Insurance Australia : Notes to financial statements (A) (622.6 KB)

NOTES TO THE FINANCIAL STATEMENTS

1. OVERVIEW

NOTE 1.1 INTRODUCTION

The financial report is structured to provide prominence to the disclosures that are considered most relevant to the users' understanding of the operations, results and financial position of IAG.

The financial report has been organised into the following sections:

1. Overview - contains information that affects the financial report as a whole, as well as segment reporting disclosures.
2. Insurance disclosures - financial statement disclosures considered most relevant to the core insurance activities.
3. Risk - discusses IAG's exposure to various risks, explains how these affect IAG's financial position and performance and how IAG seeks to manage and mitigate these risks.
4. Capital structure - provides information about the capital management practices of IAG and related shareholder returns.
5. Other balance sheet disclosures - discusses other balance sheet items such as goodwill and intangible assets, as well as disclosures in relation to IAG's tax balances.
6. Group structure - provides a summary of IAG's significant controlled entities and includes acquisition and divestment disclosure.
7. Unrecognised items - disclosure of items not recognised in the financial statements at the balance date but which could potentially have a significant impact on IAG's financial position and performance going forward.
8. Additional disclosures - other disclosures required to comply with Australian Accounting Standards.

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NOTE 1.2 ABOUT THIS REPORT

A. CORPORATE INFORMATION

Insurance Australia Group Limited (Company or Parent), the ultimate parent entity in the Group, is a for-profit company, incorporated and domiciled in Australia and limited by shares publicly traded on the Australian Securities Exchange (ASX). Its registered office and principal place of business is Level 13, Tower Two, Darling Park, 201 Sussex Street, Sydney, NSW 2000, Australia. This financial report covers the consolidated financial statements for the Company and its subsidiaries (IAG or Group) for the year ended 30 June 2022.

A description of the nature of IAG's operations and its principal activities is included in the Directors' Report.

B. STATEMENT OF COMPLIANCE

This general purpose financial report was authorised by the Board of Directors for issue on 12 August 2022 and complies with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), the Corporations Act 2001, Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB), other authoritative pronouncements of the AASB and the ASX Listing Rules.

The current IFRS standard for insurance contracts does not include a comprehensive set of recognition and measurement criteria. On 10 July 2020, the IASB published the final IFRS 17 standard (IFRS 17 Insurance Contracts - adopted as AASB 17 Insurance Contracts in an Australian context) that does include such criteria, with an effective date for IAG of 1 July 2023. Until this standard takes effect, the financial reports of insurers in different jurisdictions that comply with IFRS may not be comparable in terms of the recognition and measurement of insurance contracts.

C. BASIS OF PREPARATION

The financial statements have been prepared on the basis of historical cost principles, as modified by certain exceptions noted in the financial report, with the principal exceptions being the measurement of all investments and derivatives at fair value and the measurement of the outstanding claims liability and related reinsurance and other recoveries at present value. All values are rounded to the nearest million dollars, unless otherwise stated, in accordance with ASIC Corporations Instrument 2016/191.

The balance sheet is prepared with the assets and liabilities presented broadly in order of liquidity. The assets and liabilities comprise both current amounts (expected to be recovered or settled within 12 months after the reporting date) and non-current amounts (expected to be recovered or settled more than 12 months after the reporting date).

I. Basis of consolidation

The consolidated financial statements incorporate the assets and liabilities of all entities controlled by the Company as at 30 June 2022. A list of significant controlled entities is set out in Note 6.3. IAG controls an investee if it has (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use its power over the investee to affect the amount of those returns. Where an entity either began or ceased to be controlled during a financial year, the results are included from the date control commenced or up to the date control ceased. The financial information of all subsidiaries is prepared for consolidation for the same reporting year as the Parent. In preparing the consolidated financial statements, all inter- company balances and transactions, including income, expenses, and profits and losses resulting from intra-group transactions, have been eliminated.

Where a subsidiary is less than wholly-owned, the non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated balance sheet and statement of changes in equity. The Group recognises non-controlling interests in an acquired entity at the non-controlling interest's proportionate share of the acquired entity's net assets. A change in ownership of a controlled entity that results in no gain or loss of control is accounted for as an equity transaction.

