IAG is heading in the right direction after rebuilding from a horror 2007/08 financial year.

Mike Wilkins was a man under pressure when he took over as CEO in May last year after the resignation of Michael Hawker following a string of profit downgrades and later the rejection of an $8.7 billion merger proposal from QBE.

In the aftermath of fending off QBE’s merger overtures, Mr Wilkins was confronted with many unhappy shareholders. Institutional investors were dismayed, with Merrill Lynch calling on the board to explain itself and fund manager 452 Capital Investment Director Peter Morgan launching a blistering email attack labelling IAG’s response “a joke”.

Mr Wilkins’ first few months as CEO saw further bad news with IAG’s share price dropping and a full-year loss of $261 million reported for the 2007/08 financial year – a slump of $813 million on the previous year’s $552 million profit. This followed a tough year of severe weather claims, poor investment results and intense competition.

Buoyed by a generally supportive retail investor base prepared to give him a go, he quickly acknowledged the need to do better and predicted a brighter future for IAG after allowing for the effects of restructuring ($60 million) and UK asset write-downs ($350 million).

JP Morgan analyst Siddhartha Parameswaran told insuranceNEWS.com.au Mr Wilkins started the role in tough circumstances, but goodwill among analysts impressed by his performance as Promina MD had bought him time to make essential changes.

Mr Wilkins built and led Promina prior to its $7.9 billion merger with Suncorp in early 2007. He was highly regarded by analysts and institutional shareholders who did well out of the group.

“It’s obviously been tough for the past couple of years,” Mr Parameswaran said. “I don’t think we’re there yet in terms of saying everything’s really been fixed, but they’re doing the right things.”

Before taking over as CEO, Mr Wilkins used his time as IAG COO to lay the groundwork for success by setting up a complete makeover of the group.

IAG has since emerged from a year of corporate restructuring to finish the 2008/09 financial year with a $181 million annual net profit. But its combined ratio of 100.1% and underlying gross written premium growth of just 4% show there is still a way to go.

Mr Parameswaran says it appears that Mr Wilkins and IAG’s management are making the right decisions in restructuring.

“In terms of getting to where they would like to be, I think it’s still some years off. They have taken some reasonable steps, at least in what they are telling us externally.”

He says IAG sold its under-performing UK assets and the struggling NZ division is getting “slightly better” but is “not out of the woods yet”. He says CGU needs a lot of investment in systems, and IAG is now indicating this will happen.

Mr Parameswaran said discipline in rate increases has been a key factor in IAG’s recovery.

“Willingness to push [premium] rates up and be able to have that discipline is a big driver,” he said. “I think that’s the most noticeable change, and the one that will have the biggest impact on the group’s profit and loss.

“The other changes are longer term, trying to integrate systems such as a new pricing engine in NZ. They are all the right steps to take, [but] it will take a little bit of time to fully filter through.”

He expects Mr Wilkins’ confidence in an improved performance for IAG next year to be vindicated.

Sitting in the shadows is QBE, whose Group CEO Frank O’Halloran has made no secret of his desire to acquire a major Australian asset. Mr Parameswaran says there was never a formal bid by QBE, so it was hard to tell whether the IAG board got it right in rejecting QBE’s advances.

“I think it’s pretty fair to say there was more work needed for that [QBE proposal] to be evaluated,” he said. “I wouldn’t say it was really a wrong decision.”

As the market hardens, Mr Wilkins is well aware that IAG’s profitability and its share price will have to rise to put the group outside the easy financial reach of predators. Judging by his progress to date, he can approach the task with more confidence that he would have had a year ago.