QBE 2016 Annual Report PDF
QBE 2016 Annual Report PDF
QBE 2016 Annual Report PDF
ANNUAL
REPORT
Contents
Section 1 1
Performance overview
overview
Performance
2 Chairman’s message
4 2016 snapshot
6 Group Chief Executive Officer’s report
10 Our strategic agenda
2
Section 2
review
Business
Business review
12 Group Chief Financial Officer’s report
28 Divisions at a glance
30 North American Operations
business review
3
Governance
34 European Operations business review
37 Australian & New Zealand Operations
business review
41 Emerging Markets business review
45
48
Equator Re business review
Divisional outlook for 2017 4
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Directors'
Section 3
Governance
5
50 Group Chief Risk Officer’s report
52 Board of directors
54 Group executive committee
Report
Financial
56 Corporate governance statement
Section 4 6
Directors’ Report
information
Other
64 Directors’ Report
Section 5
Financial Report
105 Financial Report contents
106 Financial statements
110 Notes to the financial statements
178 Directors’ declaration
Section 6
Other information
179 Independent auditor’s report
188 Shareholder information
191 Financial calendar
192 10 year history
193 Glossary of insurance terms
Growing QBE’s
fundamental
value
QBE recorded a 2016 financial performance at the better end of our target range.
We believe this result is a milestone in the journey to delivering steady increases
in QBE’s fundamental value even in the face of challenging market conditions and
an increasingly uncertain global political environment. We are confident shareholders
will be rewarded as we work to further strengthen QBE’s global franchise through
a relentless focus on underwriting excellence and operating efficiency together with
measured customer and partner-led growth.
overview
Performance
Shareholders will recall that we reported an unsatisfactory transform the business to strengthen and differentiate
performance in our Australian home market at the half our global franchise.
year. This resulted from cumulative pricing declines
The success that John Neal and his team have achieved
coupled with heightened claims inflation in several
in meeting this challenge is reflected in consecutive annual
short‑tail classes, exacerbated by deterioration in the NSW
2
results towards the better end of our published targets
compulsory third party (CTP) scheme.
and a balance sheet that is in excellent shape. Only with
While it takes more than a year for the full benefits this hard work completed did we have the forward visibility
review
Business
of corrective action to be reflected in financial results to set out clear medium-term financial targets for QBE
once a commitment is made to remediate an insurance at our May 2016 Investor Update. These targets covered
business, the Board is encouraged by the early progress a range of metrics from growth in gross written premium
made by Pat Regan and the team in Australian & New to operating expense savings, reinsurance cost savings,
Zealand Operations. A carefully executed plan to restore claims efficiency, return on equity and cash remittances.
pricing to more sustainable levels saw a 0.1% decline
in Australian premium rates at the half year reversed in
Your Board recognised this strength in our mid-year action
to increase the dividend payout ratio to up to 65% of
3
Governance
short order such that a full year price increase of 1.7%
cash profits as well as our recent action to adopt a share
was recorded, including a 4.5% increase in the fourth
buyback facility.
quarter. The early benefits of these rate increases coupled
with claims cost initiatives can be seen in a meaningful Importantly, QBE’s transformation extends beyond
improvement in the division’s combined operating ratio financial measures and I am delighted that in the last year
between June and December 2016.
Our North American Operations, which welcomed Russ
we have attracted three exceptional candidates to provide
stewardship at Board level. Recent Board appointments
include two of the insurance industry’s foremost leaders
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Directors'
Johnston as Chief Executive Officer during the year in
of recent decades, Rolf Tolle and Mike Wilkins. Our
a seamless transition from Dave Duclos, continued on its
third new director, Kathy Lisson, brings a rare skillset
trajectory of performance improvement. The division is
spanning digital technology, cyber security, IT risks and
benefiting from portfolio rationalisation and a tighter focus
data analytics that is essential to shaping our company’s
on core businesses, with the ongoing growth of Specialty
an important contributor to the result.
Our European Operations had another strong year
strategic direction.
Your Board is also acutely aware that there is no room 5
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Financial
for complacency in the insurance industry of 2017. There
in a marketplace that is increasingly difficult and our
is still work to be done to ensure our global business
Emerging Markets business continues to make progress,
is operating as efficiently as possible, while the impact
adding meaningfully to our future growth opportunities.
of technology, including disruptive technologies, on the
We have a stated objective of achieving gross written insurance industry will only increase in coming years.
premium growth of 3% per annum across the cycle and
early in the year we anticipated that growth of around this
level would be achievable in 2016. While the target was
More than $4 billion has been invested in Insurtech
startups in the last two years and we are committed
to being at the forefront of industry developments.
6
information
Other
not ultimately achieved due to a combination of prudent I’m delighted that Kathy Lisson is chairing a new Board
underwriting in a challenging marketplace and our own committee focused exclusively on technology and
internal remediation initiatives, in our view this level of growth operational transformation at QBE.
remains a reasonable objective over a planning cycle.
While there has been a great deal of change at QBE
Our balance sheet remains in excellent shape, as reflected over the last three years, one constant is our cautious
in Standard & Poor’s decision in May 2016 to revise the approach to the way we go about our business. Whether
rating outlook on QBE’s core operating entities to “positive” it’s through the comprehensive reinsurance we buy or our
from “stable”. reluctance to go too far up the risk curve in our investment
strategy, our over-riding goal is to deliver stable and
Moreover, it is pleasing to note that we have now reported
predictable earnings.
five consecutive half years of positive prior accident year
claims development. In closing, I remain enthused and optimistic about QBE’s
ability to deliver high quality financial returns for our
Looking to the future investors while fulfilling our mission for our customers
This is my third annual message as Chairman, having through an increasingly talented global workforce and
taken on the role in April 2014 in the midst of a difficult leadership team.
period for the company.
Reflecting on the progress that has been made over the W. Marston Becker
last three years, it is apparent that the QBE of 2017 is
Chairman
a hugely different company from the one that I took over
as Chairman. Yet even in our darkest hour I was confident
QBE had the essential attributes required to return to being
an industry leader. Importantly, there was no question of
QBE’s solid underwriting DNA, the quality and commitment
of our people or the latent benefits of being one of only a
handful of truly global insurance franchises.
4
2016 snapshot 1
Performance
Net profit after income tax (US$M) Return on average Earnings per share (EPS) (US¢)
shareholders’ funds (%)
2016 10 61.6
844 2016
60.8
2015 687 8 8.1
7.0
6.9
2015
50.3
6.4
2013
(22.8)
23% 2
(22.8)
(2.3)
2012
65.1
0 61.6
Basic EPS
Diluted EPS
2012 2013 2014 2015 2016
Combined operating ratio (COR) (%)
125
Insurance profit and Dividend per share (A¢)
underwriting result (US$M) and dividend payout (A$M)
97.8
94.9
97.1
96.1
94.0
100 A¢ A$M
1,075
2016 60 1,500
54
Combined operating
668ratio ex discount
50
50
75 1,031 45 1,125
2015
37
629
32
1,074 30 750
50 2014
547
15 375
2013
841
25 341
0 0
1,262 2012 2013 2014 2015 2016
0
2012
453 89.7
2012 2013 2014 2015 2016
Insurance profit
96.8
4% Dividend per share (A¢)
Combined commission and expense ratio
97.1
Net claims ratio Underwriting result 6%
97.8
Dividend payout (A$M) 8%
COR excluding discount rate impact
1 The information in the tables above is extracted or derived from the Group’s audited financial statements. The Group Chief Financial Officer’s
report sets out further analysis of the results to assist in comparison of the Group’s performance against 2016 targets provided to the market.
5
overview
Performance
2
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Business
Profile
Governance
14,395 100 Financial & credit
2016
11,066
80 Accident & health
15,092
2015
12,314
4
60 Marine energy & aviation
16,332
2014 40 Professional indemnity
14,084
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Directors'
17,975 20 Workers' compensation
2013
15,396
0
2016 2015 2012
Public/product liability
2013 2014 2015 2016
18,434 % %
2012
5
15,798 Commercial & 31.4 31.0 Agriculture
Equator Re Europe
Gross written premium 5% domestic property
Motor & motor casualty 18.3 17.7
Emerging Markets
Motor & motor casualty
North America
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Financial
Agriculture 10.8 10.8
Net earned premium
Public/product liability 10. 1 10.7 Commercial & domestic property
Workers' compensation 7.4 8.3
Investments and cash at 31 December 2016 Professional indemnity 6.3 5.6 Net profit after tax by division (US$M)
Unit trusts
Marine energy & aviation 6.3 6.5
761
6
1,500
(254)
844
742
information
Other
Emerging
900
US$25,235 million Australia
Infrastructure debt 600
Europe
300 North Am
Net earned
Alternatives
premium
2016 2015 by type 0
Equities
92%
% %
Corporate bonds 44.9 46.4 -300
Cash
Government bonds 23.8 15.6
-600
Short-term money 15.7 22.2
Property trusts/ 4. 1 4.0 direct and
Property trusts/investment property
-900
investment property facultative insurance
Cash 3.4 2.5 Short-term money -1,200
8%
Equities 2.3 2.5 -1,500
Government bonds
Alternatives 1.8 1.5 2012 2013 2014 2015 2016
Infrastructure debt 1.8 1.3
Corporate bonds Equator Re Australia & New Zealand
Emerging market debts 1.3 2. 1
and equities inward reinsurance Emerging Markets North America
High yield debt 0.8 1.7 Europe Corporate & other
Unit trusts 0 .1 0.2 Consolidated QBE Group
6 Group Chief Executive Officer’s report
Delivering results
through consistent
strategy execution
QBE recorded a strong 2016 financial result including an above target combined
operating ratio and an insurance profit margin towards the upper end of our target range.
This performance is testament to the strength and diversification of our global franchise
underpinned by a strong underwriting culture and supported by a high-quality balance sheet.
It is pleasing to report that in 2016 all key performance measures improved. Excluding the impact of discount rate
movements, the combined operating ratio reduced to 93.2% from 94.3% 1 in 2015. Net profit after tax was $844 million,
up 5% on 2015 1, with an increase in investment income partially offset by an adverse discount rate movement and the
impact of the stronger US dollar, particularly against sterling. On a constant currency basis, net profit after tax increased
by 16%. Return on equity increased to 8.1% from 7.5% 1 last year.
Importantly, the detail below the headline result for 2016 is encouraging on a number of levels and reflects the
successful transformation of QBE over the last five years. Following the restructuring of both our underwriting account
and our balance sheet, our underwriting performance continues to improve year on year and we have now had
five consecutive half years of positive prior accident year claims development. Our balance sheet is of high quality
as recognised by the Standard & Poor’s Global Ratings assessment which indicates that the Group’s capital position
is “well above the AA level”.
Global market conditions leave little room for error and our underwriting discipline is evident across all of QBE’s
businesses. This is particularly the case in North American Operations, where the combined operating ratio improved
to 97.7% 2 from 99.8% in 2015, when the division produced its first underwriting profit for some years. We are expecting
further steady improvement towards a mid-90s combined operating ratio over the medium‑term.
The strength of both QBE’s market position and operational capability are reflected in early but visible signs that the
remediation plan for Australian & New Zealand Operations is gaining traction. Corrective actions across underwriting
and pricing together with improved discipline in our claims management functions underpinned a significant
improvement in the attritional claims ratio in the second half of 2016. As a consequence, I am confident that by the
end of 2017 the division will have returned to more acceptable levels of profitability.
Our 2016 performance saw QBE achieve targets for underwriting discipline, cost reduction, reinsurance savings,
claims efficiency, capital ratios and cash remittances. The profit uplift coupled with strong cash flow generation has
allowed the Board to both increase the final dividend by 10% to 33 Australian cents, as well as announce a three year
cumulative on-market share buyback facility of up to A$1 billion.
1 2015 comparable figures exclude Argentina workers’ compensation, M&LS deferred acquisition cost write-down as well as agency and
other asset sales.
2 Combined operating ratio excluding discount rate impact.
7
overview
Performance
The turnaround in performance initiated by Dave Duclos has continued under Russ Johnston’s leadership, with North
American Operations’ underwriting profit more than doubling in 2016. A second consecutive strong Crop performance
and continued profitable growth in Specialty have aided the division’s development. Actions taken to address legacy
issues, including reinsuring program business run-off liabilities with a third party and exiting our mono‑line commercial
auto business, see the division well placed for further material performance improvement. We have the right mix
of product and capability to support a well-defined plan by industry and product. Ongoing cost efficiencies are also
expected to contribute to margin improvement in 2017 and beyond. 2
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Business
2. European Operations
In what is arguably the most competitive insurance market in the world, the strength of the QBE franchise in the
London Market is evident in continued disciplined underwriting and an increase in positive prior accident year
claims development. Richard Pryce and the team delivered a strong combined operating ratio of 90.2% 1 in a year
characterised by continued deterioration in trading conditions, an industry-wide increase in large risk and catastrophe
claims activity and an uncertain political and economic backdrop. This is an extremely strong performance that 3
Governance
benefited from an ongoing commitment to underwriting excellence coupled with significant operational improvement
which reduced the expense base and enhanced efficiency.
The European Operations team is advancing its plans for the reorganisation of the business should it become
impractical to access the European single market from the UK as a consequence of the European Union referendum
outcome (Brexit).
3. Australian & New Zealand Operations 4
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Directors'
The strength of our distribution partnerships is playing a pivotal role in the turnaround of Australian & New Zealand
Operations which commenced during the second half of 2016. In August 2016, Pat Regan was appointed Acting
CEO of Australian & New Zealand Operations to lead the remediation of the business following a marked first half
deterioration in the attritional claims ratio. The deterioration was due to several years of price reductions coupled with
5
claims inflation and deterioration in the performance of the NSW CTP portfolio.
Pat and his team quickly developed a comprehensive remediation plan, with indications of successful execution evident
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Financial
in an improvement in the division’s attritional claims ratio from 62.0% in the first half to 58.6% in the second half of 2016.
An even greater improvement was achieved in the final quarter of the year.
While insurance portfolio remediation takes time, a combination of pricing increases, enhanced underwriting discipline
and claims focus is expected to return the attritional claims ratio to more acceptable levels by the end of 2017.
4. Emerging Markets
David Fried and the Emerging Markets team delivered constant currency gross written premium growth of 10% with
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Other
a stable combined operating ratio. Growth was underpinned by an enhanced focus on driving profitable growth across
specialty, commercial, SME and personal lines (via strategic partners), with the stable underwriting result achieved
despite several large individual risk and catastrophe claims.
The implementation of a single strategy across Asia Pacific and Latin America has supported enhanced productivity,
efficiency and consistency across the division. Financial performance is benefiting from more frequent and robust
technical portfolio reviews, increased utilisation of data analytics and continued portfolio remediation.
QBE is well-positioned to benefit from the additional trade and infrastructure investment expected to be generated
by the emerging markets’ favourable long-term economic outlook.
5. Equator Re
Equator Re plays an important role in assisting the Group and our four operating divisions in managing their balance
sheet and capital requirements through the provision of excess of loss reinsurance protection and proportional cover.
2016 was a successful year for Equator Re, with the division recording a significantly improved combined operating
ratio of 78.9% 1. Positive prior accident year claims development was a significant contributor to the improved
underwriting performance.
QBE’s strategy
At our Investor Update held in May 2016, QBE’s leadership team introduced six themes that together form the core of
our strategy: to deliver on clear medium-term financial targets by building upon our differentiated position as one of only
around 15 insurers that operate on a truly global basis.
As we look forward to 2017, the focus for each of these themes will continue to develop and evolve:
• Underwriting excellence – underwriting performance and margin will always be our primary areas of focus. QBE’s
commitment to underwriting excellence is evident across the divisions, whether it be continued improvement in North
American Operations, the more frequent and robust portfolio reviews now being undertaken in Latin America or
maintaining discipline in a challenging market in European Operations.
We believe there is more we can do to improve underwriting performance, and we need to be adaptable as delivering
underwriting excellence will sometimes require a bespoke approach. For example, the approach adopted to remediate
Australian & New Zealand Operations was to divide the business into 44 “cells” with regular, detailed reviews
undertaken for each cell to ensure that new underwriting plans and remediation actions are being implemented and
driving desired outcomes.
• Customer and partner-led growth – our target is to achieve 3% premium growth across the cycle through further
improvement in QBE’s market position and relationships with distribution partners. During 2016, the competitive
environment did not support achievement of this target due to our over-riding focus on underwriting excellence.
• World class talent – QBE has made a substantial investment in building, developing and retaining the very best
talent. It is four years since we launched our Leadership Academy in partnership with Duke University, with over
2,350 of our leaders having participated in Academy programs. We are now undertaking a refresh of the Leadership
Academy modules to support our leadership development, while 2017 will also see the full launch of our Underwriting
Academy following the successful completion of pilot programs in 2016. Our objective is for every QBE underwriter
to be accredited by our academy and receive a qualification that is recognised by many of the insurance bodies
around the world.
• Operational efficiency – our 2016 expense savings target of $150 million was met and planning is well-advanced
to deliver a further $150 million in expense savings by the end of 2018, with some of these savings to be reinvested
in technology. In 2017, we will also look to optimise the value of our onshore and offshore service centres.
• Claims excellence – we expect that half of our 2018 target of $200 million in claims run-rate savings will be achieved
by the end of 2017. Initiatives to combat claims fraud are an area of ongoing focus, as is efficient claims management
through the sharing of global standards.
• Data and analytics – after establishing data and analytics as a global function in 2016, including the development
of offshore support in the Philippines and in India, our focus in 2017 will be directed towards projects that support
portfolio remediation, claims initiatives and customer analysis.
In summary
I am encouraged by QBE’s response to the challenges of 2016. Following the transformation initiatives of recent
years our business is more streamlined and more focused. A challenging market backdrop put us to the test in 2016,
and we delivered.
While QBE’s transformation has been all encompassing, I am especially pleased by our success in institutionalising
a customer-centric approach. Consistent with our vision for QBE to be the insurer that builds the strongest partnerships
with customers, I am seeing increasing evidence of our people thinking about each client and what we can do for them
as an insurer.
For many customers our whole account management approach is a real differentiator, providing visibility upfront on
everything from our technical pricing capability to our claims handling approach, our risk solutions capability and our
preparedness to enter into more complex financial structures, whether that be a multi-year contract or participation
in a complex captive-based arrangement. This approach was pioneered in our European Operations but through
cross‑pollination of thought, ideas and people, is increasingly evident in how we do business elsewhere in the world,
and in our ability to serve multi-jurisdiction clients.
In closing, I want to thank our stakeholders – our customers, our people, our shareholders and our business partners
– for their ongoing support. I am confident that continued focus on our strategic themes and on further embedding our
commitment to customer partnerships will underpin QBE’s future success.
John Neal
Group Chief Executive Officer
9
overview
Performance
2017 targets:
2
Relatively stable 1,2
review
Business
Gross written premium:
Governance
Investment return:
We anticipate the market backdrop will remain challenging in 2017, although indications of modest improvement are
now emerging. The rate of decline in global insurance pricing is easing and, while there is variation between markets,
4
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Directors'
we anticipate that premium rates in markets other than Australia will be broadly flat in 2017. We are also encouraged
by the improved US macroeconomic outlook following the presidential election, while investment income should
benefit from higher bond yields in all major markets.
The QBE franchise is positioned to support growth; however, in light of the still competitive premium pricing landscape
and recent exchange rate volatility, gross written premium is expected to remain relatively stable during 2017.
Continuing focus on retention is key, along with select growth expected from Emerging Markets and targeted pockets
5
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Financial
within European Operations and North American Operations.
Looking beyond the current year, the medium-term targets provided at the May 2016 Investor Update are unchanged.
More specifically, we remain committed to our 2018 targeted combined operating ratio of around 93% as the full benefit
of our operating expense reductions and claims savings are realised. This, together with the improving outlook for
investment returns, supports our long‑term return on tangible equity target of 13-15%.
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Other
1 Premium target is based on assumed foreign exchange rates relative to the US dollar as follows: AUD 0.73; GBP 1.25; and EUR 1.10.
2 Net earned premium growth will likely exceed gross written premium growth due to in excess of $350 million of reinsurance cost savings
achieved as a result of the restructure and refinement of the Group’s 2017 reinsurance protections.
3 Assumes risk-free rates as at 31 December 2016.
4 Assumes favourable prior accident year claims development.
5 Other than the 0.5% explicit increase in the probability of adequacy of the net central estimate for potential changes to the Ogden tables
(refer page 24 for further details), the target range does not allow for a potentially more extreme legislative outcome.
10
Our strategic
agenda
2016 ACHIEVEMENTS:
Customer and
Underwriting World class
partner-led
excellence growth talent
overview
Performance
2
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Business
3
Governance
Operational Claims Data and
efficiency excellence analytics
4
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Directors'
• Multiple initiatives generated • Use of data and analytics • Over 70 projects in progress
cost savings in excess of for fraud prevention, claims to embed data and analytics
$150 million in 2016 recoveries and litigation to create a culture of
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Financial
to cost and infrastructure • Group Chief Claims Officer
management in 2017 will see appointed to facilitate sharing
−− Claims anti-fraud and
further benefit realised of best practice, to maximise
subrogated recovery
opportunities in the areas
• In excess of $350 million of fraud management,
6
−− Customer segmentation
reduction in 2017 external claims, claims supply and improved customer
reinsurance spend chain management and experience
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Other
• Further use of Group Shared claims leakage
−− Agent and broker
Services Centre to achieve • $200 million of claims benefits segmentation and
cost and efficiency benefits targeted by 2018 performance
• We are continuing to enhance • Innovative use of drone −− Underwriting exposure, loss
our long-term plan and strategy technology to deliver excellent control and pricing analytics
for technology claims service to clients
−− Recruitment effectiveness
12 Group Chief Financial Officer’s report
Financial and
operations
overview
QBE’s 2016 result demonstrates continued significant positive prior accident
year claims development, a materially improved return on equity, a very strong
capital position and increased divisional cash remittances, which together
underpinned an 8% increase in the 2016 dividend and the establishment
of a three year cumulative on-market buyback facility of up to A$1 billion.
General overview
The Group reported a net profit after tax of $844 million, up a pleasing 5% from $807 million 1 in 2015, with an increase
in investment income partially offset by an adverse discount rate movement and the impact of the stronger US dollar,
particularly against sterling.
On a constant currency basis, net profit after tax increased by 16%.
Return on equity improved to 8.1% from 7.5% 1 in 2015.
Cash profit after tax was $898 million, in line with the prior year but up 12% on a constant currency basis and broadly
consistent with the 8% uplift in the full year dividend to shareholders.
As in previous years, I have commented below on three broad areas of focus:
1. Driving improved financial performance;
2. Investment strategy and performance; and
3. Financial strength and capital management.
Once again we have made good progress in all three areas; however, there remain some notable areas for
further improvement.
1 2015 comparable figures exclude Argentina workers’ compensation, M&LS deferred acquisition cost write-down as well as agency and
other asset sales.
13
overview
Performance
Excluding an $80 million adverse impact caused by lower risk-free rates used to discount net outstanding claims
liabilities, the combined operating ratio improved significantly to 93.2% from 94.3% 1 in 2015 and compares
favourably with our 2016 targeted combined operating ratio range of 94-95%.
From my perspective, there were six key themes emerging from our 2016 underwriting result:
(a) Reserving confidence – five consecutive halves of positive prior accident year claims development
The Group reported $366 million of positive prior accident year claims development representing 3.3% of net earned
2
review
Business
premium, up from $147 million and 1.2% respectively in 2015. Once again our European and Australian & New Zealand
Operations reported significant positive prior accident year claims development, with a small net strengthening across
the rest of the Group driven by our US commercial auto business which has largely been placed into run-off.
In light of this track record, it is reasonable to expect continued positive prior accident year claims development but not
at the level reported in 2016.
(b) An improved result in Australian & New Zealand Operations
3
Governance
During the first half of 2016, Australian & New Zealand Operations experienced a significant deterioration in its
attritional claims ratio. We have acted swiftly and decisively to address this development implementing a comprehensive
remediation plan with a strong governance framework.
Key remediation initiatives undertaken to date include premium rate increases, revised policy terms and conditions,
improved risk selection, tighter management and control over claims expenses (including the removal of delegated
authorities where appropriate), focused supplier management, greater emphasis on salvage and third party recoveries 4
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Directors'
and enhancements to our management information lead indicators.
After an average premium rate reduction of 0.1% in the first half, Australian premium rates finished up 1.7% for the year
and were up by a significant 4.5% in the fourth quarter.
While these actions will primarily benefit our 2017 result, premium rate increases achieved in the second half and reduced
claims costs contributed to the 340bps improvement in our second half attritional claims ratio relative to the first half.
(c) Another strong result in Europe with solid progress in North America
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Financial
Despite sustained challenging market conditions, European Operations delivered another outstanding result reporting
a combined operating ratio of 90.2% 2. The division recorded positive prior accident year claims development of $273
million, continuing a long track record of significant releases and again highlighting the conservative approach taken to
current accident year reserving.
North American Operations’ combined operating ratio improved to 97.7% 2 from 99.8% in the prior period, reflecting
an outstanding Crop result and a significantly improved expense ratio that more than offset elevated large risk and
6
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Other
catastrophe claims experience.
Pleasingly, after experiencing an uptick during the first half of 2016, North American Operations’ full year underlying
attritional ratio improved relative to 2015. Moreover, we successfully reinsured legacy multi-line property and casualty
(program) run-off liabilities to a third party and, after significant adverse experience, exited the mono-line commercial
auto segment including discontinuing the Deep South commercial trucking program. These transactions will reduce the
risk profile of North American Operations and further improve earnings predictability.
(d) Expense reduction initiatives on track
QBE has made a good start towards achieving our targeted expense run rate savings of $300 million by 2018.
During 2016, we reduced our recurring expense base by $158 million 3 in absolute terms. Notwithstanding significant
investment in Group-led strategic initiatives, further material cost reductions were achieved in North American and
European Operations.
The Group’s underlying expense ratio improved by 0.6%, less than our targeted ~1% improvement, reflecting lower than
projected net earned premium as we sacrificed top-line in order to maintain underwriting discipline.
1 2015 comparable figures exclude Argentina workers’ compensation, M&LS deferred acquisition cost write-down as well as agency and
other asset sales.
2 Combined operating ratio excluding discount rate impact.
3 Excluding a one‑off $22 million legal provision.
14 Group Chief Financial Officer’s report
overview
Performance
M&LS REINSURANCE ADJUSTED
STATUTORY RESULT FRONTING TRANSACTIONS RESULT
FOR THE YEAR ENDED 31 DECEMBER 2016 2015 2016 2016 2016 1 2015 2
US$M US$M US$M US$M US$M US$M
Gross written premium 14,395 15,092 307 – 14,088 14,782
Gross earned premium revenue
Net earned premium
14,276
11,066
14,922
12,314
413
– 570
– 13,863
11,636
14,606
12,213 2
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Business
Net claims expense (6,442) (7,434) – (581) (7,023) (7,308)
Net commission (2,034) (2,114) – – (2,034) (2,116)
Underwriting and other expenses (1,922) (2,137) – – (1,922) (2,058)
Underwriting result 668 629 – (11) 657 731
3
Net investment income on policyholders’ funds 407 402 – – 407 368
Insurance profit 1,075 1,031 – (11) 1,064 1,099
Net investment income on shareholders’ funds 339 263 – – 339 239
Governance
Financing and other costs (294) (244) – – (294) (244)
Losses on sale of entities – (2) – – – –
Unrealised losses on assets held for sale (3) – – – (3) –
Amortisation and impairment of intangibles (45) (95) – – (45) (95)
Profit before income tax
Income tax expense
1,072
(228)
953
(260)
–
–
(11)
–
1,061
(228)
999
(186)
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Profit after income tax 844 693 – (11) 833 813
Net profit attributable to non-controlling interests – (6) – – – (6)
Net profit after income tax 844 687 – (11) 833 807
5
1 Presented excluding M&LS fronting and transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and
UK long‑tail liabilities.
2 Excludes Argentine workers’ compensation, M&LS deferred acquisition cost write-down as well as agency and other asset sales.
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Financial
Overview of the 2016 result
To assist in the explanation of the 2016 result, the 2016 statutory result in the table above is presented after excluding
the following items which, although not having a material impact on profit, materially distort key performance indicators:
• M&LS was sold in 2015; however, business continues to be written by North American Operations as part of the
transition services agreement (which expires in 2017) and is fully reinsured to the purchaser with no impact on net
premium or profit; and
6
information
Other
• transactions undertaken to reinsure legacy US multi-line property and casualty (program) run-off liabilities and
long‑tail UK liabilities, the combined impact of which was to reduce net earned premium by $570 million and net
claims expense by $581 million. Although having only a minor impact on net profit, the transactions materially impact
year‑on‑year net earned premium comparisons and underwriting ratios, depressing the net claims ratio and inflating
the combined commission and expense ratio.
Unless otherwise stated, the profit and loss and underwriting result commentary following refers to the Group’s result
on the basis described above.
The Group achieved a 2016 net profit after tax of $833 million, up 3% from $807 million recorded in 2015. Improved
investment returns driven by foreign exchange gains more than offset an $80 million pre-tax charge associated with lower
risk-free rates used to discount net outstanding claims (2015 $38 million benefit) and the impact of the stronger US dollar.
Excluding amortisation of intangibles and other non-cash items, cash profit for the year was $898 million, up slightly
from $893 million reported in 2015 but up 12% on a constant currency basis.
On a constant currency basis and excluding M&LS premium written in 2015, gross written premium increased 1%, reflecting
growth in Emerging Markets and Australian & New Zealand Operations, partially offset by contraction in European
Operations and exacerbated by the ongoing competitive global premium pricing landscape. On the same basis, net earned
premium increased 2% relative to the prior period, reflecting top line premium growth and reduced reinsurance spend.
The statutory combined operating ratio improved to 94.0% from 94.9% in the prior period despite the significant
reduction in risk-free rates used to discount net outstanding claims. Excluding this impact, the combined operating ratio
improved to 93.2% from 95.2% in 2015, mainly reflecting an increase in positive prior accident year claims development
and an improved expense ratio, partially offset by a higher (largely Australian driven) attritional claims ratio.
16 Group Chief Financial Officer’s report
The net investment return on policyholders’ funds increased to 2.6% from 2.1% in the prior period, largely due to a $40 million
foreign exchange gain. Excluding foreign exchange gains and other income, the net return on policyholders’ funds improved
slightly to 2.4% from 2.3% in 2015. This reflected higher fixed income returns on the back of reduced risk-free rates and
narrower credit spreads, partially offset by significantly reduced growth asset returns. Although broadly in line with our
original budget, this was less than our 2.7% return expectation announced with the release of our interim result, reflecting the
significant sell-off in global bond markets during the final quarter of 2016.
The Group recorded an insurance profit of $1,064 million, down 3% from $1,099 million in the prior period, with the
adverse discount rate impact largely offset by higher investment income on policyholders’ funds.
Investment income on shareholders’ funds increased 42% to $339 million from $239 million in the prior period. This
reflected a foreign exchange gain of $85 million and higher fixed income returns on the back of reduced risk-free rates
and narrower credit spreads, partially offset by lower growth asset returns (although strategic investments performed
strongly relative to the prior period).
Financing and other costs increased to $294 million from $244 million in 2015, largely due to a $30 million cost of
discontinuing certain North American agency arrangements and a $12 million write-down of contingent consideration
on the sale of the Australian Agencies in 2015.
The effective statutory tax rate fell to 21% from 27% in the prior period and reflects the mix of statutory tax rates in the
jurisdictions in which QBE operates. The 2015 rate was higher than expected due to derecognition of deferred tax in
Australia and Europe.
Cash profit
FOR THE YEAR ENDED 31 DECEMBER 2016 2015
US$M US$M
Cash profit before tax 1,147 1,096
Tax expense on cash profit (249) (197)
Profit attributable to non-controlling interests – (6)
Net cash profit after tax 898 893
Losses on sale of entities after tax – (94)
M&LS deferred acquisition cost write-down after tax – (27)
Amortisation and impairment of intangibles after tax 1 (54) (85)
Net profit after tax 844 687
Return on average shareholders’ funds 8.1% 6.4%
Basic earnings per share – cash basis (US cents) 65.5 65.3
Dividend payout ratio (percentage of cash profit) 61% 56%
1 $29 million of pre-tax amortisation expense is included in underwriting expenses (2015 $26 million).
Premium income
Gross written premium decreased 5% to $14,088 million from $14,782 million in the prior period, reflecting the stronger
US dollar (especially against sterling) and the sale of the M&LS business effective 1 October 2015.
On an average basis and compared with 2015, the Australian dollar, sterling and the euro depreciated against the
US dollar by 0.9%, 11.6% and 0.4% respectively, adversely impacting gross written premium by $526 million.
On a constant currency basis and excluding $383 million of M&LS premium written in 2015, gross written premium
increased 1%, reflecting growth in Emerging Markets and Australian & New Zealand Operations, partially offset by
contraction in European Operations and exacerbated by the ongoing competitive global premium pricing landscape.
Group-wide premium rate reductions averaged 0.1% during 2016, an improvement relative to the 1.3% average
reduction in 2015 and indicating a second half recovery following the 1.3% average rate reduction during the first
half of 2016. While the majority of QBE’s underwriters would classify current market conditions as remaining highly
competitive, rate reductions are moderating in global reinsurance and there are clear signs of price hardening in
Australia and New Zealand. Pricing was flat in North America with rate increases in personal lines and Specialty
more than offset by ongoing weakness in catastrophe exposed commercial property. Pricing trends remain negative
in European Operations with competition for new business being particularly acute. Premium rates remain highly
competitive in Asia-Pacific although the average premium rate reduction was less than anticipated.
Excluding M&LS, North America achieved a 2% increase in gross written premium. Strong growth in Specialty and
modest growth in consumer affiliated business on the back of rising housing starts outpaced declines across Property
& Casualty (exacerbated by significant commercial auto remediation) and Crop.
European Operations recorded a 3% reduction in gross written premium on a constant currency basis. This is a pleasing
outcome in light of the competitive pricing landscape which saw average premium rate reductions of 2.4% during the
year and ongoing pressures associated with the impact of lower commodity prices, especially in the oil and gas sector.
Evidencing the division’s commitment to maintaining underwriting discipline, a number of significant underperforming
accounts and facilities were not renewed during 2016.
17
overview
Performance
privatised South Australian CTP market from 1 July 2016.
Emerging Markets achieved gross written premium growth of 10% on a constant currency basis, with growth in Asia
Pacific and Latin America of 3% and 16% respectively. In Asia Pacific, strong growth in Malaysia, Papua New Guinea,
Vietnam, Fiji and Solomon Islands supplemented the modest growth in Hong Kong and Singapore. Premium rate
reductions averaged 0.1%. In Latin America, the impact of the ongoing remediation of the Colombian SOAT portfolio
and a recession driven premium decline in Ecuador was more than offset by strong growth in Argentina, Brazil and
Mexico with average (inflation driven) premium rate increases of 4.1%.
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Business
Excluding M&LS, the Group’s reinsurance expense ratio fell to 16.1% of gross earned premium from 16.7% in the prior
period, reflecting early savings from the refinement and restructuring of the Group’s external reinsurance programs.
On a constant currency basis and excluding $375 million of 2015 M&LS premium, net earned premium increased 2%
to $11,636 million, reflecting gross written premium growth coupled with reduced reinsurance spend.
Underwriting performance
3
Governance
Key ratios – Group
FOR THE YEAR ENDED 31 DECEMBER 2016 2015
STATUTORY STATUTORY ADJUSTED 2
% %1 % %
Net claims ratio
Net commission ratio
58.2
18.4
60.4
17.5
60.4
17.2
59.8
17.3
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Expense ratio 17.4 16.5 17.3 16.9
Combined operating ratio 94.0 94.4 94.9 94.0
Combined operating ratio ex risk-free rate movement 3 93.2 93.7 95.2 94.3
Insurance profit margin 9.7 9.1 8.4 9.0
1 Presented excluding transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and UK long‑tail
liabilities. 5
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Financial
2 Excludes Argentine workers’ compensation and M&LS deferred acquisition cost write-down.
3 Excludes the impact of changes in risk-free rates used to discount net outstanding claims.
Divisional performance
Contributions by region
GROSS WRITTEN
PREMIUM
NET EARNED
PREMIUM
COMBINED
OPERATING RATIO
INSURANCE PROFIT
BEFORE INCOME TAX 6
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Other
FOR THE YEAR ENDED 31 DECEMBER 2016 2015 2016 2015 2016 2015 2016 2015
US$M US$M US$M US$M % % US$M US$M
North American Operations 4,647 4,961 3,318 3,666 97.8 99.2 155 93
European Operations 4,076 4,386 3,115 3,454 93.6 89.1 314 464
Australian & New Zealand Operations 3,933 3,787 3,410 3,282 92.7 91.3 418 467
Emerging Markets 1,632 1,728 1,328 1,436 99.5 99.2 73 71
Equator Re 1,349 1,007 468 367 70.7 89.0 164 103
Equator Re elimination (1,349) (1,007) – – – – – –
Corporate and other adjustments (200) (80) (3) 8 – 0.1 (60) (99)
Group 14,088 14,782 11,636 12,213 94.4 94.0 1,064 1,099
M&LS fronting 1 307 131 – (77) – – – –
Reinsurance transactions – – (570) – 101.9 – 11 –
Other 2015 adjustments – 179 – 178 – 134.3 – (68)
Group statutory 14,395 15,092 11,066 12,314 94.0 94.9 1,075 1,031
Direct and facultative 13,369 14,138 10,219 11,511 94.3 95.2 958 921
Inward reinsurance 1,026 954 847 803 90.0 90.2 117 110
Group statutory 14,395 15,092 11,066 12,314 94.0 94.9 1,075 1,031
1 The M&LS fronting transaction incepted on 1 October 2015 and had no subsequent impact on the net underwriting result or insurance profit.
18 Group Chief Financial Officer’s report
Incurred claims
The Group’s net claims ratio increased to 60.4% from 59.8% in the prior period, reflecting an increase in the attritional
claims ratio coupled with an adverse impact from lower risk-free rates used to discount net outstanding claims, largely
offset by increased positive prior accident year claims development.
The following table provides a summary of the major components of the 2016 net claims ratio.
Analysis of net claims ratio
FOR THE YEAR ENDED 31 DECEMBER 2016 2015
STATUTORY STATUTORY ADJUSTED
% %1 % %2
Attritional claims 54.9 52.2 51.9 49.9
Large individual risk and catastrophe claims 9.6 9.1 8.7 8.7
Claims settlement costs 2.9 2.8 3.0 3.0
Claims discount (1.9) (1.9) (3.9) (1.7)
Net incurred central estimate claims ratio (current accident year) 65.5 62.2 59.7 59.9
Changes in undiscounted prior accident year central estimate (3.3) 3 (3.1) 3 (1.1) 4 (1.2) 5
Impact of one-off reinsurance transactions 6 (5.2) – – –
Changes in discount rates 0.7 0.7 (0.3) (0.3)
Other (including unwind of prior year discount) 0.5 0.6 2.1 1.4
Net incurred claims ratio (current financial year) 58.2 60.4 60.4 59.8
1 Presented excluding transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and UK long‑tail liabilities.
2 Excludes Argentine workers’ compensation and M&LS deferred acquisition cost write-down.
3 Net of discount movement ($8 million cost) due to long‑tail classes including dust disease in Australia and our retained Argentine business,
where the level of assumed claims inflation is directly linked to the discount rate.
4 Net of discount movement ($214 million release) due to long‑tail classes including dust disease in Australia and motor third party bodily
injury and workers’ compensation in Argentina, where the level of assumed claims inflation is directly linked to the discount rate.
5 Net of discount movement ($53 million release) due to long‑tail classes including dust disease in Australia and motor third party bodily
injury in Argentina, where the level of assumed claims inflation is directly linked to the discount rate.
6 Impact of transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and UK long‑tail liabilities.
The table below provides an analysis of the Group’s current accident year attritional claims ratio excluding various
influences that distort movement in the reported attritional claims ratio.
Analysis of attritional claims ratio
FOR THE YEAR ENDED 31 DECEMBER 2016 2015 1
NEP ATTRITIONAL NEP ATTRITIONAL
US$M % US$M %
Rest of world 11,093 51.9 11,282 49.3
Crop insurance 543 59.0 556 69.0
M&LS 2 – – 375 38.3
QBE Group 3 11,636 52.2 12,213 49.9
1 Prior year analysis included an adjustment for $289 million of incremental group large individual risk and catastrophe (GLRC) aggregate
reinsurance premium expense reflecting the purchase of the GLRC effective 1 January 2015. This adjustment is no longer relevant since
both periods now include a similar level of GLRC premium expense.
2 M&LS was sold effective 1 October 2015.
3 2016 presented excluding transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and UK long‑tail
liabilities.
Excluding US crop and the M&LS business that was sold effective 1 October 2015, the underlying attritional claims ratio
for the remainder of the portfolio deteriorated to 51.9% from 49.3% in the prior period reflecting:
• a 1.6% increase driven by Australian & New Zealand Operations reflecting increased NSW CTP claims frequency,
business mix changes (including increased CTP), higher short‑tail claims costs (including parts and repair costs) and
heightened trade credit claims frequency. While the attritional claims ratio increased materially to 60.2% from 55.1%
in 2015, the attritional claims ratio improved from 62.0% in the first half to 58.6% in the second half of 2016;
• a 0.9% increase caused by European Operations and largely reflecting a distorting impact from the dramatic
devaluation of sterling, whereby premium written in currencies other than sterling was earned at higher historical rates
relative to related claims expense. On a constant currency basis, European Operations’ underlying attritional claims
ratio was stable. Assuming future stability of sterling, this currency effect is not expected to have a lasting impact;
• a slightly adverse divisional business mix impact driven by growth in proportional business retained by Equator Re,
particularly North American Specialty; and
• a minor improvement in the attritional claims ratios in North American Operations and Emerging Markets.
19
overview
Performance
IN THE YEAR ENDED 31 DECEMBER 2016 COST % OF
US$M NEP
Total catastrophe claims 439 3.8
Total large individual risk claims 617 5.3
Total large individual risk and catastrophe claims 1,056 9.1
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Business
US$M NEP
Total catastrophe claims 424 3.4
Total large individual risk claims 643 5.3
Total large individual risk and catastrophe claims 1,067 8.7
In light of the Group’s multi-year aggregate reinsurance, it is not surprising that the total net cost of large individual risk
and catastrophe claims was stable at $1,056 million compared with $1,067 million in the prior period. However, the 3
Governance
gross cost before aggregate reinsurance recoveries increased significantly reflecting heightened individual risk and
catastrophe claims experience compared with a particularly benign 2015.
As summarised in the table below, the currency weighted average risk-free rate (excluding the Argentine peso) used
to discount net outstanding claims liabilities was volatile during 2016, falling substantially from 1.62% at 31 December
2015 to 0.92% at 30 June 2016, then partially recovering to 1.33% as at 31 December 2016. Although US dollar
risk‑free rates finished 2016 up relative to the prior year, sterling and euro risk-free rates remained well below prior
year levels while Australian risk-free rates were relatively stable year on year.
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Movement in weighted average risk-free rates
31 DECEMBER 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER
CURRENCY 2016 2016 2015 2015 2014
5
Australian dollar % 2.26 1.77 2.37 2.43 2.46
US dollar % 2.04 1.20 1.80 1.59 1.33
Sterling % 0.68 0.56 1.47 1.53 1.30
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Financial
Euro % 0.19 (0.16) 0.59 0.75 0.58
Group weighted average (ex Argentine peso) % 1.33 0.92 1.62 1.60 1.45
Estimated impact of discount rate movement 1 $M (80) (283) 38 45 (324)
1 Excludes discount rate impact due to changes in yields for our Australian dust disease and Argentine peso denominated liabilities,
where the level of assumed inflation is directly linked to the discount rate. 6
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Other
The reduction in risk-free rates gave rise to an adverse underwriting impact of $80 million that increased the net claims
ratio by 0.7% compared with a benefit of $38 million in the prior period which reduced the net claims ratio by 0.3%.
20 Group Chief Financial Officer’s report
The result also included $366 million of positive prior accident year claims development that benefited the claims ratio
by 3.1% compared with $147 million or 1.2% in the prior period. This is the fifth consecutive half of positive development
that has averaged $130 million or 2.1% of net earned premium per half over that period.
Excluding a small corporate adjustment, the Group’s $366 million of positive prior accident year claims development
comprised:
• European Operations once again reported strong positive development of $273 million, up slightly from $254 million
in 2015, with favourable development spread across multiple portfolios in the insurance and reinsurance divisions;
• Australian & New Zealand Operations recorded $147 million of positive development, up from $120 million in the prior
period, due to the emergence of favourable development across NSW CTP and long‑tail portfolios;
• North American Operations incurred $121 million of adverse development, up from $85 million in the prior corresponding
period, the vast majority of which related to now terminated and reinsured mono-line commercial auto business which
experienced heightened claims frequency and severity;
• Emerging Markets reported $17 million of positive development, up from $11 million in the prior period, with favourable
trends emerging in Singapore, Malaysia, Argentina and Ecuador; and
• Equator Re experienced $56 million of positive claims development compared with $120 million of adverse
development in 2015, largely reflecting increased recoveries on a Group aggregate risk reinsurance program that
experienced significantly adverse (largely currency related) development in 2015.
Commission and expenses
The Group’s combined commission and expense ratio improved marginally to 34.0% from 34.2% in the prior period.
The commission ratio increased slightly to 17.5% from 17.3% in 2015, reflecting relatively strong growth in the higher
commission paying Emerging Markets division coupled with a business mix driven increase in the commission expense
ratio of Australian & New Zealand Operations and Equator Re.
The Group’s expense ratio improved to 16.5% from 16.9% in the prior period, due to a $136 million net reduction
in operating expenses. This included a $115 million reduction in costs as a result of the sale of the M&LS business
effective 1 October 2015, much of which is reflected in the significant improvement in North America’s expense ratio
during 2016, and is net of significant investment in Group-led strategic initiatives.
Excluding a one-off $22 million legal provision, the Group’s underlying expense ratio improved by 0.6%, slightly less
than our targeted ~1% improvement reflecting lower than projected net earned premium.
Net earned premium fell short of expectations in a number of portfolios/territories including as a result of significantly
lower Crop premium due to higher than budgeted government cessions on the back of a better than expected Crop
underwriting result. Premium levels were also adversely impacted by lower than expected commercial auto premium
as a result of aggressive remediation as well as the decision not to renew a number of significant underperforming
accounts and facilities in our European Operations.
21
overview
Performance
jurisdictions in which QBE operates. The prior year rate was higher than expected due to derecognition of deferred tax
in Australia and Europe.
QBE paid $203 million in corporate income tax to tax authorities globally in the year to 31 December 2016, including
$120 million in Australia. Income tax payments in Australia benefit our dividend franking account, the balance of which
stood at A$301 million as at 31 December 2016. The Group is therefore capable of fully franking A$702 million of dividends.
The combination of a higher payout ratio and increased profitability of non-Australian operations is anticipated to reduce
2
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Business
the franking account balance and shareholders should therefore expect the franking account percentage to reduce
to around 30% in 2017 and 2018.
Foreign exchange
3
As a significant proportion of our underwriting activity is denominated in US dollars, the Group’s financial statements
are presented in this currency. Assets and liabilities of all our foreign operations that have a functional currency different
from the Group’s presentation currency are translated to US dollars at the closing balance date rates of exchange and
Governance
income and expenses are translated at average rates of exchange for the period, with the foreign exchange movements
reported through the foreign currency translation reserve (component of equity).
QBE is also exposed to currency translation risk in relation to the ultimate parent entity’s net investment in foreign
operations (NIFO) to its functional currency of Australian dollars. QBE does not ordinarily seek to use derivatives
to mitigate this risk for the following reasons:
• currency translation gains and losses generally have no cash flow;
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Directors'
• currency translation gains and losses are accounted for in the foreign currency translation reserve and therefore
do not impact profit or loss unless related to the disposal of an entity; and
• management of translation risk needs to be balanced against the impact on capital requirements and liquidity risk.
5
In extended periods of extraordinary volatility, QBE may elect to utilise derivatives to mitigate currency translation risk
in order to preserve capital. Brexit is considered such an example and the Group commenced a GBP NIFO hedging
program in early July.
