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2018-19 Financial Statements

Certification


INDEPENDENT AUDITOR’S REPORT

To the Assistant Treasurer

Opinion

In my opinion, the financial statements of the Australian Reinsurance Pool Corporation (‘the Entity’) for the year ended 30 June 2019:

(a) comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and

(b) present fairly the financial position of the Entity as at 30 June 2019 and its financial performance and cash flows for the year then ended.

The financial statements of the Entity, which I have audited, comprise the following statements as at 30 June 2019 and for the year then ended:

  • Statement by the Accountable Authority, Chief Executive and Chief Financial Officer;
  • Statement of Comprehensive Income;
  • Statement of Financial Position;
  • Statement of Changes in Equity;
  • Cash Flow Statement;
  • Notes to the financial statements, comprising a Summary of Significant Accounting Policies and other explanatory information.

Basis for opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Entity in accordance with the relevant ethical requirements for financial statement audits conducted by the Auditor-General and his delegates. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) to the extent that they are not in conflict with the Auditor-General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Accountable Authority’s responsibility for the financial statements

As the Accountable Authority of the Entity, the Board is responsible under the Public Governance, Performance and Accountability Act 2013 (the Act) for the preparation and fair presentation of annual financial statements that comply with Australian Accounting Standards – Reduced Disclosure Requirements and the rules made under the Act. The Board is also responsible for such internal control as the Board determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board is responsible for assessing the ability of the Entity to continue as a going concern, taking into account whether the Entity’s operations will cease as a result of an administrative restructure or for any other reason. The Board is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the assessment indicates that it is not appropriate.

Auditor’s responsibilities for the audit of the financial statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

  • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
  • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control;
  • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
  • conclude on the appropriateness of the Accountable Authority’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Entity to cease to continue as a going concern; and
  • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the Accountable Authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

Australian National Audit Office

Signature supplied

Lorena Skipper

A/g Executive Director

Delegate of the Auditor-General

Canberra

27 September 2019

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Primary financial statements

Statement by the Accountable Authority, Chief Executive and Chief Financial Officer

In our opinion, the attached financial statements for the year ended 30 June 2019 comply with subsection 42(2) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), and are based on properly maintained financial records as per subsection 41(2) of the PGPA Act.

In our opinion, at the date of this statement, there are reasonable grounds to believe that the Australian Reinsurance Pool Corporation will be able to pay its debts as and when they fall due.

This statement is made in accordance with a resolution of the Members.

Signed for and on behalf of and in accordance with a resolution of the Members.

Signature supplied

Mr Ian Carson AM

Chair

27 September 2019

Signature supplied

Dr Christopher Wallace

Cheif Executive

27 September 2019

Signature supplied

Mr John Park

Cheif Financial Officer

27 September 2019

Statement of Comprehensive Income for the period ended 30 June 2019

2019

2018

Notes

$’000

$’000

Premium revenue

1.1A

190,833

169,625

Outwards retrocession premium expense

1.1A

(64,801)

(62,369)

Commonwealth guarantee fee

1.1A

(55,000)

(55,000)

Net premium revenue

71,032

52,256

Claims expense

Retrocession and other recoveries revenue

Net claims incurred

Retrocession commission income

1.1B

5,149

5,979

Acquisition costs

1.2G

(1,619)

(1,843)

Other operating expenses

1.2G

(7,694)

(6,873)

Underwriting result

66,868

49,519

Investment income

1.1C

13,533

13,675

Other income

1.1D

30

25

Finance charges

1.2E

(3)

(2)

Operating result before capital holding fee

80,428

63,217

Capital holding fee

1.2D

(35,000)

(35,000)

Operating result

45,428

28,217

The above statement should be read in conjunction with the accompanying notes.

Statement of Financial Position as at 30 June 2019

2019

2018

Notes

$’000

$’000

ASSETS

Financial assets

Cash and cash equivalents

2.1A

1,099

1,561

Trade and other receivables

2.1B

57,034

48,121

Investments

2.1C

504,100

464,700

Deferred insurance assets

2.1D

33,613

33,252

Total financial assets

595,846

547,634

Non-financial assets

Leasehold improvements

2.2A

481

590

Plant and equipment

2.2A

150

181

Intangibles

2.2A

17

35

Work in progress

2.2A

181

Other non-financial assets

2.2B

113

35

Total non-financial assets

942

841

Total assets

596,788

548,475

LIABILITIES

Unearned liabilities

Unearned premium liability

2.3A

98,828

85,117

Unearned commission liability

2.3A

2,097

3,086

Total unearned liabilities

100,925

88,203

Payables

Suppliers

2.4A

33,094

33,050

Other payables

2.4B

223

25

Total payables

33,317

33,075

Provisions

Employee provisions

3.1A

480

403

Other provisions

2.5A

745

901

Total provisions

1,225

1,304

Total liabilities

135,467

122,582

Net assets

461,321

425,893

EQUITY

Accumulated reserves

Asset revaluation reserve

60

60

Claims handling reserve

34,864

25,098

Reserve for claims

426,397

400,735

Total equity

461,321

425,893

The above statement should be read in conjunction with the accompanying notes.

Statement of Changes in Equity for the period ended 30 June 2019

Accumulated
reserves

Asset
revaluation reserve

Claims handling
reserve

Reserve
for claims

Total
equity

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

Opening balance at 1 July

60

60

25,098

24,513

400,735

430,603

425,893

455,176

Income and expenses

Net operating result

45,428

28,217

45,428

28,217

Total income and expenses

45,428

28,217

45,428

28,217

Asset revaluation reserve

Transfers between equity components

Transfer to reserves

(45,428)

(28,217)

9,766

585

35,662

27,632

Transactions with owners

Distributions to owners

(10,000)

(57,500)

(10,000)

(57,500)

Closing balance at 30 June

60

60

34,864

25,098

426,397

400,735

461,321

425,893

The above statement should be read in conjunction with the accompanying notes.

Accounting Policy

Transactions with Government as owners

Pursuant to section 38(3)(a) of the Terrorism Insurance Act 2003 (TI Act), the Minister may give written direction to require ARPC to make payments to the Commonwealth designed to ensure that sections 35 and 36 do not result in a competitive advantage for ARPC. Pursuant to section 38(3)(b) of the TI Act, the Minister may give written direction to require ARPC to make payments to the Commonwealth in the nature of dividends. A direction was given by the Minister on 20 January 2019, to pay to the Commonwealth a sum of $90 million in the nature of a combined fee ($55 million Commonwealth guarantee fee and $35 million capital holding fee) (s.38(3)(a)) and a sum of $10 million as a temporary dividend (s.38(3)(b)). ARPC has made payments to the Commonwealth during 2019 totalling $100.0 million (2018: $147.5 million).

