FY13 Investor Report FINAL - IAG & reports/FY13_RR...Aug 22, 2013 · IAG FY13 INVESTOR REPORT ... Australian Securities Exchange and, in particular, the Annual Report for the year

Insurance Australia Group Limited ABN 60 090 739 923

22 August 2013

INVESTOR REPORT FY13

IAG FY13 INVESTOR REPORT

IMPORTANT INFORMATION

This report contains general information in summary form which is current as at 22 August 2013. It presents financial information on both a statutory basis (prepared in accordance with Australian accounting standards which comply with International Financial Reporting Standards (IFRS)) and non-IFRS basis. This report is not a recommendation or advice in relation to Insurance Australia Group Limited (“IAG”) or any product or service offered by IAG’s subsidiaries. It is not intended to be relied upon as advice to investors or potential investors, and does not contain all information relevant or necessary for an investment decision. It should be read in conjunction with IAG’s other periodic and continuous disclosure announcements filed with the Australian Securities Exchange and, in particular, the Annual Report for the year ended 30 June 2013. These are also available at www.iag.com.au. The information in this report is for general information only. To the extent that certain statements contained in this report may constitute “forward-looking statements” or statements about “future matters”, the information reflects IAG’s intent, belief or expectations at the date of this report. IAG gives no undertaking to update this information over time (subject to legal or regulatory requirements). Any forward-looking statements, including projections, guidance on future revenues, earnings and estimates, are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause IAG’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Any forward-looking statements, opinions and estimates in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Neither IAG, nor any other person, gives any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this report will actually occur. In addition, please note that past performance is no guarantee or indication of future performance.


CONTENTS

1. Executive Summary .......................................................................................................................................... 1

2. Strategy ............................................................................................................................................................ 4

3. Group Results ................................................................................................................................................... 6

4. Divisional Overview ........................................................................................................................................ 16

5. Australia Direct ............................................................................................................................................... 17

6. Australia Intermediated (CGU) ....................................................................................................................... 26

7. New Zealand ................................................................................................................................................... 33

8. Asia ................................................................................................................................................................. 40

9. Reinsurance .................................................................................................................................................... 51

10. Investments .................................................................................................................................................. 54

11. Balance Sheet & Capital ............................................................................................................................... 57

Appendix A Group Operating Model ................................................................................................................... 63

Appendix B IAG Snapshot .................................................................................................................................. 64

Appendix C Key Relationships ........................................................................................................................... 66

Appendix D Geographical & Product Diversification .......................................................................................... 68

Appendix E Key ASX Releases .......................................................................................................................... 69

Appendix F Glossary .......................................................................................................................................... 71

Directory ............................................................................................................................................................. 75

NOTE: THROUGHOUT THIS REPORT THE UK BUSINESS HAS BEEN TREATED AS A DISCONTINUED OPERATION FOR DISCLOSURE PURPOSES. COMPARATIVE FIGURES FOR 1H12, 2H12 AND FY12 HAVE BEEN ADJUSTED ACCORDINGLY.


FY13 GROUP RESULTS

GWP GROWTH INSURANCE PROFIT & MARGIN

NET PROFIT AFTER TAX (A$M) CASH EPS & DPS

CASH ROE REGULATORY CAPITAL (MULTIPLE)

KEY RESULTSFY12A$m

1H13A$m

2H13A$m

FY13A$m

Yr-on-YrMvt

Gross written premium 8,495 4,593 4,905 9,498 +11.8%

Net earned premium 7,346 4,095 4,223 8,318 +13.2%

Insurance profit 845 815 613 1,428 +69%

Net profit after tax 207 461 315 776 +275%

Cash NPAT 583 684 472 1,156 +98%

Insurance margin 11.5% 19.9% 14.5% 17.2% +570bps

Cash ROE 13.3% 30.7% 20.2% 25.3% +1200bps

Dividend (cents per share) 17.0 11.0 25.0 36.0 +112%

PCA multiple n/a n/a 1.67 1.67 n/a

4,045 4,450 4,593 4,905

8,495 9,498 10.4%

15.9%

13.5%

10.2%

13.2% 11.8%

-

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1H12 2H12 1H13 2H13 FY12 FY13

GWP (A$m) GWP Growth (%)

276

569

815 613

845

1,428 7.7%

15.1%

19.9%

14.5%

11.5%

17.2%

-

5.0%

10.0%

15.0%

20.0%

25.0%

1H12 2H12 1H13 2H13 FY12 FY13

Insurance Profit (A$m) Insurance Margin (%)

144 63

461

315 207

776

1H12 2H12 1H13 2H13 FY12 FY13

7.5

20.7

33.1

22.928.2

56.0

5.012.0 11.0

25.017.0

36.0

1H12 2H12 1H13 2H13 FY12 FY13

Cash EPS (cents) DPS (cents)

7.0%

19.7%

30.7%

20.2%

13.3%

25.3%

1H12 2H12 1H13 2H13 FY12 FY13

1.67

1.09

CET1

PCA

Targeted benchmark range

IAG FY13 INVESTOR REPORT 1

1. EXECUTIVE SUMMARY

GROUP HIGHLIGHTS

GWP growth of 11.8%, to $9.5bn (8.7% ex-AMI) Strong business performance, with improved underlying margin of 12.5% Reported margin of 17.2% boosted by favourable natural perils experience, higher than expected

reserve releases and credit spread benefit Strong performance from Australia Direct, despite pressure on NSW CTP Double digit underlying margin (11.2%) delivered by Australia Intermediated (CGU), along with strong

GWP growth Operating performance in New Zealand remains strong – AMI integration progressing to plan $20m profit contribution from Asia – on track to reach 10% of Group GWP by 2016 on a proportional

basis (FY13: 6.3%) Divestment of UK operation completed 112% increase in full year dividend to 36 cents per share (cps) – 65% of cash earnings Strong capital position – PCA multiple of 1.67, CET1 multiple of 1.09 FY14 guidance of GWP growth of 5-7% and an insurance margin of 12.5-14.5%

FY13 OVERVIEW

Insurance Australia Group Limited (IAG) has performed strongly across the 2013 financial year. The Group’s businesses in Australia and New Zealand have recorded further improvement in underlying profitability, along with strong gross written premium (GWP) growth. The Asia division has posted a modest profit and is on track to achieve its longer term financial goals.

Reported profitability has benefited from favourable natural peril, reserve release and investment market outcomes, which have driven an insurance margin well above the guidance held at the outset of the year.

Key features of IAG’s results for the year ended 30 June 2013 are:

GWP growth of 11.8%, to $9.5bn;

A materially higher reported insurance margin of 17.2%; and

An improved underlying margin of 12.5%.

The increase in GWP reflects strong growth in Australia, New Zealand and Asia, sourced from rate increases, some improvement in volumes and a full year’s contribution from the AMI acquisition in New Zealand. Favourable exchange rate movements in the second half assisted GWP growth in exceeding previously held guidance. Excluding AMI, GWP grew by 8.7%.

The reported insurance margin of 17.2% (FY12: 11.5%) incorporates:

Net natural peril claim costs of $464m, which were more than $150m below the related allowance and nearly $200m lower than the equivalent cost in FY12;

Prior period reserve releases of $212m, equivalent to 2.5% of net earned premium (NEP) and in excess of the 1-2% expectation held at the beginning of the year; and

A positive $110m impact from the narrowing of credit spreads during the year, in contrast to the negative $70m effect incurred in FY12.

Significantly higher investment income on shareholders’ funds, of $347m, was driven by much-improved equity market conditions.

Net profit after tax increased by over 270% to $776m. This was after recognition of a loss of $287m in respect of the UK business, the sale of which was completed in April 2013. The UK business has been treated as a discontinued operation for reporting purposes.

Strong GWP growth and underlying performance



Reported ROE in FY13 was 17.0%, and cash ROE increased to 25.3%, well in excess of the Group’s through-the-cycle target.

The Board has determined to pay a final fully franked dividend of 25.0 cents per ordinary share, increasing the full year dividend to 36.0 cents (FY12: 17.0cps). This equates to a cash payout ratio of 64.7%, in line with the Group’s policy to pay out 50-70% of full year cash earnings.

DIVISIONAL HIGHLIGHTS AND DEVELOPMENTS

At a divisional level:

The Group’s largest business, Australia Direct, has reported GWP growth of 6.6% and, as anticipated, a slightly lower underlying margin than FY12 owing to pressures in NSW CTP;

Australia Intermediated (CGU) has delivered a double digit underlying margin in FY13 (11.2%) and reported strong GWP growth;

The underlying performance of New Zealand has remained strong, with GWP growth of over 30% reflecting a full year’s input from AMI; and

Asia has produced a positive contribution after FY12’s Thai flood-affected result and, on a proportional basis, represented an increased portion of Group GWP, of 6.3%.

GROUP FY13 INSURANCE MARGIN – REPORTED VS. UNDERLYING

A$m A$m % A$m A$m %

Australia Direct 4,299 544 14.3 4,584 822 19.7

Australia Intermediated 2,759 258 10.8 3,028 470 17.8

New Zealand 1,210 103 10.4 1,575 115 8.9

Asia 219 (59) (38.6) 295 20 9.1

Corporate & Other 8 (1) n/a 16 1 n/a

Total Group 8,495 845 11.5 9,498 1,428 17.2

DIVISIONAL PERFORMANCE

FY12 FY13

GWPInsurance

Profit/(Loss)Insurance

MarginGWP

Insurance Profit

Insurance Margin

17.2%

12.5%

1.5%

1.9%

1.3%

FY13 Reported Margin Reserve Releases above 1% of NEP

Natural Perils below Allowance

Credit Spreads FY13 Underlying Margin

Increased earnings from all ongoing operating divisions



UNDERLYING INSURANCE RESULT

The Group has delivered an improved underlying insurance margin of 12.5% (FY12: 12.0%), including a second half outcome of 12.6%. IAG defines its underlying margin as the reported insurance margin adjusted for:

Net natural peril claim costs less related allowance for the period;

Reserve releases in excess of 1% of NEP; and

Credit spread movements associated with volatile investment markets.

CAPITAL

The Group’s capital position remains strong, at 1.67 times the Prescribed Capital Amount (PCA) as at 30 June 2013. If allowance is made for payment of the final dividend (which will occur in October 2013), the PCA multiple at 30 June 2013 would reduce to a level around the mid-point of the Group’s benchmark range of 1.4 to 1.6 times.

The Common Equity Tier 1 (CET1) ratio stood at 1.09 at 30 June 2013, against a target benchmark of 0.9-1.1.

The Group’s debt to total tangible capitalisation ratio is consistent with that at 31 December 2012, at 34.5%. This places the Group in the middle of its targeted range of 30-40%.

IAG’s key wholly-owned operating insurance subsidiaries continue to hold ‘very strong’ ‘AA-’ ratings from Standard & Poor’s (S&P). At the Group level, IAG is rated ‘A’.

The Group’s probability of adequacy for the outstanding claims liability remained at 90% at 30 June 2013.

OUTLOOK

The Group expects to report sound GWP growth of 5-7% in FY14. The lower rate of anticipated growth compared to FY13 reflects:

Reduced need for rate increases, particularly in property classes, to recover higher reinsurance and natural peril costs;

The absence of an increment from the AMI business in New Zealand, which has now been owned for over a year;

The cessation of GWP associated with the Victorian Fire Services Levy (FSL) from 1 July 2013 (FY13: $104m of GWP); and

Australia Direct’s decision to withdraw from the Queensland CTP market with effect from 1 January 2014 (FY13: $56m of GWP).

The Group anticipates reporting an insurance margin within the range of 12.5-14.5%. Underlying assumptions behind this guidance are:

Net losses from natural perils in line with allowance of $640m;

Lower prior period reserve releases equivalent to 1-2% of NEP; and

No material movement in foreign exchange rates or investment markets.

The outlook comprises the following divisional expectations:

Further GWP growth from Australia Direct and a higher underlying margin;

Continued GWP growth from CGU and an improving underlying margin;

Ongoing GWP growth in New Zealand, with continuing strong underlying profitability; and

Further progress in Asia, building on the positive momentum evident in FY13.

Higher underlying insurance margin of 12.5%

The Group’s capital position is strong

Positive outlook for FY14


2. STRATEGY

GROUP STRATEGY & PRIORITIES

REFINEMENT OF STRATEGIC PRIORITIES

Following the divestment of the UK business, the Group’s strategic priorities have been refined:

Accelerate profitable growth in Australia

IAG remains focused on leveraging its strong brands, customer bases and strategic capabilities in Australia. Combined GWP growth from the two Australian-based businesses was nearly 8% in FY13.

Australia Direct recorded GWP growth of 6.6% and a strong underlying margin in FY13. This outcome was achieved through the business’ ongoing focus on customer insights and its pricing capability.

CGU reported strong GWP growth of 9.7% and achieved a significantly improved underlying margin in FY13, of double digit proportions, as benefits from enhanced underwriting disciplines and the implementation of a new operating model were realised.

Sustain leading position in New Zealand

In New Zealand, following the acquisition of AMI in FY12, the Group’s focus is on securing and maintaining its market-leading position. In FY13, the business reported a strong underlying performance, with GWP growth of over 30% largely reflecting a first full year of AMI.

Realise the potential of Asian platform

The Group remains on track to reach its goal of Asia representing 10% of GWP by 2016, on a proportional basis. A significant step in FY13 was the acquisition of Kurnia Insurans (Malaysia) Berhad, via IAG’s highly profitable Malaysian joint venture, AmGeneral, completed in late September 2012. Adjusted for a full year’s contribution from Kurnia, Asia represented approximately 7% of the Group’s GWP in FY13, on a proportional basis.

The Asia division produced a much-improved earnings contribution of $20m in FY13, and the Group has committed increased capability to the region to ensure the potential of the broader Asian platform is realised over the medium to longer term.

Strategic priorities refined, following exit from UK

2. STRATEGY


Customer focused delivery and execution

Customer focus has always been a key strategic pillar for the Group, and significant work has continued in FY13 on improving the customer experience. The Group has also taken a leadership role in protecting customers and making communities safer with its participation in the Australian Business Roundtable for Disaster Resilience & Safer Communities. A related White Paper, Building our nation’s resilience to natural disasters, was launched in June 2013.

Leverage cultural strengths

The Group’s long term aspiration is for career and development to be the key differentiator between IAG and its peers. The Group is working actively to leverage its cultural strengths, organisational skills and expertise.


3. GROUP RESULTS

FINANCIAL PERFORMANCE

KEY FOREIGN EXCHANGE RATES APPLIED

GROUP RESULTS1H12A$m

2H12A$m

1H13A$m

2H13A$m

FY12A$m

FY13A$m

Gross written premium 4,045 4,450 4,593 4,905 8,495 9,498

Gross earned premium 3,916 4,130 4,494 4,641 8,046 9,135

Reinsurance expense (335) (365) (399) (418) (700) (817)

Net earned premium 3,581 3,765 4,095 4,223 7,346 8,318

Net claims expense (2,819) (2,602) (2,436) (2,546) (5,421) (4,982)

Commission expense (302) (302) (331) (364) (604) (695)

Underwriting expense (657) (733) (714) (769) (1,390) (1,483)

Underwriting profit/(loss) (197) 128 614 544 (69) 1,158

Investment income on technical reserves 473 441 201 69 914 270

Insurance profit 276 569 815 613 845 1,428

Net corporate expense - (56) (21) (33) (56) (54)

Interest (44) (53) (50) (45) (97) (95)

Profit from fee based business 10 5 13 8 15 21

Share of profit/(loss) from associates (1) (4) (2) 3 (5) 1

Investment income on shareholders' funds (30) 119 201 146 89 347

Profit before income tax and amortisation 211 580 956 692 791 1,648

Income tax expense (29) (148) (227) (197) (177) (424)

Profit after income tax (before amortisation) 182 432 729 495 614 1,224

Non-controlling interests (23) (35) (60) (46) (58) (106)

Profit after income tax and non-controlling interests (before amortisation) 159 397 669 449 556 1,118

Amortisation and impairment (8) (20) (26) (29) (28) (55)

Profit attributable to IAG shareholders from continuing operations 151 377 643 420 528 1,063

Net (loss) after tax from discontinued operation (7) (314) (182) (105) (321) (287)

Profit attributable to IAG shareholders 144 63 461 315 207 776

Insurance Ratios (Continuing Operations) 1H12 2H12 1H13 2H13 FY12 FY13

Loss ratio 78.7% 69.1% 59.5% 60.3% 73.8% 59.9%

Immunised loss ratio 70.1% 64.1% 61.6% 63.5% 67.0% 62.6%

Expense ratio 26.7% 27.5% 25.5% 26.8% 27.1% 26.2%

Commission ratio 8.4% 8.0% 8.1% 8.6% 8.2% 8.4%

Administration ratio 18.3% 19.5% 17.4% 18.2% 18.9% 17.8%

Combined ratio 105.4% 96.6% 85.0% 87.1% 100.9% 86.1%

Immunised combined ratio 96.8% 91.6% 87.1% 90.3% 94.1% 88.8%

Insurance margin 7.7% 15.1% 19.9% 14.5% 11.5% 17.2%

Key Financial Metrics (Total Operations) 1H12 2H12 1H13 2H13 FY12 FY13

Reported ROE (average equity) (% pa) 6.5% 2.9% 20.7% 13.5% 4.7% 17.0%

Cash ROE (average equity) (% pa) 7.0% 19.7% 30.7% 20.2% 13.3% 25.3%

Basic EPS (cents) 6.95 3.06 22.30 15.27 10.01 37.57

Diluted EPS (cents) 6.91 3.05 21.54 14.90 9.96 36.44

Cash EPS (cents) 7.48 20.73 33.08 22.87 28.20 55.95

DPS (cents) 5.00 12.00 11.00 25.00 17.00 36.00

Probability of adequacy 90% 90% 90% 90% 90% 90%

PCA multiple n/a n/a n/a 1.67 n/a 1.67

FY12 FY13 FY12 FY13New Zealand dollar 0.7829 0.8474 0.7797 0.8006British pound 1.5340 1.6646 1.5352 1.5276Thai baht 0.0309 0.0351 0.0314 0.0322Malaysian ringgit 0.3080 0.3464 0.3140 0.3183

Balance Sheet(spot rate)

Income Statement(average rate)

3. GROUP RESULTS


INSURANCE RATIOS

LOSS RATIO EXPENSE RATIOS

COMBINED RATIO INSURANCE MARGIN

PREMIUMS

GWP for the Group was $9,498m, up 11.8% from $8,495m in FY12. Growth was derived from rate increases in Australia and New Zealand, some improvement in volumes and a full year’s contribution from AMI in New Zealand (FY12: 3 months). Excluding AMI, GWP growth was 8.7%.

GWP – FY13 VS. FY12 (A$M)

78.7% 69.1%

59.5% 60.3%

73.8%

59.9%

70.1%

64.1% 61.6% 63.5% 67.0%

62.6%

1H12 2H12 1H13 2H13 FY12 FY13Loss Ratio Immunised Loss Ratio

14.2% 15.1%13.1% 14.2% 14.7% 13.7%

8.4% 8.0% 8.1%

8.6% 8.2% 8.4%

4.1% 4.4%4.3%

4.0% 4.2% 4.1%

26.7% 27.5% 25.5%

26.8% 27.1% 26.2%

1H12 2H12 1H13 2H13 FY12 FY13

Levies Commission Ratio Administration Ratio

105.4% 96.6%

85.0% 87.1% 100.9%

86.1%

96.8% 91.6%

87.1% 90.3%

94.1% 88.8%

1H12 2H12 1H13 2H13 FY12 FY13

Combined Ratio Immunised Combined Ratio

7.7%

15.1%

19.9%

14.5% 11.5%

17.2%

12.4% 11.5%12.1%

12.6%

12.0%

12.5%

1H12 2H12 1H13 2H13 FY12 FY13

Insurance Margin Underlying Margin

8,495

9,498

285

269

365

76 8

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

FY12 Australia Direct Australia Intermediated

New Zealand Asia External Reinsurance FY13

3. GROUP RESULTS


Comparing FY13 GWP with FY12 on a divisional basis:

Australia Direct grew by 6.6% to $4,584m, with rate increases to recover higher reinsurance costs and, in longer tail classes (CTP), to reflect lower investment yields, supplemented by volume growth;

Australia Intermediated (CGU) rose by 9.7% to $3,028m, with growth derived from a mixture of higher rate, increased volume and improved retention;

New Zealand reported an increase in GWP of over 30%, to $1,575m, reflecting a full 12-month contribution from AMI, significant rate increases to recover substantially higher reinsurance costs, and a favourable foreign exchange movement; and

In Asia, consolidated GWP (in respect of Thailand) rose by nearly 35%, following a strong recovery in car production, incentives for first-time vehicle owners and market share gain.

