In an increasingly competitive environment, our business delivered a sound operating result for the first half of the 2015 financial year.

Our underlying profitability and performance remained strong, shown by an underlying margin of 13.3%, compared to the 13.7% underlying margin we reported in the first half of last financial year

Our reported insurance margin of 13.4% moved from 17.5% in the first half of last financial year, affected by:

• net natural peril claim costs of $421 million, which were $71 million more than the half year allowance and included $165 million for the Brisbane storm in November 2014;
• lower prior period reserve releases of $92 million, equivalent to 1.8% of net earned premium (NEP), compared to 4.3% in the first half of the 2014 financial year; and
• a similar-sized favourable impact from the narrowing of credit spreads, of $40 million.

Our gross written premium (GWP) grew by 17.1% to $5.6 billion, largely reflecting the first-time addition of the former Wesfarmers business. Like-for-like GWP growth was relatively flat, influenced by:

• modest volume growth in personal lines, which was broadly in line with the industry;
• heightened competition in commercial products, in both Australia and New Zealand; and
• the ongoing relative absence of cost pressures, resulting in minimal cause for rate increases.

Insurance profit was $693 million for the half year, compared to $758 million in the prior corresponding period. Investment income on shareholders’ funds was $137 million, more than 40% lower than for the same period last year, which saw particularly strong equity market returns. Net profit after tax was nearly 10% lower, at $579 million.

In December 2014, IAG increased its gross claims reserves for the FY11 Canterbury earthquakes in New Zealand by NZ$950 million. These reserves remain within the Group’s applicable reinsurance covers. While the Group believes it has adopted an appropriate reserving position, given the complexity of the Canterbury earthquake events, there remains a degree of uncertainty as to the ultimate cost.

Our plans to integrate the former Wesfarmers business and implement a new operating model in Australia delivered modest early benefits this half. We are confident we will achieve our targeted pre-tax run rate of $80 million by the conclusion of the 2015 financial year, and a $230 million run rate by the end of the 2016 financial year.

DIVISIONAL RESULTS

• Our largest business, Personal Insurance, performed well, growing its GWP by 4.3% to $2,802 million, largely through the first-time addition of business associated with the former Wesfarmers business, including Coles. Like-for-like growth was modest and broadly in line with the industry, and the business delivered a strong underlying margin of 14%.
• Commercial Insurance grew GWP by 43.9%, to $1,514 million, reflecting the addition of the former Wesfarmers business. Like-for-like GWP growth was slightly lower as the business maintained underwriting discipline in an increasingly competitive market. Commercial Insurance maintained its double digit underlying margin; its reported margin of 6.6% was affected by natural peril experience.
• Our New Zealand business increased GWP by 26.2%, to $1,116 million, after incorporating the local Lumley Insurance business, and with a favourable foreign exchange translation effect. Local currency GWP growth was 22.2% and like-for-like GWP growth was modest.
• Asia’s overall earnings contribution increased to $17 million (from $7 million in the first half of the last financial year) and on a proportional basis, GWP increased by 4.8%, aided by a return to growth in Thailand, and continued strong growth in India.

DIVIDEND AND CAPITAL

The Group’s capital position remains strong, and the Board has declared a fully franked interim dividend of 13 cents per share, to be paid on 1 April 2015 to shareholders registered at 5pm on 4 March 2015.

OUTLOOK

We maintain our reported insurance margin guidance of 13.5-15.5% for the 2015 financial year¹, and expect GWP growth to be at the lower end of our 17-20% guidance range.

¹ The assumptions underlying our reported insurance margin guideline include:

• Net losses from natural perils in line with allowance of $700 million;
• Prior period reserve releases equivalent to around 2% of NEP; and
• No material movement in foreign exchange rates or investment markets in the second half of the financial year.