Auditing Report: Analysis of IAG's Financial Performance

This report provides a comprehensive auditing analysis of Insurance Australia Group (IAG), a multinational insurance company. It begins with an overview of IAG's business operations, investment activities, and financing activities, followed by an examination of the insurance industry, including its size, growth, supply chain, major players, and critical success factors. The report then delves into the legal and external environmental factors affecting IAG, utilizing PEST, Porter's Five Forces, and SWOT analyses to assess the company's position. Further sections cover IAG's objectives, strategies, and business risk assessment, alongside an analysis of analytical procedures used to evaluate the entity's performance and management and governance. The report concludes with a summary of key findings and recommendations based on the audit analysis.

Running head: AUDITING
Auditing
Name of the University
Name of the Student
Authors Note
Course ID

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Table of Contents
Introduction:...............................................................................................................................2
Part 1: Understanding the Nature of the Entity:.........................................................................2
Business Operations:..................................................................................................................2
Investment and investment activities:........................................................................................2
Financing and Financing Activities:..........................................................................................3
Financial reporting practices:.....................................................................................................3
Part 2: Understanding the industry:............................................................................................3
Industry size:..............................................................................................................................3
Industry Growth:........................................................................................................................4
Supply chain:..............................................................................................................................4
Major Players:............................................................................................................................4
Market Share of Industry Players:..............................................................................................5
Critical success factors:..............................................................................................................6
Major threats:.............................................................................................................................6
Part 3: Understanding the Legal Environment...........................................................................6
Part 4: Understanding the external environment factors:...........................................................7
PEST Analysis...........................................................................................................................7
Porters Five Forces Analysis:.....................................................................................................9
SWOT Analysis:......................................................................................................................11
Part 5: Understanding objectives, strategies and Assessing Business Risk:............................12

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Industry Development:.............................................................................................................12
New products and services:......................................................................................................12
Expansion of business:.............................................................................................................12
New accounting requirements:.................................................................................................13
Regulatory Requirements:........................................................................................................13
Current and prospective financing requirements:....................................................................13
USE of IT.................................................................................................................................13
Part 6: Performing Analytical Procedures to Understand Entity’s Performance.....................14
Part 7: Understand Management and Governance...................................................................18
Conclusion:..............................................................................................................................19
Reference List:.........................................................................................................................20
Appendix:.................................................................................................................................23
Computations of Profitability Ratio:........................................................................................23
Computations of Current Ratios:.............................................................................................23
Computations of Stability Ratios:............................................................................................23

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Introduction:
Insurance Australia Group Limited which is informally known as IAG is a
multinational insurance company having it’s headquarter in Sydney, Australia. The company
was formed by the demutualisation of the NRMA insurance business in the year 2000 with a
return of shares to the members of NRMA. As per the information stated from the website of
the company NRMA insurance group ltd changed its name to Insurance Australia Group Ltd
in the year 2000 (Iag.com.au, 2017). IAG is formally known as the listed company it is
generally not a consumer facing brand, nevertheless it presents the Umbrella organization
that holds several well established insurance brands.
Part 1: Understanding the Nature of the Entity:
Business Operations:
IAG has business division in Australia that represents 26 per cent of the group GWP.
The business operations of IAG produces fee income by acting in the form of agent under
both the segment of New South Wales and Victorian workers compensation scheme, which is
underwritten by respective governments of the state (Iag.com.au, 2017). Another secondary
source of business operations represents a fee income from the interest from the authorised
representative brokers. The business operations of New Zealand represents 19% of the group
GWP. Its New Zealand operations continued its better performance by registering a robust
underlying margin of 16.9%.
Investment and investment activities:
Investment activities forms the important part of the insurance business. The funds
that is received by IAG from the collection of premiums are invested in the form of key
source of return for the company in a comprehensive investment values. IAG starts investing
the insurance premium almost immediately when they are collected and continues to produce

