Wesfarmers has reaffirmed its plan to grow its broking business by making the strategic decision to sell its underwriting arm and retain its the intermediary business.
As reported yesterday,
Wesfarmers sold its underwriting business, which consists of
WFI and Lumley, to
IAG for $1.845bn. The deal also includes a 10-year distribution deal with Coles where
IAG will underwrite insurance products in a white-labelling agreement. The businesses and the partnership will be integrated into
IAG’s intermediated business
CGU.
However, Wesfarmers made the strategic decision to keep its premium funding business and broking arm which includes OAMPS and WFI, reaffirming its commitment to growing the intermediary business.
On successful completion of the transaction, Wesfarmers predicts a record pre-tax profit of approximately $700m to $750m which is expected to be included in the financial results for the second half of the 2014 financial year. The company expects to receive the proceeds in Q2, 2014, when the sale, subject to regulatory approval, is complete.
Wesfarmers has made it clear in the past that it wishes to grow the broking business but, at a media briefing yesterday, Wesfarmers MD Richard Goyder would not be drawn on plans for the proceeds of the sale.
“We will determine what we will do with the proceeds in the coming months,” he stated. “We have a good track record of growth and we have excellent growth opportunities in all of our businesses and we will be looking to pursue each of those.”
Goyder, however, said it suited the business to hold on to the broking arm having heavily invested in it and noted its growth opportunities. He explained that the underwriting arm had been subjected to increased volatility over the last five to six years and had delivered an “unacceptable” level of return for shareholders in the past, which factored into the company’s decision to sell it.
“We have also found that to mitigate risks from catastrophe events we needed to increase our various layers of reinsurance,” he explained. “The reinsurers in some ways are taking less risk as well so there has been a degree of volatility in the earnings.”
He also conceded that buyers interested in the underwriting arm would not be interested in the broking arm. “It suits us to retain the [broking] business,” he added. “We really like the broking business and it has grown significantly over the last few years. It is now a significant business and we like the growth prospects.”
IAG’s market share to grow to 24%
IAG says the deal will boost its general insurance market share to 24% “across the board”. SME and rural market shares are expected to be higher. Based on IAG’s 2013 results, it increases GWP by 18% and will bring in $1.3bn in GWP.
It expects to deliver mixed net synergies of $140m per year, with the majority realised within two years, which is when the underwriting business is expected to be fully integrated into the IAG.
IAG is funding the deal through a combination of ordinary equity, subordinated debt and internal funds:
• A fully underwritten $1.2bn institutional placement, comprising the issue of approximately 219 million shares at $5.47 per share;
• A non-underwritten share purchase plan (SPP) capped at $200m;
• $300m of Tier 2 subordinated debt, planned for issue in early calendar 2014; and
• The balance from internal funds.
IAG MD & CEO Mike Wilkins said: “We think this acquisition is a compelling strategic fit for IAG, presenting a unique opportunity which is expected to deliver significant long term value for IAG shareholders. As well as unlocking the growth potential for our businesses both in Australia and New Zealand.”
Concerns have been raised that the deal with give the major three insurers in the industry, which includes IAG, even greater control over the market, prompting concerns over competition and premium pressure.
Wilkins said the deal would make little difference to its personal lines insurance book of business and therefore is unlikely to be an issue.
“As to pricing, we remain very firmly of the view that price movements this year, particularly in personal lines, will be in the low single digits,” he added.
Neither IAG or Wesfarmers would be drawn on the impact the deal will have on jobs, stating it is too early to discuss the issue, however Goyder said Wesfarmers has a small general insurance office.
CGU CEO
Peter Harmer said combined business would have enhanced scale and capability to meet the needs of its customers and partners, providing them with access to broader product offerings.
“These businesses have a lot in common, with long and proud histories, a heartland in regional and rural Australia, well known and respected brands, a strong presence in SME and a growing capability in the large corporates segment. The addition of WFI and Lumley also provides CGU with solid positions in attractive segments, such as commercial motor,” he said.
