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8
Annual Report 2018
Insurance Australia Group Limited
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
18
Notes to the financial statements
40
41
42
44
45
Directors’ declaration
Independent auditor’s report
Shareholder information
Corporate directory
Five-year financial summary
46
47
90
91
96
99
100
Key dates
2018 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
2019 financial year end
Full year results and dividend announcement
30 June 2018
15 August 2018
10 September 2018
22 August 2018
27 September 2018
26 October 2018
31 December 2018
6 February 2019*
13 February 2019*
20 March 2019*
30 June 2019
8 August 2019*
* Please note: dates are subject to change. Any changes will be published via a notice to the Australian Securities Exchange (ASX).
2018 annual general meeting
IAG’s 2018 annual general meeting will be
held on Friday, 26 October 2018, at the Sofitel
Sydney Wentworth Hotel, 61-101 Phillip Street,
Sydney, commencing at 9.30am. Details of
the meeting, including information about
how to vote, will be contained in our notice of
meeting, which will be mailed to shareholders
and available online at www.iag.com.au,
from Monday, 10 September 2018.
About this report
The 2018 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 2018. 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.
IAG is a “dual listed issuer” that is listed on
both the ASX and the NZX Debt Market.
As such, IAG is subject to some, but not all
of the NZX Main Board/Debt Market Listing
Rules (“NZX Listing Rules”). In particular, the
rules set out in Appendix 17 to the NZX
Listing Rules do not apply to IAG.
All figures are in Australian dollars unless
otherwise stated.
2018 annual review and
safer communities report
This report should be read with the 2018
annual review and safer communities 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
safer communities report is available from the
home page of our website at www.iag.com.au.
Detailed information about the Group’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 99.
DIRECTORS' REPORT
The Directors present their report together with the consolidated financial report of Insurance Australia Group Limited and its
subsidiaries for the financial year ended 30 June 2018 and the Auditor's Report.
The following terminology is used throughout the financial report:
Company or Parent – Insurance Australia Group Limited; and
IAG or Group – 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) – 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
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 the
Nomination Committee.
Peter joined IAG in 2010 as Chief Executive Officer, CGU Insurance and has held a number of senior roles. Prior to his current role,
he was Chief Executive of the IAG Labs division, responsible for driving digital and innovation across IAG and its brands, and
creating incubator areas to explore innovative opportunities across the fintech landscape.
Before this, Peter was Chief Executive of the Australian Commercial Insurance division.
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 nearly 40 years of 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 – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Duncan Boyle was appointed a Director of IAG on 23 December 2016. He is Chairman of the Risk Committee and a member of the
Audit Committee, People and Remuneration 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).
HUGH A FLETCHER
BSc/BCom, MCom (Hons), MBA – 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 the Risk Committee, People and Remuneration 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 a trustee of The University of Auckland Foundation. He 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 and former Non-Executive Director of Vector Limited. He was also a 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;
Rubicon Limited, since 2001; and
Vector Limited, (2001-2017).
SHEILA C MCGREGOR
BA (Hons), LLB, AICD Diploma – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Sheila McGregor was appointed a Director of IAG on 13 March 2018. She is a member of the Audit Committee and Nomination
Committee.
Sheila served on the boards of the Commonwealth Bank of Australia’s life and general insurance subsidiaries (The Colonial Mutual
Life Assurance Society Limited and Commonwealth Insurance Limited) between 2005 and 2009.
OTHER BUSINESS AND MARKET EXPERIENCE
Sheila is a Partner at Gilbert + Tobin and a member of its Board and Partner Remuneration Committee. She heads up the firm’s
national Technology + Digital Group, advising on business-critical technology and digital issues. Previously, she was a Senior
Partner at Herbert Smith Freehills (then Freehills).
Sheila is a Non-Executive Director of Crestone Holdings Limited, which provides wealth advice and portfolio management services,
and is Chairman of the Loreto Kirribilli School Board. Between 2009 and 2014, she was Chairman of the Royal Women’s Hospital
Foundation, established principally to raise public funds for the Royal Hospital for Women in Sydney and was previously a Director
on the Board of the Australian Indigenous Chamber of Commerce.
Directorships of other listed companies held in the past three years:
Seven West Media Limited (2015–2017).
2 IAG ANNUAL REPORT 2018
JONATHAN (JON) B NICHOLSON
BA – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Jon Nicholson was appointed a Director of IAG on 1 September 2015. He is Chairman of the People and Remuneration Committee
and a member of the 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, HonsDBus – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Helen Nugent was appointed a Director of IAG on 23 December 2016. She is a member of the Audit Committee, Nomination
Committee and Risk Committee.
OTHER BUSINESS AND MARKET EXPERIENCE
Helen is Chairman of Ausgrid and the National Disability Insurance Agency.
She has over 30 years of experience in the financial services sector. This includes having been 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,
Mercantile Mutual and the State Bank of New South Wales. She has also been Chairman of Australian Rail Track Corporation and a
Non-Executive Director of Origin Energy.
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 of Australia.
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); and
Veda Group (2013-2016).
THOMAS (TOM) W POCKETT
CA, BCom – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Tom Pockett was appointed a Director of IAG effective 1 January 2015. He is Chairman of the 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 11 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; and
Stockland Group, since 2014.
3
MICHELLE TREDENICK
BSc, FAICD, F Fin – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Michelle Tredenick was appointed a Director of IAG on 13 March 2018 and is a member of the People and Remuneration
Committee and Nomination Committee.
Michelle has held a number of senior executive roles in major Australian companies. She was Chief Information Officer (CIO) for
Suncorp, MLC and National Australia Bank, as well as Head of Strategy for MLC and Head of Strategy and Marketing for Suncorp.
She was also CEO of MLC’s Corporate Superannuation business and Head of their New Zealand Insurance and Wealth
Management businesses.
OTHER BUSINESS AND MARKET EXPERIENCE
Michelle is a Non-Executive Director of the Bank of Queensland (since 2011), where she chairs the Information Technology
Committee. She is a Director of Cricket Australia (since 2015) and Urbis Pty Ltd (since 2016). Michelle is also a member of The
Ethics Centre Board and a member of the Senate of The University of Queensland. She is a former Chairman of the IAG & NRMA
Superannuation Plan (2012-2018).
She was awarded Banking and Finance CIO of the Year in 1998 and 2006 and is a Fellow of the Australian Institute of Company
Directors.
Directorships of other listed companies held in the past three years:
Bank of Queensland Limited (since 2011); and
Vocation Limited (2013-2015).
PHILIP J TWYMAN AM
BSc, MBA – Independent Non-Executive Director
INSURANCE INDUSTRY EXPERIENCE
Philip Twyman was appointed a Director of IAG on 9 July 2008. He is a member of the Audit Committee, Risk Committee and
Nomination Committee.
Philip was formerly Group Executive Director of Aviva plc 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 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
Alison Deans was a Director from 1 February 2013 to 20 October 2017.
4 IAG ANNUAL REPORT 2018
SECRETARY OF INSURANCE AUSTRALIA GROUP LIMITED
CHRISTOPHER (CHRIS) J BERTUCH
BEc, LLB, LLM
Chris Bertuch was appointed Group General Counsel & Company Secretary on 11 May 2011. Prior to joining IAG, he held the
position of Group General Counsel and Company Secretary at CSR Limited. Chris joined CSR as a corporate lawyer in 1993 and
prior to that was a partner in the law firm Gadens Lawyers in Sydney. He has more than 30 years of experience in corporate,
commercial and trade practices law and dispute resolution. Chris has also completed the Advanced Management Program at
Harvard Business School.
On 10 July 2018, IAG announced that Chris Bertuch has decided to leave IAG effective 30 September 2018.
REBECCA FARRELL
LLB (Hons), BA
Rebecca is currently the Acting Group General Counsel and Company Secretary. Rebecca joined IAG in July 2017 when she was
appointed Deputy Group General Counsel and Company Secretary, being formally appointed as Company Secretary on 22 August
2017.
Rebecca is a senior legal and governance professional with over 20 years of experience advising boards and senior management,
including in roles for Amcor (Zurich, Switzerland), Westpac Banking Corporation and the Future Fund. Rebecca started her career
as a corporate and M&A lawyer at King & Wood Mallesons in Melbourne, before moving to New York where she worked with Fried
Frank. On returning from New York, Rebecca joined the Head Office Advisory Team at Herbert Smith Freehills in Melbourne before
moving to Sydney to assist in the set-up of that team in the Sydney market.
SEJIL MISTRY-MOODLEY
BProc, LLM, FGIA, FCIS
Sejil was appointed Deputy Company Secretary and Legal Counsel on 18 September 2015. Sejil has over 20 years’ experience in
the insurance industry. She is a member of the Law Society and a Fellow of the Governance Institute of Australia.
MEETINGS OF DIRECTORS
The number of meetings each Director was eligible to attend and actually attended during the financial year, including those
attended in an ex-officio capacity, 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
5
4
5
5
2
1
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
4
4
2
1
4
2
4
2
-
-
-
2
1
4
-
4
2
-
7
7
7
2
7
3
7
7
7
7
7
7
2
7
3
7
7
6
5
5
5
-
5
1
5
5
5
5
5
5
-
5
-
5
5
5
Elizabeth Bryan
Peter Harmer
Duncan Boyle(1)
Alison Deans(2)
Hugh Fletcher
Sheila McGregor(3)
Jon Nicholson
Helen Nugent(4)
Tom Pockett
Michelle
Tredenick(5)
Philip Twyman
(1)
(2)
(3)
(4)
(5) Michelle Tredenick was appointed to the Board, People and Remuneration Committee and Nomination Committee on 13 March 2018.
1
4
Duncan Boyle was appointed to the People and Remuneration Committee on 14 February 2018.
Alison Deans was a member of the Board, Audit Committee, People and Remuneration Committee and Nomination Committee until 20 October 2017.
Sheila McGregor was appointed to the Board, Audit Committee and Nomination Committee on 13 March 2018.
Helen Nugent was a member of the People and Remuneration Committee until 13 February 2018. She was appointed to the Risk Committee on 14 February 2018.
2
2
-
-
2
-
-
-
-
1
1
1
1
1
-
1
1
1
1
1
1
1
1
-
1
1
1
-
-
5
-
5
-
5
1
5
5
5
5
1
5
1
5
4
4
5
5
5
2
2
1
2
5
5
2
2
-
-
2
-
-
-
-
-
-
5
2
-
1
-
5
5
-
1
3
6
3
7
1
3
-
1
-
5
2
1
2
-
-
5
1
5
-
5
-
-
-
-
5
PRINCIPAL ACTIVITY
The principal continuing activity of IAG is the underwriting of general insurance and related corporate services and investing
activities. IAG reports its financial information under the following business divisions:
DIVISION
Consumer division
(Australia)
54% 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 in Australia.
CGU Insurance;
Business division operates across Australia under the following brands:
WFI;
NRMA Insurance;
RACV;
SGIO; and
SGIC.
New Zealand
21% 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
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
Corporate and other Corporate and other comprises other activities, including corporate services,
capital management activity, shareholders' funds investment activities,
inward reinsurance from associates, and investment in associates in
Malaysia and India.
6 IAG ANNUAL REPORT 2018
OPERATING AND FINANCIAL REVIEW
OPERATING RESULT FOR THE FINANCIAL YEAR
IAG delivered an improved reported insurance margin, of 18.3%, which slightly exceeded updated guidance of 16-18%. This was
driven by a favourable net natural peril claim cost outcome, which was over $80 million below allowance, and higher than
anticipated prior period reserve releases, which equated to 4% of net earned premium (NEP). IAG’s underlying insurance margin
increased to 14.1% (2017: 12.4%). Approximately 125 basis points (bps) of this improvement attached to the inception of the
combined 12.5% quota share agreements, from 1 January 2018. The balance was derived from pricing and operational actions,
translating to improved loss and expense ratios.
GWP growth of 1.8% was in line with IAG’s guidance of ‘low single digit growth’, with like-for-like growth exceeding 4% after
allowance for ceased activities, NSW Compulsory Third Party (CTP) scheme reform impacts and foreign exchange translation
effects. Underpinning this outcome were positive rate movements in short-tail lines, of both a personal and commercial nature.
Overall volumes were relatively flat, with advances in CTP and New Zealand personal lines offset by shrinkage in commercial
segments.
In February 2018, IAG announced a strategic review to assess the options available for its Asian businesses. As a result in June
2018, IAG disclosed the agreed sale of its interests in Thailand, Indonesia and Vietnam, which have been reclassified as
discontinued operations for accounting purposes. Consequently, the after-tax earnings contribution from these operations has
been aggregated in a single line item within the Statement of Comprehensive Income (‘Loss after income tax from discontinued
operations’). In addition, all related assets and liabilities are aggregated on either side of the balance sheet and captioned ‘held for
sale’ at 30 June 2018. Options to divest IAG’s investment in China continue to be pursued. The minority interests in joint ventures
in Malaysia and India continue to be held. The announced Asian divestments are expected to realise a net profit after tax of at
least $200 million, after allowance for related costs and foreign currency translation reserve effects, which will be recognised in the
2019 financial year. The vast majority of indicated proceeds of over $525 million relate to the sale of the business in Thailand,
which is expected to settle by 31 August 2018.
At 30 June 2018, IAG had a Prescribed Capital Amount (PCA) multiple of 2.03 compared to its targeted benchmark of 1.4 to 1.6,
and a Common Equity Tier 1 (CET1) multiple of 1.26 compared to its targeted benchmark of 0.9 to 1.1. In acknowledgement of
IAG’s surplus capital position to its targeted benchmarks, the absence of significant operational demands on its capital and the
anticipated completion of the sale of the Thailand business by the end of August 2018, IAG has announced a $592 million capital
management initiative of 25.0 cents per ordinary share which is expected to occur on or around 26 November 2018. This is
expected to comprise a capital return of 19.5 cents, a fully franked special dividend of 5.5 cents and a share consolidation which
would reduce ordinary shares on issue by approximately 2.4% and preserve consistency of earnings per share (EPS) calculation.
The capital return and share consolidation components are subject to shareholder approval, which is being sought at IAG’s Annual
General Meeting (AGM) on 26 October 2018. IAG has made payment of the special dividend conditional on that approval being
obtained.
Net profit after tax
The Group's profit after tax for the year was $1,001 million (2017: $1,005 million). After adjusting for non-controlling interests in
the Group result, net profit attributable to the shareholders of the Company was $923 million (2017: $929 million), similar to the
prior year. This outcome included:
a near-11% increase in insurance profit to $1,407 million, from the combination of improved underlying profitability, lower
reserve releases and a markedly more favourable net natural peril claims cost;
a greater than $80 million contraction in contribution from investment income on shareholders’ funds, including the effect of
lower equity market returns;
a higher effective tax rate of 27.2% (2017: 24.4%); and
a $34 million increase in amortisation and impairment expense, after the recognition of a write-down on certain Asian assets
in the first half.
Gross written premium
GWP in the current financial year increased 1.8% to $11,647 million. Like-for-like growth exceeded 4%, after allowing for:
rate reductions and premium refunds stemming from NSW CTP scheme reform, which lowered reported GWP by approximately
$190 million;
a greater than $40 million reduction in GWP as a result of the decisions to exit motor dealership and motorcycle activities of
Swann Insurance in Australia; and
an adverse foreign exchange movement in respect of New Zealand, which reduced reported GWP by over $60 million
compared to the prior year.
Whilst a factor in the first half, the reintroduction of the Emergency Services Levy (ESL) in NSW had a negligible impact on GWP for
the full year.
Underlying GWP growth in the year was of the order of $500 million, across Australia and New Zealand, driven by:
mid-single-digit rate increases in short-tail motor and home; and
higher average rates in short-tail commercial lines, offset by some volume loss.
Insurance margin
IAG’s current year reported insurance profit of $1,407 million (2017: $1,270 million) was 10.8% higher than the prior year. The
reported insurance margin increased to 18.3% (2017: 15.5%). The higher reported insurance margin included:
an improved underlying business performance;
a favourable natural peril experience which saw related net claim costs of $541 million (2017: $816 million), which was over
$80 million below allowance;
lower net prior period reserve releases of $305 million (2017: $456 million), which represented 4.0% of NEP and compared to
prior guidance of around 3%; and
a similarly favourable credit spread impact of $14 million (2017: $20 million).
7
Underlying margin
IAG’s underlying insurance margin increased to 14.1% (2017: 12.4%), and included approximately 125bps of improvement arising
from the 12.5% quota share agreements which commenced on 1 January 2018. The improvement in underlying margin also
included:
rate-driven growth in earned premium in short-tail personal and commercial classes in both Australia and New Zealand;
related alleviation of claim cost pressures, notably in short-tail motor, as rate increases at least matched increases in average
claim costs;
some respite from lower large loss experience in Australian commercial property;
improved NSW CTP profitability following initial reform measures; and
the absorption of approximately $10 million of Royal Commission related costs in the second half of the year.
IAG defines its underlying margin as the reported insurance margin adjusted for:
net natural peril claim costs less the related allowance for the period;
reserve releases in excess of 1% of NEP; and
credit spread movements.
INSURANCE MARGIN
Reported insurance margin*
Net natural peril claim costs (below)/in excess of allowance
Reserve releases in excess of 1% of NEP
Credit spread movements
Underlying insurance margin
$m
1,407
(84)
(228)
(14)
1,081
2018
%
18.3
(1.1)
(3.0)
(0.1)
14.1
$m
1,270
138
(374)
(20)
1,014
2017*
%
15.5
1.7
(4.6)
(0.2)
12.4
*
Reported insurance margin is the insurance profit/(loss) as a percentage of NEP as disclosed in the Statement of Comprehensive Income. Prior year comparatives have
been re-presented due to the discontinued operations.
Tax expense
IAG reported a tax expense of $384 million (2017: $328 million), representing an effective tax rate of 27.2% (2017: 24.4%).
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 $165 million, a reduction of 33% compared to the profit of $246
million in the prior year. This included more modest equity market returns compared to the prior year, particularly in the second
half of the year.
At 30 June 2018, the weighting to defensive assets (fixed interest and cash) within shareholders’ funds was 57%, compared to 47%
at the end of the first half of the year. Increased funds in the second half, including those derived from the $350 million
subordinated note issue in March 2018, were directed towards fixed interest and cash, alongside some reduction in equity
exposures.
DIVISIONAL HIGHLIGHTS
A. AUSTRALIA
Australia accounted for 79% of Group GWP with an improved reported insurance margin of 19.6% (2017: 17.5%) and a sound
underlying margin of 12.9% (2017: 11.5%).
I. Premiums
Australia reported slightly higher GWP of $9,144 million (2017: $9,081 million). Like-for-like growth was over 3% after allowance
for impacts from discontinued business areas and the influence of NSW CTP reform. The overall Australian GWP outcome includes:
solid rate-driven growth of over 5% in short-tail motor, largely in response to claims inflation pressures;
home GWP growth of over 4%, as an adverse ESL effect in the first half fully unwound in the second half of the year;
ongoing average rate momentum of approximately 5% in commercial lines, as targeted increases were applied in most classes;
approximately $40 million reduction in GWP from exiting the Swann Insurance motor dealership and motorcycle activities; and
significantly lower NSW CTP GWP, with scheme reform-related reductions and premium refunds amounting to over $190
million.
8 IAG ANNUAL REPORT 2018
Consumer division
IAG is the largest personal lines insurer in Australia, offering short-tail motor and home products across the country under a range
of brands, as well as long-tail CTP offerings in NSW, the ACT and South Australia. The Australian Consumer division accounted for
54% of Group GWP and produced a strong underlying insurance margin of 15.5% (2017: 13.9%).
Consumer GWP increased by 1.6% to $6,214 million (2017: $6,119 million). Excluding the effect of NSW CTP-related changes, like-
for-like Consumer GWP growth was over 4%.
Short-tail personal lines GWP represented 87% of Consumer GWP, with 97% of this derived from motor and home classes.
