Australian multinational insurance company QBE (OTC BB: QBEIF.PK) announced this week that it will buy Praetorian Financial Group from parent HannoverRe. The purchase price is $800 million, and QBE plans to inject a further $200 million into its new American subsidiary. QBE's stock rose almost 10% on the Sydney exchange on Thursday.
Traders say you should never marry a stock. Investors, on the other hand, are always looking for a new addition to their long-term holdings. Call them serial polygamists: They are sincere about their desire to get married, but they would never take the risk of putting all their eggs in one basket.
Insurance is a natural sector for long-term investors, because an insurance company boils down to smart managers writing the right policies at the right prices and investing the cash that pours out for the best return. It's no accident that Warren Buffett made Geico and General Re two of the wholly owned cornerstones of Berkshire Hathaway
I married QBE, my oldest holding, shortly after 9/11, when a colleague who really knows the insurance business looked through the roster of beaten-down insurers and found QBE, one of the few general insurance and reinsurance plays with little exposure to damage claims from 9/11. You could buy the Pink Sheets American Depositary Receipts for a little more than $3 back then.
After the Praetorian news, it will cost you $22 and change. Not a bad return for a five-year investment. And did I mention the 3.4% dividend projected to increase to 4.4% in 2008? But it is still a good price to start your flirtation with QBE; at less than 14 times projected 2007 earnings, QBE's valuation is still very reasonable.
Like Berkshire's insurance operations, QBE benefited from the mild hurricane season in the U.S. this year. Rates were way up and claims way down -- the magic formula for big insurers. QBE said that in addition to the Praetorian purchase, which will add to earnings, its insurance margins would be closer to 20% than the projected 17% for 2006. That increase will fall straight to the bottom line, with profit growth projected at 30% for the year.
Praetorian is a general insurer with several business lines, most of which parallel QBE's other U.S. operations: auto, casualty, property, and workers' compensation. Its "combined ratio," a key metric in the insurance business, has improved steadily from 89.6% in 2004 to a sterling 78.1% this year. (The combined ratio is the percentage of claims paid out compared with total premiums earned; the lower the number, the more profit the insurer keeps.)
QBE had 11 billion Australian dollars in premium business before the Praetorian acquisition, which will add $1.9 billion more. It will keep Praetorian's management team, expand its U.S. business and benefit from cost savings after merging the IT system and other infrastructure with Praetorian.
Everyone I know who owns QBE periodically asks if there is a good reason to sell and end the marriage. So far, we haven't found one. You dance with the one that brung ya, and QBE has been a dandy dance partner for the past five years.
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Fool contributor Dale Baker , a private client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns shares in QBE and Berkshire Hathaway (Class B shares) for himself and his clients. He welcomes your questions or comments. Berkshire Hathaway is an Inside Value recommendation. The Fool has adisclosure policy.
