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2019-20 Financial Statements

Certification

Independent auditor's report page 1
Independent auditor's report page 2

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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 2020 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

24 September 2020

Signature supplied

Dr Christopher Wallace

Cheif Executive

24 September 2020

Signature supplied

Mr John Park

Cheif Financial Officer

24 September 2020

Statement of Comprehensive Income for the period ended 30 June 2020

Notes

2020

$’000

2019

$’000

Premium revenue

1.1A

220,876

190,833

Outwards retrocession premium expense

1.1A

(65,827)

(64,801)

Commonwealth guarantee fee

1.1A

(55,000)

(55,000)

Net premium revenue

100,049

71,032

Claims expense

Retrocession and other recoveries revenue

Net claims incurred

Retrocession commission income

1.1B

3,023

5,149

Acquisition costs

1.2G

(1,739)

(1,619)

Other operating expenses

1.2G

(6,908)

(7,694)

Underwriting result

94,425

66,868

Investment income

1.1C

9,650

13,533

Other income

1.1D

11

30

Finance charges

1.2E

(16)

(3)

Operating result before capital holding fee

104,070

80,428

Capital holding fee

1.2D

(35,000)

(35,000)

Operating result

69,070

45,428

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

Statement of Financial Position as at 30 June 2020

Notes

2020

$’000

2019

$’000

ASSETS

Financial assets

Cash and cash equivalents

2.1A

1,775

1,099

Trade and other receivables

2.1B

59,787

57,034

Investments

2.1C

571,500

504,100

Deferred insurance assets

2.1D

34,226

33,613

Total financial assets

667,288

595,846

Non-financial assets

Leasehold improvements

2.2A

1,842

481

Plant and equipment

2.2A

113

150

Intangibles

2.2A

218

17

Work in progress

2.2A

181

Other non-financial assets

2.2B

64

113

Total non-financial assets

2,237

942

Total assets

669,525

596,788

LIABILITIES

Unearned liabilities

Unearned premium liability

2.3A

112,300

98,828

Unearned commission liability

2.3A

936

2,097

Total unearned liabilities

113,236

100,925

Payables

Suppliers

2.4A

33,640

33,094

Other payables

2.4B

54

223

Total payables

33,694

33,317

Provisions

Employee provisions

3.1A

570

480

Other provisions

2.5A

122

745

Total provisions

692

1,225

Interest bearing liabilities

Leases

2.6A

1,376

Total interest bearing liabilities

1,376

Total liabilities

148,998

135,467

Net assets

520,527

461,321

EQUITY

Accumulated reserves

Asset revaluation reserve

60

60

Claims handling reserve

37,252

34,864

Reserve for claims

483,215

426,397

Total equity

520,527

461,321

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

Statement of Changes in Equity for the period ended 30 June 2020

Accumulated
reserves

Asset
revaluation
reserve

Claims
handling
reserve

Reserve for
claims

Total
equity

2020

$’000

2019

$’000

2020

$’000

2019

$’000

2020

$’000

2019

$’000

2020

$’000

2019

$’000

2020

$’000

2019

$’000

Opening balance
at 1 July

60

60

34,864

25,098

426,397

400,735

461,321

425,893

Adjustment on initial application of AASB 16

136

136

Adjusted opening balance at 1 July

60

60

34,864

25,098

426,533

400,735

461,457

425,893

Income and expenses

Net operating result

69,070

45,428

69,070

45,428

Total income
and expenses

69,070

45,428

69,070

45,428

Asset revaluation reserve

Transfers between equity components

Transfer to
reserves

(69,070)

(45,428)

2,388

9,766

66,682

35,662

Transactions with owners

Distributions
to owners

(10,000)

(10,000)

(10,000)

(10,000)

Closing balance
at 30 June

60

60

37,252

34,864

483,215

426,397

520,527

461,321

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 4 September 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 2020 totalling $100 million (2019: $100 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 2020

