To ensure we have enough capital in place to help customers in their time of need, we are focused on our capital reserves and take a conservative approach to their management.

The challenge of capitalisation is to get the balance right; too little capital poses an unacceptably high insolvency risk for both shareholders and policyholders, whereas too much capital requires high profit margins from policyholders that would fail to meet shareholder return expectations. The Board establishes a target level of capital that balances competing objectives and is synchronised with the other risk levers.

IAG's target level of capitalisation is assessed by consideration of various factors, including the minimum capital required by the Australian Prudential Regulation Authority (APRA), over the next one to three years. At 30 June 2011, we held 1.58 times the amount of capital required by our regulator, the Australian Prudential Regulation Authority (APRA). This level of capital is above our long term benchmark of 1.45 to 1.5 times APRA's requirement.

Information on IAG's capital composition is detailed in the Annual Report.

Both investment returns and reinsurance play a critical role in our overall capital management, and these are discussed below.

IAG applies our risk management expertise to our investment portfolio. We manage our investments according to a rigorous set of criteria, as well as regulatory constraints. IAG's Global Strategic Asset Allocation (SAA) framework focuses on generating cost-effective and consistent active return on shareholders' funds and technical provisions.

We align our corporate sustainability goals while considering investment returns. We remain a member of the UN Principles for Responsible Investment; however, our ability to influence the companies in which we invest to integrate Environmental, Social and Governance (ESG) factors into practices is limited due to the way that we manage our funds. We continue to believe that the best way for us to make a difference is through the Sustainable Investment Fund (SIF).

IAG's SIF was established in 2008 and is currently at a level of $100m. The fund invests in diverse assets that generate attractive long term wealth for IAG's shareholders, while aligning with the values of the communities and the environments in which we operate.

For more information, refer to our Investor Report.

We use reinsurance because it is a cost-effective way of accessing capital when it is needed. For a company like IAG, with operations that are relatively concentrated in a few markets, it would be extremely expensive to permanently hold such large amounts of capital. Reinsurance means we dilute our risk into a broader global pool and provide more affordable products to our customers.

IAG's reinsurance counterparties are the major reinsurers of the world, globally diversified and for whom the cost of holding large amounts of capital is lower than it would be for us. We have long standing relationships with our reinsurers, some of which we've been dealing with for over 50 years. Our strategy has always been to build sustainable relationships with trusted partners. We have a diversified panel of more than 30 reinsurers, and the counter-party credit profile is strong.

While it is true that the recent level of natural disasters may affect the short term profits of global reinsurers, we have not seen an impact on the availability of reinsurance capital. For reinsurers, a large Australasian company like IAG carries global importance, offering exposure into Australia and New Zealand and diversification away from other more concentrated exposure, for example, the hurricane season in North America, windstorms in Europe and earthquakes in Japan.

Over the past 12 months, managing capital in this manner has given us significant protection from the natural disasters we've experienced. For example, as New Zealand's largest insurer, IAG insures around 20-30% of Canterbury, yet our reinsurance meant the net cost to our Group of the first earthquake last September was nil and the more recent quake in February 2011 only $40 million - much lower than the gross claims of our customers.

The challenge for us is that we "rent" this capital one year at a time. It is likely that recent major events will put upward pressure on reinsurance prices. Reinsurers price over the long term and are resilient capital providers with a detailed understanding of the frequency of natural perils. Reinsurance rates are also determined based upon global supply and demand of capital. To counter the effect of these expected increases, we are passing on price increases through a phased fashion across our businesses.

In the longer term, IAG's strong position in the Australian and New Zealand markets should continue to make us strategically attractive to our global reinsurance partners.

The regulatory environment in which IAG conducts its business has a major influence on IAG's corporate governance practices. We actively engage with governments, regulators, industry, and professional groups to ensure that the interests of IAG and its stakeholders are properly considered in proposals to improve corporate governance, the general prudential regime and insurance industry practices. This includes making submissions to federal and state government committees, reviews and inquiries and regulators in relation to new legislation and regulation affecting the general insurance industry. These submissions can be found on this website.

Further details on IAG's approach to corporate governance and the key corporate governance practices followed by IAG and our people are provided in the Corporate Governance Statement of the Annual Report and in the 'About IAG' section of this website.

This approach underpins our activities, including our focus on accelerating the growth of our Group. The Asian market is vital to our medium to long term growth and our proximity to this emerging market enables IAG to deploy its capabilities and achieve profitable growth.

Our strategy is to boost our Asian footprint so that this business represents 10% of our total gross written premium in five years. While there are challenges to expanding into these markets, the opportunity available with the current limited penetration of insurance is considerable; for example, in the Indian market only 0.6%1 of the Indian Gross Domestic Product is attributable to insurance, as compared to significantly higher contributions in other economies.

