IAG Buying UK’s Equity Insurance Group for $1.12 Billion

December 6, 2006

Insurance Australia Group Limited (IAG) announced plans to acquire the U.K.-based Equity Insurance Group, one of the country’s larger motor (auto) underwriters and brokers for £570 million (A$1.397 billion – US$ 1.12 billion).

The deal would significantly expand IAG’s UK insurance business. “Equity Insurance Group is the UK’s fifth largest motor underwriter, the eighth largest motor insurance broker and the largest motorcycle insurer,” said the bulletin. “It operates through two key businesses – Equity Insurance Brokers and Equity Red Star, Lloyd’s largest motor insurance syndicate.”

CEO Michael Hawker said that the acquisition provided IAG with a unique opportunity to acquire the full range of motor underwriting skills in the UK, through a highly profitable Lloyd’s motor syndicate. “On any measure, the acquisition of Equity makes strategic and financial sense,” Hawker indicated. “Equity is an ideal fit with our acquisition criteria in stable yet profitable markets like the UK – it’s a motor-led insurance business with consistently high margins in its markets and a strong management team.

“The company has a proven ability to produce profits across the cycle, with an unbroken 37 year record of profitability, and a combined operating ratio (COR) that has outperformed the UK motor market by an average of 15 percent per annum over the past 25 years. Its focus is higher margin, specialist segments of the motor market.

“It also has significant growth opportunities including increasing its underwriting business and expanding its distribution network at a time when the UK insurance sector is showing strong signs of hardening premiums, making this an ideal time to increase our exposure to this market.”

Hawker also stressed that Equity’s operations were highly complementary with the recently acquired Hastings business (See IJ web site Sept. 29), and that approximately £22 million (US$43.2 million) post-tax, per annum in synergies were expected to be realized by 30 June 2008, with minimum change to the existing businesses. Hastings is the U.K.’s fifth largest motor insurance broker trading under the names of Hastings Direct and Peoples Choice. Australia’s largest insurer also acquired Advantage Insurance Company Limited, a direct personal lines insurer, specializing in motor insurance in the UK market.

To fund the acquisition IAG plans an immediate A$600 million (US$ 472 million) equity placement to institutional investors, “with further share capital being raised from the combination of a share purchase plan to eligible shareholders and, if required, underwriting part of the April 2007 interim dividend.” No sale of shares is authorized or anticipated in the U.S. or other markets where securities regulations require registration. The balance of the acquisition costs “will be sourced from internal funds and subordinated debt,” said the announcement.

IAG said the acquisition, which is subject to regulatory approvals, is expected to be completed in the first quarter of 2007. A web cast of IAG’s presentation to analysts may be obtained at: http://www.iag.com.au/equityacquistitionwebcast.

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