On his second day as chairman of QBE, Marty Becker told shareholders gathered at the group’s annual meeting that a focus on “earnings stability and predictability” will guide the board in its decisions for 2014.
“It’s probably the most important thing for our organization at this point in time,” he said during his opening remarks, later addressing questions about the performance of QBE’s North American business in 2013, marred by loss reserve and goodwill impairment charges that were the main contributors to a $254 million bottom line loss announced in February.
“This means being very transparent in helping our stakeholders understand how our earnings are derived and what we are doing to deliver more consistent results.”
Becker and CEO John Neal repeatedly said that QBE would return to profitability “this year—in 2014,” with Becker noting that actions to minimize unexpected volatility in the future are already taking hold.
Neal said that while the disappointing numbers of 2013 were the result of balance sheet actions, with those now squared away, QBE could see a return to net after-tax profit “in excess of $1 billion” in 2014.
Becker said that since joining the board last year, he has observed an organization with a strong underwriting culture. “This is critical DNA of any insurance company and one that seems very well-placed in our operations around the world,” he said.
In addition, he said that “QBE is one of only a handful of insurance companies truly operating globally. This is a position it has earned following more than two decades of international growth, mostly through very well-thought-out strategic acquisitions,” he said.
“This creates a unique set of both opportunities and challenges,” he said, adding that the fact that QBE was going through a transition period was another attraction to him when he was asked to join the board last year.
Becker told the stakeholders how his 30-plus years in the industry, including stints as CEO at Alterra Capital and Orion Capital, will bring a useful perspective “to guide where the company’s energy is focused, where we might find low-hanging fruit in our quest for profitable growth and where there’s risk of running into potholes.”
Later, when asked about the problems in North America last year, Becker noted that what may have seemed like a pothole—North American program business, which has been subject to repeated reserve hikes—is still very much a part of QBE’s future.
QBE does not want to abandon program business, he stressed. “We need to manage the program business properly,” he said, noting that over the last 12 months, QBE has put people in place with management know-how on programs. That will allow QBE to “join the rest of the industry and enjoy the benefits of that business as opposed to the pain that we’ve suffered in the last couple of years,” he said.
“The program business is not a bad business. The program business can be run very well and very effectively,” he said, reporting that almost 25 percent of the premium in the U.S. market is in programs of one type or another.
Problems Now Fixed
Looking back on the problems of 2013 to address a shareholder who asked pointedly “what was the real problem” with the North American business last year, Becker did say that “QBE has to take meaningful accountability for what took place” in the programs segment.
“The results have been awful from a shareholders standpoint. There’s no denying that,” he said, referring to North America overall. “There are three things that came together in a perfect storm and created an awful result for our shareholders.” These were: a concentration of business with one entity, Bank of America, in QBE’s forced-placed insurance segment; weather impacts on QBE’s crop business; and the need for loss reserve additions in the programs area.
The first two situations, he said, were largely outside of QBE’s control.
The concentration of lender-placed business related to Bank of America came about as part of an acquisition. With Bank of America operations undergoing significant restructuring in the United States in years subsequent to the business acquisition, the bank sold “hundreds of millions of dollars worth of loans, which has taken that revenue stream away from our lenders’ business.”
Although QBE has run a good loan-processing business and achieved good loss ratios on related insurance products, a fixed-cost infrastructure built around the lender-placed business “could not adjust as fast as the loans were being sold away,” Becker said, explaining charges that QBE ultimately took in this area.
Addressing a question about initial acquisition that led to this problem, Becker said that even though he wasn’t involved, he believed it was a wise decision at the time of purchase and that it brought profitable business to QBE over the years. The concentration, however, was slow to unwind, he said.
As for the crop business that was acquired a few years ago, which also contributed to the “perfect storm” of unfavorable events in 2013, Becker said it was “one of the best in North America.”
“I know because my old company used to reinsure them,” he said.
Still, rain and drought events in the past two years have been felt across the crop insurance industry, he said, noting that crop insurers lost money in only three of the last 25 years. Two of those loss years were the last two years, he said, emphasizing QBE’s lack of control over the results.
“The place where QBE has to take accountability is on the U.S. program business,” he continued, referring to December 2013 reserve additions.
“The reality is we have been too optimistic in terms of the loss picks we’ve taken on that business and the reserving levels on our balance sheet. [And] it became painfully obvious in 2013.”
Later in the meeting, he explained that the optimism was not on case reserves for individual claims but in the provision for incurred-but-not-reported losses. The IBNR was “out of sync with the marketplace.”
“We could not identify a reason why our claims experience was going to be so much better than the rest of the industry” when QBE took a deep dive into the numbers.
With external actuaries contracted to supplement the work of internal ones, appropriate levels have been set, Becker said. “The balance sheet is now correct.”
Failure of Due Diligence?
Becker disagreed with a shareholder who concluded that QBE had not done adequate due diligence on acquisitions midway through the two-hour meeting.
“If you look at the growth of QBE, which over the past two decades has largely been through acquisition, I think you’d have to give a very good scorecard to what they did.
“The acquisition DNA of the company is fairly well proven…The only thing I would suggest in the U.S. is not that the acquisitions were not properly thought out or that they weren’t properly diligenced. [Instead], I think we had too many in too close a proximity,” Becker said, suggesting that it’s hard to integrate too many in a compressed period of time.
The lesson, he said, “is not to not do M&A.” He believes M&A is a “core skill” for a global organization like QBE. The company just has to be careful not to outpace the management team’s ability to assimilate deals, he said.
During his prepared remarks, Neal said that QBE’s acquisition strategy going forward “will be strategic in design, [taking place] predominantly where we see an opportunity to consolidate a core position in a marketplace where we have proven expertise and leverage.”
“We will not be looking for opportunistic growth through acquisition,” Neal said.
Other questions raised by shareholders focused mainly on the North American problems, but there were also some inquiries about the remuneration of executives, about Becker’s ability to chair an Australian company given that he’s based in the United States, and a perceived lack of marketing skills on the board and the need for more marketing in Australia.
During his prepared remarks, Becker noted that the board’s remuneration committee had done a full review of the pay structure, and that guiding principles rest on linking pay to the group’s strategy and aligning with shareholder interests, among other things. “No incentives under the QBE cash or deferred equity award were made to the Group CEO or other executives in 2013,” he said.
As to the question of physical distance between him and the management team, Becker said QBE has worked out a schedule so that he and Neal are face-to-face at least once a month somewhere in the world.
He also said that he welcomed the marketing questions, and that he would equally welcome future questions like, “How are you going to grow?” Those questions, he said, will inevitably come once the profit picture improves as he and Neal expect.
With many changes in management and the board in the recent years, one shareholder also asked what steps were being taken to minimize strategic and operational risks.
Becker explained that the board changes have taken place over several years and have been a function of natural retirements. “There’s been a conscious effort to space out retirements so you don’t lose the continuity and boardroom knowledge.”
Becker also noted that the board has had “a significant level of interaction” with senior management to make sure new executives coming to the organization are not only fit for their roles but also understand the board priorities. “The board is commonly involved in helping interview those senior appointments,” Becker revealed.
Although many new faces on the management team have been hired away from other firms, Neal noted that QBE is working on building “world-class leadership” internally through the 2013 launch of a Leadership Academy.
“Designed in-house and built with the support of Duke University, by 2015 it is our intention that 1,400 QBE leaders will have been through various bespoke programs,” he said during his prepared remarks. So far, roughly 700 leaders have already been through the academy, he said, noting two recent promotions went to members of the inaugural class—Mike Emmett to group executive of operations in February and Jason Brown as chief risk officer in March.
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