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2023 Report2018
ANNUAL
R E P ORT
Q B E I N S U R A N C E G R O U P L I M I T E D
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Table of contents
A N N UA L R E P O R T 2 018
SECTION 1
SECTION 3
SECTION 5
Performance overview
Governance
Financial Report
Chairman’s message
2018 snapshot
Group Chief Executive
Officer’s report
SECTION 2
Business review
Group Chief Financial
Officer’s report
Divisions at a glance
North American Operations
business review
European Operations
business review
Australian & New Zealand
Operations business review
Asia Pacific Operations
business review
Equator Re business review
2
4
6
10
24
26
28
30
32
34
Climate change action plan
Risk – our business
Board of Directors
Group Executive Committee
Corporate governance
statement
36
42
44
46
48
Financial Report contents
Financial statements
Notes to the financial
statements
Directors’ declaration
85
86
90
162
SECTION 6
SECTION 4
Other information
o
n
Directors’ Report
Independent auditor’s report
Directors’ Report
Remuneration Report
56
60
Auditor’s independence declaration 84
Shareholder information
Financial calendar
10 year history
Glossary
163
172
175
176
177
QBE Insurance Group Limited | ABN 28 008 485 014
All amounts in this report are US dollars unless otherwise stated.
2
Chairman's message
Strong
foundations for a
sustainable future
Plans to reshape and simplify QBE’s business
progressed meaningfully in 2018, with management
successfully executing against our strategic agenda.
Improved market conditions combined with
a forensic approach to performance management
contributed to an improved financial performance
and better returns for shareholders. We have laid
strong foundations to build upon for a sustainable
and profitable QBE of the future.
Overview
Our 2018 combined operating ratio of 95.7% 1,2,3 represents a significant
improvement on our 2017 performance. It was also pleasing to see modest
growth in both gross written and net earned premium in 2018.
The Group statutory net profit after tax was $390 million, reflecting more
normal catastrophe incidence coupled with meaningful improvement
in the attritional claims ratio, assisted by strong premium rate momentum.
The improved result was achieved despite lower than anticipated investment
returns which were impacted by significant market volatility, particularly
in the final quarter of the year.
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
3 Continuing operations basis.
This result reflects the hard work of our
people and the performance management
discipline instilled throughout the year,
together with an improvement in the quality
and consistency of our underwriting.
Indeed, our underwriting profit this year
of $515 million 2 represents a very significant
turnaround from the loss reported in 2017.
True to our plans, we exited portfolios, regions
and countries where we lacked scale or were
unable to achieve an acceptable rate of return.
These transactions complete QBE’s portfolio
rationalisation and I congratulate Pat Regan
and his team on this significant milestone,
achieved in just 12 months. The simplification
of QBE is outlined in the Group CEO’s report
on pages 6 and 7.
We saw a reduced incidence of natural
catastrophes this year in contrast to the record
losses that impacted the global insurance and
reinsurance market in 2017. Nevertheless,
catastrophe events were again elevated
in 2018, including Hurricanes Florence and
Michael in the United States, typhoons
in Japan, a windstorm in Canada, the worsening
drought in parts of Australia as well as localised
storms, and the devastating wildfires that
swept through parts of the United States, most
recently in California. All had serious and often
tragic consequences for local communities and
caused heavy and widespread property and
infrastructure damage.
Divisional Results
All of our divisions delivered improved
underwriting results 1 in 2018.
Australian & New Zealand Operations recorded
another strong underwriting result with the
combined operating ratio improving slightly
to 91.9% 1. Result quality continues to improve
with a reduced reliance on positive prior accident
year claims development and lenders’ mortgage
insurance profits. Pricing conditions in Australia
& New Zealand remain particularly strong.
I am pleased to report that the remediation
of Asia Pacific Operations is now largely
complete with the business generating
an underwriting profit of $2 million 2 in the second
half of 2018, following a $22 million 2 loss in the
first half and a $100 million loss in 2017. Decisive
action to restore underwriting margins naturally
resulted in a reduction in premium income.
With remediation of Asia Pacific well
progressed and our portfolio rationalisation
program complete, we have consolidated the
Group’s divisional structure. Effective 1 January
2019, our Asian entities joined with European
Operations to form our new International
division. At the same time, the Pacific Islands
and Indian entities were consolidated into
Australian & New Zealand Operations
to form our Australia Pacific division.
These changes will help drive efficiencies across
the Group, with much of the administration of the
former standalone Asia Pacific Operations
absorbed by the larger and better resourced
International and Australia Pacific divisions.
2
Chairman's message
Strong
foundations for a
sustainable future
Plans to reshape and simplify QBE’s business
progressed meaningfully in 2018, with management
successfully executing against our strategic agenda.
Improved market conditions combined with
a forensic approach to performance management
contributed to an improved financial performance
and better returns for shareholders. We have laid
strong foundations to build upon for a sustainable
and profitable QBE of the future.
Overview
Our 2018 combined operating ratio of 95.7% 1,2,3 represents a significant
improvement on our 2017 performance. It was also pleasing to see modest
growth in both gross written and net earned premium in 2018.
The Group statutory net profit after tax was $390 million, reflecting more
normal catastrophe incidence coupled with meaningful improvement
in the attritional claims ratio, assisted by strong premium rate momentum.
The improved result was achieved despite lower than anticipated investment
returns which were impacted by significant market volatility, particularly
in the final quarter of the year.
This result reflects the hard work of our
people and the performance management
discipline instilled throughout the year,
together with an improvement in the quality
and consistency of our underwriting.
Indeed, our underwriting profit this year
of $515 million 2 represents a very significant
turnaround from the loss reported in 2017.
True to our plans, we exited portfolios, regions
and countries where we lacked scale or were
unable to achieve an acceptable rate of return.
These transactions complete QBE’s portfolio
rationalisation and I congratulate Pat Regan
and his team on this significant milestone,
achieved in just 12 months. The simplification
of QBE is outlined in the Group CEO’s report
on pages 6 and 7.
We saw a reduced incidence of natural
catastrophes this year in contrast to the record
losses that impacted the global insurance and
reinsurance market in 2017. Nevertheless,
catastrophe events were again elevated
in 2018, including Hurricanes Florence and
Michael in the United States, typhoons
in Japan, a windstorm in Canada, the worsening
drought in parts of Australia as well as localised
storms, and the devastating wildfires that
swept through parts of the United States, most
recently in California. All had serious and often
tragic consequences for local communities and
caused heavy and widespread property and
infrastructure damage.
Divisional Results
All of our divisions delivered improved
underwriting results 1 in 2018.
Australian & New Zealand Operations recorded
another strong underwriting result with the
combined operating ratio improving slightly
to 91.9% 1. Result quality continues to improve
with a reduced reliance on positive prior accident
year claims development and lenders’ mortgage
insurance profits. Pricing conditions in Australia
& New Zealand remain particularly strong.
I am pleased to report that the remediation
of Asia Pacific Operations is now largely
complete with the business generating
an underwriting profit of $2 million 2 in the second
half of 2018, following a $22 million 2 loss in the
first half and a $100 million loss in 2017. Decisive
action to restore underwriting margins naturally
resulted in a reduction in premium income.
With remediation of Asia Pacific well
progressed and our portfolio rationalisation
program complete, we have consolidated the
Group’s divisional structure. Effective 1 January
2019, our Asian entities joined with European
Operations to form our new International
division. At the same time, the Pacific Islands
and Indian entities were consolidated into
Australian & New Zealand Operations
to form our Australia Pacific division.
These changes will help drive efficiencies across
the Group, with much of the administration of the
former standalone Asia Pacific Operations
absorbed by the larger and better resourced
International and Australia Pacific divisions.
In 2018, European Operations produced
another strong underwriting result reporting
a combined operating ratio of 94.8% 1 and
solid premium growth. Declining industry
margins coupled with the severe catastrophe
experience of 2017 appear to have served
as a catalyst for a long overdue recovery
in pricing in many of the markets in which
European Operations competes.
North American Operations reported
a significantly improved combined operating
ratio of 97.9% 1 compared with 109.1% 1,2
in the prior year, underpinned by a healthy
improvement in the attritional claims ratio.
While catastrophe costs reduced significantly
relative to the extreme experience of 2017,
they were nevertheless above expectations
with the industry particularly hard hit by
wildfire losses in the final quarter of the year.
Group reinsurance program
Stronger and more consistent underwriting
results over the past 12 months has afforded
us the opportunity to move to a simpler, more
sustainable reinsurance structure.
While the previous program served us well
over the last four years, it is no longer the
right structure for QBE. With the Group’s
underwriting risk profile and consistency
of performance improving, a more conventional
reinsurance structure is appropriate.
This new structure, announced to the market
in December 2018 and detailed on page 11
of this Annual Report, will see us purchase
greater protection against catastrophe claims
and lower large individual risk retention,
tailored to complement the benefits our
Brilliant Basics program will deliver over time.
Shareholder returns
Our dividend policy is intended to reward
shareholders relative to cash profit, while
maintaining sufficient capital for future
investment and growth in the business.
Shareholders will recall that the Group’s
positive financial performance at the half
year enabled the Board to declare an interim
dividend of 22 Australian cents per share.
In light of the Group’s full year performance,
the Board has declared a final dividend of 28
Australian cents per share. This represents
a full year dividend of 50 Australian cents per
share and compares favourably with the 26
Australian cents per share paid out in 2017.
During 2018 we continued with our buyback
program, purchasing A$333 million of QBE
shares and we remain committed to our
overall three-year program.
Leadership
Pat Regan formally commenced in the
role of Group Chief Executive Officer
on 1 January, 2018 and, under his leadership,
the Group is now simpler, stronger and
more efficient.
Pat has also completed the formation
of his Group Executive Committee (GEC).
In February 2018, Vivek Bhatia joined as Chief
Executive Officer of our Australian & New
Zealand operations. In April 2018, Inder
Singh was promoted to Group Chief Financial
Officer and in July 2018, we welcomed Peter
Grewal to QBE as Group Chief Risk Officer.
Group General Counsel and Group Company
Secretary, Carolyn Scobie, and Group Head
of Communications and Marketing, Vivienne
Bower, also joined the GEC. Effective
1 January 2019, Jason Brown moved from the
role of CEO Asia Pacific Operations to the new
role of Group Chief Underwriting Officer.
Together with Margaret Murphy, Russ
Johnston, David McMillan and Richard Pryce,
this team provides QBE with the right mix
of skills, industry experience and technical
expertise to deliver for our shareholders
in 2019 and beyond.
Board renewal also remains an ongoing
focus of your Board, and so I was pleased
to announce the appointment of Fred
Eppinger as a non-executive director,
effective 1 January 2019. Fred brings
to QBE more than 13 years experience
as a property and casualty CEO and over
35 years of experience in senior finance and
strategic marketing roles and his appointment
further complements the depth of insurance
expertise on your Board.
Looking ahead
Our improved performance in 2018, coupled
with a more simplified structure and focus
on achieving cost reductions across the
Group, positions QBE well.
In 2019, we will continue to drive further
performance improvement, increase the
use of data analytics and digital tools in our
underwriting, strengthen earnings quality,
target further improvements in our return
on equity and, most importantly, continue
to deliver value for our shareholders.
We will be guided in this work by a new
set of strategic priorities, outlined on page
9. Consistent with our ongoing efforts to
address current and emerging environmental,
social and governance (ESG) risks for our
business, these priorities include a specific
focus on sustainability. Further information
on our approach to sustainability and ESG
risk can be found in our 2018 Sustainability
Report published on our website.
I would like to take this opportunity to thank
our people, led by Pat Regan and his executive
team, for their ongoing commitment to our
company. I would also like to particularly thank
you, our shareholders, for your continued
support as we build the QBE of the future.
