When I consider the year in review, I am very proud of how much IAG has achieved in a short period of time.

At the outset of the financial year, we acknowledged the Group had been underperforming. In response, we refined our corporate strategy and set clear priorities to rebuild profitability. That required us to take a number of tough decisions and make significant changes across the entire organisation.

This program of internal change was made even more challenging as it was undertaken during a year of demanding external conditions. This included unprecedented global economic volatility and losses from a number of natural perils, including one of Australia's worst natural disasters on record, the devastating fires across Victoria.

I am pleased to report that our refined strategy has delivered the initial signs of success through an improved financial performance in the 2009 financial year, despite being adversely impacted by a number of factors.

Financial performance in 2009

The Group reported a net profit after tax of $181 million, compared to a net loss of $261 million in the previous year.

Gross written premium, or revenue, increased during the year from $7,793 million to $7,842 million. When excluding the businesses we divested during the year, along with foreign exchange movements, gross written premium grew 4%.

In addition, the Group's insurance profit was up 31% to $515 million compared to the previous year. This represents an improved insurance margin of 7.1%, up from 5.4% last year.

Our largest business, Australia Direct Insurance—which includes NRMA Insurance, SGIC and SGIO—contributed significantly to the Group's result. A combination of increased business volume and average premium rates across its portfolio, as well as reduced costs, helped this business increase its insurance margin to 12.0% for the year, up from 10.7%.

In addition, a number of cost reduction initiatives were undertaken during the year. This has delivered $130 million in annualised pre tax savings across our Australian operations, with the full benefit to be felt in 2010.

Profitability in our Australian intermediated insurance business, CGU, was significantly hampered during the year by the challenging market conditions. This business recorded an insurance margin of 2.2% for the year, compared to 6.0% the previous year. While we are seeing the initial signs of a turnaround in CGU's underlying performance, the recovery has not been as quick as expected.

Our operations in New Zealand delivered a break–even insurance result, after a return to profitability in the second half.

In both CGU and New Zealand, we have taken actions to improve underwriting discipline and ensure premiums adequately reflect risk. The results of these actions are expected to be evident in improved profitability in the coming year.

In the UK, we sold our poorly performing mass market distribution businesses in early calendar 2009, and are now focused on our profitable specialist motor underwriter, Equity Red Star. I am pleased with the performance of this business, which has delivered a sound insurance margin of 15.2% in the 2009 financial year.

Our Asian businesses also performed well, delivering a pre tax profit of $15 million compared with a loss of $15 million in the previous year. Contributory factors were tighter underwriting, rate increases, improved cost control and the one off benefit of adopting deferred acquisition accounting in Thailand.

We are excited about the potential longer term contribution from the Asia division, particularly having signed a joint venture agreement in November 2008 to start a general insurance business with the largest bank in India, the State Bank of India. This new business is expected to start trading next calendar year, once all regulatory approvals are secured.

While the improvements to the Group's financial results are very encouraging, two key external factors—the global economic recession and natural perils—adversely affected our performance.

Global economic recession

There is no doubt the performance of our industry, like most industries around the world, has been affected by the global economic recession. However, the insurance industry in Australia has fared comparatively well, as our regulatory framework, in particular the risk-based capital regime, has ensured participants have remained strongly capitalised.

For IAG, the primary impacts have been from lower investment yields and falling equity markets.

Lower yields reduced our insurance profit by $50 million during the year. In addition, our shareholders' funds returned a pre tax loss of $39 million this year compared to a profit of $24 million the previous year.

To lessen these adverse impacts, we adopted a more conservative investment approach. We reduced the amount of our total portfolio invested in equities to 6%, and increased the portion invested in fixed interest or cash to 94%. We also ensured the credit quality of our investments was high, with 94% of our fixed interest and cash investments held with counterparties rated 'AA' or better.

During the year, we proactively strengthened our capital position. An institutional placement and share purchase plan in the second half of the year raised in excess of $530 million of new capital. We used $224 million of these funds to repurchase some of our subordinated debt at a 30% discount to face value, resulting in a pre tax profit of more than $90 million during the year.

Through these measures we have improved our overall capital mix and given IAG greater financial strength and added flexibility in the event of a prolonged economic downturn.

At 30 June 2009, the level of capital held by IAG was 1.79 times the minimum level required by our industry regulator, APRA.