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Financial
The Group is exposed to foreign exchange risk from its various activities in the normal course of writing insurance
business and aims to minimise the impact on profit or loss through the timely matching of currency assets and liabilities,
with the use of currency derivatives to manage residual exposures. Foreign exchange gains or losses arising from
such foreign currency exposures are reported in profit or loss, consistent with the gains or losses from related forward
foreign exchange contracts. The impact of operational exchange movements in 2016 was a pre-tax gain of $125 million
compared with a loss of $20 million in the prior year. The volatility of foreign exchange rates (particularly sterling) 6
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Other
around the period following the Brexit vote combined with our hedging strategy resulted in a larger than usual foreign
exchange gain in the second half of 2016.
The table below shows the impact of foreign exchange on the 2016 result and balance sheet on a constant currency basis.
Impact of exchange rate movements
2016 AT 2015 EXCHANGE RATE IMPACT
2016 EXCHANGE
ACTUAL RATES 1
US$M US$M US$M %
Gross written premium 14,395 14,921 (526) (4)
Gross earned premium 14,276 14,782 (506) (4)
Net earned premium 11,066 11,533 (467) (4)
Net profit after tax 844 939 (95) (11)
Total investments and cash 25,235 27,086 (1,851) (7)
Total assets 41,583 44,813 (3,230) (8)
Gross outstanding claims provision 18,321 20,134 (1,813) (10)
Total liabilities 31,249 33,824 (2,575) (8)
Net assets 10,334 10,989 (655) (6)
1 Income statement items are restated to 31 December 2015 average rates of exchange and balance sheet items to 31 December 2015
closing rates of exchange.
22 Group Chief Financial Officer’s report
Balance sheet
Capital management summary
Consistent with a significantly strengthened capital position, during 2016 Standard & Poor’s changed the Group’s
outlook from “stable” to “positive” with Standard & Poor’s further referring to QBE Group’s capital adequacy as being
“at the AA level”.
A.M. Best and Fitch both reaffirmed the Group’s financial strength and issuer credit ratings at “stable”.
The Group undertook a number of capital management initiatives over the course of 2016, essentially replacing tier 2
debt subject to regulatory capital decay with new capital qualifying tier 2 subordinated debt.
Each transaction is discussed separately overleaf.
Capital summary
AS AT 31 DECEMBER 2016 2015
US$M US$M
Net assets 10,334 10,560
Less: intangible assets (3,627) (3,604)
Net tangible assets 6,707 6,956
Add: borrowings 3,474 3,529
Total capitalisation 10,181 10,485
At 31 December 2016, the Group’s indicative APRA PCA multiple was 1.79x, up from 1.73x a year earlier and our
excess over and above Standard & Poor’s minimum AA equivalent capital requirement further increased.
In light of the extent to which our capital position now exceeds Standard & Poor’s minimum AA equivalent capital
requirement, we remain comfortable with our regulatory capital position at around 1.7x PCA.
Key financial strength ratios
AS AT 31 DECEMBER BENCHMARK 2016 2015
Debt to equity 25% to 35% % 33.8% 33.6%
Debt to tangible equity % 52.2% 51.1%
PCA multiple 1 1.6x to 1.8x x 1.79x 1.73x
Premium solvency 2 % 60.6% 56.5%
Probability of adequacy of outstanding claims 87.5% to 92.5% % 89.5% 89.0%
1 Prior year APRA PCA calculation has been restated to be consistent with APRA returns finalised subsequent to year end.
2 Premium solvency ratio is calculated as the ratio of net tangible assets to net earned premium.
23
overview
Performance
During 2016, the Group established:
• a $600 million two year committed revolving credit facility, which matures on 31 March 2018. The facility was undrawn
at year end;
• a $4 billion medium term note issuance program in May 2016 which allows QBE to issue senior unsecured notes,
capital qualifying tier 2 subordinated debt securities and additional tier 1 securities to non-US investors and
subsequently incorporated the ability to issue to US investors in October 2016; and
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Business
• a $1.7 billion committed standby letter of credit facility with a $300 million accordion feature. This facility was created
for the purpose of providing letters of credit to support the Group’s Funds at Lloyd’s requirement.
The Group also executed the following transactions during the year:
• a tender exchange for £325 million tier 2 subordinated debt securities due 24 May 2041. £291 million was tendered
and exchanged for £327 million of new tier 2 subordinated debt securities maturing 24 May 2042; 3
Governance
• the call of £300 million of perpetual capital securities on their first call date. This transaction closed on 18 July 2016.
As a result of a previous liability management exercise, QBE already owned £292 million of these securities;
• an intermediated tender exchange for $1.0 billion tier 2 subordinated debt securities due 24 May 2041. $456 million
was tendered and exchanged for $524 million of new tier 2 subordinated debt securities maturing 17 June 2046; and
• a tender exchange for the full residual of $1.0 billion tier 2 subordinated debt securities due 24 May 2041 which were
not exchanged as part of the intermediated tender. $372 million was tendered and exchanged for $372 million of
new tier 2 subordinated debt securities maturing 21 November 2043. We issued an additional $28 million of new tier
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Directors'
subordinated debt securities maturing 21 November 2043 at an above par price of 111.5% to bring the total issuance
to $400 million.
The sterling tender exchange, the US dollar intermediated tender exchange and the US dollar tender exchange
transactions were designed to both:
• further optimise the Group’s capital efficiency. On 1 January 2016, the Group had $1.4 billion of tier 2 subordinated
debt that had become subject to $224 million of annual regulatory capital amortisation. As a result of these
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Financial
transactions the annual regulatory capital amortisation has been reduced to $33 million; and
• layer additional duration into the maturity profile and normalise the Group’s annual funding requirements.
At 31 December 2016, QBE’s ratio of borrowings to shareholders’ funds was 33.8%, up 0.2% from a year earlier and
6
within our benchmark range of 25%-35%. Debt to tangible equity was 52.2%, up marginally from 51.1% at 31 December
2015, having been adversely impacted by the stronger US dollar.
Interest expense on borrowings for the year was $213 million, down 1% from $215 million for the same period last year.
information
Other
The weighted average annual cash cost of borrowings outstanding at the balance sheet date reduced from 6.2% at
31 December 2015 to 5.9% at 31 December 2016.
All debt issuance in 2016 was undertaken by way of regulatory capital qualifying tier 2 subordinated debt. The weighting
towards regulatory capital qualifying tier 2 within the Group’s overall borrowing mix was stable at 74%, with incremental
duration being built in to the term structure.
Borrowings maturity 1 Borrowings profile
AS AT 31 DECEMBER 2016 2015 AS AT 31 DECEMBER 2016 2015
% % % %
Less than one year 9 – Subordinated debt 74 74
One to five years 27 30 Senior debt 17 17
More than five years 64 70 Capital securities 9 9
Further details of borrowings are set out in note 5.1 to the financial statements.
24 Group Chief Financial Officer’s report
1 Excludes Argentine workers’ compensation business that was held for sale at 31 December 2015.
The table above summarises our provision for net outstanding claims liabilities, separately identifying the central estimate
and risk margin.
As required by Australian Accounting Standards, net outstanding claims liabilities are discounted by applying sovereign
bond rates as a proxy for risk-free interest rates and not the actual earning rate on our investments.
The probability of adequacy of outstanding claims increased to 89.5% compared with 89.0% at 31 December 2015.
Net profit after tax would have increased by $16 million if the probability of adequacy was maintained at 89.0%.
As at 31 December 2016, risk margins in net outstanding claims were $1,088 million or 8.6% of the net central
estimate of outstanding claims compared with $1,260 million or 8.9% of the net central estimate of outstanding claims
at 31 December 2015. The decrease in the risk margin of $172 million includes a foreign exchange movement of
$39 million and a constant currency reduction of $132 million.
The reduction in the absolute level of risk margins during the period cannot be considered in isolation and reflects the
following significant impacts:
• reduced volatility in the net discounted central estimate as a result of both a track record of positive prior accident
year claims development and transactions to reinsure legacy US multi-line property and casualty (program) run-off
liabilities and UK long‑tail liabilities;
• the growing proportion of outstanding claims liabilities protected against adverse deterioration by the Group’s large
individual risk and catastrophe aggregate reinsurance program, purchased since 1 January 2015; and
• the impact of foreign exchange which has reduced both the net central estimate and risk margins in absolute terms.
Partly offsetting the above, QBE has elected to increase the level of risk margin to reflect potential changes to
statutory discount rates in relation to UK personal injury claims liabilities. Whilst the UK Ministry of Justice is expected
to announce a change to the statutory rates (Ogden tables), no details of the change have been published as at the
date of this report. The current allowance in the risk margin assumes a reduction in the statutory rate of around 1%
(i.e. a proposed rate of 1.5% compared with the current legislated rate of 2.5%) which QBE estimates would increase
the net central estimate by $33 million. If the statutory rate reduced by a further 0.5%, this would equate to an additional
increase in the net central estimate of $20 million. Beyond this allowance, each 0.5% reduction down to a zero statutory
rate would increase the net central estimate by around $28 million, albeit that the impact is not linear.
25
overview
Performance
During the year, the carrying value of intangibles increased by $23 million primarily due to the capitalisation
of expenditure in relation to various information technology projects across the Group and costs associated with
the purchase of our 35% fixed share of the South Australian CTP liability market, largely offset by amortisation and
exchange rate movements.
At 31 December 2016, QBE reviewed all material intangibles for indicators of impairment, consistent with the Group’s
policy and the requirements of the relevant accounting standard. A detailed impairment test was completed in relation
2
review
Business
to our North American goodwill balance ($1,543 million), which indicated headroom at the balance date of $98 million
compared with $196 million at 31 December 2015 and $79 million at 30 June 2016. The valuation remains highly
sensitive to a range of assumptions, in particular to increases in the forecast combined operating ratio used in the
terminal value calculation and changes in discount rate and long‑term investment return assumptions.
Details of the sensitivities associated with this valuation are included in note 7.2.1 to the financial statements.
Governance
2016 was a very eventful year in terms of geopolitical and investment market developments, with significant volatility
experienced throughout the year.
Bond yields in aggregate ended the year little changed from where they began, with QBE’s currency-weighted two year
sovereign bond yields falling 14bps to 1.0% and the 10 year equivalent falling 16bps to 2.14%.
The year included two very distinct halves in terms of investment performance. During the first half of 2016, yields fell 4
Report
Directors'
sharply (100bps on 10 year sovereign bonds) from already historically low levels, exacerbated by the Brexit vote in late
June. During the second half of the year, bond markets reversed their course with a significant steepening of global
yield curves precipitated by the surprise outcome of the US election result in early November.
Credit spreads were somewhat more stable by comparison, although averaged higher levels in the first half of the year
before settling into a lower range and ending the year a little tighter.
After a poor start to the year, equity markets moved higher, recovering quickly from the Brexit vote and even more
5
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Financial
quickly from the unanticipated Trump victory, to end the year having posted reasonable returns in aggregate.
The portfolio underwent some notable changes during 2016. Modified asset duration was extended from 0.9 years
to 1.5 years, introducing a degree of stabilisation into performance volatility from an investment return perspective but
also consistent with our strategy of reducing the mismatch between asset and liability duration over time. Although
we added further modest exposure to structured credit and corporate bond holdings, the credit quality of the portfolio
remains conservative relative to global peers. We also altered the mix of our allocation to alternative investments,
introducing infrastructure assets for increased transparency, predictability and stability of returns but also to raise the
6
information
Other
real asset/inflation protection component of the portfolio.
Spread duration, the key measure of our sensitivity to changes in credit spreads, finished the year at a similar level to
where it began at around 1.4 years; however, again it was a tale of two halves: credit duration was extended during the
first half as spreads widened, then subsequently reduced as a result of profit-taking as spreads narrowed toward the
end of the year.
The fixed income portfolio benefited from credit spreads finishing the year tighter and delivered a 2.4% return. Growth
assets delivered a blended return of 3.0% with unlisted property a key contributor. The overall net portfolio return was
slightly below target at 2.4%, with the return shortfall largely driven by mark-to-market capital losses on longer duration
fixed income securities post the US election result.
Looking ahead, we expect recent market volatility to continue and will maintain our conservative stance enabling
us to take advantage of any further market dips to enhance portfolio returns.
26 Group Chief Financial Officer’s report
1 Includes total realised and unrealised gains on investments of $109 million (2015 $92 million) comprising gains on investments supporting
policyholders’ funds of $62 million (2015 $57 million) and shareholders’ funds of $47 million (2015 $35 million).
1 Gross yield is calculated with reference to gross investment income as a percentage of average investment assets backing policyholders’
or shareholders’ funds as appropriate.
2 Net yield is calculated with reference to net investment income as a percentage of average investment assets backing policyholders’ or
shareholders’ funds as appropriate.
3 Net investment income and other yield is calculated with reference to net investment and other income as a percentage of average
investment assets backing policyholders’ or shareholders’ funds as appropriate.
overview
Performance
GROWTH ASSETS AND CASH
AS AT 31 DECEMBER 2016 2015 AS AT 31 DECEMBER 2016 2015 2016 2015
% % % % % %
S&P rating US dollar 49 45 32 31
AAA 16 17 Australian dollar 28 37 31 30
AA
A
37
36
37
38
Sterling
Euro
11
12
12
6
18
8
21
8 2
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Business
<A 11 8 Other – – 11 10
Dividend
Our dividend policy is designed to ensure that we reward shareholders relative to cash profit and maintain sufficient
capital for future investment and growth of the business.
The final dividend for 2016 will be 33 Australian cents per share, up 10% compared with the 2015 final dividend
3
Governance
of 30 Australian cents per share. Combined with the 2016 interim dividend of 21 Australian cents per share, the total
dividend for 2016 will be 54 Australian cents, up 8% compared with the 2015 total dividend of 50 Australian cents
per share.
4
The dividend will be franked at 50% and is due to be paid on 13 April 2016. The dividend reinvestment programs will
continue at a nil discount with demand for shares under the Dividend Reinvestment Plan to be satisfied by acquiring
shares on-market. As previously noted, the franking percentage is expected to reduce to around 30% in 2017 and 2018.
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Directors'
The payout for the 2016 full year is A$741 million or around 61% of cash profit calculated by converting cash profit to
Australian dollars at the average rate of exchange during the period. The calculation of cash profit is shown on page 16.
In conjunction with the announcement of the 2016 final dividend and to recognise the Group’s already strong and
5
increasing surplus capital position but limited franking capacity, QBE has established a three year cumulative on-market
buyback facility of up to A$1 billion, with a current target of not more than A$333 million in any one calendar year.
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Financial
Closing remarks
I am pleased with our performance during 2016, particularly in the second half of the year. We performed strongly
against our combined operating ratio target of 94% – 95% and made progress in restoring the attritional claims ratio
in our Australian & New Zealand Operations, particularly in the final quarter.
That said, we believe that there remain significant opportunities for improvement across the Group.
Our priorities for 2017 will focus on the following key areas;
6
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Other
• capitalise on the efficiency benefits of our refined and restructured reinsurance program;
• drive our expense ratio below 16%;
• achieve profitable organic growth where it is available;
• sustain earnings stability and continue to deliver positive prior accident year claims development;
• maintain a strong capital position and strong cash remittances to the Group centre; and
• provide capital and dividend growth for our shareholders.
Patrick Regan
Group Chief Financial Officer
28
Divisions
at a glance
North American Operations
4,647 2%
from 2015 2 3,318 1%
from 2015 2
97.8% 1 99.2%
in 2015 4.7% 1 2.5%
in 2015
European Operations’ business units are aligned Equator Re, as part of the broader Global
by geography and/or distribution characteristics. Reinsurance Operations team, is instrumental in
Retail distributes commercial and specialty managing the Group’s exposure and reinsurance
products in the UK and continental Europe. risk appetites. In doing so, Equator Re works
International Markets is a global specialty business
closely with divisions to bridge the gap between
using the Lloyd’s platform (and includes Canada)
and QBE Re is a global reinsurance business. their risk appetites and that of the Group.
Gross written premium Net earned premium 3 Gross written premium 6 Net earned premium 6
US$ million US$ million US$ million US$ million
4,076 7%
from 2015 4 3,115 10%
from 2015 5 1,349 34%
from 2015 468 28%
from 2015
Combined operating ratio Insurance profit margin Combined operating ratio Insurance profit margin
93.6% 3 89.1%
in 2015 10.1% 3 13.4%
in 2015 70.7% 6 89.0%
in 2015 35.0% 6 28.1%
in 2015
29
overview
Performance
2
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Business
3
Governance
4
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Directors'
5
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Financial
Emerging Markets Australian & New Zealand 6
Operations
information
Other
This division has a meaningful footprint with
leading positions across many of the world’s A diversified general insurer providing cover for
most attractive emerging markets. With its commercial and personal risks. Our strong customer
customer base, distribution partners and product focus, disciplined underwriting and strong capital
range, it is uniquely positioned to continue base assists consumers and business to mitigate and
to deliver profitable growth over the long-term. manage risk while delivering strong and stable returns.
Gross written premium Net earned premium Gross written premium Net earned premium
US$ million US$ million US$ million US$ million
1,632 6%
from 2015 7 1,328 8%
from 2015 8 3,933 4%
from 2015 9 3,410 4%
from 2015 9
Combined operating ratio Insurance profit margin Combined operating ratio Insurance profit margin
1 Adjusted for transactions to reinsure run-off liabilities. 5 Down 6% on a constant currency basis.
2 Prior period comparable figures exclude premium associated 6 Adjusted for North American Operations loss portfolio transfer transaction.
with the sale of M&LS in 2015. 7 Up 10% on a constant currency basis.
3 Adjusted for transactions to reinsure UK long‑tail liabilities. 8 Up 8% on a constant currency basis.
4 Down 3% on a constant currency basis. 9 Up 5% on a constant currency basis.
30
4,647 3,318 72 1 1
155 1
2% from
2015
2
1% from
2015
2
$42M from
2015 $62M from
2015
Combined operating ratio Insurance profit margin
2016 overview
North American Operations is a specialist insurance and reinsurance franchise focused on four key
business units: Property & Casualty (formerly known as Standard Lines and includes commercial and
personal lines), Specialty, Crop and Assumed Reinsurance (a component of QBE’s global reinsurance
business headquartered in London).
Over the course of 2016, premium rates remained flat overall, compared with a modest 0.4%
increase in the prior corresponding period. It has become increasingly important to drive continuous
improvement in how we define, target, select and price risk while driving greater efficiency and
enhancing customer experience. Our investment in both talent and analytics has helped us to improve
profitability whilst ensuring that we remain focused on areas where we have a competitive advantage.
North American Operations has established a strong Specialty business that continued to grow
profitably with discipline in core segments of accident and health and errors and omission. Our Crop
business outperformed expectations, generating a superior underwriting return. Notwithstanding
significant challenges in commercial auto, our Property & Casualty business continues to improve
while results in our Reinsurance business met expectations.
During 2016, a decision was taken to exit the mono-line commercial auto segment. This included
the termination of a major program and the reinsurance of all related outstanding claims and
unearned premium reserves to the Group’s captive, Equator Re. The exit of this portfolio represented
approximately half of the overall commercial auto portfolio. We also reinsured legacy multi-line
property and casualty (program) run-off liabilities to a third party.
Collectively, these strategic decisions will remove management distractions, sharpen our Property & Casualty
underwriting focus, improve property and casualty earnings quality and enhance capital efficiency.
overview
Performance
The aforementioned reinsurance transactions resulted in
a reinsurance expense of $587 million with a consequent impact
on net earned premium, more than offset by a $603 million
reduction in net incurred claims. In addition to reducing the level
of uncertainty in the remaining net discounted central estimate,
as highlighted in the table below, the reinsurance transactions
improved North American Operations’ combined operating 2
review
Business
ratio by 0.8% (with an 8.2% positive impact on the net claims
ratio largely offset by a 7.4% adverse impact on the combined Gross written premium and
commission and expense ratio). net earned premium (US$M)
In order to assist year on year comparability, the underwriting
4,647
commentary hereafter refers to the 2016 results excluding the
3
2016
3,318
impact of these reinsurance transactions.
4,961
Governance
2015
North American Operations delivered an improved combined 3,666
operating ratio of 97.8% compared with 99.2% in 2015. The results
5,310
benefited from an outstanding Crop performance, largely offset by 2014
4,471
continued and significant challenges in commercial auto. We have
exited our mono-line commercial auto portfolio, which reported
4
2013 5,951
an underwriting loss of $105 million. 5,030
Lower corn and soybean pricing coupled with farmers opting 6,565
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Directors'
2012
5,625
for higher deductibles adversely impacted Crop gross written
premium. Nevertheless, the Crop business performed extremely
well, outperforming industry average profitability.
Gross written premium 2%
Our maturing Specialty franchise is delivering strong and profitable
Net earned premium 1%
growth across core business in accident and health and errors and
omissions. Specialty saw 50% premium growth while continuing
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Financial
to diversify across a number of businesses, including directors and
officers, transactional liability, aviation and inland marine. Combined operating ratio (COR)
and insurance profit margin (IPM) (%)
The insurance profit margin improved to 4.7% from 2.5% in 2015.
COR IPM
111.5
Underwriting result
6
100.8
102.2
120 20
99.2
97.8
FOR THE YEAR ENDED 2016 1
31 DECEMBER 2016 2015 2 2014 2 2013 2 2012 2 90
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Other
ADJUSTED 15
Gross written
premium US$M 4,647 4,647 4,961 5,310 5,951 6,565 60 10
Gross earned
premium US$M 4,657 4,657 4,930 5,457 6,225 6,984 30 5
Net earned premium US$M 2,731 3,318 3,666 4,471 5,030 5,625
Net incurred claims US$M 1,528 2,131 2,323 3,023 3,804 4,038 0 0
Net commission US$M 564 564 635 698 795 883
Expenses US$M 556 551 678 788 1,011 830 (5)
Underwriting result US$M 83 72 30 (38) (580) (126)
Net claims ratio % 56.0 64.2 63.4 67.6 75.6 71.8 (10)
Net commission ratio % 20.7 17.0 17.3 15.6 15.8 15.7 2012 2013 2014 2015 2016
Expense ratio % 20.4 16.6 18.5 17.6 20.1 14.7 Combined commission Insurance profit margin
and expense ratio IPM 5 year average
Combined
operating ratio % 97.0 97.8 99.2 100.8 111.5 102.2 Net claims ratio
Adjusted combined
operating ratio 3 % 97.7 98.5 99.8 100.4 – –
Insurance profit
margin % 6.1 4.7 2.5 0.2 (10.6) (1.0)
Premium income
North American Operations’ gross written premium declined 6%
to $4,647 million compared with $4,961 million in 2015. Excluding
$383 million of premium from the M&LS business that was sold
in 2015, gross written premium increased 2%.
Strong growth in Specialty continued with gross written premium
up $211 million or 50% relative to prior period. New business
across the segment almost doubled with a diversity of growth
across the portfolio including accident and health, errors and
omissions and transactional liability, as well as from the addition
Gross earned premium of new specialty programs. Growth in Specialty outpaced
by class of business 2016 reductions
Other across Property & Casualty and Crop, resulting
in modest growth overall.
Property & Casualty
Financial & credit premium declined 5% as a result of continued
underwriting action in underperforming areas and new business
shortfalls, primarily
Marine energy in our program business. The reduction
& aviation
in premium was largely due to commercial lines where an
increasingly competitive property premium rate environment
Professional indemnity
and corrective underwriting actions in auto led to lower premium
production. Conversely, we continue to see strong growth in the
affiliated agencies
Accident & health business within Property & Casualty, which
overview
Performance
The commission ratio decreased to 17.0% from 17.3% in 2015, reflecting a lower proportion of higher commission
paying program business.
North American Operations’ expense ratio decreased to 16.6% from 18.5% in the prior year and included a 1.4% benefit
associated with the sale of M&LS in 2015. The improvement in the expense ratio was less than anticipated due to lower
2
than budgeted premium revenue as a result of significantly higher government cessions on the back of better than
expected crop profitability.
review
Business
Having stabilised net earned premium and indeed resumed (albeit modest) growth, additional expense management
efforts are underway. These include streamlining and modernising our technology and operating infrastructure,
consistent with a simplified business strategy. North American Operations is in the process of further consolidating
its real estate footprint and increasing utilisation of the Group Shared Services Centre (GSSC) in the Philippines.
Excluding the sale of M&LS, over $40 million of cost savings were achieved during 2016, which was partially offset
by non-recurring rationalisation charges and investment in ongoing initiatives.
Summary
3
Governance
North American Operations continues its focus on building a specialist franchise that delivers profitable organic growth
by building market leading and proprietary products tailored to customer needs. Since 2013, Specialty has launched
nine new business units and has developed a culture of innovation and excellence with over 30 new products brought
to market. We have a well-diversified portfolio, anchored around accident and health and errors and omissions,
augmented with offerings across directors and officers, transactional liability, aviation and inland marine. This has
allowed us to develop an organic growth capability that we are now leveraging across the Property & Casualty portfolio.
4
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Directors'
We have launched an “excess and surplus lines” business and are building out our existing personal lines platform
to further enhance portfolio diversification. The Property & Casualty franchise is moving forward with a more focused
distribution footprint. Our value proposition is centred around the scale of our Specialty and Property & Casualty
product offerings and our delivery of integrated capabilities to customers. Our high quality Crop and Reinsurance
businesses are also integral, providing additional portfolio diversification and confidence in posting a further improved
underwriting result in 2017.
Implementation of a series of initiatives focused on claims, analytics and human capital are well underway as we
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Financial
continue to build sustainable financial results and brand value. In 2016, we started deploying advanced analytics to
enable claims triage, subrogation and anti-fraud capabilities to improve recoveries as well as third party management
to ensure we drive a positive customer experience with efficient and effective practices. In addition, utilisation of
machine learning is improving our analytical capabilities with respect to customer analysis and underwriting which
is driving improved decision making at a transactional and portfolio level across our businesses. The introduction of
drone technology in our crop business has enabled us to better serve our customers. Over the course of 2017, we will 6
increase our deployment of analytics and technology to improve business optimisation throughout the North American
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Other
Operation. Moreover, continued development of a performance-driven and results-focused culture, while building
in house technical expertise through the launch of our underwriting academy, further underpins our confidence in
delivering on our medium‑term financial targets.
2016 provides a window into the emerging strength of the North American platform. This follows significant
organisational change undertaken in 2013 and the repositioning achieved thereafter. This change included the
build‑out of Specialty, improvements to our Crop business, remediation of Property & Casualty and the sale of M&LS,
all of which contributed to a return to profitability in 2015 followed by significant further improvement in 2016. With
the transformation nearing completion, our 2016 performance evidences the breadth and depth of capabilities our
new operating model provides and underpins our confidence in sustaining modest growth while driving to a mid-90s
combined operating ratio over the medium‑term.
As we continue to strengthen the diversity of our leadership team, we were pleased to announce the appointment
of Kris Hill who joined as our new Chief Financial Officer replacing Richard Dziadzio, who left the company in mid-2016.
The strength of the QBE brand has positioned us well to continue to attract the best and brightest to our organisation.
34
European Operations
business review
European Operations delivered another strong
underwriting performance during a year of further
deterioration in trading conditions, an industry-wide
increase in large risk and catastrophe claims activity and
unprecedented currency fluctuation.”
Richard Pryce
Chief Executive Officer • European Operations
4,076 3,115 1
199 1
314 1
7% from
2015
2
10% from
2015
3
$178M from
2015 $150M from
2015
Combined operating ratio Insurance profit margin
2016 overview
Trading conditions deteriorated in line with our planning assumptions in most areas. The weighted
average premium rate reduction on renewed business in the year was 2.4%, reflecting a slight
improvement in the second half and better than the 3.2% average reduction experienced in 2015.
Gross written premium fell short of expectations this year due to our commitment to underwriting
discipline and the lack of acceptable new business opportunities. Given our decisions not to renew
a few significant underperforming accounts and facilities, the overall retention level is very pleasing.
Much of the success around retention is attributable to our strong customer engagement and our
commitment to building meaningful and sustainable relationships.
Following the European Union referendum in June and the increasingly likely outcome that we can
no longer effectively access the European single market from the UK, we are well advanced in our
business restructure planning.
overview
Performance
As reported at the half year, reinsurance transactions undertaken
to reduce exposure to UK long‑tail liabilities benefited net claims
incurred by $168 million and reduced net earned premium by
$166 million. Although almost profit neutral, the transactions improved
European Operations’ 2016 combined operating ratio by 0.4%.
In order to assist year on year comparability, the commentary
hereafter refers to the 2016 results excluding the impact of these
2
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Business
reinsurance transactions.
Gross written premium and
After a significant adverse discount rate impact during the first half
net earned premium (US$M)
of the year, risk-free rates in most of our major currencies increased
during the second half. Despite this improvement, the full year 4,076
3
2016
underwriting result included an $89 million or 2.9% adverse impact 3,115
compared with a $21 million or 0.6% benefit in 2015. 4,386
Governance
2015
3,454
Excluding the impact of movements in risk-free rates, the combined
operating ratio deteriorated slightly to 90.7% from 89.7% in 4,526
2014
the prior period. While all three business units reported strong 3,929
underwriting performances, QBE Re experienced heightened
4
5,236
catastrophe incidence following an especially benign 2015. 2013
4,160
European Operations’ insurance profit margin was 10.1% 5,162
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Directors'
compared with 13.4% in 2015. 2012
3,971
Gross written
premium US$M 4,076 4,076 4,386 4,526 5,236 5,162
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Financial
Gross earned
premium US$M 3,878 3,878 4,338 4,805 5,146 4,903 Combined operating ratio (COR)
Net earned premium US$M 2,949 3,115 3,454 3,929 4,160 3,971 and insurance profit margin (IPM) (%)
Net incurred claims US$M 1,658 1,826 1,844 2,362 2,486 2,441
Net commission US$M 574 574 634 718 768 699 COR IPM
6
120 16
Expenses US$M 516 516 599 626 646 607 93.6
89.1
94.4
94.3
93.7
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Other
90
Net claims ratio % 56.2 58.6 53.4 60.1 59.7 61.5
Net commission ratio % 19.4 18.4 18.4 18.3 18.5 17.6
60 8
Expense ratio % 17.5 16.6 17.3 15.9 15.5 15.3
Combined
4
operating ratio % 93.2 93.6 89.1 94.3 93.7 94.4 30
Adjusted combined
operating ratio 3 % 90.2 90.7 89.7 – – – 0 0
2012 2013 2014 2015 2016
Insurance profit
margin % 10.7 10.1 13.4 8.8 9.0 10.9 Combined commission Insurance profit margin
and expense ratio IPM 5 year average
1 Adjusted for transactions to reinsure UK long‑tail liabilities.
2 Adjusted for transactions to reinsure Italian and Spanish medical Net claims ratio
malpractice liabilities.
3 Combined operating ratio adjusted to exclude the impact of changes in
risk-free rates used to discount net outstanding claims. Management-basis
results were not reported in 2014 and prior.
Premium income
Headline gross written premium fell 7% to $4,076 million due
to the significantly weaker sterling, disciplined underwriting actions
and fewer acceptable new business opportunities.
On a constant currency basis gross and net earned premium
declined by 3% and 6% respectively.
During the year new business activity was less than anticipated
as in many cases, new business profit margins were deemed
unacceptable. Despite corrective underwriting action on a small
number of high profile accounts, we recorded an improved premium
retention level of 82.7% compared with 80.5% in the prior period.
36 European Operations business review
Summary
During a year in which the ongoing competitive landscape has been
compounded by increased global large risk and catastrophe claims
activity and sterling’s devaluation, European Operations delivered
another strong result along with operational improvements that
have reduced the expense base and enhanced efficiency.
Our commitment to underwriting excellence and preserving
margins remains central to our success. Regardless of market
conditions we will not waiver from this principle as it is now more
important than ever.
QBE’s vision to build the strongest partnerships with customers
is embedded in our culture and we are fortunate to have many
excellent customer and broker relationships across our insurance
and reinsurance businesses.
There were two changes to our Executive team in 2016 and,
pleasingly, they were both internal promotions. Mike East assumed
the Claims Director role and Nigel Terry was appointed Chief Risk
Officer at the end of the year.
The European Operations’ team remained focused and committed
during a difficult year and I appreciate their support and dedication.
37
overview
Performance
Operations business review
2
Increased average claim size and frequency saw our
review
Business
attritional claims ratio deteriorate in the first half of 2016.
Decisive action undertaken since, including premium rate
increases and claims cost management initiatives, has
seen the attritional claims ratio improve in the second half
3
Governance
of 2016 with further improvement expected in 2017.”
Pat Regan
Chief Executive Officer • Australian & New Zealand Operations
4
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Directors'
Gross written Net earned Underwriting Insurance
premium premium result profit
US$ million US$ million US$ million US$ million
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Financial
2015 2015 2015 2015
Combined operating ratio Insurance profit margin
%
87.9
120 20
90.6
92.7
91.3
overview
Performance
retention remained above 80%.
Over the 24 months to the balance date, we have increased our
NSW CTP premium rates by 21% with a further 3% increase
applicable from 1 February 2017. We continue to work closely
with the government in relation to the proposed reforms that aim
to deliver a fairer and more sustainable scheme. 2
review
Business
Claims expense
Gross earned premium
The net claims ratio increased to 63.7% from 62.6% in the prior
by class of business 2016
year due to an increase in the attritional claims ratio, which was
largely offset by positive prior accident year development.
The substantial deterioration in the attritional claims ratio reported
in the interim result remained a negative factor, however, and as
3
Governance
noted previously, remediation actions have started to address this.
The full effect of these initiatives will come through as premium
is earned in 2017.
The increase in the attritional claims ratio was driven by an increase
in NSW CTP small claims frequency (exacerbated by substantial
growth in the CTP portfolio itself) and heightened claims costs across
our short‑tail portfolios as a result of increased average claim costs.
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Directors'
The gross cost of large individual risk and catastrophe claims
increased in 2016 driven by the frequency of large individual risk
2016 2015
claims throughout the year and the New Zealand earthquake in % %
November. The net cost, however, remained within our allowances
5
Commercial & domestic property 33.3 33.7
as a result of recoveries against our aggregate reinsurance cover. Motor & motor casualty 25.6 23. 1
Prior accident year claims development across our long‑tail Financial & credit 11.0 12.7
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Financial
portfolios remained positive, contributing $147 million to the result Public/product liability 7.9 8.7
compared with $120 million in the prior corresponding period and Workers' compensation 7.4 7.2
$83 million at the half year. Agriculture 5. 1 5.2
Accident & health 4.4 4.0
Risk‑free rates used to discount net outstanding claims liabilities
increased from the very low levels seen at 30 June 2016, to end
the year very close to 31 December 2015 levels. As a result, the
Marine energy & aviation
Professional indemnity
Other
2.8
2.3
0. 1
3.0
2.3
0. 1
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Other
$33 million adverse discount rate impact at 30 June reduced
to $9 million at 31 December 2016, in line with the full year 2015
discount rate impact.
Commission and expenses
The acquisition cost ratio remained relatively stable at 29.0%
compared with 28.7% in 2015.
The commission ratio increased slightly to 15.0% from 14.7%
in the prior period, reflecting the aforementioned growth in our
New Zealand business at generally higher commission rates
compared with our Australian business. Portfolio mix changes
within our intermediary business and growth in our affinity
business also contributed to the minor increase.
The underwriting expense ratio remained stable at 14.0%.
Continued focus on expense management, both locally and
in our Group Shared Services Centre (GSSC), offset the loss
of income from our Victorian Workers’ Compensation Managed
Fund business (from 30 June 2016), the loss of agency income
associated with the sale of CHU and UAA (from 1 April 2015)
and an increase in technology investment spending – specifically
the implementation of the Guidewire system for our direct and
CTP businesses.
40 Australian & New Zealand Operations business review
Summary
Competition remained strong in 2016. Nonetheless, our market leading position in each of the broker, underwriting
agency and affinity distribution channels has stood us in good stead as we have progressed remediation actions across
underperforming products.
Our remediation program, which is managed through a number of work streams with strong governance and ongoing
monitoring, is focusing on improved profitability. We have already implemented a range of initiatives to improve our risk
selection, claims performance and attritional claims costs.
Whilst we have acted decisively, remediation initiatives have only been in place for four months. Nevertheless, we are
encouraged by the progress to date and are achieving desired premium rate increases with the market following in most
areas. We have made some progress in claims management but acknowledge that there remains a significant amount
of work to do in order to ensure market best practice is achieved.
The insurance market and the insurance cycle is dynamic and we recognise the need to be agile and responsive in order
to ensure sustainable profitability over the cycle.
Our ongoing investment in systems, digitisation and further development of data and analytics is helping to deliver
better customer experience, better customer insights and improve retention and growth.
The leadership team has been strengthened with the appointment of Declan Moore as Chief Underwriting Officer,
Bettina Pidcock as Executive General Manager Marketing, Andrew Broughton as Executive General Manager
Corporate Partners & Direct, Jon Fox as Executive General Manager Claims and, from 1 March 2017, Inder Singh
as Chief Financial Officer.
Since assuming the position of Chief Executive Officer I have thoroughly enjoyed working closely with the talented staff
in our Australian & New Zealand Operations. We have developed a strong plan to take our business forward and have
already achieved a huge amount of improvement over a short period. I would like to thank everyone for their efforts and
commitment and I remain optimistic and excited about the year ahead.
41
overview
Performance
business review
2
Emerging Markets delivered a solid result in 2016, recording
review
Business
a stable combined operating ratio and double-digit gross
written premium growth. We remain focused on winning
and retaining business where we see the highest potential
for further profitable growth.”
3
Governance
David Fried
Chief Executive Officer • Emerging Markets
Report
Directors'
Gross written Net earned Underwriting Insurance
premium premium result profit
US$ million US$ million US$ million US$ million
1,632 1,328 6 73 5
6% from 1
8% from 2
$5M from
$2M from
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Financial
2015 2015 2015 2015
Combined operating ratio Insurance profit margin
6
information
Other
2016 overview
In 2016, Emerging Markets posted solid underlying growth and a strong combined operating ratio
through the continued implementation of the profitable growth strategy.
On a constant currency basis, gross written premium and net earned premium grew by 10% and
8% respectively, largely due to an enhanced focus on driving profitable growth in four key areas
of business: specialty, commercial, SME and personal lines with strategic partners.
The division also recorded a stable combined operating ratio of 99.5% despite several large individual
risk and catastrophe claims during the year. The underwriting results were protected by an improved
reinsurance structure implemented in 2016.
This solid overall performance can be attributed to close management of portfolios, strategic
remediation and tight expense control. In December 2016, following a business review to address
Latin American underwriting margins, the QBE Group entered into an agreement to sell 3 its small
and currently unprofitable Chilean operations to the current management team of QBE Chile Seguros
Generales S.A.. Additionally, the Group finalised the buyout of the remaining 45% of paid-up shares
of the joint venture operation in Indonesia previously held by PT Pool Advista Indonesia Tbk and
purchased an additional 23% stake in our Indian joint venture, Raheja QBE.
To sustain long‑term growth ambitions, Emerging Markets continues to pursue improvements in
productivity, efficiency and consistency through implementation of a single operating model across
the division. A new operating structure has been introduced in Hong Kong to ensure QBE is well
positioned to meet the evolving business needs in this market.
120 12
Underwriting result
99.5
99.2
95.6
97.5
60 6
Gross written premium US$M 1,632 1,728 1,791 1,825 1,514
Gross earned premium US$M 1,588 1,687 1,706 1,703 1,423
30 3 Net earned premium US$M 1,328 1,436 1,469 1,419 1,157
Net incurred claims US$M 721 788 878 769 606
0 0 Net commission US$M 312 336 354 346 289
2012 2013 2014 2015 2016
Expenses US$M 289 301 271 269 211
Combined commission Insurance profit margin Underwriting result US$M 6 11 (34) 35 52
and expense ratio IPM 5 year average
Net claims ratio % 54.3 54.8 59.8 54.2 52.4
Net claims ratio
Net commission ratio % 23.5 23.4 24.1 24.4 25.0
Expense ratio % 21.8 21.0 18.4 18.9 18.2
Combined operating ratio % 99.5 99.2 102.3 97.5 95.6
Adjusted combined
operating ratio 2 % 99.5 99.2 102.3 – –
Insurance profit margin % 5.5 4.9 2.6 4.5 6.8
overview
Performance
on a constant currency basis.
In Asia Pacific, gross written premium reached $765 million
with the stronger US dollar limiting headline growth to only 1%.
On a constant currency basis, however, gross written and net
earned premium increased by 3% and 4% respectively, with Papua
New Guinea, Vietnam, Fiji, and Solomon Islands all achieving 2
review
Business
double-digit gross written premium growth. In 2016, QBE entered
into a 10-year exclusive distribution agreement with Manulife Gross earned premium
in Hong Kong, further strengthening our access to the retail by class of business 2016
segment beyond the existing bancassurance network.
In Hong Kong, QBE ranked first in market share in both
engineering (9%) and workers’ compensation (17%) and second
in mortgage insurance (19%). QBE ranked second in market
3
Governance
share in marine hull & liability (23%) and third in cargo (9%)
in Singapore, second in marine (8%) in Malaysia and marine hull
(10%) in Indonesia. QBE also retained its leading market positions
in Hong Kong, Singapore and the Pacific Islands.
In Latin America, the stronger US dollar drove an 11% decline
in gross written premium to $867 million. On a constant currency
4
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Directors'
basis, however, gross written and net earned premium grew
strongly by 16% and 11% respectively. Solid underlying growth
in gross written premium was mainly driven by Argentina (36%),
2016 2015
Brazil (21%) and Mexico (18%). A continued and deliberate shift % %
in the business mix towards writing more commercial, specialty
5
Motor & motor casualty 28.9 33.9
and SME risks also contributed to overall growth. Commercial & domestic property 28.2 26.5
In Argentina, QBE ranked first in cargo insurance (19%). In Ecuador, Marine energy & aviation 11.6 11. 1
Report
Financial
where QBE is the third largest private general insurer with a 12% Workers' compensation 9.8 8.7
market share, QBE ranked second in both motor (16%) and property Accident & health 8.8 7.4
insurance (14%). We also maintained our leading position in the Public/product liability 5.5 5.8
Brazilian travel sector with a 36% market share through partnerships Professional indemnity 2.4 2.2
with local travel assistance operators.
Collaboration between divisions continues to deliver benefits for
Life
Financial & credit
Agriculture
1.9
1.6
1.2
0.2
1.3
1.4
6
information
Other
Latin America. For example, we have had new business success Other 0. 1 1.6
with a combined hull and machinery/protection and indemnity
product that drew on British Marine’s expertise. Based on
strengthened relationships with MTPs, several significant accounts
were also added during the year, including the Museum of Latin
American Art in Buenos Aires and an alliance with one of the main
construction companies in Colombia.
Claims expense
Cyclone Winston in Fiji resulted in some 90 claims totalling
approximately $30 million for the QBE Group, with a $12 million
net impact to Asia Pacific.
April’s earthquake in Ecuador resulted in around 12,000 claims
totalling approximately $80 million, which translated into
a $13 million net impact to Latin America. Also in April, flooding
in the business district of Chile’s capital of Santiago resulted
in a further $6 million net claim impact.
Despite these events, the net claims ratio improved from 54.8%
to 54.3%, mainly reflecting a remediation-led improvement in the
attritional claims ratio in Latin America.
Following the Ecuadorean earthquake, QBE used drone technology
to expedite the handling of claims, enabling us to settle 90% of
large claims within 90 days of the event. Rapid settlement of claims
in Ecuador, as well as in Fiji, positively reinforced QBE’s brand.
44 Emerging Markets business review
Summary
In line with the ongoing implementation of the Emerging Markets profitable growth strategy, the division delivered
another solid result in 2016.
In Asia Pacific, profitability remains encouraging amid challenging market conditions reflecting the strength of our
franchise. In Latin America, we continue to closely monitor portfolio performance and will remediate where necessary
to improve underwriting performance.
In sustaining a solid growth trajectory, we will focus exclusively on winning and retaining high quality business in both
Asia Pacific and Latin America. Having regard to the Group’s core strengths and capabilities, we will remain focused
on the four areas where we see the highest potential for profitable growth: commercial, specialty, SME and personal
lines with strategic partners. In 2016, these core areas of business grew by more than 20%.
Across these four core areas and especially in segments such as marine and construction, we continue to be positively
impacted by international trade flows and by rising infrastructure investment in both regions. Specific to personal lines,
we are building additional strategic partnerships in both bancassurance and affinity to enable us to access target
customers without needing to create our own retail distribution network.
The implementation of a single operating model across Emerging Markets is also enhancing productivity, efficiency
and consistency. We continue to strengthen our underwriting capabilities through the regional centres of excellence
and locally through the QBE Underwriting Academy program. A number of senior management appointments and
changes have also been made to ensure the right team is in place to deliver on our profitable growth promise.
Evidencing our efforts, in 2016 we won of a number of awards. In Indonesia, we were presented with the Best Financial
Performance General Insurance Company 2016 award by the Indonesian business magazine Warta Ekonomi.
In Singapore, QBE was named the Best General Insurance Company 2016 by World Finance magazine. In the
CFO Innovation Awards, QBE was voted the Best Trade Credit Insurance provider in Asia. QBE was also shortlisted
as one of the top three insurers in the ‘General Insurance Company of the Year’ category in the Asia Insurance
Industry Awards.
I would like to take this opportunity to thank my colleagues in Asia Pacific and Latin America for their ongoing
commitment and for delivering another solid result for our shareholders.
45
overview
Performance
business review
2
Equator Re remains core to the management of the Group’s
review
Business
risk appetite and capital through its role in optimising
divisional retentions and managing the Group’s innovative
global ceded reinsurance program.”
3
Governance
Jim Fiore
Group Chief Reinsurance Officer & President • Equator Re
Report
Directors'
Gross written Net earned Underwriting Insurance
premium premium result profit
US$ million US$ million US$ million US$ million
1,349 468 1 1
137 1
164 1
5
34% from
28% from
$97M from
$61M from
Report
Financial
2015 2015 2015 2015
Combined operating ratio Insurance profit margin
89.0
70.7
79.9
US$M
90 30 Net earned premium US$M 651 468 367 525 509 621
Net incurred claims US$M 453 268 297 389 400 553
60 20
Net commission US$M 50 50 17 18 21 17
Expenses US$M 13 13 13 13 8 6
30 10
Underwriting result US$M 135 137 40 105 80 45
Net claims ratio % 69.6 57.3 80.9 74.2 78.6 89.0
0 0
2012 2013 2014 2015 2016 Net commission ratio % 7.7 10.7 4.6 3.3 4.1 2.7
Combined commission Insurance profit margin Expense ratio % 2.0 2.8 3.5 2.4 1.5 1.0
and expense ratio IPM 5 year average Combined
Net claims ratio
operating ratio % 79.3 70.7 89.0 79.9 84.2 92.7
Adjusted combined
operating ratio 2 % 78.9 70.2 89.9 75.0 – –
Insurance profit
margin % 24.9 35.0 28.1 27.7 26.5 29.7
overview
Performance
Growth in proportional premium reflects new cessions to Equator Re as part of the Group’s external reinsurance
cost saving initiative, as well as growth in the underlying business that is subject to the proportional quota shares,
particularly the growing Specialty business in North America.
Net earned premium increased by $101 million or 28% to $468 million from $367 million in 2015. Gross written
premium growth generated from the DLRCs was largely offset by increased outwards reinsurance expense, with
Equator now incurring the entire cost of the GLRC (that was previously incurred by all divisions). In comparison, 2
review
Business
growth in proportional premium income was largely retained.
Reduced external excess of loss reinsurance costs also assisted in increasing Equator Re’s net earned premium.
Claims expense
3
During 2016, Equator Re’s bespoke catastrophe programs assisted Emerging Markets and Australian & New Zealand
Operations in limiting the cost of a number of major catastrophic events, including Cyclone Winston that impacted Fiji
in February, a devastating earthquake in Ecuador in April and a significant earthquake in New Zealand in November.
Governance
Whilst the impact of these events was offset by a relatively lower frequency of northern hemisphere catastrophe
activity resulting in an average catastrophe result overall for Equator Re, this nonetheless represented a deterioration
compared with the especially benign 2015 catastrophe experience.
