The bulk of the gross earthquake claim reserve strengthening occurred at the end of the first half of the financial year. A more modest
increase was recognised at 30 June 2015, resulting in gross claim reserves for the February 2011 event exceeding the applicable
reinsurance limit of NZ$4 billion and bringing the Group on risk. The loss estimates for the other major earthquake events remain well
below their respective reinsurance limits.
While the Group believes it has adopted an appropriate reserving position, given the complexity of the Canterbury earthquake events
there remains a degree of uncertainty as to the ultimate cost. As at 30 June 2015, 78% of all earthquake-related claims by number
had been fully settled (2014-58%).
The Group’s underlying profitability has remained strong, with an underlying margin of 13.1%, compared to 14.2% in the prior financial
year. The reduction in underlying margin reflects the impact of softer commercial market conditions and, more significantly, the first-
time incorporation of the lower margin former Wesfarmers business.
IAG defines its underlying margin as the reported insurance margin adjusted for:
net natural peril claim costs less the related allowance for the period;
reserve releases in excess of 1% of NEP; and
credit spread movements.
2015
2014
INSURANCE MARGIN
$m
%
$m
%
Reported insurance margin
*
1,103
10.7
1,579
18.3
Net natural peril claim costs less allowance
348
3.3
(87)
(1.0)
Reserve releases in excess of 1% of NEP
(64)
(0.6)
(162)
(1.9)
Credit spread movements
(33)
(0.3)
(100)
(1.2)
Underlying insurance margin
1,354
13.1
1,230
14.2
*
Reported insurance margin is the insurance profit/(loss) as a percentage of NEP as disclosed in the Statement of Comprehensive Income.
Integration of the former Wesfarmers business and the Group’s move to a new operating model in Australia are progressing to plan
and are expected to generate significant annualised benefits by the end of the financial year ending 30 June 2016 ($230 million pre-
tax). A relatively small portion of these benefits was realised in the 2015 financial year, with the Group exiting the year at a pre-tax
benefit run rate of around $80 million, in line with expectations. Related benefits are reflected across a combination of the
reinsurance, claims and administration expense lines.
The Group reported a tax expense of $119 million, compared to $472 million in the prior year, representing an effective tax rate (pre-
amortisation) of approximately 11%.
This unusually low tax rate largely reflects reinsurance recoveries recognised in the period which relate to the 2010 and 2011
Canterbury earthquake events in New Zealand. A substantial portion of these recoveries is recorded by the Group’s captive vehicle in
the lower tax jurisdiction of Singapore.
The Singapore-based captive provides reinsurance cover to Group entities located outside Australia on an excess of loss basis, with
locally retained risk based on relevant regulatory requirements.
The 2015 financial year tax expense reconciles to the prevailing Australian corporate rate of 30% after allowing for:
the effect of earthquake reinsurance recoveries in the period;
other differences in tax rates applicable to the Group’s foreign operations, principally in New Zealand, Singapore and Malaysia;
and
franking credits generated from the Group’s investment portfolio.
It is the Group’s expectation that the effective tax rate will revert to a more normal level in future periods.
Investment income on shareholders’ funds was a profit of $231 million, a decrease of over 42% on the profit of $400 million in the
prior financial year. The lower outcome was driven by the markedly more modest return from equity markets, as well as lower average
funds held. The broader Australian index (S&P ASX200 Accumulation) delivered a positive result of 5.7%, while the equivalent return in
the financial year ended 30 June 2014 was 17.4%.
A. AUSTRALIA PERSONAL INSURANCE
Personal Insurance accounted for 49% of Group GWP and continued to perform well, with a strong underlying margin of 13.9% which
was lower than the prior year owing to changed business mix and some softening of current year compulsory third party (CTP)
profitability. The business’ reported margin of 15.9% (2014-21.4%) was also lower than the prior financial year, following an adverse
movement of nearly 400 basis points owing to increased net natural peril claim costs, which was partially offset by higher prior period
reserve releases. GWP growth of 5.2% was largely sourced from incoming former Wesfarmers personal lines volumes. Modest like-for-
like growth was achieved in short tail personal lines, while lower long tail GWP reflected the exit from the Queensland CTP market in
the prior year and increased competition in the Australian Capital Territory (ACT).
I. Premiums
Personal Insurance’s GWP increased by 5.2%, to $5,614 million (2014-$5,335 million). This largely reflects the first-time inclusion of
personal lines of the former Wesfarmers business, including volumes related to the Coles distribution agreement. Like-for-like GWP
growth was modest and was derived from a mixture of volume and rate.
7
