Tsunami finally catches up with insurer
Almost two years ago a senior British insurance industry figure likened QBE Insurance Group to a speedboat driven by its then boss Frank O'Halloran: "If you're driving a speedboat fast enough the wave never catches up to you, but if you slow down or stop, the wave could wash over you," he warned.
"The problem is Frank's been running fast on the growth path for a long, long time now and at some point the tsunami behind him will catch up as the company slows down."
Sixteen months ago O'Halloran passed control of the company he had led for 14 years - and which he had turned into a global empire through more than 100 acquisitions - to John Neal.
On Monday the tsunami hit as the company confessed to a net loss of $250 million for 2013, an insurance margin of 6 per cent, write-downs of $1.08 billion in its North American operations and a reduced dividend payment.
It is the third time since Neal started in August 2012 that he has had to front shareholders and apologise for not seeing the problems soon enough. As Ian Fleming's character Goldfinger warned James Bond: "Once is happenstance. Twice is coincidence. The third time it's enemy action."
Investors reacted accordingly and wiped more than 22 per cent off the share price, or more than $4 billion, to close the day at $12, a shadow of its former highs of $38 in 2007. To put it into perspective, QBE's insurance margins have been on a slippery slope for the past few years. In 2006 and 2007 QBE was generating margins of 21.9 per cent and 22.2 per cent. Since then, they have fallen steadily each year to an overall level of 15 per cent in 2010, to a low of 6 per cent for 2013.
To put it another way, its return on equity has fallen from 22 per cent five years ago to an estimated 8.5 per cent for 2013, which is less than the cost of capital and indicates the firm spent poorly on past acquisitions.
The share price shellacking after the announcement on Monday was as much about the company's credibility as it was about the downgrade and the warning that 2014 wouldn't be too flash with a forecast insurance margin of 10 per cent. Put simply, QBE has built a reputation over the past five years of disappointing the market.
Although Neal inherited some huge challenges when he signed up for the role the feeling is he should have done more sooner to fix the mess in North America. To try to sheet home some of the blame to management and processes after he has been in the job 16 months, and was aware that the US had some significant problems, says more about him not doing more to fix processes and management earlier.
Key problem areas in North America include workers' compensation and casualty in businesses including Praetorian, Winterthur, as well as the controversial force place lenders insurance business Balboa, all of which were bought by O'Halloran.
QBE makes insurance look a complicated business and the big question is whether this is the end of the problems in North America or if there is more to come. This is not a long bow given previous assurances from Neal that the worst is over. The reserve top-ups now exceed $1 billion over the past two years.
The brutal reality is all insurance companies have varying degrees of opacity, but few are as difficult to understand as QBE. Investors rely on the company's disclosures, which given past performance can make it difficult to work out what is going on.
The disastrous results ended in a change of chair with Belinda Hutchinson agreeing to step down in March. This is a positive step given Hutchinson has been on the board since 1997 and as chairwoman agreed to allow O'Halloran to do a corporate governance no-no and return to the board after he retired as CEO. For various reasons this did not eventuate but her departure and that of some other senior executives needs to be speeded up if this company is to restore some credibility. As long-time QBE analyst, BBY's Brett Le Mesurier said, "The time for promise is over. The time for delivery has come."