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					QBE European Operations plc
Annual report 2011




BUSINESS INSURANCE SPECIALIST
 QBE European Operations plc (QBE EO) is the parent company of the European
 Operations Division of QBE Insurance Group Limited (QBE), one of the world’s
 leading international insurers and reinsurers. QBE operates from 52 countries
 around the world and has a presence in all the key insurance markets.

 For further information visit www.QBEeurope.com




At a glance                                                                           Business operations                     Corporate governance
01   Our brand promise                                                                11   Our underwriting divisions         34     Board of directors
02   2011 in review                                                                   12   Property, Casualty and Motor       36     Audit committee
03   Chairman’s statement                                                             14   Marine, Energy and Aviation        38     Governance framework
04   Chief Executive Officer’s review                                                 16   Reinsurance and Credit Lines       40     Key committees
                                                                                      19   European markets                   41     Directors’ report
Strategic overview                                                                    20   Risk management                    43     Independent auditors’ report
06   Our business and strategy                                                        24   Our people
                                                                                                                              QBE European Operations – board governance structure
08   Our business structure

                                                                                                                                                                   QBE EO board


                                  ndational values
                               Fou
                                                                                                                                                                                                 QBE Management
                                                                                                                                                      QIEL and QUL
                                           d v a l ue s
                                  Br a n
                                                                                                                                    QREL board                                Secura NV board   Services (UK) Limited
                                                                                                                                                     combined boards
                                                                                                                                                                                                       board




                                      line     Grow
                                  cip               th
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                                                                                                                              Financial statements
                                                          by
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                Underwriting




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                                                                                                                              44     Group profit and loss account:
                                                               isition




                                   Our vision                                                                                        technical account – general business
                                                                         l i v er s
       Stro n




                                                                                                                              45     Group profit and loss account:
                                                                                                                                     non-technical account
                                                                         De
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                          ra d u c t a n d c a t
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                                                                                                                              46     Statement of Group total recognised gains
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                    er                                   ne                                                                          and losses
                       s                              re
                          S pe                     ep                                                                         47     Reconciliation of movement in Group
                               ci a l i s t E n t r
                                                                                                                                     shareholders’ funds
                                                                                                                              48     Balance sheets
                                                                                                                              50     Notes to the financial statements

                                                                                      Financial review                        Additional information
                                                                                      28   Chief Financial Officer’s review   82     Glossary of insurance terms
                                                                                      30   Financial management               84     Directors and officers
                                                                                                                              85     QBE EO structure
                                                             QBE European Operations plc Annual report 2011       01




Our brand promise




                                                                                                                       At a glance
The QBE European                                         Specialist
Operations brand                                         in every business line and consistently
                                                         across all disciplines

promise strives for
excellence in five
core areas

                                                         p10         Cyber Response, our bespoke product
                                                                     for cyber and data security risks




Entrepreneurial                                          Delivers
solutions to business risk                               reliable and responsive service at every
                                                         stage of the stakeholder experience




p18      Secura NV: expanding our reinsurance business
                                                         p23         QBE Rehabilitation – award-winning service




Strong                                                   Empowers
and growing market presence                              a collaborative “can do” spirit across the
                                                         business and with all business partners




p26      Strong underwriting discipline backed
         by financial strength                           p33         Road safety, our collaboration with Brake
                                                                                                   QBE European Operations plc Annual report 2011             02




2011 in review


Gross written premium                                           Total assets                                        Combined operating ratio


                                +12.1%                                                            +8.6%                                                96.6%
 2011                                                3,020       2011                                     13,837     2011                                     96.6

 2010                                                2,695       2010                                     12,746     2010                                     92.8

 2009                                                2,568       2009                                     11,085     2009                                     93.0

 2008                                                2,175       2008                                      9,846     2008                                     91.8

 2007                                                2,169       2007                                      8,703     2007                                     87.7




Net earned premium                                              Profit after tax                                    Return on allocated capital*


                                +17.5%                                                           (51.0%)                                               16.3%
 2011                                                1,967       2011                                        95      2011                                     16.3

 2010                                                1,674       2010                                       194      2010                                     19.7

 2009                                                1,639       2009                                       175      2009                                     23.1

 2008                                                1,390       2008                                       210      2008                                     34.5

 2007                                                1,594       2007                                       271      2007                                     26.8




 Group operating performance


                                                                                                                               2011                  2010   change
                                                                                                                                £m                     £m       %

 Gross written premium                                                                                                       3,020                  2,695    12.1
 Net earned premium                                                                                                          1,967                  1,674    17.5
 Underwriting profit                                                                                                            67                    121   (44.6)
 Insurance profit                                                                                                               86                    187   (54.0)
 Profit for financial year                                                                                                      95                    194   (51.0)

                                                                                                                               2011                  2010   change
                                                                                                                                 %                     %        %

 Combined operating ratio (COR)                                                                                                96.6                  92.8     3.8
 Insurance profit to net earned premium                                                                                         4.4                  11.2    (6.8)
 Return on allocated capital                                                                                                   16.3                  19.7    (3.4)




* Return excluding QBE EO’s internal reinsurance arrangements with other divisions within QBE.
                                                                                              QBE European Operations plc Annual report 2011                  03




Chairman’s statement




                                                                                                                                                                    At a glance
                                                     “In a year of exceptional natural catastrophe claims
                                                      and low investment returns, QBE EO’s ability to
                                                      continue to deliver profits is testament to our
                                                      experienced underwriters, our cautious approach
                                                      to managing risk, the quality of our products and
                                                      the benefits of our geographic diversification.”

Frank O’Halloran
Chairman of QBE European Operations
Chief Executive Officer
QBE Insurance Group Limited




QBE European Operations                               The QBE Foundation                                       Patrick Coene has been appointed to the new
2011 was a year of exceptional claims: the            The QBE Foundation was launched in                       role of Managing Director, European Markets.
London market, in particular, was affected            April 2011 and is QBE’s major corporate                  While our general managers have already
by insured losses from the floods in Thailand,        responsibility initiative. The intention of the          carried out a tremendous amount of work
earthquakes in New Zealand, an earthquake             QBE Foundation is to extend beyond                       in building our European markets business,
and tsunami in Japan, tornadoes in the US,            philanthropy and to create a platform for                Patrick’s arrival will accelerate its development.
flooding in Australia, Hurricane Irene, which         QBE and its employees to engage with                     By providing an essential continental European
caused extensive damage in the Caribbean              the communities in which we operate.                     perspective at executive level, this should help
and on the east coast of North America.                                                                        create market opportunities for QBE EO.
                                                      Global workforce diversity
In addition, investment markets continued to          QBE has also established a global workforce              People
be difficult. Market activity, which was already      diversity policy. This sets out the guiding              On behalf of the directors, I acknowledge
adversely affected by the tragic events in Japan      principles for management practices, with the            the achievements and hard work of all our
and a loss of momentum in the US economy,             aim of achieving a more balanced representation          staff. We choose our people for their ability,
came to be dominated by developments in the           of women in senior leadership roles throughout           experience, potential and “can do” approach
Eurozone, particularly the debt crisis in Greece      the organisation. A Workforce Diversity Council          to their work and we recognise that developing
and fears that sovereign debt restructuring           – which will take local legislation, business            and retaining them – through our personal
would spread to other countries that use the          operations and culture into account in each              development, performance management and
Euro. At the end of the year, the global economic     of the markets in which QBE operates                     reward frameworks – is vitally important in
outlook was one of subdued recovery in the            – is responsible for reviewing and making                achieving consistently high standards of
developed markets and – given the likely              recommendations to the QBE Group board.                  business excellence.
protracted resolution of Europe’s debt problems
– central banks were adopting a cautionary            The board and management                                 I thank our Chief Executive Officer, Steven
stance on monetary policy.                            There was one change to the board during                 Burns and his management team for their
                                                      the year. Kathy Lisson stepped down from                 diligence during the year and their contribution
The results we achieved in 2011 were,                 her role as Chief Operating Officer effective            to our success.
therefore, a testament to our experienced             15 February 2011, to return to her native
underwriters, our cautious approach to                Canada. On Kathy’s departure, David Winkett              Outlook
managing risk, the quality of our products and        was appointed Chief Financial and Operating              Our priority for 2012 continues to be to deliver
the benefits of our geographic diversification.       Officer. I have also announced my intention              our plan and to exceed the Group’s target
                                                      to retire later this year, after 35 years with the       return on allocated capital, rather than simply
Secura NV                                             QBE Group. John Neal will take up the role               pursuing top-line growth. To achieve this, we
In addition to QBE celebrating its 125th              of Chairman of QBE EO.                                   will continue our disciplined underwriting stance
anniversary in 2011, Secura NV commemorated                                                                    and our focus on retaining quality business.
its 65th year of operation. Founded in 1945           Following the board’s decision to transfer               We will also continue to look for opportunities
as a reinsurance provider within the Belgium          the management of UK National Distribution               to grow our business and, through that, to
Farmers’ Association, it became part of KBC           to the Property, Casualty and Motor Division,            increase shareholder wealth.
Bank in 1998 and was acquired by QBE EO               Terry Whittaker chose to leave QBE EO.
in 2010. Its integration is going to plan and it      He had played a vital role in the successful
has already added considerable value to our           building and management of our distribution
reinsurance capabilities as well as to our profile    capability, under the banner of National and
in Europe.                                            European markets and I thank him for his
                                                      valuable contribution.
                                                                                                       QBE European Operations plc Annual report 2011                    04




Chief Executive Officer’s review


                                                                “QBE EO achieved a profit for the year with a combined
                                                                 operating ratio of 96.6%, despite a record level
                                                                 of losses from natural catastrophes and limited
                                                                 investment returns.”




Steven Burns
Chief Executive Officer
QBE European Operations




In 2011 QBE EO achieved a pre-tax profit                          Investment market conditions are currently very       by enabling commercial managers to make full
of £83.2 million, an insurance profit margin                      unsettled; yields are low and there is no sign        use of their local expertise and relationships.
of 4.4% and a return on allocated capital*                        of a material increase in interest rates while
of 16.3%.                                                         economies continue to be depressed and                I am confident that this structural consolidation
                                                                  the European debt crisis persists.                    will help us develop our ability to provide excellent
2011 was a challenging year. The London                                                                                 products and services to our brokers and clients
market was heavily exposed to floods in                           Acquisition and integration                           in the UK and Ireland and will provide a strong
Thailand, the effects of storms in Australia                      Our Belgian reinsurer, Secura NV, which was           platform for continued profitable growth.
and the US and earthquakes in New Zealand                         acquired in November 2010, is performing
and Japan; these all had an impact on our                         well ahead of expectations. Its integration           Patrick Coene’s appointment to the new role
reinsurance, marine and direct property lines of                  is beginning to have a significantly beneficial       of Managing Director, European Markets, is
business. In addition, there was an abnormally                    effect on our reinsurance capabilities and            expected to create additional market opportunities
large number of marine and energy risk claims                     on our presence in continental Europe:                for QBE EO. Previously Chief Executive Officer
in our onshore and offshore energy portfolios.                    its premium income for the year was                   of Amlin Corporate Insurance, Patrick brings
Our combined operating ratio for 2011 was                         £203 million. Secura NV had no exposure to            with him a wealth of underwriting and
96.6%, which is a strong performance                              the 2011 catastrophes, which demonstrates             management experience.
considering the market conditions and when                        the benefits of diversification that this
compared with the majority of our peers. Our                      acquisition brings to QBE EO.                         Transformational project
strategy of diversity by product and geographic                                                                         In 2009 we launched a major transformational
spread assisted and we also benefited, on a net                   The European debt crisis has caused significant       project to create a market-leading operational
basis, from extensive reinsurance protection.                     anxiety and investment market volatility around       support model. This project (“project
                                                                  the world, resulting in an impairment of a            springboard”), which completed in Q1 2012,
Fundamentally, our underlying underwriting                        number of balance sheets as insurers and              will deliver improved functionality for our
margin and profitability remain sound and we                      banks revalue their investment portfolios and         underwriters and claims operating staff.
maintained our focus on retaining quality clients                 related assets to the lower market value. This
in what continued to be soft markets, while                       unsettled environment has led to an increase          Solvency II
inadequate pricing in many classes put                            in merger and acquisition opportunities, but          Solvency II is a fundamental review of the
pressure on the acquisition of new business.                      to date with the exception of the renewal rights      regulatory requirements for insurance companies
                                                                  for Brit Insurance UK regional operations, none       across Europe. It will result in a new regulatory
Significant rate increases in energy and                          of them have met our strict criteria. We believe,     regime that is expected to change capital
catastrophe had an impact on renewals,                            however, that opportunities in Europe will            requirements, risk management standards
particularly for Australian and Japanese                          increase as the full impact of regulatory             and disclosure requirements for the insurance
reinsurance and worldwide energy clients.                         changes, particularly Solvency II criteria, are       industry across Europe. It is expected to be
In June and July, we also increased rates                         better understood and adopted.                        implemented on 1 January 2014.
for US catastrophe reinsurance renewals
and for international property business. UK                       Distribution Division restructure                     QBE EO has invested significant resources in
commercial motor rates increased by at least                      Following a strategic review of the business, we      ensuring that it is prepared to meet the new
5% for most clients, in response to poor market                   decided to transfer the management of the UK          standards and capital requirements. We
results and inflated bodily injury claims, although               National Distribution channel into the Property,      participated in all the relevant submissions to
in other classes – particularly UK and European                   Casualty and Motor Division. This enables us to       Lloyd’s and the Association of British Insurers.
property and casualty – markets continued to                      develop our UK and Ireland regional business by       In October 2011, our syndicates were awarded
be extremely competitive. Our overall average                     facilitating a common leadership and strategy,        “green light” status under the Lloyd’s traffic light
rate increase in 2011 was around 2%.                              by optimising underwriting empowerment and            system that is currently being used to measure

* Return excluding QBE EO’s internal reinsurance arrangements with other divisions within QBE.
                                                                                        QBE European Operations plc Annual report 2011                 05




                                                                                                                                                             At a glance
The QBE Internationals

In March 2011, QBE EO signed an agreement
with the Rugby Football Union to become the
title sponsor of the QBE Internationals, the
tournament where England take on the best
of the Southern Hemisphere at Twickenham.

In November and December 2012, the
QBE Internationals will see England pit their
skills against Fiji, Australia, South Africa and
finally, the IRB Rugby World Cup winners,
New Zealand.




                                                   Solvency II readiness. Similar progress has been      working with us. As a result, we are now in the
The QBE Foundation                                 made by our regulated companies, although             process of creating an Engagement Charter.
                                                   benchmarking is not yet in place for them.
The QBE Foundation was launched                                                                          This will cover:
in April 2011 and is QBE’s major                   We are confident that our systems and internal
global corporate responsibility initiative.        processes will comply with the new regulatory         •   a definition of engagement for QBE EO;
The philosophy of the Foundation is to             requirements and that our insurance carriers
support vocational opportunities globally.         will be able to meet the minimum capital              •   our commitment to employee engagement
                                                   requirements when Solvency II is implemented.             as a top strategic priority; and
QBE believes that through work, an
individual’s ultimate ability and potential        Brand development                                     •   a plan for 2011-2014, that focuses around
can be realised. With vocational goals in          Building a strong and visible brand is a key              engaging leadership, managing people
mind, the Foundation seeks to support              component for QBE’s development and we                    effectively, powerful internal communications
individuals and groups across many                 have been driving this with our rugby                     and a more cohesive QBE culture.
countries, including providing support             sponsorship. We have been official partners of
for community-based initiatives in the             England Rugby and Premiership Rugby since             QBE EO’s enduring success is largely the result
developing world such as micro-loans               late 2009 and have been the insurance partner         of its employees’ hard work and I thank them all
for small business entrepreneurs.                  for Glasgow Warriors since 2011.                      for their endeavours and the contribution they
                                                                                                         made during the year.
The objectives of the QBE Foundation               Most recently, we signed a four-season
are to:                                            agreement with the RFU to become the title            I am confident that our culture and business
                                                   sponsor of the prestigious QBE Internationals,        model will enable us to continue our proven
•   make a difference in key areas that            the games which feature England playing               track record of growth, disciplined underwriting
    align with QBE’s vision and values;            against the best of the Southern Hemisphere           and uncompromising focus on outperformance,
                                                   at Twickenham. This tournament will start in          and allow us to deliver strong results.
•   drive employee engagement by                   November 2012 and provides us a wider range
    developing networking and a strong             of brand, business development and employee
    team-based culture; and                        engagement opportunities.
•   maximise the return and impact
    for any collection, distribution and           Employee engagement
    allocation of philanthropic resources.         Managing our commercial business is, on its
                                                   own, not enough to create long-term success.
                                                   The engagement of our people is equally
                                                   important in achieving our strategic ambition of
                                                   being recognised as Europe’s leading specialist
                                                   insurer and reinsurer for business. We are
                                                   committed to developing our employees and
                                                   improving their performance by understanding
                                                   what it is that makes them “go the extra mile”.

                                                   During 2011, we carried out a number of
                                                   research initiatives and reviews to gain a better
                                                   understanding of our employees’ experience of
                                                                                          QBE European Operations plc Annual report 2011                                   06




Our business and strategy


  Our vision is to be recognised by brokers and                                                                     ndational values
  clients as Europe’s leading specialist business                                                                Fou
  insurer and reinsurer. We are confident in our                                                                     Br a n
                                                                                                                              d v a l ue s
  ability to achieve this strategic ambition by
  continuing to focus on growth by acquisition,                                                                                   Grow
                                                                                                                         line
  product and geographic diversification and strong                                                                  cip               th
                                                                                                                  is
  underwriting discipline, all underpinned by our




                                                                                                                                             by
                                                                                                         d
                                                                                                  Underwriting




                                                                                                                                                ac
  brand promise and foundational values and




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  effective risk and capital management.




                                                                                                                                                    isition
                                                                                                                      Our vision




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Growth by acquisition                              Product and geographic diversification                               Brand promise
We have a strong record of successfully            We write a broad range of products across a wide                     We have a distinctive brand and strive for
acquiring companies that complement and            geographic area. This reduces our overall risk                       excellence, based on five promises:
extend our existing business and increase          exposure and enables us to achieve consistent
                                                                                                                        •     Strong and growing market presence
our presence in Europe. In 2000, our acquisition   returns, even during years of unusual losses. It also
                                                                                                                              coupled with financial strength in
of Limit Group enabled us to expand into the       means that we are able to offer clients the choice
                                                                                                                              underwriting (see page 26);
Lloyd’s market and, in the same year, we           of writing business on Lloyd’s or company paper.
acquired Iron Trades. We have subsequently                                                                              •     Empowerment through a collaborative
made eight further acquisitions and established    Underwriting discipline                                                    “can do” spirit throughout the business and
offices in 11 European countries as well as in     We aim for a 15% cross-cycle return on                                     with our business partners (see case study:
Singapore, Canada and Dubai. In 2010, our          allocated capital on all business lines. It is                             road safety on page 33);
acquisition of Brussels-based Secura NV added      our policy to discontinue lines that do not meet
                                                                                                                        •     Specialists in every business line and
immense value to our reinsurance capabilities      our target rate of return, rather than to chase
                                                                                                                              consistently across all disciplines (see
and to our profile in Europe.                      top-line growth.
                                                                                                                              case study: Cyber Response on page 10);
                                                                                                                        •     Entrepreneurial solutions to business risk
                                                   •   We will grow and deliver market-leading                                (see case study: expanding our reinsurance
  QBE EO
                                                       profitability in all our chosen businesses.                            business on page 18); and
  QBE EO is a division of QBE Insurance Group.     •   We will excel in the design and delivery                         •     Delivery of reliable and responsive solutions
                                                       of our products and services.                                          (see case study: QBE Rehabilitation wins
  Group’s vision                                   •   We will develop “can do” people who live                               Post magazine Rehab First Awards on
  To be the most successful global insurer and         our Essential Behaviours in everything                                 page 23).
  reinsurer in the eyes of our customers, our          they do.
  people, our shareholders and the community.                                                                           Foundational values
                                                   •   We will increase the long-term wealth                            Our values, which underpin the unique QBE
                                                       of our shareholders.                                             culture, are demonstrated through QBE’s nine
                                                                                                                        Essential Behaviours, known by the acronym
                                              QBE                                                                       OPENUPQBE. These behaviours and attitudes,
                                                                                                                        as applied by QBE people on a day-to-day
                                                                                                                        basis, are the common threads binding
                                                                                                                        together the diversity of our worldwide
                                                                                                                        organisation. We aim to employ, retain and
                         European            North              Asia              Latin                                 develop the best available people in the
         Australia
                         Operations         America            Pacific            America                                industry. Our OPENUPQBE programme,
                                                                                                                        which is actively promoted to staff across
                                                                                                                        QBE, underpins this strategy (see page 25).
                                                                       QBE European Operations plc Annual report 2011                  07




We measure our progress through specific performance goals that are fundamental to the delivery
of our vision.




                                                                                                                                            Strategic overview
    Priorities                                                         Targets

                         We have annually agreed targets,          Performance goals
Underwriting             set by QBE during the planning process    • Target a return on allocated capital in excess of 15%
discipline               and detailed business plans that define      cross-cycle and a combined operating ratio below 100%
                         profit targets for each portfolio. The    •   Strong underwriting cycle management
                         board regularly monitors our targets
                                                                   Actual
                         against plan and empowers our
                                                                   • In 2011 we achieved a return on allocated capital of 16.3%
                         underwriters to deliver within a
                                                                      against a target of 15% with a combined operating ratio
                         framework of plans and authorities.
                                                                      of 96.6%



                         Our acquisition strategy is agreed        Performance goals
Growth by                annually within the QBE framework.        • Deliver acquisitions that add value, subject to our disciplined
acquisition              Our board continually reviews                approach and acquisition criteria
                         acquisition opportunities, as and         •   Continue to integrate the acquired business of Secura NV
                         when they appear, against strict
                                                                   Actual
                         acquisition criteria.
                                                                   • In 2011 we continued to monitor potential acquisitions but
                         The board reviews the contribution           none of those reviewed met our strict criteria
                         of acquisitions to top-line growth
                                                                   •   In April 2012 we acquired the renewal rights for Brit Insurance
                         against targets agreed with the Group
                                                                       UK regional operations
                         board to ensure that they positively
                         contribute to earnings.                   •   Secura NV acquisition is meeting expectations and our agreed
                                                                       targets have been met



                         Our underwriting managers are highly      Performance goals
Product and              involved in strategy and management.      • Develop new products, business classes and/or teams
geographic               They are tasked with developing organic      and distribution opportunities through Lloyd’s and the QBE
                         growth strategies and maximising             global network
diversification          distribution opportunities, including     •   Improve on client penetration across divisions through
                         Lloyd’s and QBE global networks.              cross-portfolio initiatives
                                                                   •   Increase collaboration with other QBE divisions
                                                                   Actual
                                                                   • We appointed a Managing Director for European markets
                                                                   •   In 2011 we maintained our successful brand development
                                                                       through our rugby sponsorship



                         We have a board-approved HR strategy      Performance goals
To employ the            (see page 24 for further details).        • Develop excellent transactional process in core HR services
best people              Systems exist to identify issues early    •   Develop and implement people-focused solutions with the
                         and we track and resolve any concerns
in all disciplines       arising from our employee surveys.
                                                                       aim of improving our employees’ capabilities
                                                                   •   Ensure that QBE EO is recognised as an employer of choice
                         People who leave us are debriefed
                                                                       by existing and potential employees, the market and its
                         to help us to improve our policies.
                                                                       business partners
                                                                   Actual
                                                                   • Employee engagement, flexible working and diversity
                                                                      initiatives launched
                                                                   •   Strong progress in talent management and initiatives
                                                                                               QBE European Operations plc Annual report 2011               08




Our business structure


   QBE EO operates a product-led model, supported by an established distribution network that operates
   predominantly in the London, UK regional and European markets



                                                                          Brokers/clients




                                UK                                                                                                 UK




                                                                    QBE EO
                                                                                       QBE EO
                                London                               Lloyd’s                                                 London
                                                                                      companies
                                                                   syndicates




                                Europe                                                                                        Europe


                                                                         Product-led model
                                                                     Property, Casualty and Motor
                                                                     Marine, Energy and Aviation
                                                                     Reinsurance and Credit Lines




QBE EO companies
QBE Insurance (Europe) Limited (QIEL)                      QBE Reinsurance (Europe) Limited (QREL)              Secura NV
QIEL is a specialist business insurer writing              QREL, based in Dublin, operates as an                Secura NV is a specialised European reinsurer
business in the UK and throughout Europe.                  international treaty reinsurer. The company          operating from Brussels, Belgium. Established
It offers insurance products for professional              focuses predominantly on non-proportional            in 1946, its broadly based portfolio focuses
indemnity, financial and credit, bloodstock,               business, the majority of which it generates from    on Benelux and France.
public liability, product liability, employee liability,   brokers operating outside the London market.
motor vehicle and property facultative.                                                                         Secura NV forms part of QBE EO’s Reinsurance
The company is regulated by the Financial                                                                       Division, while continuing to operate as a
Services Authority (FSA) and has overseas                                                                       separate brand domiciled in Belgium to service
branches in Bulgaria, Czech Republic,                                                                           its established continental Europe client base.
Denmark, Estonia, France, Germany, Hungary,
Ireland, Italy, Romania, Slovakia, Spain,
Sweden, Switzerland and the United
Arab Emirates.




                                          2011      2010                                       2011     2010                                         2011   2010

Gross written premium            £m     1,283    1,282     Gross written premium US$m          146      122     Gross written premium           €m   233   229
Net earned premium               £m     1,024      963     Net earned premium       US$m       116       88     Net earned premium              €m   210   200
Net investment income            £m       123       83     Net investment income US$m           17       32     Net investment income           €m    13    56
Profit before tax                £m        49       25     Profit before tax        US$m        55       75     Profit before tax               €m    29    43
Combined operating ratio          %     105.6    106.0     Combined operating ratio    %       66.9    51.5     Combined operating ratio         % 83.9   70.0
Total assets                     £m     4,426    4,286     Total assets             US$m       725     631      Total assets                    €m 1,343 1,263
Shareholders’ funds              £m     1,002    1,041     Shareholders’ funds      US$m       351      333     Shareholders’ funds             €m   261   228
                                                                                                         QBE European Operations plc Annual report 2011                               09




   QBE EO’s product-led model comprises three distinct divisions, each of which offers clients the choice
   of writing business through company or Lloyd’s security




                                                                                                                                                                                              Strategic overview
                                                                                       QBE EO




                    Property, Casualty                                             Marine, Energy                                              Reinsurance and
                       and Motor                                                    and Aviation                                                 Credit Lines
                          Ash Bathia                                                 Colin O’Farrell                                            Jonathan Parry




    Lloyd’s syndicates             QBE EO company                     Lloyd’s syndicates      QBE EO company                  Lloyd’s syndicate           QBE EO companies

                                                                                                                                                                    QIEL
       386          1886*                    QIEL                       5555*      1036*               QIEL                           566*                          QREL

                                                                                                                                                                Secura NV




                                                                                                                                                       * Part of QBE Syndicate 2999




QBE EO Lloyd’s syndicates
                                                                                                                          S&P ratings table
QBE EO manages its Lloyd’s activities through
QBE Underwriting Limited (QUL), one of the                                                                                                                           S&P              LSA
largest managing agents at Lloyd’s.
                                                                                                                          QIEL                             A+/stable
QBE Casualty Syndicate 386                                          QBE Syndicate 2999                                    QREL                             A+/stable
Syndicate 386, established in 1974, is a                            Syndicate 2999 is a wholly aligned                    Secura NV                         A/stable
specialist UK non-marine liability insurer.                         Lloyd’s syndicate with capacity for 2011              Syndicate 386                                       5/stable
Led by Ash Bathia, active underwriter, it is a                      of £930 million, led by Ash Bathia, Colin             Syndicate 2999                                     4-/stable
non-aligned syndicate with capacity for 2011                        O’Farrell and Jonathan Parry as joint active
of £365 million, 69.6% provided by QBE EO. Part                     underwriters from 2011. It is an umbrella
of the Property, Casualty and Motor Division,                       syndicate established for the 2000 year of            Sub-syndicates of 2999
it writes professional and finance lines focused                    account to provide a mechanism for the                For 2011, Syndicate 2999 operated five
in the UK, international liability and employers’                   efficient use of capital, while maximising            autonomously managed sub-syndicates
liability, public and products’ guarantee for                       the individual strengths and professional             that wrote a broad range of business.
construction and offshore accounts in the                           expertise of the underlying sub-syndicates.
UK and Ireland.

                                               2011*        2010*                                        2011      2010                                                             2011
                                                                                                                          Sub-                                                   capacity
Gross written premium                £m   443   458                 Gross written premium         £m 1,115 1,013          syndicate    Class                                         £m

Net earned premium                   £m   377   355                 Net earned premium            £m   763   686          566          Reinsurance                                   290
Net investment income                £m    36    35                 Net investment income         £m    11    13          1036         Marine and Energy                             355
Profit for the year                  £m   160   175                 Profit for the year           £m   (24)  129          1886†        Property, Casualty and Motor                  108
Combined operating ratio              % 67.3   60.6                 Combined operating ratio       % 104.6  83.1          5555         Aviation                                      107
Total assets                         £m 1,811 1,945                 Total assets                  £m 3,012 2,810          2000         Property                                       70
* Table shows full syndicate results rather than QBE EO’s                                                                 †
                                                                                                                              For 2012 sub-syndicate 1886 includes risks previously written
  69.6% share.                                                                                                                by sub-syndicate 2000.
                                                                                       QBE European Operations plc Annual report 2011   10




Specialist
in every business line and consistently across
all disciplines

QBE EO is always looking for solutions to business risks
which means working closely with all parties to understand
their business and creating the right product for them.

QBE EO’s teams are specialists in every business line,
which means giving equal importance to the generation
of new business as to supporting the retention of key
existing business.

QBE EO’s underwriters are readily accessible with skills
and in-depth product knowledge of specialist sectors
enabling an answer straightaway. The sheer number of
underwriters means that there are specialists for individual
sub-classes of product and, if an answer is not readily
available, then QBE EO will look for creative solutions.

So whether it is cover for a sports venue or a catering
company or anything in between, QBE EO can provide
a competitive and effective outcome.




Case study: Cyber Response
Businesses are increasingly exposed to cyber and data security risks. Cyber crime and the
frequency of data breaches, together with the associated costs of recovering from such events are
rising, while at the same time, there is tighter regulation of any business that holds personal data.

Between 2008 and 2010, 90% of large                and reputation damage, data breach notification
businesses reported at least one breach            requirements, cyber extortion monies, IT system
of security. Cyber crime is now estimated          rectification, regulatory investigation demands
to cost the world economy US$114 billion           and compensatory damages arising from
a year.                                            liabilities associated with an event.

QBE believe that insurers should play an           The policy not only indemnifies but offers
important role in delivering relevant and          immediate support in the event of a loss,
responsive products to protect companies in        delivered through QBE’s network of cyber and
the event of cyber attacks and data breaches.      data security specialists via red24. The service
This was the driving factor behind the creation    offers a 24/7 telephone response line connected
of “Cyber Response”, which unlike many cyber       to a crisis management service, able to send in
and data security products offers first-party      IT forensics, PR and other specialist teams as
cover to help the insured deal with the cost       necessary to ensure the situation is quickly and
of responding to a cyber and/or data security      effectively addressed.
event rather than simply covering third-party
losses. The product was the result of 18 months’   Cyber Response is available for UK businesses
research and development. Supported by a           with income under £100 million and is distributed
vigorous underwriting and risk management          through all of QBE’s UK offices, supported by
process, the product offers an attractive          the Cyber and Data Security Risk underwriting
insurance solution whilst also managing            and claims teams in London.
QBE’s exposure.

