Insurance Australia Group is making an aggressive move to become the country's biggest provider of commercial and motor insurance, snapping up Wesfarmers' underwriting businesses for $1.85 billion.
In a deal likely to attract scrutiny from competition authorities, IAG on Monday announced a plan to buy the business-focused insurance brands Lumley and WFI from Wesfarmers, which will make a profit of up to $750 million on the sale.
IAG will also expand its presence in home and motor insurance, buying the underwriting operations for the Coles insurance arm, previously a "challenger" brand.
If regulators allow the deal, it will result in IAG overtaking QBE as Australia's biggest provider of insurance to small and medium firms through brokers, and will further entrench its dominance of motor and home insurance.
IAG would also become New Zealand's biggest player in intermediated insurance, which refers to commercial cover sold by brokers.
Chief executive Mike Wilkins said the deal - the company's biggest purchase since it bought CGU a decade ago - was a "compelling" strategic fit for the business.
The purchase would lift earnings by 5 per cent a share after the first two years as the company saved $140 million a year by merging the two groups, IAG said.
However, it remains subject to approval by authorities in Australia and New Zealand, as it would fuel concentration in parts of the market.
Despite the regulatory hurdles, Mr Wilkins was confident the deal would be approved, as it would only marginally increase the company's market share in personal products. "We are very confident that we will get the regulatory approvals that we need," he said.
The largest parts of Wesfarmers' insurance arm is Lumley, which sells mainly commercial cover through brokers, and the rural-focused WFI.
Analysts think regulators will have few concerns about concentration in the commercial sector, but other parts of the deal could be more problematic.
Nomura analyst Toby Langley said any competition hurdles to the deal were likely to stem from motor insurance.
"If there is any intervention, it's probably going to come down to the Australian motor market," he said.
A recent note by Mr Langley estimated IAG's share of the motor insurance market if it bought Wesfarmers' insurance arm would rise from 34 per cent to 38 per cent - a bigger share than Suncorp's. Despite this, he said, the ACCC was unlikely to challenge the deal in its entirety.
IAG, the group behind the NRMA, RACV and CGU brands, is the country's main provider of home and motor insurance to households alongside Suncorp.
While Coles' insurance market share is very small at about 1 to 2 per cent, it had been touted as a "challenger" brand that could inject more price competition into the market.
CLSA analyst Jan van der Schalk said the watchdog would not block the deal because of the effect on market share alone, but may object to IAG gaining control of the potentially powerful Coles brand in insurance. "It fails only if the ACCC realises the powerful tool it is putting in IAG's hands," he said.
A spokeswoman for the ACCC said it was aware of the acquisition, but did not provide details.
To fund the purchase, IAG is raising $1.2 billion from institutional investors in a placement, selling shares at a 4 per cent discount of $5.47.
Wesfarmers chief executive Richard Goyder said the sale was part of the conglomerate's "disciplined" approach to managing its portfolio of assets. "We believe this sale agreement is in the best interests of our shareholders, while offering the customers of our underwriting businesses the opportunity to become part of an established leading insurance organisation," he said.