Case Study - QBE

Key points

1. Large international insurance operation with diverse geographic and product spread – scale and diversification is essential to produce consistent operating result in insurance business.
2. Strong track record in underwriting result – 2009 is the fifth year in succession QBE have reported combined operating ratio (COR) of less than 90%. Based on A.M. Best company result, the industry average COR from 05-09 was close to 100%.
3. Strong stable management team with long tenure – top 13 executives have been with QBE for an average of 16.5 years.
4. Track record in business acquisition and integration – opportunity to grow in both domestic and international markets.
5. Valuation is low with P/E at 11 and dividend yield at 6%.


QBE versus Warren Buffett’s Berkshire

Both Warren Buffett and Charlie Munger think highly of Berkshire’s insurance operation. Warren wrote in the recent 2009 Berkshire annual report: “Berkshire has the best large insurance operation in the world.”

However QBE’s underwriting result is much better than Berkshire’s, which was 95% in 2008 and 98% in 2009.

Why Warren likes his insurance operation so much? The answer lies in how the investment portfolio within the insurance operation is managed. Berkshire’s insurance investment portfolio allocated nearly half to equities, which tends to have higher return and play with the strength of Oracle of Omaha. In contrast, QBE is not confident in the equity space and only allocated 6.6% of its $23.4 billion investment portfolio to equities.

Dec 09	Berkshire Insurance	QBE
Total Investments	U$118billion	A$23.4billion
Equity Portion	U$56.5billion	A$1.55billion
Equity%	47.9%	6.6%

If QBE’s underwriting result can be combined with Warren Buffett’s investment expertise, that will be a dream insurance business!!

Key Risks

QBE is a high quality insurance operation as demonstrated by the excellent technical result. The company is confident to produce a COR less than 89% in 2010.

The key risk for the A$ denominated share price will be the currency movement. Generally the currency contribution to the company valuation tends to be negligible in the long term. However the short-term fluctuation can be very significant. QBE has over ¾ gross premium in foreign currencies. Hence the volatile A$ can heavily influence its reported result. The company is considering to use US$ as representing currency in future financial reports.