CEO AND CHAIRMAN’S STATEMENT

There is one central consideration for our shareholders in fully understanding why business must engage in sustainability. Simply put, no business will survive unless it takes into consideration the community in which it operates, delivers consistent value to customers, maintains the highest standards of governance and ethics, and mitigates its overall impact on the environment.

It is important to remember that the prime drivers of sustainability have been the demands and high standards set by the community itself. We should never forget the public outrage directed at destructive polluters and the vocal protests against banks that withdrew services in the mid 1990s. These campaigns were powerful reminders that boards and senior managers of companies must never lose touch with the people who are their customers, employees and shareholders, and who combined, give any company its licence to operate.

It has been interesting to follow the transition of corporate sustainability thinking and practices in Australia over the last decade. Much of this began as well meaning philanthropy but some of the spend by corporations lacked clear accountability to shareholders. Our view is that it is impossible to get the sustainability equation wrong if all the actions undertaken in the name of sustainability are central to the core purpose of the business. In IAG’s case, our focus is on reducing risk in society, which in simple terms reduces risk to ourselves as an insurer. For example, by assisting society to reduce the risk of young people getting into crime, not only are we helping to make those communities safer and more productive places to live, but we are directly reducing the cost to our company in claims for household break-ins and car thefts.

Our last year of operations was pretty challenging. We have often stated that for an insurance company, long term thinking is critical. We estimate risk over time, and the risks are measured as probability distributions – not single numbers. So, in years when there are no natural disasters we perform spectacularly well. Our short term financial performance is substantially improved, for which management can take no credit, nor should they. In other years we may suffer a statistically abnormal natural disaster which has the opposite effect. For example, this year we experienced the third largest natural disaster in Australian history (as measured by insurance industry losses) with the Hunter Valley storms in New South Wales, which had a significant adverse impact on our short term financial performance.

Our challenge in these circumstances is to drive consistently excellent management across all the domains of sustainability. Our management performance in these areas is an important proxy for all our shareholders as a set of lead indicators for our likely future performance. For example, we know full well that climate change and the likelihood of increased frequency and severity of weather events will impact our business performance over time. This is why we have put so much effort into advocating on mitigation – the need to reduce greenhouse gas emissions at source – and why we are placing increasing emphasis on climate change adaptation – the need to assist communities to weather-proof themselves; in other words, building their resistance to the potential of devastating climate change catastrophes.

IAG undertook some outstanding sustainability initiatives over the last year. We would like to highlight these efforts and to place on the record our thanks to the many thousands of employees engaged in these efforts. One of the stand-outs included the stakeholder event with the Hon. Al Gore, held directly after our Annual General Meeting on 15 November 2006, in which he presented his PowerPoint presentation that features in the documentary ‘An Inconvenient Truth’, to over 400 senior business, government and civil society leaders. We surveyed the attendees at this event and received overwhelmingly positive feedback – here are comments from three of the stakeholders who were there:

We also announced at this gathering our intention for the whole of IAG to become carbon neutral by 2012. To this end we are pleased to advise that CO₂ emissions in our Australian businesses have dropped by 18% from last year, and we reduced our electricity consumption by 14%, meaning we avoided electricity costs of A$630,000.

We’ve made important strides in embracing the social sustainability agenda, including notably the alliance we formed with World Vision Australia and Visy, IBM, Medibank Private, Grey Global Group and the ANZ Bank. The Business for Poverty Relief Alliance released a report in April 2007 arguing the business case for business action on poverty alleviation, particularly with respect to making progress against the United Nations’ Millennium Development Goals which have set targets for the eradication of extreme poverty, hunger, disease, illiteracy and environmental degradation.

We’ve been externally acknowledged through a range of assessments that have been gratifying for IAG. In particular, IAG was, for the second year in a row, announced at the World Economic Forum in Davos as one of the top 100 global sustainable companies. We were also delighted to be awarded the Ethical Investor Award for Australian Sustainable Company of the Year 2006 (in the large company category). IAG also achieved a rating of ‘100’ in the Ethical Investor 50 Index EI 50 for achieving the highest Corporate Monitor SRI rating for sustainability in 2007 – one of only three Australian companies to do so. Finally, IAG was included for the first time among the industry leaders in the international insurance sector assessment of the global Dow Jones Sustainability Index.

Our priorities for the coming year include:

• Working closely with government and other important stakeholders on climate change adaptation.
• Embedding our sustainability practices in our international operations.
• Maintaining or improving our position on the global Dow Jones Sustainability Index.
• Further investigating market opportunities for the development of microinsurance business in Asia.
• Development and alignment of an indigenous strategy for the Australian businesses.
• Ensuring progress on our carbon neutral imperative.
• Ensuring high levels of community engagement through new and creative communications channels.
• Maintaining our commitment to flexible work practices.

We make no secret of our desire to lead the insurance sector. We fundamentally believe that embedding sustainability practices into our businesses generates long term shareholder return. Employees and customers alike are attracted to our organisation through these practices, driving our ability to employ the best industry talent, and building customer business volumes at sensible return on risk levels, ultimately leading to stronger financial returns for shareholders.

Clearly it is critical that managing an insurance company requires a culture which is driving sustainable performance. History is littered with failed insurance companies that drove short term financial performance to the point of long term extinction.

We know we have vastly more to do. We also know from experience that our people will do extraordinary things because they are motivated. Recently, with the catastrophic storms in the Hunter Valley, our people immediately swung into action – without the need for management prompting – working weekends, returning from holidays, and being separated from their families for significant periods of time. This is the heart and soul of our organisation.

James Strong
Chairman

Mike Hawker
Chief Executive Officer

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