PRINCIPAL ACTIVITY
The principal continuing activity of the Group is the underwriting of general insurance and related corporate services and investing
activities.
The Group reports its financial information under the following business division headings:
Australia Personal Insurance – provides general insurance products to individuals throughout Australia primarily under the NRMA
Insurance, SGIO, SGIC and CGU brands, in Victoria under the RACV brand (via a distribution and underwriting relationship with
RACV) and the Coles Insurance brand nationally (via a distribution agreement with Coles);
Australia Commercial Insurance - provides commercial insurance to business customers throughout Australia, predominantly
under the CGU, WFI, and Swann Insurance brands through intermediaries including brokers, authorised representatives and
distribution partners;
New Zealand - comprises the general insurance business underwritten through subsidiaries 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) predominantly under 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;
Asia - comprises primarily the direct and intermediated insurance business underwritten through subsidiaries in Thailand, Vietnam
and Indonesia and the share of the operating result from the investment in associates in Malaysia, India and China. The
businesses offer personal and commercial insurance products through local brands; and
Corporate and Other - comprises other activities, including corporate services, capital management activity, placement of the
Group's reinsurance program, inward reinsurance from associates and investment of the shareholders’ funds.
OPERATING AND FINANCIAL REVIEW
OPERATING RESULT FOR THE FINANCIAL YEAR
Insurance Australia Group Limited has produced a sound operating performance in an environment of increasingly competitive
conditions, including a notably softer commercial market. This outcome attests to the strength of the Group’s core franchises in
Australia and New Zealand and the considerable improvement in their collective underlying performance in recent years.
Despite the cyclical industry pressures experienced, like-for-like business volumes and underlying profitability held up well, supporting
delivery of a cash return on equity (ROE) in excess of the Group’s through-the-cycle target of 15%. With a substantial portion of the
benefits from the integration of the former Wesfarmers business and the move to a new operating model in Australia yet to be realised,
the Group is well-placed to absorb further competitive pressure and to respond to any cyclical improvement in the medium term.
While Australia and New Zealand are expected to represent the majority of the Group’s earnings base in the foreseeable future, a key
facet of IAG’s strategy is its pursuit of the long term growth potential in Asia. The Group will continue to pursue appropriate
opportunities within its target markets in the region, where low insurance penetration and rising middle class affluence and
consumption present compelling growth prospects. In particular, the Group has expressed an interest in gaining a national exposure
to the Chinese market.
The Group's profit after tax for the financial year was $830 million (2014-$1,330 million). After adjusting for non-controlling interests
in the Group result, net profit attributable to the shareholders of the Company was $728 million (2014-$1,233 million). Reported
profitability in the 2015 financial year was 41% lower than that of the prior year, largely owing to the severe incidence of net natural
peril claim costs, notably in the second half of the current year.
Total gross written premium (GWP) growth of 17.0% (2014-3.0%) primarily reflected the first-time inclusion of the former Wesfarmers
business, where related attrition levels remained at the upper end of the Group's 5-10% expectations over the course of the year. In a
low growth environment, like-for-like GWP was relatively flat, incorporating:
modest GWP growth in personal lines, driven by short tail motor and home products;
heightened competitive pressures in commercial lines, in both Australia and New Zealand, compared to the prior year;
the ongoing relative absence of input cost pressures, resulting in minimal cause for rate increases; and
the maintenance of underwriting discipline in the face of softer pricing, notably in commercial lines.
The reported insurance margin of 10.7% (2014-18.3%) incorporates:
net natural peril claim costs of $1,048 million, which were $348 million higher than the related allowance and after exhaustion of
the $150 million reinsurance cover in excess of the current year perils allowance of $700 million;
a reduced favourable impact of $33 million from the narrowing of credit spreads, compared to $100 million in the prior year; and
Prior period net reserve releases of $167 million, inclusive of strengthening related to the New Zealand earthquakes in the 2011
financial year. This is equivalent to 1.6% of net earned premium (NEP), down from $248 million (2014-2.9% of NEP) in the prior
year.
In the current financial year the Group materially strengthened its gross claim reserves in respect of the 2010 and 2011 Canterbury
earthquake events in New Zealand. The main contributory factors were:
the continuing notification of new household claims exceeding the Earthquake Commission’s (EQC) NZ$100,000 residential
dwelling limit;
an increase in forecast repair and rebuild costs; and
a series of adverse court judgements which have affected the insurance industry.
6 IAG ANNUAL REPORT 2015
