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Table of contents
A N N UA L R E P O R T 2 01 9
SECTION 1
SECTION 3
SECTION 5
Performance overview
Governance
Financial Report
Financial Report contents
Financial statements
Notes to the financial
statements
Directors’ declaration
83
84
88
160
SECTION 6
Other information
o
n
Independent auditor’s report
Shareholder information
Financial calendar
10-year history
Glossary
161
169
172
173
174
Chairman’s message
2019 snapshot
Group Chief Executive
Officer’s report
SECTION 2
Business review
Group Chief Financial
Officer’s report
Operations overview
North America business review
International business review
Australia Pacific business review
2
4
6
10
24
26
28
30
Climate change – our approach
to risks and opportunities
Risk – our business
Board of Directors
Group Executive Committee
Corporate governance
statement
32
40
44
46
48
SECTION 4
Directors’ Report
Directors’ Report
Remuneration Report
56
60
Auditor’s independence declaration 82
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
At QBE, our purpose is to give people the
confidence to achieve their ambitions.
Around the world, our team of more than
11,700 people strive every day to meet this
commitment. We aim to keep the customer
at the centre of our decision-making as
we work to deliver insurance and risk
management solutions that respond to our
customers' current and emerging needs.
When disaster strikes, our immediate priority
is the safety, wellbeing and ultimately recovery
of our customers and the communities
in which they live. Throughout 2019, our
customers around the world faced a number
of challenges, from monsoonal flooding in the
Queensland city of Townsville to devastating
wildfires in the US, and unseasonal weather
conditions which impacted the performance
of our North American Crop business.
Through it all, QBE was there to help.
As 2019 ended and 2020 began, we were
there too when unprecedented bushfires
swept across the Australian landscape
razing homes, businesses and livelihoods.
The devastation caused by the fires
is widespread and many QBE customers
and their communities were impacted.
I am enormously proud of how QBE
responded to these events, which Pat
details in his CEO report on page 6 of this
Annual Report. Just as we were there in
the immediate aftermath, we will continue
to support our customers and bushfire
communities on the long road to recovery.
2
Chairman's message
3
Strong foundations
for a sustainable future
At QBE, our purpose is to give people the
confidence to achieve their ambitions.
Around the world, our team of more than
11,700 people strive every day to meet this
commitment. We aim to keep the customer
at the centre of our decision-making as
we work to deliver insurance and risk
management solutions that respond to our
customers' current and emerging needs.
When disaster strikes, our immediate priority
is the safety, wellbeing and ultimately recovery
of our customers and the communities
in which they live. Throughout 2019, our
customers around the world faced a number
of challenges, from monsoonal flooding in the
Queensland city of Townsville to devastating
wildfires in the US, and unseasonal weather
conditions which impacted the performance
of our North American Crop business.
Through it all, QBE was there to help.
As 2019 ended and 2020 began, we were
there too when unprecedented bushfires
swept across the Australian landscape
razing homes, businesses and livelihoods.
The devastation caused by the fires
is widespread and many QBE customers
and their communities were impacted.
I am enormously proud of how QBE
responded to these events, which Pat
details in his CEO report on page 6 of this
Annual Report. Just as we were there in
the immediate aftermath, we will continue
to support our customers and bushfire
communities on the long road to recovery.
Risk culture
Sustainability
We work in an era of increasing regulatory
scrutiny for our industry. Across our
operating divisions – North America,
International and Australia Pacific
– we strive to apply the highest possible
governance standards as we respond
to changing customer, community and
stakeholder expectations around the world.
In our home market of Australia, the
Royal Commission into Misconduct in the
Banking, Superannuation and Financial
Services Industry is leading to a number of
regulatory and legislative reforms that have
ramifications for the insurance industry and
the financial services sector more broadly.
QBE is pleased to have played
a constructive role in supporting these
reforms, while also making a number of
important changes within our operations
in response to our own assessment of
the strengths and areas for improvement
in our governance, accountability and
culture frameworks.
Shareholder returns
Unusually poor weather conditions in parts
of the US adversely affected the financial
performance of our North American
Crop business in 2019. Regrettably, this
weighed on the Group's underwriting
result, despite very good pricing
momentum and a strong investment
performance in an otherwise challenging
global interest rate environment.
The Group statutory net profit after tax of
$550 million represents a 41% increase on
2018, while the cash return on equity was
8.9% 1, up from 8.0% 1 in the prior year.
The Board has taken this into account
when determining this year’s final dividend.
Our dividend policy is intended to reward
shareholders relative to cash profit, while
maintaining sufficient capital for future
investment and growth in the business.
Accordingly, the Board has declared
a final dividend of 27 Australian cents
per share. When combined with the
25 Australian cents per share dividend
declared at the half year, this represents
a 2019 full year dividend of 52 Australian
cents per share. This compares favourably
with 50 Australian cents per share paid
out in 2018 and equates to a payout ratio
of 65% of adjusted cash profit.
During 2019, we also purchased an additional
A$295 million in QBE shares as part of our
three-year on-market share buyback program.
As a company that helps people and
businesses protect themselves from risk,
QBE is keenly focused on sustainability.
The identification and management of
current and emerging environmental,
social and governance trends is integral
both to our ability to understand the needs
of our customers and to ensuring the
sustainability of our own business.
In 2019, we further improved our overall
ranking in the Dow Jones Sustainability Index
(DJSI)/Corporate Sustainability Assessment
and maintained our inclusion in the DJSI
Australia Index. This is positive recognition
of the work we are doing, and in 2020
we will maintain our efforts in this area.
Climate change is a global risk that
has had, and will continue to have,
ramifications around the world. It is
a material risk for QBE and across our
operations, and we have developed
a detailed approach for how we manage
climate-related risks.
In 2019, we continued to deliver on our
Climate Change Action Plan commitments
and further enhanced our disclosures,
in line with the recommendations of the
Task-force on Climate Related Financial
Disclosures (TCFD).
Pleasingly, our focus on climate change
was recognised by non-profit climate
research provider, CDP, with QBE’s
score for corporate transparency and
action jumping two places to a ‘B’ in 2019.
An update on our Climate Change Action
Plan is included on pages 32 to 39 of this
Annual Report.
Among the measures introduced in 2019
was the publication of our energy policy,
which provides shareholders, customers
and the wider community with a clear
explanation of the Group’s approach
to investing in and underwriting energy
projects. Due to the high emissions
intensity of thermal coal, QBE has
maintained zero direct financial investment
in thermal coal from 1 July 2019, and we
have committed to phase out all direct
insurance services for thermal coal
customers within the next decade.
I am also pleased to report that in 2019,
QBE again achieved carbon neutrality and
we set an ambitious target to use 100%
renewable electricity across our operations
by 2025. We are also working closely with
our customers in a range of sectors around
the world to support their transition to
a lower carbon economy.
Earlier this year, QBE launched its first
disaster relief and climate resilience
partnerships with two of the world’s leading
humanitarian agencies, Red Cross and
Save The Children. These three-year
partnerships support the rapid mobilisation
of support for disaster relief activities in
response to catastrophic events.
By directing a portion of these funds
to climate resilience projects, we are also
supporting the efforts of communities
to protect themselves from physical risks
and potentially mitigate future disaster.
Looking ahead
As a global insurer, with operations in
27 countries around the world, we are
acutely aware of the challenges and
uncertainties that tomorrow may bring.
Global population growth, climate change,
mass migration of people to cities,
economic uncertainty, trade disputes and
protectionism all present challenges for
our customers and for our business.
At the same time, technological innovation,
the Internet of Things (IoT), the explosion in
data and the increasingly sophisticated use
of analytics all present opportunities for QBE.
I am confident that, with a highly performing
team under Pat Regan’s leadership, QBE
is well placed to take advantage of these
opportunities and build on the momentum
we have created in 2019.
Accordingly, I have advised the Board that
I believe the time is right for me to step
down as Chairman and from the QBE
Group Board. Board renewal is important
to bring fresh ideas and perspectives and
I am delighted the Board has chosen Mike
Wilkins to succeed me in the role of Group
Chairman. Mike is a highly regarded and
well credentialed director and will bring fresh
thinking to the direction of your company.
Thank you, our shareholders, for your
support during my time as Chairman of
this great company. I feel very privileged
to have served in this role and I am
confident that I leave QBE in very capable
hands. I wish Mike, the Board, Pat and the
executive team and everyone at QBE all
the very best for the future.
W. Marston Becker
Chairman
1 2019 adjusted cash profit ROE excludes non-cash and material non-recurring items such as restructuring costs, gains (losses) on disposals, the
impact of the Ogden decision in the UK and discontinued operations. 2018 adjusted cash profit ROE excludes the transaction to reinsure Hong Kong
construction workers' compensation liabilities.
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2019 snapshot 1
Shareholder
highlights
Financial highlights 3
Net profit after income tax (US$M)
2017
(1,249)
Dividend per share (A¢)
52¢
Dividend payout (A$M)
681
A¢
60
45
30
15
0
4
0 5
5
2
5
0
5
6
2
A$M
1,500
1,125
750
375
0
2015
2016
2017
2018
2019
Dividend per share (A¢)
Dividend payout (A$M)
4% from 2018
Earnings per share (US¢)
41.8¢
2018 29.0¢
2016
Combined operating ratio 4 (COR)
2015
2014
2013
97.5% 5
2018 95.7% 6
Gross earned premium
by class of business
Gross written premium
by class of business
Adjusted net profit after tax (US$M)
844
687
742
622 5
(254)
4% from 2018 6
2019
2018
622
597
2017
(191)
Other
2016
2015
Financial & credit
833
807
Insurance profit and
underwriting result (US$M)
Accident & health
Insurance profit (US$M)
Marine energy & aviation
(cid:31) Commercial &
domestic property
(cid:31) Motor & motor casualty
(cid:31) Agriculture
(cid:31) Public/product liability
(cid:31) Professional indemnity
(cid:31) Workers' compensation
(cid:31) Marine, energy & aviation
(cid:31) Accident & health
(cid:31) Financial & credit
(cid:31) Other
2019 2018
%
%
29.2
29.2
14.4
13.7
11.9
8.4
7. 1
6.6
5.3
3.3
0. 1
15.7
12.7
11. 1
7.9
7.3
6.6
Insurance
5.2
(loss) profit
Underwriting
0.5
result
3.8
Workers' compensation
708 5
1
6
8
Professional indemnity
$153 from 2018 6
Public/product liability
8
0
7
8
2
5
Underwriting
result 4 (US$M)
Agriculture
8
1
0
2
Motor & motor casualty
Commercial & domestic property
Insurance
profit
Underwriting
result
290 5
4%
$238 from 2018 6
6%
0
9
2
9
1
0
2
Adjusted cash profit return on
average shareholders’ funds 2
8.9%
2018 8.0%
Net earned premium (US$M)
11,609
1% from 2018 7
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 84 to 159 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
2019 targets provided to the market.
2 2019 adjusted cash profit ROE excludes non-cash and material non-recurring items such as restructuring costs, gains (losses) on disposals, the
impact of the Ogden decision in the UK and discontinued operations. 2018 adjusted cash profit ROE excludes the transaction to reinsure Hong Kong
construction workers’ compensation liabilities.
3 2018 and 2019 figures reflect results for continuing operations only.
