IAG 2011 Annual Review

This is my first year as CEO of IAG’s New Zealand business, and it is clear that the year has been defined by our team’s response to the challenges posed by the series of earthquakes that have hit the Canterbury region. It is a credit to the team, and our focus on our strategy and our customers, that despite these events, our business has delivered a strong underlying result.

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The New Zealand business results for financial year 2011 reflect a strong underlying performance.

Results

Gross written premium increased 3.4% in local currency terms, largely on the back of rate increases. The insurance result was significantly affected by the increase in claim costs and reinsurance expenses due to the earthquakes. These resulted in a deterioration of the insurance margin from 14.7% in financial year 2010 to 0.4% this year. Excluding the impact of the Christchurch earthquakes and associated reinsurance costs, the underlying performance has been strong.

Earthquakes presented a significant test

The first earthquake in September 2010 severely damaged Christchurch, New Zealand’s second largest city. The earthquake on 22 February 2011 was even more devastating, tragically resulting in the loss of 181 lives. Another large earthquake hit on 13 June 2011.

The earthquakes presented us with a significant test. IAG has around 500 employees in the quake zone, and our first priority was to ensure their safety. Crisis recovery plans were implemented and support networks for our people established. These actions, and assistance from our teams across New Zealand, enabled us to focus on business continuity and helping our customers. We have now expanded our claims teams and created a special Recovery Team to focus on coordinating our earthquake response and have established partnerships to help us manage the repair and rebuild process while maintaining effective cost control.

The earthquakes have significantly affected the general insurance market and the New Zealand economy with the combined cost of the earthquakes in September 2010 and February 2011 estimated at about NZ$15 billion, equal to around 8% of the country’s gross domestic product.

Market conditions expected to improve

Strong gross written premium growth is expected in financial year 2012 due to a focus on strategy implementation, management discipline, and rate increases to offset increased reinsurance and claim costs.

Rate increases have already been notified for some portfolios, but pricing will be regularly reviewed and we will continue to price for the risks so we can insure New Zealanders over the long term.

Our insurance margin is expected to improve due to:

• earned premium growth driven by rate increases and item growth;
• a return to more normal net natural peril claims experience; and
• a continuation of favourable working and large claims frequency, partially offset by the expected rise in the average cost of claims.

• ¹More information about IAG’s activities to build sustainable businesses and communities including the greenhouse gas emissions profile is available at www.iag.com.au/sustainable.
• ²Risks in force or policies in force.