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returns until the claims and other expenditure are paid out. The outcomes from the
underwriting evaluates the profits or loss that is produced from the activities of underwriting
for a certain period (Iag.com.au, 2017). The Insurance outcomes that is the vital performance
metrics, adds the amount of net investment return to the outcome of underwriting in order to
derive the overall pre-tax profit or loss from the operations of insurance.
Financing and Financing Activities:
The financing activities are comprises of the proceeds from the issue of shares along
with the outlays for the purchase of treasury shares. The financing activities of IAG consists
of the proceeds from borrowing of $326 million with repayment of borrowings of 131 million
(Iag.com.au, 2017). The financing activities includes dividends that were paid to the
shareholders of 948 million and dividends to the non-controlling interest of 56 million.
Financial reporting practices:
The financial reporting practices of IAG insurances complies with the IFRS that is
issued by the IASB. The company complies with the Corporation Act 2001, AASB adopted
by the AASB (Iag.com.au, 2017). The financial statements of IASB is prepared in accordance
with historical cost principles as reformed by certain exceptions that is noted in the financial
report.
Part 2: Understanding the industry:
Industry size:
There are 115 licensed general insurers with as much as 18 of these companies in the
industry are in run-off. At the present date with 103 licensed insurers have accounted
approximately 90% of the industry’s $114.4 billion in overall assets (Geneva, 2014). The
acquisition of Insurance Australia Groups of Wesfarmers insurance business occurred in the
year 2014 that ultimately strengthened the market share that was held by the large insurance

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groups in the personal and commercial industry lines. In spite of the expanding concentration
in both industries, there is healthy competition among the wide number insurance groups.
Industry Growth:
The industry reported a strong operating outcome for the year ended 30 June 2016
with net profit after tax of $4.9 billion that was largely driven by the underwriting results of
the insurers. The growth in the gross earned premium for the year ended 30 June 2016 was
primarily recorded in the personal lines classes of business householders and domestic motor
along a high growth in premium that was reported in the compulsory third party
(Khachaturian & Oliver, 2016). Property insures have continued to experience gain from the
benign weather conditions leading to low claim costs. In contrast with the current strong
claims performance in the short tail property classes of business the experience in the long
tail classes namely, professional indemnity and public product liability have presented a
mixed result.
Supply chain:
The competitiveness of the insurance industry can be improved or reserved depending
upon the nature of the competition along the supply chain within which the insurance
industry is nested. Some parts of the supply chain in the industry are highly concentrated
while some are fragmented that can create an impact on the nature and efficiency of the
operations along the supply chain (Bodie, 2013). As evident from the variation in the
insurance industry whether the supply chain is competitive or not balanced and ineffective
can be an important perspective. To some extent it can stated that industry determines the
degree of competition along the supply chain and produces counter balances so that it can
equalize the market forces.

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Major Players:
Australian insurance industry has a large, moneymaking and well established
insurance market. Statistics represents that private insurance industry produces a gross
premium of $34.9 billion yearly with total assets of $113.9 billion (Rollins et al., 2014). In
the year 2014, the Australian insurance industry earned a $42.1 billion in terms of revenue
with a profit of $5.6 billion. Suncorp, IAG, QBE insurance and Allianz Australia Ltd are
regarded as the major players in this industry.
Market Share of Industry Players:
After the IAG’s acquistion of Wesfarmers Insurance, the australian insurance market
is obsevered to be very concentrated, even in the commercial classes together with the
liability classes as well (Bryce et al., 2016). There are three big listed insurers in Australia
that have the largest presence of mareket and comprises of approximately over 60% of the
total market. Allianze and Zurich is positioned in the second tier having a sizeable presence
of market.
Figure 1: representing Market Share occupied by Major Companies

