Insurance Australia : CEO's Review 2022 (155.61 KB)

CEO'S REVIEW

CEO's review

Despite the challenges in the external environment this year, your business has delivered strong gross written premium growth of 5.7%, to $13,317 million.

The year in numbers

Our results reflect the quality of our underlying business as we build a stronger, more resilient IAG.

Our net profit after tax was $347 million, compared to a $427 million loss in FY21, despite our having to respond to a high number of extreme weather events, volatile investment markets, a higher inflationary environment, and the need to strengthen prior period reserves. Our net profit also included a $200 million pre-tax release from the business interruption provision, and reflected the momentum in the underlying1 business performance.

Our reported insurance profit of $586 million represented a reported insurance margin of 7.4% (FY21: 13.5%) after net natural peril costs of $1,119 million ($354 million above our original allowance); prior period reserve strengthening of $172 million; and negative credit spread impacts of $45 million. The underlying insurance margin1 of 14.6% better reflects the strength and performance of our business.

Gross operating costs remained relatively flat at around $2.5 billion, in line with our commitment to hold our cost base at around that level. We intend to maintain our operating expense at that level in FY23.

Our Direct Insurance Australia business increased its gross written premium by 4.6% to $6,036 million, after increasing premium rates in response to heightened levels of claims cost inflation, higher reinsurance costs and an increased allowance for natural peril events. It reported strong retention rates across motor and home insurance, as well as increasing new business opportunities in the second half of the financial year.

Direct Insurance Australia reported an insurance profit of $469 million (FY21: $718 million) which was negatively impacted by higher natural perils; this equates to a lower reported insurance margin of 13.0% (FY21: 20.7%). Its underlying margin remained healthy, at 20.5%.

Intermediated Insurance Australia grew gross written premium by 6.0% to $4,289 million. It had solid rate increases with retention levels holding, supplemented by pockets of new business. It reported an insurance loss of $103 million in FY22 (FY21: $10 million loss) from natural peril costs that were ~$100 million higher this year, and an increase in prior year reserve strengthening, mainly confined to the liability class. Its FY22 underlying margin of 5.0% was 110 basis points higher than in FY21.

Our New Zealand business grew gross written premium by 7.7% to $2,991 million, with strong growth from the Business division, solid growth in the direct brands, and modest growth across the bank partner distribution channels.

New Zealand's insurance profit of $220 million (FY21: $305 million) translated to a reported insurance margin of 12.8% (FY21: 19.0%). A higher underlying margin of 16.8% (FY21: 16.4%) largely reflected ongoing disciplined cost management, including introducing automation, and increased rates to address higher input costs from inflationary pressures.

Delivering on our strategy

After resetting your company's strategy and operating model, and significantly strengthening operating risk and governance, we are confident that we have the right plans in place. We have seen many indicators

of improvements this year across our key strategic ambitions2:

• One million new customers across Australia and New Zealand by FY26;
• More than 80% of customers' activity through digital channels by FY26;
• At least $250 million in insurance profit from our Intermediated Insurance Australia business by FY24; and
• $400 million of value through claims and supply chain effectiveness from FY26.

Our efforts to grow with our customers are succeeding. Customer numbers in the NRMA Insurance business grew as we rolled out the brand in Western Australian and South Australia and migrated customers from

an intermediated relationship to a direct relationship.

Our work to build better businesses has included a significant review of our Intermediated Insurance Australia business, and the appointment of a new executive, Jarrod Hill. The division has delivered steady progress towards its ambition of $250 million insurance profit by FY24.

To create value through digital, we are investing heavily in the business' core infrastructure.

1. IAG defines its underlying insurance margin as the reported insurance margin adjusted for net natural peril claims costs less the related allowance; prior period reserve releases or strengthening; and credit spread movements
2. These goals are subject to assumptions and dependencies, including that there are no material adverse developments in macro-economic conditions and disruptions or events beyond IAG's control (for example, natural peril events in excess of IAG's allowances). See Appendix 1 on page 33 for more information.

6	Annual Review and Sustainability Report 2022

"Our results reflect the quality of our underlying business as we build a stronger, more resilient IAG."

We are working to simplify our operations and remove complexity, and accelerating the digital transformation of our customer experience, making it easier and faster for customers, brokers and partners to do business with us. We are more than half-way through the build of our strategic Enterprise Platform for our personal lines, with our consolidated Customer, Policy, Pricing and Claims systems now fully operational for NRMA Insurance customers in Western Australia, South Australia and the Northern Territory.

While it is early days, we are pleased with the progress we have made against our ambition to deliver $400 million of claims value. The Online Motor Claims tracker we launched in May has already had 140,000 customer interactions, and online digital claims lodgements have increased. We are also seeing benefits flow through to our motor repair model program.

When it comes to managing our risks, we continued to manage the balance sheet in a conservative manner, using all forms of capital (equity, debt and reinsurance). I'm pleased that we were able to refinance our New Zealand debt instrument this year, well before we needed to. We maintain strong levels of reinsurance cover and continue to be well-supported by global reinsurance markets.

Operational risk is being managed by your company's new Chief Risk Officer, Peter Taylor, who joined us in May, completing my Group Leadership Team. Peter and his team are building on the work of the last couple of years to maintain our risk skills. No new material topics have emerged in the last

12 months, and old issues continue to be well managed.

Responding to a challenging environment

The way we responded to this year's challenging environment further supports the confidence we have in our people, our structure and our business.

Our people and those working in our supply chain and partner organisations continued to be affected by COVID-19 and other seasonal illnesses.

These challenges were compounded by an extraordinary number of extreme weather events in Australia and New Zealand, including the devastating floods in northern New South Wales and along the east coast of Australia. Across Australia and New Zealand, claim lodgements from extreme weather events in FY22 more than doubled over the prior year. That huge increase in claims had a significant impact on our customers, on our people, and on our financial results. It is a credit to the resilience and skills of our people that we continued to deliver on our customer promise.

Our strong view remains that we need a coordinated national approach from governments, industries, and businesses to build more resilient communities and reduce the impact of natural disasters and we remain committed to using our expertise and information to assist with this work.

Caring for our people

Our people are key to our customers' experience, and we prioritise their work experience, health and safety. I am very proud that - despite this year's challenges - our overall employee engagement score for FY22 was 77%, a 4% improvement on last year's annual culture survey result.

We continue to use the hybrid working patterns we implemented in response

to COVID-19. These are based on team requirements and objectives and encourage purposeful connection and collaboration through a combination of working remotely and being on site on specific days.

The share of senior management roles occupied by women was 44% (FY21: 43%), and we are focusing on leadership development and accelerating our talent and succession approach to help us reach our target of 50% by 2023.

We continue to prioritise the safety and wellbeing of our people, including offering support when they need it. In our culture surveys, 92% of our people strongly agreed that their direct leader genuinely cares about their safety and wellbeing.

FY23 guidance and outlook

Having a more focused operating model, a leadership team with deep expertise, and a clear strategy for growth gives us confidence in the future. The improved guidance we have issued for FY23 reflects this confidence, and our strong underlying1 business momentum.

We are forecasting mid-to-high single digit growth in gross written premium, and a ~19% increase in our natural peril allowance. Our reported insurance margin guidance

is for a range of 14 - 16%. This aligns to IAG's aspirational goal to deliver a 15 - 17% insurance margin over the medium term.

I am confident our work to create a stronger, more resilient IAG will continue to deliver profitable business and customer growth in FY23, and longer-term value for our stakeholders.

Nick Hawkins

Managing Director and Chief Executive Officer

CEO's review

7