Insurance Australia : Remuneration report 2022 (5.69 MB)

REMUNERATION REPORT

LETTER FROM THE CHAIRMAN OF THE PEOPLE AND REMUNERATION COMMITTEE

Dear Shareholders,

On behalf of the People and Remuneration Committee (PARC) and the Board, I am pleased to present the 2022 Remuneration Report.

Responding to your feedback

The Board and PARC are determined to ensure that Executive remuneration continues to be aligned with IAG's business strategy, the market and most importantly, shareholder outcomes.

The first 'strike' against our Remuneration Report last year sent us strong and clear feedback on Executive remuneration outcomes, and the principles that guided our decision making. As a Board, we reflected deeply on this feedback, and we have made changes to ensure Executive remuneration outcomes are more closely aligned with shareholder outcomes.

The changes reflect the work of the external review of IAG's remuneration framework that we flagged last year. They were further guided by a PARC led working group that considered underlying structural issues and proposed changes. These are intended to:

• ensure greater alignment between shareholder outcomes and Executive remuneration outcomes;
• introduce a simpler approach to performance measurement and some aspects of remuneration; and
• be more transparent around the process, including how we make remuneration decisions.

While the changes to our remuneration framework will be fully implemented for FY23 onwards, we applied a number of the key new shareholder alignment performance measures for FY22. These include replacing cash earnings with net profit after tax (NPAT) before amortisation of acquired intangibles (NPAT before amortisation) as the measure to determine short-term incentive (STI) pool funding.

The elements of the Group Balanced Scorecard (Group BSC) were set at the commencement of the performance year prior to the AGM and as result are unchanged for FY22 but have been replaced by a more strategically-focused BSC for FY23.

At the same time, we are conscious of the need to appropriately reward our employees, particularly given the challenges they have had to address this year as a result of the number and degree of weather events, and the ongoing challenge of COVID-19.

What is changing?

Greater alignment

As an overarching principle, all one-off unusual items, or financial statement adjustments during the performance period will be included when we determine outcomes for STI or long-term incentive (LTI) return on equity (ROE) hurdles.

We have established earnings calculation principles the Board uses when it considers whether adjustments to incentive outcomes are required to help ensure any discretion exercised is also aligned with shareholder outcomes, and considers market, community, and regulator expectations. The principles support transparent disclosure of the rationale in cases where discretion has been applied.

A simplified approach

We have simplified the Group BSC we will use to determine the STI for FY23. We use the Group BSC to align the organisation to delivering the outcomes outlined in our 5-year strategy and ambition. To make it more effective, the weighting on financial measures in the Group BSC will increase from 50% to 60%, and we will have two financial measures, being underlying insurance profit to reflect the quality of earnings, and NPAT, because this is a true and unadjusted representation of statutory profit / earnings in the period and more closely aligns to the shareholder experience.

We have also reduced the total number of measures in the Group BSC from eight to six, and each measure has a direct link to one of the four strategy pillars. Non-financial measures will support customer growth above market growth; digital transformation; risk management; and performance underpinned by employee engagement. Details are set out in Section D. I. We will continue to review the Group BSC measures to ensure they support the execution of our strategy.

The Board has committed to introduce ESG metrics into Executive incentive arrangements for FY24 and is working through the approach.

Transparency

To improve the transparency of our STI financial targets and outcomes, we have begun to disclose these in the 2022 Remuneration Report. We have also disclosed additional detail on the determination of the STI pool, the earnings calculation and Board decision- making processes.

Alignment of remuneration outcomes with business results

The business delivered strong gross written premium growth of 5.7% and improved its underlying business performance despite the challenging external environment which included an unprecedented level of natural perils claims and volatile investment markets.

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NPAT was $347 million, compared to a $427 million loss in FY21. The result incorporates strengthening of prior period reserves, a high number of natural peril events, volatile investment markets, and a higher inflationary environment. NPAT also included a $200 million pre-tax release from the business interruption provision, and strong momentum in the underlying business performance.

