Financial Report
DIRECTORS’ REPORT
The Directors present their report together with the concise financial report of the consolidated entity, being Insurance Australia Group Limited and its controlled entities for the year ended 30 June 2006 and the audit report thereon.
The following terminology is used throughout the financial report:
- IAG, Parent or Company – Insurance Australia Group Limited.
- IAG Group, Group or Consolidated entity – the Consolidated entity consists of Insurance Australia Group Limited and its subsidiaries.
DIRECTORS OF INSURANCE AUSTRALIA GROUP LIMITED
The names and details of the Company’s Directors in office at any time during or since the end of the financial year are as follows. Directors were in office for this entire period unless otherwise stated.
CHAIRMAN
Mr JA (James) Strong appointed in August 2001
OTHER DIRECTORS
Ms YA (Yasmin) Allen appointed in November 2004
Mr JF (John) Astbury appointed in July 2000
Mr GA (Geoffrey) Cousins appointed in July 2000
Mr ND (Neil) Hamilton appointed in June 2000
Mr RA (Rowan) Ross appointed in July 2000
Mr B (Brian) Schwartz appointed in January 2005
Mr MJ (Michael) Hawker appointed in December 2001
Particulars of Directors’ qualifications and experience are set out on Board of Directors page.
SECRETARIES OF INSURANCE AUSTRALIA GROUP LIMITED
The name and details of the Company’s secretaries at any time during or since the end of financial year are as follows:
Ms AB (Anne) O’Driscoll FCA, ANZIIF (Fellow), GAICD
Ms Anne O’Driscoll was appointed to the position of Company Secretary in July 2002. Before this appointment, Ms O’Driscoll held a number of senior
positions in the IAG Group, including the position of General Manager, Finance. Currently, Ms O’Driscoll is also the Head of Investor Relations &
Capital Planning of IAG.
Mr GD (Glenn) Revell BCom, MBus, FCPA, FCIS, GAICD
Mr Revell was appointed Group Company Secretary in August 2006. Before this appointment, Mr Revell held the position of company secretary in
the IAG Group. Prior to joining IAG, he held the position of General Manager Corporate Affairs & Company Secretary of Howard Smith Limited for
eight years.
MEETINGS OF DIRECTORS
The number of meetings each Director was eligible to attend and actually attended during the financial year is summarised as follows:
| BOARD OF DIRECTORS | AUDIT COMMITTEE | NOMINATION, REMUNERATION & SUSTAINABILITY COMMITTEE | RISK MANAGEMENT & COMPLIANCE COMMITTEE | IAG BOARD SUB-COMMITTEE | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total number of meetings held | 16 | 5 | 5 | 10 | 4 | |||||
| Directors | A | B | A | B | A | B | A | B | A | B |
| Mr JA Strong | 16 | 16 | – | – | 5 | 5 | – | – | 3 | 3 |
| Ms YA Allen | 16 | 16 | – | – | – | – | 10 | 10 | 1 | 1 |
| Mr JF Astbury | 16 | 15 | 5 | 4 | 5 | 4 | – | – | – | – |
| Mr GA Cousins* | 16 | 13 | 5 | 5 | – | – | – | – | – | – |
| Mr ND Hamilton | 16 | 15 | – | – | – | – | 10 | 10 | – | – |
| Mr RA Ross | 16 | 15 | – | – | 5 | 4 | 10 | 10 | 1 | 1 |
| Mr B Schwartz | 16 | 15 | 5 | 5 | – | – | – | – | – | – |
| Mr MJ Hawker | 16 | 15 | – | – | – | – | – | – | 4 | 4 |
A Meetings eligible to attend as a member.
B Meetings attended as a member.
* Mr GA Cousins was granted a leave of absence by the Board from 23 May 2006 to 31 July 2006.
PRINCIPAL ACTIVITIES
The principal continuing activities of the IAG Group are the underwriting of general insurance and related corporate services and investing activities.
OPERATING RESULT FOR THE YEAR
OPERATING AND FINANCIAL REVIEW
The IAG Group’s net profit after tax for the year was $862 million (2005 – $928 million). After adjusting for minority interests in the IAG Group result, net profit attributable to equity holders of the Company was $759 million (2005 – $811 million). The current year result has been determined based on the adoption of the Australian equivalents of the International Financial Reporting Standards and where applicable, the prior year information has been updated to reflect this change. Note 1 of the financial statements provides detailed information on the accounting policies applied and the resultant impact on the prior year financial performance and financial position.
The following discussion includes analysis that is affected by a reclassification of the financial performance of the IAG Group’s captive insurer, by allocating the profit (or loss) earned by the captive from reinsuring the IAG Group’s consolidated operations back to those businesses on a basis which reflects the profit (or loss) it earned from those businesses. The adjustments are summarised in the following table:
| 2006 | 2005 | |||||
|---|---|---|---|---|---|---|
| Financial statements $m |
Captive financial performance $m |
Adjusted financial performance $m |
Financial statements $m |
Captive financial performance $m |
Adjusted financial performance $m |
|
| Premium revenue | 6,537 | – | 6,537 | 6,561 | – | 6,561 |
| Reinsurance expense | (405) | (162) | (567) | (417) | (53) | (470) |
| Net earned premium | 6,132 | (162) | 5,970 | 6,144 | (53) | 6,091 |
| Net claims expense | (3,900) | 145 | (3,755) | (4,090) | 42 | (4,048) |
| Underwriting expenses | (1,699) | 25 | (1,674) | (1,624) | 19 | (1,605) |
| Underwriting profit | 533 | 8 | 541 | 430 | 8 | 438 |
| Net investment income on assets backing insurance liabilities | 310 | (8) | 302 | 516 | (8) | 508 |
| Insurance profit | 843 | – | 843 | 946 | – | 946 |
UNDERWRITING RESULT
The IAG Group produced an underwriting profit before investment income on technical reserves of $541 million (2005 – $438 million). The underwriting profit is affected by interest rate movements which change the discount rate applicable to claims reserves. In 2006, this resulted in a decrease in claims expense by $107 million compared to an increase in claims expense of $88 million in 2005. This resulted in a decrease in the loss ratio to 62.9% (2005 – 66.5%) and the combined ratio to 90.9% (2005 – 92.8%). The increase in the expense ratio to 28.0% (2005 – 26.3%) was mainly attributable to an adverse fire service levy adjustment due to under collection in the first half of the financial year (due to the adoption of ICA rates) and a higher allowance for anticipated assessment for the second half of the financial year. Excluding the impact of movement in interest rates on claims expense, the underlying loss ratio improved to 64.7% (2005 – 65.0%) while the combined ratio worsened to 92.7% (2005 – 91.4%) reflecting the increased expense ratio.
The insurance profit of $843 million (2005 – $946 million), which is considered to be a sound insurance trading result, equated to an insurance margin of 14.1% (2005 – 15.5%). This margin was achieved despite challenging market conditions including the effect of Cyclone Larry.
(a) Australian personal lines insurance operations
The personal lines insurance operations produced an insurance margin of 12.6% for the financial year (2005 – 15.5%). The decline in the insurance margin is directly attributable to the impact of Cyclone Larry as well as the competitive price pressures in all segments and additional expense related to fire service levies. Despite these competitive pressures and the reduction of insurance margin, the business has regained positive momentum with renewal rates higher than they have been for two years and new business volumes recovering. The improved performance is directly related to the initiatives implemented to address the issues arising from the public debate with the Motor Traders Association in the first half of the financial year and selective pricing adjustments.
Gross written premiums decreased by 3.0% to $3,860 million (2005 – $3,978 million) due to strong competition.
(b) Australian commercial lines insurance operations
The commercial lines insurance operations produced an insurance margin of 18.0% for the financial year (2005 – 16.1%). The increase in the margin over the prior year was due to a strong performance in the long tail classes of liability and workers’ compensation and consequent reserve releases. These were significantly offset by deterioration in the claims experience of the short tail commercial portfolio (including the impact of Cyclone Larry) and additional expense related to fire service levies.
Gross written premiums decreased by 9.1% to $1,539 million (2005 – $1,694 million) due to strong competition in a softening rate environment.
Fee based income produced a profit of $8 million (2005 – loss of $14 million). The significant turn around was due to improved profitability in the non-risk workers’ compensation schemes. The premium funding business also continued to generate profits.
