Financial Statements and Investment Analysis of QBE Insurance Company

This study evaluates the financial performance of QBE Insurance Company by analyzing their financial statements through computing ratios. The analysis shows that the management in QBE Group has effective asset management due to which its return on assets is constantly positive.

BAP42A
Financial Statements and Investments
Analysis Group Assignment Semester
3, 2018
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Student name:
Student number
Subject name:
Subject code: BAP42A
Case topic: Financial Statements and Investment Analysis
Date of Submission: 30-Oct-18
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Table of Contents
Overview....................................................................................................................................2
Assessment of Major Changes in financial performance of QBE Insurance Company............4
Key Financial Ratios..................................................................................................................4
Liquidity Ratios......................................................................................................................5
Profitability Ratios.................................................................................................................5
Activity analysis ratio............................................................................................................7
Capital Structure Analysis Ratios..........................................................................................8
Capital Market Analysis Ratios.............................................................................................9
Overall Assessment and future prospects of QEB Company...................................................10
References................................................................................................................................11
Appendices...............................................................................................................................12
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EXECUTIVE SUMMARY
QBE Insurance Company is recognized as the world’s top 20 reinsurance and general
insurance companies. Moreover, it is known for its functions in all the important insurance
marketplaces. Furthermore, QBE Insurance Corporation is listed on the Australian Securities
Exchange and is head offices are established in Sydney. However, over 14,000 people within
36 countries are employed by them. The company presents commercial, personal, and general
expertise insurance services. The provided study is based on an evaluation of company
performance by analyzing their financial statements by computing ratios. The financial
analysis conducted in the study shows that the management in QBE Group has effective asset
management due to which its return on assets is constantly positive.
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Introduction
QBE Insurance Group Limited provides a guarantee for the general insurance and reinsurance
risks in the whole world. The insurance group functions all the way through European
Operations North American Operations, Latin American Operations, Australian & New
Zealand Operations, Equator Re segments and Asia Pacific Operations (QBE Insurance
Group Annual report, 2015). Additionally, it manages Lloyd’s organization and moreover
provides investment organization services. The corporation was introduced in 1886, and its
head offices are situated in Sydney, Australia. The present study is based on the evaluation of
core business activities and assessing their financial performance over the years.
1. Core Business Activities of QEB Insurance Group
The Australian administration needs to have definite kind of insurance to defend the public,
and moreover, lenders need insurance to defend their investment. While on the other hand,
other strategies might be a cautious investment that is based on the kind of business people
run.
Required Insurance
In case the person works inside the company as an employer than the authority of the
company needs to provide definite types of insurance (Pilbeam, 2018). At a minimum,
company pay for workers' compensation and unemployment insurance. These companies
offer financial safety to the employees in case they are hurt while working or lost their job.
Moreover, employees do not pay any premiums for such policies. Additionally, they could
deduct the premiums if employees pay as a business expense at the time of filing taxes.
Liability Insurance
The company offers the Liability insurance policies that pay the lawful fees and judgments
connected with negligence, accidents, and professional errors. The administration needs
several business and experts to hold liability insurance (Henderson, Peirson and Howieson,
2015). For instance, trucking business should have common liability insurance, and
physicians ought to have professional liability insurance. In case the notice is given to the
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individual by the lawsuit, then the main role of the company is to appoint lawyers to stand
them in court.
Property Insurance
Insurance companies have a provision for Property insurance which is of three kinds: special,
basic and broad. In accordance with the insurance website, the following items can be
covered by policies, for example, machinery, business’s buildings, inventory and even
companies copyrights and trademarks. Moreover, the major function of the company is to
compensate for damages or losses after storm damage or robbery. Company anticipate
changing some of this trade in the second half and upholding their development in a gross
written premium over 10% for the complete year.
