The Dulwich milkman done good

Re: re top ten spotlights, tables etcTO GO FROM studying genetics to delivering milk to running an insurance company may seem a strange career projectory, but it is one which has suited QBE Europe chief executive Steven Burns very well.

However, things could have been very different had Mr Burns been a few years younger.

“When I qualified [from Cambridge] in 1986 it was in the days when the money for staying on and doing scientific research was not there. So, if it had been five years later when the biotech companies were handing out huge grants I would have probably followed a different path,” he explains.

Instead, he ended up as chief executive of an evolving Lloyd’s managing general agency at an exciting time. “I had a lot of fun [at university], ran up an overdraft and left not knowing what I wanted to do. In fact, I did a milk round for three or four months in Dulwich before I concluded I had to get serious and joined Ernst and Young. But I decided fairly quickly I did not like accountancy, so I got out of there. But I had enjoyed working with insurance firms and had particularly loved the Lloyd’s sector.”

Joining the Lloyd’s sector full-time in 1987, Mr Burns was part of the management team which helped integrate Bankside Underwriting Agency and Janson Greem into Limit between 1996 and 1999 and saw the consolidated entity become the largest managing agency at Lloyd’s. He then nearly saw his hard work undone through what he describes as “an act of almost self destruction” when Limit tried unsuccessfully to merge with rival MGA Wellington.

It was at this point, in 2000, that QBE intervened and the path was laid which has brought Mr Burns to his current position. “Frank O’Halloran [QBE group CEO] stepped in and we became part of QBE, which I did not recognise at the time was the best thing that could have happened to the business,” he reminisces.

“We were fortunate in that sitting on the Limit board you could not accept the deal you preferred. You had to accept the deal which was best for your shareholders and when it came to the crunch Wellington lost its bottle and the QBE deal was an outstanding one for shareholders.”

Looking back, Mr Burns remembers that QBE was something of an unknown quantity to the Limit management, and that what it did know was not exactly encouraging at first.

“What we knew about QBE we did not like very much. It had a London operation that was not held in high regard, and obviously the Australian insurance industry had been through a turbulent time and the words ‘Australian’ and ‘insurance’ were rarely used positively in the same sentence.

“So it was a total surprise to us, post-acquisition, how focused and how different QBE was to anyone else. From his point of view that acquisition was the biggest risk that Frank had taken in his career and clearly one that could go badly wrong if they did not retain the right people.

“So Frank and a few of the senior underwriters got close fairly early and he was great at empowering us and giving us a clear steer on the strategy, which was to get out of underperforming parts of the business such as US casualty and focus on the bits where we had the highest quality franchises and people.”

Lloyd’s and company arm merger

Mr Burns continued as CEO of Limit until 2004 when the Australian parent company decided the time was right to bring the Lloyd’s and insurance company operations together under one management structure to benefit from obvious synergies and cost savings.

“We ran the businesses quite happily in isolation for a number of years, but it quickly became apparent that we had a number of overlapping underwriting positions. So the QBE board took the decision to put the two together and it backed the Limit management to run the whole thing, while keeping a few quality people from the management on the company side,” he explains,

The long-term strategy was to bring the underwriting teams together, but Mr Burns reflects that this did not happen overnight, Indeed, it did not even happen within 12 months, adding that it was important “not to impose anything on underwriters, as is often the American model, because you lose the hearts and minds and the business evaporates.”

He adds: “Instead, we bided our time and it was 2007 before we really took the decision to do it. One of the catalysts was the fact there were underwriters saying: ‘now is the time, people are ready, we are convinced that one and one will equal at least two’. So we got on with it.”

Dealing with the legacy

However, it was much quicker when it came to making a decision about QBE Europe’s back office functions and between 2005 and 2006 the finance and IT departments become one. But Mr Burns notes that, while the people have long been united, there are still legacy IT issues which exist today as a result of all the acquisitions the insurer has made through the years.“They may have been in one team, but staff have been dealing with 15 IT systems and ways of doing things, and that is something we are looking at now,” Mr Burns comments.

“Our priority for the next 12 to 24 months is to genuinely integrate and rationalise our office and support functions, and we are taking a radical approach based on the idea that we have too many expensive people based in London supporting business which is not London-centric.” Up to 200 staff have been put on 90-day consultations as part of the review and Accenture has been mentioned as one of the leading contenders for an outsourcing contract (Post, 23 July, p3).

“We are at a sensitive stage, but I think it is clear that the end game is going to be a fairly significant outsourcing of IT with a number of partners,” Mr Burns remarks.

“Xchanging is already a core partner, and we are talking to Accenture and IBM, so we may end up having different partners for change or development work, to running the infrastructure.”

Mr Burns describes this process as “the final building block” and believes, when complete, the firm will have an underwriting and support structure positioned for growth, both organically and given its ambitious plans, acquisition.

Not that QBE has been shy coming forward with its cheque book for acquisitions which it believes offer value to the shareholders and long-term benefits for the business, with its most recent deal seeing it acquire Burnett and Company and the Endurance London-based property portfolio in 2009.“We have never said no to a deal because of IT constrictions. But QBE is totally focused on shareholder wealth so if it does not make sense we will not do it,” explains Mr Burns.