II. Presentation and foreign currency

The financial report is presented in Australian dollars, which is the functional currency of the Company. Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at reporting date are translated to Australian dollars using reporting date exchange rates. Resulting exchange differences are recognised in profit or loss.

The assets and liabilities of foreign operations are translated to Australian dollars using reporting date exchange rates while equity items are translated using historical rates. The consolidated statement of comprehensive income and consolidated cash flow statement are translated using annual average rates for the reporting year. Exchange rate differences arising on translation are recorded directly in equity in the foreign currency translation reserve (FCTR). On the disposal of a foreign operation, the cumulative amount of exchange differences deferred in the FCTR relating to that foreign operation is recognised in profit or loss.

III. Reclassification of comparatives

Certain items have been reclassified from IAG's prior year financial report to conform to the current year's presentation basis. The reclassifications are:

• reclassification of investment income (refer to Note 2.3 for further details);
• reclassification of trade and other payables (refer to Note 2.7 for further details); and
• reclassification of remuneration of auditors (refer to Note 8.3 for further details).

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D. SIGNIFICANT ACCOUNTING POLICIES ADOPTED

The accounting policies adopted in the preparation of this financial report have been applied consistently by all entities in IAG and are the same as those applied for the previous reporting year, unless otherwise stated. The financial statements of entities operating outside Australia that maintain accounting records in accordance with overseas accounting principles are adjusted where necessary to comply with the significant accounting policies of IAG. The significant accounting policies adopted in the preparation of this financial report are set out within the relevant note.

I. Changes in accounting policies

There were no new Australian Accounting Standards applicable for the current reporting year.

II. Critical accounting estimates and judgements

In the process of applying the significant accounting policies, certain critical accounting estimates and assumptions are applied and judgements are made by management, the results of which affect the amounts recognised in the financial statements. The estimates and related assumptions are based on experience and other factors that are considered to be reasonable, and are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which they are revised, and future periods if relevant. Details of the material estimates and judgements are set out within the relevant note, as outlined below:

AREAS OF CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS	REFERENCE
Claims and reinsurance and other recoveries on outstanding claims	Note 2.2
Liability adequacy test	Note 2.4
Intangible assets and goodwill impairment testing, initial measurement and useful life	Note 5.1
Income tax and related assets and liabilities	Note 5.2
Customer refunds provision	Note 5.3

III. Coronavirus (COVID-19) pandemic and other economic factors

As the economy emerges from the COVID-19 pandemic, together with the occurrence of other global events, there are various factors that are impacting the operating environment. This includes effects that IAG is experiencing such as increasing interest rates and the emergence of higher inflation, which is increasing the estimation uncertainty in the preparation of these financial statements. The Group has developed various accounting estimates in these financial statements based on forecasts of economic conditions which reflect expectations and assumptions as at 30 June 2022 about future events that the Directors believe are reasonable in the circumstances. There is a considerable degree of judgement involved in preparing these forecasts. The underlying assumptions are also subject to uncertainties which are often outside the control of the Group. Accordingly, actual economic conditions may be different from those forecast since anticipated events may not occur as expected, and the effect of those differences may significantly impact accounting estimates included in these financial statements.

The significant accounting estimates particularly impacted by these associated uncertainties are predominantly related to the valuation of the outstanding claims liability, recoverable amount assessments of non-financial assets, and fair value measurement of investments.

The impact of the COVID-19 pandemic together with the effects of other economic factors, on each of these accounting estimates is discussed further below. Readers should carefully consider these disclosures in light of the inherent uncertainty described above.

• Outstanding claims liability

IAG's insurance portfolio continues to experience impacts as a result of COVID-19 and other economic factors. There is a risk that the associated economic factors could be more severe than estimated and, as a result, the development of the claims over time could result in the ultimate cost of those claims being higher than the current outstanding claims liability established. The impacts on claims experience is expected to materially differ between classes of business and, for certain classes, potentially impact across more than one accident year.

