Why QBE should look to the ancient Greeks

QBE’s annual general meeting did not set the world ablaze because of new guidance or prospects: it was ground-breaking because it unveiled initiatives which speak to the heart of any organisation - its culture.

This is the view of CLSA analyst Jan van der Schalk who in a client note quoted Plato, the Greek philosopher and mathematician, to illustrate his point about the value of the QBE chair’s shareholder address on sustainability.

According to the analyst, when Plato said: “No one ever teaches well who wants to teach, or governs well who wants to govern”, he was alluding to the ‘how’, not the 'why'.

“Every business requires a social licence to operate sustainably and successfully and QBE's focus on 'purpose' is fostering an organisation where everything is set to achieving it,” he said.

Further, the analyst calculated the dollar value of the insurance giant’s focus on 'how you do it' over 'why you do it'.

Green bond

For a start, van der Schalk noted that QBE is the first global insurance company to issue a Green Bond. At the shareholder meeting, QBE chair Marty Becker said the insurer was at the forefront of initiatives to direct more institutional capital to projects that make a positive, sustainable difference. Moreover, that this was an area of ongoing focus for the Board.

“The uptake by QBE’s clients of this staggeringly simple initiative has been so strong that it’s left the company searching for suitable investments to match flow with,” van der Schalk claimed. “QBE’s recently issued Green Bond was three times oversubscribed. A clear purpose creates cultural employee alignment – it’s simple; when you are proud of the organisation that you work for, you’ll work better.”

To van der Schalk, insurance is complex because it’s both soft and hard, spanning the divide between empathy and underwriting discipline. Consequently, he ranks Australian boards for their “hands on” insurance experience, the ability to create a decent culture and promote diversity.

Becker earned kudos for recruiting Australia’s top rated director Mike Wilkins, combined with the differentiated skill-set of new recruit Katheryn Lissom. “He added capability and diversity: clever.”

Canadian-based Lisson has a background in digital technology, cyber security and data analytics. Recognising the growing importance of these areas, she is chairing a new Board committee focused exclusively on technology and operational transformation.

Accordingly, QBE’s Board rises from eighth place to fourth place in CLSA’s universe. Also, QBE sits in top slot on environmental, social and governance and also gains points for candidly recognising the limitations of its remuneration structure and attempting a makeover.

“Value is not an ephemeral concept; it needs to be enduring. Aligning pay to generating this is, hence, of pivotal importance," said van der Schalk. “Not only do we know that a more mechanistic approach to incentives works, the new, long-term emphasis should be read as a clear indicator of how the organisation feels about prospects going forward.”

Slow turnaround

In applying these scores to “regular” valuation, van der Schalk has QBE’s current ESG positioning equating to a 7 per cent uplift in share price.

Additionally, he argued, QBE’s continued operational savings (US$150 million at the end of 2018), strong capital position and leverage to an insurance market rate upturn suggest that the company is likely to beat consensus expectations

The analyst is forecasting cash profits of US$1.05 billion and US$1.26 billion for 2017 and 2018 respectively and an insurance margin of 11.3 per cent and 13.3 per cent from a combination of remediation and rate rise benefits in North America and Australia, partially offset by competitive pressures in Europe.

“The management team has largely stabilised downside from the back book and smoothed volatility from increased catastrophe costs by buying additional reinsurance covers," said van der Schalk.

“The turnaround could be slow but medium-term leverage to global commercial insurance rates cycle and improving fundamentals is positive.”  

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