IAG 2011 Annual Review

Against the backdrop of a challenging environment, our UK business has accelerated its change programme by continuing to review vigorously all products and distribution channels, targeting rate increases on underperforming business and focusing on improving fraud detection and management. We are determined to realise our stated objective of restoring profitability as soon as possible.

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The extensive programme of remedial actions underway in the UK delivered early signs of improvement.

Results

The loss of $60 million in the second half of the year is in line with expectations at the end of the first half, and continues an improving trend since the loss of $379 million in the second half of financial year 2010. The full year insurance loss of $181 million reflects:

• the ongoing industry-wide issue of bodily injury claim inflation, at a level more severe than previously anticipated;
• planned rate increases in non-private motor classes taking longer to realise than initially estimated; and
• the impact of the extremely harsh winter weather, resulting in an increase in net natural peril claim costs of $11 million.

Challenging operating environment

UK insurers continue to face strong claims inflation driven by unprecedented levels of bodily injury claims. It is estimated bodily injury claims now account for 50% of UK private motor insurance claim costs.

We have made substantial progress toward restoring profitability by:

• establishing a new management team;
• embedding a new claims philosophy, including reserving policy and accelerating claim cost savings;
• applying disciplined pricing and underwriting; and
• exiting underperforming segments of business.

We have also secured protection against further deterioration in bodily injury claims with additional adverse development cover for the 2010 underwriting year.

Improvements to drive positive contribution

The UK market is expected to improve. There are some encouraging signs in the shape of government response to recommended greater controls over insurance claimants seeking unacceptable bodily injury settlements; and in the continuous enforcement regulations, which came into effect from June 2011, and which should reduce uninsured driving. We will also see benefits from a continuing reduction in road traffic accidents; high fuel prices reducing business and commuting mileage; and further rate increases.

We will sharpen the focus on our traditional strength as a specialist provider in selected segments of the UK motor market and concentrate on returning the division to making a positive contribution to Group performance.

• 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.
• ³2010 business volume has been restated from 1.4m to 1.8m to correct an error in the previous calculations.