EXECUTIVE SUMMARY

In our first Sustainability Report, published in November 2004, we outlined why sustainability is core business for us. We also detailed the value we believe our business delivers in helping to reduce risk. This year's report again goes to the heart of our purpose. We describe how sustainability is inextricably linked to our reasons for being - paying claims, understanding and pricing risk, managing costs and reducing risk.

Progress in the 2005 financial year

In the last financial year, we honoured commitments made to our customers, shareholders, employees, communities and the environment.

We encouraged wider participation in employee volunteer activities and ran community programmes to reduce high rates of burglary and car theft. We also launched an education programme to improve community awareness of insurance and risk.

In our workplace, we encouraged more employees to take up part-time employment to give them greater flexibility and work-life balance. We also offered an extensive range of learning opportunities for our people and developed strategies to address women and age issues in our workforce. In addition, we launched a strategy to encourage greater indigenous employment at IAG.

In the last year, although falling short of our targets, we have taken steps to improve our environmental performance. These include introducing more hybrid vehicles to our tool of trade fleet and commencing work on an energy management plan to reduce electricity use at our major sites.

From our customer's perspective, our research shows they are more satisfied with our service, particularly at claims time.

For our shareholders, we're delivering on our commitment to international expansion by acquiring a small general insurance business in Thailand and continuing to pursue other potential acquisition opportunities in Asia.

Sustainability is core business

We are continuing to embed governance around sustainability issues into existing business and management practices. This means for instance, incorporating sustainability into our risk management strategy to ensure we manage risk for the long term.

Governance
Responsibility for creating a sustainable IAG resides at every level of the organisation. We also have a Board committee which advises and supports the Board on the social, environmental and ethical impacts of our business practices and sets the standards for these practices. In addition, our senior management Reputation Committee meets monthly and is responsible for formulating IAG's strategies on reputation issues and reporting, and making recommendations on these.

We use public policy statements to articulate our commitment to the sustainability of our business. These polices cover diversity and flexibility, care for the environment, continuous disclosure and insider trading.

We are also in the process of developing a Code of Ethics based on our purpose and values. This will provide an ethical decision-making framework for our people across our international operations.

Culture driving sustainability

We believe that by reinforcing our desired culture with sound people practices, IAG's employees will deliver a consistent experience for our customers, shareholders and the community - ultimately helping us create a sustainable business.

To help achieve this goal, we regularly measure how passionately our people feel about working for IAG and take actions to address their concerns. We also provide a framework for rewarding employees who act in a way that reflects our values and, through our internal communication channels, we continuously reinforce these values and our purpose.

We use a number of tools to assess whether our people are in the right roles and if we have leaders in place to deal with the high level of complexity required to keep our business in shape for the long term. Our Sustainability Champions also take a strong and visible leadership role throughout the business and are adept at taking the Group-wide philosophy and 'making it real' for their division.

Paying claims

Paying claims is why we exist. We sell a 'promise' to our customers that should they suffer an unfortunate event, we will provide them with cover when they need us most, at claims time. Through our brands NRMA Insurance, SGIO, SGIC, CGU and Swann Insurance, we pay around $11 million in claims every day.

What sets us apart from our competitors is an attribute we call 'going beyond the claim' - the way we manage the process of paying claims and help our customers repair, rebuild and recover in times of need. Indicators we use to measure our progress in meeting this promise are those relating to customer and claims satisfaction and complaints. In the 2005 financial year, customer satisfaction was 81% - up from 80% in the 2004 financial year. Claims satisfaction rose by 3% to 87%, while the number of customer complaints fell from 7,789 to 7,002.

To deliver further on our promise to our customers, we work closely with our suppliers to improve efficiencies to ensure their businesses remain sustainable. For the smash repair industry, this means investing in apprenticeships, traineeships, business management training and succession planning courses and making changes to the way we work with our preferred repairer network across Australia.

For our network of 74 preferred builders who carry out repair work after home insurance claims, we've partnered with the Housing Industry Association to offer a course to help them adopt a more environmentally friendly approach. We're also seeking to improve the environmental credentials of the goods we supply our customers.

Understanding and pricing risk

To ensure we don't under-price risk (which might jeopardise our ability to pay claims), or over-price it (which could affect the affordability of insurance), we employ specialists such as underwriters, actuaries, industry researchers and atmospheric scientists to analyse data.

In addition, our extensive record of personal insurance claims gives us access to vast amounts of data such as repair costs, weather patterns and crime statistics. This helps us price risk fairly for each customer. It also presents opportunities to help the community reduce risk.

For example, our Industry Research Centre provided input into how the Subaru Liberty, Ford Territory, 2005 Mitsubishi 380 and 2006 Holden Commodore, could benefit from improved design to reduce repair costs and improve anti-theft security.

Tort law reform
We play a leading role in policy debates such as those on legal reforms affecting Australia's public liability insurance system. We recently worked with State and Federal governments, other insurers and the community to find solutions to problems resulting from the fact that the system had become unworkable. The result was a series of changes to negligence and other civil liability laws, also known as 'torts'. These changes restored the balance between appropriate compensation for injured people and the community's ability to afford the associated insurance premiums. In 2004, our commercial insurance business, CGU, reduced its public liability rates by 10% in anticipation of the benefits of tort reform. This reflected our commitment to ensuring the benefits of these reforms were passed on to the community.

