IAG to take another look at RACQ?

Is insurance giant IAG interested in taking another look at RACQ’s insurance business to take advantage of growing volatility in the sector?

The RACQ-sponsored LifeFlight retrieval service.

Is insurance giant IAG interested in taking another look at RACQ? DataRoom reported last year that RACQ was preparing to offload its insurance business to IAG for a reported $1bn as part of a rationalisation of the motoring club’s business.

That deal never eventuated but, according to Hunter Green IB analyst Mark Tomlins, it may be keen to have another look.

IAG already has experience running the insurance operations for motoring clubs, including NRMA and RACV. Tomlins, in a note to investors, said IAG’s new reinsurance arrangements would free up capital for investments or further share buybacks.

The arrangement will insulate AIG from long-term volatility, allowing it to reduce its prudential capital amount by up to $350m.

“We expect IAG to obtain approval from APRA between now and its (financial) result, enabling it to announce a further extension to its buyback,” Mr Tomlins said.

“We anticipate a further $250m buyback, alongside its normal dividend. However, there are other potential uses of the capital; IAG could potentially again take a look at RACQ Insurance, or earmark it for further capital expenditure in its systems and supply chain as it seeks to obtain further productivity gains.”

IAG declined to comment on the speculation yesterday. Founded in 1905 to patrol roads in search of broken-down vehicles, RACQ, which is owned by its members, later expanded into travel services, insurance and banking and has an annual turnover of more than $2bn.

RACQ last year announced it would no longer cover more than a million motorists for compulsory third party (CTP) insurance, after taking on too many riskier drivers in the scheme as well as absorbing losses from natural disasters and regulatory slip-ups.

RACQ was forced to repay $220m to customers after they did not get promised discounts on their insurance premiums.

At the time, RACQ chief executive David Carter argued that while the club had built a strong reputation for claims management, it was no longer viable to continue participating in the scheme. “The scheme’s design allows for all participating insurers to be profitable, however, this assumes an equitable distribution of risk,” Mr Carter said.

“In recent years, RACQ’s risk profile has worsened through no fault of our own, resulting in significant losses for the club.”

Both IAG and RACQ have previously poured cold water on the likelihood of a tie-up but, given increasing volatility in the insurance sector, does the deal now make more sense? \

RACQ faces increasing competition in the auto insurance business from companies such as Sunshine Coast-based Youi. Brand loyalty is one thing but when Youi is offering previously loyal RACQ customers cut premiums by almost half, it is another matter. Watch this space.

Originally published as IAG to take another look at RACQ?