Australia-based Insurance Australia Group Ltd. (IAUGF.PK) said that it would restructure its Australian and New Zealand operations as well as pursue select Asian growth opportunities, even as it partially exits its struggling operations in the U.K. The company said that it would incur a charge of A$350 million in fiscal year 2008 related to its decision to exit its U.K. operations. In addition, Insurance Australia announced several management changes and a reduction in the dividend for fiscal year 2008.
Insurance Australia Group, or IAG, said that it would move to a simpler model to drive improved performance of the Australian and New Zealand businesses. According to the company, the restructuring of the Australian operations is expected to deliver around A$130 million in annual pre-tax run rate savings. The implementation cost of the program is about A$60 million pre-tax and will be taken as a restructuring provision in fiscal year 2008.
IAG, which had in May rejected QBE Insurance Group's (QBEIF.PK) A$8.7 billion acquisition bid, intends to exit the private motor and mass-market distribution operations of Hastings/Advantage and Equity Insurance Brokers in the U.K. in addition to its Alba and Diagonal investments. Meanwhile, the company will maintain Equity Red Star as a stand-alone specialist underwriter and distributor. The company said it would record a non-cash impairment charge of around A$350 million in fiscal year 2008.
The company had spent about A$1.7 billion since 2006 to expand its operations in the U.K.
Meanwhile, IAG said it would pursue select Asian growth opportunities with a focus on Thailand, Malaysia, India and China.
Michael Wilkins, the CEO of IAG said, "It's clear from our recent financial performance we need to do better. Our aim is to create shareholder value by making IAG a more tightly-managed portfolio of high performing, customer-focused and diverse general insurance businesses."
The company expects fiscal year 2008 underlying gross written premium, or GWP growth, of around 6%, in line with earlier guidance to the market of GWP growth in a range of 5.5%-6.5%. The company now expects insurance margin to be at the low end of the 6%-8% range for the year.
Reported earnings per share for fiscal year 2008 is now expected to be a loss of 15 to 13 Australian cents per share, while cash earnings per share is expected in a range of earnings of 6 to 8 Australian cents per share.
For fiscal year 2009, IAG's GWP growth is expected to be around 3%-5%, while reported Group GWP is expected to grow around 0-2% due to the company's change in its U.K. strategy and the introduction of six-month CTP policies in New South Wales.
The company said that its fiscal year 2009 insurance margin is expected to be above 10%, and now includes corporate expenses and the NSW Insurance Protection Tax, which were previously reported separately and equal to about 1% of the reported margin.
"The changes announced today will involve a short-term financial impact, however we believe these actions are necessary to give us the platform to improve the performance of the business over the medium to longer term," Wilkins said.
IAG expects to declare a final dividend of 9 cents per share fully franked, taking the fiscal year 2008 dividend to 22.5 Australian cents per share. However, the dividend for the year would be lower than the dividend of 29.5 Australian cents per share in the prior year.
IAG said that from the financial year 2009, dividends will be assessed around a target payout range of 50-70% of reported cash earnings, and will continue to be fully franked for the foreseeable future.
IAG also announced several management changes. These include the appointment of a new CFO, Nicholas Hawkins, in addition to the appointment of new chief executives for its UK, New Zealand and Asian operations.
The company said that it would announce the appointment of a chief executive of Direct Insurance in the near future. Gary Dransfield, the current Head of Retail Sales & Service, will continue to act as interim CEO for the Direct Insurance business.
As a result of the changes, IAG noted that four executives would leave the company. They include George Venardos, Tony Coleman, Jan van der Schalk and Christine McLoughlin. The company's new structure will take effect from the end of August 2008.
Separately, the company announced the appointment of Philip Twyman, previously a Group Executive Director of U.K.-based insurance company Aviva plc, as IAG's new non-executive director. Twyman has also been a director of Insurance Manufacturers of Australia, IAG's joint venture with RACV since April 2007.
IAG Chairman James Strong said that a further board appointment was planned in the near future, as two current directors, Neil Hamilton and Rowan Ross, would be retiring before the company's next annual general meeting in November.
IAG's current businesses underwrite more than A$7.5 billion of premium per annum. It employs more than 16,000 people, of which around 11,000 are in Australia.
IAUGF.PK last traded at US$3.50 on March 20. On the Australian Securities Exchange, IAG is currently trading at A$3.69, up A$0.02 or 0.54%.
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