Compared to the prior year, overall short-tail GWP growth of 4.4% was predominantly rate-driven.
Long-tail (CTP) GWP decreased by over 14%, compared to the prior year, largely owing to rate reductions and refunds associated
with NSW scheme reform. Changes to legal cost regulations enacted in late calendar 2016 resulted in lower claim frequency under
the old NSW scheme, warranting average rate reductions of 4% in July 2017 and a further 4% in September 2017. Broader reforms
to the NSW scheme took effect from 1 December 2017. Changes in scheme design, including defined benefits for low severity
injuries and access to common law for only the most seriously injured, are expected to reduce future claim costs. In response, IAG
reduced its average NSW CTP premiums by an additional 22% from 1 December 2017.
Business division
IAG sells a range of commercial insurance products across Australia. The Australian Business division accounted for 25% of Group
GWP and produced an underlying insurance margin of 7.8% (2017: 6.9%).
Business GWP declined by 1.1% to $2,930 million (2017: $2,962 million). Like-for-like Business GWP was marginally higher, after
allowance for discontinued Swann Insurance activities.
The overall Business GWP outcome included:
a continuation of rate increases across most business classes;
remediation of the property and fleet portfolios;
underwriting agency-derived growth, primarily from NTI;
retention levels in key portfolios which were slightly lower than last year, however higher than expected;
lower new business volumes; and
an approximately $40 million reduction from divested or discontinued Swann Insurance activities.
II. Insurance profit
Australia reported an insurance profit of $1,190 million, compared to $1,145 million in the prior year. This equates to a higher
reported insurance margin of 19.6% (2017: 17.5%), which includes the net effect of:
an initial impact from the combined 12.5% quota share agreements which took effect from 1 January 2018, adding
approximately 125bps to the current year margin and 250bps to that for the second half;
lower prior period reserve releases;
lower net natural peril claim costs; and
a slightly lower favourable credit spread impact of $14 million.
III. Underlying margin
Australia’s underlying performance was sound, with an underlying margin of 12.9%. Excluding the effect of the new combined
12.5% quota shares (approximately 125bps), this was slightly above the prior year. Contributory factors were:
reduced pressure on motor profitability from higher claim costs, as increased rates earned through;
increased flow-through impact of average rate increases across commercial portfolios;
lower large loss levels in the commercial property portfolio, notably in the first half; and
improved current year profitability in NSW CTP, reflecting lower average claim size and frequency.
IV. Fee-based business
The principal source of fee income for the Business division is its role as agent under both the NSW and Victorian workers’
compensation schemes, which are underwritten by the respective state governments. In March 2017, IAG decided to withdraw
from the NSW scheme by 31 December 2017 after assessment of associated risks and returns. As part of the withdrawal,
anticipated redundancy costs associated with the exit were fully provided for in the prior year.
Total net income from fee-based operations in the current year was a reduced loss of $5 million, compared to $28 million in the
prior year. The improved outcome contained:
an absence of restructuring costs associated with the withdrawal from NSW, which amounted to $13 million in the prior year;
a $4 million increase in prior period fee income for the Victorian scheme, to $9 million, largely recognised in the first half;
an improvement in the Victorian business with a higher return from incentive fees combined with lower operating expenses;
and
increased fee income from NSW, as negotiated under the revised 2017 calendar year remuneration model and recognised in
the first half.
A secondary source of fee income is the division’s interest in authorised representative brokers.
9
B. NEW ZEALAND
New Zealand accounted for 21% of Group GWP with a higher reported insurance margin of 13.8% (2017: 7.6%) and a higher
underlying insurance margin of 17.6% (2017: 14.8%).
I. Premiums
New Zealand’s current year GWP grew by 6.3% to $2,486 million, compared to prior year GWP of $2,339 million. This increase
includes an adverse foreign exchange translation effect, with local currency GWP increasing by 8.9%, to NZ$2,696 million (2017:
NZ$2,475 million). This result was driven by the combination of:
continued GWP growth in the Consumer division, led by the private motor vehicle portfolio on higher volumes and increased
rates; and
strong GWP growth in the Business division, as rate increases were attained in both commercial and personal lines, partially
offset by lower new business volumes as the business continues to adhere to its strong underwriting disciplines.
II. Insurance profit
The New Zealand business produced a 74% increase in insurance profit to $218 million (2017: $125 million). This equates to a
reported insurance margin of 13.8% (2017: 7.6%), with the improvement reflecting the combination of:
an initial impact from the combined 12.5% quota share agreements which took effect from 1 January 2018, adding
approximately 125bps to the current year margin and 250bps to that for the second half;
higher gross earned premium, driven by good growth in both the Consumer and Business divisions;
lower net natural peril claim costs, despite significant peril activity in the second half and an overrun against the full year
allowance;
continued focus on disciplined expense management; and
some offset from prior period reserve strengthening.
Net prior period reserve strengthening of $39 million was recognised in the current year. This primarily relates to:
potential claims under architect/engineer professional indemnity policies relating to residual risk (e.g. negligence) from post-
earthquake building damage and rebuild activity, as recognised in the first half;
adverse development of prior year storm events; and
a favourable review of long-tail reserve assumptions in the second half.
III. Canterbury Rebuild
The settlement of claims associated with the financial year 2011 Canterbury earthquake events continues to make sound progress.
At 30 June 2018:
over NZ$6.7 billion of claim settlements had been completed;
over 98% of all claims by number had been fully settled;
close to 99% of commercial claims had been fully settled; and
over 98% of residential claims had been settled, with the balance either in construction or negotiation for cash settlement.
During the first half of the year, IAG increased its gross reserved position on the three major earthquakes in financial year 2011,
with no further movement in the second half. This falls to the account of IAG’s reinsurers, with no earnings impact to IAG. Following
this increase in earthquake reserves, IAG had utilised approximately 10% of the NZ$600 million adverse development cover in
excess of NZ$4.4 billion on the February 2011 event.
C. CORPORATE AND OTHER
A pre-tax profit of $5 million was reported, which compares to a profit of $102 million in the prior year. The movement primarily
reflects the reduction in net investment income on shareholders’ funds of $81 million in the current year. This outcome also
includes a portion of the write-down of Asian assets recognised in the first half of the 2018 financial year, reflecting updated
assumptions and forecasts in relation to the current operating landscape. Following the classification of IAG’s consolidated
businesses in Thailand, Vietnam and Indonesia as discontinued operations, the interests in Malaysia and India which continue to
be treated as associates have been reclassified to the Corporate and other segment. Further details on the operating segments
are set out in Note 1.3 within the financial statements.
I. Share of net profit/(loss) of associates
The Group's share of associates was a profit of $31 million (2017: $19 million) including allocated regional development costs.
This result includes AmGeneral Holdings Berhad (AmGeneral) in Malaysia and SBI General Insurance Company Limited (SBI
General) in India.
IAG’s share of AmGeneral's profit for the current year increased to $40 million (2017: $28 million). The outcome comprised the net
effect of:
effective pricing actions and portfolio management;
higher bodily injury-related prior period reserve releases; partially offset by
reduced net earned premium from lower average premiums and motor volumes; and
increased marketing expenses.
IAG’s share of SBI General's profit for the current year decreased to $10 million (2017: $14 million). This included an unfavourable
mark-to-market movement in shareholders’ funds income. IAG's share of SBI General's reported insurance profit of $9 million
(2017: $8 million) comprised the net effect of:
a relatively benign monsoon season in the current year, reducing seasonal losses;
a favourable one-off effect from the finalisation of a reinsurance treaty for the long-term home portfolio, as recognised in the
first half;
an improved expense ratio from the benefit of increased scale; and
lower investment income due to unfavourable mark-to-market movements.
10 IAG ANNUAL REPORT 2018
REVIEW OF FINANCIAL CONDITION
A. FINANCIAL POSITION
The total assets of the Group as at 30 June 2018 were $29,766 million, compared to $29,597 million as at 30 June 2017.
Movements within the overall net increase in assets of $169 million include:
reclassification of $655 million of assets to those held for sale and associated with the discontinued Asian operations;
an increase in deferred insurance expenses of $673 million predominantly related to the recognition of the combined 12.5%
quota share agreements from 1 January 2018, partially offset by a $111 million reclassification to assets held for sale;
an increase of $164 million of reinsurance and other recoveries on outstanding claims primarily relating to recoveries on the
Group’s whole-of-account quota share agreements, partially offset by recoveries received on prior period events;
a decrease in investments of $1,129 million relating to the funds outflow associated with the payments of the 2017 final
dividend and 2018 interim dividend, net settlements of the whole-of-account quota share arrangements, and a reclassification
of $282 million to assets held for sale, partially offset by proceeds from the issuance of $350 million subordinated convertible
term notes; and
a decrease of $149 million in goodwill and intangible assets, which includes $65 million reclassified to assets held for sale,
the sale of the retail warranty business and foreign exchange movements.
The total liabilities of the Group as at 30 June 2018 were $22,825 million, compared to $22,805 million as at 30 June 2017.
Movements within the overall net increase in liabilities of $20 million include:
recognition of $444 million of liabilities as those held for sale associated with our discontinued Asian operations;
an increase in interest-bearing liabilities of $336 million reflecting the issuance of $350 million subordinated convertible term
notes;
an increase in other liabilities of $188 million predominantly related to the recognition of deferred reinsurance commissions
associated with the combined 12.5% quota share agreements;
a $158 million increase in trade and other payables primarily related to the recognition of net sums payable to counterparties
to the 12.5% quota share agreements and partially offset by lower unsettled investment trades at the year end; and
a decrease in the gross outstanding claims liability of $961 million primarily due to reduction in long-tail reserves driven by
prior year reserve releases and payments, settlement of prior period natural peril claims, including the Canterbury
earthquakes, and a reclassification of $157 million of reserves to liabilities held for sale.
IAG shareholders’ equity (excluding non-controlling interests) increased from $6,562 million to $6,669 million as at 30 June 2018,
reflecting the combined effect of:
a sound earnings performance in the current year resulting in a net profit attributable to shareholders of $923 million; and
payment of 2017 final and 2018 interim dividends, totalling $803 million.
B. CASH FROM OPERATIONS
The net cash outflows from operating activities for the year ended 30 June 2018 were $53 million compared to net cash inflows of
$636 million for the prior year. The movement is mainly attributable to the net effect of:
an increase in outwards reinsurance premium expense paid of $687 million, predominantly related to the inception of
payments on the combined 12.5% quota share agreements;
an increase in income taxes paid of $242 million predominantly driven by a higher final tax liability for the 2017 financial year
paid in the current year, combined with higher monthly instalment rates for the current year; and
an increase in other operating receipts of $236 million, predominantly driven by reinsurance commissions received in respect
of the combined 12.5% quota share agreements.
C. INVESTMENTS
The Group’s investments totalled $11.0 billion as at 30 June 2018, excluding investments held in joint ventures and associates,
with nearly 58% represented by the technical reserves portfolio. The decrease in total investments since 30 June 2017 ($12.1
billion) reflects the combined effect of:
a reduction in technical reserves, in response to further quota share and prior period reserve release effects; and
an increase in shareholders’ funds, including $350 million of inflow from the subordinated note issue in March 2018 and
operating earnings in excess of dividend payments.
IAG’s overall investment allocation is conservatively positioned, with 82% of total investments in fixed interest and cash as at 30
June 2018. Technical reserves are 100% invested in fixed interest and cash, while shareholders’ funds comprise a mix of growth
asset categories and fixed interest and cash. IAG’s allocation to growth assets in shareholders’ funds was approximately 43% at 30
June 2018, and is consistent with IAG’s investment strategy target range.
D. INTEREST-BEARING LIABILITIES
IAG’s interest-bearing liabilities stood at $1,960 million at 30 June 2018, compared to $1,624 million at 30 June 2017. The net
increase reflects the issue in March 2018 of $350 million of subordinated notes which qualify as Tier 2 Capital.
E. CAPITAL MIX
IAG 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 2018, IAG’s capital mix was close to the mid-point of targeted ranges. Debt and hybrids represented 34.3% of total
tangible capitalisation, with the increase since the first half reflecting the issue of $350 million of subordinated notes referenced
above.
11
F. CAPITAL MANAGEMENT
IAG remains strongly capitalised under the Australian Prudential Regulatory Authority's (APRA) Prudential Standards, with regulatory
capital of $5,018 million at 30 June 2018 (2017: $4,526 million). IAG 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 2018, IAG had a PCA multiple of 2.03 (2017: 1.70) and a CET1 multiple of 1.26 (2017: 1.09).
Further capital management details are set out in Note 3.1 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, 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 strategy is to optimise its core insurance business while creating future growth options.
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.
12 IAG ANNUAL REPORT 2018
Strategic priorities
IAG has identified three key strategic priorities, supported by organisational capabilities, to deliver its strategy:
I. Customer – world-leading customer experiences:
Create a delivery platform that transforms customer experiences;
Better connect customers and automate processes, enabling IAG to reach more customers in a timely manner;
Develop an innovation approach which provides the ability to think differently and deliver quickly;
Embed cognitive capabilities and artificial intelligence that anticipate customers’ needs; and
Use data to power decision-making, allowing IAG to better understand its customers.
II. Simplification – simplified, modular and lower cost operating model:
Reduce organisational complexity by consolidating technology platforms, harmonising products, simplifying processes and
systems, and executing the technology strategy;
Leverage operational partners to optimise the operating model and drive scale economies across the value chain; and
Improve allocation and maximise utilisation of the preferred repairer network to reduce average claim size.
III. Agility – an agile organisation distinguished by innovation, speed and execution skills:
Create a disciplined approach to IAG’s management and leadership, including building stronger role clarity and introducing
agile ways of working;
Build a talent pipeline based on the skills required to deliver IAG's strategy and help IAG people transition to the future of work;
and
Be recognised as a purpose-led organisation that shapes its internal and external environment.
B. BUSINESS RISK AND RISK MANAGEMENT
IAG acknowledges that it has to take risk in an informed manner in pursuit of its strategic objectives and to meet industry and
stakeholder expectations. This means that IAG needs to manage its baseline compliance obligations and beyond that, take risk in
a manner that is aligned with customer, shareholder, industry, regulatory and other key stakeholder expectations.
IAG uses an enterprise approach to risk and its risk management framework is a core part of the governance structure, which
includes internal policies, key management processes and culture. The Group Risk Management Strategy (RMS) is reviewed
annually, or as required by the Risk Committee (RC), before being recommended for approval by the Board. IAG’s Chief Risk Office
function provides regular reports to the RC on the operation of and any changes to IAG’s risk management framework, the status of
key risks, risk and compliance incidents, risk trends and IAG's risk profile. IAG’s Internal Audit function provides reports to the Audit
Committee (AC) on significant audit findings and other audit-related matters.
Roles and responsibilities of the Board and its standing committees, the AC, the RC, the People and Remuneration Committee
(PARC) and the Nomination Committee, are set out in the Corporate Governance section of the IAG website.
IAG 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 IAG that have been identified in IAG's RMS:
strategic risk – the risk of not achieving corporate or strategic goals due to poor business decisions regarding future business
plans and strategies and/or a lack of responsiveness to changes in the business environment;
insurance risk – the risk that IAG 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);
reinsurance risk – the risk of insufficient or inappropriate reinsurance coverage, inadequate underwriting and/or pricing of
reinsurance exposures retained, inadequate or inappropriate reinsurance recovery management, reinsurance arrangements
not being legally binding, reinsurance concentration risk and credit counterparty concentration risk to reinsurers;
financial risk – 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;
operational risk – the risk of loss resulting from inadequate or failed internal processes, people and systems or from external
events; and
regulatory risk and compliance – the 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.
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 IAG's overall risk management framework, which is outlined in the RMS, is set out in Note 3.1 within the financial
statements and in the Corporate Governance Statement, which is available at www.iag.com.au/about-us/corporate-governance.
13
C. ECONOMIC, ENVIRONMENTAL AND SOCIAL SUSTAINABILITY RISK
Economic, environmental and social sustainability risks are identified and managed as part of IAG’s risk management framework,
as overseen by the Board. Through risk profiling and ongoing trend analysis, information on these risks is collected and reported to
the Group Leadership Team (GLT) and Board, and used to update IAG's strategy at appropriate intervals. This is supported by IAG's
annual materiality process and engagement with IAG's Shared Value Advisory Council to identify and develop mitigation approaches
to these risks.
As a general insurer, IAG is exposed to economic, environmental and social sustainability risks and opportunities. The IAG Board
has overarching responsibility for these areas, which are managed by the business and supported by IAG's shared value and
sustainability subject matter experts. 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 make decisions on how the Company responds through its 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.
Annually IAG undertakes a materiality assessment to help guide IAG's shared value and sustainability approach and ensure its
reporting addresses risks and opportunities that matter most to IAG's stakeholders and 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.
IAG 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 IAG's commitment to help make communities Safer, Stronger and
More Confident. IAG'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 its 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 to 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 2018 Annual Review and Safer Communities 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.
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 2018, IAG
has complied with the Australian Securities Exchange Corporate Governance Council Principles and Recommendations (3rd edition)
and is compliant as at 15 August 2018. Further details on IAG's corporate governance practices and the Corporate Governance
Statement are available at www.iag.com.au/about-us/corporate-governance.
14 IAG ANNUAL REPORT 2018
OUTLOOK
IAG expects to report further improvement in its underlying performance in financial year 2019. IAG’s GWP guidance is growth of 2-
4%. This is expected to be derived from:
further rate increases across short-tail personal and commercial classes;
modest volume increases in personal lines categories, notably motor; and
a slight decline in commercial volumes, including those from further remediation activity.
Higher underlying GWP growth is anticipated, after allowance for residual NSW CTP scheme reform effects (approximately $80
million) and ceased or exited business activities (approximately $40 million) including retail warranty and consumer credit.
IAG’s financial year 2019 reported insurance margin guidance is a range of 16.0-18.0%. Underlying assumptions are:
a net improvement in pre-tax profit of approximately $100 million from optimisation program initiatives;
net losses from natural perils in line with an allowance of $608 million (increased to $900 million, pre-quota share);
prior period reserve releases of around 2% of NEP; and
no material movement in foreign exchange rates or investment markets.
The reported insurance margin guidance also incorporates a further uplift of approximately 125bps from a full year’s effect of the
combined 12.5% quota share agreements which commenced on 1 January 2018.
Excluding the factors outlined above, IAG’s overall underlying performance in financial year 2019 is expected to reflect:
steady profitability in short-tail personal lines within Australia Consumer;
a lower contribution from long-tail CTP in Australia Consumer stemming from changed scheme design in NSW which came into
force on 1 December 2017;
an improved Australia Business margin, from ongoing momentum in average commercial line rates;
the maintenance of strong profitability in New Zealand; and
a higher non-quota share reinsurance expense as a result of:
increased protection from the 2019 financial year stop loss cover which extends directly from the 2019 financial year
natural perils allowance; and
increased renewal costs attached to commercial line per risk excess of loss cover, reflecting recent high large loss
experience.
While IAG expects prior period reserve releases of around 2% of NEP in financial year 2019, it remains the Group’s belief that long-
term reserve releases of around 1% of NEP are a recurring feature of its reported operating results in benign inflationary periods.
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.
Cash earnings are used for the purposes of targeted ROE and dividend payout policy and are defined as:
net profit after tax attributable to shareholders of the Parent;
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*
*
Cash earnings and cash payout ratio represent non-IFRS financial information.
2018
$m
923
107
1,030
9
(5)
1,034
331
474
805
2017
$m
929
59
988
8
(6)
990
307
474
781
77.9%
78.9%
15
The Board has determined to pay a final fully franked dividend of 20.0 cents per ordinary share (cps) (2017: 20.0cps). This brings
the full year dividend to 34.0 cents per share (2017: 33.0cps), an increase of 3%. The final dividend is payable on 27 September
2018 to shareholders registered as at 5pm Australian Eastern Standard Time (AEST) on 22 August 2018.
