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QBE INSURANCE GROUP LIMITED
JP Morgan
AUSTRALASIAN INVESTMENT CONFERENCE
SINGAPORE
OCTOBER 2004
Presenter: Neil Drabsch, CFO
1
Company overview
• QBE is an Australian-based general insurance and
reinsurance group and one of the world’s 25 largest
insurers and reinsurers as measured by net written
premium
– Established in 1886
– Listed on ASX as QBE in 1973 following merger of three
related companies
– Operates in 36 countries
• QBE specialises in writing mainly commercial lines in
general insurance (75%) and inward reinsurance (25%)
• QBE does not write any material life insurance or generally
undertake funds management on behalf of other
companies or individuals
• S&P A+ (Stable) insurer financial strength and counterparty
credit rating for main insurance subsidiaries.
2
Company overview
Key financial information
The Group has
•
•
•
•
•
total assets
net assets
market capitalisation
gross written premium
NPAT $M
Dec 2003
A$bn
US$bn
20.5
3.4
7.5
8.4
572
Ratios
• combined operating ratio
• insurance profit margin (% to NEP)
• capital adequacy multiple
• borrowings to shareholders’ funds
*annualised est.
** half year
14.3
2.4
3.1
5.9
400
2003
93.8%
10.4%
2.1x
40.3%
June 2004
A$bn
US$bn
25.8
3.7
9.3
9.2*
320**
18.0
2.6
6.5
6.4*
223**
Half Yr.
30.6.04
90.8%
13.1%
1.8x
40.2%
3
Company overview
Growth and insurance margin
Gross written
premium
A$M
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004*
1,180
1,336
1,561
2,054
2,409
2,877
4,406
6,793
7,723
8,350
9,200
COR
%
100.2
100.4
99.3
99.5
100.3
103.9
102.5
109.6
97.7
93.8
<92.0
Insurance
profit
%
Insurance
profit
A$M
7.4
72
8.0
88
8.4
101
7.2
116
7.7
147
2.5
56
5.4
186
(2.6)
(119)
7.2
406
10.4
627
12.0 to 13.0
Total
investments
A$M
1,755
2,045
2,694
3,105
3,505
5,123
6,986
8,724
10,759
11,106
14,900
* target
4
History of growth
full year to 31 December 2004
Gross written and net earned premium
Compound average growth rates over last 12 years:
- gross written premium 21.7%
- net earned premium 20.1%
A$M
Projected
10,000
GWP A$9.2 Bn
8,000
NEP A$6.8 Bn
6,000
4,000
2,000
0
1992
1994
1996
1998
2000
2002
2004
5
Growth strategy
•
Organic premium growth pursued in hardening insurance environment in
markets where QBE has specialised expertise and pricing power
•
A large part of QBE’s growth over the past 15 years is from acquisitions - over 78
acquisitions in 20 years
– These include teams of underwriters, corporate structures, books of business
and renewal rights
Acquisition strategy is targeted at:
– Bolt-on portfolios and underwriters to enhance existing businesses
– Target acquisition of “renewal books” - eliminate historically poor
performing risks
– Acquire at bottom of cycle or distressed businesses
– Generally low goodwill- although prepared to pay for strategic portfolios or
business segments to enhance diversity e.g. Limit, Iron Trades, Trade
Indemnity, JV in Australia
– EPS accretive year one
– Introduce QBE culture ASAP
•
There are a number of acquisition opportunities currently being examined
6
Corporate strategy
• QBE’s underlying business strategy is to maintain
operations in the key global insurance markets and for
selected lines of business to be a lead underwriter, setting
rates and conditions in the markets in which it operates
• QBE’s strategy of diversification, by product and
geographic exposure, is key to managing our insurance
and reinsurance risks and has been a vital ingredient in
the Group’s success
• Carefully manage risk for both the asset and liability side
of the balance sheet
• Relatively modest insurance net retentions
• Grow the business both organically and through
acquisitions of insurance businesses, portfolios and teams
of underwriters
• Embedded QBE culture throughout the organisation
applying proven effective risk management practices and
controls
7
Highlights
half year to 30 June 2004
• Net profit after tax up 33% to $320 million (2003 : $241
million)
• Insurance profit up 58% to $409 million (2003 : $259
million) or 13.1% of net earned premium (2003 : 8.4%)
• Cash flow from operations up 24% to $898 million
(2003 : $726 million)