Equator Re’s property risk and trade credit programs were impacted by a higher frequency and severity of claims
across most divisions. Equator Re was able to absorb this adverse claims experience due to the comprehensive
protection offered by the Group’s large risk and catastrophe aggregate program. 4
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Directors'
The result benefited from $56 million of positive prior accident year claims development compared with $120 million of
adverse development in 2015, largely reflecting increased recoveries on the novated GAR contract as previously noted.
Commission and expenses
5
The combined commission and expense ratio increased significantly to 13.5% from 8.1% reported in 2015.
Equator Re’s commission ratio increased to 10.7% from 4.6% in the prior corresponding period, reflecting growth
in proportional business that incurs higher commissions relative to the excess of loss portfolio. This was partially
Report
Financial
offset by a reduction in the underwriting expense ratio to 2.8% from 3.5% in 2015, which was largely driven by strong
net earned premium growth.
In real terms, expenses of $13 million were in line with the prior period. During 2015, the transitioning of the majority
6
of finance and policy administration roles to our Group Shared Services Centre (GSSC) in Manila generated a number
of one-off transition related costs that were not repeated in 2016. However, the build-out of our capability in Bermuda
to meet the increasing needs of our divisional customers did generate an increase in Bermuda based run rate costs
information
Other
in 2016.
Summary
Overall, 2016 was a very successful year for Equator Re. We delivered a strong underwriting result while increasing the
portfolio of products offered to our divisional customers. Many of these new initiatives facilitated the release of excess
divisional capital, thereby assisting the Group in meeting its financial strength and capital flexibility ambitions. At the
same time, Equator Re was able to pay a $450 million dividend to our parent entity.
From an operational perspective, having transitioned a number of activities to the GSSC in 2015, it was pleasing to see
that we are now starting to leverage that investment. Equator Re now has a stronger platform from which to continue
to support new global initiatives in a cost effective and efficient manner, with approximately 50% of our staff based
in the GSSC. As part of QBE’s finance transformation program, we are continually reviewing the mix of work between
onshore and offshore locations to ensure the most optimal cost structure for the Group’s captive. We also leverage
divisional and Group resources and look for ways to better collaborate globally to create further efficiencies.
I would like to thank the Group’s Global Reinsurance Operations team for all their hard work and dedication during
2016. Whilst the financial results indicate an impressive performance, this has not been achieved without significant
input and effort from all of our worldwide teams.
48
Divisional
outlook for 2017
Australian &
North American European New Zealand
Operations Operations Operations
North American Operations European Operations is prepared The insurance market will remain
aims to be a top quartile, for another challenging year competitive; however, the premium
diversified specialty insurer but, as always, will remain rate cycle is hardening as our
in the markets in which we focused on further improving competitors respond to higher
compete. The goal is to deliver an already very strong business. claims costs and continuing low
sustainable, profitable growth In this regard, several ongoing investment returns. We anticipate
with a strong underwriting margin. operational projects are expected premium rate increases at least
to deliver additional benefits in line with claims inflation and
During 2016, we further
in 2017 and beyond. in some products, particularly
strengthened the depth and
property and motor vehicle,
breadth of our management team Our approach to new business
at levels above inflation.
while building a truly national will be careful and considered but
platform, both of which are we expect to see even more value We will drive further improvement
essential to remaining a profitable from our extended distribution in our attritional claims ratio during
and growing operation. Although during 2017 with most growth 2017 as the remediation initiatives
faced with competitive industry coming from our continental are fully embedded and earned
challenges, the outlook for 2017 European offices. through the underwriting account.
remains positive. Improvements Improved risk selection is also
Inevitably, managing the outcome
in underlying business trends expected to benefit our large
of the European Union referendum
indicate that the North American individual risk claims ratio.
is very important and remains
transformation is on track and
a priority for the executive team. The NSW Government remains
our expanded field operations
committed to regulatory reform
are well established with highly
in the CTP market. At this stage,
respected and recognised
the exact nature of the likely
industry executives which
changes is difficult to predict.
bodes well for future growth
We continue to work closely
and industry relevance.
with the Government in relation
Despite headwinds in resetting our to the proposed reforms that
Property & Casualty business, the aim to deliver a fairer and more
growth of our Specialty franchise sustainable scheme.
and diversification from our high
quality Crop and Reinsurance
businesses underpin our
confidence in sustaining a mid-90s
combined operating ratio over the
medium‑term.
49
overview
Performance
2
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Business
Emerging
Markets Equator Re
3
Governance
Bermuda 4
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Directors'
Emerging Markets remains Over 90% of Equator Re’s portfolio
committed to maintaining renews at 1 January and our
strong premium growth with an renewal pricing was in line with
overarching focus on profitability.
We continue to build strong
the broader market. While the
majority of our portfolio renewed
5
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Financial
partnerships with customers similar to expiring policy terms and
by providing products where structure, portfolios without claims
the QBE Group’s core strengths activity saw rate changes between
are best utilised. We remain zero and negative 10% depending
focused on the areas of business
where we see the highest
growth potential.
on geography and product line.
Equator Re increased its
6
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Other
participation on some marine,
In Asia Pacific, the outlook for all crop and reinsurance programs that
the markets we serve is positive. will provide an additional source
Strong growth is forecast this of income in 2017. While we do
year in a number of economies, not expect major changes to our
providing a solid platform for us portfolio during the remainder of the
to continue to expand our business year, we anticipate a change in the
in the region. earning pattern in 2017, reflecting
the increased proportional treaty
In Latin America, overall GDP
component of our business. The
growth is expected to rebound in
volume of net earned proportional
2017. The region has the potential
business will continue to increase as
to sustain strong economic growth
business already written is earned.
with more than 160 million people
between the ages of 15 and 29. The 2017 outwards reinsurance
placement was achieved within
The favourable longer-term
budget and expectations. External
economic outlook for emerging
reinsurance premium spend has
markets in general should
reduced in line with expectations
translate into additional trade and
without any meaningful increase
infrastructure investment, with
in the retained risk profile of the
corresponding positive implications
Group. The structure is as per
for our business growth.
plan and provides extensive per
risk, catastrophe and aggregate
protection to the QBE Group.
50 Group Chief Risk Officer’s report
Risk:
Our business
2016 saw a number of significant economic and geo-political
developments across the globe, most notably the historic Brexit
decision and the recent US federal elections. These developments
point to a continuation of the uncertain political and economic
environment in which we operate, and highlight the increasing
importance of a robust approach to the identification, measurement
and management of risk.
QBE is fully committed to ensuring that we apply the risk appetite boundaries within which risk must be
a disciplined approach to risk management and that our managed. The Board is supported by the Board Risk
risk management practices and systems are robust, and Capital Committee which meets at least quarterly
independent and aligned with global best practice. QBE’s and is responsible for overseeing active and appropriate
Enterprise Risk Management (ERM) framework is outlined management of risks according to the stated risk appetite,
in QBE’s Risk Management Strategy and is supported strategy and business plans.
by frameworks for each risk class, including strategic,
insurance, operational, credit, market and liquidity risks. QBE manages risk in accordance with the “three lines
All risk categories are managed through Board governance, of defence” governance model. The first line is responsible
an approved risk appetite set by the Board, scenario for managing the risk that arises as a result of activities
analysis and stress testing and robust capital management. undertaken in our risk-taking businesses. The second
The ERM framework is applied across the Group and line includes the risk management and compliance
provides a sound foundation for reducing uncertainty and functions which are responsible for the maintenance
volatility in business performance. and monitoring of risk management frameworks, as well
as the measurement and reporting of risk performance
Risk appetite and compliance. The third line is provided by the
Our risk appetite forms the basis of QBE’s ERM internal audit function, which is responsible for providing
framework and represents the level of risk that the Board independent assurance to the Board and its various audit
and management are prepared to accept in pursuit of and risk committees that risk management and internal
the organisation’s objectives. Risk appetite is aligned to, control frameworks are working as designed. Having
and is considered in, all strategic and business planning defined responsibilities across all three lines of defence
decisions QBE makes and we monitor our exposures ensures that QBE adopts a coordinated approach to risk
against the risk appetite on an ongoing basis. management and that accountabilities are clear for our staff.
overview
Performance
estimate potential losses, manage exposure and assist business planning process, we continue to apply stress
in making decisions regarding risk management and and scenario testing to our performance against plan,
coverage. This capability is critical to managing our incorporating scenario analysis to identify and quantify the
exposure to possible events, such as natural catastrophes risks to our business. This allows us to proactively consider
2
and economic shocks. the various exposures we may face as an organisation
and determine what additional mitigation or remediation
Emerging risks activities may be required.
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Business
We recognise that the risk environment changes and
evolves over time. Existing risks develop in new or Risk culture
unexpected ways and new risks, which are usually QBE defines risk culture as observable patterns of
characterised by incomplete but developing knowledge, behaviour in the way employees perform their work and
the judgements they take, as it relates to risk. Risk culture
3
materialise. QBE operates emerging risk forums across
the Group to identify and monitor these emerging risks, is an integral component of QBE’s ERM framework and,
analyse their potential impact and develop strategies like other components of the framework, we continuously
Governance
to mitigate or exploit opportunities. enhance our risk culture approach. We are currently
focusing on achieving greater alignment between risk
Capital management culture, the wider organisational culture and conduct risk,
Capital management is another key component of the as well as further embedding first line accountability for
ERM framework and aims to achieve the appropriate risk culture, including through remuneration and reward.
balance between our risk appetite and the amount of
capital required to support each of our businesses. QBE
This is in addition to our ongoing initiatives to maintain
a strong risk culture across the Group. 4
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Directors'
uses a number of capital management tools to support the
assessment of risk and allocation of capital including:
Investment, market, credit and
• QBE’s Economic Capital Model – QBE’s internal model, liquidity risk
developed to measure overall exposure to risk as well as QBE actively manages its exposures to investment,
market and credit risks that arise inherently from the
5
exposure to each of our main categories of risk, provides a
quantitative base for us to understand, monitor and manage management of a global insurance operation, including
our exposures. We also use the model to make better risks generated through:
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Financial
business decisions, assess economic capital requirements • the management of a global investment portfolio;
and measure performance on a risk-adjusted basis. • regular insurance activities and exposure to reinsurance
• Analysis of regulatory and rating agency capital models counterparties; and
– to better understand how regulatory and rating agencies • global treasury operations, including exposures to
6
assess the impact of our strategic decisions on our risk foreign exchange movements, collateral management
profile and capital requirements, we conduct financial and bank counterparty risks.
modelling analysis with reference to the requirements of
information
Other
Risks to earnings due to material market movements,
the various capital environments in which QBE operates.
risk concentrations and changes to credit quality are
• A number of bespoke risk assessment tools – we use identified, measured and controlled. These are subject to
catastrophe models, scenario analysis, stress tests risk management frameworks and oversight within defined
and reverse stress tests to evaluate business plans and Board-approved risk appetites that are monitored via limits
support our capital plan. structures and specific delegated authorities.
Another key capital management tool is QBE’s Internal In 2016, we have made further improvements to our
Capital Adequacy Assessment Process (ICAAP). The risk systems that will lead to an improved risk analytics
ICAAP is supported by both the Economic Capital Model capability which will further inform our decision-making
and scenario analysis, and is used to: process and enable improved risk-return decisions.
• manage the capital held by QBE; QBE’s liquidity risk framework is designed to ensure that
• monitor the risk profile against appetite; QBE has sufficient high-quality liquid assets at all times,
• ensure the risks taken by QBE are commensurate with including at times of severe stress, to meet our liabilities
required returns; as they fall due. Liquidity risk is monitored against
• allocate capital to operating entities for planning and specified limits within the Board-approved risk appetite
performance monitoring purposes; and and supporting processes ensure that contingency plans
are in place to address crisis situations.
• analyse alternative reinsurance options and regulatory
and rating agency submissions. Regulatory risk
Several actions were completed during 2016 as part of our As a global insurance group, QBE is subject to oversight
proactive management of QBE’s risk profile. These included by approximately 30 prudential regulatory regimes around
reinsurance of long‑tail run‑off reserves in our European the world, as well as extensive legal and regulatory
and North American divisions to reduce potential future requirements and obligations, industry codes and business
volatility in our result and balance sheet; full assessment and ethical standards across its business activities.
and modelling of the Group’s reinsurance arrangements To manage the regulatory and compliance risk we face
to support the 2017 placements; and restructuring of our as a global organisation, we combine local expertise with
borrowings to achieve greater capital efficiency. a globally consistent compliance framework.
52
Board of directors
W. Marston (Marty) Becker JD, BSBA Chairman | Age 64
Marty was appointed as an independent non-executive director of QBE in 2013 and Chairman
in April 2014. Marty is a member of the Audit, Investment, Remuneration, Risk and Capital,
and Operations and Technology Committees. Marty is the Chairman of West Virginia Media
Holdings and previously served as President and CEO of Alterra Capital Holdings Limited.
Marty has over 35 years’ experience in general insurance, reinsurance, investment banking
and private equity and has held various insurance and reinsurance executive positions.
overview
Performance
position of CEO of Global Underwriting Operations as well as several leadership positions
in QBE European Operations, most recently as Chief Underwriting Officer. John has over
30 years’ experience in the insurance industry and, before joining QBE, was the CEO of Ensign.
John developed Ensign to become the UK’s leading commercial motor insurance brand. QBE
acquired Ensign in 2003.
2
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Business
Sir Brian Pomeroy MA, FCA Independent non‑executive director | Age 72
Sir Brian was appointed as an independent non‑executive director of QBE in 2014. Sir Brian
is Chairman of the Audit Committee and a member of the Risk and Capital Committee.
He was formerly a non‑executive member of the Board of the Financial Conduct Authority
in the UK, a nominated member of the Council of Lloyd’s of London and a non-executive 3
Governance
director on QBE’s European regulated boards. He was the senior partner of Deloitte
Consulting in the UK until 1999.
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Directors'
Pat joined QBE as Group Chief Financial Officer and became an executive director in 2014.
He was appointed CEO, Australian & New Zealand Operations in 2016, and is in the process
of transitioning out of his Group Chief Financial Officer role. Prior to joining QBE, Pat was the
Chief Financial Officer at Aviva Plc in London. Pat has more than 27 years’ of professional
accounting experience of which nearly 20 years is in insurance and financial services. Pat was
previously the CFO/COO of Willis and has held several roles at RSA and AXA. 5
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Financial
Jann Skinner B Com, FCA, FAICD Independent non‑executive director | Age 59
Jann was appointed as an independent non‑executive director of QBE in 2014. Jann is
Chairman of the Risk and Capital Committee, Deputy Chairman of the Audit Committee and
a member of the Remuneration Committee. Jann was a non‑executive director on QBE’s 6
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Other
Australian regulated boards, where she was also Chair of the Audit and Risk and Capital
Committees. She has over 30 years’ professional accounting experience and was an audit
partner at PricewaterhouseCoopers.
Rolf Tolle Dip PS, Dipl. Pol Independent non‑executive director | Age 69
Rolf was appointed as an independent non‑executive director in March 2016. Rolf is the
Deputy Chairman of the Risk and Capital Committee and a member of the Investment and
Remuneration Committees. He has many years’ experience in specialist insurance and
reinsurance businesses, having held senior positions in a number of global companies.
Group executive
committee
John Neal Group Chief Executive Officer | Age 52
John joined QBE in 2003 and was appointed Group CEO in 2012. Prior to this, John held the
position of CEO of Global Underwriting Operations as well as several leadership positions in
QBE European Operations, most recently as Chief Underwriting Officer. John has over 30
years’ experience in the insurance industry and, before joining QBE, was the CEO of Ensign.
John developed Ensign to become the UK’s leading commercial motor insurance brand. QBE
acquired Ensign in 2003.
David Fried BA–ECON/ POLI. SCIENCE Chief Executive Officer, Emerging Markets | Age 55
David joined QBE in 2013 as CEO, Asia Pacific Operations and was subsequently appointed
CEO, Emerging Markets in 2014. Prior to joining QBE, David was the Regional CEO of Allianz
Asia Pacific, where he was responsible for the insurer’s life and non life business across 14
countries. David was previously at HSBC for 27 years, where he worked in numerous senior
management and global strategic roles, including as the Group Head of Insurance.
Russell (Russ) Johnston BSc, BF Chief Executive Officer, North American Operations | Age 51
Russ joined QBE in May 2016 in the role of CEO, North American Operations. Russ has more
than 25 years’ experience in the insurance industry in North America, and has held a range
of senior business and operational roles since joining American International Group (AIG) in
1990. Most recently, Russ was President of AIG Casualty in the Americas, with responsibility
for all AIG’s US, Canada, Bermuda and London based US Casualty underwriters.
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overview
Performance
2
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Margaret Murphy Group Chief HR Officer | Age 44 3
Governance
Margaret joined QBE in October 2016 in the role of Group Chief Human Resources Officer.
Prior to this, she was the Chief of Staff to the Group HR Director at Barclays plc. After
starting her career with the London Underground, Margaret worked with companies including
Inchcape, BAT and J Sainsbury before spending 10 years working with Barclays. Her
penultimate role at Barclays was as HR Director for Global Functions, where she led a team
of 70 HR professionals providing services to over 14,000 people. 4
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Richard Pryce B HIS (HONS) Chief Executive Officer, European Operations | Age 57
Richard joined QBE in 2012 and was appointed CEO, European Operations in 2013. Richard
began his insurance career with R.W. Sturge syndicate at Lloyd’s where he became Claims
Director. In 1996, Richard moved to Ockham as Professional Lines Class Underwriter for 5
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Financial
Syndicate 204. Richard went on to run ACE’s Financial Lines business in London before
becoming President of ACE Global Markets in 2003 and ACE UK in 2007. He has worked
in the London insurance market for 34 years.
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Australian & New Zealand Operations
Pat joined QBE as Group Chief Financial Officer and became an executive director in 2014.
He was appointed CEO, Australian & New Zealand Operations in 2016, and is in the process
of transitioning out of his Group Chief Financial Officer role. Prior to joining QBE, Pat was the
Chief Financial Officer at Aviva Plc in London. Pat has more than 27 years’ of professional
accounting experience of which nearly 20 years is in insurance and financial services.
Pat was previously the CFO/COO of Willis and has held several roles at RSA and AXA.
QBE Insurance Group Limited (QBE) is committed to the highest standards of corporate
governance. The QBE Group has a vision and six ONE QBE values that recognise its
customers, people, shareholders and the community. QBE believes that a culture that
rewards transparency, integrity and performance will promote its long-term sustainability
and the ongoing success of its business.
This Corporate Governance Statement relates to the 2016 financial year, and should be read in conjunction with QBE’s
2016 Annual Report and the 2016 Sustainability Review. This Corporate Governance Statement has been approved
by the Board and is dated 24 February 2017.
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Performance
deals with topics such as underwriting, reinsurance protection, claims, investments, acquisitions and expenses.
The Group Chief Executive Officer delegates his authority to management throughout the QBE Group on a selective
basis, taking into account expertise and past performance. Compliance with delegated authorities is monitored
by management and adjusted as required for actual performance, market conditions and other factors. Management
and the QBE Group’s internal audit teams review compliance with delegated authorities and any breach can lead
to disciplinary procedures, including dismissal.
Chairman
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The Chairman of the Board of QBE is Marty Becker, who was appointed as the independent Chairman of the Board in
April 2014. In his role as Chairman, Mr Becker is responsible for ensuring that the Board functions as an effective and
cohesive group. Mr Becker works closely with John Neal, the Group Chief Executive Officer, to determine the strategic
direction for QBE and to establish high standards of governance and leadership.
Committees
The Board is supported by several committees which meet regularly to consider audit, risk management, investments,
3
Governance
remuneration, technology, operations and other matters. The main Committees of the Board are the Audit, Investment,
Remuneration, Nomination, Risk and Capital and Operations and Technology Committees. Further sub-committees
of the Board may be convened to confer on particular issues from time to time. Any Non-executive Director may attend
a Committee meeting. The Committees have free and unfettered access to QBE’s senior managers and may consult
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external advisers at QBE’s cost, including requiring their attendance at Committee meetings, with the consent of the
Chairman. A report on each Committee’s last meeting is provided to the next Board meeting.
Each Committee comprises at least three independent Directors and each Committee Chairman is an independent Director
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Directors'
who is not the Chairman of the Board (excluding the Nominations Committee, the Chairman of which is Mr Becker and the
Operations and Technology Committee, the Chairman of which is Kathy Lisson). Each Committee operates under a written
charter approved by the Board. These Charters are available at www.qbe.com. The membership of each Committee is provided
on our website at www.qbe.com and details of the number of Committee meetings held during the 2016 financial year and
attendance by Committee members at Committee meetings are set out in the Directors’ Report.
Further information regarding the Committees can be found throughout this Corporate Governance Statement.
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Company Secretary
The Company Secretary acts as secretary to the Board and all of the Committees and is accountable directly to the
Board, through the Chairman, on all matters to do with the proper functioning of the Board. All Directors have direct
access to the Company Secretary.
The Company Secretary’s role is described in the Board Charter and includes communication with regulatory bodies
and the Australian Securities Exchange (ASX), all statutory and other filings, assisting with good information flows
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within the Board and its Committees and between Non-executive Directors and senior management, as well as
facilitating induction and professional development as required. The Company Secretary may also provide guidance
to Directors in respect of legal and regulatory responsibilities.
Board skills and experience
Directors are selected to achieve a broad range of skills, experience and expertise complementary to the QBE Group’s
insurance activities. At the date of this Corporate Governance Statement, the Board comprised eleven Directors, being
an independent Chairman, eight other Non-executive Directors, and the Group Chief Executive Officer and Group Chief
Financial Officer.
The Board has a skills matrix covering the range of competencies and experience of each Director. When the need
for a new Director is identified, the required experience and competencies of the new Director are considered in the
context of this matrix and any gaps that may exist.
The Board’s skills matrix is below.
SKILLS INDUSTRY
Financial literacy General insurance
Legal Reinsurance
Governance Investment banking
Strategy Private equity
Commercial expertise Financial services
Risk management Accounting
Government relations Investment
Executive leadership
Digital technology
Cyber security
IT risks
Data analytics
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Details of individual Directors, including their qualifications and experience, independence status and the period
of office serving on the Board, are set out in the Board of directors section and can also be found on the QBE website
at www.qbe.com.
Independence of the Board
The majority of the Board are independent Directors, applying the “independence” definition of the ASX Corporate
Governance Council. When applying this definition, the Board has determined that an independent Director’s
relationship with QBE as a professional adviser, consultant, supplier, customer or otherwise is not material unless
amounts paid under that relationship exceed 0.1% of QBE’s revenue. None of the independent Directors provide
services to QBE other than in their capacity as an independent Director and they do not have a business relationship
with any other Director on the Board or otherwise with QBE. The roles of QBE’s Chairman and Group Chief Executive
Officer are also not exercised by the same individual.
Directors are required to advise the Board on an ongoing basis of any interest they have that they believe could
conflict with QBE’s interests. If a potential conflict does arise, either the Director concerned may choose not to, or the
Board may decide that he or she should not, receive documents or take part in Board discussions whilst the matter
is being considered.
Tenure
The mere fact that a Director has served on the QBE Board for a lengthy period of time does not, of itself, suggest
a lack of independence; however, the Board has agreed that an independent Director’s term should be approximately
10 years. The Board considers that a mandatory limit on tenure would deprive the QBE Group of valuable and relevant
corporate experience in the complex world of international general insurance and reinsurance. The tenure of each
Director is set out in the Board of directors section and can also be found on the QBE website at www.qbe.com.
QBE’s constitution provides that no Director, except the Group Chief Executive Officer, shall hold office for a continuous
period in excess of three years or past the third AGM following a Director’s appointment, whichever is the longer,
without submission for re-election. Under QBE’s constitution, there is no maximum fixed term or retirement age for
Non‑executive Directors.
Board selection process
The Board has a Nomination Committee which meets regularly during the year around the time of the Board meetings.
The Committee assists the Board in appointing Directors so that the Board as a whole has the necessary range
of skills, knowledge and experience to be effective. The Nomination Committee is comprised of all the Non-executive
Directors of the Board and is chaired by Mr Becker.
A formal process for the selection and appointment of Directors is undertaken by the Nomination Committee and Board.
Before the Board appoints a new Director or puts forward a candidate for election, appropriate background checks are
undertaken. External consultants may be employed, where necessary, to search for prospective Directors. Candidates
are assessed against the required skills and on their qualifications, backgrounds and personal qualities. In addition,
candidates must have the required time to commit to the position. The Board regularly reviews the mix of skills that
is required. Under QBE’s Constitution, the size of the Board is limited to 12 Directors. The Board considers that
a maximum of 12 will reflect the largest realistic size of the Board that is consistent with:
• maintaining the Board’s efficiency and cohesion in carrying out its governance duties on behalf of shareholders;
• reducing the risk of a Director being insufficiently involved and informed in the business of QBE; and
• providing individual Directors with greater potential to contribute and participate.
QBE also provides shareholders with all material information in its possession that is relevant to a decision on whether
or not to elect or re-elect a Director through a number of channels, such as the Notice of Meeting, Director biographies
and other information contained in the Annual Report.
The Board adopted revised Non-executive Director Nomination, Performance Evaluation and Tenure Guidelines in
September 2014. The Board believes that orderly succession and renewal contributes to strong corporate governance
and is achieved by careful planning and continual review. As an ongoing evaluation, the Board regularly discusses
its make up in relation to an appropriate mix of skills and experience, tenure, age spread, general diversity (including
gender) and geographic location of Directors to meet the needs of QBE.
Director induction and training
Upon appointment, each Non-executive Director (and senior executive) is provided with a written agreement which sets
out the terms of their appointment. Directors also attend induction sessions upon their appointment, where they are
briefed on QBE’s history and vision, strategy, financials, and risk management and governance frameworks.
The Board ensures it has the information it requires to be effective including, where necessary, independent
professional advice. A Non-executive Director may seek such advice at QBE’s cost with the consent of the Chairman.
Directors are also provided with ongoing professional development and training programs to enable them to develop
and maintain their skills and knowledge at QBE’s cost, with the consent of the Chairman.
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overview
Performance
The Chairman oversees the performance of the Board, its Committees and each Director. The Board regularly reviews
its performance through internal and external assessments, and recommendations for either improvement or increased
focus are agreed and then implemented.
In 2016, a Board evaluation was undertaken using the services of external consultants. The review covers the
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performance of the Board and its Committees. The result of the review was reported to the Chairman and discussed
in detail by the Board in 2016.
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Performance evaluation – senior management
The Remuneration Committee oversees the performance of senior management. In addition, the Board continually
monitors the performance of senior management through regular contact and reporting.
In 2016, QBE continued to use a balanced scorecard of individual key performance indicators (KPIs) to ensure that
a broader view of performance and specific strategic priorities are considered when assessing performance and
incentive outcomes. Other than as set out in the Remuneration Report, senior management have 20% of their Short 3
Governance
Term Incentive outcome determined with reference to individual KPIs.
The scorecard is aligned to QBE’s business plans and measures objectives which support the elements of QBE’s value
creation model. The Remuneration Report sets out a summary of the key objectives and outcomes for the Group Chief
Executive Officer. The Group Chief Executive Officer’s scorecard was formulated initially through a discussion between
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the Group Chief Executive Officer and the Chairman and was approved by the Board. The scorecards for the rest of
senior management (which are consistent with and support the scorecard for the Group Chief Executive Officer) were
approved by the Remuneration Committee.
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The 2016 objectives for senior management were used to measure their performance for the 2016 year. These performance
evaluations occurred in 2017.
Remuneration Committee
The Board has a Remuneration Committee which meets at least quarterly to assist it in overseeing major remuneration
practices of the QBE Group. The Remuneration Committee is comprised of independent Directors and is chaired
by John M Green.
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Remuneration policies and practices
Details of QBE’s policies and practices regarding the remuneration of executives and Non-executive Directors
(being Key Management Personnel) are set out in the Remuneration Report.
Other than meeting statutory superannuation requirements, QBE does not have in place any retirement benefit
schemes for Non-executive Directors.
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QBE’s Trading Policy for dealing in securities of QBE Insurance Group Limited or other entities outlines QBE’s approach
to derivatives or otherwise limiting the economic risk of participating in an equity-based remuneration scheme. The Trading
Policy is available at www.qbe.com.
Group governance
Group governance framework
The Board approved a new framework in 2013, which has continued to evolve. The framework includes, in particular:
• revised roles for the boards of divisional holding companies and divisional insurers; and
• divisions having committees similar to the QBE Board.
There is now a greater liaison between the QBE Board and the divisional holding boards. The QBE Board also meets
separately with local independent Directors at least once a year. These changes followed a review of governance
at QBE Group and divisional levels.
Group guidelines
The QBE Group has adopted a Code of Business Ethics and Conduct that applies to all employees of the QBE Group
worldwide. The Code of Business Ethics and Conduct builds on our company values and is an essential resource
and guide for our people. It outlines a range of business ethics and standards of conduct and requires our employees
to be respectful, professional, considerate and to maintain high ethical standards, uphold QBE’s reputation and report
unethical or illegal behaviour. The Code covers matters such as a commitment to compliance with laws and regulations,
the giving and receiving of bribes and gifts, conflict of interests, use of company resources and external activities.
The Code is available at www.qbe.com.
Director conduct is covered by the Non-executive Directors’ Nomination, Performance Evaluation and Tenure Guidelines.
These Guidelines cover Director conduct, particularly in regard to tenure, performance and evaluation. The Guidelines
are available at www.qbe.com.
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The QBE Group has also adopted global policies in key compliance areas, including Anti-Bribery and Anti-Corruption,
Sanctions, Whistleblowing and Diversity and Inclusion. These policies, like the Code of Business Ethics and Conduct,
recognise that our employees (including our contractors, Directors and agents) are key to maintaining a compliant
and ethical approach to our business practices. The global policies are supported by Group Guidelines that provide
additional information to support our employees.
In Australia, QBE complies with the General Insurance Code of Practice; a self-regulated code developed by
the Insurance Council of Australia relating to the provision of products and services to customers of the general
insurance industry in Australia. QBE’s Australian business is also a member of the Financial Ombudsman Service;
an ASIC approved external dispute resolution body which deals with general insurance disputes between consumers
and insurers.
Continuous disclosure
The Board adopted a revised Continuous Disclosure Policy in February 2015, which is available at www.qbe.com.
QBE takes its continuous disclosure obligations seriously and issues market releases during the year to satisfy those
obligations. ASX announcements are set out on QBE’s website at www.qbe.com.
Diverse leadership • Female representation at senior levels (L0-3) has increased to 28% (up 1% over
representation the year) (see Table A).
– looking to foster • In addition to an ongoing focus on retaining and developing Level 2 high potential
inclusive, gender balanced females, we expanded our pipeline focus looking at identifying high potentials
leadership teams at Level 3, 36% of whom are female.
• Our annual pay equity analysis was expanded to assess outcomes of pay
decisions (for example, at annual salary reviews, on hire or promotion of senior
roles). Each division worked locally to identify hotspots and develop strategies
to address gaps across certain levels and job families, as well as targeted
segments e.g. high potential talent.
Inclusive capabilities • There have been significant efforts to promote our commitment to ‘Inclusive
– effectively manage and drive Leadership’ across divisions. Initiatives included mentoring programs; employee
collaboration and inclusion network events led by senior leaders; globally coordinated celebration and
in teams, leveraging flexibility awareness sessions relating to gender equality, LGBT inclusion, importance
to increase productivity of work/life balance and building awareness of providing opportunities for people
and retention with disability.
• We continue to invest in educating and upskilling our leaders through the
Global Leadership Academy: an additional 531 employees globally attended
the programs, of which 43% were female. A total of 2,351 employees have
participated in the Academy since its introduction in 2013 (42% being female).
• New Leadership Insights 360 & 180 feedback surveys were launched,
supporting greater self-awareness and education on inclusive leadership
capabilities – a total of 327 employees have undertaken these surveys
(45% being female).
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Strong pipeline • A new Career Development Portal was developed and launched on our global
of diverse talent intranet site, providing tools, tips and other resources to help employees
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Performance
– offer all employees the in managing their career aspirations.
opportunity to develop
and progress their careers
– maximising the ability
to attract, retain and optimise
all talent 2
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Higher engagement • We have seen our overall engagement score improve from last year (now at 64%)
of all employees with pleasing progress in the proportion of employees who feel we provide
– create a fair, inclusive and a work environment that is collaborative, supportive of flexibility and respectful
respectful environment for of differences.
all employees • Across Divisions, we have upgraded our employee benefits and leave provisions,
offering enhanced support and options for employees with caring responsibilities. 3
Governance
QBE North America was named as one of the best Adoption-Friendly Workplaces
in the U.S. by the Dave Thomas Foundation for Adoption.
Customer satisfaction • We have introduced a global Innovation Lab to explore ways to engage our
and retention diverse workforce in creating new ideas with technologies in our lab to support
– harness our global workforce
to drive innovation and
creativity in supporting diverse
how we enhance customer solutions.
• To be closer to the customer we continue to produce selected product materials 4
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and documents into languages other than English across various countries
customer needs including Hong Kong, Indonesia, Thailand, French Polynesia, New Caledonia
and Vietnam.
• Our global product innovation, Premiums4Good, allows targeted customers to
direct a proportion of their premium to be invested in securities with an additional
social objective. Examples of these investments include Social Impact Bonds,
green bonds and investments into infrastructure projects with social benefits some
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of which focus on carers of children, youth mental health and employment as well
as children’s education.
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Details of gender representation across management levels together with targets set for achievement by 2020 are
set out below:
Table A
ACTUAL BASELINE GENDER TARGET
GENDER REPRESENTATION 31 DECEMBER 2016 31 DECEMBER 2015 BY 2020
QBE Board 27% 22% 30%
Group Executive positions (Level 0) 11% 10%
Level 1 22% 20%
Level 2 22% 21%
Level 3 30% 29%
Women in management (Total % of Levels 0, 1, 2 &3) 28% 27% 35%
Women in workforce 53% 53%
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Performance
lead engagement partner after five years. The lead engagement partner of the external auditor was last rotated in 2014.
In the event that the Audit Committee thought it appropriate to change the firm undertaking QBE’s external audit, it would
conduct an appropriate competitive tender process.
Actuarial review
It is a longstanding practice of the Directors to ensure that the QBE Group’s insurance liabilities are assessed
by actuaries. The central estimate of QBE Group’s insurance liabilities, comprising outstanding claims and premium
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liabilities, is determined by experienced internal actuarial staff. Actuarial staff form an independent view, separate from
management, of both the central estimate and the probability of adequacy of outstanding claims and premium liabilities.
At 31 December 2016, in excess of 98% of QBE’s outstanding claims central estimate was also reviewed by external
actuaries. The material exception is North American Crop that is quick to settle and where an accurate estimate of
ultimate claims cost is obtained very close to the reporting date. External actuaries are generally from organisations
that are not associated with the external auditor. 3
Governance
Internal audit
A global internal audit function is critical to the risk management process. QBE’s internal audit function reports to the
Group Chief Executive Officer and the Audit Committee on the monitoring of the QBE Group’s worldwide operations.
Internal audit provides independent assurance that the design and operation of the controls across the QBE Group
are effective. The internal audit function operates under a written charter from the Audit Committee. Other governance
documents include a reporting protocol, internal audit manual, internal audit issue rating system, internal audit opinion
levels and internal audit timetables. A risk-based internal audit approach is used so that higher risk activities are
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reviewed more frequently.
Risk management
QBE is in the business of managing risk. The Board and management are fully committed to ensuring that a disciplined
approach to managing risk delivers leading practice and that QBE Group’s risk management processes and systems
are robust and independent. QBE’s risk framework supports its businesses across all divisions and provides a sound
foundation for reducing uncertainty and volatility in business performance.
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Risk and Capital Committee
The Board monitors the QBE Group’s performance and, as such, plays a significant role in ensuring that an effective
risk management strategy is established and maintained. The Board has a Risk and Capital Committee which meets
at least quarterly to support the Board in overseeing the effectiveness of QBE Group’s risk and capital management
frameworks. The proper oversight of these frameworks supports strategic objectives, informs business plans and
ensures that current and future risks are identified, assessed and monitored in line with risk appetite. Under its Charter,
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the Risk and Capital Committee is required to review the risk framework periodically to confirm it continues to be sound.
This review was undertaken during 2016 as part of the annual refresh of the Risk Management Strategy.
The Risk and Capital Committee is comprised of independent Directors and is chaired by Jann Skinner. The Risk and
Capital Committee has access to the Group Chief Risk Officer and other relevant senior management.
Economic, social and environmental risk
Information about how QBE approaches sustainability and environmental, social and governance (ESG) issues more
broadly can be found in the 2016 Sustainability Review.
The Sustainability Review provides an overview of steps taken in 2016 to strengthen governance of QBE’s ESG
activities and ensure a coordinated approach across the Group. Central to these efforts was the formation of an ESG
Committee, formalised as an executive committee reporting to the Group Board Risk and Capital Committee (BRCC),
to provide oversight and guidance to QBE’s ESG-related projects, activities and initiatives other than those of the QBE
Foundation, which has separate governance arrangements.
Further details of how QBE manages risk are set out in the Chief Risk Officer’s Report. An overview of QBE’s risk
management framework, including QBE’s key economic material risks and how these are mitigated, is also set out
in note 4 to the Financial Report.
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Directors’ Report
Directors’ Report
FOR THE YEAR ENDED 31 DECEMBER 2016
Your directors present their report on QBE Insurance Group Limited and the entities
it controlled at the end of, or during, the year ended 31 December 2016.
Your directors present their report on QBE Insurance Group Limited and the entities it controlled at the end
of, or during, the year ended 31 December 2016.
Directors
The following directors held office during the whole of the financial year and up to the date of this report:
Marty Becker (Chairman)
Stephen Fitzgerald
John M Green (Deputy Chairman)
Margaret Leung
John Neal
Sir Brian Pomeroy
Patrick Regan
Jann Skinner
Mr Rolf Tolle was appointed to the Board on 11 March 2016. Ms Kathryn Lisson was appointed to the Board on 1 September 2016.
Mr Michael Wilkins was appointed to the Board on 1 November 2016. Ms Lisson and Messrs Becker and Wilkins offer themselves
for election at the 2017 Annual General Meeting.
Consolidated results
STATUTORY RESULT
2016 2015
US$M US$M
Gross written premium 14,395 15,092
Gross earned premium revenue 14,276 14,922
Net earned premium 11,066 12,314
Net claims expense (6,442) (7,434)
Net commission (2,034) (2,114)
Underwriting and other expenses (1,922) (2,137)
Underwriting result 668 629
Net investment income on policyholders' funds 407 402
Insurance profit 1,075 1,031
Net investment income on shareholders' funds 339 263
Financing and other costs (294) (244)
Losses on sale of entities – (2)
Unrealised losses on assets held for sale (3) –
Amortisation and impairment of intangibles (45) (95)
Profit before income tax 1,072 953
Income tax expense (228) (260)
Profit after income tax 844 693
Net profit attributable to non-controlling interests – (6)
Net profit after income tax 844 687
Result
Net profit after tax for the year to 31 December 2016 was $844 million, up 23% compared with a net profit of $687 million last year.
Net earned premium of $11,066 million was down 10% compared with $12,314 million last year. The decrease mainly reflects the impact
of a generally stronger US dollar and a higher reinsurance expense following the reinsurance of long tail liabilities in European Operations
and discontinued program business in our North American Operations. The overall reinsurance transactions had a small positive impact
on net profit with reinsurance expense of $570 million more than offset by a reduction in net incurred claims of $581 million.
The Group’s underwriting result was a profit of $668 million compared with a profit of $629 million last year, reflecting a combined
operating ratio of 94.0% compared with 94.9% last year. The net claims ratio of 58.2% (2015 60.4%) was impacted by a reduction in
risk-free rates used to discount claims liabilities of $80 million or 0.7% of net earned premium and the reinsurance recoveries mentioned
above. Combined commission and underwriting expenses were down in absolute terms compared with last year, primarily due to the
benefit of expense initiatives and the disposal of our high cost base M&LS business. The reported combined commission and expense
ratio was up, however, (35.8% compared with 34.5%) due to the lower net earned premium as described above.
Excluding the impact of lower risk-free rates used to discount claims liabilities, the statutory combined operating ratio would have been
93.2%, lower than our target range of 94%-95%.
Net investment income was $746 million compared with $665 million last year, including foreign exchange gains of $125 million compared
with foreign exchange losses of $20 million last year. The overall net return was 2.4%, slightly below target and impacted by mark
to market losses on longer duration fixed income securities following the US election result.
The tax rate was 21% of net profit, down from 27% last year, reflecting the mix of corporate tax rates in the countries in which QBE operates.
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1
Dividends
The directors are pleased to announce a final dividend of 33 Australian cents per share, up 10% from the final dividend of 30 Australian
cents per share for 2015. The dividend will be franked at 50%. The total dividend payout is A$741 million, or around 61% of full year cash
overview
Performance
profit, compared with A$685 million for 2015, or around 56% of cash profit.
Our objective is to deliver a stable and growing dividend to our shareholders. Our current dividend policy sets the full year dividend payout
ratio at up to 65% of cash profit.
Activities
The principal activities of QBE during the year were underwriting general insurance and reinsurance risks, management of Lloyd’s 2
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Business
syndicates and investment management.
Presentation currency
The Group has presented the Financial Report in US dollars because a significant proportion of its underwriting activity is denominated
in US dollars. The US dollar is also the currency that is widely understood by the global insurance industry, international investors
and analysts.
Governance
A review of the Group’s operations during the year and the results of those operations is set on pages 4 to 49 of this Annual Report.
These pages also deal with the Group’s operations, financial position, business strategies and prospects for future financial years.
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As in previous years, the directors consider that substantial risk margins are required over the actuarial net central estimate to mitigate the
inherent uncertainty in the net central estimate. The probability of adequacy of the outstanding claims liability at 31 December 2016
was 89.5% compared with 89.0% last year. The Australian Prudential Regulation Authority (APRA) prudential standards provide a capital
credit for outstanding claims in excess of a probability of adequacy of 75%.
Group indemnities
Article 78 of the company’s constitution provides that the company indemnifies past and present directors, secretaries or other officers
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against any liability incurred by that person as a director, secretary or other officer of the company or its subsidiaries. The indemnity does
not apply to any liability (excluding legal costs):
• owed to the company or a related body corporate (e.g. breach of directors’ duties);
• for a pecuniary penalty under section 1317G or a compensation order under sections 1317H or 1317HA of the Corporations Act 2001
(or a similar provision of the corresponding legislation in another jurisdiction); or
• that is owed to someone other than the company or a related body corporate and which did not arise out of conduct in good faith.
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The indemnity extends to legal costs other than where:
• in civil proceedings, one or more of the above exclusions apply;
• in criminal proceedings, the person is found guilty;
• the person is liable in proceedings brought by the Australian Securities and Investments Commission (ASIC), a corresponding regulator
in another jurisdiction or a liquidator (unless as part of the investigation before proceedings are commenced); or
• the court does not grant relief after an application under the Corporations Act 2001 or corresponding legislation in another jurisdiction.
In addition, a deed exists between the company and each director which includes an indemnity in similar terms to article 78 of the
company’s constitution.
Significant changes
There were no significant changes in the Group’s state of affairs during the financial year other than as disclosed in this Annual Report.
Meetings of directors
MEETINGS MEETINGS OF COMMITTEES
FULL OF NON-
MEETINGS OF EXECUTIVE RISK & GOVERNANCE OPERATIONS & SUB-
DIRECTORS 1 DIRECTORS AUDIT INVESTMENT REMUNERATION CAPITAL & NOMINATION TECHNOLOGY COMMITTEES 2
H A H A H A H A H A H A H A H A H A
Marty Becker 8 8 6 6 5 5 4 4 6 6 6 6 5 5 1 1 2 2
Stephen Fitzgerald 8 8 6 6 – – 4 4 – – 6 6 5 5 1 1 – –
John M Green 8 8 6 6 2 2 4 4 6 6 6 6 5 5 1 1 2 2
Margaret Leung 8 8 6 5 5 5 – – 6 6 – – 5 4 – – – –
Kathryn Lisson 3 3 2 2 2 2 – – – – – – 1 1 1 1 – –
John Neal 3 8 8 – – – – – – – – – – – – – – 2 2
Sir Brian Pomeroy 8 8 6 6 5 5 – – – – 6 6 5 5 – – 3 3
Patrick Regan 3 8 8 – – – – – – – – – – – – – – 3 3
Jann Skinner 8 8 6 6 5 5 – – 6 6 5 5 5 5 – – 3 3
Rolf Tolle 7 7 5 3 – – 3 3 – – 5 5 4 2 – – – –
Michael Wilkins 2 2 1 1 1 1 – – 1 1 – – – – 1 1 – –
Further meetings occurred during the year, including meetings of the Chairman and Group Chief Executive Officer and meetings of the
directors with management. From time to time, directors attend meetings of committees of which they are not currently members.
67
1
Directorships of listed companies held by the members of the Board
From 1 January 2014 to 24 February 2017, the directors also served as directors of the following listed entities:
overview
Performance
POSITION DATE APPOINTED DATE CEASED
John M Green
WorleyParsons Director 11 October 2002 25 October 2016
Margaret Leung
China Construction Bank Corporation Director 12 December 2013 17 June 2016
Chong Hing Bank Limited
First Pacific Company Limited
Hong Kong Exchanges and Clearing Limited
Director and Deputy Chairman
Director
Director
14 February 2014
21 December 2012
24 April 2013
–
–
–
2
review
Business
Li & Fung Ltd Director 1 April 2013 –
Sun Hung Kai Properties Limited Director 1 March 2013 –
Michael Wilkins
AMP Limited Director 12 September 2016 –
Governance
The qualifications and experience of each director are set out on pages 52 to 53 of this Annual Report.
4
Ms Scobie is Group General Counsel and Group Company Secretary. Prior to joining QBE, Ms Scobie was Group General Counsel
at the ASX-listed multinational Goodman Group for 17 years, where she ran a multi-disciplinary legal team working on matters across
16 countries and over 800 entities. Ms Scobie has extensive experience in compliance, regulatory matters, litigation and managing the
Report
Directors'
complexity of multiple jurisdictions.
Peter Smiles, LLB, MBA, AGIA and ACIS
Mr Smiles is Deputy Company Secretary of QBE Insurance Group Limited and a company secretary of various QBE subsidiaries in
Australia. He has 25 years of insurance experience, which includes 18 years as a corporate lawyer. Prior to commencing employment with
QBE in 2002, Mr Smiles worked for the NRMA Insurance Group in various corporate roles. In addition to his current company secretarial
duties, he acts as a corporate lawyer advising QBE Group head office departments and Asia Pacific offices.
Report
Financial
Ordinary share capital
Directors’ relevant interests in the ordinary share capital of the company at the date of this report are as follows:
NUMBER OF
6
DIRECTOR SHARES HELD
Marty Becker 105,306
Stephen Fitzgerald 37,704
information
Other
John M Green 37,258
Margaret Leung 21,914
Kathryn Lisson 1,465
John Neal 292,178
Sir Brian Pomeroy 12,141
Patrick Regan 552,214
Jann Skinner 35,000
Rolf Tolle 18,991
Michael Wilkins 8,670
Environmental regulation
The Group is not currently required to report under any significant environmental regulations under either Commonwealth, State or
Territory legislation.
68
Remuneration Report
Remuneration Report
To our shareholders
To our shareholders:
On behalf of the Board, I present QBE’s Remuneration Report for 2016.
On behalf of the Board, I present QBE’s Remuneration Report for 2016.
Our statutory return on equity (ROE) was 8.1%. We have maintained our approach from previous years and reversed 50% of the effect of
actual discount rate movements versus our budget assumptions from the statutory result. In 2015, this reduced the ROE outcome for
management by 0.2% while in 2016 it increased the ROE outcome by 0.3%. Consequently the Group ROE outcome for 2016 STI
purposes was 8.4%, i.e. 0.1% below our target of 8.5%.
Details on the STI outcomes for executives are set out in section 3.1.