During the current year, the motor portfolio has continued to be impacted through favourable claim frequency as a result of a sequence of mobility restrictions introduced to slow the spread of COVID-19, particularly the extended lockdowns in Victoria and New South Wales over July to October 2021. Offsetting this, IAG observed elevated inflationary pressure on claims costs in motor and home portfolios due to supply chain and labour market disruption, along with deterioration in long-tail portfolios, particularly in commercial liability reflecting elevated average claim size.

The total pre-tax provision for business interruption claims associated with COVID-19 was $975 million at 30 June 2022 (2021: $1,236 million). The reduction includes a $200 million release and a $61 million reduction based on the increase in the yield curve. Following the Full Court of the Federal Court's appeal judgment delivered on 21 February 2022 (noted below), the following factors have been considered in determining the appropriate level of release from the business interruption provision at 30 June 2022:

• the number and nature of the claims received since the second test case; and
• analysis of the scope of the judgment and its application.

Extensive scenario testing of the adequacy of the provision has been undertaken during the 2022 financial year. A substantial part of the provision continues to include a risk margin reflecting the uncertainty of the potential legal outcomes and subsequent claims that may arise.

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On 18 November 2020, the Supreme Court of New South Wales Court of Appeal (NSWCA) delivered its judgment on the first business interruption insurance test case, which determined pandemic exclusions that refer to the Quarantine Act and subsequent amendments only, rather than the Biosecurity Act, are not effective to exclude cover for losses associated with COVID-19. On 25 June 2021, the High Court of Australia (HCA) dismissed the insurers' application for special leave to appeal the decision of the

NSWCA.

During the current financial year, a number of developments have emerged. IAG's exposure in respect of policy exclusions which reference the Quarantine Act without specific reference to the Biosecurity Act is limited to historical policies only as all new and renewing policies now include the Biosecurity Act or a broader exclusion.

Even while the first business interruption insurance test case, noted above, was in progress, preparations were underway for a second business interruption insurance test case. The second business interruption insurance test case was heard by the Federal Court of Australia in September 2021. On 8 October 2021, the Federal Court of Australia delivered its judgment in the second test case and found in favour of insurers on a significant number of policy wording questions and for policyholders on other questions.

In November 2021, the Full Court of the Federal Court of Australia heard appeals in 5 of the 10 cases in the second test case (including the 2 IAG cases) and the Full Court delivered its appeal judgment on 21 February 2022. The judgment was mostly favourable to insurers and upheld many aspects of the Federal Court of Australia's original decision. The judgment did reverse two elements of the judgment in one of the IAG cases relating to the treatment of Jobkeeper payments and the calculation of interest.

Special leave applications have been filed in the HCA in 3 of the 5 test cases that were appealed to the Full Court of the Federal Court of Australia (including the 2 IAG cases). The HCA has now informed the parties that it will conduct an oral hearing to determine the special leave applications in each of these proceedings and that the oral hearing will not be listed before October 2022 (although the precise date is yet to be confirmed).

IAG is defending a representative class action that has been filed in the Federal Court of Australia relating to policyholders with business interruption policies. The representative class action has been adjourned pending conclusion of the test cases.

• Goodwill and intangible assets impairment

The assumptions underpinning the value-in-use calculations used to evaluate the supportability of goodwill and intangible assets reflect reasonable estimates of the impact of COVID-19 and other economic factors and the increased risks associated with the estimated cash flows. Whilst there is no impairment in relation to any of the cash-generating units at 30 June 2022, there is a heightened level of uncertainty around key assumptions in the current environment. This has the potential to materially impact the value-in-use assessment moving forward and potentially the carrying value of the respective intangible assets and goodwill. Refer to Note 5.1 for further details on goodwill and intangible assets.

• Fair value measurement of investments

IAG's investments are designated at fair value through profit and loss, and for the vast majority of the investments, the fair value is determined based on observable market data. This measurement basis has not changed as a result of COVID-19 and other economic factors.

Where readily available market data is not available to determine fair value, then a mark-to-model approach is adopted. Judgement is required in both the selection of the model and inputs used. The investments which are subject to valuation using unobservable inputs are disclosed in the Group's fair value hierarchy. Refer to Note 2.3 for further details on investments.

