Twelve months ago, QBE announced 2013 results that fell well short of expectations, with a loss of $254 million after tax largely driven by a number of issues in our North American Operations. This disappointing result prompted us to carry out a thorough review of our businesses worldwide that led to a general strengthening of our underwriting and management processes in a number of areas.
This year I am pleased to announce significant successes in a number of key areas. In short, we have increased profitability, strengthened the balance sheet and built a strong management team to lead us forward.
It is encouraging that 2014 second half performance was particularly strong, as the changes we implemented have begun to gain traction. This gives me increased confidence that we now have a solid foundation upon which to build for future success.
Outlook for 2015
Whilst we anticipate that our gross written premium will remain flat on a constant currency basis, it is inevitable that the relative strengthening of the US dollar will see headline premium reduce, albeit with no material impact on the construct of our combined operating ratio.
We remain resolutely focused on our overarching priority of a return to earnings improvement and predictability when measured against our published business plans and targets.
Leadership in core business
We consider the transformation of our business to be largely complete and we have plans in place to support organic growth in the medium term. QBE has a unique and truly global franchise that allows us to exploit market opportunities with a particular emphasis on commercial and speciality business lines. In 2015, we will be launching initiatives that will enhance the underwriting and service proposition for multinational clients, extending our interest in the bancassurance sector, further developing a number of key industry specialisations and continuing to deepen relationships with our major trading partners.
Operational excellence – global reach and scale
We now consider cost management part of the rhythm of our business, and will be looking to determine what additional efficiencies we can achieve over the medium term. In 2015, we are targeting further cost savings which will see the completion of our operational transformation plan and the realisation of our overarching goal to reduce our expense ratio.
We have further enhanced the structure of our global reinsurance program including the purchase of an innovative aggregate protection program for large individual risk and catastrophe claims that significantly eliminates volatility inherent in this category of claims.
Profitable growth and diversification
Our Emerging Markets leadership team is looking to build on the successes we have achieved in Asia Pacific to capitalise on important growth opportunities. This will include specific geographies, commercial and specialty client focus, key intermediary partnerships, investments in technology and a build-up of quality underwriting and support staff.
World class talent and leadership
Our Leadership Academy moves into its third year of operation as we continue to develop and build on the quality of our in-house talent. Simultaneously, we are encouraged by the quality of leaders we are able to attract to QBE and will continue to seek out the best talent in the market place to supplement our internal skills. The launch of our Underwriting Academy in 2015 will represent a further milestone in the way in which we look to train and develop our people.
Financial strength and flexibility
We are forecasting a further strengthening of our key capital metrics in 2015 and will see enhanced cash remittances from the divisions to the Group centre. While we continue to plan for the partial initial public offering of our Australian lenders’ mortgage insurance business, in light of the Group’s significantly strengthened balance sheet neither the timing nor activation is critical to meeting our expected capital needs.
A combination of stronger profitability, with enhanced cash flow and a significantly strengthened balance sheet, should facilitate increased dividend payments to our shareholders.
Our 2014 result was a profit after tax of $742 million and an insurance profit margin of 7.6%, with profit up $1 billion on the prior year. Despite a number of headwinds described below, we achieved a respectable combined operating ratio of 96.1%, broadly in line with the target we set at half year 2014.
Notwithstanding a relatively benign catastrophe year, our result was impacted by a number of internal and external market challenges:
- We announced at the half year our decision to strengthen claims reserves in Latin America by nearly $170 million most notably on Argentine workers’ compensation business.
- We have invested in operations and IT to achieve medium and long term cost benefits.
- The sharp fall in global risk-free rates adversely impacted our 2014 result by $324 million. This effectively added 2.3% to our combined operating ratio.
We have reported positive prior accident year claims development in the second half of 2014, resulting in positive prior year claims development of $1 million over the course of the entire year. Our underlying attritional claims ratio also improved from 47.5% in 2013 to 46.6% this year. All of this evidences the stronger underwriting disciplines and controls we have implemented across our business.Financial strength and flexibility
During 2014, we implemented a number of initiatives that lowered gearing and reduced the carrying value of goodwill and intangibles, resulting in significantly improved capital metrics.
- Our share placement and share purchase plan raised $780 million and was substantially oversubscribed. At the same time we successfully restructured a portion of our borrowings to improve capital effectiveness and lengthen term.
- We successfully reinsured our Italian/Spanish medical malpractice claims reserves, thereby reducing the volatility in our net claims central estimate.
- We sold a number of our agency businesses in Australia and the US which will convert slightly in excess of $300 million of intangibles into cash. We continue to retain the underwriting interests of these businesses in partnerships that we believe will successfully develop new business flow and improve underwriting profitability over time.
As a result of these initiatives, our debt to equity ratio has reduced from 44.1% a year ago to 32.5% at 31 December 2014 and is expected to reduce further through 2015. We have added around $1.5 billion of capital to our balance sheet and already one of our key rating agencies, A.M. Best, has affirmed our financial strength rating as ‘A’ (Excellent) and reassessed their outlook for our business from “negative” to “stable”.