Notes

2020
$’000

2019
$’000

OPERATING ACTIVITIES

Cash received

Premiums

248,729

211,917

Commission

3,313

5,655

Interest

11,060

13,280

Other cash received

11

30

Total cash received

263,113

230,882

Cash used

Retrocession payments

68,074

67,319

Employees

4,008

3,807

Suppliers

3,501

5,154

Government

90,709

90,743

Net GST paid

18,138

14,721

Interest payments on lease liabilities

13

Total cash used

184,443

181,744

Net cash from operating activities

78,670

49,138

INVESTING ACTIVITIES

Cash received

Proceeds from maturities of term deposits

1,395,600

1,368,200

Total cash received

1,395,600

1,368,200

Cash used

Placement of term deposits

1,463,000

1,407,600

Purchase of property, plant and equipment

204

19

Purchase of externally developed software

36

181

Total cash used

1,463,240

1,407,800

Net cash used by investing activities

(67,640)

(39,600)

FINANCING ACTIVITIES

Cash used

Principal payments of lease liabilities

354

Distributions to owners

10,000

10,000

Total cash used

10,354

10,000

Net cash used by financing activities

(10,354)

(10,000)

Net increase/(decrease) in cash held

676

(462)

Cash and cash equivalents at the
beginning of the reporting period

1,099

1,561

Cash and cash equivalents at the
end of the reporting period

2.1A

1,775

1,099

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 Commonwealth corporate entity established under the Terrorism Insurance Act 2003 (TI Act). It is wholly owned by the Commonwealth of Australia (Commonwealth). ARPC’s vision is to be an effective provider of terrorism risk insurance that facilitates private participation, supports national resilience and reduces losses arising from catastrophic events caused by terrorism.

ARPC provides commercial property insurers with reinsurance for commercial property and associated business interruption losses arising from a Declared Terrorism Incident (DTI). The TI Act renders terrorism exclusion clauses in eligible insurance contracts ineffective to the extent that the loss or liability is an eligible terrorism loss arising from a DTI.

The ARPC board is the accountable authority for the purposes of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). 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 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.

AASB 16 Leases

AASB 16 became effective on 1 July 2019. This new standard has replaced AASB 117 Leases, Interpretation 4 Determining whether an Arrangement contains a Lease, Interpretation 115 Operating Leases – Incentives, and Interpretation 127 Evaluating the Substance of Transactions Involving the Legal form of a Lease.

AASB 16 provides for a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, together with options to exclude leases where the lease term is 12 months or less, or where the underlying asset is of low value. AASB 16 substantially carries forward the lessor accounting in AASB 117, with the distinction between operating leases and finance leases being retained. The details of the changes in accounting policies, transitional provisions and adjustments are disclosed below and in the relevant notes in the financial statements.

Application of AASB 16 Leases

ARPC adopted AASB 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented for 2019 is not restated, that is, it is presented as previously reported under AASB 117 and related interpretations.

AASB 16 provides for certain optional expedients, including those related to the initial adoption of the standard. ARPC applied the following practical expedients when applying AASB 16 to leases previously classified as operating leases under AASB 117:

  • Apply a single discount rate to a portfolio of leases with reasonably similar characteristics
  • Exclude initial direct costs from the measurement of right-of-use assets at the date of initial application for leases where the right-of-use asset was determined as if AASB 16 had been applied since the commencement date
  • Reliance on previous assessments on whether leases are onerous as opposed to preparing an impairment review under AASB 136 Impairment of assets as at the date of initial application, and
  • Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term remaining as of the date of initial application

As a lessee, ARPC previously classified leases as operating or finance based on its assessment of whether the lease transferred substantially all of the risk and rewards of ownership. Under AASB 16, ARPC recognises right-of-use assets and lease liabilities for all leases.

On adoption of AASB 16, ARPC recognised a right-of-use asset and lease liability in relation to the lease of office space, which had previously been classified as an operating lease.

This lease was measured at the present value of the remaining lease payments, discounted using ARPC’s incremental borrowing rate as at 1 July 2019. ARPC’s incremental borrowing rate is the rate at which similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The weighted-average rate applied was 0.98%.

