Bank of America agreed to offload its Balboa insurance portfolio to Australia’s QBE Insurance for more than $700 million, the latest in a string of asset sales by the U.S. lender as it recovers from the global credit crisis.
Bank of America, which last year sold stakes in BlackRock and China Construction Bank to help meet government bailout-aid repayments, said QBE would assume all of Balboa’s $1.2 billion in insurance liabilities.
Shares in QBE, Australia’s largest insurance group, jumped 7.7 percent after it announced the deal, their biggest one-day gain in three years.
Fund managers said the purchase would bolster QBE’s U.S. operations, while investors were relieved the company was not planning a big capital raising to fund the deal as feared.
QBE’s deal-hungry chief executive, Frank O’Halloran, has made more than 75 acquisitions in 10 years to expand into 50 countries. QBE acquired U.S. underwriting agency ZC Sterling Corp for $575 million in 2008.
“We will continue with our current strategy of growth by acquisition,” said O’Halloran, who joined QBE in 1976 and has led the company for 13 years. His stake in the company is worth more than $200 million at current prices.
The deal with Bank of America follows a string of takeovers involving Australian insurers. Life insurer Tower Australia in December agreed to a $1.2 billion offer from shareholder Dai-ichi, while AMP Ltd has made a $13 billion bid for AXA Asia Pacific.
Bank of America said QBE would assume all of Balboa’s liabilities in exchange for an equivalent amount of cash and other assets through a reinsurance transaction.
QBE entered into a 10-year distribution agreement with the bank for lender-placed insurance and real estate owned programs and certain voluntary consumer insurance products under the deal.
“They get access to distribution and hence the profits from the underwriting in return for taking on the current book and paying $700 million,” said Peter Vann, portfolio manager at Constellation Capital Management.
Bank of America said last year it planned to sell Balboa as part of asset sales to raise $3 billion to complete its repayment of U.S. government bailout funds. It has since raised the funds, joining the list of U.S. banks repaying money received under the government’s Troubled Asset Relief Program.
It said the transaction was expected to result in a gain and it would retain Balboa’s net tangible equity of $1.7 billion, which would be redeployed as the Balboa insurance liabilities expire.
QBE said it expected the annualized gross earned premium and net earned premium from the distribution agreement to be around $1.5 billion and $1.3 billion, respectively.
“The underlying business doesn’t seem to be tracking as well as hoped, but they have plugged that gap through this acquisition,” said Mark Nathan, portfolio manager at Arnhem Investment.
QBE will fund the deal through new short-term bank facilities and expected profits for 2011 and a dividend underwriting arrangement, quashing speculation on Thursday it was planning a $1 billion capital raising.
QBE also flagged a net profit of around $1.28 billion for 2010, in line with market expectations but 17 percent below last year. It estimates costs from Australian floods in January and this week’s Cyclone Yasi to rise to about $200 million.
O’Halloran said the preliminary estimate of damage from Queensland’s Cyclone Yasi this week was around $100 million, while flooding and severe weather across Australia’s east in January would cost it about $100 million. This was on top of about $45 million for Queensland floods in late 2010.
However, its insurance profit margin was forecast at 15 percent, below the company’s guidance of 16 percent to 18 percent.
(Additional reporting by Victoria Thieberger in MELBOURNE and Adrian Bathgate in WELLINGTON; Editing by Mark Bendeich and Vinu Pilakkot)
IJ Ed. Note: The figures given are in U.S. dollars; the Australian dollar is currently worth around 1.5 percent more than the US dollar.