INSURANCE MARGIN

The Group’s insurance margin increased to 17.2% in FY13 (FY12: 11.5%). While assisted by favourable natural peril, reserve release and investment market effects, the outcome includes a near-$300m improvement in underwriting result across the Group.

The period’s insurance profit of $1,428m also contains the following notable elements:

Net natural peril claim costs of $464m, which were nearly $200m lower than those incurred in FY12 and $156m lower than allowance;

Reserve releases of $212m (FY12: $195m), or 2.5% of NEP; and

A favourable credit spread impact of $110m.

INSURANCE PROFIT / MARGIN – FY13 VS. FY12

845

1,428

104

296

17194

180

0

200

400

600

800

1,000

1,200

1,400

FY12 Underwriting Result Yield Reserve Releases Natural Perils Credit Spreads FY13

11.5%

17.2%

Strong underlying performance, boosted by peril, reserve release and credit spread effects

Strong GWP growth of 11.8%

3. GROUP RESULTS


On a divisional basis:

Australia Direct has increased its insurance profit by over 50%, to $822m, aided by notably lower net natural peril claim costs and a favourable credit spread impact. Underlying performance has been strong, but at a lower level than FY12 owing to profitability pressures in NSW CTP associated with lower investment yields, pricing constraints and high claim frequency. An improving trend was evident in 2H13;

CGU has delivered an underlying double digit margin in line with expectations. This improved performance reflects increased rates, as well as benefits from the new operating model and past initiatives. A reported insurance margin of 17.8% was assisted by higher than expected reserve releases and a favourable credit spread movement;

The New Zealand business has continued to perform well at an underlying level. A lower reported margin of 8.9% (FY12: 10.4%) reflects a net reserve strengthening of $35m largely in respect of past earthquake events, as identified in 1H13. The AMI integration continues to proceed to plan; and

Asia produced an insurance profit of $20m, a significant improvement on the Thai flood-impacted loss of $59m in FY12. The Thai business has recorded strong growth and continues to produce satisfactory returns.

REINSURANCE EXPENSE

The total reinsurance expense includes the cost of all covers purchased by the Group, including catastrophe, casualty and facultative protection. The FY13 expense of $817m represents an increase of nearly 17% over FY12.

REINSURANCE EXPENSE

1H12 2H12 1H13 2H13 FY12 FY13

INSURANCE MARGIN IMPACTS A$m A$m A$m A$m A$m A$m

Reserve releases 83 112 90 122 195 212

Natural perils (396) (262) (133) (331) (658) (464)

Natural perils allowance 262 311 310 310 573 620

Credit spreads (80) 10 90 20 (70) 110

Reserve releases 2.3% 3.0% 2.2% 2.9% 2.7% 2.5%

Natural perils (11.1%) (7.0%) (3.2%) (7.8%) (9.0%) (5.6%)

Natural perils allowance 7.3% 8.3% 7.6% 7.3% 7.8% 7.5%

Credit spreads (2.2%) 0.3% 2.2% 0.5% (1.0%) 1.3%

402 417 405 431 415 436 435 557

700 817

6.3% 6.2% 6.3% 6.5% 6.2% 6.3% 6.2%

7.4%

8.2% 8.6%

-

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-

100

200

300

400

500

600

700

800

900

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Reinsurance expense ($m) Reinsurance expense (% of GWP)

Increased reinsurance expense reflects full year of AMI and overall business growth

3. GROUP RESULTS


The higher reinsurance expense represents an amalgam of:

A full year of the standalone AMI programme;

Overall business growth and associated reinsurance needs;

Higher rates associated with the calendar 2012 catastrophe renewal impacting the first half of the financial year; and

The absence of approximately $110m of reinstatement costs amortised in the opening half of FY12.

FY13’s reinsurance expense represents 8.6% of reported GWP, slightly lower than the 8.7% recorded in 1H13.

Regional reinsurance rates have stabilised and the renewal of the Group’s catastrophe programme, for calendar 2013, was completed at a cost in line with expectations, while providing increased coverage compared to 2012.

CLAIMS

The improved FY13 immunised loss ratio of 62.6% (FY12: 67.0%) reflects the combined effect of:

Significantly lower net natural peril claim costs;

Improved claim practices and efficiencies across the Group; and

Slightly higher prior period reserve releases.

After inclusion of the substantial favourable shift in the risk free discount rate adjustment, in response to yield curve movements, the reported loss ratio of 59.9% is materially lower than FY12 (73.8%).

Reserve Releases

The FY13 net claims expense includes $212m of prior period reserve releases, equivalent to 2.5% of NEP. This compares to $195m (2.7% of NEP) reported in FY12, and is higher than the Group’s earlier expectations of 1-2% of NEP.

FY13 reserve releases primarily reflect favourable experience in Australian long tail classes, such as professional risks, workers’ compensation and CTP, in a low claims inflation environment. They included some notable case-specific releases within CGU, predominantly in 1H13.

The Group believes that reserve releases of around 1% of NEP are a recurring feature of its reported operating results in benign inflationary periods. This reflects the Group’s approach to reserving, with long term inflation assumptions tending to be in excess of actual experience in most years. The Group’s expectation is for lower reserve releases of 1-2% of NEP in FY14.

Natural Perils

The FY13 net claims expense included $464m (FY12: $658m) of losses from natural perils (net of reinsurance), compared to an allowance of $620m. The net effect of natural perils (after allowance) was a positive impact on the reported insurance margin of 1.9% (FY12: -1.2%).

1H12 2H12 1H13 2H13 FY12 FY13

RESERVE RELEASES A$m A$m A$m A$m A$m A$m


Impact on insurance margin 2.3% 3.0% 2.2% 2.9% 2.7% 2.5%

Lower loss ratio reflects more benign peril conditions and improved claim practices

Reserve releases higher than expected, at 2.5% of NEP

Net natural peril claim costs $156m lower than allowance

3. GROUP RESULTS


NATURAL PERILS – IMPACT ON INSURANCE MARGIN

The FY13 natural peril outcome is the first for a number of years to fall below allowance. After the relatively benign conditions experienced in 1H13, natural peril activity normalised in the second half of the year, with net natural peril claim costs in 2H13 exceeding the related allowance by $21m.

The most significant peril event during the year was ex-Tropical Cyclone Oswald which affected the coastal regions of Queensland and NSW in the month of January 2013. The related cost of $130m was in line with the estimated cost announced by the Group in early February 2013. There were also a number of bushfire events in January, which collectively amounted to a net cost of approximately $30m.

Attritional natural peril events (less than $15m in size) amounted to $214m, compared to $278m in FY12.

The Group’s natural peril allowance for FY14 is $640m, a 3.2% increase over the FY13 allowance. This reflects the underlying growth of the business, while allowing for the increased reinsurance protection in place.

As at 30 June 2013, approximately $105m of the $250m deductible in respect of the Group’s calendar 2013 aggregate catastrophe cover had been eroded.

-3%

-2%

-1%

0%

1%

2%

FY08 FY09 FY10 FY11 FY12 FY13

Natural perils net of allowance - margin impact

1H12 2H12 1H13 2H13 FY12 FY13

NATURAL PERILS A$m A$m A$m A$m A$m A$m

Natural peril claim costs (396) (262) (133) (331) (658) (464)

Natural peril allowance 262 311 310 310 573 620

Impact on insurance profit (134) 49 177 (21) (85) 156

Impact on insurance margin (3.8%) 1.3% 4.4% (0.5%) (1.2%) 1.9%

FY13 NATURAL PERIL COSTS BY EVENT A$mStorms - Brisbane and NSW (November 2012) 20 Windstorm and thunderstorms - Western Australia/Tamworth (November-December 2012) 38 Ex-Tropical Cyclone Oswald (January 2013) 130 East coast low - NSW and Queensland (February 2013) 23 East coast low and Bay of Plenty/Tasman Nelson flooding - NSW/New Zealand (April 2013) 19 Floods, gales and snow - SE Australia/New Zealand (June 2013) 20 Other events (<$15m) 214 Total 464

FY14 guidance includes increased natural peril assumption of $640m

3. GROUP RESULTS


EXPENSES

The Group’s reported expense ratio was 26.2% (FY12: 27.1%). Excluding government levies, the Group’s administration ratio has improved from 14.7% in FY12 to 13.7% in FY13 reflecting the combined effect of increased net earned premium and tightly controlled expenditure.

The Group’s commission ratio of 8.4% was slightly higher than FY12 (8.2%), reflecting relatively strong growth in the intermediated CGU and NZI businesses.

INVESTMENT INCOME ON TECHNICAL RESERVES

Investment income on technical reserves for FY13 was $270m, compared to $914m in FY12. This includes unrealised capital losses associated with the discount rate adjustment of $223m, compared with an equivalent positive adjustment of $497m in FY12. This reflects a steepening of the yield curve, particularly at the long end, compared to the previous year end position.

Credit spread movements remained volatile over the course of the year, with an overall positive impact of $110m. This comprised $90m in 1H13, as spreads narrowed, and a smaller benefit of $20m in the second half. FY12 incurred an adverse credit spread impact of $70m.

Allowing for credit spreads and the movement in the discount rate adjustment, the Group continued to generate over 100bps of return above the risk free rate, across the entire technical reserves portfolio. The portfolio continues to be aligned with the average weighted duration of the Group’s claims liability, at three to four years.

NET CORPORATE EXPENSE

A pre-tax net corporate expense of $54m has been identified in FY13 (FY12: $56m), broadly in line with the guidance provided at the outset of the financial year. The post-tax impact on reported earnings is approximately $38m.

As previously indicated, the FY13 charge stems from:

Costs associated with the implementation of CGU’s revised operating model ($39m); and

Integration costs associated with AMI in New Zealand ($15m).

These two sources also accounted for the bulk of the equivalent charge in FY12.

No net corporate expense is currently anticipated in FY14.

PROFIT FROM FEE BASED BUSINESS

Fee based business generated a profit of $21m in FY13, compared to $15m in FY12. The improved outcome reflects higher fee income earned by CGU in its role as agent in respect of the NSW and Victorian workers’ compensation schemes.

SHARE OF ASSOCIATES

The Group’s Asian interests represent a large portion of the share of earnings from associates, and in FY13 comprised:

A 49% interest in the Malaysian joint venture, AmGeneral Holdings, which produced a strong insurance margin in excess of 13%;

A 26% interest in SBI General Insurance Company in India, where modest losses were similar to last year but lower than expectations, as SBI General moves beyond the initial start-up phase;

Further improvement in expense ratio

Favourable credit spread impact of $110m, skewed to front half of year

Net corporate expense in respect of CGU’s revised operating model and AMI integration

Share of associates largely derived from Asian interests

3. GROUP RESULTS


A 20% interest in Bohai Property Insurance in China, which reported a small loss which was better than expectations, as IAG’s capability transfer programme is rolled out; and

A 30% interest in AAA Assurance Corporation in Vietnam, which produced a small loss. In July 2013, the Group increased its interest in AAA Assurance to 60.9%.

The combined contribution from these Asian associates was a profit of $19m, before allocation of $19m of regional support and development costs which reduced their overall input to breakeven.

After the inclusion of other associate interests within the Group, the total share of associates was a profit of $1m (FY12: $5m loss).

INVESTMENT INCOME ON SHAREHOLDERS’ FUNDS

Investment income on shareholders’ funds was a profit of $347m, compared to a profit of $89m in FY12. This significantly improved outcome reflects much stronger equity markets in FY13, compared to FY12, with the broader Australian index (S&P ASX200 Accumulation) delivering a positive return of 22.8% over the year to 30 June 2013, compared to a negative return of 6.7% in FY12.

At 30 June 2013 the weighting to growth assets (equities and alternatives) within shareholders’ funds stood at approximately 46%, compared to 40% at 30 June 2012 and 43% at 31 December 2012.

TAX EXPENSE

The Group reported a tax expense of $424m in FY13, compared to $177m in FY12, representing an effective tax rate (pre-amortisation) of 25.7%. This reconciles to the prevailing Australian corporate rate of 30%, after allowing for reinsurance recoveries by captive vehicles domiciled in lower tax jurisdictions and franking credits generated from the Group’s investment portfolio.

NON-CONTROLLING INTERESTS

The $106m non-controlling interests in the Group’s profit compares to $58m in FY12. The majority of the increase reflects higher earnings attributable to the minority 30% interest in Insurance Manufacturers of Australia Pty Limited (IMA), whose short tail business lines form part of Australia Direct. The improved result of this business was particularly influenced by a lower net natural peril claim experience compared to FY12.

AMORTISATION AND IMPAIRMENT

The FY13 amortisation charge of $55m compares to $28m reported in FY12. The higher charge in FY13 reflects:

A full year of amortisation associated with intangible assets recognised upon the acquisition of AMI in New Zealand;

IAG’s share of the amortisation charge in respect of intangible assets recognised upon the acquisition of Kurnia by AmGeneral in Malaysia, of approximately $10m; and

An approximately $10m impairment to the carrying value of the Group’s investment in AAA Assurance in Vietnam. This conservative treatment reflects AAA Assurance’s current loss-making position.

The amortisation charge in FY14 is expected to be significantly lower than FY13, reflecting the short amortisation schedule of certain AMI and Kurnia intangibles.

Shareholders’ funds income reflects much stronger equity markets

Higher non-controlling interests owing to increased IMA result

Higher amortisation includes AMI and Kurnia effects

3. GROUP RESULTS


DISCONTINUED OPERATION

The sale of the UK business was completed in April 2013 and it has been disclosed separately as a discontinued operation. Comparative figures for FY12 have been adjusted accordingly.

The $287m loss after tax from discontinued operation in FY13 comprises:

An insurance loss for the period of $17m;

An operating loss of $12m in respect of fee based business;

A loss on sale of the UK operation of $175m; and

$83m from the recycling of a foreign currency loss previously included in reserves, which was recognised upon completion of sale in 2H13.

EARNINGS PER SHARE

Basic earnings per share (EPS) in FY13 was 37.57 cents per share (cps), compared to 10.01cps in FY12, an increase of over 275%. On a diluted basis, EPS was 36.44cps (FY12: 9.96cps). Basic EPS was calculated on weighted average capital on issue in FY13 of 2,067m shares (excluding treasury shares).

Basic and diluted EPS in respect of continuing operations were 51.46cps and 49.60cps respectively, after exclusion of the discontinued UK operation.

Cash EPS was 55.95cps, compared to 28.20cps in FY12, an increase of nearly 100%. Cash earnings are used for the purposes of targeted ROE and dividend payout policy, and are defined as:

Net profit after tax attributable to IAG shareholders;

Plus amortisation and impairment of acquired identifiable intangibles; and

Excluding any unusual items.

ORDINARY ISSUED CAPITALShares

(m)

Balance at the beginning of the financial year 2,079

Balance at the end of the financial year 2,079

Average weighted shares on issue1 2,067

1 Excludes treasury shares held in trust.

FY13

A$m

Net profit after tax 776

Intangible amortisation 55

Unusual items:

- Corporate expenses 54

- Tax effect on corporate expenses (16)

- Net loss after tax from discontinued operation 287

Cash earnings 1,156

Dividend payable 748

Cash payout ratio 64.7%

CASH EARNINGS

Cash EPS nearly doubled in FY13

UK identified as a discontinued operation

3. GROUP RESULTS


DIVIDENDS

IAG’s policy is to pay dividends equivalent to approximately 50–70% of reported cash earnings in any given financial year.

The Board has determined to pay a fully franked final dividend of 25.0 cents per ordinary share (2H12: 12.0cps). This brings the full year dividend to 36.0 cents (FY12: 17cps), which equates to a payout ratio of 64.7% of cash earnings for the year. The final dividend is payable on 9 October 2013 to shareholders registered as at 5pm on 11 September 2013.

The dividend reinvestment plan (DRP) will operate for the final dividend. The issue price per share for the 2H13 dividend will be the Average Market Price as defined in the DRP terms, and there will be no discount for participants. Shares allocated under the DRP will be purchased on-market. Information about IAG’s DRP is available at: http://www.iag.com.au/shareholder/reinvestment/index.shtml.

As at 30 June 2013, and after allowance for payment of the final dividend, the Group’s franking balance was $436m, giving the capacity to fully frank a further $1,017m of distributions.

RETURN ON EQUITY

The Group targets a cash ROE of at least 1.5 times WACC through the cycle. This return is based on net profit after tax attributable to IAG shareholders, adjusted for amortisation and impairment of intangibles and unusual items. Based on the Group’s historic cost of capital and current business mix, this target equates to a cash ROE of approximately 15%. In FY13, the Group reported a cash ROE of 25.3%, compared to 13.3% in FY12.

RETURN ON EQUITY (ANNUALISED)

6.5%2.9%

20.7%

13.5%

4.7%

17.0%

7.0%

19.7%

30.7%

20.2%

13.3%

25.3%

1H12 2H12 1H13 2H13 FY12 FY13

Actual ROE attributable to holders of ordinary shares

Cash ROE attributable to holders of ordinary shares

Cash payout ratio of 64.7% in FY13

Cash ROE of 25.3%


4. DIVISIONAL OVERVIEW

FY13 DIVISIONAL FINANCIAL PERFORMANCE

Australia Direct

Australia Intermediated New Zealand Asia

Corporate & Other

Total Continuing

A$m A$m A$m A$m A$m A$m

Gross written premium 4,584 3,028 1,575 295 16 9,498

Gross earned premium 4,445 2,886 1,524 267 13 9,135


Net earned premium 4,164 2,641 1,287 220 6 8,318

Net claims expense (2,758) (1,316) (774) (130) (4) (4,982)


Underwriting expense (707) (518) (229) (29) - (1,483)

Underwriting profit 609 397 142 10 - 1,158

Investment income on technical reserves 213 73 (27) 10 1 270

Insurance profit 822 470 115 20 1 1,428Profit from fee based business - 19 2 - - 21Share of profit from associates - 1 - - - 1

Total divisional results 822 490 117 20 1 1,450

Insurance Ratios

Loss ratio 66.2% 49.8% 60.1% 59.1% 59.9%

Expense ratio 19.2% 35.1% 28.8% 36.4% 26.2%

Commission ratio 2.2% 15.5% 11.0% 23.2% 8.4%

Administration ratio 17.0% 19.6% 17.8% 13.2% 17.8%

Combined ratio 85.4% 84.9% 88.9% 95.5% 86.1%

Insurance margin 19.7% 17.8% 8.9% 9.1% 17.2%


5. AUSTRALIA DIRECT


INSURANCE RATIOS



1H12A$m

2H12A$m

1H13A$m

2H13A$m

FY12A$m

FY13A$m





Net claims expense (1,553) (1,485) (1,372) (1,386) (3,038) (2,758)


Underwriting expense (316) (355) (334) (373) (671) (707)

Underwriting profit/(loss) (43) 63 315 294 20 609


Insurance profit 230 314 453 369 544 822

Insurance Ratios 1H12 2H12 1H13 2H13 FY12 FY13

Loss ratio 83.2% 76.4% 66.4% 66.0% 79.7% 66.2%


Expense ratio 19.0% 20.4% 18.3% 20.0% 19.7% 19.2%



Combined ratio 102.2% 96.8% 84.7% 86.0% 99.4% 85.4%



83.2% 76.4%

66.4% 66.0% 79.7%

66.2%

74.6% 70.6%

68.0% 68.1%

72.6%

68.0%

1H12 2H12 1H13 2H13 FY12 FY13

Loss Ratio Immunised Loss Ratio

12.1% 12.9%10.9%

12.7% 12.5% 11.8%

2.1% 2.1%

2.1%

2.2% 2.1% 2.2%

4.8%5.4%

5.3%

5.1% 5.1% 5.2%

19.0% 20.4%

18.3% 20.0% 19.7% 19.2%

1H12 2H12 1H13 2H13 FY12 FY13

Administration Ratio Commission Ratio Levies

102.2% 96.8% 84.7% 86.0%

99.4% 85.4%

93.6% 91.0% 86.3% 88.1%

92.3% 87.2%

1H12 2H12 1H13 2H13 FY12 FY13


12.3% 16.2% 21.9% 17.6% 14.3% 19.7%

15.2%15.0%

13.1% 14.0%15.2%

13.5%

1H12 2H12 1H13 2H13 FY12 FY13


5. AUSTRALIA DIRECT


EXECUTIVE SUMMARY

Australia Direct provides personal lines insurance products, including compulsory third party (CTP)

Single pricing and claim platforms cover all its state-based brands: NRMA, RACV (via a distribution agreement), SGIO, SGIC

FY13 GWP growth of 6.6% - primarily rate, supplemented by volume

Strong underlying performance in FY13, despite pressure on NSW CTP profitability, with improvement in 2H13

Reported margin of 19.7% boosted by favourable natural peril and credit spread impacts

Further GWP growth and higher underlying margin expected in FY14

PREMIUMS

Australia Direct’s GWP increased by 6.6% to $4,584m (FY12: $4,299m). This outcome included growth of 4.6% in 2H13. Rate increases were implemented across the year to recover higher reinsurance and natural peril costs, and to reflect lower investment yields impacting the long tail book.

