Q B E I N S U R A N C E G R O U P L I M I T E D Important information Basis of presentation (unless otherwise stated) All amounts in this report are US dollars. Premium growth rates are quoted on a constant currency basis. Premium rate changes exclude North America Crop and/or Australian compulsory third party motor (CTP). Adjusted net cash profit (loss) after tax adjusts for Additional Tier 1 capital coupon accruals, amortisation and restructuring costs. APRA PCA calculations at 31 December are indicative. Prior year calculation is consistent with APRA returns finalised subsequent to year end. Basis of presentation (Section 1) Combined operating ratio, net claims ratio and underwriting results exclude the impact of changes in risk-free rates used to discount net outstanding claims. Basis of presentation (Section 2) Combined operating ratio and net claims ratio exclude the impact of changes in risk-free rates used to discount net outstanding claims. 2021 figures exclude the impact of COVID-19 and the transaction to reinsure Australian CTP. 2020 figures exclude the impact of COVID-19. Prior accident year claims development excludes North America Crop development that is matched by premium cessions under the MPCI scheme. North America and International results (2019 and earlier) have been restated for the transfer of North America’s inward reinsurance business to QBE Re, part of International. Prior periods (2019 and earlier) are presented on a continuing operations basis and adjusted basis as presented in prior year reports. Analysis of the Group by division excludes Corporate & Other. This is an interactive PDF designed to enhance your experience. The best way to view this report is with Adobe Acrobat Reader. Click on the links on the contents pages or use the home button in the footer to navigate the report. Important information Basis of presentation (unless otherwise stated) All amounts in this report are US dollars. Premium growth rates are quoted on a constant currency basis. Premium rate changes exclude North America Crop and/or Australian compulsory third party motor (CTP). Adjusted net cash profit (loss) after tax adjusts for Additional Tier 1 capital coupon accruals, amortisation and restructuring costs. APRA PCA calculations at 31 December are indicative. Prior year calculation is consistent with APRA returns finalised subsequent to year end. Basis of presentation (Section 1) Combined operating ratio, net claims ratio and underwriting results exclude the impact of changes in risk-free rates used to discount net outstanding claims. Basis of presentation (Section 2) Combined operating ratio and net claims ratio exclude the impact of changes in risk-free rates used to discount net outstanding claims. 2021 figures exclude the impact of COVID-19 and the transaction to reinsure Australian CTP. 2020 figures exclude the impact of COVID-19. Prior accident year claims development excludes North America Crop development that is matched by premium cessions under the MPCI scheme. North America and International results (2019 and earlier) have been restated for the transfer of North America’s inward reinsurance business to QBE Re, part of International. Prior periods (2019 and earlier) are presented on a continuing operations basis and adjusted basis as presented in prior year reports. Analysis of the Group by division excludes Corporate & Other. Table of contents A N N UA L R E P O R T 2 02 1 SECTION 1 Performance overview Chair’s message 2021 snapshot Group Chief Executive Officer’s report SECTION 2 Operating and financial review Group Chief Financial Officer’s report North America business review International business review Australia Pacific business review SECTION 3 Governance Managing risk – our business Climate change – our approach to risks and opportunities Board of Directors Group Executive Committee Corporate governance statement SECTION 4 Directors’ Report Directors’ Report Remuneration Report Auditor’s independence declaration SECTION 5 Financial Report Financial Report contents Financial statements Notes to the financial statements Directors’ declaration Independent auditor’s report SECTION 6 Other information Shareholder information Financial calendar 10-year history Glossary QBE Insurance Group Limited | ABN 28 008 485 014 2 4 6 10 22 24 26 28 30 38 40 42 52 56 80 81 82 86 154 155 163 166 167 168 1 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 2 CHAIR’S MESSAGE A strong return to profitability and growth We started 2021 with cautious optimism and while global economic growth surpassed expectations, headwinds still remain with a resurgence of the pandemic and inflationary pressures contributing to uncertainty. We are acutely aware of the ongoing impact of the pandemic on our people, customers and the communities in which we operate. In this environment we continue to provide support and innovative solutions in response, focusing on their wellbeing and continued recovery. While the global pandemic and associated economic and societal impacts have been top of mind for everyone, we recognise the ever‑increasing threat of climate change. In 2021 a high level of natural catastrophes ranging from severe flooding and hurricanes to unprecedented rainfall and record‑breaking temperatures impacted our results during the year. Amidst this backdrop, QBE has seen a strong return to profitability and growth, reflecting the strength of our business and the ongoing hard work by our teams across the world. We remain well placed to support and grow with our customers as the economies in which we operate recover. We are pleased with our statutory profit of $750 million for the 2021 financial year and the significant level of growth in each of our divisions. This growth and operating performance were achieved while also maintaining our strong capital position. Delivery against strategic priorities and an unrelenting focus on the fundamentals of the business were critical to this improved performance. As a result of this improved outcome, the Board has declared a final dividend of 19 Australian cents per share, up from nil for the 2020 final dividend. Leadership In March 2021, we were pleased to announce the appointment of Andrew Horton as our new Group Chief Executive Officer with effect from 1 September. Andrew has over 30 years’ experience in insurance and banking and has a deep understanding of the insurance landscape. During the interview process, the Board was particularly impressed with his engaging, inclusive and collaborative leadership style. It is evident that Andrew is a leader who believes in the power of culture as a key driver of business success and he has already demonstrated his keenness to build on the important work of our Board‑sponsored Culture Accelerator program to enhance and evolve QBE’s culture. Andrew succeeded Richard Pryce who provided important continuity and stable leadership as Interim Group Chief Executive Officer for the better part of 2021. On behalf of our shareholders, the Board and all of the people of QBE, I extend my thanks to Richard for his leadership during his time at QBE and wish him well in his retirement. We also made key appointments to our Group Executive Committee in 2021, complementing the existing team and skillset. We welcomed Fiona Larnach as Group Chief Risk Officer in March and Sue Houghton as our new Chief Executive Officer, Australia Pacific in August. Sam Harrison was promoted to the role of Group Chief Underwriting Officer in April and Amanda Hughes was promoted to the role of Group Executive, People and 2 3 CHAIR’S MESSAGE A strong return to profitability and growth We started 2021 with cautious optimism and while global economic growth surpassed expectations, headwinds still remain with a resurgence of the pandemic and inflationary pressures contributing to uncertainty. We are acutely aware of the ongoing and the significant level of growth in each of culture as a key driver of business impact of the pandemic on our people, of our divisions. This growth and operating success and he has already demonstrated customers and the communities in which performance were achieved while also his keenness to build on the important we operate. In this environment we continue to provide support and innovative solutions in response, focusing on their wellbeing and continued recovery. While the global pandemic and associated economic and societal impacts have been top of mind for everyone, we recognise the ever‑increasing threat of climate change. In 2021 a high level of natural catastrophes ranging from severe flooding and hurricanes to unprecedented rainfall and record‑breaking temperatures impacted our results during the year. Amidst this backdrop, QBE has seen a strong return to profitability and growth, reflecting the strength of our business and the ongoing hard work by our teams across the world. We remain well placed to support and grow with our customers as the economies in which we operate recover. maintaining our strong capital position. work of our Board‑sponsored Culture Delivery against strategic priorities and an Accelerator program to enhance and unrelenting focus on the fundamentals of evolve QBE’s culture. the business were critical to this improved performance. As a result of this improved outcome, the Board has declared a final dividend of 19 Australian cents per share, up from nil for the 2020 final dividend. Leadership In March 2021, we were pleased to Andrew succeeded Richard Pryce who provided important continuity and stable leadership as Interim Group Chief Executive Officer for the better part of 2021. On behalf of our shareholders, the Board and all of the people of QBE, I extend my thanks to Richard for his leadership during his time at QBE and wish him well in his retirement. announce the appointment of Andrew We also made key appointments to our Horton as our new Group Chief Executive Group Executive Committee in 2021, Officer with effect from 1 September. complementing the existing team and Andrew has over 30 years’ experience skillset. We welcomed Fiona Larnach in insurance and banking and has a deep as Group Chief Risk Officer in March and understanding of the insurance landscape. Sue Houghton as our new Chief Executive During the interview process, the Board Officer, Australia Pacific in August. Sam was particularly impressed with his engaging, inclusive and collaborative Harrison was promoted to the role of Group Chief Underwriting Officer in April We are pleased with our statutory profit leadership style. It is evident that Andrew and Amanda Hughes was promoted to of $750 million for the 2021 financial year is a leader who believes in the power the role of Group Executive, People and Culture in December, reflecting our focus on succession planning and investment in the development of our talent pipeline. Our Group Executive Committee now comprises 45.5% women and reflects our commitment to diversity. We continued to make progress on our target of having 40% women in leadership by 2025, with an increase over last year from 34.8% to 35.9%. Culture The Board is committed to a respectful and inclusive environment for all our people and culture has remained a key focus throughout the year. We made significant progress with our Culture Accelerator, which has been sponsored by John Green, Deputy Chair, and Tan Le, non‑executive director, reflecting its importance. We believe culture is foundational to our future success. As a result of this work, we have a clear view of our target‑state culture and a blueprint for change which will guide our focus over coming years. Our people are at the heart of our culture and have shaped the pathway forward. We have undertaken a comprehensive review of our culture by engaging with our people through a global survey, interviews with over 150 senior leaders across the business and workshops with over 1,000 employees. A global culture advisory group of 20 leaders and a culture connectors group of 120 employees were established and will continue to shape how we better foster and embed a QBE culture which embraces an inclusive and respectful workplace. To help our people understand expected behaviour, we refreshed our QBE DNA which interlinks seven cultural attributes that are fundamental to who we are and how we operate to achieve success. Moreover, we introduced a shared language of behaviours, to help everyone live the QBE DNA each day. Central to our cultural efforts has been an ongoing focus on inclusion and diversity. We conducted a global maturity assessment and refreshed our Inclusion of Diversity Policy. A key aspect of culture is how we invest in our people and foster talent, particularly with a focus on succession planning and building future‑ready leaders across our organisation. During the year, QBE introduced the executive team health framework which is designed to support the development of our current and future Group Executive leaders, with specific and measurable outcomes based on relevant context and priorities. We will continue to use these tools as we look to cascade our talent practices to build a consistent people focus and accountability throughout the organisation. Operating sustainably QBE remains committed to integrating sustainability across the business. Our sustainability framework helps drive performance, manage risks and identify opportunities across the areas of sustainability that are most important to our business, customers, communities and other stakeholders. There are six focus areas outlined in our framework: sustainable insurance, impact and responsible investment, operational excellence, people and culture, customer and community, and governance. In line with our framework, we publish an annual Sustainability Scorecard that outlines our key initiatives, commitments and targets. During 2021, we made strong progress against our scorecard and continued to strengthen our approach to sustainability. Further information can be found in our 2021 Sustainability Report. In June 2021, we published QBE’s Human Rights Policy outlining our commitment to respecting human rights in our role as an employer, insurer, investor and business partner. We have also outlined how we respect human rights in our interactions with customers and in our communities. We will continue to integrate human rights considerations across the business according to international principles. Our annual Modern Slavery and Human Trafficking Statement will be released in due course, outlining the steps we have taken to identify and address modern slavery risks across our operations and supply chain. In 2022, we will continue to enhance our modern slavery program of work. Our new Environmental and Social Risk Framework became effective from 1 January 2022 and our focus has been on integrating this into our business over the last year. The framework further supports the integration of environmental, social and governance (ESG) considerations into our core business and helps improve transparency for our customers. Through our positions in the framework, we have committed to reduce our exposure to higher transition risks in the energy sector including no new coal and oil sands projects, and only supporting oil sands and Arctic drilling where the company is on a pathway consistent with achieving the Paris Agreement objectives. Further detail on how we assess the transition pathway is on page 36. We also continue to maintain zero direct investments in thermal coal. QBE has a diverse and international portfolio of customers in the energy sector, and we are committed to working with them to support a shift to more sustainable business models and reducing the emissions intensity across the economy. An exclusionary approach to all fossil fuel‑related activity on a categorical basis does not represent an orderly path to a net‑zero economy. Gas continues to be an important transition fuel and oil has a role in many transport sectors, in addition to its inclusion in many industrial processes, until viable alternatives are available. We need energy that is reliable, safely produced and affordable as well as clean. We continue to support a smooth transition pathway and new business models that are being implemented at pace, particularly where this is towards renewable energy. Climate change is a global challenge requiring the collaborative efforts of a range of stakeholders to minimise economic disruption and deliver an orderly transition to a net‑zero emissions economy. We engage in climate‑related partnerships for impact, working with government, industry, customers and community groups. In 2020, we were proud to be the first Australian‑based insurer to join the UN‑convened Net‑Zero Asset Owner Alliance, committing to transition our investment portfolio to net‑zero greenhouse gas emissions by 2050. We also extended our commitment to supporting the transition to a net‑zero economy by joining the UN‑convened Net‑Zero Insurance Alliance in January 2022 and by setting a new target to achieve net‑zero emissions for our global operations by 2030. We remain focused on our commitment to reduce our overall energy use and source 100% renewable electricity for our operations by 2025. In January this year, we launched a sustainable energies unit in our International business to support customers as they transition to lower carbon energy. The unit will align QBE underwriting to the growing range of companies and energy systems that form part of a rapidly changing energy mix throughout the world. Projects include hydrogen, ammonia, hydro, solar, fixed and floating wind-power and carbon capture and sequestration. We remain proud of our impact investment initiative, Premiums4Good, which now has $1.4 billion invested in 83 securities across 10 impact areas, and our ambition is to grow impact investments to $2 billion by 2025. Looking ahead While some uncertainty surrounds the global economic outlook for 2022, we start the year expecting supportive trading conditions across the major markets in which we operate. Noting the strong momentum across the Group, we remain confident of further growth and margin improvement in 2022. We also start the year with a renewed QBE Vision and Purpose and longer‑term strategic priorities, which are outlined in detail in the Group Chief Executive Officer’s report on page 6. It has never been more important to have a Vision and Purpose that appropriately reflect the ambitions of the organisation and the world in which we live. Our refined Vision and Purpose provide a strong sense of direction for the future. 2021 was another momentous but ultimately successful year for our organisation and I thank all our employees, customers, partners, shareholders and my fellow directors for their continued support of QBE. Mike Wilkins AO Independent Chair A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 4 2021 snapshot 1 Shareholder highlights Dividend payout (A$M) 443 651% from 2020 A$M 1,500 1,125 750 375 0 A¢ 60 45 30 15 0 0 5 2 5 0 3 4 2018 2019 2020 2021 Dividend per share (A¢) Dividend payout (A$M) Sustainability highlights Return on average shareholders’ equity – adjusted cash basis 10.3% 2020 (10.9)% Basic earnings (loss) per share – adjusted cash basis (US¢) 54.6 2020 (60.7) Dividend per share (A¢) 30 2020 4 Transitioning to net-zero 2025 Set intermediate targets for our investment portfolio Inclusion of diversity Awarded Gold Employer Status in the Australian Workplace Equality Index 2030 Committed to net-zero emissions across our global operations 2050 Committed to net-zero emissions across our underwriting and investment activities 2 Met RE100 target Used 100% renewable electricity for our operations globally 3 Women in leadership 35.9% 2020 34.8% Included on the 2022 Bloomberg Gender‑Equality Index Launched new global QBE Foundation strategy Creating strong, resilient and inclusive communities 1 Financial information above is extracted or derived from the Group’s audited financial statements on pages 81 to 162 of this Annual Report. The Group Chief Financial Officer’s report provides out further analysis of the results. 2 Commitment to net-zero emissions in investment portfolio made in 2020 by joining the UN-convened Net-Zero Asset Owner Alliance. 3 In 2021, we aligned our reporting to the RE100. RE100’s calculations (as per RE100 Materiality Threshold guidance) exclude electricity use from countries with small electricity loads (<100MWh/year and up to a total of 500MWh/year) and where it is not feasible to source renewable electricity. The exclusion equated to 0.5% of our global electricity use in 2021. 4 5 2021 snapshot 1 Shareholder highlights Dividend payout (A$M) 443 651% from 2020 0 5 2 5 A¢ 60 45 30 15 0 0 3 A$M 1,500 1,125 750 375 0 4 2018 2019 2020 2021 Dividend per share (A¢) Dividend payout (A$M) Sustainability highlights Return on average shareholders’ equity – adjusted cash basis 10.3% 2020 (10.9)% Basic earnings (loss) per share – adjusted cash basis (US¢) Dividend per share (A¢) 54.6 2020 (60.7) 30 2020 4 Transitioning to net-zero 2025 Set intermediate targets for our investment portfolio Inclusion of diversity Awarded Gold Employer Status in the Australian Workplace Equality Index 2030 Committed to net-zero emissions across our global operations 2050 Committed to net-zero emissions across our underwriting and investment activities 2 Met RE100 target Used 100% renewable electricity for our operations globally 3 Women in leadership 35.9% 2020 34.8% Included on the 2022 Bloomberg Gender‑Equality Index Launched new global QBE Foundation strategy Creating strong, resilient and inclusive communities 1 Financial information above is extracted or derived from the Group’s audited financial statements on pages 81 to 162 of this Annual Report. The Group Chief Financial Officer’s report provides out further analysis of the results. 2 Commitment to net-zero emissions in investment portfolio made in 2020 by joining the UN-convened Net-Zero Asset Owner Alliance. 3 In 2021, we aligned our reporting to the RE100. RE100’s calculations (as per RE100 Materiality Threshold guidance) exclude electricity use from countries with small electricity loads (<100MWh/year and up to a total of 500MWh/year) and where it is not feasible to source renewable electricity. The exclusion equated to 0.5% of our global electricity use in 2021. Statutory financial highlights Gross written premium Gross written premium by class of business (US$M) by class of business 18,457 22% from 2020 2021 % 2020 % Commercial & domestic property Agriculture Public/product liability Motor & motor casualty Professional indemnity Marine energy & aviation Workers' compensation Accident & health Financial & credit Other 29.4 16.6 12.1 11.1 9.8 7.2 6.3 4.3 3.2 – 30.4 14.1 11.9 12.1 9.2 8.2 5.8 4.8 3.2 0.3 Net earned premium (US$M) Net earned premium by type 13,408 10% from 2020 facultative insurance 90% direct and 10% inward reinsurance Combined operating ratio Insurance profit (loss) (US$M) Insurance profit (loss) (US$M) 93.7% 2020 104.2% Net profit (loss) after tax (US$M) 750 2020 (1,517) 1,215 2020 (727) Underwriting result (US$M) 837 2020 (488) 5 1 2 , 1 7 3 8 ) 7 2 7 ( ) 8 8 4 ( 1 2 0 2 0 2 0 2 Insurance profit (loss) Underwriting result Ex-cat claims ratio Group Segment 59.4% 2020 59.3% North America International Australia Pacific Catastrophe claims (US$M) Catastrophe claims ratio 67.9% 53.3% 59.5% 924 3% from 2020 6.9% 2020 7.7% Operational highlights Gross written premium growth 22% 2020 10% Average renewal premium rate increase Premium retention Group Segment 9.7% 2020 9.8% North America International Australia Pacific 10.7% 10.2% 8.3% 84% 2020 82% A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 6 GROUP CHIEF EXECUTIVE OFFICER’S REPORT Positive momentum across the business The global economy continued to recover in 2021 as a gradual reopening in key regions saw activity levels progressively normalise, underpinned by supportive fiscal and monetary policy settings. The economic outlook remains encouraging into 2022, although we remain conscious of the risks associated with inflationary pressures, ongoing disruption to global supply chains and the withdrawal of emergency stimulus measures in many key economies. The Omicron variant serves to highlight that the health and economic risks associated with COVID-19 will be ongoing in 2022. Against this backdrop, we continue to support our people, customers and communities and recognise their ongoing resilience through 2021. Maintaining momentum in global vaccination programs will remain a key mitigating factor throughout the year. Insurance trading conditions were favourable throughout 2021 and QBE remained focused on driving further improvement in profitability while also achieving measured growth across select portfolios. Our top line momentum was particularly noteworthy, supported by strong rate increases across all divisions, improved premium retention and targeted new business growth. Following another year of elevated natural catastrophe claims costs, building inflationary signals and continued low interest rates, the premium pricing environment is expected to remain supportive in 2022. With such a degree of uncertainty in the outlook for the global economy, the industry should remain pragmatic about both building financial resilience and improving returns. Business performance We experienced positive momentum across the business in 2021, culminating in a statutory combined operating ratio of 93.7%, compared with 104.2% in the prior year. Group-wide premium rate increases of 9.7% were again broad- based and continue to compound on prior year increases including 9.8% achieved in 2020. Constant currency premium growth was 22%, the strongest organic growth achieved in over a decade, underpinned by ex-rate growth of 15% as targeted growth initiatives gathered momentum. US Crop delivered outstanding growth, assisted by materially higher commodity prices and further growth in policy count. Heightened natural catastrophe activity continued in 2021, with annual insurance industry insured losses likely to settle as one of the highest on record. Not surprisingly given this backdrop, catastrophe costs of $924 million materially exceeded our planned allowance for the year. This disappointing outcome was partly offset by ongoing expense discipline coupled with positive operating leverage 6 7 GROUP CHIEF EXECUTIVE OFFICER’S REPORT Positive momentum across the business The global economy continued to recover in 2021 as a gradual reopening in key regions saw activity levels progressively normalise, underpinned by supportive fiscal and monetary policy settings. The economic outlook remains encouraging into 2022, although we remain conscious of the risks associated with inflationary pressures, ongoing disruption to global supply chains and the withdrawal of emergency stimulus measures in many key economies. The Omicron variant serves to highlight Following another year of elevated year increases including 9.8% achieved in that the health and economic risks natural catastrophe claims costs, building 2020. Constant currency premium growth associated with COVID-19 will be ongoing inflationary signals and continued low in 2022. Against this backdrop, we continue to support our people, customers and communities and recognise their ongoing resilience through 2021. Maintaining momentum in global vaccination programs will remain a key mitigating factor throughout the year. interest rates, the premium pricing environment is expected to remain supportive in 2022. With such a degree of uncertainty in the outlook for the global economy, the industry should remain pragmatic about both building financial resilience and improving returns. Insurance trading conditions were favourable throughout 2021 and QBE remained focused on driving further improvement in profitability while also achieving measured growth across Business performance We experienced positive momentum across the business in 2021, culminating select portfolios. Our top line momentum in a statutory combined operating ratio was particularly noteworthy, supported by of 93.7%, compared with 104.2% in the strong rate increases across all divisions, prior year. Group-wide premium rate was 22%, the strongest organic growth achieved in over a decade, underpinned by ex-rate growth of 15% as targeted growth initiatives gathered momentum. US Crop delivered outstanding growth, assisted by materially higher commodity prices and further growth in policy count. Heightened natural catastrophe activity continued in 2021, with annual insurance industry insured losses likely to settle as one of the highest on record. Not surprisingly given this backdrop, catastrophe costs of $924 million materially exceeded our planned allowance for the year. This disappointing outcome was improved premium retention and targeted increases of 9.7% were again broad- partly offset by ongoing expense discipline new business growth. based and continue to compound on prior coupled with positive operating leverage due to strong growth, which contributed to further improvement in our expense ratio to 13.6% from 15.0% in 2020. Our investment result declined in 2021, albeit materially impacted by the mark-to-market associated with the gradual improvement in risk-free rates over the year, partly offset by a recovery in growth asset returns and improved running yield. Over the course of 2022 and 2023, we expect to gradually add risk to our currently conservative investment asset allocation which, together with the higher running yield at year end, should support an improved investment return in the coming year. North America’s performance improved in 2021 benefitting from organic growth and a continued positive rate environment; however, heightened catastrophe experience and further adverse prior accident year claims development resulted in a combined operating ratio of 105.2%. While the result fell short of our expectations, we are focused on a number of initiatives aimed at reducing volatility and balancing the risk profile of the overall business. North America delivered double digit premium growth across all three business segments, helping to drive improved operating leverage, with growth initiatives executed around a focus on building scale and relevance in core portfolios including financial lines and retail. We are confident that performance will continue to improve as the team executes a multi-year strategy to reshape the business into a platform of relevant and at-scale businesses that deliver a consistent, sustainable and appropriate risk-adjusted return on capital. International achieved strong premium growth in 2021 and, while much of this was driven by continued rate momentum across most markets, promising volume growth was noted across the majority of portfolios. The business responded promptly to the UK Supreme Court judgement on COVID-19 business interruption, swiftly paying valid claims and conducting a review of our policy wording in parallel. Our strategic focus has been on both leveraging market conditions to deliver robust in-year performance and building a strong platform for future organic growth across key geographies and sectors. The well diversified nature of our business served us well in 2021, and we will continue to optimise the portfolio to both improve returns and reduce volatility. Australia Pacific delivered a strong performance in 2021, achieving premium growth of 17% alongside a materially improved underwriting result. The business maintained its focus on supporting customers, partners and people through the evolving and challenging COVID-19 backdrop while continuing to progress digital capability, develop go-to-market propositions and maintain ‘Brilliant Basics’ operating disciplines. This helped to deliver a material improvement in customer retention and new business volumes which, together with the recovering economy and sustained strong rating environment, supported encouraging business momentum. Further detailed information on our financial performance is outlined in the Group Chief Financial Officer’s report on page 10. Our people, customers and communities Throughout 2021, our people successfully navigated a constantly changing landscape, demonstrating both resilience and adaptability. I am proud of their hard work and steadfast focus on supporting our customers, partners and each other. We have continued to evolve our ways of working in response to the systemic shifts brought about by the pandemic. Our people have embraced hybrid working which provides greater flexibility to work from home or the office, depending on the nature of work required. Our ongoing focus on culture and a newly employed listening strategy have enabled us to gain a deeper understanding of what drives employee engagement. In 2021, we refreshed our approach to ‘inclusion of diversity’ recognising that in order to foster and realise the benefits of our differences, it is essential to create an environment where everyone is, and feels, included. We value the collective diversity of our people with different perspectives, backgrounds and ways of working contributing to our ability to innovate, challenge and support each other, and serve our diverse customer base. We have worked hard to adapt to the evolving needs of our customers and continually improve our customer support. This year, we further developed digital tools to assess customer claims and expedite our response. In Australia, we have responded to the needs of our more vulnerable customers and now offer domestic violence support, as well as providing interpreter services for customers in over 160 languages and dialects. Supporting those most vulnerable in our community is important to QBE. In Europe, we launched a new ESG initiative for SMEs that includes a template sustainability policy and a framework to identify, monitor and manage a range of ESG issues that may impact their business. In North America, we broadened the reach of our Customer@QBE program to further embed a customer mindset through improved customer support training. Importantly, we have supported customers through a large number of natural perils across the world, including Cyclone Seroja in Western Australia, the Eastern Australian floods, Texas Winter Storm Uri and Hurricane Ida in the United States and Storm Bernd in Europe. We are proud of the support we provide to the communities in which we operate and, in 2021, our QBE Foundation celebrated its 10th birthday. To mark this anniversary, the QBE Foundation launched a new strategic framework and guiding principles focused on addressing climate resilience and inclusion for communities. Through this increased focus, we believe we can contribute to better prepared communities and improved financial stability, resulting in better outcomes for those in need. The strategy draws on our global sustainability framework, priority United Nations Sustainable Development Goals and the annual materiality assessment to achieve greater impact and directly target the areas where QBE can make the greatest contribution. Performance against 2021 strategic priorities Meaningful progress was achieved against each of our 2021 strategic priorities of performance, modernisation, customer focus and culture. We saw significant progress on a number of activities underpinning the performance agenda with the reinvigoration of cell reviews, delivery against key sustainability and climate commitments and targeted growth. Our modernisation journey continues with ongoing efforts to upgrade critical foundational capabilities and to further embed our digital capabilities across the organisation. Embedding automation across underwriting, distribution and claims to support the evolving needs of our customers and partners remains an ongoing focus. While there are still key programs of work to deliver, we are now well progressed with our modernisation journey. Work on Customer@QBE continued throughout the year with a focus on developing the framework on ‘how we show up’ to all our customers on a consistent basis across the globe. This builds on the foundational elements of the program that were launched earlier in the year and includes customer mindset (how we think about our customers), insights (the knowledge we have about our customers combined with our insurance expertise) and delivery (what and how we deliver to our customers). Our talent & culture pillar was a key area of focus throughout the year, building on our QBE DNA and leveraging our work on culture through the Board-sponsored Culture Accelerator program. We have defined the type of culture we want to A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 8 create and have mapped this against our current state, which has helped to identify key priorities for 2022. This important conversation spanned much of the year and involved the entire organisation, creating a refreshed DNA that reflects desired behaviours and a shared language to encourage people to speak up. The work also identified the need for a refreshed recognition program grounded in the DNA. Cultural focus should be ongoing and, now that we have created our first enterprise culture plan, we will embed the Culture Accelerator into our strategic priorities, recognising that culture is one of the fundamental strategic pillars that supports our ongoing success. Setting a new strategic direction I was honoured to join QBE on 1 September 2021 and immediately recognised that I had joined an organisation with great potential. My overarching goal is to establish QBE as a consistently high-performing enterprise that is both culturally and operationally united, with a clear strategic direction. The Group Executive and I have spent considerable time defining our strategic priorities for the medium to long term. In determining QBE’s future strategic priorities and direction, we felt it was important to go right back to the core of why we exist. We have spent time considering our vision and purpose statements to ensure they better reflect the world in which we live, how we can help to make a positive contribution and support our people. As a result, we were pleased to launch our new Vision and Purpose in January 2022. Our vision is to be ‘the most consistent and innovative risk partner’ and our purpose is ‘QBE – enabling a more resilient future’. Our organisational Vision and Purpose have shaped six new strategic priorities for QBE (as outlined in the page opposite), being portfolio optimisation, sustainable growth, bring the enterprise together, modernise our business, our people and our culture. Portfolio optimisation is about more actively managing the future direction of our business by making deliberate choices about the mix of products we offer, the business lines and geographies in which we operate and the customers we support. This will lead to a better understanding of the risks we are assuming, including the inherent volatility in the business we write, and therefore, a better balance of risk resulting in more consistent outcomes. We will be developing a globally consistent framework to apply across QBE with specified targets to be set by region, customer type and class. across the enterprise. Our goal is to ensure that our purpose is visible every day, in every interaction we have. Underpinning these priorities is a continuing focus on increasing consistency in how we plan and deliver performance, integrating sustainability into all facets of our business, demonstrating an enterprise mindset and continually evolving the experience we provide our customers and partners. Conclusion QBE generated strong momentum in 2021 during a second year impacted by the pandemic, underpinned by a collective team effort across the globe. Our people continue to demonstrate enormous resilience, responding well to the changes in our ways of working, and delivering for our customers and partners. I am confident we have a strong international insurance business with enormous potential and my priority is to build on the existing business momentum, bringing together our people with our shared Vision and Purpose to drive our future strategic direction. I want to extend my thanks to both the Group Executive Committee for their hard work and support and the over 11,000 people who come to work each day in support of our customers and partners. Outlook QBE delivered a strong result in 2021, with notable momentum across many of the key value drivers for the business. Our new strategic priorities will build on these strong foundations in 2022, where we are increasingly confident in our ability to drive sustained improvement across the organisation, and expect this should result in a consistent low to mid-90’s combined operating ratio for the business. We currently expect growth in constant currency gross written premium in 2022 to be in the high single digits. Andrew Horton Group Chief Executive Officer As we think more broadly about our portfolio mix, we will also identify opportunities that enable QBE to deliver sustainable growth, increasing our reach and strengthening our market relevance. We will harness the depth and breadth of product knowledge and expertise and innovate new product offerings and risk solutions to address our customers’ needs. Our growth ambition will be realised through a balanced portfolio of initiatives that include deepening our existing business with clear strategies aligned to risk appetite; selectively extending our core business into new segments, regions or product lines and experimenting to better understand emerging opportunities; and developing innovative solutions for the long term. To achieve our vision and deliver on our purpose, we need to evolve our operating model and organisational structure to bring the enterprise together, to help us more effectively organise, manage and leverage our capabilities across all markets. We also need to simplify what we do and remove complexity in how we do it, by supporting strategy-aligned prioritisation of activities, driving consistent processes, having clearer and more effective governance, and providing more clarity of accountabilities across QBE. To ensure we are a future fit and modern insurer, we must complete the modernisation of our foundational systems and processes. We also need to accelerate development of, and investment in, our digital capabilities to make interactions with QBE easier for our customers, partners and people. We will strategically invest in differentiating capabilities (people, processes, technology and data) that drive insight and support innovation. We are focused on becoming an employer of choice in our chosen markets and on building and empowering a sustainable and diverse pipeline of leaders. Our strategy also depends on our ability to enhance the link between the performance, culture and way we reward our people, so we will be doing further work on this. We will also be investing in more targeted workforce and succession planning to ensure we can harness the talent we already have and help to build the capabilities we need now and in the future. Finally, we will focus on becoming a more purpose-led organisation. We need to strengthen the alignment, trust and collaboration that takes place 8 9 create and have mapped this against our a globally consistent framework to apply across the enterprise. Our goal is to current state, which has helped to identify across QBE with specified targets to be ensure that our purpose is visible every key priorities for 2022. This important set by region, customer type and class. day, in every interaction we have. As we think more broadly about our portfolio mix, we will also identify Underpinning these priorities is a continuing focus on increasing opportunities that enable QBE to deliver consistency in how we plan and deliver performance, integrating sustainability into all facets of our business, demonstrating an enterprise mindset and continually evolving the experience we provide our customers and partners. Our purpose Our strategy Our vision To be the most consistent and innovative risk partner A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w Our priorities Portfolio optimisation Sustainable growth Actively manage for consistency and resilience Consistent framework to identify and monitor target portfolio Reduce volatility in earnings Harness the depth and breadth of product knowledge and expertise Innovate new product offerings and risk solutions to solve customer needs Bring the enterprise together Leverage expertise and capability across markets Optimise our operating model Simplify what we do and remove complexity in how we do it Modernise our business Our people Our culture 3 G o v e r n a n c e Complete the modernisation of foundational systems and processes Accelerate digital capabilities to make it easier for our customers, partners and people Invest in differentiating capabilities that drive insight and support innovation Reward and recognition to drive culture and enterprise performance Strengthen alignment and collaboration across the enterprise 4 R e p o r t D i r e c t o r s Invest in our people and internal succession Future focus through strategic workforce planning ' Live our purpose every day 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i empowering a sustainable and diverse this should result in a consistent What success looks like Consistent profitability Sustainable growth Easier to get things done Easier and simpler to do business with Employer of choice in chosen markets Culture drives performance o n We are accountable We are courageous We are technical experts We are fast-paced Our DNA We are customer-focused We are inclusive We are a team the Culture Accelerator into our strategic through a balanced portfolio of priorities, recognising that culture is one initiatives that include deepening our of the fundamental strategic pillars that existing business with clear strategies supports our ongoing success. conversation spanned much of the year and involved the entire organisation, creating a refreshed DNA that reflects desired behaviours and a shared language to encourage people to speak up. The work also identified the need for a refreshed recognition program grounded in the DNA. Cultural focus should be ongoing and, now that we have created our first enterprise culture plan, we will embed Setting a new strategic direction I was honoured to join QBE on 1 September 2021 and immediately recognised that I had joined an organisation with great potential. My overarching goal is to establish QBE as a consistently high-performing enterprise that is both culturally and operationally united, with a clear strategic direction. The Group Executive and I have spent considerable time defining our strategic priorities for the medium to long term. In determining QBE’s future strategic priorities and direction, we felt it was important to go right back to the core of why we exist. We have spent time considering our vision and purpose statements to ensure they better reflect the world in which we live, how we can help to make a positive contribution and support our people. As a result, we were pleased to launch our new Vision and Purpose in January 2022. Our vision is to be ‘the most consistent and innovative risk partner’ and our purpose is ‘QBE – enabling a more resilient future’. Our organisational Vision and Purpose have shaped six new strategic priorities for QBE (as outlined in the page opposite), being portfolio optimisation, sustainable growth, bring the enterprise together, modernise our business, our people and our culture. Portfolio optimisation is about more actively managing the future direction of our business by making deliberate choices about the mix of products we offer, the business lines and geographies in which we operate and the customers we support. This will lead to a better understanding of the risks we are assuming, including the sustainable growth, increasing our reach and strengthening our market relevance. We will harness the depth and breadth of product knowledge and expertise and innovate new product offerings and risk solutions to address our customers’ needs. Our growth ambition will be realised aligned to risk appetite; selectively extending our core business into new segments, regions or product lines and experimenting to better understand emerging opportunities; and developing innovative solutions for the long term. To achieve our vision and deliver on our purpose, we need to evolve our operating model and organisational structure to bring the enterprise together, to help us more effectively organise, manage and leverage our capabilities across all markets. We also need to simplify what we do and remove complexity in how we do it, by supporting strategy-aligned prioritisation of activities, driving consistent processes, having clearer and more effective governance, and providing more clarity of accountabilities across QBE. To ensure we are a future fit and modern insurer, we must complete the modernisation of our foundational systems and processes. We also need to accelerate development of, and investment in, our digital capabilities to make interactions with QBE easier for our customers, partners and people. We will strategically invest in differentiating capabilities (people, processes, technology and data) that drive insight and support innovation. We are focused on becoming an employer of choice in our chosen markets and on building and pipeline of leaders. Our strategy also depends on our ability to enhance the link between the performance, culture and way we reward our people, so we will be doing further work on this. We will also be investing in more targeted workforce and succession planning to ensure we can harness the talent we already have and help to build the capabilities we need now and in the future. inherent volatility in the business we Finally, we will focus on becoming write, and therefore, a better balance a more purpose-led organisation. of risk resulting in more consistent outcomes. We will be developing We need to strengthen the alignment, trust and collaboration that takes place Conclusion QBE generated strong momentum in 2021 during a second year impacted by the pandemic, underpinned by a collective team effort across the globe. Our people continue to demonstrate enormous resilience, responding well to the changes in our ways of working, and delivering for our customers and partners. I am confident we have a strong international insurance business with enormous potential and my priority is to build on the existing business momentum, bringing together our people with our shared Vision and Purpose to drive our future strategic direction. I want to extend my thanks to both the Group Executive Committee for their hard work and support and the over 11,000 people who come to work each day in support of our customers and partners. Outlook QBE delivered a strong result in 2021, with notable momentum across many of the key value drivers for the business. Our new strategic priorities will build on these strong foundations in 2022, where we are increasingly confident in our ability to drive sustained improvement across the organisation, and expect low to mid-90’s combined operating ratio for the business. We currently expect growth in constant currency gross written premium in 2022 to be in the high single digits. Andrew Horton Group Chief Executive Officer 10 Operating and financial review Group Chief Financial Officer’s report QBE achieved a strong rebound in profitability during 2021, reflecting a material improvement in underwriting earnings despite heightened catastrophe experience. Favourable market conditions and a focus on targeted growth supported a 22% increase in our premium base. We enter 2022 with real momentum. Gross written premium (US$M) 18,457 22% from 2020 Net earned premium (US$M) 13,408 10% from 2020 Statutory underwriting profit (loss) (US$M) 1,138 2020 (869) Financial performance QBE reported a statutory net profit after tax of $750 million compared with a loss of $1,517 million in 2020. Adjusted cash profit after tax improved to $805 million from a loss of $863 million in the prior year and equates to a return on equity of 10.3%. The statutory underwriting profit improved to $1,138 million (which included a $301 million risk-free rate benefit) from a loss of $869 million (which included a $381 million risk-free rate charge) in 2020, notwithstanding increased catastrophe claims and further adverse prior accident year claims development. Gross written premium increased 22% as a result of premium rate increases, improved retention and strong new business growth. Growth in our Crop business was particularly strong, supported by higher commodity prices and targeted organic initiatives. The statutory combined operating ratio improved to 93.7% from 104.2% in 2020, reflecting significant COVID-19 claims in the 2020 result and improved current accident year profitability. The benefits of increased operating efficiency more than offset a material increase in catastrophe claims. Crop reported a combined operating ratio of 92.7% compared with 95.0% in the first half and 98.2% in 2020. Underwriting profit increased to $87 million from $14 million in 2020. The Group’s statutory expense ratio improved to 13.6% from 15.0% in the prior year, reflecting further cost savings from the operational efficiency program coupled with operating leverage due to strong premium growth. We are now well into the next phase of our operating efficiency journey, including the rationalisation and modernisation of our IT estate, which is expected to contribute to an expense ratio of 13% by 2023. In addition to cost efficiencies, digitisation and modernisation are expected to drive sustained improvement in operating capacity and business agility. As we approach our 13% expense ratio target, we expect to increasingly reinvest incremental operating efficiencies to capitalise on longer-term growth opportunities. 10 11 Operating and financial review Financial strength and capital management QBE’s capital position strengthened during the year, notwithstanding very significant organic growth. QBE’s indicative APRA PCA multiple increased to 1.81x at 31 December 2021. Excluding GBP327 million of subordinated debt intended to be redeemed, the indicative pro forma APRA PCA multiple was 1.75x, up from 1.72x at the end of 2020, and at the higher end of our 1.6–1.8x target range. The improvement in the regulatory capital position primarily reflects strong organic earnings generation during the year. We have revised our measure of gearing from debt to equity to debt to total capital to align with the approach underpinning our external debt covenants. Debt to total capital was 26.9% at 31 December 2021. Excluding the subordinated debt intended to be redeemed, pro forma gearing improved to 24.1% from 25.8% at the end of 2020, and is within the Group’s 15–30% target range. The probability of adequacy (PoA) of net outstanding claims reduced slightly to 91.7% from 92.5% at the end of 2020, but remains towards the top end of our 87.5–92.5% target range. Statutory net profit (loss) after tax (US$M) 750 Investment performance and strategy 2020 (1,517) Adjusted cash profit (loss) ROE 10.3% 2020 (10.9)% The total investment return for the year was 0.4% and compared with 0.9% in 2020. During the year the Group held a modestly short asset duration relative to outstanding claims liabilities. With the significant steepening in yield curves, the Group generated a pre-tax profit of $41 million as a result of this tactical curve positioning. Our investment approach remains conservative, with 94% of our cash and investments in high quality fixed income securities and the remaining 6% in risk assets, primarily unlisted property and infrastructure. In 2022, we will gradually move towards our long-term strategic asset allocation benchmark of 15% exposure to risk assets, including equities, high yield and emerging market debt, and private credit. Summary income statement and underwriting performance Group Chief Financial Officer’s report QBE achieved a strong rebound in profitability during 2021, reflecting a material improvement in underwriting earnings despite heightened catastrophe experience. Favourable market conditions and a focus on targeted growth supported a 22% increase in our premium base. We enter 2022 with real momentum. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s STATUTORY ADJUSTMENTS MANAGEMENT BASIS ' Gross written premium (US$M) 18,457 22% from 2020 Net earned premium (US$M) 13,408 10% from 2020 Statutory underwriting profit (loss) (US$M) 1,138 2020 (869) Financial performance QBE reported a statutory net profit after tax of $750 million compared with a loss of $1,517 million in 2020. Adjusted cash profit after tax improved to $805 million from a loss of $863 million in the prior year and equates to a return on equity of 10.3%. The statutory underwriting profit improved to $1,138 million (which included a $301 million risk-free rate benefit) from a loss of $869 million (which included a $381 million risk-free rate charge) in 2020, notwithstanding increased catastrophe claims and further adverse prior accident year claims development. Gross written premium increased 22% as a result of premium rate increases, improved retention and strong new business growth. Growth in our Crop business was particularly strong, supported by higher commodity prices and targeted organic initiatives. The statutory combined operating ratio improved to 93.7% from 104.2% in 2020, reflecting significant COVID-19 claims in the 2020 result and improved current accident year profitability. The benefits of increased operating efficiency more than offset a material increase in catastrophe claims. Crop reported a combined operating ratio of 92.7% compared with 95.0% in the first half and 98.2% in 2020. Underwriting profit increased to $87 million from $14 million in 2020. The Group’s statutory expense ratio improved to 13.6% from 15.0% in the prior year, reflecting further cost savings from the operational efficiency program coupled with operating leverage due to strong premium growth. We are now well into the next phase of our operating efficiency journey, including the rationalisation and modernisation of our IT estate, which is expected to contribute to an expense ratio of 13% by 2023. In addition to cost efficiencies, digitisation and modernisation are expected to drive sustained improvement in operating capacity and business agility. As we approach our 13% expense ratio target, we expect to increasingly reinvest incremental operating efficiencies to capitalise on longer-term growth opportunities. FOR THE YEAR ENDED 31 DECEMBER Gross written premium Gross earned premium Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Net investment income on policyholders’ funds Insurance profit Net investment income on shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles Profit (loss) before income tax Income tax expense Profit (loss) after income tax Non-controlling interests Net profit (loss) after income tax KEY RATIOS Net claims ratio (ex risk-free rate) Prior accident year claims development Risk margin (release) charge Net commission ratio Expense ratio Combined operating ratio (ex risk-free rate) Combined operating ratio Insurance profit (loss) margin 2021 US$M 18,457 17,035 13,408 (8,371) (2,070) (1,829) 1,138 77 1,215 45 (247) – (7) (72) (21) 913 (156) 757 (7) 750 % 64.6 (1.1) (0.6) 15.5 13.6 93.7 91.5 9.1 2020 US$M 14,643 14,008 11,708 (8,934) (1,891) (1,752) (869) 142 (727) 84 (252) (2) (5) (104) (466) (1,472) (39) (1,511) (6) (1,517) % 73.1 3.1 2.9 16.1 15.0 104.2 107.4 (6.2) CTP 2021 US$M – – (365) 349 19 – 3 – 3 COVID 2021 US$M COVID 2020 US$M 4 4 (6) 141 2 2 139 – 139 (42) (42) (77) (560) 9 (27) (655) – (655) 20211,2 US$M 18,453 17,031 13,779 (8,861) (2,091) (1,831) 996 77 1,073 2020 1 US$M 14,685 14,050 11,785 (8,374) (1,900) (1,725) (214) 142 (72) 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n % 66.5 1.4 0.7 15.2 13.3 95.0 92.8 7.8 % 67.9 3.1 0.4 16.1 14.6 98.6 101.8 (0.6) 1 Excludes estimated impact of COVID-19 on Group underwriting results. 2 Excludes transaction to reinsure CTP liabilities which, although immaterial to profit overall, materially impacts year-on-year comparison of net earned premium and underwriting ratios. 12 Cash profit and dividends Reconciliation of cash profit FOR THE YEAR ENDED 31 DECEMBER Net profit (loss) after tax Amortisation and impairment of intangibles after tax 1 Write-off of deferred tax assets Write-off of capitalised IT assets Net cash profit (loss) after tax Restructuring and related expenses after tax Net loss on disposals after tax Additional Tier 1 capital coupon accrual Adjusted net cash profit (loss) after tax Return on average shareholders’ equity – adjusted cash basis (%) Basic earnings (loss) per share – adjusted cash basis (US cents) Dividend payout ratio (percentage of adjusted cash profit) 2 2021 US$M 750 53 – – 803 52 – (50) 805 10.3 54.6 41% 2020 US$M (1,517) 455 120 27 (915) 75 2 (25) (863) (10.9) (60.7) N/A 1 $50 million of pre-tax amortisation expense is included in underwriting expenses (2020 $50 million). 2 Dividend payout ratio is calculated as the total A$ dividend divided by adjusted cash profit converted to A$ at the period average rate of exchange. Dividends per share (A¢) Dividends 30 2021 2020 2019 2018 4 30 52 50 Dividend payout (A$M) 443 The Board has reassessed the Group’s dividend policy and now expects to pay out 40%–60% of adjusted cash profit annually. This revised approach will better support the Group’s growth ambitions and provide flexibility to manage the dynamics of the global insurance cycle. The final dividend for 2021 is 19 Australian cents per share, compared with the nil 2020 final dividend. The final dividend will be 10% franked and is payable on 12 April 2022. The Dividend Reinvestment Plan and Bonus Share Plan will be satisfied by the issue of shares at a nil discount. The combined 2021 interim and final dividend of 30 Australian cents per share is up substantially from 4 Australian cents per share in 2020 and equates to a total payout of A$443 million or 41% of adjusted cash profit. The payout for the current period balances the need to reward shareholders while retaining capital flexibility to support the near-term growth outlook and the normalisation of risk settings in our investment portfolio. Significant items impacting the underwriting result The summary income statement on the preceding page shows the statutory result excluding the following items to more clearly present underlying performance. CTP reinsurance During 2021, the Group entered into a transaction to reinsure Australian CTP prior accident year liabilities which reduced net earned premium and net claims expense by $365 million and $349 million respectively, while positively impacting commission expense by $19 million. While not materially impacting profit, the transaction impacts year-on-year comparison of net earned premium and underwriting ratios. COVID-19 The result included a COVID-19 benefit of $139 million compared with a charge of $655 million in 2020, mainly due to a $140 million risk margin release reflecting reduced uncertainty with respect to business interruption, LMI and trade credit claims outcomes. In addition, a current accident year charge of $63 million was offset by favourable prior accident year claims development of $64 million. The current accident year charge included North America claims (mainly accident & health (A&H), professional liability and workers’ compensation) and a modest second half charge for potential Australian business interruption claims. Prior accident year claims development included adverse development in North America which was more than offset by favourable development in International as well as positive development in business interruption, LMI, CTP and trade credit in Australia Pacific. While QBE separately identified obvious COVID-19 impacts, there could be other less significant impacts, both positive and negative, that were not readily identifiable or quantifiable. Further commentary in relation to COVID-19 is included in Note 1.2.3 on page 88 of this Annual Report. Unless otherwise stated, the Group and business commentary following excludes the impact of COVID-19 and the 2021 CTP reinsurance transaction. 12 13 Cash profit and dividends Segment underwriting performance Reconciliation of cash profit FOR THE YEAR ENDED 31 DECEMBER Net profit (loss) after tax Amortisation and impairment of intangibles after tax 1 Write-off of deferred tax assets Write-off of capitalised IT assets Net cash profit (loss) after tax Restructuring and related expenses after tax Net loss on disposals after tax Additional Tier 1 capital coupon accrual Adjusted net cash profit (loss) after tax Return on average shareholders’ equity – adjusted cash basis (%) Basic earnings (loss) per share – adjusted cash basis (US cents) Dividend payout ratio (percentage of adjusted cash profit) 2 2021 US$M 750 53 – – 803 52 – (50) 805 10.3 54.6 41% 2020 US$M (1,517) 455 120 27 (915) 75 2 (25) (863) (10.9) (60.7) N/A 1 $50 million of pre-tax amortisation expense is included in underwriting expenses (2020 $50 million). 2 Dividend payout ratio is calculated as the total A$ dividend divided by adjusted cash profit converted to A$ at the period average rate of exchange. Dividends per share (A¢) Dividends 30 2021 2020 2019 2018 4 443 The Board has reassessed the Group’s The combined 2021 interim and final dividend policy and now expects to pay dividend of 30 Australian cents per share out 40%–60% of adjusted cash profit is up substantially from 4 Australian cents 30 annually. This revised approach will better per share in 2020 and equates to a total support the Group’s growth ambitions and payout of A$443 million or 41% of adjusted 52 50 provide flexibility to manage the dynamics cash profit. of the global insurance cycle. The final dividend for 2021 is 19 Australian the need to reward shareholders while cents per share, compared with the nil retaining capital flexibility to support The payout for the current period balances Dividend payout (A$M) 2020 final dividend. the near-term growth outlook and the normalisation of risk settings in our investment portfolio. The final dividend will be 10% franked and is payable on 12 April 2022. The Dividend Reinvestment Plan and Bonus Share Plan will be satisfied by the issue of shares at a nil discount. Significant items impacting the underwriting result The summary income statement on the preceding page shows the statutory result excluding the following items to more clearly present underlying performance. COVID-19 CTP reinsurance During 2021, the Group entered into a transaction to reinsure Australian CTP prior accident year liabilities which reduced net earned premium and net claims expense by $365 million and The result included a COVID-19 benefit of $139 million compared with a charge of $655 million in 2020, mainly due to a $140 million risk margin release reflecting reduced uncertainty with respect to business interruption, LMI and trade credit claims outcomes. In addition, a current accident year charge of $63 million was offset by favourable prior accident year claims development $349 million respectively, while positively of $64 million. impacting commission expense by $19 million. While not materially impacting profit, the transaction impacts year-on-year comparison of net earned premium and underwriting ratios. The current accident year charge included North America claims (mainly accident & health (A&H), professional liability and workers’ compensation) and a modest second half charge for potential Australian business interruption claims. Prior accident year claims development included adverse development in North America which was more than offset by favourable development in International as well as positive development in business interruption, LMI, CTP and trade credit in Australia Pacific. While QBE separately identified obvious COVID-19 impacts, there could be other less significant impacts, both positive and negative, that were not readily identifiable or quantifiable. Further commentary in relation to COVID-19 is included in Note 1.2.3 on page 88 of this Annual Report. Unless otherwise stated, the Group and business commentary following excludes the impact of COVID-19 and the 2021 CTP reinsurance transaction. Combined operating ratio 95.0% 102.9 90.6 91.4 Net claims ratio 66.5% 78.4 59.8 63.2 Net commission ratio 15.2% 12.9 14.1 17.7 Expense ratio 13.3% 11.6 13.1 14.1 North America International Australia Pacific North America North America reported a combined operating ratio of 102.9%, down from 112.7% in 2020. Excluding further disappointing adverse prior accident year claims development, the current accident year combined ratio improved to 99.2% from 103.7% in 2020. Significantly higher catastrophe costs, which included Winter Storm Uri and Hurricane Ida, were more than offset by an improvement in the ex-cat claims ratio and the combined commission and expense ratio as a result of premium rate increases, cost savings and favourable operating leverage. Despite drought conditions in parts of the Mid West, Crop recorded a combined operating ratio of 92.7%, down from 98.2% in 2020. Strong premium growth and higher commodity prices contributed to a materially improved expense ratio. International International delivered another strong result reporting a combined operating ratio of 90.6%, down from 91.3% in 2020. Excluding favourable prior accident year claims development, the current accident year combined ratio increased to 91.8% from 89.6% in the prior year. Materially higher catastrophe costs more than offset further improvement in the combined commission and expense ratio. Both the insurance and reinsurance businesses were impacted by elevated catastrophe claims which included Storm Bernd as well as Winter Storm Uri and Hurricane Ida in the US. The ex-cat claims ratio increased slightly with the benefit of further premium rate increases on the attritional claims ratio more than offset by strengthened IBNR assumptions, especially with respect to large individual risk claims. European insurance and Asia recorded improved underwriting results relative to the prior year while QBE Re was impacted by heightened catastrophe costs and adverse prior accident year claims development. Australia Pacific Australia Pacific reported a strong combined operating ratio of 91.4%, down from 92.8% in 2020. Excluding adverse prior accident year claims development, the current accident year combined ratio improved to 88.8% from 93.3% in the prior year. Although elevated relative to the prior year, catastrophe claims costs reduced as a percentage of net earned premium. The ex-cat claims ratio and the combined commission and expense ratio improved further, supported by premium rate increases, cost control and favourable operating leverage. LMI reported a greatly improved combined operating ratio of 35.4%, down from 62.3% in the prior year. The strong residential property market and buoyant employment conditions contributed to the improved underwriting result. FOR THE YEAR ENDED 31 DECEMBER North America International Australia Pacific Corporate & Other Group management basis Risk-free rate impact NSW CTP reinsurance COVID-19 impact Group statutory GROSS WRITTEN PREMIUM NET EARNED PREMIUM COMBINED OPERATING RATIO INSURANCE PROFIT (LOSS) BEFORE INCOME TAX 2021 US$M 6,289 6,958 5,215 (9) 18,453 – – 4 18,457 2020 US$M 4,775 5,856 4,079 (25) 14,685 – – (42) 14,643 2021 US$M 3,965 5,545 4,265 4 13,779 – (365) (6) 13,408 2020 US$M 3,351 4,812 3,626 (4) 11,785 – – (77) 11,708 2021 % 102.9 90.6 91.4 – 95.0 (2.2) (0.2) (1.1) 91.5 2020 % 112.7 91.3 92.8 – 98.6 3.2 – 5.6 107.4 2021 US$M (23) 716 446 (66) 1,073 – 3 139 1,215 2020 US$M (488) 265 252 (101) (72) – – (655) (727) A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 14 Premium income and pricing Gross written premium (US$M) 18,453 21% from 2020 6,289 6,958 5,215 Net earned premium (US$M) 13,779 12% from 2020 3,965 4,265 5,545 North America International Australia Pacific Average renewal premium rate increase Group +9.7% North America International Australia Pacific +10.7% +10.2% +8.3% Group International Gross written premium increased 26% to $18,453 million from $14,685 million in the prior year. On a constant currency basis, gross written premium increased 21% reflecting rate increases, organic growth and improved retention coupled with especially strong growth in Crop. Excluding Crop, gross written premium growth was 17% on the same basis. The Group achieved an average renewal premium rate increase of 9.7% compared with 9.8% in 2020. Excluding premium rate increases and Crop, constant currency growth was 10% for the year, up from 1% in 2020 and 7% during the first half of 2021. North America North America reported a 32% increase in gross written premium, underpinned by an average renewal premium rate increase of 10.7% compared with 10.2% in 2020. Excluding Crop, gross written premium grew 20%, mainly due to premium rate increases and growth in financial lines, programs (property and specialty) and retail (middle market). Crop premium grew 51% as a result of significantly higher commodity prices coupled with strong organic growth. Excluding premium rate increases and Crop, growth was 14%. International reported a 15% uplift in gross written premium, underpinned by a 10.2% premium rate increase compared with 12.8% in the prior year. European insurance (financial lines, property and liability) and QBE Re achieved strong top-line growth of 29% and 26% respectively, while the UK and International markets grew by 15% and 10% respectively. Asia contracted by 2% due to significantly reduced travel insurance business. Excluding premium rate increases, growth was 6%. Australia Pacific Australia Pacific reported a 17% increase in gross written premium reflecting an 8.3% premium rate increase compared with 5.4% in 2020. Growth in commercial lines, home, motor and LMI was partly offset by moderation in CTP and the impact of the economic slowdown in the Pacific Islands. Excluding premium rate increases, growth was 11%. Reinsurance expense Reinsurance expense increased 44% to $3,252 million from $2,264 million in the prior year. Much of the increase reflects growth in more heavily reinsured portfolios including Crop, North America financial lines (where growth is being supported by a 50% quota share) and LMI (where the current accident year quota share was increased to 50%) as well as additional (largely government) reinsurance on trade credit & surety. Average renewal premium rate increases FOR THE YEAR ENDED 31 DECEMBER North America International Australia Pacific Group 2021 % 10.7 10.2 8.3 9.7 2020 % 10.2 12.8 5.4 9.8 2019 % 5.7 6.0 7.3 6.3 2018 % 3.8 4.1 7.2 5.0 Foreign exchange rates FOR THE YEAR ENDED 31 DECEMBER 2021 2020 Australian dollar Sterling Euro PROFIT OR LOSS BALANCE SHEET PROFIT OR LOSS BALANCE SHEET A$ £ € 0.751 1.375 1.182 0.727 1.353 1.138 0.688 1.283 1.140 0.771 1.368 1.222 14 15 Premium income and pricing Underwriting expenses, commission and tax Gross written premium (US$M) 18,453 21% from 2020 Net earned premium (US$M) 13,779 12% from 2020 6,289 6,958 5,215 3,965 4,265 5,545 North America International Australia Pacific Average renewal premium rate increase Group +9.7% North America International Australia Pacific +10.7% +10.2% +8.3% Group International Gross written premium increased 26% International reported a 15% uplift in gross to $18,453 million from $14,685 million written premium, underpinned by a 10.2% in the prior year. On a constant currency basis, gross premium rate increase compared with 12.8% in the prior year. written premium increased 21% reflecting European insurance (financial lines, rate increases, organic growth and property and liability) and QBE Re improved retention coupled with especially achieved strong top-line growth of 29% strong growth in Crop. Excluding Crop, gross written premium growth was 17% on the same basis. and 26% respectively, while the UK and International markets grew by 15% and 10% respectively. Asia contracted by 2% due to significantly reduced travel The Group achieved an average renewal insurance business. premium rate increase of 9.7% compared with 9.8% in 2020. Excluding premium rate increases and Crop, constant currency growth was 10% for the year, up from 1% in 2020 and 7% during the first half of 2021. North America North America reported a 32% increase in gross written premium, underpinned by an average renewal premium rate increase of 10.7% compared with 10.2% in 2020. Excluding Crop, gross written premium grew 20%, mainly due to premium rate increases and growth in financial lines, programs (property and specialty) and retail (middle market). Crop premium grew 51% as a result of significantly higher commodity prices coupled with strong organic growth. Excluding premium rate increases and Crop, growth was 14%. Excluding premium rate increases, growth was 6%. Australia Pacific Australia Pacific reported a 17% increase in gross written premium reflecting an 8.3% premium rate increase compared with 5.4% in 2020. Growth in commercial lines, home, motor and LMI was partly offset by moderation in CTP and the impact of the economic slowdown in the Pacific Islands. Excluding premium rate increases, growth was 11%. Reinsurance expense Reinsurance expense increased 44% to $3,252 million from $2,264 million in the prior year. Much of the increase reflects growth in more heavily reinsured portfolios including Crop, North America financial lines (where growth is being supported by a 50% quota share) and LMI (where the current accident year quota share was increased to 50%) as well as additional (largely government) reinsurance on trade credit & surety. Average renewal premium rate increases FOR THE YEAR ENDED 31 DECEMBER North America International Australia Pacific Group 2021 % 10.7 10.2 8.3 9.7 2020 % 10.2 12.8 5.4 9.8 2019 % 5.7 6.0 7.3 6.3 2018 % 3.8 4.1 7.2 5.0 Foreign exchange rates FOR THE YEAR ENDED 31 DECEMBER 2021 2020 Australian dollar Sterling Euro A$ £ € PROFIT OR PROFIT OR LOSS 0.751 1.375 1.182 BALANCE SHEET 0.727 1.353 1.138 LOSS 0.688 1.283 1.140 BALANCE SHEET 0.771 1.368 1.222 Expense ratio 13.3% 2020 14.6% Net commission ratio 15.2% 2020 16.1% Tax rate 17.1% 2020 (2.6)% Underwriting and other expenses The Group’s expense ratio improved to 13.3% from 14.6% in the prior year, reflecting disciplined cost management (albeit assisted by modest non-recurring savings) coupled with operating leverage as a result of strong premium growth. North America reported significant improvement due to cost savings and operating leverage driven by strong premium growth, especially in Crop. International and Australia Pacific also enjoyed a modest reduction in their expense ratios as a result of cost control coupled with positive operating leverage. Net commission The net commission ratio reduced to 15.2% from 16.1% in 2020, primarily due to business mix. Growth in Crop, where commissions are reimbursed by the US Government, and in classes protected by quota share such as financial lines and LMI, beneficially impacted net commission expense in North America and Australia Pacific. International’s commission ratio improved due to profit commissions coupled with additional reinsurance on trade credit. Income tax expense QBE’s effective statutory tax rate was 17.1% compared with a negative 2.6% in the prior year and reflects the mix of corporate tax rates in the countries where we operate, with profits in the North American tax group offset by previously unrecognised tax losses. The prior year tax rate was impacted by the non-deductible impairment of goodwill and corresponding write-off of deferred tax assets. During the year, QBE paid $88 million in corporate income tax globally, net of a $3 million refund in Australia which reduced our dividend franking account, the balance of which stood at A$54 million as at 31 December 2021. The franking account balance will enable the Group to fully frank A$126 million of dividends. Having regard to QBE’s franked AT1 distribution commitments, the dividend franking percentage is expected to remain around 10% for the foreseeable future. Operational efficiency Underwriting and other expenses (US$M) 1,831 Stable on 2020 1 Expense ratio 13.3% 2021 2020 2019 2018 13.3 14.6 14.6 15.2 1 Constant currency basis. We have made good progress on the next phase of our efficiency journey targeting an expense ratio of 13% by 2023. reduced development and operational service costs as well as increased contract flexibility and protection. We are making steady progress on the rationalisation and modernisation of our IT estate, with our exposure to end-of-life technology reducing in line with plan through a structured program of systems upgrades and decommissioning work underway in each of our divisions. Automation of testing and infrastructure operations is ongoing and delivering gradual improvement in quality and efficiency. As an example, 50 simple infrastructure automations delivered to date are estimated to save in excess of 3,750 person days per annum. We are nearing completion of the transition from our Sydney data centre to a co-located facility and, as part of this process, have commenced active migration of existing legacy applications to cloud based infrastructure. The Group transitioned to a new contract relationship with our main IT service provider earlier in the year which is already delivering material benefits, including Our digital capability continues to improve with digitisation and automation of claims processes and innovation driving improved customer and partner experience, particularly in Australia, Asia and North America. During the year we consolidated our real estate footprint in Australia and North America in line with new working practices. We also achieved a meaningful reduction in third party consulting costs and simplified divisional organisational structures, particularly in North America. These measures are supporting reinvestment into key areas of strategic growth and helping to unlock greater operating leverage in our business as well as improving the expense ratio. The expected cost of the restructure is approximately $150 million over three years, including a $72 million charge recognised in the current year that was not reported as part of the Group’s underwriting expenses. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 16 Claims Ex-cat claims ratio Incurred claims Ex-cat claims 57.4% 66.7% 53.1% 54.2% Catastrophe claims ratio 6.6% Excluding the impact of changes in risk-free rates used to discount net outstanding claims, the net claims ratio improved to 66.5% from 67.9% in the prior year. This was primarily driven by improvement in the ex-cat claims ratio and a reduced level of adverse prior accident year claims development, which were partly offset by an increase in the net cost of catastrophe claims. 7.7% 6.5% 5.7% The major components of the Group’s net claims ratio are discussed hereafter. North America International Australia Pacific The ex-cat claims ratio improved to 57.4% from 58.8% in the prior year, primarily due to premium rate increases in excess of claims inflation and reduced claims settlement costs, albeit partly offset by a strengthened current accident year IBNR allowance. The ex-cat claims ratio in North America improved to 66.7% from 69.3% in the prior year (57.1% from 60.2% excluding Crop) reflecting premium rate increases in excess of claims inflation and reduced severity of claims experience in aviation. Despite the strong premium rate environment, International’s ex-cat claims ratio increased marginally to 53.1% from 52.8%, with the benefit of premium rates in excess of claims inflation more than offset by stronger IBNR assumptions in long-tail classes. Australia Pacific’s ex-cat claims ratio improved to 54.2% from 56.6% in the prior year, reflecting the benefit of premium rate increases in excess of claims inflation coupled with continued refinements to risk selection and claims management initiatives. Weighted average risk-free rates CURRENCY Australian dollar US dollar Sterling Euro Group weighted Estimated risk- free rate benefit (charge) 31 DECEMBER 2021 30 JUNE 2021 31 DECEMBER 2020 31 DECEMBER 2019 31 DECEMBER 2018 1.12 1.44 0.86 (0.33) 0.87 301 0.68 1.35 0.72 (0.30) 0.73 205 1 0.41 0.82 0.07 (0.59) 0.30 (381) 1.11 1.95 0.80 (0.08) 1.05 (231) 2.06 2.74 1.08 0.23 1.66 13 % % % % % US$M 1 Estimated risk-free rate benefit for the six months to 30 June 2021. 16 Claims Ex-cat claims ratio Incurred claims Ex-cat claims 57.4% 66.7% 53.1% 54.2% prior year. Excluding the impact of changes in risk-free rates used to discount net The ex-cat claims ratio improved to 57.4% from 58.8% in the prior year, primarily outstanding claims, the net claims ratio due to premium rate increases in excess improved to 66.5% from 67.9% in the of claims inflation and reduced claims This was primarily driven by improvement in the ex-cat claims ratio settlement costs, albeit partly offset by a strengthened current accident year IBNR allowance. Catastrophe claims ratio 6.6% and a reduced level of adverse prior The ex-cat claims ratio in North America accident year claims development, improved to 66.7% from 69.3% in the which were partly offset by an increase prior year (57.1% from 60.2% excluding in the net cost of catastrophe claims. Crop) reflecting premium rate increases 7.7% 6.5% 5.7% The major components of the Group’s net claims ratio are discussed hereafter. North America International Australia Pacific in excess of claims inflation and reduced severity of claims experience in aviation. Despite the strong premium rate environment, International’s ex-cat claims ratio increased marginally to 53.1% from 52.8%, with the benefit of premium rates in excess of claims inflation more than offset by stronger IBNR assumptions in long-tail classes. Australia Pacific’s ex-cat claims ratio improved to 54.2% from 56.6% in the prior year, reflecting the benefit of premium rate increases in excess of claims inflation coupled with continued refinements to risk selection and claims management initiatives. Net catastrophe claims (US$M) 905 6.6% of NEP 2020 688 Weighted average risk-free rates As tabled on the preceding page, the currency weighted average risk-free rate used to discount net outstanding claims liabilities increased to 0.87% at 31 December 2021 from 0.30% at 31 December 2020. Risk-free rates increased materially across all currencies resulting in a $301 million underwriting benefit that decreased the net claims ratio by 2.2% compared with a $381 million charge in the prior year that increased the net claims ratio by 3.2%. The $301 million beneficial risk-free rate impact on the underwriting result was largely offset by a $260 million adverse mark-to-market impact on investment income. Catastrophe claims The net cost of catastrophe claims increased to $905 million or 6.6% of net earned premium compared with an allowance of 5.7% and a net cost of 5.8% in 2020. Catastrophe costs included Winter Storm Uri, Hurricane Ida, Storm Bernd, Cyclone Seroja and widespread flooding and storm losses in Australia. The world experienced another costly year of natural catastrophes in 2021 and, most notably, the US experienced its third most costly year on record. At $36 billion, Hurricane Ida resulted in one of the largest individual losses ever recorded. Catastrophe experience can be intensified by the effects of climate change. In that context, we continue to analyse hazard and claims trends while reviewing our exposure to properly balance the risk we face against the need to achieve an appropriate return on the capital required to support that risk. As a consequence, we are currently reducing our exposure to North American hurricane risk. Weighted average risk-free rates CURRENCY Australian dollar US dollar Sterling Euro Group weighted Estimated risk- free rate benefit (charge) % % % % % US$M 1 Estimated risk-free rate benefit for the six months to 30 June 2021. 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 2021 1.12 1.44 0.86 (0.33) 0.87 301 30 JUNE 2021 0.68 1.35 0.72 (0.30) 0.73 205 1 2020 0.41 0.82 0.07 (0.59) 0.30 (381) 2019 1.11 1.95 0.80 (0.08) 1.05 (231) 2018 2.06 2.74 1.08 0.23 1.66 13 Prior accident year claims development Prior accident year claims development was $192 1,2 million adverse or 1.4% of net earned premium, compared with $366 2 million or 3.1% adverse in the prior year. North America reported $148 2 million of adverse development reflecting significant strengthening in legacy excess & surplus (E&S) lines and discontinued programs. Across reserves for ongoing business, we experienced a modest overall release with increases in financial lines and property programs more than offset by favourable development in commercial retail, workers’ compensation and A&H. International reported $661 million of favourable development, primarily due to better than expected development in QBE Re casualty, property, UK motor, European liability and Asia which more than offset further strengthening in financial lines and QBE Re North America. Australia Pacific reported $111 million of adverse development, reflecting significant strengthening in commercial liability as well as workers’ compensation and New Zealand, partly offset by releases in CTP, LMI and credit & surety. 1 Excludes $55 million of adverse prior accident year claims development in International which is more than offset by related premium adjustments also recognised in the period. 2 Excludes $1 million (2020 $20 million) of positive prior accident year claims development pertaining to North America Crop insurance that is matched by additional premium cessions under the MPCI scheme. Prior accident year claims development (US$M) (192) 1,2 2021 2020 2019 2018 (192) (366) (22) 92 17 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 18 Balance sheet and capital management PCA multiple Capital management Prescribed capital amount 1.75x 1 2020 1.72x Target PCA multiple 1.6–1.8x Debt to total capital 24.1% 1 2020 25.8% Target debt to total capital 15–30% QBE’s indicative PCA multiple increased to 1.81x at 31 December 2021 from 1.72x at 31 December 2020, reflecting: • the $803 million full year cash profit; • the GBP400 million subordinated Tier 2 note issue in September 2021; and • an increase in the premium liabilities surplus due to significant premium rate increases. These beneficial impacts were largely offset by: • the March 2021 redemption of $200 million of subordinated notes which reduced Tier 2 capital by $37 million; • an increase in the insurance liabilities risk charge, primarily driven by strong premium growth; and • a higher asset risk charge reflecting the increase in reinsurance recoveries receivable, premium receivable and deferred reinsurance expense. Allowing for the intended redemption of GBP327 million of subordinated debt, the Group’s indicative pro forma PCA multiple was 1.75x, at the higher end of our 1.6–1.8x target range. In March 2021, QBE redeemed $200 million of subordinated Tier 2 notes. These notes were subject to APRA’s transitional arrangements and, as of 31 December 2020, only $37 million was regulatory capital qualifying. As such, the redemption had minimal impact on regulatory capital at 31 December 2021. In September 2021, QBE undertook a GBP400 million capital qualifying Tier 2 subordinated debt issuance to prefund the intended redemption of GBP327 million of subordinated debt. Debt to total capital was 26.9% at 31 December 2021. Allowing for the subordinated debt which is intended to be redeemed, pro forma debt to total capital improved to 24.1% from 25.8% at 31 December 2020. QBE has $900 million of perpetual fixed rate resetting capital notes that are AT1 qualifying under APRA’s capital adequacy framework. The notes are classified as equity, pay franked after tax distributions and do not impact the weighted average number of shares for earnings per share calculations (since the notes are written off in whole or in part if APRA determines QBE is, or would become, non-viable). The after-tax distribution on QBE’s AT1 capital was $50 million, while the reclassification of the 2017 notes (in July 2020) contributed to an $11 million reduction in financing and other costs during the year. Capitalisation and capital metrics AS AT 31 DECEMBER Net assets Less: intangible assets Net tangible assets Add: borrowings Total tangible capitalisation Debt to total capital Debt to equity Debt to tangible equity Premium solvency 2 QBE's regulatory capital base APRA's PCA PCA multiple BENCHMARK STATUTORY PRO FORMA 1 STATUTORY 2021 2020 US$M US$M US$M US$M US$M % % % % US$M US$M 15–30 1.6–1.8x 8,882 (2,449) 6,433 3,268 9,701 26.9 36.8 50.8 46.7 10,387 5,725 1.81x 8,882 (2,449) 6,433 2,826 9,259 24.1 31.8 43.9 46.7 9,945 5,692 1.75x 8,492 (2,534) 5,958 2,955 8,913 25.8 34.8 49.6 50.6 9,348 5,434 1.72x 1 Pro forma adjusting for GBP327 million pre-funded debt repayment intended to be repaid. 2 The ratio of net tangible assets to net earned premium. 