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INSURANCE AUSTRALIA GROUP LIMITED
ANNUAL REPORT 2017
ABN 60 090 739 923
CONTENTS
Directors’ report
Remuneration report
Lead auditor’s independence declaration
Consolidated financial statements contents
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
1
Consolidated cash flow statement
16
Notes to the financial statements
39
40
41
42
43
Directors’ declaration
Independent auditor’s report
Shareholder information
Corporate directory
Five year financial summary
44
45
86
87
92
95
96
KEY DATES
2017 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
2018 financial year end
Full year results and dividend announcement
30 June 2017
23 August 2017
5 September 2017
7 September 2017
9 October 2017
20 October 2017
31 December 2017
14 February 2018*
21 February 2018*
29 March 2018*
30 June 2018
15 August 2018*
* Please note: dates are subject to change. Any changes will be published via a notice to the Australian Securities Exchange (ASX).
ABOUT THIS REPORT
The 2017 annual report of Insurance Australia
Group Limited (IAG, or the Group) includes
IAG’s full statutory accounts, along with the
Directors’ and remuneration reports for the
financial year 2017. This year’s corporate
governance report is available in the About Us
area of our website (www.iag.com.au).
The financial statements are structured to
provide prominence to the disclosures that
are considered most relevant to the user’s
understanding of the operations, results and
financial position of the Group.
All figures are in Australian dollars unless
otherwise stated.
2017 ANNUAL REVIEW AND
SUSTAINABILITY REPORT
This report should be read in conjunction with
the 2017 annual review and sustainability
report, which provides a summary of IAG’s
operating performance, including the
Chairman’s, CEO’s and CFO’s reviews.
An interactive version of the annual review
and sustainability report is available from the
home page of our website at www.iag.com.au.
Detailed information about IAG’s shared
value strategy and non-financial performance
is available in the shared value area of
our website.
If you would like to have a copy of the annual
report or annual review mailed to you, contact
IAG’s Share Registry using the contact details
on page 95.
BEHIND OUR COVERS
The covers for this year’s annual report and
annual review tell the story of DipStik, a
flood monitoring system being trialled by
NRMA Insurance and the NSW SES. When a
storm occurs, warning messages are sent to
the local council and NSW SES so they can
take appropriate measures and advise the
community of floodwater risk.
In keeping with our Safer theme for this year’s
reporting suite, the Australian Red Cross
and NSW SES will have people available at
our 2017 annual general meeting to advise
shareholders about how to prepare for the
summer storm season.
2017 ANNUAL GENERAL MEETING
IAG’s 2017 annual general meeting will be
held on Friday, 20 October 2017, at the Wesley
Conference Centre, 220 Pitt Street, Sydney,
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
Tuesday, 5 September 2017.
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 2017 and the
Auditor's Report.
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
ELIZABETH B BRYAN AM
BA (Econ), MA (Econ), age 70 - Chairman and Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Elizabeth Bryan was appointed a Director of IAG on 5 December 2014, and became Chairman on 31 March 2016. She is the
Chairman of the Nomination Committee, and attends all Board committee meetings in an ex officio capacity. Elizabeth is also the
Chairman of Insurance Manufacturers of Australia Pty Limited.
OTHER BUSINESS AND MARKET EXPERIENCE
Elizabeth brings extensive leadership, strategic and financial expertise to the position of Chairman.
She has over 30 years of experience in the financial services industry, government policy and administration, and on the boards of
companies and statutory organisations.
In addition to her role as Chairman of IAG, Elizabeth is also currently Chairman of Virgin Australia Group.
Previous roles include Chairmanship of Caltex Australia Limited and UniSuper Limited.
Directorships of other listed companies held in the past three years:
IAG Finance (New Zealand) Limited (a part of the Group), since 2016;
Virgin Australia Group, since 2015;
Westpac Banking Corporation (2006-2016); and
Caltex Australia Limited (2002-2015).
MANAGING DIRECTOR
PETER G HARMER
Age 56, Managing Director and Chief Executive Officer, Executive Director
INSURANCE INDUSTRY EXPERIENCE
Peter Harmer was appointed Managing Director and Chief Executive Officer of IAG on 16 November 2015. He is a member of IAG's
Nomination Committee.
Peter joined IAG in 2010 and has held a number of senior roles. Prior to his current role, Peter was Chief Executive of the IAG Labs
division, responsible for driving digital and innovation across IAG and its brands, and creating incubator areas which specifically
explore innovative opportunities across the fintech landscape.
Before this, Peter was Chief Executive of the Commercial Insurance division and joined IAG as Chief Executive Officer, CGU
Insurance.
Peter was previously Chief Executive Officer of Aon Limited UK and a member of Aon’s Global Executive Board, and spent seven
years as Chief Executive Officer of Aon’s Australian operations.
He has over 36 years experience in the insurance industry, including senior roles in underwriting, reinsurance broking and
commercial insurance broking as Managing Director of John C. Lloyd Reinsurance Brokers, Chairman and Chief Executive of Aon Re
and Chairman of the London Market Reform Group.
Peter has completed the Harvard Advanced Management Program.
Directorships of other listed companies held in the past three years:
IAG Finance (New Zealand) Limited (a part of the Group), since 2015.
1
OTHER DIRECTORS
DUNCAN M BOYLE
BA (Hons), FCII, FAICD, age 65 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Duncan Boyle was appointed a Director of IAG on 23 December 2016. He is a member of IAG's Audit Committee, Risk Committee
and Nomination Committee.
Duncan is Chairman of TAL Dai-ichi Life and a former Non-Executive Director of QBE Insurance Group.
Duncan’s executive career included senior roles with a variety of financial and corporate institutions, including Royal and Sun
Alliance Insurance. He also held various board roles with the Association of British Insurers, Insurance Council of Australia, Global
Aviation Underwriting Managers, AAMI and APIA.
OTHER BUSINESS AND MARKET EXPERIENCE
Duncan is a former Non-Executive Director of Stockland Group and Clayton Utz.
Directorships of other listed companies held in the past three years:
Stockland Group (2007-2015); and
QBE Insurance Group (2006-2014).
CATRIONA A DEANS (ALISON DEANS)
BA, MBA, GAICD, age 49 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Alison Deans was appointed a Director of IAG on 1 February 2013. She is a member of IAG's Audit Committee, People and
Remuneration Committee and Nomination Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Alison was formerly CEO of netus Pty Limited, a technology based investment company focused on building consumer web
businesses in Australia, which was acquired by Fairfax Media Limited in December 2012. She has over 20 years experience in
general management and strategy consulting roles focused on e-business and media/entertainment in Australia.
She was appointed an Independent Non-Executive Director of Westpac Banking Corporation in April 2014, of Kikki.K Holdings Pty
Limited in October 2014 and of Cochlear Limited in January 2015. Alison has also held Chief Executive roles at eBay Australia and
New Zealand, eCorp Limited 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 2014.
Cochlear Limited, since 2015; and
HUGH A FLETCHER
BSc/BCom, MCom (Hons), MBA, age 69 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Hugh Fletcher was appointed a Director of IAG on 1 September 2007 and Chairman of IAG New Zealand Limited on 1 September
2003. He is a member of IAG's People and Remuneration Committee, Risk Committee and Nomination 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 Officer.
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:
IAG Finance (New Zealand) Limited (a part of the Group), since 2008;
Vector Limited, since 2007; and
Rubicon Limited, since 2001.
2 IAG ANNUAL REPORT 2017
JONATHAN (JON) B NICHOLSON
BA, age 61 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Jon Nicholson was appointed a Director of IAG on 1 September 2015. He is a member of IAG's People and Remuneration
Committee, Risk Committee and Nomination Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Jon is Non-Executive Chairman of Westpac Foundation, a trustee of Westpac Bicentennial Foundation and a Non-Executive Director
of Cape York Partnerships and QuintessenceLabs.
He previously spent eight years with Westpac Banking Corporation, first as Chief Strategy Officer and later as Enterprise Executive.
He retired from Westpac in 2014.
Jon’s executive career has included senior roles with a variety of financial and corporate institutions, including the Boston
Consulting Group. He also held various roles with the Australian Government, including Senior Private Secretary to the Prime
Minister of Australia (Bob Hawke) and senior positions in the Department of the Prime Minister and Cabinet.
Directorships of other listed companies held in the past three years:
None.
HELEN M NUGENT AO
BA (Hons), PhD, MBA, HonDBus, age 68 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Helen Nugent was appointed a Director of IAG on 23 December 2016. She is Chairman of IAG's People and Remuneration
Committee and a member of the Audit Committee and Nomination Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Helen is Chairman of Australian Rail Track Corporation, Ausgrid and the National Disability Insurance Agency.
She has over 30 years experience in the financial services sector. This includes being Chairman of Veda Group, Funds SA, Swiss
Re (Australia) and Swiss Re (Life and Health) Australia, as well as being a Non-Executive Director of Macquarie Group, Origin Energy
Limited, Mercantile Mutual and the State Bank of New South Wales.
Other former senior roles include Director of Strategy at Westpac Banking Corporation, Professor and Director of the MBA Program
at the Australian Graduate School of Management and Principal of McKinsey & Company, where she specialised in the financial
services and resources sectors.
Helen has given back to the community in education and the arts, having been Chancellor of Bond University, President of
Cranbrook School, Chairman of the National Opera Review, Chairman of the Major Performing Arts Inquiry and Deputy Chairman of
Opera Australia. She is currently Chairman of the National Portrait Gallery.
Helen is an Officer of the Order of Australia (AO) and has received a Centenary Medal as well as an Honorary Doctorate in Business
from the University of Queensland.
Directorships of other listed companies held in the past three years:
Origin Energy Limited (2003-2017);
Veda Group (2013-2016); and
Macquarie Group (1999-2014).
THOMAS (TOM) W POCKETT
CA, BCom, age 59 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Tom Pockett was appointed a Director of IAG, effective 1 January 2015. He is Chairman of IAG's Audit Committee and a member of
the Risk Committee and Nomination Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Tom is Chairman and Non-Executive Director of Stockland Group, Chairman and Non-Executive Director of Autosports Group Limited
and a Director of Sunnyfield Independence Association and of O'Connell Street Associates. He previously spent over eleven years
as Chief Financial Officer and over seven years as Finance Director with Woolworths Limited and retired from these roles in
February 2014 and July 2014, respectively. Tom has also held senior finance roles at Commonwealth Bank, Lend Lease
Corporation and Deloitte.
Directorships of other listed companies held in the past three years:
Autosports Group Limited, since 2016;
Stockland Group, since 2014; and
Woolworths Limited (2006-2014).
3
PHILIP J TWYMAN AM
BSc, MBA, FAICD, age 73 - Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Philip Twyman was appointed a Director of IAG on 9 July 2008. He is Chairman of IAG's Risk Committee, and a member of the 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 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 over 20 years of both board and executive level general insurance
experience.
Philip is on the Boards of Swiss Re in 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 between IAG and Royal Automobile Club of Victoria Limited, from April 2007 to July 2008.
OTHER BUSINESS AND MARKET EXPERIENCE
Philip is also a director of Tokio Marine Management (Australasia) Pty Ltd.
Directorships of other listed companies held in the past three years:
None.
DIRECTORS WHO CEASED DURING THE FINANCIAL YEAR
Raymond Lim was a Director from 1 February 2013 to 20 February 2017.
SECRETARY OF INSURANCE AUSTRALIA GROUP LIMITED
CHRISTOPHER (CHRIS) J BERTUCH
BEc, LLB, LLM
Chris Bertuch was appointed Group General Counsel and Company Secretary on 11 May 2011. Prior to joining IAG, he held the
position of Group General Counsel and Company Secretary at CSR Limited. Chris joined CSR Limited 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 30 years of experience in
corporate, commercial and trade practices law and dispute resolution. Chris has 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 below:
DIRECTOR
BOARD OF DIRECTORS
Scheduled
Unscheduled
PEOPLE AND
REMUNERATION
COMMITTEE
AUDIT
COMMITTEE
RISK
COMMITTEE
BOARD SUB
COMMITTEE
NOMINATION
COMMITTEE
Total number of
meetings held
7
1
4
4
5
2
2
Eligible
to
Eligible
to
Eligible
to
Eligible
to
Eligible
to
Eligible
to
Eligible
to
attend Attended
attend Attended
attend Attended
attend Attended
attend Attended
attend Attended
attend Attended
Elizabeth Bryan(a)
Peter Harmer
Duncan Boyle(b)
Alison Deans(c)
Hugh Fletcher(d)
Raymond Lim(e)
Jonathan
Nicholson(d)
Helen Nugent(f)
Tom Pockett
Philip Twyman
7
7
3
7
7
5
7
3
7
7
7
7
3
7
6
5
7
3
7
7
1
1
-
1
1
1
1
-
1
1
1
1
-
1
1
1
1
-
1
1
2
-
-
4
2
2
2
2
-
-
2
-
-
4
2
2
2
2
-
-
-
-
2
2
2
-
2
2
4
4
-
-
2
2
1
-
2
2
4
4
3
-
2
-
5
-
5
-
5
5
3
-
2
-
4
-
5
-
5
5
2
2
-
-
2
-
-
-
-
-
2
2
-
-
2
-
-
-
-
-
2
2
1
2
2
1
2
1
2
2
2
2
1
2
2
1
2
1
2
2
(a)
(b)
(c)
(d)
(e)
(f)
Elizabeth Bryan was Chairman of the People and Remuneration Committee until 21 February 2017 and a member of the Risk Committee until 7 February 2017. She
attends People and Remuneration Committee, Audit Committee and Risk Committee meetings in an ex officio capacity.
Duncan Boyle was appointed to the Board on 23 December 2016. He was appointed to the Audit Committee, Risk Committee and Nomination Committee on 7
February 2017.
Alison Deans was appointed to the Audit Committee on 7 February 2017.
Hugh Fletcher and Jonathan Nicholson were appointed to the People and Remuneration Committee on 7 February 2017 and were members of the Audit Committee
until 7 February 2017.
Raymond Lim was a member of the Board, People and Remuneration Committee and Nomination Committee until 20 February 2017.
Helen Nugent was appointed to the Board on 23 December 2016. She was appointed to the People and Remuneration Committee, Audit Committee and Nomination
Committee on 7 February 2017 and was appointed Chairman of the People and Remuneration Committee effective 21 February 2017.
4 IAG ANNUAL REPORT 2017
PRINCIPAL ACTIVITY
The principal continuing activity of the Group is the underwriting of general insurance and related corporate services and investing
activities. The Group reports its financial information under the following business divisions:
DIVISION
Consumer Division
(Australia)
52% of Group gross
written premium
(GWP)
OVERVIEW
Consumer insurance products are sold in Australia through branches, call
centres, the internet and representatives, under the following brands:
NRMA Insurance in NSW, ACT, Queensland and Tasmania;
SGIO in Western Australia;
SGIC in South Australia;
RACV in Victoria, via a distribution agreement with RACV;
Coles Insurance nationally, via a distribution agreement with Coles; and
CGU through affinity and financial institution partnerships and broker
and agent channels.
Consumer Division also includes travel insurance, life insurance and income
protection products which are underwritten by third parties.
Business Division
(Australia)
25% of Group GWP
Business insurance products are sold in Australia through a network of
around 2,000 intermediaries, such as brokers, agents and financial
institutions and directly through call centre and online channels. Business
Division is a leading provider of business and farm insurance, and also
provides workers' compensation services in every state and territory, except
South Australia and Queensland.
Business Division operates across Australia under the following brands:
CGU Insurance;
Swann Insurance;
WFI;
NRMA Insurance;
RACV;
SGIO; and
SGIC.
New Zealand
20% of Group GWP
The New Zealand business is the leading general insurance provider in the
country in both the direct and broker/agent channels. Insurance products
are provided directly to customers primarily under the State and AMI brands,
and indirectly through insurance brokers and agents, under the NZI and
Lumley Insurance brands. Personal products and simplified commercial
products are also distributed through agents and under third party brands by
corporate partners, which include large financial institutions.
PRODUCTS
Short tail insurance
Motor vehicle
Home and contents
Lifestyle and leisure,
such as boat, veteran
and classic car and
caravan
Long tail insurance
Compulsory Third Party
(motor injury liability)
Short tail insurance
Business packages
Farm and crop
Commercial property
Construction and
engineering
Niche, such as
consumer credit
Commercial motor and
fleet motor
Marine
Long tail insurance
Workers' compensation
Professional indemnity
Directors' and officers'
Public and products
liability
Short tail insurance
Motor vehicle
Home and contents
Commercial property,
motor and fleet motor
Construction and
engineering
Niche, such as pleasure
craft, boat, caravan and
travel
Rural and horticultural
Marine
Long tail insurance
Personal liability
Commercial liability
Asia
3% of Group GWP
The Group has interests in five general insurance businesses in Asia,
comprising the direct and intermediated insurance business underwritten
through subsidiaries in Thailand, Vietnam and Indonesia and the share of
the operating result from the investment in associates in Malaysia and India.
The businesses offer personal and commercial insurance products through
local brands.
Corporate and Other Corporate and other comprises other activities, including corporate services,
capital management activity, shareholders' funds investment activities and
inward reinsurance from associates.
5
OPERATING AND FINANCIAL REVIEW
OPERATING RESULT FOR THE FINANCIAL YEAR
IAG produced a headline insurance margin of 14.9% in the current financial year, towards the upper end of the revised guidance of
13.5-15.5% provided on 28 June 2017. Underlying performance was softer than anticipated with an underlying margin of 11.9%
(2016-14.0%) falling short of original expectations. The lower than expected underlying margin was primarily due to higher than
expected claims inflation in short tail motor in Australia and New Zealand and elevated large loss experience in commercial
classes, notably in Australia.
Gross Written Premium (GWP) growth of 3.9% (2016-negative 0.6%) was higher than that expected at the outset of the year,
encompassing a rate response to the short tail motor claims issues being experienced and better than expected retention in
Australian commercial lines.
Short tail personal lines in Australia and New Zealand continued to generate solid growth, predominantly reflecting higher rates.
Overall volumes were relatively flat, with growth in motor offset by modest declines in home. Underlying short tail profitability was
strong, but slightly lower than the corresponding prior year, as earned rate effects lagged claims inflation.
Long tail Compulsory Third Party (CTP) profitability improved, particularly in NSW, as lower claims frequency resulted from initial
reform measures in late calendar year 2016.
Commercial lines’ profitability in Australia was adversely affected by the incidence of large property losses. The modest rate
increases implemented from the conclusion of calendar year 2015 have continued to gather pace. In New Zealand, there was a
marked improvement in commercial rates and volumes, post the Kaikoura earthquake in November 2016.
Asia delivered a lower result, influenced by increased competitive pressures in the Thai and Malaysian motor markets, and
increased claim costs in Thailand, including those from flood events. Regional proportional GWP was flat, with strong ongoing
growth in India countering trends in Thailand and Malaysia.
A higher reported margin of 14.9% (2016-14.3%) included prior period reserve releases well in excess of original expectations, at
5.4% (2016-2.5%) of Net Earned Premium (NEP), reflecting the relative absence of inflation. This was partially offset by an increase
in net natural peril claim costs of over $160 million, which overran the allowance by about $140 million.
Progress on IAG’s optimisation program has been in line with expectations, with a range of cost-out initiatives building over the
course of the current year. As foreshadowed, a small net negative of $12 million was borne within the current year insurance
profit, as modest initial benefits were more than offset by related implementation costs. The creation of a single Australian
division, with effect from July 2017, is the next step in simplifying IAG’s operating model as part of this program.
Net profit after tax
Net profit after tax of $929 million (2016-$625 million) was nearly 50% higher than the prior year. In addition to the effect of a
higher insurance profit, this outcome included:
a significantly higher contribution from investment income on shareholders’ funds, incorporating stronger equity market
returns; partially offset by
a greater than $30 million deterioration in the contribution from fee based business, which included a provision for costs
associated with withdrawal from the NSW workers’ compensation scheme; and
the result in the corresponding prior year included nearly $140 million (post-tax) of non-cash accelerated amortisation and
impairment of capitalised software assets.
Gross written premium
GWP grew by 3.9%. The increase was primarily driven by:
an ongoing rate response to claim cost pressures in short tail motor;
further improvement in Australian commercial rates, while maintained retention levels were better than originally anticipated;
a post-Kaikoura earthquake improvement in commercial rates and volumes in New Zealand;
lower GWP in Asia, reflecting intensified price competition in motor in Thailand; and
an overall positive foreign exchange translation effect (approximately 0.5%).
In addition, the current year GWP outcome contained:
an initial $73 million contribution from IAG’s entry into the South Australian CTP market from 1 July 2016, within Consumer
Division; and
lower GWP of approximately $130 million owing to the divestment of the Swann Insurance motor dealership business in early
August 2016, within Business Division.
The discussion of operating performance in this section in relation to the corresponding prior year is presented on a management
reported basis unless otherwise stated. Management reported results are non-IFRS financial information and are not directly
comparable to the statutory results presented in other parts of this Annual Report.
There were two elements of the statutory results for the corresponding prior year that were not expected to be a feature of the
Group’s future sustainable earnings profile. As a result, and to ensure consistency of the reporting of key insurance measures and
metrics, these items were shown in the ‘Net corporate expense’ line in the management reported view of the corresponding prior
year results. This view was consistent with the approach adopted in IAG’s Investor Report.
6 IAG ANNUAL REPORT 2017
Reconciliation between the statutory results (IFRS) and the management reported (non-IFRS) results for the corresponding prior
year is presented below:
CONSOLIDATED
Gross earned premium
Outwards reinsurance premium expense
Net earned premium
Net claims expense
Net commission and underwriting expense
Underwriting profit
Net investment income on assets backing insurance liabilities
Insurance profit before capitalised software accelerated
amortisation and impairment
Capitalised software accelerated amortisation and impairment
Insurance profit
Net corporate expense
Net other operating income/(expenses)
Profit before income tax
STATUTORY
RESULTS
(IFRS)
RUN-OFF
PORTFOLIO
REINSURANCE
PROTECTION
$m
11,411
(3,883)
7,528
(4,702)
(2,116)
710
463
1,173
(198)
975
(18)
(37)
920
$m
-
700
700
(695)
-
5
-
5
-
5
(5)
-
-
CAPITALISED
SOFTWARE
ACCELERATED
AMORTISATION
AND
IMPAIRMENT
$m
-
-
-
-
-
-
-
-
198
198
(198)
-
-
MANAGEMENT
RESULTS
(NON-IFRS PER
INVESTOR
REPORT)
$m
11,411
(3,183)
8,228
(5,397)
(2,116)
715
463
1,178
-
1,178
(221)
(37)
920
Additional details of the adjustments are provided on page 7 of the 2016 Annual Report.
Unless otherwise stated, the insurance and underwriting profits commentary for the corresponding prior year provided below refers
to the Group’s management reported results and is non-IFRS financial information.
Insurance margin
IAG’s current year reported insurance profit of $1,258 million (2016-$1,178 million) was nearly 7% higher than the prior year. The
reported insurance margin of 14.9% (2016-14.3%) included:
significantly higher than originally expected prior period reserve releases of $457 million (2016-$207 million), equivalent to
5.4% of NEP (2016-2.5%) arising from Australian long tail classes;
net natural peril claim costs of $822 million (2016-$659 million), which exceeded allowance by over $140 million and included
significant losses from the Kaikoura earthquake, Northern Sydney hailstorm and Tropical Cyclone Debbie events; and
a favourable credit spread impact of $20 million, compared to an adverse effect of $37 million in the prior year.
Underlying margin
IAG’s underlying margin was 11.9% (2016-14.0%). The lower underlying margin included:
an adverse impact of approximately 70 basis points (bps) from an $80 million increase in natural perils allowance to $680
million;
increased short tail motor claims inflation in both Australia and New Zealand, where the earned effect of related rate increases
has yet to match higher claim costs;
elevated large loss experience in commercial lines, particularly in Australia in the second half;
a slight drag from the Satellite business (in Consumer), which delivered strong growth but operates at a lower level of
profitability;
a near $20 million reduction from Asia; and
the absorption of a small net cost from the Group’s optimisation program, of approximately $12 million.
The above were partially offset by a greater than $40 million reduction in non-quota share reinsurance expense in the current year
and improvement in NSW CTP profitability as pressure from small claim frequency eased.
IAG defines its underlying margin as the management 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.
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
1,258
142
(372)
(20)
1,008
2017
%
14.9
1.7
(4.4)
(0.3)
11.9
$m
1,178
59
(125)
37
1,149
2016
%
14.3
0.7
(1.5)
0.5
14.0
*
Reported insurance margin is the insurance profit/(loss) as a percentage of NEP as disclosed in the Statement of Comprehensive Income. The prior year represents the
management reported insurance margin which is the insurance profit as a percentage of NEP as disclosed in the Investor Report. Based on the statutory results, the
equivalent statutory insurance margin for the prior year was 13.0%.
7
The underlying insurance margin is a non-IFRS measure that is designed to present, in the opinion of management, the results
from ongoing operating activities in a way that best and most appropriately reflects the Group’s underlying performance.
Tax expense
IAG reported a tax expense of $329 million (2016-$218 million), representing an effective tax rate of 24.7% (2016-23.7%). The
main reason for this lower than normal rate is the application of the concessional zero tax rate (previously 10%) to a greater
proportion of reinsurance recoveries on the February 2011 Canterbury earthquake event by IAG’s captive vehicle in Singapore,
following a review by that country’s revenue authorities.
Other contributory elements reconciling the effective tax rate to the prevailing Australian corporate rate of 30% are:
differences in tax rates applicable to IAG’s foreign operations, principally in New Zealand, Singapore and Malaysia; and
franking credits generated from IAG’s investment portfolio.
Investment income on shareholders’ funds
Net investment income on shareholders’ funds was a profit of $249 million, a substantial increase on the profit of $97 million in
the prior year. This was driven by a stronger equity market performance, with the broader Australian index (S&P ASX200
Accumulation) delivering a return of 14.1% (2016-0.6%) and the MSCI World Total Return Index (AUD Hedged) 16.4% (2016-
negative 2.8%).
At 30 June 2017, the weighting to growth assets (equities and alternatives) within shareholders’ funds stood at approximately 47%
(2016-48%).
DIVISIONAL HIGHLIGHTS
On 19 July 2017, IAG announced the creation of a single Australian division, with immediate effect. The Australia Division simplifies
IAG’s operating model by bringing together the former Australian Consumer, Australian Business, Operations and Satellite
Divisions. It centralises accountability for the customer, product, distribution and operations functions for IAG’s Australian brands,
which include NRMA Insurance, CGU, WFI, SGIO and SGIC.
The segment information provided in this report references the reportable segments that were in place during the 2017 reporting
period.
A. CONSUMER DIVISION
The Consumer Division accounted for 52% of Group GWP. This business produced a strong underlying margin of 13.9% and its
GWP increased by 5.5%.
I. Premiums
Consumer Division’s collective brands continued to generate a sound top line performance in a dynamic and competitive
environment. GWP increased by 5.5% to $6,119 million in the current year (2016-$5,801 million), and included growth in both
short tail home and motor lines, as well as long tail CTP. Short tail GWP growth of 4.7% was predominantly rate-driven, largely in
response to higher than originally expected claims inflation in motor. This was supplemented by modest volume gain in motor,
while home volumes contracted marginally, reflecting lower new business.
Within Satellite, Coles Insurance and IAL (via the intermediated channel in partnership with Steadfast) delivered stronger growth
than Consumer Division as a whole, albeit off considerably smaller bases than those of the major brands. Tougher conditions were
experienced by the SGIO and SGIC brands in Western Australia and South Australia respectively, where GWP was flat.
Long tail CTP GWP increased by over 10%, reflecting IAG’s entry into the South Australian market from 1 July 2016 and rate
increases in NSW in the early part of the year.
II. Insurance profit
Consumer Division reported an insurance profit of $941 million (2016-$805 million). This equates to a higher reported insurance
margin of 21.8% (2016-19.8%), and included the net effect of:
considerably higher prior period reserve releases from long tail classes;
a similar net natural peril claim cost; and
a favourable credit spread movement of over $30 million.
Consumer division’s underlying performance was strong, with an underlying margin of 13.9%. This outcome was lower than the
corresponding prior year (16.0%) and contained:
pressure on profitability from higher claim costs, notably in short tail motor, moderated by solid premium rate increases across
the year;
a slight drag on reported and underlying margin from the stronger growth of the lower margin Satellite offering, comprising
Coles Insurance, SGIO, SGIC and IAL (via the intermediated channel in partnership with Steadfast); and
an improvement in NSW CTP profitability, following the regulatory cap on legal fees for low value claims, introduced from 1
November 2016.
B. BUSINESS DIVISION
The Business Division represented 25% of Group GWP. In overall terms, GWP was flat despite a reduction of almost $130 million
as a result of the divestment of the Swann Insurance car dealership business. Like-for-like GWP growth exceeded 4%, with
business retention levels holding up well and increased rate momentum evident in most intermediated classes. A lower underlying
margin of 6.9% (2016-9.7%) included an increased large loss experience. A slightly lower reported margin of 9.2% (2016-10.0%)
included higher reserve releases.
8 IAG ANNUAL REPORT 2017
I. Premiums
Business Division recorded relatively flat GWP of $2,962 million (2016-$2,979 million). This outcome contained:
the $130 million reduction in premium from the divestment of the Swann Insurance car dealership business, as outlined
above;
targeted rate increases in most classes, with increased momentum over the course of the year;
the shedding of poorly performing business, notably in the areas of workers’ compensation and commercial property;
strong underwriting agency-derived growth;
steady retention rates, which held up better than expected; and
lower new business opportunities and volumes.
Business Division has continued to focus on underwriting discipline and increasing rates in specific business segments through
targeted portfolio reviews. This process commenced over 18 months ago and has gathered momentum. Whilst rate increases vary
by segment, portfolios such as business packages, property and commercial motor have seen up to double digit advances, without
adverse impact on volumes. The key June renewal period, which represents approximately 20% of Business Division’s annual GWP,
saw average rate increases of around 5% across the intermediated business portfolio.
The direct market continued to perform well and represented 24% of the Business Division’s GWP (2016-23%). Policy growth in the
online digital channel was approximately 8% off a low base. Long tail classes represented around 28% of the division’s GWP (2016-
27%).
II. Insurance profit
Business Division reported a lower insurance profit of $204 million, compared to the prior year ($230 million). This equates to a
reported insurance margin of 9.2% (2016-10.0%), which includes the net effect of:
increased large loss experience;
a similar net natural peril claim cost;
lower investment income following the reduction in technical reserves as a result of the asbestos reinsurance arrangement in
the prior year; partially offset by
higher prior period reserve releases; and
a favourable credit spread movement of $23 million.
Business Division produced a weaker underlying margin of 6.9% (2016-9.7%). This was driven by an adverse large loss experience
against financial year 2016 and prior years. The earn-through of lower GWP in prior periods was also a contributory factor.
III. Fee based business
Net income from fee based operations was a loss of $28 million, compared to a profit of $4 million in the prior year. The principal
source of fee income is Business Division's role as agent under both the NSW and Victorian workers’ compensation schemes,
which are underwritten by the respective State governments. In March 2017 CGU announced its intention to withdraw from the
NSW scheme by 31 December 2017 after assessment of associated risks and returns. As part of the withdrawal, anticipated
redundancy payments and fixed technology recharges of approximately $13 million have been provided for in the current financial
year.
Fee based income in the current year included $5 million of prior period fee income in respect of the Victorian scheme. Excluding
this, the underlying result in the current year was lower by $17 million compared to the corresponding prior year, which was driven
by:
the loss of the largest employer in the Victorian scheme following an unsuccessful tender submission and a reduction in CGU’s
service fee under a new five year contract;
unfavourable changes to the NSW remuneration model in the final year of the current contract period; and
lower than expected returns from performance and incentive fees in both States.
A secondary source of fee income is Business Division’s interest in authorised representative brokers, which it has consolidated
into one entity following the integration of Westcourt General Insurance Brokers with National Advisor Services.
C. NEW ZEALAND
New Zealand represented 20% of Group GWP and produced a strong underlying performance, with an underlying margin of 14.8%
(2016-16.9%).