While rate accounted for most of the year’s GWP growth, this continued to be supplemented by volume gains, notably in motor and particularly in states outside NSW. GWP growth has been supported by a range of marketing initiatives and ongoing investment in customer insights and pricing capability, targeting growth in preferred risk areas. Towards the end of FY13, a new ‘Experts That Care’ brand campaign was launched in NSW and the ACT.

Since 2H12, there has been a slowing in GWP growth which is largely a function of the reduction in the level of rate increases applied to the home portfolio, as higher input costs (notably reinsurance and natural perils) become more adequately reflected in pricing.

Reduced collection of the Victorian Fire Services Levy (FSL), which ceased on 1 July 2013, was also a modest factor, particularly in the second half. GWP associated with Victorian FSL amounted to $50m in FY13 (2H13: $14m), compared to $54m in FY12.

GWP growth was achieved across most product classes and in all states. An exception was the Retail Business Insurance (RBI) book, where a 13.8% decline in GWP is attributable to the exiting of poorer performing segments and the transfer of the dealer business portfolio to CGU from 1 July 2012. The ongoing annual RBI book is approximately $160m in size.

Australia Direct's online sales channel continues to register substantial growth, with volumes increasing by over 16% against FY12 across all retail brands. Australia Direct continues to enhance its digital sales and service offering, and in September 2012 launched the Online Self Service Centre. This enables customers to view online their home, motor and CTP policies, as well as update personal details, change car registration details and pay outstanding accounts.

GWP growth of 7.9% was recorded by Australia Direct’s short tail business in FY13. The level of GWP growth has continued to ease back from the peak witnessed in 2H12 (15.0%) as input cost pressures have abated. Short tail GWP growth in 2H13 was 5.2%, compared to 10.7% in 1H13.

48%

Australia Direct - % Group GWP

GWP growth of 6.6% - primarily rate, supplemented by volume

FY13 GWP BY TAIL

FY13 GWP BY CLASS

79%

21%

Short Tail

Long Tail

44%

31%

20%

5%

Motor

Home

CTP

Other

5. AUSTRALIA DIRECT


Motor GWP increased by 4.7% compared to FY12, and by 3.2% in 2H13 against the comparable half. The majority of motor GWP growth was derived from rate increases, supplemented by volume growth across the year. Due renewal levels for motor have remained high and were similar to those of FY12.

Home GWP increased by 12.6%, compared to FY12, and by 8.0% in 2H13. The movement reflects an amalgam of:

Cumulative rate increases to recover higher input costs;

Reduced Victorian FSL collection, notably in 2H13; and

Slightly lower due renewal levels, with the completion of the roll out of non-opt out flood cover in most states a contributory factor.

Australia Direct has also implemented a range of initiatives to address affordability, particularly with respect to the home portfolio. This includes greater flexibility around premium and excess options on renewal, resulting in an increased proportion of customers with a higher than standard excess.

FY13 SHORT TAIL GWP BY STATE FY13 LONG TAIL GWP BY STATE

Overall long tail (primarily CTP) GWP growth of 6.5% was recorded in FY13. The impact of rate increases was slightly offset by lower volumes, as poorer risks were shed.

GWP GROWTH 1H12 2H12 1H13 2H13 FY12 FY13

Motor 5.7% 9.9% 6.3% 3.2% 7.8% 4.7%

Home 16.7% 24.0% 17.5% 8.0% 20.4% 12.6%

Total Short Tail 9.8% 15.0% 10.7% 5.2% 12.5% 7.9%

Long Tail 5.2% 5.5% 7.4% 5.6% 5.4% 6.5%

Retail Business Insurance (RBI) (0.6%) 4.9% (17.6%) (10.3%) 2.2% (13.8%)

Total GWP 8.4% 12.5% 8.8% 4.6% 10.5% 6.6%

60%24%

7%

9%

NSW/ACT

Victoria

Queensland

Other

92%

6%

2%

NSW/ACT

Queensland

Other

Motor GWP growth of 4.7%, majority derived from rate

CTP growth driven by rate increases

5. AUSTRALIA DIRECT


In the face of lower investment yields owing to reduced interest rates and, in the case of NSW, high claim frequency, the following approved rate increases were enacted during FY13:

NSW – a 4.5% increase from 1 July 2012 and a greater than 8% increase effective 1 February 2013;

Queensland – ceiling price increments of $5 from 1 October 2012, $5 from 1 January 2013 and $3 from 1 April 2013; and

ACT – a 9.9% increase from 1 September 2012, and a minor (c.0.1%) decrease in May 2013 as a result of changes to the way the ACT government collects its administration levy.

In NSW, Australia Direct’s share of CTP registrations (on a 12-month rolling average basis) has reduced to 39%, from nearly 41% in the preceding 12-month period. Targeted risk selection has delivered an improved business mix through a reduction in volumes in higher risk segments of the portfolio.

On a similar basis, Queensland market share has reduced slightly to 5.2% (FY12: 5.4%). As previously advised, unsatisfactory performance has led to limited marketing activity in respect of Queensland CTP in recent years.

Australia Direct was the sole provider of CTP products in the ACT market during FY13.

During 1H13, Australia Direct introduced a number of new products, seeking to further leverage the strength of the NRMA Insurance brand. These included life insurance (underwritten by TAL Direct) and a bicycle product (underwritten by Swann Insurance (CGU)) targeting the growth in high end bicycles. Related volumes have met or exceeded expectations. An income protection product (underwritten by TAL Direct) was launched late in 2H13.

REINSURANCE EXPENSE

Reinsurance expense of $281m in FY13 was approximately 7% higher than FY12 ($262m). This reflects the combined effect of:

Higher catastrophe cover costs;

Overall business growth; and

The absence of amortised reinstatement costs incurred during 1H12.

CLAIMS

Australia Direct has reported a lower immunised loss ratio of 68.0% in FY13 (FY12: 72.6%). This largely reflects a notably lower net natural peril claim cost experience, following particularly benign activity in 1H13.

The reported loss ratio of 66.2% is materially lower than FY12 (79.7%), and incorporates a favourable movement in the discount rate adjustment. This reflects a steepening of the yield curve compared to 30 June 2012.

Reserve Releases

Reserve releases of $105m were $18m lower than those reported in FY12 ($123m), with 2H13 releases consistent with those of the first half. The majority of FY13’s reserve releases were sourced from the CTP portfolios, following favourable experience against existing underlying assumptions.

1H12 2H12 1H13 2H13 FY12 FY13RESERVE RELEASES A$m A$m A$m A$m A$m A$mReserve releases 59 64 53 52 123 105 Impact on insurance margin 3.2% 3.3% 2.6% 2.5% 3.2% 2.5%

Improved loss ratio influenced by lower natural perils

5. AUSTRALIA DIRECT


Natural Perils

Losses from natural perils (net of reinsurance) totalled $205m, which was $123m lower than allowance for the year. Relatively benign conditions existed across the year, but were particularly pronounced in 1H13 which contained no major events of note. 2H13 perils were $32m below related allowance, with activity concentrated at the beginning of the half and dominated by the ex-Tropical Cyclone Oswald event in January 2013.

Net natural peril experience in FY12 included the major Victorian hailstorm event in December 2011.

Claim Experience

Excluding natural perils, the FY13 short tail claim experience was characterised by:

A slight decrease in frequency compared to FY12, owing to a reduction in motor collision; and

Underlying average claim cost increases in line with inflation, with increases skewed slightly to the home book.

Overall claim experience continues to reflect the volume growth in the business over the past 24 months.

Australia Direct’s revised partner network relationship model with motor repairers continues to deliver favourable customer experience and a positive impact on average repair costs. Launched in NSW metropolitan regions and Canberra on 1 July 2012, rollout was extended to Victoria in February 2013, and commenced in Western Australia in July 2013.

As advised at 1H13, in NSW CTP, the proportion of customers injured in accidents who are making a claim has risen, as well as the number of small claims made through the accident notification (ANF) process. Claim frequency remained high in 2H13.

EXPENSES

Australia Direct’s total expenses in FY13 amounted to $797m (FY12: $752m). This equates to an improved expense ratio of 19.2% (FY12: 19.7%), reflecting strong growth in NEP, of 9.3%, and tight expense control across the business.

Of the 6% increase in expenditure over FY12, roughly half was attributable to higher levies, in large part driven by increased home rates. The balance reflected underlying business growth.

Excluding levies, Australia Direct’s administration expense ratio improved to 11.8% in FY13, continuing the trend of steady improvement evident since FY08.

1H12 2H12 1H13 2H13 FY12 FY13NATURAL PERILS A$m A$m A$m A$m A$m A$mNatural peril claim costs (192) (180) (73) (132) (372) (205)Natural peril allowance 146 153 164 164 299 328Impact on insurance profit (46) (27) 91 32 (73) 123Impact on insurance margin (2.5%) (1.4%) 4.4% 1.5% (2.0%) 3.0%

Strong expense discipline continues

Benign peril activity, particularly in 1H13

Underlying claim costs rising in line with inflation

5. AUSTRALIA DIRECT


EXPENSE RATIO

INSURANCE PROFIT

Australia Direct has reported an insurance profit for FY13 of $822m, compared to $544m in FY12. This equates to a higher insurance margin of 19.7% (FY12: 14.3%).

REPORTED VS. UNDERLYING INSURANCE MARGIN (%)

At an underlying level, Australia Direct’s performance has remained strong. As highlighted at 1H13, short tail business returns have held up well, however NSW CTP profitability has been under pressure owing to lower investment yields, the high claim frequency experienced by the scheme and restricted ability to reflect these factors in pricing. A favourable trend was recorded in 2H13, with an underlying margin of 14.0% (1H13: 13.1%) resulting in a full year outcome of 13.5%.

Underlying margin is defined as the reported insurance margin adjusted for:




16.6% 15.5%13.5% 12.9% 12.5% 11.8%

2.2%2.2%

2.1% 2.1% 2.1% 2.2%

3.9%4.1%

4.2% 4.4% 5.1% 5.2%

22.7% 21.8%19.8% 19.4% 19.7% 19.2%

FY08 FY09 FY10 FY11 FY12 FY13Administration Ratio Commission Ratio Levies

10.7% 12.0%

16.9% 19.5%

14.3% 19.7%

14.1% 12.1%

15.9%

14.9% 15.2% 13.5%


Reported Margin Underlying Margin

Underlying margin of 14.0% in 2H13

5. AUSTRALIA DIRECT


The higher reported margin compared to FY12 reflects the combination of:

Strong NEP growth of 9.3%;

A $167m reduction in net natural peril claim costs against FY12;

Slightly lower reserve releases; and

A favourable credit spread impact of $71m, compared to an adverse impact of $42m in FY12.

The 2H13 reported margin of 17.6% compares to the 1H13 result of 21.9%. The lower 2H13 outcome reflects:

More normal natural peril activity, compared to a particularly benign first half;

A significantly lower positive credit spread impact of $13m (1H13: $58m); and

Improved underlying performance compared to 1H13, as NSW CTP pressures ease, assisted by the rate increase implemented in February 2013.

MARKET ENVIRONMENT, REGULATION AND REFORM

Economic conditions are expected to remain positive, supporting increased personal insurance demand in line with GDP growth. Residential construction activity has improved, helped by lower interest rates and rising rental yields, while national motor registrations are forecast to grow at ~2%.

Competition in the Australian personal lines market remains intense. Newer entrants, including the major supermarket chains, are active in their marketing but still represent a relatively small portion of the overall market, with a greater presence in motor than home. Australia Direct treats all its competitors seriously and remains focused on optimising its customer and service proposition.

Further premium increases are being applied to home building insurance, but of a diminishing scale as the processes to recoup higher reinsurance and peril costs, and (by most insurers) to introduce flood insurance in their product coverage, are well-advanced. Affordability remains an industry concern in light of the significant cumulative rate increases imposed, and is being addressed through increased product flexibility.

More moderate rate increases continue in motor, in the face of modest cost pressures. Whilst forecast registration growth is solid, without a major boost to new car sales it is likely that the average vehicle age of the car parc will continue its recent increase upwards, from a current position of ~10 years.

1H12 2H12 1H13 2H13 FY12 FY13



Natural perils (192) (180) (73) (132) (372) (205)


Credit spreads (48) 6 58 13 (42) 71


Natural perils (10.3%) (9.3%) (3.5%) (6.3%) (9.8%) (4.9%)


Credit spreads (2.6%) 0.3% 2.8% 0.6% (1.1%) 1.7%

Competitive conditions in direct personal lines expected to continue

5. AUSTRALIA DIRECT


The NSW government’s review of the state’s CTP scheme was announced in 2012, and is ongoing. Initial draft legislation aimed at introducing a no fault, first party scheme was withdrawn in August 2013, following opposition in the upper house. Any revised legislation is not expected to come into force before the middle of calendar 2014. NSW CTP premiums for all insurers reduced by 2-3% from 1 July 2013 due to changes in the Medical Care and Injury Services (MCIS) levy.

A $5 reduction in the ceiling price applicable to Queensland CTP took effect on 1 July 2013. Australia Direct has commenced the process with the regulator to withdraw from the Queensland CTP market with effect from 1 January 2014.

In the ACT CTP market, new licences have been granted to three brands of a competing entity, effective 15 July 2013. Australia Direct was previously the sole provider of CTP product in the ACT.

A number of other regulatory changes and government or legislative reviews are either underway or expected, with potential implications for the insurance industry. These include:

Under the Insurance Contracts Act, regulations introduced for a standard definition of flood and the development of a key facts statement. There is a two-year transition period for both;

The transition from the insurance-based Fire Services funding model to a property-based levy in Victoria, introduced from 1 July 2013. The legislation provides for scrutiny of industry pricing during the implementation period, with the establishment of a Monitor to oversee the transition and with powers to assess consumer complaints, investigate insurers and take enforcement action;

The Federal government has passed legislation that will tighten up privacy laws in Australia in relation to direct marketing and the collection and management of personal information. Reforms are being introduced in relation to data security;

The consolidation of anti-discrimination laws at a Federal level is still being considered. The draft legislation places a new obligation on insurers to provide individual customers with actuarial data, if they request it;

An Independent Review of the General Insurance Code of Practice has been completed and the report is under consideration by the Insurance Council of Australia; and

Legislation applying unfair contract terms to insurance contracts, which has been referred to a joint parliamentary inquiry.

The NSW government has indicated that the review of the NSW Emergency Services Funding (and the associated insurance levy) has been delayed for approximately two years.

FY14 OUTLOOK

In FY14, Australia Direct expects to record further GWP growth, underpinned by ongoing product initiatives and further volume growth. GWP growth will be lower than that achieved in FY13, with contributory factors being:

Reduced need to recover higher reinsurance and peril costs, particularly in respect of the home portfolio;

Cessation of the Victorian FSL from 1 July 2013. $50m of related premium was collected in FY13, with a corresponding amount in the expense line; and

Australia Direct’s decision to exit the Queensland CTP scheme with effect from 1 January 2014. Annual related premium in FY13 was $56m.

Improved underlying margin expected in FY14, as NSW CTP pressures ease

5. AUSTRALIA DIRECT


The business will continue to maintain its focus on improving underwriting quality around risk selection. It is also investing in initiatives to improve customer service, product design and people development.

A higher underlying margin is expected in FY14. Australia Direct will continue to build on improvements in underwriting quality as pressures on the NSW CTP portfolio are addressed.

Australia Direct expects to report a lower headline insurance margin in FY14, compared to FY13, assuming:

Natural perils revert to an outcome in line with allowance;

The business records lower reserve releases than the 2.5% reported in FY13; and

There is no material impact from credit spreads.


6. AUSTRALIA INTERMEDIATED (CGU)


INSURANCE RATIOS



1H12A$m

2H12A$m

1H13A$m

2H13A$m

FY12A$m

FY13A$m





Net claims expense (854) (770) (609) (707) (1,624) (1,316)



Underwriting profit/(loss) (103) (14) 240 157 (117) 397




Share of profit/(loss) from associates - (2) 1 - (2) 1

Total divisional result 88 181 314 176 269 490


Loss ratio 72.0% 64.1% 46.7% 52.9% 68.0% 49.8%


Expense ratio 36.7% 37.1% 34.9% 35.3% 36.9% 35.1%



Combined ratio 108.7% 101.2% 81.6% 88.2% 104.9% 84.9%



72.0% 64.1%

46.7% 52.9%

68.0%

49.8%

61.2%

54.9%

50.2% 57.7%

58.0%

53.9%

1H12 2H12 1H13 2H13 FY12 FY13


15.9% 16.8% 14.6% 14.6% 16.4% 14.6%

15.9% 15.1% 15.1% 15.9%

15.5% 15.5%

4.9% 5.2%5.2% 4.8%

5.0%5.0%

36.7% 37.1% 34.9% 35.3%

36.9% 35.1%

1H12 2H12 1H13 2H13 FY12 FY13

Administration Ratio Commission Ratio Levies

108.7% 101.2% 81.6% 88.2%

104.9% 84.9%

97.9% 92.0%

85.1% 93.0%

94.9%

89.0%

1H12 2H12 1H13 2H13 FY12 FY13


6.7% 14.9% 23.1% 12.6% 10.8% 17.8%

9.3%5.9%

10.7% 11.6%

7.5%

11.2%

1H12 2H12 1H13 2H13 FY12 FY13




EXECUTIVE SUMMARY

Australia Intermediated (CGU) comprises all products sold through brokers, authorised representatives, business partners and motor dealers

FY13 GWP growth of 9.7%, from rate and volume Improved underlying double digit margin delivered in FY13 (11.2%), in

line with expectations Implementation of new operating model proceeding to plan – targeted

FY13 pre-tax benefits realised Reported margin of 17.8% boosted by favourable reserve release,

credit spread and natural peril impacts Continued GWP growth and an improving underlying margin expected

in FY14

PREMIUMS

CGU’s reported GWP of $3,028m represents an increase of 9.7% against FY12 and continues the strong top line growth evident across most areas of the business in recent years. Growth in FY13 was primarily from a combination of:

Strong rate increases (up to double digit in some cases, but below FY12 levels) across most property classes, to recover the substantial increase in reinsurance and natural peril costs experienced in recent years;

Volume growth, most notably across some commercial line portfolios (particularly residential strata), workers’ compensation and some niche portfolios;

Improved retention rates in those portfolios subject to extensive remediation action in recent periods, such as Countrypak and brokered home insurance. Retention on these remediated portfolios has steadily improved over the course of FY13, to more normal levels; and

Rollout of flood cover on home, contents and landlords policies, which was completed in February 2013, with retention rates for these portfolios in line with expectations and beginning to return to long term average rates.

CGU continued to see mid single digit rate increases on its SME portfolio, however liability classes were largely flat.

GWP growth momentum continued into 2H13, with GWP of $1,595m representing an 11.6% increase on 2H12. This was due to a number of factors including improved retention rates, the completion of the rollout of flood cover and solid new business growth.

