IAG toughens up
After spending years in the wilderness pursuing a strategy of international expansion - a leaner, meaner IAG has emerged under Mike Wilkins. But the new model has some rough edges.
IAG chief executive Mike Wilkins delivered one of his more memorable quotes today when he said the troubled general insurer would no longer "export its knowledge and expertise” offshore.
It was delivered without any hint of irony soon after Wilkins had said IAG would take a $350 million impairment charge against the UK operations it purchased in 2006 at a cost of $1.75 billion.
Like its predecessor AMP, IAG showed little knowledge or expertise in the UK market and its shareholders will now pay the price as the company spends six to 12 months trying to extract itself through assets sales or running down the book and selling the customer base.
It will retain a specialist motor insurer, the only business it bought in the UK which was not vulnerable to further market share loss and margin erosion from competing with internet aggregators.
Wilkins has effectively turned the IAG corporate strategy put in place by his predecessor, Mike Hawker, on its head and in the process revealed just how little oversight of the business there was at board level. Fortunately, chairman James Strong has moved to plug the gaping hole.
The appointment of former AMP chief actuary Phil Twyman as a non-executive director is long overdue. Now there is an insurance numbers man to balance out the board's expertise in law, retailing, credit cards, corporate advisory, accounting, building and construction,
Under Hawker the board signed off on a strategy which can still be viewed on the company's website. It included doubling the business between 2006 and 2012, maintaining a AA credit rating, having an 80:20 mix of short tail and long tail risks, delivering top quartile performance, having return on equity that is 1.5 times weighted average cost of capital and aggressive offshore expansion.
The new Wilkins model at IAG is not dissimilar to the business model he developed at Promina, which was bought by Suncorp. Suncorp later adopted the Promina model.
IAG has now abandoned the double in size dictum, ditched the aggressive offshore growth strategy, it's no longer worried about losing its AA credit rating and is happy to lift long tail claims beyond 20 per cent of the book even though this was previously declared to be too risky.
The company has a new payout ratio target of 50 to 70 per cent and says it won't pay dividends that are not covered by earnings. An exception to that will occur in the second half of 2008 to alleviate the short term pain to shareholders.
The new IAG model has a lean corporate office, management responsibility devolved to six separate divisions, improved operating efficiency responsibility, measured expansion in Asia and an insurance margin through the cycle of 9 per cent to 12 per cent.
However, a Merrill Lynch analyst warned that to achieve the return on equity target IAG will have to have an insurance margin of 13 per cent. Wilkins did not disagree with that number.
The devolved management responsibility will also produce greater focus on execution, something that was lacking before. The new management structure will see four senior executives George Venardos, Tony Coleman, Jan van der Schalk and Christine McLoughlin head for the exit.
A feature of the Wilkins approach is greater transparency. Under Hawker certain costs were excluded from the insurance margin and there were regular releases from reserves to boost profits. The costs will now be included and wipe one per cent off the margin and there will be no releases from reserves in 2009.
IAG revealed that its 2008 year included storm damage of $490 million including $326 million in the first half and $164 million in second half. He refused to give a breakdown of the write downs in the UK.
After just six weeks in the job, Wilkins has told shareholders of his plan to write down the UK business and slash 600 jobs in order to deliver cost savings of $130 million a year. But those cost savings will require an outlay of $60 million first and although the job cuts will be implemented by October, only 75 per cent of the benefits will come through by late 2009.
The overall message from IAG's "refined strategy and operating model” is that insurance premiums in commercial insurance and personal lines will be pushed up as high as the market can bear. That is true in Australia, New Zealand and the UK. The most vulnerable to rate hikes are small to medium sized businesses.
Wilkins' talk of hardening rates fits with the message coming from Suncorp, which is trying to prove the benefits of paying too much for Promina. With both IAG and Suncorp intent on making up for past mistakes don't expect a price war in the insurance market any time soon.
It was delivered without any hint of irony soon after Wilkins had said IAG would take a $350 million impairment charge against the UK operations it purchased in 2006 at a cost of $1.75 billion.
Like its predecessor AMP, IAG showed little knowledge or expertise in the UK market and its shareholders will now pay the price as the company spends six to 12 months trying to extract itself through assets sales or running down the book and selling the customer base.
It will retain a specialist motor insurer, the only business it bought in the UK which was not vulnerable to further market share loss and margin erosion from competing with internet aggregators.
Wilkins has effectively turned the IAG corporate strategy put in place by his predecessor, Mike Hawker, on its head and in the process revealed just how little oversight of the business there was at board level. Fortunately, chairman James Strong has moved to plug the gaping hole.
The appointment of former AMP chief actuary Phil Twyman as a non-executive director is long overdue. Now there is an insurance numbers man to balance out the board's expertise in law, retailing, credit cards, corporate advisory, accounting, building and construction,
Under Hawker the board signed off on a strategy which can still be viewed on the company's website. It included doubling the business between 2006 and 2012, maintaining a AA credit rating, having an 80:20 mix of short tail and long tail risks, delivering top quartile performance, having return on equity that is 1.5 times weighted average cost of capital and aggressive offshore expansion.
The new Wilkins model at IAG is not dissimilar to the business model he developed at Promina, which was bought by Suncorp. Suncorp later adopted the Promina model.
IAG has now abandoned the double in size dictum, ditched the aggressive offshore growth strategy, it's no longer worried about losing its AA credit rating and is happy to lift long tail claims beyond 20 per cent of the book even though this was previously declared to be too risky.
The company has a new payout ratio target of 50 to 70 per cent and says it won't pay dividends that are not covered by earnings. An exception to that will occur in the second half of 2008 to alleviate the short term pain to shareholders.
The new IAG model has a lean corporate office, management responsibility devolved to six separate divisions, improved operating efficiency responsibility, measured expansion in Asia and an insurance margin through the cycle of 9 per cent to 12 per cent.
However, a Merrill Lynch analyst warned that to achieve the return on equity target IAG will have to have an insurance margin of 13 per cent. Wilkins did not disagree with that number.
The devolved management responsibility will also produce greater focus on execution, something that was lacking before. The new management structure will see four senior executives George Venardos, Tony Coleman, Jan van der Schalk and Christine McLoughlin head for the exit.
A feature of the Wilkins approach is greater transparency. Under Hawker certain costs were excluded from the insurance margin and there were regular releases from reserves to boost profits. The costs will now be included and wipe one per cent off the margin and there will be no releases from reserves in 2009.
IAG revealed that its 2008 year included storm damage of $490 million including $326 million in the first half and $164 million in second half. He refused to give a breakdown of the write downs in the UK.
After just six weeks in the job, Wilkins has told shareholders of his plan to write down the UK business and slash 600 jobs in order to deliver cost savings of $130 million a year. But those cost savings will require an outlay of $60 million first and although the job cuts will be implemented by October, only 75 per cent of the benefits will come through by late 2009.
The overall message from IAG's "refined strategy and operating model” is that insurance premiums in commercial insurance and personal lines will be pushed up as high as the market can bear. That is true in Australia, New Zealand and the UK. The most vulnerable to rate hikes are small to medium sized businesses.
Wilkins' talk of hardening rates fits with the message coming from Suncorp, which is trying to prove the benefits of paying too much for Promina. With both IAG and Suncorp intent on making up for past mistakes don't expect a price war in the insurance market any time soon.
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