IAG looks for a clean exit

IAG’s announcement that it is considering selling its troubled UK arm, while not a complete u-turn, is certainly a change of tack by group chief executive Mike Wilkins.

In the face of criticism and tough questions from analysts, Wilkins has always dismissed suggestions the business would be sold, insisting that he would fix the company.

IAG UK, the bulk of which is Lloyd’s motor insurer Equity Red Star, had been heading in the right direction: it cut its insurance loss to just A$5m (£3.1m) in the six months to 31 December from A$121m in the same period of 2010.

Rate increases have slowed

So why the change now? The UK motor business is in an increasingly precarious state. Rate increases put through last year have helped improve profitability, but these rises slowed towards the end of 2011. It is unclear, given the numerous pressures on them, whether motor insurers will be able to continue to maintain rate increases in line with bodily injury claims inflation.

While insurers, including IAG, are pinning their hopes on reforms that will stem the flow of bodily injury claims, it remains to be seen how effective they will ultimately be.

Then there is the current uncertain state of the UK economy, which has recently taken a turn for the worse. If recession continues, motor insurers will struggle to charge high enough rates and will need to cut costs.

Who would buy it?

Given the growing uncertainty, it is likely IAG decided it could no longer be sure of avoiding future problems in the UK motor market, and so needs to look at whether it can make a clean exit.

If it does decide a sale is the best option, who would buy it? Canopius has a history of taking on and turning around loss-making motor books – having recently bought and rejuvenated KGM. Michael Watson is also keen to keep the size of his UK personal lines book in check, and in any case probably would not be in the position for an acquisition so soon after the Omega deal.

Esure and Markerstudy might take a look

Perhaps up-and-coming motor insurers, such as Esure and Markerstudy, might want to take a look. Markerstudy underwriting director Gary Humphreys worked at Equity and its formative syndicates and so knows the business.

Or perhaps one of the larger players, such as Aviva or RSA, may want a nice quick addition to their motor books. Direct Line Group is unlikely to be interested, having pulled out of brokered personal lines.

Given IAG UK’s reserving difficulties in recent years, any sale is likely to take the form of renewal rights rather than an outright divestment, leaving the remaining liabilities to be run off either by IAG itself or a run-off buyer. Randall & Quilter would be an obvious choice, given its recent assumption of Equity Syndicate 1208’s 2007 year of account.

It is still possible, of course, that IAG could fix the business and return it to its former glory. However, Mike Wilkins’ change in tack suggests he seriously doubts his ability to do this.