Qbe Syndicate 2999 Annual Report 2008

Syndicate 5555, Emilio Di Silvio, Lloyd’s, 5555, Jerry Flaxman, aviation syndicate, portfolio, general aviation, airlines, products and airport business, technology, aviation insurance, international flag carriers, charter, cargo, airlines.
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QBE Syndicate 2999 Annual report 2008 QBE Syndicate 2999 QBE vision To be internationally recognised as: QBE values • • • • Increasing the long term wealth of shareholders Customer satisfaction and retention Employee motivation Integrity • • • • A highly successful general insurance and reinsurance group A builder of shareholders’ wealth A developer of “can do” people An organisation that excels in the continuous delivery of new and proven quality products and services 01 02 04 06 07 08 09 10 Introduction What makes QBE different? QBE Syndicate 2999 at a glance QBE Reinsurance Syndicate 566 Business of the syndicate QBE Marine and Energy Syndicate 1036 Business of the syndicate QBE Syndicate 1886 Business of the syndicate QBE Property Syndicate 2000 Business of the syndicate QBE Aviation Syndicate 5555 Business of the syndicate 11 12 18 19 20 21 22 24 25 37 Risk management Report of the directors of the managing agent Managing agency – corporate information Independent auditors’ report to the members of Syndicate 2999 Profit and loss account: technical account – general business Profit and loss account: non-technical account Balance sheet Statement of cash flows Notes to the financial statements QBE Syndicate 2999 contacts Frank O’Halloran Chief Executive Officer, QBE Insurance Group Steven Burns Chief Executive Officer, QBE European Operations This was achieved through focused underwriting discipline and high business retention ratios coupled with a strong prior year performance. Following the successful implementation of our product and distribution model and the development of our UK National and European Markets distribution capabilities, we are now very well positioned to deliver strong growth through these local offices as and when market conditions improve. QBE’s philosophy remains based on underwriting specialism, leadership and continuity, which, combined with the highest quality of products, enables us to provide a secure, professional environment to fully service clients’ insurance needs. QBE European Operations overview Despite less favourable market conditions, two major hurricanes and an increase in large loss frequency for 2008, QBE European Operations (EO) has produced another strong result with a combined operating ratio of 85.6% (2007 84.8%). EO’s eight product focused underwriting divisions allow it to leverage the breadth and depth of its capabilities in a coordinated and focused way. This means brokers and clients have access to: d lan Ire UK • • • • • A wider distribution network All expertise in one place Br itis arine hm Spec i Q B E al tion Na a ny mp Co alt y Avia ti A choice of Lloyd’s paper or company paper curity rity secu on Mo tor 2008 GWP rine Ma nergy e & The strength and size of QBE The individuals who understand their business £2.4 billion erty op Pr Reinsu ran Casu alt y s arket m an pe ro u yd Llo e ’s s E ket mar on nd Lo ce 01 QBE Syndicate 2999 Annual report 2008 What makes QBE different? 1 Strong and growing market presence Entrepreneurial solutions to business risk 2 3 Empowers through a collaborative can do spirit across the business and with all business partners Strong QBE is one of the world’s top 25 insurers and reinsurers and has been established in the UK since 1904. At QBE we understand the importance of security in the insurance decision making process and the strength of our ratings and financial backing gives us a real advantage in the market. QBE is one of the world’s leading insurers and reinsurers with offices in 45 countries, backed by A+ ratings by S&P and Fitch. Our approach is one of leading not following, so when it comes to product design or setting the terms and conditions we take the initiative. Entrepreneurial We are always looking for solutions to business risks which means working closely with all parties to understand their business and creating the right product for them. A groundbreaking six year deal signed with a major provider of transport infrastructure provides a graphic illustration of an insurer that has an appetite for tripartite partnerships with brokers and clients built around shared information. This also demonstrates our appetite to tackle risks that others cannot and this deal provided the client with the necessary insurance first to survive and, latterly, the confidence to build for the future. Empowers At every stage of the relationship we encourage a “can do” spirit, which means everyone benefits from quicker decision making and faster solutions. We emphasise the importance of cooperation across all departments and this in turn enables us to provide a bespoke service and excellent customer relations management programme to our clients. An example of this was provided recently to a major UK based corporate catering company where a flexible, coordinated approach to client care was implemented, including scheduled quarterly meetings backed up by fully transparent management reporting. 02 QBE Syndicate 2999 Annual report 2008 Heading The QBE European Operations brand promise strives for excellence in five core areas Strong 1 Specialist 5 Entrepreneurial 2 Delivers reliable and responsive service at every stage of the stakeholder experience 4 Specialist in every business line and consistently across all disciplines 5 Delivers 4 Empowers 3 Delivers By understanding the market better and in particular the risks associated with that product, we are more responsive and able to deliver solutions to everyone’s requirements. Not only do we take great satisfaction from our claims record, we also place a great emphasis on risk management, with regular forums held addressing the key risk issues facing our clients. This emphasis is recognised by brokers who rated QBE fourth for claims handling in a recent study*. Specialist Our teams are specialists in every business line, which means they give equal importance to the generation of new business as they do to supporting the retention of key existing business. Our underwriters are readily accessible and their skills and in depth product knowledge of their sector enable them to provide an answer straight away. The sheer number of underwriters allows us to have specialists for individual subclasses of product and, if an answer is not readily available, then we are always looking for creative solutions. These key attributes resulted in brokers ranking QBE underwriters in third place in a recent survey*. So whether it’s cover for aviation products or zoos, or anything in between, we can provide a competitive and effective outcome. *Commercial Insurer Service study 2008 (Insurance Times). 03 QBE Syndicate 2999 Annual report 2008 QBE Syndicate 2999 at a glance QBE Syndicate 2999 continues to provide a scalable and efficient operating structure which, supported by QBE EO’s product and distribution model, enables the specialist product lines to adapt to prevailing market conditions. The syndicate accounts are prepared on an annually accounted basis under UK GAAP. Highlights • 2008 combined operating ratio of 79.7% (2007 85.6%) Strengths of the syndicate Flexible sub-syndicate structure permitting a high degree of autonomy for each of the underlying sub-syndicates Service excellence and provision of innovative solutions – each syndicate has experienced and dedicated specialist underwriting and support teams Part of QBE Underwriting Limited, one of the largest managing agents at Lloyd’s with over £1 billion of underwriting capacity for 2009 100% QBE capital – capital to support Syndicate 2999 is provided entirely by QBE Corporate Limited, part of QBE Insurance Group Limited (S&P, “A+” (strong)) Total syndicate funds of £1.5 billion Lloyd’s security – policies issued by the subsyndicates benefit from the security, expertise and brand of the Lloyd’s insurance market (S&P, “A+” (strong)/A M Best, “A” (Excellent)) S&P LSA “3+” – S&P interactive Lloyd’s Syndicate Assessment of “3+” reflects the strength of support provided by QBE and its superior operational management • £852 million 2008 GWP • 2008 GWP of £852 million (2007 £799 million) excluding third party RITC policies (refer to note 18 on page 36) • 79.7% 2008 combined operating ratio • Continued focus on underwriting discipline and service excellence • £1.5 billion Total syndicate funds • • • • 04 QBE Syndicate 2999 Annual report 2008 QBE Syndicate 2999 comprises five sub-syndicates and is the primary entity from a Lloyd’s reporting and regulatory perspective. Under this arrangement, sub-syndicate underwriters retain a high degree of autonomy to determine and fulfil their underwriting strategies, whilst benefiting from the combined size, strength and capital base of the umbrella syndicate. Syndicate 2999 is a wholly aligned syndicate, whereby 100% of its capital is provided by QBE Insurance Group. Sub-syndicate capacity allocations are not restrictive and may be adjusted within the overall umbrella allocation. This means the team can respond to underwriting opportunities as they arise, whilst minimising the cost of capital provision. Each of the sub-syndicates (referred to herein as syndicates) has established licences and premium trust funds under their own number for the specific types of business they underwrite. They are all licensed and accredited to underwrite both surplus lines and reinsurance business in the United States and have funded trust funds in accordance with local regulatory requirements. In 2008, Syndicate 2999 wrote total gross income of £852 million QBE Aviation Syndicate 5555 £99 million (12%) Managing Director – Emilio Di Silvio QBE Reinsurance Syndicate 566 £293 million (34%) Managing Director – Jonathan Parry QBE Property Syndicate 2000 £86 million (10%) Managing Director – Bernard Mageean £852 million QBE Syndicate 1886 £92 million (11%) Managing Director – John Neal QBE Marine and Energy Syndicate 1036 £282 million (33%) Managing Director – Colin O’Farrell 05 QBE Syndicate 2999 Annual report 2008 QBE Reinsurance Syndicate 566 Business of the syndicate Jonathan Parry Managing Director QBE Reinsurance Syndicate 566 is a leading excess of loss reinsurance syndicate specialising in non-marine property, aviation, marine, North American and International casualty treaty and personal accident in the Lloyd’s market. Underwriting reinsurance treaties from most parts of the world, 566’s underwriters have an in depth knowledge of their clients and the territories in which they operate. The use of sophisticated catastrophe models enables us to estimate the magnitude and frequency of large events and to analyse and understand our clients’ portfolios effectively. As part of the product and distribution reorganisation outlined earlier for 2008, Syndicate 566 has witnessed the transfer in of the North American and International casualty treaty accounts, previously written by Syndicate 2000. International Property Treaty Ulrich Loessl The international property portfolio is heavily biased towards catastrophe excess of loss reinsurance. Less than 5% of the portfolio is risk exposed. The account is exceptionally well spread geographically, with the United Kingdom, Europe, Japan, Australasia and Latin America comprising the major focus. Much of the portfolio is written in a lead position. Property is the main focus of the portfolio but the account also includes agricultural and engineering portfolios. North American Property Treaty Paul Horgan Over 90% of the North American portfolio emanates from the US, with the remainder from Canada. Of the combined book, the majority is written on a catastrophe excess of loss basis with risk exposed programmes comprising less than 5%. Historically the account has focused on those regional companies operating in single or limited states, but more recently the account has expanded to afford cover to the large stock companies operating on a nationwide basis. The portfolio also includes a specialised agricultural account. International Casualty Treaty Richard Fothergill Syndicate 566 is a recognised market leader in this class. The account is written on both an excess of loss and proportional basis. Geographically, the syndicate focuses on all territories with the exception of the US. Incidental exposures in 06 QBE Syndicate 2999 Annual report 2008 2008 Portfolio split 8 7 1 2 6 5 4 3 1 2 3 4 5 6 7 8 International Property Treaty 18% North American Property Treaty 20% International Casualty Treaty 