Notes to the Concise Financial Statements
FOR THE YEAR ENDED 30 JUNE 2007
This concise financial report relates to the consolidated entity consisting of Insurance Australia Group Limited (“the Company”) and its subsidiaries (“IAG Group” or “Consolidated entity”) for the year ended 30 June 2007. The accounting policies adopted have been consistently applied to all years presented, unless otherwise stated.
The Company is a kind referred to in Class Order 98/100, issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in financial reports. Amounts in the concise financial report have been rounded off in accordance with that Class Order to the nearest million dollars.
NOTE 1: PRESENTATION CURRENCY
The presentation currency used in this financial report is in Australian dollars.
NOTE 2: ANALYSIS OF INCOME
| CONSOLIDATED | ||
| 2007 $m |
2006 $m |
|
|---|---|---|
| (a) General insurance revenue | ||
| Gross written premium | 7,381 | 6,435 |
| Movement in unearned premium liability | (174) | 102 |
| Premium revenue | 7,207 | 6,537 |
| Direct premium revenue | 7,192 | 6,536 |
| Inwards reinsurance premium revenue | 15 | 1 |
| Premium revenue | 7,207 | 6,537 |
| Reinsurance and other recoveries revenue | 871 | 566 |
| Total general insurance revenue | 8,078 | 7,103 |
| (b) Investment income | ||
| Dividend revenue | 59 | 87 |
| Interest revenue | 442 | 375 |
| Trust revenue | 61 | 33 |
| Total investment revenue | 562 | 495 |
| Net changes in fair values of investments | ||
| – Realised net gains and (losses) | (23) | 162 |
| – Unrealised net gains and (losses) | 185 | 248 |
| Total investment income | 724 | 905 |
| Represented by: | ||
| Investment income on assets backing insurance liabilities | 381 | 329 |
| Investment income on equity holders’ funds | 343 | 576 |
| 724 | 905 | |
| (c) Fee and other income | ||
| Fee based revenue | 463 | 218 |
| Total fee and other income | 463 | 218 |
| (d) Share of net profit of associates | 5 | 2 |
| Total income | 9,270 | 8,228 |
NOTE 3: SEGMENT REPORTING
(a) Primary reporting – business segments
The Parent is a non-operating holding company operating only in Australia.
The Consolidated entity operated in the general insurance industry throughout the year. Revenue from the general insurance industry is derived from underwriting insurance in Australia, New Zealand, United Kingdom and Asia and these form separate reportable segments. The reportable segments comprise the following businesses (each insurance product is predominantly short-tail in duration except where noted):
- Australia personal insurance – The Australia personal insurance business develops and underwrites personal insurance products (through direct and indirect distribution channels), and manages claims and assessing services. Insurance products include motor vehicle, home and contents, compulsory third party (long-tail), consumer credit, and niche insurance products such as pleasure craft, veteran and classic car, boat, caravan, and travel insurance. This includes personal insurance products sold in conjunction with commercial insurance products.
- Australia commercial insurance – The Australia commercial insurance business develops and underwrites insurance for businesses. Insurance products include commercial property, commercial motor and fleet motor, construction and engineering, farm, crop and livestock, home warranty, marine, public and product liability (long-tail), professional indemnity (long-tail), directors and officers (long-tail), and workers’ compensation (long-tail).
- New Zealand insurance – The direct insurance business underwritten through foreign subsidiaries in New Zealand.
- United Kingdom insurance – The insurance underwriting and broker distribution services operating through foreign subsidiaries in the United Kingdom.
- Asia insurance – The direct insurance business underwritten through foreign subsidiaries in Asia.
- Reinsurance operations – The inwards reinsurance operation and the captive reinsurer for subsidiaries operating outside Australia.
- Corporate and investments – Other activities, including corporate services, investment management and investment of the equity holders’ funds.
The net outstanding claims liability for each segment includes an allocation of the diversification benefit incorporated into the risk margin relating to the combination of the segments at the Consolidated entity level. Depreciation expense is allocated to different business segments as management fees from the Corporate segment and so all depreciation relating to property, plant and equipment is treated as part of the Corporate segment.
The reportable segments have changed from those disclosed in previous periods as a result of the continued geographical expansion of the IAG Group during the current financial year. The revised business segments align with the way in which information is currently viewed by key management personnel for making strategic and operational decisions.
There are no differences between the recognition and measurement criteria used in the segment disclosures and those used in the financial statements.