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(Source: Bryce et al., 2016)
Critical success factors:
Understanding and management of risk forms the critical success factors for the
insurance companies and the financial service organizations are currently experiencing an
improved degree of oversight from their respective boards instead of any other industry
(Chandel & Kumar, 2016). The companies in the insurance industry are required to maintain
its importance as the most valued partner by gaining an in depth understanding of the
industry concerns and offering appropriate solutions. Revolution of data is another key
success factor for the insurance companies as these firms can locate success by comparing,
pooling and underwriting large amount of risk data.
Major threats:
According to Kuo et al., (2017), a recent evaluation based on the Michael Porter’s
five forces found that the competition in Australian insurance market is considered to be
moderate. However, the threat of a new market entrant may limit some profits of some of the
well-known companies. The threat of new entrants introduces the threats of substitute
products could help in influencing the choice of the consumers. In addition to this, shift in the
economic situations is regarded as the major threats for the companies operating in this
industry. With the entry of new firms might substantially create an impact on the revenue and
profit making structures of the firms. More significantly, numerous government regulations
and legislations from the government can act as the major threat.
Part 3: Understanding the Legal Environment
Insurers are required to comply with the general contract law and statutes that are
concerned with the insurance contracts. IAG adheres to the legal, regulatory and prudential
requirements in all the nations wherever IAG conducts its operations (Iag.com.au, 2017). The

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disaster reinsurance cover purchased affects the ICRC under the Australian Prudential
Regulatory Authority capital computations. Any form of new and amended risk exposure
should be approved in compliance with the IAG approval authority framework.
The company maintains a sufficient amount of diverse credit risk exposure in order to
avoid the concentration charge that is added to the regulatory capital requirement. All the
insurers within the IAG group that executes the business insurance business in Australia are
required to obtain registration with the ARPA and are subjected to the ARPA Prudential
Standards. It is the policy of IAG to make sure that each of the licenced insurers maintains
the regulatory capital (Iag.com.au, 2017). IAG makes the use of Standardised Framework laid
down in the relevant prudential standards to compute the regulatory capital.
The financial statements of IAG are prepared in compliance with the Australian
Accounting Standard Board 101 for the presentation of financial statements and ascertains
that the financial statements of the group complies with the International Financial Reporting
Standards (Iag.com.au, 2017). The financial statements of IAG are prepared based on the
principles of historical cost and the balance sheet are prepared with respect to assets and
liabilities that are broadly classified in the order of liquidity in conformity the ASIC
corporation instrument 2016/191.
Part 4: Understanding the external environment factors:
External environmental factors possess large amount of effects on the business
operations of the companies operating in the insurance industry. There are some major tools
to analyse the effects of the external environmental factors of the companies, they are PEST
Analysis, Porter’s Five Forces Analysis and SWOT Analysis. These external factors are
explained below;

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PEST Analysis
The main PEST analysis factors are stated below:
Figure 2: Figure illustrating PEST Analysis
(Source: As Created by Author)
Political Factors: Political conditions of Australia is stable as it assist the growth of the
business in country (Shabanova et al., 2015). The government of Australia promotes stable
business environment in order to harmonize the insurance industry of Australia. Some of the
major results from the stable political conditions includes stable business environment,
skilled employees etc.
Economic factor: The Australian government has undertaken several steps with the
objective of increasing the expenditure in the areas of general insurance in Australia (Diacon,
2016). Due to the international economic downturn, there has been a slight decline in the per
PEST
Analysis
Political
Economic
Social
Technological

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capita income of the individuals. As result of these insurance companies are forced to reduce
their prices, that ultimate effects the profitability of the company.
Social factors: Social factors comprises of the ageing populations of the Australian citizens
that creates the business opportunities of the insurance industry. Therefore, companies like
IAG is required to capitalize on these business opportunities (Ho, 2014). The consumer
expectations and demand have been found to be increasing and this could be viewed as the
business opportunities for companies like IAG operating in the insurance industry of
Australia.
Technological factors: Australia is technologically well equipped in order to meet the rising
demands of the consumers (Gupta, 2013). Insurance companies generally keep record of the
consumers through the help of large database and this has resulted in positive impact on the
business performance of the IAG.
Porters Five Forces Analysis:
Porter’s five forces are regarded as the vital tool in determining the competitive
environment of a particular industry. The porter’s five forces of the model is discussed
below;
Existing Rivalry among companies: In the insurance industry of Australia, there are large
number of companies that provides direct competitions to IAG such as, QBE, Allianz and I-
Med Radiology etc. It can be ascertained that the above stated competition firms are identical
in size and industry (Cummins & Weiss, 2013). Therefore, it can be said that there is a
moderate to high threat from these firms.
Threat of New Entrants: A large sum of capital is required to enter in the insurance industry.
This is because new companies entering in the market are required to spend high amount of

