IAG Annual Report 2004 - Discussion & Analysis of the Financial Statements

DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE

The IAG Group recorded a net profit for the year of $665 million (2003 – $153 million).

The overall increase in the net profit after tax is attributable to a full year's contributions made by the CGU and NZI businesses (which were acquired on 2 January 2003) together with improved underwriting and investment performance from technical reserves. The net profit after tax also includes a one-off profit of $57 million after tax from the sale of the ClearView retirement services businesses.

Net premium revenue

Net premium revenue has increased by 26% to $5,863 million. This increase is attributable to:

A full year's contribution by the CGU and NZI groups; and
Continued high retention and growth in new business in the existing and acquired entities.

Net claims expense

Claims expense has increased by 13% to $3,815 million. The increase is attributable to:

A full year's contribution by the CGU and NZI groups; and
General growth of the business.

The loss ratio (net claims expense as a % to net earned premium) of 65% has improved from 73% in the previous financial year. Approximately 4% of this improvement is due to a benefit from interest rate adjustments and the balance is due to the benefits from integration of the CGU/NZI businesses and generally favourable weather conditions.

Underwriting expenses

Total underwriting expenses have increased by 40% to $1,500 million. The increase is attributable to:

A full year's contribution by the CGU and NZI groups; and
General growth of the business.

The expense ratio (underwriting expenses to net earned premium) of 26% compares to 23% for the same period last year. A full year's result from the CGU and NZI businesses has been the major driver of this increase. CGU and NZI bring a higher expense ratio, in the form of commission expense, due to the intermediary distribution of their products.

Retirement services revenue

The increase in retirement services revenue by 133% to $70 million is attributable to the improved performance from equity investments during the first half of the year. The retirement services businesses (ClearView) were sold to MBF effective 21 January 2004.

Other operating revenue

The increase in other operating revenue by 22% to $216 million is mainly attributable to a full year's contribution by the CGU and NZI groups.

Borrowing costs expense

Borrowing costs expense has increased due to a full year's expense arising from the borrowings to fund the acquisition of CGU/NZI. The increase has been offset to some extent by the decrease in short-term borrowings in the form of commercial paper.

Corporate and administration expenses

The increase in corporate and administration expenses by 11% to $386 million is mainly attributable to the increase in goodwill and intangibles amortisation by $37 million.

DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Assets

The total assets of the IAG Group are $16,335 million (2003 – $16,470 million).

The small decrease in total assets is largely attributable to the sale of the ClearView retirement services businesses and NRMA Health Pty Limited, the share buy-back of $417 million (inclusive of costs) and total dividends paid of $282 million. This was largely offset by the increase in investments backing technical reserves of approximately $400 million and the increase in investments attributable to outside equity interests of $208 million.

Liabilities

The total liabilities of the IAG Group are $12,111 million (2003 – $12,417 million) with the major component being general insurance liabilities of $9,799 million (2003 – $10,213 million, which included life insurance liabilities of $910 million). The overall decrease was due to the sale of the ClearView retirement services businesses and NRMA Health Pty Limited and the reduction in short-term borrowings. This decrease was offset to some extent by the increase in general insurance liabilities by $496 million.

Equity

Equity was impacted by the following activities during the year:

Increase:

Net profit of $665 million; and
Increase in outside equity interests.

Decrease:

Payment of dividends of $282 million; and
Share buy-back of $417 million (inclusive of costs).

DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF CASH FLOWS

Cash flows from operating activities

Cash flows from operating activities have increased by 42% to $1,169 million.

The increase is attributable to a full year's contribution by CGU/NZI during the year, affecting both the underwriting and other operating cash flows.

Cash flows from investing activities

Cash outflows from investing activities have decreased by $383 million.

The decrease is largely attributable to the net cash outlay of $1,644 million for the acquisition of CGU/NZI in 2003. However in 2003, these outflows were offset by the sale of $125 million of equities to fund the purchase of the above acquisition and the distribution received from the voluntary liquidation of a former controlled entity to the value of $531 million.

Cash flows from financing activities

Cash flows from financing activities have decreased by $1,306 million to a net outflow of $590 million.

This decrease is attributable to:

Funds raised (issue of shares and borrowings) during the previous year to fund the acquisition of CGU/NZI. However this was offset in the previous year by the repayment of an amount of $683 million due to a former controlled entity in voluntary liquidation; and
The share buy-back in the current year involving a total outlay of $417 million (inclusive of costs).

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