Based in Sydney, QBE is the largest listed general and reinsurance company in Australia. Over the past 25 years the company has expanded through 120 acquisitions, and now operates in more than 45 countries worldwide. This month, we talk to Chris Zwolinski, Group Treasurer, about the company’s recent growth and the impact of the financial crisis.
Originally from New York, Chris has lived in Sydney for 20 years acting as the Group Treasurer for companies such as Wormald, Qantas, Lend Lease, and now QBE. Prior to corporate treasury, Chris worked for several leading banks in New York, London and Sydney, trading products from municipal bonds to foreign exchange. Outside interests include a directorship with Animal Logic, a leading animation and visual effects studio based in Los Angeles and Sydney.
What has changed since you last gave an interview to Treasury Today in 2006?
One of the most notable changes has been in terms of the size of QBE and its geographical location. In fact, QBE is now almost 50% larger than it was in 2006. The majority of this growth has come through acquisitions that we have made in the US, which is a core market for us. The US is a much more complicated market however; it is highly fragmented and also regulated very differently. This means that operating in different states is almost like operating in separate countries.
The advantage of investing in the US is that you can buy large regional businesses without paying too much of a premium. In addition, these businesses are very quickly shareholder accretive, as opposed to acquisitions made in other markets that are not as fragmented.
From a global perspective, general insurance is still highly disaggregated and there are lots of acquisition opportunities, hence why this is a key area of focus in the QBE business model. Since 2006, in treasury we have increasingly focused on technology, connectivity and highly efficient platforms that allow the company to be very scalable and to accommodate change as seamlessly as possible.
How has the company been affected by the financial crisis?
The company has not really experienced much negativity as a result of the crisis. This is because QBE runs a very conservative balance sheet, and as such the company’s investment portfolios did not contain any of the dangerous products that were the downfall of many other market players. Our strongest portfolios were unaffected, and we have not had a single impaired asset throughout the global financial crisis; fundamentally we run profitable insurance businesses.
That said, we have had some difficulties with our bankers, with some becoming capital constrained. The huge volatility in currencies, particularly with the Australian dollar, has also presented us with a challenge. Generally however, we’ve managed our way through any difficulties and have been able to report improved profits and enhanced shareholder returns throughout the financial crisis, which is quite unusual.
In what ways has QBE taken advantage of the poor market conditions?
In terms of taking advantage of the financial crisis, we have been able to buy the ‘crown jewels’, that is to say, the most desirable sections of certain regional businesses, because their parents were in serious trouble. For example, we recently bought the Australian arm of a very large US mortgage insurance company that was really in trouble.
Another area of opportunity for us has been in the credit markets. With the market volatility, there was a huge rise in credit spreads. When the crisis hit, we were able to take advantage of that by buying up the credit quite cheaply. This credit spread blow-out also allowed QBE to buy back its own debt at very attractive prices.
Could you talk me through the investment policy at QBE and whether it has changed with the crisis?
It really hasn’t changed. As I mentioned, QBE runs a very conservative investment policy compared with many insurance companies, who tie their investment assets to the duration of their liabilities. We look at the investment assets and then treat them as a separate absolute return fund strategy.
We make decisions on the investment portfolio as they are driven by the investment markets, not by our liability profile. At the end of the day, if you look at the excess returns that people achieved with more speculative investments over the six or seven years before the financial crisis, they were completely wiped out in a six month period. In many cases, the extra return you get for taking more risk is eventually lost over time and you end up inadequately compensated for the extra risk, so it’s not worth it.
In my view, companies are better off in less risky, liquid, high credit areas, and avoiding the dangerous products. There is inevitably going to be another downturn at some point in the future, and at QBE our approach is to plan our investment portfolios around the downturn, not the just the good times.
“In my view, companies are better off in less risky, liquid, high credit areas, and avoiding the dangerous products. There is inevitably going to be another downturn at some point in the future, and at QBE our approach is to plan our investment portfolios around the downturn, not the just the good times.”
That said, QBE is a highly opportunistic organisation, but we are only opportunistic where we can control risk. We aren’t able to control risk in investment markets, so we shed it in our investment portfolio; we remain in conservative and liquid investments, because we can’t be sure what will happen in the markets. Insurance businesses have to be careful about what risks they take, and therefore we diversify both geographically and by product. However with acquisitions, where we can control risk in who we buy and what we pay, we’re very opportunistic. So we know what risks we can control and what we can’t, and that drives the overall business model.
