QBE Completes U.S. Acquisitions; Positive Ratings Reaction

June 4, 2007

Australia’s QBE Insurance Group Limited became a major player in the U.S. market with the closing of its acquisitions of Praetorian Financial Group and Winterthur US.

All of the parties involved – France’s AXA Group; Germany’s Hannover Re and QBE – expressed their satisfaction that the complicated transactions, first announced late last year (See IJ web site Dec. 13, 2006 and Jan. 5, 2007) had been carried to a successful conclusion. The transactions were approved by all of the regulators involved by the end of May.

Hannover Re sold its U.S. subsidiary, Praetorian Financial Group (the successor to its Clarendon subsidiary), to QBE for slightly more than $800 million, which it said was “equivalent to 2.1 times Praetorian shareholders’ equity excluding goodwill as at year-end 2006.”

When AXA agreed to buy Winterthur from Credit Suisse for around $10 billion (see IJ web site June 14, 2006), it also announced that it would put the Winterthur’s U.S. operations “under review” – shorthand for saying it didn’t want them as part of the deal. AXA duly found a buyer in QBE, who paid $1.156 billion to acquire Winterthur’s U.S. business.

QBE funded the purchase through the issuance of £258 million (app. $508 million) in hybrid securities and internal funds. Upon completing the financing plan Frank O’Halloran, QBE’s CEO, commented: “We are pleased to have completed the funding of our recently announced U.S. acquisitions, with the equity component of the funding some A$400 million [US$333 million] lower than originally anticipated.”

Now that the two companies are part of QBE, O’Halloran indicated that the Group expects “profit after tax and funding costs from the two large acquisitions of $A380 million [US$316.5 million] in the first full year and synergies of an estimated A$50 million [US$41.6 million] after tax by the end of 2008.”

Tim Kenny, President and CEO of QBE the Americas, expressed his pleasure that the transactions had been completed. He added that “Praetorian, General Casualty and Unigard add substantial scale to QBE’s consistently profitable insurance business and will markedly expand both our QBE Specialty Insurance division and QBE Regional Insurance divisions.”

The acquisitions place QBE the Americas in the top 20 U.S. P/C insurers with more than $4.6 billion in annual gross written premiums and an estimated combined policyholders’ surplus of $2.0 billion. Its U.S. divisions now account for nearly 40 percent of the QBE Group’s annualized gross premium income.

Rod Fox, CEO of Praetorian Financial Group, commented: “I would like to express my deep gratitude to all of Praetorian’s employees and our Partners for their many contributions to the Company’s success. Praetorian will benefit from being part of a company that shares its passion for excellence and is committed to growing the QBE Specialty Insurance business. As we combine Praetorian’s specialty platform with the financial strength and operational resources of a leading player like QBE, QBE Specialty Insurance will be the preferred place to trade for specialty program business.”

Standard & Poor’s Ratings Services reacted positively to the news, affirming QBE’s ratings (see related article in International), revising its outlook on Praetorian to positive, and assigning an “A rating to the Winterthur U.S Group.

In addition to raising its outlook on Praetorian, which also includes the Redland Insurance Co. and Praetorian Financial Group Inc. (PFG), S&P removed the ratings from CreditWatch, and affirmed its “A” counterparty credit and financial strength ratings on Praetorian and its “BBB” counterparty credit rating on PFG.

S&P credit analyst Siddhartha Ghosh noted the successful completion of the deal and indicated that “the ratings reflect our view that Praetorian is strategically important to QBE and also reflect the company’s continued and strong leadership position in the U.S. specialty program business market, strong management, its strong operating performance, and very strong capital adequacy.”

In assigning an “‘A” counterparty credit and financial strength ratings on Winterthur’s U.S. operations with a stable outlook, Ghosh said those ratings also reflect Winterthur’s strategically important U.S. position, as well as “QBE’s good competitive position, strong operating performance, and very strong capital adequacy.”

Ed Note:
Neither AXA nor Hannover Re has quit the U.S. market. AXA’s life and health business, as well as its financial services operations, are thriving, while Hannover Re’s reinsurance operations are expanding.

Their decision to withdraw from the P/C market was principally economic – both see better opportunities in Europe than the U.S. The decisions also took into account their relatively minor positions in the U.S. P/C market and the losses both Winterthur and Clarendon (Praetorian’s predecessor) suffered in the U.S. in recent years.

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