This strategy relies heavily on acquisition through joint ventures and we actively manage the inherent risk through a disciplined process of country analysis, market analysis, business model analysis, partner selection, and strategic return. IAG maintains strict acquisition criteria and sufficient capital to leverage opportunities and has rigorous partner selection criteria and frameworks, with a consistent approach across markets. Selection criteria include product and channel compatibility, the quality of the business, alignment with IAG's strategic objectives, and the ability to work with the partner to transfer capabilities that allow IAG to create value; for example, an IAG executive is currently CEO of AmG in Malaysia, whilst we have four full time roles including Deputy CEO and senior roles in Underwriting, Claims, and Distribution in SBI General.

We spend considerable time with potential partners to ensure they share the same principles, values, and expectations as we do. We expect the relationship we build with them is one that will last for the longer term, which means constantly balancing the intention to grow with providing long term value.

1Source: The Associated Chambers of Commerce and Industry of India

We continue to advocate strong mitigation activities to meet our commitment to be carbon neutral by the end of financial year 2012 and are focused on identifying and implementing ways to reduce consumption and/or switch to alternate sources that are less carbon intensive. Having already implemented a number of consumption reduction activities (refer to FY11 environmental performance), we are now faced with implementing more challenging and innovative initiatives that will reduce our footprint. We will not be able to reduce our carbon emissions to zero; therefore, to achieve our carbon neutral goal we will need to purchase eligible offsets in 2012.

Each division is responsible for investigating how to avoid and reduce emissions in their own operations. For example, the cross divisional Energy and Water Action Group identifies opportunities to avoid or reduce electricity consumption, such as the desk top power down initiative that reduces the electricity used by our computer equipment.

The footprint of our scope 1 (direct) and 2 (indirect, as a result of electricity generation) emissions in Australia means we did not reach the reporting threshold in FY11 for the National Greenhouse and Energy Reporting (NGER) Act. The NGER Act is a national mandatory corporate reporting system (framework) for greenhouse gas emissions, energy consumption and production, where certain thresholds are met. We will continue to monitor our carbon dioxide equivalent (CO2e) emissions to ensure ongoing compliance with this Act and remain committed to transparently reporting CO2e emissions. We continue to submit data annually to the Carbon Disclosure Project (CDP), which collects information on carbon use and distributes it to investors, corporations and governments.

To help our people perform at their peak, we have developed performance management frameworks across the Group, which link individual objectives to Group and divisional strategy, and ensure performance is appropriately measured and rewarded. Group and divisional strategy is linked to individual scorecards for each of our people, against which their performance is reviewed. Our reward philosophy is based on recognition of those people who consistently perform above expectations.

IAG manages its talent through appropriate learning and development programs, supporting extra-curricular training and education and providing financial and leave support for those pursuing tertiary education and other professional qualifications. Insurance is a specialised and technically-focused business, which means traditionally, people may not be offered leadership opportunities away from their core speciality. Key for us is tailoring the development needs of our workforce from both a technical and leadership development perspective.

Consequently, we aim to match the skills of our talented people to our most important business priorities, focusing on providing opportunities for people across the Group to move to where they can add most value and learn the most in return. This will help us deliver on our priorities as a business.

IAG's global high potential and emerging talent is identified and reviewed biannually through transparent Group and divisional talent management programs, which also enables us to plan for succession for key roles. An objective identification process reviews all talent program candidates and a small group then proceeds to formal assessment. Based on needs assessment results, individual development plans are completed for each participant. These plans may include on-the-job development, further formal study, or participation in the IAG Advanced Leadership Program, depending on their level of seniority. The IAG executive group then meets regularly to discuss the progress of the talent pool and monitor the status of the company's succession grid.

Each of the IAG operating businesses and corporate office is responsible for developing talent and succession management programs for employees within their divisions and each of our divisions has developed its own programs, such as the Leadership Development program in the IAG Corporate Office for senior managers.

The culture of our business also plays a critical role, as it influences how we work together, as well as our ability to achieve our goals and deliver against our strategy. Our businesses are therefore ensuring that the culture we are fostering focuses on the customer to support the aim of profitable growth.

IAG also has a clear diversity ambition (refer to FY11 workforce performance) that enhances our culture; we believe that delivering on our diversity ambition will help us attract and retain the people we need to drive the future success of the company and achieve our ambition to be the world's most respected group of general insurance companies.

A workforce that matches the diversity of our customers helps us to recognise and meet customer and community expectations more effectively. Diversity of background leads to diversity of thought, which helps create an environment in which outdated ideas are challenged and innovative work practices are developed. Providing the mechanisms which promote diversity, such as flexible work arrangements that meet both individual and business needs, leads to a more engaged and productive workforce.

Our challenge is to work out how to harness this diversity to benefit every level of the organisation and our dealings with all our stakeholders.