The full year dividend equates to a payout ratio of 77.9% of cash earnings, and is in accordance with IAG’s dividend policy to pay
out 60-80% of cash earnings in any financial year.
As at 30 June 2018, and after allowance for payment of the final dividend, IAG’s franking balance was $100 million, giving it the
capacity to fully frank a further $234 million of distributions. IAG’s franking balance includes its 70% entitlement to franking held
by IMA, which at 30 June 2018 amounted to $164 million.
IAG’s franking credit balance has reduced in recent years, owing to past capital management measures and the move to a higher
dividend payout policy. Following the special dividend component of the initiative planned to occur in November 2018, it is
anticipated that IAG’s franking balance will further reduce. As a result, IAG may not be in a position to fully frank distributions on its
securities from the second half of calendar 2019 onwards, with franking from that date expected to be in the range of 70% to
100%.
The dividend reinvestment plan (DRP) will operate for the final dividend for shareholders registered for the DRP as at 5pm on 23
August 2018. The issue price per share for the final dividend will be the Average Market Price as defined in the DRP terms, and
there will be no discount for participants. Shares allocated under the DRP will be purchased on-market. Information about IAG’s
DRP is available at: http://www.iag.com.au/shareholder-centre/dividends/reinvestment.
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
During the financial year the following changes became effective:
On 19 July 2017, IAG announced the creation of a single Australian division 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 reporting period 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 IAG’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 8 December 2017, IAG announced it had entered into three agreements to quota share a combined 12.5% of its
consolidated business from 1 January 2018. The agreements, with Munich Re, Swiss Re and Hannover Re, are on a whole-of-
account basis, covering IAG’s consolidated business in Australia, New Zealand and Thailand and have an average initial period
of more than five years. Expected benefits include reduced earnings volatility, reduced reliance on catastrophe reinsurance
cover and exposure to future volatility in reinsurance rates, and reduced regulatory capital requirements.
On 29 March 2018, the Company issued $350 million of subordinated convertible term notes. The subordinated notes qualify
as Tier 2 Capital under APRA's Prudential Framework for General Insurance.
On 19 June 2018, IAG announced it had entered into a sale agreement with Tokio Marine & Nichido Fire Insurance Co., Ltd
(Tokio Marine) for IAG’s operations in Thailand and Indonesia. Separate to the transactions with Tokio Marine, IAG has
reached an agreement to sell its interest in AAA Assurance Corporation, based in Vietnam. All transactions are expected to
conclude in the financial year ending 30 June 2019, subject to regulatory approvals or notifications. As a result of the sale
agreements, the Asian businesses have been identified as discontinued operations in the current financial year and
comparative figures have been re-presented accordingly. The interests in Malaysia and India continue to be treated as
associates, but have been reclassified to Corporate and other within IAG’s segment reporting.
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 within the financial statements.
These include:
On 15 August 2018, the Board determined to pay a final dividend of 20.0 cents per share, 100% franked. The dividend will be
paid on 27 September 2018. The DRP will operate by acquiring shares on-market for participants with no discount applied.
On 15 August 2018, IAG announced a capital management initiative amounting to 25.0 cents per ordinary share, or $592
million, expected to comprise a 19.5 cents capital return and a 5.5 cents fully franked special dividend, with a share
consolidation which would reduce IAG's ordinary issued shares by approximately 2.4% and preserve consistency of EPS
calculation. The capital return and share consolidation are subject to shareholder approval at the AGM, and IAG has made
payment of the special dividend conditional on approval being obtained. If approved, the capital management initiative is
expected to occur on or around 26 November 2018.
16 IAG ANNUAL REPORT 2018
NON-AUDIT SERVICES
During the financial year, KPMG performed certain other services for IAG 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 IAG’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 did 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 $2,741 thousand (refer to Note 8.3 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 40 and forms part of the Directors' Report for the year ended 30
June 2018.
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.
17
REMUNERATION REPORT
EXECUTIVE SUMMARY
IAG’s remuneration approach focuses Executives on generating strong financial outcomes for shareholders, while creating a world-
leading experience for IAG’s customers and fostering an agile culture among employees. In doing this, IAG seeks to reward
Executives for short-term outperformance and for building long-term sustainable success.
The value IAG has created is reflected in the remuneration provided to Executives.
IAG rewards Executives for the value they help create through a combination of fixed pay, short-term incentives (STI) and long-term
incentives (LTI). IAG delivered improved business performance on an underlying basis in the 2018 financial year. During the year,
further steps were taken to reduce earnings volatility and regulatory capital requirements via greater use of reinsurance quota
share capital. The announced sale of IAG assets in Thailand, Vietnam and Indonesia will result in a profit in the next financial year
and, in tandem with quota share effects, is facilitating a considerable return of capital to shareholders.
The Board considers overall Group performance, together with an assessment of each Executive’s personal performance, to
determine individual STI outcomes. Reflecting IAG’s strong performance during the year ended 30 June 2018, the Group Balanced
Scorecard outcome was 74% of the maximum achievable. Consistent with this outcome, the average STI payment for Executives
was 71% of the maximum achievable, with payments to individual Executives ranging from 50% to 84%.
Based on strong returns over the three-year period up to 30 June 2017, the cash Return on Equity (ROE) hurdle of the 2014/2015
LTI award vested in full. The Board reviewed the ROE vesting outcome to ensure it appropriately reflects the value created for
shareholders. Consistent with the approach used when calculating cash ROE in previous tests, the cash earnings result was
reduced by the value of the software impairments announced to the market on 19 August 2016.
On 30 September 2017, the relative Total Shareholder Return (TSR) hurdle of the 2013/2014 LTI award was tested. IAG’s TSR was
ranked at the 42nd percentile of the peer group and consequently this award did not vest. During the year, the TSR hurdle of the
2012/2013 LTI award was tested for the final time. IAG’s TSR was ranked at the 69th percentile of its peer group, resulting in a
final vesting outcome of 88%. Given that 56% of this award had vested previously, Executives received an additional 32% vesting
during the year. This was the last LTI grant issued with a retesting provision and there will be no further retests of any LTI grant.
In determining variable pay outcomes for Executives, the Board considers IAG’s risk culture and evaluates how well risks have been
identified, assessed and mitigated. This process ensures remuneration practices encourage behaviour that supports sound risk
management practices and IAG’s long-term financial soundness. In order to inform the Board’s assessment, the Group CEO
provided the Board with his evaluation of IAG’s risk management performance. In addition, the Board also separately received
input from the acting Chief Risk Officer and the Chair of the Risk Committee. The Board’s assessment of IAG’s risk management
performance was considered both in determining STI outcomes for the year, and also in determining whether there were any
material risk events that warranted an adjustment to unvested awards of LTI or deferred STI. Based on the assessment
undertaken by the Board, no adjustment for material risk failings was applied to the STI awards for the 2018 financial year, nor to
the deferred STI or LTI awards granted to Executives in prior years that will vest by 1 September 2018. The Board will continue to
consider risk-based adjustments when determining STI awards and when elements of deferred pay come due.
In the 2018 financial year, Craig Olsen, Chief Executive, New Zealand, was the only Executive to receive a fixed pay increase as part
of the August 2017 review to meet market pay levels.
For the 2019 financial year, the Board has approved fixed pay increases for four Executives. Peter Harmer was appointed Group
CEO in 2015. At this time, the Board determined that his fixed pay should be rebased downwards relative to the previous Group
CEO. Reflecting this decision, his fixed pay was set at $1.7 million and was unchanged for the two subsequent financial years. For
the August 2018 pay review, the Board has determined to increase his fixed pay from $1.7 million to $1.9 million to better reflect
market pay levels and his performance in the role. During the August 2018 fixed pay review, the Board also determined to increase
the fixed pay of Mark Milliner, Chief Executive Officer, Australia, to reflect a change in role and market relativities; and Craig Olsen,
Chief Executive, New Zealand and Julie Batch, Chief Customer Officer to reflect market pay levels and performance in the role.
These increases will be reflected in the Remuneration Report for the year ending 30 June 2019.
IAG considers the interests of Non-Executive Directors and Executives should be aligned with those of shareholders. To support
this alignment, Non-Executive Directors and Executives are required to hold a significant number of IAG shares after a set period.
Non-Executive Directors who had served at least three years, and Executives who had served at least four years as at 30 June 2018
were each assessed, and all met this requirement.
IAG continues to evolve its remuneration framework to focus the Executives on generating value for all of IAG’s stakeholders.
Issues highlighted through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry,
APRA’s review of remuneration practices across regulated organisations, the ‘Retail Banking Remuneration Review’ (Sedgwick
Report) and the Banking Executive Accountability Regime, have significant implications for the design and governance of
remuneration frameworks. The Board is reviewing IAG’s approach to executive remuneration to ensure it remains aligned to IAG’s
Purpose and strategy, while also reflecting broader community expectations. As part of this review, the following enhancements to
IAG’s remuneration approach were introduced for the year ended 30 June 2018:
Applying a more rigorous process for considering risk when assessing performance;
Formalising the role of the Chair of the Risk Committee and Chief Risk Officer in informing the Board’s assessment of risk
management performance;
Reducing the variable component of the Chief Risk Officer’s remuneration mix to further support the independence of this role;
and
Reviewing IAG’s sales incentive plans with the aim of improving the customer outcomes and supporting IAG’s Purpose.
In addition to the changes described above, the Board has determined that the following changes to IAG’s remuneration approach
will apply for the year ending 30 June 2019:
The proportion of an Executive’s STI award that is deferred will increase from one third to one half. This change will apply to
any Executive STI awards made from September 2019; and
The performance period for the cash ROE hurdle will be extended from three to four years.
The Board will continue to review the remuneration framework to ensure it is fit for purpose and further changes may be made in
future years.
18 IAG ANNUAL REPORT 2018
CONTENTS
A.
B.
C.
D.
E.
Key management personnel covered in this report
Executive remuneration structure
Linking IAG'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
19
20
24
29
30
32
34
35
36
38
A. KEY MANAGEMENT PERSONNEL COVERED IN THIS REPORT
This report sets out the remuneration details for IAG’s key management personnel (KMP). Although the Non-Executive Directors are
disclosed in the report, they do not have management responsibility. Therefore, their remuneration is dealt with separately.
The accounting standards define KMP to include Non-Executive Directors and executives who have ultimate accountability for
planning, directing and controlling the activities of the organisation, either directly or indirectly.
Previously, IAG determined that all members of the Group Leadership Team were KMP. However, as a result of cumulative
changes, including the changes to the Group Leadership Team structure announced to the market in July 2017, the Board
considered it appropriate to reconsider the composition of IAG’s KMP. Accordingly, following a comprehensive review, the Board
determined that effective 1 July 2017, executive KMP (referred to in this report as Executives) will comprise the Group CEO and
those of his or her direct reports who:
manage a business unit; or
The Board considers that this application of the definition of KMP more accurately identifies those in the Group who have ultimate
accountability for planning, directing and controlling IAG’s activities.
Applying this definition, not all members of the Group Leadership Team are KMP. The following executives who appeared in the
Remuneration Report for the year ended 30 June 2017 are no longer KMP:
These executives will not appear in this Remuneration Report. The full list of KMP for the year ended 30 June 2018 is presented
below.
NAME
Chris Bertuch, Group General Counsel and Company Secretary;
Duncan Brain, Chief Executive, Asia; and
David Harrington, Group Executive Strategy and Corporate Development.
have accountability for the risk or financial control of the organisation; or
have accountability to deliver a strategic priority.
TERM AS KMP(1)
POSITION
Managing Director and Chief Executive Officer
Chief Customer Officer
Acting Chief Risk Officer
Chief Financial Officer
Group Executive, People, Performance and Reputation
Chief Executive Officer, Australia
Chief Executive, New Zealand
EXECUTIVES
Peter Harmer
Julie Batch
Tim Clark
Nicholas Hawkins
Jacki Johnson
Mark Milliner(2)
Craig Olsen
EXECUTIVES WHO CEASED AS KMP
Ben Bessell(2)
Anthony Justice(2)
Clayton Whipp(3)
NON-EXECUTIVE DIRECTORS
Elizabeth Bryan
Duncan Boyle
Hugh Fletcher
Sheila McGregor
Jon Nicholson
Helen Nugent
Tom Pockett
Michelle Tredenick
Philip Twyman
NON-EXECUTIVE DIRECTOR WHO CEASED AS KMP
Alison Deans
(1)
Chief Executive, Australian Business Division
Chief Executive, Australian Consumer Division
Chief Risk Officer
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
Independent Non-Executive Director
Independent Non-Executive Director
Full year
Full year
From 27 February 2018
Full year
Full year
Full year
Full year
Ceased 19 July 2017
Ceased 18 November 2017
Ceased 1 December 2017
Full year
Full year
Full year
From 13 March 2018
Full year
Full year
Full year
From 13 March 2018
Full year
Ceased 20 October 2017
(2)
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 Officer,
Australia. From this date, Ben Bessell reported to Mr Milliner and no longer met the criteria of a KMP. Anthony Justice remained a KMP until he ceased employment
with IAG.
Clayton Whipp retired from IAG effective 1 December 2017.
(3)
Key terms that are used throughout the report are defined in detail in Appendix 5.
19
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;
support the best interests of IAG’s customers;
maintain market competitiveness to attract and retain high quality people; and
encourage constructive, collaborative behaviours that support:
IAG’s long-term financial soundness; and
IAG’s risk management framework.
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 for Executives during the year ended 30 June 2018.
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
between Executives and market pay levels for similar external
roles.
Further details relating to fixed pay are presented in Table 2.
PURPOSE
Fixed pay is provided to remunerate IAG
employees for performing their ongoing work.
STI
LTI
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.
STI plays a key role in aligning superior
operational outcomes for shareholders with
remuneration outcomes for management.
Two thirds of the total STI is delivered in cash in the
remuneration review following the financial year end; and the
remaining one third is deferred over the subsequent two years
based on continued service. The deferred portion is subject to
downward adjustment (also referred to as malus) if determined
appropriate by the Board.
Deferral of incentives encourages ongoing
employment of senior management and allows
the Board to apply downward adjustment (malus)
when appropriate. Share-based remuneration
also reinforces the link between shareholder
value creation and rewarding employees.
Further details relating to the STI plan, including changes being
introduced for the 2019 financial year, are presented in Table 3.
LTI rewards Executives for achieving long-term financial
performance based on two hurdles: cash ROE over a three-year
period and relative TSR over a four-year period.
Further details relating to the LTI plan, including changes being
introduced for the 2019 financial year, are presented in Table 4.
LTI creates a direct link between Executive
reward and the return experienced by
shareholders. LTI awards are subject to the two
hurdles below:
cash ROE provides evidence of IAG’s return
on total shareholders’ equity. 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 Executives is based on IAG’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.
20 IAG ANNUAL REPORT 2018
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 the ongoing members of the current Executive Team.
The remuneration mix is current as at 30 June 2018.
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 IAG. Relevant local market peer groups are referenced for overseas-based Executives.
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 2018 financial year, Craig Olsen was the only Executive to receive a fixed pay increase, to
meet market pay levels.
V. Short-term incentive
TABLE 3 – STI AND DEFERRED STI
Behavioural gateway
All employees are required to demonstrate appropriate behaviours in the achievement of
performance outcomes. The behavioural gateway only determines STI eligibility. Those who have
not behaved in line with expected standards will not receive any STI in that year, regardless of their
performance. If the behavioural gateway requirements are met, the size of the STI award is
subsequently determined based on individual and company performance.
STI opportunity
For Executives, their behaviours during the year are assessed by the Group CEO who subsequently
recommends to the Board whether they are eligible for an STI. For the Group CEO, an assessment of
his or her behaviour is made by the Board.
For the 2018 performance year, the maximum value of STI that could be granted to the Group CEO
was 150% of fixed pay. The maximum value of STI for the Acting Chief Risk Officer was 80% of fixed
pay, while for the other Executive Team members (Chief Executive Officer, Australia; Chief Executive,
New Zealand; Chief Financial Officer; Chief Customer Officer; and Group Executive, People,
Performance and Reputation) the maximum was 120% of fixed pay.
For the 2019 performance year, the Board determined that the maximum value of STI that can be
granted to the Chief Financial Officer and Chief Executive Officer, Australia will increase to 130% of
fixed pay. The STI opportunities for all other Executives will remain unchanged.
21
Performance measures
and evaluation
Instrument
Key terms of the
deferred STI
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). In determining STI awards, consideration is also given to the effectiveness of risk
management during the year.
The People and Remuneration Committee (PARC) reviews the Group CEO’s performance based on
Group Balanced Scorecard outcomes and the effectiveness of risk management during the year and
recommends an STI award for approval by the Board.
The STI awards for members of the Executive Team are recommended by the Group CEO to PARC
based on an assessment of their contribution to Group Balanced Scorecard outcomes and the
effectiveness of risk management during the year. 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.
An Executive’s STI award is comprised of a cash component and a deferred component. 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 award, with half vesting after
one year and the balance vesting after two years. The deferred component is typically paid in the
form of Deferred Award Rights (DARs), unless it is not possible to do so, in which case cash
equivalent payments are made according to the same vesting schedule.
Effective the year ending 30 June 2019, the proportion of STI deferred will increase from one third to
one half of the total STI awarded to an Executive.
DARs are rights over the Company's ordinary shares. DARs are granted at no cost to the Executives
and IAG’s policy is that no dividend is paid or payable for any unvested, or vested and unexercised,
DARs. The Board has determined to make an exception to this approach for holders of DARs due to
vest in 2018 and 2019 to ensure they are not disadvantaged as a result of the decision to bring
forward the record date for final dividends.
The record date to be eligible for final dividend payments has been brought forward to avoid a delay
in distributing profits to shareholders. A consequence of the change in dates is that the DARs due to
vest in 2018 and 2019 will no longer be eligible for the final dividend as the vesting dates will now
be shortly after the relevant record dates. In recognition of this adverse consequence for DARs
holders, the Board has determined to make a cash payment to employees who hold DARs at the
2018 and 2019 vesting dates, equivalent in value to the dividends they would have otherwise
received had the record date not been moved. These payments will be disclosed in the 2019 and
2020 Remuneration Reports.
The number of DARs issued is calculated based on the volume-weighted average share price (VWAP)
of the Company's ordinary shares over the 30 days up to and including 30 June before the grant
date.
Executives who participate in the STI plan become eligible to receive one ordinary share of the
Company per DAR by paying an exercise price of $1 per tranche of DARs exercised. Vesting of DARs
is subject to an Executive’s continuing employment with IAG at the vesting date, or meeting the
conditions to retain unvested DARs upon cessation, as outlined in the ‘Forfeiture Conditions’ section
below.
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 determines an alternative vesting date, which would only be done in exceptional
circumstances.
22 IAG ANNUAL REPORT 2018
VI. Long-term incentive
TABLE 4 – LTI
Overview
LTI opportunity
Instrument
Key terms of the LTI
Forfeiture conditions
LTI grants are determined annually by the Board. The grants are in the form of Executive Performance
Rights (EPRs) that have performance hurdles which align to IAG’s strategic financial targets.
For the 2018 performance year, the maximum value of LTI that could be granted to the Group CEO was
150% of fixed pay. The maximum value of LTI that could be granted to the acting Chief Risk Officer was
40% of fixed pay, while the maximum for other Executive Team members was 125% of fixed pay.
For the 2019 performance year, the Board has determined that the maximum value of the LTI that can
be granted to the Group CEO will increase to 165% of fixed pay, while the maximum value of LTI that can
be granted to the Chief Financial Officer and Chief Executive Officer, Australia will be 140% of fixed pay.
The maximum LTI opportunities for all other ongoing Executives will remain unchanged at 125%.
If performance hurdles are achieved, rights can be settled with either the Company's ordinary shares or
an equivalent cash payment. The Board may 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 VWAP for the five trading days up to and
including the vesting date.
