Huntleys' Stock of the Week

Recommendations: Buy

QBE's current stock prices

Investment Rating

QBE is one of the best managed insurance groups in the global general insurance and reinsurance industry. An enviable track record of strong earnings with a minor blemish following the events of September 11, 2001 is testament to a first class business model and conservatism. Extensive risk management is in place to protect all stakeholders. Throughout QBE diversification is used to reduce the overall risk profile by spreading exposures by product and geography. Overlaying fundamental procedures and strategies is a level of prudence providing significant comfort. A growth strategy based on the combination of organic growth and insightful acquisitions has and should deliver well above average growth in earnings and dividends. QBE is an excellent stock for inclusion in long term growth portfolios.

Event

- QBE has made an audacious bid for Insurance Australia Group (IAG). After an initial proposal of 0.135 QBE shares plus 50¢ cash, representing $3.75 per IAG share was rejected QBE upped the ante to 0.142 QBE shares plus 70¢ cash, representing $4.02 per IAG share.

- This is also unacceptable to IAG.

- The second offer values IAG at $7.6bn. QBE would outlay $1.32bn in cash and around 269m shares worth around $6.3bn.

Impact

- QBE's initial estimates from a merger are annual net pre-tax synergies of around $300m by 2010 and diversification benefits from excess risk margins in outstanding claims of over $400m.

- Based on consensus estimates the merger would be "substantially" EPS accretive for IAG shareholders and EPS accretive for QBE shareholders in year 1.

- QBE is a master of timing and has successfully completed almost 110 acquisitions over the past 25 years although IAG would be the largest.

- A merger makes sense as significantly better management lifts the performance on some $7bn in NEP. QBE would be able to reduce the reinsurance costs of the IAG portfolio.

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