Reported GWP was also influenced by a tapering of Victorian FSL collection across the year, prior to its cessation on 30 June 2013. Total GWP related to Victorian FSL was $54m in FY13 (FY12: $67m).

In terms of portfolio mix, CGU is on target to increase the long tail portion of its book from the current 22% to 25% by the end of FY16 (FY12: 20%), as part of a strategy to optimise its relative product, channel and customer segment weightings.

In relation to the June 2013 major renewal period, pricing conditions remained favourable across most portfolios with the exception of corporate property, which was flat at best.

32%

CGU - % Group GWP

Strong GWP growth, from rate and volume

FY13 GWP BY CLASS

38%

32%

12%

10%

8%

Commercial Short Tail

Personal Lines

Workers' Compensation

Commercial Long Tail

Other



REINSURANCE EXPENSE

Reinsurance costs of $245m in FY13 were identical to FY12. This reflected a combination of:

Higher catastrophe cover costs;

Business mix changes, including growth in corporate property offset by reduced home and landlord volumes, following the introduction of flood cover and lower customer retention levels; and

The absence of amortised reinstatement costs incurred during 1H12.

CLAIMS

CGU’s immunised loss ratio of 53.9% for FY13 was significantly lower than the 58.0% recorded in FY12. This reflected the combination of:

Slightly higher net natural peril claim costs;

Significantly higher reserve releases;

Further improvement in underlying claims performance; and

Strong NEP growth of 10.6%.

The 2H13 immunised loss ratio of 57.7% was considerably higher than 1H13 (50.2%), largely owing to the relatively high incidence of natural perils in the second half, which were in excess of the related allowance.

Underlying claims performance has seen lower claims frequency more than offset claims inflation, which has remained in line with expectations. Benefits from a range of claims process efficiency and cost saving initiatives, which commenced in FY12, have continued into FY13. These include the rollout of CGU’s new claims management system in October 2012.

The reported loss ratio improved to 49.8% (FY12: 68.0%), aided by a favourable movement in the discount rate adjustment which reflected a steepening of the yield curve compared to 30 June 2012.

Reserve Releases

Prior period reserve releases of $141m were significantly higher than those reported in FY12 ($85m), and represented 5.3% of NEP. These releases continue to reflect favourable claims performance in a low inflation environment across the long tail portfolios of workers’ compensation, professional risks and liability. Releases in 1H13 also contained certain notable case-specific amounts.

Natural Perils

Losses from natural perils of $203m (net of reinsurance) for FY13 were $21m lower than the related allowance, and $28m higher than FY12 levels.

After a relatively benign 1H13, the second half of the year was dominated by the impact of ex-Tropical Cyclone Oswald in January 2013 which caused severe storms and widespread flooding in coastal regions of Queensland, in particular. 2H13 peril costs exceeded allowance by $42m.

1H12 2H12 1H13 2H13 FY12 FY13RESERVE RELEASES A$m A$m A$m A$m A$m A$mReserve releases 40 45 80 61 85 141 Impact on insurance margin 3.4% 3.7% 6.1% 4.6% 3.6% 5.3%

Flat reinsurance expense, with higher catastrophe costs offset by absence of reinstatement costs

Underlying claims performance has continued to improve

Higher than expected reserve releases from long tail classes

Peril activity skewed to 2H13 and ex-Tropical Cyclone Oswald event



EXPENSES

Reported expenses, comprising commission and underwriting costs, totalled $928m in FY13, compared to $881m in FY12. Despite the increase, the expense ratio improved to 35.1% in FY13 (FY12: 36.9%), reflecting cost savings realised, including those associated with the OneCGU (CGU’s new operating model) programme, and strong growth in NEP (+10.6%).

Movements within total expenses included:

An 11.1% increase in commission expense, to $410m, reflecting increased business volumes;

The realisation of cost initiatives, including those stemming from OneCGU; and

Higher operating costs associated with sales volume growth and inflation.

Excluding levies, CGU’s FY13 administration ratio improved to 14.6%, compared to 16.4% in FY12. The FY13 commission ratio, of 15.5%, is identical to FY12.

REVISED OPERATING MODEL

Implementation of OneCGU is nearing completion, with related cost savings of close to $30m pre-tax in FY13, slightly in excess of the $25m targeted. The business remains on track to realise $65m of cost reductions by the end of FY15, reflected in both the claims and underwriting expense lines.

The new model has simplified CGU’s structure, making it easier for brokers and agents to deal with the business. The move to an integrated, function-based organisation with common approaches to account management, underwriting and claims has removed duplication within the business and enabled CGU to provide a more efficient and consistent service to its intermediaries and business partners.

Amongst the key actions taken:

The appointment of senior managers and teams across all product lines;

Restructuring of the core functions of underwriting, claims and account management;

Transition to a new branch footprint;

Centralisation of rural lines processing in Ballarat;

A national roll-out of CGU’s ClaimCentre facility;

Establishment of a single consolidated personal lines insurance underwriting centre; and

Consolidation of Broker & Agent and Workers’ Compensation within a single function servicing the one channel.

The balance of related pre-tax restructuring costs, of $39m, was recognised in the Group’s net corporate expense line in FY13.

1H12 2H12 1H13 2H13 FY12 FY13NATURAL PERILS A$m A$m A$m A$m A$m A$mNatural peril claim costs (116) (59) (49) (154) (175) (203)Natural peril allowance 89 131 112 112 220 224Impact on insurance profit (27) 72 63 (42) 45 21Impact on insurance margin (2.3%) 6.0% 4.8% (3.1%) 1.9% 0.8%

Improved expense ratio, reflecting NEP growth and realised cost savings

OneCGU delivering targeted cost savings



INSURANCE PROFIT

CGU reported an insurance profit of $470m, a substantial increase on FY12 ($258m). This equates to an insurance margin of 17.8% (FY12: 10.8%), and includes a second half margin of 12.6%.

CGU’s underlying margin has improved considerably over the course of FY13, reaching 11.2% for the full year and meeting expectations (FY12: 7.5%). The positive momentum is reflected in a 2H13 underlying margin of 11.6%, up from 10.7% in 1H13.

This result reflects the continuing improvement in the performance of the business, which has seen its underlying insurance result increase by over $300m since FY08. CGU expects to see further benefits of the OneCGU model realised throughout FY14, along with gains from the remaining components of portfolio remediation.






6.0%

2.2%

6.6% 6.5%

10.8%

17.8%

(0.9%)0.4%

5.1% 5.8%

7.5%

11.2%



1H12 2H12 1H13 2H13 FY12 FY13



Natural perils (116) (59) (49) (154) (175) (203)


Credit spreads (32) 4 32 7 (28) 39


Natural perils (9.8%) (4.9%) (3.8%) (11.5%) (7.3%) (7.7%)


Credit spreads (2.7%) 0.3% 2.5% 0.5% (1.2%) 1.5%

Underlying performance continues to improve



In addition to CGU’s underlying improvement, the significantly stronger reported margin in FY13 is explained by the net effect of:

Considerably higher reserve releases;

A slightly higher net natural peril claim cost impact of $203m (FY12: $175m); and

A favourable credit spread movement of $67m, relative to FY12.

FEE BASED INCOME AND SHARE OF ASSOCIATES

CGU generates fee income by acting as an agent under both the NSW and Victorian workers' compensation schemes that are underwritten by the respective state governments. In FY13, net income from fee based operations was $19m, compared to $13m in FY12.

While the standard fees covering expenses are reasonably predictable, the total reported fee based result will continue to be volatile on a half-by-half basis owing to the receipt of performance fees and prior year experience adjustments paid or charged by the state bodies. These fees tend to be received in the opening half of CGU’s financial year.

The FY13 result contained $3m of prior period fee income compared to $5m in FY12. Excluding this income, the underlying result was $8m higher than FY12, driven by an increase in incentive fee returns in Victoria and a more favourable regulator remuneration model in NSW.

Fee income is expected to reduce slightly in FY14, reflecting the lower remuneration pool implemented in NSW.

Share of profit from associates reflects the movement in net assets from acquired businesses (principally A&HI).


Against a backdrop of continuing economic growth, the intermediated insurance market remains competitive, but with ongoing evidence of rational pricing behaviour.

Rate movements are beginning to slow, but vary significantly by product and segment:

Property is showing modest increases in most areas and competition is returning to more normal levels;

In personal lines, home rates continue to harden, particularly in natural peril areas, while motor continues to show only low single digit increases;

Short tail commercial rates continue to increase but to a lesser degree, with mid single digit increases in SME;

The long tail commercial market remains sluggish, with some positive movement in liability and professional indemnity segments; and

Workers’ compensation continues to witness a two speed economy with increases in wages in mining and construction. Prices have stabilised in Western Australia, the ACT remains relatively flat and the Northern Territory and Tasmania have seen rate increases.

There are a number of regulatory changes and reviews currently underway, which may impact the general insurance industry. These include:

Under the Insurance Contracts Act, regulations introduced for a standard definition of flood and the development of a key facts statement. There is a two-year transition period for both;

Increased fee based income from workers’ compensation schemes

The Australian intermediated market remains competitive



The transition from the insurance-based Fire Services funding model to a property-based levy in Victoria, introduced from 1 July 2013. The legislation provides for scrutiny of industry pricing during the implementation period, with the establishment of a Monitor to oversee the transition and with powers to assess consumer complaints, investigate insurers and take enforcement action;

The Federal government has passed legislation that will tighten up privacy laws in Australia in relation to direct marketing and the collection and management of personal information. Reforms are being introduced in relation to data security;

The consolidation of anti-discrimination laws at a Federal level is still being considered. The draft legislation places a new obligation on insurers to provide individual customers with actuarial data, if they request it;

An Independent Review of the General Insurance Code of Practice has been completed and the report is under consideration by the Insurance Council of Australia; and

Legislation applying unfair contract terms to insurance contracts, which has been referred to a joint parliamentary inquiry.

The NSW government has indicated that the review of the NSW Emergency Services Funding (and the associated insurance levy) has been delayed for approximately two years.

FY14 OUTLOOK

Continued GWP growth is expected in FY14, primarily driven by the enhanced ease of interaction with brokers and agents and the clearer focus on customer needs that the new operating model affords. To a lesser extent, a contribution is expected from further rate increases in certain portfolios.

Reported GWP growth in FY14 will be held back slightly by the complete removal of FSL in Victoria, which contributed $54m to the top line in FY13.

On the back of the strong FY13 result, an improving underlying margin is expected in FY14. Additional benefits will be realised from the more streamlined and cost effective operations that the new operating model delivers, as the business builds towards total related cost savings of $65m by the end of FY15. The improving business fundamentals are, however, expected to be tempered by strong competition and a flattening of rates across most segments.

Reported margin is expected to be lower in FY14, assuming no material credit spread impact and a lowering of reserve releases from the 5.3% of NEP witnessed in FY13.

Ongoing GWP growth and an improving underlying margin expected in FY14


7. NEW ZEALAND


INSURANCE RATIOS



1H12A$m

2H12A$m

1H13A$m

2H13A$m

FY12A$m

FY13A$m

Gross written premium 538 672 751 824 1,210 1,575

Gross earned premium 517 623 739 785 1,140 1,524


Net earned premium 454 537 626 661 991 1,287

Net claims expense (298) (303) (399) (375) (601) (774)



Underwriting profit 19 74 53 89 93 142

Investment income on technical reserves 14 (4) (1) (26) 10 (27)



Total divisional result 34 71 53 64 105 117


Loss ratio 65.6% 56.4% 63.7% 56.7% 60.6% 60.1%


Expense ratio 30.1% 29.8% 27.8% 29.8% 30.0% 28.8%



Combined ratio 95.7% 86.2% 91.5% 86.5% 90.6% 88.9%



65.6% 56.4%

63.7% 56.7% 60.6% 60.1%

61.5% 62.9% 65.5%61.7% 62.3% 63.6%

1H12 2H12 1H13 2H13 FY12 FY13


17.8% 18.1% 17.1% 18.5% 18.0% 17.8%

12.3% 11.7% 10.7%

11.3% 12.0% 11.0%

30.1% 29.8% 27.8%

29.8% 30.0% 28.8%

1H12 2H12 1H13 2H13 FY12 FY13

Commission Ratio Administration Ratio

95.7% 86.2% 91.5% 86.5% 90.6% 88.9%

91.6% 92.7% 93.3% 91.5% 92.3% 92.4%

1H12 2H12 1H13 2H13 FY12 FY13


7.3%

13.0%

8.3% 9.5% 10.4%

8.9%

11.1%

12.4% 11.5%10.7%

11.8% 11.1%

1H12 2H12 1H13 2H13 FY12 FY13


7. NEW ZEALAND


EXECUTIVE SUMMARY

IAG is the largest general insurer in New Zealand, trading under the State, NZI and AMI brands

Strong local currency GWP growth of 26.8%, driven by the first full year’s contribution from AMI and rate increases

Operating performance has remained strong – underlying margin of 11.1%

AMI integration tracking to plan Increasing momentum of Christchurch rebuild as building

standard and land zoning decisions made Positive FY14 outlook, as business focuses on core customer,

underwriting, claims and pricing disciplines

PREMIUMS

New Zealand’s FY13 GWP of $1,575m increased by over 30% compared to FY12 ($1,210m), and by 26.8% in local currency terms. This reflects:

A full year’s contribution from AMI (FY12: 3 months);

Rate increases to recover increased reinsurance costs, notably in the domestic home portfolio across all channels; and

A favourable foreign exchange movement effect.

All distribution channels reported GWP growth in FY13. Excluding AMI, reported GWP in FY13 rose by 5.7% in local currency terms.

2H13 local currency GWP growth of 17.4% was lower than the full year, reflecting a reduced increment from AMI (3 months vs. 6 months in 1H13) and moderation of rate increases in the commercial book.

The NZI intermediated channel represented approximately 45% of GWP in FY13. Rate increases during the year were primarily in the domestic home book, while low to moderate increases were implemented in key commercial lines following the significant post-earthquake rate increases achieved in FY12. Commercial line new business opportunities and retention levels remained steady. Retention levels on personal lines were slightly lower, with customers more price sensitive to increasing premiums. NZI’s strong market standing has continued, with it winning ‘Insurer of the Year’ for the second year in a row, in November 2012.

The direct personal lines channel accounted for approximately 44% of GWP in FY13, with the State and AMI brands contributing similar amounts of premium. Significant rate increases were applied to the respective domestic home portfolios to offset higher reinsurance costs.

State has contained rate increases in other product lines to within inflationary levels to help address customer affordability concerns. Continued focus on maintaining customer retention through excess options, product choices and operational initiatives targeted on improving the customer experience has contributed to State’s steady retention rate. During FY13, AMI concentrated on strengthening its brand, and a renewed focus on customer activities has seen improved policy retention during the year.

GWP growth from Business Partners’ affinity brands was largely driven by steady new business growth across the main personal lines products. Retention rates have continued to hold, despite domestic home rate increases in excess of 20% flowing through this portfolio in FY13. Inflationary rate increases were applied to the domestic contents and motor portfolios.

17%

New Zealand - % Group GWP

Local currency GWP growth of 26.8% reflects full year of AMI FY13 GWP BY CLASS

FY13 GWP BY CHANNEL

65%

35%

Personal

Commercial

45%

44%

11%

Broker/Agent

Direct

Affinity

7. NEW ZEALAND


REINSURANCE EXPENSE

Reinsurance expense of $237m was nearly 60% higher than FY12 ($149m). The increase reflects the combination of:

Increased catastrophe cover costs as a result of the Canterbury earthquakes and regulatory requirements;

A full 12 months of expense from the standalone AMI programme (FY12: 3 months); and

The absence of reinstatement costs amortised in FY12.

CLAIMS

The FY13 net claims expense of $774m (FY12: $601m) translates to an immunised loss ratio of 63.6% (FY12: 62.3%). The outcome contained:

Higher net natural peril costs of $56m (FY12: $49m);

Net reserve strengthening of $35m, reflecting the $40m strengthening identified in 1H13 in respect of the Canterbury earthquake events; and

Inclusion of a full year of claims activity from AMI.

The reported loss ratio of 60.1% (FY12: 60.6%) includes a positive $40m foreign exchange effect associated with reinsurance recoveries in respect of the earthquakes in FY11, held by the offshore captive in Singapore. A corresponding adverse effect is included in investment income on technical reserves, resulting in no impact to the insurance margin.

Net natural peril costs in FY13 were slightly below the allowance for the year. Following relatively benign experience in 1H13, natural peril activity escalated in the second half. The most significant events during the year were the flooding which impacted much of the Nelson and Bay of Plenty regions in late April and the severe New Zealand-wide winter storm activity, including high winds and snow in June.

As more certainty on individual rebuilds and repairs occurs, greater refinement of the division of claim costs between the four respective major earthquake events since September 2011 has been possible. This has also been driven in part by Earthquake Commission (EQC) claim apportionment and land settlement decisions. In 1H13, a $40m prior period reserve strengthening was recognised, primarily in respect of the June 2011 earthquake event.

As at 30 June 2013, the New Zealand business had completed over NZ$2.2bn in claim settlements in respect of the Canterbury earthquakes (FY12: over NZ$1.3bn). Of this, approximately two-thirds relates to commercial line claims.

Representing approximately 30% of total residential earthquake claims, IAG continues to lead the industry in the number of major repairs and rebuilds completed.

1H12 2H12 1H13 2H13 FY12 FY13NATURAL PERILS A$m A$m A$m A$m A$m A$mNatural peril claim costs (23) (26) (11) (45) (49) (56)Natural peril allowance 25 25 31 32 50 63Impact on insurance profit 2 (1) 20 (13) 1 7Impact on insurance margin 0.4% (0.1%) 3.2% (2.0%) 0.1% 0.5%

1H12 2H12 1H13 2H13 FY12 FY13RESERVE RELEASES A$m A$m A$m A$m A$m A$mReserve releases (19) 4 (40) 5 (15) (35) Impact on insurance margin (4.2%) 0.7% (6.4%) 0.8% (1.5%) (2.7%)

Increased reinsurance expense reflects earthquake impact and full year of AMI

Contrasting halves in FY13 for natural peril activity

7. NEW ZEALAND


Finalisation of commercial claims has continued to progress in line with expectations, with over 71% of claims completed by the end of June 2013. Residential claims have been slower to finalise, however with the majority of all land zoning decisions in Christchurch made by the end of December 2012, as well as clarification of building requirements, the business is now able to provide customers with greater certainty over the timing of their repairs or rebuild. IAG remains on track to complete all claims within the residential rebuild and repair programme by December 2015.

Underlying claims performance has maintained the improvement evident since FY11, with relatively flat frequency reflecting higher excesses, disciplined underwriting and improved risk selection.

Working claims experience in FY13 was favourable, as low frequency was slightly offset by higher inflation. Large claim (>NZ$100,000) incidence was slightly above FY12 experience, but lower than expected.

EXPENSES

Total reported expenses of $371m in FY13 resulted in an improved expense ratio of 28.8% (FY12: 30.0%).

Commission expense increased by 19.3% compared to FY12, to $142m, broadly reflecting gross earned premium growth in the intermediated channel. The improvement in the commission ratio to 11.0% (FY12: 12.0%) reflects the higher proportion of direct business following the acquisition of AMI.

Underwriting expenses of $229m were approximately 29% higher than the prior year, explained by the net effect of:

The full year inclusion of AMI;

NZ$13m of expenditure associated with the preparation for changes in domestic home policies, which was largely incurred in 2H13;

Increased regulatory cost pressures; and

A net benefit of $9m from the introduction of deferred acquisition cost (DAC) accounting in respect of AMI, skewed to the front half of the year.

Excluding AMI and home-related project costs, underwriting expenses rose by 1.0% in local currency terms.

Responding to the Canterbury recovery, the integration of AMI and managing the changing reinsurance and regulatory requirements were all key areas of focus during the year. Further investment in these core areas will ensure the long term sustainability of the business.

INVESTMENT INCOME ON TECHNICAL RESERVES

Negative investment income on technical reserves, of $27m, includes an adverse foreign exchange impact of $40m flowing from the hedge associated with reinsurance recoveries in respect of the earthquakes in FY11. These recoveries are held by the offshore captive in Singapore. A corresponding positive effect is included in the net claims expense, resulting in no net impact to the insurance margin.

