AGM SHAREHOLDER QUESTIONS

The KPMG lead audit engagement partner responsible for the audit signs an independence declaration required under s307C of the Corporations Act 2001 and this was included in the Annual Report 2011 (page 37).

This declaration states that: “To the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2011 there have been:

• no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
• no contraventions of any applicable code of professional conduct in relation to the audit.”

KPMG has detailed policies and procedures that act as safeguards to preserve and protect its audit independence. These policies and procedures comply with, and sometimes exceed, all relevant rules of professional conduct promulgated by the Australian professional and accounting bodies as well as other regulatory requirements.

They cover such matters as holding of financial interests, business relationships, employment with client companies, audit partner rotation and the provision of non-audit services. Amongst other things, KPMG obtains annual confirmation from all partners and professional staff as to their compliance with these policies and procedures.

The Board took a decision to suspend the dividend reinvestment plan for the final dividend paid on 5 October 2011.

We took this decision after due consideration of the interests of all shareholders, because for some time now, the dividend reinvestment plan has been calculated without a discount and the requirements to provide shares under the DRP had been met by acquiring shares on-market, with the result that no additional capital is raised under the DRP.

This decision was made by the directors, taking account of the interests of all shareholders and the company, as allowed within the rules of the plan. We are aware that some shareholders prefer having the option to participate in a dividend reinvestment plan and, with this in mind, we are committed to reviewing its operation each half year reporting period.

We are very mindful of views held by the community about executive remuneration and recognise our shareholders have a legitimate interest in the subject.

A key consideration for IAG's board in developing our remuneration approach has been to ensure it is in step with community expectations and, at the same time, supports the Group's financial and strategic goals. We believe that achieving this outcome ultimately benefits all our stakeholders.

Our remuneration structure is designed to achieve three key outcomes:

• to align reward with superior performance, and the performance hurdles are set very high;
• to align management's interests with those of our shareholders; and
• to ensure we can attract and retain the right people.

The remuneration of our executive is closely tied to performance – this is demonstrated by the large proportion of their salary that is ‘at-risk' each year. 75% of the CEO's potential pay was at-risk in the 2011 financial year and on average 71% of an executive's remuneration was at-risk.

Our short term incentive plan is directly linked to our corporate strategy which outlines how the business will compete in its chosen markets and create value for our shareholders. To measure performance against the strategy, we use a balanced scorecard. Importantly, the measures in the balanced scorecard relate to both financial measures such as return on equity and profit, and non-financial measures such as the achievement of customer satisfaction, employee engagement, effective risk management and internal process improvement. This balanced scorecard approach is cascaded throughout the Group so that every employee has goals and objectives that are consistent with, and support, the delivery of the Group's strategy.

In addition the company has a mandatory shareholding policy that requires the executive team to obtain two times salary (for the CEO) and one times salary (for the executive team) in shares, within four years of appointment.

We benchmark our remuneration annually using external advice.

Based on performance outcomes in the 2011 financial year, the Group CEO received less than half of the potential remuneration he had the opportunity to receive; and the whole executive team received around 50% of their potential remuneration.

It is also important to note that the Group's performance improved during the year against key metrics, a very sound result given the challenging conditions faced by the Group.

During the year, the board reviewed the terms of the short term incentive and long term incentive plans to give the board discretion to adjust rewards downwards to protect the financial soundness of the Group in circumstances where the board determines an adjustment is necessary to ensure that an inappropriate reward outcome does not occur.

Under the Corporations Act, the vote on the remuneration report is advisory only, however the directors will consider the outcome of the vote and comments made by shareholders on the remuneration report when reviewing the company's remuneration policies.

We monitor board fees to ensure they are in line with community expectations and also with our peer companies. We also conduct an annual external review to ensure market competitiveness.

Additionally, IAG must ensure it can continue to attract high quality directors to its board.

Between 2007 and 2010, directors' fees were frozen. In the 2011 financial year, base board fees increased 4%. In total, board fees remain well within the $2.75m annual aggregate limit approved by shareholders.

The fees are set in accordance with the significant responsibilities of non-executive directors and chairman of a company like IAG and also take into account the increased responsibilities required of directors.

Directors who retire on rotation continue to act as directors until the AGM at which they stand for re-election so they continue to receive their fees. They would only cease to receive their fees if they were not re-elected at the AGM.

IAG's total shareholder return has improved relative to our peers and to the market since July 2008. However, the trading price of any company's shares, including IAG's, is a function of the share market, and determined by a number of prevailing factors which are not generally within the control of the individual company.

IAG's board and management are committed to continuing to improve the operational and financial performance of the Group for the benefit of all stakeholders, including shareholders.

In June 2011, we reset our strategic priorities, and we're confident that these reset strategic priorities will deliver further improvement in our top and bottom line performance in the 2012 financial year.

Our confidence that this will be achieved is reflected in the guidance provided on 25 August 2011 and reaffirmed at our AGM that, subject to the usual caveats, the Group is on track to grow its gross written premium in the range of 6–9% and deliver an insurance margin of 10–12% in the 2012 financial year.

Given the Group's performance improved during the 2011 financial year across its key financial metrics; its capital position remained well above its regulatory requirement; and it retained some of the highest financial strength ratings from Standard & Poor's for its key wholly owned insurers of any Australian based financial services group, the likelihood of it being “wound up” is remote.

While Mr Talbot was eligible to nominate himself for election to the board, the IAG directors recommended shareholders vote against his election.