Reserves

The intention of the Government in establishing ARPC was that premiums would be used to fund a reserve pool. The reserve for claims has been created to enable ARPC to build up the required pool.

Cash Flow Statement for the period ended 30 June 2019

2019

2018

Notes

$’000

$’000

OPERATING ACTIVITIES

Cash received

Premiums

211,917

189,847

Commission

5,655

6,578

Interest

13,280

13,766

Other cash received

30

25

Total cash received

230,882

210,216

Cash used

Retrocession payments

67,319

64,841

Employees

3,807

4,226

Suppliers

5,154

3,456

Government

90,743

90,873

Net GST paid

14,721

13,757

Total cash used

181,744

177,153

Net cash from operating activities

49,138

33,063

INVESTING ACTIVITIES

Cash received

Proceeds from maturities of term deposits

1,368,200

1,582,500

Total cash received

1,368,200

1,582,500

Cash used

Placement of term deposits

1,407,600

1,557,200

Purchase of property, plant and equipment

19

111

Purchase of externally developed software

181

Total cash used

1,407,800

1,557,311

Net cash from/(used by) investing activities

(39,600)

25,189

FINANCING ACTIVITIES

Cash used

Distributions to owners

10,000

57,500

Total cash used

10,000

57,500

Net cash used by financing activities

(10,000)

(57,500)

Net increase/(decrease) in cash held

(462)

752

Cash and cash equivalents at the beginning of the reporting period

1,561

809

Cash and cash equivalents at the end of the reporting period

2.1A

1,099

1,561

The above statement should be read in conjunction with the accompanying notes.

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Overview

Objectives of Australian Reinsurance Pool Corporation

Australian Reinsurance Pool Corporation (ARPC) is a statutory authority that was established as an independent entity wholly owned by the Commonwealth of Australia (Commonwealth) on 1 July 2003 by the Terrorism Insurance Act 2003 (TI Act). ARPC was established to protect Australia from economic losses caused by terrorism catastrophe.

The role of ARPC is to administer the terrorism reinsurance scheme and reduce losses arising from catastrophic events caused by terrorism, using our expertise to provide cost effective reinsurance to support national resilience. Specifically, ARPC provides primary insurers with reinsurance for commercial property and associated business interruption losses arising from a Declared Terrorism Incident (DTI). The TI Act operates by overriding terrorism exclusion clauses in eligible insurance contracts to the extent that losses excluded are eligible terrorism losses arising from a DTI.

ARPC has the power to do all things necessary in connection with the performance of its functions. The continued existence of ARPC in its present form and with present programs is dependent upon Government policy.

The basis of preparation

The financial statements are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act 2013).

The financial statements have been prepared in accordance with:

a) Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR); and

b) the Australian Accounting Standards and Interpretations – Reduced Disclosure Requirements issued by the Australian Accounting Standards Board that apply for the reporting period.

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position. The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise stated.

The financial statements have been prepared on the basis that ARPC is a going concern.

New accounting standards

Consistent with Government policy, no accounting standard has been adopted earlier than the application date as stated in the standard.

The adoption of new standards and amendments that came into effect for this financial year did not have a significant impact on the financial statements.

A number of new and revised Australian Accounting Standards apply to ARPC’s financial statements in later years. ARPC’s assessment of the main effect of these standards on its financial statements is set out below.

AASB 16 – Leases

AASB 16 requires the net present value of payments under most operating leases to be recognised as assets and liabilities. ARPC has $1.761 million in operating lease commitments as at 30 June 2019. ARPC will apply the new standard in the 2019-20 financial year. The transition to AASB 16 will result in a right-of-use asset and lease liability being recognised on ARPC’s Balance Sheet to the value of the remaining operating lease commitment at transition date.

AASB 17 – Insurance contracts

AASB 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It will replace the corresponding AASB 1023 General Insurance Contracts. ARPC will apply the new standard in the 2022-23 financial year. The transition to AASB 17 will have an impact on ARPC’s financial position, however it is not possible to quantify the impact at present.

Taxation

ARPC is exempt from income tax by virtue of section 36 of the TI Act. ARPC is subject to Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). Revenues, expenses and assets are recognised net of the amount of GST except:

  • where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO), or
  • for receivables and payables.

Insurance

ARPC has insured its operating risks with a number of leading insurers using the brokering services of Aon Risk Services Australia Limited. The insurance coverage includes Directors and Officers Liability, Public and Products Liability, Group Journey Injury Insurance, Corporate Travel Insurance, and Business Package Insurance. Workers compensation is insured through Comcare Australia.

Outstanding claims liability

The financial statements have not included a liability for outstanding claims (2018: $0).

There were no declared terrorist incidents announced during the reporting period or outstanding claims from incidents in prior periods. Any such declaration must be announced by the Minister after consultation with the Attorney-General.

ARPC considers that there are no significant inherent uncertainties in respect of the liability estimate. Accordingly, ARPC has not established a central estimate and has not, therefore, applied a prudential margin in respect of the outstanding claims liability. This is in accordance with AASB 1023 General Insurance Contracts.

In the event of a declared terrorist incident, an actuary will be engaged to independently assess the outstanding claims liability at the balance date when it is possible that claims will be in excess of the primary insurer’s deductible.

Net claims incurred

There were no declared terrorist incidents during the reporting period. Net claims incurred from prior year declared terrorist incidents did not exceed the individual primary insurer’s deductible.

Assets backing general insurance liabilities

With the exception of property, plant and equipment and intangibles, ARPC has determined that all assets are held to back general insurance liabilities.

Events after the reporting period

ARPC is not aware of any significant events that have occurred since reporting date which warrant disclosure in these financial statements

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NOTES TO THE FINANCIAL STATEMENTS

Financial performance

This section analyses the financial performance of ARPC for the financial year ended 30 June 2019.

Revenue

1.1A: Net premium revenue

2019

$’000

2018

$’000

Gross written premium

204,544

178,900

Movement in unearned premium reserve

(13,711)

(9,275)

Total premium revenue

190,833

169,625

Outwards retrocession premium expense

(64,801)

(62,369)

Commonwealth guarantee fee

(55,000)

(55,000)

Net premium revenue

71,032

52,256

Accounting policy

Premium revenue

Premium revenue comprises amounts charged to insurers, excluding taxes collected on behalf of third parties. The earned portion of premiums received and receivable, including unclosed business, is recognised as revenue in the Statement of Comprehensive Income. Premiums are recognised as earned based on time from the date of attachment of risk. Premiums not received at reporting date and for the quarter ended 30 June 2019 are recognised as premiums receivable in the Statement of Financial Position. The proportion of premium received or receivable not earned in the Statement of Comprehensive Income at the reporting date is recognised in the Statement of Financial Position as unearned premium.