I. Premiums
New Zealand reported GWP of $2,339 million (2016-$2,182 million), representing growth of 7.2%. This included a favourable
foreign exchange translation effect, with local currency GWP increasing by 4.3% to NZ$2,475 million. This outcome embraces:
strong GWP growth in the Consumer Division, led by the private motor vehicle portfolio from a combination of higher volumes
and rates; and
improving GWP growth in the Business Division where positive signs of rate and volume growth emerged in commercial lines in
the second half.
II. Insurance profit
The New Zealand business produced an insurance profit of $125 million (2016-$135 million), translating to a reported insurance
margin of 7.6% (2016-8.6%). The slightly lower outcome reflects the net effect of:
substantially higher net natural peril claim costs, notably from the Kaikoura earthquake;
higher than expected working claim costs, predominantly in the personal lines and commercial motor books as a result of
higher average claim costs and frequency;
challenging market conditions in the Business Division where the focus remains on the maintenance of pricing and
underwriting discipline;
9
a continued focus on disciplined expense management; and
the absence of the NZ$150 million increase to risk margin for the February 2011 earthquake event, which was recognised in
the prior year.
New Zealand generated a strong underlying margin of 14.8% (2016-16.9%). The current year margin was impacted by a
deterioration in working and large claim costs, as well as the cumulative effect of competitive pricing pressure in commercial lines.
Steps taken to address these trends include rate and excess increases, supply chain initiatives and internal claim process changes.
III. Canterbury Rebuild
The settlement of claims associated with the financial year 2011 Canterbury earthquake events continues to make sound progress.
At 30 June 2017:
nearly NZ$6.4 billion of claim settlements had been completed;
over 97% of all claims by number had been fully settled;
over 98% of commercial claims had been fully settled; and
over 97% of residential claims had been settled, with the balance either in construction or negotiation for cash settlement.
During the current year IAG continued to receive new claims from the Earthquake Commission (EQC) as they tipped over the EQC
cap of NZ$100,000 (plus GST), but at a diminishing rate. IAG’s reserving position at the end of the current year allows for some
further claims exceeding the EQC’s cap.
In financial year 2016, IAG acquired NZ$600 million of adverse development cover in respect of the February 2011 earthquake,
which effectively increased IAG’s cover for this event to NZ$5 billion. IAG’s reserved position remains below the attachment point
of this cover.
D. ASIA
Asia reported a decline in consolidated GWP of over 5%, as intensified price competition in Thailand was exaggerated by an adverse
foreign exchange translation effect. Asia’s overall earnings contribution decreased to $10 million (2016-$26 million), as both
Thailand and Malaysia incurred the effect of increased competitive pressures and, in the case of Thailand, flood-related claim costs.
The combined contribution from the developing markets of India, Vietnam and Indonesia improved, driven by the move into profit
from India as better claim and expense outcomes were supplemented by higher investment income.
I. Divisional result
The division contributed a total profit of $10 million in the current year, including shares of associates and allocated costs,
compared to a $26 million profit in the corresponding prior year. The lower result reflects the combination of:
the move to a small loss in Thailand, driven by a higher claims ratio and increased competitive pressures in motor;
a lower margin from Malaysia in the face of soft new car sales and increased competition in motor ahead of detariffication;
an increased loss from Indonesia, as it explores the development of a digital model; offset by
a move into profit by India on the back of better risk selection, coupled with improved expense management;
a favourable net movement in mark-to-market valuations of investments in Malaysia and India; and
lower regional support and development costs.
II. Controlled entities
GWP from the Group's controlled entities was $366 million, which was a decrease of over 5% on the corresponding prior financial
year (2016-$386 million), within this:
the Thai business (Safety Insurance) reported a decrease in GWP of 3.9% to $348 million from $362 million in the prior year,
compared to a local currency GWP decline of 1.8% in the current year. This outcome was influenced by weaker than expected
growth in new vehicle sales, intensified price competition in the motor segment and significantly lower commercial volumes
following a planned reduction in exposure to selected segments;
AAA Assurance in Vietnam recorded GWP equivalent to $15 million (2016-$17 million); and
Parolamas in Indonesia recorded GWP equivalent to $3 million (2016-$7 million).
The controlled entities reported an insurance loss of $7 million for the current year (2016-$21 million profit) excluding allocated
costs. Within this:
the Thai business reported an insurance loss of $2 million, compared to a profit of $23 million in the corresponding prior year.
The significantly weaker outcome was driven by a deterioration in the loss ratio, which was characterised by a higher number
of large losses in the engineering and fire classes, significantly lower prior period reserve releases; a regulatory-led increase in
compulsory motor claim limits, with no commensurate premium increase; and increased natural peril-related net claim costs
of $6 million, associated with flood incidents and a prolonged wet season;
AAA Assurance contributed an insurance loss of $1 million (2016-$1 million loss). The result included an increase in the loss
ratio, which was in line with expectations following the expiration of the earnings contribution from the run-off loan protection
portfolio; and
Parolamas in Indonesia contributed an insurance loss of $4 million (2016-$1 million loss).
III. Share of net profit/(loss) of associates
The Group's share of associates was a profit of $42 million (2016-$36 million), excluding allocated costs and before amortisation.
This result includes AmGeneral Holdings Berhad (AmGeneral) in Malaysia and SBI General Insurance Company Limited (SBI
General) in India. AmGeneral accounts for the majority of the Group's share of net profit from associates.
IAG’s share of AmGeneral's profit for the current year decreased to $28 million (2016-$40 million). The decrease was primarily
due to reduced net earned premium on the back of a reduction in average premiums for motor insurance; an increased loss
ratio of 64.6% (2016-60.7%), largely driven by higher repair costs from motor franchise partnerships, changes to motor
business mix and the adverse impact of the ringgit’s depreciation on replacement car parts; increased expenses relating to
marketing and sales campaigns; and higher administration expenses, particularly those associated with motor detariffication
and GST implementation.
10 IAG ANNUAL REPORT 2017
IAG’s share of SBI General’s profit for the current year was $14 million compared to a $4 million loss in 2016. This move into
profit comprised an improved loss ratio arising from motor portfolio remediation; a favourable monsoon season in the current
year, reducing seasonal losses; an improved expense ratio resulting from tightened cost control; and higher investment
income bolstered by business growth and favourable mark-to-market movements in technical reserves income.
E. CORPORATE AND OTHER
A pre-tax profit of $83 million was reported, which compares to a loss of $282 million in the corresponding prior year. The
movement is mainly comprised of increased net investment income on shareholders’ funds of $152 million in the current year and
the non-recurrence of the $198 million non-cash accelerated amortisation and impairment charge on capitalised software assets
incurred in the prior year.
Further details on the operating segments are set out in Note 1.3 Segment reporting within the Financial Statements.
REVIEW OF FINANCIAL CONDITION
A. FINANCIAL POSITION
The total assets of the Group as at 30 June 2017 were $29,597 million compared to $30,030 million as at 30 June 2016.
Movements within the overall decrease of $433 million include:
a decrease in investments and cash of $649 million from the funds outflow associated with payment of the 2016 final dividend
and 2017 interim dividend, the off-market ordinary share buy-back of 64 million shares, redemption of GBP and NZD
subordinated debt and buy-back of convertible preference shares, partially offset by the issuance of capital notes and sound
operating earnings for the year;
a decrease in trade and other receivables of $168 million, predominantly driven by a $416 million decrease in reinsurance
recoveries on paid claims as recoveries on claims associated with the Canterbury earthquakes were settled, partially offset by
an increase of $182 million in investment related receivables, relating to the outstanding settlement of fixed interest holdings
at year end; and
an increase in reinsurance and other recoveries on outstanding claims of $569 million, predominantly due to recoveries
relating to the Kaikoura earthquake and Tropical Cyclone Debbie, partially offset by the continued settlement of the 2011
Canterbury earthquake and other prior period natural peril events.
The total liabilities of the Group as at 30 June 2017 were $22,805 million compared to $23,245 million at 30 June 2016. The
decrease in liabilities of $440 million is mainly attributable to the net effect of:
a decrease in the outstanding claims liability of $370 million primarily due to prior year reserve releases from Australian long
tail classes, higher discount rates impacting claim reserves and settlements on prior year events, partially offset by the
Kaikoura earthquake and Tropical Cyclone Debbie claim reserves;
a decrease in interest bearing liabilities of $338 million following the redemption of NZD and GBP subordinated debt and buy-
back of convertible preference shares, partially offset by issuance of capital notes;
an increase in unearned premium liability of $111 million consistent with growth in GWP; and
an increase in trade and other payables of $88 million driven by an increase in payables relating to unsettled investment
trades at year end, offset by lower reinsurance premiums payable.
IAG shareholders’ equity (excluding non-controlling interests) decreased from $6,563 million at 30 June 2016 to $6,562 million at
30 June 2017, mainly attributable to:
payment of the 2016 final and 2017 interim dividends and the dividend component of the off-market share buy-back, totalling
$746 million;
reduction in share capital following the off-market share buy-back totalling $193 million; and
a sound earnings performance in the current year resulting in a net profit attributable to shareholders of $929 million.
B. CASH FROM OPERATIONS
The net cash inflows from operating activities for the year ended 30 June 2017 were $636 million compared to net cash outflows of
$1,946 million for the prior year. The movement is mainly attributable to the net effect of:
a $483 million increase in premiums received consistent with growth in GWP;
an increase in reinsurance and other recoveries received of $959 million predominantly due to higher recoveries under the
Berkshire Hathaway (BH) quota share and continued collection of recoveries pertaining to the 2010 and 2011 Canterbury
earthquakes;
a $452 million decrease in claims costs paid, mainly attributable to the period on period reduction in payments made in
respect of natural peril events; and
a $700 million decrease in outwards reinsurance premium expense paid, primarily driven by the purchase of the run-off
portfolio protection placement in the prior financial year and lower catastrophe reinsurance premiums, stemming from the
favourable renewals.
C. INVESTMENTS
The Group’s investments totalled $12.1 billion as at 30 June 2017, excluding investments held in joint ventures and associates,
with over 67% represented by the technical reserves portfolio. The decrease in total investments since 30 June 2016 ($12.9
billion) reflects the combined effect of:
further reduction in technical reserves, mirroring the progressive effect of the 20% BH quota share in lowering related
insurance liabilities and the significant reserve releases recognised in the current year; and
the net reduction in shareholders’ funds due to dividend payments ($623 million) and completion of the off-market share
buyback ($316 million) in the first half of the current financial year.
As at 30 June 2017, the Group’s overall investment allocation remains conservatively positioned and the credit quality of the
investment book remains strong, with 73% (2016-77%) of the fixed interest and cash portfolio rated in the 'AA' category or higher.
11
Technical reserves as at 30 June 2017 accounted for $8.1 billion (2016-$8.7 billion) of the Group's investments, and were invested
in fixed interest and cash.
The Group’s allocation to growth assets was 47% of the $4 billion of shareholders' funds at 30 June 2017 (2016-48%). 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 $1,624 million at 30 June 2017, compared to $1,962 million at 30 June 2016. The
net decrease of $338 million is largely explained by:
the buy-back of $377 million convertible preference shares;
the redemption of NZ$187 million subordinated bonds ($179 million as of the redemption date);
the redemption of £100 million subordinated term notes ($171 million as of the redemption date); partially offset by
the issue of $404 million capital notes, qualifying as Additional Tier 1 Capital for regulatory purposes.
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 remains 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 2017, the Group’s capital mix was within the targeted range, with debt and hybrids representing 31.9% (2016-36.8%) of
total tangible capitalisation.
F. CAPITAL MANAGEMENT
The Group remains strongly capitalised under APRA's Prudential Standards, with regulatory capital of $4,526 million at 30 June
2017 (2016-$4,619 million). The Group 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 2017, the Group had a PCA multiple of 1.70 (2016-1.72) and a CET1 multiple of 1.09 (2016-1.06).
Further capital management details are set out in Note 3.1 Risk and capital management within the Financial Statements.
STRATEGY AND RISK MANAGEMENT
A. STRATEGY
At IAG, our purpose is to make your world a safer place: IAG’s purpose means that whether you are a customer, partner,
employee, shareholder or part of the communities IAG serves across Australia, New Zealand or Asia, IAG exists to ‘make your
world a safer place’. IAG believes its purpose will enable it to become a more sustainable business over the long term, and
deliver stronger and more consistent returns for its shareholders.
IAG’s opportunity is to embrace innovation: The way we live our lives is changing at a rapid pace driven by new technologies
and shifting demographic trends. This means our customers are faced with new challenges and opportunities every day. IAG
is determined to lead, helping our customers navigate through this journey and using innovation to make their lives safer and
better.
Our promise is to deliver world class customer experiences: All the elements of our strategy are driven by our customers'
needs. As well as delivering world class customer experiences, we will make IAG as successful as possible so that we can
reinvest in our leadership position.
Financial targets
IAG is focused on delivering through-the-cycle targets of:
cash return on equity (ROE) 1.5x weighted average cost of capital (WACC);
a dividend payout of 60-80% of cash earnings;
top quartile total shareholder return (TSR); and
approximately 10% compound earnings per share (EPS) growth.
Strategic themes
IAG is focused on optimising its core business and building the necessary platforms for future growth. IAG has identified two key
strategic themes to deliver this strategy:
I. Leading:
IAG is determined to lead the change that its customers need and demand. This has the company’s customers at its core and
IAG will embrace innovation and new technology to make each individual interaction a world class experience. This will be
driven by:
deepening customer intimacy through digitally-enabled customer experiences, providing needs-based customer
propositions and creating ecosystems of relevant adjacent services alongside insurance to help make customers’ lives
safer and fulfil IAG’s purpose.
partnering selectively to complement and strengthen our capabilities, incorporating third party offerings in our ecosystems
and investing in new ventures and incubation.
II. Fuelling:
IAG will fuel the business so that it can deliver on these opportunities. This involves tackling necessary changes to the way IAG
operates – simplifying processes and systems, and optimising resources, to be more efficient. This will be driven by:
optimising our core through simplification and scalability and becoming an agile organisation so that we can deliver
inspiring customer experiences with less cost and complexity.
12 IAG ANNUAL REPORT 2017
modularising our operating and capital platforms so that the business can derive maximum value from each component of
the value chain, including offering elements on a fee-for-service basis where they strengthen our competitive advantage
and partnering for capability in areas that are not a competitive advantage.
B. BUSINESS RISK AND RISK MANAGEMENT
Managing risk is central to the sustainability of IAG's business, its purpose and delivery of value to shareholders. IAG uses an
enterprise approach to risk and its risk management framework is a core part of the governance structure and includes internal
policies, key management processes and culture. The Risk Management Strategy is reviewed annually or as required by the Risk
Committee before being recommended for approval by the Board. IAG’s risk and governance function provides regular reports to
the Risk Committee 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 on significant audit findings and
other audit related matters.
Roles and responsibilities of the Board and its standing committees, the Audit Committee, Risk Committee, People and
Remuneration Committee and Nomination Committee, are set out in the Corporate Governance section of the IAG website.
The Group is exposed to multiple risks relating to the conduct of its general insurance business. The risks noted below are not
meant to represent an exhaustive list, but outline those risks faced by the Group that have been identified in IAG's Risk
Management Strategy:
strategic risk: the risk of not achieving corporate or strategic goals;
insurance risk: the risk that the Group is exposed to financial loss, as a result of inadequate or inappropriate underwriting,
inadequate or inappropriate product pricing, unforeseen, unknown or unintended liabilities that may eventuate, inadequate or
inappropriate claims management including reserving or insurance concentration risk (i.e. by locality, segment or distribution);
reinsurance risk: the risk of insufficient or inappropriate reinsurance coverage, inadequate underwriting and pricing of
reinsurance exposures retained by IAG’s reinsurance captives, inadequate or inappropriate reinsurance recovery management,
reinsurance arrangements not legally binding and reinsurance concentration risk;
financial risk: the risk of inadequate liquidity, adverse movements in market prices (equities, derivatives, interest rates, foreign
exchange, etc) or inappropriate concentration within investment funds, a counterparty failing to meet its obligations and/or
inappropriate capital management; and
operational risk: the risk of loss from inadequate or failed internal processes, people, systems and/or external events.
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, regulators and shareholders.
Detail of the Group's overall risk management framework, which is outlined in the Risk Management Strategy, is set out in Note 3.1
Risk and capital management within the Financial Statements and in the Corporate Governance Statement, which is available at
www.iag.com.au/about-us/corporate-governance.
C. ECONOMIC, ENVIRONMENTAL AND SOCIAL SUSTAINABILITY RISK
As a general insurer that operates in Australia, New Zealand and throughout Asia, IAG is exposed to economic, environmental and
social sustainability risks and opportunities. The IAG Board has overarching responsibility for these areas, which are managed
under shared value and sustainability. Performance and risk management is formally reported to the Board annually, with ad-hoc
updates as required.
The Consumer Advisory Board and Ethics Committee provide external stakeholder input into the understanding of economic,
environmental and social sustainability risk. The Shared Value Advisory Council is an internal governance body that acts as a forum
to identify environmental and social risks, determine the materiality of risks and make decisions on how the Company responds
through our approach to shared value, sustainability and broader community activity. Established in 2014, the Shared Value
Advisory Council fulfils the role of a sustainability committee for IAG. It meets at least quarterly, is chaired by the Group Executive
Office of the CEO, and is comprised of Senior Leaders from across the business, including the Group Executive for People,
Performance and Reputation and the Chief Customer Officer.
Annually IAG undertakes a materiality assessment to identify and prioritise economic, environmental and social sustainability risks
and opportunities. The results of the assessment help guide our shared value and sustainability approach and ensure our
reporting addresses risks and opportunities that matter most to our stakeholders and our business. The Shared Value Advisory
Council plays an active role in the finalisation of the material issues, which are signed off by the Group Executive, People,
Performance and Reputation.
The Group has in place a shared value framework that guides decision making and ensures value is being created for both the
community and IAG. This framework defines eight focus areas that support our commitment to help make communities Safer,
Stronger and More Confident. The Group's sustainability performance is managed within this framework and supported by a
number of policies and position statements including IAG’s Social & Environmental Policy and Public Policy Position on Climate
Change.
IAG is a signatory to several voluntary principles-based frameworks which guide the integration of environmental, social and
governance considerations into our business practices. These include the United Nations Environment Program Finance Initiative
Principles for Sustainable Insurance and the United Nations Principles for Responsible Investment. IAG is also a signatory of the
Geneva Association's Climate Risk Statement.
Detail of IAG’s material issues, how IAG manages related risks and opportunities and details of other shared value and
sustainability activities can be found in the 2017 Annual Review & Sustainability Report, which is available at
www.iag.com.au/shared-value/our-performance. IAG’s management of Economic, Environmental and Social Sustainability Risk is
outlined in detail in Principle 7.4 of the Corporate Governance Statement, which is available at www.iag.com.au/about-
us/corporate-governance.
13
CORPORATE GOVERNANCE
IAG is committed to attaining the highest level of corporate governance to ensure the future sustainability of the organisation and
to create long term value for its shareholders.
IAG's Corporate Governance Statement has been approved by the Board. Throughout the financial year ended 30 June 2017, IAG
has complied with the Australian Securities Exchange Corporate Governance Council Principles and Recommendations (3rd edition)
and is compliant as at 23 August 2017. Further details on IAG's corporate governance practices and the Corporate Governance
Statement are available at www.iag.com.au/about-us/corporate-governance.
OUTLOOK
IAG expects to report an improved underlying operating performance in financial year 2018. GWP growth is expected to be in the
low single digit range. The Group’s reported margin guidance for the year ended 30 June 2018 is a range of 12.5-14.5%.
Underlying assumptions behind the reported margin guidance are:
net losses from natural perils in line with an allowance of $680 million (2017-$680 million);
prior period reserve releases of at least 2% of NEP;
no material movement in foreign exchange rates or investment markets; and
a relatively neutral impact from optimisation program initiatives, as benefits are matched by related costs.
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
Note 4.4 Dividends within the Financial Statements.
Cash earnings are used for the purposes of targeted 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 (non-recurring in nature).
CASH EARNINGS
Net profit after tax
Acquired intangible amortisation and impairment (post-tax)
Non-recurring items:
Corporate expenses
Tax effect on corporate expenses
Cash earnings*
Interim dividend
Final dividend
Dividend payable
Cash payout ratio*
2017
$m
929
59
988
8
(6)
990
307
474
781
2016
$m
625
57
682
221
(36)
867
316
316
632
78.9%
72.9%
*
Cash earnings and cash payout ratio represent non-IFRS financial information.
IAG's full year dividend payout policy is to pay dividends equivalent to approximately 60-80% (30 June 2016-60-80%) of reported full
year cash earnings.
The Board has determined to pay a fully franked final dividend of 20.0 cents per ordinary share (cps) (2016-13.0 cps), bringing the
full year dividend to 33.0 cps (2016-26.0 cps). The final dividend is payable on 9 October 2017 to shareholders registered as at
5pm on 7 September 2017. The Company's Dividend Reinvestment Plan (DRP) will operate for the final dividend by acquiring
shares on market with no discount applied. The DRP Issue Price will be based on a volume weighted average share price as
defined in the DRP terms. The last date for receipt of an election notice for participation in the Company's DRP is 8 September
2017. Information about IAG’s DRP is available at www.iag.com.au/shareholder centre/dividends/reinvestment.
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
During the financial year the following changes became effective:
On 10 October 2016, IAG completed its ordinary share off-market buy-back, with IAG acquiring 64 million shares (representing
2.6% of IAG's issued share capital) for a consideration of $316 million (including transaction costs). The buy-back price per
share was $4.91, which comprised a capital component of $2.99 and a fully franked dividend of $1.92.
On 15 December 2016, IAG redeemed NZ$187 million of subordinated bonds ($179 million as of the redemption date).
On 21 December 2016, IAG redeemed £100 million of subordinated term notes ($171 million as of the redemption date).
On 22 December 2016, IAG bought back $224 million of convertible preference shares (CPS) and the proceeds received by
holders were reinvested in capital notes (refer below).
On 22 December 2016, IAG issued $404 million of capital notes including the above mentioned reinvestment. The notes
qualify as Additional Tier 1 Capital under APRA's Prudential Framework for General Insurance.
On 1 May 2017, IAG bought back the remaining CPS for a consideration of $156 million. The buy-back price per CPS was
$102.08 which comprised the issue price of $100.00 and an additional amount determined by the Directors of $2.08 which
was equivalent to the dividend that was scheduled to be paid on 1 May 2017 and was fully franked.
14 IAG ANNUAL REPORT 2017
EVENTS SUBSEQUENT TO REPORTING DATE
Details of matters subsequent to the end of the financial year are set out below and in Note 7.3 Events subsequent to reporting
date within the Financial Statements. These include:
Effective 19 July 2017, IAG announced the creation of a single Australian division to be led by Mark Milliner as CEO Australia.
The Australian division simplifies IAG’s operating model by bringing together the former Australian Consumer, Australian
Business, Operations and Satellite divisions. There has been no change to the reportable segments in the current financial
year as financial information was prepared and reviewed by the chief operating decision maker based on the pre-existing
segment structure for Australia.
On 1 August 2017, IAG consolidated its nine Australian Insurance licences into two licences following Federal Court approval
received in July 2017. The consolidation transferred the insurance assets and liabilities of seven entities into a related entity,
Insurance Australia Limited, with no impact to the Group’s consolidated financial performance or position. Following the
transfer, IAG retains two authorised insurers in Australia being Insurance Australia Limited and Insurance Manufacturers of
Australia Pty Limited. The transfer is part of IAG’s focus on becoming a simpler, more efficient and agile business.
On 23 August 2017, the Board determined to pay a final dividend of 20 cents per share, 100% franked. The dividend will be
paid on 9 October 2017. The dividend reinvestment plan will operate by acquiring shares on market for participants with no
discount applied.
NON-AUDIT SERVICES
During the financial year, KPMG 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 amounted to approximately $1,359 thousand (refer to Note 8.3 Remuneration of
auditors 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 39 and forms part of the Directors' Report for the year ended 30
June 2017.
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 is prohibited by the relevant
contract of insurance.
15
REMUNERATION REPORT
EXECUTIVE SUMMARY
IAG’s remuneration approach is designed to align the interests of shareholders and Executives as well as to encourage sustainable,
superior performance.
The alignment between the short term performance of the Group and the reward of Executives has been strengthened.
In August 2016, the People and Remuneration Committee (PARC) and the Board reviewed IAG's short term performance goals for
the Managing Director and Chief Executive Officer (Group CEO) and the Executive Team, and the way performance against these
goals translates into Short Term Incentive (STI) outcomes. Previously, the STI of the Executive Team was determined with reference
to individual balanced scorecards that were tied to the performance of the division each Executive managed. For the year ended
30 June 2017, the STI of the Group CEO and each member of the Executive Team has been measured against the Group Balanced
Scorecard, which drives collective accountability for the performance of the Group under the concept of “One IAG”. STI awards for
the year ended 30 June 2017 have been calculated with reference to the Group Balanced Scorecard outcome, with the Board able
to exercise discretion up or down from this outcome to reflect the Executive’s contribution to the Group’s performance. Other
significant changes to the Group Balanced Scorecard include:
highlighting the importance of the Group’s financial performance in determining STI outcomes by increasing the weighting of
financial measures in the Group Balanced Scorecard to comprise 60% of all goals;
introducing a Net Promoter Score as the customer measure for the Group Balanced Scorecard. This reflects IAG’s strategic
focus on delivering world class customer experiences; and
simplifying the Group Balanced Scorecard by reducing the number of measures.
PARC considers that IAG’s executive reward framework supports the creation of sustainable financial performance.
To focus Executives on achieving sustainable, long term performance, Executives are provided with Long Term Incentive (LTI)
awards in the form of performance rights. The LTI requires Executives to meet challenging long term financial performance targets
based on cash Return on Equity and relative Total Shareholder Return. Vesting of the LTI only occurs if the Group exceeds its long
term performance targets and delivers superior financial performance over a three year period for the cash Return on Equity
hurdle, and four years in the case of the relative Total Shareholder Return hurdle.
As foreshadowed in the 2016 Remuneration Report, a review of the cash Return on Equity hurdle was completed during the 2017
financial year. The outcome of this review was that cash Return on Equity was confirmed for this year as an important strategic
measure.
The remuneration outcomes presented in the 2017 Remuneration Report demonstrate a strong link between value created for
IAG’s shareholders and reward for its Executives.
To attract and retain Executive talent, IAG provides competitive fixed pay. IAG has taken a conservative approach to fixed pay
increases, with increases awarded where Executives are below the market for equivalent roles, or where there has been an
increase in responsibilities. For the year ended 30 June 2017 fixed pay was held constant for the majority of IAG’s Executives, with
only four out of the thirteen Executives receiving increases due to changes in role or to reflect market pay levels. For the
remuneration review conducted in August 2017, two out of twelve Executives will receive a fixed pay increase.
In the 2017 financial year, IAG’s business performance was sound. After allowing for divestments and new market entry, the
business maintained a stable market position and generated a sound underlying performance despite industry-wide claim cost
pressures. A strong capital position was maintained, while shareholder returns were improved through active capital management.
Reflecting this performance, the Group Balanced Scorecard outcome was 67% of the maximum achievable. The Board determined
to cap STI payments to Executives at the Group Balanced Scorecard outcome and in some cases exercised downward discretion.
The average STI payment for the Group CEO and the Executive Team was 64% of the maximum achievable.
Based on multiple years of strong returns, the cash Return on Equity hurdle for the three year period up to 30 June 2016 vested in
full. The Board actively considers the performance tests of the LTI to ensure that the outcome appropriately rewards management
for the value created for shareholders and has due regard for risk and compliance. The Board determined that software
impairments announced to the market on 19 August 2016 would be included in the calculation when determining the cash Return
on Equity vesting outcome.
On 30 September 2016, the relative Total Shareholder Return hurdle of the LTI grant awarded in the year ended 30 June 2013 was
tested for the second time. Following this retest, IAG’s Total Shareholder Return was ranked at the 53rd percentile of its peer
group, resulting in an overall vesting outcome of 56%. This result translated to an additional 2% vesting above the 54% that had
already vested following the original test on 30 September 2015. This was the last LTI grant issued with a retesting provision, with
the final retest for this grant to be performed on 30 September 2017.
PARC maintains a strong governance focus to ensure remuneration outcomes support the long term financial soundness of the
Group.
The Board conducted a review of IAG’s remuneration policy to ensure it reflects sound governance practices that reinforce the
financial soundness of IAG and encourages behaviour that supports its risk management framework.
In addition, a more comprehensive review of IAG’s remuneration structure is underway.
IAG considers it is important to align the interests of Non-Executive Directors and Executives with those of shareholders. To
support this alignment, Non-Executive Directors and Executives are required to hold a significant number of IAG shares with a
period allowed to acquire those shares. Non-Executive Directors who had served at least three years and Executives who had
served at least four years as at 30 June 2017 were tested at this date and all met this requirement.
16 IAG ANNUAL REPORT 2017
As part of the Board’s role in providing sound governance for IAG’s remuneration programs, the Board conducted an assessment to
determine if any reduction of unvested or unexercised equity grants was required. The Board is satisfied that no adjustment was
necessary.
For employees whose primary role is risk and financial control, including the Chief Risk Officer and the Chief Financial Officer, the
Board maintains oversight of their remuneration to ensure the independence of their functions and its alignment with IAG’s risk
management framework.
CONTENTS
A
B
C
D
E
Key management personnel covered in this report
Executive remuneration structure
Linking the Group's performance and reward
Executive remuneration governance
Non-Executive Director remuneration
Appendix 1. Statutory remuneration disclosure requirements
Appendix 2. Executive employment agreements
Appendix 3. Movement in equity plans within the financial year
Appendix 4. Related party interests
Appendix 5. Key terms and definitions
PAGE
17
18
21
28
29
31
33
33
35
37
A. KEY MANAGEMENT PERSONNEL COVERED IN THIS REPORT
This report sets out the remuneration details for IAG’s key management personnel (KMP). For the year ended 30 June 2017, KMP
included the Executives and Non-Executive Directors listed below. Although the Non-Executive Directors are listed below, they do
not have management responsibility. Their remuneration is, therefore, dealt with separately.
NAME
EXECUTIVES
Peter Harmer
Julie Batch
Chris Bertuch
Ben Bessell(b)
Duncan Brain
David Harrington
Nicholas Hawkins
Jacki Johnson
Anthony Justice(b)
Mark Milliner(b)
Craig Olsen
Clayton Whipp
POSITION
TERM AS KMP(a)
Managing Director and Chief Executive Officer
Chief Customer Officer
Group General Counsel and Company Secretary
Chief Executive, Australian Business Division
Chief Executive, Asia
Group Executive, Office of the CEO
Chief Financial Officer
Group Executive, People, Performance and Reputation
Chief Executive, Australian Consumer Division
Chief Operating Officer
Chief Executive, New Zealand
Chief Risk Officer
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Claire Rawlins
Group Executive, Digital and Technology
NON-EXECUTIVE DIRECTORS
Elizabeth Bryan
Duncan Boyle
Alison Deans
Hugh Fletcher
Jonathan Nicholson
Helen Nugent
Tom Pockett
Philip Twyman
Chairman, Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
NON-EXECUTIVE DIRECTORS WHO CEASED AS KEY MANAGEMENT PERSONNEL
Raymond Lim
Independent Non-Executive Director
Ceased 7 December 2016
Full year
From 23 December 2016
Full year
Full year
Full year
From 23 December 2016
Full year
Full year
Ceased 20 February 2017
(a)
(b)
If an individual did not serve as a KMP for the full financial year, all remuneration is disclosed from the date the individual was appointed as a KMP to the date they
ceased as a KMP.
Following the implementation of the new IAG Australian Operating Model, effective 19 July 2017, Mark Milliner commenced in the role of Chief Executive, Australia and
Ben Bessell assumed the role of Executive General Manager, Business Distribution, while Anthony Justice will cease employment with IAG on 18 November 2017.
Key terms that are used throughout the report are defined in detail in Appendix 5. Key terms and definitions.
17
B. EXECUTIVE REMUNERATION STRUCTURE
I. Remuneration guiding principles
IAG's remuneration practices have been designed to achieve the following objectives:
align remuneration with the interests of IAG’s shareholders;
retain market competitiveness to attract and retain high quality people; and
encourage constructive, collaborative behaviours as well as prudent risk-taking that support long term financial soundness.
