IAG has agreed to purchase the insurance underwriting businesses of Wesfarmers for $1.845 billion to strengthen its Australian and New Zealand businesses.

The acquisition comprises Wesfarmers’ underwriting companies trading under the WFI and Lumley Insurance brands, as well as a 10-year distribution agreement with Coles.

Wesfarmers’ broking businesses – OAMPS in Australia and the UK and Crombie Lockwood in New Zealand – are to be retained, Wesfarmers’ MD Richard Goyder told a briefing today, adding: “We really like the broking business.”

IAG MD Mike Wilkins says the acquisition is “a compelling strategic fit for IAG”.

“This is a unique opportunity, which is expected to deliver significant long-term value for IAG shareholders and unlock further growth potential for our businesses in Australia and New Zealand,” he said.

CGU CEO Peter Harmer told a media briefing the acquisition will give IAG a 24% share of the Australian intermediated market.

About half of Wesfarmers’ premium income comes from Lumley, which has an SME emphasis, and about a third is from WFI, which is active in both personal and commercial lines in rural and regional Australia.

The two businesses complement each other geographically, with CGU stronger in Queensland while Wesfarmers has a larger base in WA.

OAMPS and Crombie Lockwood and the Australian and New Zealand premium funding businesses were not offered for sale, Mr Wilkins said.

Mr Goyder says Wesfarmers received a number of unsolicited expressions of interest for the underwriting operations, which in the past few years have delivered inadequate returns amid increased volatility.

A decision was made to hold talks with several parties on the sale of the underwriting businesses, while retaining the broking side, which he says Wesfarmers has built into a significant business through acquisition.

“We really like the broking business,” he told the media briefing. “We like the growth prospects and, in reality, the buyers of the underwriting business were not going to be interested in the broking business, in any case.”

Mr Goyder declined to comment on which other insurers had expressed interested in the underwriting operations, but said there had been “on-and-off conversations” with some parties “for a while”.

The acquisition is expected to deliver IAG modest earnings per share (EPS) accretion in its first full year of ownership, and at least 5% accretion in the second year (excluding integration costs and amortisation of identified intangibles).

Funding will come from a combination of ordinary equity, subordinated debt and internal funds. This includes a fully underwritten $1.2 billion institutional placement at $5.47 per share, a 4% discount to the closing IAG share price on the ASX on 13 December 2013.

Mr Wilkins says IAG is yet to hold talks with competition regulators but he is confident the deal will be approved given the relatively open Australian market.

“We don’t see that this in any way detracts from the competitive opportunities that are available,” he said.