IAG's share purchase plan

Insurance Australia Group has announced a $1.4bn capital raising to pay for its purchase of Wesfarmers insurance business. We passed verdict on that acquisition in IAG buys Wesfarmers insurance arm on 16 Dec (Hold – $5.70). Now, as investors are faced with an offer of more shares, it’s time to pass verdict on IAG’s share purchase plan. In preview, we don’t recommend applying for more shares.

Retail investors, who account for about 30% of all shareholders, will be offered just 14% of the funds raised. The rest – $1.2bn – will be offered to institutional shareholders. This is disappointing. Small shareholders are getting a raw deal in terms of access.

Shares will be offered at the lesser of $5.47, or a 2% discount to the five day average share price before January 24. With today’s price about $5.85, the price will almost certainly settle on $5.47, a 7% discount to the current price. Existing shareholders may apply for shares in increments between $1,000 upto $15,000. Since a maximum of $200m will be raised from the retail component, a massive scale back is likely. The offer is now open and closes on 24 January 2014.

IAG had a stellar 2013, raising gross written premiums and insurance margins. Those conditions are unlikely to persist for long and, with IAG now approaching our sell price, we don’t recommend increasing your exposure now. On the SPP, we say pass. With IAG’s share price up marginally since 16 Dec 13, for now, HOLD.