The directors provided this recommendation because they believe Mr Talbot does not have the experience, knowledge and skills required of a director of an Australian public listed general insurance company such as IAG.

In forming its view, the board took into consideration the removal of Mr Talbot as a director of NRMA in 2006, and the reasons put forward by the then board in recommending his removal from that position. These reasons were set out in the NRMA 2006 notice of annual general meeting (a copy of which can be found on IAG's website).

In addition the board noted that in 2007, NRMA members approved amendments to its constitution, the effect of which was to disqualify Mr Talbot from standing for election as a director of NRMA until the 2014 board election.

The directors believe Mr Talbot's record as a director is relevant to assess whether he has the experience, knowledge and skills and will uphold the corporate governance standards and behaviour required of a non-executive independent director of an Australian public listed general insurance company such as IAG.

The directors provided their recommendation, along with explanatory notes, in the Notice of Meeting, for this item of business for the AGM, along with other items of business, to ensure shareholders have the relevant information to form their own independent judgement on voting on these items.

The significant majority of insurance claims related to the extensive flooding across Queensland and Victoria are being paid – in IAG's case, more than 90% of those claims are being paid.

However, there is no doubt that these events have posed substantial challenges for the insurance industry and its customers as there were many people with property in high risk areas without appropriate insurance cover.

One of the reasons for the inability of most insurers to offer a flood product in the affected states is that adequate flood mapping data has not been made available by local governments and planning authorities.

Insurers cannot responsibly underwrite a risk without understanding the extent of that risk. Equally, it would be unsustainable for us to pay claims that are not covered in our policies as we've not charged a premium for them and we don't have reinsurance to cover them. Ex-gratia payments would threaten the industry's solvency and its ability to pay other customers' claims.

Our businesses have committed to expand flood cover during 2012, as more flood mapping data is now becoming available.

More insurance products, however, will not prevent floods from recurring.

The root causes of severe flood damage are poor planning decisions, inappropriate building standards and lack of resolve in mitigation investments. Over the last four years, government budgets for mitigation works have averaged just over $27 million annually, while around $6 billion has been spent on recovery and rebuilding. Clearly, this is unsustainable. Fortunately, governments have indicated a willingness to review this situation.

IAG is participating in a number of reviews and parliamentary inquiries to help shape the future of the insurance industry and improve the resilience of our communities to natural disasters. We take our leadership role on these matters very seriously.

The result of our UK operation in the 2011 financial year represented an improvement from the previous year, however it was still disappointing. It reflects the ongoing high level of bodily injury claim inflation in that market.

We have already undertaken significant remedial action to improve the performance of our UK business, and have now accelerated this programme of initiatives.

We have a new management team; we've achieved rate increases of around 20% across the private motor book; and we're implementing further significant rate increases across the broader portfolio. We have exited unprofitable broker relationships, stopped writing externally-sourced aggregator private motor business, and continue to exit other poorly performing business. We've also taken out additional reinsurance protection.

As these actions take hold, we remain confident the UK business will move towards breakeven in the 2012 financial year.

We've also had positive developments with the UK government's announcement that it plans to ban referral fees and regulate contingency fees charged by lawyers.

IAG's capital position remains strong. The Group's minimum capital requirement multiple of 1.58 at 30 June 2011 remained above IAG's long term benchmark of 1.45-1.5. The movement in our capital position since 31 December 2010 reflected a combination of factors relating to the natural peril activity on gross balance sheet values and associated regulatory capital requirements. These effects are largely temporary in nature and will reverse over future reporting periods as premium increases take effect, claims are settled and reinsurance recoveries are received.

Although IAG continues to hold surplus capital, we believe it is prudent to put discussion of capital management initiatives on hold for the time being. This reflects the current volatility in global financial markets, as well as the implications of potential changes to capital requirements as a result of the current review by our regulator, the Australian Prudential Regulation Authority.

IAG is targeting a 30% increase in the number of women in senior executive roles by 2015 (from 1 in 4 to 1 in 3). This number increased by 1% to 28% this year.

We believe a diverse and engaged workforce is crucial to us delivering on our strategy for shareholders and we are concentrating on improving gender, age and ethnic diversity in our organisation. Our activities in this area are overseen by the IAG Diversity Working Group, which is chaired by the CEO, and its members comprise the Chairman and senior representatives from each of the key businesses.

We believe that improvement in these areas supports our workforce sustainability and builds competitive advantage by providing a broader range of perspectives and aligning us more closely with our customers.

We welcome the public discussion on this issue, and believe that for greater certainty, there should be a price on carbon and a move toward a market-based scheme that reduces our greenhouse emissions in an economically efficient way. The appropriate price is a matter for policymakers.

We are considering the possible impact on insurance premiums, although there are no direct implications, because we are not directly captured by the tax. However, there may be some flow-on effects in our supply chain.

In FY11, we reduced our CO2 equivalent emissions in Australia by 3.4% to just over 51,000 tonnes. We continue to focus on practical measures to reduce our carbon footprint as much as possible. These include:

• Continued reduction in electricity and paper consumption;
• Ongoing campaign to transfer shareholders to receiving share registry communication via email;
• Continued application of our desktop power-down application across all computers in the Australian businesses to enable them to be automatically shut down at night; and
• Consolidation of our property portfolio to reduce electricity consumption.

We will not be able to reduce our carbon emissions to zero, so to achieve our carbon neutral goal we will need to purchase eligible offsets in 2012.