II. Summary of remuneration components
The Executive remuneration approach consists of the following components: fixed pay, cash STI, deferred STI and LTI. The table
below describes the structure and purpose of each component.
TABLE 1 - REMUNERATION COMPONENTS
COMPONENT STRUCTURE
Fixed pay
Fixed pay comprises base salary and superannuation. Fixed pay
for an Executive is determined by reference to the experience
and skills an individual brings to the role, the internal relativities
within the Executive Team and market pay levels for similar
external roles.
PURPOSE
Fixed pay is provided to remunerate IAG
employees for performing their ongoing work.
STI
LTI
Further details relating to fixed pay are presented in table 2.
STI is provided on an annual basis subject to the achievement of
short term goals agreed by the Board, outlined in the Group
Balanced Scorecard.
Two thirds of the total STI is delivered in cash in the
remuneration review following the financial year end, the
remaining one third is deferred over the subsequent two years
based on continued service and is subject to downward
adjustment if determined by the Board (termed malus).
Further details relating to the STI plan are presented in table 3.
LTI rewards Executives for achieving challenging long term
financial performance based on two hurdles: cash Return on
Equity (ROE) over a three year period and relative Total
Shareholder Return (TSR) over a four year period.
Further details relating to the LTI plan are presented in table 4.
STI plays a key role in aligning superior
operational outcomes for shareholders with
remuneration outcomes for management. A
focus for the year ended 30 June 2017 has been
on encouraging collaboration.
Deferral of incentives encourages ongoing
employment of senior management and allows
the Board to consider adjustment (malus). Share
based remuneration reinforces the link between
shareholder value creation and rewarding
employees.
LTI creates a direct link between Executive
reward and the return experienced by IAG’s
shareholders, subject to the two hurdles below:
cash ROE provides evidence of the Group’s
return on shareholders’ funds employed. The
ROE hurdle utilises cash earnings, which is
the measure used to determine the dividend
paid to shareholders; and
relative TSR reflects the value created for
shareholders through the movement of the
share price and the value of dividends.
Remuneration received by the Executive Team is based on the Group’s performance over a number of different time periods, as
illustrated in the following graph. The timeframe of potential payments to Executives is staggered progressively from one to four
years to encourage decision making which supports long term, sustainable performance.
18 IAG ANNUAL REPORT 2017
III. Remuneration mix
The mix of remuneration components in IAG’s remuneration framework is outlined in the following graph. This represents the
structure based on the maximum potential earnings for the Group CEO and Executive Team. The remuneration mix is current as at
30 June 2017.
Each remuneration component is described in more detail below.
IV. Fixed pay
TABLE 2 - FIXED PAY
Overview
Fixed pay at IAG is set with reference to the median of the external market for comparable roles, with
the flexibility to adjust based on the size and complexity of the role, and the skills and experience of the
Executive. Fixed pay for Australian based Executives is compared to the market using peer groups,
including financial services companies in the S&P/ASX 50 Index and companies that are of similar size
to that of IAG. Relevant local market peer groups are referenced for overseas based Executives.
V. Short term incentive
TABLE 3 - STI AND DEFERRED STI
Performance gateway
The IAG Spirit describes what is important to IAG: how we serve our customers, partners,
shareholders, communities and each other. The IAG Spirit gateway is designed to ensure that IAG’s
employees demonstrate appropriate behaviours in the achievement of performance outcomes.
Eligibility for an STI payment depends on demonstrating the IAG Spirit. The IAG Spirit is measured
through demonstrating behaviour in line with IAG’s core values of being 'Closer, Braver, Faster' as
evaluated by the reporting manager and approved by the second level manager.
STI opportunity
The maximum value of STI that can be granted to the Group CEO is 150% of fixed pay. The maximum
value of STI that can be granted to the Executive Team is 120% of fixed pay.
Performance measures
and evaluation
STI is the at risk remuneration component designed to motivate and reward Executives for superior
performance in the financial year. Performance is measured against the Group Balanced Scorecard
using both financial and non-financial goals (the Group Balanced Scorecard is discussed in more
detail in table 5a). The Group CEO’s STI is recommended by PARC based on balanced scorecard
performance and is approved by the Board.
The amount of STI paid to members of the Executive Team is recommended by the Group CEO to
PARC based on the Group Balanced Scorecard outcome. These remuneration outcomes are
subsequently recommended by PARC for approval by the Board.
For all individuals, the Board may apply discretion in determining the STI outcomes to ensure they
appropriately reflect performance.
Instrument
An Executive’s STI award is paid in cash and deferred in the form of Deferred Award Rights (DARs).
The cash component is two thirds of the total STI and is paid in September following the end of the
performance year. The deferred component is one third of the total STI and vests in equal amounts
over the subsequent two years.
19
Key terms of the
deferred STI
DARs are rights over IAG ordinary shares. DARs are granted at no cost to the Executives and no
dividend is paid or payable for any unvested or vested and unexercised DARs.
For grants of DARs made after 1 July 2017, the number of DARs issued is calculated based on the
volume weighted average share price of an IAG ordinary share over the 30 days up to and including
30 June before the grant date. Prior grants utilised the closing price at 30 June to determine the
number of DARs granted.
Executives who participate in the STI plan become eligible to receive one IAG ordinary share per DAR
by paying an exercise price of $1 per tranche of DARs exercised, subject to their continuing
employment with the Group at the vesting date.
Executives may not enter into transactions or arrangements which operate to limit the economic risk
of unvested entitlements to IAG Securities (termed hedging).
Forfeiture conditions
The Board retains the discretion to adjust downwards the unvested portion of any deferred STI
awards, including to zero. DARs will be forfeited if the Executive resigns before the vesting date,
except in special circumstances as outlined below.
When an Executive ceases employment in special circumstances, any unvested rights may be
retained on cessation of employment up to the point they vest, subject to Board discretion. Special
circumstances include: redundancy, retirement, death or total and permanent disability. Any rights
retained under these circumstances will remain subject to the original vesting period unless the
Board determine an alternative vesting date, which would only be done in exceptional
circumstances.
VI. Long term incentive
TABLE 4 - LTI
Overview
LTI opportunity
Instrument
LTI grants are determined annually by the Board. The grants provided are in the form of Executive
Performance Rights (EPRs) that have performance hurdles which align to the Group’s strategic financial
targets.
The maximum value of LTI that can be granted to the Group CEO is 150% of fixed pay. The maximum
value of LTI that can be granted to the Executive Team is 125% of fixed pay.
If performance hurdles are achieved, rights granted after 1 July 2013 can be settled with IAG ordinary
shares. The Board may, however, choose to exercise discretion to settle rights on vesting in cash in
circumstances where it is restrictive to settle rights with shares, including in jurisdictions where
legislative requirements prohibit share ownership in a foreign entity. Where rights are settled in cash,
the value of the cash payment is determined based on the volume weighted average share price for the
five trading days up to and including the date of vesting.
Rights granted prior to 1 July 2013 are only settled with IAG ordinary shares.
Key terms of the LTI
The number of EPRs issued is calculated based on the volume weighted average share price over the 30
days up to and including 30 June before the grant date. EPRs granted during the year will not vest and
have no value to the Executive unless the performance hurdles are achieved. The cash ROE
performance hurdle is measured over three years, while the relative TSR hurdle is measured over four
years. No dividend is paid or payable for any unvested or vested and unexercised EPRs.
Executives may not enter into transactions or arrangements which operate to limit the economic risk of
unvested entitlements to IAG Securities.
Forfeiture conditions
The Board retains the discretion to adjust downwards the unvested portion of any LTI awards, including
to zero. Under the terms of the LTI, if an Executive resigns before the performance hurdles are tested,
the unvested EPRs will generally lapse. In cases where the Executive acts fraudulently or dishonestly or
is in breach of his or her obligations to the Group, the unvested EPRs will lapse.
When an Executive ceases employment in special circumstances, any unvested rights may be retained
on cessation of employment up to the point they vest, subject to Board discretion. Special
circumstances include: redundancy, retirement, death or total and permanent disability. Any rights
retained under these circumstances will remain subject to the original performance conditions.
20 IAG ANNUAL REPORT 2017
PERFORMANCE HURDLES CASH ROE
Description
50% weighting
RELATIVE TSR
50% weighting
Testing
Cash ROE is measured relative to the
Group’s weighted average cost of
capital (WACC).
Relative TSR is measured against that of the top 50 industrials
within the S&P/ASX 100 Index. Industrial companies are
defined by Standard & Poor’s as being all companies excluding
those defined as being in the Energy sector (GICS Tier 1) and the
Metals & Mining industry (GICS Tier 3). Companies which are no
longer part of the index at the end of the performance period (for
example due to acquisition or delisting), may be removed from
the peer group.
The ROE portion of the LTI is tested
from 1 July of the grant year to 30 June
three years later. The cash ROE/WACC
ratio is calculated for each half year.
The average of the six half years in the
three year performance period form
the final outcome.
The TSR portion of the LTI is tested four years after 30
September of the grant year, with no opportunity for retesting.
TSR performance is measured between 30 September of the
base year, and 30 September of the test year. The opening and
closing share prices used for the TSR calculation are both based
on the three months to 30 September.
For LTI awards granted prior to July 2013, the TSR portion is
tested after three years and then again at four years and five
years. Retesting was removed from subsequent LTI awards.
Vesting
0% vesting <1.2 x WACC
0% vesting if <50th percentile of index group
20% vesting at 1.2 x WACC
50% vesting if aligned to 50th percentile of index group
100% vesting at 1.6 x WACC
100% vesting if aligned to 75th percentile of index group
with straight line vesting in between.
with straight line vesting in between.
C. LINKING THE GROUP'S PERFORMANCE AND REWARD
I. Linking IAG's short term performance and short term reward
IAG’s strategic priorities are to drive customer and business benefits through the ‘leading’ and ‘fuelling’ themes. Leading puts
customers at the centre of what IAG does using enhanced technology, offering innovative new products through IAG’s core
businesses, and identifying new ways to meet ever-changing customer needs. To fuel IAG’s leading position, IAG is simplifying the
operations of the business, optimising resources, leveraging the benefits of IAG’s supply chain and continuing to build strong
partnerships. In working to achieve these priorities, IAG is mindful of its social and environmental responsibilities.
The tables below provide a summary of key balanced scorecard objectives and outcomes for the Group for the year ended 30 June
2017. The objectives are agreed with the Board at the beginning of each financial year and are designed to focus Executives on
delivering superior performance outcomes against the agreed priorities. To drive collective responsibility, in the year ended 30
June 2017 each Executive shared the same objectives.
TABLE 5a - BALANCED SCORECARD OBJECTIVES
CATEGORY
Financial measures
OBJECTIVE
Growth
(60% of scorecard)
RATIONALE
IAG continues to expand its product and service offerings to its markets,
which creates value for its shareholders, customers and partners.
Controllable operating
expense
IAG’s continued focus on optimisation of its operating model and related
cost-out initiatives improve the efficiency with which IAG deploys its
resources.
Profitability
Return on equity
Non-financial measures
Customer advocacy
(40% of scorecard)
Underlying insurance margin presents a view of normalised performance,
which is an important measure of how IAG generates value for
shareholders.
The Group sets targets to achieve a return on its equity that requires
outperformance through the cycle. This return reflects how effectively IAG
uses its capital.
IAG’s strategy is designed to put the customer at the centre of what IAG
does. IAG considers this is essential to drive the Group’s ability to grow
profitably over the longer term. IAG is focused on designing compelling
product offerings by developing a deeper understanding of customers’
needs and the changing environment, then delivering world class
customer experiences, including through digital channels. IAG uses
Customer Net Promoter Score to measure the impact of these initiatives
for our customers.
21
CATEGORY
OBJECTIVE
Partner advocacy
RATIONALE
IAG fosters collaborative relationships with its partners to deliver mutual
benefit. IAG works with distribution partners to develop joint strategies
that develop their business capabilities, and aspires to provide best in
class products and value added services. Ultimately, the Group aims to
jointly deliver world leading experiences to mutual end customers. IAG
uses Partner Net Promoter Score to measure the Group's effectiveness in
delivering through partners.
Agility
A constructive and agile culture enables IAG to provide great experiences
for its people and customers.
Risk and governance
Management of risk is integral to delivering IAG’s strategy to meet short
term objectives and achieve long term sustainability. IAG seeks to
optimise the evaluation and pricing of risk. IAG has a clear articulation of
its risk appetite, which the Board approves to uphold the expectations of
IAG’s stakeholders for how IAG employees conduct themselves. Due to
the importance of risk management to IAG, it is included as an explicit
measure on the scorecard.
TABLE 5b - BALANCED SCORECARD RESULTS FOR THE YEAR ENDED 30 JUNE 2017
OBJECTIVE AND
WEIGHTING
Growth
MEASURE AND OUTCOME
Exceeded
COMMENT
Over the year, IAG’s GWP increased in its Australian Consumer Division and in
New Zealand. This was slightly offset by a contraction in the Australian
Business Division, reflecting the sale of renewal rights to the Swann motor
dealer business and planned portfolio remediation activity, and in Asia due to
competitive pressures and unfavourable foreign exchange effects.
This result was due to favourable variances in the Australian Consumer
Division, Australian Business Division and Chief Operating Office. This was
partially offset by unfavourable foreign exchange effects.
10%
IAG achieved Gross Written
Premium (GWP) growth of
3.9%, compared to -0.6% in
the year ended 30 June
2016.
Controllable
operating expense
Partially exceeded
20%
Controllable expenses were
lower than the prior year
and slightly bettered the
targeted reduction.
Profitability
Did not meet
IAG’s Australian and New Zealand businesses were adversely impacted this
year by claims cost pressures and an unusually high incidence of large losses.
The Group achieved its return on equity target for the year. Solid shareholders’
fund investment returns in conjunction with prior year reserve releases
contributed to this success.
The superior result in customer advocacy was driven by strong performances by
NRMA, Coles Insurance, CGU and WFI; achieving absolute Strategic Customer
NPS scores of +25, +28, +37 and +27 respectively.
IAG continues to invest in its customer advocacy programs to drive
improvements across the customer journey.
15%
IAG’s underlying insurance
margin was 11.9%
compared to 14.0% in the
year ended 30 June 2016.
Return on equity
Exceeded
15%
The Group’s cash ROE was
15.2% for the year ended
30 June 2017, compared to
13.0% in the prior year.
Customer advocacy
Partially exceeded
15%
IAG sets a full year
Customer Net Promoter
Score (NPS) relative to its
peers. IAG’s NPS is +7 NPS
above the competitive
market average. This
exceeded the target range
of +4 to +6 NPS points
above the competitor
average.
22 IAG ANNUAL REPORT 2017
OBJECTIVE AND
WEIGHTING
Partner advocacy
5%
Agility
10%
MEASURE AND OUTCOME
Met
IAG sets a full year Partner
NPS target. IAG’s partner
brands (CGU and NZI)
achieved an NPS of +24.
Partially met
Measured based on
performance against agility-
related components of
IAG’s culture survey.
Whilst target results were
achieved for some
behaviours and outcomes
achieved target results, IAG
failed to achieve the target
for all measures.
COMMENT
IAG’s partner brands outperformed their competitive market means, with the
2017 financial year Strategic Partner NPS results of +31 and +15 for CGU and
NZI respectively.
In the 2017 financial year, both CGU and NZI were voted Insurer of the Year in
their respective industry surveys.
IAG continues to invest in building a constructive and agile culture. While the
Group did not realise targets set for the current year, significant progress has
been made in delivering a Diversity, Inclusion and Belonging strategy and
framework; as well as strengthening community connection through Shared
Value initiatives and the IAG Foundation.
Further focus is required to embed leadership capability, and continuing to
create a positive and effective employee experience. The Leading@IAG
program was launched during the 2017 financial year. This program will help
connect structure with strategy, provide role clarity to employees, and set clear
expectations for leadership behaviours with a particular focus on building trust
and empowering people.
Risk and governance
Partially met
10%
IAG partially met new
targets designed to deliver
a step change in IAG’s risk
management practices.
IAG continues to strengthen its risk management framework, with ongoing
focus on embedding improvements to risk management and governance
models made during the 2017 financial year. Key achievements during the
year included delivering further improvements in IAG’s risk management
practices in relation to Operational Risk, Regulatory Compliance, Enterprise
Risk Profiling, Cyber resilience and an overall uplift in risk management
maturity.
II. STI outcomes for the year ended 30 June 2017
Set out below are the STI outcomes that will be made to Executives who were classed as a KMP for the full year ended 30 June
2017. STI outcomes are based on achievement against the Group Balanced Scorecard objectives described in table 5a. Reflecting
the desire to encourage collaboration among Executives, all shared the same performance measures. The Board has the ability to
adjust each Executive’s STI up or down by 20%. The Board decided to cap Executive STI outcomes at the overall Group Balanced
Scorecard result of 67%, with individual performance being reflected in the different outcomes for Executives. The average STI for
all Executives was 64%.
TABLE 6 - ACTUAL STI OUTCOMES FOR THE YEAR ENDED 30 JUNE 2017
MAXIMUM STI
OPPORTUNITY
(% of fixed pay)
150 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
120 %
CASH STI
OUTCOME
DEFERRED STI
OUTCOME
ACTUAL STI OUTCOME
(% of maximum)(a)
67 %
63 %
67 %
55 %
67 %
67 %
67 %
60 %
67 %
67 %
67 %
50 %
(% of fixed pay)
101 %
76 %
80 %
66 %
80 %
80 %
80 %
72 %
80 %
80 %
80 %
60 %
(2/3 OF OUTCOME)
(% of fixed pay)
67 %
50 %
54 %
44 %
54 %
54 %
54 %
48 %
54 %
54 %
54 %
40 %
(1/3 OF OUTCOME)
(% of fixed pay)
34 %
26 %
26 %
22 %
26 %
26 %
26 %
24 %
26 %
26 %
26 %
20 %
Peter Harmer
Julie Batch
Chris Bertuch
Ben Bessell
Duncan Brain
David Harrington
Nicholas Hawkins
Jacki Johnson
Anthony Justice
Mark Milliner
Craig Olsen
Clayton Whipp
(a)
The proportion of STI forfeited is derived by subtracting the actual percentage of maximum received from 100% and was 36% on average for the year ended 30 June
2017 (compared to 33% in 2016).
23
III. Linking the Group's long term performance and long term reward
Details of LTI vested during the year are set out below:
Cash ROE – 100% vesting
Cash ROE is calculated after each half year by comparing the
cash earnings of the Group against the average equity for that
period. This cash ROE figure is then expressed as a multiple of
the Group’s WACC over the same half-year period. The ROE
vesting outcome is based on the average ROE to WACC multiple
over each of the six half years during the performance period.
For the performance period from 1 July 2013 to 30 June 2016,
the average cash ROE was 2.00 times WACC. This award vested
in full in the year ended 30 June 2017. The strong cash ROE
performance has similarly been reflected in the dividend
provided to shareholders.
The Board considers any adjustments to cash earnings during
the three year performance period to ensure reward outcomes
appropriately reflect performance. The Board determined that
impairments for software announced to the market on 19
August 2016 would be included when determining the cash ROE
vesting outcome.
Relative TSR - additional 2% vesting
There was a legacy retest of the 2012/2013 LTI award on 30 September 2016. Following the retest, IAG’s TSR was ranked at the
53rd percentile of its peer group, resulting in an overall vesting outcome of 56%. This result translated to an additional 2% vesting
above the 54% that had already vested following the test on 30 September 2015. The final retest for this grant will occur on 30
September 2017. This will be the last retest performed for any LTI award.
The following graph illustrates IAG’s relative TSR against the top 50 industrial companies in the ASX 100 for the 2012/2013 LTI
award:
24 IAG ANNUAL REPORT 2017
The following table shows the returns IAG delivered to its shareholders for the last five financial years for a range of measures.
TABLE 7 - HISTORICAL ANALYSIS OF SHAREHOLDER RETURN
Closing share price ($)
Dividends per ordinary share (cents)
Basic earnings per share (cents)
Cash ROE (%)
Three year average cash ROE to WACC outcome for EPR
Plan
YEAR ENDED
30 JUNE 2013
5.44
36.00
37.57
25.3
1.83
YEAR ENDED
30 JUNE 2014
5.84
39.00
56.09
23.0
2.34
YEAR ENDED
30 JUNE 2015
5.58
29.00
31.22
15.3
2.47
YEAR ENDED
30 JUNE 2016
5.45
36.00(a)
25.79
13.0
2.00(b)
YEAR ENDED
30 JUNE 2017
6.78
33.00
39.03
15.2
1.76(b)
(a)
(b)
This includes the 10.00 cents (per ordinary share) 2016 special dividend.
Outcomes in table 7 reflect IAG’s average cash ROE to WACC prior to the Board considering the impact of the software impairments announced to the market on 19
August 2016. The impact of the software impairments was to reduce average cash ROE to WACC by 0.09 times WACC in the three years to 30 June 2016 and 0.08
times WACC in the three years to 30 June 2017.
IV. Changes to Executive appointments and remuneration impacts
Increases to an Executive’s fixed pay are generally only provided in situations where either their pay is below market levels, or
where there has been a material change in the responsibilities of their role. During the 2017 financial year Duncan Brain and
Anthony Justice received fixed pay increases to meet market pay levels. Julie Batch and Nicholas Hawkins received fixed pay
increases to reflect a change in their role. The table below summarises how changes in roles within the Executive Team during the
last two financial years have been reflected in Executive pay.
TABLE 8 - CHANGES IN ROLE AND IMPACTS ON REMUNERATION DURING 2017 AND 2016
EXECUTIVES
Peter Harmer
Julie Batch
Chris Bertuch
Ben Bessell
Duncan Brain
David
Harrington
Nicholas
Hawkins
Jacki Johnson
YEAR
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Anthony Justice 2017
2016
Mark Milliner
Craig Olsen
2017
2016
2017
2016
FIXED
PAY
$000
1,700
1,460
662
343
700
400
700
686
943
934
600
346
1,173
1,026
1,091
1,053
690
372
1,000
181
711
330
CHANGE
IN ROLE
PART YEAR
KMP
SUMMARY OF CHANGES
Appointed as Group CEO on 16 November 2015, with an increase in
remuneration at that time to reflect the increased responsibilities.
Appointed to a role classed as KMP on 8 December 2015. Julie
Batch received a fixed pay increase in the year ended 30 June 2017
to reflect the expansion of her role to include responsibility for
Digital Labs.
Appointed as KMP on 8 December 2015. The remuneration for the
year ended 30 June 2016 reflects the period served as KMP which
was less than twelve months.
Appointed the Chief Executive, Australian Business Division
(previously acting Chief Executive Commercial Insurance) on 8
December 2015.
Served as KMP for both financial years with no change in role.
Appointed as KMP on 8 December 2015. The remuneration for the
year ended 30 June 2016 reflects the period served as KMP which
was less than twelve months.
Changed role 8 December 2015 to incorporate leadership of the NZ
and Asian businesses. Subsequently received a fixed pay increase
in the year ended 30 June 2017 to reflect the increased
responsibility.
Changed role on 1 January 2016 to become Group Executive,
People Performance and Reputation. Previously, Jacki Johnson was
the Chief Executive, New Zealand. There was no adjustment to
remuneration.
Appointed as KMP on 8 December 2015. The remuneration for the
year ended 30 June 2016 reflects the period served as KMP which
was less than twelve months.
Commenced as the Chief Operating Officer at IAG on 27 April 2016.
Remuneration was set upon appointment with no subsequent
changes.
Appointed as KMP on 1 January 2016. The remuneration for the
year ended 30 June 2016 reflects the period served as KMP which
was less than twelve months.
Clayton Whipp 2017
2016
775
784
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
250
Claire Rawlins 2017
341
2016
Served as KMP for both financial years with no change in role.
Appointed to a role classed as KMP on 8 December 2015 and
ceased as KMP on 7 December 2016. Claire Rawlins’ remuneration
for both years reflects the period served as a KMP. In each financial
year the period served was less than twelve months.
25
V. Actual remuneration received by Executives
Table 9 below provides details of the remuneration received by Executives during the financial year. The table provides fixed pay
and other benefits paid, and the value of prior years’ deferred STI and LTI awards that vested during the financial year. For
remuneration details provided in accordance with the Accounting Standards, refer to Appendix 1. Statutory remuneration disclosure
requirements.
TABLE 9 - ACTUAL REMUNERATION RECEIVED IN 2017 AND 2016
FINANCIAL
YEAR
OTHER BENEFITS
AND LEAVE
ACCRUALS
$000
(2)
FIXED PAY
$000
(1)
TERMINATION
BENEFITS
$000
(3)
CASH STI
$000
(4)
DEFERRED
STI VESTED
$000
(5)
LTI VESTED
$000
(6)
TOTAL ACTUAL
REMUNERATION
RECEIVED
$000
EXECUTIVES
Peter Harmer
Julie Batch
Chris Bertuch
Ben Bessell
Duncan Brain
David Harrington
Nicholas Hawkins
Jacki Johnson(7)
Anthony Justice
Mark Milliner
Craig Olsen(8)
Clayton Whipp
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
1,700
1,460
662
343
700
400
700
686
943
934
600
346
1,173
1,026
1,091
1,053
690
372
1,000
181
711
330
775
784
17
70
(11)
34
(4)
33
33
31
341
261
3
33
25
(48)
(40)
92
(6)
(6)
22
20
33
36
11
64
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Claire Rawlins(9)
2017
2016
250
341
(15)
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
600
-
1,139
905
353
153
375
138
308
271
508
532
322
160
643
593
524
585
375
156
536
-
381
124
310
415
126
152
288
311
110
-
129
-
82
83
217
154
112
-
327
318
240
252
71
-
-
-
74
-
153
117
-
-
697
1,428
111
-
127
-
91
161
620
273
125
-
697
1,428
644
1,286
-
-
-
-
79
-
127
243
-
-
3,841
4,174
1,225
530
1,327
571
1,214
1,232
2,629
2,154
1,162
539
2,865
3,317
2,459
3,268
1,130
522
1,558
201
1,278
490
1,376
1,623
961
525
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Fixed pay includes amounts paid in cash, superannuation contributions plus the portion of the Group’s superannuation contribution that is paid as cash instead of being
paid into superannuation. Fixed pay also includes salary sacrifice items such as cars and parking as determined in accordance with AASB 119 Employee Benefits.
Further details are provided in table 14 in Appendix 1. Statutory remuneration disclosure requirements.
Payment in lieu of notice, which incorporates statutory notice and severance entitlements.
Cash STI earned within the year ended 30 June 2017 and to be paid in September 2017.
The deferred STI vesting on 1 September 2016 was valued using the five day weighted average share price $5.60 (1 September 2015: $5.14).
The LTI vested was valued using the five day weighted average share price at vesting date which was $5.90 for awards vested on 22 August 2016 and $5.46 for awards
vested on 30 September 2016 (24 August 2015: $5.50 and 30 September 2015: $4.84).
Remuneration for Jacki Johnson was determined in New Zealand dollars and reported in Australian dollars for the period between 1 July 2015 and 31 December 2015
using the average exchange rate for the year ended 30 June 2016, which was 1 NZD = 0.91957 AUD.
Remuneration for Craig Olsen was determined in New Zealand dollars and reported in Australian dollars using the average exchange rate for the year ended 30 June
2017 which was 1 NZD = 0.94497 AUD.
Claire Rawlins was a KMP for the period up to 7 December 2016. Claire Rawlins received a payment in lieu of notice of $600,000, equivalent to 12 months’ fixed pay,
under the terms of her contract upon her termination.
26 IAG ANNUAL REPORT 2017
VI. Group CEO remuneration
Below are further details on drivers of the actual remuneration received by the Group CEO that are outlined in table 9. His
remuneration has been broken down into the components of the remuneration mix, with commentary on how performance has
translated into remuneration outcomes.
VII. Remuneration allocated to Executives
The following table provides details of the remuneration allocated to each Executive who was a KMP for the entire year ended 30
June 2017. This table comprises: fixed pay, STI awarded for performance during the financial year to be paid in September 2017,
and LTI grants made during the financial year. The difference between this table and table 9 is that table 9 includes the value of
equity awards (LTI and deferred STI) that vested during the year, whereas table 10 includes the face value of equity awards that
were allocated during the year. For remuneration details provided in accordance with the Accounting Standards, refer to Appendix
1. Statutory remuneration disclosure requirements.
TABLE 10 - TOTAL PAY ALLOCATED FOR THE YEAR ENDED 30 JUNE 2017
Fixed pay
$000
(1)
1,700
662
700
700
943
600
1,173
1,091
690
1,000
711
775
Other benefits and
leave accruals
$000
(2)
17
(11)
(4)
33
341
3
25
(40)
(6)
22
33
11
Cash STI
$000
(3)
1,139
353
375
308
508
322
643
524
375
536
381
310
Peter Harmer
Julie Batch
Chris Bertuch
Ben Bessell
Duncan Brain
David Harrington
Nicholas Hawkins
Jacki Johnson
Anthony Justice
Mark Milliner(8)
Craig Olsen
Clayton Whipp
EQUITY PAY
Total cash
remuneration STI deferred LTI allocation
$000
(6)
2,550
875
875
875
1,184
750
1,500
1,364
875
2,500
864
969
$000
(4)
2,856
1,004
1,071
1,041
1,792
925
1,841
1,575
1,059
1,558
1,125
1,096
$000
(5)
569
176
188
154
254
161
322
262
188
268
190
155
Total awarded
remuneration
$000
(7)
5,975
2,055
2,134
2,070
3,230
1,836
3,663
3,201
2,122
4,326
2,179
2,220
(1)
(2)
(3)
(4)
(5)
Fixed pay includes amounts paid in cash, superannuation contributions plus the portion of the Group’s superannuation contribution that is paid as cash instead of being
paid into superannuation. Fixed pay also includes salary sacrifice items such as cars and parking as determined in accordance with AASB 119 Employee Benefits.
Further details are provided in table 14 in Appendix 1. Statutory remuneration disclosure requirements.
Cash STI earned within the year ended 30 June 2017 to be paid in September 2017.
The sum of columns 1 to 3.
The deferred component of the STI earned within the year ended 30 June 2017, which is one third of the total STI and vests in equal amounts over the subsequent two
years.
27
(6)
(7)
(8)
The value of the LTI awards granted to Executives within the year ended 30 June 2017. The value ultimately received by Executives will be dependent on IAG meeting
challenging performance targets over a three and four year period. Further details are provided in table 4.
The sum of columns 4 to 6.
In the year ended 30 June 2017, Mark Milliner received LTI awards for two financial years. Mr Milliner commenced his employment after the annual grant of LTI for the
year ended 30 June 2016, therefore this grant was made in the year ended 30 June 2017.
VIII. Fixed pay changes for the year ending 30 June 2018
In August 2017 the Board determined to maintain the current fixed pay levels for all Executives except the Chief Executive, New
Zealand and the Group Executive, Office of the CEO. All other Executives including the Group CEO have not received fixed pay
increases.
IX. Upcoming LTI awards
The proposed LTI awards to Executives for the year ending 30 June 2018 will again be 150% of fixed pay for the Group CEO, and
125% of fixed pay for other Executives, other than for Anthony Justice who will leave IAG on 18 November 2017. The value of these
LTI allocations will be calculated based on the Executive’s fixed pay at the time of grant. The LTI allocation for the Group CEO will
be subject to approval by shareholders at the AGM.
D. EXECUTIVE REMUNERATION GOVERNANCE
I. IAG's approach to remuneration governance
IAG governs its remuneration through the Board and PARC. These governance arrangements are illustrated in the following chart.
II. Use of remuneration consultants
PARC engaged Pay Governance as external remuneration consultants to independently review IAG's approach to Executive
remuneration. This review is ongoing as part of a comprehensive review of IAG’s remuneration structure. No remuneration
recommendations were provided in the year ended 30 June 2017. EY was engaged during the year to provide Non-Executive
Director and KMP remuneration benchmarking. The remuneration data provided was used as an input to the remuneration
decisions by the Board only. No remuneration recommendations, as defined by the Corporations Act 2001, were provided by EY.
The Board considered the data provided, together with other factors, in setting Executives’ remuneration.
