to only deal with reinsurers with credit ratings of at least Standard & Poor’s BBB+ (or other rating agency equivalent)
without collateralisation. Where the credit rating of a reinsurer falls below the required quality during the period of risk, a contractual
right to replace the counterparty exists. Some of the reinsurance protection is purchased on a ‘collateralised’ basis, where reinsurers
have deposited funds equivalent to their participation in a trust fund. The counterparty credit profile of the catastrophe reinsurance
program currently stands with more than 89% of the limit for the 2014 program (2013-87%) with parties rated by Standard & Poor’s as
A+ or better. For long-tail reinsurance arrangements 100% (2013-100%) of the program is placed with parties rated by Standard &
Poor's as A+ or better.
Having reinsurance protection with strong reinsurers also benefits the Consolidated entity in its regulatory capital calculations. The
risk charges vary with the grade of the reinsurers such that higher credit quality reinsurance counterparties incur lower APRA
regulatory capital charges.
72 IAG ANNUAL REPORT 2014
The following table provides information regarding the credit risk relating to the reinsurance recoveries receivable on the outstanding
claims balance, excluding other recoveries, based on Standard & Poor’s counterparty credit ratings. These rating allocations relate to
balances accumulated from reinsurance programs in place over a number of years and so will not necessarily align with the rating
allocations noted above for the current program.
CREDIT RATING
AAA
AA
A
BBB and below
Total
CONSOLIDATED
2013
$m
33
1,031
794
31
1,889
2014
$m
1
1,142
901
12
2,056
Of these, approximately $862 million (2013-$1,190 million) is secured directly as follows, which reduces the credit risk:
deposits held in trust: $354 million (2013-$517 million);
letters of credit: $460 million (2013-$503 million); and
loss deposits: $48 million (2013-$170 million).
iii. Investments
The Group is exposed to credit risk from investments in third parties where the Group holds debt and similar securities issued by those
companies.
The credit risk relating to investments is monitored and assessed and maximum exposures are limited. The maximum exposure to
credit risk loss as at reporting date is the carrying amount of the investments on the balance sheet as they are measured at fair value.
The investments comprising assets backing insurance liabilities are restricted to investment grade securities.
The following table provides information regarding the credit risk relating to the interest bearing investments based on Standard &
Poor’s counterparty credit ratings.
CREDIT RATING
AAA
AA
A
BBB and below
Total
CONSOLIDATED
2013
$m
4,557
5,772
1,505
293
12,127
2014
$m
5,153
6,727
1,001
903
13,784
LIQUIDITY RISK
a. NATURE OF THE RISK AND HOW MANAGED
Liquidity risk is concerned with the risk that sufficient cash resources will not be available to meet payment obligations as they become
due (without incurring significant additional costs). The liquidity position is derived from operating cash flows and access to liquidity
through related bodies corporate. The Group complies with its liquidity risk management practices, which include the framework and
procedures in place to ensure an adequate and appropriate level of monitoring and management of liquidity.
Underwriting insurance contracts expose the Group to liquidity risk through the obligation to make payments of unknown amounts on
unknown dates. The assets backing insurance liabilities consist of government securities and other quality securities which can
generally be readily sold or exchanged for cash. The assets are managed so as to broadly match the maturity profile of the expected
pattern of claims payments. The debt securities are restricted to investment grade securities with concentrations of investments
managed by various criteria including: issuer, industry, geography and credit rating.
An additional source of liquidity risk for the Group relates to interest bearing liabilities. The management of this risk includes the
issuance of a range of interest bearing liabilities denominated in different currencies with different maturities.
b. LIQUIDITY RISK EXPOSURE
i. Outstanding claims liability and investments
The breakdown of the fixed term investments are provided by expected maturity. Actual maturities may differ from expected maturities
because certain counterparties have the right to call or prepay certain obligations with or without call or prepayment penalties.
A maturity analysis of the estimated net discounted outstanding claims liability based on the remaining term to payment at the
reporting date and the investments that have a fixed term is provided in the table below.
This maturity profile is a key tool used in the investment of assets backing insurance liabilities in accordance with the policy of broadly
matching the maturity profile of the assets with the estimated pattern of claims payments.
73
MATURITY ANALYSIS
Floating interest rate (at call)
Within 1 year or less
Within 1 to 2 years
Within 2 to 3 years
Within 3 to 4 years
Within 4 to 5 years
Over 5 years
Total
NET DISCOUNTED
OUTSTANDING CLAIMS
LIABILITY
2013
$m
-
2,664
1,437
890
641
450
1,534
7,616
2014
$m
-
3,400
1,559
1,039
678
441
1,589
8,706
CONSOLIDATED
INVESTMENTS
2013
$m
1,136
2,883
1,440
1,047
1,523
3,125
973
12,127
2014
$m
948
4,042
581
1,340
3,509
1,424
1,940
13,784
Timing of future claim payments is inherently uncertain. The table above represents estimated timing.
ii. Interest bearing liabilities
The following table provides information about the residual maturity periods of the interest bearing liabilities of a capital nature based
on the contractual maturity dates of undiscounted cash flows. All of the liabilities have call, reset or conversion dates which occur prior
to any contractual maturity.
CARRYING
VALUE
MATURITY DATES OF CONTRACTUAL UNDISCOUNTED CASH
FLOWS
CONSOLIDATED
$m
927
834
927
704
Within 1
year 1 - 2 years 2 - 5 years
$m
$m
$m
Over 5
years
$m
Perpetual
$m
-
-
96
96
-
-
84
84
-
-
96
96
-
-
84
84
-
-
287
287
-
-
252
252
-
834
-
834
-
704
-
704
927
-
-
927
927
-
-
927
Total
$m
927
834
479
2,240
927
704
420
2,051
2014
Tier 1 regulatory capital(a)
Tier 2 regulatory capital(a)
Contractual undiscounted interest
payments(b)
Total contractual undiscounted payments
2013
Tier 1 regulatory capital(a)
Tier 2 regulatory capital(a)
Contractual undiscounted interest
payments(b)
Total contractual undiscounted payments
(a)
(b)
These liabilities have call, reset or conversion dates upon which certain terms, including the interest or distribution rate, can be changed or the security may be
redeemed or converted. The detailed descriptions of the instruments are provided in the interest bearing liabilities note. The classification of Tier 1 and Tier 2 is subject
to Life and General Insurance Capital transitional arrangements.
Contractual undiscounted interest payments are calculated based on underlying fixed interest rates or prevailing market floating rates as applicable at the reporting
date. Interest payments have not been included beyond five years. Reporting date exchange rates have been used for interest projections for liabilities in foreign
currencies.
iii. Capital
Refer to the capital management note for further details.
V. Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Operational risk can impact other risk categories. When controls fail, an operational risk incident can cause injury, damage to
reputation, have legal or regulatory implications or can lead to financial loss. The Group does not aim to eliminate all operational risks,
but manages these by initiating an appropriate control framework and by monitoring and managing potential risks.
IAG’s Group Operational Risk Policy articulates the operational risk management requirements of the Group. It aims to ensure that
activities undertaken involving operational risk are measured and managed with appropriate regard to the achievement of IAG’s
objectives. The Board and Executive team believe an effective, documented and structured approach to operational risk is a key part of
the broader risk management framework.
As outlined in the RMS and in the Group Operational Risk Policy, operational risk is to be identified and assessed on an ongoing basis.
The Internal Capital Adequacy Assessment Process (ICAAP) summary includes consideration of operational risk. Management and
staff are responsible for identifying, assessing and managing operational risks in accordance with their roles and responsibilities. The
Group's Internal Audit function reviews the effectiveness of processes and procedures surrounding operational risk.
74 IAG ANNUAL REPORT 2014
The general insurance operations of the Group are subject to regulatory supervision in the jurisdictions in which they operate.
Regulatory frameworks continue to evolve in a number of jurisdictions. The Group works closely with regulators and monitors
regulatory developments across its international operations to assess any potential impact on its ongoing ability to meet the various
regulatory requirements.
Throughout the current reporting year the Group has conformed with the requirements of its debt agreements, including all financial
and non-financial covenants (2013-full conformance).
NOTE 4. ANALYSIS OF INCOME
A. GENERAL INSURANCE REVENUE
Gross written premium
Movement in unearned premium liability
Premium revenue
Reinsurance and other recoveries revenue
Reinsurance commission revenue
Total general insurance revenue
B. INVESTMENT INCOME
Dividend revenue
Interest revenue
Trust revenue
Total investment revenue
Net change in fair value of investments
Realised net gains and (losses)
Unrealised net gains and (losses)
Total investment income
Represented by
Investment income on assets backing insurance liabilities
Investment income on shareholders’ funds
C. FEE AND OTHER INCOME
Fee based revenue
Other income
Total fee and other income
D. SHARE OF NET PROFIT/(LOSS) OF ASSOCIATES
Total income
NOTE 5. ANALYSIS OF EXPENSES
A. EXPENSES AS PRESENTED IN THE STATEMENT OF COMPREHENSIVE INCOME
Outwards reinsurance premium expense
Claims expense
Acquisition costs
Other underwriting expenses
Fire services levies
Investment expenses on assets backing insurance liabilities
Finance costs
Net loss attributable to non-controlling interests in unitholders' funds
Fee based, corporate and other expenses
Total expenses
B. ANALYSIS OF EXPENSES BY FUNCTION
General insurance business expenses
Fee based business expenses
Investment and other expenses
Corporate and administration expenses
Total expenses
CONSOLIDATED
2013
$m
2014
$m
9,779
(58)
9,721
1,857
51
11,629
38
511
16
565
(2)
296
859
459
400
859
9,498
(363)
9,135
818
-
9,953
35
550
16
601
110
(50)
661
290
371
661
125
74
199
(8)
12,679
126
49
175
(29)
10,760
CONSOLIDATED
2013
$m
2014
$m
1,077
7,058
1,386
752
216
20
98
14
256
10,877
10,509
113
21
234
10,877
817
5,800
1,203
644
331
20
95
12
245
9,167
8,815
105
29
218
9,167
75
C. OTHER ITEMS
Disclosure of the following items is considered relevant in explaining the results for the financial year:
I. Depreciation and amortisation
Acquired intangible assets
Capitalised software development expenditure
Property and equipment
II. Employee benefits
Defined contribution superannuation plans
Defined benefit superannuation plans
Share based remuneration
Salaries and other employee benefits expense
III. Transfers to provisions charged to profit or loss
Restructuring provision
IV. Finance costs
Subordinated term notes interest paid/payable
Convertible preference share distributions paid/payable
Reset exchangeable securities interest paid/payable
Subordinated bonds interest paid/payable
Other debts of an operational nature, interest paid/payable
Amortisation of capitalised transaction costs
*
NOTE 6. INCOME TAX
A. INCOME TAX EXPENSE
Current tax
Deferred tax
(Over)/under provided in prior year
Income tax expense/(credit)
Deferred income tax expense/(credit) included in income tax comprises
(Increase)/decrease in deferred tax assets
Increase/(decrease) in deferred tax liabilities
B. INCOME TAX RECONCILIATION
The income tax for the financial year differs from the amount calculated on the profit/(loss)
before income tax. The differences are reconciled as follows:
Profit/(loss) from continuing operations for the year before income tax
Income tax calculated at 30% (2013-30%)
Amounts which are not deductible/(taxable) in calculating taxable income
Rebateable dividends
Amortisation and impairment charge on acquired intangible assets and goodwill
Interest on convertible preference shares and reset preference shares
Other
Income tax expense/(credit) applicable to current year
Adjustment relating to prior year
Income tax expense/(credit) attributable to profit/(loss) for the year from continuing operations
after impact of tax consolidation
76 IAG ANNUAL REPORT 2014
CONSOLIDATED
2013
$m
2014
$m
11
38
62
111
99
12
25
1,313
1,449
50
26
18
26
22
1
5
98
25
24
57
106
90
4
22
1,186
1,302
39
20
19
29
20
2
5
95
CONSOLIDATED
2013
$m
2014
$m
427
51
(6)
472
(20)
71
51
486
(26)
(36)
424
(48)
22
(26)
1,802
541
1,593
478
(6)
2
5
(64)
478
(6)
472
(6)
1
6
(19)
460
(36)
424
C. DEFERRED TAX ASSETS
I. Composition
a. AMOUNTS RECOGNISED IN PROFIT
Property and equipment
Employee benefits
Insurance provisions
Investments
Other
Tax losses
b. AMOUNTS RECOGNISED DIRECTLY IN OTHER COMPREHENSIVE INCOME
Defined benefit superannuation plans
Other
c. AMOUNTS SET-OFF AGAINST DEFERRED TAX LIABILITIES
II. Reconciliation of movements
Balance at the beginning of the financial year
Credited/(charged) to profit or loss
Credited/(charged) to equity
Additions through business acquisition
Transfers
Adjustments relating to prior year
Foreign exchange differences
Disposal on sale of business
Balance at the end of the financial year prior to set-off
CONSOLIDATED
2013
$m
2014
$m
66
87
143
17
19
278
610
16
6
632
(328)
304
561
20
(2)
40
2
-
11
-
632
62
72
112
29
29
233
537
24
-
561
(160)
401
512
48
(12)
-
3
(8)
21
(3)
561
III. Tax losses
The Consolidated entity has an unrecognised deferred tax asset of $14 million (2013-$14 million) in relation to discontinued operation
tax losses.
D. DEFERRED TAX LIABILITIES
I. Composition
a. AMOUNTS RECOGNISED IN PROFIT
Investments
Intangible assets
Other
b. AMOUNTS RECOGNISED DIRECTLY IN OTHER COMPREHENSIVE INCOME
Hedges
c. AMOUNTS SET-OFF AGAINST DEFERRED TAX ASSETS
II. Reconciliation of movements
Balance at the beginning of the financial year
Charged/(credited) to profit or loss
Charged/(credited) to equity
Additions through business acquisition
Foreign exchange differences
Transfers
Adjustments relating to prior year
Balance at the end of the financial year prior to set-off
108
78
130
316
12
328
(328)
-
160
71
(8)
108
(1)
2
(4)
328
78
-
62
140
20
160
(160)
-
148
22
(22)
1
1
3
7
160
77
NOTE 7. SEGMENT REPORTING
The Consolidated entity has general insurance products in Australia, New Zealand, and Asia. In Australia, the financial results are
generated from three different divisions being Australia Direct Insurance, Australia Intermediated Insurance and Corporate and other.
On 30 June 2014 the Group acquired the Wesfarmers insurance underwriting business in Australia and New Zealand, with the balance
sheets of these entities consolidated by the Group from this date. In this report the Australian and New Zealand acquired business
form part of the Australian Intermediated Insurance and New Zealand Insurance segments respectively. There is no contribution to
profit after tax attributable to the acquisition in the current financial year.
The Consolidated entity has identified its operating segments based on the internal reports that are reviewed and used by the Chief
Executive Officer (being the chief operating decision maker) in assessing performance and in determining the allocation of resources.
The operating segments are identified by management based on the manner in which the insurance products are underwritten and the
related services provided to customers through the various distribution channels in various countries. Discrete financial information
about each of these operating segments is reported to the Chief Executive Officer on a monthly basis.
The reportable segments are based on aggregated operating segments as these are the source of the Consolidated entity’s major risks
and have the most effect on the rates of return.
The reportable segments comprise the following business divisions:
A. AUSTRALIA DIRECT INSURANCE
This segment provides personal lines insurance products sold primarily under the NRMA, SGIO and SGIC brands, as well as
products distributed through an underwriting arrangement with RACV.
B. AUSTRALIA INTERMEDIATED INSURANCE
This segment provides insurance products primarily sold under the CGU and Swann Insurance brands through insurance brokers,
authorised representatives and distribution partners. This also includes the acquired Wesfarmers Australian insurance
underwriting business which operates under the WFI and Lumley brands. It also includes a 10-year distribution agreement with
Coles supermarket chain.
C. NEW ZEALAND INSURANCE
This segment provides general insurance products, offering most of its products under the State, AMI and NZI brands, as well as
the Lumley brand following the Wesfarmers New Zealand insurance underwriting business acquisition.
D. ASIA INSURANCE
This segment provides direct and intermediated insurance through local brands, underwritten through subsidiaries in Thailand
and Vietnam and the share of the operating result from the investment in associates in Malaysia, India and China.
E. CORPORATE AND OTHER
This segment comprises other activities, including corporate services, interest bearing liabilities funding costs and investment of
the shareholders’ funds.
Further details of the reporting segments' principal activities are disclosed in the Directors' Report. There are no differences
between the recognition and measurement criteria used in the segment disclosures and those used in the financial statements.