18 19 PCA multiple Capital management Prescribed capital amount Net outstanding claims Borrowings Total borrowings 1 (US$M) A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p At 31 December 2021, the risk margin was $1,418 million or 8.8% of the net discounted central estimate of outstanding claims compared with $1,537 million and 9.7% at 31 December 2020. Excluding foreign exchange and the CTP reinsurance transaction, the risk margin decreased $45 million in 2021 compared with a $344 million increase in 2020. The probability of adequacy (PoA) of net outstanding claims reduced to 91.7% from 92.5% at 31 December 2020 but remains comfortably above the midpoint of the Group’s 87.5%–92.5% target range. The reduction in risk margin as a percentage of the net discounted central estimate primarily reflects a $140 million risk margin release due to reduced COVID-19 related uncertainty, particularly with respect to business interruption, trade credit and LMI, which more than offset significant margin strain associated with strong new business growth. Excluding foreign exchange, the risk margin increased $95 million on a management basis compared with $44 million in the prior year, reflecting especially strong new business growth. At 31 December 2021, total borrowings were $3,268 million, up $313 million from $2,955 million at 31 December 2020. The increase in borrowings reflects the GBP400 million subordinated note issue in September 2021, which more than offset the $200 million subordinated note redemption in March 2021. Excluding the pre-funding of the intended redemption of GBP327 million of subordinated debt, pro forma borrowings are $2,826 million. Gross interest expense on borrowings for the year was $177 million, down from $185 million in the prior year. The average annualised cash cost of borrowings at 31 December 2021 was 5.4%, down from 6.1% as at 31 December 2020, and will reduce to around 5.3% after the intended redemption of GBP327 million of subordinated debt. At 31 December 2021, all but $6 million of the Group’s borrowings continued to count towards regulatory capital. AS AT 31 DECEMBER Net discounted central estimate Risk margin Net outstanding claims Probability of adequacy Risk margin to central estimate US$M US$M US$M % % 2021 16,107 1,418 17,525 91.7 8.8 2020 15,797 1,537 17,334 92.5 9.7 The carrying value of identifiable intangibles and goodwill at 31 December 2021 was $2,449 million, down from $2,534 million at 31 December 2020. During the year, the carrying value of intangibles reduced by $85 million due to amortisation and impairment expense of $71 million and a $104 million foreign exchange impact which more than offset net additions in the period, being mainly the capitalisation of software in relation to various information technology projects. 3,268 Less than one year One to five years More than five years 442 2,288 538 Borrowings profile r e v i e w 3,268 Senior debt 2 Subordinated debt – 100% 1 Based on first call date. 2 Senior debt at 31 December 2021 is $6 million. 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 1 o v e r v i e w P e r f o r m a n c e 2 fi n a n c i a l O p e r a t i n g a n d 6 i O t h e r n f o r m a t i 2,016 o n North America International Australia Pacific 358 524 1,134 Capitalisation and capital metrics Identifiable intangibles and goodwill Goodwill (US$M) Balance sheet and capital management Debt to total capital of subordinated debt. 1.75x 1 2020 1.72x Target PCA multiple 1.6–1.8x 24.1% 1 2020 25.8% Target debt to total capital 15–30% In March 2021, QBE redeemed $200 QBE’s indicative PCA multiple increased million of subordinated Tier 2 notes. These to 1.81x at 31 December 2021 from notes were subject to APRA’s transitional 1.72x at 31 December 2020, reflecting: arrangements and, as of 31 December 2020, only $37 million was regulatory capital qualifying. As such, the redemption had minimal impact on regulatory capital at 31 December 2021. In September 2021, QBE undertook a GBP400 million capital qualifying Tier 2 subordinated debt issuance to prefund the intended redemption of GBP327 million Debt to total capital was 26.9% at 31 December 2021. Allowing for the subordinated debt which is intended to be redeemed, pro forma debt to total capital improved to 24.1% from 25.8% at 31 December 2020. • the $803 million full year cash profit; • the GBP400 million subordinated Tier 2 note issue in September 2021; and • an increase in the premium liabilities surplus due to significant premium rate increases. These beneficial impacts were largely offset by: • the March 2021 redemption of $200 million of subordinated notes which reduced Tier 2 capital by $37 million; • an increase in the insurance liabilities risk charge, primarily driven by strong premium growth; and • a higher asset risk charge reflecting QBE has $900 million of perpetual fixed the increase in reinsurance recoveries rate resetting capital notes that are AT1 receivable, premium receivable and qualifying under APRA’s capital adequacy deferred reinsurance expense. Allowing for the intended redemption of GBP327 million of subordinated debt, the Group’s indicative pro forma PCA multiple was 1.75x, at the higher end of our 1.6–1.8x target range. framework. The notes are classified as equity, pay franked after tax distributions and do not impact the weighted average number of shares for earnings per share calculations (since the notes are written off in whole or in part if APRA determines QBE is, or would become, non-viable). The after-tax distribution on QBE’s AT1 capital was $50 million, while the reclassification of the 2017 notes (in July 2020) contributed to an $11 million reduction in financing and other costs during the year. AS AT 31 DECEMBER Net assets Less: intangible assets Net tangible assets Add: borrowings Total tangible capitalisation Debt to total capital Debt to equity Debt to tangible equity Premium solvency 2 QBE's regulatory capital base APRA's PCA PCA multiple BENCHMARK STATUTORY PRO FORMA 1 STATUTORY US$M US$M US$M US$M US$M % % % % US$M US$M 15–30 1.6–1.8x 2021 8,882 (2,449) 6,433 3,268 9,701 26.9 36.8 50.8 46.7 10,387 5,725 1.81x 8,882 (2,449) 6,433 2,826 9,259 24.1 31.8 43.9 46.7 9,945 5,692 1.75x 2020 8,492 (2,534) 5,958 2,955 8,913 25.8 34.8 49.6 50.6 9,348 5,434 1.72x 1 Pro forma adjusting for GBP327 million pre-funded debt repayment intended to be repaid. 2 The ratio of net tangible assets to net earned premium. 20 Investment performance and strategy Total investment income (US$M) 122 104 from 2020 Total investment return 0.4% 2020 0.9% Fixed income Vs Growth assets (0.4)% 13.5% 2020 1.9% 2020 (4.8%) The Group’s investment portfolio remains conservatively positioned with around 94% invested in high quality fixed income securities and the remaining 6% invested in growth assets, primarily unlisted property and infrastructure assets. Unlisted property, infrastructure and private equity enjoyed strong returns of 13.6%, 10.8% and 15.9% respectively, with most of the private equity portfolio (excluding $50 million held for sale at year end) sold immediately prior to year-end. Our corporate credit portfolio performed in line with general spread movements throughout the year and contributed incremental yield as expected. The portfolio proved highly resilient from a credit event perspective with minimal exposure to ratings downgrades and certainly well below the level of ratings downgrades seen across the fixed income market more broadly. Our decision to adopt a duration position modestly short of that required to match the Group’s insurance liabilities added value as bond yields rose, benefitting pre tax profit by $41 million. The total investment return for the year was 0.4% compared with 0.9% in the prior year reflecting the increase in risk-free rates during the year. After adjusting for the risk-free rate impact on fixed income securities, the total investment return was 1.3% compared with a negative return of 0.9% in the prior year. 14,777 Closing total cash and investments was $28,967 million, up from $27,735 million at 31 December 2020. Strong operating cash flow coupled with the net increase in subordinated debt were partly offset by a $764 million foreign exchange impact. 6,953 We intend gradually introducing a modest amount of additional risk to the portfolio during 2022. 4,537 Interest bearing financial assets – S&P security grading AS AT 31 DECEMBER Rating AAA AA A =525). High emitting sectors exposure To confirm the portfolio’s low transition risks associated with a disruptive shift to a net‑zero economy, we again quantified our exposure by assessing the proportion of our investment grade corporate credit portfolio to high emitting sectors using the Paris Agreement Capital Transition Assessment tool. Our exposure to these high emitting sectors is small, with 4.3% of our portfolio in automotive, and no exposure to coal mining, power generation, oil and gas production, cement production, steel production, shipping, and aviation, all of which contribute significantly to global greenhouse gas emissions. Understanding our small exposure to the Paris Agreement automotive industry will enable us to continue to target Target 1.5–2°C our engagement strategies towards the companies we hold in this sector. Warming potential With increased availability of underlying data tailored to understanding climate risk, working with our data provider we were also able to determine the combined Scope 1 and 2 warming potential of the portfolio. A portfolio’s warming potential is calculated as a weighted average of each portfolio company’s individual contribution to rising temperatures. While a carbon footprint is intrinsically backward‑ looking, a warming potential metric incorporates individual company emission reduction targets and allows for a forward‑looking analysis of the portfolio. Our combined Scope 1 and 2 warming potential of 1.9°C indicates that we are within the Paris Agreement temperature range of 1.5°C to 2°C. We will continue to push for 1.5°C alignment through targeted engagement with our highest emitters. By understanding where our sector exposures lie and engaging with our top emitters, we will continue our progress towards net‑zero by 2050 and 1.5°C alignment. Investment grade corporate credit warming potential The temperature gauge illustrates the Scope 1 and 2 combined warming potential for the investment grade corporate credit portfolio. Paris Agreement Target 1.5–2°C 4°C 3°C 2°C 1°C 0°C A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 34 Investments (continued) Engaging on climate change Engagement is our preferred method to effect change in companies and external fund managers. We adopt targeted engagement to gain insight into integration of climate‑related issues, which allows us to understand our exposure to risks and opportunities for improvement. An ESG review is undertaken for all existing managers and, as part of this process, we have included targeted due diligence questions focusing on climate change strategy including mitigation and adaptation, policy implementation and practical business actions, with a view to better understanding what emission reduction targets have been set, as well as the key strategic initiatives being undertaken to ensure a just transition. In 2021, we strengthened this review process with the introduction of a new scoring methodology, informed by industry best practice frameworks. This scoring methodology allows us to produce a quantitative indicator score of how our external fund managers are implementing responsible investment practices and approaching these key ESG areas including climate risks and opportunities. The outcome of each assessment enables us to further understand the journey of our external fund managers and lays a strong foundation for engagement on action in 2022. We have also actively engaged our external fund managers in reporting in line with the TCFD and understanding the climate scenario analysis they are undertaking to identify key physical and transition risks. At a minimum, we will conduct an ESG review annually for all existing managers, with additional reviews if material issues arise. We are also committed to reviewing our own integration of ESG into these processes on an annual basis, to reflect continuing changes in market practice and business priorities. Positively, while our external fund manager reviews and discussions highlighted that climate change is the largest challenge they are currently facing, over 75% of our external fund managers are committed to net‑zero by 2050 and integrating emissions reduction considerations into key investment decisions. Approximately 50% of our external fund managers are also doing targeted work to understand their progress in achieving the UN Sustainable Development Goals and exploring opportunities to further develop in this space. Risk management Climate change is embedded into QBE’s risk management framework. As part of our Risk Management Strategy, we categorise risks into eight classes, with ESG risk classified as part of strategic risk. Our Group ESG Risk Standard, which forms part of our Strategic Risk Policy, outlines the process we use to identify and manage ESG risks across our business. ESG risks are reported to the Group Chief Risk Officer regularly, with our ESG Risk Committee focusing on material ESG risks. Our E&S Risk Framework helps us identify and mitigate risks to our underwriting and investment portfolios across a range of material ESG risk issues and sectors including energy. Since the initial release of our E&S Risk Framework, we have focused on the development of practical implementation guidance ahead of it coming into effect. As a result of this work, we made some minor amendments to our commitments in relation to biodiversity and protected areas, and controversial weapons to ensure we are able to practically implement and comply with our commitments. The E&S Risk Framework is available here: www.qbe.com/investor-relations/corporate- governance/global-policies. Risk tool In Europe QBE has developed a tool to provide a risk management framework for customers to better assess ESG risk. Developed by QBE’s Risk Solutions practice, the tool provides a template sustainability policy and ESG framework to help smaller and medium sized enterprises identify, monitor and manage a range of ESG issues that may impact on their business. 34 35 Investments (continued) Underwriting Climate in business planning Climate change underwriting strategy This year, our Group business planning process has explicitly considered the potential impact of climate change. This includes consideration of how climate change is reflected within divisional business plans, the potential impact to the portfolio/product’s horizon strategy and anticipated impact on exposures, and any medium‑term activities to be considered to adapt to the risks posed by climate change. As part of its roadmap work in response to the UK Prudential Regulation Authority, our European division has undertaken detailed analysis, mapping exposure by line of business to climate sensitive sectors. There has been extensive engagement with the product heads of each line of business on scenario analysis and the identification of risks and responses to inform our underwriting strategy. A divisional climate change underwriting strategy has been developed, led by the division’s Chief Underwriting Officer. It is built upon product‑based strategies and has been updated to reflect the latest Network for Greening the Financial System transition scenarios as used by the Bank of England as part of its climate biennial exploratory scenarios. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w Physical scenario analysis Both the frequency and severity of natural catastrophes have increased steadily over time, causing economic and insured losses with the general trend further heightened by climate change. In 2021, we undertook a deeper review of our natural catastrophe exposure to ensure that QBE is not over ‑exposed to climate risk as the climate continues to change. This resulted in a change in our natural catastrophe business planning philosophy. We strengthened our annual natural catastrophe allowance in the business plan, reflecting the recent period of elevated natural catastrophe activity. We are continuing to learn from the various natural catastrophes, and are continuously refining our models to better price catastrophe risk. This leads to a better understanding of climate change resilience and therefore, where meaningful, credits are built into our pricing for properties with more resilient and energy efficient building features. North America Europe 3 G o v e r n a n c e Asia Australia Pacific Key: Windstorm Convective storm/Hail Flood Bushfire/Wildfire Scenario analysis completed Scenario analysis underway 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i How do we manage physical risks from climate change? We use stochastic catastrophe models to better understand our exposure to climate risk. These models inform capital requirements, policy pricing and risk selection, to monitor our change in climate risk exposure, to define and quantify policy exclusions, and to structure reinsurance protection. They are also used to inform financial and strategic planning. We routinely review the adequacy of our catastrophe models and adjust them to reflect the current climate risk. How do we adjust the catastrophe models for future climate change? Firstly, we need to determine how climate change will impact the intensity and frequency of severe weather events. This requires the interpretation of scientific papers and establishing consensus scientific views on the impact of climate change and the related timeframe for specific weather phenomena and specific regions. The next step is to modify the weather events embedded in the models to reflect the impact of future climate change. Over the past few years we have worked with catastrophe modelling vendors, Risk Management Solutions, Inc. and AIR Worldwide, and with Aon plc to better understand the impact of climate change and to reflect it in our catastrophe models. This exercise essentially provides us with a tool to better quantify the impact future climate change could have on our insurance and reinsurance portfolios. o n Pricing Change in exposure Exclusions Reinsurance Engaging on climate change Engagement is our preferred method to effect change in companies and external fund managers. We adopt targeted engagement to gain insight into integration of climate‑related issues, which allows us to understand our exposure to risks and opportunities for improvement. An ESG review is undertaken for all existing managers and, as part of this process, we have included targeted due diligence questions focusing on climate change strategy including mitigation and adaptation, policy implementation and practical business actions, with a view to better understanding what emission reduction targets have been set, as well as the key strategic initiatives being undertaken to ensure a just transition. In 2021, we strengthened this review process with the introduction of a new scoring methodology, informed by industry best practice frameworks. This scoring methodology allows us to produce a quantitative indicator score of how our external fund managers are implementing responsible investment practices and approaching these key ESG areas including climate risks and opportunities. The outcome of each assessment enables us to further understand the journey of our external fund managers and lays a strong foundation for engagement on action in 2022. We have also actively engaged our external fund managers in reporting in line with the TCFD and understanding the climate scenario analysis they are undertaking to identify key physical and transition risks. At a minimum, we will conduct an ESG review annually for all existing managers, with additional reviews if material issues arise. We are also committed to reviewing our own integration of ESG into these processes on an annual basis, to reflect continuing changes in market practice and business priorities. Positively, while our external fund manager reviews and discussions highlighted that climate change is the largest challenge they are currently facing, over 75% of our external fund managers are committed to net‑zero by 2050 and integrating emissions reduction considerations into key investment decisions. Approximately 50% of our external fund managers are also doing targeted work to understand their progress in achieving the UN Sustainable Development Goals and exploring opportunities to further develop in this space. Risk management Climate change is embedded into QBE’s risk management framework. As part of our Risk Management Strategy, we categorise risks into eight classes, with ESG risk classified as part of strategic risk. Our Group ESG Risk Standard, which forms part of our Strategic Risk Policy, outlines the process we use to identify and manage ESG risks across our business. ESG risks are reported to the Group Chief Risk Officer regularly, with our ESG Risk Committee focusing on material ESG risks. Our E&S Risk Framework helps us identify and mitigate risks to our underwriting and investment portfolios across a range of material ESG risk issues and sectors including energy. Since the initial release of our E&S Risk Framework, we have focused on the development of practical implementation guidance ahead of it coming into effect. As a result of this work, we made some minor amendments to our commitments in relation to biodiversity and protected areas, and controversial weapons to ensure we are able to practically implement and comply with our commitments. The E&S Risk Framework is available here: www.qbe.com/investor-relations/corporate- governance/global-policies. Risk tool In Europe QBE has developed a tool to provide a risk management framework for customers to better assess ESG risk. Developed by QBE’s Risk Solutions practice, the tool provides a template sustainability policy and ESG framework to help smaller and medium sized enterprises identify, monitor and manage a range of ESG issues that may impact on their business. 36 Energy sector QBE has a diverse and international portfolio of customers in the energy sector. We are committed to working with them to support a shift to more sustainable business models and providing risk management solutions for innovative technologies which will be key to achieving a net‑zero economy by 2050. We have committed to reduce our exposure to higher transition risks in the energy sector, including no longer underwriting new coal and oil sands projects and ensuring that we are only supporting oil sands and Arctic drilling where the company is on a pathway consistent with achieving the Paris Agreement objectives. To assess the transition pathway for oil sands, we have developed a methodology which considers five key dimensions (governance, metrics, strategy, reporting, and carbon commitments) that will impact a company’s emission pathway to 2050. In analysing these dimensions in a standardised way, we expect to gain insight into the level of awareness, acknowledgement and integration of climate change at an operational and a management level. Furthermore, we are seeking to establish how these companies are integrating their climate change strategies into a transition plan. However, this is a complex and unfolding topic, and one in which we need to continue to engage and better understand. It is clear that the evaluation of a pathway towards the Paris Agreement objectives continues to be an evolving space with national, regional and industry‑wide issues to consider. In addition, consideration needs to be given to the development and commercialisation of new technologies and other abatement strategies. We will rely on each company’s public disclosures on this topic to assess these dimensions, but we will also enter into more advanced due diligence discussions with them if this helps to develop and improve our understanding of their approach and baselines. In addition, we will also consider the operational environmental policies in place, particularly those that measure and drive companies towards material reductions in their emissions, as a key consideration in assessing the transition pathway goals in place at the time of underwriting the company. There are restrictions on the maximum policy period QBE will commit to before re‑checking their progress. We will continue to review our approach towards emissions‑intensive industries, including assessing and refining the transition pathway methodology. This will allow us to evolve our approach and reflect changes to national or intergovernmental policies and agreements, technology and the availability of practical alternatives. We will continue to support industries and companies as they themselves work through the transition to a net‑zero economy and continue to develop and offer new insurance products and risk management solutions in support of net‑zero by 2050. Sustainable energies unit QBE has launched a sustainable energies unit to support customers as they transition to lower carbon energy. The unit will align QBE underwriting capabilities across construction, operational, property & casualty, and D&O lines, focusing on underwriting the growing range of companies and energy systems that form part of a rapidly changing energy mix throughout the world. Projects include hydrogen, ammonia, hydro, solar, fixed and floating wind‑power and carbon capture and sequestration. 36 37 Metrics and targets We are committed to net‑zero across our operations by 2030, and our investment and underwriting portfolios by 2050. Getting to net‑zero in operations will require ongoing work to optimise the energy efficiency of our buildings; transition our fleet to hybrid and, when feasible, fully electric vehicles; and transition to 100% renewable electricity. This year, we refreshed our energy reduction target which came to an end in 2021 and maintained carbon neutrality. More detail on QBE’s Sustainability Framework and our performance and progress is available in QBE’s 2021 Sustainability Report. MEASURE Energy use (GJ) Scope 1 and 2 emissions (1.5°C trajectory aligned science-based target) (tCO2-e) TARGET 25% reduction by 2025 (2019 baseline) 30% reduction by 2025 (2018 baseline) 2021 106,673 2020 STATUS 122,115 Achieved 6,062 5,881 Achieved Renewable electricity use (MWh) 100% by 2025 20,199 (100%)1 22,529 (97%) Achieved Underwriting portfolio emissions Carbon intensity reduction Net‑zero emissions (Scope 1 and 2) in underwriting portfolio by 2050 25% reduction by 2025 of Scope 1 and 2 emissions in equity portfolio Engagement • All external managers Financing the transition • 20 highest emitters in investment grade corporate credit portfolio 5% increase of assets under management in climate solutions investments by 2025 N/A N/A N/A N/A N/A N/A N/A Interim targets to be set Target set in 2021 Target set in 2021 N/A Target set in 2021 Impact investing ambition $2 billion by 2025 $1.4 billion $1.1 billion On track 1 Based on RE100 Materiality Threshold guidance and excludes electricity use from countries with small electricity loads (<100 MWh/year) up to a total of 500 MWh/year and where it is not feasible to source renewable electricity. Sustainability-linked loan In 2021, we launched our first syndicated sustainability‑linked banking facility, connecting fees paid on the facility to QBE’s commitment to sustainability performance, underpinned by performance targets linked to renewable electricity, women in leadership and Premiums4Good impact investments. The sustainability aspect of the facility has been drafted in accordance with the Sustainability Linked Loan Principles published by the Asia Pacific Loan Market Association. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i Partnerships and initiatives o n Climate change is a global challenge requiring the collaborative efforts of a range of stakeholders to minimise economic disruption and deliver an orderly transition to a low carbon economy. We engage in climate‑related partnerships for impact, working with government, industry, customers and community groups. These include: • Actuaries Institute • Insurance Council of Australia – Climate Change Working Group – Climate Change Action Committee • Australian Sustainable Finance Institute • CDP • ClimateWise • CRO Forum • Investor Group on Climate Change • RE100 • UN‑convened Net‑Zero AOA • UN‑convened NZIA, including the insured emissions working group in collaboration with the Partnership for Carbon Accounting Financials • UNEP FI Principles for Responsible Investment • UNEP FI Principles for Sustainable Insurance Energy sector QBE has a diverse and international portfolio of customers in the energy sector. We are committed to working with them to support a shift to more sustainable business models and providing risk management solutions for innovative technologies which will be key to achieving a net‑zero economy by 2050. We have committed to reduce our exposure to higher transition risks in the energy sector, including no longer underwriting new coal and oil sands projects and ensuring that we are only supporting oil sands and Arctic drilling where the company is on a pathway consistent with achieving the Paris Agreement objectives. To assess the transition pathway for oil sands, we have developed a methodology which considers five key dimensions (governance, metrics, strategy, reporting, and carbon commitments) that will impact a company’s emission pathway to 2050. In analysing these dimensions in a standardised way, we expect to gain insight into the level of awareness, acknowledgement and integration of climate change at an operational and a management level. Furthermore, we are seeking to establish how these companies are integrating their climate change strategies into a transition plan. However, this is a complex and unfolding topic, and one in which we need to continue to engage and better understand. It is clear that the evaluation of a pathway towards the Paris Agreement objectives continues to be an evolving space with national, regional and industry‑wide issues to consider. In addition, consideration needs to be given to the development and commercialisation of new technologies and other abatement strategies. We will rely on each company’s public disclosures on this topic to assess these dimensions, but we will also enter into more advanced due diligence discussions with them if this helps to develop and improve our understanding of their approach and baselines. In addition, we will also consider the operational environmental policies in place, particularly those that measure and drive companies towards material reductions in their emissions, as a key consideration in assessing the transition pathway goals in place at the time of underwriting the company. There are restrictions on the maximum policy period QBE will commit to before re‑checking their progress. We will continue to review our approach towards emissions‑intensive industries, including assessing and refining the transition pathway methodology. This will allow us to evolve our approach and reflect changes to national or intergovernmental policies and agreements, technology and the availability of practical alternatives. We will continue to support industries and companies as they themselves work through the transition to a net‑zero economy and continue to develop and offer new insurance products and risk management solutions in support of net‑zero by 2050. Sustainable energies unit QBE has launched a sustainable energies unit to support customers as they transition to lower carbon energy. The unit will align QBE underwriting capabilities across construction, operational, property & casualty, and D&O lines, focusing on underwriting the growing range of companies and energy systems that form part of a rapidly changing energy mix throughout the world. Projects include hydrogen, ammonia, hydro, solar, fixed and floating wind‑power and carbon capture and sequestration. 38 Board of Directors Michael (Mike) Wilkins AO BCom, MBA, FCA, FAICD Independent Chair Mike became a non-executive director of QBE in 2016 and was appointed Chair in March 2020. He is Chair of the Governance & Nomination Committee and a member of the People & Remuneration, Audit, Investment, Risk & Capital and Operations & Technology Committees. Mike has more than 30 years’ experience in financial services. He was the Managing Director and CEO of Insurance Australia Group Limited until November 2015 and previously served as Managing Director and CEO of Promina Group Limited and Managing Director of Tyndall Australia Limited. He is currently Chair of Medibank Private Limited and a non-executive director of Scentre Group Limited. He previously served as a non-executive director of AMP Limited, Alinta Limited, Maple-Brown Abbott Limited, The Geneva Association and the Australian Business and Community Network. Mike was the founding member of the Australian Business Roundtable for Disaster Resilience & Safer Communities from 2013 until his retirement in 2015. Andrew Horton BA Natural Sciences, ACA Group Chief Executive Officer Andrew joined QBE as Group Chief Executive Officer in September 2021. He was previously the CEO, and before that the Finance Director, of Beazley Group, a specialist insurer based in the United Kingdom with operations in Europe, the United States and Asia. Prior to this, he held various senior finance roles in ING, NatWest and Lloyds Bank. Andrew has more than 30 years’ experience across insurance and banking, and has extensive experience across international markets. Stephen Fitzgerald AO BEc Independent Director Stephen became a non-executive director of QBE in 2014. He is Chair of the Investment Committee, Deputy Chair of the People & Remuneration Committee and a member of the Risk & Capital and Governance & Nomination Committees. Stephen joined Goldman Sachs in 1992 and held a number of leadership roles in London, Tokyo, Hong Kong and Australia. He was Chair of Goldman Sachs, Australia and New Zealand when he retired in 2012. Stephen is currently the Managing Partner of Affirmative Investment Management and sits on the boards of Great Barrier Reef Foundation and Champions of Change Coalition and is a member of the Investment Committee of the British Museum. He is also on the board of Lombard Odier Investment Management. Stephen was previously a member of the Board of Guardians of the Future Fund (Australia’s Sovereign Wealth Fund). John M Green BJuris/LLB, FAICD, SF FIN Independent Deputy Chair John became a non-executive director of QBE in 2010. He is Deputy Chair of the Board, Chair of the People & Remuneration Committee and Deputy Chair of the Investment, Operations & Technology and Governance & Nomination Committees. He is also a member of the Risk & Capital and Audit Committees. John was previously a director of Worley Limited, an executive director at Macquarie Group leading its financial institutions group and a partner at two major law firms. John is a non-executive director of the Cyber Security Cooperative Research Centre and Challenger Limited. He is also a novelist and co-founder of independent book publisher Pantera Press. Tan Le BCom (Hons), LLB (Hons) Independent Director Tan became a non-executive director of QBE in September 2020. She is a member of the Audit, Operations & Technology and Governance & Nomination Committees. Tan is the founder and CEO of EMOTIV, a neuroinformatics company advancing understanding of the human brain. She was previously co-founder and President of SASme, a wireless technology company. Tan has been a contributor at the World Economic Forum (WEF) and previously served on the WEF Global Future Council and on the WEF Board of Stewards on Shaping the Future of Information & Entertainment. 38 39 Board of Directors Mike became a non-executive director of QBE in 2016 and was appointed Chair in March 2020. He is Chair of the Governance & Nomination Committee and a member of the People & Remuneration, Audit, Investment, Risk & Capital and Operations & Technology Committees. Mike has more than 30 years’ experience in financial services. He was the Managing Director and CEO of Insurance Australia Group Limited until November 2015 and previously served as Managing Director and CEO of Promina Group Limited and Managing Director of Tyndall Australia Limited. He is currently Chair of Medibank Private Limited and a non-executive director of Scentre Group Limited. He previously served as a non-executive director of AMP Limited, Alinta Limited, Maple-Brown Abbott Limited, The Geneva Association and the Australian Business and Community Network. Mike was the founding member of the Australian Business Roundtable for Disaster Resilience & Safer Communities from 2013 until his retirement in 2015. Andrew joined QBE as Group Chief Executive Officer in September 2021. He was previously the CEO, and before that the Finance Director, of Beazley Group, a specialist insurer based in the United Kingdom with operations in Europe, the United States and Asia. Prior to this, he held various senior finance roles in ING, NatWest and Lloyds Bank. Andrew has more than 30 years’ experience across insurance and banking, and has extensive experience across international markets. Stephen Fitzgerald AO BEc Independent Director Stephen became a non-executive director of QBE in 2014. He is Chair of the Investment Committee, Deputy Chair of the People & Remuneration Committee and a member of the Risk & Capital and Governance & Nomination Committees. Stephen joined Goldman Sachs in 1992 and held a number of leadership roles in London, Tokyo, Hong Kong and Australia. He was Chair of Goldman Sachs, Australia and New Zealand when he retired in 2012. Stephen is currently the Managing Partner of Affirmative Investment Management and sits on the boards of Great Barrier Reef Foundation and Champions of Change Coalition and is a member of the Investment Committee of the British Museum. He is also on the board of Lombard Odier Investment Management. Stephen was previously a member of the Board of Guardians of the Future Fund (Australia’s Sovereign Wealth Fund). John M Green BJuris/LLB, FAICD, SF FIN Independent Deputy Chair John became a non-executive director of QBE in 2010. He is Deputy Chair of the Board, Chair of the People & Remuneration Committee and Deputy Chair of the Investment, Operations & Technology and Governance & Nomination Committees. He is also a member of the Risk & Capital and Audit Committees. John was previously a director of Worley Limited, an executive director at Macquarie Group leading its financial institutions group and a partner at two major law firms. John is a non-executive director of the Cyber Security Cooperative Research Centre and Challenger Limited. He is also a novelist and co-founder of independent book publisher Pantera Press. Tan Le BCom (Hons), LLB (Hons) Independent Director Tan became a non-executive director of QBE in September 2020. She is a member of the Audit, Operations & Technology and Governance & Nomination Committees. Tan is the founder and CEO of EMOTIV, a neuroinformatics company advancing understanding of the human brain. She was previously co-founder and President of SASme, a wireless technology company. Tan has been a contributor at the World Economic Forum (WEF) and previously served on the WEF Global Future Council and on the WEF Board of Stewards on Shaping the Future of Information & Entertainment. Michael (Mike) Wilkins AO BCom, MBA, FCA, FAICD Independent Chair Kathryn (Kathy) Lisson BSc (Hons) Independent Director Kathy became a non-executive director of QBE in 2016. She is Chair of the Operations & Technology Committee and a member of the Audit and Governance & Nomination Committees. Kathy has over 30 years’ experience across insurance and banking in technology, operations and management. She was previously Chief Operating Officer for two insurance companies (QBE Europe (a QBE regulated entity) and Brit Insurance) and Operational Transformation Director at Barclays Bank PLC, which included delivering global solutions in digital technology, cyber security and IT risk. Kathy also held executive positions at Bank of Montreal, including as President of its Mortgage Corporation and EVP Technology Strategy and Delivery. Kathy was a senior partner at Ernst & Young and Price Waterhouse in Canada, leading their insurance and banking advisory practices. Kathy has also held several other non-executive director roles in the United Kingdom and in Canada. Andrew Horton BA Natural Sciences, ACA Group Chief Executive Officer Sir Brian Pomeroy MA, FCA Independent Director Sir Brian became a non-executive director of QBE in 2014. He is Deputy Chair of the Audit Committee and a member of the Investment, Risk & Capital and Governance & Nomination Committees. He has extensive insurance industry experience, including in his previous role as a Nominated Member of the Council of Lloyd’s and as Chair of the Independent Commission on Equitable Life Payments. He was formerly a non-executive member of the board of the Financial Conduct Authority in the United Kingdom and a non-executive director on QBE’s European regulated boards. Sir Brian also chaired the United Kingdom Treasury’s Financial Inclusion Taskforce, the Payments Council and the Gambling Commission. He was the Senior Partner of Deloitte Consulting in the United Kingdom until 1999. Jann Skinner BCom, FCA, FAICD Independent Director Jann became a non-executive director of QBE in 2014. She is Chair of the Audit Committee, Deputy Chair of the Risk & Capital Committee and a member of the People & Remuneration and Governance & Nomination Committees. Jann has over 30 years’ professional experience in audit and accounting with a focus on financial services, particularly the insurance industry. She was an audit partner for 17 years with PricewaterhouseCoopers before retiring in 2004. Jann is a non-executive director of Telix Pharmaceuticals Limited, HSBC Bank Australia Limited and Create Foundation Limited. Previously, Jann was a non-executive director of Enstar Australia Group and the Tasmanian Public Finance Corporation. Jann was also a non-executive director on QBE’s Australian regulated boards. Eric Smith MBA, BSc Independent Director Eric became a non-executive director of QBE in September 2020. He is a member of the Risk & Capital, Operations & Technology and Governance & Nominations Committees. Eric has more than 40 years’ experience in insurance and financial services, and was most recently President and Chief Executive Officer of Swiss Re Americas from 2011 to 2020. Eric has held a number of executive roles in his career including President of USAA Life Insurance Co and President of Allstate Financial Services, Allstate’s business unit that distributes life insurance, annuities and other financial products. He has also held various roles in property and casualty insurance with Country Financial over a 20 year period. Eric is a non-executive director of Deutsche Bank Americas. Rolf Tolle Dipl.-Pol Independent Director Rolf became a non-executive director of QBE in 2016. He is Chair of the Risk & Capital Committee and a member of the Audit, People & Remuneration and Governance & Nomination Committees. He has significant experience in specialist insurance and reinsurance businesses, having held senior positions in a number of global companies. He was the first ever Franchise Performance Director at Lloyd’s, for which he was awarded the Silver Medal for Services at Lloyd’s, an honour bestowed on only a few individuals since its creation in 1917. Rolf is a director of Marco Insurance PCC Limited and British Reserve Insurance Company Limited and is also on the advisory board of Wrisk Ltd. Rolf was previously a director of Beazley plc and Beazley Furlonge Ltd. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 40 Group Executive Committee Andrew Horton BA Natural Sciences, ACA Group Chief Executive Officer Andrew joined QBE as Group Chief Executive Officer in September 2021. He was previously the CEO, and before that the Finance Director, of Beazley Group, a specialist insurer based in the United Kingdom with operations in Europe, the United States and Asia. Prior to this, he held various senior finance roles in ING, NatWest and Lloyds Bank. Andrew has more than 30 years’ experience across insurance and banking, and has extensive experience across international markets. Inder Singh BCom Group Chief Financial Officer Inder joined QBE in 2015 and was appointed Group Chief Financial Officer in 2018. His previous roles at QBE include Chief Financial Officer for Australian & New Zealand Operations and Group Head of Corporate Development and Financial Planning & Analysis. Inder has more than 20 years’ experience in financial services spanning property and casualty, life insurance and banking. He started his career at Arthur Andersen before working in investment banking in Sydney and London with Deutsche Bank and UBS. Prior to joining QBE, he was Group M&A Director at Aviva plc in London where he led a number of transformational transactions. Vivienne (Viv) Bower BA Organisational Communication Group Executive, Corporate Affairs and Sustainability Viv joined QBE in 2017 and was appointed Group Executive, Corporate Affairs and Sustainability in 2019. She previously held senior investor relations and corporate affairs roles, including Group Head of Corporate Affairs and Investor Relations at Lendlease, Head of Group Internal Communications at Westpac and Group General Manager of Communications at Multiplex Group. Jason Harris BSc (Hons) Geology Chief Executive Officer, International Jason joined QBE as Chief Executive Officer, International in October 2020. Prior to joining QBE, Jason held a number of global and international leadership roles at XL Group including most recently as Chief Executive, Global Property and Casualty and previously as Chief Executive, International Property and Casualty. He previously worked at AIG/Chartis in several senior roles including Executive Director, Commercial Lines. He is an underwriter by background and started his career in offshore energy. He has worked in insurance for over 25 years. Sam Harrison BA (Hons) Economics Group Chief Underwriting Officer Sam was appointed Group Chief Underwriting Officer in April 2021. Having worked at QBE for more than 23 years, Sam has held a number of senior roles including most recently as Managing Director, Insurance, for QBE’s International division and prior to this as Managing Director of International Markets. Sam joined QBE in 1998 as an offshore energy underwriter and has 30 years’ experience in underwriting across the global market. Sue Houghton BA History, ACA Chief Executive Officer, Australia Pacific Sue joined QBE as Chief Executive Officer, Australia Pacific in August 2021. She was previously Managing Director, Insurance for the Westpac Group. Sue has more than 20 years’ experience in the financial services sector, having held senior leadership and management roles at Wesfarmers Insurance, Insurance Australia Group and Arthur J Gallagher. She is a member of the Champions of Change Coalition and is a director and immediate past President of the Insurance Council of Australia. 40 41 Group Executive Committee Andrew Horton BA Natural Sciences, ACA Group Chief Executive Officer Amanda Hughes BCom, MBA, CA, GAICD Group Executive, People and Culture Andrew joined QBE as Group Chief Executive Officer in September 2021. He was previously the CEO, and before that the Finance Director, of Beazley Group, a specialist insurer based in the United Kingdom with operations in Europe, the United States and Asia. Prior to this, he held various senior finance roles in ING, NatWest and Lloyds Bank. Andrew has more than 30 years’ experience across insurance and banking, and has extensive experience across international markets. Amanda joined QBE in 2020 as Group Head of Culture, Performance and Reward and was appointed Group Executive, People and Culture in December 2021. Prior to joining QBE, she was the Director of People and Culture at AMP and she previously held senior HR roles at Lendlease and Macquarie Group. Amanda began her career as a chartered accountant and has worked in Sydney, London and Auckland. Inder Singh BCom Group Chief Financial Officer Todd Jones BSc, MBA Chief Executive Officer, North America Inder joined QBE in 2015 and was appointed Group Chief Financial Officer in 2018. His previous roles at QBE include Chief Financial Officer for Australian & New Zealand Operations and Group Head of Corporate Development and Financial Planning & Analysis. Inder has more than 20 years’ experience in financial services spanning property and casualty, life insurance and banking. He started his career at Arthur Andersen before working in investment banking in Sydney and London with Deutsche Bank and UBS. Prior to joining QBE, he was Group M&A Director at Aviva plc in London where he led a number of transformational transactions. Vivienne (Viv) Bower BA Organisational Communication Group Executive, Corporate Affairs and Sustainability Viv joined QBE in 2017 and was appointed Group Executive, Corporate Affairs and Sustainability in 2019. She previously held senior investor relations and corporate affairs roles, including Group Head of Corporate Affairs and Investor Relations at Lendlease, Head of Group Internal Communications at Westpac and Group General Manager of Communications at Multiplex Group. Jason Harris BSc (Hons) Geology Chief Executive Officer, International Jason joined QBE as Chief Executive Officer, International in October 2020. Prior to joining QBE, Jason held a number of global and international leadership roles at XL Group including most recently as Chief Executive, Global Property and Casualty and previously as Chief Executive, International Property and Casualty. He previously worked at AIG/Chartis in several senior roles including Executive Director, Commercial Lines. He is an underwriter by background and started his career in offshore energy. He has worked in insurance for over 25 years. Sam Harrison BA (Hons) Economics Group Chief Underwriting Officer Sam was appointed Group Chief Underwriting Officer in April 2021. Having worked at QBE for more than 23 years, Sam has held a number of senior roles including most recently as Managing Director, Insurance, for QBE’s International division and prior to this as Managing Director of International Markets. Sam joined QBE in 1998 as an offshore energy underwriter and has 30 years’ experience in underwriting across the global market. Sue Houghton BA History, ACA Chief Executive Officer, Australia Pacific Sue joined QBE as Chief Executive Officer, Australia Pacific in August 2021. She was previously Managing Director, Insurance for the Westpac Group. Sue has more than 20 years’ experience in the financial services sector, having held senior leadership and management roles at Wesfarmers Insurance, Insurance Australia Group and Arthur J Gallagher. She is a member of the Champions of Change Coalition and is a director and immediate past President of the Insurance Council of Australia. Todd joined QBE in October 2019 as Chief Executive Officer, North America. Prior to joining QBE, Todd held a number of senior roles at Willis Towers Watson, including most recently as Head of Global Corporate Risk and Broking, and previously as CEO for Willis North America. Todd began his career as a technical broker in management liability insurance serving large, complex and middle market clients. Todd has over 25 years’ experience in the insurance and financial services industry. Fiona Larnach FCPA, MAICD Group Chief Risk Officer Fiona joined QBE in March 2021 as Group Chief Risk Officer. She has previously held senior executive roles at major financial services companies in Australia and the United Kingdom and was, most recently, the Chief Risk Officer for Barclays UK. Prior to this, she has held senior management roles including as Chief Risk Officer, Retail Banking for Commonwealth Bank of Australia and as a risk advisory partner at Ernst & Young consulting to insurance, banking and wealth management clients, and has worked at Westpac, AMP Limited, GE Mortgage Insurance and Citibank. Matt Mansour MBA Group Executive, Operations and Technology Matt joined QBE in 2018 as Group Chief Information Officer and was appointed to the Group Executive Committee in 2019. Prior to joining QBE, he held senior global roles in Barclays Bank and GE Capital. Matt has over 27 years’ experience in technology, operations and digital business leadership roles. Carolyn Scobie BA, LLB, MA, AGIA, GAICD Group General Counsel and Company Secretary Carolyn joined QBE in 2016 as Group General Counsel and Company Secretary. Prior to joining QBE, she was Group General Counsel at Goodman Group for 17 years, where she ran a multi-disciplinary legal team. Carolyn has extensive experience in corporate law, compliance, regulatory matters, litigation and managing the complexity of multiple jurisdictions. Richard Pryce BHis (Hons) Richard joined QBE in 2012 and was appointed Interim Group Chief Executive Officer in October 2020. He ceased this role in September 2021 on the arrival of the new Group Chief Executive Officer, and retired from QBE in December 2021. Former Interim Group Chief Executive Officer Margaret Murphy BA (Hons) Business Margaret joined QBE in October 2016 and resigned from her position as Group Executive, People and Change in 2021. Amanda Hughes succeeded her in that role from 1 December 2021 and Margaret will cease employment with QBE in March 2022. Former Group Executive, People and Change Jason Brown BEC ACA Jason joined QBE in 2002 and was appointed as Group Chief Underwriting Officer in 2019. He ceased employment with QBE in December 2021. Former Group Chief Underwriting Officer A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 42 Corporate governance statement QBE is committed to the highest standards of corporate governance. The QBE DNA consists of seven interwoven elements that are fundamental to QBE and how QBE needs to operate to succeed, recognising its customers, people, shareholders and communities. QBE believes that a culture that rewards transparency, integrity and performance will promote its long‑term sustainability and the ongoing success of its business. Board and management Board functions The Board charter sets out the role and responsibilities of the Board, including matters expressly reserved for the Board and those delegated to its Committees and management. The role of the Board is to represent and serve the interests of shareholders by providing guidance and oversight of QBE’s strategies, policies and performance. This includes demonstrating leadership, setting the strategic direction for QBE, approving QBE values that underpin the desired culture, monitoring the performance of management in the delivery of strategy and instilling the values and desired culture of QBE. The Board’s principal objective is to maintain and increase shareholder value while ensuring that the activities of QBE are properly managed. The Board reviews strategy on an ongoing basis. To help the Board maintain its understanding of the business and to effectively assess management, directors receive regular presentations from the divisional chief executive officers and other senior managers of the various divisions on relevant topics, including budgets, three-year business plans and operating performance. The Board receives updated forecasts during the year. The non-executive directors also have contact with senior executives in various forums throughout the year. Visits by non-executive directors to QBE’s offices in key locations are encouraged. The Board meets regularly in Australia and, due to QBE’s substantial overseas operations, usually spends time in the United Kingdom and the United States each year; however, in 2021, due to COVID-19, Board and Committee meetings, strategy sessions and other meetings were held virtually. Each formal Board meeting normally considers reports from the Group Chief Executive Officer and the Group Chief Financial Officer, together with other relevant reports. The non-executive directors regularly meet in the absence of management. The Chair and Group Chief Executive Officer in particular, and directors in general, including those on the divisional boards, have substantial contact outside Board and Committee meetings. Details of the number of Board meetings held during the 2021 financial year and attendance by directors are set out in the Directors’ Report. Directors are expected to attend all Board meetings. Senior management functions Management’s responsibilities are to: • develop a draft strategy, make recommendations to the Board and implement the Board approved strategy, subject to market conditions; • instil and reinforce QBE’s values and desired culture; • prepare annual budgets and three-year business plans; • carry on day-to-day operations within the Board-approved annual budget and three-year business plans, subject to market conditions; • design and maintain internal controls; • establish and monitor the effectiveness of the risk management and compliance management system, and monitor and manage all material risks consistent with the strategic objectives, risk appetite statements and policies approved by the Board; • provide the Board with accurate, timely and clear information on the Group’s operations, including on compliance with material legal and regulatory requirements and any conduct materially inconsistent with the Group Code of Ethics and Conduct; • inform the Board of material matters and keep the Board and market fully informed about material continuous disclosure; and • monitor that succession plans exist for all Group executive positions other than the Group Chief Executive Officer. The succession plans for the Group Chief Executive Officer are managed by the Governance & Nomination Committee, and are discussed in more detail below. The Board delegates responsibility to the Group Chief Executive Officer for the day-to-day management of the business. QBE has operated under an extensive written system of delegated authorities for many years. In particular, a written delegated authority with specified limits is approved by the Board each year to enable the Group Chief Executive Officer to conduct QBE’s business in accordance with detailed budgets and business plans. This delegated authority deals with topics such as underwriting, reinsurance protection, claims, investments, acquisitions and expenses. The Group Chief Executive Officer delegates authority to management throughout the Group on a selective basis, taking into account expertise and past performance. Compliance with delegated authorities is monitored by management and adjusted as required based on performance, market conditions and other factors. Management and the Group’s internal audit teams review compliance with delegated authorities and a breach can lead to disciplinary procedures, including dismissal. 42 43 Corporate governance statement QBE is committed to the highest standards of corporate governance. The QBE DNA consists of seven interwoven elements that are fundamental to QBE and how QBE needs to operate to succeed, recognising its customers, people, shareholders and communities. QBE believes that a culture that rewards transparency, integrity and performance will promote its long‑term sustainability and the ongoing success of its business. Board and management Board functions The Board charter sets out the role and responsibilities of the Board, including matters expressly reserved for the Board and those delegated to its Committees and management. The role of the Board is to represent and serve the interests of shareholders by providing guidance and oversight of QBE’s strategies, policies and performance. This includes demonstrating leadership, setting the strategic direction for QBE, approving QBE values that underpin the desired culture, monitoring the performance of management in the delivery of strategy and instilling the values and desired culture of QBE. The Board’s principal objective is to maintain and increase shareholder value while ensuring that the activities of QBE are properly managed. The Board reviews strategy on an ongoing basis. To help the Board maintain its understanding of the business and to effectively assess management, directors receive regular presentations from the divisional chief executive officers and other senior managers of the various divisions on relevant topics, including budgets, three-year business plans and operating performance. The Board receives updated forecasts during the year. The non-executive directors also have contact with senior executives in various forums throughout the year. Visits by non-executive directors to QBE’s offices in key locations are encouraged. The Board meets regularly in Australia and, due to QBE’s substantial overseas operations, usually spends time in the United Kingdom and the United States each year; however, in 2021, due to COVID-19, Board and Committee meetings, strategy sessions and other meetings were held virtually. Each formal Board meeting normally considers reports from the Group Chief Executive Officer and the Group Chief Financial Officer, together with other relevant reports. The non-executive directors regularly meet in the absence of management. The Chair and Group Chief Executive Officer in particular, and directors in general, including those on the divisional boards, have substantial contact outside Board and Committee meetings. Details of the number of Board meetings held during the 2021 financial year and attendance by directors are set out in the Directors’ Report. Directors are expected to attend all Board meetings. • develop a draft strategy, make recommendations to the Board and implement the Board approved strategy, subject to market conditions; Senior management functions Management’s responsibilities are to: • instil and reinforce QBE’s values and desired culture; • prepare annual budgets and three-year business plans; • design and maintain internal controls; • carry on day-to-day operations within the Board-approved annual budget and three-year business plans, subject to market conditions; • establish and monitor the effectiveness of the risk management and compliance management system, and monitor and manage all material risks consistent with the strategic objectives, risk appetite statements and policies approved by the Board; • provide the Board with accurate, timely and clear information on the Group’s operations, including on compliance with material legal and regulatory requirements and any conduct materially inconsistent with the Group Code of Ethics and Conduct; • inform the Board of material matters and keep the Board and market fully informed about material continuous disclosure; and • monitor that succession plans exist for all Group executive positions other than the Group Chief Executive Officer. The succession plans for the Group Chief Executive Officer are managed by the Governance & Nomination Committee, and are discussed in more detail below. The Board delegates responsibility to the Group Chief Executive Officer for the day-to-day management of the business. QBE has operated under an extensive written system of delegated authorities for many years. In particular, a written delegated authority with specified limits is approved by the Board each year to enable the Group Chief Executive Officer to conduct QBE’s business in accordance with detailed budgets and business plans. This delegated authority deals with topics such as underwriting, reinsurance protection, claims, investments, acquisitions and expenses. The Group Chief Executive Officer delegates authority to management throughout the Group on a selective basis, taking into account expertise and past performance. Compliance with delegated authorities is monitored by management and adjusted as required based on performance, market conditions and other factors. Management and the Group’s internal audit teams review compliance with delegated authorities and a breach can lead to disciplinary procedures, including dismissal. Chair The independent Chair of the Board is Mike Wilkins AO, who was appointed to that role in March 2020. The Chair is responsible for ensuring that the Board functions as an effective and cohesive group. The Chair works closely with the Group Chief Executive Officer to determine the strategic direction for QBE and to establish high standards of governance and leadership. Committees The Board is supported by several Committees which meet regularly to consider audit, risk management, investments, remuneration, technology, operations and other matters. The main Committees of the Board are the Audit, Governance & Nomination, Investment, Operations & Technology, People & Remuneration and Risk & Capital Committees. Further sub-committees of the Board may be convened to confer on particular issues from time to time. Any non-executive director may attend a Committee meeting. The Board is considering how the work of some Committees could be streamlined and accordingly there may be changes to some Committees in 2022. The Committees have free and unfettered access to QBE’s senior managers and may consult external advisers at QBE’s cost, including requiring their attendance at Committee meetings, with the consent of the Committee Chair. A report on each Committee’s last meeting is provided at the next Board meeting. Each Committee comprises at least three independent directors and each Committee Chair is an independent director who is not the Chair of the Board (excluding the Governance & Nomination Committee, the Chair of which is Mike Wilkins). Each Committee operates under a written charter approved by the Board. These charters are available at www.qbe.com/investor-relations/ corporate-governance/qbe-charters-and-constitution. The membership of each Committee is provided at www.qbe.com/about-qbe/ group-board-of-directors and details of the number of Committee meetings held during the 2021 financial year and attendance by Committee members at Committee meetings is set out in the Directors’ Report. Further information regarding the Committees can be found throughout this corporate governance statement. Company Secretary The Company Secretary acts as secretary to the Board and all of the Committees and is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. All directors have direct access to the Company Secretary. The Company Secretary’s role is described in the Board Charter and includes communication with regulatory bodies and the Australian Securities Exchange (ASX), all statutory and other filings and assisting with good information flows within the Board and its Committees and between non-executive directors and senior management, as well as facilitating induction and professional development as required. The Company Secretary may also provide guidance to directors in relation to governance matters. Board skills and experience Directors are selected to provide to QBE a broad range of skills, experience and expertise complementary to QBE’s insurance activities. The Board comprised 10 directors at 31 December 2021, being an independent Chair, Group Chief Executive Officer and eight other independent directors. The Board has a skills matrix covering the range of competencies and experience of each director. When the need for a new director is identified, the required experience and competencies of the new director are considered in the context of this matrix and any gaps that may exist. The Board’s skills matrix is summarised below: SKILLS Financial literacy Legal Governance Strategy Government relations Executive leadership Digital technology Cyber security Commercial expertise IT risks Risk management Data analytics INDUSTRY General insurance Private equity Reinsurance Financial services Investment banking Accounting Details of individual directors, including their qualifications and experience, independence status and period of Board tenure, are set out in the Board of Directors section of the Annual Report and can also be found on the QBE website at www.qbe.com/about-qbe/group-board-of-directors. Independence of the Board During the 2021 year, the majority of the directors on the Board were independent directors, applying the ‘independence’ definition of the ASX Corporate Governance Council. When applying this definition, the Board has determined that an independent director’s relationship with QBE as a professional adviser, consultant, supplier, customer or otherwise is not material unless amounts paid under that relationship exceed 0.1% of QBE’s revenue. The roles of the Chair and Group Chief Executive Officer are generally also not exercised by the same individual. Directors are required to advise the Board on an ongoing basis of any interest they have that they believe could conflict with QBE’s interests. If a potential conflict does arise, either the director concerned may choose not to, or the Board may decide that he or she should not, receive documents or take part in Board discussions while the matter is being considered. Conflicts of interest, including related party transactions, are a standing agenda item and are considered by the Board at each Board meeting. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 44 Corporate governance statement continued Tenure The mere fact that a director has served on the Board for a lengthy period of time does not, of itself, suggest a lack of independence; however, the Board has agreed that a non-executive director’s term should be approximately 10 years. Under the Company’s Constitution, there is no maximum fixed term or retirement age for non-executive directors. The Board considers that a mandatory limit on tenure would deprive the Group of valuable and relevant corporate experience in the complex world of international general insurance and reinsurance. John M Green has been a non-executive director since 2010 and Deputy Chair since 2015. He was re-elected as a director at the 2019 Annual General Meeting (AGM). QBE’s other directors believe that Mr Green continues to exercise independent judgement and, through his QBE experience, makes an important contribution. The tenure of each director is set out in the Board of Directors section of the Annual Report and can also be found on the QBE website at www.qbe.com/about-qbe/group-board-of-directors. The Constitution provides that no director, except the Group Chief Executive Officer, shall hold office for a continuous period in excess of three years or past the third AGM following a director’s appointment, whichever is the longer, without submission for individual re-election. Board and senior executive selection process The Board has a Governance & Nomination Committee which meets regularly during the year around the time of the Board meetings. The Committee assists the Board in appointing directors so that the Board as a whole has the necessary range of skills, knowledge and experience to be effective. The Committee also assists the Board in managing the succession plans for the Group Chief Executive Officer and reviewing succession plans for members of the Group Executive Committee. The Governance & Nomination Committee is comprised of all the non-executive directors of the Board and is chaired by Mike Wilkins. A formal process for the selection and appointment of directors or senior executives is undertaken by the Governance & Nomination Committee and Board. Appropriate background checks are undertaken before the Board appoints a new director or senior executive or puts forward a candidate for election. External consultants may be employed, where necessary, to search for prospective directors. Candidates are assessed against the required skills and on their qualifications, background and personal qualities. For Board appointments, candidates must also have the required time to commit to the position. The Board regularly reviews the mix of skills that is required to operate effectively. Under the Constitution, the size of the Board is limited to 12 directors. The Board considers that a maximum of 12 directors reflects the largest realistic size of the Board that is consistent with: • maintaining the Board’s efficiency and cohesion in carrying out its governance duties on behalf of shareholders; • reducing the risk of a director being insufficiently involved in, and informed about, the business of QBE; and • providing individual directors with greater potential to contribute and participate. QBE also provides shareholders with all material information in its possession that is relevant to a decision on whether or not to elect or re-elect a director through a number of channels, such as the notice of meeting, director biographies and other information contained in the Annual Report. Upon appointment, each non-executive director and senior executive is provided with a written agreement which sets out the terms of their appointment. The Board believes that orderly succession and renewal contribute to strong corporate governance and are achieved by careful planning and continual review. As an ongoing evaluation, the Board regularly discusses its composition in relation to the mix of skills, diversity and geographic location of directors to meet the needs of QBE. Director induction and training Upon appointment, directors attend induction sessions where they are briefed on QBE’s history, DNA, strategy, financials, and risk management and governance frameworks. The Board obtains the information it requires to be effective including, where necessary, independent professional advice. A non-executive director may seek such advice at QBE’s cost with the consent of the Chair. Directors are also provided with ongoing professional development and training programs to enable them to develop and maintain their skills and knowledge at QBE’s cost, with the consent of the Chair. Non-executive directors are required to complete continuing professional development each year, including on insurance, customer and regulatory matters. 44 Corporate governance statement continued Tenure The mere fact that a director has served on the Board for a lengthy period of time does not, of itself, suggest a lack of independence; however, the Board has agreed that a non-executive director’s term should be approximately 10 years. Under the Company’s Constitution, there is no maximum fixed term or retirement age for non-executive directors. The Board considers that a mandatory limit on tenure would deprive the Group of valuable and relevant corporate experience in the complex world of international general insurance and reinsurance. John M Green has been a non-executive director since 2010 and Deputy Chair since 2015. He was re-elected as a director at the 2019 Annual General Meeting (AGM). QBE’s other directors believe that Mr Green continues to exercise independent judgement and, through his QBE experience, makes an important contribution. The tenure of each director is set out in the Board of Directors section of the Annual Report and can also be found on the QBE website at www.qbe.com/about-qbe/group-board-of-directors. The Constitution provides that no director, except the Group Chief Executive Officer, shall hold office for a continuous period in excess of three years or past the third AGM following a director’s appointment, whichever is the longer, without submission for individual re-election. Board and senior executive selection process The Board has a Governance & Nomination Committee which meets regularly during the year around the time of the Board meetings. The Committee assists the Board in appointing directors so that the Board as a whole has the necessary range of skills, knowledge and experience to be effective. The Committee also assists the Board in managing the succession plans for the Group Chief Executive Officer and reviewing succession plans for members of the Group Executive Committee. The Governance & Nomination Committee is comprised of all the non-executive directors of the Board and is chaired by Mike Wilkins. A formal process for the selection and appointment of directors or senior executives is undertaken by the Governance & Nomination Committee and Board. Appropriate background checks are undertaken before the Board appoints a new director or senior executive or puts forward a candidate for election. External consultants may be employed, where necessary, to search for prospective directors. Candidates are assessed against the required skills and on their qualifications, background and personal qualities. For Board appointments, candidates must also have the required time to commit to the position. The Board regularly reviews the mix of skills that is required to operate effectively. Under the Constitution, the size of the Board is limited to 12 directors. The Board considers that a maximum of 12 directors reflects the largest realistic size of the Board that is consistent with: • maintaining the Board’s efficiency and cohesion in carrying out its governance duties on behalf of shareholders; • reducing the risk of a director being insufficiently involved in, and informed about, the business of QBE; and • providing individual directors with greater potential to contribute and participate. QBE also provides shareholders with all material information in its possession that is relevant to a decision on whether or not to elect or re-elect a director through a number of channels, such as the notice of meeting, director biographies and other information contained in the Annual Report. of their appointment. Upon appointment, each non-executive director and senior executive is provided with a written agreement which sets out the terms The Board believes that orderly succession and renewal contribute to strong corporate governance and are achieved by careful planning and continual review. As an ongoing evaluation, the Board regularly discusses its composition in relation to the mix of skills, diversity and geographic location of directors to meet the needs of QBE. Director induction and training management and governance frameworks. Upon appointment, directors attend induction sessions where they are briefed on QBE’s history, DNA, strategy, financials, and risk The Board obtains the information it requires to be effective including, where necessary, independent professional advice. A non-executive director may seek such advice at QBE’s cost with the consent of the Chair. Directors are also provided with ongoing professional development and training programs to enable them to develop and maintain their skills and knowledge at QBE’s cost, with the consent of the Chair. Non-executive directors are required to complete continuing professional development each year, including on insurance, customer and regulatory matters. Performance evaluation and remuneration Performance evaluation – Board and directors The Chair oversees the performance of the Board, its Committees and each director. The Board regularly reviews its performance through internal and external assessments, and recommendations for either improvement or increased focus are agreed and promptly implemented. A Board performance evaluation was conducted in 2021 for the 2020 year. The review covered the performance of boards and committees at both the Group and divisional levels. People & Remuneration Committee The Board has a People & Remuneration Committee which meets at least quarterly to assist it in, amongst other things, overseeing major remuneration practices of QBE. The People & Remuneration Committee is comprised of independent directors and is chaired by John M Green. Performance evaluation – senior executives The People & Remuneration Committee oversees the performance of senior executives. In addition, the Board continually monitors the performance of senior executives through regular review and reporting. In 2021, QBE used a balanced scorecard of an individual’s achievement against specific strategic priorities. Other than as set out in the Remuneration Report, senior executives have 35% of their short-term incentive plan outcome determined with reference to individual objectives. The scorecard is aligned to QBE’s business plans and measures performance against objectives, which supported QBE’s strategic objectives in 2021. The Remuneration Report sets out a summary of the key objectives and outcomes against these for the executive key management personnel. The Group Chief Executive Officer’s and Interim Group Chief Executive Officer’s (26 October 2020 – 31 August 2021) scorecards were formulated initially through a discussion between them and the Chair and were approved by the Board. Consistent with the Group Chief Executive Officer’s scorecard, the scorecards for the other senior executives align with QBE’s business plans and support the strategic priorities. The approval and assessment process for the senior executives’ scorecards is completed by the People & Remuneration Committee. A senior executives’ performance evaluation was conducted for the 2021 year, with reference to their performance against agreed 2021 objectives. Remuneration policies and practices Details of QBE’s policies and practices regarding the remuneration of executives and non-executive directors (being key management personnel) are set out in the Remuneration Report. Other than meeting statutory superannuation requirements, QBE does not have in place any retirement benefit schemes for non-executive directors. QBE’s Securities Trading Policy outlines QBE’s approach to derivatives or otherwise limiting the economic risk of participating in an equity-based remuneration scheme, and is available at www.qbe.com/investor-relations/corporate-governance/global-policies. Group governance Governance frameworks QBE has a Board-approved Group governance framework that sets out five overarching governance principles that support best practice governance across QBE and is designed to encourage collective accountability across Group Head Office and the divisions. 45 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i The framework defines the roles, responsibilities and composition of the Group and divisional boards and committees to facilitate the governance surrounding appropriate guidance and oversight of the business. The framework also strengthens the relationship and information flows between the Group and divisional boards and committees, so they can work together to achieve the best possible outcomes for QBE. o n 46 Corporate governance statement continued QBE DNA Everything we do at QBE is underpinned by our QBE DNA, which consists of seven interwoven elements. These elements describe who we are and what we stand for, and outline the standards and behaviours we expect from our employees to achieve our goals and fulfil our purpose. At QBE, when we show up for our customers, shareholders, communities and each other: • we are customer-focused; • we are technical experts; • we are inclusive; • we are fast-paced; • we are courageous; • we are accountable; and • we are a team. The QBE DNA is set and approved by the Board, with the GEC responsible for bringing the elements to life throughout the organisation through our day-to-day interactions as well through our recruitment, onboarding, performance, reward, leadership, feedback, learning and communication practices. Employees’ demonstration of the QBE DNA is integral to how strategic performance objectives are measured. At the end of the performance year, employees are assessed in terms of both what they have achieved and how they have achieved it – whether their behaviours were aligned to the QBE DNA. This in turn links to reward outcomes and is applicable for all employees, including senior executives. The Group Code of Ethics and Conduct addresses the responsibilities employees have to the Group, to each other and to customers, suppliers, communities and governments. It provides clear guidance to help employees apply good judgement and make considered decisions that exemplify the QBE DNA. Group policies QBE maintains a suite of Group policies commensurate with a mature and well-run organisation. QBE policies are governed by a global policy framework designed to establish consistent policy design and management requirements. Group policies serve as vital conduits to facilitate an understanding of the Group’s compliance and conduct expectations. QBE’s approach in key compliance areas recognises that employees (including contractors, directors and agents) are key to maintaining a compliant and ethical approach to QBE’s business practices. Most global policies are supported by Group standards and procedures that provide additional information and guidance to support employees. The Group Code of Ethics and Conduct applies to all employees as well as directors, agents and contractors. The Group Code of Ethics and Conduct is complemented by the Group Conduct Reporting & Whistleblower Policy, which was last updated in December 2021 for release in 2022. The Board oversees, and receives reports on compliance with amongst other things, the Group Code of Ethics and Conduct. The Group Conflicts of Interest Policy operates in conjunction with the Group Gift and Entertainment Policy, to create a system to identify and report actual, perceived or potential conflicts of interest. In recognition of the importance of protecting employee and customer data across QBE, we have a global privacy framework that is periodically reviewed and updated to reflect developments in privacy laws across the global footprint. QBE’s policy framework also addresses sanctions, outsourcing, modern slavery, anti-bribery and corruption, health, safety and wellbeing, continuous disclosure, diversity and inclusion, securities trading, flexible working, supplier sustainability, and environment and energy. Policy summaries are available at www.qbe.com/investor-relations/corporate-governance/global-policies. Material breaches and incidents relating to the policies within the policy framework, including the Group Code of Ethics and Conduct and the Group Conduct Reporting & Whistleblower Policy, are required to be recorded and reported to the Board. Global policies are also in place to address the prudential requirements of APRA, including risk management, cyber risk, business continuity management, reinsurance management, fitness and propriety and material outsourcing. In Australia, QBE complies with the General Insurance Code of Practice, an industry code relating to the provision of products and services to customers of the general insurance industry in Australia. The Code Governance Committee is the independent body that monitors and enforces insurers’ compliance with the Code. The General Insurance Code of Practice will also have sections that are enforceable by ASIC. Discussion as to identification of relevant sections is ongoing with ASIC and the Insurance Council of Australia. QBE’s Australian business is also a member of the Australian Financial Complaints Authority, the external dispute resolution scheme that deals with complaints from consumers related to financial services. 46 Corporate governance statement continued Everything we do at QBE is underpinned by our QBE DNA, which consists of seven interwoven elements. These elements describe who we are and what we stand for, and outline the standards and behaviours we expect from our employees to achieve our goals and At QBE, when we show up for our customers, shareholders, communities and each other: QBE DNA fulfil our purpose. • we are customer-focused; • we are technical experts; • we are inclusive; • we are fast-paced; • we are courageous; • we are accountable; and • we are a team. The QBE DNA is set and approved by the Board, with the GEC responsible for bringing the elements to life throughout the organisation through our day-to-day interactions as well through our recruitment, onboarding, performance, reward, leadership, feedback, learning and communication practices. Employees’ demonstration of the QBE DNA is integral to how strategic performance objectives are measured. At the end of the performance year, employees are assessed in terms of both what they have achieved and how they have achieved it – whether their behaviours were aligned to the QBE DNA. This in turn links to reward outcomes and is applicable for all employees, including senior executives. The Group Code of Ethics and Conduct addresses the responsibilities employees have to the Group, to each other and to customers, suppliers, communities and governments. It provides clear guidance to help employees apply good judgement and make considered decisions that exemplify the QBE DNA. Group policies QBE maintains a suite of Group policies commensurate with a mature and well-run organisation. QBE policies are governed by a global policy framework designed to establish consistent policy design and management requirements. Group policies serve as vital conduits to facilitate an understanding of the Group’s compliance and conduct expectations. QBE’s approach in key compliance areas recognises that employees (including contractors, directors and agents) are key to maintaining a compliant and ethical approach to QBE’s business practices. Most global policies are supported by Group standards and procedures that provide additional information and guidance to support employees. The Group Code of Ethics and Conduct applies to all employees as well as directors, agents and contractors. The Group Code of Ethics and Conduct is complemented by the Group Conduct Reporting & Whistleblower Policy, which was last updated in December 2021 for release in 2022. The Board oversees, and receives reports on compliance with amongst other things, the Group Code of Ethics and Conduct. The Group Conflicts of Interest Policy operates in conjunction with the Group Gift and Entertainment Policy, to create a system to identify and report actual, perceived or potential conflicts of interest. In recognition of the importance of protecting employee and customer data across QBE, we have a global privacy framework that is periodically reviewed and updated to reflect developments in privacy laws across the global footprint. QBE’s policy framework also addresses sanctions, outsourcing, modern slavery, anti-bribery and corruption, health, safety and wellbeing, continuous disclosure, diversity and inclusion, securities trading, flexible working, supplier sustainability, and environment and energy. Policy summaries are available at www.qbe.com/investor-relations/corporate-governance/global-policies. Material breaches and incidents relating to the policies within the policy framework, including the Group Code of Ethics and Conduct and the Group Conduct Reporting & Whistleblower Policy, are required to be recorded and reported to the Board. Global policies are also in place to address the prudential requirements of APRA, including risk management, cyber risk, business continuity management, reinsurance management, fitness and propriety and material outsourcing. In Australia, QBE complies with the General Insurance Code of Practice, an industry code relating to the provision of products and services to customers of the general insurance industry in Australia. The Code Governance Committee is the independent body that monitors and enforces insurers’ compliance with the Code. The General Insurance Code of Practice will also have sections that are enforceable by ASIC. Discussion as to identification of relevant sections is ongoing with ASIC and the Insurance Council of Australia. QBE’s Australian business is also a member of the Australian Financial Complaints Authority, the external dispute resolution scheme that deals with complaints from consumers related to financial services. Diversity and inclusion People are at the heart of our business, and creating a workplace culture and influencing the external environment so that our people, customers, suppliers and stakeholders feel included is essential to our success, now and into the future. In 2021, we developed a new Group Inclusion of Diversity Policy that sets out our expectations for how we interact with each other, and our aspiration to be a positive influence for the inclusion of diversity beyond the boundaries of the organisation. At QBE: • We fundamentally believe everyone should be included. • We know the inclusion of diversity is good for us now and in the future. • We are positive role models for our communities. To achieve this, the GEC has set the following key global focus areas, which are overseen and progressed by the GEC and monitored by the People & Remuneration Committee of the Board: AREA OF FOCUS ACHIEVEMENTS IN 2021 Diverse workforce including diverse leadership representation, diverse pipeline of talent and fair remuneration • In 2021, we maintained 33.3% women on the Group Board, just below our target of 40% by 2025. Across QBE we continued to make progress during 2021 regarding our 2025 target of 40% women in leadership, with an increase over last year from 34.8% to 35.9%. 