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Five Year Financial Summary
Directors' Report
Discussion Analysis of The Financial Statements
Consolidated Statement Financial Performance
Consolidated Statement Financial Position
Consolidated Statement of Cash Flows
Note to the Financial Statement
Directors' Declaration
Independent Auditors' Report
Directors' Report

The Directors present their report together with the concise financial report of the consolidated entity, being Insurance Australia Group Limited and its controlled entities for the year ended 30 June 2004 and the auditors' report thereon.

The following terminology is used throughout the financial report:

DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITED

The following persons held office as Director at any time during or since the financial year:

Chairman

Mr JA (James) Strong appointed in August 2001

Other directors

Mr JF (John) Astbury appointed in July 2000
Mr GA (Geoffrey) Cousins appointed in July 2000
Ms DG (Dominique) Fisher appointed in June 2000
Mr ND (Neil) Hamilton appointed in June 2000
Ms AJ (Anne) Keating appointed in June 2000
Mr RA (Rowan) Ross appointed in July 2000
Mr MJ (Michael) Hawker appointed in December 2001

Former independent non-executive directors who retired during the financial year

Mrs MC (Maree) Callaghan from 19 June 2000 to 1 September 2003
Mrs M (Mary) Easson from 19 June 2000 to 1 September 2003

PRINCIPAL ACTIVITIES

The principal continuing activities of the IAG Group are the underwriting of general insurance and related corporate services and investing activities.

RESULT AND REVIEW OF OPERATIONS

The IAG Group net profit after tax for the year was $806 million (2003 – $217 million). After adjusting for outside equity interests in the IAG Group result, the net profit attributable to shareholders of the Company was $665 million (2003 – $153 million).

The key components contributing to the full year result were:

LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS

Insurance and investment operations are, by their nature, volatile due to the exposure to natural disasters and industry cycles and thus profit predictions are difficult. The Directors believe that premium rate growth will be lower in the coming year than in recent periods reflecting the benefits of improved claims experience, cost control and the international insurance cycle. The IAG Group's insurance margin for the coming year is still expected to be above the IAG Group's long-term target range of 9% – 12%. In addition, the growth in business volume is expected to continue. The Directors consider that the IAG Group is well placed to continue to leverage opportunities in this environment.

DIVIDENDS

Details of dividends paid or declared by the Company are set out in note 6.

SIGNIFICANT CHANGES

Significant changes in the state of affairs of IAG Group during the financial year were as follows:

(a) On 1 July 2003, IAG announced the sale of NRMA Health Pty Limited for $99 million to MBF, effective 25 July 2003. IAG has entered into a six-year marketing alliance, including a possible four-year extension, with MBF;
(b) On 11 December 2003, IAG announced the agreement to sell its ClearView retirement services businesses to MBF, effective 21 January 2004. The sale price was $218 million plus up to an additional $50 million earn-out, subject to business performance over the following five years; and
(c) On 28 June 2004, IAG completed an off-market share buy-back of $414 million, whereby the Company repurchased 94 million shares at a price of $4.40 per share, which included a fully franked dividend of $2.62 per share. This represented approximately 5.6% of the IAG Group's ordinary shares on issue.

MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR

Details of matters subsequent to the end of the financial year including a dividend declared of 14 cents per ordinary share and the impact of the introduction of Australian equivalents of the International Financial Reporting Standards are set out in note 11.

MEETINGS OF DIRECTORS

The number of meetings each Director was eligible to attend and actually attended during the financial year is summarised as follows:

  Board of Directors Audit Committee Nomination, Remuneration & Corporate Governance Committee Risk Management & Compliance Committee Reinsurance Committee
Total number of meetings held 12 4 4 7 4
Directors A B A B A B A B A B
Mr JA Strong 12 12 - - 4 4 - - 4 4
Mr MJ Hawker 12 12 - - - - - - - -
Mr JF Astbury 12 12 4 4 4 4 - - - -
Mrs MC Callaghan* 4 4 - - - - 1 1 - -
Mr GA Cousins 12 11 4 3 - - - - - -
Mrs M Easson* 4 4 1 1 - - - - - -
Ms DG Fisher 12 12 - - - - 7 7 - -
Mr ND Hamilton 12 11 - - - - 7 7 - -
Ms AJ Keating 12 12 4 4 - - - - - -
Mr RA Ross 12 11 - - 4 3 7 7 4 4

  ClearView Sale Committee IAG Share Buy-Back Committee IAG Board Sub-Committee
Total number of meetings held 2 3 2
Directors A B A B A B
Mr JA Strong 2 2 3 2 2 2
Mr MJ Hawker 2 2 3 1 2 2
Mr JF Astbury - - - - - -
Mr JF Astbury - - - - - -
Mrs MC Callaghan* - - - - - -
Mr GA Cousins - - 3 3 - -
Mrs M Easson* - - - - - -
Ms DG Fisher - - - - - -
Mr ND Hamilton - - - - - -
Ms AJ Keating - - - - - -
Mr RA Ross - - - - - -

A – Meetings eligible to attend as a member
B – Meetings attended as a member
* Mrs MC Callaghan and Mrs M Easson retired as Directors on 1 September 2003.

