Insurance Australia Group (IAG), which trades in New Zealand under the NZI, AMI and State Insurance brands, is buying the underwriting businesses of Australia's Wesfarmers, which includes Lumley Insurance in New Zealand.
The A$1.845 billion (about NZ$2 billion) deal, agreed between the two companies still requires regulatory approval.
In New Zealand this will include the green light from the Reserve Bank, Commerce Commission and Overseas Investment Office.
IAG is clearly confident the deal will be rubber stamped, saying it's expected to be completed in the second quarter of 2014.
In New Zealand Lumley offers commercial insurance products through brokers and personal insurance through a partnership with Westpac.
The Lumley deal follows IAG completing the acquisition of AMI's "good book" last year in a deal that saw it pay the Government NZ$380 million, and gain control of around 60% of the New Zealand market for home and contents and car insurance. At the time of the AMI deal it was touted as lifting IAG's share of the general insurance market to 40% from 31%, well ahead of the second placed and Suncorp owned Vero Insurance's 23%, with Lumley third with 9%. Sydney-based Merrill Lynch analysts suggested the Commerce Commission could block the IAG takeover of AMI due to reduced competition, something that ultimately didn't happen.
In a presentation on the Wesfarmers deal released to the Australian Securities Exchange (ASX), IAG notes the deal would increase its share of the New Zealand intermediated market, including insurance sold via brokers, from just under 30% to about 40%.
IAG puts Lumley's 2013 gross written premiums (GWP) at NZ$441 million, which when combined with IAG's own GWP rises to NZ$1.5 billion. Lumley has 640 full time staff. IAG also says Lumley has 48% of its property exposure in the "higher growth" central and upper North Island region, which aligns it to NZI's strategy.
In a statement IAG’s New Zealand CEO Jacki Johnson said the plan was to combine Lumley's operations with NZI.
“This is an exciting opportunity that will see the combined business have greater capability to meet the needs of customers and partners and provide them with broader product and service offerings,” Johnson said.
“Lumley in New Zealand has very complementary strengths, such as its expertise in the commercial motor vehicle and professional indemnity insurance segments and IAG will look to build on these strengths to broaden our offering to our customers and partners.”
Johnson said IAG would undertake a "detailed customer-focused integration process" that would leverage the best of both businesses.
“The talent and experience within Lumley, and its product offerings in complementary areas, forms an expanded platform from which NZI can provide greater choice, service and protection to its customers," said Johnson.
IAG says the the acquisition will be funded through a combination of ordinary equity, subordinated debt and internal funds. This includes a fully underwritten A$1.2 billion institutional share placement at A$5.47 per share, a 4% discount to last Friday's closing IAG share price.
And IAG says the integration of Wesfarmers’ underwriting businesses should generate net synergies of approximately A$140 million per annum before tax, with a significant proportion derived from reinsurance. It expects to "substantially complete" integration within two years, with pre-tax integration costs of A$120 million expected.