W. Marston Becker
Chairman
Dividend
per share (A¢)
50�
92% from 2017
Dividend
payout (A$)
$669M
88% from 2017
A$M
1,500
1,125
750
375
0
A¢
60
45
30
15
0
4
0 5
5
0
5
7
3
6
2
2014
2015
2016
2017
2018
Dividend per share (A¢)
Dividend payout (A$M)
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
3 Continuing operations basis.
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
2 Excludes transactions to reinsure liabilities.
3
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4
2018 snapshot 1
Shareholder
highlights
Dividend per share (A¢)
50¢
669
Dividend payout (A$M)
A¢
60
45
30
15
0
4
0 5
5
0
5
7
3
6
2
A$M
1,500
1,125
750
375
0
2014
2015
2016
2017
2018
Dividend per share (A¢)
Dividend payout (A$M)
88% from 2017
Earnings (loss) per share (US¢)
29.0¢
2017 (91.5)¢
Financial highlights 3Net profit after income tax (US$M)
2017
(1,249)
2016
Combined operating ratio (COR) (%)
2015
95.9%
2017 104.5%
2014
2013
Net profit (loss) after income tax (US$M)
844
687
742
567
(254)
$1,779M from 2017
Gross earned premium
by class of business (%)
Gross earned premium
Gross earned premium
by class of business
by class of business
2018
2017
(1,212)
2016
2015
2014
Other
Other
Financial & credit
Financial & credit
567
844
687
742
Insurance profit and
underwriting result (US$M)
Accident & health
Accident & health
Insurance profit (loss) (US$M)
Marine energy & aviation
Marine energy & aviation
6
2
8
0
8
4
2018
826
Workers' compensation
Workers' compensation
Professional indemnity
Professional indemnity
$886M from 2017
Public/product liability
Public/product liability
Agriculture
0
6
Motor & motor casualty
(
)
)
7
0
5
(
Motor & motor casualty
2017
Commercial & domestic property
Agriculture
Underwriting
result (US$M)
480
4%
$987M from 2017
6%
Insurance
Commercial & domestic property
(loss) profit
Underwriting
result
2018
%
2018
%
29.2
29.2
2017
%
2017
%
29.9
29.9
Commercial &
domestic property
Commercial &
Motor & motor casualty
domestic property
Agriculture
Motor & motor casualty
Public/product liability
Agriculture
Professional indemnity
Public/product liability
Workers' compensation
Professional indemnity
Marine, energy & aviation
Workers' compensation
Accident & health
Marine, energy & aviation
Financial & credit
Accident & health
Other
Financial & credit
Other
15.7
12.7
11.1
7.9
7.3
6.6
5.2
3.8
0.5
15.7
12.7
11.1
7.9
7.3
6.6
5.2
3.8
0.5
15.9
12.3
15.9
10.7
12.3
7.5
10.7
7.5
7.5
6.3
7.5
4.9
Insurance
6.3
(loss) profit
4.0
4.9
Underwriting
1.0
4.0
result
1.0
Cash profit (loss) return on
average shareholders’ funds (%) 2
8.0%
2017 (1.4)%
Net earned premium (US$M)
11,640
3% from 2017
Net earned premium by type (%)
facultative
insurance
92% direct and
8% inward
reinsurance
1 The information in the tables above is extracted or derived from the Group’s audited financial statements included on pages 86 to 161 of this Annual
Report. The Group Chief Financial Officer’s report sets out further analysis of the results to assist in comparison of the Group’s performance against
2018 targets provided to the market.
2 Cash profit ROE from continuing operations excluding gains (losses) on disposals.
3 2017 and 2018 figures reflect results for continuing operations only.
4
5
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Financial highlights 3Net profit after income tax (US$M)
Operational highlights
Sustainability highlights
Dividend per share (A¢)
Combined operating ratio (COR) (%)
Net profit (loss) after income tax (US$M)
Average premium rate increase (%)
Group-wide 4
5.0%
Divisions
North American
Operations
European
Operations
Australian &
New Zealand
Operations
Asia Pacific
Operations
4
Workforce (%)
32%
Women in senior
management
4.1%
4.4%
7.3%
1.0%
Target 35% by 2020
Greenhouse
gas emissions
reduction (%)
10%
from 2017
2
r
e
v
i
e
w
B
u
s
i
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s
s
3
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4
R
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s
QBE Ventures
Retention (%)
'
1
o
v
e
r
v
i
e
w
P
e
r
f
o
r
m
a
n
c
e
Insurance profit and
Accident & health
Accident & health
underwriting result (US$M)
3 investments
81%
Carbon neutrality (tonnes CO2-e)
47,273 tonnes
CO2-e
Cell reviews
offset through
>500
Premiums4Good (US$M)
Climate change
action plan
Countries of operation 31
Bermuda
2021 ambition
$1B
Total invested
$440M
Collaborating on TCFD
and sustainability
1 The information in the tables above is extracted or derived from the Group’s audited financial statements included on pages 86 to 161 of this Annual
Report. The Group Chief Financial Officer’s report sets out further analysis of the results to assist in comparison of the Group’s performance against
2018 targets provided to the market.
2 Cash profit ROE from continuing operations excluding gains (losses) on disposals.
3 2017 and 2018 figures reflect results for continuing operations only.
4 Excludes premium rate changes relating to compulsory third party motor (CTP).
5
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2018 snapshot 1
2017
2016
2015
2014
2013
(1,249)
844
687
742
567
(254)
$1,779M from 2017
95.9%
2017 104.5%
Gross earned premium
by class of business (%)
Gross earned premium
Gross earned premium
by class of business
by class of business
Shareholder
highlights
50¢
Dividend payout (A$M)
669
4
0 5
5
0
5
7
3
6
2
A¢
60
45
30
15
0
2014
2015
2016
2017
2018
Dividend per share (A¢)
Dividend payout (A$M)
88% from 2017
A$M
1,500
1,125
750
375
0
Earnings (loss) per share (US¢)
29.0¢
2017 (91.5)¢
2018
2017
2018
%
%
2017
%
29.2
%
29.9
Commercial &
domestic property
Commercial &
domestic property
Motor & motor casualty
29.2
15.7
Motor & motor casualty
Agriculture
Public/product liability
Agriculture
Professional indemnity
Public/product liability
Workers' compensation
Professional indemnity
Marine, energy & aviation
Workers' compensation
Accident & health
Marine, energy & aviation
Financial & credit
Accident & health
Other
Financial & credit
12.7
15.7
11.1
12.7
7.9
7.3
6.6
11.1
7.9
7.3
6.6
5.2
3.8
0.5
Other
29.9
15.9
12.3
15.9
10.7
12.3
10.7
7.5
7.5
7.5
7.5
6.3
5.2
Insurance
4.9
3.8
(loss) profit
4.0
6.3
4.9
0.5
Underwriting
1.0
result
4.0
1.0
Cash profit (loss) return on
average shareholders’ funds (%) 2
8.0%
2017 (1.4)%
Net earned premium (US$M)
11,640
3% from 2017
2017
(1,212)
2018
2016
2015
2014
Other
Other
Financial & credit
Financial & credit
567
844
687
742
Insurance profit (loss) (US$M)
Marine energy & aviation
Marine energy & aviation
826
Workers' compensation
Workers' compensation
Professional indemnity
Professional indemnity
$886M from 2017
Public/product liability
Public/product liability
6
2
8
0
8
4
Agriculture
Underwriting
result (US$M)
Agriculture
)
0
6
)
7
0
5
(
Motor & motor casualty
(
480
Motor & motor casualty
2017
2018
Commercial & domestic property
Commercial & domestic property
Insurance
(loss) profit
$987M from 2017
Underwriting
result
4%
6%
Net earned premium by type (%)
92% direct and
insurance
facultative
8% inward
reinsurance
6
Group Chief Executive Officer’s report
A stronger
and simpler QBE
The actions we have taken this year to simplify the
Group, upgrade core capabilities in pricing, underwriting
and claims management and implement a rigorous
performance management framework have delivered
meaningful improvement in the underlying quality
of our business and our financial performance in 2018.
The positive momentum we have built throughout 2018,
combined with our 2019 strategic agenda, positions
us well to deliver value for our shareholders in 2019
and beyond. Set out hereafter is our progress against the
seven key priorities we set ourselves at the start of 2018.
Simplify QBE
During 2018, we successfully exited
the countries and portfolios where
we lacked scale or were not able
to deliver an acceptable return to
shareholders. This included the
sale of operations in nine countries
covering our entire Latin American
Operations, Thailand, Indonesia
and the Philippines. We also exited
loss-making portfolios including North
American personal lines, Hong Kong
construction workers' compensation
and Australian & New Zealand
travel insurance.
Our disposal program generated total
sale proceeds of around $550 million
and a premium to book value
of around $100 million. Businesses
exited generated underwriting losses
in 2017 of around $200 million.
6
Group Chief Executive Officer’s report
7
A stronger
and simpler QBE
The actions we have taken this year to simplify the
Simplify QBE
Group, upgrade core capabilities in pricing, underwriting
and claims management and implement a rigorous
performance management framework have delivered
meaningful improvement in the underlying quality
of our business and our financial performance in 2018.
The positive momentum we have built throughout 2018,
combined with our 2019 strategic agenda, positions
us well to deliver value for our shareholders in 2019
and beyond. Set out hereafter is our progress against the
seven key priorities we set ourselves at the start of 2018.
During 2018, we successfully exited
the countries and portfolios where
we lacked scale or were not able
to deliver an acceptable return to
shareholders. This included the
sale of operations in nine countries
covering our entire Latin American
Operations, Thailand, Indonesia
and the Philippines. We also exited
loss-making portfolios including North
American personal lines, Hong Kong
construction workers' compensation
and Australian & New Zealand
travel insurance.
Our disposal program generated total
sale proceeds of around $550 million
and a premium to book value
of around $100 million. Businesses
exited generated underwriting losses
in 2017 of around $200 million.
Portfolio simplification has allowed
us to streamline our operating structure,
reducing the number of divisions to three:
Australia Pacific, International and North
America. From 1 January 2019, Asia
sits within International, alongside our
European Operations, while the Pacific
and India have joined Australian & New
Zealand Operations to form Australia
Pacific. The restructure will allow our
businesses in Asia, the Pacific and India
to generate efficiencies by leveraging the
scale and resources of our major divisions.
Brilliant Basics
The Brilliant Basics program is at the
core of our strategy. We are upgrading
QBE’s capabilities in the basics of pricing,
risk selection and claims management
to deliver a consistent level of excellence
in every country in which we do business
and in every portfolio.
The implementation of a new set
of Group-wide Underwriting Standards
and Claims Standards during the
year was a key milestone in creating
a framework for consistent excellence
across the Group. We also took steps
to upgrade our pricing capabilities
including making greater use of third-party
data. The team delivering the Brilliant
Basics program was also strengthened
with the appointment of a Global Head
of Pricing, the establishment of Chief
Underwriting Offices in each of the
divisions and the appointment of Jason
Brown as the Group Chief Underwriting
Officer. We now have a full team in place
to accelerate the Brilliant Basics program
in 2019.
Delivering on the plan
We delivered a combined operating
ratio of 95.7% 1,2 for 2018, ahead of the
midpoint of our target range. Pleasingly,
the result included a 2.9% 3 reduction
in the attritional claims ratio with all
divisions showing positive momentum
underpinned by our rigorous approach
to performance management through
our cell review process. Cell reviews have
proven to be an effective method to drive
accountability throughout the organisation
and enable us to quickly respond
to changes in the market as they occur.
Together with other members of the GEC,
I completed over 500 cell reviews in 2018.
This performance management focus
is quickly becoming part of the culture
at QBE and the cell reviews will continue
with the same frequency and intensity
in 2019.
Further reposition North America
Build for the future
In November, we launched a new
customer commitment program (EQUITY),
to bring our customer-centred DNA
to life. Our aim is to consistently deliver
a high-quality customer experience and
outcome that will differentiate QBE.
Providing cutting edge solutions to
our customers' current and emerging
needs is essential to this work and we
have continued to invest in solutions
through our venture capital arm, QBE
Ventures. We made three investments
in 2018 including in HyperScience,
a machine learning company focused
on building artificial intelligence (AI)
solutions for automating office work;
Jupiter, an emerging leader in predicting
and managing climate risk; and Zeguro
a platform that helps SME customers
manage cyber security risks.
These are in addition to our existing
investments in Cytora, an AI company
powering a new way for commercial
insurers to target, select and price risk
and RiskGenius, a machine learning
company helping carriers, brokers
and regulators to analyse policy and
endorsement language and assist with
product development.
In closing, I am pleased with the progress
we have made against our strategic
objectives for 2018, which is reflected
in our improved financial performance
for the year. With our simplified structure,
the implementation of Brilliant Basics
and our relentless focus on performance
across the business, I am confident
we can build upon this result to deliver
value for our shareholders into 2019
and beyond.
Pat Regan
Group Chief Executive Officer
Despite above average catastrophe
incidence, North American Operations
recorded a much improved result
in 2018 with a combined operating
ratio of 97.9% 1 including a significantly
improved attritional claims ratio.
In 2018, we exited the retail personal
lines segment in North America which
will enable us to take significant costs
out of the business. Cost reduction
will be an important driver of further
margin expansion in this business
over the next few years. We have also
changed our operating model in North
America, combining our Specialty and
Commercial businesses to better align
with customer needs and to deliver
industry specialist capabilities.
Remediate Asia
Throughout the year, excellent progress
was made in re-underwriting our Asian
business, with Asia Pacific Operations
returning to an underwriting profit
in the second half of the year with
a combined operating ratio of 99.5% 1,2.
This turnaround was achieved in a highly
competitive market and our Asian
operations are now well positioned
to return to selective growth in 2019
as part of the International division.
Talent and culture
We are focused on creating a diverse,
inclusive and high-performance
workplace, and this year our efforts were
recognised with QBE’s inclusion in the
top 200 companies in the Equileap 2018
Gender Equality Global Report & Ranking
and on the Bloomberg Gender-Equality
Index. We have set ourselves the goal
of having 35% of senior management
roles filled by women by 2020. In 2018,
we achieved a 2% increase to 32%.