In recognising shareholder and community concerns on executive remuneration, the Remuneration Committee followed a process which
was thorough and included consultation with independent advisers, regulators and internal and external stakeholders. I am grateful for the
continued support and engagement we have with shareholders and their representative bodies, especially during consultation on the
remuneration review.
The review found that, on the whole, STI has demonstrated strong alignment between performance and incentive outcomes, although it
could be improved with broader and more clearly defined performance measures. LTI, on the other hand, has not worked as well. Setting
appropriate three-year performance hurdles in a volatile macro-economic environment has been challenging, as has finding a suitable
globally diversified insurance TSR peer group as a benchmark. Consequently, the current LTI scheme is not well-understood or valued by
our executives, and is not sufficiently driving strategy delivery or creating shareholder value.
The review prompted us to consider ways of making LTI more effective for all stakeholders, and enhancing long-term alignment through
increased share ownership. The resultant QBE Executive Incentive Plan (EIP) combines STI and LTI into a single, simpler incentive plan
which we believe provides better correlation to performance and shareholder outcomes and is more tangible for our executives.
Importantly, in an increasingly volatile business environment, the model is more adaptable to the evolution of our strategy, changing
business cycles and the external operating environment.
Details on the changes to be implemented for 2017 and how they will apply to the Group CEO are set out in section 7.
Cash ROE will use cash profit after tax, the same basis used to determine shareholder dividends. However, other than in exceptional
circumstances, losses due to unplanned amortisation or impairment of intangibles will be added back so that executives remain
accountable for the management of intangible assets. The target range for 2017 is 7.0% to 11.0%, with on-target performance at 9.0%.
COR has been introduced as it is the most relevant measure of the profitability of our insurance operations. The target range for 2017 is
96.3% to 92.3% with on target performance set at 94.3%. In line with previous years, this excludes the effect of unbudgeted discount rate
movements. Also, for 2017, an adjustment will be made for the impact of changes, if any, to the Ogden tables in the UK beyond the
provision included in the business plan.
Measures of progress against our longer-term strategic imperatives of operational efficiency and claims excellence have been introduced
for 2017. We are targeting generation of expense savings of $109m in 2017 through operational excellence, automation and sourcing
capability. A further $170m of projected savings is targeted from initiatives to be undertaken in 2017 through leveraging our global claims
and data analytics capabilities to improve fraudulent claims detection, claims handling and recoveries performance.
John M Green
Chairman, Remuneration Committee
Group Deputy Chairman
1
69
1. INTRODUCTION
1.1 Key management personnel 70 1
overview
Performance
2. SUMMARY OF REMUNERATION OUTCOMES FOR 2016
2.1 Remuneration and incentive outcomes in 2016 71
2.2 Realised 2016 remuneration 72
3.
3.1
DETAILED REMUNERATION OUTCOMES FOR 2016
The impact of QBE’s 2016 performance on remuneration 73
2
review
Business
3.2 Measuring performance 74
3.3 Long-term performance and incentive outcomes 76
Governance
4.3 Fixed remuneration 80
4.4 Short-term incentives 81
4.5 Long-term incentives 82
4.6 Keeping executives’ and shareholders’ interests aligned 84
5.
5.1
REMUNERATION GOVERNANCE
Use of remuneration consultants 86 4
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Directors'
5.2 Risk management 86
6. REMUNERATION IN DETAIL
6.1 Statutory remuneration disclosures 87
5
6.2 Former executives 88
6.3 Equity-based remuneration 88
6.4 Conditional rights 89
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Financial
6.5 Employment agreements 90
9. APPENDIX
9.1 Legacy equity schemes 97
9.2 Valuation of conditional rights 98
9.3 Equity instruments 99
9.4 Shareholdings 101
9.5 Loans 102
70
Remuneration Report
Remuneration Report CONTINUED
1. INTRODUCTION
1. INTRODUCTION
Overview
Overview
This Remuneration Report sets out QBE’s remuneration framework and provides detail of remuneration outcomes for key
management personnel (KMP) for 2016 and how this aligns with QBE’s performance.
Accounting standards define KMP as those executives and non-executive directors with the authority and responsibility for
planning, directing and controlling the activities of the Group, either directly or indirectly.
The 2016 Remuneration Report has been prepared and audited in accordance with the disclosure requirements of the
Corporations Act 2001.
COUNTRY OF
NAME POSITION RESIDENCE TERM AS KMP IN 2016
Current executives
John Neal Group Chief Executive Officer Australia Full year
Executive Director
Jason Brown Group Chief Risk Officer Australia Full year
Colin Fagen 1 Group Chief Operations Officer Australia Full year
David Fried Chief Executive Officer, Emerging Markets Hong Kong Full year
Russell Johnston Chief Executive Officer, North American Operations United States of Commenced 2 May 2016
America
Margaret Murphy Group Chief Human Resource Officer Australia Commenced 1 October 2016
Richard Pryce Chief Executive Officer, European Operations United Kingdom Full year
Patrick Regan 2 Group Chief Financial Officer Australia Full year
Chief Executive Officer, Australian & New Zealand Operations
Executive Director
Former executives
David Duclos Chief Executive Officer, North American Operations United States of Ceased 31 May 2016
America
Mike Emmett Group Executive Officer, Operations Australia Ceased 23 February 2016
Tim Plant Chief Executive Officer, Australian & New Zealand Operations Australia Ceased 17 August 2016
Jenni Smith Group Executive Officer, People and Communications Australia Ceased 31 October 2016
Non-executive directors
Marty Becker Chairman, Non-executive director United States of Full year
America
Stephen Fitzgerald Non-executive director United Kingdom Full year
John M Green Deputy Chairman, Non-executive director Australia Full year
Margaret Leung Non-executive director Hong Kong Full year
Kathryn Lisson Non-executive director Canada Commenced 1 September 2016
Sir Brian Pomeroy Non-executive director United Kingdom Full year
Jann Skinner Non-executive director Australia Full year
Rolf Tolle Non-executive director United Kingdom Commenced 11 March 2016
Michael Wilkins Non-executive director Australia Commenced 1 November 2016
1 Colin Fagen was in the role of Group Chief Strategy Officer prior to becoming the Group Chief Operations Officer on 23 February 2016.
Colin Fagen ceased being a KMP on 9 February 2017.
2 While retaining his existing Group Chief Financial Officer responsibilities, Pat Regan became Chief Executive Officer, Australian & New
Zealand Operations on 17 August 2016.
3
71
Remuneration Report
overview
Performance
2.1 Remuneration and incentive outcomes in 2016
This section provides a summary of the remuneration outcomes for executives and non-executive directors in 2016. Further details
of remuneration outcomes are found in section 6 of the Remuneration Report.
2
review
Business
COMPONENT
COMPONENT 2016 OUTCOMES
2016 OUTCOMES
Fixed
Fixed There were no increases in fixed remuneration to the Group CEO and executives in 2016 and
3
none have been budgeted for 2017.
remuneration
remuneration
Governance
Short-term STI outcomes have been improving since 2013 as we moved through a period of refocus and
incentive (STI) stabilisation. An STI for the Group CEO of A$2,199,953 (or 50.0% of maximum opportunity) was
awarded in 2015 and A$1,307,000 (or 31.1% of maximum opportunity) in 2014.
Our statutory return on equity (ROE) for 2016 was 8.1%. We have maintained our approach from
4
previous years and reversed 50% of the effect of actual discount rate movements versus our
budget assumptions from the statutory result. In 2015, this reduced the ROE outcome for
management by 0.2% while in 2016 it increased the ROE outcome by 0.3%. Consequently the
Report
Directors'
Group ROE outcome for 2016 STI purposes was 8.4%, i.e. 0.1% below our target of 8.5%.
Based on this and the Board’s assessment of the Group CEO’s performance against his balanced
Short-term scorecard, an STI of A$2,762,646 would have been awarded. The Group CEO has had a
incentive commendable year and delivered a strong full year result for QBE. His performance is well
regarded by the Board. However, both parties agree some recent personal decisions by the CEO
(STI) have been inconsistent with the Board’s expectations. Therefore, the Board has decided that his
2016 STI will be reduced by 20%. Consequently, the Group CEO’s 2016 STI was adjusted to
A$2,210,117 (or 50.2% of maximum opportunity).
5
Report
Financial
50% of the Group CEO’s STI is deferred in the form of conditional rights vesting in two equal
tranches over two years subject to service conditions and malus provisions.
The average STI awarded to executives, other than the Group CEO, was 61.1% of the maximum
opportunity, 33% of which is deferred in the form of conditional rights.
The average STI awarded to executives, other than the Group CEO, in 2015 and 2014 was 57.9%
and 39.1% of the maximum opportunity respectively. 6
information
Other
Long-term
Long-term LTI grants were made in 2016 in accordance with the target remuneration mix for each executive.
incentive (LTI)
incentive
Performance hurdles for LTI awards made in 2012 and 2014 were tested in February 2017 and did
not meet the level of performance required to vest.
(LTI) No LTI has vested since awards were introduced in 2010.
Awards
Awards vesting Deferred equity awards (DEA) made under the 2010 DEA, 2012 DEA and 2014 STI plans vested
vesting during the year upon satisfaction of service conditions.
Other payments Russell Johnston was granted 50,000 conditional rights to QBE shares to compensate for
Other incentives forfeited on ceasing his previous employment to join QBE. Vesting of these conditional
payments rights is subject to the achievement of Group targets over three performance years and service
conditions. The award will vest in three equal tranches on 15 March 2017, 2018 and 2019.
Non-executive Total amount paid to non-executive directors in 2016 was A$3,113,000 (2015: A$2,957,000).
director fees There were no increases to director fees in 2016 and none have been budgeted for 2017.
Non- Total remuneration pool available to non-executive directors remained at A$3,500,000 in 2016.
executive For 2017, the Board will be recommending for shareholders’ approval at the AGM that the pool be
director fees increased to A$4,000,000. This will allow scope for an increase in the number of directors on the
Board, the formation of a new Operations and Technology Committee, as well as to enable the
Group to manage the Board succession planning.
4
72
Remuneration Report
Remuneration Report CONTINUED
Overview
Overview
QBE is required to disclose actual remuneration outcomes in the financial period under review. The values reported
include the accrued STI cash award for the 2016 financial year and the value of any equity awards that vested during
the year. The value of vested equity awards has been calculated using the closing share price on the vesting date.
The figures in this table are different from those shown in the statutory table in section 6.1 of the Remuneration Report.
For example, the statutory table includes an apportioned accounting value for all unvested equity held during the year,
which remains subject to performance and service conditions and consequently may or may not ultimately vest.
The table below sets out the actual value of the remuneration realised by executives in 2016.
DEFERRED
EQUITY
REMUNERATION EARNED IN 2016 OUTCOME IN 2016
TOTAL
FIXED CONDITIONAL TERMINATION REMUNERATION
REMUNERATION STI CASH 1
OTHER 2
RIGHTS VESTED 3 BENEFITS 4 REALISED IN 2016
EXECUTIVES US$000 US$000 US$000 US$000 US$000 US$000
Group head office
John Neal 1,635 821 97 476 – 3,029
Jason Brown 520 347 27 172 – 1,066
Colin Fagen 5 971 – 109 451 – 1,531
Margaret Murphy 139 92 87 – – 318
Patrick Regan 1,189 992 103 1,174 – 3,458
Divisional
David Fried 920 576 1,547 415 – 3,458
Russell Johnston 584 429 18 – – 1,031
Richard Pryce 966 801 149 410 – 2,326
Former executives
David Duclos 475 296 17 367 – 1,155
Mike Emmett 106 65 (10) – 900 1,061
Tim Plant 442 149 30 191 357 1,169
Jenni Smith 462 303 57 92 457 1,371
1 The STI cash amount in respect of performance in 2016 is payable in March 2017. For further details, refer to section 4.4 of the
Remuneration Report.
2 “Other” includes provision of motor vehicles, health insurance, spouse travel, staff insurance discount benefits received during the year,
life assurance and personal accident insurance and the applicable taxes thereon. It also includes the deemed value of interest-free share
loans, the movement in annual leave and long service leave provisions, tax payments and other one-off expenses. For David Fried, this also
includes expatriate benefits including a housing allowance, education assistance, a cost of living adjustment and associated taxes thereon.
For Margaret Murphy, this includes cost of relocation.
3 The value of conditional rights has been determined by reference to the closing share price on the relevant vesting date. For Patrick Regan,
this includes the second tranche of conditional rights granted on 20 August 2014 which vested on 1 March 2016. For further details, refer
to section 6.4.3 of the Remuneration Report.
4 “Termination benefits” in respect of Mike Emmett, Tim Plant and Jenni Smith includes apportioned fixed remuneration paid for the balance
of the notice period to the termination date and STI cash awards from the date of ceasing to be a KMP to the date of termination. For Mike
Emmett this also includes a redundancy payment and a restraint payment. For further details, refer to section 6.2 of the Remuneration Report.
5 At the time of publishing the Remuneration Report, the 2016 STI award to Colin Fagen has not been determined. The award will be
determined in accordance with the STI Plan Rules.
5
73
Remuneration Report
overview
Performance
Overview
Overview
This section explains the link between our reward framework and the key financial profit drivers that encourage achievement
of Group business plans and create long-term shareholder value.
The incentive structure and financial targets are approved annually by the Remuneration Committee. ROE and total
2
review
Business
shareholder return (TSR) are the primary measures for at-risk remuneration purposes. Achievement of these targets
demonstrates the alignment between financial performance over time and incentive awards for Group executives.
Governance
The table below shows 2016 Group and divisional financial performance targets for 2016 and the 2016 Group ROE and divisional return
on allocated capital (RoAC) performance for executive incentive purposes. The ROE/RoAC targets reflect market factors in each division.
4
ROE/ROAC PERFORMANCE %
NORTH AUSTRALIAN &
AMERICAN EUROPEAN NEW ZEALAND EMERGING
Report
Directors'
OPERATIONS OPERATIONS OPERATIONS MARKETS GROUP
Threshold 3.3 6.5 9.7 5.6 6.0
Target 7.8 11.5 14.7 13.6 8.5
Superior 13.3 16.5 19.7 21.6 12.0
Performance 6.8 12.7 11.7 13.0 8.4
% achievement of target 82.2 112.1 52.5 93.8 97.7
5
Report
Financial
The table below shows the performance and total 2016 STI outcomes (both the cash and deferred portions) achieved by executives for
the year ended 31 December 2016.
PERFORMANCE AS A % OF TARGET TARGET STI ACTUAL STI OUTCOME 1
GROUP DIVISIONAL BALANCED TOTAL STI % OF FIXED % OF FIXED STI STI
EXECUTIVES
Group head office
ROE
%
ROAC SCORECARD
% %
OUTCOME
%
REMUNERATION
%
REMUNERATION
%
TOTAL CASH DEFERRED
US$000 US$000 US$000
6
information
Other
John Neal 2 78.2 N/A 64.0 75.3 133.3 100.5 1,642 821 821
Jason Brown 97.7 N/A 101.3 99.5 100.0 99.5 518 347 171
Patrick Regan 97.7 N/A 127.5 103.7 120.0 124.4 1,480 992 488
Colin Fagen 3 – – – – 100.0 – – – –
Margaret Murphy 4 97.7 N/A 100.0 98.2 100.0 98.2 137 92 45
Divisional
Russell Johnston 4 97.7 82.2 82.5 86.9 120.0 104.3 640 429 211
David Fried 97.7 93.8 82.5 92.7 100.0 92.7 860 576 284
Richard Pryce 97.7 112.1 115.6 108.5 100.0 108.5 1,196 801 395
Former executives
David Duclos 4 97.7 82.2 82.5 86.9 120.0 104.3 442 296 146
Mike Emmett 4 97.7 N/A 82.5 94.7 100.0 94.7 97 65 32
Tim Plant 4, 5 67.7 36.4 57.5 50.0 100.0 50.0 222 149 73
Jenni Smith 4 97.7 N/A 82.5 94.7 100.0 94.7 452 303 149
6
74
Remuneration
Remuneration
RemunerationReport
Report
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Remuneration Report CONTINUED
3.2
3.2
3.2 Measuring
Measuring
Measuring
performance
performance
performance
Overview
Overview
Overview
Overview
All
AllAll
executives
executives
executives have
have
have20%
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their
STI
STISTI
outcome
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with
with
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totoindividual
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and
and
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Jason
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incentive
incentive
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outcomes.
outcomes.
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balanced
balanced
balanced
scorecard
scorecard
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isisaligned
isaligned
aligned
with
with
with
QBE’s
QBE’s
QBE’s
business
business
business
plans
plans
plans
and
and
and
measures
measures
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objectives
objectives
objectives
which
which
which
support
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support
the
the
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elements
elements
ofofof
QBE’s
QBE’s
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value
value
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creation
creation
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model.
model.
model.
The
TheThe
balanced
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scorecard
scorecard
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forfor
each
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toensure
ensure ititisitisappropriate.
isappropriate.
appropriate.
The
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table
table
table
below
below
below
sets
sets
sets
out
out
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the
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keykeyobjectives
objectives
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for
forfor
the
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for
forfor
2016.
2016.
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The
The
objectives
objectives
objectives
for
forfor
other
other
other
executives
executives
executives
are
are
are
consistent.
consistent.
consistent.
STRATEGIC
STRATEGIC
STRATEGIC Achieve
Achieve
Achieve
Group
Group
Group On
On
On
target
target
target Plan
Plan
Plan
executed
executed
executed successfully
successfully
successfullyininchallenging
inchallenging
challenging
MANAGEMENT
MANAGEMENT
MANAGEMENT performance
performance
performance
targets
targets
targets markets
markets
markets
and
andandnotwithstanding
notwithstanding
notwithstanding ANZO
ANZO
ANZO
Strategic Strengthen
Strengthenstress
Strengthen
stresstesting
stresstesting
testing challenges
challenges
challenges
management approach
approach
approach Business
Business review
Business review
reviewand
and stress
andstress testing
stresstesting
testing
continues
continues totoprovide
continues toprovidestronger
providestronger
strongerlead
leadwarnings
leadwarnings
warnings
PROFITABLE
PROFITABLE
PROFITABLE Achieve
Achieve
Achievegrowth
growth
growth
and
and
and Slightly
Slightly
Slightly Targets
Targets
Targets achieved
achieved
achieved ininLatin
inLatin
Latin
America
America
America but
butbut
GROWTH
GROWTH
GROWTH AND
AND
AND profitability
profitability
profitability
targets
targets
targets below
below
below
target
target
target profitability
profitability
profitability
still
still
still
challenged
challenged
challenged ininLatin
inLatin
Latin
America
America
America
Profitable
DIVERSIFICATION
DIVERSIFICATION
DIVERSIFICATION ininEmerging
inEmerging
Emerging Markets
Markets
Markets where
where
where focus
focus has
focus has been
has been
beenon rationalisation
onon rationalisation
rationalisation
growth and Achieve
Achieve
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new growth
growth and
and remediation
and remediation
remediation
diversification opportunities
opportunities
opportunitieswhich
which
which Focus
Focus
Focus on strengthening
ononstrengthening
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core rather
core ratherthan
ratherthan
than
support
support core
support core strategy
corestrategy
strategy new
new
newopportunities
opportunities
opportunities
LEADERSHIP
LEADERSHIP
LEADERSHIP Progress
Progress
Progressgrowth
growth
growthinitiatives
initiatives
initiatives On
On
On
target
target
target Good
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progress
progress on
onon
Multinational
Multinational
Multinational
capability
capability
capability
IN
ININ
OUR
OUR
OUR
CORE
CORE
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around
aroundcore
core
core Customer
Customer
Customer retention
retention improved
retention improved
improved by 1%
byby 1% across
1% across
across
BUSINESS
BUSINESS
BUSINESS Sponsor
Sponsor
Sponsorimproved
improved
improved the
thebusiness
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retention
retention Hub
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andspoke
spokemodel
model
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analyticswith focus
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focuson customer,
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in our core and
and claims
andclaims
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insights. 70
insights. active
7070activeprojects
active
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projects
Strengthen
Strengthen
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distribution
distribution
business relationships
relationships
relationships underway
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underway
Excellent
Excellent relationships
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relationships maintained
maintained
maintained although
although
although
growth
growth continues
growth continues
continues totobe challenging
tobebechallenging
challenging
77 7
75
Remuneration
RemunerationReport
Report
overview
Performance
OPERATIONAL
OPERATIONAL Achieve
Achieverunrun
raterate
cost
cost OnOn
target
target Target
Target
achieved
achievedwithwith
plans
plans
for for
further
further
EXCELLENCE
EXCELLENCE reduction
reductionof $100
of $100million
million reduction
reduction
in 2017
in 2017
–Operational
– GLOBAL
GLOBAL Strengthen
Strengthen operating
operating Procurement,
Procurement,IT and
IT andHRHRcentralised
centralisedto to
2
REACH
REACH
excellence model
modelto achieve
to achieve achieve benefits
achieve of global
benefits solutions
of global andand
solutions
ANDAND SCALE
SCALE
– global reach synergies
synergiesandand
economies
economies economies
economiesof scale
of scale
review
Business
of scale
of scale Target exceeded
Target exceeded in 2017 through
in 2017 throughlower
lower
and scale
15%
15%reduction
reductionin in brokerage andand
brokerage programme
programme restructure
restructure
reinsurance
reinsurance costs by by
costs 2018
2018
FINANCIAL
FINANCIAL
STRENGTH
STRENGTH
Drive
Drive
strong
strong
remittances
remittances
cash
cash
>$700
flow
>$700
flow
million
million
OnOn
target
target Exceeded
Exceeded
of $1,100
of $1,100
target,
target,
million
cash
million
cash
flowflow
remittances
remittances 3
Governance
Financial
AND
AND Maintain
Maintaina strong
a capital
strong capital Target achieved
Target achieved
FLEXIBILITY
FLEXIBILITY
strength and position consistent
position consistentwith
with Net investment
Net return
investment of 2.4%,
return slightly
of 2.4%, below
slightly below
flexibility S&PS&P‘AA’
‘AA’ target
target
Achieve
Achievetarget investment
target investment
return
return
4
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Directors'
WORLD
WORLD Strengthen
Strengthenleadership
leadership Slightly
Slightly Executive
Executiveleadership
leadershipbench
benchstrength
strength
CLASS
CLASS andand
succession
succession plans
plans below
below
target
target improved.
improved.Succession
Succession plans
plans
areare
developing
developing
TALENT
TALENT AND
AND across QBE
across QBE Engagement
Engagement scores improved
scores improved by by
3%3% – still
– still
LEADERSHIP
LEADERSHIP Modernise
Modernise culture andand
culture work in progress
work in progress
World class
talent and
improve
improve
scores
engagement
by by
scores
engagement
5%5%
Diversity
Global
statistics
Diversity
Head
Global Head
improving
statistics improving
of Communications
of Communications recruited
recruited
5
Report
Financial
leadership Achieve
Achievediversity targets
diversity targets to drive communications
to drive communications strategy
strategy
Implement
Implement corporate
corporate
communications
communications strategy
strategy
to drive ONE
to drive ONEQBE QBE
thinking
thinking
6
information
Other
TheThe
Group
GroupCEOCEO
hashas
hadhad
a commendable
a commendable year
year
andand
delivered
delivereda strong
a strong
fullfull
yearyear
result
result
for for
QBE.
QBE.
HisHis
performance
performanceis well
is well
regarded
regarded
by by
thethe
Board.
Board.
However,
However,both
both
parties
parties
agree
agree
somesomerecent
recent
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personal decisions
decisionsby by
thethe
CEOCEOhave
havebeenbeen
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inconsistent
with
with
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Board’s
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expectations.
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Therefore,
thethe
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Board
hashas
decided
decided
thatthat
hishis
2016
2016
STISTI
willwill
be be
reduced
reduced
by by
20%.
20%.
8 8
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The following table shows KPIs of the Group over the last five years.
FINANCIAL RESULTS 2016 2015 2014 2013 2012
Combined operating ratio % 94.0 94.9 96.1 97.8 97.1
Profitability measures
Net profit (loss) after income tax (NPAT) US$M 844 687 742 (254) 761
Diluted earnings per share US cents 60.8 49.8 55.8 (22.8) 61.6
Weighted average risk-free discount rate 1 % 1.3 1.6 1.4 2.2 1.6
Net investment yield % 2.4 2.3 2.4 2.6 4.1
Return on equity
Return on average shareholders’ funds % 8.1 6.4 6.9 (2.3) 7.0
ROE for STI purposes 2 % 8.4 7.8 8.1 N/A N/A
Return to shareholders
Dividend per share Australian cents 54 50 37 32 50
Share price at 31 December A$ per share 12.42 12.59 11.21 11.51 10.90
Underwriting profit US$M 668 629 547 341 453
Total Shareholder Return 3 % 5.32 15.24 (0.37) 7.72 (11.44)
Howperformance
How performancetranslated
translated to
to remuneration
remuneration outcomes
outcomes
The chart on the right shows the return on average STI outcomes and company performance
shareholders’ funds (i.e. Group statutory ROE) over % %
the past five years and STI outcomes for the Group 10 100
CEO as a percentage of maximum opportunity. This
shows a high level of correlation between performance
8.1
8 80
and STI outcomes and a steady improvement in
7.0
6.9
6.4
2 20
(2.3)
0 0
9
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Remuneration Report
overview
Performance
Overview
Overview
QBE’s remuneration strategy is designed to provide market competitive remuneration that motivates and retains QBE’s
executives, aligned with the creation of sustained shareholder value. QBE’s executive remuneration structure comprises
a mix of fixed and at-risk remuneration reflecting a balance of short and long-term incentives. This section provides an overview
of the remuneration components and their link to strategy.
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Business
4.1 QBE’s remuneration principles
3
Governance
Overview
Overview
4
QBE’s remuneration principles have been developed to promote robust risk management practices to manage remuneration
across the Group. These are summarised below.
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Directors'
Reflect ONE QBE 5
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Financial
6
information
Other
Linked Globally Shareholder
Simple to strategy competitive Motivating aligned
At-risk reward Incentive performance A common global At-risk reward Significant levels of
methodology that is measures that provide remuneration design schemes that combine deferred equity resulting
easily understood by significant alignment that provides flexibility “stretch” targets and from performance
internal stakeholders and linkage to QBE’s key to calibrate local performance measures against key investor
and transparent to strategic priorities. financial targets, linked to statutory metrics that align
external shareholders. enabling QBE to disclosures and business reward arrangements
compete in key markets. plans, providing to shareholder
transparency and interests. Executive
motivating participants. minimum shareholding
requirements further
link their interests to
those of shareholders.
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The diagram below illustrates the payment profile for the Group CEO of the 2016 total remuneration framework.
Fixed remuneration
STI – cash
STI – deferred equity
LTI equity
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Remuneration Report
overview
Performance
Overview
Overview
QBE’s remuneration mix is designed to remunerate executives competitively and suitably reward for the achievement of the
2
Group’s performance targets, whilst providing strong governance to protect the financial soundness of the Group and
shareholders’ interests.
The mix of total remuneration is reflective of an executive’s ability to influence QBE’s financial results, therefore the
review
Business
range is varied. The mix between short-term cash, deferred STI and LTI is focused towards the longer term time horizon,
enhancing alignment with the delivery of QBE’s long-term strategy and shareholders’ interests.
The diagram below shows the remuneration mix for 2016, assuming on-target performance.
Governance
Group CEO
Group CEO
23.1% 15.4% 15.4% 46.1%
23.1% 15.4% 15.4% 46.1%
4
Group CFO
Group CFO
27.0% 21.7% 10.7% 40.6%
27.0% 21.7% 10.7% 40.6%
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Directors'
Group head office executives
Group head office executives
36.4% 24.4% 12.0% 27.2%
36.4% 24.4% 12.0% 27.2%
Group Chief Operations Officer
Group Chief Operations Officer
30.8%
30.8%
20.6%
20.6%
10.1%
10.1%
38.5%
38.5%
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Financial
CEO, North American Operations
CEO, North American Operations
31.3% 25.1% 12.4% 31.2%
31.3% 25.1% 12.4% 31.2%
Other divisional CEOs
Other divisional CEOs
33.4%
33.4%
22.3%
22.3%
11.0%
11.0%
33.3%
33.3%
6
information
Other
Fixed STI cash STI deferred LTI
Fixed STI cash STI deferred LTI
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Description
Description
Fixed remuneration comprises cash salary, superannuation/pension and packaged benefits, additional annual benefits and
associated taxes.
Additional annual benefits may include health insurance, life assurance, personal accident insurance, car allowances, expatriate benefits
and the applicable taxes thereon.
Excludes deemed interest on employee share loans and long service leave accruals.
Delivered in accordance with terms and conditions of employment.
Determining
Determiningfixed remuneration
fixed levels
remuneration levels
Fixed remuneration considers the diversity, complexity and expertise required of individual roles. Remuneration quantum is set in the
context of QBE’s broader reward strategy and internal relativities.
To assess the competitiveness of fixed remuneration, the Remuneration Committee considers market data and recognised published
surveys. In addition, external market reviews are undertaken periodically to inform the setting of competitive fixed remuneration levels.
Executive roles that are Australian based are generally benchmarked to the ASX30 peer group of companies, with a specific focus on global
companies and companies in the financial services industry.
Overseas-based executives or roles that have a global reach are compared with a peer group consisting of global insurers. The peer group
of companies used for remuneration benchmarking purposes in 2016 is set out in the table below:
PEER GROUP DESCRIPTION
ASX30 peer group Excludes infrastructure trusts and companies domiciled overseas.
The financial services company sub-peer group is determined based on the industry classification listed on the
ASX and includes commercial banks and insurers.
The sub-peer group of global companies in the ASX30 is determined based on the global complexity of the
organisation using the following criteria:
companies with greater than 25% revenue from overseas; and
companies operating in greater than two geographic locations.
Global insurance Consists of large, global insurance companies in the Dow Jones Insurance Titans Index excluding life and health
peer group insurance, reinsurance and insurance brokers.
RSA and Hartford are included in this peer group given their similarities to QBE.
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overview
Performance
The following outlines the key details of the STI plan. STI awards made in 2016 are summarised in section 3.1 of the Remuneration Report.
Description
Description
The STI is a performance based incentive delivered in the form of an annual cash payment and a deferred award in the form of conditional
rights to QBE shares. For executives in the United Kingdom, the deferred award is in the form of zero exercise price options (ZEPOs).
2
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Performance is measured over a 12 month period.
Performance
Performancemeasures
measuresand rationale
and rationale
3
STI outcomes are based on performance against Group statutory ROE and divisional RoAC targets in the case of divisional executives,
as well as individual performance against a balanced scorecard of KPIs relevant to each executive’s role.
Group statutory ROE is calculated as statutory consolidated net profit after tax as a percentage of average shareholders’ funds. Statutory
Governance
ROE was selected as it is transparent and a strong measure of value created for shareholders. The STI rules provide suitable discretion to the
Remuneration Committee to adjust any formulaic outcome to ensure STI awards appropriately reflect performance. Adjustments are
typically made in limited cases to better reflect underlying performance. These include an adjustment for 50% of any unbudgeted change in
discount rates and to exclude the impact of unbudgeted acquisitions or divestments. For 2016, the only adjustment to ROE related to
unbudgeted changes in discount rates.
RoAC is calculated as the divisional management basis profit divided by allocated capital, as determined by the Group’s economic
capital model.
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The balanced scorecard comprises financial and non-financial KPIs relevant to each executive’s role which are aligned to the QBE value
creation model. Executive performance against the balanced scorecard is evaluated annually by the Group CEO and by the Chairman
in respect of the Group CEO, through formal business review assessments.
The following table details the weighting of the performance measures for the STI.
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Financial
Group CEO, Group CFO and Group head office executives
80% 20%
6
Group Chief Operations Officer and Group Chief Risk Officer
50% 50%
information
Other
Divisional CEOs
Vesting
Vestingschedule
schedule
Instrument andand
Instrument deferral mechanics
deferral mechanics
67% of any STI award is delivered in cash (50% in the case of the Group CEO); and
33% of any STI award is deferred as conditional rights to QBE shares (50% in the case of the Group CEO).
Deferred STI vests in two tranches – 50% on the first anniversary of the award and the other 50% on the second anniversary of the award.
Vesting is subject to service conditions and malus provisions during the deferral period.
To calculate the number of conditional rights to be granted, the award value is divided by the volume weighted average sale price
of QBE shares over the five trading days prior to the grant date.
Notional dividends accrue during the deferral period.
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Leaver
Leaverprovisions
provisions
“Good leaver” provisions (e.g. retirement, redundancy, ill health, injury) will apply such that:
STI opportunity is reduced to a pro-rata amount to reflect the proportion of the performance year in service;
deferred awards remain in the plan subject to the original vesting conditions; and
on voluntary termination, dismissal or termination due to poor performance, all awards are forfeited.
Malus
Malusprovision
provisions
STI deferral is subject to malus provisions, enabling awards to be either forfeited or reduced at the discretion of the Remuneration
Committee. See section 4.6 of the Remuneration Report for more details on malus.
The following outlines the key details of the LTI plan. LTI awards made in 2016 are summarised in section 6.4.2 of the Remuneration Report.
Description
Description
The LTI plan consists of an award of conditional rights to QBE shares. Conditional rights are awarded at no cost to the executive.
LTI awards for the Group CEO and Group CFO in 2016 were approved by shareholders at the Annual General Meeting.
Performance
Performancemeasures
measures
Vesting is subject to two performance conditions measured over a three year performance period:
1. Average Group statutory ROE over three years – for 50% of the award.
2. Relative TSR – for 50% of the award.
LTI
LTIallocation
allocation
To calculate the number of conditional rights to be granted, the award value is divided by the volume weighted average price of QBE shares
over the five trading days prior to the grant date.
Vesting
Vestingschedules
schedules
GROUP ROE
The Group ROE vesting schedule for 2016 awards is outlined below:
PERCENTAGE OF CONDITIONAL RIGHTS IN THE ROE
ROE PERFORMANCE TRANCHE TO VEST
Below 7.0% 0%
At 7.0% 20%
Between 7.0% and 10.6% Straight line between 20% and 100%
At or above 10.6% 100%
The Remuneration Committee may use, and intends to use, discretion when assessing the extent to which the Group statutory ROE
performance target has been met, to adjust the vesting outcome upwards or downwards in circumstances where there has been a material
variance in the risk-free discount rate over the performance period from that assumed when setting the target. This acknowledges that
QBE’s results are heavily influenced by movements in risk-free discount rates that are beyond the influence of participants.
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Performance
QBE RTSR RANKING RELATIVE TO THE COMPARATOR GROUP TRANCHE TO VEST
Less than the 50th percentile 0%
At the 50th percentile 50%
Between the 50th and the 75th percentile Straight line between 50% and 100%
75th percentile or greater 100%
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Business
The relative TSR comparator group will generally consist of companies in the Dow Jones Insurance Titans Index group adjusted for those
with most relevance to QBE’s business operations. The comparator group for the 2016 LTI award is Allstate Corp (US), Allianz SE-Reg
(Germany), American International Group (US), Assicurazoni Generali (Italy), Aviva Plc (UK), AXA – SA (France), Chubb Corp (US),
IAG Ltd (Australia), RSA Group (UK), Suncorp Group Ltd (Australia), The Hartford (US), The Travellers Cos Inc (US), QBE Insurance
Group Ltd (Australia) and Zurich Insurance Group (Switzerland).
Vesting
Vestingofof
LTI
LTI
3
Governance
Following assessment of performance measures at the end of the three year performance period, conditional rights will vest in three
tranches as set out in the table below, subject to service conditions and malus provisions.
PORTION OF ELIGIBLE CONDITIONAL
4
TRANCHE VESTING DATE RIGHTS TO VEST
1 End of the three year performance period 33%
2 First anniversary of the end of the performance period 33%
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Directors'
3 Second anniversary of the end of the performance period 34%
“Good leaver” provisions (e.g. retirement, redundancy, ill health, injury) will apply such that a pro-rata amount (applied over the three year
performance period) of LTI conditional rights remain subject to the original performance and vesting conditions.
Notional dividends accrue during the vesting period.
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Financial
Malus
Malus
LTI is subject to malus provisions such that awards may be either forfeited or reduced at the discretion of the Remuneration Committee. See
section 4.6 of the Remuneration Report for more details on malus.
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QBE has a number of practices which ensure executives’ interests are aligned with those of QBE’s shareholders.
Minimum
Minimumshareholding
shareholding
The minimum shareholding requirement (MSR) encourages executives to build their shareholding and ensures they have significant
exposure to QBE’s share price and, by doing so, confirms their long-term interests are aligned with shareholders.
Under the requirement, all executives must accumulate a minimum shareholding in QBE equivalent to one year’s fixed remuneration and
1.5 times fixed remuneration for the Group CEO by 31 March each year. From 2017, the MSR will increase to 3.0 times fixed remuneration
for the Group CEO and 1.5 times for other executives. This minimum holding is to be maintained for as long as the executive remains
employed by QBE. New executives are required to build their shareholding over a three year period after becoming an executive.
For the 2016 test, the following components were included in the calculation:
all fully owned shares – using the closing share price as at 1 April 2016; and
all unvested conditional rights without a performance condition – using the greater of the value at grant date and the closing share price
as at 1 April 2016.
If an executive does not meet the minimum shareholding at the annual review date, QBE may impose a restriction on the future sale of any
equity grants. Individual executive requirements are recalculated annually to consider fixed remuneration increases and changes in the
share price or exchange rates.
The total shareholding investment of executives against the MSR at the 2016 test date (31 March 2016) is shown in the table in section 9.4
of the Remuneration Report.
Malus
Malus
The “malus” provision gives the Remuneration Committee discretion to reduce the amount of an unvested award (including to zero)
in certain circumstances during the retention period including in the case of:
serious misconduct; or
circumstances that materially undermine the reputation or performance of QBE; and
on the basis that, in each case, the conduct or circumstances were not foreseen at the time of granting the award.
This provision reflects best practice and QBE’s obligations under APRA’s prudential standard CPS 510 to incorporate terms allowing
for the adjustment of incentive awards to protect QBE’s financial soundness and ability to respond to unforeseen significant issues.
Treatment
Treatmentof of
conditional rights
conditional on aon
rights change in control
a change of QBE
in control of QBE
In accordance with the STI and LTI rules, a change in control is defined as either a scheme of arrangement that has been approved
by QBE’s shareholders or a bidder has at least 50% of the issued and to be issued QBE shares under an unconditional takeover offer
made in accordance with the Corporations Act 2001.
Should a change in organisational control occur, the Remuneration Committee has discretion to determine how unvested conditional
rights should be treated, having regard to factors such as the length of time elapsed in the performance period, the level of performance
to date and the circumstances of the change of control.
Trading
Tradingpolicy
policy
Trading in QBE ordinary shares is generally permitted outside of designated blackout periods. The QBE Share Trading Policy states that
non-executive directors and executives should notify any intended share transaction to nominated people within the Group.
The policy prohibits the hedging of unvested equity entitlements by executives. The purpose of this prohibition is to ensure that, until equity
has vested, there is an alignment between the interests of executives and shareholders, with the effect that share price movements (either
positive or negative) will economically impact executive rewards. There is a further restriction on hedging vested equity entitlements if such
entitlement counts towards the executive’s minimum shareholding requirement.
The policy is enforced by requiring non-executive directors and executives to sign an annual declaration that confirms compliance with
the restrictions on hedging. A copy of QBE’s trading policy for dealing in securities is available from www.group.qbe.com/corporate-
governance/background-documents.
Dilution
Dilutionlimits for for
limits share plans
share plans
Shares awarded under QBE’s employee share plans may be purchased on market or issued subject to Board discretion and the
requirements of the Corporations Act 2001 and the ASX Listing Rules.
At 31 December 2016, the proportion of shares and unvested conditional rights and options held in the QBE Employee Share Plan
is 2.43%. This is significantly less than the maximum of 10% over a 10 year period allowed under the plan rules.
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Performance
QBE has a robust remuneration governance framework overseen by the QBE Group Board.
review
Business
• Reviews and, as appropriate, approves recommendations from the Remuneration Committee.
Remuneration Committee 3
Governance
Reviews and recommends
Reviews Oversees
for approval to the
and approves and monitors
4
QBE Group Board
Report
Directors'
framework for executives and • Reward structures and planning framework.
non-executive directors. incentive schemes in line • Compliance with
• Contractual arrangements for the with APRA’s prudential statutory remuneration
Group CEO and other executives. standard on governance. reporting disclosures.
• Fixed remuneration and at-risk
reward for the Group CEO and
other executives.
• Major human resources
policies relating to incentive
schemes, equity schemes and
• Diversity and inclusion.
• The QBE Foundation. 5
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Financial
• Group remuneration policy. superannuation plans.
Group CEO
Divisional Remuneration
External advisors 6
Committees
information
Other
Makes recommendations to the Consisting of non-executive Provide independent
Remuneration Committee on: directors of QBE’s divisional advice to the Remuneration
• Incentive targets and outcomes. boards, provide input to the Committee on:
Remuneration Committee • Management proposals.
• Balanced scorecard
and the Group CEO on:
measures and assessment • Benchmark data and
for direct reports. • Remuneration practices market practice.
of the respective division.
• Remuneration policy for
all employees. • Ongoing compliance
with regulatory
• Long-term
remuneration requirements.
incentive participation.
• Individual remuneration and
• Individual remuneration and
contractual arrangements
contractual arrangements
for senior employees
for executives.
reporting to the divisional
CEO and any other
employees specified by the
relevant regulations.
Further details on the role and scope of the Remuneration Committee are set out in the QBE Remuneration Committee charter (available
from www.group.qbe.com/corporate-governance/background-documents).
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Remuneration consultants provide guidance on remuneration for executives, facilitate discussion, review remuneration and at-risk reward
benchmarking within industry peer groups and provide guidance on current trends in executive remuneration practices.
Any advice provided by remuneration consultants is used as a guide and is not a substitute for consideration of all the issues by each
non-executive director on the Remuneration Committee.
The Remuneration Committee retained UK based firm FIT Remuneration Consultants LLP (FIT) to act as its independent remuneration
adviser. Having received a declaration by FIT that they were not unduly influenced by QBE executives in regard to their remuneration
recommendations, the Remuneration Committee and the Board are satisfied that the advice provided by FIT during 2016 was provided
free from undue influence.
The cost of advice and assistance provided by FIT in 2016 was $157,000.
During 2016, management requested reports on market practice from PwC and other sources. No recommendations in relation to the
remuneration of KMP were provided as part of these engagements.
The Remuneration Committee works closely with Group Risk to ensure that any risk associated with remuneration arrangements
is managed within the Group’s risk management framework. Risk oversight policies exist within the remuneration governance
framework to ensure executives cannot unduly influence a decision that could materially impact their own incentive outcome.
Global risk KPIs are included in executives balanced scorecards providing direct alignment between adherence to QBE’s risk management
process and incentives. In addition, the Group Chief Risk Officer attends the Remuneration Committee annually to report on executive
risk behaviours.
The Group Board approves a comprehensive delegated authority for the Group CEO, which is an integral part of QBE’s risk
management process.
Executives are required to adhere to a range of Group-wide policies to ensure risk taking is well managed, strong governance structures
are in place and high ethical standards are maintained. These policies are communicated to all employees throughout the Group.
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Remuneration Report
overview
Performance
6.1 Statutory remuneration disclosures
Overview
Overview 2
review
Business
The following table provides details of the remuneration of QBE’s executives as determined by reference to applicable
Australian Accounting Standards (AASB) for the financial year ended 31 December 2016. Remuneration has been
converted to US dollars using the average rate of exchange for the relevant year.
Governance
OTHER
POST LONG-TERM SHARE-
SHORT-TERM EMPLOYMENT EMPLOYMENT EMPLOYEE BASED
BENEFITS BENEFITS BENEFITS PAYMENTS 1
BASE STI LEAVE CONDITIONAL TERMINATION
SALARY OTHER 2
CASH 3 SUPERANNUATION ACCRUALS 4 RIGHTS 5 BENEFITS TOTAL
EXECUTIVES
Group head office
YEAR US$000 US$000 US$000 US$000 US$000 US$000 US$000 US$000
4
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Directors'
John Neal 2016 1,635 113 821 – (16) 1,975 – 4,528
2015 1,631 79 330 – (13) 1,232 – 3,259
Jason Brown 2016 506 2 347 15 25 377 – 1,272
2015 501 39 310 14 26 377 – 1,267
Colin Fagen 6 2016 956 22 – 15 87 748 – 1,828
Margaret Murphy
2015
2016
844
127
40
80
465
92
14
12
57
7
708
17
–
–
2,128
335
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Financial
2015 – – – – – – – –
Patrick Regan 2016 1,189 94 992 – 9 1,439 – 3,723
2015 1,190 34 412 – (9) 2,155 – 3,782
Divisional
David Fried 2016 906 1,539 576 21 – 668 – 3,710
Russell Johnston
2015
2016
899
571
1,235
11
501
429
21
21
–
–
573
367
–
–
3,229
1,399
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information
Other
2015 – – – – – – – –
Richard Pryce 2016 966 149 801 – – 910 – 2,826
2015 1,085 166 985 – – 775 – 3,011
Former executives
David Duclos 7 2016 462 9 296 21 – 439 – 1,227
2015 1,000 19 729 23 – 826 – 2,597
Mike Emmett 8 2016 106 1 65 – (12) 49 1,397 1,606
2015 678 31 339 14 24 449 – 1,535
Tim Plant 8 2016 428 5 149 15 25 241 832 1,695
2015 270 20 140 9 (10) 318 – 747
Jenni Smith 8 2016 448 18 303 15 39 199 813 1,835
2015 556 23 279 14 28 224 – 1,124
Total 2016 2016 8,300 2,043 4,871 135 164 7,429 3,042 25,984
Total 2015 2015 8,654 1,686 4,490 109 103 7,637 – 22,679
1 The fair value at grant date of options and conditional rights is determined using appropriate models including Monte Carlo simulations,
depending on the vesting conditions. The fair value of each conditional right is recognised evenly over the service period ending at vesting
date. Details of grants of conditional rights are provided in section 6.4 of the Remuneration Report.
2 “Other” includes provision of motor vehicles, health insurance, spouse travel, staff insurance discount benefits received during the year, life
assurance and personal accident insurance and the applicable taxes thereon. It also includes the deemed value of interest-free share loans,
tax payments and other one-off expenses. For David Fried, this also includes expatriate benefits including a housing allowance, education
assistance, a cost of living adjustment and associated taxes thereon. For Margaret Murphy, this includes cost of relocation.
3 Cash STI is payable in March 2017 for performance in 2016.
4 Includes the movement in annual leave and long service leave provisions during the year.
5 For Patrick Regan this includes the conditional rights granted on 20 August 2014. For further details, refer to section 6.4.3 of the
Remuneration Report.
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6 At the time of publishing the Remuneration Report, the 2016 STI award to Colin Fagen has not been determined. The award will be
determined in accordance with the STI Plan Rules.
7 David Duclos ceased being a KMP on 31 May 2016. He remains a QBE employee in an alternate position.
8 “Termination benefits” in respect of Mike Emmett, Tim Plant and Jenni Smith includes apportioned fixed remuneration paid for the balance
of the notice period to the termination date, STI cash awards from the date of ceasing to be a KMP to the date of termination and the
accelerated accounting charge or reversal of equity vesting or cancellation. For Mike Emmett this also includes a redundancy payment and
a restraint payment. For further details, refer to section 6.2 of the Remuneration Report.
The table below shows remuneration of executives who ceased employment during the financial year ended 31 December 2016,
as determined under applicable Australian Accounting Standards.
APPORTIONED FIXED OTHER ACCELERATED
REMUNERATION TO STI TERMINATION ACCOUNTING CHARGE
TERMINATION DATE 1 STI CASH 2
DEFERRED 3 PAYMENTS 4 – CONDITIONAL RIGHTS 5 TOTAL 6
FORMER EXECUTIVES US$000 US$000 US$000 US$000 US$000 US$000
Mike Emmett 239 374 204 289 291 1,397
Tim Plant 357 - 55 24 396 832
Jenni Smith 396 61 121 40 195 813
1 Apportioned fixed remuneration from the date of ceasing to be a KMP to the date of termination of employment.
2 Apportioned STI cash from the date of ceasing to be a KMP to the date of termination of employment.
3 Apportioned STI deferred from the date of ceasing to be a KMP to the date of termination of employment.
4 “Other termination payments” includes redundancy payments and movement in annual leave and long service leave provisions during the
year.