(c) International insurance operations
New Zealand insurance operations:
The New Zealand insurance operations produced an insurance margin
of 14.5% for the financial year (2005 – 14.4%). The insurance profit was adversely impacted by a snowstorm in June 2006 in the South Island which incurred around $18 million of gross claims. Nevertheless, a strong insurance result was still achieved in the face of slowing
economic growth and strong competition in a concentrated market.
Gross written premiums decreased by 3.0% to $971 million (2005 – $1,001 million), the reduction being entirely attributable to the depreciation of the New Zealand dollar. In New Zealand dollar terms, the New Zealand operations achieved growth in gross written premium of around 0.5%.
Thailand insurance operations:
The IAG Group acquired IAG Insurance (Thailand) Ltd (formerly Royal
and Sun Insurance Alliance (Thailand) Ltd) on 4 July 2005 and Safety Insurance Public Company Limited on 31 March 2006. Gross written premium for the date of acquisition to 30 June 2006 was $65 million with a combined ratio of 95.2%. The IAG Group has identified and
implemented initiatives to capitalise on growth relevant to the Thailand insurance market, including introducing new products, skills, technology and distribution strategies.
AmAssurance, Malaysia:
On 10 March 2006, IAG completed its acquisition of a 30% stake
in AmAssurance. The agreement includes a right to increase the
IAG Group’s holding to 40% by March 2008 and an option, subject
to regulatory approval, to increase to 49% over time. The increase
is likely to occur if the business needs more capital to support its
expansion whether organically or through acquisition.
Under the principles of equity accounting, IAG recognised 30% of AmAssurance’s profit as a share of profits from associates in the income statement. This amounted to $2 million for the quarter ended 30 June 2006.
Captive reinsurer:
The Captive acts solely as the IAG Group’s reinsurer assuming risk
from other parts of the business and obtaining reinsurance protections
for the IAG Group in the open market. The insurance result decreased
by $133 million due to a loss of $56 million in the financial year. This
was mainly driven by losses from Cyclone Larry in tandem with the IAG
Group’s decision to accept higher catastrophe retention levels, facilitated
in part through the issue of contingent capital in the form of reset
exchangeable securities by the IAG Group in January 2005. As previously
discussed, the Captive’s financial performance has been allocated to the
Australian personal and commercial lines, the New Zealand and Thailand
insurance operations.
(d) Corporate and investments
Investment income on corporate and equity holders’ funds (net of investment expenses) increased by 7.4% to $537 million. The increase was due to the strong investment performance by all the major asset classes, particularly Australian equities, in the current financial year. The net corporate expenses have increased by $6 million or 4.2% to $148 million. This increase was mainly attributable to the increase in borrowing costs by $17 million in the current financial year due to the reclassification of reset preference shares as debt under AIFRS, offset to some extent by the netting off of interest on the reset exchangeable securities against portfolio investment income. This was offset by a decrease in amortisation of intangibles by $5 million and a decrease in other fee based business expenses of $6 million.
REVIEW OF FINANCIAL CONDITION
(a) Financial position
Assets:
The total assets of the IAG Group as at 30 June 2006 are
$16,972 million (2005 – $17,102 million). The decrease is mainly
attributable to the payment of a special dividend in June 2006 and
an increase in income taxes paid resulting in a reduction in total
investments.
Liabilities:
The total liabilities of the IAG Group as at 30 June 2006 are
$13,301 million (2005 – $12,599 million) with the major component being general insurance liabilities of $10,430 million (2005 – $10,426 million). The increase in liability is mainly attributable to the:
- reclassification of $550 million of reset preference shares (issued by IAG in 2002 and 2003) as an interest-bearing liability from 1 July 2005 on transition to AIFRS. Previously under AGAAP they were classified as equity; and
- reclassification of minority interests in unitholder funds as liability from 1 July 2005 on transition to AIFRS. Previously under AGAAP these were classified as minority interests in equity.
The increases were offset to some extent by decreases in current tax liabilities and employee benefits provisions. The decrease in current tax liabilities was mainly attributable to a significant increase in PAYG payments during the year and the settlement of income tax payable for the 2005 financial year. The decrease in employee benefits provisions was mainly attributable to actuarial gains on the defined benefit plan during the financial year.
Equity:
Equity was impacted by the following activities during the year:
-
Increase:
- net profit of $862 million.
-
Decrease:
- reclassification of reset preference shares and minority interests in unitholder funds to liability (see comment in liabilities above); and
- payment of dividends of $647 million.
(b) Cash from operations
Cash flows from operating activities:
Cash flows from operating activities have decreased by 58% to $387 million. The decrease is mainly attributable to a decrease in premiums received and an increase in gross claims paid. Other factors contributing to the decrease were:
- an increase in reinsurance expense paid due to an advance reinsurance payment in June 2006;
- timing of income tax paid which resulted in the 2006 cash flows including instalments for two years;
- an increase in interest payments due to the reclassification of reset preference shares to liabilities; and
- an increase in other operating payments due to commencement of superannuation contributions in June 2005 (as a result of the cessation of the contribution holiday in the IAG & NRMA Superannuation Plan) and increase in fire service levies.
The decrease was offset to some extent by the increase in reinsurance and other recoveries received which includes recoveries on an aggregate excess of loss cover.
Cash flows from investing activities:
Cash inflows from investing activities have increased by $1,018 million
to $822 million. The increase is largely attributable to the higher level of redemption of investments in 2006 to fund the surplus capital fund in light of acquisitions in Thailand and Malaysia, as well as increased dividend and income tax payments. In addition there was a net redemption of units in IAG controlled trusts by minority interests.
Cash flows from financing activities:
Cash outflows from financing activities have increased by $245 million to $937 million. This increase is attributable to:
- $205 million in additional dividends paid in the 2006 financial year;
- net redemptions of units in IAG controlled trusts of $136 million in the year compared with $128 million in the prior year;
- the repayment of $46 million of NZ senior term notes during the financial year; and
- the purchase of treasury shares.
There was no issue of reset exchangeable securities (“RES”) during the year. In the prior year, the issue of RES and the investment of the proceeds from RES in the Portfolio involved a net outflow of $13 million, mainly attributable to the transaction costs associated with the issue.
(c) Capital adequacy / minimum capital requirements
The IAG Group minimum capital requirement (“MCR”) multiple, calculated by applying APRA standards for individual licensed insurers to the consolidated results, is 1.83 times MCR as at 30 June 2006 (2005 – 2.00 times MCR). The multiple remains above the IAG Group’s current benchmark multiple of 1.55 times MCR.
Further information on the IAG Group’s result and review of operations can be found in the 30 June 2006 Investor Report on the Company’s website, www.iag.com.au.
LIKELY DEVELOPMENTS
Insurance and investment operations are, by their nature, volatile due to the exposure to natural disasters and industry cycles and thus profit predictions are difficult.
The IAG Group expects to grow and diversify its earnings in the 2007 financial year and:
- generate gross written premium growth of 5 – 10%, including acquisitions;
- deliver a return on equity (“ROE”) of at least 1.5 times the weighted average cost of capital (“WACC”) on a normalised basis; and
- maintain its strong balance sheet and prudent reserving philosophy.
The organic growth expectation takes account of:
- leveraging the IAG Group’s current competitive position and positive momentum in direct motor and home insurance;
- reduced premium in New South Wales compulsory third party (“CTP”) due to changes in the scheme structure which result in lower premiums;
- the soft cycle in commercial insurance in Australia and New Zealand; and
- ongoing strong growth in the IAG Group’s Thai subsidiaries.
Acquisitive growth is likely to be sourced in Asia and Europe. Delivering on ROE at least 1.5 times WACC is considered achievable based on:
- continued focus on cost management including leveraging the capacity in the existing business to write additional business at marginal additional cost;
- maintaining pricing discipline for premiums;
- being disciplined in the price paid for acquisitions; and
- continued active capital management.
Delivery of these returns is also subject to not incurring any large losses or catastrophes beyond the IAG Group’s normal allowances and experiencing no major falls in bond values.
DIVIDENDS
Details of dividends paid or declared by the Company are set out in note 6.