15% Aviation 5% Marine 6% Personal Accident 7% Worldwide and Retrocession 20% North American Casualty Treaty 9% the US can be accommodated. Syndicate 566 underwrites a diverse book encompassing most liability classes. The syndicate will also look at retrocessional business. Aviation Richard Sammons The syndicate’s aerospace focus is on non-proportional aviation and space treaty reinsurance. The major part of the portfolio comprises excess of loss treaties, protecting insurers and reinsurers of the world’s major airlines, airports and aerospace product manufacturers. The account also targets insurers and co-insurers writing general aviation and hull liability for smaller planes. Syndicate 566 is a member of the SATEC Pool providing cover on satellite launch and in-orbit risks on a proportional basis. Marine Jonathon Dean The syndicate’s marine portfolio covers all aspects of marine business and also includes third party coverages such as P&I and pollution. We write the account on a risk and catastrophe excess of loss basis and the syndicate has the ability and capacity to act as a lead reinsurer. It focuses on middle to high layers avoiding attritional levels. The portfolio currently consists of business emanating from over 50 countries. Personal Accident Peter Wilkins The personal accident account written by the syndicate is split almost equally between risk and catastrophe excess of loss business and primary direct and facultative insurance including lineslips and binders. In addition to PA business, the account also comprises life and travel business. Worldwide and Retrocession Jonathan Parry This is the longest established portfolio in Syndicate 566. The account comprises catastrophe retrocession, catastrophe protections of direct and facultative accounts, and tier 1 and tier 2 risk excess business. The syndicate leads over 80% of the account written and has a significant impact in the quoting process of the remainder. Syndicate 566 targets business with a high risk to reward ratio whilst positioning itself away from attritional loss activity. The syndicate values continuity and has been trading with its core clients for many years. North American Casualty Treaty David Woodruff This account is biased toward risk and catastrophe excess of loss treaty, but most reinsurance structures will be entertained. We split the account between standard lines and professional lines. Historically, professional lines have comprised errors and omissions, healthcare, fidelity and directors’ and officers’ covers. From January 2008 the decision was taken to focus exclusively on healthcare business in this sector. Standard lines comprise general liability, WCA, clash and motor covers. The syndicate tends to target small to medium sized regional portfolios. Claims Mark Wilson Our adjusters are authorised to handle all classes of business. Technical strengths are combined with a pragmatic claims handling philosophy, which recognises the need for proactive and flexible claims management. QBE Marine and Energy Syndicate 1036 Business of the syndicate Colin O’Farrell Managing Director QBE Marine and Energy Syndicate 1036 is a leading marine syndicate specialising in hull, energy, liability, specie, cargo, war and allied risks. Established in 1987, the syndicate underwrites a worldwide account, requiring underwriters to have a comprehensive knowledge of their clients’ businesses and the territories in which they operate. The use of sophisticated software, combined with extensive travel, enables the syndicate to analyse and understand its clients’ needs effectively. As part of the product and distribution reorganisation in 2008, Syndicate 1036 now incorporates the sabotage and terrorism portfolio, previously written by Syndicate 1886 and QBE’s company operations. Cargo Tim Pembroke We write a high quality portfolio of cargo business and are recognised as a leader in hightech, pharmaceutical and manufactured goods as well as excess cargo business. We emphasise the value of long term relationships with our clients and work with them to develop mutually beneficial risk control programmes. Liability Daryl Ewer We are a major leading underwriter in the global liability market, with an account produced from all the major brokers worldwide and from industry specialists. The account comprises pure marine coverages such as P&I, pollution, charterers, stand alone energy liabilities and package policies. Working closely with our colleagues in hull and energy, particularly offshore, we specialise in tailoring complex and unusual coverages to clients’ needs and requirements. We are the leading underwriter to many International Group P&I associations, providing extended coverages, over and above those offered by club rules, as well as reinsurance capacity solutions. Energy Offshore Sam Harrison Writes a portfolio of risks worldwide, from dedicated upstream entities to fully integrated energy companies. We insure offshore risks for oil and gas companies worldwide, specialising in offshore insurance for assets located in the North Sea and the Far East, particularly China. Approximately 60% of the business written is in a lead capacity. 07 QBE Syndicate 2999 Annual report 2008 2008 Portfolio split 7 6 5 4 1 2 1 2 3 4 5 6 7 Cargo 7% Liability 18% Energy Offshore 33% Energy Onshore 17% Specie 7% Hull and War 11% Political Risk and Terrorism 7% 3 Energy Onshore Stephen Saunders A wide range of onshore assets for oil and gas companies worldwide are insured, from well heads to refineries and petro-chemical plants, with particular dominance in the Middle East and Indonesia. Approximately 75% is written in a lead capacity. To complement the above we also underwrite an onshore construction account focusing on erection all risks and associated lines of third party liability. Specie Ryan Joseph We underwrite a worldwide account specialising in the areas of armoured car, general specie, fine art and jewellers’ block. Business is written to all the major brokers, dealing with some of the most prominent institutions in the financial sector and art world. We lead approximately 40% of the business we write. Hull Haydn Costin We write an established high quality hull account. The portfolio, which principally consists of bluewater vessels, includes a significant proportion of builders’ risks, short-tail total loss only, increased value and mortgagees’ interest risks. Risks of physical damage to ports, worldwide are also included. Recognised as leaders in all aspects of the account, we are supported by all the major hull brokers. We maintain a significant presence on market wide initiatives, for example the Joint Hull Committee, which complement our underwriting. War Haydn Costin We write a maritime war account, which includes war risks on vessels, cargo, floating energy risks and maritime liabilities. We are an established leader in the class and are instrumental in setting terms and conditions which are followed worldwide. Political Risk and Terrorism Nicky Ablett Through a specialist underwriting team, we have developed a political risk and terrorism portfolio of broad based, worldwide business. This account complements existing areas of the book, but particularly onshore energy, cargo and specie. Claims Gary Crowley Our well respected claims team works closely with our underwriters to ensure claims are managed to an extremely high standard. The claims team have long standing relationships with surveyors, loss adjusters, lawyers and other professional advisers whose expertise can be brought to bear on our response to a claim. We enjoy a good working relationship with brokers and London insurance market organisations. QBE Syndicate 1886 Business of the syndicate John Neal Managing Director QBE Syndicate 1886 was established for the 2006 year and specialises in non-marine casualty and specialty. The business is focused into a number of areas, each with a specialist underwriting team responsible for its account. The underwriters have dual underwriting authorities allowing them access to Lloyd’s or company paper. By operating on this basis, Syndicate 1886 enables QBE company underwriters to participate in previously inaccessible markets and provides existing Lloyd’s underwriters with additional capacity. This adds significantly to the company’s underwriting capabilities and brings new business to the Lloyd’s market. General Liability Ash Bathia We offer a broad spectrum of insurance and reinsurance products backed by extensive experience in all classes. We have dedicated professionals specialising in public liability, product liability, medical malpractice, product recall, directors’ and officers’ liability, professional indemnity and construction all risks. Financial Institutions Gary Norman We underwrite a broad spectrum account specialising in leading middle market financial institutions and all commercial crime business. This includes comprehensive crime, professional indemnity, directors’ and officers’ liability and commercial crime. 2008 Portfolio split 4 5 3 1 1 2 3 4 5 General Liability 56% Financial Institutions 22% Overseas Motor 14% Specialty 7% Marine Liability 1% 2 Overseas Motor Steve Stone Aiming to underwrite personal lines portfolios, the overseas motor team targets well managed and administered coverholders with good local knowledge and high integrity anywhere in the world, outside North America. Specialty This division comprises the following portfolios: Kidnap and Ransom Graeme Rayner Offering worldwide cover for kidnap, extortion, hijacking and wrongful detention. Bloodstock Graeme Rayner Offering worldwide insurance products for bloodstock and equine, livestock, aquaculture, all risks of mortality, infertility, theft and associated risks. Product Protection Graeme Rayner We have developed a reputation for delivering successful insurance programmes covering extended warranty, GAP insurance and creditor insurance. Marine Liability Robert Johnston We offer intermodal and professional indemnity insurance to companies in the shipping/transport fields. Cover is offered on a worldwide basis, including the US. Claims Andrew McBride The team is focused on delivering outstanding levels of service and expertise to clients across all lines of business. This embedded customer service ethic is supported by innovation and transparency in claims handling and management. The team is also proactive in supporting and embracing new technologies and market initiatives, including the use of electronic claims files. 08 QBE Syndicate 2999 Annual report 2008 QBE Property Syndicate 2000 Business of the syndicate Bernard Mageean Managing Director QBE Property Syndicate 2000 is a leading syndicate operating in the Lloyd’s market, specialising in direct property and accident and health. Dedicated professionals within specialist expert underwriting teams have full authority to trade and clear accountability and responsibility for each account. As part of the product and distribution reorganisation outlined earlier for 2008, Syndicate 2000 has become the exclusive vehicle for property insurance and all accident and health business within umbrella syndicate 2999. Property Direct and Facultative Andrew Stout We have a worldwide property account predominantly at present in North America, for business ranging from small surplus lines commercial and light industrial risks to larger Fortune 1000 type accounts. We are still willing, and have the capacity, to write catastrophe exposed business worldwide. Property Binders Martin Rowling We underwrite a select number of property related and commercial vehicle facilities, enabling agents to bind, on underwriters’ behalf, a comprehensive portfolio of business in the agent’s office. Business under these contracts, predominantly for US based agents, ranges from small to medium sized commercial and industrial risks, homeowner/condominium and real estate type risks and selective catastrophe peril facilities. 2008 Portfolio split 3 2 1 1 Property Direct and Facultative 66% 2 Property Binders 27% 3 Accident and Health 7% Accident and Health Mike Bridgeman Syndicate 2000 has developed a broad range of insurance products supported by extensive experience in all classes. The syndicate has dedicated professionals specialising in general personal accident, high risk personal accident, sports personal accident and film and contingency. Claims Andrew McBride We provide a professional, effective and efficient claims service to our clients and their agents. Our claims handling expertise is used by our underwriters to ensure our future underwriting success. 