Unearned premiums are determined using the one eighth method; a fractional method of calculation of the balance. This method is driven by the assumption that the risk attached to the revenue ceded expires evenly over each quarter of the financial year.

Premiums on unclosed business are brought to account using estimates based on the previous year’s actual unclosed business with due allowance made for any changes in the pattern of new business and renewals and having regard to the premium reported for the current year prior to the signing of the financial statements.

Retrocession premium expense

Amounts paid to retrocessionaires are recorded as an outwards retrocession premium expense and are recognised in the Statement of Comprehensive Income from the attachment date over the contract indemnity period. This is in accordance with the expected pattern of the incidence of risk ceded.

Commonwealth guarantee fee

Pursuant to section 38(3)(a) of the TI Act, the Minister may give written direction to require ARPC to make payments to the Commonwealth designed to ensure that sections 35 and 36 do not result in a competitive advantage for ARPC. A direction was given by the Minister on 20 January 2019, to pay to the Commonwealth a sum of $55 million in the nature of a Commonwealth guarantee fee. The Commonwealth guarantee operates as retrocession protection above the private market retrocession layers. The guarantee is an unlimited solvency guarantee, but the reduction percentage mechanism is designed to limit the guarantee to $10 billion.

1.1B: Retrocession commission income

2019

$’000

2018

$’000

Retrocession commission income

5,149

5,979

Total retrocession commission income

5,149

5,979

Accounting policy

Retrocession commission revenue is recognised in the Statement of Comprehensive Income in accordance with the pattern of retrocession expenses incurred.

1.1C: Investment income

2019

$’000

2018

$’000

Cash at bank

98

117

Term deposits

13,435

13,558

Total investment income

13,533

13,675

Accounting policy

Interest revenue is recognised using the effective interest method.

1.1D: Other income

2019

$’000

2018

$’000

Other revenue

30

25

Total other income

30

25

Expenses

1.2A: Employee benefits

2019

$’000

2018

$’000

Wages and salaries

3,244

3,243

Superannuation

Defined contribution plans

456

436

Defined benefit plans

4

6

Leave and other entitlements

302

383

Separation and redundancies

191

Total employee benefits

4,006

4,259

Accounting policy

Accounting policies for employee related expenses are contained in the People and Relationships section.

1.2B: Suppliers

2019

$’000

2018

$’000

Goods and services supplied or rendered

Consultants

2,352

1,085

Reinsurance broker services

537

537

Assurance services

277

298

Travel

260

247

Information & communications technology

245

341

Staff development and training

179

240

Shared services

178

336

Legal fees

144

125

Other

521

602

Total goods and services supplied or rendered

4,693

3,811

Goods supplied

88

82

Services rendered

4,605

3,729

Total goods and services supplied or rendered

4,693

3,811

Other supplier expenses

Operating lease rentals

411

415

Workers compensation insurance

25

40

Total other supplier expenses

436

455

Total supplier expenses

5,129

4,266

Leasing commitments

ARPC in its capacity as lessee currently has one agreement relating to office accommodation. Lease payments are subject to regular increases in accordance with rent reviews and pre-determined percentage increases. The remaining period of the lease agreement is four years and five months. This operating lease is effectively non-cancellable.

2019

$’000

2018

$’000

Commitments for minimum lease payments in relation to
non-cancellable operating leases are payable as follows:

Within 1 year

368

350

Between 1 to 5 years

1,393

1,580

More than 5 years

180

Total operating lease commitments

1,761

2,110

Accounting policy

An operating lease is a lease where the lessor retains substantially all risks and benefits in the underlying asset. Operating lease payments are expensed on a straight-line basis which is representative of the pattern of benefits derived.

1.2C: Depreciation and amortisation

2019

$’000

2018

$’000

Depreciation

Leasehold improvements

109

109

Property, plant and equipment

51

45

Total depreciation

160

154

Amortisation

Intangibles – computer software

18

36

Total amortisation

18

36

Total depreciation and amortisation

178

190

Accounting policy

Accounting policies for depreciation and amortisation are contained in the non-financial assets section.

1.2D: Capital holding fee paid to the Commonwealth

2019

$’000

2018

$’000

Capital holding fee

35,000

35,000

Total capital holding fee paid to the Commonwealth

35,000

35,000

1.2E: Finance charges

2019

$’000

2018

$’000

Bank charges

3

2

Total finance charges

3

2

Accounting policy

All finance charges are expensed as incurred.

1.2F: Losses from asset sales

2019

$’000

2018

$’000

Property, plant and equipment

Carrying value of assets disposed

1

Total losses from asset sales

1

1.2G: Reconciliation of expenses to the Statement
of Comprehensive Income

2019

$’000

2018

$’000

Expenses by nature

Employee benefits

4,006

4,259

Suppliers

5,129

4,266

Depreciation and amortisation

178

190

Capital holding fee paid to the Commonwealth

35,000

35,000

Finance charges

3

2

Losses from asset sales

1

Total expenses by nature

44,316

43,718

Expenses by function

Acquisition costs

1,619

1,843

General and administration expenses

42,697

41,875

Total expenses by function

44,316

43,718

Reconciliation of expenses to the Statement of Comprehensive Income

General and administration expenses

42,697

41,875

Less: Capital holding fee paid to the Commonwealth

(35,000)

(35,000)

Less: Finance costs

(3)

(2)

Other operating expenses

7,694

6,873

Financial position

This section analyses ARPC’s assets used to conduct its operations and the operating liabilities incurred as a result. Employee-related information is disclosed in the People and relationships section.

Financial assets

2.1A: Cash and cash equivalents

2019

$’000

2018

$’000

Cash at bank

1,099

1,561

Total cash and cash equivalents

1,099

1,561

Accounting policy

Cash and cash equivalents includes notes and coins held and any deposits in bank accounts with an original maturity of three months or less and subject to insignificant risk of valuation changes. Cash is recognised at the nominal amount.

2.1B: Trade and other receivables

2019

$’000

2018

$’000

Premium receivable

52,013

42,438

Commission receivable

2,080

3,061

Interest receivable

2,851

2,599

Net GST receivable from the Australian Taxation Office

90

23

Total receivables

57,034

48,121

Credit terms are net 30 days (2018: 30 days). Trade debtors are non-interest bearing.

