IAG takes £197m hit on Equity Red Star valuation

Australian insurer IAG’s group result has been hit by a A$297m (£197m) write-down on its UK arm, which is spearheaded by Lloyd’s motor insurer Equity Red Star.

The write-down of goodwill and other intangibles contributed to a 17% drop in group profit after tax to A$207m for the year to 30 June 2012 (2011: A$250m).

The Australian insurer has also revealed that the strategic review of its UK arm, which could result in its sale, will be completed before the end of the 2012 calendar year.

Equity Red Star has hemorrhaged money due to a surge in bodily injury claims in the UK beginning about 2009.

The bulk of IAG UK is Equity Red Star. It also includes the Equity Insurance Partnerships (EIP) affinity business and specialist brokers Barnett & Barnett and NBJ, which trade under the name Independent Commercial Brokers (ICB).

Improved result

The news comes despite a much improved results at IAG UK. It lost A$15m (£10m) in the 2012 financial year, a much better result than the A$179m loss it reported in 2011.

The company said it was in line with its expectations for a close-to-break-even result for the year.

The combined ratio also showed a big improvement, falling 31 percentage points to 104.6% (2011: 135.6%).

IAG group chief executive Mike Wilkins said: “The programme of remedial actions in the UK has also delivered further improvement, placing the business close to breakeven.”

Premium drop

IAG remedial actions in the UK have come at the price of lower premium volume. Gross written premiums (GWP) dropped 9% to A$497m (2011: A$546m).

While first-half premium growth was flat, IAG said second half GWP was down 18% on the comparable period of 2011, driven by a sharp decline in business volumes.

IAG attributed the drop to its continuing work to exit unprofitable business and broker relationships, and the re-emergence of price-based competition in the second half of 2012, which has suppressed renewal retention and new business volumes.

Affinity and broking losses

IAG UK’s fee-generating businesses - with comprise the EIP affinity business and the ICB broking business, slipped into a A$3m loss in 2012, compared with a A$2m profit in 2011.

EIP was hit by lower new motor business from its affinity partners, notably banking brands Santander and First Direct, where successful promotional offerings in 2011 were not repeated in 2012.

Despite this, EIP extended its insurer panel to five and secured contract extensions with a number of potential new affinity partners.

IAG said ICB also experienced difficult market conditions in the 2012 financial year, saying new commercial business was difficult to attain and margins on renewal business were squeezed due to “intense competition”.

However, it added that ICB produced “encouraging results” in the latter part of 2012’s second half, with new business exceeding targets.