IAG EXITS MASS MARKET DISTRIBUTION BUSINESSES IN UNITED KINGDOM

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1 18 December 2008 Manager, Company Announcements Office ASX Limited Level 4, Exchange Centre 20 Bridge Street SYDNEY NSW 2000 Dear Sir/Madam, IAG EXITS MASS MARKET DISTRIBUTION BUSINESSES IN UNITED KINGDOM Please find attached a media release and presentation with information relating to IAG s exit from its mass market distribution businesses in the United Kingdom. IAG management will present the slides via a teleconference at 14:30pm AEDT today. To participate from within Australia, dial To participate from outside Australia, dial Please quote conference ID: Yours sincerely, Glenn Revell Group Company Secretary Insurance Australia Group Limited ABN George Street Sydney NSW 2000 Australia T +61 (0)

2 MEDIA RELEASE 18 DECEMBER 2008 IAG exits mass market distribution businesses in United Kingdom Insurance Australia Group Limited (IAG) today announced it had agreed to sell its mass market distribution businesses in the United Kingdom (UK) for a total value of 73.5 million (approximately A$165 million), in line with its strategy to concentrate on its profitable specialist motor underwriting business in that market. The sale will be effected through two separate transactions: IAG s UK insurance branch network will be sold to Swinton Group for 50 million (approximately A$112 million); and IAG s Hastings and Advantage businesses will be sold via a management buy out for 23.5 million (approximately A$53 million). These transactions, combined with the costs relating to the recent closure of IAG s specialist Lloyd s syndicate Alba and associated underwriter Diagonal, will result in IAG recognising a pre-tax loss of approximately 40 million (approximately A$90 million) in FY09. Following completion of the transactions, IAG s capital position will improve slightly. IAG Managing Director and Chief Executive Officer Mr Michael Wilkins said he was pleased to have finalised these transactions, which complete IAG s major restructuring initiatives under its refined corporate strategy announced in July Since we stated our intention to sell the mass market distribution businesses of our UK operations, we have considered a number of divestment options. We believe the transactions announced today represent the best outcome available to IAG shareholders, particularly in light of the deterioration in market conditions which has occurred since July, Mr Wilkins said. The divestment of these businesses means we can now focus on our profitable specialist motor underwriter, Equity Red Star. In FY08, Equity Red Star reported an insurance margin of 10.6% and contributed around 71% of the UK operations gross written premium. Under the ongoing leadership of our UK CEO, Mr Neil Utley, we will continue to focus on Equity Red Star s underwriting and cost discipline to build on its impressive 37 year track record of profitability, Mr Wilkins said. Sale of the UK branch network The branch network of Equity Insurance Brokers consists of 91 high street branches across England and Northern Ireland which are branded Equity Insurance and Open+Direct. Equity Red Star will continue to benefit from its existing relationship with Swinton Group, with the branch network remaining a distribution channel for Equity Red Star s specialist insurance products. Sale of the Hastings/Advantage businesses IAG s remaining mass market distribution businesses, Hastings Direct and its associated underwriter Advantage, together with the internet-based operations which trade under the Insure brands, will be bought by a small team of management and private investors. During FY08, these businesses generated 29% of IAG s UK operations gross written premium. Page 1 of 2

3 The management buy out will be led by Mr Edward Fitzmaurice, Chief Executive of Hastings, and Mr Keith Charlton, Chief Executive of Advantage. Mr Neil Utley will be a minority shareholder in the management buy out vehicle and will become non-executive Chairman of the separated business, while continuing in his executive role as CEO of IAG UK. The transactions remain subject to regulatory approvals, and are expected to complete in early calendar ends - About Insurance Australia Group Insurance Australia Group Limited (IAG) is a general insurance group with operations in Australia, New Zealand, the United Kingdom and Asia. Its current businesses underwrite around $7.5 billion of premium per annum. It employs around 15,000 people. It sells insurance under many leading brands including NRMA Insurance, CGU, SGIO, SGIC and Swann (Australia); NZI and State (NZ); Equity Red Star (UK); and NZI and Safety (Thailand). For further information please visit MEDIA RELATIONS Carolyn McCann T M E carolyn.mccann@iag.com.au INVESTOR RELATIONS Simon Phibbs T M E simon.phibbs@iag.com.au Insurance Australia Group Limited ABN George Street Sydney NSW 2000 Australia T +61 (0) Page 2 of 2