On a management results basis, our reported insurance profit of $586 million represented a reported insurance margin of 7.4%, compared to 13.5% in FY21 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.

FY22 short-term incentives (STI) outcomes

The Board determined it was appropriate to establish an Executive STI pool for FY22 at 20% of maximum, representing 33% of target payout. In making this decision, the Board recognised the strength of the overall balanced scorecard outcome. However, the Board used the NPAT before amortisation result as the key factor in determining the size of the STI pool to closely align Executive remuneration outcomes with shareholder outcomes.

The NPAT before amortisation result used to determine STI outcomes excluded the $200 million pre-tax benefit associated with the reversal of a portion of the Business Interruption provision. The adjusted FY22 NPAT before amortisation result of $214 million (which was 33% of target) was significantly affected by the high level of natural peril claims, volatile investment markets and strengthening of prior period reserves.

Each Executive's share of the STI pool was determined based on an assessment of their performance against Group and Divisional scorecards. In line with the size of the Executive STI pool, the Group CEO STI outcome was 20% of maximum, with the outcome for other Executives ranging from 17% to 22%.

LTI relating to performance periods ending in FY22

The FY18 LTI award with a relative total shareholder return (TSR) performance hurdle was measured during the year ended 30 June 2022 following the conclusion of the performance period on 30 September 2021. The FY19 LTI awards with cash ROE and relative TSR performance hurdles were measured at the end of the 30 June 2022 performance period.

Both the FY18 TSR LTI award and the FY19 TSR LTI awards did not meet the performance threshold and as a result there has been nil vesting of these awards.

We included all FY21 and FY22 one-off items in the cash ROE calculation for the FY19 LTI award with a performance period ending 30 June 2022; this resulted in nil vesting for that tranche.

We will replace cash ROE with reported ROE for the LTI to be granted in November 2022 (FY23 award), using a simple and transparent reported ROE measurement approach that is explained in detail in Section E. III.

As in past years, the Managing Director and CEO's LTI grant will be subject to shareholder approval at the AGM.

Risk-based adjustments to performance pay

In response to risk matters that emerged during FY22, the Board applied downward adjustments to reduce the FY22 STI awards of three employees and the accountable Executive.

Changes to Executive pay and Non-Executive Director fees

There were no increases to Executive pay recommended for FY23 as part of the August 2022 review. Likewise, the Board has left Board and Committee fees unchanged for the year ending 30 June 2023; these have now been unchanged since the year ended 30 June 2017.

Executive remuneration review during FY23

It is important that we continue to attract, motivate, and reward Executives for their work, and we acknowledge the improved underlying performance of the business, which is reflected in the improved outlook that management has provided for FY23.

From FY23, we will more closely link STI outcomes to progress in the four strategic ambitions to ensure Executives are motivated to drive IAG's long-term aspirational goals.

We will maintain our focus on aligning Executive and shareholder outcomes. At the same time, we will ensure our remuneration framework is fit-for-purpose and complies with regulatory changes such as APRA Prudential Standard CPS 511 as they become effective.

Thank you for taking the time to read the Remuneration Report and we welcome your feedback.

George Savvides

Chairman, People and Remuneration Committee

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CONTENTS	PAGE
A.	KMP covered by this report	32
B.	Shareholder feedback and IAG's response	32
C.	Executive remuneration structure	34
D.	Linking IAG's performance and reward	35
E.	Overview of remuneration elements	41
F.	Non-Executive Director arrangements	45
G.	Executive remuneration governance	46
H.	Other statutory disclosures	48

Abbreviations used in the Remuneration Report are outlined in the table below.

