Ah, when QBE reveals another review, as it did yesterday of part of its US business, it usually means the market sees another round of losses and one-off shocks are coming.
We won’t know until August about the outcome of the latest review, but 2012 and 2013 saw a succession of one-off writedowns, impairments and losses after reviews of the company’s business, so why should this one be any different, especially as its being conducted into the company’s US business – as 2013’s review and the subsequent huge losses were.
In fact last year it was more than $2.5 billion in losses and writedowns, mostly in the North American business, that helped send the group to an after tax and significant items loss of $US254 million.
The company described the losses as being "primarily attributable to significant upgrades to prior accident year claims reserves and the write-down of intangibles and other assets in our North American Operations following the rapid and severe decline in lender-placed premium income which caused substantial expense strain and the consequential need to restructure and right-size the FPS business”.
Whew, an insurance mouthfull – what it meant was that more money had to be set aside to handle growing levels of claims, weak reserves (designed to provide for future claims) and underpricing of existing business.
The results of that review were made public last December – the news of the losses sent the shares down more than 20% in one day.
That saw the dividend chopped sharply and long time chairman Belinda Hitchinson announce her surprise retirement (it took place in late March) – now shareholders will have to wait until the interim results are released in August to learn of the impact of the latest review on earnings and their income.
Many are sanguine, having experienced the QBE downgrade effect a number of times in the past five or so years.
As a result, investors sent the shares down 3.7% yesterday to $11.98.
"QBE today confirmed that it is undertaking a strategic review of its US based middle market business, as foreshadowed in February 2014," the company said in yesterday’s surprise statement.
QBE’s Chief Executive Officer Mr John Neal said, "We are well advanced in implementing remediation work which will allow QBE’s North American business to return to profit. As part of this process, we continue to assess options for various components of the US business, including the US middle market business.
"The review will include a continuing focus on improving the profitability of the middle market business, consideration of opportunities to increase scale and support for our business partners, refining the business strategy and operating model and exploring options for a potential sale of all or part of the middle market business.
"The US middle market business represents around US $900 million of gross written premium, mainly property and casualty business written through a number of agencies across the US.
Mr Neal added, "Consistent with our strategic objectives to return the North American business to profit and to deliver on our performance targets, the time is right to consider our longer term plans to maximise shareholder value."
"Further update on progress of the review will be included in QBE’s half year results announcement," QBE said.
The losses will be smaller than those of last December, but it is another grim reminder for shareholders that they continue to pay the price of hectic expansion programs, especially in the US by the old management (under CEO Frank O’Halloran) and the board.
Yesterday’s announcement means it will be 2015 before there’s a chance of QBE not reminding the market of past sins by announcing more reviews and writedowns.
That means eight straight years of underperformance, even though the actual insurance businesses seems to be still going OK. But cash profit fell 20% in 2013 to $US761 million.
