This has been a momentous year for IAG. With the acquisition of the Wesfarmers insurance underwriting business we have established a leading position in each of our chosen markets in Australia and New Zealand, and we are now reshaping our organisation to be fitter and more agile, ready to face the challenges of the future.

FINANCIAL RESULTS

The soundness of our strategy is reflected in the strong financial returns we are achieving.

Our underlying insurance margin1, the key indicator of the underlying strength of our businesses, improved to 14.2% for the 2014 financial year, from 12.5% in 2013. This measure has more than doubled since 2008 when we revised our strategy to remediate, and then realise the potential of, our operating businesses. Our reported insurance margin of 18.3% increased from 17.2% in the prior year, reflecting the benefits of:

  • a net natural peril claim expense of $553 million, compared to our full-year allowance of $640 million, after relatively benign weather in the second half of the year in Australia, partially offset by significant storm activity in New Zealand;
  • prior period reserve releases of $248 million, equivalent to 2.9% of net earned premium; and
  • a positive $100 million impact from the narrowing of credit spreads during the year.

Revenue, measured as gross written premium (GWP), grew by 3.0% to $9,779 million and our insurance profit improved by over 10% to $1,579 million. The lower level of GWP growth, compared to last financial year, was largely the result of the combined effects of:

  • the substantially reduced need for premium rate increases in Australia and New Zealand in an environment of modest input cost pressures;
  • the end of the collection of the Victorian Fire Services Levy (FSL) which accounted for over $100 million of GWP in the 2013 financial year (on an ex-Victorian FSL basis, GWP growth for 2014 was over 4%); and
  • the favourable effect of foreign exchange movements, notably related to the New Zealand business.

A STRATEGIC FOCUS

Our strategic focus and concentration on the fundamentals of our business continued to deliver sound results:

  • our largest business, Australia Direct, reported a stronger underlying performance, and benefited from cost efficiencies, notably in the area of claims. While it recorded relatively flat GWP, it achieved modest growth after allowing for the removal of the Victorian FSL and the decision to exit the poorly performing Queensland CTP portfolio;
  • CGU, our intermediated business, maintained a double-digit underlying margin performance, cementing the gains of recent years and maintaining its market position. GWP growth was 2.8% on an ex-Victorian FSL basis and its underlying margin was slightly higher at 11.4%;
  • in New Zealand, underlying performance remained strong across the year, with the business reporting an improvement in underlying margin to 14.8%, and solid local currency GWP growth of 3.7%; and
  • Asia produced a slightly smaller profit of $14 million, compared to the prior year and, on a proportional basis, represented 7.1% of our GWP this financial year.

EXTENDING OUR LEADERSHIP ROLE

We believe we have a responsibility to use our leadership position to provide opportunities for our people, work more effectively with our partners, meet the changing demands of our customers, deliver returns for our shareholders and, through our experience and resources, contribute to creating safer, stronger and more resilient communities.

Through a range of training, development and coaching programmes, we continued to provide opportunities for leadership development and personal growth for our people.

Our businesses are constantly improving their insights into our customers’ needs, and using that knowledge to create more relevant products and services. This year, there has been a focus on improving the technology platforms that customers increasingly use to do business with us, including enhanced websites and easy-to-use smart-phone applications.

We have continued to speak out on issues of national significance, such as the need for increased investment to improve community resilience and mitigate against natural disasters.

In July 2014, the IAG-led Australian Business Roundtable for Disaster Resilience & Safer Communities successfully launched its second research report to key Australian government officials, research organisations and the media at Parliament House in Canberra.

This paper, Building an Open Platform for Natural Disaster Resilience Decisions, shows that wider access to accurate and relevant data and information would facilitate better decision making for mitigation investments and generate even greater financial savings than calculated in the Roundtable’s first White Paper.

CEMENTING OUR MARKET LEADERSHIP

Last December, we announced our acquisition of the Australian and New Zealand insurance underwriting businesses of Wesfarmers Limited. The acquisition is a compelling strategic fit for IAG and provides us with a unique opportunity to unlock further opportunity for our businesses in Australia and New Zealand, while delivering significant long term value for our shareholders.