This is the second year in a row where
we have achieved a 2% increase and
reflects our ongoing focus on recruitment,
selection, promotion and development.
In September I was pleased to launch the
QBE DNA, which interlinks seven cultural
elements that are fundamental to who
we are and how we need to operate in the
future to succeed. This new set of cultural
elements places a greater emphasis
on being customer-centred, technically
excellent, diverse, fast-paced, courageous
and accountable and working together
as a team.
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
2 Excludes transactions to reinsure Hong Kong construction workers' compensation liabilities.
3 Excludes Crop and LMI.
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2019 outlook
R E S U LT S F O C U S E D
2019 targets
Combined
operating ratio 1
94.5%
to
96.5%
Investment return 1
3.0%
to
3.5%
We have a clear set of priorities in place for
2019 that will build upon the progress we made in
2018, while also positioning QBE for the long term.
We will remain focused on our plan, underpinned by our rigorous
performance management framework that will translate into further
improvement in our attritional claims ratio. In addition, we will reduce our
cost base by $130 million (net) over three years, reducing complexity,
optimising end-to-end processes and increasing automation.
In 2018, we laid the foundations for Brilliant Basics and it has led
to greater focus and improved consistency across the Group. However,
there is more we need to do to develop truly world class capabilities
in pricing, risk selection and claims management. Our newly formed
Group Chief Underwriting Office will be tasked with further advancing
the Brilliant Basics agenda.
In 2019, we will also remain focused on attracting and developing
high quality talent and building QBE for the future by investing in,
and leveraging, data, analytics and technology.
Our 2019 priorities, described opposite, include a greater focus
on customer outcomes and delivering against our customer commitment
program (EQUITY). We will also continue to invest in our risk management
capabilities, recognising our obligations to meet the expectations
of our shareholders, regulators and the communities in which we
operate. The Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry in Australia recently
made a number of recommendations for policy makers, regulators and
the industry to consider, to ensure the Australian financial services
sector meets community standards and expectations. QBE takes these
recommendations seriously and we will work closely with governments,
regulators and the industry in their implementation while ensuring the best
interests of our customers and partners continue to be met.
Sustainability will also be a key priority for QBE and we will continue
to implement the recommendations of the Financial Stability Board’s
Task Force on Climate-related Financial Disclosures (TCFD). We have
taken several important steps towards their implementation through 2018
including joining a pilot project run by the United Nations Environment
Programme – Finance Initiative, with 17 other global insurers. Our first
climate change action plan is on pages 36 to 41 of this Annual Report.
We have also announced our ambition to grow our impact investing
to $1 billion by 2021 and were delighted to report that QBE became carbon
neutral in 2018, in partnership with the Qantas Future Planet Program.
1 Assumes risk-free rates as at 31 December 2018.
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2019 outlook
2019 priorities
R E S U LT S F O C U S E D
D R I V I N G P E R F O R M A N C E
2019 targets
Combined
operating ratio 1
94.5%
to
96.5%
Investment return 1
3.0%
to
3.5%
We have a clear set of priorities in place for
2019 that will build upon the progress we made in
2018, while also positioning QBE for the long term.
We will remain focused on our plan, underpinned by our rigorous
performance management framework that will translate into further
improvement in our attritional claims ratio. In addition, we will reduce our
cost base by $130 million (net) over three years, reducing complexity,
optimising end-to-end processes and increasing automation.
In 2018, we laid the foundations for Brilliant Basics and it has led
to greater focus and improved consistency across the Group. However,
there is more we need to do to develop truly world class capabilities
in pricing, risk selection and claims management. Our newly formed
Group Chief Underwriting Office will be tasked with further advancing
the Brilliant Basics agenda.
In 2019, we will also remain focused on attracting and developing
high quality talent and building QBE for the future by investing in,
and leveraging, data, analytics and technology.
Our 2019 priorities, described opposite, include a greater focus
on customer outcomes and delivering against our customer commitment
program (EQUITY). We will also continue to invest in our risk management
capabilities, recognising our obligations to meet the expectations
of our shareholders, regulators and the communities in which we
operate. The Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry in Australia recently
made a number of recommendations for policy makers, regulators and
the industry to consider, to ensure the Australian financial services
sector meets community standards and expectations. QBE takes these
recommendations seriously and we will work closely with governments,
regulators and the industry in their implementation while ensuring the best
interests of our customers and partners continue to be met.
Sustainability will also be a key priority for QBE and we will continue
to implement the recommendations of the Financial Stability Board’s
Task Force on Climate-related Financial Disclosures (TCFD). We have
taken several important steps towards their implementation through 2018
including joining a pilot project run by the United Nations Environment
Programme – Finance Initiative, with 17 other global insurers. Our first
climate change action plan is on pages 36 to 41 of this Annual Report.
We have also announced our ambition to grow our impact investing
to $1 billion by 2021 and were delighted to report that QBE became carbon
neutral in 2018, in partnership with the Qantas Future Planet Program.
1 Assumes risk-free rates as at 31 December 2018.
Deliver the 2019 plan
Continue to drive a rigorous
performance management
focus through cell reviews
and deliver our 2019 target
combined operating ratio. Reduce
operational costs by $130 million
(net) over a three-year period.
Brilliant Basics
Drive the next phase of the Brilliant
Basics agenda, building on our
early successes in upgrading our
capabilities in the core areas of
underwriting, pricing and claims.
Further enhance our underwriting
governance and pricing capability
through the newly established
Group Chief Underwriting Office.
Future focus
Build a successful QBE for the future
and a strong platform for sustainable
and targeted growth. Leverage
our enhanced data and analytics
capabilities, technology roadmap
and leading Insurtech partnerships.
Continue our focus on reducing
complexity, increasing automation
and simplifying processes.
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Talent and culture
Bring our QBE DNA to life,
which is essential to our ability to
deliver for our people, customers,
communities and our shareholders.
Reward and celebrate our people
and create an environment that
supports diversity, inclusiveness
and flexibility.
Customer focus
Bring our new customer commitment
program to life, delivering
a consistent level of outstanding
service to our customers and
partners. Through technical
expertise and know-how, we will
provide solutions for our customers'
current and emerging needs.
o
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Managing risk
Build a stronger and more
resilient QBE by continuing to
invest in managing our risks in an
increasingly dynamic environment.
Operating sustainably
Continue our focus on
sustainability and making positive
contributions where we operate
by working with our customers,
partners and communities
to address key economic, social
and environmental issues.
10
Group Chief Financial Officer’s report
Operating and
financial review
selection and pricing. We expect further
performance improvement over the next
few years as we move from establishing
Group-wide base-level consistency
to building “brilliant” and distinctive
capabilities in pricing, underwriting
and claims management.
While the cell review process and Brilliant
Basics program will improve underwriting
discipline and help underpin more consistent
financial performance, a more granular
approach to capital allocation will also play
a critical role in fostering a return-oriented
culture and driving the right behaviours
and strategic decisions. In this regard,
we continue to refine our approach to capital
allocation to ensure that individual cells are
delivering acceptable risk-adjusted returns
to maximise return on equity.
Portfolio rationalisation and
simplification
During 2018, we announced a number
of asset sales and/or portfolio exits that
will materially reduce complexity and simplify
QBE as follows:
• The sale of our Latin American Operations
narrows our geographical footprint and
focuses QBE’s ambition on being an
“international” as distinct from a “global”
insurer, with meaningful operations in the
major insurance hubs. During the year
we completed the sale of our operations
in Argentina, Brazil, Ecuador and Mexico
while the sale of our operation in Colombia
completed on 1 February 2019.
• On 27 March 2018, we reinsured 100%
of our ongoing exposure to Hong Kong
construction workers’ compensation,
including $166 million of potentially volatile
claims liabilities. Having contributed
$37 million of the division’s $100 million
underwriting loss in 2017, a clean exit
from this business materially reduces
the risk profile of our Asian business
while significantly improving underwriting
profitability and earnings certainty.
• On 16 May 2018, we completed the
sale of our operation in Thailand. The
business lacked scale and had consistently
been unprofitable.
• On 3 August 2018, we announced the sale
of our Australian & New Zealand travel
insurance business. This business has
a poor track record of profitability and lacks
scale relative to major competitors. Gross
written premium is around $55 million and
the sale is expected to complete in 2019.
• On 11 December 2018, we announced
the sale of our operations in Puerto Rico,
Indonesia and the Philippines, which are
held for sale as at 31 December 2018 and
together represent around $100 million
2018 was an important year in terms of consistent
execution against our plan and the delivery of our
financial targets. Our exit from underperforming
portfolios and a step-change in performance
management through the forensic cell review
process has improved earnings quality and
resilience. With good momentum around premium
rate increases and encouraging progress on our
Brilliant Basics program, we are well positioned
to deliver further sustainable performance
improvement in 2019.
General overview
I am pleased with the performance improvement that is evident in our
divisional results as well as the strategic initiatives that were successfully
completed across the Group over the past 12 months.
Improving earnings quality and resilience across the Group remains a major
focus, and critical to that objective are the cell review process and Brilliant
Basics program. The cell review process is now well embedded across the
Group and earnings quality and resilience (as measured by the spread of
underwriting profit contribution by cell) has improved as evidenced by the
2018 interim and full year results.
We rolled out the Brilliant Basics program across the Group in 2018 and
are already seeing early benefits of improved and more consistent risk
10
Group Chief Financial Officer’s report
Operating and
financial review
selection and pricing. We expect further
performance improvement over the next
few years as we move from establishing
Group-wide base-level consistency
to building “brilliant” and distinctive
capabilities in pricing, underwriting
and claims management.
While the cell review process and Brilliant
Basics program will improve underwriting
discipline and help underpin more consistent
financial performance, a more granular
approach to capital allocation will also play
a critical role in fostering a return-oriented
culture and driving the right behaviours
and strategic decisions. In this regard,
we continue to refine our approach to capital
allocation to ensure that individual cells are
delivering acceptable risk-adjusted returns
to maximise return on equity.
Portfolio rationalisation and
simplification
During 2018, we announced a number
of asset sales and/or portfolio exits that
will materially reduce complexity and simplify
QBE as follows:
• The sale of our Latin American Operations
narrows our geographical footprint and
focuses QBE’s ambition on being an
“international” as distinct from a “global”
insurer, with meaningful operations in the
major insurance hubs. During the year
we completed the sale of our operations
in Argentina, Brazil, Ecuador and Mexico
while the sale of our operation in Colombia
completed on 1 February 2019.
• On 27 March 2018, we reinsured 100%
of our ongoing exposure to Hong Kong
construction workers’ compensation,
including $166 million of potentially volatile
claims liabilities. Having contributed
$37 million of the division’s $100 million
underwriting loss in 2017, a clean exit
from this business materially reduces
the risk profile of our Asian business
while significantly improving underwriting
profitability and earnings certainty.
• On 16 May 2018, we completed the
sale of our operation in Thailand. The
business lacked scale and had consistently
been unprofitable.
• On 3 August 2018, we announced the sale
of our Australian & New Zealand travel
insurance business. This business has
a poor track record of profitability and lacks
scale relative to major competitors. Gross
written premium is around $55 million and
the sale is expected to complete in 2019.
• On 11 December 2018, we announced
the sale of our operations in Puerto Rico,
Indonesia and the Philippines, which are
held for sale as at 31 December 2018 and
together represent around $100 million
of premium income. Achieving profitability
in each of these businesses has proven
challenging and both Puerto Rico
and the Philippines carry significant
catastrophe exposure.
• During the second half of 2018, we also
finalised our planned exit from North
American personal lines. The decision
to exit reflects our sub-scale position
in US personal lines and will enable further
material cost efficiencies by facilitating the
decommissioning of legacy systems and
downsizing of the regional office footprint.
The sale of renewal rights in relation to the
independent agent business ($230 million
of gross premium) was completed in late
2018, with policy conversion commencing
on 1 January 2019, while the sale
of Farmers Union Insurance ($175 million
of premium) is expected to take effect on
1 April 2019.
In addition to embedding the cell review
process and the Brilliant Basics program,
portfolio simplification has been critical in
improving the quality and consistency of our
underwriting profits and I am pleased with
what we achieved in 2018.
Negotiation and placement of our 2019
reinsurance program
In December 2018, we finalised the Group’s
2019 reinsurance program which is effective
from 1 January 2019. Since 2015, a key
feature of our reinsurance program has been
a deeply “in-the-money” large individual risk
and catastrophe aggregate program with
a single reinsurer. While this program served
us well for a period, our growing exposure
to a single reinsurer was not optimal and
the time value of money was an important
consideration, particularly in a rising interest
rate environment.
With primary premium rates increasing
and the Group’s underwriting risk profile
and consistency of performance improving,
we have moved to a more conventional
“out-of-the-money” reinsurance structure.
The new structure provides significantly
higher protection for catastrophe risk
including a lower event retention, increased
limit and increased coverage for non-peak
zones, supplemented by catastrophe
aggregate or sideways protection. As the cost
of large individual risk and catastrophe claims
decline in line with our improving risk profile,
this new structure should offer shareholders
greater returns over time and strikes an
appropriate balance between optimising
balance sheet protection, capital credit,
cost and earnings variability.
