|
||
 |
The concise financial report has been derived from the consolidated entity’s 2005 full financial report. The concise financial report does not, and cannot be expected to, provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the 2005 full financial report.
A copy of the Insurance Australia Group Limited 2005 full financial reports, including the independent audit report, is available to all shareholders, and can be accessed on the internet at www.iag.com.au.
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 2005 and the audit report thereon.
The following terminology is used throughout the financial report:
- IAG, parent entity or Company - Insurance Australia Group Limited.
- IAG Group, Group or consolidated entity - the consolidated entity consists of Insurance Australia Group Limited and its controlled entities.
DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITED
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 this entire period unless otherwise stated.
| Chairman | |
|---|---|
| Mr JA (James) Strong | appointed in August 2001 |
| Other directors | |
| Ms YA (Yasmin) Allen | appointed in November 2004 |
| Mr JF (John) Astbury | appointed in July 2000 |
| Mr GA (Geoffrey) Cousins | appointed in July 2000 |
| Mr ND (Neil) Hamilton | appointed in June 2000 |
| Mr RA (Rowan) Ross | appointed in July 2000 |
| Mr B (Brian) Schwartz | appointed in January 2005 |
| Mr MJ (Michael) Hawker | appointed in December 2001 |
Particulars of the Directors’ qualifications and experience are set out on pages 30 and 31.
| Former independent non-executive directors who retired during the financial year | |
|---|---|
| Ms DG (Dominique) Fisher | from 19 June 2000 to 10 November 2004 |
| Ms AJ (Anne) Keating | from 19 June 2000 to 10 November 2004 |
SECRETARIES OF INSURANCE AUSTRALIA GROUP LIMITED
The name and details of the Company’s secretaries at any time during or since the end of the financial year are as follows:
Ms AB (Anne) O’Driscoll FCA, ANZIIF (Fellow), GAICD
Ms Anne O’Driscoll was appointed to the position of company secretary in July 2002. Before this appointment, Ms O’Driscoll has held a number of senior positions in the IAG Group, including the position of General Manager, Finance. Currently, Ms O’Driscoll is also the Head of Investor Relations of IAG. Ms O’Driscoll is responsible to the Board for ensuring Board procedures are complied with. She also provides advice and counsel to the Board in relation to corporate governance and other matters.
Mr GD (Glenn) Revell BCom, MBus, FCPA, FCIS, GAICD
Mr Revell was appointed to the position of company secretary in October 2002. Prior to holding this position, he held the position of General Manager Corporate Affairs & Company Secretary of Howard Smith Limited for eight years.
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 & SUSTAINABILITY COMMITTEE | RISK MANAGEMENT& COMPLIANCE COMMITTEE | IAG BOARD SUB-COMMITTEE | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total number of meetings held | 16 | 4 | 5 | 8 | 3 | |||||
| Directors | A | B | A | B | A | B | A | B | A | B |
| Mr JA Strong | 16 | 16 | - | - | 5 | 5 | - | - | 2 | 2 |
| Mr MJ Hawker | 16 | 15 | - | - | - | - | - | - | 2 | 2 |
| Ms YA Allen* | 10 | 10 | - | - | - | - | 6 | 6 | - | - |
| Mr JF Astbury | 16 | 15 | 4 | 4 | 5 | 5 | - | - | - | - |
| Mr GA Cousins | 16 | 14 | 4 | 4 | - | - | - | - | - | - |
| Ms DG Fisher** | 6 | 5 | - | - | - | - | 2 | 2 | - | - |
| Mr ND Hamilton | 16 | 15 | - | - | - | - | 8 | 8 | 1 | 1 |
| Ms AJ Keating** | 6 | 6 | 2 | 2 | - | - | - | - | - | - |
| Mr RA Ross | 16 | 15 | - | - | 5 | 5 | 8 | 8 | 1 | 1 |
| Mr B Schwartz* | 8 | 8 | 2 | 2 | - | - | - | - | - | - |
A - Meetings eligible to attend as a member
B - Meetings attended as a member
* Ms YA Allen and Mr B Schwartz were appointed as Directors on 10 November 2004 and 1 January 2005, respectively.
