SYDNEY (Reuters) - Bank of America (BAC.N) agreed to offload its Balboa insurance portfolio to Australia’s QBE Insurance (QBE.AX) 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 (BLK.N) and China Construction Bank (0939.HK) to help meet government bailout-aid repayments, said QBE would assume all of Balboa’s $1.2 billion in insurance liabilities under the deal.
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.
Analysts said the purchase would bolster QBE’s U.S. operations, while investors were also relieved the company was not planning a big capital raising to fund the deal as expected.
“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’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 and focus on market-leading underwriting performance,” O’Halloran said.
O’Halloran, 64, joined QBE in 1976 and has been the chief executive of the company for 13 years. His stake in the company is worth more than $200 million at current prices.
QBE also flagged a 2010 year net profit in line with expectations although 17 percent below last year, and said it expected costs from severe weather in Australia’s east in January and this week’s Cyclone Yasi to rise to about $200 million.
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.
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 said the transaction was expected to result in a one-time gain and it would retain Balboa’s net tangible equity of $1.7 billion which would be redeployed as the Balboa insurance liabilities expire.
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.
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.
“From the first read it seems like QBE has done the deal at a reasonable price ... and in line with what they’ve done in the past it looks like a sensible acquisition,” said Steven Robinson, senior investment manager at Alleron Investment Management.
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 said it expected to report a 17 percent fall in full-year net profit to around $1.28 billion, in line with market consensus.
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 Ed Davies and Vinu Pilakkot