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
Significant changes in the state of affairs of IAG Group during the financial year were as follows:
(a) On 9 December 2005, the IAG Group announced that it had agreed to acquire a 30% interest in a general insurer in Malaysia, AmAssurance Berhad, for approximately A$69 million (MYR 193 million);
(b) On 30 March 2006, the IAG Group announced that it has completed its tender offer for shares in Thailand for Safety Insurance Public Company Limited (“Safety”). As a result, the IAG Group has acquired approximately 96.1% which has increased from 21.6% since its initial investment in 1998;
(c) On 12 April 2006, IAG announced a special fully franked dividend of 12.5 cents per shares to be paid to its shareholders on 26 June 2006. This payment is in line with its commitment to return $200 million in surplus capital to shareholders by 30 June 2006;
(d) On 15 June 2006, IAG announced it agreed to acquire a newly-formed Lloyd’s managing agency and specialist Asian syndicate to support the development and management of its expanding Asian business. The businesses operate as Alba Group Pte Limited and have been newly established. The syndicate has access to all markets in which Lloyd’s is licensed. The terms of the acquisition are confidential but neither the purchase price nor the capital required in the first two years from completion is material to the IAG Group. A letter of credit was issued in support of the IAG Group’s participation. The terms of the acquisition are subject to final regulatory approval from the relevant regulatory authorities in Singapore and the United Kingdom.
EVENTS SUBSEQUENT TO REPORTING DATE
Details of matters subsequent to the end of the financial year are set out in note 10. These include:
- declaration of final dividend of 16 cents per ordinary share; and
- progress of negotiations with a China based general insurance business.
OFFICERS WHO WERE PREVIOUSLY PARTNERS OF THE AUDITORS
The following person is currently an officer of the IAG Group and was a partner of KPMG, the Company’s auditor, at a time when KPMG was the auditor of the Company:
- Mr NB Hawkins: Chief Executive Officer – IAG New Zealand (left KPMG in October 2001).
NON-AUDIT SERVICES
During the financial year, KPMG has performed certain other services for the IAG Group in addition to their statutory duties.
The Directors have considered the non-audit services provided during the financial year by KPMG and, in accordance with written advice provided by resolution of the Audit Committee, are satisfied that the provision of those non-audit services by the Company’s auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:
- all non-audit assignments were approved in accordance with the process set out in the IAG Audit Committee Charter (“Charter”) on the agreed framework for engaging auditors for non-audit services; and
- the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence of the Institute of Chartered Accountants in Australia and CPA Australia, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.
A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is included in the directors’ report.
The level of fees for non-audit services amount to approximately 27.8% of total audit fees (refer to note 5 of the full financial statements for further details on costs incurred on individual non-audit assignments).
LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001
The lead auditor’s independence declaration is set out on page 61 and forms part of the directors’ report for the year ended 30 June 2006.
INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
The Company’s constitution contains an indemnity in favour of every person who is or has been:
(a) a Director of the Company;
(b) a secretary of the Company or of a subsidiary of the Company; or
(c) a person making or participating in making decisions that affect the whole or a substantial part of the business or Company or of a subsidiary of the Company; or
(d) a person having the capacity to affect significantly the financial standing of the Company or of a subsidiary of the Company.
The indemnity applies to liabilities incurred by the person in the relevant capacity (except a liability for legal costs). That indemnity also applies to legal costs incurred in defending or resisting certain legal proceedings. The indemnity does not apply where the Company is forbidden by statute or, if given, would be made void by statute. In addition, the Company has granted deeds of indemnity to certain current and former Directors and secretaries and members of senior management of the Company and its subsidiaries and associated companies. Under these deeds, the Company indemnifies, to the maximum extent permitted by the law, the former or current Directors or secretaries or members of senior management against liabilities incurred by the person in the relevant capacity. The indemnity does not apply where the liability is owed to the Company or any of its subsidiaries or associated companies, or (in general terms) where the liability arises out of a lack of good faith, willful misconduct, gross negligence, reckless misbehavior or fraud.
Under each deed, the Company is also effectively required to maintain and pay the premiums on a contract of insurance covering the current or former Directors or members of senior management against liabilities incurred in respect of the relevant office. The insurance must be maintained until the seventh anniversary after the date when the relevant person ceases to hold office. Disclosure of the insurance premiums and the nature of liabilities covered by such insurance is prohibited by the relevant contract of insurance.
ENVIRONMENTAL REGULATION
The IAG Group’s operations are subject to environmental regulations under either Commonwealth or State legislation. These regulations do not have a significant impact on the IAG Group’s operations. The Board of Directors believes that the IAG Group has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the IAG Group.
REMUNERATION REPORT
This report outlines the Board’s policy in relation to, and details of, the remuneration of IAG key management personnel (“KMP”) being, the IAG Directors (including the Chief Executive Officer and Managing Director) and the senior executives having the greatest authority and responsibility for planning, directing and controlling the activities of the IAG Group, including the five executives receiving the highest remuneration during the financial year.
It is important to note that the Company’s Non-executive Directors are specifically required to be included as key management personnel in accordance with the accounting standard AASB 124 Related Party Disclosures. However, the Non-executive Directors do not consider that they are part of “management”.
The term “remuneration” used in the remuneration report has the same meaning as compensation as prescribed in the accounting standard AASB 124.
This report provides the disclosures which meet the remuneration reporting requirements of the Corporations Act 2001 and the accounting standard AASB 124.
NOMINATION, REMUNERATION & SUSTAINABILITY COMMITTEE
The role and responsibilities of the Nomination, Remuneration & Sustainability Committee (“Committee” or “NRSC”) are set out in the Committee’s charter which is available at www.iag.com.au. The key responsibilities of the NRSC in relation to remuneration are to:
(a) provide assurance to the Board relating to the effectiveness, integrity and compliance of the Company’s remuneration policies and practices; and
(b) ensure the overall remuneration policy and approach fits the strategic goals of IAG.
The Chief Executive Officer (“CEO”), Group Executive Culture & Reputation and Head of Human Resources regularly attend Committee meetings and assist the Committee in its deliberations.
The Committee receives reports from Mercer Human Resources Consulting and various other consultants on remuneration for executives and directors. Mallesons Stephen Jaques provides legal advice to the Committee as required.
REMUNERATION REPORT – AUDITED INFORMATION
A. EXECUTIVES
1. EXECUTIVE REMUNERATION POLICY
IAG’s approach to executive remuneration is to ensure that IAG can attract and retain the best people and reward performance in line with returns delivered to shareholders. Building and retaining a high quality management team has enabled IAG to achieve superior long term performance.
The principles that underpin IAG’s approach to executive remuneration are that:
- the quantum and mix of remuneration is sufficiently competitive to attract and retain a high calibre executive team;
- remuneration practices are consistent with IAG’s values;
- the mix of fixed and variable remuneration reflects the impact of each executive position on IAG’s short term and long term results;
- remuneration levels take account of both external market practice and internal relativities; and
- measures of performance are based on a balanced scorecard with a focus on the delivery of sustainable value to our shareholders.
IAG aims to set base pay around the market median and total potential reward (which includes short and long term incentives) between the median and the 75th percentile depending on individual performance and contribution to the IAG Group’s results. Market positioning is determined by reference to a number of comparator groups, being: the largest 50 companies in the S&P / ASX 100 index; financial services companies that are among the largest 50 companies in the S&P / ASX 100 index and companies in the S&P / ASX 100 index with a market capitalisation of between 50% and 200% of IAG’s capitalisation.
2. EXECUTIVE REMUNERATION STRUCTURE
Executive remuneration consists of four components:
- base salary
- superannuation
- short term incentives
- long term incentives
(a) Base salary
Base salary is defined as the total value of components that make up an executive’s salary. Components are cash, salary sacrifice items such as superannuation, cars or parking and any related taxes. Base salary is determined by a review of job size, internal relativities and market benchmarking. Mercer Human Resources Consulting provides advice on job responsibility and market benchmarking. The comparator groups for market benchmarking are the largest 50 companies in the S&P / ASX 100 index, financial services companies that are among the largest 50 companies in the S&P / ASX 100 index and companies in the S&P / ASX 100 index with a market capitalisation of between 50% and 200% of IAG’s capitalisation. Base salary is targeted at the median of the market. Unless there has been a significant change in job responsibility, increases in base salary generally do not exceed external market movements.
(b) Superannuation
Executives are defined contribution members of the IAG & NRMA Superannuation Plan. Employer superannuation contributions are 13% of base salary. This contribution rate is consistent with the contribution provided to other employees of IAG.
(c) Short term incentives
Executives have the opportunity to earn a short term incentive payment based on both IAG’s performance and achievement of individual goals.
IAG uses a balanced scorecard for setting goals and measuring performance. This ensures that assessment of performance is viewed holistically and assists the development of a sustainable business that meets the performance expectations of IAG’s shareholders, stakeholders and the communities in which it conducts its business.