Climate change
We are acutely aware of the impact of climate change on risks faced by the insurance industry. The past 19 out of 20 major insurance events in Australia have been weather related. We are working to mitigate the impacts of climate change and are learning more about weather patterns and how they may affect Australians' lives.

Because climate change means historical records become less relevant in determining future risk, we commission research into extreme weather risk and how it may change. Through this work, we are better able to make informed decisions for our business.

Climate change considerations are key to our efforts to reduce our environmental footprint and to encourage our customers and suppliers to do the same.

Flood insurance
Another area of current concern is the lack of affordable and consistent flood insurance in Australia. It's a challenge that we have been working hard to address, but it is fraught with complexity. Although the issue poses a significant risk to insurers, we believe it is a whole-of-society issue affecting local communities, governments and insurers - and one that must be resolved. We believe that a solution should allow premiums to vary according to flood risk, but provide some subsidy on the premium for householders whose risk is so high that risk-rated flood cover would be unaffordable.

Managing costs

Because our operating costs are reflected in the price of premiums, we must be as efficient as possible to maintain premiums at an accessible level for the wider community. Our obligations to shareholders also mean we have a responsibility to manage our costs efficiently.

We do this by keeping our administration costs down, looking for savings in our supply chain without sacrificing quality, using technology to increase our efficiency, and identifying opportunities to integrate our business and find synergies in our operations.

We're also working to reduce our own CO₂ emissions, not only to benefit the environment but also because of the financial advantages.

Because we did not meet our environmental targets for the 2005 financial year, we're making greater efforts across the organisation to reduce our environmental impact. We aim to do this by:

• improving our measuring capability and developing a monthly reporting process for all managers that tracks CO₂ emissions alongside spend;
• setting more tailored divisional targets and engaging our people around improving our performance;
• delivering on projects to reduce print paper use through eBusiness systems, reduced policy documentation and online shareholder interaction;
• rolling out action plans to address high environmental impact areas; and
• implementing an energy management plan to reduce the electricity use across our major sites.

Reducing risk

There are four key areas in which we are working to reduce risk: road and home safety, crime prevention, workplace safety and climate change. These areas reflect priorities for our business lines and where we have the greatest experience and wealth of claims data.

To reduce risk in the community, we have formed a network of partnerships, embarked on a series of programmes and supported a range of community projects in crime and injury prevention, emergency services and the environment. In the 2005 financial year, our financial contribution to the community totalled more than $12 million.

In response to employee feedback, we have also developed a number of programmes that give our people the chance to get involved in their communities. Employees can donate to selected charities, with IAG matching these donations dollar for dollar, take one day of paid volunteering leave a year, become communityhelp Champions or nominate groups who are involved in reducing community risk, for grants.

Our safety performance has been a major focus of our sustainability efforts in the past year. As we are the country's largest underwriter of workers' compensation insurance, it is particularly important that IAG has a best practice safety culture.

In the 2005 financial year, our OH&S performance improved considerably. We developed an online training programme for all our people, implemented an electronic accident and incident reporting process and introduced the Internal Risk Radar, an online OH&S self-assessment process, into all our worksites.

Through our workers' compensation business, we are sharing our experiences in improving OH&S with our commercial customers so they can prevent workplace injuries and help injured people get back to work earlier.

Our stakeholders

One reason we are taking steps to ensure the sustainability of our business is so that we can meet the needs of our key stakeholders (customers, shareholders, employees and communities) for many years to come.

Managing the complex, and sometimes conflicting, needs of stakeholders is a defining attribute in sustainable leadership and one which we are working to foster among all our leaders.

It's about being socially responsible, but it's also good for business.

Sustaining shareholder value
In the 2005 financial year, IAG achieved another year of record results in a complex operating environment. This result is a demonstration of our commitment to managing our business in a way that brings sustainable long-term benefits.

The Group achieved a net profit attributable to shareholders of $760 million, up from $665 million in the previous corresponding period. We've done this by adhering to tight underwriting disciplines and focusing on building stronger relationships through initiatives to better align our products, service and distribution networks with customers' needs, while reducing costs. Our performance has been boosted by strong investment returns.

Engaging in dialogue
In order to achieve longevity, we aim to engage in regular dialogue with our various stakeholder groups.

In November 2004, a survey was sent to more than 2,000 stakeholders, including customers, shareholders, regulators and not-for-profit organisations, to allow for more targeted stakeholder engagement. Detailed findings from the survey and our actions as a result of this survey were collated in a report entitled, "We're listening", which will be sent to all survey respondents in late 2005.

In addition to surveys, we garner stakeholder feedback through informal and formal consultation, focus groups and representation on industry bodies. We are also in the process of forming an expert advisory committee to look out for the interests of our stakeholders and provide our Executive team and Board with independent, expert advice.