IAG takes $240m hit on sale of British car unit
INSURANCE AUSTRALIA GROUP has finally sold its troubled British car insurance business, although the underwriter has taken a $240 million loss on the sale reflecting the knock-down prices for assets there.
IAG sold its Equity Red Star unit to the private equity firm Aquiline Capital Partners for £87 million ($133 million). IAG warned it was expected to book a loss of about $240 million in 2013, including a $160 million loss in the first half on the price tag and exposure to pension liabilities.
In the second half of 2013, IAG is expected to book a further $80 million loss mostly on foreign currency exposure to the insurer's reserves as the sale is completed.
The exit marks a costly adventure for shareholders. IAG paid $1.39 billion for the business in 2006. This included an insurance broking business, which has since been divested.
IAG launched a formal review of its loss-making British business earlier this year, in a move most expected would lead to its departure from the tough market.
While the recession-hit British economy is pressuring returns, many of IAG's problems there relate to deep structural problems in that market.
There has been a surge in payouts linked to car accidents in recent years driven by "claim farming" - lawyers acting on a "no win, no fee" basis, leading to more litigation and inflated payouts.
Insurers also point to a rise in fraud during economic downturns, while discounting over recent years has resulted in Equity Red Star failing to price for risk.
Before Friday's sale, analysts valued IAG's British business at about $350 million, including goodwill.
While Equity Red Star represented a headache for IAG in recent years, it had also been focusing on expanding into the faster-growing Asian region, investing in businesses in Malaysia, Vietnam and India. IAG also has operations in India and China.
The IAG chief executive, Mike Wilkins, said all options for Equity Red Star had been investigated, but a sale was the best outcome.
He said the insurer had examined the prospect of improving the performance of the British business within the current operating model and refining the strategy to a more focused specialist motor offering.