IAG’s proposed $855 million RACQ insurance acquisition should be positive for the company if it gains clearance from the competition regulator, analysts say.

S&P Global Ratings says IAG can absorb the financial consideration and associated underwriting portfolio using its robust capital position, and the Sydney-based company has a “slightly underweight” position in Queensland. 

“The 25-year distribution agreement with RACQ furthers IAG’s association with Australia’s motor clubs while capitalising on its robust insurance capabilities,” S&P analysts said. 

JP Morgan says RACQ Insurance has a poor record on profits, but IAG should lift operational performance and eventually hit a target margin of 15%, with reinsurance offering benefits. 

“We think IAG can get other savings as well, particularly on expenses, and can risk-rate better than RACQ could,” a research report says. “There also may be claims management-related savings.” 

IAG plans to buy 90% of RACQ Insurance, which ranks second in the Queensland consumer home and motor market, and enter into a 25-year distribution agreement. 

It would have the right to acquire the remaining 10% two years after completion, on consistent terms. 

The price comprises $522 million for the equity and $333 million upfront for the exclusive agreement, with ongoing “market-standard commissions” paid to RACQ for product distribution. 

But analysts say it is not certain the Australian Competition and Consumer Commission will allow the deal, which is planned to be completed in the third quarter next year. 

“The likelihood of deal completion is unclear, as we think the ACCC may raise some concerns, although, prima facie, concentration would not hit extreme levels,” JP Morgan analysts say. 

Morningstar says a decision will hinge on how many competitors are still active in the region, and how much success challenger insurers and subsidiaries of large global insurers are having in Queensland. 

IAG says RACQ Group has 1.7 million members in a fast-growing part of the country and acquisition of the insurance portfolio is expected to add about $1.3 billion of gross written premium. 

RACQ will maintain its brand and customer relationships, with products underwritten by IAG, while there will be no change to IAG’s brands in Queensland.  

“The insurer has experience in these types of arrangement, having provided insurance under the RACV brand, a Victorian mutual since 1999,” Morningstar said. 

IAG has a leading position in NSW motor and home through the NRMA Insurance brand, which it has extended to other states.