43% of all leader hires and 49% of leader promotions were women, reflecting the continued focus on gender diversity in leadership, and we continue to identify opportunities for further progress, and to develop targeted initiatives to address attraction, progression and retention of women in leadership at QBE. • We were honoured to be recognised in the ‘Top 100 Companies for Gender Equality Globally’ in Equileap’s ‘Gender Equality Global Report & Ranking’ 2021, for positively progressing our gender equality agenda. Equileap, the leading organisation for data and insights on gender equality in the corporate sector, ranks over 3,500 public companies worldwide across gender pay gap, work-life balance and parental leave policies. • We were a gold sponsor for the Insurance Business Australia ‘Women in Insurance Summit 2021’ with Cecile Fresneau, Managing Director – Insurance Division, featuring in a panel discussion on personal resilience. 39 women from our talent pipeline also attended. • In Asia, two of our female Asian leaders were named ‘Elite Women’ of 2021 by Insurance Business Asia for going above and beyond for their clients, colleagues, QBE and the insurance industry as a whole. • Our performance management and remuneration frameworks are highly correlated and support a pay-for-performance methodology. This is designed to remove gender bias from the process and we annually review performance, by gender, to ensure comparable outcomes. • In Europe, we have continued our pay equity exercise, extending the work we began on gender pay reporting. The scope of our review has moved beyond gender and now takes into consideration other factors such as tenure, performance and market position. The exercise aims to identify individuals paid below peers using statistical modelling, and also relies on software to allow us to have instant and accurate access to the data. In 2021, we published our first United Kingdom Ethnicity Pay Gap report, holding a follow-up session entitled ‘An insight into…’, which allowed us to speak to the data from the report in more detail and how we planned to use it to further embed positive change. 47 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 48 Corporate governance statement continued AREA OF FOCUS ACHIEVEMENTS IN 2021 Inclusive workplace including inclusive leader capabilities, QBE DNA, Voice of Employee, Flex@QBE and Workplace Wellbeing • In 2021, we undertook an extensive maturity assessment of diversity and inclusion at QBE, which informed the development of a contemporary policy and strategy. These will be launched in 2022, along with a more extensive and globally consistent approach to diversity data. Our new approach to ‘Inclusion of Diversity’ includes a move to this new terminology, as we recognise that to foster and realise the benefits of all the ways we are different, it is essential to create an environment where everyone is, and feels that they are, included. • Additionally in 2021 we refreshed our seven DNA attributes – our organisational values – and the ideal behaviours that underpin them. In line with our new Inclusion of Diversity approach was the rebadging of one of our attributes from “We are diverse” to “We are inclusive”. • A shared language of phrases for calling out behaviour in the moment, both positive and negative, was created. This was supported by the development of a GIF for each phrase to support calling out behaviour in the virtual environment. • We are committed to supporting a diverse and inclusive workforce by recognising and responding to people’s needs at different stages of their lives through Flex@QBE. While maintaining a cohesive and purpose-led common culture is vital, we recognise our ways of working are changing, and will continue to change in the future. We offer a range of flexible ways of working including part-time hours, flexible working hours, working from home, job sharing and flexible return from parental leave. • In Europe, we created a network of champions, Flex Champions, to help drive and embed Flex@QBE. We also launched ‘Team Connection’ plans to agree how and when we come together to collaborate, and facilitated ‘Flex Checks’ with senior leadership teams to review these plans and ensure our Flex@QBE principles are applied fairly and consistently. • The Flex@QBE approach across Asia allows employees to work in another location, outside the office, for up to two days a week (subject to any local regulatory safe-distancing measures). • In North America, we rolled out unconscious bias training that will continue through 2022, focusing on inclusion and providing ways to foster it further. • Our Minimum Corporate Standards set the minimum standards of behaviour and conduct for all QBE employees. Our people are required to meet these standards and complete a self-declaration during the ‘My Year in Review’ process. • Our new Learning@QBE platform provides continuous learning modules to all employees regardless of location. In Australia Pacific, in 2021, over 1,000 employees participated in at least one of more than 50 ‘Learning for All’ sessions during the year. Topics included ‘Thrive with Change’, ‘Building Hybrid Team Connections’ and ‘Digital Meetings that Matter’. Connected marketplace including customer satisfaction and retention, vulnerable customers and diversity in supply chain • Where appropriate, QBE continues to offer Premiums4Good to customers, which invites them to join with us to make a real difference. By choosing QBE, a portion of a customer’s premium is directed towards investments and select customers can ask us to direct a further 25% of their insurance premium towards impact investments – investments in securities with an additional environmental or social objective. This social objective includes social inclusion, diversity and gender. • QBE maintains supplier sustainability principles to provide minimum expectations of suppliers to foster an inclusive workforce and a culture; provide a workplace that is free from direct and indirect discrimination, harassment, and bullying; and develop, monitor and maintain workforce management systems and/or policies which include and seek to improve diversity in recruitment, equal opportunity, pay equity, anti-discrimination and anti-harassment standards. Gender balance at Board and senior management levels In 2020, we set ourselves the goal of achieving 40% women in leadership across QBE by 2025, and 40% women on our Board by 2025. During 2021 we saw an increase from 34.8% to 35.9% women in leadership, and maintained 33.3% women on our Board. Action plans and succession planning continue to progress the diversity of our leadership and our Board. Details of gender representation across our workforce and management levels together with targets are set out below: FEMALE REPRESENTATION Board GEC Level 1 Level 2 Level 3 Women in leadership (total % of GEC and levels 1–3) Women in workforce GENDER TARGET BY 2025 ACTUAL 31 DECEMBER 2021 ACTUAL 31 DECEMBER 2020 ACTUAL 31 DECEMBER 2019 ACTUAL 31 DECEMBER 2018 40% 40% 40% to 60% 33.3% 45.5% 28.3% 32.0% 36.9% 35.9% 52.2% 33.3% 30.0% 25.5% 29.4% 36.3% 34.8% 52.0% 22.2% 27.3% 19.6% 28.8% 35.3% 33.7% 52.2% 22.2% 27.3% 23.1% 25.7% 33.8% 32.0% 52.7% 48 Corporate governance statement continued AREA OF FOCUS ACHIEVEMENTS IN 2021 Inclusive workplace • In 2021, we undertook an extensive maturity assessment of diversity and inclusion at QBE, which including inclusive leader informed the development of a contemporary policy and strategy. These will be launched in 2022, capabilities, QBE DNA, Voice along with a more extensive and globally consistent approach to diversity data. Our new approach of Employee, Flex@QBE and to ‘Inclusion of Diversity’ includes a move to this new terminology, as we recognise that to foster Workplace Wellbeing and realise the benefits of all the ways we are different, it is essential to create an environment where everyone is, and feels that they are, included. • Additionally in 2021 we refreshed our seven DNA attributes – our organisational values – and the ideal behaviours that underpin them. In line with our new Inclusion of Diversity approach was the rebadging of one of our attributes from “We are diverse” to “We are inclusive”. • A shared language of phrases for calling out behaviour in the moment, both positive and negative, was created. This was supported by the development of a GIF for each phrase to support calling out behaviour in the virtual environment. • We are committed to supporting a diverse and inclusive workforce by recognising and responding to people’s needs at different stages of their lives through Flex@QBE. While maintaining a cohesive and purpose-led common culture is vital, we recognise our ways of working are changing, and will continue to change in the future. We offer a range of flexible ways of working including part-time hours, flexible working hours, working from home, job sharing and flexible return from parental leave. • In Europe, we created a network of champions, Flex Champions, to help drive and embed Flex@QBE. We also launched ‘Team Connection’ plans to agree how and when we come together to collaborate, and facilitated ‘Flex Checks’ with senior leadership teams to review these plans and ensure our Flex@QBE principles are applied fairly and consistently. • The Flex@QBE approach across Asia allows employees to work in another location, outside the office, for up to two days a week (subject to any local regulatory safe-distancing measures). • In North America, we rolled out unconscious bias training that will continue through 2022, focusing on inclusion and providing ways to foster it further. • Our Minimum Corporate Standards set the minimum standards of behaviour and conduct for all QBE employees. Our people are required to meet these standards and complete a self-declaration during the ‘My Year in Review’ process. • Our new Learning@QBE platform provides continuous learning modules to all employees regardless of location. In Australia Pacific, in 2021, over 1,000 employees participated in at least one of more than 50 ‘Learning for All’ sessions during the year. Topics included ‘Thrive with Change’, ‘Building Hybrid Team Connections’ and ‘Digital Meetings that Matter’. Connected marketplace • Where appropriate, QBE continues to offer Premiums4Good to customers, which invites them to join including customer with us to make a real difference. By choosing QBE, a portion of a customer’s premium is directed satisfaction and retention, towards investments and select customers can ask us to direct a further 25% of their insurance vulnerable customers and premium towards impact investments – investments in securities with an additional environmental or diversity in supply chain social objective. This social objective includes social inclusion, diversity and gender. • QBE maintains supplier sustainability principles to provide minimum expectations of suppliers to foster an inclusive workforce and a culture; provide a workplace that is free from direct and indirect discrimination, harassment, and bullying; and develop, monitor and maintain workforce management systems and/or policies which include and seek to improve diversity in recruitment, equal opportunity, pay equity, anti-discrimination and anti-harassment standards. Gender balance at Board and senior management levels In 2020, we set ourselves the goal of achieving 40% women in leadership across QBE by 2025, and 40% women on our Board by 2025. During 2021 we saw an increase from 34.8% to 35.9% women in leadership, and maintained 33.3% women on our Board. Action plans and succession planning continue to progress the diversity of our leadership and our Board. Details of gender representation across our workforce and management levels together with targets are set out below: FEMALE REPRESENTATION Board GEC Level 1 Level 2 Level 3 Women in leadership (total % of GEC and levels 1–3) Women in workforce 40% 40% to 60% TARGET BY 2025 40% GENDER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER ACTUAL ACTUAL ACTUAL ACTUAL 2021 33.3% 45.5% 28.3% 32.0% 36.9% 35.9% 52.2% 2020 33.3% 30.0% 25.5% 29.4% 36.3% 34.8% 52.0% 2019 22.2% 27.3% 19.6% 28.8% 35.3% 33.7% 52.2% 2018 22.2% 27.3% 23.1% 25.7% 33.8% 32.0% 52.7% In addition to gender equality, QBE’s commitment extends to other areas of diversity including: • actively promoting inclusion for lesbian, gay, bisexual, transgender, intersex and queer plus (LGBTIQ+) employees with a global QBE Pride employee network; • ongoing commitment to supporting indigenous communities in Australia and driving our third Reconciliation Action Plan (RAP), which is now at the Innovate stage of the RAP framework; • looking to embed accessibility in the workplace and enhance our ability to employ people with a disability, with our recruitment team embedding questions around workplace adjustments into every stage of the recruitment process; • actively promoting racial equity with a global guide and glossary with advice on how to engage in conversation around race relations, inequality and injustice; and • increasing the quality and consistency of our diversity data globally and across the employee lifecycle, so we can understand the diversity of our workforce, and how representative we are of the communities in which we operate. For further details on our approach and progress, refer to QBE’s 2021 Sustainability Report. QBE also makes an annual filing to comply with the Workplace Gender Equality Act 2012 (Cth) (WGEA) in Australia disclosing our performance against the ‘Gender Equality Indicators’. The report can be found at www.qbe.com/investor-relations/corporate-governance/global-policies. Communications with shareholders Shareholder engagement QBE is committed to regularly communicating with its shareholders and other stakeholders in a timely and accessible manner, and encouraging shareholder participation at its AGM. Detailed information about QBE can be found on the website at www.qbe.com including: • its history; • the Board and management; • its Constitution, Board charter and the charters of each of its Committees; • corporate governance and policies; • periodic disclosures, including annual reports, half year reports and sustainability reports; • ASX announcements; • shareholder calendar; • notices of meeting and any accompanying documents; • presentation materials provided at investor and analyst briefings; and • webcasts of meetings of shareholders and investor and analyst briefings. The QBE website includes a dedicated investor relations section where shareholders can access relevant information regarding their shares. There is also a direct link where shareholders can access their shareholding online through QBE’s share registry, Computershare. They can update their personal information and provide their email address and elect to receive communications electronically. Shareholders can discuss their shareholding with either QBE’s shareholder services department by email to shares@qbe.com or by contacting QBE’s share registry, Computershare, by email to qbe.queries@computershare.com.au or by phone at +61 3 9415 4840. Shareholders may request to receive a hard copy of the Annual Report by updating their communication preferences by logging into their shareholding at www.investorcentre.com/au. QBE has a comprehensive investor relations program that facilitates effective communication with its investors. The Group Chief Executive Officer, Group Chief Financial Officer, Group Chief Risk Officer, Group General Counsel and Company Secretary, Global Head of Investor Relations, Group Executive, Corporate Affairs and Sustainability, Group Treasurer and divisional chief executives generally deal with analysts, investors, media, rating agencies and others, taking account of regulatory guidelines including those issued by the ASX on continuous disclosure. The presentations on the 30 June and 31 December results and other major presentations are sent to the ASX before the presentations commence and are available promptly at www.qbe.com/investor-relations/ reports-presentations. The 30 June and 31 December results presentations are also webcast live and subsequently archived at www.qbe.com/investor-relations/reports-presentations. Annual General Meetings QBE welcomes and encourages shareholder participation at its AGM, in person, online or by proxy. The AGM is held in Sydney each year. In 2021, QBE held a hybrid AGM in response to the COVID-19 pandemic. Shareholders were able to: • participate by attending the meeting in person, watching online or dialling in to the teleconference; • ask questions in person, online or on the telephone once they were verified; and • vote by appointing a proxy, direct voting prior to the AGM and direct voting online during the AGM. 49 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 50 Corporate governance statement continued Within the required statutory period before each AGM, QBE distributes to shareholders a notice of meeting and proxy form in accordance with the requirements of the Corporations Act 2001, the ASX Listing Rules and the Company’s Constitution. To encourage effective participation at AGMs, QBE: • issues notices of meeting that are honest, accurate and not misleading; • includes explanatory notes for all resolutions included in the notice; • provides a proxy appointment form which clearly indicates how a shareholder may appoint a proxy, direct their proxy how to vote on a particular resolution if they so choose and, if they appoint the Chair of the meeting as their proxy, how the Chair intends to vote undirected proxies; • only combines or ‘bundles’ resolutions in notices of meeting in limited circumstances; and • provides shareholders with the opportunity to lodge proxies electronically. Shareholders are encouraged to provide questions or comments ahead of the AGM so that these can be addressed at the meeting. QBE will make directors, members of the management team and the external auditor available to shareholders at the AGM to respond to questions regarding the items of business, including about the conduct of the audit and the preparation and content of the auditor’s report. Votes at the AGM are by way of a poll, i.e. one vote for each fully paid ordinary share held. Continuous disclosure QBE takes its continuous disclosure obligations seriously and issues market releases during the year to satisfy those obligations. Significant developments affecting QBE may be the subject of an announcement to the ASX. All ASX announcements are placed on QBE’s website at www.qbe.com/investor-relations/asx-announcements as soon as practicable after release. The Board and relevant management also receive copies of all material market announcements promptly after they have been made. QBE’s Continuous Disclosure Policy is available at www.qbe.com/investor-relations/corporate-governance/global-policies. Verification of periodic corporate reports QBE prepares periodic corporate reports for the benefit of investors such as annual reports, half year reports and sustainability reports. QBE follows a robust process for satisfying itself that the report is materially accurate and balanced, and that it provides investors with appropriate information to make investment decisions. Periodic corporate reports are drafted by staff with direct responsibility for, or expertise in, the subject matter and are supported by evidence, including by documenting the various sources of information and consultation undertaken within QBE or with external parties. The information is then reviewed by senior management who have the knowledge and skills to verify the accuracy and completeness of the information provided. QBE uses an independent assurance engagement to confirm that certain data in the annual sustainability report has been prepared and presented appropriately in all material aspects. The Board and its Committees review and approve statutory and other significant corporate reports prior to release to the market. All other periodic corporate reports are submitted for approval to the Disclosure Committee, a committee comprised of senior executives including the Group Chief Executive Officer and Group Chief Financial Officer. Financial and other reporting Audit Committee The Board has an Audit Committee which meets at least quarterly to support the Board in overseeing the effectiveness of the Group’s financial reporting and risk management framework. In particular, the Audit Committee oversees and monitors the integrity of the Group’s financial reporting, including climate-related financial disclosures. The Audit Committee is also responsible for overseeing the management of tax risks. The Audit Committee is comprised of independent directors, all of whom have financial expertise, and is chaired by Jann Skinner. Group Chief Executive Officer and Group Chief Financial Officer declaration Prior to the Audit Committee’s review and the Board’s approval of the 2021 Annual Report, the Group Chief Executive Officer and Group Chief Financial Officer provided a declaration to the Board that, in their opinion, the financial records were properly maintained, that the financial statements complied with the appropriate accounting standards and that they gave a true and fair view of the financial position and performance of QBE. The declaration also provides that the opinion of the Group Chief Executive Officer and Group Chief Financial Officer was based on a sound system of risk management and internal control which is operating effectively. External auditor independence QBE firmly believes that the external auditor must be, and must be seen to be, independent. The external auditor confirms its independence and the Audit Committee verifies this by separate enquiry. The Audit Committee regularly meets with the external auditor in the absence of management. The external auditor attends the AGM and a representative is available to answer questions from shareholders relevant to the audit. The Audit Committee has free and unfettered access to the external auditor. The external auditor has free and unfettered access to the Audit Committee. 51 Q B E I n s u r a n c e G r o u p i e w o v e r v A n n u a l R e p o r t 2 0 2 1 Votes at the AGM are by way of a poll, i.e. one vote for each fully paid ordinary share held. Actuarial review QBE has issued an internal policy on external auditor independence. Under this policy, the external auditor is not allowed to provide the excluded services of preparing accounting records, financial reports or asset or liability valuations. Furthermore, it cannot act in a management capacity, as an advocate, as a custodian of assets or as a share registry. The Board believes some non-audit services are appropriate given the external auditor’s knowledge of the QBE Group. QBE may engage the external auditor for some non-audit services, subject to the general principle that fees for non-audit services excluding audit-related and assurance services should not exceed 50% of all fees paid to the external auditor in any one financial year. External tax services are generally provided by an accounting firm other than the external auditor. The Audit Committee approves the audit plan each year and receives information on the external auditor’s fees. QBE also considers the terms of engagement of the external auditor every few years. The Corporations Act 2001 and Australian professional auditing standards require rotation of the lead engagement partner after five years. The lead engagement partner of the external auditor was last rotated in 2019. The Audit Committee regularly reviews the need to rotate external auditors and if the Audit Committee thought it appropriate to change the firm undertaking QBE’s external audit, it would conduct a competitive tender process. The central estimate of QBE’s insurance liabilities, comprising outstanding claims and premium liabilities, is determined by experienced internal actuarial staff. Actuarial staff form an independent view of both the central estimate and the probability of adequacy of outstanding claims and premium liabilities. At 31 December 2021, close to 100% of QBE’s outstanding claims central estimate was also reviewed by external actuaries. Internal audit A global internal audit function is a core part of QBE’s three lines of defence approach to effective risk management. QBE’s Group Internal Audit team is an independent global function that operates on an integrated basis and is managed by the Group Head of Internal Audit. Group Internal Audit is formally accountable to the Chair of the Audit Committee and has an operational reporting line to the Group Chief Financial Officer. Group Internal Audit operates under an Audit Committee-approved internal audit charter that provides Group Internal Audit with free and unrestricted access to the Audit Committee, and all management, records and properties. Group Internal Audit’s primary purpose is to assist the Audit Committee and senior management to discharge their responsibility for sound and prudent management of risk at QBE. Group Internal Audit does this by performing audits, reviews and investigations to provide independent assurance that the design and operation of controls across QBE’s international operations are effective. Group Internal Audit develops and delivers an annual risk-based internal audit plan that is aligned to QBE’s risk management framework and includes audits to address relevant regulatory requirements. The annual Group Internal Audit plan is designed so that higher materiality risk processes are reviewed more frequently. Audit findings and related themes are reported to management, local audit committees and the Audit Committee. Risk management QBE is in the business of managing risk. The Board and management are fully committed to adopting a disciplined approach to managing risk, delivering leading practice and maintaining robust and independent risk management processes and systems. QBE’s risk management framework supports its businesses across all divisions and provides a sound foundation for reducing uncertainty and volatility in business performance. Further details of how QBE manages risk are set out in the Group Chief Risk Officer’s report and the climate change section of the Annual Report on pages 28 to 37. An overview of QBE’s risk management framework, including QBE’s material economic risks and how these are mitigated, is also set out in note 4 to the financial statements. Risk & Capital Committee 50 Corporate governance statement continued Within the required statutory period before each AGM, QBE distributes to shareholders a notice of meeting and proxy form in accordance with the requirements of the Corporations Act 2001, the ASX Listing Rules and the Company’s Constitution. To encourage effective participation at AGMs, QBE: • issues notices of meeting that are honest, accurate and not misleading; • includes explanatory notes for all resolutions included in the notice; • provides a proxy appointment form which clearly indicates how a shareholder may appoint a proxy, direct their proxy how to vote on a particular resolution if they so choose and, if they appoint the Chair of the meeting as their proxy, how the Chair intends to vote undirected proxies; • only combines or ‘bundles’ resolutions in notices of meeting in limited circumstances; and • provides shareholders with the opportunity to lodge proxies electronically. Shareholders are encouraged to provide questions or comments ahead of the AGM so that these can be addressed at the meeting. QBE will make directors, members of the management team and the external auditor available to shareholders at the AGM to respond to questions regarding the items of business, including about the conduct of the audit and the preparation and content of the auditor’s report. Continuous disclosure QBE takes its continuous disclosure obligations seriously and issues market releases during the year to satisfy those obligations. Significant developments affecting QBE may be the subject of an announcement to the ASX. All ASX announcements are placed on QBE’s website at www.qbe.com/investor-relations/asx-announcements as soon as practicable after release. The Board and relevant management also receive copies of all material market announcements promptly after they have been made. QBE’s Continuous Disclosure Policy is available at www.qbe.com/investor-relations/corporate-governance/global-policies. Verification of periodic corporate reports QBE prepares periodic corporate reports for the benefit of investors such as annual reports, half year reports and sustainability reports. QBE follows a robust process for satisfying itself that the report is materially accurate and balanced, and that it provides investors with appropriate information to make investment decisions. Periodic corporate reports are drafted by staff with direct responsibility for, or expertise in, the subject matter and are supported by evidence, including by documenting the various sources of information and consultation undertaken within QBE or with external parties. The information is then reviewed by senior management who have the knowledge and skills to verify the accuracy and completeness of the information provided. QBE uses an independent assurance engagement to confirm that certain data in the annual sustainability report has been prepared and presented appropriately in all material aspects. The Board and its Committees review and approve statutory and other significant corporate reports prior to release to the market. All other periodic corporate reports are submitted for approval to the Disclosure Committee, a committee comprised of senior executives including the Group Chief Executive Officer and Group Chief Financial Officer. Financial and other reporting Audit Committee The Board has an Audit Committee which meets at least quarterly to support the Board in overseeing the effectiveness of the Group’s financial reporting and risk management framework. In particular, the Audit Committee oversees and monitors the integrity of the Group’s financial reporting, including climate-related financial disclosures. The Audit Committee is also responsible for overseeing the management of tax risks. The Audit Committee is comprised of independent directors, all of whom have financial expertise, and is chaired by Jann Skinner. Group Chief Executive Officer and Group Chief Financial Officer declaration Prior to the Audit Committee’s review and the Board’s approval of the 2021 Annual Report, the Group Chief Executive Officer and Group Chief Financial Officer provided a declaration to the Board that, in their opinion, the financial records were properly maintained, that the financial statements complied with the appropriate accounting standards and that they gave a true and fair view of the financial position and performance of QBE. The declaration also provides that the opinion of the Group Chief Executive Officer and Group Chief Financial Officer was based on a sound system of risk management and internal control which is operating effectively. QBE firmly believes that the external auditor must be, and must be seen to be, independent. The external auditor confirms its independence and the Audit Committee verifies this by separate enquiry. The Audit Committee regularly meets with the external auditor in the absence of management. The external auditor attends the AGM and a representative is available to answer questions External auditor independence from shareholders relevant to the audit. to the Audit Committee. The Audit Committee has free and unfettered access to the external auditor. The external auditor has free and unfettered access Environmental, social and governance risk Information about how QBE approaches sustainability and the management of ESG issues can be found in the climate change disclosures section on pages 30 to 37 of the Annual Report and in the 2021 Sustainability Report available at www.qbe.com/sustainability. Refer to QBE’s 2021 Sustainability Report at www.qbe.com/sustainability. The Board monitors QBE’s performance and, as such, plays a significant role in monitoring that an effective risk management strategy is established and maintained. The Board has a Risk & Capital Committee which meets at least quarterly to support the Board in overseeing the effectiveness of QBE’s risk and capital management frameworks. The proper oversight of these frameworks supports strategic objectives, informs business plans and enables current and future risks to be identified, assessed and monitored in line with risk appetite. Under its charter, the Risk & Capital Committee is required to review the risk management framework periodically to confirm it continues to be sound. This review was undertaken during 2021 as part of the annual refresh of the Risk Management Strategy. The Risk & Capital Committee is also responsible for overseeing QBE’s ESG responsibilities and performance, and external reporting relating to this. o n The Risk & Capital Committee is comprised of independent directors and is chaired by Rolf Tolle. The Risk & Capital Committee has free and unfettered access to the Group Chief Risk Officer and other relevant senior management. fi n a n c i a l r e v i e w n f o r m a t i R e p o r t R e p o r t i 1 P e r f o r m a n c e 2 O p e r a t i n g a n d 3 G o v e r n a n c e 4 D i r e c t o r s ' 5 F i n a n c i a l 6 O t h e r 52 Directors' Report FOR THE YEAR ENDED 31 DECEMBER 2021 Your directors present their report on QBE Insurance Group Limited and the entities it controlled at, or during, the year ended 31 December 2021. Directors Michael Wilkins AO (Chair) Andrew Horton (from 1 September 2021) Stephen Fitzgerald AO John M Green (Deputy Chair) Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Consolidated results Gross written premium Gross earned premium revenue Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Net investment income on policyholders’ funds Insurance profit (loss) Net investment income on shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles Profit (loss) before income tax Income tax expense Profit (loss) after income tax Net profit attributable to non-controlling interests Net profit (loss) after income tax attributable to ordinary equity holders of the Company STATUTORY RESULT 2021 US$M 18,457 17,035 13,408 (8,371) (2,070) (1,829) 1,138 77 1,215 45 (247) – (7) (72) (21) 913 (156) 757 (7) 750 2020 US$M 14,643 14,008 11,708 (8,934) (1,891) (1,752) (869) 142 (727) 84 (252) (2) (5) (104) (466) (1,472) (39) (1,511) (6) (1,517) Result The Group reported a net profit after tax attributable to ordinary equity holders of the Company of $750 million for the year ended 31 December 2021, compared with a net loss after tax of $1,517 million for the prior year. The current year profit reflects a material turnaround from the prior year which included a significant underwriting loss due to COVID-19, adverse prior accident year claims development, and impairments of North American goodwill and deferred tax assets. Gross written premium increased by $3,814 million mainly due to premium rate increases, improved retention and new business growth across the Group, with particularly strong growth in Crop. Reinsurance expense increased by $1,327 million, mainly reflecting the cost of reinsuring certain prior accident year Australian compulsory third party motor (CTP) liabilities ($365 million) combined with growth in more heavily reinsured portfolios and the higher cost of renewal of the Group’s main catastrophe and per risk treaties. The Group reported an underwriting profit of $1,138 million compared with a loss of $869 million in the prior year, equating to a combined operating ratio of 91.5% compared with 107.4%. Excluding the impacts of changes in risk-free rates, the combined operating ratio was 93.7% compared with 104.2% in the prior year. The net claims ratio was 62.4% compared with 76.3% in the prior year. Excluding the impact of changes in risk-free rates, the net claims ratio was 64.6% compared with 73.1%, with the improvement reflecting the aforementioned CTP reinsurance transaction ($349 million), the reduced impact of COVID-19 claims (a net release of $141 million compared with a cost of $560 million in the prior year), and a reduced level of adverse prior accident year claims development relative to the prior year. 52 Directors' Report FOR THE YEAR ENDED 31 DECEMBER 2021 Directors Michael Wilkins AO (Chair) Andrew Horton (from 1 September 2021) Stephen Fitzgerald AO John M Green (Deputy Chair) Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Consolidated results Gross written premium Gross earned premium revenue Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Net investment income on policyholders’ funds Insurance profit (loss) Net investment income on shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles Profit (loss) before income tax Income tax expense Profit (loss) after income tax Net profit attributable to non-controlling interests Result STATUTORY RESULT 2021 US$M 18,457 17,035 13,408 (8,371) (2,070) (1,829) 1,138 1,215 77 45 (247) – (7) (72) (21) 913 (156) 757 (7) 750 2020 US$M 14,643 14,008 11,708 (8,934) (1,891) (1,752) (869) 142 (727) 84 (252) (2) (5) (104) (466) (1,472) (39) (1,511) (6) (1,517) Net profit (loss) after income tax attributable to ordinary equity holders of the Company The Group reported a net profit after tax attributable to ordinary equity holders of the Company of $750 million for the year ended 31 December 2021, compared with a net loss after tax of $1,517 million for the prior year. The current year profit reflects a material turnaround from the prior year which included a significant underwriting loss due to COVID-19, adverse prior accident year claims development, and impairments of North American goodwill and deferred tax assets. Gross written premium increased by $3,814 million mainly due to premium rate increases, improved retention and new business growth across the Group, with particularly strong growth in Crop. Reinsurance expense increased by $1,327 million, mainly reflecting the cost of reinsuring certain prior accident year Australian compulsory third party motor (CTP) liabilities ($365 million) combined with growth in more heavily reinsured portfolios and the higher cost of renewal of the Group’s main catastrophe and per risk treaties. The Group reported an underwriting profit of $1,138 million compared with a loss of $869 million in the prior year, equating to a combined operating ratio of 91.5% compared with 107.4%. Excluding the impacts of changes in risk-free rates, the combined operating ratio was 93.7% compared with 104.2% in the prior year. The net claims ratio was 62.4% compared with 76.3% in the prior year. Excluding the impact of changes in risk-free rates, the net claims ratio was 64.6% compared with 73.1%, with the improvement reflecting the aforementioned CTP reinsurance transaction ($349 million), the reduced impact of COVID-19 claims (a net release of $141 million compared with a cost of $560 million in the prior year), and a reduced level of adverse prior accident year claims development relative to the prior year. Your directors present their report on QBE Insurance Group Limited and the entities it controlled at, or during, the year ended 31 December 2021. The combined commission and expense ratio decreased to 29.1% from 31.1% in the prior year. The net commission ratio reduced to 15.5% from 16.1% in the prior year, primarily due to business mix changes in North America and Australia Pacific. The Group’s expense ratio decreased to 13.6% from 15.0% in the prior year, mainly reflecting disciplined cost management and operating leverage driven by strong premium growth. 53 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v P e r f o r m a n c e Total investment income was $122 million compared with $226 million in the prior year, reflecting the adverse impact of higher risk-free rates partly offset by improved returns on growth assets. i e w The Group’s effective tax rate was 17% compared with negative 3% in the prior year reflecting the mix of corporate tax rates in the jurisdictions in which QBE operates and the utilisation of previously unrecognised tax losses in the North American tax group. The prior year tax rate was also impacted by the non-deductible impairment of goodwill and derecognition of deferred tax assets in North America. Dividends The directors are announcing a final dividend of 19 Australian cents per share, 10% franked, compared with no final dividend for the prior year. The 2021 full year dividend payout is A$443 million compared with A$59 million for 2020. Further details of dividends paid during the year are set out in note 5.4 to the financial statements. The directors have reassessed the Group’s dividend policy and expect to pay out 40%–60% of annual adjusted cash profit. This approach will better support the Group’s growth ambitions and provide flexibility to manage the dynamics of the global insurance cycle. Activities The principal activities of QBE during the year were underwriting general insurance and reinsurance risks, management of Lloyd’s syndicates and investment management. Presentation currency The Group has presented the Financial Report in US dollars because a significant proportion of its underwriting activity is denominated in US dollars. The US dollar is also the currency that is widely understood by the global insurance industry, international investors and analysts. Operating and financial review Information on the Group’s results, operations, business strategy, prospects and financial position is set out in the operating and financial review on pages 10 to 21 of this Annual Report. Outstanding claims liability The net central estimate of outstanding claims is determined by the Group Chief Actuary. The assessment takes into account the statistical analysis of past claims, allowance for claims incurred but not reported, reinsurance and other recoveries and future interest and inflation factors. As in previous years, the directors consider that substantial risk margins are required to mitigate the inherent uncertainty in the net central estimate. The probability of adequacy of the outstanding claims liability at 31 December 2021 was 91.7% compared with 92.5% last year. The Australian Prudential Regulation Authority (APRA) prudential standards provide a capital credit for risk margins in excess of a probability of adequacy of 75%. Group indemnities Rule 78 of the Company’s Constitution provides that the Company indemnifies past and present directors, secretaries or other officers against any liability incurred by that person as a director, secretary or other officer of the Company or its subsidiaries. The indemnity does not apply to any liability (excluding legal costs): • owed to the Company or a related body corporate (e.g. breach of directors’ duties); • for a pecuniary penalty under section 1317G or a compensation order under sections 1317H or 1317HA of the Corporations Act 2001 (Cth) (or a similar provision of the corresponding legislation in another jurisdiction); or • that is owed to someone other than the Company or a related body corporate and which did not arise out of conduct in good faith. The indemnity extends to legal costs other than where: • in civil proceedings, one or more of the above exclusions apply; • in criminal proceedings, the person is found guilty; • the person is liable in proceedings brought by the Australian Securities and Investments Commission (ASIC), a corresponding regulator in another jurisdiction or a liquidator (unless as part of the investigation before proceedings are commenced); or • the court does not grant relief after an application under the Corporations Act 2001 or corresponding legislation in another jurisdiction. In addition, a deed exists between the Company and each director which includes an indemnity in similar terms to rule 78 of the Company’s Constitution. 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 54 Directors' Report continued FOR THE YEAR ENDED 31 DECEMBER 2021 Directors’ and officers’ insurance QBE pays a premium each year in respect of a contract insuring directors, secretaries, senior managers and employees of the Group together with any natural person who is either a trustee or a member of a policy committee for a superannuation plan established for the benefit of the Group’s employees against liabilities past, present or future. The officers of the Group covered by the insurance contract include the directors listed on pages 38 and 39 of this Annual Report, the Group Company Secretary, Carolyn Scobie, and Deputy Company Secretary, Peter Smiles. In accordance with normal commercial practice, disclosure of the amount of premium payable under, and the nature of liabilities covered by, the insurance contract is prohibited by a confidentiality clause in the contract. No such insurance cover has been provided for the benefit of any external auditor of the Group. Significant changes There were no significant changes in the Group’s state of affairs during the financial year other than as disclosed in this Annual Report. Likely developments and expected results of operations Likely developments in the Group’s operations in future financial years and the expected results of those operations have been included in the operating and financial review on pages 10 to 21 of this Annual Report. Events after balance date Other than the declaration of the final dividend, no matter or circumstance has arisen since 31 December 2021 that, in the opinion of the directors, has significantly affected or may significantly affect the Group’s operations, the results of those operations or the Group’s state of affairs in future financial periods. Material business risks As a global insurance and reinsurance business, QBE is subject to a substantial variety of business risks. The directors believe that effective management of these risks is critical to delivering value for QBE’s stakeholders. It is QBE’s policy to adopt a rigorous approach to managing risk throughout the Group. Risk management is a continuous process and an integral part of QBE’s governance structure, QBE’s broader business processes and, most importantly, QBE’s culture. Some of the material business risks that QBE faces include strategic, insurance, credit, market, liquidity, operational, compliance and Group risks. Explanations of these risks and their mitigations are set out in detail in note 4 to the financial statements which we recommend you read. Further details of how QBE manages risk are set out in the Group Chief Risk Officer’s Report on pages 28 to 29, the climate change section on pages 30 to 37 and the risk management section of the corporate governance statement on page 51 of this Annual Report. The Group makes judgements and estimates in respect of the reported amounts of certain assets and liabilities, the most significant of which are in relation to the determination of the net outstanding claims liability, the application of the liability adequacy test and the valuation of deferred tax assets and impairment testing of goodwill in North America. Details of these, and information on how QBE has responded to uncertainties created by COVID-19, are included in the notes to the financial statements. Meetings of directors FULL MEETINGS OF DIRECTORS1 H A 11 11 3 11 11 11 11 11 11 11 10 11 3 11 11 11 11 11 11 11 MEETINGS OF INDEPENDENT DIRECTORS GOVERNANCE & AUDIT NOMINATION INVESTMENT OPERATIONS & TECHNOLOGY PEOPLE & RE- MUNERATION RISK & CAPITAL SUB- COMMITTEES2 MEETINGS OF COMMITTEES H 6 6 – 6 6 6 6 6 6 6 A 6 6 – 6 6 6 6 6 6 6 H – 5 – 5 5 5 5 – 5 5 A – 5 – 5 5 5 5 – 5 5 H 6 6 – 6 6 6 6 6 6 6 A 6 6 – 6 6 6 6 6 6 6 H 4 4 – – – 4 – – – 4 A 4 4 – – – 4 – – – 4 H – 4 – 4 4 – – 4 – 4 A – 4 – 4 4 – – 4 – 4 H 4 4 – – – – 4 – 4 4 A 4 4 – – – – 4 – 4 4 H 6 6 – – – 6 6 6 6 6 A 6 5 – – – 6 6 6 6 6 H A 1 10 – – – 3 12 – 5 8 1 10 – – – 3 12 – 5 8 Stephen Fitzgerald John M Green Andrew Horton Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Michael Wilkins H Number of meetings held while a Board or Committee member. A Number of meetings attended while a Board or Committee member. 1 All directors attended all scheduled Board meetings. Some of the 2021 Board meetings were unscheduled and called at short notice, resulting in some directors being unable to attend. 2 Ad hoc committees of the Board were convened during the year in relation to the financial results and other reporting matters. 54 Directors' Report continued FOR THE YEAR ENDED 31 DECEMBER 2021 Directors’ and officers’ insurance QBE pays a premium each year in respect of a contract insuring directors, secretaries, senior managers and employees of the Group together with any natural person who is either a trustee or a member of a policy committee for a superannuation plan established for the benefit of the Group’s employees against liabilities past, present or future. The officers of the Group covered by the insurance contract include the directors listed on pages 38 and 39 of this Annual Report, the Group Company Secretary, Carolyn Scobie, and Deputy Company Secretary, Peter Smiles. In accordance with normal commercial practice, disclosure of the amount of premium payable under, and the nature of liabilities covered by, the insurance contract is prohibited by a confidentiality clause in the contract. No such insurance cover has been provided for the benefit of any external auditor of the Group. Significant changes There were no significant changes in the Group’s state of affairs during the financial year other than as disclosed in this Annual Report. Likely developments and expected results of operations Likely developments in the Group’s operations in future financial years and the expected results of those operations have been included in the operating and financial review on pages 10 to 21 of this Annual Report. Other than the declaration of the final dividend, no matter or circumstance has arisen since 31 December 2021 that, in the opinion of the directors, has significantly affected or may significantly affect the Group’s operations, the results of those operations or the Events after balance date Group’s state of affairs in future financial periods. Material business risks As a global insurance and reinsurance business, QBE is subject to a substantial variety of business risks. The directors believe that effective management of these risks is critical to delivering value for QBE’s stakeholders. It is QBE’s policy to adopt a rigorous approach to managing risk throughout the Group. Risk management is a continuous process and an integral part of QBE’s governance structure, QBE’s broader business processes and, most importantly, QBE’s culture. Some of the material business risks that QBE faces include strategic, insurance, credit, market, liquidity, operational, compliance and Group risks. Explanations of these risks and their mitigations are set out in detail in note 4 to the financial statements which we recommend you read. Further details of how QBE manages risk are set out in the Group Chief Risk Officer’s Report on pages 28 to 29, the climate change section on pages 30 to 37 and the risk management section of the corporate governance statement on page 51 of this Annual Report. The Group makes judgements and estimates in respect of the reported amounts of certain assets and liabilities, the most significant of which are in relation to the determination of the net outstanding claims liability, the application of the liability adequacy test and the valuation of deferred tax assets and impairment testing of goodwill in North America. Details of these, and information on how QBE has responded to uncertainties created by COVID-19, are included in the notes to the financial statements. Meetings of directors FULL MEETINGS OF MEETINGS OF INDEPENDENT DIRECTORS1 DIRECTORS H A GOVERNANCE & AUDIT NOMINATION INVESTMENT TECHNOLOGY MUNERATION OPERATIONS & PEOPLE & RE- RISK & CAPITAL SUB- COMMITTEES2 MEETINGS OF COMMITTEES Stephen Fitzgerald John M Green Andrew Horton Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Michael Wilkins 11 11 3 11 11 11 11 11 11 11 10 11 3 11 11 11 11 11 11 11 H 6 6 – 6 6 6 6 6 6 6 A 6 6 – 6 6 6 6 6 6 6 H – 5 – 5 5 5 5 – 5 5 A – 5 – 5 5 5 5 – 5 5 H 6 6 – 6 6 6 6 6 6 6 A 6 6 – 6 6 6 6 6 6 6 H 4 4 – – – 4 – – – 4 A 4 4 – – – 4 – – – 4 H – 4 – 4 4 – – 4 – 4 A – 4 – 4 4 – – 4 – 4 H 4 4 – – – – 4 – 4 4 A 4 4 – – – – 4 – 4 4 H 6 6 – – – 6 6 6 6 6 A 6 5 – – – 6 6 6 6 6 H A 1 10 1 10 – – – 3 – 5 8 – – – 3 – 5 8 12 12 H Number of meetings held while a Board or Committee member. A Number of meetings attended while a Board or Committee member. 1 All directors attended all scheduled Board meetings. Some of the 2021 Board meetings were unscheduled and called at short notice, resulting in some directors being unable to attend. 2 Ad hoc committees of the Board were convened during the year in relation to the financial results and other reporting matters. Further meetings occurred during the year, including meetings of the Chair, Group Chief Executive Officer and Interim Group Chief Executive Officer, and meetings of the directors with management. Often directors attend meetings of committees of which they are not currently members. Directorships of listed companies held by the members of the Board From 1 January 2018 to 18 February 2022, the directors also served as directors of the following listed entities: DIRECTOR POSITION DATE APPOINTED DATE CEASED John M Green Challenger Limited Michael Wilkins AMP Limited Medibank Private Limited Scentre Group Limited Jann Skinner Telix Pharmaceuticals Limited Director Director Director Director Director 6 December 2017 – 12 September 2016 25 May 2017 8 April 2020 14 February 2020 – – 19 June 2018 – Qualifications and experience of directors The qualifications and experience of each director are set out on pages 38 and 39 of this Annual Report. Qualifications and experience of company secretaries Carolyn Scobie, BA, LLB, MA, AGIA, GAICD Carolyn joined QBE in 2016 as Group General Counsel and Company Secretary. Prior to joining QBE, Carolyn was Group General Counsel at Goodman Group for 17 years, where she ran a multi-disciplinary legal team. Carolyn has extensive experience in corporate law, compliance, regulatory matters, litigation and managing the complexity of multiple jurisdictions. Peter Smiles, LLB, MBA, FGIA, FCIS, GAICD Peter is Deputy Company Secretary of QBE Insurance Group Limited and a company secretary of various QBE subsidiaries in Australia. He has 30 years of insurance experience, which includes 25 years as a corporate lawyer. In addition to his current company secretarial duties, he acts as a corporate lawyer advising Group head office departments. Directors’ interests and benefits Ordinary share capital Directors’ relevant interests, including those of their personal related parties, in the ordinary share capital of the Company at the date of this report are as follows: DIRECTOR Stephen Fitzgerald John M Green Andrew Horton Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Michael Wilkins NUMBER OF SHARES HELD 69,268 41,253 150,000 4,127 44,079 37,445 70,000 4,127 67,618 72,258 Options and conditional rights At the date of this report, Andrew Horton has 335,570 conditional rights to ordinary shares of the Company. No executives hold options at the date of this report. Details of the schemes under which options and conditional rights are granted are provided in the Remuneration Report and in note 8.5 to the financial statements. The names of all persons who currently hold options granted under the Employee Share and Option Plan and conditional rights to ordinary shares of the Company are entered in the registers kept by the Company pursuant to section 168 of the Corporations Act 2001. Environmental regulation While the Group is not currently required to report under any significant environmental regulations under Commonwealth, State or Territory legislation, climate change disclosures are provided on pages 30 to 37 of this Annual Report and operational greenhouse gas emissions and other environmental data are disclosed in the 2021 Sustainability Report. 55 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 56 Remuneration Report To our shareholders On behalf of the Board, I present QBE’s Remuneration Report for 2021. The efforts of our people and the ongoing support of our customers, along with continued premium rate momentum, have resulted in a Group result reflecting strong top line growth and ongoing improvement across the business. A strong return to profitability was achieved with a Group adjusted cash return on equity (ROE) of 10.3% whilst our balance sheet continued to strengthen. Relative to initial expectations, COVID-19 impacts were more benign through 2021 than expected, though our teams have nonetheless remained focused in light of considerable uncertainty across our key markets. From the strong foundations evident in this result, we expect further momentum in the business as our new purpose, vision and six strategic priorities are embedded across the Group and our culture. During 2021, we also welcomed a number of new executives and, as foreshadowed in last year’s report, carried out a broader review of remuneration arrangements to address the incoming regulatory requirements across the Australian financial services sector. For more information about the changes for 2022, refer to page 59. In a challenging year, we are pleased with the results our people have achieved for your Company and delivered for our customers. For more information on how we performed in 2021, refer to pages 60–61. Executive changes People, culture and inclusion As announced in March 2021, we appointed a new Group Chief Executive Officer (CEO), Andrew Horton, who commenced in September 2021, replacing Interim Group CEO, Richard Pryce. Mr Horton was also appointed an executive director of QBE effective 1 September 2021. Mr Horton’s experience in the insurance sector provides QBE with refreshed rigour having driven positive change and high performance in his previous roles. Upon Mr Horton’s commencement, Mr Pryce transitioned to an advisory role and retired in December 2021. We also welcomed Fiona Larnach as the Group Chief Risk Officer (CRO) and Sue Houghton as CEO, Australia Pacific. Pleasingly, we promoted two members of our senior management to the Group Executive being Sam Harrison to the role of Group Chief Underwriting Officer and Amanda Hughes to the role of Group Executive, People and Culture. It has been encouraging to see tangible benefit from our efforts to build our internal talent pipeline to fill a number of these roles. We are confident that these most recent executive changes provide QBE with the capability to continue to build the momentum across the business for future success. There were no changes in non-executive director membership or fees during 2021. For more information, refer to page 77. There continued to be a strong commitment to the wellbeing of our people in 2021. Having regard to both physical and mental health during the year, we evolved our employee listening strategy to better connect with our people. The former annual engagement and enablement survey is now carried out through more frequent, shorter and tailored pulse surveys. Through these, we have started to deliver on our ambition for a modernised listening approach at QBE and we are able to gather important insights into how our people are feeling. Our focus is on four key dimensions: wellbeing, respect, inclusion and risk. Our progress on the ‘Culture Accelerator’ program during 2021 has provided a solid base from which to build. The activities carried out as part of the program, which were to refine and enhance our DNA and support our journey towards making QBE more future-fit, have seen significant traction. A refreshed DNA and shared language for calling out behaviour were launched in October 2021 and sponsorship of a number of culture-related initiatives will continue into 2022. The development of a renewed approach to inclusion occurred during 2021 with the formal launch of a new Inclusion of Diversity policy in early 2022. The change in terminology is representative of the fact that inclusion is needed to both foster and unlock the value of diversity and QBE’s continued commitment and focus in this area. Pleasingly, during the year, QBE became one of the first organisations in Australia certified as a Family Friendly Workplace and is a founding partner of the National Work + Family Standards, launched in Remuneration Report contents Our remuneration framework at a glance How we performed: Financial performance 2021 priorities 1. Executive KMP performance snapshots 2. Remuneration governance 3. Executive KMP remuneration in detail 58 60 61 62 65 68 4. Executive KMP remuneration tables 73 5. Non-executive director remuneration 77 56 Remuneration Report To our shareholders On behalf of the Board, I present QBE’s Remuneration Report for 2021. The efforts of our people and the ongoing support of our customers, along with continued premium rate momentum, have resulted in a Group result reflecting strong top line growth and ongoing improvement across the business. A strong return to profitability was achieved with a Group adjusted cash return on equity (ROE) of 10.3% whilst our balance sheet continued to strengthen. Relative to initial expectations, COVID-19 impacts were more benign through 2021 than expected, though our teams have nonetheless remained focused in light of considerable uncertainty across our key markets. From the strong foundations evident in this result, we expect further momentum in the business as our new purpose, vision and six strategic priorities are embedded across the Group and our culture. During 2021, we also welcomed a number of new executives and, as foreshadowed in last year’s report, carried out a broader review of remuneration arrangements to address the incoming regulatory requirements across the Australian financial services sector. For more information about the changes for 2022, refer to page 59. In a challenging year, we are pleased with the results our people have achieved for your Company and delivered for our customers. For more information on how we performed in 2021, refer to pages 60–61. Executive changes People, culture and inclusion As announced in March 2021, we There continued to be a strong commitment appointed a new Group Chief Executive to the wellbeing of our people in 2021. Officer (CEO), Andrew Horton, who commenced in September 2021, replacing Interim Group CEO, Richard Pryce. Mr Horton was also appointed an executive director of QBE effective 1 September 2021. Having regard to both physical and mental health during the year, we evolved our employee listening strategy to better connect with our people. The former annual engagement and enablement survey is now carried out through more frequent, shorter Mr Horton’s experience in the insurance and tailored pulse surveys. Through these, sector provides QBE with refreshed rigour we have started to deliver on our ambition having driven positive change and high for a modernised listening approach at performance in his previous roles. Upon QBE and we are able to gather important Mr Horton’s commencement, Mr Pryce insights into how our people are feeling. transitioned to an advisory role and retired Our focus is on four key dimensions: in December 2021. wellbeing, respect, inclusion and risk. We also welcomed Fiona Larnach as Our progress on the ‘Culture Accelerator’ the Group Chief Risk Officer (CRO) and program during 2021 has provided a solid Sue Houghton as CEO, Australia Pacific. base from which to build. The activities Pleasingly, we promoted two members carried out as part of the program, of our senior management to the Group which were to refine and enhance our Executive being Sam Harrison to the role DNA and support our journey towards of Group Chief Underwriting Officer and making QBE more future-fit, have seen Amanda Hughes to the role of Group significant traction. A refreshed DNA and Executive, People and Culture. It has been encouraging to see tangible benefit from our efforts to build our internal talent pipeline to fill a number of these shared language for calling out behaviour were launched in October 2021 and sponsorship of a number of culture-related initiatives will continue into 2022. roles. We are confident that these most The development of a renewed approach recent executive changes provide QBE to inclusion occurred during 2021 with with the capability to continue to build the formal launch of a new Inclusion of the momentum across the business for Diversity policy in early 2022. The change There were no changes in non-executive director membership or fees during 2021. For more information, refer to page 77. in this area. in terminology is representative of the fact that inclusion is needed to both foster and unlock the value of diversity and QBE’s continued commitment and focus Pleasingly, during the year, QBE became one of the first organisations in Australia certified as a Family Friendly Workplace and is a founding partner of the National Work + Family Standards, launched in Remuneration Report contents Our remuneration framework at a glance How we performed: Financial performance 2021 priorities 1. Executive KMP performance snapshots 2. Remuneration governance 3. Executive KMP remuneration in detail 4. Executive KMP 5. Non-executive director remuneration 58 60 61 62 65 68 77 remuneration tables 73 future success. Looking ahead With culture and our people being two of the six strategic priorities, highlighted on page 9, I am confident that we will continue to drive forward a strong agenda for the benefit of our employees, customers and shareholders in 2022 and beyond. The remuneration changes provide QBE with an opportunity to continue to adapt to the changing landscape along with the additional areas of focus for the year ahead. As always, we look forward to shareholder feedback. John M Green Deputy Chair Chair, People & Remuneration Committee Changes for 2022 For 2022, we have continued to evolve our remuneration arrangements to support our future direction and proactively respond to the upcoming regulatory requirements in Australia. A number of changes were introduced in 2021 such as the revised malus and new clawback provisions, and we will continue to transition further in 2022 and 2023. For STI in 2022 we will be taking a broader view of performance and will include overall enterprise financial and also non-financial performance including risk, people and strategic measures. The detail of the measures will be provided along with the outcomes at the end of the performance year and will consider both qualitative and quantitative factors. In addition, executive KMP STI deferral periods will be lengthened from vesting across two years to four years. We will also simplify the LTI award in 2022. Whilst the use of average Group cash ROE and relative total shareholder return (TSR) measures will be retained, a varied weighting will apply. We will recommence our use of a three year average Group cash ROE with ranges set with reference to a risk free rate plus margin and remove the use of a catastrophe collar. This measure will be weighted as 70%. The remaining 30% weighting will be based on the performance of a relative TSR peer group which will reflect a global insurance peer group. These changes maintain a strong link to measures management are able to influence and provide a stepped change approach to the regulatory requirements being introduced in 2023. For more information, refer to page 59. partnership with UNICEF Australia and Parents at Work. The standards set out best practice and ways to build family-friendly workplace cultures. In addition, we have been recognised in the Top 100 of Equileap’s 2021 Gender Equality Global Report & Ranking for progressing our gender equality agenda and included in the 2022 Bloomberg Gender-Equality Index. For more information, refer to QBE’s Sustainability Report at www.qbe.com/sustainability. Performance during 2021 The Group’s 2021 financial result was pleasing as we have seen a strong return to profitability and growth in comparison to 2020. Across the three divisions of North America, International and Australia Pacific, strong premium growth and progress against key initiatives was delivered against a backdrop of heightened natural catastrophe activity. The Group’s statutory combined operating ratio (COR) (excluding the impact of changes in risk-free rates) was 93.7% compared with 104.2% in 2020 and the Group cash ROE of 10.3% compared with (10.9)% in 2020. For 2021 incentives, the Group COR used to determine short-term incentive (STI) calculations is based on a blend of divisional COR outcomes. This results in a payout of 93.9%. The non-financial component of the STI for the executive KMP, the ME@QBE component, was determined by the Board and outcomes ranged from 100% to 120%. Based on the above, overall STI outcomes for the current executive KMP ranged from 80% to 128% of their target. The 2021 STI outcome for the Group CEO reflects his part year in the role. Based on this, he will receive 115.2% of his target opportunity (76.8%% of his maximum opportunity). For the other executive KMP, the average STI outcome is 73% of their maximum opportunity. There was no executive KMP long-term incentive (LTI) due to vest during 2021. For more information on 2021 performance and STI outcomes, refer to pages 60-64. This Remuneration Report sets out QBE’s remuneration framework and provides detail of remuneration outcomes for key management personnel (KMP) for 2021 and how this aligns with QBE’s performance. Accounting standards define KMP as those executives and non-executive directors with the authority and responsibility for planning, directing and controlling the activities of the Group, either directly or indirectly. The 2021 Remuneration Report has been prepared and audited in accordance with the disclosure requirements of the Corporations Act 2001. 57 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 58 Our remuneration framework at a glance Our remuneration strategy is designed to attract, motivate and retain QBE’s executives by providing market competitive remuneration aligned with the creation of sustained shareholder value. Our purpose QBE – enabling a more resilient future Our remuneration principles The guiding principles which promote robust risk management practices are applied effectively to manage remuneration and reward across the Group. Simple and clear Linked to strategy Motivating Aligned to shareholders Globally consistent and locally competitive The remuneration framework supports the strategy Simple and clear A simple and clear view of how delivery of our strategy impacts incentive outcomes for our executives. Adaptable to changes in our strategy and external environment Measures that are correlated with performance Performance targets aimed at delivering our long-term objectives will evolve with our strategy, changes to business cycles and the external operating environment. Measures that focus on profitability, management of the balance sheet and our longer-term strategic priorities enable remuneration outcomes to reflect a holistic view of performance. Encourages our executives to think and act like business owners A significant portion of incentives is paid in equity which focuses executives on creating shareholder value, managing risk and being accountable for the long-term success of QBE. Aligning remuneration to culture and managing risk The remuneration structure is designed to align remuneration with prudent risk-taking, underpinned by clear messaging of our QBE DNA which describes who we are, what we stand for and how we need to operate to be successful. The way that each executive manages risk and conduct is a key consideration of the Board in determining incentive outcomes. An enhanced focus on measuring not only what was achieved but how it was achieved will be implemented in 2022. 58 59 Our remuneration framework at a glance Our remuneration strategy is designed to attract, motivate and retain QBE’s executives by providing market competitive remuneration aligned with the creation of sustained shareholder value. A number of changes to the QBE short and long-term incentive plans will apply with effect from 2022. The Group CEO terms are shown below. Additional details will be provided in the 2022 Remuneration Report. Our purpose QBE – enabling a more resilient future Our remuneration principles The guiding principles which promote robust risk management practices are applied effectively to manage remuneration and reward across the Group. Simple and clear Linked to strategy Motivating Aligned to shareholders Globally consistent and locally competitive Key features: 2021 2022 Short-term incentive f Delivered through A mix of STI cash (50%) and STI deferred equity (50%) f Incentive opportunity 150% (target), 225% (maximum) f Performance period One year f No change for 2022 f Equity deferral period One to two years from end of performance period f One to four years from end of performance period f Performance measures Group cash ROE (25%), blended Group COR (40%), strategic performance objectives (35%) f Performance measured through a business scorecard containing Group cash ROE and Group COR financial measures alongside risk, people and strategic non-financial measures. In addition, personal performance objectives will focus both on what has been achieved and how it was achieved during the year. The remuneration framework supports the strategy Simple and clear A simple and clear view of how delivery of our strategy impacts incentive outcomes for our executives. Adaptable to changes in our strategy and external environment Measures that are correlated with performance Encourages our executives to think and act like business owners Performance targets aimed at delivering our long-term objectives will evolve with our strategy, changes to business cycles and the external operating environment. Measures that focus on profitability, management of the balance sheet and our longer-term A significant portion of incentives is paid in equity which focuses executives on creating strategic priorities enable shareholder value, remuneration outcomes to reflect a holistic view of performance. managing risk and being accountable for the long-term success of QBE. Long-term incentive f Delivered through Equity (100%) f Incentive opportunity 200% (face-value) f Performance period Three years f Equity deferral period Three to five years from start of performance period f No change for 2022 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i Aligning remuneration to culture and managing risk The remuneration structure is designed to align remuneration with prudent risk-taking, underpinned by clear messaging of our QBE DNA which describes who we are, what we stand for and how we need to operate to be successful. The way that each executive manages risk and conduct is a key consideration of the Board in determining incentive outcomes. An enhanced focus on measuring not only what was achieved but how it was achieved will be implemented in 2022. f Performance measures Group average cash ROE (50%) and relative TSR (50%) with two peer groups A catastrophe collar may apply to Group average cash ROE f New weighting of two measures: Group average cash ROE (70%) and relative TSR (30%) with a single global insurance peer group, no catastrophe collar on Group average cash ROE. o n The STI and LTI arrangements for the Interim Group CEO in 2021 were consistent with terms disclosed in the 2020 Remuneration Report. Risk and behaviours, malus and clawback (no change) Executive KMP performance assessments include a formal assessment of risk and behaviours using input from the Group CRO, the Chair of People & Remuneration Committee, the Chair of the Risk & Capital Committee and chairs of divisional boards where relevant. Malus and clawback provisions and executive minimum shareholding requirements (MSR) will continue to apply in 2022. 60 How we performed: Financial performance Financial performance for the Group reflected strong top line momentum from continued premium rate increases and targeted growth across all divisions, alongside a much improved combined operating ratio. The impact of the financial performance on the incentive payouts for executive KMP is provided on pages 62 to 64. Financial performance Return to shareholders COR . 8 4 0 1 1 . 4 0 1 . 0 0 0 1 . 9 5 9 . 7 5 9 . 4 7 0 5 1 7 9 . Profit measures Return to shareholders Dividend per share . 8 3 0 1 5 . 1 9 ) 9 4 2 , 1 ( ) . 0 3 1 ( . ) 2 9 ( 0 8 . . 5 4 . 9 8 . 7 6 7 6 5 1 7 5 . 3 0 1 . 6 8 0 5 7 ) . 0 3 1 ( ) 7 1 5 , 1 ( . ) 2 6 1 ( . ) 2 8 1 ( 8 8 2 1 . . 2 9 2 3 5 8 . 5 3 . 1 1 . 5 3 2 0 5 2 5 6 2 0 3 ) . 0 4 2 ( 4 8 6 0 1 . . ) 9 8 ( 0 1 . 0 1 ) 9 0 . ( 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Statutory COR (%) 1 Group COR for incentive purposes (%) 2 Net profit (loss) after tax (US$M) 1 Group cash ROE for incentive purposes (%) 3 Return on average shareholders’ equity (%) Share price at 31 December (A$/share) TSR (%) Dividend per share (Australian cents) Award outcomes COR North America COR award International COR award Australia Pacific COR award Superior 94.0% 89.7% 86.9% . % 0 0 5 1 % 7 . 1 3 1 Target Threshold 100.0% % 0 0 . Blended Group COR Award 93.9% An equal blend of the divisional COR outcomes (to the left) is used to determine the blended Group COR award for 2021 STI purposes. Cash ROE Group cash ROE 3 Award 150.0% Superior 10.3% Outcome 10.3% . % 0 0 5 1 95.7% 92.9% Threshold 6.3% Group CEO outcomes 4 STI or Executive Incentive Plan (EIP) (from 2017 to 2018) achievement as % of target LTI vested (% of grant) 2017 15.6 0 2018 98.6 0 2019 68.5 0 2020 90.4 – 2021 115.2 – Tracking of unvested LTI awards 2019 LTI award – vesting Q1 2022/23/24 – Average cash ROE and relative TSR performance – Will not vest 2020 LTI award – vesting Q1 2023/24/25 – Average cash ROE and relative TSR performance – Unlikely to vest in full 2021 LTI award – vesting Q1 2024/25/26 – Average cash ROE and relative TSR performance – On track 1 From 2018, the results reflect continuing operations only. For 2017, the results reflect consolidated Group performance including discontinued operations. 2 For incentive purposes, the 2021 Group COR was replaced by a blended Group COR award as detailed above. 3 For incentive purposes, the adjusted cash ROE of 10.3% is as provided on page 12. Prior year adjustments are detailed in the Remuneration Report for each relevant year. 4 For 2021, the results reflect the pro-rated STI outcome for the Group CEO. For full details see page 62. Previous Group CEO outcomes are detailed in the Remuneration Report for each relevant year. There were no LTI grants due to vest in 2021. 60 61 How we performed: Financial performance How we performed: 2021 priorities Financial performance for the Group reflected strong top line momentum from continued premium rate increases and targeted growth across all divisions, alongside a much improved combined operating ratio. The impact of the financial performance on the incentive payouts for executive KMP is provided on pages 62 to 64. Financial performance Return to shareholders COR 8 . 4 0 1 1 . 4 0 1 0 . 0 0 1 4 . 7 0 8 . 3 0 1 5 1 . 7 9 9 . 5 9 7 . 5 9 5 . 1 9 Profit measures Return to shareholders Dividend per share 0 . 8 5 . 4 9 . 8 7 . 6 1 7 5 3 . 0 1 6 . 8 0 5 7 7 6 5 ) 0 . 3 1 ( ) 9 4 2 , 1 ( ) 0 . 3 1 ( ) 2 . 9 ( ) 7 1 5 , 1 ( ) 2 . 6 1 ( ) 2 . 8 1 ( 8 8 . 2 1 2 . 9 2 5 3 . 1 1 5 . 3 2 3 5 . 8 ) 0 . 4 2 ( 8 6 . 0 1 ) 9 . 8 ( 0 1 . 0 1 ) 9 . 0 ( 0 5 2 5 6 2 0 3 4 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Statutory COR (%) 1 Group COR for incentive purposes (%) 2 Net profit (loss) after tax (US$M) 1 Share price at 31 December Group cash ROE for incentive purposes (%) 3 Return on average shareholders’ equity (%) (A$/share) TSR (%) Dividend per share (Australian cents) North America International Australia Pacific COR award COR award COR award Blended Group COR Group cash ROE 3 Award outcomes COR Target Superior 94.0% 89.7% 86.9% % 0 . 0 5 1 % 7 . 1 3 1 Threshold 100.0% 95.7% 92.9% % 0 . 0 Award 93.9% An equal blend of the divisional COR outcomes (to the left) is used to determine the blended Group COR award for 2021 STI purposes. Cash ROE Award 150.0% Superior 10.3% % 0 . 0 5 1 Outcome 10.3% Threshold 6.3% Group CEO outcomes 4 STI or Executive Incentive Plan (EIP) (from 2017 to 2018) achievement as % of target LTI vested (% of grant) 2017 15.6 0 2018 98.6 0 2019 68.5 0 2020 90.4 – 2021 115.2 – Tracking of unvested LTI awards 2019 LTI award – vesting Q1 2022/23/24 – Average cash ROE and relative TSR performance – Will not vest 2020 LTI award – vesting Q1 2023/24/25 – Average cash ROE and relative TSR performance – Unlikely to vest in full 2021 LTI award – vesting Q1 2024/25/26 – Average cash ROE and relative TSR performance – On track 1 From 2018, the results reflect continuing operations only. For 2017, the results reflect consolidated Group performance including discontinued operations. 2 For incentive purposes, the 2021 Group COR was replaced by a blended Group COR award as detailed above. 3 For incentive purposes, the adjusted cash ROE of 10.3% is as provided on page 12. Prior year adjustments are detailed in the Remuneration Report for each relevant year. 4 For 2021, the results reflect the pro-rated STI outcome for the Group CEO. For full details see page 62. Previous Group CEO outcomes are detailed in the Remuneration Report for each relevant year. There were no LTI grants due to vest in 2021. The progress made against our strategic priorities through 2021 is summarised below. The executive KMP objectives are aligned with these and a portion of their STI outcomes are tied to their delivery. Performance Customer focus Evolve and reinvigorate cell reviews and Brilliant Basics+ to further enhance performance discipline and drive portfolio optimisation. Targeted, sustainable, profitable growth, maximising the favourable rate environment. Deliver against our sustainability and climate commitments. Continued focus on shareholder returns. Deliver value and exceed customer expectations through Customer@QBE. Better understanding of our customers’ industries and needs. Embed a culture of proactive, insightful customer engagement. Fully embed the use of Salesforce and related analytical tools across the business, central to all our customer activity. f Cell reviews A redesign of the format of cell reviews and reporting metrics provided for a more streamlined process and performance focus. Greater emphasis on underwriting actions (cell performance) and new lenses to focus on growth and claims provided a step-change in our ability to proactively address issues. f Sustainability and climate commitment Ongoing integration of sustainability considerations saw QBE set a new net-zero commitment across its global operations by 2030 and complete a new Environment & Social Risk Framework which came into effect on 1 January 2022. QBE celebrated the 10th anniversary of the QBE Foundation, won Green Insurer of the Year, launched our first syndicated sustainability linked loan and made progress towards our $2 billion impact investment target. f Robust growth and shareholder returns Performance discipline focused on maximising the favourable rate environment. GWP growth was driven by strong rate momentum and improved new business volumes in targeted growth areas. Launched a project to assess how we optimise natural catastrophe business. f Customer@QBE Developed the customer engagement framework to drive consistent discovery around our customers; how we articulate value to our customers and partners and increase visibility of customer metrics. Global awareness and education targeted to enhance customer mindset and shape our customer-focused culture. f Customer insights Increased global visibility of core customer and industry data in one place supported the sharing of global customer research with business leaders. Customer-focused panels allowed sharing of insights and best practice. Consistency in measurement allows for trend analysis and interconnections between customer experience, our people, brand and results. f Salesforce Sales enablement tools embedded with greater visibility of new business pipeline and opportunities to cross sell. Related analytical tools expanded along with consistent increase in usage across all divisions. Modernisation Talent & culture Deliver on our program of work to accelerate our technology infrastructure modernisation. Continued automation across underwriting, distribution and claims to support the evolving needs of our customers and partners. Accelerate adoption of machine learning models across pricing and claims. f Technology infrastructure modernisation Building blocks for a more modern, efficient and secure QBE are taking shape. End of life remediation plans remain on track, rollouts of capability across core platforms continue and cyber security capability delivered. f Automation The evolution of our maturity in digitalisation continues. Tactical robots and automation solutions introduced across a range of underwriting and claims areas. Ongoing digitisation of claims lifecycle in place for many products and growing capability in this area. Digital channels available to support full sales lifecycle for most flow products and modernisation of customer portals underway in Australia Pacific and North America. f Machine learning Emergence of advanced analytics across the claims lifecycle in certain pockets of QBE. Initial stages of embedding data-enabled pricing/risk selection and decision support. Enhance the QBE culture and reinforce a positive risk culture by building on the QBE DNA through the Culture Accelerator. Accelerate our talent and leadership strategy by developing our people and building a diverse talent pipeline. Focus on embedding performance through ME@QBE and retaining and motivating people through our Reward approach. Define our future ways of working. f Culture Defined the culture we want to create, supported through a global survey and ‘Culture Hack’ to source ideas from our people. Launched our new employee listening approach to capture employee feedback on a continuous basis. Refreshed our QBE DNA to reflect desired behaviours, created a shared language to encourage people to speak up and identified the need for a refreshed recognition program grounded in our DNA. f Talent and leadership Continued to build deeper insights into our talent pool and pipeline to enable focus on our senior leader hiring and development activities. Launched an online learning platform that provides skills-based training relevant to individual roles, supported by a campaign around development conversations. f Ways of working Strengthened our understanding of our workforce so we can define our future workforce needs and deliver on our strategic ambitions. Continued focus on employee wellbeing and defined future ways of working through Flex@QBE. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 62 Remuneration Report continued 1. EXECUTIVE KMP PERFORMANCE SNAPSHOTS QBE discloses actual remuneration outcomes in the financial period under review. The realised 2021 remuneration figures below include the accrued STI cash award for the 2021 financial year, the value of any conditional rights granted in prior years that vested during 2021 and executive shareholdings against the MSR. The value of vested conditional rights awards has been calculated using the share price on the vesting date. These figures are different from those shown in the statutory table on page 73. For example, the statutory table includes an apportioned accounting value for all unvested conditional rights held during the year, which remain subject to performance and service conditions and consequently may or may not ultimately vest. Group CEO Andrew Horton Group CEO Term as KMP in 2021 Commenced 1 September 2021 Country of residence Australia 2021 STI outcome (US$000) 115.2% of target STI (cash) STI (deferred) $390 $390 measured on... 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 114.8%) Total value of shareholdings against the MSR (times fixed remuneration) 3.2 2021 realised remuneration1 (US$000) $1,286 Total Target remuneration mix 22% 17% 17% 44% $431 $390 $465 Divisional executive KMP Jason Harris Chief Executive Officer, International Term as KMP in 2021 Full year Country of residence United Kingdom 2021 STI outcome (US$000) STI (cash) $922 STI (deferred) $454 128.2% of target measured on... 11.5% Group cash ROE (achieved 150.0%) 18.5% Blended Group COR (achieved 93.9%) 35.0% Divisional COR 2 (achieved 146.7%) 35.0% Strategic performance objectives (achieved 120.6%) Total value of shareholdings against the MSR (times fixed remuneration) 0.9 2021 realised remuneration (US$000) $1,823 Total Target remuneration mix 31% 26% 12% 31% $894 $922 $7 box overlay for “Other” 1 Other total for Andrew Horton includes a cash payment of A$500,000 on commencement of employment with QBE, payable in February 2022. 2 Divisional COR achievement outcome adjusted for items held in the Corporate & Other segment. Key: Fixed remuneration STI (cash) STI (deferred) LTI face-value Value of vested rights Other 62 Remuneration Report continued 1. EXECUTIVE KMP PERFORMANCE SNAPSHOTS QBE discloses actual remuneration outcomes in the financial period under review. The realised 2021 remuneration figures below include the accrued STI cash award for the 2021 financial year, the value of any conditional rights granted in prior years that vested during 2021 and executive shareholdings against the MSR. The value of vested conditional rights awards has been calculated using the share price on the vesting date. These figures are different from those shown in the statutory table on page 73. For example, the statutory table includes an apportioned accounting value for all unvested conditional rights held during the year, which remain subject to performance and service conditions and consequently may or may not ultimately vest. Group CEO Andrew Horton Group CEO 2021 STI outcome (US$000) 115.2% of target STI (cash) STI (deferred) $390 $390 measured on... 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 114.8%) Term as KMP in 2021 Commenced 1 September 2021 Country of residence Australia Target remuneration mix Divisional executive KMP Total value of shareholdings against the MSR (times fixed remuneration) 3.2 2021 realised remuneration1 (US$000) $1,286 Total 22% 17% 17% 44% $431 $390 $465 Jason Harris Chief Executive Officer, International 2021 STI outcome (US$000) STI (cash) $922 STI (deferred) $454 128.2% of target measured on... 11.5% Group cash ROE (achieved 150.0%) 18.5% Blended Group COR (achieved 93.9%) 35.0% Divisional COR 2 (achieved 146.7%) 35.0% Strategic performance objectives (achieved 120.6%) Term as KMP in 2021 Full year Country of residence United Kingdom Target remuneration mix Total value of shareholdings against the MSR (times fixed remuneration) 0.9 2021 realised remuneration (US$000) $1,823 Total 31% 26% 12% 31% $894 $922 $7 Sue Houghton Chief Executive Officer, Australia Pacific Term as KMP in 2021 Commenced 3 August 2021 Country of residence Australia 2021 STI outcome (US$000) STI (cash) $289 STI (deferred) $142 115.7% of target measured on... 11.5% Group cash ROE (achieved 150.0%) 18.5% Blended Group COR (achieved 93.9%) 35.0% Divisional COR (achieved 131.7%) 35.0% Strategic performance objectives (achieved 100.0%) Total value of shareholdings against the MSR (times fixed remuneration) 1.4 2021 realised remuneration1 (US$000) $740 Total Target remuneration mix 31 % 26% 12% 31% $300 $289 $151 Todd Jones Chief Executive Officer, North America Term as KMP in 2021 Full year Country of residence United States 2021 STI outcome (US$000) STI (cash) $659 STI (deferred) $325 80.1% of target measured on... 11.5% Group cash ROE (achieved 150.0%) 18.5% Blended Group COR (achieved 93.9%) 35.0% Divisional COR2 (achieved 30.0%) 35.0% Strategic performance objectives (achieved 100.0%) Total value of shareholdings against the MSR (times fixed remuneration) 2.2 2021 realised remuneration (US$000) $2,883 Total Target remuneration mix 27% 22% 11% 40% $1,023 $659 $1,174 $27 Group Head Office executive KMP Sam Harrison Group Chief Underwriting Officer Term as KMP in 2021 Commenced 1 April 2021 Country of residence United Kingdom 2021 STI outcome (US$000) 110.1% of target STI (cash) $578 measured on... STI (deferred) $285 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 100.0%) Total value of shareholdings against the MSR (times fixed remuneration) 1.3 2021 realised remuneration (US$000) $1,242 Total Target remuneration mix box overlay for “Other” 31% 26% 12% 31% $650 $578 $14 1 Other total for Andrew Horton includes a cash payment of A$500,000 on commencement of employment with QBE, payable in February 2022. 2 Divisional COR achievement outcome adjusted for items held in the Corporate & Other segment. 1 Other total for Sue Houghton includes a cash payment of A$200,000 on commencement of employment with QBE, paid in August 2021. 