Rights granted prior to 1 July 2013 are only settled with the Company's ordinary shares.
The number of EPRs issued is calculated based on the VWAP 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. There are no opportunities to retest these
performance hurdles. For awards made in the year ending 30 June 2019 onwards, the Board has
approved an increase to the performance period of the ROE hurdle from three years to four years.
Executives may not enter into transactions or arrangements which operate to limit the economic risk of
unvested entitlements to IAG securities.
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 IAG, 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.
PERFORMANCE HURDLES CASH ROE
Description
50% weighting
RELATIVE TSR
50% weighting
Testing
Cash ROE is measured relative to IAG’s
weighted average cost of capital
(WACC).
The cash 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 is used to determine the final
vesting outcome.
For grants to be made in November
2018 onwards, the performance period
for the cash ROE hurdle will increase
from three to four years.
Relative TSR is measured against that of the top 50 industrial
companies 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 (e.g. due to acquisition or delisting), may be
removed from the peer group.
The relative 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-month VWAP to 30 September.
IAG removed retesting from LTI grants from July 2013 onwards.
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. The final retest of these legacy awards occurred in the
year ended 30 June 2018 and there will be no further retesting
of any LTI awards in future years.
Vesting
0% vesting <1.2 x WACC
0% vesting if <50th percentile of peer group
20% vesting at 1.2 x WACC
50% vesting if aligned to 50th percentile of peer group
100% vesting at 1.6 x WACC
100% vesting if aligned to 75th percentile of peer group
with straight-line vesting in between.
with straight-line vesting in between.
23
C. LINKING IAG'S PERFORMANCE AND REWARD
I. Linking IAG's short-term performance and short-term reward
IAG’s strategy focuses Executives to achieve a successful, sustainable company that can deliver on IAG’s Purpose of ‘making your
world a safer place’. The initiatives that enable IAG to deliver on these objectives are grouped under three broad strategic
priorities: ‘customer’, ‘simplification’ and ‘agility’. In working to achieve these priorities, IAG is mindful of its social and
environmental responsibilities.
The 'customer' priority is to deliver world-leading customer experiences. To achieve this, IAG is pursuing a program of work that is
transforming IAG from a product-led organisation to one that is orientated around the customer and informed by a deeper data-
driven understanding of customers and their behaviours.
The 'simplification' priority is focused on developing a simplified, modular and lower cost operating model. The organisational
capabilities that are helping to achieve the simplification priority are technology transformation, operational partnering and supply
chain improvements.
The 'agility' priority defines the work to become an agile organisation distinguished by innovation, speed and importantly, execution
skills.
The tables below provide a summary of key balanced scorecard objectives and outcomes for IAG for the year ended 30 June 2018.
The objectives were agreed with the Board at the beginning of the financial year and are designed to focus Executives on delivering
superior performance outcomes against the agreed priorities. In determining these priorities, the Board has also considered what
they believe will support IAG’s long-term financial soundness and ensured the risks undertaken are appropriately managed within
the risk appetite. Each Executive’s performance is also assessed based on their contribution to the objectives outlined below.
TABLE 5a – BALANCED SCORECARD OBJECTIVES
CATEGORY
Financial measures
OBJECTIVE
Earnings
(60% of scorecard)
RATIONALE
Net profit after tax shows IAG’s overall earnings after all expenses and
taxation attributable to shareholders of the Company.
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
Underlying profit has been used as the measure of profitability for the
2018 financial year. In previous years, IAG has used underlying
insurance margin to present a view of normalised performance. IAG has
adopted underlying profit as the measure as it provides a more holistic
view of the absolute earnings power of IAG’s core insurance-related
businesses. It provides a view of the underlying profitability (in dollars) of
the underwriting, fee-based and associate businesses and is an important
measure of how IAG generates value for shareholders.
Growth
IAG continues to expand its product and service offerings to its markets,
measured through Gross Written Premium growth, creating value for its
shareholders, customers and partners.
Non-financial measures
Customer advocacy
(40% of scorecard)
Employee advocacy
Risk appetite
24 IAG ANNUAL REPORT 2018
IAG’s strategy is designed to 'put the customer at the centre of everything
we do'. IAG considers this essential to driving the 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-leading customer
experiences, including through digital channels. IAG uses the Customer
Net Promoter Scores to measure the impact of these initiatives for its
customers.
IAG seeks to motivate and engage its employees around its Purpose of
'making your world a safer place'. Creating a strong organisational
culture helps IAG deliver strong business results. IAG uses the Employee
Net Promoter Score to measure its effectiveness in fostering a strong
organisational culture.
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 2018
OBJECTIVE AND
WEIGHTING
Earnings
MEASURE AND OUTCOME
Exceeded
COMMENT
The strong net profit after tax result was driven largely by an improvement in
the underlying profitability of the business, significantly higher than anticipated
reserve releases and relatively benign natural perils experience.
20%
The Group’s earnings
exceeded target, with a net
profit after tax of $923
million.
Controllable
operating expense
Partially met
15%
The Group remains on
track to achieve its
targeted run-rate reduction
of 10% of controllable
operating expenses at the
end of the 2019 financial
year.
Profitability
Partially exceeded
15%
Growth
10%
IAG’s underlying result was
ahead of target. This was
achieved whilst also
lowering the Group’s risk
exposure via a new whole-
of-account quota share
arrangement mid-way
through the year.
Exceeded
IAG achieved Gross Written
Premium growth from
continuing operations of
1.8% (or 2.4% after
adjusting for currency
movements), which
exceeded the target.
Customer advocacy
Met
20%
IAG sets a Customer Net
Promoter Score (NPS)
target relative to its peers.
IAG’s NPS for the 2018
financial year was 4 points
above the competitive
market average. This met
the target range of +4 to
+6 NPS points above the
competitor average.
Controllable operating expenses in the period were influenced by higher costs
primarily associated with the restructure of the Australian division announced
in July 2017, additional investment in relation to a number of optimisation
initiatives and incremental costs related to the Royal Commission.
IAG has partially exceeded its underlying result target for the year. The
underlying performance of the core general insurance business improved over
the prior year, reflecting rate-driven growth in short-tail personal and
commercial classes in Australia and New Zealand, lower large loss experience
in Australian commercial property and improved NSW CTP profitability.
IAG’s reported growth for the year was adversely impacted by a combination of
lower premium attributable to reform of the NSW CTP Scheme, and ceasing
participation in Swann’s motorcycle and motor distribution channels.
Normalising for these effects and the impact of foreign currency movements
(particularly the NZD), IAG’s underlying growth was over 4%. This underlying
growth has been predominantly driven by rate increases.
IAG continued to perform above its competitors during the 2018 financial year.
The stable overall performance was driven by NRMA achieving an NPS of +19,
with improvements seen for the SGIO, SGIC and New Zealand-based brands.
However, a decline has been recorded for CGU, with an NPS of -3. IAG
continues to invest in its customer advocacy programs to drive improvements
across the customer journey.
25
OBJECTIVE AND
WEIGHTING
Employee advocacy
10%
MEASURE AND OUTCOME
Partially exceeded
IAG measures employee
advocacy using an
Employee Net Promoter
Score (eNPS). The eNPS
target was to increase
IAG’s eNPS by between 8
and 16 points compared to
the year ended 30 June
2017.
IAG's eNPS result for June
2018 saw an 18-point
improvement, partially
exceeding the target.
Risk appetite
Met
10%
IAG measures risk-taking
within the Board approved
risk appetite. IAG targets
95% of operations to be
within the risk appetite
statements, with formal
risk acceptance in place for
areas operating outside of
this risk appetite statement
and appropriate actions to
mitigate being in place.
COMMENT
IAG has experienced a significant improvement in IAG's employee advocacy
scores, which employees attribute to IAG’s leadership effectiveness, approach
to workplace flexibility, employment benefits, work life balance and a positive
work environment.
IAG is implementing a system of work to support the shift towards an agile
culture. The positive improvements in eNPS suggest the implementation of
this system of work is generating positive outcomes for IAG’s employees.
There has been a significant level of improvement in relation to risk
management and governance across IAG during the 2018 financial year. This
work has resulted in an effective risk management framework and improved
progress in risk maturity in both Australia and New Zealand. IAG will continue
to invest in improving its risk management framework to be sufficiently robust
when applied to IAG future strategy.
II. STI outcomes for the year ended 30 June 2018
The following table sets out the STI outcomes for Executives for the year ended 30 June 2018. Reflecting the desire to encourage
collaboration among Executives, STI outcomes are based on each Executive’s contribution to the Group Balanced Scorecard
objectives described in Table 5a. The Board has the ability to adjust each Executive’s STI up or down by 20%, based on their
performance against individual goals and how they have fulfilled the accountabilities of their role.
Prior to determining the final incentive outcome, the Board assesses the risk management performance of the Executives, to
ensure that incentives provided to Executives are appropriate. The assessment of risk by the Group CEO was informed by the Chair
of the Risk Committee and acting Chief Risk Officer, who also subsequently provided their assessment directly to the Board. The
Board considered whether any risk issue required the adjustment of an STI outcome for the year ended 30 June 2018, or to
deferred STI awards from prior years due to vest on 1 September 2018, and determined that no adjustments were necessary. The
Board will continue to consider risk-based adjustments when determining future STI awards. The Board also exercised its
discretion to ensure that the final Balanced Scorecard outcomes appropriately reflected performance. The average STI for all
Executives was 71% of the maximum achievable, with payments ranging from 50% to 84% of the maximum achievable.
TABLE 6 – ACTUAL STI OUTCOMES FOR THE YEAR ENDED 30 JUNE 2018
MAXIMUM STI
OPPORTUNITY
(% of fixed pay)
150 %
120 %
120 %
80 %
120 %
120 %
120 %
120 %
120 %
CASH STI
OUTCOME
DEFERRED STI
OUTCOME
ACTUAL STI OUTCOME
(% of maximum)(1)
74 %
72 %
60 %
70 %
80 %
76 %
72 %
84 %
50 %
(% of fixed pay)
111 %
86 %
72 %
56 %
96 %
91 %
86 %
101 %
60 %
(2/3 OF OUTCOME)
(% of fixed pay)
74 %
57 %
48 %
37 %
64 %
61 %
57 %
67 %
40 %
(1/3 OF OUTCOME)
(% of fixed pay)
37 %
29 %
24 %
19 %
32 %
30 %
29 %
34 %
20 %
Peter Harmer
Julie Batch
Ben Bessell
Tim Clark
Nicholas Hawkins
Jacki Johnson
Mark Milliner
Craig Olsen
Clayton Whipp
(1)
The proportion of STI forfeited is derived by subtracting the actual percentage of maximum received from 100% and was 29% on average for the year ended 30 June
2018 (compared to 36% in 2017).
Anthony Justice was not eligible for an STI for the year ended 30 June 2018.
26 IAG ANNUAL REPORT 2018
III. Linking IAG'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 dividing the cash
earnings of IAG by the average equity balance for that period.
This cash ROE figure is then expressed as a multiple of IAG’s
WACC over the same timeframe. The cash ROE vesting outcome
is based on the average cash ROE to WACC multiple over each
of the six half years during the performance period.
Cash earnings is IAG’s net profit after tax attributable to owners
of the Company, adjusted for the post-tax effect of any
amortisation and impairment of acquired identifiable intangible
assets and unusual items. The Board considers the difference
between the statutory profit and cash earnings. Any
adjustments to statutory profit are assessed to determine
whether they should be considered in determining the cash ROE
outcome. The Board can reduce the cash ROE vesting
outcomes in order to ensure that reward outcomes
appropriately reflect performance.
For the performance period from 1 July 2014 to 30 June 2017,
the average cash ROE was 1.76 times WACC. In considering the
differences between statutory profit and cash ROE over this
period, the Board reduced the cash ROE outcome by the value
of the software impairments announced to the market on 19
August 2016. The Board made no other adjustments to cash
ROE in determining the vesting outcome. After making the
adjustment for the software impairment, the notional cash ROE
outcome was 1.68 times WACC. The award still vested in full as
this was still above the maximum of the vesting range. The
strong cash ROE performance has similarly been reflected in the
dividend provided to shareholders.
Relative TSR – additional 32% vesting
On 30 September 2017, two grants of the TSR portion of the LTI were tested: the test of the 2013/2014 LTI award and a legacy
retest of the 2012/2013 LTI award.
2013/2014 LTI award: IAG’s TSR was ranked at the 42nd percentile of its peer group and subsequently none of this award
vested. There will be no retests for this award.
2012/2013 LTI award: IAG’s TSR was ranked at the 69th percentile of its peer group, resulting in an overall vesting outcome of
88%. This result translated to an additional 32% vesting above the 56% that had already vested following the retest on 30
September 2016. This was the final test for this grant.
The following graph illustrates IAG’s relative TSR against the top 50 industrial companies in the S&P/ASX 100 for the 2012/2013
LTI award:
27
The following table shows the returns IAG delivered to 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 2014
5.84
39.00
56.09
23.0
YEAR ENDED
30 JUNE 2015
5.58
29.00
31.22
15.3
YEAR ENDED
30 JUNE 2016
5.45
36.00(1)
25.79
13.0
YEAR ENDED
30 JUNE 2017
6.78
33.00
39.03
15.2
YEAR ENDED
30 JUNE 2018
8.53
34.00
39.06
15.6
2.34
2.47
2.00(2)
1.76(2)
1.83(2)
(1)
(2)
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, 0.08 times
WACC in the three years to 30 June 2017 and 0.09 times WACC in the three years to 30 June 2018.
IV. Actual remuneration received by Executives
Table 8 below provides details of the remuneration received by Executives during the financial year. The table displays fixed pay
and other benefits paid during the financial year, the value of cash STI awards earned in the financial year, 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.
TABLE 8 – ACTUAL REMUNERATION RECEIVED IN 2018 AND 2017
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(7)
Tim Clark(8)
Nicholas
Hawkins(7)
Jacki Johnson
Mark Milliner
Craig Olsen(9)
2018
2017
2018
2017
2018
2018
2017
2018
2017
2018
2017
2018
2017
1,700
1,700
700
662
206
1,200
1,173
1,091
1,091
1,000
1,000
728
711
EXECUTIVES WHO CEASED AS KMP
Ben Bessell(8)
Anthony Justice(10)
Clayton Whipp(10)
2018
2017
2018
2017
2018
2017
35
700
269
690
329
775
88
17
(7)
(11)
12
37
25
12
(40)
76
22
58
33
(21)
33
(2)
(6)
26
11
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
555
-
255
-
1,258
1,139
403
353
76
768
643
663
524
576
536
496
381
17
308
-
375
130
310
398
288
141
110
-
344
327
289
240
-
-
119
74
131
82
130
71
218
153
1,058
697
169
111
-
1,058
697
1,054
644
-
-
122
79
141
91
90
-
309
127
4,502
3,841
1,406
1,225
294
3,407
2,865
3,109
2,459
1,652
1,558
1,523
1,278
303
1,214
1,042
1,130
1,267
1,376
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Fixed pay includes amounts paid in cash, superannuation contributions plus the portion of IAG’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 12 in Appendix 1.
Payment in lieu of notice, which incorporates statutory notice and severance entitlements.
Cash STI earned within the year ended 30 June 2018 and to be paid in September 2018.
The deferred STI vesting on 1 September 2017 was valued using the five-day VWAP of $6.34 (1 September 2016: $5.60).
The LTI vested was valued using the five-day VWAP at vesting date which was $6.43 for awards vested on 24 August 2017 and $6.39 for awards vested on 30
September 2017 (22 August 2016: $5.90 and 30 September 2016: $5.46).
The reported fixed pay for Nicholas Hawkins and Julie Batch is higher in 2018 than 2017 as their fixed pay was increased part-way through the 2017 year.
Remuneration for Tim Clark and Ben Bessell is presented for the period for which they served as a KMP. As Tim Clark was not a KMP in the prior year, no information is
shown for the year ended 30 June 2017.
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
2018 which was 1 NZD = 0.922 AUD.
(10) Refer to Appendix 2, section IV for details on termination benefits.
28 IAG ANNUAL REPORT 2018
V. Group CEO remuneration
Below are further details on drivers of the actual remuneration received by the Group CEO that are outlined in Table 8. His
remuneration has been broken down into the components of the remuneration mix, with commentary on how performance has
translated into remuneration outcomes.
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.
29
II. Use of remuneration consultants
PARC engaged Pay Governance as external remuneration consultants to assist with the review of IAG's approach to executive
remuneration. Pay Governance was engaged during the year to provide a review of global market practices and to facilitate a
workshop for the Board in reviewing IAG’s executive remuneration strategy. The remuneration information provided was used as an
input to the remuneration decisions by the Board only. EY was separately engaged to provide remuneration benchmarking of the
Non-Executive Directors and the Executive Team. No remuneration recommendations, as defined by the Corporations Act 2001,
were provided by Pay Governance or EY.
III. Adjustment policy
Each year, the Board assesses whether variable remuneration 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.
Each year PARC makes a recommendation to the Board on whether to adjust variable reward. The Group CEO initially assesses
material financial and non-financial risks across the Group as well as the risk management performance of each member of the
Executive Team. This assessment is supported by a detailed review of risk and audit reporting across the year by the acting Chief
Risk Officer. The Chair of the Risk Committee independently provides input to the Group CEO. The Group CEO makes a
recommendation to PARC on whether an adjustment is necessary to the remuneration of any individual or group of employees.
PARC and the Board separately consider the Group CEO’s recommendation, together with input from both the acting Chief Risk
Officer and the Chair of the Risk Committee, in conducting their own assessment of whether an adjustment of variable
remuneration is required. In the year ended 30 June 2018, this assessment did not reveal any requirement for the Board to adjust
remuneration.
IV. Mandatory shareholding requirement for Executives
The Group CEO is required to accumulate and hold ordinary shares of the Company or other IAG securities with a value of two times
his or her 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 2014 met the mandatory shareholding requirement at 30 June 2018.
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 ordinary shares of the Company or other IAG securities with a value equal to their
annual Board fee. The mandatory shareholding requirement for Non-Executive Directors is based on either the value of shares at
acquisition or the market value at the testing date, whichever is higher. This allows Non-Executive Directors to build a long-term
shareholding in IAG without being impacted by short-term share price volatility. 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 2018, compliance with the mandatory shareholding requirement was assessed using the closing
share price as at that date and the Non-Executive Directors’ Board fee from three years prior. All Non-Executive Directors
appointed prior to 30 June 2015 met the mandatory shareholding requirement at 30 June 2018.
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 two 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 April 2018. The Formal Review led by the Chairman 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 well as the Group CEO and Executive Team. PARC is responsible for coordinating the Board’s
review of the Chairman’s performance in those years where a Formal Review is not conducted.
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.
30 IAG ANNUAL REPORT 2018
a. CHANGES TO NON-EXECUTIVE DIRECTOR REMUNERATION DURING THE YEAR ENDED 30 JUNE 2018
In the year ended 30 June 2018, there were no changes to the fees for service as Chairman or a Director on the Insurance
Australia Group Limited Board. All Committee fees also remain unchanged. Similarly, in August 2018 the Board reviewed fees for
the 2019 financial year and determined that no increase to fees would be made. 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.
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 9 – BOARD AND COMMITTEE FEES
BOARD/COMMITTEE
Board
Audit Committee
Risk Committee
People and Remuneration Committee
Nomination Committee
YEAR
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
ROLE
CHAIRMAN
$577,166
$577,166
$50,000
$50,000
$50,000
$50,000
$50,000
$50,000
N/A
N/A
DIRECTOR
$192,372
$192,372
$25,000
$25,000
$25,000
$25,000
$25,000
$25,000
N/A
N/A
b. SUBSIDIARY BOARD FEES
A summary of Non-Executive Directors’ service on subsidiary boards and the fees paid is set out below:
TABLE 10 – 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
$184,800
$138,300
*
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 2018
which was 1 NZD = 0.922 AUD.
