QBE Raises Insurance Australia Bid to A 8 7 Billion Update4

QBE Insurance Group Ltd. raised its hostile bid for Insurance Australia Group Ltd. for a second time, offering A$8.7 billion ($8.3 billion) to keep alive the nation's biggest insurance takeover.

QBE, Australia's largest property and casualty insurer, offered the equivalent of A$4.60 a share for Insurance Australia's stock, increasing the cash component to 90 cents, it said in a statement. Insurance Australia Chairman James Strong said the 6 percent higher bid is still ``short of fair value.''

Insurance Australia, the nation's biggest auto and home insurer, declined the most in more than two months in Sydney on speculation the bid may fail. Insurance Australia's profit has fallen for three straight years while QBE doubled earnings and market value by acquiring rivals at home and abroad.

``It looks like there's a good chance now that QBE will walk away from the bid, at least for the time being,'' said Richard Wallace, who helps manage $138 million at Wallace Funds Management in Sydney and this year sold his holdings in both companies. ``There will now be enormous pressure on IAG's board to justify their position to shareholders.''

Insurance Australia's board is willing to discuss a higher bid, the Sydney-based company said in a statement following QBE's revised offer.

QBE Chief Executive Officer Frank O'Halloran and Chairman John Cloney made their first approach on April 10, with a confidential proposal offering Insurance Australia the equivalent of A$3.75 a share. That was rejected, as was its first increased bid, valued at A$4.33 a share based on the closing price May 16.

Final Offer

Insurance Australia stock, which rebounded this year on speculation the company would be taken over, fell 20 cents, or 4.5 percent, to A$4.23 at 2:48 p.m. in Sydney. QBE rose 13 cents, or 0.5 percent, to A$25.68. The stock has risen 9.6 percent since QBE's approaches to Insurance Australia were made public April 15.

``The recent rise in QBE's share price means that our final proposal still meets QBE's acquisition criteria including earnings per share accretive in year one,'' O'Halloran said in the statement.

Insurance Australia said last month storms and higher borrowing costs will harm profitability. Storms cost the company about A$135 million between January and early April, while higher borrowing costs may cut insurance profit by A$55 million.

QBE, which gets more than 70 percent of earnings overseas, has a market value of A$22.9 billion, almost three times that of Insurance Australia.

The risk of QBE defaulting on its debt, as measured by credit-default swaps on the company's bonds, rose about 10 basis points to 83 basis points at 12:15 p.m. in Sydney, JPMorgan Chase & Co. prices show. This indicates investors in debt markets may expect QBE's bid to succeed, requiring it to borrow more to fund the transaction and putting its credit rating at risk.

The rise in the price of the credit-default swaps means it costs $83,000 to protect $10 million of QBE's debt from default for five years.

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QBE Raises Insurance Australia Bid to A 8 7 Billion Update4