Interest receivable

Effective interest rates range from 0.65% to 2.80% (2018: 0.90% to 2.75%) and the frequency of payment is monthly for cash accounts and on maturity for term deposits.

Accounting policy

Amounts due from policyholders and intermediaries are initially recognised at fair value, being the amounts due. They are subsequently measured at fair value, which is approximated by taking the initially recognised amount and reducing it for impairment, as appropriate.

A provision for receivables impairment is established when there is objective evidence that ARPC will not be able to collect all amounts due according to the original terms of the receivables. The provision established is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The discount is calculated using a risk-free rate. The impairment charge is recognised in the Statement of Comprehensive Income.

2.1C: Investments

2019

$’000

2018

$’000

Fixed interest term deposits

504,100

464,700

Total investments

504,100

464,700

Term deposits at balance date are held with local banks regulated by the Australian Prudential Regulation Authority (APRA). These deposits earn an effective rate of interest of 2.41% (2018: 2.61%). Interest is payable on maturity for all term deposits. Terms are between 90 and 369 days (2018: 91 and 182 days).

Accounting policy

Fixed interest deposits are carried at the face value of the amounts deposited. The carrying amounts are an approximate to their fair value.

2.1D: Deferred insurance assets

Notes

2019

$’000

2018

$’000

(i) Deferred insurance assets

Deferred retrocession premium

2.1D(ii)

32,850

32,487

Deferred acquisition costs

2.1D(iii)

763

765

Total deferred insurance assets

33,613

33,252

(ii) Deferred retrocession premium

Deferred retrocession premium as at 1 July

32,487

30,412

Retrocession premium deferred

32,850

32,487

Amortisation charged to expense

(32,487)

(30,412)

Deferred retrocession premium as at 30 June

32,850

32,487

(iii) Deferred acquisition costs

Deferred acquisition costs as at 1 July

765

965

Acquisition costs deferred

763

765

Amortisation charged to expense

(765)

(965)

Deferred acquisition costs as at 30 June

763

765

Accounting policy

Deferred acquisition costs

Acquisition costs are incurred in obtaining and recording policies of insurance. They include legal, advertising, risk assessment and other administrative costs.

A portion of acquisition costs relating to unearned premium revenue is deferred in recognition in that it represents future benefits to ARPC, where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the Statement of Comprehensive Income in subsequent reporting periods. Deferred acquisition costs are measured at the lower of cost and recoverable amount. These costs are amortised on the same basis as the earning pattern of the corresponding premium revenue.

Deferred retrocession premium

Deferred retrocession premiums are recognised as part of deferred insurance assets. The amortisation of deferred retrocession premiums is in accordance with the pattern of retrocession benefit received. The amount deferred represents the future economic benefit to be received from the retrocession contracts.

Unexpired risk liability

ARPC has compared the net present value of the expected future cash flows relating to future claims arising under general insurance contracts with the reported unearned premium liability. There is no deficiency noted or recorded in these financial statements (2018: $0). Accordingly, there has been no write down in ARPC’s deferred acquisition costs and no requirement to establish an unexpired risk liability

Non-financial assets

Reconciliation of the Opening and Closing Balances of Property, Plant and Equipment and Intangibles

Leasehold improvements

Plant and equipment

Intangibles
– Computer Software Purchased

Work in Progress – Software Purchased

Total

$’000

$’000

$’000

$’000

$’000

As at 1 July 2018

Gross book value

820

277

2,661

3,758

Accumulated depreciation, amortisation and impairment

(230)

(96)

(2,626)

(2,952)

Total as at 1 July 2018

590

181

35

806

Additions – By purchase

20

181

201

Depreciation and amortisation expense

(109)

(51)

(18)

(178)

Asset disposal

(16)

(16)

Accumulated depreciation on asset disposal

16

16

Total as at 30 June 2019

481

150

17

181

829

Total as at 30 June 2019

Gross book value

820

281

2,661

181

3,943

Accumulated depreciation, amortisation and impairment

(339)

(131)

(2,644)

(3,114)

Total as at 30 June 2019

481

150

17

181

829

No indicators of impairment were found for property, plant and equipment and intangibles (2018: Nil). No property, plant and equipment and intangibles are expected to be sold or disposed of within the next 12 months (2018: Nil).

Revaluations of non-financial assets

All revaluations were conducted in accordance with the revaluation accounting policy stated below.

Accounting policy

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition.

Asset recognition threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $2,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total). The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located.

This is also relevant to make good provisions in property leases taken up by ARPC where there exists an obligation to restore the property back to its original condition.

These costs are included in the value of ARPC’s leasehold improvements with a corresponding provision for the make good recognised.

Revaluations

Following initial recognition at cost, property, plant and equipment are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets did not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depended upon the volatility of movements in market values for the relevant assets.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reversed a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reversed a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset restated to the revalued amount. Depreciation is recalculated over the remaining estimated useful life of the asset.

Depreciation

Depreciable plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to ARPC using the straight-line method of depreciation. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

2019

2018

Leasehold improvements

Lease term

Lease term

Plant and equipment

3 to 8 years from
purchase date

3 to 8 years from
purchase date

Impairment

All assets were assessed for impairment at 30 June 2019. Where indications of impairment exist, the asset’s recoverable amount is estimated, and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

Intangibles

Software development expenditure that meets the criteria as an intangible asset is capitalised in the Statement of Financial Position and amortised over its expected useful life, subject to impairment testing. Costs incurred in researching and evaluating a project up to the point of formal project commitment are treated as research costs and are expensed as incurred.

ARPC’s intangibles comprise purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses. Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of ARPC’s software assets are 4 years (2018: 4 years).

All software assets were assessed for indications of impairment as at 30 June 2019.

