During a Monday conference call on which QBE executives described details of an expected bottom-line loss of $250 million for 2013, the CEO of the North American operations said cultural changes are emerging to right the ship.

Dave Duclos, who has been QBE’s CEO in North America since April, spoke about a developing culture of transparency, an operational redesign and plans to diversify the underwriting portfolio to a more balanced one, after Group CEO John Neal delineated various loss reserving and goodwill charges producing an overall net loss for the Australia-based group.

While the loss reserve and goodwill write-downs relate mainly to the U.S. operations, Neal said, “we are confident that our North American division is a core business for QBE, with a clearly defined strategy appropriate for a commercial specialty insurer in the United States,” paving the way for Duclos to describe a transformation in-progress in the North American business.2013 Duclos, D

“Our culture is changing. There is increased transparency [and] more data-driven decision-making,” Duclos said. “A performance agenda is clearly evolving,” he said, noting changes in management reporting which he said will ensure that results are correctly measured.

He also noted that cultural change is being driven by new leaders in claims, information technology, finance, actuarial and specialty, which QBE North America has been able to attract from other carriers. This “high-quality talent,” he said, is starting to “infuse the [QBE] organization with best practices from their predecessor organizations,” prompting existing staff members to “step up to deliver those [same] best practices.”

Duclos began his remarks by admitting that while he “recognized a need to drive change” when he signed on to his position at QBE, the challenge subsequently turned out to be greater than expected as evidenced by Monday’s announcement.

The announcement, for example, included a $300 million loss reserve charge for program business, coming on the heels of earlier reserve charges—one for $68 million during the first half and another for $316 million in 2012, Neal said.

Duclos said QBE North America’s results are being reshaped on three major fronts:

  • Operational redesign, strategic savings and right-sizing initiatives.
  • The build-out of an operating platform to improve service to brokers and policyholders.
  • Expansion into attractive lines of business, such as specialty and commercial, with remediation of underperforming businesses.

Duclos described a “shared-services operational transformation,” explaining that both the claims and IT divisions have been restructured. “Both groups are leveraging outsourced solutions, and both groups are operating more efficiently as a result,” he said. He noted, however, that the operational changes aren’t “solely about becoming more cost competitive” but also to improve service.

On the underwriting front, he said, QBE is building on strong performance in selected businesses, notably the consumer insurance programs division of its Financial Partner Services segment (a segment unit which also houses a lender-placed insurance business that Neal said is having some revenue problems) and specialty lines where combined ratios are 90 and under.

“We recognize that we cannot be dependent on one or two businesses to carry the day for us,” he said, noting plans to diversify the North American business and highlighting the recent launch of a management and professional liability division under the direction of Jeffrey Grange, who joined QBE from Torus in August.

“The momentum that we are building every day will drive North America’s strategy that we began rolling out this past quarter. We are focusing on our strength as a commercial specialty insurer, and we are aligning around market-relevant products and the underwriting specialists who have a real market brand,” Duclos said.

Explaining the point about diversification further in answer to an analyst who questioned the move to long-tailed casualty lines—the types of lines that are prompting reserve charges—Duclos said he did not intend analysts and investors listening to the call to come away with the impression that the company intends to become “lopsided from a liability perspective.”

Noting that the book today is 75-80 percent property—with program business, middle-market business, crop business and the Financial Partner Services (FPS) segments tilting the portfolio to property lines—he said the portfolio could be more balanced.

“By no means are we going to get into casualty or long-tailed lines that from a near-term profit perspective are going to put our earnings in jeopardy,” he asserted.

The move into management liability, or D&O business, he said, reflects a belief in the line’s near-term and long-term profitability, he said, noting that the D&O line “stuck out in terms of favorable combined ratio results” in a strategic analysis of 2008-2012 market results. He added that the D&O line is seeing rate increases in the 5-6 percent range in North America, suggesting future profitability as well.

Separately, Neal addressed what an analyst referred to as “chatter” about the middle-market business and the likelihood that it could be “under review” by QBE executives in the near future.

While the management team is happy with the middle-market claim ratio, “it is one area [where] we’re attacking the cost base pretty hard,” Neal said. “By any standards in the U.S. market, it’s performing—certainly from a claims perspective—in line if not better than the market. So subject to us being able to improve it and potentially achieve some growth in it, then we’ll carry on. But it’s a business that we’ll keep a close eye on,” Neal said.

Drawing a Line

Leading off the call, Neal described the three components of QBE’s business that are contributing to the $250 million net loss.

First addressing the program business reserve charge of $300 million, he said that while a SWOT analysis by newly appointed chief claims and chief actuarial officers indicates that reported claims on the runoff book are holding, “our actuaries continue to express concerns around the longer term classes of business, which include workers compensation, excess of loss liability, construction defects and general liability lines.”

“There is every indication that our external reporting actuaries, Ernst & Young, will adopt a similar view as our own internal actuaries,” Neal said.

Turning to the lender-placed business of QBE FPS, Neal noted that decreased revenue from QBE’s single biggest customer—Bank of America—and the inability to secure another major banking client has signaled a need to restructure the business and prompted asset write-downs.

A third issue, Neal said, is higher-than-expected crop insurance claims, which will reduce profitability by roughly $125 million relative to plan.

In addition to the other items, Neal reported that the board of directors, recognizing the impact of the restructuring plans described by Duclos, has moved to write down the carrying goodwill of North American business interests by $600 million.

“We do believe that these painful decisions will draw a line under the past and [allow] our North American business to trade profitably and support our attractive portfolios globally in delivering improving performance through 2014 and beyond,” Neal said, concluding his opening remarks.

Neal repeated his reference to drawing a line under QBE’s problems when an analyst noted that the CEO’s statements of disappointment on the conference call marked the third time that he apologized for downgrading earnings guidance.

“You’re absolutely right. I think if I take a step back, it’s taken me longer than what I would have hoped…to get my arms around the issues in North America,” Neal said. But the earlier reserve boost this year “really saw us go into a pretty heavy forensic mode,” he continued, highlighting “much improved processes in the way in which we look at our reserves in North America,” and also referring to marketwide movements around workers comp business.

“I’m confident today that the reserves that we’re holding and the practices that we’ve adopted are as strong as any peer in North America—or indeed globally,” he said.

Later on the call, Group CFO Neil Drabsch gave some further explanation of the latest loss reserve boost. Drabsch suggested that while past problems related to carried reserves for reported claims had already been fixed, the most recent analysis addressed the second component of loss reserves—the provision for incurred-but-not-reported claims. For these, the actuaries used industry data to capture future development in long-tailed lines like workers compensation and general liability.

Topics Trends USA Profit Loss Claims Workers' Compensation Excess Surplus