• Return on equity increased to 18.5% of average
shareholders’ funds (2003 : 16.0%)
• Diluted earnings per share including hybrid securities
increased 28% from 32.7 cents to 41.8 cents per share
• Investment income excluding realised and unrealised
gains and losses on investments increased 6% to $186
million (2003: $176 million)
• Investment income includes realised and unrealised
losses before tax of $66 million (2003: gains of $13
million)
8
Worldwide operations
half year to 30 June 2004
GWP Growth *
Net profit
after tax and
minorities
COR
2004
A$M
951
2004
%
11
2004
%
90.4
2003
%
96.2
2004
A$M
121
2003
A$M
75
Asia-Pacific
247
(10)
88.0
93.3
15
9
the Americas
692
(5)
91.8
95.7
22
19
European companies
1,371
(5)
92.1
96.4
90
66
Lloyd’s division
1,502
(1)
90.1
96.2
72
72
Group
4,763
(1)
90.8
96.0
320
241
General insurance
3,460
4
91.5
96.9
226
174
Inward reinsurance **
1,303
(13)
89.1
92.7
94
67
Group
4,763
(1)
90.8
96.0
320
241
Australia
* The stronger A$ reduced reported growth by approximately 10%
** Inward reinsurance reduced as a proportion of GWP - 27% compared with 31% in 2003. Excluding facultative
reinsurance, inward reinsurance business is 24% (2003 : 25%) of total GWP
9
Worldwide portfolio mix
half year to 30 June 2004
gross earned premium
Professional indemnity
9.2% (7.9%)
Marine and aviation
6.2% (8.6%)
Workers’ compensation
10.6% (8.7%)
Financial and credit
3.0% (3.6%)
Property
32.4% (35.5%)
Liability
18.4% (15.1%)
Accident and health
Other
5.7% (6.4%)
3.0% (4.9%) Motor and motor
casualty 11.5% (9.3%)
Short tail 49% (54%), Long tail 51% (46%)
Growth in long tail business is mainly due to higher premium rate
increases on the longer tail classes of business
Percentages in parentheses represent 30 June 2003 comparisons
10
Geographical diversification
Gross earned premium
half year to 30 June 2004
Lloyd’s division
27% (27%)
Australia
23% (21%)
Asia-Pacific
6% (7%)
the Americas
16% (15%)
European company operations
28% (30%)
Percentages in parentheses represent comparisons at 30 June 2003
11
Net invested funds
30 June 2004
%
A$M
%
1,127
3,960
7,796
1,426
126
7.8
27.4
54.0
9.9
0.9
717
3,499
6,216
1,272
119
6.1
29.5
52.6
10.8
1.0
14,435
100.0
11,823
100.0
Cash
Short term money
Fixed interest securities and other
Equities
Property
Total investments and cash
Borrowings
Net invested funds
[2]
[1]
[2]
[1]
[2]
A$M
31 Dec 2003
(1,452)
12,983
(1,334)
10,489
$0.8 billion of consideration in respect of the acquisition of the remaining 50% share in QBE Mercantile Mutual
joint venture was settled on 1 July 2004
Excludes ABC investments and ABC securities (A$789 million)
A$’m
Strong operating cash flow
June 2004
Dec, 2003
Dec. 2002
898 (½ year)
2,089
1,511
12
Historical share price performance
An investment in QBE has outperformed the Australian All Ordinaries Index and
inflation with a compound average annual growth rate of 21.9% over 5 years,
21.1% over 10 years and 23.7% over 20 years to 30 June 2004
QBE Share Price Performance
QBE Share Price Performance Including Reinvestment of Dividends
$24.00
ASX All Ordinaries Accumulation Index
QBE Share Price (A$)
$18.00
$12.00
$6.00
$0.00
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
13
Capital & Solvency
•
Strategy focused on
-
•
Maximising regulatory capital adequacy and tier 1 and tier 2 balance
Maintaining our financial strength and credit rating
Meeting market expectations
Ensuring a competitive and realistic ROE
Solvency and capital adequacy:
Year
2003
2004*
=
•
•
Shareholders’
Funds
A$’m
3,313
3,615
Solvency
Ratio
%
47.3
45.3
Capital
adequacy
x MCR
2.1
1.8
*at 30 June 2004
Convert LYONs securities (A$725 million* at 30 June 2004)
64% or A$465 million expected to convert to capital in Sept./Oct. 2004
36% or A$260 million to convert on or before December 2005
(*Note: A$59 million under Australian Accounting Standards treated
as equity)
The ratio of borrowings to shareholders’ funds is expected to remain within the
range of 40% to 42% by year end
14
Insurance liabilities - reserve adequacy
• Outstanding claims – 93.7% probability of adequacy at 30
June 2004 exceeds Group benchmark of 85%
