QBE CEO John Neal says the writedown of the group’s North American operations draws a line under the past – but can he convince investors?

Many brokers had a “buy” on QBE before last week, but the tone of some comments when Mr Neal hosted a teleconference to announce it will make a loss this year suggested patience is wearing thin.

“This is probably the third or fourth time you have apologised for downgrading guidance – what level of confidence should we have for next year?” one analyst asked.

The cynicism must be worrying for management. If brokers are getting angry phone calls from investors who they put into the stock, they will be reluctant to call QBE a “buy” until they are convinced the turnaround is working. 

That will take time, and in this sort of environment the bad news eclipses the good.

Local operations were barely mentioned last week, although Mr Neal says Colin Fagen’s Australia and New Zealand operation is running “very, very well”, with a combined operating ratio below 90%.

Asia-Pacific operations are also growing by 20-25%, and Latin America is “a business that we feel very comfortable with”.

European gross written premium will fall 4-5% next year because QBE is quitting lines that are not performing, and pricing is weak. “In Europe we just have to be patient,” Mr Neal said.

Although the North American mortgage insurer QBE Financial Partner Services will make a loss this year, it is expected to break even next year. Mr Neal says it is viable as a much smaller business.

He says it will take a year to get North America into shape and has forecast a combined operating ratio (COR) of 96% there next year.

He believes QBE can achieve a COR of 90% in the medium term, if European rates move. He told analysts the cost reduction program “is going very nicely” and above expectations.

Considerable analysis has been carried out on “what is a core business and what is not a core business for QBE”.

Next year will show if Mr Neal’s program of reform is gaining traction, but it is not going to be a great time for comparisons with peers, as other insurers report higher profits following a relatively benign period for catastrophes.

Investors like a turnaround story, since there is profit to be made for those smart or brave enough to jump in early, but last week’s 30% share price fall shows how they react when disappointed.

Management’s first challenge is to prove that a line has indeed been drawn under the past; its second is to show that QBE has emerged stronger and has a strategy for growth.

Mr Neal has probably the hardest job in insurance, as he not only works to transform the company but also provide a positive vision for coming years.