update - oct 2013

Long time.

I would like to make a few comments regarding the 1H results.

1. Two disappointments- Prior accident year losses of $178 million. John Neal conveyed on the 2nd July webcast that he was very comfortable with prior years so this was a massive disappointment to say the least.

The 2nd disappointment was the Balboa purchase from Bank of America. I don't understand how Bank of America can sell parts of their loan book which Qbe relies on to derive lender placed insurance without penalty considering we paid $700 million for those 10 year rights. This explains the lower premium income than forecast, higher abnormal $40 million claims experience and higher amortization/ write-off expenses with the lower earning capacity of this business.

Now for the positives.

The business in Australia and Asia Pacific is going great with high premium increases, stable claims, cost controls and a relatively strong economy.

Europe & latin America are going reasonably well and will benefit from the recently announced cost controls and re-structuring.

The CEO of the US business, David Dulcos has a massive job re-building this damaged business. He will need to generate new business opportunities using his extensive contacts in the industry and return it to a more sustainable and stable business. This task will be the most crucial in delivering QBE much higher returns on equity.

Current outlook
The crop insurance business should report a bumper profit with record yields of corn and soybeans forecast and the hurricane season is looking benign this year so this too will improve insurance margins.

Long term interest rates were until recently trending up nicely but with the delay in tapering of QE and the recent US govt tussle over the debt ceiling, rates have come back 30 points.

I suspect we should be back on track by November with rates moving back up as long as the US economy keeps it momentum.

I recently bought additional shares at $14.30 and will buy more if we get to $14. A significant de-risking of Qbe will occur if we get thru October unscathed.

The appreciation of the UK pound & Euro against the US dollar will also provide some upside in the reported profits in US dollars.

Overall,even though I am an impatient person by nature, we must give John Neal this year to sort out the bugs in the business and set up his Manilla claims processing centre.

At this moment, I am not informed enough to predict any outcomes with confidence but I suspect this year was about getting the debt under control, increasing the risk margins to keep the regulators and rating agencies happy, selling non core businesses and ending unprofitable business where a reasonable premium cannot be achieved.

Next year will hold no excuses for John Neal and will become his make or break year.