4
5
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Shareholder
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Financial highlights 3
Net profit after income tax (US$M)
Operational highlights
Sustainability highlights
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Investments and cash at 31 December 2019
70%
Private equity
Average renewal rate increase
Group-wide 8
Segment
6.3%
North America
International
Australia Pacific
8
2018 5.0%
5.8%
6.0%
7.3%
Retention
78%
2018 81%
Net investment
return 4
3.6%
2018 2.3%
Gross written
premium growth 7
2%
2018 3%
Fixed income
duration
2.6years
2018 2.1 years
Cash and investments at 31 December 2019 (US$M)
24,374
Investments and cash at 31 December 2019
Private equity
2019 2018
%
%
(cid:31) Corporate bonds
54.4
53. 1
(cid:31) Government bonds
23.8
21.7
(cid:31) Short-term money
4.4
5.6
Other - growth assets
(cid:31) Infrastructure assets
3.7
3.7
(cid:31) Property trusts
Developed Market Equities
4. 1
3. 1
(cid:31) Emerging market debt
1.0
2.3
High yield debt
(cid:31) Cash and cash equivalents 2.2
3.8
(cid:31) Infrastructure debt
Infrastructure debt
2.2
1.6
(cid:31) High yield debt
0.4
1.6
Cash and cash equivalents
(cid:31) Developed Market Equities 1.2
2.5
(cid:31) Other – growth assets
0.9
1.2
Emerging market debt
(cid:31) Private equity
0.7
0.8
Property trusts
Renewable
electricity
use (%)
Target
by 2025
100%
Currently 63%
Climate change
disclosure
DISCLOSURE INSIGHT ACTION
Score: B
Employment
engagement (%)
Fostering a culture
of innovation
Ran a global challenge
for employees to identify
sustainable solutions
155
5
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4% from 2018
Other - growth assets
projects identified
Developed Market Equities
Financial inclusion
High yield debt
Infrastructure debt
Impact investments
Cash and cash equivalents
Emerging market debt
Property trusts
QBE joined the program
in Australia
Infrastructure assets
Short-term money
Government bonds
Corporate bonds
Premiums4Good: Ethical
Corporation’s global
Responsible Business
Awards – Finalist, 2019
Global disaster relief partnerships
Partnering to
build resilient
communities
and futures
Infrastructure assets
Short-term money
%
(cid:31) Corporate bonds
54.4
4 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
(cid:31) Government bonds
23.8
(cid:31) Short-term money
5 Excludes one-off impact of the Ogden decision in the UK.
4.4
(cid:31) Infrastructure assets
3.7
6 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
(cid:31) Property trusts
3. 1
(cid:31) Emerging market debt
2.3
7 Constant currency basis.
(cid:31) Cash and cash equivalents 2.2
8 Excludes premium rate changes relating to Australian compulsory third party motor (CTP).
(cid:31) Infrastructure debt
1.6
(cid:31) High yield debt
1.6
(cid:31) Developed Market Equities 1.2
(cid:31) Other – growth assets
0.9
(cid:31) Private equity
0.8
2019 2018
%
53. 1
21.7
5.6
3.7
4. 1
1.0
3.8
2.2
0.4
2.5
1.2
0.7
Government bonds
Corporate bonds
2019 snapshot 1
Dividend per share (A¢)
Combined operating ratio 4 (COR)
Adjusted net profit after tax (US$M)
52¢
Dividend payout (A$M)
681
4
0 5
5
2
5
0
5
6
2
A¢
60
45
30
15
0
2015
2016
2017
2018
2019
Dividend per share (A¢)
Dividend payout (A$M)
4% from 2018
A$M
1,500
1,125
750
375
0
Earnings per share (US¢)
41.8¢
2018 29.0¢
2017
2016
2015
2014
2013
97.5% 5
2018 95.7% 6
Gross earned premium
by class of business
Gross written premium
by class of business
Insurance profit and
underwriting result (US$M)
(cid:31) Commercial &
domestic property
29.2
29.2
2019 2018
%
%
(cid:31) Motor & motor casualty
(cid:31) Agriculture
(cid:31) Public/product liability
(cid:31) Professional indemnity
(cid:31) Workers' compensation
(cid:31) Marine, energy & aviation
(cid:31) Accident & health
(cid:31) Financial & credit
(cid:31) Other
15.7
12.7
11. 1
7.9
7.3
6.6
14.4
13.7
11.9
8.4
7. 1
6.6
5.3
3.3
Insurance
5.2
(loss) profit
3.8
Underwriting
0. 1
0.5
result
844
687
742
622
597
(1,249)
2019
2018
2016
2015
622 5
(254)
4% from 2018 6
2017
(191)
Other
833
807
Financial & credit
Accident & health
Insurance profit (US$M)
Marine energy & aviation
Workers' compensation
708 5
$153 from 2018 6
Professional indemnity
Public/product liability
1
6
8
8
2
5
8
0
7
0
9
2
Agriculture
Underwriting
result 4 (US$M)
Motor & motor casualty
8
1
0
2
9
1
0
2
Insurance
profit
Commercial & domestic property
Underwriting
result
290 5
$238 from 2018 6
4%
6%
Net earned premium by type
92% direct and
insurance
facultative
8% inward
reinsurance
Adjusted cash profit return on
average shareholders’ funds 2
8.9%
2018 8.0%
Net earned premium (US$M)
11,609
1% from 2018 7
1 The information in the tables above is extracted or derived from the Group’s audited financial statements included on pages 84 to 159 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
2019 targets provided to the market.
2 2019 adjusted cash profit ROE excludes non-cash and material non-recurring items such as restructuring costs, gains (losses) on disposals, the
impact of the Ogden decision in the UK and discontinued operations. 2018 adjusted cash profit ROE excludes the transaction to reinsure Hong Kong
construction workers’ compensation liabilities.
3 2018 and 2019 figures reflect results for continuing operations only.
6
Group Chief Executive Officer’s report
Building
momentum
QBE was founded in 1886 in Townsville,
Queensland. I’m not sure that anyone then could
have imagined the kind of world we live in
today, particularly the level of unpredictability
facing business and society at large.
In 2019, we saw low economic growth across most major
economies but we also saw generally low unemployment and
stock markets at record highs. Politically we saw trade tensions
and protectionist policies, however we ended the year with a series
of trade agreements signed, or in discussion. We also saw central
banks maintain interest rates at record lows to try to stimulate
growth – albeit at this stage with mixed success.
This had implications for QBE and for our customers who represent
almost every facet of the global economy – from big business
to local stores and from skyscrapers to first homes – and who
face new risks and opportunities every day.
Among these is the disruptive influence of technology, which
is changing almost every aspect of our lives and revolutionising
traditional business models. Machine learning, artificial intelligence
and the extraordinary growth in internet enabled devices are leading
to the creation of whole new industries.
Just as our customers are exploring ways to integrate these tools
and technologies into their businesses and lives, we too are
exploring the enormous opportunities for our
industry. I have described some of our work
in this area in 2019, and our ambition for QBE
for the future, below.
What we perhaps feel most profoundly
though, is the challenge that climate change
presents to our customers and indeed the
whole economy. Globally, the economic costs
from natural disasters have now exceeded the
30‑year average for seven of the last 10 years,
while the number of extreme weather
events globally has tripled since the 1980s.
In 2019 alone, we saw examples of this.
As I write this, Australia is yet again
experiencing severe weather, floods and
storms. This includes the recent Australian
summer which was marked by severe
weather and unprecedented bushfires that
had a devastating effect on many of our
customers and the communities in which
they live. I want to take this opportunity to
personally acknowledge the hard work and
bravery of the firefighters who were at the
front line of these fires, risking their lives
to protect others. I am proud to say this
incredible group of people included some
QBE employees.
6
Group Chief Executive Officer’s report
7
Building
momentum
QBE was founded in 1886 in Townsville,
Queensland. I’m not sure that anyone then could
exploring the enormous opportunities for our
industry. I have described some of our work
in this area in 2019, and our ambition for QBE
have imagined the kind of world we live in
for the future, below.
today, particularly the level of unpredictability
facing business and society at large.
In 2019, we saw low economic growth across most major
economies but we also saw generally low unemployment and
stock markets at record highs. Politically we saw trade tensions
and protectionist policies, however we ended the year with a series
of trade agreements signed, or in discussion. We also saw central
banks maintain interest rates at record lows to try to stimulate
growth – albeit at this stage with mixed success.
This had implications for QBE and for our customers who represent
almost every facet of the global economy – from big business
to local stores and from skyscrapers to first homes – and who
face new risks and opportunities every day.
Among these is the disruptive influence of technology, which
is changing almost every aspect of our lives and revolutionising
traditional business models. Machine learning, artificial intelligence
and the extraordinary growth in internet enabled devices are leading
to the creation of whole new industries.
Just as our customers are exploring ways to integrate these tools
and technologies into their businesses and lives, we too are
What we perhaps feel most profoundly
though, is the challenge that climate change
presents to our customers and indeed the
whole economy. Globally, the economic costs
from natural disasters have now exceeded the
30‑year average for seven of the last 10 years,
while the number of extreme weather
events globally has tripled since the 1980s.
In 2019 alone, we saw examples of this.
As I write this, Australia is yet again
experiencing severe weather, floods and
storms. This includes the recent Australian
summer which was marked by severe
weather and unprecedented bushfires that
had a devastating effect on many of our
customers and the communities in which
they live. I want to take this opportunity to
personally acknowledge the hard work and
bravery of the firefighters who were at the
front line of these fires, risking their lives
to protect others. I am proud to say this
incredible group of people included some
QBE employees.
The obvious link between these events
and the changing climate brings into sharp
focus how climate‑related risks are now
the new normal for our industry. We must
take action to address these risks in our
own operations, at the same time as
supporting our customers to mitigate their
exposure to climate risks and support the
transition to a lower carbon economy.
You will find a summary of QBE’s work in
this area on page 32 of this Annual Report.
Our year in review
Despite the economic challenges described
above, QBE made strong underlying
progress in 2019.
Through cell reviews and the Brilliant Basics
program we have built on the significant
work undertaken over the last two years
to simplify the portfolio, modernise our
business and systematically overhaul our
underwriting capability and culture.
This has enabled us to deliver meaningful
improvement in our operating metrics and
a solid set of results in 2019. This includes
a further improvement in the Group’s
attritional claims ratio, positive premium
rate momentum and very strong divisional
performances in our Australia Pacific and
International businesses. This gives us
good momentum heading into 2020.
Severe weather in parts of the US, including
an unusually wet spring, created difficult
planting conditions for many of our Crop
customers and this was compounded
by frost and hail during the growing
season. This resulted in a Crop combined
operating ratio of 107.5%, materially
higher than the 10‑year historical average
of around 90%, and contributed to a net
combined operating ratio for the Group
of 97.5% 1,2,3 – outside our targeted range.
However, with many of our North American
casualty portfolios already subject to
portfolio de‑risking initiatives since 2017,
the underlying fundamentals of our North
American business, and the entire Group,
are strong and we are well placed for
further improvement.
science, third party data and artificial
intelligence (AI) tools being deployed
across the Group.
At the same time, the Brilliant Basics
program continues to grow in influence
and sophistication as it maintains
its strong momentum throughout
the Group. In 2019, we established
the Office of the Group Chief
Underwriter, further strengthened our
underwriting governance, embedded
global pricing standards and made
significant improvements to our
claims handling processes.
Cell reviews and Brilliant Basics
underpinned a further 2.7% 4 improvement
in the Group’s attritional claims ratio
in 2019. This means that the Group’s
attritional claims ratio has improved
by almost 7% 4, since the second half
of 2017 and we believe there is further
improvement to come.
In Australia Pacific, a further 4.2% 5
improvement in the attritional claims ratio
helped underpin a very strong result for
the division, which recorded a combined
operating ratio of 90.0% 1. This compares
with 90.3% 1 in 2018 and is despite the
2.6% higher costs of catastrophes.
Similarly, in International, a further 3.0%
improvement in the attritional claims ratio
contributed to an improved divisional
combined operating ratio of 95.4% 1.
We also achieved positive rate
momentum, with an average renewal
rate increase of 8.3% 6 in the second half
of 2019 contributing to a full year Group
outcome of 6.3% 6. This positions us well
moving forward.
Importantly, despite the sluggish global
economic conditions I described earlier,
our investment returns were above the
top end of our target range in 2019 and
we also delivered our cost commitment
targets, with meaningful efficiency
initiatives underway across the Group.
Performance against
our 2019 priorities
Operational highlights
Cell reviews remain core to the Group’s
strategy and in 2019 they helped
contribute to a further improvement in the
quality and consistency of our earnings.
We continue to evolve cell reviews as
we take advantage of improved data and
insights now available to us through data
The rollout of our global customer
commitment program, coupled with our
focus on replicating best practice customer
programs across the Group, underpinned
further improvements in our customer
experience metrics in 2019. These metrics
are also now routinely integrated into our
cell review conversations, reflecting the
importance of customer outcomes in our
overall performance assessment.
At the same time, our investments in
technology are also helping deliver better
customer outcomes, such as our robotic
claims processes in UK motor and digital
travel claims in Hong Kong.
We are also deploying initiatives to support
financial wellbeing and enhance the
accessibility of our products and services,
for example by simplifying our product
disclosures. In June, our Australian
business also joined the Financial
Inclusion Action Plan (FIAP) program
– an initiative that promotes economic
wellbeing, resilience and inclusion.
