QBE Insurance: Acquisition Approved

QBE Insurance, last Friday, have confirmed that they had completed and settled the acquisitions of Praetorian Financial Group and Winterthur US after receiving regulatory approvals from 35 US states. Australian sharemarket analysts Macquarie Research Equities said that QBE has underperformed of late on the back of recent A$ strength (which has partially reversed), concerns regarding the global pricing cycle and an absence of news flow. But MRE remain believers in the QBE story, and note that the stock remains "attractive" at these levels. The finalised acquisition details are consistent with previous guidance: The total purchase price for the two acquisitions was A$2.5bn (~A$1bn for Praetorian and ~A$1.5bn for Winterthur) plus QBE will repay a US$557m loan to Winterthur US' parent bringing the total funding cost to ~A$3.18bn; Net Tangible Assets (NTA) on completion is estimated at A$1.5bn giving rise to A$1bn of acquisition goodwill (consistent with our $1.019bn estimate); Annual gross written and net earned premium from the acquisitions is estimated at US$2.8bn and US$2.6bn respectively, including additional retained premium from the cancellation of the Praetorian 50% quota share treaty with Hannover Re.; QBE will consolidate Praetorian from 1 April and Winterthur US from 1 June (underpinning CY07 and CY08 Gross Written Premium GWP growth of 30% and 15% respectively); Profit after tax and funding costs from the acquisitions is estimated at A$380m in the first full year with $50m of after tax synergies ($19m from Praetorian and $31m from Winterthur) forecast by the end of 2008. While there was never really any doubt that the acquisitions would ultimately proceed, there was the very real threat of delays. In this regard, achieving regulatory approval in 35 US states in a timely manner so as to be able to meet CY07 premium and earnings expectations is impressive and will provide further confidence in QBE's FY07 earnings outlook and management’s acquisition capabilities more generally. Moreover, having completed and settled the acquisitions, QBE Insurance is presumably now back on the acquisition trail with Europe seen as the most likely area for consolidation in the lead up to Solvency II. In this regard, QBE could acquire $1.5bn of GWP without requiring any additional equity funding. The analysts reiterate their outperform recommendation, with a $35.53ps price target (based on a long-term insurance margin assumption of 12%), QBE Insurance represents attractive buying at current levels.

QBE Insurance Group Limited is listed on the Australian Stock Exchange (ASX) under stock code QBE. You can view their investor website here. QBE was listed on the ASX on 28 June, 1973. Find out the meaning of the recommendations in this primer. John Cloney is the Chairman of QBE Insurance and Francis O'Halloran the CEO. The company is involved in underwriting general and reinsurance risks, investment management and the management of the economic entity's share of the NSW and Victorian workers' compensation scheme. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade QBE. Check your charts and good luck with your share trading!