In a further confirmation of our continued financial strength, we retained our 'very strong' category 'AA–' rating from Standard & Poor's for our major wholly owned general insurers, the highest rating for an Australian general insurer.

Natural perils

Claim costs from natural perils—such as storms and bushfires—were high during the year, at $451 million, although around 10% lower than the previous year. This cost exceeded our budgeted allowance for natural perils, primarily due to the cost incurred from the devastating fires across Victoria in February 2009.

These fires resulted in the tragic loss and dislocation of many lives and extensive destruction of property. IAG's reinsurance program capped our claim costs relating to the fires at $126 million. However, the Insurance Council of Australia estimates that the total insurable cost was around $1.2 billion, and if you consider the level of underinsurance in the affected area, the cost to the community was even higher.

In addition to the fires, many of our customers experienced severe storms and flooding throughout the year. In New Zealand, major storms across the country in July 2008 led to claim costs of around $23 million for IAG. Similarly in Australia, severe storms ripped through Brisbane in November 2008, incurring approximately $52 million in costs. We also incurred costs of $56 million following further downpours and flooding across northern NSW and Queensland between March and May 2009.

While the recovery effort from some of the natural perils during the year is far from over for the people affected, I am extremely proud of the response of our employees. The dedication and commitment of our people during these often stressful and traumatic circumstances brings alive our long and deep heritage of being there for customers in their times of greatest need.

Although the cost to insurers from natural perils is high, managing the impact is part of our day to day business. We mitigate the effect of these events on our financial results in the following ways:

• We budget for natural perils. This means we estimate the claim costs and reflect the risk in premiums to ensure we can adequately cover the cost of anticipated perils. This year we exceeded our budgeted allowance primarily due to the Victorian fires.
• We have extensive, high quality reinsurance covers. This means the cost to the Group from catastrophic events is capped, with reinsurers covering claim costs above the cap.
• We help communities prepare and adapt for the threat of a natural peril, thereby minimising potential damage to their property and reducing claim costs.
• We have operational procedures in place to respond quickly to natural perils. This helps our affected customers get on with their lives as quickly as possible.

The external conditions we have faced during the year have only added impetus to the importance of getting the fundamentals of our business right.

Strategy progressing to plan

Despite the challenging operating environment, I am pleased with the progress we've made against the refined strategy we adopted in July 2008, and the role this has played in restoring the profitability of the Group.

At the beginning of the year, we set four clear priorities, which were to:

• Improve our performance in our home markets of Australia and New Zealand;
• Pursue selective international growth options—in Asia and other specialist opportunities;
• Implement a devolved operating model—this means streamlining our operating model, by creating a portfolio of end to end businesses and devolving responsibility and accountability as close as possible to our customers; and
• Drive operational performance and execution.

The key activities we delivered to meet these priorities are summarised here.

I do not underestimate the effort of all our people across every part of the Group to achieve the significant amount of activity which these priorities have demanded.

In particular, by September 2008, we had a new operating model up and running, along with the majority of the cost savings initiatives which have flowed through in the financial results for the year.

By December 2008, we had announced the sale of our poorly performing assets in the UK, signed an agreement to start a new business in India, and increased our interest in our Malaysian general insurance joint venture.

We had our full complement of new executives in place by February 2009 and had launched our new internet based business, The Buzz, by May 2009.

This progress has helped to rebuild the core foundations of our business so we can continue to improve the Group's financial performance and, importantly, its profitability. However, we have certainly not finished the job.

While the improvement in this year's financial result reflects the initial benefits of our efforts, we still have a lot of work to do to meet our long term financial targets of delivering top quartile shareholder returns and a return on equity of more than 1.5 times the weighted average cost of capital through the cycle.

Building long term performance

While we were heavily focused on actions to immediately improve our financial performance during the year, we have also refined our approach to ensure we can sustain our profitability over the long term.

This has meant evolving the way we respond to the needs of our customers, employees, and the communities and environment in which we operate. We believe that we need to take a balanced approach to responding across each of these dimensions if we are to ensure the long term success of our business.

While details of how we have performed against our non-financial indicators are contained in the sustainability review pages of this report, I am pleased to highlight that we have improved against many measures.

Delivering superior customer experiences

Customer retention across our Australian and New Zealand businesses remained high during the year, and the satisfaction score among Australia Direct Insurance customers was in line with the previous year at 84.