NOTE 1.3 SEGMENT REPORTING

IAG has identified its operating segments based on the internal reports that are reviewed and used by the Group Chief Executive Officer (being the chief operating decision maker) in assessing performance and in determining the allocation of resources.

A. REPORTABLE SEGMENTS

IAG has general insurance operations in Australia and New Zealand, with the reportable segments for the period ended 30 June

2022 comprising the following business divisions:

I. Direct Insurance Australia

This segment predominantly provides personal lines, and some commercial lines, general insurance products sold directly to customers primarily under the NRMA Insurance, SGIO and SGIC brands, the RACV brand in Victoria (via a distribution and underwriting relationship with RACV), as well as the CGU and ROLLiN' brands.

II. Intermediated Insurance Australia

This segment predominantly provides commercial lines, and some personal lines, general insurance products sold to customers through intermediaries including brokers, authorised representatives and distribution partners primarily under the CGU and WFI brands, as well as the Coles Insurance brand via a distribution agreement with Coles.

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III. New Zealand

This segment provides general insurance products underwritten in New Zealand. Insurance products are sold directly to customers predominantly under the State and AMI brands, and through intermediaries (insurance brokers and authorised representatives) primarily using the NZI and Lumley Insurance brands. General insurance products are also distributed by corporate partners, such as large financial institutions, using third party brands.

IV. Corporate and other

This segment comprises other activities, including corporate services, capital management activity, shareholders' funds investment activities, inward reinsurance from associates, investment in associates, and other businesses that offer products and services that are adjacent to IAG's insurance business. IAG's captive reinsurance operation (captive) is a corporate function that acts as the interface between the external providers of reinsurance capital and the operating business divisions. IAG does not manage, or view, the captive as a separate business. Consequently, the operating results of the captive are systematically allocated to the operating business segments.

B. FINANCIAL INFORMATION

		DIRECT	INTERMEDIATED
	INSURANCE		INSURANCE		NEW CORPORATE
		AUSTRALIA		AUSTRALIA		ZEALAND AND OTHER		TOTAL
		$m		$m		$m	$m		$m
2022
I. Financial performance
Total external revenue(1)		8,464			6,034			3,787		62			18,347
Underwriting profit	533	255	224	-		1,012
Net investment loss on assets backing insurance liabilities		(84)	(150)	(4)	-		(238)
Insurance profit		449			105	220	-		774
Net investment loss on shareholders' funds	-		-		-		(105)	(105)
Share of net profit of associates	(7)	-		-		24	17
Finance costs	-		-		-		(93)	(93)
Other net operating result		(13)	1	-		(17)	(29)
Total segment result from continuing operations		429			106			220		(191)			564
Income tax expense												(140)
Profit for the year from continuing operations													424
II. Other segment information
Capital expenditure(2)		-			-			-		330			330
Depreciation, amortisation and impairment expense		68			49			21		1			139
2021
I. Financial performance
Total external revenue(1)		8,325			6,588			3,603		379			18,895
Underwriting profit/(loss)	580	(1,442)	294		(3)	(571)
Net investment income/(loss) on assets backing insurance
liabilities		84			50	8	(3)	139
Insurance profit/(loss)		664	(1,392)	302		(6)	(432)
Net investment income on shareholders' funds	-		-		-		306	306
Share of net profit of associates	(3)	-		-		38	35
Finance costs	-		-		-		(89)	(89)
Other net operating result		(15)	4	-		(198)	(209)
Total segment result from continuing operations		646			(1,388)			302		51			(389)
Income tax benefit													125
Loss for the year from continuing operations													(264)
II. Other segment information
Capital expenditure(2)		-			-			-		206			206
Depreciation, amortisation and impairment expense		68			67			30		94			259

1. Total external revenue comprises gross earned premium, reinsurance and other recoveries, reinsurance commission revenue, investment income on assets backing insurance liabilities, investment income on shareholders' funds, fee and other income and share of net profit/(loss) of associates.
2. Capital expenditure includes acquisitions of property and equipment, intangibles and other non-current segment assets.

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