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) a Director of the Company;
(b) a secretary of the Company;
(c) a person making or participating in making decisions that affect the whole or a substantial part of the business or Company; or
(d) a person having the capacity to affect significantly the financial standing of the Company or any of its wholly-owned subsidiaries.

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.

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 the 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.

Under each deed, the Company is also effectively 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. 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.

During previous years, the Company advanced amounts, in accordance with a deed of indemnity, in respect of legal costs incurred by a former Director of the Company (Mr Nicholas Whitlam) in defending legal proceedings brought against the former Director by the Australian Securities & Investments Commission. Mr Whitlam was successful in his defence of those proceedings which are now at an end. Whilst the advances previously made by the Company in respect of legal costs are not repayable by the former Director, the former Director has the benefit of costs orders in his favour in the proceedings. The Company is entitled to the benefit of any amount recovered by Mr Whitlam in respect of the costs of the proceedings, so far as it had previously advanced those costs to him. The Company has requested Mr Whitlam to take the appropriate steps to recover those costs.

DIRECTORS' AND EXECUTIVE OFFICERS' EMOLUMENTS

Non-executive directors

Base fees for non-executive Directors are set according to external advice. The payment of Directors' fees also seeks to align the interests of Directors with those of shareholders by requiring them to receive at least 20% and up to 90% of their annual base fee under the Non-executive Directors' Share Plan in IAG shares, rather than cash. No other equity-based remuneration is available to non-executive Directors.

Following consideration of changing views on non-executive Directors retirement benefit arrangements, a decision has been made to freeze the operation of the non-executive Directors' retirement benefits scheme with effect from 1 September 2003. This means no further accruals to existing benefits will be made and new Directors will not be admitted to the scheme.

In consideration of the cessation of retirement benefits and the increased size and complexity of the IAG Group, including additional duties on subsidiary boards, remuneration for non-executive Directors was increased with effect from 1 September 2003. This is the first change since the Company listed four years ago. The base fee increased from $70,000 to $100,000 per annum, with the Chairman's fee maintained at three times the base fee per annum. Under the new fee arrangement, the Chairman does not receive additional fees for serving on the Nomination, Remuneration & Corporate Governance Committee or for serving as a director of IAG Re Limited.

The table below sets out the fees paid by the IAG Group to non-executive Directors for the year ended 30 June 2004.

Non-executive directors Primary benefits(1) Post-employment benefits(2) Equity compensation(3) Total
  $000 $000 $000 $000
Mr JA Strong 266 39 131 436
Mr JF Astbury 106 12 18 136
Mrs MC Callaghan(4) 10 271 3 284
Mr GA Cousins 89 10 18 117
Mrs M Easson(4) 11 277 2 290
Ms DG Fisher 51 10 55 116
Mr ND Hamilton 46 11 79 136
Ms AJ Keating 101 11 17 129
Mr RA Ross 80 11 44 135

(1) Primary benefits include base fee paid by cash and fees paid for some of the IAG committees and two subsidiaries board.
(2) Post-employment benefits include superannuation contributions made and retirement benefits paid for the two retired Directors, refer to (4) below for further details.
(3) Equity compensation relates to portion of base fee received as IAG shares under the Non-executive Directors' Share Plan.
(4) Post-employment benefits include retirement benefits of $269,000 and $276,000 paid to Mrs MC Callaghan and Mrs M Easson, respectively. The retirement benefits were calculated in accordance with the Non-executive Directors' Retirement Benefits Policy and the Corporations Act 2001.

Executive director and officers

The Nomination, Remuneration & Corporate Governance Committee (“NRCGC”) is a committee of the Board which provides assurance to the Board of the effectiveness, integrity and compliance of the Company's remuneration policies and practice. The NRCGC makes recommendations on the remuneration to be paid to the executive director who holds the office of Chief Executive Officer (“CEO”) and approves the remuneration to be paid to the executives who report directly to the CEO.

The CEO of IAG does not receive fees for his service on the Board. The responsibilities of Board membership are considered in determining remuneration provided as part of his normal employment conditions. The broad remuneration policy is to ensure the remuneration package reflects the person's duties and responsibilities, is market competitive and aligns reward with the achievement of the Company's strategic objectives and the creation of value for shareholders.

The tables below set out the remuneration of the CEO and each of the officers of the IAG Group for the year ended 30 June 2004. For the CEO, a comparative is also provided on his remuneration for the previous financial year.

Executive director Primary benefits(1) Post-employment benefits(2) Equity compensation(3) Other benefits Total
  $000 $000 $000 $000 $000
Chief Executive Officer:
Mr MJ Hawker
– 30 June 2004 1,933 146 1,296 - 3,375
– 30 June 2003 1,804 135 860 - 2,799

The increase in the remuneration of the CEO is primarily attributable to an increase in his base pay of $150,000 and an increase in equity compensation, through an additional allocation of Performance Award Rights. The comparative primary benefits have been adjusted to reflect bonus paid in accordance with the changed requirements of Accounting Standard disclosure.