78 IAG ANNUAL REPORT 2014
CONSOLIDATED
2014
External revenue
Total revenue
Underwriting profit/(loss)
Investment income net of investment fees -
technical reserves
Insurance profit/(loss)
Investment income net of investment fees -
shareholders' funds
Share of net profit/(loss) of associates
Finance costs
Other net operating result
Profit/(loss) before income tax from
continuing operations
Income tax expense
Profit/(loss) for the year from continuing
operations
Acquisitions of property and equipment,
intangibles and other non-current segment
assets
Depreciation expense
Amortisation and impairment charges on
acquired intangibles and goodwill
Total depreciation and amortisation
expense
2013
External revenue
Total revenue
Underwriting profit/(loss)
Investment income net of investment fees -
technical reserves
Insurance profit/(loss)
Investment income net of investment fees -
shareholders' funds
Share of net profit/(loss) of associates
Finance costs
Other net operating result
Profit/(loss) before income tax from
continuing operations
Income tax expense
Profit/(loss) for the year from continuing
operations
Acquisitions of property and equipment,
intangibles and other non-current segment
assets
Depreciation expense
Amortisation and impairment charges on
acquired intangibles and goodwill
Total depreciation and amortisation
expense
AUSTRALIA
DIRECT
INSURANCE
$m
AUSTRALIA
INTER-
MEDIATED
INSURANCE
$m
NEW
ZEALAND
INSURANCE
$m
ASIA
INSURANCE
$m
CORPORATE
AND OTHER
$m
TOTAL
$m
5,764
5,764
619
289
908
-
-
-
-
3,394
3,394
305
174
479
-
-
-
9
2,809
2,809
206
(26)
180
-
-
-
3
908
488
183
-
39
12
51
5,066
5,066
609
213
822
-
-
-
-
-
10
19
29
3,282
3,282
397
73
470
-
1
-
19
-
11
14
25
1,822
1,822
142
(27)
115
-
-
-
2
301
301
9
3
12
-
2
-
-
14
-
2
4
6
230
230
10
10
20
-
-
-
-
822
490
117
20
-
27
9
36
-
9
18
27
-
9
22
31
-
1
-
1
411
411
1
12,679
12,679
1,140
(1)
-
439
1,579
396
(10)
(98)
(79)
209
396
(8)
(98)
(67)
1,802
(472)
1,330
1,700
1,700
-
-
-
360
360
-
1
1
347
(30)
(95)
(79)
144
157
11
-
11
62
49
111
10,760
10,760
1,158
270
1,428
347
(29)
(95)
(58)
1,593
(424)
1,169
157
57
49
106
79
NOTE 8. EARNINGS PER SHARE
A. REPORTING PERIOD VALUES
Continuing and discontinued operations(a)
Basic earnings per ordinary share(b)
Diluted earnings per ordinary share
Continuing operations(a)
Basic earnings per ordinary share(b)
Diluted earnings per ordinary share
CONSOLIDATED
2013
cents
2014
cents
56.09
53.62
56.09
53.62
37.57
36.44
51.46
49.60
(a)
(b)
The calculation is not rounded.
The basic earnings per ordinary share excludes the treasury shares held in trust from the denominator of the calculation, but includes earnings attributable to those
shares in the numerator, to comply with AASB 133 Earnings Per Share.
B. RECONCILIATION OF EARNINGS USED IN CALCULATING EARNINGS PER SHARE
Profit/(loss) for the year
Profit attributable to non-controlling interests
Profit/(loss) attributable to shareholders of the Parent which is used in calculating basic and
diluted earnings per share
Earnings used in calculating diluted earnings per share
Finance costs of convertible securities, net of tax
Profit/(loss) attributable to shareholders of the Parent which is used in calculating diluted
earnings per share
Profit/(loss) from continuing operations attributable to shareholders of the Parent
Profit/(loss) from discontinued operation attributable to shareholders of the Parent
CONSOLIDATED
2013
$m
2014
$m
1,330
(97)
1,233
24
1,257
1,233
-
882
(106)
776
18
794
1,063
(287)
2014
Number of
shares in
millions
CONSOLIDATED
2013
Number of
shares in
millions
C. RECONCILIATION OF WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN CALCULATING EARNINGS PER SHARE
Weighted average number of ordinary shares on issue
Weighted average number of treasury shares held in trust
Weighted average number of ordinary shares used in the calculation of basic earnings per share
Weighted average number of dilutive potential ordinary shares relating to:
Convertible securities
Unvested share based remuneration rights supported by treasury shares held in trust
2,211
(13)
2,198
2,079
(12)
2,067
133
13
2,344
102
12
2,181
Weighted average number of ordinary shares used in the calculation of diluted earnings per share
NOTE 9. DIVIDENDS
A. ORDINARY SHARES
2014
2014 interim dividend
2013 final dividend
2013
2013 interim dividend
2012 final dividend
80 IAG ANNUAL REPORT 2014
CENTS PER
SHARE
TOTAL
AMOUNT
$m
PAYMENT DATE
TAX RATE FOR
FRANKING
CREDIT
PERCENTAGE
FRANKED
13.0
25.0
11.0
12.0
304
519
823
229
249
478
2 April 2014
9 October 2013
3 April 2013
3 October 2012
30%
30%
30%
30%
100%
100%
100%
100%
It is standard practice that the Board determines to pay the dividend for a period after the relevant reporting date. In accordance with
the relevant accounting policy (refer to section AE of the summary of significant accounting policies note) a dividend is not accrued for
until it is determined to pay and so the dividends for a six-monthly period are generally recognised and measured in the financial
reporting period following the period to which the dividend relates.
The dividends recognised in the current reporting year include $3 million (2013-$1 million) paid in relation to treasury shares held in
trusts controlled by the Consolidated entity.
B. DIVIDEND REINVESTMENT
A Dividend Reinvestment Plan (DRP) operates which allows shareholders to elect to receive their dividend entitlement in the form of
IAG shares. The price of DRP shares is the volume weighted average share market price, less a discount if any (determined by the
Directors) calculated over the pricing period (which is at least five trading days) as determined by the Directors for each dividend
payment date.
The DRP for the 2014 interim dividend paid on 2 April 2014 was settled with the on-market purchase of 11.3 million shares priced at
$5.4195 per share (based on a daily volume weighted average price for 10 trading days from 10 March 2014 to 21 March 2014
inclusive, with no discount applied).
A copy of the terms and conditions for the DRP are available at www.iag.com.au/shareholder.
C. DIVIDEND NOT RECOGNISED AT REPORTING DATE
In addition to the above dividends, the Board determined to pay the following dividend after the reporting date but before finalisation of
this financial report and it has not been recognised in this financial report.
2014 final dividend
CENTS PER
SHARE
26.0
TOTAL
AMOUNT
$m
609
EXPECTED
PAYMENT DATE
TAX RATE FOR
FRANKING
CREDIT
PERCENTAGE
FRANKED
8 October 2014
30%
100%
On 19 August 2014 the Board determined the final dividend will be payable to shareholders on 8 October 2014.
The Company's DRP will operate by issuing ordinary shares to participants by acquiring shares on market with an issue price per share
of the volume weighted average market price as defined in the DRP terms with no discount applied. The last election notice for
participation in the DRP in relation to this final dividend is 11 September 2014.
D. HISTORICAL SUMMARY
The table below provides a historical summary over the last ten years of dividend payments (cents per share) by aggregating dividends
based on the financial period for which they were declared and not the financial period in which they were recognised and paid:
YEAR
ENDED
30 JUNE
2005
12.0
14.5
-
YEAR
ENDED
30 JUNE
2006
13.5
16.0
12.5
YEAR
ENDED
30 JUNE
2007
13.5
16.0
-
YEAR
ENDED
30 JUNE
2008
13.5
9.0
-
YEAR
ENDED
30 JUNE
2009
4.0
6.0
-
YEAR
ENDED
30 JUNE
2010
8.5
4.5
-
YEAR
ENDED
30 JUNE
2011
9.0
7.0
-
YEAR
ENDED
30 JUNE
2012
5.0
12.0
-
YEAR
ENDED
30 JUNE
2013
11.0
25.0
-
YEAR
ENDED
30 JUNE
2014
13.0
26.0
-
Interim dividend
Final dividend
Special dividend
E. DIVIDEND POLICY
The Group's dividend policy is to pay dividends equivalent to 50%-70% of reported cash earnings on a full year basis. Cash earnings
are defined as:
net profit after tax attributable to IAG shareholders;
plus amortisation and impairment of acquired identifiable intangible assets; and
excluding any unusual items.
F. RESTRICTIONS THAT MAY LIMIT THE PAYMENT OF DIVIDENDS
There are currently no restrictions on the payment of dividends by the Parent other than:
the payment of dividends is subject to provisions of the Corporations Act 2001 and IAG's constitution;
the payment of dividends generally being limited to profits subject to ongoing solvency obligations noting that under the APRA
Level 2 insurance group supervision requirements, IAG is required to obtain approval from APRA before payment of dividends on
ordinary shares that exceeds the Group’s after tax earnings as defined by APRA; and
no dividends can be paid and no returns of capital can be made on ordinary shares, if distributions are not paid on the convertible
preference shares or reset exchangeable securities, unless certain actions are taken by IAG. For further details refer to the
interest bearing liabilities note.
81
There are currently no restrictions on the payment of dividends from subsidiaries to the Parent other than:
the payment of dividends generally being limited to profits subject to ongoing solvency obligations of the subsidiary; and
for certain subsidiaries which are required to meet the statutory reserve and regulatory minimum capital requirements. In
particular, APRA has advised Australian general insurers that a general insurer under its supervision must obtain approval from it
before declaring a dividend if the general insurer has incurred a loss, or proposes to pay dividends which exceed the level of
profits earned in the current period.
G. DIVIDEND FRANKING AMOUNT
Franking account balance at reporting date at 30%
Franking credits to arise from payment of income tax payable
Franking credits available for future reporting periods
Franking account impact of dividends determined before issuance of financial report but not
recognised at reporting date
Franking credits available for subsequent financial periods based on a tax rate of 30%
CONSOLIDATED
2013
$m
583
173
756
2014
$m
609
81
690
(261)
429
(223)
533
After payment of the final dividend the franking balance of the Company has $321 million franking credits available for subsequent
financial periods and is capable of fully franking a further $748 million of distributions.
The balance of the franking account arises from:
franked income received or recognised as a receivable at the reporting date;
income tax paid, after adjusting for any franking credits which will arise from the payment of income tax provided for in the
financial statements; and
franking debits from the payment of dividends recognised as a liability at the reporting date.
In accordance with the tax consolidation legislation, the consolidated amounts include franking credits that would be available to the
Parent if distributable profits of non-wholly owned subsidiaries were paid as dividends.
All of the distributions paid in relation to the convertible preference shares and the interest payments in relation to the reset
exchangeable securities for the financial year were fully franked at 30% (2013-fully franked at 30%).
NOTE 10. CLAIMS
A. NET CLAIMS EXPENSE IN THE STATEMENT OF COMPREHENSIVE INCOME
Current year claims relate to claim events that occurred in the current financial year. Prior year claims relate to a reassessment of the
claim events that occurred in all previous financial periods.
Current year
$m
Prior years
$m
2014
Total Current year
$m
$m
CONSOLIDATED
2013
Total
$m
Prior years
$m
Gross claims - undiscounted
Discount
Gross claims - discounted
Reinsurance and other recoveries -
undiscounted
Discount
Reinsurance and other recoveries -
discounted
Net claims expense
6,728
(199)
6,529
(1,074)
49
(1,025)
5,504
309
220
529
(806)
(26)
(832)
(303)
7,037
21
7,058
(1,880)
23
(1,857)
5,201
6,280
(202)
6,078
(535)
12
(523)
5,555
(204)
(74)
(278)
(431)
136
(295)
(573)
6,076
(276)
5,800
(966)
148
(818)
4,982
82 IAG ANNUAL REPORT 2014
B. OUTSTANDING CLAIMS LIABILITY RECOGNISED ON THE BALANCE SHEET
I. Composition of gross outstanding claims liability
Gross central estimate - undiscounted
Claims handling costs
Risk margin
Discount to present value
Gross outstanding claims liability - discounted
CONSOLIDATED
2013
$m
2014
$m
10,646
449
2,781
13,876
(1,939)
11,937
9,570
409
2,712
12,691
(2,217)
10,474
The outstanding claims liability includes $7,171 million (2013-$6,659 million) which is expected to be settled more than 12 months
from the reporting date.
II. Reconciliation of movements in discounted outstanding claims liability
Reinsurance
and other
recoveries
$m
(2,858)
(692)
(1,087)
1,892
(71)
(23)
-
(291)
(101)
-
(3,231)
Gross
$m
10,474
440
6,225
(7,009)
252
130
-
1,256
169
-
11,937
2014
Net
$m
7,616
(252)
5,138
(5,117)
181
107
-
965
68
-
8,706
CONSOLIDATED
2013
Reinsurance
and other
recoveries
$m
(3,928)
(102)
(787)
1,753
(33)
(6)
280
-
(112)
77
(2,858)
Gross
$m
11,709
(139)
5,948
(6,551)
67
46
(668)
-
182
(120)
10,474
Net
$m
7,781
(241)
5,161
(4,798)
34
40
(388)
-
70
(43)
7,616
Balance at the beginning of the financial year
Movement in the prior year central estimate
Current year claims incurred
Claims paid/recoveries received
Movement in discounting
Movement in risk margin
Disposed through sale of businesses
Addition through business acquisition
Net foreign currency movements
Net claims charged to discontinued operation
Balance at the end of the financial year
III. Maturity analysis
Refer to the risk management note for details of the maturity profile of the estimated net discounted outstanding claims liability based
on the remaining term to payment at the reporting date.
83
IV. Development table
The following table shows the development of the net undiscounted ultimate claims for the ten most recent accident years and a
reconciliation to the net discounted outstanding claims liability.
2004
and
prior
$m
2005
$m
2006
$m
2007
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
Total
$m
CONSOLIDATED
Accident year
3,670
3,623
3,592
3,546
3,512
3,461
3,435
3,428
3,417
3,422
NET ULTIMATE CLAIMS PAYMENTS
Development
At end of
accident year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Current estimate
of net ultimate
claims payments
Cumulative
payments made
to date(a)
Net
undiscounted
outstanding
claims payments
Discount to
present value
Net discounted
outstanding
claims payments
3,422
3,375
(143)
594
451
39
47
(8)
5,521
5,145
5,068
5,204
5,272
5,216
5,050
5,130
5,112
5,167
4,655
4,630
4,528
4,476
4,424
4,696
4,736
4,672
4,665
4,579
4,526
4,673
4,630
4,627
4,606
4,585
4,517
4,505
4,771
4,734
4,693
4,708
4,638
4,563
4,536
4,526
4,040
3,967
3,892
3,900
3,887
3,862
3,842
3,850
3,847
3,847
4,526
4,505
4,526
4,424
5,167
5,216
5,068
5,521
3,723
4,451
4,366
4,299
4,082
4,046
4,320
3,901
2,861
124
75
139
227
342
1,121
896
1,167
2,660
7,392
(19)
(10)
(18)
(27)
(37)
(76)
(91)
(113)
(152)
(694)
105
65
121
200
305
1,045
805
1,054
2,508
6,698
Reconciliation
Claims handling costs
Risk margin
Net outstanding claims liability
407
1,601
8,706
The development table above includes claims related to the United Kingdom (UK) discontinued operation up to the 2012 accident year
only. Any outstanding claims relating to the UK that remained at the time of divestment have been treated as paid in the table above
within item (a).
Where an entity or business that includes an outstanding claims liability has been acquired the claims for the acquired businesses are
included in the claims development table from and including the year of acquisition. Accordingly the 2014 accident year includes
claims acquired on acquisition of the Wesfarmers insurance underwriting business in Australia and New Zealand.
Conditions and trends that have affected the development of the liabilities in the past may or may not occur in the future. Accordingly
conclusions about future results may not necessarily be derived from the information presented in the tables above.
The development table shown above relates to both short-tail and long-tail claims.
The gross outstanding claims liability includes international operations. For ease of comparison within the claims development table,
all payments not denominated in Australian dollars have been converted to Australian dollars using the exchange rates as at the
reporting date. Therefore, the claims development table disclosed each reporting year cannot be reconciled directly to the equivalent
tables presented in previous years' financial report.
84 IAG ANNUAL REPORT 2014
V. Central estimate and risk margin
a. REPORTING DATE VALUES
The percentage risk margin applied to the net outstanding claims liability
The probability of adequacy of the risk margin
CONSOLIDATED
2013
%
21
2014
%
23
90
90
b. PROCESS
The outstanding claims liability is determined based on three building blocks being:
a central estimate of the future cash flows;
discounting for the effect of the time value of money; and
a risk margin for uncertainty.
i. Future cash flows
The estimation of the outstanding claims liability is based on a variety of actuarial techniques that analyse experience, trends and
other relevant factors. The expected future payments include those in relation to claims reported but not yet paid or not yet paid in full,
claims incurred but not enough reported (IBNER), claims incurred but not reported (IBNR) and the anticipated direct and indirect
claims handling costs.
The estimation process involves using the Consolidated entity’s specific data, relevant industry data and more general economic data.
Each class of business is usually examined separately and the process involves consideration of a large number of factors. These
factors may include the risks to which the business is exposed at a point in time, claim frequencies and average claim sizes, historical
trends in the incidence and development of claims reported and finalised, legal, social and economic factors that may impact upon
each class of business, the key actuarial assumptions set out in section VI and the impact of reinsurance and other recoveries.
