Responding to a challenging year

QBE’s 2017 financial performance was well short of our expectations. Heavy catastrophe losses were extremely costly for the wider insurance industry; however, QBE’s results were also marred by a material decline in the performance of our emerging markets businesses. These challenges necessitated action and change. We finished the year with refreshed leadership and a clear plan for a simpler footprint and improved performance in 2018 and beyond.

QBE Chairman - W. Marston Becker


Coming after several years of downward pressure on insurance pricing across most of the globe and continuing low investment yields, the record insured catastrophe losses of 2017 provided an additional test for insurers and reinsurers in the second half of the year. North America and the Caribbean were responsible for more than 80% of the estimated $135 billion 1 in insured catastrophe losses, with Hurricanes Harvey, Irma and Maria and wildfires in California causing tragic loss of life and heavy and widespread property and infrastructure damage. Notwithstanding our comprehensive reinsurance protections, the net cost of catastrophes for QBE (after reinsurance) was $1,227 million, which compares with $439 million in 2016.

Natural disasters were not the only challenge confronted by QBE during the year, with the performance of the Emerging Markets division a major disappointment due to adverse claims experience in numerous portfolios. Prompt action was taken when declining performance became evident around the middle of the year, with two separate operating divisions formed to facilitate a more granular focus on each of the Asia Pacific and Latin American regions. Detailed performance improvement plans have been developed for Asia Pacific Operations while we have made the decision to exit Latin America as part of a broader strategy to simplify our global footprint and improve the quality and consistency of our results.

The statutory financial result was also impacted by non-cash items that included a $700 million impairment of North American goodwill along with a $230 million write down of the deferred tax asset in our North American Operations due to the reduction in the US corporate tax rate. Incorporating these items, the Group reported a statutory net loss after tax of $1,249 million compared with a net profit after tax of $844 million in the prior year. On a cash basis, a loss after tax of $258 million compares with a profit of $898 million in 2016.

At a divisional level, Australian & New Zealand Operations was the only major division not to be significantly affected by catastrophes during the year. The turnaround of the division is continuing to plan, with the attritional claims ratio seeing further improvement following the program of rate increases and underwriting initiatives that was first introduced by Pat Regan in 2016.

Our European Operations had another strong result in difficult trading conditions, with a reduced performance in the second half partly due to the division’s exposure to Hurricanes Harvey, Irma and Maria, as well as a reduced level of positive prior accident year claims development which has moderated from the levels seen in recent years.

European Operations’ result also included a $141 million one-off charge following a legislative decision that required a reduction in the statutory discount rate used in the determination of lump sum payments in relation to UK personal injury claims (the Ogden decision). Although disappointing, more recent statements from the relevant government authority give us cause for optimism that this charge could partially reverse in 2018.

Whilst the underwriting performance of our North American Operations was significantly impacted by catastrophes, the underlying performance in the second half was still below expectations. We have taken actions to ensure a more consistent and improved future performance, including the strengthening of claims provisions by more than $100 million in the second half while also reinsuring the division’s commercial auto runoff liabilities, thereby eliminating any possibility of surprises from this segment of the portfolio in the future. The rehabilitation of North American Operations has been a multi-year and costly effort, but we are starting to see our portfolio strategy emerge and believe this persistent reshaping will prove to be beneficial to all QBE stakeholders.

Leadership transition

2017 was a landmark year for QBE with the appointment of Pat Regan as Group Chief Executive Officer from 1 January 2018 following a four month leadership transition. The Board is grateful to John Neal for his dedication and leadership over five years as Group Chief Executive Officer as he led the business through a significant transformation during a very challenging period for the insurance industry globally. QBE is a demonstrably better organisation today thanks to John’s leadership and I am confident future financial results will benefit from his past stewardship.

In the year prior to his appointment as Group Chief Executive Officer, Pat Regan led the strong turnaround in Australian & New Zealand Operations, and the Board supports his plans to apply a similar approach to performance management across all of QBE’s operations. In his previous role as Group Chief Financial Officer, Pat was pivotal in strengthening the balance sheet and enhancing the Group’s capital management discipline.

Alongside the appointment of a new Group Chief Executive Officer, the Group Executive Committee has been strengthened following three external appointments in the last half year. David McMillan (Group Chief Operations Officer) and Michael Ford (Group Chief Financial Officer) joined QBE in September 2017, bringing a wealth of experience from the insurance and broader financial services sectors. In early 2018 Vivek Bhatia, a seasoned insurance executive with management consulting experience in restructuring and transformation, was appointed to replace Pat as Chief Executive Officer of Australian & New Zealand Operations.

Capital strength

Achieving the right balance between prioritising QBE’s capital strength and rewarding shareholders is an ongoing priority for the Board. Shareholders would recall that a strong balance sheet and positive outlook for cash remittances from the divisions enabled us to revise the dividend policy in 2016 to allow for “up to 65% of cash profit” to be paid out as dividends, while more recently we commenced a program of buying back shares in QBE.

The Group’s financial performance shaped our approach to capital management during the year. In the first half the Group generated a substantial cash profit, and the dividend of 22 Australian cents per share represented a payout ratio of 61%. During the second half of 2017 we purchased A$139 million of QBE shares under the buyback, resulting in the cancellation of 0.9% of the Group’s issued capital.

Due to adverse catastrophe experience a significant loss was recorded for the second half on a cash basis and the Board had this in mind, as well as our confidence in the Group’s future earnings prospects, when declaring a reduced final 2017 dividend of four Australian cents per share.

The Board is aware that the dividends QBE pays are highly valued by many of our shareholders but we are also mindful of the overriding importance of ensuring the Group balance sheet remains robust when measured against both regulatory and rating agency capital requirements.

Our dividend policy remains unchanged for 2018.

We remain committed to the three-year share buyback announced in February 2017; however, we intend taking a considered approach in the near term.

Looking to the future

While our European and Australian & New Zealand Operations delivered strong results, aspects of QBE’s performance in 2017 were unsatisfactory and your Board is taking the necessary steps to improve the Group’s performance in coming years.

There are now signs of a modest recovery in the commercial insurance market in the northern hemisphere after years of weakness, with premium rates in some classes starting to adjust for the catastrophe losses of 2017. At the same time, there are tangible signs of rising global interest rates which, if sustained, bode well for future investment returns.

Although there are some encouraging signs, Pat Regan and his management team are not relying on an improving external landscape. Their focus is on “Brilliant Basics” – improving underwriting quality, pricing and claims handling while simplifying the business portfolio and improving efficiency across QBE’s operations. Investing in technology and accelerating the pace of innovation will have a substantial role to play. Both the Board and management are committed to moving expeditiously, with the required decision-making to deliver on our plans and on QBE’s potential.

In closing, I would like to thank shareholders. QBE has been through a period of challenge and change with financial results that are below expectations. We expect better and more consistent results in the future that will reward your continued support. We also acknowledge the hard work of QBE employees around the world, for their commitment to supporting the management team and the company as we finalise, and commence implementation of, a refreshed strategic plan.

W. Marston Becker

  1. Source: Munich Re, 4 January 2018.