IAG announced this morning it has entered into an agreement to buy troubled New Zealand insurer AMI for $NZ380 million ($288 million).

The acquisition excludes all liabilities relating to the earthquakes which have affected the Canterbury region. It will be funded from internal resources.

CEO Mike Wilkins says the acquisition is an important further step in IAG’s stated strategy to accelerate profitable growth in its home markets of Australia and New Zealand and is expected to be earnings per share accretive in the first full year of ownership, excluding integration costs and amortisation of identified intangibles.

AMI, New Zealand’s second-largest personal lines insurer, has been for sale for several months after incurring massive claims liabilities from the earthquakes in Christchurch. The mutual holds up to a third of its business in the city, and has been criticised for undercutting the market and not carrying sufficient reinsurance.

Mr Wilkins says the acquisition is a unique opportunity that delivers on IAG’s strategic priorities both at a group and local business level.

“It adds nearly 30% to our existing New Zealand premium base, in a market which we know well and believe will continue to offer attractive returns in the future,” he said.

“AMI is one of New Zealand’s most iconic brands, with a proud heritage and strong customer loyalty and retention rates. It has approximately $NZ360 million ($273 million) in annual gross written premium, more than half of which is motor insurance, and has demonstrated sound underlying profitability in recent years.”

Mr Wilkins added that reinsurance cover will remain in place providing significant protection up to $NZ1.4 billion ($1.06 billion) with a retention level of $NZ10 million ($7.6 million). Combining IAG and AMI in New Zealand is expected to generate at least $NZ30 million ($22.8 million) a year in net synergies within two years. Related integration costs of NZ$40 million ($30.4 million) are expected to be recognised.

IAG NZ CEO Jacki Johnson said the integration process will involve leveraging the best of each insurer’s product and service capabilities, while realising the benefits of greater scale.

As part of the sale process, all of AMI’s liabilities relating to current and future claims from the earthquakes which have affected the Canterbury region will be retained by a new company owned and backed by the New Zealand Government. IAG has agreed to provide people and IT support services for those liabilities.