The battle of Hastings

It has been 18 months since Australian insurance giant IAG burst on to the UK insurance market with the acquisition of Hastings Insurance Services and its subsidiary, insurer Advantage.

Followed swiftly with the purchase of Equity Insurance Group, IAG had swiftly created a UK operation underwriting £750m – and broking £400m – in premiums.

But IAG’s entry into the UK insurance market has not been as smooth a ride as its executives had initially anticipated.

Overcoming initial problems

In a presentation at IAG’s annual general meeting last November, group chief executive Michael Hawker conceded that there were “operational issues” with Hastings and Advantage.

“These issues mean we will not meet the hurdle rate of returns that we expected when we acquired this company,” Hawker told shareholders.

IAG also became embroiled in a legal claim with an insurer, worth in excess of A$24 (£11.18m), for an alleged breach of duties under an agency agreement by Hastings, prior to its acquisition by IAG. Hastings was also facing a demand for an unpaid tax bill from the UK tax authorities – although IAG said the amount was not significant.

Last month IAG published its interim results (see box), which for the first time showed the full impact of the Australian insurance giant’s UK acquisitions.

The numbers threw into sharp relief the challenges faced by IAG’s UK businesses. IAG UK produced an underwriting loss of A$31m (£14.31m) for the six months to 31 December 2007. This was compared to a A$2m (£0.92m) loss in 2006.

Gibraltar-based motor insurer Advantage was the principal reason for the loss. Sister insurer Equity had made an insurance profit during the period, with a margin of 12.9%.

Advantage’s underwriting losses had clearly made a significant dent in the business.

The challenge for IAG UK’s management team, led by chief executive Neil Utley, was to address the problems within Hastings and Advantage. This was on top of integrating the various UK acquisitions in order to achieve the targeted cost savings of over £22m.

Speaking this month to Insurance Times, Utley says he is confident that Hastings and Advantage can be turned around. “Advantage will be profitable in the next financial year,” he insists. “We are excited now [about the business].”

One of the reasons for Advantage’s unprofitability was that it had underwritten large volumes of “severely underpriced” business in 2006. This had enabled it to grow rapidly but at the expense of profitability. Its combined operating ratio for the six months to June 2007 was 118% – deteriorating from the high 90s a year earlier.

This was compounded by the fact that Hastings had also lost third party capacity from Inter Hannover, which resulted in a reduction in competitiveness, forcing it to turn to Advantage for (underpriced) capacity.

There were also rating engine issues and the business had been slow to develop its internet sales capability.

Changing fortunes

Hastings’ and Advantage’s problems are being addressed in a number of ways, says Utley.

Premium rates have been raised by as much as 15%. Utley says: “It has made it difficult for Advantage to compete but now conversion rates are up.”

Hastings’ advertising, featuring the Harry Hastings character, is also changing. “It is much more generic,” says Utley. “We are trying to move away from price, price, price.

“We have spent more in the last six weeks on marketing than the last six months. It is a re-birth of Hastings. We want to be known for value and piece of mind.”

“When IAG bought Advantage it knew of the issues and put money away. The business is a quality business.

Neil Utley, IAG

Advantage has also pulled back from selling through big name broker panels, which had pushed its rates down. It is also using Equity’s and IAG’s expertise to improve its data and remove poor performing segments of business.

But despite the problems, Utley insists that acquiring Hastings and Advantage was the right move for IAG.

“When IAG bought Advantage it knew of the issues and put money away. The business is a quality business,” he says.

Buying Hastings gave IAG a well-known UK motor insurance brand, says Utley. “It had the choice of setting up a business or buying a top 10 brand. It was right to buy a top 10 brand and buying Hastings was absolutely right.”

Acquiring Equity alone would not have been the right approach as Equity is not a well-known consumer brand. He adds: “People look at the negatives; they rarely look at the good.”

On the plus side Hastings had 500,000 owned customers and a brand with high recall.

Utley also points out that Advantage operates exclusively in the tough motor insurance market, whereas its sibling Equity has a mixed portfolio of which private motor makes up only 20%.

When IAG acquired Hastings in 2006, the view was that the UK motor market was about to turn. In fact it deteriorated further which affected profitability.

“Advantage is an all private car business. It is a small insurer that is competing in the hardest part of the market with no compensating classes. It is a difficult time to be a monoline.”

Utley would not comment on Hastings’ outstanding tax bill.

In relation to the agency agreement dispute, Utley says that the matter was not distracting him.

Utley, as boss of Equity, considered a move on Hastings, prior to the sale to IAG. “We had a look at Hastings from afar. It was a business we would have been interested in, but we had not been down due-diligence, we did not have a data room,” he says.

Would Utley have bought Hastings had due diligence been done? “We had different criteria to IAG. It was a good business and we may well have done. Every business has a value.”

So are Utley’s Australian bosses happy with how their UK acquisitions are progressing? “It is surprised and unhappy with the way the [motor] market is developing. Everyone thought it should have turned two years ago. There have been some operational issues such as getting the rates wrong.”

But despite the problems, Utley insists that IAG is committed to the UK. “It is a key strategic platform for IAG. It is not going to succumb to a quick deal.”

Last week’s acquisition of commercial broker Barnett and Barnett demonstrates IAG’s commitment to the UK, says Utley.

He adds: “When IAG bought Equity we said it was the first time that Equity had had a strategic owner.” Equity was previously owned by a consortium of private equity firms.

In terms of the integration of the UK business, Utley says the process has been successful. “We now have one management team, no duplication and 2,700 staff. The business is now one and the targets are now one.”

He adds that the cost savings of £25m have been achieved – more than the £22m originally targeted.

Utley plays down suggestions that the integration was hampered by the different cultures of Equity and Hastings. “There are always issues with personalities. There are the same values between Hastings and Equity and there are great people in both.”

He also points to the different ownership histories of Hastings and Equity “Hastings had one owner with vision, whereas Equity had a range of owners including private equity.”