We made further investments to
strengthen our talent, leadership and
capabilities in risk in 2019, with a heavy
focus on conduct, risk management and
governance. Our RISKsight program will
underpin a stronger risk and compliance
capability and culture. The rollout of
this program has already led to the
development of strengthened risk appetite
statements and a refresh of our risk policies
for all risk categories. Risk management
is embedded in our day‑to‑day operations
and our recent QBE Voice employee
survey showed that 88% of our employees
believe that managing risk is prioritised
and valued across the business.
With technology so critical to the future
of our business, we made further
progress on our technology roadmap.
We increased the stability of our existing
technology environment, automated
our global infrastructure, upgraded and
decommissioned end‑of‑life applications
and provided the critical foundations
for enhanced digital enablement. We
have also made substantial investments
in our cyber security capabilities,
including the establishment of a Global
Cyber Security Operations Centre.
We are streamlining our engagement
process with start‑ups to create ‘faster
paths to partnership’, to make QBE
a partner of choice as we look to create
new opportunities, while continuing
to leverage our existing Ventures and
other strategic partnerships.
As we seek to work in faster and
more agile ways, we are also creating
opportunities for our people to develop
and build the capabilities we will need
for the future.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Excludes on‑off impact of the Ogden decision in the UK.
3 Continuing operations basis.
4 Excludes Crop and LMI.
5 Excludes LMI.
6 Excludes premium rate changes relating to CTP.
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8
Group Chief Executive Officer’s report
We continue to support a host of flexibility,
diversity and inclusion initiatives across
our global operations, including the launch
of Share the Care in Australia and New
Zealand, which gives both men and women
equal opportunity to access parenting leave
to balance their careers with taking care of
a family. Across the Group, we have made
a range of improvements in the available
tools and benefits for our people to support
them with a healthy mind whether they are
at work or at home.
Our efforts to improve the diversity of our
workforce were again recognised with
QBE’s inclusion in the 2020 Bloomberg
Gender Equality Index. Pleasingly,
we have made good progress towards
our target of 35% women in senior
management by 2020, with a further
increase of 2% to 34% in 2019.
Finally, I am also pleased to report further
significant progress in our efforts to
manage climate related risk and reduce
our environmental footprint in 2019. We
have maintained carbon neutrality and we
are committed to using 100% renewable
electricity across our global operations
by the end of 2025. We are already more
than 60% of the way towards our goal.
Conclusion
In closing, I would like to thank all of our
employees around the world for their hard
work in 2019, as we continue to evolve and
grow our business and lay the foundations
for our long‑term sustainable growth.
I would also like to acknowledge Marty
Becker’s decision to retire from the QBE
Board and to express my sincere thanks
for his wise counsel and friendship during
our time working together. He has made
an enormous contribution to QBE in his
time as Chairman. I wish Marty every
success for the future and I look forward
to working with our new Chairman,
Mike Wilkins, as we continue to build
the QBE of the future.
Finally, thank you to our customers,
brokers and shareholders for your
ongoing support for our great company.
Pat Regan
Group Chief Executive Officer
Looking ahead
2020 targets
Combined
operating ratio 1,2
93.5%
to
95.5%
Investment return 1
2.5%
to
3.0%
With good progress against our seven priorities in 2019, and with a stronger culture
and risk management now firmly embedded in our day-to-day operations, we are
more resilient and better equipped to respond to a changing regulatory environment.
For 2020, we have developed a new set of priorities that will further concentrate
our efforts on our key differentiators, helping us build a reputation for value, service,
claims payment and performance.
We are evolving our business at the same time as technological disruption
continues to reshape the global economy and revolutionise entire industries.
We are determined to stay ahead by building best in class AI, data and digital
capabilities that will enable us to better support our customers in assessing
and mitigating risk, while delivering every‑day brilliance in underwriting,
pricing and claims.
That work is well underway with a number of projects, including those identified
above, leveraging these enhanced capabilities and already delivering results.
For example, we piloted a water monitoring technology with various housing
associations in the UK, to reduce the number of water leak incidents they
experience across an extensive property portfolio. In North America, we have
partnered with Roost, a technology company based in Sunnyvale California,
to offer our customers industry‑leading smart home products that offer
innovative ways to monitor their home smoke detector and water systems.
Wherever possible, we will replicate best practice and apply lessons learned
as we refine and test new customer-focused ideas for the future.
Above all else, in 2020, we will continue to deliver for our customers and maintain
our rigorous focus on performance through cell reviews, Brilliant Basics and our
operational efficiency drive, to harness the momentum we have built and continue
creating value for our shareholders.
1 Assumes risk‑free rates as at 31 December 2019.
2 Excludes $30 million one‑off regulatory and other costs and the remaining $52 million of restructuring charges.
8
Group Chief Executive Officer’s report
9
2020
priorities
Performance
Continue to mature our cell review
process to deliver our target COR.
Deliver against key sustainability and
climate commitments. Turn our focus
to organic growth opportunities.
Brilliant Basics +
Talent & Culture
Execute the next phase of Brilliant
Basics with a sharper focus on
delivering for our customers. Leverage
best in class AI, data, and digital
capabilities to embed everyday
brilliance in underwriting
and pricing and in particular,
throughout our customer
claims experience.
Accelerate our talent and leadership
strategy, building on our DNA to
empower our people to thrive, now and
in the future. Continue to enhance our
performance management
system, ME@QBE, supporting
our people and leaders
in managing career and
talent development.
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Innovation & Technology
Customer Focus
Enhance our digital and data capability,
update our IT platforms and accelerate the
transition to the cloud. Through innovative
partnerships and QBE Ventures, cultivate
skills and capabilities for the future and create
an environment that nurtures innovation
and continuous improvement.
Expand the breadth and depth of our customer
focus by embedding our Customer@QBE
framework, leveraging customer research
to build deeper industry expertise and
customer insights. Implement leading digital
technologies to create seamless end‑to‑end
experiences for our customers.
We continue to support a host of flexibility,
management by 2020, with a further
I would also like to acknowledge Marty
diversity and inclusion initiatives across
increase of 2% to 34% in 2019.
our global operations, including the launch
of Share the Care in Australia and New
Zealand, which gives both men and women
equal opportunity to access parenting leave
to balance their careers with taking care of
a family. Across the Group, we have made
a range of improvements in the available
tools and benefits for our people to support
them with a healthy mind whether they are
at work or at home.
Finally, I am also pleased to report further
significant progress in our efforts to
manage climate related risk and reduce
our environmental footprint in 2019. We
have maintained carbon neutrality and we
are committed to using 100% renewable
electricity across our global operations
by the end of 2025. We are already more
than 60% of the way towards our goal.
Our efforts to improve the diversity of our
Conclusion
workforce were again recognised with
In closing, I would like to thank all of our
QBE’s inclusion in the 2020 Bloomberg
employees around the world for their hard
Gender Equality Index. Pleasingly,
work in 2019, as we continue to evolve and
we have made good progress towards
grow our business and lay the foundations
our target of 35% women in senior
for our long‑term sustainable growth.
Becker’s decision to retire from the QBE
Board and to express my sincere thanks
for his wise counsel and friendship during
our time working together. He has made
an enormous contribution to QBE in his
time as Chairman. I wish Marty every
success for the future and I look forward
to working with our new Chairman,
Mike Wilkins, as we continue to build
the QBE of the future.
Finally, thank you to our customers,
brokers and shareholders for your
ongoing support for our great company.
Pat Regan
Group Chief Executive Officer
Looking ahead
2020 targets
Combined
operating ratio 1,2
93.5%
to
95.5%
Investment return 1
2.5%
to
3.0%
With good progress against our seven priorities in 2019, and with a stronger culture
and risk management now firmly embedded in our day-to-day operations, we are
more resilient and better equipped to respond to a changing regulatory environment.
For 2020, we have developed a new set of priorities that will further concentrate
our efforts on our key differentiators, helping us build a reputation for value, service,
claims payment and performance.
We are evolving our business at the same time as technological disruption
continues to reshape the global economy and revolutionise entire industries.
We are determined to stay ahead by building best in class AI, data and digital
capabilities that will enable us to better support our customers in assessing
and mitigating risk, while delivering every‑day brilliance in underwriting,
pricing and claims.
That work is well underway with a number of projects, including those identified
above, leveraging these enhanced capabilities and already delivering results.
For example, we piloted a water monitoring technology with various housing
associations in the UK, to reduce the number of water leak incidents they
experience across an extensive property portfolio. In North America, we have
partnered with Roost, a technology company based in Sunnyvale California,
to offer our customers industry‑leading smart home products that offer
innovative ways to monitor their home smoke detector and water systems.
Wherever possible, we will replicate best practice and apply lessons learned
as we refine and test new customer-focused ideas for the future.
Above all else, in 2020, we will continue to deliver for our customers and maintain
our rigorous focus on performance through cell reviews, Brilliant Basics and our
operational efficiency drive, to harness the momentum we have built and continue
creating value for our shareholders.
1 Assumes risk‑free rates as at 31 December 2019.
2 Excludes $30 million one‑off regulatory and other costs and the remaining $52 million of restructuring charges.
10
Group Chief Financial Officer’s report
Operating and
financial review
QBE reported a combined operating ratio
of 97.5% 1,2,3, up from 95.7% 1,2,4 in 2018.
A further improvement in the attritional
claims ratio was more than offset by
a severely weather-impacted Crop result
and an expected increase in the net cost of
large individual risk and catastrophe claims.
Strong rate momentum, coupled with
ongoing progress on Brilliant Basics and
our operational efficiency drive, bodes
well for sustainable margin expansion.
General overview
I am pleased with the continued improvement
in the quality and resilience of our earnings as
evidenced by a further material improvement in
the attritional claims ratio, the promising early
progress on our operational efficiency program
and the strong pricing momentum underpinned
by our forensic cell review process.
However, unusually poor weather in the US,
including an extremely wet spring followed
by early frost and hail, severely impacted the
performance of our historically profitable Crop
business. This weighed on the Group’s result
and contributed to a combined operating ratio
of 97.5% 1,2,3 which was above our 2019 target
range of 94.5%–96.5% 1,2.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Continuing operations basis.
3 Excludes one‑off impact of the Ogden decision in the UK.
4 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
10
Group Chief Financial Officer’s report
11
Operating and
financial review
QBE reported a combined operating ratio
of 97.5% 1,2,3, up from 95.7% 1,2,4 in 2018.
A further improvement in the attritional
claims ratio was more than offset by
a severely weather-impacted Crop result
and an expected increase in the net cost of
large individual risk and catastrophe claims.
Strong rate momentum, coupled with
ongoing progress on Brilliant Basics and
our operational efficiency drive, bodes
well for sustainable margin expansion.
General overview
I am pleased with the continued improvement
in the quality and resilience of our earnings as
evidenced by a further material improvement in
the attritional claims ratio, the promising early
progress on our operational efficiency program
and the strong pricing momentum underpinned
by our forensic cell review process.
However, unusually poor weather in the US,
including an extremely wet spring followed
by early frost and hail, severely impacted the
performance of our historically profitable Crop
business. This weighed on the Group’s result
and contributed to a combined operating ratio
of 97.5% 1,2,3 which was above our 2019 target
range of 94.5%–96.5% 1,2.
The result was also impacted
by a strengthening of prior accident year
claims reserves in specific US and European
casualty portfolios exposed to heightened
industry-wide claims inflation. Many of these
portfolios have been the subject of de‑risking
initiatives since 2017 and it is encouraging
that much of the reserve strengthening
related to underwriting years pre‑dating those
initiatives. Importantly, reserve strengthening
in these areas was almost entirely offset by
a combination of reinsurance recoveries and
continued favourable reserve development
elsewhere across the Group.
In 2019, we reset the Group’s reinsurance
program which warranted a higher allowance
for large individual risk and catastrophe
claims. Pleasingly, we finished the year
within our overall allowance, albeit with
large individual risk claims higher than
expected offset by lower than expected
catastrophe claims.
Large individual risk claims were higher than
expected at $955 million, in part reflecting an
industry‑wide increase in claim frequency and
severity which is contributing to accelerating
premium rate increases. Although above
plan, risk claims are down from 2018 levels
on a like‑for‑like (reinsurance) basis.
In addition to premium rate increases,
the continued and material improvement
in the attritional claims ratio and early signs
of a reduction in large individual risk claims
reflect our ongoing commitment to cell
reviews and Brilliant Basics.
Cell reviews provide a direct link and
alignment between our commercial activity
and our financial returns, enabling us to
hold each cell accountable for delivering
an appropriate return on capital. Remediation
work over the last two years has materially
improved the results of cells delivering
sub‑optimal returns and we believe there
is further opportunity to optimise our return
on capital.