Different actuarial valuation models are used for different claims types and lines of business. The selection of the appropriate
actuarial model takes into account the characteristics of a claim type and class of business and the extent of the development of each
accident period.
ii. Discounting
Projected future claims payments, both gross and net of reinsurance and other recoveries and associated claims handling costs are
discounted to a present value using appropriate risk free discount rates.
iii. Risk margin
The central estimate of the outstanding claims liability is an estimate which is intended to contain no deliberate or conscious over or
under estimation and is commonly described as providing the mean of the distribution of future cash flows. It is considered
appropriate to add a risk margin to the central estimate in order for the claims liability to have an increased probability of sufficiency.
The risk margin refers to the amount by which the liability recognised in the financial statements is greater than the actuarial central
estimate of the liability.
Uncertainties surrounding the outstanding claims liability estimation process include those relating to the data, actuarial models and
assumptions, the statistical uncertainty associated with a general insurance claims runoff process, and risks external to IAG, for
example the impact of future legislative reform. Uncertainty from these sources is examined for each class of business and expressed
as a volatility measure relative to the net central estimate. The volatility measure for each class is derived after consideration of
statistical modelling and benchmarking to industry analysis. Certain product classes may be subject to the emergence of new types of
latent claims and such uncertainties are considered when setting the volatility and hence the risk margin appropriate for those
classes.
The long-tail classes of business generally have the highest volatilities for outstanding claims as the longer average time for claims to
be reported and settled allows more time for sources of uncertainty to emerge. Short-tail classes generally have lower levels of
volatility for outstanding claims.
The risk margin required to provide a given probability of adequacy for two or more classes of business or for two or more geographic
locations combined is likely to be less than the sum of the risk margins for the individual classes. This reflects the benefit of
diversification. The level of diversification assumed between classes has due regard to industry analysis, historical experience and the
judgement of experienced and qualified actuaries.
The determination of the overall risk margin takes into account the volatility of each class of business and the diversification between
the lines of business. The current risk margin, which has been determined after assessing the inherent uncertainty in the central
estimate and risks in the prevailing environment, results in an overall probability of adequacy for the outstanding claims liability of 90%
(2013-90%).
85
VI. Actuarial assumptions
The following ranges of key actuarial assumptions were used in the measurement of outstanding claims and recoveries, where
appropriate, at the reporting date, within the operating segments.
ASSUMPTION
2014
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
2013
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
AUSTRALIA
DIRECT
INSURANCE
AUSTRALIA
INTERMEDIATED
INSURANCE*
NEW ZEALAND
INSURANCE*
ASIA INSURANCE
CONSOLIDATED
3.3 years
2.4%-4.0%
0.0%-5.0%
2.4%-5.0%
4.1%
3.3 years
2.6%-4.0%
0.0%-5.0%
2.5%-5.4%
4.8%
4.4 years
2.5%-4.8%
0.0%-5.0%
2.5%-5.0%
5.8%
5.2 years
2.8%-5.0%
0.0%-5.0%
2.5%-5.3%
5.4%
0.8 years
2.5%
0.0%
3.0%-4.1%
5.2%
0.7 years
2.2%
0.0%
2.2%-3.4%
5.2%
0.4 years
0.0%-4.0%
0.0%
0.0%
2.1%
0.4 years
0.0%-4.0%
0.0%
0.0%
1.5%
*
2014 operating segments include Wesfarmers’ insurance underwriting business acquired at 30 June 2014.
a. PROCESS USED TO DETERMINE ASSUMPTIONS
i. Discounted average term to settlement
The discounted average term to settlement relates to the expected payment pattern for claims (inflated and discounted). It is
calculated by class of business and is generally based on historic settlement patterns. The discounted average term to settlement,
while not itself an assumption, provides a summary indication of the future cash flow pattern.
ii. Inflation rate
Insurance costs are subject to inflationary pressures. Economic inflation assumptions are set by reference to current economic
indicators.
iii. Superimposed inflation rate
Superimposed inflation tends to occur due to trends in wider society such as the cost of court settlements increasing at a faster rate
than the economic inflation rate utilised. An allowance for superimposed inflation is made for each underlying model, where
appropriate, after considering the historical levels of superimposed inflation present in the portfolio, projected future superimposed
inflation and industry superimposed inflation trends.
iv. Discount rate
The discount rate is derived from market yields on government securities.
v. Claims handling costs ratio
The future claims handling costs ratio is generally calculated with reference to the historical experience of claims handling costs as a
percentage of past payments, together with budgeted costs going forward.
VII. The effect of changes in assumptions
a. GENERAL IMPACT OF CHANGES
i. Discounted average term to settlement
A decrease in the discounted average term to settlement would reflect claims being paid sooner than anticipated and so would
increase the claims expense. Note that this sensitivity test only extends or shortens the term of the payments assumed in the
valuation, without changing the total nominal amount of the payments.
ii. Inflation and superimposed inflation rates
Expected future payments take account of inflationary increases. An increase or decrease in the assumed levels of either economic or
superimposed inflation will have a corresponding decrease or increase on profit and loss.
iii. Discount rate
The outstanding claims liability is calculated with reference to expected future payments. These payments are discounted to adjust for
the time value of money. An increase or decrease in the assumed discount rate will have a corresponding increase or decrease on
profit and loss.
iv. Claims handling costs ratio
An increase in the ratio reflects an increase in the estimate for the internal costs of administering claims. An increase or decrease in
the ratio assumption will have a corresponding decrease or increase on profit and loss.
86 IAG ANNUAL REPORT 2014
b. SENSITIVITY ANALYSIS OF CHANGES
The impact on the net outstanding claims liabilities before income tax to changes in key actuarial assumptions is summarised below.
Each change has been calculated in isolation of the other changes and without regard to other balance sheet changes that may
simultaneously occur. Changes are stated net of reinsurance recoveries.
The movements are stated in absolute terms where the base assumption is a percentage, for example, if the base inflation rate
assumption was 3.5%, a 1% increase would mean assuming a 4.5% inflation rate.
ASSUMPTION
CONSOLIDATED
MOVEMENT IN
ASSUMPTION
AUSTRALIA
DIRECT
INSURANCE
$m
AUSTRALIA
INTERMEDIATED
INSURANCE*
$m
NEW ZEALAND
INSURANCE*
$m
ASIA
INSURANCE
$m
2014
Discounted average term to
settlement
Inflation rate
Discount rate
Claims handling costs ratio
2013
Discounted average term to
settlement
Inflation rate
Discount rate
Claims handling costs ratio
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
(52)
52
135
(127)
(126)
137
51
(51)
(54)
54
135
(127)
(126)
137
42
(42)
(89)
86
140
(124)
(121)
140
37
(37)
(119)
108
134
(116)
(114)
134
25
(25)
*
2014 operating segments include Wesfarmers’ insurance underwriting business acquired at 30 June 2014.
NOTE 11. REINSURANCE AND OTHER RECOVERIES ON OUTSTANDING CLAIMS
A. REINSURANCE AND OTHER RECOVERIES RECEIVABLE ON OUTSTANDING CLAIMS
Expected reinsurance and other recoveries receivable on outstanding claims - undiscounted
Discount to present value
Expected reinsurance and other recoveries receivable on outstanding claims - discounted
(1)
1
4
(4)
(4)
4
7
(7)
(1)
1
4
(4)
(3)
3
3
(3)
-
-
-
-
-
-
2
(2)
-
-
-
-
-
-
1
(1)
CONSOLIDATED
2013
$m
2014
$m
3,877
(646)
3,231
3,642
(784)
2,858
The carrying value of reinsurance recoveries and other recoveries includes $1,865 million (2013-$1,707 million) which is expected to
be settled more than 12 months from the reporting date.
Refer to the claims note for a reconciliation of the movement in reinsurance and other receivables on incurred claims.
B. ACTUARIAL ASSUMPTIONS
The measurement of reinsurance and other recoveries on outstanding claims is an inherently uncertain process involving estimates.
The amounts are generally calculated using actuarial assumptions and methods similar to those used for the outstanding claims
liability (refer to section VI of the claims note).
Where possible, the valuation of reinsurance recoveries is linked directly to the valuation of the gross outstanding claims liability.
Accordingly, the valuation of outstanding reinsurance recoveries is subject to similar risks and uncertainties as the valuation of the
outstanding claims liability. Significant individual losses (for example those relating to catastrophe events) are analysed on a case by
case basis for reinsurance purposes.
C. THE EFFECT OF CHANGES IN ASSUMPTIONS
The effect of changes in assumptions on the net outstanding claims liability, which incorporates the reinsurance recoveries on
outstanding claims and other recoveries receivable, is disclosed in the claims note.
87
NOTE 12. DEFERRED INSURANCE ASSETS
A. DEFERRED ACQUISITION COSTS
Reconciliation of movements
Deferred acquisition costs at the beginning of the financial year
Acquisition costs deferred
Amortisation charged to profit
Disposed through sale of business
Net acquisition costs earned and written on discontinued operation
Net foreign exchange movements
Deferred acquisition costs at the end of the financial year
CONSOLIDATED
2013
$m
2014
$m
795
1,607
(1,386)
-
-
12
1,028
753
1,283
(1,203)
(45)
(5)
12
795
The carrying value of deferred acquisition costs includes $82 million (2013-$58 million) which is expected to be amortised more than
12 months from reporting date.
B. DEFERRED OUTWARDS REINSURANCE EXPENSE
Reconciliation of movements
Deferred outwards reinsurance expense at the beginning of the financial year
Reinsurance expenses deferred
Amortisation charged to profit
Addition through business acquisition
Disposed through sale of business
Net acquisition costs earned and written on discontinued operation
Net foreign exchange movements
Deferred outwards reinsurance expense at the end of the financial year
542
1,186
(1,077)
20
-
-
35
706
493
849
(817)
-
(8)
(1)
26
542
The carrying value of deferred outwards reinsurance expense includes $9 million (2013-$45 million) which is expected to be amortised
more than 12 months from reporting date.
NOTE 13. UNEARNED PREMIUM LIABILITY
A. RECONCILIATION OF MOVEMENTS
Unearned premium liability at the beginning of the financial year
Deferral of premiums written during the financial year
Earning of premiums written in previous financial years
Additions through business acquisition
Disposed through sale of business
Net premiums earned and written on discontinued operation
Net foreign exchange movements
Unearned premium liability at the end of the financial year
CONSOLIDATED
2013
$m
2014
$m
5,145
5,062
(5,004)
987
-
-
66
6,256
4,942
4,981
(4,618)
-
(212)
(18)
70
5,145
The carrying value of unearned premium liability includes $236 million (2013-$141 million) which is expected to be earned more than
12 months from reporting date.
B. LIABILITY ADEQUACY TEST
The liability adequacy test (LAT) has been conducted using the central estimate of the premium liabilities calculated for reporting to
APRA (refer to the capital management note), adjusted as appropriate, together with an appropriate margin for uncertainty for each
portfolio of contracts. The test is based on prospective information and so is heavily dependent on assumptions and judgements.
The liability adequacy test is required to be conducted at a level of a portfolio of contracts that are subject to broadly similar risks and
that are managed together as a single portfolio. The Group defines ‘broadly similar risks’ at a level where policies are affected by one
or more common risk factors, including natural peril events, general weather conditions, economic conditions, inflationary movements,
legal and regulatory changes as well as legislative reforms, reinsurance cost changes and variation in other input costs. For the
current reporting year, the ‘broadly similar risks’ test results in a more granular interpretation for business written in Asia. The Group
defines 'managed together' at a segment level as the respective Divisional CEOs manage the entire portfolio within their respective
division. The ‘managed together’ test results in a more granular interpretation for business written within Australia. As a result, the
liability adequacy test is currently performed at the segment level for Australia Direct, Australia Intermediated and New Zealand, and at
subsidiary level within Asia until such time when the Asian portfolio becomes more diverse.
The liability adequacy test at reporting date resulted in a surplus for the Group (2013-surplus for all portfolios).
88 IAG ANNUAL REPORT 2014
Net central estimate of present value of expected future cash flows from future claims
Risk margin of the present value of expected future cash flows
Risk margin percentage
Probability of adequacy
CONSOLIDATED
2013
$m
3,360
71
3,431
2014
$m
4,013
93
4,106
2.3%
60.0%
2.1%
60.0%
The risk margin used in testing individual portfolios is calculated by using a probability of adequacy methodology based on
assessments of the levels of risk in each portfolio for the liability adequacy test. The methodology of using probability of adequacy as a
basis for calculating the risk margin, including diversification benefit, is consistent with that used for the determination of the risk
margin for the outstanding claims liability. The process used to determine the risk margin, including the way in which diversification of
risks has been allowed for, is explained in the claims note. The probability of adequacy represented by the liability adequacy test
differs from the probability of adequacy represented by the outstanding claims liability. The reason for this difference is that the former
is in effect an impairment test used only to test the sufficiency of net premium liabilities whereas the latter is a measurement
accounting policy used in determining the carrying value of the outstanding claims liability.
NOTE 14. INVESTMENTS
A. COMPOSITION
I. Interest bearing investments
Cash and short term money held in investment
Government and semi-government bonds
Corporate bonds and notes
Subordinated debt
Fixed interest trusts
Other
II. Equity investments
a. DIRECT EQUITIES
Listed
Unlisted
b. EQUITY TRUSTS (INCLUDING PROPERTY TRUSTS)
Listed
Unlisted
III. Other investments
Other trusts
IV. Derivatives
Investment related derivatives
CONSOLIDATED
2013
$m
2014
$m
2,554
2,248
6,810
1,307
63
802
13,784
808
119
69
426
1,422
158
158
1,226
2,810
6,447
836
53
755
12,127
768
228
63
271
1,330
199
199
13
13
15,377
(40)
(40)
13,616
The Group's equity investments include the exposure to convertible securities.
B. DETERMINATION OF FAIR VALUE
The table below separates the total investments balance based on a hierarchy that reflects the significance of the inputs used in the
determination of fair value. The increase in investment assets is primarily driven by the acquired insurance underwriting business of
Wesfarmers Limited in Australia and New Zealand. The fair value hierarchy is determined using the following levels:
I. Level 1 quoted prices
Quoted prices (unadjusted) in active markets for identical assets and liabilities are used.
II. Level 2 other observable inputs
Valued using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices), including: quoted prices in active markets for similar assets or liabilities, quoted prices in
markets in which there are few transactions for identical or similar assets or liabilities and other inputs that are not quoted prices but
are observable for the asset or liability, for example interest rate yield curves observable at commonly quoted intervals.
89
III. Level 3 unobservable inputs
Inputs for the asset or liability that are not based on observable market data (unobservable inputs) are used. Level 3 investments are
primarily unlisted private equity funds where the fair value of investments is determined on the basis of published redemption values
of those funds received from the relevant managers who themselves use various methods to value the underlying investments.
Where the determination of fair value for an instrument involves inputs from more than one category, the level within which the
instrument is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value
measurement.
LEVEL 1
$m
LEVEL 2
$m
LEVEL 3
$m
CONSOLIDATED
TOTAL
$m
2014
Interest bearing investments
Equity investments
Other investments
Derivatives
2013
Interest bearing investments
Equity investments
Other investments
Derivatives
NOTE 15. RECEIVABLES
A. COMPOSITION
I. Premium receivable
Premium receivable
Provision for impairment
Net premium receivable
II. Trade and other receivables (a)
Reinsurance recoveries on paid claims
Other trade debtors
Provision for impairment
Loan to associates(b)
Investment income receivable
Investment transactions not yet settled at reporting date
Corporate treasury derivatives receivable
Other debtors
Trade and other receivables
4,850
877
-
(1)
5,726
4,818
831
-
(2)
5,647
8,934
433
158
14
9,539
7,309
417
199
(38)
7,887
-
112
-
-
112
-
82
-
-
82
13,784
1,422
158
13
15,377
12,127
1,330
199
(40)
13,616
CONSOLIDATED
2013
$m
2014
$m
3,357
(41)
3,316
230
39
(5)
34
98
106
38
10
112
628
3,944
2,749
(37)
2,712
187
33
(5)
28
103
90
47
-
71
526
3,238
(a)
(b)
Other than the loan to associates, receivables are non-interest bearing and are normally settled between 30 days and 12 months. The balance has not been discounted
as the effect of the time value of money is not material. The net carrying amount of receivables is a reasonable approximation of the fair value of the assets due to the
short term nature of the assets.
This loan is denominated in Malaysian ringgit and has a fixed term of 15 years. A cumulative preference dividend of 1% is payable annually. The loan relates to the
Group's increased investment in AmGeneral to acquire Kurnia during the financial year ended 30 June 2013.
