Diversified conglomerate Wesfarmers is selling its Australasian insurance underwriting operations to Insurance Australia Group (IAG) for about $1.85 billion - its biggest ever divestment.
Wesfarmers managing director Richard Goyder said the sale followed approaches by a number of parties that were interested in the underwriting business.
Wesfarmers had spent a lot of money in recent years getting the Australian and New Zealand insurance underwriting business into much better shape.
"But it hasn't delivered satisfactory returns on average over the last five years to Wesfarmers," Mr Goyder told reporters.
"And over a period of time, if any of our businesses don't generate satisfactory returns, we'll look and see what we do with it."
Mr Goyder said the sale of the insurance underwriting business also reduced some of the risk in Wesfarmers' portfolio of industrial, mining, retail and financial businesses.
There was inherent volatility in the insurance business because of catastrophic events like earthquakes in New Zealand, and Cyclone Yasi.
The sale does not include the insurance division's broking operations in Australia, New Zealand and the UK, and its Australian and New Zealand premium funding businesses which will remain part of Wesfarmers.
Wesfarmers expects a pre-tax profit of about $700 million to $750 million from the transaction, which will be included in the financial results for the second half of the 2014 financial year.
Mr Goyder said Wesfarmers had not yet decided what to do with the proceeds from the sale.
The sale is subject to regulatory approval, which is expected to take several months.
The acquisition comprises Wesfarmers' underwriting companies trading under the WFI and Lumley Insurance brands, and a 10-year distribution agreement with Coles.
IAG chief executive Mike Wilkins said the acquisition was a compelling strategic fit for IAG.
"Acquiring these businesses supports the group's strategic priorities of accelerating profitable growth in Australia and sustaining our market-leading position in New Zealand, and we expect attractive EPS (earnings per share) accretion," Mr Wilkins said.
IAG expects the acquisition will lift earnings per share by a modest amount in the first full year of ownership and by at least five per cent in the second year.
The acquisition will be partly funded from a $1.2 billion placement of shares to institutional investors, at $5.47 per share.
The integration of Wesfarmers' underwriting businesses is expected to generate pre-tax net benefits of about $140 million a year, with a significant proportion derived from reinsurance.
The integration process is expected to be substantially complete within two years, with pre-tax integration costs of $120 million.
Shares in Wesfarmers were 20.5 cents higher at $41.51 at 1515 AEDT. IAG shares are in a trading halt until the start of trading on Wednesday, December 18. They last traded at $5.70.