2 The Board has considered the performance of North America as being in line with the 2021 plan (excluding the above average catastrophes in 2021), and has specifically considered the strong top line growth, delivery of cost savings and build-out of financial lines in determining the North America COR outcome applied to Todd Jones. Key: Fixed remuneration STI (cash) STI (deferred) LTI face-value Value of vested rights Other Key: Fixed remuneration STI (cash) STI (deferred) LTI face-value Value of vested rights Other 63 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 64 Remuneration Report continued 1. EXECUTIVE KMP PERFORMANCE SNAPSHOTS Amanda Hughes Group Executive, People and Culture Term as KMP in 2021 Commenced 1 December 2021 Country of residence Australia 2021 STI outcome (US$000) 110.1% of target STI (cash) $38 $19 STI (deferred) measured on... 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 100.0%) Total value of shareholdings against the MSR (times fixed remuneration) 0.3 2021 realised remuneration (US$000) $80 Total Target remuneration mix 33% 23% 11% 33% $42 $38 Fiona Larnach Group Chief Risk Officer Term as KMP in 2021 Commenced 2 March 2021 Country of residence Australia Total value of shareholdings against the MSR (times fixed remuneration) 0.0 Target remuneration mix 36% 19% 9% 36% Inder Singh Group Chief Financial Officer Term as KMP in 2021 Full year Country of residence Australia 2021 STI outcome (US$000) 107.7% of target STI (cash) $306 measured on... STI (deferred) $151 19.2% Group cash ROE (achieved 150.0%) 30.8% Blended Group COR (achieved 93.9%) 50.0% Strategic performance objectives (achieved 100.0%) 2021 realised remuneration (US$000) $863 Total $556 $306 $1 2021 STI outcome (US$000) 115.4% of target STI (cash) $905 measured on... STI (deferred) $446 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 115.2%) Total value of shareholdings against the MSR (times fixed remuneration) 2.1 2021 realised remuneration1 (US$000) $2,217 Total Target remuneration mix 31% 26% 12% 31% $980 $905 $322 $10 1 The fixed remuneration for Inder Singh was increased from A$1,100,000 to A$1,300,000 with effect from 1 January 2021 following a broadening of his role and a market review. Key: Fixed remuneration STI (cash) STI (deferred) LTI face-value Value of vested rights Other manual overlay 10 segment 64 Remuneration Report continued Term as KMP in 2021 Commenced 1 December 2021 Country of residence Australia Target remuneration mix 33% 23% 11% 33% Fiona Larnach Group Chief Risk Officer Term as KMP in 2021 Commenced 2 March 2021 Country of residence Australia Total value of shareholdings against the MSR (times fixed remuneration) 0.0 Target remuneration mix 36% 19% 9% 36% 2021 STI outcome (US$000) 107.7% of target STI (cash) $306 measured on... STI (deferred) $151 19.2% Group cash ROE (achieved 150.0%) 30.8% Blended Group COR (achieved 93.9%) 50.0% Strategic performance objectives (achieved 100.0%) 1. EXECUTIVE KMP PERFORMANCE SNAPSHOTS Former executive KMP Amanda Hughes Group Executive, People and Culture 2021 STI outcome (US$000) 110.1% of target STI (cash) $38 $19 STI (deferred) measured on... 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 100.0%) Total value of shareholdings against the MSR (times fixed remuneration) 0.3 2021 realised remuneration (US$000) $80 Total Jason Brown (former Group Chief Underwriting Officer) – Jason Brown ceased as executive KMP on 31 March 2021 immediately prior to the internal promotion of Sam Harrison. Margaret Murphy (former Group Executive, People & Culture) – Margaret Murphy ceased as executive KMP on 30 November 2021 immediately prior to the internal promotion of Amanda Hughes. Richard Pryce (former Interim Group CEO) – Richard Pryce ceased as executive KMP on 31 August 2021 immediately prior to the appointment of Andrew Horton. Mr Pryce’s planned retirement was previously communicated. 2. REMUNERATION GOVERNANCE QBE has a robust remuneration governance framework overseen by the Board. This ensures that the remuneration arrangements are appropriately designed, managed and that the agreed frameworks and policies are applied and monitored across QBE. $42 $38 Board Has overall responsibility for the remuneration strategy and outcomes for executives and non-executive directors. People & Remuneration Committee Is the main governing body for key people and remuneration items across the Group. Further details on the role and scope of the People & Remuneration Committee are set out in the QBE People & Remuneration Committee charter (available from www.qbe.com/investor-relations/corporate-governance/qbe-charters-and-constitution). 2021 realised remuneration (US$000) $863 Total Managing risk $556 $306 $1 The continued focus on and investment in managing our risk provides for a stronger and resilient QBE. Inder Singh Group Chief Financial Officer 2021 STI outcome (US$000) 115.4% of target STI (cash) $905 measured on... STI (deferred) $446 25.0% Group cash ROE (achieved 150.0%) 40.0% Blended Group COR (achieved 93.9%) 35.0% Strategic performance objectives (achieved 115.2%) Term as KMP in 2021 Full year Country of residence Australia Target remuneration mix Total value of shareholdings against the MSR (times fixed remuneration) 2.1 2021 realised remuneration1 (US$000) $2,217 Total 31% 26% 12% 31% $980 $905 $322 $10 1 The fixed remuneration for Inder Singh was increased from A$1,100,000 to A$1,300,000 with effect from 1 January 2021 following a broadening of his role and a market review. Key: Fixed remuneration STI (cash) STI (deferred) LTI face-value Value of vested rights Other manual overlay 10 segment The People & Remuneration Committee works with Group Risk and Human Resources to ensure that any risk associated with remuneration arrangements is managed within the Group’s risk management framework. The Chair of the People & Remuneration Committee is a member of the Risk & Capital Committee and vice versa. The attendance of other members of the Board at the People & Remuneration Committee meetings and close working relationship with the Risk & Capital Committee strengthen remuneration governance across QBE. The Group CRO attends the People & Remuneration Committee periodically to report on executive risk behaviours. Executive KMP are required to adhere to a range of Group-wide policies to ensure risks are well managed, strong governance structures are in place and high ethical standards are maintained. The Board approves a comprehensive delegated authority for the Group CEO, which is an integral part of QBE’s risk management process. The remuneration governance framework incorporates risk oversight principles so that executives cannot unduly influence a decision that could materially impact their own incentive outcome, and the performance-based components of remuneration established in QBE’s incentive plans are designed to encourage behaviour that supports the Group’s long-term financial soundness. Specifically, the QBE incentive plans: • are designed to deliver a target remuneration mix balanced between fixed/variable remuneration and short and long-term and cash and equity; • incorporate individual objectives through the STI that measure demonstrable proactive sound risk management, including the setting of a clear and consistent tone about the importance of managing risk throughout the organisation; • incorporate robust corporate standards for all employees supporting the QBE risk culture; • balance performance outcomes based on delivery against a range of financial and non-financial strategic metrics which are set in the context of business plans that have been appropriately stress-tested by the Group CRO; • enable the build-up of meaningful shareholding with deferred STI equity and LTI underpinned by a MSR for executive KMP (refer to page 66); • provide the Board with discretion to take other factors into account when determining the appropriate award outcome; and • allow for multiple risk adjustments, notably in year, malus provisions for unvested awards and clawback of cash payments and vested equity (refer to page 66). 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n Group CEO Divisional people and remuneration committees External advisors ' 65 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s 66 Remuneration Report continued 2. REMUNERATION GOVERNANCE As part of the year end process, an assessment of each senior executive’s approach to risk management has been completed using input from the CRO. This process recognises positive and negative risk culture and risk management through upward or downward adjustment of performance ranges, incentive payouts and consequences that can include executives leaving the organisation. Across the Group in 2021, over 100 assessments were carried out including for executive KMP and divisional executive teams. Based on the assessments in 2021, there were adjustments applied both upwards and downwards. Malus provision The malus provision gives the People & Remuneration Committee and the Board discretion to reduce the amount of an unvested award (including to zero) in certain circumstances during the retention period including in the case of: • misconduct leading to significant adverse outcomes; • a significant failure of financial or non-financial risk management; • a significant failure or breach of accountability, fitness and propriety, or compliance obligations; • a significant error or a significant misstatement of criteria on which the variable remuneration determination was based; and/or • significant adverse outcomes for customers, beneficiaries or counterparties. This provision reflects QBE’s obligations under APRA’s Prudential Standard CPS 510 Governance to incorporate terms allowing for the adjustment of incentive awards to protect QBE’s financial soundness and ability to respond to unforeseen significant issues. A review against the malus provision was completed as part of the year end process. There was no requirement to apply the provision in 2021. Clawback provision The clawback provision, introduced for the 2021 performance year, allows, to the extent permissible by applicable law, all variable remuneration (cash and deferred remuneration) to remain subject to clawback for a period of two years from the date of payment or vesting (as the case may be) of the relevant component of variable remuneration. The Board can determine whether to apply clawback to paid or vested variable remuneration and, if so, the appropriate value over which clawback will be applied. The circumstances in which the Board may apply clawback include those where it concludes in good faith that there is or has been: • misconduct leading to material adverse outcomes; • a material failure of financial or non-financial risk management; • a material failure or breach of accountability, fitness and propriety, or compliance obligations; • a material error or a material misstatement of criteria on which the variable remuneration determination was based; and/or • material adverse outcomes for customers, beneficiaries or counterparties. Clawback may be applied to any variable remuneration that has been paid or vested (as the case may be) regardless of whether or not the employment or engagement of the relevant person is ongoing. A review against the clawback provision was completed as part of the year end process. There was no requirement to apply the provision in 2021. Trading policy Trading in QBE ordinary shares is generally permitted outside of designated closed periods. QBE’s trading policy states that non-executive directors and other designated employees must notify any intended share transaction to nominated people within the Group. The policy prohibits the hedging of QBE securities at all times. The purpose of this prohibition is to ensure that there is an alignment between the interests of executives and shareholders. A copy of QBE’s trading policy for dealing in securities is available from www.qbe.com/investor-relations/corporate-governance/ global-policies. Minimum shareholding requirement The MSR ensures executives build their shareholding to have significant exposure to QBE’s share price. Under the MSR, a minimum of three times fixed remuneration for the Group CEO (one and a half times for other executive KMP) is to be maintained as long as the executive KMP remains at QBE. The value of shareholdings as a percentage of fixed remuneration at 31 December 2021 for each executive KMP is shown on pages 62 to 64. New executive KMP are required to build their shareholdings over a five-year period after becoming executive KMP. 66 Remuneration Report continued 2. REMUNERATION GOVERNANCE Dilution limits for share plans Shares awarded under QBE’s employee share plans may be purchased on-market or issued subject to Board discretion and the requirements of the Corporations Act 2001 and the ASX Listing Rules. At 31 December 2021, the proportion of shares and unvested conditional rights and options held in the QBE Employee Share Plan is 1.12%. This is significantly less than the maximum of 10% over a 10-year period allowed under the plan rules. Treatment of conditional rights on a change in control of QBE In accordance with the rules of each of QBE’s incentive plans, a change in control is defined as either a scheme of arrangement that has been approved by QBE’s shareholders or the acquisition by a bidder of at least 50% of the issued and to be issued QBE shares under an unconditional takeover offer made in accordance with the Corporations Act 2001. Should a change in organisational control occur, the People & Remuneration Committee has discretion to determine how unvested conditional rights should be treated, having regard to factors such as the length of time elapsed in the performance period, the level of performance to date and the circumstances of the change of control. Use of external advisors Remuneration consultants provide guidance on remuneration for executives, facilitate discussion, review remuneration and at-risk reward benchmarking within industry peer groups and provide guidance on current trends in executive remuneration practices. Any advice provided by remuneration consultants is used as a guide and is not a substitute for consideration of all the issues by each non-executive director on the People & Remuneration Committee. Australian-based firm Ernst & Young (EY) currently acts as the independent remuneration advisor to the People & Remuneration Committee. The People & Remuneration Committee and the Board are satisfied that the advice provided by EY during 2021 was free from undue influence. The cost of advice and assistance provided by EY in 2021 was $61,000 (2020 $65,000). During 2021, management requested and utilised reports on market practice from various reputable sources. No recommendations in relation to the remuneration of KMP were provided as part of these engagements. As part of the year end process, an assessment of each senior executive’s approach to risk management has been completed using input from the CRO. This process recognises positive and negative risk culture and risk management through upward or downward adjustment of performance ranges, incentive payouts and consequences that can include executives leaving the organisation. Across the Group in 2021, over 100 assessments were carried out including for executive KMP and divisional executive teams. Based on the assessments in 2021, there were adjustments applied both upwards and downwards. Malus provision The malus provision gives the People & Remuneration Committee and the Board discretion to reduce the amount of an unvested award (including to zero) in certain circumstances during the retention period including in the case of: • misconduct leading to significant adverse outcomes; • a significant failure of financial or non-financial risk management; • a significant failure or breach of accountability, fitness and propriety, or compliance obligations; • a significant error or a significant misstatement of criteria on which the variable remuneration determination was based; and/or • significant adverse outcomes for customers, beneficiaries or counterparties. This provision reflects QBE’s obligations under APRA’s Prudential Standard CPS 510 Governance to incorporate terms allowing for the adjustment of incentive awards to protect QBE’s financial soundness and ability to respond to unforeseen significant issues. A review against the malus provision was completed as part of the year end process. There was no requirement to apply the provision in 2021. Clawback provision The clawback provision, introduced for the 2021 performance year, allows, to the extent permissible by applicable law, all variable remuneration (cash and deferred remuneration) to remain subject to clawback for a period of two years from the date of payment or vesting (as the case may be) of the relevant component of variable remuneration. The Board can determine whether to apply clawback to paid or vested variable remuneration and, if so, the appropriate value over which clawback will be applied. The circumstances in which the Board may apply clawback include those where it concludes in good faith that there is or has been: • misconduct leading to material adverse outcomes; • a material failure of financial or non-financial risk management; • a material failure or breach of accountability, fitness and propriety, or compliance obligations; • a material error or a material misstatement of criteria on which the variable remuneration determination was based; and/or • material adverse outcomes for customers, beneficiaries or counterparties. Clawback may be applied to any variable remuneration that has been paid or vested (as the case may be) regardless of whether or not the employment or engagement of the relevant person is ongoing. A review against the clawback provision was completed as part of the year end process. There was no requirement to apply the provision in 2021. Trading policy Trading in QBE ordinary shares is generally permitted outside of designated closed periods. QBE’s trading policy states that non-executive directors and other designated employees must notify any intended share transaction to nominated people within the Group. The policy prohibits the hedging of QBE securities at all times. The purpose of this prohibition is to ensure that there is an alignment between the A copy of QBE’s trading policy for dealing in securities is available from www.qbe.com/investor-relations/corporate-governance/ interests of executives and shareholders. global-policies. Minimum shareholding requirement The MSR ensures executives build their shareholding to have significant exposure to QBE’s share price. Under the MSR, a minimum of three times fixed remuneration for the Group CEO (one and a half times for other executive KMP) is to be maintained as long as the executive KMP remains at QBE. The value of shareholdings as a percentage of fixed remuneration at 31 December 2021 for each executive KMP is shown on pages 62 to 64. New executive KMP are required to build their shareholdings over a five-year period after becoming executive KMP. 67 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 68 Remuneration Report continued 3. EXECUTIVE KMP REMUNERATION IN DETAIL At QBE, having the right talent across the Group enables us to create shareholder value, while prudently managing risk and maintaining strong corporate governance. To deliver our strategic ambitions, we must ensure that our executive remuneration framework reflects QBE’s desire to attract and retain the best people. This section sets out our approach for 2021. The graph below sets out the typical remuneration structure and delivery for the Group CEO for on-target performance, and how the remuneration vests over time: LTI STI: deferred equity STI: cash Fixed remuneration 44% 17% 17% 22% Pay mix Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Executive remuneration structure QBE’s executive remuneration structure for 2021 remained broadly consistent with the prior year and comprised a mix of fixed and at-risk remuneration through STI and LTI plan arrangements. Each of these components is discussed in further detail in the following pages. FIXED REMUNERATION – KEY DETAILS Description Fixed remuneration comprises cash salary, superannuation/pension and packaged benefits, additional annual benefits and associated taxes. Additional annual benefits may include health insurance, life assurance, personal accident insurance, car allowances, expatriate benefits, occasional spouse travel to accompany the executive on business and applicable taxes. Fixed remuneration is delivered in accordance with terms and conditions of employment. Determining fixed remuneration levels Fixed remuneration considers the diversity, complexity and expertise required of individual roles. Remuneration quantum is set in the context of QBE’s broader reward strategy and internal relativities. To assess the competitiveness of fixed remuneration, the People & Remuneration Committee considers market data and recognised published surveys. Executive roles that are Australian-based are generally benchmarked to the ASX 30 and ASX 10-50 peer group of companies, with a specific focus on global companies and companies in the financial services industry. Overseas-based executives or roles that have a global reach are compared with a peer group consisting of global insurers. The peer group of companies used for remuneration benchmarking purposes is set out in the table below: PEER GROUP DESCRIPTION ASX peer group The financial services company sub-peer group is determined based on the industry classification listed on the ASX and includes commercial banks and insurers. Global insurance peer group Consists of large, global insurance companies aligned with the peer group used for the LTI plan. 68 Remuneration Report continued 3. EXECUTIVE KMP REMUNERATION IN DETAIL STI – KEY DETAILS At QBE, having the right talent across the Group enables us to create shareholder value, while prudently managing risk and maintaining strong corporate governance. To deliver our strategic ambitions, we must ensure that our executive remuneration framework reflects QBE’s desire to attract and retain the best people. This section sets out our approach for 2021. The graph below sets out the typical remuneration structure and delivery for the Group CEO for on-target performance, and how the remuneration vests over time: LTI STI: deferred equity STI: cash Fixed remuneration 44% 17% 17% 22% Pay mix Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Executive remuneration structure QBE’s executive remuneration structure for 2021 remained broadly consistent with the prior year and comprised a mix of fixed and at-risk remuneration through STI and LTI plan arrangements. Each of these components is discussed in further detail in the following pages. FIXED REMUNERATION – KEY DETAILS Description Fixed remuneration comprises cash salary, superannuation/pension and packaged benefits, additional annual benefits and associated taxes. Additional annual benefits may include health insurance, life assurance, personal accident insurance, car allowances, expatriate benefits, occasional spouse travel to accompany the executive on business and applicable taxes. Fixed remuneration is delivered in accordance with terms and conditions of employment. Determining fixed remuneration levels Fixed remuneration considers the diversity, complexity and expertise required of individual roles. Remuneration quantum is set in the context of QBE’s broader reward strategy and internal relativities. To assess the competitiveness of fixed remuneration, the People & Remuneration Committee considers market data and recognised published surveys. Executive roles that are Australian-based are generally benchmarked to the ASX 30 and ASX 10-50 peer group of companies, with a specific focus on global companies and companies in the financial services industry. Overseas-based executives or roles that have a global reach are compared with a peer group consisting of global insurers. The peer group of companies used for remuneration benchmarking purposes is set out in the table below: PEER GROUP DESCRIPTION ASX peer group The financial services company sub-peer group is determined based on the industry classification listed on the ASX and includes commercial banks and insurers. Global insurance peer group Consists of large, global insurance companies aligned with the peer group used for the LTI plan. Description The STI is a performance-based incentive delivered in the form of an annual cash payment and deferred award in the form of conditional rights to QBE shares. Performance is measured over a 12-month period. Performance measures and rationale STI outcomes are based on performance against Group cash ROE and COR, and divisional COR targets in the case of divisional executives, as well as individual strategic performance objectives reflecting QBE's strategic priorities as they apply to each executive's role. An explanation of the financial measures and their rationale is provided below: Group cash return on equity Combined operating ratio DEFINITION A measure of how effectively we are managing shareholders’ investment in QBE. For the STI, this measure will generally be measured on the same basis as that used to determine shareholder dividends. As a principle, losses due to unbudgeted amortisation/impairment of intangibles will, other than in exceptional circumstances, be included in cash ROE so that executives remain accountable for the management of intangible assets. RATIONALE Cash ROE is a measure of how effectively we manage shareholders’ funds. DEFINITION Net claims, commissions and expenses as a percentage of net earned premium. Consistent with how we report COR to the market, this is measured excluding the impact of changes in risk-free rates used to discount net outstanding claims. An equal blend of the COR outcomes for North America (1/3), International (1/3) and Australia Pacific (1/3) is used for the 2021 blended Group COR. RATIONALE COR is the most relevant measure of the underwriting performance of our insurance operations. The measure excludes the impact of risk-free rates because it is consistent with the way we report and with the basis on which the market assesses the underwriting performance of QBE. Strategic performance objectives: These objectives are linked to our longer-term strategic priorities. Executive KMP performance against the strategic performance objectives is evaluated annually by the Group CEO, and by the Chair in respect of the Group CEO, through formal business review assessments which include management of risk. A summary of the achievements against the strategic performance objectives for 2021 is provided on page 61. ADJUSTMENTS STI outcomes may be adjusted by other items (such as material acquisitions or divestments) not included in the business plan and as deemed appropriate by the People & Remuneration Committee. Vesting schedule The indicative STI vesting schedule is outlined below: % of STI opportunity achieved THRESHOLD 30% TARGET 100% SUPERIOR 150% The STI rules provide suitable discretion to the People & Remuneration Committee to adjust any formulaic outcome to ensure STI awards appropriately reflect performance. Instrument and deferral mechanics The STI award is delivered as 67% in cash (50% in the case of the Group CEO and Interim Group CEO) and 33% is deferred as conditional rights to QBE shares (50% in the case of the Group CEO and Interim Group CEO). Deferred STI vests in two equal tranches – half on the first anniversary of the award and the remainder on the second anniversary of the award. Vesting is subject to service conditions during the deferral period. Malus and clawback also apply. To calculate the number of conditional rights to be granted, the award value is divided by the volume weighted average price of QBE shares over the five trading days prior to the grant date. Notional dividends accrue during the deferral period. STI awards for the 2021 performance year are detailed on pages 62 to 64. Leaver provisions On voluntary termination, dismissal or termination due to poor performance, all awards are forfeited. ‘Good leaver’ provisions (e.g. retirement, redundancy, ill health, injury, mutually agreed separation (in some cases)) will apply such that: • STI opportunity is reduced to a pro-rata amount to reflect the proportion of the performance year in service; and • deferred awards remain in the plan subject to the original vesting conditions. Malus and clawback provisions STI is subject to malus and clawback, as applicable, enabling awards to be either forfeited, reduced or have clawback applied at the discretion of the People & Remuneration Committee and Board. 69 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 70 Remuneration Report continued 3. EXECUTIVE KMP REMUNERATION IN DETAIL LTI – KEY DETAILS Description The LTI plan consists of an award of conditional rights to QBE shares. Conditional rights are awarded at no cost to the executive KMP. Performance measures Vesting is subject to two equally weighted performance conditions measured over a three-year performance period: Average cash return on equity Relative total shareholder return DEFINITION The average of the three individual annual cash ROEs for the three individual years comprising the performance period (used for the 2021 grant due to volatility). A catastrophe adjustment may apply, which defines a ceiling and floor for catastrophe claims (see below) when determining LTI outcomes. Prior year grant details are provided in the relevant Annual Reports. DEFINITION TSR is the change in percentage value of an entity’s share price plus the value of reinvested dividends and any capital returns measured over the three-year performance period. TSR of QBE is measured against two independent peer groups, shown below for 2021: • ASX 50 peer group (for 50% of the TSR component); and • a global insurance peer group (for 50% of the TSR component). RATIONALE Cash ROE is the primary financial measure of success for QBE and is most tangible for long-term decision making. RATIONALE The use of a relative TSR measure enables stronger pay for performance, aligning with shareholders. ADJUSTMENTS Because the LTI performance period is measured over three years, extreme or benign catastrophe periods can have a material effect across multiple LTI awards. A levelling mechanism, introduced in 2019, effectively puts a ceiling and a floor on aggregate catastrophe claims when determining LTI outcomes. This levelling mechanism uses a range of +/- 1.5% of net earned premium either side of the budgeted catastrophe allowance for which LTI participants are exposed to catastrophe risk. For 2021, the range of $505 million to $865 million is applied. This means where actual aggregate catastrophe claims (after allowing for reinsurance recoveries) exceed $865 million, aggregate catastrophe claims are capped at this amount for calculating cash ROE. Conversely, in a very benign period, the lower limit of the collar ($505 million) provides a floor on aggregate catastrophe claims for calculating cash ROE. The cost of catastrophe claims for 2021 was $924 million, and this in excess of the range and consequently an after-tax adjustment of $49 million is applied and an adjusted cash ROE of 11% will be used for the 2021 performance period (2020 (14.2)%). Any other items (such as material acquisitions or divestments) not included in the business plan and deemed appropriate by the People & Remuneration Committee may be adjusted. TSR peer group 1 – ASX 50 peer group (excludes any organisations domiciled overseas) Afterpay Limited APA Group Aristocrat Leisure Limited ASX Limited Australia and New Zealand Banking Group Limited Australian Foundation Investment Company Limited BHP Group Limited BlueScope Steel Limited Brambles Limited Cochlear Limited Coles Group Limited Commonwealth Bank of Australia CSL Limited Dexus Fortescue Metals Group Ltd Goodman Group GPT Group Insurance Australia Group Limited Qantas Airways Limited QBE Insurance Group Limited Ramsay Health Care Limited REA Group Ltd Reece Limited Sydney Airport Tabcorp Holdings Limited Telstra Corporation Limited TPG Telecom Limited Transurban Group Lendlease Group Rio Tinto Limited Wesfarmers Limited Macquarie Group Limited Magellan Financial Group Limited Mirvac Group National Australia Bank Limited Newcrest Mining Limited Northern Star Resources Ltd Origin Energy Limited Santos Limited Scentre Group Seek Limited Sonic Healthcare Limited South32 Limited Stockland Suncorp Group Limited Westpac Banking Corporation WiseTech Global Limited Woodside Petroleum Ltd Woolworths Group Limited Coca-Cola Amatil Limited (removed due to delisting) TSR peer group 2 – Global insurance peer group Allianz SE American International Group Aviva plc AXA SA Beazley PLC Chubb Ltd CNA Financial Corp Hiscox Ltd Insurance Australia Group Limited QBE Insurance Group Limited Suncorp Group Limited Hartford Financial Services Group, Inc. The Travelers Companies, Inc. Zurich Insurance Group AG RSA Insurance Group plc (removed due to delisting) 70 Remuneration Report continued 3. EXECUTIVE KMP REMUNERATION IN DETAIL LTI – KEY DETAILS LTI – KEY DETAILS Description Description Performance measures Performance measures The LTI plan consists of an award of conditional rights to QBE shares. Conditional rights are awarded at no cost to the executive KMP. The LTI plan consists of an award of conditional rights to QBE shares. Conditional rights are awarded at no cost to the executive KMP. Vesting is subject to two equally weighted performance conditions measured over a three-year performance period: Vesting is subject to two equally weighted performance conditions measured over a three-year performance period: Average cash return on equity Average cash return on equity Relative total shareholder return Relative total shareholder return DEFINITION DEFINITION DEFINITION DEFINITION The average of the three individual annual cash ROEs The average of the three individual annual cash ROEs TSR is the change in percentage value of an entity’s share price plus TSR is the change in percentage value of an entity’s share price plus for the three individual years comprising the performance for the three individual years comprising the performance the value of reinvested dividends and any capital returns measured the value of reinvested dividends and any capital returns measured period (used for the 2021 grant due to volatility). period (used for the 2021 grant due to volatility). A catastrophe adjustment may apply, which defines A catastrophe adjustment may apply, which defines a ceiling and floor for catastrophe claims (see below) a ceiling and floor for catastrophe claims (see below) when determining LTI outcomes. Prior year grant details when determining LTI outcomes. Prior year grant details are provided in the relevant Annual Reports. are provided in the relevant Annual Reports. over the three-year performance period. over the three-year performance period. TSR of QBE is measured against two independent peer groups, TSR of QBE is measured against two independent peer groups, shown below for 2021: shown below for 2021: • ASX 50 peer group (for 50% of the TSR component); and • ASX 50 peer group (for 50% of the TSR component); and • a global insurance peer group (for 50% of the TSR component). • a global insurance peer group (for 50% of the TSR component). RATIONALE RATIONALE RATIONALE RATIONALE Cash ROE is the primary financial measure of success for Cash ROE is the primary financial measure of success for The use of a relative TSR measure enables stronger pay for The use of a relative TSR measure enables stronger pay for QBE and is most tangible for long-term decision making. QBE and is most tangible for long-term decision making. performance, aligning with shareholders. performance, aligning with shareholders. ADJUSTMENTS ADJUSTMENTS Because the LTI performance period is measured over three years, extreme or benign catastrophe periods can have a material Because the LTI performance period is measured over three years, extreme or benign catastrophe periods can have a material effect across multiple LTI awards. A levelling mechanism, introduced in 2019, effectively puts a ceiling and a floor on aggregate effect across multiple LTI awards. A levelling mechanism, introduced in 2019, effectively puts a ceiling and a floor on aggregate catastrophe claims when determining LTI outcomes. This levelling mechanism uses a range of +/- 1.5% of net earned premium catastrophe claims when determining LTI outcomes. This levelling mechanism uses a range of +/- 1.5% of net earned premium either side of the budgeted catastrophe allowance for which LTI participants are exposed to catastrophe risk. For 2021, the range either side of the budgeted catastrophe allowance for which LTI participants are exposed to catastrophe risk. For 2021, the range of $505 million to $865 million is applied. This means where actual aggregate catastrophe claims (after allowing for reinsurance of $505 million to $865 million is applied. This means where actual aggregate catastrophe claims (after allowing for reinsurance recoveries) exceed $865 million, aggregate catastrophe claims are capped at this amount for calculating cash ROE. Conversely, recoveries) exceed $865 million, aggregate catastrophe claims are capped at this amount for calculating cash ROE. Conversely, in a very benign period, the lower limit of the collar ($505 million) provides a floor on aggregate catastrophe claims for calculating in a very benign period, the lower limit of the collar ($505 million) provides a floor on aggregate catastrophe claims for calculating cash ROE. The cost of catastrophe claims for 2021 was $924 million, and this in excess of the range and consequently an cash ROE. The cost of catastrophe claims for 2021 was $924 million, and this in excess of the range and consequently an after-tax adjustment of $49 million is applied and an adjusted cash ROE of 11% will be used for the 2021 performance period after-tax adjustment of $49 million is applied and an adjusted cash ROE of 11% will be used for the 2021 performance period Any other items (such as material acquisitions or divestments) not included in the business plan and deemed appropriate by the Any other items (such as material acquisitions or divestments) not included in the business plan and deemed appropriate by the People & Remuneration Committee may be adjusted. People & Remuneration Committee may be adjusted. TSR peer group 1 – ASX 50 peer group (excludes any organisations domiciled overseas) TSR peer group 1 – ASX 50 peer group (excludes any organisations domiciled overseas) Dexus Dexus Qantas Airways Limited Qantas Airways Limited Sydney Airport Sydney Airport Fortescue Metals Group Ltd Fortescue Metals Group Ltd QBE Insurance Group Limited QBE Insurance Group Limited Tabcorp Holdings Limited Tabcorp Holdings Limited Australia and New Zealand Banking Australia and New Zealand Banking Insurance Australia Group Limited Insurance Australia Group Limited Reece Limited Reece Limited GPT Group GPT Group REA Group Ltd REA Group Ltd TPG Telecom Limited TPG Telecom Limited Transurban Group Transurban Group Australian Foundation Investment Australian Foundation Investment Lendlease Group Lendlease Group Rio Tinto Limited Rio Tinto Limited Wesfarmers Limited Wesfarmers Limited BlueScope Steel Limited BlueScope Steel Limited Magellan Financial Group Limited Magellan Financial Group Limited Scentre Group Scentre Group Mirvac Group Mirvac Group Seek Limited Seek Limited WiseTech Global Limited WiseTech Global Limited Woodside Petroleum Ltd Woodside Petroleum Ltd Macquarie Group Limited Macquarie Group Limited Santos Limited Santos Limited Westpac Banking Corporation Westpac Banking Corporation (2020 (14.2)%). (2020 (14.2)%). Afterpay Limited Afterpay Limited APA Group APA Group ASX Limited ASX Limited Group Limited Group Limited Company Limited Company Limited BHP Group Limited BHP Group Limited Brambles Limited Brambles Limited Cochlear Limited Cochlear Limited Coles Group Limited Coles Group Limited Commonwealth Bank of Australia Commonwealth Bank of Australia Northern Star Resources Ltd Northern Star Resources Ltd Stockland Stockland CSL Limited CSL Limited Origin Energy Limited Origin Energy Limited Suncorp Group Limited Suncorp Group Limited Coca-Cola Amatil Limited Coca-Cola Amatil Limited (removed due to delisting) (removed due to delisting) TSR peer group 2 – Global insurance peer group TSR peer group 2 – Global insurance peer group Allianz SE Allianz SE Aviva plc Aviva plc AXA SA AXA SA American International Group American International Group Chubb Ltd Chubb Ltd QBE Insurance Group Limited QBE Insurance Group Limited Zurich Insurance Group AG Zurich Insurance Group AG Beazley PLC Beazley PLC Insurance Australia Group Limited Insurance Australia Group Limited The Travelers Companies, Inc. The Travelers Companies, Inc. CNA Financial Corp CNA Financial Corp Suncorp Group Limited Suncorp Group Limited Hiscox Ltd Hiscox Ltd Hartford Financial Services Group, Inc. Hartford Financial Services Group, Inc. RSA Insurance Group plc RSA Insurance Group plc (removed due to delisting) (removed due to delisting) LTI allocation To calculate the number of conditional rights granted, the award value is divided by the volume weighted average price of QBE shares over the five trading days prior to the grant date. Vesting schedules For the 2021 LTI, the Group cash ROE component is determined with reference to the average of the three annual performance ranges set over the three individual years, being 2021, 2022 and 2023 to determine vesting outcomes. This approach addresses the difficulty of long range forecasting due to the economic volatility. The indicative Group average cash ROE vesting schedule for 2021 awards is outlined below: QBE'S GROUP CASH ROE PERFORMANCE Below 6.3% At 6.3% Between 6.3% and 10.3% At or above 10.3% % OF LTI CONDITIONAL RIGHTS SUBJECT TO THE GROUP CASH ROE COMPONENT WHICH MAY VEST 0% 30% Straight line vesting between 30% and 100% 100% For the 2021 LTI only, target ranges for 2021, 2022 and 2023 will be set at the start of the relevant years and disclosed in the following year. The individual annual ranges will be used to create the target range for the three-year period. The indicative relative TSR vesting schedule for 2021 awards is outlined below: QBE'S TSR PERFORMANCE RELATIVE TO THE PEER GROUPS Less than 50th percentile At the 50th percentile Between 50th and 75th percentile 75th percentile or greater % OF LTI CONDITIONAL RIGHTS SUBJECT TO THE TSR COMPONENT WHICH MAY VEST 0% 50% 50% plus 2% for each percentile above the 50th percentile 100% The LTI rules provide suitable discretion to the People & Remuneration Committee to adjust any formulaic outcome to ensure LTI awards appropriately reflect performance. Vesting periods Following assessment of performance measures at the end of the three-year performance period, conditional rights will vest in three tranches as set out in the table below, subject to service conditions and malus provisions: TRANCHE VESTING DATE PERFORMANCE PERIOD PROPORTION OF ELIGIBLE 2021 LTI CONDITIONAL RIGHTS TO VEST 1 2 3 25 February 2024 End of the three-year performance period 25 February 2025 First anniversary of the end of the performance period 25 February 2026 Second anniversary of the end of the performance period 33% 33% 34% Aristocrat Leisure Limited Aristocrat Leisure Limited Goodman Group Goodman Group Ramsay Health Care Limited Ramsay Health Care Limited Telstra Corporation Limited Telstra Corporation Limited Notional dividends accrue during the vesting period. National Australia Bank Limited National Australia Bank Limited Sonic Healthcare Limited Sonic Healthcare Limited Woolworths Group Limited Woolworths Group Limited Newcrest Mining Limited Newcrest Mining Limited South32 Limited South32 Limited LTI is subject to malus and clawback provisions, enabling awards to be either forfeited or reduced or have clawback applied at the discretion of the People & Remuneration Committee and Board. Leaver provisions In cases of ‘Good leaver’ (e.g. retirement, redundancy, ill health, injury, mutually agreed separation (in some cases)) the unvested LTI conditional rights may be reduced to a pro-rata amount to reflect the proportion of the performance period in service and may continue to be held subject to the same vesting conditions. Malus and clawback provisions 71 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 72 Remuneration Report continued 3. EXECUTIVE KMP REMUNERATION IN DETAIL Changes to incentives for 2022 In considering our future incentive design, we have included feedback from multiple sources in an effort to evolve our incentive plans to better support our future strategy, target culture and align with the future requirements being introduced by Australian regulators. Dialogue captured through the Culture Accelerator identified a number of areas that could be enhanced through incentive plan design. These included, being more future focused, being more enterprise focused, having a broader view of performance and having an increased focus on behaviours. Based on this the three key areas of change are firstly, the introduction of non-financial metrics with a material weighting through the STI. These would be assessed through quantitative and qualitative methods. Secondly, the use of a formalised ‘how’ rating which informs the overall rating of an executive KMP. This emphasises its importance and brings focus to the role that behaviours play in achieving STI outcomes across QBE. Thirdly, changes to simplify LTI for future grants include the removal of the relative TSR ASX 50 peer group and a higher weighting of the Group cash ROE component for 2022, removing the catastrophe adjustment mechanism and using risk free rate plus margin basis ensure that LTI outcomes are more easily understood, and therefore supported, by our internal stakeholders and shareholders. The People & Remuneration Committee retain discretion to adjust performance outcomes. Employment agreements The table below summarises the material terms for the current executive KMP which are subject to applicable laws. The terms and conditions of employment of each executive KMP reflect market conditions at the time of their contract negotiation on appointment and thereafter. In addition, the typical treatment of incentives is also provided below. CONTRACTUAL TERM GROUP CEO 1 OTHER EXECUTIVE KMP Duration Permanent full-time employment contract until notice given by either party. Notice period (by executive KMP or QBE) 12 months: QBE may elect to make a payment in lieu of notice. Six months: QBE may elect to make a payment in lieu of notice. Post-employment restraints 12 months non-compete and non-solicitation. Six to 12 months non-compete and non-solicitation. 1 The terms for the Interim Group CEO were not aligned with the Group CEO role due to the interim nature of the role. Treatment of incentives Involuntary termination On termination with cause or for poor performance: All unvested incentives are forfeited. On termination without cause: For STI in the year of termination, the executive remains eligible to be considered for an award on a pro-rata basis, with any award to be determined following the end of the performance year and subject to the standard deferral arrangements. Unvested deferred EIP and STI conditional rights remain in the plan subject to the original vesting dates and malus provisions. The unvested LTI conditional rights may be reduced to a pro-rata amount to reflect the proportion of the performance period in service and may continue to be held subject to the same performance and vesting conditions. Legacy LTI awards generally remain in the plan subject to the original performance and vesting conditions; however, the People & Remuneration Committee has discretion to vest these awards. Voluntary termination All unvested incentives are forfeited. 72 Remuneration Report continued In considering our future incentive design, we have included feedback from multiple sources in an effort to evolve our incentive plans to better support our future strategy, target culture and align with the future requirements being introduced by Australian regulators. Dialogue captured through the Culture Accelerator identified a number of areas that could be enhanced through incentive plan design. These included, being more future focused, being more enterprise focused, having a broader view of performance and having an increased focus on behaviours. Based on this the three key areas of change are firstly, the introduction of non-financial metrics with a material weighting through the STI. These would be assessed through quantitative and qualitative methods. Secondly, the use of a formalised ‘how’ rating which informs the overall rating of an executive KMP. This emphasises its importance and brings focus to the role that behaviours play in achieving STI outcomes across QBE. Thirdly, changes to simplify LTI for future grants include the removal of the relative TSR ASX 50 peer group and a higher weighting of the Group cash ROE component for 2022, removing the catastrophe adjustment mechanism and using risk free rate plus margin basis ensure that LTI outcomes are more easily understood, and therefore supported, by our internal stakeholders and shareholders. The People & Remuneration Committee retain discretion to adjust performance outcomes. Employment agreements The table below summarises the material terms for the current executive KMP which are subject to applicable laws. The terms and conditions of employment of each executive KMP reflect market conditions at the time of their contract negotiation on appointment and thereafter. In addition, the typical treatment of incentives is also provided below. CONTRACTUAL TERM GROUP CEO 1 OTHER EXECUTIVE KMP Permanent full-time employment contract until notice given by either party. Duration Notice period (by executive KMP or QBE) in lieu of notice. in lieu of notice. 12 months: QBE may elect to make a payment Six months: QBE may elect to make a payment Post-employment restraints 12 months non-compete and non-solicitation. Six to 12 months non-compete and non-solicitation. 1 The terms for the Interim Group CEO were not aligned with the Group CEO role due to the interim nature of the role. On termination with cause or for poor performance: All unvested incentives are forfeited. On termination without cause: For STI in the year of termination, the executive remains eligible to be considered for an award on a pro-rata basis, with any award to be determined following the end of the performance year and subject to the standard deferral arrangements. Unvested deferred EIP and STI conditional rights remain in the plan subject to the original vesting dates and malus provisions. The unvested LTI conditional rights may be reduced to a pro-rata amount to reflect the proportion of the performance period in service and may continue to be held subject to the same performance and vesting conditions. Legacy LTI awards generally remain in the plan subject to the original performance and vesting conditions; however, the People & Remuneration Committee has Treatment of incentives Involuntary termination discretion to vest these awards. Voluntary termination All unvested incentives are forfeited. 3. EXECUTIVE KMP REMUNERATION IN DETAIL 4. EXECUTIVE KMP REMUNERATION TABLES Changes to incentives for 2022 4.1 Statutory remuneration disclosures The following table provides details of the remuneration of QBE’s executive KMP as determined by reference to applicable Australian Accounting Standards (AASB) for the financial year ended 31 December 2021. Remuneration has been converted to US dollars using the average rate of exchange for the relevant year. SHORT-TERM EMPLOYMENT BENEFITS POST-EMPLOYMENT BENEFITS SUPERANNUATION US$000 Andrew Horton 6 Jason Harris Sam Harrison 6 BASE SALARY US$000 OTHER 1 US$000 STI CASH 2 US$000 431 465 390 894 60 650 7 847 14 922 – 578 YEAR 2021 2021 2020 2021 Sue Houghton 6 2021 295 151 289 Amanda Hughes 6 2021 42 – 38 Todd Jones Fiona Larnach 6 Inder Singh 2021 2020 2021 2021 2020 Former executive KMP Jason Brown 7 Margaret Murphy7 Richard Pryce 7 Total 1,000 1,000 540 962 743 172 641 602 605 1,011 1,089 6,599 4,138 27 106 1 10 9 50 97 104 84 147 177 976 1,320 659 – 306 905 – 165 – 487 – 945 – 5,684 – 2021 2020 2021 2020 2021 2020 2021 2020 8 OTHER LONG-TERM EMPLOYEE BENEFITS LEAVE ACCRUALS 3 US$000 SHARE-BASED PAYMENTS 4 US$000 TERMINATION BENEFITS 5 US$000 – – – – 5 – 23 23 16 18 15 – – 5 15 – – 67 53 33 – – – 6 (10) – – 32 21 23 – – – 15 – – 82 38 913 810 39 620 396 2 818 2,160 168 733 568 674 472 510 582 5,610 2,003 11,254 5,824 – – – – – – – – – – – – – – – – – – – TOTAL US$000 2,232 2,633 946 1,862 1,142 72 2,527 3,289 1,063 2,649 1,358 1,061 1,210 1,708 1,301 7,713 3,269 24,662 11,373 1 Other includes, where relevant, provision of motor vehicles, health insurance, spouse travel, accommodation costs, staff insurance discount benefits received during the year, life assurance and personal accident insurance and applicable taxes. It also includes the deemed value of interest-free share loans, tax accruals in respect of employment benefits and other one-off expenses. For Andrew Horton and Sue Houghton, this includes a cash payment of A$500,000 (payable in February 2022) and A$200,000 (paid in August 2021) respectively to compensate for incentives forfeited in ceasing previous employment to join QBE. 2 STI cash is payable in March 2022 for performance in 2021. Where an executive is a KMP for only part of the year, amounts shown are 3 4 pro-rated. The Board exercised its discretion to deliver the 2020 STI in conditional rights. Includes the movement in annual leave and long service leave provisions during the relevant year. Includes conditional rights and legacy cash-settled awards. The fair value at grant date of conditional rights is determined using appropriate models including Monte Carlo simulations, depending on the vesting conditions. The fair value of each conditional right is recognised evenly over the service period ending at vesting date. Where an award will no longer vest, the related accounting charge for any non-market component is reversed in full and the reversal is included in the table above. For new executive KMP, this may include conditional rights granted as compensation for incentives forfeited on ceasing previous employment to join QBE in addition to a pro-rata grant of conditional rights for the 2021 LTI. Details of grants of conditional rights are provided on pages 74 to 75. For Sam Harrison, this includes legacy cash-settled share-based awards relating to grants made prior to his appointment as executive KMP under the 2019 and 2020 EIP. Details of EIP awards are provided on page 76. For Jason Brown and Richard Pryce, the accelerated accounting charge relating to conditional rights awards which remain unvested is included. 5 There were no termination benefits payable in this period. 6 Andrew Horton, Sam Harrison, Sue Houghton, Amanda Hughes and Fiona Larnach were all executive KMP for part of the year. Dates are shown on pages 62 to 64. 7 Jason Brown, Margaret Murphy and Richard Pryce were executive KMP through to 31 March 2021, 30 November 2021 and 31 August 2021 respectively. 8 The 2020 totals above are not the same as those disclosed in the 2020 Remuneration Report because of changes in executive KMP. 73 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 74 Remuneration Report continued 4. EXECUTIVE KMP REMUNERATION TABLES 4.2 Conditional rights movements Equity awards at QBE are granted in the form of conditional rights. A conditional right is a promise by QBE to acquire or issue one fully paid ordinary QBE Insurance Group Limited share where certain conditions are met. The table below details conditional rights provided under the terms of both current and legacy plans, details of which can be found on pages 69 and 76, and contractual arrangements. LTI conditional rights are subject to future performance hurdles as detailed on pages 70 to 71 and 76. Conditional rights under the STI for the 2021 performance year will be granted in the first quarter of 2022. BALANCE AT 1 JANUARY 2021 NUMBER 1 2021 Andrew Horton Jason Harris Sam Harrison Sue Houghton Amanda Hughes Todd Jones Fiona Larnach Inder Singh Former executive KMP Jason Brown Margaret Murphy Richard Pryce – 162,533 126,290 – 6,916 488,646 – 288,111 246,372 293,470 824,172 VALUE AT GRANT DATE US$000 3 VESTED AND EXERCISED NUMBER VALUE AT VESTING DATE US$000 FORFEITED/ LAPSED NUMBER NOTIONAL DIVIDENDS ATTACHING IN THE YEAR NUMBER BALANCE AT 31 DECEMBER 2021 NUMBER 4 3,003 893 654 1,435 – 1,535 527 1,177 308 829 1,476 – – – – – (168,374) – (45,586) (33,713) (111,929) (120,544) – – – – – 1,174 – 322 238 792 853 – – – – – – – – – – – – 2,950 2,292 1,798 – 5,442 897 4,107 – 2,997 – 335,570 320,683 248,761 195,370 6,916 591,236 97,626 445,936 256,741 325,313 915,059 GRANTED NUMBER 2 335,570 155,200 120,179 193,572 – 265,522 96,729 199,304 44,082 140,775 211,431 1 The opening balance for Sam Harrison and Amanda Hughes is their respective conditional rights holding at the date they became executive KMP. 2 On commencement of employment, Andrew Horton and Sue Houghton were granted conditional rights as compensation for incentives forfeited on ceasing their previous employment to join QBE. The award details are shown in table 4.3. In addition for new executive KMP, 2021 LTI grants made, where relevant, are subject to the performance conditions detailed on pages 70 to 71. 3 The value at grant date is calculated in accordance with AASB 2 Share-based Payment. 4 For former executive KMP Jason Brown, Margaret Murphy and Richard Pryce, this represents the balance at 31 March 2021, 30 November 2021 and 31 August 2021 respectively, being the dates they ceased to be executive KMP. 4.3 Valuation of conditional rights outstanding at 31 December 2021 The table below details the conditional rights issued affecting remuneration of executives in the previous, current or future reporting periods: 2021 Andrew Horton Jason Harris Sam Harrison Sue Houghton GRANT Special Special 2020 LTI 2020 STI 2021 LTI 2017 EIP 2018 EIP 2019 EIP 2020 EIP 2021 LTI 2021 LTI Special Amanda Hughes 2020 EIP GRANT DATE 1-Sep-21 1-Oct-20 1-Oct-20 26-Feb-21 26-Feb-21 5-Mar-18 4-Mar-19 24-Feb-20 26-Feb-21 26-Feb-21 3-Aug-21 3-Aug-21 26-Feb-21 PERFORMANCE PERIOD START DATE 1-Sep-21 1-Oct-20 1-Jan-20 1-Jan-20 1-Jan-21 1-Jan-17 1-Jan-18 1-Jan-19 1-Jan-20 1-Jan-21 1-Jan-21 3-Aug-21 1-Jan-20 CONDITIONAL RIGHTS AT 31 DECEMBER 2021 NUMBER 1 335,570 62,492 101,549 31,496 125,146 13,502 35,632 27,221 51,111 121,295 92,680 102,690 6,916 MAXIMUM VALUE OF AWARD TO VEST A$ 3,999,994 543,680 631,891 292,913 907,930 139,206 433,641 405,865 475,332 879,993 810,797 1,118,294 64,319 EXERCISE DATE 2022-2025 1-Mar-22 2023-2025 2022-2023 2024-2026 4-Mar-22 2022-2023 2022-2024 2022-2025 2024-2026 2024-2026 2022-2024 2022-2025 FAIR VALUE PER CONDITIONAL RIGHT A$ 2 GROUP ROE – – 8.70 – 9.30 – – – – 9.30 10.89 – – TSR TIME – – 3.75 – 5.21 – – – – 5.21 6.61 – – 11.92 8.70 – 9.30 – 10.31 12.17 14.91 9.30 – – 10.89 9.30 4.3 Valuation of conditional rights outstanding at 31 December 2021 (continued) 1 The opening balance for Sam Harrison and Amanda Hughes is their respective conditional rights holding at the date they became 2 On commencement of employment, Andrew Horton and Sue Houghton were granted conditional rights as compensation for incentives forfeited on ceasing their previous employment to join QBE. The award details are shown in table 4.3. In addition for new executive KMP, 2021 LTI grants made, where relevant, are subject to the performance conditions detailed on pages 70 to 71. 3 The value at grant date is calculated in accordance with AASB 2 Share-based Payment. 4 For former executive KMP Jason Brown, Margaret Murphy and Richard Pryce, this represents the balance at 31 March 2021, 30 November 2021 and 31 August 2021 respectively, being the dates they ceased to be executive KMP. Richard Pryce 3 Margaret Murphy 2021 Todd Jones Fiona Larnach Inder Singh Former executive KMP Jason Brown GRANT GRANT DATE PERFORMANCE PERIOD START DATE 2019 LTI 2019 STI 2020 LTI 2020 STI 2021 LTI 2021 LTI 2017 EIP 2018 EIP 2019 LTI 2019 STI 2020 LTI 2020 STI 2021 LTI 2017 EIP 2018 EIP 2019 LTI 2019 STI 2020 LTI 2020 STI 2017 EIP 2018 EIP 2019 LTI 2019 STI 2020 LTI 2020 STI 2021 LTI 2017 EIP 2018 EIP 2019 Special LTI 2019 STI 2020 Special LTI 2020 STI 2021 Special LTI 1-Oct-19 24-Feb-20 24-Feb-20 26-Feb-21 26-Feb-21 26-Feb-21 5-Mar-18 4-Mar-19 4-Mar-19 24-Feb-20 24-Feb-20 26-Feb-21 26-Feb-21 5-Mar-18 4-Mar-19 4-Mar-19 24-Feb-20 24-Feb-20 26-Feb-21 5-Mar-18 4-Mar-19 4-Mar-19 24-Feb-20 24-Feb-20 26-Feb-21 26-Feb-21 5-Mar-18 4-Mar-19 4-Mar-19 24-Feb-20 24-Feb-20 26-Feb-21 26-Oct-20 1-Jan-19 1-Jan-19 1-Jan-20 1-Jan-20 1-Jan-21 1-Jan-21 1-Jan-17 1-Jan-18 1-Jan-19 1-Jan-19 1-Jan-20 1-Jan-20 1-Jan-21 1-Jan-17 1-Jan-18 1-Jan-19 1-Jan-19 1-Jan-20 1-Jan-20 1-Jan-17 1-Jan-18 1-Jan-19 1-Jan-19 1-Jan-20 1-Jan-20 1-Jan-21 1-Jan-17 1-Jan-18 1-Jan-19 1-Jan-19 1-Jan-20 1-Jan-20 26-Oct-20 CONDITIONAL RIGHTS AT 31 DECEMBER 2021 NUMBER 1 157,013 4,078 162,155 58,615 209,375 97,626 10,541 46,282 98,522 12,328 77,108 60,139 141,016 7,361 31,390 88,573 10,658 74,677 44,082 6,873 33,486 71,650 8,127 63,092 41,004 101,081 39,138 107,676 165,594 27,571 135,772 211,431 227,877 EXERCISE DATE 2022-2024 23-Feb-22 2023-2025 2022-2023 2024-2026 2024-2026 4-Mar-22 2022-2023 2022-2024 23-Feb-22 2023-2025 2022-2023 2024-2026 4-Mar-22 2022-2023 2022-2024 23-Feb-22 2023-2025 2022-2023 4-Mar-22 2022-2023 2022-2024 23-Feb-22 2023-2025 2022-2023 2024-2026 4-Mar-22 2022-2023 2022-2024 23-Feb-22 2023-2025 2022-2023 2024-2026 MAXIMUM VALUE OF AWARD TO VEST A$ 1,602,722 60,803 2,072,744 545,120 1,519,014 708,281 108,678 563,252 1,022,148 183,810 985,633 559,293 1,023,071 75,892 382,016 918,947 158,911 954,552 409,963 70,861 407,525 743,365 121,174 806,473 381,337 733,345 403,513 1,310,417 2,015,279 411,084 2,024,361 1,966,308 2,014,433 FAIR VALUE PER CONDITIONAL RIGHT A$ 2 GROUP ROE 12.60 – 14.91 – 9.30 9.30 – – 12.17 – 14.91 – 9.30 – – 12.17 – 14.91 – – – 12.17 – 14.91 – 9.30 – – – – – – – TSR TIME 7.82 – 10.66 – 5.21 5.21 – – 8.58 – 10.66 – 5.21 – – 8.58 – 10.66 – – – 8.58 – 10.66 – 5.21 – – – – – – – – 14.91 – 9.30 – – 10.31 12.17 – 14.91 – 9.30 – 10.31 12.17 – 14.91 – 9.30 10.31 12.17 – 14.91 – 9.30 – 10.31 12.17 12.17 14.91 14.91 9.30 8.84 1 Includes original grant of conditional rights and notional dividends. For the former executive KMP shown, this represents the number of conditional rights immediately prior to ceasing to be executive KMP. These remain subject to original performance and vesting conditions. 2 The fair value of conditional rights at grant date is determined using appropriate models including Monte Carlo simulations, depending on the vesting conditions. The fair value of each conditional right is recognised evenly over the service period ending at vesting date. For the LTI allocations, the TSR fair value shown above was averaged over the two peer groups. 3 The Special LTI awards for Richard Pryce include specific performance measures as detailed on page 76. 74 Remuneration Report continued 4. EXECUTIVE KMP REMUNERATION TABLES 4.2 Conditional rights movements Equity awards at QBE are granted in the form of conditional rights. A conditional right is a promise by QBE to acquire or issue one fully paid ordinary QBE Insurance Group Limited share where certain conditions are met. The table below details conditional rights provided under the terms of both current and legacy plans, details of which can be found on pages 69 and 76, and contractual arrangements. LTI conditional rights are subject to future performance hurdles as detailed on pages 70 to 71 and 76. Conditional rights under the STI for the 2021 performance year will be granted in the first quarter of 2022. BALANCE AT 1 JANUARY 2021 NUMBER 1 162,533 126,290 6,916 488,646 – – – 288,111 246,372 293,470 824,172 2021 Andrew Horton Jason Harris Sam Harrison Sue Houghton Amanda Hughes Todd Jones Fiona Larnach Inder Singh Jason Brown Margaret Murphy Richard Pryce executive KMP. Former executive KMP GRANTED NUMBER 2 335,570 155,200 120,179 193,572 – 265,522 96,729 199,304 44,082 140,775 211,431 VALUE AT GRANT DATE US$000 3 VESTED AND EXERCISED NUMBER VALUE AT FORFEITED/ ATTACHING IN VESTING DATE US$000 LAPSED NUMBER THE YEAR NUMBER NOTIONAL DIVIDENDS BALANCE AT 31 DECEMBER 2021 NUMBER 4 3,003 893 654 1,435 – 1,535 527 1,177 308 829 1,476 – – – – – – (45,586) (33,713) (111,929) (120,544) – – – – – – 322 238 792 853 (168,374) 1,174 – – – – – – – – – – – 2,950 2,292 1,798 – – 5,442 897 4,107 2,997 – – 335,570 320,683 248,761 195,370 6,916 591,236 97,626 445,936 256,741 325,313 915,059 4.3 Valuation of conditional rights outstanding at 31 December 2021 The table below details the conditional rights issued affecting remuneration of executives in the previous, current or future reporting periods: 2021 Andrew Horton Jason Harris Sam Harrison GRANT Special Special 2020 LTI 2020 STI 2021 LTI 2017 EIP 2018 EIP 2019 EIP 2020 EIP 2021 LTI 2021 LTI Special Sue Houghton Amanda Hughes 2020 EIP PERFORMANCE PERIOD START DATE EXERCISE DATE CONDITIONAL RIGHTS AT 31 DECEMBER 2021 NUMBER 1 MAXIMUM VALUE OF AWARD TO FAIR VALUE PER CONDITIONAL RIGHT A$ 2 VEST GROUP A$ ROE TSR TIME 1-Sep-21 2022-2025 335,570 3,999,994 1-Oct-20 1-Mar-22 1-Jan-20 2023-2025 1-Jan-20 2022-2023 1-Jan-21 2024-2026 1-Jan-17 4-Mar-22 1-Jan-18 2022-2023 1-Jan-19 2022-2024 1-Jan-20 2022-2025 1-Jan-21 2024-2026 1-Jan-21 2024-2026 62,492 101,549 31,496 125,146 13,502 35,632 27,221 51,111 121,295 92,680 543,680 631,891 292,913 907,930 139,206 433,641 405,865 475,332 879,993 3-Aug-21 2022-2024 102,690 1,118,294 1-Jan-20 2022-2025 6,916 64,319 8.70 3.75 9.30 5.21 – – – – – – – – – – – – – – – – 11.92 8.70 9.30 – – 10.31 12.17 14.91 9.30 – – – – 10.89 9.30 810,797 10.89 9.30 5.21 6.61 GRANT DATE 1-Sep-21 1-Oct-20 1-Oct-20 26-Feb-21 26-Feb-21 5-Mar-18 4-Mar-19 24-Feb-20 26-Feb-21 26-Feb-21 3-Aug-21 3-Aug-21 26-Feb-21 75 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 76 Remuneration Report continued 4. EXECUTIVE KMP REMUNERATION TABLES 4.4 Executive KMP shareholdings The table below provides details of movements during the year in the number of ordinary shares in QBE held by executive KMP, including their personally-related parties. In prior years, where non-recourse loans were provided by the Group to executive KMP for the purchase of shares in QBE, details are shown in the Remuneration Report of each relevant year. There are no loans outstanding at 31 December 2021 to any executive KMP. 2021 Andrew Horton Jason Harris Sam Harrison Sue Houghton Amanda Hughes Todd Jones Fiona Larnach Inder Singh Former executive KMP Jason Brown Margaret Murphy Richard Pryce INTEREST IN SHARES AT 1 JANUARY 2021 NUMBER 1 DIVIDENDS REINVESTED NUMBER CONDITIONAL RIGHTS VESTED NUMBER SHARES PURCHASED (SOLD) NUMBER 2 INTEREST IN SHARES AT 31 DECEMBER 2021 3 NUMBER 150,000 – 199 17,000 16,460 101,334 – 67,455 189,639 35,853 255,888 – – 2 – – – – – – 810 – – – – – – 168,374 – 45,586 33,713 111,929 120,544 – – – – – (64,552) – – – (60,587) (56,832) 150,000 – 201 17,000 16,460 205,156 – 113,041 223,352 88,005 319,600 1 The opening balances for Andrew Horton, Sam Harrison, Sue Houghton and Amanda Hughes is their respective holding at the date they became executive KMP. 2 The shares listed as sold may either partially or fully relate to sales to meet withholding tax obligations upon the vesting of conditional rights. 3 For former executive KMP Jason Brown, Margaret Murphy and Richard Pryce, this represents the interest in shares at 31 March 2021, 30 November 2021 and 31 August 2021 respectively, being the dates they ceased to be executive KMP. 4.5 Legacy equity schemes The information below summarises QBE’s legacy incentive plans. Executive Incentive Plan – until 31 December 2018 The EIP was an at-risk reward structure comprised of cash and deferred equity that vested progressively over a five-year period. 40% of the award was delivered in cash and 60% of the award was deferred as conditional rights to fully paid ordinary QBE shares. The conditional rights were deferred over four equal tranches: 25% over each of the four anniversaries of the award. EIP outcomes were subject to the achievement of multiple performance measures over the one-year performance period including the Group’s cash ROE and COR targets, individual performance ratings and, for divisional staff, divisional COR targets. The EIP was replaced by the STI and LTI plans for executive KMP from 2019 but remains in existence for senior employees below the executive KMP level. The EIP awards made to Sam Harrison prior to his appointment as executive KMP include cash-settled share based payment awards which are subject to the same vesting conditions as the equivalent conditional rights described above. The benefit received at vesting is indexed to the movement in the A$ value of QBE’s shares including dividends declared in the period between grant and vest dates. Special long-term incentive awards The LTI award made to Richard Pryce in early 2020 includes performance criteria aligned to specific deliverables as he transitioned to retirement. Other than the tailored performance criteria, the terms and conditions of the award are consistent with other executive KMP. The LTI award made to Richard Pryce in October 2020, at the time of his appointment as Interim Group CEO, is subject to two performance conditions measured by the Board over the period he held this role. The performance measures were set with a focus on the delivery of a number of important priorities. These include a blend of individual and strategic measures to both reward for the stability provided as Interim Group CEO through 2021, setting QBE up for future success, and the creation of alignment with shareholder interests, structured as follows: • individual component (40%) – the Board will apply its discretion to determine outcomes against this component having considered achievement of agreed deliverables relating to executive team transition and development, building talent succession and depth, and effective engagement with regulators and shareholders; and • strategic component (60%) – this component will be measured against the delivery of a number of objectives including Customer@QBE, reinsurance strategy, IT modernisation strategy and cultural change. Subject to performance against the above, consideration of appropriate financial outcomes, risk behaviours during the vesting period and malus provisions, the conditional rights will vest in three tranches in Q1 2024 (33%), 2025 (33%) and 2026 (34%). 76 Remuneration Report continued 4. EXECUTIVE KMP REMUNERATION TABLES 5. NON-EXECUTIVE DIRECTOR REMUNERATION 4.4 Executive KMP shareholdings The following section contains information on the approach to non-executive director remuneration, the fees, other benefits and shareholdings. The table below provides details of movements during the year in the number of ordinary shares in QBE held by executive KMP, including their personally-related parties. In prior years, where non-recourse loans were provided by the Group to executive KMP for the purchase of shares in QBE, details are shown in the Remuneration Report of each relevant year. There are no loans outstanding at 31 December 2021 to any executive KMP. 2021 Andrew Horton Jason Harris Sam Harrison Sue Houghton Amanda Hughes Todd Jones Fiona Larnach Inder Singh Jason Brown Margaret Murphy Richard Pryce Former executive KMP became executive KMP. INTEREST IN SHARES AT 1 JANUARY 2021 DIVIDENDS REINVESTED NUMBER CONDITIONAL RIGHTS VESTED NUMBER INTEREST IN SHARES AT (SOLD) 31 DECEMBER 2021 3 SHARES PURCHASED NUMBER 2 NUMBER 1 150,000 – 199 17,000 16,460 101,334 – 67,455 189,639 35,853 255,888 – – 2 – – – – – – – 810 – – – – – – 45,586 33,713 111,929 120,544 – – – – – – – – (60,587) (56,832) 168,374 (64,552) NUMBER 150,000 – 201 17,000 16,460 205,156 – 113,041 223,352 88,005 319,600 1 The opening balances for Andrew Horton, Sam Harrison, Sue Houghton and Amanda Hughes is their respective holding at the date they 2 The shares listed as sold may either partially or fully relate to sales to meet withholding tax obligations upon the vesting of conditional rights. 3 For former executive KMP Jason Brown, Margaret Murphy and Richard Pryce, this represents the interest in shares at 31 March 2021, 30 November 2021 and 31 August 2021 respectively, being the dates they ceased to be executive KMP. 4.5 Legacy equity schemes The information below summarises QBE’s legacy incentive plans. Executive Incentive Plan – until 31 December 2018 The EIP was an at-risk reward structure comprised of cash and deferred equity that vested progressively over a five-year period. 40% of the award was delivered in cash and 60% of the award was deferred as conditional rights to fully paid ordinary QBE shares. The conditional rights were deferred over four equal tranches: 25% over each of the four anniversaries of the award. EIP outcomes were subject to the achievement of multiple performance measures over the one-year performance period including the Group’s cash ROE and COR targets, individual performance ratings and, for divisional staff, divisional COR targets. The EIP was replaced by the STI and LTI plans for executive KMP from 2019 but remains in existence for senior employees below the executive KMP level. The EIP awards made to Sam Harrison prior to his appointment as executive KMP include cash-settled share based payment awards which are subject to the same vesting conditions as the equivalent conditional rights described above. The benefit received at vesting is indexed to the movement in the A$ value of QBE’s shares including dividends declared in the period between grant and vest dates. Special long-term incentive awards The LTI award made to Richard Pryce in early 2020 includes performance criteria aligned to specific deliverables as he transitioned to retirement. Other than the tailored performance criteria, the terms and conditions of the award are consistent with other executive KMP. The LTI award made to Richard Pryce in October 2020, at the time of his appointment as Interim Group CEO, is subject to two performance conditions measured by the Board over the period he held this role. The performance measures were set with a focus on the delivery of a number of important priorities. These include a blend of individual and strategic measures to both reward for the stability provided as Interim Group CEO through 2021, setting QBE up for future success, and the creation of alignment with shareholder interests, structured as follows: • individual component (40%) – the Board will apply its discretion to determine outcomes against this component having considered achievement of agreed deliverables relating to executive team transition and development, building talent succession and depth, and effective engagement with regulators and shareholders; and • strategic component (60%) – this component will be measured against the delivery of a number of objectives including Customer@QBE, reinsurance strategy, IT modernisation strategy and cultural change. Subject to performance against the above, consideration of appropriate financial outcomes, risk behaviours during the vesting period and malus provisions, the conditional rights will vest in three tranches in Q1 2024 (33%), 2025 (33%) and 2026 (34%). Remuneration philosophy Non-executive director remuneration reflects QBE’s desire to attract, motivate and retain experienced independent directors and to ensure their active participation in the Group’s affairs for the purpose of corporate governance, regulatory compliance and other matters. QBE aims to provide a level of remuneration for non-executive directors comparable with that of its peers, which include multi-national financial institutions. The Board reviews surveys published by independent remuneration consultants and other public information to ensure that fee levels are appropriate. The remuneration arrangements of non-executive directors are distinct and separate from those of the executive KMP. Fee structure and components The aggregate amount approved by shareholders at the 2017 AGM was A$4,000,000 per annum. The total amount paid to non-executive directors in 2021 was A$3,398,414 (2020 A$3,237,700). Under the current fee framework, non-executive directors receive a base fee expressed in Australian dollars. In addition, a non-executive director (other than the Chair) may receive further fees for chairing or membership of a board committee. No changes were made to non-executive director remuneration during 2021. The non-executive director fee structure in place since 2017 is shown in the table below: ROLE Board Committee Other benefits CHAIR FEE A$663,000 A$50,000 DEPUTY CHAIR FEE A$229,000 – MEMBER FEE A$208,000 A$27,000 Non-executive directors do not receive any performance-based remuneration such as cash incentives or equity awards. Under QBE’s Constitution, non-executive directors are entitled to be reimbursed for all travel and related expenses properly incurred in connection with the business of QBE. All non-executive directors are eligible to receive an annual cash travel allowance of A$42,750 (A$64,000 for the Chair), in addition to fees for the time involved in travelling to Board meetings and other Board commitments. Due to the impacts of COVID-19, the travel allowance was temporarily ceased in 2021 for non-executive directors. Superannuation QBE pays superannuation to Australian-based non-executive directors in accordance with Australian superannuation guarantee (SG) legislation. Overseas-based non-executive directors receive the cash equivalent amount in addition to their fees. From 1 July 2021, the SG contribution increased by 0.5% to 10.0%. This change is reflected in table 5.2. Since 1 January 2020, Australian-based directors may elect to opt out of superannuation contributions as long as they are still receiving contributions from at least one employer. In such cases, a superannuation allowance will be paid in lieu of actual contributions. Minimum shareholding requirement With effect from 1 April 2014, a non-executive director MSR was introduced for the Board. Under this requirement, non-executive directors have five years to build a minimum shareholding equal to 100% of annual base fees. To assist current and new non-executive directors in meeting the requirement, a Director Share Acquisition Plan (DSAP) was established with effect from 1 June 2014. The DSAP allows non-executive directors to sacrifice a portion of their director pre-tax fees to acquire QBE shares. Where the MSR has not been met, non-executive directors are required to sacrifice a mandatory minimum amount of 20% of pre-tax fees into the DSAP until the MSR is achieved. Shares acquired in this way are not subject to performance targets, as they are acquired in place of cash payments. Directors’ shareholdings are shown overleaf. All non-executive directors have met the MSR as at 31 December 2021, or are within the five-year period to achieve the MSR. 77 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 78 Remuneration Report continued 5. NON-EXECUTIVE DIRECTOR REMUNERATION 5.1 Non-executive director shareholdings The table below details movements during the year in the number of ordinary shares in QBE held by the non-executive directors, all of whom were in role for the full year, including their personally-related parties: 2021 Michael Wilkins Stephen Fitzgerald John M Green Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle INTEREST IN SHARES AT 1 JANUARY 2021 NUMBER CHANGES DURING THE YEAR NUMBER INTEREST IN SHARES AT 31 DECEMBER 2021 NUMBER 63,172 65,286 41,253 783 40,442 33,757 63,995 783 63,336 9,086 3,982 – 3,344 3,637 3,688 6,005 3,344 4,282 72,258 69,268 41,253 4,127 44,079 37,445 70,000 4,127 67,618 5.2 Remuneration details for non-executive directors The table below details the nature and amount of each component of the remuneration of QBE’s current non-executive directors. Remuneration has been converted to US dollars using the average rate of exchange for the relevant year. SHORT-TERM EMPLOYMENT BENEFITS POST-EMPLOYMENT BENEFITS NON-EXECUTIVE DIRECTOR Michael Wilkins Stephen Fitzgerald John M Green Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Total YEAR 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 3 FEES 1 US$000 498 422 257 253 290 263 216 66 235 223 238 226 234 222 216 66 257 243 2,441 1,984 OTHER US$000 SUPERANNUATION – SG 2 US$000 SUPERANNUATION – OTHER 2 US$000 – – – – – – 1 2 3 4 3 4 – – 1 1 3 4 11 15 17 15 – – – – – – – – – – 4 4 – – – – 21 19 32 25 – – 28 25 – – – – – – 18 17 – – – – 78 67 TOTAL US$000 547 462 257 253 318 288 217 68 238 227 241 230 256 243 217 67 260 247 2,551 2,085 1 Travel allowances, additional fees in lieu of superannuation in Australia and amounts sacrificed in relation to the DSAP are included in directors’ fees. • Stephen Fitzgerald, Tan Le, Kathryn Lisson, Sir Brian Pomeroy, Eric Smith and Rolf Tolle received additional fees of 9.5% in lieu of superannuation in Australia from 1 January 2021 to 30 June 2021, and 10.0% from 1 July 2021 to 31 December 2021. • Michael Wilkins, Stephen Fitzgerald, Tan Le, Kathryn Lisson, Sir Brian Pomeroy, Eric Smith and Rolf Tolle all participated in the DSAP. 2 Michael Wilkins, John M Green and Jann Skinner are Australian residents. Superannuation is calculated as 9.5% of fees, up to 30 June 2021 and increased by 0.5% to 10.0% through to 31 December 2021. Superannuation in excess of the statutory minimum may be taken as additional cash fees or in the form of superannuation contributions at the option of the director. During all or part year during 2021, John M Green and Jann Skinner elected to opt out of superannuation contributions and a superannuation allowance was paid in lieu of superannuation contributions. 3 The 2020 totals above are not the same as those disclosed in the 2020 Remuneration Report because of changes in non-executive directors. Directors' Report FOR THE YEAR ENDED 31 DECEMBER 2021 Auditor PricewaterhouseCoopers, Chartered Accountants, continues in office in accordance with section 327B of the Corporations Act 2001. Non-audit services During the year, PricewaterhouseCoopers performed certain other services in addition to statutory duties. The Board, on the advice of the Audit Committee, has considered the position and is satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are also satisfied that the provision of non-audit services by the auditor, as set out in note 8.8 to the financial statements, did not compromise the auditor independence requirements of the Corporations Act 2001. A copy of the auditor’s independence declaration required under section 307C of the Corporations Act 2001 is set out on page 80. Details of amounts paid or payable to PricewaterhouseCoopers for audit and non-audit services are provided in note 8.8 to the financial statements. Rounding of amounts The Company is of a kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. Amounts have been rounded off in the Directors’ Report to the nearest million dollars or, in certain cases, to the nearest thousand dollars in accordance with that instrument. Signed in SYDNEY this 18th day of February 2022 in accordance with a resolution of the directors. 5.2 Remuneration details for non-executive directors The table below details the nature and amount of each component of the remuneration of QBE’s current non-executive directors. Remuneration has been converted to US dollars using the average rate of exchange for the relevant year. SHORT-TERM EMPLOYMENT BENEFITS POST-EMPLOYMENT BENEFITS FEES 1 US$000 SUPERANNUATION SUPERANNUATION OTHER US$000 – SG 2 US$000 – OTHER 2 US$000 TOTAL US$000 Michael Wilkins AO Director Andrew Horton Director 78 Remuneration Report continued 5. NON-EXECUTIVE DIRECTOR REMUNERATION 5.1 Non-executive director shareholdings The table below details movements during the year in the number of ordinary shares in QBE held by the non-executive directors, all of whom were in role for the full year, including their personally-related parties: INTEREST IN SHARES AT 1 JANUARY 2021 NUMBER CHANGES DURING INTEREST IN SHARES AT THE YEAR NUMBER 31 DECEMBER 2021 NUMBER 63,172 65,286 41,253 783 40,442 33,757 63,995 783 63,336 9,086 3,982 – 3,344 3,637 3,688 6,005 3,344 4,282 72,258 69,268 41,253 4,127 44,079 37,445 70,000 4,127 67,618 YEAR 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 3 498 422 257 253 290 263 216 66 235 223 238 226 234 222 216 66 257 243 2,441 1,984 – – – – – – 1 2 3 4 3 4 1 1 3 4 – – 11 15 17 15 – – – – – – – – – – 4 4 – – – – 21 19 32 25 – – 28 25 – – – – – – 18 17 – – – – 78 67 547 462 257 253 318 288 217 68 238 227 241 230 256 243 217 67 260 247 2,551 2,085 1 Travel allowances, additional fees in lieu of superannuation in Australia and amounts sacrificed in relation to the DSAP are included • Stephen Fitzgerald, Tan Le, Kathryn Lisson, Sir Brian Pomeroy, Eric Smith and Rolf Tolle received additional fees of 9.5% in lieu of superannuation in Australia from 1 January 2021 to 30 June 2021, and 10.0% from 1 July 2021 to 31 December 2021. • Michael Wilkins, Stephen Fitzgerald, Tan Le, Kathryn Lisson, Sir Brian Pomeroy, Eric Smith and Rolf Tolle all participated in the DSAP. 2 Michael Wilkins, John M Green and Jann Skinner are Australian residents. Superannuation is calculated as 9.5% of fees, up to 30 June 2021 and increased by 0.5% to 10.0% through to 31 December 2021. Superannuation in excess of the statutory minimum may be taken as additional cash fees or in the form of superannuation contributions at the option of the director. During all or part year during 2021, John M Green and Jann Skinner elected to opt out of superannuation contributions and a superannuation allowance was paid in lieu of superannuation contributions. 3 The 2020 totals above are not the same as those disclosed in the 2020 Remuneration Report because of changes in non-executive directors. 2021 Michael Wilkins Stephen Fitzgerald John M Green Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle NON-EXECUTIVE DIRECTOR Michael Wilkins Stephen Fitzgerald John M Green Tan Le Kathryn Lisson Sir Brian Pomeroy Jann Skinner Eric Smith Rolf Tolle Total in directors’ fees. 79 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 80 Directors' Report continued FOR THE YEAR ENDED 31 DECEMBER 2021 Auditor’s independence declaration As lead auditor for the audit of QBE Insurance Group Limited for the year ended 31 December 2021, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of QBE Insurance Group Limited and the entities it controlled during the period. Voula Papageorgiou Partner, PricewaterhouseCoopers Sydney 18 February 2022 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, Sydney NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 80 Directors' Report continued FOR THE YEAR ENDED 31 DECEMBER 2021 Auditor’s independence declaration of my knowledge and belief, there have been: As lead auditor for the audit of QBE Insurance Group Limited for the year ended 31 December 2021, I declare that to the best (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of QBE Insurance Group Limited and the entities it controlled during the period. Voula Papageorgiou Partner, PricewaterhouseCoopers Sydney 18 February 2022 Financial Report contents FINANCIAL STATEMENTS Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows NOTES TO THE FINANCIAL STATEMENTS OVERVIEW 1. 1.1 About QBE 1.2 About this report 1.3 Segment information UNDERWRITING ACTIVITIES 2. 2.1 Revenue 2.2 Net claims expense 2.3 Net outstanding claims liability 2.4 Claims development – net undiscounted central estimate 2.5 Unearned premium and deferred insurance costs 2.6 Trade and other receivables 2.7 Trade and other payables INVESTMENT ACTIVITIES Investment income 3. 3.1 3.2 Investment assets RISK MANAGEMENT 4. 4.1 Strategic risk 4.2 Insurance risk 4.3 Credit risk 4.4 Market risk 4.5 Liquidity risk 4.6 Operational risk 4.7 Compliance risk 4.8 Group risk 5. CAPITAL STRUCTURE 5.1 Borrowings 5.2 Cash and cash equivalents 5.3 Contributed equity and reserves 5.4 Dividends 5.5 Earnings per share 5.6 Derivatives TAX 6. 6.1 Reconciliation of prima facie tax to income tax expense or credit 6.2 Deferred income tax GROUP STRUCTURE Intangible assets 7. 7.1 7.2 Controlled entities OTHER 8. 8.1 Other accounting policies 8.2 Contingent liabilities 8.3 Offsetting financial assets and liabilities 8.4 Reconciliation of profit or loss after income tax to net cash flows from operating activities PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, Sydney NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 8.5 Share‑based payments 8.6 Key management personnel 8.7 Defined benefit plans 8.8 Remuneration of auditors 8.9 Ultimate parent entity information DIRECTORS' DECLARATION INDEPENDENT AUDITOR’S REPORT This Annual Report includes the consolidated financial statements for QBE Insurance Group Limited (the ultimate parent entity or the Company) and its controlled entities (QBE or the Group). All amounts in this Financial Report are presented in US dollars unless otherwise stated. QBE Insurance Group Limited is a company limited by its shares and incorporated and domiciled in Australia. Its registered office is located at: Level 18, 388 George Street Sydney NSW 2000 Australia. A description of the nature of the Group’s operations and its principal activities is included on pages 4 to 27, none of which is part of this Financial Report. The Financial Report was authorised for issue by the directors on 18 February 2022. The directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely, complete and available globally at minimum cost to the Company. All material press releases, this Financial Report and other information are available at our QBE investor centre at our website: www.qbe.com. 82 83 84 85 86 86 87 90 92 92 93 93 99 101 104 105 106 106 107 110 111 112 114 116 120 121 122 122 123 123 125 126 128 129 130 133 133 134 137 137 141 144 144 146 147 147 148 150 151 152 153 154 155 81 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 82 Consolidated statement of comprehensive income FOR THE YEAR ENDED 31 DECEMBER 2021 Gross written premium Unearned premium movement Gross earned premium revenue Outward reinsurance premium Deferred reinsurance premium movement Outward reinsurance premium expense Net earned premium (a) Gross claims expense Reinsurance and other recoveries revenue Net claims expense (b) Gross commission expense Reinsurance commission revenue Net commission (c) Underwriting and other expenses (d) Underwriting result (a)+(b)+(c)+(d) Investment income – policyholders’ funds Investment expenses – policyholders’ funds Insurance profit (loss) Investment income – shareholders’ funds Investment expenses – shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles Profit (loss) before income tax Income tax expense Profit (loss) after income tax Other comprehensive income Items that may be reclassified to profit or loss Net movement in foreign currency translation reserve Net movement in cash flow hedge and cost of hedging reserves Income tax relating to these components of other comprehensive income Items that will not be reclassified to profit or loss Remeasurement of defined benefit plans Income tax relating to this component of other comprehensive income Other comprehensive (loss) income after income tax Total comprehensive income (loss) after income tax Profit (loss) after income tax attributable to: Ordinary equity holders of the Company Non-controlling interests Total comprehensive income (loss) after income tax attributable to: Ordinary equity holders of the Company Non-controlling interests NOTE 2.1 2.2 2.2 2.2 2.1 3.1 3.1 3.1 3.1 5.1.2 7.1 6.1 5.3.2 5.3.2 2021 US$M 18,457 (1,422) 17,035 (3,983) 356 (3,627) 13,408 (11,464) 3,093 (8,371) (2,704) 634 (2,070) (1,829) 1,138 94 (17) 1,215 53 (8) (247) – (7) (72) (21) 913 (156) 757 (272) 41 (13) 21 (7) (230) 527 750 7 757 520 7 527 2020 US$M 14,643 (635) 14,008 (2,462) 162 (2,300) 11,708 (12,300) 3,366 (8,934) (2,331) 440 (1,891) (1,752) (869) 153 (11) (727) 90 (6) (252) (2) (5) (104) (466) (1,472) (39) (1,511) 375 (24) 7 38 (10) 386 (1,125) (1,517) 6 (1,511) (1,131) 6 (1,125) EARNINGS (LOSS) PER SHARE FOR PROFIT (LOSS) AFTER INCOME TAX ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY For profit (loss) after income tax Basic earnings (loss) per share Diluted earnings (loss) per share NOTE 5.5 5.5 2021 US CENTS 2020 US CENTS 47.5 47.2 (108.5) (108.5) The consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 82 Consolidated statement of comprehensive income FOR THE YEAR ENDED 31 DECEMBER 2021 Consolidated balance sheet AS AT 31 DECEMBER 2021 Gross written premium Unearned premium movement Gross earned premium revenue Outward reinsurance premium Deferred reinsurance premium movement Outward reinsurance premium expense Net earned premium (a) Gross claims expense Reinsurance and other recoveries revenue Net claims expense (b) Gross commission expense Reinsurance commission revenue Net commission (c) Underwriting and other expenses (d) Underwriting result (a)+(b)+(c)+(d) Investment income – policyholders’ funds Investment expenses – policyholders’ funds Insurance profit (loss) Investment income – shareholders’ funds Investment expenses – shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles Profit (loss) before income tax Income tax expense Profit (loss) after income tax Other comprehensive income Items that may be reclassified to profit or loss Net movement in foreign currency translation reserve Net movement in cash flow hedge and cost of hedging reserves Income tax relating to these components of other comprehensive income Items that will not be reclassified to profit or loss Remeasurement of defined benefit plans Income tax relating to this component of other comprehensive income Other comprehensive (loss) income after income tax Total comprehensive income (loss) after income tax Profit (loss) after income tax attributable to: Ordinary equity holders of the Company Non-controlling interests Total comprehensive income (loss) after income tax attributable to: Ordinary equity holders of the Company Non-controlling interests NOTE 2.1 2.2 2.2 2.2 2.1 3.1 3.1 3.1 3.1 5.1.2 7.1 6.1 5.3.2 5.3.2 2021 US$M 18,457 (1,422) 17,035 (3,983) 356 (3,627) 13,408 (11,464) 3,093 (8,371) (2,704) 634 (2,070) (1,829) 1,138 94 (17) 1,215 53 (8) (247) – (7) (72) (21) 913 (156) 757 (272) 41 (13) 21 (7) (230) 527 750 7 757 520 7 527 2020 US$M 14,643 (635) 14,008 (2,462) 162 (2,300) 11,708 (12,300) 3,366 (8,934) (2,331) 440 (1,891) (1,752) (869) 153 (11) (727) 90 (6) (252) (2) (5) (104) (466) (1,472) (39) (1,511) 375 (24) 7 38 (10) 386 (1,125) (1,517) (1,511) (1,131) 6 6 (1,125) EARNINGS (LOSS) PER SHARE FOR PROFIT (LOSS) AFTER INCOME TAX ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY For profit (loss) after income tax Basic earnings (loss) per share Diluted earnings (loss) per share NOTE 5.5 5.5 2021 US CENTS 2020 US CENTS 47.5 47.2 (108.5) (108.5) The consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Assets Cash and cash equivalents Investments Derivative financial instruments Trade and other receivables Current tax assets Deferred insurance costs Reinsurance and other recoveries on outstanding claims Other assets Assets held for sale Defined benefit plan surpluses Right-of-use lease assets Property, plant and equipment Deferred tax assets Investment properties Investments in associates Intangible assets Total assets Liabilities Derivative financial instruments Trade and other payables Current tax liabilities Unearned premium Gross outstanding claims Lease liabilities Provisions Defined benefit plan deficits Deferred tax liabilities Borrowings Total liabilities Net assets Equity Contributed equity Treasury shares held in trust Reserves Retained profits Shareholders’ equity Non-controlling interests Total equity NOTE 5.2 3.2 5.6 2.6 2.5 2.3 3.2 8.7 6.2 7.1 5.6 2.7 2.5 2.3 8.7 6.2 5.1 5.3.1 5.3.2 2021 US$M 819 28,111 142 7,109 6 2,697 6,757 2 50 92 328 155 521 37 28 2,449 49,303 452 3,215 24 8,637 24,282 354 129 29 31 3,268 40,421 8,882 9,777 (2) (1,608) 714 8,881 1 8,882 2020 US$M 766 26,935 520 5,760 60 2,282 6,527 19 – 65 383 167 546 34 27 2,534 46,625 845 2,338 15 7,466 23,861 431 149 22 51 2,955 38,133 8,492 10,273 (1) (1,898) 117 8,491 1 8,492 The consolidated balance sheet should be read in conjunction with the accompanying notes. 