Rumours that have been circulating through the market for the past couple of months surfaced today with a report in the Australian Financial Review that IAG is set to purchase CGU in Australia for $1.8 billion.

An ASX statement this morning said that the company had halted trading pending an announcement by IAG.

The AFR report says the purchase will be funded through a $1 billion rights issue being underwritten by Deutsche Bank and UBS Warburg.

Although no one will comment on the matter, it has been open knowledge for some time that CGU’s British parent, Aviva, does not see its Australian and NZ operations as core assets. Aviva has suffered a 47% fall in share value this year and tough equity market conditions.

A takeover by IAG (despite the competition rules) is seen by local analysts as a logical step. It would also confirm widely held views in the market that at least two of the “top 10” insurers in the local market could be taken over by their competitors in the near future.  Royal & SunAlliance and Zurich are both seen as vulnerable to takeover, mainly because of troubles with their parents.

The fate of Aviva’s Australian life and wealth creation assets in Australia is less clear. The Norwich Union operation has been operated separately from the general insurance business.

We’ll keep you posted.