Cyber Response is a bespoke product able to
be tailored to the insured’s particular coverage
requirements. Features can include: first-party
cover for business interruption losses, brand
                                                                     QBE European Operations plc Annual report 2011             11




Our underwriting divisions
QBE EO is organised into three product-focused
underwriting divisions, which enables us to co-ordinate
and focus our capabilities. The divisions write a diverse
portfolio of business through our insurance carriers.

                                                            Property, Casualty and Motor
                                                            The Property, Casualty and Motor Division, led by Chief
                                                            Underwriting Officer Ash Bathia, was established in
                                                            November 2010 with the objective of creating a market-
                                                            leading business unit. It provides a broad range of casualty
                                                            insurance; commercial specialist property and business
                                                            interruption insurance; and commercial motor insurance.
                                                            It writes business at Lloyd’s through Syndicates 386 and
                                                            1886 as well as QIEL.




                                                                                                                                     Business operations
                                                                More information on Property, Casualty and Motor is available
                                                                on pages 12 to 13




                                                            Marine, Energy and Aviation
                                                            The Marine, Energy and Aviation Division, led by Chief
                                                            Underwriting Officer Colin O’Farrell, writes direct marine
                                                            and energy, protection and indemnity (P&I) and aviation
                                                            business. Marine and energy and aviation business are
                                                            both underwritten at Lloyd’s through Syndicates 1036 and
                                                            5555 respectively. P&I and hull insurance are underwritten
                                                            through British Marine, which was acquired by QIEL
                                                            in 2005.




                                                                More information on Marine, Energy and Aviation is available
                                                                on pages 14 to 15




                                                            Reinsurance and Credit Lines
                                                            The Reinsurance and Credit Lines Division, led by Chief
                                                            Underwriting Officer Jonathan Parry, comprises four
                                                            operating units: Syndicate 566, at Lloyd’s; QREL, in Dublin;
                                                            Secura NV, in Brussels, acquired in 2010; and Credit Lines
                                                            insurance. The division writes a broad range of reinsurance
                                                            across a number of classes and also writes Credit Lines
                                                            business from offices in mainland Europe and the UK.




                                                                More information on Reinsurance and Credit Lines is available
                                                                on pages 16 to 17
                                                                                             QBE European Operations plc Annual report 2011               12




Property, Casualty and Motor

                                                      “We have achieved an excellent result despite
                                                       the continuing uncertain economic climate and
                                                       challenges of fierce market competition across
                                                       all our main classes.”




Ash Bathia
Chief Underwriting Officer
Property, Casualty and Motor Division,
Active Underwriter QBE Casualty Syndicate 386,
Joint Active Underwriter QBE Syndicate 2999




Divisional overview                                   insurance programmes. In-house skills,
                                                                                                              Gross written premium
The Property, Casualty and Motor (PCM)                combined with an in-depth understanding of




                                                                                                              £1,703m
Division provides commercial specialist               clients’ needs and of the risk and financial
property and business interruption insurance,         return, enable us to propose strong solutions
a broad range of casualty insurance and               and to take a bespoke approach for major
also offers commercial vehicle, bus and               clients and complex risks.
coach, fleet, car, taxi, minibus and self-drive
hire programmes. Business is written                  The specialist London market teams focus on             Up 6.4% from last year
through Lloyd’s and QIEL.                             larger industrial and commercial UK-based and
                                                      international property risks and are empowered
UK and Ireland                                        with additional capacity to provide for the needs       Combined operating ratio
A market leader in the UK and Ireland liability       of multinational clients. The insurance is
business with highly experienced and qualified
underwriters, the team underwrites employers’,
                                                      distributed in London to open market London
                                                      brokers and through Lloyd’s.                                                            90.5%
public, pollution and products liability as well as                                                            2011                                     90.5%
product guarantee and recall. Excess layer            Our preferred position on large/complex risks
coverage is offered as well as primary insurance.     is a lead or significant line to influence clients       2010                                     95.8%

The team serves all major industry groups, with       and gain a better understanding of the risks
significant involvement in construction, offshore     they present. Our portfolio includes a
and transportation. Insurance is distributed in       combination of full value, primary and excess
London to open market and Lloyd’s brokers             of loss. This business is written on Lloyd’s            Property, Casualty and Motor
and through our eight national offices.               paper for North American-domiciled risks.               portfolio mix
                                                      Since our preferred position is to write                Net earned premium for the year ended
In 2011, we incorporated our Bloodstock and           excess-of-loss business rather than primary             31 December 2011
Accident & Health teams into UK and Ireland           for international property, the portfolio is
liability to add to our product mix. We also now      moving increasingly in that direction.                    Property          18.7%
                                                                                                                UK and
offer our clients a multinational solution through
                                                                                                                Irish liability   18.7%
our network of QBE offices worldwide and              International Liability and Professional                  International
network partners.                                     and Financial Lines                                       liability and
                                                      The portfolio comprises a diverse spread                  professional
Property                                              of business that, using company or Lloyd’s                and financial
The portfolio covers four key markets:                security and licences, is spread geographically           lines             41.2%
UK, European, London and International.               across 130 territories. It covers a wide range            Motor             21.4%
                                                      of industry groups, from hotels and local
The UK and European portfolios comprise               government through to heavy industry, such
property and business interruption insurance          as construction, mining, energy, transportation
across a full spectrum of clients, from               and utilities.
householders to multinational corporations.                                                                   The team is widely recognised in the market for
A wide range of industries is written, from           The International Liability and Professional and        its expertise across its lines and has benefited
manufacturing, technology, chemical and               Financial Lines team is known for its wealth of         from an ability to respond to brokers on
pharmaceutical to retail and financial services.      market experience, specialised knowledge and            a cross-class basis.
The team applies innovative solutions to writing      innovative approach. It has a long-standing
risks on primary and full-value property              reputation as the leading liability business in
                                                      the London market.
                                                                                                   QBE European Operations plc Annual report 2011                      13




Underwriting structure                                                    Property, Casualty
With 2011 GWP
                                                                             and Motor



                                                                                Ash Bathia
                                                                               £1,703 million




                                    Property                 UK and Ireland                International                  Motor and
                                                                                            Liability and                  Product
                                                                                         Professional and                 Protection
                                                                                          Financial Lines
                                    Peter Fice                 Craig Bennett                 David Harries              Matthew Crane
                                   £388 million                 £291 million                  £714 million               £310 million




                                                                                                                                                                            Business operations
The underwriting structure is supported by David Cooney (Operations), Neila Buurman (Underwriting Management), Talbir Bains (Actuarial/Management Information),
Chris Wallace (Broker Development and Client Management) and Elliot Miller (UK National Distribution), providing performance and operational support across the Division.




In addition to a long-standing UK portfolio,              QBE EO is one of the fastest-growing
an international book of non USA-domiciled                commercial motor insurers in the UK and has                  QBE National, Elliot Miller
business has been written over a number                   an award-winning claims service backed up
of years. A significant global book of solicitors’        by an innovative risk management team. This                  “UK National Distribution became part of the
business is written, both at a primary and                ensures that we are well positioned to develop               PCM Division on 17 November 2011. The
excess level and in construction, the team                the portfolio as market conditions improve                   product range for UK National is dominated
is the market leader in the design and                    in 2012.                                                     by property, casualty and motor business
construct product.                                                                                                     and has been very successful since its
                                                          Financial performance                                        launch in 2008. This change will enable us
The Management Liability team focuses on the              The trading environment for the division was                 to further develop our UK and Ireland
development of mid-market UK and European                 difficult across all the main classes in 2011.               regional business by facilitating a common
business on a primary basis, in addition to the           Gross written premiums increased by 6.4%                     leadership and strategy, optimising
excess-of-loss business, which will be developed.         overall during 2011 to £1,703 million as a result            underwriting empowerment and allowing
                                                          of a number of successful new business and                   commercial managers to fully utilise their
The Financial Institutions team has now                   product initiatives. The division’s combined                 local experience and relationships.”
completed the significant re-engineering of the           operating ratio reduced by 5.3 points, primarily             UK National provides local brokers outside
portfolio that started in 2010. Changes have              as a result of an improved performance on                    the London Market access to QBE EO’s
been made to the structure, personnel and                 the Property book, mostly on international                   products through a network of eight
appetite of this portfolio. Its focus includes            business. UK Commercial motor rates have                     regional offices throughout the UK and
opportunistic well-priced banks, SMEs, asset              been increasing by around 5% for most                        Ireland. Our empowered specialist
management for Professional Indemnity,                    clients in response to poor market results and               underwriters combine technical expertise
Bankers’ Blanket Bond and Director and                    bodily injury claims and inflation in the market,            with knowledge and understanding of their
Officers’ Insurance.                                      however, in other classes markets remained                   own market to match the needs of our
                                                          very competitive.                                            brokers and clients. In 2011, National
Motor and Product protection                                                                                           offices wrote gross written premium
The Motor team offers a broad range of                    Outlook                                                      totalling £282 million.
specialist commercial motor products, ranging             Given the uncertain economic climate and                     Our product offering differs in some
from haulage, bus and coach risks to fleet car.           challenges of fierce market competition across               locations dependent upon staffing,
                                                          all main classes, the division performed very                market appetite and opportunity. Our core
These products are written conventionally                 well in 2011. There remains an abundance of                  product offering of property, casualty and
and non-conventionally and are currently                  capital, capacity and underwriting appetite in               motor incorporates liability, professional
underwritten in the UK, Ireland and various               the market and we are expecting a tough year                 indemnity, construction all risks, directors
European and international territories. There             in 2012. The team’s focus will remain on                     and officers, financial institutions, crime,
are also bespoke sub-products (including a                maintaining underwriting disciplines, prioritising           clinical and pharmaceuticals, bus and
combined Motor Trade product) which covers                client retention and delivering levels of service            coach, commercial motor, motor trade,
most areas of motor insurance.                            that meets the demands of all our stakeholders.              accident and health, travel, commercial
                                                                                                                       property and trade credit.
The diversity of our products has been increased                                                                       UK National is committed to the continuing
by the addition of the Product Protection team,                                                                        development of our broker relationships
which principally underwrites a GAP and warranty                                                                       with national and independent brokers
product to the international motor market.                                                                             through a partnership that aims to deliver
                                                                                                                       mutual profitable growth.
                                                                                                 QBE European Operations plc Annual report 2011            14




Marine, Energy and Aviation

                                                          “The division’s historically strong underwriting
                                                           discipline, expertise and service enabled us
                                                           to deliver an underwriting profit in extremely
                                                           competitive market conditions.”




Colin O’Farrell
Chief Underwriting Officer
Marine, Energy and Aviation Division,
Joint Active Underwriter QBE Syndicate 2999




Divisional overview                                        •   The hull and war portfolios comprise               Gross written premium
The Marine, Energy and Aviation Division                       blue water hulls, mortgagees’ interests,




                                                                                                                  £644m
comprises Marine and Energy Syndicate                          shipbuilders and war risks, written worldwide.
1036, British Marine and Aviation
Syndicate 5555.                                            •   Port writes cover for ports and terminals,
                                                               intermodal transport and marine
Syndicate 1036, a direct marine and energy                     professionals’ liabilities.
syndicate that operates in the Lloyd’s insurance                                                                  same as last year
market, specialises in hull, energy, liability, specie,    •   Liability operates across the global marine
cargo, ports, war, political risks, political                  and energy liability markets. The portfolio
violence and associated risks. Its product                     comprises pure marine risks, such as P&I,          Combined operating ratio
distribution is increased through our wholly                   pollution and charterers; and energy
owned US underwriting agency, Burnett & Co
Inc. and through local participation in the
                                                               liabilities both offshore and onshore.
                                                                                                                                                  98.2%
Lloyd’s Asia market in Singapore.                          Energy and Political                                    2011                                   98.2%
                                                           Energy and Political comprises the offshore and
                                                                                                                   2010                                   87.0%
British Marine specialises in writing protection and       onshore energy portfolios, together with the
indemnity (P&I) for smaller vessels and 100%               political risk and violence underwriting portfolios.
hull risks. Since January 2010, its management
has been integrated with that of Syndicate 1036.           Offshore energy is the division’s largest individual
                                                                                                                  Marine, Energy and Aviation
                                                           portfolio. It is written worldwide, from dedicated
                                                                                                                  portfolio mix
Syndicate 5555 is a dedicated specialist                   upstream entities to fully integrated energy
                                                                                                                  Net earned premium for the year ended
aviation syndicate at Lloyd’s. It writes all               companies. The portfolio specialises in offshore
                                                                                                                  31 December 2011
elements of general aviation, airline operations,          cover for assets located in the North Sea and
products and airport business. It became part              the Far East, particularly China. Approximately
                                                                                                                    Marine      27.6%
of the division on 1 December 2010.                        60% of business is written in a lead capacity.
                                                                                                                    British
                                                                                                                    Marine      23.5%
Product range                                              The onshore team writes a wide range of risks,           Energy and
Marine                                                     worldwide, for oil and gas companies’ onshore            Political   27.8%
Marine comprises the cargo, specie, hull and               assets, from wellheads to refineries and                 General
war, ports and liability underwriting portfolios.          petro-chemical plants, particularly in the Middle        Aviation     9.6%
                                                           East and Indonesia. Approximately 75% of the             Airlines     5.1%
•   Cargo consists of a high-quality portfolio             account is written in a lead capacity.                   Products
                                                                                                                    and Airports 6.4%
    of international business; the team is
    recognised as a leader in high-tech,                   The political risk and terrorism team writes
    pharmaceutical and manufactured goods                  a broad-based portfolio of risks, worldwide.
    and excess stock.                                      The portfolio complements existing risk classes
                                                           written by the division, particularly onshore
•   Specie writes risks worldwide and                      energy, cargo and specie.
    specialises in areas such as armoured car,
    general specie, fine art, jewellers’ block
    and financial institutions.
                                                                                                QBE European Operations plc Annual report 2011                 15




Underwriting structure                                                            Marine, Energy
With 2011 GWP
                                                                                   and Aviation
                                                                                   Colin O’Farrell
                                                                                    £644 million




                                                                                                        Paul Letherbarrow*
                                                            Sam Harrison
                                                                                                      Director of Underwriting
                                                       Director of Underwriting
                                                                                                             (Aviation)
                                                             £531 million
                                                                                                            £113 million




                           Marine                         British Marine                Energy and Political
                       Tim Pembroke                          Tim Harris                       Peter Burton
                        £152 million                        £115 million                      £264 million




                                                                                                                                                                     Business operations
The underwriting structure is supported by Nick Menear (Operations), Gary Crowley (Claims) and Daryl Ewer (Business Development).
* Joined April 2012




British Marine                                           Products and Airports                                   Outlook
Cover includes P&I risks, written on a worldwide         The Products and Airports portfolio consists            We assume that pressure on rates will increase
basis, for smaller, specialist vessels and yachts        of an international book written predominantly          in 2012 unless capacity or market participants
that typically do not exceed 10,000 gross tons.          through London-based insurance brokers.                 contract following the high level of catastrophe
Premium cover includes protection for cargo,             Business is spread over all sectors, including          claims in 2011. The division’s historically
pollution, collision and personal injury.                airframe engine and component manufacturers,            strong underwriting discipline, expertise and
The portfolio also includes a dedicated hull             airport and airport-related servicing risks and         service will be the key to profitability in 2012.
underwriting team that specialises in offering           refuelling operations.                                  Consolidation and expansion of managed
cover for hull and machinery, increased value                                                                    operations overseas, combined with
and war risks, which are routinely written for           Financial performance                                   co-operation with QBE European and Group
100% of a vessel’s value up to US$20 million.            The division’s trading environment was mixed            offices worldwide, will become increasingly
Approximately 10% of the hull portfolio relates          in 2011, with average rate increases of                 important as the year progresses.
to the insurance of commercial fishing vessels,          4.8% (2010 2.1%). Significant rate increases
predominately in the UK, Ireland and Canada.             were observed during 2011 on renewal
                                                         of energy impacted classes of business,
General Aviation                                         particularly worldwide energy clients. Rates
The GA team leads more than 40% of the risks             in the marine, British Marine and aviation
it writes. Clients include the private owners of         markets remained relatively flat during the
fixed-wing and rotor-wing aircraft, flying clubs         year. Gross written premium remained stable
and all types of commercial operations. Although         at £644 million. Underpinning this performance
the portfolio is international, the majority of          were prior-year reserve releases from QBE
business comes from Europe and Asia and is               Syndicate 1036 of £10.9 million. This includes
written through London-based brokers. Income             a 2011 reserve release, reflecting a benign
is also generated through branch offices in              hurricane season for catastrophe exposed risk
mainland Europe, Mexico and the USA, where               business in the US Gulf.
we provide products through local market
agents and brokers.                                      Market environment
                                                         The market environment was extremely
Airlines                                                 competitive across all marine, energy and aviation
Airline risks are written, through brokers, on a         product lines. While rates in the onshore and
co-insurance basis in the international subscription     offshore energy risk and liability sectors increased
market. The syndicate has the capacity to                following market losses in the former and
underwrite all classes of airline business               contraction in capacity in energy liability, there
worldwide, from international, national and              was little or no rating progress in other classes,
regional carriers, to charter and cargo airlines.        in which overcapacity and commission levels
                                                         became increasingly significant issues. The
                                                         market rating environment across all classes
                                                         was particularly disappointing, despite the
                                                         increased level of catastrophe claims
                                                         throughout the 2011 calendar year.
                                                                                          QBE European Operations plc Annual report 2011          16




Reinsurance and Credit Lines

                                                     “Our philosophy of writing a diverse portfolio, together
                                                      with purchasing an extensive retrocession programme,
                                                      has enabled us to achieve a result well ahead of the
                                                      majority of our competitors.”




Jonathan Parry
Chief Underwriting Officer
Reinsurance and Credit Lines Division
Joint Active Underwriter QBE Syndicate 2999




Divisional overview                                  The team covers most liability classes in all         Gross written premium
The Reinsurance and Credit Lines Division            territories, except the US and writes business




                                                                                                           £670m
comprises four operating units: Reinsurance          on both an excess-of-loss and proportional
Syndicate 566 at Lloyd’s, QREL, Secura NV,           basis through Syndicate 566 and QREL.
which was acquired in 2010 and Credit Lines
Insurance. This excellent distribution platform      North American Property and Casualty Treaty
enables access to markets such as Europe,            The majority of the Property Treaty portfolio
North America, Australasia, Japan and Latin          emanates from the US, with the remainder              Up 48.9% from last year
America, while offering clients the choice           from Canada. The account is mostly written on
of company or Lloyd’s security. The division         a catastrophe excess-of-loss basis. Casualty
writes a broad range of reinsurance across           Treaty business is biased towards risk and            Combined operating ratio
a number of classes and also writes Credit           catastrophe excess-of-loss treaty and is split
Lines business from offices in mainland
Europe and the UK.
                                                     between standard lines – comprising general
                                                     liability, workers compensation agency, clash                                         103.0%
                                                     and motor covers – and professional lines,             2011                               103.0%
Our breadth of expertise in many classes             comprised exclusively of healthcare business.
                                                                                                            2010                                74.6%
means that we are able to offer clients
long-term support, together with financial           Marine, Aviation and Personal Accident
strength and first-rate service. The portfolio’s     This portfolio is entirely written through
diversity gives it a lower risk profile than other   Syndicate 566. It covers all aspects of marine
                                                                                                           Reinsurance and Credit Lines portfolio mix
less diverse portfolios, because pricing and         business and includes third party cover, such
                                                                                                           Net earned premium for the year
claims between classes are not linked.               as P&I and pollution. The account is written
                                                                                                           ended 31 December 2011
                                                     on a risk and catastrophe excess-of-loss basis.
2011 was the first full year of Secura NV being      The portfolio focuses on middle to high layers,
                                                                                                             Int Property
part of the QBE Group; the teams in London,          avoiding attritional levels and currently consists      Treaty         15.3%
Brussels and Dublin are all working well             of business emanating from more than                    Int Casualty
together for the good of the division.               50 countries.                                           Treaty         16.2%
                                                                                                             North American
International Property Treaty                        The aviation team provides cover for insurers and       Property and
The largest account in the portfolio is              reinsurers of the world’s major airlines, airports      Casualty Treaty 9.5%
International Property Treaty. The majority of       and aerospace product manufacturers. Business           Marine, Aviation
                                                                                                             and Personal
business is written on a catastrophe excess-         is written through excess-of-loss treaties.
                                                                                                             Accident Treaty 7.5%
of-loss basis through Syndicate 566 and QREL.
                                                                                                             Worldwide and
The portfolio is well spread geographically;         Personal Accident business is split evenly              Retrocession 10.8%
it focuses primarily on the United Kingdom,          between risk and catastrophe excess of loss             Credit Lines    6.5%
Europe, Japan, Australasia and Latin America.        business and primary direct and facultative             Secura NV 34.2%
The division leads much of the business              insurance including line slips and binders.
written in this portfolio.
                                                     Syndicate 566 is a member of the SATEC Pool
International Casualty Treaty                        providing cover on satellite launch and in-orbit
QBE EO is a recognised market leader                 risks on a promotional basis.
in International Casualty Treaty business.
                                                                                            QBE European Operations plc Annual report 2011                    17




Underwriting structure                                                   Reinsurance
With 2011 GWP
                                                                       and Credit Lines



                                                                         Jonathan Parry
                                                                          £670 million




                                Syndicate 566                  QREL                    Secura NV                     Credit
                                  (London)                                             (Brussels)                    Lines


                                  Paul Horgan                                            Jan LeFlot
                                  Peter Wilkins             Padraig Kelly               Luc Boghe                Trevor Williams
                                  £322 million               £92 million                £203 million               £53 million




                                                                                                                                                                   Business operations
Worldwide and Retrocession                             These catastrophes have hit the reinsurance
This is the longest established portfolio in           industry very hard and although there have not
                                                                                                                QBE Re
Syndicate 566 and comprises catastrophe                yet been insolvencies, several companies have
retrocession, catastrophe protections of direct        begun to withdraw from the market. This will
                                                                                                                QBE is combining its worldwide
and facultative accounts and risk excess               help in obtaining a much-needed rating
                                                                                                                reinsurance operations under a single
business. The syndicate leads more than 80%            improvement, which started at the 1 January
                                                                                                                management team and unified brand,
of the account written and has a significant           2012 renewal period.
                                                                                                                QBE Re.
impact in the quoting process of the remainder.
Syndicate 566 targets business with a high             After two profitable years for Credit Lines,
                                                                                                                QBE Re will comprise the current
risk-to-reward ratio, while positioning itself away    it is disappointing that there is considerable
                                                                                                                statutory businesses of Syndicate 566,
from attritional loss activity. It values continuity   price competition in the midst of the current
                                                                                                                QREL, Secura NV and QBE Re
and has been trading with its core clients for         European economic turmoil.
                                                                                                                (Americas). The combined business will
many years.
                                                                                                                have a gross written premium of over
                                                       Financial performance
                                                                                                                US$1.5 billion, across a well-balanced
Credit Lines                                           It is always disappointing to report a combined
                                                                                                                portfolio of property, casualty and
QBE EO is a leading provider of Credit Lines           operating ratio in excess of 100%, but in a year
                                                                                                                specialty lines. The business will be
insurance. The portfolio includes European             of such frequency of worldwide catastrophes,
                                                                                                                led by Jonathan Parry, who will become
Credit Lines operations, which provide a range         it is not a surprise. Our philosophy of writing a
                                                                                                                Chief Underwriting Officer of QBE Re.
of solutions to middle-sized and large corporate       diverse portfolio, together with purchasing an
entities, based in Europe and Switzerland. The         extensive retrocession programme, enabled us
                                                                                                                The unified business will be backed by
Surety teams, based in the UK, France and              to achieve a result well ahead of the majority of
                                                                                                                QBE Group’s A+ (S&P) and A (A.M. Best)
Germany, offer a broad range of commercial             our competitors. A full year of Secura NV’s
                                                                                                                financial ratings and with specific QBE Re
and contract surety products with an innovative        well-earned profit and another good result from
                                                                                                                capital of more than US$1.9 billion, the
approach to risk.                                      Credit Lines also helped.
                                                                                                                move strengthens its flexibility to support
                                                                                                                a broader reinsurance risk appetite.
Market environment                                     Outlook
2011 was a year of unprecedented catastrophe           After a difficult year in 2011, we are pushing
                                                                                                                “This global approach allows us to create
losses, particularly from international territories.   through rate increases and, where we cannot
                                                                                                                a platform where we can provide the
It is estimated that the market total exceeded         achieve them, we have declined to renew
                                                                                                                best possible service to our clients
US$105 billion. The Japanese earthquake and            business. We believe the pain of 2011’s
                                                                                                                worldwide. Our business philosophies,
tsunami in March was a significant disaster,           catastrophe losses will become even more
                                                                                                                market approach and appetite will be
followed by the devastating Thai flooding and          apparent in the next few months and that there
                                                                                                                co-ordinated, which in turn will help
another earthquake, in Christchurch, New Zealand,      will be withdrawals from the market. We hope
                                                                                                                ensure greater consistency across
in February. Although there was not a single           this will create the opportunity for us to take
                                                                                                                underwriting, pricing, risk management
enormous event in the United States, tornado           advantage and achieve profitable growth.
                                                                                                                and reserving. I and QBE Re’s leadership
losses added up to US$18 billion during the year.
                                                                                                                team, are excited by the opportunities
                                                                                                                offered by the new business model.”

                                                                                                                Jonathan Parry, CUO
                                                                                        QBE European Operations plc Annual report 2011                    18




Entrepreneurial
solutions to business risk

QBE EO is always looking for solutions to business risks,
which means working closely with all parties to understand
their business and creating the right product for them.

Based upon an appetite for tripartite partnerships with
brokers and clients, built around shared information,
QBE EO’s aim is always to find a competitive and effective
solution looking far beyond the initial relationship.




Case study: expanding our reinsurance business
Our acquisition of Brussels-based Secura NV, in November 2010,
added immense value to our reinsurance capabilities and
our profile in Europe.

Secura NV’s specialist underwriting focus,         We continue, however, to operate two separate
understanding and accurate pricing of risk         business models: Secura NV uses the client-
                                                                                                            General Manager
and prudent reserving and investment               driven model that their European clients prefer,
strategy, complement our existing                  where one person manages a client’s entire               Jan Leflot
reinsurance business.                              relationship; in the UK and Ireland – where
                                                   clients are used to having contact with different        Number of employees
Our expanded capital base gives us the             underwriters from the same reinsurer – we use
opportunity to grow our reinsurance business       our product-based model. In addition, Secura             87 (everyone speaks at least three
by cross-selling our different products to a       NV continues to set its profit requirements at           languages).
larger number of core clients. Becoming known      a client level, whereas in the UK and Ireland
for providing service, rather than capacity,       we base each treaty on the profitability of the          Lines of business
enables us to explain and protect our pricing      individual account.                                      Secura NV is a leading European reinsurer.
more effectively. We also aim for strong                                                                    The most significant non-life lines of
solvency, with a minimum A rating from S&P;        Secura NV is an excellent fit with our existing          business are property, motor liability,
a broad range of products, including specialty     reinsurance business and the addition of its             general third party liability and workers’
lines; and sufficient capacity to cover            European portfolio to our existing worldwide             compensation.
catastrophe and large risks.                       business has created an equally excellent
                                                   platform to ensure our continued growth.                 Secura NV
Our centres of expertise for each product line     Together we have the strength and experience             A unique office culture
– in London, Brussels and Dublin – are             and the distribution and underwriting capability,
responsible for the models that drive a uniform    in London, Brussels and Dublin to enable us              Secura NV has an office culture in which
pricing environment for our brokers and clients    to achieve our strategic ambition of becoming            none of the employees, including the
and which are used by underwriters in each         Europe’s leading reinsurance specialist.                 members of the Executive board, has
office. We use our considerable expertise in all                                                            their own office or even their own desk.
classes of reinsurance to maintain a consistent                                                             Instead, employees can choose to work at
approach to meet clients’ expectations                                                                      a desk in an open-plan environment, in a
and needs.                                                                                                  closed office, a lounge chair or the library,
                                                                                                            depending on what they are working on
                                                                                                            and with whom they need to be working.




                                                                                                               More information on Europe-wide strength
                                                                                                               is available on page 19
                                                                        QBE European Operations plc Annual report 2011               19




European markets

QBE EO has a strong and growing presence in
Europe, where we have an in-depth understanding
of our chosen markets. Our ability to combine local
expertise with the broad knowledge of our product
specialities enables us to provide innovative solutions
in each territory.




                                                                                                                                          Business operations
                                                                                            Mainland European markets

                                                                                            Patrick Coene was appointed to the new
                                                                                            role of Managing Director, European
                                                                                            Markets in November 2011.

                                                                                            European markets currently employs
                                                                                            approximately 694 staff spread across
                                                                                            mainland Europe.

                                                                                            QBE EO has a presence in 17 countries
                                                                                            in mainland Europe.


                       11
                                                                                             1   Belgium
                                                                                             2   Bulgaria
                                                               5                             3   Czech Republic
                                       15                                                    4   Denmark
                                                                                             5   Estonia
                                                                                             6   France
                           4
                                                                                             7   Germany
                                                                                             8   Hungary
                                                                                             9   Italy
                                                                                            10   Macedonia
                                                                                            11   Norway
                  1            7
                                                                                            12   Romania
                                            3                      17
                                                                                            13   Slovakia
                                                13
                                                                                            14   Spain
              6                                  8                                          15   Sweden
                      16
                                                                                            16   Switzerland
                                                          12
                                                                                            17   Ukraine

                                                                                            ■    Mainland European markets
                                   9                       2
                                                     10                                     ■    QBE EO companies
       14
                                                                                           QBE European Operations plc Annual report 2011                 20




Risk management

                                                    “QBE EO has established a market leading framework
                                                     for risk and capital management that provides a strong
                                                     base to take advantage of opportunities arising from
                                                     both the Eurozone crisis and the Solvency II regime.”