| 2007 | Australia personal insurance $m |
Australia commercial insurance $m |
New Zealand insurance $m |
United Kingdom insurance $m |
Asia insurance $m |
Reinsurance operations $m |
Corporate and investments $m |
Intersegment elimination $m |
Total $m |
|---|---|---|---|---|---|---|---|---|---|
| External revenue | 4,740 | 2,056 | 1,000 | 912 | 193 | 15 | 354 | – | 9,270 |
| Intersegment revenue | – | – | 5 | 27 | 6 | 41 | – | (79) | – |
| Total revenue | 4,740 | 2,056 | 1,005 | 939 | 199 | 56 | 354 | (79) | 9,270 |
| Underwriting profit | 203 | 172 | 64 | (3) | 1 | (30) | – | – | 407 |
| Investment income net of investment fees – technical reserves | 213 | 83 | 22 | 33 | 8 | 1 | – | – | 360 |
| Insurance profit | 416 | 255 | 86 | 30 | 9 | (29) | – | – | 767 |
| Investment income net of investment fees – equity holders’ funds | – | – | – | – | – | – | 319 | – | 319 |
| Share of net profit of associates | – | – | – | (2) | 7 | – | – | – | 5 |
| Other net operating result | – | 65 | – | 18 | (9) | – | (257) | – | (183) |
| Profit/(loss) before income tax | 416 | 320 | 86 | 46 | 7 | (29) | 62 | – | 908 |
| Income tax expense | (279) | ||||||||
| Profit/(loss) for the year | 629 | ||||||||
| Segment assets | 6,010 | 4,171 | 674 | 1,762 | 131 | 83 | 8,835 | (56) | 21,610 |
| Total assets | 21,610 | ||||||||
| Segment liabilities | 6,010 | 4,171 | 674 | 1,762 | 131 | 83 | 4,003 | (56) | 16,778 |
| Total liabilities | 16,778 | ||||||||
| Acquisitions of property, plant and equipment, intangibles and other non-current segment assets | – | – | – | – | – | – | 1,746 | – | 1,746 |
| Depreciation expense | 21 | 13 | 4 | 11 | 2 | – | 10 | – | 61 |
| Amortisation of acquired intangibles | – | – | – | – | – | – | 55 | – | 55 |
| Total depreciation and amortisation expense | 21 | 13 | 4 | 11 | 2 | – | 65 | – | 116 |
| Other non-cash expenses | 46 | 23 | 11 | 7 | – | – | 6 | – | 93 |
| 2006 | Australia personal insurance $m |
Australia commercial insurance $m |
New Zealand insurance $m |
United Kingdom insurance $m |
Asia insurance $m |
Reinsurance operations $m |
Corporate and investments $m |
Intersegment elimination $m |
Total $m |
|---|---|---|---|---|---|---|---|---|---|
| External revenue | 4,356 | 2,086 | 1,024 | – | 113 | – | 649 | – | 8,228 |
| Total revenue | 4,356 | 2,086 | 1,024 | – | 113 | – | 649 | – | 8,228 |
| Underwriting profit | 266 | 165 | 100 | – | 2 | – | – | – | 533 |
| Investment income net of investment fees – technical reserves | 197 | 82 | 30 | – | 1 | – | – | – | 310 |
| Insurance profit | 463 | 247 | 130 | – | 3 | – | – | – | 843 |
| Investment income net of investment fees – equity holders’ funds | – | – | – | – | – | – | 537 | – | 537 |
| Share of net profit of associates | – | – | – | – | 2 | – | – | – | 2 |
| Other net operating result | – | 8 | – | – | (7) | – | (148) | – | (147) |
| Profit/(loss) before income tax | 463 | 255 | 130 | – | (2) | – | 389 | – | 1,235 |
| Income tax expense | (373) | ||||||||
| Profit/(loss) for the year | 862 | ||||||||
| Segment assets | 5,951 | 3,702 | 635 | – | 142 | – | 6,542 | – | 16,972 |
| Total assets | 16,972 | ||||||||
| Segment liabilities | 5,951 | 3,702 | 635 | – | 142 | – | 2,871 | – | 13,301 |
| Total liabilities | 13,301 | ||||||||
| Acquisitions of property, plant and equipment, intangibles and other non-current segment assets | – | – | – | – | – | – | 158 | – | 158 |
| Depreciation expense | 20 | 13 | 5 | – | – | – | 9 | – | 47 |
| Amortisation of acquired intangibles | – | – | – | – | – | – | 8 | – | 8 |
| Total depreciation and amortisation expense | 20 | 13 | 5 | – | – | – | 17 | – | 55 |
| Other non-cash expenses | 45 | 25 | 9 | – | – | – | 9 | – | 88 |
(b) Secondary reporting – geographical segments
The Consolidated entity operates in the Australia, New Zealand, United Kingdom and Asia (principally Thailand) general insurance industries. Each of these markets forms a separate reportable geographical segment. Australia is the IAG Group’s principal market with operations covering all states and territories. The reinsurance operation is a global shared service and there is no sensible transparent manner in which to allocate the results of this operation across the geographic segments.