The right-of-use asset was measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

Impact on transition

On transition to AASB 16, ARPC recognised a right-of-use asset and lease liability. Lease incentive was reversed, and the difference was recognised in retained earnings. The impact on transition is summarised below:

1 July 2019

Right-of-use assets – property, plant and equipment

1,729,795

Lease liabilities

1,729,795

Reduction in lease incentive provision

(136,428)

Increase in retained earnings

136,428

The following table reconciles the minimum lease commitments disclosed in ARPC’s 30 June 2019 annual financial statements to the amount of lease liabilities recognised on 1 July 2019:

1 July 2019

Minimum operating lease commitment at 30 June 2019

1,760,291

Undiscounted lease payments

1,760,291

Less: effect of discounting using incremental borrowing rate as at the date of initial application

(30,496)

Lease liabilities recognised at 1 July 2019

1,729,795

New and revised Australian Accounting Standards

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 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.

AASB 2018-7 – Amendments to Australian Accounting Standards – Definition of Material

AASB 2018-7 amends the definition of ‘material’ and clarifies that materiality will depend on the nature or magnitude of information or both. ARPC will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. AASB 2018-7 aligns the definition of ‘material’ across AASB 101 Presentation of Financial Statements and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors and clarifies certain aspects of the definition. ARPC will apply AASB 2018-7 in the 2020-21 financial year and the expected impact is considered minimal.

AASB 1060 – General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities

AASB 1060 is the new simplified disclosure standard developed by the AASB based in IFRS for small to medium-sized entities. It requires Tier 2 entities to follow the recognition and measurement requirements under Australian Accounting Standards but to apply the simplified disclosure requirements in AASB 1060. This standard will only apply to disclosures. ARPC will apply AASB 1060 in the 2021-22 financial year and is yet to analyse the possible impact of this standard on the financial statements.

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, Cyber Liability 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 (2019: $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 and a liability will be held if it is estimated that claims are in excess of the primary insurers’ 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

1. Financial performance

This section analyses the financial performance of ARPC for the financial year ended
30 June 2020.

1.1 Revenue

1.1A: Net premium revenue

2020

$’000

2019

$’000

Gross written premium

234,348

204,544

Movement in unearned premium reserve

(13,472)

(13,711)

Total premium revenue

220,876

190,833

Outwards retrocession premium expense

(65,827)

(64,801)

Commonwealth guarantee fee

(55,000)

(55,000)

Net premium revenue

100,049

71,032

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 2020 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 04 September 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

2020

$’000

2019

$’000

Retrocession commission income

3,023

5,149

Total retrocession commission income

3,023

5,149

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

2020

$’000

2019

$’000

Cash at bank

26

98

Term deposits

9,624

13,435

Total investment income

9,650

13,533

Accounting policy
Interest revenue is recognised using the effective interest method.

1.1D: Other income

2020

$’000

2019

$’000

Other revenue

11

30

Total other income

11

30

1.2 Expenses

1.2A: Employee benefits

2020

$’000

2019

$’000

Wages and salaries

3,139

3,244

Superannuation

Defined contribution plans

432

456

Defined benefit plans

4

4

Leave and other entitlements

318

302

Separation and redundancies

34

Total employee benefits

3,927

4,006

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

1.2B: Suppliers

2020

$’000

2019

$’000

Goods and services supplied or rendered

Consultants

1,775

2,352

Reinsurance broker services

571

537

Information & communications technology

365

245

Assurance services

264

277

Travel

251

260

Staff development and training

137

179

Shared services

180

178

Legal fees

92

144

Other

442

521

Total goods and services supplied or rendered

4,077

4,693

Goods supplied

107

88

Services rendered

3,970

4,605

Total goods and services supplied or rendered

4,077

4,693

Other supplier expenses

Operating lease rentals1

411

Workers compensation insurance

18

25

Total other supplier expenses

18

436

Total supplier expenses

4,095

5,129

1.ARPC has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117.

The above lease disclosures should be read in conjunction with the accompanying notes 1.2C, 1.2E, 2.2A and 2.6A.

For the current financial year ARPC paid $105,000 for the provision of external audit services (2019: $105,000).

Accounting policy
Short-term leases and leases of low-value assets
ARPC has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets (less than $10,000). ARPC recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

1.2C: Depreciation and amortisation

2020

$’000

2019

$’000

Depreciation

Leasehold improvements

125

109

Property, plant and equipment

54

51

Total depreciation

179

160

Amortisation

Intangibles – computer software

16

18

Right-of-use asset – office lease

386

Total amortisation

402

18

Total depreciation and amortisation

581

178

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

2020

$’000

2019

$’000

Capital holding fee

35,000

35,000

Total capital holding fee paid to the Commonwealth

35,000

35,000

1.2E: Finance charges

2020

$’000

2019

$’000

Bank charges

3

3

Interest on lease liabilities

13

Total finance charges

16

3

ARPC has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117.