Phillip Dodridge
Chief Risk Officer
QBE European Operations




To create wealth for our shareholders,              Management culture                                      Internal management model
QBE EO must pursue opportunities                    QBE maintains a strong risk management                  QBE’s internal risk management model is at
that involve risk. Through robust risk              culture which, supported by its global risk             the core of its framework. QBE EO has defined
management, QBE EO aims to:                         management framework, protects and                      its internal model as an integrated framework
                                                    advances the interests of shareholders                  to support its objectives by managing risk
•	 achieve competitive advantage by better          and policyholders.                                      and capital across the business. The scope
   understanding the risk environments in                                                                   of our internal model extends beyond capital
   which it operates;                               The OPENUPQBE programme helps QBE                       modelling to include risk identification,
                                                    achieve its strategic goals by promoting and            mitigation, assessment and monitoring.
•	 optimise risk and more effectively allocate      maintaining a common culture throughout the
   capital and resources by assessing the           business. It defines nine Essential Behaviours          Identification of risks
   balance of risk and reward; and                  that involve the careful assessment of risk             Risks which could affect QBE EO’s ability
                                                    and reward. Risk management – particularly              to achieve its objectives are identified on a
•	 avoid unwelcome surprises by reducing            planning perspective, business acumen and               continuous basis. We support identification
   uncertainty and volatility through the           entrepreneurship – is an integral part of Essential     through an emerging risk process, which aims
   identification and management of risks           Behaviours, which enable opportunities to               to identify and manage effectively those risks
   to achieve our strategies and objectives.        be identified, QBE EO’s business activities             that we perceive as being potentially significant,
                                                    to be maximised and any potential downside              but which may not yet be fully understood or
Strategy                                            to be limited. To be successful, all employees          allowed for in our decision-making activities.
QBE EO’s risk management strategy puts              need to follow them.
structure to the risks that QBE EO is exposed                                                               Mitigation of risks
to and defines the framework to manage those        Appetite                                                Our control framework ensures that risks
risks and meet strategic objectives.                Risk appetite is the level of risk that the board       are managed in accordance with risk appetite.
                                                    and management are prepared to take in pursuit          The control registers process ensures that risks
Our defined and robust risk management              of the organisation’s objectives.                       have the appropriate controls in place, with the
framework sets out the risks to which we are                                                                appropriate owners and are regularly assessed.
exposed. In managing those risks to enable us       It is managed;
to meet our strategic objectives, the creation of                                                           Assessment and monitoring of risks
shareholder value is an important consideration.    •   through a set of risk appetite statements           Our committees assess and monitor risk.
The framework comprises complementary                   and risk tolerances;                                Risk dashboards, which are used to support
elements that are embedded in our business                                                                  assessment decisions, provide information on
management cycle and culture.                       •   through the business plan’s capital adequacy        stress and scenario tests, key risk indicators,
                                                        objectives, including return on risk-adjusted       control assessments, loss experience and
Risk management is integrated into QBE EO’s             capital and through detailed risk limits;           management action plans.
quality business management process. By this
we mean we link business strategy with              •   within the delegation of authority from             Exposure to catastrophe losses is assessed
business planning and the evaluation and                the board to the CEO and onward to the              by realistic disaster scenarios, commercial
monitoring of performance.                              management team; and                                catastrophe loss models and in-house
                                                                                                            catastrophe aggregate management tools.
                                                    •   within QBE’s policies that cover risk areas.
                                                                                                                        QBE European Operations plc Annual report 2011                                     21




  QBE’s risk strategy
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                                                                                                                                                                                                                Business operations
Capital model                                             improving decision making, providing the
QBE uses a Group-wide economic capital model              enterprise risk framework and reviewing and                                                             Solvency II
(ECM) to assess risk and to help determine the            supporting its application and by offering an
level of risk-based capital required for insurance,       independent viewpoint.                                                                                  QBE EO has been an active participant in
credit, market, liquidity and operational risks.                                                                                                                  the development and implementation of
                                                       3 The audit committee, internal audit                                                                      Solvency II and has proactively adopted
Economic capital is defined as the level of              committee and internal audit function                                                                    the broad principles of effective risk and
capital necessary to ensure that QBE can, with           form the third level of governance                                                                       capital management before it becomes a
a pre-specified probability, satisfy its obligations     They challenge the integrity and                                                                         regulatory requirement. As a result, QBE
on all policies issued before the end of the plan        effectiveness of the framework and provide                                                               EO is well placed to take advantage of the
year. It is a measure of risk and is integral to the     independent assurance, across all our                                                                    challenges that Solvency II is presenting
Group’s business management cycle and risk               business functions. More than 95% of                                                                     the insurance industry.
management framework. Its allocation helps               QBE EO’s outstanding claims provision
to ensure that risks taken by the business are           is reviewed annually by independent
commensurate with required returns and comply            external actuaries.
with the board’s risk appetite. Economic capital
enables QBE to make decisions which involve            Business continuity management
quantitative risk reward trade-offs and underpins      A business continuity management framework
the return on capital targets set for members          ensures that QBE is resilient and able to
of the Group’s bonus schemes.                          respond effectively to incidents that threaten
                                                       business continuity. It also ensures that the
QBE EO’s risk governance                               impact of any major disruption is minimised.
Everyone at QBE EO is responsible for
managing risks; as a result, a large number            The framework includes a set of emergency
of people are involved in the process. Our risk        management plans, department-level business
governance is summarised as follows.                   continuity plans and technology recovery plans.
                                                       It is supported by a range of activities, including
1 The board, underwriting divisions and                staff awareness and testing.
  corporate services form the top level
  of our risk governance structure                     The risk strategy and framework is applied
  They have direct responsibility for risk             to the following categories of risk
  management and control.                              Strategic risk
                                                       QBE EO’s strategic ambition is to be recognised
2 The risk and capital committee, enterprise           as the leading specialist insurer and reinsurer
  risk management (ERM) function and other             for business in Europe. We manage strategic
  control functions form the second level of           risk by ensuring that it accords with the Group’s
  governance                                           targets on premium and profitability growth
  They are responsible for co-ordinating,              while, at the same time, maintaining our brand
  facilitating and overseeing the risk framework’s     integrity. We manage strategic risks through
  effectiveness and integrity. The ERM team’s          a robust planning and change process, best
  objective is to optimise return from risk by         practice corporate governance and appropriate
                                                       safeguards on regulatory capital.
                                                                                         QBE European Operations plc Annual report 2011              22




Risk management
continued




Insurance risk                                      Liquidity risk                                        Group risk
QBE EO accepts appropriate insurance risk to        The objectives with regard to liquidity risk          QBE EO derives significant benefits from being
enable it to meet its objectives. To ensure that    management are to ensure that the business            part of QBE and part of the Lloyd’s Franchise
we balance insurance risk with reward, all          remains solvent by a significant margin; and all      and primarily manages Group risk through its
underwriting divisions are expected to achieve      funding requirements can be met out of readily        strong relationships with them. Our business
measurable performance targets by operating         available sources of funding. The business            objectives are aligned with QBE’s strategy and
within the limits and authorities of our risk       maintains a strong liquidity position (by holding     with Lloyd’s Franchise strategic imperatives;
appetite framework and business plans.              its assets in high quality liquid funds) and would    where appropriate, the boards follow relevant
                                                    meet any major unexpected cash outflow by             Group and franchise policies, guidelines and
Business plan parameters include a range of         using its existing resources as well as support       reporting requirements.
limits and authorities, including maximum line      provided by other companies within the Group.
size, premium allocation by class, sub-class
and geographic spread, underwriting                 Market risk
authorities, aggregation limits and reinsurance     Exposure to market risk is managed through
strategy. Business performance is measured          the investment strategy, which reflects
by return on capital, where economic capital        the appetite of the board. The strategy is
is allocated to business areas based on the         deliberately conservative in order to eliminate
level of assessed risk. Underwriters use            potential volatility from market fluctuations
benchmarking models to ensure the appropriate       as much as possible whilst still delivering
premium is charged for each risk exposure.          an acceptable absolute return.

Credit risk                                         Operational risk
A certain amount of credit risk is unavoidable,     The principal objective in managing operational
as it can arise as a result of the inability or     risk is to identify, assess and manage risks
slow payment by counterparties. Exposure            and to reduce any failures or inadequacies
to credit risk is limited as far as practical and   in processes, people and systems (including
QBE EO has established detailed guidelines,         regulatory risk). We mitigate operational risk
security assessments, limits and monitoring         by ensuring that we have an effective
requirements to mitigate credit risk.               infrastructure, robust systems and controls
                                                    and experienced and qualified individuals
                                                    throughout the organisation.
                                                                                         QBE European Operations plc Annual report 2011   23




Delivers
reliable and responsive service at every stage
of the stakeholder experience

By understanding the market better and, in particular, the
risks associated with a product, QBE EO is more responsive
and able to deliver solutions to everyone’s requirements.

QBE EO places great emphasis on risk management, with
regular newsletters and forums held addressing the key risk
issues facing clients. The approach when managing claims is
always sympathetic and understanding of clients’ needs.




                                                                                                                                               Business operations
Case study: QBE Rehabilitation wins Post magazine
Rehab First Awards
In 2011, QBE became the first ever insurer to win the Rehabilitation Initiative of the Year award for a
third time at the Post Magazine Rehab First Awards. The award was a welcome acknowledgement
of our continued commitment to offering market-leading service.

Rehabilitation is an important part of             increased commitment – and, of course, more
the service QBE EO offers its clients.             engaged employees lead to better results –
The benefits of getting sick or injured            whilst it saves costs for employers. In addition,
employees back to work as quickly as               by giving a company a reputation as a caring
possible – and before they get to the              employer, it increases the value of its brand
stage of making a claim – benefits them            and by helping it to plan for absentee cover it
as well as their employers.                        enables it to run its businesses more efficiently.

An analysis of our award-winning RIDDOR            QBE EO, which has made a considerable
Minor Injury Management service showed that        investment in developing the rehabilitation
employees returned to work 29% more quickly        service, is putting it at the heart of the claims
than they would otherwise have done. Treating      process to ensure that rehabilitation is available
people at an early stage not only helps them       to more injured parties.
to recover more speedily, it also saves around
£1,200 a claim. Indeed, over a four year period,   The members of the rehabilitation team are
one client saved just under £1 million in hidden   all skilled clinicians: nurses, occupational
business costs.                                    therapists, physiotherapists and sports
                                                   therapists. Two of the team are based in
We are working to raise awareness of the           London, one each in Chelmsford, Bristol and
scheme with brokers, as well as with our           Leeds. They use their expert knowledge in
clients, the employers and their employees.        managing clients and suppliers, working with
For employees to realise that the company          our underwriters to meet customers’ needs
they work for has a scheme in place to help        and in developing projects and products.
them if they are sick or injured leads to their
                                                                                      QBE European Operations plc Annual report 2011                 24




Our people

                                                   “QBE EO is dedicated to employing the best people
                                                    in all disciplines and to being known as an employer
                                                    of choice.”




Mohinder Kang
Chief Human Resources Officer
QBE European Operations




Working at QBE EO                                  Remuneration
QBE EO is a high-performing business,              QBE EO continues to review and redesign
                                                                                                          QBE EO’s people strategy
which uses some of the world’s leading             its remuneration package to attract, motivate
technologies and best practices. QBE               and retain high-performing people while,
                                                                                                          It is QBE EO’s strategy to employ
EO offers a professional results-driven            at the same time, maintaining its focus on
                                                                                                          the best people in all disciplines.
environment in which people are proud              the Group’s interests.
                                                                                                          We maintain our focus on three key
to work. Our success is supported by a
                                                                                                          people strategies:
close partnership between the business             Increasing regulation on remuneration in the
and HR, where strategy is aligned.                 financial sector is instrumental in any changes          to develop excellent transactional
                                                                                                          •
                                                   we make. For example, HR worked with the risk              processes in core HR services;
One of our strategic priorities is to ensure the   teams throughout 2011 to carry out reviews
                                                                                                          • to develop and implement people-
commitment of our employees. Working with          and gap analyses to ensure that we comply
                                                                                                             focused solutions with the aim of
high-performing people, who comply with            with Solvency II and also investigated the FSA
                                                                                                             improving our employees’ capabilities
our Essential Behaviours, delivers a better        Code to ensure that we are in a position to
                                                                                                             and, thereby, to increase shareholder
experience for them, as well as for our brokers    understand and comply with it, if it is extended
                                                                                                             value; and
and clients. During 2011, we used the feedback     to cover insurance companies. We also made
from our employee engagement survey to             progress in broadening our online Flexible             • to ensure that QBE EO is recognised
generate ideas and create plans to make            Benefits Scheme; following employee feedback              as an employer of choice by existing
changes throughout the business. These             we added a number of extra voluntary benefits.            and potential employees, the market
included the launch of the QBE Foundation                                                                    and its business partners.
and a clearer focus on diversity.                  Performance management
                                                   Performance management continues to be an               2011 key metrics
                                                   important element in achieving our strategic


                                                                                                           £1.8m
                                                   vision. In 2011, we focused on improving and
                                                   embedding the process and, as in 2010, we
                                                   carried out a peer review, which focused on
                                                   increasing the quality of performance review
                                                   discussions. We also undertook a quality review         Training spend
                                                   audit – which included interviewing a number


                                                                                                           2,722
                                                   of people managers – to achieve an in-depth
                                                   insight into ways of making improvements.

                                                   We continue to emphasise the recognition and
                                                   rewarding of individual performance through             Average number of employees
                                                   this process.                                           during 2011




                                                                                                           8.6%
                                                                                                           Employee turnover
                                                                                        QBE European Operations plc Annual report 2011                  25




   Our values
      O    Open thinking

      P    Personal impact
                                              Motivating
                                              our people                                                 Our values, which underpin the unique
      E    Entrusting
                                                                                                         QBE culture, are demonstrated through
      N    Networking
                                                                       Delivering                        QBE’s nine Essential Behaviours,
                                                                                                         known by the acronym OPENUPQBE.
                                                                        superior                         These behaviours and attitudes,
      U    Utmost integrity                     Driving
                                                                       returns to                        as applied by QBE people on a
                                               decisions
                                                                                                         day-to-day basis, are the common
      P    Planning perspective                                      shareholders                        threads binding together the diversity
                                                                                                         of our worldwide organisation.
      Q    Quality customer focus
                                              Optimising
      B    Business acumen                    outcomes


      E    Entrepreneurship




                                                                                                                                                             Business operations
Employee learning and development
QBE EO supports its strong learning and                The Big Difference awards
development culture through management and
leadership development programmes, support             In 2011 we repeated the Big Difference awards – an important employee engagement
for professional qualifications and personal and       initiative which gives recognition to our employees – at our annual Christmas party. Employees
technical development. In 2011, we focused             were asked to nominate colleagues who have delivered something exceptional to improve
on developing our talented leading underwriters        brokers’, clients’ or employees’ experience of QBE. Awards were also presented to
by helping with succession plans.                      employees who made a significant contribution to charity.

As a result of feedback from our employee
surveys, which highlighted engagement
and diversity, in 2012 we will be launching
workshops for managers to support these
initiatives. They are based on the QBE Essential
Behaviours, which form the basis of business
                                                       Doug Jenkins                                         Heena Patel
performance and leadership standards and define
                                                       Senior Client Risk Manager, Motor                    Operations Team Leader, Property,
the values which embody the QBE culture.
                                                       and Big Difference Award Winner                      Casualty and Motor and Big Difference
                                                                                                            Award Winner
These behaviours create a common language
                                                       “After ten years in a police force
throughout the organisation and, through that,
                                                       environment and 20 years running a                   “QBE has provided me with many
provide consistency in its activities. Over the
                                                       successful business, I was surprised                 opportunities to give something
past 25 years, the Group has achieved one of
                                                       to find a company the size of QBE                    back to the community. It’s great to
its core strategies – to diversify its product and
                                                       whose values aligned with my own.                    work for a company that encourages its
geography – primarily by making more than
                                                       I am grateful to work in a culture that              employees to get involved and make
130 acquisitions. The strength of the QBE
                                                       gives me the freedom to use my                       a real difference to local, national and
culture has provided a platform for the
                                                       initiative, pursue my ambitions and                  international causes.”
successful integration of diverse teams from
                                                        use my strengths.”
these acquisitions.
                                                                                                            Heena did a huge amount of work to
                                                       Doug is one of our finest brand                      support QBE EO’s charity programme in
                                                       ambassadors. He appreciates the                      2011. Not only did she help manage the
                                                       importance of reputation for an                      reading and maths partners scheme at
                                                       organisation like ours. By helping to                Canon Barnett School, in east London,
                                                       demonstrate QBE EO’s risk management                 she also organised our participation in the
                                                       expertise and by sharing the risk                    JP Morgan challenge – and if it were not
                                                       management services unit’s market-                   for Heena, QBE EO wouldn’t have formed
                                                       leading work, he has made a positive                 a partnership with the Rainbow Trust in
                                                       impact on the external perception of the             2011. She has championed the Trust’s
                                                       brand. Doug has made a big difference to             cause from the very beginning and was
                                                       the way brokers and clients view QBE EO.             instrumental in achieving a record
                                                                                                            fundraising amount for an annual
                                                                                                            charity partner.
                                                                         QBE European Operations plc Annual report 2011                          26




Strong
and growing market presence

QBE is one of the world’s top 20 insurers and reinsurers
and has been established in the UK since 1904. At QBE
we understand the importance of security in the insurance
decision-making process and the strength of our ratings and
financial backing gives us a real advantage in the market.

QBE has offices in 52 countries, backed by A+ ratings by
S&P and Fitch. Our approach is one of leading not following,
so when it comes to product design or setting the terms and
conditions we take the initiative.




                                                                                                        A+
Financial strength

QBE EO has total assets of £13.8 billion and a strong financial rating
of A+/stable. The value of our assets (net of dividend payments) has
grown by 156% over the last 10 years through a combination of
successful acquisitions and organic growth.



                                                                                               /stable                                       *
                                                                                                  More information on ratings is available
                                                                                                  on page 09



Europe-wide strength

QBE EO has more than 100 years’ experience in the UK. We have offices
in Birmingham, Bristol, Chelmsford, Glasgow, Leeds, London, Manchester,
Stafford and in Dublin, Ireland.

In mainland Europe, we have subsidiaries in Belgium, Denmark, Macedonia,
Norway and Ukraine; we operate as a branch of QBE Insurance (Europe)
Limited (QIEL) in Bulgaria, Czech Republic, Denmark, Estonia, France,
Germany, Hungary, Italy, Romania, Slovakia, Spain, Sweden, Switzerland
and the United Arab Emirates. In addition, we have representative offices
                                                                                                  More information on Europe-wide strength
in Sydney, Australia; Singapore; Toronto, Canada; and Tokyo, Japan.                               is available on page 19



Strength in underwriting

Our underwriters target a cross-cycle return of 15% on allocated                          Combined operating ratio
capital on all business lines regardless of the insurance cycle.
We have achieved an average COR of 93.5% over the last 10 years                                                                96.6%
which have all delivered an underwriting profit.                                           2011                                              97%

                                                                                           2010                                              93%

                                                                                           2009                                              93%

                                                                                           2008                                              92%

                                                                                           2007                                              88%

* Rated by Standard & Poor’s as at March 2011.
                         QBE European Operations plc Annual report 2011   27




QBE Casualty Syndicate 386
has an S&P Lloyd’s Syndicate
Assessment of 5/stable,
the highest award available.
QBE Syndicate 2999 has
a rating of 4-/stable
demonstrating strength
and durability.




                                                                               Financial review
                                                                                        QBE European Operations plc Annual report 2011                    28




Chief Financial Officer’s review

                                                   “Despite huge losses from natural catastrophes,
                                                    continuing challenging market conditions and
                                                    significantly lower investment return, QBE EO
                                                    delivered a commendable return on allocated
                                                    capital of 16.3%.”


David Winkett
Chief Financial and Operating Officer
QBE European Operations




                                                   Highlights                                            The divisional split is shown in the following table:
                                                   QBE EO’s insurance operations delivered
 Financial performance
                                                   a return on allocated capital of 16.3%                Rate change
                               2011        2010    (2010 19.7%) amid huge losses from natural                                                2011        2010
                                £m           £m
                                                   catastrophes, continuing challenging market           12 months ended 31 December           %           %
 Gross written premiums     3,019.6     2,695.0    conditions that affected the underwriting result
                                                                                                         Property, Casualty and Motor        0.6          2.3
                                                   and significantly lower investment return from
 Net earned premiums     1,966.8 1,673,6                                                                 Marine, Energy and Aviation         4.8          2.1
                                                   the volatile fixed-interest and equities markets.
 Net claims incurred    (1,304.9) (997.7)                                                                Reinsurance and Credit Lines        3.1          1.4
 Net operating expenses                            Gross written premium for the year was up 12%         QBE EO total                        2.0          2.1
 and commissions          (594.9) (554.8)          to £3,019.6 million (2010 £2,695.0 million). The
 Underwriting results          67.0      121.1     growth in premium income was partly due to the        Rate increases were primarily driven by the
 Investment return             48.2      104.2     acquisition of the Belgian reinsurer, Secura NV, in   Marine and Energy Division, following higher
 Other charges                (32.0)      (12.1)   late 2010. Growth was also assisted by premium        catastrophe levels and the frequency of large
                                                   rate increases, a number of successful new
 Profit before tax            83.2       213.2                                                           losses in the first half of 2011. The high
                                                   product and business initiatives and inward
 Tax                          11.9        (19.1)                                                         retention ratio is a reflection of the success
                                                   reinstatements on reinsurance portfolios.
 Minority interests              –          0.1                                                          of our continued efforts in providing quality
                                                                                                         customer service and in building relationships to
 Profit after tax             95.1       194.2     The combined operating ratio is higher than in        achieve premium growth, rather than of cutting
                                                   2010, amid numerous large catastrophe losses,         our margins.
                               2011        2010    coupled with an above-average frequency of
                                 %           %
                                                   risk losses. This was partly offset by releases       Net earned premium was 17.5% higher at
 Claims ratio                 66.3        59.6     of prior years’ reserves, following the favourable    £1,966.8 million (2010 £1,673.6 million). The
 Expense and                                       earn-out of prior accident-year claims provisions     higher relative growth rate, compared with
 commission ratio             30.3        33.2     from the casualty, reinsurance and marine and         gross written premium, was the result of a
 Combined operating ratio     96.6        92.8     energy portfolios.                                    lower reinsurance expense ratio return in 2011.
                                                                                                         Reinsurance costs decreased from 36.6%
                                                   Premium income                                        to 32.2% of gross earned premium.
                                                   Gross written premium for the year was
                                                   £3,019.6 million (2010 £2,695.0 million), an          Claims experience
                                                   increase of 12%. The Secura NV acquisition            The claims ratio has deteriorated from 59.6%
                                                   contributed £203.4 million to gross written           in 2010 to 66.3% in 2011 amid the large
                                                   premium in 2011 (2010 £29 million). Excluding         losses during the year and an above-average
                                                   the impact of the Secura NV acquisition, GWP          frequency of risk losses. QBE EO was well
                                                   increased by 5.6%. This came from an overall          protected by reinsurance for these events.
                                                   modest improvement in the rating environment,
                                                   as well as the addition of new business.              Net losses for catastrophe-related claims were
                                                   Retention ratios on renewed business were             approximately £193 million net, £118 million
                                                   maintained at over 80%, a very pleasing result        higher than in 2010. Catastrophes in the year
                                                   considering the competitive market conditions.        included the earthquakes in New Zealand, the
                                                   Overall premium rate increases were 2% on             earthquake and tsunami in Japan, flooding in
                                                   renewed business.                                     Thailand, Australia and Denmark, tornadoes
                                                                                                        QBE European Operations plc Annual report 2011                 29




in the US, Cyclone Yasi, Hurricane Irene and                    Expenses
riots in London. The earthquake and tsunami                     During 2011, the combined commission and                 Product and geographical diversification
in Japan, on 11 March 2011, was the largest                     expense ratio reduced to 30.3% (2010 33.2%).
insured event of the year.                                      An increase in the underlying cost of Project            QBE EO writes a broad range of products, with
                                                                Springboard (the IT transformational project             a wide geographical spread of risks. This reduces
QBE EO released £139 million (2010 £87 million)                 launched in 2009) and preparation for Solvency           our overall risk exposure, allowing for consistent




                                                                                                                                                                                Financial review
of claims reserves from prior years as a result of              II regulatory compliance were offset by lower            returns, even during years of unusual loss activity.
a favourable earn-out of previous accident-year                 staff incentive provisions due to reduced profits
claims provisions from the casualty, reinsurance                and increased external profit commission on              Product diversification
and marine and energy portfolios. Our                           Syndicate 386. The expense ratio is expected             31 December 2011
significant casualty portfolio continued to                     to reduce to a business-as-usual level in 2012
perform well, with stable claims costs and                      when the Springboard project will have been                Marine, Energy
positive development from previous years.                       completed. Amortisation charges on capitalised             and Aviation 21.3%
The level of risk margins in outstanding claims                 assets should be offset by savings on direct               Public/Product
continues to be strong, particularly in our                     costs as a result of operating efficiencies.               Liability    18.4%
Lloyd’s and reinsurance portfolios.                                                                                        Property
                                                                Investment return                                          Facultative
The divisional split of QBE EO’s combined                       Investment return was £48.2 million,                       and Direct 12.2%
operating ratio is in the following table:                      £56.0 million lower than in 2010. Investment               Professional
                                                                                                                           Indemnity 12.1%
                                                                market conditions in 2011 were volatile – there
                                                                                                                           Motor and Motor
Combined operating ratio                                        were significant movements in bond and equity              Casualty     11.7%
                                          2011           2010   indices, with widening credit spreads in the               Property Treaty           10.7%
12 months ended 31 December                 %              %    second half of the year. Uncertainty in Europe             Workers’ Compensation      5.0%
                                                                continued to be high, particularly in relation             Finance and Credit         3.4%
Property, Casualty and Motor 90.5                       95.8    to the peripheral economies, as investors                  Other                      2.6%
Marine, Energy and Aviation   98.2                      87.1                                                               Accident and Health        2.6%
                                                                displayed concerns over credit ratings.
Reinsurance and Credit Lines 103.0                      74.6
QBE EO total*                            96.6           92.8    In light of the uncertainty and volatility on the bond
                                                                and equity markets, we continued to focus on             Geographical diversification
* The divisional metrics shown here do not take account of                                                               31 December 2011
  QBE EO’s internal reinsurance arrangements with other         high-grade financial credit and floating-rate
  divisions in the QBE Group.                                   securities and maintained the decision to hold
                                                                                                                           UK/Ireland 33.3%
                                                                a low proportion of equities during the year.
The high combined ratio for the Reinsurance                                                                                Europe
and Credit Lines Division is primarily in property                                                                         (excl. UK) 21.3%
                                                                Tax                                                        Latin/South
and a consequence of the large number of                        QBE EO’s effective tax rate for the year was               America     11.9%
catastrophe losses during the year.                             14.3% (2010 9.0%), significantly lower than                Worldwide 8.6%
                                                                the UK tax rate of 26.5%. This is primarily                USA          7.9%
                                                                attributable to non-taxable items and material             Oceania      5.4%
                                                                one-off credits in 2011, combined with                     Asia         4.3%
                                                                differences in tax rates in our jurisdictions,             Canada       4.3%
                                                                                                                           Middle East
                                                                principally Ireland.
                                                                                                                           and Africa   3.0%
                                                                                                QBE European Operations plc Annual report 2011                 30




Financial management

“QBE EO has maintained a strong capital position.
 Shareholders’ funds were £1.7 billion after the payment
 of a dividend totalling £600 million and we continue
 to hold a significant economic capital surplus.”




 Financial management encompasses capital                  an Individual Capital Assessment (ICA) each year.     Insurers. In October 2011, our syndicates were
 management and allocation of resources,                   The ICA defines the level of capital needed to        awarded “green light” status under the Lloyd’s
 as well as those financial risks that have an             ensure that the entity will be able to meet the       traffic light system, which is currently being
 impact on the balance sheet. It is integral to            ultimate value of liabilities arising from past       used to measure Solvency II readiness. No
 QBE EO’s overall risk management strategy                 business and the expected new business                such benchmarking is in place for QIEL, QREL
 and commercial objective, which is to generate            to be written in the forthcoming year. Our ICAs       and Secura NV, but similar progress has been
 a 15% cross-cycle return on allocated                     have been reviewed and accepted by the FSA            made for these entities.
 capital from insurance operations.                        and Lloyd’s.
                                                                                                                 We are confident that our systems and internal
 It is also vital in providing confidence in our ability   Lloyd’s corporate members are also required to        processes will comply with the new regulatory
 to pay claims and meet debt obligations and in            hold capital, Funds at Lloyd’s (FAL), in a trust at   requirements and that our entities will meet
 ensuring that regulatory requirements are met.            Lloyd’s. These are intended to cover circumstances    Solvency II’s minimum capital requirements.
                                                           in which the syndicates’ assets are insufficient      Over the next 12 to 24 months, we will determine
 Capital management                                        to meet their liabilities. The level of FAL depends   the optimum level of capital to be maintained
 Capital management covers all QBE EO’s                    on corporate members’ participations on               (taking regulatory and rating agency expectations
 business activities, including underwriting and           syndicates and on the level of the syndicate ICAs     into account).
 investment strategy decisions and measures                after Lloyd’s has reviewed and accepted them.
 of increasing capital efficiency, such as debt                                                                  Liquidity and cash management
 management and reinsurance strategy. We                   Rating agencies review the quality of admissible      During the year, QBE EO’s cash and financial
 ensure that all insurance entities are adequately         assets, the mix and risk of business and              investments increased by £108.6 million, largely
 capitalised to enable them to achieve our target          counterparty exposures, to measure how much           as a result of surplus cash flow generated by
 S&P rating and to use their capital efficiently.          capital is required for each ratings band. The        its operations. It is vital for us to have strong
                                                           treatment of assets is broadly consistent with        liquidity and cash management to ensure that
 We use a stochastic risk-based tool to model              the regulatory basis. QBE EO monitors its             we have the ability to respond quickly to events,
 our capital requirements. The tool, which                 capital position on an ongoing basis to ensure        such as the payment of claims following a
 incorporates the principal risks being faced              that it continues to have a strong rating and         catastrophic loss.
 by each of our legal entities together with the           stable outlook. Our core (re)insurance entities
 output, is tailored to our risk profile. The resulting    maintained their S&P ratings.                         We aim to maintain a strong liquidity position
 capital requirements are reported to the risk                                                                   by holding our assets predominately in liquid
 and capital committee which, in turn,                     The ratings for each of our insurance carriers        funds. We monitor our exposures and run tests
 recommends them to the relevant boards.                   are on page 9.                                        to ensure that, even in realistic disasters,
                                                                                                                 sufficient liquidity is available.
 In addition to assessing capital requirements             Solvency II
 for regulated entities, our capital model is used         Solvency II is a fundamental review of the            We have a low appetite for credit risk, although
 to support decision-making, including allocating          prudential regulatory requirements that are           we have taken on more credit risk – on a very
 capital to class of business for business planning        expected to change the capital and disclosure         selective basis – since high-quality corporate
 and performance monitoring, assessing the                 requirements and risk management standards,           spreads widened towards the end of 2009. We
 effectiveness of existing reinsurance protections         for the European insurance industry.                  have established detailed guidelines, procedures,
 and new reinsurance strategies and considering            Implementation is expected on 1 January 2014.         limits and monitoring requirements to mitigate
 the implications of Solvency II on the business.                                                                credit risk, particularly in the more significant
                                                           We have invested significant resources to ensure      area of reinsurance counterparty credit risk.
 QBE EO capital resources                                  that we are prepared to meet the new regime.
 All registered insurance companies regulated by           We participated in all relevant submissions to        Liquidity risk is discussed further on page 22.
 the FSA and Lloyd’s syndicates have to perform            Lloyd’s and to the Association of British
                                                                                              QBE European Operations plc Annual report 2011                              31




Total cash and investments                              Current AAA cash rate –                                Bond type
                                                        weighted average yield

                                      2011       2010                                        2011      2010                                                2011           2010
                                       £m          £m   As at 31 December                      %         %     Bonds                                        £m              £m

Cash                               99.2   178.9         Australian dollar                     4.7      4.4     Corporate                              5,304.6 4,934.5
Shares                             39.6    66.4         US dollar                             0.3      0.3     Government                             1,138.8   728.1
Other variable yield securities   456.7   498.2         Sterling                              0.5      0.5     Supranational                            110.4   676.1
Debt                            6,037.5 5,676.7         Euro                                  1.3      1.0
Deposits                           59.6   163.8         Other                                 0.9      1.3                                            6,553.8 6,338.7

                                  6,692.6 6,584.0       Weighted average yield                0.9      1.9

                                                        QBE EO actual yield achieved          1.2      2.0




Credit rating of portfolio                              Currency and market value of total                     Currency and duration
As at 31 December 2011                                  investments and cash                                   31 December 2011
                                                        As at 31 December 2011
                                                                                                               Currency           Duration
  AAA        27%                                                          £m
  AA         48%                                          US dollar    1,622                                   %                                                          Years
  A          19%                                          Australian                                           45                                                           1.0
  Equities    1%                                          dollar         432                                   40
  Other       5%                                          Sterling     2,574
                                                                                                               35                                                           0.8
                                                          Euro         1,534
                                                          Other          531                                   30
                                                                                                                                                                            0.6
                                                                                                               25

