Wilkins faces short honeymoon at IAG
As the dust settles at IAG, newly installed CEO Mike Wilkins’ in-tray is overflowing.
Mr Wilkins can tap into reserves of goodwill as he battles to turn IAG around. Institutional investors, in particular, remember his impressive track record at Promina, which he took from a $2.5 billion listing in 2003 to last year’s $7.9 billion merger with Suncorp.
Michael Hawker departed the company last Monday as his position as CEO became untenable after a string of profit downgrades leading up to the failure of QBE’s $8.7 billion merger proposal.
The only way for IAG is up, says Credit Suisse analyst Arjan van Veen. “Expectations are very low in terms of the market and the share price,” he told insuranceNEWS.com.au.
So Mr Wilkins’ honeymoon – the period in which he can expect uncritical support for his actions – is therefore likely to be limited.
He has some tough decisions to make in a difficult operating environment, most notably what to do with IAG’s troublesome UK motor businesses Hastings/Advantage, which the insurer acquired in late 2006 for $350 million in the vain hope the cycle was about to turn.
It hasn’t and, if anything, intense competition from UK online aggregators – which, unlike Australia, have attracted the big players – means the market is becoming tougher for traditional operators like Hastings/Advantage.
Offloading the troublesome British assets is an option. “Anything outside Australia and NZ is potentially up for divestiture,” Mr van Veen said.
But remedial work is necessary before selling as it’s very hard to offload a loss-making business. Mr Wilkins would have to write down a fair amount of goodwill on the balance sheet.
Mr van Veen estimates IAG has about a year to turn around the UK motor businesses before looking at a sale. “My gut feeling is they will look at breaking even within 12 months or take some drastic action,” he said.
Back in Australia, Mr Wilkins is likely to change IAG’s philosophy from its preoccupation with top-line growth that proved Mr Hawker’s downfall to a greater focus on margins. “Wilkins will focus on operating performance,” Mr van Veen said. “In the short term, margin growth is a bigger driver of profitability.”
As COO for the past six months, Mr Wilkins has already quietly been putting much of the structure in place.
In commercial lines, he has combined the CGU and Business Partnerships divisions into an Intermediated Insurance arm headed by CGU CEO and former Promina comrade Duncan West.
And CGU is taking a harder line in terms of writing profitable business. “Underwriting discipline” is the new mantra.
But challenges remain. “CGU has shed a bit of business but there’s a lot of work to be done,” Mr van Veen said. “It’s very hard to turn around a commercial business in a tough market.”
In personal lines, Mr Wilkins has renamed the Personal Lines division Direct Insurance, incorporating the NRMA, SGIO and SGIC brands. And IAG has “started acting in a more rational manner by putting rate increases” across the group, says Mr van Veen.
Mr Wilkins has also acted to secure new business channels by establishing a separate online start-up.
One new area of responsibility is shareholders, and it’s there Mr Wilkins is likely to feel the most immediate pressure. Any move on dividends is likely to spark a shareholder outcry.
IAG maintained its interim dividend of 13.5c a share in late February’s profit announcement, but its subsequent earnings downgrade sparked intense speculation IAG will need to look at cutting its dividend.
That’s not a belief Mr van Veen shares. “I don’t think they will cut the dividend,” he said. “They will keep it flat.”
So how much time does Mr Wilkins have? IAG’s next set of figures is due out in late August and, while last month’s downgrades have prepared the market for the worst, investors will be looking for the first signs of a recovery.
The half-year profit announcement in February will be the acid test for Mr Wilkins. The market will need to see a concerted improvement by then or investors are likely to start pressuring for the group to open talks with QBE.
While speculation has started about other potential suitors such as the Commonwealth Bank, Mr van Veen reckons QBE would be unlikely to face any serious rivals. Suncorp would face insurmountable competition issues, while Allianz, Zurich and the banks would struggle to create synergies from any deal.
There’s an awareness QBE is waiting in the wings to jump on any perceived weakness in IAG’s share price. Despite its travails, IAG’s retail expertise remains an attractive target for a scrip bid as the Aussie dollar continues to firm.
At Friday’s closing prices, QBE’s “final” proposal of 0.145 QBE shares and $0.90 cash for each IAG share values the offer at $4.44, compared with IAG’s price of $4.02.
