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A new world of opportunity Market consolidation – the opportunity for some

A new world of opportunity Market consolidation – the opportunity for some. FRANK O’HALLORAN CEO, QBE INSURANCE GROUP. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS. USA A number of mergers, e.g. St Paul/ Travellers Numerous acquisitions – Berkshire Hathaway, AIG

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A new world of opportunity Market consolidation – the opportunity for some

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  1. A new world of opportunityMarket consolidation – the opportunity for some FRANK O’HALLORAN CEO, QBE INSURANCE GROUP

  2. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS USA • A number of mergers, e.g. St Paul/ Travellers • Numerous acquisitions – Berkshire Hathaway, AIG • A number of failures, e.g. Reliance, Kemper

  3. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS USA (cont’d) • Some foreign insurers have withdrawn from the market or parts of the market, e.g. Generali • Number of reinsurers reduced from 65 to 35 – most have had rating downgrades

  4. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS United Kingdom • Lloyd’s syndicates reduced from around 200 to just over 60 • A number of failures, e.g. Independent, HIH • Numerous acquisitions and mergers, e.g. CU, GA, Norwich – QBE, Limit, Iron Trades • Number of companies operating in London company market reduced by approx two thirds • Numerous rating downgrades

  5. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS Japan • Numerous mergers of Japanese companies, e.g. Sumitomo/Mitsui • A number of foreign insurers have withdrawn from the market

  6. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS Western Europe • A number of acquisitions, e.g. Allianz/Euler • Numerous Rating downgrades • Problems with both sides of balance sheet • Low ROE’s

  7. CONSOLIDATION OF OUR INDUSTRY OVER THE PAST 10 YEARS Australia • Acquisitions – IAG/CGU, QBE, Mercantile Mutual and others, HIH/FAI • Failures HIH, GIO Re, New Cap Re • Top 5 control 80% of market versus 40% in 1995 • 4 of top 5 are now Australian listed companies versus 1 in 1995

  8. WHY THE CONSOLIDATION? • Inadequate returns for shareholders • Inadequate pricing • Broad coverages • Inadequate claims reserves • Poor investments • Availability of low level reinsurance

  9. WHY THE CONSOLIDATION? (cont’d) • Reinsurer failures • Finite reinsurance • Failure to understand implications of organic growth • Fraud • Poor management

  10. CURRENT POSITION - GENERALLY • Inadequate returns for shareholders (for many) • Reduced pricing for large property, energy, marine and liability risks • Inadequate claims reserves in many cases • Some changes to coverages • Some reinsurers getting into insurance (via fronting)

  11. CURRENT POSITION – GENERALLY (cont’d) • New underwriting agencies established over past 2 years usually by underwriters of insurers that are no longer writing business • Substantial reinsurance recoveries on insurer balance sheets • Reinsurers challenging more claims

  12. CURRENT POSITION – GENERALLY (cont’d) • Inflation on long tail claims in some countries still out of control (e.g. USA) – how do you price it? • Many new entrants into alternate risk and USA long tail business • Fall out from Spitzer and other authorities on commissions and finite reinsurance

  13. CURRENT POSITION – GENERALLY (cont’d) • Some Bermudian insurers anxious to use excess capital • Availability of quality reinsurance security has diminished • Failed underwriters still find it easy to change jobs

  14. CURRENT POSITION – SOME EXAMPLES • Quoted share price to book value • Most near book value • A few above two times book value • Return on Equity • Most in range of 0%-10% • A few above 20%

  15. CURRENT POSITION – SOME EXAMPLES (cont’d) • Asbestos and environmental claims reserves survival ratio • Most 5 to 15 times • A few above 30 times • Some above 50 times • USA insurers/reinsurers at an average of 8.5 times (2003 – US $30 billion reserves) • A considerable number of market announcements made in the past 18 months on upgrade of claims reserves

  16. CONCLUSION • The number of insurers and reinsurers around the world will continue to reduce • Creators of long term wealth (not short term) will continue to grow and prosper

  17. CONCLUSION (cont’d) • The only way to create long term wealth is to focus on the bottom line. This can only be achieved if you have sound risk management and a thorough knowledge of each of the key profit drivers, in particular the cost of claims • We all have a choice – we at QBE made our decision many years ago.

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