The 2019 program will cost around
$125 million less than the expiring program
and the capital credit afforded by the cover
is stronger than the expiring cover and
will result in an incremental capital credit
of around $200 million for S&P rating
agency purposes and an incremental APRA
PCA benefit of around $285 million (due
to a reduction in the ICRC capital charge).
Notwithstanding the aforementioned benefits,
the “out-of-the-money” nature of the new
structure means the potential variability
of modelled reinsurance recoveries versus
actual reinsurance recoveries is higher,
resulting in an increased probability of actual
earnings differing from planned earnings.
As a consequence, we are budgeting for
an increase in the net allowance for large
individual risk and catastrophe claims to
around $1.4 billion from $1.2 billion in 2018.
Net of the reinsurance cost savings, we
are therefore budgeting for an underwriting
profit headwind of around $50 million
to $100 million which is allowed for in our
2019 targeted combined operating ratio.
Divisional reporting and consolidation
As announced on 31 October 2018, to further
simplify our operations and build a more
streamlined, agile and customer-oriented
business, effective 1 January 2019 QBE’s
operations comprise three divisions:
International – includes European
Operations and Asia (Hong Kong,
Singapore, Malaysia and Vietnam).
Australia Pacific – includes Australia,
New Zealand, the Pacific and India.
North America – will continue as is.
This restructure and resulting simplification
will contribute to the Group’s efficiency
agenda with much of the administration
and governance of the former standalone
Asia Pacific Operations absorbed by the
significantly larger and better resourced
International and Australia Pacific divisions.
In conjunction with the divisional
consolidation, we will also simplify the way
we communicate our divisional results to the
market. We will no longer separately identify
Equator Re as a standalone entity; the
captive’s results will instead be eliminated
into the relevant divisional results to provide
a more holistic view of performance in each
of the operating divisions – Australia Pacific,
International and North America.
Operational efficiency program
Having consolidated our regional
footprint into three divisions, we are now
focused on making our operations more
effective and streamlined, consolidating
technology tools, reducing IT run costs and
re-engineering and automating processes.
Gross written
premium 1 (US$)
$13,657M
2% from 2017
Net earned
premium 1 (US$)
$11,640M
3% from 2017
2018 1
2017 1
2016
2015
2014
13,657
11,640
13,328
11,351
14,395
11,066
15,092
12,314
16,332
14,084
Gross written premium (US$M)
Net earned premium (US$M)
1 Continuing operations basis.
2018 was an important year in terms of consistent
execution against our plan and the delivery of our
financial targets. Our exit from underperforming
portfolios and a step-change in performance
management through the forensic cell review
process has improved earnings quality and
resilience. With good momentum around premium
rate increases and encouraging progress on our
Brilliant Basics program, we are well positioned
to deliver further sustainable performance
improvement in 2019.
General overview
I am pleased with the performance improvement that is evident in our
divisional results as well as the strategic initiatives that were successfully
completed across the Group over the past 12 months.
Improving earnings quality and resilience across the Group remains a major
focus, and critical to that objective are the cell review process and Brilliant
Basics program. The cell review process is now well embedded across the
Group and earnings quality and resilience (as measured by the spread of
underwriting profit contribution by cell) has improved as evidenced by the
2018 interim and full year results.
We rolled out the Brilliant Basics program across the Group in 2018 and
are already seeing early benefits of improved and more consistent risk
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With that in mind, we recently embarked on a three-year operational efficiency program targeting more than $200 million of gross
cost savings by 2021 translating into net savings of $130 million over the same time horizon after underlying inflation and further
investment in the Brilliant Basics program, technology and digitisation. From our 2018 cost base of $1.8 billion and an expense
ratio of 15.2% 1,2, we are targeting an expense ratio of less than 14% by 2021, inclusive of the benefit of very modest and selective
premium growth.
The financial impact of efficiency benefits will be relatively modest in 2019 reflecting the earning of net cost savings of around
$40 million while net earned premium will reflect the full year impact of previously discussed disposals. At the same time, we expect
to incur one-off restructuring costs in 2019 that will not be reported as part of our underwriting results.
Our exit from underperforming portfolios, momentum around premium rates and underwriting performance improvement, the
successful placement of our 2019 reinsurance program and the commencement of our new efficiency program position us well
to deliver further sustainable performance improvement in 2019.
2018 full year result
With respect to the recently announced 2018 full year result, I would like to discuss three broad areas:
1. Financial performance.
2.
Investment performance and strategy.
3. Financial strength and capital management.
1.
Financial performance
QBE reported a statutory net profit after tax of $390 million, a significant turnaround from a net loss of $1,249 million in 2017,
while cash profit after tax also rebounded strongly to $715 million from a loss of $262 million in the prior year.
Adjusted net profit after tax recovered to $420 million 1 from a net loss of $228 million 3,4,5 in 2017, reflecting significantly improved
underwriting profitability partly offset by weaker investment returns.
The Group’s combined operating ratio improved to 95.7% 1,2,6 from 103.9% 2,3,5,6 in the prior year, primarily due to a significant
improvement in the attritional claims ratio and a reduction in catastrophe claims following record industry losses in 2017.
Looking briefly at divisional performance, the key themes to emerge from the 2018 result are set out below:
Improved performance in North America after a difficult 2017
North American Operations reported an improved combined operating ratio of 97.9% 6 compared with 109.1% 5,6 in the prior year.
While catastrophe experience improved significantly from the record levels experienced in the prior year, 2018 was still an above
average year impacted by multiple hurricanes and wildfires.
The combined operating ratio also benefited from a 2.8% (excluding Crop) improvement in the attritional claims ratio reflecting more
granular performance management driven by the cell review process coupled with early benefits from the Brilliant Basics program
including improved risk selection and enhanced pricing capability.
Disciplined performance management and enhanced pricing capability contributed to an average premium rate increase of 4.1%
compared with 0.7% in the prior year.
Good progress on Asia Pacific remediation with a return to underwriting profit in the second half of 2018
Asia Pacific Operations finished the year strongly with a combined operating ratio of 104.2% 1,6 compared with 115.5% 6 in the
prior year and 108.5% 1,6 in the first half of 2018, underpinned by a 5.0% improvement in the attritional claims ratio. Performance
improvement gathered momentum as the year progressed culminating in a return to underwriting profitability in the second half
with a combined operating ratio of 99.5% 1,6.
Premium income contracted 15% on a constant currency basis reflecting aggressive remediation including the sale of our business
in Thailand, exiting Hong Kong construction workers’ compensation and the shedding of significant higher hazard marine, property
and engineering business, particularly in Hong Kong, Singapore and Indonesia.
While key insurance markets remain competitive, Asia Pacific Operations achieved an average premium rate increase of 1.0%
compared with a reduction of 2.3% in the prior period.
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Continuing operations basis.
3 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
4 Excludes a $700 million non-cash goodwill impairment charge and a $230 million non-cash write-down of deferred tax assets.
5 Excludes transaction to reinsure US liabilities.
6 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
12
Group Chief Financial Officer’s report
13
With that in mind, we recently embarked on a three-year operational efficiency program targeting more than $200 million of gross
cost savings by 2021 translating into net savings of $130 million over the same time horizon after underlying inflation and further
investment in the Brilliant Basics program, technology and digitisation. From our 2018 cost base of $1.8 billion and an expense
ratio of 15.2% 1,2, we are targeting an expense ratio of less than 14% by 2021, inclusive of the benefit of very modest and selective
premium growth.
The financial impact of efficiency benefits will be relatively modest in 2019 reflecting the earning of net cost savings of around
$40 million while net earned premium will reflect the full year impact of previously discussed disposals. At the same time, we expect
to incur one-off restructuring costs in 2019 that will not be reported as part of our underwriting results.
Our exit from underperforming portfolios, momentum around premium rates and underwriting performance improvement, the
successful placement of our 2019 reinsurance program and the commencement of our new efficiency program position us well
to deliver further sustainable performance improvement in 2019.
With respect to the recently announced 2018 full year result, I would like to discuss three broad areas:
2018 full year result
1. Financial performance.
2.
Investment performance and strategy.
3. Financial strength and capital management.
1.
Financial performance
QBE reported a statutory net profit after tax of $390 million, a significant turnaround from a net loss of $1,249 million in 2017,
while cash profit after tax also rebounded strongly to $715 million from a loss of $262 million in the prior year.
Adjusted net profit after tax recovered to $420 million 1 from a net loss of $228 million 3,4,5 in 2017, reflecting significantly improved
underwriting profitability partly offset by weaker investment returns.
The Group’s combined operating ratio improved to 95.7% 1,2,6 from 103.9% 2,3,5,6 in the prior year, primarily due to a significant
improvement in the attritional claims ratio and a reduction in catastrophe claims following record industry losses in 2017.
Looking briefly at divisional performance, the key themes to emerge from the 2018 result are set out below:
Improved performance in North America after a difficult 2017
North American Operations reported an improved combined operating ratio of 97.9% 6 compared with 109.1% 5,6 in the prior year.
While catastrophe experience improved significantly from the record levels experienced in the prior year, 2018 was still an above
average year impacted by multiple hurricanes and wildfires.
The combined operating ratio also benefited from a 2.8% (excluding Crop) improvement in the attritional claims ratio reflecting more
granular performance management driven by the cell review process coupled with early benefits from the Brilliant Basics program
including improved risk selection and enhanced pricing capability.
Disciplined performance management and enhanced pricing capability contributed to an average premium rate increase of 4.1%
compared with 0.7% in the prior year.
Good progress on Asia Pacific remediation with a return to underwriting profit in the second half of 2018
Asia Pacific Operations finished the year strongly with a combined operating ratio of 104.2% 1,6 compared with 115.5% 6 in the
prior year and 108.5% 1,6 in the first half of 2018, underpinned by a 5.0% improvement in the attritional claims ratio. Performance
improvement gathered momentum as the year progressed culminating in a return to underwriting profitability in the second half
with a combined operating ratio of 99.5% 1,6.
Premium income contracted 15% on a constant currency basis reflecting aggressive remediation including the sale of our business
in Thailand, exiting Hong Kong construction workers’ compensation and the shedding of significant higher hazard marine, property
and engineering business, particularly in Hong Kong, Singapore and Indonesia.
While key insurance markets remain competitive, Asia Pacific Operations achieved an average premium rate increase of 1.0%
compared with a reduction of 2.3% in the prior period.
European Operations’ improved current accident year profitability underpinned by a lower attritional claims ratio
European Operations recorded another strong result with the combined operating ratio improving to 94.8% 1 from 95.2% 1,2 in the prior
year due to a 2.8% improvement in the attritional claims ratio which more than offset a reduced level of positive prior accident year
claims development.
While competition remains intense as evidenced by lower new business volumes, the soft pricing cycle has abated with an average
premium rate increase of 4.4% representing a welcome turnaround from the 0.2% average premium rate reduction in the prior year.
Although remaining vigilant with respect to underwriting discipline, gross written premium grew 6% on a constant currency basis
indicating modest but pleasing volume growth.
Given significant uncertainty surrounding Brexit, it is comforting to report that we now have a fully operational and well-capitalised
insurance and reinsurance company located in Belgium and successfully renewed our existing business in continental Europe at the
recently completed 1 January 2019 renewals.
Further improvement in Australian & New Zealand Operations’ result quality and strong pricing momentum
Despite further moderation in lenders’ mortgage insurance (LMI) earnings and the level of positive prior accident year claims
development, Australian & New Zealand Operations’ performance continues to improve with the division recording a combined
operating ratio of 91.9% 1, underpinned by a 2.9% (excluding LMI) improvement in the attritional claims ratio. The cell review discipline
coupled with early benefits of the Brilliant Basics program contributed to a meaningful improvement in earnings quality and resilience
(as measured by the spread of underwriting profit contribution by cell).
The combined operating ratio of our LMI business increased as a result of higher net commissions due to revised reinsurance and
a lengthening of the assumed premium earning pattern in light of slower claims emergence. Despite some reduction in property
prices, lending practices continue to improve and arrears rates are trending broadly in line with expectations. We have taken the
opportunity to purchase 30% quota share reinsurance on the 2019 underwriting year from a panel of external reinsurers on favourable
terms.
Pricing momentum accelerated as the year progressed (from already strong levels) with premium rate increases averaging 7.3% 3
across 2018 compared with 6.1% 3 in the prior period and 6.6% 3 in the first half of 2018.
2.
Investment performance and strategy
Our investment portfolio delivered a net investment yield of 2.2% compared with 3.1% in the prior year. This was at the bottom
end of our 2.25%–2.75% target range reflecting especially volatile markets in the final quarter of 2018.
Fixed income assets generated a 1.8% return compared with 2.0% in the prior year. Returns were adversely impacted by higher
US Treasury yields and wider global credit spreads. Growth asset returns moderated to 6.2% from 13.3% in the prior year.