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money in the areas of research and development (Bikker, 2016). With strong supplier base
companies generally faces low threat of new entertains in this industry.
Bargaining Power of the Buyers: Bargaining power of the consumers is relatively low with
limited number of companies with recognized operate in Australia and the buyers have very
little to choose from the firms providing service in this industry (Geneva, 2014).
Bargaining Power of Suppliers: There are ample of suppliers in the general insurance
industry. The facilities provided by the insurance companies such as large number of
suppliers generally provides medical coverage and lower premium service. Therefore, it can
be said that suppliers have higher power in this industry.
Threat of substitute: Threat of substitute products are generally low and the reason behind
this is that almost each products have identical facilities to offer. With base of suppliers it can
be said that the threat of substitute products are relatively lower.
Figure 3: Porter’s Five Forces Analysis
(Source: As created by author)
Existing Rivalry
Threat of New Entrants
Bargaining Power of Buyers
Bargainig Power of Suppliers
Threat of Substitute

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SWOT Analysis:
Below stated is the SWOT analysis of IAG insurance:
Strength
a. IAG over the years have rendered
premium quality service to the
consumers both domestically and in
overseas operations
b. Use of data base technology is
regarded as one of the strength of
IAG Insurance
c. Experienced workforce and effective
decision making forms the strength
of the IAG Insurance
Weakness
a. With the objective of delivering
premium quality service at lower
price IAG at times has to face the
problems of higher cost which
ultimately creates an impact on the
profitability of the organization.
b. Little or lower entrance in the major
health care services could be viewed
as the weakness of the firm
Opportunity
a. A recent rise in the disposable
income of the citizens could be
viewed as the business opportunity
for IAG
b. Government support and
encouragement to the general
insurance industry could be viewed
Threat
a. Cost involved in research,
development is relatively high, and
this forms the major threat to the
IAG.
b. Though the entry of new firms is
relatively but with few new firms
providing identical service could be

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as the opportunity doing business in
the overseas conditions as well.
viewed as major threat for IAG as
they may substantially disrupt the
market demand.
Table 1: Table reflecting SWOT analysis of IAG
(Source: As created by author)
Besides the above stated factors, the economic downturn could be viewed as the
major external factors for the business operations of insurance industry in Australia. Over the
past few years it has been found that Australia reported a low rate of inflation and this could
be viewed as the growing business opportunities for a company like IAG.
Part 5: Understanding objectives, strategies and Assessing Business Risk:
Industry Development:
Market conditions for incumbent insurers and potential market entrants do creates a
risk for IAG. In spite of the barriers for new market entrants the adverse competition impact
are less clear for IAG (Pritchard, & PMP, 2014). Restricted number of entrants to the market
might reflect that new entrant face barrier but IAG still lags expertise in measuring the
current return of new entrants as these restrictions cannot be maintained over the long term
period.
New products and services:
There are currently large number of general insurance products that are available in
the market to customers from 34 different insurers and this could be viewed as the potential
business risk because majority of these products are from the open insurers that can be
accessed by any consumer (Wetherell & Evensen, 2016). The number of product policies are

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very high and such varied circumstances could be viewed as potential business risk for IAG
that effects the choice of the consumers.
Expansion of business:
The market behaviour for intermediaries remains to be the major focus of interest for
IAG in expanding at the Asian markets. This because consumer demand for online
information continues to saturate the general insurance market and adds another dimension of
risk and competitiveness of the market (Hopkin, 2017). Demanding regulations can possess
risk for IAG to navigate in the Asian markets.
New accounting requirements:
In order to estimate the outstanding amount of claim liability involves number of
certain key assumptions and most critical sort of accounting estimations (Duverne & Hele,
2016). The process requires IAG to make use of the consolidated method accounting for
specific data that is relevant to the industry for more general economic information.
Regulatory Requirements:
For a IAG a contract of legal exposure is required as it is important in protecting the
adverse consequences of future events at the time of transferring the economic loss that might
flow from insured to the insurer.
Current and prospective financing requirements:
General insurance is embedded in the wider insurance financing system and decision
of consumer concerning the coverage and the use of general insurance that have direct impact
on the consumers (Thursby & Berbari, 2016). In spite of the long-standing tenure of the IAG,
other insurers have continued to evolve their products. Given the fact the regulatory
framework is extensive consumer uptake and evolution of the general insurance products
could play supplementary role in financing system.