Portfolio rationalisation and
simplification
During 2019, we completed a number of asset
sales and portfolio exits that have materially
reduced complexity and contributed to the
simplification of QBE.
These included the sale of our operations
in Colombia, Indonesia, the Philippines and
Puerto Rico as well as our travel insurance
business in Australia and New Zealand and
our personal lines business in North America.
Total annual gross written and net earned
premium associated with these sales
was around $410 million. In 2020, gross
written and net earned premium will
be impacted by around $150 million and
$200 million respectively, reflecting the
full year impact of the sales.
Operational efficiency program
In December 2018, we announced a three‑year
operational efficiency program targeting
gross cost savings of more than $200 million
by 2021, translating into net cost savings
of $130 million over the same time horizon,
after allowing for underlying inflation and
further investment in technology, digitisation
and the Brilliant Basics program.
From a 2018 cost base of $1.8 billion 1,2 and
an expense ratio of 15.2% 1,2, we are targeting
an expense ratio of less than 14% by 2021.
Although only one year into a three‑year
schedule of work, the efficiency program is
progressing better than planned. Meaningful
progress has been achieved in technology
rationalisation and modernisation as we
simplify our technology estate. A number
of other areas contributed to expense savings
including the sale of our retail personal lines
business in North America as well as the
simplification of divisional organisational
structures, particularly in Australia, New
Zealand and Global Infrastructure Services.
We also achieved a meaningful reduction
in third party consulting and travel costs.
The Brilliant Basics program continues
to improve our underwriting governance,
risk selection, pricing tools and claims
efficiency. This activity is translating into
better underlying profitability and reduced
earnings volatility. We now have tightly
defined risk appetites in place, a clear line
of sight on the business we are underwriting
and better science supporting expected
risk‑adjusted returns.
As a result of these initiatives, we achieved
underlying net cost savings of around
$70 million.
To support the program and as previously
advised, we incurred a $43 million
restructuring charge that was not reported
as part of the Group’s underwriting result.
Further restructuring charges of up to
$52 million are anticipated during 2020.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Continuing operations basis.
3 Excludes one‑off impact of the Ogden decision in the UK.
4 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
1 Continuing operations basis.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
3 Constant currency basis.
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Gross written
premium 1 (US$M)
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13,442
2% from 2018 3
Net earned
premium 1 (US$M)
11,609
1% from 2018 3
2019
2018
2017
2016
2015
13,442
11,609
13,657
11,640
13,328
11,351
14,395
11,066
15,092
12,314
Gross written premium (US$M)
Net earned premium (US$M)
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Group Chief Financial Officer’s report
2019 full year result
With respect to the 2019 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 $550 million, up 41% from $390 million in 2018.
Excluding non-cash and material non-recurring items as reconciled on page 15, the adjusted cash profit was $733 million, up 6% from
$692 million in the prior year. Adjusted cash profit return on equity was 8.9%, up from 8.0% in 2018.
Including the final dividend of 27 Australian cents per share, the full year dividend of 52 Australian cents per share is up 4% on the
prior year and equates to an adjusted cash profit payout ratio of 65%.
The Group’s combined operating ratio of 97.5% 1,2,3 was up from 95.7% 1,2,4 in the prior year.
The Group’s attritional claims ratio (excluding Crop and LMI) improved by 2.7% as a result of firming pricing conditions and portfolio
enhancement driven by cell reviews and the Brilliant Basics program. The underwriting expense ratio improved by 0.6% 4 due to early
benefits from the Group’s operational efficiency initiatives, coupled with the aforementioned one-off savings.
These improvements were more than offset by a weather-impacted Crop result, an expected adverse impact from the restructure
of the Group’s reinsurance program and a reduced level of positive prior accident year claims development as we recognised areas
of heightened claims inflation in North America and Europe.
Gross written and net earned premium increased by 2% 2,5 and 1% 2,5 respectively, with renewal rate increases partly offset
by disposals, further contraction in our Australian lenders’ mortgage insurance business (LMI) and targeted portfolio repositioning,
particularly in North America.
Looking briefly at divisional performance, the key themes to emerge from the 2019 result are set out below.
North America result impacted by Crop underperformance, attritional weather and reserve strengthening
North America reported a combined operating ratio of 106.5% 1, up from 98.7% 1 in the prior year. The result was adversely affected
by a weather-impacted Crop result, coupled with adverse prior accident year development including reserve strengthening in specific
casualty portfolios exposed to heightened industry-wide claims inflation.
The attritional claims ratio improved slightly despite a heightened level of attritional weather events during the second half.
Impacted by record prevented planting claims following an abnormally wet spring and reduced yields due to an unusually cold and hail
affected end to the growing season, Crop reported a combined operating ratio of 107.5% (as flagged in our ASX announcement of 18
December 2019), up materially from the 10 year average combined operating ratio of around 90%.
Premium rate momentum accelerated during 2019 with North America achieving an average renewal rate increase of 5.8% compared
with 4.1% in the prior year. Second half renewal rate increases averaged 7.7%, up from 4.1% in the first half.
Solid International result reflecting a lower attritional claims ratio and improved efficiency, partly offset
by an increase in the cost of large individual risk claims
International recorded another solid result with the combined operating ratio improving to 95.4% 1,3 from 95.9% 1,4 in the prior year.
A further 3.0% improvement in the attritional claims ratio, coupled with a 1.3% reduction in the total acquisition cost ratio more than
offset a largely expected increase in the net cost of large individual risk and catastrophe claims following the renegotiation of the
Group’s external reinsurance program effective 1 January 2019.
Premium rate momentum accelerated during 2019, especially in the second half of the year, with International achieving an average
renewal rate increase of 6.0% compared with 4.1% in the prior year. Second half renewal rate increases averaged 9.2%, up from 3.8%
in the first half.
Strong Australia Pacific result despite adverse catastrophe experience, further moderation in LMI earnings
and reduced positive prior accident year claims development
Despite adverse catastrophe experience, further moderation in LMI earnings and reduced positive prior accident year claims
development, Australia Pacific delivered a strong result reporting a combined operating ratio of 90.0% 1 compared with 90.3% 1
in the prior year. The result included a further 3.6% improvement in the attritional claims ratio (4.2% excluding LMI).
Premium rate momentum remains strong with renewal rate increases averaging 7.3% 6 compared with 7.1% 6 in 2018.
The combined operating ratio of our LMI business increased to 58.3% 1 from 54.8% 1 in the prior year, primarily due to the impact
of significant premium contraction on both the net claims and expense ratios. Although lending practices continue to improve and
arrears rates and new delinquencies fell during the year, total claims costs were broadly unchanged from the prior year as the
business gradually works through claims relating to the unwind of the mining boom in regional Queensland and Western Australia.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Continuing operations basis.
3 Excludes one‑off impact of the Ogden decision in the UK.
4 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
5 Constant currency basis.
6 Excludes premium rate changes relating to CTP.
12
Group Chief Financial Officer’s report
13
2.
Investment performance and strategy
Our investment portfolio delivered a net investment return of 3.6% 1 in 2019, slightly above the upper end of our 3.0%–3.5% target
range 1 with most asset classes delivering better than expected returns.
Fixed income assets generated a 3.7% return compared with 1.8% in the prior year, reflecting significant mark-to-market gains from
lower sovereign bond yields and narrower global credit spreads. The decision to close our balance sheet duration mismatch during
the year proved beneficial with the $231 million adverse impact of lower risk-free-rates used to discount net outstanding claims
liabilities more than offset by $265 million of mark-to-market gains on our fixed income portfolio.
In response to falling risk‑free rates, growth asset returns also outperformed, increasing to 11.8% from 6.2% in the prior year.
Growth assets finished the year at 13.5% of the portfolio, in line with 13.7% at 31 December 2018.
As at 31 December 2019, the running yield of the fixed income portfolio was 1.5%, down from 2.2% at 31 December 2018.
Going forward and to align more closely with peer reporting, we have reallocated high yield and emerging market debt to fixed income
from growth assets and have also commenced the deployment of a private credit allocation where the additional illiquidity premium
offers incremental risk‑adjusted returns.
Together, these changes are expected to increase our fixed income running yield to around 1.75% once fully implemented.
During 2020, we intend to manage fixed income duration in a range of 2.5–3.0 years and growth asset exposure at around 12.5% 2
of total cash and investments. Together with a modest allowance for tactical asset allocation outperformance, these portfolio settings
support our 2020 net investment return target range of 2.5%–3.0% 3.
3.
Financial strength and capital management
Our capital position remains strong when measured against both regulatory and rating agency capital requirements with the Group’s
indicative APRA PCA multiple 1.71x at 31 December 2019. Although down from 1.78x at 31 December 2018, the PCA multiple
remains above the midpoint of the Group’s 1.6–1.8x target PCA range, and the Group retains an excess above Standard & Poor’s
(S&P) ‘AA’ minimum capital levels.
The reduction in the Group’s PCA multiple primarily reflects the share buyback and dividends paid during the year (which together
exceeded net cash profit) coupled with an increase in the asset risk charge due to the material increase in investment funds and
following the decision to extend asset duration and modestly increase credit risk. An increase in the insurance risk charge due to the
increase in net outstanding claims liabilities was more than offset by a reduction in the insurance concentration risk charge (ICRC)
following further enhancements to the Group’s reinsurance protection effective 1 January 2020.
At 31 December 2019, QBE’s debt to equity ratio was unchanged at 38.0% and slightly above the benchmark range of 25%–35%.
Retained profit growth coupled with the senior debt repurchased during the year were offset by the share buyback and the adoption
of AASB 9.
The probability of adequacy (PoA) of outstanding claims was broadly unchanged at 90.0%, the mid‑point of our targeted PoA range
of 87.5%–92.5%.
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1 Assumes risk‑free rates as at 31 December 2018.
2 From 1 January 2020, growth assets no longer include high yield debt or emerging market debt which is now considered part of our fixed
income portfolio consistent with peer reporting.
3 Assumes risk‑free rates as at 31 December 2019.
2019 full year result
With respect to the 2019 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 $550 million, up 41% from $390 million in 2018.
Excluding non-cash and material non-recurring items as reconciled on page 15, the adjusted cash profit was $733 million, up 6% from
$692 million in the prior year. Adjusted cash profit return on equity was 8.9%, up from 8.0% in 2018.
Including the final dividend of 27 Australian cents per share, the full year dividend of 52 Australian cents per share is up 4% on the
prior year and equates to an adjusted cash profit payout ratio of 65%.
The Group’s combined operating ratio of 97.5% 1,2,3 was up from 95.7% 1,2,4 in the prior year.
The Group’s attritional claims ratio (excluding Crop and LMI) improved by 2.7% as a result of firming pricing conditions and portfolio
enhancement driven by cell reviews and the Brilliant Basics program. The underwriting expense ratio improved by 0.6% 4 due to early
benefits from the Group’s operational efficiency initiatives, coupled with the aforementioned one-off savings.
These improvements were more than offset by a weather-impacted Crop result, an expected adverse impact from the restructure
of the Group’s reinsurance program and a reduced level of positive prior accident year claims development as we recognised areas
of heightened claims inflation in North America and Europe.
Gross written and net earned premium increased by 2% 2,5 and 1% 2,5 respectively, with renewal rate increases partly offset
by disposals, further contraction in our Australian lenders’ mortgage insurance business (LMI) and targeted portfolio repositioning,
particularly in North America.
Looking briefly at divisional performance, the key themes to emerge from the 2019 result are set out below.
North America result impacted by Crop underperformance, attritional weather and reserve strengthening
North America reported a combined operating ratio of 106.5% 1, up from 98.7% 1 in the prior year. The result was adversely affected
by a weather-impacted Crop result, coupled with adverse prior accident year development including reserve strengthening in specific
casualty portfolios exposed to heightened industry-wide claims inflation.
The attritional claims ratio improved slightly despite a heightened level of attritional weather events during the second half.
Impacted by record prevented planting claims following an abnormally wet spring and reduced yields due to an unusually cold and hail
affected end to the growing season, Crop reported a combined operating ratio of 107.5% (as flagged in our ASX announcement of 18
December 2019), up materially from the 10 year average combined operating ratio of around 90%.
Premium rate momentum accelerated during 2019 with North America achieving an average renewal rate increase of 5.8% compared
with 4.1% in the prior year. Second half renewal rate increases averaged 7.7%, up from 4.1% in the first half.