TABLE 11 – NON-EXECUTIVE DIRECTOR AWARD RIGHT (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 IAG, 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 is 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 VWAP 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
31
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 12 – STATUTORY REMUNERATION DETAILS (EXECUTIVES)
OTHER
LONG-
TERM
EMPLOY-
MENT
BENEFITS
SHORT-TERM EMPLOYMENT
BENEFITS
POST
EMPLOY-
MENT
BENEFITS
TERM-
INATION
BENEFITS
SUB-TOTAL SHARE-BASED PAYMENT
TOTAL
Base
salary Cash STI
$000
$000
(2)
(1)
Leave
accruals
and other
benefits
$000
(3)
Superan-
nuation
$000
(4)
Long
service
leave
accruals
$000
(5)
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
%
76
671
632
403
353
663
524
768
643
1,066
1,056
1,675
1,665
1,258
1,139
EXECUTIVES
Peter Harmer
2018
2017
Julie Batch
2018
2017
Tim Clark(9)
197
2018
Nicholas Hawkins
1,171
2018
2017
1,143
Jacki Johnson
2018
2017
Mark Milliner
2018
2017
Craig Olsen(10)
2018
2017
EXECUTIVES WHO CEASED AS KMP
Ben Bessell(11)
2018
34
670
2017
Anthony Justice(12)
259
2018
2017
660
Clayton Whipp(13)
2018
2017
17
308
496
381
576
536
728
711
980
965
130
310
318
740
-
375
63
(8)
(17)
(21)
11
19
8
(4)
(56)
61
7
58
33
(21)
23
(4)
(16)
24
-
25
35
29
30
9
29
30
25
35
20
35
-
-
1
30
10
30
11
35
25
25
10
10
1
18
17
16
16
15
15
-
-
-
10
2
10
2
11
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
555
-
255
-
3,046
2,856
1,096
1,004
294
2,005
1,841
1,766
1,575
1,652
1,558
1,282
1,125
31
1,041
822
1,059
740
1,096
424
307
135
111
28
285
293
249
234
443
235
131
87
7
96
281
92
354
187
1,419
1,139
4,889
4,302
410
267
1,641
1,382
44
366
922
853
901
857
693
232
418
261
22
285
653
249
860
437
3,212
2,987
2,916
2,666
2,788
2,025
1,831
1,473
60
1,422
1,756
1,400
1,954
1,720
63
60
58
53
40
61
60
62
61
61
50
57
49
77
48
53
51
69
54
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Base salary includes amounts paid in cash plus the portion of IAG’s superannuation contribution that is paid as cash instead of being paid into superannuation, and salary
sacrifice items such as cars and parking, as determined in accordance with AASB 119 Employee Benefits. Base salary for Nicholas Hawkins and Julie Batch has increased
between the 2017 and 2018 financial years as their remuneration in the 2017 financial year was increased part-way through the year.
Cash STI represents the amount to be settled in cash in relation to the financial year from 1 July 2017 to 30 June 2018.
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 are limited to Craig Olsen for 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 is included in the total remuneration
disclosure above. The deferred STI for the year ended 30 June 2018 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
ordinary shares of the Company as at the grant date, expected volatility of the Company's 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.
Tim Clark was appointed to the role of acting Chief Risk Officer on 27 February 2018. Remuneration has been disclosed for the period he acted in a KMP role.
32 IAG ANNUAL REPORT 2018
(10) 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 2018
which was 1 NZD = 0.922 AUD.
(11) Ben Bessell ceased being a KMP on 19 July 2017 as a result of the implementation of the new IAG Australian operating model.
(12) Anthony Justice ceased being a KMP on 18 November 2017 when he ceased employment with IAG.
(13) Clayton Whipp retired from the role of Chief Risk Officer on 1 December 2017.
II. Total remuneration details for Non-Executive Directors
Details of total remuneration for Non-Executive Directors for the year ended 30 June 2018 are set out below:
TABLE 13 – STATUTORY REMUNERATION DETAILS (NON-EXECUTIVE DIRECTORS)
SHORT-TERM
EMPLOYMENT BENEFITS
POST-EMPLOYMENT BENEFITS
IAG Board
fees
received
as cash
$000
Other
board and
committee
fees Superannuation
$000
$000
Retirement
benefits
$000
OTHER LONG-
TERM
EMPLOYMENT
BENEFITS
TERMINATION
BENEFITS
SHARE-
BASED
PAYMENT
TOTAL
$000
$000
$000
$000
7
53
63
18
184
187
176
176
481
474
197
226
176
92
NON-EXECUTIVE DIRECTORS
Elizabeth Bryan
2018
2017
Duncan Boyle
2018
2017
Hugh Fletcher
2018
2017
Sheila McGregor(1)
2018
Jon Nicholson
2018
2017
Helen Nugent
2018
2017
Tom Pockett
2018
2017
Michelle Tredenick(1)
2018
Philip Twyman
2018
2017
NON-EXECUTIVE DIRECTOR WHO CEASED AS KMP
Alison Deans
2018
2017
59
149
176
69
176
177
179
180
178
180
55
46
68
68
15
32
60
70
59
26
53
7
20
19
23
10
21
21
6
22
20
22
11
20
19
6
20
19
7
20
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
90
97
-
-
-
-
-
-
-
-
24
-
-
-
-
-
-
24
(1)
Non-Executive Directors appointed part way through the year ended 30 June 2018.
788
816
262
120
381
384
66
253
243
257
130
267
267
66
258
269
81
225
33
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; and
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 would 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 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 did not exceed the level that would require shareholder approval under the
Corporations Act 2001.
On ceasing employment, Anthony Justice received a contractual payment in lieu of notice of $525,000. In addition, Mr Justice
received outplacement support to the value of $30,000. No other payments were provided to Mr Justice upon termination.
On ceasing employment, Clayton Whipp received a contractual payment in lieu of notice of $255,000. No other payments were
provided to Mr Whipp upon termination.
Ben Bessell did not receive any termination benefits upon ceasing as KMP as Mr Bessell has continued employment with IAG.
34 IAG ANNUAL REPORT 2018
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 2017. The EPRs granted during the year ended 30 June 2018 were in relation to the LTI plan. The NARs granted during the
year represent the total number of rights a Non-Executive Director has agreed to receive as part of the payment of their base Board
fees.
TABLE 14 – MOVEMENT IN POTENTIAL VALUE OF DARS, EPRS AND NARS FOR THE YEAR ENDED 30 JUNE 2018
RIGHTS ON
ISSUE AT
30 JUNE
RIGHTS EXERCISED
(3)
RIGHTS GRANTED
(2)
RIGHTS LAPSED
RIGHTS ON
ISSUE AT
1 JULY
(1)
RIGHTS
VESTED
DURING THE
YEAR
RIGHTS
VESTED
AND
EXERCIS-
ABLE AT
30 JUNE
Number
Number
Value
$000
Number
Value
$000
Number
Value
$000
Number
Number Number
EXECUTIVES
Tim Clark
Julie Batch
Peter Harmer DAR
104,350
EPR 1,247,762
34,750
DAR
309,206
EPR
21,300
DAR
117,100
EPR
81,400
DAR
Nicholas
912,362
EPR
Hawkins
72,450
DAR
Jacki
901,083
EPR
Johnson
150,000
DAR
Mark
453,500
Milliner
EPR
30,400
Craig Olsen DAR
300,268
EPR
88,100
394,200
27,300
135,300
-
-
49,800
231,900
40,500
210,800
41,500
193,200
29,500
146,100
EXECUTIVES WHO CEASED AS KMP
Ben Bessell(4) DAR
EPR
DAR
EPR
33,150
324,184
33,150
283,400
Anthony
Justice(4)
-
-
29,000
-
Clayton
Whipp(4)
DAR
EPR
76,100
24,000
558
173
596
-
-
316
(62,800)
1,736 (164,986)
(22,300)
(26,368)
-
-
(54,200)
1,021 (164,986)
257
(45,600)
928 (167,457)
-
263
-
851
(18,800)
187
(19,004)
644
-
-
184
-
152
-
-
(20,500)
(14,050)
(34,400)
456
162
191
-
-
393
-
1,197 (136,026)
-
(21,538)
-
-
-
1,197 (136,026)
-
1,215 (125,276)
-
-
-
(14,864)
-
-
136
138
331
-
-
149
102
250
354
-
-
-
-
-
-
987
-
156
-
-
-
987
-
909
-
-
-
108
-
-
-
-
-
463,354
-
-
(48,716)
(24,588)
178
129,650
1,340,950
39,750
396,600
21,300
117,100
77,000
843,250
67,350
819,150
191,500
646,700
41,100
412,500
33,150
324,184
41,650
269,350
65,700
390,050
62,800
164,986
22,300
26,368
-
-
54,200
164,986
45,600
164,286
-
-
18,800
19,004
-
-
20,500
14,050
34,400
48,118
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,611
NON-EXECUTIVE DIRECTORS
18,877
NAR
Elizabeth
Bryan
Helen
Nugent
NON-EXECUTIVE DIRECTOR WHO CEASED AS KMP
-
Alison Deans NAR
4,112
4,720
NAR
-
-
90
(28,621)
208
-
(4,112)
30
(4,720)
34
-
-
-
-
-
-
4,867
14,611
4,867
-
-
-
-
-
-
(1)
(2)
(3)
(4)
Opening number of rights on issue represents the balance as at the date of appointment as KMP or 1 July 2017.
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 DARs granted on 3
November 2017 was $6.34. This amount is allocated to remuneration over years ending 30 June 2018 to 30 June 2020. The value of the cash ROE portion of the
EPRs granted on 3 November 2017 is the fair value at grant date, calculated using the Black-Scholes valuation model, which was $5.95. The cash ROE portion of the
EPR grants is first exercisable after the performance period concludes on 30 June 2020. The value of the relative TSR portion of the EPRs granted on 3 November
2017 is the fair value at grant date, calculated using the Monte Carlo simulation, which was $2.86. The relative TSR portion of the EPRs is first exercisable on 30
September 2021. The amount is allocated to remuneration over the years ending 30 June 2018 to 30 June 2022. 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 September 2017 was $6.14. This amount is
allocated to remuneration over the year ended 30 June 2018.
Rights vested and exercised during the financial year. The value of the rights exercised is based on the VWAP for the year ended 30 June 2018, which was $7.26.
The rights on issue at 30 June for former KMP represents the rights held at the date they ceased to be a KMP.
35
I. LTI awards outstanding during the year ended 30 June 2018
Details of outstanding LTI awards made to Executives in the year ended 30 June 2018 are shown in the table below:
TABLE 15 – LTI AWARDS OUTSTANDING DURING THE YEAR ENDED 30 JUNE 2018
AWARD
GRANT DATE
BASE DATE
2017/2018 Series 6 – TSR(1)
2017/2018 Series 6 – ROE(1)
2016/2017 Series 6 – TSR(1)
2016/2017 Series 6 – ROE(1)
2016/2017 Series 6 – TSR(1)
2016/2017 Series 6 – ROE(1)
2015/2016 Series 6 – TSR(1)
2015/2016 Series 6 – ROE(1),(2)
2015/2016 Series 6 – TSR(1)
2015/2016 Series 6 – ROE(1),(2)
2014/2015 Series 6 – TSR(1)
2014/2015 Series 6 – ROE(1)
2013/2014 Series 6 – TSR(1)
2012/2013 Series 5 – TSR(3)
03/11/2017
03/11/2017
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
26/10/2012
30/09/2017
01/07/2017
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
30/09/2012
TEST
DATE
30/09/2021
30/06/2020
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
30/09/2015
PERFORMANCE
HURDLE
ACHIEVEMENT LAST EXERCISE DATE
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
100%
0%
88%
03/11/2024
03/11/2024
24/03/2024
24/03/2024
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
26/10/2019
(1)
(2)
(3)
Terms and conditions for EPR Plans from 2013/2014 to 2017/2018 relating to relative TSR and cash ROE are the same; therefore, they are all referred to as Series 6.
The cash ROE portion of EPR Plan 2015/2016 has been tested and is expected to vest in full. Vesting details will be included in the Remuneration Report for the year
ending 30 June 2019.
The TSR portion of the EPR Plan 2012/2013 is the final award that is subject to retesting. The final test was performed on 30 September 2017.
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 KMP and their related parties in ordinary shares of the Company are disclosed in the table below:
TABLE 16 – MOVEMENT IN TOTAL NUMBER OF ORDINARY SHARES HELD
SHARES HELD
AT 1 JULY
Number
SHARES
RECEIVED ON
EXERCISE OF
DAR
Number
SHARES
RECEIVED ON
EXERCISE OF
EPR
Number
SHARES
RECEIVED ON
EXERCISE OF
NAR
Number
NET
MOVEMENT OF
SHARES DUE
TO OTHER
CHANGES(1)
Number
TOTAL SHARES
HELD
AT 30 JUNE
Number
SHARES HELD
NOMINALLY AT
30 JUNE(2)
Number
2018
NON-EXECUTIVE DIRECTORS AND EXECUTIVES
Elizabeth Bryan
Duncan Boyle
Hugh Fletcher
Sheila McGregor(3)
Jon Nicholson
Helen Nugent
Tom Pockett
Michelle
Tredenick(3)
Philip Twyman
Peter Harmer
Julie Batch
Tim Clark
Nicholas Hawkins
Jacki Johnson
Mark Milliner
Craig Olsen
34,234
32,679
83,552
-
34,589
540
32,428
-
15,522
825,788
98,930
521
220,000
741,960
-
149,947
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
28,621
-
-
-
-
4,112
-
-
-
62,800
22,300
-
54,200
45,600
-
18,800
-
164,986
26,368
-
164,986
167,457
-
19,004
-
-
-
-
-
-
-
-
-
-
1,704
-
-
15,460
199
-
-
(120,000)
(70,645)
-
(269,186)
(149,200)
-
-
62,855
32,679
85,256
-
34,589
20,112
32,627
-
15,522
933,574
76,953
521
170,000
805,817
-
187,751
62,855
32,679
48,695
-
24,162
20,112
-
-
12,780
172,800
-
521
-
592,760
-
14,800
36 IAG ANNUAL REPORT 2018
SHARES HELD
AT 1 JULY
Number
SHARES
RECEIVED ON
EXERCISE OF
DAR
Number
SHARES
RECEIVED ON
EXERCISE OF
EPR
Number
SHARES
RECEIVED ON
EXERCISE OF
NAR
Number
NET
MOVEMENT OF
SHARES DUE
TO OTHER
CHANGES(1)
Number
TOTAL SHARES
HELD
AT 30 JUNE
Number
SHARES HELD
NOMINALLY AT
30 JUNE(2)
Number
NON-EXECUTIVE DIRECTOR AND EXECUTIVES WHO CEASED AS KMP(4)
Alison Deans
Ben Bessell
Anthony Justice
Clayton Whipp
37,742
42,780
12,750
125,957
-
-
20,500
34,400
-
-
14,050
48,716
4,720
-
-
-
-
-
-
(89,962)
42,462
42,780
47,300
119,111
37,742
277
-
509
(1)
(2)
(3)
(4)
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.
Information on shares held is disclosed up to the date of cessation.
II. Movements in total number of capital notes held
During the year ended 30 June 2018, Philip Twyman indirectly held 5,109 capital notes (2017: 5,109 capital notes). No other KMP
had any interest directly or nominally in capital notes during the financial year (2017: nil).
III. Movements in total number of reset exchangeable securities held
No KMP had any interest directly or nominally in reset exchangeable securities of IAG Finance (New Zealand) Limited at any time
during the financial year (2017: nil).
IV. Relevant interest of each Director and their related parties in listed securities of the Group in accordance with the
Corporations Act 2001
TABLE 17 – HOLDINGS OF SHARES, CAPITAL NOTES AND RESET EXCHANGEABLE SECURITIES
ORDINARY SHARES
CAPITAL NOTES
Elizabeth Bryan
Duncan Boyle
Hugh Fletcher
Sheila McGregor
Jon Nicholson
Helen Nugent
Tom Pockett
Michelle Tredenick
Philip Twyman
Peter Harmer
Held directly(1)
-
-
36,561
-
10,427
-
32,627
-
2,742
760,774
Held indirectly(2)
62,855
32,679
48,695
-
24,162
20,112
-
-
12,780
172,800
Held directly
-
-
-
-
-
-
-
-
-
-
Held indirectly
-
-
-
-
-
-
-
-
5,109
-
RESET EXCHANGEABLE SECURITIES
Held indirectly
-
-
-
-
-
-
-
-
-
-
Held directly
-
-
-
-
-
-
-
-
-
-
(1)
(2)
This represents the relevant interest of each Director in ordinary shares issued by the Company, as notified by the Directors to the ASX in accordance with section 205G of
the Corporations Act 2001 until the date the financial report was signed. Trading in ordinary shares of the Company 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 ordinary shares of the Company 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.
37
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 IAG, 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)
Cash STI
Deferred STI
Executive Team
Executives
Fixed pay
Group Balanced Scorecard
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 owners of the Company 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.
The 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.
The portion of an Executive’s STI that is deferred over a period of two years and typically awarded
in the form of DARs.
The Executives who report directly to the Group CEO and:
manage a business unit; or
have accountability for the risk or financial control of the organisation; or
have accountability to deliver a strategic priority.
The Executive Team comprises the following members of IAG’s Group Leadership Team: Chief
Executive Officer, Australia; Chief Executive, New Zealand; Chief Financial Officer; Chief Risk
Officer; Chief Customer Officer; 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 Balanced 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.
Group CEO
IAG’s Managing Director and Chief Executive Officer.
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 ordinary shares of the Company 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 NAR Plan provides Directors with the opportunity to build their shareholding in IAG. Under the
Plan, Directors agree to receive a portion of their base Board fee in the form of rights over
ordinary IAG shares. 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 in the 2018 financial
year, 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 reflect total return to shareholders.
IAG uses relative TSR performance against other companies in the peer group to calculate one
half of the LTI outcome.
Weighted average cost of capital
(WACC)
This is the rate that a company is expected to pay on average to all its securityholders to finance
its assets.
38 IAG ANNUAL REPORT 2018
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 15th day of August 2018 in accordance with a resolution of the Directors.
Peter Harmer
Director
39
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 2018 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
15 August 2018
40 IAG ANNUAL REPORT 2018
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.
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
6.5
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
Discontinued operations
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
PAGE
42
44
45
46
47
48
49
51
52
56
58
59
59
60
61
70
72
73
74
75
76
78
80
81
82
82
84
85
86
86
86
87
87
88
88
88
41
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2018
NOTE
2.1
2.1
2.2
2.1
2.3
2.3
5.2
6.5
6.5
6.5
6.5
6.5
6.5
2018
$m
11,522
(3,851)
7,671
(8,005)
3,388
(4,617)
(970)
(1,787)
880
(1,877)
1,177
249
(19)
1,407
177
164
31
(82)
(284)
(3)
1,410
(384)
1,026
(25)
1,001
(15)
2
(13)
1
989
947
(24)
79
(1)
1,001
934
(23)
79
(1)
989
2017*
$m
11,321
(3,122)
8,199
(8,358)
3,276
(5,082)
(985)
(1,781)
687
(2,079)
1,038
248
(16)
1,270
261
180
19
(93)
(290)
(4)
1,343
(328)
1,015
(10)
1,005
(17)
25
8
1
1,014
938
(9)
77
(1)
1,005
946
(8)
77
(1)
1,014
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
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 from continuing operations
Income tax expense
Profit after income tax from continuing operations
Loss after income tax from discontinued operations
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 (expense)/income from continuing operations, net of tax
Other comprehensive income from discontinued operations, net of tax
Total comprehensive income for the year, net of tax
PROFIT/(LOSS) FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent – continuing operations
Shareholders of the Parent – discontinued operations
Non-controlling interests – continuing operations
Non-controlling interests – discontinued operations
Profit for the year
TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR ATTRIBUTABLE TO
Shareholders of the Parent – continuing operations
Shareholders of the Parent – discontinued operations
Non-controlling interests – continuing operations
Non-controlling interests – discontinued operations
Total comprehensive income for the year, net of tax
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
42 IAG ANNUAL REPORT 2018
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME (CONTINUED)
EARNINGS PER SHARE – CONTINUING AND DISCONTINUED OPERATIONS
Basic earnings per ordinary share
Diluted earnings per ordinary share
EARNINGS PER SHARE – CONTINUING OPERATIONS
Basic earnings per ordinary share
Diluted earnings per ordinary share
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
NOTE
4.3
4.3
4.3
4.3
2018
cents
39.06
38.30
40.08
39.26
2017*
cents
39.03
37.72
39.41
38.07
The above consolidated statement of comprehensive income should be read in conjunction with the notes to the financial
statements.