“And it is not a geographic model. Frank O’Halloran does not sit there thinking we will now do a deal in Europe, we will buy wherever the right opportunities are. It just so happens that the best opportunities recently have been in the US and Australia. We have not had a major opportunity here in Europe that fitted our criteria.

“Saying that, we have done bolt-ons worth £100m in 2009 alone. And British Marine in 2005 was a sizable bolt-on, Minibus Plus was a platform for us to expand into the regions, and this year we have completed the Endurance and Burnett acquisitions. And although the latter looks like a US acquisition — being based in Houston — it is linked to our marine business here so it is really a Lloyd’s deal.”

Ultimately, Mr Burns cedes that QBE has not had a “major transformational opportunity in Europe”, something he attributes not only to its strict criteria, but also to its business model. Given its large London market presence, he says it will never “be a contender for consolidating Lloyd’s”.

He adds that another distinction for QBE is that its model calls for consistent shareholder returns, so it is limited in the amount of reinsurance or US catastrophe-exposed business it underwrites. “As a group, we are not prepared to lose more than 5% of our net premium in any one year on a catastrophe event. So from a London point of view, a lot of the potential candidates which focus on US cat and reinsurance would not work for us,” he continues.

“We are growing in the UK regions, but we are doing that organically. We are not going to start buying brokers and distribution, and the prices they have been going for are ridiculous anyway, so you are really looking at continental Europe as our platform for significant acquisition activity and we have been looking at it long and hard for the past two to three years, but it is tough there.”

Limited deals

He adds that as a specialist company, which is not planning a major personal lines assault and does not do life, the opportunities for major deals here are also limited.

“It is well known that the Fortis Corporate Insurance business was attractive to five or six players in Lloyd’s and we had a good hard look at that again, but we stuck to our strategy and the price became higher than we could justify with our criteria so we let it go,” Mr Burns admits.

“But our strategy is one of patience. As long as QBE is making an acquisition somewhere in the world there is no pressure on us to do one here. We are still 35-40% of the group and we would very much like to do a major acquisition in Europe.”

Despite having no major personal lines aspirations, fate could have handed Mr Burns one of the largest broker-only motor insurers in the market if the parent group had been successful with its pursuit of rival Insurance Australia Group in 2008. But having offered A$8.7bn (£5.3m), the bid for the business which owns Equity in the UK was spurned

“Before IAG bought Equity, we thought about buying it. We know [UK CEO] Neil Utley very well and the Equity and our Ensign brand have always been very close as the two leaders in that commercial motor sector for many years,” he reflects.

“But we never got to due diligence stage because IAG came in with an outrageous price so that was history. If we had got it back after the talks last year we would have done what Neil has done. Clearly, IAG UK was distressed on the Hastings side and he has cut the business back to the core lines, which is very sound.

“Even now, if QBE was to buy IAG — and it is not going to happen — I would still think of more positives than negatives. It is a good quality blue chip brand in its market sectors.”

As a long-standing member of the Lloyd’s market, Mr Burns has seen the market undergo a significant amount of upheaval, although he adds that, in essence, the building blocks — such as the dynamics between the diversity of players and flexibility of capital — are pretty much the same.

“What has changed is the influx of corporate capital. Running businesses aligned to one capital provider brings fundamentally different dynamics and the transformation of Lloyd’s, with the combination of the Franchise Board and the better management, has been extraordinary.

“When I think back just 10 years ago to some of the ways we used to run the business and the lack of disciplines, it brings me out in a cold sweat, it was almost primitive. So there has been a total transformation across the business in terms of transparency and the Lloyd’s franchise has been a major driver in that.”

The Lloyd’s “cynic”

Despite being a self-confessed fan of franchise performance director Rolf Tolle, Mr Burns also describes himself as a “cynic” when it comes to Lloyd’s and says he was originally not convinced that franchise discipline could work. And today he remains unconvinced that Lloyd’s will be able to maintain its recent run of record profits.

“When Lloyd’s is at a high — as it is now — it faces its most difficult challenges and I suspect we are entering a period when the numbers won’t stay as good as they have been. Lloyd’s has let a lot of people in, but it has done the right things with regards to quality control. However, there is always a lower quartile and people who don’t perform so well,” he continues.

“And if you look at the business left in Lloyd’s there is too much centred on volatile classes and it has missed an opportunity to keep a broader base of business in. We took our motor business out in 2004 and the people seemed to be waving goodbye to it, rather than trying to persuade us to keep it under the Lloyd’s banner. There were some shorter-sighted decisions in the past which were not right. But on the whole I am a huge fan.”

However, there remains one hangover of the Limit days, which QBE has not been able to draw a line under, namely the participation of the private Lloyd’s investors – Names – on its 386 syndicate. The insurance group last made an offer of £1.25 per £1 of capacity for the 30% it does not own in July 2007 which was rejected by the members’ agencies.