Officers Primary benefits(1) Post-employment benefits(2) Equity compensation(3) Other benefits Total
  $000 $000 $000 $000 $000
Ms KL Baylis 727 60 159 - 946
Mr IF Brown 965 92 348 - 1,405
Mr AM Coleman 858 69 185 - 1,112
Mr DA Issa 757 60 88 - 905
Mr RJ Jackson 1,121 88 14 - 1,223
Ms SJ Mostyn 717 59 145 - 921
Mr DRA Pearce 737 61 155 - 953
Mr MJ Pirone 699 61 198 - 958
Mr LF Power 823 32 26 - 881
Mr DJP Smith 919 70 156 124(4) 1,269
Mr G Venardos 1,062 77 212 - 1,351
Mr RJ Wagstaffe 940 36 26 - 1,002

(1) Primary benefits include amounts of salary paid in cash, bonuses, provision of cars, parking and related fringe benefits tax, annual leave and long service leave. Bonuses, including shortterm and long-term incentive bonuses, are measured on accruals basis.
(2) Post-employment benefits include superannuation contributions made and deemed contributions for the IAG & NRMA Superannuation Plan (formerly NRMA Superannuation Plan) where IAG is on a contribution holiday.
(3) Equity compensation includes values of the executives' participation in the Bonus Equity Share Plan (“BESP”) for their short-term incentive bonus and values for Performance Share Rights (“PSRs” – related to unissued shares) and Performance Award Rights (“PARs” – related to issued shares) in accordance with AASB 1046: Director and executive disclosures by disclosing entities. Values of BESP are in accordance with market price of IAG shares at grant date. An allocated portion of unvested PSRs and PARs is included in the total remuneration disclosure above. To determine these values the Black Scholes model has been applied. The valuation takes into account the share price at grant date, the expected life of the option, the exercise price of the option, the volatility in price of the underlying shares of IAG, expected dividends and the risk-free interest rate.
(4) Represents an accommodation allowance on relocation to Auckland in New Zealand.

Set out below is the Performance Award Rights (“PARs”) granted during the year ended 30 June 2004.

Executive director PARs granted during the year(1) Date first exercisable
  Number  
Chief Executive Officer:
Mr MJ Hawker 400,000 29/09/2006

 

Officers PARs granted during the year(1) Date first exercisable
Number
Ms KL Baylis 61,679 29/09/2006
Mr IF Brown 80,451 29/09/2006
Mr AM Coleman 80,451 29/09/2006
Mr DA Issa 67,042 29/09/2006
Mr RJ Jackson 80,451 29/09/2006
Ms SJ Mostyn 67,042 29/09/2006
Mr DRA Pearce 61,679 29/09/2006
Mr MJ Pirone 73,746 29/09/2006
Mr LF Power 53,634 29/09/2006
Mr DJP Smith 80,451 29/09/2006
Mr G Venardos 93,859 29/09/2006
Mr RJ Wagstaffe 53,634 29/09/2006

(1) The Company has issued PARs to certain executives during the financial year. Each executive who participates in the PARs becomes eligible to receive a number of shares by paying $1 per tranche of rights allocated, subject to a specific performance hurdle met.

DIRECTORS' INTERESTS

The relevant interest of each Director in the shares and/or options issued by the Company, as notified by the Directors to the Australian Stock Exchange in accordance with section 205G of the Corporations Act 2001, at the date of this report is as follows:

Directors Ordinary shares directly held Ordinary shares indirectly held* Reset preference shares Performance share rights Performance award rights
Mr JA Strong 12,083 139,122 - - -
Mr JF Astbury 10,083 38,252 - - -
Mr GA Cousins 150,000 18,252 - - -
Ms DG Fisher 4,799 56,078 - - -
Mr ND Hamilton 4,817 60,460 - - -
Ms AJ Keating 709 18,252 - - -
Mr RA Ross 102,557 40,053 - - -
Mr MJ Hawker 183,971 - - 1,000,000 700,000

* Ordinary shares indirectly held includes shares held in the Non-executive Directors' Share Plan and held by Directors' related entities.

ENVIRONMENTAL REGULATION

The IAG Group's operations are subject to environmental regulations under either Commonwealth or State legislation. These regulations do not have a significant impact on the IAG Group's operations. The Board of Directors believes that the IAG Group has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the IAG Group.

ROUNDING OF AMOUNTS

Unless otherwise stated, amounts in the financial report and Directors' report have been rounded to the nearest million dollars. The Company is of a kind referred to in the class order 98/100 dated 10 July 1998 issued by the Australian Securities & Investments Commission. All rounding has been conducted in accordance with that class order.

Signed at Sydney this 19th of August 2004 in accordance with a resolution of the Directors.

Mr J A Strong
Director

Mr M J Hawker
Director

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