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NOTICE OF FILING
This document was lodged electronically in the FEDERAL COURT OF AUSTRALIA (FCA) on
24/11/2015 4:14:10 PM AEDT and has been accepted for filing under the Court’s Rules. Details of
filing follow and important additional information about these are set out below.
Details of Filing
Document Lodged: Defence - Form 33 - Rule 16.32
File Number: VID513/2015
File Title: Money Max Int Pty Limited, as trustee for the Goldie Superannuation Fund v
QBE Insurance Group Limited
Registry: VICTORIA REGISTRY - FEDERAL COURT OF AUSTRALIA
Dated: 24/11/2015 4:14:13 PM AEDT Registrar
Important Information
As required by the Court’s Rules, this Notice has been inserted as the first page of the document which
has been accepted for electronic filing. It is now taken to be part of that document for the purposes of
the proceeding in the Court and contains important information for all parties to that proceeding. It
must be included in the document served on each of those parties.
The date and time of lodgment also shown above are the date and time that the document was received
by the Court. Under the Court’s Rules the date of filing of the document is the day it was lodged (if
that is a business day for the Registry which accepts it and the document was received by 4.30 pm local
time at that Registry) or otherwise the next working day for that Registry.
r j f e i STR
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ys,
^co^ tjm
Form 33 Rule 16.32
*
Defence
No VID 513 of 2015
Federal Court of Australia District Registry: Victoria Division: General
Money Max Int Pty Ltd (ACN 152 073 580) as trustee for the Goldie Superannuation Fund
Applicant
and
QBE Insurance Group Ltd (ACN 008 485 014)
Respondent
CONTENTS
I. PRELIMINARY
A. The Applicant and Group Members
B. The Respondent
II. QBE's BUSINESS
A. QBE's North American Operations
B. Relevant QBE personnel
0. Compliance and reporting requirements
III. RELEVANT PUBLICATIONS, ANNOUNCEMENTS AND DISCLOSURES OF QBE.... 4
A. The 12 November 2012 Call
B. February 2013 Events
3
3
3
3
3
4
4
4
7
Filed on behalf of: QBE Insurance Group Ltd, the Respondent
Prepared by: Law firm:
Guy Foster Aliens
Tel: (02) 9230 4000 Fax: (02) 9230 5333 GHFS:SXiS (Mr Foster) Guv.Foster(S)allens.com.au / [email protected]
Email:
Address for service: Aliens, Deutsche Bank Place, Corner Hunter and Phillip Streets, Sydney NSW 2000 Email: [email protected] DX: 105 Sydney
2
C. August 2013 Events
D. December 2013 Events
13
23
E. QBE share prices on 9 and 10 December 2013 25
IV. ALLEGED REPRESENTATIONS 25
A. Alleged Systemic Representations
B. Alleged Representations in Respect of Provisioning
25
26
V. MATTERS IT IS ALLEGED QBE KNEW OR OUGHT TO HAVE KNOWN 33
A. Matters in relation to the North American operations generally.
B. The North American Program Business
C. The FPS Business
D. The Crop Business
VI. ALLEGED CONTINUOUS DISCLOSURE CONTRAVENTIONS
A. Allegations Concerning the North American Operations
B. Allegations Concerning the North American Program Business
C. Allegations concerning the FPS Business
D. Allegations concerning the Crop Business
E. Alleged Continuous Disclosure Contraventions
33
36
39
47
50
50
50
51
51
52
VII. ALLEGED MISLEADING OR DECEPTIVE CONDUCT AND MATERIALLY
MISLEADING CONDUCT 56
A. Alleged Misleading Conduct Contraventions...
B. Alleged Misleading Statement Contraventions
56
61
VIII. ALLEGATIONS CONCERNING GROUP MEMBERS' LOSS 62
A. Acquisition of QBE Shares
B. Alleged Market-Based Causation
C. Alleged Reliance
D. Alleged Loss or Damage
62
62
62
62
IX. INDEX TO DEFINITIONS 63
Note: save as set out in the Defence below, defined terms have the meaning specified in the
Statement of Claim and references are to US dollars.
In answer to the Statement of Claim dated 9 September 2015, the Respondent says as
follows:
3
I. PRELIMINARY
A. The Applicant and Group Members
It does not plead to paragraph 1 as it makes no material allegation against it.
It does not know, and so does not admit, paragraph 2.