III. Adjustment policy
Each year, the Board assesses whether variable remuneration under the DARs and EPRs Plans needs 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 that an adjustment is necessary, including circumstances where
behaviour does not align with a desired risk culture, to ensure that an inappropriate reward outcome does not occur.
Annually PARC makes a recommendation to the Board on whether to adjust variable reward. This assessment requires the Group
CEO, the Chief Risk Officer, the Chief Financial Officer, Group Executive People, Performance and Reputation, Chief Actuary and all
Executives with profit and loss responsibility to attest as to whether an adjustment is necessary to the remuneration of any
individual or group of employees. PARC and the Board separately consider these attestations in conducting their own assessment
of whether an adjustment of variable remuneration is required. In the year ended 30 June 2017, this assessment did not reveal
any requirement for the Board to adjust remuneration.
28 IAG ANNUAL REPORT 2017
IV. Mandatory shareholding requirement for Executives
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 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 and
the Executive's base salary from four years prior. 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 calculation.
All Executives appointed prior to 30 June 2013 met the mandatory shareholding requirement at 30 June 2017.
E. 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. Mandatory shareholding requirement for Non-Executive Directors
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. Compliance with this requirement
is assessed at the end of each financial year. For the test conducted at 30 June 2017, this requirement was assessed using the
closing share price at 30 June and the Non-Executive Directors’ Board fee from three years prior. Non-Executive Directors
appointed prior to 30 June 2014 were required to meet the mandatory shareholding requirement at 30 June 2017 and all have
done so.
From the year ending 30 June 2018, the mandatory shareholding requirement for Non-Executive Directors will be set based on
either the value of shares at acquisition or the market value at the testing date, whichever is higher. Each Non-Executive Director
will continue to be required to hold shares to the value of their annual Board fee, with a three year period allowed to reach that
holding. This change is intended to allow Non-Executive Directors to build a long-term shareholding in IAG without being impacted
by short term share price volatility.
III. Board performance
The Board conducts a review of its performance, composition, size and succession annually and it conducts an independent review
of these matters at least every three years with the assistance of external experts (Formal Review). A Formal Review of the Board
and each Non-Executive Director (including the Chairman), with assistance and input from an independent board performance
expert, was conducted in 2016. The Formal Review involves the completion of questionnaires by Non-Executive Directors and
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. PARC is responsible for coordinating the Board’s review of the Chairman’s
performance.
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, the fulfilment of the additional role as Chairman.
IV. Remuneration structure
Non-Executive Director remuneration is comprised of:
board fees (paid as cash, superannuation and Non-Executive Director Award Rights);
committee fees; and
subsidiary board fees.
a. CHANGES TO NON-EXECUTIVE DIRECTOR REMUNERATION DURING THE YEAR ENDED 30 JUNE 2017
In August 2016, the Board approved a fee increase of 2.0% for Chairman and director fees paid for service on the IAG Limited
Board, with all Committee fees remaining unchanged. The Board has determined that there will be no increase to Board fees for
the year ended 30 June 2018. Fees for the Nomination Committee have been removed for the Chair and all directors. The
aggregate limit of Board fees approved by shareholders at the Annual General Meeting in October 2013 remains unchanged at
$3,500,000 per annum.
29
The figures shown below are inclusive of superannuation. Directors can elect the portion of fees contributed into their nominated
superannuation fund, provided minimum legislated contribution levels are met.
TABLE 11 - BOARD AND COMMITTEE FEES
BOARD/COMMITTEE
Board
Audit Committee
Risk Committee
People and Remuneration Committee
Nominations Committee*
YEAR
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
ROLE
CHAIRMAN
$577,166
$565,800
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
N/A
N/A
DIRECTOR
$192,372
$188,600
$25,000
$25,000
$25,000
$25,000
$25,000
$25,000
N/A
$10,000
* In the year ended 30 June 2016 the Chair of the Nominations Committee is also the Chairman of the Group, therefore no Chair fee was applicable.
b. SUBSIDIARY BOARD AND COMMITTEE FEES
A summary of Non-Executive Directors’ service on subsidiary boards and the fees paid is set out below:
TABLE 12 - FEES FOR NON-EXECUTIVE DIRECTORS' SERVICE ON SUBSIDIARY BOARDS
DIRECTOR
Elizabeth Bryan
Hugh Fletcher*
SUBSIDIARY
Insurance Manufacturers of Australia Pty Limited
IAG New Zealand Limited
CAPACITY
Chairman
Chairman
ANNUAL FEE
$247,000
$141,746
*
This amount was paid to Hugh Fletcher in New Zealand dollars and reported in Australian dollars using the average exchange rate for the year ended 30 June 2017
which was 1 NZD = 0.94497 AUD.
TABLE 13 - NON-EXECUTIVE DIRECTOR AWARD RIGHTS (NAR) PLAN
Overview
PARC has determined that the annual remuneration paid by IAG to Non-Executive Directors for their
services may be delivered partially in cash and partially in rights over IAG shares. Participation in the
NAR Plan is voluntary. Structuring Non-Executive Director remuneration in this way supports Non-
Executive Directors in building their shareholdings in the Group, which enhances the alignment of
interests between Non-Executive Directors and shareholders.
Performance measures
There are no performance conditions attached to the NAR Plan, which reflects good governance
practices by ensuring that the structure of Non-Executive Director remuneration does not act to bias
decision making or compromise objectivity.
A service condition is attached to the vesting of the NARs. The full annual allocation of unvested
NARs are issued at the grant date, with tranches vesting each month to align the vesting of NARs
with the payment of Non-Executive Director fees. As the grant date for NARs is part way through a
financial year, a proportion of the NARs granted are immediately vested.
Instrument
Grants under the NAR Plan are in the form of NARs over IAG shares. Each NAR entitles the Non-
Executive Director to acquire one ordinary share in IAG subject to satisfaction of a service condition.
Key terms of the NAR
Plan
The Non-Executive Director and IAG agree a proportion of the base Board fee to be provided as
NARs. The number of NARs offered is determined by dividing this value by the five day volume
weighted average share price up to and including the grant date, rounded to the nearest NAR.
Non-Executive Directors have no voting rights until the NARs are exercised and the Non-Executive
Director holds shares in IAG.
Non-Executive Directors do not have to pay any amount to exercise NARs.
NARs expire on the date that is 15 years from the grant date, or any other date determined by the
Board (Expiry Date). NARs that are not exercised before the Expiry Date will lapse.
Non-Executive Directors may not enter into transactions or arrangements which operate to limit the
economic risk of unvested entitlements to IAG Securities.
In the event a Non-Executive Director ceases service with the Board, any vested NARs may be
exercised for shares in IAG in the subsequent trading window. Any unvested NARs will lapse. Under
certain circumstances (e.g. change of control), the Board also has sole and absolute discretion to
deal with the rights, including waiving any applicable vesting conditions and/or exercise conditions
by giving notice or allowing a Non-Executive Director affected by the relevant event to transfer their
rights.
Forfeiture conditions
30 IAG ANNUAL REPORT 2017
APPENDIX 1. STATUTORY REMUNERATION DISCLOSURE REQUIREMENTS
I. Total remuneration for Executives
Statutory remuneration details for Executives as required by Australian Accounting Standards are set out below:
TABLE 14 - STATUTORY REMUNERATION DETAILS (EXECUTIVES)
SHORT TERM EMPLOYMENT
BENEFITS
Base
salary Cash STI
$000
$000
(2)
(1)
Leave
accruals
and other
benefits
$000
(3)
OTHER
LONG
TERM
EMPLOY-
MENT
BENEFITS
Long
service
leave
accruals
$000
(5)
POST
EMPLOY-
MENT
BENEFITS
Superan-
nuation
$000
(4)
10
18
10
36
30
17
30
30
14
16
25
54
35
20
35
35
35
35
10
8
23
(5)
(6)
29
(8)
16
(21)
16
(14)
25
632
326
353
153
670
656
308
271
322
160
665
380
508
532
375
138
327
245
1,665
1,425
1,139
905
EXECUTIVES
Peter Harmer(9)
2017
2016
Julie Batch(10)
2017
2016
Chris Bertuch(10)
2017
2016
Ben Bessell(11)
2017
2016
Duncan Brain
908
2017
2016
899
David Harrington(10)
565
2017
2016
326
Nicholas Hawkins
1,143
2017
2016
996
Jacki Johnson(12)(13)
1,056
2017
2016
1,025
Anthony Justice(10)
660
2017
355
2016
Mark Milliner(14)
2017
2016
Craig Olsen(15)(16)
2017
2016
Clayton Whipp
2017
2016
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Claire Rawlins(10)(17)
233
2017
321
2016
375
156
524
585
643
593
126
152
310
415
536
-
381
124
965
176
740
749
711
330
17
(13)
(16)
(17)
(56)
78
8
(35)
(13)
30
35
5
15
1
7
19
35
28
30
17
30
30
17
20
35
35
-
48
33
36
16
14
10
11
35
20
11
16
(2)
2
9
4
-
-
-
-
TERM-
INATION
BENEFITS
SUB-TOTAL SHARE BASED PAYMENT
TOTAL
Value of
deferred
STI
$000
(7)
Value of
rights
granted
$000
(8)
$000
(6)
$000
AT-RISK
REMUN-
ERATION
PAID
As a % of
total
reward
$000
%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,856
2,435
1,004
530
1,071
571
1,041
988
1,792
1,727
925
539
1,841
1,571
1,575
1,730
1,059
522
1,558
201
1,125
490
1,096
1,263
307
313
111
110
118
131
96
86
1,090
815
113
96
293
341
234
258
92
64
235
-
87
75
187
184
1,139
1,016
4,302
3,764
267
171
302
195
285
156
723
719
276
163
853
977
857
957
249
76
232
-
261
130
437
321
1,382
811
1,491
897
1,422
1,230
3,605
3,261
1,314
798
2,987
2,889
2,666
2,945
1,400
662
2,025
201
1,473
695
1,720
1,768
600
-
961
525
-
-
(15)
21
946
546
60
59
53
54
53
52
48
42
64
63
54
53
60
66
61
61
51
45
50
-
49
47
54
52
12
32
(1)
(2)
Base salary includes amounts paid in cash plus the portion of the Group’s superannuation contribution that is paid as cash instead of being paid into superannuation,
salary sacrifice items such as cars and parking, as determined in accordance with AASB 119 Employee Benefits.
Cash STI represents the amount to be settled in cash in relation to the financial year from 1 July 2016 to 30 June 2017.
31
(3)
(4)
(5)
(6)
(7)
(8)
This column includes annual and mid-service 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 KMP are provided as follows:
Duncan Brain: accommodation allowances, airfares for home visits and medical insurance; and Craig Olsen: salary continuance insurance.
Superannuation represents the employer’s contributions.
Long service leave accruals as determined in accordance with AASB 119.
Payment in lieu of notice which incorporates statutory notice and severance entitlements.
The deferred STI is granted as DARs and is valued using the Black-Scholes valuation model. An allocated portion of unvested DARs are included in the total remuneration
disclosure above. The deferred STI for the year ended 30 June 2017 will be granted in the next financial year, so no value was included in the current financial year’s total
remuneration.
This value represents the allocated portion of unvested EPRs. To determine the value of EPRs, a Monte Carlo simulation (for the relative TSR performance hurdle) and
Black-Scholes valuation (for the cash ROE performance hurdle) 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 the grant date, 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.
Peter Harmer was appointed Group CEO on 16 November 2015. His remuneration increased upon his appointment.
(9)
(10) Executive Team members were appointed to KMP roles on 8 December 2015.
(11) Ben Bessell was appointed to the role of Chief Executive, Australian Business Division on 8 December 2015. Mr Bessell was previously acting Chief Executive, Commercial
(12)
Insurance.
Jacki Johnson was appointed to the role of Group Executive, People Performance and Reputation on 1 January 2016. Prior to this, Jacki Johnson was the CEO IAG New
Zealand.
(13) Prior year remuneration for Jacki Johnson was determined in New Zealand dollars and reported in Australian dollars for the period between 1 July 2015 and 31 December
2015 using the average exchange rate for the year ended 30 June 2016, which was 1 NZD = 0.91957 AUD.
(14) Mark Milliner commenced with IAG on 27 April 2016.
(15) Craig Olsen commenced as a KMP on 1 January 2016 upon appointment to the role of CEO IAG New Zealand.
(16) Remuneration for Craig Olsen was determined in New Zealand dollars and reported in Australian dollars using the average exchange rate for the year ended 30 June 2017
which was 1 NZD = 0.94497 AUD.
(17) Claire Rawlins received a payment in lieu of notice of $600,000 upon her termination in accordance with her contractual terms.
II. Total remuneration details for Non-Executive Directors
Details of total remuneration for Non-Executive Directors for the year ended 30 June 2017 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
-
-
-
-
-
10
92
18
19
19
20
19
32
28
226
111
176
172
149
172
474
276
187
184
NON-EXECUTIVE DIRECTORS
Elizabeth Bryan
2017
2016
Duncan Boyle(1)
2017
Alison Deans
2017
2016
Hugh Fletcher
2017
2016
Jonathan Nicholson
2017
2016
Helen Nugent(1)
2017
Tom Pockett
2017
2016
Philip Twyman
2017
2016
NON-EXECUTIVE DIRECTORS WHO CEASED AS KEY MANAGEMENT PERSONNEL
Raymond Lim
2017
2016
180
177
113
172
180
177
177
145
70
82
14
23
46
36
68
78
21
21
12
19
19
19
20
14
19
19
69
26
11
-
-
-
-
-
-
-
-
-
-
-
(1)
Non-Executive Directors appointed part way through the year ended 30 June 2017.
32 IAG ANNUAL REPORT 2017
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
97
-
-
24
-
-
-
-
-
24
-
-
-
-
-
-
816
406
120
225
219
384
377
243
195
130
267
274
269
278
139
214
APPENDIX 2. EXECUTIVE EMPLOYMENT AGREEMENTS
Details are provided below of contractual elements for the Group CEO and Executive Team: all employment agreements for
Executives 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.
All Executive contracts have a 12 month notice period from the relevant company for termination and the Executives must provide
six months' notice. Executives are employed by Insurance Australia Group Services Pty Limited, except for Craig Olsen who is
employed by IAG New Zealand Limited.
I. Retrenchment
In the event of retrenchment, Executives (except for Craig Olsen) are entitled to the greater of:
the 12 month notice period, or payment in lieu of notice, as provided in their employment agreement; or
the retrenchment benefits due under the company retrenchment policy.
For Executives based in Australia, the maximum benefit under the retrenchment policy is 87 weeks of base salary, payable to
employees with service of 25 years or more.
For Craig Olsen, the retrenchment payment is 12 months of fixed pay.
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 could bring 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 12 months' notice or payment in lieu
of notice. Payment in lieu of notice will be calculated based on fixed pay. If an Executive terminates voluntarily, they are required to
provide six months' notice.
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.
IV. Executives who ceased employment in the financial year
All termination benefits provided to Executives were consistent with IAG’s termination policy as disclosed in the Remuneration
Report and did not exceed the level that would require shareholder approval under the Corporations Act 2001.
Termination benefits for Claire Rawlins included a contractual payment in lieu of notice of $600,000. No other payments were
provided to Ms Rawlins upon termination.
APPENDIX 3. MOVEMENT IN EQUITY PLANS WITHIN THE FINANCIAL YEAR
Changes in each Executive’s holding of DARs and EPRs and each Non-Executive Director’s holdings of NARs during the financial
year are set out below. The DARs granted during the year reflect the deferred portion of the STI outcome for the year ended 30
June 2016. The EPRs granted during the year ended 30 June 2017 were in relation to the LTI plan. The NARs granted during the
year represents the total number of rights a Non-Executive Director has agreed to receive as part of the payment of their base
Board fees.
TABLE 16 - MOVEMENT IN POTENTIAL VALUE OF DARS, EPRS AND NARS FOR THE YEAR ENDED 30 JUNE 2017
RIGHTS ON
ISSUE
30 JUNE
RIGHTS EXERCISED
DURING THE YEAR
(3)
RIGHTS GRANTED
DURING THE YEAR
(2)
RIGHTS ON
ISSUE 1 JULY
(1)
RIGHTS LAPSED
DURING THE YEAR
RIGHTS
VESTED
DURING THE
YEAR
RIGHTS
VESTED
AND
EXERCIS-
ABLE
30 JUNE
Number
Number
Value
($000)
Number
Value
($000)
Number
Value
($000)
Number
Number Number
EXECUTIVES
Julie Batch
Peter Harmer DAR
EPR
DAR
EPR
DAR
Chris
Bertuch
EPR
Ben Bessell DAR
EPR
72,650
898,283
29,450
176,929
33,950
203,045
22,850
199,700
83,100
467,900
24,900
151,200
22,500
160,600
24,900
160,600
409
(51,400)
1,580 (118,421)
(19,600)
(18,923)
(22,950)
(21,615)
(14,600)
(36,116)
122
522
111
542
122
542
303
697
115
111
135
127
86
213
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
104,350
1,247,762
34,750
309,206
33,500
342,030
33,150
324,184
51,400
118,421
19,600
18,923
22,950
21,615
14,600
15,547
-
-
-
-
-
-
-
-
33
RIGHTS ON
ISSUE 1 JULY
(1)
RIGHTS GRANTED
DURING THE YEAR
(2)
RIGHTS EXERCISED
DURING THE YEAR
(3)
RIGHTS LAPSED
DURING THE YEAR
RIGHTS ON
ISSUE
30 JUNE
RIGHTS
VESTED
DURING THE
YEAR
RIGHTS
VESTED
AND
EXERCIS-
ABLE
30 JUNE
Number
Number
Value
($000)
Number
Value
($000)
Number
Value
($000)
Number
Number Number
DAR
Duncan
EPR
Brain
DAR
David
EPR
Harrington
DAR
Nicholas
EPR
Hawkins
DAR
Jacki
EPR
Johnson
DAR
Anthony
EPR
Justice
DAR
Mark
Milliner(4)
EPR
Craig Olsen DAR
EPR
DAR
EPR
418,350
629,379
29,450
182,491
85,350
755,483
61,700
757,033
20,600
122,800
-
-
20,350
154,962
65,150
306,554
48,900
217,300
26,000
137,700
54,400
275,300
53,700
250,300
25,300
160,600
150,000
453,500
23,200
158,700
38,200
177,800
(38,800)
240
734 (104,550)
(20,050)
128
465
(20,900)
(58,350)
268
930 (118,421)
264
(42,950)
845 (106,250)
(12,750)
124
-
542
-
714
-
1,715
(13,150)
114
(13,394)
536
(27,250)
188
(21,000)
600
Clayton
Whipp
EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL
Claire
Rawlins(5)
-
75,500
DAR
EPR
-
-
-
-
-
-
NON-EXECUTIVE DIRECTORS
-
NAR
Elizabeth
Bryan
Alison Deans NAR
NAR
Helen
Nugent
-
-
18,877
4,720
4,112
97
24
24
-
-
-
229
616
118
123
344
697
253
626
75
-
-
-
77
79
160
124
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
428,450
742,129
35,400
299,291
81,400
912,362
72,450
901,083
33,150
283,400
150,000
453,500
30,400
300,268
76,100
463,354
38,800
105,223
20,050
21,217
58,350
118,421
42,950
109,421
12,750
-
-
-
13,150
13,394
27,250
21,598
-
673
-
317
-
-
-
3,171
-
-
-
-
-
-
-
598
-
(75,500)
-
445
-
-
-
-
-
-
-
-
-
-
-
-
18,877
18,877 18,877
4,720
4,112
4,720
4,112
4,720
4,112
(1)
(2)
(3)
Opening number of rights on issue represents the balance as at the date of appointment as KMP or 1 July 2016.
The value of the DARs granted during the year is the fair value at grant date calculated using the Black-Scholes valuation model. The value of the annual DARs granted
on 2 November 2016 was $4.92 except for the grant of 150,000 DARs provided to Mark Milliner which had a value of $4.76 per DAR. This amount is allocated to
remuneration over years ending 30 June 2017 to 30 June 2019. The value of the cash ROE portion of the EPRs granted on 2 November 2016 and 24 March 2017 is
the fair value at grant date, calculated using the Black-Scholes valuation model, which was $4.51 and $5.40 respectively. The cash ROE portion of the EPRs grants is
first exercisable after the performance period concludes on 30 June 2019. The value of the relative TSR portion of the EPRs granted on 2 November 2016 and 24
March 2017 is the fair value at grant date, calculated using the Monte Carlo simulation, which was $2.24 and $3.00 respectively. The relative TSR portion of the EPRs
is first exercisable on 30 September 2020. The amount is allocated to remuneration over the years ending 30 June 2017 to 30 June 2021. The value of the NARs
granted during the year is the fair value at grant date calculated using the Black-Scholes valuation model. The value of the annual NARs granted on 15 November 2016
and 15 January 2017 was $5.15 and $5.95. This amount is allocated to remuneration over year ended 30 June 2017.
Rights vested and exercised during the financial year. The value of the rights exercised is based on the weighted average share price for the year ended 30 June 2017,
which was $5.89.
(4) Mark Milliner received 150,000 DARs in November 2016 as compensation for incentives foregone on leaving his previous employer. As EPRs relate to future
performance, Mr Milliner received two allocations of EPRs in the year ended 30 June 2017: 224,100 EPRs in relation to his first year of employment, being the year
ending 30 June 2016 under the terms of the 2015/2016 Series 6 EPR and 229,400 EPRs in relation to the year ending 30 June 2017 under the terms of the
2016/2017 Series 6 EPR.
The rights on issue at 30 June for Claire Rawlins represents the balance as at 7 December 2016.
(5)
34 IAG ANNUAL REPORT 2017
I. LTI awards outstanding during the year ended 30 June 2017
Details of outstanding LTI awards made to Executives in the year ended 30 June 2017 are shown in the table below:
TABLE 17 - LTI AWARDS OUTSTANDING DURING THE YEAR ENDED 30 JUNE 2017
AWARD
GRANT DATE
BASE DATE
FIRST TEST
DATE
LAST TEST
DATE
PERFORMANCE
HURDLE
ACHIEVEMENT
2016/2017 Series 6 - TSR(a)
2016/2017 Series 6 - ROE(a)
2016/2017 Series 6 - TSR(a)
2016/2017 Series 6 - ROE(a)
2015/2016 Series 6 - TSR(a)
2015/2016 Series 6 - ROE(a)
2015/2016 Series 6 - TSR(a)
2015/2016 Series 6 - ROE(a)
2014/2015 Series 6 - TSR(a)
2014/2015 Series 6 - ROE(a)(b)
2013/2014 Series 6 - TSR(a)
2013/2014 Series 6 - ROE(a)
2012/2013 Series 5 - TSR
2012/2013 Series 5 - ROE
24/03/2017
24/03/2017
02/11/2016
02/11/2016
31/03/2016
31/03/2016
02/11/2015
02/11/2015
03/11/2014
03/11/2014
01/11/2013
01/11/2013
26/10/2012
26/10/2012
30/09/2016
01/07/2016
30/09/2016
01/07/2016
30/09/2015
01/07/2015
30/09/2015
01/07/2015
30/09/2014
01/07/2014
30/09/2013
01/07/2013
30/09/2012
01/07/2012
30/09/2020
30/06/2019
30/09/2020
30/06/2019
30/09/2019
30/06/2018
30/09/2019
30/06/2018
30/09/2018
30/06/2017
30/09/2017
30/06/2016
30/09/2015
30/06/2015
30/09/2017
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
100%
56%
100%
LAST EXERCISE
DATE
31/03/2024
31/03/2024
02/11/2023
02/11/2023
31/03/2023
31/03/2023
02/11/2022
02/11/2022
03/11/2021
03/11/2021
01/11/2020
01/11/2020
26/10/2019
26/10/2019
(a)
(b)
Terms and conditions for EPR Plans from 2013/2014 to 2016/2017 are the same; therefore, they are all referred to as Series 6.
The cash ROE portion of EPR Plan 2014/2015 has been tested and is expected to vest in full. Vesting details will be included in the Remuneration Report for the year
ended 30 June 2018.
APPENDIX 4. RELATED PARTY INTERESTS
In accordance with the Corporations Act Regulation 2M.3.03, the Remuneration Report includes disclosure of related parties'
interests.
I. Movements in total number of ordinary shares held
The relevant interests of each key management personnel and their related parties in IAG ordinary shares are disclosed in the table
below:
TABLE 18 - MOVEMENT IN TOTAL NUMBER OF ORDINARY SHARES HELD
SHARES
RECEIVED ON
EXERCISE OF
DAR
Number
SHARES
RECEIVED ON
EXERCISE OF
EPR
Number
NET
MOVEMENT OF
SHARES DUE
TO OTHER
CHANGES(a)
Number
SHARES HELD
AT 1 JULY
Number
TOTAL SHARES
HELD
AT 30 JUNE
Number
SHARES HELD
NOMINALLY AT
30 JUNE(b)
Number
2017
NON-EXECUTIVE DIRECTORS AND EXECUTIVES
32,725
Elizabeth Bryan
Duncan Boyle(c)
-
37,742
Alison Deans
82,032
Hugh Fletcher
11,468
Jonathan Nicholson
Helen Nugent(c)
540
32,251
Tom Pockett
Philip Twyman
15,522
655,967
Peter Harmer
182,907
Julie Batch
53,880
Chris Bertuch
Ben Bessell
464
234,758
Duncan Brain
David Harrington
1,387
220,000
Nicholas Hawkins
Jacki Johnson(d)
592,760
-
Anthony Justice
Mark Milliner
-
123,403
Craig Olsen
101,314
Clayton Whipp
-
-
-
-
-
-
-
-
51,400
19,600
22,950
14,600
38,800
20,050
58,350
42,950
12,750
-
13,150
27,250
-
-
-
-
-
-
-
-
118,421
18,923
21,615
36,116
104,550
20,900
118,421
106,250
-
-
13,394
21,000
1,509
32,679
-
1,520
23,121
-
177
-
-
(122,500)
164
(8,400)
(210,000)
202
(176,771)
-
-
-
-
(23,607)
34,234
32,679
37,742
83,552
34,589
540
32,428
15,522
825,788
98,930
98,609
42,780
168,108
42,539
220,000
741,960
12,750
-
149,947
125,957
34,234
32,679
37,742
46,991
24,162
540
-
12,780
172,800
277
544
277
-
953
-
592,760
-
-
14,800
688
35
SHARES
RECEIVED ON
EXERCISE OF
DAR
Number
SHARES
RECEIVED ON
EXERCISE OF
EPR
Number
NET
MOVEMENT OF
SHARES DUE
TO OTHER
CHANGES(a)
Number
SHARES HELD
AT 1 JULY
Number
TOTAL SHARES
HELD
AT 30 JUNE
Number
SHARES HELD
NOMINALLY AT
30 JUNE(b)
Number
NON-EXECUTIVE DIRECTORS AND EXECUTIVES WHO CEASED AS KEY MANAGEMENT PERSONNEL(e)
Raymond Lim
Claire Rawlins
(35,000)
-
35,000
-
-
-
-
-
-
-
-
-
(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.
Shares nominally held 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.
The opening balance for Jacki Johnson is 366,827 shares higher than the closing balance in the year ended 30 June 2016. This is a result of the overstatement of the
number of shares disposed of in the year ended 30 June 2016 by this amount.
Information on shares held is disclosed up to the date of cessation.
II. Movements in total number of convertible preference shares
On 1 July 2016, Philip Twyman had an indirect holding of 5,109 convertible preference shares. On 22 December 2016 Mr
Twyman’s total holding of convertible preference shares were bought back by IAG. No other key management personnel had any
interest directly or nominally in convertible preference shares during the financial year (2016-nil).
III. Movements in total number of capital notes held
During the year ended 30 June 2017 Philip Twyman indirectly purchased 5,109 capital notes (2016-nil). No other key management
personnel had any interest directly or nominally in capital notes during the financial year (2016-nil).
IV. 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 (2016-nil).
V. Relevant interest of each director and their related parties in listed securities of the IAG Group in accordance with the
Corporations Act 2001
TABLE 19 - HOLDINGS OF SHARES, CAPITAL NOTES AND RESET EXCHANGEABLE SECURITIES
ORDINARY SHARES
CAPITAL NOTES
Elizabeth Bryan
Duncan Boyle
Alison Deans
Hugh Fletcher
Jonathan Nicholson
Helen Nugent
Tom Pockett
Philip Twyman
Peter Harmer
Held directly(a)
-
-
-
36,561
10,427
-
32,428
2,742
652,988
Held indirectly(b)
34,234
32,679
37,742
46,991
24,162
540
-
12,780
172,800
Held directly
-
-
-
-
-
-
-
-
-
Held indirectly
-
-
-
-
-
-
-
5,109
-
RESET EXCHANGEABLE SECURITIES
Held indirectly
-
-
-
-
-
-
-
-
-
Held directly
-
-
-
-
-
-
-
-
-
(a)
(b)
This represents the relevant interest of each Director in ordinary shares issued by the Group, as notified by the Directors to the ASX in accordance with section 205G of the
Corporations Act 2001 until the date the financial report was signed. Trading in IAG shares is covered by the restrictions which limit the ability of an IAG Director to trade in
the securities 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.
36 IAG ANNUAL REPORT 2017
APPENDIX 5. KEY TERMS AND DEFINITIONS
The key terms and definitions used throughout this report are explained below:
TERM
Actual remuneration
At-risk remuneration
DEFINITION
The dollar value of remuneration actually received by the Executives in the financial year. This is
the sum of fixed pay plus the cash STI earned in the reported financial year plus the value of
DARs vested during the financial year plus the value of EPRs vested during the year.
Remuneration that is dependent on a combination of the financial performance of the Group, the
Executives' performance against individual measures (financial and non-financial) and continuing
employment. At-risk remuneration typically includes STI (cash and deferred remuneration) and
LTI.
Base salary
The cash component of fixed pay.
Cash return on equity (ROE)
Calculated as cash earnings divided by 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 after tax (non-recurring in nature). Cash ROE is used to calculate one half of the outcome
in the LTI plan.
Cash STI
The two thirds portion of an Executive’s STI outcome that is paid in the form of cash, following
the end of year assessment and approval by the Board.
Deferred STI/Deferred Award
Rights (DARs)
The one third portion of an Executive’s STI that is deferred over a period of two years and
awarded in the form of DARs.
Executive Team
Executives
Fixed pay
Group Balanced Scorecard
Group CEO
IAG Spirit
The Executives who form part of the Group Leadership Team, comprising: Chief Executive,
Australian Consumer Division; Chief Executive, Australian Business Division; Chief Executive, New
Zealand; Chief Executive, Asia; Chief Financial Officer; Chief Operating Officer; Chief Risk Officer;
Chief Customer Officer; Group Executive, Office of the CEO; Group General Counsel and Company
Secretary; and Group Executive, People, Performance and Reputation.
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.
The Group Balanced Scorecard sets out the objectives that have to be achieved to meet key
strategic priorities of the organisation. The Group Balance Scorecard uses goals set against
financial and non-financial objectives. Achievement against these objectives is measured and
this informs the Board's determination of STI outcomes.
IAG’s Managing Director and Chief Executive Officer.
The IAG Spirit 'Closer, Braver, Faster' is a set of statements that capture a shared view across IAG
of how we work together, what we stand for and what makes us unique.
Key management personnel
(KMP)
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.
Long term incentive
(LTI)/Executive Performance
Rights (EPRs)
A grant of rights in the form of EPRs that are exercisable for IAG ordinary shares or cash as
determined by the Board. Vesting occurs between three and four years after the grant date if
performance hurdles are achieved.
Malus
The Board has the ability to reduce the value of deferred remuneration before it has vested,
including down to zero.
Non-Executive Director Award
Right (NAR)
The NARs Plan provides directors with the opportunity to build their shareholding in IAG and is
provided in the form of NARs. Participation in the plan is voluntary.
People and Remuneration
Committee (PARC)
Short term incentive (STI)
The Board committee which oversees IAG's remuneration practices.
The part of annual at risk remuneration that is designed to motivate and reward for annual
performance. STI results are determined by performance against a balanced scorecard, based
on goals which reflect financial and non-financial measures. For Executives, one third of STI is
deferred for a period of two years and two thirds is paid in cash in September following the end of
the performance year.