09 QBE Syndicate 2999 Annual report 2008 QBE Aviation Syndicate 5555 Business of the syndicate Emilio Di Silvio Managing Director QBE Aviation Syndicate 5555 was launched in September 2006 and began writing business incepting 1 October 2006. The objective has always been to develop a balanced portfolio across all classes of business namely general aviation, airlines, products and airports. After our second full year under our belts we are well on our way to achieving this. We will continue to focus on growing the general aviation portfolio in line with the improving market which will further reduce the volatility in the major areas of our business which is in line with our long term strategy of balance across the account. The last two months of 2008 saw us reduce our airline portfolio by approximately 20% on business which we felt was inadequately priced in an improving environment. We have focused on achieving a lead position on the business which allows us to control our claims more robustly and in the process have been successful in a large number of cases, but predominantly on the general aviation portfolio to date. Undoubtedly price is still a major driver in the client’s purchasing criteria, but our approach has been to supplant price as the primary requisite by promoting competitive terms in relation to the service, coverage and security we are able to offer. General Aviation Anthony Prokopiou We are a leader of business in the general aviation market. This is a position that we have cemented during the past 12 months as we continue to build our account in a structured and measured way. This leadership position enables us to manage our clients’ needs effectively and efficiently on both underwriting and claims issues. Our portfolio is very broad in terms of the geographical location of our clients, the aircraft types that we insure and the coverages that we offer. 2008 Portfolio split 3 1 1 General Aviation 52% 2 Airlines 22% 3 Products and Airports 26% 2 We sub-divide our portfolio into three sections: Private Business and Pleasure, which is essentially light aircraft owned by private individuals and flying clubs. Industrial Aid, which consists of fixed wing aircraft and helicopters owned or operated by corporations for the transport of their executives and employees. Commercial, which we categorise as aircraft with a maximum of 50 seats conducting revenue earning flights. The insurance solutions that we provide for all of our clients, and our expertise in the general aviation area, differentiates us from our competitors. Airlines Dan Boultwood Our airline business continues to be written on a co-insurance basis within the international subscription market. Our capacity is available for a complete cross section of worldwide airline business ranging from international, national and regional carriers to charter and cargo airlines. Our focus has been on the major flag carriers during our initial development phase, although our book is constantly under review as the market and the syndicate develop. We have taken leadership on one account at present and although technical pricing of the business has to be our main driver, our long term objective is to become an influential market leader demonstrating our knowledge, skills and expertise in this sector. Products and Airports Graham Daldry Our objective and experience is that of a strong leader, having gained significant participation and influence in the aviation market. We have expanded our underwriting and claims services that we offer directly to the brokers and to our mutual clients. Our areas of expertise include airframe, engine and component manufacturers as well as airport and airport related servicing risks including refuelling operations. Claims Jerry Flaxman Providing our customers with an efficient, sympathetic and speedy resolution to a claim is our primary aim as this is when the insurance policy and our promises come to life. Our claims handling philosophy focuses on being prepared and proactive in providing an effective and professional claims handling service to our clients. We adopt a sympathetic approach to determining any claims issues and with our breadth of expertise and experience can manage the simplest to the most complex and potentially costly claims, fairly and in a timely fashion. 10 QBE Syndicate 2999 Annual report 2008 Risk management The syndicate’s activities expose the business to a number of key risks which have the potential to affect its ability to achieve its business objectives. The board is responsible for ensuring that an appropriate structure for managing these risks is maintained. The board acknowledges that it is not realistic or possible to eliminate risk entirely, and therefore seeks to ensure that the appropriate controls are in place to manage risks effectively in line with the agreed tolerance. The syndicate continues to develop its risk management capability to ensure that an effective framework exists to support the management of all types of risk. Elements of this framework include the regular identification and assessment of the key risks and controls and clearly defined ownership of both the risks and controls. Risk groups The key risks can be grouped under the following headings. Insurance risk The syndicate’s business is to accept insurance risk which is appropriate to enable it to meet its objectives. In line with the QBE Group risk strategy, the syndicate seeks to balance insurance risk with reward. All underwriting divisions are set specific and measurable performance targets which they are expected to achieve by operating within the parameters of the approved business plan. Credit risk In addition to the insurance terms of trade offered as standard, a certain amount of credit risk is unavoidable, as it can arise as a result of the inability to pay or slow payment of any of the syndicate’s counterparties. The syndicate therefore seeks to limit exposure as far as is practical and therefore has established detailed guidelines, procedures, limits and monitoring requirements to mitigate credit risk. Capital and liquidity risk Capital and liquidity risk is the potential that the syndicate is unable to meet its obligations as they fall due or its capital falls below that required by regulators. The objective of QBE’s capital and liquidity risk management is to ensure that capital is optimally managed, that the syndicate remains solvent by a significant margin and that all withdrawals and funding requirements can be met out of readily available sources of funding. QBE undertakes capital exercises to ensure that capital is adequate to meet risks and seeks to maintain a strong liquidity position by holding its assets in liquid funds. Market risk The syndicate’s exposure to financial market risk arises out of the investment decisions made in relation to the investment of Premium Trust Fund assets. Exposure to market risk is managed through the investment strategy, which reflects the appetite of the board. The strategy is deliberately conservative in order to eliminate potential volatility to market fluctuations as much as possible. Operational risk The syndicate seeks to mitigate exposure to operational risks through ensuring that an effective infrastructure, robust systems and controls and appropriately experienced and qualified individuals are in place throughout the organisation. Cash flow risk The syndicate’s exposure to cash flow risk is addressed under the heading of capital and liquidity risk. 11 QBE Syndicate 2999 Annual report 2008 Report of the directors of the managing agent The directors of QBE Underwriting Limited (QUL), the managing agent for Syndicate 2999, present the syndicate’s annual report and audited financial statements for the year ended 31 December 2008. This annual report is prepared using the annual basis of accounting as required by Statutory Instrument No 3219 of 2004 the Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004 (the 2004 Regulations). Principal activity Syndicate 2999 is an umbrella syndicate with Peter Grove as Active Underwriter. For 2008, it comprised the following five actively trading sub-syndicates: Sub-syndicate Managing Director Specialist classes 566 1036 1886 2000 5555 Jonathan Parry Colin O’Farrell John Neal Bernard Mageean Emilio Di Silvio Reinsurance: property; aviation; casualty treaty; personal accident; and marine Marine insurance: hull; energy; liability; specie; cargo; war; and political risks Non-marine: general liability; bloodstock; specialty; product protection; overseas motor; and marine liability Non-marine: property; and accident and health Aviation: general aviation; airlines; and products and airports Business review and future developments For the 2008 financial year Syndicate 2999 produced a combined operating ratio of 79.7% (2007 85.6%) and an insurance profit for the financial year of £166.4 million (2007 £161.8 million), analysed by sub-syndicate as shown in the following table: 5661 £000 1036 £000 1886 £000 2000 £000 5555 £000 2008 Total £000 2007 Total2 £000 Gross premium written Net earned premiums Net claims Acquisition costs Net underwriting profit Profit/(loss) on exchange Other net operating expenses Investment return Total profit for the financial year Claims ratio Combined operating ratio 293,275 206,689 (124,099) (41,700) 40,890 31,102 (26,640) 5,180 50,532 60.0% 78.1% 282,222 158,351 (83,907) (43,726) 30,718 19,491 (25,624) 10,300 34,885 53.0% 84.5% 92,082 69,871 (21,509) (19,047) 29,315 5,381 (14,335) 4,908 25,269 30.8% 70.9% 85,583 81,993 (14,724) (30,976) 36,293 37,497 (29,098) 25,100 69,792 18.0% 45.5% 99,105 71,500 (72,626) (18,818) (19,944) 6,120 (1,450) 1,150 (14,124) 101.6% 121.4% 852,267 588,404 (316,865) (154,267) 117,272 99,591 (97,147) 46,638 166,354 53.9% 79.7% 977,891 742,494 (446,452) (150,454) 145,588 10,011 (48,780) 54,954 161,773 60.1% 85.6% 1 Excludes 2000 and prior open year of account liabilities, which remain in a separate syndicate. 2 Gross written premiums in 2007 included the reinsurance to close of syndicates 456, 980 and 1036 as required by UK GAAP (see note 18 on page 36). On analysis of the account on an underwriting year basis, the 2008 year produced a modest loss in the financial year of £12.2 million, reflecting the tough trading conditions and severity and frequency of losses. This was materially outweighed by a strong prior year performance, coupled with significant releases arising from the run-off portfolios. The Managing Director comments for each sub-syndicate are as follows: Jonathan Parry – QBE Reinsurance Syndicate 566 We are pleased to report an insurance profit of £50.5 million for the 2008 financial year, which represents a combined operating ratio of 78.1%. Unlike the previous two years, 2008 was a more active year for US hurricanes and the syndicate suffered losses from both Ike and Gustav. Hurricane Ike caused nearly US$20 billion of market insured damage both offshore and onshore, producing a loss to the syndicate of US$77.0 million gross, US$41.5 million net. Thankfully, with the exception of the marine account, attritional losses remained low, enabling the account to remain profitable. The result was also assisted by the favourable earn-out of the 2006 and 2007 underwriting years as well as the strong US dollar. With the turmoil in financial markets, demand for reinsurance capacity has again increased, and with a reduction in supply, this has led to a hardening in the market for 2009. We can see terms improving throughout this year and into 2010, which will obviously help the syndicate’s ability to deal with any catastrophic losses. 