It does not know, and so does not admit, paragraph 3.
B. The Respondent
Save that the correct reference in paragraph 4(e)(iii) is to s 16 (and not s 26) of the
Fair Trading Act 1989 (Qld), it admits paragraph 4 and says further that at all material
times approximately 70 to 75% of its shares were held by institutional investors.
4
ii. QBE'S BUSINESS
A. QBE's North American Operations
It admits paragraph 5 and says further that:
its subsidiaries conducted operations in: (a)
(i) Australia and New Zealand;
(ii) Asia;
(iii) Europe;
(iv) Latin America;
(v) North America; and
(b) one of its subsidiaries, Equator Reinsurances Limited (Equator Re),
conducted the operations of a captive reinsurer.
It admits paragraph 6 and says further that its operations in North America (referred
to as QBE North America - QBENA) were conducted by various subsidiaries, the
shares in which were held directly or indirectly by QBE Holdings, Inc.
0
It admits paragraph 7 and says further that the operations of QBENA also included:
the "US P&C" business (which included the "US Middle Markets", "Major
Brokers" and "Specialty" businesses);
(a)
(b) the "US Agencies" business; and
(c) the "Reinsurance" business.
4
B. Relevant QBE personnel
Save that John Neal was appointed on 17 August 2012, it admits paragraph 8. g
Save that Neil Drabsch became Chief Financial Officer of QBE on 23 May 1994, it
admits paragraph 9.
9.
10, Save that David Duclos became Chief Executive Officer of QBENA from 2 April
2013, it admits paragraph 10.
C. Compliance and reporting requirements
11. It admits paragraph 11.
12. In answer to paragraph 12, it says that:
(a) pursuant to the terms of s 674(2) of the Corporations Act 2001 (Cth) (the Act),
QBE was not required to make continuous disclosure of information that:
(i) was generally available; or
was not information that a reasonable person would expect, if it were
generally available, to have a material effect on the price or value of
its securities; and
(ii)
(b) subject to reference to the full terms and effect of the Act and the Listing
Rules published by the ASX (the ASX Listing Rules), it otherwise admits
paragraph 12.
13. It admits paragraph 13.
14. It admits paragraph 14.
III. RELEVANT PUBLICATIONS, ANNOUNCEMENTS AND DISCLOSURES OF QBE
A. The 12 November 2012 Call
15. In answer to paragraph 15, it
admits that, on 12 November 2012, it convened a conference call: (a)
(i) which was attended by various market analysts (the 12 November
Call);
(ii) a recording of which was available to the public on its website; and
5
(iii) a transcript of which was prepared by Bloomberg and Thomson
Reuters;
(b) says further that:
(i) the conference call was preceded by a release made by QBE to the
ASX headed "Market update on Superstorm Sandy and 2012 forecast
results" (the 12 November Announcement) [QIG.012.001.0216]; and
(ii) the context in which statements were made during the 12 November
Call included the 12 November Announcement referred to above,
including the disclaimers and qualifications contained therein; and
(c) otherwise does not admit paragraph 15.