Improved full year expense ratio

7. NEW ZEALAND


INSURANCE PROFIT

The New Zealand business produced an insurance profit of $115m in FY13, an increase on the prior year profit of $103m. This equated to a reported insurance margin of 8.9% (FY12: 10.4%). The reduction in reported margin is explained by a net reserve strengthening of $35m, largely in respect of the June 2011 earthquake event, more than offsetting operational improvement and a full year’s contribution from AMI.

AMI contributed an insurance profit ahead of expectations.

The New Zealand business has continued to deliver a strong underlying underwriting performance, after allowance for natural peril effects and prior period reserve movements. The FY13 underlying margin of 11.1% included a 2H13 outcome of 10.7% which was influenced by reduced DAC benefits in relation to AMI and the project spend costs associated with changes to domestic home policies.



Net natural peril claim costs less related allowance for the period; and

All prior period reserve movements.

Given the essentially short tail nature of the New Zealand business, no allowance is made for recurring reserve releases when calculating the underlying margin.

AMI INTEGRATION

The integration of AMI is tracking to plan as the business remains focused on delivering key milestones and achieving efficiency improvements. Annual synergies of at least NZ$30m are anticipated within two years of acquisition (April 2012), with around NZ$18m realised in FY13.

Actions completed to date include:

Alignment of shared services functions;

Creation of a dedicated team focusing on synergy realisation;

The successful integration of all AMI staff;

Consolidation of product and pricing teams;

Supplier review and procurement consolidation;

Completion of the reinsurance renewal;

14.7%

0.4%

10.4%8.9%

11.2%

8.5%

11.8%11.1%

FY10 FY11 FY12 FY13


Strong underlying profitability maintained

AMI integration on track to deliver synergies of at least NZ$30m per annum

7. NEW ZEALAND


Launch of a refreshed marketing campaign highlighting the local presence of AMI branches and incorporating the key message ‘working for you’;

Integration of the motor assessing teams; and

Alignment of policy wordings.

Remaining pre-tax acquisition and integration costs associated with AMI of approximately $15m have been identified within the Group’s net corporate expense line in FY13.


The underlying economic environment in New Zealand is starting to show signs of improvement, with business confidence and household spending levels increasing. The Canterbury rebuild is expected to be a key driver of economic growth over the next few years as it gains further momentum.

Higher EQC levies and further rate increases applied to recoup higher reinsurance costs are impacting customer affordability levels. IAG continues to work with its customers to manage their risks. As a result, increased take-up of voluntary excesses and higher deductibles is occurring.

Fundamental changes to the New Zealand home insurance market were rolled out in the latter part of FY13 with a move away from open ended policies to those requiring specified sum insured limits. Recognising that this change requires a new level of engagement with, and from, customers through the transition period, IAG developed a nationwide public education programme, promoted through television, radio, print and online media. The ‘need2know’ campaign established a one-stop source for information on the changes, able to be accessed directly or through IAG brands, key brokers and financial institution partners. IAG has received a positive response from customers and stakeholders for the lead it has taken in this transition.

Whilst the risk of further seismic activity in the Canterbury region remains, the latest independent probability modelling shows the likelihood of an event above magnitude 6.0 occurring within the following 12 months falling to 10%. Based on the completion of land zoning decisions and the current seismic risk, there are now no geographical restrictions in place with respect to rebuilding properties in the Canterbury region.

The major obstacles to finalisation of Christchurch-related claims are now EQC decisions on land damage and delays in decisions by customers. The majority of commercial property claims have had interim indemnity settlements and remain open waiting for the property owner to decide if they will ultimately reinstate the property or not.

IAG has continued to work with Treasury in its review of the Earthquake Commission Act 1993. This has focused on developing a set of design principles to re-shape the updated Act and the role the EQC will play in future natural disasters. Public consultation is anticipated in August/September 2013, with legislation expected to be introduced in early 2014 and passed before the next election in November 2014.

The government has released the report into the functions and funding of New Zealand’s fire services. The report did not accept the insurance industry’s preferred property rates and vehicle registration-based funding model, instead recommending the retention of a predominantly insurance-based funding model, with a contribution from the transport sector to be investigated. The responsible Minister is open to further discussion on the funding model, which will occur in late 2013.

IAG continues to work with the Reserve Bank of New Zealand in progressing towards full licensing under the Insurance (Prudential Supervision) Act 2010.

Active regulatory environment, including earthquake-related issues

7. NEW ZEALAND


IAG and the Insurance Council of New Zealand (ICNZ) have worked closely with officials and the responsible Minister to ensure the workable introduction of a prohibition of unfair contract terms in insurance contracts. This is being introduced as part of a wider set of consumer law reforms. The Bill is expected to pass in the coming months, with the prohibition applying to all contracts from their first renewal 15 months after the law comes into effect.

FY14 OUTLOOK

Like-for-like GWP growth is expected to continue in FY14, albeit at a lower rate than FY13 as commercial rates flatten and competition remains strong in both commercial and personal lines. Customer retention is expected to remain steady through the combination of marketing and operational initiatives.

Despite an anticipated further increase in reinsurance costs, underlying profitability is expected to remain strong, driven by a number of key factors:

A strong earnings base generated from the significant rate increases combined with corrective pricing action taken in prior periods;

The smooth integration of AMI and the realisation of significant synergies;

Further progress on the transformation of the direct insurance operation by taking the best elements of both the AMI and State businesses in determining a new operating model which adds value for customers;

Continued focus on disciplined underwriting across the business; and

Ongoing claims disciplines positively impacting frequency and cost inflation outcomes.

Further GWP growth expected in FY14, while maintaining a strong underlying performance


8. ASIA


FINANCIAL CONTRIBUTION BY COUNTRY

1H12A$m

2H12A$m

1H13A$m

2H13A$m

FY12A$m

FY13A$m

Gross written premium 94 125 137 158 219 295

Gross earned premium 92 101 122 145 193 267


Net earned premium 73 80 97 123 153 220

Net claims expense (114) (41) (56) (74) (155) (130)



Underwriting profit/(loss) (71) 7 4 6 (64) 10


Insurance profit/(loss) (67) 8 6 14 (59) 20

Share of profit/(loss) from associates (1) (2) (3) 3 (3) -

Total divisional result (68) 6 3 17 (62) 20

Insurance Ratios1 1H12 2H12 1H13 2H13 FY12 FY13

Loss ratio 156.2% 51.3% 57.7% 60.2% 101.3% 59.1%

Expense ratio 41.1% 40.1% 38.2% 35.0% 40.5% 36.4%



Combined ratio 197.3% 91.4% 95.9% 95.2% 141.8% 95.5%

Insurance margin (91.8%) 10.0% 6.2% 11.4% (38.6%) 9.1%1Insurance ratios include divisional expense overlays and are not a true representation of the standalone consolidated business (Thailand).

FY12A$m

FY13A$m

FY12A$m

FY13A$m

FY12A$m

FY13A$m

Thailand 219 295 219 295 (49) 26

Malaysia 200 460 98 225 13 28

Established markets 419 755 317 520 (36) 54

India 68 164 18 43 (5) (5)

China 40 243 8 49 - (1)

Vietnam - 24 - 7 - (3)

Developing markets 108 431 26 99 (5) (9)

Total Asian operations 527 1,186 343 619 (41) 45

Support and development costs n/a n/a n/a n/a (21) (25)

Total divisional result 527 1,186 343 619 (62) 20

Gross GWP Proportional GWP Earnings Contribution

8. ASIA


EXECUTIVE SUMMARY

IAG has a presence in five of its six targeted markets in Asia: Thailand, Malaysia, India, China and Vietnam

The Asia division is on track to achieve its goal of representing 10% of Group GWP by 2016, on a proportional basis

Asia accounted for 6.3% of FY13 Group GWP on that basis (FY12: 4.0%), and approximately 7% after allowance for a full year of Kurnia

Strong GWP growth in India and Thailand, Malaysia boosted by inclusion of Kurnia from October 2012 and full year contributions from China and Vietnam

An improved divisional profit of $20m, driven by strong underlying performance of established businesses (Thailand and Malaysia)

High proportional GWP growth expected in FY14, and further operational progress

REGIONAL STRATEGY AND PRESENCE

IAG has identified Asia as a long term growth opportunity. The Group’s Asian strategy is based around three key tenets:

Effective market entry – a disciplined and structured approach, targeting high growth and regionally significant markets;

Local partnering – identification of local partners aligned to IAG’s aspirations and with a strong brand, customer base and distribution footprint. IAG appointees occupy key positions in each joint venture; and

Capability transfer – IAG brings value-add through capability transfer across the insurance process chain.

IAG has identified six target markets in the region and has established a presence in five of them:

Thailand: IAG holds a controlling interest in Safety Insurance (Safety), a predominantly motor insurer (c.80% of GWP), following the establishment of an initial presence in Thailand in 1998. The business operates under a single licence whilst using two brands, Safety (personal lines) and NZI (commercial lines).

Malaysia: IAG owns a 49% interest in AmGeneral Holdings Berhad (AmGeneral), the general insurance arm of AmBank Group, which controls Malaysia’s sixth largest bank branch network. The joint venture was established in 2006, and is the largest motor insurer in Malaysia following the acquisition of Kurnia Insurans (Malaysia) Berhad (Kurnia) in September 2012. From 1 March 2013, the combined business has operated as AmGeneral using two brands, AmAssurance and Kurnia, the first dual brand strategy in the Malaysian insurance market.

India: IAG owns a 26% interest in SBI General Insurance Company (SBI General), a joint venture with State Bank of India (SBI), India’s largest bank. SBI General commenced limited underwriting from April 2010 and is building a portfolio with a presence in the corporate, retail and SME markets across India, with the majority in the retail segment distributed through SBI’s bancassurance channel. IAG has an option to increase its shareholding to 49%, subject to a change in the Indian foreign direct investment limit.

China: IAG acquired a 20% interest in Bohai Property Insurance Company Ltd (Bohai Insurance) in April 2012. Bohai Insurance was established in 2005, and has a predominantly motor insurance focus. It is headquartered in Tianjin and has a strong emphasis on the surrounding

Thailand 48%

Malaysia 36%

India 7%

China 8%

Vietnam 1%

Asia GWP Mix FY13 -Proportional Basis

Presence established in five out of six target markets

8. ASIA


pan-Bohai region. IAG has an in-principle agreement to increase its ownership to 24.9%, subject to foreign investment regulations.

Vietnam: IAG acquired a 30% interest in AAA Assurance Corporation in May 2012. AAA Assurance is headquartered in Ho Chi Minh City and commenced operation in 2006, growing rapidly to become the seventh largest motor insurer in Vietnam in 2012. IAG increased its holding in AAA Assurance to 60.9%, with effect from 24 July 2013.

The Group continues to actively work on market entry opportunities in its remaining target market, Indonesia.

As at 30 June 2013, IAG’s investment in Asia was approximately $820m, of which around $620m is in the established and profitable markets of Thailand and Malaysia. This compares to a total investment of approximately $740m at 31 December 2012, with the increase since then largely a function of foreign exchange movements.

The Group has established the following financial targets for the Asia division:

To represent 10% of Group GWP by 2016, on a proportional basis; and

To achieve an ROE in excess of 15% by FY17, before regional support and development costs (assumes funding mix of 70% equity, 30% debt).

In FY13, Asia represented 6.3% of the Group’s GWP on a proportional basis, compared to 4.0% in FY12, based on ongoing operations. After allowance for a full year of Kurnia, which was consolidated by AmGeneral from October 2012, the FY13 figure rises to approximately 7%.

Proportional GWP of $619m in FY13 increased by over 80% compared to FY12 ($343m), reflecting a full year of the investments in China and Vietnam, the inclusion of Kurnia in Malaysia from October 2012, rapid expansion in India and a strong post-flood recovery in Thailand. IAG now participates in a gross regional GWP pool of $1.3bn, after inclusion of a full year of Kurnia.

ASIAN GWP POOL (A$M / % OF GROUP GWP)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

-

200

400

600

800

1,000

1,200

FY07 FY08 FY09 FY10 FY11 FY12 FY13

Thailand Malaysia (IAG share) India (IAG share)China (IAG share) Vietnam (IAG share) Share of other parties% Group GWP (proportional)

Note: All amounts have been converted to A$ using the exchange rate at the most recent reporting date to aid comparison. The % of Group GWP is calculated after exclusion of the discontinued UK operation.

Asia represented 6.3% of FY13 Group GWP, on a proportional basis

8. ASIA


THAILAND

Operating Performance

The Thai business reported GWP growth of nearly 35% in FY13, and in excess of 31% in local currency terms. The key drivers leading the rebound were:

Safety’s superior customer service experience during the flood crisis, which has resulted in increased customer numbers;

A return to full output by local car production plants;

The government’s tax incentive scheme for first-time vehicle owners to boost domestic consumption; and

Heightened risk awareness by consumers leading to increased demand for high quality, well-capitalised insurers.

Safety Insurance’s above-industry growth has cemented its position as the third largest motor insurer in Thailand. Its motor GWP grew by 43% in calendar 2012, compared to industry growth of 25%.

In 2H13, Safety’s GWP grew by just over 20% in local currency terms, reflecting the cessation of the government’s tax incentive scheme for new car buyers on 31 December 2012 and the stability of commercial rates post-flood.

The Thai business has continued to perform well at an underlying level. A slightly lower insurance margin of 7.4% (FY12: 9.3%) was recorded, as the loss ratio normalised to 62.5%. This was partially offset by further improvement in the business’ expense ratio, to 32.9%.

After inclusion of Group reinsurance overlays, the Thai business reported a substantially improved insurance profit of $26m, compared to the flood-impacted loss of $49m in FY12.

Following allocation of regional support and development costs, Thailand’s profit contribution was $20m (FY12: loss of $59m), representing the division’s consolidated insurance profit before share of associates.

฿m1 A$m2 ฿m1 A$m2

Gross written premium 6,958 219 9,145 295

Net earned premium 4,683 153 6,515 220

Net claims expense (2,847) (155) (4,074) (130)

Commission & underwriting expenses (1,575) (52) (2,145) (74)

Investment income on technical reserves 173 5 185 10

Insurance profit/(loss) 434 (49) 481 26

Insurance Ratios

Loss ratio 60.8% 62.5%

Expense ratio 33.6% 32.9%

Combined ratio 94.4% 95.4%

Insurance margin 9.3% 7.4%

1 Excludes captive reinsurance result and allocated regional support and development costs.2 Includes captive reinsurance result and excludes allocated regional support and development costs.

THAILAND FINANCIAL PERFORMANCE

FY12 FY13

Strong GWP growth and underlying performance from Thailand

THAILAND GWP BY CLASS

76%

15%

5%3%

1%

Motor

Other Short Tail

Short Tail Commercial

Health

Liability

8. ASIA


Market Environment, Regulation and Reform

The long term outlook for Thailand remains positive. After recording a strong post-flood recovery of 6.4% in 2012, the economy is expected to grow at a slower pace of 4.2% in 2013 and about 5% in 2014, supported by rising foreign direct investment and robust private consumption to offset weak external demand.

The Thai general insurance industry is expected to slow down in calendar 2013 from the strong growth of 28% in 2012 that was driven mainly by higher volumes. The Thai government’s tax incentive scheme for first-time car buyers and interest rate cuts by the central bank in October 2012, resulting in cheaper car financing for consumers, both played their part in this upturn in growth.

With the government’s incentive scheme now concluded, a resumption of high single digit industry growth is anticipated as market conditions normalise, post-floods. This will be supported by strong domestic consumption, as well as Thailand’s infrastructure and strategic location as a key auto hub in South East Asia.

MALAYSIA


AmGeneral has continued to perform strongly, with the overall result boosted by the inclusion of Kurnia from October 2012 onwards. Operating under both the AmAssurance and Kurnia brands, AmGeneral is now a clear leader in the Malaysian motor market with a market share close to 21% as at the end of 2012.

FY13 GWP of $460m represented an increase of around 130% compared to FY12 ($200m), in both reported and local currency terms, with growth primarily derived from the initial nine-month contribution from Kurnia. Following the merging of the two entities, retained business volumes have been in line with expectations, reflecting the strength of the Kurnia and AmAssurance brands in the Malaysian market.

AmGeneral’s FY13 insurance margin declined to 13.3% (FY12: 18.1%), owing to the higher expense ratio associated with Kurnia integration costs. The result also included one-off transaction costs related to the Kurnia acquisition of approximately RM21m ($6m), partly offset by initial associated synergy benefits.

AmGeneral’s loss ratio, of under 61%, has continued to register significant improvement (FY12: 63.2%), following claims process re-engineering and enhancement which has brought about positive reserve development in relation to earlier accident years.

AmGeneral’s earnings contribution increased by over 115%, to $28m (FY12: $13m), with a large proportion of the improvement reflecting the first time inclusion of Kurnia.

Return to high single digit growth, as market conditions normalise post-floods

Kurnia integration progressing to plan AMG – FY13 GWP BY CLASS

82%

8%

6%4%

Motor

Other

Fire

Personal Accident

8. ASIA


The integration of Kurnia is well on track with the following key activities undertaken in 2H13:

The merger of AmG and Kurnia on 1 March 2013;

The alignment and rationalisation of the combined branch footprint to service both AmAssurance and Kurnia customers – 18 dual-branded branches launched and 11 branch operations centralised. Completion of dual branch branding and centralisation of operations is targeted for the third quarter of calendar 2013;

Harmonisation of back office processes, including claims and underwriting;

Transitioning to a single core insurance platform and IT systems development. Interim claim systems are expected to go live in the third quarter of calendar 2013; and

Utilisation of Kurnia’s centralised processing capability for AmGeneral’s existing business.

Pre-tax synergies of at least RM50m are expected to be realised within two years of the acquisition of Kurnia. To date, synergies of approximately RM31m have been realised.


The Malaysian economy grew by 5.6% in 2012 and is anticipated to achieve similar growth of about 5% in 2013. Strong domestic demand has been partially offset by exports exposed to the weak global environment.

Malaysia’s general insurance market is expected to grow by an average 6-7% per annum until 2016. With moderate GDP growth, a strengthening regulatory environment and significant development in insurance penetration expected, Malaysia continues to offer good long term growth prospects.

The Malaysian government has signalled its intention to commence the revision of the motor tariff, with changes expected to be implemented in 2016. This is expected to impact the competitive landscape, with premium rates further differentiated according to the risk profile of individual vehicles and drivers. Work is underway to ensure AmGeneral capitalises on its market leading position.

RMm A$m RMm A$m

Gross written premium 636 200 1,444 460

Net earned premium 563 1,265

Net claims expense (356) (768)

Commission & underwriting expenses (143) (384)

Investment income on technical reserves 38 55

Insurance profit 102 168

Net profit after tax 87 180

Net profit after tax - IAG's share (49%) 43 13 88 28

Insurance Ratios




Insurance margin 18.1% 13.3%1 Includes Kurnia with effect from October 2012 (9 months).

AmGENERAL FINANCIAL PERFORMANCEFY12 FY13¹

AmGeneral possesses scale advantage in face of detariffing process

8. ASIA


INDIA


In FY13, SBI General generated GWP equivalent to $164m (IAG’s 26% share being approximately $43m), an increase of over 140% against FY12 ($68m). In local currency terms, year-on-year GWP growth was over 160%. A significant portion of this growth was derived from home insurance business and the personal accident product launched in May 2012, both of which are written through the bancassurance channel.

IAG’s share of SBI General’s losses in FY13 was $5m. This was similar to FY12 but better than expectations.

As at the end of FY13, SBI General had over 65 products in the market (45 at the end of FY12). During 1H13, distribution access was extended to the two remaining subsidiary and associate banks of SBI. SBI General currently has 40 dedicated branches across the major cities of India.

SBI General currently has over 1,500 employees. A number of IAG personnel are based in India, although this figure is reducing following the completion of the near-term capability transfer programmes and as the business moves into the operational phase.

The Group’s target remains for SBI General to reach profitability by FY15, and to achieve a top three position in the private sector, with around 5% market share and the equivalent of approximately $1bn GWP (subject to FX movements), by 2016.

To support SBI General’s rapid expansion, a small capital injection occurred in the opening quarter of FY14. This is in line with expectations and IAG’s share was approximately $12m.


