O'Halloran's capital QBE legacy

Today's results – a 45 per cent slump in earnings and a decimated dividend – were in line with the shock update QBE gave the market last month but with another unpleasant twist. At a point where QBE's share price is at levels not seen since the aftermath of September 11, QBE is raising up to $600 million of new capital through an institutional placement of $450 million and a retail share purchase plan.

For a company that has, justifiably given its lengthy track record, been proud of its conservatism and its ability to manage risk, the result is a blot on the otherwise stellar history of the group's performance during O'Halloran's tenure. It has shaken the confidence the market has long had in QBE's ability to perform consistently in an inherently volatile industry.

The result and O'Halloran's legacy do, however, need to be seen in perspective.

QBE, and the sector, was blindsided not by one massive disaster but by a multitude of them, ranging from US crop flood and hail claims to Thai floods, Japanese tsunamis, the Christchurch earthquakes, Victorian storms and West Australian bushfires. In total QBE's large individual risk and catastrophe claims soared from $US1 billion to $US2.4 billion, with much of the damage done right at the year's end.

As if that weren't enough, the flow-on effects of the global financial crisis – the lowering of interest rates globally – meant a materially lower risk-free rate for discounting claims and a materially lower investment yield on QBE's reserves.

Despite the severity of those events, QBE still generated an underwriting profit of almost $US500 million and produced a combined operating ratio that, at 96.8 per cent, was better than all but a couple of its global peers.

The 2011 year may have been a dreadful one for QBE but it still outperformed most of the industry, which tends to suggest that the number of major events and the flow-on effects of central banks' responses to the renewal of the financial crisis were, if not unforeseeable, unforseen.

While O'Halloran's retirement was announced today – and his successor, the chief executive of the group's global underwriting operations, John Neal, named – it is apparent that in his board's view, at least, the result hasn't undermined O'Halloran's credibility. QBE chairman Belinda Hutchison announced that he would be appointed a non-executive director of the group shortly ahead of the 2013 annual meeting.

O'Halloran will also remain as chief executive during a six-month handover period before Neal replaces him in August.

The QBE model has, under O'Halloran, been growth via acquisitions – more than 100 of them.

Generally they have been relatively small bolt-ons that, when combined, have grown QBE's premium income from $US1.5 billion at the start of his period as chief executive to $US18 billion as QBE has expanded internationally and become a global top 20 insurer and reinsurer with, until 2011, a remarkably consistent record of underwriting profits and risk-management.

O'Halloran will have the first half of this year to get QBE back on track, with some positive signs already emerging.

Given the spate of catastrophes last year it isn't surprising that the premium cycle has turned up, with most insurers raising their rates. QBE expects overall average rate increases of more than five per cent this year. It has also responded to its 2011 experience by increasing deductibles, reducing exposures to some catastrophe-exposed regions and by buying more reinsurance.

O'Halloran said today that the group had made a positive start to 2012, with catastrophe claims substantially lower, credit spreads reducing, risk-free rates rising slightly and premium rate increases that were higher than anticipated, particularly in the US and Australia.

While QBE remains in defensive mode and expects it to be a year of consolidations and low growth it is still on the look-out for more bolt-on acquisitions. The O'Halloran model might have been shaken by the events of last year but as far as QBE is concerned it remains intact.