Australia-based international insurer QBE (OTCBB: QBEIF.PK) rounded out its U.S. portfolio with a deal to buy the U.S. operations of Winterthur from French insurance giant AXA SA (NYSE:AXA), which recently bought all of Winterthur and decided that the U.S. subsidiary was not a good strategic fit. QBE will pay US$1.16 billion for Winterthur US Holdings and assume $636 million in debt.
Winterthur's U.S. office wrote $1.48 billion of gross premiums last year through General Casualty and Unigard, with 700 agents in 33 states. One-third of its business is personal property and casualty, with the rest in commercial lines. The estimated 2006 combined ratio was 95.8%, with almost $100 million in net profit.
If Winterthur's U.S. office traded separately on the NYSE, it could have drawn a sector average of 1.67 times sales, or more than $2.4 billion. QBE bought a profitable operation cheap.
The Winterthur purchase was a balancing move for QBE, which will now get roughly 40% of its business from Europe and the same from the U.S., with only 20% coming from its home market in Australia.
It also completes QBE's strategic plan in the United States. CEO Frank O'Halloran explained that QBE wanted four business streams in the U.S.: specialist insurance (from its recent Praetorian purchase); property and casualty in regional markets (Winterthur); reinsurance; and Latin American business.
Once the Winterthur deal closes, QBE will account for 1% of the general insurance market in the U.S. and rank in the top 10 underwriters for commercial risks in the agricultural sector (through QBE Agri and its mid-2006 purchase of National Farmers Union from OneBeacon, a White Mountains (NYSE:WTM) subsidiary).
The Winterthur takeover will be immediately accretive to QBE's earnings, with estimated profits of $160 million in the first full year before the cost of funding and synergies. By the end of 2008, the synergies are expected to produce $25 million in after-tax savings.
O'Halloran plans to stop QBE's U.S. acquisition streak with Winterthur, but he didn't exclude more in the future, "wherever we think we can make money for our shareholders."
I like CEOs who set out a long-term growth strategy and execute it flawlessly. I like it even better when they focus on making money for their shareholders above everything else. It's a simple formula: strategy, execution, profits, and increased shareholder value. We don't see it often enough these days.
That's why QBE stays in my portfolio family, the grand old lady I married in 2001 at US$3.37 and just won't let go.
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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 for himself and his clients. He welcomes your questions or comments. The Fool's disclosure policy would like to alert you to the cuteness of the wombat.