| Australia | New Zealand | United Kingdom | Asia | Reinsurance | Inter-segment elimination | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 $m |
2006 $m |
2007 $m |
2006 $m |
2007 $m |
2006 $m |
2007 $m |
2006 $m |
2007 $m |
2006 $m |
2007 $m |
2006 $m |
2007 $m |
2006 $m |
|
| External revenue | 7,106 | 6,928 | 1,062 | 1,087 | 887 | – | 196 | 114 | 19 | 99 | – | – | 9,270 | 8,228 |
| Segment assets | 16,685 | 15,649 | 1,721 | 1,508 | 3,581 | – | 315 | 308 | 228 | 1,249 | (920) | (1,742) | 21,610 | 16,972 |
| Acquisitions of property, plant and equipment, intangibles and other non-current segment assets | 57 | 71 | 42 | 23 | 1,622 | – | 1 | 64 | 24 | – | – | – | 1,746 | 158 |
NOTE 4: EARNINGS PER SHARE
| CONSOLIDATED | ||
| 2007 cents |
2006 cents |
|
|---|---|---|
| (a) Reporting period values | ||
| Basic earnings per ordinary share(i) | 32.79 | 47.66 |
| Diluted earnings per ordinary share | 32.59 | 47.38 |
Note: |
||
| 2007 $m |
2006 $m |
|
| (b) Reconciliation of earnings used in calculating earnings per share | ||
| Profit for the year | 629 | 862 |
| Profit attributable to minority interests | (77) | (103) |
| Profit attributable to equity holders of the Parent which is the earnings used in calculating basic and diluted earnings per share | 552 | 759 |
| 2007 Number of shares in millions |
2006 Number of shares in millions |
|
| (c) Reconciliation of weighted average number of ordinary shares used in calculating earnings per share | ||
| Ordinary shares on issue(i) | 1,691 | 1,602 |
| Treasury shares held in trust | (10) | (9) |
| Weighted average number of ordinary shares used in the calculation of basic earnings per share | 1,681 | 1,593 |
| Weighted average number of dilutive potential ordinary shares relating to: | ||
| – Unvested share based remuneration rights supported by treasury shares held in trust | 10 | 9 |
| Weighted average number of ordinary shares used in the calculation of diluted earnings per share | 1,691 | 1,602 |
Note:
(i) The weighted average number of ordinary shares used to calculate the basic earnings per share includes an additional 7 million shares that are deemed to be bonus
shares. These deemed bonus shares were issued in response to the $750 million institutional placement (completed on 12 December 2006) and the $125 million
share purchase plan (completed on 31 January 2007) as these capital raisings were considered to be issued at a discount compared to the relevant market price
and accordingly these shares are deemed to contain a bonus element. These deemed bonus shares are considered to have been issued on 1 July 2005 (being at the
beginning of the corresponding prior period presented in these financial statements) and thus have a retrospective dilutive effect on the basic earnings per share.
The following matters are relevant to the determination of the weighted average number of ordinary shares:
- the reset preference shares are not considered to be dilutive potential ordinary shares even though they may convert into ordinary shares because the contingent conversion conditions were not met at the reporting date; and
- the reset exchangeable securities (refer note 8(b)) are not considered to be dilutive potential ordinary shares because the contingent conversion conditions were not met at the reporting date.
NOTE 5: DIVIDENDS
| Cents per share |
Total amount $m |
Payment date | Tax rate for franking credit |
Percentage franked |
|
|---|---|---|---|---|---|
| (a) Ordinary shares | |||||
| Recognised in year ended 30 June 2007 | |||||
| 2007 interim dividend | 13.5 | 237 | 16 April 2007 | 30% | 100% |
| 2006 final dividend | 16.0 | 255 | 9 October 2006 | 30% | 100% |
| 492 | |||||
| Recognised in year ended 30 June 2006 | |||||
| Special dividend | 12.5 | 201 | 26 June 2006 | 30% | 100% |
| 2006 interim dividend | 13.5 | 215 | 10 April 2006 | 30% | 100% |
| 2005 final dividend | 14.5 | 231 | 17 October 2005 | 30% | 100% |
| 647 | |||||
It is standard practice to declare the dividend for a period after the relevant reporting date. In accordance with the relevant accounting policy (refer note 1(ac) of the full financial statements) a dividend is not accrued for until it is declared and so the dividends for a period are generally recognised and measured in the financial reporting period following the period to which the dividend relates.
A special dividend was paid to shareholders during the year ended 30 June 2006 as a return of excess capital in line with the commitment to ensure capital is managed efficiently. The total special dividend is presented inclusive of transaction costs of $1.3 million.
(b) Dividend reinvestment
A Dividend Reinvestment Plan (“DRP”) operates which allows equity holders to elect to receive their dividend entitlement in the form of IAG shares. The price of DRP shares is the average share market price, less a discount if any (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.
The DRP for the 2007 interim dividend payable on 16 April 2007 was settled with the issuance of 40.5 million fully paid ordinary shares priced at $5.8507 per share (based on the average market price for the 10 trading days from 19 March 2007 to 30 March 2007 inclusive) with 10.5 million shares issued to existing shareholders with dividend entitlements and 30 million shares issued to the underwriter of the subscriptions for the DRP. There was no discount applied.
The DRP for the 2006 final dividend payable on 9 October 2006 was settled with the on-market purchase of 15.5 million shares priced at $5.3220 per share (based on the average market price for the 10 trading days from 11 September 2006 to 22 September 2006 inclusive). There was no discount applied.
The 29.5 million shares allocated to equity holders participating in the DRP during the year ended 30 June 2006 were purchased on-market (including 8.7 million shares relating to the special dividend).
