QBE's $2 Billion Raising

Sydney, Nov 27, 2008 (ABN Newswire) - QBE obviously has no plans at the moment to return to Insurance Australia Group after revealing plans to raise $2 billion through a share placement to pay for a number of acquisitions and to improve the quality of the company's capital.

At the same time the plunging Australian dollar has given a substantial boost to QBE's premium income in Aussie dollars, with a 25% rise predicted for 2008.

QBE sold its offer to major investors at a 10% discount to yesterday's suspended share price of $23, with the placement thought to have been at about $20.50 a share. the shares resume trading today.

The company said in yesterday's 146 page statement and accounts for the capital raising that for 2008, the targets advised to the market in August have been upgraded to 7.5% growth in gross written premium or A$13.3 billion; and 10% growth in net earned premium or A$11.2 billion if the value of the Australian dollar continues at current levels for the remainder of the year.

"For 2009, based on an average Australian dollar exchange rate equal to US 70 cents and Sterling 40 pence and anticipated organic growth and acquisitions in 2008, gross written premium is expected to be around A$16.5 billion and net earned premium A$14.0 billion.

"Net earned premium for 2009 is targeted to increase by 25% compared with our 2008 forecast, "the company said.

With around 80% of QBE's gross written premium in currencies other than the Australian dollar, the weaker Australian dollar, particularly compared with the US dollar and Sterling, has had a very significant positive impact on QBE's premium income.

It will go a long way to offsetting the adverse impact on the returns from the company's reserves and float.

QBE said at the June halfway mark that the acquisitions made in the first half would add "around $160 million" to profit on an after tax basis.

But it did say that net profit after tax for the half year "was affected by substantially weaker equity markets and the stronger Australian dollar".

QBE posted a 7% fall in net profits in the June half $859 million in August on declining equity markets. 

Earnings from insurance rose 6% during the first half to $A1.16 billion, with insurance profit as a proportion of net earned premiums dropping to 21.8% from 22.2% in the first half of 2007. 

Lower returns from investments and the impact of the high Australian dollar cut the higher insurance earnings.

Realised and unrealised losses on equities were $86 million compared with gains of $82 million for the same period last year, representing a net adverse movement of $122 million after tax. The stronger Australian dollar adversely impacted profit after tax by an estimated $74 million.

Clearly the Australian dollar has turned around and has now provided a substantial benefit.

There will be some benefit from acquisitions made after June 30, but the big imponderable will be the impact of the dramatic slump in all markets since June 30.

Insurers have two sources of profit: the surplus they get from premium income less operating expenses and claims actual and provided for, and on the other side, the returns from investing the cash from reserves, premiums the float and claims not paid in financial markets.

While QBE's premium income has been boosted by the weaker Aussie dollar (nicely offsetting an expected fall in premium growth in the US), the huge falls in markets will have played havoc with the group's investment returns.

Such was the nature of the slump in the markets, that there was nowhere to hide, even for a sophisticated investor like QBE. Hedging would have helped, but eventually the real world has to be faced and besides the plunge in day to day cash interest rates, sometimes to almost nothing in the US for three month money, would have slashed returns as well.

The sharp fall in equities markets and the fall in interest rates in the US, Australia, the UK and other major markets will drain overall earnings.

QBE warned at the June half year report in August:

"The recent reduction in interest rates on our substantial US and UK cash and fixed interest portfolios will continue to impact investment income in the next six months. We had previously advised that our target gross investment yield for 2008 was 5.5%, including a 5% capital appreciation on equities.

"We will need a major rebound in the equity markets in the next few months to achieve our target. 

"We are still cautiously optimistic of achieving our overall budgeted cash and fixed interest yields; however, foreign exchange volatility may again impact our investment income in the second half."

There has been no rebound, in fact there has been a savage fall as trillions of dollars of value have been destroyed.

Financial markets have worsened considerably since June 30 and the comments from the company and its hopes for the second half have been dashed by the slump in share markets and the rapid cuts in official interest rates (and in Government bond and note yields, especially in the US and UK).

The company made no mention in its statement yesterday on what has happened to investment income since June 30.

QBE has made 12 acquisitions so far this year up till the latest. The one miss was the failed $A8.7 billion attempt to snaffle Insurance Australia Group by trying to seduce it into talks. IAG said no, twice and QBE eventually walked.

It then bought the Asian and Australian operations of US mortgage insurer, PMI for just over $A1 billion. The second biggest US mortgage group was withdrawing from many overseas markets and QBE caught it as it was about to depart Australia and some Asian markets.

Yesterday QBE said it had acquired three underwriting agencies in the US, the largest being ZCS for an up-front payment of $US575 million.

ZCS specialises in and has sizeable market shares in property insurance and voluntary homeowners' insurance, and is not involved with lenders' mortgage insurance, QBE said.

QBE has also acquired two further underwriting agencies in the US and one in Europe, as well as a renewal rights portfolio in the US.

The five acquisitions are expected to produce a gross written premium of close to $US525 million ($807 million) and profit after tax of around $US175 million ($269 million), QBE said in its statement to the ASX.

But perhaps the most interesting part of the announcement yesterday was what QBE plans to do with the rest of the money.

"QBE proposes to conduct an accelerated, fully underwritten share placement to institutional investors to raise A$2 billion.

"QBE also proposes to conduct a non-underwritten share purchase plan for eligible retail shareholders to raise up to A$100 million.

"QBE also intends to buy back up to A$1.25 billion in face value of its tier 1 perpetual securities issued in 2006 and 2007 in exchange for five year senior notes. The buy back will be offered at a discount to face value."

CEO Frank O'Halloran, said "The capital raising and the other capital management initiatives will assist in funding the acquisitions and our 2009 growth as well as provide further balance sheet strength and flexibility for other opportunities".

QBE said the initiatives will "further strengthen QBE's capital base by replacing hybrid tier 1 capital with ordinary equity and thereby positioning QBE for future growth; Standard & Poor's A+ financial strength rating expected to be maintained for main insurance subsidiaries

"Subject to the level of acceptance of the debt exchange offer, we expect QBE's capital adequacy multiple using APRA's risk weighted capital model applicable to Australian insurers to be around 2.0 times the minimum capital requirement," the company said in its statement.

That means it's using the climate rush to cash to fund further growth in the US market (and get a welcome benefit from more US dollar income being converted into more weaker Australian dollars, while using the capital it is raising to improve the strength rating of its capital base.

It will buy the Perpetual securities back at a price less than it paid for them.

QBE shares were halted yesterday for 24 hours to allow the capital raising to proceed.


 
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