Insurance Australia Group Limited (IAG) has signed an agreement with State Bank of India (SBI) from sharemarket analyst Macquarie Research Equities.

Insurance Australia Group (IAG) a step closer to India

Event: Signs agreement with State Bank of India:

IAG has signed a non-binding agreement to create an Indian GI JV with the State Bank of India. SBI is India's largest bank (c60% govt owned) with >100m customers and >10k branches. The JV is expected to be signed later this year, and become operational in FY09E. IAG will own 26% of the JV (max permitted under Indian law) and intends to fund the transaction through internal resources, with the quantum "immaterial". Licence is subject to local approvals.

Impact: Industry top line growing fast, but profitability mixed:

Premiums: Indian GI premiums have grown at c14% CAGR in the past 5yrs, and are expected to grow at 15-20% CAGR in the next 10yrs. Growth should be underpinned by low penetration (0.8% premiums/GDP), and driven by private insurers (61% growth vs 8% for public insurers in 2007). Premium mix biased towards motor (>40% of premiums). Combined ratio: private sector CORs have been >100% in 6 of past 7 years, with declining rates further challenging industry profitability in 2007.

Action: estimates unchanged:

We have left our forecasts unchanged given non-binding commitments, relatively small size and FY09E start date.

Valuation: Restricted

We are currently restricted on IAG and cannot provide a price target or rating.