Particulars
The 12 November Announcement contained a disclaimer in the following terms:
"IMPORTANT DISCLAIMER
Any forward-looking statements assume no overall reduction in premium rates; no significant fall in equity markets and interest rates; no large adverse movements in credit spreads; no major difference to budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; recoveries from our strong reinsurance panel; and no substantial change in proposed regulation. Should one or more of these assumptions prove incorrect, actual results may differ materially from the expectations described in this market release. "[QIG.012.001.0216 at .0220]
16. In answer to paragraph 16, it:
(a) admits that, during the 12 November Call:
(i) Mr Neal stated that:
(A) in the second half of the year, QBE had reorganised its North
American business and established dedicated divisions and
infrastructure to manage different components of the US
business [SOC.OOI.001.0001 at .0002];
(B) as part of that restructure, a dedicated team had been
established to manage portfolios in run-off and under
remediation [SOC.001.001.0001 at .0002];
6
(C) detailed claims reviews had identified potential shortfalls in
reserves, following which QBE decided to increase provisions by
$180m, principally for its Program business [SOC.001.001.0001
at .0002];
(D) the sum of $180m was "set aside for North American program
and run-off business" [SOC.OOl001.0001 at .0003];
including the previously mentioned "$180 million upgrade for the
North American run-off portfolio, we also consider it prudent to
provide a further $83 million to cover further possible prior year
(E)
claims upgrades" [SOC.OOt001.0001 at .0002];
(F) QBE's aim was to set its risk margins so as to maintain a
probability of adequacy (PoA) for its outstanding claims of more
than 85% and, based on projections and assumptions regarding
the likely level of the central estimate of the provision for
outstanding claims at year end, QBE considered a further $125m
would be required to maintain an appropriate level of risk
margins [SOC.001.001.0001 at .0002]; and
QBE considered the large individual risk and catastrophe
allowances for the balance of the year to be reasonable and,
based on the assumptions and allowances advised in the 12
November Announcement, QBE did not anticipate any further
meaningful prior-year developments in the US or elsewhere
(G)
[SOC.001.001.0001 at .0003];
(b) says further that the statements made during the 12 November Call were
made in the context of the contents of the 12 November Announcement,
which:
stated that the increase in the claims provision of $180m was in
respect of the "run-off portfolio" which "consists mainly of program
(i)
business" [QIG.012.001.0216 at .0218];
stated that it considered it prudent to "provide some allowance for
other possible adverse developments and as such we anticipate prior
year claims development will be around $380m" [QIG.012.001.0216 at
.0218];
(ii)
7
Particulars
The sum of $380m comprised the previous adverse prior year development of $117m announced to the market on 17 August 2012 primarily for 2011 catastrophes (HY12 results presentation) [QIG.998.001.0379 at .0381], and the increase of $180m for prior year claims and the further $83m in respect of a future potential increase in prior year claims announced on 12 November 2012.
(iii) in referring to the decision to hold a further $125m, explained that the
decision was taken "in order to maintain an appropriate level of risk
margins to cater for uncertainty in the discounted central estimate for
outstanding claims provisions" [QIG.012.001.0216 at .0218]; and
(iv) contained a disclaimer in the terms set out in the particulars to
paragraph 15 above;
(c) says further that:
the increased claims provision of $180m was in respect of the run-off
portfolio, the majority (but not the whole) of which comprised lines of
business in the Program business;
(i)
(ii) the increased provision of $83m was in respect of other possible
developments in prior year claims across the whole of the North
American business, and not just the Program business; and
the increase in provisions of $125m was an increase in the risk margin
taken at Group level in order to achieve a PoA of more than 85%; and
(iii)
(d) otherwise denies paragraph 16.
B. February 2013 Events
17. It admits paragraph 17 and says further that on 26 February 2013, it released to the
ASX:
(a) its Appendix 4E - Preliminary Final Report;
(b) its 2012 Annual Report (the 2012 Annual Report) [QIG.012.001.0290];
(c) an announcement headed "QBE announces 2012 results and senior
management succession" (the 26 February Announcement)
[QIG.012.001.0485]; and
8
(d) a presentation headed "2012 full year results announcement" (26 February
Presentation) [QIG.012.001.0495].
18. In answer to paragraph 18, it:
admits that, on 26 February 2013, it convened a conference call: (a)
(i) which was attended by various market analysts (the 26 February
Call);
a recording of which was available to the public on its website; and (ii)
(iii) a transcript of which was prepared by Bloomberg and Thomson
Reuters;
(b) says further that:
the 26 February Call was preceded by the release of the documents
referred to in paragraph 17 above;
(i)
the context in which statements were made during the 26 February
Call included the contents of the documents referred to in paragraph
17 above, including the disclaimers and qualifications contained
therein; and
(ii)
(c) otherwise does not admit paragraph 18.
Particulars
The 26 February Presentation contained a disclaimer in the following terms:
"Important Disclaimer
The information in this presentation provides an overview of the results for the year ended 31 December 2012.
This presentation should be read in conjunction with all information which QBE has lodged with the Australian Securities Exchange ("ASX"). Copies of those lodgements are available from either the ASX website www.asx.com.au or QBE's website www.qbe.com.
Prior to making a decision in relation to QBE's securities, products or services, investors, potential investors and customers must undertake their own due diligence as to the merits and risks associated with that decision, which includes obtaining independent financial, legal and tax advice on their personal circumstances.
9
This presentation contains certain "forward-looking statements" for the purposes of the U.S. Private Securities Litigation Reform Act of 1995. The words "anticipate", "believe", "expect", "project", "forecast", "estimate", "likely", "intend", "should", "could", "may", "target", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of, and guidance on, future earnings and financial position and performance are also forward-looking statements.
Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of QBE that may cause actual results to differ materially from those expressed or implied in such statements. There can be no assurance that actual outcomes will not differ materially from these statements. You are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements only speak as of the date of this presentation and QBE assumes no obligation to update such information.
Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the significant allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; recoveries from our strong reinsurance panel; and no substantial change in regulation. Should one or more of these assumptions prove incorrect, actual results may differ materially from the expectations described in this presentation." [QIG.012.001.0495 at .0518]
The 26 February Announcement contained a disclaimer in the following terms:
"IMPORTANT DISCLAIMER
Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the significant allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; recoveries from our strong reinsurance panel; and no substantial change in regulation. Should one or more of these assumptions prove incorrect, actual results may differ materially from the expectations described in this market release." [QIG.012.001.0485 at .0494]
10
The 2012 Annual Report further identified risks faced by QBE including:
"...the risk of fluctuations in the timing, frequency and severity of insured events and claims settlements, relative to expectations at the time of underwriting. This includes underwriting, catastrophe claims concentration and claims estimation risks. The risks inherent in any single insurance contract are the possibility of the insured event occurring and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, these risks are random and unpredictable."[QIG.012.001.0290 at .0421]
19. In answer to paragraph 19, it:
(a) says, in answer to paragraph 19(a)(i) that:
(i) it admits that:
(A) during the 26 February Call, Mr Neal stated that:
"If you look at the underwriting result, that 97.1% COR actually suffered a drag on the insurance margin of nearly 4% as we've looked hard at our prior accident year claims provisions and increased those by $464 million. The main activities there, again as we discussed in November, are around the U.S. business, and particularly the U.S. program business, where we're actually carrying $316 million as an increase on prior accident year." [SOC.001.003.0001 at .0002]; and
"The predominant strengthening that you've seen in the results has really come through in the U.S. but that figure of $316 million, $236 million of which relates to the review of the program business that we discussed in November that we've either put into runoff or believe is remediated." [SOC.001.003.0001 at .0004]
(B) in the 2012 Annual Report, it stated, in relation to the Program
business, that:
"Multiple claims reviews led to the recognition of $236 million prior accident year development with a further $80 million relating to a number of other US portfolios ..." [QIG.012.001.0290 at .0308];
(ii) says further that only $236m of the sum of $316m was referable to the
Program business; and
11
(b) it denies paragraph 19(a)(ii) and refers to and repeats paragraphs 16(c)(i),
16(c)(ii) and 19(a)(ii) above;
(c) says, in answer to paragraph 19(a)(iii) that it admits that, during the 26
February Call, Mr Neal stated that:
"We've undertaken a very extensive review of our entire claims portfolio, with particular emphasis on the U.S. that we've discussed previously, and confident that we've done that job as thoroughly and as completely as you could ask." [SOC.001.003.0001 at .0002]
(d) says, in answer to paragraph 19(a)(iv) that it admits that the "Year in Review"
section of the 2012 Annual Report stated that:
"In addition to a thorough year end review by our in-house divisional and head office actuarial teams, the Group's $22.8 billion gross claims provision was also subject for the first time to a coordinated global actuarial review by a single firm of independent actuaries. In addition to the actions we have taken, the assessment of the independent external actuaries is that our claims central estimate is appropriate, giving us a valuable external perspective. The prior accident year claims strengthening and risk margin top up, coupled with aggressive portfolio remediation initiatives and the additional year end provisioning focus, give us confidence in the appropriateness of our year end claims provision." [QIG.012.001.0290 at .0308]
(e) says, in answer to paragraph 19(b) that it admits that, during the 26 February
Call, Mr Neal stated that:
" ... we see no reason as to why the crop business should not return to its long-term average COR of 88% or better in 2013." [SOC.001.003.0001 at .0004]
(f) says, in answer to paragraph 19(c), that it admits that:
(i) during the 26 February Call, Mr Neal stated that:
"So I think as far as North America is concerned, when we look at the fundamentals and the work that we put in, we are seeing rate increases across the P&C classes of between 5% and 6%, and we see no reason why we can't achieve a combined operating ratio of 92% or better this year" [SOC.001.003.0001 at .0004]; and
