Insurance Australia Group (IAG) has agreed to buy Wesfarmers' insurance business for $1.85bn by raising capital and taking on more debt. The deal is expected to close in the second quarter of 2014 following regulatory approval.
The purchase includes the WFI and Lumley insurance brands which produce $1.6bn in premiums. That's around one fifth the size of IAG’s existing business, and the acquisition price of 1.2 times gross written premium is virtually in line with IAG's current valuation. The combined entity will roughly boast a 24% share of the intermediated (or indirect) insurance market (i.e. the insurance market that uses brokers - see Hail the insurance middle man), knocking QBE Insurance from the top spot with its ~20% share. While it's a large purchase for IAG, it's small beer for Wesfarmers and it doesn't impact our view of the company or its valuation.