                                                                                                               20
                                                                                                                                                                            0.4
                                                                                                               15

                                                                                                               10                                                           0.2
                                                                                                                5




                                                                                                                                                                                  Financial review
                                                                                                                0                                                           0.0
                                                                                                                       Sterling      US      Euro   Canadian Australian
                                                                                                                                    dollar           dollar    dollar




Investment management                                   securities have a relatively short duration            and expenses in accordance with our accounting
Responsibility for implementation and                   of 0.5 years. However, the maturity of the             policies and requirements of accounting
monitoring of the investment strategy has               portfolio is broadly in line with our cash             standards. During the year, operating gains of
been delegated to the QBE EO’s investment               settlement obligations.                                £9.6 million were generated (2010 £16.5 million).
committee. Further information on committee                                                                    Gains and losses arising from hedging
structure, governance and risk management               We continue to adapt a very cautious approach          transactional exposures on derivative contracts
is listed in the Corporate Governance section.          to investing our assets and prefer to focus on         are taken to the profit and loss account.
                                                        the quality of securities and issuers rather than
Total cash and investments under management             yield. The global economic outlook remains             Project costs
were £6,692.6 million, up from £6,584.0 million         uncertain and volatility in markets is expected        Significant operational projects have an impact
at the end of 2010 which includes a minority            to continue.                                           on profitability and are, therefore, an important
interest of 30.4% (2010 30.4%) in Syndicate 386.                                                               part of financial management. QBE EO launched
                                                        Currency management                                    a major transformational project, Project
Our investment strategy is prudent and most             QBE EO reports in sterling but conducts                Springboard, in 2009 to create a market leading
of the investment portfolio is in fixed income          business in a number of different currencies.          operational support model. The core project
instruments, which traditionally have a lower           Transactional foreign exchange risk arises             completed in Q1 and is already delivering P&L
risk profile than equities. Throughout the year,        on mismatches between assets and liabilities           benefits that should grow to approximately
we successfully avoided permanent impairment            denominated in major currencies. To manage             £20 million per annum through improved claims
of any securities issued by sovereign and               these risks, we monitor net currency positions         leakage, once development costs are fully
financial market issuers that were downgraded,          and hedge material net exposures.                      amortised. Other key benefits include:
who defaulted or were subject to restructuring
fears with a consequent impact on market                Our hedges are effected by physically                  •    Enhanced efficiency and effectiveness of
value. Our fixed interest and cash portfolios           matching assets and liabilities, where practical,           the underwriting and policy administration
remain highly liquid and in excess of 82% of            supplemented by the use of derivative contracts.            processes
funds under management are invested in                  These mitigate the risk that we cannot meet
security rated “AA” or higher. The credit rating        our obligations in local currency and reduces          •    Efficiencies from automated document
of the portfolio is shown in the chart above.           the risk of financial loss resulting from movements         production and workflow
                                                        in exchange rates. Due to the nature of QBE EO’s
In order to mitigate interest rate risk, particularly   business, small mismatches occur and foreign           •    Reduced application maintenance and
in an environment where interest rates are              exchange gains and losses in operational                    development costs
at an all-time low, our cash and fixed interest         transactions are recorded in investment income
                                                                                            QBE European Operations plc Annual report 2011   32




Financial management
continued
Borrowings maturity                                  Credit rating of reinsurance recoverables
£000                                                 As at 31 December 2011

                                                       AAA        0.1%
1500
                                                       AA        23.5%
                                                       A         19.1%
1200                                   325
                                                       Other      4.3%
                                                       Other QBE
    900                                644             companies 53.0%

    600
                  565

    300                                       354
                                       308

      0
           2012   2013   2014   2015   2016   2017



    Replacement of SPV subordinated notes (GBP)
    Replacement of SPV subordinated notes (USD)
    Replacement of perpetual securities (GBP)
    Replacement of perpetual securities (USD)
    Conversion of convertible securities




•     Complete enterprise information solutions      Debt management
      providing powerful analytics                   On 24 May 2011 QBE EO issued US$1,000
                                                     million and £325 million of fixed-rate reset
•     A technology platform that supports            subordinated call notes, due in 2041. The
      future merger and acquisition                  securities may not be called for redemption by
                                                     the investors. Interest payments are deferrable
We depreciate fixed assets over the estimated        and no payments are due unless QBE EO
useful life of the underlying assets – between       satisfies certain solvency conditions. QBE EO’s
three and five years. The useful life for the        first call date is May 2016.
depreciation of Project Springboard assets
is reviewed on an asset-by-asset basis.              In addition, QBE EO has existing external
                                                     convertible debt securities, with a first call date
Estimate of claims reserve                           in 2013 and two perpetual securities which
The estimate of QBE EO’s reserves to pay             have no fixed redemption date and may not be
for reported claims and for claims incurred          called for redemption or conversion by investors.
but not reported, necessarily requires the           Distributions are deferrable and not cumulative,
application of judgement and is, therefore,          but if we do not pay a distribution or principal
an important part of financial management            amount, the capital securities are to be
because the level of reserves can have a             redeemed for QBE preference shares.
significant impact on profitability.
                                                     QBE EO’s letter of credit facilities of £909 million,
Our reserving committee, which is chaired            which principally support FAL, are reviewed
by our Chief Risk Officer, monitors reserves on      at least annually. In addition, QIEL has letters
a quarterly basis. Claims estimates are set by       of credit, totalling £66 million, to support its
experienced claims technicians. The ultimate         US (re)insurance business.
costs of outstanding claims, including claims
incurred but not reported, is estimated by our       Reinsurance protection
actuaries, who apply recognised actuarial            Reinsurance is an important part of our risk
techniques. A best estimate of our reserves is       management strategy for our insurance
produced and reviewed by internal and external       operations. We have put in place various
actuaries and is assessed by management with         reinsurance programmes, such as whole account
input from underwriting and claims experts.          quota share, facultative and treaty reinsurance
More than 95% of our outstanding claims              and participation in the QBE’s catastrophe
provision is reviewed annually by independent        losses cover. Further detail is in the risk
external actuaries.                                  management report on pages 20 to 22.
                                                                                          QBE European Operations plc Annual report 2011                      33




Empowers
a collaborative “can do” spirit across the
business and with all business partners

At every stage of relationship QBE EO encourages
a “can do” spirit, which means everyone benefits from
quicker decision making and faster solutions.

QBE EO emphasises the importance of co-operation across
all departments and this, in turn, enables a bespoke service
and excellent customer relations management programme
to clients.




Case study: road safety
QBE EO has been insuring commercial motorists in the UK for more than 80 years and is dedicated
to improving road safety for all road users and pedestrians. To help raise the importance of
responsible driving – and to reduce incidents and claims – we have been working with Brake,
the road safety charity, since 2007.

In 2011, for the second year running,              •   227 community groups and volunteers and
we were headline sponsor of Brake’s Road               758 companies that registered for information          Martians Explorer Scouts
Safety Week. The theme, Too young to die,              and to take part in events. Of the companies
highlighted the particular need to improve                                                                    “Showed some of your videos and those




                                                                                                                                                                   Financial review
safety awareness among young drivers.                  –   419 planned to promote road safety to              made by students. Then we gave out fact
                                                           staff or to train/educate company drivers;         sheets and made our own videos. It went
The campaign, which was also aimed at older                                                                   fabulously. They learned lots about the
drivers, parents, the wider community and              –   412 intended to set up a road safety               impact of mobiles, drink and speed. I was
government policymakers, focused on what                   display;                                           surprised and scared how ignorant they
can be done to reduce the number of deaths                                                                    were before we did this! I’m so glad we
on the UK’s roads.                                     –   230 promoted road safety messages                  did it!”
                                                           to customers or partners;
Now in its 15th year, Road Safety Week creates
                                                                                                              Lordship Farm School
an opportunity for communities and organisations       –   229 worked with schools/colleges;
to take action on road safety. During the week
                                                                                                              “It was a successful week, looking at road
organisations, including emergency services,           –   181 promoted road safety in their local
                                                                                                              safety and personal safety. We had classes
local authorities, schools, colleges, youth and            communities; and
                                                                                                              go out into the local area with our road
community groups, ran road safety promotions
                                                                                                              safety team and assemblies from the fire
and media campaigns, held talks, workshops             –   84 launched a road safety initiative
                                                                                                              department and police. We also had
and demonstrations and displayed posters.                  or campaign.
                                                                                                              afternoon work dedicated to road safety
                                                                                                              and we ran workshops for different classes.
As part of our sponsorship, in the months          •   111,123 promotional emails sent by Brake;
                                                                                                              On the final day we had a bright day.”
running up to Road Safety Week, Brake
surveyed 8,000 young people on their               •   18,804 unique visitors to the Road Safety
experiences as passengers with young drivers.          Week website during September, October                 St Bernadette’s Pre-school
The results were covered extensively by national       and November.
and local newspapers, radio and TV stations.                                                                  “We incorporated Road Safety Week into
                                                   In addition to sponsoring Road Safety Week,                our daily activities, including a visit from
2011’s Road Safety Week generated more than        we also supported Brake’s Fleet Safety Forum.              Wigan road safety department, a safety
£535,000 worth of media value, which helped        This provided an opportunity for us to raise               walk to the village using our yellow jackets.
Brake in its campaign to make our roads safer.     awareness of QBE as an insurer of commercial               We used the pedestrian crossing and
                                                   vehicles (including buses, coaches and                     explained to the children how we use the
As headline sponsor we were associated with        emergency vehicles) while, at the same time,               button to wait for the green man before
Road Safety Week through:                          campaigning for improved driving standards.                crossing. Our local ‘lollipop’ lady was
                                                   Since one third of accidents involve vehicles              invited in to talk to the children. We feel
•   6,062 schools, organisations and               being driven for work, the importance of safe              this event was very successful.”
    communities that registered to take part       driving by those drivers has never been higher.
    in the week;

•   20 press releases to national, regional and
    trade media;
                                                                               QBE European Operations plc Annual report 2011                34




Board of directors




Frank O’Halloran                             Steven Burns                                       Phillip Dodridge
Chairman                                     Chief Executive Officer                            Chief Risk Officer
Chief Executive Officer,                     Age 53                                             Age 43
QBE Insurance Group Limited
Age 65


Frank was appointed Chairman of QBE EO       Steven joined QBE EO when it acquired              Phil was appointed to the board on 9 March
on 5 December 1991. He joined QBE in 1976    Limit Underwriting Ltd in 2000 – he had been       2007. He joined QIEL in 2000, as Chief Actuary
as Group Financial Controller and was        Managing Director of Limit since 1999 – and        of the Major Risks Division and became Chief
appointed Chief Financial Officer in 1982.   was appointed CEO of QBE EO’s Lloyd’s              Actuary in 2004. He was appointed Operations
He joined the Group board as Director of     Division in that year. He was appointed CEO        Director of QIEL in 2005 and joined the board of
Finance in 1987 and was appointed Director   of QBE EO on 17 September 2004.                    Limit in 2006. Appointed Chief Actuarial Officer
of Operations in 1994. In January 1998,                                                         for QBE EO in 2007, his role was extended to
he was appointed Chief Executive Officer.    He trained as a chartered accountant, joined       Chief Risk Officer in 2009.
                                             the Lloyd’s managing agency, Janson Green,
He is a chartered accountant and has had     in 1987 and became finance director before it      Before joining QIEL, he spent ten years as
15 years’ experience in professional         was acquired by Limit in 1996. His extensive       a consultant actuary at Watson Wyatt’s
accountancy and 35 years’ experience in      experience at Lloyd’s includes being a member      general insurance practice. His experience
insurance management.                        of the Council of Lloyd’s, between 2003 and        covers a wide range of areas, including
                                             2005 and a non-executive director of the           business planning, capital modelling, reserving,
                                             Lloyd’s Franchise Board.                           catastrophe aggregate management,
                                                                                                reinsurance, acquisition pricing and
                                             Steven is a member of QBE’s Group Operations       performance monitoring.
                                             Executive, the principal objective of which is
                                             to build and control the Group’s insurance
                                             business and to maximise opportunities in
                                             the markets in which it chooses to operate.
                                                                                          QBE European Operations plc Annual report 2011             35




Mohinder Kang                                         John Neal                                            David Winkett
Chief Human Resources Officer                         Chief Executive Officer,                             Chief Financial and Operating Officer
Age 49                                                Global Underwriting Operations                       Age 42
                                                      Age 47




Mohinder was appointed to the board on                John was appointed to the board on                   David was appointed to the board on
11 November 2004. He joined QBE EO in                 11 November 2004. Appointed Chief Executive          17 September 2004. He joined QBE EO in
September 2003 and was appointed Chief                Officer of QBE Global Underwriting Operations        2000 and became Finance Director of Limit
Human Resources Officer in November 2004.             in January 2011, he continues to sit on QBE          Underwriting Ltd later that year when it was
He had previously spent seven years at Zurich         EO’s board.                                          acquired by QBE. He was appointed Chief
Financial Services, in a number of senior positions                                                        Financial Officer of QBE EO in September 2004.
in the UK management team, including Claims           He has more than 20 years’ experience in the
Operations Director, Director – Organisation          insurance industry and has held senior roles at      He chaired the Lloyd’s Market Association
Development and Innovation and Head of HR.            Lloyd’s and in company market organisations.         Finance Committee between 2008 and 2010
                                                                                                           and is a member of the Lloyd’s Investment
Before that, Mohinder worked for the Civil            He was owner and CEO of the Lloyd’s managing         Committee. A chartered accountant, he spent
Service and also held HR management roles             agency, Ensign Holdings Limited, which was           ten years at PricewaterhouseCoopers, where
at HBOS, State Street Bank and Trust and              acquired by QBE EO in 2004. In 2006, he was          he worked extensively with Lloyd’s, London
Peugeot Citroën.                                      appointed Managing Director of QIEL, our             market and international insurance companies.
                                                      company market operation and in 2007
                                                      became Chief Operating Officer of QBE EO,
                                                      before taking on the role of Chief Underwriting
                                                      Officer in 2009.




                                                                                                                                                            Corporate governance
                                                                                                                  QBE European Operations plc Annual report 2011                           36




Audit committee*




Brian Pomeroy                                                       Peter Grove                                                         Philip Olsen
Age 67                                                              Age 62                                                              Age 66

Brian was appointed to the boards of QBE                            Peter joined the board when QBE EO acquired                         Philip is a non-executive director of QBE
Insurance (Europe) Limited and QBE                                  Limit Underwriting Limited in 2000 and was                          Underwriting Limited (formerly Limit Underwriting
Underwriting Limited in January 2006. He is                         appointed Chief Underwriting Officer of QBE EO                      Limited) and was appointed to the board of
also a director of QBE Reinsurance (Europe)                         in 2004. He has worked in the London insurance                      QBE Insurance (Europe) Limited in February
Limited. He was formerly Senior Partner of                          and reinsurance market since 1966 and was a                         2005. He is also a director of QBE Reinsurance
Deloitte Consulting and now holds a number                          lead underwriter on reinsurance and retrocession                    (Europe) Limited and Secura NV. He is a
of public, voluntary and private sector                             business for more than 30 years. He retired as                      member of the Securities Institute and, from
appointments, including non-executive director                      an executive director at the end of 2009, but                       1969 to 1990, was an investment analyst and
of the Financial Services Authority and member                      remains on the boards of QBE Insurance (Europe)                     partner at stockbroker Kitcat & Aitken. He is
of the Financial Reporting Review Panel.                            Limited and QBE Underwriting Limited. He is a                       also a director of Marketform Managing
                                                                    member of the Lloyd’s Market Supervision and                        Agency Limited.
                                                                    Review Committee.




                                                                                                                                        Non-executive membership of the board
                                                                                                                                        and committees
                                                                                                                                                          Brian Peter   Philip   Howard Charles
                                                                                                                                                       Pomeroy Grove    Olsen     Posner   Irby

                                                                                                                                        QUL                   ●    ●       ●         ●
                                                                                                                                        QIEL                  ●    ●       ●         ●
                                                                                                                                        Secura NV                          ●
                                                                                                                                        QBE Re                ●            ●
                                                                                                                                        Audit committee       ●    ●       ●         ●       ●
                                                                                                                                        Investment
Howard Posner                                                       Charles Irby FCA                                                    committee                          ●
Age 55                                                              Age 66                                                              Underwriting and
                                                                                                                                        RI review committee        ●
Howard was appointed as a non-executive                             Charles was appointed as an independent
director of QBE Insurance (Europe) Limited                          non-executive director of QBE Insurance Group
and QBE Underwriting Limited in 2006. He                            in June 2001 and is a member of QBE EO’s
is also a non-executive director of a number                        audit committee. He is a director of Great
of companies in the financial services sector.                      Portland Estates plc and North Atlantic Smaller
He was Managing Director of HBOS General                            Companies Investment Trust plc. He is also
Insurance for 11 years, before which he worked                      a trustee and governor of King Edward VII’s
in the London reinsurance market.                                   Hospital Sister Agnes.




* The members of the Audit committee are not on the board of QBE EO plc but are directors of the regulated subsidiaries as shown in the table.
                            QBE European Operations plc Annual report 2011   37




QBE’s Contractors’
Environmental Liability
solutions are designed to
respond to pollution and
environmental damage
caused by the activities
of contractors.




                                                                                  Corporate governance
                                                                                         QBE European Operations plc Annual report 2011                  38




Governance framework

                                                    “QBE EO is committed to high standards of
                                                     corporate governance and has established
                                                     a practical governance framework.”




Ian Beckerson
Compliance and Governance Director
QBE European Operations




Overview and basis of reporting                     The board has an established policy in relation       The board’s committees
QBE EO’s board governance structure                 to the provision of non-audit services by the         The board has appointed and authorised a
is shown in the chart opposite. Our key             auditors. The objective is to ensure that the         number of committees which operate within
committees and their respective roles               provision of such services does not impair the        established terms of reference.
and responsibilities are summarised                 auditor’s objectivity.
on page 40.                                                                                               QBE EO’s key committees comprise:
                                                    Key entities
The committees all comprise appropriately           Our board governance structure which                  •   Executive committee;
skilled and experienced members and operate         details our key operating and regulated
under formal terms of reference. As an internal     entities is outlined on page 39. The boards of        •   Audit committee;
holding company of QBE, our board is not            these entities each have a schedule of matters
bound by the UK Corporate Governance Code           reserved for their decision and are responsible       •   Underwriting and reinsurance review
but, as a matter of best practice, seeks to         for the overall management of the companies.              committee;
comply with it wherever possible.                   This includes strategic matters, approval
                                                    of financial statements and dividends,                •   Investment committee;
The financial statements have been prepared         appointments and terminations of directors
in accordance with applicable law and               and auditors, delegation of authority, approval       •   Reserving committee;
United Kingdom Accounting Standards                 of major capital projects, structure and
(United Kingdom Generally Accepted                  capital changes and internal controls and             •   Internal audit committee; and
Accounting Practice).                               risk management.
                                                                                                          •   Risk and capital committee.
The board                                           Our non-executive directors sit on the boards
The board comprises four executive directors        of our regulated entities as well as on the Audit     Further detail on the roles and responsibilities
and two QBE executive directors. Biographical       Committee and other key committees as shown           of each of these committees is provided on
details for each member of the board are            in the table on page 36. Biographical details for     page 40.
provided on pages 34 and 35.                        our non-executive directors are also provided
                                                    on page 36. Our non-executive directors are           Accountability and internal control
There was one change to the board during the        considered by the board to be independent             QBE EO’s activities expose it to a number of
year. Kathy Lisson stepped down from her role       of management and free from any relationship          risks that could affect its ability to achieve its
as Chief Operating Officer (COO), effective         which could materially interfere with the exercise    business objectives. The board, supported
15 February 2011, to return to her native Canada.   of their independent judgement.                       by the risk and capital committee, ensures that
On Kathy’s departure, David Winkett was                                                                   an appropriate structure for managing these
appointed Chief Financial and Operating Officer.    Board performance                                     risks is maintained. Since it is neither realistic
                                                    Board performance is evaluated on an ongoing          nor desirable to eliminate risk entirely, the board
The board meets regularly and is chaired by         basis and governance is reviewed to ensure            seeks to ensure that appropriate controls are
Frank O’Halloran, Chief Executive Officer of        that its performance meets regulatory, legal and      in place to manage risk effectively and to an
QBE Insurance Group Limited. The role of the        business requirements.                                agreed level of tolerance. QBE EO’s risk
Chairman is distinct from that of the CEO and                                                             management processes and systems are
the roles are both clearly established.                                                                   set out in more detail on pages 20 to 22.
                                                                                        QBE European Operations plc Annual report 2011                    39




 QBE European Operations – board governance structure




                                                                QBE EO board




                                                                                                                      QBE Management
                                                QIEL and QUL
              QREL board                                                          Secura NV board                    Services (UK) Limited
                                               combined boards
                                                                                                                            board




Shareholder communications
As an internal holding company, EO plc does          QBE Global Workplace Diversity Policy               QBE’s workforce diversity policy is aligned
not have external shareholders; shareholder                                                              with the Essential Behaviours that form our
communications are, therefore, dealt with by         With operations in 52 countries, QBE Group          corporate culture, in particular maintaining
QBE, which sends a half-yearly report to all         recognises that workforce diversity is critical     absolute integrity in all we do. Our aim is to
shareholders who elect to receive it. Reports        to building and maintaining a workplace that        create a workforce that is fair and inclusive
are available on QBE’s website, www.qbe.com          is fair and inclusive. Through QBE’s vision,        and to attract and retain the best people to
which also contains historical and other details     values and Essential Behaviours, the Group          do the job.
on the Group. Shareholders can discuss their         seeks to retain and attract the best people
shareholding with the shareholder services           to do the job and to enable them to                 Through our Group vision to develop “can
department, or the share registrar, both of          achieve sustainable high performance.               do” people who live our Essential Behaviours
which are based in Sydney, Australia.                We believe that drawing upon the wide               in everything they do, we will achieve positive
                                                     variety of capabilities, ideas and insights         business outcomes through the efforts of a
The Group’s AGM is held in Sydney each year,         of our employees enhances the quality of            strong, cohesive and committed workforce
usually in April. Shareholders are encouraged        decision-making and entrepreneurship.               across our global network.
to attend the AGM in person, or by proxy.




                                                                                                                                                               Corporate governance
Most resolutions in the notice of meeting            The guiding principles of workplace diversity       To help achieve our workplace diversity
have explanatory notes. During the AGM,              within QBE have been in place for some              initiatives in 2012 and beyond, QBE Group
shareholders may question the Chairman               years. In 2011, QBE undertook a survey of           has established a workforce diversity
or the external auditor.                             its top 2,500 managers around the world on          committee, headed by the QBE Group
                                                     workplace diversity. As a result of this survey,    Chief Executive Officer of global underwriting
                                                     QBE is planning to introduce a range of             operations. The committee is responsible
                                                     initiatives including a new workplace flexibility   for monitoring of progress against agreed
                                                     policy, manager education programmes and            objectives and reporting to the board to
                                                     development of a “keeping in touch”                 ensure the implementation of this strategic
                                                     programme for those taking parental leave.          objective in line with the Group’s vision.
                                                                                                         At QBE EO level, a diversity committee has
                                                                                                         also been established
                                                                                           QBE European Operations plc Annual report 2011                   40




Key committees


Executive committee                                   Underwriting and reinsurance                          Investment committee
                                                      review committee

Chairman                                              Chairman                                              Chairman
Steven Burns                                          Peter Grove                                           David Winkett

Roles and responsibilities                            Roles and responsibilities                            Roles and responsibilities
• To formulate strategy for discussion and            • To provide assurance that the control               • To recommend to the board appropriate
   approval by the board.                                framework is appropriate and mitigates                investment policies and guidelines for each
                                                         underwriting and reinsurance risk.                    of the companies’ – and subsidiary
•   The committee comprises all executive                                                                      companies’ – funds.
    directors of the board, together with the         •   To review the framework (to ensure that it is
    divisional Chief Underwriting Officers.               consistent with that of QBE), the companies’      •   To monitor the agreed investment strategy
                                                          policies and procedures and legislative and           on a day-to-day basis.
                                                          regulatory requirements.

                                                      •   To contribute to change management
                                                          projects to ensure that control weaknesses
                                                          are identified quantified and managed.




Audit committee and its sub-committees

Audit committee                                       Reserving committee                                   Risk and capital committee

Chairman                                              Chairman                                              Chairman
Brian Pomeroy                                         Phil Dodridge                                         Phil Olsen

Roles and responsibilities                            Roles and responsibilities                            Roles and responsibilities
• To assist the boards in discharging their           • Undertaking a review of the reserve                 • Ensuring an embedded framework to
   oversight responsibilities.                           information in support of the accounts and            manage risk and capital is in place.
                                                         the calculation of total reserves ensuring
•   Principal responsibilities include:                  consistency with the standards required to         •   Oversight of day-to-day activity relating
    – overseeing the financial reporting process;        attain satisfactory audit and actuarial opinion.       to Solvency II.
    –   reviewing the effectiveness of the internal
        financial control and risk management
        system and the internal audit function; and
                                                      Internal audit committee
    –   overseeing the independent audit
        process, including recommending the           Chairman
        appointment – and assessing the               Phil Olsen
        performance – of the external auditor.
                                                      Roles and responsibilities
•   In addition, overseeing the reserving             • Provide assurance that an appropriate
    committee, risk and capital committee and            control framework is in place.
    internal audit committee.
                                                      •   Ensure controls are functioning in practice
                                                          and consistent with QBE and QBE EO
                                                          procedures, together with legislative and
                                                          regulatory requirements.
                                                                                        QBE European Operations plc Annual report 2011                    41




Directors’ report

The directors present their report and the          On 15 December 2011, the company                     Charitable donations
audited financial statements for the year           completed a court-approved capital reduction         During the year the Group made donations
ended 31 December 2011.                             of £507,110,000 with £23,300,000 was                 for charitable purposes of £1,019,000
                                                    returned to the minority equity shareholder and      (2010 £40,000).
Principal activity                                  the remaining £483,810,000 was transferred
QBE European Operations plc (the company)           to the profit and loss account. Details on the       QBE’s new global corporate responsibility
is an investment holding company and the            capital reduction is set out in note 20.             initiative, The QBE Foundation, was officially
principal activity of its subsidiary undertakings                                                        launched in July 2011. The Foundation is
continues to be the transaction of insurance        On 29 December 2011, the company changed             a Group-wide initiative that sets out to:
and reinsurance business (together the Group).      its name to QBE European Operations plc,
The company and Group will continue these           from QBE International Holdings (UK) plc,            •   make a difference in key areas that align
activities for the foreseeable future.              a name that reflects the role of the company             with QBE’s vision and values;
                                                    going forward.
The company is wholly owned by QBE                                                                       •   drive employee engagement by developing
Insurance Group Limited (QBE), an Australian        On 16 February 2012, the company paid an                 networking and a strong team-based
listed company that prepares consolidated           interim dividend of £356,700,000 to ordinary             culture; and
financial statements in accordance with             shareholders.
Australian equivalents to International Financial                                                        •   maximise the return and impact from any
Reporting Standards. These consolidated             Key Performance Indicators                               collection, distribution and allocation of
financial statements are prepared using             The directors monitor the progress of the Group          philanthropic resources.
UK Generally Accepted Accounting Practice.          by reference to the KPIs table on page 2.
The company is the holding company for                                                                   In 2011, The Foundation made £868,000
the European Operations Division (QBE EO)           Overseas operations                                  of donations across four key categories
of QBE.                                             The Group has overseas operations in Australia,      of support: matching employee fundraising;
                                                    Belgium, Bulgaria, Canada, the Czech Republic,       matching payroll giving; employee volunteer
Business review and future developments             Denmark, Estonia, France, Germany, Hungary,          day; and charitable grants.
The results of the Group for the year are set out   Ireland, Italy, Macedonia, Romania, Singapore,
in the Group profit and loss account and the        Slovakia, Spain, Sweden, Switzerland, Ukraine        Corporate governance
statement of Group total recognised gains           and the United Arab Emirates.                        Please refer to Corporate governance
and losses on pages 44 to 46. The profit after                                                           statement on pages 38 and 39.
tax for the year was £95,052,000 (2010              Directors
£194,159,000). A dividend was paid on the           Details of the current directors and those that      Financial risk
ordinary shares for the year of £596,693,000        served during the year are shown on page 84.         Financial risk is dealt with in note 15 to
(2010 £423,708,000) and a dividend of                                                                    the accounts.
£3,361,000 was paid on the preference shares        Creditor payment policy
(2010 £6,292,000). Details of movements on          The company agrees terms with its suppliers          Risk management




                                                                                                                                                               Corporate governance
reserves are set out in note 20.                    when it enters into binding purchase contracts.      Please refer to Risk management section
                                                    The company seeks to abide by the payment            on pages 20 to 22.
On 16 May 2011, a Group company lent a              terms agreed with suppliers when it is satisfied
further US$200 million to QBE Investments           that the supplier has provided the goods or          Employees – disabled persons
(North America) Inc., funded by the surplus         services in accordance with the agreed terms         Applications for employment by disabled
cash in the Group.                                  and conditions.                                      persons are always considered, bearing in mind
                                                                                                         the respective aptitudes and abilities of the
On 24 May 2011, as detailed in note 24, the         The Group has on average 22 days’ creditors          applicant concerned. In the event of members
Group raised US$1 billion and £325 million          outstanding at 31 December 2011 (2010                of staff becoming disabled, every effort is made
through the issue of 30-year fixed rate             30 days) based on the average daily amount           to ensure that their employment with the Group
subordinated notes.                                 invoiced by suppliers during the year.               continues and the appropriate training is
                                                                                                         arranged. It is the policy of the Group that the
                                                                                                         training, career development and promotion of
                                                                                                         a disabled person should, as far as possible, be
                                                                                                         identical to that of a person who does not suffer
                                                                                                         from a disability.
                                                                                             QBE European Operations plc Annual report 2011   42




Directors’ report
continued
Employees – employee involvement                       The directors are responsible for keeping
Communication with all employees continues             adequate accounting records that are sufficient
through internal announcements and                     to show and explain the company’s transactions
distribution of information concerning the             and disclose with reasonable accuracy at any
performance of the Group, with the aim of              time the financial position of the company
ensuring that all employees are aware of the           and the Group and enable them to ensure
financial and economic performance of their            that the financial statements comply with the
business units and of the Group as a whole.            Companies Act 2006. They are also responsible
                                                       for safeguarding the assets of the company and
Involvement in the performance of the                  the Group and hence for taking reasonable
company is encouraged through share                    steps for the prevention and detection of fraud
schemes and performance-related bonus                  and other irregularities.
schemes. Employee representatives are
consulted to ensure employee views are                 Statement of disclosure of information
considered in decision-making likely to                to auditors
affect their interests.                                Each person who is a director at the date of this
                                                       report confirms that:
Statement of directors’ responsibilities
The directors are responsible for preparing            •   so far as the director is aware, there is no
the Directors’ report and the financial                    relevant audit information of which the
statements in accordance with applicable                   auditors are unaware; and
law and regulations.
                                                       •   the director has taken all the steps that
Company law requires the directors to prepare              he/she ought to have taken as a director
financial statements for each financial year.              in order to make himself/herself aware
Under that law the directors have elected to               of and to establish that the company’s
prepare the Group and company financial                    auditors are aware of, any relevant
statements in accordance with United Kingdom               audit information.
Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable            This confirmation is given and should be
law). Under company law the directors must not         interpreted, in accordance with the provisions
approve the financial statements unless they are       of s418 of the Companies Act 2006.
satisfied that they give a true and fair view of the
state of affairs of the company and the Group          By order of the board:
and the profit or loss of the Group for that
period. In preparing these financial statements,
the directors are required to:

•   select suitable accounting policies and then
    apply them consistently;                           S M Boland
                                                       Company Secretary
•   make judgements and accounting estimates           QBE European Operations plc
    that are reasonable and prudent;                   Registered Number 02641728
                                                       London
•   state whether applicable UK accounting             4 May 2012
    standards have been followed, subject
    to any material departures disclosed and
    explained in the financial statements; and

•   prepare the financial statements on the
    going concern basis unless it is inappropriate
    to presume that the company will continue
    in business.
                                                                                                                      QBE European Operations plc Annual report 2011                              43




Independent auditors’ report
to the members of QBE European
Operations plc
We have audited the Group and parent company financial statements                                       Opinion on financial statements
(the “financial statements”) of QBE European Operations plc for the year                                In our opinion the financial statements:
ended 31 December 2011 which comprise the Group profit and loss
account, the Group and parent company balance sheets, the statement of                                  •    give a true and fair view of the state of the Group’s and the parent
Group total recognised gains and losses, the reconciliation of movement                                      company’s affairs as at 31 December 2011 and of the Group’s profit
in Group shareholders’ funds and the related notes. The financial reporting                                  for the year then ended;
framework that has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally                                       •    have been properly prepared in accordance with United Kingdom
Accepted Accounting Practice), having regard to the statutory requirement                                    Generally Accepted Accounting Practice; and
for insurance companies to maintain equalisation provisions. The nature
of equalisation provisions, the amounts set aside at 31 December 2011                                   •    have been prepared in accordance with the requirements of the
and the effect of the movement in those provisions during the year on the                                    Companies Act 2006.
Group’s shareholders’ funds, the balance on the Group’s general business
technical account and profit before tax, are disclosed in accounting policy                             Opinion on other matter prescribed by the Companies Act 2006
(d) (vii) and note 21.                                                                                  In our opinion the information given in the Directors’ report for the financial
                                                                                                        year for which the financial statements are prepared is consistent with the
Respective responsibilities of directors and auditors                                                   financial statements.
As explained more fully in the statement of directors’ responsibilities set
out on page 42, the directors are responsible for the preparation of the                                Matters on which we are required to report by exception
financial statements and for being satisfied that they give a true and fair                             We have nothing to report in respect of the following matters where
view. Our responsibility is to audit and express an opinion on the financial                            the Companies Act 2006 requires us to report to you if, in our opinion:
statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with                                 •    adequate accounting records have not been kept by the parent
the Auditing Practices Board’s Ethical Standards for Auditors.                                               company or returns adequate for our audit have not been received
                                                                                                             from branches not visited by us; or
This report, including the opinions, has been prepared for and only for
the company’s members as a body in accordance with Chapter 3 of                                         •    the parent company financial statements are not in agreement with
Part 16 of the Companies Act 2006 and for no other purpose. We do                                            the accounting records and returns; or
not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or                                    •    certain disclosures of directors’ remuneration specified by law are
into whose hands it may come save where expressly agreed by our prior                                        not made; or
consent in writing.
                                                                                                        •    we have not received all the information and explanations we require
Scope of the audit of the financial statements                                                               for our audit.
An audit involves obtaining evidence about the amounts and disclosures
in the financial statements sufficient to give reasonable assurance that




                                                                                                                                                                                                       Corporate governance
the financial statements are free from material misstatement, whether
caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s and parent company’s
circumstances and have been consistently applied and adequately                                         Nigel Terry
disclosed; the reasonableness of significant accounting estimates made                                  Senior Statutory Auditor
by the directors; and the overall presentation of the financial statements.                             For and on behalf of PricewaterhouseCoopers LLP
In addition, we read all the financial and non-financial information in                                 Chartered Accountants and Statutory Auditors
the Annual report to identify material inconsistencies with the audited                                 London
financial statements. If we become aware of any apparent material                                       4 May 2012
misstatements or inconsistencies we consider the implications for
our report.