Total shareholder return (TSR)
TSR combines share price movements and dividends paid to show total return to shareholders.
IAG uses relative TSR performance against other companies in the peer group to calculate one
half of the LTI outcome.
WACC
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on
average to all its security holders to finance its assets.
37
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 ASIC Corporations Instrument 2016/191 dated 24 March 2016 issued by the Australian
Securities and Investments Commission. All rounding has been conducted in accordance with that instrument.
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.
Signed at Sydney this 23rd day of August 2017 in accordance with a resolution of the Directors.
Peter Harmer
Director
38 IAG ANNUAL REPORT 2017
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 of Insurance Australia Group Limited for the financial
year ended 30 June 2017 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
Andrew Yates
Partner
Sydney
23 August 2017
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.
39
CONSOLIDATED FINANCIAL
STATEMENTS
CONTENTS
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
NOTES TO THE FINANCIAL STATEMENTS
1
1.1
1.2
1.3
OVERVIEW
Introduction
About this report
Segment reporting
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3
3.1
4
4.1
4.2
4.3
4.4
4.5
5
5.1
5.2
5.3
6
6.1
6.2
6.3
6.4
7
7.1
7.2
7.3
8
8.1
8.2
8.3
8.4
8.5
INSURANCE DISCLOSURES
General insurance revenue
Claims and reinsurance and other recoveries on outstanding claims
Investments
Unearned premium liability
Deferred insurance expenses
Trade and other receivables
Trade and other payables
RISK
Risk and capital management
CAPITAL STRUCTURE
Interest bearing liabilities
Notes to the statement of changes in equity
Earnings per share
Dividends
Derivatives
OTHER BALANCE SHEET DISCLOSURES
Goodwill and intangible assets
Income tax
Provisions
GROUP STRUCTURE
Details of subsidiaries
Non-controlling interests
Investment in joint venture and associates
Parent entity disclosures
UNRECOGNISED ITEMS
Contingencies
Commitments
Events subsequent to reporting date
ADDITIONAL DISCLOSURES
Notes to the consolidated cash flow statement
Related party disclosures
Remuneration of auditors
Net tangible assets
Impact of new Australian Accounting Standards issued
40 IAG ANNUAL REPORT 2017
PAGE
41
42
43
44
45
46
47
49
50
54
56
57
57
58
58
67
69
70
70
71
73
75
77
78
79
79
81
81
82
82
83
83
84
84
84
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2017
Gross earned premium
Outwards reinsurance premium expense
Net earned premium (i)
Claims expense
Reinsurance and other recoveries revenue
Net claims expense (ii)
Commission expense
Underwriting expense
Reinsurance commission revenue
Net underwriting expense (iii)
Underwriting profit (i) + (ii) + (iii)
Investment income on assets backing insurance liabilities
Investment expenses on assets backing insurance liabilities
Insurance profit before capitalised software accelerated amortisation and impairment
Capitalised software accelerated amortisation and impairment expense
Insurance profit
Investment income on shareholders' funds
Fee and other income
Share of net profit of associates
Finance costs
Fee based, corporate and other expenses
Net loss attributable to non-controlling interests in unitholders' funds
Profit before income tax
Income tax expense
Profit for the year
OTHER COMPREHENSIVE INCOME/(EXPENSE)
Items that may be reclassified subsequently to profit or loss:
Net movement in foreign currency translation reserve, net of tax
Items that will not be reclassified to profit or loss:
Remeasurements of defined benefit plans, net of tax
Other comprehensive income, net of tax
Total comprehensive income for the year, net of tax
PROFIT FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent
Non-controlling interests
Profit for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent
Non-controlling interests
Total comprehensive income for the year, net of tax
EARNINGS PER SHARE
Basic earnings per ordinary share
Diluted earnings per ordinary share
NOTE
2.1
2.1
2.2
2.1
2.3
5.1
2.3
5.2
NOTE
4.3
4.3
2017
$m
11,692
(3,227)
8,465
(8,638)
3,375
(5,263)
(1,065)
(1,835)
715
(2,185)
1,017
257
(16)
1,258
-
1,258
262
182
19
(93)
(290)
(4)
1,334
(329)
1,005
(16)
25
9
1,014
929
76
1,005
938
76
1,014
2017
cents
39.03
37.72
The above consolidated statement of comprehensive income should be read in conjunction with the notes to the financial
statements.
2016
$m
11,411
(3,883)
7,528
(8,500)
3,798
(4,702)
(1,039)
(1,822)
745
(2,116)
710
484
(21)
1,173
(198)
975
113
204
17
(99)
(285)
(5)
920
(218)
702
65
(32)
33
735
625
77
702
658
77
735
2016
cents
25.79
25.34
41
CONSOLIDATED BALANCE
SHEET
AS AT 30 JUNE 2017
ASSETS
Cash held for operational purposes
Investments
Trade and other receivables
Current tax assets
Reinsurance and other recoveries on outstanding claims
Deferred insurance expenses
Deferred levies and charges
Deferred tax assets
Property and equipment
Other assets
Investment in joint venture and associates
Goodwill and intangible assets
Total assets
LIABILITIES
Trade and other payables
Current tax liabilities
Unearned premium liability
Outstanding claims liability
Non-controlling interests in unitholders' funds
Provisions
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
8.1
2.3
2.6
2.2
2.5
5.2
6.3
5.1
2.7
2.4
2.2
5.3
4.1
4.2
2017
$m
424
12,136
4,153
66
5,258
2,770
105
545
182
121
505
3,332
29,597
2,434
169
6,331
11,371
219
329
328
1,624
22,805
6,792
7,082
(38)
17
(499)
6,562
230
6,792
2016
$m
263
12,946
4,321
54
4,689
2,778
131
603
204
145
486
3,410
30,030
2,346
5
6,220
11,741
247
370
354
1,962
23,245
6,785
7,275
(43)
32
(701)
6,563
222
6,785
The above consolidated balance sheet should be read in conjunction with the notes to the financial statements.
42 IAG ANNUAL REPORT 2017
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2017
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
2017
Balance at the beginning of the
financial year
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive income/(expense)
for the year
Transactions with owners in their
capacity as owners
Off-market share buy-back, including
transaction costs
Share based remuneration
Purchase of non-controlling interest
Dividends determined and paid
Balance at the end of the financial year
2016
Balance at the beginning of the
financial year
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive income for the
year
Transactions with owners in their
capacity as owners
Share based remuneration
Dividends determined and paid
Dividends received on treasury shares
held in trust
Balance at the end of the financial year
7,275
-
(43)
-
-
-
(193)
-
-
-
-
-
-
5
-
-
(3)
-
(16)
(16)
-
-
-
-
35
-
-
-
-
1
-
-
7,082
(38)
(19)
36
7,275
-
-
-
-
-
-
7,275
(83)
-
-
-
40
-
-
(43)
(68)
-
65
65
-
-
-
(3)
30
-
-
-
5
-
-
35
(701)
929
25
954
(123)
(3)
(3)
(623)
(499)
(337)
625
(32)
593
(12)
(948)
3
(701)
222
76
6,785
1,005
-
9
76
1,014
-
-
-
(68)
(316)
3
(3)
(691)
230
6,792
201
77
7,018
702
-
77
33
735
-
(56)
33
(1,004)
-
222
3
6,785
The above consolidated statement of changes in equity should be read in conjunction with the notes to the financial statements.
43
CONSOLIDATED CASH FLOW
STATEMENT
FOR THE YEAR ENDED 30 JUNE 2017
NOTE
8.1
CASH FLOWS FROM OPERATING ACTIVITIES
Premium received
Reinsurance and other recoveries received
Claims costs paid
Outwards reinsurance premium expense paid
Dividends, interest and trust distributions received
Finance costs paid
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 of subsidiaries and associates
Net cash flows from sale/(purchase) of investments and plant and equipment
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Outlays for repurchase of shares, including transaction costs
Proceeds from borrowings, net of transaction costs
Repayment of borrowings
Net cash flow from issue and redemption of trust units
Dividends paid to IAG shareholders
Dividends paid to non-controlling interests
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
Cash and cash equivalents at the end of the financial year
8.1
2017
$m
11,793
3,129
(8,995)
(3,329)
458
(86)
(137)
1,566
(3,763)
636
37
1,081
1,118
(316)
394
(727)
(38)
(623)
(68)
-
(1,378)
376
-
1,104
1,480
2016
$m
11,310
2,170
(9,447)
(4,029)
525
(95)
(388)
1,582
(3,574)
(1,946)
5
2,362
2,367
-
326
(131)
45
(948)
(56)
3
(761)
(340)
11
1,433
1,104
The above consolidated cash flow statement should be read in conjunction with the notes to the financial statements.
44 IAG ANNUAL REPORT 2017
NOTES TO THE
FINANCIAL STATEMENTS
1. OVERVIEW
NOTE 1.1 INTRODUCTION
The financial report is structured to provide prominence to the disclosures that are considered most relevant to the users'
understanding of the operations, results and financial position of the Group.
The financial report has been organised into the following sections:
1. Overview - contains information that affects the financial report as a whole, as well as segment reporting disclosures.
Insurance disclosures - financial statement disclosures considered most relevant to the core insurance activities.
2.
3. Risk - discusses the Group's exposure to various risks, explains how these affect the Group's financial position and performance
and how the Group seeks to manage and mitigate these risks.
4. Capital structure - provides information about the capital management practices of the Group and related shareholder returns.
5. Other balance sheet disclosures - discusses other balance sheet items such as goodwill and intangible assets, as well as
disclosures in relation to the Group's tax balances.
6. Group structure - provides a summary of the Group's controlled entities and includes acquisition and divestment disclosure.
7. Unrecognised items - disclosure of items not recognised in the financial statements at the balance date but which could
potentially have a significant impact on the Group's financial position and performance going forward.
8. Additional disclosures - other disclosures required to comply with Australian Accounting Standards.
45
NOTE 1.2 ABOUT THIS REPORT
A. CORPORATE INFORMATION
Insurance Australia Group Limited (IAG, Parent or Company), the ultimate parent entity in the Consolidated entity, is a for-profit
company, incorporated and domiciled in Australia and limited by shares 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 covers the consolidated financial statements for the Company and its subsidiaries (Group or Consolidated entity) for the year
ended 30 June 2017.
A description of the nature of the Group's operations and its principal activities is included in the Directors' Report.
B. STATEMENT OF COMPLIANCE
This general purpose financial report was authorised by the Board of Directors for issue on 23 August 2017 and complies with
International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), the Corporations
Act 2001, Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB), other
authoritative pronouncements of the AASB and the ASX Listing Rules.
The current IFRS standard for insurance contracts does not include a comprehensive set of recognition and measurement criteria.
The IASB has recently issued a new standard (IFRS 17 Insurance Contracts) that does include such criteria, however this standard
will not come into effect until 1 January 2021. Until this standard takes effect, 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.
C. BASIS OF PREPARATION
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 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. All values are
rounded to the nearest million dollars, unless otherwise stated, in accordance with ASIC Corporations Instrument 2016/191.
The balance sheet is prepared with the assets and liabilities 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).
I. Basis of consolidation
The consolidated financial statement incorporates the assets and liabilities of all entities controlled by the Company as at 30 June
2017. A list of significant controlled entities is set out in Note 6.1 Details of subsidiaries. IAG controls an investee if it has (i)
power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use
its power over the investee to affect the amount of those returns. Where an entity either began or ceased to be controlled during a
financial year, the results are included 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. In preparing the
consolidated financial statements, all inter-company balances and transactions, including income, expenses, and profits and losses
resulting from intra-Group transactions, have been eliminated.
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 when presented as a liability where the subsidiary is a trust or
similar entity. A change in ownership of a controlled entity that results in no gain or loss of control is accounted for as an equity
transaction.
II. Presentation and foreign currency
The financial report is presented in Australian dollars, which is the functional currency of the Company. Foreign currency
transactions are translated into Australian dollars 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 Australian dollars using reporting date
exchange rates. Resulting exchange differences are recognised in profit or loss.
The assets and liabilities of foreign operations are translated to Australian dollars using reporting date exchange rates while equity
items are translated using historical rates. The consolidated statement of comprehensive income and consolidated cash flow
statement are translated using annual average rates for the reporting year. Exchange rate differences arising on translation are
recorded directly in equity in the foreign currency translation reserve (FCTR). On the disposal of a foreign operation, the cumulative
amount of exchange differences deferred in the FCTR relating to that foreign operation is recognised in profit or loss.
46 IAG ANNUAL REPORT 2017
D. SIGNIFICANT ACCOUNTING POLICIES ADOPTED
The accounting policies adopted in the preparation of this financial report have been applied consistently by all entities in the
Group and are the same as those applied for the previous reporting year, unless otherwise stated. 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. The significant accounting
policies adopted in the preparation of this financial report are set out within the relevant note.
I. Changes in accounting policies
There were new Australian Accounting Standards and Interpretations applicable for the current reporting year, with no material
financial impact to the Group on adoption. Refer to Note 8.5 Impact of new Australian Accounting Standards issued for further
details.
II. Critical accounting estimates and judgements
In the process of applying the significant accounting policies, certain critical accounting estimates and assumptions are applied
and judgements are made by management, the results of which affect the amounts recognised in the financial statements. The
estimates and related assumptions are based on experience and other factors that are considered to be reasonable, and are
reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which they are revised, and future
periods if relevant. Details of the material estimates and judgements are set out with the relevant note, as outlined below:
AREAS OF CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Claims and reinsurance and other recoveries on outstanding claims
Liability adequacy test
Intangible assets and goodwill impairment testing, initial measurement and useful life
Income tax and related assets and liabilities
Investment in joint venture and associates impairment testing
REFERENCE
Note 2.2
Note 2.4
Note 5.1
Note 5.2
Note 6.3
NOTE 1.3 SEGMENT REPORTING
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.
A. REPORTABLE SEGMENTS
The Consolidated entity has general insurance operations in Australia, New Zealand and Asia, with the reportable segments for the
period ended 30 June 2017 comprising the following business divisions:
I. Consumer division (Australia)
This segment provides general insurance products to individuals and families throughout Australia, primarily under the NRMA
Insurance, SGIO, SGIC and CGU brands, under the RACV brand in Victoria (via a distribution and underwriting relationship with
RACV) and the Coles Insurance brand nationally (via a distribution agreement with Coles).
II. Business division (Australia)
This segment provides commercial insurance to businesses throughout Australia, predominantly under the CGU, WFI, and
Swann Insurance brands through intermediaries including brokers, authorised representatives and distribution partners.
III. New Zealand
This segment provides general insurance business underwritten in New Zealand. Insurance products are sold directly to
customers predominantly under the State and AMI brands, and through intermediaries (insurance brokers and authorised
representatives) primarily using the NZI and Lumley Insurance brands. Personal and commercial products are also distributed
by corporate partners, such as large financial institutions, using third party brands.
IV. Asia
This segment provides direct and intermediated insurance business underwritten through subsidiaries in Thailand, Vietnam
and Indonesia and the share of the operating result from the investment in associates in Malaysia and India. The businesses
offer personal and commercial insurance products through local brands.
V. Corporate and other
This segment comprises other activities, including corporate services, capital management activity, shareholders’ funds
investment activities and inward reinsurance from associates. The Group’s captive reinsurance operation (captive) is a
corporate function that acts as the interface between the external providers of reinsurance capital and the operating business
divisions. The Group does not manage or view the captive as a separate business. Consequently, the operating results of the
captive are systematically allocated to the operating business segments.
47
B. FINANCIAL INFORMATION
2017
I. Financial performance
Total external revenue(a)
Underwriting profit/(loss)
Net investment income on assets backing
insurance liabilities
Insurance profit/(loss)
Net investment income on shareholders'
funds
Share of net profit/(loss) of associates
Finance costs
Other net operating result
Total segment result
Income tax expense
Profit for the year
II. Other segment information
Capital expenditure(b)
Depreciation and amortisation expense
2016
I. Financial performance
Total external revenue(a)
Underwriting profit/(loss)
Net investment income on assets backing
insurance liabilities
Insurance profit/(loss) before capitalised
software accelerated amortisation and
impairment
Capitalised software accelerated
amortisation and impairment expense
Net investment income on shareholders'
funds
Share of net profit/(loss) of associates
Finance costs
Other net operating result
Total segment result
Income tax expense
Profit for the year
II. Other segment information
Capital expenditure(b)
Depreciation, amortisation and impairment
expense
AUSTRALIA
CONSUMER
DIVISION
$m
BUSINESS
DIVISION
$m
NEW
ZEALAND
$m
ASIA
$m
CORPORATE
AND OTHER
$m
TOTAL
$m
8,162
816
4,241
141
3,276
80
125
941
-
-
-
-
941
-
53
63
204
-
(1)
-
(28)
175
-
54
45
125
-
-
-
-
125
-
52
7,956
544
4,563
41
2,791
128
261
805
-
-
-
-
-
805
-
57
189
230
-
-
1
-
4
235
-
87
7
135
-
-
-
-
1
136
-
49
531
(21)
9
(12)
-
22
-
-
10
-
3
292
16,502
1
(1)
-
249
(2)
(93)
(71)
83
1,017
241
1,258
249
19
(93)
(99)
1,334
(329)
1,005
109
1
109
163
513
949
16,772
2
5
7
-
-
19
-
-
26
-
3
(5)
1
710
463
(4)
1,173
(198)
(198)
97
(3)
(99)
(75)
(282)
189
198
97
17
(99)
(70)
920
(218)
702
189
394
(a)
Total external revenue comprises gross earned premium, reinsurance and other recoveries, reinsurance commission revenue, investment income on assets backing
insurance liabilities, investment income on shareholders' funds, fee and other income and share of net profit/(loss) of associates.
(b)
Capital expenditure includes acquisitions of property and equipment, intangibles and other non-current segment assets.
48 IAG ANNUAL REPORT 2017
2. INSURANCE DISCLOSURES
SECTION INTRODUCTION
This section provides an overview of the Group's general insurance operations, which are the main driver of the Group's overall
performance and financial position.
The Group collects premium and recognises revenue for the insurance policies it underwrites. From this, the Group pays amounts
to customers on settlement of insurance claims, with the claims expense representing the largest cost to the Group, as well as
operating costs, which include the costs associated with obtaining and recording insurance contracts.
To mitigate the Group's overall risk and optimise its return profile, the Group passes some of its underwriting exposure to third
parties (primarily reinsurance companies). The premiums paid to reinsurers are an expense to the Group, whereas recoveries
under the reinsurance contracts are recognised as revenue. These recoveries can either be in relation to operating costs
(reinsurance commission) or underwriting risk (reinsurance recoveries).
Investment activities are an integral part of the insurance business. The funds received from the collection of premium are
invested as a key source of return for the Group under a sound investment philosophy. The Group starts investing insurance
premiums as soon as they are collected and continues to generate returns until claims or other expenses are paid out.
The underwriting result measures the profit (or loss) generated from underwriting activities in a given period. The insurance
result, which is a key performance metric, adds the net investment return to the underwriting result to derive the overall pre-tax
profit (or loss) from insurance operations.
NOTE 2.1 GENERAL INSURANCE REVENUE
A. COMPOSITION
Gross written premium
Movement in unearned premium liability
Gross earned premium
Reinsurance and other recoveries revenue
Reinsurance commission revenue
Total general insurance revenue
2017
$m
11,805
(113)
11,692
3,375
715
15,782
2016
$m
11,367
44
11,411
3,798
745
15,954
B. RECOGNITION AND MEASUREMENT
I. Premium revenue
Premiums written are earned through the profit or loss in line with the incidence of the pattern of risk. The majority of premium is
earned according to the passage of time (e.g. for a one year policy, 1/365th of premium written will be earned each day).
II. Reinsurance and other recoveries
The recognition and measurement criteria for reinsurance and other recoveries revenue is referred to in Note 2.2 Claims and
reinsurance and other recoveries on outstanding claims.
III. Reinsurance commission revenue
Reinsurance commission revenue includes reimbursements by reinsurers to cover a share of IAG’s operating costs and, where
applicable, fee income which reinsurers pay for accessing IAG's franchise. These income items are recognised broadly in line with
the reference premium over the term of the reinsurance agreements. Where applicable, the reinsurance commission revenue also
includes income which is based on the expected profitability of the covered business ceded to the reinsurer. The final value of the
variable commission revenue recognised is subject to the achievement of a specified underlying profitability hurdle rate over time.
This variable revenue is recognised over the term of the reinsurance contract on a straight line, or other systematic basis, in
accordance with the terms of the contract, and is reassessed at each reporting date.
49
NOTE 2.2 CLAIMS AND REINSURANCE AND OTHER RECOVERIES ON OUTSTANDING CLAIMS
A. NET CLAIMS EXPENSE
Current year
$m
9,637
(135)
9,502
Prior years
$m
(1,012)
148
(864)
2017
Total Current year
$m
8,934
(165)
8,769
$m
8,625
13
8,638
Prior years
$m
(786)
517
(269)
(3,449)
66
(3,383)
6,119
25
(17)
8
(856)
(3,424)
49
(3,375)
5,263
(3,128)
302
(2,826)
5,943
Gross claims - undiscounted
Discount
Gross claims - discounted
Reinsurance and other recoveries -
undiscounted
Discount
Reinsurance and other recoveries -
discounted
Net claims expense
B. NET OUTSTANDING CLAIMS LIABILITY
I. Composition of net outstanding claims liability
Gross central estimate - discounted
Reinsurance and other recoveries - discounted
Net central estimate - discounted
Claims handling costs - discounted
Risk margin
Net outstanding claims liability - discounted
2016
Total
$m
8,148
352
8,500
(4,077)
279
(3,798)
4,702
2016
$m
9,548
(4,009)
5,539
384
1,129
7,052
(949)
(23)
(972)
(1,241)
2017
$m
9,224
(4,358)
4,866
362
885
6,113
The gross outstanding claims liability includes $6,488 million (2016-$6,940 million) which is expected to be settled more than 12
months from the reporting date.
The carrying value of reinsurance and other recoveries includes $3,151 million (2016-$2,694 million) which is expected to be
settled more than 12 months from the reporting date.
II. Reconciliation of movements in net discounted outstanding claims liability
Net outstanding claims liability at the beginning of the financial year
Movement in the prior year central estimate
Current year claims incurred, net of reinsurance and other recoveries
Claims paid, net of reinsurance and other recoveries received
Movement in discounting
Movement in risk margin
Net foreign currency movements
Net outstanding claims liability at the end of the financial year
Reinsurance and other recoveries on outstanding claims liability
Gross outstanding claims liability at the end of the financial year
2017
$m
7,052
(387)
5,871
(6,208)
40
(244)
(11)
6,113
5,258
11,371
2016
$m
8,974
(580)
5,474
(6,703)
224
(431)
94
7,052
4,689
11,741
50 IAG ANNUAL REPORT 2017
III. Maturity analysis
Refer to Note 3.1 Risk and capital management 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.
IV. Development table
Claims will often take a number of years to be settled from the date the original loss occurred. The following table shows the
development of the net undiscounted ultimate claims estimate for the ten most recent accident years and a reconciliation to the
net discounted outstanding claims liability. This table provides the user with an overview of how the Group's estimates of total
claim amounts payable in relation to a given year have evolved over time. If the estimate of ultimate claims in relation to a given
accident year declines over time, this suggests claims have developed more favourably than was anticipated at the time the original
reserving assumptions were set.
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. The 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 applicable exchange rates at the reporting dates. Therefore, the claims
development table disclosed each reporting year cannot be reconciled directly to the equivalent tables presented in previous years'
financial statements.
2007
and
prior
$m
2008
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
Total
$m
ACCIDENT YEAR
NET ULTIMATE CLAIM 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 claim
payments
Cumulative payments
made to date
Net undiscounted
outstanding claims
liability
Discount to present
value
Net discounted
outstanding claims
liability
155
145
(10)
5,343
4,961
4,938
6,317
6,244
6,182
5,633
5,638
5,552
5,411
5,174
5,098
5,017
4,938
4,858
5,206
5,281
5,222
5,132
5,080
5,019
5,001
5,117
5,160
5,192
5,402
5,474
5,484
4,653
4,627
4,525
4,474
4,422
4,369
4,334
4,304
4,707
4,741
4,677
4,669
4,583
4,530
4,485
4,448
4,444
4,691
4,651
4,644
4,622
4,602
4,532
4,521
4,506
4,487
4,471
4,471
4,444
4,304
5,484
5,019
4,858
5,411
6,182
4,938
5,343
4,430
4,390
4,230
5,158
4,868
4,585
4,892
5,454
4,178
3,371
41
54
74
326
151
273
519
728
760
1,972
5,053
(3)
(3)
(5)
(7)
(9)
(14)
(21)
(28)
(33)
(54)
(187)
38
51
69
319
142
259
498
700
727
1,918
4,866
Reconciliation
Claims handling costs
Risk margin
Net outstanding claims liability
362
885
6,113
C. RECOGNITION AND MEASUREMENT
I. Outstanding claims liability and claims expense
Claims expense represents claim payments and the movement in the closing outstanding claims liability from one financial period
to the next. Current year claims relate to loss events that occurred during the current financial year. Prior year claims represent
the movement on the estimates held for claims that occurred in all previous financial periods. Allowance has been made for
potential remediation costs resulting from the past sale by a subsidiary company of add-on insurance through car and motorcycle
dealers.
The outstanding claims liability is determined based on three building blocks:
a central estimate of the future cash flows;
discounting for the effect of the time value of money; and
a risk margin for uncertainty.
51
a. CENTRAL ESTIMATE OF THE FUTURE CASH FLOWS
The outstanding claims liability is measured as the central estimate of the expected future payments relating to claims incurred
prior to the reporting date including direct and indirect claims handling costs. The liability is measured based on the advice and/or
valuations performed by, or under the direction of, the Appointed Actuary, and is intended to contain no deliberate or conscious
bias toward over or under estimation. Given the uncertainty in establishing the liability, it is likely that the final outcome will differ
from the original liability established. Changes in claim estimates are recognised in profit or loss in the reporting year in which the
estimates are changed.
b. DISCOUNTING
Projected future claims payments, both gross and net of reinsurance and other recoveries and associated claim handling costs, are
discounted to a present value using risk free discount rates (derived from market yields on government securities) to reflect the
time value of money.
c. RISK MARGIN
Given the uncertainty inherent in estimating future claim payments, it is considered appropriate to add a risk margin to the central
estimate of expected future claim payments. The risk margin represents the amount by which the liability recognised in the
financial statements is greater than the actuarial central estimate. IAG currently applies a 90% probability of adequacy to the
outstanding claims liability. In effect this means there is approximately a 1-in-10 chance all future claims payments will exceed the
overall reserve held.
Uncertainties surrounding the liability estimation process include those relating to the available data, actuarial models and
assumptions, the statistical uncertainty associated with a general insurance claims run-off 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 analyses. 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.
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 Group benefits from holding a portfolio diversified into many classes of business across different regions. 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 risk margins for the individual classes. This reflects the benefit of diversification. The
level of diversification assumed between classes takes into account industry analysis, historical experience and the judgement of
experienced and qualified actuaries.
The current risk margin and resultant overall probability of adequacy for the outstanding claims, which has been determined after
assessing the inherent uncertainty in the central estimate, diversification and risks in the prevailing environment, is set out below:
The percentage risk margin applied to the net outstanding claims liability
The probability of adequacy of the risk margin
2017
%
17
90
2016
%
19
90
II. Reinsurance and other recoveries on outstanding claims
Reinsurance and other recoveries on outstanding claims are recognised as income with the corresponding asset being recognised
on the balance sheet. Reinsurance and other recoveries on outstanding claims are measured at the present value (discounted
using appropriate risk free discount rates) of the expected future receipts due as a result of the reinsurance protection that IAG has
in place. The reporting date balance also includes the net GST receivable on outstanding claims.
D. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
I. Outstanding claims liability
The estimation of the outstanding claims liability involves a number of key assumptions and is the most critical accounting
estimate. The 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,
including 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, as well as legal, social and economic factors that may affect
each class of business.
52 IAG ANNUAL REPORT 2017
The following ranges of key actuarial assumptions were used in the measurement of outstanding claims and recoveries, where
appropriate, within the operating segments at the reporting date.
ASSUMPTION
2017
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
2016
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
AUSTRALIA
CONSUMER
DIVISION
2.1 years
2.4%-4.1%
0.0%-5.0%
1.5%-4.5%
4.1%
2.9 years
2.2%-4.0%
0.0%-5.0%
1.5%-4.5%
4.1%
BUSINESS
DIVISION
2.0 year
0.0%-4.3%
0.0%-5.0%
1.5%-4.4%
4.4%
2.5 years
0.0%-4.5%
0.0%-5.0%
1.6%-3.2%
4.6%
NEW ZEALAND
ASIA
1.0 years
2.0%
0.0%
1.8%-3.5%
4.1%
0.9 years
1.7%
0.0%
1.8%-2.3%
4.2%
0.4 years
0.0%-4.0%
0.0%
0.0%
1.6%
0.3 years
0.0%-4.0%
0.0%
0.0%
1.9%
a. DISCOUNTED AVERAGE TERM TO SETTLEMENT
The discounted average term to settlement provides a summary indication of the expected future cash flow pattern for claims
(inflated and discounted). It is calculated by class of business and is generally based on historic settlement patterns. 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.
b. INFLATION RATE AND SUPERIMPOSED INFLATION
Payments of claims outstanding at the reporting date are to be made in the future and so need to take account of expected
increases in the underlying cost of final claims settlements due to inflationary pressures. Economic inflation assumptions are set
by reference to current economic indicators. Superimposed inflation tends to occur due to wider societal trends such as the cost of
court settlements increasing at a faster rate than the economic inflation rate.
c. DISCOUNT RATE
An increase or decrease in the assumed discount rate will have a corresponding decrease or increase (respectively) on the claims
expense recognised in the profit or loss.
d. CLAIMS HANDLING COSTS RATIO
This reflects the cost to administer future claims. The ratio is generally calculated with reference to the historical experience of
claims handling costs as a percentage of past payments, together with budgeted future costs.
II. Reinsurance and other recoveries on outstanding claims
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, with appropriate consideration of the credit risk of the counterparty. Accordingly, the valuation of
outstanding reinsurance recoveries is subject to largely 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.
E. SENSITIVITY ANALYSIS
The impact on the divisional net outstanding claims liabilities (net of reinsurance recoveries) 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 occur simultaneously. The movements are stated in absolute terms where the
base assumption is a percentage or average term.
53
AUSTRALIA
MOVEMENT IN
ASSUMPTION
CONSUMER
DIVISION
$m
BUSINESS
DIVISION
$m
NEW ZEALAND
$m
ASIA
$m
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
(14)
14
61
(59)
(61)
65
53
(53)
(21)
21
101
(96)
(99)
107
56
(56)
(9)
9
40
(39)
(39)
42
41
(41)
(11)
11
56
(53)
(54)
58
42
(42)
(1)
1
5
(5)
(5)
5
7
(7)
(1)
1
4
(4)
(3)
3
6
(6)
-
-
-
-
-
-
2
(2)
-
-
-
-
-
-
2
(2)
2017
$m
2016
$m
46
378
19
88
(12)
519
257
262
519
1,056
1,034
6,311
1,768
199
10,368
1,099
479
1,578
158
32
190
12,136
34
448
26
(74)
163
597
484
113
597
841
1,671
6,826
1,636
160
11,134
1,045
446
1,491
291
30
321
12,946
ASSUMPTION
2017
Discounted average term to settlement
Inflation rate
Discount rate
Claims handling costs ratio
2016
Discounted average term to settlement
Inflation rate
Discount rate
Claims handling costs ratio
NOTE 2.3 INVESTMENTS
A. INVESTMENT INCOME
Dividend revenue
Interest revenue
Trust revenue
Realised net gains/(losses)
Unrealised net (losses)/gains
Total investment income
Represented by
Investment income on assets backing insurance liabilities
Investment income on shareholders’ funds
B. INVESTMENT COMPOSITION
I. Interest bearing investments
Cash and short term money
Government and semi-government bonds
Corporate bonds and notes
Subordinated securities
Other
II. Equity investments (includes exposure to convertible securities)
Listed
Unlisted
III. Other investments
Other trusts
Derivatives
Total investments
54 IAG ANNUAL REPORT 2017
C. RECOGNITION AND MEASUREMENT
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.