The above lease disclosures should be read in conjunction with the accompanying notes 1.2B, 1.2C, 2.2A and 2.6A.

Accounting policy
All finance charges are expensed as incurred.

1.2F: Losses from asset sales

2020

$’000

2019

$’000

Property, plant and equipment

Carrying value of assets disposed

44

Total losses from asset sales

44

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

2020

$’000

2019

$’000

Expenses by nature

Employee benefits

3,927

4,006

Suppliers

4,095

5,129

Depreciation and amortisation

581

178

Capital holding fee paid to the Commonwealth

35,000

35,000

Finance charges

16

3

Losses from asset sales

44

Total expenses by nature

43,663

44,316

Expenses by function

Acquisition costs

1,739

1,619

General and administration expenses

41,924

42,697

Total expenses by function

43,663

44,316

Reconciliation of expenses to the Statement of Comprehensive Income

General and administration expenses

41,924

42,697

Less: Capital holding fee paid to the Commonwealth

(35,000)

(35,000)

Less: Finance costs

(16)

(3)

Other operating expenses

6,908

7,694

2. 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.

2.1 Financial assets

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

2020

$’000

2019

$’000

Premium receivable

57,378

52,013

Commission receivable

931

2,080

Interest receivable

1,441

2,851

Net GST receivable from the Australian Taxation Office

37

90

Total receivables

59,787

57,034

Credit terms are net 30 days (2019: 30 days). Trade debtors are non-interest bearing.

Interest receivable
Effective interest rates range from 0.10% to 1.72% (2019: 0.65% to 2.80%) 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

2020

$’000

2019

$’000

Fixed interest term deposits

571,500

504,100

Total investments

571,500

504,100

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 1.06% (2019: 2.41%). Interest is payable on maturity for all term deposits. Terms are between 91 and 276 days (2019: 90 and 369 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

2020

$’000

2019

$’000

(i) Deferred insurance assets

Deferred retrocession premium

2.1D(ii)

33,340

32,850

Deferred acquisition costs

2.1D(iii)

886

763

Total deferred insurance assets

34,226

33,613

(ii) Deferred retrocession premium

Deferred retrocession premium as at 1 July

32,850

32,487

Retrocession premium deferred

33,340

32,850

Amortisation charged to expense

(32,850)

(32,487)

Deferred retrocession premium as at 30 June

33,340

32,850

(iii) Deferred acquisition costs

Deferred acquisition costs as at 1 July

763

765

Acquisition costs deferred

886

763

Amortisation charged to expense

(763)

(765)

Deferred acquisition costs as at 30 June

886

763

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 (2019: $0). Accordingly, there has been no write down in ARPC’s deferred acquisition costs and no requirement to establish an unexpired risk liability.

2.2 Non-financial assets

2.2A: Reconciliation of the Opening and Closing Balances of Property, Plant and Equipment and Intangibles

Leasehold improvements

$’000

Plant and equipment

$’000

Intangibles

– computer software purchased

$’000

Work in progress – software purchased

$’000

Total

$’000

As at 1 July 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 1 July 2019

481

150

17

181

829

Recognition of right-of-use asset on initial application of AASB 16

1,730

1,730

Adjusted total as at 1 July 2019

2,211

150

17

181

2,559

Additions – By purchase

142

62

217

421

Depreciation and amortisation expense

(125)

(54)

(16)

(195)

Amortisation on right-of-use asset

(386)

(386)

Asset disposal

(130)

(517)

(647)

Accumulated depreciation on asset disposal

85

517

602

Other movements – transfer between classes

(181)

(181)

Total as at 30 June 2020

1,842

113

218

2,173

Total as at 30 June 2020

Gross book value

2,692

213

2,361

5,266

Accumulated depreciation, amortisation and impairment

(850)

(100)

(2,143)

(3,093)

Total as at 30 June 2020

1,842

113

218

2,173

Carrying amount of right-of-
use asset

1,344

1,344

No indicators of impairment were found for property, plant and equipment and intangibles (2019: Nil). No property, plant and equipment and intangibles are expected to be sold or disposed of within the next 12 months. At the time of preparing the prior year financial year financial statements, there were no plans to dispose of assets within the next 12 months.