Note
The maintenance and integrity of the QBE website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly,
the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
                                                                                       QBE European Operations plc Annual report 2011                    44




Group profit and loss account:
technical account – general business
For the year ended 31 December 2011


                                                                                                         2011                                  2010
                                                                             Notes               £000              £000                 £000             £000

Earned premiums, net of reinsurance
Gross premiums written                                                          2          3,019,592                           2,694,964
Outward reinsurance premiums                                                                (987,546)                           (960,986)
Net premiums written                                                                                       2,032,046                             1,733,978

Change in the gross provision for unearned premiums                                         (107,741)                             (89,895)
Change in the provision for unearned premiums, reinsurers’ share                              42,488                               29,521
Change in the net provision for unearned premiums                                                               (65,253)                              (60,374)
Earned premiums, net of reinsurance                                                                        1,966,793                             1,673,604
Allocated investment return transferred from the non-technical account                                        37,902                                65,719
Total technical income                                                                                     2,004,695                             1,739,323
Claims incurred, net of reinsurance
Claims paid
   Gross amount                                                                            (1,625,403)                        (1,588,200)
   Reinsurers’ share                                                                          498,518                            598,285
                                                                                           (1,126,885)                          (989,915)
Change in the provision for claims
  Gross amount                                                                              (412,600)                              41,899
  Reinsurers’ share                                                                          234,629                              (49,728)
                                                                                            (177,971)                              (7,829)
Claims incurred, net of reinsurance                                                                       (1,304,856)                             (997,744)
Net operating expenses                                                          4                           (594,875)                             (552,130)
Other technical charges, net of reinsurance                                    13                             (2,886)                                (2,672)
Change in equalisation provision                                               21                            (16,335)                                     –
Total technical charges                                                                                   (1,918,952)                           (1,552,546)
Balance on technical account – general business                                                                 85,743                                186,777


The notes set out on pages 50 to 81 form an integral part of these financial statements.
                                                                                            QBE European Operations plc Annual report 2011                  45




Group profit and loss account:
non-technical account
For the year ended 31 December 2011


                                                                                                                                             2011          2010
                                                                                                                       Notes                 £000          £000

Balance on technical account – general business                                                                                        85,743          186,777
Investment income                                                                                                        9(a)         244,138          237,473
Investment expenses and charges                                                                                          9(b)        (137,679)        (113,332)
Unrealised losses on investments                                                                                                      (58,351)          (19,961)
Allocated investment return transferred to the general business technical account                                                     (37,902)          (65,719)
Other charges                                                                                                                         (12,758)          (12,075)
Profit on ordinary activities before tax                                                                                2,10           83,191          213,163

Tax on profit on ordinary activities                                                                                     11            11,926          (19,111)
Profit on ordinary activities after tax                                                                                                95,117          194,052
Equity minority interests                                                                                                                    (65)          107
Profit for the financial year                                                                                                          95,052          194,159


The results above are all derived from continuing operations.

Neither gains and losses arising on the holding or disposal of investments, nor the effect of fair value accounting for financial instruments are required to
be included in a note of historical profit and losses. There are no other differences between the profit on ordinary activities before tax or the profit for the
financial year stated above and their historical cost equivalents.

The notes set out on pages 50 to 81 form an integral part of these financial statements.




                                                                                                                                                                   Financial statements
                                                                                       QBE European Operations plc Annual report 2011              46




Statement of Group total
recognised gains and losses
For the year ended 31 December 2011


                                                                                                                                        2011       2010
                                                                                                                  Notes                 £000       £000

Profit for the financial year                                                                                        20           95,052       194,159
Actuarial gain/loss recognised in the pension schemes                                                              7,20            3,088         (7,740)
Movement on deferred tax liability relating to pension liability                                                     20            1,266            882
Movement in cash flow hedge                                                                                                            –          3,722
Movement in revaluation reserve                                                                                      20             (113)           412
Currency translation differences                                                                                     20           18,186        49,644
Total recognised gains for the year                                                                                              117,479       241,079


The notes set out on pages 50 to 81 form an integral part of these financial statements.
                                                                                           QBE European Operations plc Annual report 2011                47




Reconciliation of movement
in Group shareholders’ funds
For the year ended 31 December 2011


                                                                                                                                            2011        2010
                                                                                                                      Notes                 £000        £000

Profit for the financial year                                                                                           20            95,052         194,159
Other recognised gains                                                                                                  20            22,427          46,920
Dividends                                                                                                               20          (600,054)       (430,000)
Capital reduction                                                                                                       20           (23,300)              –
Issue of ordinary share capital                                                                                                            –         545,490
Net (decrease)/increase in shareholders’ funds                                                                                     (505,875)         356,569
Opening shareholders’ funds                                                                                             20        2,196,978        1,840,409
Closing shareholders’ funds                                                                                             20        1,691,103        2,196,978


The notes set out on pages 50 to 81 form an integral part of these financial statements.




                                                                                                                                                                Financial statements
                                                                                       QBE European Operations plc Annual report 2011                     48




Balance sheets
As at 31 December 2011




                                                                                                        Group                                  Company
                                                                                                2011              2010                  2011              2010
Assets                                                                       Notes              £000              £000                  £000              £000

Intangible assets                                                              13           194,244          209,894                    671               806
Investments
Land and buildings                                                            14(a)           12,094          12,546                   –                  –
Shares in group undertakings                                                  14(b)                –               –           4,118,930          3,804,748
Other financial investments                                                   14(c)        6,268,289       6,042,620             157,837             34,819
Deposits with ceding undertakings                                                            144,699         149,942                   –                  –
                                                                                           6,425,082       6,205,108           4,276,767          3,839,567
Reinsurers’ share of technical provisions
Provision for unearned premiums                                                              423,275         380,188                      –                    –
Claims outstanding                                                                         2,509,964       2,204,901                      –                    –
                                                                                           2,933,239       2,585,089                      –                    –
Debtors
Debtors arising out of direct insurance operations                                           994,694         953,576                   –                  –
Debtors arising out of reinsurance operations                                                117,371          96,206                   –                  –
Other debtors including taxation                                               17          2,646,437       2,120,443             639,882            219,613
                                                                                           3,758,502       3,170,225             639,882            219,613
Other assets
Tangible assets                                                                18            85,539           74,621                    –                    –
Cash at bank and in hand                                                                     98,350          182,930                2,951                2,470
                                                                                            183,889          257,551                2,951                2,470
Prepayments and accrued income
Accrued interest and rent                                                                    34,416           27,416                    542                16
Deferred acquisition costs                                                                  282,307          255,664                      –                 –
Other prepayments and accrued income                                                         25,185           35,114                      –                 –
                                                                                            341,908          318,194                    542                16
Total assets                                                                           13,836,864         12,746,061           4,920,813          4,062,472


The notes set out on pages 50 to 81 form an integral part of these financial statements.
                                                                                           QBE European Operations plc Annual report 2011                    49




Balance sheets continued
As at 31 December 2011




                                                                                                            Group                                  Company
                                                                                                   2011               2010                  2011             2010
Equity and liabilities                                                       Notes                 £000               £000                  £000             £000

Capital and reserves
Called up share capital                                                      19,20          2,308,573          2,454,133          2,308,573           2,454,133
Share premium account                                                          20                   –            361,550                  –             361,550
Revaluation reserve                                                            20                 299                412                  –                   –
Other reserves                                                                 20             167,049            148,863                  –                   –
Profit and loss account                                                        20            (784,818)          (767,980)           600,192             334,073
Total shareholders’ funds                                                                   1,691,103          2,196,978          2,908,765           3,149,756
Equity minority interests                                                                        8,624               8,559                    –                –
Total equity                                                                                1,699,727          2,205,537          2,908,765           3,149,756
Technical provisions
Provision for unearned premiums                                                             1,408,459          1,304,970                      –                –
Claims outstanding                                                                          6,514,462          6,137,377                      –                –
                                                                                            7,922,921          7,442,347                      –                –
Provisions for other risks and charges
Provisions for liabilities and charges                                         27               1,428                1,534                    –                –
Deferred taxation                                                              22             185,630               57,236                    –                –
                                                                                              187,058               58,770                    –                –
Deposits received from reinsurers                                                              46,529               49,961                    –                –
Creditors
Creditors arising out of direct insurance operations                                          126,636            160,509                  –                   –
Creditors arising out of reinsurance operations                                             1,295,568          1,197,152                  –                   –
Amounts owed to credit institutions                                            23             564,735            546,602                  –                   –
Other creditors including tax and social security                              24           1,944,869          1,032,556          2,012,048             912,286
                                                                                            3,931,808          2,936,819          2,012,048             912,286
Accruals and deferred income                                                                   42,495               40,059                    –              430
Total equity and liabilities excluding pension liabilities                             13,830,538             12,733,493          4,920,813           4,062,472
Pension liabilities                                                            7(a)              6,326              12,568                    –                –
Total equity and liabilities including pension liabilities                             13,836,864             12,746,061          4,920,813           4,062,472


These financial statements on pages 44 to 81 were approved by the board of directors on 4 May 2012 and signed on its behalf by:




D J Winkett
Director
                                                                                                                                                                    Financial statements




The notes set out on pages 50 to 81 form an integral part of these financial statements.
                                                                                              QBE European Operations plc Annual report 2011                 50




Notes to the financial statements
For the year ended 31 December 2011




1 Accounting policies
The principal accounting policies adopted in the preparation of these               iv) Claims incurred
financial statements are set out below. These policies have been                    Claims incurred comprise claims and related expenses paid in the year
consistently applied to all the years presented unless otherwise stated.            and changes in provisions for outstanding claims, including provisions
The consolidated financial statements incorporate the assets, liabilities           for claims incurred but not reported and related expenses, together with
and results of the company and its subsidiary undertakings and are                  any other adjustments to claims from previous years. Where applicable,
drawn up to 31 December each year.                                                  deductions are made for salvage and other recoveries.

a) Basis of preparation                                                             v) Claims provisions and related reinsurance recoveries
These financial statements have been prepared in accordance with                    Provision is made at the year end for the estimated cost of claims
the provisions of The Large and Medium-Sized Companies and Groups                   incurred but not settled at the balance sheet date, including the cost
(Accounts and Reports) Regulations 2008 (SI 2008/410) relating to                   of claims incurred but not yet reported to the Group. The estimated
insurance groups and applicable accounting standards in the United                  cost of claims includes expenses to be incurred in settling claims and
Kingdom. The Group has adopted the recommendations of the                           a deduction for the expected value of salvage and other recoveries.
Statement of Recommended Practice on Accounting for Insurance
Business issued by the Association of British Insurers in December                  Outstanding claims and reinsurance recoveries are estimated by
2005 (as amended in December 2006).                                                 reviewing individual claims cases and making allowance for claims
                                                                                    incurred but not reported, using past experience and trends adjusted
Compliance with Statement of Standard Accounting Practice (SSAP) 19,                for foreseeable events.
“Accounting for Investment Properties” requires departure from the
requirements of the Companies Act 2006 relating to depreciation and                 Case estimates are set by experienced claims technicians, applying their
explanation of the departure is given in Accounting Policy 1(g) below.              skill and specialist knowledge to the circumstances of individual claims.
                                                                                    The ultimate cost of outstanding claims, including claims incurred but not
b) Basis of consolidation                                                           reported, is estimated by the Group’s actuaries who apply recognised
The results of subsidiary undertakings acquired or sold during the period           actuarial techniques considered appropriate for each portfolio, such
are included in the consolidated results from the date of acquisition or up         as chain ladder and Bornhuetter-Ferguson methods. These methods
to the date of disposal. On acquisition of a subsidiary undertaking, the            take into account, amongst other things, statistical analysis of the
Group’s share of its assets and liabilities that exist at the date of acquisition   development of the value and frequency of past claims and the results of
are recorded at their fair values reflecting their condition at that date.          analyses undertaken at the point of underwriting. Techniques considered
                                                                                    appropriate for specific portfolios include contract by contract analysis,
c) Cash flow statement and related party disclosures                                segmentation by subclass and stochastic analysis. Classes of business
The Group and company is included in the consolidated financial                     are analysed at a level of detail appropriate to their materiality. Allowance
statements of QBE Insurance Group Limited, which are publicly available.            is made for changes or uncertainties which may create distortions in the
Consequently, the Group and company have taken advantage of the                     underlying statistics or which might cause the cost of unsettled claims to
exemption from preparing cash flow statements allowed under Financial               increase or decrease when compared with the cost of previously settled
Reporting Standard (FRS) 1 (revised 1996). The Group and company are                claims, for example, one-off occurrences and changes in mix of business,
also exempt under FRS 8 from disclosing related party transactions with             policy conditions or the legal environment. The best estimate of reserves
other entities that are wholly owned by QBE Insurance Group Limited.                for the Group is produced and reviewed by a combination of internal and
                                                                                    external actuarial review and is then assessed by QBE management with
d) Basis of accounting for insurance                                                input from underwriting and claims experts.
The result is determined on an annual basis whereby the incurred cost
of claims, commissions and related expenses are charged against the                 As provisions for claims outstanding are based on information which
earned proportion of premiums, net of reinsurance, as described below.              is currently available, the eventual outcome may vary from the original
                                                                                    assessment depending on the nature of information received or
i) Premiums written                                                                 developments in future periods. For certain classes of business including
Premiums written comprise premiums on contracts incepted during the                 liability and other long-tail classes written by the Group, claims may not
financial year, together with adjustments made in the year to premiums              be apparent for many years after the event giving rise to the claim has
written in prior years. Premiums are shown gross of commissions payable             happened. These classes will typically display greater variation between
to intermediaries and exclude taxes and duties levied on them. Estimates            initial estimates and final outcomes. Differences between the estimated
are included for premiums due but not yet received or notified, less an             cost and subsequent re-estimation or settlement of claims are reflected
allowance for cancellations.                                                        in the technical account for the year in which these claims are
                                                                                    re-estimated or settled.
ii) Unearned premiums
Unearned premiums represent the proportion of premiums written in the               Provisions are calculated gross of any reinsurance recoveries. A separate
year that relate to the unexpired terms of policies in force at the balance         estimate is made of the amounts that will be recoverable from reinsurers
sheet date, calculated on the basis of established earnings patterns.               based upon the gross provisions and having due regard to collectability.

iii) Acquisition costs                                                              vi) Unexpired risks provision
A portion of acquisition costs, which represent commission and other                Provisions are made for any deficiencies arising when unearned
related expenses, is deferred in recognition that it represents a future            premiums, net of associated acquisition costs, are insufficient to meet
benefit. Deferred acquisition costs are measured at the lower of cost and           expected claims and expenses after taking into account future investment
recoverable amount and amortised over the period in which the related               return on the investments supporting the unearned premiums provision
premiums are earned.
                                                                                          QBE European Operations plc Annual report 2011                     51




1 Accounting policies continued
and unexpired risks provision. The expected claims are calculated having       fair values of Group’s share of the net identifiable assets acquired and is
regard to events that have occurred prior to the balance sheet date.           capitalised in the balance sheet at cost and amortised through the profit
                                                                               and loss account over 20 years. Carrying values are reviewed regularly
Unexpired risk surpluses and deficits are offset where business classes        for signs of impairment. The gain or loss on any subsequent disposal
are managed together.                                                          of subsidiary or associated undertakings will include any attributable
                                                                               unamortised goodwill.
vii) Equalisation provision
Amounts are set aside as equalisation provisions in accordance with            Other goodwill relates to the discounting of technical provisions
the Financial Services Authority Handbook for the purpose of mitigating        arising from the fair value exercise carried out following acquisitions.
exceptionally high loss ratios in future years. The amounts provided are       Its amortisation period is based on the class of business, the historic
not liabilities because they are in addition to the provisions required to     settlement rate and the consideration of whether the historic settlement
meet the anticipated ultimate cost of settlement of outstanding claims         pattern would be appropriate into the future. The settlement period was
at the balance sheet date. Notwithstanding this, they are required by          estimated by modelling the settlement patterns of the underlying claims
Schedule 3 to SI 2008/410 to be included within technical provisions.          and related reinsurance recoveries.

viii) Reinsurance to close (RITC)                                              The cost of purchased syndicate participation is amortised over 20 years
Following the end of the third year, the underwriting account of each          from the start of the first underwriting year, being management’s best
Lloyd’s syndicate is normally closed by reinsurance into the following         estimate of its useful economic life.
year of account. The amount of the RITC premium is determined by the
managing agent, generally by estimating the cost of claims notified but        The cost of renewal rights are written off over five years and other
not settled together with the estimated cost of claims incurred but not        intangible assets over ten years, from the acquisition date, being
reported at that date and claims handling costs.                               management’s best estimate of their useful economic life.

To the extent that the Group has increased or decreased its participation      Amortisation of other goodwill is included in other technical charges in
in a syndicate from one year of account to the next, the RITC paid is          the technical account. Amortisation of other intangible assets is included
treated as a portfolio transfer from the closing year to the receiving year.   in other charges in the non-technical account.
The share of the RITC receivable is recognised as income in the period
that the RITC contract is concluded, together with related claims incurred     g) Tangible assets
under the contract.                                                            Tangible assets are stated at cost less depreciation, with the exception
                                                                               of owner occupied property which is stated at its revalued amount.
The payment of an RITC premium does not eliminate the liability of the         Cost includes the original purchase price of the asset and the costs
closed year for outstanding claims. If the reinsuring syndicate was unable     attributable to bringing the asset to its working condition for its intended
to meet its obligations and other elements of Lloyd’s chain of security        use. Depreciation is provided at rates calculated to write off the cost
were to fail, then the closed underwriting account would have to settle the    less estimated residual value in equal amounts over the estimated useful
outstanding claims. The directors consider that the likelihood of such a       lives of the tangible assets. No depreciation is provided on assets under
failure of the RITC is remote and consequently the RITC has been deemed        construction. Each asset’s estimated useful life, residual value and
to settle liabilities outstanding at the closure of an underwriting account.   method of depreciation are reviewed and adjusted if appropriate at
                                                                               each year end.
ix) Outwards reinsurance
Outwards reinsurance premiums written relate to business ceded during          The estimated lives are as follows:
the year, including an estimate of any adjustment premiums payable,
together with any differences between estimates in the prior years and         Office equipment                   from three to ten years
that actually ceded. Outwards premiums are recognised as earned over           Computer equipment                 from three to ten years
the period of the policy having regard to the incidence of risk. Policies      Motor vehicles                     five years
that respond with reference to the attachment point are earned in line         Leasehold improvements             life of lease
                                                                                                                                                                   Financial statements




with the related inwards written premiums. Policies that respond in
relation to the date of loss are earned on a time apportionment basis          A review for impairment of a tangible asset is carried out if events or
unless there is a marked unevenness in the incidence of risk over              changes in circumstances indicate that the carrying amount of the
the period of cover, when a basis which reflects the profile of risk is        tangible asset may not be recoverable. The recoverable amount is the
used. The unexpired proportion of the outwards premiums at the                 higher of its fair value less costs to sell and its value in use. If the carrying
balance sheet date is carried forward as reinsurers’ share of unearned         value exceeds the recoverable amount the carrying value is reduced
premiums provision.                                                            by writing the difference to the profit and loss account in that period.

e) Expenses                                                                    Investment properties included in land and buildings are valued at open
Acquisition costs, general overheads and other expenses are charged            market valuation. Full valuations are made by independent, professional
as incurred to the profit and loss technical account, net of the change        qualified valuers every year. The aggregate surplus or deficit on
in deferred acquisition costs. Investment expenses are charged to the          revaluation is taken to the non-technical account.
profit and loss non-technical account.
                                                                               In accordance with SSAP 19, no depreciation is provided in respect of
f) Intangible assets                                                           freehold investment properties and leasehold investment properties with
Goodwill represents the excess of the cost of an acquisition over the          over 20 years to run. The requirement of the Companies Act 2006 is to
                                                                                        QBE European Operations plc Annual report 2011                  52




Notes to the financial statements
continued
For the year ended 31 December 2011


1 Accounting policies continued
depreciate all properties, which conflicts with SSAP 19. The directors        For qualifying hedges, the fair value gain or loss associated with the
consider that, as these properties are held for investments, to depreciate    effective portion of the hedge is recognised initially directly in reserves
them would not give a true and fair view, hence it is necessary to adopt      and transferred to the profit and loss account in the period when the
SSAP 19.                                                                      hedged item will affect profit or loss. The gain or loss on any ineffective
                                                                              portion of the hedging instrument is recognised in the profit and loss
h) Taxation                                                                   account immediately. When a hedging instrument expires or is sold,
The charge for taxation is based on the result for the year adjusted for      or when a hedge no longer meets the criteria for hedge accounting,
disallowable items. Deferred taxation is measured on an undiscounted          any cumulative gain or loss existing in equity at that time remains in
basis at the tax rates that are expected to apply in the periods in which     reserves and is recognised when the hedged item affects the profit and
timing differences reverse, based on tax rates and laws enacted or            loss account. When a transaction is no longer expected to occur, the
substantively enacted at the balance sheet date. Deferred tax assets are      cumulative gain or loss that was recognised in reserves is recognised
recognised to the extent that it is regarded as more likely than not that     immediately through the profit and loss account.
they will be recovered.
                                                                              k) Financial liabilities
i) Investments                                                                Creditors are initially recognised at fair value, net of directly attributable
Except where noted below, all investments are designated as fair value        transaction costs and are subsequently stated at amortised cost through
through profit and loss on initial recognition. They are initially recorded   the profit and loss account using the effective interest method. The
at fair value, being the cost of acquisition excluding transaction costs      exception being derivatives are initially recognised at fair value on the date
and are subsequently remeasured to fair value at each reporting date.         on which a derivative contract is entered into and are subsequently stated
Financial assets are managed on a fair value basis in accordance with         at fair value determined using generally accepted valuation techniques,
the Group’s documented investment strategy.                                   including the use of forward exchange rates for the valuation of forward
                                                                              foreign exchange contracts.
Listed investments are stated at fair value on current bid prices quoted
by the relevant exchanges. Unlisted investments are carried at the            l) Shares in Group undertakings
directors’ estimate of the current fair value.                                Shares in Group undertakings are included in the company’s balance
                                                                              sheet at cost less any impairment, based on the directors having prudent
Derivatives are initially recognised at fair value on the date on which       regard for their likely realisable value. Dividends from Group undertakings
a derivative contract is entered into and are subsequently stated at          are taken into account when the right to receive payment is established,
fair value determined using generally accepted valuation techniques,          for interim dividends, when they are paid and, for final dividends, when
including the use of forward exchange rates for the valuation of forward      they are approved by shareholders.
foreign exchange contracts.
                                                                              m) Investment income
Loans to Group undertakings are stated at amortised cost converted            Interest income is recognised on an accruals basis. Dividends are
at the relevant exchange rates at balance sheet date.                         recognised when the right to receive payment is established. Investment
                                                                              income includes realised and unrealised gains or losses on financial
Financial assets are derecognised when the right to receive future            assets which are reported on a combined basis as fair value gains or
cash flows from the assets has expired, or has been transferred               losses on financial assets.
and the Group has transferred substantively all the risks and rewards
of ownership.                                                                 A transfer is made from the non-technical account to the technical account
                                                                              of the return on investments supporting the insurance technical provisions.
j) Hedging transactions
Derivatives held for risk management purposes which meet the criteria         n) Realised and unrealised gains and losses
specified in FRS 26 are accounted for using net investment in foreign         Realised gains and losses on investments carried at fair value through
operating hedge accounting or cash flow hedge accounting.                     profit and loss are calculated as the difference between net sales
                                                                              proceeds and purchase price.
When a financial instrument is designated as a hedge, the Group
formally documents the relationship between the hedging instrument            Unrealised gains and losses represent the difference between the
and hedged item as well as its risk management objectives and its             valuation of the investment at the balance sheet date and their purchase
strategy for undertaking the various hedging transactions. The Group          price, or if they have been previously valued, their valuation at the last
also documents its assessment, both at hedge inception and on an              balance sheet date, together with a reversal of unrealised gains and
ongoing basis, of whether the hedging instruments are highly effective        losses recognised in earlier accounting periods in respect of investment
in offsetting changes in cash flows of hedged items.                          disposals in the current year.

Hedge accounting is discontinued when:                                        All realised and unrealised gains and losses on investments are initially
                                                                              recorded in the profit and loss non-technical account. A transfer is made
•   it is determined that a derivative is not, or has ceased to be, highly    from the non-technical account to the technical account of the realised
    effective as a hedge;                                                     and unrealised gains and losses on investments supporting the insurance
                                                                              technical provisions.
•   the derivative expires, or is sold, terminated or exercised; or
                                                                              o) Foreign currency translations
•   the hedged item matures, is sold or repaid.                               The functional currency of the company is UK pound sterling (£). The
                                                                              company and Group present its accounts in thousands of pounds sterling.
                                                                                            QBE European Operations plc Annual report 2011                       53




1 Accounting policies continued
Transactions denominated in foreign currencies are translated into                represents the present value of the defined benefit obligation reduced
sterling at the rates of exchange prevailing at the time of the transactions.     by the fair value of scheme’s assets.
Assets and liabilities denominated in foreign currencies are translated into
sterling at the rates of exchange prevailing at the balance sheet date,           A surplus is only recognised if it is either recoverable from reductions
with the exception of non-monetary items which are maintained at historic         in future contributions, or if agreement is in place to recover it from
rates. The results of subsidiary undertakings and branches that have a            the scheme.
functional currency different from sterling are translated into sterling at
average rates of exchange. The subsidiary undertakings’ and branches’             q) Share based payments
assets and liabilities are translated at the balance sheet date rates of          The Group participates in a QBE wide equity settled, share based
exchange. Unclosed foreign exchange derivatives are marked to market              compensation plan. The fair value of the employee services received in
at year end date.                                                                 exchange for the grant of those instruments is recognised as an expense.
                                                                                  The total amount to be expensed over the vesting period is determined
Exchange gains or losses are recognised in the profit and loss non-               by reference to the fair value of the instruments granted, excluding the
technical account, including gains and losses on foreign exchange                 impact of any non-market vesting conditions. The fair value at grant date
derivatives, except those arising upon the revaluation of subsidiary              of the options and conditional rights is calculated using a binomial model.
undertakings and branches, which are included in the foreign currency             The fair value of each instrument is recognised evenly over the service
translation reserve and statement of total recognised gains and losses.           period ending at the vesting date. Non-market vesting conditions are
                                                                                  included in assumptions about the number of instruments that are
p) Pensions                                                                       expected to become exercisable.
The Group operates defined contribution pension schemes for certain
employees. The pension entitlement of employees is secured through                At each balance sheet date, the Group revises its estimates of the
contributions by the Group to a separately administered pension fund.             number of options and conditional rights that are expected to become
Payments are charged as expense as they fall due.                                 exercisable. The Group recognises the impact of the revision of original
                                                                                  estimates, if any, in the profit and loss technical account with a
The Group also operates four defined benefit pension schemes. The                 corresponding adjustment to reserves.
costs of the defined benefit pension schemes are determined using the
projected unit credit method. Actuarial gains and losses are recognised           r) Operating leases
in the statement of total recognised gains and losses in the year they            Costs in respect of operating leases are charged to the profit and loss
arise. The retirement benefit obligation recognised in the balance sheet          technical account on a straight line basis over the lease term.