Solid International result reflecting a lower attritional claims ratio and improved efficiency, partly offset
by an increase in the cost of large individual risk claims
International recorded another solid result with the combined operating ratio improving to 95.4% 1,3 from 95.9% 1,4 in the prior year.
A further 3.0% improvement in the attritional claims ratio, coupled with a 1.3% reduction in the total acquisition cost ratio more than
offset a largely expected increase in the net cost of large individual risk and catastrophe claims following the renegotiation of the
Group’s external reinsurance program effective 1 January 2019.
Premium rate momentum accelerated during 2019, especially in the second half of the year, with International achieving an average
renewal rate increase of 6.0% compared with 4.1% in the prior year. Second half renewal rate increases averaged 9.2%, up from 3.8%
in the first half.
Strong Australia Pacific result despite adverse catastrophe experience, further moderation in LMI earnings
and reduced positive prior accident year claims development
Despite adverse catastrophe experience, further moderation in LMI earnings and reduced positive prior accident year claims
development, Australia Pacific delivered a strong result reporting a combined operating ratio of 90.0% 1 compared with 90.3% 1
in the prior year. The result included a further 3.6% improvement in the attritional claims ratio (4.2% excluding LMI).
Premium rate momentum remains strong with renewal rate increases averaging 7.3% 6 compared with 7.1% 6 in 2018.
The combined operating ratio of our LMI business increased to 58.3% 1 from 54.8% 1 in the prior year, primarily due to the impact
of significant premium contraction on both the net claims and expense ratios. Although lending practices continue to improve and
arrears rates and new delinquencies fell during the year, total claims costs were broadly unchanged from the prior year as the
business gradually works through claims relating to the unwind of the mining boom in regional Queensland and Western Australia.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Continuing operations basis.
3 Excludes one‑off impact of the Ogden decision in the UK.
4 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
5 Constant currency basis.
6 Excludes premium rate changes relating to CTP.
14
Group Chief Financial Officer’s report
Operating and financial performance
Summary income statement
STATUTORY RESULT
ADJUSTMENTS
ADJUSTED RESULT
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
Net investment income on shareholders’ funds
Financing and other costs
(Losses) gains on sale of entities and businesses
Unrealised losses on assets held for sale
Share of net losses of associates
Restructuring and related expenses
Amortisation and impairment of intangibles
Profit before income tax from continuing
operations
Income tax expense
Profit after income tax from continuing
operations
Loss after income tax from discontinued
operations
Non‑controlling interests
Net profit after income tax
2019
US$M
13,442
13,257
11,609
(8,102)
(1,819)
(1,690)
(2)
649
647
387
(257)
(8)
–
(3)
(43)
(51)
672
(104)
568
(21)
3
550
2018
US$M
13,657
13,601
11,640
(7,405)
(1,957)
(1,798)
480
346
826
201
(305)
12
(25)
(2)
–
(80)
627
(72)
555
(177)
12
390
2019
US$M
2018
US$M
–
–
–
61
–
–
61
–
61
–
–
–
–
–
–
–
61
(10)
51
–
–
51
–
–
190
(166)
6
5
35
–
35
–
–
–
–
–
–
–
35
(5)
30
–
–
30
2019 1
US$M
13,442
13,257
11,609
(8,041)
(1,819)
(1,690)
59
649
708
387
(257)
(8)
–
(3)
(43)
(51)
733
(114)
619
(21)
3
601
2018 2
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
1 Excludes one‑off impact of the Ogden decision in the UK.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
Overview of the 2019 result
The Group reported a 2019 statutory net profit after tax of $550 million compared with $390 million in the prior year. Continuing
operations reported a statutory net profit after tax of $568 million compared with $555 million in the prior year, with the improvement
primarily due to significantly stronger investment returns which more than offset the reduced underwriting result due to a severely
weather-impacted North American Crop result. Discontinued operations reported a statutory net loss after tax of $21 million compared
with a $177 million loss in the prior year, including a $10 million non-cash foreign currency translation reserve reclassification.
The Group’s effective tax rate was 15% compared with 11% in the prior year, with the increase reflecting the mix of corporate tax
rates in the jurisdictions in which QBE operates and the utilisation of previously unrecognised tax losses in the US.
Excluding non-cash and material non-recurring items as reconciled on the opposite page, the adjusted cash profit was $733 million,
up 6% from $692 million in the prior year. Adjusted cash profit return on equity was 8.9%, up from 8.0% in 2018.
The preceding table shows the statutory result excluding items which materially distort key performance indicators.
The 2019 adjusted result in the preceding table excludes a $61 million increase in the Group’s net central estimate of outstanding
claims reflecting the reduction in statutory discount rates applicable to UK personal injury liabilities (the Ogden decision) with
an associated $10 million tax impact.
The 2018 adjusted result 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 $5 million respectively. The transaction impacts year‑on‑year comparison of net earned
premium and underwriting ratios, depressing the net claims ratio and inflating the combined commission and expense ratio.
The underwriting results in the preceding table are presented on a continuing operations basis with the results of our Latin America
Operations presented separately as discontinued operations for both the current and prior year.
Further details of the Group’s disposal activities and discontinued operations are set out in note 7.1 to the financial statements.
Unless otherwise stated, the commentary following refers to the Group’s result on the adjusted basis described above.
14
Group Chief Financial Officer’s report
15
STATUTORY RESULT
ADJUSTMENTS
ADJUSTED RESULT
Operating and financial performance
Summary income statement
FOR THE YEAR ENDED 31 DECEMBER
Gross written premium
Gross earned premium
Net earned premium
Net claims expense
Net commission
Underwriting and other expenses
Underwriting result
Net investment income on policyholders’ funds
Insurance profit
Net investment income on shareholders’ funds
Financing and other costs
(Losses) gains on sale of entities and businesses
Unrealised losses on assets held for sale
Share of net losses of associates
Restructuring and related expenses
Amortisation and impairment of intangibles
Profit before income tax from continuing
operations
Income tax expense
Profit after income tax from continuing
Loss after income tax from discontinued
operations
operations
Non‑controlling interests
Net profit after income tax
2019
US$M
13,442
13,257
11,609
(8,102)
(1,819)
(1,690)
(2)
649
647
387
(257)
(8)
–
(3)
(43)
(51)
672
(104)
568
(21)
3
550
2018
US$M
13,657
13,601
11,640
(7,405)
(1,957)
(1,798)
480
346
826
201
(305)
12
(25)
(2)
–
(80)
627
(72)
555
(177)
12
390
2019
US$M
–
–
–
–
–
61
61
–
61
–
–
–
–
–
–
–
61
(10)
51
–
–
51
1 Excludes one‑off impact of the Ogden decision in the UK.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
Overview of the 2019 result
2018
US$M
–
–
190
(166)
6
5
35
–
35
–
–
–
–
–
–
–
35
(5)
30
–
–
30
2019 1
US$M
13,442
13,257
11,609
(8,041)
(1,819)
(1,690)
59
649
708
387
(257)
(8)
–
(3)
(43)
(51)
733
(114)
619
(21)
3
601
2018 2
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
The Group reported a 2019 statutory net profit after tax of $550 million compared with $390 million in the prior year. Continuing
operations reported a statutory net profit after tax of $568 million compared with $555 million in the prior year, with the improvement
primarily due to significantly stronger investment returns which more than offset the reduced underwriting result due to a severely
weather-impacted North American Crop result. Discontinued operations reported a statutory net loss after tax of $21 million compared
with a $177 million loss in the prior year, including a $10 million non-cash foreign currency translation reserve reclassification.
The Group’s effective tax rate was 15% compared with 11% in the prior year, with the increase reflecting the mix of corporate tax
rates in the jurisdictions in which QBE operates and the utilisation of previously unrecognised tax losses in the US.
Excluding non-cash and material non-recurring items as reconciled on the opposite page, the adjusted cash profit was $733 million,
up 6% from $692 million in the prior year. Adjusted cash profit return on equity was 8.9%, up from 8.0% in 2018.
The preceding table shows the statutory result excluding items which materially distort key performance indicators.
The 2019 adjusted result in the preceding table excludes a $61 million increase in the Group’s net central estimate of outstanding
claims reflecting the reduction in statutory discount rates applicable to UK personal injury liabilities (the Ogden decision) with
an associated $10 million tax impact.
The 2018 adjusted result 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.
The underwriting results in the preceding table are presented on a continuing operations basis with the results of our Latin America
Operations presented separately as discontinued operations for both the current and prior year.
Further details of the Group’s disposal activities and discontinued operations 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 adjusted basis described above.
The Group reported a 2019 profit after tax from continuing operations of $619 million, up 6% from $585 million in the prior year,
primarily reflecting significantly stronger investment returns which more than offset reduced underwriting profits as a result
of a severely weather-impacted North American Crop result.
On a constant currency basis, gross written premium increased by 2% reflecting premium rate driven growth largely offset
by divestments, further LMI contraction and targeted portfolio repositioning in North America. On the same basis, net earned
premium increased by 1% relative to the prior year assisted by reduced reinsurance costs.
The combined operating ratio increased to 97.5% 1 compared with 95.7% 1 in the prior year. A further material improvement in the
attritional claims ratio (excluding Crop and LMI), coupled with efficiency gains, was more than offset by significantly reduced Crop
profitability, a reduced level of positive prior accident year claims development and an expected increase in the net cost of large
individual risk and catastrophe claims following the restructure of the Group’s reinsurance program.
The current accident year combined operating ratio increased to 97.3% 1 from 96.5% 1 in 2018.
The net return on investments backing policyholders’ funds increased to 4.5% from 2.3% in the prior year. Fixed income returns were
especially strong reflecting mark-to-market gains on sovereign and corporate bonds driven by significantly lower global risk-free rates
and a narrowing of credit spreads. Growth asset returns were also extremely strong, supported by lower global risk‑free rates.
The Group reported an insurance profit of $708 million, down from $861 million in the prior year, largely reflecting the Crop-impacted
underwriting result. The insurance profit margin decreased to 6.1% from 7.3% in the prior year.
Consistent with the increase in investment income on policyholders’ funds, net investment income on shareholders’ funds was also
significantly higher at $387 million compared with $201 million in 2018.
Despite the first-time inclusion of lease liability interest charges associated with implementation of AASB 16, financing and other
costs reduced materially to $257 million from $305 million in the prior year reflecting the non-recurrence of costs associated with
foreign exchange contracts and other one‑off costs.
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
Reconciliation of cash profit 1
FOR THE YEAR ENDED 31 DECEMBER
Net profit after tax
Amortisation and impairment of intangibles after tax 2
Reclassification of foreign currency translation reserve after tax (FCTR) 3
Net cash profit after tax
Restructuring and related expenses after tax
Net loss (profit) on disposals after tax
Ogden decision after tax
Transaction to reinsure Hong Kong construction workers’ compensation liabilities after tax
Loss from discontinued operations after tax (excluding reclassification of FCTR)
Adjusted net cash profit after tax
Return on average shareholders’ funds – adjusted cash basis (%)
Basic earnings per share – cash basis (US cents)
Dividend payout ratio (percentage of adjusted cash profit) 4
2019
US$M
550
71
16
637
32
8
51
–
5
733
8.9
48.4
65%
2018
US$M
390
108
217
715
–
(13)
–
30
(40)
692
8.0
53.1
72%
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1 Cash profit is presented on a statutory basis.
2 $43 million of pre‑tax amortisation expense is included in underwriting expenses (2018 $33 million).
3 The sale of operations in Colombia, Indonesia and Philippines gave rise to a foreign currency translation reserve (FCTR) reclassification
charge (out of equity into profit or loss). This is a non-cash item and does not impact shareholders’ funds or QBE’s regulatory or rating
agency capital base. Refer note 7.1.1 for further details.
4 Dividend payout ratio is calculated as the total A$ dividend divided by adjusted cash profit converted to A$ at the period average rate
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of exchange.
16
Group Chief Financial Officer’s report
Premium income
Gross written premium fell 2% to $13,442 million from $13,657 million in the prior year.
On an average basis and compared with 2018, the Australian dollar, sterling and euro depreciated against the US dollar by 7%,
4% and 5% respectively. Currency movements adversely impacted gross written premium by $434 million relative to the prior year.
Gross written premium increased 2% on a constant currency basis reflecting premium rate driven growth in International (despite
remediation led contraction in Asia) and Australia Pacific, largely offset by the impact of divestments and targeted portfolio
repositioning, particularly in North America. Excluding divestments, underlying growth was 4% on a constant currency basis.
