IAUGY Insurance Australia Group Ltd (PK)

Insurance Australia Group Ltd. (IAG.AU) said Thursday it is considering selling its U.K. operations, which include the nation's fifth largest motor insurer Equity Red Star and commercial insurance broker Barnett & Barnett.

The U.K. businesses reported an insurance loss of A$5 million in the six months ended Dec. 31, compared to a loss of A$121 million a year earlier, making it a good time to reassess the company's options, IAG Chief Executive Mike Wilkins said in a statement.

The options include "a continuing focus on improving the business' performance within the current operating model, refining the business' strategy to a more focused specialist motor offering, and exploring options for a potential sale of all or part of the business," he said.

"One of our key strategic priorities is to return the U.K. to profitability. Given the progress towards that goal in the opening half of the current financial year, we believe the time is right to consider our longer term plans for the business," Wilkins added.

Commonwealth Bank of Australia analyst Ross Curran said the sale was a "belated admission of their massive strategic mistake" of buying into the U.K. in the first place. IAG's U.K. operation has cost the insurer more than 500 million Australian dollars over the past two years, he said.

"Their U.K. business has been unprofitable for 28 out of the last 30 years," said Curran. "It's unlikely to ever make a profit in IAG's hands for the future. The only problem is there won't be any buyers for these assets."

Recently, IAG has been focussing its efforts on the faster-growing Asia Pacific region, with a spate of acquisitions in Malaysia, Vietnam and New Zealand, to add to its existing operations in India, Thailand and China. The group is aiming to generate 10% of its gross written premium on a proportional basis from Asia by 2016.

"In terms of strategic relevance, the U.K. has taken a backseat to Asia for some time. IAG's approach has been to restore the business to profitability as a means to providing further options down the track and the review may signal that such options are emerging," Merlon Capital principal Hamish Carlisle said.

"Within the context of IAG, the U.K. is small and doesn't materially impact our view of longer term value, which is primarily driven by the core Australian and New Zealand franchises," Carlisle added.

Investors welcomed the news that IAG may quit the U.K. and therefore focus its attention on expanding in Asia. At 0200 GMT, shares in IAG were up 2.4% at A$3.42, while the S&P/ASX 200 index was down 0.4% at 4149.6 points.

-By Caroline Henshaw, Dow Jones Newswires; 61-2-8272-4689; caroline.henshaw@dowjones.com

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