90 IAG ANNUAL REPORT 2014
NOTE 16. INTANGIBLE ASSETS
CONSOLIDATED
2014
A. COMPOSITION*
Cost
Accumulated amortisation
Accumulated impairment
Net foreign exchange movements
Balance at the end of the financial year
B. RECONCILIATION OF MOVEMENTS
Balance at the beginning of the financial
year
Additions acquired and developed
Additions through business acquisitions
Amortisation
Net foreign exchange movements
Balance at the end of the financial year
2013
C. COMPOSITION OF COMPARATIVES
Cost
Accumulated amortisation
Accumulated impairment
Net foreign exchange movements
Balance at the end of the financial year
D. RECONCILIATION OF MOVEMENTS
Balance at the beginning of the financial
year
Additions acquired and developed
Additions through business acquisition
Disposal through sale of businesses
Amortisation
Amortisation charged to discontinued
operation
Net foreign exchange movements
Balance at the end of the financial year
Software
development
expenditure
$m
Distribution
channels
$m
Customer
relationships
$m
Other
contractual
arrangements
$m
Brands
$m
596
(292)
(7)
(9)
288
160
105
57
(38)
4
288
434
(254)
(7)
(13)
160
122
77
-
(12)
(24)
(5)
2
160
160
(5)
-
-
155
17
-
140
(2)
-
155
290
(88)
(113)
(72)
17
19
-
-
-
(2)
-
-
17
169
(30)
-
5
144
38
-
112
(8)
2
144
140
(52)
(30)
(20)
38
41
-
2
-
(8)
-
3
38
108
(1)
-
6
113
30
-
80
(1)
4
113
120
(21)
(33)
(36)
30
28
-
-
-
-
-
2
30
-
-
-
-
-
-
-
-
-
-
-
32
(30)
(1)
(1)
-
15
-
-
-
(15)
-
-
-
Total
$m
1,033
(328)
(7)
2
700
245
105
389
(49)
10
700
1,016
(445)
(184)
(142)
245
225
77
2
(12)
(49)
(5)
7
245
*
Certain intangible assets were fully amortised in the prior reporting period and have therefore been removed from the 2014 balances.
E. AMORTISATION RATES
20%-33.3%
10%-20%
10%-35%
0%-33%
100%
F. EXPLANATORY NOTES FOR INTANGIBLE ASSETS
I. Software development expenditure
The software development expenditure asset comprises both internally generated assets and acquired assets.
II. Acquired intangible assets
All of the intangible assets, other than the capitalised software development expenditure intangible asset, have been acquired. With
the exception of certain brand assets, each of the acquired assets has a finite useful life. The amortisation of the acquired intangible
assets with finite lives forms part of fee based, corporate and other expenses in the statement of comprehensive income. A broad
description of the nature of each of the significant intangible assets is provided below.
a. DISTRIBUTION CHANNELS
The value of the distribution channels is derived from future revenue expected to be generated as a result of the existing relationships
with the broker networks.
91
b. CUSTOMER RELATIONSHIPS
This represents the present value of future profits expected to arise from existing customer relationships (developed prior to
acquisition). The assumptions for the useful life and attrition rates for the existing customer base are determined based on historical
information of the business.
c. BRANDS
This represents the revenue generating value of the acquired brand and is determined using the relief from royalty method. Certain
brands are recognised as having an indefinite useful life as there is no foreseeable limit to the period over which the brand is expected
to generate net cash flows. Brand assets with an indefinite useful life are not subject to amortisation but are subject to impairment
testing annually or more frequently when indicators of impairment are identified.
d. OTHER CONTRACTUAL ARRANGEMENTS
This represented the value of in-force customer contracts. The basis of determination is expected profit emerging from in-force
business as it is earned.
G. IMPAIRMENT TESTING
For each category an impairment trigger review was conducted and where necessary the recoverable amount of particular assets
determined.
I. For the year ended 30 June 2014
There was no impairment charge recognised during the year.
II. For the year ended 30 June 2013
There was no impairment charge recognised during the year.
NOTE 17. GOODWILL
A. COMPOSITION*
Goodwill
Accumulated impairment charges
Net foreign exchange movements
B. RECONCILIATION OF MOVEMENTS
Balance at the beginning of the financial year
Additional amounts arising from business acquisitions
Net foreign currency movements
Balance at the end of the financial year
C. ALLOCATION TO CASH GENERATING UNITS
Australia Direct insurance operations
Australia Intermediated insurance operations
New Zealand insurance operations
Asia insurance operations
CONSOLIDATED
2013
$m
2014
$m
2,839
-
1
2,840
1,666
1,135
39
2,840
582
1,586
624
48
2,840
2,303
(421)
(216)
1,666
1,625
1
40
1,666
582
584
448
52
1,666
*
30 June 2013 includes the discontinued operation balances that were fully impaired and have therefore been removed from the 2014 balances.
As the Group incorporates businesses into the Group and/or reorganises the way businesses are managed, reporting structures may
change requiring a reconsideration of the identification of the cash generating units.
The goodwill relating to certain acquisitions outside Australia is denominated in currencies other than Australian dollars and so is
subject to foreign exchange rate movements.
D. IMPAIRMENT ASSESSMENT
The impairment testing of goodwill involves the use of accounting estimates and assumptions. The recoverable amount of each cash
generating unit is determined on the basis of value in use calculations. The value in use is calculated using a discounted cash flow
methodology covering a ten or twenty year period with an appropriate terminal value at or before the end of year ten or twenty for each
cash generating unit. The carrying value of identified intangible assets is deducted from the value generated from the cash flow
projections to arrive at a recoverable value for goodwill which is then compared with the carrying value of goodwill.
92 IAG ANNUAL REPORT 2014
I. Assumptions used
The following describes the key assumptions on which management has based its cash flow projections to undertake impairment
testing of goodwill.
a. CASH FLOW FORECASTS
For the mature businesses, cash flow forecasts are based on ten year valuation forecasts for growth and profitability. Twenty year
periods are only used in emerging markets, to enable appropriate phasing to terminal values.
b. TERMINAL VALUE
Terminal value is calculated using a perpetuity growth formula based on the cash flow forecast for year ten or twenty, terminal growth
rate in profit or premium and, where appropriate, terminal insurance margin. Terminal growth rates and insurance margins are based
on past performance and management's expectations for future performance in each segment and country. The terminal growth rate
assumptions used in the Group's impairment assessment for significant cash generating units as at 30 June 2014 are: Australia Direct
insurance operations 4.5% (2013-4.5%), Australia Intermediated insurance operations 4.5% (2013-4.5%) and New Zealand insurance
operations 3.5% (2013-3.5%).
c. DISCOUNT RATE
Discount rates reflect a beta and equity risk premium appropriate to the Group, with risk adjustments for individual segments and
countries where applicable. The pre-tax discount rates used for significant cash generating units as at 30 June 2014 are: Australia
Direct insurance operations 13.1% (2013-13.1%), Australia Intermediated insurance operations 12.6% (2013-13.2%) and New
Zealand insurance operations 15.0% (2013-14.3%).
E. IMPAIRMENT TESTING
I. For the year ended 30 June 2014
There was no impairment charge recognised during the year.
II. For the year ended 30 June 2013
There was no impairment charge recognised during the year.
NOTE 18. TRADE AND OTHER PAYABLES
A. COMPOSITION
I. Trade creditors
Commissions payable
Stamp duty payable
GST payable on premium receivable
Corporate treasury derivatives payable
Other
II. Other payables
Other creditors and accruals
Investment creditors
Interest payable on interest bearing liabilities
Loan from joint venture (a)
CONSOLIDATED
2013
$m
2014
$m
219
123
137
-
323
802
528
170
15
8
1,523
167
99
132
32
410
840
401
6
16
-
1,263
(a)
The loan relates to the Group's current payable balance with NTI Limited, a joint venture, and is expected to be settled within 12 months.
Other trade creditors includes $59 million (2013-$128 million) reinsurance collateral arrangements with various reinsurers to secure
the Group reinsurance recoveries. The balance is anticipated to reduce through the settlement of amounts from reinsurers as they fall
due. This payable is interest bearing.
Trade and other payables are unsecured, non-interest bearing and are normally settled within 30 days to 12 months. Amounts have
not been discounted because the effect of the time value of money is not material. The carrying amount of payables is a reasonable
approximation of the fair value of the liabilities because of the short term nature of the liabilities.
93
NOTE 19. RESTRUCTURING PROVISION
A. COMPOSITION
Restructuring provision
B. RECONCILIATION OF MOVEMENTS
Balance at the beginning of the financial year
Additions
Amounts settled
Remeasurement of provisions
Balance at the end of the financial year
CONSOLIDATED
2013
$m
2014
$m
50
6
50
(6)
-
50
6
20
41
(53)
(2)
6
All of the provision outstanding at the reporting date is expected to be settled within 12 months (2013–all). The balance has not been
discounted.
NOTE 20. INTEREST BEARING LIABILITIES
A. COMPOSITION
I. Capital nature
a. TIER 1 REGULATORY CAPITAL*
Convertible preference shares
Reset exchangeable securities
b. TIER 2 REGULATORY CAPITAL
GBP subordinated term notes
GBP subordinated exchangeable term notes
NZD subordinated bonds
AUD subordinated convertible term notes
II. Operational nature
Other interest bearing liabilities
Less: capitalised transaction costs
2014
CONSOLIDATED
2013
CARRYING
VALUE
$m
FAIR VALUE
$m
CARRYING
VALUE
$m
FAIR VALUE
$m
Section
B. I
B. II
B. III
B. IV
B. V
B. VI
377
550
182
-
302
350
2
(11)
1,752
402
589
190
-
314
357
2
377
550
167
261
276
-
2
(13)
1,620
384
565
168
261
293
-
2
*
These instruments are eligible for recognition as Tier 1 capital. A portion may be reclassified as Tier 2 capital to the extent the amount on issue is in excess of APRA's
Tier 1 limits.
B. SIGNIFICANT TERMS AND CONDITIONS
I. Convertible preference shares
The convertible preference shares (CPS) have a face value of $377 million and were issued by the Company.
Key terms and conditions:
Non-cumulative floating rate distribution payable semi-annually, the payments are expected to be fully franked.
Distribution rate equals the sum of six month bank bill rate plus CPS margin of 4.00% per annum multiplied by (1–tax rate).
Payments of distributions can only be made subject to meeting certain conditions. If no distribution is made, no dividends can be
paid and no returns of capital can be made on ordinary shares until the next CPS dividend payment date.
The CPS are scheduled for conversion on 1 May 2019 provided the mandatory conversion conditions are satisfied.
IAG may exchange or redeem CPS on the exchange date, or upon occurrence of certain events, subject to APRA approval. The
first optional exchange date is 1 May 2017.
The CPS must be converted into ordinary shares upon request by APRA on occurrence of a non-viability trigger event.
A non-viability trigger event occurs where APRA determines that CPS must be converted because without conversion or a public
sector injection of capital or equivalent support IAG would become, in APRA’s opinion, non-viable.
94 IAG ANNUAL REPORT 2014
II. Reset exchangeable securities
The reset exchangeable securities (RES) have a face value of $550 million and were issued at par by IAG Finance (New Zealand)
Limited, a wholly owned subsidiary of the Company.
Key terms and conditions:
Non-cumulative floating rate distribution payable quarterly and expected to be fully franked.
Distribution rate equals the sum of the three month bank bill rate plus RES margin of 4.00% per annum multiplied by (1-tax rate).
Payments of distributions can only be made subject to meeting certain conditions. If no distribution is made, no dividends can be
paid and no returns of capital can be made on ordinary shares unless IAG takes certain actions.
The RES may be exchanged by IAG or the holder on a reset date, or upon certain events. The next reset date for the RES is 16
December 2019. On exchange, IAG may convert RES into IAG ordinary shares, arrange a third party to acquire RES for their face
value or redeem RES for their face value (subject to APRA approval).
The RES convert into IAG ordinary shares which would rank equally in all respects with all other IAG ordinary shares.
III. GBP subordinated term notes
The GBP subordinated term notes were issued with a face value of £250 million (equivalent to $625 million at date of issue) by the
Company. A total of £150 million of the notes have been bought back since 2009.
Key terms and conditions:
Fixed interest rate of 5.625% per annum payable annually.
The notes mature on 21 December 2026 (non-callable for the first 10 years). If the notes are not redeemed by 21 December
2016, all notes become floating rate notes with an interest rate of the three month GBP LIBOR plus 1.62%.
IV. GBP subordinated exchangeable term notes
The GBP subordinated exchangeable term notes were issued at par with a face value of £157 million (equivalent to $260 million at
date of issue) and were issued by Insurance Australia Limited, a wholly owned subsidiary of the Company.
On 13 June 2014, Insurance Australia Limited repurchased and cancelled its £157 million subordinated exchangeable loan note
instrument.
V. NZD subordinated bonds
The NZD subordinated bonds were issued with a face value of NZ$325 million (equivalent to $246 million at date of issue) by the
Company.
Key terms and conditions:
Fixed interest rate of 7.5% per annum payable quarterly.
The bonds mature on 15 December 2036 with the issuer having the option to redeem at par from 15 December 2016 and at
subsequent interest payment dates subject to approval from APRA.
If the bonds are not redeemed by 15 December 2016, the interest rate will equal the sum of the five year New Zealand swap rate
on 15 December 2016 and each 5th anniversary thereafter plus a margin of 3.78% per annum.
The bonds may also be redeemed by the issuer upon certain events subject to APRA's approval.
VI. AUD subordinated convertible term notes
The AUD subordinated convertible term notes were issued with a face value of $350 million by Insurance Australia Limited (IAL), a
wholly owned subsidiary of the Company.
Key terms and conditions:
Investors are entitled to interest paid quarterly at a floating rate equal to the three month bank bill swap rate (BBSW) plus a
margin of 2.80% per annum;
The notes mature on 19 March 2040 unless converted or redeemed earlier, subject to rights of conversion or redemption;
IAL has an option to redeem the securities at face value between years five and six and for certain tax and regulatory events (in
each case subject to APRA’s prior written approval);
The securities are convertible into IAG ordinary shares at the option of holders on certain dates from year eight;
If APRA determines IAG or IAL to be non-viable, the securities will convert into IAG ordinary shares or, if that is not possible, the
securities will be written off; and
The number of IAG ordinary shares received on conversion will be based on a volume-weighted average price (VWAP) over a
certain period, less a discount of 1%. The number of IAG ordinary shares will be capped at a maximum number set by reference
to the VWAP of IAG ordinary shares at the issue date (50% of that VWAP for conversion at the holder’s option and 20% of that
VWAP for conversion on non-viability).
C. FAIR VALUE INFORMATION
The interest bearing liabilities are initially measured at fair value (net of transaction costs) but are subsequently measured at
amortised cost. Based on market conditions at any point in time, the carrying value of the liabilities may not be representative of the
fair value of the liabilities.
The fair value for all interest bearing liabilities is calculated using their quoted market price (fair value hierarchy level 1), except for the
GBP subordinated exchangeable term notes where a valuation technique based on market available data for a similar instrument is
used (fair value hierarchy level 2).
95
NOTE 21. NOTES TO THE STATEMENT OF CHANGES IN EQUITY
A. SHARE CAPITAL
I. Ordinary shares
Balance at the beginning of the financial year
Shares issued under institutional placement, net of transaction costs
Share issued under Share Purchase Plan, net of transaction costs
Balance at the end of the financial year
2014
Number of
shares in
millions
2013
Number of
shares in
millions
CONSOLIDATED
2013
2014
$m
$m
2,079
219
43
2,341
2,079
-
-
2,079
5,353
1,186
236
6,775
5,353
-
-
5,353
All ordinary shares on issue are fully paid. Ordinary shares entitle the holder to a vote at a general meeting of the Company and to
participate in the dividends and the proceeds on winding up of the Company in proportion to the number of, and amounts paid on, the
shares held. Dividends, if declared, are subject to there being distributable profits available and not breaching APRA capital adequacy
requirements.
II. Changes during the year
During the year ended 30 June 2014, the Company undertook the following two issues of ordinary shares to fund the acquisition of the
insurance underwriting business of Wesfarmers Limited in Australia and New Zealand:
$1.2 billion raised through a fully underwritten institutional placement at $5.47 per ordinary share, of approximately 219 million
shares on 23 December 2013; and
$236 million raised through a Share Purchase Plan at $5.47 per ordinary share, of approximately 43 million shares on 3 February
2014.
There were no issues of ordinary shares during the year ended 30 June 2013.
B. TREASURY SHARES HELD IN TRUST
Share based remuneration is provided in different forms to eligible employees. To satisfy obligations under the various share based
remuneration plans, shares are generally bought on market at or near grant date of the relevant arrangement and held in trust. Upon
consolidation of the trusts, the shares held that are controlled for accounting purposes are recognised as treasury shares held in trust,
as described in section AH of the summary of significant accounting policies note. The balance of treasury shares held in trust at a
reporting date represents the cumulative cost of acquiring IAG shares that have not yet been distributed to employees as share based
remuneration.
C. NATURE AND PURPOSE OF RESERVES
I. Foreign currency translation reserve
The foreign currency translation reserve records the foreign currency differences arising from the translation of the financial position
and performance of subsidiaries that have a functional currency other than Australian dollars.
II. Share based remuneration reserve
The share based remuneration reserve is used to recognise the fair value at grant date of equity settled share based remuneration
provided to employees over the vesting period, as described in section AB of the summary of significant accounting policies note.
