DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
The IAG Group recorded a net profit for the year of $760 million (2004 – $665 million).

The overall increase in the net profit after tax is attributable to organic growth in business together with improved underwriting and investment performance from technical reserves. In 2004, the net profit after tax included a one-off profit of $57 million after tax from the sale of the ClearView retirement services businesses.

Net premium revenue
Net premium revenue has increased by 5% to $6,144 million. This increase is attributable to continued high retention and organic growth in business.

Net claims expense
Claims expense has increased by 7% to $4,069 million. The increase is mainly attributable to growth in business.

The loss ratio (net claims expense as a % to net earned premium) of 66% has remained consistent with the previous financial year of 65%. This has been mainly achieved through continuous claims management and the generally favourable weather conditions. The current year ratio includes an unfavourable interest rate adjustment which has impacted the loss ratio by approximately 2%.

Underwriting expenses
Total underwriting expenses have increased by 6% to $1,591 million. The increase is mainly attributable to general growth in business.

The expense ratio (underwriting expenses to net earned premium) of 26% has also remained consistent with the previous financial year.

Investment revenue
The increase in investment revenue by 30% to $1,055 million reflects strong investment returns on both technical reserves and shareholders’; fund. In respect of the shareholders’ fund, Australian equities class performed strongly and increased investment income was achieved from the portfolio of investments established from the proceeds of the issue of reset exchangeable securities (“RES”) during the financial year.

Other operating revenue
The decrease in other operating revenue by 38% to $178 million is mainly attributable to the:

• sale of the ClearView retirement services businesses in the prior year; and
• lower level of fee income from the management of statutory fund for the NSW WorkCover Authority.

Borrowing costs expense
Borrowing costs expense has increased due to borrowing costs incurred on the issue of RES during the financial year. RES are listed on the Australian Stock Exchange.

Corporate, administration and other expenses
The decrease in corporate, administration and other expenses by 11% to $390 million is mainly attributable to the:

• decrease in goodwill and intangibles amortisation by $13 million; and
• sale of the ClearView retirement services businesses in the prior year.

These decreases were offset to some extent by costs incurred for internal restructuring and mergers and acquisition work during the financial year.

DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Assets
The total assets of the IAG Group as at 30 June 2005 are $17,147 million (2004 – $16,291 million).

The increase is mainly attributable to funds generated from insurance operations during the financial year, reflecting the increase in investments and insurance balances held at 30 June 2005. This increase was offset to some extent by total dividends paid of $442 million and an increase in income taxes paid.

Liabilities
The total liabilities of the IAG Group as at 30 June 2005 are $12,707 million (2004 – $12,067 million) with the major component being general insurance liabilities of $10,426 million (2004 – $9,799 million).

Equity
Equity was impacted by the following activities during the year:

Increase:

• net profit of $760 million.

• payment of dividends of $442 million; and
• decrease in outside equity interests.

DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF CASH FLOWS

Cash flows from operating activities
Cash flows from operating activities have decreased by 23% to $897 million.

The decrease is mainly attributable to:

• a decrease in reinsurance and other recoveries received;
• higher income taxes paid;
• an increase in other operating payments; and
• a decrease in other operating receipts.

The decrease was offset to some extent by the:

• increase in premiums received; and
• decrease in reinsurance expense paid.

Cash flows from investing activities
Cash outflows from investing activities have decreased by $599 million to $185 million.

The decrease is largely attributable to the lower level of investing activity in 2005 in light of increased dividends (funded by a reduction in investments) and the net redemption of units in IAG controlled trusts by outside equity interests.

Cash flows from financing activities
Cash outflows from financing activities have increased by $89 million to $679 million.

This increase is attributable to $160 million in additional dividends paid in the 2005 financial year and net redemptions of units in IAG controlled trusts of $126 million in the year compared with net proceeds of $381 million in the prior year.

The issue of reset exchangeable securities 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.