Active duration management enhanced fixed income returns. While yields rose during the first half of 2018 we held duration
around 1.5 years thereby minimising mark-to-market capital losses. During the second half, we extended duration to 2.1 years
enabling us to capture more of the December global bond market rally. During December we also took advantage of the equity
market weakness and increased our exposure to growth assets which finished the year at 13.7% of total cash and investments.
As at 31 December 2018, the running yield of the fixed income portfolio was 2.2%, up from 1.7% a year earlier. During 2019,
we intend to manage fixed income duration in a 2.0–2.5 year range and growth assets within a 10%–15% range of total cash
and investments which together should support our 2019 net investment return target range of 3.0%–3.5% 4.
3.
Financial strength and capital management
The Group’s capital position remains strong when measured against both regulatory and rating agency capital requirements.
Our APRA PCA multiple increased to 1.78x from 1.64x at 31 December 2017 and the excess above Standard & Poor’s (S&P) ‘AA’
minimum capital levels increased.
Our improved capital strength reflects stronger earnings for 2018, the benefit of de-risking initiatives undertaken during the year
(such as the disposal of non-core businesses and a reduction in our catastrophe exposure) and a material reduction in insurance
risk charges due to the more traditional reinsurance program effective 1 January 2019. These positive impacts were partly offset
by capital management initiatives and by the stronger US dollar which adversely impacted reported shareholders’ funds.
As announced in February 2017, QBE established a three-year cumulative on-market share buyback facility of up to A$1 billion,
with a target of acquiring not more than A$333 million in any one calendar year. During 2018, QBE purchased A$333 million of QBE
shares resulting in the cancellation of 31.3 million shares or 2.2% of issued capital. Since commencement of the buyback, QBE has
purchased A$472 million of QBE shares resulting in the cancellation of 44.2 million shares or 3.2% of issued capital.
At 31 December 2018, QBE’s debt to equity ratio was 38.0%, down from 40.8% at 31 December 2017 and slightly above the
benchmark range of 25%–35%, reflecting the debt buybacks undertaken during the first half of 2018, which were partly offset
by the impact of the stronger US dollar and the share buyback.
The probability of adequacy (PoA) of outstanding claims was broadly stable at 90.1%, around the mid-point of our targeted PoA range
of 87.5%–92.5%.
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Continuing operations basis.
3 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
4 Excludes a $700 million non-cash goodwill impairment charge and a $230 million non-cash write-down of deferred tax assets.
5 Excludes transaction to reinsure US liabilities.
6 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
2 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
3 Excludes premium rate changes relating to CTP.
4 Assumes risk-free rates as at 31 December 2018.
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14
Group Chief Financial Officer’s report
Operating and financial performance
Summary income statement
FOR THE YEAR ENDED 31 DECEMBER
Gross written premium
Gross earned premium
Net earned premium
Net claims expense
Net commission
Underwriting and other expenses
Underwriting result
Net investment income on policyholders’ funds
Insurance profit (loss)
Net investment income on shareholders’ funds
Financing and other costs
Gains (losses) on sale of entities and
businesses
Unrealised losses on assets held for sale
Share of net losses of associates
Amortisation and impairment of intangibles
Profit (loss) before income tax from continuing
operations
Income tax expense
Profit (loss) after income tax from continuing
operations
Loss after income tax from discontinued
operations
Non-controlling interests
Net profit (loss) after income tax
STATUTORY RESULT
ADJUSTMENTS
ADJUSTED RESULT
2018
US$M
13,657
13,601
11,640
(7,405)
(1,957)
(1,798)
480
346
826
201
(305)
12
(25)
(2)
(80)
627
(72)
555
(177)
12
390
2017
US$M
13,328
13,611
11,351
(8,114)
(1,938)
(1,806)
(507)
447
(60)
311
(302)
(1)
–
(1)
(740)
(793)
(423)
(1,216)
(37)
4
(1,249)
2018
US$M
–
–
190
(166)
6
5
35
–
35
–
–
–
–
–
–
35
(5)
30
–
–
30
2017
US$M
–
–
417
(297)
–
2
122
–
122
–
–
–
–
–
700
822
199
1,021
–
–
1,021
2018 1
US$M
13,657
13,601
11,830
(7,571)
(1,951)
(1,793)
515
346
861
201
(305)
12
(25)
(2)
(80)
662
(77)
585
(177)
12
420
2017 2,3,4
US$M
13,328
13,611
11,768
(8,411)
(1,938)
(1,804)
(385)
447
62
311
(302)
(1)
–
(1)
(40)
29
(224)
(195)
(37)
4
(228)
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
3 Excludes transaction to reinsure US liabilities.
4 Excludes a $700 million non-cash goodwill impairment charge and a $230 million non-cash write-down of deferred tax assets.
Overview of the 2018 result
The Group reported a 2018 statutory net profit after tax of $390 million compared with a loss of $1,249 million in the prior
year. The material improvement is primarily due to significantly reduced catastrophe activity coupled with the non-recurrence
of a $700 million non-cash goodwill impairment charge and a $230 million non-cash write down of deferred tax assets.
Continuing operations reported a statutory net profit after tax of $567 million compared with a loss of $1,212 million in the prior year
while discontinued operations reported a statutory net loss after tax of $177 million in 2018 compared with a loss of $37 million in the
prior year, primarily as a result of higher than expected net claims costs and charges associated with the sale transactions.
The Group’s effective tax rate was 11%, materially different from the prior period which was distorted by the significant
catastrophe claims in North America in 2017 where substantial deferred tax assets precluded the recognition of further tax losses.
The low effective tax rate reflects increased profits in North America and Bermuda, which benefit from the utilisation of previously
unrecognised tax losses, profits in the UK (where the corporate tax rate is lower than Australia) and the recognition of additional
North American deferred tax assets.
Excluding amortisation of intangibles and other non-cash items, statutory cash profit after tax for the year was $715 million, up from
a loss after tax on a cash basis of $262 million in the prior period.
Cash profit return on equity was 8.0% 1, up from (1.4)% 1 in the prior year.
The preceding table also shows the statutory result excluding items which materially distort key performance indicators.
The 2018 adjusted statutory result in the preceding table excludes the one-off transaction to reinsure Hong Kong construction
workers’ compensation liabilities which reduced net earned premium by $190 million and net claims expense by $166 million,
whilst adversely impacting commission and underwriting expenses by $6 million and $5 million respectively. The transaction impacts
year-on-year comparison of net earned premium and underwriting ratios, depressing the net claims ratio and inflating the combined
commission and expense ratio.
1 Cash profit ROE from continuing operations excluding gains (losses) on disposals.
14
Group Chief Financial Officer’s report
15
Operating and financial performance
Summary income statement
FOR THE YEAR ENDED 31 DECEMBER
Gross written premium
Gross earned premium
Net earned premium
Net claims expense
Net commission
Underwriting and other expenses
Underwriting result
Net investment income on policyholders’ funds
Insurance profit (loss)
Net investment income on shareholders’ funds
Financing and other costs
Gains (losses) on sale of entities and
businesses
Unrealised losses on assets held for sale
Share of net losses of associates
Amortisation and impairment of intangibles
Profit (loss) before income tax from continuing
operations
Income tax expense
operations
operations
Profit (loss) after income tax from continuing
Loss after income tax from discontinued
Non-controlling interests
Net profit (loss) after income tax
STATUTORY RESULT
ADJUSTMENTS
ADJUSTED RESULT
2018
US$M
13,657
13,601
11,640
(7,405)
(1,957)
(1,798)
480
346
826
201
(305)
12
(25)
(2)
(80)
627
(72)
555
(177)
12
390
2017
US$M
13,328
13,611
11,351
(8,114)
(1,938)
(1,806)
(507)
447
(60)
311
(302)
(1)
–
(1)
(740)
(793)
(423)
(1,216)
(37)
4
(1,249)
2018
US$M
–
–
190
(166)
6
5
35
–
35
–
–
–
–
–
–
35
(5)
30
–
–
30
2017
US$M
417
(297)
122
122
–
–
–
2
–
–
–
–
–
–
700
822
199
1,021
–
–
1,021
2018 1
US$M
13,657
13,601
11,830
(7,571)
(1,951)
(1,793)
515
346
861
201
(305)
12
(25)
(2)
(80)
662
(77)
585
(177)
12
420
2017 2,3,4
US$M
13,328
13,611
11,768
(8,411)
(1,938)
(1,804)
(385)
447
62
311
(302)
(1)
–
(1)
(40)
29
(224)
(195)
(37)
4
(228)
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
3 Excludes transaction to reinsure US liabilities.
4 Excludes a $700 million non-cash goodwill impairment charge and a $230 million non-cash write-down of deferred tax assets.
Overview of the 2018 result
The Group reported a 2018 statutory net profit after tax of $390 million compared with a loss of $1,249 million in the prior
year. The material improvement is primarily due to significantly reduced catastrophe activity coupled with the non-recurrence
of a $700 million non-cash goodwill impairment charge and a $230 million non-cash write down of deferred tax assets.
Continuing operations reported a statutory net profit after tax of $567 million compared with a loss of $1,212 million in the prior year
while discontinued operations reported a statutory net loss after tax of $177 million in 2018 compared with a loss of $37 million in the
prior year, primarily as a result of higher than expected net claims costs and charges associated with the sale transactions.
The Group’s effective tax rate was 11%, materially different from the prior period which was distorted by the significant
catastrophe claims in North America in 2017 where substantial deferred tax assets precluded the recognition of further tax losses.
The low effective tax rate reflects increased profits in North America and Bermuda, which benefit from the utilisation of previously
unrecognised tax losses, profits in the UK (where the corporate tax rate is lower than Australia) and the recognition of additional
North American deferred tax assets.
Excluding amortisation of intangibles and other non-cash items, statutory cash profit after tax for the year was $715 million, up from
a loss after tax on a cash basis of $262 million in the prior period.
Cash profit return on equity was 8.0% 1, up from (1.4)% 1 in the prior year.
The preceding table also shows the statutory result excluding items which materially distort key performance indicators.
The 2018 adjusted statutory result in the preceding table excludes the one-off transaction to reinsure Hong Kong construction
workers’ compensation liabilities which reduced net earned premium by $190 million and net claims expense by $166 million,
whilst adversely impacting commission and underwriting expenses by $6 million and $5 million respectively. The transaction impacts
year-on-year comparison of net earned premium and underwriting ratios, depressing the net claims ratio and inflating the combined
commission and expense ratio.
1 Cash profit ROE from continuing operations excluding gains (losses) on disposals.
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The 2017 adjusted statutory result in the preceding table is similarly presented after excluding:
• a $139 million increase in the Group’s net central estimate of outstanding claims reflecting the increase in the statutory discount
rates applicable to UK personal injury liabilities (the Ogden decision) and a related $2 million reinsurance charge with an associated
$31 million tax benefit;
• a transaction to reinsure US commercial auto run-off liabilities which reduced net earned premium by $415 million and net claims
expense by $436 million while adversely impacting underwriting expenses by $2 million;
• a $700 million non-cash impairment charge pertaining to the carrying value of North American Operations’ goodwill; and
• a $230 million non-cash write-down of the deferred tax asset in our North American Operations following the enacted reduction
in the US corporate tax rate to 21% from 35%.
The underwriting results in the preceding table are also presented on a continuing operations basis with the results of our Latin
American Operations presented separately as discontinued operations for both the current and prior year.
Further details of the Group’s disposal activities are set out in note 7.1 to the financial statements.
Unless otherwise stated, the commentary following refers to the Group’s result on the basis described above.
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The Group reported a 2018 adjusted net profit after tax of $420 million compared with a loss of $228 million in the prior year,
including a profit after tax from continuing operations of $597 million compared with a loss of $191 million in the prior year.
On a constant currency basis, gross written premium increased by 3% reflecting premium rate driven growth in North American,
European and Australian & New Zealand Operations, largely offset by a remediation-driven reduction in Asia Pacific Operations and
a significant reduction in NSW CTP premium following recent legislative reform. On the same basis, net earned premium increased
by 0.6% relative to the prior period.
The combined operating ratio improved to 95.7% 1 from 103.9% 1 in the prior year, primarily reflecting significantly reduced
catastrophe activity and a strong improvement in the attritional claims ratio.
3
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The net investment return on policyholders’ funds fell to 2.3% from 2.9% in the prior year, contributing 2.9% to the insurance profit
margin compared with 3.8% in 2017. While returns on fixed income assets were marginally lower reflecting mark-to-market losses
on sovereign and corporate bonds, growth asset returns were substantially down on the prior year.
The Group reported an insurance profit of $861 million, up substantially from $62 million in the prior year, with significantly improved
underwriting profitability partly offset by lower investment income. The insurance profit margin increased to 7.3% from 0.5% in 2017.
Consistent with the reduction in investment income on policyholders’ funds, investment income on shareholders’ funds was
significantly lower at $201 million compared with $311 million in 2017.