5 Accounting charge accelerated or reversed due to termination.
6 Amounts have been converted to US dollars using the average rate of exchange for the 2016 year.
1 The closing share price at 31 January 2017 was A$12.50 ($9.46 using the 31 January 2017 closing rate of exchange).
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overview
Performance
Overview
Overview
Equity awards at QBE are granted in the form of conditional rights. A conditional right is a promise by QBE to acquire
one fully paid ordinary QBE Insurance Group Limited share where certain conditions are met. 2
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Business
6.4.1 Deferred equity awards
The table below details conditional rights provided under the terms of the STI Plan, QBE Incentive Scheme (QIS) (which ceased from
1 January 2014) and contractual arrangements. Further details are provided in sections 4.4 and 9.1 of the Remuneration Report.
CONDITIONAL VALUE OF
3
Governance
VALUE OF CONDITIONAL VALUE OF RIGHTS CONDITIONAL
CONDITIONAL CONDITIONAL RIGHTS VESTED CONDITIONAL FORFEITED/ RIGHTS AT
RIGHTS GRANTED RIGHTS AT AND EXERCISED RIGHTS AT LAPSED IN THE FORFEITURE/
IN THE YEAR GRANT DATE IN THE YEAR VESTING DATE YEAR LAPSE DATE
EXECUTIVES NUMBER US$000 NUMBER US$000 NUMBER US$000
Group head office
John Neal
Jason Brown
100,546
18,607
840
155
55,334
14,192
476
122
–
–
–
– 4
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Directors'
Colin Fagen 27,913 233 52,337 451 – –
Margaret Murphy – – – – – –
Patrick Regan 44,739 374 7,603 64 – –
Divisional
David Fried 31,590 264 50,074 415 – –
Russell Johnston
Richard Pryce
–
56,491
–
472
–
48,415
–
410
–
–
–
–
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Financial
Former executives
David Duclos 46,000 384 44,814 367 – –
Mike Emmett – – – – – –
Tim Plant 15,287 128 22,170 191 – –
Jenni Smith 16,723 140 10,747 92 – –
6
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Other
6.4.2 Long-term incentive plan
The table below details conditional rights provided under the terms of the LTI plan. LTI conditional rights are subject to future performance
hurdles as detailed in section 4.5 of the Remuneration Report.
CONDITIONAL VALUE OF
VALUE OF CONDITIONAL VALUE OF RIGHTS CONDITIONAL
CONDITIONAL CONDITIONAL RIGHTS VESTED CONDITIONAL FORFEITED/ RIGHTS AT
RIGHTS GRANTED RIGHTS AT AND EXERCISED RIGHTS AT LAPSED IN THE FORFEITURE/
IN THE YEAR GRANT DATE 1 IN THE YEAR VESTING DATE YEAR LAPSE DATE
EXECUTIVES NUMBER US$000 NUMBER US$000 NUMBER US$000
Group head office
John Neal 402,194 2,767 – – – –
Jason Brown 47,989 313 – – – –
Colin Fagen 148,537 970 – – – –
Margaret Murphy 25,720 141 – – – –
Patrick Regan 219,378 1,509 – – – –
Divisional
David Fried 118,824 776 – – – –
Russell Johnston 107,719 649 – – – –
Richard Pryce 145,227 948 – – – –
Former executives
David Duclos 196,222 1,281 – – – –
Mike Emmett – – – – 29,964 258
Tim Plant 86,837 567 – – 70,675 553
Jenni Smith 52,788 345 – – 50,835 341
1 The value at grant date is calculated in accordance with AASB 2 Share-based Payment.
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1 The value at grant date is calculated in accordance with AASB 2 Share-based Payment.
The table below summarises the material terms of the employment agreements for the current executives which are subject to applicable
laws. The terms and conditions of employment of each executive reflect market conditions at the time of their contract negotiation
on appointment and thereafter.
EXECUTIVES
CONTRACTUAL TERM AFFECTED CONDITIONS
Duration of contract All Permanent full-time employment contract until notice given by either party.
Notice to be provided All Notice period is 12 months for John Neal.
by executive or QBE
For Russell Johnston, notice required by QBE is 12 months, reducing to six months after
18 months of service.
Other executives’ notice periods are six months.
QBE may elect to make a payment in lieu of notice.
Treatment of incentives All On termination with cause or for poor performance
on involuntary termination
All unvested incentives are forfeited.
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Performance
7.1 The Executive Incentive Plan
For 2017, we are introducing the EIP which effectively combines STI and LTI into a single, simpler incentive plan. The EIP balances both
short and long-term performance through an annual award based on performance against a range of financial metrics that measure
progress against longer-term strategy, with a significant portion of the award made in deferred equity. The diagram below illustrates the
payment profile for the Group CEO of the revised remuneration framework to apply in 2017.
2
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Business
2016 2017
$M
9.00
400% 2016 maximum incentive opportunity 350% 2017 maximum incentive opportunity
$M
9.00
3
Governance
8.00 8.00
6.00 6.00
4
1.14
5.00 5.00
1.14
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Directors'
4.00 4.00
1.14
3.00 3.00
1.14
2.00 2.00
5
1.00 1.64 1.00
0.00 0.00
CURRENT Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NEW Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Report
Financial
Fixed remuneration STI – cash STI – deferred equity LTI equity EIP – cash EIP – deferred equity
6
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Other
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Remuneration Report CONTINUED
The incentive opportunity in the EIP is the sum of the existing STI
opportunity, plus the face-value of the LTI award discounted for the $M
4.00
3.00
Fixed remuneration LTI equity
STI – cash EIP – cash 2.00
0.00
2016 2017
The EIP creates long-term shareholder alignment through the building of significant share ownership as deferred equity awards are
earned. The diagram below illustrates how the Group CEO shareholding, as a multiple of fixed remuneration, would build up if annual
business plans are met.
12.00
10.00 Executive
8.00 minimum
shareholding
6.00 requirement
4.00
2017 3.00
2.00 2016 1.50
0.00
Year 1 Year 3 Year 3 Year 4 Year 5
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Performance
Group strategic Balanced
Group
priorities scorecard
Cash ROE (25%) and COR (40%) (15%) (20%)
Group
Groupfinancial performance
financial measures
performance measures
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Business
For 2017, statutory ROE will be replaced with two Group measures, being cash ROE and COR. We believe this provides a better balance
between alignment with shareholders and rewarding performance within the control of our people. The features of the Group financial
performance measures are summarised in the table below.
Governance
Definition Net cash profit divided by average shareholders’ Net claims, commissions and expenses as a percentage
funds. In accordance with existing policy and while of net earned premium (measured on an ex-discount
we manage an unmatched asset-liability position with rate basis).
regards to duration, an adjustment for 50% of the
impact of movements in risk-free discount rates
Rationale
will apply.
Cash ROE will generally be measured on the same COR has been introduced as it is the most relevant
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Directors'
basis as that used to determine shareholder dividends. measure of the profitability of our insurance operations
As a principle, losses due to unbudgeted amortisation/ and therefore success. It is widely used externally for
impairment of intangibles will, other than in exceptional non-life insurance companies.
circumstances, be added back to cash ROE so that
In the divisions, we will also use divisional COR,
executives remain accountable for the management
replacing RoAC.
Adjustments
of intangible assets.
Any other items (such as material acquisitions or divestments) not included in the business plan and deemed 5
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Financial
appropriate by the Remuneration Committee. For 2017, an adjustment will be made for the impact of changes, if
any, to the Ogden tables in the UK beyond the provision included in the business plan.
The Board will retain an overarching discretion to adjust formulaic outcomes upwards or downwards to properly
reflect performance.
Strategic
Strategicpriorities
priorities 6
information
Other
We have broadened our view of performance to include measures linked to annual milestones in achieving our three-year strategic
priorities that in turn lead to value creation in future years. These measures account for 15% of the EIP outcome. The measures are
expected to evolve over time as our strategy and focus evolves. As such, we will in future contemplate using human capital measures,
such as employee engagement, that reflect our cultural objectives; however, measures will be quantifiable, typically be no more than three
in number and will apply where relevant at a divisional level. For 2017 the strategic priorities will be:
1. Operational efficiency, measured by expense savings generated through operational excellence, automation and sourcing
capability; and
2. Claims excellence, measured by savings generated through leveraging and improving our global claims capabilities and
insights through data analytics.
Balanced
Balancedscorecard
scorecard
The balanced scorecard will continue to comprise financial and non-financial KPIs that are relevant the executive’s role and aligned to the
QBE value creation model.
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The table below summarises the key features of the EIP changes.
Group CEO STI cash (50%) LTI equity (100%) EIP cash (20%)
incentive STI deferred equity (50%) EIP deferred equity (80%)
components
Group CEO 200% 200% 350%
maximum incentive
opportunity
Performance period 1 year 3 years 1 year
Equity deferral 1-2 years from end 3-5 years from start 1-4 years from
period of performance period of performance period end of performance period
Performance Group statutory ROE Group statutory ROE Group cash ROE
measures Divisional RoAC Relative TSR Group COR
(for divisional CEOs) Group/divisional strategic priorities
Balanced scorecard Divisional COR (for divisional
CEOs)
Balanced scorecard
Post-employment Unvested awards remain in the Unvested awards pro-rated for Unvested awards remain in the
conditions plan subject to the original vesting portion of performance period plan subject to the original vesting
(deferred equity) conditions and dates completed and award remains conditions and dates
On resignation or termination for in the plan subject to the original On resignation or termination for
cause, all awards are forfeited vesting conditions and dates cause, all awards are forfeited
On resignation or termination for
cause, all awards are forfeited
Malus Subject to malus during the Subject to malus during the Subject to malus during the
vesting period vesting period vesting period
Executive minimum Group CEO: 1.5 times fixed remuneration Group CEO: 3.0 times fixed
shareholding Executives: 1.0 times fixed remuneration remuneration
requirement Executives: 1.5 times fixed
remuneration
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Performance
8.1 Remuneration philosophy
Non-executive director remuneration reflects QBE’s desire to attract, motivate and retain experienced independent directors and to ensure
their active participation in the Group’s affairs for the purposes of corporate governance, regulatory compliance and other matters.
QBE aims to provide a level of remuneration for non-executive directors comparable with its peers, which include multinational financial
institutions. The Board reviews surveys published by independent remuneration consultants and other public information to ensure that
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Business
fee levels are appropriate. The remuneration arrangements of non-executive directors are distinct and separate from the executives.
Non-executive directors do not have formal service agreements.
Governance
The aggregate amount approved by shareholders at the 2015 AGM was A$3,500,000 per annum.
Under the current fee framework, non-executive directors receive a base fee expressed in Australian dollars. In addition, a non-executive
director (other than the Chairman) may receive further fees for chairmanship or membership of a board committee.
No change was made to non-executive remuneration during 2016.
Active committees in 2016 were as follows:
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Audit Committee
Investment Committee
Remuneration Committee
Risk and Capital Committee
Operations and Technology Committee (from 1 September 2016)
The non-executive director fee structure for 2016 and 2015 is shown in the table below.
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Financial
2016 2015
FEE FRAMEWORK A$000 A$000
Chairman base fee 663 663
Deputy Chairman base fee 229 229
Non-executive director base fee
Committee chairman base fee
Committee membership fee
208
50
27
208
50
27
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Other
8.3 Other benefits
Non-executive directors do not receive any performance-based remuneration such as cash incentives or equity awards. Under QBE’s
constitution, non-executive directors are entitled to be reimbursed for all travel and related expenses properly incurred in connection with the
business of QBE. All non-executive directors receive an annual cash travel allowance of A$42,750 (A$64,000 for the Chairman) in addition
to fees for the time involved in travelling to Board meetings and other Board commitments.
Superannuation
QBE pays superannuation to Australian-based non-executive directors in accordance with Australian superannuation guarantee legislation.
Overseas-based non-executive directors receive the cash equivalent amount in addition to their fees.
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With effect from 1 April 2014, a non-executive director minimum shareholding requirement was introduced for the Group Board. Under this
requirement, directors have five years to build a minimum shareholding equal to 100% of annual base fees.
To assist current and new non-executive directors in meeting the requirement, a Director Share Acquisition Plan (DSAP) was established
with effect from 1 June 2014. The DSAP allows non-executive directors to sacrifice a portion of their pre-tax director fees to acquire QBE
shares. Where the minimum shareholding requirement has not been met, directors are required to sacrifice a mandatory minimum amount
of 20% of pre-tax fees into the DSAP until the minimum shareholding is met. Shares acquired in this way are not subject to performance
targets, as they are acquired in place of cash payments.
Directors’ shareholdings are shown in section 9.4 of the Remuneration Report.
1 Travel allowances, additional fees in lieu of superannuation in Australia and amounts sacrificed in relation to the Director Share Acquisition
Plan are included in directors' fees.
Marty Becker, Stephen Fitzgerald, Margaret Leung, Kathryn Lisson, Sir Brian Pomeroy and Rolf Tolle receive additional fees of 9.5%
in lieu of superannuation in Australia.
Marty Becker, Stephen Fitzgerald, Margaret Leung, Kathryn Lisson, Sir Brian Pomeroy, Rolf Tolle and Michael Wilkins all participate in
the Director Share Acquisition Plan.
2 John Green, Jann Skinner and Michael Wilkins are Australian residents. Superannuation is calculated as 9.5% of fees. Superannuation in excess
of the statutory minimum may be taken as additional cash fees or in the form of superannuation contributions at the option of the director.
3 Remuneration has been converted to US dollars using the average rate of exchange for the relevant year.
4 Former non-executive director, John Graf, retired during 2015 therefore is excluded from the table above. Total non-executive director
remuneration in 2015 was $2,219,000.
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Performance
9.1 Legacy equity schemes
review
Business
Until 31 December 2013 The legacy LTI plan comprised an award of conditional rights to fully-paid shares without payment
by the executive, subject to a five year tenure hurdle, with vesting contingent upon the achievement
of two future performance hurdles as follows:
50% of the award granted will be contingent on QBE’s diluted EPS increasing by a compound
average of 7.5% per annum over the five year vesting period; and
50% of the award granted will be contingent on QBE’s average statutory ROE and COR being
in the top 10% of the top 50 largest global insurers and reinsurers as measured by net earned
3
Governance
premium for the five year vesting period.
Conditional rights were granted as a maximum percentage of fixed remuneration ranging from 50%
for the Group CEO, 25% for the Group CFO and 15% for Group and divisional executives.
QBE Incentive Scheme (QIS)
Until 31 December 2013 The QBE Incentive Scheme (QIS) was a short-term, at-risk reward structure comprised cash and
deferred equity awards (QIS-DEA). It came into effect from 1 January 2010 and was applicable 4
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Directors'
to deferred equity awards made in March 2011 to March 2014.
Under the QIS, the directors could approve the issue of conditional rights to shares to executives
who achieved predetermined performance targets. The maximum deferred equity award was based
on an amount which was the lesser of 80% of the cash award earned or 100% of fixed remuneration
at 31 December, in each case for the financial year immediately prior to the year in which the cash
award was paid. The deferred equity award was used as the basis for calculating the number
of conditional rights as follows: 5
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Financial
conditional rights to the value of 50% of the award converted to fully paid ordinary QBE shares after
three years; and
conditional rights to the value of 50% of the award converted to fully paid ordinary QBE shares after
five years.
6
During the period from the date of the QIS grant to the vesting date of the conditional rights, further
conditional rights are issued under the Bonus Share Plan to reflect dividends paid on ordinary shares
of QBE.
information
Other
The shares issued pursuant to the conditional rights are issued without payment being made by the
recipient (i.e. at a nil exercise price).
The shares issued pursuant to the conditional rights vest only if the individual has remained in the
Group’s service throughout the vesting period. For awards made prior to 2012, the Remuneration
Committee has the discretion to pay cash in lieu of shares in certain circumstances such as death,
disability, redundancy or retirement if the individual is not subject to disciplinary proceedings or notice
to terminate employment on that date. The extent of vesting of the conditional rights may be reduced
(including to zero) for any material deterioration of the relevant entity’s return on equity during the
vesting period.
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The table below details the conditional rights issued affecting remuneration of KMP in the previous, current or future reporting periods.
GRANT DATE DATE EXERCISABLE FAIR VALUE PER RIGHT AT GRANT DATE 1
7 March 2011 6 March 2016 A$17.93
7 March 2012 6 March 2017 A$11.78
1 September 2012 1 March 2016 A$13.03
5 March 2013 4 March 2016 A$13.18
5 March 2013 4 March 2018 A$13.18
27 March 2013 26 March 2018 A$13.02
2 April 2013 1 April 2016 A$13.18
2 April 2013 1 April 2018 A$13.18
8 April 2013 7 April 2016 A$13.61
8 April 2013 7 April 2018 A$13.61
4 March 2014 3 March 2017 A$8.34
4 March 2014 3 March 2018 A$8.34
4 March 2014 3 March 2019 A$8.34
4 March 2014 3 March 2017 A$8.60
4 March 2014 3 March 2018 A$8.60
4 March 2014 3 March 2019 A$8.60
4 March 2014 3 March 2017 A$12.68
4 March 2014 3 March 2018 A$12.68
4 March 2014 3 March 2019 A$12.68
4 March 2014 3 March 2017 A$12.75
4 March 2014 3 March 2018 A$12.75
4 March 2014 3 March 2019 A$12.75
20 August 2014 3 March 2017 A$6.08
20 August 2014 3 March 2018 A$6.08
20 August 2014 3 March 2019 A$6.08
20 August 2014 3 March 2017 A$10.70
20 August 2014 3 March 2018 A$10.70
20 August 2014 3 March 2019 A$10.70
20 August 2014 1 March 2015 A$11.23
20 August 2014 1 March 2016 A$11.23
20 August 2014 1 March 2017 A$11.23
3 March 2015 2 March 2018 A$9.15
3 March 2015 2 March 2019 A$9.15
3 March 2015 2 March 2020 A$9.15
3 March 2015 2 March 2018 A$9.35
3 March 2015 2 March 2019 A$9.35
3 March 2015 2 March 2020 A$9.35
3 March 2015 2 March 2016 A$11.63
3 March 2015 2 March 2017 A$11.63
3 March 2015 2 March 2016 A$12.63
3 March 2015 2 March 2017 A$12.63
3 March 2015 2 March 2018 A$12.63
3 March 2015 2 March 2019 A$12.63
3 March 2015 2 March 2020 A$12.63
3 March 2015 2 March 2016 A$12.90
3 March 2015 2 March 2017 A$12.90
3 March 2015 2 March 2018 A$12.90
3 March 2015 2 March 2019 A$12.90
3 March 2015 2 March 2020 A$12.90
19 August 2015 2 March 2016 A$14.06
19 August 2015 2 March 2017 A$14.06
19 August 2015 2 March 2018 A$14.06
1 March 2016 28 February 2019 A$4.93
1 March 2016 28 February 2019 A$6.16
1 March 2016 28 February 2020 A$6.16
1 March 2016 28 February 2021 A$6.16
1 March 2016 28 February 2019 A$6.89
1 March 2016 28 February 2020 A$6.89
1 March 2016 28 February 2021 A$6.89
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Performance
1 March 2016 28 February 2019 A$10.94
1 March 2016 28 February 2020 A$10.94
1 March 2016 28 February 2021 A$10.94
1 March 2016 28 February 2019 A$11.13
1 March 2016
1 March 2016
2 May 2016
28 February 2020
28 February 2021
15 March 2017
A$11.13
A$11.13
A$11.21
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2 May 2016 15 March 2018 A$11.21
2 May 2016 15 March 2019 A$11.21
31 August 2016 28 February 2019 A$5.81
31 August 2016 28 February 2020 A$5.81
31 August 2016
31 August 2016
31 August 2016
28 February 2021
28 February 2019
28 February 2020
A$5.81
A$9.97
A$9.97
3
Governance
31 August 2016 28 February 2021 A$9.97
10 October 2016 28 February 2019 A$4.62
10 October 2016 28 February 2020 A$4.62
10 October 2016 28 February 2021 A$4.62
10 October 2016
10 October 2016
10 October 2016
28 February 2019
28 February 2020
28 February 2021
A$9.72
A$9.72
A$9.72
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Directors'
1 The fair value of conditional rights at grant date is determined using appropriate models including Monte Carlo simulations, depending on the vesting
conditions. The fair value of each conditional right is recognised evenly over the service period ending at vesting date. Details of grants of conditional
rights are provided in section 6.4 of the Remuneration Report.
Report
Financial
9.3.1 QBE deferred equity plans – conditional rights
The table below details the movements in the number of conditional rights to ordinary shares in QBE provided as remuneration to the
KMP and issued under the STI, QIS and DCP.
NOTIONAL
DIVIDENDS VESTED AND FORFEITED/
6
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Other
BALANCE AT GRANTED ATTACHING TRANSFERRED LAPSED IN THE BALANCE AT
1 JAN 2016 IN THE YEAR IN THE YEAR IN THE YEAR YEAR 31 DEC 2016
2016 NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
Executive directors
John Neal 82,032 100,546 6,359 (55,334) – 133,603
Patrick Regan 15,206 44,739 2,616 (7,603) – 54,958
Other key management personnel
Jason Brown 45,354 18,607 2,488 (14,192) – 52,257
Colin Fagen 175,603 27,913 7,556 (52,337) – 158,735
David Fried 118,109 31,590 6,231 (50,074) – 105,856
Russell Johnston – – – – – –
Margaret Murphy – – – – – –
Richard Pryce 126,617 56,491 6,734 (48,415) – 141,427
Former key management personnel
David Duclos 162,105 46,000 5,652 (44,814) – 168,943
Mike Emmett 72,831 – – – – 72,831
Tim Plant 67,521 15,287 1,694 (22,170) – 62,332
Jenni Smith 15,550 16,723 1,076 (10,747) – 22,602
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Performance
The table below details movements during the year in the number of ordinary shares in QBE held by KMP, including their personally
related parties.
INTEREST IN
2
SHARES AT
31 DEC 2016
INTEREST IN DIVIDENDS INTEREST IN SUBJECT TO
SHARES AT CONDITIONAL NET OTHER REINVESTED SHARES AT NON-RECOURSE
review
Business
1 JAN 2016 RIGHTS VESTED CHANGES IN THE YEAR 31 DEC 2016 LOANS
2016 NUMBER NUMBER NUMBER 1 NUMBER NUMBER NUMBER
Non-executive directors
Marty Becker 80,243 – 25,063 – 105,306 –
Stephen Fitzgerald 32,147 – 5,557 – 37,704 –
John M Green
Margaret Leung
37,258
6,464
–
–
–
14,879
–
571
37,258
21,914
–
– 3
Governance
Kathryn Lisson – – 1,465 – 1,465 –
Sir Brian Pomeroy 6,662 – 5,479 – 12,141 –
Jann Skinner 25,000 – 10,000 – 35,000 –
Rolf Tolle 15,000 2 – 3,991 – 18,991 –
Michael Wilkins – – 8,670 – 8,670 –
Executive directors
John Neal 234,998 55,334 (12,400) 14,246 292,178 – 4
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Patrick Regan 388,979 142,611 – 20,624 552,214 –
Other key management personnel
Jason Brown 38,052 20,152 1,171 2,935 62,310 2,390
Colin Fagen 78,179 52,337 (44,234) 3,092 89,374 19,084
David Fried – 50,074 (8,829) 754 41,999 –
Russell Johnston
Margaret Murphy
30,000 3
–
–
–
–
–
–
–
30,000
–
–
–
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Richard Pryce 50,570 48,415 (22,832) 746 76,899 –
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The table below details the position of KMP against the minimum shareholding requirement.
UNVESTED
CONDITIONAL
RIGHTS
MINIMUM INTEREST WITHOUT VALUE OF MINIMUM
SHAREHOLDING IN SHARES AT PERFORMANCE EMPLOYEE TOTAL VALUE SHAREHOLDING
REQUIREMENT 31 MAR 2016 CONDITIONS LOAN SHARES 1 OF HOLDINGS REQUIREMENT
2016 A$000 A$000 A$000 A$000 A$000 STATUS 2
Non-executive directors
Marty Becker 663 1,011 – – 1,011 Met
Stephen Fitzgerald 208 434 – – 434 Met
John M Green 229 775 – – 775 Met
Margaret Leung 208 123 – – 123 On track
Sir Brian Pomeroy 208 100 – – 100 On track
Jann Skinner 208 384 – – 384 Met
Rolf Tolle 208 118 – – 118 On track
Executive directors
John Neal 3,300 2,966 1,437 – 4,403 Met
Patrick Regan 1,600 5,672 2,030 – 7,702 Met
Other key management personnel
Jason Brown 700 599 601 25 1,225 Met
Colin Fagen 1,300 1,137 1,884 (7) 3,014 Met
David Fried 1,210 65 1,845 – 1,910 Met
Richard Pryce 1,523 813 1,617 – 2,430 Met
Former key management personnel
David Duclos 1,332 278 2,023 – 2,301 Met
Tim Plant 950 289 746 – 1,035 Met
Jenni Smith 770 443 244 – 687 Not met
9.5 Loans
This section details the loans made by the Group to KMP. All non-recourse loans are due to be paid within 10 days of ceasing employment.
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1
Auditor
PricewaterhouseCoopers, Chartered Accountants, continue in office in accordance with section 327B of the Corporations Act 2001.
overview
Performance
Non-audit services
During the year, PricewaterhouseCoopers performed certain other services in addition to its statutory duties.
The Board, on the advice of the Audit Committee, has considered the position and is satisfied that the provision of non-audit services
is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are also
satisfied that the provision of non-audit services by the auditor, as set out in note 8.7 to the financial statements, did not compromise
the auditor independence requirements of the Corporations Act 2001. 2
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Business
A copy of the auditor’s independence declaration required under section 307C of the Corporations Act 2001 is set out on page 104.
Details of amounts paid or payable to PricewaterhouseCoopers for audit and non-audit services are provided in note 8.7 to the
financial statements.
Rounding of amounts
The company is of a kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191.
Amounts have been rounded off in the Directors’ Report to the nearest million dollars or, in certain cases, to the nearest thousand dollars
3
Governance
in accordance with that instrument.
Signed in SYDNEY this 24th day of February 2017 in accordance with a resolution of the directors.
Report
Directors'
W. Marston Becker John Neal
Director Director
5
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Financial
6
information
Other
53
104
RJ Clark
Partner, PricewaterhouseCoopers
Sydney
24 February 2017
54
105
overview
Performance
Consolidated statement of changes in equity 108 company) and its controlled entities
(QBE or the Group). All amounts in this
Consolidated statement of cash flows 109
Financial Report are presented in US
dollars unless otherwise stated. QBE
NOTES TO THE FINANCIAL STATEMENTS Insurance Group Limited is a company
1. OVERVIEW
limited by its shares, and incorporated
and domiciled in Australia.
Its registered office is located at:
2
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Business
1.1 About QBE 110 Level 27, 8 Chifley Square
1.2 About this report 111 Sydney NSW 2000
1.3 Segment information 113 Australia
A description of the nature of the
2. UNDERWRITING ACTIVITIES Group’s operations and its principal
2.1 Revenue
2.2 Net claims expense
116
117
activities is included on pages 4 to 49,
none of which is part of this Financial
Report. The Financial Report was
3
Governance
2.3 Net outstanding claims liabilty 117 authorised for issue by the directors
2.4 Claims development – net undiscounted central estimate 124 on 24 February 2017. The directors
2.5 Unearned premium and deferred insurance costs 126 have the power to amend and reissue
the financial statements.
2.6 Trade and other receivables 129
2.7 Trade and other payables 130 Through the use of the internet,
4
we have ensured that our corporate
reporting is timely, complete and
3. INVESTMENTS ACTIVITIES available globally at minimum cost
Report
Directors'
to the company. All material press
3.1 Investment income 131
releases, this Financial Report and
3.2 Investment assets 132 other information are available
at our QBE investor centre at our
4. RISK MANAGEMENT website: www.qbe.com.
4.1
4.2
4.3
Strategic risk
Insurance risk
Credit risk
137
138
139
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Financial
4.4 Market risk 141
4.5 Liquidity risk 145
4.6 Operational risk 146
6
5. CAPITAL STRUCTURE
5.1 Borrowings 147
information
Other
5.2 Cash and cash equivalents 150
5.3 Equity and reserves 151
5.4 Dividends 153
5.5 Earnings per share 154
5.6 Derivatives 155
6. TAX
6.1 Income tax 156
6.2 Deferred income tax 157
7. GROUP STRUCTURE
7.1 Acquisitions, disposals and assets held for sale 160
7.2 Intangible assets 161
7.3 Controlled entities 164
8. OTHER
8.1 Other accounting policies 168
8.2 Contingent liabilities 169
8.3 Reconciliation of profit after income tax to cash flows from operating activities 170
8.4 Share-based payments 171
8.5 Key management personnel 174
8.6 Defined benefit plans 175
8.7 Remuneration of auditors 176
8.8 Ultimate parent entity information 176
Directors’ declaration 178
106
Consolidated statement
Consolidated
of statement
comprehensive income
of comprehensive income
FOR THE YEAR ENDED 31 DECEMBER 2016
FOR THE YEAR ENDED 31 DECEMBER 2016
2016 2015
NOTE US$M US$M
Gross written premium 14,395 15,092
Unearned premium movement (119) (170)
Gross earned premium revenue 2.1 14,276 14,922
Outward reinsurance premium (2,653) (3,319)
Deferred reinsurance premium movement (557) 711
Outward reinsurance premium expense (3,210) (2,608)
Net earned premium (a) 11,066 12,314
Gross claims expense 2.2 (9,042) (8,712)
Reinsurance and other recoveries revenue 2.2 2,600 1,278
Net claims expense (b) 2.2 (6,442) (7,434)
Gross commission expense (2,425) (2,488)
Reinsurance commission revenue 2.1 391 374
Net commission (c) (2,034) (2,114)
Underwriting and other expenses (d) (1,922) (2,137)
Underwriting result (a)+(b)+(c)+(d) 668 629
Investment and other income – policyholders' funds 3.1 422 418
Investment expenses – policyholders' funds 3.1 (15) (16)
Insurance profit 1,075 1,031
Investment and other income – shareholders' funds 3.1 348 273
Investment expenses – shareholders' funds 3.1 (9) (10)
Financing and other costs 5.1.2 (294) (244)
Losses on sale of entities 7.1 – (2)
Unrealised losses on assets held for sale 7.1.2 (3) –
Amortisation and impairment of intangibles 7.2 (45) (95)
Profit before income tax 1,072 953
Income tax expense 6.1 (228) (260)
Profit after income tax 844 693
Other comprehensive income
Items that may be reclassified to profit or loss
Net movement in foreign currency translation reserve 5.3.2 (474) 74
Net movement in cash flow hedges 5.3.2 – (1)
Income tax relating to these components of other comprehensive income 33 41
Items that will not be reclassified to profit or loss
(Losses) gains on remeasurement of defined benefit superannuation plans (48) 17
(Losses) gains on revaluation of owner occupied property 5.3.2 (1) 1
Income tax relating to these components of other comprehensive income 10 (6)
Other comprehensive income after income tax (480) 126
Total comprehensive income after income tax 364 819
Profit after income tax attributable to:
Ordinary equity holders of the company 844 687
Non-controlling interests – 6
844 693
Total comprehensive income after income tax attributable to:
Ordinary equity holders of the company 364 813
Non-controlling interests – 6
364 819
EARNINGS PER SHARE FOR PROFIT AFTER INCOME TAX ATTRIBUTABLE TO ORDINARY 2016 2015
EQUITY HOLDERS OF THE COMPANY NOTE US CENTS US CENTS
Basic earnings per share 5.5 61.6 50.3
Diluted earnings per share 5.5 60.8 49.8
The consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
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AS AT 31 DECEMBER 2016
1
2016 2015
NOTE US$M US$M
Assets
overview
Performance
Cash and cash equivalents 5.2 847 662
Investments 3.2 24,374 26,032
Derivative financial instruments 5.6 151 33
Trade and other receivables 2.6 4,831 4,950
Current tax assets 51 46
Deferred insurance costs
Reinsurance and other recoveries on outstanding claims
2.5
2.3
1,965
4,540
2,538
3,204 2
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Business
Other assets 8 6
Assets held for sale 7.1.2 85 –
Defined benefit plan surpluses 8.6 27 44
Property, plant and equipment 257 263
Deferred tax assets 6.2 778 767
Investment properties
Investment in associates
Intangible assets 7.2
14
28
3,627
14
13
3,604
3
Governance
Total assets 41,583 42,176
Liabilities
Derivative financial instruments 5.6 147 35
Trade and other payables 2.7 2,139 2,101
4
Current tax liabilities 73 43
Liabilities held for sale 7.1.2 72 –
Unearned premium 2.5 6,763 7,006
Report
Directors'
Outstanding claims 2.3 18,321 18,583
Provisions 69 76
Defined benefit plan deficits 8.6 85 67
Deferred tax liabilities 6.2 106 176
Borrowings 5.1
5
3,474 3,529
Total liabilities 31,249 31,616
Net assets 10,334 10,560
Report
Financial
Equity
Share capital 5.3.1 8,350 8,440
Reserves 5.3.2 (1,654) (1,248)
Retained profits 3,588 3,313
6
Shareholders' funds 10,284 10,505
Non-controlling interests 50 55
Total equity 10,334 10,560
information
Other
The consolidated balance sheet should be read in conjunction with the accompanying notes.
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Consolidated statement
Consolidated
of changes in statement
equity
of changes in equity
FOR THE YEAR ENDED 31 DECEMBER 2016
FOR THE YEAR ENDED 31 DECEMBER 2016
The consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
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Consolidated statement
1
2016 2015
NOTE US$M US$M
Operating activities
overview
Performance
Premium received 14,939 15,144
Reinsurance and other recoveries received 1,556 1,563
Outward reinsurance paid (2,786) (2,664)
Claims paid (9,018) (9,410)
2
Acquisition and other underwriting costs paid (4,000) (4,430)
Interest received 450 483
Dividends received 65 99
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Business
Other operating income 13 46
Other operating payments (184) (253)
Interest paid (273) (247)
Income taxes paid (203) (347)
Net cash flows from operating activities 8.3 559 (16)
Investing activities
Proceeds on sale of growth assets 3,258 692 3
Governance
Payments for purchase of growth assets (2,755) (1,289)
Payments for foreign exchange transactions (101) (58)
Net proceeds on purchase and sale of interest bearing financial assets 35 534
Payments for purchase of intangible assets (216) (78)
Net proceeds on purchase and sale of non-controlling interests 16 –
Proceeds on disposal of entities (net of cash disposed)
Proceeds on sale of investment property
Proceeds on sale of property, plant and equipment
–
1
14
493
1
13
4
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Directors'
Payments for purchase of property, plant and equipment (78) (55)
Payments for purchase of investment in associates (16) –
Net cash flows from investing activities 158 253
Financing activities
Capital contribution from non-controlling interests
Purchase of treasury shares
Proceeds from settlement of staff share loans
–
(79)
1
2
(18)
4
5
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Financial
Proceeds from borrowings 38 640
Repayment of borrowings (21) (657)
Dividends paid (494) (359)
Net cash flows from financing activities (555) (388)
Net movement in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate changes
162
662
37
(151)
852
(39)
6
information
Other
Cash transferred to assets held for sale (14) –
Cash and cash equivalents at the end of the year 5.2 847 662
The consolidated statement of cash flows should be read in conjunction with the accompanying notes.
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110
1. OVERVIEW
1. OVERVIEW
About insurance
In simple terms, insurance and reinsurance companies help their customers (consumers, businesses and other insurance companies)
to manage risk. More broadly put, an insurance company creates value by pooling and redistributing risk. This is done by collecting
premium from those that it insures (i.e. policyholders), and then paying the claims of the few that call upon their insurance protection.
The company may also choose to reduce some of its own accumulated risk through the use of outward reinsurance, which is insurance
for insurance companies. As not all policyholders will actually experience a claims event, the effective pooling and redistribution of risk
lowers the total cost of risk management, thereby making insurance protection more cost effective for all.
The operating model of insurance companies relies on profits being generated:
• by appropriately pricing risk and charging adequate premium to cover the expected payouts that will be incurred over the life of the
insurance policy (both claims and operating expenses); and
• by earning a return on the collected premium and funds withheld to pay future claims through the adoption of an appropriate
investment strategy.
Insurance therefore serves a critical function of providing customers with the confidence to achieve their business and personal goals
through cost-effective risk management. This is achieved within a highly regulated environment, designed to ensure that insurance
companies maintain adequate capital to protect the interests of policyholders.
The diagram below presents a simplified overview of the key components of this Financial Report.
EME N T FRAMEW
A NAG ORK
M NO
SK T
RI Debt and E4
equity investors
NOTE 2
DEBT & EQUITY
UNDERWRITING NOTE 5
ACTIVITIES
CAPITAL
STRUCTURE
PREMIUMS
Policyholders Growth
CLAIMS INVESTMENTS assets
and fixed
REINSURANCE PREMIUMS interest
Reinsurers DIVIDENDS & INTEREST
NOTE 1
securities
REINSURANCE RECOVERIES
NOTE 3
OTHER COSTS
NOTE 6 TO 8
TAXES
INVESTMENT
OTHER COSTS OF ACTIVITIES
DOING BUSINESS
Tax authorities,
service providers,
RI 4
SK employees, etc. TE
MA NO
NAG RK
E M E N T F R A M E WO
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overview
Performance
This Financial Report includes the consolidated financial statements of QBE Insurance Group Limited (the ultimate parent entity or the
company) and its controlled entities (QBE or the Group).
The Financial Report includes the four primary statements, namely the statement of comprehensive income (which comprises profit
or loss and other comprehensive income), balance sheet, statement of changes in equity and statement of cash flows as well as
associated notes as required by Australian Accounting Standards. Disclosures have been grouped into the following categories in order
to assist users in their understanding of the financial statements: 2
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1. Overview contains information that impacts the Financial Report as a whole as well as segment reporting disclosures.
2. Underwriting activities brings together results and balance sheet disclosures relevant to the Group’s insurance activities.
3. Investment activities includes results and balance sheet disclosures relevant to the Group’s investments.
4. Risk management provides commentary on the Group’s exposure to various financial and capital risks, explaining the potential
impact on the results and balance sheet and how the Group manages these risks.
5. Capital structure provides information about the debt and equity components of the Group’s capital.
3
Governance
6. Tax includes disclosures relating to the Group’s tax balances.
7. Group structure provides a summary of the Group’s controlled entities and includes disclosures in relation to transactions impacting
the Group structure.
8. Other includes additional disclosures required in order to comply with Australian Accounting Standards.
Where applicable within each note, disclosures are further analysed as follows: 4
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Directors'
• Overview provides some context to assist users in understanding the disclosures.
• Disclosures (both numbers and commentary) provides analysis of balances as required by Australian Accounting Standards.
• How we account for the numbers summarises the accounting policies relevant to an understanding of the numbers.
• Critical accounting judgements and estimates explains the key estimates and judgements applied by QBE in determining the
numbers.
The notes include information which the directors believe is required to understand the financial statements and is material and relevant
5
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Financial
to the operations, balance sheet and results of the Group. Information is considered material and relevant if:
• the amount in question is significant because of its size or nature;
• it is important to assist in understanding the results of the Group;
• it helps to explain the impact of significant changes in the Group’s business – for example, significant acquisitions or disposals; or
• it relates to an aspect of the Group’s operations that is important to its future performance.
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Exchange rates
The principal exchange rates used in the preparation of the financial statements were:
2016 2015
PROFIT BALANCE PROFIT BALANCE
OR LOSS SHEET OR LOSS SHEET
A$/US$ 0.743 0.721 0.750 0.729
£/US$ 1.350 1.234 1.527 1.474
€/US$ 1.106 1.052 1.111 1.087
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overview
Performance
Overview
Overview
2
The segment note provides information by operating division to assist the understanding of the Group’s performance.
The operating segments are consistent with the basis on which information is provided to the Group Executive
for measuring performance and determining the allocation of capital, being the basis upon which the Group’s underwriting
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Business
products and services are managed within the various markets in which QBE operates.
Operating segments
The Group’s operating segments are as follows:
• North American Operations writes general insurance and reinsurance business in the United States of America.
• European Operations writes general insurance business principally in the United Kingdom, Canada and throughout
mainland Europe; both general insurance and reinsurance business through Lloyd’s of London; and worldwide reinsurance 3
Governance
business through offices in London, Ireland, Bermuda and mainland Europe.
• Australian & New Zealand Operations primarily underwrites general insurance risks throughout Australia and New
Zealand, providing all major lines of insurance for personal and commercial risks.
• Emerging Markets writes general insurance business in North, Central and South America and provides personal,
commercial and specialist general insurance covers throughout the Asia Pacific region.
• Equator Re is based in Bermuda and provides reinsurance protection to related entities. Inward premium received
by Equator Re is principally derived from within the Group and is eliminated on consolidation.
4
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Directors'
Corporate and Other includes non-operating holding companies that do not form part of the Group’s insurance operations;
gains or losses on disposals, borrowings, financing costs and amortisation of any intangibles which are not allocated
to a specific operating segment; and consolidation adjustments and internal reinsurance eliminations. Additional information
in relation to the Group’s intangibles, borrowings and gains or losses on disposals is disclosed in notes 7.2, 5.1 and
7.1 respectively.
Divisional management results are reported before corporate quota share reinsurances to Equator Re which exist to optimise
capital management in the Group.
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Financial
Intersegment transactions are priced on an arm’s length basis and are eliminated on consolidation.
6
information
Other
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AUSTRALIAN
NORTH & NEW TOTAL
AMERICAN EUROPEAN ZEALAND EMERGING EQUATOR REPORTABLE CORPORATE
OPERATIONS OPERATIONS OPERATIONS MARKETS RE SEGMENTS & OTHER TOTAL
2016 US$M US$M US$M US$M US$M US$M US$M US$M
Gross written premium 4,647 4,076 3,933 1,632 1,532 15,820 (1,425) 14,395
Gross earned premium
revenue – external 4,532 3,840 3,913 1,588 1 13,874 402 14,276
Gross earned premium
revenue – internal 125 38 11 – 1,428 1,602 (1,602) –
Outward reinsurance
premium expense (1,926) (929) (514) (260) (778) (4,407) 1,197 (3,210)
Net earned premium 2,731 2,949 3,410 1,328 651 11,069 (3) 11,066
Net claims expense (1,528) (1,658) (2,172) (720) (453) (6,531) 89 (6,442)
Net commission (564) (574) (511) (313) (50) (2,012) (22) (2,034)
Underwriting and other
expenses (556) (516) (477) (289) (13) (1,851) (71) (1,922)
Underwriting result 83 201 250 6 135 675 (7) 668
Net investment income
on policyholders' funds 83 115 168 67 27 460 (53) 407
Insurance profit 166 316 418 73 162 1,135 (60) 1,075
Net investment income
on shareholders' funds 52 39 84 87 18 280 59 339
Financing and other costs – – – – – – (294) (294)
Unrealised loss on assets
held for sale – – – – – – (3) (3)
Amortisation and
impairment of intangibles 1 – – (6) – – (6) (39) (45)
Profit (loss) before income tax 218 355 496 160 180 1,409 (337) 1,072
Income tax (expense)
credit (47) (64) (147) (48) (31) (337) 109 (228)
Profit (loss) after income
tax 171 291 349 112 149 1,072 (228) 844
Profit attributable to
non-controlling interests – – – – – – – –
Net profit (loss) after
income tax 171 291 349 112 149 1,072 (228) 844
1 The amortisation and impairment of intangible assets acquired in 2016 (refer note 7.2) is now presented in segment profit or loss, consistent
with information provided to the Group Executive.
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1
AUSTRALIAN
NORTH & NEW TOTAL
AMERICAN EUROPEAN ZEALAND EMERGING EQUATOR REPORTABLE CORPORATE
OPERATIONS OPERATIONS OPERATIONS MARKETS RE SEGMENTS & OTHER TOTAL
2015
overview
Performance
US$M US$M US$M US$M US$M US$M US$M US$M
Gross written premium 4,961 4,386 3,787 1,907 1,007 16,048 (956) 15,092
Gross earned premium
revenue – external 4,930 4,338 3,753 1,865 – 14,886 36 14,922
Gross earned premium
revenue – internal
Outward reinsurance
premium expense
–
(1,264)
–
(884)
–
(471)
–
(251)
994
(627)
994
(3,497)
(994)
889
–
(2,608)
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Net earned premium 3,666 3,454 3,282 1,614 367 12,383 (69) 12,314
Net claims expense (2,323) (1,844) (2,054) (992) (297) (7,510) 76 (7,434)
Net commission (635) (634) (481) (345) (17) (2,112) (2) (2,114)
Underwriting and other
3
expenses (678) (599) (461) (328) (13) (2,079) (58) (2,137)
Underwriting result 30 377 286 (51) 40 682 (53) 629
Net investment income
Governance
on policyholders' funds 63 87 181 123 63 517 (115) 402
Insurance profit (loss) 93 464 467 72 103 1,199 (168) 1,031
Net investment income
on shareholders' funds 48 30 88 132 25 323 (60) 263
4
Financing and other costs – – – – – – (244) (244)
Losses on sale of entities – – – – – – (2) (2)
Amortisation and impairment
Report
Directors'
of intangibles – – – – – – (95) (95)
Profit (loss) before income
tax 141 494 555 204 128 1,522 (569) 953
Income tax (expense) credit (4) (89) (166) (65) (6) (330) 70 (260)
Profit (loss) after income tax 137 405 389 139 122 1,192 (499) 693
Profit attributable to
non-controlling interests – – – – – – (6) (6)
5
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Financial
Net profit (loss) after income
tax 137 405 389 139 122 1,192 (505) 687
Geographical analysis
All operating segments except for Emerging Markets are defined by reference to the geographical locations of each operating segment
and, as such, satisfy the requirements of a geographical analysis as well as an operating segment analysis. No country within Emerging 6
information
Other
Markets is individually material.
Gross earned premium revenue – external for Australia, the parent entity’s country of domicile, was $3,643 million (2015 $3,515 million).
Product analysis
QBE does not collect Group-wide revenue information by product and the cost to develop this information would be excessive. Gross
earned premium revenue by class of business is disclosed in note 4.2.
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2.
2. UNDERWRITING
UNDERWRITINGACTIVITIES
ACTIVITIES
Overview
Overview
This section provides analysis and commentary on the Group’s underwriting activities. Underwriting, in simple terms,
is the agreement by the insurer to assume insurance risk in return for a premium paid by the insured. The underwriter
assesses the quality of the risk and prices it accordingly.
2.1 Revenue
Overview
Overview
Revenue mainly comprises premiums charged for providing insurance coverage. Premiums are classified as either:
• direct, being those paid by the policyholder to the insurer;
• facultative, being reinsurance of an individual (usually significant) risk by a ceding insurer or reinsurer; or
• inward reinsurance premiums, being coverage provided to an insurer or reinsurer in relation to a specified grouping
of policies or risks.
Other sources of revenue include amounts recovered from reinsurers under the terms of reinsurance contracts and
commission income from reinsurers.
2016 2015
NOTE US$M US$M
Gross earned premium revenue
Direct and facultative 13,298 13,967
Inward reinsurance 978 955
14,276 14,922
Other revenue
Reinsurance and other recoveries revenue 2.2 2,600 1,278
Reinsurance commission revenue 391 374
17,267 16,574
How we
How we account
account for
for the
thenumbers
numbers
Premium revenue
Premium written comprises amounts charged to policyholders, excluding taxes collected on behalf of third parties. Premium
is recognised as revenue in profit or loss based on the incidence of the pattern of risk associated with the insurance policy.
The earned portion of premium on unclosed business, being business that is written at the balance date but for which
detailed policy information is not yet booked, is also included in premium revenue.
Reinsurance and other recoveries
Reinsurance and other recoveries on paid claims, reported claims not yet paid, claims incurred but not reported (IBNR)
and claims incurred but not enough reported (IBNER) are recognised as revenue. Recoveries are measured as the present
value of the expected future receipts.
