QBE buys PMI Mortgage Insurance for $1 billion

Katherine Jimenez | August 15, 2008| The Australian

QBE Insurance is set to become the biggest mortgage insurer in Australia after securing a deal to buy PMI Mortgage Insurance for more than $1 billion.

QBE last night revealed it had signed definitive agreements to acquire PMI Mortgage Insurance in Australia and New Zealand and had entered into an in principle agreement to acquire PMI Mortgage Insurance Asia.

Sale talks between the two parties have been under way for several weeks, following a decision by PMI's struggling parent company a few months ago to refocus capital on its American operations and begin a sale process for the Australian operation. The Australian operation is considered to be the jewel in PMI Group's crown, with an AA minus rating.

"The purchase of PMI in Australia and Asia is in line with QBE's strategy of diversification," said highly regarded QBE chief Frank O'Halloran, who will consider his future at the end of the year.

"The acquisitions have been structured to allow us to meet or exceed our minimum profit requirements even in the event of extremely adverse economic conditions over the next three years."

Under the deal, QBE will pay 80 per cent in cash at completion of the transaction from existing capital and $300 million in short-term funding.

The balance will be paid in the form of a promissory note payable in three years at an accumulating interest of 3.8 per cent a year.

The promissory note, together with accumulated interest, will be paid to PMI only "if the claims ratio on policies in force is less than 50 per cent of the US GAAP unearned premium liability of $525 million at June 30, 2008".

The note will be reduced by $1 for each $1 the claims ratio is more than 50 per cent. QBE said PMI would contribute $50 million to the cost of reinsurance protection above the unearned premium liability.

The acquisition is expected to be profitable in the first year.

PMI writes about 40 per cent of the residential mortgage insurance market in Australia and is expected to generate gross written premiums of $200 million in 2008, including $5 million through its New Zealand branch.

That result is $63 million less than the previous year, largely due to the fall in lending, and is also down on the $218 million reported in 2003. Net tangible assets (US GAAP) at June 30 were $969 million.

PMI Asia is projected to deliver gross written premium of $12 million.

Mr O'Halloran made a point of saying that PMI had a 40-year track record of consistent profitability in lenders' residential mortgage insurance.

"In the 15 years to June 2008, which includes two significant downturns in the Australian housing market, gross incurred claims were $345 million against gross earned premium of $1.68 billion."

PMI Australia and PMI Asia booked an operating profit after tax using US GAAP of $109 million in 2007.

QBE said it would provide support to PMI Australia and PMI Asia to maintain Standard & Poor's AA- rating. It does not expect the acquisition to have a significant effect on its capital adequacy.

The acquisition is due to be completed next month and is subject to regulatory approval.

Shares in QBE closed down 40c to $25.50 before the announcement.