Wilkins says Equity Red Star will continue to step back from brokers as he announces £76m loss

Lloyd’s motor insurer Equity Red Star will continue to withdraw from broker relationships and push through 20% rate increases in 2011, the chief executive of its parent company Insurance Australia Group (IAG) Michael Wilkins said.

IAG UK suffered worse-than-expected losses of A$121m (£75.8m) for the six months to 31 December 2010.

The accounts for the first half of the firm’s financial year, also revealed that it boosted UK motor reserves by A$18m, including a charge of A$40m for the acturial review. This comes on top of the A$367 reserve strengthening already pumped into Equity Red Star last year.

The firm was also hit by A$11m of claims related to the severe winter weather.

Wilkins, speaking to analysts this week, said IAG UK continued to “take strong remedial action in the UK” and push forward with “aggressive repricing”.

He said IAG had already achieved rates increases of up to 20% in private motor and was looking to do the same for the current year.

He also said that following its exit from the aggregator business and 230 broker relationships, the firm would “continue to exit other poorly performing business areas or distribution relationships over the coming months as circumstances allow”.

Ian Foy took over as chief executive of IAG UK from Neil Utley last year.

IAG forecast a smaller loss for the second half of its financial year. Wilkins refused to be drawn on the amount, but said: “We don’t anticipate it is going to be anything like A$100m.”

He said that original expectations had been to break even or make a small profit in the second half.

The company said it was improving its management information services. It will also buy a further A$100m of adverse development reinsurance cover for the 2010 underwriting year, which will kick in at A$25m above current reserving levels. The cover will cost IAG A$40m, which it will book in the second half.

At the presentation, Wilkins faced a barrage of questions from equity analysts about the UK business, including whether the company would sell the unit, and how long it intended to continue tolerating the losses.

Wilkins responded: “We are concentrating on remediating the business at the moment. Despite the fact that these remediation actions are taking longer than planned to take hold, we still remain confident that profitability will be restored in the UK over the longer term.”

Legal reform will be required to return the UK motor insurance market to profitability and banish the spectre of bodily injury claims inflation, he said.

“The UK remains a difficult market, which is in need of major tort and other reform if the position is to fully stabilise for the benefit of customers and insurers.”

The main cause of the loss, according to Wilkins, was higher-than-expected inflation of bodily injury claims in the UK motor market, which in some sectors of the UK market was running at 30%.

“That was certainly higher than the expectations we had at the start of the year,” he said. “Previous estimates put inflation at between 10% and 15%.”