2 Segmental analysis
a) Analysis by geographic area
By origin:
                                                               Gross premiums written                  Profit before taxation                       Net assets
                                                              2011                 2010             2011                    2010             2011                2010
                                                              £000                 £000             £000                    £000             £000                £000

United Kingdom                                         2,441,873          2,321,946              49,643             205,789        1,311,581             1,471,244
Other EU member countries                                551,756            369,889              31,348               29,933         366,385               411,777
Other countries                                           25,963              3,129               2,200              (22,559)         21,761               322,516
                                                       3,019,592          2,694,964              83,191             213,163        1,699,727             2,205,537


By destination:
                                                                                                                                                                         Financial statements




                                                                                                                                              Gross premiums written
                                                                                                                                             2011                 2010
                                                                                                                                             £000                 £000

United Kingdom                                                                                                                        763,278               718,096
Other EU member countries                                                                                                             385,740               421,835
North America                                                                                                                         158,709               215,025
Other countries                                                                                                                       763,649               571,329
                                                                                                                                   2,071,376             1,926,285
Reinsurance acceptances                                                                                                              948,216               768,679
                                                                                                                                   3,019,592             2,694,964
                                                                                          QBE European Operations plc Annual report 2011                 54




Notes to the financial statements
continued
For the year ended 31 December 2011


2 Segmental analysis continued
b) Analysis of gross premiums written, gross premiums earned, gross claims incurred, gross operating expenses and the
reinsurance balance
                                                                    Gross premiums      Gross premiums        Gross claims    Gross operating     Reinsurance
                                                                             written             earned           incurred          expenses          balance
2011                                                                           £000                £000               £000              £000             £000

Direct insurance:
Accident and health                                                        27,233             29,139             (10,152)           (18,801)         (3,499)
Motor (third party liability)                                             269,670            270,313            (210,911)           (61,446)          6,131
Marine, aviation and transport                                            287,402            295,554            (198,963)           (71,583)        (21,375)
Fire and other damage to property                                         382,483            349,502            (213,680)          (117,075)        (49,037)
Third party liability                                                     883,571            855,331            (506,498)          (269,471)          2,341
Credit and suretyship                                                      20,493             18,476                (375)            (6,115)         (5,268)
Other                                                                     105,463             96,582             (43,687)           (31,326)        (12,501)
                                                                       1,976,315           1,914,897         (1,184,266)           (575,817)        (83,208)

Reinsurance acceptances                                                1,043,277             996,954            (870,072)          (112,471)        (38,176)
Total                                                                  3,019,592           2,911,851         (2,054,338)           (688,288)       (121,384)


                                                                     Gross premiums      Gross premiums        Gross claims     Gross operating    Reinsurance
                                                                              written             earned           incurred           expenses         balance
2010                                                                           £000                £000               £000                £000            £000

Direct insurance:
Accident and health                                                        24,174             30,798              (17,396)           (13,223)         (3,886)
Motor (third party liability)                                             260,300            265,520            (207,033)            (79,449)         (6,838)
Marine, aviation and transport                                            276,049            269,562            (169,945)            (68,207)       (17,573)
Fire and other damage to property                                         322,186            328,067            (170,349)          (133,135)        (77,203)
Third party liability                                                     937,420            864,568            (495,139)          (214,146)        (32,590)
Credit and suretyship                                                      20,138             19,822                 (108)             (4,665)        (7,858)
Other                                                                      86,018             79,729              (40,502)             (2,276)      (17,790)
                                                                       1,926,285           1,858,066          (1,100,472)          (515,101)       (163,738)

Reinsurance acceptances                                                   768,679            747,003            (445,829)          (117,866)       (141,005)
Total                                                                  2,694,964           2,605,069          (1,546,301)          (632,967)       (304,743)


The reinsurance balance represents the (charge)/credit to the technical account from the aggregate of all items relating to reinsurance outwards.


3 Movements in prior years’ net claims provisions
During the year a positive/(adverse) run-off development was experienced in respect of the following portfolios:
                                                                                                                                           2011          2010
                                                                                                                                           £000          £000

Direct insurance:
Accident and health                                                                                                                      (10)          6,584
Motor (third party liability)                                                                                                         (1,757)          2,799
Marine, aviation and transport                                                                                                          (875)        35,084
Fire and other damage to property                                                                                                      1,344        (16,067)
Third party liability                                                                                                                (17,319)        74,038
Credit and suretyship                                                                                                                  9,890          (1,996)
Other                                                                                                                                (11,405)          9,284
                                                                                                                                     (20,132)       109,726

Reinsurance acceptances                                                                                                               50,741         35,005
Total                                                                                                                                 30,609        144,731
                                                                                         QBE European Operations plc Annual report 2011              55




4 Net operating expenses
                                                                                                                                          2011       2010
                                                                                                                                          £000       £000

Acquisition costs                                                                                                                  609,675       534,358
Changes in deferred acquisition costs                                                                                              (10,578)        (1,912)
Administrative expenses                                                                                                            101,982       114,155
                                                                                                                                   701,079       646,601
Reinsurance commissions and profit participation                                                                                   (93,413)       (80,837)
Other fee income                                                                                                                   (12,791)       (13,634)
                                                                                                                                   594,875       552,130



5 Employees
The average number of persons (including executive directors) employed by the Group for the year was:
                                                                                                                                      2011           2010
                                                                                                                                    Number         Number

Underwriting                                                                                                                         1,098         1,086
Claims                                                                                                                                 566           552
Administration                                                                                                                       1,058         1,097
                                                                                                                                     2,722         2,735


Total employee costs for the year were:
                                                                                                                                          2011       2010
                                                                                                                                          £000       £000

Wages and salaries                                                                                                                 172,706       188,352
Social security costs                                                                                                               19,568        20,966
Pension costs                                                                                                                       15,265        14,814
                                                                                                                                   207,539       224,132



6 Directors’ emoluments
                                                                                                                                          2011       2010
                                                                                                                                          £000       £000

Aggregate emoluments (excluding pension contributions)                                                                               6,091         6,989
Company pension contributions to money purchase schemes                                                                                   143        256
Compensation for loss of office                                                                                                            11           –


                                                                                                                                    Number         Number

Number of directors who are members of a money purchase scheme                                                                              4           5
                                                                                                                                                             Financial statements




                                                                                                                                          £000       £000

Highest paid director:
   Aggregate emoluments                                                                                                              2,885         2,991


During the year, nil (2010 seven) directors, including the highest paid director, exercised share options in the ultimate parent company.
                                                                                          QBE European Operations plc Annual report 2011                 56




Notes to the financial statements
continued
For the year ended 31 December 2011


7 Pension schemes
a) Defined benefit schemes
The company’s subsidiaries operate four defined benefit pension schemes. The Iron Trades scheme relates to former employees of QBE Insurance
(Europe) Limited and the Janson Green scheme relates to former employees of QBE Underwriting Limited. In addition, the QBE (Europe) Reinsurance
Ltd Pension & Life Assurance Plan (“QBE Re scheme”, relating to employees in Ireland) became part of the Group during 2009 and the Secura NV
scheme became part of the Group in 2010 on the acquisition of Secura NV. All four schemes were part of the Group for the whole year.

The pension contributions relating to each scheme are assessed in accordance with the advice of independent qualified actuaries so as to spread
the cost over the service lives of employees.

Three schemes have been closed to future benefit accruals, the two UK schemes on 31 May 2006 and the Irish scheme on 31 December 2006.
The Group retains the risk on employee service in these defined benefit schemes up until those dates. During 2011, full actuarial reviews were performed
by independent qualified actuaries of both UK schemes. The reviews found that the Iron Trades scheme was in deficit and the Janson Green scheme
in surplus. As a result, the company agreed to make annual payments of £560,000 to the Iron Trades scheme for the next two years. The actuarial
assumptions are stricter than those required to be used for these accounts. In late 2009 an actuarial review on the Irish scheme was performed by
independent qualified actuaries and identified the scheme to be in deficit. At the balance sheet date the Group has not agreed to make contributions
to the Irish scheme.

At the time of the acquisition of Secura NV their pension scheme was valued as part of the fair value exercise by independent external actuary.

The actuarial valuations were reviewed and updated by independent external actuaries as at 31 December 2011 for the purposes of inclusion in
these accounts.

The principal actuarial assumptions used at the year end were:
                                                                                                                                           2011          2010
                                                                                                                                             %             %

Rate of increase to pensions in payment accrued before 1 September 2002 in Janson Green scheme                                          5.0            5.00
Rate of increase in other pensions in payment                                                                                     2.95–3.05       1.85–3.45
Expected return on plan assets                                                                                                    4.14–5.50       4.15–6.45
Rate of increase in deferred pensions                                                                                             1.75–2.05       1.85–3.45
Discount rate                                                                                                                     4.00–4.70       1.50–5.40
Inflation                                                                                                                         2.00–3.05       2.00–3.55


The assumption as to the rate of increase in salaries is no longer applicable, as benefits are no longer based on the final salary.

The valuation of the schemes’ liabilities has been determined using the Projected Unit Method.

In addition, an assumption is made as to the life expectancy of members of the schemes. In conjunction with the scheme actuaries, the mortality tables
used to calculate the liabilities are the PXA92 Long Cohort tables, projected forward based on the year of birth.

The scheme assets do not include any of the Group’s own financial instruments or any property occupied by, or other assets used by, the Group.

The following disclosures relate to the four schemes combined.
                                                                                                                                 Market value     Market value
                                                                                                                                         2011            2010
                                                                                                                                         £000            £000

Equities                                                                                                                             67,607         64,603
Bonds                                                                                                                               226,350        197,700
Others                                                                                                                               10,120         10,453
Total market value of assets                                                                                                        304,077        272,756


The overall expected long-term rate of return on fund assets is based on historical and future expectations of returns for each of the major asset classes
as well as the expected and actual allocation of scheme assets to these major classes.
                                                                                                                                           2011          2010
                                                                                                                                           £000          £000

Analysis of the amount credited to other finance income:
Expected return on scheme assets                                                                                                     14,407          13,804
Interest on scheme liabilities                                                                                                      (15,085)        (14,316)
Restriction on expected return under FRS 17                                                                                            (464)              –
Net charge                                                                                                                            (1,142)           (512)
                                                                                      QBE European Operations plc Annual report 2011                  57




7 Pension schemes continued
a)   Defined benefit schemes continued
                                                                                                                                       2011           2010
                                                                                                                                       £000           £000

Analysis of the amount recognised in the statement of total recognised gains and losses (STRGL):
Actuarial gains/(losses)                                                                                                         35,370            (7,740)
Restriction on expected return under FRS 17                                                                                         464                 –
Restriction on recognising surplus under FRS 17                                                                                 (32,746)                –
Gain/(Loss) recognised in the STRGL                                                                                               3,088            (7,740)


The cumulative amount of actuarial gains and losses recognised in the statement of total recognised gains and losses is a loss of £53,713,000
(2010 £56,801,000).

History of assets and liabilities
                                                                            2011              2010               2009                  2008           2007
                                                                            £000              £000               £000                  £000           £000

Fair value of scheme assets                                             304,077           272,756            251,433            229,606          242,574
Present value of scheme liabilities                                    (277,657)         (285,324)          (255,262)          (216,296)        (227,048)
Surplus/(deficit) at 31 December                                         26,420           (12,568)            (3,829)            13,310           15,526
Surplus not recognised                                                  (32,746)                –                  –            (13,310)         (15,526)
Deficit per balance sheet                                                 (6,326)         (12,568)            (3,829)                    –               –
Related deferred tax asset                                                     –                –                223                     –               –
Net pension liability                                                     (6,326)         (12,568)            (3,606)                    –               –


                                                                                                                                       2011           2010
                                                                                                                                       £000           £000

Wholly funded defined benefit obligation at 1 January                                                                          (285,324)        (255,262)
Service cost                                                                                                                       (345)                 (6)
Interest cost                                                                                                                   (15,085)          (14,316)
Actuarial gains/(losses)                                                                                                         14,237           (17,464)
Benefits and expenses paid                                                                                                        8,315            10,187
Arising from the transfer in of acquired subsidiaries                                                                                 –             (8,708)
Foreign exchange                                                                                                                    545                245
Wholly funded defined benefit obligation at 31 December                                                                        (277,657)        (285,324)


Fair value of scheme assets at 1 January                                                                                        272,756         251,433
Expected return on scheme assets                                                                                                 14,407           13,804
Actuarial gain on scheme assets                                                                                                  21,133            9,725
Benefits and expenses paid                                                                                                       (8,315)         (10,187)
Employer contributions                                                                                                            4,436            3,415
Arising from the transfer in of acquired subsidiaries                                                                                 –            4,752
Foreign exchange                                                                                                                   (340)            (186)
                                                                                                                                                               Financial statements




Fair value of scheme assets at 31 December                                                                                      304,077         272,756


Net surplus/(deficit) at 31 December                                                                                             26,420          (12,568)
Surplus not recognised                                                                                                          (32,746)               –
Deficit in the balance sheet at 31 December                                                                                       (6,326)        (12,568)
                                                                                            QBE European Operations plc Annual report 2011                 58




Notes to the financial statements
continued
For the year ended 31 December 2011


7 Pension schemes continued
a) Defined benefit schemes continued
History of experience gains and losses
(Excludes restriction on recognising surplus)
                                                                                  2011              2010               2009                  2008          2007
                                                                                  £000              £000               £000                  £000          £000

Difference between the expected and actual return
on scheme assets
    Amount                                                                      21,133            9,725              9,502             (21,694)          (1,951)
    Percentage of scheme assets                                                  6.9%             3.6%               3.8%                (9.4%)           (0.8%)

Experience gain/(loss) on scheme liabilities
   Amount                                                                       14,237           (1,563)             2,820               1,472             (510)
   Percentage of the present value of liabilities                                4.7%             0.6%               1.1%                0.7%            (0.2%)

Total actuarial gain/(loss) recognised in the STRGL
   Amount                                                                       34,906           (7,740)           (17,868)             (6,040)         11,400
   Percentage of the present value of liabilities                               11.5%             (2.7%)             (7.0%)              (2.8%)          4.8%


b) Defined contribution schemes
For those members of staff who are not members of the defined benefit schemes, the Group operates defined contribution schemes. The pension
entitlement of employees is secured through contributions to separately administered pension funds as appropriate. There are no outstanding pension
accruals or prepayments for these schemes as at 31 December 2011 (2010 nil). The charge for the year was £14,242,000 (2010 £14,296,000).

The Group has no significant exposure to any other post-retirement benefits obligations other than those disclosed in note 27.


8 Share based payments
a) Employee Share and Option Plan                                                 Currently these are the following schemes operating within the Plan:
The Group’s and company’s ultimate parent undertaking and controlling
entity, QBE Insurance Group Limited, at its 1981 AGM, approved the                i) Deferred equity plans
issue of shares from time to time under an Employee Share and Option              QBE Incentive Scheme
Plan (the Plan), up to 5% of the issued ordinary shares in its capital.           The QBE Incentive Scheme (QIS) is an at-risk structure that comprises
Any full-time or part-time employee of the Group who is offered shares            cash and deferred equity awards. It came into effect from 1 January 2010
or options pursuant to the offer document of the Plan is eligible to              and is applicable to deferred equity awards made in March 2011
participate in the Plan. This includes employees employed by the Group.           and thereafter.
The company does not directly employ any staff.
                                                                                  Under the QIS, the directors can issue conditional rights to shares
Under the Plan, ordinary shares of QBE Insurance Group Limited are                to executives and key senior employees of QBE EO who have already
offered at the weighted average market price during the five trading days         achieved predetermined performance targets. The maximum award
up to the date of the offer. Likewise, the exercise price for options offered     restricted to the lesser of 66.67% of the cash award in that year or 100%
under the Plan is the weighted average market price during the five               of base (cash) salary as at 31 December in the financial year prior to the
trading days up to the date of the offer.                                         year in which the cash award was paid. The deferred equity award is
                                                                                  used as the basis for calculating the number of conditional rights with
In accordance with the terms of the Plan, for awards made up to and               rights equivalent to 60% of the award converted to shares after three
including March 2009 interest free loans were granted to employees                years and 60% after five years.
to subscribe for shares issued under the Plan. Prior to 20 June 2005,
the terms of the loans were either personal recourse or non-recourse.             Further shares are issued in relation to the conditional rights to reflect
With effect from 20 June 2005, only personal recourse loans are granted           dividends paid by QBE in the period commencing from the date of the
to employees to subscribe for shares under the Plan. The loans are                grant of the conditional rights.
repayable in certain circumstances as set out in the Plan, such as
termination of employment or breach of condition. Except for awards               The shares issued pursuant to the conditional rights are issued without
made under the Long-term Incentive Plan (see note 8(a)(iii)), the award of        payment being made by the recipient (i.e. at a nil exercise price).
options and interest free loans was discontinued for awards made after
March 2009.

The Group is charged, by QBE Insurance Group Limited, the accounting
cost of the options and awards issued to its employees, as calculated
using FRS 20 and it is this cost that appears in these financial statements.
                                                                                            QBE European Operations plc Annual report 2011                   59




8 Share based payments continued
a) Employee Share and Option Plan continued                                       •   Any options issued between 2005 and 2008 inclusive will generally be
i) Deferred equity plans continued                                                    exercisable after five years. They must be exercised within a 12 month
The shares issued pursuant to the conditional rights will only vest if the            period after vesting. Interest free personal recourse loans are granted
individual remains in the Group’s service throughout the vesting period.              on the terms permitted by the Plan as described above to persons
The directors have the discretion to pay cash in lieu of shares in certain            who hold options to fund the exercise of options.
circumstances such as death, disability, redundancy or retirement if the
individual is not subject to disciplinary proceedings or notice on that date.     The shares issued pursuant to the conditional rights and options will only
The ultimate vesting of the conditional rights is also contingent on there        be issued if the individual has remained in the QBE’s service throughout
being no material deterioration of the relevant entity’s return on equity         the vesting period (unless they leave due to redundancy, retirement
during the vesting period.                                                        through ill health or age, or death) and is not subject to disciplinary
                                                                                  proceedings or notice on that date.
Deferred Compensation Plan – legacy scheme applicable to the 2009
financial year                                                                    ii) Share Incentive Plan
The terms of the Deferred Compensation Scheme (DCP) applicable for                Generally, all full-time or part-time employees with a minimum of one
awards in March 2010 was as follows:                                              year’s service are invited to participate in the Share Incentive Plan (the
                                                                                  SIP). Under the SIP, directors can provide shares up to A$1,000 to
•   The directors and key senior employees of QBE EO were invited to              employees without payment being made by employees. The allocation
    participate in the DCP, under which they received conditional rights          of shares is based on the period of service. The shares are purchased
    to fully paid shares of QBE. The maximum deferred equity award                on market and held in trust for the employee for a minimum of three years
    was based on an amount which was the lesser of 66.67% of the                  or until cessation of employment, whichever is earlier. Further details are
    STI award earned in the financial year or 100% of base (cash) salary          provided in note 8(e) below.
    in the financial year immediately prior to the year in which the cash
    award was paid. The maximum DCP award was used as basis for                   iii) Long-term Incentive (LTI) Plan
    calculating the number of conditional rights, with rights equivalent          The LTI was introduced from 1 January 2010. Only the CEO of QBE EO
    to 60% of the award converted to shares after three years and 60%             is invited to participate. The LTI plan comprises an award of conditional
    after five years.                                                             rights to fully paid shares of QBE without payment, subject to a five year
                                                                                  tenure hurdle with vesting contingent upon the achievement of two future
Further shares were issued in relation to the conditional rights to reflect       performance hurdles as follows:
dividends paid by QBE in the period commencing from the date of the
grant of the conditional rights.                                                  •   50% of the award allocation will be contingent on the QBE’s average
                                                                                      diluted earnings per share increasing by a compound 7.5% per
The shares issued pursuant to the conditional rights will only vest if the            annum over the five year vesting period; and
individual has remained in the Group’s service throughout the vesting
period. The directors have the discretion to pay cash in lieu of shares in        •   50% of the award allocation will be contingent on the QBE’s average
certain circumstances such as death, disability, redundancy or retirement             return on equity and combined operating ratio being in the top 10%
if the individual is not subject to disciplinary proceedings or notice as of          of the top 50 largest global insurers and reinsurers as measured by
that date.                                                                            net earned premium for the five year vesting period.

Deferred Compensation Plan – legacy scheme applicable to the 2008                 Further shares will be issued in relation to the conditional rights to reflect
and prior financial years                                                         dividends paid on ordinary shares of the QBE in the period commencing
Senior management were invited to participate in the DCP. Under the               from the date of the grant of the conditional rights.
DCP, the directors can issue conditional rights to shares and grant
options to senior management who have already achieved predetermined              The QBE remuneration committee will continue to exercise discretion
performance criteria. The terms of the DCP may vary to take into account          when determining the vesting of awards under the LTI. The committee
the requirements and market conditions of the locations of senior                 has the discretion to allocate a pro-rata amount in cash in lieu of shares in
                                                                                                                                                                   Financial statements




management, but the general terms of the DCP are set out below.                   certain circumstances such as death, disability, redundancy or retirement.
                                                                                  Then ultimate vesting of the conditional rights is also contingent on there
•   The conditional rights entitled relevant employees to receive shares on       being no material subsequent deterioration of the QBE’s return on equity
    the third anniversary and the fifth anniversary of the grant of the rights.   during the vesting period.
    Further shares are granted in relation to the conditional rights to reflect
    dividends paid on ordinary shares of QBE in the period commencing
    from the date of the grant of the conditional rights. The shares issued
    pursuant to the conditional rights are issued without payment being
    made by senior management (i.e. at a nil exercise price).
                                                                                      QBE European Operations plc Annual report 2011                   60




Notes to the financial statements
continued
For the year ended 31 December 2011


8 Share based payments continued
b) Employee options
During the year one qualifying employee of this Group (2010 one) was granted options over ordinary shares of QBE with a total market value of
A$348,000 (2010 A$410,000), based on the quoted market price at the date the options were granted. The weighted average fair value of options
granted during the year ended 31 December 2011 was A$nil (2010 A$1.88).

The market value of the options outstanding at the balance sheet date was A$36,991,000 (2010 A$78,574,000), calculated by reference to the quoted
market value of the underlying shares at that date.

Details of the number of employee options granted, exercised and forfeited or cancelled during the year, including those issued under the DCP,
were as follows:

2011
                                                        Exercise        Balance at                                             Cancelled/         Balance at
                                                           price         1 January          Granted          Exercised           forfeited     31 December
Grant date                                                    A$              2011       in the year        in the year        in the year             2011

2 March 2006                                             20.44          939,934                 –           (885,657)           (54,277)               –
2 March 2007                                             32.68          704,534                 –                  –           (117,104)         587,430
2 March 2007                                             20.44           20,000                 –            (20,000)                 –                –
4 March 2008                                             20.44           20,000                 –            (20,000)                 –                –
4 March 2008                                             24.22        1,010,356                 –                  –           (164,612)         845,744
6 March 2009                                             17.57        1,586,689                 –                  –           (221,514)       1,365,175
6 March 2009                                             20.44           20,000                 –                  –                  –           20,000
5 March 2010                                             20.44           20,000                 –                  –                  –           20,000
7 March 2011                                             20.44                –            20,000                  –                  –           20,000
                                                                      4,321,513            20,000           (925,657)          (557,507)       2,858,349
Weighted average exercise price A$                                         22.27            20.44              20.44               22.99              22.7


The weighted average share price at the date of exercise of options during the year was A$18.09 (2010 A$21.05). The weighted average remaining
contractual life of total options outstanding at 31 December 2011 was 2.4 years (2010 4.69 years).

Employee options outstanding at 31 December 2011 were as follows:

Year of expiry                                                                                                    DCP                  Other   Total options

2012                                                                                                                             60,000           60,000
2013                                                                                                        587,430                              587,430
2014                                                                                                        845,744                              845,744
2015                                                                                                      1,365,175                            1,365,175
                                                                                                          2,798,349              60,000        2,858,349
Vested and exercisable at 31 December 2011                                                                           –                    –                 –


The future performance options have been issued subject to the achievement of specific performance criteria.
                                                                                                  QBE European Operations plc Annual report 2011                               61




8 Share based payments continued
b) Employee options continued
Details of the number of options granted, exercised and forfeited or cancelled during the prior year, including those issued under the DCP,
were as follows:

2010
                                                                               Balance at                                                             Cancelled/         Balance at
                                                      Exercise price            1 January                 Granted in            Exercised in          forfeited in    31 December
Grant Date                                                       A$                 2010                    the year               the year              the year             2010

3 March 2004                                                11.08              20,000                          –                    –                  (20,000)               –
3 March 2005                                                 8.04             135,583                          –             (135,583)                       –                –
3 March 2005                                                11.08             150,310                          –             (150,310)                       –                –
3 March 2005                                                14.85           1,162,313                          –           (1,072,032)                 (90,281)               –
2 March 2006                                                20.44           1,185,013                          –                    –                (245,079)          939,934
2 March 2007                                                32.68             873,920                          –                    –                (169,386)          704,534
2 March 2007                                                20.44              20,000                          –                    –                        –           20,000
4 March 2008                                                20.44              20,000                          –                    –                        –           20,000
4 March 2008                                                24.22           1,234,479                          –                    –                (224,123)        1,010,356
6 March 2009                                                17.57           1,897,597                          –                    –                (310,908)        1,586,689
6 March 2009                                                20.44              20,000                          –                    –                        –           20,000
5 March 2010                                                20.90                   –                     20,000                    –                        –           20,000
                                                                            6,719,215                     20,000           (1,357,925)              (1,059,777)       4,321,513

Weighted average exercise price A$                                               20.46                      20.90                   13.75                21.70              22.27


Employee options outstanding at 31 December 2010 were as follows:

Year of expiry                                                                                                                         DCP                 Other       Total options

2011                                                                                                                               7,871               60,000            67,871
2012                                                                                                                             936,400               20,000           956,400
2013                                                                                                                             711,294                    –           711,294
2014                                                                                                                           1,023,813                    –         1,023,813
2015                                                                                                                           1,562,135                    –         1,562,135
                                                                                                                               4,241,513               80,000         4,321,513
Vested and exercisable at 31 December 2010                                                                                                –                     –                 –


c) Conditional rights
Details of the number of employee entitlements to conditional rights to ordinary shares under the DCP granted, vested and transferred to employees
during the year were as follows:

2011
                                                    Fair value                                                                       Vested and
                                                   per right at         Balance at                                Dividends          transferred                         Balance at
                                           Date     grant date           1 January             Granted            attaching         to employee          Cancelled    31 December
                                                                                                                                                                                       Financial statements




Grant date                          exercisable             A$                2011          in the year          in the year          in the year       in the year           2011

4 March 2008                  3 March 2011             24.22             705,770                  –                   750             (647,873)         (58,647)               –
6 March 2009                  5 March 2012             17.57           1,057,030                  –                75,171                    –         (153,726)         978,475
6 March 2010                  4 March 2013             20.90             589,086                  –                44,907                    –          (85,952)         548,041
6 March 2010                  4 March 2015             20.90             574,090                  –                44,044                    –          (82,233)         535,901
7 March 2011                  6 March 2014             20.90                   –            602,044                49,732                    –          (50,491)         601,285
1 July 2011                   31 March 2014            17.93                   –            593,008                48,937                    –          (50,541)         591,404
1 July 2011                   31 March 2016            17.48                   –             10,000                   464                    –                –           10,464
                                                                       2,925,976       1,205,052                  264,005             (647,873)        (481,590)      3,265,570


The weighted average share price at the date of vesting of conditional rights during the year ended 31 December 2011 was A$17.42 (2010 A$21.25).
The weighted average fair value of conditional rights granted during the year ended 31 December 2011 was A$17.82 (2010 A$20.90).
                                                                                                   QBE European Operations plc Annual report 2011                              62




Notes to the financial statements
continued
For the year ended 31 December 2011


8 Share based payments continued
c) Conditional rights continued
Details of the number of employee entitlements to conditional rights to ordinary shares under the DCP granted, vested and transferred to employees
during the prior year were as follows:

2010
                                                        Fair value                                                               Vested and
                                                       per right at     Balance at                              Dividends         transferred                          Balance at
                                                Date   grant date        1 January              Granted          attaching      to employee         Cancelled       31 December
Grant date                               exercisable            A$           2010            in the year       in the year         in the year     in the year              2010

2 March 2007                    1 March 2010              32.68         504,696                    –              301           (456,853)           (48,144)               –
4 March 2008                    3 March 2011              24.22         855,866                    –                –                  –          (150,096)          705,770
6 March 2009                    5 March 2012              17.57       1,266,475                    –                –                  –          (209,445)        1,057,030
6 March 2010                    4 March 2013              20.90               –              644,695           17,884                  –            (73,493)         589,086
6 March 2010                    4 March 2015              20.90               –              621,120           17,421                  –            (64,451)         574,090
                                                                      2,627,037          1,265,815             35,606           (456,853)         (545,629)        2,925,976


d) Fair value of options and conditional rights
The fair value of both options and conditional rights is determined using a binomial model. The fair value is earned evenly over the period between grant
and vesting. For those options and conditional rights granted during the year to 31 December 2011, the following significant assumptions were used:

                                                                                                                     Options                              Conditional rights
                                                                                                            2011                 2010                2011                      2010

Share price on grant date                                                              A$                  17.41               20.50         13.67–19.00                 20.50
Fair value of instrument at grant date                                                 A$                    Nil                1.88         14.05–18.44                 20.90
Risk free interest rate                                                                 %                   4.75                4.25                 4.75                 4.25
Expected share price volatility                                                         %                   20.0                25.0                 20.0                 25.0
Expected dividend yield                                                                 %                    7.0                 5.0                  7.0                  5.0
Expected life of instrument                                                          Years                   0.1                 1.0              1.2–5.0              3.0–5.0


Some of the assumptions including expected share price volatility are based on historical data which is not necessarily indicative of future trends.
Reasonable changes in these assumptions would not have a material impact on the amounts recognised in the financial statements.

e) Share Incentive Plan
The SIP was introduced during 2005 and is a global reward scheme available to eligible permanent employees who have met minimum service
conditions at the annual grant date. Under the terms of the SIP, eligible employees may be offered up to A$1,000 of fully paid ordinary shares in QBE
Insurance Group Limited annually for no cash consideration. The market value of shares issued under the terms of the SIP is expensed in the period
in which the shares are granted. The total number of shares issued to participating employees in the year was 54,166 (2010 48,278). The weighted
average market price on the issue date was A$13.85 (2010 A$19.25).

f) Share based payment expenses
Total expenses arising from share based payment transactions during the year included in expenses were as follows:
                                                                                                                                                     2011                      2010
                                                                                                                                                     £000                      £000

Options provided under the DCP                                                                                                                     2,314                 2,779
Conditional rights provided under the DCP                                                                                                         10,280                11,973
Shares provided under the SIP                                                                                                                        381                   489
                                                                                                                                                  12,975                15,241
                                                                          QBE European Operations plc Annual report 2011             63




9 Investment income, expenses and charges
a)   Income from investments other than participating interests
                                                                                                                           2011      2010
                                                                                                                           £000      £000

Dividend income                                                                                                       3,936         6,133
Interest receivable:
    From Group undertakings                                                                                          92,169        86,391
    Other                                                                                                           136,776       115,148
Gains on realisation of investments                                                                                       –        13,483
Foreign currency exchange gains                                                                                       9,608        16,318
Other investment income                                                                                               1,649
                                                                                                                    244,138       237,473


b) Investment expenses and charges
                                                                                                                           2011      2010
                                                                                                                           £000      £000

Investment management expenses                                                                                       19,608        29,619
Interest payable:
    To Group undertakings                                                                                           101,194        57,957
    Other                                                                                                            15,055        23,143
Losses on realisation of investments                                                                                  1,822         2,613
                                                                                                                    137,679       113,332



10 Profit on ordinary activities before tax
Profit on ordinary activities before taxation is stated after charging:
                                                                                                                           2011      2010
                                                                                                                           £000      £000

Auditors’ services:
   Auditors’ remuneration in respect of audit services                                                                     141       157
Other services:
   Audit of the company’s subsidiaries, pursuant to legislation                                                       1,053         1,019
   Other services supplied pursuant to legislation                                                                      390           387
   Services relating to taxation                                                                                        197           428
   Other services not covered above                                                                                     727           239
Payments on operating leases – land and buildings                                                                    14,011        13,135
Payments on operating leases – other                                                                                    271           240
Depreciation:
   Charge in year                                                                                                    25,831        14,358
Net loss on disposal of fixed assets – other                                                                             79           123
                                                                                                                                            Financial statements
                                                                                        QBE European Operations plc Annual report 2011               64




Notes to the financial statements
continued
For the year ended 31 December 2011


11 Tax on profit on ordinary activities
                                                                                                                                         2011        2010
Analysis of (credit)/charge in period                                                                                                    £000        £000

Current tax:
UK Corporation Tax                                                                                                                 12,643        26,757
Adjustments to tax in respect of prior period                                                                                    (173,947)          (657)
Double tax relief                                                                                                                       –         (1,704)
                                                                                                                                 (161,304)       24,396
Foreign tax                                                                                                                        20,729        11,074
Adjustments to tax in respect of prior period                                                                                      (6,640)          382
                                                                                                                                   14,089        11,456
Total current tax                                                                                                                (147,215)       35,852
Deferred tax:
Origination and reversal of timing differences                                                                                    (21,033)       (25,109)
Impact from change in UK tax rate                                                                                                 (17,958)         (2,545)
Adjustments to tax in respect of prior period                                                                                     174,280         10,913
Total deferred tax                                                                                                                135,289        (16,741)
Tax (credit)/charge on profit on ordinary activities                                                                              (11,926)       19,111


Factors affecting tax (credit)/charge for the period
The current year charge for the period is lower (2010 lower) than the standard rate of corporation tax in the UK, 26.5% (2010 28%). The differences are
explained below:
                                                                                                                                         2011        2010
                                                                                                                                         £000        £000

Profit on ordinary activities before tax                                                                                           83,191       213,163
Profit on ordinary activities before tax multiplied by standard rate of UK corporation tax of 26.5% (2010 28%)                     22,045        59,686

Effects of:
Difference in tax rate                                                                                                                546            209
Expenses not deductible for tax purposes                                                                                            4,139            615
Income exempt from tax                                                                                                            (20,111)       (23,926)
Tax effect on foreign exchange expense                                                                                             27,465        (18,491)
Other timing differences                                                                                                              336         25,109
Other permanent differences                                                                                                         4,422          2,948
Overseas tax rate adjustments                                                                                                      (5,470)       (10,023)
Adjustments to tax in respect of prior period                                                                                    (180,587)          (275)
Current tax (credit)/charge for year                                                                                             (147,215)       35,852


The Group’s subsidiary undertaking, QBE Corporate Limited, has resubmitted its corporation tax returns for the years ended 31 December 2007, 2008
and 2009 following change in HM Revenue & Customs’ guidance. As a result, there are prior period timing adjustments included in the accounts.