2. Assessment of Major Changes in the financial performance of QBE
Insurance Company
OEB Insurance Company has produced an additional outstanding guarantee result, in spite of
an increase in huge individual risk and disasters claims as of diverse climate connected losses
and somewhat lower on the whole average premium rates. The mutual functioning ratio for
the half year was 82.1% in contrast with 82.4% for the similar phase last year. On the other
hand Insurance profit, however, the % of net earned premium was 28.5% in contrast with
25.8% for the similar phase last year (QBE Insurance Group Limited Annual Report, 2017).
Further, it has been measured that Gross written premium enlarged 12% to $1,480 million
and net earned premium was up 7% to $1,131 million. The strong premium expansion for the
half year pursues the procurement of extra sharing channels in the precedent 12 months and
the move of portfolios by mediators from additional insurers to QBE. Consumer preservation
persists to be high. On the whole premium rate reductions on transformed trade were less
than 1% and however, that is which more improved than company predictable at the
commencement of the year. Furthermore, it is examined that the commission ratio enlarged to
some extent from 12.7% to 12.8%. As well as the expense ratio enlarged from 12.4% to
14.4% because of higher costs connected with an innovative planned proposal to get better
efficiencies and their interface with mediators going ahead in advance.
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3. Key Financial Ratios
Year 2017 2016
Liquidity Ratio
Current Ratio 0.26 0.43
Quick Ratio 0.26 0.43
Operating cash Flow Ratio 0.06 0.26
Liquidity Ratios
Narayanaswamy, (2017) asserts that the current ratio is applied in order to ascertain that
organization’s capability of paying off its short-term liabilities with assets. Further, higher the
current ratio more the firm is able to pay off its liabilities. In the present case, the current ratio
of QBE is below 1 indicates that the firm will not be capable of paying back its debt in case
they came due at that point in time. Quick ratio refers to the organisation’s capability of
fulfilling its short-term debt with its liquid assets. Further, companies having quick ratio 1 or
above indicates that firm is completely equipped with enough assets that can be immediately
liquidated to pay back its current liabilities. The Quick Ratio of QBE Insurance Group Ltd is
less than 1, which signifies that company is not able of paying back its obligations in short-
term and vice versa.
Operating Cash Flow Ratio
With the help of this ratio, it can be computed that how well a company will pay its current
liabilities from the cash which is generated from its operations. Utilising cash in contrast to
income is sometimes a better sign since cash is how bills are generally paid off (Ehiedu,
2014). Operating cash flow ratio higher than 1 signifies that organisation has produced more
cash in a period than what is required to pay back its current liabilities. Moreover, the ratio of
the company in the present case is less than 1 in both the year which it has generated less
cash in a period than what is needed to pay off its current liabilities.
Profitability Ratios
Year 2017 2016
Profitability Ratio
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Return on Equity -0.14 0.08
Return on Assets -0.01 0.02
(Net profit/ Total Assets)
Gross Profit -0.67 7.53
(Gross profit / Revenue *100)
Net Profit -5.71 7.50
(Net Profit/ Revenue *100)
Return on Investment -3.40% 2.50%
(Gain from investment - the cost of
investment/cost of investment)
Shareholder's equity 8901 10340
(Total Assets -Total Liabilities)(In US $
Million)
Return on assets ratio can be defined as the indicator of how gainfully an organisation is
comparative to its total assets. Further, it provides an idea as to how effective administration
is at utilising its assets to produce income. Furthermore, the company has a positive return to
assets ratio in both the year that is 0.14 in 2017 and 0.08 in 2016 which indicates an
increasing profit tendency (QBE Insurance Group Limited, 2017).
Diamond and Kashyap (2016) stated that return on equity ratio reflects the amount of net
income returned as a percentage of shareholder equity. A company with a higher return on
equity indicates how well it gives return to its shareholders. QBE Insurance Group Ltd has a
lower return on equity ratio as compared to last year which indicates that the company is not
giving well to its shareholders.
Return on investment ratio is a performance measure which is utilised to assess the
effectiveness of an investment (Rosemann and vom Brocke, 2015.). It tries to directly
calculate the amount of return on a specific investment, comparative to the investment’s cost.