The balanced scorecard sets goals under the following broad categories:
- financial
- customer
- people
- risk
- community / environment
At the commencement of each financial year, IAG and individual goals are set for each executive. The goals set are stretch goals and are designed to encourage executives to strive for exceptional performance. At the end of the financial year the amount of any incentive payment is determined based on measured achievement against those goals and a review of the executive’s overall performance by the CEO and NRSC. The NRSC reviews the performance of the CEO and makes a recommendation to the Board in relation to any incentive payment for the CEO.
The following table is a summary of IAG’s key goals for the current year:
| Category | Goal | Reason Chosen | Method of Assessment | Outcome |
|---|---|---|---|---|
| Finance | Group insurance margin target | Measures the profitability of the core business of IAG | Comparison of achievement against target | Not met |
| Customer | Improvement across customer satisfaction measures | Meeting or exceeding customer expectations is a key part of establishing and maintaining a competitive advantage | Outcome of customer satisfaction surveys and measurement of customer retention rates compared to outcomes from previous years | Met |
| Risk | Improvement in risk management behaviours | Positive risk management behavior in relation to prevention, detection and recovery from operational risks and issues is critical for a sustainable business | Increased employee awareness of risk prevention, detection and recovery compared to target set at the start of the year | Partially met(1) |
| People management | Employee engagement score target | Measures how engaged employees are with IAG’s purpose, strategy and goals | Outcome of annual employee survey compared to target set at the start of the year | Partially met(1) |
| People management | Reduction in employee turnover | A solid employee base is critical for growing IAG’s business for the benefit of customers, shareholders and the wider community | Comparison of outcome achieved against target set at the start of the year | Not met |
| Community / environment | Reduction in workers’ compensation claims per million hours worked | A safe work environment and the well being of employees is vital for growing IAG’s business for the benefit of customers, shareholders and the wider community | Comparison of reduction achieved against target set at the start of the year | Partially met(1) |
(1) Where a goal is partially met, there has been improvement in performance but the stretch goal has not been met.
The methods of assessment have been selected as they can be objectively measured and verified.
Actual short term incentive payments made to executives for the year ended 30 June 2006 reflect the degree of achievement against these goals and the degree of achievement against each individual executive’s goals.
(d) Long term incentives – Equity based remuneration
IAG utilises long term incentives to create a link between the delivery of value to shareholders, financial performance and rewarding and retaining employees. IAG’s program for delivering long term incentives is its Performance Award Rights (“PARs”) Plan. Note 30(a) of the full financial statements sets out further details of the PARs Plan.
PARs are rights over issued shares held by a trustee. The rights are granted at no cost to executives and may be exercised for a nominal price if a performance hurdle related to IAG’s Total Shareholder Return (“TSR”) is met or if some specified events occur, such as a takeover bid for the Company. During the year PARs were issued to executives. Previously IAG delivered long term incentives using its Performance Share Rights (“PSRs”) Plan with the last issue to the executives on 5 March 2002. Note 30(b) of the full financial statements sets out further details of the PSRs Plan.
Details of the terms of allocations made to executives under IAG’s long term incentive plans, including those allocations that at the date of this report are not exercisable, are summarised below:
| Plan | PARs Plan 2002 / 2003 – Series 1 | PARs Plan 2003 / 2004 – Series 2 | PARs Plan 2004 / 2005 – Series 3 | PARs Plan 2005 / 2006 – Series 4 |
|---|---|---|---|---|
| Grant Date | 24/12/2002 | 22/09/2003 10/12/2003 26/03/2004 |
17/09/2004 30/11/2004 |
19/09/2005 30/11/2005 22/03/2006 |
| Performance Period Definition(i) | 3 – 5 years from Grant Date | 3 – 5 years from Base Date(ii) | 3 – 5 years from Base Date(ii) | 3 – 5 years from Base Date(ii) |
| TSR Performance Condition | IAG TSR compared to a Peer Group of companies. The Peer Group comprises the companies in the S&P / ASX 100 index with such inclusions and exclusions as the Board may determine. | |||
| Vesting Schedule | < 50th percentile – 0% vesting = 50th percentile – 50% vesting >=75th percentile – 100% vesting The percentage of PARs which vest and become exercisable increases proportionately where IAG’s performance ranks between the 50th and 75th percentile |
|||
| Performance Hurdle Test Schedule | Quarterly – Last trading day of each calendar quarter in performance period | Quarterly – Last trading day of each calendar quarter in performance period | Quarterly – Last trading day of each calendar quarter in performance period | Quarterly – Last trading day of each calendar quarter in performance period |
| 1st Test Day | 30/12/2005 | 29/09/2006 | 28/09/2007 | 30/09/2008 |
| Last Test Day | 28/09/2007 | 30/06/2008 | 30/06/2009 | 30/06/2010 |
| Last Exercise Date (Continuing employees only) | 24/12/2012 | 22/09/2013 10/12/2013 26/03/2014 |
17/09/2014 30/11/2014 |
19/09/2015 30/11/2015 22/03/2016 |
| Plan Exercise Status | Partially exercisable(iii) | Not exercisable | Not exercisable | Not exercisable |
Notes:
(i) The performance period will be shortened if the employee ceases employment with the IAG Group due to redundancy or in other special circumstances.
(ii) The Base Date is the date which is the second trading day after the date on which IAG’s financial results for the twelve month period ending on the 30 June that immediately precedes the Grant Date are announced to the ASX.
(iii) 56% of Series 1 PARs are exercisable.
3. RELATIONSHIP BETWEEN EXECUTIVE REWARD AND IAG’S PERFORMANCE
A significant component of executive remuneration is “at risk” which ensures a direct link between IAG’s performance and reward for executives. For further details of the percentage of “at risk” remuneration, refer to the table in section 6.
The payment of short-term incentives is directly linked to IAG’s performance over the previous year based on a balanced scorecard of measures, which includes a measure of the profitability of IAG’s core business. Non-financial measures are also used as they are lead indicators of delivering future value for shareholders. For the 2005 / 2006 year the IAG key goals were partially met. This will determine the portion of an executive’s short term incentive payment that is linked to IAG’s goals.
The use of the balanced scorecard to assess and reward executive performance has assisted IAG to deliver superior returns for shareholders since listing in August 2000:
| Year ended 30 June 2001 |
Year ended 30 June 2002 |
Year ended 30 June 2003 |
Year ended 30 June 2004 |
Year ended 30 June 2005 |
Year ended 30 June 2006 |
|
|---|---|---|---|---|---|---|
| Closing share price ($) | 3.40 | 3.15 | 3.40 | 5.00 | 6.01 | 5.35 |
| Dividends paid (cents) | 10.00 | 10.50 | 11.50 | 22.00 | 26.50 | 42.00 |
| Earnings per share (cents)* | 9.40 | (1.78) | 8.65 | 37.87 | 49.31 | 47.87 |
| Normalised net profit after tax ($ million)* | 178 | 294 | 360 | 434 | 601 | 542 |
* Amounts in 2005 and 2006 have been measured under Australian equivalent to International Financial Reporting Standards (“AIFRS”). All amounts prior to 2005 were measured under previous Australian Accounting Standards.
IAG’s long term incentive plans provide a direct link between return to shareholders over a 3 to 5 year period and executive reward. IAG’s TSR measured from March 2003 until January 2006 was at the 53rd percentile compared to the TSR of companies in the S&P / ASX 100 index. As a result of this, 56% of PARs issued to executives in December 2002 became exercisable for IAG shares.
Grants of PARs to executives are based on an assessment of each executive against a range of factors including the executive’s performance, their strategic impact and leadership capability. This process strengthens the link between individual executive reward outcomes and the creation of value for shareholders.
IAG’s share price performance from the period since IAG’s listing in August 2000 is shown in the following graph:
4. SERVICE AGREEMENTS
During the year the following persons were the executives identified as key management personnel, with the greatest authority and responsibility for planning, directing and controlling the activities of the IAG Group:
| Name | Current title |
|---|---|
| Mr MJ Hawker | Chief Executive Officer and Managing Director |
| Mr JP Breheny(i) | Chief Executive Officer – Asia |
| Mr AM Coleman | Chief Risk Officer and Group Actuary |
| Mr NB Hawkins(ii) | Chief Executive Officer – IAG New Zealand |
| Mr DA Issa(ii) | Chief Executive Officer – Personal Insurance |
| Ms JS Johnson(ii) | Chief Executive Officer – Business Partnerships |
| Ms CF McLoughlin(iii) | Group Executive – Strategy |
| Ms SJ Mostyn | Group Executive – Culture & Reputation |
| Mr MJ Pirone | Chief Executive Officer – CGU |
| Mr J van der Schalk(iv) | Chief Executive Officer – Asset Management & Reinsurance |
| Mr G Venardos | Chief Financial Officer |
(i) Mr JP Breheny, joined the IAG Group as Chief Executive Officer – Asia, on 20 March 2006.
