An American anchor drags on QBE's renewal

When John Neal announced a steep decline in interim earnings and a halving of QBE Insurance Group’s dividend after disclosing continuing problems within its US operations, the market remained sceptical that it had got to the bottom of its US issues.

The market was right. Today Neal foreshadowed a full-year loss of about $250 million centred on a further blowout in prior year claims, an implosion in the revenue of the US lender-placed business and more fallout from the collapse of crop prices in the US.

The new guidance has sent QBE’s shares plummeting again – they are now down about 30 per cent compared to before the group’s interim result was disclosed. The downgrade follows a board appraisal of findings from a strategic and operational review undertaken by the new North American executive team Neal put in place after becoming QBE’s chief executive in mid-2012.

The raft of writedowns and increased provisioning relating to the outcome of the review, which included a charge for impaired assets of $150 million and a write-off of $330 million of intangible assets with the specialist lender-placed business, were described by Neal as “emphatically dealing with the North American issues that have been detrimental to confidence and underwriting performance over recent reporting periods”.

“As painful as these decisions are, we are confident that our business in North America will trade profitably in 2014,” Neal said. Those comments won’t please those in the market urging QBE to exit the more troublesome segments of its North American operations.

Neal succeeded the long-serving Frank O’Halloran as QBE’s chief executive only to be hit by a succession of issues, some of them – like a spate of natural disasters – beyond the group’s control, but the core of them relating to some of the myriad of acquisitions O’Halloran had made.

Those issues have coincided with an ambitious plan for structural change within QBE, which had developed as a federation of loosely-related businesses, to create a simpler and more centrally-directed – and significantly lower-cost – operating platform. There have also been wholesale changes to the senior leadership team under Neal.

QBE’s cash profit this year is forecast to be around $US850 million ($933.3 million) compared with $US1.04 billion in 2012, with an insurance profit margin that, at 6 per cent, is almost half what Neal had targeted in the group’s mid-year guidance.

QBE is targeting an insurance profit margin of 10 per cent in 2014 but, after several years where the group has badly undershot its forecasts, the market will want to see it actually meet or exceed expectations before credibility can be restored.

The group’s chairman, Belinda Hutchinson, announced her planned retirement in March next year (after the full-year results are announced). Hutchinson previously told the board she wouldn’t seek re-election in 2015, indicating she is departing a year earlier than planned.

While Hutchinson has been on the QBE’s board since 1997, she became chairman in mid-2010 and has presided over the change in chief executive as well as the senior executive team and the reviews that have flushed out the dire, underlying state of the group’s North American operations. She has also overseen a significant renewal of the QBE board.

One of those new directors, Marty Becker, will succeed her as chairman. Becker, who joined the board only in August, comes into the job with a clean pair of hands and a vast history in the international general insurance industry – 40 years – including deep experience in the North American market. Having a chairman unconnected to QBE’s past and with US experience ought to be a positive for Neal and the group.

Another positive for Neal and QBE is that the second half of this year hasn’t (yet) been blighted further by the kinds of abnormally large and expensive catastrophe and individual risk claims that the group has experienced in recent years. Neal and his shareholders could do with some better luck, as well as better management of the troubled North American operations.