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USE of IT
IT risk such as uncertainties in the estimation of process relating to the available data,
actuarial models and statistical assumptions associated to general insurance could be major
risk to the business.
The IAG boards makes the use of the risk and capital management strategy in order to
mitigate the risk. IAG effective management and provisioning, reinsurance and capital
management helps in additionally mitigating the risk of the group (Aithal, 2017).
Part 6: Performing Analytical Procedures to Understand Entity’s Performance
In order to evaluate the performance of the IAG some major ratios have been
computed and outcomes derived from such computations are compared with the competitor
such as QBE. The analysis is reflected below;
Profitability ratio:
The net profit margin of IAG for the financial year ended 2014 reflected a net margin
of 6.89% which subsequently declined in the year 2015 to 6.43% (IAG Limited, 2017). The
decline was primarily attributable to the decline in the consumer demand. In the year 2016
the company reported an improved net profit margin of 12.74%.
2016 2015 2014
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00% 12.74%
6.43% 6.89%
5.91%
4.60% 4.49%
Net Profit Margin
IAG QBE

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Figure 4: Figure Illustrating Net Profit Margin
(Source: As created by Author)
QBE on the other hand, reported a relatively lower net profit margin of 4.49% in the
year 2014 with a marginally increased net margin of 4.60% and 5.91% in the subsequent year
of 2015 and 2016 respectively. The net profit margin reported by IAG is better than its
competitor QBE over the last three years.
The return on equity for IAG for the year 2014 stood 8.64% which subsequently
increased to 10% in the year 2015 (IAG Limited, 2017). In the year 2016 IAG reported an
increased return on equity of 18% and the growth is primarily attributable to the increase in
the attributable net profit of the organization.
2016 2015 2014 2016 2015 2014
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20% 18%
10%
9%8%
7% 7%
Return on Equity
IAG
QBE
Figure 5: Figure Illustrating Return on Equity
(Source: As created by Author)
QBE on the other hand reported a low return on equity of 7% in the year 2014 and
2015 with a marginal increase of 1% in the following year of 2016. It can be stated that the

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IAG is better placed in terms of QBE regarding the net return on equity provided to its
shareholders.
Short-term liquidity:
Current ratio: Current ratio can be defined as the ratio that measures the liquidity position
of an organization. An organization with higher current ratio represents better ability of
meeting its short term obligations.
Current ratio of IAG for the year ended 2014 stood 0.76 whereas QBE reported a
better current ratio of 0.98 for the year 2014 (IAG Limited, 2017). In the subsequent years of
2015 and 2016 IAG reported a lower current ratio of 0.61 and 0.76 respectively. While QBE
reported a stronger current ratio of 1.00 and 0.96 for the year 2015 and 2016. This reflects
that QBE better placed than IAG in discharge of its short term obligations.
2016 2015 2014
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.96 1.00 0.98
0.76
0.61
0.76
Current Ratio
QBE
IAG
Figure 6: Figure Illustrating Current Ratio
(Source: As created by Author)
Stability Ratios:

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The leverage ratio reported by IAG for the year ended 2014 stood 3.47. The company
reported the leverage ratio of 3.55 and 3.50 for the year ended 2015 and 2016 respectively.
QBE on the other hand reported a leverage ratio of 3.06 for the year ended 2014. For the year
ended 2015 and 2016 the leverage ratio of QBE stood 2.99 and 3.02 respectively. This
reflects that both the companies maintains a somewhat stable leverage ratio.
2016 2015 2014
2.70
2.80
2.90
3.00
3.10
3.20
3.30
3.40
3.50
3.60 3.50 3.55
3.47
3.02 2.99
3.06
Leverage Ratio
IAG
QBE
Figure 7: Figure Illustrating Leverage Ratio
(Source: As created by Author)
Operating Margin:
The operating margin ratio for IAG stood 21.18% in the financial year 2014. This
subsequently declined to 9.32% in the year 2015 and significantly increased in 2016 to stand
12.45% (IAG Limited, 2017). QBE on the other hand reported an inferior operating margin
of 2.01%, which further deteriorated to negative figure of -0.11 in the year 2015. QBE though
managed to improve the operating margin in the year 2016, which stood 3.92%. Overall, it