Financing and other costs increased slightly to $305 million from $302 million in the prior year. While the prior year included the net
cost of the class action, the current year included significant costs associated with foreign exchange contracts coupled with other
one-off costs. The Group’s cost of borrowings reduced to $205 million from $212 million in the prior year.
1 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
Reconciliation of cash profit 1
FOR THE YEAR ENDED 31 DECEMBER
Profit (loss) after tax from continuing operations including NCI
Loss attributable to non-controlling interests (NCI)
Profit (loss) after tax from continuing operations
Discontinued operations
Operating loss from discontinued operations after tax
Gain on sale of discontinued operations after tax
Reclassification of foreign currency translation reserve 2
Loss after tax from discontinued operations
Net profit (loss) after tax
Amortisation and impairment of intangibles after tax 3
Reclassification of foreign currency translation reserve 2
Write down of deferred tax asset
Net cash profit (loss) after tax
Return on average shareholders’ funds – cash basis (%)
Basic earnings per share – cash basis (US cents)
Dividend payout ratio (percentage of cash profit) 6
2018
US$M
555
12
567
(57)
97
(217)
(177)
390
108
217
–
715
8.0 4
53.1
70%
2017
US$M
(1,216)
4
(1,212)
(32)
(5)
–
(37)
(1,249)
757
–
230
(262)
(1.4) 4
(18.9) 5
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1 Cash profit is presented on a statutory basis.
2 The sale of operations in Argentina, Brazil, Ecuador and Mexico gave rise to a foreign currency translation reserve (FCTR) reclassification
charge (out of equity into the profit or loss statement). This is a non-cash item and does not impact shareholders’ funds or QBE’s regulatory
or rating agency capital base. Refer Note 7.1.1 for further details.
3 $33 million of pre-tax amortisation expense is included in underwriting expenses (2017 $29 million).
4 Cash profit ROE from continuing operations excluding gains (losses) on disposals.
5 As previously reported.
6 Dividend payout ratio is calculated as the total AUD dividend divided by cash profit converted to AUD at the average rate of exchange
for the period.
16
Group Chief Financial Officer’s report
Premium income
Gross written premium increased 2% to $13,657 million from $13,328 million in the prior year.
On an average basis and compared with 2017, the Australian dollar depreciated against the US dollar by 3% while sterling and euro
appreciated against the US dollar by 3% and 4% respectively. Currency movements adversely impacted gross written premium
by $31 million relative to the prior year.
Gross written premium increased 3% on a constant currency basis. This reflects premium rate driven growth in North American and
European Operations, partly offset by a remediation-led contraction in Asia Pacific Operations. Premium growth in Australian & New
Zealand Operations was adversely impacted by legislative changes in NSW CTP that drove a significant premium rate reduction.
The Group achieved an average premium rate increase of 5.0% 1 during the year compared with 1.8% 1 in 2017 with improved pricing
conditions enjoyed in all divisions. Premium rate momentum accelerated in Australian & New Zealand Operations from an already
strong level.
North American Operations reported a 3% increase in gross written premium, underpinned by an average premium rate increase
of 4.1% compared with only 0.7% in the prior period. Growth in accident & health within Specialty coupled with modest growth in P&C
as well as Crop was partly offset by the full year impact of the cancellation of two large programs in 2017.
Although up 8% on a headline basis, European Operations’ gross written premium was up 6% on a constant currency basis. Improved
pricing conditions gave rise to an average premium rate increase of 4.4% compared with a reduction of 0.2% in the prior period.
Growth reflects the improved rating environment and targeted growth in profitable portfolios such as Continental European insurance,
reinsurance life and accident and the improved rating environment in several London market portfolios.
Australian & New Zealand Operations reported a 2% increase in gross written premium on a constant currency basis. An average
premium rate increase (excluding CTP) of 7.3% compared with 6.1% in the prior period was largely offset by a significant reduction
in NSW CTP premium following legislative reform and the non-renewal of two travel insurance credit card portfolios. Excluding the
impact of CTP premium rate reductions, gross written premium increased 5% on a constant currency basis, broadly consistent with
pricing. Retention was stable across the portfolio.
Asia Pacific gross written premium fell 15% on a constant currency basis. This reflected our exits from Thailand, Hong Kong
construction workers’ compensation and Indonesian marine hull businesses as well as the accelerated remediation of marine,
property and engineering, particularly in Hong Kong and Singapore. Although the region remains competitive, we achieved
an average premium rate increase of 1.0% during the year compared with a reduction of 2.3% in the prior period.
Net earned premium increased 0.5% to $11,830 million from $11,768 million in the prior year with negligible foreign exchange impact.
1 Excludes premium rate changes relating to CTP.
Underwriting performance
Key ratios – Group
FOR THE YEAR ENDED 31 DECEMBER
Net claims ratio
Net commission ratio
Expense ratio
Combined operating ratio
Adjusted combined operating ratio 4
Insurance profit (loss) margin
2018
2017
STATUTORY
%
ADJUSTED 1
%
STATUTORY
%
ADJUSTED 2,3
%
63.6
16.9
15.4
95.9
96.0
7.1
64.0
16.4
15.2
95.6
95.7
7.3
71.5
17.1
15.9
104.5
105.1
(0.5)
71.5
16.5
15.3
103.3
103.9
0.5
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Excludes transaction to reinsure US liabilities.
3 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
4 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
16
Group Chief Financial Officer’s report
17
Divisional performance
Contributions by region
FOR THE YEAR ENDED 31 DECEMBER
North American Operations 1
European Operations 2
Australian & New Zealand Operations
Asia Pacific Operations 3
Equator Re
Equator Re elimination 4
Corporate adjustments
Group adjusted
Reinsurance transactions
Ogden adjustment
Group statutory
Direct and facultative
Inward reinsurance
Group statutory
GROSS WRITTEN
PREMIUM
NET EARNED
PREMIUM
COMBINED OPERATING
RATIO
INSURANCE PROFIT
BEFORE INCOME TAX
2018
US$M
4,711
4,355
3,992
633
1,486
(1,485)
(35)
13,657
–
–
13,657
12,599
1,058
13,657
2017
US$M
4,556
4,049
4,024
740
1,580
(1,567)
(54)
13,328
–
–
13,328
12,289
1,039
13,328
2018
US$M
3,569
3,505
3,519
538
664
–
35
11,830
(190)
–
11,640
10,708
932
11,640
2017
US$M
3,541
3,212
3,480
653
847
–
35
11,768
(415)
(2)
11,351
10,471
880
11,351
2018
%
96.9
95.0
92.4
103.7
91.0
–
–
95.6
0.3
–
95.9
96.4
89.8
95.9
2017
%
108.8
93.4
91.9
115.3
141.3
–
–
103.3
–
1.2
104.5
104.1
108.3
104.5
2018
US$M
2017
US$M
221
311
420
(12)
85
–
(164)
861
(35)
–
826
703
123
826
(236)
335
438
(93)
(323)
–
(59)
62
19
(141)
(60)
(22)
(38)
(60)
1 Excludes transaction to reinsure US liabilities in 2017.
2 Excludes one-off adverse impact on the Group’s underwriting result due to the Ogden decision in the UK in 2017.
3 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities in 2018.
4 Non-eliminated Equator Re gross written premium relates to minority interests in Lloyd’s Syndicate 386.
Incurred claims
The Group’s net claims ratio improved to 64.0% from 71.5% in the prior year, reflecting significantly reduced catastrophe incidence
and a strong improvement in the attritional claims ratio.
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Net earned premium increased 0.5% to $11,830 million from $11,768 million in the prior year with negligible foreign exchange impact.
The table below provides a summary of the major components of the net claims ratio.
'
Premium income
Gross written premium increased 2% to $13,657 million from $13,328 million in the prior year.
On an average basis and compared with 2017, the Australian dollar depreciated against the US dollar by 3% while sterling and euro
appreciated against the US dollar by 3% and 4% respectively. Currency movements adversely impacted gross written premium
by $31 million relative to the prior year.
Gross written premium increased 3% on a constant currency basis. This reflects premium rate driven growth in North American and
European Operations, partly offset by a remediation-led contraction in Asia Pacific Operations. Premium growth in Australian & New
Zealand Operations was adversely impacted by legislative changes in NSW CTP that drove a significant premium rate reduction.
The Group achieved an average premium rate increase of 5.0% 1 during the year compared with 1.8% 1 in 2017 with improved pricing
conditions enjoyed in all divisions. Premium rate momentum accelerated in Australian & New Zealand Operations from an already
strong level.
North American Operations reported a 3% increase in gross written premium, underpinned by an average premium rate increase
of 4.1% compared with only 0.7% in the prior period. Growth in accident & health within Specialty coupled with modest growth in P&C
as well as Crop was partly offset by the full year impact of the cancellation of two large programs in 2017.
Although up 8% on a headline basis, European Operations’ gross written premium was up 6% on a constant currency basis. Improved
pricing conditions gave rise to an average premium rate increase of 4.4% compared with a reduction of 0.2% in the prior period.
Growth reflects the improved rating environment and targeted growth in profitable portfolios such as Continental European insurance,
reinsurance life and accident and the improved rating environment in several London market portfolios.
Australian & New Zealand Operations reported a 2% increase in gross written premium on a constant currency basis. An average
premium rate increase (excluding CTP) of 7.3% compared with 6.1% in the prior period was largely offset by a significant reduction
in NSW CTP premium following legislative reform and the non-renewal of two travel insurance credit card portfolios. Excluding the
impact of CTP premium rate reductions, gross written premium increased 5% on a constant currency basis, broadly consistent with
pricing. Retention was stable across the portfolio.
Asia Pacific gross written premium fell 15% on a constant currency basis. This reflected our exits from Thailand, Hong Kong
construction workers’ compensation and Indonesian marine hull businesses as well as the accelerated remediation of marine,
property and engineering, particularly in Hong Kong and Singapore. Although the region remains competitive, we achieved
an average premium rate increase of 1.0% during the year compared with a reduction of 2.3% in the prior period.
1 Excludes premium rate changes relating to CTP.
Underwriting performance
Key ratios – Group
FOR THE YEAR ENDED 31 DECEMBER
Net claims ratio
Net commission ratio
Expense ratio
Combined operating ratio
Adjusted combined operating ratio 4
Insurance profit (loss) margin
2018
2017
STATUTORY
ADJUSTED 1
STATUTORY
ADJUSTED 2,3
%
63.6
16.9
15.4
95.9
96.0
7.1
%
64.0
16.4
15.2
95.6
95.7
7.3
%
71.5
17.1
15.9
104.5
105.1
(0.5)
%
71.5
16.5
15.3
103.3
103.9
0.5
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Excludes transaction to reinsure US liabilities.
3 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
4 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
5
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O
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FOR THE YEAR ENDED 31 DECEMBER
2018
2017
STATUTORY
%
ADJUSTED 1
%
STATUTORY
%
ADJUSTED 2,3
%
Attritional claims
Large individual risk and catastrophe claims
Impact of reinsurance transactions
Claims settlement costs
Claims discount
Net incurred central estimate claims ratio (current accident year)
Changes in undiscounted prior accident year central estimate
Impact of reinsurance transactions
Impact of Ogden
Changes in discount rates
Movement in risk margins
Other (including unwind of prior year discount)
Net incurred claims ratio (current financial year)
53.2
10.0
(0.1)
3.3
(2.0)
64.4
(1.0)
(1.3)
–
(0.1)
0.1
1.5
63.6
52.3
9.8
–
3.3
(2.0)
63.4
(1.0)
–
–
(0.1)
0.1
1.6
64.0
56.6
15.9
(0.7)
3.1
(2.2)
72.7
(0.5)
(3.0)
1.2
(0.6)
0.7
1.0
71.5
54.5
15.4
–
3.0
(2.1)
70.8
(0.4)
–
–
(0.6)
0.8
0.9
71.5
1 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
2 Excludes one-off impact on the Group’s underwriting result due to the Ogden decision in the UK.
3 Excludes transaction to reinsure US liabilities.
Excluding Crop insurance and LMI, the attritional claims ratio reduced to 50.2% from 53.1% in the prior period, reflecting significant
improvement across all divisions.
Excluding Crop insurance, North America Operations’ attritional claims ratio improved 2.8% relative to the prior year driven mainly
by underwriting and pricing initiatives in our corporate, affiliated, directors & officers and trade credit & surety portfolios.
European Operations’ attritional claims ratio also improved 2.8% reflecting underlying improvement coupled with the unwind of the
post-Brexit devaluation of sterling and the non-recurrence of one-off reinsurance expense which suppressed net earned premium
in the prior year.
Excluding LMI, Australian & New Zealand Operations’ attritional claims ratio fell by 2.9% with improvement observed across most
of the portfolio including significant reductions in commercial property, CTP and workers’ compensation.
Asia Pacific Operations’ attritional claims ratio improved by 5.0% reflecting strong portfolio management actions including the exiting
of poor performing segments in Hong Kong workers’ compensation, Indonesian marine hull and our operations in Thailand, coupled
with premium rate increases.