2.2B: Other non-financial assets

2019

$’000

2018

$’000

Prepayments

113

35

Total other non-financial assets

113

35

Unearned liabilities

2.3A: Unearned liability

Notes

2019

$’000

2018

$’000

Unearned premium liability

2.3B

98,828

85,117

Unearned commission liability

2.3C

2,097

3,086

Total unearned liability

100,925

88,203

2.3B: Unearned premium liability

2019

$’000

2018

$’000

Unearned premium liability as at 1 July

85,117

75,842

Deferral of premiums on contracts written in the period

98,828

85,117

Earning of premiums written in the previous periods

(85,117)

(75,842)

Unearned premium liability as at 30 June

98,828

85,117

2.3C: Unearned commission liability

2019

$’000

2018

$’000

Unearned commission liability as at 1 July

3,086

2,943

Deferral of commissions on contracts written in the period

2,097

3,086

Earning of commissions written in the previous periods

(3,086)

(2,943)

Unearned commission liability as at 30 June

2,097

3,086

Payables

2.4A: Supplier payables

2019

$’000

2018

$’000

Retrocession payable

32,582

32,222

Accruals

512

828

Total supplier payables

33,094

33,050

Retrocession payable

In accordance with ARPC’s retrocession treaty expiring 31 December 2019, the retrocession premium is paid quarterly in advance. Settlement is made net 30 days.

Trade creditors

Settlement is made net 30 days.

All of ARPC’s liabilities are guaranteed by the Commonwealth by virtue of section 35 of the TI Act.

2.4B: Other payables

2019

$’000

2018

$’000

Salaries and wages

198

22

Superannuation

25

3

Total other payables

223

25

Accounting policy

Accounting policies for employee related payables are contained in the People and Relationships section.

Other provisions

2.5A: Other provisions

Lease
incentive
$’000

Provision for restoration
$’000

Other provisions
$’000

Total
$’000

Carrying amount as at 1 July 2018

119

122

660

901

Additional provisions made

17

7

24

Amounts used

(180)

(180)

Unwinding of discount

Amounts owing at 30 June 2019

136

122

487

745

The lease end date for ARPC’s Market Street, Sydney office is 30 November 2023.

Provisions noted in Other provisions relate to future premium refund payable (2018: future premium refund payable).

The financial statements have not included an outstanding claims liability (2018: nil).

Accounting policy

Lease incentives

Lease incentive taking the form of rent-free periods are recognised as liabilities when received and subsequently reduced by allocating lease payments between rental expense and a reduction of the lease liability over the lease term.

People and relationships

This section describes a range of employment and post-employment benefits provided to our people and our relationships with other key people.

Employee provisions

3.1A: Employee Provisions

2019

$’000

2018

$’000

Leave

480

403

Total employee provisions

480

403

Accounting policy

Liabilities for short-term employee benefits and termination benefits expected within twelve months of the end of reporting period end are measured at their nominal amounts.

Other long-term employee benefits are measured as the net total of the present value of the defined benefit obligation at the end of the reporting period.

Leave

The liability for employee benefits includes provision for annual leave, long service leave and purchased leave. No provision has been made for sick leave, as all sick leave is non-vesting and the average sick leave taken in future years by employees of ARPC is estimated to be less than the annual sick leave entitlement.

The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken. This includes ARPC’s employer superannuation contribution rates and other employee benefits to the extent that the leave is likely to be taken during service, rather than being paid out on termination.

The liability for long service leave is the present value of employee entitlements based on the Australian Government shorthand method as per the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Superannuation

Superannuation guarantee contributions are made by ARPC for employees and Members.

The default superannuation scheme is AustralianSuper.

The liability for superannuation recognised as at 30 June 2019 represents the outstanding contributions for the final fortnight of the year.

Key management personnel remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of ARPC, directly or indirectly, including any director (whether executive or otherwise) of ARPC. ARPC has determined the key management personnel to be the responsible Portfolio Minister and Cabinet, ARPC’s seven Board Members, the Chief Executive, the Chief Underwriting Officer, the Chief Operating Officer and the Chief Financial Officer.

Key management personnel remuneration is reported in the table below:

2019

$

2018

$

Short-term employee benefits

1,448,620

1,912,225

Post-employment benefits

133,871

179,154

Other long-term employee benefits

6,611

166,612

Termination benefits

191,376

Total key management personnel remuneration expense

1,589,102

2,449,367

The above key management personnel remuneration excludes the remuneration and other benefits of the responsible Portfolio Minister and Cabinet. The Portfolio Minister and Cabinet’s remuneration and other benefits are set by the Remuneration Tribunal and are not paid by ARPC.

The total number of key management personal that are included in the above table are 11 (2018: 15). The 2018 comparative includes two additional senior executive roles that were made redundant in April 2018.

Related party disclosures

Members of ARPC at 30 June 2019 were:

Mr Ian Carson AM

Ms Janet Torney

Ms Karen Payne

Ms Robin Low

Mr John Peberdy

Mr Michael Callaghan AM PSM

Ms Elaine Collins

Changes in membership during the year:

  • Ms Janet Torney’s term expired on 30 June 2018 and she was re-appointed effective 1 July 2018 for a 3-year term.
  • Ms Elaine Collins’ term expired on 30 June 2018 and she was re-appointed effective 1 July 2018 for a 3-year term.
  • Mr John Peberdy’s term expired on 30 June 2018 and he was re-appointed effective 1 July 2018 for a 3-year term.

Other than where noted, Members held their positions for the full year.

Key management personnel employed by ARPC at 30 June 2019 were:

  • Dr Christopher Wallace – Chief Executive
  • Mr Michael Pennell PSM – Chief Underwriting Officer
  • Ms Janice Nand – Acting Chief Operating Officer
  • Mr John Park – Chief Financial Officer

Related party relations:

ARPC is an Australian Government controlled entity established by section 9 of the TI Act. ARPC is only authorised to transact business and carry out functions as provided in the TI Act or as approved or directed by the Minister. ARPC’s liabilities are guaranteed by the Commonwealth by virtue of section 35 of the TI Act. Related parties to ARPC are the Members, Key Management Personnel including the Portfolio Minister and Cabinet, and other Australian Government entities.

Transactions with related parties:

ARPC’s Chair Mr Ian Carson AM became a partner with PricewaterhouseCoopers (PwC) effective 1 August 2018, when his previous firm PPB Advisory was acquired by PwC. ARPC purchases internal audit services from PwC on normal commercial terms. The purchase of internal audit services is overseen by the Audit & Compliance Committee of which Mr Carson is not a member. Mr Carson has not been involved in any discussions or decisions involving the contract with PwC and has excluded himself from all meetings and discussions were this matter was raised. Mr Carson does not hold a management role at PwC and is not a member of the PwC board or Executive Committee. During the year ARPC made payments to PwC to the value of $301,170.

Given the breadth of Government activities, related parties may transact with the government sector in the same capacity as ordinary citizens. These transactions are disclosed in the table below. Apart from the items disclosed in the table below and in note 3.2 relating to the remuneration and expenses of key management personnel during the year, there were no further related party transactions.

