Insurance Australia Group CEO Mike Wilkins unveiled his much-anticipated strategic review yesterday and it followed the predictable script.
Big cuts, cost savings, job losses, exiting a business bought by the old CEO and a burst in initial enthusiasm from punters in the market, only for the surge to flag as second and more rational analysis set in.
As is typical in these situations, the new CEO indirectly blamed his predecessor for the problems by cutting the value of IAG’s struggling UK operations by $350 million and scaling back their future operations.
The Wilkins changes were sweeping: four members of the senior management team are out, including long-serving finance director George Vernardos. All joining former CEO, Michael Hawker in the departure lounge.
The new guard includes two former Promina colleagues of Wilkins, Duncan West who will run CGU and Leona Murphy who will run a slimmed down corporate office.
Job losses were put at 600 here and in the UK. Wilkins claimed there would $130 million in annual costs savings and a $60 million restructuring charge on the way out.
The bottom line is a loss for the year to June.
The shares bounced to $3.75 in an early burst of applause, and sagged to a low of $3.57 before trading unchanged on the day at $3.66, down a cent. That’s hardly a ringing endorsement on a day when the market bravely rose in the face of some difficult news.
Perhaps it was news of the year’s loss, or was it the more intelligent investor realising that for all the problems in the UK (bad floods last year caused it havoc) and in Australia bad weather caused havoc here as well, IAG is like all insurers the world over: the insurance cycle is trending lower and even the very smart folk at Warren Buffett’s Berkshire Hathaway insurance and re-insurance companies have been caught by the down leg of the cycle.
The credit crunch, plunging share values and volatile market conditions are causing all insurers grief as they struggle to make a turn on their ‘floats’.
The revamp makes James Strong’s position as chairman of IAG look tenuous, especially given he’s been there for seven years. Seeing Strong has foreshadowed the retirement of two directors at this year’s November AGM, in Neil Hamilton and Macquarie executive Rowan Ross, will he join them? After all they have been there from 1999 and 2000 respectively.
The most interesting move (the restructuring was predictable and well-leaked to the market and the media over the past five days) was the appointment of former AMP finance chief, Phil Twyman. He went from the AMP to the global operations of big British insurer Aviva.
IAG will report a loss of up to 15c a share for the June 30 year, the company told the ASX in its statement yesterday.
Second-half dividend will drop to 9c a share, from 16c a year earlier. The full year’s payout will be 22.5c a share compared to 29.5c in 2007.
Wilkins said that as he cuts, the company will continue to pursue growth opportunities in Asia, focusing on Thailand, Malaysia, India and China.
But it will conduct a staged exit of the private motor and mass market distribution operations of Hastings/Advantage and Equity Insurance Brokers and an exit of its Alba and Diagonal investments businesses in the UK.
The decision means the group will book a non-cash impairment charge of around $350 million in fiscal 2008.
"It’s clear from our recent financial performance we need to do better," chief executive Michael Wilkins said.
He said IAG aimed to have a more tightly-managed portfolio of high performing, customer-focused and diverse general insurance businesses.
It would simplify its operating structure, creating end-to-end businesses with autonomy to manage their own brands, customer bases and markets.
"We’ll also stay focused on the fundamentals of our business in Australia and New Zealand, while continuing to selectively pursue growth opportunities primarily in Asia," Mr Wilkins said.
The market had been expecting IAG, which earlier this year rejected a takeover approach from QBE Insurance, to announce write-downs from its UK operations; and the cut in final dividend was also forecast.
