QBE INSURANCE GROUP LIMITED MARKET ANNOUNCEMENTS

Transcription

1 USA EXPANSION QBE INSURANCE GROUP LIMITED MARKET ANNOUNCEMENTS QBE Insurance Group today announced the acquisition of the Praetorian Financial Group ( PFG ) in the United States from Hannover Rueckversicherung AG ( Hannover Re ). The acquisition is complementary to QBE s existing business in the US. The acquisition is subject to regulatory approvals. QBE anticipates completion of the acquisition in the second quarter of PFG will add around US$1.4 billion to gross premium income on an annualised basis. The purchase price is US$0.8 billion and net assets using US GAAP are estimated to be US$0.46 billion on completion. The funding of the acquisition will be from internal excess capital, dividend reinvestment and short-term debt. PFG is based in New York and writes 37 specialist property and casualty insurance programs through various managing agents (78%) and specialist retail agency business through brokers (22%). PFG was created by Hannover Re in 2005 to selectively renew business from Clarendon Insurance Group, a subsidiary of Hannover Re. Clarendon now focuses on terminated programs and commodity business. The combined operating ratio for the business written into PFG for 2005 was 81.7% and the projected combined operating ratio for 2006 is 78.1%. PFG currently reinsures 50% of its business by way of quota share to Hannover Re and affiliates. QBE intends to cancel these reinsurance arrangements at closing and inject around US$200 million additional capital into PFG. The acquisition will form part of QBE the Americas Division under Tim Kenny, President and CEO. Frank O Halloran, QBE Group s Chief Executive Officer said, We have been fortunate to secure an excellent insurance business in the US which is highly complementary to our existing profitable specialist insurance program business. He added, The acquisition meets our established criteria; in particular, earnings per share accretion in year one. Subject to no unforeseen circumstances, we anticipate that PFG will produce a profit after tax of US$150 million in the first full year before the cost of funding the acquisition, the capital injection and synergies. Tim Kenny said, The acquisition is consistent with our strategy of building our business in the specialist insurance program and small to medium regional markets of the US. It follows the successful acquisitions of National Farmers Union Property and Casualty Company in 2005 and the One Beacon Agriculture division earlier this year. Details of the acquisition are provided in the Supplementary Information attached RESULTS UPDATE QBE also advised that, subject to large losses and catastrophes between now and the end of this year being within expectations, it anticipates its insurance profit to be around 20% of net earned premium and profit after tax to be up around 30% for This compares to previous guidance of an insurance profit margin of 17% to 18% and profit after tax up by more than 15%. Frank O Halloran stated, The significant improvement in profit outlook is due to better than expected market conditions and lower large losses and catastrophes for 2006 to date. For further information, please contact: Frank O Halloran, Chief Executive Officer Neil Drabsch, Chief Financial Officer Tim Kenny, President and CEO, the Americas December 2006

2 MARKET ANNOUNCEMENT SUPPLEMENTARY INFORMATION ACQUISITION OF PRAETORIAN FINANCIAL GROUP INC. 13 December 2006

3 US acquisition strategy The acquisition of the Praetorian Financial Group is highly complementary to QBE s existing business in the US Our growth strategy in the US is to focus on acquiring primary insurance businesses (i.e. general insurance) that will enhance our existing business by targeting: - businesses which can meet our profit expectations in the short and long term - small to medium regional business - high customer retention portfolios through long-standing agency/broker relationships - increase our geographic and product diversity with limited increase in catastrophe exposure - quality management teams and underwriters - specialist business - development of middle market property and casualty business Increased scale in the US is targeted to provide synergies in IT, infrastructure, reinsurance, premises and capital costs 1

4 Praetorian history Praetorian Financial Group Inc. ( Praetorian ) is Hannover Re s recently established US speciality primary insurance platform. Praetorian, established in 2005, includes the following insurance companies: - Insurance Company of Hannover (renamed Praetorian Insurance Company ( PIC )), an Illinois domiciled entity licenced to write admitted business in all 50 states - Redland Insurance Company ( RIC ) a New Jersey domiciled entity licenced to write admitted business in 45 states - Praetorian Speciality Insurance Company a Delaware domiciled entity authorised to write non-admitted business in 37 states Hannover has provided run off protection on net claims reserves for PIC and RIC for 2003 and prior years. 2

5 Hannover Re corporate structure Praetorian acquisition 4 Hannover Re Hannover Finance, Inc. Praetorian Financial Group Clarendon Insurance Group Praetorian Insurance Company Redland Insurance Company Clarendon National Insurance Company Praetorian Specialty Insurance Company Clarendon America Insurance Company Clarendon Select Insurance Company Harbor Specialty Insurance Company Companies to be acquired by QBE 3

6 Praetorian overview Praetorian underwrites 37 specialist insurance programs producing an estimated US$1.4 billion annual gross premium income. This compares with the 260 programs written by Clarendon at its peak. In addition, Praetorian assumed Clarendon s Chicago-based broker sourced specialist agency business of profitable inland marine, fine arts and other primary insurance business estimated to produce US$300 million annualised gross written premium. Included in the above is approximately US$200 million of fee based fronted primary insurance. Fronting business is expected to be cancelled by QBE. Praetorian has over 200 staff with its head office located in New York and distribution channels through managing general agents and specialist retail agents through brokers in the US. 4