The following cash transactions with related parties occurred during the year:

2019

$

2018

$

Related Party – Owner

Purpose

The Treasury

Commonwealth guarantee fee

55,000,000

55,000,000

The Treasury

Capital holding fee

35,000,000

35,000,000

Geoscience Australia

Development of loss estimate model

448,000

411,800

The Treasury

Provision of corporate support services to ARPC

188,095

336,325

Australian Government Solicitor

Provision of legal services

77,974

19,287

Comcare

Workers compensation insurance premiums

25,308

46,229

Artbank

Hire of artwork

2,600

2,913

Department of Communications and the Arts

Copyright fees

1,480

2,711

Department of Foreign Affairs
and Trade

Transfer of employee leave liability

53,556

90,743,457

90,872,821

Related Party – Member

Purpose

PricewaterhouseCoopers (PwC)

Provision of internal audit services

301,170

301,170

Total Related Party Transactions

91,044,627

90,872,821

Managing uncertainties

This section analyses how ARPC manages risks within its operating environment.

Risk management

ARPC’s approach to managing risk is consistent with the Australian/New Zealand Standard for Risk Management (AS/NZS IS0 31000:2009). The Board maintains a Risk Appetite and Tolerance Statement, and monitors performance reports against this statement provided by management at each Board meeting. The Board-approved Risk Management Policy outlines the commitment of the Board and senior management to promote a supportive risk culture, set risk objectives, provide training and resources for risk management activities, manage and report risk information, and monitor, review and continually improve. The Risk Management Policy describes the key risk types and the systems and controls to manage these.

The broad risk categories discussed below are:

  • insurance risk;
  • operational risk;
  • capital risk; and
  • financial risks (considered in Note 4.2).

Within each of these categories, risks are evaluated before considering the impact of mitigating controls. The existence and effectiveness of such mitigating controls are measured such that residual risks are managed within risk tolerance.

Insurance risk

The following outlines how ARPC manages its insurance risks across the underwriting, claims and actuarial disciplines.

Underwriting risks

Section 8 of the TI Act renders terrorism exclusion clauses in all eligible insurance contracts ineffective in the event of a declared terrorist incident. Insurers have the right to reinsure this risk with ARPC.

Key aspects of the process established to mitigate risks include:

  • ARPC’s underwriting risk is limited to eligible terrorism losses arising in respect of eligible insurance contracts;
  • ARPC utilises a standard reinsurance agreement for underwriting and accepting insurance risks, with retentions to share risk exposure with each cedant;
  • ARPC undertakes a cedant review program to verify premium levels;
  • ARPC’s exposure to insurance risk concentrations is mitigated by the fact the TI Act applies to all eligible insurance contracts. The TI Act wording is designed to facilitate concentration risk diversification both geographically and by type of risk.

Claims risk

Claims submitted to ARPC associated with the 2014 DTI did not exceed the retentions of the reinsured. Therefore, no claims expense has been incurred and no liability has been recognised for the payment of claims. ARPC’s mitigation strategies for the claims risks include:

  • access to a Commonwealth guarantee for the due payment of money that may become payable by ARPC to any person other than the Commonwealth. If a DTI occurs the Minister must specify a pro rata (percentage) reduction in claims to be paid out by insurers, if, in the absence of such a reduction percentage, the total amounts payable by the Commonwealth might exceed $10 billion;
  • the appointment of a claims manager and the development of claims procedures to validate that all claims advices are captured and updated on a timely basis;
  • a standing agreement with an actuarial firm to value claims arising from a DTI;
  • collecting annual aggregate exposure data from cedants;
  • supporting the continued development of blast and plume models estimating terrorism losses to support advice given regarding a reduction percentage and ultimate claim costs;
  • the asset mix which ARPC invests in is regulated by section 59 of the PGPA Act. The management of investments is closely monitored to confirm the liquidity of funds to match the cash needs of ARPC;
  • maintaining a claims handling reserve. The purpose of this reserve is to validate that there are sufficient monies set aside to allow ARPC to continue to operate in order to finalise any claims and reinsurance recoveries following the scheme cessation or a significant DTI. The claims handling reserve as at 30 June 2019 is $34.86 million (2018: $25.10 million).
Operational risk

Operational risk is the risk of loss arising from system failure or inadequacies, human error or external events that do not relate to insurance, capital and financial risks.

ARPC manages these risks within the entity’s enterprise wide risk management framework. ARPC’s mitigation strategies for operational risk include:

  • effective staff recruitment and retention policies;
  • segregation of duties including access controls, delegated authorisation levels and accounting reconciliations controls;
  • maintenance and use of sophisticated information systems which provide up to date and reliable data to assist in managing the risk to which the business is exposed to at any point in time; and
  • ongoing management of ARPC’s Business Continuity Plan.
Capital risk

ARPC’s capital structure to cover claims from declared terrorist incidents is outlined below:

  • ARPC has access to its reserve for claims in cash and investments of $426 million (2018: $400 million);
  • In the event of a DTI, ARPC would be required to pay $285 million (2018: $285 million) before claiming on its retrocession program;
  • ARPC has access to a $3.315 billion retrocession program in excess of the $285 million retention (2018: $3.065 billion retrocession program, in excess of $285 million);
  • ARPC has access to a Commonwealth guarantee for the due payment of money that may become payable by ARPC to any person other than the Commonwealth. If a DTI occurs, the Minister must specify a pro rata (percentage) reduction in claims to be paid out by insurers if, in the absence of such a reduction percentage, the total amounts payable by the Commonwealth might exceed $10 billion (2018: $10 billion).

Financial risk management

ARPC is exposed to financial risks such as market risk, credit risk, and liquidity risk. It seeks to minimise potential adverse effects on its financial performance through its risk management framework. The key objectives are capital stability, accessibility and rate of return.

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 two types of risk:

  • interest rate risk (owing to fluctuations in market interest rates); and
  • price risk (owing to fluctuations in market prices).

Interest rate risk

Interest rate risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Financial instruments with floating rate interest expose ARPC to cash flow interest rate risk, whereas fixed interest rate instruments expose ARPC to fair value interest rate risk.

ARPC manages the interest rate risk through its investment policy. The policy notes ARPC must comply with the requirements of the PGPA Act. Section 59(1)(b) of the PGPA Act provides that a corporate Commonwealth entity may invest surplus money:

(i) on deposit with a bank, including a deposit evidenced by a certificate of deposit; or

(ii) in securities of, or securities guaranteed by, the Commonwealth, a State or a Territory; or

(iii) in any other form of investment authorised by the Finance Minister in writing; or

(iv) in any other form of investment prescribed by the rules; or

(v) for a government business enterprise – in any other form of investment that is consistent with sound commercial practice.