(ii) On 8 February 2006, IAG announced a new structure for its operations. This led to a change in the executive team structure. Mr DA Issa has held his current position since this time and previously held the position of Chief Information Officer. Mr NB Hawkins and Ms JS Johnson were appointed to their roles on 1 March 2006 and 13 February 2006 respectively.
(iii) Ms CF McLoughlin, joined the IAG Group on 2 August 2005 and her current position is Group Executive – Strategy.
(iv) On 26 May 2006 Mr Jan van der Schalk was appointed to the role of Chief Executive Officer – Asset Management & Reinsurance following Mr RJ Jackson leaving the IAG Group.
Mr IF Brown retired on 31 December 2005. Mr DRA Pearce left on 31 August 2005, Mr DJP Smith left on 8 February 2006 and Mr RJ Jackson left on 26 May 2006.
All service agreements for executives are unlimited in term but may be terminated by written notice from either party or by IAG making a payment in lieu of notice. The service agreements outline the components of remuneration paid to executives and require the remuneration of executives to be reviewed annually. The service agreements do not require IAG to increase base salary, pay a short term incentive or offer a long term incentive in any given year.
| Name | Notice period, Company | Notice period, Employee | Termination provisions | Additional payment if IAG invokes a restraint clause |
|---|---|---|---|---|
| Mr MJ Hawker | 12 months | 6 months | 12 months base salary, plus payment for annual leave, long service leave and short-term incentive that would have accrued had termination not occurred. | 6 months base salary |
| Mr JP Breheny | 12 months | 3 months | 12 months base salary | – |
| Mr AM Coleman | 12 months | 3 months | 12 months base salary | 6 months base salary |
| Mr NB Hawkins | 12 months | 3 months | 12 months base salary | – |
| Mr DA Issa | 12 months | 3 months | 12 months base salary | – |
| Ms JS Johnson | 12 months | 3 months | 12 months base salary | – |
| Ms CF McLoughlin | 6 months | 2 months | 6 months base salary | – |
| Ms SJ Mostyn | 12 months | 3 months | 12 months base salary | – |
| Mr MJ Pirone | 12 months | 3 months | 12 months base salary | 6 months base salary |
| Mr J van der Schalk | 12 months | 3 months | 12 months base salary | – |
| Mr G Venardos | 12 months | 3 months | 12 months base salary | 6 months base salary |
Executives are employed by Insurance Australia Group Services Pty Limited, except for Mr NB Hawkins who is employed by IAG New Zealand Limited.
(a) Retrenchment
In the event of retrenchment, the executives listed above (except for Mr MJ Hawker) are entitled to the greater of:
(i) the written notice or payment in lieu of notice as provided in their service agreement; or
(ii) the retrenchment benefits due under the relevant company retrenchment policy.
For Mr MJ Hawker, the retrenchment payment is in accordance with the termination provisions set in the table above.
(b) Company retrenchment policy
On retrenchment, employees with less than 25 years service will receive:
(i) at least eight weeks notice or payment in lieu of notice (calculated on the employee’s base salary); and
(ii) three weeks base salary for each year of continuous service to a maximum of 75 weeks base salary.
The minimum benefit that can be received is 11 weeks base salary and the maximum benefit that can be received is 83 weeks base salary.
On retrenchment, employees with 25 or more years of service or who are over 45 years of age will receive:
(i) at least twelve weeks notice or payment in lieu of notice (calculated on the employee’s base salary); and
(ii) three weeks base salary for each year of continuous service to a maximum of 75 weeks base salary.
The minimum benefit that can be received is 15 weeks base salary and the maximum benefit that can be received is 87 weeks base salary.
(c) Termination of employment without notice and without payment in lieu of notice
The employment of the executives may be terminated without notice or payment in lieu of notice in some circumstances. Generally, this could occur where the executive: is charged with a criminal offence that is capable of bringing the organisation into disrepute; is declared bankrupt; breaches a provision of their employment agreement; is guilty of serious and willful misconduct; or unreasonably fails to comply with any material and lawful direction given by the Company.
(d) Termination of employment with notice or payment in lieu of notice
The employment of the executives may be terminated at any time by the Company with notice or payment in lieu of notice (which also includes a pro rata short term incentive earned but not paid). The amount of notice the Company must provide or the payment in lieu of notice is specified above.
5. REMUNERATION DETAILS
(a) Remuneration of executives for the IAG Group for 2006
(b) Remuneration of executives for the IAG Group for 2005
(c) Details of notes (1) to (9) used in tables in sections 5(a) and (b)
(1) Salary represents amounts paid in cash during the financial year.
(2) Non-monetary benefits are valued in accordance with the cost to IAG for provision of cars, parking and related fringe benefits tax on a salary sacrifice basis.
(3) Annual leave accruals as determined in accordance with AASB 119 Employee Benefits.
(4) Short term incentive to be settled for the current performance period accrual and prior performance periods over or under accruals. Executives may elect to receive some of their short term incentive in the form of IAG shares rather than cash through participation in the Bonus Equity Share Plan, which vests immediately and is valued in accordance with the market value of IAG shares at grant date. Refer to note 29(c) of the full financial report for details.
(5) Represents an accommodation allowance in New Zealand.
(6) Superannuation includes the employer’s contributions (2005 – the amount included the first 11 months contributions which was recognised on a deemed basis as the employer was on a contribution holiday).
(7) Long service leave accruals as determined in accordance with AASB 119 Employee Benefits.
(8) Long term incentive to be settled in cash from the 2002 / 2003 IMA long term incentive plan (only relevant to Mr Jackson). The amount in the 2005 table represented the 2005 performance period accrual and prior performance periods over or under accruals.
(9) An allocated portion of Performance Share Rights (“PSRs” – related to unissued shares) and unvested Performance Award Rights (“PARs” – related to issued shares) is included in the total remuneration disclosure above. To determine these values the Monte Carlo model has been applied. The valuation takes into account the exercise price of the PSRs / PARs, life of the PSRs / PARs, current price of IAG shares, expected volatility of the IAG share price, expected dividends, risk free interest rate, the performance of the shares in the Peer Group of companies, early exercise and non transferability, and turnover.
6. AT RISK REMUNERATION
Total remuneration for executives is comprised of “at risk” and “not at risk” remuneration. Base salary and superannuation is “not at risk”, while short term incentives and long term incentives are “at risk”.
(a) Details of total remuneration that is “at risk”
| Name | Total remuneration $000 |
Short term incentives $000 |
Long term incentives (IMA LTI / PSRs / PARs) $000 |
Percentage of remuneration at risk(1) % |
Percentage of option / right remuneration % |
|---|---|---|---|---|---|
| 2006 | |||||
| Mr MJ Hawker | 3,040 | 632 | 982 | 53 | 32 |
| Mr JP Breheny | 308 | 76 | 21 | 31 | 7 |
| Mr AM Coleman | 1,340 | 367 | 213 | 43 | 16 |
| Mr NB Hawkins | 387 | 84 | 52 | 35 | 13 |
| Mr DA Issa | 1,205 | 331 | 187 | 43 | 16 |
| Ms JS Johnson | 318 | 94 | 21 | 36 | 7 |
| Ms CF McLoughlin | 751 | 195 | 49 | 32 | 7 |
| Ms SJ Mostyn | 1,184 | 336 | 211 | 46 | 18 |
| Mr MJ Pirone | 1,331 | 395 | 203 | 45 | 15 |
| Mr J van der Schalk | 73 | 17 | 9 | 36 | 12 |
| Mr G Venardos | 1,495 | 393 | 247 | 43 | 17 |
| 2005 | |||||
| Mr MJ Hawker | 3,264 | 1,270 | 614 | 58 | 19 |
| Mr IF Brown | 1,298 | 342 | 127 | 36 | 10 |
| Mr AM Coleman | 1,227 | 434 | 145 | 47 | 12 |
| Mr DA Issa | 1,191 | 476 | 125 | 50 | 10 |
| Mr RJ Jackson | 1,529 | 402 | 384 | 51 | 7 |
| Ms SJ Mostyn | 1,119 | 366 | 167 | 48 | 15 |
| Mr DRA Pearce | 895 | 230 | 110 | 38 | 12 |
| Mr MJ Pirone | 1,338 | 520 | 135 | 49 | 10 |
| Mr DJP Smith | 1,177 | 202 | 135 | 29 | 11 |
| Mr G Venardos | 1,444 | 451 | 171 | 43 | 12 |
(1) Reductions in the percentage of remuneration “at risk” from 2005 to 2006 are largely the result of lower actual short term incentives being awarded in 2006.