NOTE 22. NOTES TO THE CASH FLOW STATEMENT
A. COMPOSITION
Cash held for operational purposes
Cash and short term money held in investments
Cash held as discontinued operation
Cash and cash equivalents
CONSOLIDATED
2013
$m
2014
$m
447
2,554
9
3,010
394
1,226
96
1,716
Cash and cash equivalents represent cash on hand and held with banks, deposits at call and short term money held in investments
readily convertible to cash within two working days, net of any bank overdraft. The carrying amount of the cash and cash equivalents
presented on the balance sheet is the same as that used for the purposes of the cash flow statement.
Cash held as discontinued operation is subject to certain restrictions. Part of the funds are held to support the United Kingdom
pension fund liability and can be withdrawn if certain conditions are satisfied.
96 IAG ANNUAL REPORT 2014
B. SIGNIFICANT RISKS
The net carrying amount of cash and cash equivalents represents the maximum exposure to credit risk relevant to cash and cash
equivalents at reporting date and is equivalent to the fair value of the assets because of the negligible credit risk and frequent
repricing.
A portion of the cash balances is held in currencies other than the Australian dollar. For information regarding the management of
currency risk by the Group refer to the risk management note.
The majority of the amounts bear variable rates of interest. Those balances bearing a fixed rate of interest mature in less than one
year. A small portion of the amounts bear no interest.
CONSOLIDATED
2013
$m
2014
$m
C. RECONCILIATION OF PROFIT/(LOSS) FOR THE YEAR TO NET CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) for the year
I. Non-cash items
Depreciation of property and equipment
Amortisation and impairment of intangible assets and goodwill
Net realised (gains) and losses on disposal of investments
Net unrealised (gains) and losses on revaluation of investments
Net retained earnings remeasurements of defined benefit superannuation plans
Retained earnings adjustment for share based remuneration
Non-cash items related to discontinued operation
Other
II. Movement in operating assets and liabilities
DECREASE/(INCREASE) IN OPERATING ASSETS
Premium and other receivables
Prepayments, deferred levies and charges
Deferred tax assets
Defined benefit superannuation asset
INCREASE/(DECREASE) IN OPERATING LIABILITIES
Trade and other payables
Provisions
Current tax liabilities
Deferred tax liabilities
Outstanding claims liability
Unearned premium liability
Net cash flows from operating activities
1,330
62
49
2
(296)
18
25
-
(30)
(248)
(172)
29
-
42
(33)
(32)
-
207
124
1,077
882
57
49
(110)
50
28
22
264
29
430
(124)
(31)
(1)
427
20
(1)
(9)
(608)
416
1,790
D. SIGNIFICANT NON-CASH TRANSACTIONS RELATING TO FINANCING AND INVESTING TRANSACTIONS
There were no financing or investing transactions during the year which have had a material effect on the assets and liabilities that did
not involve cash flows.
NOTE 23. ACQUISITIONS AND DISPOSALS OF BUSINESSES
A. ACQUISITION OF SUBSIDIARIES
I. For the financial year ended 30 June 2014
a. WESFARMERS ACQUISITION
On 30 June 2014, the Group acquired the insurance underwriting business of Wesfarmers Limited in Australia and New Zealand,
strengthening IAG's position in its home markets of Australia and New Zealand. Accordingly, the assets and liabilities of acquired
companies are consolidated from this date, with no contribution to the Group's profit or loss after tax in the current financial year. The
acquisition comprises Wesfarmers’ insurance underwriting business trading under the WFI and Lumley Insurance brands. It also
includes a 10-year distribution agreement with Coles supermarket chain. The acquisition supports the Group’s strategic priorities of
accelerating profitable growth in Australia and sustaining its market-leading position in New Zealand.
The acquired business forms part of the Australian and New Zealand respective cash generating units. The total consideration for the
acquisition was $1,980 million which includes an initial purchase price of $1,845 million and a completion payment adjustment of
$135 million. This was funded by the combination of an issue of ordinary shares through an institutional placement, Share Purchase
Plan, subordinated debt as well as internal funds.
97
Details of the financial impact of the acquisition are as follows:
2014
Purchase price
Cash paid
Cash payable
Total purchase consideration
Provisional fair value of identifiable assets and liabilities acquired and goodwill recognised by acquiree
Cash and cash equivalents
Investments
Trade and other receivables
Reinsurance and other recoveries on outstanding claims
Deferred tax assets
Trade and other payables
Deferred tax liabilities
Unearned premium liability
Outstanding claims liability
Other assets and liabilities
Net identifiable assets acquired during the financial year
Intangible assets recognised upon acquisition
Brands
Customer relationships
Distribution channels
Software development expenditure
Goodwill
WESFARMERS ACQUISITION
$m
1,845
135
1,980
1,558
218
536
291
40
(134)
(108)
(976)
(1,251)
294
468
77
104
140
57
1,134
1,512
At 30 June 2014 the fair values of the assets and liabilities acquired are provisional and pending final valuations. On completion of
the final valuations the balances for the acquisition may be revised in accordance with applicable Australian Accounting Standards.
The measurement of identifiable intangible assets acquired in a business combination is highly subjective and there are a range of
possible values that could be attributed for initial recognition. The Group uses the skills and experience of valuation specialists in
establishing an initial range within which the fair value is to be recognised. Judgement is then applied in selecting the value to be
recognised on the balance sheet. Judgement is also applied in determining the useful life of the intangible assets which impacts
directly on the amortisation charges to be incurred following an acquisition.
Goodwill represents the excess of the purchase consideration over the fair value of identifiable net assets acquired at the acquisition
date. Goodwill comprises components such as other intangible assets not separately identified such as the assembled workforce;
buyer-specific synergies not factored into the valuation of intangible assets from the perspective of a generic acquirer; and the ability
to generate new customer and broker relationships. None of the goodwill recognised is expected to be deductible for income tax
purposes.
The net cash flow in relation to the acquisition is as follows:
2014
Cash consideration paid
Cash balance acquired
Net outflow of cash
Contribution from the acquired business*
Revenue
Profit/(loss) after income tax
WESFARMERS ACQUISITION
$m
(1,845)
1,558
(287)
2,027
124
*
The revenue and profit/(loss) after income tax disclosure represent management's estimate of the contribution the acquisition would have made to the Consolidated
entity result if the acquisition had occurred on 1 July 2013.
The Group incurred acquisition related costs of $18 million on legal fees and due diligence costs. These costs have been included in
corporate and other expenses in the statement of comprehensive income.
98 IAG ANNUAL REPORT 2014
b. AAA ASSURANCE CORPORATION
On 24 July 2013, the Group increased its stake in AAA Assurance from 30% to 60.9% for a consideration of less than $20 million. The
Group's effective shareholding was further increased to 63.17% as a result of a capital reduction during the first half of the current
financial year. The operating results, assets and liabilities of AAA Assurance have been consolidated by the Group from 24 July 2013.
B. OTHER ACQUISITIONS
I. For the financial year ended 30 June 2014
There were no other material acquisitions by the Consolidated entity.
C. DISPOSAL OF SUBSIDIARIES
I. For the financial year ended 30 June 2014
There were no disposals of subsidiaries by the Consolidated entity.
NOTE 24. DETAILS OF SUBSIDIARIES
The following entities constitute the Consolidated entity.
TABLE
NOTE
COUNTRY OF
INCORPORATION/
FORMATION
EXTENT OF BENEFICIAL
INTEREST IF NOT 100%
2013
%
2014
%
A. ULTIMATE PARENT
Insurance Australia Group Limited
B. SUBSIDIARIES
I. Australian general insurance operations
A.C.N. 137 507 110
CGU Foundation Pty Ltd
CGU Insurance Australia Limited
CGU Insurance Limited
CGU-VACC Insurance Limited
CGU Workers Compensation (NSW) Limited
CGU Workers Compensation (VIC) Limited
HBF Insurance Pty Ltd
Hunter Insurance Services Pty Limited
IAG Re Australia Limited
IAL Life Pty Limited
Insurance Australia Limited
Insurance Manufacturers of Australia Pty Limited
Mutual Community General Insurance Proprietary Limited
National Adviser Services Pty Ltd
NRMA Personal Lines Holdings Pty Limited
Sitrof Australia Limited
Strata Unit Underwriting Agency Pty Limited
Swann Insurance (Aust) Pty Ltd
WFI Insurance Limited (formerly Wesfarmers General Insurance Ltd)
World Class Accident Repairs (Cheltenham North) Pty Limited
II. New Zealand operations
151 Insurance Limited
AMI Insurance Limited
Belves Investments Limited
Direct Insurance Services Limited
IAG New Zealand Limited
IAG (NZ) Holdings Limited
IAG (NZ) Share Plan Nominee Limited
Lumley General Insurance (NZ) Limited
New Zealand Insurance Limited
NZI Staff Superannuation Fund Nominees Limited
Runacres and Associates Limited
Runacres Premium Funding Limited
State Insurance Limited
The IAG New Zealand Limited Employee Share Plan
The IAG Performance Awards Rights Plan for Executives in New Zealand
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
A
A
B
A
A
B
A
C
C
C
C
C,D
C
C
B
C
C
C
C
C
C
C
70.00
70.00
70.00
-
70.00
-
99
III. Other international operations
AAA Assurance Corporation
Alba Group Pte Ltd
IAG (Asia) General Pte Ltd
IAG Insurance (Thailand) Ltd
IAG Re Labuan (L) Berhad
IAG Re Singapore Pte Ltd
Safety Insurance Public Company Limited
IV. Investment operations
Fixed Interest Shareholders Fund
Fixed Interest Technical Provisions Fund
IAG Asset Management Alternative Investment Trust
IAG Asset Management Cash Management Trust
IAG Asset Management Equity Trust
IAG Asset Management Limited
IAG Asset Management Private Equity Trust
IAG Asset Management Sustainable Investment Trust
K2 Advisors Alpha Strategies Fund
V. Corporate operations
Empire Equity Australia Pty Limited
IAG & NRMA Superannuation Pty Limited
IAG Finance (New Zealand) Limited
IAG International Pty Limited
IAG Share Plan Nominee Pty Limited
IAG Share and Rights Plan Trust
IAG UK Holdings Limited
Insurance Australia Group Services Pty Limited
Lumley Insurance Group Limited
Lumley Technology Pty Ltd
Safety Thailand Holding Pty Limited
Thailand Insurance Holdings Pty Limited
WFI Dormant Pty Ltd (formerly Wesfarmers Federation Insurance Pty Ltd)
WFI Insurance Holdings Pty Ltd (formerly Wesfarmers Insurance Pty Ltd)
TABLE
NOTE
COUNTRY OF
INCORPORATION/
FORMATION
B
C
C
C
C
C
C
A
A
A
A
A
A
A
A
A
A
A
C
B
B
A
A
B
B
Vietnam
Singapore
Singapore
Thailand
Malaysia
Singapore
Thailand
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
United Kingdom
Australia
Australia
Australia
Australia
Australia
Australia
Australia
C. ENTITIES THAT COMMENCED DEREGISTRATION DURING THE YEAR ENDED 30 JUNE 2014
Alba Underwriting Limited
AU No 2 Limited
B&BHL Limited
Cox Commercial Limited
Diagonal Underwriting Agency Limited
Direct Insurance Services Limited
EIGL Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
E
E
E
E
E
E
E
D. DISSOLUTION OF PARTNERSHIP DURING THE YEAR ENDED 30 JUNE 2014
E
IAG Finance (UK) LLP
E. ENTITIES IN VOLUNTARY LIQUIDATION AT 30 JUNE 2014
CGU Workers Compensation (SA) Limited
Lumley Superannuation Pty Limited
Parks Insurance Pty Limited
E
E
E
Gilbraltar
Australia
Australia
Australia
NOTES
A
B
C
D
E
Small proprietary companies, trusts or funds that are not required to prepare, and have not prepared, audited financial statements.
Audited by accounting firms not affiliated with KPMG.
Audited by overseas KPMG firms.
All subsidiaries have only ordinary shares on issue except this entity also has perpetual preference shares on issue.
Companies in liquidation or deregistration not required to prepare audited financial statements.
100 IAG ANNUAL REPORT 2014
EXTENT OF BENEFICIAL
INTEREST IF NOT 100%
2013
%
2014
%
63.17
30.00
98.62
98.62
86.20
86.33
83.19
50.01
83.19
50.01
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
NOTE 25. NON-CONTROLLING INTERESTS
A. SUMMARISED FINANCIAL INFORMATION
The Group has non-controlling interests in Insurance Manufacturers of Australia Pty Limited, AAA Assurance Corporation and Safety
Insurance Public Company Limited.
Set out below is summarised financial information for the Group's material non-controlling interests, being Insurance Manufacturers of
Australia Pty Limited. The amounts disclosed are before intercompany eliminations.
I. Summarised statement of comprehensive income
Net premium revenue
Profit/(loss) after tax attributable to IAG shareholders
Profit/(loss) after tax attributable to non-controlling interest
Other comprehensive income
Total comprehensive income
II. Summarised balance sheet
Total assets
Total liabilities
Net assets
Carrying amount of non-controlling interest
III. Summarised cash flow
Net cash flows from operating and investing activities
Dividends paid to other Group entities
Dividends paid to non-controlling interest
Total net cash flows
INSURANCE
MANUFACTURERS OF
AUSTRALIA PTY LIMITED
2013
$m
2014
$m
2,633
2,547
238
102
2
342
3,459
(2,716)
743
223
204
(189)
(81)
(66)
248
106
2
356
3,460
(2,789)
671
201
255
(198)
(85)
(28)
NOTE 26. INVESTMENT IN JOINT VENTURE AND ASSOCIATES
A. INTERESTS IN JOINT VENTURE AND ASSOCIATES
Summarised information of interests in material joint venture and associates accounted for on an equity basis is as follows:
TABLE
NOTE
REPORTING
DATE
COUNTRY OF
INCORPORATION
/FORMATION
PRINCIPAL ACTIVITY
CONSOLIDATED
CARRYING
VALUE
OWNERSHIP
INTEREST
2014 2014
2013
$m
%
%
AmGeneral Holdings Berhad
(AmGeneral)
SBI General Insurance Company
Limited (SBI General)
Bohai Property Insurance
Company Ltd (Bohai Insurance)
Other
A
A
B
31 March
Malaysia
Insurance underwriting
352
49.00 49.00
31 March
India
Insurance underwriting
87
26.00 26.00
31 December China
Insurance underwriting
20.00 20.00
107
26
572
TABLE NOTE
A
B
Audited by accounting firms not affiliated with KPMG.
Audited by overseas KPMG firms.
None of the associates are listed on a stock exchange. Those entities that do not have a 30 June financial year end are equity
accounted using financial information for the reporting year to 30 June which includes, at least in part, unaudited management
results.
There is no unrecognised share of losses arising from the above joint venture or associates, both for the reporting year and
cumulatively.
101
B. RECONCILIATION OF MOVEMENTS
Balance at the beginning of the financial year
Additional investment in existing associate
Disposal of investment in associate
Share of associates' net profit/(loss)*
Net foreign exchange movements
Dividends received
Balance at the end of the financial year
CONSOLIDATED
2013
$m
2014
$m
577
12
(7)
12
(21)
(1)
572
384
153
-
(10)
50
-
577
*
The contribution of Asian-based associates to the net profit/(loss) of the Group in the statement of comprehensive income includes regional support and development
costs of $20 million (2013-$19 million).
C. SUMMARISED FINANCIAL INFORMATION OF ASSOCIATES
These disclosures relate to the investment in Asia (AmGeneral, SBI General and Bohai Insurance) as all other investments in
associates are not significant.
Disclosure is based on the financial statements, prepared in accordance with IFRS under Group accounting policies, for the financial
year ended 31 March 2014 for AmGeneral and SBI General and for the financial year ended 31 December 2013 for Bohai Insurance.
The following summarised information represents the financial position and performance of the entities as a whole and not just IAG's
share.
SBI General
Insurance
Company
Limited
$m
2014
Bohai
Property
Insurance
Company Ltd
$m
AmGeneral
Holdings
Berhad
$m
SBI General
Insurance
Company
Limited
$m
2013
Bohai
Property
Insurance
Company Ltd
$m
AmGeneral
Holdings
Berhad
$m
617
236
347
404
153
257
45
(6)
39
1,690
(1,073)
617
302
50
352
(17)
-
(17)
334
(239)
95
25
62
87
(17)
-
(17)
634
(445)
189
38
69
107
44
(1)
43
1,527
(974)
553
271
71
342
(26)
-
(26)
209
(143)
66
18
66
84
(8)
-
(8)
497
(324)
173
35
79
114
I. Summarised statement of
comprehensive income
Revenue
Profit/(loss) after tax
Other comprehensive income
Total comprehensive income
II. Summarised balance sheet
Total assets
Total liabilities
Net assets as at reporting date
Group's ownership interest
Other adjustments*
Carrying value as at 30 June
*
Other adjustments include IFRS adjustments, foreign exchange revaluations, goodwill, intangibles, and share of profits/(loss) from financial statement date to 30 June.
D. NATURE AND EXTENT OF ANY SIGNIFICANT RESTRICTIONS
There are no significant restrictions on the ability of joint venture or associates to transfer funds to the Consolidated entity in the form
of cash dividends, or to repay loans or advances made by the Consolidated entity.
