CEO’S REVIEW

ENSURING OUR FUTURE SUCCESS

This year, we made significant progress in our work to ensure the future success of our company by pursuing the key elements of our strategy:

• better understanding who our current and future customers are, and their needs and expectations, so we can put them at the centre of everything we do;
• simplifying our business and making it more efficient; and
• embracing innovation to prepare for a future where customers’ needs are based on experiences rather than products.

WORKING WITH OUR CUSTOMERS TO PREPARE FOR THE FUTURE

One of our strategic priorities is to deliver amazing customer experiences that contribute to making their world a safer place.

Everything we do needs to start with our eight million or so customers. We work with them to design products, experiences and marketing programs; we empower our frontline people to solve customer needs or problems in real time; and we provide world-class experiences around claims and repair work. The success of our approach is shown in the fact that our net promoter scores increased steadily across all of our brands this year.

This year, we developed a world-leading way of understanding our customers which defines a range of their needs, hopes and life stages. With this understanding, we can offer the right customers the right products at the right time.

We have improved our understanding of what is important to our customers, and the communities in which we operate, by bringing in an “outside” view through our Consumer Advisory Board, our Ethics Committee and our work with the Australian Business Roundtable for Disaster Resilience & Safer Communities, as well as Resilient New Zealand.

We helped to highlight the scale and cost of fraud in the compulsory third party insurance scheme and contributed to significant reforms which will benefit all motorists in New South Wales.

Our work with the Australia Business Roundtable and Resilient New Zealand to create more resilient communities and encourage investment in infrastructure has led us to adopt a stronger position on the impact of climate change.

Looking further ahead, we are developing an impressive innovation pipeline for products and services, evidenced by the launch of Firemark Labs in Singapore and in Sydney. Firemark Labs will connect IAG talent, insights and capabilities with external partners who can help us design new customer experiences. We have already partnered with several organisations, including The University of Sydney, cyber security start-up UpGuard and rental platform Snug.co, and they will now work within Firemark Labs on new projects. Both Firemark Labs hubs will be supported by Firemark Ventures, our $75 million fund to invest in, and partner with, start-ups and emerging businesses that can help us understand how the principles of disruption might help our customers, and therefore our business.

CREATING A SIMPLER, MORE EFFICIENT BUSINESS

The factors that created the successful company we are today have added complexity that we are working to remove. We have grown by acquiring other businesses, and their systems and processes, so we need to simplify our technology systems and standardise our processes to make us easier for our customers to do business with.

I’m pleased to say we are well advanced in our work to reduce our 32 policy and claims systems down to two and we have started work to rationalise our product range from around 1,500 to just over 400. We also received court approval to consolidate our Australian insurance licences from nine to two which will simplify our processes and eliminate duplication in our reporting work.

Advances in technology mean that many processes within our industry can be automated, and we have established partnerships with some global leaders in the field of automation in areas such as accounts to improve our efficiency and reduce costs. The savings we achieve are being invested in improving the services we offer, and developing new and improved products that meet the changing needs of our customers.

We took a further significant step to simplify our business in July 2017 when we announced the creation of one Australian business, headed by Mark Milliner as CEO Australia. Australia Division brings together Consumer, Business, Satellite and Operations to create a single Australian business responsible for delivering our customer experience.

All these actions are core to us achieving the commitment we made in December 2016 to reduce our gross operating costs by an annual run rate of at least 10%, or $250 million pre-tax, by the end of the 2019 financial year; we are on track to achieve this.

SUPPORTING OUR PEOPLE TO MEET CUSTOMERS’ NEEDS

We know we need to continuously help our people build their skills so we – and they – can be agile, flexible and innovative in meeting new and emerging customer needs.

This year, we started to implement a Leading@IAG management framework that will help our people better understand what is expected of them, and empower them to make decisions that can bring our purpose to life.

FINANCIAL PERFORMANCE

For the 2017 financial year, we recorded a strong performance in our key measures, demonstrating our ability to focus on our core strategic business as well as the future.

Our gross written premium – basically the money we collected from the products we sold during the year – rose by 3.9% to $11,805 million, reflecting a very loyal and satisfied customer base as well as rate increases to counter increased motor claim costs.

Net profit after tax of $929 million was nearly 50% higher than last year. This outcome reflects a higher insurance profit, as well as a significantly higher contribution from investment income on shareholders’ funds, from stronger equity market returns. Our result was negatively affected by a greater than $30 million deterioration in the contribution from fee based business, including a provision for costs associated with withdrawal from the New South Wales workers’ compensation scheme; and a slightly higher tax rate of 23.6%, compared to last year.

Last year's result included nearly $140 million (post-tax) of non-cash accelerated amortisation and impairment of capitalised software assets.

Our reported insurance margin was 14.9% – slightly above last year’s 14.3% – due to the inclusion of significantly higher-than-expected reserve releases, partially offset by increased natural peril costs.

It was a tougher year in terms of our underlying insurance margin, which shows our reported insurance margin, with reserve releases above 1% of net earned premium, net natural peril claim costs less our related allowance, and credit spread movements stripped out. The lower underlying insurance margin of 11.9%, compared to 14.0% last year, fell short of our original expectations because of higher than expected claims inflation in our business in Australia and New Zealand; and higher large losses in commercial classes, notably in Australia, in the second half of the year.

OUTLOOK

We expect to report an improved underlying operating performance in the 2018 financial year, with low single digit growth in gross written premium, and our reported insurance margin guidance for the year is for a range of 12.5-14.5%. This incorporates a lower reserve release expectation of at least 2% of net earned premium.

IAG – like others in the insurance industry – has traditionally been product focused. Moving from a product to a customer focus is not easy: it takes time, and it takes significant change to the way we operate and the mindsets we bring.

This is the challenge we are embracing, and I believe we have a really exciting opportunity ahead of us and should look to the future with confidence.

We have an ambitious purpose, and strong businesses in our key geographies of Australia, New Zealand, Thailand and Malaysia.

We have a diverse and loyal customer base; we have skilled and passionate people; and we have market-leading capabilities in designing and pricing products, managing claims and repairs, distributing our products and, most importantly, in customer service.

We are well advanced in our work to build a successful and enduring company for our customers, our people, our shareholders and everyone in the community who relies on us.

¹ Underlying assumptions behind the reported insurance margin guidance are:

• net losses from natural perils in line with allowance of $680 million, after taking into account the status of the aggregate cover at 30 June 2017. At that date, this cover was active, providing approximately $340 million of protection (post-quota share) for the six months to 31 December 2017 and serving to limit a first event retention to $20 million;
• prior period reserve releases of at least 2% of net earned premium, on the assumption that the presently particularly benign inflationary environment continues to prevail;
• no material movement in foreign exchange rates or investment markets; and
• a relatively neutral impact from optimisation program initiatives, as benefits are matched by related costs.

While prior period reserve releases of at least 2% of net earned premium are expected in the 2018 financial year, it remains IAG’s belief that long term reserve releases of around 1% of net earned premium are a recurring feature of reported operating results in benign inflationary periods.