(b) Short term incentives
The portion of the short term incentives that either vested or were forfeited during the year cannot be determined as no maximum or target amount is set. Executives may be paid a short term incentive based on IAG’s performance and their own performance. The amount of short term incentives paid to an executive is recommended by the CEO and approved by the NRSC. The amount of short term incentives paid to the CEO is recommended by the NRSC and approved by the Board.
(c) Long term incentives
For the year ended 30 June 2006, 56% of PARs issued to the eligible executives in December 2002 are exercisable. There was no forfeited PARs because the person did not meet the service and performance criteria. No part of the forfeited rights are payable in future years.
It is not practical to provide an estimate of the maximum possible total value of long term incentives that may vest in future years for any PARs issued up to 30 June 2006 because the value is directly linked to the IAG share price at the time of vesting. The minimum possible total value of long term incentives is zero.
7. LONG TERM INCENTIVES – PARS AND PSRS
Rights under the PARs Plan and PSRs Plan were issued by the IAG Group and used as long term incentives. Refer to sections 2(d) for further details.
The following sections provided details movements in PARs and PSRs for each executive during the financial year ended 30 June 2006.
(a) PARs
(i) Details of PARs granted
The IAG Group has issued PARs to the executives during the financial year for nil consideration. Each executive who participates in the plan becomes eligible to receive an ordinary share per PAR, by paying the exercise price of $1 per tranche of PARs exercised, subject to a specific performance hurdle being met. Refer to section 2(d) for details of the performance hurdle.
Following are details of the number of PARs granted to each executive during the financial year ended 30 June 2006:
| Grant date | Date first exercisable | Last expiry date | Value per PAR at grant date $ |
PARs granted during the year Number | |
|---|---|---|---|---|---|
| Mr MJ Hawker | 30/11/2005 | 30/09/2008 | 30/11/2015 | 2.596 | 600,000 |
| Mr JP Breheny | 22/03/2006 | 30/09/2008 | 22/03/2016 | 3.150 | 100,000 |
| Mr AM Coleman | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 90,000 |
| Mr NB Hawkins | * | * | * | * | * |
| Mr DA Issa | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 83,500 |
| Ms JS Johnson | * | * | * | * | * |
| Ms CF McLoughlin | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 80,000 |
| Ms SJ Mostyn | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 80,000 |
| Mr MJ Pirone | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 90,000 |
| Mr J van der Schalk | * | * | * | * | * |
| Mr G Venardos | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 100,000 |
| Executives who ceased as key management personnel during the year: | |||||
| Mr IF Brown | – | – | – | – | – |
| Mr RJ Jackson | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 90,000 |
| Mr DRA Pearce | – | – | – | – | – |
| Mr DJP Smith | 19/09/2005 | 30/09/2008 | 19/09/2015 | 3.187 | 80,000 |
| 1,393,500 | |||||
* All PARs granted prior to Mr Hawkins’, Ms Johnson’s and Mr van der Schalk’s appointment to their executive role are excluded.
(ii) Movements in total number of PARs on issue by each executive
| PARs on issue 1 July 2005 Number |
PARs granted during the year Number |
PARs exercised during the year(2) Number |
PARs lapsed during the year Number |
PARs on issue 30 June 2006 Number |
PARs vested and exercisable 30 June 2006 Number |
|
|---|---|---|---|---|---|---|
| Mr MJ Hawker | 1,200,000 | 600,000 | (168,000) | – | 1,632,000 | – |
| Mr JP Breheny | – | 100,000 | – | – | 100,000 | – |
| Mr AM Coleman | 258,195 | 90,000 | (54,176) | – | 294,019 | – |
| Mr NB Hawkins | 168,456(1) | – | – | – | 168,456 | – |
| Mr DA Issa | 223,177 | 83,500 | (47,675) | – | 259,002 | – |
| Ms JS Johnson | 87,300(1) | – | (5,972) | – | 81,328 | – |
| Ms CF McLoughlin | – | 80,000 | – | – | 80,000 | – |
| Ms SJ Mostyn | 214,307 | 80,000 | (45,508) | – | 248,799 | – |
| Mr MJ Pirone | 239,881 | 90,000 | (47,675) | – | 282,206 | – |
| Mr J van der Schalk | 149,004(1) | – | – | – | 149,004 | 22,753 |
| Mr G Venardos | 305,048 | 100,000 | (66,745) | – | 338,303 | – |
| Total | 2,845,368 | 1,223,500 | (435,751) | – | 3,633,117 | 22,753 |
| Executives who ceased as key management personnel during the year: | ||||||
| Mr IF Brown | 221,716 | – | – | – | 221,716 | 45,508 |
| Mr RJ Jackson | 161,451 | 90,000 | – | – | 251,451 | – |
| Mr DRA Pearce | 196,232 | – | – | – | 196,232 | 49,029 |
| Mr DJP Smith | 238,167 | 80,000 | (48,560) | – | 269,607 | – |
| Total | 817,566 | 170,000 | (48,560) | – | 939,006 | 94,537 |
(1) This balance represents the PARs held by Mr Hawkins, Ms Johnson and Mr van der Schalk at the date of appointment as executive.
(2) $1 per tranche of PARs is payable to exercise. Nil remains unpaid per issued share acquired. For each PAR exercised, one ordinary IAG share was issued.
(b) PSRs
The PSRs Plan was closed for issuing further PSRs from the financial year ended 30 June 2003. Following is a summary of the movements in total number of PSRs on issue by each executive:
| PSRs on issue 1 July 2005 Number |
PSRs exercised during the year(2) Number |
PSRs lapsed during the year Number |
PSRs on issue 30 June 2006 Number |
PSRs vested and exercisable 30 June 2006 Number |
|
|---|---|---|---|---|---|
| Mr MJ Hawker | 60,000 | (60,000) | – | – | – |
| Ms SJ Mostyn | 68,670 | (68,670) | – | – | – |
| Mr J van der Schalk | 40,000(1) | – | – | 40,000 | 40,000 |
(1) This balance represents the PSRs held by Mr van der Schalk at the date of appointment as executive.
(2) The exercise price was $1 per tranche of PSRs. Nil remains unpaid per issued share acquired. For each PSR exercised, one ordinary IAG share was issued.
(c) Analysis of movements in PARs and PSRs
Following is a summary of the movement during the financial year, by value, of PARs and PSRs by each executive:
| Total value of PARs granted during the year(1) $000 |
Total value of PSRs exercised during the year(2) $000 |
Total value of PARs exercised during the year(3) $000 |
Total value PARs and PSRs that lapsed during the year(4) $000 |
Total of (1) to (4) $000 |
|
|---|---|---|---|---|---|
| Mr MJ Hawker | 1,558 | 338 | 918 | – | 2,814 |
| Mr JP Breheny | 315 | – | – | – | 315 |
| Mr AM Coleman | 287 | – | 296 | – | 583 |
| Mr NB Hawkins | * | * | * | * | * |
| Mr DA Issa | 266 | – | 259 | – | 525 |
| Ms JS Johnson | * | * | * | * | * |
| Ms CF McLoughlin | 255 | – | – | – | 255 |
| Ms SJ Mostyn | 255 | 366 | 246 | – | 867 |
| Mr MJ Pirone | 287 | – | 260 | – | 547 |
| Mr J van der Schalk | * | * | * | * | * |
| Mr G Venardos | 319 | – | 362 | – | 681 |
| Total | 3,542 | 704 | 2,341 | – | 6,587 |
| Executives who ceased as key management personnel during the year: | |||||
| Mr IF Brown | – | – | – | – | – |
| Mr RJ Jackson | 287 | – | – | – | 287 |
| Mr DRA Pearce | – | – | – | – | – |
| Mr DJP Smith | 255 | – | 265 | – | 520 |
| Total | 542 | – | 265 | – | 807 |
Notes:
(1) The value of PARs granted in the year is the fair value of the PARs calculated at grant date using a Monte Carlo model. The total value of the PARs granted is included in the table above. This amount is allocated to remuneration over the vesting period (ie in years 30 June 2006 to 30 June 2010).