During the year, as a result of the changes in the UK main corporation tax rate to 26% that was substantively enacted on 29 March 2011 and that was
effective from 1 April 2011 and to 25% that was substantively enacted on 5 July 2011 and that will be effective from 1 April 2012, the relevant deferred
tax balances have been remeasured.

Further reduction to the UK corporation tax rate were announced in the March 2012 Budget. The changes, which are expected to be enacted
separately each year, propose to reduce the rate to 22% by 1 April 2014. The changes had not been substantively enacted at the balance sheet date
and therefore are not recognised in these financial statements. Had they been substantively enacted they would have reduced the deferred tax liability
at the period end by £9.1 million. The impact of these changes in future periods will be dependent on the level of taxable profits in those periods.
                                                                                          QBE European Operations plc Annual report 2011                  65




12 Profit for the financial year
As permitted by section 408 of the Companies Act 2006, the company’s profit and loss account has not been included in these financial statements.
The company’s profit for the financial year was £382,363,000 (2010 £543,925,000).


13 Intangible assets
                                                                                                                     Purchased
                                                                                      Renewal            Other        syndicate              Total        Total
                                                         Goodwill     Intangible        rights         goodwill     participation            2011         2010
Group                                                      £000            £000          £000            £000               £000             £000         £000

Cost
At 1 January                                         167,960           1,300           3,308         179,098           59,716         411,382        365,894
Purchases during the year                                  –               –               –               –                –               –         46,944
Adjustment during the year                                 –               –               –               –                –               –          (1,456)
At 31 December                                       167,960           1,300           3,308         179,098           59,716         411,382        411,382
Amortisation
At 1 January                                          (46,602)           (494)        (1,654)       (126,763)         (25,975)       (201,488)       (186,729)
Amortisation during the year                            (8,630)          (135)          (827)          (2,886)          (3,172)       (15,650)         (14,759)
At 31 December                                        (55,232)           (629)        (2,481)       (129,649)         (29,147)       (217,138)       (201,488)
Net book value at 31 December                        112,728              671            827          49,449           30,569         194,244        209,894


Goodwill represents the difference between the cost of the acquired entity and the aggregate of the fair values of that entity’s identifiable assets
and liabilities. An element of this balance (described as “other goodwill” above) relates to the discounting of certain technical provisions arising from
the fair value exercises carried out following the acquisitions of QBE Reinsurance (UK) Limited in 1996, QBE Holdings (Europe) Limited in 2000,
QBE Insurance Company (UK) Limited in 2000, QBE Reinsurance (Europe) Limited in 2009 and Secura NV in 2010. These technical provisions were
discounted solely to satisfy the requirements of FRS 7 “Fair Values in Acquisition Accounting”. The criteria adopted for estimating the period that will
elapse before the claims are settled were based on the class of business, the historic settlement rate and the consideration of whether the historic
settlement pattern would be appropriate into the future. The period of time which will elapse before the technical provisions are settled was estimated
by modelling the settlement patterns of the underlying claims and related reinsurance recoveries.

Details of the purchase of Secura NV is in note 14(b).
                                                                                                                                           Total          Total
                                                                                                                                           2011           2010
Company – Intangible                                                                                                                       £000           £000

Cost
At 1 January/31 December                                                                                                              1,300             1,300
Amortisation
At 1 January                                                                                                                               (494)         (366)
Amortisation during the year                                                                                                               (135)         (128)
At 31 December                                                                                                                             (629)         (494)
Amortised cost at 31 December                                                                                                              671            806
                                                                                                                                                                  Financial statements




On 28 February 2007, the company purchased intellectual property, business information and a business database relating to the motor underwriting
market, for total consideration of £1,300,000. The full purchase price has been treated as an intangible asset.
                                                                                      QBE European Operations plc Annual report 2011                       66




Notes to the financial statements
continued
For the year ended 31 December 2011


14 Investments
a)   Land and buildings
                                                                                                                                                Group
                                                                                                                                       2011                2010
                                                                                                                                       £000                £000

Cost or valuation
As at 1 January                                                                                                                  12,546                 11,102
Surplus on revaluation                                                                                                             (300)                   219
Purchase                                                                                                                              –                  1,225
Exchange difference                                                                                                                (152)                     –
As at 31 December                                                                                                                12,094                 12,546


If the investment properties had not been revalued, they would have been included at the following amounts:
                                                                                                                                                Group
                                                                                                                                       2011                2010
                                                                                                                                       £000                £000

Cost                                                                                                                             12,187                 12,187
Aggregate depreciation based on cost                                                                                               (283)                  (223)
Net book value                                                                                                                   11,904                 11,964


Land and buildings were valued in October 2011 on an open market basis by independent surveyors, Cushman & Wakefield LLP and DCE Daniela Ilieska.

b) Shares in Group undertakings
                                                                                                                                               Company
                                                                                                                                       2011                2010
                                                                                                                                       £000                £000

At 1 January                                                                                                                  3,804,748           3,496,954
Dissolution of Ensign Holdings Limited                                                                                             (412)                   –
Liquidation of HP Jenni & Partner AG                                                                                             (1,122)                   –
Purchase of Secura NV                                                                                                                 –             275,891
Purchase of additional shares in QBE Holdings (EO) Limited                                                                      122,860             265,490
Dissolution of QBE Funding Limited, QBE Funding II Limited, QBE Funding III Limited and QBE Funding IV Limited                        –                 (691)
Write down reversal/(charge) of QBE Holdings (EO) Limited                                                                       192,856            (192,856)
Write down of QBE Management Services (UK) Limited                                                                                    –              (40,040)
At 31 December                                                                                                                4,118,930           3,804,748


There were no acquisitions in 2011. The company’s subsidiary, MBP Holdings Limited, was dissolved in February 2012.

Purchases
2010
On 2 November 2010, the company completed the purchase of the entire shareholding in Secura NV, a Belgian based specialist reinsurer.
The purchase has been accounted for as an acquisition.
                                                                                                          Book value of           Fair value        Fair value of
                                                                                                            Secura NV          adjustments           Secura NV
Book value and fair value of net assets on acquisition                                                            £000                 £000                 £000

Cash and investments                                                                                         777,355              36,616             813,971
Fixed assets                                                                                                      255                   –                 255
Reinsurers’ share of technical provisions                                                                      98,851              (6,113)             92,738
Debtors                                                                                                      217,663                1,150            218,813
Technical provisions                                                                                        (812,816)             53,057            (759,759)
Creditors and accruals                                                                                        (76,604)           (13,523)             (90,127)
Net assets acquired                                                                                         204,704              71,187             275,891
Cost of acquisition                                                                                                                                 275,891
Goodwill arising on acquisition                                                                                                                                 –
                                                                                           QBE European Operations plc Annual report 2011                    67




14 Investments continued
b) Shares in Group undertakings continued

The fair value adjustments consist of valuation of certain investments that were carried at amortised cost, discounting of net technical provisions and
the corresponding tax effects. The discounting of net technical provision of £46,944,000 was recognised as other goodwill on acquisition (see note 13).

Secura NV made a profit of €28,914,000 in the period before purchase in 2010.

Disposals
2011
The company’s subsidiaries, Ensign Holdings Limited, was dissolved in April 2011 and HP Jenni & Partner AG, was liquidated in August 2011.

2010
The company’s subsidiaries, QBE Funding Limited, QBE Funding II Limited, QBE Funding III Limited and QBE Funding IV Limited, were dissolved
in October 2010.

During the year, the company sold its investment in QBE Pl Sp. z.o.o., which was dormant, with no gains or losses from this disposal.


Held by company                                                         Country of incorporation    Equity Holdings %                            Principal activity

Anex Jenni & Partner AG                                                        Switzerland                      100                      Underwriting agency
Greenhill International Insurance Holdings Limited                        United Kingdom                        100                         Holding company
Lifeco s.r.o.                                                             Czech Republic                        100                      Underwriting agency
MBP Holdings Limited                                                      United Kingdom                        100             Dissolved on 7 February 2012
QBE Investment Management (UK) Limited                                    United Kingdom                        100        Investment management company
QBE Holdings (EO) Limited                                                 United Kingdom                        100                         Holding company
QBE Management Services (UK) Limited                                      United Kingdom                        100                         Service company
Secura NV                                                                         Belgium                       100                    Reinsurance company
Standfast Corporate Underwriters Limited                                  United Kingdom                        100             Corporate member of Lloyd’s

Held by subsidiaries                                                    Country of incorporation    Equity Holdings %                            Principal activity

Atlasz Real Estate and Management Company Limited                                Hungary                       100                 Property holding company
Aviabel CIE. Belge d’Assurances Aviation SA                                       Belgium                    19.14                                  Insurance
British Marine Managers Limited                                           United Kingdom                       100                              Non-operating
Greenhill BAIA Underwriting GmbH                                                 Germany                       100                     Insurance intermediary
Greenhill Sturge Underwriting Limited                                     United Kingdom                       100                     Insurance intermediary
Greenhill Underwriting Espana Limited                                     United Kingdom                       100                     Insurance intermediary
Iron Trades Management Services Limited                                   United Kingdom                       100             Dissolved on 31 January 2012
Lifeco Re Limited                                                         United Kingdom                       100                              Non-operating
Limit (No.2) Limited                                                      United Kingdom                       100              Corporate member of Lloyd’s
Limit (No.7) Limited                                                      United Kingdom                       100              Corporate member of Lloyd’s
Limit (No.10) Limited                                                     United Kingdom                       100              Corporate member of Lloyd’s
Limit Corporate Members Limited                                           United Kingdom                       100                          Holding company
Limit Holdings Limited                                                    United Kingdom                       100                          Holding company
QBE Atlaz Ingatlankezelo zrt                                                     Hungary                       100                              Non-operating
                                                                                                                                                                      Financial statements




QBE Corporate Limited                                                     United Kingdom                       100              Corporate member of Lloyd’s
QBE Europe Holding Services Agent de Asigurare                                   Romania                       100                              Non-operating
QBE European Services Limited                                             United Kingdom                       100                     Insurance intermediary
QBE European Underwriting Services (Australia) Pty Limited                       Australia                     100                          Service company
QBE Funding V Limited                                                              Jersey                      100              Issuer of zero coupon bonds
QBE Funding Trust V                                                                Jersey                      100                      Special purpose entity
QBE Holdings (Europe) Limited                                             United Kingdom                       100                          Holding company
QBE Hu kft                                                                       Hungary                       100                       Underwriting agency
QBE Insurance Company (UK) Limited                                        United Kingdom                       100                              Non-operating
QBE Insurance (Europe) Limited                                            United Kingdom                       100       Insurance and reinsurance company
QBE Investments (Australia) Pty Limited                                          Australia                     100              Investment holding company
                                                                                              QBE European Operations plc Annual report 2011                      68




Notes to the financial statements
continued
For the year ended 31 December 2011


14 Investments continued
b) Shares in Group undertakings continued

Held by subsidiaries                                                        Country of incorporation   Equity Holdings %                              Principal activity

Stock Company for Insurance and Reinsurance
   “QBE Makedonjia” – Skopje                                                       Macedonia                    65.23                          Insurance company
QBE Management (Ireland) Limited                                                        Ireland                   100                             Service company
QBE Marine and Energy Services Pte Limited                                          Singapore                     100                             Service company
QBE Denmark A/S                                                                      Denmark                      100                          Insurance company
QBE Reinsurance (Europe) Limited                                                        Ireland                   100                      Reinsurance company
QBE Reinsurance (UK) Limited                                                  United Kingdom                      100                                Non-operating
QBE Services Inc.                                                                     Canada                      100                             Service company
QBE Sk, s.r.o.                                                                        Slovakia                    100                         Underwriting agency
QBE s.r.o.                                                                    Czech Republic                      100                         Underwriting agency
QBE UK Finance III Limited                                                    United Kingdom                      100                        Investment company
QBE UK Finance IV Limited                                                     United Kingdom                      100                        Investment company
PrJSCIC “QBE Ukraine”                                                                  Ukraine                     49                           Insurance business
QBE Underwriting Limited                                                      United Kingdom                      100                     Lloyd’s managing agent
QBE Underwriting Services Limited                                             United Kingdom                      100                             Service company
QBE Underwriting Services (Ireland) Limited                                             Ireland                   100                             Service company
QBE Underwriting Services (UK) Limited                                        United Kingdom                      100                             Service company
Ridgwell Fox & Partners (Underwriting Management) Limited                     United Kingdom                      100             Underwriting management for a
                                                                                                                                                   reinsurance pool
Standfast Holdings Limited                                                    United Kingdom                    23.34             Dissolved on 25 February 2012
Strakh-Consult                                                                        Ukraine                     100                             Holding company
The Minibus & Coach Club Limited                                              United Kingdom                      100                      Insurance intermediary
Visionex 2000 Limited                                                         United Kingdom                      100              Dissolved on 31 January 2012


Included in the above listing is investment in participating interest, being Standfast Holdings Limited.

QBE Ukraine is a subsidiary as the Group has management control in addition to its 49% shareholding.

In the opinion of the directors, the aggregate value of the assets of the company consisting of shares in, or amounts owing (whether on account of a
loan or otherwise) from the company’s subsidiary undertakings, is not less than the aggregate of the amounts at which these assets are stated in the
company’s balance sheet.

In accordance with the requirements of FRS 5 “Reporting the substance of transactions” – special purpose entity, QBE Funding Trust V, as a quasi-
subsidiary, has been included in the consolidated financial statements.

c)   Other financial investments
                                                                                                       Cost      Carrying value                Cost    Carrying value
                                                                                                       2011                2011                2010             2010
Group                                                                                                  £000                £000                £000             £000

Shares – listed                                                                                    24,399             24,963             71,851            50,868
Shares – unlisted                                                                                  15,011             14,670             15,568            15,528
Other variable yield securities                                                                   382,886            382,886            426,025           426,025
Debt securities and other fixed income – listed                                                 5,786,255          5,753,516          5,338,905         5,361,631
Deposits with credit institutions                                                                  56,180             56,180            150,399           150,399
Derivatives                                                                                             –             36,074                  –            38,169
                                                                                                6,264,731          6,268,289          6,002,748         6,042,620


                                                                                                       Cost      Carrying value                Cost    Carrying value
                                                                                                       2011                2011                2010             2010
Company                                                                                                £000                £000                £000             £000

Other variable yield securities                                                                     3,177              3,177             18,137              18,137
Debt securities and other fixed income – listed                                                   140,247            138,559                  –                   –
Derivatives                                                                                             –             16,100                  –              16,682
                                                                                                  143,424            157,836             18,137              34,819
                                                                                          QBE European Operations plc Annual report 2011                       69




14 Investments continued
d) Derivative financial instruments
                                                                                                           Group                                  Company
                                                                                                  2011                2010                 2011                2010
Fair value                                                                                        £000                £000                 £000                £000

Foreign currency derivatives
Other financial investments – derivatives (note 14(c))                                        35,826                38,169           16,100                  16,682
Other creditors (note 24)                                                                    (37,076)              (65,440)            (859)                (12,291)
Equity derivatives
Shares – listed                                                                                   248                    –                   –                    –


Foreign currency derivatives
The Group uses forward foreign exchange derivatives in order to hedge its exposure to foreign currencies. These are valued using the underlying foreign
exchange rates at the year end. Contractual amounts for foreign currency exchange derivatives outstanding at the balance sheet date include foreign
exchange contracts to transact the net equivalent of £1,119,799,000 (2010 £2,115,718,000), as broken down by local currency in the following table:

                                                                                                        2011                                     2010
                                                                                                 Local currency 000                       Local currency 000
                                                                                             Purchase                  Sell          Purchase                   Sell

Australian dollar                                                                                  –            (19,175)                  –             (552,515)
Brazilian real                                                                                 3,600                  –               3,600                    –
Bulgarian lev                                                                                  7,900                  –               8,688                    –
Canadian dollar                                                                                    –           (356,158)                  –             (308,981)
Colombian peso                                                                             1,664,600                  –                   –             (241,900)
Czech koruna                                                                                 164,400                  –              88,400                    –
European euro                                                                                      –           (263,149)                  –             (226,807)
Hong Kong dollar                                                                              23,000                  –              36,200                    –
Hungarian forint                                                                           1,326,800                  –                   –                    –
Great British pound                                                                                –           (104,300)
Indian rupee                                                                                 269,000                  –            287,900                        –
Indonesian rupiah                                                                                  –                  –          7,532,700                        –
Japanese yen                                                                               4,977,800                  –            151,500                        –
Malaysian ringgit                                                                                  –                                     –                   (1,600)
New Zealand dollar                                                                           104,900                  –                  –                     (800)
Norwegian krone                                                                                7,000                  –
Romanian leu                                                                                       –             (4,800)                  –                (2,900)
Singapore dollar                                                                                   –             (3,800)                  –                     –
South African rand                                                                           101,857                  –              75,527                     –
Swedish kroner                                                                                     –             (4,600)                  –                (6,400)
Swiss franc                                                                                        –            (10,500)                  –                (2,100)
Ukraine hryvnia                                                                                    –                  –              28,916                     –
US dollar                                                                                          –           (301,733)                              (2,249,449)


The net sterling position of the above transaction is a buy position of £1,121,049,000.
                                                                                                                                                                       Financial statements




The forward foreign exchange derivatives outstanding at year end expired in January 2012 (2010 January 2011).

During the year a profit of £14,048,000 (2010 loss of £17,133,000) relating to such contracts was recognised. This is included in the net foreign
exchange gain of £9,608,000 (2010 gain £16,318,000) in the profit and loss non-technical account.

Equity derivatives
The Group entered into equity derivative contracts in order to protect the equity portfolios within the Group from the risk of downside movements
in the share markets. The derivatives outstanding at the balance sheet date relate only to option contracts.

During the year a loss of £1,095,000 (2010 loss £2,195,000) was included in the profit and loss non-technical account relating to these derivatives.
                                                                                       QBE European Operations plc Annual report 2011              70




Notes to the financial statements
continued
For the year ended 31 December 2011


14 Investments continued
e) Valuation hierarchy
The following table presents the Group’s assets measured at fair value at 31 December 2011 in a three level hierarchy.

2011
                                                                                             Level 1            Level 2             Level 3        Total
Group                                                                                          £000               £000                £000         £000

Equity shares                                                                              24,963                  –              14,670         39,633
Other variable yield securities                                                            56,099            326,787                   –        382,886
Debt securities and other fixed income securities                                         318,933          5,434,583                   –      5,753,516
Derivatives                                                                                   248             35,826                   –         36,074
                                                                                          400,243          5,797,196              14,670      6,212,109


2010
                                                                                             Level 1             Level 2            Level 3        Total
Group                                                                                          £000                £000               £000         £000

Equity shares                                                                              50,868                  –              15,528         66,396
Other variable yield securities                                                           147,509            278,516                   –        426,025
Debt securities and other fixed income securities                                         312,895          5,048,736                   –      5,361,631
Derivatives                                                                                     –             38,169                   –         38,169
                                                                                          511,272          5,365,421              15,528      5,892,221


2011
                                                                                             Level 1            Level 2             Level 3        Total
Company                                                                                        £000               £000                £000         £000

Other variable yield securities                                                              3,177                 –                     –       3,177
Debt securities and other fixed income securities                                                –           138,559                     –     138,559
Derivatives                                                                                      –            16,100                     –      16,100
                                                                                             3,177           154,659                     –     157,836


2010
                                                                                             Level 1             Level 2            Level 3        Total
Company                                                                                        £000                £000               £000         £000

Other variable yield securities                                                            18,137                   –                    –      18,137
Derivatives                                                                                     –              16,682                    –      16,682
                                                                                           18,137              16,682                    –      34,819
                                                                                            QBE European Operations plc Annual report 2011                   71




14 Investments continued
e)   Valuation hierarchy continued

The investments included in Level 3 have one or more inputs that are not based on observable market data. These instruments are valued using
cost or stale prices, where alternative inputs are not available. The following table presents the movements of Level 3 investments during the year.

                                                                                                                                             2011           2010
                                                                                                                                             £000           £000

Balance at 1 January                                                                                                                   15,528              4,277
Transfer out from Level 3                                                                                                                (124)            (4,188)
Unrealised losses in profit and loss statement                                                                                           (302)                (73)
Purchases                                                                                                                                   –            15,528
Foreign exchange                                                                                                                         (432)                (16)
Balance at 31 December                                                                                                                 14,670            15,528


Notes:
Level 1    Valued using unadjusted quoted prices in active markets for identical financial instruments. This category includes listed equity shares,
           certain exchange-traded derivatives, G10 government securities and certain US agency securities.

Level 2    Valued using techniques based significantly on observable market data. Instruments in this category are valued using:
           a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or
           b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable
              market data.

Level 3    Valued using techniques where at least one input (which could have a significant effect on the instrument’s valuation) is not based on
           observable market data.


15 Financial risk
The activities of the Group expose it to financial risks such as market risk, credit risk and liquidity risk. The Group’s risk management framework
recognises the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance.

The key objectives of the Group’s asset and liability management strategy are to ensure sufficient liquidity is maintained at all times to meet the Group’s
obligations, including its settlement of insurance liabilities and, within these parameters, to optimise investment returns for the Group.

i) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market factors. Market risk
comprises three types of risk: currency risk (due to fluctuations in foreign exchange rates), interest rate risk (due to fluctuations in market interest rates)
and price risk (due to fluctuations in market prices).

Currency risk
The Group is exposed to foreign currency risk in respect of its foreign currency exposures and forward foreign exchange derivatives are used to protect
the currency positions.
                                                                                                                                                                     Financial statements




The risk management process covering forward foreign exchange derivatives involves close senior management scrutiny, including regular board and
other management reporting. All forward foreign exchange derivatives are subject to delegated authority levels provided to management and levels of
exposure are reviewed on an ongoing basis.
                                                                                              QBE European Operations plc Annual report 2011                           72




Notes to the financial statements
continued
For the year ended 31 December 2011


15 Financial risk continued
i) Market risk continued
The table below shows the impact on profit after income tax and equity of changes in foreign currency exchange rates against the UK pound sterling
on our major operational currency exposures.
                                                                                                                  2011                                    2010
                                                                             Movement in        Profit/(loss)                 Equity      Profit/(loss)               Equity
                                                                              variable %                £000                   £000              £000                  £000

Australian dollar                                                                  +10                  (75)                    (75)            (572)              (1,167)
                                                                                   -10                   75                      75              572                1,167
Canadian dollar                                                                    +10               1,511                   1,511           (1,306)               (1,306)
                                                                                   -10              (1,511)                 (1,511)           1,306                 1,306
Euro                                                                               +10                (288)                   (435)           1,570                     861
                                                                                   -10                 288                     435           (1,570)                   (861)
US dollar                                                                          +10               7,736                   6,979           (4,522)               (5,733)
                                                                                   -10              (7,736)                 (6,979)           4,522                 5,733


The above is shown net of taxation at the standard rate of 26% (2010 28%).

Interest rate risk
The Group is exposed to interest rate risk arising on interest bearing assets. Assets with floating interest rates expose the Group to cash flow interest
rate risk. Fixed interest rate assets expose the Group to fair value interest rate risk. The Group’s strategy is to invest in high quality, liquid fixed interest
securities and cash and to actively manage duration. The investment portfolios are actively managed to achieve a balance between cash flow interest
rate risk and fair value interest rate risk bearing in mind the need to meet the liquidity requirements of the business.

The Group’s exposure to interest rate risk for each significant class of interest bearing financial assets and liabilities is as follows:

                                                                                                 Fixed interest rate maturing in

                                                              Floating         One year             One to                   Two to       Over three
                                                          interest rate          or less          two years              three years           years                   Total
2011                                                              £000             £000                £000                     £000            £000                   £000

Interest bearing securities                              3,041,201          2,204,456            223,651                  401,925          419,699           6,290,932
Financial liabilities                                            –                  –           (564,735)                       –       (1,632,465)         (2,197,200)
Net interest bearing financial assets/(liabilities)      3,041,201          2,204,456           (341,084)                 401,925       (1,212,766)          4,093,732


                                                                                                  Fixed interest rate maturing in

                                                                Floating        One year             One to                   Two to       Over three
                                                           interest rate          or less          two years              three years           years                  Total
2010                                                               £000            £000                £000                     £000            £000                   £000

Interest bearing securities                              2,656,620          2,169,221            232,674                  527,852         534,618            6,120,985
Financial liabilities                                            –                  –                  –                 (546,602)       (675,892)          (1,222,494)
Net interest bearing financial assets/(liabilities)      2,656,620          2,169,221            232,674                  (18,750)       (141,274)           4,898,491


The Group’s sensitivity to movements in interest rates in relation to the value of fixed interest securities is shown in the table below. This sensitivity
analysis is presented gross of any inter-dependencies between financial assets and liabilities.
                                                                                                                                                 2011                   2010
                                                                                                                       Movement in       Profit/(loss)           Profit/(loss)
                                                                                                                        variable %               £000                   £000

Interest rate movement – fixed                                                                                                +1.5          28,958                43,305
interest securities                                                                                                           -1.5         (28,958)              (43,305)


The above is shown net of taxation at the standard rate of 26% (2010 28%).
                                                                                              QBE European Operations plc Annual report 2011                           73




15 Financial risk continued
i) Market risk continued
Price risk
Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those
arising from interest rate or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer,
or factors affecting all similar financial instruments traded on the market.

The Group is exposed to price or market value risk on its investment in equities and fixed interest securities and uses derivatives to manage the equity
exposure. The risk management processes over these forward contracts and options are the same as those explained under currency risk.

The potential impact of movements in the market value of equities on the profit and loss account and balance sheet is shown in the sensitivity analysis
below. The price risk in relation to unlisted securities is immaterial in terms of the possible impact on profit and loss and has not been included in the
sensitivity analysis.

The impact has been shown on the basis that equity funds are fully exposed to market price fluctuations. Equity portfolios are from time to time hedged
in order to manage this exposure. Exchange traded futures contracts used to provide the hedges are not perfectly correlated to the composition of the
underlying equity fund.
                                                                                                                                                 Financial impact
                                                                                                                                              2011                   2010
                                                                                                                                      Profit/(loss)           Profit/(loss)
                                                                                                                   Movement in         and equity             and equity
                                                                                                                    variable %                £000                   £000

ASX 100                                                                                                                  +20                   –                     6,073
                                                                                                                         -20                   –                    (6,073)
FTSE 100                                                                                                                 +20               2,165                     1,169
                                                                                                                         -20              (2,165)                   (1,169)
EUR – DJ EURO STOXX                                                                                                      +20               3,591                          5
                                                                                                                         -20              (3,591)                        (5)


The above are shown net of taxation at the standard rate of 26% (2010 28%).

ii) Credit risk
Credit risk is the risk that one party to a financial instrument will cause financial loss to the other party by failing to discharge an obligation.

Credit risk exposures are calculated regularly and compared with authorised credit limits before further transactions are undertaken with counterparties.
94% (2010 94%) of total fixed interest and cash investments are with counterparties having a Moody’s rating of A or better. The Group does not expect
any investment counterparties to fail to meet their obligations given their strong credit ratings. The Group only uses derivatives in highly liquid markets.

The reinsurers’ share of claims outstanding is also exposed to credit risk. 53% (2010 44%) of the reinsurers’ share of claims outstanding is with fellow
Group undertakings. 91% (2010 94%) of the remaining balance is with reinsurers with S&P rating of A- or greater.

The following table provides information regarding the carrying value of the Group’s financial assets, excluding amounts in respect of insurance
contracts. All amounts are neither past due nor impaired at the balance sheet date.
                                                                                                                                               2011                   2010
                                                                                                                                               £000                   £000

Cash                                                                                                                                    98,350                182,930
                                                                                                                                                                               Financial statements




Interest bearing investments                                                                                                         6,192,582              5,938,055
Derivative financial instruments                                                                                                        36,074                 38,169
Amounts owed by Group undertakings                                                                                                   2,370,272              1,945,946
Other receivables                                                                                                                      131,320                117,828
                                                                                           QBE European Operations plc Annual report 2011                74




Notes to the financial statements
continued
For the year ended 31 December 2011


15 Financial risk continued
iii) Liquidity risk
In addition to treasury cash held for working capital requirements, a minimum percentage of the Group’s total financial assets is held in liquid,
short-term money market securities to ensure there are sufficient liquid funds available to meet insurance and investment obligations.

At 31 December 2011, the average duration of cash and fixed interest securities was 0.45 years (2010 0.7 years).

The table below summarises the maturity profile of all financial liabilities based on the remaining contractual obligations.

                                                                                 2011                                                       2010
                                                                             Between                                                   Between
                                                             Within           one and               Over              Within            one and            Over
                                                           one year         five years        five years            one year          five years     five years
                                                              £000                £000              £000               £000                £000           £000

Non-derivatives
Trade and other payables                                 (317,823)                –                 –            (261,126)                 –               –
Borrowings                                                      –          (564,735)       (1,632,465)                  –           (546,602)       (675,892)
Derivatives                                               (37,076)                  –                 –           (65,440)                    –               –


The company has no significant concentration of liquidity risk.