ABBREVIATIONS

Group BSC	Group Balanced Scorecard
DARs	Deferred Award Rights
EPRs	Executive Performance Rights
FP	Fixed Pay
KMP	Key Management Personnel
LTI	Long-term incentive
NARs	Non-Executive Director Award Rights
NPAT(1)	Net profit after tax
NPAT before amortisation(2)	Net profit after tax before amortisation of acquired intangibles
PARC	People and Remuneration Committee
ROE	Return on equity
STI	Short-term incentive
TSR	Total shareholder return
VWAP	Volume weighted average price
WACC	Weighted average cost of capital

1. NPAT will replace cash earnings as the earnings measure for the FY23 ROE hurdled LTI awards and will also be used as a FY23 Group BSC measure.
2. NPAT before amortisation replaced cash earnings as the FY22 STI pool funding measure.

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A. KMP COVERED BY THIS REPORT

This report sets out the remuneration details for IAG's KMP. KMP is defined as persons having authority and responsibility for planning, directing, and controlling the activities of an entity, directly or indirectly, including any director (whether Executive or otherwise) of that entity. For the purposes of this report, the term Executive KMP is used to refer to KMP who are Executives.

Although the Non-Executive Directors are disclosed in the report, they do not have management responsibility. IAG's KMP for FY22 are presented in the table below.

If an individual did not serve in a KMP role for the full financial year, all remuneration is disclosed for the period they served in a KMP role.

NAME	POSITION	TERM AS KMP
EXECUTIVE KMP
Nick Hawkins	Managing Director and Chief Executive Officer	Full year
Julie Batch	Group Executive, Direct Insurance Australia	Full year
Jarrod Hill	Group Executive, Intermediated Insurance Australia	From 13 September 2021
Peter Horton	Group General Counsel and Company Secretary(1)	Full year
Michelle McPherson	Chief Financial Officer	Full year
Neil Morgan	Chief Operating Officer	Full year
Tim Plant	Chief Insurance and Strategy Officer, Acting Chief Risk	From 15 November 2021
	Officer(2)
Christine Stasi	Group Executive, People, Performance and Reputation	Full year
Peter Taylor	Chief Risk Officer	From 18 May 2022
Amanda Whiting	Chief Executive, New Zealand(3)	Full year
FORMER EXECUTIVE KMP
David Watts	Chief Risk Officer	Ceased 11 February 2022
NON-EXECUTIVE DIRECTORS
Tom Pockett	Chairman, Independent Non-Executive Director(4)	Full year
Simon Allen	Independent Non-Executive Director	Full year
David Armstrong	Independent Non-Executive Director	From 1 September 2021
Sheila McGregor	Independent Non-Executive Director	Full year
Jon Nicholson	Independent Non-Executive Director	Full year
Helen Nugent	Independent Non-Executive Director	Full year
Scott Pickering	Independent Non-Executive Director	From 1 November 2021
George Sartorel	Independent Non-Executive Director	From 1 September 2021
George Savvides	Independent Non-Executive Director	Full year
Michelle Tredenick	Independent Non-Executive Director	Full year
NON-EXECUTIVE DIRECTORS WHO CEASED AS KMP
Elizabeth Bryan	Chairman, Independent Non-Executive Director	Ceased 22 October 2021
Duncan Boyle	Independent Non-Executive Director	Ceased 22 October 2021

1. The Group General Counsel and Company Secretary became a KMP role effective from 1 July 2021.
2. Tim Plant served as Acting Chief Risk Officer from 14 February 2022 to 17 May 2022.
3. Amanda Whiting also served as Acting Group Executive, Intermediated Insurance Australia from 1 July 2021 to 12 September 2021.
4. Tom Pockett commenced as Chairman on 22 October 2021.

There have been no changes to KMP since the end of FY22 and the release of this Report.

B. SHAREHOLDER FEEDBACK AND IAG'S RESPONSE

At the 2021 Annual General Meeting, IAG's shareholders expressed concerns regarding aspects of our remuneration framework and FY21 Executive remuneration outcomes, resulting in a 'strike' against the 2021 Remuneration Report (57.25% vote against). Since the strike, the Board and PARC have spent time engaging with and listening to the concerns of our shareholders, investors, and proxy advisors. We value the feedback received, including that there needs to be greater alignment between shareholder outcomes and Executive remuneration outcomes, a simpler approach to performance measurement and greater transparency including on how remuneration decisions are made. After careful consideration, the Board has taken the following actions to address the concerns raised.

