QBE: the safe insurer

The stock did almost nothing for over a year after our first positive recommendation, in late 1998. That was issue 17 and the company's shares were trading at $6.55. They are up 63.4% since then, so we are glad we stuck by them. The stock is up 0.5% since our last issue (Accumulate - $10.65) when we looked at the company as part of our defensive portfolio. So what has driven its success and more importantly can it be maintained?

In a way, QBE has something in common with a few high-profile dot.com companies – it has pursued growth by acquiring other companies. The dot.coms have fallen by the wayside, of course, while the insurer has maintained its momentum. The difference has been QBE's tight focus on paying the right price for top class assets.

That focus is what lay behind an excellent result from QBE for the year to December (it has just changed its balance date from 30 June). Sales in the period were up 66.2% on the previous calendar year to $3.46bn and NPAT was up 28% to $101m. A dividend of 16 cents was paid, franked to 30%.

They are impressive numbers you'll agree and were largely thanks to recent acquisitions in the UK – Limit and Iron Trades. Limit is an insurance and reinsurance underwriter, while Iron Trades has a significant share of the employers' liability market in the UK. Both are good fits.

Not all the company's deals are overseas, however. Just prior to the request for liquidation by the board of HIH, QBE struck a deal to establish a 60-40 joint venture with the troubled insurer to swallow its corporate insurance book. Negotiations continue with HIH's liquidators.

But there are dark clouds on the horizon for QBE. Investment income will suffer as global equity markets lose their lustre. QBE was able to lift investment income from $136m to $185m in the last half, but that was largely due to the UK acquisitions and the market positions that they came with. Tough equities markets globally will make it hard to grow earnings at the rate of the last few years.

The scope for more big purchases looks limited, with QBE managing director Frank O'Halloran pointing toward Asian markets as a potential source of new conquests, albeit smaller than those of the last couple of years. The washup is that we anticipate a period of consolidation for QBE, with no big acquisitions and quieter investment results. We are sticking with our ACCUMULATE recommendation because we expect that cost efficiencies and small acquisitions will continue to add value for QBE shareholders.