7 Praetorian overview Praetorian s underwriting strategy focuses on providing primary insurance cover to small and mid-sized accounts with an emphasis on specialty business and generally with low sum insured limits. Property and casualty lines are targeted which provide diversity through customer type, product line, geographic region, non-admitted and admitted business and distribution spread throughout the US with limited exposure to catastrophes. Gross premium income (source: Praetorian) Commercial auto Workers compensation Commercial liability Specialist auto Fronted business (fee driven) Commercial property Total 2005 US$ m ,519 Forecast 2006 US$ m ,714 The workers compensation portfolio is mainly comprised of small to medium sized clients such as trade association members with average premiums around US$5,000 5

8 Portfolio mix Distribution Source: Praetorian acquisition Class of Business: Open Sourced 22% (Retail agencies) Commercial Auto 22% Commercial Casualty 22% Fee Driven 13% Program Manager 78% Commercial Property 12% Specialty Auto 10% Workers Comp 22% Source: Praetorian 2005 gross written premium 6

9 Transaction highlights Praetorian acquisition Acquisition of Praetorian Financial Group Inc and subsidiary companies: - Praetorian Insurance Company - Redland Insurance Company - Praetorian Specialty Insurance Company Cost: US$800 million Net assets of US$467 million acquired using US GAAP including US$86 million of intangibles Likely completion: second quarter 2007 with QBE consolidation expected effective 1 April 2007 QBE has option to cancel the 50% quota share reinsurance with Hannover Re on completion which will require around US$200 million capital top-up for Praetorian Indemnities from Hannover Re continue for 2003 and prior year loss reserves and other indemnities to apply to 2004, 2005 and 2006 underwriting year loss developments if quota share reinsurance is not cancelled 7

10 Praetorian acquisition Acquisition and new Praetorian capital expected to be funded by: Cash from internal sources Dividend reinvestment Short term debt A$ m ,280 Group debt to equity ratio to remain around 40% with hybrid debt converted as necessary to maintain key ratios Post completion of the transaction, QBE s group capital adequacy expected to be around 1.9 times the minimum capital requirement as measured using the Australian regulator s (APRA) risk-based criteria as applies to Australian licenced insurers 8

11 Financials Underwriting results - Praetorian Notes: (2) The combined operating ratio ( COR ) i.e. ratio of claims, commissions and expenses to net earned premium for 2006 is made up of: Praetorian acquisition Gross written premium (1) 1,412 1,519 1,714 Net written premium (3) Net earned premium Combined operating ratio (2) 89.6% 81.7% 78.1% (1) As if 2004 and 2005 underwriting results are based on the Praetorian selected business assuming it renewed the business in those years With quota share Without quota share % % Claims incurred Commissions incurred Expenses incurred COR (1) As if 2004 US$ m (3) 2006 net written premium is after quota share reinsurance premium of US$743 million to Hannover Re and affiliates (1) As if 2005 US$ m Forecast 2006 US$ m Source: Praetorian 9

12 Financials Praetorian acquisition Projected Praetorian balance sheet on completion Assets: Investments Receivables and other assets Intangibles US$ bn Liabilities: Insurance provisions Borrowings Other liabilities Net assets Assets include US$200 million additional capital introduced by QBE on completion Investments are expected to be in high quality short duration cash and fixed interest securities Completion is estimated effective 1 April

13 Praetorian acquisition 12 Benefits to QBE Up to US$1.4 billion of profitable renewal portfolios (assuming fee based and some other business is cancelled) Seasoned management team Business model similar to QBE the Americas Program Division Programs complement existing QBE program and class of business mix Strengthens our geographic spread with limited catastrophe exposure Synergies expected from IT infrastructure, premises, reinsurance arrangements and capital management Will strengthen QBE s position as a major specialty program insurer in the U.S. 11

14 QBE Americas - US program business Praetorian acquisition QBE writes 24 specialist insurance programs through managing agents in the US. Gross written premium income for QBE Americas US program business for 2006 is approximately US$1.2 billion. Combined operating ratios for this business for the past four underwriting years has been around 85% QBE has adopted a stringent approach to due diligence on new programs and comprehensive audits of each existing program on a regular basis in all facets including underwriting, pricing, claims, compliance, actuarial, finance and internal controls. Praetorian has similar processes in place 12

15 Full year Praetorian targets Praetorian acquisition Portfolio mix Forecast 2006 First full year target US$ m US$ m % Commercial automobile Specialty automobile Workers compensation Commercial property Commercial liability Fronted business (fee driven) Total 1,714 1, Ongoing external reinsurance costs not expected to exceed 10% of gross written premium assuming cancellation of the Hannover Re quota share reinsurance. Synergies of US$15 million after tax expected by end 2008 and include savings on IT, infrastructure, premises and reinsurance arrangements Targets for the first full year after completion are: combined operating ratio 87.5%; insurance margin 17%; net earned premium US$1.3 billion (assuming cancellation of quota share to Hannover Re) Net profit after tax in the first year before cost of funding, new capital and synergies estimated to exceed US$150 million 13