FRANKFURT (Reuters) - German reinsurer Munich Re will pay $742 million in cash to buy American International Group Inc's HSB Group as a way to expand its U.S. business, the companies said on Monday.
HSB's main asset is the Hartford Steam Boiler Inspection and Insurance Co, which provides coverage for a range of risks, including the cost of lost business and repairs when equipment breaks down.
In 2007, HSB posted an after-tax profit of $158 million and had gross premiums of $904 million.
"The purchase seems low-priced and matches (Munich Re's) growth strategy in the United States well," LBBW analyst Robert Mazzuoli said in a note.
"But we hope that Munich Re can buy HSB without burdens inherited from AIG."
AIG, which bought Hartford Steam Boiler for around $1.2 billion in 2000, is under pressure to sell assets around the world to pay off a huge U.S. government loan.
Munich Re said a clause in its purchase agreement would protect it from further investment losses at HSB. "If (HSB's) equity capital increases, Munich Re will pay more, and if capital declines, it will pay less," Chief Financial Officer Joerg Schneider told journalists in a conference call.
Munich Re said it planned to finance the transaction, which it expected to close at the end of the first quarter of 2009, entirely from existing resources.
HSB would start boosting Munich Re's earnings next year, even if no synergies were realized by then, Schneider said.
"We estimate Munich Re's earnings per share will rise by some 0.30 euros due to the HSB earnings after deducting financing costs," Merck Finck analyst Konrad Becker said in a note, adding he saw only limited synergy potential.
CFO Schneider said the purchase would help boost revenue in the medium term and was not driven by a push for cost cuts.
"Owing to our strong capital base, this acquisition will not affect our share buy-back program or the planned dividend of 5.50 euros per share for the financial year 2008," Schneider said in a statement.
Munich Re's shares were up 0.4 percent at 106.78 euros at 8 a.m. EST, while the German blue-chip DAX index <.GDAXI> was down 0.5 percent.
(Reporting by Michael Shields and Maria Sheahan in Frankfurt, Irene Preisinger in Munich and Paritosh Bansal in New York; Editing by Jon Loades-Carter)