IAG will consider further merger and acquisition opportunities following the $855 million RACQ insurance deal announced last week, CEO Nick Hawkins says.

The environment in Australia and New Zealand is causing some smaller insurance businesses to consider their options and IAG is open to acquisitions that clear strategic and financial hurdles, he told an investor day briefing this morning. 

“In addition to RACQ, we do expect there will be further opportunities in these markets as capital, technology and regulation become increasingly challenging for sub-scale market participants.

“We will be financially disciplined in evaluating any opportunities, and our capital allocation framework will ensure we will deliver against the targets we have set.”

Acquisitions should add to earnings per share in the first year and help deliver a 15% insurance margin and a 14%-15% return on equity, he says.

“It does seem like there’s a number of small insurers in Australia and New Zealand that are looking to do something different, and so there are definitely opportunities available,” Mr Hawkins told analysts. “We’ve got a very strong bias to retail insurers in this discussion.”

He says IAG has delivered the bulk of a retail platform modernisation program and has shown it can efficiently add new partners, providing confidence for the RACQ insurance integration over the next couple of years.

IAG will provide underwriting and claims handling and bring the portfolio under its IAL licence, while RACQ policies will continue. 

Mr Hawkins says RACQ is an “extremely well-loved brand in Queensland” and has characteristics similar to NRMA.  

The RACQ arrangements include a 25-year distribution agreement that NRMA Insurance CEO Julie Batch says “contemplates perpetuity”. 

“Our absolute intent is that this is a long-term transaction that endures well beyond that time period,” she said. 

Allianz Australia announced yesterday that it will buy the insurance business of SA motoring group RAA for $642 million, with that deal including a 20-year distribution agreement. 

Mr Hawkins declined to comment when asked if IAG also looked at RAA and what he saw as the relative merits of RACQ. The Queensland transaction remains subject to Australian Competition and Consumer Commission approval. 

IAG today reaffirmed its guidance for full-year “mid to high single digit” gross written premium growth. 

It expects a reported insurance profit of $1.4-$1.6 billion and a reported insurance margin of 13.5%-15.5%. 

Natural perils costs have been favourable compared with the allowance, but the company says it is maintaining its full-year $1.283 billion assumption for now. 

Analysts heard inflation is easing in New Zealand and in Australian motor, while the company is cautious about home, with low double digit inflation continuing due to the cost of trades and the availability of some building materials. 

“It’s improving in pockets, but there are some parts of the country where those costs are still reasonably high,” Ms Batch said. “Over the next couple of months as we move through the first part of the storm season, we will feel more confident about the outlook on property.”