The medium to long term prospects of the general insurance market in India remain favourable. The industry grew almost 19% in the fiscal year ending March 2013, with private sector growth of nearly 24% outstripping that of the four public insurers which still represent over half of the market. Average forecast growth for the industry is 16% per annum until 2020.

`m A$m `m A$m

Gross written premium 3,513 68 9,190 164


Net claims expense (548) (2,421)

Commission & underwriting expenses (1,499) (2,860)


Insurance (loss) (1,622) (1,631)

Net (loss) after tax (1,013) (1,190)

Net (loss) after tax - IAG's share (26%) (263) (5) (309) (5)

Insurance Ratios

Loss ratio 136.0% 80.7%



Insurance margin (402.5%) (54.4%)

SBI GENERAL FINANCIAL PERFORMANCEFY12 FY13

Rapid GWP growth from SBI General, through bancassurance channel

Strong growth outlook for Indian market

SBIG – FY13 GWP BY CLASS

40%

36%

15%

9%

Fire

Motor

PA

Miscellaneous

8. ASIA


The regulatory framework continues to incorporate reforms conducive for growth in the insurance industry. These include the restructuring of the Third Party Motor Pool, where insurers are able to keep the benefits from efficiencies in claim management.

Improved reinforcement and directives from the Insurance Regulatory and Development Authority (IRDA) and the Indian Ministry of Finance are expected to lead to a steady uplift in the profitability of the non-life sector. This includes active discouragement of the public sector insurers from giving unsustainable discounts to maintain market share, as well as increasing third party motor tariffs.

In October 2012, the Indian cabinet cleared the way for legislation to raise foreign direct investment (FDI) in the insurance sector to 49%, from its current 26% limit. India’s ongoing trade talks with the European Union are seen as an influencing factor. With the move to raise the FDI ceiling being subject to parliamentary approval, there is widespread expectation that lawmakers might take up the Insurance Laws (Amendment) Bill 2008 in the forthcoming session of parliament.

CHINA


IAG has been recognising its 20% share of Bohai Insurance’s results since 1 May 2012. In FY13, Bohai Insurance reported GWP equivalent to $243m (IAG’s 20% share being approximately $49m), with a strong focus on more profitable lines of business and selective geographical areas.

Management focus has been on the development of underwriting, claims, reinsurance and actuarial capabilities and implementation of more stringent and effective underwriting controls. Business mix optimisation is helping to drive profitability, along with reforms in claims management and reinsurance processes.

A number of IAG personnel have been seconded to Bohai Insurance to develop and roll out capability transfer programmes in these areas. The capability transfer programmes are progressing on track in all areas, including centralisation of underwriting and claims. The first centralised claims centre went live in Tianjin in 2H13.

¥m A$m ¥m A$m

Gross written premium 257 40 1,544 243


Net claims expense (164) (943)

Commission & underwriting expenses (116) (721)


Insurance (loss) (21) (87)

Net (loss) after tax (10) (26)

Net (loss) after tax - IAG's share (20%) (2) 0 (6) (1)

Insurance Ratios




Insurance margin (8.3%) (5.8%)

¹Bohai Insurance's financial results have been included with effect from 1 May 2012.

BOHAI INSURANCE FINANCIAL PERFORMANCE

FY12¹ FY13

Improving underwriting performance from Bohai BOHAI – FY13 GWP BY CLASS

84%

5%

4%7%

Motor

Fire

PA

Miscellaneous

8. ASIA


IAG’s share of Bohai Insurance’s net loss after tax was $1m in FY13, which was better than expectations. The main driver was the improved loss ratio of 63.2%, from the tightening of risk selection and cost savings from the right-sizing of operations.

It remains the Group’s target for Bohai Insurance to reach profitability by FY15.


The Chinese economy is slowing, with GDP growth in the second quarter of 2013 touching 7.5%. The Beijing central government is setting a lower growth target as part of major reforms to transform an economy that has been overly dependent on fast but high risk credit growth.

China remains an attractive general insurance market, underpinned by the government’s promotion of the development of the general insurance industry and numerous measures to boost economic activity. The general insurance market is expected to increase by 10-15% per annum over the next decade. The industry recorded premium growth of 15.7% in calendar 2012 and 16.8% in the six months to 30 June 2013.

Following the enhancement of risk management and market discipline in recent years, the Chinese insurance regulator (CIRC) is steadily introducing plans for solvency reform, implementing less restrictive investment rules, opening compulsory motor insurance to foreign players and conducting a partial liberalisation of the commercial motor market.

VIETNAM


IAG commenced recognition of its initial 30% share of AAA Assurance’s results from 1 July 2012. In FY13, AAA Assurance reported GWP equivalent to $24m (IAG’s 30% share being approximately $7m). GWP was relatively flat compared to the prior 12 months, reflecting remediation activity which has seen concentration on higher quality risks.

Defined capability transfer programmes have centred on the three key areas of risk, profitability and growth, with early work focused on stronger claims management, improving the efficiency of the branch operating model and increased governance and controls. IAG has seconded a number of personnel to AAA Assurance.

IAG’s share of AAA Assurance’s loss after tax was $3m. AAA Assurance is targeted to reach breakeven by FY15.

IAG increased its interest in AAA Assurance to 60.9% with effect from 24 July 2013, following receipt of all necessary regulatory approvals. An IAG appointee was appointed CEO of the business in March 2013.

₫m A$m

Gross written premium 486,408 24

Net (loss) after tax (210,894)

Net (loss) after tax - IAG's share (30%) (63,306) (3)

AAA Assurance's financial results have been included with effect from July 2012.

AAA ASSURANCE FINANCIAL PERFORMANCEFY13

Strong industry growth outlook in China over next decade

Post-balance date increase in ownership of AAA Assurance, to 60.9%

8. ASIA


The carrying value of the Group’s initial 30% interest in AAA Assurance was written down at 30 June 2013 by approximately $10m. This charge is included in the Group’s amortisation and impairment expense line. This conservative treatment reflects AAA Assurance’s current loss-making position.

The Group remains confident of AAA Assurance’s long term prospects for growth and profitability, as confirmed by the decision in July 2013 to increase its holding to 60.9%.


Despite the current economic slowdown, Vietnam remains attractive in the longer term as a result of its growing consumer market and low insurance penetration rate. Motor presently represents 30% of general insurance premiums, which is significantly lower than other South East Asian countries.

The first six months of 2013 saw subdued industry GWP growth of 2%, as weak credit conditions hit the business community. Most of the non-life players are sub-scale local firms that do not necessarily have access to the capital needed for growth. The increased pace of regulatory reform continues to aim at building a professional insurance industry, with signs of improved pricing discipline apparent.

REGIONAL SUPPORT AND DEVELOPMENT COSTS

As IAG broadens its operational footprint in Asia, the division incurs regional support and development costs. These costs cover a wide range of activities, including the divisional level management, on-the-ground capability transfer teams and the cost of developing opportunities in new and existing markets.

The regional support and development costs are self-funded within the division and, for reporting purposes, are allocated between the consolidated business (Thailand) and shares of associates.

Total regional support and development costs for FY13 increased to $25m (FY12: $21m) owing to greater capability support rendered in respect of the investments in India, China and Vietnam, along with the pursuit of opportunities in Indonesia.

With the enlarged business footprint in Asia, a new regional operating model is being established to support the division’s operational excellence strategy and to enhance risk management and governance. This will result in higher regional support and development costs in FY14, of up to $35m.

REGIONAL SUPPORT AND DEVELOPMENT COSTS - ALLOCATIONFY12A$m

FY13A$m

Consolidated operations (Thailand) 10 6

Associates (Malaysia, India, China & Vietnam) 11 19

Total regional support and development costs 21 25

% %

Total costs/share of regional GWP 6.1% 4.0%

Increased regional support focused on delivering operational excellence

Strong industry growth outlook in Vietnam over next decade

8. ASIA


FY14 OUTLOOK

The overall Asian business is expected to demonstrate further operational progress in FY14, building on the positive momentum evident in FY13. High GWP growth is anticipated, on both a gross and proportional basis, with notable elements being ongoing expansion in India and a full year’s contribution from Kurnia as part of the enlarged AmGeneral business.

The underlying performance of the Thai and Malaysian businesses is expected to remain strong in FY14, with sound organic growth anticipated in both markets.

The integration of Kurnia will remain the key focus in Malaysia, with the final technology phase to be completed by 2H14. The emphasis is on maintaining Kurnia’s agent and broker relationships, while consolidating operational capability around processes, distribution, product development and supplier costs.

Very strong GWP growth is anticipated from SBI General in India, with further inroads to lower-tier cities and widening of the product range. Operating losses are expected to reduce as the business moves towards the end of its start-up phase.

Capability transfer programmes remain a priority with respect to Bohai Insurance in China. These will strengthen the foundation for Bohai Insurance’s expansion into a significant business over the next few years.

In Vietnam, the priority is the realignment of operations through capability transfer in claims, underwriting, corporate governance and risk management, as well as the enhancement of efficiencies in the branch operating model.

With a presence established in five out of the six identified priority markets, IAG is actively assessing market entry opportunities in Indonesia. The preferred approach is via joint venture with a distribution partner.

High GWP growth anticipated in FY14


9. REINSURANCE

EXECUTIVE SUMMARY

Reinsurance represents a key part of the Group’s overall approach to capital management

Catastrophe programme renewed 1 January 2013 with increased cover of up to $5bn

Group maximum event retention (MER) of $150m at 30 June 2013

Aggregate deductible erosion of approximately $105m at 30 June 2013

Strong counter-party credit profile

Counter-Party Credit Profile – Catastrophe Programme

REINSURANCE STRATEGY

IAG’s reinsurance programme is an important part of the Group’s overall approach to capital management. The Group has a philosophy of limiting its main catastrophe retention to a maximum of 4% of NEP. Its current retentions are below this level.

The Group determines its reinsurance requirements for Australia and New Zealand on a modified whole of portfolio basis (where modified whole of portfolio is the sum of all correlated risk). The limits purchased reflect a 1-in-250 year return period, and are more conservative than the regulator’s 1-in-200 year return period requirement.

The Group’s Australian-based captive reinsurer absorbs 100% of the total reinsurance spend, both treaty and facultative, of the Australian businesses. A key responsibility of the captive is to capture and manage counter-party and regulatory exposures within a single entity.

The Group’s international captive reinsurers underwrite 100% of New Zealand and Thailand treaty business, and a substantial amount from IAG’s joint venture interests in Asia. IAG’s international business units continue to place some facultative reinsurance directly with the external market.

The Group’s international captive reinsurers provide considerable input to, and some participation in, the reinsurance covers concluded by its interests in Malaysia, India, China and Vietnam.

MARKET ENVIRONMENT

There has been a significant moderation in the level of increase in reinsurance rates applicable to the region. This reflects the more benign regional peril environment over the last 18 months, in contrast to the unprecedented sequence of major natural peril events in Australia and New Zealand experienced in 2010 and 2011. Throughout, reinsurance capacity has remained resilient and continues to be available to the Group in all risk categories, including earthquake in New Zealand.

The Group renewed its catastrophe programme on 1 January 2013 at rates in line with those embodied in its insurance margin guidance at the beginning of FY13.

87%

13%

'A+' or higher

Lower than 'A+'

Reinsurance is a key part of IAG’s overall approach to capital management

Regional reinsurance rates have stabilised

9. REINSURANCE


CATASTROPHE COVER

IAG’s catastrophe reinsurance protection runs to a calendar year and operates on an excess of loss basis. It covers all territories in which IAG has operations, with the exception of AMI which currently has a dedicated programme.

IAG’s 2013 Group catastrophe programme is similar in structure to 2012’s, but contains increased coverage in three areas: at the upper end of the main programme; a second event buy-down secured for 2013; and with respect to the aggregate cover.

The 2013 programme fully complies with the requirements embodied in the Australian Prudential Regulation Authority’s (APRA) Life and General Insurance Capital (LAGIC) regime, which became operative from 1 January 2013.

2013 CATASTROPHE REINSURANCE COVER – AS AT 30 JUNE 2013

At renewal on 1 January 2013 the integrated programme comprised the following key components:

A main catastrophe cover for losses up to $4.5bn, including one prepaid reinstatement. The Group retains the first $250m of each loss, with the lower layer of the main programme ($250m excess of $250m) contracted for a period of three years commencing 1 January 2012, at agreed prices. Two reinstatements of this layer have been secured;

A $500m upper layer providing earthquake cover in respect of Australia and New Zealand. This layer is also contracted for a three-year period from 1 January 2012, and in 2013 extends from $4.5bn to $5.0bn;

A buy-down arrangement that reduces the maximum cost of a first event to $150m;

$m5000

4500

500

250

200

150

25

0

Event 1st

Australia/NZ Earthquake

Main Catastrophe Programme

2nd 3rd

Aggregate Cover ($250m xs $250m)

Subsequent Event Covers

4th

Buy-downBuy-down

Increased catastrophe cover of up to $5bn, for calendar 2013

9. REINSURANCE


A buy-down arrangement that reduces the maximum cost of a second event to $200m;

Subsequent event cover providing protection above $150m;

An aggregate sideways cover of $250m excess of $250m, with qualifying events capped at a maximum contribution of $125m excess of $25m, per event; and

A buy-down arrangement that reduces the cost of a first and second event in Thailand and Malaysia to $25m.

With regard to New Zealand, all amounts itemised above in respect of the Group’s 2013 catastrophe programme are denominated in NZ$. For example, the main catastrophe cover is in respect of losses of up to NZ$4.5bn. This is consistent with prior year programmes.

As at 30 June 2013, there has been $105m of erosion to the deductible applicable to the 2013 aggregate cover from the ex-Tropical Cyclone Oswald event which occurred in January 2013. As at 30 June 2013, $145m of the deductible remained.

From 1 July 2013, the Group’s standalone reinsurance protection for the AMI business in New Zealand comprises a main catastrophe cover for losses up to NZ$1.3bn, including one prepaid reinstatement, with the Group retaining the first NZ$20m of each loss. This extends to 31 December 2014.

At 30 June 2013, the Group also renewed its specific reinsurance buy-down in respect of its Thailand and Malaysian interests. Cover is purchased up to $150m, being the attachment of the Group catastrophe programme, in excess of a $25m retention including one prepaid reinstatement.

The combination of covers in place at 1 July 2013 results in maximum first event retentions of $150m for Australia, $130m (NZ$150m) for New Zealand and $25m for Thailand and Malaysia.

The Group has purchased additional catastrophe protection in respect of FY14. This provides $100m of cover in excess of the Group’s natural peril allowance of $640m, for the 12 months to 30 June 2014.

The Group has a customised event definition in its catastrophe reinsurance contract wording which ensures that covers provide appropriate protection to the Group, both in terms of geographical exposure and event duration.

OTHER COVERS

IAG has a comprehensive suite of per risk and proportional reinsurances which protect the Group in all territories in which it underwrites.

The casualty reinsurances were renewed at 30 June 2013 at stable prices. Unlimited cover is purchased on statutory classes where available and for other lines cover was placed up to the original underwriting limits for each class. Cover is also secured for potential accumulations within a class or between classes of business.

COUNTER-PARTY CREDIT PROFILE

The counter-party credit profiles for the key reinsurances of the Group, as at 1 July 2013, are:

Over 87% of limits placed with ‘A+’ or higher rated entities for the property catastrophe programme; and

100% of limits placed with ‘A+’ or higher rated entities for the casualty programme.

AMI standalone protection renewed until 31 December 2014

Casualty reinsurances renewed at stable prices

Strong counter-party credit profile

Additional $100m of cover purchased for FY14, in excess of $640m


10. INVESTMENTS

EXECUTIVE SUMMARY

Total investments of $13.6bn as at 30 June 2013 Overall investment allocation remains relatively

conservatively positioned Technical reserves of $9.4bn invested in fixed interest

and cash Continue to target around 100bps of return above the

risk free rate across the technical reserves portfolio Growth asset allocation in shareholders’ funds

increased from 43% to 46% in 2H13 Investment returns reflect strong equity markets Very high fixed interest credit quality: 86% ‘AA’ or

higher

INVESTMENT PHILOSOPHY

The Group’s investment philosophy is:

To manage the assets backing technical reserves and shareholders’ funds separately;

To invest the assets backing technical reserves, wherever possible, in a combination of government and high quality fixed interest securities with interest rate sensitivities that match the underlying insurance liabilities;

To invest the Group’s shareholders’ funds to maximise the return on risk-based capital, consistent with the Group’s risk appetite and flexibility requirements; and

To invest Group assets such that the contribution of investment risk to IAG’s earnings volatility should not dominate the contribution from insurance risk.

INVESTMENT STRATEGIES

As at 30 June 2013, the Group’s overall investment allocation remained conservatively positioned, with 86% of total investments in fixed interest and cash. Technical reserves were entirely invested in fixed interest and cash, whilst the equivalent figure for shareholders’ funds was 54%.

The Group’s allocation to growth assets was 46% of shareholders’ funds at 30 June 2013 (30 June 2012: 40%). Within the Group’s allocation to growth assets, alternative investments accounted for 22% of shareholders’ funds as at 30 June 2013 (30 June 2012: 19%). These alternative investments typically display a lower volatility than equities, deliver a higher return than fixed income and increase overall investment diversification.

GROUP INVESTMENT ASSETS

The Group’s investments totalled $13.6bn as at 30 June 2013, excluding investments held in joint ventures and associates, with nearly 70% represented by the technical reserves portfolio. Total investments at 30 June 2012 were $13.0bn.

The $0.6bn increase in investment assets since 30 June 2012 relates to shareholders’ funds, and reflects the strong operating performance of the Group along with positive investment returns during the year.

Technical reserves at 30 June 2013 were at a similar level to the preceding year end, with positive investment returns sufficient to offset the exclusion of investments in respect of the discontinued UK operation.

86%

14%

Group Asset Allocation

Fixed Interest and Cash Growth

Technical reserves invested in duration-matched fixed interest securities

Distinct investment strategies for technical reserves and shareholders’ funds

Total investments of $13.6bn

10. INVESTMENTS


ASSET ALLOCATION

Since 31 December 2012, the most significant change in asset allocation has been the reduced proportion of shareholders’ funds held in fixed interest and cash, in favour of alternative investments. The Group’s largest allocation in alternative investments remains global convertible bonds.

GROUP ASSET ALLOCATION

GROUP ASSET ALLOCATION – 30 JUNE 2013 CREDIT QUALITY – 30 JUNE 2013

CREDIT QUALITY OF ASSETS

The credit quality of the Group’s investment book remains high, with 86% of the fixed interest and cash portfolio rated in the 'AA' category or higher. All credit assets are meeting interest and principal repayment obligations.

GROUP INVESTMENT ASSETS1H12A$bn

FY12A$bn

1H13A$bn

FY13A$bn

Technical reserves 9.0 9.4 9.1 9.4

Shareholders' funds 3.7 3.6 4.0 4.2

Total investment assets 12.7 13.0 13.1 13.6

Other funds managed on behalf of third parties 0.5 0.5 0.5 0.5

1H12 FY12 1H13 FY13

SHAREHOLDERS' FUNDS % % % %

Australian equities 17.2 20.5 23.1 22.1

International equities 0.4 0.5 1.5 2.5

Alternatives 17.2 18.6 18.0 21.6

Fixed interest and cash 65.2 60.4 57.4 53.8

Total 100.0 100.0 100.0 100.0

TECHNICAL RESERVES % % % %

Alternatives 0.8 1.1 - -


Total 100.0 100.0 100.0 100.0

TOTAL SHAREHOLDERS' FUNDS AND TECHNICAL RESERVES % % % %

Australian equities 5.0 5.7 7.0 6.8

International equities 0.1 0.1 0.5 0.8

Alternatives 5.6 6.0 5.5 6.7


Total 100.0 100.0 100.0 100.0

86%

14%

Fixed Interest and Cash

Growth

38%

48%

12%2%

'AAA''AA''A'< 'A'

86% of total investments in fixed interest and cash

High credit quality maintained

10. INVESTMENTS


SENSITIVITY ANALYSIS

As at 30 June 2013, the sensitivity of the Group's net profit before tax to market movements in investments was as set out in the table below and includes indirect sensitivities relating to alternative assets.