83 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 84 Consolidated statement of changes in equity FOR THE YEAR ENDED 31 DECEMBER 2021 SHAREHOLDERS’ EQUITY CONTRIBUTED EQUITY US$M TREASURY SHARES HELD IN TRUST US$M At 1 January 2021 Profit after income tax Other comprehensive (loss) income Total comprehensive (loss) income Transactions with owners in their capacity as owners Shares issued under Employee Share and Option Plan and held in trust Share-based payment expense Shares vested and/or released Dividends paid on ordinary shares Dividend Reinvestment Plan and Bonus Share Plan Distributions on capital notes Foreign exchange At 31 December 2021 10,273 – – – 31 – – – 11 – (538) 9,777 (1) – – – (31) – 30 – – – – (2) RESERVES US$M (1,898) – (244) (244) – 32 (30) – – – 532 (1,608) RETAINED PROFITS US$M 117 750 14 764 – – – TOTAL US$M 8,491 750 (230) 520 – 32 – (118) (118) 1 (50) – 714 12 (50) (6) 8,881 SHAREHOLDERS’ EQUITY CONTRIBUTED EQUITY US$M TREASURY SHARES HELD IN TRUST US$M At 1 January 2020 Loss after income tax Other comprehensive income Total comprehensive income (loss) Transactions with owners in their capacity as owners Shares issued under Employee Share and Option Plan and held in trust Share-based payment expense Shares vested and/or released Contributions of equity, net of transaction costs Reclassification on disposal of controlled entities Dividends paid on ordinary shares Dividend Reinvestment Plan and Bonus Share Plan Distributions on capital notes Foreign exchange At 31 December 2020 7,594 – – – 26 – – 1,699 – – 27 – 927 10,273 (1) – – – (28) – 28 – – – – – – (1) RESERVES US$M (1,335) – 358 RETAINED PROFITS US$M 1,895 (1,517) 28 TOTAL US$M 8,153 (1,517) 386 358 (1,489) (1,131) – 20 (28) – 2 – – – (915) (1,898) – – – – (2) (2) 20 – 1,699 – (265) (265) 3 (25) – 117 30 (25) 12 8,491 NON- CONTROLLING INTERESTS US$M 1 7 – 7 – – – (7) – – – 1 NON- CONTROLLING INTERESTS US$M – 6 – 6 – – – – – (5) – – – 1 TOTAL EQUITY US$M 8,492 757 (230) 527 – 32 – (125) 12 (50) (6) 8,882 TOTAL EQUITY US$M 8,153 (1,511) 386 (1,125) (2) 20 – 1,699 – (270) 30 (25) 12 8,492 The consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 84 Consolidated statement of changes in equity FOR THE YEAR ENDED 31 DECEMBER 2021 SHAREHOLDERS’ EQUITY CONTRIBUTED SHARES HELD TREASURY IN TRUST US$M RESERVES US$M RETAINED PROFITS US$M NON- CONTROLLING INTERESTS US$M EQUITY US$M 10,273 At 1 January 2021 Profit after income tax Other comprehensive (loss) income income Total comprehensive (loss) Transactions with owners in their capacity as owners Shares issued under Employee Share and Option Plan and held in trust Share-based payment expense Shares vested and/or released Dividends paid on ordinary shares Dividend Reinvestment Plan and Bonus Share Plan Distributions on capital notes Foreign exchange At 31 December 2021 At 1 January 2020 Loss after income tax Other comprehensive income Total comprehensive income (loss) Transactions with owners in their capacity as owners Shares issued under Employee Share and Option Plan and held in trust Share-based payment expense Shares vested and/or released Contributions of equity, net of transaction costs Reclassification on disposal of controlled entities Dividends paid on ordinary shares Dividend Reinvestment Plan and Bonus Share Plan Distributions on capital notes Foreign exchange At 31 December 2020 (538) 9,777 – – – 31 – – – 11 – – – – 26 – – – – 1,699 27 – 927 10,273 (1) – – – (31) – 30 – – – – (2) (1) – – – (28) – 28 – – – – – – (1) (1,898) – (244) (244) – 32 (30) – – – 532 (1,608) (1,335) – 358 358 – 20 (28) – 2 – – – (915) (1,898) (118) (118) TOTAL US$M 8,491 750 (230) 520 – 32 – 12 (50) (6) 8,881 TOTAL US$M 8,153 (1,517) 386 (2) 20 – 1,699 – 30 (25) 12 8,491 117 750 14 764 – – – (50) 1 – 714 – – – – (2) (25) 3 – 117 SHAREHOLDERS’ EQUITY CONTRIBUTED SHARES HELD TREASURY IN TRUST US$M RESERVES US$M EQUITY US$M 7,594 NON- CONTROLLING INTERESTS US$M RETAINED PROFITS US$M 1,895 (1,517) 28 (1,489) (1,131) TOTAL EQUITY US$M 8,492 757 (230) 527 – 32 – (125) 12 (50) (6) 8,882 TOTAL EQUITY US$M 8,153 (1,511) 386 (1,125) (2) 20 – 1,699 – 30 (25) 12 8,492 1 7 – 7 (7) – – – – – – 1 – 6 – 6 – – – – – – – – 1 (265) (265) (5) (270) The consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Consolidated statement of cash flows FOR THE YEAR ENDED 31 DECEMBER 2021 Operating activities Premium received Reinsurance and other recoveries received Outward reinsurance premium paid Claims paid Acquisition and other underwriting costs paid Interest received Dividends received Other operating payments Interest paid Income taxes paid Net cash flows from operating activities Investing activities Net proceeds on sale of growth assets Net payments for purchase of interest-bearing financial assets Net (payments for) proceeds from foreign exchange transactions Payments for purchase of intangible assets Payments for purchase of property, plant and equipment Payments for investments in associates Proceeds on disposal of entities and businesses (net of cash disposed) Proceeds on sale of investment property Net cash flows from investing activities Financing activities Net proceeds from issue of equity instruments Proceeds from settlement of staff share loans Payments relating to principal element of lease liabilities Proceeds from borrowings Repayments of borrowings Dividends and distributions paid Net cash flows from financing activities Net movement in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes Cash and cash equivalents at the end of the year NOTE 8.4 5.2 2021 US$M 17,020 2,538 (2,616) (10,056) (4,116) 406 124 (220) (238) (88) 2,754 156 (2,782) (20) (91) (29) (9) – 4 (2,771) – – (85) 550 (202) (162) 101 84 766 (31) 819 2020 US$M 14,471 2,080 (2,054) (9,429) (3,793) 426 77 (174) (257) (113) 1,234 42 (2,387) 277 (71) (40) – 17 – (2,162) 1,300 1 (61) 358 (140) (265) 1,193 265 547 (46) 766 The consolidated statement of cash flows should be read in conjunction with the accompanying notes. 85 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 86 Notes to the financial statements FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.1 About QBE About QBE Insurance Group QBE is one of the world’s largest insurance and reinsurance companies, with operations in all the major insurance markets. Formed in Australia in 1886, QBE employs more than 11,000 people and carries on insurance activities in 27 countries, with operations in Australia, Europe, North America, Asia and the Pacific. QBE’s captive reinsurer, Equator Re, provides reinsurance protection to our divisions in conjunction with the Group’s external reinsurance programs. The Company is listed on the Australian Securities Exchange and is a for-profit entity. About insurance In simple terms, insurance and reinsurance companies help their customers (consumers, businesses and other insurance companies) to manage risk. More broadly put, an insurance company creates value by pooling and redistributing risk. This is done by collecting premium from those that it insures (i.e. policyholders), and then paying the claims of the few that call upon their insurance protection. A company may also choose to reduce some of its own accumulated risk through the use of outward reinsurance, which is insurance for insurance companies. As not all policyholders will actually experience a claims event, the effective pooling and redistribution of risk lowers the total cost of risk management, thereby making insurance protection more cost effective for all. The operating model of insurance companies relies on profits being generated by: • appropriately pricing risk and charging adequate premium to cover the expected payouts that will be incurred over the life of the insurance policy (both claims and operating expenses); and • earning a return on the collected premium and funds withheld to pay future claims through the adoption of an appropriate investment strategy. Insurance therefore serves a critical function of providing customers with the confidence to achieve their business and personal goals through cost-effective risk management. This is achieved within a highly regulated environment, designed to ensure that insurance companies maintain adequate capital to protect the interests of policyholders. The diagram below presents a simplified overview of the key components of this Financial Report: ss kk MM aa nn aa gg eemmeenntt FFrraammeewwoorrkk NNoottee 44 s k m a n a gement framework Note 4 R i RR ii Debt and equity investors Note 2 Underwriting activities D e b t a n d e q u i t y i i D v d e n d s a n d i n t e r e s t Note 5 Capital structure Policyholders Premium Claims Reinsurers Reinsurance premium Reinsurance recoveries Note 6 to 8 Other costs of doing business Note 1 T a x e s O t h e r c o s t s Investments Dividends and interest Growth assets and fixed interest securities Note 3 Investment activities Tax authorities, service providers, employees, etc. RRiisskk MMaannaaggeemmeenntt FFrraa mm ee ww oo rr kk NN oo tt Risk management fra m e w o r k N o t ee 44 e 4 86 87 Notes to the financial statements FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.1 About QBE About QBE Insurance Group QBE is one of the world’s largest insurance and reinsurance companies, with operations in all the major insurance markets. Formed in Australia in 1886, QBE employs more than 11,000 people and carries on insurance activities in 27 countries, with operations in Australia, Europe, North America, Asia and the Pacific. QBE’s captive reinsurer, Equator Re, provides reinsurance protection to our divisions in conjunction with the Group’s external reinsurance programs. The Company is listed on the Australian Securities Exchange and is a for-profit entity. About insurance In simple terms, insurance and reinsurance companies help their customers (consumers, businesses and other insurance companies) to manage risk. More broadly put, an insurance company creates value by pooling and redistributing risk. This is done by collecting premium from those that it insures (i.e. policyholders), and then paying the claims of the few that call upon their insurance protection. A company may also choose to reduce some of its own accumulated risk through the use of outward reinsurance, which is insurance for insurance companies. As not all policyholders will actually experience a claims event, the effective pooling and redistribution of risk lowers the total cost of risk management, thereby making insurance protection more cost effective for all. The operating model of insurance companies relies on profits being generated by: • appropriately pricing risk and charging adequate premium to cover the expected payouts that will be incurred over the life of the insurance policy (both claims and operating expenses); and • earning a return on the collected premium and funds withheld to pay future claims through the adoption of an appropriate investment strategy. Insurance therefore serves a critical function of providing customers with the confidence to achieve their business and personal goals through cost-effective risk management. This is achieved within a highly regulated environment, designed to ensure that insurance companies maintain adequate capital to protect the interests of policyholders. The diagram below presents a simplified overview of the key components of this Financial Report: s k m a n a gement framework Note 4 ss kk MM aa nn aa gg eemmeenntt FFrraammeewwoorrkk NNoottee 44 R i RR ii Debt and equity investors Note 2 Underwriting activities Note 5 Capital structure D e b t a n d e q u i t y D i v i d e n d s a n d i n t e r e s t Note 1 T a x e s O t h e r c o s t s Policyholders Premium Claims Reinsurers Reinsurance premium Reinsurance recoveries Investments Dividends and interest Growth assets and fixed interest securities Note 6 to 8 Other costs of doing business Note 3 Investment activities Tax authorities, service providers, employees, etc. RRiisskk MMaannaaggeemmeenntt FFrraa mm ee ww oo rr kk NN oo tt Risk management fra m e w o r k N o t ee 44 e 4 1.2 About this report This Financial Report includes the consolidated financial statements of QBE Insurance Group Limited (the ultimate parent entity or the Company) and its controlled entities (QBE or the Group). The Financial Report includes the four primary statements, namely the statement of comprehensive income (which comprises profit or loss and other comprehensive income or loss), balance sheet, statement of changes in equity and statement of cash flows as well as associated notes as required by Australian Accounting Standards. Disclosures have been grouped into the following categories in order to assist users in their understanding of the financial statements: 1. Overview contains information that impacts the Financial Report as a whole as well as segment reporting disclosures. 2. Underwriting activities brings together results and balance sheet disclosures relevant to the Group’s insurance activities. 3. Investment activities includes results and balance sheet disclosures relevant to the Group’s investments. 4. Risk management provides commentary on the Group’s exposure to various financial and capital risks, explaining the potential impact on the results and balance sheet and how the Group manages these risks. 5. Capital structure provides information about the debt and equity components of the Group’s capital. 6. Tax includes disclosures relating to the Group’s tax expense and balances. 7. Group structure provides a summary of the Group’s controlled entities and includes disclosures in relation to transactions impacting the Group structure. 8. Other includes additional disclosures required to comply with Australian Accounting Standards. Where applicable within each note, disclosures are further analysed as follows: • Overview provides some context to assist users in understanding the disclosures. • Disclosures (both numbers and commentary) provide analysis of balances as required by Australian Accounting Standards. • How we account for the numbers summarises the accounting policies relevant to an understanding of the numbers. • Critical accounting judgements and estimates explains the key estimates and judgements applied by QBE in determining the numbers. The notes include information which the directors believe is required to understand the financial statements and is material and relevant to the operations, balance sheet and results of the Group. Information is considered material and relevant if: • the amount in question is significant because of its size or nature; • it is important to assist in understanding the results of the Group; • it helps to explain the impact of significant changes in the Group’s business – for example, significant acquisitions or disposals; or • it relates to an aspect of the Group’s operations that is important to its future performance. Basis of preparation 1.2.1 This Financial Report is a general purpose financial report which: • has been prepared in accordance with Australian Accounting Standards and the Corporations Act 2001; • complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Interpretations as issued by the IFRS Interpretations Committee (IFRIC); • has been prepared on a historical cost basis as modified by certain exceptions, the most significant of which are the measurement of investments and derivatives at fair value and the measurement of the net outstanding claims liability at present value; • is presented in US dollars; and • is presented with values rounded to the nearest million dollars or, in certain cases, to the nearest thousand dollars in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. New and amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are now effective are detailed in note 8.1.1. The Group has not adopted any Accounting Standards and Interpretations that have been issued or amended but are not yet effective as listed in note 8.1.2. The consolidated financial statements incorporate the assets and liabilities of all entities controlled by the Company as at 31 December 2021 and the results for the financial year then ended. In preparing the consolidated financial statements, all transactions between controlled entities are eliminated in full. Where control of an entity commences or ceases during a financial year, the results are included for that part of the year during which control existed. A list of entities controlled by the Company at the balance date is contained in note 7.2. Lloyd’s syndicates are accounted for on a proportional basis. The nature of Lloyd’s syndicates is such that, even when one party provides the majority of capital, the syndicate as a whole is not controlled for accounting purposes. Where necessary, comparative information has been restated to conform to the current year’s disclosures. A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 88 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.2.2 Critical accounting judgements and estimates The preparation of the Group’s consolidated financial statements requires management to make judgements and estimates that affect reported amounts. The diversity and complexity of the Group are evidenced by its international operations and the broad product range as shown in the class of business analysis in note 4.2. In view of its geographic and product diversity, the Group has developed a centralised risk management and policy framework designed to ensure consistency of approach across a number of operational activities, subject to the specific requirements of local markets, legislation and regulation. Such operational activities include underwriting, claims management, actuarial assessment of the outstanding claims liability and investment management. Given the centralised approach to many activities and the diversity of products and geographies, sensitivity analyses in respect of critical accounting estimates and judgements are presented at the consolidated Group level in order to provide information and analysis which is meaningful, relevant, reliable and comparable year-on-year. Sensitivity disclosure at business segment or product level would not provide a meaningful overview given the complex interrelationships between the variables underpinning the Group’s operations. The key areas in which critical estimates and judgements are applied are as follows: • net outstanding claims liability (note 2.3); • liability adequacy test (note 2.5.1); • recoverability of deferred tax assets (note 6.2.1); and • impairment testing of intangible assets (note 7.1.1). The impacts of COVID-19 on these areas are discussed in note 1.2.3 and in individual notes where appropriate. 1.2.3 COVID-19 COVID-19 was declared a pandemic by the World Health Organisation in March 2020. The virus itself, as well as measures to slow its spread, have had a profound impact on the global economy. QBE has considered a broad range of factors in assessing the impact of the resulting uncertainty on the consolidated financial statements. While the areas of critical accounting judgements and estimates did not change, the impact of COVID-19 resulted in the application of further judgement within those identified areas. Given the continued uncertainty related to the potential impact of COVID-19, there may be changes in market conditions in the future and the impact of these changes will be accounted for in future reporting periods as they arise and/or can be reasonably predicted. Areas which were most impacted by COVID-19 at the balance date were as follows: • Net discounted central estimate (note 2.3): QBE’s result and balance sheet were materially impacted by the estimated cost of COVID-19-related claims in 2020. The projected net ultimate cost of COVID-19-related claims is based on detailed reviews of the Group’s emerging claims experience and exposure, scenario analysis under a variety of macroeconomic and legislative outcomes, and consideration of the Group’s reinsurance protections. There has been no material change to the projected ultimate cost of COVID-19-related claims, noting a release of claims incurred in 2020 has been offset by claims incurred in 2021. Although the overall cost of COVID-19-related claims is relatively unchanged, the uncertainty in relation to ultimate outcomes is, in our view, somewhat reduced compared with the prior reporting period. The release relating to COVID-19-related claims incurred in 2020, which is supported by emerging claims experience, is consistent with this view. The potential impact of ongoing litigation relating to the Group’s property business interruption exposure (refer to note 8.2), including the second industry test case in Australia concerning the interpretation and application of exclusion clauses in relation to COVID-19, has been considered in the determination of the net discounted central estimate and risk margin (see below). While the initial judgement from the second Australian business interruption test case was favourable to insurers, it is currently subject to appeal. The ultimate cost of claims therefore remains uncertain pending the outcome of the appeal. QBE will continue to monitor emerging claims experience, legislative outcomes and wider market developments to ensure that the net discounted central estimate is reflective of the Group’s best estimate of expected future claims. • Risk margin (note 2.3.3): The Group aims to maintain a probability of adequacy in the range of 87.5% to 92.5% reflecting the level of uncertainty in the net discounted central estimate. In response to the heightened level of uncertainty related to the potential impact of COVID-19 on claims outcomes, QBE increased the risk margin at 31 December 2020 to achieve a probability of adequacy of 92.5%, at the upper end of the Group’s target range. During the current period, the Group released $140 million of this risk margin reflecting the reduced uncertainty related to COVID-19, particularly with respect to business interruption claims across all regions where we have exposure, trade credit and LMI claims. The probability of adequacy at 31 December 2021 is 91.7%. • Liability adequacy test (note 2.5.1): This assessment is informed by the Group’s expectation of future net claims including a risk margin and is therefore subject to uncertainties similar to those discussed above. Future claims assumptions used in the liability adequacy test have been selected whilst giving consideration to, amongst other factors, the potential for ongoing impact from COVID-19, albeit that the future risk associated with COVID-19 is somewhat reduced compared with the prior reporting period. • Goodwill impairment testing (note 7.1.1): A detailed impairment test has been completed in respect of the carrying value of QBE’s cash-generating units, which included consideration of the impact of COVID-19 consistent with the process undertaken at 31 December 2020. The explicit risk premium adjustment which was included in the pre-tax discount rate at 31 December 2020 in response to COVID-19 uncertainty has been removed with the continuing, albeit reduced, uncertainty in relation to COVID-19 now implicitly reflected in the equity beta used to calculate the cost of equity. The impact of this change on the recoverable value of the cash-generating units was not material. 88 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.2.2 Critical accounting judgements and estimates The preparation of the Group’s consolidated financial statements requires management to make judgements and estimates that affect reported amounts. The diversity and complexity of the Group are evidenced by its international operations and the broad product range as shown in the class of business analysis in note 4.2. In view of its geographic and product diversity, the Group has developed a centralised risk management and policy framework designed to ensure consistency of approach across a number of operational activities, subject to the specific requirements of local markets, legislation and regulation. Such operational activities include underwriting, claims management, actuarial assessment of the outstanding claims liability and investment management. Given the centralised approach to many activities and the diversity of products and geographies, sensitivity analyses in respect of critical accounting estimates and judgements are presented at the consolidated Group level in order to provide information and analysis which is meaningful, relevant, reliable and comparable year-on-year. Sensitivity disclosure at business segment or product level would not provide a meaningful overview given the complex interrelationships between the variables underpinning the Group’s operations. The key areas in which critical estimates and judgements are applied are as follows: • net outstanding claims liability (note 2.3); • liability adequacy test (note 2.5.1); • recoverability of deferred tax assets (note 6.2.1); and • impairment testing of intangible assets (note 7.1.1). 1.2.3 COVID-19 The impacts of COVID-19 on these areas are discussed in note 1.2.3 and in individual notes where appropriate. COVID-19 was declared a pandemic by the World Health Organisation in March 2020. The virus itself, as well as measures to slow its spread, have had a profound impact on the global economy. QBE has considered a broad range of factors in assessing the impact of the resulting uncertainty on the consolidated financial statements. While the areas of critical accounting judgements and estimates did not change, the impact of COVID-19 resulted in the application of further judgement within those identified areas. Given the continued uncertainty related to the potential impact of COVID-19, there may be changes in market conditions in the future and the impact of these changes will be accounted for in future reporting periods as they arise and/or can be reasonably predicted. Areas which were most impacted by COVID-19 at the balance date were as follows: • Net discounted central estimate (note 2.3): QBE’s result and balance sheet were materially impacted by the estimated cost of COVID-19-related claims in 2020. The projected net ultimate cost of COVID-19-related claims is based on detailed reviews of the Group’s emerging claims experience and exposure, scenario analysis under a variety of macroeconomic and legislative outcomes, and consideration of the Group’s reinsurance protections. There has been no material change to the projected ultimate cost of COVID-19-related claims, noting a release of claims incurred in 2020 has been offset by claims incurred in 2021. Although the overall cost of COVID-19-related claims is relatively unchanged, the uncertainty in relation to ultimate outcomes is, in our view, somewhat reduced compared with the prior reporting period. The release relating to COVID-19-related claims incurred in 2020, which is supported by emerging claims experience, is consistent with this view. The potential impact of ongoing litigation relating to the Group’s property business interruption exposure (refer to note 8.2), including the second industry test case in Australia concerning the interpretation and application of exclusion clauses in relation to COVID-19, has been considered in the determination of the net discounted central estimate and risk margin (see below). While the initial judgement from the second Australian business interruption test case was favourable to insurers, it is currently subject to appeal. The ultimate cost of claims therefore remains uncertain pending the outcome of the appeal. QBE will continue to monitor emerging claims experience, legislative outcomes and wider market developments to ensure that the net discounted central estimate is reflective of the Group’s best estimate of expected future claims. • Risk margin (note 2.3.3): The Group aims to maintain a probability of adequacy in the range of 87.5% to 92.5% reflecting the level of uncertainty in the net discounted central estimate. In response to the heightened level of uncertainty related to the potential impact of COVID-19 on claims outcomes, QBE increased the risk margin at 31 December 2020 to achieve a probability of adequacy of 92.5%, at the upper end of the Group’s target range. During the current period, the Group released $140 million of this risk margin reflecting the reduced uncertainty related to COVID-19, particularly with respect to business interruption claims across all regions where we have exposure, trade credit and LMI claims. The probability of adequacy at 31 December 2021 is 91.7%. • Liability adequacy test (note 2.5.1): This assessment is informed by the Group’s expectation of future net claims including a risk margin and is therefore subject to uncertainties similar to those discussed above. Future claims assumptions used in the liability adequacy test have been selected whilst giving consideration to, amongst other factors, the potential for ongoing impact from COVID-19, albeit that the future risk associated with COVID-19 is somewhat reduced compared with the prior reporting period. • Goodwill impairment testing (note 7.1.1): A detailed impairment test has been completed in respect of the carrying value of QBE’s cash-generating units, which included consideration of the impact of COVID-19 consistent with the process undertaken at 31 December 2020. The explicit risk premium adjustment which was included in the pre-tax discount rate at 31 December 2020 in response to COVID-19 uncertainty has been removed with the continuing, albeit reduced, uncertainty in relation to COVID-19 now implicitly reflected in the equity beta used to calculate the cost of equity. The impact of this change on the recoverable value of the cash-generating units was not material. • North American tax group deferred tax asset recoverability (note 6.2.1): QBE’s reassessment of the recoverability of this asset included consideration of the potential impacts of COVID-19. The recoverability assessment has been updated, consistent with the impairment testing completed for the North American cash-generating unit and other entities where relevant. The Group’s COVID-19 financial impact assessment was not limited to the areas identified above. All material components of the balance sheet were considered in detail, as was the effectiveness of QBE’s risk management framework in responding to both financial and non-financial risks, with no material issues identified. 1.2.4 Foreign currency Translation of foreign currency transactions and balances Transactions included in the financial statements of controlled entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into functional currencies at the spot rates of exchange applicable at the dates of the transactions. At the balance date, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date. Resulting exchange gains and losses are included in profit or loss. Translation of foreign operations The results and balance sheets of all foreign operations that have a functional currency different from the Group’s presentation currency of US dollars are translated into US dollars as follows: • income, expenses and other current period movements in comprehensive income are translated at average rates of exchange; and • balance sheet items are translated at the closing balance date rates of exchange. On consolidation, exchange differences arising from the translation of net investments in foreign operations are taken to shareholders’ equity and recognised in other comprehensive income. When a foreign operation is sold in whole or part and capital is repatriated, exchange differences on translation from the entity’s functional currency to the ultimate parent entity’s functional currency of Australian dollars are reclassified out of other comprehensive income and recognised in profit or loss as part of the gain or loss on sale. Hedging of foreign exchange risk The Group manages its foreign exchange exposures as part of its foreign currency risk management processes, further information on which is provided in note 4.4. 89 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s QBE uses borrowings to mitigate currency risk on translation of net investments in foreign operations to the ultimate parent entity’s functional currency of Australian dollars. QBE may elect to use derivatives to manage currency translation risk in order to preserve capital. ' QBE also uses derivatives to mitigate risk associated with foreign currency transactions and balances. The Group designates hedge relationships which meet the specified criteria in AASB 9 Financial Instruments as either cash flow hedges or hedges of net investments in foreign operations. Further information on the accounting for derivatives and for designated hedge relationships is provided in note 5.6. Exchange rates The principal exchange rates used in the preparation of the financial statements were: A$/US$ £/US$ €/US$ 2021 2020 PROFIT OR LOSS BALANCE SHEET PROFIT OR LOSS BALANCE SHEET 0.751 1.375 1.182 0.727 1.353 1.138 0.688 1.283 1.140 0.771 1.368 1.222 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 90 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.3 Segment information Overview Information is provided by operating segment to assist an understanding of the Group’s performance. The operating segments are consistent with the basis on which information is provided to the Group Executive Committee for measuring performance and determining the allocation of capital, being the basis upon which the Group’s underwriting products and services are managed within the various markets in which QBE operates. Operating segments The Group’s operating segments are as follows: • North America writes general insurance, reinsurance and Crop business in the United States. • International writes general insurance business in the United Kingdom, Europe and Canada. It also writes general insurance and reinsurance business through Lloyd’s; worldwide reinsurance business through offices in the United Kingdom, United States, Ireland, Bermuda, Dubai and mainland Europe; and provides personal and commercial insurance covers in Hong Kong, Singapore, Malaysia and Vietnam. • Australia Pacific primarily underwrites general insurance risks throughout Australia, New Zealand and the Pacific region, providing all major lines of insurance for personal and commercial risks. Corporate & Other includes non-operating holding companies that do not form part of the Group’s insurance operations; gains or losses on disposals; and financing costs and amortisation of any intangibles which are not allocated to a specific operating segment. It also includes consolidation adjustments and internal reinsurance eliminations. Intersegment transactions are priced on an arm’s length basis and are eliminated on consolidation. NORTH AMERICA US$M INTERNATIONAL US$M AUSTRALIA PACIFIC US$M TOTAL REPORTABLE SEGMENTS US$M CORPORATE & OTHER US$M 2021 Gross written premium Gross earned premium revenue – external Gross earned premium revenue – internal Outward reinsurance premium expense Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Investment income – policyholders’ funds Insurance (loss) profit Investment income – shareholders’ funds Financing and other costs Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles (Loss) profit before income tax Income tax credit (expense) (Loss) profit after income tax Net profit attributable to non-controlling interests Net (loss) profit after income tax attributable to ordinary equity holders of the Company 6,289 5,838 – (1,873) 3,965 (3,136) (512) (460) (143) 30 (113) 30 (1) – (18) – (102) 21 (81) – (81) 6,962 6,480 6 (947) 5,539 (3,118) (978) (724) 719 12 731 5 (2) – (8) – 726 (139) 587 5,215 4,730 1 (831) 3,900 (2,217) (581) (601) 501 22 523 10 (6) – (13) (5) 509 (149) 360 18,466 17,048 7 (3,651) 13,404 (8,471) (2,071) (1,785) 1,077 64 1,141 45 (9) – (39) (5) 1,133 (267) 866 – – – (9) (13) (7) 24 4 100 1 (44) 61 13 74 – (238) (7) (33) (16) (220) 111 (109) (7) TOTAL US$M 18,457 17,035 – (3,627) 13,408 (8,371) (2,070) (1,829) 1,138 77 1,215 45 (247) (7) (72) (21) 913 (156) 757 (7) 587 360 866 (116) 750 90 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 1. OVERVIEW 1.3 Segment information Overview Information is provided by operating segment to assist an understanding of the Group’s performance. The operating segments are consistent with the basis on which information is provided to the Group Executive Committee for measuring performance and determining the allocation of capital, being the basis upon which the Group’s underwriting products and services are managed within the various markets in which QBE operates. Operating segments The Group’s operating segments are as follows: • North America writes general insurance, reinsurance and Crop business in the United States. • International writes general insurance business in the United Kingdom, Europe and Canada. It also writes general insurance and reinsurance business through Lloyd’s; worldwide reinsurance business through offices in the United Kingdom, United States, Ireland, Bermuda, Dubai and mainland Europe; and provides personal and commercial insurance covers in Hong Kong, Singapore, Malaysia and Vietnam. • Australia Pacific primarily underwrites general insurance risks throughout Australia, New Zealand and the Pacific region, providing all major lines of insurance for personal and commercial risks. Corporate & Other includes non-operating holding companies that do not form part of the Group’s insurance operations; gains or losses on disposals; and financing costs and amortisation of any intangibles which are not allocated to a specific operating segment. It also includes consolidation adjustments and internal reinsurance eliminations. Intersegment transactions are priced on an arm’s length basis and are eliminated on consolidation. NORTH AMERICA INTERNATIONAL AUSTRALIA REPORTABLE CORPORATE PACIFIC US$M SEGMENTS US$M & OTHER US$M 2021 Gross written premium Gross earned premium revenue – external Gross earned premium revenue – internal Outward reinsurance premium expense Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Investment income – policyholders’ funds Insurance (loss) profit Investment income – shareholders’ funds Financing and other costs Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles (Loss) profit before income tax Income tax credit (expense) (Loss) profit after income tax Net profit attributable to non-controlling interests Net (loss) profit after income tax attributable to ordinary equity holders of the Company US$M 6,289 5,838 – (1,873) 3,965 (3,136) (512) (460) (143) 30 (113) 30 (1) – (18) – (102) 21 (81) – (81) US$M 6,962 6,480 6 (947) 5,539 (3,118) (978) (724) 719 12 731 5 (2) – (8) – 726 (139) 587 – 5,215 4,730 1 (831) 3,900 (2,217) (581) (601) 501 22 523 10 (6) – (13) (5) 509 (149) 360 – TOTAL 18,466 17,048 7 (3,651) 13,404 (8,471) (2,071) (1,785) 1,077 64 1,141 45 (9) – (39) (5) 1,133 (267) 866 – TOTAL US$M 18,457 17,035 – (3,627) 13,408 (8,371) (2,070) (1,829) 1,138 1,215 77 45 (247) (7) (72) (21) 913 (156) 757 (7) (9) (13) (7) 24 100 4 1 (44) 61 13 74 – (238) (7) (33) (16) (220) 111 (109) (7) 587 360 866 (116) 750 2020 Gross written premium Gross earned premium revenue – external Gross earned premium revenue – internal Outward reinsurance premium expense Net earned premium Net claims expense Net commission Underwriting and other expenses Underwriting result Investment income (loss) – policyholders’ funds Insurance (loss) profit Investment income – shareholders’ funds Financing and other costs Loss on sale of entities and businesses Share of net loss of associates Restructuring and related expenses Amortisation and impairment of intangibles (Loss) profit before income tax Income tax credit (expense) (Loss) profit after income tax Net profit attributable to non-controlling interests Net (loss) profit after income tax attributable to ordinary equity holders of the Company Geographical analysis NORTH AMERICA US$M INTERNATIONAL US$M AUSTRALIA PACIFIC US$M TOTAL REPORTABLE SEGMENTS US$M CORPORATE & OTHER US$M 4,744 4,519 1 (1,200) 3,320 (2,974) (480) (482) (616) 33 (583) 33 (2) – – (22) – (574) 121 (453) – (453) 5,845 5,513 18 (765) 4,766 (3,229) (874) (648) 15 91 106 27 (2) – – (8) (5) 118 (25) 93 – 93 4,079 3,984 1 (360) 3,625 (2,479) (534) (572) 40 31 71 7 (5) – – (37) (16) 20 (6) 14 – 14 14,668 14,016 20 (2,325) 11,711 (8,682) (1,888) (1,702) (561) 155 (406) 67 (9) – – (67) (21) (436) 90 (346) (25) (8) (20) 25 (3) (252) (3) (50) (308) (13) (321) 17 (243) (2) (5) (37) (445) (1,036) (129) (1,165) TOTAL US$M 14,643 14,008 – (2,300) 11,708 (8,934) (1,891) (1,752) (869) 142 (727) 84 (252) (2) (5) (104) (466) (1,472) (39) (1,511) – (6) (6) (346) (1,171) (1,517) 91 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s North America is defined by reference to its geographical location and, as such, satisfies the requirements of a geographical analysis as well as an operating segment analysis. ' Gross earned premium revenue – external for Australia, the ultimate parent entity’s country of domicile, was $4,254 million (2020 $3,573 million). No other country within International or Australia Pacific is individually material in this respect. Product analysis QBE does not collect Group-wide revenue information by product and the cost to develop this information would be excessive. Gross earned premium revenue by class of business is disclosed in note 4.2. 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 92 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES Overview This section provides analysis and commentary on the Group’s underwriting activities. Underwriting, in simple terms, is the agreement by the insurer to assume insurance risk in return for a premium paid by the insured. The underwriter assesses the quality of the risk and prices it accordingly. 2.1 Revenue Overview Revenue mainly comprises premiums charged for providing insurance coverage. Premiums are classified as: • direct, being those paid by the policyholder to the insurer; • facultative, being reinsurance of an individual (usually significant) risk by a ceding insurer or reinsurer; or • inward reinsurance, being coverage provided to an insurer or reinsurer in relation to a specified grouping of policies or risks. Other sources of revenue include amounts recovered from reinsurers under the terms of reinsurance contracts, commission income from reinsurers and salvage or third-party recoveries. Gross earned premium revenue Direct and facultative Inward reinsurance Other revenue Reinsurance and other recoveries revenue Reinsurance commission revenue NOTE 2.2 2021 US$M 15,493 1,542 17,035 3,093 634 20,762 2020 US$M 12,634 1,374 14,008 3,366 440 17,814 How we account for the numbers Premium revenue Premium written comprises amounts charged to policyholders, excluding taxes collected on behalf of third parties. Premium is recognised as revenue in profit or loss based on the incidence of the pattern of risk associated with the insurance policy. The earned portion of premium on unclosed business, being business that is written at the balance date but for which detailed policy information is not yet booked, is also included in premium revenue. Reinsurance and other recoveries Reinsurance and other recoveries on paid claims, reported claims not yet paid, claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER) are recognised as revenue. Recoveries are measured as the present value of the expected future receipts. 92 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.1 Revenue Overview Overview or risks. Revenue mainly comprises premiums charged for providing insurance coverage. Premiums are classified as: • direct, being those paid by the policyholder to the insurer; • facultative, being reinsurance of an individual (usually significant) risk by a ceding insurer or reinsurer; or • inward reinsurance, being coverage provided to an insurer or reinsurer in relation to a specified grouping of policies Other sources of revenue include amounts recovered from reinsurers under the terms of reinsurance contracts, commission income from reinsurers and salvage or third-party recoveries. Gross earned premium revenue Direct and facultative Inward reinsurance Other revenue Reinsurance and other recoveries revenue Reinsurance commission revenue NOTE 2.2 2021 US$M 15,493 1,542 17,035 3,093 634 20,762 2020 US$M 12,634 1,374 14,008 3,366 440 17,814 How we account for the numbers Premium revenue Premium written comprises amounts charged to policyholders, excluding taxes collected on behalf of third parties. Premium is recognised as revenue in profit or loss based on the incidence of the pattern of risk associated with the insurance policy. The earned portion of premium on unclosed business, being business that is written at the balance date but for which detailed policy information is not yet booked, is also included in premium revenue. Reinsurance and other recoveries Reinsurance and other recoveries on paid claims, reported claims not yet paid, claims incurred but not reported (IBNR) and claims incurred but not enough reported (IBNER) are recognised as revenue. Recoveries are measured as the present value of the expected future receipts. This section provides analysis and commentary on the Group’s underwriting activities. Underwriting, in simple terms, is the agreement by the insurer to assume insurance risk in return for a premium paid by the insured. The underwriter assesses the quality of the risk and prices it accordingly. The largest expense for an insurance company is net claims expense, which is the difference between the net outstanding claims liability (as described in note 2.3) at the beginning and the end of the financial year plus any claims payments made net of reinsurance and other recoveries received during the financial year. 2.2 Net claims expense Overview Gross claims expense Direct and facultative Inward reinsurance Reinsurance and other recoveries revenue Direct and facultative Inward reinsurance Net claims expense Analysed as follows: Movement in net discounted central estimate Movement in risk margin Net claims expense 2.3 Net outstanding claims liability NOTE 2.1 2.4.2 2.3.3 2021 US$M 10,321 1,143 11,464 2,851 242 3,093 8,371 8,453 (82) 8,371 2020 US$M 11,144 1,156 12,300 3,217 149 3,366 8,934 8,590 344 8,934 Overview The net outstanding claims liability comprises the elements described below: • the gross central estimate (note 2.3.1): This is the provision for expected future claims payments and includes claims reported but not yet paid, IBNR, IBNER and estimated claims handling costs; less • reinsurance and other recoveries on outstanding claims (note 2.3.2): Insurance companies may elect to purchase reinsurance cover to manage their exposure to any one claim or series of claims. When an insurance company incurs a claim as a result of an insured loss, it may be able to recover some of that claim from reinsurance. An insurer may also be entitled to non-reinsurance recoveries under the insurance contract such as salvage, subrogation and sharing arrangements with other insurers; less • an amount to reflect the discount to present value using risk‑free rates of return: The net central estimate is discounted to present value recognising that the claim and/or recovery may not be settled for some time. The weighted average risk-free rate for each operating segment and for the consolidated Group are summarised in note 2.3.4; plus • a risk margin (note 2.3.3): A risk margin is added to reflect the inherent uncertainty in the net discounted central estimate of outstanding claims. Gross discounted central estimate Risk margin Gross outstanding claims Reinsurance and other recoveries on outstanding claims Net outstanding claims NOTE 2.3.1 2.3.3 2.3.2 2021 US$M 22,864 1,418 24,282 (6,757) 17,525 2020 US$M 22,324 1,537 23,861 (6,527) 17,334 93 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 94 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES The table below analyses the movement in the net outstanding claims liability, showing separately the movement in the gross liability and the impact of reinsurance: At 1 January Claims expense – current accident year Claims expense – prior accident years Movement in risk margin Incurred claims recognised in profit or loss Claims payments Foreign exchange At 31 December NOTE 2.4.2 2.4.2 2.3.3 2.2 2021 GROSS REINSURANCE US$M US$M 23,861 12,172 (626) (82) 11,464 (10,361) (682) 24,282 (6,527) (3,359) 266 – (3,093) 2,742 121 (6,757) NET US$M 17,334 8,813 (360) (82) 8,371 (7,619) (561) 17,525 2020 GROSS REINSURANCE US$M US$M 19,915 10,947 1,009 344 12,300 (9,254) 900 23,861 (5,104) (3,099) (267) – (3,366) 2,079 (136) (6,527) 2.3.1 Gross discounted central estimate Gross undiscounted central estimate excluding claims settlement costs Claims settlement costs Gross undiscounted central estimate Discount to present value Gross discounted central estimate Payable within 12 months Payable in greater than 12 months Gross discounted central estimate NOTE 2.3 2.3 2021 US$M 23,129 500 23,629 (765) 22,864 8,339 14,525 22,864 NET US$M 14,811 7,848 742 344 8,934 (7,175) 764 17,334 2020 US$M 22,169 447 22,616 (292) 22,324 7,777 14,547 22,324 How we account for the numbers The gross discounted central estimate is the present value of the expected future payments for claims incurred and includes reported but unpaid claims, IBNR, IBNER and claims handling costs. The central estimate is determined by the Group Chief Actuary, supported by a team of actuaries in each of the Group’s divisions. The valuation process is performed quarterly and, on at least a semi-annual basis, includes extensive consultation with claims and underwriting staff as well as senior management. The central estimate of outstanding claims is also subject to annual comprehensive independent actuarial review. The risk management procedures related to the actuarial function are explained in note 4.2. 94 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES The table below analyses the movement in the net outstanding claims liability, showing separately the movement in the gross liability and the impact of reinsurance: At 1 January Claims expense – current accident year Claims expense – prior accident years Movement in risk margin Incurred claims recognised in profit or loss 2.2 NOTE 2.4.2 2.4.2 2.3.3 Claims payments Foreign exchange At 31 December 2021 2020 GROSS REINSURANCE GROSS REINSURANCE US$M 23,861 12,172 (626) (82) 11,464 (10,361) (682) 24,282 US$M (6,527) (3,359) 266 – (3,093) 2,742 121 (6,757) NET US$M 17,334 8,813 (360) (82) 8,371 (7,619) (561) 17,525 US$M 19,915 10,947 1,009 344 12,300 (9,254) 900 23,861 US$M (5,104) (3,099) (267) – (3,366) 2,079 (136) (6,527) 2.3.1 Gross discounted central estimate Gross undiscounted central estimate excluding claims settlement costs Claims settlement costs Gross undiscounted central estimate Discount to present value Gross discounted central estimate Payable within 12 months Payable in greater than 12 months Gross discounted central estimate NOTE 2.3 2.3 2021 US$M 23,129 500 23,629 (765) 22,864 8,339 14,525 22,864 NET US$M 14,811 7,848 742 344 8,934 (7,175) 764 17,334 2020 US$M 22,169 447 22,616 (292) 22,324 7,777 14,547 22,324 How we account for the numbers The gross discounted central estimate is the present value of the expected future payments for claims incurred and includes reported but unpaid claims, IBNR, IBNER and claims handling costs. The central estimate is determined by the Group Chief Actuary, supported by a team of actuaries in each of the Group’s divisions. The valuation process is performed quarterly and, on at least a semi-annual basis, includes extensive consultation with claims and underwriting staff as well as senior management. The central estimate of outstanding claims is also subject to annual comprehensive independent actuarial review. The risk management procedures related to the actuarial function are explained in note 4.2. Critical accounting judgements and estimates The determination of the amounts that the Group will ultimately pay for claims arising under insurance and inward reinsurance contracts involves a number of critical assumptions. Some of the uncertainties impacting these assumptions are as follows: • changes in patterns of claims incidence, reporting and payment; • volatility in the estimation of future costs for long-tail insurance classes due to the longer period of time that can elapse before a claim is paid in full; • existence of complex underlying exposures; • incidence of catastrophic events close to the balance date; • changes in the legal environment, including the interpretation of liability laws and the quantum of damages; • changing social, political and economic trends, for example price and wage inflation; and • impacts of COVID-19 as described in note 1.2.3. 95 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w The estimation of IBNR and IBNER is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims that have been reported to the Group but are not yet paid, for which more information about the claims is generally available. The notification and settlement of claims relating to liability and other long-tail classes of business may not happen for many years after the event giving rise to the claim. As a consequence, liability and other long-tail classes typically display greater variability between initial estimates and final settlement due to delays in reporting claims and uncertainty in respect of court awards and future claims inflation. Claims in respect of property and other short-tail classes are typically reported and settled soon after the claim event, giving rise to more certainty. 3 G o v e r n a n c e Central estimates for each class of business are determined using a variety of estimation techniques, generally based on an analysis of historical experience and with reference to external benchmarks where relevant. The gross central estimate is discounted to present value using appropriate risk-free rates. Central estimates are calculated gross of any reinsurance and other recoveries. A separate estimate is made of the amounts recoverable based on the gross central estimate (refer to note 2.3.2). 4 R e p o r t D i r e c t o r s 2.3.2 Reinsurance and other recoveries on outstanding claims ' Reinsurance and other recoveries on outstanding claims – undiscounted1 Discount to present value Reinsurance and other recoveries on outstanding claims Receivable within 12 months Receivable in greater than 12 months Reinsurance and other recoveries on outstanding claims 1 Net of a provision for impairment of $32 million (2020 $21 million). How we account for the numbers NOTE 2.3 2.3 2021 US$M 7,014 (257) 6,757 2,758 3,999 6,757 2020 US$M 6,623 (96) 6,527 2,715 3,812 6,527 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i The recoverability of amounts due from reinsurers is assessed at each balance date to ensure that the balances properly reflect the amounts ultimately expected to be received, taking into account counterparty credit risk and the contractual terms of the reinsurance contract. Counterparty credit risk in relation to reinsurance assets is considered in note 4.3. Recoveries are discounted to present value using appropriate risk-free rates. o n 96 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.3.3 Risk margin Overview A risk margin is determined by the Board to reflect the inherent uncertainty in the net discounted central estimate. The risk margin and the net discounted central estimate are key inputs in the determination of the probability of adequacy, which is a statistical measure of the relative adequacy of the outstanding claims liability to ultimately be able to pay claims. For example, a 90% probability of adequacy indicates that the outstanding claims liability is expected to be adequate nine years in 10. Risk margin Risk margin as a percentage of the net discounted central estimate Probability of adequacy US$M % % 2021 1,418 8.8 91.7 2020 1,537 9.7 92.5 Excluding the impact of foreign exchange which reduced the risk margin by $37 million (2020 $57 million increase), the net movement in profit or loss was a release of $82 million (2020 $344 million charge). The resulting probability of adequacy was 91.7% (2020 92.5%). Net profit after tax would have reduced by $40 million, at the Group’s prima facie income tax rate of 30%, if the probability of adequacy was maintained at 92.5%. The reduction in risk margin mainly reflects reduced uncertainty related to the impact of COVID-19 partly offset by additional risk margin in response to business growth. How we account for the numbers AASB 1023 General Insurance Contracts requires an entity to adopt an appropriate risk margin. The resulting probability of adequacy is not of itself an accounting policy as defined by AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. QBE reviews a number of factors when determining the appropriate risk margin, including any changes in the level of uncertainty in the net discounted central estimate, the resulting probability of adequacy and the risk margin as a percentage of the net discounted central estimate. The Group aims to maintain a probability of adequacy in the range of 87.5% to 92.5%. Critical accounting judgements and estimates The risk margin is determined by the Board and is held to mitigate the potential for uncertainty in the net discounted central estimate. The determination of the appropriate level of risk margin takes into account similar factors to those used to determine the central estimate, such as: • mix of business, in particular the mix of short-tail and long-tail business and the overall weighted average term to settlement; and • the level of uncertainty in the central estimate due to estimation error, data quality, variability of key inflation assumptions and possible economic and legislative changes. The variability by class of business is measured using techniques that determine a range of possible outcomes of ultimate payments and assign a likelihood to outcomes at different levels. These techniques generally use standard statistical distributions, and the measure of variability is referred to as the coefficient of variation. The appropriate risk margin for two or more classes of business or for two or more geographic locations combined is likely to be less than the sum of the risk margins for the individual classes, reflecting the benefit of diversification in general insurance, but is not determined by reference to a fixed probability of adequacy. The statistical measure used to determine diversification is called the correlation; the higher the correlation between two classes of business, the more likely it is that a negative outcome in one class will correspond to a negative outcome in the other class. For example, higher correlation exists between classes of business affected by court cases involving bodily injury claims such as motor third-party liability, workers’ compensation and public liability, particularly in the same jurisdiction. The probability of adequacy for the Group is determined by analysing the variability of each class of business and the correlation between classes of business and divisions. Correlations are determined for aggregations of classes of business, where appropriate, at the divisional level. The correlations adopted by the Group are generally derived from industry analysis, the Group’s historical experience and the judgement of experienced and qualified actuaries. 96 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.3.3 Risk margin Overview A risk margin is determined by the Board to reflect the inherent uncertainty in the net discounted central estimate. The risk margin and the net discounted central estimate are key inputs in the determination of the probability of adequacy, which is a statistical measure of the relative adequacy of the outstanding claims liability to ultimately be able to pay claims. For example, a 90% probability of adequacy indicates that the outstanding claims liability is expected to be adequate nine years in 10. Risk margin Probability of adequacy Risk margin as a percentage of the net discounted central estimate US$M % % 2021 1,418 8.8 91.7 2020 1,537 9.7 92.5 Excluding the impact of foreign exchange which reduced the risk margin by $37 million (2020 $57 million increase), the net movement in profit or loss was a release of $82 million (2020 $344 million charge). The resulting probability of adequacy was 91.7% (2020 92.5%). Net profit after tax would have reduced by $40 million, at the Group’s prima facie income tax rate of 30%, if the probability of adequacy was maintained at 92.5%. margin in response to business growth. The reduction in risk margin mainly reflects reduced uncertainty related to the impact of COVID-19 partly offset by additional risk How we account for the numbers AASB 1023 General Insurance Contracts requires an entity to adopt an appropriate risk margin. The resulting probability of adequacy is not of itself an accounting policy as defined by AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. QBE reviews a number of factors when determining the appropriate risk margin, including any changes in the level of uncertainty in the net discounted central estimate, the resulting probability of adequacy and the risk margin as a percentage of the net discounted central estimate. The Group aims to maintain a probability of adequacy in the range of 87.5% to 92.5%. Critical accounting judgements and estimates The risk margin is determined by the Board and is held to mitigate the potential for uncertainty in the net discounted central estimate. The determination of the appropriate level of risk margin takes into account similar factors to those used to determine the central estimate, such as: • mix of business, in particular the mix of short-tail and long-tail business and the overall weighted average term to settlement; and • the level of uncertainty in the central estimate due to estimation error, data quality, variability of key inflation assumptions and possible economic and legislative changes. The variability by class of business is measured using techniques that determine a range of possible outcomes of ultimate payments and assign a likelihood to outcomes at different levels. These techniques generally use standard statistical distributions, and the measure of variability is referred to as the coefficient of variation. The appropriate risk margin for two or more classes of business or for two or more geographic locations combined is likely to be less than the sum of the risk margins for the individual classes, reflecting the benefit of diversification in general insurance, but is not determined by reference to a fixed probability of adequacy. The statistical measure used to determine diversification is called the correlation; the higher the correlation between two classes of business, the more likely it is that a negative outcome in one class will correspond to a negative outcome in the other class. For example, higher correlation exists between classes of business affected by court cases involving bodily injury claims such as motor third-party liability, workers’ compensation and public liability, particularly in the same jurisdiction. The probability of adequacy for the Group is determined by analysing the variability of each class of business and the correlation between classes of business and divisions. Correlations are determined for aggregations of classes of business, where appropriate, at the divisional level. The correlations adopted by the Group are generally derived from industry analysis, the Group’s historical experience and the judgement of experienced and qualified actuaries. 2.3.4 Discount rate used to determine the outstanding claims liability Overview Claims in relation to long-tail classes of business (e.g. professional indemnity and workers’ compensation) typically may not settle for many years. As such, the liability is discounted to reflect the time value of money. The table below summarises the weighted average discount rate for each operating segment and for the Group. North America International Australia Pacific Group 2021 % 1.44 0.55 1.12 0.87 2020 % 0.84 0.03 0.41 0.30 97 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w How we account for the numbers AASB 1023 General Insurance Contracts requires that the net central estimate is discounted to reflect the time value of money using risk-free rates that are based on current observable, objective rates that reflect the nature, structure and terms of the future obligations. 3 G o v e r n a n c e 2.3.5 Weighted average term to settlement Overview The weighted average term to settlement refers to the period from the balance date to the expected date of claims settlement. All other factors being equal, a longer weighted average term to settlement generally results in a larger impact on the central estimate from discounting. The table below summarises the weighted average term to settlement for each operating segment and for the consolidated Group. North America International Australia Pacific Group US$ 3.2 4.0 – 3.4 £ – 5.0 – 5.0 2021 YEARS A$ – 3.5 2.2 2.4 € OTHER TOTAL – 4.0 – 4.0 – 2.5 1.7 2.4 3.2 4.1 2.2 3.5 US$ 3.6 3.6 – 3.6 £ – 3.3 – 3.3 2020 YEARS A$ – 3.5 2.7 2.7 € OTHER TOTAL – 4.3 – 4.3 – 2.4 1.9 2.3 3.6 3.7 2.6 3.3 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 98 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.3.6 Net discounted central estimate maturity profile Overview The maturity profile is the Group’s expectation of the period over which the net central estimate will be settled. The Group uses this information to ensure that it has adequate liquidity to pay claims as they are due to be settled and to inform the Group’s investment strategy. The table below summarises the expected maturity profile of the Group’s net discounted central estimate for each operating segment. 2021 North America International Australia Pacific 2020 North America International Australia Pacific LESS THAN 1 YEAR US$M 13 TO 24 MONTHS US$M 25 TO 36 MONTHS US$M 37 TO 48 MONTHS US$M 49 TO 60 MONTHS US$M 1,578 2,404 1,599 5,581 608 1,631 713 2,952 413 1,143 465 2,021 274 842 300 1,416 193 632 190 1,015 LESS THAN 1 YEAR US$M 13 TO 24 MONTHS US$M 25 TO 36 MONTHS US$M 37 TO 48 MONTHS US$M 49 TO 60 MONTHS US$M 1,241 2,581 1,240 5,062 571 1,192 831 2,594 417 1,201 596 2,214 289 897 454 1,640 195 665 268 1,128 OVER 5 YEARS US$M 647 2,120 355 3,122 OVER 5 YEARS US$M 684 1,992 483 3,159 TOTAL US$M 3,713 8,772 3,622 16,107 TOTAL US$M 3,397 8,528 3,872 15,797 2.3.7 Impact of changes in key variables on the net outstanding claims liability Overview The impact of changes in key variables used in the calculation of the outstanding claims liability is summarised in the table below. Each change has been calculated in isolation from the other changes and shows the after-tax impact on profit or loss assuming that there is no change to any of the other variables. In practice, this is considered unlikely to occur as, for example, an increase in interest rates is normally associated with an increase in the rate of inflation. Over the medium to longer term, the impact of a change in discount rates is expected to be largely offset by the impact of a change in the rate of inflation. The sensitivities below assume that all changes directly impact profit after tax. In practice, if the central estimate was to increase, it is possible that part of the increase may result in an offsetting change in the level of risk margin required rather than in a change to profit or loss after tax, depending on the nature of the change in the central estimate and risk outlook. Likewise, if the coefficient of variation were to increase, it is possible that the probability of adequacy would reduce from its current level rather than result in a change to net profit or loss after income tax. Net discounted central estimate Risk margin Inflation rate Discount rate Coefficient of variation Probability of adequacy Weighted average term to settlement 1 Net of tax at the Group’s prima facie income tax rate of 30%. SENSITIVITY % +5 -5 +5 -5 +0.5 -0.5 +0.5 -0.5 +1 -1 +1 -1 +10 -10 PROFIT (LOSS)1 2021 US$M (564) 564 (50) 50 (206) 193 193 (206) (163) 162 (53) 48 38 (38) 2020 US$M (553) 553 (54) 54 (194) 185 185 (194) (166) 166 (60) 54 11 (11) 98 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.3.6 Net discounted central estimate maturity profile Overview The maturity profile is the Group’s expectation of the period over which the net central estimate will be settled. The Group uses this information to ensure that it has adequate liquidity to pay claims as they are due to be settled and to inform the Group’s investment strategy. The table below summarises the expected maturity profile of the Group’s net discounted central estimate for each operating segment. 2021 North America International Australia Pacific 2020 North America International Australia Pacific LESS THAN 13 TO 24 MONTHS US$M 25 TO 36 MONTHS US$M 37 TO 48 MONTHS US$M 49 TO 60 MONTHS US$M 1 YEAR US$M 1,578 2,404 1,599 5,581 1 YEAR US$M 1,241 2,581 1,240 5,062 LESS THAN 13 TO 24 MONTHS US$M 25 TO 36 MONTHS US$M 37 TO 48 MONTHS US$M 49 TO 60 MONTHS US$M 608 1,631 713 2,952 571 1,192 831 2,594 413 1,143 465 2,021 417 1,201 596 2,214 274 842 300 193 632 190 1,416 1,015 289 897 454 1,640 195 665 268 1,128 OVER 5 YEARS US$M 647 2,120 355 3,122 OVER 5 YEARS US$M 684 1,992 483 3,159 TOTAL US$M 3,713 8,772 3,622 16,107 TOTAL US$M 3,397 8,528 3,872 15,797 2.3.7 Impact of changes in key variables on the net outstanding claims liability Overview The impact of changes in key variables used in the calculation of the outstanding claims liability is summarised in the table below. Each change has been calculated in isolation from the other changes and shows the after-tax impact on profit or loss assuming that there is no change to any of the other variables. In practice, this is considered unlikely to occur as, for example, an increase in interest rates is normally associated with an increase in the rate of inflation. Over the medium to longer term, the impact of a change in discount rates is expected to be largely offset by the impact of a change in the rate of inflation. The sensitivities below assume that all changes directly impact profit after tax. In practice, if the central estimate was to increase, it is possible that part of the increase may result in an offsetting change in the level of risk margin required rather than in a change to profit or loss after tax, depending on the nature of the change in the central estimate and risk outlook. Likewise, if the coefficient of variation were to increase, it is possible that the probability of adequacy would reduce from its current level rather than result in a change to net profit or loss after income tax. Net discounted central estimate Risk margin Inflation rate Discount rate Coefficient of variation Probability of adequacy Weighted average term to settlement 1 Net of tax at the Group’s prima facie income tax rate of 30%. SENSITIVITY PROFIT (LOSS)1 % +5 -5 +5 -5 +0.5 -0.5 +0.5 -0.5 +1 -1 +1 -1 +10 -10 2021 US$M (564) 564 (50) 50 (206) 193 193 (206) (163) 162 (53) 48 38 (38) 2020 US$M (553) 553 (54) 54 (194) 185 185 (194) (166) 166 (60) 54 11 (11) 99 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v P e r f o r m a n c e 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i 2.4 Claims development – net undiscounted central estimate Overview i e w The claims development table demonstrates the extent to which the original estimate of net ultimate claims payments in any one accident year (item (a) in the table below) has subsequently developed favourably (i.e. claims cost estimates have reduced) or unfavourably (i.e. further claims expense has been recognised in subsequent years). This table therefore illustrates the variability and inherent uncertainty in estimating the central estimate each year. The ultimate claims cost for any particular accident year is not known until all claims payments have been made which, for some long-tail classes of business, could be many years into the future. The estimate of net ultimate claims payments at the end of each subsequent accident year demonstrates how the original estimate has been revised over time (b). Cumulative net claims payments (d) are deducted from the estimate of net ultimate claims payments in each accident year (c) at the current balance date, resulting in the undiscounted central estimate at a fixed rate of exchange (e). This is revalued to the balance date rate of exchange (f) to report the net undiscounted central estimate (g), which is reconciled to the discounted net outstanding claims liability (h). The treatment of foreign exchange in the claims development table is explained on the following page. The net increase (decrease) in estimated net ultimate claims payments (i) reflects the estimated ultimate net claims payments at the end of the current financial year (c) less the equivalent at the end of the previous financial year (b). This is further summarised in note 2.4.1. The claims development table is presented net of reinsurance. With insurance operations in 27 countries, hundreds of products, various reinsurance arrangements and with the Group’s risk tolerance managed on a consolidated basis, it is considered neither meaningful nor practicable to provide this information other than on a consolidated Group basis. 2011 & 2021 2016 PRIOR US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M 2020 2019 2018 2014 2015 2012 2013 2017 TOTAL US$M 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 7,791 8,463 8,116 7,554 7,143 6,947 7,071 6,302 6,621 8,271 7,546 8,213 7,805 7,400 7,230 6,514 6,967 8,264 7,359 7,831 7,310 7,230 6,531 6,746 8,336 7,535 7,860 7,747 7,253 7,739 7,228 6,976 6,277 6,635 8,479 7,607 7,732 7,684 7,249 6,964 6,144 6,643 7,615 7,200 6,916 7,181 6,908 7,590 7,577 7,176 7,559 6,177 6,691 8,474 6,117 7,559 7,176 6,908 6,117 6,643 8,474 7,607 8,213 7,554 8,463 74,714 (7,363) (6,929) (6,617) (5,865) (6,022) (7,210) (6,306) (6,001) (4,806) (2,605) (59,724) 1,310 196 247 291 252 621 1,264 1,301 2,212 2,748 5,858 o n 16,300 (217) 32 16,115 (508) 500 1,418 17,525 48 (18) (5) (8) (27) (48) (5) 61 97 (237) 8,463 8,321 Net ultimate claims payments1 (a) (b) (c) (d) (e) (f) (g) (h) (i) Original estimate of net ultimate claims payments One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of net ultimate claims payments Cumulative net payments to date Net undiscounted central estimate at fixed rate of exchange Foreign exchange impact Provision for impairment Net undiscounted central estimate at 31 December 2021 Discount to present value Claims settlement costs Risk margin Net outstanding claims liability at 31 December 2021 (note 2.3) Movement in estimated net ultimate claims payments (note 2.4.1) 1 Excludes claims settlement costs. 100 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES How we account for the numbers The estimate of net ultimate claims payments attributable to business acquired is generally included in the claims development table in the accident year in which the acquisition was made. The exception is increased participation in Lloyd’s syndicates where the estimate of net ultimate claims payments is allocated to the original accident year(s) in which the underlying claim was incurred. The Group writes business in many currencies. The translation of estimated net ultimate claims payments denominated in foreign currencies gives rise to foreign exchange movements which have no direct bearing on the development of the underlying claims. To eliminate this distortion, estimated net ultimate claims payments have been translated to the functional currencies of our controlled entities at constant rates of exchange. All estimates of ultimate claims payments for the 10 most recent accident years reported in functional currencies other than US dollars have been translated to US dollars using 2021 average rates of exchange. 2.4.1 Reconciliation of claims development table to profit or loss Overview The table below reconciles the net increase or decrease in estimated net ultimate claims payments in the current financial year from the claims development table (item (i) in note 2.4) to the analysis of current and prior accident year net central estimate development recognised in profit or loss (refer to note 2.4.2). Movement in estimated net ultimate claims payments (note 2.4)1, 2,3 Movement in claims settlement costs Movement in discount Other movements Movement in net discounted central estimate (note 2.4.2) CURRENT ACCIDENT YEAR US$M 2021 PRIOR ACCIDENT YEARS US$M 8,463 433 (85) 2 8,813 (142) 1 (232) 13 (360) CURRENT ACCIDENT YEAR US$M 2020 PRIOR ACCIDENT YEARS US$M 7,469 413 (39) 5 7,848 363 (1) 387 (7) 742 TOTAL US$M 8,321 434 (317) 15 8,453 TOTAL US$M 7,832 412 348 (2) 8,590 1 Excludes claims settlement costs. 2 2021 prior accident year claims includes a benefit of $324 million from the reinsurance of Australian CTP liabilities. Excluding this recovery, the movement in prior accident year claims in 2021 reflects adverse development in North America and Australia Pacific, partly offset by positive development in International. 3 The movement in prior accident year claims in 2020 mainly reflects adverse development in North America and, to a lesser extent, International, partly offset by positive development in Australia Pacific. 100 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES How we account for the numbers The estimate of net ultimate claims payments attributable to business acquired is generally included in the claims development table in the accident year in which the acquisition was made. The exception is increased participation in Lloyd’s syndicates where the estimate of net ultimate claims payments is allocated to the original accident year(s) in which the underlying claim was incurred. The Group writes business in many currencies. The translation of estimated net ultimate claims payments denominated in foreign currencies gives rise to foreign exchange movements which have no direct bearing on the development of the underlying claims. To eliminate this distortion, estimated net ultimate claims payments have been translated to the functional currencies of our controlled entities at constant rates of exchange. All estimates of ultimate claims payments for the 10 most recent accident years reported in functional currencies other than US dollars have been translated to US dollars using 2021 average rates of exchange. 2.4.1 Reconciliation of claims development table to profit or loss Overview The table below reconciles the net increase or decrease in estimated net ultimate claims payments in the current financial year from the claims development table (item (i) in note 2.4) to the analysis of current and prior accident year net central estimate development recognised in profit or loss (refer to note 2.4.2). Movement in estimated net ultimate claims payments (note 2.4)1, 2,3 Movement in claims settlement costs Movement in discount Other movements Movement in net discounted central estimate (note 2.4.2) 1 Excludes claims settlement costs. 2021 CURRENT ACCIDENT PRIOR ACCIDENT YEAR US$M YEARS US$M 8,463 433 (85) 2 8,813 (142) 1 (232) 13 (360) CURRENT ACCIDENT PRIOR ACCIDENT 2020 YEARS US$M TOTAL US$M 8,321 434 (317) 15 8,453 YEAR US$M 7,469 413 (39) 5 7,848 TOTAL US$M 7,832 412 348 (2) 8,590 363 (1) 387 (7) 742 2 2021 prior accident year claims includes a benefit of $324 million from the reinsurance of Australian CTP liabilities. Excluding this recovery, the movement in prior accident year claims in 2021 reflects adverse development in North America and Australia Pacific, partly offset by positive development in International. 3 The movement in prior accident year claims in 2020 mainly reflects adverse development in North America and, to a lesser extent, International, partly offset by positive development in Australia Pacific. 2.4.2 Net central estimate development Overview The table below further analyses the current and prior accident year movement in the net discounted central estimate, separately identifying the gross and reinsurance components. Prior accident year claims are those claims that occurred in a previous year but for which a reassessment of the claims cost has impacted the result in the current period. CURRENT ACCIDENT YEAR US$M 2021 PRIOR ACCIDENT YEARS US$M TOTAL US$M CURRENT ACCIDENT YEAR US$M Gross central estimate development Undiscounted Discount Reinsurance and other recoveries Undiscounted Discount Net central estimate development Undiscounted Discount Net discounted central estimate development (note 2.4.1) 12,280 (108) 12,172 (3,382) 23 (3,359) 8,898 (85) 8,813 (253) (373) (626) 125 141 266 (128) (232) (360) 12,027 (481) 11,546 (3,257) 164 (3,093) 8,770 (317) 8,453 10,994 (47) 10,947 (3,107) 8 (3,099) 7,887 (39) 7,848 2.5 Unearned premium and deferred insurance costs 2020 PRIOR ACCIDENT YEARS US$M 476 533 1,009 (121) (146) (267) 355 387 742 TOTAL US$M 11,470 486 11,956 (3,228) (138) (3,366) 8,242 348 8,590 Overview Unearned premium Gross written premium is earned in profit or loss in accordance with the pattern of risk of the business written. The unearned premium liability is that portion of gross written premium that QBE has not yet earned in profit or loss as it represents insurance coverage to be provided by QBE after the balance date. Deferred insurance costs Premium ceded to reinsurers by QBE in exchange for reinsurance protection is expensed in profit or loss in accordance with the reinsurance contract’s expected pattern of incidence of risk. The deferred reinsurance premium asset is that portion of the reinsurance premium that QBE has not yet expensed in profit or loss as it represents reinsurance coverage to be received by QBE after the balance date. Acquisition costs are the costs associated with obtaining and recording insurance business. Acquisition costs are similarly capitalised and amortised, consistent with the earning of the related premium for that business. Commissions are a type of acquisition cost and are disclosed separately. 101 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 102 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES Summary of unearned premium and deferred insurance costs Unearned premium (a) To be earned within 12 months To be earned in greater than 12 months Unearned premium Deferred reinsurance premium1 Deferred net commission Deferred acquisition costs Deferred insurance costs (b) To be expensed within 12 months To be expensed in greater than 12 months Deferred insurance costs Net unearned premium (a)–(b) 1 Deferred reinsurance premium relating to future business not yet written was $114 million (2020 $96 million). Unearned premium movements At 1 January Deferral of unearned premium on contracts written in the financial year Earning of premium written in previous financial years Net profit or loss movement Foreign exchange At 31 December Deferred insurance costs movements 2021 US$M 8,637 7,847 790 8,637 1,052 1,230 415 2,697 2,260 437 2,697 5,940 2021 US$M 7,466 7,516 (6,094) 1,422 (251) 8,637 2020 US$M 7,466 6,429 1,037 7,466 724 1,141 417 2,282 1,909 373 2,282 5,184 2020 US$M 6,460 5,988 (5,353) 635 371 7,466 At 1 January Costs deferred in financial year Amortisation of costs deferred in previous financial years Net profit or loss movement Foreign exchange At 31 December DEFERRED REINSURANCE PREMIUM DEFERRED NET COMMISSION DEFERRED ACQUISITION COSTS 2021 US$M 724 951 (595) 356 (28) 1,052 2020 US$M 523 593 (431) 162 39 724 2021 US$M 1,141 1,038 (922) 116 (27) 1,230 2020 US$M 1,008 891 (815) 76 57 1,141 2021 US$M 417 354 (342) 12 (14) 415 2020 US$M 376 329 (310) 19 22 417 Unearned premium is calculated based on the coverage period of the insurance or reinsurance contract and in accordance with the expected pattern of the incidence of risk, using either the daily pro-rata method or the 24ths method, adjusted where appropriate to reflect different risk patterns. i e w How we account for the numbers Unearned premium 102 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES Summary of unearned premium and deferred insurance costs Unearned premium (a) To be earned within 12 months To be earned in greater than 12 months Unearned premium Deferred reinsurance premium1 Deferred net commission Deferred acquisition costs Deferred insurance costs (b) To be expensed within 12 months To be expensed in greater than 12 months Deferred insurance costs Net unearned premium (a)–(b) Unearned premium movements 2021 US$M 8,637 7,847 790 8,637 1,052 1,230 415 2,697 2,260 437 2,697 5,940 2021 US$M 7,466 7,516 (6,094) 1,422 (251) 8,637 2020 US$M 7,466 6,429 1,037 7,466 724 1,141 417 2,282 1,909 373 2,282 5,184 2020 US$M 6,460 5,988 (5,353) 635 371 7,466 2020 US$M 376 329 (310) 19 22 417 Deferred insurance costs Deferred reinsurance premium is calculated based on the period of indemnity provided to QBE by the reinsurance contract and in accordance with the related pattern of the incidence of risk. Acquisition costs are capitalised when they relate to new business or the renewal of existing business and are amortised on the same basis as the earning pattern for that business. At the balance date, deferred acquisition costs represent the capitalised acquisition costs that relate to unearned premium and are carried forward to a subsequent accounting period in recognition of their future benefit. The carrying value of deferred acquisition costs is subject to impairment testing in the form of the liability adequacy test (refer to note 2.5.1). Deferred net commission is a type of deferred acquisition cost and is disclosed separately. 1 Deferred reinsurance premium relating to future business not yet written was $114 million (2020 $96 million). 2.5.1 Liability adequacy test At 1 January Deferral of unearned premium on contracts written in the financial year Earning of premium written in previous financial years Net profit or loss movement Foreign exchange At 31 December Deferred insurance costs movements At 1 January Costs deferred in financial year Amortisation of costs deferred in previous financial years Net profit or loss movement Foreign exchange At 31 December DEFERRED REINSURANCE PREMIUM DEFERRED NET COMMISSION DEFERRED ACQUISITION COSTS 2021 US$M 724 951 (595) 356 (28) 1,052 2020 US$M 523 593 (431) 162 39 724 2021 US$M 1,141 1,038 (922) 116 (27) 1,230 2020 US$M 1,008 891 (815) 76 57 1,141 2021 US$M 417 354 (342) 12 (14) 415 Overview At each balance date, the Group is required to assess net unearned premium to determine whether the amount provided is sufficient to pay future claims net of reinsurance recoveries attributable to the net unearned premium. If the present value of expected future net claims including a risk margin exceeds the net unearned premium, adjusted for deferred reinsurance premium relating to future business not yet written, the net unearned premium is deemed deficient. This deficiency is immediately recognised in profit or loss. In recognising the deficiency, an insurer must first write down related intangible assets and then deferred acquisition costs before recognising an unexpired risk liability. Expected present value of future cash flows for future claims including risk margin Undiscounted net central estimate Discount to present value Risk margin at the 75th percentile of insurance liabilities Expected present value of future cash flows for future claims including risk margin 2021 US$M 5,282 (98) 5,184 197 5,381 2020 US$M 4,676 (23) 4,653 181 4,834 The risk margin at the 75th percentile of insurance liabilities as a percentage of the net discounted central estimate is 3.8% (2020 3.9%). The application of the liability adequacy test at 31 December 2021 did not identify a deficiency (2020 nil). 103 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i How we account for the numbers At each balance date, the adequacy of net unearned premium is assessed on a net of reinsurance basis against the present value of the expected future claims cash flows in respect of the relevant insurance contracts, plus an additional risk margin to reflect the inherent uncertainty of the central estimate. The assessment is carried out at the operating segment level other than Europe, Asia and the Group’s captive reinsurer, Equator Re, which are assessed separately, each being a portfolio of contracts subject to broadly similar risks and which are managed together as a single portfolio. o n 104 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES Critical accounting judgements and estimates In assessing the adequacy of net unearned premium, AASB 1023 General Insurance Contracts requires the inclusion of a risk margin but does not prescribe a minimum level of margin. While there is established practice in the calculation of the probability of adequacy of the outstanding claims liability, no such guidance exists in respect of the level of risk margin to be used in determining the adequacy of net unearned premium. The liability adequacy test assumes a 75% probability of adequacy. The risk margin applied in the liability adequacy test is determined on a consistent basis with the methodology described in note 2.3.3 and also reflects the benefit of diversification. The 75% basis is a recognised industry benchmark in Australia, being the minimum probability of adequacy required for Australian licensed insurers by APRA. 2.6 Trade and other receivables Overview Trade and other receivables are principally amounts owed to QBE by policyholders or reinsurance counterparties. Unclosed premium receivables are estimated amounts due to QBE in relation to business for which the Group is on risk but which have not yet been processed into financial systems. Trade debtors Premium receivable1 Reinsurance and other recoveries 2 Unclosed premium Other trade debtors Other receivables Trade and other receivables Receivable within 12 months Receivable in greater than 12 months Trade and other receivables 2021 US$M 3,462 2,118 774 195 6,549 560 7,109 6,628 481 7,109 2020 US$M 2,990 1,452 729 224 5,395 365 5,760 5,471 289 5,760 1 Net of a provision for impairment of $81 million (2020 $88 million). 2 Net of a provision for impairment of $17 million (2020 $14 million). Due to the predominantly short-term nature of these receivables, the carrying value is assumed to approximate the fair value. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables. No receivables are pledged by the Group as collateral for liabilities or contingent liabilities. Information on the ageing and credit rating of these balances is included in note 4.3. How we account for the numbers Receivables are recognised initially at fair value and are subsequently measured at amortised cost less any impairment. The vast majority of the Group's receivables arise from general insurance contracts. These include premium receivable, reinsurance and other recoveries, and unclosed premium. For these receivables, a provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The remainder of the Group's receivables are assessed for impairment based on expected credit losses, the impacts of which are not material. Any increase or decrease in the provision for impairment is recognised in profit or loss within underwriting expenses. 104 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 2. UNDERWRITING ACTIVITIES 2.7 Trade and other payables Critical accounting judgements and estimates Overview i e w In assessing the adequacy of net unearned premium, AASB 1023 General Insurance Contracts requires the inclusion of a risk margin but does not prescribe a minimum level of margin. While there is established practice in the calculation of the probability of adequacy of the outstanding claims liability, no such guidance exists in respect of the level of risk margin to be used in determining the adequacy of net unearned premium. The liability adequacy test assumes a 75% probability of adequacy. The risk margin applied in the liability adequacy test is determined on a consistent basis with the methodology described in note 2.3.3 and also reflects the benefit of diversification. The 75% basis is a recognised industry benchmark in Australia, being the minimum probability of adequacy required for Australian licensed insurers by APRA. 2.6 Trade and other receivables Trade payables primarily comprise amounts owed to reinsurance counterparties and cedants. Treasury and investment payables are amounts due to counterparties in settlement of treasury and investment transactions. Trade payables Other payables and accrued expenses Treasury payables Investment payables Trade and other payables Payable within 12 months Payable in greater than 12 months Trade and other payables 2021 US$M 2,322 823 19 51 3,215 3,029 186 3,215 2020 US$M 1,604 714 16 4 2,338 2,174 164 2,338 Overview Trade and other receivables are principally amounts owed to QBE by policyholders or reinsurance counterparties. Unclosed premium receivables are estimated amounts due to QBE in relation to business for which the Group is on risk but which have not yet been processed into financial systems. Due to the predominantly short-term nature of these payables, the carrying value is assumed to approximate the fair value. How we account for the numbers Trade payables are recognised initially at their fair value and are subsequently measured at amortised cost using the effective interest method. Reinsurance and other recoveries 2 Trade debtors Premium receivable1 Unclosed premium Other trade debtors Other receivables Trade and other receivables Receivable within 12 months Receivable in greater than 12 months Trade and other receivables 2021 US$M 3,462 2,118 774 195 6,549 560 7,109 6,628 481 7,109 2020 US$M 2,990 1,452 729 224 5,395 365 5,760 5,471 289 5,760 1 Net of a provision for impairment of $81 million (2020 $88 million). 2 Net of a provision for impairment of $17 million (2020 $14 million). Due to the predominantly short-term nature of these receivables, the carrying value is assumed to approximate the fair value. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables. No receivables are pledged by the Group as collateral for liabilities or contingent liabilities. Information on the ageing and credit rating of these balances is included in note 4.3. How we account for the numbers Receivables are recognised initially at fair value and are subsequently measured at amortised cost less any impairment. The vast majority of the Group's receivables arise from general insurance contracts. These include premium receivable, reinsurance and other recoveries, and unclosed premium. For these receivables, a provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The remainder of the Group's receivables are assessed for impairment based on expected credit losses, the impacts of which are not material. Any increase or decrease in the provision for impairment is recognised in profit or loss within underwriting expenses. 105 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 106 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 3. INVESTMENT ACTIVITIES Overview Premiums collected from policyholders are invested to meet the Group’s cash flow needs to pay claims and other expenses, as well as generating a return that contributes to the Group’s profitability. A sound investment strategy is therefore integral to the success of the Group’s operations. The Group invests across a diversified range of instruments to achieve an appropriate balance between risk and return. Decisions on where to invest are dependent on expected returns, cash flow requirements of the Group, liquidity of the instrument, credit quality of the instrument and the overall risk appetite of the Group. Further details on the management of risk associated with investment assets can be found in note 4. 3.1 Investment income (Loss) income on fixed interest securities, short-term money and cash Income (loss) on growth assets Gross investment income1 Investment expenses Net investment income Foreign exchange Other income Other expenses Total investment income Investment income – policyholders’ funds Investment expenses – policyholders’ funds Investment income – shareholders’ funds Investment expenses – shareholders’ funds Total investment income 2021 US$M (96) 258 162 (25) 137 (4) – (11) 122 94 (17) 53 (8) 122 2020 US$M 449 (170) 279 (17) 262 (29) 5 (12) 226 153 (11) 90 (6) 226 1 Includes net fair value losses of $409 million (2020 $206 million), interest income of $396 million (2020 $407 million) and dividend and distribution income of $175 million (2020 $78 million). How we account for the numbers Interest income is recognised in the period in which it is earned. Dividends and distribution income are recognised when the right to receive payment is established. Investment income includes realised and unrealised gains or losses on financial assets which are reported on a combined basis as fair value gains or losses on financial assets. 106 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 3. INVESTMENT ACTIVITIES Overview Premiums collected from policyholders are invested to meet the Group’s cash flow needs to pay claims and other expenses, as well as generating a return that contributes to the Group’s profitability. A sound investment strategy is therefore integral to the success of the Group’s operations. The Group invests across a diversified range of instruments to achieve an appropriate balance between risk and return. Decisions on where to invest are dependent on expected returns, cash flow requirements of the Group, liquidity of the instrument, credit quality of the instrument and the overall risk appetite of the Group. Further details on the management of risk associated with investment assets can be found in note 4. (Loss) income on fixed interest securities, short-term money and cash 3.1 Investment income Income (loss) on growth assets Gross investment income1 Investment expenses Net investment income Foreign exchange Other income Other expenses Total investment income Investment income – policyholders’ funds Investment expenses – policyholders’ funds Investment income – shareholders’ funds Investment expenses – shareholders’ funds Total investment income 2021 US$M (96) 258 162 (25) 137 (4) – (11) 122 94 (17) 53 (8) 122 2020 US$M 449 (170) 279 (17) 262 (29) 5 (12) 226 153 (11) 90 (6) 226 1 Includes net fair value losses of $409 million (2020 $206 million), interest income of $396 million (2020 $407 million) and dividend and distribution income of $175 million (2020 $78 million). How we account for the numbers Interest income is recognised in the period in which it is earned. Dividends and distribution income are recognised when the right to receive payment is established. Investment income includes realised and unrealised gains or losses on financial assets which are reported on a combined basis as fair value gains or losses on financial assets. 3.2 Investment assets Fixed income assets Short-term money Government bonds Corporate bonds Infrastructure debt Growth assets Developed market equity Unlisted property trusts Infrastructure assets Private equity1 Alternatives Total investments Amounts maturing within 12 months Amounts maturing in greater than 12 months Total investments 2021 US$M 4,537 6,953 14,777 99 26,366 85 758 788 – 114 1,745 28,111 10,051 18,060 28,111 2020 US$M 2,974 5,600 15,958 372 24,904 25 750 894 262 100 2,031 26,935 6,679 20,256 26,935 1 At 31 December 2021, $50 million of private equity assets were reclassified to assets held for sale and are expected to be disposed of during 2022. At 31 December 2021, QBE had undrawn commitments to externally managed investment vehicles of $209 million (2020 $156 million). How we account for the numbers The Group's investments are required to be measured at fair value through profit or loss, with all investments managed and assessed on a fair value basis to maximise returns within risk appetites and investment strategy parameters and limits. They are therefore initially recognised at fair value, determined as the cost of acquisition excluding transaction costs, and are remeasured to fair value through profit or loss at each reporting date. The fair value hierarchy and the Group’s approach to measuring the fair value of each category of investment instrument are disclosed in note 3.2.1. All purchases and sales of investments that require delivery of the asset within the time frame established by regulation or market convention are recognised at trade date, being the date on which the Group commits to buy or sell the asset. Investments are de-recognised when the right to receive future cash flows from the asset has expired or has been transferred along with substantially all the risks and rewards of ownership. 107 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 108 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 3. INVESTMENT ACTIVITIES 3.2.1 Fair value hierarchy Overview The Group Revaluation Committee is responsible for the governance and oversight of the valuation process. The fair value of investments is determined in accordance with the Group’s investment valuation policy. The investments of the Group are disclosed in the table below using a fair value hierarchy which reflects the significance of inputs into the determination of fair value as follows: Level 1: Valuation is based on quoted prices in active markets for identical instruments. Level 2: Valuation is based on quoted prices for identical instruments in markets which are not active, quoted prices for similar instruments, or valuation techniques for which all significant inputs are based on observable market data, for example, consensus pricing using broker quotes or valuation models with observable inputs. Level 3: Valuation techniques are applied in which one or more significant inputs are not based on observable market data. Fixed income assets Short-term money Government bonds Corporate bonds Infrastructure debt Growth assets Developed market equity Unlisted property trusts Infrastructure assets Private equity Alternatives Total investments 2021 2020 LEVEL 1 US$M LEVEL 2 US$M LEVEL 3 US$M TOTAL US$M LEVEL 1 US$M LEVEL 2 US$M LEVEL 3 US$M TOTAL US$M 141 5,236 – – 5,377 83 – – – 64 147 5,524 4,396 1,717 14,777 – 20,890 – – – – – – 20,890 – – – 99 99 2 758 788 – 50 1,598 1,697 4,537 6,953 14,777 99 26,366 85 758 788 – 114 1,745 28,111 24 2,978 – – 3,002 23 – – – 100 123 3,125 2,950 2,622 15,953 – 21,525 – – – – – – 21,525 – – 5 372 377 2 750 894 262 – 1,908 2,285 2,974 5,600 15,958 372 24,904 25 750 894 262 100 2,031 26,935 The Group’s approach to measuring the fair value of investments is described below: Short-term money Cash managed as part of the investment portfolio is categorised as a level 1 fair value measurement. Term deposits are valued at par; other short-term money (bank bills, certificates of deposit, treasury bills and other short-term instruments) is priced using interest rates and yield curves observable at commonly quoted intervals. Government bonds and corporate bonds Government bonds and corporate bonds are valued based on quoted prices sourced from external data providers. The fair value categorisation of these assets is based on the observability of the inputs. At 31 December 2021, $332 million of government bonds were reclassified from level 2 to level 1 following a reassessment of the observability of inputs used in the valuation of those assets. Infrastructure debt Infrastructure debt is priced by external data providers where quoted prices are available or by the external fund manager who may use a combination of observable market prices or comparable prices where available and other valuation techniques. When valuation techniques require the use of significant unobservable inputs, these assets have been categorised as level 3. Developed market equity Listed equities traded in active markets are valued by reference to quoted bid prices. Unlisted equities are priced using QBE’s share of the net assets of the entity. Unlisted property trusts and infrastructure assets These assets are valued using current unit prices as advised by the responsible entity, trustee or equivalent of the investment management scheme. As the valuation techniques require the use of significant unobservable inputs, these assets have been categorised as level 3. 108 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 3. INVESTMENT ACTIVITIES 3.2.1 Fair value hierarchy Overview The Group Revaluation Committee is responsible for the governance and oversight of the valuation process. The fair value of investments is determined in accordance with the Group’s investment valuation policy. The investments of the Group are disclosed in the table below using a fair value hierarchy which reflects the significance of inputs into the determination of fair value as follows: Level 1: Valuation is based on quoted prices in active markets for identical instruments. Level 2: Valuation is based on quoted prices for identical instruments in markets which are not active, quoted prices for similar instruments, or valuation techniques for which all significant inputs are based on observable market data, for example, consensus pricing using broker quotes or valuation models with observable inputs. Level 3: Valuation techniques are applied in which one or more significant inputs are not based on observable market data. 2021 2020 LEVEL 1 US$M LEVEL 2 US$M LEVEL 3 US$M TOTAL US$M LEVEL 1 US$M LEVEL 2 US$M LEVEL 3 US$M TOTAL US$M 141 5,236 – – 4,396 1,717 14,777 5,377 20,890 83 – – – 64 147 – – – 99 99 2 758 788 – 50 4,537 6,953 14,777 99 26,366 85 758 788 – 114 1,598 1,697 1,745 28,111 24 2,978 2,950 2,622 15,953 3,002 21,525 – – 23 – – – 100 123 3,125 – – – – – – – – – 5 372 377 2 750 894 262 – 1,908 2,285 2,974 5,600 15,958 372 24,904 25 750 894 262 100 2,031 26,935 – – – – – – – Total investments 5,524 20,890 21,525 The Group’s approach to measuring the fair value of investments is described below: Fixed income assets Short-term money Government bonds Corporate bonds Infrastructure debt Growth assets Developed market equity Unlisted property trusts Infrastructure assets Private equity Alternatives Short-term money Private equity These assets comprise limited partnerships and fund of funds vehicles. Fair value is based on the net asset value of the vehicle, and the responsibility for the valuation of the underlying securities lies with the external fund manager. In most cases, an independent administrator will be utilised by the external fund manager for pricing and valuation. When the most up to date information is not available at the balance date, management may consider a combination of other valuation techniques in the determination of fair value. During the period, these assets were disposed of, or reclassified to assets held for sale as described in note 3.2. Alternatives These assets mainly comprise investments in exchange-traded commodity products that are listed, traded in active markets and valued by reference to quoted bid prices. Alternatives also includes strategic unlisted investments which are valued based on other valuation techniques utilising significant unobservable inputs. Movements in level 3 investments The following table provides an analysis of investments valued with reference to level 3 inputs: LEVEL 3 At 1 January Purchases Disposals/transfers to assets held for sale Reclassifications from level 2 Fair value movement recognised in profit or loss Foreign exchange At 31 December 2021 US$M 2,285 61 (675) – 86 (60) 1,697 2020 US$M 1,379 121 (146) 816 17 98 2,285 3.2.2 Charges over investments and restrictions on use A controlled entity has given fixed and floating charges over certain of its investments and other assets in order to secure the obligations of the Group’s corporate members at Lloyd’s as described in note 8.2. Included in investments are amounts totalling $3,417 million (2020 $3,071 million) which are held in Lloyd’s syndicate trust funds. In order to conduct underwriting business within some territories, Lloyd’s syndicates are required to lodge assets in locally regulated trust funds. Under Lloyd’s byelaws, these amounts can only be used to pay claims and allowable expenses of the syndicate and cannot be withdrawn from the trust funds until they become distributable as profit once annual solvency requirements are met. Included in this amount is $287 million (2020 $164 million) of short-term money. 3.2.3 Derivatives over investment assets In accordance with our investment management policies and procedures, derivatives may be used in the investment portfolio as both a hedging tool and to alter the risk profile of the portfolio. Risk management policies over the use of derivatives are set out in note 4. QBE may also have exposure to derivatives through investments in underlying pooled funds in accordance with the fund mandate. Those derivative exposures are not included in the table below. The Group’s notional exposure to investment derivatives at the balance date is set out in the table below: Cash managed as part of the investment portfolio is categorised as a level 1 fair value measurement. Term deposits are valued at par; other short-term money (bank bills, certificates of deposit, treasury bills and other short-term instruments) is priced using interest rates and yield curves observable at commonly quoted intervals. Government bonds and corporate bonds Government bonds and corporate bonds are valued based on quoted prices sourced from external data providers. The fair value categorisation of these assets is based on the observability of the inputs. At 31 December 2021, $332 million of government bonds were reclassified from level 2 to level 1 following a reassessment of the observability of inputs used in the valuation of those assets. NOTIONAL EXPOSURE Bond futures and options Short government bond futures Long government bond futures Short government bond options Interest rate futures Short interest rates futures 2021 US$M (1,751) 36 (23) (1,214) 2020 US$M (403) – – – Infrastructure debt Developed market equity of the net assets of the entity. Infrastructure debt is priced by external data providers where quoted prices are available or by the external fund manager who may use a combination of observable market prices or comparable prices where available and other valuation techniques. When valuation techniques require the use of significant unobservable inputs, these assets have been categorised as level 3. Listed equities traded in active markets are valued by reference to quoted bid prices. Unlisted equities are priced using QBE’s share Unlisted property trusts and infrastructure assets These assets are valued using current unit prices as advised by the responsible entity, trustee or equivalent of the investment management scheme. As the valuation techniques require the use of significant unobservable inputs, these assets have been categorised as level 3. How we account for the numbers Derivatives over investment assets are required to be measured at fair value through profit or loss. They are therefore initially recognised at fair value, determined as the cost of acquisition excluding transaction costs, and are remeasured to fair value through profit or loss at each reporting date. For futures and options traded in an active market, the fair value is determined by reference to quoted market prices. The mark-to-market value of futures positions is cash settled on a daily basis resulting in a fair value of nil at the balance date. The fair value of options was not material at the balance date. 109 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 110 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT Overview QBE is in the business of managing risk. The Group’s ability to satisfy customers’ risk management needs is central to what we do. QBE aims to generate wealth and maximise returns for its shareholders by pursuing opportunities that involve risk. Our people are responsible for ensuring that QBE’s risks are managed and controlled on a day-to-day basis. QBE aims to use its ability to properly manage risk to provide more certainty and improved outcomes for all stakeholders. QBE applies a consistent and integrated approach to enterprise risk management (ERM). QBE’s framework for managing risk sets out the approach to managing risk effectively to meet strategic objectives whilst taking into account the creation of value for our shareholders. QBE’s ERM framework is articulated in the Group Risk Management Strategy (RMS) and Reinsurance Management Strategy (REMS), both of which are approved annually by the Board and lodged with APRA. The ERM framework consists of complementary elements that are embedded throughout the business management cycle and culture of the organisation. Key aspects include risk appetite, governance, reporting, risk identification and measurement, modelling and stress testing, risk systems, and risk culture. Risk management is a continuous process and an integral part of robust business management. QBE’s approach is to integrate risk management into the broader management processes of the organisation. It is QBE’s philosophy to ensure that risk management remains embedded in the business and that the risk makers or risk takers are themselves the risk managers. Specifically, the management of risk must occur at each point in the business management cycle. The Group’s strategy for managing risk is to: • achieve competitive advantage by better understanding the risk environments in which we operate; • give confidence to the business to make objective, risk-based decisions to optimise returns; and • avoid unwelcome surprises to the achievement of business objectives by reducing uncertainty and volatility through the identification and management of risks. The framework is supported by a suite of policies that detail QBE’s approach to the key risk categories used by QBE to classify risk as follows: • strategic risk (note 4.1); • insurance risk (note 4.2); • credit risk (note 4.3); • market risk (note 4.4); • liquidity risk (note 4.5); • operational risk (note 4.6); • compliance risk (note 4.7); and • Group risk (note 4.8). 110 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT Overview all stakeholders. QBE is in the business of managing risk. The Group’s ability to satisfy customers’ risk management needs is central to what we do. QBE aims to generate wealth and maximise returns for its shareholders by pursuing opportunities that involve risk. Our people are responsible for ensuring that QBE’s risks are managed and controlled on a day-to-day basis. QBE aims to use its ability to properly manage risk to provide more certainty and improved outcomes for QBE applies a consistent and integrated approach to enterprise risk management (ERM). QBE’s framework for managing risk sets out the approach to managing risk effectively to meet strategic objectives whilst taking into account the creation of value for our shareholders. QBE’s ERM framework is articulated in the Group Risk Management Strategy (RMS) and Reinsurance Management Strategy (REMS), both of which are approved annually by the Board and lodged with APRA. The ERM framework consists of complementary elements that are embedded throughout the business management cycle and culture of the organisation. Key aspects include risk appetite, governance, reporting, risk identification and measurement, modelling and stress testing, risk systems, and risk culture. Risk management is a continuous process and an integral part of robust business management. QBE’s approach is to integrate risk management into the broader management processes of the organisation. It is QBE’s philosophy to ensure that risk management remains embedded in the business and that the risk makers or risk takers are themselves the risk managers. Specifically, the management of risk must occur at each point in the business management cycle. The Group’s strategy for managing risk is to: • achieve competitive advantage by better understanding the risk environments in which we operate; • give confidence to the business to make objective, risk-based decisions to optimise returns; and • avoid unwelcome surprises to the achievement of business objectives by reducing uncertainty and volatility through the identification and management of risks. The framework is supported by a suite of policies that detail QBE’s approach to the key risk categories used by QBE to classify risk as follows: • strategic risk (note 4.1); • insurance risk (note 4.2); • credit risk (note 4.3); • market risk (note 4.4); • liquidity risk (note 4.5); • operational risk (note 4.6); • compliance risk (note 4.7); and • Group risk (note 4.8). 4.1 Strategic risk Overview Strategic risk is the current and prospective impact on earnings and/or capital arising from strategic business decisions and responsiveness to external change. QBE classifies strategic risk into six subcategories, as follows: • Performance risk: QBE is not able to achieve its performance objectives. • Capital risk: QBE’s structure and availability of capital do not meet regulatory requirements and/or support strategic initiatives. • Reputational risk: QBE’s stakeholders have a negative perception of QBE’s brand which may damage QBE’s reputation and threaten overall performance. • Environmental, social and governance (ESG) risk: negative impact on QBE’s strategic priorities or objectives from ESG issues. 111 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w • Emerging risk: new or future risks which are difficult to assess but may have a significant impact to QBE or the markets in which it operates. • Risk culture: the norms of behaviour within QBE that determine the organisation’s ability to understand, discuss and act on current and future risks. QBE’s approach to managing strategic risk is underpinned by the Group strategic risk appetite statement as set by the Board and is summarised below. 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n Performance risk Failure to deliver acceptable performance can result in shareholders losing confidence, impacting our reputation in the market and ultimately impacting our ability to deliver our strategic objectives. QBE evaluates performance risk by assessing changing levels of risk in the business plan (supported by an established regime of attestations to the business plan by chief underwriting officers, chief actuaries, chief financial officers and chief risk officers) and taking action accordingly, prior to signing off the business plan and making market commitments. Performance risk is monitored throughout the year against committed business plans (supported by performance monitoring, cell reviews and mid-year performance risk reviews.) Capital risk The Internal Capital Adequacy Assessment Process (ICAAP) outlines QBE’s approach to ensuring that the Group maintains adequate capital over time and monitors compliance with regulatory capital requirements and targets. The ICAAP includes: • specific capital targets set in the context of QBE’s risk profile, the Board’s risk appetite and regulatory capital requirements; • plans for how target levels of capital are to be met; and • potential sources of additional capital, if required. The ICAAP also sets out QBE’s actions and procedures for monitoring compliance with its regulatory capital requirements and capital targets. These include: • the setting of triggers to alert management to potential breaches of these requirements; and • actions to avert and rectify potential breaches of these requirements. Achieving capital targets is dependent on an appropriate level and mix of capital, and effective capital management to yield adequate returns. Oversight of the Group’s capital management framework is performed by senior management, the Executive Investment & Capital Committee, Executive Risk Committee and the Board Risk & Capital Committee. Management has a particular focus on the following performance indicators: • The Group actively manages the components of capital in order to maintain a level of eligible regulatory capital that exceeds APRA requirements. Having determined that the current risk appetite remains appropriate, the Board sets the target level of regulatory capital for 2021 at 1.6–1.8 times (2020 1.6–1.8 times) the Group’s Prescribed Capital Amount (PCA). • All regulated controlled entities are required to maintain a minimum level of capital to meet obligations to policyholders. It is the Group’s policy that each regulated entity maintains a capital base appropriate to its size, business mix, complexity and risk profile which fully complies with and meets or exceeds local regulatory requirements. • The Group aims to maintain the ratio of borrowings to total capital at 15%–30%. At the balance date, the ratio of borrowings to total capital was 26.9% (2020 25.8%). Excluding the subordinated debt due 2042 which is intended to be redeemed (refer to note 5.1), the ratio at the balance date was 24.1%. • Insurer financial strength ratings are provided by the major rating agencies which indicate the Group’s financial strength and claims paying ability. 112 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT Reputational risk QBE assesses reputational risk through the quality of the relationships with key stakeholders, including shareholders, regulators, customers, governments, communities, employees, and third-party partners including distributors and suppliers. Each of these relationships is managed through divisional and Group teams, including corporate affairs, human resources, regulatory, compliance and distribution teams. ESG and emerging risks QBE’s ESG risk and emerging risk standards operationalise QBE’s approach to managing ESG and emerging risks respectively, including climate change. Biannual horizon scans are performed on ESG and emerging risks, including assessment of potential financial and reputational impacts to the Group. Risk treatment plans are developed for material risks, which include development of underwriting and investment policy, monitoring frameworks and stress and scenario analysis. ESG and emerging risks are regularly reported to the Executive Risk Committee and the Board Risk & Capital Committee. Climate change is a material business risk for QBE, potentially impacting our business and customers in the medium to long term. We have considered potential short-term scenarios that could affect our insurance business written to date and our current investments, and we expect no material impact on the amounts recognised or disclosed in the financial statements. Further detail on QBE’s approach to climate change is included in our climate change disclosures on pages 30 to 37 of this Annual Report. Risk culture A sound risk culture underpins QBE’s risk management strategy and is a key component of the ERM framework. QBE is committed to, and supports, a strong risk culture. It recognises the importance of risk awareness and culture as being instrumental in the effectiveness of the ERM framework. Further information on risk culture is provided on page 28 of this Annual Report. 4.2 Insurance risk Overview Insurance risk is the risk of fluctuations in the timing, frequency and severity of insured events and claims settlements, relative to expectations. QBE classifies insurance risk into three subcategories, as follows: • underwriting/pricing risk; • insurance concentration risk; and • reserving risk. QBE’s approach to managing insurance risk is underpinned by the Group’s insurance risk appetite statement which is set by the Board and is summarised below. 112 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT Reputational risk and distribution teams. ESG and emerging risks QBE assesses reputational risk through the quality of the relationships with key stakeholders, including shareholders, regulators, customers, governments, communities, employees, and third-party partners including distributors and suppliers. Each of these relationships is managed through divisional and Group teams, including corporate affairs, human resources, regulatory, compliance QBE’s ESG risk and emerging risk standards operationalise QBE’s approach to managing ESG and emerging risks respectively, including climate change. Biannual horizon scans are performed on ESG and emerging risks, including assessment of potential financial and reputational impacts to the Group. Risk treatment plans are developed for material risks, which include development of underwriting and investment policy, monitoring frameworks and stress and scenario analysis. ESG and emerging risks are regularly reported to the Executive Risk Committee and the Board Risk & Capital Committee. Climate change is a material business risk for QBE, potentially impacting our business and customers in the medium to long term. We have considered potential short-term scenarios that could affect our insurance business written to date and our current investments, and we expect no material impact on the amounts recognised or disclosed in the financial statements. Further detail on QBE’s approach to climate change is included in our climate change disclosures on pages 30 to 37 of this Annual Report. Risk culture A sound risk culture underpins QBE’s risk management strategy and is a key component of the ERM framework. QBE is committed to, and supports, a strong risk culture. It recognises the importance of risk awareness and culture as being instrumental in the effectiveness of the ERM framework. Further information on risk culture is provided on page 28 of this Annual Report. 4.2 Insurance risk Insurance risk is the risk of fluctuations in the timing, frequency and severity of insured events and claims settlements, Overview relative to expectations. • underwriting/pricing risk; • insurance concentration risk; and • reserving risk. QBE classifies insurance risk into three subcategories, as follows: QBE’s approach to managing insurance risk is underpinned by the Group’s insurance risk appetite statement which is set by the Board and is summarised below. Underwriting/pricing risk QBE manages underwriting/pricing risk by appropriately setting and adjusting underwriting strategy, risk selection and pricing practices throughout the underwriting cycle. Underwriting/pricing risk is monitored throughout the year against committed business plans underpinned by cell reviews. QBE’s underwriting strategy aims to diversify and limit the type of insurance risks accepted and reduce the variability of the expected outcome. The underwriting strategy is implemented through QBE’s annual business planning process, supported by minimum underwriting standards and delegated authorities. These authorities reflect the level of risk that the Group is prepared to take with respect to each permitted insurance class. Pricing of risks is controlled by the use of in-house pricing models relevant to specific portfolios and the markets in which QBE operates. Underwriters and actuaries maintain pricing and claims analysis for each portfolio, combined with a knowledge of current developments in the respective markets and classes of business. Insurance concentration risk QBE’s exposure to concentrations of insurance risk is mitigated by maintaining a business portfolio that is diversified across countries and classes of business. Product diversification is pursued through a strategy of developing strong underwriting skills in a wide variety of classes of business. The table below demonstrates the diversity of QBE’s operations: GROSS EARNED PREMIUM REVENUE Commercial and domestic property Agriculture Public/product liability Motor & motor casualty Professional indemnity Marine, energy and aviation Workers’ compensation Accident and health Financial and credit Other 2021 US$M 5,031 2,825 1,983 1,937 1,644 1,271 1,040 772 511 21 17,035 2020 US$M 4,194 1,957 1,647 1,750 1,263 1,098 847 727 465 60 14,008 Insurance concentration risk includes the risks from natural or man-made events that have the potential to produce claims from many of the Group’s policyholders at the same time (e.g. catastrophes). QBE currently uses a variety of methodologies to monitor aggregate exposures and manage catastrophe risk. These include the use of catastrophe models from third-party vendors, realistic disaster scenarios and group aggregate methodology. QBE sets the risk appetite relating to catastrophe risk with reference to the insurance concentration risk charge (ICRC). QBE’s maximum risk tolerance for an individual natural catastrophe, measured using the ICRC methodology, is determined annually and is linked to a maximum net aggregate allowance of catastrophe and large individual risk claims. Reserving risk Reserving risk is managed through the actuarial valuation of insurance liabilities, which is conducted at least half-yearly. The valuation of the net discounted central estimate of outstanding claims is performed by qualified and experienced actuaries, with reference to historical data and reasoned expectations of future experience and events. The net discounted central estimate of outstanding claims is subject to a comprehensive independent review at least annually. 113 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 114 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.3 Credit risk Overview Credit risk is the risk of financial loss from a counterparty’s failure to meet their financial obligations, including both inability or unwillingness to pay, as well as loss due to credit quality deterioration from rating downgrades. QBE’s exposure to credit risk results from financial transactions with securities issuers, debtors, brokers, policyholders, reinsurers and guarantors. QBE’s approach to managing credit risk is underpinned by the Group’s credit risk appetite as set by the Board and is summarised below. Reinsurance credit risk The Group’s objective is to maximise placement of reinsurance with highly rated counterparties. Concentration of risk with reinsurance counterparties is monitored strictly and regularly by the Group’s Security Committee and is controlled by reference to the following protocols: • treaty or facultative reinsurance is placed in accordance with the requirements of the Group REMS and Group Security Committee guidelines; • reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical claims and potential future claims based on the Group’s insurance concentrations; and • exposure to reinsurance counterparties and the credit quality of those counterparties are actively monitored. Credit risk exposures are calculated regularly and compared with authorised credit limits. The Group is exposed to material concentrations of credit risk in relation to reinsurance recoveries at the balance date, in particular to large global reinsurers. In certain cases, the Group requires letters of credit or other collateral arrangements to be provided to guarantee the recoverability of the amount involved. Collateral held for the Group in respect of reinsurance arrangements is $1,960 million (2020 $1,098 million). The carrying amount of relevant asset classes on the balance sheet represents the maximum amount of credit exposure. Collateral held may reduce the level of credit risk associated with this exposure but does not change the total amount recoverable. The credit rating analysis below includes the impact of such security arrangements. In some cases, further security has been obtained in the form of trust arrangements, reinsurer default protection and other potential offsets. This additional security has not been included in the credit rating analysis below. The following table provides information about the quality of the Group’s credit risk exposure in respect of reinsurance recoveries at the balance date. The analysis classifies the assets according to Standard & Poor’s (S&P) counterparty credit ratings. AAA is the highest possible rating. Rated assets falling outside the range of AAA to BBB are classified as speculative grade. As at 31 December 2021 Reinsurance recoveries on outstanding claims1, 2 Reinsurance recoveries on paid claims1 As at 31 December 2020 Reinsurance recoveries on outstanding claims1, 2 Reinsurance recoveries on paid claims1 1 Net of a provision for impairment. 2 Excludes other recoveries of $261 million (2020 $303 million). CREDIT RATING AAA US$M 2 – 67 1 AA US$M 4,713 1,701 4,613 1,138 A US$M 1,662 388 1,419 301 BBB US$M NOT RATED US$M 55 4 58 3 64 25 67 9 TOTAL US$M 6,496 2,118 6,224 1,452 114 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.3 Credit risk Overview reinsurers and guarantors. is summarised below. Credit risk is the risk of financial loss from a counterparty’s failure to meet their financial obligations, including both inability or unwillingness to pay, as well as loss due to credit quality deterioration from rating downgrades. QBE’s exposure to credit risk results from financial transactions with securities issuers, debtors, brokers, policyholders, QBE’s approach to managing credit risk is underpinned by the Group’s credit risk appetite as set by the Board and Reinsurance credit risk to the following protocols: Committee guidelines; The Group’s objective is to maximise placement of reinsurance with highly rated counterparties. Concentration of risk with reinsurance counterparties is monitored strictly and regularly by the Group’s Security Committee and is controlled by reference • treaty or facultative reinsurance is placed in accordance with the requirements of the Group REMS and Group Security • reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical claims and potential future claims based on the Group’s insurance concentrations; and • exposure to reinsurance counterparties and the credit quality of those counterparties are actively monitored. Credit risk exposures are calculated regularly and compared with authorised credit limits. The Group is exposed to material concentrations of credit risk in relation to reinsurance recoveries at the balance date, in particular to large global reinsurers. In certain cases, the Group requires letters of credit or other collateral arrangements to be provided to guarantee the recoverability of the amount involved. Collateral held for the Group in respect of reinsurance arrangements is $1,960 million (2020 $1,098 million). The carrying amount of relevant asset classes on the balance sheet represents the maximum amount of credit exposure. Collateral held may reduce the level of credit risk associated with this exposure but does not change the total amount recoverable. The credit rating analysis below includes the impact of such security arrangements. In some cases, further security has been obtained in the form of trust arrangements, reinsurer default protection and other potential offsets. This additional security has not been included in the credit rating analysis below. The following table provides information about the quality of the Group’s credit risk exposure in respect of reinsurance recoveries at the balance date. The analysis classifies the assets according to Standard & Poor’s (S&P) counterparty credit ratings. AAA is the highest possible rating. Rated assets falling outside the range of AAA to BBB are classified as speculative grade. As at 31 December 2021 Reinsurance recoveries on outstanding claims1, 2 Reinsurance recoveries on paid claims1 As at 31 December 2020 Reinsurance recoveries on outstanding claims1, 2 Reinsurance recoveries on paid claims1 1 Net of a provision for impairment. 2 Excludes other recoveries of $261 million (2020 $303 million). CREDIT RATING AAA US$M 2 – 67 1 AA US$M 4,713 1,701 4,613 1,138 A US$M 1,662 388 1,419 301 BBB US$M NOT RATED US$M 55 4 58 3 64 25 67 9 TOTAL US$M 6,496 2,118 6,224 1,452 The following table provides further information regarding the ageing of reinsurance recoveries on paid claims at the balance date: PAST DUE BUT NOT IMPAIRED NEITHER PAST DUE NOR IMPAIRED US$M 1,333 1,014 YEAR 2021 2020 0 TO 3 MONTHS US$M 4 TO 6 MONTHS US$M 7 MONTHS TO 1 YEAR US$M 642 304 58 76 36 31 GREATER THAN 1 YEAR US$M 49 27 TOTAL US$M 2,118 1,452 Reinsurance recoveries on paid claims1 1 Net of a provision for impairment. Investment and treasury credit risk The Group only transacts with investment counterparties within the limits outlined in the delegated authorities. Investment counterparty exposure limits are applied to individual counterparty exposures and to multiple exposures within a group of related companies in relation to investments, cash deposits and forward foreign exchange exposures. Counterparty exposure limit compliance is monitored daily. The following table provides information regarding the Group’s aggregate credit risk exposure at the balance date in respect of the major classes of financial assets. Trade and other receivables are excluded from this analysis on the basis that they comprise smaller credit risk items which generally cannot be rated and are not individually material. The analysis classifies the assets according to S&P counterparty credit ratings. AAA is the highest possible rating. Rated assets falling outside the range of AAA to BBB are classified as speculative grade. As at 31 December 2021 Cash and cash equivalents Interest-bearing investments Derivative financial instruments As at 31 December 2020 Cash and cash equivalents Interest-bearing investments Derivative financial instruments CREDIT RATING AAA US$M – 4,435 – 38 2,947 – AA US$M 232 9,706 53 238 9,509 218 A US$M 499 9,474 81 275 8,982 115 BBB US$M NOT RATED US$M TOTAL US$M 35 2,715 6 155 3,427 186 53 38 2 60 39 1 819 26,368 142 766 24,904 520 The carrying amount of the relevant asset classes on the balance sheet represents the maximum amount of credit exposure at the balance date. The fair value of derivatives shown on the balance sheet represents the risk exposure at the balance date but not the maximum risk exposure that could arise in the future as a result of changing values. Insurance and other credit risk The Group transacts with brokers that are reputable, suitable and approved in accordance with local broker policies. The continuous due diligence over brokers involves an assessment of the broker’s reputation, regulatory standing and financial strength. QBE regularly reviews the collectability of receivables and the adequacy of associated provisions for impairment. Concentration risk for large brokers is also monitored. Balances are monitored on the basis of uncollected debt and debt outstanding in excess of six months. Brokers are also subject to regular due diligence to ensure adherence to local broker policies and associated requirements. The following table provides information regarding the ageing of the Group’s financial assets that are past due but not impaired and which are largely unrated at the balance date: PAST DUE BUT NOT IMPAIRED NEITHER PAST DUE NOR IMPAIRED US$M 0 TO 3 MONTHS US$M 4 TO 6 MONTHS US$M 7 MONTHS TO 1 YEAR US$M GREATER THAN 1 YEAR US$M 2,789 126 508 2,425 212 353 421 60 41 334 1 4 152 2 1 159 2 1 65 1 1 50 3 1 35 6 9 22 6 6 TOTAL US$M 3,462 195 560 2,990 224 365 As at 31 December 2021 Premium receivable1 Other trade debtors Other receivables As at 31 December 2020 Premium receivable1 Other trade debtors Other receivables 1 Net of a provision for impairment. 115 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 116 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.4 Market risk Overview Market risk is the risk of adverse impacts on earnings resulting from changes in market factors. Market factors include, but are not limited to, interest rates, equity prices, credit spreads and foreign exchange rates. QBE’s approach to managing market risk is underpinned by the Group’s market risk appetite as set by the Board and is summarised below. QBE’s approach to managing investment market movements is underpinned by the Group’s investment strategy which outlines QBE’s view of the markets and its corresponding investment approach. Investment market risk is managed through the application of exposure and asset limits. These limits are based on the market risk appetite as determined by the Board and apply to: • losses generated on the investment portfolio under market stress scenarios. The scenarios assume adverse movements in market factors and are designed to reflect a significant market stress event; and • sensitivities to changes in interest rate and credit spread risk, measured in terms of sensitivities to changes in risk factors such as interest rate risk. Interest rate risk QBE is exposed to interest rate risk through its holdings in interest-bearing assets. Financial instruments with a floating interest rate expose the Group to cash flow interest rate risk, whereas fixed interest rate instruments expose the Group to fair value interest rate risk. Interest-bearing borrowings issued by the Group are measured at amortised cost and therefore do not expose the Group result to fair value interest rate risk. QBE’s risk management approach is to minimise interest rate risk by actively managing investment portfolios to achieve a balance between cash flow interest rate risk and fair value interest rate risk. The Group predominantly invests in high quality, liquid interest-bearing securities and cash and may use derivative financial instruments to manage the interest rate risk of the fixed interest portfolio and other financial instruments. The risk management processes over these derivative financial instruments include close senior management scrutiny, including appropriate board and other management reporting. Derivatives are used only for approved purposes and are subject to Board-approved risk appetites and delegated authority levels provided to management. The level of derivative exposure is reviewed on an ongoing basis. Appropriate segregation of duties exists with respect to derivative use, and compliance with policy, limits and other requirements is closely monitored. The net central estimate of outstanding claims is discounted to present value by reference to risk-free interest rates. The Group is therefore exposed to potential underwriting result volatility as a result of interest rate movements. In practice, over the longer term, an increase or decrease in interest rates is normally offset by a corresponding increase or decrease in inflation. Information relating to this sensitivity is provided in note 2.3.7. At the balance date, the average modified duration of cash and fixed interest securities was 2.1 years (2020 2.1 years). Although QBE maintains a shorter asset duration relative to insurance liabilities, the Group’s overall exposure to interest rate risk is not material given the quantum by which the value of fixed income assets exceeds the value of insurance liabilities. All investments are financial assets measured at fair value through profit or loss. Movements in interest rates impact the fair value of interest-bearing financial assets and therefore impact reported profit or loss after tax. The impact of a 0.5% increase or decrease in interest rates on interest-bearing financial assets owned by the Group at the balance date is shown in the table below: Interest rate movement – interest-bearing financial assets 1 Net of tax at the Group’s prima facie income tax rate of 30%. SENSITIVITY % +0.5 -0.5 PROFIT (LOSS)1 2021 US$M (199) 169 2020 US$M (186) 101 Equity price risk Equity price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded on the market. QBE is exposed to equity price risk on its investment in growth assets and may use derivative financial instruments to manage this exposure. The risk management processes over these derivative financial instruments are the same as those already explained in respect of interest rate derivative financial instruments. Exposure is also managed by diversification across international markets and currencies. Growth assets are measured at fair value through profit or loss. The impact of a 20% increase or decrease in the value of investments owned by the Group at the balance date on profit after tax is shown in the table below: QBE’s approach to managing investment market movements is underpinned by the Group’s investment strategy which outlines QBE’s Unlisted property trusts view of the markets and its corresponding investment approach. Infrastructure assets Alternatives ASX 200 S&P 500 Private equity2 SENSITIVITY % +20 -20 +20 -20 +20 -20 +20 -20 +20 -20 +20 -20 PROFIT (LOSS)1 2021 US$M 110 (110) 106 (106) 16 (16) 3 (3) 3 (3) – – 2020 US$M 125 (125) 105 (105) 14 (14) 2 (2) – – 37 (37) 1 Net of tax at the Group’s prima facie income tax rate of 30%. 2 At 31 December 2021, $50 million of private equity is classified as held for sale (note 3.2) but is not considered subject to equity price risk. 117 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s QBE is also exposed to price risk on its fixed interest securities as discussed above in relation to interest rate risk, and below in relation to credit spread risk. All securities are measured at fair value through profit or loss. ' 116 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.4 Market risk Overview Market risk is the risk of adverse impacts on earnings resulting from changes in market factors. Market factors include, but are not limited to, interest rates, equity prices, credit spreads and foreign exchange rates. QBE’s approach to managing market risk is underpinned by the Group’s market risk appetite as set by the Board and is summarised below. Investment market risk is managed through the application of exposure and asset limits. These limits are based on the market risk appetite as determined by the Board and apply to: • losses generated on the investment portfolio under market stress scenarios. The scenarios assume adverse movements in market factors and are designed to reflect a significant market stress event; and • sensitivities to changes in interest rate and credit spread risk, measured in terms of sensitivities to changes in risk factors such as interest rate risk. Interest rate risk QBE is exposed to interest rate risk through its holdings in interest-bearing assets. Financial instruments with a floating interest rate expose the Group to cash flow interest rate risk, whereas fixed interest rate instruments expose the Group to fair value interest rate risk. Interest-bearing borrowings issued by the Group are measured at amortised cost and therefore do not expose the Group result to fair value interest rate risk. QBE’s risk management approach is to minimise interest rate risk by actively managing investment portfolios to achieve a balance between cash flow interest rate risk and fair value interest rate risk. The Group predominantly invests in high quality, liquid interest-bearing securities and cash and may use derivative financial instruments to manage the interest rate risk of the fixed interest portfolio and other financial instruments. The risk management processes over these derivative financial instruments include close senior management scrutiny, including appropriate board and other management reporting. Derivatives are used only for approved purposes and are subject to Board-approved risk appetites and delegated authority levels provided to management. The level of derivative exposure is reviewed on an ongoing basis. Appropriate segregation of duties exists with respect to derivative use, and compliance with policy, limits and other requirements is closely monitored. The net central estimate of outstanding claims is discounted to present value by reference to risk-free interest rates. The Group is therefore exposed to potential underwriting result volatility as a result of interest rate movements. In practice, over the longer term, an increase or decrease in interest rates is normally offset by a corresponding increase or decrease in inflation. Information relating to this sensitivity is provided in note 2.3.7. At the balance date, the average modified duration of cash and fixed interest securities was 2.1 years (2020 2.1 years). Although QBE maintains a shorter asset duration relative to insurance liabilities, the Group’s overall exposure to interest rate risk is not material given the quantum by which the value of fixed income assets exceeds the value of insurance liabilities. All investments are financial assets measured at fair value through profit or loss. Movements in interest rates impact the fair value of interest-bearing financial assets and therefore impact reported profit or loss after tax. The impact of a 0.5% increase or decrease in interest rates on interest-bearing financial assets owned by the Group at the balance date is shown in the table below: Interest rate movement – interest-bearing financial assets 1 Net of tax at the Group’s prima facie income tax rate of 30%. SENSITIVITY % +0.5 -0.5 PROFIT (LOSS)1 2021 US$M (199) 169 2020 US$M (186) 101 Credit spread risk Movements in credit spreads impact the value of corporate interest-bearing securities, and therefore impact reported profit or loss after tax. This risk is managed by investing in high quality, liquid interest-bearing securities and by managing the credit spread duration of the corporate securities portfolio. The impact of a 0.5% increase or decrease in credit spreads on interest-bearing financial assets held by the Group at the balance date on profit or loss after tax is shown in the table below: Credit spread movement – corporate interest-bearing financial assets 2 1 Net of tax at the Group’s prima facie income tax rate of 30%. 2 Includes infrastructure debt and other investments in non-government bonds. SENSITIVITY % +0.5 -0.5 PROFIT (LOSS)1 2021 US$M (114) 96 2020 US$M (143) 111 5 R e p o r t F i n a n c i a l 6 i n f o r m a t i o n O t h e r 118 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT Foreign exchange risk QBE’s approach to foreign exchange management is underpinned by the Group’s foreign currency strategy. The Group’s foreign exchange exposure generally arises as a result of either the translation of foreign currency amounts to the functional currency of a controlled entity (operational currency risk) or due to the translation of the Group’s net investments in foreign operations to the functional currency of the ultimate parent entity of Australian dollars and to QBE’s presentation currency of US dollars (currency translation risk). Operational currency risk Operational currency risk is managed as follows: • Each controlled entity manages the volatility arising from changes in foreign exchange rates by matching liabilities with assets of the same currency, as far as is practicable, thus ensuring that any exposures to foreign currencies are minimised. The Group’s aim is to mitigate, where possible, its operational foreign currency exposures at a controlled entity level. • Forward foreign exchange contracts are used where possible to protect any residual currency positions. Where appropriate, forward foreign exchange contracts may also be used in relation to the Group’s borrowings and may be designated as hedge relationships for accounting purposes. Further information on forward foreign exchange contracts used to manage operational currency risk is provided in note 5.6. The risk management process relating to the use of forward foreign exchange contracts involves close senior management scrutiny. All forward foreign exchange contracts are subject to delegated authority levels provided to management and the levels of exposure are reviewed on an ongoing basis. The analysis below demonstrates the impact on profit or loss after income tax of a 10% strengthening or weakening of the major currencies against the functional currencies of the underlying QBE entities for which the Group has a material exposure at the balance date. The exposures below reflect the aggregation of operational currency exposures of multiple entities with different functional currencies. The sensitivity is measured with reference to the Group’s residual (or unmatched) operational foreign currency exposures at the balance date. Operational foreign exchange gains or losses are recognised in profit or loss in accordance with the policy set out in note 1.2.4. The sensitivities provided demonstrate the impact of a change in one key variable in isolation while other assumptions remain unchanged. The sensitivities shown in the table below are relevant only at the balance sheet date, as any unmatched exposures are actively monitored by management and the exposure subsequently matched. EXPOSURE CURRENCY US dollar Australian dollar 2021 2020 RESIDUAL EXPOSURE US$M 198 95 SENSITIVITY % PROFIT (LOSS)1 US$M +10 ‑10 +10 ‑10 14 (14) 7 (7) RESIDUAL EXPOSURE US$M 258 (55) SENSITIVITY % PROFIT (LOSS)1 US$M +10 -10 +10 -10 18 (18) (4) 4 1 Net of tax at the Group’s prima facie income tax rate of 30%. 118 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 QBE’s approach to foreign exchange management is underpinned by the Group’s foreign currency strategy. The Group’s foreign exchange exposure generally arises as a result of either the translation of foreign currency amounts to the functional currency of a controlled entity (operational currency risk) or due to the translation of the Group’s net investments in foreign operations to the functional currency of the ultimate parent entity of Australian dollars and to QBE’s presentation currency of US dollars (currency 4. RISK MANAGEMENT Foreign exchange risk translation risk). Operational currency risk Operational currency risk is managed as follows: • Each controlled entity manages the volatility arising from changes in foreign exchange rates by matching liabilities with assets of the same currency, as far as is practicable, thus ensuring that any exposures to foreign currencies are minimised. The Group’s aim is to mitigate, where possible, its operational foreign currency exposures at a controlled entity level. • Forward foreign exchange contracts are used where possible to protect any residual currency positions. Where appropriate, forward foreign exchange contracts may also be used in relation to the Group’s borrowings and may be designated as hedge relationships for accounting purposes. Further information on forward foreign exchange contracts used to manage operational currency risk is provided in note 5.6. are reviewed on an ongoing basis. The risk management process relating to the use of forward foreign exchange contracts involves close senior management scrutiny. All forward foreign exchange contracts are subject to delegated authority levels provided to management and the levels of exposure The analysis below demonstrates the impact on profit or loss after income tax of a 10% strengthening or weakening of the major currencies against the functional currencies of the underlying QBE entities for which the Group has a material exposure at the balance date. The exposures below reflect the aggregation of operational currency exposures of multiple entities with different functional currencies. The sensitivity is measured with reference to the Group’s residual (or unmatched) operational foreign currency exposures at the balance date. Operational foreign exchange gains or losses are recognised in profit or loss in accordance with the policy set out in note 1.2.4. The sensitivities provided demonstrate the impact of a change in one key variable in isolation while other assumptions remain unchanged. The sensitivities shown in the table below are relevant only at the balance sheet date, as any unmatched exposures are actively monitored by management and the exposure subsequently matched. EXPOSURE CURRENCY US dollar Australian dollar RESIDUAL EXPOSURE US$M 198 95 2021 2020 SENSITIVITY PROFIT (LOSS)1 SENSITIVITY PROFIT (LOSS)1 % +10 ‑10 +10 ‑10 US$M 14 (14) 7 (7) RESIDUAL EXPOSURE US$M 258 (55) % +10 -10 +10 -10 US$M 18 (18) (4) 4 1 Net of tax at the Group’s prima facie income tax rate of 30%. Currency translation risk QBE is exposed to currency risk in relation to the translation of: • the ultimate parent entity’s net investments in foreign operations to its functional currency of Australian dollars; and • all non-US dollar functional currency operations to the Group’s presentation currency of US dollars. Currency translation risk in relation to QBE’s investment in foreign operations is monitored on an ongoing basis and may be mitigated by designation of foreign currency borrowings as a hedge of this risk. Any borrowing that qualifies as a hedging instrument may be designated as a hedge of the Australian dollar ultimate parent entity’s net investments in foreign operations and any residual exposure to foreign operations in tradeable currencies may be hedged up to the limit specified in the Group risk appetite statement. The extent of hedging this exposure is carefully managed to ensure an appropriate balance between currency risk and associated risks such as liquidity risk and stability of capital adequacy levels. QBE does not ordinarily seek to use derivatives to mitigate currency translation risk on translation to the ultimate parent entity functional currency of Australian dollars for the following reasons: • currency translation gains and losses generally have no cash flow; • currency translation gains and losses are accounted for in the foreign currency translation reserve (a component of equity) and therefore do not impact profit or loss unless the related foreign operation is disposed of; and • management of translation risk needs to be balanced against the impact on capital requirements and liquidity risk. QBE may, however, elect to use derivatives to manage currency translation risk in order to preserve capital. Currency management processes are actively monitored by Group Treasury and involve close senior management scrutiny. All hedge transactions are subject to delegated authority levels provided to management, and the levels of exposure are reviewed on an ongoing basis. All instruments that are designated as hedges are tested for effectiveness in accordance with AASB 9 Financial Instruments. Further information on derivatives and borrowings designated as hedges of net investments in foreign operations is provided in note 5.6.1. Foreign exchange gains or losses arising on translation of the Group’s foreign operations from the ultimate parent entity’s functional currency of Australian dollars to the Group’s US dollar presentation currency are recognised directly in equity in accordance with the policy set out in note 1.2.4. The Group cannot hedge this exposure. 119 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s The analysis below demonstrates the impact on equity of a 10% strengthening or weakening against the US dollar of the major currencies to which QBE is exposed through its net investments in foreign operations. The basis for the sensitivity calculation is the Group’s actual residual exposure at the balance date. ' EXPOSURE CURRENCY Australian dollar Euro Sterling New Zealand dollar Singapore dollar Hong Kong dollar 2021 RESIDUAL EXPOSURE US$M SENSITIVITY % EQUITY INCREASE (DECREASE) US$M 2,702 1,538 782 278 121 116 +10 ‑10 +10 ‑10 +10 ‑10 +10 ‑10 +10 ‑10 +10 ‑10 270 (270) 154 (154) 78 (78) 28 (28) 12 (12) 12 (12) RESIDUAL EXPOSURE US$M 2,962 1,632 150 222 120 36 2020 SENSITIVITY % EQUITY INCREASE (DECREASE) US$M +10 -10 +10 -10 +10 -10 +10 -10 +10 -10 +10 -10 296 (296) 163 (163) 15 (15) 22 (22) 12 (12) 4 (4) 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 120 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.5 Liquidity risk Overview Liquidity risk is the risk of having insufficient liquid assets to meet liabilities as they fall due to policyholders and creditors or only being able to access liquidity at excessive cost. QBE’s approach to managing liquidity risk is underpinned by the Group’s liquidity risk appetite which is set by the Board and is summarised below. QBE manages liquidity risk using a number of tools, as follows: • cash flow targeting; • maintenance of a minimum level of liquid assets relative to the Group’s liabilities; • cash flow forecasting; and • stress testing and contingency planning. Liquidity is managed across the Group using a number of cash flow forecasting and targeting tools and techniques. Cash flow forecasting and targeting are conducted at a legal entity level and involve actively managing operational cash flow requirements. To supplement the cash flow targeting and to ensure that there are sufficient liquid funds available to meet insurance and investment obligations, a minimum percentage of QBE’s liabilities is held, at all times, in cash and liquid securities. QBE also maintains a defined proportion of the funds under management in liquid assets. QBE actively forecasts cash flow requirements to identify future cash surpluses and shortages to optimise invested cash balances and limit unexpected calls from the investment pool. The Group limits the risk of liquidity shortfalls resulting from mismatches in the timing of claims payments and receipts of claims recoveries by negotiating cash call clauses in reinsurance contracts and seeking accelerated settlements for large reinsurance recoveries. The following table summarises the maturity profile of the Group’s financial liabilities based on the remaining contractual obligations. Borrowings and contractual undiscounted interest payments are disclosed by reference to the first call date of the borrowings, details of which are included in note 5.1. As at 31 December 2021 Derivative financial instruments Trade payables Other payables and accrued expenses Treasury payables Investment payables Lease liabilities Borrowings1 Contractual undiscounted interest payments As at 31 December 2020 Derivative financial instruments Trade payables Other payables and accrued expenses Treasury payables Investment payables Lease liabilities Borrowings1 Contractual undiscounted interest payments LESS THAN 1 YEAR US$M 13 TO 36 MONTHS US$M 37 TO 60 MONTHS US$M OVER 5 YEARS US$M NO FIXED TERM US$M 130 2,123 767 19 51 56 442 162 316 1,475 679 16 4 68 200 191 322 191 46 – – 90 1,106 268 231 122 26 – – 103 854 326 – 2 5 – – 60 1,188 108 298 3 3 – – 84 1,000 194 – 1 – – – 148 541 17 – – – – – 176 909 23 – 5 5 – – – – – – 4 6 – – – – – TOTAL US$M 452 2,322 823 19 51 354 3,277 555 845 1,604 714 16 4 431 2,963 734 1 Excludes capitalised finance costs of $9 million (2020 $8 million). The maturity profile of the Group’s net discounted central estimate is analysed in note 2.3.6. 120 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.5 Liquidity risk Overview Liquidity risk is the risk of having insufficient liquid assets to meet liabilities as they fall due to policyholders and creditors or only being able to access liquidity at excessive cost. QBE’s approach to managing liquidity risk is underpinned by the Group’s liquidity risk appetite which is set by the Board and is summarised below. QBE manages liquidity risk using a number of tools, as follows: • cash flow targeting; • maintenance of a minimum level of liquid assets relative to the Group’s liabilities; • cash flow forecasting; and • stress testing and contingency planning. Liquidity is managed across the Group using a number of cash flow forecasting and targeting tools and techniques. Cash flow forecasting and targeting are conducted at a legal entity level and involve actively managing operational cash flow requirements. To supplement the cash flow targeting and to ensure that there are sufficient liquid funds available to meet insurance and investment obligations, a minimum percentage of QBE’s liabilities is held, at all times, in cash and liquid securities. QBE also maintains a defined proportion of the funds under management in liquid assets. QBE actively forecasts cash flow requirements to identify future cash surpluses and shortages to optimise invested cash balances and limit unexpected calls from the investment pool. The Group limits the risk of liquidity shortfalls resulting from mismatches in the timing of claims payments and receipts of claims recoveries by negotiating cash call clauses in reinsurance contracts and seeking accelerated settlements for large reinsurance recoveries. The following table summarises the maturity profile of the Group’s financial liabilities based on the remaining contractual obligations. Borrowings and contractual undiscounted interest payments are disclosed by reference to the first call date of the borrowings, details of which are included in note 5.1. LESS THAN 1 YEAR US$M 13 TO 36 MONTHS US$M 37 TO 60 MONTHS US$M OVER 5 YEARS US$M NO FIXED TERM US$M As at 31 December 2021 Derivative financial instruments Trade payables Other payables and accrued expenses Treasury payables Investment payables Lease liabilities Borrowings1 Contractual undiscounted interest payments As at 31 December 2020 Derivative financial instruments Trade payables Other payables and accrued expenses Treasury payables Investment payables Lease liabilities Borrowings1 Contractual undiscounted interest payments 130 2,123 767 19 51 56 442 162 679 16 4 68 200 191 316 1,475 322 191 46 – – 90 1,106 268 231 122 26 – – 103 854 326 – 2 5 – – 3 3 – – 60 1,188 108 298 84 1,000 194 148 541 17 – 1 – – – – – – – – 176 909 23 1 Excludes capitalised finance costs of $9 million (2020 $8 million). The maturity profile of the Group’s net discounted central estimate is analysed in note 2.3.6. TOTAL US$M 452 2,322 823 19 51 354 3,277 555 845 1,604 714 16 4 431 2,963 734 – 5 5 – – – – – – 4 6 – – – – – The maturity of the Group’s interest-bearing financial assets is shown in the table below. INTEREST-BEARING FINANCIAL ASSETS MATURING IN: LESS THAN 1 YEAR 13 TO 24 MONTHS 25 TO 36 MONTHS 37 TO 48 MONTHS 49 TO 60 MONTHS OVER 5 YEARS US$M % p.a. US$M % p.a. US$M % p.a. US$M % p.a. 9,353 0.3 1,517 0.1 5,867 0.4 1,578 0.1 4,105 0.7 705 0.3 4,095 0.2 630 0.3 2,636 1.0 762 0.6 3,677 0.3 610 0.4 2,038 1.2 337 0.7 2,314 0.4 297 1.0 1,348 1.2 294 0.8 2,030 0.4 341 0.8 3,369 1.3 723 1.1 3,374 0.6 857 1.2 TOTAL 22,849 0.7 4,338 0.5 21,357 0.4 4,313 0.5 As at 31 December 2021 Fixed rate Weighted average interest rate Floating rate Weighted average interest rate As at 31 December 2020 Fixed rate Weighted average interest rate Floating rate Weighted average interest rate 4.6 Operational risk Overview Operational risk is the risk of financial loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk can materialise in a number of forms including fraud perpetrated by employees or by external parties (e.g. claims fraud or cyber attacks), employment practices (e.g. losses arising from breaches of employment, health or safety laws), improper business practices (e.g. failure to meet professional obligations or issues with the nature or design of an insurance product), business disruption and system failures, or business and transaction processing failures. QBE manages operational risk through setting policy, minimum standards, and process and system controls, including effective segregation of duties, access controls, authorisations and reconciliation procedures, business continuity management, fraud management, information security and physical security. QBE identifies, assesses and manages operational risk through the: • risk and control self-assessment process, which identifies and assesses the key risks to achieving business objectives and is conducted at the business unit level; • operational risk appetite statement, which sets out the nature and level of risk that the Board and Group Executive Committee are willing to take in pursuit of the organisation’s objectives. The operational risk appetite statement is measured through an assessment of the control environment, key risk indicators, issues and incidents; and • scenario analysis process, which assesses the impact of potentially extreme scenarios and the appropriateness of our contingency planning. Key residual risks from the above processes are monitored by the Executive Risk Committee. 121 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 122 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 4. RISK MANAGEMENT 4.7 Compliance risk Overview Compliance risk is the risk of legal or regulatory penalties, financial loss or impacts and non-financial loss or impacts (including reputational damage) resulting from a breach of obligations. Obligations refer to those in legislation, regulation, industry codes and standards, internal policies and ethical and business standards. QBE’s approach to managing compliance risk is underpinned by the Group risk appetite as set by the Board and is summarised below. QBE manages compliance risk through its governance, culture, stakeholder management and strategy approach. There are six components for managing compliance risk: • identify compliance obligations and controls; • embed compliance obligations across systems and processes; • communicate and train staff on compliance requirements; • monitor obligations and controls; • identify and rectify incidents, issues and breaches; and • report on and assess the state of compliance. Compliance management is subject to continuous improvement, recognising changes in the regulatory and legal environment and industry, customer and community expectations. 4.8 Group risk Overview Group risk is the risk to a division arising specifically from being part of the wider Group, including financial impact and loss of support from the Company. QBE’s approach to managing Group risk is supported by divisional Group risk appetite statements where divisions define the Board-approved plan to address identified Group risk exposures. Sources of Group risk are summarised below. Sources of Group risk may include: • shared global reinsurance program, including counterparty risk of Equator Re; • intercompany loans; • contagion reputational risk; • credit agency dependency; • use of Group functions where there is a global operating model in place; • use of QBE’s internal asset management function – Group Investments; • Group initiatives or decisions with a material impact on one or more divisions; and • liquidity and central foreign exchange management. QBE manages Group risk through various systems, controls and processes, including the management of reinsurance arrangements, use of intercompany transactions and balances accounting guidance, transfer pricing guidelines, investment management agreements, capital planning and assessments of the use of Group functions, Group initiatives and contagion reputational events. 123 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 fi n a n c i a l O p e r a t i n g a n d 5. CAPITAL STRUCTURE Overview QBE’s objective in managing capital is to maintain an optimal balance between debt and equity in order to reduce the overall cost of capital while satisfying the capital adequacy requirements of regulators and rating agencies, providing financial security for our policyholders and continuing to provide an adequate return to shareholders. The Company is listed on the Australian Securities Exchange and its share capital is denominated in Australian dollars. The Group also accesses international debt markets to diversify its funding base and maintain an appropriate amount of leverage. Borrowings are diversified across currencies and tenure. 122 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 Compliance risk is the risk of legal or regulatory penalties, financial loss or impacts and non-financial loss or impacts (including reputational damage) resulting from a breach of obligations. Obligations refer to those in legislation, regulation, industry codes and standards, internal policies and ethical and business standards. 4. RISK MANAGEMENT 4.7 Compliance risk Overview is summarised below. components for managing compliance risk: • identify compliance obligations and controls; • embed compliance obligations across systems and processes; • communicate and train staff on compliance requirements; • monitor obligations and controls; • identify and rectify incidents, issues and breaches; and • report on and assess the state of compliance. 4.8 Group risk Overview Compliance management is subject to continuous improvement, recognising changes in the regulatory and legal environment and industry, customer and community expectations. Group risk is the risk to a division arising specifically from being part of the wider Group, including financial impact and loss of support from the Company. QBE’s approach to managing Group risk is supported by divisional Group risk appetite statements where divisions define the Board-approved plan to address identified Group risk exposures. Sources of Group risk are summarised below. Sources of Group risk may include: • shared global reinsurance program, including counterparty risk of Equator Re; • intercompany loans; • contagion reputational risk; • credit agency dependency; • use of Group functions where there is a global operating model in place; • use of QBE’s internal asset management function – Group Investments; • Group initiatives or decisions with a material impact on one or more divisions; and • liquidity and central foreign exchange management. QBE manages Group risk through various systems, controls and processes, including the management of reinsurance arrangements, use of intercompany transactions and balances accounting guidance, transfer pricing guidelines, investment management agreements, capital planning and assessments of the use of Group functions, Group initiatives and contagion reputational events. QBE’s approach to managing compliance risk is underpinned by the Group risk appetite as set by the Board and Details of the Group’s approach to capital risk management are disclosed in note 4.1. r e v i e w QBE manages compliance risk through its governance, culture, stakeholder management and strategy approach. There are six 5.1 Borrowings FINAL MATURITY DATE ISSUE DATE PRINCIPAL AMOUNT Senior debt 25 May 2023 Subordinated debt 25 August 2036 13 September 2038 24 May 2041 24 May 2041 24 May 2042 24 November 2043 2 December 2044 12 November 2045 17 June 2046 25 September 2017 $6 million 25 August 2020 13 September 2021 24 May 2011 24 May 2011 24 May 2016 21 November 2016 2 December 2014 12 November 2015 17 June 2016 A$500 million1 £400 million (2020 nil) Nil (2020 $167 million) Nil (2020 £24 million) £327 million $400 million/A$689 million1 $700 million/A$1,169 million1 $300 million $524 million Total borrowings 2 Amounts expected to be settled within 12 months Amounts expected to be settled in greater than 12 months Total borrowings 1 Details of related hedging activity are included in note 5.6.1. 2 $3 million of finance costs (2020 $2 million) were capitalised during the year. Subordinated debt key terms Subordinated debt due 2036 2021 US$M 6 6 362 538 – – 442 400 698 300 522 3,262 3,268 442 2,826 3,268 2020 US$M 6 6 385 – 167 33 445 400 697 300 522 2,949 2,955 200 2,755 2,955 Interest is payable quarterly in arrears at a rate equal to the three-month BBSW rate plus a margin of 2.75% per annum. Subordinated debt due 2038 Interest is payable semi-annually in arrears at a fixed rate of 2.5% per annum until 13 September 2028. The rate will reset in 2028 and 2033 to a rate calculated by reference to the then five-year gilt rate plus a margin of 2.061% per annum. 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 124 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE Subordinated debt due 2041 The securities were redeemed on 8 March 2021. Interest was payable semi-annually in arrears at a fixed rate of 7.25% per annum on the US dollar denominated debt and 7.5% per annum on the sterling debt. Subordinated debt due 2042 Interest is payable semi-annually in arrears at a fixed rate of 6.115% per annum until 24 May 2022. The rate will reset in 2022, 2027, 2032 and 2037 to a rate calculated by reference to the then five-year mid-market swap rate plus a margin of 5.0% per annum. The securities are intended to be redeemed. Subordinated debt due 2043 Interest is payable semi-annually in arrears at a fixed rate of 7.50% per annum until 24 November 2023. The rate will reset in 2023 and 2033 to a rate calculated by reference to the then 10-year US dollar swap rate plus a margin of 6.03% per annum. QBE has an option to defer payment of interest in certain circumstances and such deferral will not constitute an event of default. Subordinated debt due 2044 Interest is payable semi-annually in arrears at a fixed rate of 6.75% per annum until 2 December 2024, at which time the rate will reset to a 10-year mid-market swap rate plus a margin of 4.3% per annum. The rate will reset again, on the same basis, on 2 December 2034. Subordinated debt due 2045 Interest is payable semi-annually in arrears at a fixed rate of 6.1% per annum until 12 November 2025, at which time the rate will reset to a 10-year mid-market swap rate plus a margin of 3.993% per annum. The rate will reset again, on the same basis, on 12 November 2035. Subordinated debt due 2046 Interest is payable semi-annually in arrears at a fixed rate of 5.875% per annum until 17 June 2026. The rate will reset in 2026 and 2036 to a rate calculated by reference to the then 10-year mid-market swap rate plus a margin of 4.395% per annum. Redemption terms The securities are redeemable at the option of QBE, with the prior written approval of APRA, at any time in the event of certain tax and regulatory events and on: • 25 August 2026 and each interest payment date thereafter for securities due 2036; • any business day within the six-month period up to and including the first reset date of 13 September 2028 and on each reset date thereafter for securities due 2038; and • each reset date for securities due 2042, 2043, 2044, 2045 and 2046. Conversion terms The securities due 2036, 2038, 2042, 2043, 2044, 2045 and 2046 must be converted into a variable number of the Company’s ordinary shares, or written off, if APRA determines QBE to be non-viable. The conversion rate is subject to a price floor of 20% of the VWAP of the shares in the five trading days before the date of issue of the securities. Security arrangements The claims of bondholders pursuant to the subordinated debt will be subordinated in right of payment to the claims of all senior creditors. How we account for the numbers Borrowings are initially measured at fair value net of transaction costs directly attributable to the transaction and are subsequently measured at amortised cost. Any difference between the proceeds and the redemption amount is recognised through profit or loss over the period of the financial liability using the effective interest method. 124 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE Subordinated debt due 2041 Subordinated debt due 2042 The securities are intended to be redeemed. Subordinated debt due 2043 The securities were redeemed on 8 March 2021. Interest was payable semi-annually in arrears at a fixed rate of 7.25% per annum on the US dollar denominated debt and 7.5% per annum on the sterling debt. Interest is payable semi-annually in arrears at a fixed rate of 6.115% per annum until 24 May 2022. The rate will reset in 2022, 2027, 2032 and 2037 to a rate calculated by reference to the then five-year mid-market swap rate plus a margin of 5.0% per annum. Interest is payable semi-annually in arrears at a fixed rate of 7.50% per annum until 24 November 2023. The rate will reset in 2023 and 2033 to a rate calculated by reference to the then 10-year US dollar swap rate plus a margin of 6.03% per annum. QBE has an option to defer payment of interest in certain circumstances and such deferral will not constitute an event of default. Subordinated debt due 2044 Subordinated debt due 2045 Subordinated debt due 2046 Redemption terms and regulatory events and on: Conversion terms Security arrangements Interest is payable semi-annually in arrears at a fixed rate of 6.1% per annum until 12 November 2025, at which time the rate will reset to a 10-year mid-market swap rate plus a margin of 3.993% per annum. The rate will reset again, on the same basis, on 12 November 2035. Interest is payable semi-annually in arrears at a fixed rate of 5.875% per annum until 17 June 2026. The rate will reset in 2026 and 2036 to a rate calculated by reference to the then 10-year mid-market swap rate plus a margin of 4.395% per annum. The securities are redeemable at the option of QBE, with the prior written approval of APRA, at any time in the event of certain tax • 25 August 2026 and each interest payment date thereafter for securities due 2036; • any business day within the six-month period up to and including the first reset date of 13 September 2028 and on each reset date thereafter for securities due 2038; and • each reset date for securities due 2042, 2043, 2044, 2045 and 2046. The securities due 2036, 2038, 2042, 2043, 2044, 2045 and 2046 must be converted into a variable number of the Company’s ordinary shares, or written off, if APRA determines QBE to be non-viable. The conversion rate is subject to a price floor of 20% of the VWAP of the shares in the five trading days before the date of issue of the securities. The claims of bondholders pursuant to the subordinated debt will be subordinated in right of payment to the claims of all senior creditors. How we account for the numbers Borrowings are initially measured at fair value net of transaction costs directly attributable to the transaction and are subsequently measured at amortised cost. Any difference between the proceeds and the redemption amount is recognised through profit or loss over the period of the financial liability using the effective interest method. 5.1.1 Fair value of borrowings Senior debt Subordinated debt Total fair value of borrowings 2021 US$M 6 3,475 3,481 2020 US$M 6 3,220 3,226 Consistent with other financial instruments, QBE is required to disclose the basis of valuation with reference to the fair value hierarchy which is explained in detail in note 3.2.1. The fair value of the Group’s borrowings is categorised as level 2 fair value measurements. Fixed and floating rate securities are priced using broker quotes and comparable prices for similar instruments in active markets. Where no active market exists, floating rate resettable notes are priced at par plus accrued interest. Interest is payable semi-annually in arrears at a fixed rate of 6.75% per annum until 2 December 2024, at which time the rate will reset to a 10-year mid-market swap rate plus a margin of 4.3% per annum. The rate will reset again, on the same basis, on 2 December 2034. 5.1.3 Movement in borrowings 5.1.2 Financing and other costs Interest expense on borrowings Other costs Total financing and other costs At 1 January Net changes from financing cash flows Reclassification of Additional Tier 1 instrument Other non-cash changes Foreign exchange At 31 December 5.2 Cash and cash equivalents Fixed interest rate Floating interest rate Restrictions on use 2021 US$M 177 70 247 2021 US$M 2,955 348 – 2 (37) 3,268 2021 US$M 14 805 819 2020 US$M 188 64 252 2020 US$M 3,095 218 (399) (1) 42 2,955 2020 US$M 13 753 766 Included in cash and cash equivalents are amounts totalling $74 million (2020 $73 million) which are held in Lloyd’s syndicate trust funds. In order to conduct underwriting business within some territories, Lloyd’s syndicates are required to lodge assets in locally regulated trust funds. Under Lloyd’s byelaws, these amounts can only be used to pay claims and allowable expenses of the syndicates and cannot be withdrawn from the trust funds until allowed to be distributed as profit once annual solvency requirements are met. 125 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i Also included in cash and cash equivalents is $125 million (2020 $110 million) relating to policyholder trust accounts in the United Kingdom which can only be accessed by QBE in certain circumstances, such as when QBE is owed a deductible by the policyholder on a claim. The Group recognises a corresponding payable in relation to these until such an event occurs. o n QBE has operations in many countries which have foreign exchange controls and regulations. These controls and regulations can vary from simple reporting requirements to outright prohibition of movement of funds without explicit prior central bank or regulator approval. The impact of these controls and regulations may restrict the Group’s capacity to repatriate capital and/or profits. How we account for the numbers Cash and cash equivalents include cash at bank and on hand and deposits at call which are readily convertible to cash on hand and which are used for operational cash requirements. Amounts in cash and cash equivalents are the same as those included in the consolidated statement of cash flows. The reconciliation of profit or loss after income tax to net cash flows from operating activities is included in note 8.4. 