The Group achieved an average renewal rate increase of 6.3% 1 compared with 4.7% 1 in the first half of 2019 and 5.0% 1 in 2018.
Premium rate momentum accelerated during 2019, especially in International (particularly Europe) and North America.
North America reported a 2% reduction in gross written premium. An average renewal rate increase of 5.8% compared with 4.1%
in the prior year was more than offset by the divestment of the personal lines business and premium contraction due to targeted
repositioning of the corporate and excess & surplus (E&S) lines portfolios. Adjusting for disposals, underlying growth was around 3%
due primarily to strong service-driven growth in Crop.
International reported gross written premium growth of 1% (up 4% on a constant currency basis), underpinned by an average renewal
rate increase of 6.0% compared with 4.1% in the prior year. European Operations’ achieved an average renewal rate increase of 6.3%
compared with 4.4% in 2018 while Asia achieved an average renewal rate increase of 3.5% compared with 0.7% in the prior year.
Reflecting the improved pricing environment and emerging new business opportunities, European Operations achieved gross written
premium growth of 5% on a constant currency basis which was partly offset by a further 4% contraction in Asia reflecting disposals
coupled with further remediation initiatives that are now largely complete.
Australia Pacific reported a 4% reduction in gross written premium (up 3% on a constant currency basis). An average renewal rate
increase of 7.3% 1 compared with 7.1% 1 in the prior year was more than offset by the sale of the travel insurance business, a further
contraction in LMI premium due to the slowdown in home lending and some normalisation of market share in South Australian CTP
following the opening of the scheme to competition from 1 July 2019. Adjusting for the disposal of the travel insurance business,
underlying premium growth was around 3%.
Net earned premium fell 2% to $11,609 million from $11,830 million in the prior year but was up 1% on a constant currency basis
assisted by reduced reinsurance costs following the restructure of the Group’s reinsurance program, effective 1 January 2019.
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 3
Insurance profit margin
2019
2018
STATUTORY
%
ADJUSTED 1
%
STATUTORY
%
ADJUSTED 2
%
69.8
15.6
14.6
100.0
98.0
5.6
69.3
15.6
14.6
99.5
97.5
6.1
63.6
16.9
15.4
95.9
96.0
7.1
64.0
16.4
15.2
95.6
95.7
7.3
1 Excludes one‑off impact of the Ogden decision in the UK.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
3 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
16
Group Chief Financial Officer’s report
17
Premium income
Gross written premium fell 2% to $13,442 million from $13,657 million in the prior year.
On an average basis and compared with 2018, the Australian dollar, sterling and euro depreciated against the US dollar by 7%,
4% and 5% respectively. Currency movements adversely impacted gross written premium by $434 million relative to the prior year.
Gross written premium increased 2% on a constant currency basis reflecting premium rate driven growth in International (despite
remediation led contraction in Asia) and Australia Pacific, largely offset by the impact of divestments and targeted portfolio
repositioning, particularly in North America. Excluding divestments, underlying growth was 4% on a constant currency basis.
The Group achieved an average renewal rate increase of 6.3% 1 compared with 4.7% 1 in the first half of 2019 and 5.0% 1 in 2018.
Premium rate momentum accelerated during 2019, especially in International (particularly Europe) and North America.
North America reported a 2% reduction in gross written premium. An average renewal rate increase of 5.8% compared with 4.1%
in the prior year was more than offset by the divestment of the personal lines business and premium contraction due to targeted
repositioning of the corporate and excess & surplus (E&S) lines portfolios. Adjusting for disposals, underlying growth was around 3%
due primarily to strong service-driven growth in Crop.
International reported gross written premium growth of 1% (up 4% on a constant currency basis), underpinned by an average renewal
rate increase of 6.0% compared with 4.1% in the prior year. European Operations’ achieved an average renewal rate increase of 6.3%
compared with 4.4% in 2018 while Asia achieved an average renewal rate increase of 3.5% compared with 0.7% in the prior year.
Reflecting the improved pricing environment and emerging new business opportunities, European Operations achieved gross written
premium growth of 5% on a constant currency basis which was partly offset by a further 4% contraction in Asia reflecting disposals
coupled with further remediation initiatives that are now largely complete.
Australia Pacific reported a 4% reduction in gross written premium (up 3% on a constant currency basis). An average renewal rate
increase of 7.3% 1 compared with 7.1% 1 in the prior year was more than offset by the sale of the travel insurance business, a further
contraction in LMI premium due to the slowdown in home lending and some normalisation of market share in South Australian CTP
following the opening of the scheme to competition from 1 July 2019. Adjusting for the disposal of the travel insurance business,
underlying premium growth was around 3%.
Net earned premium fell 2% to $11,609 million from $11,830 million in the prior year but was up 1% on a constant currency basis
assisted by reduced reinsurance costs following the restructure of the Group’s reinsurance program, effective 1 January 2019.
1 Excludes premium rate changes relating to CTP.
Underwriting performance
Key ratios – Group
FOR THE YEAR ENDED 31 DECEMBER
Net claims ratio
Net commission ratio
Expense ratio
Combined operating ratio
Adjusted combined operating ratio 3
Insurance profit margin
2019
2018
STATUTORY
ADJUSTED 1
STATUTORY
ADJUSTED 2
%
69.8
15.6
14.6
100.0
98.0
5.6
%
69.3
15.6
14.6
99.5
97.5
6.1
%
63.6
16.9
15.4
95.9
96.0
7.1
%
64.0
16.4
15.2
95.6
95.7
7.3
1 Excludes one‑off impact of the Ogden decision in the UK.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
3 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
Divisional performance
Contributions by region
FOR THE YEAR ENDED 31 DECEMBER
North America
International 2,3
Australia Pacific
Corporate adjustments
Group adjusted
Risk‑free rate impact
Ogden adjustment
Reinsurance transaction
Group statutory
Direct and facultative
Inward reinsurance
Group statutory
GROSS WRITTEN
PREMIUM
NET EARNED
PREMIUM
COMBINED OPERATING
RATIO
INSURANCE PROFIT
BEFORE INCOME TAX
2019
US$M
4,637
4,924
3,920
(39)
13,442
–
–
–
13,442
12,263
1,179
13,442
2018
US$M
4,711
4,876
4,104
(34)
13,657
–
–
–
13,657
12,599
1,058
13,657
2019
US$M
3,942
4,089
3,568
10
11,609
–
–
–
11,609
10,641
968
11,609
2018
US$M
3,796
4,224
3,758
52
11,830
–
–
(190)
11,640
10,708
932
11,640
2019
%
106.5 1
95.4 1
90.0 1
–
97.5 1
2.0
0.5
–
100.0
99.7
103.7
100.0
2018
%
98.7 1
95.9 1
90.3 1
–
95.7 1
(0.1)
–
0.3
95.9
96.4
89.8
95.9
2019
US$M
2018
US$M
(187)
391
487
17
708
–
(61)
–
647
629
18
647
146
284
498
(67)
861
–
–
(35)
826
703
123
826
1 Excludes the impact of changes in risk‑free rates used to discount net outstanding claims.
2 Excludes one‑off impact of the Ogden decision in the UK.
3 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
Incurred claims
The Group’s net claims ratio increased to 69.3% from 64.0% in the prior year, in part reflecting a material reduction in risk-free rates
used to discount net outstanding claims liabilities. Risk‑free rate movements aside, a further improvement in the underlying attritional
claims ratio was partly offset by reduced profitability in Crop insurance and a largely expected increase in the net cost of large
individual risk and catastrophe claims following the restructure of the Group’s reinsurance program coupled with a reduced level
of positive prior accident year claims development.
The table below provides a summary of the major components of the net claims ratio.
FOR THE YEAR ENDED 31 DECEMBER
Attritional claims
Large individual risk and catastrophe claims
Impact of reinsurance transaction
Claims settlement costs
Claims discount
Net incurred central estimate claims ratio (current accident year)
Changes in undiscounted prior accident year central estimate
Impact of Ogden
Impact of reinsurance transaction
Impact of changes in risk‑free rates
Movement in risk margins
Other (including unwind of prior year discount)
Net incurred claims ratio (current financial year)
2019
2018
STATUTORY
%
ADJUSTED 1
%
STATUTORY
%
ADJUSTED 2
%
52.5
11.9
–
3.3
(1.4)
66.3
(0.8)
0.5
–
2.0
(0.2)
2.0
69.8
52.5
11.9
–
3.3
(1.4)
66.3
(0.8)
–
–
2.0
(0.2)
2.0
69.3
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
1 Excludes one‑off impact of the Ogden decision in the UK.
2 Excludes transaction to reinsure Hong Kong construction workers’ compensation liabilities.
As set out in the table overleaf, excluding Crop insurance and LMI, the attritional claims ratio reduced to 47.5% from 50.2% in the prior
year, reflecting improvement in International and Australia Pacific.
Excluding Crop insurance, North America’s attritional claims ratio improved 0.1% relative to the prior year. Benefits from underwriting
and pricing initiatives as well as the sale of the personal lines (independent agency) business were largely offset by non‑catastrophe
weather experience which impacted the affiliated and program property portfolios during the second half of the year.
International’s attritional claims ratio improved 3.0% relative to the prior period reflecting favourable pricing conditions coupled with
significantly reduced reinsurance expense and business mix changes.
Excluding LMI, Australia Pacific’s attritional claims ratio improved by 4.2% with improvement observed across all portfolios except for
engineering and personal accident.
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18
Group Chief Financial Officer’s report
Analysis of attritional claims ratio
FOR THE YEAR ENDED 31 DECEMBER
Rest of portfolio
Crop insurance
LMI
QBE Group adjusted
2019
2018
NEP
US$M
10,251
1,197
161
11,609
ATTRITIONAL
%
47.5
97.7
34.8
52.5
NEP
US$M
10,662
980
188
11,830
ATTRITIONAL
%
50.2
78.8
30.9
52.3
Large individual risk and catastrophe claims net of reinsurance are summarised in the table below.
Large individual risk and catastrophe claims
FOR THE YEAR ENDED 31 DECEMBER
Total catastrophe claims
Total large individual risk claims
Total large individual risk and catastrophe claims
2019
US$M
426
955
1,381
% OF NEP
3.7
8.2
11.9
2018
US$M
523
640
1,163
% OF NEP
4.4
5.4
9.8
The increase in the total net cost of large individual risk and catastrophe claims was broadly in line with expectations following
changes to the Group’s reinsurance, effective 1 January 2019.
The net cost of catastrophe claims reduced to $426 million or 3.7% of net earned premium compared with $523 million or 4.4%
in the prior year. This was below our annual allowance with adverse catastrophe experience in Australia Pacific more than offset
by relatively benign experience in International and, to a lesser degree, North America.
The net cost of large individual risk claims increased to $955 million or 8.2% of net earned premium from $640 million or 5.4% in the
prior year. While down from 2018 on a like‑for‑like (reinsurance) basis, the net cost was nevertheless above our annual allowance
largely reflecting higher than expected activity in International.
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
decreased to 1.05% at 31 December 2019 from 1.66% at 31 December 2018. Risk‑free rates reduced appreciably across all currencies.
Weighted average risk‑free rates 1
CURRENCY
31 DECEMBER
2019
30 JUNE
2019
31 DECEMBER
2018
30 JUNE
2018
Australian dollar
US dollar
Sterling
Euro
Group weighted
Estimated impact of discount rate (charge) benefit
%
%
%
%
%
$M
1.11
1.95
0.80
(0.08)
1.05
(231)
1.14
2.09
0.80
(0.22)
1.10
(231)
2.06
2.74
1.08
0.23
1.66
13
2.29
2.80
1.10
0.30
1.77
40
1 Continuing operations basis.
The significant reduction in risk-free rates gave rise to a $231 million underwriting charge that increased the net claims ratio by
2.0% compared with a $13 million benefit in the prior year that reduced the net claims ratio by 0.1%. Given the longer weighted
average term to settlement of our euro denominated net claims liabilities, the fall in euro risk‑free rates during the period contributed
disproportionately to the overall impact of lower weighted average risk‑free rates on the Group’s underwriting result.
The $231 million impact on the underwriting result was more than offset by a corresponding $265 million gain in the value of fixed
interest securities.
Prior accident year claims development
The result included $96 million of positive prior accident year claims development that benefited the claims ratio by 0.8% compared
with $113 million or 1.0% in the prior year.
The claims development includes $32 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 and an $86 million benefit in International due
to the impact of adjusting the UK periodic payment order rate that is matched by a reduced discount benefit.