(c) Dividend not recognised at reporting date
In addition to the above dividends, the following dividend was declared after the reporting date but before finalisation of this financial report and has not been recognised in this financial report.
| Cents per share |
Total amount $m |
Expected payment date |
Tax rate for franking credit |
Percentage franked |
|
|---|---|---|---|---|---|
| 2007 final dividend | 16.0 | 287 | 8 October 2007 | 30% | 100% |
The dividend was declared on 24 August 2007. The Company’s dividend reinvestment plan (“DRP”) will operate by issuing new ordinary shares to participants. The dividend will be fully underwritten such that the shortfall in the DRP take-up will be underwritten. The last date for the receipt of an election notice for participation in the dividend reinvestment plan in relation to this final dividend is 5 September 2007.
(d) 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 generally being limited to profits subject to ongoing solvency obligations; and
- no dividends can be paid and no returns of capital can be made on ordinary shares, if distributions are not paid on the reset preference shares, unless certain actions are taken by IAG. For further details refer to note 21 of the full financial statements.
There are currently no restrictions on the payment of dividends from subsidiaries to the Parent other than:
- the payment of dividends generally being limited to profits subject to ongoing solvency obligations of the subsidiary;
- for certain subsidiaries, statutory reserve and regulatory minimum capital requirements, in particular, APRA has advised Australian general insurers that a general insurer under its supervision must obtain approval from it before declaring a dividend if the general insurer has incurred a loss, or proposes to pay dividends which exceed the level of profits earned in the current period; and
- the Lloyd’s syndicate operations being subject to specific solvency calculation restrictions regarding the payment of distributions from Funds at Lloyd’s.
The impact to these requirements caused by the payment of dividends is monitored. Payments of dividends from overseas subsidiaries may attract withholding taxes which have not been provided for in this financial report.
(e) Dividend franking amount
| CONSOLIDATED | ||
| 2007 $m |
2006 $m |
|
|---|---|---|
| The amount of franking credits available for the subsequent annual reporting period are: | ||
| Franking account balance at reporting date at 30% | 570 | 483 |
| Franking credits to arise from payment of income tax payable | 51 | 103 |
| Franking debits to arise from receipt of income tax refundable | (15) | (20) |
| Franking credits to arise from receipt of dividends receivable | 2 | 4 |
| Franking credits available for future reporting periods | 608 | 570 |
| Franking account impact of dividends declared before issuance of financial report but not recognised at reporting date | (123) | (109) |
| Franking credits available for subsequent financial years based on a tax rate of 30% | 485 | 461 |
The balance of the franking account arises from:
- franked income received or recognised as a receivable at the reporting date;
- income tax paid, after adjusting for any franking credits which will arise from the payment of income tax provided for in the financial statements; and
- franking debits from the payment of dividends recognised as a liability at the reporting date.
In accordance with the tax consolidation legislation, the Parent, as the head entity in the tax consolidated group, has also assumed the benefit of the franking credits available. The consolidated amounts include franking credits that would be available to the Parent if distributable profits of non-wholly owned subsidiaries were paid as dividends.
All of the distributions paid in relation to the reset preference shares and the interest payments in relation to the reset exchangeable securities for the current financial year were fully franked at 30% (2006 – fully franked at 30%).
NOTE 6: RECONCILIATION OF TOTAL EQUITY
| CONSOLIDATED | ||||
| 2007 Number of shares in millions |
2006 Number of shares in millions |
2007 $m |
2006 $m |
|
|---|---|---|---|---|
| Share capital | ||||
| Ordinary shares | ||||
| Balance at the beginning of the financial year | 1,595 | 1,594 | 3,263 | 3,263 |
| Shares issued under institutional placement | 136 | – | 750 | – |
| Institutional placement share issue costs, net of tax | – | – | (13) | – |
| Shares issued under Share Purchase Plan | 23 | – | 125 | – |
| Share Purchase Plan issue costs, net of tax | – | – | (1) | – |
| Shares issued for the fully underwritten dividend | 40 | – | 237 | – |
| Shares issued under Performance Share Rights Plan | – | 1 | – | – |
| Balance at the end of the financial year | 1,794 | 1,595 | 4,361 | 3,263 |
| Treasury shares held in trust | ||||
| Balance at the beginning of the financial year | (8) | (6) | (40) | (34) |
| Acquisition of shares | (5) | (2) | (30) | (19) |
| Shares vested and/or released to participants | – | – | 1 | 13 |
| Balance at the end of the financial year | (13) | (8) | (69) | (40) |
| CONSOLIDATED | ||||
| 2007 $m |
2006 $m |
|||
|---|---|---|---|---|
| (a) Share capital (refer above) | 4,361 | 3,263 | ||
| (b) Treasury shares held in trust (refer above) | (69) | (40) | ||
| (c) Reserves | ||||
| Foreign currency translation reserve | ||||
| Balance at the beginning of the financial year | (15) | (6) | ||
| Net exchange difference on translation of foreign operations | (73) | (18) | ||
| Hedge of net investment in a subsidiary | 54 | 9 | ||
