QBE Insurance Group

2018 
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.

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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.

  
   
  
   
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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
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3

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4

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s

QBE Ventures

Retention (%)

'

1

o
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w

P
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f
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a
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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).

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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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8

Group Chief Executive Officer’s report

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.

8

Group Chief Executive Officer’s report

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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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Group Chief Financial Officer’s report

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 
na

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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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