Inside the borders of pariah state Russia lie hundreds of stranded jets and a multimillion-dollar headache for Australian investors.
The headache is an insurance headache: Sydney-based QBE is among a horde of insurers underwriting cover for planes that have been effectively seized.
The jets are examples of the widespread – and occasionally exotic – risks covered by QBE, which started as a marine insurer in Townsville in 1886 and now operates in 27 countries. It’s also an example of what QBE chief executive Andrew Horton finds on his plate nearly one year into the job.
Questions in the market include if Horton can lead reformation of a company stained with top-level scandal. Secondly, can QBE avoid repeating blow-ups from an earlier acquisition spurt? And lastly, why is Englishman Horton, 60, taking his first overseas job after making $45 million in his past gig?
But back to the planes. Russia’s Ukrainian invasion check-mated plane owners leasing aircraft to Russian operators. Sanctions meant lessors had to repossess their craft but Russia passed a law allowing aircraft to be placed on Russian registers. The leased jets are trapped. S&P Global Ratings estimates the aviation losses could range from $US6 billion ($8.8 billion) to $US15 billion.
We pay out billions and billions in claims.
— Andrew Horton, QBE
The jets contributed to a $US75 million provision for QBE’s Ukraine war problems, and expensive questions linger, affecting which insurance policies are triggered.
“Is this an act of war, that’s holding the planes there?” Horton says.
“The ‘aviation war policy’ will pay out probably 25 per cent of the value of the asset. While the ‘aviation all risk’ [policy] will pay out full value of the asset.
“The debates are still going on within the industry about whether it’s an act of war.”
The $US75 million was a sting rather than femoral rupture when QBE’s profits dropped to $US151 million from $US441 million in the six months to June. That result was sapped by turbulent investment markets, but Horton is hopeful of a smoother ride ahead.
Speaking from QBE’s glass-walled CBD headquarters, Horton espouses a mantra of providing consistency for investors, properly grasping risks and avoiding over-exposure to any one risk.
It’s a world away for a man born in Manchester, to a father who was an auto-parts finance director and a part-time book-keeper mother who raised three children, and who graduated with a Cambridge University chemistry degree.
Despite choosing chemistry, Horton could not find sector work so became an accountant and worked for banks before moving to UK-based insurer Beazley in 2003.
Beazley is a “specialty” insurer for sometimes out-of-the-box events. Take its “deadly weapons protection” to insure liability risks. One scenario? “Syringe rage in a shopping mall” – where a “homeless drug addict who takes exception to being moved on by security personnel in a shopping mall reacts by using a used syringe to attack families passing by.”
Horton became chief executive in 2008, and Beazley’s share price grew from 108.5 pence to 351.8 pence by his 2021 departure. It reaped $US3.56 billion in premiums in 2020 and posted a pre-tax $50.4 million loss in a COVID-19-ravaged year.
What is there to like about insurance? “There are deep relationships,” Horton says, citing ties between insurers, brokers and clients.
Relationships are important to the QBE chief, who describes himself as “a reasonably good listener” and someone who communicates “relatively clearly”.
“[Insurance] is a force for good. It’s keeping individuals, communities, companies up and running when they have a major incident,” he adds. “We pay out billions and billions in claims.”
Those with an insurance dispute might splutter. QBE itself has fought small businesses making business interruption claims when closed during the pandemic, and also set aside $US75 million for not passing on promised discounts to Australian clients, part of industry-wide problems.
Beazley even had a lengthy legal battle with a former insurance partner, US-based Prime Insurance, with the US entity saying it won a $6.5 million reimbursement dispute about a US water park spinal-cord injury claim.
Horton says the industry cops flak but counters that, in general, disagreements emerge when claims are not easily defined, such as determining professional negligence losses.
‘Leaves ego at the door’
A bevy of congratulations marked Horton’s move to QBE. Among well-wishers was Bermuda-based John Turner, of global insurance and reinsurance broker Ed Broking, who has known Horton for 20 years and speaks highly of his record, including building out cyber insurance.
“[Horton] is a leader who leaves his ego at the door and will make the right decisions for the business, shareholders and colleagues,” Turner tells BOSS.
Horton’s package includes a base salary of $1.8 million and potential bonuses of $7.6 million. A BOSS check of Beazley accounts shows Horton’s statutory pay came to almost $45 million between 2003 and 2021.