E. COMMITMENTS AND CONTINGENT LIABILITIES
There are no capital or other commitments or contingent liabilities arising from the joint venture or any of the associates that are
significant to the Consolidated entity.
102 IAG ANNUAL REPORT 2014
NOTE 27. EMPLOYEE BENEFITS
A. EMPLOYEE BENEFITS PROVISION
Annual leave
Long service leave
Cash based incentive arrangements
Defined benefit superannuation plans
Other employee benefits*
CONSOLIDATED
2013
$m
2014
$m
97
85
106
39
8
335
79
72
81
64
9
305
*
There is one defined benefit pension arrangement in Australia with a discounted liability of $6 million as at the current reporting date (2013-$7 million) involving 55
participants (2013-58) and one defined benefit pension arrangement in New Zealand with a discounted liability of $2 million as at the current reporting date
(2013-$2 million) involving 34 participants (2013-36). These liabilities are met from general assets rather than assets being set aside in trust.
The employee benefits provision includes $95 million (2013-$116 million) which is expected to be settled after more than 12 months
from reporting date.
B. CASH BASED INCENTIVE ARRANGEMENTS
I. Short term incentive plan
The short term incentive plan continued in operation during the current reporting year. Eligible employees have the capacity to earn a
proportion of their base pay as a cash incentive annually. The incentive opportunity is set depending on an employee's role and
responsibilities. The majority of employees are on a 10%, 15% or 20% plan. The incentive payments are determined based on an
assessment of individual performance and achievement of a range of business unit and individual goals.
NOTE 28. SHARE BASED REMUNERATION
The provision of share based remuneration creates a link between shareholder value creation and rewarding employees. Share based
remuneration encourages employee share ownership, links employee reward to the performance of the Group and assists with
retention of key personnel. This encourages employees to focus on creating shareholder value over the longer term.
The obligations under share based payment arrangements are covered by the on-market purchase of IAG ordinary shares which are
held in trust. The shares are purchased on or near grant date at the prevailing market price. The arrangements are managed using in-
house trusts, one for Australia and one for New Zealand, which are controlled for accounting purposes and are subsidiaries of the
Consolidated entity. The trustee for each trust is a subsidiary of the Consolidated entity. The trusts are administered externally.
The number of shares purchased to cover each allocation of rights is determined by the trustee based on independent actuarial
advice. The trusts allow for excess shares purchased in relation to one plan to be used to meet obligations of the other plans at the
trustee’s discretion. The trusts held 16,547,487 shares as at 30 June 2014 (2013-13,558,821 shares) representing 0.71% (2013-
0.65%) of the issued share capital. This includes shares that are not controlled for accounting purposes and so not recognised as
treasury shares.
Trading in IAG ordinary shares that are awarded under the share based remuneration arrangements is covered by the same
restrictions that apply to all forms of share ownership by employees. These restrictions limit an employee trading in IAG ordinary
shares when they are in a position to be aware, or are aware, of price sensitive information.
Share based remuneration is provided through a range of different plans, each of which has different purposes and different rules.
The share based remuneration expense amounts are included in the claims expense, other underwriting expenses and fee based,
corporate and other expenses lines in the statement of comprehensive income.
A. SENIOR MANAGEMENT AND EXECUTIVE SHARE PLANS
The senior management and Executive share plan arrangements consist of two separate arrangements working together. These two
arrangements are the DAR and EPR Plans which are detailed below. The PARC approves the participation of each individual in the
plans. Certain other share plan arrangements remain in place but are closed to new offers.
I. Deferred Award Rights Plan
The Deferred Award Rights Plan (DAR Plan) is the deferred portion of the short term incentive issued as rights over IAG ordinary shares.
Key terms and conditions:
The rights are granted for nil consideration, are non-transferable, and can be settled only with existing IAG ordinary shares.
Holders do not receive dividends and do not have voting rights until the rights are exercised.
The vesting condition is not market related and requires the participant to continue in relevant employment.
Where the rights vest (the holder becomes entitled to exercise the right), the plan entitles participating employees to acquire one
IAG ordinary share for each right. The exercise price of all vested rights is a nominal value of $1 per tranche of rights exercised.
The rights vest after a maximum two year period as determined by the Board subject to the participants continuing in relevant
employment for the full period. If there is a change of control of IAG, the Board has discretion to determine if and when rights
should vest.
If the vesting condition is not met then the rights lapse. The rights also lapse where the holder chooses to forgo the rights and all
rights expire seven years from grant date where they have not previously lapsed or been exercised.
103
The following information relates to the rights issued under the DAR Plan.
FAIR
VALUE AT
GRANT
DATE
RIGHTS
ON ISSUE AT
1 JULY
RIGHTS
GRANTED
DURING THE
YEAR
RIGHTS
EXERCISED
DURING THE
YEAR
RIGHTS
LAPSED
DURING THE
YEAR
NUMBER OF RIGHTS AT 30
JUNE
Exercisable
On issue
GRANT DATE
2014
19/12/2006
27/09/2007
18/09/2008
27/02/2009
25/09/2009
25/03/2010
06/10/2010
03/03/2011
21/10/2011
17/02/2012
26/10/2012(a)
26/10/2012(a)
25/02/2013(a)
25/02/2013(a)
01/11/2013(a)
01/11/2013(a)
11/03/2014
02/04/2014
$5.354
$4.820
$3.668
$3.397
$3.600
$3.780
$3.532
$3.467
$2.880
$2.740
$4.291
$4.360
$5.467
$5.511
$5.684
$5.876
$5.083
$5.216
51,465
213,790
472,820
10,000
238,280
6,100
698,340
9,600
1,560,200
17,800
3,171,500
13,400
41,100
10,700
-
-
-
-
6,515,095
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,431,600
11,200
7,600
21,100
2,471,500
(18,186)
(85,770)
(196,220)
-
(129,380)
(2,900)
(535,800)
(5,400)
(1,347,600)
(17,800)
(1,398,400)
(13,400)
(18,150)
-
(31,300)
-
-
-
(3,800,306)
(a)
Rights issued on the same grant date may have different fair values to reflect different vesting periods.
2013
19/12/2006
13/03/2007
27/09/2007
27/05/2008
18/09/2008
27/02/2009(a)
27/02/2009(a)
27/02/2009(a)
25/09/2009
24/11/2009
25/03/2010
06/10/2010
03/03/2011(a)
03/03/2011(a)
21/10/2011
17/02/2012
26/10/2012(a)
26/10/2012(a)
25/02/2013(a)
25/02/2013(a)
$5.354
$5.156
$4.820
$2.810
$3.668
$3.155
$3.397
$3.311
$3.600
$3.770
$3.780
$3.532
$3.467
$3.492
$2.880
$2.740
$4.291
$4.360
$5.467
$5.511
116,240
21,937
359,550
26,345
773,620
10,000
10,000
15,000
899,050
31,640
19,200
1,601,800
29,350
20,000
3,332,800
70,800
-
-
-
-
7,337,332
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,525,200
13,400
41,100
10,700
3,590,400
(62,900)
(21,937)
(142,260)
(26,345)
(293,100)
(10,000)
-
(15,000)
(657,970)
(31,640)
(13,100)
(890,300)
(19,750)
(20,000)
(1,712,450)
(47,700)
(235,900)
-
-
-
(4,200,352)
-
-
-
-
-
-
-
-
(8,000)
-
(66,300)
-
-
-
(42,000)
-
-
-
(116,300)
(1,875)
-
(3,500)
-
(7,700)
-
-
-
(2,800)
-
-
(13,160)
-
-
(60,150)
(5,300)
(117,800)
-
-
-
(212,285)
33,279
128,020
276,600
10,000
108,900
3,200
162,540
4,200
204,600
-
1,706,800
-
22,950
10,700
2,358,300
11,200
7,600
21,100
5,069,989
51,465
-
213,790
-
472,820
-
10,000
-
238,280
-
6,100
698,340
9,600
-
1,560,200
17,800
3,171,500
13,400
41,100
10,700
6,515,095
33,279
128,020
276,600
10,000
108,900
3,200
162,540
4,200
204,600
-
241,450
-
5,600
10,700
-
-
-
-
1,189,089
51,465
-
213,790
-
472,820
-
10,000
-
238,280
-
6,100
254,200
7,680
-
264,300
-
41,400
-
4,600
-
1,564,635
(a)
Rights issued on the same grant date may have different fair values to reflect different vesting periods.
The weighted average share price for rights exercised for the year ended 30 June 2014 was $5.74 (2013-$4.84).
The fair value of the rights is calculated as at the grant date using a Black Scholes valuation.
104 IAG ANNUAL REPORT 2014
2014
Grant date
Share price on grant date ($)
Exercise price ($)
Risk free interest rate (%)
Expected dividend yield (%)
Expected life of rights (years)
2013
Grant date
Share price on grant date ($)
Exercise price ($)
Risk free interest rate (%)
Expected dividend yield (%)
Expected life of rights (years)
SIGNIFICANT FACTORS AND ASSUMPTIONS
1/11/2013
$6.13
$1 per tranche exercised
3.25%
5.71%
1 or 2 years
11/03/2014
$5.41
$1 per tranche exercised
3.13%
6.44%
1 or 2 years
2/04/2014
$5.54
$1 per tranche exercised
3.24%
6.63%
1 or 2 years
26/10/2012
$4.51
$1 per tranche exercised
3.00%
3.70%
1 or 2 years
25/02/2013
$5.69
$1 per tranche exercised
3.11%
3.96%
1 or 2 years
Some of the assumptions are based on historical data which is not necessarily indicative of future trends. Reasonable changes in
these assumptions would not have a material impact on the amounts recognised in the financial statements.
II. Executive Performance Rights Plan
The Executive Performance Rights Plan (EPR Plan) is the Group's long term incentive plan issued as rights over IAG ordinary shares.
Key terms and conditions:
The rights are granted for nil consideration, are non-transferable, and for Series 1 to 5 can be settled only with IAG ordinary
shares. From Series 6 onwards, the rights may be settled in cash or IAG ordinary shares, subject to Board discretion. Holders do
not receive dividends and do not have voting rights until the rights are exercised.
Where the rights vest (the holder becomes entitled to exercise the right), the EPR Plan entitles participating employees to acquire
either one IAG ordinary share or its equivalent cash value as determined by the Board for each right. There is no exercise price.
Each allocation is split equally into two portions and is subject to different performance hurdles. The first vesting condition is not
market related and requires the participant to continue relevant employment. The second set of vesting conditions are as follows:
50% is subject to a return on equity hurdle (ROE allocation);
50% is subject to a total shareholder return hurdle (TSR allocation).
If a participant ceases employment with IAG before the performance conditions are tested, their unvested rights will generally lapse.
Under the TSR allocation, IAG's TSR is assessed against the TSR of a peer group of entities. For allocations made prior to 30 June
2009, the peer group consists of entities in the S&P/ASX 100 Index and for allocations made after 30 June 2009, the peer group
consists of entities in the top 50 industrials within the S&P/ASX 100 Index. The performance hurdle is set with a tiered vesting
scale:
Maximum vesting of 100% if IAG's relative TSR is equal or larger than the 75th percentile of the peer group;
A vesting of 0% if IAG's TSR is below the 50th percentile of the peer group.
The ROE hurdle compares IAG's performance with IAG's weighted average cost of capital (WACC), where the Board determines the
WACC. The tiered vesting scale is:
Maximum vesting of 100% if ROE is larger than 1.6 x WACC (1.8 x WACC for rights granted between 1 July 2008 to 30 June
2010);
A vesting at 0% if ROE is below 1.2 x WACC (1.5 x WACC for rights granted between 1 July 2008 to 30 June 2010, 1.3 x WACC
for rights granted before 30 June 2008).
If there is a change of control of IAG, the Board has discretion to determine if and when rights should vest.
105
The following information relates to the rights issued under the EPR Plan:
GRANT DATE
2014
29/10/2007
13/03/2008
18/09/2008
27/02/2009
25/09/2009
24/11/2009
25/03/2010
06/10/2010
03/03/2011
21/10/2011
26/10/2012
25/02/2013
01/11/2013
11/03/2014
2013
29/10/2007
29/11/2007
13/03/2008
27/05/2008
18/09/2008
27/02/2009
25/09/2009
24/11/2009
25/03/2010
06/10/2010
03/03/2011
21/10/2011
17/02/2012
26/10/2012
25/02/2013
FAIR VALUE
AT GRANT
DATE (TSR)
FAIR VALUE
AT GRANT
DATE (ROE)
RIGHTS ON
ISSUE AT 1
JULY
RIGHTS
GRANTED
DURING THE
YEAR
RIGHTS
EXERCISED
DURING THE
YEAR
RIGHTS
LAPSED
DURING THE
YEAR
NUMBER OF RIGHTS AT 30
JUNE
Exercisable
On issue
$2.870
$1.630
$2.530
$2.570
$2.480
$2.590
$2.460
$2.420
$2.270
$1.860
$3.046
$3.977
$3.036
$1.920
$2.870
$2.350
$1.630
$2.120
$2.530
$2.570
$2.480
$2.590
$2.460
$2.420
$2.270
$1.860
$1.630
$3.046
$3.977
$4.310
$2.710
$3.410
$3.150
$3.480
$3.650
$3.600
$3.380
$3.300
$2.690
$4.085
$5.186
$5.266
$4.663
$4.310
$3.680
$2.710
$3.220
$3.410
$3.150
$3.480
$3.650
$3.600
$3.380
$3.300
$2.690
$2.600
$4.085
$5.186
97,940
5,002
1,934,290
127,500
2,386,676
569,232
148,608
3,980,700
530,600
4,757,600
4,973,700
4,000
-
-
19,515,848
467,240
170,000
20,360
6,800
3,002,582
167,500
3,012,200
790,600
171,400
4,093,200
530,600
4,882,400
52,500
-
-
17,367,382
-
-
-
-
-
-
-
-
-
-
-
-
3,221,400
20,900
3,242,300
-
-
-
-
-
-
-
-
-
-
-
-
-
5,122,800
4,000
5,126,800
(93,840)
(5,002)
(315,025)
(2,500)
(777,346)
(173,932)
(17,908)
(3,738,400)
(530,600)
-
-
-
-
-
(5,654,553)
(33,480)
(22,500)
(1,080)
(900)
(669,751)
(40,000)
(586,796)
(221,368)
(22,792)
-
-
-
-
-
-
(1,598,667)
-
-
(1,582,250)
(125,000)
(360,500)
-
(130,700)
-
-
(82,400)
(85,300)
-
-
-
4,100
-
37,015
-
1,248,830
395,300
-
242,300
-
4,675,200
4,888,400
4,000
3,221,400
20,900
(2,366,150) 14,737,445
(335,820)
(147,500)
(14,278)
(5,900)
(398,541)
-
(38,728)
-
-
(112,500)
-
(124,800)
(52,500)
(149,100)
-
97,940
-
5,002
-
1,934,290
127,500
2,386,676
569,232
148,608
3,980,700
530,600
4,757,600
-
4,973,700
4,000
(1,379,667) 19,515,848
4,100
-
37,015
-
110,680
-
-
242,300
-
-
-
-
-
-
394,095
97,940
-
5,002
-
320,395
-
253,820
-
25,200
-
-
-
-
-
-
702,357
The weighted average share price for rights exercised for the year ended 30 June 2014 was $5.74 (2013-$4.84).
The fair value of the rights is calculated as at the grant date using Black Scholes (for ROE performance hurdle) and Monte Carlo
simulation (for TSR performance hurdle) models. The valuations take into account the probability of achieving the market related
performance hurdle.
Some of the assumptions, including expected share price volatility, are based on historical data which is not necessarily indicative of
future trends. Reasonable changes in these assumptions would not have a material impact on the amounts recognised in the
financial statements.
106 IAG ANNUAL REPORT 2014
2014
Grant date
Share price on grant date ($)
Risk free interest rate (%)
Expected dividend yield (%)
Expected life of rights (years)*
2013
Grant date
Share price on grant date ($)
Risk free interest rate (%)
Expected dividend yield (%)
Expected life of rights (years)*
SIGNIFICANT FACTORS AND ASSUMPTIONS
1/11/2013
$6.13
5.71%
3.25%
3 or 4 years
26/10/2012
$4.51
3.00%
3.70%
3 or 4 years
11/03/2014
$5.41
3.13%
6.44%
3 or 4 years
25/02/2013
$5.69
3.11%
3.96%
3 or 4 years
*
The expected life for the ROE rights is three years and four years for TSR rights.
B. EMPLOYEE SHARE PLANS
Offers were made under the employee share plans during the year ended 30 June 2014 in Australia and New Zealand which gave
employees the opportunity to own a stake in IAG and share in the Group's future success.
Under the plans, shares are purchased under salary sacrifice arrangements, allowing employees to acquire shares in a tax effective
manner, and IAG contributes towards 10% of the cost of the share purchase. IAG ordinary shares taken up through the plans do not
incur any brokerage. The salary sacrifice arrangements and structure of the plans differ between jurisdictions to comply with local
legislation and utilise tax concessions.
