One of the largest property and casualty insurers of U.S.
) has announced that it will buy ItauSegurosSolucoesCorporativas
SA. This is the property and casualty (P&C) insurance unit of
ItaúUnibanco S.A., one of the largest private banks of Brazil.
ItauSeguros specializes in providing high-risk corporate and
reinsurance. The segment provides insurance to projects related to
oil and gas and infrastructure and is dependent on economic growth.
The business hit an unfavorable patch since the economic growth
rate for the past four years trailed the government average target
growth rate of 4.5%.
ItauUnibanco Holding S.A. is exiting this unit to focus on growing
its core business of selling insurance to retail-banking customers
that offers higher return on equity. Moreover, the capital
generated from the divestiture will fortify the bank's capital
enabling it to comply with the Basel III capital requirement.
For Swiss-based ACE Limited, the Brazilian insurance market is a
lucrative opportunity. The company foresees huge demand high-risk
corporate and reinsurance demand driven by rapid economic expansion
which Brazil is expected to witness. The country has been often
criticized for its weak infrastructure.
The president of Brazil, Dilma Rousseff, last year announced plans
to make huge investments in infrastructure projects, such as sewage
systems and road paving. Other projects to refurbish the country's
transport network, increase electricity supplies, and develop vast
offshore petroleum reserves are also being worked out.
ACE Ltd sees a huge growth opportunity and is therefore willing
to even pay a price of $685 million which amounts to four times the
book value of the company, which has a short operating history
dating back to 2006.
Post buyout, ACE Ltd which already provides commercial and personal
property and casualty insurance, personal accident and supplemental
health insurance, reinsurance and life insurance in Brazil, will
rise in rank by becoming the country's largest commercial P&C
insurer. The company has a strong international business profile
with operations in 54 countries.
The acquisition which will likely close by early next year will be
accretive to ACE Ltd's 2015 earnings and equip it with 320
employees and more than 600 brokers.
A Compelling Inorganic Story
ACE Limited has always considered acquisitions as a prudent
strategy to boost growth and expand its global footprint. Over the
years, ACE Limited has made significant acquisitions to diversify
its product offerings. Last month, the company acquired a 32.17%
stake in The Siam Commercial Samaggi Insurance PCL (Samaggi).
Prior to this in Apr 2013 ACE Limited acquired Fianzas Monterrey, a
leading surety lines company in Mexico for $293 million in cash.
Indonesia's PT Asuransi Jaya Proteksi was also taken over for $100
million in cash in Jan 2013. Acquisitions boost ACE's premiums and
take it closer, a step at a time, to its long-term ROE goal of 15%.
Supported by Flush Cash Position
ACE Ltd has been strengthening its balance sheet to travel the
inorganic path and perk up operational performance. At the
end of first quarter 2014, the company's cash balance
improved 46% over the 2013 level and retained earnings grew 5.3%.
ACE Ltd has also been effectively lowering its leverage ratios.
Other Stocks to Consider
ACE Ltd carries a Zacks Rank # 3(Hold). Better-ranked property and
casualty stocks include
W.R. Berkley Corp.
Endurance Specialty Holdings Ltd.
Hallmark Financial Services Inc.
). All these stocks sport a Zacks Rank #1 (Strong Buy).
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