| Balance at the end of the financial year | (34) | (15) | ||
| Share based remuneration reserve | ||||
| Balance at the beginning of the financial year | 19 | 13 | ||
| Charged to profit for the year | 15 | 19 | ||
| Transfers from the reserve upon vesting of rights/shares | (1) | (13) | ||
| Balance at the end of the financial year | 33 | 19 | ||
| Hedging reserve | ||||
| Balance at the beginning of the financial year | (10) | (5) | ||
| Net movements in fair value of derivatives forming hedge | (30) | 1 | ||
| Net movements in fair value recognised in profit | 40 | (8) | ||
| Net tax impact on movements | (3) | 2 | ||
| Balance at the end of the financial year | (3) | (10) | ||
| Total reserves | (4) | (6) | ||
| (d) Retained earnings | ||||
| Balance at the beginning of the financial year | 274 | 142 | ||
| Profit attributable to equity holders of the Parent | 552 | 759 | ||
| Actuarial gains and (losses) on defined benefit superannuation plans, net of tax | 39 | 21 | ||
| Vesting of share based remuneration | – | (1) | ||
| Dividends declared and paid | (492) | (647) | ||
| Acquisition of minority interest in subsidiaries | (5) | – | ||
| Dividends on treasury shares held in trust | 4 | – | ||
| Balance at the end of the financial year | 372 | 274 | ||
| Parent interest | 4,660 | 3,491 | ||
| (e) Minority interests | ||||
| Balance at the beginning of the financial year | 180 | 164 | ||
| Profit attributable to minority interests | 77 | 103 | ||
| Actuarial gains and (losses) on defined benefit superannuation plans, net of tax, attributable to minority interests | 1 | – | ||
| Distributions to minority interests | (86) | (89) | ||
| Business combination | – | 2 | ||
| Balance at the end of the financial year | 172 | 180 | ||
| Minority interests comprising: | ||||
| - Share capital | 126 | 126 | ||
| - Retained earnings | 46 | 54 | ||
| Minority interests | 172 | 180 | ||
| Total equity | 4,832 | 3,671 | ||
NOTE 7: ACQUISITIONS AND DISPOSALS OF BUSINESSES
(a) Acquisition of subsidiaries
Details of acquisitions of subsidiaries for the financial year ended 30 June 2007 are as follows:
(i) Acquisition of a United Kingdom based general insurance business and insurance broker
On 4 December 2006, the Consolidated entity announced that it would acquire EIG (Investments) Limited, the holding company of the Equity Insurance Group. Equity Insurance Group is the United Kingdom’s fifth largest motor underwriter, the eighth largest motor insurance broker and the largest motorcycle insurer. It operates through two key businesses – Equity Insurance Brokers and Equity Red Star, Lloyd’s largest motor insurance syndicate.
The acquisition was completed on 8 January 2007 upon receipt of regulatory approval. The IAG Group consolidated Equity Insurance Group from and including 1 January 2007.
The total consideration for the acquisition was $1,425 million (including transaction costs) and was funded by the issue of ordinary shares, raising of long term debt and use of existing internal funds. Fund raisings included:
- $750 million of ordinary share capital issued through an institutional placement at $5.50 per ordinary share (completed 12 December 2006);
- GBP250 million ($625 million) of GBP subordinated term notes placed to UK institutional investors (completed 21 December 2006). GBP140 million ($350 million) of the proceeds of the notes were used to repay the short term bank loans raised for the acquisition of Hastings and Advantage;
- $125 million of ordinary share capital issued through a Share Purchase Plan at $5.50 per ordinary share (completed 31 January 2007);
- GBP37 million ($93 million) of unsecured notes issued; and
- sell down of $190 million of assets from existing internal funds.
The key changes made to bring the financial position of the acquired entities prepared in accordance with UK GAAP in line with the significant accounting policies of the Consolidated entity related to alignment of outstanding claims liability reserving policies. After those adjustments were made there were no significant fair value adjustments acquired. The fair value of the net assets and liabilities acquired are provisional.
(ii) Acquisition of a United Kingdom based insurance broker and general insurance business
The Consolidated entity, effective 29 September 2006, acquired 100% of the share capital of Hastings Insurance Services Limited (“Hastings”) and Advantage Insurance Company Limited (“Advantage”) which are involved in general insurance broking and underwriting in the United Kingdom, for total acquisition cost (including transaction costs) of $349 million.
The key changes made to bring the financial position of the acquired entities prepared in accordance with UK GAAP in line with the significant accounting policies of the Consolidated entity related to alignment of outstanding claims liability reserving policies. After those adjustments were made, there was only one significant fair value adjustment that revalued a property upwards from its historical cost. The fair value of the net assets and liabilities acquired are provisional.
(iii) Acquisitions of a Lloyd’s managing agency and specialist Asian syndicate
Effective from 3 July 2006 the Consolidated entity acquired a newly formed Lloyd’s managing agency and specialist Asian syndicate to support the development and management of its expanding Asia business for a total acquisition cost of $23 million. The businesses operate as Alba Group Pte Limited (“Alba”). The syndicate has access to all markets in which Lloyd’s is licensed.
