(Adds analysts comments, deal details, background)
By Maggie Lu Yueyang
SYDNEY Dec 16 Insurance Australia Group Ltd
(IAG) is set to become Australia's biggest insurer by
market share after it agreed to buy the insurance underwriting
businesses of Wesfarmers Ltd for A$1.85 billion ($1.66
The deal allows IAG, previously Australia's second-biggest
insurer, to cement its No. 1 position and surpass QBE Insurance
Group Ltd, which flagged a yearly loss last week due to
its struggling North American businesses.
"IAG appears to have taken an attractive step because it
cements its position in the Australian market both in totality
and importantly within the commercial insurance business," said
Toby Langley, an analyst of insurance and wealth management at
IAG is acquiring Wesfarmers' commercial underwriting
businesses under the Lumley and WFI brands, and a personal lines
business through Coles Insurance with a 10-year distribution
agreement with Coles, IAG and Wesfarmers said in statements on
"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," IAG managing director and chief executive Mike Wilkins
said in the statement.
The deal will deliver modest earnings-per-share growth in
the first full year, and at least five percent in the second
year, excluding integration costs, IAG said.
"It looks like it has a sound industrial logic to bring
these two businesses together. They appear to be quite
complementary," Langley said, noting that IAG was previously
dominated by personal insurance and the deal would help to
balance out its commercial side.
David Spotswood, an insurance analyst at Shaw Stockbroking
Ltd, said IAG had done a good deal without paying too much.
"They've paid about 1.15 times (Wesfarmers insurance)
revenue, and currently IAG is trading at 1.25 times its revenue,
they paid less than IAG is currently trading on," Spotswood
"It (the deal) leads to increased concentration in the
industry, so that's positive for the companies operating in
there. It provides a growth path for IAG," he added.
Media reported in late October that Zurich Insurance
was in advanced talks to buy Wesfarmers' insurance
business and had started due diligence.
Analysts said both QBE and Suncorp Group Ltd had
also considered the business but pulled out.
Normura's Langley said he expected further consolidation in
Australia's insurance sector, particularly in the more
fragmented commercial insurance space.
"There remain a number of sub-scale players in the
Australian market and, with players like IAG building even
greater scale, they may come under further pressure in future,"
Wesfarmers, a coal-to-retail conglomerate, said that the
sale was consistent with its focus on disciplined portfolio
The sale does not include Wesfarmers' insurance broking
operations and its premium funding businesses, Wesfarmers added.
IAG said the acquisition would be funded from a combination
of ordinary equity, subordinated debt and internal funds, which
included a fully underwritten A$1.2 billion institutional
placement at A$5.47 per share.
IAG shares were put on a trading halt on Monday morning,
after closing at A$5.70 on Friday, while Wesfarmers rose 0.9
percent to A$41.66 by 0207 GMT against a 0.1 percent slip in the
($1 = 1.1166 Australian dollars)
(Editing by Stephen Coates)