After completing this transaction, we are in the enviable position of being market leaders in our chosen markets in Australia and New Zealand. Adding the WFI and Lumley Insurance brands to our portfolio makes us the leading intermediated insurer in Australia, and ensures we retain our leading position in New Zealand.

CREATING A NEW IAG

All good organisations must constantly evolve to remain relevant for their customers and everyone who depends on them and we are undertaking such an evolution to ensure IAG is fit for the future.

We aim to be able to better respond to our customers’ changing expectations and behaviours as technology creates new and more opportunities for them to interact with us. We must also be ready to address any challenges we may face.

It is a credit to the hard work of our people that we are culturally and financially in a sound position to be able to do this, without losing focus on our day-to-day activities.

IAG now has three divisions in Australia:

  • Personal Insurance, incorporating the customer-facing operations of our former Australia Direct business, and the affinity and financial institution partnerships that were part of both our CGU division and the former Wesfarmers business; and
  • Commercial Insurance, which includes the business customer operations that were part of our former CGU division, along with the WFI and Lumley Insurance components of the former Wesfarmers business and the Retail Business Insurance operation from Australia Direct; supported by
  • a service-based division, Enterprise Operations.

The brands our customers know and trust remain the same, while our increased size and focus will enable us to generate better customer experiences and take a greater leadership role, identifying opportunities to influence the way our industry operates and drive positive changes in the communities we protect.

From 1 July 2014, we welcomed our colleagues from the Wesfarmers business into our revised structure, setting us up for future success together.

We expect the new operating model, and the addition of the Wesfarmers insurance underwriting business to:

  • deliver an annualised pre-tax synergy and benefit run rate of approximately $230 million by the end of the 2016 financial year; and
  • result in the recognition of one-off pre-tax costs of approximately
    $220 million, including the $50 million identified this year.

OUTLOOK

We expect to report GWP growth of 17–20% in the 2015 financial year, as we consolidate the Wesfarmers insurance underwriting business in Australia and New Zealand. Our insurance margin is expected to be in the range of 13.5–15.5%. This guidance is subject to our usual assumptions2.

CHANGES TO OUR EXECUTIVE TEAM

The new structure has resulted in some changes to our Executive team, as we welcomed Alex Harrison, formerly Chief Operating Officer for Australia Direct, as Chief Executive, Enterprise Operations, and Clayton Whipp, formerly Group General Manager Finance, as acting Chief Strategy Officer. Leona Murphy has accepted the challenging role of Chief Transformation Officer for the next year, managing the move to our new operating model and bringing in the Wesfarmers insurance underwriting business. During the year we also welcomed Duncan Brain to the team as Chief Executive Asia.

I am grateful for the support of the team and I am very much looking forward to working with the expanded team to achieve the new IAG.

I also thank our Directors for their ongoing guidance and counsel, and our shareholders for their continued confidence in our business.

Finally, I thank our people for their hard work, dedication and belief in achieving our strong operating and financial performance and strengthening our industry leadership position. I also welcome those who have joined us from the Wesfarmers insurance underwriting business. I am encouraged by the enthusiasm and performance demonstrated by our new colleagues and look forward to everyone’s contribution in 2015 as we work to implement our new operating model and to cement a strong and successful future for our organisation.

MIKE WILKINS MANAGING DIRECTOR AND CEO

1 IAG defines its underlying insurance margin as the reported insurance margin adjusted for:
– net natural peril claim costs less related allowance for the period;
– reserve releases in excess of 1% of net earned premium; and
– credit spread movements.

2 The underlying assumptions behind our guidance are net losses from natural perils in line with our allowance of $700 million; lower prior period reserve releases equivalent to around 2% of net earned premium; and no material movement in foreign exchange rates or investment markets.

“We are creating an organisation that is much more connected, efficient and effective, delivering better outcomes for our customers, our partners, our people and our shareholders.”