126 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.3 Contributed equity and reserves Overview Contributed equity comprises share capital and capital notes. Ordinary shares in the Company rank after all creditors, have no par value and entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. Capital notes are Additional Tier 1 instruments with discretionary and non-cumulative distributions, and no fixed redemption date. 5.3.1 Contributed equity Issued ordinary shares, fully paid Capital notes Contributed equity Share capital Issued ordinary shares, fully paid at 1 January Shares issued on-market net of transaction costs Shares issued under the Employee Share and Option Plan Shares issued under Dividend Reinvestment Plan Shares issued under Bonus Share Plan Foreign exchange Issued ordinary shares, fully paid at 31 December Shares notified to the Australian Securities Exchange Less: plan shares subject to non-recourse loans, de- recognised under accounting standards Issued ordinary shares, fully paid at 31 December Capital notes ISSUE DATE 12 May 2020 16 July 20201 PRINCIPAL AMOUNT $500 million $400 million 2021 NUMBER OF SHARES MILLIONS 1,471 – 4 1 1 – 1,477 1,477 – 1,477 US$M 9,387 – 31 11 – (538) 8,891 8,894 (3) 8,891 2021 US$M 8,891 886 9,777 2020 US$M 9,387 886 10,273 2020 NUMBER OF SHARES MILLIONS 1,305 157 3 5 1 – 1,471 1,471 – 1,471 2021 US$M 493 393 886 US$M 7,594 813 26 27 – 927 9,387 9,390 (3) 9,387 2020 US$M 493 393 886 1 In July 2020, the terms of these instruments (originally issued in November 2017) were amended such that the notes are written off at a point of non-viability, as determined by APRA, with no possibility of conversion into ordinary shares of the Company. This resulted in the classification of these instruments as equity. Key terms Capital note issued 12 May 2020 Distributions of 5.875% per annum are paid semi-annually in arrears until 12 May 2025. The rate will reset in 2025 and on every fifth anniversary thereafter to a rate calculated by reference to the then five-year US Treasury rate plus a margin of 5.513% per annum. Capital note issued 16 July 2020 Distributions of 5.250% per annum are paid semi-annually in arrears until 16 May 2025. The rate will reset in 2025 and on every fifth anniversary thereafter to a rate calculated by reference to the then five-year US Treasury rate plus a margin of 3.047% per annum. Redemption terms The notes are redeemable at the option of QBE, with the prior written approval of APRA, on each interest reset date or at any time in the event of certain tax or regulatory events. In the event that APRA was to declare a point of non-viability, the notes would be written off. 126 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.3 Contributed equity and reserves Overview Contributed equity comprises share capital and capital notes. Ordinary shares in the Company rank after all creditors, have no par value and entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. Capital notes are Additional Tier 1 instruments with discretionary and non-cumulative distributions, and no fixed redemption date. 5.3.1 Contributed equity Issued ordinary shares, fully paid Capital notes Contributed equity Share capital Issued ordinary shares, fully paid at 1 January Shares issued on-market net of transaction costs Shares issued under the Employee Share and Option Plan Shares issued under Dividend Reinvestment Plan Shares issued under Bonus Share Plan Foreign exchange Issued ordinary shares, fully paid at 31 December Shares notified to the Australian Securities Exchange Less: plan shares subject to non-recourse loans, de- recognised under accounting standards Issued ordinary shares, fully paid at 31 December Capital notes ISSUE DATE 12 May 2020 16 July 20201 PRINCIPAL AMOUNT $500 million $400 million 2021 2020 NUMBER OF SHARES MILLIONS 1,471 – 4 1 1 – 1,477 1,477 – 1,477 US$M 9,387 – 31 11 – (538) 8,891 8,894 (3) 8,891 2021 US$M 8,891 886 9,777 2020 US$M 9,387 886 10,273 NUMBER OF SHARES MILLIONS 1,305 157 3 5 1 – 1,471 1,471 – 1,471 2021 US$M 493 393 886 US$M 7,594 813 26 27 – 927 9,387 9,390 (3) 9,387 2020 US$M 493 393 886 1 In July 2020, the terms of these instruments (originally issued in November 2017) were amended such that the notes are written off at a point of non-viability, as determined by APRA, with no possibility of conversion into ordinary shares of the Company. This resulted in the classification of these instruments as equity. Key terms Capital note issued 12 May 2020 Capital note issued 16 July 2020 Redemption terms Distributions of 5.875% per annum are paid semi-annually in arrears until 12 May 2025. The rate will reset in 2025 and on every fifth anniversary thereafter to a rate calculated by reference to the then five-year US Treasury rate plus a margin of 5.513% per annum. Distributions of 5.250% per annum are paid semi-annually in arrears until 16 May 2025. The rate will reset in 2025 and on every fifth anniversary thereafter to a rate calculated by reference to the then five-year US Treasury rate plus a margin of 3.047% per annum. The notes are redeemable at the option of QBE, with the prior written approval of APRA, on each interest reset date or at any time in the event of certain tax or regulatory events. In the event that APRA was to declare a point of non-viability, the notes would be written off. 5.3.2 Reserves Owner occupied property revaluation reserve1 At 1 January At 31 December Cash flow hedge reserve 2 At 1 January Hedging amounts recognised in other comprehensive income Hedging amounts reclassified to profit or loss Taxation At 31 December Cost of hedging reserve 3 At 1 January Amounts recognised in other comprehensive income Amounts reclassified to profit or loss Taxation At 31 December Foreign currency translation reserve 4 At 1 January Net movement on translation Net movement on hedging transactions At 31 December Share‑based payment reserve 5 At 1 January Options and conditional rights expense Transfers from reserve on vesting of options and conditional rights Foreign exchange At 31 December Premium on purchase of non‑controlling interests 6 At 1 January Reclassification to retained profits on disposal At 31 December Total reserves at 31 December 2021 US$M 1 1 (25) 92 (56) (11) – 2 7 (2) (2) 5 (2,031) 218 48 (1,765) 168 32 (30) (6) 164 (13) – (13) (1,608) 2020 US$M 1 1 (4) (157) 127 9 (25) (2) 11 (5) (2) 2 (1,479) (525) (27) (2,031) 164 20 (28) 12 168 (15) 2 (13) (1,898) Each of the above reserves relates to the following: 1 Fair value movements in the carrying value of owner occupied property. 2 Cash flow hedges of foreign exchange and interest rate risk, the accounting policies for which are disclosed in note 5.6.1. 3 Cost of hedging elections as described in note 5.6.1. 4 Exchange gains and losses arising on translation of foreign controlled entities and related hedging instruments, the accounting policies for which are disclosed in note 5.6.1. 5 Equity-settled share-based payment awards. 6 Movements in ownership interests in controlled entities that do not result in a loss of control and represent the difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received. 127 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 128 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.4 Dividends Overview Our dividend policy is designed to ensure that we reward shareholders relative to cash profit and maintain sufficient capital for future investment and growth of the business. Dividend per share (Australian cents) Franking percentage Franked amount per share (Australian cents) Dividend payout (A$M) Payment date 2021 INTERIM 11 10% 1.1 162 24 September 2021 2020 FINAL INTERIM – – – – N/A 4 10% 0.4 59 25 September 2020 On 18 February 2022, the directors declared a 10% franked final dividend of 19 Australian cents per share payable on 12 April 2022. The final dividend payout is A$281 million (2020 nil). Previous year final dividend on ordinary shares – Nil (2019 30% franked) Interim dividend on ordinary shares – 10% franked (2020 10% franked) Bonus Share Plan dividend forgone Total dividend paid . Dividend Reinvestment and Bonus Share Plans 2021 US$M – 118 (1) 117 2020 US$M 224 41 (3) 262 The Company operates a Dividend Reinvestment Plan (DRP) and a Bonus Share Plan (BSP) which allow equity holders to receive their dividend entitlement in the form of ordinary shares of the Company. Bonus Share Plan dividend forgone The amount paid in dividends during the year has been reduced as a result of certain eligible shareholders participating in the BSP and forgoing all or part of their right to dividends. These shareholders were issued ordinary shares under the BSP. During the year, 116,016 (2020 523,532) ordinary shares were issued under the BSP. Franking credits The franking account balance on a tax paid basis at 31 December 2021 was a surplus of A$54 million (2020 A$71 million). The unfranked part of the dividend is declared to be conduit foreign income. For shareholders not resident in Australia, the dividend will not be subject to Australian withholding tax. 128 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.4 Dividends Overview Our dividend policy is designed to ensure that we reward shareholders relative to cash profit and maintain sufficient capital for future investment and growth of the business. Dividend per share (Australian cents) Franking percentage Franked amount per share (Australian cents) Dividend payout (A$M) Payment date 2021 INTERIM 11 10% 1.1 162 On 18 February 2022, the directors declared a 10% franked final dividend of 19 Australian cents per share payable on 12 April 2022. The final dividend payout is A$281 million (2020 nil). 24 September 2021 N/A 25 September 2020 Previous year final dividend on ordinary shares – Nil (2019 30% franked) Interim dividend on ordinary shares – 10% franked (2020 10% franked) Bonus Share Plan dividend forgone Total dividend paid . Dividend Reinvestment and Bonus Share Plans The Company operates a Dividend Reinvestment Plan (DRP) and a Bonus Share Plan (BSP) which allow equity holders to receive their dividend entitlement in the form of ordinary shares of the Company. Bonus Share Plan dividend forgone The amount paid in dividends during the year has been reduced as a result of certain eligible shareholders participating in the BSP and forgoing all or part of their right to dividends. These shareholders were issued ordinary shares under the BSP. During the year, 116,016 (2020 523,532) ordinary shares were issued under the BSP. Franking credits The franking account balance on a tax paid basis at 31 December 2021 was a surplus of A$54 million (2020 A$71 million). The unfranked part of the dividend is declared to be conduit foreign income. For shareholders not resident in Australia, the dividend will not be subject to Australian withholding tax. 2020 FINAL – – – – 2021 US$M – 118 (1) 117 INTERIM 4 10% 0.4 59 2020 US$M 224 41 (3) 262 5.5 Earnings per share Overview Earnings per share (EPS) is the amount of profit or loss after income tax attributable to each share. Diluted EPS adjusts the EPS for the impact of shares that are not yet issued but which may be in the future, such as shares potentially issuable from convertible notes, options and employee share-based payments plans. For profit (loss) after income tax Basic earnings (loss) per share Diluted earnings (loss) per share 2021 US CENTS 2020 US CENTS 47.5 47.2 (108.5) (108.5) 5.5.1 Reconciliation of earnings used for earnings per share measures Earnings per share is based on profit or loss after income tax attributable to ordinary equity holders of the Company, as follows: Profit (loss) after income tax attributable to ordinary equity holders of the Company Less: distributions paid on capital notes classified as equity (note 5.3.1) Profit (loss) used in calculating basic and diluted earnings per share 2021 US$M 750 (50) 700 2020 US$M (1,517) (25) (1,542) 5.5.2 Reconciliation of weighted average number of ordinary shares used for earnings per share measures Weighted average number of ordinary shares on issue and used as the denominator in calculating basic earnings per share Weighted average number of dilutive potential ordinary shares issued under the Employee Share and Option Plan1 Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share 2021 NUMBER OF SHARES MILLIONS 2020 NUMBER OF SHARES MILLIONS 1,474 8 1,482 1,421 – 1,421 1 In the prior year, eight million potential ordinary shares issued were excluded from the calculation because they were anti-dilutive. How we account for the numbers Basic earnings (loss) per share is calculated by dividing profit or loss after income tax attributable to members of the Company, adjusted for the cost of servicing capital notes classified as equity, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings (loss) per share adjusts the weighted average number of shares to include dilutive potential ordinary shares and instruments with mandatory conversion features. As there are no impacts on interest and other financing costs from such instruments, diluted earnings (loss) per share utilises the same earnings (loss) figure used in the determination of basic earnings (loss) per share. 129 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 130 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.6 Derivatives Overview Derivatives may be used as a tool to hedge the Group’s foreign exchange exposures. Each controlled entity manages operational foreign exchange volatility by matching liabilities with assets of the same currency, as far as practicable. Forward foreign exchange contracts are used to manage residual currency exposures, with both the foreign exchange gains or losses on translation of the exposure and the mark-to-market of related derivatives reported through profit or loss. Forward foreign exchange contracts and purchased currency options may also be utilised in cash flow hedging of foreign currency borrowings and/or exposure to net investments in foreign operations (NIFO). Interest rate swaptions are used to hedge exposure to interest rate movements on the Group’s borrowings. Refer to note 4.4 for additional information relating to QBE’s approach to managing interest rate risk and foreign exchange risk. The Group’s exposure to treasury derivatives at the balance date determined by reference to the functional currency of the relevant controlled entity is set out in the table below: Forward foreign exchange contracts not in designated hedges Forward foreign exchange contracts used in cash flow hedges Forward foreign exchange contracts used in NIFO hedges Interest rate swaptions EXPOSURE US$M 2,143 (1,599) 489 363 2021 FAIR VALUE ASSET US$M FAIR VALUE LIABILITY US$M EXPOSURE US$M 2020 FAIR VALUE ASSET US$M FAIR VALUE LIABILITY US$M 118 – 11 13 142 161 291 – – 452 2,603 (1,796) (345) 385 505 – 13 2 520 394 419 32 – 845 The fair value of forward foreign exchange contracts and interest rate swaptions are categorised as level 2 in the fair value hierarchy. They are fair valued using present value techniques utilising observable market data, broker quotes and/or comparable prices for similar instruments in active markets. How we account for the numbers Derivatives are initially recognised at fair value, determined as the cost of acquisition excluding transaction costs, and remeasured to fair value at each reporting date. Remeasurements are recognised in profit or loss at each reporting date, unless the derivative is designated as part of a qualifying hedge relationship (refer to note 5.6.1). 5.6.1 Designated hedges The Group’s material designated hedge relationships are analysed below by risk category and are accounted for with reference to the accounting policies set out at the end of this note. Hedging ratios, being the relationship between the quantity of the hedging instrument and the quantity of the hedged item, are 1:1 as the nominal values of hedging instruments match those of the hedged items. Any ineffectiveness arising from factors such as credit risk is not expected to be material. Amounts recognised in equity or reclassified to profit or loss are disclosed in note 5.3.2. Cash flow hedges of borrowings At the balance date, forward foreign exchange contracts were used to hedge foreign currency risk associated with highly probable forecast transactions in relation to $400 million of subordinated notes maturing in 2043 and $700 million of subordinated notes maturing in 2044. Foreign currency risk on future coupons and principal amounts is hedged up to and including the first call dates of the notes, being 2023 and 2024 respectively. Similarly, an interest rate swaption was put in place to hedge interest rate risk in relation to coupons on A$500 million of subordinated notes maturing in 2036. The swaption is exercisable in August 2023 and hedges coupon payments from that date to the first call date in August 2026. These hedges were put in place to more effectively manage currency exposures and costs of funding. 130 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE 5.6 Derivatives Overview Derivatives may be used as a tool to hedge the Group’s foreign exchange exposures. Each controlled entity manages operational foreign exchange volatility by matching liabilities with assets of the same currency, as far as practicable. Forward foreign exchange contracts are used to manage residual currency exposures, with both the foreign exchange gains or losses on translation of the exposure and the mark-to-market of related derivatives reported through profit or loss. Forward foreign exchange contracts and purchased currency options may also be utilised in cash flow hedging of foreign currency borrowings and/or exposure to net investments in foreign operations (NIFO). Interest rate swaptions are used to hedge exposure to interest rate movements on the Group’s borrowings. Refer to note 4.4 for additional information relating to QBE’s approach to managing interest rate risk and foreign exchange risk. The Group’s exposure to treasury derivatives at the balance date determined by reference to the functional currency of the relevant controlled entity is set out in the table below: Forward foreign exchange contracts not in designated hedges Forward foreign exchange contracts used in cash flow hedges Forward foreign exchange contracts used in NIFO hedges Interest rate swaptions EXPOSURE US$M 2,143 (1,599) 489 363 2021 FAIR VALUE ASSET US$M FAIR VALUE LIABILITY US$M EXPOSURE US$M 2020 FAIR VALUE ASSET US$M FAIR VALUE LIABILITY US$M 118 – 11 13 142 161 291 – – 452 2,603 (1,796) (345) 385 505 – 13 2 520 394 419 32 – 845 The fair value of forward foreign exchange contracts and interest rate swaptions are categorised as level 2 in the fair value hierarchy. They are fair valued using present value techniques utilising observable market data, broker quotes and/or comparable prices for similar instruments in active markets. How we account for the numbers Derivatives are initially recognised at fair value, determined as the cost of acquisition excluding transaction costs, and remeasured to fair value at each reporting date. Remeasurements are recognised in profit or loss at each reporting date, unless the derivative is designated as part of a qualifying hedge relationship (refer to note 5.6.1). 5.6.1 Designated hedges The Group’s material designated hedge relationships are analysed below by risk category and are accounted for with reference to the accounting policies set out at the end of this note. Hedging ratios, being the relationship between the quantity of the hedging instrument and the quantity of the hedged item, are 1:1 as the nominal values of hedging instruments match those of the hedged items. Any ineffectiveness arising from factors such as credit risk is not expected to be material. Amounts recognised in equity or reclassified to profit or loss are disclosed in note 5.3.2. Cash flow hedges of borrowings At the balance date, forward foreign exchange contracts were used to hedge foreign currency risk associated with highly probable forecast transactions in relation to $400 million of subordinated notes maturing in 2043 and $700 million of subordinated notes maturing in 2044. Foreign currency risk on future coupons and principal amounts is hedged up to and including the first call dates of the notes, being 2023 and 2024 respectively. Similarly, an interest rate swaption was put in place to hedge interest rate risk in relation to coupons on A$500 million of subordinated notes maturing in 2036. The swaption is exercisable in August 2023 and hedges coupon payments from that date to the first call date in August 2026. These hedges were put in place to more effectively manage currency exposures and costs of funding. Only the spot components of the forward foreign exchange contracts and the intrinsic value of the interest rate swaption are designated in hedge relationships. For forward foreign exchange contracts, reclassifications of hedging gains and losses to profit or loss are included in foreign exchange (refer to note 3.1), consistent with the currency movement of the hedged borrowings. For the interest rate swaption, reclassifications of any cumulative hedging gains or losses to profit or loss will occur as related coupon payments are made during the period from August 2023 to August 2026. A ‘cost of hedging’ election was made in respect of these hedges, as described below, and amortisation of the forward and currency basis components is included in financing costs (refer to note 5.1.2) where they relate to hedged coupons, or in foreign exchange (refer to note 3.1) where they relate to principal amounts. The interest rate swaption does not generate any cash flows until August 2023, when the potential settlement would occur if the swaption is in-the-money at that point in time. The timing of cash flows relating to the forward foreign exchange contracts and corresponding average forward rates are provided in the following table: 2021 MATURING IN: 2020 MATURING IN: LESS THAN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS LESS THAN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS Nominal amounts Average forward rate Buy US$M/ Sell A$M US$/A$ 77/130 0.60 1,225/2,071 0.59 – – 77/129 0.60 1,301/2,200 0.59 – – Hedges of currency risk relating to translation of net investments in foreign operations At the balance date, forward foreign exchange contracts and borrowings were designated as hedges of net investments in foreign operations. Only the spot components of the forward foreign exchange contracts are designated as being in hedge relationships. The forward and currency basis components are included in foreign exchange (refer to note 3.1). Cumulative hedging gains or losses recognised in equity are recycled to profit or loss only on disposal of the foreign operation. The timing of cash flows relating to the hedging instruments and corresponding average forward rates, if applicable, are provided in the following table, with borrowings being disclosed by reference to their first call dates (refer to note 5.1): 2021 MATURING IN: 2020 MATURING IN: LESS THAN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS LESS THAN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS Debt instruments used in US dollar NIFO hedges Subordinated debt Senior debt Debt instruments used in sterling NIFO hedges Subordinated debt £M Forward foreign exchange contracts used in sterling NIFO hedges 528 6 – – 327 US$M US$M – Nominal amounts Average forward rate Forward foreign exchange contracts used in Hong Kong dollar NIFO hedges – – – – A$/£ Buy A$M/ Sell £M Nominal amounts Average forward rate Forward foreign exchange contracts used in Indian rupees NIFO hedges 175/970 5.55 A$/HKD – – Buy A$M/ Sell HKDM Nominal amounts Average forward rate Forward foreign exchange contracts used in US dollar NIFO hedges – – – – A$/INR Buy A$M/ Sell INRM Nominal amounts Average forward rate Buy A$M/ Sell US$M A$/US$ – – 497/350 0.70 – – – – – – – – – – – – – 25 657/367 0.56 177/970 5.48 27/1,484 54.89 – – – 6 327 – – – – – – – – 49 – – – – – – – – – – 131 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 132 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE How we account for the numbers When a derivative or other financial instrument is designated in a qualifying hedge relationship, the relevant controlled entity formally documents the relationship between the hedging instrument and hedged item, as well as its risk management objectives and its strategy for undertaking hedging transactions. The relevant entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the hedge effectiveness requirements are met, including the relevant economic relationship, the effect of credit risk and the hedge ratio. For qualifying cash flow hedges and hedges of net investments in foreign operations, the gain or loss on the hedging instrument associated with the effective portion of the hedge is accumulated in equity through other comprehensive income and is subsequently reclassified to profit or loss when the hedged item also affects profit or loss. For cash flow hedges, this is reflected in the cash flow hedge reserve; for hedges of net investments in foreign operations, this is reflected in the foreign currency translation reserve (refer to note 5.3.2). The gain or loss on any ineffective portion of the hedging instrument is recognised in profit or loss immediately. Where the forward and currency basis components of a designated derivative do not form part of the designated hedge relationship, these components are accounted for at fair value through profit or loss unless a 'cost of hedging' election is made. Under this election, the fair value of these components at inception of the hedge are amortised through profit or loss over time periods relevant to the hedge, with other changes in their fair values after inception recognised in equity through other comprehensive income. This election can be made on a hedge-by-hedge basis and is reflected in the cost of hedging reserve (refer to note 5.3.2). Hedge accounting is discontinued when the qualifying hedge no longer meets the criteria for hedge accounting, including when the risk management objective is no longer met or is no longer relevant; the hedging instrument expires or is sold, terminated or exercised; the hedged item matures, is sold or repaid; or a hedged forecast transaction is no longer considered highly probable. When a cash flow hedge is discontinued, any cumulative hedging gain or loss in equity at that time remains in equity and is reclassified to profit or loss when the hedged item affects profit or loss. If the hedged item is a forecast transaction that is no longer considered highly probable, the cumulative gain or loss is immediately reclassified to profit or loss. When a hedge of a net investment in a foreign operation is discontinued, any cumulative hedging gain or loss at that time remains in equity and is only recycled to profit or loss on disposal of the foreign operation, forming part of the resulting gain or loss. 132 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 5. CAPITAL STRUCTURE How we account for the numbers When a derivative or other financial instrument is designated in a qualifying hedge relationship, the relevant controlled entity formally documents the relationship between the hedging instrument and hedged item, as well as its risk management objectives and its strategy for undertaking hedging transactions. The relevant entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the hedge effectiveness requirements are met, including the relevant economic relationship, the effect of credit risk and the hedge ratio. For qualifying cash flow hedges and hedges of net investments in foreign operations, the gain or loss on the hedging instrument associated with the effective portion of the hedge is accumulated in equity through other comprehensive income and is subsequently reclassified to profit or loss when the hedged item also affects profit or loss. For cash flow hedges, this is reflected in the cash flow hedge reserve; for hedges of net investments in foreign operations, this is reflected in the foreign currency translation reserve (refer to note 5.3.2). The gain or loss on any ineffective portion of the hedging instrument is recognised in profit or loss immediately. Where the forward and currency basis components of a designated derivative do not form part of the designated hedge relationship, these components are accounted for at fair value through profit or loss unless a 'cost of hedging' election is made. Under this election, the fair value of these components at inception of the hedge are amortised through profit or loss over time periods relevant to the hedge, with other changes in their fair values after inception recognised in equity through other comprehensive income. This election can be made on a hedge-by-hedge basis and is reflected in the cost of hedging reserve (refer to note 5.3.2). Hedge accounting is discontinued when the qualifying hedge no longer meets the criteria for hedge accounting, including when the risk management objective is no longer met or is no longer relevant; the hedging instrument expires or is sold, terminated or exercised; the hedged item matures, is sold or repaid; or a hedged forecast transaction is no longer considered highly probable. When a cash flow hedge is discontinued, any cumulative hedging gain or loss in equity at that time remains in equity and is reclassified to profit or loss when the hedged item affects profit or loss. If the hedged item is a forecast transaction that is no longer considered highly probable, the cumulative gain or loss is immediately reclassified to profit or loss. When a hedge of a net investment in a foreign operation is discontinued, any cumulative hedging gain or loss at that time remains in equity and is only recycled to profit or loss on disposal of the foreign operation, forming part of the resulting gain or loss. 6. TAX Overview Income tax expense or credit is the accounting tax outcome for the period and is calculated as the tax payable on the current period taxable income based on the applicable income tax rate for each jurisdiction, adjusted for changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses. The relationship between accounting profit or loss and income tax expense or credit is provided in the reconciliation of prima facie tax to income tax expense or credit (refer to note 6.1). Income tax expense does not equate to the amount of tax actually paid to tax authorities around the world, as it is based upon the accrual accounting concept. Accounting income and expenses do not always have the same recognition pattern as taxable income and expenses, creating a timing difference as to when a tax expense or credit can be recognised. These differences usually reverse over time but, until they do, a deferred tax asset or liability is recognised on the balance sheet. Note 6.2 details the composition and movements in deferred tax balances and the key management assumptions applied in recognising tax losses. Details of franking credits available to shareholders are disclosed in note 5.4. 6.1 Reconciliation of prima facie tax to income tax expense or credit Profit (loss) before income tax Prima facie tax expense (credit) at 30% Tax effect of non-temporary differences: Untaxed dividends Differences in tax rates Other, including non-allowable expenses and non-taxable income Prima facie tax adjusted for non-temporary differences Deferred tax assets (re-recognised) de-recognised (Overprovision) underprovision in prior years Income tax expense Analysed as follows: Current tax Deferred tax Deferred tax (credit) expense comprises: Deferred tax assets recognised in profit or loss Deferred tax liabilities recognised in profit or loss NOTE 6.2.1 6.2.2 2021 US$M 913 274 (2) (93) (2) 177 (18) (3) 156 169 (13) 156 (57) 44 (13) 2020 US$M (1,472) (442) (1) 109 75 (259) 278 20 39 59 (20) 39 (125) 105 (20) 133 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i How we account for the numbers The current income tax expense or credit is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries in which controlled entities operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, as appropriate. o n 134 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 6. TAX 6.2 Deferred income tax Deferred tax assets Deferred tax liabilities 6.2.1 Deferred tax assets Amounts recognised in profit or loss Financial assets – fair value movements Provision for impairment Employee benefits Intangible assets Insurance provisions Tax losses recognised Other Amounts recognised in other comprehensive income and equity Defined benefit plans Other Deferred tax assets before set‑off Set-off of deferred tax liabilities Movements At 1 January Amounts recognised in profit or loss Amounts recognised in other comprehensive income Foreign exchange At 31 December NOTE 6.2.1 6.2.2 NOTE 6.2.2 6.2 NOTE 6.1 2021 US$M 521 31 2021 US$M 6 13 70 159 706 197 159 1,310 30 4 34 1,344 (823) 521 2021 US$M 1,306 57 1 (20) 1,344 2020 US$M 546 51 2020 US$M 4 14 55 161 696 204 136 1,270 32 4 36 1,306 (760) 546 2020 US$M 1,150 125 (1) 32 1,306 134 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 6. TAX 6.2 Deferred income tax Deferred tax assets Deferred tax liabilities 6.2.1 Deferred tax assets Amounts recognised in profit or loss Financial assets – fair value movements Provision for impairment Employee benefits Intangible assets Insurance provisions Tax losses recognised Other Defined benefit plans Other Deferred tax assets before set‑off Set-off of deferred tax liabilities Movements At 1 January Foreign exchange At 31 December Amounts recognised in profit or loss Amounts recognised in other comprehensive income NOTE 6.2.1 6.2.2 NOTE 6.2.2 6.2 NOTE 6.1 2021 US$M 521 31 2021 US$M 6 13 70 159 706 197 159 30 4 34 1,344 (823) 521 2021 US$M 1,306 57 1 (20) 1,344 2020 US$M 546 51 2020 US$M 4 14 55 161 696 204 136 32 4 36 1,306 (760) 546 2020 US$M 1,150 125 (1) 32 1,306 Amounts recognised in other comprehensive income and equity 1,310 1,270 Critical accounting judgements and estimates Recoverability of deferred tax assets QBE assesses the recoverability of deferred tax assets at each balance date. In making this assessment, QBE considers in particular each controlled entity’s future business plans, history of generating taxable profits, whether the unused tax losses resulted from identifiable causes which are unlikely to recur and if any tax planning opportunities exist in the period in which the taxable losses can be utilised. The recognised deferred tax asset relating to the North American tax group of $295 million (2020 $295 million) comprises $105 million (2020 $117 million) of carry forward tax losses and $190 million (2020 $178 million) of deductible temporary differences, net of applicable offsetting deferred tax liabilities, as a result of insurance technical reserves and the tax deductibility of goodwill and other intangibles. Uncertainty continues to exist in relation to the utilisation of this asset, which is subject to there being continued future taxable profits over the period of time in which the losses can be utilised. QBE has made a judgement that the North American tax group will be able to generate sufficient taxable profits over the foreseeable future, based upon its future business plans. Key assumptions include an expectation of future taxable profit driven by no material deterioration in the prior accident year central estimate, a sustained return to underwriting profitability, benefits flowing from initiatives to reduce the cost base of the division and future increases in investment yields. Losses expire over the next 19 years, with the majority expiring between 2031 and 2040. The uncertainty around the recognition of the deferred tax asset will be resolved in future years if taxable profits are generated. Recovery of the asset continues to be sensitive to changes in the combined operating ratio, premium growth and investment yield assumptions as these items are the key drivers of future taxable profits. We continue to monitor developments in global tax reform led by the Organisation for Economic Co-operation and Development (OECD) for potential impacts on the Group’s deferred tax balances. 6.2.2 Deferred tax liabilities Amounts recognised in profit or loss Intangible assets Insurance provisions Financial assets – fair value movements Other provisions Other Amounts recognised in other comprehensive income and equity Defined benefit plans Deferred tax liabilities before set‑off Set-off of deferred tax assets Movements At 1 January Amounts recognised in profit or loss Amounts recognised in other comprehensive income Foreign exchange At 31 December NOTE 6.2.1 6.2 NOTE 6.1 2021 US$M 155 556 2 38 83 834 20 20 854 (823) 31 2021 US$M 811 44 8 (9) 854 2020 US$M 143 531 7 27 92 800 11 11 811 (760) 51 2020 US$M 686 105 6 14 811 135 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 136 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 6. TAX How we account for the numbers Deferred income tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill or if they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the controlled entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset in the consolidated financial statements when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. 6.2.3 Tax losses The Group has not brought to account $402 million (2020 $414 million) of tax losses, which includes the benefit arising from tax losses in overseas countries. $78 million (2020 $66 million) of tax losses not brought to account have an indefinite life and the remaining $324 million (2020 $348 million) expire in nine to 19 years. The benefits of unused tax losses will only be brought to account when it is probable that they will be realised. This benefit of tax losses will only be obtained if: • the Group derives future assessable income of a nature and an amount sufficient to enable the benefit from the deductions for the losses to be realised; • the Group continues to comply with the conditions for deductibility imposed by tax legislation; and • no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the losses. 6.2.4 Tax consolidation legislation On adoption of the tax consolidation legislation, the Company and its wholly-owned Australian controlled entities entered into a tax sharing and tax funding agreement that requires the Australian entities to fully compensate the Company for current tax liabilities and to be fully compensated by the Company for any current tax or deferred tax assets in respect of tax losses arising from external transactions occurring after the date of implementation of the tax consolidation legislation. The contributions are allocated by reference to the notional taxable income of each Australian entity. The head entity is QBE Insurance Group Limited. 136 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 6. TAX How we account for the numbers Deferred income tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill or if they arise from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the controlled entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset in the consolidated financial statements when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. 6.2.3 Tax losses The Group has not brought to account $402 million (2020 $414 million) of tax losses, which includes the benefit arising from tax losses in overseas countries. $78 million (2020 $66 million) of tax losses not brought to account have an indefinite life and the remaining $324 million (2020 $348 million) expire in nine to 19 years. The benefits of unused tax losses will only be brought to account when it is probable that they will be realised. This benefit of tax losses will only be obtained if: losses to be realised; • the Group derives future assessable income of a nature and an amount sufficient to enable the benefit from the deductions for the • the Group continues to comply with the conditions for deductibility imposed by tax legislation; and • no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the losses. 6.2.4 Tax consolidation legislation On adoption of the tax consolidation legislation, the Company and its wholly-owned Australian controlled entities entered into a tax sharing and tax funding agreement that requires the Australian entities to fully compensate the Company for current tax liabilities and to be fully compensated by the Company for any current tax or deferred tax assets in respect of tax losses arising from external transactions occurring after the date of implementation of the tax consolidation legislation. The contributions are allocated by reference to the notional taxable income of each Australian entity. The head entity is QBE Insurance Group Limited. 7. GROUP STRUCTURE Overview This section provides information to help users understand the Group structure, including the impact of changes in the financial year. This includes acquisitions and disposals of businesses, intangible assets acquired or developed and the results of impairment reviews. 7.1 Intangible assets Overview Intangible assets are assets with no physical substance. The most significant classes of intangible assets are detailed below: Lloyd’s syndicate capacity The Lloyd’s syndicate capacity intangible asset relates to the syndicate capacity acquired as part of the acquisition of QBE Underwriting Limited (formerly trading as Limit) in 2000 and costs incurred as a result of increasing capacity since that date. Syndicate capacity is the aggregate of the premium limits of each member of that syndicate at a point in time. An existing capital provider has the first right to participate on the next year of account, giving the indefinite right to participate on all future years of account. The Group has demonstrated a long-term commitment to developing its operations at Lloyd’s. The value of this asset is in the access it gives to future underwriting profits at Lloyd’s. For these reasons, Lloyd’s syndicate capacity is deemed to have an indefinite useful life. 137 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s Customer relationships ' Customer relationships comprise the capitalisation of future profits relating to insurance contracts acquired and the expected renewal of those contracts. It also includes the value of distribution networks and agency relationships. Customer relationships are amortised over remaining lives of up to eight years depending on the classes of business to which the assets relate. Brand names These assets reflect the revenue generating ability of acquired brands. In some circumstances, brand names are considered to have an indefinite useful life due to the long-term nature of the asset. Insurance licences These assets give the Group the right to operate in certain geographic locations and to write certain classes of business with a potential to generate additional revenue. In some cases, these are considered to have an indefinite useful life due to their long-term nature; however, where there is a finite useful life, assets are amortised over the remaining period, up to 15 years. Software This includes both acquired and internally developed software which is not integral or closely related to an item of hardware such as an underwriting system. Capitalised software is amortised over periods of up to 10 years, reflecting the period during which the Group is expected to benefit from the use of the software. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets acquired. Goodwill has an indefinite useful life and therefore is not subject to amortisation but is tested for impairment annually, or more often if there is an indication of impairment. 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 138 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE 2021 Cost At 1 January Additions Impairment Disposals Foreign exchange At 31 December Amortisation At 1 January Amortisation1 Foreign exchange At 31 December Carrying amount At 31 December IDENTIFIABLE INTANGIBLES GOODWILL TOTAL LLOYD’S SYNDICATE CAPACITY US$M CUSTOMER RELATION- SHIPS US$M BRAND NAMES US$M INSURANCE LICENCES US$M SOFTWARE US$M OTHER US$M US$M US$M 87 – – – (1) 86 – – – – 455 – – – (1) 454 (412) (16) 2 (426) 86 28 27 – – – (1) 26 (22) – – (22) 4 148 – (2) – (7) 139 (79) (2) 4 (77) 62 442 91 – (1) (40) 492 (219) (51) 31 (239) 253 19 – – – – 19 (19) – – (19) 2,107 – – – (91) 2,016 – – – – 3,285 91 (2) (1) (141) 3,232 (751) (69) 37 (783) – 2,016 2,449 1 Amortisation of $50 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities. 2020 Cost At 1 January Additions Impairment Disposals/transfer to assets held for sale Foreign exchange At 31 December Amortisation At 1 January Amortisation1 Foreign exchange At 31 December Carrying amount At 31 December IDENTIFIABLE INTANGIBLES GOODWILL TOTAL LLOYD’S SYNDICATE CAPACITY US$M CUSTOMER RELATION- SHIPS US$M BRAND NAMES US$M INSURANCE LICENSES US$M SOFTWARE US$M OTHER US$M US$M US$M 84 – – – 3 87 – – – – 454 – (3) – 4 455 (388) (21) (3) (412) 87 43 26 – – – 1 27 (21) – (1) (22) 5 152 – (11) (3) 10 148 (70) (2) (7) (79) 69 378 71 (34) (1) 28 442 (155) (50) (14) (219) 223 19 – – – – 19 (18) (1) – (19) 2,330 – (390) – 167 2,107 – – – – 3,443 71 (438) (4) 213 3,285 (652) (74) (25) (751) – 2,107 2,534 1 Amortisation of $46 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities. How we account for the numbers Intangible assets are measured at cost less accumulated amortisation and impairment. Those with a finite useful life are amortised over their estimated useful life in accordance with the pattern of expected consumption of economic benefits, with amortisation expense reported in underwriting and other expenses or in amortisation and impairment of intangibles depending on the use of the asset. Intangible assets with an indefinite useful life are not subject to amortisation but are tested for impairment annually or more frequently if there are indicators of impairment. Intangible assets with a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 7.1.1 Impairment testing of intangible assets Overview An intangible asset’s recoverable value is the greater of its value in use and its fair value less cost to sell. For intangible assets with a finite life, if there are indicators that the intangible asset’s recoverable value has fallen below its carrying value (e.g. due to changing market conditions), an impairment test is performed and a loss is recognised for the amount by which the carrying value exceeds the asset’s recoverable value. Intangible assets that have an indefinite useful life, such as goodwill, are tested annually for impairment or more frequently where there is an indication that the carrying amount may not be recoverable. Goodwill is allocated to cash-generating units, or groups of cash-generating units, expected to benefit from synergies arising from the acquisition giving rise to the goodwill. Cash-generating units or groups of cash-generating units reflect the level at which goodwill is monitored for impairment by QBE. As the Group acquires or disposes of operations or reorganises the way that operations are managed, reporting structures may change, giving rise to a reassessment of cash-generating units and the allocation of goodwill to those cash-generating units. The goodwill relating to certain acquisitions is denominated in currencies other than the US dollar and so is subject to foreign exchange movements. 1 Amortisation of $50 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities. Goodwill is analysed by groups of cash-generating units as follows: 86 28 2,016 2,449 IDENTIFIABLE INTANGIBLES GOODWILL TOTAL LLOYD’S SYNDICATE CAPACITY US$M CUSTOMER RELATION- SHIPS US$M BRAND NAMES US$M INSURANCE LICENSES US$M SOFTWARE US$M OTHER US$M US$M US$M 84 454 19 2,330 North America International Australia Pacific Impairment losses 2021 US$M 358 524 1,134 2,016 2020 US$M 358 546 1,203 2,107 Disposals/transfer to assets 87 455 During 2021, insurance licences of $2 million were impaired. During 2020, $390 million of goodwill relating to North America and $48 million of identifiable intangible assets were impaired. 138 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE 2021 Cost At 1 January Additions Impairment Disposals Foreign exchange At 31 December Amortisation At 1 January Amortisation1 Foreign exchange At 31 December Carrying amount At 31 December 2020 Cost At 1 January Additions Impairment held for sale Foreign exchange At 31 December Amortisation At 1 January Amortisation1 Foreign exchange At 31 December Carrying amount At 31 December IDENTIFIABLE INTANGIBLES GOODWILL TOTAL LLOYD’S SYNDICATE CAPACITY US$M CUSTOMER RELATION- SHIPS US$M BRAND NAMES US$M INSURANCE LICENCES US$M SOFTWARE US$M OTHER US$M US$M US$M 87 – – – (1) 86 – – – – – – – 3 – – – – 455 – – – (1) 454 (412) (16) 2 (426) – (3) – 4 (388) (21) (3) (412) 27 – – – (1) 26 (22) (22) – – 4 26 – – – 1 27 (21) – (1) (22) 5 148 – (2) – (7) 139 (79) (2) 4 (77) 62 152 – (11) (3) 10 148 (70) (2) (7) (79) 69 442 91 – (1) (40) 492 (219) (51) 31 (239) 253 378 71 (34) (1) 28 442 (155) (50) (14) (219) 223 – – – – 19 (19) (19) – – – – – – – 19 (18) (1) – (19) 19 2,107 3,285 (91) 2,016 – – – – – – – 91 (2) (1) (141) 3,232 (751) (69) 37 (783) (390) 167 2,107 – – – – – – 3,443 71 (438) (4) 213 3,285 (652) (74) (25) (751) 1 Amortisation of $46 million is included in underwriting expenses as it relates to intangible assets integral to the Group’s underwriting activities. 87 43 – 2,107 2,534 How we account for the numbers Intangible assets are measured at cost less accumulated amortisation and impairment. Those with a finite useful life are amortised over their estimated useful life in accordance with the pattern of expected consumption of economic benefits, with amortisation expense reported in underwriting and other expenses or in amortisation and impairment of intangibles depending on the use of the asset. Intangible assets with an indefinite useful life are not subject to amortisation but are tested for impairment annually or more frequently if there are indicators of impairment. Intangible assets with a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 139 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 140 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE How we account for the numbers Impairment testing of identifiable intangible assets The recoverable amount of each intangible asset with an indefinite useful life has been determined by reference to a value in use calculation based on the following key assumptions and estimates: • Cash flow forecasts relevant to the initial valuation of the identifiable intangible asset are reviewed and updated (if appropriate). Cash flow forecasts are based on a combination of actual performance to date and expectations of future performance based on prevailing and anticipated market factors. • Discount rates include a beta and a market risk premium sourced from observable market information and a specific risk premium appropriate to reflect the nature of the risk associated with the intangible asset or the cash-generating unit to which the asset is allocated. Impairment testing of goodwill The recoverable amount of each cash-generating unit or group of cash-generating units has been determined by reference to a value in use calculation based on the following key assumptions and estimates: • Cash flow forecasts reflect combined operating ratio and investment return assumptions that build from the latest three-year business plan. These forecasts cover a period of five years, with the final two years determined with reference to the terminal growth rates discussed below. The cash flow forecasts are based on a combination of historical performance and expectations of future performance based on prevailing and anticipated market factors and the benefit of committed cost saving measures. • Terminal value is calculated using a perpetuity growth formula from the end of the cash flow forecast period. Growth rates reflect the long-term average growth rates of the countries relevant to the cash-generating unit or group of cash-generating units and are based on observable market information. The terminal growth rates used in impairment testing are: North America 2.3% (2020 2.3%), Australia Pacific 2.5% (2020 2.5%) and International 2.0% (2020 2.0%). • Discount rates reflect a beta and a market risk premium sourced from observable market information and a specific risk premium appropriate to reflect the nature of the business of each cash-generating unit or group of cash-generating units. The pre-tax discount rates used were: North America 9.7% (2020 9.8%), Australia Pacific 12.8% (2020 12.5%) and International 8.9% (2020 9.0%). The post-tax discount rates used were: North America 7.6% (2020 7.8%), Australia Pacific 9.1% (2020 9.1%) and International 7.2% (2020 7.3%). Critical accounting judgements and estimates Based on the detailed impairment test completed in respect of goodwill relating to North America, the headroom (being the excess of recoverable value over carrying value) at the current balance date increased to $83 million compared with nil at 31 December 2020. The valuation continues to be highly sensitive to a range of assumptions, in particular the forecast combined operating ratio used in the terminal value calculation, discount rate and long-term investment return. The impact of changes in these key assumptions is shown in the table below and each change has been calculated in isolation from other changes. In practice, this is considered unlikely to occur due to interrelationships between assumptions. KEY ASSUMPTION Terminal value combined operating ratio Long-term investment return Post-tax discount rate ASSUMPTION % SENSITIVITY % IMPACT OF SENSITIVITY ON CARRYING VALUE OF GOODWILL 98.5 (2020 98.5) 3.43 (2020 3.75) 7.6 (2020 7.8) +1 -1 +1 -1 +1 -1 Impairment of $358 million Increase headroom to $641 million Increase headroom to $863 million Impairment of $358 million Impairment of $358 million Increase headroom to $733 million ASSUMPTION AT WHICH HEADROOM IS NIL % 98.7 3.33 7.8 140 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE How we account for the numbers Impairment testing of identifiable intangible assets The recoverable amount of each intangible asset with an indefinite useful life has been determined by reference to a value in use calculation based on the following key assumptions and estimates: • Cash flow forecasts relevant to the initial valuation of the identifiable intangible asset are reviewed and updated (if appropriate). Cash flow forecasts are based on a combination of actual performance to date and expectations of future performance based on prevailing and anticipated market factors. • Discount rates include a beta and a market risk premium sourced from observable market information and a specific risk premium appropriate to reflect the nature of the risk associated with the intangible asset or the cash-generating unit to which the asset is allocated. Impairment testing of goodwill The recoverable amount of each cash-generating unit or group of cash-generating units has been determined by reference to a value in use calculation based on the following key assumptions and estimates: • Cash flow forecasts reflect combined operating ratio and investment return assumptions that build from the latest three-year business plan. These forecasts cover a period of five years, with the final two years determined with reference to the terminal growth rates discussed below. The cash flow forecasts are based on a combination of historical performance and expectations of future performance based on prevailing and anticipated market factors and the benefit of committed cost saving measures. • Terminal value is calculated using a perpetuity growth formula from the end of the cash flow forecast period. Growth rates reflect the long-term average growth rates of the countries relevant to the cash-generating unit or group of cash-generating units and are based on observable market information. The terminal growth rates used in impairment testing are: North America 2.3% (2020 2.3%), Australia Pacific 2.5% (2020 2.5%) and International 2.0% (2020 2.0%). • Discount rates reflect a beta and a market risk premium sourced from observable market information and a specific risk premium appropriate to reflect the nature of the business of each cash-generating unit or group of cash-generating units. The pre-tax discount rates used were: North America 9.7% (2020 9.8%), Australia Pacific 12.8% (2020 12.5%) and International 8.9% (2020 9.0%). The post-tax discount rates used were: North America 7.6% (2020 7.8%), Australia Pacific 9.1% (2020 9.1%) and International 7.2% (2020 7.3%). Critical accounting judgements and estimates Based on the detailed impairment test completed in respect of goodwill relating to North America, the headroom (being the excess of recoverable value over carrying value) at the current balance date increased to $83 million compared with nil at 31 December 2020. The valuation continues to be highly sensitive to a range of assumptions, in particular the forecast combined operating ratio used in the terminal value calculation, discount rate and long-term investment return. The impact of changes in these key assumptions is shown in the table below and each change has been calculated in isolation from other changes. In practice, this is considered unlikely to occur due to interrelationships between assumptions. ASSUMPTION SENSITIVITY IMPACT OF SENSITIVITY ON CARRYING HEADROOM IS NIL KEY ASSUMPTION Terminal value combined operating ratio Long-term investment return Post-tax discount rate % 98.5 3.43 7.6 (2020 98.5) (2020 3.75) (2020 7.8) % +1 -1 +1 -1 +1 -1 VALUE OF GOODWILL Impairment of $358 million Increase headroom to $641 million Increase headroom to $863 million Impairment of $358 million Impairment of $358 million Increase headroom to $733 million ASSUMPTION AT WHICH % 98.7 3.33 7.8 7.2 Controlled entities Overview This section lists the Group’s controlled entities. The consolidated financial statements incorporate the assets and liabilities of all entities controlled by the Company at 31 December 2021 and the results for the financial year then ended, or for the period during which control existed if the entity was acquired or disposed of during the financial year. 7.2.1 Controlled entities Ultimate parent entity QBE Insurance Group Limited Controlled entities Anex Jenni & Partner SA (liquidated 19 March 2021) Austral Mercantile Collections Pty Limited Australian Aviation Underwriting Pool Pty Limited Burnett & Company, Inc. Elders Insurance (Underwriting Agency) Pty Limited Equator Reinsurances Limited General Casualty Company of Wisconsin General Casualty Insurance Company Greenhill BAIA Underwriting GmbH Greenhill International Insurance Holdings Limited Greenhill Sturge Underwriting Limited Greenhill Underwriting Espana Limited Insurance Box Holdings Pty Limited (deregistered 22 March 2021) Insurance Box Pty Limited (deregistered 4 February 2021) Lifeco s.r.o. NAU Country Insurance Company North Pointe Insurance Company Praetorian Insurance Company QBE (PNG) Limited QBE Administration Services, Inc. QBE Americas, Inc. QBE Asia Pacific Holdings Limited QBE Asia Services Sdn. Bhd (incorporated 3 May 2021) QBE Blue Ocean Re Limited QBE Capital Funding III Limited (dissolved 16 December 2021) QBE Capital Funding IV Limited (dissolved 16 December 2021) QBE Corporate Limited QBE Emerging Markets Holdings Pty Limited QBE Employee Share Trust 1 QBE Europe Intermediary Services SAS (deregistered 27 December 2021) QBE Europe SA/NV QBE European Operations plc QBE European Services Limited QBE European Underwriting Services (Australia) Pty Limited QBE Finance Holdings (EO) Limited QBE FIRST Enterprises, LLC QBE FIRST Property Tax Solutions, LLC QBE General Insurance (Hong Kong) Limited QBE Group Services Pty Ltd QBE Group Shared Services Limited COUNTRY OF INCORPORATION/ FORMATION Australia Switzerland Australia Australia United States Australia Bermuda United States United States Germany United Kingdom United Kingdom United Kingdom Australia Australia Czech Republic United States United States United States PNG United States United States Hong Kong Malaysia Bermuda Jersey Jersey United Kingdom Australia Australia France Belgium United Kingdom United Kingdom Australia United Kingdom United States United States Hong Kong Australia United Kingdom EQUITY HOLDING 2021 % 2020 % – 100.00 100.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – – 100.00 100.00 – – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 141 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 142 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE QBE Holdings (AAP) Pty Limited QBE Holdings (EO) Limited QBE Holdings, Inc. QBE Hongkong & Shanghai Insurance Limited QBE Insurance (Australia) Limited QBE Insurance (Fiji) Limited QBE Insurance (International) Pty Limited QBE Insurance (Malaysia) Berhad QBE Insurance (PNG) Limited QBE Insurance (Singapore) Pte Ltd QBE Insurance (Vanuatu) Limited QBE Insurance (Vietnam) Company Limited QBE Insurance Corporation QBE Insurance Holdings Pty Limited QBE International Markets Pte Ltd QBE Investments (Australia) Pty Limited QBE Investments (North America), Inc. QBE Irish Share Incentive Plan1 QBE Latin America Insurance Holdings Pty Ltd QBE Lenders’ Mortgage Insurance Limited QBE Management (Ireland) Limited QBE Management, Inc. QBE Management Services (Philippines) Pty Limited QBE Management Services (UK) Limited QBE Management Services Pty Limited QBE Mortgage Insurance (Asia) Limited QBE Partner Services (Europe) LLP QBE Regional Companies (N.A.), Inc. QBE Reinsurance Corporation QBE Reinsurance Services (Bermuda) Limited QBE Services Inc QBE SK s.r.o. (dissolved 19 January 2021) QBE Specialty Insurance Company QBE s.r.o. QBE Stonington Insurance Holdings Inc QBE Strategic Capital (Europe) Limited QBE Strategic Capital (International) Limited QBE Strategic Capital Company Pty Limited QBE UK Finance IV Limited QBE UK Limited QBE UK Share Incentive Plan1 QBE Underwriting Limited QBE Underwriting Services (Ireland) Limited QBE Underwriting Services (UK) Limited QBE Ventures Pty Limited QBE Workers Compensation (NSW) Limited (dormant) QBE Workers Compensation (VIC) Pty Limited (dormant) Queensland Insurance (Investments) Pte Limited (in liquidation) Regent Insurance Company Ridgwell Fox & Partners (Underwriting Management) Limited (dissolved 20 February 2021) Sinkaonamahasarn Company Limited2 Southern National Risk Management Corporation COUNTRY OF INCORPORATION/ FORMATION Australia United Kingdom United States Hong Kong Australia Fiji Australia Malaysia PNG Singapore Vanuatu Vietnam United States Australia Singapore Australia United States Ireland Australia Australia Ireland United States Australia United Kingdom Australia Hong Kong United Kingdom United States United States Bermuda Canada Slovakia United States Czech Republic United States United Kingdom United Kingdom Australia United Kingdom United Kingdom United Kingdom United Kingdom Ireland United Kingdom Australia Australia Australia Fiji United States United Kingdom Thailand United States EQUITY HOLDING 2021 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 49.00 100.00 2020 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 100.00 EQUITY HOLDING Southern Pilot Insurance Company Standfast Corporate Underwriters Limited Stonington Insurance Company Trade Credit Collections Pty Limited Trade Credit Underwriting Agency NZ Limited Trade Credit Underwriting Agency Pty Limited Westwood Insurance Agency COUNTRY OF INCORPORATION/ FORMATION United States United Kingdom United States Australia New Zealand Australia United States EQUITY HOLDING 2021 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 2020 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 1 QBE Employee Share Trust, QBE Irish Share Incentive Plan and QBE United Kingdom Share Incentive Plan have been included in the consolidated financial statements as these entities are special purpose entities that exist for the benefit of the Group. 2 Although QBE has less than a 50% equity interest in Sinkaonamahasarn Company Limited, controlled entities have the right to acquire the remaining share capital. All equity in controlled entities is held in the form of shares or through contractual arrangements. How we account for the numbers Controlled entities Control exists when the Group is exposed, or has rights, to variable returns from its involvement with an entity and has the ability to affect those returns through its power over it. All transactions between and with controlled entities are eliminated in full. Non-controlling interests in the results and equity of controlled entities are shown separately in the consolidated statement of comprehensive income, balance sheet and statement of changes in equity. Where control of an entity commences during a financial year, its results are included in the consolidated statement of comprehensive income from the date on which control is obtained. Where control of an entity ceases during a financial year, its results are included for that part of the year during which the control existed. 143 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s A change in ownership of a controlled entity without the gain or loss of control is accounted for as an equity transaction. ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 142 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 7. GROUP STRUCTURE QBE Holdings (AAP) Pty Limited QBE Holdings (EO) Limited QBE Holdings, Inc. QBE Hongkong & Shanghai Insurance Limited QBE Insurance (Australia) Limited QBE Insurance (Fiji) Limited QBE Insurance (International) Pty Limited QBE Insurance (Malaysia) Berhad QBE Insurance (PNG) Limited QBE Insurance (Singapore) Pte Ltd QBE Insurance (Vanuatu) Limited QBE Insurance (Vietnam) Company Limited QBE Insurance Corporation QBE Insurance Holdings Pty Limited QBE International Markets Pte Ltd QBE Investments (Australia) Pty Limited QBE Investments (North America), Inc. QBE Irish Share Incentive Plan1 QBE Latin America Insurance Holdings Pty Ltd QBE Lenders’ Mortgage Insurance Limited QBE Management (Ireland) Limited QBE Management, Inc. QBE Management Services (Philippines) Pty Limited QBE Management Services (UK) Limited QBE Management Services Pty Limited QBE Mortgage Insurance (Asia) Limited QBE Partner Services (Europe) LLP QBE Regional Companies (N.A.), Inc. QBE Reinsurance Corporation QBE Reinsurance Services (Bermuda) Limited QBE Services Inc QBE SK s.r.o. (dissolved 19 January 2021) QBE Specialty Insurance Company QBE s.r.o. QBE Stonington Insurance Holdings Inc QBE Strategic Capital (Europe) Limited QBE Strategic Capital (International) Limited QBE Strategic Capital Company Pty Limited QBE UK Finance IV Limited QBE UK Limited QBE UK Share Incentive Plan1 QBE Underwriting Limited QBE Underwriting Services (Ireland) Limited QBE Underwriting Services (UK) Limited QBE Ventures Pty Limited QBE Workers Compensation (NSW) Limited (dormant) QBE Workers Compensation (VIC) Pty Limited (dormant) Queensland Insurance (Investments) Pte Limited (in liquidation) Regent Insurance Company February 2021) Ridgwell Fox & Partners (Underwriting Management) Limited (dissolved 20 Sinkaonamahasarn Company Limited2 Southern National Risk Management Corporation COUNTRY OF INCORPORATION/ FORMATION Australia United Kingdom United States Hong Kong Australia Fiji Australia Malaysia PNG Singapore Vanuatu Vietnam United States Australia Singapore Australia United States Ireland Australia Australia Ireland United States Australia United Kingdom Australia Hong Kong United Kingdom United States United States Bermuda Canada Slovakia United States Czech Republic United States United Kingdom United Kingdom Australia United Kingdom United Kingdom United Kingdom United Kingdom Ireland United Kingdom Australia Australia Australia Fiji United States United Kingdom Thailand United States 2021 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 49.00 100.00 2020 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 – 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 100.00 144 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER Overview This section includes other information that must be disclosed to comply with the Australian Accounting Standards or the Corporations Act 2001. 8.1 Other accounting policies 8.1.1 New accounting standards and amendments adopted by the Group The Group adopted the following new or amended accounting standards from 1 January 2021: TITLE AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19-Related Rent Concessions AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 The adoption of these revised standards did not significantly impact the Group’s accounting policies or financial statements. In March 2021, the IFRIC issued an agenda decision on Configuration or Customisation Costs in a Cloud Computing Arrangement. The IFRIC decision is consistent with the Group’s accounting policies and did not materially impact the Group’s financial statements. 8.1.2 New accounting standards and amendments issued but not yet effective TITLE OPERATIVE DATE AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between 1 January 2022 an Investor and its Associate or Joint Venture AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018–2020 1 January 2022 and Other Amendments AASB 2021-3 Amendments to Australian Accounting Standards – COVID-19-Related Rent Concessions 1 January 2022 beyond 30 June 2021 AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current 1 January 2023 or Non-current AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and 1 January 2023 Definition of Accounting Estimates AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities 1 January 2023 arising from a Single Transaction AASB 17 Insurance Contracts 1 January 2023 The Australian Accounting Standards and amendments detailed in the table above are not mandatory for the Group until the operative dates stated; however, early adoption is often permitted. The Group currently plans to adopt the standards and amendments detailed above in the reporting periods beginning on their respective operative dates. An assessment of the financial impact of the standards and amendments has been undertaken and they are not expected to have a material impact on the Group’s financial statements, except where noted below. AASB 17 Insurance Contracts AASB 17, a new accounting standard for insurance contracts, was adopted by the AASB in July 2017. In June 2020, the IASB issued Amendments to IFRS 17 which deferred the effective date from 1 January 2021 to 1 January 2023 and made significant amendments to the standard in response to feedback from, and implementation issues raised by, stakeholders. These amendments were adopted by the AASB in July 2020. Measurement of insurance contracts Measurement models The standard introduces a new ‘general model’ for the recognition and measurement of insurance contracts. The liability for remaining coverage (which represents insurance coverage to be provided after the balance date) under the general model is measured as the sum of: • the present value of expected future cash flows and a risk adjustment (collectively referred to as the ‘fulfilment cash flows’); and • a contractual service margin, being the unearned profit, which is recognised as insurance revenue in profit or loss over the coverage period of the contracts. The contractual service margin is earned based on a pattern of coverage units which may not be the same as the pattern of incidence of risk used to earn gross written premium under AASB 1023 General Insurance Contracts (AASB 1023). 144 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER Overview or the Corporations Act 2001. 8.1 Other accounting policies This section includes other information that must be disclosed to comply with the Australian Accounting Standards TITLE TITLE 8.1.1 New accounting standards and amendments adopted by the Group The Group adopted the following new or amended accounting standards from 1 January 2021: AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19-Related Rent Concessions AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 The adoption of these revised standards did not significantly impact the Group’s accounting policies or financial statements. 8.1.2 New accounting standards and amendments issued but not yet effective AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between 1 January 2022 an Investor and its Associate or Joint Venture AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018–2020 1 January 2022 OPERATIVE DATE and Other Amendments beyond 30 June 2021 or Non-current Definition of Accounting Estimates arising from a Single Transaction AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current 1 January 2023 AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and 1 January 2023 AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities 1 January 2023 AASB 17 Insurance Contracts 1 January 2023 The Australian Accounting Standards and amendments detailed in the table above are not mandatory for the Group until the operative dates stated; however, early adoption is often permitted. The Group currently plans to adopt the standards and amendments detailed above in the reporting periods beginning on their respective operative dates. An assessment of the financial impact of the standards and amendments has been undertaken and they are not expected to have a material impact on the Group’s financial statements, except where noted below. AASB 17, a new accounting standard for insurance contracts, was adopted by the AASB in July 2017. In June 2020, the IASB issued Amendments to IFRS 17 which deferred the effective date from 1 January 2021 to 1 January 2023 and made significant amendments to the standard in response to feedback from, and implementation issues raised by, stakeholders. These amendments were adopted AASB 17 Insurance Contracts by the AASB in July 2020. Measurement of insurance contracts Measurement models The standard introduces a new ‘general model’ for the recognition and measurement of insurance contracts. The liability for remaining coverage (which represents insurance coverage to be provided after the balance date) under the general model is measured as the sum of: • the present value of expected future cash flows and a risk adjustment (collectively referred to as the ‘fulfilment cash flows’); and • a contractual service margin, being the unearned profit, which is recognised as insurance revenue in profit or loss over the coverage period of the contracts. The contractual service margin is earned based on a pattern of coverage units which may not be the same as the pattern of incidence of risk used to earn gross written premium under AASB 1023 General Insurance Contracts (AASB 1023). AASB 17 permits the use of a simplified approach (which is similar to the current basis on which general insurance is brought to account under AASB 1023) if the liability for remaining coverage under the simplified approach is not expected to materially differ from that under the general model, or if the coverage period of the contracts is less than one year. QBE has developed a model and methodology for assessing eligibility of contracts with coverage periods of greater than one year to apply the simplified approach. Our preliminary assessment, which involves detailed modelling under a range of scenarios as well as a qualitative assessment of contract features, has determined that the simplified approach is expected to apply to more than 98% of the Group’s business based on gross written premium. For groups of contracts that apply the simplified approach and have a coverage period of one year or less, AASB 17 provides an option to recognise any insurance acquisition costs as expenses when incurred. QBE does not plan to apply this option and expects to amortise acquisition costs over the coverage period of the related insurance contracts, consistent with current accounting under AASB 1023. Onerous contracts AASB 17 requires the identification of ‘groups’ of onerous contracts which are expected to be determined at a more granular level of aggregation than the level at which the liability adequacy test is performed under AASB 1023. Contracts that are measured using the simplified approach are assumed not to be onerous unless facts and circumstances indicate otherwise. QBE has developed a framework for identifying relevant facts and circumstances that may be indicators of possible onerous contracts which includes consideration of management information provided to the Group Executive Committee for planning and performance management purposes. If such facts and circumstances that may be indicators of possible onerous contracts exist, the onerous contract losses are measured based on an estimation of fulfilment cash flows and are recognised in profit or loss. Models for measuring potential onerous contract losses are currently being developed, tested and approved. Onerous contract losses must be measured on a gross basis (excluding the effect of reinsurance), with the impact on equity and profit or loss mitigated by the deduction of related income on reinsurance recoveries to the extent that the onerous contracts are covered by reinsurance. The financial impact is still being determined but the application of the onerous contracts requirements could result in a decrease in opening equity on adoption of AASB 17. In March 2021, the IFRIC issued an agenda decision on Configuration or Customisation Costs in a Cloud Computing Arrangement. The IFRIC decision is consistent with the Group’s accounting policies and did not materially impact the Group’s financial statements. Risk adjustment The measurement of insurance contract liabilities will include a risk adjustment which replaces the risk margin under AASB 1023. The risk margin under AASB 1023 reflects the inherent uncertainty in the net discounted central estimate, whereas the risk adjustment is defined as the compensation required for bearing the uncertainty that arises from non-financial risk. Similar to the risk margin, the risk adjustment includes the benefit of diversification. AASB 17 requires the disclosure of the confidence level that corresponds to the risk adjustment used in the measurement of insurance contract liabilities. The application of the AASB 17 requirements is one of substantial judgement and QBE is currently defining the methodology for determining the risk adjustment and, in doing so, is giving consideration to evolving industry interpretation. Given QBE’s ongoing work on this complex component of the standard, the financial impact cannot be reasonably estimated at the balance date. AASB 2021-3 Amendments to Australian Accounting Standards – COVID-19-Related Rent Concessions 1 January 2022 Discount rates AASB 1023 requires the net central estimate of outstanding claims to be discounted using risk-free rates as described in note 2.3.4. AASB 17 requires estimates of future cash flows to be discounted to reflect the time value of money and financial risks related to those cash flows but does not prescribe a methodology for determining the discount rates used. QBE expects to apply a ‘bottom-up approach’ which uses risk-free rates adjusted to reflect the illiquidity characteristics of the insurance contracts, which could result in higher discount rates relative to current requirements. The methodology and impact of reflecting illiquidity within discount rates is currently being determined. Foreign exchange Insurance contract assets and liabilities that are denominated in foreign currency are treated as monetary items under AASB 17. This differs from current industry practice in respect of unearned premium and deferred insurance costs which are treated as non-monetary items. The financial impact of this change will be known once the other measurement impacts of AASB 17 have been determined and will be impacted by the exchange rates at the balance date. QBE will reassess its operational and translational currency exposures, as well as related risk management strategies, once the impacts are reasonably estimable. Interim reporting AASB 17 provides an option to change the treatment of accounting estimates made in interim financial statements when applying AASB 17 in the subsequent annual financial statements (i.e. a ‘year-to-date basis’). QBE expects to apply this option and will measure accounting estimates on a year-to-date basis which is consistent with current practice. Presentation and disclosure The standard introduces significant changes to the presentation and disclosure of insurance line items in the financial statements, introducing new line items on the balance sheet and statement of comprehensive income and increased disclosure requirements compared with existing reporting requirements. Existing insurance and reinsurance contract line items on the balance sheet (including trade debtors arising from general insurance contracts, unearned premium, deferred insurance costs, gross outstanding claims and reinsurance and other recoveries on outstanding claims) will be replaced with insurance contract assets and liabilities, and reinsurance contract assets and liabilities. Insurance contract liabilities under AASB 17 will include all cash flows that directly relate to the fulfillment of insurance contracts (direct and inward reinsurance), including acquisition, claims settlement, policy administration and maintenance costs. It also includes other costs such as direct overheads which are currently recognised in trade and other payables on the balance sheet. 145 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 146 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER Transition AASB 17 will be applied retrospectively to all of QBE’s insurance contracts on transition except to the extent that it is impracticable to do so, in which case either a modified retrospective or fair value approach may be applied. QBE expects to apply a modified retrospective approach to certain contracts acquired in the past (e.g. as part of a business combination) that, at the time of acquisition, were considered past expiry and were in their claims settlement period. For these contracts, the related liabilities are expected to be classified as liabilities for incurred claims, on the basis that it would be impracticable to treat these liabilities as related to unexpired coverage. QBE is currently performing an assessment to conclude on the expected transition approach to be applied for the remainder of the business. Financial impact The requirements of AASB 17 are complex and the expectations noted above are subject to change as the implementation progresses and as QBE continues to analyse the impacts of the standard and recent amendments. Market developments also continue to be monitored in order to assess the impact of evolving interpretations and other changes. The financial impact of adopting AASB 17 cannot be reasonably estimated at the date of this report. QBE intends to disclose the potential financial impact of adopting AASB 17 once it is practical to provide a reliable estimate. Implementation progress QBE has performed an impact assessment which identified the key areas of expected impact. Group-wide accounting guidance and application methodologies are being developed, and a global implementation team has been mobilised to progress the detailed design and implementation of required changes to financial reporting systems. In addition to concluding on methodology decisions in relation to the areas of judgement described above, the implementation team is currently focused on the development and testing of actuarial models as well as the implementation of changes to finance systems and reporting processes. Complementing these changes, QBE’s transition approach also includes the development and delivery of training to the global finance teams and relevant stakeholders on the new requirements and their practical application. 8.2 Contingent liabilities Overview Contingent liabilities are disclosed when the possibility of a future settlement of economic benefits is considered to be less than probable but more likely than remote. If the expected settlement of the liability becomes probable, a provision is recognised. QBE is required to support the underwriting activities of the Group’s controlled entities including corporate members at Lloyd’s. Funds at Lloyd’s are those funds of the Group which are subject to the terms of the Lloyd’s Deposit Trust Deed and are required to support underwriting for the following year and the open years of account, determined by a formula prescribed by Lloyd’s each year. At the balance date, letters of credit and similar forms of support of $2,177 million (2020 $2,085 million) were in place in respect of the Group’s participation in Lloyd’s, along with cash and investments of $106 million (2020 $250 million). In addition, a controlled entity has entered into various trust and security deeds with Lloyd’s in respect of assets lodged to support its underwriting activities. These deeds contain covenants that require the entity to meet financial obligations should they arise in relation to cash calls from syndicate participations. A cash call would be made first on the assets held in syndicate trust funds and would only call on funds at Lloyd’s after syndicate resources were exhausted. Only if the level of these trust funds was not sufficient would a cash call result in a draw down on the letters of credit and other assets lodged with Lloyd’s. In the normal course of business, the Group is also exposed to contingent liabilities in relation to claims litigation and regulatory examinations arising out of its insurance and reinsurance activities. The Group may also be exposed to the possibility of contingent liabilities in relation to insurance and non-insurance litigation including but not limited to regulatory test cases and class actions, taxation and compliance matters, which may result in legal or regulatory penalties and financial or non-financial losses and other impacts. QBE is currently defending a representative class action in Australia relating to policyholders with business interruption policies (refer to note 1.2.3). Entities in the Group may also provide guarantees to support representations in commercial transactions. 146 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER Transition remainder of the business. Financial impact AASB 17 will be applied retrospectively to all of QBE’s insurance contracts on transition except to the extent that it is impracticable to do so, in which case either a modified retrospective or fair value approach may be applied. QBE expects to apply a modified retrospective approach to certain contracts acquired in the past (e.g. as part of a business combination) that, at the time of acquisition, were considered past expiry and were in their claims settlement period. For these contracts, the related liabilities are expected to be classified as liabilities for incurred claims, on the basis that it would be impracticable to treat these liabilities as related to unexpired coverage. QBE is currently performing an assessment to conclude on the expected transition approach to be applied for the The requirements of AASB 17 are complex and the expectations noted above are subject to change as the implementation progresses and as QBE continues to analyse the impacts of the standard and recent amendments. Market developments also continue to be monitored in order to assess the impact of evolving interpretations and other changes. The financial impact of adopting AASB 17 cannot be reasonably estimated at the date of this report. QBE intends to disclose the potential financial impact of adopting AASB 17 once it is practical to provide a reliable estimate. Implementation progress QBE has performed an impact assessment which identified the key areas of expected impact. Group-wide accounting guidance and application methodologies are being developed, and a global implementation team has been mobilised to progress the detailed design and implementation of required changes to financial reporting systems. In addition to concluding on methodology decisions in relation to the areas of judgement described above, the implementation team is currently focused on the development and testing of actuarial models as well as the implementation of changes to finance systems and reporting processes. Complementing these changes, QBE’s transition approach also includes the development and delivery of training to the global finance teams and relevant stakeholders on the new requirements and their practical application. 8.2 Contingent liabilities Overview a provision is recognised. Contingent liabilities are disclosed when the possibility of a future settlement of economic benefits is considered to be less than probable but more likely than remote. If the expected settlement of the liability becomes probable, QBE is required to support the underwriting activities of the Group’s controlled entities including corporate members at Lloyd’s. Funds at Lloyd’s are those funds of the Group which are subject to the terms of the Lloyd’s Deposit Trust Deed and are required to support underwriting for the following year and the open years of account, determined by a formula prescribed by Lloyd’s each year. At the balance date, letters of credit and similar forms of support of $2,177 million (2020 $2,085 million) were in place in respect of the Group’s participation in Lloyd’s, along with cash and investments of $106 million (2020 $250 million). In addition, a controlled entity has entered into various trust and security deeds with Lloyd’s in respect of assets lodged to support its underwriting activities. These deeds contain covenants that require the entity to meet financial obligations should they arise in relation to cash calls from syndicate participations. A cash call would be made first on the assets held in syndicate trust funds and would only call on funds at Lloyd’s after syndicate resources were exhausted. Only if the level of these trust funds was not sufficient would a cash call result in a draw down on the letters of credit and other assets lodged with Lloyd’s. In the normal course of business, the Group is also exposed to contingent liabilities in relation to claims litigation and regulatory examinations arising out of its insurance and reinsurance activities. The Group may also be exposed to the possibility of contingent liabilities in relation to insurance and non-insurance litigation including but not limited to regulatory test cases and class actions, taxation and compliance matters, which may result in legal or regulatory penalties and financial or non-financial losses and other impacts. QBE is currently defending a representative class action in Australia relating to policyholders with business interruption policies (refer to note 1.2.3). Entities in the Group may also provide guarantees to support representations in commercial transactions. 