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can be stated that IAG is better placed in terms of leverage and operating performance than
QBE.
2016 2015 2014
-500
0
500
1,000
1,500
2,000
2,500
1,205 1,056
1,922
559
-16
332
Operating Margin
IAG
QBE
Figure 8: Figure Illustrating Operating Margin
(Source: As created by Author)
Part 7: Understand Management and Governance
Code of ethics and fundamental values of IAG helps in moving the business to the
right direction of achieving excellence. The company is committed towards achieving service
excellence by demonstrating responsibility and equality. The managerial personnel are
enthusiastic concerning the continuous improvement and maintenance of appropriate
financial reporting requirements. It has been found that the managerial and administrative
decisions are undertaken by bearing mind key business risk (McNeil et al., 2015).
The business processes are so designed that it mitigates the business risk by
establishing and developing policies for the board of directors so that they can review the risk
management procedure on constant basis (Chance & Brooks, 2015). The management

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mitigates the business risk by providing sufficient training and development for the existing
workforce regarding efficient risk management. IAG has well-established human resource
policies by providing benefits to the employees through share based incentive programme
with the objective of creating a relation between the shareholder value creation and rewarding
employees.
Conclusion:
As evident from the above stated discussion, it can be stated that there are large
number of major external environmental factors that have turned out to be the risk factor for
companies. From the PEST analysis it has been evident that stable political conditions
prevails in Australia and this paves the business opportunities for IAG. However, the
uncertainty in the global consumer demand has created an uncertain overseas business
environment for IAG.
As evident from the Porter’s Five Forces Analysis it can be said that threats from new
entrant persists in the market for IAG. On the other hand, the financial performance of IAG is
relatively better than its competitors however the company is required to undertake more
suitable business strategy to meet its short-term obligations. Hence, based on the overall
analysis it can be concluded that IAG still has the areas of improvement in the areas of
technology for better data storage and probable business risks.

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Appendix:
Computations of Profitability Ratio:
Profitability Ratio Analysis:-
IAG QBE
Particulars 2016 2015 2014 2016 2015 2014
Revenue (A) 9679 11329 9074 14276 14922 16521
Net Profit/Loss (D) 1233 728 625 844 687 742
Common Stock(H) 6681 7192 7232 10334 10560 11082
Net Profit Margin (D/A) 12.74% 6.43% 6.89% 5.91% 4.60% 4.49%
Return on Equity (A/H)) 18% 10% 8.64% 8% 7% 7%
Computations of Current Ratios:
Short-Term Liquidity Ratio Analysis:-
IAG QBE
2016 2015 2014 2016 2015 2014
Total Current Assets (A) 10099 8948 10108 30103 31677 33336
Total Current Liabilities (F) 13347 14760 13313 31249 31616 33918
Current Ratio (A/F) 0.76 0.61 0.76 0.96 1.00 0.98
Computations of Stability Ratios:
Stability ratios
IAG QBE
2016 2015 2014 2016 2015 2014
Revenue (C) 9,679 11,329 9,074 14,276 14,922 16,521
Net Profit/Loss (D) 1,233 728 625 844 687 742
Stock Price (E) 0 0 0 0 0 0
Total Liabilities (K) 22,998 24,186 22,764 31,249 31,616 33,918
Shareholder's Equity (J) 6,563 6,817 6,568 10,334 10,560 11,082
Operating Income (L) 1,205 1,056 1,922 559 -16 332
Total Current Assets (A) 10,099 8,948 10,108 30,103 31,677 33,336

25AUDITING
Leverage Ratio (J/K) 3.50 3.55 3.47 3.02 2.99 3.06
Operating Margin (L/C) 12.45% 9.32% 21.18% 3.92%
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0.11% 2.01%