Sale of Equity moves closer after IAG writes £197m off its UK arm

It seems only a matter of time before IAG offloads the albatross around its neck that has been its UK operations.

Today, the Australian insurer took a A$297m (£197m) writedown on its UK arm, which is led by Lloyd’s motor insurer Equity Red Star.

IAG bought the UK operation for £540m in 2005 and the company has pumped A$403m (£251m) into reserves and reinsurance protection over two years as Equity has continued to hemorrhage money following a surge in bodily injury claims in the UK since about 2009.

Future of Equity to be decided by year’s end

Only last month the sale of Equity moved steps closer after IAG entered into talks with potential bidders.

IAG chief executive Mike Wilkins had previously announced a strategic review of the UK operation in May, which could result in continuing to improve the business, refocusing on specialist motor, or selling all or part of the business.

But concerns were raised at the time that Equity may fail to attract buyers.

However, other parts of the IAG UK business, including brokers Barnett and Barnett and NBJ, were thought to be likely to attract significant interest from the consolidators.

IAG said the review would be completed by the end of the 2012 calendar year, by which time there could already be some bids on the table.

Overall the financial performance of IAG UK, however, seems to be improving, bouncing back from a A$179m loss in 2011 to post a smaller loss of A$15m this year – in line with expectations.

Added to that has been an improved combined ratio, bringing the business closer to breakeven, but for all the remedial action carried out on the UK arm, gross written premiums were down 9%.

More worryingly perhaps, is IAG UK’s fee-generating businesses, which comprise the Equity Insurance Partnerships affinity business and the Independent Commercial Brokers broking business, which turned a A$2m profit in 2011 into a A$3m loss in 2012. This was attributed to tough market conditions that made new commercial business hard to come by and resulted in squeezed margins from increased competition.