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Will Wesfarmers sell its insurance division?

A report in the Australia Financial Review has cited a source suggesting that conglomerate Wesfarmers (ASX: WES) is in advanced talks with insurance giant Zurich Insurance Group about a sale of its insurance division.

In the financial year ending 30 June 2013, Wesfarmers reported revenues from its insurance division of just over $2 billion and earnings before interest and tax of $205 million. The 8.8% growth in revenue was helped along by strong growth in personal insurance premiums written by Coles Insurance.

Certainly compared to the revenues of the majors, Wesfarmers’ insurance division is a small player. QBE Insurance’s (ASX: QBE) Australian and New Zealand operations wrote nearly US$4 billion in premiums in 2012, while Insurance Australia Group (ASX: IAG) and Suncorp (ASX: SUN) both wrote approximately $7.6 billion within their respective Australian divisions in financial year 2013.

The report of a potential sale will come as a shock to many followers of Wesfarmers who had been expecting the conglomerate to increasing try to cross-sell Wesfarmers-generated insurance products to its significant customer base. However the substantial market share of its competitors perhaps makes the task of building scale too daunting for management.

At the same time, the aim of cross-selling products and services to its customer base can be done under both ‘white label’ products or in partnership with suppliers. Should a sale occur, Wesfarmers will likely follow in the footsteps of Woolworths (ASX: WOW), which uses third parties to underwrite the Woolworths’ branded insurance products it sells. Under this model, the retailer can still make a margin without taking on the actual insurance risk. 

Foolish takeaway

Both Wesfarmers and Woolworths are actively looking for ways to expand their retailing operations, which already boast significant size and market share. Further expansion into the financial services space is seen as an exciting opportunity that will make a divestment of Wesfarmers’ insurance division – should it occur – closely scrutinised by investors.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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