QBE expands South American, Asian reach

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12 March 2012

QBE has snared the Argentinian and Hong Kong insurance businesses of global bank HSBC as part of a $US914 million ($862.8 million) offloading of non-core assets.

Just a week after raising $US600 million ($566.4 million) to offset a $US500 million ($471 million) convertible debt note, QBE announced it has purchased the insurance arms of HSBC Argentina and Hong Kong subsidiary Hang Seng Bank for $US420 million ($396.4 million) in cash.

In a related deal, Europe’s second-largest insurer Axa purchased HSBC’s insurance channels in Hong Kong, Singapore and Mexico for $US494 million ($470 million).

In one of his last acts as QBE CEO, Frank O’Halloran announced the deal also includes 10-year distribution agreements. Both businesses will be earnings per share accretive in their first full year and are expected to deliver combined net profit after tax of more than $US40 million ($37.75 million) before synergies.

“These fit well with our strategic objectives of profitable growth in the fast-growing economies of Asia and Latin America,” Mr O’Halloran said.

The deal will be funded from existing sources. It includes $US190 million ($179.3 million) in tangible assets, $US230 million ($217 million) in goodwill and $US364 million ($343.5 million) in outstanding claims liabilities.

In a note to investors, Sydney-based Merrill Lynch analyst Andrew Kearnan says the Argentinian and Hong Kong businesses will have an insurance margin between 13% and 14%.

Mr Kearnan says there is some concern the acquisition cuts too deep into QBE’s capital position.

“The biggest reservation we have is that QBE has now spent most that it raised in equity from institutions for less than half of it back in tangible assets,” he said.

In its most recent annual report, QBE said it has more than $US2.5 billion ($2.36 billion) in excess cash required to meet benchmarks set by the Australian Prudential Regulation Authority.

The deal to acquire HSBC La Buenos Aires Seguros SA will add $US450 million ($424.6 million) in annual gross written premium (GWP), more than doubling QBE’s current stake in Argentina worth $US300 million ($283.1 million).

QBE is now likely to double its GWP in Latin America in 2012 after previously forecasting GWP growth of 20% this year.

While the group is one of the largest workers’ compensation insurers in Argentina, the HSBC deal will mainly bolster its motor book, currently worth around 7.5% of its business.

QBE’s Latin American businesses have grown substantially over the past five years, with operations now in Argentina, Colombia, Brazil, Ecuador, Mexico, Chile and Puerto Rico.

Mr O’Halloran announced in December the acquisition of Optima Insurance Group, a small Puerto Rican company with $100 million in estimated gross written premium.

Hang Seng’s insurance book and bancassurance distribution deal – worth $US200 million ($187.9 million) in cash – will add about $US75 million ($70.7 million) in annual GWP. In Asia, QBE booked $US680 million ($641.7 million) in GWP last year.

Hang Seng Bank CEO Margaret Leung says she is “delighted to partner with QBE” and is “committed to providing a comprehensive and competitive range of insurance solutions”.

“By focusing on distribution in the non-life insurance business and collaborating with a general insurance group with a strong track record, we will be able to further excel in our insurance service delivery.”