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overview
Performance
Overview
Overview
2
The largest expense for an insurance company is net claims expense, which is the difference between the net outstanding
claims liability (as described in note 2.3 below) at the beginning and the end of the financial year plus any claims incurred
and settled during the financial year.
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2016 2015
Governance
Direct and facultative 8,525 8,367
Inward reinsurance 517 345
9,042 8,712
Reinsurance and other recoveries revenue
Direct and facultative 2,568 1,210
Inward reinsurance
2.1
32
2,600
68
1,278 4
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Directors'
Net claims expense 6,442 7,434
Analysed as follows:
Movement in net discounted central estimate 2.4.2 6,574 7,453
Movement in risk margin 2.3.3 (132) (19)
Net claims expense 6,442 7,434
Report
Financial
2.3 Net outstanding claims liability
Overview
Overview 6
information
Other
The net outstanding claims liability comprises the elements described below.
• The gross central estimate (note 2.3.1). This is the provision for expected future claims payments and includes claims
reported but not yet paid, claims incurred but which have not yet been reported (IBNR), claims incurred but not enough
reported (known as IBNER) and estimated claims handling costs.
• Less amounts recoverable from reinsurers (note 2.3.2). Insurance companies may elect to purchase reinsurance cover
to manage their exposure to any one claim or series of claims. When an insurance company incurs a claim as a result
of an insured loss, it may be able to recover some of that claim from reinsurance.
• Less an amount to reflect the discount to present value using risk-free rates of return. The net central estimate is
discounted to present value recognising that the claim and/or recovery may not be settled for some time. The weighted
average risk-free rate for each operating segment and for the consolidated Group are summarised in note 2.3.4.
• Plus a risk margin (note 2.3.3). A risk margin is added to reflect the inherent uncertainty in the net discounted central
estimate of outstanding claims.
2016 2015
NOTE US$M US$M
Gross discounted central estimate 2.3.1 17,233 17,323
Risk margin 2.3.3 1,088 1,260
Gross outstanding claims liability 18,321 18,583
Reinsurance and other recoveries on outstanding claims 2.3.2 (4,540) (3,204)
Net outstanding claims liability 13,781 15,379
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The table below analyses the movement in the net outstanding claims liability, showing separately the movement in gross claims liability
and the impact of reinsurance.
2016 2015
GROSS REINSURANCE NET GROSS REINSURANCE NET
US$M US$M US$M US$M US$M US$M
At 1 January 18,583 (3,204) 15,379 20,412 (3,464) 16,948
Claims expense – current accident year
(note 2.4.2) 9,168 (1,894) 7,274 8,743 (1,394) 7,349
Claims expense – prior accident year
(note 2.4.2) 6 (706) (700) (12) 116 104
Movement in risk margin (note 2.3.3) (132) – (132) (19) – (19)
Incurred claims recognised in profit or
loss (note 2.2) 9,042 (2,600) 6,442 8,712 (1,278) 7,434
Transfers to liabilities held for sale /
disposals (33) 6 (27) (135) 5 (130)
Claims payments (8,623) 1,172 (7,451) (9,259) 1,402 (7,857)
Foreign exchange (648) 86 (562) (1,147) 131 (1,016)
At 31 December 18,321 (4,540) 13,781 18,583 (3,204) 15,379
How we
How we account
account for
for the
thenumbers
numbers
The gross discounted central estimate is the present value of the expected future payments for claims incurred and includes
reported but unpaid claims, IBNR, IBNER and claims handling costs. The central estimate is determined by the Group Chief
Actuary, supported by a team of actuaries in each of the Group’s businesses. The valuation process is performed quarterly
and includes extensive consultation with claims and underwriting staff as well as senior management. The central estimate
of outstanding claims is subject to a comprehensive independent review at least annually. The risk management procedures
related to the actuarial function are explained in note 4.2.
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Critical accounting
Critical accounting judgements
judgements and
and estimates
estimates 1
overview
Performance
The determination of the amounts that the Group will ultimately pay for claims arising under insurance and inward
reinsurance contracts involves a number of critical assumptions. Some of the uncertainties impacting these assumptions
are as follows:
• changes in patterns of claims incidence, reporting and payment;
• volatility in the estimation of future costs for long tail insurance classes due to the longer period of time that can elapse
before a claim is paid in full;
2
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Business
• the existence of complex underlying exposures;
• the incidence of catastrophic events close to the balance date;
• changes in the legal environment, including the interpretation of liability laws and the quantum of damages; and
• changing social, political and economic trends (e.g. price and wage inflation).
The estimation of IBNR and IBNER is generally subject to a greater degree of uncertainty than the estimation of the cost
of settling claims that have been reported to the Group but not yet paid, for which more information about the claims 3
Governance
is generally available. The notification and settlement of claims relating to liability and other long tail classes of business
may not happen for many years after the event giving rise to the claim. As a consequence, liability and other long tail
classes typically display greater variability between initial estimates and final settlement due to delays in reporting claims
and uncertainty in respect of court awards and future claims inflation. Claims in respect of property and other short tail
classes are typically reported and settled soon after the claim event, giving rise to more certainty.
Central estimates for each class of business are determined using a variety of estimation techniques, generally based
on an analysis of historical experience and with reference to external benchmarks where relevant. The gross central 4
Report
Directors'
estimate is discounted to present value using appropriate risk-free rates.
Central estimates are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts
recoverable from reinsurers based on the gross central estimate (note 2.3.2).
Report
Financial
2.3.2 Reinsurance and other recoveries on outstanding claims
2016 2015
NOTE US$M US$M
6
Reinsurance and other recoveries on outstanding claims – undiscounted 1 4,816 3,426
Discount to present value (276) (222)
Reinsurance and other recoveries on outstanding claims 2.3 4,540 3,204
information
Other
Receivable within 12 months 2,102 1,099
Receivable in greater than 12 months 2,438 2,105
Reinsurance and other recoveries on outstanding claims 2.3 4,540 3,204
How we
How we account
account for
forthe
thenumbers
numbers
The recoverability of amounts due from reinsurers is assessed at each balance date to ensure that the balances properly
reflect the amounts ultimately expected to be received, taking into account counterparty credit risk and the contractual terms
of the reinsurance contract. Counterparty credit risk in relation to reinsurance assets is considered in note 4.3. Recoveries
are discounted to present value using appropriate risk-free rates.
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Overview
Overview
A risk margin is determined by the Group Board to reflect the inherent uncertainty in the net discounted central estimate.
The risk margin and the net discounted central estimate are key inputs in the determination of the probability of adequacy,
which is a statistical measure of the relative adequacy of the outstanding claims liability to ultimately be able to pay claims.
For example, a 90% probability of adequacy indicates that the net discounted central estimate is expected to be adequate
nine years in 10.
2016 2015
Risk margin US$M 1,088 1,260
Risk margin as a percentage of the net discounted central estimate % 8.6 8.9
Probability of adequacy % 89.5 89.0
The decrease in the risk margin of $172 million includes a foreign exchange movement of $39 million and a constant currency reduction of
$132 million. The absolute level of risk margin has reduced due to a combination of reduced volatility in the net central estimate as a result
of the reinsurance or termination of underperforming portfolios, the benefit of a further year of the Group’s aggregate reinsurance covers
and the impact of foreign exchange on both the risk margin and net central estimate. Partly offsetting these decreases, QBE has elected
to increase the level of risk margin in response to the relatively increased uncertainty in the net discounted central estimate as a result of
potential changes to statutory discount rates in relation to UK personal injury claims liabilities. Whilst the UK Ministry of Justice is expected
to announce a change to the statutory rates (Ogden tables), no details of the change have been published as at the date of this report.
The current allowance in the risk margin assumes a reduction in the statutory rate of around 1% (i.e. a proposed rate of 1.5% compared
with the current legislated rate of 2.5%) which QBE estimates would increase the net central estimate by $33 million. If the statutory rate
reduced by a further 0.5%, this would equate to an additional increase in the net central estimate of $20 million. Beyond this allowance,
each further 0.5% reduction down to a zero statutory rate would increase the net central estimate by around $28 million, albeit that the
impact is not linear.
The probability of adequacy is 89.5% at the balance date compared with 89.0% last year. Net profit after tax would have increased
by $16 million if the probability of adequacy was maintained at 89.0%.
How we
How we account
account for
for the
thenumbers
numbers
AASB 1023 General Insurance Contracts requires an entity to adopt an appropriate risk margin. The resulting probability
of adequacy is not of itself an accounting policy as defined by AASB 108 Accounting Policies, Changes in Accounting
Estimates and Errors. The appropriate level of risk margin is not determined by reference to a fixed probability of adequacy.
QBE reviews a number of factors when determining the appropriate risk margin, including any changes in the level of
uncertainty in the net discounted central estimate, the resulting probability of adequacy and the risk margin as a percentage
of the net discounted central estimate. The Group aims to maintain a probability of adequacy in the range of 87.5% to 92.5%.
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Critical
Critical accounting
accounting judgements
judgements and
and estimates
estimates 1
overview
Performance
The risk margin is determined by the Group Board and is held to mitigate the potential for uncertainty in the net discounted
central estimate. The determination of the appropriate level of risk margin takes into account similar factors to those used
to determine the central estimate, such as:
• mix of business, in particular the mix of short tail and long tail business and the overall weighted average term to settlement; and
• the level of uncertainty in the central estimate due to estimation error, data quality, variability of key inflation assumptions
and possible economic and legislative changes. 2
review
Business
The variability by class of business is measured using techniques that determine a range of possible outcomes of ultimate
payments and assign a likelihood to outcomes at different levels. These techniques generally use standard statistical
distributions, and the measure of variability is referred to as the coefficient of variation.
At a fixed probability of adequacy, the appropriate risk margin for two or more classes of business or for two or more
3
geographic locations combined is likely to be less than the sum of the risk margins for the individual classes. This reflects
the benefit of diversification in general insurance. The statistical measure used to determine diversification is called the
correlation. The higher the correlation between two classes of business, the more likely it is that a negative outcome
Governance
in one class will correspond to a negative outcome in the other class. For example, high correlation exists between classes
of business affected by court cases involving bodily injury claims such as motor third party liability, workers’ compensation
and public liability, particularly in the same jurisdiction.
The probability of adequacy for the Group is determined by analysing the variability of each class of business and the
correlation between classes of business and divisions. Correlations are determined for aggregations of classes of business,
where appropriate, at the divisional level. The correlations adopted by the Group are generally derived from industry
analysis, the Group’s historical experience and the judgement of experienced and qualified actuaries. 4
Report
Directors'
2.3.4 Discount rate used to determine the outstanding claims liability
Report
Financial
Overview
Overview
Claims in relation to long tail classes of business (e.g. professional indemnity and workers’ compensation) typically may not
settle for many years. As such, the liability is discounted to reflect the time value of money. The table below summarises the
weighted average discount rate for each operating segment and for the consolidated Group.
6
information
Other
2016 2015
% %
North American Operations 2.11 1.85
European Operations 0.65 1.21
Australian & New Zealand Operations 2.24 2.36
Emerging Markets 1 8.53 10.43
Equator Re 1.63 1.73
Group 1 1.54 1.86
1 Emerging Markets and Group excluding the Argentine peso were 2.57% (2015 2.34%) and 1.33% (2015 1.62%) respectively.
How we account
How we account for
for the
the numbers
numbers
AASB 1023 General Insurance Contracts requires that the net central estimate is discounted to reflect the time value
of money using risk-free rates that are based on current observable, objective rates that reflect the nature, structure
and terms of the future obligations.
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Overview
Overview
The weighted average term to settlement refers to the period from the balance date to the expected date of claims
settlement. All other factors being equal, a longer weighted average term to settlement generally results in a larger impact
on the central estimate from discounting.
2016 2015
YEARS YEARS
US$ £ A$ € OTHER TOTAL US$ £ A$ € OTHER TOTAL
North American Operations 2.9 – – – – 2.9 2.8 – – – – 2.8
European Operations 2.5 2.9 3.6 5.4 2.8 3.7 2.6 3.4 3.7 5.1 3.1 3.7
Australian & New Zealand
Operations – – 2.2 – 1.8 2.1 – – 2.2 – 1.4 2.2
Emerging Markets 0.6 – – – 1.6 1.6 0.9 – – – 1.5 1.5
Equator Re 2.1 3.5 2.8 3.6 1.8 2.4 2.9 3.5 2.9 3.5 2.3 2.9
Group 2.5 3.0 2.3 5.3 2.0 2.9 2.7 3.4 2.4 5.0 2.1 3.0
Overview
Overview
The maturity profile is the Group’s expectation of the period over which the net central estimate will be settled. The Group uses
this information to ensure that it has adequate liquidity to pay claims as they are due to be settled and to inform the Group’s
investment strategy. The expected maturity profile of the Group’s net discounted central estimate is analysed below.
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2.3.7 Impact of changes in key variables on the net outstanding claims liability
1
overview
Performance
Overview
Overview
The impact of changes in key variables used in the calculation of the outstanding claims liability is summarised in the
2
table below. Each change has been calculated in isolation from the other changes and shows the after tax impact on profit
assuming that there is no change to any of the other variables. In practice, this is considered unlikely to occur as, for
example, an increase in interest rates is normally associated with an increase in the rate of inflation. Over the medium
review
Business
to longer term, the impact of a change in discount rates is expected to be largely offset by the impact of a change in the
rate of inflation.
The sensitivities below assume that all changes directly impact profit after tax. In practice, however, if the central estimate
was to increase, at least part of the increase may result in an offsetting change in the level of risk margin rather than
in a change to profit after tax, depending on the nature of the change in the central estimate. Likewise, if the coefficient
of variation were to increase, it is possible that the probability of adequacy would reduce from its current level rather than
result in a change to net profit after income tax. 3
Governance
PROFIT (LOSS) 1,2
Report
Directors'
-5 444 494
Risk margin +5 (38) (44)
-5 38 44
Inflation rate +0.5 (130) (145)
Discount rate
-0.5
+0.5
-0.5
124
124
(130)
139
139
(145)
5
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Financial
Coefficient of variation +1 (114) (124)
-1 114 124
Probability of adequacy +1 (37) (43)
-1 35 40
6
Weighted average term to settlement +10 43 58
-10 (43) (59)
information
Other
1 Net of tax at the Group’s prima facie income tax rate of 30%.
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Overview
Overview
The claims development table demonstrates the extent to which the original estimated ultimate claims payments in any one
accident year (item (a) in the table below) has subsequently developed favourably (i.e. claims cost estimates have reduced)
or unfavourably (i.e. further claims expense has been recognised in subsequent years). This table therefore illustrates the
variability and inherent uncertainty in estimating the central estimate each year. The ultimate claims cost for any particular
accident year is not known until all claims payments have been made which, for some long tail classes of business, could
be many years into the future. The estimated ultimate claims payments at the end of each subsequent accident year
demonstrates how the original estimate has been revised over time (b).
Cumulative actual net claims payments (d) are deducted from the expected ultimate claims payments in each accident year
(c) at the current balance date, resulting in the undiscounted central estimate at a fixed rate of exchange (e). This is
revalued to the balance date rate of exchange (f) to report the net undiscounted central estimate (g), which is reconciled
to the discounted net central estimate (h). The treatment of foreign exchange in the claims development table is explained
on the following page.
The net (increase) decrease in estimated ultimate claims payments (i) reflects the estimated ultimate net claims payments
at the end of the current financial year (c) less the equivalent at the end of the previous financial year (b). This is further
summarised in note 2.4.1.
The claims development table is presented net of reinsurance. With operations in 37 countries, hundreds of products,
various reinsurance arrangements and with the Group’s risk tolerance managed on a consolidated basis, it is considered
neither meaningful nor practicable to provide this information other than on a consolidated Group basis.
2006 &
PRIOR 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TOTAL
US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M
Net ultimate claims payments
(a) Original estimate of net
ultimate claims payments 5,779 5,312 5,216 6,969 8,974 8,089 7,767 7,831 7,165 7,121
(b) One year later 5,561 5,458 5,245 7,039 9,229 8,217 7,793 7,930 7,168
Two years later 5,669 5,437 5,194 7,110 9,260 8,239 7,791 7,783
Three years later 5,664 5,560 5,236 7,129 9,185 8,272 7,764
Four years later 5,658 5,567 5,347 7,329 9,191 8,255
Five years later 5,659 5,719 5,370 7,358 9,144
Six years later 5,725 5,704 5,335 7,273
Seven years later 5,730 5,707 5,297
Eight years later 5,722 5,704
Nine years later 5,759
(c) Current estimate of net
ultimate claims payments 5,759 5,704 5,297 7,273 9,144 8,255 7,764 7,783 7,168 7,121
(d) Cumulative net payments
to date (5,468) (5,508) (5,032) (6,373) (8,346) (7,440) (6,485) (6,162) (4,804) (2,451)
(e) Net undiscounted central
estimate at fixed rate of
exchange 1 885 291 196 265 900 798 815 1,279 1,621 2,364 4,670 14,084
(f) Foreign exchange impact (490)
Reinsurance recoveries
on closed portfolios (560)
Provision for impairment (24)
(g) Net undiscounted central
estimate at 31 Dec 2016 13,010
Discount to present value (660)
Claims settlement costs 343
Risk margin 1,088
(h) Net outstanding claims
liability at 31 Dec 2016
(note 2.3) 13,781
(i) Movement in accident
year net undiscounted
central estimate
(note 2.4.1) (50) 37 (3) (38) (85) (47) (17) (27) (147) 3 7,121 6,747
1 Excluding claims settlement costs.
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How we
How we account
account for
for the
thenumbers
numbers 1
overview
Performance
The estimate of net ultimate claims payments attributable to business acquired is generally included in the claims
development table in the accident year in which the acquisition was made. The exception is increased participation
in Lloyd’s syndicates where the estimate of net ultimate claims payments is allocated to the original accident year(s)
in which the underlying claim was incurred.
The Group writes business in currencies other than the US dollar. The translation of ultimate claims estimates denominated
in foreign currencies gives rise to foreign exchange movements which have no direct bearing on the development of the
2
review
Business
underlying claims. To eliminate this distortion, amounts have been translated to the functional currencies of our controlled
entities at constant rates of exchange. All estimates of ultimate claims payments for the 10 most recent accident years
reported in functional currencies other than US dollars have been translated to US dollars using the 2016 average rates
of exchange.
Governance
2.4.1 Reconciliation of claims development table to profit or loss
Overview
Overview
The table below reconciles the net increase or decrease in estimated ultimate claims payments in the current financial year
4
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Directors'
from the claims development table (item (i) in note 2.4) to the analysis of current and prior accident year central estimate
development recognised in profit or loss (note 2.4.2).
2016 2015
5
Report
Financial
CURRENT PRIOR CURRENT PRIOR
ACCIDENT ACCIDENT ACCIDENT ACCIDENT
YEAR YEARS TOTAL YEAR YEARS TOTAL
US$M US$M US$M US$M US$M US$M
Net undiscounted central estimate
movement (note 2.4) 1 7,121 (374) 6,747 7,473 77 7,550
Discount reclassification 2
Net undiscounted central estimate
development
–
7,121
8
(366)
8
6,755
–
7,473
(214)
(137)
(214)
7,336
6
information
Other
Reinsurance recoveries on closed portfolios – (574) (574) – – –
Movement in claims settlement costs 341 (14) 327 373 21 394
Movement in discount 2, 3 (209) 270 61 (486) 202 (284)
Other movements 21 (16) 5 (11) 18 7
Movement in net discounted central
estimate (note 2.4.2) 7,274 (700) 6,574 7,349 104 7,453
In 2016, prior accident year central estimate development was a net release of $366 million (2015 net release of $137 million). This
reflects positive development in European Operations, Australian & New Zealand Operations and Equator Re, partly offset by adverse
development in North American Operations.
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Overview
Overview
The table further analyses the current and prior accident year movement in the net discounted central estimate, separately
identifying the gross and reinsurance components. Prior accident year claims are those claims that occurred in a previous
year but for which a reassessment of the claims cost has impacted the result in the current period.
2016 2015
CURRENT PRIOR CURRENT PRIOR
ACCIDENT ACCIDENT ACCIDENT ACCIDENT
YEAR YEARS TOTAL YEAR YEARS TOTAL
US$M US$M US$M US$M US$M US$M
Gross central estimate development
Undiscounted 9,442 (255) 9,187 9,250 123 9,373
Discount (274) 261 (13) (507) (135) (642)
9,168 6 9,174 8,743 (12) 8,731
Reinsurance and other recoveries
Undiscounted 1,959 723 2,682 1,415 7 1,422
Discount (65) (17) (82) (21) (123) (144)
1,894 706 2,600 1,394 (116) 1,278
Net central estimate development
Undiscounted 7,483 (978) 6,505 7,835 116 7,951
Discount (209) 278 69 (486) (12) (498)
Net discounted central estimate
development (note 2.4.1) 7,274 (700) 6,574 7,349 104 7,453
Overview
Overview
Unearned premium
Gross written premium is earned in profit or loss in accordance with the pattern of incidence of risk of the related business.
The unearned premium liability is that portion of gross written premium that QBE has not yet earned in profit or loss
as it represents insurance coverage to be provided by QBE after the balance date.
Deferred insurance costs
Premium ceded to reinsurers by QBE in exchange for reinsurance protection is expensed in profit or loss in accordance with
the reinsurance contract’s expected pattern of incidence of risk. The deferred reinsurance premium asset is that portion of the
reinsurance premium that QBE has not yet expensed in profit or loss as it represents reinsurance coverage to be received by
QBE after the balance date.
Acquisition costs are the costs associated with obtaining and recording insurance business. Acquisition costs are similarly
capitalised and amortised, consistent with the earning of the related premium for that business. Commissions are a type
of acquisition cost but are disclosed separately.
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127
overview
Performance
Unearned premium (a) 6,763 7,006
To be earned within 12 months 6,175 6,356
To be earned in greater than 12 months 588 650
Unearned premium 6,763 7,006
2
Deferred reinsurance premium 585 1,160
Deferred net commission 990 995
Deferred acquisition costs 390 383
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Business
Deferred insurance costs (b) 1,965 2,538
To be expensed within 12 months 1,782 2,377
To be expensed in greater than 12 months 183 161
Deferred insurance costs 1,965 2,538
Net premium liabilities (a) – (b) 4,798 4,468
3
Governance
Unearned premium movements
2016 2015
US$M US$M
At 1 January 7,006 7,366
Deferral of unearned premium on contracts written in the financial year
Earning of premium written in previous financial years
Transfers to liabilities held for sale
6,149
(6,030)
(27)
6,043
(5,873)
–
4
Report
Directors'
Foreign exchange (335) (530)
At 31 December 6,763 7,006
Report
Financial
REINSURANCE PREMIUM NET COMMISSION ACQUISITION COSTS
2016 2015 2016 2015 2016 2015
US$M US$M US$M US$M US$M US$M
At 1 January 1,160 502 995 1,019 383 510
Costs deferred in financial year 448 1,106 758 673 331 382
Amortisation of costs deferred in
previous financial years
Transfers to assets held for sale /
(1,005) (395) (690) (661) (322) (365) 6
information
Other
disposals (2) – (3) – – (45)
Impairment – – – – – (41)
Foreign exchange (16) (53) (70) (36) (2) (58)
At 31 December 585 1,160 990 995 390 383
How we
How we account
account for
for the
thenumbers
numbers
Unearned premium
Unearned premium is calculated based on the coverage period of the insurance or reinsurance contract and in accordance
with the expected pattern of the incidence of risk, using either the daily pro-rate method or the 24ths method, adjusted
where appropriate to reflect different risk patterns.
Deferred insurance costs
Deferred reinsurance premium is calculated based on the period of indemnity provided to QBE by the reinsurance contract
and in accordance with the related pattern of the incidence of risk.
Acquisition costs are capitalised when they relate to new business or the renewal of existing business and are amortised
on the same basis as the earning pattern for that business. At the balance date, deferred acquisition costs represent the
capitalised acquisition costs that relate to unearned premium and are carried forward to a subsequent accounting period
in recognition of their future benefit. The carrying value of deferred acquisition costs is subject to impairment testing in the
form of the liability adequacy test (note 2.5.1).
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Overview
Overview
At each balance date, the Group is required to assess net premium liabilities (being unearned premium less deferred
insurance costs) to determine whether the amount provided is sufficient to pay future claims.
If the present value of expected future claims exceeds the net premium liabilities, the net premium liability is deemed
deficient. This deficiency is immediately recognised in profit or loss. In recognising the deficiency, an insurer must first
write down any related intangible assets and then deferred acquisition costs before recognising an unexpired risk liability.
Expected present value of future cash flows for future claims including risk margin
2016 2015
US$M US$M
Undiscounted net central estimate 4,498 4,378
Discount to present value (171) (240)
4,327 4,138
Risk margin at the 75th percentile of insurance liabilities 186 186
Expected present value of future cash flows for future claims including risk margin 4,513 4,324
The application of the liability adequacy test did not identify a deficiency at either 31 December 2016 or 2015.
How we
How we account
account for
for the
thenumbers
numbers
At each balance date, the adequacy of the unearned premium liability is assessed on a net of reinsurance basis against the
present value of the expected future claims cash flows in respect of the relevant insurance contracts, plus an additional risk
margin to reflect the inherent uncertainty of the central estimate. The assessment is carried out at the operating segment
level, being a portfolio of contracts subject to broadly similar risks and which are managed together as a single portfolio.
The exception is the Emerging Markets segment where risks are considered to be broadly similar within each of the Latin
American and Asia Pacific geographic regions but not across the operating segment as a whole.
Critical
Critical accounting
accounting judgements
judgements and
and estimates
estimates
In assessing the adequacy of net premium liabilities, AASB 1023 General Insurance Contracts requires the inclusion
of a risk margin but does not prescribe a minimum level of margin. Whilst there is established practice in the calculation
of the probability of adequacy of the outstanding claims liability, no such guidance exists in respect of the level of risk margin
to be used in determining the adequacy of net premium liabilities.
The Group has adopted a risk margin of 4.3% (2015 4.5%) for the purpose of the liability adequacy test to produce a 75%
probability of adequacy in respect of total insurance liabilities. The 75% basis is a recognised industry benchmark in
Australia, being the minimum probability of adequacy required for Australian licensed insurers by APRA. Without allowing
for diversification benefits, the application of the 4.3% risk margin to the net premium liabilities is estimated to achieve
a probability of adequacy of 70% (2015 71%) for net unearned premium liabilities on a standalone basis.
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overview
Performance
Overview
Overview
2
Trade and other receivables are principally amounts owed to QBE by policyholders or reinsurance counterparties. Unclosed
premium receivables are estimated amounts due to QBE in relation to business for which the Group is on risk but where the
policy is not billed to the counterparty at the balance date.
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Business
3
2016 2015
US$M US$M
Trade debtors
Governance
Premium receivable 1 2,149 2,289
Reinsurance and other recoveries 2 984 1,088
Unclosed premium 955 1,085
Other trade debtors 123 192
4,211 4,654
Other receivables
Trade and other receivables
620
4,831
296
4,950 4
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Directors'
Receivable within 12 months 4,775 4,744
Receivable in greater than 12 months 56 206
Trade and other receivables 4,831 4,950
Report
Financial
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivables. No receivables are pledged
by the Group as collateral for liabilities or contingent liabilities. Information on the ageing and credit rating of these balances is included
in note 4.3.
6
information
Other
How we
How we account
account for
for the
thenumbers
numbers
Receivables are recognised at fair value and are subsequently measured at amortised cost less any impairment. A provision
for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due
according to the original terms of the receivable. Any increase or decrease in the provision for impairment is recognised
in profit or loss within underwriting expenses.
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Overview
Overview
Trade payables primarily comprise amounts owed to reinsurance counterparties and cedants. Treasury and investment
payables are amounts due to investment counterparties in settlement of transactions.
2016 2015
US$M US$M
Trade payables 1,172 1,261
Other payables and accrued expenses 612 678
Treasury payables 22 32
Investment payables 333 130
Trade and other payables 2,139 2,101
Payable within 12 months 2,017 2,056
Payable in greater than 12 months 122 45
Trade and other payables 2,139 2,101
How we
How we account
account for
for the
thenumbers
numbers
Trade payables are recognised initially at their fair value and are subsequently measured at amortised cost using the
effective interest method.
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3. INVESTMENT ACTIVITIES
3. INVESTMENTS ACTIVITIES
1
overview
Performance
Overview
Overview
Premiums collected from policyholders are invested to meet the Group’s cash flow needs to pay claims and other expenses,
as well as generating a return that contributes to the Group’s profitability. A sound investment strategy is therefore integral
to the success of the Group’s operations. 2
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Business
The Group invests across a diversified range of instruments to achieve an appropriate balance between risk and return.
Decisions on where to invest are dependent on expected returns, cash flow requirements of the Group, liquidity of the
instrument, credit quality of the instrument and the overall risk appetite of the Group. Further details on the management
of risk associated with investment assets can be found in note 4.
The Group’s investment assets are categorised as either backing policyholders’ or shareholders’ funds, with the former
being investment assets which back insurance liabilities whilst the latter comprises all other investment assets.
3
Governance
3.1 Investment income
2016
US$M
2015
US$M
4
Report
Directors'
Income on growth assets 86 225
Income on fixed interest securities, short-term money and cash 561 489
Gross investment income 1 647 714
Investment expenses (24) (26)
5
Net investment income 623 688
Foreign exchange gain (loss) 125 (20)
Other income 2 7
Report
Financial
Other expenses (4) (10)
Total investment income 746 665
Investment and other income – policyholders' funds 422 418
Investment expenses – policyholders' funds (15) (16)
6
Investment and other income – shareholders' funds 348 273
Investment expenses – shareholders' funds (9) (10)
Total investment income 746 665
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Other
1 Includes net fair value gains of $109 million (2015 $128 million), interest income of $482 million (2015 $482 million) and dividend income
of $56 million (2015 $104 million).
How we
How we account
account for
for the
thenumbers
numbers
Interest income is recognised in the period in which it is earned. Dividends are recognised when the right to receive payment
is established. Investment income includes realised and unrealised gains or losses on financial assets which are reported
on a combined basis as fair value gains or losses on financial assets.
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2016 2015
US$M US$M
Fixed income
Short-term money 3,954 5,924
Government bonds 5,996 4,158
Corporate bonds 11,339 12,385
Infrastructure debt 463 348
Unit trusts 31 64
21,783 22,879
Growth assets
Developed market equity 579 683
Emerging market equity 34 254
Emerging market debt 305 318
High yield debt 202 458
Unlisted property trusts 1,028 1,043
Alternatives 443 397
2,591 3,153
Total investments 24,374 26,032
Amounts maturing within 12 months 6,948 10,442
Amounts maturing in greater than 12 months 17,426 15,590
Total investments 24,374 26,032
How we
How we account
account for
for the
thenumbers
numbers
Investments are designated as fair value through profit or loss on initial recognition, being the cost of acquisition excluding
transaction costs, and are subsequently remeasured to fair value at each reporting date. The fair value hierarchy and the
Group’s approach to measuring the fair value of each investment instrument is disclosed in note 3.2.1.
All purchases and sales of investments that require delivery of the asset within the time frame established by regulation
or market convention are recognised at trade date, being the date on which the Group commits to buy or sell the asset.
Investments are derecognised when the right to receive future cash flows from the asset has expired or has been
transferred and the Group has transferred substantially all the risks and rewards of ownership.
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overview
Performance
Overview
Overview
The Group Investments Valuation Committee is responsible for the governance and oversight of the investment valuation
process and ensures that the determination of fair value is in accordance with the Group’s investment valuation policy.
The investments of the Group are disclosed in the table below using a fair value hierarchy which reflects the significance
of inputs into the determination of fair value as follows:
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Level 1: Valuation is based on quoted prices in active markets for the same instruments.
Level 2: Valuation is based on quoted prices for identical instruments in markets which are not active, quoted prices for
similar instruments, or valuation techniques for which all significant inputs are based on observable market data, for
example, consensus pricing using broker quotes or valuation models with observable inputs.
Level 3: Valuation techniques are applied in which one or more significant inputs are not based on observable market data. 3
Governance
2016 2015
4
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
US$M US$M US$M US$M US$M US$M US$M US$M
Fixed income
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Directors'
Short-term money 854 3,099 1 3,954 861 5,062 1 5,924
Government bonds 4,808 1,186 2 5,996 2,849 1,300 9 4,158
Corporate bonds – 11,339 – 11,339 – 12,384 1 12,385
Infrastructure debt – 170 293 463 – 139 209 348
Unit trusts – 31 – 31 – 64 – 64
Growth assets
5,662 15,825 296 21,783 3,710 18,949 220 22,879
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Developed market equity 560 – 19 579 657 – 26 683
Emerging market equity – 34 – 34 – 254 – 254
Emerging market debt – 305 – 305 – 318 – 318
High yield debt – 202 – 202 – 458 – 458
Unlisted property trusts – 1,028 – 1,028 – 1,043 – 1,043
Alternatives –
560
186
1,755
257
276
443
2,591
–
657
397
2,470
–
26
397
3,153 6
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Other
Total investments 6,222 17,580 572 24,374 4,367 21,419 246 26,032
The Group’s approach to measuring the fair value of investments is described below:
Short-term money
Term deposits are valued at par plus accrued interest and are categorised as level 1 fair value measurements. Other short-term money
(bank bills, certificates of deposit, treasury bills and other short-term instruments) are priced using interest rates and yield curves
observable at commonly quoted intervals.
Government bonds and corporate bonds
Bonds which are traded in active markets and have quoted prices from external data providers are categorised as level 1 fair value
measurements. Bonds which are not traded in active markets are priced using broker quotes, using comparable prices for similar instruments
or using pricing techniques set by local regulators or exchanges.
Infrastructure debt
Infrastructure debt prices are sourced from the investment manager who may use a combination of observable market prices or comparable
market prices where available and other valuation techniques.
Developed market equity
Listed equities traded in active markets are valued by reference to quoted bid prices. Unlisted equities are priced using QBE’s share of the
net assets of the entity.
Emerging market equity, emerging market debt, high yield debt, unit trusts and unlisted property trusts
These assets are valued using quoted bid prices in active markets or current unit prices as advised by the responsible entity, trustee
or equivalent of the investment management scheme.
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Alternatives
Alternatives comprise fund of funds vehicles. Fair value is based on the net asset value of the vehicle, and the responsibility for the
valuation of the underlying securities lies with the external manager. In most cases, an independent administrator will be utilised
by the external fund manager for pricing and valuation. A combination of observable market prices or comparable market prices
(where available) and other valuation techniques may be used in the determination of fair value.
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overview
Performance
Overview
Overview
In accordance with our investment management policies and procedures, derivatives may be used in the investment
2
portfolio as both a hedging tool and to alter the risk profile of the portfolio. All long positions must be cash backed, all short
positions must be covered by an underlying physical asset and no net short exposure to an asset class is permitted. Risk
management policies over the use of derivatives are set out in note 4.
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QBE may also have exposure to derivatives through investments in underlying pooled funds in accordance with the fund
mandate. Those derivative exposures are not included in the table below.
The Group’s notional exposure to investment derivatives at the balance date is set out in the table below. 3
Governance
2016 2015
NOTIONAL EXPOSURE US$M US$M
Fixed interest futures
ASX 90 day bank bills – 760
SFE Australian 3 year bond futures – 81
90 day sterling futures
Equity futures
– (713)
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Directors'
ASX SPI 200 – 104
S&P 500 E-mini – 191
How we
How we account
account for
for the
thenumbers
numbers 5
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Financial
Derivatives over investment assets are initially recognised at fair value and are subsequently remeasured to fair value
through profit or loss. For derivatives traded in an active market, the fair value of derivatives is determined by reference
to quoted market prices. The mark to market value of futures positions are cash settled on a daily basis resulting in a fair
value of nil at the balance date.
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Other
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4.
4. RISK
RISKMANAGEMENT
MANAGEMENT
Overview
Overview
QBE is in the business of managing risk. The Group’s ability to satisfy customers’ risk management needs is central to what
we do. QBE aims to generate wealth and maximise returns for its shareholders by pursuing opportunities that involve risk.
Our people are responsible for ensuring that QBE’s risks are managed and controlled on a day to day basis. QBE aims
to use its ability to properly manage risk to provide more certainty and improved outcomes for all stakeholders.
QBE applies a consistent and integrated approach to enterprise risk management (ERM); we refer to this as ONE ERM. QBE’s global risk
management framework sets out the approach to managing key risks and meeting strategic objectives whilst taking into account the
creation of value for our shareholders. QBE’s risk management framework is articulated in the Risk Management Strategy (RMS) and
Reinsurance Management Strategy (REMS), both of which are approved annually by the Group Board and lodged with APRA.
The framework consists of complementary elements that are embedded throughout the business management cycle and culture of the
organisation. Key aspects include: risk appetite, governance, reporting, risk assessments, modelling and stress testing, management,
and monitoring and risk culture.
Risk management is a continuous process and an integral part of robust business management. QBE’s approach is to integrate risk
management into the broader management processes of the organisation. It is QBE’s philosophy to ensure that risk management remains
embedded in the business and that the risk makers or risk takers are themselves the risk managers. Specifically, the management of risk
must occur at each point in the business management cycle.
QBE Group’s strategy for managing risk is to:
• achieve competitive advantage by better understanding the risk environments in which we operate;
• operate within our stated risk appetite and more effectively allocate capital and resources by assessing the balance of risk and reward; and
• avoid unwelcome surprises to the achievement of business objectives by reducing uncertainty and volatility through the identification
and management of risks.
The framework is supported by a suite of policies that detail QBE’s approach to the key risk categories used by QBE to classify risk:
• Strategic risk (note 4.1)
• Insurance risk (note 4.2)
• Credit risk (note 4.3)
• Market risk (note 4.4)
• Liquidity risk (note 4.5)
• Operational risk (note 4.6)
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overview
Performance
Overview
Overview
2
Strategic risk is the potential impact on earnings and/or capital as a result of strategic business decisions or lack
of responsiveness to external change. QBE classifies strategic risk into five subcategories, as follows:
• business, product and market distribution;
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Business
• capital structure and management;
• acquisition, decision and negotiation;
• tax risk management; and
• investment strategy.
QBE’s approach to managing strategic risk is underpinned by the Group strategic risk appetite statement as set
by the Group Board and is summarised below.
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Governance
Business, product and market distribution
Business: The Group is a geographically diversified international general insurance and reinsurance group, underwriting most major
commercial and personal lines classes of business through operations in 37 countries. The Group Board and the board of each division
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meet at least quarterly to review performance against business plans. Actual results are monitored and analysed regularly at various
levels in the Group to identify adverse trends so that remedial action can be taken at an early stage. One of the key tools used to ensure
achievement of business plans is to identify our ‘manage to’ likely scenarios impacting the plan year based on events that have occurred
or risks identified since plans were set. We assess how these scenarios would impact return on equity (ROE) forecasts and develop and
implement bridging actions to drive plan achievability.
Product: QBE reviews the structuring of its insurance products on an ongoing basis in line with market expectations and developments,
legislation and claims trends.
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Market distribution approach: QBE makes use of distributed networks of insurance agents and brokers to undertake sales and
marketing of its insurance products. The Group also markets and distributes insurance products directly by phone and on the internet.
6
QBE’s objective when managing capital is to maintain an optimal balance of debt and equity in the capital structure to reduce the cost of capital
whilst meeting capital adequacy requirements, providing security for policyholders and continuing to provide sufficient returns to shareholders.
Where appropriate, adjustments are made to capital levels in light of changes in economic conditions and risk characteristics of the
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Other
Group’s activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares or debt securities with capital characteristics, sell assets to reduce debt or adopt more
conservative investment or reinsurance strategies.
QBE is subject to, and complies with, various externally imposed regulatory capital requirements, both through its wholly-owned insurance
controlled entities and as a consolidated insurance group. These requirements are designed to ensure that a sufficient solvency margin
is maintained in order to provide adequate protection for policyholders. In addition, the Group aims to maintain a strong credit and insurer
financial strength rating along with robust capital ratios in order to support its business objectives and maximise shareholder wealth.
The Group uses an economic capital model (ECM) to assess the level of capital required for the underwriting, claims estimation, credit,
market, liquidity and operational risk to which it is exposed. Economic capital is determined as the level of capital that the Group needs
to ensure that it can, with a pre-specified probability, satisfy its ultimate policyholder obligations in relation to all insurance contracts issued
on or before the end of the business plan year. The ECM is used by management to help in the determination of strategic capital
allocation, business planning, underwriting performance, pricing, reinsurance arrangements and aggregate management. Capital
is allocated to business units, divisions and ultimately to underwriting portfolios according to the associated risk. The business plans
include net asset, dividend, issued share capital and solvency projections as well as the impact of potential acquisitions. In the event
of a significant change in the Group’s risk profile, the ECM will be recalculated and the results reported to the Group’s Board.
The Group reviews its capital structure on an ongoing basis to optimise the allocation of capital whilst minimising the cost of capital.
Active management of the business and its capital has enabled the Group to maintain its insurer financial strength and credit rating,
and has afforded QBE good access to capital markets when needed.
Management has a particular focus on the following performance indicators:
• The Group actively manages the components of capital in order to maintain a level of eligible regulatory capital that exceeds APRA
requirements. Having determined that the current Group risk appetite remains appropriate, the Board has set the target level
of regulatory capital for 2017 at 1.6 – 1.8 times (2016 1.6 – 1.8 times) the Prescribed Capital Amount (PCA).
• All regulated wholly-owned entities are required to maintain a minimum level of capital to meet obligations to policyholders. It is the
Group’s policy that each regulated entity maintains a capital base appropriate to its size, business mix, complexity and risk profile which
fully complies with and meets or exceeds local regulatory requirements.
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• The Group aims to maintain the ratio of borrowings to shareholders’ funds at 25% – 35% (2015 25% – 35%). The ratio of borrowings
to shareholders’ funds at 31 December 2016 was 33.8% (2015 33.6%).
• Insurer financial strength ratings provided by the major rating agencies demonstrate the Group’s financial strength and claims paying ability.
In addition to the management reporting and planning processes, the Group has dedicated staff across its business units and divisions
responsible for understanding the regulatory capital requirements of both the operating insurance entities and consolidated operations.
The quality of QBE’s assets (particularly investments and reinsurance recoveries) is continuously monitored to ensure any potential issues
are identified and remedial action, where necessary, is taken to restore effective capital performance and levels.
Investment strategy
QBE’s approach to investment risk is underpinned by the Group’s investment strategy, which is designed to achieve absolute return
targets within pre-defined risk and capital constraints whilst meeting regulatory requirements in every jurisdiction. The strategy requires
QBE to invest in a range of asset classes with portfolios consisting mainly of investment grade fixed income securities.
Overview
Overview
Insurance risk is the risk of fluctuations in the timing, frequency and severity of insured events and claims settlements,
relative to expectations. Key drivers of insurance risk include natural or man-made catastrophic events, pricing of individual
insurance contracts, reserving and insurance claims.
QBE classifies insurance risk into four subcategories, as follows:
• underwriting;
• insurance concentrations;
• reserving; and
• reinsurance.
QBE’s approach to managing insurance risk is underpinned by the Group insurance risk appetite statement as set by the
Group Board and is summarised below.
Underwriting risk
QBE manages underwriting risk by appropriately setting and adjusting underwriting strategy, risk selection and pricing practices
throughout the underwriting cycle.
QBE’s underwriting strategy aims to diversify and limit the type of insurance risks accepted and reduce the variability of the expected
outcome. The underwriting strategy is implemented through QBE’s annual business planning process, supported by underwriting
authorities. These authorities reflect the level of risk that the Group is prepared to take with respect to each permitted insurance class.
Pricing of risks is controlled by the use of in-house pricing models relevant to specific portfolios and the markets in which QBE operates.
Underwriters and actuaries maintain pricing and claims analysis for each portfolio, combined with a knowledge of current developments
in the respective markets and classes of business.
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overview
Performance
Commercial & domestic property 4,480 4,625
Motor & motor casualty 2,606 2,640
Agriculture 1,549 1,616
Public/product liability 1,442 1,592
2
Workers' compensation 1,062 1,240
Marine energy & aviation 904 976
Professional indemnity 898 840
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Accident & health 652 592
Financial & credit 570 611
Other 113 190
14,276 14,922
Concentration risk includes the risks from natural or man-made events that have the potential to produce claims from many of the Group’s
policyholders at the same time (e.g. catastrophes). QBE currently uses a variety of methodologies to monitor aggregates and manage
3
Governance
catastrophe risk. These include the use of catastrophe models from third party vendors such as RMS and AIR, the Lloyd's realistic
disaster scenarios (RDS) and group aggregate methodology. QBE sets the risk appetite relating to catastrophe risk with reference to the
insurance concentration risk charge (ICRC). QBE’s maximum risk tolerance for an individual natural catastrophe, measured using the
ICRC methodology, is determined annually and is linked to budgeted net earned premium.
Reserving risk
Reserving risk is managed through the quarterly actuarial valuation of insurance liabilities. The valuation of the net central estimate 4
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Directors'
is performed by qualified and experienced actuaries, with reference to historical data and reasoned expectations of future events.
The central estimate of outstanding claims is subject to a comprehensive independent review at least annually.
Reinsurance risk
The Group limits its exposure to an individual catastrophe or an accumulation of claims by reinsuring a portion of risks underwritten.
This allows the Group to control exposure to insurance losses, reduce volatility of reported results and protect capital.
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4.3 Credit risk
Overview
Overview 6
information
Other
Credit risk is the risk of not recovering money owed to QBE by third parties as well as the loss of value of assets due
to deterioration in credit quality. QBE’s exposure to credit risk arises from financial transactions with securities issuers and/or
a reduction or delay in repayments or interest payments from the default of counterparties such as debtors, brokers,
policyholders, reinsurers and guarantors. QBE categorises credit risk into three sub-categories, as follows:
• reinsurance counterparty credit;
• investment counterparty credit; and
• premium and other counterparty credit.
QBE’s approach to managing credit risk is underpinned by the Group credit risk appetite as set by the Group Board
and summarised below.
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The following table provides information about the quality of the Group’s credit risk exposure in respect of reinsurance recoveries
on outstanding claims at the balance date. The analysis classifies the assets according to Standard & Poor’s (S&P) counterparty credit
ratings. AAA is the highest possible rating. Rated assets falling outside the range of AAA to BBB are classified as speculative grade.
CREDIT RATING
SPECULATIVE NOT
AAA AA A BBB GRADE RATED TOTAL
US$M US$M US$M US$M US$M US$M US$M
As at 31 December 2016
Reinsurance recoveries on outstanding claims 1,2 65 2,873 1,115 2 14 120 4,189
Reinsurance recoveries on paid claims 1 2 847 116 3 4 12 984
As at 31 December 2015
Reinsurance recoveries on outstanding claims 1,2 51 1,572 1,099 7 12 123 2,864
Reinsurance recoveries on paid claims 1 1 878 185 11 4 9 1,088
CREDIT RATING
SPECULATIVE
AAA AA A BBB GRADE NOT RATED TOTAL
US$M US$M US$M US$M US$M US$M US$M
As at 31 December 2016
Cash and cash equivalents – 207 363 213 4 60 847
Interest-bearing investments 3,654 8,124 7,792 1,852 297 64 21,783
Derivative financial instruments – 122 16 13 – – 151
As at 31 December 2015
Cash and cash equivalents 4 183 289 148 6 32 662
Interest-bearing investments 3,937 8,444 8,773 1,337 263 125 22,879
Derivative financial instruments – 12 12 9 – – 33
The carrying amount of the relevant asset classes in the balance sheet represents the maximum amount of credit exposure. The fair value
of derivatives shown on the balance sheet represents the current risk exposure but not the maximum risk exposure that could arise in the
future as a result of changing values.
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Performance
QBE regularly reviews the collectability of receivables and the adequacy of associated provisions for impairment. Concentration risk
is also monitored for large brokers. Balances are monitored on the basis of uncollected debt and debt outstanding in excess of six months.
Brokers are also subject to regular due diligence to ensure adherence to local broker policies and associated requirements.
The following table provides information regarding the ageing of the Group’s financial assets that are past due but not impaired and which
are largely unrated at the balance date.
