asx market announcement - market release- for asx

8/7/2019 ASX Market Announcement - Market Release- FOR ASX

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QBE Insurance Group Limited

ABN 28 008 485 014

Head Office82 Pitt Street

SYDNEY NSW 2000Australia

Postal AddressBox 82 GPO SYDNEY 2001Telephone: +61 (2) 9375 4444Facsimile: +61 (2) 9231 6104DX 10171, Sydney Stock Exchange

4 February 2011

The ManagerCompany AnnouncementsASX LimitedLevel 6Exchange Centre20 Bridge Street

SYDNEY NSW 2000

Dear Sir/Madam,

Market Release on:

2010 results guidance; Long term distribution agreement with Bank of America in the US and

acquisition of Balboa insurance portfolio;

2011 worldwide reinsurance protections;

Queensland, New South Wales and Victorian catastrophes; and

2011 financial targets

Please find attached an announcement for release to the market.

Yours faithfully,

Duncan Ramsay

Company Secretary

Encl.


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MARKET RELEASE4 February 2011

2010 net profit after tax in line with market expectations after a recordunderwriting profit but a lower insurance margin from continuing lowinterest yields in the US and UK

Long term distribution agreement with Bank of America in the US addingan estimated US$1.3 billion of annualised net earned premium

Comprehensive worldwide reinsurance programme in place for 2011-2013

Strong growth and outlook for 2011

2010 RESULTS GUIDANCE

QBE is in the process of finalising its financial accounts and audit for the year ending 31December 2010. Results are scheduled for release on 28 February 2011.

QBE expects to report improved net profit after tax (NPAT) in the second half comparedwith the same period last year, with full year NPAT to be in line with market consensus ofaround US$1.28 billion. Other key financial metrics, which are subject to detailed reviewand audit, include:

Gross written premium up 21% to US$13.6 billion; Net earned premium up 20% to US$11.4 billion; Net claims ratio down from 60.3% to 59.8%; Net commissions and expenses ratio up from 29.3% to 29.9%; Combined operating ratio of 89.7%; Underwriting profit up 18% to US$1.17 billion; Insurance profit margin of 15.0%; Investment income, before foreign exchange gains, down 41% to US$518

million; Foreign exchange gains down 51% to US$141 million;

Net profit after tax and exceptional items down 17% to around US$1.28 billion;and

Probability of adequacy of outstanding claims >89%.

QBEs diverse portfolios and operations have enabled the Group to produce an excellentcombined operating ratio with a slightly lower claims ratio. This has been achieved despitethe 2010 financial year including a frequency of small and large weather-related andearthquake catastrophe claims not seen since 1999. Catastrophe events included Perth andMelbourne storms, Chile earthquake, Christchurch earthquake and Queensland storms inlate December.


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The slightly lower claims ratio compared with last year was achieved due to a reduction inattritional claims and reflects the benefits of the Groups diverse portfolios and extensive

reinsurance arrangements. The net commissions and expenses ratio was higher than lastyear due to transformational IT projects, lower income from owned underwriting agenciesdue to more business being written by QBE at reduced commissions and increasedpremium taxes and Lloyds levies.

The insurance profit margin is below the bottom end of company guidance of 16% 18%.This is attributable to the higher than expected frequency of small and large catastropheclaims through the second half and the continuing low interest yields in the US, UK andEurope. Our investment yield, including foreign exchange gains, on the investments ofUS$17 billion set aside to meet policyholders obligations decreased from 4.5% for 2009 to3.4%.

Subject to the Boards consideration of the financial statements, the final dividend for 2010is expected to be maintained at 66 cents per share and will be franked at 10%. Thedividend reinvestment programmes continue at a 2.5% discount.

Mr Frank OHalloran, QBEs Group Chief Executive Officer, said QBEs underwritingperformance continues to outperform the large majority of our global peers and theAustralian market and is very satisfying in a year of increased frequency of small and largecatastrophes.

Our strategy for profitable growth from acquisitions and market leading results remainsunchanged. Over the past six years we have increased premium income by an average of15% per annum and produced combined operating ratios of less than 90% in each of thoseyears.

LONG TERM DISTRIBUTION AGREEMENT WITH BANK OF AMERICA IN THE US ANDACQUISITION OF BALBOA INSURANCE PORTFOLIO

QBE has entered into an initial ten year distribution agreement with Bank of America forlender placed and voluntary homeowners, contents, motor and other related consumer linesand associated services. Lenders mortgage insurance is not included. As part of theagreements, QBE will assume the outstanding claims and unearned premium liabilities ofBank of Americas wholly owned subsidiary, Balboa Insurance Company and affiliatedentities in return for matching assets (portfolio transfer). The agreements, which are

subject to regulatory approvals, are expected to be completed in the second quarter, withthe portfolio transfer effective on 1 April 2011.