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SHAREHOLDER FEEDBACK	CONCERN RAISED	IAG'S RESPONSE
Greater alignment between	Significant one-off items	As an overarching principle, one-off items will be included in the
shareholder outcomes and	should be included in cash	earnings calculations for the on-foot ROE hurdled LTI incentive
Executive remuneration	earnings and reflected in	awards and the STI pool for Executive KMP. Adjustments to
outcomes	STI and LTI ROE vesting	earnings for one-off items will only be made in limited
circumstances where calculation principles will be used to guide
	outcomes
	decision making. Refer to Section G for further information.
		On-footLTI: All FY21 and FY22 one-off items were included in the
		ROE calculation for the FY19 LTI award with a performance period
		ending 30 June 2022.
		FY22 STI: NPAT before amortisation has replaced cash earnings as
		the FY22 STI pool funding measure. The Board determined to
		exclude the reversal of the business interruption provision
		ensuring that Executive KMP do not receive a benefit from this
		reversal.
		FY23 STI: NPAT has replaced the cash ROE measure as one of the
		financial measures in the FY23 Group BSC to better reflect overall
		performance and more closely align to the shareholder
		experience.
		FY23 LTI grant: Reported ROE has replaced the cash ROE LTI
		measure for the FY23 LTI grant to be made in November 2022.
		NPAT is used in the calculation of Reported ROE as it represents
		the true representation of statutory profit/earnings. Its use more
		closely aligns Executive remuneration outcomes to the
		shareholder experience. The measurement approach will also be
		simplified and more transparent. In addition, vesting of the TSR
		grant will not occur unless performance above the 50.1th
		percentile is achieved. Refer Section E. III. for further details.
	Incentive outcomes were	Strengthened earnings calculation principles: were introduced to
	misaligned with Group	support decisions about whether to adjust the earnings measures
	financial performance and	used to determine the STI pool funding and LTI ROE calculation.
	shareholder outcomes	The principles are simple, clear and will be applied consistently.
	The principles will help ensure any adjustments are aligned with
		shareholder outcomes, and consider market, community, and
		regulator expectations. Refer to Section G for further information.
	CEO Fixed Pay increase not	IAG will continue to benchmark Executive remuneration to ensure
	justified based on tenure	Fixed Pay is market competitive, reflects role responsibilities, and
	and Group performance	is sufficient to attract and retain talent. Further detail on our
		benchmarking approach is provided in Section E.
Simpler approach to	The weighting of STI	Number of STI measures: The number of Group BSC measures will
performance measurement	financial measures should	be reduced from eight to six, and more closely aligned to IAG's
	be strengthened	strategy pillars for FY23, with two of these measures being
		financial (underlying insurance profit and NPAT).
		Weighting of STI measures: The weighting on financial measures
		will be increased from 50% to 60% for the FY23 Group BSC.
	LTI ROE hurdle requires	The ROE/WACC LTI measure will be replaced by the simpler
	appropriate stretch, and the	reported ROE for the FY23 LTI awards.
	measurement approach	Reported ROE targets will be set in line with the business strategy,
	should be simplified	and LTI awards will only vest when stretching reported ROE targets
		have been achieved. Further detail on reported ROE targets is
		provided in Section E.III.
Further enhancement of	Executive remuneration	The Board has committed to introduce appropriate ESG metrics
Executive remuneration	framework should consider	into IAG's remuneration framework for FY24. The specific form
framework	ESG	and application of these measures is still to be worked through.
Greater transparency	Remuneration Report	Clearer, more transparent disclosures regarding FY22 Group BSC
including on how	disclosures should be more	financial measures, targets and outcomes are provided in Section
remuneration decisions are	transparent	D of this report.
made		Disclosure of the Board's remuneration decision making
		processes, including the factors considered when making
		decisions, has been enhanced.

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