(2) The PSRs and PARs exercised during the year by the executives were issued to them on 13 December 2001, 5 March 2002 and 24 December 2002. The respective values at grant date were allocated to their remuneration during the three years’ vesting period between 30 June 2002 to 30 June 2006. PSRs and PARs are exercisable only if a performance hurdle is reached in relation to IAG’s TSR.
The value of PSRs and PARs exercised during the year is calculated as the weighted average of the prices at which IAG shares were traded over 5 days before and including date of exercise after deducting the $1 exercise price per tranche of PSRs exercised.
(3) No PARs or PSRs lapsed during the year.
(4) Related parties of executives cannot participate in the PARs or PSRs Plans.
* The above table excludes all PARs and PSRs movement prior to the date when Mr Hawkins, Ms Johnson and Mr van der Schalk were appointed to their executive roles.
B. NON-EXECUTIVE DIRECTORS
1. REMUNERATION POLICY
The principles that underpin IAG’s approach to remuneration for Non-executive Directors are that remuneration should be:
- sufficiently competitive to attract and retain a high calibre of Non-executive Director; and
- consistent with IAG’s values.
The aggregate limit of remuneration is approved by shareholders and is currently $2 million per annum. The aggregate annual remuneration is inclusive of employer superannuation contributions paid by IAG on behalf of Non-executive Directors.
The Board has agreed that each Non-executive Director should take a minimum of 20% and up to a maximum of 90% of their annual base fee (at the time shares are allocated), on a fee sacrifice basis, in the form of IAG shares provided under the Non-Executive Directors’ Share Plan, which was approved by shareholders on 13 November 2002. IAG shares are purchased by the trustee on market and allocated to directors in December each year. Non-executive Directors may elect to restrict the disposal of these shares for a minimum period of one year and up to 10 years or until the Director retires. No other equity-based remuneration is available to Non-executive Directors.
The current elements of Non-executive Director remuneration are:
| Board / Committee | Role | Fee |
|---|---|---|
| IAG Board | Chairman | $360,000 (includes committee fees*) |
| Director | $120,000 | |
| Audit Committee | Chairman | $30,000 |
| Member | $15,000 | |
| Risk Management & Compliance Committee | Chairman | $30,000 |
| Member | $15,000 | |
| Nomination, Remuneration & Sustainability Committee | Member | $15,000 |
* The Chairman does not receive additional fees for serving on the Nomination, Remuneration & Sustainability Committee or for serving as a director of IAG Re Limited. The Chairman is, however, paid a fee for his role as Chairman of Insurance Manufacturers of Australia Pty Limited, a 70% owned subsidiary of IAG.
In addition, IAG pays a superannuation contribution of 9% of a Director’s fees into a superannuation fund nominated by the Director. Directors’ fees and superannuation contributions are paid monthly.
IAG has a Non-executive Directors’ Expenses policy. Under this policy IAG reimburses expenses reasonably incurred by Directors in connection with the discharge of their duties.
2. INCREASE TO DIRECTORS’ FEES
Following a review of the remuneration of Non-executive Directors, taking into account the remuneration paid to the Non-executive Directors of the 50 largest companies in the S&P / ASX 100 index and market movements in directors fees, the Board has determined that fees payable to Non-executive Directors should be increased with effect from 1 July 2006 as follows:
| Board / committee | Role | Fee |
|---|---|---|
| IAG Board | Chairman | $390,000 (includes committee fees*) |
| Director | $130,000 | |
| Audit Committee | Chairman | $32,500 |
| Member | $16,250 | |
| Risk Management & Compliance Committee | Chairman | $32,500 |
| Member | $16,250 | |
| Nomination, Remuneration & Sustainability Committee | Member | $16,250 |
3. PERFORMANCE
Directors’ performance is subject to evaluation by the Chairman at least every two years, by discussion between the Chairman and the individual Director. In these discussions, the individual Directors also evaluate the Chairman’s performance. Performance measures for Directors considered by the Chairman and Board include:
- contribution of the Director to Board teamwork;
- contribution to debates on significant issues and proposals;
- advice and assistance given to management;
- in the case of the Chairman’s performance, the fulfilment of his or her additional role as Chairman; and
- input regarding regulatory, industry and social developments surrounding the business.
The Nomination, Remuneration & Sustainability Committee has responsibility for coordinating the Board’s review of the Chairman’s performance.
4. REMUNERATION DETAILS
(a) Remuneration of Non-executive Directors for 2006
| SHORT-TERM BENEFITS | POST-EMPLOYMENT BENEFITS | OTHER LONG-TERM EMPLOYMENT BENEFITS | TERMINATION BENEFITS | SHARE-BASED PAYMENT | TOTAL | |||
|---|---|---|---|---|---|---|---|---|
| 2006 | Board fees received as cash $000 |
Committee fees $000 |
Superannuation $000 |
Retirement benefits $000 |
$000 | $000 | Board fees received as IAG shares $000 |
$000 |
| Mr JA Strong(i) | 352 | – | 47 | – | – | – | 168 | 567 |
| Ms YA Allen | 98 | 15 | 12 | – | – | – | 22 | 147 |
| Mr JF Astbury | 98 | 45 | 15 | – | – | – | 22 | 180 |
| Mr GA Cousins | 98 | 15 | 12 | – | – | – | 22 | 147 |
| Mr ND Hamilton | 20 | 15 | 12 | – | – | – | 100 | 147 |
| Mr RA Ross | 64 | 45 | 15 | – | – | – | 56 | 180 |
| Mr B Schwartz | 87 | 15 | 12 | – | – | – | 33 | 147 |
| Total remuneration | 817 | 150 | 125 | – | – | – | 423 | 1,515 |
Note:
(i) Board fees for Mr Strong included $160,000 for his service as Chairman of the Board of Insurance Manufacturers of Australia Pty Limited (“IMA”).
(b) Remuneration of Non-executive Directors for 2005
| SHORT-TERM BENEFITS | POST-EMPLOYMENT BENEFITS | OTHER LONG-TERM EMPLOYMENT BENEFITS | TERMINATION BENEFITS | SHARE-BASED PAYMENT | TOTAL | |||
|---|---|---|---|---|---|---|---|---|
| 2005 | Board fees received as cash $000 |
Committee fees $000 |
Superannuation $000 |
Retirement benefits $000 |
$000 | $000 | Board fees received as IAG Shares $000 |
$000 |
| Mr JA Strong(i) | 280 | – | 39 | – | – | – | 150 | 469 |
| Ms YA Allen(ii) | 52 | 8 | 6 | – | – | – | 12 | 78 |
| Mr JF Astbury | 80 | 30 | 12 | – | – | – | 20 | 142 |
| Mr GA Cousins | 80 | 12 | 10 | – | – | – | 20 | 122 |
| Ms DG Fisher(iii) | 18 | 4 | 4 | 259 | – | – | 18 | 303 |
| Mr ND Hamilton(iv) | 10 | 19 | 11 | – | – | – | 90 | 130 |
| Ms AJ Keating(v) | 29 | 8 | 4 | 250 | – | – | 7 | 298 |
| Mr RA Ross | 50 | 30 | 12 | – | – | – | 50 | 142 |
| Mr B Schwartz(vi) | 37 | 6 | 5 | – | – | – | 13 | 61 |
| Total remuneration | 636 | 117 | 103 | 509 | – | – | 380 | 1,745 |
Notes:
(i) Board fees for Mr Strong included $130,000 for his service as Chairman of the Board of IMA.
(ii) Ms Allen was appointed to the Board on 10 November 2004.
(iii) Ms Fisher retired from the Board on 10 November 2004.
(iv) Board fees for Mr Hamilton included $7,000 for his services as Director of Mutual Community General Proprietary Limited (“MCGI”), a 51% owned controlled entity of IAG.
(v) Ms Keating retired from the Board on 10 November 2004. During the period, Board fees for Ms Keating included $4,000 for her services as Director of MCGI.
(vi) Mr Schwartz was appointed to the Board on 1 January 2005.
5. RETIREMENT BENEFITS
IAG decided to freeze the operation of the Non-executive Director retirement benefit scheme adopted by IAG in 2001 with effect from 1 September 2003.