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. Financial assets are initially measured at their fair value plus transaction costs where appropriate. 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.

Lease Right of Use (ROU) Assets
Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability amount, initial direct costs incurred when entering into the lease less any lease incentives received. These assets are accounted for by Commonwealth lessees as separate asset classes to corresponding assets owned outright, but included in the same column as where the corresponding underlying assets would be presented if they were owned.

On initial adoption of AASB 16 ARPC has adjusted the ROU assets at the date of initial application by the amount of any provision for onerous leases recognised immediately before the date of initial application. Following initial application, an impairment review is undertaken for any right of use lease asset that shows indicators of impairment and an impairment loss is recognised against any right of use lease asset that is impaired. Leased ROU assets continue to be measured at cost after initial recognition in Commonwealth agency, GGS and Whole of Government financial statements.

Revaluations
Following initial recognition at cost, property, plant and equipment (excluding ROU assets) 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 property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to ARPC using, in all cases, the straight-line method of depreciation.

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:

2020

2019

Leasehold improvements

Lease term

Lease term

Plant and equipment

3 to 8 years from
purchase date

3 to 8 years from
purchase date

The depreciation rates for ROU assets are based on the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term.

Impairment
All assets were assessed for impairment at 30 June 2020. 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 to 5 years (2019: 4 years).

All software assets were assessed for indications of impairment as at 30 June 2020.

2.2B: Other non-financial assets

2020

$’000

2019

$’000

Prepayments

64

113

Total other non-financial assets

64

113

2.3 Unearned liabilities

2.3A: Unearned liability

Notes

2020

$’000

2019

$’000

Unearned premium liability

2.3B

112,300

98,828

Unearned commission liability

2.3C

936

2,097

Total unearned liability

113,236

100,925

2.3B: Unearned premium liability

2020

$’000

2019

$’000

Unearned premium liability as at 1 July

98,828

85,117

Deferral of premiums on contracts written in the period

112,300

98,828

Earning of premiums written in the previous periods

(98,828)

(85,117)

Unearned premium liability as at 30 June

112,300

98,828

2.3C: Unearned commission liability

2020

$’000

2019

$’000

Unearned commission liability as at 1 July

2,097

3,086

Deferral of commissions on contracts written in the period

936

2,097

Earning of commissions written in the previous periods

(2,097)

(3,086)

Unearned commission liability as at 30 June

936

2,097

2.4 Payables

2.4A: Supplier payables

2020

$’000

2019

$’000

Retrocession payable

33,159

32,582

Trade creditors

63

Accruals

418

512

Total supplier payables

33,640

33,094

Retrocession payable
In accordance with ARPC’s retrocession treaty expiring 31 December 2020, 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

2020

$’000

2019

$’000

Salaries and wages

48

198

Superannuation

6

25

Total other payables

54

223

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

2.5 Other provisions

2.5A: Other provisions

Lease
incentive
$’000

Provision for restoration
$’000

Other provisions
$’000

Total
$’000

Carrying amount as at 1 July 2019

136

122

487

745

Additional provisions made

Amounts used

(136)

(487)

(623)

Unwinding of discount

Amounts owing at 30 June 2020

122

122

Provisions noted in Other provisions relate to future premium refund payable (2019: future premium refund payable).

ARPC currently has one (2019: one) agreement for the leasing of premises which has a provision requiring ARPC to restore the premise to their original condition at the conclusion of the lease. ARPC has made a provision to reflect the present value of this obligation.

The financial statements have not included an outstanding claims liability (2019: nil).

2.6 Interest bearing liabilities

2.6A: Leases

2020

$’000

2019

$’000

Lease liabilities

Office lease

1,376

Total leases

1,376

Accounting policy
Refer to Overview Section for accounting policy on leases.

3. 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.