NOTE 29. SUPERANNUATION
Contributions are made to a number of superannuation plans in various countries. Entry to all defined benefit superannuation plans is
closed to new members. New employees are provided with defined contribution arrangements. The defined benefit contribution plans
provide benefits for members or their dependants in the form of lump sum or pension payments generally upon retiring from relevant
employment.
A. DEFINED CONTRIBUTION SUPERANNUATION ARRANGEMENTS
Contributions to the plans are made in accordance with the governing rules of each plan together with relevant legislative
requirements in each geographical region. The contributions are generally based on a percentage of employees’ salaries.
The Consolidated entity is not exposed to risks or rewards of the defined contribution arrangements and has no obligations beyond the
payment of contributions. There were no employer contributions payable at the end of the year for defined contribution members
(2013-$nil).
B. DEFINED BENEFIT SUPERANNUATION ARRANGEMENTS
There are a number of defined benefit superannuation plans in the Group. Contributions to the plans are made in accordance with the
governing rules of each plan and the contribution recommendations of an independent actuary. In contrast to defined contribution
superannuation arrangements, the future cost of the defined benefit superannuation plans is not known with certainty in advance.
The benefits for defined benefit members are generally based on length of service and/or final average salary and/or age together with
the member’s own contributions (if any). The net financial positions of the plans are recognised on the balance sheet.
I. Australia
The Superannuation Industry (Supervision) (SIS) legislation governs the superannuation industry and provides the framework within
which the superannuation plans operate. The SIS Regulations require an actuarial valuation to be performed for each defined benefit
superannuation plan every three years, or every year if the plan pays defined benefit pensions.
The Plan's trustee is responsible for the governance of the plan. The trustee has a legal obligation to act solely in the best interest of
Plan beneficiaries. The trustee has the following roles:
management and investment of the Plan assets; and
administration of the Plan and payment to the beneficiaries from Plan assets when required in accordance with the Plan rules;
compliance with superannuation law and other applicable regulations.
As the prudential regulator, APRA licences and supervises regulated superannuation plans.
All Australian employees with defined benefit superannuation arrangements are members of the IAG & NRMA Superannuation Plan
(IAG Plan). There were 448 members as at reporting date (2013-502). The Consolidated entity has contributed $9 million to the
members during the period (2013-$19 million). There were no employer contributions payable at the end of the year (2013-$nil).
The employer contribution rate for Australian defined benefit members was 17.5% with a quarterly payment of $1 million. The Group
has agreed with the Trustee to target the value of the Plan's assets to 120% of defined benefit vested benefits to manage risk against
possible future adverse market fluctuations. Once the target vested benefit of 120% is achieved, the $1 million per quarter deficiency
contributions will cease.
The future expected contributions to the IAG Plan for the year ending 30 June 2015 are $8 million.
107
There are no assets and liability matching schemes adopted by the Plan.
II. New Zealand
The New Zealand operation contributes to one defined benefit superannuation arrangement being the AMI Superannuation Scheme.
The Plan had 174 (2013-190) defined benefit members and a $2 million (2013-$4 million) net deficit as at reporting date. The fair
value of the Plan assets was $28 million (2013-$25 million) and the present value of the defined benefit obligation was $30 million
(2013-$29 million) at reporting date.
III. Financial information of defined benefit arrangements
a. REPORTING DATE BALANCES
Fair value of plan assets
Present value of defined benefit obligation (net discount rate)
Net asset/(liability) recognised on the balance sheet
b. RECONCILIATION OF MOVEMENTS IN NET ASSET/(LIABILITY)
Net asset/(liability) at the beginning of the financial year
Included in profit and loss
Current service cost
Past service cost
Net interest cost
Included in other comprehensive income
Return on plan assets, excluding interest income
Gains/(losses) from change in demographic assumptions
Gains/(losses) from change in financial assumptions
Gains/(losses) from liability experience
Other
Contributions by employers
Total net amount recognised at reporting date valuation
c. RECONCILIATION OF MOVEMENTS IN THE PRESENT VALUE OF DEFINED BENEFIT OBLIGATION
Defined benefit obligation at the beginning of the financial year
Current service cost
Past service cost
Interest expense/(income)
(Gains)/losses from change in demographic assumptions
(Gains)/losses from change in financial assumptions
(Gains)/losses from liability experience
Contributions by plan participants
Benefits paid
Taxes, premiums & expenses paid
Defined benefit obligation at the end of the financial year
d. RECONCILIATION OF MOVEMENTS IN THE FAIR VALUE OF ASSETS
Fair value of plan assets at the beginning of the financial year
Interest (expense)/income
Return on plan assets, excluding interest income
Contributions by employers
Contributions by plan participants
Benefits paid
Taxes, premiums and expenses paid
Fair value of plan assets at the end of the financial year
The asset ceiling had no impact on the net defined liability recognised in the balance sheet.
108 IAG ANNUAL REPORT 2014
2014
$m
163
(200)
(37)
IAG PLAN
2013
$m
153
(213)
(60)
(60)
(111)
(7)
(1)
(2)
14
-
5
5
9
(37)
213
7
1
7
-
(5)
(5)
1
(16)
(3)
200
153
5
14
9
1
(16)
(3)
163
(7)
(1)
3
9
4
22
2
19
(60)
252
7
1
7
(4)
(22)
(2)
1
(23)
(4)
213
141
10
9
19
1
(23)
(4)
153
e. PLAN ASSETS
The percentage invested in each asset class at reporting date is shown in the table below:
Australian shares
Overseas shares
Listed property trusts
Fixed interest
Cash
Other
2014
%
29.0
29.0
10.0
22.0
5.0
5.0
IAG PLAN
2013
%
30.0
26.0
11.0
23.0
6.0
4.0
To determine the fair value of the investment fund that the Plan assets are invested in, significant observable inputs are used (fair
value hierarchy level 2).
The direct Australian equity mandates of the IAG Plan do not include any shares issued by the Consolidated entity or any property that
is occupied by the Consolidated entity. The IAG Plan does invest in Australian equity investments in unit trusts or other pooled vehicles
which may contain shares issued by the Consolidated entity.
f. ACTUARIAL ASSUMPTIONS
The principal actuarial assumptions used in determining the financial position of the plans include:
Discount rate (gross)*
Expected future salary increases
Future pension increases - adult/child
2014
%
4.0
4.0
2.5/0.0
IAG PLAN
2013
%
3.8
4.0
2.5/0.0
*
The discount rate for the IAG Plan has been determined by reference to the market yields on 12 year (2013-10 year) government bonds in Australia.
The weighted average duration of the defined benefit obligation is 10.6 years (2013-11.9 years).
g. SENSITIVITY OF MEASUREMENT TO ACTUARIAL ASSUMPTIONS
The impact on the Plan's net liability to changes in key actuarial assumptions is summarised below. The sensitivity analysis is based
on a change in an assumption whilst holding all other assumptions constant. The methods and assumptions used in preparing the
sensitivity analysis did not change compared to the prior year.
ASSUMPTION
Discount rate (gross)
Expected future salary increase
Future pension increases - adult/child
IAG PLAN
2014
DEFINED
BENEFIT
OBLIGATION
$m
12
(11)
(5)
5
(6)
6
MOVEMENT IN
ASSUMPTION
+0.5%
- 0.5%
+0.5%
- 0.5%
+0.5%
- 0.5%
h. RISK EXPOSURE
There are a number of risks to which the Plan exposes the employer, including the measurement process of the defined benefit
obligation which involves estimates and assumptions, based on experience and other reasonable factors. Differences in actuarial
valuations compared to actual performance can impact the expense recognised, movements in other comprehensive income and the
value of plan assets and liability.
The Group's risk management framework provides assurance risks arising from the Plan are soundly managed (refer to the risk
management note for further details). The Plan supplements its risk management approach and includes the development of a Risk
Management Strategy, policies and processes to meet superannuation regulatory obligations.
109
i. FUNDING OBLIGATIONS FOR THE IAG PLAN
The financial information disclosed below has been determined in accordance with AAS 25 Financial Reporting by Superannuation
Plans, using the Attained Age Actuarial Funding method.
Net market value of plan assets
Present value of accrued benefits
Defined benefit surplus/(deficit)
Vested benefits
The principal actuarial assumptions used in determining the financial position of the IAG Plan in
accordance with AAS 25 and the funding recommendation include:
Expected investment returns – pension assets/other assets (gross)
Expected future salary increases
Future pension increases – adult/child
2014
$m
163
(150)
13
146
2014
%
IAG PLAN
2013
$m
153
(152)
1
141
IAG PLAN
2013
%
7.5
4.0
2.5/0.0
7.5
4.0
2.5/0.0
The accrued benefits are determined on the basis of the present value of expected future payments that arise from membership up to
the measurement date. The accrued benefits are determined by reference to expected future salary levels and are discounted using a
market based, risk adjusted discount rate. Vested benefits are the benefits which would be payable to members if they all voluntarily
resigned as at the reporting date.
The contribution recommendation uses a different actuarial methodology and a different discount rate assumption to that used in
determining the financial position for measurement on the balance sheet of the employer sponsor.
NOTE 30. COMMITMENTS
A. CAPITAL AND OTHER COMMITMENTS
I. Capital commitments
Software development
II. Other commitments
Software licence and rental
Other
B. OPERATING LEASE COMMITMENTS
I. Property
Due within 1 year
Due within 1 to 2 years
Due within 2 to 5 years
Due after 5 years
II. Equipment
Due within 1 year
Due within 1 to 2 years
Due within 2 to 5 years
Due after 5 years
CONSOLIDATED
2013
$m
2014
$m
14
38
7
59
134
118
263
85
19
18
24
-
661
32
26
8
66
116
111
277
113
11
14
26
9
677
Certain property, motor vehicles and computer equipment are leased under non-cancellable operating leases. Most leases are subject
to annual reviews with increases subject to a set percentage or based on either movements in consumer price indices or operating
criteria. Where appropriate, a right of renewal has been incorporated into the lease agreements at which time all terms and conditions
may be renegotiated. There are no options to purchase the relevant assets on expiry of the lease.
110 IAG ANNUAL REPORT 2014
NOTE 31. CONTINGENCIES
The Group is exposed to a range of contingencies. Some are specific to instruments or transactions, others relate more to risks faced
in the normal course of business.
A. CONTINGENT LIABILITIES
Contingent liabilities are not recognised on the balance sheet but are disclosed here where the possibility of settlement is less than
probable but more than remote. Provisions are not required with respect to these matters as it is not probable that a future sacrifice
of economic benefits will be required or the amount is not reliably measurable. If settlement becomes probable, a provision is
recognised. The best estimate of the settlement amount is used in measuring a contingent liability for disclosure. The measurement
involves judgement.
In the normal course of business, transactions are entered into that may generate a range of contingent liabilities. These include:
litigation arising out of insurance policies; and
undertakings for maintenance of net worth and liquidity support to subsidiaries in the Consolidated entity. It is normal practice to
provide wholly owned subsidiaries with support and assistance as may be appropriate with a view to enabling them to meet their
obligations and to maintain their good standing. Such undertakings constitute a statement of present intent only and are not
intended to give rise to any binding legal obligation.
It is not believed that there are any other potential material exposures to the Consolidated entity and there are no known events that
would require it to satisfy the guarantees or take action under a support agreement.
B. FIDUCIARY ACTIVITIES
The Consolidated entity’s fiduciary activities consist of investment management and other fiduciary activities conducted as manager,
custodian or trustee for a number of investments and trusts. The funds managed on behalf of third parties which are not included in
the Consolidated entity’s balance sheet had a fair value as at the current reporting date of $638 million (2013-$524 million). This
does not include the investment by third parties in the IAG Asset Management Wholesale Trusts presented as non-controlling interests
in unitholders’ funds on the balance sheet. The Consolidated entity is exposed to operational risk relating to managing these funds on
behalf of third parties.
NOTE 32. RELATED PARTY DISCLOSURES
A. CONTROLLING ENTITIES
The ultimate parent entity in the Consolidated entity is Insurance Australia Group Limited which is incorporated in Australia.
The Consolidated entity consists of Insurance Australia Group Limited and its subsidiaries (information in relation to ownership
interests is provided in the subsidiaries note).
The Group at 30 June 2014 operated under a devolved model with shared services through the use of dedicated units (such as head
office finance providing accounting and processing services to operational entities) and entities (such as dedicated entities that
provide employee services and reinsurance services) which provide services across the Group. All such intragroup transactions are
charged to the relevant entities on normal commercial terms and conditions and on a direct and actual cost recovery basis or time
allocation basis. Certain entities are economically dependent on other entities in the Group. There are also loans between entities in
the Group. All transactions that have occurred among the subsidiaries within the Group have been eliminated for consolidation
purposes.
B. KEY MANAGEMENT PERSONNEL
I. Details of compensation
Key management personnel (KMP) are those persons having authority and responsibility for planning, directing and controlling the
activities of the entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity. It is important to note
that the Company’s Non-Executive Directors are specifically required to be included as KMP in accordance with AASB 124 Related
Party Disclosures. However, the Non-Executive Directors do not consider that they are part of 'management'.
The aggregate compensation of the KMP is set out below:
Short term employee benefits
Post employment benefits
Other long term benefits
Termination benefits
Share based payments
CONSOLIDATED
2013
$000
17,042
364
130
524
11,812
29,872
2014
$000
17,349
308
203
-
11,278
29,138
The compensation disclosed in the table above represents the KMP’s estimated compensation received from the Group in relation to
their involvement in the activities with the Consolidated entity.
C. OTHER RELATED PARTIES
Contributions are made to various superannuation plans, both defined contribution and defined benefit plans. Information regarding
transactions with the plans is provided in the superannuation note.
111
NOTE 33. DERIVATIVES
A. DERIVATIVES FOR WHICH HEDGE ACCOUNTING IS APPLIED
I. Net investment hedges
The foreign currency exposures arising on translation of net investments in foreign operations are hedged using forward exchange
contracts and the designation of certain foreign currency borrowings as hedging instruments.
Each of the hedging relationships has been broadly effective throughout the current financial year or since inception with the small
amount of ineffectiveness recognised in profit or loss.
II. Reporting date positions
The notional amount and fair value of derivative financial instruments, together with a maturity profile, are provided below:
2014
CONSOLIDATED
2013
Notional
contract
amount
Fair value
asset
Fair value
liability
Notional
contract
amount
Fair value
asset
Fair value
liability
$m
$m
$m
$m
$m
$m
Maturity profile
Over 5
1 to 5
years
years
$m
$m
Within
1 year
$m
a. NET INVESTMENT HEDGES
Forward foreign exchange
contracts
1,304
-
-
1,304
9
(6)
2,320
23
(67)
B. DERIVATIVES FOR WHICH HEDGE ACCOUNTING IS NOT APPLIED (DERIVATIVES HELD FOR ECONOMIC HEDGING PURPOSES
ONLY)
I. Reporting date positions
The notional amount and fair value of derivative financial instruments, together with a maturity profile, are provided below:
2014
CONSOLIDATED
2013
Notional
contract
amount
Fair value
asset
Fair value
liability
Notional
contract
amount
Fair value
asset
Fair value
liability
Maturity profile
Over 5
1 to 5
years
years
$m
$m
$m
$m
Within
1 year
$m
a. PRESENTED IN INVESTMENTS (INVESTMENT RELATED DERIVATIVES)
Interest rate swaps
Options
Bond futures
Share price index futures
Forward foreign exchange
contracts
b. PRESENTED IN TRADE AND OTHER RECEIVABLES/PAYABLES (TREASURY RELATED DERIVATIVES)
Forward foreign exchange
contracts
Interest rate swaps
310
(2)
3,415
271
5
(2)
3,415
271
236
-
-
-
69
-
-
-
-
-
(1)
-
302
50
302
50
8
-
-
-
445
445
$m
7
-
-
-
-
-
-
-
6
-
-
-
$m
$m
$m
-
-
4,032
318
607
484
550
-
-
-
-
-
13
-
-
-
(2)
-
(38)
(1)
-
In addition to the derivatives described above, certain contracts entered into include embedded derivative features. Such embedded
derivatives are assessed at inception of the contract and, depending on their characteristics, are accounted for as separate derivative
financial instruments. The fair value of the embedded derivatives was nil as at 30 June 2014 (2013-nil).
112 IAG ANNUAL REPORT 2014
NOTE 34. CAPITAL MANAGEMENT
A. CAPITAL MANAGEMENT STRATEGY
The capital management strategy plays a central role in managing risk to create shareholder value whilst meeting the crucial and
equally important objective of providing an appropriate level of capital to protect policyholders’ and lenders’ interests and satisfy
regulators.
The Group actively considers its risk appetite through the holistic implementation of strategies around identified key risk levers of
underwriting, reinsurance, capital, asset allocation and risk management. The target level of capitalisation for the Group is assessed
by consideration of factors including:
the probability of financial ruin over the next one to three years;
the probability of falling below the APRA prescribed capital amount (PCA) over the next one to three years;
other stakeholder perspectives on capitalisation, including rating agency capital models and associated ratings; and
domestic and international levels of capitalisation.
The amount of capital required that fulfils these risk appetite factors varies according to the business underwritten, extent of
reinsurance and asset allocation and is estimated using dynamic financial analysis modelling. For ease of communication, internally
and externally, the Group has translated the outcome into a multiple of PCA by applying the APRA prescribed methodology for a Level 2
Insurance Group.