** Ms DG Fisher and Ms AJ Keating retired as Directors on 10 November 2004.
PRINCIPAL ACTIVITIES
The principal continuing activities of the IAG Group are the underwriting of general insurance and related corporate services and investing activities.
OPERATING AND FINANCIAL REVIEW
Operating Result for the Year
The IAG Group’s net profit after tax for the year was $879 million (2004 - $806 million). After adjusting for outside equity interests in the IAG Group result, net profit attributable to shareholders of the Company was $760 million (2004 - $665 million).
Underwriting result
The IAG Group produced an underwriting result before investment income on technical reserves of $484 million (2004 - $548 million). The underwriting profit has been affected by interest rate movements which change the discount rate applicable to claims reserves. In 2005, this resulted in an increase in claims expense by $88 million compared to a benefit of $123 million in 2004. This resulted in an increase in loss ratio to 66.2% (2004 - 65.1%) and combined ratio to 92.1% (2004 - 90.7%). Excluding the impact of movement in interest rates on claims expense, the underlying ratios improved - the loss ratio was 64.8% (2004 - 67.2%) and combined ratio was 90.7% (2004 - 92.8%).
The expense ratio of 25.9% (2004 - 25.6%) remained fairly constant despite a reduction in premium growth.
The insurance profit of $1,000 million (2004 - $792 million), representing an insurance margin of 16.3% (2004 - 13.5%) reflects an improved underwriting performance and strong investment returns on technical reserves.
(a) Australian personal lines insurance operations
The personal lines insurance operations produced an insurance margin of 16.0% for the financial year (2004 - 16.5%). The continued strong margin performance was achieved despite approximately $100 million of additional claims expense from major storms during the year. The strength in the underlying performance was a result of the continued focus on adhering to underwriting discipline and risk selection and the continued stability in NSW compulsory third party insurance.
Gross written premiums increased by 2.0% to $3,978 million.
(b) Australian commercial lines insurance operations
The commercial lines insurance operations produced an insurance margin of 17.2% for the financial year (2004 - 9.6%). The significant increase in the margin over prior year, was due in part to reserve releases in the property, liability and workers’ compensation, and also in part due to the benefits flowing from tort reform. However, it was underpinned by a strong performance by the core business. After adjusting for the releases from prior period reserves, the underlying insurance margin remained strong at 15.8% for 2005.
Gross written premiums increased by 5.0% to $1,694 million.
Fee based income for the year incurred a loss of $14 million (versus a $21 million profit in the prior year). This result was negatively impacted by significant provisioning required in the NSW workers’ compensation business arising from the overstatement of fee income relating to prior periods.
(c) International insurance operations
IAG New Zealand operations:
The international insurance operations produced an insurance margin of 10.6% for the financial year (2004 - 8.5%), despite incurring approximately $20 million more in storm related claims in 2005. The improved margin performance was driven by better claims management and processes on its motor portfolio and improved risk-based pricing in its home and commercial portfolios.
Gross written premiums increased by 9.5% to $1,001 million, which includes a benefit of $47 million or 4.7% from favourable exchange rate movements in 2005.
Captive reinsurer:
The Captive acts solely as the IAG Group’s reinsurer assuming risk from other parts of the business and obtaining reinsurance protections for the Group in the open market. There was a significant improvement in the insurance result from a loss of $8 million in 2004 to a profit of $77 million in 2005. This was mainly driven by the absence of any major insured catastrophes in 2005 and the recognition of reinsurance recoverables on attritional storm losses incurred by the rest of the IAG Group.
(d) Corporate and investments
Investment income on corporate and shareholders’ funds (net of investment expenses) decreased by 7.7% to $501 million. This decrease was primarily due to the reduction in outside equity interest in investment income by $28 million and the profit on sale of ClearView retirement services and Health insurance businesses in the 2004 financial year of $59 million. Excluding these items, investment income on shareholders’ funds has increased by $45 million to $479 million. The increase is due to strong investment performance by all the major asset classes, particularly Australian equities, in the 2005 financial year and investment income from the portfolio of investments established from the proceeds of the issue of reset exchangeable securities (“RES”) during the financial year.