12 QBE Syndicate 2999 Annual report 2008 The long-tail classes are now fully integrated, and with a new marine reinsurance underwriter on board, we believe the syndicate is well placed to take advantage of the current market upturn. We are also pleased to report the acceptance of Syndicate 566 open year reinsurance to close premium following a successful consultation with all capital providers. Colin O’Farrell – QBE Marine and Energy Syndicate 1036 After what can only be described as a quite extraordinary year it is particularly pleasing to be able to record another exceptional result where the syndicate has delivered a combined operating ratio of 84.5% and a profit of £34.9 million. I say extraordinary because who would have predicted that the global economic crisis would deepen at such speed, whilst the market endured yet another year of significant hurricane activity culminating in Hurricane Ike battering the coastline of the Gulf of Mexico. Both events have had substantial impact on the syndicate. As we entered 2008, market conditions in all areas we trade continued to worsen. Underwriters’ memories had been wiped clean of the troubles of 2005 and they were fooled into thinking that 2006 and 2007 years were the norm. New entrants had also emerged and intermediaries were quick to remind underwriters that there were always alternatives. All was not lost, as in the spring of 2008 the onshore energy market had a short and sharp reminder of the exposures that exist when several mining losses occurred causing a temporary halt to the rate cutting. As the year progressed the effects of the economic crisis became apparent, and accelerated sharply in the last quarter. At this time the market began to react. No longer was it acceptable to offer reductions, but business that sought such terms were stringently reviewed and risk management processes they deployed rigorously evaluated. However, there still appears to be resistance to this hardening. Brokers and clients alike continue to seek reductions: brokers, for fear of being the individual who delivers bad news to the client and; clients due to the effects that the current global recession is having on their own business. Cost savings became of paramount importance as opposed to expertise and security. Hurricane Ike has tested the resolve of the market. Few experts would have predicted that a category 2 hurricane could have caused such damage. As a consequence, capital providers, risk modellers and industry experts alike have reviewed their positions and thinking with regard to hurricanes. As we enter 2009 many capital providers have withdrawn their capacity for such risks, both insurance and reinsurance. We remain firmly in the market place but our underwriting of this risk will become even more vigilant and we will only provide the product to the companies that can show outstanding risk management. We highlighted last year that the diversity of our product offering had enabled us to deliver the result we had. This comment is echoed for 2008. Whilst our energy portfolio has suffered in 2008 other accounts have made substantial contributions. Of particular note are our political risk and political violence accounts, whilst we only started underwriting these for the 2005 year they are now producing healthy profits. Another important contributor to the result has been the development of our prior years. Disappointingly our 2007 underwriting year has had a number of large risk losses during 2008, however this has been offset by prior years and it demonstrates the robustness of the syndicate’s reserving policy. The tenacity shown by all involved in this process is tremendous and I express a special note of thanks to the syndicate’s claims team for their contribution. In the aftermath of the catastrophic losses of 2005, reinsurance was a scarce commodity. However, there was a surfeit of capacity in 2008 following the relatively benign loss environment in recent years. How times change. The full effects of the “credit crunch” and subsequent lack of capital has meant reinsurers have retrenched and the amount of capacity being deployed for catastrophic risks, particularly USA exposed, has become almost non-existent. Having expanded our product capability in 2008 with the ability to offer dual pens utilising either our Lloyd’s or QBE paper and licenses, it is very pleasing to announce further diversification. During 2008 we expanded our distribution by opening an office in Singapore operating on the Lloyd’s Asia platform and now offer capacity for risks in the region in conjunction with our Asian colleagues. Furthermore, in December 2008 we purchased Burnett & Co, a USA based MGA, with offices in both Houston and New Orleans to enable us to further strengthen our position in a very important market for QBE. Both platforms will enable us to offer our products in a fast and efficient way as our customer demands change. Given the current global economic conditions, it will be a tremendous challenge to replicate the 2008 result for 2009. A worldwide recession is upon us, capital is difficult to acquire, assureds face challenges not seen for a generation or more and commodity prices have plummeted from their recent all time highs. However, I am sure that with the team we have within the syndicate, allied to the support we receive from management we will meet the challenge head on and succeed. Lastly, a personal note of thanks to all the syndicate staff for their continued fortitude and hard work in producing the result. 13 QBE Syndicate 2999 Annual report 2008 Report of the directors of the managing agent continued John Neal – QBE Syndicate 1886 Syndicate 1886 remains a cornerstone in enabling QBE European Operations’ underwriters to deliver its products to brokers and clients around the globe. In 2008 gross written premiums increased to £92 million (2007 £53 million) coupled with an impressive combined operating ratio of 70.9%. Whilst appropriate provisions have been made on the 2008 underwriting year for the potential of claims arising from the global credit and liquidity crisis, the profitable outturn of the 2007 underwriting year and a significant surplus on the motor account prior years have bolstered profits. The syndicate continues to add to both its product range and its geographical reach, further increasing our presence in Canada and adding professional indemnity covers and a contractors all risks package to its stable. Bernard Mageean – QBE Property Syndicate 2000 Syndicate 2000 was restructured with effect from 1 January 2008, becoming the exclusive vehicle for the property, leisure and sports insurance portfolios within Syndicate 2999. Prior to 2008 the syndicate wrote a range of non-marine business, property and casualty, insurance and reinsurance. The 2008 calendar year produced a profit of £69.8 million and a combined operating ratio of 45.5%, due primarily to 2006 and prior underwriting year performances. The property portfolio experienced a difficult year in 2008 which also adversely impacted 2007. The causes have been inadequate and reducing rates, and a large increase in both the frequency and more importantly the severity of losses. This was especially true in the mineral, metals and utility industries. On top of this there has been a frequency of natural catastrophe losses, the largest of which, Hurricane Ike, has slightly impacted our reinsurance programme; but others such as Gustav and Dolly have also contributed lesser amounts. The 2007 underwriting year deteriorated during 2008, not only because of the increased attrition on the property account, but also due to adverse developments on the financial institutions portfolio. Our analysis of the syndicate’s US sub-prime exposures has not changed materially over the past 12 months. However, as the turmoil in worldwide financial markets gathered pace during 2008, we had to strengthen our overall reserves for this sector. The 2006 and prior years have performed extremely well during 2008. Significant releases have been made from the various run-off syndicates previously reinsured into Syndicate 2000, the largest element relating to an anticipated global settlement of the so-called “IPO Laddering” claims, which mainly impacted the 2000 and 2001 years of account. There have also been material releases from the 2004-2006 years of Syndicate 2000’s reinsurance casualty portfolios. The outlook for 2009 is more encouraging. From late 2008, rates, especially in the USA and in the problem industries, started rising and so far in 2009 the pace of increase has accelerated. Rates in other territories have so far been slow to follow suit but we are expecting all rates to harden as the year progresses. Emilio Di Silvio – QBE Aviation Syndicate 5555 We are disappointed to have produced an underwriting loss for 2008. This is a reflection of difficult market trading conditions for all sectors of our business. The underwriting loss comes largely from our airlines account, from risks written during the fourth quarter of 2007 when the world’s major aviation risks renew. During 2008, airline rates increased most significantly towards the end of the year although, irrespective of improving market conditions, we took the decision to reduce our airline portfolio until such time that we are able to achieve further improvement of rates. We have developed an airline rating tool to support our decision making process in this regard. The most noticeable incident in the year was the Spanair loss of 20 August 2008. Our general aviation business is developing to plan although market conditions have been such that an underwriting loss resulted. Our products and airport account continues to be profitable. During the latter part of 2008, the products, airports and general aviation portfolios began to stabilise and with airline risks receiving the much needed rate increases, there is now a brighter prospect of returning to underwriting profit. We are optimistic about 2009 and believe that the market will improve further thus offering us greater opportunities. 14 QBE Syndicate 2999 Annual report 2008 Investment policy QBE European Operations operates an investment committee which is responsible for recommending to the QUL agency board appropriate investment policy and strategy, and which also monitors the performance of investment managers and their compliance with internal guidelines and external regulation. The investment policy is designed to ensure that appropriate levels of liquidity, credit and investment risk are maintained. Syndicate investments are currently limited to fixed income bonds and money market instruments. The majority of portfolios have an average credit rating equivalent to or better than Standard and Poor’s “AA”. The minimum permitted credit quality is “A-”. The performance of the investment manager is monitored against an absolute return mandate with other reference benchmarks or peer group performance used as key performance indicators. Management of the investment portfolios for the syndicate is delegated under an arm’s length agreement to Minster Court Asset Management (UK) Ltd, (the investment manager), a wholly owned subsidiary of the QBE Group. The activities of the investment manager are regulated by the Financial Services Authority (FSA). Investment performance The total investment returns achieved for each calendar year are set out below. These include income earned on funds which are not managed by the investment manager, such as short term liquid deposits and certain regulatory overseas deposits. The combined total currency return for the year was 3.8% (2007 5.2%). 2008 Average funds 000 2008 Actual return % 2008 Target return % 2007 Average funds 000 2007 Actual return % 2007 Target return % Portfolio currency Canadian dollar Euro Sterling US dollar 183,311 46,770 228,482 1,643,560 5.0 1.9 6.9 3.0 4.3 4.0 5.2 4.6 139,114 51,593 242,845 1,512,068 4.3 3.3 5.6 5.3 4.0 3.4 4.8 4.9 The benchmark target for fixed income portfolios is now an absolute return yield to be agreed for each currency on an annual basis by the QBE European Operations executive board. Targets for each currency agreed for each calendar year are shown above. Individual currency investment returns varied in performance when compared to their respective currency targets for the year. Outperformance was achieved in the sterling and Canadian portfolios whilst the euro and US dollar funds fell short of their benchmark. Overall performance for the syndicate was below the weighted target return of 4.6% but slightly better than the currency weighted cash equivalent return. During 2008, the investment manager adopted a cautious stance by maintaining relatively short duration in all portfolios. As the intensity of the credit crunch worsened during the year, the investment strategy adopted for the syndicate was dominated by an emphasis on preservation of capital as the primary goal. As a result of this strategy, the syndicate investment portfolios performed favourably when compared with returns in the insurance industry peer group and managed funds avoided any credit defaults in 2008. After taking account of the investment return, profit payments and significant exchange rate movements, overall syndicate funds closed the year below budgeted target but materially above their opening level. Corporate governance Managing agency board The board is committed to high standards of corporate governance and has established a practical governance framework which includes the delegation of considerable authority to divisional product management committees and a number of other authorised committees. All of the committees comprise appropriately skilled and experienced members, and operate under formal terms of reference. The board comprises 19 executive directors and three non-executive directors and meets seven times a year. Divisional product management committees These committees are responsible for the reporting and review of all aspects of the division’s day to day management of underwriting and meet monthly. Each committee is chaired by the divisional Managing Director and comprises senior underwriting and management representatives of the division, together with representatives of the managing agency board. 