Excluding these items, prior accident year claims development is better stated at $22 million adverse or 0.2% of net earned premium
compared with $92 million or 0.8% of positive development in the prior year:
• North America recorded $112 million of adverse development compared with $7 million in the prior year. This reflected a reduced
level of positive development in Crop (that was not matched by additional premium cessions under the MPCI scheme), adverse
development in assumed reinsurance (casualty and multi-line), corporate commercial, E&S lines and specialty programs;
• International recorded $14 million of adverse development compared with $25 million in the prior year, reflecting substantial reserve
strengthening in financial lines and direct and facultative property, largely offset by reinsurance recoveries and positive development
in liability, reinsurance, marine and Asia; and
• Australia Pacific reported $104 million of positive development compared with $129 million in the prior year, largely reflecting
favourable claim development on NSW CTP coupled with lower than expected average claim size following privatisation of the
SA CTP market, albeit partly offset by minor adverse development in householders, public liability, engineering and New Zealand.
18
Group Chief Financial Officer’s report
19
Analysis of attritional claims ratio
FOR THE YEAR ENDED 31 DECEMBER
Rest of portfolio
Crop insurance
LMI
QBE Group adjusted
Large individual risk and catastrophe claims
FOR THE YEAR ENDED 31 DECEMBER
Total catastrophe claims
Total large individual risk claims
Total large individual risk and catastrophe claims
2019
2018
ATTRITIONAL
ATTRITIONAL
NEP
US$M
10,251
1,197
161
11,609
%
47.5
97.7
34.8
52.5
NEP
US$M
10,662
980
188
11,830
%
50.2
78.8
30.9
52.3
2019
US$M
426
955
1,381
% OF NEP
3.7
8.2
11.9
2018
US$M
523
640
1,163
% OF NEP
4.4
5.4
9.8
Large individual risk and catastrophe claims net of reinsurance are summarised in the table below.
The increase in the total net cost of large individual risk and catastrophe claims was broadly in line with expectations following
changes to the Group’s reinsurance, effective 1 January 2019.
The net cost of catastrophe claims reduced to $426 million or 3.7% of net earned premium compared with $523 million or 4.4%
in the prior year. This was below our annual allowance with adverse catastrophe experience in Australia Pacific more than offset
by relatively benign experience in International and, to a lesser degree, North America.
The net cost of large individual risk claims increased to $955 million or 8.2% of net earned premium from $640 million or 5.4% in the
prior year. While down from 2018 on a like‑for‑like (reinsurance) basis, the net cost was nevertheless above our annual allowance
largely reflecting higher than expected activity in International.
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
decreased to 1.05% at 31 December 2019 from 1.66% at 31 December 2018. Risk‑free rates reduced appreciably across all currencies.
Weighted average risk‑free rates 1
CURRENCY
Australian dollar
US dollar
Sterling
Euro
Group weighted
Estimated impact of discount rate (charge) benefit
1 Continuing operations basis.
31 DECEMBER
30 JUNE
31 DECEMBER
30 JUNE
%
%
%
%
%
$M
2019
1.11
1.95
0.80
(0.08)
1.05
(231)
2019
1.14
2.09
0.80
(0.22)
1.10
(231)
2018
2.06
2.74
1.08
0.23
1.66
13
2018
2.29
2.80
1.10
0.30
1.77
40
The significant reduction in risk-free rates gave rise to a $231 million underwriting charge that increased the net claims ratio by
2.0% compared with a $13 million benefit in the prior year that reduced the net claims ratio by 0.1%. Given the longer weighted
average term to settlement of our euro denominated net claims liabilities, the fall in euro risk‑free rates during the period contributed
disproportionately to the overall impact of lower weighted average risk‑free rates on the Group’s underwriting result.
The $231 million impact on the underwriting result was more than offset by a corresponding $265 million gain in the value of fixed
interest securities.
Prior accident year claims development
with $113 million or 1.0% in the prior year.
The result included $96 million of positive prior accident year claims development that benefited the claims ratio by 0.8% compared
The claims development includes $32 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 and an $86 million benefit in International due
to the impact of adjusting the UK periodic payment order rate that is matched by a reduced discount benefit.
Excluding these items, prior accident year claims development is better stated at $22 million adverse or 0.2% of net earned premium
compared with $92 million or 0.8% of positive development in the prior year:
• North America recorded $112 million of adverse development compared with $7 million in the prior year. This reflected a reduced
level of positive development in Crop (that was not matched by additional premium cessions under the MPCI scheme), adverse
development in assumed reinsurance (casualty and multi-line), corporate commercial, E&S lines and specialty programs;
• International recorded $14 million of adverse development compared with $25 million in the prior year, reflecting substantial reserve
strengthening in financial lines and direct and facultative property, largely offset by reinsurance recoveries and positive development
in liability, reinsurance, marine and Asia; and
• Australia Pacific reported $104 million of positive development compared with $129 million in the prior year, largely reflecting
favourable claim development on NSW CTP coupled with lower than expected average claim size following privatisation of the
SA CTP market, albeit partly offset by minor adverse development in householders, public liability, engineering and New Zealand.
Commission and expenses
The Group’s combined commission and expense ratio reduced to 30.2% from 31.6% in the prior year.
The commission ratio improved to 15.6% from 16.4% in the prior year. International’s commission ratio fell significantly due to reduced
reinsurance spend and actions to reduce commissions in the London Market and UK business units. North America and Australia
Pacific also reported a modest improvement in their commission ratios, which also benefited from reduced reinsurance costs.
The Group’s expense ratio improved to 14.6% from 15.2% in the prior year, reflecting a material cost and operating leverage driven
improvement in North America partly offset by a modest increase in both International and Australia Pacific. International’s expense
ratio increased as a result of higher incentive payments, irrecoverable VAT associated with Brexit and reduced net earned premium.
The increase in Australia Pacific was primarily due to a further reduction in builders’ warranty fee income and a transitional excess
profits and losses (TEPL) accrual with respect to NSW CTP scheme outperformance.
The Group’s 2019 expense ratio is broadly in line with our expectations and we remain on track to deliver in accordance with previously
advised commitments in relation to the three-year efficiency program.
Income tax expense
i
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The Group’s income tax expense of $114 million equated to an effective tax rate of 16% compared with tax expense of $77 million
or 12% in the prior year. The low effective tax rate in 2019 reflects the mix of corporate tax rates in the countries where we operate,
with profits in North America and Bermuda continuing to benefit from the utilisation of previously unrecognised tax losses.
During 2019, QBE paid $52 million in corporate income tax to tax authorities globally, including $6 million in Australia. Income tax
payments in Australia benefit our dividend franking account, the balance of which stood at A$87 million as at 31 December 2019.
The Group is therefore capable of fully franking dividends of A$204 million. The dividend franking percentage is expected to remain
at 30% for the 2020 interim dividend.
Balance sheet
Capital management summary
Key financial strength ratios
AS AT 31 DECEMBER
Debt to equity
Debt to tangible equity
PCA multiple 1,2
Premium solvency 3
Probability of adequacy of outstanding claims
BENCHMARK
25% to 35%
1.6x to 1.8x
87.5% to 92.5%
2019
38.0%
57.7%
1.71x
46.2%
90.0%
2018
38.0%
57.1%
1.78x
47.3%
90.1%
1 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
2 Indicative APRA PCA calculation at 31 December 2019.
3 Premium solvency ratio is calculated as the ratio of net tangible assets to adjusted net earned premium.
The Group’s indicative APRA PCA multiple of 1.71x remains above the midpoint of the Group’s 1.6–1.8x target PCA range while the
Group retains an excess above S&P ‘AA’ minimum capital levels.
PCA summary
AS AT 31 DECEMBER
QBE’s regulatory capital base
APRA’s Prescribed Capital Amount (PCA)
PCA multiple
2019 1
US$M
8,502
4,965
1.71x
o
n
2018 2
US$M
8,762
4,931
1.78x
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1 Indicative APRA PCA calculation at 31 December 2019.
2 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
The PCA multiple is down from the December 2018 multiple of 1.78x, reflecting the following:
• the share buyback and dividends paid during the year (which together exceeded net cash profit);
• a higher asset risk charge due to the material increase in investment funds and following the decision to extend asset duration
and modestly increase credit risk;
• a higher insurance risk charge due to the increase in net outstanding claims liabilities; partly offset by
• a reduction in the insurance concentration risk charge (ICRC) as a result of further enhancements to the Group’s reinsurance
protection, effective 1 January 2020.
During 2020, we intend maintaining our PCA within a target range of 1.6–1.8x.
Debt to equity (gearing) was 38.0% at 31 December 2019, unchanged from the prior year. An ongoing focus on reducing gearing
toward the Board’s target range of 25%–35% resulted in further liability management activity, the benefit of which was offset by the
adoption of AASB 9.
20
Group Chief Financial Officer’s report
During 2019, the major rating agencies revised their outlooks as follows:
• On 11 April 2019, Moody’s revised the Group’s outlook from “negative” to “stable” and affirmed the ‘A3‘ issuer credit rating (ICR)
on QBE Insurance Group Limited (the parent entity) as well as the ‘A1’ insurer financial strength (IFS) ratings of QBE’s main
operating entities.
• On 30 May 2019, S&P affirmed the ‘A-’ long-term ICR on the parent entity and the ‘A+’ IFS ratings on the Group’s core and highly
strategic operating entities. The outlook across all entities remained “stable”.
• On 18 June 2019, Fitch downgraded LMI’s IFS rating to ‘A+’ from ‘AA-‘ following a sector-wide reassessment by the agency.
The outlook remained “stable”.
• On 5 July 2019, A.M. Best affirmed the long term ICR of the parent entity and its main operating subsidiaries at ‘bbb+’ and ‘a+’
respectively and the IFS of the main operating subsidiaries at ‘A’ while affirming the outlook of the Group at “stable”.
• On 12 July 2019, Fitch affirmed the long-term issuer default rating (IDR) at ‘A-‘ on the parent entity and the IFS ratings of its
subsidiaries at ‘A+’. The outlook across all entities remained “stable”.
• On 25 July 2019 and following a rating methodology change, S&P downgraded LMI to ‘A’ from ‘A+’. The outlook remained “stable”.
LMI Asia was placed on CreditWatch Negative, with its rating unchanged at ‘A’.
• On 31 July 2019 and following a rating methodology change, S&P affirmed QBE’s core subsidiaries at ‘A+’, outlook “stable”.
• On 19 September 2019, LMI Asia’s rating was affirmed at ‘A’, with CreditWatch removed and a “stable” outlook.
In August 2017, the Group commenced a three‑year cumulative on‑market share buyback program of up to A$1 billion, with a target
of not more than A$333 million to be purchased in any one calendar year. During 2019, QBE purchased A$295 million of QBE
shares resulting in the cancellation of 23.9 million shares or 1.8% of issued capital. Since commencement of the buyback, QBE has
purchased A$767 million of QBE shares resulting in the cancellation of 68.1 million shares or 5.0% of issued capital.
Capital summary
AS AT 31 DECEMBER
Net assets
Less: intangible assets
Net tangible assets
Add: borrowings
Total tangible capitalisation
Borrowings
2019
US$M
8,153
(2,791)
5,362
3,095
8,457
2018
US$M
8,400
(2,800)
5,600
3,188
8,788
As at 31 December 2019, total borrowings were $3,095 million, down $93 million or 3% from $3,188 million at 31 December 2018.
In March 2019, the Group undertook a tender offer for the buyback of senior unsecured debt securities due 21 October 2022,
which resulted in the purchase and cancellation of $195 million of senior debt.
The debt buyback undertaken during the year was partly offset by the adoption of AASB 9, effective 1 January 2019 which gave rise
to the immediate derecognition of $83 million of capitalised debt exchange premiums, with a corresponding increase in the carrying
value of borrowings and decrease in opening retained earnings. The decrease in retained earnings will be offset by reduced financing
costs going forward, including a $14 million saving in financing costs in the current year.
Gross interest expense on long term borrowings for the year was $195 million, down from $205 million in the prior year. The average
annualised cash cost of borrowings at 31 December 2019 was 6.3%, down slightly from 6.4% at 31 December 2018, reflecting the
buyback of the remaining senior debt (which had a lower coupon compared with the Group’s remaining capital qualifying debt) more
than offset by reduced capitalised debt exchange premium amortisation following the adoption of AASB 9.
