Markets: QBE’s Manila thriller

Morgan Stanley analyst Daniel Toohey says cost cutting at insurer QBE, led by savings from its Philippine office, may be better than expected.

Morgan Stanley analyst Daniel Toohey has listened to QBE’s management expound on their plans and has come away impressed.

Toohey says QBE will make $US250 million worth of cost cuts by the end of the 2015 financial year. The insurer’s information technology redesign has delivered savings through efficiencies. There seems to be no “nasty surprises", says Toohey, with regard to insurance claims.

“QBE seems to have a clear line of sight to restoring its balance sheet strength, with initiatives reducing borrowings, optimising low interest rates, exiting non-core assets, commutating non-core run-off portfolios, potentially the troubled US program book, and additional reinsurance,” he says.

Toohey does not recommend investors buy or sell the stock. He views the insurance industry as “attractive”.

A key driver in QBE’s cost cutting is via its office in the Philippine capital Manila.

"It is taking less than one Manila staff to replace one Australian staff with the benefit of improved processes,” says Toohey. “Wage inflation risks may be higher in Manila than Australia, but given Australia’s higher base and history of ‘mandated’ wage inflation, QBE does not see this as an issue medium term.”

For QBE an added advantage to the Manila operation is that its working hours are similar to Australia’s. This will help to recruit and retain staff, says Toohey, as work increases in Manila. QBE’s US back office jobs are also moving to Manila.

“QBE was assuming 75 per cent retrenchment for displaced Australian staff but the cost is likely to be much lower due to natural attrition,” says Toohey. “This could see the overall QBE project cost below the budgeted $US310 million."

AT 1151 AEST QBE shares were down 25 cents, or 1.6 per cent, to $15.69. The stock has risen 18 per cent in the last 12 months compared with the S&P/ASX200 Index that has gained 15 per cent during the same period.

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