What is the future for IAG's troubled UK business?
See also: IAG plans UK business sell off
IAG faces some tough decisions over the future of its UK assets.
The appointment of corporate advisors Lexicon Partners to assess the company’s strategic options in the UK is proof that rumours regarding the future of insurer Advantage, personal lines broker Hastings, and insurer and broker Equity have more than an element of truth about them.
With ire from shareholders around the group’s strategic investment in the UK less than two years ago showing little signs of abating, the Australian giant now appears to have only one card left to play.
However if IAG, which is set to reveal its hand on Wednesday, is to elect to sell either part or the whole of the business, the question is who will want to buy it?
Given that RBSI seems unlikely to receive full value for its highly efficient (and extremely profitable) business, what is clear at this point is that IAG will not recoup the £710m it paid to acquire its UK assets less than two years ago.
“The most likely outcome is for history to repeat itself, with UK chief Neil Utley leading a management buyout of parts of the business.
Nonetheless, the IAG getaway car appears to be revving up, with the company’s shares rising over 4 per cent on Wednesday, and a further 3.3 per cent on Thursday – the largest jump since QBE’s approach sent the stock soaring almost three months ago.
A closer look at IAG’s share price tells the story. The stock has lost almost half its value in the past three years (including a record low in March this year of A$3.21), driven in no small part by three years of falling profit. It is widely expected that number will increase to four, and the company will be forced to slash its dividend, which will likely increase the pressure to offload the UK book.
Sources within the business say that the most likely outcome is for history to repeat itself, with UK chief Neil Utley leading a management buyout of parts of the business. In 2005, not long after being deposed as managing director, Utley led a £300m buyout of insurer Cox, which later became Equity. Less than eighteen months later, he sold the business to IAG for almost twice that sum.
Another source close to the business says that another option is to restructure, perhaps shutting down some of its various parts; a move hinted at in the company’s latest profit warning in April, when it said its strategic shift towards internet and branch-based trading would be "implemented as a matter of priority", calling into question the future of Hastings, which derives around two-thirds of its income from its three call centres.
Long before the conclusion of its strategic review – hastened by the departure of group chief executive Neil Hawker – IAG had decided to bite the bullet and move its UK portfolio away from private motor. Given that only 20 per cent of Equity’s business of the private motor variety, this is entirely feasible. And Equity, with its margin of 12.9 per cent for the six months ending 31 December 2007, is in good shape. As for Hastings and Advantage, they are doing better – but it seems, not well enough.
A warning shot should have been fired across the bows when other suitors Norwich Union and Budget were believed to have aborted a deal for Hastings after reaching due diligence.
“IAGs 900,000 retail shareholders have either the time or the inclination to understand the dynamics of the UK motor market
The problem for IAG is that its purchase of both Hastings and Advantage was largely predicated on the motor market hardening.
Not that many of IAG’s 900,000 retail shareholders have either the time or the inclination to understand the dynamics of the UK motor market. But they certainly understand the implications of Hastings’ involvement in an £11m legal spat over an agency agreement, and concerns from the UK authorities over an unpaid tax bill.
At the time IAG made its move, Hawker said he planned to accelerate the growth of the business, which was expected to contribute about 3% of the Group’s GWP target growth of 5-10% by June 2007. In October last year, an investor report revealed that the broker’s income had fallen instead by a fifth year on year, and the following month Hawker pointed to ‘operational issues’ that needed addressing at both Hastings and Advantage.
Whether these issues have been properly dealt with will become clearer next week, but given that the company has gone to great pains to integrate its UK businesses – very much part of its original plan – it will be interesting to see if the group is willing, or indeed able, to hive off its constituent parts.
Whatever the case may be, the wait for transparency and accountability for which IAG shareholders have long been calling is almost over.