Investments comprise assets held to back insurance liabilities (policyholder funds that represent assets available for future
settlement of outstanding claims) and assets that represent shareholders' funds. The investment funds themselves are
predominantly generated from the collection of insurance premiums. The allocation of investments between policyholder funds
and shareholders' funds is regularly monitored and the portfolio rebalanced accordingly. To determine the allocation, the Group’s
investment funds under management are compared to the technical provisions of the Group, which includes insurance liabilities.
The policyholder funds are allocated to back the technical provisions, with the excess representing shareholders' funds.
All investments are designated at fair value through profit or loss. Investments are recorded and 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 (described below) 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.
The inputs used to determine the fair value for securities recognised under each level of the fair value hierarchy is set out below.
I. Level 1 quoted prices
The fair value is determined by reference to quoted prices (mid-market) in active markets for identical assets and liabilities. For
IAG, this category includes government securities and listed equities.
II. Level 2 other observable inputs
The fair value is determined by reference to quoted prices in active markets for similar assets or liabilities or by reference to other
significant inputs that are not quoted prices but are based on observable market data, for example interest rate yield curves
observable at commonly quoted intervals. For IAG, this category primarily includes corporate and other fixed interest securities
where the market is considered to be lacking sufficient depth to be considered active.
III. Level 3 unobservable inputs
The fair value is determined using valuation techniques in which a number of the significant inputs are not based on observable
market data. 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. This category also includes IAG's unlisted equity interest in Bohai
Property Insurance Company Limited (Bohai). The fair value of Bohai is supported by comparable transaction multiples observed in
the local market.
The table below separates the total investment balance by hierarchy category:
2017
Interest bearing investments
Equity investments
Other investments
2016
Interest bearing investments
Equity investments
Other investments
LEVEL 1
$m
LEVEL 2
$m
LEVEL 3
$m
2,085
1,076
4
3,165
2,047
1,021
14
3,082
8,282
340
185
8,807
9,086
313
306
9,705
1
162
1
164
1
157
1
159
TOTAL
$m
10,368
1,578
190
12,136
11,134
1,491
321
12,946
55
NOTE 2.4 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
Net foreign exchange movements
Unearned premium liability at the end of the financial year
2017
$m
6,220
6,097
(5,984)
-
(2)
6,331
2016
$m
6,156
5,866
(5,910)
20
88
6,220
The carrying value of unearned premium liability includes $172 million (2016-$236 million) which is expected to be earned more
than 12 months from reporting date.
B. RECOGNITION AND MEASUREMENT
Unearned premium is the portion of premium income that has yet to be recognised in the profit or loss (i.e. unexpired portion for
risks underwritten) and is calculated based on the term of the risk and in accordance with the expected pattern of the incidence of
risk underwritten, using an appropriate pro-rata method.
C. ADEQUACY OF UNEARNED PREMIUM LIABILITY
I. Liability adequacy test (LAT)
The LAT assesses the adequacy of the carrying amount of the net unearned premium liability to settle future claims. To determine
if any deficiency exists, estimates of future claim costs (premium liabilities net of reinsurance) are compared to the unearned
premium liability (net of reinsurance and related deferred acquisition costs). If the future claim costs exceed the net premium
liabilities, then a deficiency exists. Any deficiency is recognised immediately 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 and then
through the establishment of a provision (unexpired risk liability).
The LAT is required to be conducted at the 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. The Group defines 'managed together' at a segment level as the respective Divisional CEOs collectively manage the entire
portfolio within their control. The LAT is currently performed at the segment level for Australia (Australian Consumer Division and
Australian Business Division) and New Zealand, and at a subsidiary level within Asia.
The LAT at reporting date resulted in a surplus for the Group (2016-surplus for the Group), with the table below providing details of
the net premium liabilities (net of reinsurance and adjusted for appropriate risk margin) used in the LAT:
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
2017
$m
3,416
77
3,493
2.3%
60.0%
2016
$m
3,564
82
3,646
2.3%
60.0%
II. Significant accounting estimates and judgements
The LAT is conducted using the central estimate of the premium liabilities, applying a methodology consistent for reporting to APRA,
which requires an estimation of the present value of future net cash flows (relating to future claims arising from the rights and
obligations under current general insurance contracts) and adjusted for an appropriate risk margin for uncertainty in the central
estimate for each portfolio of contracts. The test is based on prospective information and so is heavily dependent on assumptions
and judgements.
The risk margin used in the LAT for individual portfolios is calculated by using a probability of adequacy (POA) methodology including
diversification benefit, which is consistent with that used for the determination of the risk margin for the outstanding claims
liability, based on assessments of the levels of risk in each portfolio. The 60% POA represented by the LAT differs from the 90%
POA represented by the outstanding claims liability as the former is in effect an impairment test used only to test the sufficiency of
net unearned premium liabilities, whereas the latter is a measurement accounting policy used in determining the carrying value of
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 Note 2.2 Claims and reinsurance and other recoveries on outstanding claims.
56 IAG ANNUAL REPORT 2017
NOTE 2.5 DEFERRED INSURANCE EXPENSES
A. RECONCILIATION OF MOVEMENTS
At the beginning of the financial
year
Costs deferred
Amortisation charged to profit
Net foreign exchange movements
Deferred costs at the end of the
financial year
DEFERRED ACQUISITION
COSTS(a)
2016
$m
2017
$m
DEFERRED OUTWARDS
REINSURANCE EXPENSE(b)
2016
$m
2017
$m
TOTAL DEFERRED
INSURANCE EXPENSES
2016
$m
2017
$m
1,051
1,843
(1,873)
(1)
1,015
1,769
(1,749)
16
1,727
3,251
(3,227)
(1)
1,823
3,744
(3,883)
43
2,778
5,094
(5,100)
(2)
2,838
5,513
(5,632)
59
1,020
1,051
1,750
1,727
2,770
2,778
(a)
(b)
The carrying value of deferred acquisition costs includes $54 million (2016-$90 million) which is expected to be amortised more than 12 months from reporting date.
The carrying value of deferred outwards reinsurance expense includes $42 million (2016-$28 million) which is expected to be amortised more than 12 months from
reporting date.
B. RECOGNITION AND MEASUREMENT
I. Acquisition costs
Acquisition costs are incurred in obtaining and recording general insurance contracts, which include advertising expenses,
commission or brokerage paid to agents or brokers, premium collection costs, risk assessment costs and other administrative
costs. These costs are initially capitalised and then expensed in line with the earning pattern of the related premium. Deferred
acquisition costs at the reporting date represent the acquisition costs relating to unearned premium.
II. Outwards reinsurance expense
Premium ceded to reinsurers is recognised as an expense in accordance with the pattern of reinsurance service received. The
outwards reinsurance premium relating to unearned premium is treated as a prepayment at the reporting date.
NOTE 2.6 TRADE AND OTHER RECEIVABLES
A. COMPOSITION
I. Premium receivable
Gross premium receivable
Provision for impairment
Net premium receivable
II. Trade and other receivables(a)
Reinsurance recoveries on paid claims
Loan to associates(b)
Investment related receivables
Trade and other debtors
Trade and other receivables
2017
$m
2016
$m
3,402
(39)
3,363
242
90
280
178
790
4,153
3,370
(36)
3,334
658
99
98
132
987
4,321
(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.
B. RECOGNITION AND MEASUREMENT
Trade and other receivables are stated at the amounts to be received in the future, inclusive of GST and 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 for individual receivables 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.
57
NOTE 2.7 TRADE AND OTHER PAYABLES
A. COMPOSITION
I. Reinsurance premium payable(a)
II. Trade creditors(b)
Commissions payable
Stamp duty payable
GST payable on premium receivable
Corporate treasury derivatives payable
Other(c)
III. Other payables(b)
Other creditors and accruals
Investment creditors
Interest payable on interest bearing liabilities
2017
$m
2016
$m
712
848
268
123
157
-
472
1,020
378
310
14
702
2,434
257
116
147
22
543
1,085
371
27
15
413
2,346
(a)
(b)
(c)
Under the agreement with National Indemnity Company (NICO), a Berkshire Hathaway (BH) company, the Group has a right of offset, and settles on a net basis. This
balance includes reinsurance premium payable to BH of $1,166 million (2016-$1,126 million), which has been offset with receivables due under the contract of $677
million (2016-$620 million). The relevant cash flows pertaining to the contract have been presented on a gross basis within the cash flow statement.
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.
Other trade creditors include $6 million (2016-$25 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.
B. RECOGNITION AND MEASUREMENT
Trade and other payables are stated at the fair value of the consideration to be paid in the future for goods and services received,
inclusive of GST. The amounts are discounted where the effect of the time value of money is material.
3. RISK
SECTION INTRODUCTION
This section provides an overview of the Group's approach to risk and capital management.
The Group is exposed to multiple risks relating to the conduct of its general insurance business. IAG does not seek to avoid all
risks, but to optimally manage and/or price them. Management of those risks is an integral part of delivering the Group's
strategy, decision making and IAG's long term sustainability. Risk management arrangements are designed to reflect the scope,
scale and complexity of IAG's activities and where appropriate capital is held to support these activities.
IAG uses an enterprise-wide approach to risk that includes six risk categories:
Strategic
Insurance
Reinsurance
Financial
Operational
Regulatory Risk and Compliance
The risk categories, their definition and structured arrangements for their management are included in IAG's Risk Management
Strategy (RMS). Risks rarely occur, or should be considered, in isolation. The interconnectivity of IAG's six risk categories and the
key risks faced are understood and overseen. Key risks and their impact, likelihood, interconnectedness and velocity are
considered in IAG's Enterprise Risk Profile (ERP).
NOTE 3.1 RISK AND CAPITAL MANAGEMENT
A. RISK MANAGEMENT OVERVIEW
The IAG Board has responsibility for setting risk strategy. The IAG Risk Committee (RC) assists the Board in fulfilling its risk
management responsibilities, oversight of risk management, development of IAG's risk management framework (RMF) and policies
and provides advice to the IAG Executives and Board. The RC monitors the effectiveness of the Risk Management function. The
Group Chief Risk Officer (CRO) oversees risk management across the Group and is supported by a risk function. IAG's CRO and the
risk function provide regular reports to the RC on the operation of IAG's RMF, the status of key risks, risk and compliance incidents
and risk framework changes.
IAG's RMF is in place to assist the Board and senior executive management in managing risk. The RMF is the totality of systems,
structures, policies and processes within the Group that identify, assess, treat, monitor, report and/or communicate all internal and
external sources of risk that could have a material impact on the Group's operations. The RMF supports management by:
58 IAG ANNUAL REPORT 2017
ensuring clear roles and responsibilities for the management of risk;
standardising risk management language, definitions and processes so risks can be accurately benchmarked and compared;
establishing common reporting standards, tools and risk management information; and
defining input for risk management reports as well as the ERP.
IAG's documented RMS describes the group-wide RMF and how it is implemented, including risk appetite (i.e. the levels, boundaries
and nature of risk the organisation is willing to accept), the risk categories used, the major risk management processes, and the
roles and responsibilities for managing risk. The RMS is a Board-approved policy which brings together consistent strategies and
sets the minimum acceptable standards for managing the full spectrum of risks associated with pursuing corporate objectives and
fulfilling IAG's purpose. IAG uses Group policies and other supporting documents to help ensure the risk management
requirements are clear across the Group, and provide context to implement risk management principles described in the RMS. The
RMS must be adhered to along with the legal, regulatory and prudential requirements in all countries in which the organisation has
operations.
Other key documents within the Group's RMF include:
Reinsurance Management Strategy (ReMS), which describes the systems, processes, procedures, controls and assurance to
ensure IAG's reinsurance arrangements are prudently managed;
Group Risk Appetite Statement (RAS), which articulates the levels, boundaries and nature of risk the Board is willing to accept
in pursuit of IAG's strategic objectives; and
Internal Capital Adequacy Assessment Process (ICAAP) and the ICAAP Summary Statement, which summarises the Group's risk
assessment processes for capital management and describes the strategy for maintaining adequate capital over time.
The definitions of the risk categories and mitigation strategies are set out in the subsequent sections.
Risk culture and behaviours are the foundation for appropriate risk management and business sustainability. Conducting
businesses in a manner aligned with IAG's Purpose is a core goal. Conduct related matters and risks are managed via IAG's
enterprise approach to risk within established practices.
B. STRATEGIC RISK
Strategic risk is defined as the risk of not achieving corporate or strategic goals due to:
poor business decisions regarding future business plans and strategies, and/or
lack of responsiveness to changes in the business environment.
Strategic risk is managed by the IAG Group Leadership Team with Board oversight. Key elements in the management of strategy
and strategic risk include a rigorous strategic planning program and associated oversight arrangements, with progress against
strategic priorities regularly considered. IAG implements active portfolio management of its insurance operations. This involves
robust and regular review of the portfolios that leads to informed decisions on the allocation of assets (scarce resources) in the
most efficient and value-accretive way in order to achieve the Group's strategic objectives. Consideration of both current and
future value is critical in the process. Portfolio management can involve the acquisition or divestment of other entities, for which
IAG has implemented a Merger & Acquisitions Framework to help ensure the associated risks are appropriately managed.
C. INSURANCE RISK
Insurance risk is defined as the risk that the Group is exposed to financial loss as a result of:
inadequate or inappropriate underwriting;
inadequate or inappropriate product design and pricing;
inadequate or inappropriate reserving including unforeseen, unknown or unintended liabilities that may eventuate;
inadequate or inappropriate claims management; and
insurance concentration risk (e.g. by locality, segment, or distribution channel).
A fundamental part of the Group's overall risk management approach is the effective governance and management of the risks that
affect the amount, timing and certainty of cash flows arising from insurance contracts. The level of insurance risk accepted by IAG
is formally documented in its Insurance Business Licences, which are issued to each operating division. The Insurance Business
Licence is prepared by the Group Chief Underwriting Officer in consultation with the customer facing divisions and is approved by
the Group CEO. The Insurance Business Licences are reviewed annually or more frequently if required. In addition to Insurance
Business Licences, insurance risk is also managed through the implementation of the Insurance Risk Framework and supporting
Insurance Risk Principles.
I. Acceptance and pricing of risk
IAG adopts a disciplined approach to the underwriting of risks, rather than a premium volume or market share oriented approach.
IAG believes this approach provides the greatest long term likelihood of being able to meet the objectives of all stakeholders,
including policyholders, lenders, regulators and shareholders. IAG's significant underwriting and pricing expertise, coupled with
data and analytics capability, allow the Group to effectively underwrite policies to the desired level of risk.
The underwriting by IAG of large numbers of less than fully correlated individual risks, predominantly short tail business, across a
range of classes of insurance businesses in different regions reduces the variability in overall claims experience over time. A risk
still remains that the actual amount of claims paid is different to the amount estimated at the time an insurance product was
designed and priced. IAG's effective claims management and provisioning, reinsurance and capital management further mitigate
the impact of this risk to the Group.
Business divisions underwrite to set criteria as contained in the Insurance Business Licence. Maximum limits are set for the
acceptance of risk both on an individual insurance contract basis and for classes of business and specific risk groupings.
59
Management information systems are maintained to provide up to date, reliable data on the risks to which the business is exposed
at any point in time. Statistical models that combine historical and projected data (pricing, claims and market conditions) are used
to calculate premiums and monitor claims patterns for each class of business.
II. Claims management and provisioning
Once an incident has occurred, initial claim estimates are 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 of specific incidents.
These case estimates are used to form part of the basis of the claims provisions. 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. Efforts are
made, including plain language policy terms, to ensure there is no misalignment between policyholders' perceived benefits when a
policy is initially sold and their actual entitlement when a claim is made.
Claims provisions are established using actuarial valuation models, including a risk margin to cover inherent uncertainty in the
ultimate cost of the claims, to ensure adequate capital is allocated to settle the claims that have occurred. Refer to Note 2.2
Claims and reinsurance and other recoveries on outstanding claims for further details.
III. Concentrations of insurance risk
Each year the Group sets its tolerance for concentration risk through the use of various models to estimate the Group's maximum
exposure to potential natural disasters and other catastrophes. The Group mitigates its exposure to concentrations of insurance
risk by holding a portfolio diversified into many classes of business across different regions and by the utilisation of reinsurance,
taking into account the cost of reinsurance and capital efficiency. The reinsurance cover limits the Group's financial exposure to a
single event with a given probability, and also protects capital. The catastrophe reinsurance cover purchased affects the Insurance
Concentration Risk Charge (ICRC) in the Australian Prudential Regulatory Authority (APRA) capital calculation.
Concentration risk is particularly relevant in the case of catastrophes, usually natural disasters including earthquakes, bushfires,
hailstorms, tropical storms and high winds, which generally result in a concentration of affected policyholders being impacted by
the same event. This aggregation of losses constitutes the largest individual potential financial loss to the Group. The Group is
also exposed to certain large man-made catastrophic events such as industrial accidents and building fires. Catastrophe losses are
an inherent risk of the general insurance industry that contributes to potentially material year-to-year fluctuations in the results of
operations and financial position. 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 monitors and limits the aggregate exposure to
catastrophe losses in regions that are subject to high levels of natural perils. Specific processes for monitoring identified key
concentrations are set out below:
RISK
An accumulation of risks arising from a
natural peril/catastrophe
SOURCE OF CONCENTRATION
Insured property concentrations
RISK MANAGEMENT MEASURES
Accumulation risk modelling and
reinsurance protection
A large property loss
Fire or accident affecting one building or a
group of adjacent buildings
Maximum per risk acceptance limits,
property risk grading and reinsurance
protection
Multiple liability retentions being
involved in the same event
Response by a multitude of policies to the
one event
Purchase of reinsurance clash protection
The tables below provide an analysis of gross written premium by both region and product, which demonstrates the diversity of the
Group's operations and its relatively limited exposure to additional risks associated with long tail classes of business (where there
is increased uncertainty of the ultimate cost of claims due to the additional period of time to settlement):
a. REGION
Australia
New Zealand
Asia
b. PRODUCT
Motor
Home
Short tail commercial
CTP (motor liability)
Liability
Other short tail
Workers' compensation
60 IAG ANNUAL REPORT 2017
2017
%
2016
%
77
20
3
100
32
27
22
8
5
3
3
100
77
19
4
100
32
27
22
8
5
3
3
100
D. REINSURANCE RISK
Reinsurance risk is defined as the risk of:
insufficient or inappropriate reinsurance coverage;
inadequate underwriting and/or pricing of reinsurance exposures retained by IAG's reinsurance captives;
inadequate or inappropriate reinsurance recovery management;
reinsurance arrangements not being legally binding;
reinsurance concentration risk; and
credit counterparty concentration risk to reinsurers, which is covered under the credit risk section of financial risk.
IAG's reinsurance program is an important part of the Group's overall approach to risk and capital management. It is used to limit
exposure to large single claims as well as an accumulation of claims that arise from the same or similar events in order to stabilise
earnings and protect capital resources. IAG's ReMS outlines the reinsurance principles, including the requirement that the Group's
reinsurance retention for catastrophe must not exceed 4% of net earned premium.
The Group purchases catastrophe reinsurance protection to the greater of:
a 1-in-250 years return period for earthquake loss calculated on a whole-of-portfolio basis for Australia;
a 1-in-1000 years return period for an earthquake loss calculated on a whole-of-portfolio basis for New Zealand.
This is a more conservative view than APRA’s prescribed minimum approach of 1-in-200 years return period loss calculated on a
whole-of-portfolio, all perils 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.
To facilitate the reinsurance process, manage counterparty exposure and create economies of scale, the Group has established
captive reinsurance operations across Australia, Singapore and Labuan. The captives act as the reinsurer for the Group by being
the buyer of the Group's outwards reinsurance program. While the majority of business ceded by the Consolidated entity's
subsidiaries is reinsured with the Group's captive reinsurance operations, some individual businesses are required by their
regulator to purchase reinsurance locally. This is monitored by the captives.
The use of reinsurance introduces credit and basis risk. The management of credit risk includes the monitoring of reinsurers’
credit ratings and controlling total exposures to limit counterparty default risk which is further explained in the financial risk
section. IAG mitigates basis risk by adopting a sound underwriting approach to the Group’s reinsurance program through the
specialist captive reinsurance operations. The Group’s catastrophe reinsurance program is primarily purchased on a broad
indemnity basis. Retained exposures sit within the Board risk appetite and appropriate capital is maintained.
I. Current reinsurance program
The external reinsurance program consists of a combination of the following reinsurance arrangement:
a 20% whole-of-account quota share;
a Group catastrophe cover which is placed in line with the strategy of buying to the level of a 1-in-250 years event on a whole-
of-portfolio basis. IAG's catastrophe reinsurance protection runs to a calendar year and operates on an excess of loss basis,
with the Group retaining the first $250 million ($200 million post-quota share) of each loss. It covers all territories in which
IAG operates. The limit of catastrophe cover purchased was $7 billion placed to 80%. Should a loss event occur that is
greater than $7 billion, the Group could potentially incur a net loss greater than the retention. The Group holds capital to
mitigate the impact of this possibility;
additional $1 billion catastrophe cover in excess of $7 billion placed to 80%. The reinsurance protection runs for a period of
19 months, commencing 1 June 2017. The existing $7 billion remains in force and will be renewed in January 2018;
an aggregate sideways cover which protects against a frequency of attritional event losses in Australia, New Zealand and Asia,
and operates below the Group catastrophe cover;
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, Vietnam and Indonesia;
excess of loss reinsurance for all casualty portfolios including CTP, public liability, workers’ compensation and home owners
warranty products;
quota share protection for agency distributed financial lines products including surety and trade credit;
quota share protection for cyber;
excess of loss reinsurance for all marine portfolios;
excess of loss reinsurance cover for retained natural peril losses;
crop quota share & stop loss;
adverse development cover (ADC) and quota share protection on the CTP portfolio;
ADC for the February 2011 Canterbury earthquake event; and
ADC for policies issued prior to 31 December 2015 covering IAG’s exposure to asbestos relating to legacy general liability
and/or workers’ compensation policies.
E. FINANCIAL RISK
Financial risk is defined as the risk of:
adverse movements in market prices (foreign exchange, equities, credit spreads, interest rates etc) or inappropriate
concentration within the investment funds;
a counterparty failing to meet its obligations (credit risk);
inadequate liquidity; and
inappropriate capital management.
61
Key aspects of the processes established by IAG to monitor and mitigate financial risks include:
the Board Risk and Audit Committees with Non-Executive Directors as members;
an Asset and Liability Committee (ALCo) comprising key Executives with relevant oversight responsibilities;
value-at-risk analysis is performed, position limits are in place and monitored and monthly stress testing is undertaken to
determine the impact of adverse market movements;
maintenance of an approved Group Credit Risk Policy, Group Liquidity Policy, Group Foreign Exchange Policy and Group
Investment Policy;
active asset management, Board approved Strategic Asset Allocation and Investment Management Agreements;
capital management activities, for further details refer to the capital management section (IV) of this 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.
I. Market risk
a. FOREIGN EXCHANGE RISK
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 managed by IAG Asset Management and the Group Treasury function.
The key foreign exchange risk exposures and mitigation strategies are set out below:
EXPOSURE
Net investment in foreign operations - through the translation of the financial
position (recognised directly in equity) and performance (recognised in profit or
loss) of foreign operations that have a functional currency other than the Australian
dollar.
RISK MANAGEMENT MEASURES
Designated hedging instruments - forward
foreign exchange contracts (derivatives).
Translation of interest bearing liabilities denominated in foreign currency.
Translation of insurance liabilities denominated in currencies other than the
Australian dollar (directly recognised in profit or loss).
Some designated as hedging instruments
where the currency matches the functional
currency of investments in foreign
operations.
Assets backing technical reserves are held in
the same currency as the related insurance
liabilities, mitigating any net foreign
exchange exposure.
Translation of investments denominated in currencies other than Australian dollars. Designated hedging instruments – forward
foreign exchange contracts (derivatives).
The table below provides information regarding the impact on the measurement of net investments in foreign operations held at
reporting date of an instantaneous 10% depreciation of the Australian dollar compared with selected currencies on equity, net of
related derivatives. An appreciation of the Australian dollar would broadly have the opposite impact.
IMPACT OF 10% DEPRECIATION OF AUSTRALIAN DOLLAR
Net investments in foreign operations and related hedge arrangements
New Zealand dollar
Malaysian ringgit
Other currencies where considered significant
2017
$m
Impact
directly to
equity
2016
$m
Impact
directly to
equity
66
18
13
97
65
15
14
94
The sensitivity analysis demonstrates the effect of a change in one key assumption while other assumptions remain unchanged
(isolated exchange rate movements).
b. PRICE RISK
The Group has exposure to equity price risk through its investments in equities (both directly and through certain trusts) and the
use of equity related derivative contracts. 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:
IMPACT OF CHANGE IN EQUITY VALUE
Investments – equity and trust securities and related equity derivatives
62 IAG ANNUAL REPORT 2017
2017
$m
Impact to
profit
108
(107)
2016
$m
Impact to
profit
115
(115)
+10%
-10%
c. INTEREST RATE RISK
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 cash flow variability.
The Group's interest rate risk arises primarily from fluctuations in the valuation of investments in fixed interest bearing securities
recognised at fair value and from the underwriting of general insurance contracts, which creates exposure to the risk that interest
rate movements materially impact the fair value of the insurance liabilities (the insurance liabilities are discounted with reference
to the government yields). Movements in interest rates should have minimal impact on the insurance profit or loss due to the
Group's policy of investing in assets backing insurance liabilities principally in fixed interest securities that are closely matched to
the duration of the insurance liabilities (period to settlement). Therefore, movements in the fair value measurement of the assets
broadly offset the impact of movements in the insurance liabilities from changes in interest rates.
The impact on the measurement of investments in fixed 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. The sensitivity analysis provided
demonstrates the effect of a change in interest rates only, whilst other assumptions remain unchanged.
IMPACT OF CHANGE IN FIXED INTEREST BEARING SECURITIES VALUE
Investments - interest bearing securities and related interest rate derivatives
2017
$m
Impact to
profit
(200)
213
2016
$m
Impact to
profit
(228)
245
+1%
-1%
Refer to Note 2.2 Claims and reinsurance and other recoveries on outstanding claims for details of the impact on the net
outstanding claims liabilities before income tax to changes in key actuarial assumptions, including movements in discount rates.
II. Credit risk
Concentrations of credit risk exist where a number of counterparties have similar economic characteristics. The Group's credit risk
arises predominantly from investment activities, reinsurance activities, premium debtors and dealings with other intermediaries.
The Group maintains a credit risk appetite, which is approved by the Board, and a Group Credit Risk Policy that is consistent with
the Board's risk appetite. 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 with the Group Treasury function responsible for
implementation. Any new or amended credit risk exposures must be approved in accordance with the Group’s approval authority
framework. The Group maintains sufficiently diverse credit exposures to avoid a concentration charge added to the regulatory
capital requirement.
The maximum exposure to credit risk loss as at reporting date is the carrying amount of the assets/receivables on the balance
sheet as they are measured at fair value.
a. INVESTMENTS
The Group is exposed to credit risk from investments in third parties, for example debt or similar securities issued by those
companies. At the reporting date, there are material concentrations of credit risk to the banking sector, in particular the four major
Australian banks. The credit risk relating to investments is regularly monitored and assessed, with maximum exposures limited by
credit rating, counterparty, industry and geography. The assets backing insurance liabilities include predominantly high credit
quality investments, such as government securities and other investment grade securities, which reduce the risk of default.
The following table provides information regarding the credit risk relating to the interest bearing investments based on Standard &
Poor’s counterparty credit ratings, which demonstrates the strong credit quality of the Group's investment book:
CREDIT RATING OF INTEREST BEARING INVESTMENTS
AAA
AA
A
BBB and below
2017
$m
3,794
3,776
433
2,365
10,368
2016
$m
4,747
3,820
972
1,595
11,134
63
b. REINSURANCE RECOVERIES ON PAID CLAIMS
Reinsurance arrangements mitigate insurance risk but expose the Group to credit risk. Reinsurance is placed with companies
(reinsurers) based on an evaluation of their financial strength, terms of coverage and price. At the reporting date, there are
material concentrations of credit risk in relation to reinsurance recoverables, in particular to large global reinsurers. The Group has
clearly defined 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
under respective existing and future reinsurance contracts. Some of the reinsurers are domiciled outside the jurisdictions in which
the Group operates and so there is the potential for additional risk such as country risk and transfer risk.
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, other than a mandatory placement to meet local regulatory requirements. 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 either deposit funds equivalent to
their participation (trust or loss deposits) or provide other forms of collateral (letters of credit).
The following table provides the Group's exposure to reinsurance recoveries receivable on the outstanding claims balance,
excluding other recoveries, by counterparty credit rating (Standard & Poor's) and the secured collateral:
CREDIT RATING OF REINSURANCE RECOVERIES ON OUTSTANDING CLAIMS
AA
A
BBB and below
Total
2017
$m % of total
86
14
-
100
3,367
526
12
3,905
2016
$m % of total
85
15
-
100
2,826
501
10
3,337
Of these, approximately $1,001 million (2016-$1,127 million) is secured directly as follows, reducing the credit risk:
deposits held in trust: $144 million (2016-$210 million);
letters of credit: $854 million (2016-$907 million); and
loss deposits: $3 million (2016-$10 million).
An ageing analysis for reinsurance recoveries on paid claims is provided below, which shows the largely current nature of the
balance:
2017
Reinsurance recoveries on paid claims
2016
Reinsurance recoveries on paid claims
NOT OVERDUE
$m
128
531
<30 days
$m
OVERDUE
30-120 days
$m
>120 days
$m
11
63
44
14
59
50
TOTAL
$m
242
658
c. PREMIUM RECEIVABLE
The majority of the premium receivable balance relates to policies which are paid on a monthly instalment basis. 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. The Group is exposed to the credit risk associated with brokers and other intermediaries when premium is collected via
these intermediaries. The Group’s exposure is regularly monitored by ALCo with reference to aggregated exposure, credit rating,
internal credit limits and ageing of receivables by counterparty. Ageing analysis for premium receivable is provided below, with
amounts aged according to their original due date, demonstrating the Group's limited exposure:
NOT OVERDUE
$m
2,771
(5)
2,766
2,745
(5)
2,740
<30 days
$m
OVERDUE
30-120 days
$m
>120 days
$m
308
(3)
305
272
(3)
269
273
(7)
266
317
(6)
311
50
(24)
26
36
(22)
14
TOTAL
$m
3,402
(39)
3,363
3,370
(36)
3,334
2017
Premium receivable
Provision for impairment
2016
Premium receivable
Provision for impairment
64 IAG ANNUAL REPORT 2017
III. Liquidity risk
The Group's liquidity position is derived from operating cash flows, access to liquidity through related bodies corporate and interest
bearing liabilities (with some denominated in different currencies and with different maturities). The Group complies with its
liquidity risk management practices, which include a Group policy, and has the framework and procedures in place to ensure an
adequate and appropriate level of monitoring and management of liquidity.
a. OUTSTANDING CLAIMS LIABILITY AND INVESTMENTS
Underwriting insurance contracts expose the Group to liquidity risk through the obligation to make payment for claims of unknown
amounts on unknown dates. The assets backing insurance liabilities can generally be readily sold or exchanged for cash to settle
claims and are managed in accordance with the policy of broadly matching the overall maturity profile to the estimated pattern of
claims payments.
A maturity analysis is provided below 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 (provided by expected maturity). The timing of future
claim payments is inherently uncertain. Actual maturities may differ from expected maturities because certain counterparties have
the right to call or prepay certain obligations with or without penalties.