Internal policies are in place to ensure significant deviations from this benchmark is considered at the Board level as to how any
shortfall should be made good or any surplus utilised.
I. Regulatory capital
All insurers within the Group that carry on insurance business in Australia are registered with APRA and are subject to APRA prudential
standards. IAG uses the standardised framework detailed in the relevant prudential standards to calculate the regulatory capital
requirements that must be held to meet policyholder obligations. It is the Group's policy to ensure that each of the licenced insurers
maintains an adequate capital position from an entity perspective.
From 1 January 2013, APRA revised the regulatory capital adequacy requirements applicable to all APRA authorised insurers and
insurance groups. Under the new capital regulatory regime, the Group has maintained its consistent risk appetite and set the following
long term target capital ranges from 1 January 2013:
a total capital position equivalent to 1.4-1.6 times the PCA, compared to a regulatory requirement of 1.0 times; and
Common Equity Tier 1 capital of 0.9-1.1 times the PCA, compared to a regulatory requirement of 0.6 times.
II. Economic capital
In conjunction with the above, consideration is given to the operational capital needs of the business. Targeting a capital multiple
above the minimum regulatory requirement aims to ensure the ongoing strength and security of the Group whilst suitably protecting
policyholders and lenders.
An important influence on the capital levels is the payment of dividends. The Consolidated entity aims to maintain cash earnings
payouts within a ratio range approved by the Board (refer to note 9).
The capital objectives are achieved through dynamic management of the balance sheet and capital mix, the use of a risk based capital
adequacy framework for capital needs that relies on explicit quantification of uncertainty or risk and the use of modelling techniques
such as dynamic financial analysis which provide the capacity to understand the risk/return trade-off as well as valuable inputs to the
capital management process. The influence on capital such as product mix, reinsurance program, catastrophe exposure, investment
strategy, profit margins and capital structure are all assessed through the dynamic financial analysis modelling.
B. CAPITAL COMPOSITION
The Group’s capital comprises ordinary equity and interest bearing liabilities. The balance sheet capital mix at reporting date was as
shown in the table below:
Ordinary equity less goodwill and intangible assets
Interest bearing liabilities - hybrid securities and debt
Total capitalisation
C. REGULATORY CAPITAL COMPLIANCE
The PCA calculation is based on applying the APRA Level 2 Insurance Group requirements.
Target
%
60-70
30-40
CONSOLIDATED
2013
%
65.5
34.5
100
2014
%
65.0
35.0
100
As at 30 June 2014, the Group capital position includes the acquired insurance underwriting business of Wesfarmers Limited in
Australia and New Zealand (refer to the acquisitions and disposals of businesses note for further detail).
113
I. Common Equity Tier 1 capital
Ordinary shares
Reserves
Retained earnings
Excess technical provisions (net of tax)
Minority interests
Less: Deductions
Common Equity Tier 1 capital (CET1 capital)
II. Additional Tier 1 capital
Hybrid equities
Total Tier 1 capital
III. Tier 2 capital
Subordinated term notes
Total Tier 2 capital
Total regulatory capital
IV. Prescribed Capital Amount (PCA)
Insurance risk charge
Insurance concentration risk charge
Diversified asset risk charge
Asset concentration risk charge
Aggregation benefit
Operating risk charge
Total PCA
PCA multiple
CET1 multiple
CONSOLIDATED
2013
$m
2014
$m
6,775
38
(151)
914
226
(4,514)
3,288
817
4,105
876
876
4,981
1,624
225
1,441
-
(729)
335
2,896
1.72
1.14
5,353
63
(568)
677
202
(2,929)
2,798
872
3,670
592
592
4,262
1,434
150
1,338
-
(653)
289
2,558
1.67
1.09
D. CREDIT RATING
Key wholly owned insurers within the Group had the following ratings published by Standard & Poor's (S&P) as at the current reporting
date. S&P last reviewed these ratings on 2 July 2014.
ENTITY
Parent
Insurance Australia Group Limited
Licenced insurers
Insurance Australia Limited
IAG New Zealand Limited
CGU Insurance Limited
Swann Insurance (Aust) Pty Ltd
IAG Re Labuan (L) Berhad
IAG Re Australia Limited
IAG Re Singapore Pte Ltd
Lumley General Insurance (NZ) Limited
WFI Insurance Limited
NOTE 35. NET TANGIBLE ASSETS
Net tangible assets per ordinary share
ISSUER CREDIT RATING
FINANCIAL STRENGTH
RATING
A/Stable
AA-/Stable
AA-/Stable
AA-/Stable
AA-/Stable
n/a
AA-/Stable
AA-/Stable
A+/Stable
A+/Stable
n/a
AA-/Stable
AA-/Stable
AA-/Stable
AA-/Stable
AA-/Stable
AA-/Stable
AA-/Stable
A+/Stable
A+/Stable
CONSOLIDATED
2013
$
1.38
2014
$
1.29
Net tangible assets per ordinary share have been determined using the net assets on the balance sheet adjusted for non-controlling
interests, intangible assets and goodwill.
114 IAG ANNUAL REPORT 2014
NOTE 36. REMUNERATION OF AUDITORS
A. KPMG
I. Assurance services
Audit of the financial statements prepared for the Parent and subsidiaries
Audit of statutory returns in accordance with regulatory requirements
Other assurance services
II. Advisory services
Taxation services
Due diligence and other services on acquisitions, divestments and capital transactions
Other
B. OTHER AUDITORS
I. Assurance services
Audit of the financial statements prepared for subsidiaries
Assurance related to regulatory requirements
Total remuneration of auditors
CONSOLIDATED
2013
$000
2014
$000
6,883
1,109
184
8,176
905
978
277
2,160
7,430
1,092
440
8,962
628
488
155
1,271
873
164
11,373
27
-
10,260
NOTE 37. PARENT ENTITY DISCLOSURES
The ultimate Parent entity in the Consolidated entity is Insurance Australia Group Limited which is incorporated in Australia. The
following information of the Parent entity is disclosed as required by the current regulatory requirements in Australia.
A. FINANCIAL RESULTS
Profit/(loss) for the year
Total comprehensive income and (expense) for the year, net of tax
B. FINANCIAL POSITION
Current assets
Total assets
Current liabilities
Total liabilities
C. SHAREHOLDERS' EQUITY
Share capital
Reserves
Retained earnings
Total shareholders' equity
2014
$m
769
769
344
13,401
370
3,882
6,775
(12)
2,756
9,519
PARENT
2013
$m
2,227
2,227
304
11,532
220
3,396
5,353
(15)
2,798
8,136
Current liabilities exceeded current assets by $26 million as at 30 June 2014, primarily due to a $135 million payable to Wesfarmers
Limited. Due to the operation of a significant loan facility between the Parent and its controlled entities, the Parent entity has the
ability to pay its debts as and when they become due and payable. Total assets of the Parent entity exceeded total liabilities by $9,519
million.
D. CONTINGENT LIABILITIES
Contingent liabilities are not recognised on the balance sheet but are disclosed where the possibility of settlement is less than
probable but more than remote. Provisions are not required with respect to these matters as it is not probable that a future sacrifice
of economic benefits will be required or the amount is not reliably measurable. If settlement becomes probable, a provision is
recognised. The best estimate of the settlement amount is used in measuring a contingent liability for disclosure. The measurement
involves judgement.
There are no known material exposures to the Parent or events that would require it to satisfy the guarantees or take action under a
support agreement.
E. COMMITMENTS
The Parent has no material commitments.
115
NOTE 38. EVENTS SUBSEQUENT TO REPORTING DATE
As the following transactions occurred after reporting date and did not relate to conditions existing at reporting date, no account has
been taken of them in the financial statements for the current reporting year ended 30 June 2014.
A. FINAL DIVIDEND
On 19 August 2014, the Board determined to pay a final dividend of 26 cents per share, 100% franked. The dividend will be paid on 8
October 2014. The dividend reinvestment plan will operate by acquiring shares on market for participants with no discount applied.
B. IAG NEW OPERATING MODEL
On 22 May 2014 the Group announced it would implement a new operating model for its Australian operations effective from 1 July
2014, to create a more customer-focused and efficient organisation. The new model will allow IAG to better leverage its scale and
insurance expertise to deliver better outcomes for its customers, partners, people and shareholders. From 1 July 2014, in Australia
IAG will operate under three divisions:
Personal Insurance, led by Andy Cornish, formerly Chief Executive of Australia Direct, this division provides personal insurance
products;
Commercial Insurance, led by Peter Harmer, formerly Chief Executive of CGU, this division provides insurance to business
customers; and
Enterprise Operations, led by Alex Harrison, formerly Chief Operating Officer for Australia Direct, this division provides support
services to Personal Insurance and Commercial Insurance.
116 IAG ANNUAL REPORT 2014
DIRECTORS' DECLARATION
In the opinion of the Directors of Insurance Australia Group Limited:
the financial statements and notes 1 to 38, including all the remuneration disclosures that are contained in the Remuneration
Report of the Directors’ Report, are in accordance with the Corporations Act 2001 including:
giving a true and fair view of the financial position of the Company and Consolidated entity as at 30 June 2014 and of their
performance, as represented by the results of their operations and their cash flows, for the year ended on that date;
complying with Australian Accounting Standards and the Corporations Regulations 2001; and
the financial report also complies with International Financial Reporting Standards as disclosed in note 1.A; and
the Remuneration Report of the Directors’ Report complies with the Corporations Act 2001 and Australian Accounting Standards;
and
there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and
payable.
The Directors have been given the declaration required by section 295A of the Corporations Act 2001 from the Chief Executive Officer
and the Chief Financial Officer for the financial year ended 30 June 2014.
Signed at Sydney this 19th day of August 2014 in accordance with a resolution of the Directors.
Michael Wilkins
Director
117
INDEPENDENT
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF INSURANCE AUSTRALIA GROUP LIMITED
REPORT ON THE FINANCIAL REPORT
We have audited the accompanying financial report of Insurance Australia Group Limited (Company), which comprises the
consolidated balance sheet as at 30 June 2014, and the consolidated statement of comprehensive income, consolidated statement of
changes in equity and consolidated cash flow statement for the year ended on that date, notes 1 to 38 comprising a summary of
significant accounting policies and other explanatory information and the Directors’ Declaration of the Group comprising the Company
and the entities it controlled at the year’s end or from time to time during the financial year.
DIRECTORS' RESPONSIBILITY FOR THE FINANCIAL REPORT
The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance
with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is
necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In
note 1.A, the Directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements,
that the financial statements of the Group comply with International Financial Reporting Standards.
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with
Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit
engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The
procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the
financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the
Directors, as well as evaluating the overall presentation of the financial report.
We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the
Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the
Group’s financial position and of its performance.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
INDEPENDENCE
In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.
AUDITOR'S OPINION
In our opinion:
the financial report of the Group is in accordance with the Corporations Act 2001, including:
giving a true and fair view of the Group’s financial position as at 30 June 2014 and of its performance for the year ended on
that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001.
the financial report also complies with International Financial Reporting Standards as disclosed in note 1.A.
118 IAG ANNUAL REPORT 2014
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
REPORT ON THE REMUNERATION REPORT
We have audited the Remuneration Report included on pages 27 to 47 of the Directors' Report for the year ended 30 June 2014. The
Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section
300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit
conducted in accordance with auditing standards.
AUDITOR'S OPINION
In our opinion, the Remuneration Report of Insurance Australia Group Limited for the year ended 30 June 2014 complies with Section
300A of the Corporations Act 2001.
KPMG
Dr Andries B Terblanché
Partner
Sydney
19 August 2014
KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation.
119
SHAREHOLDER INFORMATION
Information about Insurance Australia Group Limited including company announcements, presentations and reports can be accessed
at www.iag.com.au.
ASX CODES
Insurance Australia Group Limited’s shares are listed on the ASX under:
IAG (ordinary shares); and
IAGPC (convertible preference shares).
Insurance Australia Group Limited’s wholly owned subsidiary IAG Finance (New Zealand) Limited issued reset exchangeable securities
(RES) in January 2005 and are listed on the ASX under IANG.
ANNUAL REPORT
Amendments to the Corporations Act 2001 have changed the obligations of companies regarding the provision of annual reports to
shareholders. The default option for receiving annual reports has changed from a printed copy to an electronic copy via IAG’s website
at www.iag.com.au.
ANNUAL GENERAL MEETING
The 2014 annual general meeting (AGM) of Insurance Australia Group Limited will be held on Thursday, 30 October 2014 commencing
at 10am at the Wesley Conference Centre, 220 Pitt Street, Sydney NSW 2000, Australia. The AGM will be webcast live on the internet
at www.iag.com.au and an archive version will be placed on the website to enable the AGM to be viewed at a later time.
ONLINE VOTING
Shareholders can lodge voting instructions electronically either as a direct vote or by appointing a proxy for the 2014 AGM at
www.iag.com.au. The information required to log on and use online voting is shown on your voting form.
SHAREHOLDER QUESTIONS
If you would like to submit a written question to the Company or the Company’s auditor in regard to the AGM or any of the Resolutions
to be discussed please use the form supplied and return it with your completed Voting Form in the pre addressed envelope provided or
by fax to +61 (0)3 9473 2555. Please note your questions for the auditor must be received by 5pm on Thursday, 23 October 2014.
You may also submit a question, after completing your voting instructions online at www.iag.com.au. Members will also be given a
reasonable opportunity to ask questions of the Company and the auditor at the AGM.
During the course of the AGM IAG intends to answer as many of the frequently asked questions as practicable but will not be
responding to individual questions. Responses to the most commonly asked questions will be added to the website at
www.iag.com.au/shareholder/agm.
DIVIDEND PAYMENT METHODS
Insurance Australia Group Limited no longer issues shareholders resident in Australia dividend payments by cheque. Shareholders
should provide the share registry with their alternative instructions as detailed below:
IAG ORDINARY SHAREHOLDERS
Paid directly into a New Zealand bank account or to an Australian bank, credit union, building society or nominated account; or
Eligible shareholders can choose to participate in IAG’s Dividend Reinvestment Plan (DRP), if available, providing the option to
increase your shareholding without incurring brokerage or GST.
IAGPC CONVERTIBLE PREFERENCE SHAREHOLDERS
Paid directly into an Australian bank, credit union, building society or nominated account.
MANAGE YOUR HOLDING
Using your Shareholder Reference Number (SRN) or Holder Identification Number (HIN) and postcode of your registered address you
can view your holding online through IAG's share registry, Computershare, by following the easy prompts on their website at
www.investorcentre.com where you will be able to:
view your holding balance;
review your dividend payment history;
access shareholder forms; and
retrieve holding statements, including recent dividend payment advices.
120 IAG ANNUAL REPORT 2014
The share registry investor centre site will also allow you to update or add details to your shareholding. If you wish to amend or update
any of the current details you will be asked to register by choosing a User ID and Password which you can easily remember for
additional security purposes.
You will also be asked to enter answers to three personal questions for verification purposes should you forget your password in the
future.
If you have previously used the Investor Centre site you will be asked to key in your password only.
Once you have completed these steps you are then able to update your details and submit your changes to the share register
including:
change or amend your address if you are registered with an SRN;
nominate or amend your direct credit payment instructions;
set up or amend your DRP instructions;
sign up for electronic shareholder communications, including the annual report via email; and
add/change TFN/ABN details.
A confirmation/receipt number will be shown on screen for your online transaction which should be recorded should you have a
question in the future.
You are strongly advised to lodge your TFN, ABN or exemption. If you choose not to lodge these details with the share registry, then IAG
is obliged to deduct tax at the highest marginal tax rate (plus the Medicare levy) from the unfranked portion of any dividend or interest
payment.
Shareholders may also complete a number of transactions or request a form over the phone by contacting the share registry on 1300
360 688.
EMAIL ALERT SERVICE
You can register to receive an email alert advising of new IAG media releases, financial announcements or presentations. You simply
need to visit IAG's website at www.iag.com.au, click on the email alert button in the right hand margin and register your email address.
IAG has improved its email alert service in the past year so you can now choose to receive email alerts about specific subjects (annual
meetings, annual reports, careers information, company announcements, government submissions, results and sustainability reports).
EMAIL ENQUIRIES
If you have a question, you can email your enquiry directly to IAG's share registry at iag@computershare.com.au. If your question
relates to an IAG company matter and the answer is not on IAG's website, you can email your question to
investor.relations@iag.com.au.
121
ORDINARY SHARES INFORMATION
IMPORTANT DATES*
IAG year end
Full year results and dividend announced
Annual report and notice of meeting mailout commences
Record date for final dividend
Final dividend paid
Written questions for the auditor close (5pm)
Proxy return close (10am)
Annual general meeting (10am)
IAG half year end
*
Please note dates are subject to change.
TWENTY LARGEST ORDINARY SHAREHOLDERS AS AT 31 JULY 2014
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
NATIONAL NOMINEES LIMITED
CITICORP NOMINEES PTY LIMITED
BNP PARIBAS NOMS PTY LTD
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