Chief Executive

Officer’s Review

Like many other service industries, the insurance industry is facing a number of challenges in the way it meets the needs of its customers and the way it runs its business.

New technology – like collision avoidance technology, driverless cars and sensor-laden household appliances that advise when they need repairs – will fundamentally change the nature of insurance, and our products. At the same time, an increasingly digital and mobile society encourages customers to demand new and better ways of accessing our products and services.

We see these as opportunities and, guided by our purpose to make your world a safer place, we are determined to lead the change to unlock the benefits of innovation for our customers so that we can make their lives safer and better.

To fuel the investments demanded by our leadership, we know we need to be a leaner, more responsive company. That is why we are changing how we operate our businesses, and how our people work together. Becoming more efficient, faster and more agile will free up people, and resources, to fund our leadership.

We have begun to tackle these opportunities throughout IAG.

We will hold a market briefing in December this year to explain in more detail how we will lead, and fuel, the changes we want to achieve, and I encourage you to read the materials we will release to the market then to learn more about our strategy.

KEEPING CUSTOMERS AT THE CENTRE OF OUR BUSINESS

Our objective is to improve our customers’ experiences, and everything we do is designed with them in mind. This year, we found new ways to bring customers into our conversations, and include them in how we are shaping our business.

We continued to use a human-centred design approach to develop solutions for our customers. This year, we created our Traidz website as a direct result of this work. Traidz effectively opens up our network of tradespeople to our customers.

Our NRMA Insurance business created the Safer Homes website to help demonstrate some of the factors we take into account in determining insurance premiums. Using our data, we help people learn more about the risks that apply to their homes, and what they can do to protect against these.

In June, we established the IAG Consumer Advisory Board to bring together a number of Australia’s leading consumer representatives and IAG management to discuss key customer issues in the insurance industry, with the goal of improving customer service and consumer protection.

MAINTAINING AN EFFECTIVE CULTURE

We are acutely aware of the important role culture plays in how a business operates and performs. We believe we have a very effective – and caring – culture at IAG and we took steps this year to ensure our assessment is correct. Mindful of wider community discussions about corporate culture, we decided to get an external perspective, by appointing renowned ethicist Dr Simon Longstaff AO, Executive Director, The Ethics Centre, to lead our Ethics Committee. At the same time, we have reviewed our Codes of Ethics and Conduct to confirm they remain relevant and appropriate.

OUR SPIRIT IN ACTION: CLOSER

The title for this year’s report is Closer, the first pillar of our spirit: Closer, Braver, Faster. Our spirit expresses the essence of what it means to work at IAG and the spirit in which we serve our customers, partners, communities, shareholders and each other.

To help bring our people closer, we have flattened our internal structures and established Guilds which are collectives of professionals across various business divisions who are bound together to champion a “trade”, regardless of their skill and trade base. We have many Guilds including Marketing and Innovation, Digital Strategy and Data and Insights and anyone from any part of the business is invited, and actively encouraged, to join.

We have also started a program to have our executives regularly spend time at our call centres and meet our partners to see first-hand how we respond to our customers.

And we have our shared value framework to help us establish tight connections between strong business outcomes and the things we want to achieve for the communities in which we operate. More information about our shared value approach is contained here.

STRONG RESULTS SUPPORT OUR APPROACH

I am pleased with the sound operating performance we achieved this year. Our success allows us to embrace the opportunities provided by change.

Our gross written premium of $11.4 billion was relatively flat compared to last year, and our reported margin of 14.3% was consistent with the updated guidance we provided in February 2016.

We achieved these results despite challenging operating conditions in our core markets in Australia and New Zealand, where there are particular pressures in our commercial markets, and in Compulsory Third Party (CTP) insurance, especially in New South Wales, where the scheme has experienced an increase in the frequency of minor injuries where people have legal representation.

Our short tail personal insurance businesses in Australia and New Zealand achieved strong profitability and sound growth, as they successfully responded to evolving customer behaviours and needs with a range of services complemented by digital and new product initiatives.

We also realised the residual benefits from the integration of the former Wesfarmers business and the implementation of a revised Australian operating model as planned, meeting our pre-tax run rate of $180 million of non-reinsurance benefits by the end of the financial year.

Asia increased its contribution to our results, with strong performances from the established businesses in Thailand and Malaysia. Asia remains an important long term growth option for IAG.

Detailed results of our individual business divisions, Operations and IAG Labs are set out in the operating performance review here.

Our underlying profitability remained strong, with an underlying margin of 14.0%. This result reflected a 250 basis point benefit from the Berkshire Hathaway quota share arrangement, described in more detail in the CFO’s review, as well as the strong profitability of our personal lines businesses in Australia and New Zealand; pressure in the equivalent commercial markets and in New South Wales CTP insurance profitability; and slightly lower like-for-like expenses.

LOOKING AHEAD

We expect to record a sound operating performance in the 2017 financial year, against a backdrop of competitive conditions in our core mature markets of Australia and New Zealand and ongoing pressure on profitability in commercial insurance segments and in New South Wales CTP insurance.

We will continue to make the necessary changes to our business, to fuel the opportunity we have identified. Specific cost saving activities will include operational partnering with offshore-based global service suppliers, and organisation-wide systems simplification.

Our gross written premium guidance for the 2017 financial year is for relatively flat growth, and our reported margin guidance is for a range of 12.5–14.5%. The impact of the Berkshire Hathaway quota share is expected to be similar to that in the 2016 financial year.

In closing, I acknowledge the solid foundation created by my predecessor, Mike Wilkins, and thank the Chairman and other directors for the opportunity they have given me, and the confidence they have in me.

I also thank my colleagues for their loyalty and support, and all our people for their tireless work to make our customers’ and partners’ worlds safer.

Together we have the extraordinary honour of having an opportunity to shape Australia’s leading general insurance company.

Peter Harmer
Managing Director and
Chief Executive Officer