Weighing a big opportunity against big possibilities
Today is deadline day for QBE’s $7.4 billion second offer which values IAG at $4.02 per share. As the stakes rise in QBE’s bid for IAG, it’s hard to envisage CEO Frank O’Halloran walking away from the table empty-handed. Not this time, and not right now.
QBE knows this particular bid needs sweetening and needs to be kept moving if it is to succeed. IAG Chairman James Strong yesterday shrugged this bid off as “1% above the market”, but that doesn’t indicate QBE has adopted a “take it or leave it” approach.
Analysts and industry insiders seem to agree that QBE is determined to see this one through and will be prepared to come back with a better offer.
It’s not hard to see why. This is a golden opportunity for QBE to get stuck into the Australian personal lines market, in which it has hitherto been a relatively minor player.
And the timing is good, although maybe a month or so later than optimum. IAG is at what is probably its lowest point in a long and difficult recovery period, and the cycle is beginning to turn up in some critical areas of its business. It has a more dynamic management strategy in place under COO Mike Wilkins. It’s not – as Mr Strong noted yesterday – “sitting here for sale”.
The figures are compelling for QBE. A takeover would give it 44% of the motor market, 45% of personal lines and just about double its commercial portfolio to around 30% of the total market.
QBE says it stands to gain $300 million in annual synergies by 2010 and more than $400 million of diversification benefits from excess risk margins in outstanding claims.
Various analysts’ estimates suggest this deal could proceed for around $8 billion – a similar sum to the $7.9 billion paid by Suncorp for Promina last year.
That’s why QBE will not simply walk away. Mr Strong is making a strong case for future recovery. So it’s maybe now or never to grab a long-desired slice of the action in a country that presently accounts for just 20% of QBE’s annual profit.
The prospect is met with general acceptance by brokers, who generally don’t like underwriter consolidations. They were asked by insuranceNEWS.com.au to consider a market dominated by QBE, Suncorp, Allianz and Zurich.
There was some concern among brokers about the size of QBE’s potential market share, but generally they say it would be out of character for the company to throw its weight around in regard to premium rates and commission levels.
“QBE is a fine company,” one NSW broker said. “They have good policies and a brilliant claims service.”
That’s a fairly common theme with brokers. “QBE would have done their homework,” another NSW broker said. “They’re switched on. IAG has been suffering a bit of late, and they haven’t got their act together yet.”
All brokers contacted by insuranceNEWS.com.au said business with the two companies make up substantial portions of their income, and some expressed concern that QBE would hold more than 40% of the personal lines market and 30% of commercial lines.
“The big five will become the big four,” a Victorian broker said. “It’s one less insurer to deal with and that’s not necessarily good for the market. We’ve seen these mergers in the past and it’s something we hate.”
A NSW metropolitan broker agreed. “It will restrict the market.”
But most say a takeover would have little effect on premiums or commission levels. One NSW broker said there would still be plenty of competition around to keep QBE on its toes.
“If they did [raise rates unfairly], we’d go elsewhere,’ he said.
The Australian Securities and Investments Commission and the ACCC will run the rule over the transaction but indications are that it would pass unhindered.
The next couple of weeks will be interesting. IAG has advised shareholders to sit tight. We are probably in for a period of horse-trading and carefully written media releases.
QBE will need to play a tough negotiating hand to succeed. It will also need to move quickly with a new offer to overcome Mr Strong’s message to his huge retail shareholder base that their company is recovering and may well be worth hanging on to.
QBE doesn’t much like paying goodwill, but this time it might have to. The smart money says it will.
QBE knows this particular bid needs sweetening and needs to be kept moving if it is to succeed. IAG Chairman James Strong yesterday shrugged this bid off as “1% above the market”, but that doesn’t indicate QBE has adopted a “take it or leave it” approach.
Analysts and industry insiders seem to agree that QBE is determined to see this one through and will be prepared to come back with a better offer.
It’s not hard to see why. This is a golden opportunity for QBE to get stuck into the Australian personal lines market, in which it has hitherto been a relatively minor player.
And the timing is good, although maybe a month or so later than optimum. IAG is at what is probably its lowest point in a long and difficult recovery period, and the cycle is beginning to turn up in some critical areas of its business. It has a more dynamic management strategy in place under COO Mike Wilkins. It’s not – as Mr Strong noted yesterday – “sitting here for sale”.
The figures are compelling for QBE. A takeover would give it 44% of the motor market, 45% of personal lines and just about double its commercial portfolio to around 30% of the total market.
QBE says it stands to gain $300 million in annual synergies by 2010 and more than $400 million of diversification benefits from excess risk margins in outstanding claims.
Various analysts’ estimates suggest this deal could proceed for around $8 billion – a similar sum to the $7.9 billion paid by Suncorp for Promina last year.
That’s why QBE will not simply walk away. Mr Strong is making a strong case for future recovery. So it’s maybe now or never to grab a long-desired slice of the action in a country that presently accounts for just 20% of QBE’s annual profit.
The prospect is met with general acceptance by brokers, who generally don’t like underwriter consolidations. They were asked by insuranceNEWS.com.au to consider a market dominated by QBE, Suncorp, Allianz and Zurich.
There was some concern among brokers about the size of QBE’s potential market share, but generally they say it would be out of character for the company to throw its weight around in regard to premium rates and commission levels.
“QBE is a fine company,” one NSW broker said. “They have good policies and a brilliant claims service.”
That’s a fairly common theme with brokers. “QBE would have done their homework,” another NSW broker said. “They’re switched on. IAG has been suffering a bit of late, and they haven’t got their act together yet.”
All brokers contacted by insuranceNEWS.com.au said business with the two companies make up substantial portions of their income, and some expressed concern that QBE would hold more than 40% of the personal lines market and 30% of commercial lines.
“The big five will become the big four,” a Victorian broker said. “It’s one less insurer to deal with and that’s not necessarily good for the market. We’ve seen these mergers in the past and it’s something we hate.”
A NSW metropolitan broker agreed. “It will restrict the market.”
But most say a takeover would have little effect on premiums or commission levels. One NSW broker said there would still be plenty of competition around to keep QBE on its toes.
“If they did [raise rates unfairly], we’d go elsewhere,’ he said.
The Australian Securities and Investments Commission and the ACCC will run the rule over the transaction but indications are that it would pass unhindered.
The next couple of weeks will be interesting. IAG has advised shareholders to sit tight. We are probably in for a period of horse-trading and carefully written media releases.
QBE will need to play a tough negotiating hand to succeed. It will also need to move quickly with a new offer to overcome Mr Strong’s message to his huge retail shareholder base that their company is recovering and may well be worth hanging on to.
QBE doesn’t much like paying goodwill, but this time it might have to. The smart money says it will.