The Insurance Australia Group Ltd (ASX: IAG) share price is up more than 3% after a deal with RACQ.
The insurance giant was up 5% in early trading in response to the deal.
IAG is the parent business of a number of insurance brands including NRMA Insurance, CGU, WFI and ROLLiN’.
IAG and RACQ enter alliance
Insurance Australia Group announced it is entering into a 25-year exclusive alliance to provide RACQ general insurance products and services for RACQ members and Queenslanders.
Under this alliance, IAG will acquire 90% of RACQ’s existing insurance underwriting business, with an option to acquire the remaining 10% in two years on consistent terms. The consideration of $855 million comprises “entry into the exclusive 25-year distribution agreement.”
IAG said $522 million was for 90% of RACQ, equivalent to the expected real value (net tangible assets) at the time of completion. The other $333 million is an upfront payment for the entry into a 25-year distribution agreement.
On completion, the RACQ portfolio is expected to add around $1.3 billion to IAG’s gross written premiums.
IAG looked to reassure stakeholders by noting there will be no change to IAG’s existing insurance business and brands, or RACQ’s brand, as a result of the alliance.
How will this impact the company’s finances?
IAG said this deal will be funded from its surplus capital.
The business also said it’s expected to add to profit / earnings per share (EPS) in the first full-year of ownership.
The ASX insurance share said that it’s expecting to achieve synergies of approximately $50 million per annum, predominately by adopting IAG’s reinsurance strategy for the RACQ portfolio.
Management commentary
IAG Managing Director and CEO Nick Hawkins said:
IAG has a well-established presence in Queensland through our trusted insurance brands, and we are excited to now help protect and serve RACQ’s members.
The transaction is a true partnership between IAG and RACQ. It builds on our proven track record of working collaboratively with leading member motoring organisations that share our values.
RACQ will maintain brand and customer relationships, while leveraging IAG’s scale and financial strength, best-in-class technology for claims, policies and pricing, customer orientated claims experience and underwriting expertise.
Final thoughts on the IAG share price
The IAG share price has jumped more than 40% in the past year, so it doesn’t seem cheap to me, with the market pricing in the stronger market conditions for the insurance sector.
In my opinion, there are other ASX dividend shares that appeal more to me.