Document details action insurer has taken following reserving crisis

Equity Red Star

Evercore, the insurance banker appointed to help with the strategic review of Insurance Australia Group’s (IAG) UK business, including Equity Red Star, has issued a teaser document as IAG prepares to sell off that part of the operation.

The document, which has been released to a small number of parties, is said to detail the action taken since Equity Red Star underwent a reserving crisis in 2010-11 and states that the insurer’s underwriting operations are now back on track following its losses over the last two financial years.

It also highlights the benefits of Equity Red Star’s specialty focus, with a Lloyd’s franchise.

Credit Suisse analyst Andrew Adams said IAG’s UK operations could be in worse shape than previously thought, which could damage its prospects of selling the business.

Adams said the company’s higher than expects combined operating ratio indicated the UK business could report a loss of A$39m in the second half of this year compared to a forecast A$5m profit, equating to a 8.7% drop in IAG’s initial forecast for fiscal 2012 to $462m.

A spokesman for IAG said the numbers reported in the teaser were different to how the company reports, as they are prepared on a UK GAAP basis which is different to Australian accounting standards, and IAG reports to a financial not a calendar year, and the numbers were also exclusive of corporate overlays.

“We continue to work towards break-even in our UK business and will be announcing the UK business’ results as part of the group’s results in August,” he said.

The strategic review is considering all options, including a continuing focus on improving the business’ performance within the current operating model, refining its strategy to a more focused specialist motor offering, and looking at options for a potential sale of all or part of the business.

IAG expects to update the market on the progress of the review around its results announcement in August.

The announcement of the review marked a climbdown for IAG chief executive Mike Wilkins, who had previously insisted he would keep and fix the business, having pumped A$403m (£251m) into reserves and reinsurance protection over two years as Equity was dragged into huge underwriting losses by bodily injury claims.

The other parts of the IAG UK business, which include brokers Barnett and Barnett and NBJ, are likely to attract considerable interest from the consolidators.

IAG bought the UK operation for £540m in 2005.