Focus on sweating the assets
You couldn't pick two businesses that are more different than BHP Billiton and the QBE insurance group, but their new bosses are talking the same language. The rapid expansion that preceded them is over, and their job is to "sweat" the assets.
Andrew Mackenzie has signalled very clearly that when he takes over from Marius Kloppers as BHP chief executive in May, his priority is not to extend BHP's physical footprint, but to get more out of the assets it owns, and get rid of ones that don't have enough upside. John Neal took over from Frank O'Halloran at QBE last August, and he is headed down the same track.
QBE has a global presence but it's not fully integrated after years of bolt-on expansion by O'Halloran. There are for example eight different payroll systems operating in various places around the world. Neal will rationalise them as part of effort to get less complicated administrative machinery behind the group and the products it sells.
He aims to lock in annual cost savings of $250 million by 2015, and his plan will involve the relocation of work from Australia, the US and Europe to lower-cost offshore centres.
Existing QBE processing centres in the Philippines capital, Manila, and the southern Indian information hub, Bangalore, are the likely beneficiaries, but Neal is managing the process carefully.
The group employs about 17,000 people worldwide including 14,000 outside of Australia, and also employs about 1000 contractors. About 10 per cent of the workforce turns over every year, and the 5000-plus rollover in the three years it will take to bed the restructuring down means forced redundancies are unlikely. Customer-facing call centres will also not move offshore, putting QBE in the same camp as CBA's Ian Narev on that score.
A 28¢, 2.1 per cent slide in QBE's share price to $12.75 after the 2012 profit result was released on Tuesday mainly reflected the fact that that dividend payments are being wound back. The December-half dividend was cut from 25¢ a share to 10¢ a share, pulling the annual payout down from 87¢ to 50¢.
The reduced dividend still represented 59 per cent of cash earnings, however, and QBE's new policy is to pay up to 50 per cent of cash earnings by way of dividends: earnings need to rise, in other words.
QBE is moving towards international peers with the dividend change. The previous guideline was that it would pay up to 70 per cent of reported earnings, but big overseas investors believe that a company that pays that much out each year has run out of good things to invest in. By holding more of its earnings back, QBE is also building balance sheet strength: in a subdued business environment where regulators are lifting capital requirements, that makes sense.
The performance of QBE since 2008 underlines the fact that like BHP's Andrew Mackenzie, John Neal is a manager for the times.
QBE's return on equity was 22.6 per cent in 2008, 20.2 per cent in 2009, 15.9 per cent in 2010, 7.4 per cent in 2011, and up only slightly to 9.2 per cent in 2012, the year the group has just reported on. Its insurance and underwriting profit fell by from $US1.83 billion to $1.1 billion between 2008 and 2011, and climbed to $US1.26 billion last year. Net profits decreased at a compound rate of 16 per cent a year between 2008 and 2012.
On the industry's closely watched combined operating ratio that measures claims, costs and other expenses as a percentage of premium income, QBE has moved from a strongly profitable ratio of 88.5 per cent in 2008 to 97.1 per cent last year, up from 96.8 per cent in 2011 (100 per cent is break-even). The ratio is the benchmark for the recovery Neal and his senior team are working on, and for what they get paid if they succeed.
Neal has already rationalised the group's US businesses, quitting low margin products including workers' compensation and restructuring others to get scale advantages. As these changes went through in 2012 gross underwriting premiums fell by 13 per cent, and the business posted an underwriting loss of $US170 million on a combined operating ratio of 106.8 per cent.
Impairment charges and extra provisioning totalling $US407 million were one-offs, however, and the North American arm should be profitable this year. Neal believes it can achieve an operating ratio of 92 per cent, and aims for a ratio of 90 per cent or better for QBE as a whole: half of the at-risk pay of the senior management team is tied to a target of 92 per cent.
There's one other similarity between BHP and QBE. Marius Kloppers said last week that as soon as he took over in 2007, former BHP CEO Paul Anderson told him to put internal succession candidates in place. He called Mackenzie with a job offer soon after.
Neal has also moved quickly after taking over in August. In January he head-hunted David Fried from Allianz to head up QBE's Asia-Pacific business.
Now he's announced that the chief executive of QBE's European operations, Steven Burns, will replace the retiring CFO, Neil Drabsch, that Burns' deputy, Richard Pryce, will take over in Europe, and that QBE's North American head John Rumpler will be be replaced by US insurance executive David Duclos: add QBE's Australian head Colin Fagen and you have the internal succession line-up.
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