INVESTMENT PERFORMANCE

A summary of investment income and investment returns generated on the technical reserves and shareholders’ funds portfolios is set out in the following table. The percentage returns are net of transaction costs, management fees and expenses, but before income tax.

Investment income on technical reserves for FY13 included unrealised capital losses associated with the discount rate adjustment of $223m, compared with an equivalent positive adjustment of $497m in FY12. This reflects a steepening of the yield curve, particularly at the long end, compared to the previous year end position. The 3-year government bond yield rose to 2.75%, from 2.46% at 30 June 2012.

Credit spreads narrowed during FY13, supported by global demand for higher yielding assets, contributing positively to the Group’s investment returns.

Allowing for narrower credit spreads and the movement in yields, the Group continued to generate over 100bps of return above the risk free rate, across the entire technical reserves portfolio. The portfolio continues to be aligned with the weighted average duration of the Group’s claims liability, at three to four years.

Investment returns on shareholders’ funds were strong, benefiting from a sharp rally in the Australian equity market and from the robust performance of alternative investments. The broader Australian index (S&P ASX200 Accumulation) returned 22.8% over the year to 30 June 2013.

+1% -1%A$m A$m

Equity market values:

Australian equities 9 (9)

International equities 4 (4)

Total equity market sensitivity 13 (13)

Interest rates:

Technical reserves (304) 324

Shareholders' funds (35) 37

Total interest rate sensitivity (339) 361

INVESTMENT SENSITIVITIES (NET PROFIT BEFORE TAX)AS AT 30 JUNE 2013

Change in Assumption

INVESTMENT RETURNS

(INCLUDING DERIVATIVES)1A$m %2 A$m %2 A$m %2 A$m %2 A$m % A$m %

Technical reserves 473 5.3 441 4.7 201 2.2 69 0.7 914 9.7 270 2.9

Shareholders' funds (30) (0.8) 119 3.3 201 5.0 146 3.5 89 2.5 347 8.3

Total investment income 443 3.5 560 4.3 402 3.1 215 1.6 1,003 7.7 617 4.5

2Half year returns have not been annualised.3FY12 returns have been restated to exclude the discontinued UK operation.

1Returns are accounting yields, being investment income based on average exchange rates divided by closing funds under management.

FY123 FY131H123 2H123 1H13 2H13

FY13 investment returns reflect strong equity markets


11. BALANCE SHEET & CAPITAL

EXECUTIVE SUMMARY

Strong balance sheet and regulatory capital position maintained

PCA multiple of 1.67 at 30 June 2013 vs. benchmark of 1.4-1.6

CET1 multiple of 1.09 at 30 June 2013 vs. benchmark of 0.9-1.1

Capital mix in middle of targeted range – debt and hybrids 34.5% of total tangible capitalisation

S&P ‘AA-’ rating for core operating subsidiaries reaffirmed in May 2013

Regulatory Capital - 30 June 2013

BALANCE SHEET

The total assets of the Group as at 30 June 2013 were $24,859m compared to $25,349m at 31 December 2012. This decrease largely reflects the completion of the sale of the discontinued UK operation. Partially offsetting factors included:

Increased cash and investment levels, following strong operational cash flow; and

Increased premium related assets owing to growth in GWP.

1.67

1.09

CET1

PCA

Targeted benchmark range

1H12A$m

FY12A$m

1H13A$m

FY13A$m

Assets

Cash and cash equivalents 466 969 458 394

Investments 12,704 12,953 13,069 13,616

Investments in joint ventures and associates 273 384 536 577

Premium receivable 2,069 2,502 2,366 2,712

Trade and other receivables 655 449 614 526

Reinsurance and other recoveries on outstanding claims 4,209 3,928 3,044 2,858

Deferred acquisition costs 718 753 738 795

Deferred reinsurance expense 675 493 809 542

Intangible assets 240 225 207 245

Goodwill 1,647 1,625 1,631 1,666

Assets discontinued operation - - 1,138 96

Other assets 836 851 739 832

Total assets 24,492 25,132 25,349 24,859

Liabilities

Outstanding claims 11,826 11,709 10,528 10,474

Unearned premium 4,477 4,942 4,817 5,145

Interest bearing liabilities 1,627 1,659 1,572 1,620

Trade and other payables 777 1,135 1,099 1,263

Liabilities discontinued operation - - 1,103 106

Other liabilities 1,272 1,163 1,462 1,263

Total liabilities 19,979 20,608 20,581 19,871

Net assets 4,513 4,524 4,768 4,988

Equity

Equity attributable to holders of ordinary shares 4,367 4,343 4,562 4,786

Non-controlling interests 146 181 206 202

Total equity 4,513 4,524 4,768 4,988



The other assets category represents the aggregate of deferred levies and charges, deferred tax assets, property and equipment and other assets.

The total liabilities of the Group as at 30 June 2013 were $19,871m, compared to $20,581m at 31 December 2012. The decrease primarily reflects completion of the sale of the discontinued UK operation.

The other liabilities category represents the aggregate of current and deferred tax liabilities, employee provisions, unitholders’ funds held by external holders of units in IAG-controlled trusts, reinsurance premium payable and other provisions and liabilities.

IAG shareholders’ equity (excluding non-controlling interests) increased, from $4,562m at 31 December 2012 to $4,786m at 30 June 2013, reflecting the combined effect of:

A strong operating earnings performance in the second half of the financial year; and

Payment of the 11 cents per share dividend declared in respect of 1H13 ($229m).

GOODWILL & INTANGIBLES

Total goodwill and intangibles at 30 June 2013 stood at $1,911m, up from $1,838m at 31 December 2012, comprising $1,666m of goodwill (1H13: $1,631m) and $245m of other intangible assets (1H13: $207m).

The increase since 31 December 2012 is explained by increased capitalised software assets and foreign exchange movements applicable to goodwill in respect of offshore operations.

OUTSTANDING CLAIMS

Net Outstanding Claims Liability

The Group’s net outstanding claims liability at 30 June 2013 stood at $7,616m, compared to $7,781m at 30 June 2012. The movement over the year reflects the combined effect of:

Reduced outstanding claims and reinsurance recoveries on major prior year events;

Underlying business growth; and

A favourable movement in the discount rate adjustment, reflecting a steepening of the yield curve compared to 30 June 2012.

As at 30 June 2013, the sensitivity of the Group’s net outstanding claims liability to a 1% movement in the discount rate, as applied to expected future payments, was:

+1%, a reduction in net outstanding claims liability of $243m; and

-1%, an increase in net outstanding claims liability of $274m.

Claims Development

Note 11 of the Group’s Financial Report includes a claims development table that shows the development of the estimated net undiscounted outstanding claims liability relative to the current estimate of ultimate claims costs for the ten most recent accident years as estimated at each reporting date. An extract from that table is set out below.

The table shows a history of the claim reserves being conservatively stated and demonstrates favourable development across the period, as the ultimate claim costs were settled or became more certain.

Reduced net claims liability as claims on major prior year events settled



The table highlights that, as at 30 June 2013, more than 90% of the total estimated liability for the 2004 to 2009 accident years had been paid, for the 2010 accident year more than 80% had been paid, and for the 2011 and 2012 accident years more than 70% had been paid.

Risk Margins

The claims development table also identifies the total risk margin held to allow for the uncertainty surrounding the outstanding claims liability estimation process. The risk margin is set to take into account the correlations assessed between outstanding claim liabilities arising from the various forms of business underwritten by the different entities within the consolidated Group. The aggregated central estimate plus the risk margin is calculated on a diversified basis and this forms the outstanding claims liability.

The Group’s policy is for the risk margin to be set so as to provide an overall probability of adequacy for the outstanding claims liability of 90%, which has been determined having regard to the inherent uncertainty in the central estimate and the prevailing market environment. The Group’s probability of adequacy of the claims liability for FY13 is 90%, which is unchanged from the prior year.

Insurers are in the business of accepting and managing risks. A key feature of insurance businesses is diversification between risks and without it the insurance business would not exist. The Group uses diversification to manage the portfolio of risks that arise in the business.

The risk margin applied to the net central estimate of the outstanding claims liability was 21% at 30 June 2013 (FY12: 21%).

NET ULTIMATE CLAIMS PAYMENTS DEVELOPMENT TABLE

2003 and prior 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TOTALA$m A$m A$m A$m A$m A$m A$m A$m A$m A$m A$m A$m

DevelopmentAt end of accident year 3,514 3,626 4,011 4,669 4,591 4,615 4,575 4,957 5,109 5,085One year later 3,349 3,579 3,939 4,633 4,548 4,649 4,550 5,044 5,190Two years later 3,376 3,548 3,863 4,595 4,541 4,585 4,449 5,004Three years later 3,360 3,503 3,871 4,605 4,520 4,577 4,397Four years later 3,343 3,468 3,858 4,534 4,499 4,491Five years later 3,333 3,417 3,833 4,460 4,431Six years later 3,305 3,392 3,813 4,433Seven years later 3,300 3,384 3,819Eight years later 3,288 3,373Nine years later 3,260Current estimate of net ultimate claims 3,260 3,373 3,819 4,433 4,431 4,491 4,397 5,004 5,190 5,085Cumulative payments made to date (3,222) (3,310) (3,661) (4,320) (4,239) (4,132) (3,869) (3,831) (3,966) (2,898)Net undiscounted outstanding claims 595 38 63 158 113 192 359 528 1,173 1,224 2,187 6,630Discount to present value (154) (6) (9) (22) (14) (24) (39) (54) (96) (123) (161) (702)Net discounted outstanding claims 441 32 54 136 99 168 320 474 1,077 1,101 2,026 5,928

3621,3267,616

10,474(2,858)7,616

During FY13 the UK business was sold. The development table above includes claims related to the UK operation up to, and including, the 2012 accident year. Any outstanding claims relating to the UK that remained at the time of divestment have been treated as paid in the table above.

Reinsurance and other recoveries on outstanding claimsNet outstanding claims liability

Accident Year Ended 30 June

Claims handling expenseRisk marginNet outstanding claims liability Gross outstanding claims liability on the balance sheet



CAPITAL

Capital Adequacy

The Group remains strongly capitalised, with regulatory capital of nearly $4.3bn at 30 June 2013. This is as defined under APRA’s LAGIC regime, which came into force on 1 January 2013.

At 30 June 2013, the Group’s Prescribed Capital Amount (PCA) multiple was 1.67, compared to a targeted benchmark of 1.4 to 1.6 times. This compares to a pro forma multiple of 1.69 presented at 31 December 2012. The modest movement since then largely comprises the net effect of:

The Group’s strong operating earnings performance in 2H13;

Payment of the 1H13 dividend of 11 cents per share;

Required amortisation of debt and hybrid instruments, effective 1 January 2013;

An increased growth asset weighting within shareholders’ funds; and

Foreign exchange movements, notably in respect of disallowable assets.

After allowance for the 2H13 dividend of 25 cents per share, which will be paid in October 2013, the PCA multiple at 30 June 2013 would reduce to around the mid-point of the Group’s benchmark range of 1.4 to 1.6 times.

At 30 June 2013 the Group’s Common Equity Tier 1 (CET1) ratio was 1.09 times the PCA, compared to a targeted range of 0.9 to 1.1 times. The regulatory requirement is 0.6 times.

GROUP COVERAGE OF REGULATORY CAPITAL REQUIREMENT

FY13A$m

Common Equity Tier 1 Capital (CET1)

Ordinary shares 5,353

Reserves 63

Retained earnings (568)

Technical provisions in excess of liabilities 677

Minority interests 202

Less: Deductions (2,929)

Total Common Equity Tier 1 Capital 2,798

Additional Tier 1 Capital

Hybrid equities 872

Total Tier 1 Capital 3,670

Tier 2 Capital

Subordinated term notes 592

Total Tier 2 Capital 592

Total Regulatory Capital 4,262

Prescribed Capital Amount (PCA)

Insurance risk charge 1,434

Insurance concentration risk charge 150

Diversified asset risk charge 1,338

Asset concentration risk charge -

Aggregation benefit (653)

Operating risk charge 289

Total Prescribed Capital Amount 2,558

PCA multiple 1.67

CET1 multiple 1.09

The Group retains a strong capital position



Interest Bearing Liabilities

The Group’s interest bearing liabilities stood at $1,620m at 30 June 2013, compared to $1,659m at 30 June 2012. The net reduction largely reflects the repayment of the Group’s NZ$100m subordinated note issue in November 2012, following exercise of its issuer call option. This was partially offset by foreign exchange translation effects on other non-A$ denominated issues.

During FY13, the Group also redeemed and re-issued its £157m subordinated exchangeable term note instrument. Amended terms included an extension of the first date at which the notes may be exchanged into IAG ordinary shares, from 14 December 2012 to 13 June 2014, and an increased coupon rate of LIBOR +3.20% (previously LIBOR +1.875%).

GROUP DEBT MATURITY PROFILE

INTEREST BEARING LIABILITIES1H12A$m

FY12A$m

1H13A$m

FY13A$m

Subordinated debt 715 728 658 704

Reset Preference Shares 350 - - -

Convertible Preference Shares - 377 377 377

Reset Exchangeable Securities 550 550 550 550

Capitalised transaction costs/other 12 4 (13) (11)

Total interest bearing liabilities 1,627 1,659 1,572 1,620

Yield (net of swaps)

m A$m % Rate

Subordinated exchangeable term notes1 £157 261 3.79% Variable Jun-14 'A'

Subordinated fixed rate notes £100 167 5.63% Fixed Dec-16 'BBB+'

Subordinated fixed rate bonds NZ$325 276 7.50% Fixed Dec-16 'BBB+'

Total Subordinated Debt 704

Convertible Preference Shares (IAGPA)2 A$377 377 4.79% Variable May-17 'N/R'

Reset Exchangeable Securities (IANG)3 A$550 550 4.75% Variable Dec-19 'BBB+'

3The Reset Exchangeable Securities pay floating rate quarterly interest. The yield shown is the current cash yield, excluding attached franking credits.

2Dividend yield on the Convertib le Preference Shares is a cash yield, excluding attached franking credits. The principal excludes capitalised transaction costs.

1Stated yield based on margin of LIBOR +3.20%, as amended in October 2012.

Principal amountFirst call or

exchange date

S&P ratingGROUP DEBT & HYBRID CAPITAL

0

200

400

600

800

1000

1200

1400

1600

0-1 1-2 2-3 3-4 4-5 5-10 10-20 >20

A$m

Years from 30 June 2013

Legal maturity date Call/exchange date

Reduction in interest bearing liabilities following repayment of subordinated note issue



Capital Mix

The Group measures its capital mix on a net tangible equity basis, i.e. after deduction of goodwill and intangibles, giving it strong alignment with regulatory and rating agency models. It is IAG’s intention to have a capital mix in the following ranges over the longer term:

Ordinary equity (net of goodwill and intangibles) 60-70%; and

Debt and hybrids 30-40%.

At 30 June 2013, the Group’s capital mix was towards the middle of the targeted range, with debt and hybrids representing 34.5% of total tangible capitalisation.

Credit Ratings

On 29 May 2013, Standard & Poor's (S&P) affirmed its ‘very strong’ ‘AA-’ insurer financial strength and issuer credit ratings in respect of IAG’s core operating subsidiaries.

In addition, the issuer credit rating of the non-operating holding company, Insurance Australia Group Limited, was lowered from ‘A+’ to ‘A’. This is consistent with S&P’s revised criteria for the global insurance industry, which assign ratings to non-operating holding companies without material banking and/or non-regulated businesses two notches below those of related core operating subsidiaries.

The outlook on all entities is stable.

CAPITAL MIX1H12A$m

FY12A$m

1H13A$m

FY13A$m

Shareholder equity 4,513 4,524 4,768 4,988

Intangibles and goodwill (1,887) (1,850) (1,838) (1,911)

Tangible shareholder equity 2,626 2,674 2,930 3,077

Interest bearing liabilities 1,627 1,659 1,572 1,620

Total tangible capitalisation 4,253 4,333 4,502 4,697

Debt to total tangible capitalisation 38.3% 38.3% 34.9% 34.5%

Capital mix at mid-point of targeted range


APPENDIX A GROUP OPERATING MODEL

GROUP OPERATING MODEL

The Group has a portfolio of end-to-end general insurance businesses aligned around customers, brands and markets. In this devolved model, accountability and responsibility are close to the end customer. This provides the operating businesses with control over the levers needed to execute strategies and manage performance, but within an overall Group framework. The operating model is summarised below.

PORTFOLIO OF INSURANCE BRANDS AND MARKETS

1 IAG’s short tail personal insurance products are distributed in Victoria under the RACV brand, via a distribution relationship and underwriting joint venture with

RACV Limited. These products are distributed by RACV and manufactured by Insurance Manufacturers of Australia Pty Limited (IMA), which is 70% owned by IAG and 30% by RACV.

2 IAG holds 98.6% voting rights in Safety Insurance, based in Thailand. 3 IAG owns 49% of the general insurance arm of Malaysian-based AmBank Group, AmGeneral Holdings Berhad (AmGeneral), whose wholly-owned subsidiary

trades under the AmAssurance and Kurnia brands. 4 IAG owns 26% of SBI General Insurance Company, a joint venture with State Bank of India. 5 IAG owns 20% of Bohai Property Insurance Company Ltd, based in China. 6 IAG owns 60.9% of AAA Assurance Corporation, based in Vietnam (30% at 30 June 2013).


APPENDIX B IAG SNAPSHOT

AUSTRALIA DIRECT

Direct insurance products, which include personal insurance as well as business insurance packages targeted at sole operators and smaller businesses, are sold primarily under the NRMA Insurance brand in NSW, ACT, Queensland and Tasmania. SGIO is the primary brand in Western Australia, and SGIC in South Australia. In Victoria, home, motor and other insurance products are distributed through RACV. Products are distributed through branches, call centres, the internet and representatives. Australia Direct also sells life insurance and income protection products which are underwritten by a third party.

AUSTRALIA INTERMEDIATED

Intermediated insurance products are sold primarily under the CGU Insurance and Swann Insurance brands through a network of more than 1,000 intermediaries, such as brokers, agents, motor dealerships and financial institutions. CGU is a leading provider of business and farm insurance, as well as personal insurance through business partnerships, across Australia. It also provides workers’ compensation services in every state and territory, except South Australia and Queensland.

NEW ZEALAND

The New Zealand business is the leading insurance provider in the country in the direct channel and a leading insurer in the broker/agent channel. Insurance products are provided directly to customers under the State and AMI brands and indirectly, through insurance brokers and agents, under the NZI brand. Personal lines and simplified commercial products are also distributed through agents and under third party brands by corporate partners, which include large financial institutions.

Short tail insurance

Motor vehicle Home and contents Commercial property, motor and

fleet motor Construction and engineering Niche insurance, such as

pleasure craft, boat, caravan and travel

Rural and horticultural Marine

Long tail insurance

Personal liability Income protection Commercial liability


Motor vehicle Home and contents Niche insurance, such as

pleasure craft, veteran and classic car, caravan and travel

Commercial property Commercial motor and fleet

motor Farm, crop and livestock

Long tail insurance

Compulsory Third Party (motor injury liability)

Public and products liability


Commercial property Commercial motor and fleet

motor Construction and engineering Farm, crop and livestock Marine Motor vehicle Home and contents Niche insurance, such as

consumer credit and travel

Long tail insurance

Public and products liability Professional indemnity Directors’ and officers’ Workers’ compensation

APPENDIX B IAG SNAPSHOT


ASIA

The Group has interests in five insurance businesses in Asia: A controlling economic interest in the merged business of Safety Insurance and NZI in Thailand; 49% of AmGeneral Holdings Berhad (AmGeneral), a general insurance joint venture in Malaysia; 26% of SBI General Insurance Company, a general insurance joint venture in India; 20% of Bohai Property Insurance Company Ltd, a general insurer based in China; and 60.9% of AAA Assurance Corporation, a general insurer based in Vietnam (30% at 30 June 2013).