(iv) Acquisition of a Northern Ireland based insurance broker business
The Consolidated entity acquired Open & Direct Insurance Services Limited (“Open & Direct”) and its subsidiaries effective 17 January 2007 for a total acquisition cost (including transaction costs) of $57 million.
Details of the financial impact of the acquisitions made are as follows:
| CONSOLIDATED | ||||
| 2007 | Open & Direct $m |
Alba $m |
Hastings and Advantage $m |
Equity Insurance Group $m |
|---|---|---|---|---|
| Purchase price: | ||||
| Cash paid | 55 | – | 346 | 1,323 |
| Deferred settlement | – | 23 | – | 93(i) |
| Costs directly associated with acquisition | 2 | – | 3 | 9 |
| Total purchase consideration | 57 | 23 | 349 | 1,425 |
| Fair value of net identifiable assets acquired: | ||||
| Cash and cash equivalents | 9 | – | 81 | 1,202 |
| Investments | – | – | 187 | 889 |
| Receivables | 6 | – | 114 | 463 |
| Deferred acquisition costs | – | – | 8 | 104 |
| Property, plant and equipment | 1 | – | 34 | 51 |
| Deferred tax assets | – | – | – | 81 |
| Capitalised software development expenditure | – | – | – | 31 |
| Payables | (16) | – | (78) | (91) |
| Current tax liabilities | (1) | – | (3) | – |
| Unearned premium liability | – | – | (138) | (383) |
| Outstanding claims liability | – | – | (132) | (1,044) |
| Interest bearing liabilities | – | – | (71) | (906) |
| Other | (1) | – | 23 | (115) |
| Net identifiable assets acquired during the financial year | (2) | – | 25 | 282 |
| Intangible assets | 45 | – | 168 | 598 |
| Goodwill | 14 | 23 | 156 | 545 |
| 59 | 23 | 324 | 1,143 | |
Note:
(i) Deferred settlement on Equity Insurance Group comprised of unsecured notes and deferred award rights.
The fair value of assets and liabilities is based on discounted cash flow models or the book values have been used as a proxy for fair value. In addition to the intangible assets recognised and disclosed above, there are other intangible benefits that have been acquired as part of the transactions. These benefits have not been recognised separately from goodwill because they were not separately recognisable and/or were not able to be reliably measured. These assets are principally the value of the workforce acquired and the value of cost and revenue synergies.
The measurement of identifiable intangible assets acquired in a business combination is highly subjective and there are a range of possible values that could be attributed for initial recognition. The IAG Group uses the skills and experience of valuation specialists in establishing an initial range within which the fair value is to be recognised. Judgement is then applied in selecting the value to be recognised on the balance sheet. Judgement is also applied in determining the useful life of the intangible assets which impacts directly on the amortisation charges to be incurred following an acquisition.
| CONSOLIDATED | ||||
| 2007 | Open & Direct $m |
Alba $m |
Hastings and Advantage $m |
Equity Insurance Group $m |
|---|---|---|---|---|
| The net cash flow in relation to acquisitions is as follows: | ||||
| Cash consideration paid | 57 | – | 349 | 1,332 |
| Cash balance acquired | (9) | – | (81) | (1,202) |
| Net outflow of cash | 48 | – | 268 | 130 |
| Contribution from the acquired businesses (from date of acquisition): | ||||
| Income | n/a* | 12 | 329 | 557 |
| Profit/(loss) before income tax | n/a* | (13) | (21) | 2 |
Note:
* Amounts for Open & Direct are included in the disclosure for Equity Insurance Group for these items.
The income, gross written premium and profit of the Consolidated entity for the year ended 30 June 2007 would have increased by $578 million and $408 million and $43 million respectively, had the subsidiaries acquired during the financial year been consolidated from the beginning of the financial year.
This information is at least in part based on the acquiree’s unaudited management accounts prepared in accordance with the acquiree’s accounting policies and does not include fair value adjustments. This information is not necessarily indicative of the operating results that would have occurred if the acquisition had been completed at the beginning of the financial year or of the operating results in future years at least in part because the information does not include expenses relating to integration of the businesses or the operating synergies to be realised.
Details of acquisitions of subsidiaries for the financial year ended 30 June 2006 are as follows:
(i) Acquisition of a Thailand based general insurance business
The Consolidated entity acquired all of the ordinary shares in IAG Insurance (Thailand) Ltd (“IAG Thailand”) (formerly Royal and Sun Insurance Alliance (Thailand) Ltd) effective 4 July 2005. This subsidiary is involved in general insurance underwriting in Thailand.
The key changes made to bring the financial position of IAG Thailand prepared in accordance with Thai GAAP in line with the significant accounting policies of the Consolidated entity related to an analysis of all insurance products on offer to confirm the status as insurance contracts, the measurement of all investments at fair value through profit or loss, and the alignment of outstanding claims liability reserving policies. After those adjustments were made, there were no significant fair value adjustments required.
