I am pleased to report IAG has delivered an encouraging improvement in its financial performance during the 2009 financial year, despite the adverse influence of unprecedented volatility in financial markets, including a steep decline in interest rates, and high claim costs from natural perils.

The Group's revenue, measured by gross written premium, increased during the year from $7,793 million to $7,842 million. The insurance margin was 7.1%, up from 5.4%, and net profit after tax was $181 million, compared with a net loss of $261 million recorded in the previous year.

The improvement in these results reflects the early benefits of the Group's refined strategy, which we announced in July last year.

In line with that strategy, we have refocused on our core businesses in Australia and New Zealand, ensuring we are selecting and pricing risk appropriately, containing costs and delivering superior customer experiences.

In the United Kingdom (UK), in December 2008 we announced the sale of the non core, underperforming parts of the business. We are now concentrating on our specialist UK motor underwriter, Equity Red Star, which is trading profitably.

In Asia, we continue to invest for future growth opportunities, such as our joint venture with the State Bank of India which we announced in November 2008.

The operating model of the Group has been simplified and now better aligns our businesses with customer needs. That has enabled substantial cost savings and increased efficiency.

At the time the Group outlined its refined strategy, we could not have anticipated the full impact of the deteriorating global economic environment. This has contributed to a significant reduction in the pre tax returns generated on our shareholders' funds to a loss of $39 million this year, compared to a profit of $24 million the previous year.

In addition, we could not have predicted the devastating consequences for our customers from some of Australia's worst natural perils on record, including the devastating fires which swept across Victoria in February 2009.

The fact that the Group's results improved despite the adverse influence of these events is an indication that our underlying business is moving in the right direction.

None of the initiatives implemented during the year has been easy, and we acknowledge that IAG still has some way to go to deliver its long term financial targets. However, we are confident we now have the right strategy and team to make this possible.

I would like to thank chief executive officer Michael Wilkins and the executive team for their leadership throughout this challenging period.

Capital management

Given the unprecedented volatility in equity markets, we took measures to strengthen IAG's capital position during the year by raising more than $530 million from our institutional and retail shareholders. The success of these initiatives is a sign of market support for our strategy.

At 30 June 2009, IAG had 1.79 times the minimum level of capital required by the Australian Prudential Regulation Authority (APRA). We also maintain the highest financial strength ratings from Standard & Poor's of any Australian based insurer, with 'AA–' ratings for each of our key wholly owned insurers.

In addition, during the year we maintained a conservative investment approach. More than 94% of the Group's $10.6 billion investment portfolio was invested in fixed interest and cash at 30 June 2009, of which 94% was invested with counterparties rated 'AA' or better.

Dividends

A fully franked final dividend of 6 cents per ordinary share (cps) will be paid on 2 October 2009. This brings the total dividend for the year to 10cps, fully franked.

This represents a payout ratio of 71.5% of cash earnings, which is slightly above the target of approximately 50%–70% outlined in the dividend policy introduced by the board this year.

BOARD AND EXECUTIVE REMUNERATION

There was no increase to the overall fees received by directors during the 2009 financial year and, mindful of the current economic conditions, no increase is planned for the 2010 financial year. Similarly, there will be no increase to the fixed pay for the CEO and executive team in the 2010 financial year.

The board has also made a number of changes to executive remuneration during the year, including setting a maximum value for short term incentives; and adjusting the performance hurdles for long term incentives under the Executive Performance Rights Plan to a better match of comparable companies. Under this plan, performance will be benchmarked to that of the Top 50 ASX Industrials and to achieve the full incentive the performance of the Group must rank in the top quartile.

The board will complete a further review of our remuneration practices to ensure we remain in step with community expectations, are able to meet new regulatory requirements announced by APRA and maintain a strong link between executive incentives and shareholder returns.

Detailed information on IAG's board and executive remuneration can be found in the remuneration report contained in the 2009 annual report.

BOARD RENEWAL

Whilst driving the change program to take the Group in new directions as detailed in this report, the board is undertaking a review of its own composition and succession planning.

That process includes the engagement of professional advisors and external benchmarking.

Future board plans will be outlined by the time of the annual general meeting of shareholders in November.

Outlook

The 2009 financial year has been a challenging but productive year. Despite external volatility, the renewed strategy committed to last year is starting to deliver results.

Our management team and all employees have risen to the challenges we have faced to move IAG towards a more efficient and profitable business and the board is grateful for their sustained efforts in often difficult circumstances.

By focusing on the basics and the underlying business, we have been able to deliver encouraging results in the 2009 financial year. I am confident that the improvements evident in our underlying performance will continue in the year ahead and deliver stronger returns for shareholders.

James Strong
Chairman

Moving forward - Chief Executive Officer's review Progress against strategy Looking further afield