• Level of prudential margins increased in 2003 and half year to
June 2004, despite the impact of the stronger A$
• The Group’s main asbestos-related claims exposure is in
Australia – UK and US exposure is minimal – Group survival
ratio* is over 24 times
• QBE’s record of claims development over the past 5 years
(undiscounted) discloses a positive release of prior year
reserves for each of the 5 years:
(A$m)
Reserve Release
2003
2002
2001
44
12
162
2000**
15
1999
1998
33
14
* survival ratio is the ratio of net provisions held to the average of the past three years’ net
claims paid
** 18 month period
15
Acquisitions 2004
• Acquisition of the remaining 50% in the QBE Mercantile
Mutual joint venture, ING’s general insurance subsidiaries in
Australia and Zurich's insurance business in Singapore
completed on 30 June 2004
• Will add approximately A$325 million of gross written
premium in the second half of 2004 and A$750 million in
2005
• Synergies of approximately A$30 million before tax
expected by 2006 from ING acquisition
• Ensign motor business acquired in February 2004 added
A$153 million of gross written premium in first half
• Syndicate 386 capacity of A$125 million purchased in
September auctions
• Confident that acquisitions will be earnings per share
accretive in second half of 2004 and going forward
• Acquisitions funded by conversion of A$465 million of
hybrid securities and issue of Senior Convertible Securities
US$375 million and Sterling 5-year senior debt £175 million
16
European operations
restructure
• Two European operations merged into one under
Steven Burns, previously CEO of Lloyd's division
• Two marine syndicates merged and will be
incorporated under umbrella syndicate 2999
• Central and Eastern Europe operations now report to
Vince McLenaghan, MD of Asia-Pacific operations
• Benefits will include:
– more focussed strategy and management of
underwriting
– more flexible use of capital
– lower maximum event retention
– synergies from merging back office functions – plans
currently being developed
17
Market conditions
• 4 years of cumulative premium rate increases for most
commercial lines of business
• Significant gains on terms and conditions across all
portfolios – e.g. higher deductibles
• More competition emerging, particularly for larger risks –
however not irrational
• Recent US hurricane losses for QBE are within allowances
included in insurance liabilities at 30 June 2004
18
Market conditions
Commercial US P & C market average premium rate
changes by account size
19
Market conditions
20
Business strategy & 2004 targets
•
Maximise opportunities in current market
– overall premium rate increases expected to meet claims inflation in 2004
– improved policy terms and conditions gained over the last 2 years to
continue
– maintain high customer retention ratio
– consider acquisitions as they arise
•
Target insurance margin of between 12.0% to 13.0%
•
Achieve gross written and net earned premium growth of around 10% and 12.5%
respectively
•
Increase profit after tax by more than 10%
•
Achieve return on equity in excess of 1.5 times WACC
•
Reinsurance costs to reduce to around 21% of gross earned premium
•
Further reduce risk profile
•
Continue focus on aggregate exposures and reduce maximum event retention
•
Further reduce inwards reinsurance as percentage of total premium income target around 20% of gross earned premium
21
Business strategy & 2004 targets
•
Continue focus on expense management - expense ratio target 12.4% or
less
•
Increase net invested funds by over A$1.7 billion to >A$14 billion from
strong cash flow and acquisitions (subject to A$ value changes)
•
Continue low risk strategy for investments - target gross investment yield
of 4%
•
Maintain Group capital adequacy of at least 1.5 times minimum
requirement – expect at least 1.8 times to prevail through 2004
•
Maintain borrowing and capital adequacy ratios within S&P AA rating
category
-
Borrowings to shareholder funds
Debt leverage ratio
Sub debt ratio
2003
Target
40.3%
15.1%
16.0%
<40%
<15%
<15%
•
Tax expense rate target of 22% of net profit before tax
•
Target an S&P AA rating
•
Continue to invest in our people
22