(ii) Acquisition of a further interest in a Thailand based listed general insurance business
On 10 February 2006, an additional 16.7% interest was acquired in Safety Insurance Public Company Limited (“Safety Insurance”) taking the then 21.6% shareholding to 38.3%. A general tender offer to all Safety Insurance shareholders was subsequently lodged at the end of February 2006. The tender closed on 27 March 2006 with the Consolidated entity holding 96.09% of the voting share capital. The entity has been deemed to be a subsidiary from 31 March 2006.
Safety Insurance, which has been listed on the Stock Exchange of Thailand since 1977, is Thailand’s seventh largest general insurer and sixth largest motor insurer and generated approximately A$100 million in gross written premium per annum at the time. Providing predominantly motor insurance, as well as fire, marine and other general insurance, Safety Insurance distributes its products through insurance agents and brokers, as well as selling direct to customers.
The key changes made to bring the financial position of Safety Insurance prepared in accordance with Thai GAAP to comply with the significant accounting policies of the Consolidated entity related to an analysis of all insurance products on offer to confirm the status as insurance contracts, the measurement of all investments at fair value through profit or loss, and the alignment of outstanding claims liability reserving policies. After those adjustments were made, there were no significant fair value adjustments required.
(iii) Acquisition of a specialist New Zealand underwriter
On 3 May 2006 IAG New Zealand Limited acquired a 51% share of DriveRight Limited, a specialist underwriter of mechanical breakdown insurance in New Zealand, with a contractual obligation, subject to certain criteria being satisfied, to acquire the remaining 49% on or before 31 August 2008. This obligation was fulfilled in October 2006 (see note 7(b)).
Details of the financial impact of the acquisitions made are as follows:
| CONSOLIDATED | ||||
| 2006 | Safety Insurance $m |
IAG Thailand $m |
||
|---|---|---|---|---|
| Purchase price: | ||||
| Cash paid | 68 | 34 | ||
| Costs directly associated with acquisition | 2 | 2 | ||
| Total purchase consideration | 70 | 36 | ||
| Fair value of net identifiable assets acquired: | ||||
| Cash and cash equivalents | 10 | 6 | ||
| Investments | 107 | 18 | ||
| Receivables | 30 | 22 | ||
| Deferred acquisition costs | – | 1 | ||
| Property, plant and equipment | 9 | 1 | ||
| Deferred tax assets | 8 | – | ||
| Capitalised software development expenditure | (19) | (18) | ||
| Payables | (3) | (1) | ||
| Current tax liabilities | (58) | (5) | ||
| Unearned premium liability | (30) | (14) | ||
| Other | (2) | – | ||
| Less: transfer of associate to subsidiary | (11) | – | ||
| Net identifiable assets acquired during the financial year | 41 | 10 | ||
| Intangible assets | – | 5 | ||
| Goodwill* | 29 | 21 | ||
| 29 | 26 | |||
|
* The goodwill on Safety Insurance includes the goodwill amount on the first acquisition in 1998 (which rounded to zero). The fair value of assets and liabilities are based on discounted cash flow models or the book values have been used as a proxy for fair value. In addition to the intangible assets recognised and disclosed above, there are other intangible benefits that have been acquired as part of the transactions. These benefits have not been recognised separately from goodwill because they were not separately recognisable and/or were not able to be reliably measured. These assets are principally the value of the workforce acquired and the value of cost and revenue synergies. The net cash flow in relation to acquisitions is as follows: |
||||
| Cash consideration paid | 70 | 36 | ||
| Cash balance acquired | (10) | (6) | ||
| Net outflow of cash | 60 | 30 | ||
| Contribution from the acquired businesses (from date of acquisition): | ||||
| Income | 28 | 37 | ||
| Profit/(loss) before income tax | 1 | 1 | ||
The gross written premium and profit of the Consolidated entity for the year ended 30 June 2006 would have been higher by $63 million and $3 million respectively, had the subsidiaries acquired during the year been consolidated from the beginning of the financial year.
(b) Other acquisitions
Details of other acquisitions for the financial year ended 30 June 2007 are as follows:
(i) Mike Henry Travel Insurance Limited
On 7 July 2006 the remaining 49.9% share of Mike Henry Travel Insurance Limited, a specialist travel underwriter, was acquired for a purchase consideration of $4 million.
(ii) DriveRight Limited
On 20 October 2006 IAG New Zealand Limited acquired the remaining 49% share of DriveRight Limited, a specialist underwriter of mechanical breakdown insurance in New Zealand, was acquired for a purchase consideration of $2 million.
Details of other acquisitions for the financial year ended 30 June 2006 are as follows:
(i) Acquisition of an interest in a Malaysian based composite insurance business
On 31 March 2006, the Consolidated entity acquired a 30% strategic stake in AmAssurance Berhad, a Malaysian based general and life insurer. Based on the annual report for the year ended 31 March 2006 prepared under Malaysian generally accepted accounting principles, AmAssurance Berhad had gross assets of RM1,783 million (approximately $653 million). The general insurance operations generate an annual gross written premium of RM438 million (approximately $161 million).
(c) Disposal of subsidiaries
During the financial year ended 30 June 2007 there were no disposals of subsidiaries by the Consolidated entity.
