QBE should cut $2.5 billion from the value of its goodwill to raise returns, according to Ross Curran, an insurance analyst with the Commonwealth Bank’s CommSec broking house.

“It has $6.2 billion worth of goodwill on its balance sheet and has written down only $461 million in the past 10 years, or 7% of the total,” Mr Curran told insuranceNEWS.com.au.

“That means it’s saying that with 93% of the businesses it has bought it didn’t pay a premium above intrinsic value. The best fund managers in the world only score about 70%.”

Mr Curran’s call challenges the record of former QBE CEO Frank O’Halloran, who stopped amortising goodwill in 2003 and subjected it to an annual impairment test.

He devised a formula to establish the value of potential acquisitions and another to ensure acquisitions were paying their way; if they were, there was no writedown, as insuranceNEWS.com.au revealed in April (see earlier story).

Under this system goodwill grew from $356 million to the current $6.2 billion, with the company making more than 100 acquisitions, the latest in Argentina and Hong Kong.

Mr Curran says a writedown would help QBE increase its return on equity (ROE) to 14%, a target not met since 2009, before a spate of Australasian catastrophes. Last year ROE was 6.8%.

“We see a 14% ROE hurdle as being entirely justifiable,” he said. “However, it needs to be based on a realistically sized balance sheet.”

A $2.5 billion writedown would allow QBE to achieve this target.

“Management are paid largely according to ROE multiples,” Mr Curran said. “If it is artificially low, then to increase it the company has to take increased risks. So [a writedown] is in shareholders’ interests.”

He says a goodwill writedown would reduce QBE’s capital base, making its returns higher as a percentage of assets. It would not affect the regulatory capital base because “regulators don’t count goodwill” as mandatory capital.

The failure to write down goodwill has led to more than half of QBE’s shareholders’ equity being made up of intangibles.

There has been speculation new CEO John Neal may want a writedown to break with the past.

However, a QBE spokesman says the company has no plans to do so.

“Goodwill carrying value is subject to an annual assessment of recoverability based on discounted cashflow analysis,” he said. “We had no valuation issues at the end of [calendar] 2011 and underlying profitability has improved since then.”