15 QBE Syndicate 2999 Annual report 2008 Report of the directors of the managing agent continued Other committees • Strategic underwriting committee: the committee is responsible for developing the business strategy and agrees and oversees the implementation of appropriate policies and controls for underwriting activities. The committee is chaired by the Chief Operating Officer. • General business committee: the committee reviews and approves routine matters where the board has delegated authority to the committee; it makes recommendations where board approval is required; and reviews and approves routine matters and regulatory returns which do not require board approval. The committee is chaired by the Compliance and Risk Management Director. Group security committee: the committee is responsible for establishing and monitoring procedures and systems for the evaluation of all reinsurance security and outwards reinsurance intermediaries to be utilised by regulated entities within the Group. The committee is chaired by the Chief Underwriting Officer. Information technology committee: the committee is responsible for reviewing and recommending the IT strategy to the board, recommending the annual IT plan, implementing strategy and providing oversight of material IT projects. The committee is chaired by the Chief Operating Officer. Investment committee: the committee is responsible for making recommendations to the board as to the appropriate investment policy and guidelines for each of the syndicates’ funds and to take responsibility for the day to day implementation and monitoring of the agreed strategy. The committee is chaired by the Chief Financial Officer. Audit committee: the committee is responsible for assisting the boards in discharging their oversight responsibilities, by overseeing the financial reporting process and reviewing the effectiveness of the internal financial control and risk management system, the effectiveness of the internal audit function, the independent audit process including recommending the appointment and assessing the performance of the external auditor, and the process for monitoring compliance with laws and regulations. The committee is chaired by a non-executive director. Reserving committee: the committee is primarily responsible for undertaking a review of the reserve information (including reinsurance to close and open year reserve information produced by each managed syndicate) in support of the accounts and solvency returns, and to be satisfied that the level of total closed and open year reserves have been calculated, where appropriate having regard to Lloyd’s Code for Management for Reserving Risks, Regulations and Byelaws, and are consistent with the standards required to attain satisfactory audit and actuarial opinions. The committee is chaired by the Chief Actuarial Officer. Capital committee: the committee is responsible for providing guidance and review on capital assessment issues in relation to the FSA and Lloyd’s regimes. The committee is chaired by the Chief Actuarial Officer. Risk management committee: the committee is responsible for ensuring that all risks to QUL’s objectives are identified, assessed and monitored in accordance with the overall risk policy. The committee is chaired by a non-executive director. Internal audit committee: the committee provides assurance that an appropriate control framework is in place to mitigate business risk and that these controls are both functioning in practice and consistent with QBE Group and QUL procedures together with legislative and regulatory requirements. The committee also provides assurance that compliance and monitoring procedures are operating effectively. The committee is chaired by a nonexecutive director. • • • • • • • • Internal audit An independent internal audit function provides assurance to the internal audit committee as to the effectiveness of internal systems and controls, makes recommendations for improvement and monitors progress towards completion via management action plans. Internal audit also provides independent feedback on the risk management process. Risk management Details of the principal risks and uncertainties facing the syndicate are shown on page 11. Other governance issues QUL has adopted a code of conduct which outlines a set of general business ethics that apply to all employees when conducting any activity on behalf of the company. The code of conduct requires employees to carry on business in an open and honest manner with customers, shareholders, employees, regulatory bodies, outside suppliers, intermediaries and the community at large. The code also deals with a number of other requirements including whistle blowing, confidentiality, disclosure of information and conflicts of interest. Other policies are in place to cover areas such as health and safety, harassment, equal opportunities and financial crime. 16 QBE Syndicate 2999 Annual report 2008 Directors Details of the directors of the managing agent that served during the year are shown on page 18. Creditor payment policy The managing agent’s policy on the payment of creditors is to abide by London insurance market practices, including those of Lloyd’s and the International Underwriting Association. The managing agent agrees terms with its other suppliers when it enters into binding purchase contracts. The managing agent seeks to abide by the payment terms agreed with these suppliers whenever it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions. Statement of managing agent’s responsibilities The Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004 require the managing agent to prepare syndicate annual accounts at 31 December each year which give a true and fair view of the state of affairs of the syndicate as at that date and of its profit or loss for that year. In preparing the syndicate annual accounts, the managing agent is required to: • • • • Select suitable accounting policies which are applied consistently, subject to changes arising on the adoption of new accounting standards in the year Make judgements and estimates that are reasonable and prudent State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements Prepare the financial statements on the basis that the syndicate will continue to write future business unless it is inappropriate to presume that the syndicate will do so The directors confirm that they have complied with the above requirements in preparing the annual accounts for Syndicate 2999. The managing agent is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the syndicate and enable it to ensure that the syndicate annual accounts comply with the 2004 Regulations. It is also responsible for safeguarding the assets of the syndicate and hence for taking reasonable steps for prevention and detection of fraud and other irregularities. Statement of disclosure of information to auditors Each of the persons who is a director of the managing agent at the date of this report confirms that: • • So far as each of the directors is aware, there is no information relevant to the audit of the syndicate’s financial statements for the year ended 31 December 2008 of which the auditors are unaware; and The director has taken all the steps that he ought to have taken in his duty as a director in order to make himself aware of any relevant audit information and to establish that the syndicate’s auditors are aware of that information. Auditors The directors of the managing agent intend to reappoint PricewaterhouseCoopers LLP as the syndicate’s auditors. By order of the Board S M Boland Company Secretary QBE Underwriting Limited Plantation Place 30 Fenchurch Street London EC3M 3BD 17 March 2009 17 QBE Syndicate 2999 Annual report 2008 Managing agency – corporate information Directors The directors of QUL, the managing agent, who served during the year ended 31 December 2008 and subsequently are: A M Bathia I D Beckerson S P Burns D A Constable M F Crane E Di Silvio P A Dodridge D Grossman P E Grove R B M Johnston B Mageean V McLenaghan J D Neal C R O’Farrell F M O’Halloran P J O’Neill P V Olsen* J W Parry B W Pomeroy* H M Posner* G S Rayner T J Whittaker D J Winkett Appointed 1 January 2008 Appointed 1 January 2008 Appointed 1 January 2008 Appointed 10 March 2009 Appointed 11 June 2008 Appointed 1 January 2008 Resigned 11 June 2008 Appointed 1 January 2008 Appointed 1 January 2008 *non-executive director Directors’ interests None of the directors were members of the syndicate for the years of account open during the period of these accounts. Secretary S M Boland Registered office Plantation Place 30 Fenchurch Street London EC3M 3BD Auditors PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Hay’s Galleria 1 Hay’s Lane London SE1 2RD 18 QBE Syndicate 2999 Annual report 2008 Independent auditors’ report to the members of Syndicate 2999 We have audited the syndicate annual accounts of Syndicate 2999 for the year ended 31 December 2008 which comprise the profit and loss account, the balance sheet, the cash flow statement and the related notes. These accounts have been prepared under the accounting policies set out therein. Respective responsibilities of managing agent and auditors The managing agent’s responsibilities for preparing the syndicate annual accounts in accordance with the Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004 and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of managing agent’s responsibilities. Our responsibility is to audit the syndicate annual accounts in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the syndicate’s members as a body and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the syndicate annual accounts give a true and fair view and are properly prepared in accordance with the Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004. We also report to you whether, in our opinion, the information given in the report of the directors of the managing agent is consistent with the syndicate annual accounts. We also report to you if, in our opinion, the managing agent has not kept proper accounting records in respect of the syndicate, if the syndicate annual accounts are not in agreement with the accounting records, if we have not received all the information and explanations we require for our audit or if information specified by law regarding remuneration of the directors of the managing agent and the active underwriter and other transactions is not disclosed. We read other information attached to the syndicate annual accounts and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the syndicate annual accounts. This other information comprises only the report of the directors of the managing agent and the information on pages 01 to 11. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the syndicate annual accounts. It also includes an assessment of the significant estimates and judgements made by the managing agent in the preparation of the syndicate annual accounts, and of whether the accounting policies are appropriate to the syndicate’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the syndicate annual accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the syndicate annual accounts. Opinion In our opinion: • • • the syndicate annual accounts give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the syndicate’s affairs as at 31 December 2008 and of its profit and cash flows for the year then ended; the syndicate annual accounts have been properly prepared in accordance with the Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004; and the information given in the report of the directors of the managing agent is consistent with the syndicate annual accounts. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London, United Kingdom 17 March 2009 Note: The maintenance and integrity of the QBE website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 19 QBE Syndicate 2999 Annual report 2008 Profit and loss account: technical account – general business For the year ended 31 December 2008 2008 Notes £000 £000 £000 2007 £000 Earned premiums, net of reinsurance Gross premiums written – continuing operations discontinued operations Gross premiums written Outward reinsurance premiums Net premiums written Changes in the provision for unearned premiums: Gross amount Reinsurers’ share 3 851,963 304 852,267 (217,767) 634,500 (49,975) 3,879 (46,096) 836,516 141,375 977,891 (226,993) 750,898 (9,216) 812 (8,404) 742,494 54,954 3 Earned premiums, net of reinsurance Investment return transferred from the non-technical account Claims incurred, net of reinsurance Claims paid Gross amount Reinsurers’ share Changes in the provision for claims Gross amount Reinsurers’ share Claims incurred, net of reinsurance Net operating expenses Balance on technical account – general business Attributable to: Continuing operations Discontinued operations 4 5 588,404 46,638 (458,859) 144,759 (314,100) (55,371) 52,606 (2,765) (316,865) (151,823) 166,354 (442,453) 198,704 (243,749) (189,071) (13,632) (202,703) (446,452) (189,223) 161,773 119,523 46,831 166,354 140,362 21,411 161,773 The notes on pages 25 to 36 form an integral part of these financial statements. 20 QBE Syndicate 2999 Annual report 2008 Profit and loss account: non-technical account For the year ended 31 December 2008 Notes 2008 £000 2007 £000 Balance on technical account – general business Investment income Unrealised losses on investments Unrealised gains on investments Investment expenses and charges Investment return Allocated investment return – transferred to general business account Profit for the financial year 8 166,354 50,400 (2,445) – (1,317) 46,638 (46,638) 166,354 161,773 55,480 – 609 (1,135) 54,954 (54,954) 161,773 8 There are no recognised gains or losses for the current and preceding year other than those included in the profit and loss account above and therefore no statement of recognised gains and losses has been presented. The notes on pages 25 to 36 form an integral part of these financial statements. 21 QBE Syndicate 2999 Annual report 2008 Balance sheet As at 31 December 2008 Assets Investments Financial investments Reinsurers’ share of technical provisions Provision for unearned premiums Claims outstanding Notes 2008 £000 2007 £000 9 1,414,383 1,078,880 37,226 743,313 780,539 33,347 530,572 563,919 291,499 169,620 928 462,047 12,658 65,750 78,408 26,094 – 63,109 89,203 2,272,457 Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Other debtors 11 367,450 242,249 875 610,574 Other assets Cash at bank and in hand Overseas deposits 12 10,136 69,768 79,904 Prepayments and accrued income Accrued interest Other payments and accrued income Deferred acquisition costs 15,287 89 71,618 86,994 Total assets 2,972,394 The notes on pages 25 to 36 form an integral part of these financial statements. 22 QBE Syndicate 2999 Annual report 2008 Liabilities Capital and reserves Member’s balance Technical provisions Provision for unearned premiums Claims outstanding Notes 2008 £000 2007 £000 13 172,318 357,564 2,098,100 2,455,664 105,426 307,588 1,642,221 1,949,809 88,547 95,692 32,789 217,028 194 2,272,457 Creditors Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other creditors 14 109,952 143,085 91,290 344,327 Accruals and deferred income Total liabilities 85 2,972,394 These financial statements on pages 20 to 36 were approved by the Board of QUL on 17 March 2009 and were signed on its behalf by D J Winkett Director 17 March 2009 The notes on pages 25 to 36 form an integral part of these financial statements. 23 QBE Syndicate 2999 Annual report 2008 Statement of cash flows For the year ended 31 December 2008 Notes 2008 £000 2007 £000 Net cash inflow from operating activities Transfer to member in respect of underwriting participations Distribution of profits Open year profit release Other Financing Cash calls received 129,861 (19,950) (79,624) – 40 30,327 376,772 (46,476) (59,197) (520) 44 270,623 5,081 11,091 254,451 270,623 Cash flows were invested as follows: (Decrease)/increase in cash holdings (Decrease)/increase in overseas deposits Net portfolio investments Net investment of cash flows 15 15 15 (5,382) (5,909) 41,618 30,327 Notes 2008 £000 2007 £000 Reconciliation of profit to net cash flow from operating activities Profit for the financial year Unrealised investment (gains) Increase in net technical provisions (Increase)/decrease in debtors Increase/(decrease) in creditors Other Net cash inflow from operating activities 166,354 (306,672) 289,235 (146,318) 127,190 72 129,861 161,773 (3,817) 208,414 25,536 (14,987) (147) 376,772 The notes on pages 25 to 36 form an integral part of these financial statements. 24 QBE Syndicate 2999 Annual report 2008 Notes to Heading the financial statements Forming part of the financial statements 1 Accounting policies a) Basis of preparation These financial statements have been prepared in accordance with the Insurance Accounts Directive (Lloyd’s Syndicate and Aggregate Accounts) Regulations 2004 and applicable Accounting Standards and comply with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers dated December 2005 (as amended in December 2006), except that foreign exchange gains and losses are taken to the profit and loss technical account. The accounts incorporate all transactions committed to by the 2008 year of account and prior years of account. The directors of the managing agent have prepared the financial statements on the basis that the syndicate will continue to write future business. The ability of the syndicate to meet its obligations as they fall due is underpinned by the support provided by Lloyd’s solvency process and its chain of security for any members who are unable to meet their underwriting liabilities. Members’ funds at Lloyd’s are further explained in note 2. b) Insurance The result is determined on an annual basis whereby the incurred cost of claims, commission and related expenses are charged against the earned portion of premiums, net of reinsurance, as described below. i) Premiums written Premiums written comprise premiums on contracts incepted during the financial year, together with adjustments made in the year to premiums written in prior years. Premiums are shown gross of commissions payable to intermediaries and exclude taxes and duties levied on them. Estimates are included for premiums due but not yet received or notified, less an allowance for cancellations. ii) Unearned premiums Unearned premiums represent the proportion of premiums written in the year that relate to unexpired terms of policies in force at the balance sheet date, calculated on the basis of established earnings patterns. iii) Reinsurance premium ceded Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards business being reinsured. iv) Claims provisions and related recoveries Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not reported and related expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries. Provision is made at the year end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported to the syndicate. The estimated cost of claims includes expenses to be incurred in settling claims and allows for the expected value of salvage and other recoveries. Outstanding claims and reinsurance recoveries are estimated by reviewing individual claims and making allowance for claims incurred but not reported using past experience and trends adjusted for foreseeable events. Case estimates are set by experienced claims technicians, applying their skill and specialist knowledge to the circumstances of individual claims. The ultimate cost of outstanding claims, including claims incurred but not reported, is estimated by the syndicate actuaries who apply recognised actuarial techniques considered appropriate for each portfolio, such as the Chain Ladder and Bornhuetter-Ferguson methods. These methods take into account, amongst other things, statistical analysis of the development of the value and frequency of past claims and the results of analyses undertaken at the point of underwriting. Techniques considered appropriate for specific portfolios include contract by contract analysis, segmentation by subclass, and stochastic analysis. Classes of business are analysed at a level of detail appropriate to their materiality. Allowance is made for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or decrease when compared with the cost of previously settled claims, for example, one-off occurrences and changes in mix of business, policy conditions or the legal environment. The syndicate actuaries produce an estimate of reserves, which is reviewed by an independent actuarial firm, and is then assessed by QBE management with input from the syndicate underwriting and claims experts. 25 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 1 Accounting policies continued iv) Claims provisions and related recoveries continued As provisions for claims outstanding are based on information which is currently available, the eventual outcome may vary from the original assessment depending on the nature of information received or developments in future periods. For certain classes of business including liability and other long-tail classes written by the syndicate, claims may not be apparent for many years after the event giving rise to the claim has happened. These classes will typically display greater variation between initial estimates and final outcomes. Differences between the estimated cost and subsequent re-estimation or settlement of claims are reflected in the technical account for the year in which these claims are re-estimated or settled. Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability. v) Unexpired risks provision Provision is made for any deficiencies arising when unearned premiums, net of associated acquisition costs, are insufficient to meet expected claims and expenses after taking into account future investment return on the investments supporting the unearned premiums provision and unexpired risks provision. The expected claims are calculated having regard to events that have occurred prior to the balance sheet date. Unexpired risks surpluses and deficits are offset where business classes are managed together. vi) Acquisition costs Acquisition costs, which represent commission and other costs related to the acquisition of new insurance contracts, are deferred subject to recoverability and amortised over the period to which the related premiums are earned. vii) Reinsurance to close Following the end of the third year, the underwriting account of each Lloyd’s syndicate is normally closed by reinsurance into the following year of account. The amount of the reinsurance to close (RITC) premium is determined by the managing agent, generally by estimating the cost of claims notified but not settled together with the estimated cost of claims incurred but not reported at that date and claims handling costs. The payment of an RITC premium does not eliminate the liability of the closed year for outstanding claims. If the reinsuring syndicate was unable to meet its obligations, and other elements of Lloyd’s chain of security were to fail, then the closed underwriting account would have to settle the outstanding claims. The directors of the managing agent consider that the likelihood of such a failure of the RITC is extremely remote, and consequently the RITC has been deemed to settle liabilities outstanding at the closure of an underwriting account. c) Foreign currency transactions Transactions denominated in foreign currencies are translated into sterling at the rate of exchange prevailing at the time of the transaction. Assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange prevailing at the balance sheet date with the exception of non-monetary assets and liabilities which are maintained at historic rates. Exchange differences are included in the technical account, except for differences arising on the member’s balance, which are included in members’ balances. d) Financial assets Financial assets are managed on a fair value basis in accordance with the syndicate’s investment strategy. The syndicate has therefore elected to measure all financial assets at fair value through the profit and loss non-technical account, except where noted below. Listed investments are stated at fair value on current bid prices quoted by the relevant exchanges. Unlisted investments are carried at the directors’ estimate of the current fair value, except as stated below. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently stated at fair value obtained from quoted market prices in active markets. Financial assets are derecognised when the right to receive future cash flows from the assets has expired, or has been transferred, and the Group has transferred substantially all the risks and rewards of ownership. 