During the year ended 30 June 2006 the Consolidated entity disposed of New Zealand Car Parts Limited. As this disposal was not significant to the Consolidated entity no further disclosure is provided.
NOTE 8: CONTINGENCIES
(a) Contingent liabilities
Contingent liabilities are not recognised on the balance sheet but are disclosed here 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.
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;
- Hastings Insurance Services Limited (“Hastings”), a wholly owned subsidiary of IAG, has received a claim for alleged breaches of its duties under an agency agreement. The claim is for loss and damage suffered in excess of $24 million. Hastings was acquired by the Consolidated entity on 29 September 2006. The claims against Hastings may, if proved, constitute a breach of warranty under the Share Purchase Agreement (“SPA”) relating to the Hastings acquisition, which if proved, would give rise to warranty claims against the previous owner;
- undertakings for maintenance of net worth and liquidity support to subsidiaries in the Consolidated entity. It is normal practice to provide wholly owned subsidiaries with support and assistance as may be appropriate with a view to enabling them to meet their obligations and to maintain their good standing. Such undertakings constitute a statement of present intent only and are not intended to give rise to any binding legal obligation;
- guarantees for performance obligations, including a guarantee in relation to a standby letter of credit issued in support of the Consolidated entity’s participation in Lloyd’s of London; and
- there is a potential assessment by the United Kingdom tax authority of outstanding tax payments relating to Hastings for tax years prior to the date when the company was acquired by the IAG Group. The amount of the assessment would not be significant to the IAG Group. The claim, if successful, would give rise to a claim under a tax indemnity provided by the previous owner.
It is not believed that there are any other potential material exposures to the Consolidated entity and there are no known events that would require it to satisfy the guarantees or take action under a support agreement.
(b) Reset exchangeable securities
In respect of the issue of reset exchangeable securities (“RES”) by a wholly owned subsidiary, IAG Finance (New Zealand) Limited (“IAGF NZ”):
- IAGF NZ has granted to Permanent Trustee Company Limited (“Trustee”), the trustee of the RES, a fixed charge over its right, title and interest in the payments to it under the Portfolio Management Agreement and certain intragroup receivables. IAG Portfolio Limited, a wholly owned subsidiary of IAG, has granted to the Trustee a mortgage over IAG Portfolio Limited’s portfolio of investments (“Portfolio”) and a floating charge over its rights, property and undertaking as security to the RES holders.
- Insurance Australia Limited has put in place an interest rate floor with IAG Portfolio Limited in the event the bank bill rate applicable to the calculation of the interest rate payable on the RES falls below a specified rate. This will enable IAG Portfolio Limited to generate sufficient income to allow IAGF NZ to make part or full interest payments on the RES.
- In the event of an interest payment on the RES being unfranked, IAG must pay an amount into IAG Portfolio Limited to fund a gross-up of the interest payment on the RES.
- IAG may exchange some or all of the RES for preference shares issued by IAG at any time. This exchange right is considered an embedded derivative within the RES and is recognised at fair value on the balance sheet. The exchange right has been assessed as having a fair value of $Nil at 30 June 2007 (2006 – $Nil).
- IAGF NZ may, in relation to the RES, change their terms, redeem them for cash or convert them into ordinary shares issued by IAG on any reset date. The next reset date is 15 March 2010.
- IAGF NZ may, in relation to the RES, redeem them for cash or convert them into ordinary shares issued by IAG, if a tax event, regulatory event or acquisition event, as defined in the RES terms, occurs.
- RES holders may redeem the RES on any reset date or if a trigger event, as defined in the RES terms, occurs.
- IAG has an obligation to pay all costs, charges and expenses in managing the Portfolio including costs of the trustee and custodian.
- IAG and other members of the IAG Group may be entitled to any surplus in the Portfolio from excess income from the Portfolio after the payment of aggregate interest payments on the RES or from excess net assets of the Portfolio after the payment of aggregate redemption amounts on the RES.
(c) Fiduciary activities
The Consolidated entity’s fiduciary activities consist of investment management and other fiduciary activities conducted as manager, custodian or trustee for a number of investments and trusts. The funds managed on behalf of third parties which are not included in the Consolidated entity’s balance sheet had a fair value as at 30 June 2007 of $2,012 million (2006 – $1,969 million). This does not include the investment by third parties in the IAG Asset Management Wholesale Trusts presented as minority interests in unitholders’ funds on the balance sheet. The Consolidated entity is exposed to operational risk relating to managing these funds on behalf of third parties.
NOTE 9: EVENTS SUBSEQUENT TO REPORTING DATE
As the following transactions 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 year ended 30 June 2007.
(a) Declaration of final dividend
On 24 August 2007, a final dividend of 16 cents per share, 100% franked, was declared by the Company. The dividend will be paid on 8 October 2007. The Company’s dividend reinvestment plan (“DRP”) will operate by issuing new ordinary shares to participants. The dividend will be fully underwritten such that the shortfall in the DRP take up will be underwritten.
(b) Sale of premium funding business
On 17 August 2007, a contract was entered into for the sale of the existing and ongoing loan business of CGU Premium Funding Pty Limited. It is expected that the transaction will be completed in September 2007.