Insurance Australia Group Limited (ASX: IAG) announced Monday that it is buying Wesfarmers' (ASX: WES) underwriting business for $1.85 billion. The deal includes subsidiaries WFI and Lumley Insurance, and also comes with a 10-year distribution agreement with Wesfarmers' Coles stores.
"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," said IAG managing director Mike Wilkins in a statement today.
Of special interest to IAG shareholders, the deal is expected to deliver "modest" earnings per share (EPS) accretion in the first year, with "at least" 5% accretion in the second year, excluding integration and amortisation costs.
While the deal will be funded from ordinary equity, subordinated debt, and internal funds, the majority ($1.2 billion) comes from an institutional placement on 13 December. Wilkins noted that in addition to pushing up profitable growth in Australia, this latest move should help solidify its position as New Zealand's top underwriting business. IAG expects to incur around $120 million in pre-tax integration costs, but estimates pre-tax net synergy gains at around $140 million per year.
Pending regulatory approvals, the deal should be sealed by Q2 of calendar 2014. In its press release, IAG also took the opportunity to reaffirm its fiscal 2014 guidance of gross written premium growth between 5% and 7% and a reported insurance margin between 12.5% and 14.5%.
Foolish takeaway
IAG just got bigger, and this latest acquisition is well in line with its current businesses. At the same time, Wesfarmers has managed to divest a non-core asset, ostensibly allowing the company to focus more on its major retail and manufacturing assets. The move comes at an especially bad time for Australia's largest insurer, QBE Insurance Group (ASX: QBE). Last week, QBE announced a series of write-downs on its North American businesses and shares fell a whopping 22%.
As a smaller player, Suncorp Group Limited (ASX: SUN) will also have to watch out for IAG's new size. With $96 billion in assets, Suncorp is no small player, but IAG's new purchase puts the two corporations on a more competitive scale. The insurance world just got a little smaller, and investors will need to keep a close watch on how this latest acquisition plays out over the next year and beyond.