QBE estimates that the annualised gross earned premium and net earned premium fromthe distribution agreement will be around US$1.5 billion and US$1.3 billion respectively.We expect that the annualised insurance profit margin before tax, after catastropheallowances, amortization of cost of the distribution rights and portfolio transfer and theexpenses of distribution, will be slightly higher than that currently achieved on QBEsworldwide net earned premium and within the range of 15% to 20% of net earned premium.


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The agreements involve the following:

1. the assumption of insurance liabilities of Balboa and its affiliates of approximatelyUS$1.2 billion matched by tangible assets of an equivalent amount; and

2. the upfront payment to Bank of America of US$700 million for the distribution rightsand the portfolio transfer, which will be substantially amortised in the first threeyears.

The funding of the distribution rights payment initially will be from new short term bankfacilities which are intended to be replaced at the appropriate time by Tier 2 debt securitiesacceptable to regulators and ratings agencies. The expected profits for 2011 andreinvestment of the 2010 final dividend through dividend reinvestment and a dividendunderwriting arrangement will preserve the existing capital adequacy.Mr Frank OHalloran said The distribution agreement with Bank of America in the US andthe portfolio transfer provide QBE with a specialist personal lines portfolio which iscomplementary to the Sterling National business acquired in 2008. QBEs business in theUS will now be made up of five major segments, namely, lender placed and voluntaryhomeowners, contents and motor primarily through financial institutions (GWP of US$2.1billion), specialty insurance programmes (US$1.5 billion), crop insurance (US$1.2 billion),regional agency and broker (US$1.3 billion) and reinsurance (US$0.5 billion).

He added QBEs strategy in the US of specialisation for the majority of business hasenabled it to outperform the market in recent years, with 2010 producing a preliminarycombined operating ratio of 89.7% and a 19% increase in underwriting profit to US$309million. We now have sizeable market shares in the lender placed homeowners, specialtyinsurance programme and crop sectors.

2011 WORLDWIDE REINSURANCE PROTECTIONS

As previously foreshadowed, QBE has implemented an initiative to leverage its global scalein acquiring reinsurance for its diverse portfolios. Benefits to QBE will be an overall lowerreinsurance cost, greater risk coverage and an improvement in the combined operatingratio.

QBE has purchased a comprehensive worldwide reinsurance programme for risk and

catastrophe claims in 2011. Acquisitions above US$250 million of premium income made in2011 require prior approval from reinsurers before they are included in the worldwidecovers.

The worldwide covers will reduce the cost of annual reinsurance protections by close toUS$300 million, with an estimated improvement in underwriting margins of 0.5%. Thecovers include all classes of business with the exception of inwards reinsurance, cropinsurance, business written in Lloyds syndicate 1036 and lenders mortgage insurance.Programme details include:

(i) Worldwide catastrophesA single layer of US$1.3 billion excess of US$200 million with total pre-paid cover

purchased of US$2.6 billion. This cover is 100% placed for 2011 and 80% for 2012and 2013, with the balance likely to be placed on a one year basis.


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(ii) Worldwide per riskA single layer of US$200 million excess of US$50 million with US$1 billion of

aggregate cover. The cover includes a clash of retentions from various classes ofbusiness. This cover is placed 100% for 2011 and 82.5% for 2012 and 2013, withthe balance likely to be placed on a one year basis.

(iii) Worldwide catastrophe and risk aggregate coverUS$170 million excess of US$800 million for an accumulation of catastrophe andindividual risk claims above US$5 million. The aggregate limit for individual riskclaims is US$300 million. The cover includes inward reinsurance and syndicate1036. This cover is 100% placed for 2011.

(iv) Worldwide risk aggregate coverUS$200 million excess of US$400 million for an accumulation of individual risk

claims above US$5 million from the ground up. It is 87.25% placed for 2011, 2012and 2013.

QBE has also purchased additional high level catastrophe covers for Australia and NewZealand as well as renewing protections for the business not included in the worldwidecovers. QBEs captive reinsurer, Equator Re, has purchased catastrophe protection ofUS$100 million in excess of US$100 million, 90% placed.

The distribution agreement and portfolio transfer with Bank of America and the newworldwide covers means that QBEs maximum retention from the largest realisticcatastrophe scenario will be lower than 2010 at around 4.0% of net earned premium for2011.

Mr Frank OHalloran said The covers purchased are one of the most comprehensiveavailable in the market place.

He added This has been achieved with a significant reduction in cost of reinsurance, morecomprehensive reinsurance and expected benefit to profitability.

QUEENSLAND, NSW AND VICTORIAN CATASTROPHES

The estimated net cost to QBE for the Queensland catastrophe in late 2010 is US$45million; the three catastrophes in Queensland, Northern New South Wales and Victoria in

January 2011 is around US$100 million; and the very preliminary estimate of Cyclone Yasion 3 February 2011 is around US$100 million. The claims for 2011 are well within thesignificant allowances for large risk and catastrophe claims included in our 2011 businessplans, which after the worldwide aggregate protections are close to US$1.5 billion.

Mr Frank OHalloran said We have had 4,500 claims reported to date from the Decemberand January storms. As was the case with the Victorian bush fires and the Melbourne andPerth storms, QBE has mobilised staff from around Australia and overseas to support ourmany policyholders in Queensland.