APPENDIX C KEY RELATIONSHIPS

NRMA MOTORING & SERVICES

NRMA Motoring & Services was established in 1920 and is a mutual organisation with over 2.4 million members in NSW and the ACT. Until August 2000 it owned the NRMA Insurance business which now forms the bulk of IAG’s Australia Direct division. Under the terms of the demutualisation agreements, from that date NRMA Motoring & Services and IAG co-own the NRMA brand, with the respective parties having the following exclusive rights to its use:

NRMA Motoring & Services – roadside assistance and other motoring services (except smash repairs), motoring products, transportation and travel.

IAG (NRMA Insurance) – insurance and financial services and any other good or service not specifically reserved for NRMA Motoring & Services.

In addition, both parties cannot, under any brand, carry out activities engaged in by the other at the point of demutualisation.

IAG continues to provide certain services to NRMA Motoring & Services, notably those in respect of the NRMA branch network which is operated and managed by IAG. The two organisations retain a strong and closely aligned relationship.

NRMA Motoring & Services and its members received IAG shares as consideration for the NRMA Insurance business at demutualisation.

RACV

RACV is a mutual organisation founded in 1903. It provides a diverse range of services to more than two million members. These services include: insurance; finance; roadside assistance; general mobility, road safety and vehicle design advocacy; and leisure, which includes club and resorts, touring and travel products and services.

IAG’s short tail personal insurance products are distributed in Victoria under the RACV brand, via a distribution relationship and underwriting joint venture with RACV established in 1999. These products are distributed by RACV and manufactured by Insurance Manufacturers of Australia Pty Limited (IMA), which is owned 70% by IAG and 30% by RACV.

If one of IMA’s shareholders were to experience a change of control, the other has a pre-emptive right to acquire that shareholder’s interest in IMA at fair market value. The duration of the arrangements governing RACV’s distribution of RACV-branded products in Victoria would be a relevant factor in determining this market value, as would the duration of the arrangements governing IMA’s reinsurance of NRMA-branded products in NSW and the ACT.

AMBANK GROUP

With a history stretching back to 1975, the Malaysian-based AmBank Group provides a wide range of financial products and services through various subsidiaries. Its business divisions cover activities across retail banking, business banking, transaction banking, corporate and institutional banking, investment banking including funds management and stockbroking, Islamic banking, general insurance, life assurance and family takaful.

IAG has a general insurance joint venture in Malaysia with AmBank, AmGeneral Holdings Berhad (AmGeneral), which was established in 2006. AmBank owns 51% of AmGeneral and IAG 49%. AmGeneral is Malaysia’s largest motor insurer following the purchase of Kurnia Insurans (Malaysia) Berhad in September 2012.

APPENDIX C KEY RELATIONSHIPS


STATE BANK OF INDIA

State Bank of India (SBI) is India’s largest and oldest bank, with origins that can be traced back to 1806. It offers a broad range of banking and financial services, and has a footprint which, including associated banks, spans over 170 million customers and around 19,700 branches across all states of India.

SBI General Insurance Company (SBI General), a joint venture between SBI and IAG, was established in late 2009. SBI General commenced operations in 2010 and is building a portfolio in the corporate, retail and SME markets across India, with the majority in the retail segment through SBI’s bancassurance channel. SBI General has an exclusive corporate agency agreement with SBI and all of its five associate banks for general insurance business.

SBI owns 74% of SBI General and IAG 26%. IAG has an option to increase its shareholding to 49%, subject to a change in the Indian foreign direct investment limit.

TEDA

TEDA (Tianjin Economic-Technological Development Area) companies, led by TEDA Investment Holding Co., Ltd (TEDA Investment Holding), have majority ownership of Bohai Property Insurance Company Ltd (Bohai Insurance). TEDA Investment Holding is a Chinese state-controlled investment company which was established in December 1984. Its main scope of business covers real estate, public utilities, manufacturing and finance. At the end of 2012, TEDA Investment Holding owned 15 wholly-owned subsidiaries, 23 holding companies and 23 joint venture companies, with total assets in excess of RMB 790bn.

Bohai Insurance was founded in October 2005 by TEDA Investment Holding and is headquartered in Tianjin in northern China. Bohai has 25 branches, over 250 sub-branches and a network of agents, with around 3,000 employees across China. It holds a full licence in non-life insurance, with motor premiums representing more than 80% of total revenue.

In April 2012, IAG entered into a strategic partnership with Bohai Insurance through a 20% ownership position. IAG has an in-principle agreement to increase its ownership to 24.9%, subject to regulatory approval.


APPENDIX D GEOGRAPHICAL & PRODUCT DIVERSIFICATION

IAG GROUP GWP BY PRODUCT — FY13 IAG GROUP GWP BY BUSINESS — FY13

IAG GROUP GWP BY TAIL — FY13 IAG GROUP GWP BY CHANNEL — FY13

33%

27%

19%

10%

4%4% 3%

Motor

Home

Short Tail Commercial

CTP/Motor Liability

Liability

Other Short Tail

Workers' Compensation

48%

32%

17%

3%

Australia Direct

Australia Intermediated

New Zealand

Asia

82%

18%

Short Tail

Long Tail

57%30%

13%

Direct

Intermediated

Af f inity


APPENDIX E KEY ASX RELEASES

A summary of the announcements made by IAG to the ASX since 31 December 2012 is set out below. It does not include announcements of changes in directors’ interests, or the issue of shares upon exercise by employees of share rights. Reference should be made to a copy of the ASX announcements if further information is required. These are available at http://www.iag.com.au.

3-JAN-13 IAG FINALISES 2013 CATASTROPHE REINSURANCE COVER

IAG announced details of its Group catastrophe reinsurance programme for the calendar year commencing 1 January 2013. The programme provides protection of up to $5bn, compared to $4.7bn in 2012.

25-JAN-13 RECLASSIFICATION OF FY12 RESULTS – UK OPERATIONS HELD FOR SALE

IAG provided details of the reclassification of its FY12 results, as required by the relevant accounting standard to reflect the changed treatment of the UK business as ‘discontinued operations’.

30-JAN-13 EX-TROPICAL CYCLONE OSWALD CLAIMS UPDATE

IAG announced it had received around 5,600 claims arising from the severe weather that impacted Queensland and New South Wales as a result of ex-Tropical Cyclone Oswald.

11-FEB-13 IAG CLAIMS UPDATE

IAG provided an update on the claims arising from ex-Tropical Cyclone Oswald, as well the bushfires in New South Wales, Tasmania and Victoria. Respective estimated net claim costs were $120-140m and $35m.

21-FEB-13 IAG DELIVERS INCREASED PROFIT AND DIVIDEND, AND RAISES FY13 GUIDANCE

IAG announced an insurance profit of $815m for the half-year ended 31 December 2012. This equated to an insurance margin of 19.9% and was achieved on the back of a 13.5% increase in GWP to $4,593m. Full year GWP growth guidance was increased to 9.5-11.5%, on an ex-UK basis, and insurance margin guidance was increased to 12.5-14.5%, up from 11-13%, after exclusion of the UK and allowing for the 1H13 credit spread benefit of $90m.

26-FEB-13 IAG LAUNCHES SMALL SHAREHOLDING FACILITY

IAG launched a Small Shareholding Sale Facility to shareholders with an unmarketable parcel of IAG ordinary shares. This Sale Facility was only available to shareholders who had an unmarketable parcel, valued at less than $500.

25-MAR-13 DIVIDEND REINVESTMENT PLAN PRICING

IAG advised that ordinary shares to be allocated under the Company’s Dividend Reinvestment Plan would be priced at $5.6689 per share for the dividend payable on 3 April 2013.

2-APR-13 IAG ANNOUNCES BOARD APPOINTMENT

IAG announced that Dr Nora Scheinkestel had been appointed to the IAG Board as a non-executive director, with effect from 1 July 2013.

11-APR-13 PRESENTATION TO THE MORGAN STANLEY INSURANCE FORUM

IAG lodged a copy of a presentation entitled ‘Looking forward with confidence’, delivered in Sydney by Peter Harmer, Chief Executive Officer of the Australia Intermediated business, to the Morgan Stanley Insurance Forum.

APPENDIX E KEY ASX RELEASES


22-APR-13 IAG COMPLETES SALE OF UK OPERATIONS

IAG confirmed it had completed the sale of the Equity Red Star business to Aquiline Capital Partners, following receipt of all regulatory approvals.

23-APR-13 IAG SMALL SHAREHOLDING FACILITY

IAG advised the IAG Small Shareholding Sale Facility closed on 16 April 2013 and that eligible shareholders would receive $5.7027 per share.

23-APR-13 IAG OUTLINES STRATEGY TO SUSTAIN MARKET LEADING POSITION IN NEW ZEALAND

IAG provided an update on its New Zealand business and outlined its strategy to maintain its leading position and deliver sustainable strong returns in that market.

29-MAY-13 S&P REVIEWS IAG RATINGS

IAG advised that S&P had published updated ratings in respect of the Group following their announcement on 7 May 2013 of revised rating criteria for the global insurance industry. S&P’s updated ratings comprised affirmation of ‘AA-’ insurer financial strength and issuer credit ratings in respect of IAG’s core operating subsidiaries and a reduction in the issuer credit rating of the non-operating holding company, Insurance Australia Group Limited, from ‘A+’ to ‘A’.

17-JUL-13 IAG FLAGS FY13 REPORTED INSURANCE MARGIN OF 16.8-17.2%

IAG announced that it expected to report an insurance margin of between 16.8% and 17.2% for the financial year ended 30 June 2013, compared to previous guidance of 12.5-14.5%. The Group confirmed its underlying performance had remained strong, while reported financial results would reflect favourable natural peril, reserve release and credit spread impacts. The Group also indicated anticipated GWP growth of 11.8%, slightly higher than the guidance range of 9.5-11.5% owing to favourable foreign exchange movements.


APPENDIX F GLOSSARY

The following is a glossary of the terms used in this report, including those commonly used in the insurance industry.

AFFINITY A long term relationship where insurance services, such as underwriting, are provided to a third party under whose brand insurance products are sold.

APRA Australian Prudential Regulation Authority.

ASX Australian Securities Exchange Limited.

CASH EARNINGS IAG defines cash earnings as net profit after tax attributable to IAG shareholders, plus amortisation and impairment of acquired identifiable intangibles and excluding any unusual items. This definition is used for the purposes of the Group’s dividend policy. It is non-IFRS financial information that has not been audited or reviewed.

CASH ROE IAG defines cash ROE as reported ROE adjusted for amortisation and impairment of acquired identifiable intangibles and unusual items.

COMBINED RATIO Represents the total of net claims expense, commission expense and underwriting expense, expressed as a percentage of net earned premium. It is equivalent to the sum of the loss ratio and expense ratio.

COMMON EQUITY TIER 1 CAPITAL (CET1) The highest quality component of capital, as defined by APRA under its LAGIC regime. It is subordinated to all other elements of funding, absorbs losses as and when they occur, has full flexibility of dividend payments and has no maturity date.

CONVERTIBLE PREFERENCE SHARES (CPS) Convertible Preference Shares were issued by IAG in May 2012 and are quoted as IAGPC on ASX.

CREDIT SPREAD The credit spread is the difference between the average yield to maturity of the portfolio of non-government securities and the average yield to maturity of the liability profile, valued using Commonwealth Government of Australia yields.

CTP Compulsory Third Party insurance, which is liability cover that motorists are obliged to purchase in Australia.

DEFERRED ACQUISITION COSTS (DAC) Accounting standards require acquisition costs incurred in obtaining and recording general insurance contracts to be deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the income statement in subsequent periods. Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the related general insurance contracts.

DISCOUNT RATE In accordance with accounting standards, outstanding claim liabilities are discounted to account for the time value of money. IAG uses a risk free discount rate.

DIVISIONAL Divisional is the same as segment in the audited financial statements.

APPENDIX F GLOSSARY


DRP Dividend Reinvestment Plan. This plan permits shareholders to receive shares as consideration for dividends. IAG can elect to issue shares or have them acquired on market for DRP participants.

EXPENSE RATIO The ratio of expenses to net earned premium. Expenses are split into administration (underwriting) and commission, with ratios calculated on the same basis.

GROSS EARNED PREMIUM Premium is recognised in the income statement as it is earned. The insurer estimates the pattern of the incidence of risk over the period of the contract for direct business, or over the period of indemnity for reinsurance business, and the premium revenue is recognised in the income statement in accordance with this pattern.

GROSS WRITTEN PREMIUM (GWP) The total premiums relating to insurance policies underwritten by a direct insurer or reinsurer during a specified period and measured from the date of attachment of risk and before payment of reinsurance premiums. The attachment date is the date the insurer accepts risk from the insured.

GROUP Insurance Australia Group Limited (IAG) and its subsidiaries.

IFRS International Financial Reporting Standards.

IMMUNISED RATIO An immunised ratio is used to compare underwriting results between periods, as it normalises the ratio for the effects of changes in the risk free rate used to discount liabilities.

INSURANCE MARGIN The ratio of insurance profit to net earned premium.

INSURANCE PROFIT Underwriting result plus investment income on assets backing technical reserves.

LAGIC APRA’s Life and General Insurance Capital regulatory regime, which became operative on 1 January 2013.

LEVIES Levies are taxes on insurers to assist government funding for fire and emergency services. They are an expense of the insurer, rather than government charges directly upon those insured. The insurer is responsible for paying levies, usually in arrears. In Australia, these comprise the Emergency Services Levy (ESL) in NSW, and the Fire Services Levy (FSL) in both Victoria (phased out by 30 June 2013) and Tasmania (commercial property lines only). Levies are included in GWP and expenses for reporting purposes.

LIABILITY ADEQUACY TEST (LAT) Accounting standards require an assessment of the sufficiency of the unearned premium liability be performed each reporting period by considering the expected future cash flows relating to future claims arising from the unearned premium, net of reinsurance and deferred acquisition costs. If the unearned premium liability is considered deficient then the entire deficiency is recognised in the income statement, firstly through the write down of deferred acquisition costs and with any remaining amount recognised in the balance sheet as an unexpired risk liability.

APPENDIX F GLOSSARY


LONG TAIL Classes of insurance (such as CTP and workers’ compensation) with an average period generally greater than 12 months between the time when earned premiums are collected and final settlement of claims occurs.

LOSS RATIO The ratio of net claims expense to net earned premium.

MER Maximum Event Retention, representing the maximum cost which could be incurred in the event of a further major catastrophe event, after allowing for reinsurance cover.

NATURAL PERILS Natural peril events include, but are not limited to, storm, wind, flood, earthquake and bushfire.

NATURAL PERILS ALLOWANCE The natural perils expense forecast to be incurred within a specified period of time based upon previous experience and management judgement, which is reflected in the pricing of related insurance products for the same period.

NATURAL PERILS EXPENSE Losses arising from natural perils after deducting any applicable reinsurance recoveries.

NET CLAIMS EXPENSE Insurance claim losses incurred plus claims handling expenses, net of recoveries from reinsurance arrangements.

NET EARNED PREMIUM (NEP) Net earned premium is gross earned premium less reinsurance expense.

PCA/PCR Prescribed Capital Amount or Prescribed Capital Requirement, as defined by APRA under its LAGIC regime.

PROBABILITY OF ADEQUACY (POA) The estimated probability that the amounts set aside to settle claims will be equal to or in excess of the amounts eventually paid in respect of those claims. This estimation is based on a combination of prior experience and expectations, actuarial modelling and judgement. It is also known as the probability of sufficiency (PoS). APRA’s prudential standard GPS 310 requires general insurers to maintain a minimum value of insurance liabilities that is greater than a 75% level of sufficiency.

RECOVERIES The amount of claims recovered from reinsurers, third parties or salvage.

RESET EXCHANGEABLE SECURITIES (RES) Reset Exchangeable Securities (RES) are quoted as IANG on ASX and issued by IAG Finance (New Zealand) Limited. The issuer is a wholly owned subsidiary of IAG.

RISK FREE RATE The risk free rate is the rate of return on a range of Commonwealth Government bonds. It is deemed to be risk free as there is a very low risk the Commonwealth Government of Australia will default on its obligations.

RISKS IN FORCE Risk refers to the subject matter that an insurance policy or contract protects (for example, number of vehicles, houses, employees). An insurance policy may cover one risk or many risks, depending on the terms of the policy. Risks in force are a measure of the total number of risks covered by an insurance company at a point in time.

APPENDIX F GLOSSARY


SHAREHOLDERS’ FUNDS The investment portfolio of assets held in excess of the amount backing technical reserves, representing shareholders’ equity not used in day-to-day operations.

SHORT TAIL Classes of insurance (such as motor, home and small-to-medium enterprise (SME) commercial) with an average period generally less than 12 months between the time when premiums are earned and final settlement of claims occurs.

TECHNICAL RESERVES The investments held to back the outstanding claims liability (including incurred but not reported (IBNR) and incurred but not enough reported (IBNER)) and unearned premium, net of recoveries and premium debtors.

UNDERLYING MARGIN IAG defines underlying margin as the reported insurance margin adjusted for: Net natural peril claim costs less related allowances; Reserve releases in excess of 1% of NEP; and Credit spread movements. The underlying margin is non-IFRS financial information that has not been audited or reviewed. It is provided to give management’s view of normalised performance and can also be referred to as underlying result, underlying performance, underlying insurance profit or underlying profitability.

UNDERWRITING The process of examining, accepting or rejecting insurance risk, and classifying those accepted, in order to charge an appropriate premium for each accepted risk.

UNDERWRITING EXPENSES Those expenses incurred as a result of underwriting activities, including risk assessment and other acquisition expenses.

UNDERWRITING PROFIT/(LOSS) Net earned premium less net claims expense, commission expenses and underwriting expenses.

UNEARNED PREMIUM Premium applicable to the unexpired portion of an insurance contract, which has not been recognised in the income statement and is identified in the balance sheet as an unearned premium liability. The unearned premium liability is to meet the costs, including the claims handling costs, of future claims that will arise under current general insurance contracts and the deferred acquisition costs that will be recognised as an expense in the income statement in future reporting periods.

WACC Weighted average cost of capital.


DIRECTORY

SECURITIES EXCHANGE LISTINGS

ASX Limited:

ASX code for Ordinary Shares: IAG (shares on issue, 30 June 2013: 2,079,034,021)

ASX code for Reset Exchangeable Securities: IANG (listed January 2005)

ASX code for Convertible Preference Shares: IAGPC (listed May 2012)

London Stock Exchange:

LSE code for Fixed Rate Subordinated Notes due 2026: 70QG (£100.0m outstanding at 30 June 2013)

NZX Limited:

NZDX code for Unsecured Subordinated Bonds due 2036: IAGFA (NZ$325m outstanding at 30 June 2013)

KEY DATES

Final dividend – ordinary shares

Ex-dividend date 5 September 2013

Record date 11 September 2013

Payment date 9 October 2013

Payment date for IANG and IAGFA quarterly distributions 16 September 2013

Annual General Meeting 30 October 2013

Payment date for IAGPC dividend 1 November 2013

Payment date for IANG and IAGFA quarterly distributions 16 December 2013

Announcement of half year results to 31 December 2013 20 February 2014*

Interim dividend – ordinary shares

Ex-dividend date 27 February 2014*

Record date 5 March 2014*

Payment date 2 April 2014*

Payment date for IANG and IAGFA quarterly distributions 17 March 2014

Payment date for IAGPC dividend 1 May 2014

Payment date for IANG and IAGFA quarterly distributions 16 June 2014

Announcement of full year results to 30 June 2014 21 August 2014* *These dates are indicative dates only and are subject to change. Any change will be announced on ASX.

CONTACT DETAILS

Investor Relations Simon Phibbs Telephone: +61 2 9292 8796 Mobile: +61 411 011 899 Email: [email protected] Media Andrew Tubb Telephone: +61 2 9292 3134 Mobile: +61 411 014 771 Email: [email protected] Email: [email protected]

Registered Office Level 26, 388 George Street Sydney NSW 2000 Telephone: +61 2 9292 9222 Website: www.iag.com.au Investor Information/Administration Computershare Investor Services Pty Limited 452 Johnston Street, Abbotsford VIC 3067 Telephone: 1300 360 688 Email: [email protected] Facsimile: +61 3 9473 2470 Or by mail to: GPO Box 4709 Melbourne VIC 3001

Documents

FY13 Investor Report FINAL - IAG & reports/FY13_RR...Aug 22, 2013 · IAG FY13 INVESTOR REPORT ... Australian Securities Exchange and, in particular, the Annual Report for the year