As at 31 December 2019, virtually all the Group’s debt counted towards regulatory capital. This is up from 94% as at 31 December
2018, reflecting the buyback and cancellation of almost all the remaining non-qualifying senior unsecured debt during the half.
Borrowings maturity 1
AS AT 31 DECEMBER
Less than one year
One to five years
More than five years
1 Based on first call date.
Borrowings profile
AS AT 31 DECEMBER
Senior debt
Subordinated debt
Additional tier 1 securities
Further details of borrowings are set out in note 5.1 to the financial statements.
2019
%
5
56
39
2019
%
–
87
13
2018
%
–
42
58
2018
%
6
81
13
20
Group Chief Financial Officer’s report
21
During 2019, the major rating agencies revised their outlooks as follows:
Net outstanding claims liabilities
AS AT 31 DECEMBER
Net central estimate
Risk margin
Net outstanding claims
Probability of adequacy of outstanding claims (PoA)
Weighted average discount rate
Weighted average term to settlement (years)
2019
US$M
13,675
1,136
14,811
%
90.0
1.1
3.6
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
Net outstanding claims liabilities are discounted using sovereign bond rates as a proxy for risk‑free interest rates and not the actual
earning rate on our investments.
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At 31 December 2019, risk margins in net outstanding claims were $1,136 million or 8.3% of the net central estimate of outstanding
claims compared with $1,158 million or 9.0% of the net central estimate at 31 December 2018. Excluding foreign exchange
movements, risk margins decreased $23 million during the year compared with a $12 million increase in the prior year.
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The PoA is broadly unchanged at 90.0%. The reduction in risk margin as a percentage of the net central estimate of outstanding
claims is supported by a decrease in the coefficient of variation, which reflects reduced reserve uncertainty as a result of the Ogden
decision, the stability of our current Crop reserves on a net of reinsurance basis and the insights we have drawn from Brilliant Basics
pricing and claims initiatives as part of our reserving process, particularly in North America.
Intangible assets
The carrying value of identifiable intangibles and goodwill at 31 December 2019 was $2,791 million, down from $2,800 million
at 31 December 2018.
During the year, the carrying value of intangibles reduced by only $9 million primarily due to the net amortisation and impairment
expense of $94 million which more than offset net additions in the period, being mainly the capitalisation of software in relation
to various information technology projects.
At 31 December 2019, QBE reviewed all material intangibles for indicators of impairment, consistent with the Group’s policy and
the requirements of the relevant accounting standard. No material impairment was identified.
Investment performance and strategy
Our investment portfolio delivered a net investment return of 4.6% in 2019, up materially from 2.2% in the prior year. Excluding the
impact of lower risk‑free rates during the year, the net investment return was 3.6% slightly above the upper end of our 3.0%–3.5%
target return range. Most asset classes delivered better than expected returns following especially volatile markets in the final quarter
of 2018.
Despite progressively falling yields across the year, fixed income assets generated a 3.7% return compared with 1.8% in 2018,
reflecting significant mark-to-market gains as a result of lower risk-free rates and credit spread tightening. The decision to close our
balance sheet duration mismatch during the year proved beneficial with the $231 million adverse impact of lower risk-free-rates used
to discount net outstanding claims liabilities more than offset by $265 million of mark-to-market gains on our fixed income portfolio.
Growth asset returns were also very strong, achieving an overall return of 11.8%, substantially above expectations and the prior year
return of 6.2%. Equity markets were particularly buoyant delivering significantly higher than expected investment income; returns
on our infrastructure assets were above expectations; and unlisted property exposures were in line with expectations.
As at 31 December 2019, the running yield of the fixed income portfolio was 1.5%, down from 2.2% at 31 December 2018. This reflects
the significant bond market rally and credit spread narrowing experienced during the year, partly offset by a slightly increased
exposure to credit. Fixed income portfolio duration at the balance date was 2.6 years and growth asset exposure was 13.5% of total
cash and investments.
Going forward and to align more closely with peer reporting, we have reallocated high yield and emerging market debt to fixed income
from growth assets and have also commenced the deployment of a private credit allocation where the additional illiquidity premium
offers incremental risk‑adjusted returns.
Together, these changes are expected to increase our fixed income running yield to around 1.75% once fully implemented.
Closing total cash and investments was $24,374 million, up 6% from $22,887 million at 31 December 2018, partly reflecting an
increase in reinsurance recovery collections pertaining to the group aggregate reinsurance that was in place during 2015–2019.
During 2020, we intend to manage fixed income duration in a range of 2.5–3.0 years, target growth assets at around 12.5% 1 of total
cash and investments and modestly raise our exposure to lower rated and less liquid credit. Together with a modest allowance for
tactical asset allocation outperformance, these portfolio settings support a 2020 target net investment return of 2.5%–3.0% 2.
1 From 1 January 2020, growth assets no longer include high yield debt or emerging market debt which is now considered part of our fixed
income portfolio consistent with peer reporting.
2 Assumes risk‑free rates as at 31 December 2019.
• On 11 April 2019, Moody’s revised the Group’s outlook from “negative” to “stable” and affirmed the ‘A3‘ issuer credit rating (ICR)
on QBE Insurance Group Limited (the parent entity) as well as the ‘A1’ insurer financial strength (IFS) ratings of QBE’s main
operating entities.
• On 30 May 2019, S&P affirmed the ‘A-’ long-term ICR on the parent entity and the ‘A+’ IFS ratings on the Group’s core and highly
strategic operating entities. The outlook across all entities remained “stable”.
• On 18 June 2019, Fitch downgraded LMI’s IFS rating to ‘A+’ from ‘AA-‘ following a sector-wide reassessment by the agency.
The outlook remained “stable”.
• On 5 July 2019, A.M. Best affirmed the long term ICR of the parent entity and its main operating subsidiaries at ‘bbb+’ and ‘a+’
respectively and the IFS of the main operating subsidiaries at ‘A’ while affirming the outlook of the Group at “stable”.
• On 12 July 2019, Fitch affirmed the long-term issuer default rating (IDR) at ‘A-‘ on the parent entity and the IFS ratings of its
subsidiaries at ‘A+’. The outlook across all entities remained “stable”.
• On 25 July 2019 and following a rating methodology change, S&P downgraded LMI to ‘A’ from ‘A+’. The outlook remained “stable”.
LMI Asia was placed on CreditWatch Negative, with its rating unchanged at ‘A’.
• On 31 July 2019 and following a rating methodology change, S&P affirmed QBE’s core subsidiaries at ‘A+’, outlook “stable”.
• On 19 September 2019, LMI Asia’s rating was affirmed at ‘A’, with CreditWatch removed and a “stable” outlook.
In August 2017, the Group commenced a three‑year cumulative on‑market share buyback program of up to A$1 billion, with a target
of not more than A$333 million to be purchased in any one calendar year. During 2019, QBE purchased A$295 million of QBE
shares resulting in the cancellation of 23.9 million shares or 1.8% of issued capital. Since commencement of the buyback, QBE has
purchased A$767 million of QBE shares resulting in the cancellation of 68.1 million shares or 5.0% of issued capital.
As at 31 December 2019, total borrowings were $3,095 million, down $93 million or 3% from $3,188 million at 31 December 2018.
In March 2019, the Group undertook a tender offer for the buyback of senior unsecured debt securities due 21 October 2022,
which resulted in the purchase and cancellation of $195 million of senior debt.
The debt buyback undertaken during the year was partly offset by the adoption of AASB 9, effective 1 January 2019 which gave rise
to the immediate derecognition of $83 million of capitalised debt exchange premiums, with a corresponding increase in the carrying
value of borrowings and decrease in opening retained earnings. The decrease in retained earnings will be offset by reduced financing
costs going forward, including a $14 million saving in financing costs in the current year.
Gross interest expense on long term borrowings for the year was $195 million, down from $205 million in the prior year. The average
annualised cash cost of borrowings at 31 December 2019 was 6.3%, down slightly from 6.4% at 31 December 2018, reflecting the
buyback of the remaining senior debt (which had a lower coupon compared with the Group’s remaining capital qualifying debt) more
than offset by reduced capitalised debt exchange premium amortisation following the adoption of AASB 9.
As at 31 December 2019, virtually all the Group’s debt counted towards regulatory capital. This is up from 94% as at 31 December
2018, reflecting the buyback and cancellation of almost all the remaining non-qualifying senior unsecured debt during the half.
Capital summary
AS AT 31 DECEMBER
Net assets
Less: intangible assets
Net tangible assets
Add: borrowings
Total tangible capitalisation
Borrowings
Borrowings maturity 1
AS AT 31 DECEMBER
Less than one year
One to five years
More than five years
1 Based on first call date.
Borrowings profile
AS AT 31 DECEMBER
Senior debt
Subordinated debt
Additional tier 1 securities
2019
US$M
8,153
(2,791)
5,362
3,095
8,457
2018
US$M
8,400
(2,800)
5,600
3,188
8,788
2019
%
5
56
39
2019
%
–
87
13
2018
%
–
42
58
2018
%
6
81
13
Further details of borrowings are set out in note 5.1 to the financial statements.
22
Group Chief Financial Officer’s report
Total net investment income
POLICYHOLDERS’ FUNDS
SHAREHOLDERS’ FUNDS
TOTAL
FOR THE YEAR ENDED 31 DECEMBER
2019
US$M
2018
US$M
2019
US$M
2018
US$M
Fixed interest, short‑term money and
cash income
Income on growth assets
Gross investment income 1
Investment expenses
Net investment income
Foreign exchange (loss) gain
Other (expenses) income
Net investment and other income
481
212
693
(11)
682
(23)
(10)
649
245
111
356
(11)
345
1
–
346
272
129
401
(6)
395
–
(8)
387
142
60
202
(6)
196
–
5
201
2019
US$M
753
341
1,094
(17)
1,077
(23)
(18)
1,036
1 Includes fair value gains on investments of $492 million (2018 $143 million losses) comprising gains on investments supporting
policyholders’ funds of $309 million (2018 $87 million losses) and shareholders’ funds of $183 million (2018 $56 million losses).
Annualised gross and net investment yield
YIELD ON INVESTMENT ASSETS
BACKING POLICYHOLDERS’ FUNDS
YIELD ON INVESTMENT ASSETS
BACKING SHAREHOLDERS’ FUNDS
TOTAL
FOR THE YEAR ENDED 31 DECEMBER
Gross investment yield 1
Net investment yield 2
Net investment and other
income yield 3
2019
%
4.6
4.5
4.3
2018
%
2.3
2.3
2.3
2019
%
4.7
4.6
4.5
2018
%
2.3
2.2
2.2
2019
%
4.6
4.6
4.4
2018
US$M
387
171
558
(17)
541
1
5
547
2018
%
2.3
2.2
2.3
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 investment yield is calculated with reference to gross investment income less investment expenses as a percentage of average
investment assets backing policyholders’ or shareholders’ funds as appropriate.
3 Net investment and other income yield is calculated with reference to net investment and other net income as a percentage of average
investment assets backing policyholders’ or shareholders’ funds as appropriate.
Total cash and investments
AS AT 31 DECEMBER
Cash and cash equivalents
Short‑term money
Government bonds
Corporate bonds
Infrastructure debt
Developed market equity
Emerging market equity
Emerging market debt
High yield debt
Unlisted property trusts
Infrastructure assets
Private equity
Alternatives
Investment properties
Total investments and cash
INVESTMENT ASSETS BACKING
POLICYHOLDERS’ FUNDS
INVESTMENT ASSETS BACKING
SHAREHOLDERS’ FUNDS
TOTAL
2019
US$M
359
699
3,811
8,698
253
150
71
363
263
469
592
133
60
24
15,945
2018
US$M
536
796
3,089
7,540
308
324
180
145
50
567
528
99
–
22
14,184
2019
US$M
188
367
2,002
4,570
133
131
37
191
138
247
311
70
31
13
8,429
2018
US$M
327
487
1,886
4,604
187
241
109
89
31
346
323
60
–
13
8,703
2019
US$M
547
1,066
5,813
13,268
386
281
108
554
401
716
903
203
91
37
24,374
2018
US$M
863
1,283
4,975
12,144
495
565
289
234
81
913
851
159
–
35
22,887
22
Group Chief Financial Officer’s report
23
Total net investment income
Interest bearing financial assets – S&P security grading
POLICYHOLDERS’ FUNDS
SHAREHOLDERS’ FUNDS
TOTAL
AS AT 31 DECEMBER
S&P rating
AAA
AA
A
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