4 IAG EXITS MASS MARKET DISTRIBUTION BUSINESSES IN UNITED KINGDOM Michael Wilkins Managing Director & Chief Executive Officer 18 December 2008 Insurance Australia Group Limited ABN

5 AGENDA OVERVIEW OF THE TRANSACTIONS OUTLOOK FOR IAG S RETAINED UK OPERATIONS DELIVERY AGAINST STRATEGIC PRIORITIES QUESTIONS Page 2 Thank you for participating in our teleconference. Whilst this presentation concentrates on our announcement today that we are selling the mass market distribution businesses of our operations in the United Kingdom, I would also like to highlight a couple of other announcements we made today. Firstly, the publication of reclassified results for FY08 to conform with the company s future segment reporting. This reflects the changes we notified you of in August, being the reallocation of corporate expenses and the NSW Insurance Protection Tax to the operating divisions, and the transfer of the Group s direct commercial insurance offerings from Australian Intermediated to Australian Direct in line with the revised operating model. In addition, from FY09 the Group will be reporting the results of its international captive across the related businesses, namely UK, New Zealand and Asia, which makes its treatment consistent with that of the Australian captive. Secondly, you will be pleased to learn we have brought forward our half year results date by one day, to 26 February, to avoid conflict with another insurance company. Turning back to today s announcement on the UK. During this presentation I plan to provide an overview of the transactions and the financial implications, discuss the outlook for our retained business in the UK, and provide an opportunity for questions. 2

6 OVERVIEW DELIVERING ON OUR REFINED CORPORATE STRATEGY In July 2008, IAG announced it would: Exit its UK mass market distribution businesses Concentrate on being a specialist motor underwriter in the UK via Equity Red Star In realisation of this strategy, IAG has agreed to: Sell the UK branch network to Swinton Group for 50m (approx A$112m) Sell the Hastings and Advantage businesses via a management buy out for 23.5m (approx A$53m) These divestments are the best outcome available, given the significant deterioration in market conditions This completes IAG s restructuring initiatives under the refined corporate strategy Page 3 In July 2008, we announced IAG s refined corporate strategy designed to improve the performance of the Group. As part of that strategy, we took a decision to scale back our operations in the United Kingdom, to concentrate on being a specialist motor underwriter through our profitable Equity Red Star business. That meant exiting our mass market distribution businesses in the UK. We took this decision because the performance of these parts of the business had been severely impacted by the protracted challenging conditions in the UK s private motor market, and we do not expect these conditions to improve for at least another 18 months. After considering a number of divestment options, we have now agreed to sell those businesses in two separate transactions. First, our branch network which consists of 91 high street branches across England and Northern Ireland will be sold to Swinton Group for 50m (approximately A$112m). And second, our remaining mass market business, Hastings and its associated underwriter Advantage, as well as the direct internet based business operating under the Insure brands, will be sold via a management buy out led by Hastings Chief Executive, Edward Fitzmaurice and Advantage Chief Executive, Keith Charlton for 23.5m (approximately A$53m). We are pleased to have finalised these transactions, particularly given the deterioration in market conditions which has occurred since we announced our intention to sell these businesses. We believe the divestments we are announcing today deliver the best outcome available. With the sale of these businesses, we can now focus on Equity Red Star, which will continue to be led by the CEO of our UK operations, Mr Neil Utley. These divestments mark the completion of the major restructuring initiatives we have put in place since announcing our refined corporate strategy in July. 3