The ratio represents that QBE’s return on investment has increased in 2017 that is from
2.50% to 3.40% which implies that the company is operating efficiently. Gross Profit Margin
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represents the per cent of total sales revenue that the organisation maintains after incurring
the direct costs associated with manufacturing the products and services by a firm
(Rutkowska-Ziarko,2015). The gross profit margin ratio of QBE Company is low as
compared to the previous year which represents that profit earned by them is less than the
year 2016. Thus, the company requires improving the performance to a significant level.
Net Profit Ratio evaluates the per cent of sales which is preserved by firm subsequent to
incurring direct as well as indirect expenses (Brigham and Ehrhardt, 2013). There is an
increase in the costs of the company which results in a lower net profit margin due to which
costs requires to be controlled in an efficient manner. There are two sources from where
shareholder’s equity can be obtained. The primary source is the funds which are originally
invested in the organisation, with additional investments made thereafter (Baños-
Caballero,García-Teruel and Martínez-Solano, 2014). The second source from where
shareholder’s equity can be obtained is retained earnings which the firm is capable of
collecting over time with its operations. Moreover, the higher the amount of shareholder’s
equity, more the shareholders are enabled to in the event that the company is closing. In
addition, shareholder’s equity ratio is less than the previous year.
Activity analysis ratio
Year 2017 2016
Activity Analysis Ratio
Asset Turnover Ratio 0.33 0.39
Account Receivable Turnover Ratio 2.96 2.91
Assets Turnover Ratio associates to the amount of sales created per dollar of assets (Baker,
and Logue,2017). Higher ratio signifies that form is producing more income per dollar of
assets. At the same time in the present case, the company’s assets turnover ratio of the year
2017 is 0.33 which is less than that of the year 2016 that is 0.39. Further Accounts
Receivable Turnover Ratio is utilised to find out the time taken in collecting debts. Further,
the high accounts receivables turnover ratio of QBE indicates that organisation functions on
the cash basis or that its expansion of credit and collection is effective. In the current case,
the company has no inventories. Thus no inventory ratio has been assessed.
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Capital Structure Analysis Ratios
Year 2017 2016
Debt to Equity 0.41 0.34
Interest Coverage -1.70 4.67
Capital structure ratio assesses the manner in which an organization finances its daily
operations as well as activities for growth through the application of different sources of
fund. Debt to ratio equity assesses the dependency of organization on outer resources. In the
present case of QBE Insurance Company, it can be assessed that the company is not
aggressive in financing as the ratio is low for both the year. However, it has been increased to
somewhat extent in the year 2017, but the same has not enhanced to a significant level that it
can be categorized as a company which is aggressive for financing. The higher ratio
represents the company is aggressive in financing through the application of debt source of
funds. The ratio represents that QBE Insurance Company has sufficient funds in order to
accomplish its daily operations with smoothness. Higher ratio leads to volatile income, but at
the same time, it has to incur additional interest expense. But, in the present case, no such
issue will arise as the company has appropriate funds.
Interest coverage ratio is applied to ascertain the easiness with which the company is able to
pay of interest relating to outstanding debt. The ratio is determined by dividing Earning
before interest and taxes from Interest Expenses. The higher the ratio, the company is able to
pay off its interest with easiness. In the present case of QBE Insurance company in the year
2017 the ratio is appropriate, i.e. 4.67, but the same is negative in the year 2017 due to loss.
Thus, the situation it too critical in the year 2017 as it is below one and same represents that
the company is not generating appropriate revenue in order to cover interest expenses.
Capital Market Analysis Ratios
Year 2017 2016
Price Earnings -9.85 14.72
Market to Book 1.192 1.137
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Dividend Payout (in US cents) -0.59 0.42
Capital Market Ratio Analysis analyzes the saving and investment within sources who have
provided the capital (retail investors and institutional investors) and users of capital
(government, individuals). In accordance with assertions of Weygandt, Kimmel and Kieso
(2015), price Earnings ratio represents the relation of market value and earnings per share. In
the case of QBE Insurance Company, it can be assessed that in the year 2016 the company is
having a positive relation in the year 2016 but the same turn to negative in the year 2017.