MATURITY ANALYSIS
Floating interest rate (at call)
Within 1 year or less
Within 1 to 2 years
Within 2 to 5 years
Over 5 years
Total
NET DISCOUNTED
OUTSTANDING CLAIMS
LIABILITY
2016
$m
-
2,806
1,510
1,759
977
7,052
2017
$m
-
2,776
1,182
1,601
554
6,113
INVESTMENTS
2016
$m
723
1,592
2,109
3,366
3,344
11,134
2017
$m
944
2,255
880
2,550
3,739
10,368
b. 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 cash flows:
CARRYING
VALUE
$m
1,638
1,969
MATURITY DATES OF CONTRACTUAL UNDISCOUNTED CASH FLOWS
Within 1
year 1 - 2 years 2 - 5 years
$m
$m
$m
-
73
73
-
93
93
-
73
73
-
89
89
-
220
220
-
230
230
Over 5
years
$m
684
-
684
1,042
-
1,042
Perpetual
$m
954
-
954
927
-
927
Total
$m
1,638
366
2,004
1,969
412
2,381
2017
Principal repayments(a)
Contractual interest payments(a)
Total contractual undiscounted payments
2016
Principal repayments(a)
Contractual interest payments(a)
Total contractual undiscounted payments
(a)
All of the liabilities have call, reset or conversion dates which occur prior to any contractual maturity. Detailed descriptions of the instruments are provided in Note 4.1
Interest bearing liabilities. The contractual interest payments are undiscounted and 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.
IV. Capital management risk
The capital management strategy plays a central role in managing risk to create shareholder value whilst meeting the objective of
maintaining an appropriate level of capital to protect policyholders' and lenders' interests, and meet regulatory requirements.
Under the APRA Prudential Standards, IAG is required to have a documented description of the capital management process (ICAAP)
and to report annually on the operation of the ICAAP to the Board, together with a forward looking estimate of expected capital
utilisation (as represented in the Group’s Capital Plan) and capital resilience (ICAAP Annual Report). Adequacy of the Group's
capital position is judged relative to the Board's Capital RAS, with an internal capital model (ICM) used to assess the risks of
breaching the minimum levels established in the Capital RAS. Scenario analysis and stress testing are important adjuncts to the
ICM. The amount of capital required varies according to the business underwritten, extent of reinsurance and investment asset
allocation.
65
The target level of capitalisation (risk appetite) 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.
a. REGULATORY CAPITAL
All insurers within the Group that carry on insurance business in Australia are registered with APRA and are subject to APRA's
Prudential Standards. It is the Group's policy to ensure that each of the licensed insurers maintains an adequate capital position.
The Group's long term target capital ranges set out below remain unchanged:
a total regulatory capital position equivalent to 1.4 to 1.6 times the PCA, compared to a regulatory requirement of 1.0 times;
and
Common Equity Tier 1 capital of 0.9 to 1.1 times the PCA, compared to a regulatory requirement of 0.6 times.
Internal policies are in place to ensure significant deviations from the benchmarks are considered by the Board as to how any
shortfall should be made good, or any surplus utilised.
IAG uses the standardised framework detailed in the relevant prudential standards (APRA Level 2 Insurance Group requirements) to
calculate regulatory capital.
REGULATORY CAPITAL POSITION
Common Equity Tier 1 capital (CET1 capital)
Additional Tier 1 capital
Total Tier 1 capital
Tier 2 capital
Total regulatory capital
Total PCA
PCA multiple
CET1 multiple
2017
$m
2,888
679
3,567
959
4,526
2,661
1.70
1.09
2016
$m
2,838
707
3,545
1,074
4,619
2,682
1.72
1.06
At 30 June 2017, the Group's Insurance Concentration Risk Charge (ICRC) from a catastrophe event was $200 million (2016-$200
million).
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, while suitably protecting policyholders and lenders.
The capital objectives are achieved through dynamic management of the balance sheet and capital mix, the use of a risk based
capital adequacy framework that relies on explicit quantification of uncertainty or risk and the use of modelling techniques that
provide the capacity to understand the risk/return trade-off as well as valuable inputs to the capital management process. The
influences on capital, such as product mix, reinsurance program, catastrophe exposure, investment strategy, profit margins and
capital structure, are all assessed through using dynamic financial analysis modelling.
An important influence on the Group's capital level 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 4.4 Dividends).
b. CAPITAL COMPOSITION
The balance sheet capital mix at reporting date is shown in the table below:
CAPITAL MIX
Ordinary equity less goodwill and intangible assets
Interest bearing liabilities - hybrid securities and debt
Total capitalisation
Target
%
60-70
30-40
2017
%
68.1
31.9
100.0
2016
%
63.2
36.8
100.0
F. OPERATIONAL RISK
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events.
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. The Board is responsible for oversight of the Operational Risk
Framework and approval of the Operational Risk Management Policy, and any changes to it. The Board and Group Leadership
Team believe an effective, documented and structured approach to operational risk is a key part of the broader RMF that is outlined
in IAG's RMS.
66 IAG ANNUAL REPORT 2017
IAG's Operational Risk Framework, inclusive of the Group Operational Risk Policy, operates within IAG's RMF. The Operational Risk
Framework and supporting Operational Risk Policy and procedures aim to ensure that consistent governance mechanisms and
practices are in place, and that activities undertaken which involve operational risk are continually assessed and managed with
appropriate regard to the Group's RAS and the achievement of IAG's objectives. The Operational Risk Framework is supported by
aligned frameworks, policies and procedures for key aspects of operational risk. For example, Fraud and Business Continuity
Frameworks and policies are in place as are various other operational risk policies.
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 also reviews the effectiveness of controls and processes surrounding
operational risk.
G. REGULATORY RISK AND COMPLIANCE
Regulatory Risk and Compliance is defined as failure or inability to comply with applicable laws, regulations or codes excluding
failure of staff to adhere to internal policies/procedures and meeting contractual obligations. Regulatory Risk and Compliance has
recently been established as a standalone risk category to give it more focus and distinguish it from the risks associated with
identification and management of regulatory change to the control environment and management compliance. The Group's
general insurance operations are subject to regulatory supervision in the jurisdictions in which they operate, with various regulatory
frameworks continuing to evolve. The Group works closely with regulators and regularly monitors developments across its
international operations to assess potential impacts on its ongoing ability to meet the various regulatory requirements.
4. CAPITAL STRUCTURE
SECTION INTRODUCTION
This section provides disclosures on the capital structure of the Group, which demonstrates how IAG finances its overall
operations and growth through the use of different sources of funds, including ordinary equity and debt and hybrid instruments.
Reinsurance is also an increasingly important source of long term capital for the Group - reinsurance specific disclosures are
included in section 2 insurance disclosures.
The capital that IAG maintains provides financial security to its policyholders, whilst ensuring adherence to the capital adequacy
requirements of industry regulators. The Group also seeks to maintain, and where possible enhance, the overall diversity and
efficiency of its capital structure to support the delivery of targeted returns to shareholders. 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 both regulatory and
rating agency models. IAG's target is a capital mix of ordinary equity (net of goodwill and intangibles) at 60-70% and debt and
hybrids at 30-40%.
NOTE 4.1 INTEREST BEARING LIABILITIES
A. COMPOSITION
I. Capital nature(a)
a. ADDITIONAL TIER 1 REGULATORY CAPITAL(b)
Convertible preference shares
Reset exchangeable securities
Capital notes
b. TIER 2 REGULATORY CAPITAL
GBP subordinated term notes
NZD subordinated bonds
AUD subordinated convertible term notes
NZD subordinated convertible term notes(c)
II. Operational nature
Other interest bearing liabilities
Less: capitalised transaction costs
Carrying
Value
$m
2017
Fair Value
$m
Carrying
Value
$m
2016
Fair Value
$m
Section
B. I
B. II
B. III
B. IV
B. V
B. VI
B. VII
-
550
404
-
-
350
334
2
(16)
1,624
-
569
431
-
-
356
337
2
377
550
-
178
179
350
335
2
(9)
1,962
383
550
-
177
180
352
329
2
(a)
(b)
(c)
Capital instruments above cannot be reconciled to the regulatory capital section of Note 3.1 Risk and capital management due to APRA transitional arrangements.
Instruments issued prior to 1 January 2013 are eligible for inclusion in the relevant category of regulatory capital up to limits prescribed by APRA under transitional
arrangements. Any capital that is ineligible to be included in Tier 1 capital as a consequence may be included in Tier 2 capital to the extent there is residual capacity
within Tier 2 transitional limits.
At the reporting date, the Company recognised accrued interest of $1 million (2016-$1 million) which is presented within trade and other payables.
67
B. SIGNIFICANT TERMS AND CONDITIONS
I. Convertible preference shares (CPS)
The CPS had a face value of $377 million and were issued by the Company. On 22 December 2016, IAG bought back and cancelled
$224 million of CPS with the remaining CPS bought back and cancelled on 1 May 2017.
II. Reset exchangeable securities (RES)
face value of $550 million and were issued by IAG Finance (New Zealand) Limited, a wholly owned subsidiary of the Company;
all remain outstanding as at the reporting date;
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; and
the RES may be exchanged by IAG or the holder on a reset date, or upon certain events. The next reset date 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).
III. Capital notes
face value of $404 million and issued by the Company on 22 December 2016;
all remain outstanding as at the reporting date;
non-cumulative floating rate distribution payable quarterly and expected to be fully franked;
distribution rate equals the sum of three month bank bill swap rate (BBSW) plus margin of 4.70% 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 distribution payment date;
IAG may exchange or redeem capital notes on the exchange date, or upon occurrence of certain events, subject to APRA
approval. The first optional exchange date is 15 June 2023;
the capital notes are scheduled for conversion into a variable number of IAG ordinary shares (subject to a maximum number of
140.6 million shares) on 16 June 2025 and at each subsequent distribution payment date provided the mandatory conversion
conditions are satisfied; and
the capital notes must be converted into a variable number of IAG ordinary shares (subject to a maximum of 351.1 million
shares) or written off if APRA determines the Company to be non-viable.
IV. 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 had been bought back prior to the current financial year with the remaining £100
million of the notes ($171 million as of the redemption date) being redeemed on 21 December 2016.
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. A total of NZ$138 million of the bonds had been bought back prior to the current financial year with the remaining
NZ$187 million of the bonds ($179 million as of the redemption date) redeemed on 15 December 2016.
VI. AUD subordinated convertible term notes
face value of $350 million and issued by Insurance Australia Limited (IAL), a wholly owned subsidiary of the Company on 19
March 2014;
all remain outstanding as at the reporting date;
floating interest rate equal to the three month bank bill swap rate (BBSW) plus a margin of 2.80% per annum is payable
quarterly;
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 to a maximum number by reference to
the VWAP 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).
VII. NZD subordinated convertible term notes
face value of NZ$350 million (equivalent to $332 million at date of issue) and issued by the Company on 15 June 2016;
all remain outstanding as at the reporting date;
fixed interest rate of 5.15% per annum, payable quarterly;
the notes mature on 15 June 2043 with the issuer having the option to redeem at par from and including 15 June 2022 and at
each subsequent interest payment date to and including 15 June 2023, subject to approval from APRA;
if the notes are not redeemed on 15 June 2022, the interest rate will become the applicable three month bank bill rate (BKBM)
plus margin of 2.60% per annum;
68 IAG ANNUAL REPORT 2017
the notes can be converted into a variable number of IAG ordinary shares (subject to a maximum of 114.0 million shares) at
the option of holders from and including 15 June 2025 and at each subsequent interest payment date and the maturity date of
15 June 2043; and
the notes must be converted into a variable number of IAG ordinary shares (subject to a maximum of 284.9 million shares) or
written off if APRA determines the Company to be non-viable.
C. RECOGNITION AND MEASUREMENT
The interest bearing liabilities are initially measured at fair value (net of transaction costs) and 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).
NOTE 4.2 NOTES TO THE STATEMENT OF CHANGES IN EQUITY
A. SHARE CAPITAL
Balance at the beginning of the financial year
Off-market share buy-back, including transaction costs
Balance at the end of the financial year
2017
Number of
shares in
millions
2016
Number of
shares in
millions
2017
2016
$m
$m
2,431
(64)
2,367
2,431
-
2,431
7,275
(193)
7,082
7,275
-
7,275
B. STRATEGIC RELATIONSHIP WITH BH
As part of the strategic relationship with BH, the Company and NICO entered into a subscription agreement dated 16 June 2015
(Subscription Agreement). The terms of the Subscription Agreement were released to the ASX on 16 June 2015 (attached to the
Appendix 3B on that date).
I. Put option
IAG had an option to place up to a further 121,569,233 new shares at a maximum issue price of $6.50 per share to NICO within 24
months after the date of the Subscription Agreement. This option was not exercised as at 16 June 2017 and lapsed. Under
standstill terms of the Subscription Agreement, NICO can only increase its shareholding in IAG above 14.9% with majority Board
agreement and receipt of requisite regulatory approvals.
II. Anti-dilution right
On entry by the Company and NICO into the Subscription Agreement, the Company granted NICO a right to maintain, by way of a
right to participate in any issue of shares or to subscribe for shares, its percentage interest in the issued share capital of the
Company (Anti-dilution Right) in respect of a diluting event which occurs or is announced after 16 June 2015.
C. NATURE AND PURPOSE OF EQUITY
I. Ordinary shares
All ordinary shares on issue are fully paid and have no par value. 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.
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.
II. Treasury shares held in trust
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 are managed using in-house trusts, one for Australia and one for New Zealand, which are
controlled by the Consolidated entity. The shares are measured at cost and are presented as a deduction from equity. 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. The total number of treasury shares acquired on-
market during the financial year was 3 million (2016-54 thousand) at an average price per share of $5.47 (2016-$5.50).
III. 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 and investments in associates that have a functional currency other than Australian
dollars.
IV. Share based remuneration reserve
The share based remuneration reserve is used to recognise the fair value of equity settled share based remuneration obligations
issued to employees. The total amount expensed over the vesting period through the consolidated statement of comprehensive
income is calculated by reference to the fair value of the rights at grant date. The fair value of the rights is calculated at the grant
date using a Black-Scholes valuation model. The volatility assumption has been set considering the Company's historic share price.
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.
69
The Company provides benefits to employees (including senior management and Executives) through share based incentives to
create a link between shareholder value creation and rewarding employees, and assist with retention of key personnel. The senior
management and Executive share plan arrangements consist of two separate arrangements working together. These two
arrangements are the Deferred Award Rights Plan (DAR Plan) and Executive Performance Rights Plan (EPR Plan). PARC approves
the participation of each individual in the plans.
The obligations under share based payment arrangements are covered by the on-market purchase of IAG ordinary shares which are
held in trust. The number of shares purchased to cover each allocation of rights is determined by the trustee based on
independent actuarial advice.
NOTE 4.3 EARNINGS PER SHARE
A. REPORTING PERIOD VALUES
Basic earnings per ordinary share(a)
Diluted earnings per ordinary share(b)
2017
cents
39.03
37.72
2016
cents
25.79
25.34
(a)
(b)
The basic earnings per ordinary 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. The treasury shares held in trust are deducted, but earnings attributable to those shares are included.
Diluted earnings per share is determined by dividing the profit or loss attributable to shareholders of the Parent, adjusted for the finance costs of dilutive convertible
instruments, by the weighted average number of ordinary shares and dilutive potential ordinary shares, primarily as a result of debt instruments that possess a
conversion feature.
B. RECONCILIATION OF EARNINGS USED IN CALCULATING EARNINGS PER SHARE
Profit attributable to shareholders of the Parent which is used in calculating basic and diluted
earnings per share
Finance costs of convertible securities, net of tax
Profit attributable to shareholders of the Parent which is used in calculating diluted earnings
per share
C. RECONCILIATION OF WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
USED IN CALCULATING EARNINGS PER SHARE
Weighted average number of ordinary shares on issue (adjusted for treasury shares held in trust)
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
NOTE 4.4 DIVIDENDS
A. ORDINARY SHARES
2017 interim dividend (paid 30 March 2017): $0.13 (2016-$0.13) per ordinary share fully franked at
30%(a)
Dividend component of off-market share buy-back (paid 17 October 2016): $1.92 (2016-nil) per
ordinary share fully franked at 30%
2016 final dividend (paid 5 October 2016): $0.13 (2015-$0.16) per ordinary share fully franked at
30%
Special dividend: nil (2016-$0.10) per ordinary share fully franked at 30%
2017
$m
2016
$m
929
37
966
625
25
650
2017
Number of
shares in
millions
2016
Number of
shares in
millions
2,380
2,423
175
6
2,561
2017
$m
307
123
316
-
746
134
8
2,565
2016
$m
316
-
389
243
948
(a)
Of the total 2017 interim dividend declared of $308 million, right and entitlement of $1 million (2016-nil) to dividends on unallocated treasury shares was waived
during the year by the trustee of the IAG Share and Rights Plans Trust.
70 IAG ANNUAL REPORT 2017
B. DIVIDEND NOT RECOGNISED AT REPORTING DATE
2017 final dividend: $0.20 (2016: $0.13) per ordinary share fully franked at 30% to be paid on 9
October 2017
C. DIVIDEND FRANKING AMOUNT
Franking credits available for subsequent financial periods based on a tax rate of 30%
2017
$m
474
115
2016
$m
316
212
The consolidated amounts above are calculated from the balance of the franking account as at the end of the reporting period,
adjusted for franking credits that will arise from the settlement, after the end of the reporting date, of liabilities or receivables for
income tax and dividends and the franking credits that will be utilised for dividends determined but not recognised at the reporting
date.
The Company, immediately after payment of the final dividend, has no further franking credits available for distribution.
D. DIVIDEND REINVESTMENT
A Dividend Reinvestment Plan (DRP) operates which allows shareholders with ordinary shares to elect to receive their dividend
entitlement in the form of IAG shares. The price of DRP shares is the VWAP, less a discount if 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.
A copy of the terms and conditions for the DRP is available at www.iag.com.au/shareholder-centre/dividends/reinvestment.
The DRP for the 2017 interim dividend paid on 30 March 2017 was settled with the on-market purchase of 8.0 million shares
priced at $6.13 per share (based on a VWAP for 10 trading days from 6 March 2017 to 17 March 2017 inclusive, with no discount
applied).
E. 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 the provisions of the Corporations Act 2001 and IAG's constitution;
the payment of dividends generally being limited to profits, subject to ongoing solvency obligations, and 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 exceed 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 capital
notes or reset exchangeable securities, unless certain actions are taken by IAG. For further details, refer to Note 4.1 Interest
bearing liabilities.
F. RECOGNITION AND MEASUREMENT
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.
NOTE 4.5 DERIVATIVES
A. REPORTING DATE POSITIONS
2017
2016
Notional
contract
amount
$m
Fair value
asset
$m
Fair value
liability
$m
Notional
contract
amount
$m
Fair value
asset
$m
Fair value
liability
$m
922
I. Net investment hedges (hedge accounting applied)
Forward foreign exchange contracts
II. Investment related derivatives (derivatives without hedge accounting applied)
-
Bond futures
-
Share price index futures
29
Forward foreign exchange contracts
Options
3
III. Treasury related derivatives (derivatives without hedge accounting applied)
11
Forward foreign exchange contracts
-
Interest rate swaps
2,913
(44)
2,827
(48)
1,160
334
14
(3)
1,627
-
-
-
(1)
(4)
(5)
1,920
40
1,624
-
1,851
335
7
-
-
30
-
20
2
(21)
-
-
(7)
-
(30)
-
All derivative contracts are expected to be settled within 12 months, except for interest rate swaps which mature in more than four
years.
71
B. RECOGNITION AND MEASUREMENT
Derivatives are initially recognised at trade date at fair value, which is determined by reference to current market quotes or
generally accepted valuation principles. The investment related derivatives are presented together with the underlying investments
or as payables when the fair value is negative. The treasury related derivatives are presented as receivables when the fair value is
positive or as payables when the fair value is negative.
I. Hedge accounting
Hedge accounting may be applied to derivatives designated as hedging instruments provided certain criteria are met. 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. The hedging relationships have been effective throughout the current financial year,
or since inception.
The foreign currency exposures arising on translation of net investments in foreign operations are hedged (net investment hedge)
using forward exchange contracts and the designation of certain foreign currency borrowings as hedging instruments. The fair
value is determined using observable inputs (level 2 in the fair value hierarchy).
Any gain or loss on the net investment hedges 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.
II. Derivatives without hedge accounting applied
For derivatives that do not qualify for hedge accounting, the changes in fair value are immediately recognised in profit or loss.
Transaction costs for purchases of derivatives are expensed as incurred.
The fair value of the bond futures and share price index futures are measured using a quoted price in an active market (level 1 in
the fair value hierarchy), whilst the fair value of the interest rate swaps and forward foreign exchange contracts are determined
using observable inputs (level 2 in the fair value hierarchy).
5. OTHER BALANCE SHEET DISCLOSURES
SECTION INTRODUCTION
This section provides disclosures on other components of the Group's financial position, including:
Goodwill and intangible assets - these balances primarily relate to the difference between the total consideration paid and the
net tangible assets acquired in relation to past business acquisitions as well as internally developed capitalised software.
These assets support the generation of future earnings and are subject to impairment testing, with finite useful life intangible
assets also subject to amortisation. For example, an impairment will arise if future earnings can no longer support the
carrying value of the assets in question.
Income tax - the note summarises both the comprehensive income (profit or loss and other comprehensive income) and
balance sheet items related to income tax. The profit or loss disclosure includes a reconciliation between the income tax
expense reported and the prima facie amount when applying the Australian company tax rate (30%). The balance sheet
disclosure focuses on deferred tax balances, which arise due to timing differences between the accounting treatment of
taxable income or expenses and the treatment adopted by the relevant tax authority. For example, the Group recognises a
deferred tax asset in relation to the earthquake losses incurred by its New Zealand operations since the 2011 financial year.
This asset is expected to unwind over time as the tax benefit recognised for accounting purposes is used to offset future
taxable income.
Provisions - this balance primarily includes employee related costs, for example an annual leave entitlement representing
amounts owing to employees at the balance date based on past service.
72 IAG ANNUAL REPORT 2017
NOTE 5.1 GOODWILL AND INTANGIBLE ASSETS
SOFTWARE
DEVELOPMENT
EXPENDITURE
GOODWILL
DISTRIBUTION
CHANNELS
CUSTOMER
RELATIONSHIPS
BRANDS AND
OTHER
$m
$m
$m
$m
$m
2017
A. COMPOSITION
Cost
Accumulated amortisation and
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
Disposal through sale of businesses
Amortisation
Net foreign exchange movements
Balance at the end of the financial year
2016
C. COMPOSITION
Cost
Accumulated amortisation and
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
Disposal through sale of businesses
Amortisation
Accelerated amortisation and impairment
Net foreign exchange movements
Balance at the end of the financial year
2,947
-
27
2,974
2,982
20
(26)
-
(2)
2,974
2,953
-
29
2,982
2,890
44
(6)
-
-
54
2,982
798
(690)
(9)
99
132
22
-
(54)
(1)
99
776
(636)
(8)
132
343
62
-
(80)
(198)
5
132
157
(93)
2
66
96
-
(1)
(29)
-
66
158
(64)
2
96
114
11
(5)
(28)
-
4
96
190
(105)
5
90
93
21
-
(24)
-
90
169
(81)
5
93
114
2
(2)
(23)
-
2
93
125
(29)
7
103
107
-
-
(4)
-
103
125
(25)
7
107
100
7
-
(3)
-
3
107
TOTAL
$m
4,217
(917)
32
3,332
3,410
63
(27)
(111)
(3)
3,332
4,181
(806)
35
3,410
3,561
126
(13)
(134)
(198)
68
3,410
E. IMPAIRMENT
An impairment charge is recognised in profit or loss when the carrying value of the asset, or Cash Generating Unit (CGU), exceeds
the calculated recoverable amount. The impairment charge for goodwill cannot be subsequently reversed, whereas for identified
intangibles the charge can be reversed where estimates used to determine the recoverable amount have changed. For assets with
indefinite useful lives, which include goodwill, 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. The carrying
amounts of intangible assets with finite useful lives are reviewed at each reporting date by determining whether there is an
indication that the carrying values may be impaired. If any such indication exists, the asset is tested for impairment.
I. Impairment testing of goodwill
For the purpose of impairment testing goodwill is allocated to CGUs. The recoverable amount of goodwill is determined by value-in-
use calculations, which estimate the present value of future cash flows by using a post-tax discount rate that reflects current
market assessment of the risks specific to the CGUs. 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. Where an impairment is determined, impairment losses relating to CGUs are allocated first to reduce goodwill
and then to other CGU assets on a pro-rata basis.
73
Goodwill is allocated to the following CGUs:
Consumer Division - Australia
Business Division - Australia
New Zealand
Asia
2017
$m
771
1,479
667
57
2,974
2016
$m
771
1,496
658
57
2,982
The following describes the key assumptions on which management based its cash flow projections to undertake the impairment
testing:
Cash flow forecasts are based on ten year valuation forecasts for growth and profitability. Twenty year periods are used only in
emerging markets, to enable appropriate phasing to terminal values. The forecast durations reflect the insurance business life
cycle and the growth trajectories of portfolios within each of the established and emerging markets.
Terminal value is calculated using a perpetuity growth formula based on the cash flow forecast at the end of the relevant
valuation forecast period, 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 CGUs as at 30 June 2017 are: Australian Consumer Division 4.5% (2016-4.5%), Australian Business
Division 4.5% (2016-4.3%) and New Zealand 3.5% (2016-3.5%).
Discount rates reflect a beta and equity risk premium appropriate to the Group, with risk adjustments for individual segments
and countries where applicable. The post-tax discount rates used for significant CGUs as at 30 June 2017 are: Australian
Consumer Division 9.7% (2016-9.7%), Australian Business Division 9.7% (2016-9.7%) and New Zealand 10.3% (2016-10.3%).
II. Impairment testing of identified intangible assets
Where the recoverable amount is determined by a value-in-use calculation, it involves the use of accounting estimates and
assumptions to determine the projected net cash flows, which are discounted using an appropriate discount rate to reflect current
market assessment of the risk associated with the assets or CGU. A description of the nature of significant intangible assets is
provided below:
The value of distribution channels is derived from future revenue expected to be generated as a result of the existing
relationships with the broker networks.
Customer relationships represent the present value of future profits expected to arise from existing customer relationships
(developed prior to acquisition of the business). The assumptions for the useful life and customer attrition rates are
determined based on historical information.
Brands represents the revenue generating value of the acquired brand and is determined using the relief from royalty method.
An impairment charge for capitalised software is incurred if there is evidence of obsolescence or significant changes impacting
the manner in which an asset is used or expected to be used or evidence indicating the economic performance of the asset is
not as intended by management.
F. RECOGNITION AND MEASUREMENT
All of the goodwill and intangible assets, other than components of capitalised software development expenditure (internally
generated), have been acquired.
Intangible assets are initially recorded at cost at the date of acquisition, being the fair value of the consideration. Internally
generated intangible assets comprise all directly attributable costs necessary to create, produce and prepare the asset to be
capable of operating in the manner intended by management. Goodwill is generated as a result of business acquisition and is
initially measured as the excess of the purchase consideration over the fair value of the net identifiable assets and liabilities
acquired. At the date of disposal of a business, attributed goodwill is used to calculate the gain or loss on disposal.
Intangible assets with an indefinite useful life, including goodwill and certain brands, are not subject to amortisation but to
impairment testing. Intangible assets with finite useful lives are amortised on a straight line basis over the period in which the
related economic benefits are expected to be realised. Amortisation rates and residual values are reviewed annually and any
changes are accounted for prospectively. Amortisation is recognised within fee based, corporate and other expenses in the
consolidated statement of comprehensive income, whilst the amortisation of capitalised software is recognised within the
insurance profit. The useful lives for each category of intangible assets are as follows:
capitalised software: up to 3 years;
distribution channels: 5 to 10 years;
customer relationships: 5 to 10 years; and
brands and other: up to 20 years.
74 IAG ANNUAL REPORT 2017
NOTE 5.2 INCOME TAX
A. INCOME TAX EXPENSE
Current tax
Deferred tax
Over provided in prior year
Income tax expense
Deferred income tax expense/(credit) included in income tax comprises
Decrease in deferred tax assets
Decrease in deferred tax liabilities
B. RECONCILIATION OF PRIMA FACIE TAX TO INCOME TAX EXPENSE
Profit for the year before income tax
Income tax calculated at 30% (2016-30%)
Amounts which are not deductible/(taxable) in calculating taxable income
Difference in tax rate
Rebateable dividends
Interest on capital notes and convertible preference shares
Other
Income tax expense applicable to current year
Adjustment relating to prior year
Income tax expense attributable to profit for the year after impact of tax consolidation
C. DEFERRED TAX ASSETS
I. Composition
a. AMOUNTS RECOGNISED IN PROFIT
Property and equipment
Employee benefits
Insurance provisions
Investments
Provisions
Tax losses
Other
b. AMOUNTS RECOGNISED DIRECTLY IN OTHER COMPREHENSIVE INCOME
Defined benefit superannuation plans
c. AMOUNTS SET-OFF AGAINST DEFERRED TAX LIABILITIES
II. Reconciliation of movements
Balance at the beginning of the financial year
Charged to profit or loss
(Charged)/credited to equity
Adjustments relating to prior year
Foreign exchange differences
Balance at the end of the financial year prior to set-off
2017
$m
2016
$m
352
13
(36)
329
54
(41)
13
1,334
400
(32)
(5)
6
(4)
365
(36)
329
88
85
119
31
4
433
-
760
12
772
(227)
545
861
(54)
(11)
(23)
(1)
772
291
-
(73)
218
4
(4)
-
920
276
19
(8)
5
(1)
291
(73)
218
119
83
118
47
17
447
7
838
23
861
(258)
603
782
(4)
14
35
34
861
75
III. Tax losses
The deferred tax assets on tax losses primarily relates to those incurred in IAG’s New Zealand business as a result of the
Christchurch earthquake events that occurred in 2010 and 2011 and the 2016 Kaikoura earthquake. Subsequent revisions to the
associated ultimate expected losses relating to the Christchurch events have offset the strong underlying performance of IAG’s New
Zealand business since the 2011 financial year. In the context of the New Zealand Income Tax Act, tax losses carried forward do
not expire after a particular period and remain available to offset against future income tax liabilities, provided the 49% continuity
of shareholding requirement is met at the listed holding company level.
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
Credited to profit or loss
Charged/(credited) to equity
Acquisitions of subsidiaries
Adjustments relating to prior year
Balance at the end of the financial year prior to set-off
2017
$m
2016
$m
80
26
114
220
7
227
(227)
-
258
(41)
2
-
8
227
90
34
129
253
5
258
(258)
-
283
(4)
(22)
1
-
258
E. RECOGNITION AND MEASUREMENT
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 either equity or other comprehensive income.
II. Current tax
Current tax assets and liabilities are the expected tax recoverable or 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. These include any rates or laws
enacted or substantially enacted at the balance sheet date.
III. Deferred tax
Deferred tax liabilities are recognised for all taxable temporary differences between the carrying amount and tax bases. Deferred
tax assets (deductible temporary differences, carried forward unused tax assets and unused tax losses) are recognised to the
extent it is probable that future taxable profit will be available to utilise them before the unused tax losses or credits expire. In
making this assessment, IAG considers historical trends of profit generation.
The following demonstrates other 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.
IV. 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.
76 IAG ANNUAL REPORT 2017
NOTE 5.3 PROVISIONS
A. EMPLOYEE BENEFITS
I. Expense recognised in the consolidated statement of comprehensive income
Defined contribution superannuation plans
Defined benefit superannuation plans
Share based remuneration
Salaries and other employee benefits expense
II. Provision recognised on the consolidated balance sheet
Annual leave
Long service leave
Cash based incentive arrangements
Defined benefit superannuation plans
Other employee benefits
2017
$m
111
1
25
1,487
1,624
92
91
98
18
7
306
2016
$m
122
8
29
1,530
1,689
97
90
88
61
8
344
The employee benefits provision includes $76 million (2016-$122 million) which is expected to be settled after more than 12
months from reporting date.
B. RESTRUCTURING PROVISION
Balance at the beginning of the financial year
Additions
Amounts settled
Balance at the end of the financial year
2017
$m
2016
$m
26
25
(28)
23
59
25
(58)
26
The provision primarily comprises redundancy costs in respect of IAG's prospective withdrawal from the NSW workers’
compensation scheme. All provision outstanding at the reporting date is expected to be settled within 12 months (2016–all).
C. RECOGNITION AND MEASUREMENT
I. Annual leave
Liability for annual leave is recognised at the nominal amounts unpaid at the reporting date using remuneration rates that are
expected to be paid when the liability is settled, including on-costs.
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 corporate bond
yields 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. 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.