One of the keys to continuing to improve these measures is to be able to adapt to the changing expectations of our customers and to deliver superior products and services.

During the year, we continued to invest in our brands. Under the NRMA Insurance brand, we introduced new offerings, such as a third party fire and theft option and several extra features including variable excess options for motor insurance customers; more bundled discount options; and a tailored home insurance offering for renters. I'm extremely pleased we also introduced flood insurance which addresses the longstanding difficulties associated with this cover for home owners.

Similarly, CGU invested in a new brand campaign and introduced customer initiatives, including the CGU Privilege Card, the entry-level Fundamentals Home Insurance product, and an all-in-one insurance package, CGU Padlock. CGU's retention levels have remained high at around 80%.

In New Zealand, State launched its new online presence, while a new technology platform in Business Partners has improved the customer experience.

Another exciting milestone was the launch of our new online insurance business, The Buzz. This provides car insurance customers the option of interacting with us online through the entire life cycle of their insurance policy—from buying a policy through to making a claim.

These initiatives are examples of the innovation we are now pursuing to stay relevant to our customers, providing them with choices not only in what they buy but also in how they buy it.

Driving employee engagement

The level of employee engagement within IAG was high at 84%. This meets the global high performing companies' benchmark, and exceeds the benchmark for global financial services companies, as set by our survey provider Towers Watson.

This is particularly pleasing given our employees have undergone a period of significant change, which has regrettably led to a number of roles becoming redundant. We have also taken a decision to freeze remuneration for the senior leadership team in an effort to contain costs.

Without skilled and engaged employees, it is impossible to build a stronger and more sustainable company. We've continued to work hard to attract and retain the best people, and have developed a new framework to identify, assess and grow the future leaders of our company. Driven by our executive team and board, this targeted program is addressing succession for all of our top tier roles.

Addressing community needs

As an insurer, we have a role to play in identifying and mitigating risk in the community, so our proactive involvement is important. This is an area where we can make a real difference, by sharing our knowledge and experience in crime prevention, road safety and adapting to a world in which severe weather events are likely to increase.

This year our community investment has been more focused, driven by the operating brands which are closest to the communities they serve.

For example, we invested $7.6 million in the Australian community through initiatives including our CommunityHelp Grants program, and we continued our long term involvement with a number of community partners and sponsorships, including the NRMA CareFlight helicopter rescue service. We also invested resources to help tackle underinsurance in the community by lobbying to reduce the burden of tax charged on insurance policies.

Reducing impacts on the environment

The severe effect of natural perils on our business is well documented. Given that scientific evidence points to the role that climate change is playing in increasing the severity and frequency of these natural perils, it makes sense for the Group to reduce its own environmental impact and help our customers do the same.

During the year, the Group's CO₂ equivalent emissions continued to fall, reducing by 12% from the previous year. This reduction supports our goal to become carbon neutral by 2012.

We continued to support Earth Hour and in New Zealand we recently relocated to one of the country's most environmentally sustainable buildings.

We also continued to assist our customers and suppliers reduce their emissions, providing tools to guide customers in purchasing decisions and developing products which reward people for sustainable behaviour, such as motor insurance discounts for fuel efficient cars.

Through a combination of immediate actions to get the fundamentals right, and bringing future events into today's decisions, we have positioned the Group well to continue to improve performance.

Outlook

This year we have rebuilt the foundations to strengthen our business. As a result, we expect to see a stronger performance in the coming year.

We expect gross written premium to grow in the range of 1% to 3% and for our insurance margin to improve to within a range of 9% to 11%.¹

We are keenly aware that we are responsible for some of Australia and New Zealand's premier insurance brands and we intend to meet our commitment to continually improve these assets.

In Asia, we look forward to our new Indian general insurance joint venture commencing trade and further improvement in our existing operations, and we're confident the business we have retained in the UK will continue its unbroken track record of profitability.

We'll also continue to pursue other selective growth opportunities which will incrementally drive value.

I do not underestimate the challenges that exist to meet our objectives in the coming year. However, I am confident that we have the right people, led by a strong executive team, and are pursuing a sound business strategy which will deliver improved results for shareholders.

Michael Wilkins
Managing Director and Chief Executive Officer

• 1Subject to losses from natural perils being within the budgeted allowance of $350m, and no material movement in foreign exchange rates or investment markets.

Progress against strategy Looking further afield