THE DISTILLERY: QBE's downgrade parade

One scribe channels Oscar Wilde to blame QBE's latest downgrade on carelessness, while another wonders who's at fault.

QBE Insurance chief executive John Neal came out of yesterday’s guidance announcement quite bruised. Australia’s business commentators focus their attention on the degree to which Hurricane Sandy absolves the relatively new boss of responsibility.
 
Fairfax’s Adele Ferguson simply has to go first in this morning’s edition of The Distillery for referencing Oscar Wilde.
 
"In The Importance of Being Earnest, Lady Bracknell describes the loss of one parent as a misfortune, but to lose both looks like carelessness. Applying a similar principal to insurance giant QBE, which has made two insurance profit margin downgrades in the past 12 months, one can only wonder what Lady Bracknell would have concluded… Sandy and other issues in its US division forced Neal to cut profit guidance by hundreds of millions of dollars and slice the group's insurance profit margin by more than one-third to 8 per cent, after reconfirming three weeks ago that its margin would be at least 12 per cent. While Sandy happened on October 29, the 4 per cent slide in insurance margins cannot solely be sheeted home to the storm, nor can the slashing of its profit forecasts. The brutal reality is that behind Sandy are other issues in the US, the latest of which is a $US1.1 billion run-off on part of its US business and the need to raise $US500 million to prop up its reserves in the US.”
 
At least columnists are being clear with Neal this morning. Wilde also spoke of how a true friend will "stab you in the front”.
 
The Australian’s John Durie opens with an announcement that Neal has basically staked his career on accurate profit forecasts. Although he also points out that the half year profit and downgrade in January was his predecessor’s work.
 
"Yesterday's profit downgrade and insurance margin estimates had Neal's name all over them, which explains why the forecasts will either help him try to recover some lost credibility or trash it completely. It's a tough game, insurance, especially when you have taken the chair from a company veteran who, at least until his latter days, was an absolute legend in the marketplace. Neal has served the past 12 months as, effectively, chief operating officer, so he knew what was going on, but sometimes when the regime changes new things emerge. To compound those nuances, Hurricane Sandy hit the US and already ranks as the third biggest in history, with estimated insurance losses of more than $US20 billion. This comes with some silver lining because big losses mean premiums increase to help pay for the losses. The US drought and accompanying increase in commodity prices also mean higher crop insurance premiums. Insurance is one of those games in which the providers always seem to have the last say, even after some short pain.”
 
Business Spectator’s Stephen Bartholomeusz gave The Distillery a chuckle by pointing out in his opening sentence that insurance companies are, by design, a bit accident prone.
 
"It wasn’t however, just about Sandy and the $350 million to $450 million of retained losses QBE expects to experience as its share of the insurance industry incurs losses of more than $20 billion. The US crop business which weighed heavily on last year’s results continues to be a drag on the group while it has also increased the provisioning against its $1.1 billion North American run-off portfolio by $180 million. In fact, there are a number of increases in provisioning that suggest Neal has decided to err on the side of conservatism at the outset of his tenure. The bottom line to today’s revisions is that large individual risk and catastrophe claims have blown out from 8 per cent of net earned premium to 12 per cent and QBE’s insurance profit margin, which had been projected at more than 12 per cent, and is now expected to come in at about 8 per cent."
 
And The Australian Financial Review’s Chanticleer columnist Tony Boyd says the situation at QBE underlines the risk associated with changing chief executives.
 
"Shareholders in QBE are now facing the prospect of a capital raising to rebuild the company’s balance sheet. The size of that capital raising is not immediately clear, but it could be as much as $1 billion. In today’s environment, where the emphasis is on balance sheet strength ahead of shareholder return, QBE will probably take the opportunity to go to the market once in a big way and cover unseen contingencies. Ratings agency Standard & Poor’s warned that the company’s capital position was "deficient” even after it had announced a $US500 million subordinated convertible debt issue, which was handled by JPMorgan and Bank of America Merrill Lynch. QBE has been the subject of speculation about a capital raising for some time because of its admission in August that its claims reserves in the United States were deficient.”
 
Meanwhile, Fairfax’s Elizabeth Knight describes Brisbane tollroad company Brisconnections as a "slow-mo train wreck since the start”. And Fairfax television writer Michael Idato says Ten Network’s Breakfast program was axed after a rushed launch and "humiliatingly low” ratings.

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