26 QBE Syndicate 2999 Annual report 2008 Heading 1 Accounting policies continued e) Investment return Investment return comprises all investment income, realised investment gains and losses and movements in unrealised gains and losses, net of investment expenses, charges and interest. Realised gains and losses on investments carried at fair value are calculated as the difference between net sale proceeds and purchase price. Unrealised gains and losses on investments represent the difference between the valuation at the balance sheet date and their purchase price, or if they have previously been valued, their valuation at the previous balance sheet date, together with a reversal of unrealised gains and losses recognised in earlier accounting periods in respect of investment disposals in the current year. Investment return is initially recorded in the non-technical account. A transfer is made from the non-technical account to the general business technical account. Investment return has been wholly allocated to the technical account as all investments related to the technical account. f) Taxation Under Schedule 19 of the Finance Act 1993 managing agents are not required to deduct basic rate income tax from trading income. In addition, all UK basic rate income tax deducted from syndicate investment income is recoverable by managing agents and consequently the distribution made to the member is gross of tax. Capital appreciation falls within trading income and is also distributed gross of tax. No provision has been made for any United States Federal Income tax payable on underwriting results or investment earnings. Any payments on account made by the syndicate during the year are included in the balance sheet under the heading “member’s balance”. No provision has been made for any overseas tax payable by the member on underwriting results. g) Administrative expenses Administrative expenses are taken into account on an accruals basis. These recharged expenses include the costs of staff, who are employed by QBE Management Services (UK) Limited. QBE Management Services (UK) Limited operates both defined benefit and defined contribution pension schemes, the expense of which is included in the recharges. h) Profit commission Profit commission is recognised on the basis of the annual accounting result for each year of account, and charged to the syndicate as incurred. For the 2008 year of account no profit commission has been charged by the managing agent. For prior years of account profit commission was charged by the managing agent at a rate of 20% of profit subject to the operation of a deficit clause. i) Change in accounting standards The following accounting standards were adopted by the syndicate this year as a result of the purchase of derivative contracts in the year and accounting for them at fair value: i) The syndicate has adopted FRS 26, “Financial Instruments: Measurement”. There is no impact on current or prior years’ profit or net assets resulting from the adoption of this standard as previously the syndicate has valued its financial instruments at fair value. In addition, the syndicate has reviewed the classification of its contracts with policyholders and has determined that they are all insurance contracts. Following adoption of FRS 26, the syndicate has adopted FRS 23, “The Effects of Changes in Foreign Exchange Rates”. There is no impact on the current or prior years’ profit or net assets resulting from the adoption of this standard. ii) iii) Following adoption of FRS 26, the syndicate has adopted FRS 29, “Financial Instruments: Disclosures”. There is no impact on the current or prior years’ profit or net assets resulting from the adoption of this standard. 27 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 2 Capital Each syndicate in Lloyd’s is required to carry out a self assessment of the capital it requires, the Individual Capital Assessment (ICA). This is required to reflect the level of capital needed to ensure that the syndicate will remain solvent for the next 12 months in 99.5% of future foreseeable scenarios. QBE has developed a sophisticated stochastic risk-based capital model over the past three years, which incorporates the key risks being faced by each of the legal entities. The output from this model, which is tailored to QBE’s risk profile, is reported to the Capital Committee, which in turn recommends it to the relevant QBE Boards for adoption. The ICAs have been reviewed by Lloyd’s, and form the basis of the minimum capital required by the syndicate. Every member is required to hold capital at Lloyd’s which is held in trust and known as Funds at Lloyd’s (FAL). These funds are intended primarily to cover circumstances where syndicate assets prove insufficient to meet participating members’ underwriting liabilities. The level of FAL that Lloyd’s requires a member to maintain is determined by Lloyd’s based on FSA requirements and resource criteria. FAL has regard to a number of factors including the nature and amount of risk to be underwritten by the member and the assessment of the reserving risk in respect of business that has been underwritten. Since FAL is not under the management of the managing agent, no amount has been shown in these financial statements by way of such capital resources. However, the managing agent is able to make a call on the member’s FAL to meet liquidity requirements or to settle losses. All externally imposed capital requirements have been complied with during the year. QBE’s capital model has been embedded in the business, and as well as assessing minimum capital requirements for QBE entities, it has also been used to: • • • allocate capital to class of business for business planning and performance monitoring assess the effectiveness of existing reinsurance protections and new reinsurance strategies consider the implications of Solvency II on the business 3 Segmental information Gross premiums written £000 Gross premiums earned £000 Gross claims incurred £000 Gross operating expenses £000 Reinsurance balance £000 Total £000 2008 Direct insurance: Accident and health Motor (third party liability) Marine, aviation and transport Fire and other damage to property Third party liability Credit and suretyship Miscellaneous Reinsurance acceptances Total 15,669 11,142 113,079 80,931 136,129 18,042 (4) 374,988 477,279 852,267 12,132 5,245 107,325 81,921 146,638 13,971 (4) 367,228 435,064 802,292 (4,186) (3,669) (93,643) (52,954) (139,520) 1,452 1,733 (290,787) (223,443) (514,230) (3,019) (2,034) (21,624) (29,012) (25,049) (5,324) (11) (86,073) (65,751) (151,824) (2,707) 119 (207) (9,659) 33,442 (6,235) (1,400) 13,353 (29,876) (16,523) 2,220 (339) (8,149) (9,704) 15,511 3,864 318 3,721 115,993 119,714 28 QBE Syndicate 2999 Annual report 2008 3 Segmental information continued Gross premiums written £000 Gross premiums earned £000 Gross claims incurred £000 Gross operating expenses £000 Reinsurance balance £000 Total £000 2007 Direct insurance: Accident and health Motor (third party liability) Marine, aviation and transport Fire and other damage to property Third party liability Credit and suretyship Miscellaneous Reinsurance acceptances Total 10,238 9,733 104,979 75,282 145,117 12,425 (53) 357,721 620,170 977,891 8,864 9,859 98,213 77,479 119,254 12,376 (38) 326,007 642,668 968,675 (1,224) (9,462) (50,488) (31,527) (95,413) (3,503) 171 (191,446) (440,078) (631,524) (2,372) (2,432) (25,503) (21,296) (33,783) (2,935) (46) (88,367) (100,857) (189,224) (919) (143) (15,086) (20,220) (1,191) (5,883) (140) (43,582) 2,473 (41,109) 4,349 (2,178) 7,136 4,436 (11,133) 55 (53) 2,612 104,206 106,818 The geographical analysis of gross premiums written by destination of risk is as follows: 2008 £000 2007 £000 UK Other EU countries US Other countries 83,776 78,740 191,909 497,842 852,267 267,071 68,748 214,984 427,088 977,891 The above includes the effects of RITC accepted as per note 18, which is wholly included in the “reinsurance acceptances” segment. All premiums were concluded in the UK. 4 Claims outstanding During the year there was a positive net run-off development of £126,187,000 (2007 £42,938,000), of which the main contributor was reinsurance accepted, with a positive development of £97,123,000 (2007 £39,767,000). 5 Net operating expenses 2008 £000 2007 £000 Acquisition costs – direct commission Acquisition costs – other Change in deferred acquisition costs Administrative expenses Reinsurance commission revenue (Profit)/loss on exchange 126,871 36,693 (8,509) 97,147 (788) (99,591) 151,823 116,763 35,768 (1,696) 48,780 (381) (10,011) 189,223 362 294 Administrative expenses include auditors’ remuneration: Fees payable to the syndicate’s auditor for the audit of the syndicate’s annual accounts Other services pursuant to legislation 336 288 29 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 6 Directors’ emoluments The directors of QUL and the Active Underwriter received the following aggregate remuneration charged to the syndicate and included within net operating expenses: 2008 £000 2007 £000 Directors of the managing agent Active Underwriter Further information in respect of the directors of QUL is provided in that company’s financial statements. 5,895 142 2,123 138 7 Employees All staff are employed by QBE Management Services (UK) Limited, a wholly owned subsidiary of QBE Insurance Group Limited. The following amounts were charged to the syndicate in respect of salary costs: 2008 £000 2007 £000 Wages and salaries Social security costs Other pension costs 46,979 5,606 3,466 56,051 23,018 2,564 2,811 28,393 The average number of staff represented by the above recharge for the period was: 2008 Number 2007 Number Underwriting Claims Administration 137 52 249 438 105 80 156 341 8 Investment income, expenses and charges Investment income Income from investments Gains on the realisation of investments 2008 £000 2007 £000 46,590 3,810 50,400 2008 £000 51,963 3,517 55,480 2007 £000 Investment expenses and charges Investment management expenses 1,317 1,135 30 QBE Syndicate 2999 Annual report 2008 Heading 9 Financial investments a) Designated at fair value through profit and loss Cost 2008 £000 2007 £000 Market value 2008 2007 £000 £000 Shares and other variable yield securities and units in unit trusts Debt securities and other fixed income securities Participation in investment pools Deposits with credit institutions 66,075 1,286,232 57,078 7,346 1,416,731 95,923 907,035 63,279 11,125 1,077,362 66,075 1,283,884 57,078 7,346 1,414,383 95,923 908,553 63,279 11,125 1,078,880 Shares and other variable yield securities, units in unit trusts, and debt securities and other fixed income securities are all listed on recognised stock exchanges. b) Derivative financial instruments Fair value Foreign currency derivatives Included in other creditors 2008 £000 2007 £000 30,891 – Foreign currency derivatives The company uses forward foreign exchange derivatives in order to hedge its exposure to foreign currencies. These are valued using the underlying foreign exchange rates at the year end. Contractual amounts for foreign currency exchange derivatives outstanding at the balance sheet date include foreign exchange contracts to transact the net equivalent of £30,891,000 (2007 £nil). All derivative forward contracts entered into during the financial year were to purchase US dollars. The forward foreign exchange derivatives outstanding at year end expire by 5 February 2009 (2007 n/a). During the year an unrealised loss of £30,891,000 (2007 £nil) relating to such contracts was recognised. This is included in the net foreign exchange gain of £99,591,000 (2007 £10,001,000) in the profit and loss non-technical account. 10 Financial risk management The activities of the syndicate expose it to financial risks such as market risk (including currency risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk. The syndicate’s risk management framework recognises the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the syndicate. The key objectives of the syndicate’s asset and liability management strategy are to ensure sufficient liquidity is maintained at all times to meet the syndicate’s obligations, including its settlement of insurance liabilities and, within these parameters, to optimise investment returns for the syndicate. i) Market risk Currency risk The syndicate is exposed to foreign currency risk in respect of its foreign currency exposures and forward foreign exchange derivatives are used to protect the currency positions. In the past the syndicate has not undertaken currency hedging, and the results shown in converted sterling were susceptible to material fluctuations arising from movements in the exchange rate. During the year this policy was changed, and from the fourth quarter the syndicate now hedges foreign currency risks. The risk management process covering forward foreign exchange derivatives involves close senior management scrutiny, including regular board and other management reporting. All forward foreign exchange derivatives are subject to delegated authority levels provided to management, and levels of exposure are reviewed on an ongoing basis. 