Insurance Australia Group (IAG) is to buy one of the UK's biggest motor insurers Equity Insurance Group (EIG) for $1.4 billion (GBP 570 million).
It is the second purchase in three months for Australia's leading general insurer after it bought UK insurance broker Hastings in September.
IAG plans to raise up to $600 million worth of equity from its institutional investors to help fund the purchase. The remainder will be made up through a share purchase plan, internal funds and subordinated debt.
IAG chief executive Michael Hawker said buying EIG made strategic and financial sense and it was an ideal time to enter the UK market thanks to "hardening premiums".
"Equity is an ideal fit with our acquisition criteria in stable yet profitable markets like the UK - it's a motor-led insurance business with consistently high margins in its markets and a strong management team."
IAG's foreign acquisitions, which include firms in Asia, are seen as a reaction to Australia's increasingly saturated home insurance market.
In October Suncorp-Metway agreed to buy Promina, another Australian insurer, for $7.87 billion in what was seen as potentially the last step in the consolidation of Australia's general insurance sector.
Hawker said the $1.4 billion price tag for EIG represented a forward price/earnings multiple of 11.8 times forecast December 2007 earnings.
It is also expected the purchase will add 10 per cent to IAG's earnings per share in the 2008 financial year, and achieve synergies of about $55 million (GBP 22 million) thanks to IAG's ownership of Hastings.
IAG's shares were trading at $5.64 at the time the acquisition was announced.
The acquisition is subject to regulatory approvals and expected to be completed in the first quarter of 2007. Standard & Poor's affirmed the IAG's 'AA-' insurer credit rating.
