Insurer QBE rights the ship, rues ex-CEO O’Halloran
Another day, another celebrity CEO’s reputation lies in tatters.
Like Eddie Groves and Wal King before him, Frank O’Halloran — the former emperor of insurer QBE for 14 years — was once considered a king among executives. Between the New York terrorist attacks in 2001 and the global financial crisis, O’Halloran was hailed as a corporate mastermind, with QBE’s share price rocketing from $6 to $35.
The rise was driven by a spate of acquisitions, but like most celebrity executives whose share price came from takeover rather than operational improvements, the growth turned out to be little more than a mirage.
The emperor’s clothes were finally revealed in 2011, when QBE announced a 45% fall in profit, as the company’s earnings were hit by natural disasters and poor investment returns. QBE’s share price retreated all the way down to $9.88, barely above the level it was when O’Halloran was appointed CEO back in 1998.
QBE’s shareholder returns plummeted in recent years as the company expanded shareholder funds to pay for acquisitions while profit was falling. This led to return on equity falling from 22% in 2007 to only 7% in 2012.
But it wasn’t merely the number of acquisitions that destroyed QBE’s balance sheet — it was the inability to properly execute the transactions. As the Financial Times‘ Lex column explained:
“Any group of 17,000 employees running eight payroll systems has some easy ways to save money and integrate units.”
Lex also observed O’Halloran made between 70 and 140 acquisitions during his tenure, and the “mere fact that the number is not clear says it all”.
Even worse is the fact the biggest potential landmine in QBE’s portfolio, its mortgage insurance business (QBE LMI), is yet to inflict any damage. QBE LMI, however, remains reliant on the Australian residential property bubble, continuing to remain inflated as it insures the riskiest parts of Australian mortgages.
But while O’Halloran was swanning across the globe acquiring overpriced assets, the QBE board — led by former cleanskin Belinda Hutchinson (from 2010) and John Cloney (himself a former managing director of QBE) before then — was paying O’Halloran very handsomely indeed. Since 2002, O’Halloran was paid more than $58 million by QBE shareholders, making him one of Australia’s wealthiest executives.
And just in case he hadn’t been rewarded enough during his tenure, the QBE board kindly allowed O’Halloran an early release from a non-compete agreement so he would be able to take up the chairmanship of a competitor, Steadfast Group (an insurance broker).
O’Halloran’s replacement, John Neal, earlier this week announced QBE will slash 700 jobs worldwide as part of a plan to save $250 million a year, while also announcing the company will pay a final dividend of only 10 cents per share, well down from the 25 cents it paid in 2011.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Greed, published by John Wiley & Sons in 2010