QBE Insurance Group took another step in its quest to achieve strong results, consistently, by reporting a cash profit after tax of $715 million during 2018, a significant improvement on the cash loss of$262 million reported in 2017.
Group CEO Pat Regan attributed the results to the company’s restructuring and re-underwriting program, the lower level of global natural catastrophe activity after record industry losses in 2017 as well as lower attritional (or non-catastrophe) losses.
QBE’s formula for success is targeted rate increases, strong retention of good accounts and selective new business, he said during an investors’ earnings call this week.
“The combined operating ratio improved by just over 8 points to 95.7 percent, reflecting the significant improvement in the attritional claims ratio, coupled with the lower level of [catastrophe] activity after record industry losses in 2017,” said QBE Chief Financial Officer Inder Singh. This ratio compares with the 103.9 percent reported in 2017. (A combined ratio below 100 percent indicates the company is making an underwriting profit).
QBE reported $13.7 billion worth of gross premiums in 2018, a 3 percent increase over the $13.3 billion reported in 2017.
Regan went on to detail QBE’s playbook for success during 2018, which the company aims to repeat during the coming year.
- Exiting under-performing businesses. “We’re now a much more simplified and focused company having announced the exits from a range of underperforming businesses and portfolios,” he said, citing the examples of the company’s entire Latin America division, Thailand, the Philippines, Indonesia, Hong Kong construction workers’ comp business, the travel business and the North American personal lines business.
- Simplifying corporate structure. The company has streamlined its operations into three divisions from six divisions: International, Australia Pacific and North America. The company’s Asian and European operations have been combined to form an “International Division,” while the Pacific Islands and India are now combined with Australia and New Zealand to form the new “Australia Pacific Division.”
- Targeted de-risking. “We’ve also taken a number of underwriting actions to improve the consistency of our results,” said Regan. “This includes reducing cat exposures in both peak and non-peak zones, ceasing underwriting things like beachfront hotels, reducing cat aggregates in cat-prone areas such as the Pacific Islands.” The group has also reduced commercial property hazard-grade profiles in order to cut exposure to large losses and made targeted reduction of line sizes in areas such as property and financial lines.
- Performance management. Regan said the company’s rigorous approach to performance management via its “cell review” process is achieving the objective of improving the quality and consistency of earnings, best measured by the nearly 3 percent improvement in the attritional loss ratio. Cell reviews allow QBE “to target rate increases and make risk selection changes where they’re required,” he said, noting they have also been a big driver of improvements in discipline, transparency and accountability. (Excluding crop insurance, the attritional claims ratio reduced to 50.2 percent in 2018 from 53.1 percent the previous year).
- Brilliant Basics. This program was first piloted in 2016 and was rolled out across the company in 2018 with the aim of upgrading the company’s core capabilities, providing the teams with all the tools they need to improve underwriting quality, pricing and claims handling. The Brilliant Basics program continues to accelerate and will be a key driver of longer-term performance improvement at QBE, Regan said during the earnings call. “We have now have fully implemented group claims standards and fully implemented group underwriting standards, and are significantly upgrading our pricing capabilities.”
While the global pricing environment generally has been more supportive in 2018, Regan said the company’s approach to monitoring price at a portfolio level in the cell reviews has been a key differentiator for QBE, helping the company to achieve group-wide premium rate increases of 5.0 percent on average during the year (compared with 1.8 percent in 2017, according to the financial results).
Such price increases are “in excess of almost all of our peer group, and the cell review process does allow us to target rate in the right portfolios that are the least price adequate…,” Regan emphasized.
“The actions we’ve taken to decisively re-underwrite underperforming portfolios and more disciplined risk-taking have led to a 10-point improvement in the attritional loss ratio. And pleasingly, these improvements have been evident in nearly all of our major markets,” he affirmed.
“Overall, I’m encouraged by the progress we made in 2018. We’ve done what we set out to do, executing against these strategic priorities for the year, and we now have a business that’s more focused on the markets where we have scale,” Regan continued. “We’ve embedded a rigorous performance management process. And we’ve upgraded our capabilities in the core areas of insurance: pricing, underwriting and claims.”
Looking at the year ahead, Regan said the company sees opportunities for targeted growth in all its divisions, “but we will continue to be disciplined about our risk selection, seeking margin overgrowth, broadly repeating our 2018 playbook.”