QBE CEO Frank O'Halloran is in his nervous nineties. With a stated target of orchestrating 100 acquisitions for Australia's premier insurance company, he has added two to his tally over the past few months. O'Halloran's current score? Ninety-eight.

The two recent acquisitions include the US based businesses of French insurance giant AXA, known as Winterthur, for US$1.16 billion, and Praetorian, also a US company, for US$0.8 billion.

QBE's acquisitive nature has been the driving force behind the company's stellar share price performance over the past five and a half years. From a low of $3.24 following September 11, the shares have soared to a recent all-time-high of $30.98. In the process, QBE has easily been one of the best performing stocks on the ASX.

In the past six months alone QBE has rallied by as much as 51 percent. This brings the total increase in the share price since the 2001 low to almost ten fold.

The astute O'Halloran isn't chasing runs recklessly though, having snapped up Praetorian at less than twice estimated book value. Given QBE trades at just over three times book value, the deal has the potential to create significant value for QBE shareholders. This did not go un-noticed by the market, as shown in December's share price jump.

The US$1.16 billion paid for Winterthur completes the company's strategy of building four core business streams in the Americas: specialist insurance programs, property and casualty insurance in regional markets, reinsurance and a presence in Latin America.

Writing business through 1,700 independent agents in 33 American states, Winterthur operates through two distinct underwriting divisions: General Casualty and Unigard. The primary business is casualty and property insurance, which in insurance speak is short tail business.

Short tail business refers to insurance claims that are known and settled relatively quickly. This is opposed to long tail business where liabilities can take years to reveal themselves, such as medical malpractice claims. Short tail business is considered less risky.

An acquisition based growth strategy does not always guarantee rising shareholder value. However, QBE has consistently demonstrated an ability to choose its targets carefully, betting on management's ability to increase the profitability of the target company, whilst not overpaying for the opportunity.

The Winterthur acquisition is a good example. Winterthur's 2006 combined operating ratio (COR - which measures the percentage of claims and other expenses to premium income) is estimated at 95.8 percent. In other words, for every $1 of premium income, Winterthur pays out nearly 96 cents in claims and other expenses. The company retains and invests the remaining 4 cents, of which the returns contribute to overall company profitability.

This compares to QBE's more favourable COR of around the 90 percent mark, with the America's division sitting at 91 percent. As such, we would expect QBE to extract more value from the business, as it moves under the group's operating structure.

We estimate the gearing ratio (net debt to equity) to be around 30 percent as at June 2006, which gives scope for management to maintain their stated target of 40 percent, following the recent acquisitions. While gearing levels appear reasonable, operating earnings cover debt servicing costs by 6 times, which is a lower interest cover than QBE has maintained for the past few years. Accordingly, we will monitor debt levels closely over the coming months.

QBE's acquisition strategy, combined with benign insurance market conditions, is translating into solid profit growth. In December, the company increased its full year profit guidance substantially. Management now expect to report a profit increase of 30 percent for the year to 31 December, rather than the originally announced 15 percent profit increase. Furthermore, QBE expects insurance margins to expand to 20 percent, from previous forecasts of 17 percent.

The rise in insurance profit margins comes from the unusually favourable market conditions which have seen lower than expected large losses and catastrophes for the year.

While QBE has continued to enhance shareholder value through astute acquisitions and margin growth, the share price appreciation over the last year has caused the margin of safety to thin, as price converges with value.

Consensus Valuation Estimates

Although the upward trend remains firmly intact, we are mindful that QBE has not experienced a meaningful correction since 2002. With the stock trading at an all-time high and the low rate of claims unlikely to support higher margins indefinitely, we believe it prudent to take some profits off the table. Accordingly, we recommend that Members sell half their holding around $30.65.