The net corporate expenses have increased by 10% to $224 million. This increase was mainly attributable to:
- the financial services profit of $15 million included in net corporate expenses in 2004. The financial services segment was sold in January 2004;
- increase in borrowing costs by $13 million in 2005 due to the issue of reset exchangeable securities. This expense is offset by the interest income from the portfolio in the shareholders’ funds; and
- increase in corporate expenses by approximately $7 million due to internal restructuring and mergers and acquisition costs.
These increases were offset to some extent by the decrease of $13 million in amortisation of intangibles due to accelerated amortisation of certain contractual arrangements in 2004.
Review of Financial Condition
(a) Financial position
Assets:
The total assets of the IAG Group as at 30 June 2005 are $17,147 million (2004 - $16,291 million).
The increase is mainly attributable to funds generated from insurance operations during the financial year, reflecting the increase in investments and insurance balances held at 30 June 2005. This increase was offset to some extent by total dividends paid of $442 million and an increase in income taxes paid.
Liabilities:
The total liabilities of the IAG Group as at 30 June 2005 are $12,707 million (2004 - $12,067 million) with the major component being general insurance liabilities of $10,426 million (2004 - $9,799 million).
Equity:
Increase:
- Net profit of $760 million.
Decrease:
- payment of dividends of $442 million; and
- a decrease in outside equity interests.
(b) Cash from operations
Cash flows from operating activities:
Cash flows from operating activities have decreased by 23% to $897 million.
The decrease is mainly attributable to:
- a decrease in reinsurance and other recoveries received;
- higher income taxes paid;
- an increase in other operating payments; and
- a decrease in other operating receipts.
The decrease was offset to some extent by the:
- increase in premiums received; and
- decrease in reinsurance expense paid.
Cash flows from investing activities:
Cash outflows from investing activities have decreased by $599 million to $185 million.
The decrease is largely attributable to the lower level of investing activity in 2005 in light of increased dividends (funded by a reduction in investments) and the net redemption of units in IAG controlled trusts by outside equity interests.
Cash flows from financing activities:
Cash outflows from financing activities have increased by $89 million to $679 million.
This increase is attributable to $160 million in additional dividends paid in the 2005 financial year and net redemptions of units in IAG controlled trusts of $126 million in the year compared with net proceeds of $381 million in the prior year.
The issue of reset exchangeable securities and the investment of the proceeds from RES in the Portfolio involved a net outflow of $13 million, mainly attributable to the transaction costs associated with the issue.
(c) Capital adequacy/minimum capital requirements
The IAG Group minimum capital requirement (“MCR”) multiple, calculated by applying APRA standards for individual licensed insurers to the relevant consolidated results, is 2.00 times as at 30 June 2005 (2004 - 1.75 times). The multiple remains above the IAG Group’s current benchmark multiple of 1.55 times MCR.
The IAG Group minimum capital requirement (“MCR”) multiple, calculated by applying APRA standards for individual licensed insurers to the relevant consolidated results, is 2.00 times as at 30 June 2005 (2004 - 1.75 times). The multiple remains above the IAG Group’s current benchmark multiple of 1.55 times MCR.
Further information on the IAG Group’s result and review of operations can be found in the 30 June 2005 Investor Report on the Company’s website, www.iag.com.au.
LIKELY DEVELOPMENTS
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, while the volume of risks-in-force will continue to grow, this increase will be offset to an extent by lower premium rate growth 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 expected to moderate to be more in line with the 2004 financial year. The Directors consider that the IAG Group is well placed to continue to leverage opportunities in this environment.
Equity markets are not expected to repeat returns as high as those experienced in the last two financial years. person who is or has been:
The IAG Group is continuing to investigate potential investments in general insurance operations offshore.