3.1 Employee provisions

3.1A: Employee Provisions

2020

$’000

2019

$’000

Leave

570

480

Total employee provisions

570

480

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 and long service leave.
No provision has been made for personal leave (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 2020 represents the outstanding contributions for the final fortnight of the year.

3.2 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 Portfolio Minister and Cabinet, ARPC’s seven Board Members, the Chief Executive, the Chief Underwriting Officer, the Chief Operating Officer, the Chief Financial Officer and the General Counsel.

Key management personnel remuneration is reported in the table below:

2020

$

2019

$

Short-term employee benefits

1,496,409

1,448,620

Post-employment benefits

146,816

133,871

Other long-term employee benefits

69,406

6,611

Total key management personnel remuneration expense

1,712,631

1,589,102

The total number of key management personnel that are included in the above table are 12 (2019: 11).

The above key management personnel remuneration excludes the remuneration and other benefits of the 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.

3.3 Related party disclosures

Members of ARPC at 30 June 2020 were:

Mr Ian Carson AM

Ms Janet Torney

Ms Karen Payne

Ms Robin Low

Mr John Peberdy

Maria Fernandez PSM

Ms Elaine Collins

New appointments during the year:

  • Ms Maria Fernandez was appointed on 23 April 2020 for a 3-year term.

Changes in membership during the year:

  • Mr Michael Callaghan’s term expired on 4 October 2019.
  • Ms Robin Low’s term expired on 4 October 2019 and she was re-appointed effective 23 April 2020 for a 3-year term.
  • Mr Ian Carson’s term expired on 30 June 2020 and he was re-appointed effective 1 July 2020 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 2020 were:

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

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 is the Chairman of Markets at PwC Australia. 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 where this matter has been raised. Mr Carson does not hold a management role at PwC and is not a member of the PwC Board or Executive Committee. ARPC does not believe this matter constitutes a related party transaction as defined by AASB 124, but considers it good practice for full transparency to nevertheless report as if it was and include disclosures in respect of the matter in accordance with the requirements of AASB 124. During the year ARPC made payments to PwC to the value of $148,740 (2019: $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:

2020

$

2019

$

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

480,500

448,000

The Treasury

Provision of corporate support services to ARPC

180,223

188,095

Australian Government Solicitor

Provision of legal services

22,591

77,974

Comcare

Workers compensation insurance premiums

20,013

25,308

Artbank

Hire of artwork

3,929

2,600

Department of Communications and the Arts

Copyright fees

1,591

1,480

Attorney General’s Department

Legal services panel

502

90,709,349

90,743,457

Related Party – Member

Purpose

PwC Australia

Provision of internal audit services

148,740

301,170

148,740

301,170

Total Related Party Transactions

90,858,089

91,044,627

4. Managing uncertainties

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

4.1 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

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.

4.1A: 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 claim 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, and
  • 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 2020 is $37.25 million (2019: $34.86 million)
4.1B: 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
4.1C: 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 $483 million (2019: $426 million)
  • In the event of a DTI, ARPC would be required to pay $250 million (2019: $285 million) before claiming on its retrocession program
  • ARPC has access to a $3.45 billion retrocession program in excess of the $250 million retention (2019: $3.315 billion retrocession program, in excess of $285 million), and
  • 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 (2019: $10 billion)
4.1D 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 to 5 years

> 5 years

Notes

2020

$’000

2020

$’000

2020

$’000

2020

$’000

2020

$’000

Interest bearing financial assets

Cash and cash equivalents

2.1A

1,775

1,775

Fixed term deposits

2.1C

571,500

571,500

Total

1,775

571,500

573,275

Weighted average interest rate

0.14%

1.06%

1.06%

Floating interest rate

Fixed interest rate
maturing in

Total

1 year
or less

1 year
or less

1 to 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%

The Department of Finance deemed a 9-basis point change to be reasonably possible and ARPC adopted this when reporting interest rate risk (2019: 20-basis point change). ARPC has considered the implied financial impact of the deemed 9 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

2020

%

2019

%

2020

$’000

2019

$’000

2020

$’000

2019

$’000

Interest rate movement

Interest bearing

+0.09

+0.20

516

1,010

516

1,010

Financial assets

-0.09

-0.20

(516)

(1,010)

(516)

(1,010)