8.3 Offsetting financial assets and liabilities The Group has $243 million (2020 $261 million) receivable from and payable to a single counterparty which are fully set off in the balance sheet in accordance with Australian Accounting Standards, on the basis that the Group intends to settle these on a net basis and has a legally enforceable right to do so. 8.4 Reconciliation of profit or loss after income tax to net cash flows from operating activities Overview AASB 1054 Australian Additional Disclosures requires a reconciliation of profit or loss after income tax to net cash flows from operating activities. Profit (loss) after income tax Adjustments for: Depreciation and impairment of property, plant and equipment Amortisation of right-of-use lease assets Amortisation/impairment of intangibles Loss on sale of entities and businesses Share of net loss of associates Net foreign exchange losses Fair value losses on financial assets Equity-settled share-based payments expense Balance sheet movements: Increase in trade debtors Increase in net operating assets Increase in trade payables Increase in gross outstanding claims liability Increase in unearned premium Increase in deferred insurance costs Increase in net defined benefit obligation Decrease (increase) in net tax assets Net cash flows from operating activities 2021 US$M 757 37 60 71 – 7 4 409 32 (1,920) (229) 1,755 753 1,422 (474) 2 68 2,754 2020 US$M (1,511) 40 68 512 2 5 29 206 20 (433) (142) 378 1,760 635 (262) 1 (74) 1,234 147 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 148 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.5 Share‑based payments Overview Share-based payments are equity-based compensation schemes provided to employees and executives. The Company issues shares from time to time under an Employee Share and Option Plan (the Plan). Any full-time or part-time employee of the Group or any equally-owned joint venture who is offered shares or options is eligible to participate in the Plan. Share schemes 8.5.1 A summary of deferred equity award plans is set out below: PLAN AVAILABLE TO: NATURE OF AWARD VESTING CONDITIONS Executive Incentive Plan (EIP) (2017–2021) Executives (before 1 Jan 2019) and other key senior employees • 40%-50% delivered in cash. The conditional rights are deferred in four equal tranches, such that 25% vests on each of the first, second, third and fourth anniversaries of the award. • 50%-60% deferred as conditional rights1 to fully paid ordinary shares of the Company. EIP outcomes are subject to the achievement of: • a blend of divisional combined operating ratios (COR) for 2021, or Group COR for 2017-2020, and cash ROE targets; • divisional COR targets in the case of divisional employees; and • individual performance objectives reflecting QBE’s strategic priorities. Short‑term Incentive (STI) (2014–2021) Executives and other key senior employees • 67% delivered in cash (50% in the case of the Group CEO). The conditional rights are deferred in two equal tranches such that 50% vests on the first anniversary of the award and 50% vests on the second anniversary of the award. • 33% deferred as conditional rights to fully paid ordinary shares of the Company (50% in the case of the Group CEO). STI outcomes are subject to the achievement of: • a blend of divisional CORs for 2021, or Group COR for 2017-2020, and cash ROE targets; • divisional COR targets2 in the case of divisional employees; and • individual performance objectives reflecting QBE’s strategic priorities. Executives Long‑term incentive (LTI) (2019–2021) • Conditional rights to fully paid ordinary QBE shares. On achievement of the performance measures at the end of a three-year performance period, conditional rights vest in three tranches as follows: • 33% at the end of the three-year performance period; • 33% on the first anniversary of the end of the performance period; and • 34% on the second anniversary of the end of the performance period. Vesting is subject to performance conditions as follows: • 50% of each tranche is subject to the achievement against the Group ROE performance target based on the average of three individual annual performance ranges set over three individual years (for 2021 awards), or a three-year average target (for 2019 and 2020 awards); and • 50% of each tranche is based on the Group’s relative total shareholder return, compared against two independent peer groups, over a three- year performance period. 1 For participants outside Australia, the deferred component may be delivered in equal shares of conditional rights and cash. 2 Divisional return on allocated capital targets until 31 December 2016. Additionally: • plan rules provide suitable discretion for the People & Remuneration Committee to adjust any formulaic outcome to ensure that awards made under the EIP, STI and LTI appropriately reflect performance; • during the period from the grant date to the vesting date, further conditional rights are issued under the BSP to reflect dividends paid on ordinary shares of the Company. These conditional rights are subject to the same vesting conditions as the original grant of conditional rights; • recipients must remain in the Group’s service throughout the service period in order for the awards to vest, except in cases where good leaver provisions apply. Vesting is also subject to malus, with clawback provisions applicable to 2021 allocations under the plan; • under good leaver provisions (e.g. retirement, redundancy, ill health, injury or mutually agreed separation), conditional rights remain subject to the performance and vesting conditions; and • once vested, conditional rights can be exercised for no consideration. 148 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.5 Share‑based payments Overview Share-based payments are equity-based compensation schemes provided to employees and executives. The Company issues shares from time to time under an Employee Share and Option Plan (the Plan). Any full-time or part-time employee of the Group or any equally-owned joint venture who is offered shares or options is eligible to participate in the Plan. 8.5.1 Share schemes A summary of deferred equity award plans is set out below: PLAN AVAILABLE TO: NATURE OF AWARD VESTING CONDITIONS Executive Executives • 40%-50% delivered The conditional rights are deferred in four equal tranches, such that 25% Incentive Plan (before 1 Jan in cash. vests on each of the first, second, third and fourth anniversaries of the award. (EIP) (2017–2021) key senior employees 2019) and other • 50%-60% deferred as conditional rights1 to fully paid ordinary shares of the Company. EIP outcomes are subject to the achievement of: • a blend of divisional combined operating ratios (COR) for 2021, or Group COR for 2017-2020, and cash ROE targets; • divisional COR targets in the case of divisional employees; and • individual performance objectives reflecting QBE’s strategic priorities. Short‑term Executives and • 67% delivered in cash The conditional rights are deferred in two equal tranches such that 50% Incentive (STI) other key senior (50% in the case vests on the first anniversary of the award and 50% vests on the second (2014–2021) employees of the Group CEO). anniversary of the award. • 33% deferred as conditional rights to fully paid ordinary shares of the Company (50% in the case of the STI outcomes are subject to the achievement of: • a blend of divisional CORs for 2021, or Group COR for 2017-2020, and cash ROE targets; • divisional COR targets2 in the case of divisional employees; and Group CEO). • individual performance objectives reflecting QBE’s strategic priorities. Long‑term Executives • Conditional rights to On achievement of the performance measures at the end of a three-year incentive (LTI) (2019–2021) fully paid ordinary performance period, conditional rights vest in three tranches as follows: QBE shares. • 33% at the end of the three-year performance period; • 33% on the first anniversary of the end of the performance period; and • 34% on the second anniversary of the end of the performance period. Vesting is subject to performance conditions as follows: • 50% of each tranche is subject to the achievement against the Group ROE performance target based on the average of three individual annual performance ranges set over three individual years (for 2021 awards), or a three-year average target (for 2019 and 2020 awards); and • 50% of each tranche is based on the Group’s relative total shareholder return, compared against two independent peer groups, over a three- year performance period. 1 For participants outside Australia, the deferred component may be delivered in equal shares of conditional rights and cash. 2 Divisional return on allocated capital targets until 31 December 2016. Additionally: of conditional rights; • plan rules provide suitable discretion for the People & Remuneration Committee to adjust any formulaic outcome to ensure that awards made under the EIP, STI and LTI appropriately reflect performance; • during the period from the grant date to the vesting date, further conditional rights are issued under the BSP to reflect dividends paid on ordinary shares of the Company. These conditional rights are subject to the same vesting conditions as the original grant • recipients must remain in the Group’s service throughout the service period in order for the awards to vest, except in cases where good leaver provisions apply. Vesting is also subject to malus, with clawback provisions applicable to 2021 allocations under the plan; • under good leaver provisions (e.g. retirement, redundancy, ill health, injury or mutually agreed separation), conditional rights remain subject to the performance and vesting conditions; and • once vested, conditional rights can be exercised for no consideration. 8.5.2 Conditional rights Details of the number of employee entitlements to conditional rights to ordinary shares granted, vested and transferred to employees during the year are as follows: At 1 January Granted Dividends attaching Vested and transferred to employees Forfeited At 31 December Weighted average share price at date of vesting of conditional rights during the year Weighted average fair value of conditional rights granted during the year 2021 NUMBER OF RIGHTS 13,247,240 4,061,715 83,887 (4,196,217) (2,212,696) 10,983,929 A$9.41 A$9.23 2020 NUMBER OF RIGHTS 13,484,807 3,999,178 357,956 (2,827,980) (1,766,721) 13,247,240 A$13.10 A$12.35 8.5.3 Fair value of conditional rights The fair value of conditional rights granted during the year was determined using the following significant assumptions: Five-day volume weighted average price of instrument at grant date Expected volatility Risk-free rate Expected life of instrument A$ % % Years 2021 9.30–12.01 25–27 0.09–0.81 0.1–5.0 2020 7.49–14.91 21–24 0.18–0.68 0.1–5.0 The fair value is determined using appropriate models including Monte Carlo simulations, depending on the vesting conditions. Some of the assumptions used may be based on historical data which is not necessarily indicative of future trends. Reasonable changes in these assumptions would not have a material impact on the Group’s financial statements. 8.5.4 Employee options The market value of all shares underlying the options at the balance date was A$0.2 million (2020 A$0.1 million). During 2021, no options were cancelled or forfeited. At 31 December 2021, 17,000 remained, excluding notional dividends (2020 17,000). The options were issued to employees in 2004 in lieu of shares under the Plan. The options vested immediately and are exercisable until March 2024. 8.5.5 Share-based payment expense This expense, which includes amounts in relation to cash-settled share-based payment awards, was $36 million (2020 $20 million). These amounts are included in underwriting and other expenses. 8.5.6 Shares purchased on-market The Group may purchase shares on-market to satisfy entitlements under employee share schemes. The Group acquired 0.1 million (2020 0.2 million) such shares during the period at an average price of A$11.07 (2020 A$13.18). How we account for the numbers The fair value of the employee services received in exchange for the grant of equity-settled instruments is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the instruments granted, excluding the impact of any non-market vesting conditions. The impacts of non-market vesting conditions are included in assumptions about the number of instruments that are expected to become exercisable. The fair value of each instrument is recognised evenly over the service period ending at the vesting date; however, at each balance date, the Group revises its estimates of the number of instruments that are expected to become exercisable due to the achievement of non-market vesting conditions. The Group recognises the impact of the revision of original estimates, if any, in profit or loss with a corresponding adjustment to equity. 149 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 150 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.6 Key management personnel Overview AASB 124 Related Party Disclosures requires disclosure of the compensation of directors (executive and non-executive) and those persons having authority and responsibility for planning, directing and controlling the activities of the Group, either directly or indirectly. This group is collectively defined as key management personnel. Additional details in respect of key management personnel and their remuneration are shown in the Remuneration Report. Short-term employee benefits Post-employment benefits Other long-term employment benefits Share-based payments Termination benefits 2021 US$000 15,711 166 82 11,254 – 27,213 2020 US$000 10,060 162 38 2,793 622 13,675 How we account for the numbers Short-term employee benefits – profit sharing and bonus plans A provision is recognised for profit sharing and bonus plans where there is a contractual obligation or where past practice has created a constructive obligation at the end of each reporting period. Bonus or profit sharing obligations are settled within 12 months from the balance date. Post-employment benefits – defined contribution plans Defined contribution plans are post-employment benefit plans under which an entity pays a fixed contribution into a fund during the course of employment and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Contributions to defined contribution plans are expensed as incurred. Other long-term employee employment benefits The liabilities for long service leave and annual leave are recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using high quality corporate bond yields with terms and currencies that match, as closely as possible, the estimated future cash outflows. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. Share-based payments Further information in relation to remuneration under equity-based compensation schemes is provided in note 8.5. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the date when the Group: • can no longer withdraw the offer of those benefits; and • recognises costs for a restructuring that is within the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. 150 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.6 Key management personnel Overview AASB 124 Related Party Disclosures requires disclosure of the compensation of directors (executive and non-executive) and those persons having authority and responsibility for planning, directing and controlling the activities of the Group, either directly or indirectly. This group is collectively defined as key management personnel. Additional details in respect of key management personnel and their remuneration are shown in the Remuneration Report. 8.7 Defined benefit plans Overview Defined benefit plans are post-employment plans which provide benefits to employees on retirement, disability or death. The benefits are based on years of service and an average salary calculation. Contributions are made to cover the current cash outflows from the plans and a liability is recorded to recognise the estimated accrued but not yet funded obligations. FAIR VALUE OF PLAN ASSETS PRESENT VALUE OF PLAN OBLIGATIONS NET RECOGNISED SURPLUSES (DEFICITS) DATE OF LAST ACTUARIAL ASSESSMENT 2021 US$M 2020 US$M 2021 US$M 2020 US$M 2021 US$M 2020 US$M r e v i e w 151 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 fi n a n c i a l O p e r a t i n g a n d Short-term employee benefits Post-employment benefits Other long-term employment benefits Share-based payments Termination benefits 2021 US$000 15,711 166 82 11,254 – 27,213 2020 US$000 10,060 162 38 2,793 622 13,675 Defined benefit plan surpluses Iron Trades Insurance staff trust Janson Green final salary superannuation scheme1 31 Dec 2021 31 Dec 2021 Defined benefit plan deficits QBE the Americas plan1 Other plans 2 31 Dec 2021 31 Dec 2021 365 197 562 214 34 248 363 209 572 258 44 302 (285) (185) (470) (224) (53) (277) (299) (208) (507) (259) (65) (324) 80 12 92 (10) (19) (29) 3 G o v e r n a n c e 64 1 65 (1) (21) (22) How we account for the numbers Short-term employee benefits – profit sharing and bonus plans A provision is recognised for profit sharing and bonus plans where there is a contractual obligation or where past practice has created a constructive obligation at the end of each reporting period. Bonus or profit sharing obligations are settled within 12 months from the balance date. Post-employment benefits – defined contribution plans Defined contribution plans are post-employment benefit plans under which an entity pays a fixed contribution into a fund during the course of employment and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Contributions to defined contribution plans are expensed as incurred. Other long-term employee employment benefits The liabilities for long service leave and annual leave are recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using high quality corporate bond yields with terms and currencies that match, as closely as possible, the estimated future cash outflows. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. Share-based payments Termination benefits Further information in relation to remuneration under equity-based compensation schemes is provided in note 8.5. Termination benefits are payable when employment is terminated before the normal retirement date or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the date when the Group: • can no longer withdraw the offer of those benefits; and • recognises costs for a restructuring that is within the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. 1 Defined benefit plan obligations are funded. 2 Other plans include $11 million (2020 $12 million) of defined benefit post-employment plan obligations that are not funded. The measurement of assets and liabilities in defined benefit plans makes it necessary to use assumptions about discount rates, expected future salary increases, investment returns, inflation and life expectancy. If actual outcomes differ materially from actuarial assumptions, this could result in a significant change in employee benefit expense recognised in profit or loss or in actuarial remeasurements recognised in other comprehensive income, together with the defined benefit assets and liabilities recognised in the balance sheet. The Group does not control the investment strategies of defined benefit plans; they are managed by independent trustees. Nonetheless, the Group has agreed, as part of ongoing funding arrangements, that the trustees should manage their strategic asset allocation in order to minimise the risk of material adverse impact. In particular, the Group has agreed with the trustees to reduce the level of investment risk by investing in assets that match, where possible, the profile of the liabilities. This involves holding a mixture of government and corporate bonds. The Group believes that due to the long-term nature of the plan liabilities, a level of continuing equity investment is also appropriate. The charge recognised in profit or loss in the year of $2 million (2020 $3 million) is included in underwriting expenses. Total employer contributions expected to be paid to the various plans in 2022 amount to $1 million. How we account for the numbers The surplus or deficit recognised in the balance sheet in respect of defined benefit plans is the present value of the defined benefit obligation at the balance date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate or government bonds that are denominated in the currency in which the benefits will be paid, and that have a term to maturity approximating the term of the related superannuation liability. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, and are recognised in other comprehensive income. Past service costs are recognised immediately in profit or loss. 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 152 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.8 Remuneration of auditors Overview QBE may engage the external auditor for non-audit services other than excluded services subject to the general principle that fees for non-audit services should not exceed 50% of all fees paid to the external auditor in any one financial year. The Board believes some non-audit services are appropriate given the external auditor’s knowledge of the Group. External tax services are generally provided by an accounting firm other than the external auditor. Consistent with prior periods, the external auditor cannot provide the excluded services of preparing accounting records or financial reports or acting in a management capacity. PricewaterhouseCoopers (PwC) Australian firm Audit or review of financial reports of the ultimate parent entity Audit of financial reports of controlled entities Audit of statutory returns Other assurance services Taxation services Advisory services Related practices of PwC Australian firm (including overseas PwC firms) Audit of financial reports of controlled entities Audit of statutory returns Other assurance services Taxation services Advisory services Audit and assurance services Other services Other auditors Audit of financial reports of controlled entities 2021 US$000 2,022 2,258 591 515 14 524 5,924 9,157 2,640 53 34 72 11,956 17,880 17,236 644 17,880 1,101 2020 US$000 1,868 1,805 483 920 32 505 5,613 9,654 2,824 130 74 102 12,784 18,397 17,684 713 18,397 15 152 Notes to the financial statements continued FOR THE YEAR ENDED 31 DECEMBER 2021 8. OTHER 8.8 Remuneration of auditors Overview QBE may engage the external auditor for non-audit services other than excluded services subject to the general principle that fees for non-audit services should not exceed 50% of all fees paid to the external auditor in any one financial year. The Board believes some non-audit services are appropriate given the external auditor’s knowledge of the Group. External tax services are generally provided by an accounting firm other than the external auditor. Consistent with prior periods, the external auditor cannot provide the excluded services of preparing accounting records or financial reports or acting in a management capacity. Related practices of PwC Australian firm (including overseas PwC firms) Audit of financial reports of controlled entities PricewaterhouseCoopers (PwC) Australian firm Audit or review of financial reports of the ultimate parent entity Audit of financial reports of controlled entities Audit of statutory returns Other assurance services Taxation services Advisory services Audit of statutory returns Other assurance services Taxation services Advisory services Audit and assurance services Other services Other auditors Audit of financial reports of controlled entities 2021 US$000 2,022 2,258 591 515 14 524 5,924 9,157 2,640 53 34 72 11,956 17,880 17,236 644 17,880 1,101 2020 US$000 1,868 1,805 483 920 32 505 5,613 9,654 2,824 130 74 102 12,784 18,397 17,684 713 18,397 15 153 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v P e r f o r m a n c e 8.9 Ultimate parent entity information Overview i e w The Corporations Act 2001 requires the disclosure of summarised financial information relating to the ultimate parent entity, QBE Insurance Group Limited. 8.9.1 Summarised financial data of QBE Insurance Group Limited (the Company) Loss after income tax Other comprehensive loss Total comprehensive loss Assets due within 12 months1 Shares in controlled entities Total assets Liabilities payable within 12 months 2 Borrowings Total liabilities Net assets Contributed equity Treasury shares held in trust Foreign currency translation reserve Other reserves Retained profits Total equity 1 Includes amounts due from QBE companies of $667 million (2020 $977 million). 2 Includes amounts due to QBE companies of $379 million (2020 $255 million). 8.9.2 Guarantees and contingent liabilities Support of the Group’s participation in Lloyd’s Support of other insurance operations of controlled entities Guarantees to investors in subordinated debt1 1 Excludes subordinated debt owned by the ultimate parent entity. 2021 US$M (73) (727) (800) 1,737 14,012 15,749 451 3,511 3,962 11,787 9,777 (2) 137 112 1,763 11,787 2021 US$M 2,177 2,512 – 2020 US$M (78) (1,011) (1,089) 1,366 14,860 16,226 504 3,016 3,520 12,706 10,273 (1) 315 116 2,003 12,706 2020 US$M 2,085 2,187 1,443 8.9.3 Tax consolidation legislation The accounting in relation to the legislation is set out in note 6.2.4. On adoption of the tax consolidation legislation, the directors of the Company and its wholly-owned Australian controlled entities entered into a tax sharing and tax funding agreement that requires the Australian entities to fully compensate the Company for current tax liabilities and to be fully compensated by the Company for any current tax or deferred tax assets in respect of tax losses arising from external transactions occurring after the date of implementation of the tax consolidation legislation. The contributions are allocated by reference to the notional taxable income of each Australian entity. Details of franking credits available to shareholders are shown in note 5.4. How we account for the numbers The financial information of the ultimate parent entity of the Group has been prepared on the same basis as the consolidated financial report except for shares in controlled entities, which are recorded at cost less any provision for impairment. 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 154 Directors' declaration FOR THE YEAR ENDED 31 DECEMBER 2021 In the directors’ opinion: (a) the financial statements and notes set out on pages 82 to 153 are in accordance with the Corporations Act 2001, including: (i) complying with accounting standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Note 1.2.1 confirms that the financial statements comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Group Chief Executive Officer and Group Chief Financial Officer required by section 295A of the Corporations Act 2001 and as recommended under the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Signed in Sydney this 18th day of February 2022 in accordance with a resolution of the directors. Michael Wilkins AO Director Andrew Horton Director 154 Directors' declaration FOR THE YEAR ENDED 31 DECEMBER 2021 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED In the directors’ opinion: requirements; and year ended on that date; and (a) the financial statements and notes set out on pages 82 to 153 are in accordance with the Corporations Act 2001, including: (i) complying with accounting standards, the Corporations Regulations 2001 and other mandatory professional reporting (ii) giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its performance for the financial (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Note 1.2.1 confirms that the financial statements comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Group Chief Executive Officer and Group Chief Financial Officer required by section 295A of the Corporations Act 2001 and as recommended under the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Signed in Sydney this 18th day of February 2022 in accordance with a resolution of the directors. Michael Wilkins AO Director Andrew Horton Director Report on the audit of the Financial Report Our opinion In our opinion: The accompanying Financial Report of QBE Insurance Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group Financial Report comprises: • the consolidated balance sheet as at 31 December 2021 • the consolidated statement of comprehensive income for the year then ended • the consolidated statement of changes in equity for the year then ended • the consolidated statement of cash flows for the year then ended • the notes to the financial statements, which include significant accounting policies and other explanatory information • the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 155 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, Sydney NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999 Liability limited by a scheme approved under Professional Standards Legislation. 156 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Our audit approach An audit is designed to provide reasonable assurance about whether the Financial Report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the Financial Report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. MATERIALITY KEY AUDIT MATTERS AUDIT SCOPE Materiality • For the purpose of our audit we used overall Group materiality of US$60 million, which represents approximately 0.5% of the Group’s net earned premium. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the Financial Report as a whole. • We chose Group net earned premium because, in our view, it is a key financial statement metric used in assessing the performance of the Group and is not as volatile as other profit or loss measures. • We utilised a 0.5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. To conduct this risk assessment, we considered the inherent risks facing the Group, including those arising from its respective business operations, and how the Group manages these risks. • In conjunction with component auditors, we conducted an audit of the most financially significant components, being the Australia Pacific, International and North America divisions. In addition, we performed specified risk focused audit procedures in relation to the captive reinsurer, Equator Re, and other head office entities. Further audit procedures were performed over the consolidation process. • We determined the level of direction and supervision we needed to have over the audit work performed by component auditors to be satisfied that sufficient audit evidence had been obtained for the purposes of our opinion. • We kept in regular communication with component auditors throughout the year with conference calls and written instructions. • We also ensured that our team, including the component auditors across the Group, possessed the appropriate competence and capabilities needed for the audit of a complex global insurer. This included industry expertise as well as specialists and experts in IT, actuarial, tax and valuations. 156 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Our audit approach An audit is designed to provide reasonable assurance about whether the Financial Report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the Financial Report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report for the current period. The key audit matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. Key audit matter How our audit addressed the key audit matter MATERIALITY KEY AUDIT MATTERS AUDIT SCOPE Materiality Group’s net earned premium. • For the purpose of our audit we used overall Group materiality of US$60 million, which represents approximately 0.5% of the • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the Financial Report as a whole. • We chose Group net earned premium because, in our view, it is a key financial statement metric used in assessing the performance of the Group and is not as volatile as other profit or loss measures. • We utilised a 0.5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. To conduct this risk assessment, we considered the inherent risks facing the Group, including those arising from its respective business operations, and how the Group manages these risks. • In conjunction with component auditors, we conducted an audit of the most financially significant components, being the Australia Pacific, International and North America divisions. In addition, we performed specified risk focused audit procedures in relation to the captive reinsurer, Equator Re, and other head office entities. Further audit procedures were performed over the consolidation process. • We determined the level of direction and supervision we needed to have over the audit work performed by component auditors to be satisfied that sufficient audit evidence had been obtained for the purposes of our opinion. • We kept in regular communication with component auditors throughout the year with conference calls and written instructions. • We also ensured that our team, including the component auditors across the Group, possessed the appropriate competence and capabilities needed for the audit of a complex global insurer. This included industry expertise as well as specialists and experts in IT, actuarial, tax and valuations. Valuation of net outstanding claims liability (Refer to note 2.3) $17,525 million The liability for outstanding claims relates to claims incurred during the year or prior periods, net of any reinsurance and other recoveries. The liability for outstanding claims is estimated by the Group as a central estimate but, as is the case with any accounting estimate, there is a risk that the ultimate claims paid will differ from the initial estimate. A risk margin is therefore applied by the Group to reflect the uncertainty in the estimate. The central estimate and risk margin combined, which are estimated based on judgements and actuarial expertise, are intended to achieve a probability of adequacy within the Group’s desired range of 87.5% - 92.5%, being the estimated overall sufficiency of the liability to pay future claims. We considered the valuation of the net outstanding claims liability a key audit matter due to: • The significant judgement required by the Group and the inherent uncertainty in estimating the expected future payments for claims incurred, including those not yet reported. • The uncertainty related to catastrophe events, particularly those occurring closer to year end, and in relation to classes of business where there is a greater length of time between the initial claim event and settlement, because of the inherent difficulty in assessing amounts until further evidence is available. • The uncertainty created by the COVID-19 pandemic on particular classes of business including property business interruption, credit exposed lines and certain long-tail classes as a result of ongoing legal test cases, wider macroeconomic impacts and other factors. • Models used to calculate the net outstanding claims liability across the Group are complex and judgement is applied in determining the appropriate construct of the models. • The higher degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to significant assumptions, particularly patterns of claims incidence, reporting and payments. • The audit effort required the use of experts with specialised skills and knowledge. Together with PwC actuarial experts, our procedures included: Gross discounted central estimate • Evaluating the design of the Group’s relevant controls over the claims reserving process and assessing whether a sample of these controls operated effectively throughout the year. • Evaluating whether the Group’s actuarial methodologies were consistent with recognised practices and with prior periods. • Evaluating the appropriateness and reliability of data used to derive the central estimate, including testing a sample of case estimates and settlement by agreeing to underlying documentation. • Assessing the appropriateness of significant actuarial assumptions such as patterns of claims incidence, reporting and payments, focusing on those classes of business which present a higher risk and in particular those impacted by the COVID-19 pandemic. We assessed these assumptions by comparing them with our expectations based on the Group’s experience, current trends and benchmarks, and our own industry knowledge. • Testing the discount assumptions applied through evaluating the yield curves and claims payment patterns. This included comparing the rates applied to external market data and the payment patterns to historical information. Reinsurance and other recoveries • Evaluating a sample of reinsurance recoveries held by divisions and the Group against underlying contracts to assess the existence of cover and appropriateness of their recognition, including making inquiries regarding legal advice obtained by the Group. • Assessing the recoverability of reinsurance recoveries by considering the payment history and credit worthiness of reinsurer counterparties for a sample of reinsurance recoveries. 157 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 158 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Key audit matter How our audit addressed the key audit matter Risk margin and probability of adequacy • Assessing the Group’s approach to setting the risk margin in accordance with the requirements of Australian Accounting Standards, with a focus on the assessed level of uncertainty in the net central estimate leading to a change in the margin year on year. • Considering the Group’s key judgements about the variability of each class of business underwritten and the extent of correlation within each division based on the Group’s experience and prior periods. • Evaluating the Group’s calculation of the probability of adequacy for reasonableness and consistency with previous valuations by developing an understanding of and testing the actuarial techniques applied by the Group. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Our procedures included: • Evaluating the determination and composition of the CGUs to which goodwill is allocated. • Evaluating the appropriateness of the value-in-use methodology adopted against the requirements of Australian Accounting Standards. • Developing an understanding of the process by which the cash flow projections were developed and comparing the cash flows included in the impairment assessment with the three year business plan presented to the Board. • Evaluating the reasonableness of significant assumptions used to derive the cash flow projections by comparing to external market and industry data where available, and current and past performance of the CGUs. • Together with PwC valuation experts, we: – Assessed the consistency of the terminal growth rates and investment returns with available external information. – Reperformed the calculation of the discount rates applied to cash flow projections, comparing key inputs (including risk-free rates, market premiums and unlevered betas) to industry and other benchmarks. • Testing the mathematical accuracy of the models which were used to determine the value-in-use of the CGUs. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Carrying value of goodwill (Refer to note 7.1.1) $2,016 million An impairment assessment is performed annually by the Group, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. Potential impairment is identified by comparing the value-in-use of a cash-generating unit (CGU) to its carrying value, including goodwill. The value-in-use for each of the CGUs is estimated by the Group using a discounted cash flow model which includes significant judgements and assumptions relating to cash flow projections, investment returns, terminal growth rates, and discount rates. We considered the carrying value of goodwill a key audit matter due to: • The inherent estimation uncertainty and subjectivity in judgements in a number of assumptions, including cash flow projections, investment returns, terminal growth rates and discount rates. • Models used to calculate value-in-use are complex and judgement is applied in determining the appropriate construct of the models. • The higher degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence in relation to significant assumptions, particularly cash flow projections. • The audit effort required the use of experts with specialised skills and knowledge. 158 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Key audit matter How our audit addressed the key audit matter Key audit matter How our audit addressed the key audit matter Risk margin and probability of adequacy • Assessing the Group’s approach to setting the risk margin in accordance with the requirements of Australian Accounting Standards, with a focus on the assessed level of uncertainty in the net central estimate leading to a change in the margin year on year. • Considering the Group’s key judgements about the variability of each class of business underwritten and the extent of correlation within each division based on the Group’s experience and prior periods. • Evaluating the Group’s calculation of the probability of adequacy for reasonableness and consistency with previous valuations by developing an understanding of and testing the actuarial techniques applied by the Group. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Recoverability of deferred tax assets in the North American tax group (Refer to note 6.2.1) $295 million The Group holds deferred tax assets comprised of carry forward tax losses and deductible temporary differences related to the North American tax group. The Group performs a recoverability assessment at each balance date in order to evaluate the expected utilisation of the deferred tax assets. The assessment is largely dependent upon the future profitability of the North American CGU, as well as the period over which tax losses will be available for recovery, and the execution of any future tax planning strategies. Our procedures included: • Evaluating the appropriateness of the recoverability assessment against the requirements of Australian Accounting Standards, and in particular the “convincing other evidence” test under AASB 112 Income Taxes. • Evaluating the appropriateness of significant assumptions used to derive the cash flow projections, by comparing with external market and industry data where available, and current and past performance of the North American CGU. We considered the recoverability of the deferred tax assets in the North American tax group a key audit matter due to: • The inherent estimation uncertainty and subjectivity in judgements in a number of assumptions, including cash flow projections, investment returns, and terminal growth rates. • Comparing cash flow projections and other assumptions used in the recoverability assessment to those used for the goodwill impairment assessment for the North American CGU. • Testing the mathematical accuracy of the model which was used to determine the recoverability of the deferred tax assets. • The higher degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to significant assumptions, particularly cash flow projections. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Carrying value of goodwill (Refer to note 7.1.1) $2,016 million An impairment assessment is performed annually by the Our procedures included: Group, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. • Evaluating the determination and composition of the CGUs to which goodwill is allocated. Potential impairment is identified by comparing the value-in-use • Evaluating the appropriateness of the value-in-use of a cash-generating unit (CGU) to its carrying value, including methodology adopted against the requirements of Australian goodwill. The value-in-use for each of the CGUs is estimated Accounting Standards. by the Group using a discounted cash flow model which includes significant judgements and assumptions relating to cash flow projections, investment returns, terminal growth rates, and discount rates. • Developing an understanding of the process by which the cash flow projections were developed and comparing the cash flows included in the impairment assessment with the three year business plan presented to the Board. We considered the carrying value of goodwill a key audit matter • Evaluating the reasonableness of significant assumptions due to: discount rates. of the models. • The inherent estimation uncertainty and subjectivity in judgements in a number of assumptions, including cash flow projections, investment returns, terminal growth rates and • Models used to calculate value-in-use are complex and judgement is applied in determining the appropriate construct • The higher degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence in relation to significant assumptions, particularly cash flow projections. skills and knowledge. • The audit effort required the use of experts with specialised used to derive the cash flow projections by comparing to external market and industry data where available, and current and past performance of the CGUs. • Together with PwC valuation experts, we: – Assessed the consistency of the terminal growth rates and investment returns with available external information. – Reperformed the calculation of the discount rates applied to cash flow projections, comparing key inputs (including risk-free rates, market premiums and unlevered betas) to industry and other benchmarks. • Testing the mathematical accuracy of the models which were used to determine the value-in-use of the CGUs. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. 159 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 160 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Key audit matter How our audit addressed the key audit matter Valuation of level 3 investments (Refer to note 3.2.1) $1,697 million The Group held US$28,111 million of investments at 31 December 2021, of which US$1,697 million were classified as level 3 in accordance with AASB 13 Fair Value Measurements. The Group exercises judgement in valuing level 3 investments as there are significant unobservable inputs as a result of market illiquidity and/or instrument complexity. The level 3 investments held at fair value largely consist of infrastructure assets and unlisted property trusts. We considered the valuation of level 3 investments a key audit matter due to: • The extent of judgement involved in determining the fair value of investments as a result of significant unobservable market inputs. • The level of effort required in evaluating audit evidence obtained in relation to the valuation, and use of experts with specialised skills and knowledge. Our procedures included: • Evaluating the design of the Group’s relevant controls over the investments process and assessing whether a sample of these controls operated effectively throughout the year. • Evaluating the appropriateness of the valuation methodologies used against the requirements of Australian Accounting Standards. • For infrastructure assets and unlisted property trusts, where the Group determines the fair value with reference to external information, we: – Compared the price used by the Group to the 31 December 2021 price quoted by the fund manager. – Obtained the most recent audited financial statements of the relevant funds and evaluated the reliability and accuracy of past statements. – Inspected the most recent reports provided by the fund manager setting out the controls in place at the fund manager, and that included an independent audit opinion over the design and operating effectiveness of those controls, where available. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Operation of IT systems and controls Our procedures included: The Group’s operations and financial reporting systems are heavily dependent on IT systems, including automated accounting procedures and IT dependent manual controls. The Group’s IT controls over IT systems include: • The framework of governance over IT systems. • Controls over program development and changes. • Controls over access to programs, data and IT operations. • Governance over generic and privileged user accounts. We considered this a key audit matter given the reliance on the IT systems in the financial reporting process and the impact on relevant controls we seek to rely on as part of our audit. • Evaluating the design and testing the operating effectiveness of key controls over the continued integrity of the IT systems that are relevant to financial reporting. Where we identified design and operating effectiveness issues relating to IT systems or application controls relevant to our audit, we performed alternative audit procedures. • Assessing the operation of key applications to establish the accuracy of selected calculations, the correct generation of certain reports, and to evaluate the correct operation of selected automated controls and technology-dependent manual controls. • Where technology services were provided by a third party, we considered assurance reports from the third party’s auditor on the design and operating effectiveness of controls and management’s monitoring controls over third parties. 160 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Key audit matter How our audit addressed the key audit matter The Group held US$28,111 million of investments at 31 December Our procedures included: Valuation of level 3 investments (Refer to note 3.2.1) $1,697 million 2021, of which US$1,697 million were classified as level 3 in accordance with AASB 13 Fair Value Measurements. The Group exercises judgement in valuing level 3 investments as there are significant unobservable inputs as a result of market illiquidity and/or instrument complexity. The level 3 investments held at fair value largely consist of infrastructure assets and unlisted property trusts. matter due to: market inputs. • The extent of judgement involved in determining the fair value of investments as a result of significant unobservable • The level of effort required in evaluating audit evidence obtained in relation to the valuation, and use of experts with specialised skills and knowledge. We considered the valuation of level 3 investments a key audit information, we: • Evaluating the design of the Group’s relevant controls over the investments process and assessing whether a sample of these controls operated effectively throughout the year. • Evaluating the appropriateness of the valuation methodologies used against the requirements of Australian Accounting Standards. • For infrastructure assets and unlisted property trusts, where the Group determines the fair value with reference to external – Compared the price used by the Group to the 31 December 2021 price quoted by the fund manager. – Obtained the most recent audited financial statements of the relevant funds and evaluated the reliability and accuracy of past statements. – Inspected the most recent reports provided by the fund manager setting out the controls in place at the fund manager, and that included an independent audit opinion over the design and operating effectiveness of those controls, where available. We also considered the reasonableness of the Group’s disclosures against the requirements of Australian Accounting Standards. Operation of IT systems and controls Our procedures included: The Group’s operations and financial reporting systems are heavily dependent on IT systems, including automated accounting procedures and IT dependent manual controls. • Evaluating the design and testing the operating effectiveness of key controls over the continued integrity of the IT systems that are relevant to financial reporting. Where we identified The Group’s IT controls over IT systems include: • The framework of governance over IT systems. • Controls over program development and changes. • Controls over access to programs, data and IT operations. • Governance over generic and privileged user accounts. We considered this a key audit matter given the reliance on the manual controls. IT systems in the financial reporting process and the impact on relevant controls we seek to rely on as part of our audit. design and operating effectiveness issues relating to IT systems or application controls relevant to our audit, we performed alternative audit procedures. • Assessing the operation of key applications to establish the accuracy of selected calculations, the correct generation of certain reports, and to evaluate the correct operation of selected automated controls and technology-dependent • Where technology services were provided by a third party, we considered assurance reports from the third party’s auditor on the design and operating effectiveness of controls and management’s monitoring controls over third parties. Other information The directors are responsible for the other information. The other information comprises the information included in the Annual Report for the year ended 31 December 2021, but does not include the Financial Report and our auditor’s report thereon. Our opinion on the Financial Report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the Financial Report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor’s report. 161 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 162 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Report on the Remuneration Report Our opinion on the Remuneration Report We have audited the Remuneration Report included in pages 56 to 78 of the Directors’ Report for the year ended 31 December 2021. In our opinion, the Remuneration Report of QBE Insurance Group Limited for the year ended 31 December 2021 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Voula Papageorgiou Partner Sydney 18 February 2022 162 Independent auditor's report TO THE MEMBERS OF QBE INSURANCE GROUP LIMITED Report on the Remuneration Report Our opinion on the Remuneration Report section 300A of the Corporations Act 2001. Responsibilities We have audited the Remuneration Report included in pages 56 to 78 of the Directors’ Report for the year ended 31 December 2021. In our opinion, the Remuneration Report of QBE Insurance Group Limited for the year ended 31 December 2021 complies with The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Voula Papageorgiou Partner Sydney 18 February 2022 Shareholder information The Company was incorporated in Australia, is listed on the Australian Securities Exchange (ASX) and trades under the code ‘QBE’. Registered office QBE Insurance Group Limited Level 18, 388 George Street Sydney NSW 2000 Australia Telephone: +61 2 9375 4444 Facsimile: +61 2 9231 6104 Website: www.qbe.com QBE website QBE’s website provides investors with information about QBE including annual reports, corporate governance statements, sustainability reports, half-yearly reports and announcements to the ASX. The website also offers regular QBE share price updates, a calendar of events, a history of QBE’s dividends and online access to your shareholding details via the share registry. Shareholder information and enquiries Enquiries and correspondence regarding shareholdings can be directed to QBE’s share registry: Computershare Investor Services Pty Limited (Computershare) GPO Box 2975 Melbourne VIC 3001 Australia 452 Johnston Street Abbotsford VIC 3067 Australia Telephone: 1300 723 487 (Australia) Telephone: +61 3 9415 4840 (International) Website: www.computershare.com.au Email: qbe.queries@computershare.com.au For security purposes, you will need to quote your Securityholder Reference Number (SRN) or Holder Identification Number (HIN). If you are broker (CHESS) sponsored, queries relating to incorrect registrations and changes to name and/or address can only be processed by your stockbroker. Please contact your stockbroker. Computershare cannot assist you with these changes. Shareholding details online Manage your shareholding online by visiting QBE’s share registry, Computershare. Log onto www.investorcentre.com to view your holding balance and dividend statements, to update your address (if you are registered with an SRN) or direct credit instructions, provide DRP or BSP instructions or change/add your tax file number (TFN)/Australian Business Number (ABN) details. You may also register to receive shareholder documentation electronically including your dividend statements, notices of meetings and proxy and annual reports. Privacy legislation Chapter 2C of the Corporations Act 2001 requires information about you as a securityholder (including your name, address and details of the securities you hold) to be included in QBE’s share register. These details must continue to be included in the public register even if you cease to be a securityholder. A copy of the privacy policy is available on Computershare’s website. Dividends QBE pays cash dividends to shareholders resident in Australia and New Zealand by direct credit. Shareholders in the United Kingdom and the United States also have the option to receive their cash dividends by direct credit, although it is not mandatory. The benefit to shareholders of the direct credit facility is access to cleared funds quickly and securely, reducing the risk of cheques being lost or stolen. Shareholders in other countries will receive cheque payments in Australian dollars if they have not elected to receive their payment by direct credit. Shareholders receive a dividend statement for tax records, either by post or by email depending on the selected communications option. Eligible shareholders can participate in QBE’s DRP and BSP when the plans are active. The DRP enables shareholders to subscribe for additional shares. The BSP is a bonus share plan whereby the dividend entitlement is forgone for bonus shares in lieu of the dividend. In order to participate in either the DRP or BSP, shareholders must have a minimum shareholding of 100 shares and have a registered address in Australia or New Zealand. Participants may change their election to participate in the DRP and BSP at any time. DRP/BSP election cut-off dates and application forms are available from QBE’s website. 163 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 164 Shareholder information continued Tax File Number (TFN), Australian Business Number (ABN) or exemption – Australian residents You can confirm whether you have lodged your TFN, ABN or exemption by visiting Computershare’s Investor Centre. If you choose not to lodge these details, QBE is obliged to deduct tax at the highest marginal rate (plus the Medicare levy) from the unfranked portion of dividends paid. Australian shareholders living abroad should advise Computershare of their resident status. Conduit foreign income (CFI) Shareholders will receive CFI credits in respect of the whole unfranked portion of QBE dividends. These credits exempt non-resident shareholders from Australian withholding tax. Unpresented cheques/unclaimed money Under the Unclaimed Moneys Act 1950, unclaimed dividends six or more years old must be given to the Australian Capital Territory. It is very important that shareholders bank outstanding dividend cheques promptly and advise Computershare immediately of changes of address or bank account details. Recent QBE dividends DATE PAID 28 March 2013 23 September 2013 31 March 2014 23 September 2014 13 April 2015 2 October 2015 14 April 2016 28 September 2016 13 April 2017 29 September 2017 20 April 2018 5 October 2018 18 April 2019 4 October 2019 9 April 2020 25 September 2020 24 September 2021 TYPE Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Interim RECORD DATE 8 March 2013 2 September 2013 13 March 2014 29 August 2014 6 March 2015 28 August 2015 11 March 2016 26 August 2016 10 March 2017 25 August 2017 9 March 2018 24 August 2018 8 March 2019 23 August 2019 6 March 2020 21 August 2020 20 August 2021 AUSTRALIAN CENTS PER SHARE FRANKING % 10 20 12 15 22 20 30 21 33 22 4 22 28 25 27 4 11 100 100 100 100 100 100 100 50 50 30 30 30 60 60 30 10 10 Annual General Meeting The Annual General Meeting of QBE Insurance Group Limited will be held at 10am on Thursday, 5 May 2022. Details of the meeting, including information about how to vote, will be contained in our notice of meeting. Annual Report mailing list Amendments to the Corporations Act 2001 have removed the obligation for companies to mail an annual report to shareholders. To improve efficiency, save costs and reduce our impact on the environment by minimising unnecessary use of paper and printing resources, QBE’s Annual Report is published on our website at www.qbe.com. If you wish to receive a hard copy of the Annual Report, please update your communication preferences by logging into your shareholding at www.investorcentre.com. 164 Shareholder information continued You can confirm whether you have lodged your TFN, ABN or exemption by visiting Computershare’s Investor Centre. If you choose not to lodge these details, QBE is obliged to deduct tax at the highest marginal rate (plus the Medicare levy) from the unfranked portion of dividends paid. Australian shareholders living abroad should advise Computershare of their resident status. Shareholders will receive CFI credits in respect of the whole unfranked portion of QBE dividends. These credits exempt non-resident Under the Unclaimed Moneys Act 1950, unclaimed dividends six or more years old must be given to the Australian Capital Territory. It is very important that shareholders bank outstanding dividend cheques promptly and advise Computershare immediately of changes Conduit foreign income (CFI) shareholders from Australian withholding tax. Unpresented cheques/unclaimed money of address or bank account details. Recent QBE dividends DATE PAID 28 March 2013 23 September 2013 31 March 2014 23 September 2014 13 April 2015 2 October 2015 14 April 2016 28 September 2016 13 April 2017 29 September 2017 20 April 2018 5 October 2018 18 April 2019 4 October 2019 9 April 2020 25 September 2020 24 September 2021 TYPE Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Interim RECORD DATE 8 March 2013 2 September 2013 13 March 2014 29 August 2014 6 March 2015 28 August 2015 11 March 2016 26 August 2016 10 March 2017 25 August 2017 9 March 2018 24 August 2018 8 March 2019 23 August 2019 6 March 2020 21 August 2020 20 August 2021 AUSTRALIAN CENTS PER SHARE FRANKING 10 20 12 15 22 20 30 21 33 22 4 22 28 25 27 4 11 % 100 100 100 100 100 100 100 50 50 30 30 30 60 60 30 10 10 The Annual General Meeting of QBE Insurance Group Limited will be held at 10am on Thursday, 5 May 2022. Details of the meeting, including information about how to vote, will be contained in our notice of meeting. Annual General Meeting Annual Report mailing list Amendments to the Corporations Act 2001 have removed the obligation for companies to mail an annual report to shareholders. To improve efficiency, save costs and reduce our impact on the environment by minimising unnecessary use of paper and printing resources, QBE’s Annual Report is published on our website at www.qbe.com. If you wish to receive a hard copy of the Annual Report, please update your communication preferences by logging into your shareholding at www.investorcentre.com. Tax File Number (TFN), Australian Business Number (ABN) or exemption – Australian residents Top 20 shareholders as at 31 January 2022 NAME HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited Citicorp Nominees Pty Limited (Colonial First State Inv A/C) BNP Paribas Noms Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) HSBC Custody Nominees (Australia) Limited – A/C 2 BNP Paribas Nominees Pty Ltd Six Sis Ltd (DRP A/C) Argo Investments Limited HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp A/C) Netwealth Investments Limited (Wrap Services A/C) CPU Share Plans Pty Ltd (QBE Ves Control A/C) BNP Paribas Nominees Pty Ltd (Global Markets DRP) HSBC Custody Nominees (Australia) Limited – GSCO Customers A/C) BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd (DRP A/C) UBS Nominees Pty Ltd Mutual Trust Pty Ltd BNP Paribas Noms (NZ) Ltd (DRP) The Senior Master Of The Supreme Court (Common Fund No 3 A/C) QBE substantial shareholders as at 31 January 2022 NUMBER OF SHARES 502,000,177 371,562,463 164,334,093 97,676,185 30,926,462 30,353,565 29,336,220 11,502,844 9,481,319 9,040,088 8,418,712 3,946,732 3,597,504 3,315,085 3,115,542 2,557,778 1,863,532 1,849,220 1,452,606 1,433,614 1,287,763,741 % OF TOTAL 34.00 25.16 11.13 6.62 2.09 2.06 1.99 0.78 0.64 0.61 0.57 0.27 0.24 0.22 0.21 0.17 0.13 0.13 0.10 0.10 87.22 NAME AustralianSuper Pty Ltd Vanguard Group (The Vanguard Group, Inc and its controlled entities) BlackRock Group (and its associated entities) NUMBER OF SHARES 108,811,707 80,289,148 76,689,478 % OF TOTAL DATE OF NOTICE 1 7.37 6.06 6.03 29 October 2021 17 May 2019 6 June 2019 1 Percentage of total at date of notice. Distribution of shareholders and shareholdings as at 31 January 2022 SIZE OF HOLDING 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total NUMBER OF SHAREHOLDERS 46,475 26,679 4,242 2,405 109 79,910 % 58.15 33.39 5.31 3.01 0.14 100.00 NUMBER OF SHARES 18,016,525 60,248,282 29,724,798 49,968,096 1,318,555,065 1,476,512,766 % 1.23 4.08 2.01 3.38 89.30 100.00 165 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i Shareholdings of less than a marketable parcel as at 31 January 2022 o n Holdings of 45 or fewer shares SHAREHOLDERS SHARES NUMBER 4,504 % OF TOTAL 5.64 NUMBER 81,860 % OF TOTAL 0.0055 166 Financial calendar YEAR MONTH DAY ANNOUNCEMENT 2022 February 18 Results and dividend announcement for the full year ended 31 December 2021 March April May June August 7 8 9 12 5 30 111 181 191 221 Shares begin trading ex dividend Record date for determining shareholders’ entitlement to the 2021 final dividend DRP/BSP election close date - last day to nominate participation in the DRP or BSP Payment date for the 2021 final dividend 2022 Annual General Meeting Half year end Results and dividend announcement for the half year ended 30 June 2022 Shares begin trading ex dividend Record date for determining shareholders’ entitlement to the 2022 interim dividend DRP/BSP election close date – last day to nominate participation in the DRP or BSP September 231 Payment date for the 2022 interim dividend December 31 Full year end 1 Dates shown may be subject to change. 166 Financial calendar 10-year history FOR THE YEAR ENDED 31 DECEMBER YEAR MONTH DAY ANNOUNCEMENT 2021 2020 20191 2018 1 2017 1 2016 2015 2014 2013 2012 2022 February 18 Results and dividend announcement for the full year ended 31 December 2021 March Shares begin trading ex dividend Record date for determining shareholders’ entitlement to the 2021 final dividend DRP/BSP election close date - last day to nominate participation in the DRP or BSP Payment date for the 2021 final dividend 2022 Annual General Meeting Half year end Results and dividend announcement for the half year ended 30 June 2022 Shares begin trading ex dividend Record date for determining shareholders’ entitlement to the 2022 interim dividend DRP/BSP election close date – last day to nominate participation in the DRP or BSP April May June August 7 8 9 12 5 30 111 181 191 221 September 231 Payment date for the 2022 interim dividend December 31 Full year end 1 Dates shown may be subject to change. Profit or loss information Gross written premium Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio Investment income before investment gains/losses after investment gains/losses Insurance profit (loss) Insurance profit (loss) to net earned premium Financing and other costs Operating profit (loss) before income tax after income tax and non-controlling interests Balance sheet and share information Number of ordinary shares on issue 2 Shareholders' equity Total assets Net tangible assets per share 2 Borrowings to total capital Basic earnings (loss) per share 2 Basic earnings (loss) per share – adjusted cash basis3 Diluted earnings (loss) per share Return on average shareholders' equity Dividend per share Dividend payout Total investments and cash 4 US$M 18,457 17,035 US$M US$M 13,408 62.4 15.5 13.6 91.5 % % % % 14,643 14,008 11,708 76.3 16.1 15.0 107.4 13,442 13,257 11,609 69.8 15.6 14.6 100.0 13,657 13,601 11,640 63.6 16.9 15.4 95.9 13,328 13,611 11,351 71.5 17.1 15.9 104.5 14,395 14,276 11,066 58.2 18.4 17.4 94.0 15,092 14,922 12,314 60.4 17.2 17.3 94.9 16,332 16,521 14,084 63.2 16.8 16.1 96.1 17,975 17,889 15,396 64.5 16.8 16.5 97.8 18,434 18,341 15,798 66.0 16.2 14.9 97.1 US$M US$M US$M % US$M US$M US$M 531 432 555 122 1,215 9.1 247 226 (727) 1,036 647 (6.2) 252 690 547 826 7.1 305 576 641 541 676 758 (60) 746 1,075 665 1,031 814 1,074 (0.5) 302 9.7 294 5.6 257 672 571 913 (1,472) 750 (1,517) 627 (793) 1,072 567 (1,212) 844 691 772 841 5.5 345 (448) (254) 723 1,227 1,262 8.0 324 941 761 8.4 244 953 687 7.6 297 931 742 millions 1,477 8,881 US$M US$M 49,303 1,471 8,491 46,625 1,305 8,153 40,035 1,327 8,381 1,358 8,859 39,582 43,862 1,370 10,284 41,583 1,363 1,370 10,505 11,030 42,176 45,000 1,247 10,356 47,271 1,194 11,358 50,748 US$ % 4.36 26.9 4.05 25.8 4.11 24.0 4.22 24.5 4.29 27.1 4.90 24.1 5.07 24.0 5.32 24.1 4.75 32.8 4.49 32.9 US cents 47.5 (108.5) 41.8 29.0 (91.5) 61.6 50.3 57.4 (22.8) 65.1 ' US cents 54.6 (60.7) 55.7 51.4 (19.2) 65.5 65.3 63.5 62.9 89.1 US cents 47.2 (108.5) 41.5 28.6 (91.5) 60.8 49.8 55.8 (22.8) 61.6 % Australian cents 8.6 (18.2) 6.7 4.5 (13.0) 8.1 6.4 6.9 (2.3) 7.0 30 443 US$M 28,967 A$M 4 59 27,735 52 681 24,374 50 669 22,887 26 356 26,141 54 741 25,235 50 685 37 492 26,708 28,583 32 394 30,619 50 593 31,525 1 Profit or loss information for 2017 to 2019 excludes the results of discontinued operations. 2 Reflects shares on an accounting basis. 3 Calculated with reference to adjusted cash profit or loss, being profit or loss after tax adjusted for impairment of intangibles and other non-cash items net of tax as well as coupons on Additional Tier 1 instruments. 4 Includes financial assets at fair value through profit or loss, cash and cash equivalents and investment properties; excludes balances held for sale. 167 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 168 Glossary Accident year claims The matching of all claims occurring (regardless of when reported or paid) during a given 12-month period with all premium earned over the same period. Acquisition cost The total of net commission and underwriting and other expenses incurred in the generation of net earned premium and often expressed as a percentage of net earned premium. Admitted insurance Insurance written by an insurance company that is admitted (or licensed) to do business in the state in the United States in which the policy was sold. Agent One who negotiates contracts of insurance or reinsurance as an insurance company’s representative i.e. the agent’s primary responsibility is to the insurance company, not the insured party. Aggregate reinsurance Reinsurance cover that provides protection for an accumulation of claims arising from multiple events over a specified period of time. APRA Australian Prudential Regulation Authority, being the Group’s primary insurance regulator. Attachment point The amount of claims retained by the cedant in a reinsurance arrangement, after which reinsurance protection will apply. Attritional claims ratio Total of all claims with a net cost of less than $2.5 million as a percentage of net earned premium. Borrowings to total capital The Group’s gearing ratio (also referred to as debt to total capital), calculated as borrowings expressed as a percentage of total capital. Total capital is shareholders’ equity plus Tier 1 instruments classified as liabilities (which are excluded from borrowings for the purposes of this calculation), and subordinated debt. Broker Capacity One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving a commission from the insurance or reinsurance company for placement and other services rendered. In contrast with an agent, the broker’s primary responsibility is to the insured party, not the insurance company. In relation to a Lloyd’s member, the maximum amount of insurance premium (gross of reinsurance but net of brokerage) which a member can accept. In relation to a syndicate, it is the aggregate of each member’s capacity allocated to that syndicate. Captive A licensed entity within the Group that provides reinsurance protection to other controlled entities. Cash profit or loss Profit or loss after tax attributable to QBE shareholders, adjusted for the post-tax effect of amortisation and impairment of intangibles and other non-cash items. Casualty insurance Insurance that is primarily concerned with the claims resulting from injuries to third persons or their property (i.e. not the policyholder) and the resulting legal liability imposed on the insured. It includes, but is not limited to, general liability, employers’ liability, workers’ compensation, professional liability, public liability and motor liability insurance. Catastrophe reinsurance A reinsurance contract (often in the form of excess of loss reinsurance) that, subject to specified limits and retention, compensates the ceding insurer for financial losses related to an accumulation of claims resulting from a catastrophe event or series of events. Claim Claims incurred Claims provision The amount payable under a contract of insurance or reinsurance arising from a loss relating to an insured event. The aggregate of all claims paid during an accounting period adjusted for the change in the claims provision in that accounting period. The estimate of the most likely cost of settling present and future claims and associated claims adjustment expenses plus a risk margin to cover possible fluctuation of the liability. Accident year claims The matching of all claims occurring (regardless of when reported or paid) during a given Claims ratio Net claims incurred as a percentage of net earned premium. 12-month period with all premium earned over the same period. Coefficient of variation The measure of variability in the net discounted central estimate used in the determination of the probability of adequacy. Combined operating ratio (COR) The sum of the net claims ratio, commission ratio and expense ratio. A combined operating ratio below 100% indicates an underwriting profit. A combined operating ratio over 100% indicates an underwriting loss. Commercial lines Refers to insurance for businesses, professionals and commercial establishments. Commission Fee paid to an agent or broker as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods. Commission ratio Net commission expense as a percentage of net earned premium. Credit spread The difference in yield between a bond and a reference yield (e.g. LIBOR, BBSW or a fixed sovereign bond yield). Credit spread duration The weighted average term of cash flows for a corporate bond. It is used to measure the price sensitivity of a corporate bond to changes in credit spreads. Deductible The amount or proportion of some or all losses arising under an insurance contract that the insured must bear. Deferred acquisition costs Acquisition costs relating to the unexpired period of risk of contracts in force at the balance date which are carried forward from one accounting period to subsequent accounting periods. 169 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 O p e r a t i n g a n d fi n a n c i a l r e v i e w 3 G o v e r n a n c e 4 R e p o r t D i r e c t o r s Excess of loss reinsurance A form of reinsurance in which, in return for a premium, the reinsurer accepts liability for claims settled by the original insurer in excess of an agreed amount, generally subject to an upper limit. ' 168 Glossary Acquisition cost The total of net commission and underwriting and other expenses incurred in the generation of net earned premium and often expressed as a percentage of net earned premium. Admitted insurance Insurance written by an insurance company that is admitted (or licensed) to do business in the state in the United States in which the policy was sold. Agent One who negotiates contracts of insurance or reinsurance as an insurance company’s representative i.e. the agent’s primary responsibility is to the insurance company, not the insured party. Aggregate reinsurance Reinsurance cover that provides protection for an accumulation of claims arising from multiple events over a specified period of time. APRA Australian Prudential Regulation Authority, being the Group’s primary insurance regulator. Attachment point The amount of claims retained by the cedant in a reinsurance arrangement, after which reinsurance protection will apply. Attritional claims ratio Total of all claims with a net cost of less than $2.5 million as a percentage of net earned premium. Borrowings to total capital The Group’s gearing ratio (also referred to as debt to total capital), calculated as borrowings expressed as a percentage of total capital. Total capital is shareholders’ equity plus Tier 1 instruments classified as liabilities (which are excluded from borrowings for the purposes of this calculation), and subordinated debt. Broker Capacity One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving a commission from the insurance or reinsurance company for placement and other services rendered. In contrast with an agent, the broker’s primary responsibility is to the insured party, not the insurance company. In relation to a Lloyd’s member, the maximum amount of insurance premium (gross of reinsurance but net of brokerage) which a member can accept. In relation to a syndicate, it is the aggregate of each member’s capacity allocated to that syndicate. Cash profit or loss Profit or loss after tax attributable to QBE shareholders, adjusted for the post-tax effect of amortisation and impairment of intangibles and other non-cash items. Casualty insurance Insurance that is primarily concerned with the claims resulting from injuries to third persons or their property (i.e. not the policyholder) and the resulting legal liability imposed on the insured. It includes, but is not limited to, general liability, employers’ liability, workers’ compensation, professional liability, public liability and motor liability insurance. Catastrophe reinsurance A reinsurance contract (often in the form of excess of loss reinsurance) that, subject to specified limits and retention, compensates the ceding insurer for financial losses related to an accumulation of claims resulting from a catastrophe event or series of events. Claim The amount payable under a contract of insurance or reinsurance arising from a loss relating to an insured event. Claims incurred The aggregate of all claims paid during an accounting period adjusted for the change in the claims provision in that accounting period. Claims provision The estimate of the most likely cost of settling present and future claims and associated claims adjustment expenses plus a risk margin to cover possible fluctuation of the liability. Inward reinsurance See Reinsurance. Gross written premium (GWP) The total premium on insurance underwritten by an insurer or reinsurer during an accounting period, before deduction of reinsurance premium. o n Incurred but not enough reported (IBNER) The upward adjustment to claims incurred as a result of the initial under-estimation of the ultimate cost of claims. Incurred but not reported (IBNR) Claims arising out of events that have occurred before the end of an accounting period but have not been reported to the insurer by that date. Insurance profit or loss The sum of the underwriting result and net investment income or loss on assets backing policyholders’ funds. Insurance profit margin The ratio of insurance profit or loss to net earned premium. Captive A licensed entity within the Group that provides reinsurance protection to other controlled entities. General insurance Generally used to describe non-life insurance business including property and casualty insurance. Gross claims incurred The amount of claims incurred during an accounting period before deducting reinsurance recoveries. Gross earned premium (GEP) The proportion of gross written premium recognised as revenue in the current accounting period, reflecting the pattern of the incidence of risk and the expiry of that risk. Expense ratio Underwriting and administrative expenses as a percentage of net earned premium. Facultative reinsurance The reinsurance of individual risks through a transaction between the reinsurer and the cedant (usually the primary insurer) involving a specified risk. 5 R e p o r t F i n a n c i a l 6 i n f o r m a t i O t h e r 170 Glossary continued Large individual risk and catastrophe claims ratio The aggregate of claims each with a net cost of $2.5 million or more as a percentage of net earned premium. Lead/non‑lead underwriter A lead underwriter operates in the subscription market and sets the terms and price of an insurance or reinsurance policy. The follower or non-lead underwriter is an underwriter of a syndicate or an insurance or reinsurance company that agrees to accept a proportion of a given risk on terms set by the lead underwriter. Lenders’ mortgage insurance (LMI) A policy that protects the lender (e.g. a bank) against non-payment or default on the part of the borrower on a residential property loan. Letters of credit (LoC) Written undertaking by a financial institution to provide funding if required. Limit Lloyd’s The maximum amount that a reinsurer will pay in respect of claims covered by a reinsurance contract. Insurance and reinsurance market in London. It is not a company but is a society of individuals and corporate underwriting members. Lloyd’s managing agent An underwriting agent which has permission from Lloyd’s to manage one or more syndicates and carry on underwriting and other functions for a member. Long‑tail Classes of insurance business involving coverage for risks where notice of a claim may not be received for many years and claims may be outstanding for more than one year before they are finally quantifiable and settled by the insurer. Managing General Agent (MGA) A wholesale insurance agent with the authority to accept placements from (and often to appoint) retail agents on behalf of an insurer. MGAs generally provide underwriting and administrative services such as policy issuance on behalf of the insurers they represent. Some may handle claims. Maximum event retention (MER) An estimate of the largest claim to which an insurer will be exposed (taking into account the probability of that loss event at a return period of one in 250 years) due to a concentration of risk exposures, after netting off any potential reinsurance recoveries and inward and outward reinstatement premiums. Modified duration The weighted average term of cash flows in a bond. It is used to measure the price sensitivity of a bond to changes in interest rates. Multi‑peril crop insurance (MPCI) United States federally regulated crop insurance protecting against crop yield losses by allowing participating insurers to insure a certain percentage of historical crop production. Net claims incurred The amount of claims incurred during an accounting period after deducting reinsurance recoveries. Net claims ratio Net claims incurred as a percentage of net earned premium. Net earned premium (NEP) Net written premium adjusted by the change in net unearned premium. Net written premium (NWP) The total premium on insurance underwritten by an insurer during a specified period after the deduction of premium applicable to reinsurance. Outstanding claims liability The amount of provision established for claims and related claims expenses that have occurred but have not been paid. Personal lines Insurance for individuals and families, such as private motor vehicle and homeowners’ insurance. Policyholders’ funds The net insurance liabilities of the Group. Premium Amount payable by the insured or reinsured in order to obtain insurance or reinsurance protection. 170 Glossary continued Lead/non‑lead underwriter A lead underwriter operates in the subscription market and sets the terms and price of an insurance or reinsurance policy. The follower or non-lead underwriter is an underwriter of a syndicate or an insurance or reinsurance company that agrees to accept a proportion of a given risk on terms set by the lead underwriter. Lenders’ mortgage insurance A policy that protects the lender (e.g. a bank) against non-payment or default on the part of the (LMI) borrower on a residential property loan. Letters of credit (LoC) Written undertaking by a financial institution to provide funding if required. Limit Lloyd’s The maximum amount that a reinsurer will pay in respect of claims covered by a reinsurance contract. Insurance and reinsurance market in London. It is not a company but is a society of individuals and corporate underwriting members. Lloyd’s managing agent An underwriting agent which has permission from Lloyd’s to manage one or more syndicates and carry on underwriting and other functions for a member. Long‑tail Classes of insurance business involving coverage for risks where notice of a claim may not be received for many years and claims may be outstanding for more than one year before they are finally quantifiable and settled by the insurer. Managing General Agent (MGA) A wholesale insurance agent with the authority to accept placements from (and often to appoint) retail agents on behalf of an insurer. MGAs generally provide underwriting and administrative services such as policy issuance on behalf of the insurers they represent. Some may handle claims. Maximum event retention (MER) An estimate of the largest claim to which an insurer will be exposed (taking into account the probability of that loss event at a return period of one in 250 years) due to a concentration of risk exposures, after netting off any potential reinsurance recoveries and inward and outward reinstatement premiums. Modified duration The weighted average term of cash flows in a bond. It is used to measure the price sensitivity of a bond to changes in interest rates. Multi‑peril crop insurance United States federally regulated crop insurance protecting against crop yield losses by allowing (MPCI) participating insurers to insure a certain percentage of historical crop production. Net claims incurred The amount of claims incurred during an accounting period after deducting reinsurance recoveries. Net claims ratio Net claims incurred as a percentage of net earned premium. Net earned premium (NEP) Net written premium adjusted by the change in net unearned premium. Net written premium (NWP) The total premium on insurance underwritten by an insurer during a specified period after the deduction of premium applicable to reinsurance. Outstanding claims liability The amount of provision established for claims and related claims expenses that have occurred but have not been paid. Personal lines Insurance for individuals and families, such as private motor vehicle and homeowners’ insurance. Policyholders’ funds The net insurance liabilities of the Group. Premium Amount payable by the insured or reinsured in order to obtain insurance or reinsurance protection. Large individual risk and catastrophe claims ratio earned premium. The aggregate of claims each with a net cost of $2.5 million or more as a percentage of net Premium solvency ratio Ratio of net tangible assets to net earned premium. This is an important industry indicator in assessing the ability of general insurers to settle their existing liabilities. Prescribed Capital Amount (PCA) The sum of the capital charges for asset risk, asset concentration risk, insurance concentration risk and operational risk as required by APRA. The PCA must be disclosed at least annually. Probability of adequacy A statistical measure of the level of confidence that the outstanding claims liability will be sufficient to pay claims as and when they fall due. Proportional reinsurance A type of reinsurance in which the insurer and the reinsurer share claims in the same proportion as they share premiums. 171 A n n u a l R e p o r t 2 0 2 1 Q B E I n s u r a n c e G r o u p 1 o v e r v i e w P e r f o r m a n c e 2 fi n a n c i a l O p e r a t i n g a n d Prudential Capital Requirement (PCR) The sum of the PCA plus any supervisory adjustment determined by APRA. The PCR may not be disclosed. r e v i e w Recoveries Reinsurance The amount of claims recovered from reinsurance, third parties or salvage. An agreement to indemnify an insurer by a reinsurer in consideration of a premium with respect to agreed risks insured by the insurer. The enterprise accepting the risk is the reinsurer and is said to accept inward reinsurance. The enterprise ceding the risks is the cedant or ceding company and is said to place outward reinsurance. 3 G o v e r n a n c e Reinsurance to close A reinsurance agreement under which members of a syndicate, for a year of account to be closed, are reinsured by members who comprise that or another syndicate for a later year of account against all liabilities arising out of insurance business written by the reinsured syndicate. Reinsurer Retention The insurer that assumes all or part of the insurance or reinsurance liability written by another insurer. The term includes retrocessionaires, being insurers that assume reinsurance from a reinsurer. That amount of liability for which an insurer will remain responsible after it has completed its reinsurance arrangements. Retrocession Reinsurance of a reinsurer by another reinsurance company. Return on allocated capital (RoAC) Divisional management-basis profit as a percentage of allocated capital as determined by the Group’s economic capital model. Return on equity (ROE) Net profit after tax as a percentage of average shareholders’ equity. Short‑tail Classes of insurance business involving coverage for risks where claims are usually known and settled within 12 months. Stop loss reinsurance A form of excess of loss reinsurance which provides that the reinsurer will pay some or all of the reinsured’s claims in excess of a stated percentage of the reinsured’s premium income, subject (usually) to an overall limit of liability. Surplus (or excess) lines insurers In contrast to admitted insurers, every state in the United States also allows non-admitted (or surplus lines or excess lines) carriers to transact business where there is a special need that cannot or will not be met by admitted carriers. The rates and forms of non-admitted carriers generally are not regulated in that state, nor are the policies back-stopped by the state insolvency fund covering admitted insurance. Brokers must inform insurers if their insurance has been placed with a non-admitted insurer. Survival ratio A measure of how many years it would take for dust disease claims to exhaust the current level of claims provision. It is calculated on the average level of claims payments in the last three years. 4 R e p o r t D i r e c t o r s ' 5 R e p o r t F i n a n c i a l 6 i O t h e r n f o r m a t i o n 172 Glossary continued Syndicate A member or group of members underwriting insurance business at Lloyd’s through the agency of a managing agent. Total investment income or loss Gross investment income or loss including foreign exchange gains and losses and net of investment expenses. Total shareholder return (TSR) A measure of performance of a company’s shares over time. It includes share price appreciation and dividend performance. Treaty reinsurance Reinsurance of risks in which the reinsurer is obliged by agreement with the cedant to accept, within agreed limits, all risks to be underwritten by the cedant within specified classes of business in a given period of time. Underwriting The process of reviewing applications submitted for insurance or reinsurance coverage, deciding whether to provide all or part of the coverage requested and determining the applicable premium. Underwriting expenses The aggregate of policy acquisition costs, excluding commissions, and the portion of administrative, general and other expenses attributable to underwriting operations. Underwriting result The amount of profit or loss from insurance activities exclusive of net investment income or loss and capital gains or losses. Underwriting year The year in which the contract of insurance commenced or was underwritten. Unearned premium The portion of a premium representing the unexpired portion of the contract term as of a certain date. Volume weighted average price (VWAP) A measure of the average trading price during a period, adjusted for the volume of transactions. This is often used for determining the share price applicable to dividend and other share-related transactions. 172 Glossary continued Syndicate A member or group of members underwriting insurance business at Lloyd’s through the agency Total investment income or loss Gross investment income or loss including foreign exchange gains and losses and net Total shareholder return (TSR) A measure of performance of a company’s shares over time. It includes share price appreciation Treaty reinsurance Reinsurance of risks in which the reinsurer is obliged by agreement with the cedant to accept, within agreed limits, all risks to be underwritten by the cedant within specified classes of business of a managing agent. of investment expenses. and dividend performance. in a given period of time. Underwriting The process of reviewing applications submitted for insurance or reinsurance coverage, deciding whether to provide all or part of the coverage requested and determining the applicable premium. Underwriting expenses The aggregate of policy acquisition costs, excluding commissions, and the portion of administrative, general and other expenses attributable to underwriting operations. Underwriting result The amount of profit or loss from insurance activities exclusive of net investment income or loss and capital gains or losses. Underwriting year The year in which the contract of insurance commenced or was underwritten. Unearned premium The portion of a premium representing the unexpired portion of the contract term as of a certain date. Volume weighted average price A measure of the average trading price during a period, adjusted for the volume of transactions. (VWAP) This is often used for determining the share price applicable to dividend and other share-related transactions. Design Communication and Production by ARMSTRONG Armstrong.Studio QBE Insurance Group Limited Level 18, 388 George Street, Sydney NSW 2000 Australia telephone +61 2 9375 4444 www.qbe.com