QBE Raises A$ 2 billion. Will it bid for AIG?

Post by Sharat on November 26, 2008 · Under Company News, Equities, feature, insurance · Comment

QBE Insurance, Australia’s largest insurer announced that it would be raising capital into order to repay debt and fund foreign expansion through acquisitions. The exercise should raise A$ 2 billion and would take place in the form of a fully underwritten institutional share placement.

Insurance assets globally are looking very cheap currently as the banking crisis and quasi nationalisation of AIG has meant global stock markets and financial stocks in particular have taken a pummelling in recent months.

QBE has already agreed to buy some overseas assets, but the company may also be gearing up to make a bid for some of AIG’s assets when it finally divests them, in particular its Asian franchises which are the jewels in the crown. If it does not intend to do so, then the thought will most certainly have crossed the company’s mind.

It must be said though that AIG’s South East Asian assets have a speculated valuation in the region of US$ 10 billion, and potential suitors mentioned so far have been the UK’s Prudential and India’s Reliance ADAG. If QBE did intend to become a bidder for those assets it would need to raise far more than the A$ 2 billion it plans to raise this week.

QBE whose shares are suspended until Thursday also added that it planned to raise A$ 100 million from retail investors. The institutional book build is being led by JP Morgan and Merrill Lynch. A$ 1.25 billion of the proceeds are to be used to convert a hybrid issue into reduced debt.

Chief Executive Frank O’Halloran said “The capital raising and other capital management initiatives will assist in funding the acquisitions and our 2009 growth as well as provide further balance sheet strength and flexibility for other opportunities,”

The Aussie insurance major is buying buy US mortgage insurance services firm ZC Sterling for US$ 575 million whilst it has also agreed to buy two further underwriting agencies in the US and one in Europe. The initial purchase price of all 3 acquisitions is US$ 695 million.

“Based on our projections and the increased number of shares, the acquisitions will be earnings per share accretive in year one,” Mr O’Halloran said.

QBE, which earns four-fifths of its premium income from overseas has benefited greatly from a weakening domestic currency and has said it is revising its earnings targets upwards. The company now expected 10 per cent growth in net earned premium to $11.2 billion if the value of the Australian dollar remains around current levels until the end of this year.

“Net earned premium for 2009 is targeted to increase by 25 per cent compared with our 2008 forecast,” said the company, adding that the estimate was based on an average Aussie dollar exchange rate of US70 cents and sterling 40 pence.

The great AIG divestment has been talked about for some time now. AIG management has issued conflicting statements about its intentions; initially CEO Edward Liddy indicated a desire to become a traditional property and casualty insurer, but wanted to South East Asian life insurance assets. As conditions deteriorated and the US Federal Government had to pump in more money to prop up the failed insurer, it has become more obvious that the holding company will not be able to hang on to its prized assets. AIG though has the luxury of time with the US Government being the major stakeholder now. The insurer may now choose to wait until conditions improve and valuations return before auctioning of the china.

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