The terms of the retirement benefits scheme provided for:
(a) Any Non-executive Director of IAG who had completed five years’ continuous service with the IAG (including service with any subsidiaries) at the date of retirement, a retirement benefit equivalent to the last three years’ Directors’ fees, employer superannuation contributions, committee fees and fees for extra services received from IAG and its subsidiaries.
(b) A pro-rata retirement benefit for Non-executive Directors who have completed at least three years’ service but less than five years’ service at the date of their retirement, based on a specified formula.
(c) No retirement benefit to be paid to a Non-executive Director who had served for a period of less than three years.
IAG determined that the frozen retirement benefits would be calculated as follows:
(a) Non-executive Directors joining the Board from 1 September 2003 would have no retirement benefit;
(b) For each Non-executive Director as at 31 August 2003 who had served a minimum of three years, the retirement benefit was assessed as if they had retired at 31 August 2003; and
(c) For a Non-executive Director with less than three years of service at 31 August 2003, a retirement benefit was assessed as if they had three years of service as at that date, and then reduced on a pro-rata basis based on their uncompleted period of service as a proportion of three years. The retirement benefit was not subsequently payable to such a Non-executive Director if they had less than three years of service as a Non-executive Director at the date of their retirement.
The following table sets out the frozen retirement benefits of the remaining Directors who held office on 31 August 2003 and who have continued in office since then:
| Name | Retirement benefit $000 |
|---|---|
| Mr JA Strong | 295 |
| Mr JF Astbury | 184 |
| Mr GA Cousins | 169 |
| Mr ND Hamilton | 248 |
| Mr RA Ross | 232 |
On retirement, Directors may also be entitled to be paid a benefit from their company funded superannuation. Such a benefit would be in addition to the Director’s frozen retirement benefit.
No amounts have been accrued in the accounts of the IAG Group for the frozen retirement benefits of the remaining Directors who held office on 31 August 2003 and who have continued in office since, as the Board has not exercised its discretion to pay these retirement benefits.
C. OTHER BENEFITS
Remuneration does not include premiums paid by IAG for an insurance contract covering current and former Directors’ and executives’ liabilities and legal expenses incurred in respect of the relevant office, as the insurance policies do not specify premiums paid in respect of individual Directors and executives and the terms of contract specifically prohibited the disclosure of the premium paid. Insurance products provided by the IAG Group are also available to all directors and executives on the same terms and conditions available to other employees.
D. EQUITY AND DEBT INSTRUMENT DISCLOSURE
1. HOLDING OF ORDINARY SHARES
(a) The relevant interest of each key management personnel and their related parties in ordinary shares of IAG
| Shares held at the beginning of the year | Shares granted as remuneration during the year | Shares received on exercise of PSRs | Shares received on exercise of PARs | Net movement of shares due to other changes(2) | Total shares held at the end of the year | Shares held nominally at the end of the year(1) | |
|---|---|---|---|---|---|---|---|
| Mr JA Strong | 225,547 | 33,918 | – | – | – | 259,465 | 247,382 |
| Ms YA Allen | 3,437 | 4,522 | – | – | – | 7,959 | 7,959 |
| Mr JF Astbury | 51,772 | 4,522 | – | – | 9,400 | 65,694 | 55,611 |
| Mr GA Cousins | 171,689 | 4,522 | – | – | – | 176,211 | 26,211 |
| Mr ND Hamilton | 80,744 | 20,351 | – | – | 173 | 101,268 | 96,278 |
| Mr RA Ross | 154,100 | 11,306 | – | – | – | 165,406 | 62,849 |
| Mr B Schwartz | 3,906 | 6,783 | – | – | – | 10,689 | 10,689 |
| Mr MJ Hawker | 1,150,059 | – | 60,000 | 168,000 | – | 1,378,059 | – |
| Mr JP Breheny | – | – | – | – | – | – | – |
| Mr AM Coleman | 65,896 | – | – | 54,176 | (58,020) | 62,052 | 54,176 |
| Mr NB Hawkins | – | – | – | – | 24,332(3) | 24,332 | – |
| Mr DA Issa | – | – | – | 47,675 | (47,675) | – | – |
| Ms JS Johnson | – | – | – | 5,972 | – | 5,972 | – |
| Ms CF McLoughlin | – | – | – | – | – | – | – |
| Ms SJ Mostyn | 16,083 | – | 68,670 | 45,508 | – | 130,261 | – |
| Mr MJ Pirone | 31,388 | – | – | 47,675 | – | 79,063 | 11,432 |
| Mr J van der Schalk | – | – | – | – | – | – | – |
| Mr G Venardos | 38,289 | – | – | 66,745 | 5,746 | 110,780 | 27,632 |
| Executives who ceased employment during the year: | |||||||
| Mr IF Brown | 253,691 | 36,920 | – | – | (2,530) | * | * |
| Mr RJ Jackson | 7,351 | – | – | – | – | * | * |
| Mr DRA Pearce | 7,806 | – | – | – | (6,738) | * | * |
| Mr DJP Smith | 129,591 | – | – | 48,560 | (54,511) | * | * |
(1) Nominally held shares are included in the column headed total shares held at the end of the year. These shares are held by the key management personnel’s related parties, inclusive of domestic partner, dependents and entities controlled, jointly controlled or significantly influenced by the key management personnel.
(2) Net movement of shares relate to acquisition and disposal transactions by the key management personnel and their related parties during the year. It includes any opening balances of shares held by key management personnel who were appointed during the year.
(3) This balance represents the shares held by Mr Hawkins at the date of appointment as executive.
* These key management personnel ceased employment during the financial year. Information on shares held only disclosed up to the date of their cessation.
(b) The relevant interest of each Director and their related party in ordinary shares of IAG in accordance with the Corporations Act 2001
| FOR SECTION 205G OF THE CORPORATIONS ACT 2001 | ||
|---|---|---|
| Shares held directly at the end of the year(1) | Shares held indirectly at the end of the year(1)(2) | |
| Mr JA Strong | 12,083 | 198,819 |
| Ms YA Allen | – | 7,959 |
| Mr JF Astbury | 10,083 | 55,611 |
| Mr GA Cousins | 150,000 | 26,211 |
| Mr ND Hamilton | 4,990 | 96,278 |
| Mr RA Ross | 102,557 | 59,952 |
| Mr B Schwartz | – | 10,689 |
| Mr MJ Hawker | 1,378,059 | – |
(1) This represents the relevant interest of each Director in ordinary shares issued by the Company, as notified by the Directors to the Australian Stock Exchange in accordance with section 205G of the Corporations Act 2001. Trading in IAG shares is covered by the restrictions which limit the ability of an IAG Director to trade in the shares of the IAG Group where they are in a position to be aware, or are aware, of price sensitive information.
(2) These shares are held by the Director’s related parties, inclusive of entities controlled, jointly controlled or significantly influenced by the Directors.
2. HOLDINGS OF RESET PREFERENCE SHARES
No key management personnel had any interest in reset preference shares at any time during the financial year.
3. HOLDINGS OF RESET EXCHANGEABLE SECURITIES
In respect of the relevant interest of each key management personnel in reset exchangeable securities (“RES”) of IAG Finance (New Zealand) Limited, other than Mr Hawker, no other person held any RES directly or through their related party.
| FOR SECTION 205G OF THE CORPORATIONS ACT 2001 | ||||||
|---|---|---|---|---|---|---|
| RES held at the beginning of the year | Net movement of RES due to other changes | Total RES held at the end of the year | RES held nominally at the end of the year(1) | RES held directly at the end of the year(2) | RES held indirectly at the end of the year(2) | |
| Mr MJ Hawker | 1,000 | – | 1,000 | 1,000 | – | 1,000 |
(1) Nominally held RES are included in the column headed total RES held at the end of the year. These RES are indirectly held by key management personnel’s related parties.
(2) This represents the relevant interest of each Director in RES issued by IAG Finance (New Zealand) Limited, as notified by the Directors to the Australian Stock Exchange in accordance with section 205G of the Corporations Act 2001. Trading in RES is covered by the IAG Group’s Continuous Disclosure & Insider Trading Policy.
ROUNDING OF AMOUNTS
Unless otherwise stated, amounts in the financial report and Directors’ report have been rounded to the nearest million dollars. The Company is of a kind referred to in the class order 98 / 100 dated 10 July 1998 issued by the Australian Securities & Investments Commission. All rounding has been conducted in accordance with that class order.
Signed at Sydney this 25th day of August 2006 in accordance with a resolution of the Directors.
James Strong
Director
Michael Hawker
Director