Clyne and Wilkins' anarchy in the UK

To go or not to go? In retrospect it should never have been the question for NAB and IAG. If they'd exited the UK at the first opportunity, these tortured departures could have been avoided.

Hindsight must keep chief executives awake at night. Both Mike Wilkins and Cameron Clyne would have said "if only" to themselves many times in recent years as they considered the painful UK legacies they each inherited.

Wilkins, at least, today closed the door on a costly expansion into the UK motor insurance industry that cost his predecessor, Mike Hawker, his job and has been a major and consistent blemish on the results Wilkins has presented since taking on the role in 2008.

Wilkins today announced the sales of IAG’s Equity Red Star and Independent Commercial Brokers businesses in the UK for something over $130 million. Those sales will put a full stop to IAG’s ill-fated UK expansion – and crystallise another $240 million of losses for IAG. At least they will stop the haemorrhaging.

Hawker had embarked on an ambitious "low risk" acquisition-led expansion into the UK market to reduce the group’s dependence on its home markets, spending about $350 million to acquire the Hastings and Advantage insurance companies in 2006 and then following that up with the $1.4 billion acquisition of the Equity Insurance Group in 2007.

More than $750 million later, and continual restructuring of its UK interests, IAG has now exited the market. When Hawker acquired Equity, the UK’s fifth-largest motor underwriter, it boasted 37 years of unbroken profitability. That record didn’t last long in a market which has been undermined by over-capacity, sub-economic pricing, remarkable levels of claims inflation and a culture of compensation and outright fraud.

With hindsight Wilkins could have, and should have, quit the UK earlier.

Clyne, who inherited NAB’s UK banks when he became chief executive of NAB in early 2009, has had their fate at or near the top of his agenda ever since (The sun will soon shine for Cameron Clyne, December 14).

The financial crisis, the UK government’s bailouts and continuing ownership of its High Street banks, the rolling recession the UK has experienced ever since and its fallout within the UK’s commercial property markets has impacted his options and ravaged his earnings results.

Initially he was open-minded about whether to try to exit the market or to take advantage of the distressed state of the UK industry – and the EU-imposed sales of bank branch networks – to bulk up as a way of improving the terms of an eventual exit.

It became apparent that bulking up in the UK wasn’t a realistic option, given the likely response from NAB shareholders, the price tags on the networks and, more particularly, the increased funding task an acquisition would create. Neither, however, was a sale on anything approaching acceptable terms.

As NAB chairman Michael Chaney told shareholders at yesterday’s annual meeting, the group has devoted a lot of time looking at the possibility of selling the UK banks but "we haven’t been able to do that on sensible terms".

Hence the decision taken earlier this year after an extensive review to restructure the business, transfer a $10 billion portfolio of troubled commercial loans onto the parent bank’s balance sheet and into run-off mode, recapitalise the UK operations so that they could in future be self-funding and batten down the hatches for what is likely to be a protracted wait for improved conditions.

Given the state of the UK economy and banking sector, and that of the wider eurozone, it could be a very long wait and the UK business and the under-performing capital tied up in it are likely to be a drag on NAB’s performance and performance statistics for a long time to come.

Could he have done anything different? There is an aphorism that the first loss is the best loss and therefore that NAB should have ditched the UK banks regardless of the costs – there is an argument that they represent negative value within NAB’s market capitalisation and therefore their fundamental value, whatever that might be, is irrelevant from NAB shareholders’ perspective.

Knowingly foregoing value to appease the market or to respond to imperfect markets is not, however, an argument or decision that boards and management find palatable.

Wilkins will be relieved today that finally he has cauterised IAG’s UK wounds. For Clyne, who has at least done everything he can to reduce the flow of red ink in the UK, it appears unlikely that he will reach that point any time soon. Indeed, while Clyne is a relatively young chief executive, it may fall to one of his successors to finally define the fate of NAB’s presence in the UK.

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