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2011 FINANCIAL TARGETS

The acquisitions made in 2010 and announced in 2011 to date and the new worldwidereinsurance covers will assist premium growth and profitability in 2011. We have allowed forcancellation of some unprofitable business and re-underwriting of some of our propertyexposure. Our targets, allowing for stable bond and currency markets, are:

Gross earned premium growth 17% - 20% Net earned premium growth 20% - 23% Combined operating ratio 87% - 90% Insurance profit margin 15% - 18% Benchmark APRA regulatory MCR multiple > 1.5 times

The above targets are subject to the usual caveats, particularly large individual risk andcatastrophe claims not exceeding the substantial allowances in our business plans and fromthe aggregate covers purchased, and existing interest yields not falling from current levels.

Mr OHalloran said We will continue with our current strategy of growth by acquisition andfocus on market leading underwriting performance.

He added Our short duration conservative investment strategy means that any rise ininterest rates in the US, UK and Europe will be beneficial for our profitability and our capitaladequacy.

For further information, please contact:

Investor Relations QBE Insurance Group LimitedTel: +612 9375 4636 ABN 28 008 485 [email protected] 82 Pitt Street

SYDNEY NSW 2000Australia

Media EnquiriesDavid SymonsTel: +61 [0] 410 559 [email protected]

QBE Insurance Group Limited is listed on the Australian Securities Exchange, is recognisedas one of the top 25 global insurance and reinsurance companies as measured by netearned premium and has operations in 49 countries.

[see attached additional information]


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Additional Information

Bank of AmericaBank of America is one of the world's largest financial institutions, serving individual consumers,small- and middle-market businesses and large corporations with a full range of banking, investing,asset management and other financial and risk management products and services. The companyprovides unmatched convenience in the United States, serving approximately 57 million consumerand small business relationships with more than 5,800 retail banking offices and approximately18,000 ATMs and award-winning online banking with 29 million active users. Bank of America isamong the world's leading wealth management companies and is a global leader in corporate andinvestment banking and trading across a broad range of asset classes, serving corporations,governments, institutions and individuals around the world. Bank of America offers industry-leadingsupport to approximately 4 million small business owners through a suite of innovative, easy-to-useonline products and services. The company serves clients through operations in more than 40

countries. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow JonesIndustrial Average and is listed on the New York Stock Exchange.

Balboa Insurance Group (BIG)For over 60 years, BIG has provided risk management and loss mitigation solutions to financialinstitutions in the mortgage and auto finance industries.

On 1 July 2008, BIGs former parent, Countrywide Financial Corporation, was acquired by Bank ofAmerica. On 1 January 2009, all BIG entities became part of Bank of America Insurance Group.

BIG is licensed in all 50 states with the exception of Louisiana, where it is licensed for surplus linesonly. BIG is headquartered in Irvine, California.

Companies in the BIG general insurance group: Balboa Insurance Company Meritplan Insurance Company Newport Insurance Company Newport E & S Insurance Company Balboa Warranty Services Company

Lender Products Lender Placed Insurance Programs

o Lender placed flood and flood gapo Lender placed fireo Lender placed wind and hailstorm

o Real Estate Owned property and liability coverageo State of the art insurance tracking

Auto Risk Mitigationo Collateral Protection Insurance (for the lender in the event no other insurance is in place

at the time of the loss)o RepoSource (proprietary insurance recovery program)o TrackSource (proprietary insurance process flow tracking system)

Consumer Products Homeowners Insurance Renter Insurance Automobile Insurance


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Selected financial information - Balboa Insurance Company and subsidiariesMeritplan Insurance and Newport Insurance

Income Statement

2007 2008 2009

US$m US$m US$m

Gross written premium 1,767 1,919 1,942

Net earned premium 1,228 1,613 1,737

Losses & loss adjustment expenses 551 662 643

Underwriting expenses 408 408 386

Underwriting result 269 543 708Investment income 72 118 47

Profit before tax 341 661 755

Tax 138 234 312

Profit after tax 203 427 443

Ratios

Claims ratio 44.9% 41.0% 37.0%

Expense ratio 33.2% 25.3% 22.2%

Combined ratio 78.1% 66.3% 59.2%

Net Earned Premiums by Product

Total2009

US$m

Fire 611

Allied Lines 536

Homeowners 174Auto physical damage 284

Private passenger auto liability 43

Other 89

Total 1,737

Balance Sheet

2008 2009US$m US$m

Assets

Investments & cash 2,361 2,963

Premiums receivable 110 46Investment income 16 24Taxes 60 89

Other assets 58 112

Total assets 2,605 3,234

Liabilities

Unearned premiums 850 919Outstanding claims 279 308

Taxes 65 104Other liabilities 153 161

Total liabilities 1,347 1,492

Shareholders equity 1,258 1,742

Balboa Insurance

Source: Balboa Insurance Group NAIC filings

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