Timing Everything In Iag Bid

Sydney Morning Herald

Wednesday April 16, 2008

Danny John

IT IS the deal that the global insurer QBE is keen to do, but does not necessarily have to complete. For Insurance Australia Group it is the takeover that makes most sense, even if it ultimately ends up losing its independence at a moment of cyclical weakness.

There's little doubt that QBE has struck at the best possible time, and not just in terms of where IAG's share price has been lagging.

While IAG's 900,000-plus retail shareholders are a key plank in its defence - given any viable offer will need a board recommendation to get them over the line - they could also prove to be the company's weak point as a result of the stock and profit slide it has experienced over the past two years.

The company's large and expensively maintained register is a hangover from its demutalisation days when it was spun out of the NRMA's insurance arm. It now contains thousands of disgruntled small investors whose support for IAG's board, chaired by James Strong, and the management team of the embattled chief executive, Michael Hawker, is now dependent on the company not cutting its dividend.

Given that IAG is heading for its third successive fall in net earnings - from $759 million in 2006 to $552 million last year and now an even worse half year that saw it turn in just $110 million - analysts have been speculating about how long it can maintain its annual payout at current levels.

Keeping its investors sweet will be critical to IAG's efforts to see off QBE, if the tempo of their rather hostile "informal" negotiations is maintained and the second, slightly raised, offer is put directly to shareholders.

But the falling share price - down from highs of $6.12 in recent months to lows of $3.30 four weeks ago before a recovery on the back of takeover speculation - has undercut any possible claim of capital growth. There is little doubt QBE will home in on the perceived threat to the dividend.

To be fair to IAG, its situation is in part a result of bad timing and bad luck. It now finds itself towards the bottom of a soft insurance cycle, one of those downturns in the industry where insurers find it hard to make its premiums stick just as claims have risen sharply.

It also chose to expand rapidly in Britain - where it has splashed out the best part of $2 billion - at a time when it thought the low point there had levelled out but had not.

As for bad luck, not even its forecasters could predict just how horrendous the storms of the last two years were likely to be, the results of which have wiped hundreds of millions of dollars off IAG's bottom line.

To that end, timing is everything, as both Hawker and his QBE counterpart, Frank O'Halloran, will readily testify. But only one has got it right to date.

© 2008 Sydney Morning Herald

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