The Insurance Australia Group Ltd (ASX: IAG) share price is on the move on Thursday.
In morning trade, the insurance giant's shares are up 4.5% to $8.80.
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Why is the IAG share price charging higher?
Investors have been buying the insurer's shares after it signed a major new partnership in Western Australia.
According to the release, IAG will enter a strategic alliance with the Royal Automobile Club of Western Australia (RAC), acquiring 100% of RAC Insurance (RACI) and securing a 20-year exclusive distribution agreement to provide RAC-branded general insurance products across the state.
The transaction will see IAG pay $400 million to acquire RACI, and a further $950 million for the long-term distribution and brand licensing rights. This gives the deal a total value of $1.35 billion.
IAG's managing director and CEO, Nick Hawkins, notes that the alliance builds on IAG's successful model of partnering with leading motoring organisations, and aligns with the group's broader strategic ambitions. He said:
We're excited to partner with RAC to help protect and serve more Western Australians. RAC is a highly trusted institution with a quality insurance business and strong member relationships. This partnership lays a solid foundation for continued commitment to Western Australia, the nation's top performing economy.
RAC Group's CEO, Rob Slocombe, also spoke positively about the agreement. He adds:
RAC is pleased to partner with IAG, a leading Australian general insurance company, in a long-term partnership that will strengthen the value we deliver to our 1.3 million members across Western Australia. IAG brings national scale, global reinsurance capability and industry-leading technology to support RAC members, along with a deep understanding of member focused organisations.
Earnings boost
The transaction will be funded from IAG's existing surplus capital, debt and strong, stable organic capital generation. On completion, the RACI portfolio is expected to add ~$1.5 billion to IAG's Gross Written Premium (GWP).
The good news is that IAG believes the deal will give its earnings a boost. It is expected to be earnings per share (EPS) accretive in the first full year, and mid-single digit earnings per share accretive on a full synergy run-rate basis.
The company highlights that it is consistent with its 'through the cycle' 15% insurance margin target and contributes to an upgrade in its return on equity target to 15%.
Guidance update
Also giving the IAG share price a boost is an update on its guidance. While the company has not upgraded its earnings guidance just yet, it has revealed that there is potential for this to happen due to lower than expected perils in April. It said:
IAG maintains its FY25 perils expectation of $1,283 million which is the basis of its FY25 guidance. If the current perils favourability (~$250 million) continues for the remainder of FY25, the reported insurance profit guidance will increase to $1,650 million to $1,850 million, from $1,400 million to $1,600 million. Similarly, the reported insurance margin range guidance will increase to towards the top end of the 16% to 18% range, from towards the top end of the 13.5% to 15.5% range.