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PAST DUE BUT NOT IMPAIRED
NEITHER
PAST DUE GREATER
NOR 0 TO 3 4 TO 6 7 MONTHS THAN
IMPAIRED MONTHS MONTHS TO 1 YEAR 1 YEAR TOTAL
3
US$M US$M US$M US$M US$M US$M
As at 31 December 2016
Premium receivable 1 1,220 756 86 65 22 2,149
Governance
Other trade debtors 89 17 2 2 13 123
Other receivables 480 131 3 4 2 620
As at 31 December 2015
Premium receivable 1 1,359 681 138 68 43 2,289
4
Other trade debtors 172 2 1 3 14 192
Other receivables 284 11 – – 1 296
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Directors'
1 Net of a provision for impairment.
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Financial
Overview
Overview
Market risk is the risk of variability in the value of investments due to:
• movement in market factors (including interest rates, credit spreads and equity prices); and
• movement in foreign exchange rates. 6
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Other
QBE’s approach to managing market risk is underpinned by the Group market risk appetite as set by the Group Board
and is summarised below.
QBE’s approach to managing investment market movements is underpinned by the Group’s investment strategy which outlines QBE’s
view of the markets and its corresponding investment approach. One of the key limits set by the strategy is the probability (as determined
by the Economic Scenario Generator (ESG) Model) of earning negative returns on the investment portfolio. The ESG models asset class
and portfolio returns using a stochastic process based on a range of economic and financial market scenarios.
Investment market risk is also managed through the application of exposure and asset limits. These limits are based on the market risk
appetite as determined by the Group Board and apply to:
• initial losses generated on the investment portfolio under a market stress scenario. The scenario assumes adverse movements in credit
spreads, equity markets and property markets and is designed to reflect a significant short-term market stress event. The loss generated
by the stress scenario is partially offset by any gains from a downward shift in sovereign bond yields;
• interest rate risk, measured in terms of modified duration and spread duration; and
• total combined holdings in equity, investment property and other growth assets as a proportion of the Group’s total investment portfolio.
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1 Net of tax at the Group’s prima facie income tax rate of 30%.
Price risk
Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices
(other than those arising from interest rate or currency risk), whether those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar financial instruments traded on the market.
QBE is exposed to price risk on its investment in equities and may use derivative financial instruments to manage this exposure. The risk
management processes over these derivative financial instruments are the same as those explained above in respect of interest rate
derivative financial instruments. Exposure is also managed by diversification across worldwide markets and currencies.
At 31 December 2016, 2.3% (2015 3.8%) of the Group’s investments and cash was held in listed equities (including derivatives), of which
the majority was publicly traded in the major financial markets and 1.9% (2015 2.5%) of the Group’s investments and cash was held
in emerging market equity and alternatives.
All equities are measured at fair value through profit or loss. The impact of a 20% increase or decrease in the value of investments
(including derivatives – refer to note 3.2.3) owned by the Group at the balance date on consolidated profit after tax is shown in the
table below.
PROFIT (LOSS) 1
SENSITIVITY 2016 2015
% US$M US$M
ASX 200 +20 18 48
-20 (18) (48)
FTSE 100 +20 15 8
-20 (15) (8)
EURO STOXX +20 16 13
-20 (16) (13)
S&P 500 +20 21 57
-20 (21) (57)
MSCI Emerging Markets Index +20 5 36
-20 (5) (36)
Alternatives +20 62 56
-20 (62) (56)
1 Net of tax at the Group’s prima facie income tax rate of 30%.
QBE is also exposed to price risk on its interest-bearing (fixed interest, high yield and emerging market debt) financial assets. All securities
are measured at fair value through profit or loss. Movements in credit spreads impact the value of corporate interest-bearing securities,
emerging market debt, alternatives and high yield debt and therefore impact reported profit after tax. This risk is managed by investing in
high quality, liquid interest-bearing securities and by managing the credit spread duration of the corporate securities portfolio.
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The impact of either a 0.5% increase or decrease in credit spreads on interest-bearing financial assets held by the Group at the balance
date is shown in the table below.
PROFIT (LOSS) 1
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Performance
SENSITIVITY 2016 2015
% US$M US$M
Credit spread movement – corporate interest-bearing financial assets +0.5 (113) (113)
-0.5 98 106
Credit spread movement – high yield and emerging market debt +0.5 (5) (13)
-0.5 5 13
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1 Net of tax at the Group’s prima facie income tax rate of 30%.
QBE is also exposed to price risk on its investment in unlisted property trusts. All unlisted property trust investments are measured at fair
value through profit or loss. QBE manages this risk by investing in high quality, diversified unlisted property funds. Movements in unit
prices impact the value of unlisted property trusts and therefore impact reported profit after tax. The impact of a 10% increase or decrease
in unit prices on unlisted property trust securities owned by the Group at the balance date was $72 million (2015 $73 million) net of tax
at the Group’s prima facie income tax rate of 30%. 3
Governance
Foreign exchange
QBE’s approach to foreign exchange management is underpinned by the Group’s foreign currency strategy. The Group’s foreign
exchange exposure generally arises as a result of either the translation of foreign currency amounts to the functional currency
of a controlled entity (operational currency risk) or due to the translation of the Group’s net investment in foreign operations to the
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functional currency of the parent entity of Australian dollars and to QBE’s presentation currency of US dollars (currency translation risk).
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Directors'
Operational currency risk is managed as follows:
• each controlled entity manages the volatility arising from changes in foreign exchange rates by matching liabilities with assets of the
same currency, as far as is practicable, thus ensuring that any exposures to foreign currencies are minimised; and
• forward foreign exchange contracts are used where possible to protect residual currency positions. These forward foreign exchange
contracts are accounted for in accordance with the derivatives accounting policy set out in note 5.6.
Foreign exchange gains or losses arising from operational foreign currency exposures are reported in profit or loss consistent with the
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Financial
gains or losses from related forward foreign exchange contracts. The risk management process covering the use of forward foreign
exchange contracts involves close senior management scrutiny. All forward foreign exchange contracts are subject to delegated authority
levels provided to management and the levels of exposure are reviewed on an ongoing basis.
The Group’s aim is to mitigate, where possible, its operational foreign currency exposures at a controlled entity level. From time to time,
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the company or controlled entities may maintain an operational foreign currency exposure to offset currency volatility arising from
translation of foreign currency forecast profits, subject to senior management approval and adherence to Board approved limits.
The analysis below demonstrates the impact on profit after income tax of a 10% strengthening or weakening of the major currencies against
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Other
the functional currencies of the underlying QBE Group entities. The exposures below reflect the aggregation of operational currency
exposures of multiple entities with different functional currencies. The sensitivity is measured with reference to the Group’s residual
(or unmatched) operational foreign currency exposures at the balance date. Operational foreign exchange gains or losses are recognised
in profit or loss in accordance with the policy set out in note 1.2.3. The sensitivities provided demonstrate the impact of a change in one key
variable in isolation whilst other assumptions remain unchanged.
The sensitivities shown in the table below are relevant only at the balance sheet date, as any unmatched exposures are actively
monitored by management and the exposure subsequently matched.
2016 2015
RESIDUAL PROFIT (LOSS) RESIDUAL PROFIT (LOSS)
EXPOSURE SENSITIVITY 1
EXPOSURE SENSITIVITY 1
1 Net of tax at the Group’s prima facie income tax rate of 30%.
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Performance
Overview
Overview
2
Liquidity risk is the risk of insufficient liquid assets to meet liabilities as they fall due or only being able to achieve the
required level of liquidity at excessive cost. The Group’s liquidity risk arises due to the nature of insurance activities where
the timing and amount of cash outflows are uncertain.
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QBE’s approach to managing liquidity risk is underpinned by the Group liquidity risk appetite as set by the Group Board
and is summarised below.
Governance
• cash flow targeting;
• maintaining a proportion of liabilities in liquid assets;
• cash flow forecasting; and
• stress testing and contingency planning.
Liquidity is managed across the Group using a number of cash flow forecasting and targeting tools and techniques. Cash flow forecasting
and targeting is conducted at a legal entity level and involves actively managing operational cash flow requirements. 4
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To supplement the cash flow targeting and to ensure that there are sufficient liquid funds available to meet insurance and investment
obligations, a minimum percentage of QBE’s liabilities is held, at all times, in cash and liquid securities. QBE also maintains a defined
proportion of the funds under management in liquid assets.
QBE actively forecasts cash flow requirements to identify future cash surpluses and shortages to optimise invested cash balances and
limit unexpected calls from the investment pool. The Group limits the risk of liquidity shortfalls resulting from mismatches in the timing
of claims payments and receipts of claims recoveries by negotiating cash call clauses in reinsurance contracts and seeking accelerated
settlements for large reinsurance recoveries. 5
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Financial
The following table summarises the maturity profile of the Group’s financial liabilities based on the remaining contractual obligations.
Borrowings and contractual undiscounted interest payments are disclosed by reference to the first call date of the borrowings, details
of which are included in note 5.1.
LESS THAN 13 TO 36 37 TO 60 OVER 5 NO FIXED
6
ONE YEAR MONTHS MONTHS YEARS TERM TOTAL
US$M US$M US$M US$M US$M US$M
As at 31 December 2016
information
Other
Forward foreign exchange contracts 47 100 – – – 147
Trade payables 1,050 75 26 18 3 1,172
Treasury payables 22 – – – – 22
Investment payables 333 – – – – 333
Borrowings 1 10 600 353 2,221 301 3,485
Contractual undiscounted interest
payments 191 345 322 420 – 1,278
As at 31 December 2015
Forward foreign exchange contracts 35 – – – – 35
Trade payables 1,160 60 2 4 35 1,261
Treasury payables 32 – – – – 32
Investment payables 130 – – – – 130
Borrowings 1 11 901 146 2,479 – 3,537
Contractual undiscounted interest
payments 219 394 364 317 – 1,294
The maturity profile of the Group’s net discounted central estimate is analysed in note 2.3.6.
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The maturity of the Group’s directly held interest-bearing financial assets is shown in the table below. Interest bearing assets held
indirectly through collective investment schemes (such as high yield debt and emerging market debt) are excluded from the analysis.
INTEREST-BEARING FINANCIAL ASSETS MATURING IN
LESS THAN 13 TO 24 25 TO 36 37 TO 48 49 TO 60 OVER 5
ONE YEAR MONTHS MONTHS MONTHS MONTHS YEARS TOTAL
As at 31 December 2016
Fixed rate US$M 5,916 1,648 1,770 1,622 2,226 1,554 14,736
Weighted average interest rate % 1.7 2.2 1.8 2.1 2.0 1.9 1.9
Floating rate US$M 1,879 1,214 916 1,281 685 1,919 7,894
Weighted average interest rate % 1.4 1.9 2.0 1.6 2.4 2.9 2.0
As at 31 December 2015
Fixed rate US$M 8,005 1,768 557 496 1,791 511 13,128
Weighted average interest rate % 1.5 1.7 2.3 1.9 2.3 3.0 1.7
Floating rate US$M 3,099 1,642 1,513 634 1,390 2,135 10,413
Weighted average interest rate % 1.7 2.2 2.0 3.7 2.0 2.8 2.2
Overview
Overview
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events (including legal risk).
Operational risk can materialise in a number of forms including fraud perpetrated by employees or by external parties
(e.g. claims fraud or cyber attacks), employment practices (losses arising from breaches of employment, health or safety
laws, breach of employment contracts, payment of personal injury claims or diversity and discrimination events), improper
business practices (failure to meet professional obligations or issues with the nature or design of an insurance product),
disasters and other events, technology and infrastructure failures, or business and transaction processing failures.
QBE identifies and assesses operational risk through Risk and Control Assessment (RCA), Divisional Risk Assessment (DRA), top risks
and emerging risks processes, and scenario analysis. The RCA process identifies and assesses the key risks to achieving business
objectives and is conducted at the business unit level. The DRA process creates a single, divisional-level view of risk across all QBE risk
categories. The top risks process involves the identification and assessment of the key risks relating to the Group and each division by
their respective CEOs. The emerging risks process identifies and assesses new risks, which are characterised by incomplete but
developing knowledge or existing risks that develop in new or surprising ways. The scenario analysis process assesses the impact of
potentially extreme scenarios and the appropriateness of our contingency planning.
QBE manages operational risk through various systems, controls and processes, including effective segregation of duties, access
controls, authorisations and reconciliation procedures, business continuity management, fraud management, information security and
physical security. QBE monitors operational risk through control assurance, key risk indicators and internal loss events and issues and
actions. Another key tool used by QBE is the targeted risk review process whereby reviews are conducted to identify whether there are
any unmitigated risks or inadequacies in control design and provide recommendations to enhance the management of risk. The reviews
are generally conducted by the Group’s risk management and compliance function (the second line of defence) and involve various risk
management techniques and approaches.
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5. CAPITAL
CAPITALSTRUCTURE
5. STRUCTURE
1
overview
Performance
Overview
Overview
QBE’s objective in managing capital is to maintain an optimal balance between debt and equity in order to reduce the overall
cost of capital whilst satisfying the capital adequacy requirements of regulators and rating agencies, providing financial
security for our policyholders and continuing to provide an adequate return to shareholders. 2
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Business
QBE is listed on the ASX and its equity is denominated in Australian dollars. The Group also accesses international debt
markets to diversify its funding base and maintain an appropriate amount of leverage. Debt is diversified across currencies,
tenure and levels of seniority. The Group targets a benchmark debt to equity ratio of between 25% to 35%.
Details of the Group’s approach to capital risk management are disclosed in note 4.1.
Governance
5.1 Borrowings
4
2016 2015
FINAL MATURITY DATE PRINCIPAL AMOUNT US$M US$M
Bank loans
Report
Directors'
29 March 2017 $10 million 10 –
10 –
Senior debt
1 May 2018 $600 million 599 599
599 599
Subordinated debt
29 September 2040 A$200 million 144 145
5
Report
Financial
24 May 2041 $167 million (2015 $1,000 million) 167 1,000
24 May 2041 £34 million (2015 £325 million) 42 479
24 May 2042 £327 million 362 –
24 November 2043 $400 million 400 –
2 December 2044 $700 million 695 695
12 November 2045
17 June 2046
$300 million
$524 million
300
455
300
– 6
information
Other
2,565 2,619
Capital securities
No fixed date Nil (2015 £8 million) – 11
No fixed date $301 million 300 300
300 311
Total borrowings 1 3,474 3,529
Amounts maturing within 12 months 10 11
Amounts maturing in greater than 12 months 3,464 3,518
Total borrowings 3,474 3,529
Senior debt
Subordinated debt
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The securities are redeemable at the option of QBE, with the written approval of APRA, on 29 September 2020 and on each subsequent
interest payment date during the 12 months following or at any time in the event of certain tax and regulatory events.
The securities must be converted into a variable number of QBE ordinary shares, or written off, if APRA determines QBE to be non-viable.
The conversion rate is subject to a price floor of 20% of the volume-weighted average price (VWAP) of the shares in the five trading days
before the date of issue of the securities.
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The securities must be converted into a variable number of QBE ordinary shares or written off if APRA determines QBE to be non-viable.
The conversion rate is subject to a price floor of 20% of the VWAP of the shares in the five trading days before the date of issue
of the securities. 1
overview
Performance
Subordinated debt due 2046
On 17 June 2016, QBE exchanged $456 million of the $1,000 million of the subordinated debt securities due 2041 for $524 million
of subordinated debt due 2046. The new subordinated debt securities have a 30 year maturity and entitle holders to receive a fixed
rate coupon of 5.875% per annum until 17 June 2026. The rate will reset in 2026 and 2036 to a rate calculated by reference to the
then 10 year mid-market swap rate plus a margin of 4.395%. Interest is payable semi-annually in arrears.
The securities are redeemable at the option of QBE, with the written approval of APRA, on each interest reset date or at any time
2
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Business
in the event of certain tax and regulatory events.
The securities must be converted into a variable number of QBE ordinary shares, or written off, if APRA determines QBE to be non-viable.
The conversion rate is subject to a price floor of 20% of the VWAP of the shares in the five trading days before the date of issue
of the securities.
Security arrangements
The claims of bondholders pursuant to the subordinated debt will be subordinated in right of payment to the claims of all senior creditors.
3
Governance
Capital securities
In 2006, a controlled entity issued £300 million of capital securities. Between 2008 and 2012, £292 million of capital securities were
repurchased by the Group for cash at a discount, and were held on the balance sheets of Group entities as an investment asset.
The assets and the corresponding liabilities were eliminated on consolidation in the Group’s balance sheet and the interest income and
expense was eliminated on consolidation in the profit or loss. On 18 July 2016, QBE repurchased the remaining sterling capital securities
and subsequently cancelled them in full. 4
Report
Directors'
In 2007, a controlled entity issued $550 million of subordinated capital securities. The subordinated capital securities entitle holders
to receive a fixed rate coupon of 6.797% per annum until 1 June 2017, at which time the rate will reset to floating three month US$ LIBOR
plus a spread of 2.625%. Between 2008 and 2012, $249 million of capital securities were repurchased by the Group for cash at a discount,
and were held on the balance sheets of Group entities as an investment asset. The assets and the corresponding liabilities are eliminated
on consolidation in the Group’s balance sheet and the interest income and expense is eliminated on consolidation in the profit or loss.
Report
Financial
2016 2015
US$M US$M
Bank loans 10 –
Senior debt 601 601
Subordinated debt 2,833 2,813
Capital securities
Total borrowings
304
3,748
322
3,736 6
information
Other
Consistent with other financial instruments, QBE is required to disclose the basis of valuation with reference to the fair value hierarchy
which is explained in detail in note 3.2.1. The fair value of the Group’s borrowings are categorised as level 2 fair value measurements.
Fixed and floating rate securities are priced using broker quotes and comparable prices for similar instruments in active markets. Where
no active market exists, floating rate resettable notes are priced using par plus accrued interest.
How we
How we account
account for
for the
thenumbers
numbers
Borrowings are initially measured at fair value net of transaction costs directly attributable to the transaction and are
subsequently measured at amortised cost. Any difference between the proceeds and the redemption amount is recognised
through profit or loss over the period of the financial liability using the effective interest method.
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1 Includes $12 million write down of contingent consideration recognised on the sale of Australian agencies in 2015 and a $30 million cost
of discontinuing certain North American agency relationships.
2016 2015
US$M US$M
Fixed interest rate 30 29
Floating interest rate 817 633
847 662
Restrictions on use
Included in cash and cash equivalents are amounts totalling $76 million (2015 $63 million) which are held in Lloyd’s syndicate trust funds.
In order to conduct underwriting business within some territories, Lloyd’s syndicates are required to lodge assets in locally regulated trust
funds. Under Lloyd’s byelaws, these amounts can only be used to pay claims and allowable expenses of the syndicates and cannot
be withdrawn from the trust funds until allowed to be distributed as profit once annual solvency requirements are met.
QBE has operations in many countries which have foreign exchange controls and regulations. The nature of the controls and regulations
is highly dependent on the relevant country’s banking practices, and these practices can vary from simple reporting requirements
to outright prohibition of movement of funds without explicit prior central bank approval. The impact of these controls and regulations may
be the restriction of the Group’s capacity to repatriate capital and/or profits. Whilst QBE’s operations in these countries are generally
small, foreign exchange controls and regulations may impact our ability to repatriate funds.
How we
How we account
account for
for the
thenumbers
numbers
Cash and cash equivalents include cash at bank and on hand and deposits at call which are readily convertible to cash
on hand and which are used for operational cash requirements. Amounts in cash and cash equivalents are the same as
those included in the statement of cash flows.
The reconciliation of profit after income tax to cash flows from operating activities is included in note 8.3.
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overview
Performance
Overview
Overview
2
Ordinary shares in the company rank after all creditors, have no par value and entitle the holder to participate in dividends
and the proceeds on winding up of the company in proportion to the number of shares held.
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Business
5.3.1 Share capital
3
2016 2015
NUMBER OF NUMBER OF
SHARES SHARES
Governance
MILLIONS US$M MILLIONS US$M
Issued ordinary shares, fully paid at 1 January 1,370 8,440 1,363 9,391
Shares issued under the Employee Share and Option Plan – 1 – 3
Shares issued under dividend reinvestment plans – – 7 56
Foreign exchange – (91) – (1,010)
Issued ordinary shares, fully paid at 31 December
Shares notified to the Australian Securities Exchange
1,370
1,371
8,350
8,357
1,370
1,371
8,440
8,448 4
Report
Directors'
Less: Plan shares subject to non-recourse loans, derecognised under
IFRS (1) (7) (1) (8)
Issued ordinary shares, fully paid at 31 December 1,370 8,350 1,370 8,440
Report
Financial
6
information
Other
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5.3.2 Reserves
2016 2015
US$M US$M
Owner occupied property revaluation reserve 1
At 1 January 9 10
Valuation (decrease) increase (1) 1
Reclassification on disposal of owner occupied property (6) –
Deferred taxation 2 –
Foreign exchange 3 (2)
At 31 December 7 9
Cash flow hedges reserve 2
At 1 January – 1
Transfers into reserve – (1)
At 31 December – –
Foreign currency translation reserve 3
At 1 January (1,426) (1,541)
(Losses) gains on translation (443) 377
Reclassification to profit or loss on disposal – 53
Losses on hedging transactions (31) (356)
Taxation 33 41
At 31 December (1,867) (1,426)
Share-based payment reserve 4
At 1 January 208 185
Options and conditional rights expense 58 59
Transfers from reserve on vesting of options and conditional rights (38) (18)
Foreign exchange (8) (18)
At 31 December 220 208
Associates 5
At 1 January 1 1
Movement in the year – –
At 31 December 1 1
Premium on purchase of non-controlling interests 6
At 1 January (40) (61)
Net changes in non-controlling interests 25 –
Reclassification to retained profits on disposal – 15
Foreign exchange – 6
At 31 December (15) (40)
Total reserves at 31 December (1,654) (1,248)
1 Used to recognise fair value movements in the carrying value of owner occupied property.
2 Used to record gains or losses on cash flow hedges that are recognised directly in equity.
3 Exchange gains and losses arising on translation of a foreign controlled entity and related hedging instruments are taken to the foreign
currency translation reserve. Refer to note 1.2.3. In the event of the disposal of a relevant net investment, the related movement in the
reserve is reclassified to profit or loss.
4 Used to recognise the fair value of instruments issued as share-based payments.
5 Used to recognise the Group’s share of other comprehensive income of associates.
6 Used to recognise movements in ownership interest that do not result in a change of control and represents the difference between the
amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received.
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5.4 Dividends
1
overview
Performance
Overview
Overview
2
The Group’s dividend policy sets the dividend payout ratio at up to 65% of full year cash profit with a likely weighting of 40%
for the interim dividend and 60% for the final.
review
Business
2016 2015
INTERIM FINAL INTERIM
3
Dividend per share (Australian cents) 21 30 20
Franking percentage 50% 100% 100%
Franked amount per share (Australian cents) 10.5 30.0 20.0
Governance
Dividend payout (A$M) 288 411 274
Payment date 28 September 2016 14 April 2016 2 October 2015
On 24 February 2017, the directors announced a 50% franked final dividend of 33 Australian cents per share payable on 13 April 2017.
The final dividend payout is A$453 million (2015 A$411 million).
2016 2015
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Directors'
US$M US$M
Previous year final dividend on ordinary shares – fully franked 317 228
Interim dividend on ordinary shares – 50% franked (2015 fully franked) 220 193
Bonus Share Plan dividend forgone (2) (6)
5
Total dividend paid 535 415
Report
Financial
Dividend Reinvestment and Bonus Share Plans
The company operates a Dividend Reinvestment Plan (DRP) and a Bonus Share Plan (BSP) which allow equity holders to receive their
dividend entitlement in the form of QBE ordinary shares.
The last date of receipt of election notices to participate in the DRP or the BSP is 13 March 2017.
Franking credits
The franking account balance on a tax paid basis at 31 December 2016 was a surplus of A$301 million (2015 A$391 million). After taking
into account the impact of franking on the final dividend recommended by the Board since year end, but not recognised as a liability
at year end, the franking account balance will have a surplus of A$113 million (2015 A$171 million).
The unfranked part of the dividend is declared to be conduit foreign income. For shareholders not resident in Australia, the dividend will
not be subject to Australian withholding tax.
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Overview
Overview
Earnings per share (EPS) is the amount of profit after tax attributable to each share. Diluted EPS adjusts the EPS for the
impact of shares that are not yet issued but which may be in the future, such as shares potentially issuable from convertible
notes, options and employee share-based payments plans.
2016 2015
US CENTS US CENTS
Basic earnings per share 61.6 50.3
Diluted earnings per share 60.8 49.8
5.5.2 Reconciliation of weighted average number of ordinary shares used in calculating earnings per share
2016 2015
NUMBER OF NUMBER OF
SHARES SHARES
MILLIONS MILLIONS
Weighted average number of ordinary shares on issue 1,371 1,368
Weighted average number of non-recourse loan shares issued under the Employee Share
and Option Plan (the Plan) (1) (1)
Weighted average number of ordinary shares used as the denominator in calculating basic
earnings per share 1,370 1,367
Weighted average number of dilutive potential ordinary shares issued under the Plan 19 13
Weighted average number of ordinary shares used as the denominator in calculating diluted
earnings per share 1,389 1,380
How we
How we account
account for
for the
thenumbers
numbers
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5.6 Derivatives
1
overview
Performance
Overview
Overview
2
Derivatives may be used as a tool to hedge the Group’s foreign exchange exposures. Each controlled entity manages
operational foreign exchange volatility by matching liabilities with assets of the same currency, as far as practicable.
Forward foreign exchange contracts are used to hedge residual currency exposures, with both the foreign exchange and
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Business
derivatives impact reported through profit or loss. Forward foreign exchange contracts are also used to hedge the
company’s exposure to its net investments in foreign operations.
Interest rate swaps are used to hedge exposure to interest rate movements on the Group’s borrowings.
Refer to note 4.4 for additional information relating to QBE’s approach to managing interest rate risk and currency risk.
Governance
The Group’s exposure to treasury derivatives at the balance date is set out in the table below:
2016 2015
FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
1,731
ASSET
US$M
151
LIABILITY
US$M
147
EXPOSURE
US$M
908
ASSET
US$M
33
LIABILITY
US$M
35
4
Report
Directors'
Interest rate swaps 144 – – 146 – –
How we
How we account
account for
forthe
thenumbers
numbers
5
Report
Financial
Derivatives are initially recognised at fair value and are subsequently re-measured at fair value through profit or loss unless
hedge accounting is applied. For derivatives traded in an active market, the fair value of derivatives is determined by
reference to quoted market prices. For derivatives that are not traded or which are traded in a market that is not sufficiently
6
active, fair value is determined using generally accepted valuation techniques. The mark-to-market value of futures positions
is cash settled on a daily basis.
In accordance with the criteria for hedge accounting, when a financial instrument is designated as being in a hedge
information
Other
relationship, the relevant controlled entity formally documents the relationship between the hedging instrument and hedged
item, as well as its risk management objectives and its strategy for undertaking various hedging transactions. The relevant
entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the hedging instruments
are highly effective in offsetting changes in fair values, cash flows or net investments in foreign operations.
Hedge accounting is discontinued when:
• the hedge no longer meets the criteria for hedge accounting;
• the hedging instrument expires or is sold, terminated or exercised;
• the hedged item matures, is sold or repaid; or
• the entity revokes the designation.
For qualifying cash flow hedges and hedges of net investments in foreign operations, the gain or loss associated with the
effective portion of the hedge is initially recognised directly in other comprehensive income. The gain or loss on any
ineffective portion of the hedging instrument is recognised through profit or loss immediately. In a cash flow hedge, when
a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative
gain or loss existing in equity at that time remains in equity and is reclassified to profit or loss when the hedged item affects
profit or loss. When a transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is
immediately reclassified to profit or loss. In hedges of net investments in foreign operations, the cumulative gain or loss
is recycled to profit or loss on disposal.
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6. TAX
6. TAX
Overview
Overview
Income tax expense is the accounting tax charge for the period and is calculated as the tax payable on the current period
taxable income based on the applicable income tax rate for each jurisdiction, adjusted for changes in deferred tax assets
and liabilities attributable to temporary differences and unused tax losses. The relationship between accounting profit and
income tax expense is provided in the reconciliation of prima facie tax to income tax expense (note 6.1). Income tax
expense does not equate to the amount of tax actually paid to tax authorities around the world, as it is based upon the
accrual accounting concept.
Accounting income and expenses do not always have the same recognition pattern as taxable income and expenses,
creating a timing difference as to when a tax expense or benefit can be recognised. These differences usually reverse over
time but until they do, a deferred tax asset or liability is recognised on the balance sheet. Note 6.2 details the composition
and movements in deferred tax balances and the key management assumptions applied in recognising tax losses.
The Group’s approach to managing tax risk is disclosed in note 4.1.
Details of franking credits available to shareholders are disclosed in note 5.4.
1 Consolidated deferred tax expense includes $3 million charged (2015 $1 million credited) to profit as a result of changes in income tax rates.
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How we
How we account
account for
for the
thenumbers
numbers 1
overview
Performance
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the
reporting period in the countries in which controlled entities operate and generate taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation
and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends to either
settle on a net basis or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised
in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity.
2
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Business
In this case, the tax is also recognised in other comprehensive income or directly in equity, as appropriate.
Governance
2016 2015
NOTE US$M US$M
Deferred tax assets 6.2.1 778 767
Deferred tax liabilities 6.2.2 106 176
4
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Directors'
6.2.1 Deferred tax assets
The balance comprises temporary differences attributable to:
2016 2015
5
NOTE US$M US$M
Amounts recognised in profit and loss
Financial assets – fair value movements 4 4
Report
Financial
Provision for impairment 20 20
Employee benefits 83 77
Intangible assets 219 177
Insurance provisions 532 582
Tax losses recognised 434 385
Other 128
1,420
147
1,392 6
information
Other
Amounts recognised in other comprehensive income and equity
Capitalised expenses 1 2
Defined benefit plans 54 50
Other 3 2
58 54
Deferred tax assets before set-off 1,478 1,446
Set-off of deferred tax liabilities 6.2.2 (700) (679)
6.2 778 767
Deferred tax assets before set-off analysed as follows:
Recoverable within 12 months 74 64
Recoverable in greater than 12 months 1,404 1,382
1,478 1,446
Movements:
2016 2015
NOTE US$M US$M
At 1 January 1,446 1,458
Amounts recognised in profit or loss 6.1 50 38
Amounts recognised in other comprehensive income 4 (7)
Foreign exchange (22) (43)
At 31 December 1,478 1,446
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Movements:
2016 2015
NOTE US$M US$M
At 1 January 855 854
Amounts recognised in profit or loss 6.1 (2) 38
Amounts recognised in other comprehensive income (8) (1)
Foreign exchange (39) (36)
At 31 December 806 855
How we
How we account
account for
for the
thenumbers
numbers
Deferred income tax is provided in full using the liability method on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are not
recognised if they arise from the initial recognition of goodwill or if they arise from the initial recognition of an asset or liability
in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable
profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted
by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the
deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that
future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases
of investments in foreign operations where the company is able to control the timing of the reversal of the temporary
differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset in the consolidated financial statements when there is a legally enforceable right
to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority.
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overview
Performance
in 15 to 18 years, and $74 million have an indefinite life. This benefit will only be brought to account when the directors believe
it is probable that it will be realised.
This benefit of tax losses will only be obtained if:
• the Group derives future assessable income of a nature and an amount sufficient to enable the benefit from the deductions for the
losses to be realised;
• the Group continues to comply with the conditions for deductibility imposed by tax legislation; and 2
review
Business
• no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the losses.
Critical accounting
Critical judgements and
accounting judgements estimates
and estimates
3
Governance
Recoverability of deferred tax assets
QBE assesses the recoverability of deferred tax assets at each balance date. In making this assessment, QBE considers
in particular the controlled entity’s future business plans, history of generating taxable profits, whether the unused tax losses
resulted from identifiable causes which are unlikely to recur and if any tax planning opportunities exist in the period in which
the taxable losses can be utilised.
In North American Operations, a deferred tax asset of $573 million (2015 $573 million) continues to be recognised,
comprising $388 million (2015 $333 million) of carry forward tax losses and $185 million (2015 $240 million) of deductible
4
Report
Directors'
temporary differences, net of applicable offsetting deferred tax liabilities, as a result of insurance technical reserves and the
tax deductibility of goodwill and other intangibles. Uncertainty continues to exist in relation to the utilisation of this asset
which is subject to there being continued future taxable profits over the period of time in which the losses can be utilised.
QBE has made a judgement that North American Operations will be able to generate sufficient taxable profits over the
foreseeable future, based upon its future business plans. Key assumptions include a continuation of taxable profit driven
by no material deterioration in the prior accident year central estimate, a sustained return of crop profitability to historical
averages, benefits flowing from initiatives to reduce the cost base of the division and future increases in investment yields. 5
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Financial
Losses expire over the next 20 years, with the majority expiring between 2030 and 2034. The uncertainty around the
recognition of the deferred tax asset will be resolved in future years if taxable profits are generated. Recovery of the asset
continues to be sensitive to changes in the combined operating ratio, premium growth and investment yield assumptions
as these items are the key drivers of future taxable income.
6
There is prevailing uncertainty about potential changes to the North American corporate tax rate. If this was reduced by
5%, everything else being equal, the North American Operations deferred tax asset would be written down by $82 million.
information
Other
6.2.4 Tax consolidation legislation
On adoption of the tax consolidation legislation, the company and its wholly-owned Australian controlled entities entered into a tax sharing
and tax funding agreement that requires the Australian entities to fully compensate the company for current tax liabilities and to be fully
compensated by the company for any current tax or deferred tax assets in respect of tax losses arising from external transactions
occurring after the date of implementation of the tax consolidation legislation. The contributions are allocated by reference to the notional
taxable income of each Australian entity. The head entity is QBE Insurance Group Limited.
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7.
7. GROUP
GROUP STRUCTURE
STRUCTURE
Overview
Overview
This section provides information to help users understand the QBE Group structure, including the impact of changes in the
financial year. This includes acquisitions and disposals of businesses, intangible assets acquired or developed and the
results of impairment reviews.
A summary of the impact of each disposal on the financial statements is included in the table below.
ARGENTINE MORTGAGE &
AUSTRALIAN WORKERS' LENDER
AGENCIES US AGENCIES COMPENSATION SERVICES OTHER TOTAL
2015 US$M US$M US$M US$M US$M US$M
Underwriting expenses – – – (41) – (41)
Gain (loss) on sale of entities 130 12 (58) (92) 6 (2)
130 12 (58) (133) 6 (43)
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overview
Performance
Overview
Overview
2
Intangible assets are assets with no physical substance. The most significant classes of intangible assets are detailed below:
Lloyd’s syndicate capacity
review
Business
The Lloyd’s syndicate capacity intangible asset relates to the syndicate capacity acquired as part of the acquisition of QBE
Underwriting Limited (formerly trading as Limit) in 2000 and costs incurred as a result of increasing capacity since that date.
Syndicate capacity is the aggregate of the premium limits of each member of that syndicate at a point in time. An existing
capital provider has the first right to participate on the next year of account, giving the indefinite right to participate on all future
years of account. The Group has demonstrated a long-term commitment to developing its operations at Lloyd’s. The value
3
of this asset is in the access it gives to future underwriting profits at Lloyd’s. For these reasons, Lloyd’s syndicate capacity
is deemed to have an indefinite useful life.
Customer relationships
Governance
Customer relationships comprise the capitalisation of future profits relating to insurance contracts acquired and the expected
renewal of those contracts. It also includes the value of the distribution networks and agency relationships. Customer
relationships are amortised over remaining lives of between five and 25 years depending on the classes of business to which
the assets relate.
Brand names
These assets reflect the revenue generating ability of acquired brands. In some circumstances, brand names are considered
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to have an indefinite useful life due to the long-term nature of the asset. When there is a contractual limit on the use of the
brand name, the asset is amortised over the remaining period, being in the range of five to 20 years.
Insurance licences
These assets give the Group the right to operate in certain geographic locations and to write certain classes of business with
5
a potential to generate additional revenue. They are considered to have an indefinite useful life due to their long-term nature.
Software
Report
Financial
This includes both acquired and internally developed software which is not integral or closely related to an item of hardware
such as an underwriting system. Capitalised software is amortised over periods of up to seven years, reflecting the period
during which the Group is expected to benefit from the use of the software.
Goodwill
6
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable
assets acquired. Goodwill has an indefinite useful life and therefore is not subject to amortisation but is tested for impairment
annually, or more often if there is an indication of impairment.
information
IDENTIFIABLE INTANGIBLES GOODWILL TOTAL Other
LLOYD'S CUSTOMER
SYNDICATE RELATION- BRAND INSURANCE
CAPACITY SHIPS NAMES LICENSES SOFTWARE OTHER
2016 US$M US$M US$M US$M US$M US$M US$M US$M
Cost
At 1 January 81 878 31 50 152 43 3,190 4,425
Additions/reclassifications – 130 – – 93 – – 223
Disposals/transfer to assets
held for sale – (5) – (2) – – (2) (9)
Impairment – (1) – – – – (2) (3)
Foreign exchange (13) (13) – – (33) (1) (94) (154)
At 31 December 68 989 31 48 212 42 3,092 4,482
Amortisation
At 1 January – (692) (22) – (73) (34) – (821)
Disposals – 3 – – – – – 3
Amortisation 1 – (40) – – (29) (2) – (71)
Foreign exchange – 13 – – 21 – – 34
At 31 December – (716) (22) – (81) (36) – (855)
Carrying amount
At 31 December 68 273 9 48 131 6 3,092 3,627
1 Amortisation of $29 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities.
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1 Amortisation of $26 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities.
How we
How we account
account for
for the
thenumbers
numbers
Intangible assets are measured at cost less accumulated amortisation and impairment. Those with a finite useful life are
amortised over their estimated useful life in accordance with the pattern of expected consumption of economic benefits,
with amortisation expense reported in underwriting and other expenses or in amortisation and impairment of intangibles
depending on the use of the asset. Intangible assets with an indefinite useful life are not subject to amortisation but are
tested for impairment annually or more frequently if there are indicators of impairment. Intangible assets with a finite useful
life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable.
Overview
Overview
If there are indicators that an intangible asset’s recoverable value has fallen below its carrying value (e.g. due to changing
market conditions), an impairment test is performed and a loss is recognised for the amount by which the carrying value
exceeds the asset’s recoverable value. Intangible assets that have an indefinite useful life, such as goodwill, are tested
annually for impairment or more frequently where there is an indication that the carrying amount may not be recoverable.
Goodwill is allocated to cash generating units, or groups of units, expected to benefit from synergies arising from the
acquisition giving rise to the goodwill. Cash generating units or groups of cash generating units reflect the level at which
goodwill is monitored for impairment by management. As the Group continues to acquire operations and reorganise the
way that operations are managed, reporting structures may change, giving rise to a reassessment of cash generating units
and/or the allocation of goodwill to those cash generating units.
The goodwill relating to certain acquisitions is denominated in currencies other than the US dollar and so is subject to foreign
exchange movements.
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overview
Performance
North American Operations 1,543 1,544
Australian & New Zealand Operations 1,128 1,133
European Operations 388 463
Other 1 33 50
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Impairment losses
Intangible assets in Australian & New Zealand Operations of $3 million (2015 North American Operations and Emerging Markets of
$47 million) were impaired following management’s review of future cash flows attributable to these assets.
Governance
How we
How we account
account for
forthe
thenumbers
numbers
Impairment testing of identifiable intangible assets
The recoverable amount of each intangible asset with an indefinite useful life has been determined by reference to a value
in use calculation based on the following key assumptions and estimates:
• cash flow forecasts relevant to the initial valuation of the identifiable intangible asset are reviewed and updated (if appropriate) 4
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Directors'
by management. Cash flow forecasts are based on a combination of actual performance to date and management’s
expectations of future performance based on prevailing and anticipated market factors; and
• discount rates that include a beta and a market risk premium sourced from observable market information and a specific
risk premium appropriate to reflect the nature of the risk associated with the intangible asset or the cash generating unit
to which the asset is allocated.
Impairment testing of goodwill
The recoverable amount of each cash generating unit or group of cash generating units has been determined by reference
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Financial
to a value in use calculation based on the following key assumptions and estimates:
• cash flow forecasts, including investment returns, based on the latest three year business plan which has been approved
by the Group Board. These forecasts are based on a combination of historical performance and management’s expectations
of future performance based on prevailing and anticipated market factors and the benefit of committed cost saving
6
measures;
• terminal value is calculated using a perpetuity growth formula based on the cash flow forecast for year three. Growth rates
reflect the long-term average of the countries relevant to the cash generating unit or group of cash generating units and
information
Other
are sourced from observable market information. The terminal growth rates used in management’s impairment testing are:
North American Operations 2.5% (2015 2.5%), Australian & New Zealand Operations 2.5% (2015 2.5%), European
Operations 2.0% (2015 2.0%); and
• discount rates that reflect a beta and a market risk premium sourced from observable market information and a specific risk
premium appropriate to reflect the nature of the business of each cash generating unit or group of cash generating units.
The pre-tax discount rates used were: North American Operations 11.8% (2015 12.1%), Australian & New Zealand
Operations 12.8% (2015 12.1%) and European Operations 9.6% (2015 9.8%). The post-tax discount rates used were:
North American Operations 9.25% (2015 9.5%), Australian & New Zealand Operations 9.3% (2015 9.3%) and European
Operations 8.0% (2015 8.1%).
Critical accounting
Critical judgements and
accounting judgements estimates
and estimates
Uncertainty continues to exist in relation to the valuation of goodwill in QBE’s North American Operations.
QBE has completed an impairment calculation and has determined that the recoverable amount exceeded the carrying
value, albeit only by $98 million. The goodwill impairment valuation continues to be highly sensitive to a range of
assumptions, in particular to increases in the forecast combined operating ratio used in the terminal value calculation and
changes in discount rate and investment return assumptions.
If the terminal value combined operating ratio used was increased by 1.0% compared with QBE’s estimate (94.2% to 95.2%),
the impairment charge would be $244 million. If the post-tax discount rate was increased by 1.0% (9.25% to 10.25%),
the impairment charge would be $456 million. If the long-term investment return was reduced by 1.0% (4.25% to 3.25%),
the impairment charge would be $398 million.
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Overview
Overview
This section lists all of the Group’s controlled entities. The consolidated financial statements incorporate the assets and
liabilities of all entities controlled by the company at 31 December 2016 and the results for the financial year then ended,
or for the period during which control existed if the entity was acquired or disposed of during the financial year.
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1
COUNTRY OF EQUITY HOLDING
INCORPORATION/ 2016 2015
FORMATION % %
overview
Performance
QBE Agencies Holdings Pty Limited Australia 100.00 100.00
QBE Americas, Inc. US 100.00 100.00
QBE Asegurando LTDA (in liquidation) Colombia 100.00 100.00
QBE Asia Pacific Holdings Limited Hong Kong 100.00 100.00
2
QBE Atlantic, LLC US 100.00 100.00
QBE Atlasz Ingatlankezelo zrt (in liquidation) Hungary 100.00 100.00
QBE Brazil Seguros SA Brazil 99.99 99.99
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QBE Capital Funding LP (dissolved on 9 November 2016) 2 Jersey – –
QBE Capital Funding II LP 2 Jersey – –
QBE Capital Funding III Limited Jersey 100.00 100.00
QBE Capital Funding IV Limited Jersey 100.00 100.00
QBE Chile Seguros Generales SA
QBE Compania Argentina de Reaseguros SA
QBE Corporate Limited
Chile
Argentina
UK
100.00
100.00
100.00
100.00
100.00
100.00
3
Governance
QBE de Mexico Compania de Seguros SA de CV Mexico 99.99 99.99
QBE Denmark A/S Denmark 100.00 100.00
QBE Emerging Markets Holdings Pty Limited Australia 100.00 100.00
QBE Employee Share Trust 2 Australia – –
QBE European Operations plc
QBE European Services Limited
UK
UK
100.00
100.00
100.00
100.00
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QBE European Underwriting Services (Australia) Pty Limited Australia 100.00 100.00
QBE Finance Holdings (EO) Limited UK 100.00 100.00
QBE FIRST Enterprises, LLC US 100.00 100.00
QBE FIRST Property Tax Solutions, LLC US 100.00 100.00
5
QBE General Insurance (Hong Kong) Limited Hong Kong 100.00 100.00
QBE Group Services Pty Ltd Australia 100.00 100.00
QBE Group Shared Services Limited UK 100.00 100.00
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Financial
QBE Holdings (AAP) Pty Limited Australia 100.00 100.00
QBE Holdings (EO) Limited UK 100.00 100.00
QBE Holdings (Europe) Limited (in liquidation) UK 100.00 100.00
QBE Holdings (LMI) Pty Limited (formerly QBE Holdings (LMI) Limited) Australia 100.00 100.00
QBE Holdings (UK) Limited
QBE Holdings, Inc.
UK
US
100.00
100.00
100.00
100.00 6
information
Other
QBE Hongkong & Shanghai Insurance Limited Hong Kong 74.47 74.47
QBE Insurance (Australia) Limited Australia 100.00 100.00
QBE Insurance (Europe) Limited UK 100.00 100.00
QBE Insurance (Fiji) Limited Fiji 100.00 100.00
QBE Insurance (International) Pty Limited (formerly QBE Insurance
(International) Limited) Australia 100.00 100.00
QBE Insurance (Malaysia) Berhad Malaysia 100.00 100.00
QBE Insurance (PNG) Limited PNG 100.00 100.00
QBE Insurance (Singapore) Pte Ltd Singapore 100.00 100.00
QBE Insurance (Thailand) Public Company Limited 3 Thailand 47.49 47.47
QBE Insurance (Vanuatu) Limited Vanuatu 100.00 100.00
QBE Insurance (Vietnam) Company Limited Vietnam 100.00 100.00
QBE Insurance Corporation US 100.00 100.00
QBE Insurance Group of Puerto Rico Inc Puerto Rico 100.00 100.00
QBE Insurance Holdings Pty Limited Australia 100.00 100.00
QBE Insurance Services (Regional) Limited UK 100.00 100.00
QBE Investments (Australia) Pty Limited Australia 100.00 100.00
QBE Investments (North America), Inc. US 100.00 100.00
QBE Irish Share Incentive Plan 2 Ireland – –
QBE Jersey Finance Limited Jersey 100.00 100.00
QBE Latin America Insurance Holdings Pty Ltd (formerly QBE Latin America
Insurance Holdings SL) Australia 100.00 100.00
QBE Lenders’ Mortgage Insurance Limited Australia 100.00 100.00
QBE Life (Australia) Limited Australia 100.00 100.00
QBE Management (Ireland) Limited Ireland 100.00 100.00
QBE Management, Inc. US 100.00 100.00
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1 The disposal of CHU Residentsline Limited and NIA Underwriting Agency Pty Limited during the year had an immaterial impact on the
consolidated financial statements.
2 QBE Employee Share Trust, QBE Irish Share Incentive Plan, QBE UK Share Incentive Plan, QBE Capital Funding LP (dissolved
on 9 November 2016), QBE Capital Funding II LP and QBE UK Finance GP have been included in the consolidated financial statements
as these entities are special purpose entities that exist for the benefit of the Group.
3 For accounting purposes, QBE has management control of QBE Insurance (Thailand) Public Company Limited by reference to management
agreements.
4 Although QBE has less than a 50% equity interest in Sinkaonamahasarn Company Limited, controlled entities have the right to acquire the
remaining share capital.
All equity in controlled entities is held in the form of shares or through contractual arrangements.
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How we
How we account
account for
forthe
thenumbers
numbers 1
overview
Performance
Controlled entities
Control exists when the Group is exposed, or has rights, to variable returns from its involvement with an entity and has the
ability to affect those returns through its power over it. All transactions between controlled entities are eliminated in full.
Non-controlling interests in the results and equity of controlled entities are shown separately in the consolidated statement
of comprehensive income, balance sheet and statement of changes in equity.
Where control of an entity commences during a financial year, its results are included in the consolidated statement
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of comprehensive income from the date on which control is obtained. Where control of an entity ceases during a financial
year, its results are included for that part of the year during which the control existed.
A change in ownership of a controlled entity without the gain or loss of control is accounted for as an equity transaction.
Governance
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information
Other
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8. OTHER
8. OTHER
Overview
Overview
This section includes other information that must be disclosed to comply with the Australian Accounting Standards or the
Corporations Act 2001.
