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Hawker pays the price as IAG tries to win over doubting shareholders

Yesterday’s leadership change is set to be the first of a raft of measures at Insurance Australia Group Ltd (IAG) as the beleaguered insurer looks to restore investor confidence in its future as an independent entity.

Announcing the resignation of under fire CEO Michael Hawker – replaced by COO Michael Wilkins – IAG also confirmed it is undertaking a review “of every aspect of its business in Australia and overseas”.

IAG chairman James Strong, himself lambasted by shareholders after turning down a “final merger offer” from its suitor and fellow Australian insurer QBE Insurance, said the outcome of the review would be communicated to the market in early July.

The review was welcomed in some quarters, with Deutsche Bank analyst James Coghill suggesting the move made sense, as Wilkins – who ran RSA spin-off Promina for eight years before its sale to Suncorp – has a track record of running lean businesses.

Wilkins, who took Promina from a A$2.5bn float to a A$7.9bn takeover by Suncorp two years ago, is also seen as in an advantageous position to exploit his knowledge of his former employer as he goes head-to-head with IAG’s Australian rival.

Nevertheless, the Australian Financial Review suggested the management change was not the “magic bullet” investors had hoped for, adding the new CEO faces a big challenge to reverse the insurer’s fortunes.

The Australian, meanwhile, said if IAG is serious about restoring shareholder confidence and credibility, “it needs to overhaul the board and senior management and sell or close its disastrous British business”.

Shares in the company were flat, trading at A$3.99 although down on last week’s high of A$4.23 before QBE’s decision to walk away.

In a statement, Hawker acknowledged he had lost the confidence of shareholders in his leadership of the company, which last week rejected the improved offer of 0.145 QBE shares and 90 cents per IAG share, valuing the company at around A$8.7bn.

As reported by The Insurance Insider on Thursday, some commentators had suggested growing pressure on IAG management would see the departure of Hawker, with Wilkins identified as a likely successor.

The leadership change comes as the company tries to restore investor confidence against a backdrop of disappointing share performance, profits warnings, and a downgrade by Standard & Poor’s – compounded by disquiet among shareholders over its handling of QBE’s repeated overtures, described by IAG chairman James Strong as “inadequate and incomplete”.

In his resignation statement, former Wallaby rugby player Hawker said: “I believe we are currently undervalued and our underlying performance is improving, however, I also believe I have lost the confidence of a number of our shareholders which is not tenable for the company.

“Given ultimate accountability sits with me, I have offered my resignation to the board.”

Strong added that, with Wilkins’ appointment as COO in November, there would be a “smooth transition”.

But despite Hawker paying the price for the lost investor confidence, it was Strong who was the focus of shareholder attacks last week.

The chairman was accused of a lack of transparency and accountability over the decision to reject QBE’s last offer that led to a termination of talks between the two parties.

Peter Morgan, investment director at fund manager 452 Capital, who is reported to have written to Strong demanding an explanation of why IAG snubbed QBE’s repeated offers, described Hawker’s departure as “un-Australian” scapegoating.

“I think it reflects very badly on that incumbent board, they should be hanging their head in shame today – it’s un-Australian just to let one bloke take the blame for everything,” Morgan said.

“I respect Michael for taking some accountability, but [my] attack is not totally on Michael, it is on the board itself for not being transparent and accountable.”

Other fund managers have blamed “appalling decisions” from the board for the underperforming stock which had lost half of its value in little over a year before news broke of QBE’s interest last month.

Don Williams from fund manager Platypus said: “The board was not in a position to reject QBE’s offer without at least engaging with them. IAG has a great brand in the NRMA and they nearly killed it a couple of years ago, and they have made so many other appalling decisions that they really shouldn’t be running the company but should be handing it over to somebody else.”

As previously reported, the insurer has had its “AA” status downgraded by Standard & Poor’s and has released its second profit warning in a year. Meanwhile, some analysts have questioned the wisdom of its expansion in the UK and expect a wide-reaching restructure of its operations.

Following the leadership change, IAG remains under pressure to come up with measures to validate its decision to spurn QBE’s overtures. These could even include entering into a partnership with a sovereign wealth fund.

Alternatively, the restructuring of its international operations, with specific emphasis on its UK-based businesses, and more cost-cutting measures, such as the A$7mn in savings to be made from the restructure of its corporate head office, may help alleviate shareholders’ concerns.

Meanwhile, QBE CEO Frank O’Halloran said his company would look elsewhere for M&A opportunities.

“QBE will now continue to focus on the pipeline of acquisitions that have been accumulating in recent months. The pipeline includes a range of opportunities in the Americas, Europe, Asia and Australia,” he said in a statement following the withdrawal.

He added: “We will continue to adhere to QBE’s strict acquisition criteria which have proven to be beneficial for shareholders over a long period of time.”

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