“We missed a trick, and that is the perversity of the Lloyd’s market in that you can buy your capacity when you are underperforming at times of distress, so we could have bought the 386 Names out for 30-40 pence in 2000 or 2001,” he says. “We have become a victim of our success in that the 386 Names’ expectations are now very high — indeed, so much higher than when we made the offer two years ago. I hear from the Names’ members agencies that they would not contemplate an offer of anything less than £2.50 now.”

Mr Burns expands on this: “If you look at the profit 386 has made in recent years it is quite extraordinary. What is frustrating is that when you cut through it, that profitability is not going to be sustained at those levels in the future. With regards normal business valuation, the expectation is far too high

“What it means is that we are unlikely to make another offer for many years as there is a mismatch in our valuations. So until reality prevails and their expectations are more aligned I can’t see us buying any capacity, let alone making an offer.”

Looking ahead, Mr Burns forecasts that, globally, QBE will be doing £8bn gross written premium this year, putting it right on the cusp of the top 20 international insurance groups.

“And we will continue growing by acquisition, so I would be surprised if QBE was not in the top 10 global players in five years’ time,” he explains. “We have crept up on the industry, but because we do not do personal or other high-profile lines, we have not got the brand presence of some of those other companies. We will go through a period of evolution over the next five years where we will definitely grow and that will make us more of a household name. We will also probably do personal lines in some territories outside the UK.”

When asked about how it intends to raise its brand profile, Mr Burns points to Brit’s evolving sponsorship of cricket from the Oval and Surrey Cricket Club to the England cricket team as a path it would like to follow. “I would not swap anything else with Brit at QBE other than it has done a fantastic job with that sponsorship. We had a recent meeting and we have now decided we are ready to do something to raise the brand in terms of sponsorship and we need our version of the Brit Oval.”

Getting noticed

Despite not having the brand awareness it aspires to among the public, QBE has certainly become what could be best described as an irritant to many of the UK’s leading commercial insurance players.
RSA UK insurance CEO Adrian Brown recently told Post: “A number of insurers like the Brits and QBEs of this world are using this period as an opportunity to gain market share. It is not for me to judge their strategies, but I think all brokers would recognise that rates need to harden across the market, and you have some players that are not yet dragging that through. (Post, 14 May, p3)”

Mr Burns responds: “I am in the camp that if people aren’t talking about you, then you are not doing things right. QBE Europe is an extraordinarily financially driven business and our core strategy is about retaining clients.
“We look for retention rates of 90% and in areas where we have got really good business in terms of performance and margins we might be seen to be quite aggressive at defending it, but it is very targeted and we know the risks very well.

“We are not out there being silly on new business so I take the criticism with a pinch of salt as it indicates that we are getting both noticed and under people’s skins.”

In fact, Mr Burns appears to be enjoying the new-found recognition in the regions and concludes with what could be seen as a swipe at the more long-standing players in the market: “We are creating a local model built on empowerment and service delivery without being constrained by any past. But I am surprised how well we come out in the broker surveys, because, to be honest, we are still in start-up mode and our IT is far from perfect. But we are getting recognition for being service minded and broker focused.”
What QBE can do when its IT is up to the speed and consistency Mr Burns thinks is perfect remains to be seen, but it is likely to continue to get under rivals skins for many years yet.

What Steven Burns thinks

On rate increases:

“Remarkably, the 4% expectation we set at the start of the year has been spot on. We are running at 4.6% at the year to date and we write more reinsurance and energy in the first half of the year so that 4.6% will blend back to a round 4% for the year. So, by good fortune, we have been spot on.

“When you cut behind it, the reality is that we have seen stronger increases than we anticipated on the energy book and probably US catastrophe and reinsurance, so they are a little bit ahead of our plan and when you go to the core property and casualty and motor classes it has been a litttle bit disappointing.”

On Solvency II

“We have been surprised at how high the bar has been set by the Financial Services Authority. We have had a recent Arrow review from the regulator and the message was that we still have a long way to go to hit the bar for Solvency II.

“We are responding to the challenge in terms of committing people and resource to it, and it will be a huge amount of work over the next 18 months, but we will get there. It will bring a lot of embedded value. Some of us have done a lot with regard risk management, but have we really made it a living, breathing, added dynamic? Probably not. The challenge of Solvency II is to turn risk management into an embedded, dynamic process.”

On Lloyd’s opening in foreign territories:

“I am not convinced that opening offices in Europe is the right thing to do. I can see why they want to do it, but for a company like QBE is has virtually no interest as we want to open and use our own offices for growth. There is no dynamic as to why you would want to do business on Lloyd’s paper.”

On QBE Europe’s parent company redomiciling to the UK

“It is an issue that is kept under constant review and if you came back in 10 years’ time and QBE was in the top five or 10 global insurance groups and has continued its growth, then there would be a fair possibility that the group would have looked for a dual listing. One of the reasons that QBE has gone the way it has is that it realises that Australia will never be more than 1.5-2% of the global market. Can you become a £30bn company and be based in Sydney, maybe or maybe not, we will wait and see.”