DIVIDENDS
Details of dividends paid or declared by the Company are set out in note 7.
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
Significant changes in the state of affairs of IAG Group during the financial year were as follows:
On 11 January 2005, IAG announced the issue of 5.5 million reset exchangeable securities (“RES”) by the New Zealand branch of IAG Finance (New Zealand) Limited, a wholly-owned subsidiary of IAG, raising a total of $550 million. The RES began trading on the Australian Stock Exchange (“ASX”) on 12 January 2005. The gross proceeds of the issue, through a series of intra-group arrangements, are invested by IAG Portfolio Limited, a wholly-owned subsidiary of IAG, in a portfolio of high quality, short-dated, fixed interest securities (“Portfolio”). IAG’s obligations to the RES holders are secured by the Portfolio and interest payments and redemption amounts will depend on the performance and creditworthiness of this Portfolio. IAG may, at any time, exercise its right to exchange some or all RES for preference shares issued by IAG. The RES may be redeemed for cash or converted into ordinary shares of IAG on a reset date or under certain circumstances.
The issue of RES has had a net positive, though immaterial impact, on IAG’s financial performance as the increase in investment income generated by the Portfolio is largely offset by the increase in interest expense from interest payments to RES holders and the amortisation of deferred borrowing costs. RES and the Portfolio are set-off in IAG’s statement of financial position with a net asset being recorded to the extent that the Portfolio value is greater than the RES redemption amount.
EVENTS SUBSEQUENT TO REPORTING DATE
Details of matters subsequent to the end of the financial year including a dividend declared of 14.5 cents per ordinary share, the acquisition of a general insurance business in Thailand in July 2005 and the transitional impact of the introduction of Australian equivalents of the International Financial Reporting Standards are set out in note 11.
NON-AUDIT SERVICES
During the financial year KPMG, the Company’s auditor, has performed certain other services in addition to their 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 Audit Committee, are satisfied that the provision of those non-audit services by the Company’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 Audit Committee Charter (“Charter”) on the agreed framework for engaging auditors for non-audit services; and
- the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, 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.
A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is included in the Directors’ report.
The level of fees for non-audit services amount to approximately 50% of total audit fees (refer to note 9 to the financial statements for further details on 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 forms part of the director’s report for the year ended 30 June 2005.
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 the 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 steps to recover those costs.
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.
REMUNERATION REPORT
This report outlines the remuneration arrangements for IAG’s directors and senior executives and provides the disclosures which meet the remuneration reporting requirements of the Corporations Act 2001 and takes into account the requirements of the Corporate Law and Economic Reform Programme (CLERP 9) which applies to reporting periods commencing from 1 July 2004. This report also provides the disclosures required by the accounting standard AASB 1046 Director and Executive Disclosures by Disclosing Entities and AASB 1046A Amendments to Accounting Standard AASB 1046.
This report outlines the Board’s policy in relation to, and details of, the remuneration of IAG directors (including the Chief Executive Officer and Managing Director) and the senior executives (referred to as “specified executives” or “executives”) having the greatest authority for managing the IAG Group, including the five executives receiving the highest remuneration during the financial year.
1. NOMINATION, REMUNERATION & SUSTAINABILITY COMMITTEE
The role and responsibilities of the Nomination, Remuneration & Sustainability Committee (“Committee” or “NRSC”) are set out in the Committee’s charter and a copy of it is available at www.iag.com.au. The key responsibilities of the NRSC in relation to remuneration are to:.
(a) provide assurance to the Board relating to the effectiveness, integrity and compliance of the Company’s remuneration policies and practices;
(b) ensure the overall remuneration policy and approach fits the strategic goals of IAG;
The Chief Executive Officer (“CEO”), Group Executive Culture & Reputation and Head of Human Resources regularly attend Committee meetings and assist the Committee in its deliberations.
The Committee receives reports from Mercer Human Resources Consulting and Egan Associates on remuneration for executives and directors. Mallesons Stephen Jaques provides legal advice to the Committee as required.
