A couple of weeks ago, one of QBE's most talented underwriters quietly left. Ash Bathia, a senior underwriter in the London market, was said to have left with "immediate effect". Bathia is credited with helping to build QBE's casualty business in London from nothing to £1 billion ($1.69 billion) of annual premium income.
The transformation of the company from the entrepreneurial-styled, Macquarie Bank-like QBE under former chief executive Frank O'Halloran to a more traditional-looking insurer is all but complete and there is little room for the old guard. As one of the ASX 50's least-well-understood companies, the changes have gone largely unnoticed. O'Halloran's successor, John Neal, has spoken of evolution over revolution. "QBE has been a hugely successful organisation ... but, as the world changes, we need to evolve to continue to meet or exceed the expectations of our key stakeholders."
But insiders say behind the scenes the transformation has been brutal and unexpected by O'Halloran - who was Neal's mentor. Few of O'Halloran's direct reports are left, with one of the last, CFO Neil Drabsch, having signalled his departure. Neal is emphasising consolidation, standardisation and process improvement. Is it a natural extension of his background in the UK motor underwriting market or just the inevitable consequence of low interest rates that kill an insurance company's margins and demand a focus on efficiency gains?
Either way, it is a far cry from the acquisition strategy and entrepreneurship of O'Halloran. From taking the helm of the company at the end of 1998, the former chartered accountant grew the company's gross written premium more than 10 fold-to more than $18 billion through a global expansion and more than 125 acquisitions. QBE spread its footprint to operations in 48 countries, providing insurance to policyholders in more than 140.
O'Halloran would review 400 portfolios annually, culling a handful perceived most likely to generate losses. The aim was to maintain a sector-leading return on equity (ROE) regardless of the volatility of an insurance cycle. He was willing to make big strategic calls on particular product lines that he believed had the best prospects.
The most telling example was the move into long-tailed casualty insurance after the September 11 terrorist attacks. It proved an enormously profitable call. For years, QBE maintained an ROE above 20 per cent and the stock traded at more than two times book. Shares in QBE peaked at a high above $34 in 2007.
But with a slump in global interest rates in 2008 a new strategy - less reliant on investment income - was required and QBE shifted its emphasis from casualty lines to other products, including short-tailed catastrophe risks.
Catastrophes in the Australasian and Asian region in 2010 and 2011 generated significant claims costs on a global scale and QBE fared worse than some of its peers because the catastrophes were in its backyard. The volatile US market also threw up losses.
ROE inevitably fell as claims provisions and risk margins were strengthened and the company embarked on aggressive portfolio remediation. In March last year, there was a $600 million capital raising to shore up the capital base, and after 36 years with the company, O'Halloran left in August 2012. The shares bottomed in December at little more than $10.
These days the strategy is all about consolidation: no plans to expand into new geographies and limited acquisition activity. Chairman Belinda Hutchinson has said QBE is entering a "new stage of development" with divisional managers having a greater degree of accountability and more involvement in the group's direction. The old guard says that what made the company great is being trashed after the bad luck of a big rush in claims and record lows in interest rates that will recover. Others said the global expansion was too aggressive and left the company vulnerable.
Either way, the shares have risen 66 per cent since the December low. A new generation of investors are buying QBE in expectation of rises in interest rates, noting that a periodic bout of big claims is business as usual for an insurer.
Stewart Oldfield is a research analyst at Wilson HTM. email@example.com