17 February 2016 Financial results Half year ended 31 December 2015 Peter Harmer Nick Hawkins Managing Director and Chief Financial Officer Chief Executive Officer
Important information This presentation contains general information in summary form which is current as at 17 February 2016. It presents financial information on both a statutory basis (prepared in accordance with Australian Accounting Standards which comply with International Financial Reporting Standards (IFRS)) and non-IFRS basis. This presentation is not a recommendation or advice in relation to Insurance Australia Group Limited (IAG) or any product or service offered by IAG’s subsidiaries and does not take into account the financial situation, investment objectives or particular needs of any person. It is not intended to be relied upon as advice to investors or potential investors, and does not contain all information relevant or necessary for an investment decision. No recommendation is made as to how investors should make an investment decision. Investors must rely on their own examination of IAG, including the merits and risks involved, and should consult with their own professional advisers in connection with any acquisition of securities. This presentation should be read in conjunction with IAG’s other periodic and continuous disclosure announcements filed with the Australian Securities Exchange which are also available at www.iag.com.au. No representation or warranty, express or implied, is made as to the currency, accuracy, adequacy, completeness or reliability of any statements, estimates or opinions, or the accuracy, likelihood of achievement or reasonableness of any forecasts, prospects or returns contained in, or implied by, this presentation. To the maximum extent permitted by law, IAG, its subsidiaries and their respective directors, officers, employees, agents and advisers disclaim all liability and responsibility for any direct or indirect loss, costs or damage which may be suffered by any recipient through use of or reliance on anything contained in, implied by or omitted from this presentation. To the extent that certain statements contained in this presentation may constitute “forward-looking statements” or statements about “future matters”, the information reflects IAG’s intent, belief or expectations at the date of this presentation. Any forward-looking statements, including projections, guidance on future revenues, earnings and estimates, are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, contingencies and other factors (many of which are beyond the control of IAG and its directors, officers, employees, agents and advisers) that may cause IAG’s actual results, performance or achievements to differ materially from any future results, performance or achievements predicted, expressed or implied by these forward-looking statements. Subject to any legal or regulatory obligations, IAG disclaims any obligation or undertaking to release any updates or revisions to the information in this presentation to reflect any change in expectations or assumptions. Any forward-looking statements, opinions and estimates in this presentation are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Neither IAG, nor any other person, gives any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this presentation will actually occur and IAG assumes no obligation to update such information. In addition, past performance is no guarantee or indication of future performance. This presentation is not, and does not constitute, an invitation, solicitation, recommendation or offer to buy, issue or sell securities or other financial products in any jurisdiction. This presentation may not be reproduced or published, in whole or in part, for any purpose without the prior written permission of IAG. Local currencies have been used where possible. Prevailing exchange rates have been used to convert local currency amounts into Australian dollars, where appropriate. All references starting with “1H” refer to the six months ended 31 December, being the first half of IAG’s financial year. For example, “1H16” refers to the six months ended 31 December 2015. All references starting with “2H” refer to the six months ended 30 June, being the second half of IAG’s financial year. For example, “2H16” refers to the six months ended 30 June 2016. All references starting with “FY” refer to the financial year ended 30 June. For example, “FY16” refers to the year ended 30 June 2016. 1H16 Results Page 2