ARPC actively manages portfolio duration. The maturity profile of ARPC’s interest bearing financial assets, the exposure to interest rate risk and the effective weighted average interest rate for interest bearing financial assets is listed below.

Floating interest rate

Fixed interest rate
maturing in

Total

1 year
or less

1 year
or less

1-5 years

> 5 years

Notes

2019

$’000

2019

$’000

2019

$’000

2019

$’000

2019

$’000

Interest bearing financial assets

Cash and cash equivalents

2.1A

1,099

1,099

Fixed term deposits

2.1C

504,100

504,100

Total

1,099

504,100

505,199

Weighted average interest rate

0.89%

2.41%

2.41%

Floating interest rate

Fixed interest rate
maturing in

Total

1 year
or less

1year
or less

1-5 years

> 5 years

Notes

2018

$’000

2018

$’000

2018

$’000

2018

$’000

2018

$’000

Interest bearing financial assets

Cash and cash equivalents

2.1A

1,561

1,561

Fixed term deposits

2.1C

464,700

464,700

Total

1,561

464,700

466,261

Weighted average interest rate

1.06%

2.61%

2.61%

The Department of Finance deemed a 20-basis point change to be reasonably possible and ARPC adopted this when reporting interest rate risk (2018: 20-basis point change). ARPC has considered the implied financial impact of the deemed 20 basis point change. The table below details the interest rate sensitivity analysis of ARPC at the reporting date, holding all other variables constant.

Movement
in variable

Financial Impact

Profit/Loss

Equity

2019

%

2018

%

2019

$’000

2018

$’000

2019

$’000

2018

$’000

Interest rate movement

Interest bearing

+0.20

+0.20

1,010

933

1,010

933

Financial assets

-0.20

-0.20

(1,010)

(933)

(1,010)

(933)

Price risk

Price risk is the risk that the fair value of a financial instrument’s future cash flows will fluctuate because of market price changes, other than those arising from interest rate or currency risk. These changes can be caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar, financial instruments traded on the market.

The premium charged for reinsurance is determined by Ministerial Direction. The premiums have been set having regard to the level of risk.

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. The following policies and procedures are in place to mitigate ARPC’s credit risk:

  • premium debtors in respect of credit risk is monitored monthly; and
  • an approved investment policy document. Compliance with the policy is monitored and reported monthly.

The following table provides information regarding the aggregate credit risk exposure to ARPC in respect of financial assets. The table classifies the assets according to Standard and Poor’s counterparty credit ratings.

Credit rating

AAA

AA-

A+

A

Unrated

Total

Notes

2019

$’000

2019

$’000

2019

$’000

2019

$’000

2019

$’000

2019

$’000

ARPC

Cash and cash equivalents

2.1A

1,099

1,099

Receivables

2.1B

57,034

57,034

Fixed term deposits

2.1C

402,500

96,600

5,000

504,100

Total

1,099

402,500

96,600

5,000

57,034

562,233

Credit rating

AAA

AA-

A+

A

Unrated

Total

Notes

2018

$’000

2018

$’000

2018

$’000

2018

$’000

2018

$’000

2018

$’000

ARPC

Cash and cash equivalents

2.1A

1,561

1,561

Receivables

2.1B

48,121

48,121

Fixed term deposits

2.1C

349,100

99,600

16,000

464,700

Total

1,561

349,100

99,600

16,000

48,121

514,382

The carrying amount of the relevant asset classes in the Statement of Financial Position represents the maximum amount of credit exposure.

The following table provides information regarding the carrying value of ARPC’s financial assets that have been impaired and the ageing of those that are past due but not impaired at the balance date.

Not past due
or impaired

Past due

Total

Notes

2019

$’000

2018

$’000

2019

$’000

2018

$’000

2019

$’000

2018

$’000

Financial assets

Premium receivables

2.1B

51,649

42,413

364

25

52,013

42,438

Commission receivables

2.1B

2,080

3,061

2,080

3,061

Interest receivable

2.1B

2,851

2,599

2,851

2,599

Net GST receivable

2.1B

90

23

90

23

Total

56,670

48,096

364

25

57,034

48,121

Ageing of financial assets past due

0 to
30 days

31 to
60 days

61 to
90 days

90+
days

Total

Notes

2019

$’000

2019

$’000

2019

$’000

2019

$’000

2019

$’000

Financial assets

Premium receivables

2.1B

347

2

15

364

Total

347

2

15

364

Ageing of financial assets past due

0 to
30 days

31 to
60 days

61 to
90 days

90+
days

Total

Notes

2018

$’000

2018

$’000

2018

$’000

2018

$’000

2018

$’000

Financial assets

Premium receivables

2.1B

6

19

25

Total

6

19

25

Retrocession counterparty risk

ARPC purchases retrocession to encourage commercial market reinsurance capacity to return to the terrorism insurance market, control exposure to DTI losses and protect capital. ARPC’s strategy for retrocession selection, approval and monitoring is addressed by:

  • placing treaty retrocession in accordance with ARPC’s retrocession management strategy requirements;
  • regularly reassessing retrocession arrangements based on current exposure information; and
  • actively monitoring the credit quality of retrocessionaires.

Counterparty exposures and limits are reviewed by management on a regular basis. Retrocession is only placed with counterparties that have a Standard and Poor’s credit rating of A- and above and concentration risk is managed through counterparty limits. In the event of a DTI, ARPC will receive recognised collateral from non-APRA authorised participants in the program.

The following tables provide information about the quality of ARPC’s credit risk exposure in respect of its retrocession program. The analysis classifies the counterparty risk according to counterparty Standard and Poor’s credit ratings.

Retrocession program counterparty credit rating

2019

$

2018

$

AAA

AA+

71,672

71,660

AA

88,853

86,188

AA-

612,019

414,511

A+

1,203,448

1,243,960

A

804,160

780,594

A-

534,848

468,087

ARPC Total Exposure

3,315,000

3,065,000

Liquidity risk

ARPC’s financial liabilities are payables. Liquidity risk is the risk of encountering difficulty in meeting obligations associated with financial liabilities. ARPC has the internal policies and procedures in place such that there are sufficient resources to meet its financial obligations. ARPC’s liquidity risk is also mitigated through the strategy of short-term investments that provides for ready access to assets.

The table below summaries the maturity profile of ARPC’s financial liabilities. All liabilities are measured on an undiscounted cash flow basis given their short-term maturity.