Thus, it can be analysed that the performance was excellent in the year 2017, but after
analyzing the performance of the year 2017, investors will not anticipate higher earnings due
to loss. Through assessing market to book ratio, it can be assessed that shares are overvalued
in both the years. Dividend payout ratio assesses the manner in which earning assist the
dividend payments. Thus, in a situation when shares of a company are overvalued than
investors are advised to sell the shares because soon the prices will fall as they are
overpriced. In the case of QBE Insurance Company it can be assessed that in the year 2016
the company has appropriate earning and due to the same, it has significantly supported
dividend payments. But the situation is opposite in the year 2017 and reason behind same is
the occurrence of losses.
4. Overall Assessment and future prospects of QEB Company
The management in QBE Group in managing its assets is very effective due to which its
return on assets is constantly positive. At the same time, since management is not effective
and the same leads to a decrease in the net profits of the company as there is an increase in
costs. Based on the recent analyst predictions, the company is assessed to sizably raise its
income by 10.58% in the next three years. At present EPS of $0.67, shareholders could
anticipate upcoming year’s EPS to be approximate $0.77. Further, positive income growth
might attract investors on the surface, but it is significant to contrast this anticipation to
QBE’s track record. The same will provide investors framework as whether growth prospect
is acceptable and reinforced by past trends. In order to assess whether growth rate
anticipation is justified, past performance of the company should be considered.
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Conclusion
In accordance with the present study, conclusion can be drawn that QBE Group is performing
well which can be noticed through their improvising financial ratios in 2017 in comparison to
2016. Further, the company is operating in a very efficient manner which results in an
increase in return on investment. The analysis shows that the company is able to provide
good returns to their investors and have the potential for further growth.
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References
Baker, T. and Logue, K.D., 2017. Insurance law and policy: cases and materials. Wolters
Kluwer Law & Business.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital
management, corporate performance, and financial constraints. Journal of Business
Research, 67(3), pp.332-338.
Brigham, E.F. and Ehrhardt, M.C. 2013. Financial management: Theory & practice.
Cengage Learning.
Diamond, D.W. and Kashyap, A.K., 2016. Liquidity requirements, liquidity choice, and
financial stability. In Handbook of Macroeconomics (Vol. 2, pp. 2263-2303). Elsevier.
Ehiedu, V.C., 2014. The impact of liquidity on the profitability of some selected companies:
The financial statement analysis (FSA) approach. Research Journal of Finance and
Accounting, 5(5), Pp 81-90.
Henderson, S., Peirson, G and Howieson, B., 2015. Issues in financial accounting. Pearson
Higher Education AU.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning
Pvt. Ltd.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
QBE Insurance Group Annual report 2015. 2015. [PDF]. Available through
https://www.qbe.com/us/about-qbe/financial-reports/ 2015 [Accessed on 26th October 2108]
QBE Insurance Group Limited 2017. 2017. [PDF]. Available through <
https://www.qbe.com/us/about-qbe/financial-reports > . Accessed on [26th October 2018]
Rosemann, M. and vom Brocke, J., 2015. The six core elements of business process
management. In Handbook on business process management 1 (pp. 105-122). Springer,
Berlin, Heidelberg.
Rutkowska-Ziarko, A., 2015. The Influence of Profitability Ratios and Company Size on
Profitability and Investment Risk in the Capital Market. Folia Oeconomica Stetinensia, 15(1),
pp.151-161.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.
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Appendices
1.
Working Note of Current Assets and Current Liabilities
(Amount in US$M)
Particulars 2017 2016
Current Assets
572+7+22+6
3
847+8+51+8
5
Cash and Cash Equivalents+ Other Assets+ Current Tax Assets+
Assets held for Sale 664 991
Current liabilities
2327+160+2
8 2139+73+72
Trade and other payables + Current Tax Liabilities + Liabilities
held for Sale 2515 2284
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2.
Analysis of performance of QEB Insurance Company
Figure 1: Performance measures of QEB Insurance Group
(Source: Annual Report. QEB Insurance Group, 2017)
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