Results overview Peter Harmer Managing Director and Chief Executive Officer
Highlights Sound result in challenging environment Gross written premium growth • GWP of $5,543m, down 1.1% • Strong underlying +20.1% margin of 14.2% • On track to realise benefits from $5,543m $2,848m $1,419m $1,070m $197m integration and new +1.6% operating model Group Consumer Business New Zealand Asia -4.1% -1.1% -6.3% 1H16 Results Page 4
Strategic transactions Acquisitions and capital management initiatives to create value • AMI and Wesfarmers insurance acquisitions History of strategic transactions • NSW CTP quota share reinsurance contract • Strategic relationship with Berkshire Hathaway Innovative reinsurance • Effective NZ$5bn cover on February 2011 earthquake transaction addresses run-off event portfolios • Asbestos run-off portfolio solution 1H16 Results Page 5
Capital and dividend Strong position, as quota share benefits flow Regulatory capital Interim dividend 62.7% 60.0% 50.0% 10.0 46.6% 40.0% 30.0% FY15 1.80 1.70 20.0% 1H16 13.0 13.0 1.23 1.14 10.0% 0.0% PCA CET1 1H15 1H16 Target benchmark range Interim dividend (¢) Special dividend (¢) Interim cash payout ratio 1H16 Results Page 6
Financials Nick Hawkins Chief Financial Officer
Financial summary Cash ROE of 14.7% 1H15 1H16 CHANGE GWP ($M) 5,603 5,543 1.1% NET EARNED PREMIUM ($M) 5,154 4,102 20.4% INSURANCE PROFIT ($M) 693 610 12.0% UNDERLYING MARGIN (%) 13.3 14.2 90bps REPORTED MARGIN (%) 13.4 14.9 150bps SHAREHOLDERS’ FUNDS INCOME ($M) 137 38 72.3% NET PROFIT AFTER TAX ($M) 19.5% 579 466 CASH EARNINGS ($M) 653 504 22.8% DIVIDEND (CPS) 13.0 13.0 0% SPECIAL DIVIDEND (CPS) n/a 10.0 n/a CASH ROE (%) 19.8 14.7 510bps PCA MULTIPLE 1.62 1.80 18bps 1H16 Results Page 8
Underlying insurance margin Quota share uplift of c.250bps Insurance margin (reported vs. underlying) • Higher underlying margin of 14.2% (1H15: 13.3%) from blend of: ◦ Favourable Berkshire Hathaway quota share effect of approximately 250bps 14.2% 14.2% 13.1%% 12.5% ◦ Maintenance of strong returns in short 12.0% 11.4% 10.9% tail personal lines ◦ Lower CTP profitability – higher claim 6.3% 6.4% frequency ◦ Pressure on commercial lines in soft 7.0% 6.7% rating environment 13.0% 12.6% 11.5% 18.3% 17.2% 10.7% 14.9% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1H16 Reported Margin Underlying Margin 1H16 Results Page 9
Berkshire Hathaway quota share Reducing earnings volatility and capital requirement CHANGE (VS 1H15) 1H16 QUOTA SHARE IMPACT GWP ($M) 5,543 1.1% None REINSURANCE EXPENSE ($M) 1,632 150.7% Includes 20% of GWP attributable to BH NET EARNED PREMIUM ($M) 4,102 20.4% Reflects higher reinsurance expense NET CLAIMS EXPENSE ($M) 2,589 25.6% 20% attributable to BH, excluding reserve releases COMMISSION EXPENSE ($M) 423 18.3% 20% attributable to BH 26.4% UNDERWRITING EXPENSE ($M) 20% attributable to BH, plus exchange commission 654 59.3% Progressive reduction, <10% in 1H16 TECHNICAL RESERVES INCOME ($M) 174 12.0% Neutral $ effect INSURANCE PROFIT ($M) 610 UNDERLYING MARGIN (%) 14.2 90bps Margin enhancement of approximately 250bps PCA MULTIPLE 1.80 18bps Positive impact of approximately 10bps in 1H16 1H16 Results Page 10
Reinsurance expense Reported reinsurance expense inflated by quota share effect Reinsurance expense • Reported reinsurance expense 8.6% 1,632 00 9.0 8.3% 8.2% amplified by commencement of 00 7.7% 7.4% 8.0 00 Berkshire Hathaway quota share 6.8% 00 6.5% 7.0 00 6.3% 6.3% 6.2% 6.2% 1,196 • Ex-quota share expense ratio trending 00 1,077 6.0 00 down: 310 1,255 00 267 5.0 00 817 ◦ Full realisation of Wesfarmers-related 00 700 4.0 synergies 00 557 00 3.0 436 435 431 00 415 ◦ Lower catastrophe costs 405 886 817 810 00 2.0 700 00 557 • Calendar 2016 catastrophe renewal: 436 431 435 405 415 377 00 1.0 00 - - ◦ $7bn of cover, placed to 80% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1H16 ◦ MER of $200m Reinsurance expense (ex-quota shares) (A$m) Reinsurance expense - quota shares (A$m) ◦ Favourable market conditions Reinsurance expense (ex-quota shares) (% of GWP) 1H16 Results Page 11
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