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

2020

$’000

2020

$’000

2020

$’000

2020

$’000

2020

$’000

2020

$’000

ARPC

Cash and cash equivalents

2.1A

1,775

1,775

Receivables

2.1B

59,787

59,787

Fixed term deposits

2.1C

396,500

125,500

49,500

571,500

Total

1,775

396,500

125,500

49,500

59,787

633,062

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

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

2020

$’000

2019

$’000

2020

$’000

2019

$’000

2020

$’000

2019

$’000

Financial assets

Premium receivables

2.1B

57,335

51,649

43

364

57,378

52,013

Commission receivables

2.1B

931

2,080

931

2,080

Interest receivable

2.1B

1,441

2,851

1,441

2,851

Net GST receivable

2.1B

37

90

37

90

Total

59,744

56,670

43

364

59,787

57,034

Ageing of financial assets past due

0 to
30 days

31 to
60 days

61 to
90 days

90+
days

Total

Notes

2020

$’000

2020

$’000

2020

$’000

2020

$’000

2020

$’000

Financial assets

Premium receivables

2.1B

29

6

8

43

Total

29

6

8

43

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

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 minus 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 (or equivalent) credit ratings.

Retrocession program counterparty credit rating

2020

$’000

2019

$’000

AAA

AA+

71,800

71,672

AA

91,210

88,853

AA-

648,660

612,019

A+

1,316,976

1,203,448

A

730,106

804,160

A-

591,248

534,848

ARPC Total Exposure

3,450,000

3,315,000

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

2020

$’000

2019

$’000

2020

$’000

2019

$’000

2020

$’000

2019

$’000

Financial liabilities

Payables

2.4A

33,640

33,094

33,640

33,094

Total

33,640

33,094

33,640

33,094

4.2 Contingent assets and liabilities

Quantifiable contingencies

As at 30 June 2020 ARPC had no quantifiable contingencies (2019: Nil).

Unquantifiable contingencies

As at 30 June 2020 ARPC had no unquantifiable contingencies (2019: 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.

4.3 Financial instruments

4.3A: Categories of financial instruments

2020

$’000

2019

$’000

Financial assets:

Financial assets at fair value through profit or loss

Cash and cash equivalents

1,775

1,099

Fixed term deposits

571,500

504,100

Total financial assets at fair value through profit or loss

573,275

505,199

Financial assets at amortised cost

Receivables (gross)

59,787

57,034

Total financial assets at amortised cost

59,787

57,034

Total financial assets

633,062

562,233

Financial liabilities:

Financial liabilities measured at amortised cost

Suppliers payables

33,640

33,094

Other payables

54

223

Total financial liabilities measured at amortised cost

33,694

33,317

Total financial liabilities

33,694

33,317

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; and

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.

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.

Amortised cost is determined using the effective interest method.

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 do not 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 if 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 financial liabilities measured at amortised cost. Financial liabilities are recognised and derecognised upon ‘trade date’. They represent trade creditors, accruals and leases 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.

4.3B: Net income from financial assets

2020

$’000

2019

$’000

Financial assets at fair value through profit or loss

Interest revenue

9,650

13,533

Net gains on financial assets at fair value through profit or loss

9,650

13,533

4.4 Fair value measurement

Fair value measurements at the
end of the reporting period

Notes

2020

$’000

2019

$’000

Financial assets

Cash and cash equivalents

2.1A

1,775

1,099

Receivables (gross)

2.1B

59,787

57,034

Fixed term deposits1

2.1C

571,500

504,100

Total financial assets

633,062

562,233

Financial liabilities

Suppliers payables

2.4A

33,640

33,094

Other payables

2.4B

54

223

Total

33,694

33,317

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

In accordance with AASB 13 Fair Value Measurement, ARPC establishes a fair value hierarchy that categories financial assets and liabilities into three levels:

Level 1 – Fair value 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.

5. Other information

5.1 Aggregate assets and liabilities

2020

$’000

2019

$’000

Assets expected to be recovered in:

No more than 12 months

667,352

595,959

More than 12 months

2,173

829

Total assets

669,525

596,788

Liabilities expected to be settled in:

No more than 12 months

148,669

135,048

More than 12 months

329

419

Total liabilities

148,998

135,467

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