Hello to all SUN holders.QBE takeover talk continuing though...

Hello to all SUN holders.

QBE takeover talk continuing though we've heard it all before. SUN just too big and may require joint bid from bank and insurance company or, one of the majors.

Interesting to note this weeks media noting that QBE again looking at SUN and Macquarie poised to make some big acquisition. I've heard this before, QBE take the insurance side and Macquarie dress up and onsell the bankign side which is a highly prized possession.

Wilson HTM have come up with $19.50 as a takeover price and I for one would be very happy to sell out.

Here is today's article...

QBE Insurance's decision to pull the plug on an $8.6 billion bid for IAG and tell the market that it has turned its attention to other acquisitions has sparked speculation that it is doing some preliminary work on the struggling Suncorp. Like IAG, Suncorp has a weak share price, investors are unhappy with management and the board, and its $7.9 billion acquisition of Promina insurance group in 2007 will be earnings per share dilutive until 2010.

On a share price basis, Suncorp's merger with Promina has been nothing short of a disaster.

At the time it bid for Promina it told the market it would result in a combined entity with 8 million customers and a market value of about $20 billion (it is now about $13.7 billion).

Put another way, the market has wiped off almost three-quarters of the value of the bid. There are few acquisitions in the history of financial institutions that have met with such scepticism by the market.

QBE's highly respected management team and board, led by Frank O'Halloran, is believed to have looked at Suncorp on more than one occasion but could never justify the price.

But that was then.

Since Westpac made a bid for St George Bank, the next game in town, apart from removing the Four Pillars policy, is for a bank to buy either Suncorp or BankWest, both of which operate in the two strongest states.

Suncorp is a listed entity with an open register, while BankWest is 100 per cent owned by HBOS. For QBE, it could do a deal with one of the foreign banks, or Commonwealth Bank, ANZ or National Australia Bank, to sell Suncorp's banking operations.

Wilson HTM banking analyst Brett Le Mesurier crunched the numbers for The Australian and calculated that QBE could afford to make a $19.50 a share bid for Suncorp, which is a 35 per cent premium over Friday's close.

Le Mesurier says by taking into account synergy benefits equal to 25 per cent to 30 per cent of the Suncorp cost base, a $19.50 bid leaves $1.2 billion in benefits for the acquirers.

At $20.75 it wipes out all the benefits.

Le Mesurier concludes that QBE could pay up to $10.5 billion for the general insurer. This would result in no decline in its earnings per share after receiving synergy benefits equal to 25 per cent of the Suncorp general insurance cost base.

A bank could pay up to $9.6 billion for the Suncorp banking and wealth management business. A $19.50 bid price would represent 13.4 times 2009 earnings and 3.4 times net tangible assets.

A combined Suncorp general insurance/QBE would create an insurance giant with a market cap well north of $30 billion, and increase its index weighting.

This makes life easy for QBE, which would be looking to ditch the banking side of the business.

QBE will have also learned from its failure with the IAG bid and the seeming success of Westpac's bid for St George that the way to get a board onside is to offer a few board seats and promise to keep the brands.

Another option is to sit it out and wait for IAG to come back on the market. Since the IAG board rejected QBE's offer, the share price has gone backwards, and despite the resignation of chief executive Michael Hawker and promises to cut costs and review the entire business, shareholders remain unimpressed.

If IAG has any more hiccups, the share price will fall further, and QBE will be able to replicate a strategy O'Halloran used in 1999 when he made an unsolicited offer for British-based insurance group Limit.

The first attempt was spurned by the Limit board on the basis that the offer was too cheap, but he returned to Limit less than nine months later with a slightly lower offer and won the company.

The fact is that O'Halloran has spent the better part of his reign doing offshore acquisitions, but as the Australian dollar continues to rise, now hovering around US96c, QBE would greatly benefit from having a far larger Australian earnings profile as a percentage of overall earnings than is currently the case. To put it into perspective, less than 20 per cent of QBE's business is in Australia and the Asia-Pacific region, and the rest is written in the US, Britain and Asia. Almost 50 per cent of its earnings are in US dollars, which will play havoc with its earnings.

The upshot is, every time the US dollar falls by 1 per cent, it hurts earnings by 0.5 per cent.

Research from JPMorgan's US team suggests that rates remain under pressure in the US. In particular, rates in the small to medium markets, where QBE operates, are under pressure.

Research suggests that rates fell by 5.5 per cent in January across middle-market, small commercial and personal lines.

According to JP Morgan's US team's P&C Agent and Broker Survey, rates in the commercial lines alone fell by 7.7 per cent during the January renewals and are expected to fall by a further 5.6 per cent in the coming 12 months. In addition, capacity in the US market is still healthy with little sign that competition is slowing. Similarly JP Morgan's European team has indicated that rates are still under pressure across Europe.

Furthermore, a lot of QBE's business is long-tail insurance (claims that take years to come to the insurer's attention), while much of Suncorp's portfolio of brands is short tail (insurance claims that take a short time to claim such as car insurance or house insurance) and so it would broaden QBE's portfolio.

An acquisition of Suncorp would also strengthen QBE's position in New Zealand, and turn QBE from the number four player to the number two player.

Suncorp owns Vero New Zealand, which has about 30 per cent of the New Zealand general insurance market and has been rumoured to be slashing prices to win New Zealand business.

In sharp contrast, QBE's New Zealand business has largely avoided participating in price discounting.

It writes very little domestic business and, unlike some of its competitors, its staff in NZ are not under pressure to write a certain amount of insurance business each month. Furthermore, unlike some of its competitors, QBE's business is not outsourced to underwriting agencies whose mindset is to write business at any cost.

The upshot is New Zealand is one of QBE's best performing businesses. It generates a return on equity of about 65 per cent and its insurance margin is an estimated 20 per cent.

If O'Halloran could buy Suncorp and take its Vero business in New Zealand and extract similar ROE's and insurance margins, it would give a big boost to QBE's group profit. In the current cycle, insurance margins and profit, two of the key indicators of the health of an insurance company, are being crunched.

Economic growth is slowing in Australia and New Zealand, and while margins are in a trough, they are bound to turn around in the next few years.

If QBE wants to continue to post strong profit growth, a substantial acquisition is an attractive option.

O'Halloran is now over 60 and the market has long speculated the timing of his retirement. With more than 10 years under his belt as boss of QBE, some believe 2008 will be the year he chooses to go -- before the global insurance market gets too soft and premiums fall too far. No doubt he will want to go on a high with a big Australian acquisition under his belt.