Equator Re’s attritional claims ratio improved very significantly due to a reduction in proportional business that ordinarily operates
at a higher attritional claims ratio relative to excess of loss business.
18
Group Chief Financial Officer’s report
Analysis of attritional claims ratio
FOR THE YEAR ENDED 31 DECEMBER
2018
2017
Rest of portfolio
Crop insurance
LMI
QBE Group adjusted
NEP
US$M
10,662
980
188
11,830
ATTRITIONAL
%
50.2
78.8
30.9
52.3
NEP
US$M
10,604
951
213
11,768
ATTRITIONAL
%
53.1
77.5
24.9
54.5
Large individual risk and catastrophe claims net of reinsurance are summarised in the table below.
Large individual risk and catastrophe claims
FOR THE YEAR ENDED 31 DECEMBER
Total catastrophe claims
Total large individual risk claims
Total large individual risk and catastrophe claims
2018
US$M
523
640
1,163
% OF NEP
4.4
5.4
9.8
2017
US$M
1,208
596
1,804
% OF NEP
10.3
5.1
15.4
The total net cost of catastrophe claims fell to $523 million or 4.4% of net earned premium compared with $1,208 million or
10.3% in the prior period. Although not as extreme as 2017 which is widely regarded as having been the costliest year on record,
catastrophe incidence remained elevated and significantly above historical averages, particularly in North America. After a benign
first half, North America was impacted by Hurricanes Florence and Michael as well as devastating Californian bushfires while Asia
was impacted by multiple typhoons and Australia by significant east coast storm activity in December including the Sydney hailstorm.
The net cost of large individual risk claims increased to $640 million or 5.4% of net earned premium from $596 million or 5.1% in the
prior year. This was due to a lesser proportion of aggregate reinsurance recoveries being allocated to individual risk claims in 2018.
Reduced large individual risk claim activity in Australian & New Zealand Operations and Equator Re was offset by increased activity
in North American, European and Asia Pacific Operations. After a particularly poor first half, claims frequency improved significantly
in Asia Pacific during the second half as de-risking and portfolio exit initiatives took effect.
Weighted average risk-free rates
As summarised in the table below, the currency weighted average risk-free rate used to discount net outstanding claims liabilities
increased to 1.66% as at 31 December 2018 from 1.50% as at 31 December 2017. The US dollar risk-free rate increased strongly,
particularly in the first half of 2018, while Australian dollar and euro risk-free rates fell appreciably.
Weighted average risk‑free rates
CURRENCY
Australian dollar
US dollar
Sterling
Euro
Group weighted
Estimated impact of discount rate benefit (charge)
%
%
%
%
%
$M
1 Continuing operations basis.
31 DECEMBER
2018 1
30 JUNE
2018 1
31 DECEMBER
2017 1
30 JUNE
2017 1
2.06
2.74
1.08
0.23
1.66
13
2.29
2.80
1.10
0.30
1.77
40
2.31
2.36
0.92
0.42
1.50
68
2.17
2.16
0.89
0.45
1.40
30
The increase in risk-free rates gave rise to an underwriting benefit of $13 million that reduced the net claims ratio by 0.1% compared
with $68 million in the prior period that reduced the net claims ratio by 0.6%. Given the longer duration of our euro denominated net
claims liabilities, the fall in euro risk-free rates during the period disproportionately reduced the overall impact of higher weighted
average risk-free rates on the Group’s underwriting result.
Prior accident year claims development
The result included $113 million of positive prior accident year claims development that benefited the claims ratio by 1.0% compared
with $52 million or 0.4% of favourable development in the prior period.
Excluding $64 million of positive prior accident year claims development pertaining to North American Crop insurance that is
matched by additional premium cessions under the MPCI scheme (resulting in a nil profit impact) but including a $43 million benefit
in European Operations due to a lengthening of the expected future claims payment patterns, prior accident year claims development
is better stated at $92 million or 0.8% of net earned premium compared with $17 million or 0.1% in the prior period.
18
Group Chief Financial Officer’s report
19
Analysis of attritional claims ratio
FOR THE YEAR ENDED 31 DECEMBER
2018
2017
Rest of portfolio
Crop insurance
LMI
QBE Group adjusted
ATTRITIONAL
ATTRITIONAL
NEP
US$M
10,662
980
188
11,830
%
50.2
78.8
30.9
52.3
NEP
US$M
10,604
951
213
11,768
%
53.1
77.5
24.9
54.5
Large individual risk and catastrophe claims net of reinsurance are summarised in the table below.
Large individual risk and catastrophe claims
FOR THE YEAR ENDED 31 DECEMBER
Total catastrophe claims
Total large individual risk claims
Total large individual risk and catastrophe claims
2018
US$M
523
640
1,163
% OF NEP
4.4
5.4
9.8
2017
US$M
1,208
596
1,804
% OF NEP
10.3
5.1
15.4
The total net cost of catastrophe claims fell to $523 million or 4.4% of net earned premium compared with $1,208 million or
10.3% in the prior period. Although not as extreme as 2017 which is widely regarded as having been the costliest year on record,
catastrophe incidence remained elevated and significantly above historical averages, particularly in North America. After a benign
first half, North America was impacted by Hurricanes Florence and Michael as well as devastating Californian bushfires while Asia
was impacted by multiple typhoons and Australia by significant east coast storm activity in December including the Sydney hailstorm.
The net cost of large individual risk claims increased to $640 million or 5.4% of net earned premium from $596 million or 5.1% in the
prior year. This was due to a lesser proportion of aggregate reinsurance recoveries being allocated to individual risk claims in 2018.
Reduced large individual risk claim activity in Australian & New Zealand Operations and Equator Re was offset by increased activity
in North American, European and Asia Pacific Operations. After a particularly poor first half, claims frequency improved significantly
in Asia Pacific during the second half as de-risking and portfolio exit initiatives took effect.
Weighted average risk-free rates
As summarised in the table below, the currency weighted average risk-free rate used to discount net outstanding claims liabilities
increased to 1.66% as at 31 December 2018 from 1.50% as at 31 December 2017. The US dollar risk-free rate increased strongly,
particularly in the first half of 2018, while Australian dollar and euro risk-free rates fell appreciably.
Weighted average risk‑free rates
CURRENCY
Australian dollar
US dollar
Sterling
Euro
Group weighted
Estimated impact of discount rate benefit (charge)
1 Continuing operations basis.
31 DECEMBER
30 JUNE
31 DECEMBER
30 JUNE
2018 1
2.06
2.74
1.08
0.23
1.66
13
2018 1
2.29
2.80
1.10
0.30
1.77
40
2017 1
2.31
2.36
0.92
0.42
1.50
68
2017 1
2.17
2.16
0.89
0.45
1.40
30
%
%
%
%
%
$M
The increase in risk-free rates gave rise to an underwriting benefit of $13 million that reduced the net claims ratio by 0.1% compared
with $68 million in the prior period that reduced the net claims ratio by 0.6%. Given the longer duration of our euro denominated net
claims liabilities, the fall in euro risk-free rates during the period disproportionately reduced the overall impact of higher weighted
average risk-free rates on the Group’s underwriting result.
Prior accident year claims development
The result included $113 million of positive prior accident year claims development that benefited the claims ratio by 1.0% compared
with $52 million or 0.4% of favourable development in the prior period.
Excluding $64 million of positive prior accident year claims development pertaining to North American Crop insurance that is
matched by additional premium cessions under the MPCI scheme (resulting in a nil profit impact) but including a $43 million benefit
in European Operations due to a lengthening of the expected future claims payment patterns, prior accident year claims development
is better stated at $92 million or 0.8% of net earned premium compared with $17 million or 0.1% in the prior period.
The Group’s overall net positive prior accident year claims development of $92 million compares with $17 million in the prior year and
included the following:
• North American Operations recorded $11 million of positive development compared with $149 million of adverse development
in the prior period, reflecting favourable development in Crop (that was not matched by additional premium cessions under the
MPCI scheme) partly offset by adverse development in assumed multi-line, commercial corporate, D&O and Specialty programs;
• European Operations recorded $86 million of positive development compared with $141 million in the prior year, reflecting
the aforementioned payment pattern benefit and a net reserve release of $43 million primarily driven by QBE Re European
property business;
• Australian & New Zealand Operations reported $112 million of positive development compared with $158 million in the prior year,
largely reflecting the continuing absence of any notable claims inflation across most long-tail classes;
• Asia Pacific Operations reported $10 million of adverse development primarily due to late notification of short-tail claims in the first
half of 2018, a pleasing improvement from $35 million in the prior year;
• Equator Re reported $84 million of adverse development, down from $97 million in the prior year, largely relating to the September
2017 Mexican earthquakes coupled with reduced recoveries projected on older year aggregate reinsurance treaties; and
• adverse development of $23 million in Corporate reflects internal reinsurance between Latin American Operations and Equator Re,
with the equivalent $23 million reinsurance recovery recorded in discontinued operations (resulting in a net nil impact to the Group).
The result also included a risk margin increase of $17 million ($12 million on a statutory basis) or 0.1% of net earned premium
compared with an increase of $93 million ($75 million on a statutory basis) or 0.8% in the prior year.
Commission and expenses
The Group’s combined commission and expense ratio improved to 31.6% from 31.8% in the prior year.
The commission ratio improved slightly to 16.4% from 16.5% in 2017. European Operations’ commission ratio fell due to the
non-recurrence of commission adjustments and one-off reinsurance spend in the prior year. This was partly offset by higher
commission expense in Australian & New Zealand Operations primarily due to the non-renewal of the CTP quota share reinsurance
treaty with Equator Re.
The Group’s expense ratio improved marginally to 15.2% from 15.3% in the prior year. Cost savings from efficiency initiatives were
achieved in all divisions, partly offset by the loss of managed fund fee income in Australian & New Zealand Operations, costs
associated with the implementation of the Brexit solution and the Brilliant Basics program as well as various other strategic initiatives
across the Group.
Income tax expense
The Group’s income tax expense of $77 million equated to an effective tax rate of 12% compared with tax expense of $224 million
in 2017. The low effective tax rate reflects increased profits in North America and Bermuda, which benefit from the utilisation
of previously unrecognised tax losses, profits in the UK (where the corporate tax rate is lower than Australia) and the recognition
of additional North American deferred tax assets.
In 2018, QBE paid $200 million in corporate income tax to tax authorities globally, including $88 million in Australia. Income tax
payments in Australia benefit our dividend franking account, the balance of which stood at A$224 million as at 31 December 2018.
The Group is therefore capable of fully franking A$523 million of dividends. The dividend franking percentage will increase to 60%
for dividend payments in calendar 2019 (including the 2018 final dividend), however, the franking rate is expected to fall to around
10% in 2020 and thereafter reflecting the anticipated increase in the profit contribution of non-Australian operations.
Balance sheet
Capital management summary
During 2018, the Group’s focus was on a return to the strong capital adequacy levels seen prior to the extreme catastrophe
experience of 2017. As at 31 December 2018, the Group’s indicative APRA PCA multiple was 1.78x, up from 1.64x at 31 December 2017
and towards the upper end of our 1.6x–1.8x PCA target range, while our excess above S&P ‘AA’ minimum capital levels increased.
During the second half of 2018 and following detailed semi-annual reviews, the major rating agencies published updated credit
rating opinions which resulted in the rating and outlook for QBE remaining unchanged. These outcomes are highlighted below:
• On 5 September 2018, Fitch Ratings’ credit opinion highlighted the long-term issuer default rating (IDR) as ‘A-’ and the insurer
financial strength (IFS) ratings of QBE’s core subsidiaries at ‘A+’ (Strong). The ratings outlook is “stable”.
• On 19 September 2018, S&P’s credit opinion highlighted the parent entity’s issuer credit rating (ICR) at ‘A-’ as well as the ICR and
IFS ratings on QBE’s core operating entities at ‘A+’. The outlook remained “stable”.
On 21 December 2018, Moody’s reiterated QBE insurance Group Limited’s (the parent entity) ICR of ‘A3’, while the outlook remained
“negative”. The IFS ratings of the core subsidiaries remain at ‘A1’, also with a “negative” outlook. While A.M. Best did not publish
a revised credit opinion during the second half of 2018, A.M. Best’s long-term ICR of the parent entity and its main operating
subsidiaries remains at ‘bbb+’ and ‘a+’ respectively, while the IFS of the main operating subsidiaries remain at ‘A’. The Group’s outlook
remains “stable”.
