Equity Red Star legacy still looms over IAG

Australian insurance group IAG has given shareholders what they wanted: a disposal of the loss-making UK business. But it is perhaps too early to celebrate as the break is not as clean as they may have hoped.

Analysts and shareholders have long called for the business to be sold, mostly because of the losses emanating from Lloyd’s motor insurer Equity Red Star, which makes up most of the business, and the uncertainty about future losses given rising bodily injury claims in the UK.

Equity Red Star’s future claims liabilities are now the problem of private equity house Aquiline Capital Partners, which is run by Jeffrey Greenberg – son of iconic ex-AIG chief executive Maurice “Hank” Greenberg. The broking parts of the business, meanwhile, will undergo a management buy-out.

IAGH investors may be shot of any future claims liabilities from Equity Red Star, but they are still exposed to its defined benefits pension liabilities. These were a big sticking point in the sale negotiations, and it appears IAG lost the battle. The sale statement said: “As part of the sale agreement the existing pension fund liabilities will remain with IAG.”

The liabilities arise from Equity Red Star’s own funds, as well as the company’s membership of the Lloyd’s Superannuation Fund. According to the results for the year to 30 June 2011 of Equity Insurance Management, which is responsible for paying IAG UK’s pension liabilities, the defined pension benefit stood at £3m. This was an improvement over the £8.9m from the previous financial year.

While the deficit is small within the context of IAG as a whole and is going in the right direction for the time being, pension deficits  are volatile, and so it is an uncertainty that will be with IAG for many years to come.

Keeping hold of the pensions liabilities has contributed to the hit IAG took on the sale of Equity Red Star. The sale will cost IAG A$240m (£157m), part of which was attributed to “an increase in the retained existing pension fund liabilities based upon current actuarial assumptions”.

Perhaps IAG will rue the day talks broke down with Tungsten Corporation’s Edmund Truell, Aquiline’s main rival in the bidding for Equity Red Star. Truell, who founded pension insurer Pension Corporation in 2006, had offered IAG a solution for the pension liabilities as part of his bid.