43
CONSOLIDATED BALANCE
SHEET
AS AT 30 JUNE 2018
ASSETS
Cash held for operational purposes
Investments
Trade and other receivables
Current tax assets
Assets held for sale
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
Liabilities held for sale
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
6.5
2.2
2.5
5.2
6.3
5.1
2.7
6.5
2.4
2.2
5.3
4.1
4.2
2018
$m
448
11,007
4,085
17
655
5,422
3,443
136
544
180
89
557
3,183
29,766
2,592
120
444
6,217
10,410
239
327
516
1,960
22,825
6,941
7,082
(27)
(4)
(382)
6,669
272
6,941
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
The above consolidated balance sheet should be read in conjunction with the notes to the financial statements.
44 IAG ANNUAL REPORT 2018
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2018
2018
Balance at the beginning of the
financial year
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive income/(loss) for
the year
Transactions with owners in their
capacity as owners
Share-based remuneration
Dividends determined and paid
Balance at the end of the financial year
2017
Balance at the beginning of the
financial year
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive income/(loss) 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
SHARE
CAPITAL
$m
7,082
-
-
-
-
-
7,082
7,275
-
-
-
(193)
-
-
-
7,082
TREASURY
SHARES
HELD IN
TRUST
$m
FOREIGN
CURRENCY
TRANSLATION
RESERVE
$m
SHARE-
BASED
REMUN-
ERATION
RESERVE
$m
RETAINED
EARNINGS
$m
NON-
CONTROLLING
INTERESTS
$m
TOTAL
EQUITY
$m
(38)
-
-
-
11
-
(27)
(43)
-
-
-
-
5
-
-
(38)
(19)
-
(14)
(14)
-
-
(33)
(3)
-
(16)
(16)
-
-
-
-
(19)
36
-
-
-
(7)
-
29
35
-
-
-
-
1
-
-
36
(499)
923
2
925
(5)
(803)
(382)
(701)
929
25
954
(123)
(3)
(3)
(623)
(499)
230
78
6,792
1,001
-
78
(12)
989
-
(36)
(1)
(839)
272
6,941
222
76
6,785
1,005
-
9
76
1,014
-
-
-
(68)
230
(316)
3
(3)
(691)
6,792
The above consolidated statement of changes in equity should be read in conjunction with the notes to the financial statements.
45
CONSOLIDATED CASH FLOW
STATEMENT
FOR THE YEAR ENDED 30 JUNE 2018
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 disposal/(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 shareholders of the Parent
Dividends paid to non-controlling interests
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
2018
$m
11,779
3,195
(9,006)
(4,016)
416
(87)
(379)
1,802
(3,757)
(53)
4
387
391
-
348
(2)
18
(803)
(36)
(475)
(137)
2
1,480
1,345
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
The above consolidated cash flow statement should be read in conjunction with the notes to the financial statements.
46 IAG ANNUAL REPORT 2018
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 IAG.
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 IAG's exposure to various risks, explains how these affect IAG's financial position and performance and how
IAG seeks to manage and mitigate these risks.
4. Capital structure – provides information about the capital management practices of IAG 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 IAG's tax balances.
6. Group structure – provides a summary of IAG'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 IAG's financial position and performance going forward.
8. Additional disclosures – other disclosures required to comply with Australian Accounting Standards.
47
NOTE 1.2 ABOUT THIS REPORT
A. CORPORATE INFORMATION
Insurance Australia Group Limited (Company or Parent), the ultimate parent entity in the Group, 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 13, Tower Two, Darling Park, 201 Sussex Street, Sydney, NSW 2000,
Australia. This financial report covers the consolidated financial statements for the Company and its subsidiaries (IAG or Group) for
the year ended 30 June 2018.
A description of the nature of IAG'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 15 August 2018 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 issued a new standard (IFRS 17 Insurance Contracts – adopted as AASB 17 Insurance Contracts in an Australian
context) 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 statements incorporates the assets and liabilities of all entities controlled by the Company as at 30 June
2018. A list of significant controlled entities is set out in Note 6.1. 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.
III. Reclassification of comparatives
Certain items have been reclassified from IAG's prior year financial report due to IAG'S consolidated Asian businesses now meeting
the classification of discontinued operations. For further details, refer to Note 6.5.
48 IAG ANNUAL REPORT 2018
D. SIGNIFICANT ACCOUNTING POLICIES ADOPTED
The accounting policies adopted in the preparation of this financial report have been applied consistently by all entities in IAG 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 IAG. 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 IAG on adoption. Refer to Note 8.5 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 within 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
IAG 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
IAG has general insurance operations in Australia and New Zealand. Following the classification of IAG’s consolidated businesses
in Thailand, Vietnam and Indonesia as discontinued operations at 30 June 2018, Asia is no longer disclosed as a distinct operating
segment. For further details refer to Note 6.5. IAG's ongoing interests in Malaysia and India continue to be treated as associates,
but have been reclassified to Corporate and other within IAG’s segment reporting.
The reportable segments for the period ended 30 June 2018 comprise the following business divisions:
I. Australia
The Australian division comprises two segments:
Consumer
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).
Business
This segment provides commercial insurance to businesses throughout Australia, predominantly under the CGU and WFI
brands through intermediaries including brokers, authorised representatives and distribution partners
II. New Zealand
This segment provides general insurance products 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.
III. Corporate and other
This segment comprises other activities, including corporate services, capital management activity, shareholders’ funds
investment activities, inward reinsurance from associates, and investment in associates in Malaysia and India. IAG’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. IAG 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.
49
-
64
-
114
-
51
155
-
155
165
AUSTRALIA
CONSUMER BUSINESS
$m
$m
TOTAL
$m
NEW
ZEALAND
CORPORATE
AND OTHER
TOTAL
$m
$m
$m
B. FINANCIAL INFORMATION
2018
I. Financial performance
Total external revenue(1)
Underwriting profit/(loss)
Net investment income on assets backing insurance
liabilities
Insurance profit/(loss)
Net investment income on shareholders' funds
Share of net profit of associates
Finance costs
Other net operating result
Total segment result from continuing operations
Income tax expense
Profit for the year from continuing operations
II. Other segment information
Capital expenditure(2)
Depreciation and amortisation expense
2017(3)
I. Financial performance
Total external revenue(1)
Underwriting profit
Net investment income/(expense) on assets backing
insurance liabilities
Insurance profit
Net investment income on shareholders' funds
Share of net profit/(loss) of associates
Finance costs
Other net operating result
Total segment result from continuing operations
Income tax expense
Profit for the year from continuing operations
II. Other segment information
Capital expenditure(2)
Depreciation and amortisation expense
138
971
-
-
-
-
971
-
50
125
941
-
-
-
-
941
-
53
8,434
833
4,473
142
12,907
975
3,267
209
77
219
-
2
-
(5)
216
215
1,190
-
2
-
(5)
1,187
9
218
-
-
-
-
218
8,162
816
4,241
141
12,403
957
3,276
80
63
204
-
(1)
-
(28)
175
188
1,145
-
(1)
-
(28)
1,116
45
125
-
-
-
-
125
237
(7)
6
(1)
165
29
(82)
(106)
5
16,411
1,177
230
1,407
165
31
(82)
(111)
1,410
(384)
1,026
313
1
(1)
-
246
20
(93)
(71)
102
15,992
1,038
232
1,270
246
19
(93)
(99)
1,343
(328)
1,015
-
54
-
107
-
52
109
1
109
160
(1)
(2)
(3)
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.
Capital expenditure includes acquisitions of property and equipment, intangibles and other non-current segment assets.
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
50 IAG ANNUAL REPORT 2018
2. INSURANCE DISCLOSURES
SECTION INTRODUCTION
This section provides an overview of IAG's general insurance operations, which are the main driver of IAG's overall performance
and financial position.
IAG collects premium and recognises revenue for the insurance policies it underwrites. From this, IAG pays amounts to customers
on settlement of insurance claims, with the claims expense representing the largest cost to IAG, as well as operating costs, which
include the costs associated with obtaining and recording insurance contracts.
To mitigate IAG's overall risk and optimise its return profile, IAG passes some of its underwriting exposure to third parties (primarily
reinsurance companies). The premiums paid to reinsurers are an expense to IAG, 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 IAG under a sound investment philosophy. IAG 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
2018
$m
11,647
(125)
11,522
3,388
880
15,790
2017*
$m
11,439
(118)
11,321
3,276
687
15,284
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
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.
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.
51
NOTE 2.2 CLAIMS AND REINSURANCE AND OTHER RECOVERIES ON OUTSTANDING CLAIMS
A. NET CLAIMS EXPENSE
Gross claims – undiscounted
Discount
Gross claims – discounted
Reinsurance and other recoveries –
undiscounted
Discount
Reinsurance and other recoveries –
discounted
Net claims expense
Current year
$m
8,585
(114)
8,471
Prior years
$m
(675)
209
(466)
2018
Total Current year
$m
9,364
(135)
9,229
$m
7,910
95
8,005
Prior years
$m
(1,019)
148
(871)
(3,304)
57
(3,247)
5,224
(18)
(123)
(141)
(607)
(3,322)
(66)
(3,388)
4,617
(3,355)
66
(3,289)
5,940
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5
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
2017*
Total
$m
8,345
13
8,358
(3,325)
49
(3,276)
5,082
2017
$m
9,224
(4,358)
4,866
362
885
6,113
30
(17)
13
(858)
2018
$m
8,267
(4,377)
3,890
364
734
4,988
The gross outstanding claims liability includes $5,756 million (2017: $6,488 million) which is expected to be settled more than 12
months from the reporting date.
The carrying value of reinsurance and other recoveries includes $3,214 million (2017: $3,151 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
Transfers to liabilities held for sale
Net movement of discontinued operations
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
2018
$m
6,113
(244)
4,979
(5,644)
67
(143)
(105)
(8)
(27)
4,988
5,422
10,410
2017*
$m
7,052
(391)
5,689
(6,033)
40
(247)
-
12
(9)
6,113
5,258
11,371
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
III. Maturity analysis
Refer to Note 3.1 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.
52 IAG ANNUAL REPORT 2018
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 IAG'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.
During the financial year, IAG announced the sale of its consolidated businesses in Thailand, Vietnam and Indonesia. The
development table below includes claims related to these operations up to the 2018 accident year. Any outstanding claims relating
to these businesses have been treated as paid in the table below within item (1).
2008
and
prior
$m
2009
$m
2010
$m
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
2018
$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(1)
Net undiscounted
outstanding claims
liability
Discount to present
value
Net discounted
outstanding claims
liability
104
98
(6)
4,495
5,267
5,211
4,965
4,917
4,858
6,293
6,219
6,156
6,040
5,602
5,606
5,519
5,378
5,309
5,167
5,090
5,010
4,930
4,850
4,831
5,216
5,290
5,231
5,142
5,090
5,027
5,020
5,010
5,123
5,162
5,193
5,390
5,457
5,475
5,562
4,663
4,637
4,535
4,485
4,432
4,379
4,344
4,315
4,306
4,708
4,746
4,680
4,673
4,587
4,534
4,489
4,451
4,447
4,441
4,441
4,306
5,562
5,020
4,831
5,309
6,040
4,858
5,211
4,495
4,400
4,260
5,357
4,911
4,653
5,036
5,632
4,375
4,604
2,896
41
46
205
109
178
273
408
483
607
1,599
4,053
(2)
(3)
(7)
(6)
(9)
(13)
(19)
(21)
(34)
(43)
(163)
39
43
198
103
169
260
389
462
573
1,556
3,890
Reconciliation
Claims handling costs
Risk margin
Net outstanding claims liability
364
734
4,988
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.
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.
53
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 claim payments, both gross and net of reinsurance and other recoveries and associated claims 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 claim 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.
IAG 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
2018
%
17
90
2017
%
17
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 goods and services tax (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 IAG'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.
54 IAG ANNUAL REPORT 2018
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
AUSTRALIA
NEW ZEALAND
ASIA
CONSUMER
BUSINESS
2018
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
2017
Discounted average term to settlement
Inflation rate
Superimposed inflation rate
Discount rate
Claims handling costs ratio
1.9 years
2.2%-3.9%
0.0%-5.0%
1.5%-4.2%
4.6%
2.1 years
2.4%-4.1%
0.0%-5.0%
1.5%-4.5%
4.1%
2.0 years
0.0%-4.3%
0.0%-5.0%
1.5%-4.1%
4.3%
2.0 years
0.0%-4.3%
0.0%-5.0%
1.5%-4.4%
4.4%
1.0 year
1.9%
0.0%
1.8%-3.6%
3.9%
1.0 year
2.0%
0.0%
1.8%-3.5%
4.1%
n/a
n/a
n/a
n/a
n/a
0.4 year
0.0%-4.0%
0.0%
0.0%
1.6%
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.
55
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.
MOVEMENT IN
ASSUMPTION
AUSTRALIA
NEW ZEALAND
ASIA
CONSUMER
$m
BUSINESS
$m
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
+10%
-10%
+1%
-1%
+1%
-1%
+1%
-1%
(11)
11
46
(45)
(46)
48
48
(48)
(14)
14
61
(59)
(61)
65
53
(53)
(9)
9
35
(34)
(35)
37
41
(41)
(9)
9
40
(39)
(39)
42
41
(41)
ASSUMPTION
2018
Discounted average term to settlement
Inflation rate
Discount rate
Claims handling costs ratio
2017
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 (losses)/gains
Unrealised net gains/(losses)
Total investment income
Represented by
Investment income on assets backing insurance liabilities
Investment income on shareholders’ funds
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
$m
(1)
1
5
(4)
(4)
4
9
(9)
(1)
1
5
(5)
(5)
5
7
(7)
$m
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
-
-
-
-
-
-
2
(2)
2018
$m
2017*
$m
42
320
37
(33)
60
426
249
177
426
45
373
18
74
(1)
509
248
261
509
56 IAG ANNUAL REPORT 2018
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
2018
$m
753
933
5,896
1,333
253
9,168
1,049
683
1,732
107
-
107
11,007
2017
$m
1,056
1,034
6,311
1,768
199
10,368
1,099
479
1,578
158
32
190
12,136
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, IAG’s
investment funds under management are compared to the technical provisions of IAG, 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. IAG 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.
57
The table below separates the total investment balance by hierarchy category:
LEVEL 1
$m
LEVEL 2
$m
LEVEL 3
$m
2,169
1,049
-
3,218
2,085
1,076
4
3,165
6,998
341
107
7,446
8,282
340
185
8,807
2018
Interest-bearing investments
Equity investments
Other investments
2017
Interest-bearing investments
Equity investments
Other investments
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
Net premiums earned and written on discontinued operations
Transfers to liabilities held for sale
Net foreign exchange movements
Unearned premium liability at the end of the financial year
1
342
-
343
1
162
1
164
2018
$m
6,331
5,915
(5,790)
(3)
(206)
(30)
6,217
TOTAL
$m
9,168
1,732
107
11,007
10,368
1,578
190
12,136
2017*
$m
6,220
5,748
(5,630)
(4)
-
(3)
6,331
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
The carrying value of unearned premium liability includes $133 million (2017: $172 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. IAG 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. IAG
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.
The LAT at reporting date resulted in a surplus for IAG (2017: surplus for IAG), 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 cash flows on future claims
Risk margin of the present value of expected future cash flows
Risk margin percentage
Probability of adequacy
58 IAG ANNUAL REPORT 2018
2018
$m
2,718
66
2,784
2.4%
60.0%
2017
$m
3,416
77
3,493
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.
NOTE 2.5 DEFERRED INSURANCE EXPENSES
DEFERRED ACQUISITION
COSTS(1)
2017(3)
$m
2018
$m
DEFERRED OUTWARDS
REINSURANCE EXPENSE(2)
2017(3)
$m
2018
$m
TOTAL DEFERRED
INSURANCE EXPENSES
2017(3)
$m
2018
$m
A. RECONCILIATION OF MOVEMENTS
At the beginning of the financial
year
Costs deferred
Amortisation charged to profit
Transfers to assets held for sale
Net costs earned and written on
discontinued operations
Net foreign exchange movements
Deferred costs at the end of the
financial year
1,020
1,809
(1,835)
(37)
(2)
(6)
1,051
1,787
(1,819)
-
2
(1)
1,750
4,662
(3,851)
(74)
25
(18)
1,727
3,134
(3,122)
-
12
(1)
2,770
6,471
(5,686)
(111)
23
(24)
2,778
4,921
(4,941)
-
14
(2)
949
1,020
2,494
1,750
3,443
2,770
(1)
(2)
(3)
The carrying value of deferred acquisition costs includes $27 million (2017: $54 million) which is expected to be amortised more than 12 months from reporting date.
The carrying value of deferred outwards reinsurance expense includes $101 million (2017: $42 million) which is expected to be amortised more than 12 months from
reporting date.
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
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(1)
Reinsurance recoveries on paid claims
Loan to associates(2)
Investment-related receivables
Trade and other debtors
Trade and other receivables
2018
$m
2017
$m
3,622
(33)
3,589
92
99
124
181
496
4,085
3,402
(39)
3,363
242
90
280
178
790
4,153
(1)
(2)
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 IAG's
increased investment in AmGeneral to acquire Kurnia during the financial year ended 30 June 2013.
59
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.
NOTE 2.7 TRADE AND OTHER PAYABLES
A. COMPOSITION
I. Reinsurance premium payable(1)
II. Trade creditors(2)
Commissions payable
Stamp duty payable
GST payable on premium receivable
Corporate treasury derivatives payable
Other(3)
III. Other payables(2)
Other creditors and accruals
Investment creditors
Interest payable on interest-bearing liabilities
2018
$m
2017
$m
1,157
712
275
130
175
14
321
915
403
113
4
520
2,592
268
123
157
-
472
1,020
378
310
14
702
2,434
(1)
(2)
(3)
IAG has a right of offset and settles on a net basis under the agreement with National Indemnity Company (NICO), a Berkshire Hathaway (BH) company, and under the
combined 12.5% quota share agreements. This balance includes reinsurance premium payable to BH of $1,166 million (2017: $1,166 million) and the combined
12.5% quota share agreements of $727 million (2017: nil), which have been offset with receivables due from BH of $650 million (2017: $677 million) and the
combined 12.5% quota share agreements of $294 million (2017: nil), respectively. The relevant cash flows pertaining to the contracts 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 $4 million (2017: $6 million) of 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 IAG's approach to risk and capital management.
IAG 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 IAG's strategy, decision-
making and 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).
60 IAG ANNUAL REPORT 2018
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 IAG 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 IAG that identify, assess, treat, monitor, report and/or communicate all internal and
external sources of risk that could have a material impact on IAG's operations. The RMF supports management by:
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 IAG, and provide context to implement the 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 IAG'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 IAG'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.
The RMS is supported by risk culture and behaviours that are the foundation for appropriate risk management and business
sustainability. IAG is committed to conducting businesses in a manner aligned with IAG's purpose which is supported by principles
developed in conjunction with the Ethics and Consumer Advisory Board which includes external representation.
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 IAG'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. Strategic risk
mitigation is further enhanced by the accountabilities of the Customer Labs function operated under the Chief Customer Officer.
