Hastings and Advantage could be subject to MBOs following Lexicon review.

Free trial analysis: What is the future for IAG's UK business?

Insurance Australia Group (IAG) has appointed corporate adviser Lexicon Partners to review its UK business and consider selling off its underperforming divisions to their management.

It is understood that the group, listed on the Australian stock exchange, is due to make a public announcement on its plans next Wednesday.

Group chairman James Strong said in May that he was conducting a review of every aspect of the business in Australia and overseas and would report back in July.

The IAG UK business consists of Equity Insurance, Equity Red Star, motor broker Hastings, and Advantage, an underwriting agency based in Gibraltar.

A senior IAG UK source said that following the group’s strategic review, carried out by the parent company, Lexicon was now on board in London to assess its UK options and examine potential buyers for the under-performing Hastings broking business.

The source added that it was likely that the management team would be given the first option to take over the company along with its underwriting division Advantage.

He said: “IAG cannot officially say anything right now as it is in its closed period in the Australian stock market, but the market will have clarity after the Lexicon review and we will see some strategic changes.”

IAG was not available to comment as Insurance Times went to press.

“One could imagine [Utley] taking a look at it and considering whether to take it on, break it up and sell off parts of the business separately.

Source close to IAG

It is understood that the most likely scenario is that the Equity Group would continue operating under the umbrella of IAG but that Hastings and Advantage would be subject to a management buy-out. However a source close to the deal said that a move by Equity group chief executive Neil Utley to buy the whole UK business with private equity backing could not be ruled out.

He said: “One could imagine Neil taking a look at it and considering whether to take it on, break it up and sell off parts of the business separately.”

In April, the group lowered its projected profit margins for the second time this year, and said it planned to accelerate the rebalancing of its UK portfolio toward more profitable speciality classes.

The company also said it was in the concluding phase of a review of its operating model, with an expected shift towards internet and branch operations. Hastings’ business is based around three call centres.

Last month, IAG chief executive Michael Hawker left the group following sustained shareholder pressure and an audacious takeover attempt from rival QBE.

IAG bought Hastings and Advantage for £140m – over 10 times Hastings’ earnings – in September 2006, and Equity for £570m in January last year.

Hastings is the fifth largest motor broker in the UK, while Equity Red Star, Equity’s Lloyd’s operation, is the fifth largest UK motor insurer.

IAG UK reported an underwriting loss of A$31m (£14.31m) for the six months to 31 December 2007, up from a loss of A$2m (£0.92m) in 2006. Equity’s margin stood at 12.9%.

IAG shares have fallen 14% in the past month.

Testing times

April 2005: Former managing director Neil Utley leads 300m pounds buy-out of Cox Insurance. It later rebrands as Equity.
October 2006: IAG confirms acquisition of Hastings and Advantage for 140m pounds.
January 2007: IAG finalises purchase of Equity Insurance Group for 570m pounds.
October 2007: Company confirms plans to cut up to 200 UK staff as part of cost cutting measures worth 22m pounds.
November 2007: Group chief Michael Hawker concedes there are operational issues with Hastings and Advantage at AGM.
March 2008: Hastings Direct rebrands. IAG shares fall to record low of 3.21 Australian dollars
April 2008: QBE makes initial 3.38bn pound bid for IAG. IAG lowers projected full-year margin to 6%-8% and announces shift in balance of UK portfolio away from private motor.
May 2008: QBE makes final improved offer for IAG worth 4.14bn dollars. Boards meet in New Zealand, but fail to thrash out a deal. IAG chief Michael Hawker resigns. Chief operating officer Michael Wilkins becomes chief executive. Company announces full strategic review.
July 2008: IAG to issue trading update and results of strategic review.