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
Key financial information Company overview Dec 2003 June 2004 The Group has A$bn US$bn A$bn US$bn total assets 20.5 14.3 25.8 18.0 net assets 3.4 2.4 3.7 2.6 market capitalisation 7.5 3.1 9.3 6.5 gross written premium 8.4 5.9 9.2* 6.4* NPAT $M 572 400 320** 223** Ratios 2003 combined operating ratio 93.8% insurance profit margin (% to NEP) 10.4% capital adequacy multiple 2.1x borrowings to shareholders funds 40.3% Half Yr. 30.6.04 90.8% 13.1% 1.8x 40.2% *annualised est. ** half year 3
Growth and insurance margin Company overview Gross written premium A$M COR % Insurance profit % Insurance profit A$M Total investments A$M 1994 1,180 100.2 7.4 72 1,755 1995 1,336 100.4 8.0 88 2,045 1996 1,561 99.3 8.4 101 2,694 1997 2,054 99.5 7.2 116 3,105 1998 2,409 100.3 7.7 147 3,505 1999 2,877 103.9 2.5 56 5,123 2000 4,406 102.5 5.4 186 6,986 2001 6,793 109.6 (2.6) (119) 8,724 2002 7,723 97.7 7.2 406 10,759 2003 8,350 93.8 10.4 627 11,106 2004* 9,200 <92.0 12.0 to 13.0 14,900 * target 4
History of growth full year to 31 December 2004 Gross written and net earned premium A$M 10,000 8,000 6,000 Compound average growth rates over last 12 years: - gross written premium 21.7% - net earned premium 20.1% Projected GWP A$9.2 Bn NEP A$6.8 Bn 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 $13 million) 8
Worldwide operations half year to 30 June 2004 GWP Growth * COR Net profit after tax and minorities 2004 2004 2004 2003 2004 2003 A$M % % % A$M A$M Australia 951 11 90.4 96.2 121 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 * 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%) Other 3.0% (4.9%) Accident and health 5.7% (6.4%) 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%) European company operations 28% (30%) the Americas 16% (15%) Percentages in parentheses represent comparisons at 30 June 2003 11
Net invested funds 30 June 2004 A$M % A$M % Cash 1,127 7.8 717 6.1 Short term money 3,960 27.4 3,499 29.5 Fixed interest securities and other 7,796 54.0 6,216 52.6 Equities 1,426 9.9 1,272 10.8 Property 126 0.9 119 1.0 Total investments and cash [2] 14,435 100.0 11,823 100.0 Borrowings [2] (1,452) (1,334) Net invested funds [1] 12,983 10,489 31 Dec 2003 [1] $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 [2] Excludes ABC investments and ABC securities (A$789 million) A$ m Strong operating cash flow June 2004 898 (½ year) Dec, 2003 2,089 Dec. 2002 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 $24.00 QBE Share Price Performance Including Reinvestment of Dividends ASX All Ordinaries Accumulation Index $18.00 QBE Share Price (A$) $12.00 $6.00 $0.00 Jun-84 Jun-86 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 13
Strategy focused on - Maximising regulatory capital adequacy and tier 1 and tier 2 balance - Maintaining our financial strength and credit rating - Meeting market expectations - Ensuring a competitive and realistic ROE Solvency and capital adequacy: = Year Shareholders Funds A$ m Capital & Solvency Solvency Ratio % Capital adequacy x MCR 2003 3,313 47.3 2.1 2004* 3,615 45.3 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) 2003 2002 2001 2000** 1999 1998 Reserve Release 44 12 162 15 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 2003 Target - Borrowings to shareholder funds 40.3% <40% - Debt leverage ratio 15.1% <15% - Sub debt ratio 16.0% <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