IV. Superannuation
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. For defined
contribution superannuation plans, obligations for contributions are recognised in profit or loss as they become payable.
V. 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 and may include termination benefits.
It does not include costs associated with ongoing activities. The adequacy of the provision is reviewed regularly and adjusted if
required. Revisions to the estimated amount of a restructuring provision are reported in the period in which the revision to the
estimate occurs.
77
6. GROUP STRUCTURE
SECTION INTRODUCTION
This section provides disclosures on the Group structure, including details of the significant controlled entities and equity
accounted investments. It also provides details of the significant acquisitions and divestments during the year.
NOTE 6.1 DETAILS OF SUBSIDIARIES
The following table details the Group’s general insurance operations and other significant controlled entities:
A. ULTIMATE PARENT
Insurance Australia Group Limited
B. SUBSIDIARIES
I. Australian general insurance operations
CGU Insurance Limited(a)
CGU-VACC Insurance Limited(a)
HBF Insurance Pty Ltd(a)
IAG Re Australia Limited(a)
Insurance Australia Limited
Insurance Manufacturers of Australia Pty Limited
Mutual Community General Insurance Proprietary Limited(a)
Swann Insurance (Aust) Pty Ltd(a)
WFI Insurance Limited(a)
II. New Zealand general insurance operations
AMI Insurance Limited
IAG New Zealand Limited
Lumley General Insurance (NZ) Limited
III. International insurance operations
AAA Assurance Corporation
IAG Re Labuan (L) Berhad
IAG Re Singapore Pte Ltd
PT Asuransi Parolamas
Safety Insurance Public Company Limited
IV. Corporate operations
IAG Finance (New Zealand) Limited
COUNTRY OF
INCORPORATION/
FORMATION
EXTENT OF BENEFICIAL
INTEREST IF NOT 100%
2016
%
2017
%
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
Vietnam
Malaysia
Singapore
Indonesia
Thailand
Australia
70.00
70.00
63.17
63.17
80.00
98.61
80.00
98.61
(a)
On 1 August 2017, all the insurance assets and liabilities of this entity were transferred into a related business, Insurance Australia Limited.
78 IAG ANNUAL REPORT 2017
NOTE 6.2 NON-CONTROLLING INTERESTS
A. SUMMARISED FINANCIAL INFORMATION
Set out below is summarised financial information (before intercompany eliminations) of controlled entities where significant non-
controlling interests exist, being Insurance Manufacturers of Australia Pty Limited of which the Group's beneficial interest is 70%.
I. Summarised statement of comprehensive income
Net premium revenue
Profit after tax attributable to IAG shareholders
Profit 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
2016
$m
2017
$m
2,935
2,806
179
77
3
259
3,791
(3,039)
752
226
217
(163)
(68)
(14)
181
78
(3)
256
3,601
(2,876)
725
218
247
(128)
(56)
63
NOTE 6.3 INVESTMENT IN JOINT VENTURE AND ASSOCIATES
A. INTERESTS IN JOINT VENTURE AND ASSOCIATES
Summarised information of interests in material associates and joint venture accounted for on an equity basis is as follows:
COUNTRY OF
INCORPORATION/
FORMATION
PRINCIPAL ACTIVITY
CARRYING VALUE
OWNERSHIP
INTEREST
AmGeneral Holdings Berhad
(AmGeneral)
SBI General Insurance Company
Limited (SBI General)
Other
Malaysia
Insurance underwriting
India
Insurance underwriting
2017
2016
2017
2016
$m
$m
%
%
353
138
14
505
360
49.00
49.00
26.00
26.00
111
15
486
The Malaysian general insurance industry has historically operated under a tariff structure for Motor and Fire insurance products.
The operating landscape is expected to evolve with regulatory-driven liberalisation over the next few years, beginning with the
phased implementation of detariffication of motor insurance from 1 July 2017. Whilst AmGeneral is well prepared for the tariff
reform, this uncertainty presents additional risk to the business.
79
B. SUMMARISED FINANCIAL INFORMATION
Summarised financial information of material associates is provided below. The summarised financial information represents the
financial position and performance of the entities as a whole (100% stand-alone basis) and not just IAG's share. The financial
statements below are for the year ended 31 March 2017.
2017
SBI General
Insurance
Company
Limited
$m
AmGeneral
Holdings
Berhad
$m
2016
SBI General
Insurance
Company
Limited
$m
AmGeneral
Holdings
Berhad
$m
I. Summarised statement of comprehensive income
Revenue
543
580
573
483
Profit/(loss) after tax
Other comprehensive income
Total comprehensive income
Dividends received from associate
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
53
1
54
-
1,643
(1,024)
619
303
50
353
30
-
30
-
957
(736)
221
58
80
138
59
-
59
23
1,849
(1,206)
643
315
45
360
(25)
-
(25)
-
713
(572)
141
37
74
111
*
Other adjustments include IFRS adjustments, foreign exchange revaluations, goodwill, intangibles and share of profit/(loss) from financial statement date to 30 June.
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.
C. RECOGNITION AND MEASUREMENT
The Group's investments in its associates and joint ventures are accounted for using the equity method and are those entities over
which it exercises significant influence or joint control, generally reflecting a shareholding of between 20% and 50% of the voting
rights of an entity. The investment in associates is initially recognised at cost (fair value of consideration provided plus directly
attributable costs) and 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 consolidated 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 carrying values of 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.
80 IAG ANNUAL REPORT 2017
NOTE 6.4 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 for the year
Total comprehensive income for the year, net of tax
B. FINANCIAL POSITION
Current assets
Total assets
Current liabilities
Total liabilities
C. SHAREHOLDERS' EQUITY
Share capital
Retained earnings
Total shareholders' equity
2017
$m
467
467
16
12,221
171
3,619
7,082
1,520
8,602
PARENT
2016
$m
439
439
287
13,704
28
4,630
7,275
1,799
9,074
D. CONTINGENT LIABILITIES
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.
Recognition and measurement
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.
E. COMMITMENTS
The Parent has no material commitments.
7. UNRECOGNISED ITEMS
SECTION INTRODUCTION
This section provides an overview of those items that are not required to be recognised in the financial statements, but may have
informative content in relation to the Group’s performance or financial position and is required to be disclosed under the
accounting standards. These include:
contingencies – these primarily relate to contingent liabilities that are only recognised in the financial statements when their
settlement becomes probable or the amount to be settled can be reliably measured;
commitments – this note provides information on the Group’s future contractual obligations, which includes those in relation
to signed property lease agreements; and
events subsequent to reporting date - information is included on non-adjusting events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the financial statements are authorised for issue. For
example, disclosure of the final dividend in relation to a financial year as it is declared to be paid by the Board subsequent to
the reporting date.
NOTE 7.1 CONTINGENCIES
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 the Consolidated entity's undertakings for maintenance of net worth and liquidity
support to subsidiaries. Such undertakings constitute a statement of present intent only and are not intended to give rise to any
binding legal obligation. The Directors are of the opinion that provisions are not required in respect of these matters, as it is either
not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.
The Consolidated entity conducts fiduciary activities in the form of investment management as it operates 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 reporting date of $335 million (2016-$289 million).
81
NOTE 7.2 COMMITMENTS
A. 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
2017
$m
120
104
257
642
1,123
31
22
6
59
1,182
2016
$m
128
107
254
519
1,008
20
21
22
63
1,071
B. RECOGNITION AND MEASUREMENT
Certain properties, motor vehicles and computer equipment are leased under non-cancellable operating leases. Most leases are
subject to annual reviews and, where appropriate, a right of renewal has been incorporated into the lease agreements. There are
no options to purchase the relevant assets on expiry of the lease.
Operating lease payments are recognised as an expense in the consolidated statement of comprehensive income on a straight line
basis over the term of the lease. The operating lease incentives received are initially recognised as a liability, presented as trade
and other payables and are subsequently reduced through recognition in profit or loss on a straight line basis over the period of the
lease.
NOTE 7.3 EVENTS SUBSEQUENT TO REPORTING DATE
As the following events 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 2017. These include:
Effective 19 July 2017, IAG announced the creation of a single Australian division to be led by Mark Milliner as CEO Australia.
The Australian division simplifies IAG’s operating model by bringing together the former Australian Consumer, Australian
Business, Operations and Satellite divisions. There has been no change to the reportable segments in the current financial
year as financial information was prepared and reviewed by the chief operating decision maker based on the pre-existing
segment structure for Australia.
On 1 August 2017, IAG consolidated its nine Australian Insurance licences into two licences following Federal Court approval
received in July 2017. The consolidation transferred the insurance assets and liabilities of seven entities into a related entity,
Insurance Australia Limited, with no impact to the Group’s consolidated financial performance or position. Following the
transfer, IAG retains two authorised insurers in Australia being Insurance Australia Limited and Insurance Manufacturers of
Australia Pty Limited. The transfer is part of IAG’s focus on becoming a simpler, more efficient and agile business.
On 23 August 2017, the Board determined to pay a final dividend of 20 cents per share, 100% franked. The dividend will be
paid on 9 October 2017. The dividend reinvestment plan will operate by acquiring shares on market for participants with no
discount applied.
82 IAG ANNUAL REPORT 2017
8. ADDITIONAL DISCLOSURES
SECTION INTRODUCTION
This section includes other information that must be disclosed to comply with the Accounting Standards, Corporations Act and ASX
Listing Rules, but which are considered less relevant to understanding the Group's performance or financial position.
NOTE 8.1 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
A. COMPOSITION OF CASH AND CASH EQUIVALENTS
Cash held for operational purposes
Cash and short term money held in investments
Cash and cash equivalents
B. RECONCILIATION OF PROFIT FOR THE YEAR TO NET CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the year
I. Non-cash items
Net gains on investments
Amortisation and impairment of intangible assets and goodwill
Depreciation of property and equipment
Other non-cash items
II. Movement in operating assets and liabilities
Insurance assets
Insurance liabilities
Net movement in other operating assets and liabilities
Net movement in tax assets and liabilities
Provisions
Net cash flows from operating activities
2017
$m
424
1,056
1,480
1,005
(76)
111
52
11
(577)
(411)
352
210
(41)
636
2016
$m
263
841
1,104
702
(89)
332
62
(76)
(994)
(1,470)
(137)
(263)
(13)
(1,946)
C. 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.
D. RECOGNITION AND MEASUREMENT
Cash and cash equivalents represent cash at bank and on hand, deposits at call and short term money held in investments, net of
any bank overdraft. Money held in investments is readily convertible to cash within two working days and subject to insignificant
risk of change in value. The majority of the amounts bear variable rates of interest based on daily bank deposit rates. Those
balances bearing a fixed rate of interest mature in less than one year.
NOTE 8.2 RELATED PARTY DISCLOSURES
A. 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 disclosed in the table below represents the KMP’s estimated compensation received from the Group in
relation to their involvement in the activities within the Consolidated entity.
Short term employee benefits
Post-employment benefits
Other long term benefits
Termination benefits
Share based payments
2017
$000
19,074
533
145
600
8,974
29,326
2016
$000
20,012
499
53
3,736
19,082
43,382
83
II. 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 on behalf of specific 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.
NOTE 8.3 REMUNERATION OF AUDITORS
A. KPMG
Audit of the financial statements prepared for the Parent and subsidiaries
Audit of statutory returns in accordance with regulatory requirements
Other assurance services
Advisory services
B. OTHER AUDITORS
Audit of the financial statements prepared for subsidiaries
Total remuneration of auditors
NOTE 8.4 NET TANGIBLE ASSETS
Net tangible assets per ordinary share
2017
$000
8,098
1,059
126
1,233
10,516
-
10,516
2017
$
1.36
2016
$000
7,853
1,047
151
1,369
10,420
26
10,446
2016
$
1.30
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.
NOTE 8.5 IMPACT OF NEW AUSTRALIAN ACCOUNTING STANDARDS ISSUED
A. ISSUED AND EFFECTIVE
The Australian Accounting Standards and Interpretations applicable for the current reporting year are given below. The adoption of
these standards did not have a material financial impact:
TITLE
AASB 1057
AASB 2014-3
AASB 2014-4
AASB 2014-9
AASB 2015-1
AASB 2015-2
AASB 2015-9
DESCRIPTION
Application of Australian Accounting Standards
Amendments to Australian Accounting Standards - Accounting for Acquisitions of Interests in Joint Operations
Amendments to Australian Accounting Standards - Clarification of Acceptable Methods of Depreciation and
Amortisation
Amendments to Australian Accounting Standards - Equity Method in Separate Financial Statements
Amendments to Australian Accounting Standards - Annual Improvements to Australian Accounting Standards
2012-2014 Cycle
Amendments to Australian Accounting Standards - Disclosure Initiative: Amendments to AASB 101
Amendments to Australian Accounting Standards - Scope and Application Paragraphs
B. 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.
TITLE
AASB 9
AASB 15
AASB 16
AASB 17
AASB 2010-7
AASB 2014-1
(Part E)
AASB 2014-7
AASB 2014-10
AASB 2015-8
AASB 2015-10
DESCRIPTION
Financial Instruments
Revenue from Contracts with Customers
Leases
Insurance Contracts
Amendments to Australian Accounting Standards arising from AASB 9
Amendments to Australian Accounting Standards – Financial Instruments
OPERATIVE DATE
1 January 2018
1 January 2018
1 January 2019
1 January 2021
1 January 2018
1 January 2018
Amendments to Australian Accounting Standards arising from AASB 9
(December 2014)
Amendments to Australian Accounting Standards – Sale or Contribution of
Assets between an Investor and its Associate or Joint Venture
Amendments to Australian Accounting Standards – Effective Date of AASB 15 1 January 2018
1 January 2018
Amendments to Australian Accounting Standards – Effective Date of
Amendments to AASB 10 and AASB 128
1 January 2018
1 January 2018
NOTE
A
A
A
B
A
A
A
A
A
A
84 IAG ANNUAL REPORT 2017
TITLE
AASB 2016-1
AASB 2016-2
AASB 2016-3
AASB 2016-5
AASB 2016-6
IFRIC Interpretation
22
DESCRIPTION
Amendments to Australian Accounting Standards – Recognition of Deferred
Tax Assets for Unrealised Losses
Amendments to Australian Accounting Standards – Disclosure Initiative:
Amendments to AASB 107
Amendments to Australian Accounting Standards – Clarifications to AASB 15
Amendments to Australian Accounting Standards – Classification and
Measurement of Share based Payment Transactions
Amendments to Australian Accounting Standards – Applying AASB 9 Financial
Instruments with AASB 4 Insurance Contracts
Foreign Currency Transactions and Advance Consideration
OPERATIVE DATE
1 January 2017
NOTE
A
1 January 2017
1 January 2018
1 January 2018
1 January 2018
1 January 2018
A
A
B
A
B
TABLE NOTE
A
B
These changes are not expected to have a significant, if any, financial and disclosure impact.
The changes may have financial impact, however the assessment has not been completed yet.
The Australian Accounting Standards and amendments detailed in the table above are not mandatory for the Group until the
operative dates stated, however, early adoption is permitted. The Group currently plans to apply the standards and amendments
detailed above for the reporting periods beginning on or after the operative dates set out above, except for AASB 9 as detailed
below. An initial assessment of the financial impact of the standards and amendments has been undertaken and they are not
expected to have a material impact on the Group’s financial statements.
AASB 9 was issued during 2014 and will replace existing accounting requirements for financial instruments. Currently, the Group’s
investments are designated as at fair value through profit or loss on initial recognition and are subsequently remeasured to fair
value at each reporting date, reflecting the business model applied by the Group to manage and evaluate its investment portfolio.
Under this business model, the adoption of AASB 9 is not expected to result in significant changes to accounting for investments.
Other changes to the accounting for the Group’s financial instruments arising from the application of AASB 9 are expected to be
minimal. The Group plans to defer the adoption of AASB 9 to align with the implementation of AASB 17 Insurance Contracts
(effective 1 January 2021), which is permissible under the standard.
AASB 15 introduces a single model for the recognition of revenue based on when control of goods and services transfers to a
customer. It does not apply to insurance contracts and financial instruments. Hence the vast majority of the Group’s revenue is
not impacted by this change.
AASB 16 was issued during 2016 and will replace existing accounting requirements for leases. Under current requirements, leases
are classified based on their nature as either finance leases, which are recognised on the balance sheet, or operating leases,
which are not recognised on the balance sheet. The application of AASB 16 will result in the recognition of all leases on the
balance sheet in the form of a right-of-use asset and a corresponding lease liability, except for leases of low value assets and
leases with a term of 12 months or less. As a result, the new standard is expected to impact leases which are currently classified
by the Group as operating leases, primarily, leases over premises and equipment. Based on preliminary assessments, the resulting
amount to be recognised, in effect as a gross up to the balance sheet, is expected to be approximately $780 million.
AASB 17 Insurance Contracts was released on 18 May 2017, with an expected effective date of 1 January 2021. The
implementation date for IAG will be for the year ending 30 June 2022, with the comparative period the year ended 30 June 2021. A
detailed impact assessment is currently underway.
85
DIRECTORS' DECLARATION
In the opinion of the Directors of Insurance Australia Group Limited:
the financial statements and notes 1 to 8.5, 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 2017 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 1.2.B; 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 2017.
Signed at Sydney this 23rd day of August 2017 in accordance with a resolution of the Directors.
Peter Harmer
Director
86 IAG ANNUAL REPORT 2017
INDEPENDENT
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF INSURANCE AUSTRALIA GROUP LIMITED
REPORT ON THE AUDIT OF THE FINANCIAL REPORT
Opinion
We have audited the Financial Report of Insurance Australia
Group Limited (Company).
In our opinion, the accompanying Financial Report of the
Company 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 2017 and of its financial performance for
the year ended on that date; and
complying with Australian Accounting Standards and the
Corporations Regulations 2001.
The Financial Report comprises:
Consolidated balance sheet as at 30 June 2017;
Consolidated statement of comprehensive income,
Consolidated statement of changes in equity, and
Consolidated cash flow statement for the year then
ended;
Notes including a summary of significant accounting
policies; and
Directors’ declaration.
The Group consists of the Company and the entities it
controlled at the year-end or from time to time during the
financial year.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial
Report section of our report.
We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting
Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to
our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code.
Key Audit Matters
The Key Audit Matters we identified are:
Valuation of Gross outstanding claims liability
Valuation of Reinsurance and other recoveries on
outstanding claims
Valuation of Goodwill and Investment in joint venture and
associates
Key Audit Matters are those matters that, in our professional
judgement, were of most significance in our audit of the
Financial Report of the current period.
These matters were addressed in the context of our audit of the
Financial Report as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
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.
87
Valuation of Gross outstanding claims liability ($11,371 million)
Refer to Note 2.2 of the Financial Report
The key audit matter
Gross outstanding claims liability is a key audit matter as a
result of significant complexity relating to:
How the matter was addressed in our audit
Our procedures included:
Valuation of gross outstanding claims liability
Valuation of gross outstanding claims liability
The valuation of gross outstanding claims liability is significant
to the Key Audit Matter as:
judgement is required by us to consider the central
estimate of the gross outstanding claims liability which is a
significant estimate as the eventual outcomes of incurred
but unsettled claims at the balance sheet date are
inherently uncertain;
there is a lower level of information available and a greater
level of uncertainty inherent in assessing estimations of
claims that have been incurred by the balance sheet date
but have not yet been reported to the Group, including
where there has been a recent natural catastrophe, such
as the Kaikoura earthquake in November 2016 and
Cyclone Debbie in late March 2017;
judgement is required when considering the application of
historical experience of claims development to determine
current estimates, including the greater variability between
the original estimation and the ultimate settlement of
claims where there is a long time delay between the claim
being incurred and the ultimate settlement. Examples
include claims arising from Workers’ Compensation,
Liability, Compulsory Third Party (CTP) and the main
Canterbury earthquakes of September 2010 and February
2011;
the claims estimation uses an actuarial modelling process
which involves complex and subjective actuarial
methodologies, judgements and assumptions about future
events and developments, both within and external to the
Group, and for which small changes can have significant
implications to the quantification, as outlined in Note
2.2(E);
the Canterbury earthquake claims require judgement and
technical actuarial expertise to evaluate the attribution of
claims costs between the September 2010 and the
February 2011 Canterbury earthquake events;
judgement is required to assess the estimation of the
periods the claims are expected to be settled in;
the estimation of claims at year end relies on the integrity
of the underlying data, including claim payments and
individual estimates of unsettled claims, which is gathered
from many different systems; and
we involve senior resources, with deep industry experience,
together with our actuarial specialists in evaluating the
Group’s estimations of outstanding claims.
We adopted a risk based approach to determine which classes
of business posed higher claims estimation risks. Factors that
influenced the risk assessment included level of judgement
required, higher degrees of uncertainty regarding the
assumptions adopted, longer delays between claims being
incurred, reported and expected settlement, greater relative
magnitude in size, and more significant variations over prior
estimates.
For the higher risk areas identified, such as Workers’
Compensation, Liability, CTP and the main Canterbury
earthquakes, we:
compared the Group’s actuarial methodologies with the
methodologies applied in the industry and in prior periods;
evaluated the Group’s governance processes, including
Management Reserving Committees and actuarial control
cycles for the valuation of the outstanding claims liabilities;
evaluated the appropriateness of the actuarial
methodologies and the assumptions applied in the previous
reporting period by comparing the actual claims
development to the prior year claims liability estimate and
considering their accuracy. We used the information to
assess the adjustments made to the current year’s
actuarial methodologies and assumptions applied in the
estimation;
challenged key actuarial assumptions, including loss ratios,
claim frequency and average size of claims, expected
trends in court settlements and jury awards, and allowance
for future claims inflation. Further we evaluated the
attribution of losses to Canterbury earthquake events, by
comparing these to our expectations based on the Group’s
historical experience, our industry knowledge and
independently observable trends; and
considered judgements required to estimate the period in
which the claims will be settled by analysing historical
payment patterns and assessing any significant changes.
For certain classes of business, we independently projected the
gross outstanding claims liability by applying our own actuarial
methodologies and selecting assumptions for those
methodologies. We used this re-projection to compare our
results to the Group’s estimates and challenge any significant
differences.
We were assisted by KPMG actuarial specialists in interpreting
and evaluating the Group’s actuarial modelling processes and
methodology for determining the level of provisions for gross
outstanding claims liabilities. We also considered the work and
findings of external, independent actuaries, engaged by the
Group.
Our procedures around the financial records and controls
included, amongst others:
testing accounting and actuarial controls such as
reconciliations of key data;
testing key controls and a sample of claims case estimates
and paid claims, by comparing the Group’s estimations for
individual claims to third party evidence; and
88 IAG ANNUAL REPORT 2017
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.
using our IT specialists, we tested the general IT
environment as well as tested the reconciliations between
data on the claims systems (underlying data) and data used
in the actuarial modelling processes by evaluating the
Group’s automated comparison programs which they apply
to assess the consistency of the data.
Risk margins and Probability of Adequacy
Risk margins and Probability of Adequacy
The evaluation of the risk margins and Probability of Adequacy is
significant to the Key Audit Matter as it is complex and
necessitated a significant level of judgement by us in our audit.
With the assistance of our actuarial specialists we evaluated the
appropriateness of the statistical processes to establish the
Group's risk margins. In particular, our procedures included:
Outstanding claims include statistically determined risk margins
developed by the Group to make allowance for the inherent
uncertainty in estimating ultimate claim settlements. The risk
margins are included to achieve a specified Probability of
Adequacy for the total outstanding claims reserves.
We involved senior resources and our actuarial specialists to
focus on the complex statistical processes and parameters used
by the Group to establish the risk margins.
assessing the statistical processes' suitability by critically
studying these and comparing them to known industry
practices, our industry knowledge and other observable
trends in industry discussion forums and Actuaries Institute
papers;
assessing the risk margin parameters for significant
portfolios by comparing these with external sources of data
including published statistics (e.g. APRA-published data),
prior periods and our industry knowledge;
checking the central estimates of outstanding claims, that
were tested in the valuation of gross outstanding claims
liability processes, and which are a key input into the risk
margin model, to the underlying financial records; and
critically evaluating the Group’s judgement in the execution
of the statistical processes by comparing the judgements
and overall results to our expectations based on the
Group's historical experience, our industry knowledge and
independent observable trends (e.g. listed competitors).
Valuation of Reinsurance and other recoveries on outstanding claims ($5,258 million)
Refer to Note 2.2 of the Financial Report
The key audit matter
Reinsurance and other recoveries on outstanding claims is a
Key Audit Matter as:
reinsurance and other recoveries, similar to the valuation of
gross outstanding claims, are quantified from claims case
estimates, paid claims data and estimates of ultimate
claims settlement amounts. As such, the rationale for
identifying it as a key audit matter is the same as that
highlighted for valuation of gross outstanding claims;
the Group has extensive reinsurance arrangements
designed to protect its aggregate exposure to catastrophic
claim events. Evaluating the reinsurance transactions
accounting across the three reinsurance captive
companies, and in the respective insurance companies
within the Group requires significant consideration by our
senior resources with deep industry knowledge and
specialised technical skills; and
the Group also has a range of significant reinsurance
contracts, including the Whole of Account Quota Share, the
Catastrophe excess of loss program, Adverse Development
Covers in the form of excess of loss contracts, and other
Quota Share arrangements, that form part of its capital
management. Our consideration of the accounting
treatment and recoverability of balances owed by the
reinsurer counterparties requires our senior resources,
deep industry experience and specialised technical skills.
How the matter was addressed in our audit
In addition to the audit procedures undertaken to assess the
valuation of gross outstanding claims liability, our procedures
included:
testing, for a sample of contracts, how the reinsurance and
other recoveries on outstanding claims were accounted for,
including their processing through the Group’s captive
reinsurance companies. We referred to the terms of the
captive reinsurance contracts, board meeting minutes, our
expectations based on the Group’s past experience, our
industry knowledge, and the insurance accounting
standard;
independently evaluating a sample of reinsurance balances
and other recoveries due to the Group arising from the
Whole of Account Quota Share contract. We referred to the
terms of the reinsurance contract, and applied it to the
original underlying claims estimates and paid claims data to
recalculate the reinsurance and other recoveries due.
These independently generated results were compared to
the amounts processed by the Group;
evaluating a sample of the transactions processed relating
to the reinsurance contracts. We tested the consistency of
the contract terms to the criteria for the recognition of the
transaction contained in those requirements; and
assessing the recoverability of balances owed by reinsurer
counterparties by considering their credit worthiness and
capital strength, based on external sources of information,
payment history of amounts and evaluation of information
for indicators of disputes.
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.
89
Valuation of Goodwill ($2,974 million) and Investment in joint venture and associates ($505 million)
Refer to Notes 5.1 and 6.3 of the Financial Report
The key audit matter
Valuation of goodwill and investment in joint venture and
associates is a Key Audit Matter as:
How the matter was addressed in our audit
With the assistance of our valuation specialists, our procedures
included:
judgement is involved in considering the appropriateness of
the cash generating units identified by the Group;
the evaluation of potential impairment involves judgement
in relation to forecast cash flows and key variables.
Instances where judgement is required include interest
rates, risk premium, growth rates, profit measures and
terminal growth rates. We focused specifically on those
cash generating units and associates where the valuation
showed potential impairment indicators, or where there was
a significant reduction in the valuation in the period;
the assessment of the valuation of goodwill, and
investment in joint venture and associates, requires the
involvement of senior resources from the audit team
together with our valuation specialists; and
the Group uses complex models to perform their annual
testing of goodwill for impairment. The models are largely
internally developed, use adjusted historical performance,
and a range of internal and external sources as inputs to
the assumptions. Complex modelling, particularly those
containing highly judgemental allocations of corporate
assets and costs to cash generating units, using forward-
looking assumptions tend to be prone to greater risk for
potential bias, error and inconsistent application. These
conditions necessitate additional scrutiny by us, in
particular to address the objectivity of sources used for
assumptions, and their consistent application.
evaluating the Group’s determination of their cash
generating units based on our understanding of the
industries in which the Group operates, and our knowledge
of the business, including internal management reporting,
against the accounting standard requirements;
performing sensitivity testing, using the Group’s models, to
evaluate the impact of varying key assumptions. This
enabled us to critically challenge the Group’s quantification
of assumptions and focus our testing to the most sensitive
assumptions;
assessing the Group’s quantification of key variables by
comparing them to external, observable metrics (e.g. GDP
growth and inflation incl. forecasts provided by Oxford
Economics and IBIS World), our knowledge of the markets,
and current market practice;
comparing the forecast cash flows to Board approved
budgets and business plans, and performing an
examination of the accuracy of past budgets to actual cash
flows in order to challenge the Group’s current forecasts;
comparing the valuations for certain joint venture and
associates to external, independent and observable
valuations for broadly similar enterprises, and investigate
significant outliers;
assessing the Group’s allocation of corporate assets to
cash generating units for consistency based on the
requirements of the accounting standards;
assessing the Group’s allocation of corporate costs to the
forecasted cash flows contained in the value in use model,
based on a reasonable and consistent basis using our
understanding of the business; and
involving our specialists, we evaluated the internally
prepared discounted cash flow model. This included:
assessing the reasonableness of the valuation
approach and methodology against market and
industry practices and accounting standards; and
assessing the integrity of the models used, including
the accuracy of the underlying calculation formulas.
Using our IT specialists, we tested the general IT environment as
well as specific system controls in relation to the underlying data
used in the valuation models to assess the consistency of the
data.
Other Information
Other Information is financial and non-financial information in Insurance Australia Group Limited’s annual reporting which is
provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information.
Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or
any form of assurance conclusion thereon, with the exception of the Remuneration Report.
In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider
whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we
have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report.
90 IAG ANNUAL REPORT 2017
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.
Responsibilities of the Directors for the Financial Report
The Directors are responsible for:
preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the
Corporations Act 2001;
implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is
free from material misstatement, whether due to fraud or error; and
assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the Financial Report
Our objective is:
to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether
due to fraud or error; and
to issue an Auditor’s Report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian
Auditing Standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of this Financial Report.
A further description of our responsibilities for the Audit of the Financial Report is located at the Auditing and Assurance Standards
Board website at www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report.
REPORT ON THE REMUNERATION REPORT
Opinion
In our opinion, the Remuneration Report of Insurance Australia
Group Limited for the year ended 30 June 2017, complies with
Section 300A of the Corporations Act 2001.
Directors’ responsibilities
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 responsibilities
We have audited the Remuneration Report included in pages 16 to
to 37 of the Directors’ report for the year ended 30 June 2017.
Our responsibility is to express an opinion on the Remuneration
Report, based on our Audit conducted in accordance with
Australian Auditing Standards.
KPMG
Andrew Yates
Partner
Sydney
23 August 2017
Ian Moyser
Partner
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.
91
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).
Insurance Australia Group Limited’s wholly owned subsidiary IAG Finance (New Zealand) Limited issued reset exchangeable
securities (RES) in January 2005 which are listed on the ASX under IANG.
ANNUAL REPORT
Under the Corporations Act 2001 regarding the provision of Annual Reports to shareholders, the default option for receiving Annual
Reports is an electronic copy via IAG’s website at www.iag.com.au.
ANNUAL GENERAL MEETING
The 2017 annual general meeting (AGM) of Insurance Australia Group Limited will be held on 20 October 2017 commencing at
10am at Wesley Conference Centre, 220 Pitt Street, Sydney, NSW 2000. The AGM will be webcast live on the internet at
www.iag.com.au/shareholder-centre/annual-meetings 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 2017 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 with 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 13
October 2017.
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 written questions. Responses to the most commonly asked questions will be added to the website at
www.iag.com.au/shareholder-centre/annual-meetings.
DIVIDEND PAYMENT METHODS
Insurance Australia Group Limited no longer issues dividend payments by cheque to shareholders resident in Australia.
Shareholders should provide the share registry with their alternative instructions as detailed below:
IAG ordinary shares
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.
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.
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.
92 IAG ANNUAL REPORT 2017
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 an email alert service that allows you to 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.
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 that some dates are subject to change.
TWENTY LARGEST ORDINARY SHAREHOLDERS AS AT 18 JULY 2017
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL INDEMNITY COMPANY
NATIONAL NOMINEES LIMITED
BNP PARIBAS NOMINEES PTY LTD
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