This function ensures IAG is accessing data-driven customer insights and reacting to such through the innovation of products,
services and adjacencies.
C. INSURANCE RISK
Insurance risk is defined as the risk that IAG 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).
61
A fundamental part of IAG'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, regulators and shareholders. IAG's significant underwriting and pricing expertise, coupled with its data and
analytics capability, allow IAG 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 IAG.
As referenced above, business divisions underwrite within 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.
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 IAG's intention to respond to and settle all
valid 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 for
further details.
III. Concentrations of insurance risk
Each year IAG sets its tolerance for concentration risk through the use of various models to estimate IAG's maximum exposure to
potential natural disasters and other catastrophes. IAG 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 IAG'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 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 policyholders being impacted by the same
event. This aggregation of multiple claims arising from a single event creates the most material financial loss potential in the
Group. IAG 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. IAG actively monitors the aggregate
exposure to catastrophe losses in all regions and limits exposure 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
62 IAG ANNUAL REPORT 2018
The tables below provide an analysis of gross written premium from continuing operations by both region and product, which
demonstrates the diversity of IAG'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
b. PRODUCT
Motor
Home
Short-tail commercial
CTP (motor liability)
Liability
Other short-tail
Workers' compensation
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
2018
%
2017*
%
79
21
100
32
29
22
7
6
1
3
100
80
20
100
31
28
22
8
6
2
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;
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 IAG'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 IAG's
reinsurance retention for catastrophe must not exceed 4% of net earned premium.
IAG purchases catastrophe reinsurance protection to the greater of:
a 1-in-250 year return period for earthquake loss calculated on a whole-of-portfolio basis for Australia;
a 1-in-1000 year return period for 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 year 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.
The amount of reinsurance purchased is determined by reference to the modelled probable maximum loss (PML). Natural perils
are inherently uncertain, which presents model risk. As a result, the loss from an actual event could exceed the modelled PML.
To facilitate the reinsurance process, manage counterparty exposure and create economies of scale, IAG has established a
centralised reinsurance model across its operations. This is via captive reinsurance entities in Singapore and Labuan and a
reinsurance department or virtual captive in Australia, collectively referred to as IAG Reinsurance. IAG Reinsurance acts as the
interface between the external providers of reinsurance capital and the operating business divisions.
The use of reinsurance introduces credit 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 adopts
a sound underwriting approach to the reinsurance program through the expertise provided by IAG Reinsurance. Retained
exposures sit within the Board risk appetite and appropriate capital is maintained.
63
I. Current reinsurance program
The external reinsurance program consists of a combination of the following reinsurance arrangements:
a 32.5% whole-of-account quota share arrangements;
a Group catastrophe cover which is placed in line with the strategy of buying to the level of a 1-in-250 year 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
IAG retaining the first $250 million ($169 million post-quota share) of each loss. It covers all territories in which IAG operates.
The limit of catastrophe cover purchased effective 1 January 2018 was $8 billion placed to 67.5%. Should a loss event occur
that is greater than $8 billion, IAG could potentially incur a net loss greater than the retention. IAG holds capital to mitigate
the impact of this possibility;
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 and 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.
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;
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
IAG 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.
64 IAG ANNUAL REPORT 2018
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
2018
$m
Impact
directly to
equity
2017
$m
Impact
directly to
equity
63
18
5
86
66
18
13
97
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
IAG 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
2018
$m
Impact to
profit
108
(105)
2017
$m
Impact to
profit
108
(107)
+10%
-10%
65
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.
IAG'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 IAG'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
2018
$m
Impact to
profit
(159)
167
2017
$m
Impact to
profit
(200)
213
+1%
-1%
Refer to Note 2.2 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. IAG's credit risk arises
predominantly from investment activities, reinsurance activities, premium debtors and dealings with other intermediaries. IAG
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 IAG with the Group Treasury function responsible for implementation. IAG 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
IAG 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 very strong overall credit quality of IAG's investment book:
CREDIT RATING OF INTEREST-BEARING INVESTMENTS
AAA
AA
A
BBB and below
2018
$m
3,520
3,514
482
1,652
9,168
2017
$m
3,794
3,776
433
2,365
10,368
66 IAG ANNUAL REPORT 2018
b. REINSURANCE RECOVERIES ON PAID CLAIMS
Reinsurance arrangements mitigate insurance risk but expose IAG 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. IAG has clearly
defined policies for the approval and management of credit risk in relation to reinsurers. IAG 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 IAG operates and so there is
the potential for additional risk such as country risk and transfer risk.
It is IAG 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 IAG'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
2018
$m % of total
89
11
-
100
3,667
456
11
4,134
2017
$m % of total
86
14
-
100
3,367
526
12
3,905
Of these, approximately $1,025 million (2017: $1,001 million) is secured directly as follows, reducing the credit risk:
deposits held in trust: $23 million (2017: $144 million);
letters of credit: $1,000 million (2017: $854 million); and
loss deposits: $2 million (2017: $3 million).
An ageing analysis for reinsurance recoveries on paid claims is provided below:
2018
Reinsurance recoveries on paid claims
2017
Reinsurance recoveries on paid claims
NOT OVERDUE
$m
70
128
<30 days
$m
OVERDUE
30-120 days
$m
>120 days
$m
8
11
3
44
11
59
TOTAL
$m
92
242
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. IAG is also exposed to the credit risk associated with brokers and other intermediaries when premium is collected via
these intermediaries. IAG’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 IAG's limited exposure:
2018
Premium receivable
Provision for impairment
2017
Premium receivable
Provision for impairment
NOT OVERDUE
$m
2,981
(3)
2,978
2,771
(5)
2,766
<30 days
$m
OVERDUE
30-120 days
$m
>120 days
$m
315
(3)
312
308
(3)
305
278
(7)
271
273
(7)
266
48
(20)
28
50
(24)
26
TOTAL
$m
3,622
(33)
3,589
3,402
(39)
3,363
67
III. Liquidity risk
IAG'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). IAG 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 IAG 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
claim 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
2017
$m
-
2,776
1,182
1,601
554
6,113
2018
$m
-
2,446
920
1,200
422
4,988
INVESTMENTS
2017
$m
944
2,255
880
2,550
3,739
10,368
2018
$m
755
1,607
773
2,656
3,377
9,168
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
1,974
1,638
MATURITY DATES OF CONTRACTUAL UNDISCOUNTED CASH FLOWS
Within 1
year 1 - 2 years 2 - 5 years
$m
$m
$m
-
91
91
-
73
73
-
91
91
-
73
73
-
274
274
-
220
220
Over 5
years
$m
1,020
-
1,020
684
-
684
Perpetual
$m
954
-
954
954
-
954
Total
$m
1,974
456
2,430
1,638
366
2,004
2018
Principal repayments(1)
Contractual interest payments(1)
Total contractual undiscounted payments
2017
Principal repayments(1)
Contractual interest payments(1)
Total contractual undiscounted payments
(1)
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.
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
IAG's 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.
IAG has a documented description of the capital management process (ICAAP) and reports annually on the operation of the ICAAP
to the Board, together with a forward-looking estimate of expected capital utilisation (as represented in IAG’s Capital Plan) and
capital resilience (ICAAP Annual Report). Adequacy of IAG'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.
68 IAG ANNUAL REPORT 2018
The target level of capitalisation (risk appetite) for IAG 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 IAG that carry on insurance business in Australia are registered with APRA and are subject to APRA's Prudential
Standards. It is IAG's policy to ensure that each of the licenced insurers maintains an adequate capital position.
IAG'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
2018
$m
3,114
624
3,738
1,280
5,018
2,468
2.03
1.26
2017
$m
2,888
679
3,567
959
4,526
2,661
1.70
1.09
At 30 June 2018, IAG's Insurance Concentration Risk Charge (ICRC) from a catastrophe event was $169 million (2017: $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 IAG, 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 design, catastrophe exposure, investment strategy, profit margins
and capital structure, are all assessed using dynamic financial analysis modelling.
An important influence on IAG's capital level is the payment of dividends. IAG targets a dividend payout ratio, measured as a
proportion of cash earnings, within a range approved by the Board (refer to Note 4.4).
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
2018
%
65.7
34.3
100.0
2017
%
68.1
31.9
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. IAG 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.
69
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. IAG'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. IAG 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.
IAG acknowledges that a Royal Commission is the highest level of public inquiry in Australia. The Board, together with
Management, is committed to cooperating fully with the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry (the Royal Commission). IAG has provided submissions to the Royal Commission, and resources and
expertise have been allocated to ensure any request arising from the Royal Commission is addressed with the appropriate
consideration and importance. While it is likely the Royal Commission will make recommendations that could impact the broader
financial services landscape in Australia, it remains too early to predict the nature and extent of these changes and any
consequential impact these may have for IAG's businesses.
4. CAPITAL STRUCTURE
SECTION INTRODUCTION
This section provides disclosures on the capital structure of IAG, 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 IAG – 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. IAG 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. IAG 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
Final Maturity Date
A. COMPOSITION
I. Capital nature(1)
a. ADDITIONAL TIER 1 REGULATORY CAPITAL(2)
Reset exchangeable securities
No fixed date
Capital notes
No fixed date
b. TIER 2 REGULATORY CAPITAL
AUD subordinated convertible term notes
19 March 2040
15 June 2044
NZD subordinated convertible term notes(3)
15 June 2043
II. Operational nature
Other interest-bearing liabilities
Less: capitalised transaction costs
Principal
Amount
Section
2018
Carrying
Value
$m
Fair Value
$m
Carrying
Value
$m
2017
Fair Value
$m
$550 million
B. I
$404 million
B. II
$350 million
$350 million
B. III
B. IV
NZ$350 million B. V
550
404
350
350
700
320
-
(14)
1,960
565
423
354
353
332
-
550
404
350
-
350
334
2
(16)
1,624
569
431
356
-
337
2
(1)
(2)
(3)
Capital instruments above cannot be reconciled to the regulatory capital section of Note 3.1 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 (2017: $1 million) which is presented within trade and other payables.
70 IAG ANNUAL REPORT 2018
B. SIGNIFICANT TERMS AND CONDITIONS
I. 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;
distribution rate equals the sum of the three-month bank bill swap rate (BBSW) plus a margin of 4.00% per annum multiplied
by (1-tax rate);
if the distributions are not fully franked, the distribution rate is increased to compensate holders for the unfranked portion of
the distribution, subject to no payment conditions existing;
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).
II. 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;
distribution rate equals the sum of three-month bank bill swap rate (BBSW) plus a margin of 4.70% per annum multiplied by (1-
tax rate);
if the distributions are not fully franked, the distribution rate is increased to compensate holders for the unfranked portion of
the distribution, subject to no payment conditions existing;
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 convert, redeem or resell capital notes on 15 June 2023, or upon occurrence of certain events, subject to APRA
approval;
the capital notes are scheduled for conversion into a variable number of ordinary shares of the Company (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.
III. AUD subordinated convertible term notes due 2040
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 notes at face value between 19 March 2019 and 19 March 2020 and for certain tax and
regulatory events (in each case subject to APRA’s prior written approval);
the notes can be converted into a variable number of ordinary shares of the Company (subject to a maximum of 128.0 million
shares) at the option of holders from and including 19 March 2022 and at each subsequent interest payment date and the
maturity date of 19 March 2040; and
the notes must be converted into a variable number of ordinary shares of the Company (subject to a maximum of 319.9 million
shares) or written-off if APRA determines the Company to be non-viable.
IV. AUD subordinated convertible term notes due 2044
face value of $350 million and issued by the Company on 29 March 2018;
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 2.10% per annum is payable
quarterly;
the notes mature on 15 June 2044 unless converted or redeemed earlier, subject to rights of conversion or redemption;
IAG has an option to redeem the notes at face value between 15 June 2024 and 15 June 2025 and for certain tax and
regulatory events (in each case subject to APRA’s prior written approval);
the notes can be converted into a variable number of ordinary shares of the Company (subject to a maximum of 88.7 million
shares) at the option of holders from and including 15 June 2027 and at each subsequent interest payment date and the
maturity date of 15 June 2044; and
the notes must be converted into a variable number of ordinary shares of the Company (subject to a maximum of 221.8 million
shares) or written-off if APRA determines the Company to be non-viable.
71
V. 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 unless converted or redeemed earlier, subject to rights of conversion or redemption;
IAG has an option to redeem the notes at face value between 15 June 2022 and 15 June 2023, and for certain tax and
regulatory events (in each case subject to APRA’s prior written approval);
if the notes are not redeemed on 15 June 2022, the interest rate will become the applicable three-month bank bill benchmark
rate (BKBM) plus a margin of 2.60% per annum;
the notes can be converted into a variable number of ordinary shares of the Company (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 ordinary shares of the Company (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
2018
Number of
shares in
millions
2017
Number of
shares in
millions
2018
2017
$m
$m
2,367
-
2,367
2,431
(64)
2,367
7,082
-
7,082
7,275
(193)
7,082
B. STRATEGIC RELATIONSHIP WITH BERKSHIRE HATHAWAY (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. 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 IAG. 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 (2017: 3 million) at an average price per share of $6.20 (2017: $5.47).
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.
72 IAG ANNUAL REPORT 2018
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 and Monte Carlo simulation. 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.
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 ordinary shares of the
Company 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
Continuing and discontinued operations
Basic earnings per ordinary share(1)
Diluted earnings per ordinary share(2)
Continuing operations
Basic earnings per ordinary share(1)
Diluted earnings per ordinary share(2)
2018
cents
39.06
38.30
40.08
39.26
2017(3)
cents
39.03
37.72
39.41
38.07
(1)
(2)
(3)
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.
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
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
Profit from continuing operations attributable to shareholders of the Parent
Loss from discontinued operations attributable to shareholders of the Parent
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
2018
$m
2017
$m
923
38
961
947
(24)
929
37
966
938
(9)
2018
Number of
shares in
millions
2017
Number of
shares in
millions
2,363
2,380
142
4
2,509
175
6
2,561
73
NOTE 4.4 DIVIDENDS
A. ORDINARY SHARES
2018 interim dividend paid on 29 March 2018 (2017: 2017 interim
dividend) fully franked at 30%(1)
Dividend component of off-market share buy-back fully franked at 30%
2017 final dividend paid on 9 October 2017 (2017: 2016 final dividend)
fully franked at 30%(2)
Cents per
share
14.0
-
20.0
2018
$m
330
-
473
803
Cents per
share
13.0
192.0
13.0
2017
$m
307
123
316
746
B. DIVIDEND NOT RECOGNISED AT REPORTING DATE
2018 final dividend (2017: 2017 final dividend) fully franked at 30% to
be paid on 27 September 2018(2)
20.0
474
20.0
474
(1)
(2)
Of the total 2018 interim dividend declared of $331 million, right and entitlement of $1 million (2017 interim dividend: $1 million) to dividends on unallocated treasury
shares was waived during the year by the trustee of the IAG Share and Rights Plans Trust.
Of the total 2017 final dividend declared of $474 million, right and entitlement of $1 million (2016 final dividend: nil) to dividends on unallocated treasury shares was
waived during the year by the trustee of the IAG Share and Rights Plans Trust.
C. DIVIDEND FRANKING AMOUNT
Franking credits available for subsequent financial periods based on a
tax rate of 30%
2018
$m
100
2017
$m
115
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, will have 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 ordinary shares of the Company. 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 2018 interim dividend paid on 29 March 2018 was settled with the on-market purchase of 6.6 million shares
priced at $8.09 per share (based on a VWAP for 10 trading days from 26 February 2018 to 9 March 2018 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.
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.
74 IAG ANNUAL REPORT 2018
NOTE 4.5 DERIVATIVES
A. REPORTING DATE POSITIONS
2018
2017
Notional
contract
amount
$m
Fair value
asset
$m
Fair value
liability
$m
Notional
contract
amount
$m
Fair value
asset
$m
Fair value
liability
$m
1,223
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
-
Forward foreign exchange contracts
Options
-
III. Treasury-related derivatives (derivatives without hedge accounting applied)
6
Forward foreign exchange contracts
1
Interest rate swaps
2,559
(28)
3,394
-
754
320
11
(15)
922
-
-
(53)
-
2,913
(44)
2,827
(48)
(8)
-
1,160
334
14
-
-
29
3
11
-
(3)
-
-
-
(1)
(4)
(5)
All derivative contracts are expected to be settled within 12 months, except for interest rate swaps which mature in more than
three years.
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).
75
5. OTHER BALANCE SHEET DISCLOSURES
SECTION INTRODUCTION
This section provides disclosures on other components of IAG'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, IAG 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.
NOTE 5.1 GOODWILL AND INTANGIBLE ASSETS
SOFTWARE
DEVELOPMENT
EXPENDITURE
GOODWILL
DISTRIBUTION
CHANNELS
CUSTOMER
RELATIONSHIPS
BRANDS AND
OTHER
$m
$m
$m
$m
$m
TOTAL
$m
2018
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
Net movement in discontinued
operations
Transfers to assets held for sale
Amortisation
Amortisation and impairment charged to
discontinued operations
Net foreign exchange movements
Balance at the end of the financial year
2017
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
Net foreign exchange movements
Balance at the end of the financial year
76 IAG ANNUAL REPORT 2018
2,870
-
5
2,875
2,974
-
(15)
-
(62)
-
-
(22)
2,875
2,947
-
27
2,974
2,982
20
(26)
-
(2)
2,974
872
(743)
(8)
121
99
81
-
2
(3)
(58)
(1)
1
121
798
(690)
(9)
99
132
22
-
(54)
(1)
99
157
(122)
1
36
66
-
-
-
-
(29)
-
(1)
36
157
(93)
2
66
96
-
(1)
(29)
-
66
192
(131)
4
65
90
3
(1)
-
-
(25)
-
(2)
65
190
(105)
5
90
93
21
-
(24)
-
90
125
4,216
(42)
3
86
103
-
-
(1)
-
-
(14)
(2)
86
125
(29)
7
103
107
-
-
(4)
-
103
(1,038)
5
3,183
3,332
84
(16)
1
(65)
(112)
(15)
(26)
3,183
4,217
(917)
32
3,332
3,410
63
(27)
(111)
(3)
3,332
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.
Goodwill is allocated to the following CGUs:
Australian Consumer division
Australian Business division
New Zealand
Asia
2018
$m
756
1,479
640
-
2,875
2017
$m
771
1,479
667
57
2,974
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 IAG's impairment assessment for
significant CGUs as at 30 June 2018 are: Australian Consumer division 4.8% (2017: 4.5%), Australian Business division 4.0%
(2017: 4.5%) and New Zealand 3.7% (2017: 3.5%).
Discount rates reflect a beta and equity risk premium appropriate to IAG, with risk adjustments for individual segments and
countries where applicable. The post-tax discount rates used for significant CGUs as at 30 June 2018 are: Australian
Consumer division 9.5% (2017: 9.7%), Australian Business division 9.5% (2017: 9.7%) and New Zealand 10.1% (2017: 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 represent 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.
77
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.
NOTE 5.2 INCOME TAX
A. INCOME TAX EXPENSE
Current tax
Deferred tax
Under/(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% (2017: 30%)
Amounts which are not deductible/(taxable) in calculating taxable income
Difference in tax rate
Impairment not subject to income tax
Rebatable 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 from continuing operations 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
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 to equity
Adjustments relating to prior year
Transfers to assets held for sale
Charged to discontinued operations
Foreign exchange differences
Balance at the end of the financial year prior to set-off
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
78 IAG ANNUAL REPORT 2018
2018
$m
2017*
$m
393
(11)
2
384
5
(16)
(11)
350
14
(36)
328
55
(41)
14
1,410
423
1,343
403
(48)
11
(4)
6
(6)
382
2
384
106
78
113
30
6
396
729
11
740
(196)
544
772
(5)
(1)
11
(25)
2
(14)
740
(31)
-
(5)
6
(9)
364
(36)
328
88
85
119
31
4
433
760
12
772
(227)
545
861
(55)
(11)
(23)
-
1
(1)
772
III. Tax losses
The deferred tax assets from tax losses primarily relate 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. 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
(Credited)/charged to equity
Adjustments relating to prior year
Transfers to liabilities held for sale
Charged to discontinued operations
Balance at the end of the financial year prior to set-off
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
2018
$m
2017*
$m
67
18
108
193
3
196
(196)
-
227
(16)
(4)
-
(12)
1
196
80
26
114
220
7
227
(227)
-
258
(41)
2
8
-
-
227
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
The Company 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. The Company is the head entity within the tax-consolidated group.
