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QBE Buys Balboa's Insurance Portfolio from BofA-Merrill Lynch

Source: Dow Jones/Cynthia Koons

Posted on 04 Feb 2011

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Australia's largest insurance group, QBE Insurance Group Ltd., has agreed to buy the Balboa insurance portfolio from Bank of America-Merrill Lynch (BAC) and entered into a 10-year distribution agreement for an upfront payment of US$700 million.

The structuring of the agreement means the insurance giant will not need to tap the equity markets for funding, which market participants had been expecting when word of the potential acquisition initially got out. As a result, QBE's stock is up 6.9% to A$18.12 as of 0347 GMT.

Under the agreement, QBE is buying a subset of the Balboa business and paying for future rights to the business, according to Goldman Sachs analysts. The deal looks as though it will add 5% to QBE's per-share earnings, Goldman Sach's early research said but the cyclical nature of the industry and controversy over how much insurers make from this line of business could hinder the amount the acquisition adds to earnings.
Balboa offers lender-placed insurance, which is a type of homeowner insurance for foreclosed homes.

QBE said the annualized net earned premium from the Balboa distribution agreement will be around US$1.3 billion.
QBE, Australia's largest insurer, also said second-half net profit will be around US$1.28 billion, which it said was in line with analyst expectations.

Insurance profit margins are below the bottom end of company guidance of 16%-18%, management said, due to both the frequency of catastrophic claims in the second half as well as continuing low interest rates in the U.S., U.K. and Europe.

QBE said that the annualized insurance profit margin before tax from the Balboa acquisition will be within 15%-20% of net earned premium, slightly higher than the group is currently delivering.

QBE will fund the upfront payment through new short-term bank facilities, which the group plans to replace with Tier 2 debt securities.
Recent acquisitions and global reinsurance cover should assist premium growth and profitability in 2011, QBE said. The group is targeting an insurance profit margin of 15% to 18%.

"We are reluctant to assume above the minimum guidance as QBE just missed its own guidance, interest rates look like (they are) staying low, and rate increases are not happening outside Australia," said David Spotswood, analyst at Select Equities. Spotswood has a long-term Buy rating on QBE, saying "significant earnings upside" is possible after the insurance and interest rate cycles improve.

As for the recent extreme weather events in Australia, QBE estimates the costs for the recent flooding in Queensland was US$45 million; for the catastrophes in Queensland, Northern North South Wales and Victoria in January will be US$100 million; and the preliminary cost estimate for the damage from Cyclone Yasi will be around US$100 million. The group said those claims are within the company's allowances in its business plans.

Those estimates for costs to QBE were not surprising to Goldman Sachs analysts, who said that shareholders should rest easier given the fiscal 2011 guidance, the Balboa acquisition and the fact that the insurer won't be issuing shares.