A closer look at the fallout from IAG’s decision to scale back its UK operations.
IAG’s decision to bite the bullet and dispense with around half of its troubled UK portfolio has been met with approval from shareholders, analysts and, no doubt, potential buyers.
It is also an indictment of the state of the UK private motor market, besieged by aggregators, and the strategy of deposed chief Michael Hawker to double the business in size every five years.
Almost two years to the day since IAG entered the UK market by purchasing Lloyd’s agency, Alba for A$23m (£11.2m), the company announced last Wednesday that it would be writing down its UK assets by A$350m (£170m) and scaling back to specialist underwriting and commercial wholesale broking under the umbrella of Equity Red Star, Equity Direct and recently acquired SME broker, Barnett & Barnett.
The move can be traced back as far back as the autumn, when turnaround specialist Michael Wilkins was appointed as group chief operating officer to lead a strategic review of the business.
Later, buried in IAG’s second profit warning of the year in April, the group outlined a strategic shift in the UK away from both private motor and the call-centre based trading model – the bread and butter of personal lines giant Hastings, where 300 staff will now lose their jobs following the closure of two of the group’s five call centres.
In the same month, Equity moved 150 of its 800 Brentwood staff, comprising its claims liability, classic car and motor breakdown teams, into a separate office.
Hastings and Advantage, meanwhile, failed to hit their targets. Now, they are on the block. But who will buy them?
With IAG maintaining it has received unsolicited approaches for both the sum and the parts of the retail business, a key consideration will be how much any potential buyer will have to pay – or rather, how little IAG will let them get away with paying.
“There are other larger players [in the sector] than us. Thats why there has been significant interest.
Michael Wilkins, IAG
Certainly, the £140m it paid for Hastings and Advantage in October 2006 should not be used a benchmark. But history could still repeat itself if UK chief executive Neil Utley were to lead a management buy out of parts of the business, as he did when he bought Cox (later renamed Equity) in April 2005 for £430m (including £130m of debt), backed by venture capitalists Englefield and Duke Street, each taking a 40% stake in the business.
IAG says it is looking for “natural owners who can derive greater value from the personal lines distribution assets”, as well as the group’s branch network.
“There are other larger players [in the sector] than us, and that’s why there has been significant interest,” Wilkins told investors last week.
But the difficulty RBS has experienced in selling its market-leading brands Churchill and Direct Line, and Wilkins’ own admission that there is “nothing about [the retail] businesses that is going to make them stand out in a crowd”, means there is no timeline for the sale – though there must be pressure from the board to move quickly. Utley says he expects any sale to be concluded by the end of the year.
Equity Insurance Brokers (EIB), with almost 100 branches and 900 employees across the UK, could be attractive to players such as Giles and most likely, Swinton, which are looking to develop their branch networks.
However, with no figures available for the individual performance of EIB, a look at the group’s most recent filings recommends caution. With its full year figures up to 31 June yet to be audited, IAG posted a net broking loss for the six months ending 31 December of A$5m (£2.4m), down from profits of A$13m (£6.3m) and $1m (£0.49m) for the preceding half year periods respectively. Total broking income fell A$10m (£4.8m) to $A80 (£38.8m) in the six months ending 31 December, while expenses rose from A$77 (£37.4m) to A$85m (£41.3m). The key component of the deterioration, IAG maintains, was Hastings, not EIB. However, Utley has insisted that both Hastings and Advantage are profitable businesses.
The group has gone to great pains to integrate its UK portfolio. A high proportion of IAG’s brokered business that is underwritten in-house – with around two thirds of Hastings business written into Advantage, and Equity-owned brokers placing around half their business with Red Star. This means selling the retail units, either piecemeal or as a whole, could be far from straightforward.
But when the dust eventually settles on the reshaped IAG UK family, there may finally be some good news. Equity’s margin of 13% in the six months ending 31 December (compared to Advantage’s -20%) exceeded expectations by a third.