Horton says he has not moved for monetary reward. Rather, working overseas was an attraction. Despite widespread offshore travel for work – Beazley had US insurance operations, for instance – his whole career had been British-based.
“I thought I’d missed out on something. When you talked to friends, colleagues, they’d worked somewhere else,” he says. He adds he had known QBE as a good European competitor but one that had encountered challenges earlier in the US.
He says he “told the remuneration committee chair here that I’m perhaps going to be one of the easiest CEOs they’ve ever come across because I’m not worried about it”.
“If we do a good job, we will be rewarded relatively well financially ... and if we don’t, we won’t.”
He lives in eastern Sydney with wife Sophie, catching a bus or walking the 4.25 kilometres to work. His other exercise includes having started jogging when COVID started (a shoe salesperson assured Horton his virgin knees would last until his 70s), and so now runs twice a week.
“You’ll see the slowest guy running around, being overtaken by all these younger people,” he says.
He also likes wine. “I drink every [type] – white, red, sparkling,” he says. “It’s not quantity … I’m not drinking a bottle a night or anything like that. But I just like trying new wines.”
He’s yet to try Australian cask wine, though. “It’s worth trying?” he asks innocently.
Horton’s soft-spoken reputation differs from the hard-driving tactics of some predecessors, such as fellow Briton Pat Regan, QBE’s previous permanent chief executive. Some insiders recalled Regan being a competitive man – a keen soccer player, but some QBE leadership offsite games became so rough that fellow employees were injured.
While views are mixed, some industry sources also believed QBE’s top echelon historically suffered from an arrogant or aggressive culture.
It came to a swift end for Regan, who resigned, with the board saying he did “not meet” code of conduct standards for workplace communications. It arose from a female US employee’s complaint. The board would not divulge the scandal, resulting in a gossip-filled vacuum. Horton says he doesn’t know what happened.
How can he reform culture if he doesn’t know the issue? “Because that’s an individual, and there’s 11,000 of us,” he responds.
Horton says QBE’s core culture is good. “I find it straightforward, the people are very open. They really care about what they are doing,” he says.
He thinks QBE is becoming more collaborative, breaking down international silos. The logic is to avoid one division trying something without learning from experiences learned elsewhere in the group.
Another cultural issue that insiders cite is a degree of personality split within QBE. Australia accounts for less than one-third of premiums – $US5.2 billion from the group’s 2021 result of $18.45 billion. Is it an Australian operation? A UK operation?
Horton argues that while QBE is different to Suncorp and IAG, which have well-known home and auto brands focused largely in Australia, he regards it as “an Australian company” and does not feel any geographical rupture in the entity’s identity.
So can QBE, which is focused on commercial insurance, comprehend the dangers of covering everything from US crops to Australian businesses and European terrorism risk?
After all, QBE had expanded under Frank O’Halloran’s 14-year run with more than 100 acquisitions – though it later had troublespots, increasing reserves by $US170 million in 2014, mostly to cover higher Argentinian workers’ compensation claims.
Horton points out that QBE has withdrawn from some countries and argues insurance is about balancing risks.
The company has created “cells” within divisions to examine what is being underwritten, he says. But he also realises surprises can happen, pointing to COVID-19.
JP Morgan analyst Siddharth Parameswaran believes the US is one of QBE’s greatest opportunities. “[Another is] restoring confidence in investors’ minds about their ability to be somewhat predictable with their results,” he says.
Parameswaran says while QBE had some great buyouts, problems included a weaker insurance pricing cycle earlier and some “tough acquisitions in the late 2000s”.
Among Horton’s strategies is building presence in North America, without suddenly introducing and then dropping products, which he thinks alienated brokers previously.
He also pours cold water on a new acquisition spree. QBE has toyed previously with audacious moves, such as trying to break into Australia’s home insurance market by teaming with Bank of Queensland during the global financial crisis to acquire Suncorp.
“I don’t want to be distracted by acquisitions and so on,” Horton says. “Let’s build on what we’ve got for the moment. If there was a bolt-on acquisition that came along that did something perfect for us, then great. But let’s not get too excited about that.”
Perhaps QBE’s softer-softer era is upon investors.
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