IAG wants to swallow Lumley

Business

Insurance Australia Group, owner of NZI, AMI and State Insurance, to buy Lumley

16th Dec 13, 3:10pm by Gareth Vaughan

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.

Here's IAG's press release issued to the ASX. The charts below are taken from IAG's presentation.

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10 Comments

by MikeM | 16th Dec 13, 3:28pm 1387160897

Yet another monopoly industry in the making in this country. Marvellous.

by Stephen Hulme | 16th Dec 13, 3:58pm 1387162688

This whole FIRE sector thing is a cost burden lowly NZers can no longer afford since all the profits always get expatriated and spent in foreign shores. Thus the acitivities of this industry guarantee debt entrapment, in the absence of revolving reinvestment amongst the payers of the tributes.

by Zoltuger | 16th Dec 13, 4:18pm 1387163892

All the profits always get expatriated.

Not true, there are a handful of NZ owned banks and life insurers. You meant most profits usually get expatriated

by Stephen Hulme | 16th Dec 13, 4:23pm 1387164224

Oh OK - but to borrow someone else's observation - a magnitude smaller than a rounding error.

by Happy123 | 17th Dec 13, 11:42am 1387233754

And what percentage of AUS FS shares (on NZX or ASX) are owned by Kiwis; either directly, through Kiwisaver or another managed fund? To say that all profits go offshore is not strictly correct, they may be reported in AUS but then paid back to Kiwi shareholders. If these firms were owned locally and only traded on the NZX would it ensure more Kiwi ownership?

by iconoclast | 16th Dec 13, 4:33pm 1387164789

I agree with you. There is a current precedent for this view. As Bernard Hickey noted in his weekend wrap on "white pixie dust", over the past 5 plus years the unit price per tonne of australian coal and iron ore exports doubled, which produced a drunken euphoric spending spree across both private and public sectors. The reality was the 3 foreign owned mining majors were the exclusive beneficiaries of those windfall price increases which flowed straight to their bottom line profits, and were repatriated out of the country. Now commodity prices are back to trend, the credit card debt is being exposed as now still owing while the imagined revenue wasn't there to pay it off in the first place.

by Stephen Hulme | 16th Dec 13, 3:35pm 1387161316

Too big to fail now?

Best the government nationalise IAG right now to secure the benefits of elevated premuims to offset the inevitable future cost.

Remember how the expensive part of AMI morphed into government owned Southern Response Earthquake Services Limited.

by Chris-M | 17th Dec 13, 12:15pm 1387235710

I think that the government would be very foolish to allow IAG to get any larger. 60% of the nations insurance in the hands of one company is far too high. The whole rational of insurance is to spread risk. 60% of the total NZ market is far too much concentration of risk in one entity. They are already far too large from this perspective. I would have thought that 25-30% with any one company should be the limit. (think about how we expect fund managers to structure a share portfolio) If we have have another Christchurch or worse, one company will have to fund the lions share of the rebuild costs. The risk is that they may well go under and the government end up picking up the tab or they will look for every loophole to avoid paying up. In Christchurch IAG are performing very poorly in this respect; so they have form. See http://insurancewatch.org.nz/ICNews

http://insurancewatch.org.nz/docs/Graph%20-%20Pace%20of%20Progress%20-%20September%2026.png

by two otherguys | 17th Dec 13, 12:42pm 1387237364

If IAG is one of the insurance companies that have been playing hard-ball with christchurch earthquake rebuild claims, the government should tell them to take a hike

If they are playing mean and hard at their current size you dont need to be a genius to work out what they can and will do if they control the market

by moorina | 17th Dec 13, 5:52pm 1387255936

What a huge risk to the insuree. Haven't we learnt from the ChCh quake issues!