NOTE 33. CAPITAL MANAGEMENT
A. CAPITAL MANAGEMENT STRATEGY
The capital management strategy plays a central role in managing risk to create shareholder value whilst meeting the crucial and
equally important objective of providing an appropriate level of capital to protect policyholders’ and lenders’ interests and satisfy
regulators.
The Group actively considers its risk appetite through the holistic implementation of strategies around identified key risk levers of
underwriting, reinsurance, capital, asset allocation and risk management. The target level of capitalisation for the Group is assessed
by consideration of factors including:
the probability of financial ruin over the next one to three years;
the probability of falling below the APRA prescribed capital amount (PCA) over the next one to three years;
other stakeholder perspectives on capitalisation, including rating agency capital models and associated ratings; and
domestic and international levels of capitalisation.
The amount of capital required that fulfils these risk appetite factors varies according to the business underwritten, extent of
reinsurance and asset allocation and is estimated using dynamic financial analysis modelling. For ease of communication, internally
and externally, the Group has translated the outcome into a multiple of PCA by applying the APRA prescribed methodology for a Level 2
insurance group.
Internal policies are in place to ensure significant deviations from this benchmark are considered at the Board level as to how any
shortfall should be made good or any surplus utilised.
I. Regulatory capital
All insurers within the Group that carry on insurance business in Australia are registered with APRA and are subject to APRA prudential
standards. IAG uses the standardised framework detailed in the relevant prudential standards to calculate the regulatory capital
requirements that must be held to meet policyholder obligations. It is the Group's policy to ensure that each of the licensed insurers
maintains an adequate capital position from an entity perspective.
The Group has maintained both its consistent risk appetite and the following long term target capital ranges:
a total capital position equivalent to 1.4-1.6 times the PCA, compared to a regulatory requirement of 1.0 times; and
Common Equity Tier 1 capital of 0.9-1.1 times the PCA, compared to a regulatory requirement of 0.6 times.
II. Economic capital
In conjunction with the above, consideration is given to the operational capital needs of the business. Targeting a capital multiple
above the minimum regulatory requirement aims to ensure the ongoing strength and security of the Group, whilst suitably protecting
policyholders and lenders.
An important influence on the capital levels is the payment of dividends. The Consolidated entity aims to maintain cash earnings
payouts within a ratio range approved by the Board (refer to the dividends note).
The capital objectives are achieved through dynamic management of the balance sheet and capital mix, the use of a risk based capital
adequacy framework for capital needs that relies on explicit quantification of uncertainty or risk and the use of modelling techniques
such as dynamic financial analysis which provide the capacity to understand the risk/return trade-off as well as valuable inputs to the
capital management process. The influences on capital such as product mix, reinsurance program, catastrophe exposure, investment
strategy, profit margins and capital structure are all assessed through the dynamic financial analysis modelling.
B. CAPITAL COMPOSITION
The Group’s capital comprises ordinary equity and interest bearing liabilities. The balance sheet capital mix at reporting date was as
shown in the table below:
CONSOLIDATED
Target
2015
2014
%
%
%
Ordinary equity less goodwill and intangible assets
60-70
66.2
64.6
Interest bearing liabilities - hybrid securities and debt
30-40
33.8
35.4
Total capitalisation
100
100
95