31 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 10 Financial risk management continued The table below shows the impact on profit/(loss) and equity of changes in the value of the syndicate’s financial instruments as a result of movements in foreign exchange rates. Movement in variable % 2008 Profit (loss) £000 Equity £000 2007 Profit (loss) £000 Equity £000 US dollar Canadian dollar Euro +10 –10 +10 –10 +10 –10 (8,415) 10,284 (701) 856 105 (128) (8,415) 10,284 (701) 856 105 (128) (12,959) 15,838 (777) 950 1 (2) (12,959) 15,838 (777) 950 1 (2) The syndicate manages its exposure to foreign currencies based on the balance sheet by currency which also include insurance assets and liabilities. Interest rate risk The syndicate is exposed to interest rate risk arising on interest bearing assets. Assets with floating interest rates expose the syndicate to cash flow interest rate risk. Fixed interest rate assets expose the syndicate to fair value interest rate risk. The syndicate’s strategy is to invest in high quality, liquid fixed interest securities and cash and to actively manage duration. The investment portfolios are actively managed to achieve a balance between cash flow interest rate risk and fair value interest rate risk bearing in mind the need to meet the liquidity requirements of the business. The syndicate’s exposure to interest rate risk and the effective weighted average interest rates for each significant class of interest bearing financial assets and liabilities is as follows: Floating interest rate £000 1 year or less £000 Fixed interest rate maturing in 1 to 2 2 to 3 years years £000 £000 2008 Interest bearing assets Weighted average interest rate Financial liabilities Weighted average interest rate Net interest bearing financial assets Total £000 429,960 1,042,048 3.0% 2.9% – – 429,960 Floating interest rate £000 2,466 5.0% – – 2,466 19,813 1,494,287 5.3% 3.0% – – 19,813 – – 1,494,287 – – 1,042,048 2007 Interest bearing assets Weighted average interest rate Financial liabilities Weighted average interest rate Net interest bearing financial assets 1 year or less £000 Fixed interest rate maturing in 1 to 2 2 to 3 years years £000 £000 Total £000 296,122 4.6% – – 296,122 833,603 4.8% – – 833,603 60,045 5.0% – – 60,045 2,984 1,192,754 5.3% 4.7% – – 2,984 – – 1,192,754 32 QBE Syndicate 2999 Annual report 2008 Heading 10 Financial risk management continued The syndicate’s sensitivity to movements in interest rates in relation to the value of fixed interest securities is shown in the table below. Movement in variable % 2008 Profit (loss) £000 Equity £000 2007 Profit (loss) £000 Equity £000 Interest rate movement – fixed interest securities +1.5 -1.5 (13.234) 13.234 (13.234) 13.234 (6,530) 6,530 (6,530) 6,530 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. The syndicate holds no equity investments and so has a low exposure to price risk. ii) Credit risk Credit risk is the risk that one party to a financial instrument will cause financial loss to the other party by failing to discharge an obligation. Credit risk exposures are calculated regularly and compared with authorised credit limits before further transactions are undertaken with counterparties. 99.6% (2007 99.4%) of total fixed interest and cash investments are with counterparties having a Moody’s rating of Aa or better. The syndicate does not expect any investment counterparties to fail to meet their obligations given their strong credit ratings. The syndicate only uses derivatives in highly liquid markets. The reinsurers share of claims outstanding is also exposed to credit risk. 94.9% (2007 95.7%) of the balance is with reinsurers with an S&P rating of Aor greater. The following table provides information regarding the carrying value of the syndicate’s financial assets, excluding amounts in respect of insurance contracts. All amounts are neither past due nor impaired at the balance sheet date. 2008 £000 2007 £000 Cash and cash equivalents Interest bearing investments Other receivables 10,136 1,484,151 16,456 12,658 1,144,630 27,022 iii) Liquidity risk In addition to the treasury cash held for working capital requirements, a minimum percentage of the syndicate’s total financial assets is held in liquid, short term money market securities to ensure there are sufficient liquid funds available to meet current obligations. The table below summarises the maturity profile of all financial liabilities based on the remaining contractual obligations. 2008 Within 1 year £000 Over 1 year £000 Within 1 year £000 2007 Over 1 year £000 Trade and other payables Derivative financial instruments Borrowings The syndicate has no significant concentration of liquidity risk. 252,976 30,891 14,394 61 – – 183,675 – 32,983 564 – – 33 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 11 Debtors arising out of direct insurance operations 2008 £000 2007 £000 Due within one year Due from policyholders Due from intermediaries Due after one year Due from intermediaries 1,384 365,460 705 289,541 606 367,450 1,253 291,499 12 Overseas deposits Overseas deposits are lodged as a condition of conducting underwriting business in certain countries. 2008 £000 2007 £000 Joint Asset Trust Funds Canadian Margin Fund Kentucky Trust Funds Australian Trust Funds South African Trust Funds ASL Overseas Deposit Illinois Deposit 8,025 14,147 4,153 18,205 9,423 4,355 11,460 69,768 9,005 9,841 2,973 17,323 10,962 2,844 12,802 65,750 The deposits with Additional Securities Limited are required to allow names to write business in various overseas countries. 13 Reconciliation of member’s balance 2008 £000 2007 £000 At 1 January Profit for the financial year Payments out of profit to member’s personal reserve funds Other At 31 December 105,426 166,354 (99,574) 112 172,318 49,949 161,773 (106,296) – 105,426 Members participate on syndicates by reference to years of account and their ultimate result, assets and liabilities are assessed with reference to policies incepting in that year of account in respect of their membership of a particular year. 34 QBE Syndicate 2999 Annual report 2008 14 Creditors arising out of direct insurance operations 2008 £000 2007 £000 Due within one year Due to policyholders Due to intermediaries Due after one year Due to intermediaries 1,277 108,650 1,521 86,867 25 109,952 159 88,547 15 Movement in opening and closing portfolio investments net of financing 2008 £000 2007 £000 (Decrease)/increase in cash holdings (Decrease)/increase in overseas deposits Cash inflow from portfolio investments Movement arising from cash flows Changes in market value and exchange rates Total movement in portfolio investments, net of financing At 1 January, net of financing At 31 December, net of financing (5,382) (5,909) 41,618 30,327 306,671 336,998 1,157,288 1,494,286 5,081 11,091 254,451 270,623 3,817 274,440 882,848 1,157,288 Movement in cash, portfolio investments and financing Cash at bank and in hand Overseas deposits Shares and other variable yield securities and units in unit trusts Debt securities and other fixed income securities Participations in investment pools Deposits with credit institutions Total cash, portfolio investments and financing At 1 January 2008 £000 Cash flow £000 Changes to market At value and 31 December currencies 2008 £000 £000 12,658 65,750 95,923 908,553 63,279 11,125 1,157,288 (5,382) (5,909) (58,854) 124,033 (15,826) (7,735) 30,327 2,860 9,926 29,006 251,298 9,625 3,956 306,671 10,136 69,767 66,075 1,283,884 57,078 7,346 1,494,286 35 QBE Syndicate 2999 Annual report 2008 Notes to the financial statements continued Forming part of the financial statements 16 Cash flows invested in portfolio investments 2008 £000 2007 £000 Purchase of shares and other variable yield securities Purchase of debt securities and other fixed income securities Purchase of participations in investment pools Decrease in deposits with credit institutions Sale of shares and other variable yield securities Sale of debt securities and other fixed income securities Sale of participation in investment pools Increase in loans with credit institutions Net cash outflow on portfolio investments (1,035,357) (3,198,645) (115,385) – 1,094,211 3,074,612 131,211 7,735 (41,618) (300,046) (2,390,484) (52,391) (372) 258,799 2,207,821 13,838 8,384 (254,451) 17 Related parties The managing agent of the syndicate, QUL, and the corporate member that provides capital to the syndicate, are wholly owned subsidiaries of their ultimate parent company, QBE Insurance Group Limited. All transactions between the syndicate and companies within the QBE Insurance Group are conducted on normal market terms on an arm’s length basis. The syndicate is exempt under the terms of FRS 8 from disclosing related party transactions. 18 Reinsurance to close accepted In 2007, the syndicate accepted the reinsurance to close of three other syndicates, Syndicate 456, Syndicate 980 and Syndicate 1036. Syndicate 456 ceased writing in 2001 and had three years of account open, 1999, 2000 and 2001. It wrote mainly following lines on US and UK liability classes. The reinsurance to close of all these years totalled £48.9 million which included a risk premium of £3.5 million. Syndicate 980 ceased writing at the end of 2004 when its business was transferred from the Lloyd’s market. It wrote mainly motor business. The reinsurance to close of £91.9 million did not include a risk premium. Syndicate 1036 ceased writing as a separate syndicate at the end of 2004 when it became a sub-syndicate of Syndicate 2999. It was a direct marine and energy syndicate. The reinsurance to close of £38.4 million did not include a risk premium. Those amounts, totalling £179.2 million, have been treated as gross written premium in the technical account. The business of Syndicate 456 and Syndicate 980 has been treated as discontinued, because their lines of business are no longer written within the 2999 umbrella. Syndicates 1036 has been treated as continuing business on the basis that this business continues to be written within the 2999 umbrella. In early 2009, the syndicate agreed to accept the RITC of Syndicate 566’s 2000 and prior years of account, following a successful consultation with capital providers. 36 QBE Syndicate 2999 Annual report 2008 QBE Syndicate 2999 contacts Heading QBE Reinsurance Syndicate 566 Managing Director Jonathan Parry [email protected] tel +44 (0)20 7105 4077 Head of Underwriting Management David Woodruff [email protected] tel +44 (0)20 7105 4638 Head of Reinsurance Operations Steve Edwards [email protected] tel +44 (0)20 7105 4686 QBE Marine and Energy Syndicate 1036 Managing Director Colin O’Farrell colin.o’[email protected] tel +44 (0)20 7105 4073 Head of Operations David Herridge [email protected] tel +44 (0)20 7105 4753 Head of Claims Gary Crowley [email protected] tel +44 (0)20 7105 4792 QBE Syndicate 1886 Managing Director John Neal [email protected] tel +44 (0)20 7105 4054 Operations Manager Roger French [email protected] tel +44 (0)20 7105 4401 Claims Director Andrew McBride [email protected] tel +44 (0)20 7105 4050 QBE Property Syndicate 2000 Managing Director Bernard Mageean [email protected] tel +44 (0)20 7105 5621 Operations Manager Nick Dinsdale [email protected] tel +44 (0)20 7105 4210 Claims Director Andrew McBride [email protected] tel +44 (0)20 7105 4050 QBE Aviation Syndicate 5555 Managing Director Emilio Di Silvio [email protected] tel +44 (0)20 7105 5714 Operations Manager Ken Limber [email protected] tel +44 (0)20 7105 5707 Claims and Business Development Manager Jerry Flaxman [email protected] tel +44 (0)20 7105 5706 Designed and produced by 85four www.85four.com Printed in England by Cousin www.cousin.uk.com Cousin is a carbon neutral company with ISO 14001 accreditation: it recycles all solvents used in the printing process, making any waste ph neutral, and also hold fsc status. This report is printed on paper made from totally chlorine-free (TCF) and elemental chlorine-free (ECF) pulp, sourced from sustainable forests. It is recyclable and biodegradable. 37 QBE Syndicate 2999 Annual report 2008 QBE Syndicate 2999 Plantation Place 30 Fenchurch Street London EC3M 3BD tel +44 (0)20 7105 4000 fax +44 (0)20 7105 4019 For more information: e-mail [email protected] or visit www.QBEeurope.com QBE Syndicate 2999 is managed by QBE Underwriting Limited (no. 01035198), registered office Plantation Place, 30 Fenchurch Street, London, EC3M 3BD, a Lloyd’s managing agent authorised and regulated by the Financial Services Authority.