1 year or less

From 1-5 years

Total

Notes

2019

$’000

2018

$’000

2019

$’000

2018

$’000

2019

$’000

2018

$’000

Financial liabilities

Payables

2.4A

33,094

33,050

33,094

33,050

Total

33,094

33,050

33,094

33,050

Contingent assets and liabilities

Quantifiable contingencies

As at 30 June 2019 ARPC had no quantifiable contingencies (2018: Nil).

Unquantifiable contingencies

As at 30 June 2019 ARPC had no quantifiable contingencies (2018: Nil).

Accounting policy

Contingent assets and liabilities

Contingent assets and liabilities are not recognised in the Statement of Financial Position but are reported in the relevant notes. They may arise from uncertainty as to the existence of a liability or asset or represent an existing liability or asset in respect of which settlement is not probable or the amount cannot be reliably measured.

Contingent assets are reported when settlement is probable, but not virtually certain, and contingent liabilities are recognised when settlement is greater than remote.

Financial instruments

4.4A: Categories of financial instruments

2019

$’000

2018

$’000

Comparative financial assets under AASB 139:

Financial assets at fair value through profit or loss

Cash and cash equivalents

1,561

Fixed term deposits

464,700

Total financial assets at fair value through profit or loss

466,261

Loans and receivables

Receivables (gross)

48,121

Total loans & receivables

48,121

Financial assets under AASB 9:

Financial assets at fair value through profit or loss

Cash and cash equivalents

1,099

Fixed term deposits

504,100

Total financial assets at fair value through profit or loss

505,199

Financial assets at amortised cost

Receivables (gross)

57,034

Total financial assets at amortised cost

57,034

Financial liabilities:

Financial liabilities measured at amortised cost

Suppliers payables

33,094

33,050

Other payables

223

25

Total financial liabilities measured at amortised cost

33,317

33,075

Classification of financial assets on the date of initial application of AASB 9.

Financial assets class

Notes

AASB 139 original classification

AASB 9
new classification

AASB 139 carrying amount at 1 July 2018

$’000

AASB 9
carrying amount at 1 July 2018

$’000

Cash and cash equivalents

2.1A

Fair value through Profit or Loss

Fair value through Profit or Loss

1,561

1,561

Trade receivables

2.1B

Loans and receivables

Amortised Cost

48,121

48,121

Fixed term deposits

2.1C

Fair value through Profit or Loss

Fair value through Profit or Loss

464,700

464,700

Total financial assets

514,382

514,382

Reconciliation of carrying amounts of financial assets on the date of initial application of AASB 9.

Financial assets class

AASB 139
carrying amount
at 1 July 2018
$’000

Reclassification $’000

Remeasurement $’000

AASB 9
carrying amount at 1 July 2018
$’000

Financial assets at fair value
through profit or loss

Held to maturity

Cash and cash equivalents

1,561

1,561

Fixed term deposits

464,700

464,700

Total fair value through
profit or loss

466,261

466,261

Financial assets at amortised cost

Loans and receivables

Receivables (gross)

48,121

48,121

Total amortised cost

48,121

48,121

Accounting policy

Financial assets

With the implementation of AASB 9 Financial Instruments for the first time in 2019, ARPC classifies its financial assets in the following categories:

a) financial assets at fair value through profit or loss;

b) financial assets measured at amortised cost.

The classification depends on both ARPC’s business model for managing financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when ARPC becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash and derecognised when the contractual rights to the cash flows from the financial asset expire or are transferred upon trade date.

Comparatives have not been restated on initial application.

Financial Assets at Amortised Cost

Financial assets included in this category need to meet two criteria:

1. the financial asset is held in order to collect the contractual cash flows; and

2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Effective interest Method

Income is recognised on an effective interest rate basis for financial assets that are recognised at amortised cost.

Financial assets at Fair Value Through Profit or Loss (FVTPL)

Financial assets are classified as financial assets at fair value though profit or loss where the financial assets either doesn’t meet the criteria of financial assets held at amortised cost or at financial assets at fair value through other comprehensive income (FVOCI) or may be designated.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest earned on the financial asset.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period based on Expected Credit Losses, using the general approach which measures the loss allowance based on an amount equal to lifetime expected credit losses where risk has significantly increased, or an amount equal to 12-month expected credit losses of risk has not increased.

The simplified approach for trade, contract and lease receivables is used. This approach always measures the loss allowance as the amount equal to the lifetime expected credit losses.

A write-off constitutes a derecognition event where the write-off directly reduces the gross carrying amount of the financial asset.

Financial liabilities

Financial liabilities are classified as other financial liabilities. Financial liabilities are recognised and derecognised at the transaction date. They represent trade creditors and accruals and are recognised at the amounts at which they are expected to be settled. Financial liabilities are recognised to the extent that the goods or services have been received (irrespective of having been invoiced).

All payables are unsecured and are paid within credit terms.

Derecognition of financial assets and liabilities

Financial assets are derecognised when the contractual rights to the financial asset cash flows expire or the asset is transferred to another entity. In the case of a transfer to another entity, it is necessary that the risks and rewards of ownership are also transferred.

Financial liabilities are derecognised when the obligation under the contract is discharged, cancelled or expires.

No financial assets or liabilities were derecognised in these financial statements (2018: $0).

4.4B: Net income from financial assets

2019

$’000

2018

$’000

Investment income

13,533

13,675

Net gains from financial assets

13,533

13,675

Fair value measurement

Fair value measurements at the
end of the reporting period

Notes

2019

$’000

2018

$’000

Financial assets

Cash and cash equivalents

2.1A

1,099

1,561

Receivables (gross)

2.1B

57,034

48,121

Fixed term deposits

2.1C

504,100

464,700

Total financial assets

562,233

514,382

Financial liabilities

Suppliers payables

2.4A

33,094

33,050

Other payables

2.4B

223

25

Total

33,317

33,075

Fixed term deposits are classified as Level 2 in the fair value hierarchy.

Level 1 – Fair values measured using quoted prices (unadjusted) in active markets for identical instruments.

Level 2 – Fair values measured using directly or indirectly observable inputs, other than those included in Level 1.

Level 3 – Fair values measured using inputs that are not based on observable market data.

Other information

5.1 Aggregate assets and liabilities

2019

$’000

2018

$’000

Assets expected to be recovered in:

No more than 12 months

595,959

547,669

More than 12 months

829

806

Total assets

596,788

548,475

Liabilities expected to be settled in:

No more than 12 months

135,048

122,223

More than 12 months

419

359

Total liabilities

135,467

122,582

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