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20
Group Chief Financial Officer’s report
Capital summary
AS AT 31 DECEMBER
Net assets
Less: intangible assets
Net tangible assets
Add: borrowings
Total tangible capitalisation
AS AT 31 DECEMBER
QBE’s regulatory capital base
APRA’s Prescribed Capital Amount (PCA)
PCA multiple
2018
US$M
8,400
(2,800)
5,600
3,188
8,788
2018 1
US$M
8,761
4,930
1.78x
1 Indicative APRA PCA calculation at 31 December 2018.
2 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
Key financial strength ratios
AS AT 31 DECEMBER
Debt to equity
Debt to tangible equity
PCA multiple 1
Premium solvency 2
Probability of adequacy of outstanding claims
BENCHMARK
25% to 35%
1.6x to 1.8x
87.5% to 92.5%
2018
38.0%
57.1%
1.78x
47.3%
90.1%
2017
US$M
8,901
(3,079)
5,822
3,616
9,438
2017 2
US$M
8,974
5,488
1.64x
2017
40.8%
62.6%
1.64x
49.5%
90.0%
1 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
2 Premium solvency ratio is calculated as the ratio of net tangible assets to adjusted net earned premium.
Borrowings
At 31 December 2018, total borrowings stood at $3,188 million, down $428 million or 12% from $3,616 million at 31 December 2017.
During the year, the Group completed two liability management exercises:
• The buyback in March 2018 of $291 million of senior unsecured debt securities due 25 May 2023.
• The buyback in June 2018 of $100 million of senior unsecured debt securities due 10 October 2022.
The Group also bought back an additional $8 million of senior unsecured debt securities from individual holders during the year.
At 31 December 2018, QBE’s ratio of borrowings to shareholders’ funds was 38.0%, down from 40.8% at 31 December 2017. This
reflects the debt buybacks undertaken during the year partly offset by a strengthening of the US dollar against major currencies which
adversely impacted our reported shareholders’ funds. Debt to tangible equity was 57.1%, down from 62.6% at 31 December 2017.
Gross interest expense on long-term borrowings was down $7 million from the prior year to $205 million. The average annual cash
cost of borrowings outstanding at the balance date increased from 5.9% at 31 December 2017 to 6.4% at 31 December 2018,
reflecting the repurchase of $399 million of senior debt that has a lower coupon relative to the Group’s capital qualifying debt.
At 31 December 2018, 94% of the Group’s debt counted towards regulatory capital, up from 83% at 31 December 2017, reflecting the
repurchase and cancellation of senior debt during the year.
Borrowings maturity 1
AS AT 31 DECEMBER
Less than one year
One to five years
More than five years
1 Based on first call date.
Borrowings profile
AS AT 31 DECEMBER
Senior debt
Subordinated debt
Additional tier 1 securities
Further details of borrowings are set out in note 5.1 to the financial statements.
2018
%
–
42
58
2018
%
6
81
13
2017
%
–
29
71
2017
%
17
72
11
20
Group Chief Financial Officer’s report
21
Capital summary
AS AT 31 DECEMBER
Net assets
Less: intangible assets
Net tangible assets
Add: borrowings
Total tangible capitalisation
AS AT 31 DECEMBER
QBE’s regulatory capital base
APRA’s Prescribed Capital Amount (PCA)
PCA multiple
Key financial strength ratios
AS AT 31 DECEMBER
Debt to equity
Debt to tangible equity
PCA multiple 1
Premium solvency 2
Borrowings
2018
US$M
8,400
(2,800)
5,600
3,188
8,788
2018 1
US$M
8,761
4,930
1.78x
2018
38.0%
57.1%
1.78x
47.3%
90.1%
2017
US$M
8,901
(3,079)
5,822
3,616
9,438
2017 2
US$M
8,974
5,488
1.64x
2017
40.8%
62.6%
1.64x
49.5%
90.0%
BENCHMARK
25% to 35%
1.6x to 1.8x
1 Indicative APRA PCA calculation at 31 December 2018.
2 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
Probability of adequacy of outstanding claims
87.5% to 92.5%
1 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
2 Premium solvency ratio is calculated as the ratio of net tangible assets to adjusted net earned premium.
At 31 December 2018, total borrowings stood at $3,188 million, down $428 million or 12% from $3,616 million at 31 December 2017.
During the year, the Group completed two liability management exercises:
• The buyback in March 2018 of $291 million of senior unsecured debt securities due 25 May 2023.
• The buyback in June 2018 of $100 million of senior unsecured debt securities due 10 October 2022.
The Group also bought back an additional $8 million of senior unsecured debt securities from individual holders during the year.
At 31 December 2018, QBE’s ratio of borrowings to shareholders’ funds was 38.0%, down from 40.8% at 31 December 2017. This
reflects the debt buybacks undertaken during the year partly offset by a strengthening of the US dollar against major currencies which
adversely impacted our reported shareholders’ funds. Debt to tangible equity was 57.1%, down from 62.6% at 31 December 2017.
Gross interest expense on long-term borrowings was down $7 million from the prior year to $205 million. The average annual cash
cost of borrowings outstanding at the balance date increased from 5.9% at 31 December 2017 to 6.4% at 31 December 2018,
reflecting the repurchase of $399 million of senior debt that has a lower coupon relative to the Group’s capital qualifying debt.
At 31 December 2018, 94% of the Group’s debt counted towards regulatory capital, up from 83% at 31 December 2017, reflecting the
repurchase and cancellation of senior debt during the year.
Net outstanding claims liabilities
AS AT 31 DECEMBER
Net central estimate
Risk margin
Net outstanding claims
Probability of adequacy of outstanding claims (PoA)
Weighted average discount rate
Weighted average term to settlement (years)
2018
US$M
12,870
1,158
14,028
%
90.1
1.7
3.3
2017
US$M
14,029
1,239
15,268
%
90.0
1.7
3.1
2016
US$M
12,693
1,088
13,781
%
89.5
1.5
2.9
2015
US$M
14,119
1,260
15,379
%
89.0
1.9
3.0
2014
US$M
15,595
1,353
16,948
%
88.7
1.7
2.8
As required by Australian Accounting Standards, net outstanding claims liabilities are discounted by applying sovereign bond rates
as a proxy for risk-free interest rates and not the actual earning rate on our investments.
At 31 December 2018, risk margins in net outstanding claims were $1,158 million or 9.0% of the net central estimate of outstanding
claims compared with $1,239 million or 8.8% of the net central estimate at 31 December 2017. Excluding foreign exchange
movements and risk margins sold or held for sale, risk margins increased $12 million during the year compared with a $75 million
increase in the prior year.
The PoA was broadly stable at 90.1%. A slight increase in risk margins as a percentage of the net central estimate was largely offset
by an increase in the coefficient of variation, primarily due to the loss of diversification benefit associated with the Latin American
claims reserves sold or held for sale.
Intangible assets
The carrying value of identifiable intangibles and goodwill at 31 December 2018 was $2,800 million, down from $3,079 million
at 31 December 2017.
During the year, the carrying value of intangibles reduced by $279 million, primarily due to a $183 million foreign exchange impact
coupled with $51 million of intangibles either sold or designated as held for sale at 31 December 2018 following the announced and/
or completed sales of QBE’s operations in Latin America, Puerto Rico, Thailand, Indonesia, the Philippines and the personal lines
operations in North America. Amortisation and impairment expense of $113 million more than offset net additions in the period which
comprised the capitalisation of expenditure in relation to various information technology projects.
At 31 December 2018, QBE reviewed all material intangibles for indicators of impairment, consistent with the Group’s policy and
the requirements of the relevant accounting standard. A detailed impairment test was completed in relation to our North American
goodwill balance of $832 million, which indicated headroom at the balance date of $250 million compared with nil at 31 December 2017.
The valuation remains highly sensitive to a range of assumptions, particularly changes in the forecast combined operating ratio used
in the terminal value calculation, discount rate and long-term investment assumptions.
Details of the sensitivities associated with this valuation are included in note 7.2.1 to the financial statements.
Investment performance and strategy
The investment portfolio delivered a net investment yield of 2.2% compared with 3.1% in the prior year.
Growth asset returns were more modest, delivering an aggregate return of 6.2% in 2018 compared with 13.3% in the prior year.
Continued strong returns from our unlisted property and infrastructure assets partly offset weaker equity market returns.
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Borrowings maturity 1
AS AT 31 DECEMBER
Less than one year
One to five years
More than five years
1 Based on first call date.
Borrowings profile
AS AT 31 DECEMBER
Senior debt
Subordinated debt
Additional tier 1 securities
Further details of borrowings are set out in note 5.1 to the financial statements.
2018
%
–
42
58
2018
%
6
81
13
2017
%
–
29
71
2017
%
17
72
11
Fixed income returns were adversely impacted by higher US Treasury yields and wider global credit spreads, both of which generated
mark-to-market capital losses and partly offset the underlying running yield generated by the portfolio. Fixed income assets returned
1.8% compared with 2.0% in the prior year.
o
n
Active duration management throughout the year enhanced fixed income returns. While yields rose during the first half of 2018,
we held duration around 1.5 years thereby minimising mark-to-market capital losses. During the second half we extended duration
to 2.1 years enabling us to capture more of the December global bond market rally. Similarly, in December we took advantage of
equity market weakness and increased our exposure to growth assets which finished the year at 13.7% of total cash and investments.
Throughout the credit spread widening experienced in 2018 our high quality and short duration credit portfolio has been relatively
resilient, allowing us to extend risk modestly at what are now much more attractive valuations.
As at 31 December 2018 the running yield of the fixed income portfolio was 2.2%, up from 1.7% a year earlier.
Total cash and investments at 31 December 2018 was $22.9 billion, down 12% from $26.1 billion at 31 December 2017. The reduction
in cash and investments during the year primarily reflects a $1.3 billion impact from the stronger US dollar, a $0.7 billion impact from
the settlement of the 2017 North American loss portfolio transfer and the Hong Kong construction workers’ compensation reinsurance
transaction, $0.6 billion of debt and equity buybacks and $0.6 billion of Latin American investments sold.
We see 2019 as likely to be a year of reasonable global growth and corporate earnings, although both have likely peaked, as have the
economic and market tail winds from significant monetary and fiscal policy stimulation.
During 2019 we intend to manage our exposure to equities and other liquid risk assets within a 10%–15% range of total cash and
investments and modestly increase the duration of our fixed income portfolio which is expected to be managed in a 2.0–2.5 year range.
22
Group Chief Financial Officer’s report
Total net investment income 1
FOR THE YEAR ENDED 31 DECEMBER
Income on growth assets
Fixed interest, short-term money and
cash income
Gross investment income
Investment expenses
Net investment income
Foreign exchange gain (loss)
Other income (expenses)
Net investment and other income
POLICYHOLDERS’ FUNDS
SHAREHOLDERS’ FUNDS
TOTAL
2018
US$M
111
245
356
(11)
345
1
–
346
2017
US$M
192
287
479
(11)
468
(19)
(2)
447
2018
US$M
60
142
202
(6)
196
–
5
201
2017
US$M
141
174
315
(7)
308
–
3
311
2018
US$M
171
387
558
(17)
541
1
5
547
2017
US$M
333
461
794
(18)
776
(19)
1
758
1 Includes total realised and unrealised losses on investments of $143 million (2017 $184 million gains) comprising losses on investments
supporting policyholders’ funds of $87 million (2017 $100 million gains) and shareholders’ funds of $56 million (2017 $84 million gains).
Annualised gross and net investment yield
YIELD ON INVESTMENT ASSETS
BACKING POLICYHOLDERS’ FUNDS
YIELD ON INVESTMENT ASSETS
BACKING SHAREHOLDERS’ FUNDS
TOTAL
FOR THE YEAR ENDED 31 DECEMBER
Gross investment yield 1
Net investment yield 2
Net investment income and other
income yield 3
2018
%
2.3
2.3
2.3
2017
%
3.0
2.9
2.8
2018
%
2.3
2.2
2.2
2017
%
3.4
3.3
3.4
2018
%
2.3
2.2
2.3
2017
%
3.2
3.1
3.0
1 Gross investment yield is calculated with reference to gross investment income as a percentage of average investment assets backing
policyholders’ or shareholders’ funds as appropriate.
2 Net yield is calculated with reference to gross investment income less investment management expenses as a percentage of average
investment assets backing policyholders’ or shareholders’ funds as appropriate.
3 Net investment income and other income yield is calculated with reference to net investment and other income as a percentage of average
investment assets backing policyholders’ or shareholders’ funds as appropriate.
INVESTMENT ASSETS BACKING
POLICYHOLDERS’ FUNDS
INVESTMENT ASSETS BACKING
SHAREHOLDERS’ FUNDS
TOTAL
Total cash and investments
AS AT 31 DECEMBER
Cash and cash equivalents
Short-term money
Government bonds
Corporate bonds
Infrastructure debt
Unit trusts
Strategic equities
Other equities
Emerging market equity
Emerging market debt
High yield debt
Infrastructure assets
Private equity
Property trusts
Investment properties
Total investments and cash
2018
US$M
536
796
3,089
7,540
308
–
–
324
180
145
50
528
99
567
22
14,184
2017
US$M
368
2,228
3,589
8,523
361
18
–
280
71
–
–
575
49
696
10
16,768
2018
US$M
327
487
1,886
4,604
187
–
43
198
109
89
31
323
60
346
13
8,703
2017
US$M
204
1,234
1,987
4,720
201
11
85
155
39
–
–
319
27
386
5
9,373
Interest bearing financial assets – S&P security grading
AS AT 31 DECEMBER
S&P rating
AAA
AA
A
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