If Mr Wilkins can maintain momentum for change and improvement, the IAG prize could yet slip out of QBE’s grasp.
Mr Wilkins can tap into reserves of goodwill as he battles to turn IAG around. Institutional investors, in particular, remember his impressive track record at Promina, which he took from a $2.5 billion listing in 2003 to last year’s $7.9 billion merger with Suncorp.
Michael Hawker departed the company last Monday as his position as CEO became untenable after a string of profit downgrades leading up to the failure of QBE’s $8.7 billion merger proposal.
The only way for IAG is up, says Credit Suisse analyst Arjan van Veen. “Expectations are very low in terms of the market and the share price,” he told insuranceNEWS.com.au.
So Mr Wilkins’ honeymoon – the period in which he can expect uncritical support for his actions – is therefore likely to be limited.
He has some tough decisions to make in a difficult operating environment, most notably what to do with IAG’s troublesome UK motor businesses Hastings/Advantage, which the insurer acquired in late 2006 for $350 million in the vain hope the cycle was about to turn.
It hasn’t and, if anything, intense competition from UK online aggregators – which, unlike Australia, have attracted the big players – means the market is becoming tougher for traditional operators like Hastings/Advantage.
Offloading the troublesome British assets is an option. “Anything outside Australia and NZ is potentially up for divestiture,” Mr van Veen said.
But remedial work is necessary before selling as it’s very hard to offload a loss-making business. Mr Wilkins would have to write down a fair amount of goodwill on the balance sheet.
Mr van Veen estimates IAG has about a year to turn around the UK motor businesses before looking at a sale. “My gut feeling is they will look at breaking even within 12 months or take some drastic action,” he said.
Back in Australia, Mr Wilkins is likely to change IAG’s philosophy from its preoccupation with top-line growth that proved Mr Hawker’s downfall to a greater focus on margins. “Wilkins will focus on operating performance,” Mr van Veen said. “In the short term, margin growth is a bigger driver of profitability.”
As COO for the past six months, Mr Wilkins has already quietly been putting much of the structure in place.
In commercial lines, he has combined the CGU and Business Partnerships divisions into an Intermediated Insurance arm headed by CGU CEO and former Promina comrade Duncan West.
And CGU is taking a harder line in terms of writing profitable business. “Underwriting discipline” is the new mantra.
But challenges remain. “CGU has shed a bit of business but there’s a lot of work to be done,” Mr van Veen said. “It’s very hard to turn around a commercial business in a tough market.”
In personal lines, Mr Wilkins has renamed the Personal Lines division Direct Insurance, incorporating the NRMA, SGIO and SGIC brands. And IAG has “started acting in a more rational manner by putting rate increases” across the group, says Mr van Veen.
Mr Wilkins has also acted to secure new business channels by establishing a separate online start-up.
One new area of responsibility is shareholders, and it’s there Mr Wilkins is likely to feel the most immediate pressure. Any move on dividends is likely to spark a shareholder outcry.
IAG maintained its interim dividend of 13.5c a share in late February’s profit announcement, but its subsequent earnings downgrade sparked intense speculation IAG will need to look at cutting its dividend.
That’s not a belief Mr van Veen shares. “I don’t think they will cut the dividend,” he said. “They will keep it flat.”
So how much time does Mr Wilkins have? IAG’s next set of figures is due out in late August and, while last month’s downgrades have prepared the market for the worst, investors will be looking for the first signs of a recovery.
The half-year profit announcement in February will be the acid test for Mr Wilkins. The market will need to see a concerted improvement by then or investors are likely to start pressuring for the group to open talks with QBE.
While speculation has started about other potential suitors such as the Commonwealth Bank, Mr van Veen reckons QBE would be unlikely to face any serious rivals. Suncorp would face insurmountable competition issues, while Allianz, Zurich and the banks would struggle to create synergies from any deal.
There’s an awareness QBE is waiting in the wings to jump on any perceived weakness in IAG’s share price. Despite its travails, IAG’s retail expertise remains an attractive target for a scrip bid as the Aussie dollar continues to firm.
At Friday’s closing prices, QBE’s “final” proposal of 0.145 QBE shares and $0.90 cash for each IAG share values the offer at $4.44, compared with IAG’s price of $4.02.
If Mr Wilkins can maintain momentum for change and improvement, the IAG prize could yet slip out of QBE’s grasp.