7 OVERVIEW FINANCIAL IMPLICATIONS Total value of 73.5m (approx A$165m) 50m (approx A$112m) cash consideration for branch network Hastings/Advantage total value of 23.5m (approx A$53m) comprises: Cash proceeds of 17m (approx A$38m) 6.5m (approx A$15m) commutation of Advantage s quota share agreement with Labuan Recognised pre-tax loss of approximately 40m (approx A$90m) in FY09 includes: Loss on sale of Hastings/Advantage Loss of some of the diversification benefit Costs associated with Alba/Diagonal closure Commutation profit Small positive impact on capital Intangibles exchanged for cash Page 4 The two transactions will realise a total value of 73.5m (approx A$165m). We will receive 50m in cash (approx A$112m) for the branch network. The Hastings/Advantage total value of 23.5m (approx A$53m) comprises cash proceeds of 17m and 6.5m in respect of commutation of the quota share agreement between Advantage and Labuan. As part of the sale process, IAG is providing the MBO vehicle with an overdraft facility of up to 3.5m for a period of two years, on commercial rates. The combined transactions will result in IAG recognising a pre-tax loss of approximately 40m (approximately A$90m) in FY09. Whilst the majority of this relates to the loss on sale of Hastings/Advantage, it also encompasses the loss of some diversification benefit and costs relating to the recent closure of our specialist Lloyd s syndicate Alba and associated underwriter Diagonal, partially offset by the profit on commutation. Our capital position will improve slightly following completion of the transactions. 4

8 OVERVIEW IAG NOW FOCUSED ON PROFITABLE EQUITY RED STAR BUSINESS IAG S UK FY08 GROSS WRITTEN PREMIUM IAG S UK FY08 INSURANCE MARGIN* 29% Business Equity Red Star Insurance Margin +10.6% Advantage -25% 71% Total IAG UK operations +2.8% * Prior to reclassification of FY08 results Hastings/Advantage GWP: 144m Equity Red Star GWP: 360m Page 5 We ve included this slide to provide some clarity and context around the businesses being sold and those being retained by IAG. In the context of the overall Group, our UK operations prior to the sales generated approximately 14% of IAG s total gross written premium in FY08. Of that 14%, Equity Red Star which is the business we are retaining generated the lion s share of revenue, writing 71% of the gross premium in the UK, or 360m, in FY08. Equity Red Star has continued to perform well, and delivered a reported insurance margin of 10.6% in FY08, compared to the negative 25% produced by Advantage which reflected the difficult market conditions. 5

9 IAG S RETAINED UK OPERATIONS OUTLOOK Equity Red Star continues to perform well Equity Red Star will continue to source business through the divested branch network strong existing relationship with Swinton Group to be maintained Management team remains in place Neil Utley continues as CEO Retained focus on implementing rate rises and maintaining underwriting and cost discipline Page 6 Narrowing our focus to Equity Red Star means we can concentrate on building on this business impressive 37 year track record of profitability. The sale of the mass market distribution businesses will not adversely impact Equity Red Star. Equity Red Star will benefit from its existing relationship with Swinton, and will continue to source business through the divested branch network. The management team will remain in place, with Neil Utley as Chief Executive Officer of our UK operations. Neil will be a minority shareholder in the management buy out vehicle and will have a non-executive role in that business, while continuing in his full time executive role as CEO of IAG UK. The priority for Equity Red Star moving forward is to improve profitability by maintaining underwriting and cost disciplines. 6

10 DELIVERY AGAINST STRATEGIC PRIORITIES Priority Move to a simpler operating model by end of September Deliver $130m in annual before tax run rate savings in Australia Appoint CEO of Direct Insurance in Australia Pursue select opportunities in Asia Scale back operations in the UK Exit from Lloyd s syndicate 4455 ( Alba ) and underwriting agency Status Ongoing priority: to focus on driving performance and optimising returns in our home markets of Australia and New Zealand Page 7 It has been a busy six months for IAG. With our exit from our UK mass market businesses, we have now delivered against the key strategic priorities we set in July By the end of September, our operational model was up and running and the majority of our cost saving initiatives in Australia were also implemented. We appointed a new CEO with significant industry experience to manage our largest business, Australian Direct Insurance. We finalised our general insurance joint venture in India with the State Bank of India, which we expect to be up and running in 2009; and we ve increased ownership of the general insurance business of our Malaysian joint venture. We have also exited our Lloyd s managing agency and specialist Asian syndicate, Alba, as it was no longer required to support the Group s Asian businesses. With these priorities achieved, our prime focus is to continue to drive the performance in our home markets of Australia and New Zealand to optimise returns. 7

11 QUESTIONS I m now happy to open up the line for questions. 8