16 Capital
Each registered insurance company regulated by the Financial Services Authority (FSA), Central Bank of Ireland (CBI), National Bank of Belgium (NBB)
in Belgium, Insurance Supervision Agency in Macedonia (ISAM), The State Commission for Regulation of Financial Services Markets of Ukraine
(SCRFSM) and each syndicate in Lloyd’s is required to carry out a self assessment of the capital it requires, the Individual Capital Assessment (ICA).
This is required to reflect the level of capital needed to ensure that the entity will remain solvent for the next 12 months in 99.5% of future foreseeable
scenarios.

The Group has developed a sophisticated stochastic risk-based capital model, which incorporates the key risks being faced by each of the legal
entities. The output from this model, which is tailored to the Group’s risk profile, is reported to the Risk and Capital Committee, which in turn
recommends it to the relevant boards for adoption. The ICAs have been reviewed by the FSA, CBI and Lloyd’s and form the basis of the minimum
capital required by each registered insurance company and syndicate.

Lloyd’s corporate members are required to hold capital, Funds at Lloyd’s (FAL), in a trust at Lloyd’s. These funds are intended to cover circumstances
where syndicate assets prove insufficient to meet their liabilities. The level of FAL is dependent on corporate member’s participations on syndicates
and the level of the syndicate ICAs after they have been reviewed and accepted by Lloyd’s.

The Group’s capital model has been embedded in the business and as well as assessing minimum capital requirements for Group undertakings,
it has also been used to:

•   allocate capital to class of business for business planning and performance monitoring

•   assess the effectiveness of existing reinsurance protections and new reinsurance strategies

•   consider the implications of Solvency II on the business
                                                                                        QBE European Operations plc Annual report 2011                         75




17 Other debtors including taxation
                                                                                                         Group                                  Company
                                                                                                2011                    2010             2011                  2010
                                                                                                £000                    £000             £000                 £’000

Corporation tax                                                                            179,261                  84,085         89,650                  23,778
Amounts owed by Group undertakings                                                       2,370,272               1,945,946        518,624                 194,539
Deferred taxation (note 22)                                                                      –                       –         30,728                       –
Other                                                                                       96,904                  90,412            880                   1,296
                                                                                         2,646,437               2,120,443        639,882                 219,613


Two subsidiary undertakings have made long-term loans to a fellow QBE company, QBE Investments (North America) Inc. The first loan amounts to
US$1,840,027,537 and was made on 5 June 2009. This loan is split into 4 Tranches: A: US$500,000,000; B: US$500,000,000; C: US$500,000,000;
D: US$340,027,537. QBE Investments (North America) Inc pays interest on the Tranche Loans at the base rate of US dollar 6 Month LIBOR plus
5.29% for Tranche A, 5.25% for Tranche B, 5.43% for Tranche C and 5.58% for Tranche D. The actual repayment of interest takes place every
31 May and 30 November, with the first payment made on 30 November 2009. The total US$1,840,027,537 is to be repaid by 31 May 2019.

The second loan amounts to US$286,000,000 and was made on 30 November 2009. QBE Investments (North America) Inc pays interest on this loan
which is calculated using US dollar 6 Month LIBOR plus 4.25%. Interest payment dates and LIBOR reset dates are identical to the first loan with the
first payment made on 31 May 2010. The US$286,000,000 is to be repaid on 30 November 2019.

The third loan amounts to US$400,000,000 and was made on 30 June 2010. QBE Investments (North America) Inc pays interest on this loan which
is calculated using US dollar 6 Month LIBOR plus 3.85%. Interest payment dates and LIBOR reset dates are identical to the first loan with the first
payment made on 30 November 2010. The US$400,000,000 is to be repaid on 31 May 2020.

The fourth loan amounts to US$200,000,000 and was made on 16 May 2011. QBE Investments (North America) Inc pays interest on this loan which
is calculated using US dollar 6 Month LIBOR plus 2.25%. Interest payment dates and LIBOR reset dates are identical to the first loan with the first
payment made on 31 May 2011. The US$200,000,000 is to be repaid on 15 May 2021.

The carrying value of these loans is deemed to be the fair value at 31 December 2011.


18 Tangible assets – Group
                                                                                             Assets in                                Owner
                                          Motor        Computer               Office     the course of              Leasehold      occupied
                                        vehicles       equipment         equipment        construction           improvements       property                  Total
                                          £000              £000              £000               £000                    £000          £000                   £000

Cost or revaluation
At 1 January 2011                       2,312           97,083            17,369             21,821                 19,042          7,272                 164,899
Exchange adjustments                       (49)            (119)              (85)                 –                  (119)          (430)                    (802)
Transfer                                     –          14,728                  –           (14,728)                     –              –                        –
Revaluation                                  –                –                 –                  –                     –           (113)                    (113)
Additions                                 316             1,686            2,320             38,631                    352             64                   56,169
Disposals                                (674)           (3,152)            (882)             (3,370)                 (435)          (110)                 (21,423)
At 31 December 2011                     1,905          110,226            18,722            42,354                  18,840          6,683                 198,730
Cumulative depreciation
                                                                                                                                                                      Financial statements




At 1 January 2011                      (1,114)         (65,037)          (11,576)                   –               (12,551)               –               (90,278)
Exchange adjustments                        –               74                 12                   –                     21               –                   107
Charge for year                          (373)         (21,029)            (2,271)                  –                 (2,158)              –               (25,831)
Disposals                                 444            1,142                812                   –                    413               –                 2,811
At 31 December 2011                    (1,043)         (84,850)          (13,023)                   –               (14,275)               –              (113,191)
Net book value
at 31 December 2011                       862           25,376             5,699            42,354                    4,565         6,683                  85,539
Net book value
at 31 December 2010                     1,198           32,046             5,793            21,821                    6,491         7,272                  74,621
                                                                                             QBE European Operations plc Annual report 2011                   76




Notes to the financial statements
continued
For the year ended 31 December 2011


19 Share capital
                                                                                                                                              2011            2010
                                                                                                                                              £000            £000

Called up, allotted and fully paid
“A” Ordinary Shares – 330,000,000 shares of £1 each                                                                                     330,000           330,000
“B” Ordinary Shares – 1,978,572,962 shares of £1 each                                                                                 1,978,573         1,978,573
Non-Voting Ordinary Shares – 23,300,000 shares of £1 each                                                                                     –            23,300
Floating Rate Non-Voting Preference Shares – 122,260,000 shares of £1 each                                                                    –           122,260
                                                                                                                                      2,308,573         2,454,133


On 15 December 2011, the company completed a Court approved capital reduction by reducing 122,260,000 and 23,300,000 of Floating Rate
Non-Voting Preference Shares and Non-Voting Ordinary Shares respectively. Detail on the capital reduction is set out in note 20.

During 2010, the company issued at par 545,489,545 “B” Ordinary Shares of £1 each.

There are no differences in rights and rank between the holders of “A” Ordinary Shares and holders of “B” Ordinary Shares.

The holders of the Non-Voting Ordinary Shares had the following restrictions on their rights:

i)    They had the right to participate in any dividend or other distribution of profits of the company if and to the extent resolved by the directors
      of the company in their absolute discretion.

ii)   They had no rights to vote at general meetings of the company.

The holders of the Floating Rate Non-Voting Preference Shares had the following restrictions on their rights:

i)    They had no rights to vote at general meetings of the company.

ii)   They were entitled to receive, out of profits legally available for that purpose if and when declared by the directors of the company, preferential
      cumulative dividends that accrue rateably on a daily basis and are payable in cash, semi-annually in arrears.

iii) They were not entitled to any dividends in excess of the full non-cumulative dividends declared on the Floating Rate Non-Voting Preference Shares.

iv) On a return of capital on winding-up (other than on redemption or purchase of shares) or otherwise, they were entitled to any payment in priority to
    the holders of any other class of shares.

v) They would not share in the balance of assets remaining after the payments due in (iv) above.


20 Reconciliation of movements in reserves and shareholders’ funds
                                                                                                            Foreign
                                                                         Called up          Share          currency
                                                                             share       premium         translation    Revaluation        Profit and
2011                                                                       capital        reserve           reserve        reserve       loss reserve         Total
Group                                                                        £000           £000              £000            £000              £000          £000

At 1 January 2011                                                    2,454,133          361,550         148,863               412        (767,980)      2,196,978
Profit for the year                                                          –                –               –                 –          95,052           95,052
Capital reduction                                                     (145,560)        (361,550)              –                 –         483,810          (23,300)
Currency translation differences                                             –                –          18,186                 –               –           18,186
Actuarial gain recognised in the pension schemes                             –                –               –                 –           3,088            3,088
Movement on deferred tax relating to pension liability                       –                –               –                 –           1,266            1,266
Revaluation                                                                  –                –               –              (113)              –             (113)
Dividend                                                                     –                –               –                 –        (600,054)       (600,054)
At 31 December 2011                                                  2,308,573                 –        167,049               299        (784,818)      1,691,103
                                                                                        QBE European Operations plc Annual report 2011                   77




20 Reconciliation of movements in reserves and shareholders’ funds continued
                                                                                     Foreign
                                                     Called up         Share        currency                            Cash
                                                         share      premium       translation     Revaluation            flow         Profit and
2010                                                   capital       reserve         reserve         reserve           hedge        loss reserve         Total
Group                                                    £000          £000            £000             £000            £000               £000          £000

At 1 January 2010                                 1,908,643        361,550         99,219                 –           (3,722)      (525,281)       1,840,409
Profit for the year                                        –             –              –                 –                –        194,159          194,159
Issuance of share capital                            545,490             –              –                 –                –               –         545,490
Movement on cash flow hedge                                –             –              –                 –            3,722               –            3,722
Currency translation differences                           –             –         49,644                 –                –               –          49,644
Actuarial loss recognised in the pension schemes           –             –              –                 –                –          (7,740)          (7,740)
Movement on deferred tax relating to pension liability     –             –              –                 –                –             882              882
Revaluation                                                –             –              –               412                –               –              412
Dividend                                                   –             –              –                 –                –       (430,000)        (430,000)
At 31 December 2010                              2,454,133         361,550        148,863               412                –       (767,980)       2,196,978


                                                                                                    Called up           Share
                                                                                                        share        premium          Profit and
2011                                                                                                  capital         reserve       loss reserve         Total
Company                                                                                                 £000            £000               £000          £000

At 1 January 2011                                                                               2,454,133           361,550         334,073        3,149,756
Profit for the year (note 12)                                                                           –                 –         382,363          382,363
Capital reduction                                                                                (145,560)         (361,550)        483,810           (23,300)
Dividend                                                                                                –                 –        (600,054)        (600,054)
At 31 December 2011                                                                             2,308,573                  –        600,192        2,908,765


                                                                                   Called up            Share
                                                                                       share         premium        Cash flow         Profit and
2010                                                                                 capital          reserve          hedge        loss reserve         Total
Company                                                                                £000             £000            £000               £000          £000

At 1 January 2010                                                               1,908,643          361,550            (3,722)       220,148        2,486,619
Profit for the year (note 12)                                                           –                –                 –        543,925          543,925
Issuance of share capital                                                         545,490                –                 –              –          545,490
Movement on cash flow hedge                                                             –                –             3,722              –            3,722
Dividend                                                                                –                –                 –       (430,000)        (430,000)
At 31 December 2010                                                             2,454,133          361,550                 –        334,073        3,149,756


On 15 December 2011, the company completed a Court approved capital reduction of £507,110,000 with £23,300,000 returned to the minority equity
shareholder and the remaining £483,810,000 transferred to the profit and loss account. The total amounts of capital reduction of £507,110,000
comprises of £122,260, £23,300,000 and £361,550,000 of Floating Rate Non-Voting Preference Shares, Non-Voting Ordinary Shares respectively and
of share premium reserve respectively.

During the year the company declared and paid an interim dividend of £596,692,842 (2010 £423,708,000) and a dividend of £3,361,614 (2010
£6,292,000) to ordinary shareholders and preference shareholder respectively.
                                                                                                                                                                 Financial statements




On 30 June 2010, as part of the refinancing of QBE the Americas via QBE European operations, the company issued at par 265,489,545 “B” Class
Ordinary Shares of £1 each to its immediate parent entity QBE Insurance Group Limited and in turn on lent funds to QBE Investments (North America) Inc.

On 2 November 2010, the company completed the purchase of the entire issued share capital of Secura NV, a Belgian based specialist reinsurer.
This acquisition was funded by issuance of 280 million “B” Class ordinary shares of £1 each to its immediate parent entity QBE Insurance Group
Limited. Full details can be found in note 14(b).
                                                                                         QBE European Operations plc Annual report 2011                    78




Notes to the financial statements
continued
For the year ended 31 December 2011


21 Equalisation provision
The equalisation provision required to be made by the Group in accordance with the FSA Handbook is as follows:
                                                                                                                                          2011             2010
                                                                                                                                          £000             £000

At 1 January                                                                                                                             –                      –
Transfers in                                                                                                                        16,335                      –
At 31 December                                                                                                                      16,335                      –


As explained in accounting policy (d) (vii), an equalisation provision is established in the Group financial statements. The effect of this provision
is to reduce the Group’s shareholders’ funds by £16.3 million (2010 £nil). The increase in the provision during the year has the effect of reducing
the balance on the technical account for general business and decreasing the profit on ordinary activities before taxation by £16.3 million (2010 £nil).


22 Deferred tax
                                                                                                          Group                                  Company
                                                                                                 2011                 2010                2011             2010
                                                                                                 £000                 £000                £000             £000

Movements in deferred tax are made up as follows:
Deferred tax liability at start of period                                                    (57,236)             (64,171)               –                      –
Deferred tax (charge)/credit in profit and loss account                                     (135,289)              16,741           30,728                      –
Movement in provisions – acquisitions/disposals                                                   61                (8,950)              –                      –
Movement in provisions – other                                                                 6,834                  (856)              –                      –
Deferred tax liability at end of period                                                     (185,630)             (57,236)          30,728                      –
The elements of deferred tax are made up as follows:
Accelerated capital allowances                                                                   977                   (97)              –                      –
Short-term timing differences                                                               (191,447)             (62,999)          30,728                      –
Employee compensation and benefits                                                             4,840                5,860                –                      –
(Liability)/asset in balance sheet                                                          (185,630)             (57,236)          30,728                      –



23 Amounts owed to credit institutions
                                                                                                                                                  Group
                                                                                                                                          2011             2010
                                                                                                                                          £000             £000

Amounts due in more than one year
QBE Funding Trust V                                                                                                                564,735            546,602


On 12 May 2010, the Group raised US$850 million through the issue of 20 year hybrid securities. Interest accumulates at 2.5% per annum
(compounding semi-annually). In the event of conversion, QBE Insurance Group Limited, the Group’s ultimate parent company, will issue a fixed
number of its shares to the security holders. The conversion rate may be adjusted in certain circumstances to take account of dividends paid on that
company’s ordinary shares. In the event of redemption, repurchase or maturity, QBE Insurance Group Limited can elect to repay the principal and
accreted interest in either cash or the equivalent value in shares of the company, or a combination of both. Investors can request repurchase at the end
of three, five, seven, 10 or 15 years from the date of issue. QBE Insurance Group Limited can redeem the securities at any time on or after three years
from the date of issue. Investors have the option to convert the security if:

•   the market value of the security is less than the US dollar equivalent of the market value of the underlying shares in QBE Insurance Group Limited
    for five consecutive trading days;

•   the securities are called for redemption; or

•   on certain corporate transactions occurring (e.g. change in control).

The hybrid securities are guaranteed by the QBE Insurance Group Limited.

The fair value of the hybrid securities at 31 December 2011 is £565,559,000 (2010 £548,877,000).
                                                                                            QBE European Operations plc Annual report 2011                    79




24 Other creditors including tax and social security
                                                                                                            Group                                   Company
                                                                                                    2011               2010                  2011             2010
                                                                                                    £000               £000                  £000             £000

Corporation tax                                                                                      –               70,157                    –                –
Amounts due to fellow QBE Insurance Group Limited subsidiaries                                 160,898              117,262              376,773          233,770
Amounts due to fellow QBE Insurance Group Limited subsidiaries (i)                             307,890              307,561              307,890          307,561
Amounts due to fellow QBE Insurance Group Limited subsidiaries (ii)                            354,588              352,614              354,588          352,614
Amounts due to fellow QBE Insurance Group Limited subsidiaries (iii)                           644,675                    –              644,675                –
Amounts due to fellow QBE Insurance Group Limited subsidiaries (iv)                            325,312                    –              325,312                –
Derivative financial liabilities (note 14(d))                                                   37,076               65,440                  859           12,291
Other creditors                                                                                114,430              119,522                1,951            6,050
                                                                                             1,944,869          1,032,556           2,012,048             912,286


i)    In 2006, the company issued £300,000,000 of capital securities to a fellow QBE Insurance Group Limited subsidiary. The securities have no fixed
      redemption date and may not be called for redemption or conversion by the investors. The securities are subordinated. Distributions are deferrable
      and not cumulative. However, if a distribution or principal amount is not paid by the company and the guarantor does not pay the amount under the
      guarantee, then the capital securities are to be redeemed for QBE Insurance Group Limited preference shares. QBE Insurance Group Limited has
      fully and unconditionally guaranteed the Group’s obligations under the capital securities. The fair value of the capital securities at 31 December 2011
      is £210,750,000 (2010 £216,750,000).

ii)   In 2007, the company issued US$550,000,000 of capital securities to a fellow QBE Insurance Group Limited subsidiary. The securities have
      no fixed redemption date and may not be called for redemption or conversion by the investors. The securities are subordinated. Distributions
      are deferrable and not cumulative. However, if a distribution or principal amount is not paid by the company and the guarantor does not pay the
      amount under the guarantee, then the capital securities are to be redeemed for QBE Insurance Group Limited preference shares. QBE Insurance
      Group Limited has fully and unconditionally guaranteed the Group’s obligations under the capital securities. The fair value of the capital securities
      at 31 December 2011 is £303,693,000 (2010 £296,113,000).

iii) In May 2011, the company issued US$1,000,000,000 of Fixed Rate Reset Subordinated Callable Notes due 2041 to a fellow QBE Insurance
     Group Limited subsidiary. The securities may not be called for redemption by the investors. The securities are subordinated. Interest payments
     are deferrable and no payments are due unless the Group satisfies certain solvency conditions. These notes are non-current liabilities. The fair
     value of the subordinated notes at 31 December 2011 is £601,036,000.

iv) In May 2011, the company issued £325,000,000 of Fixed Rate Reset Subordinated Callable Notes due 2041 to a fellow QBE Insurance Group
    Limited subsidiary. The securities may not be called for redemption by the investors. The securities are subordinated. Interest payments are
    deferrable and no payments are due unless the Group satisfies certain solvency conditions. These notes are non-current liabilities. The fair value
    of the subordinated notes at 31 December 2011 is £296,998,000.


25 Operating lease commitments
                                                                                                                           Land and buildings
                                                                                                            Group                                   Company
                                                                                                    2011               2010                  2011             2010
                                                                                                    £000               £000                  £000             £000

Annual commitments under operating leases are:
Leases which expire within one year                                                                938                  377                     –               –
                                                                                                                                                                     Financial statements




Leases which expire between one and five years                                                   1,751                1,497                     –               –
Leases which expire after five years                                                            15,442               11,892                     –               –
                                                                                                18,131               13,766                     –               –


                                                                                                                                 Other
                                                                                                            Group                                   Company
                                                                                                    2011               2010                  2011             2010
                                                                                                    £000               £000                  £000             £000

Annual commitments under operating leases are:
Leases which expire within one year                                                                  11                 55                      –               –
Leases which expire between one and five years                                                      153                118                      –               –
                                                                                                    164                173                      –               –
                                                                                           QBE European Operations plc Annual report 2011                     80




Notes to the financial statements
continued
For the year ended 31 December 2011


26 Guarantees and contingencies
Of the total assets disclosed on the Group’s balance sheet £2,294,371,000 (2010 £2,379,073,000) are subject to Lloyd’s Premium Trust Funds,
or will become subject to them on realisation, of which £2,232,177,000 (2010 £2,256,411,000) are investments.

The Group has liabilities covered by the deposit of certain investments and cash, in respect of undrawn letters of credit amounting to:

                                                                                                           2011                                    2010
                                                                                                Original          Reporting             Original          Reporting
                                                                                               currency            currency            currency            currency
                                                                                                    000                £000                 000               £000

United States dollar                                                                           30,366              19,544             42,044               26,930
Euro                                                                                           13,336              11,108             29,151               24,983
Canadian dollar                                                                                   111                  70                209                  135
Pound sterling                                                                                 35,132              35,132             46,381               46,381
                                                                                                                   65,854                                  98,429


Additionally there are charges over fixed income securities of US$14,732,635 (£9,482,284) (2010 US$17,020,060 (£10,901,896)) backing the Group’s
Excess and Surplus lines business in the USA, which are required by the US insurance regulatory authorities.


27 Provisions for liabilities and charges
                                                                                                                                            2011              2010
                                                                                                                                            £000              £000

1 January 2011                                                                                                                          1,534               4,275
Utilised during year                                                                                                                     (106)             (2,741)
31 December 2011                                                                                                                        1,428               1,534


The current year provision is in relation to the voluntary pension provision. On 1 January 2006, Limit Holdings Limited, a fellow QBE undertaking,
transferred at book value to the company a voluntary pension provision. Details of the voluntary pension arrangement are as follows:

The company operates an arrangement under which former employees of QBE Underwriting Limited (previously Janson Green Limited) receive
retirement benefits, including enhanced pension payments and medical insurance, provided by the company on an ex-gratia basis. The payments
are adjusted for inflation on an annual basis. The costs are paid by the company as they fall due and hence the arrangement is unfunded.

Since the commitments under the arrangement relate to past service the liability is provided for in full at the directors’ estimate of the ultimate cost
based on mortality tables. The provision assumes that future inflation in pension payments is offset by similar changes in the discount rate used to
calculate the present value of such obligations. All adjustments to the provision are dealt with in the profit or loss account.

The restructuring provision booked in 2009 was fully utilised in 2010 upon the completion of the exercise.


28 Funds at Lloyd’s (“FAL”)
FAL are those of the Group’s funds which are subject to the terms of the Lloyd’s Deposit Trust Deed and which are used to support the underwriting
of the Group’s corporate member subsidiary. Under Lloyd’s regulations, the amounts of FAL required to support underwriting for the following year
and open years of account are determined at the “coming-into-line” date as prescribed by Lloyd’s each year. At 31 December 2011, these amounted
to £1,068,481,000 (2010 £897,004,000). This requirement was satisfied as follows:
                                                                                                                                            2011              2010
                                                                                                                                            £000              £000

Letters of credit guaranteed by the ultimate holding company                                                                         908,844              688,764
Interim profits                                                                                                                       47,537               76,051
General deposit                                                                                                                       28,318               64,469
Reserve margins                                                                                                                       83,782               67,720
                                                                                                                                   1,068,481              897,004
                                                                                      QBE European Operations plc Annual report 2011             81




29 Parent undertaking
The company’s ultimate controlling entity is QBE Insurance Group Limited which is incorporated in Australia. The consolidated accounts for
QBE Insurance Group Limited are available from the company’s registered office at Plantation Place, 30 Fenchurch Street, London EC3M 3BD.

The company’s immediate parent company is QBE Insurance Holdings Pty Limited, which is incorporated in Australia.


30 Capital commitments
The Group’s capital commitments authorised and contracted for but not provided for in the accounts amount to £1.1 million (2010 £5.8 million).


31 Post balance sheet event
On 16 February 2012, the company paid an interim dividend of £356,700,000 to ordinary shareholders.




                                                                                                                                                      Financial statements
                                                                                             QBE European Operations plc Annual report 2011                   82




Glossary of insurance terms

Binders/Binding authority The delegation of the        Commission ratio Net commission expense                Incurred but not reported (IBNR) Claims
authority to enter into the insurance contracts        as a percentage of net earned premium.                 arising out of events that have occurred before
from a managing agent to a cover holding.                                                                     the end of an accounting period but have not
                                                       Deferred acquisition costs Acquisition costs           been reported to the insurer by that date.
Broker One who negotiates contracts of                 relating to the unexpired period of risk of
insurance or reinsurance on behalf of an insured       contracts in force at the balance sheet date           Insurance profit The sum of the underwriting
party, receiving a commission from the insurer         which are carried forward from one accounting          profit/(loss) and investment income on
or reinsurer for placement and other services          period to subsequent accounting periods.               policyholders’ funds.
rendered.
                                                       Earned premium The proportion of written               Inward reinsurance The reinsurance or
Capacity In relation to a Lloyd’s member, it is        premium (including, where relevant, those              assumption of risks written by another insurer.
the maximum amount of insurance premiums               of prior accounting periods) attributable to
(gross of reinsurance but net of brokerage)            the risks borne by the insurer during the              Lead Underwriter who sets the terms and price
which a member can accept. In relation to a            accounting period.                                     of a policy in the Lloyd’s market.
syndicate it is the aggregate of each member’s
capacity allocated to that syndicate.                  Equalisation provision Amounts set aside               Line slip Document (used at Lloyd’s) that
                                                       in accordance with the Financial Services              describes the risk to be insured. Underwriters
Casualty insurance Insurance that is primarily         Authority Handbook for the purpose of mitigating       subscribe to the risk by stating the percentage
concerned with the losses caused by injuries           exceptionally high loss ratios in future years. The    of the risk that they are willing to take.
to third persons or their property (i.e. not the       amounts provided are not liabilities because
policyholder) and the resulting legal liability        they are in addition to the provisions required to     Lloyd’s Insurance and reinsurance market
imposed on the insured. It includes, but is not        meet the anticipated ultimate cost of settlement       in London. It is not a company but is a
limited to, general liability, employers’ liability,   of outstanding claims at the balance sheet date.       society of individuals and corporate
workers’ compensation, professional liability          Notwithstanding this, they are required by the         underwriting members.
and public liability insurance.                        Companies Act 2006 to be included within
                                                       technical provisions.                                  Net claims incurred The amount of claims
Catastrophe reinsurance A form of excess                                                                      incurred during an accounting period after
of loss reinsurance that, subject to specified         Excess of loss reinsurance A form of                   deducting reinsurance recoveries.
limits, indemnifies the insured for the amount         reinsurance in which, in return for a premium,
of loss in excess of a specified retention with        the reinsurer accepts liability for claims settled     Net claims ratio Net claims incurred as
respect to an accumulation of claims resulting         by the original insurer in excess of an agreed         a percentage of net earned premium.
from a catastrophe event or series of events.          amount, generally subject to an upper limit.
                                                                                                              Net earned premium Net written premium
Claim The amount payable under a contract              Expense ratio Underwriting and administrative          adjusted by the net change in unearned
of insurance or reinsurance arising from a loss        expenses as a percentage of net earned premium.        premium for a year.
relating to an insured event.
                                                       Facultative reinsurance The reinsurance of             Net investment income Gross investment
Claims incurred The aggregate of all claims            individual risks through a transaction between         income net of finance costs, foreign exchange
paid during an accounting period adjusted              the reinsurer and the cedant (usually the primary      gains and losses and investment expenses.
by the change in the claims provision for that         insurer) involving a specified risk.
accounting period.                                                                                            Net underwriting profit/(loss) The amount
                                                       General insurance Used to describe non-life            of profit/(loss) from insurance activities exclusive
Claims outstanding The amount of provision             insurance business including property and              of net investment income and capital gains
established for claims and related claims expenses     casualty insurance.                                    or losses.
that have occurred but have not been paid.
                                                       Gross claims incurred The amount of claims             Net written premium The total premium on
Claims provision The estimate of the most              incurred during an accounting period before            insurance underwritten by an insurer during
likely cost of settling present and future claims      deducting reinsurance recoveries.                      a specified period after the deduction of
and associated claims adjustment expenses                                                                     premium applicable to reinsurance.
plus a risk margin for the possible fluctuation        Gross earned premium The total premium
of the liability.                                      on insurance earned by an insurer or reinsurer         Policyholders’ funds Those financial assets
                                                       during a specified period on premiums                  held to fund the insurance provisions of the
Claims ratio Claims incurred as a percentage           underwritten in the current and previous               consolidated entity.
of net earned premium.                                 underwriting years.
                                                                                                              Premium Amount payable by the insured
Combined operating ratio The sum of the                Gross written premium The total premium                or reinsured in order to obtain insurance or
claims ratio, commission ratio and expense             on insurance underwritten by an insurer or             reinsurance protection.
ratio. A combined operating ratio below 100%           reinsurer during a specified period, before
indicates profitable underwriting results.             deduction of reinsurance premium.                      Proportional reinsurance A type of
A combined operating ratio over 100%                                                                          reinsurance in which the original insurer
indicates unprofitable underwriting results.                                                                  and the reinsurer share claims in the same
                                                                                                              proportion as they share premiums.
                                                                                      QBE European Operations plc Annual report 2011   83




Recoveries The amount of claims recovered            Underwriting year The year in which the
from reinsurance, third parties or salvage.          period of cover commences under a contract
                                                     of insurance.
Reinsurance An agreement to indemnify a
primary insurer by a reinsurer in consideration of   Unearned premium The portion of a premium
a premium with respect to agreed risks insured       representing the unexpired portion of the
by the primary insurer. The enterprise accepting     contract term as of a certain date.
the risk is the reinsurer and is said to accept
inward reinsurance. The enterprise ceding the        Written premium Premiums written, whether
risks is the cedant or ceding company and is         or not earned, during a given period.
said to place outward reinsurance.

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 The insurer that assumes all or
part of the insurance or reinsurance liability
written by another insurer. The term includes
retrocessionaires, being insurers that assume
reinsurance from a reinsurer.

Retention ratio Percentage of previous year’s
premium which is renewed.

Retrocession Reinsurance of a reinsurer by
another reinsurance carrier.

Retention That amount of liability for which
an insurance company will remain responsible
after it has completed its reinsurance
arrangements.

Syndicate A member, or group of members,
underwriting insurance business at Lloyd’s
through the agency of a managing agent.

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
                                                                                                                                            Additional information




underwriting operations.
                                                                                         QBE European Operations plc Annual report 2011                 84




Directors and officers

Directors
S P Burns
P A Dodridge
M S Kang
J D Neal
F M O’Halloran
D J Winkett

Former director who served during part of the year
K M Lisson        resigned 15 February 2011

Company secretary
S M Boland




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                                                                                            QBE European Operations plc Annual report 2011     85




QBE EO structure



                                                                                QBE




                                                                                                    Australia
            Latin                            North                          European
                                                                                                      and                        Asia Pacific
           America                          America                         Operations
                                                                                                   New Zealand




                                               QBE                                                      QBE
                                                                              QBE
                                           Insurance                                                Reinsurance
                                                                          Underwriting
                                            (Europe)                                                 (Europe)                    Secura NV
                                                                            Limited
                                             Limited                                                  Limited
                                                                             (QUL)
                                              (QIEL)                                                  (QREL)




                                                                                                       QBE
                                             QBE
                                                                                                     Casualty
                                           Syndicate
                                                                                                     Syndicate
                                             2999
                                                                                                        386




                                            QBE                              QBE
            QBE                           Marine and                       Property,                   QBE
        Reinsurance                        Energy                         Casualty and                Aviation
         Syndicate                        Syndicate                          Motor                   Syndicate
            566                             1036                           Syndicate                   5555
                                                                             1886*




   * For 2012 Sub-syndicate 1886 includes risks previously written by Sub-syndicate 2000.
                                                                                                         QBE European Operations plc
                                                                                                                             Plantation Place
                                                                                                                         30 Fenchurch Street
                                                                                                                          London EC3M 3BD

                                                                                                                       tel +44 (0)20 7105 4000
                                                                                                                      fax +44 (0)20 7105 4019

                                                                                                                        For more information:

                                                                                                              e-mail enquiries@uk.qbe.com
                                                                                                              or visit www.QBEeurope.com




QBE European Operations plc, no. 02641728, registered office Plantation Place, 30 Fenchurch Street, London EC3M 3BD

				
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