QBE's tasty sliver of American pie

QBE Insurance has done its widely-flagged deal with Bank of America and made its eleventh acquisition in the US and 45th in the past decade and a half. The deal, however, isn't quite what was anticipated and isn't as big as had been expected.

That is typical of QBE, which is a conservative organisation. It might be exceptionally good at assessing and managing and pricing risk, but it has never had much of an appetite for taking risk itself, which explains why despite the wave of recent catastrophes it has been exposed to it was able to foreshadow a 2010 result in line with the market's expectation.

The group had been expected to announce the acquisition of the larger part of Bank of America's Balboa Insurance subsidiary's portfolio at a cost of between about $US1.5 billion and $US2 billion, which would probably have required an equity raising.

Instead it announced it had signed a 10-year distribution agreement with BofA for lender-placed and voluntary homeowners, contents, motor and other related consumer lines. The deal, however, excludes the lenders' mortgage insurance products that had been expected to be the core of the purchase and will cost QBE a more modest $US700 million. The deal will add about $A1.3 billion of net earned premium to QBE's existing net earned premium income of $US11.4 billion.

Lender-placed insurance – insurance the lender imposes on customers without cover for the assets mortgaged – is relatively expensive and QBE says the $US1.2 billion of liabilities and matching assets being transferred from Balboa are expected to generate an insurance margin, after amortisation of the costs of the distribution rights and costs, slightly higher than it achieves from the rest of its portfolio.

The 2010 result, while down 17 per cent to "around $US1.28 billion", has the usual hallmarks of a QBE result, with gross written premium up 21 per cent, net earned premium up 20 per cent, a combined operating ratio of 89.7 per cent and an underwriting profit up 18 per cent.

As its chief executive Frank O'Halloran said today, QBE consistently grows premium income by around 15 per cent each year and produces a combined operating ratio of less than 90 per cent, a remarkably high-quality performance when measured against its peers.

Part of the reason that QBE has been able to get through one of the worst years for catastrophes in more than a decade – storms, floods and cyclones in Australia and earthquakes in New Zealand and Chile among them – is that it rigorously contains its exposures with extensive reinsurance arrangements.

It has put together a new global reinsurance program for the next three years, which is says will reduce its annual reinsurance costs by about $US300 million and improve underwriting margins by 0.5 per cent, and says that the new arrangements and the deal with BofA means it maximum retention from the largest realistic catastrophe scenario will be lower at around 4 per cent of net earned premium this year.

For this year it is targeting 20 per cent-plus growth in net earned premium, a combined operating ratio between 87 per cent and 90 per cent and an insurance margin of 15 per cent to 18 per cent – business as usual. It is also still on the lookout for acquisitions, which is also very much business as usual for QBE.