How does the treasury fit into the company’s business model?
We run three treasury centres: one here in Sydney, one in London and the other is in New York. QBE has a segregated investment division which looks after 95% of the funds under management. Treasury works with the business units to move money as quickly and as efficiently as possible into the actively managed investment portfolios. If you think of an insurance company’s cash flow, it takes cash in sometimes two or three years before it actually has to provide a service, so the company has to get money in and actively invest it as quickly as possible. The treasury is also responsible for making sure that when a claim is made there is a smooth flow between business units and their investment activity.
As we operate in 45 countries and have over 1,000 bank accounts, we have nearly 100 banking relationships. Just keeping visibility of all of that is quite complicated so cash identification and cash flow management are high priorities for treasury at QBE. The insurance industry is somewhat different to most other businesses in that we cannot pool cash globally, because each local regulator ring-fences their jurisdiction’s portion of it. This means that we effectively have to manage 45 portfolios on a centralised basis. Some of these portfolios are quite large, so it is a very different method of operating compared with other large multinationals that simply pool everything.
“The insurance industry is somewhat different to most other businesses in that we cannot pool cash globally, because each local regulator ring-fences their jurisdiction’s portion of it. This means that we effectively have to manage 45 portfolios on a centralised basis.”
Treasury achieves an overview of this cash using very sophisticated and deeply embedded technology, and we integrate and connect our banking platforms directly to our treasury systems. In fact, I increasingly spend a great deal of time on integrating new businesses and getting the banking platforms, business processes, payment and receiving channels right. These are the processes that treasury takes part in when on-boarding acquisitions, and every year we try to do it better, faster and less painfully than before.
Please can you explain how technology facilitates treasury operations at QBE?
When you acquire a business the first challenge is embedding a treasury system, so that you can achieve visibility of their cash positions and insight into their foreign exchange positions. Once we can see it, we can manage it, and that’s when we start to look at whether they need other systems and platforms.
Personally speaking, I am very pro paperless systems – if you see paper moving around that is often not a good thing. We aim to achieve straight through processing between banking systems, treasury systems and accounting systems in the acquired business. We believe that you can effectively outsource full business processes to the treasury, so that all of your investments, risk management and cash management activities can be centralised. In our case we often have to do this in very different environments as we are doing business in countries that have very different cultures, and diverse levels of business continuity and sophistication.
“I am very pro paperless systems – if you see paper moving around that is often not a good thing. We aim to achieve straight through processing between banking systems, treasury systems and accounting systems in the acquired business.”
We use a variety of treasury systems as well as the SWIFT network. We have a very open policy and would rather use a system that works for the business than sticking with legacy versions that no longer function efficiently. One of the main challenges we have when we acquire businesses is that many of them run on general systems. Sometimes we can’t integrate immediately so we use a lot of interfacing programmes and software to get the straight through processing that we need.
How is treasury culture maintained across the business?
In terms of culture, what I am really interested in is having a diversified team of people that can creatively solve problems. In all our treasury centres, we have a real mix of people; from Ireland, the UK, Vietnam, Australia, India, China and I’m from the States as an example. We are also very interested in empowering people and letting them do their job in the way that suits them and the company best. When it comes to the day-to-day operations, I am quite happy to let the team do that as they see fit, within boundaries, and act more as a coach and a mentor.
What would you say are the most challenging aspects of your job today?
I would say that there are two or three big challenges that I face daily. The first is communicating the message to the business units, and getting people excited about improving basic business processes. Treasury can sometimes be seen as somewhat ‘unsexy’ and not terribly interesting, but my job is to convince the units that it is worth the upheaval involved in changing banking platform for example. It is all about communicating and getting people excited about making modifications. At the same time you have to manage and resource the change in a fashion that doesn’t fatigue people, or put them off. So really, it’s almost a sales role in many respects.
“Treasury can sometimes be seen as somewhat ‘unsexy’ and not terribly interesting, but my job is to convince the units that it is worth the upheaval involved in changing banking platform for example. It is all about communicating and getting people excited about making modifications.”
Managing currency volatility is the second major challenge. The difficulty is in coming up with new and different ways of dealing with that particular risk, which is tricky if you’re a company like QBE which has 80% of its business outside of its reporting currency.
I think probably the third challenge is people; finding good individuals that you can work with for long periods of time, on-boarding them, mentoring and coaching them. Even in the middle of a recession, and a global financial crisis, good people get snapped up very quickly and keeping them excited and focused in treasury is the biggest challenge.