The adoption of these new or revised standards did not materially affect the Group’s accounting policies or financial statements.
8.1.2 New accounting standards and amendments issued but not yet effective
TITLE OPERATIVE DATE
AASB 2016–1 Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017
AASB 2016–2 Disclosure Initiative: Amendments to AASB 107 1 January 2017
AASB 9 Financial Instruments 1 January 2018
AASB 15 Revenue from Contracts with Customers 1 January 2018
AASB 2014–10 Sale or Contribution of Assets between an Investor and its Associates or Joint Venture 1 January 2018
AASB 2016–5 Classification and Measurement of Share-based Payment Transactions 1 January 2018
AASB 2016–6 Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts 1 January 2018
AASB 16 Leases 1 January 2019
The Australian Accounting Standards and amendments detailed in the table above are not mandatory for the Group until the operative
dates stated; however, early adoption is permitted.
The Group currently plans to apply the standards and amendments detailed above for the reporting periods beginning on the operative
dates set out above. An initial assessment of the financial impact of the standards and amendments has been undertaken and they are
not expected to have a material impact on the Group’s financial statements.
AASB 9 was issued during 2014 and will replace existing accounting requirements for financial instruments. Currently, the Group’s
investments are designated as at fair value through profit or loss on initial recognition and are subsequently remeasured to fair value
at each reporting date, reflecting the business model applied by the Group to manage and evaluate its investment portfolio. Under this
business model, the adoption of AASB 9 is not expected to result in significant changes to accounting for investments, with the exception
of certain equity investments which are held by the Group for strategic purposes. Any changes to the Group’s investment business model
prior to the adoption of AASB 9 will require the impact of adoption to be reassessed and could result in a different outcome when
accounting for investments. Other changes to the accounting for the Group’s financial instruments arising from the application of AASB 9
are currently expected to be minimal.
AASB 16 was issued during 2016 and will replace existing accounting requirements for leases. Under current requirements, leases are
classified based on their nature as either finance leases, which are recognised on the balance sheet, or operating leases, which are not
recognised on the balance sheet. The application of AASB 16 will result in the recognition of all leases on the balance sheet in the form
of a right-of-use asset and a corresponding lease liability, except for leases of low value assets and leases with a term of 12 months
or less. As a result, the new standard is expected to impact leases which are currently classified by the Group as operating leases;
primarily, leases over offices, equipment, and motor vehicles.
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overview
Performance
Overview
Overview
2
Contingent liabilities are disclosed when the possibility of a future settlement of economic benefits is considered
to be less than probable but more likely than remote. If the expected settlement of the liability becomes probable,
a provision is recognised.
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In the normal course of business, the Group is exposed to contingent liabilities in relation to claims litigation arising out of its insurance
and reinsurance transactions and may be exposed to the possibility of contingent liabilities in relation to non-insurance litigation.
Provisions are made for obligations that are probable and quantifiable. There are no individually significant amounts not provided for 3
Governance
and such transactions are not considered likely to have a material impact on the net assets of the Group.
On 9 September 2015, QBE was served with a statement of claim alleging breaches of continuous disclosure and conduct obligations
in relation to profit guidance issued for the year ended 31 December 2013. QBE rejects the allegations and is defending the claim.
As at the date of this report, it is not possible to produce a reliable estimate of the potential financial effect arising from the claim, if any.
On 1 October 2015, QBE sold its Mortgage & Lender Services business in the US. Whilst the purchaser assumed responsibility for all
potential future litigation in relation to this business, the sale contract specifically excludes liabilities associated with class action litigation
and regulatory examinations underway at the time of the sale. This business is subject to litigation and regulatory examinations in the
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normal course of business. We do not believe that the outcome of class action litigation currently underway will be material. We do not
have sufficiently reliable information to assess potential liability for current regulatory examinations.
QBE is required to support the underwriting activities of the Group’s controlled entities which are corporate members at Lloyd’s of London.
Funds at Lloyd’s are those funds of the Group which are subject to the terms of the Lloyd’s Deposit Trust Deed and are required
5
to support underwriting for the following year and the open years of account, determined by a formula prescribed by Lloyd’s each year.
Letters of credit of $1,624 million (2015 $1,463 million) were issued in support of the Group’s participation in Lloyd’s, along with cash
and investments of $75 million (2015 $93 million). In addition, a controlled entity has entered into various trust and security deeds with
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Financial
Lloyd’s in respect of assets lodged to support its underwriting activities. These deeds contain covenants that require the entity to meet
financial obligations should they arise in relation to cash calls from syndicate participations. A cash call would be made first on the assets
held in syndicate trust funds and would only call on funds at Lloyd’s after syndicate resources were exhausted. Only if the level of these
trust funds was not sufficient would a cash call result in a draw down on the letters of credit and other assets lodged with Lloyd’s.
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information
Other
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8.3 Reconciliation of profit after income tax to cash flows from operating activities
Overview
Overview
AASB 1054 Australian Additional Disclosures requires a reconciliation of profit after income tax to cash flows from
operating activities.
2016 2015
US$M US$M
Profit after income tax 844 693
Depreciation/impairment of property, plant and equipment 53 70
Amortisation and impairment of intangibles 74 121
Losses on sale of entities – 2
Losses on sale of plant and equipment – 15
Net foreign exchange (gains) losses (125) 20
Other gains on financial assets (109) (128)
Unrealised losses on assets held for sale 3 –
Decrease in net outstanding claims (1,009) (577)
Increase in unearned premium 119 170
Decrease (increase) in deferred insurance costs 480 (723)
Decrease in trade debtors 455 315
Increase in net operating assets (13) (187)
(Decrease) increase in trade payables (280) 252
Decrease (increase) in net tax assets 24 (87)
Share-based payments expense 58 59
Decrease in net defined benefit obligation (15) (31)
Cash flows from operating activities 559 (16)
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overview
Performance
Overview
Overview
2
Share-based payments are equity based compensation schemes provided to employees and executives. The company
issues shares from time to time under an Employee Share and Option Plan (the Plan). Any full-time or part-time employee
of the Group or any equally-owned joint venture who is offered shares or options is eligible to participate in the Plan.
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8.4.1 Share schemes
A summary of the current deferred equity award plans together with the legacy deferred equity award plans is set out below.
Governance
PLAN AVAILABLE TO NATURE OF AWARD VESTING CONDITIONS
Short-term Executives and • 67% delivered in The conditional rights are deferred in two equal tranches. The first tranche
incentive other key senior cash (50% in the vests two years and the second tranche vests three years after the original
(STI) employees case of the Group grant date.
4
(2014-2016) CEO).
STI outcomes are subject to the achievement of:
• 33% deferred as
conditional rights • the Group’s ROE target;
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Directors'
to fully paid • individual performance ratings; and
ordinary QBE • for divisional staff, divisional return on allocated capital targets.
shares (50% in the
case of the Group
CEO).
Long-term
incentive
Executives Conditional rights
to fully paid
The conditional rights are deferred in three equal tranches, vesting after
three years (on achievement of performance conditions) and then one and
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(LTI) ordinary QBE two years after that date.
(2014-2016) shares.
Vesting is subject to performance conditions as follows:
• 50% of each tranche is subject to the achievement of Group ROE
performance targets over a three year performance period.
• 50% of each tranche is subject to the performance of the Group’s
relative total shareholder return over a three year performance period. 6
information
Other
Additionally, for current QBE deferred equity plans:
• Plan rules provide suitable discretion for the Remuneration Committee to adjust any formulaic outcome to ensure that awards made
under the STI and LTI plans appropriately reflect performance.
• During the period from the grant date to the vesting date, further conditional rights are issued under the Bonus Share Plan to reflect
dividends paid on ordinary shares of the company. These conditional rights are subject to the same vesting conditions as the original
grant of conditional rights.
• Recipients must remain in the Group’s service throughout the service period in order for the awards to vest, except in cases where
good leaver provisions apply. Vesting is also subject to malus provisions.
• Good leaver provisions (e.g. retirement, redundancy, ill health, injury) apply and a pro-rata amount of conditional rights remain subject
to the performance and vesting conditions.
• Once vested, conditional rights can be exercised for no consideration.
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Long-term Executives Conditional rights to fully paid Conditional rights vested over a five year
Incentive ordinary shares. service period.
plan legacy
Vesting is also subject to performance conditions
scheme
as follows:
(2013)
• 50% of the award is subject to the Group’s average
diluted EPS increasing by a compound average
of 7.5% per annum over the five year period.
• 50% of the award is subject to the Group’s average
ROE and combined operating ratio being in the top
10% of the top 50 largest global insurers and
reinsurers as measured by net earned premium over
the five year period.
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overview
Performance
2016 2015
NUMBER OF NUMBER OF
RIGHTS RIGHTS
At 1 January 19,734,647 15,168,840
Granted in the year 10,646,139 7,327,623
Dividends attaching in the year
Vested and transferred to employees in the year
1,219,401
(4,693,348)
627,473
(1,884,686)
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Forfeited in the year (1,777,113) (1,504,603)
At 31 December 25,129,726 19,734,647
Weighted average share price at date of vesting of conditional rights during the year A$11.20 A$13.13
Weighted average fair value of conditional rights granted during the year A$9.80 A$12.63
Governance
The fair value of conditional rights is determined using appropriate models including Monte Carlo simulations, depending on the vesting
conditions. For conditional rights granted during the year to 31 December 2016 and 31 December 2015, the following significant
assumptions are used:
2016 2015
Share price at grant date
Fair value of instrument at grant date
Expected life of instrument
A$
A$
Years
9.33 – 12.44
4.60 – 12.34
0.1 – 5.0
10.35 – 14.44
10.38 – 14.60
0.1 – 5.0
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Some of the assumptions are based on historical data which is not necessarily indicative of future trends. Reasonable changes in these
assumptions would not have a material impact on the amounts recognised in the financial statements.
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Financial
were cancelled or forfeited. At 31 December 2016, 17,000 remained (excluding notional dividends). The options were issued
to employees in 2004 in lieu of shares under the Plan. The options vested immediately and are exercisable until March 2024.
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Overview
Overview
AASB 124 Related Party Disclosures requires disclosure of the compensation of directors (executive and non-executive)
and those persons having authority and responsibility for planning, directing and controlling the activities of the Group,
either directly or indirectly. This group is collectively defined as key management personnel. Additional details in respect
of key management personnel and their remuneration are shown in the Remuneration Report.
2016 2015
US$000 US$000
Short-term employee benefits 17,474 16,985
Post-employment benefits 189 173
Other long-term employment benefits 164 103
Share-based payments 7,429 7,637
Termination benefits 3,042 –
28,298 24,898
How we
How we account
account for
for the
thenumbers
numbers
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overview
Performance
Overview
Overview
2
Defined benefit plans are post-employment plans which provide benefits to employees on retirement, disability or death.
The benefits are based on years of service and an average salary calculation. Contributions are made to cover the current
cash outflows from the plans and a liability is recorded to recognise the estimated accrued but not yet funded obligations.
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FAIR VALUE OF PLAN PRESENT VALUE OF NET RECOGNISED
DATE OF LAST
ACTUARIAL
ASSETS
2016 2015
PLAN OBLIGATIONS
2016 2015
SURPLUSES (DEFICITS)
2016 2015
3
Governance
ASSESSMENT US$M US$M US$M US$M US$M US$M
Defined benefit plan surpluses
Iron Trades insurance staff trust 31 Dec 16 304 308 (277) (264) 27 44
Defined benefit plan deficits 1
Janson Green final salary superannuation
scheme
QBE the Americas plan
31 Dec 16
31 Dec 16
171
228
193
217
(194)
(264)
(196)
(258)
(23)
(36)
(3)
(41) 4
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Other plans 2 31 Dec 16 37 37 (63) (60) (26) (23)
436 447 (521) (514) (85) (67)
The measurement of assets and liabilities in defined benefit plans makes it necessary to use assumptions about discount rates, expected
future salary increases, investment returns, inflation and life expectancy. If actuarial assumptions differ materially from actual outcomes,
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this could result in a significant change in employee benefit expense recognised in profit or loss or in actuarial remeasurements
recognised in other comprehensive income, together with the defined benefit assets and liabilities recognised in the balance sheet.
The Group does not control the investment strategies of defined benefit plans; they are managed by independent trustees. Nonetheless,
the Group has agreed, as part of ongoing funding arrangements, that the trustees should manage their strategic asset allocation in order
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to minimise the risk of material adverse impact. In particular, the Group has agreed with the trustee to reduce the level of investment risk
by investing in assets that match, where possible, the profile of the liabilities. This involves holding a mixture of government and corporate
bonds. The Group believes that due to the long-term nature of the plan liabilities, a level of continuing equity investment is also
information
Other
appropriate.
The charge recognised in profit or loss in the year of $2 million (2015 $5 million) is included in underwriting expenses. Total employer
contributions expected to be paid to the various plans in 2017 amount to $16 million.
How we
How we account
account for
forthe
thenumbers
numbers
The surplus or deficit recognised in the balance sheet in respect of defined benefit superannuation plans is the present
value of the defined benefit obligation at the balance date less the fair value of plan assets. The defined benefit obligation
is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined
benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality
corporate or government bonds that are denominated in the currency in which the benefits will be paid, and that have a term
to maturity approximating the term of the related superannuation liability. Remeasurement gains and losses arising from
experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, and are
shown in other comprehensive income. Past service costs are recognised immediately in profit or loss.
125
176
Overview
Overview
QBE may engage the external auditor for non-audit services other than excluded services subject to the general principle that
fees for non-audit services should not exceed 50% of all fees paid to the external auditor in any one financial year. The Board
believes some non-audit services are appropriate given the external auditor’s knowledge of the Group. External tax services
are generally provided by an accounting firm other than the external auditor. Consistent with prior periods, the external auditor
cannot provide the excluded services of preparing accounting records or financial reports or acting in a management capacity.
2016 2015
US$000 US$000
PricewaterhouseCoopers (PwC) Australian firm
Audit or review of financial reports of the ultimate parent entity 1,435 1,244
Audit of financial reports of controlled entities 2,525 2,119
Audit of statutory returns 596 569
Other assurance services 900 305
Taxation services 295 190
Advisory services 1,713 2,365
7,464 6,792
Related practices of PwC Australian firm (including overseas PwC firms)
Audit of financial reports of controlled entities 9,772 9,826
Audit of statutory returns 2,270 2,328
Other assurance services 129 200
Taxation services 420 1,881
Advisory services 908 705
13,499 14,940
20,963 21,732
Audit and assurance services 17,627 16,591
Other services 3,336 5,141
20,963 21,732
Other auditors
Audit of financial reports of controlled entities 167 238
Other services 5 –
172 238
Overview
Overview
The Corporations Act 2001 requires the disclosure of summarised financial information for the ultimate parent entity,
QBE Insurance Group Limited.
126
177
8.8.1 Summarised financial data of QBE Insurance Group Limited (the company)
2016
US$M
2015
US$M
1
overview
Performance
Profit after income tax for the year 943 738
Other comprehensive income for the year 12 45
Total comprehensive income 955 783
Assets due within 12 months 1 2,822 1,297
Shares in controlled entities 13,035 13,521
Total assets
Liabilities payable within 12 months 2
15,857
1,700
14,818
2,291
2
review
Business
Borrowings 3,061 1,739
Total liabilities 4,761 4,030
Net assets 11,096 10,788
Share capital 8,350 8,440
Share-based payment reserve 169 159
Foreign currency translation reserve
Retained profits
87
2,490
105
2,084
3
Governance
Total equity 11,096 10,788
1 Includes amounts due from QBE Group companies of $551 million (2015 $349 million).
2 Includes amounts due to QBE Group companies of $1,575 million (2015 $2,192 million).
Report
Directors'
2016 2015
US$M US$M
Letters of credit issued in support of the Group's participation in Lloyd's of London 1,624 1,463
Letters of credit issued in support of insurance provisions of controlled entities 716 1,088
Guarantees to investors in capital securities 1 354 757
Guarantees to investors in subordinated debt 1
Guarantees in relation to bank loans of controlled entities
329
10
1,479
– 5
Report
Financial
1 Excludes capital securities and subordinated debts owned by the ultimate parent entity.
Details of the guarantees to investors in capital securities and security arrangements in respect of borrowings are provided in note 5.1.
On 9 September 2015, QBE was served with a statement of claim alleging breaches of continuous disclosure and conduct obligations
6
in relation to profit guidance issued for the year ended 31 December 2013. QBE rejects the allegations and is defending the claim.
As at the date of this report, it is not possible to produce a reliable estimate of the potential financial effect arising from the claim, if any.
information
Other
8.8.3 Tax consolidation legislation
The accounting policy in relation to the legislation is set out in note 6.2.4. On adoption of the tax consolidation legislation, the directors
of the company and its wholly-owned Australian controlled entities entered into a tax sharing and tax funding agreement that requires the
Australian entities to fully compensate the company for current tax liabilities and to be fully compensated by the company for any current
tax or deferred tax assets in respect of tax losses arising from external transactions occurring after the date of implementation of the tax
consolidation legislation. The contributions are allocated by reference to the notional taxable income of each Australian entity.
Details of franking credits available to shareholders are shown in note 5.4
How we
How we account
account for
for the
thenumbers
numbers
The financial information of the ultimate parent entity of the Group has been prepared on the same basis as the
consolidated financial report except for shares in controlled entities which are recorded at cost less any provision
for impairment in the ultimate parent entity balance sheet.
127
178
Directors’ declaration
Directors’ declaration
128
179
overview
Performance
2
review
Business
Report on the audit of the Financial Report
Our opinion
3
In our opinion:
The accompanying Financial Report of QBE Insurance Group Limited (the company) and its controlled entities (together, the Group)
is in accordance with the Corporations Act 2001, including:
Governance
a) giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its financial performance for the year
then ended; and
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
Report
Directors'
• the consolidated balance sheet as at 31 December 2016;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated statement of cash flows for the year then ended;
• the notes to the consolidated financial statements, which include summaries of the significant accounting policies; and
• the directors’ declaration.
5
Report
Financial
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
6
described in the Auditor’s responsibilities for the audit of the Financial Report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
information
Other
Independence
We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and
the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional
Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled our other ethical
responsibilities in accordance with the Code.
AUDIT
SCOPE
MATERIALITY
• For the purpose of our audit we used overall Group materiality of $61 million, which represents approximately 0.5% of the
Group’s net earned premium.
• We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements on the Financial Report as a whole.
• We chose net earned premium as the benchmark because, in our view, it is a key financial statement metric used in
assessing the performance of the Group and is not as volatile as other profit and loss measures. We selected 0.5% based
on our professional judgement, noting that it is also within the range of commonly accepted revenue-related benchmarks.
181
overview
Performance
• Our audit focused on where the directors made subjective judgements; for example, significant accounting estimates
involving assumptions and inherently uncertain future events.
• We ensured that the audit teams at both Group and operational levels possessed the appropriate skills and competencies
needed for the audit of a complex global insurer. This included industry expertise in insurance, as well as IT specialists,
2
review
Business
actuarial, tax, treasury and valuation professionals.
• We conducted an audit of the most financially significant operations being the North American Operations, European
Operations, Australian & New Zealand Operations and Equator Re (the “Operations”). In addition, we performed
specified risk focused audit procedures on certain account balances for other Corporate and Emerging Market entities
within the Group.
• For the work performed by auditors within PwC Australia or from other PwC network firms operating under our
3
Governance
instructions, we determined the level of involvement we needed to have in their audit work to be satisfied that sufficient
audit evidence had been obtained for the purposes of our opinion.
• We kept in regular communication with audit teams throughout the year with phone calls, discussions and written
instructions, where appropriate. Further, we visited the significant operations on a rotational basis and met with
management and local audit teams in New York, London, Hong Kong, Singapore and Sydney.
• We performed further audit procedures at a Group level over the remaining balances and the consolidation of the Group’s
4
Report
Directors'
reporting units.
• The work carried out in the Operations, together with these additional procedures performed at the Group level, provided
us with sufficient evidence to express an opinion on the Group Financial Report as a whole.
Report
Financial
6
information
Other
182 TERIA
KEY AUDIT MATTER How our audit addressed the key audit matter
We focused on this net outstanding claims balance because of the complexity involved in the estimation process and the
significant judgements that management and the directors make in determining the balance.
Note 2.3 to the financial statements describes the elements that make up the balance. We comment on the most
judgemental aspects of these elements below.
The estimation of outstanding Our audit procedures included evaluating the design effectiveness and
claims involves significant implementation of key actuarial controls, including key data reconciliations
judgement given the size of the and the Group’s review of the estimates.
liability and inherent uncertainty
Historical claims data is a key input to the actuarial estimates. Accordingly,
in estimating the expected future
we tested controls and performed detailed testing over a sample of claims
payments for claims incurred.
case estimates and settlements. No material issues arose and so, in the
In particular, judgement arises context of our audit materiality, we were satisfied with the adequacy of the
over the estimation of payments data used in the actuarial estimates in our sample.
for claims that have been incurred
We determined those classes of business where claims reserve estimates
at the reporting date but have not
present a higher risk and focused on classes which inherently involve
yet been reported to the Group as
greater levels of judgement and have historically shown greater year
there is generally less information
on year variation over previous estimates. In the current year such
available in relation to these claims.
portfolios included CTP in Australia and certain liability portfolios in North
Classes of business where there is
America and Europe.
a greater length of time between the
initial claim event and settlement In order to challenge management’s methodologies and assumptions, with
(such as workers’ compensation, particular focus on the higher risk areas, we:
professional indemnity and other
• Evaluated whether the Group’s actuarial methodologies were consistent
liability classes) also tend to display
with those used in the industry and with prior periods. We sought sufficient
greater variability between initial
justification for any significant differences.
estimates and final settlement.
• Assessed key actuarial assumptions including claims ratios, and expected
The valuation of outstanding
frequency and severity of claims. We challenged these assumptions by
claims relies on the quality of the
comparing them with our expectations based on the Group’s experience,
underlying data. It involves complex
current trends and our own industry knowledge. For some classes of
and subjective judgements about
business, we also performed our own independent actuarial projections
future events, both internal and
and compared the results with management’s estimates. Based on this
external to the business, for which
work, we concluded that the methodologies and assumptions tested were
small changes in assumptions
materially consistent with our independent expectations and analysis.
can result in material impacts
on the estimate. • Tested the discount applied for classes of business where there is a
greater length of time between the initial claim event and settlement by
The estimate of expected future
territory and line of business.
payments is discounted to present
value using a risk-free rate of return We were assisted by our own actuarial experts to understand and evaluate
in order to reflect the time value of the Group’s actuarial practices and the Group’s gross discounted central
money. Judgement is involved in estimate. We also considered the work and findings of external actuarial
estimating the period over which experts engaged by management.
claims are expected to settle.
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overview
Performance
(b) Reinsurance and other recoveries
Refer to Note 2.3.2 – $4,540 million
The valuation of reinsurance We obtained audit evidence in relation to the data and actuarial
2
review
Business
assets requires a significant processes for estimating reinsurance recoveries on outstanding claims by
level of judgement, given performing the same audit procedures as those outlined above for gross
its inherent dependence on claims estimates.
underlying estimates of gross
With regards to the GLRC contract, we gave particular focus to assessing
outstanding claims.
and challenging management’s estimate of claims that will be subject to
In addition, significant management
judgement may be required to
recovery under the contract. We inspected the work of management’s
actuarial experts, as well as directly testing a sample of relevant claims. 3
Governance
ensure contractual terms on
We tested individually material new reinsurance arrangements including
the most material contracts are
the program run off reinsurance in North America. Our work focused on
correctly accounted for (such
reviewing all relevant contracts to ensure that the key terms contained
as the Group’s aggregate large
therein had been appropriately reflected in the financial statements.
risk and catastrophe reinsurance
program (GLRC)).
4
Report
Directors'
(c) Risk margins and Probability of Adequacy (PoA)
Refer to Note 2.3.3 – $1,088 million
Report
Financial
central estimate of the present value assessed level of uncertainty in the net central estimate leading to a change
of the expected future payments, in the margin year on year. We challenged these factors by considering the
a risk margin which relates to findings from our work performed on the net central estimate.
the inherent uncertainty in that
We tested the Group’s actuarial calculation of the Probability of Adequacy
estimate. In determining the risk
6
(PoA) for reasonableness and consistency with previous valuations.
margin, management must make
This included developing an understanding of and testing the actuarial
judgements about the variability of
techniques applied by management, and comparing the results with industry
each class of business underwritten
information
Other
benchmarks. We found the variability assumptions to be aligned with
and the extent of correlation within
industry benchmarks and prior year.
each division and between different
geographical locations.
PoA is a measure of the estimated
overall sufficiency of reserves
including a risk margin in light of
that variability.
184
KEY AUDIT MATTER How our audit addressed the key audit matter
We focused on goodwill in North We have evaluated management’s identification of the North American
America because the level of cash generating unit, and evaluated the process by which the relevant cash
headroom between management’s flow forecasts were developed. We compared these forecasts with Board
valuation and the balance sheet approved business plans and also compared previous forecasts to actual
carrying value remains limited results to assess the performance of the business and the historical
following impairment in 2013. The accuracy of forecasting.
carrying value is material, and the
We were satisfied that the three year forecast used in management’s
impairment test remains sensitive
valuation model was consistent with the Board approved North America
to reasonably possible changes
business plan, and that the key assumptions were subject to oversight from
in assumptions.
the directors.
The valuation is based on the
We tested the assumptions and methodologies used in the model, in
Board approved business plan
particular those relating to the discount rate and growth rates. To do this:
for North America. The most
significant judgements relate to • Our valuation experts evaluated these assumptions with reference to
the discount rate applied together valuations of similar companies.
with the assumptions supporting
• We compared the key assumptions to externally derived data where
the underlying forecast cash
possible, including market expectations of investment return, projected
flows, in particular the terminal
economic growth and interest rates.
growth rate and the forecast
combined operating ratios in the • We applied sensitivities in evaluating the directors’ assessment of the
projection period and investment planned growth rate in cash flows, including forecast premium growth and
return assumptions. combined operating ratios.
We were satisfied that the growth rate assumptions were reasonable given
the economic outlook and industry forecasts. Further, the discount rate used
by management was consistent with market data and industry research
available to us.
In testing the valuation model:
• We checked the calculations for mathematical accuracy,
noting no exceptions.
• We considered the sensitivity of the calculation by varying the
assumptions and applying other values within a reasonably possible range
for North America.
We also considered the work and findings of external valuation experts
engaged by management.
The impairment assessment remains sensitive to a range of assumptions,
in particular to changes in the discount rate and achievement of forecast
improvements in investment returns and combined operating ratios.
Accordingly relevant disclosures have been made in note 7.2.1.
185
overview
Performance
Recoverability of deferred tax assets in North America
Refer to Note 6.2.3 – $573 million
We focused on this balance The ultimate recoverability of the deferred tax asset depends upon both
2
review
Business
because there has been a history continued improvement in the profitability of the North American business,
of tax losses in North America, and the period over which tax losses will be available for recovery.
and as such, the recoverability
We focused on whether sufficient evidence was available with regard to
of the deferred tax asset in North
these two elements, as follows:
America is particularly sensitive
to expectations about the future
profitability of this business. This in
turn depends on the achievement of
• Evaluated the progress made by management in improving the profitability
of the business in recent periods, which includes the remediation of the
causes of past losses through, amongst other things, run off reinsurance
3
Governance
underlying business plans. arrangements, implementation of a revised capital structure to reduce
funding costs, business disposals, and other expense reduction initiatives.
Significant judgement is required
We noted that progress has been made in relation to each of these.
over the recoverability of deferred
tax assets arising from past tax • Assessed the credibility of the business plans used in the deferred tax
losses because the realisation
of tax benefits is dependent on
future taxable profits and there are
asset recoverability assessment. These were based on the same three
year forecast used in the goodwill valuation model, and were therefore
assessed as part of our goodwill testing as outlined above.
4
Report
Directors'
inherent uncertainties involved in
• Used our tax experts, who considered that the tax losses are legally
forecasting such profits.
available for the forecast recoupment period.
Valuation of investments
5
Report
Financial
Refer to Note 3.2 – $24,374 million
This is the largest asset on the We performed the following audit procedures over the valuation of
balance sheet, representing investments held by the Group:
6
approximately 59% of total assets.
• Assessed the design and performed tests of the implementation and
Our audit effort has increased in
operating effectiveness of the key controls over the investment function
this area as the Group’s investment
carried out by Group Investments, which is responsible for managing the
information
Other
portfolio has become more
majority of investments for the Group.
diversified in recent years.
• Assessed the Group’s valuation of individual investment holdings. Where
In particular, there is significant
readily observable data was available, we sourced that independently
focus on considering whether
and compared it to the company’s valuation. For investments where
the underlying investments are
there was less or little observable market data, including level 3 holdings
valued appropriately.
as disclosed in note 3.2.1, we obtained and assessed other relevant
The valuation of financial valuation data or carried out our own independent valuations. We did
investments held at fair value not identify any material differences from the company’s valuations from
is based on a range of inputs. performing this work.
Many of the inputs required can
be obtained from readily available
liquid market prices and rates.
Where observable market data
is not available, for example,
when determining the valuation
of certain infrastructure debt,
estimates must be developed based
on the most appropriate source
data and are subject to a higher
level of judgement.
186
Other information
The directors are responsible for the other information. The other information comprises the Performance overview, Business review,
Governance, Directors’ Report, and Other information included in the Group’s Annual Report for the year ended 31 December 2016
but does not include the Financial Report and our auditor’s report thereon.
Our opinion on the Financial Report does not cover the other information and accordingly we do not express any form of assurance
conclusion thereon.
In connection with our audit of the Financial Report, our responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the Financial Report or our knowledge obtained in the audit,
or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required
to report that fact. We have nothing to report in this regard.
overview
Performance
Our opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 68 to 102 of the Directors’ Report for the year ended 31 December 2016.
In our opinion, the Remuneration Report of QBE Insurance Group Limited for the year ended 31 December 2016 complies with
section 300A of the Corporations Act 2001.
Responsibilities 2
review
Business
The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with
section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our
audit conducted in accordance with Australian Auditing Standards.
Governance
PricewaterhouseCoopers
4
Report
Directors'
5
Report
Financial
RJ Clark SJ Hadfield
Partner Partner
6
Sydney
24 February 2017
information
Other
Shareholder information
Shareholder information
QBE is incorporated in Australia, is listed on the Australian Securities Exchange (ASX) and trades under the code “QBE”.
Registered office
QBE Insurance Group Limited
Level 27, 8 Chifley Square
Sydney NSW 2000 Australia
Telephone: +61 2 9375 4444
Facsimile: +61 2 9231 6104
Website: www.qbe.com
QBE website
QBE’s website provides investors with information about QBE including annual reports, corporate governance statements, annual
reviews, sustainability reviews, half yearly reports and announcements to the ASX. The website also offers regular QBE share price
updates, a calendar of events, a history of QBE’s dividend and online access to your shareholding details via the share registry.
Privacy legislation
Chapter 2C of the Corporations Act 2001 requires information about you as a security holder (including your name, address and details
of the securities you hold) to be included in QBE’s share register. These details must continue to be included in the public register even
if you cease to be a security holder. A copy of the privacy policy is available on Computershare’s website.
Dividends
QBE pays cash dividends to shareholders resident in Australia and New Zealand by direct credit. Shareholders in the UK and the US
also have the option to receive their cash dividends by direct credit, although it is not mandatory. The benefit to shareholders of the direct
credit facility is access to cleared funds quickly and securely – reducing the risk of cheques being lost or stolen. Shareholders in other
countries will receive cheque payments in Australian dollars if they have not elected to receive their payment by direct credit.
Shareholders receive a dividend statement for tax records, either by post or by email depending on the selected communications option.
Eligible shareholders can participate in QBE’s Dividend Reinvestment Plan (DRP) and Bonus Share Plan (BSP) when the plans are active.
The DRP enables you to subscribe for additional shares. The BSP is a bonus share plan whereby the dividend entitlement is forgone for
bonus shares in lieu of the dividend. In order to participate in either the DRP or BSP, you must have a minimum shareholding of 100 shares
and have a registered address in Australia or New Zealand.
Participants may change their election to participate in the DRP and BSP at any time. DRP/BSP election cut-off dates and application
forms are available from QBE’s website.
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189
Shareholder information
overview
Performance
of dividends paid. Australian shareholders living abroad should advise Computershare of their resident status.
review
Business
Under the Unclaimed Moneys Act unclaimed dividends six or more years old must be given to the ACT Public Trustee. It is very important
that shareholders bank outstanding dividend cheques promptly and advise Computershare immediately of changes of address or bank
account details.
Governance
DATE PAID TYPE RECORD DATE PER SHARE %
28 March 2013 Final 8 March 2013 10 100
23 September 2013 Interim 2 September 2013 20 100
31 March 2014 Final 13 March 2014 12 100
23 September 2014 Interim 29 August 2014 15 100
13 April 2015
2 October 2015
Final
Interim
6 March 2015
28 August 2015
22
20
100
100
4
Report
Directors'
14 April 2016 Final 11 March 2016 30 100
28 September 2016 Interim 26 August 2016 21 50
13 April 2017 Final 10 March 2017 33 50
Report
Financial
The Annual General Meeting will be webcast at www.group.qbe.com/investor-centre/annual-general-meeting and an archive copy
uploaded for later viewing.
131
190
Shareholder information
Shareholder information CONTINUED
132
191
Financial calendar
1
YEAR MONTH DAY ANNOUNCEMENT
2017 February 27 Results and dividend announcement for the year ended 31 December 2016
March 9 Shares begin trading ex dividend
overview
Performance
10 Record date for determining shareholders’ entitlement to 2016 final dividend
13 DRP/BSP election close date – last day to nominate to participate in the Dividend
Reinvestment Plan or the Bonus Share Plan
April 13 Payment date for the 2016 final dividend
May
June
August
3
30
17 1
2017 Annual General Meeting
Half year end
Results and dividend announcement for the half year ended 30 June 2017
2
review
Business
24 1 Shares begin trading ex dividend
25 1 Record date for determining shareholders’ entitlement to 2017 interim dividend
28 1 DRP/BSP election close date – last day to nominate to participate in the Dividend
Reinvestment Plan or the Bonus Share Plan
September
December
29 1
31
Payment date for the 2017 interim dividend
Full year end 3
Governance
1 Dates shown may be subject to change.
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Directors'
5
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Financial
6
information
Other
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192
10 year history
10 year history
FOR THE YEAR ENDED 31 DECEMBER
2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Gross written premium US$M 14,395 15,092 16,332 17,975 18,434 18,291 13,629 11,239 11,015 10,391
Gross earned premium US$M 14,276 14,922 16,521 17,889 18,341 17,840 13,432 10,943 10,773 10,353
Net earned premium US$M 11,066 12,314 14,084 15,396 15,798 15,359 11,362 9,446 9,293 8,552
Claims ratio % 58.2 60.4
60.3 63.2 64.5 66.0 68.2 59.9 60.3 57.6 54.3
Commission ratio % 18.4 17.2 16.8 16.8 16.2 14.9 15.5 16.2 17.2 18.5
Expense ratio % 17.4 17.3 16.1 16.5 14.9 13.7 14.3 13.1 13.7 13.1
Combined operating ratio % 94.0 94.9 96.1 97.8 97.1 96.8 89.7 89.6 88.5 85.9
Investment income
before investment gains/losses US$M 641 541 676 691 723 948 658 832 1,237 837
after investment gains/losses US$M 746 665 814 772 1,227 767 657 1,153 1,199 1,130
Insurance profit US$M 1,075 1,031 1,074 841 1,262 1,085 1,703 1,609 1,830 1,895
Insurance profit to net earned
premium % 9.7 8.4 7.6 5.5 8.0 7.1 15.0 17.0 19.7 22.2
Financing and other costs US$M 294 244 297 345 324 275 222 191 223 189
Operating profit (loss)
before income tax US$M 1,072 953 931 (448) 941 868 1,551 1,891 2,028 2,135
after income tax and
non-controlling interests US$M 844 687 742 (254) 761 704 1,278 1,532 1,558 1,612
Number of shares on issue 1 millions 1,370 1,370 1,363 1,247 1,194 1,112 1,048 1,020 982 881
Shareholders' funds US$M 10,284 10,505 11,030 10,356 11,358 10,386 10,311 9,164 7,834 7,435
Total assets US$M 41,583 42,176 45,000 47,271 50,748 46,737 41,386 36,723 33,967 34,737
Net tangible assets per share 1 US$ 4.90 5.07 5.32 4.75 4.49 3.93 4.78 4.64 4.04 6.02
Borrowings to shareholders'
funds % 33.8 33.6 32.5 44.1 43.4 45.8 31.5 29.1 32.9 40.8
Basic earnings per share 1 US cents 61.6 50.3 57.4 (22.8) 65.1 64.9 123.7 152.8 175.0 189.0
Basic earnings per
share-cash basis 2 US cents 65.5 65.3 63.5 62.9 89.1 73.0 127.7 156.4 177.2 190.5
Diluted earnings per share US cents 60.8 49.8 55.8 (22.8) 61.6 61.3 119.6 149.9 172.2 181.8
Return on average
shareholders' funds % 8.1 6.4 6.9 (2.3) 7.0 6.8 13.1 18.0 22.3 26.0
Australian
Dividend per share cents 54 50 37 32 50 87 128 128 126 122
Dividend payout A$M 741 685 492 394 593 956 1,336 1,306 1,187 1,068
Total investments and cash 3 US$M 25,235 26,708 28,583 30,619 31,525 28,024 25,328 22,448 19,995 21,552
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Accident year
experience
The matching of all claims occurring (regardless of when reported or paid) during a given 12 month period
with all premium earned over the same period. 1
overview
Performance
Acquisition cost The total of net commission and operating expenses incurred in the generation of net earned premium and
often expressed as a percentage of net earned premium.
Admitted insurance Insurance written by an insurer that is admitted (or licensed) to do business in the (US) state in which the
Agent
policy was sold.
review
Business
i.e. the agent’s primary responsibility is to the insurance carrier, not the insurance buyer.
Attritional claims Total of all claims with a net cost of less than $2.5 million as a percentage of net earned premium.
ratio
Broker One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving
a commission from the insurer or reinsurer for placement and other services rendered. In contrast with
3
Governance
an agent, the broker’s primary responsibility is to the insurance buyer not the insurance carrier.
Capacity In relation to a Lloyd’s member, the maximum amount of insurance premiums (gross of reinsurance but net
of brokerage) which a member can accept. In relation to a syndicate, the aggregate of each member’s capacity
allocated to that syndicate.
Cash profit Net profit after tax attributable to QBE shareholders, adjusted for the post-tax effect of amortisation and
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Directors'
impairment of intangibles and other non-cash items. This definition is used for the purpose of the Group’s
dividend policy.
Casualty insurance Insurance that is primarily concerned with the losses resulting from injuries to third persons or their property
(i.e. not the policyholder) and the resulting legal liability imposed on the insured. It includes, but is not limited
to, general liability, employers’ liability, workers’ compensation, professional liability, public liability and motor
liability insurance. 5
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Financial
Catastrophe A reinsurance contract (often in the form of excess of loss reinsurance) that, subject to specified limits and
reinsurance retention, compensates the ceding insurer for losses related to an accumulation of claims resulting from
a catastrophe event or series of events.
Claim
Claims incurred
The amount payable under a contract of insurance or reinsurance arising from a loss relating to an insured event.
The aggregate of all claims paid during an accounting period adjusted by the change in the claims provision
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information
Other
for that accounting period.
Claims provision The estimate of the most likely cost of settling present and future claims and associated claims adjustment
expenses plus a risk margin to cover possible fluctuation of the liability.
Coefficient The measure of variability in the net discounted central estimate used in the determination of the probability
of variation of adequacy.
Combined operating The sum of the net claims ratio, commission ratio and expense ratio. A combined operating ratio below
ratio 100% indicates profitable underwriting results. A combined operating ratio over 100% indicates unprofitable
underwriting results.
Commercial lines Refers to insurance for businesses, professionals and commercial establishments.
Commission Fee paid to an agent or broker as a percentage of the policy premium. The percentage varies widely
depending on coverage, the insurer and the marketing methods.
Credit spread The difference in yield between a corporate bond and a reference yield (e.g. LIBOR, BBSW or a fixed
sovereign bond yield).
Credit spread The weighted average term of cash flows for a corporate bond. It is used to measure the price sensitivity
duration of a bond to changes in credit spreads.
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Deductible The amount or proportion of some or all losses arising under an insurance contract that the insured must bear.
Deferred acquisition Acquisition costs relating to the unexpired period of risk of contracts in force at the balance date which are
costs carried forward from one accounting period to subsequent accounting periods.
Excess of loss A form of reinsurance in which, in return for a premium, the reinsurer accepts liability for claims settled
reinsurance by the original insurer in excess of an agreed amount, generally subject to an upper limit.
Expense ratio Underwriting and administrative expenses as a percentage of net earned premium.
Facultative The reinsurance of individual risks through a transaction between the reinsurer and the cedant (usually the
reinsurance primary insurer) involving a specified risk.
General insurance Generally used to describe non-life insurance business including property and casualty insurance.
Gross claims The amount of claims incurred during an accounting period before deducting reinsurance recoveries.
incurred
Gross earned The proportion of gross written premium recognised as income in the current financial year, reflecting the
premium (GEP) pattern of the incidence of risk and the expiry of that risk.
Gross written The total premium on insurance underwritten by an insurer or reinsurer during a specified period, before
premium (GWP) deduction of reinsurance premium.
Incurred but not Claims arising out of events that have occurred before the end of an accounting period but have not been
reported (IBNR) reported to the insurer by that date.
Insurance profit The sum of the underwriting result and investment income on assets backing policyholders’ funds.
Large individual risk The aggregate of claims each with a net cost of $2.5 million or more as a percentage of net earned premium.
and catastrophe
claims ratio
Lenders’ mortgage A policy that protects the lender (e.g. a bank) against non-payment or default on the part of the borrower
insurance (LMI) on a residential property loan.
Lead/non-lead A lead underwriter operates in the subscription market and sets the terms and price of a policy. The follower
underwriter or non-lead is an underwriter of a syndicate or an insurance company that agrees to accept a proportion
of a given risk on terms set by the lead underwriter.
Lloyd’s Insurance and reinsurance market in London. It is not a company but is a society of individuals and corporate
underwriting members.
Lloyd’s managing An underwriting agent which has permission from Lloyd’s to manage one or more syndicates and carry
agent on underwriting and other functions for a member.
Long tail Classes of insurance business involving coverage for risks where notice of a claim may not be received for
many years and claims may be outstanding for more than one year before they are finally quantifiable and
settled by the insurer.
Managing General A wholesale insurance agent with the authority to accept placements from (and often to appoint) retail agents
Agent (MGA) on behalf of an insurer. MGAs generally provide underwriting and administrative services such as policy
issuance on behalf of the insurers they represent. Some may handle claims.
Maximum event An estimate of the largest claim to which an insurer will be exposed (taking into account the probability of that
retention (MER) loss event at a return period of one in 250 years) due to a concentration of risk exposures, after netting off any
potential reinsurance recoveries and inward and outward reinstatement premiums.
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overview
Performance
Multi-peril crop US federally regulated crop insurance protecting against crop yield losses by allowing participating insurers
scheme to insure a certain percentage of historical crop production.
Net claims incurred The amount of claims incurred during an accounting period after deducting reinsurance recoveries.
Net claims ratio Net claims incurred as a percentage of net earned premium. 2
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Business
Net earned premium Net written premium adjusted by the change in net unearned premium.
(NEP)
Net investment Gross investment income including foreign exchange gains and losses and net of investment expenses.
income
Net written premium The total premium on insurance underwritten by an insurer during a specified period after the deduction
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Governance
(NWP) of premium applicable to reinsurance.
Outstanding claims The amount of provision established for claims and related claims expenses that have occurred but have
liability not been paid.
Personal lines Insurance for individuals and families, such as private motor vehicle and homeowners’ insurance. 4
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Directors'
Policyholders’ funds Those financial assets held to fund the net insurance liabilities of the Group.
Premium Amount payable by the insured or reinsured in order to obtain insurance or reinsurance protection.
Premium solvency
ratio
Ratio of net tangible assets to net earned premium. This is an important industry indicator in assessing the
ability of general insurers to settle their existing liabilities. 5
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Financial
Prescribed Capital This comprises the sum of the capital charges for asset risk, asset concentration risk, insurance concentration
Amount (PCA) risk and operational risk as required by APRA. The PCA must be disclosed at least annually.
Probability A statistical measure of the level of confidence that the outstanding claims liability will be sufficient to pay
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of adequacy claims as and when they fall due.
Proportional A type of reinsurance in which the original insurer and the reinsurer share claims in the same proportion
information
Other
reinsurance as they share premiums.
Prudential Capital The sum of the Prescribed Capital Account (PCA) plus any supervisory adjustment determined by APRA.
Requirement (PCR) The PCR may not be disclosed.
Recoveries The amount of claims recovered from reinsurance, third parties or salvage.
Reinsurance An agreement to indemnify a primary insurer by a reinsurer in consideration of a premium with respect
to agreed risks insured by the primary insurer. The enterprise accepting the risk is the reinsurer and is said
to accept inward reinsurance. The enterprise ceding the risks is the cedant or ceding company and is said
to place outward reinsurance.
Reinsurance A reinsurance agreement under which members of a syndicate, for a year of account to be closed, are
to close reinsured by members who comprise that or another syndicate for a later year of account against all liabilities
arising out of insurance business written by the reinsured syndicate.
Reinsurer The insurer that assumes all or part of the insurance or reinsurance liability written by another insurer.
The term includes retrocessionaires, being insurers that assume reinsurance from a reinsurer.
Retention That amount of liability for which an insurance company will remain responsible after it has completed
its reinsurance arrangements.
Return on allocated Divisional management-basis profit as a percentage of allocated capital as determined by the Group’s
capital (RoAC) economic capital model.
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Return on equity Group statutory net profit after tax as a percentage of average shareholders’ funds.
(ROE)
Short tail Classes of insurance business involving coverage for risks where claims are usually known and settled
within 12 months.
Stop loss A form of excess of loss reinsurance which provides that the reinsurer will pay some or all of the reassured’s
reinsurance losses in excess of a stated percentage of the reassured’s premium income, subject (usually) to an overall
limit of liability.
Surplus (or excess) In contrast to “admitted insurers”, every US state also allows non-admitted (or “surplus lines” or “excess lines”)
lines insurers carriers to transact business where there is a special need that cannot or will not be met by admitted carriers.
The rates and forms of non-admitted carriers generally are not regulated in that state, nor are the policies
back-stopped by the state insolvency fund covering admitted insurance. Brokers must inform insurers if their
insurance has been placed with a non-admitted insurer.
Syndicate A member or group of members underwriting insurance business at Lloyd’s through the agency
of a managing agent.
Survival ratio A measure of how many years it would take for dust disease claims to exhaust the current level of claims
provision. It is calculated on the average level of claims payments in the last three years.
Total shareholder A measure of performance of a company’s shares over time. It includes share price appreciation and dividend
return (TSR) performance.
Treaty reinsurance Reinsurance of risks in which the reinsurer is obliged by agreement with the cedant to accept, within agreed
limits, all risks to be underwritten by the cedant within specified classes of business in a given period of time.
Underwriting The process of reviewing applications submitted for insurance or reinsurance coverage, deciding whether
to provide all or part of the coverage requested and determining the applicable premium.
Underwriting The aggregate of policy acquisition costs, excluding commissions, and the portion of administrative, general
expenses and other expenses attributable to underwriting operations.
Underwriting result The amount of profit or loss from insurance activities exclusive of net investment income and capital gains
or losses.
Underwriting year The year in which the contract of insurance commenced or was underwritten.
Unearned premium The portion of a premium representing the unexpired portion of the contract term as of a certain date.
Volume weighted A methodology used for determining the share price applicable to dividend and other share related
average price transactions.
(VWAP)
Written premium Premiums written, whether or not earned, during a given period.
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QBE Insurance Group Limited
Level 27, 8 Chifley Square, Sydney NSW 2000 Australia
telephone +61 2 9375 4444
www.qbe.com