IAG hurt by problems at its British motor insurance business

INSURANCE Australia Group faces intensifying pressure to find a solution to its troubled offshore operations after cutting full-year profit guidance because of problems in its British motor insurance business.

Since inheriting the troubled British division from his predecessor in 2008, IAG chief Michael Wilkins has been forced to write down the value of the business and pump further funds into the unit, in moves that have cost IAG shareholders more than $800 million.

Yesterday, the company announced it expected to recognise a one-off pre-tax charge of about $365m in the year to the end of June, following a surge in injury claims in its niche British motor insurer Equity Red Star.

It expects this will result in a further writedown for the British business of about $86m.

Those accounting losses followed an earlier $350 million writedown soon after Mr Wilkins took over from former CEO Michael Hawker, when Mr Wilkins managed to sell parts of its British business at below purchase price.

The latest injection of funds will be used to strengthen IAG's British claim reserves and pay for a new reinsurance arrangement to provide protection against a further $200m in claims deterioration.

As a result, the insurer expects to post a full-year insurance margin of 6-7 per cent, down from previous guidance of 9.5-11 per cent.

The company's share price plunged more than 6 per cent yesterday to close at $3.39.

Analysts estimate the $365m one-off charge will hit IAG's full-year net profit after tax by more than 30 per cent, taking it from about $625m to about $400m.

Last financial year, the company posted a net profit of $181m.

But Mr Wilkins is standing by Equity Red Star, confident that its niche motor specialisation will deliver attractive returns over the longer term.

"We remain committed to the UK," he told The Australian.

He plans to boost the business' profitability by hiking rates by 10-20 per cent, dumping certain unprofitable broker relationships and revising claim practices.

However, Constellation Capital Management head of investment research Dr Peter Vann said if a potential buyer offered the right price, "I'd hazard a guess that they would jump at it".

Injury claims related to car accidents, such as back and neck claims, have soared in Britain as law firms spruiking "no win, no fee" services gain traction and lists of potential claimants are put up for sale. IAG said there had been a notable rise in the number of injured people per car accident despite the number of accidents going down. The company also announced yesterday that it expected its insurance margin next financial year to be 10.5-12.5 per cent, reflecting its confidence in the continued underlying improvement of its overall business. Underlying gross written premium growth is expected to be in the region of 3-5 per cent for the same period.