79
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
Executive performance rights
Other employee benefits
2018
$m
106
6
32
1,472
1,616
87
88
97
17
16
4
309
2017*
$m
111
1
22
1,464
1,598
92
91
98
18
-
7
306
*
Prior year comparatives have been re-presented due to the discontinued operations. Refer to Note 6.5.
The employee benefits provision includes $80 million (2017: $76 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
2018
$m
2017
$m
23
29
(34)
18
26
25
(28)
23
The provision primarily comprises restructuring costs in respect of the operating model changes in Australia. All provision
outstanding at the reporting date is expected to be settled within 12 months (2017: 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. Under the plan, eligible employees have the
capacity to earn an incentive, calculated as a proportion of their base salary, which is paid in cash each year. 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 Group,
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. Executive performance rights
Executive performance rights (EPRs) issued after July 2013 are indeterminate rights in that they can be cash-settled or equity-
settled. The choice of settlement is with the Board. Liabilities for the EPRs that are cash-settled are recognised as employee
benefit expense over the relevant service period. The liabilities are remeasured to fair value at each reporting date and are
presented as employee benefit obligations in the balance sheet.
80 IAG ANNUAL REPORT 2018
VI. 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.
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 IAG’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(1),(3)
CGU-VACC Insurance Limited(1),(2)
HBF Insurance Pty Ltd(1),(2)
IAG Re Australia Limited(1),(2)
Insurance Australia Limited
Insurance Manufacturers of Australia Pty Limited
Mutual Community General Insurance Proprietary Limited(1),(2)
Swann Insurance (Aust) Pty Ltd(1),(3)
WFI Insurance Limited(1),(3)
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(4)
IAG Re Labuan (L) Berhad
IAG Re Singapore Pte Ltd
PT Asuransi Parolamas(4)
Safety Insurance Public Company Limited(4)
IV. Corporate operations
IAG Finance (New Zealand) Limited
COUNTRY OF
INCORPORATION/
FORMATION
EXTENT OF BENEFICIAL
INTEREST IF NOT 100%
2017
%
2018
%
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
73.07
63.17
80.00
98.61
80.00
98.61
On 1 August 2017, all the insurance assets and liabilities of these entities were transferred into a related business, Insurance Australia Limited.
(1)
(2) Mutual Community General Insurance Propriety Limited was deregistered in April 2018, and CGU-VACC Insurance Limited, HBF Insurance Pty Ltd and IAG Re Australia
Limited were deregistered in July 2018.
These entities are targeted for deregistration.
On 19 June 2018, IAG announced the sale of its businesses in Thailand, Vietnam and Indonesia. Refer to Note 6.5.
(3)
(4)
81
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 IAG's beneficial interest is 70%.
I. Summarised statement of comprehensive income
Net premium revenue
Profit after tax attributable to the Parent entity
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 IAG entities
Dividends paid to non-controlling interest
Total net cash flows
INSURANCE
MANUFACTURERS OF
AUSTRALIA PTY LIMITED
2017
$m
2018
$m
3,085
2,935
186
79
1
266
4,136
(3,237)
899
270
34
(83)
(36)
(85)
179
77
3
259
3,791
(3,039)
752
226
217
(163)
(68)
(14)
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
2018
2017
2018
2017
$m
$m
%
%
392
139
26
557
353
49.00
49.00
26.00
26.00
138
14
505
During the reporting period, IAG has undertaken an assessment of the recoverable amount of its Asian assets. In aggregate, this
has given rise to a write-down totalling $50 million. The write-down reflects updated assumptions and forecasts in relation to the
current operating landscape affecting both the investment in associates and select identifiable intangibles. The related expense
has been presented within 'Fee-based, corporate and other expenses' and 'Loss after income tax from discontinued operations' in
the statement of comprehensive income. Where applicable, in addition to the impact of the write-down, the movement in carrying
values shown above also includes the net impact of current period earnings and changes in exchange rates. The post-tax discount
rates applied for valuation purposes have remained unchanged since 30 June 2017.
82 IAG ANNUAL REPORT 2018
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 2018.
2018
SBI General
Insurance
Company
Limited
$m
AmGeneral
Holdings
Berhad
$m
2017
SBI General
Insurance
Company
Limited
$m
AmGeneral
Holdings
Berhad
$m
I. Summarised statement of comprehensive income
Revenue
519
784
543
580
Profit after tax
Other comprehensive (expense)/income
Total comprehensive income
II. Summarised balance sheet
Total assets
Total liabilities
Net assets as at reporting date
IAG's ownership interest
Other adjustments*
Carrying value as at 30 June
74
(1)
73
1,982
(1,198)
784
384
8
392
79
-
79
1,185
(887)
298
77
62
139
53
1
54
1,643
(1,024)
619
303
50
353
30
-
30
957
(736)
221
58
80
138
*
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
IAG'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 IAG 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 IAG. 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 IAG 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 IAG.
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.
83
NOTE 6.4 PARENT ENTITY DISCLOSURES
The ultimate Parent entity in the Group 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
2018
$m
1,428
1,428
12
10,789
159
1,563
7,082
2,144
9,226
PARENT
2017
$m
467
467
16
12,221
171
3,619
7,082
1,520
8,602
The Group’s consolidation of its nine Australian insurance licences into two, which occurred on 1 August 2017, had the combined
effect on the Parent entity of a reduction in both non-current assets and non-current liabilities resulting from the return of capital
from its seven subsidiary entities whose operations ceased on completion of the transfer of their insurance assets and liabilities to
a related entity, Insurance Australia Limited. The restructure has also caused the upstreaming of material dividends, which largely
explains the increase in the profit for the Parent entity during the year. The consolidation of insurance licences had no impact to
the Group’s consolidated financial performance or position.
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 (2017: nil).
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 (2017: nil).
84 IAG ANNUAL REPORT 2018
NOTE 6.5 DISCONTINUED OPERATIONS
On 19 June 2018, IAG announced it had entered into a sale agreement with Tokio Marine & Nichido Fire Insurance Co., Ltd (Tokio
Marine) for IAG’s operations in Thailand and Indonesia. Separate to the transactions with Tokio Marine, IAG has reached an
agreement to sell its interest in AAA Assurance Corporation, based in Vietnam. All transactions are expected to conclude in the
financial year ending 30 June 2019, subject to regulatory approvals or notifications. As a result of the sale agreements, these
consolidated Asian businesses have been identified as discontinued operations in the current financial year and comparative
figures have been re-presented accordingly.
A. RESULTS OF DISCONTINUED OPERATIONS
Revenue
Expenses
Loss before income tax
Income tax expense
Loss for the year from discontinued operations
Other comprehensive income, net of tax
Total comprehensive loss from discontinued operations
Loss for the year attributable to shareholders of the Parent
Loss for the year attributable to non-controlling interests
Loss for the year from discontinued operations
Total comprehensive loss for the year attributable shareholders of the Parent
Total comprehensive loss for the year attributable non-controlling interests
Total comprehensive loss from discontinued operations
B. EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS
Basic earnings per share, from discontinued operations – cents per share
Diluted earnings per share, from discontinued operations – cents per share
C. CASH FLOW FROM DISCONTINUED OPERATIONS
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net cash flows for the year from discontinued operations
2018
$m
493
(516)
(23)
(2)
(25)
1
(24)
(24)
(1)
(25)
(23)
(1)
(24)
2017
$m
510
(519)
(9)
(1)
(10)
1
(9)
(9)
(1)
(10)
(8)
(1)
(9)
(1.02)
(0.96)
(0.38)
(0.35)
(47)
34
(4)
(17)
7
16
(4)
19
D. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities related to the Group’s consolidated businesses in Thailand, Vietnam and Indonesia, that have been classified
as held for sale are included in the table below:
Cash held for operational purposes
Investments
Trade and other receivables
Reinsurance and other recoveries on outstanding claims
Deferred insurance expenses
Other assets
Goodwill and intangible assets
Total assets held for sale
Trade and other payables
Outstanding claims liability
Unearned premium liability
Other liabilities
Total liabilities held for sale
2018
$m
32
282
72
52
111
41
65
655
65
157
206
16
444
85
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 IAG’s performance or financial position and are 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 IAG’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 IAG'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.
IAG 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 IAG's balance sheet had
a fair value as at the reporting date of $335 million (2017: $335 million).
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
2018
$m
84
89
237
559
969
25
13
32
70
1,039
2017
$m
120
104
257
642
1,123
31
22
6
59
1,182
B. RECOGNITION AND MEASUREMENT
Certain properties, motor vehicles and computer equipment are leased under non-cancellable operating leases. Most leases are
subject to annual review 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 2018. These include:
On 15 August 2018, the Board determined to pay a final dividend of 20.0 cents per share, 100% franked. The dividend will be
paid on 27 September 2018. The DRP will operate by acquiring shares on-market for participants with no discount applied.
On 15 August 2018, IAG announced a capital management initiative amounting to 25.0 cents per ordinary share, or $592
million, expected to comprise a 19.5 cents capital return and a 5.5 cents fully franked special dividend, with a share
consolidation which would reduce IAG's ordinary issued shares by approximately 2.4% and preserve consistency of EPS
calculation. The capital return and share consolidation are subject to shareholder approval at the AGM, and IAG has made
payment of the special dividend conditional on approval being obtained. If approved, the capital management initiative is
expected to occur on or around 26 November 2018.
86 IAG ANNUAL REPORT 2018
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 IAG'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 in discontinued operations
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 of intangible assets and impairment
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
2018
$m
448
753
144
1,345
2017
$m
424
1,056
-
1,480
1,001
1,005
(31)
161
58
(1)
(1,335)
(70)
174
(9)
(1)
(53)
(76)
111
52
11
(577)
(411)
352
210
(41)
636
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 IAG in relation
to their involvement in the activities within the Group.
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments
2018
$000
14,098
326
89
810
8,769
24,092
2017
$000
19,074
533
145
600
8,974
29,326
The reduction in KMP compensation compared to the prior financial year reflects the lower number of individuals that met the
refined KMP definition, as outlined in the Remuneration Report.
87
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 the contract
specifically prohibit the disclosure of the premium paid. Insurance products provided by IAG 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
Total remuneration of auditors
2018
$000
7,762
585
121
2,620
11,088
2017
$000
8,098
1,059
126
1,233
10,516
In relation to the Royal Commission, IAG has engaged external legal advisors. As part of this engagement, the legal advisors have
appointed IAG’s auditors, KPMG, to provide project administration, documentation and preparation assistance, process and control
review and testing and general assistance. During the 2018 financial year, the costs incurred for this engagement relating to
KPMG totalled $1,503 thousand, which have been presented within advisory services costs above.
NOTE 8.4 NET TANGIBLE ASSETS
Net tangible assets per ordinary share
2018
$
1.47
2017
$
1.36
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 new 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 2016-1
AASB 2016-2
AASB 2017-2
AASB 1048
DESCRIPTION
Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses
[AASB 112]
Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107
Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle
Interpretation of Standards
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
AASB 2016-3
DESCRIPTION
Financial Instruments
Revenue from Contracts with Customers
Leases
Insurance
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
Amendments to Australian Accounting Standards – Effective Date of AASB 15 1 January 2022
1 January 2022
Amendments to Australian Accounting Standards – Effective Date of
Amendments to AASB 10 and AASB 128
Amendments to Australian Accounting Standards – Clarifications to AASB 15
1 January 2018
1 January 2022
1 January 2018
NOTE
A
A
A
B
A
A
A
A
A
A
A
88 IAG ANNUAL REPORT 2018
TITLE
AASB 2016-5
AASB 2016-6
AASB 2017-3
AASB 2017-6
AASB 2017-7
AASB 2018-1
AASB 2018-2
AASB
Interpretation 22
AASB
Interpretation 23
Conceptual
Framework
DESCRIPTION
Classification and Measurement of Share–based Payment Transactions
Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts
Amendments to Australian Accounting Standards – Clarifications to AASB 4
Amendments to Australian Accounting Standards – Prepayment Features with
Negative Compensation
Amendments to Australian Accounting Standards – Long-term Interests in
Associates and Joint Ventures
Amendments to Australian Accounting Standards – Annual Improvements
2015–2017 Cycle
Amendments to Australian Accounting Standards – Plan Amendment,
Curtailment or Settlement
Foreign Currency Transactions and Advance Consideration
OPERATIVE DATE
1 January 2018
1 January 2018
1 January 2018
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2018
Uncertainty over Income Tax Treatments, and relevant amending standards
1 January 2019
Amendments to standards to apply the new definition and recognition criteria
in the Conceptual Framework for Financial Reporting
1 January 2020
NOTE
A
A
A
A
A
A
A
A
A
A
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 IAG until the operative
dates stated, however, early adoption is permitted. IAG currently plans to apply the standards and amendments detailed above for
the reporting periods beginning on or after the operative dates set out above.
AASB 9 was issued during 2014 and will replace existing accounting requirements for financial instruments. Currently, IAG’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 IAG 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 IAG’s financial instruments arising from the application of AASB 9 are expected to be minimal.
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 majority of IAG’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 IAG 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 $775 million. This is based
on lease commitments and discount rates as at 30 June 2018.
AASB 17, a new accounting standard for insurance contracts, was adopted by the Australian Accounting Standards Board on 19
July 2017 subsequent to being issued by the International Accounting Standards Board on 18 May 2017. The standard is effective
for periods beginning 1 January 2021. The first applicable reporting period for IAG will be for the year ending 30 June 2022, with
the comparative period for the year ending 30 June 2021. The standard introduces a new general measurement model for
accounting for insurance contracts, with the application of a simplified approach (similar to AASB 1023) permitted in certain
circumstances. IAG is currently undertaking a detailed impact assessment of the new standard. There are changes in the
presentation of the financial statements and disclosures anticipated. Due to the complexity of the requirements within the
standard the final impact of certain requirements may not be determined until global interpretations and regulatory responses to
the new standard are developed.
89
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 Group as at 30 June 2018 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 2018.
Signed at Sydney this 15th day of August 2018 in accordance with a resolution of the Directors.
Peter Harmer
Director
90 IAG ANNUAL REPORT 2018
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 (the 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 2018 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 2018;
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.
91
Valuation of Gross outstanding claims liability ($10,410 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 audit 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:
judgment is required by us to consider the central estimate
of the gross outstanding claims liability. This is a significant
estimate as the eventual outcomes of incurred but
unsettled claims at the balance sheet date are inherently
uncertain;
there is limited information available and a greater level of
uncertainty inherent in assessing estimations of claims
which have been incurred by the balance sheet date but
have not yet been reported to the Group. Examples include
where there has been a recent natural catastrophe, or for
the liability business;
judgment 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, judgments and assumptions about future
events and developments, both within and external to the
Group. Small changes in these methodologies, judgements
and assumptions can have significant implications to the
quantification of outstanding claims liabilities, 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
influencing the risk assessment included the level of judgement
required, degree of uncertainty regarding the assumptions
adopted, longer delays between claims being incurred, reported
and expected settlement, greater relative magnitude in size, and
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
Reserving Committees and actuarial control cycles for the
valuation of the outstanding claims liabilities;
evaluated 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. 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 judgments 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
92 IAG ANNUAL REPORT 2018
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 a sample of reconciliations between
data on the claims systems (underlying data) and data used
in the actuarial modelling processes. We evaluated the
Group’s comparison programs which they use 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
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 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, which
were tested in the valuation of gross outstanding claims
liability processes, and 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 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 ($5,422 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 the 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 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
arrangements, the catastrophe excess of loss program,
adverse development covers in the form of excess of loss
contracts, and other quota share arrangements, which 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.
We referred to the terms of the 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 contracts. We referred to the
terms of the reinsurance contracts, and applied them 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 accounting standards; 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.
93
Valuation of Goodwill ($2,875 million) and Investment in joint venture and associates ($557 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 assessing 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 tends 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 knowledge of the business,
and understanding of the industries in which the Group
operates, against the accounting standard requirements;
evaluating the impact of the restructure of the Australian
business on the determination of cash generating units;
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;
challenging the Group’s calculations and assumptions used
in the discounted cash flow model during the year;
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 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 ventures and
associates to external, independent and observable
valuations for broadly similar enterprises, and investigating
significant outliers;
assessing the Group’s allocation of corporate costs to the
forecast cash flows contained in the value in use model,
based on the requirements of the accounting standard and
our understanding of the business; and
involving our specialists, we evaluated the internally
prepared discounted cash flow model. This included:
assessing 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 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.
94 IAG ANNUAL REPORT 2018
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 and whether the use of the going concern basis of accounting is
appropriate. 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 http://www.auasb.gov.au/auditors_responsibilities/ar1.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 2018, 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 18 to
to 38 of the Directors’ Report for the year ended 30 June 2018.
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
15 August 2018
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.
95
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 2018 annual general meeting (AGM) of Insurance Australia Group Limited will be held on 26 October 2018 commencing at
9.30am at Sofitel Sydney Wentworth, 61-101 Philip 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 2018 AGM at
www.iag.com.au. The information required to log on and use online voting is shown on the voting form.
SHAREHOLDER QUESTIONS
If shareholders 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, shareholders should use the form supplied with the notice of meeting and return it with their
completed Voting Form in the pre-addressed envelope provided or by fax to +61 (0)3 9473 2555. Questions for the auditor must
be received by 5pm on 19 October 2018.
Shareholders may also submit a question after completing their voting instructions online at www.iag.com.au. Shareholders 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 the Company’s Dividend Reinvestment Plan (DRP), if available, providing the
option to increase their shareholding without incurring brokerage or GST.
MANAGEMENT OF HOLDING
Using their Shareholder Reference Number (SRN) or Holder Identification Number (HIN) and postcode of their registered address,
shareholders can view their holding online through IAG's share registry, Computershare, by following the easy prompts on their
website at www.investorcentre.com where shareholders will be able to:
view holding balance;
review dividend payment history;
access shareholder forms; and
retrieve holding statements, including recent dividend payment advices.
The share registry investor centre site also allows shareholders to update or add details to their shareholding. If shareholders wish
to amend or update any of the current details, they will be asked to register by choosing a User ID and Password.
Shareholders will also be asked to enter answers to three personal questions for verification purposes should they forget their
password in the future.
If shareholders have previously used the Investor Centre site, they will be asked to key in their password only.
96 IAG ANNUAL REPORT 2018
Once shareholders have completed these steps, they are then able to update their details and submit their changes to the share
register including:
change or amend their address if they are registered with an SRN;
nominate or amend their direct credit payment instructions;
set up or amend their DRP instructions;
sign up for electronic shareholder communications, including the annual report via email; and
add/change tax file number (TFN) / Australian business number (ABN) details.
A confirmation/receipt number will be shown on-screen for the online transaction which should be recorded should shareholders
have a question in the future.
Shareholders are strongly advised to lodge their TFN, ABN or exemption. If they 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
Shareholders can register to receive an email alert advising of new IAG media releases, financial announcements or presentations.
Shareholders 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 their email address.
IAG has an email alert service that allows shareholders 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 shareholders have a question, they can email their enquiry directly to IAG's share registry at iag@computershare.com.au. If their
question relates to an IAG Company matter and the answer is not on IAG's website, they 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 (9.30am)
IAG half year end
*
Please note that some dates are subject to change.
TWENTY LARGEST ORDINARY SHAREHOLDERS AS AT 12 JULY 2018
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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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