IAG to buy Wesfarmers Insurance business for A$1.85bn

By Iain McDonald and Narayanan Somasundaram

Insurance Australia Group Ltd. (IAG) agreed to buy Wesfarmers Ltd.’s (WES) insurance underwriting businesses in Australia and New Zealand for A$1.85 billion ($1.66 billion) to become the largest insurer in Australia.

Wesfarmers will record a pretax profit of as much as A$750 million on the sale, the Perth-based company said in a statement to the stock exchange. Sydney-based IAG will raise A$1.2 billion in a share sale to fund the deal, it said in a regulatory filing.

IAG, which has businesses dating back to 1925, is seeking to grow its Australian and Asian operations after agreeing to sell its U.K. business last December. Wesfarmers, which owns coal mines, supermarkets, chemical producers and an investment bank, has been shifting spending to the Coles retail chain it bought in 2007 in Australia’s largest corporate takeover.

"It makes sense to bring the two businesses together," said Toby Langley, Sydney-based analyst at Nomura Holdings Inc. "Wesfarmers has struggled to deliver on its own and IAG has an opportunity to enhance the performance of the acquired operations and also potentially squeeze out further synergy benefits on top."

IAG, which is raising A$1.2 billion to fund the transaction, is already the top home and car insurer in Australia. Its total insurance market share in the country will rise to 27 percent, surpassing Suncorp Group Ltd.’s (SUN) 22 percent, Langley said.



Unacceptable Returns

Wesfarmers’ insurance underwriting businesses reported gross written premiums of more than A$1.6 billion in the financial year ending June 30 and employ more than 2,100 people, IAG said. The sale accord with IAG includes the underwriting operations for Coles Insurance, which will continue with Coles Supermarkets under an agreement that has 10 years remaining.

"Over any period of time, if any business doesn’t deliver satisfactory returns we’ll look what to do with it," Wesfarmers Managing Director Richard Goyder said in a media call today.

The insurance unit’s return on capital averaged 6.5 percent over the five years to 2013, according to a calculation based numbers in Wesfarmers’ 2013 and 2011 annual reports. That’s below a weighted average cost of capital that’s averaged an estimated 11.5 percent over the period, according to data compiled by Bloomberg.

The addition of Wesfarmers’s businesses will take IAG’s Australian motor insurance market share to 38 per cent from 34 per cent and the share of commercial insurance -- which covers business risk -- to 21 per  cent from 14 per cent, Nomura said in a note to investors.




Accelerating Growth

The acquisition needs to be approved by regulators, including Australian Competition and Consumer Commission and New Zealand Commerce Commission, Wesfarmers said. IAG is confident of securing all necessary regulatory approvals, IAG Managing Director Mike Wilkins said during a media conference call today.

"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 earnings-per-share accretion," Wilkins said in the statement.

The sale doesn’t include the insurance division’s broking operations in Australia, New Zealand and the U.K. or its Australian and New Zealand premium funding businesses, Wesfarmers said.

Along with the institutional placement at A$5.47 per share, IAG expects to raise A$200 million from a share purchase plan and A$300 million from a Tier 2 subordinated debt issue in early 2014, it said. UBS AG will underwrite the placement, IAG spokesman Andrew Tubb said in an e-mail

Guidance Affirmed

While the funds from the placement "would be used for a sensible acquisition, the size of a discount means it isn’t a massive opportunity for investors," said Angus Gluskie, chief Investment officer at White Funds Management, which owns shares in IAG and Wesfarmers.

Shares in IAG, which were suspended from trading this morning, have risen 22 percent this year and closed Dec. 13 at A$5.70. Wesfarmers shares climbed 0.5 percent to A$41.51, taking gains for the year to 13 percent. The benchmark S&P/ASX 200 (AS51) index dropped 0.2 percent.

IAG also affirmed its guidance for an insurance margin of as much as 14.5 percent and gross written premium growth of a maximum 7 percent in the fiscal year through June 2014. The reiteration of the full-year forecast is in contrast to QBE’s unexpected forecast on Dec. 9 of a $250 million loss for the year to Dec. 31 due to writedowns at its North American operations.

To contact the reporters on this story: Iain McDonald in Sydney at imcdonald7@bloomberg.net; Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net