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IAG to buy Wesfarmers NZ, Australian underwriting for $A1.85B

Insurance Australia Group has agreed to buy the New Zealand and Australian underwriting businesses of Wesfarmers for A$1.85 billion, to bolster its position in the two markets.

IAG would acquire Wesfarmers' WFI and Lumley Insurance brands as well as a 10-year distribution agreement with Coles, it said in a statement today.

The insurer will fund the transaction via a fully-underwritten A$1.2 billion institutional placement, of about 219 million shares at a discounted price of A$5.47 apiece, a non-underwritten share purchase plan capped at A$200 million, the issue of A$300 million of Tier 2 subordinated debt and from existing funds, it said. IAG shares last traded on the ASX at A$5.70. The stock has been halted for the placement.

"Acquiring these businesses supports the group's strategic priorities of accelerating profitable growth in Australia and sustaining our market-leading position in New Zealand, and we expect attractive EPS accretion," said IAG managing director Mike Wilkins.

"This is a unique opportunity, which is expected to deliver significant long-term value for IAG shareholders and unlock further growth potential for our businesses in Australia and New Zealand," he said.

Merging the Wesfarmers businesses with its own is expected to generate net synergies of about A$140 million a year before tax, the company said. Costs of integration would be $120million over two years.

In New Zealand, the Wesfarmers underwriting would be merged with IAG's existing NZI operations.

The transaction was expected to be completed in the second quarter of 2014. IAG affirmed its 2014 guidance for an insurance margin of between 12.5 percent and 14.5 percent.


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Comments and questions

This is getting dangerously close to IAG having a significant monopoly on the insurance industry in NZ, ComCom should be casting a keen eye....

By my estimation they will have more than 70% market share in some key products - sounds fair...

I think that is about right - after doing some back of the envelope calcs: IAG would have close to 70% of NZ's car insurance market with around 40% return on capital in that market. Aussie investors who were upset about Chorus can look forward to IAG milking NZ consumers for dividends instead.

This purchase takes out a competitor leaving only 3 real players in the commercial general insurance space in New Zealand. This will not be good for healthy competition.

If the CC waves this deal through in NZ they should all hang up their boots... and Labour will have a great platform in which to browbeat National Re: the structure of the insurance industry in NZ during the election year.