The only capital plan initiative outstanding is the initial public offering of a minority stake in the Australian lenders’ mortgage insurance business. While planning for this initiative continues, in light of the Group’s significantly strengthened balance sheet neither the timing nor activation is critical to meeting our expected capital needs.Premium
As a result of the rationalisation and refocus of our global business towards what we consider “core”, gross written premium reduced by 9% in 2014 to $16.3 billion, a reduction compounded by a stronger US dollar against the Australian dollar and Argentine peso. I am encouraged that this reduced level of gross written premium is more targeted around QBE’s sweet spot, where QBE operates in a market leading position and can provide greater benefits to our clients and consequently returns for our investors.Cost management
At a time when market conditions remain tough and premium rates are generally low or flat, we believe it is essential to proactively manage our expenses. Our operational transformation program has delivered $250 million in run rate savings as planned, with an additional $90 million of savings in claims-related procurement activities.
As part of our expense management program, we have successfully transferred processes from our major divisions to our lower cost operations in the Philippines. Our Group Shared Service Centre now operates in three locations in the country, with over 2,000 employees providing largely operational support. In addition to the obvious cost arbitrage, even more important to us is the team’s world-class expertise in transforming and simplifying processes, offering further efficiency and effectiveness benefits.Reinsurance
Our ability to make good use of our in-house captive reinsurer, Equator Re, coupled with smarter reinsurance structures, have seen our external reinsurance spend reduce in 2014.Investments
Our revised investment strategy allows for increased exposure to growth assets and, as a result, at the time of print, we now have around 14% of our portfolio in growth assets, up from around 2% at the end of 2013. Importantly, even at this increased level of exposure, our portfolio remains conservative relative to our global peers, and I am satisfied that we can pursue further yield enhancement as opportunities allow.People
We believe that world class talent is one of the few sustainable competitive advantages in the insurance industry. We are working towards this goal by developing our people to make the best use of their talents, whilst at the same time increasing our talent pool with high quality and experienced external hires.
We were delighted to welcome Pat Regan as Group Chief Financial Officer and similarly pleased to promote two members from our executive talent development program – Mike Emmett as Group Executive Officer, Operations and Jason Brown as Group Chief Risk Officer. We have also increased the bench strength of our divisional leadership teams.
In order to further embed our focus on underwriting excellence, we developed our QBE Underwriting Academy aimed at producing world class underwriting expertise. We expect the results of this to flow through to our bottom line in terms of ongoing improvement in attritional claims ratios.
I am pleased with the improved performance of our North American business, posting a combined operating ratio close to breakeven despite another disappointing crop result. Dave Duclos and team have led a fundamental reset of our business, including the sale of our US agency businesses. Post restructuring, our focus will now be exclusively on commercial lines and a significant build out of our specialty underwriting capabilities.Australian & New Zealand Operations
In Australia and New Zealand, Colin Fagen and team have again produced an excellent result with a combined operating ratio of 87.0% despite an increasingly competitive market. The team has embedded strong underwriting disciplines supported by strict expense management, and has delivered a result alongside a transformational change program which gives us a solid platform for future profitable growth.European Operations
In Europe, Richard Pryce and team continue to face challenging market conditions and increasing competition. Nevertheless, the team delivered a solid 93.8% combined operating ratio, achieved through strict underwriting discipline and a re-focus around our core lines of business. The resultant disposal of interests in Central and Eastern Europe and of our European aviation book, coupled with remediation activities elsewhere in the division, resulted in a 14% decrease in gross written premium but an improved profit margin of 9.7%, up from 9.0% last year.Emerging Markets
In August, we announced the combination of our Latin American and Asia Pacific Operations under David Fried, focusing on business synergies and economies of scale. Our Asia Pacific business produced a combined operating ratio of 93.5%, with our growth strategy for that business proving itself with underlying premium growth buoyed by the region’s continued investment in infrastructure. In Latin America, our result was adversely impacted by the strengthening of reserves, most notably in Argentina, resulting in a disappointing combined operating ratio of 122.9%. We are confident that the actions taken in Latin America have reset these businesses to provide a strong base for future performance and profitability across our Emerging Markets division.Equator Re
Alongside our external global reinsurance programs, Equator Re provides excess of loss reinsurance protection and proportional cover to our four operating divisions. Equator Re’s quality underwriting and in-depth knowledge of QBE’s business, combined with a benign catastrophe year, produced a 79.9% combined operating ratio, an improvement from last year’s result.
I am encouraged by the huge progress we have made during 2014. Our business is more streamlined, more focused and in far better shape to compete strongly in increasingly competitive conditions. While there are remediation activities still underway, our transformation is largely complete and we are well placed to deliver further improvement in performance and efficiency and meet our published targets in 2015. I believe we are now in a position to look to the future with confidence and optimism.
In closing, on behalf of our Group Executive, I want to thank our key stakeholders – our customers, our people, our shareholders and our many business partners – for their commitment and support. I look forward to future success, with real optimism.
Group Chief Executive Officer