"So the insurance profit margin that we're calling out for 2013 is 11%. That's actually an underlying margin of 12%, 1% higher when you take out the investment for the transformational costs. So it's an insurance profit margin, absolute, of 11% against a combined
12
operating ratio of 92%, and it assumes an investment yield on policyholders'funds of 2.25%." [SOC.001.003.0001 at .0007]
(ii) the 26 February Presentation:
(A) stated, under the heading "Outlook 2013":
Assumes lower investment yield on policyholders' funds of 2.25% with 1.35 years premium period held
"Underlying insurance profit margin of 11.0%
COR 92.0%"
[QIG.012.001.0495 at .0515]
described the COR of 92.0% and 11.0% insurance profit margin
figures as a "target" [QIG.012.001.0495 at .0517]; and
(B)
described 2013 as a "year of transition" [QIG.012.001.0495 at
.0516];
(C)
(g) says further, in relation to the FPS business, that:
(i) in the 26 February Call, Mr Neal stated:
"When we look at lender-placed business, we've closed down the discussions on pricing with the main states, and the main department of insurances in the main states for 2013. That will actually result in a reduction this year of 8% in price. It's in fact 9% on a full-year basis. So that's what's being disclosed in the slide. And we're at the low ebb of the income expectations for that class of business in 2013, and forecasting $1.2 billion." [SOC.001.003.0001 at .0004]
"The major movement in the U.S. forecast is through the lender placed business. That's actually been driven as the Bank of America has looked to sell on part of its loan portfolio which it did most recently to Nationstar so 20% of its portfolio was sold in the early part of this year, and that's driven that income estimate down. So I think in full year 2013, we do see that as the low-ebb of income for lender-placed. We've got quite a number of initiatives underway and are in discussions with a number of the major banks in the U.S., and we're hopeful that that business can grow again, albeit I don't think it'll come through to 2013." [SOC.001.003.0001 at .0008]
(ii) the 2012 Annual Report stated that:
13
"We are committed to enhancing our existing [FPS] infrastructure and winning new business opportunities, although new business lead times are extensive."
"Our lender-placed insurer provides a bespoke set of loan tracking and insurance products to the US banks and their customers. We were pleased to conclude our pricing negotiations satisfactorily with a number of key state regulators in February 2013 and believe we can profitably grow this business over the medium term." [QIG.012.001.0290 at .0308]
(iii) the 26 February Presentation stated that:
"QBENA: GWP down 13% despite rate increases, primarily due to reductions in FPS and crop as well as portfolio remediation initiatives in P&C lines." [QIG.012.001.0495 at .0528]
"Remediation, lower crop prices and LPI volumes led to a reduction in North American Operations of $960M." [QIG.012.001.0495 at .0500]
(h) otherwise denies paragraph 19.
C. August 2013 Events
20. It admits paragraph 20 and says further that on 20 August 2013, it released to the
ASX:
(a) its Appendix 4D and 2013 half year report (2013 Half Year Report)
[QIG.012.001.0760];
(b) its market release for the half year ended 20 June 2013 (20 August
Announcement) [QIG.012.001.0821]; and
(c) its results presentation for the half year ended 30 June 2013 (2013 Half Year
Results Presentation) [QIG.012.001.0826].
21. In answer to paragraph 21, it:
(a) admits that, on 20 August 2013, it convened a conference call:
(i) which was attended by various market analysts (the 20 August Call);
(ii) a recording of which was available to the public on its website;
(iii) a transcript of which was prepared by Bloomberg and Thomson
Reuters;
(b) says further that:
14
(i) the 20 August Call was preceded by the release of the documents
referred to in paragraph 20 above;
the context in which statements were made during the 20 August Call
included the documents referred to in paragraph 20 above, including
the disclaimers and qualifications contained therein; and
(ii)
(c) otherwise does not admit paragraph 21.
Particulars
The 20 August Announcement contained a disclaimer in the following terms:
"IMPORTANT DISCLAIMER
Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the significant allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; recoveries from our strong reinsurance panel; and no substantial change in regulation. Should one or more of these assumptions prove incorrect, actual results may differ materially from the expectations described in this market release."[QIG.012.001.0821 at .0825]
The 2013 Half Year Results Presentation contained a disclaimer in the following terms:
"The information in this presentation provides an overview of the results for the half year ended 30 June 2013.
This presentation should be read in conjunction with all information which QBE has lodged with the Australian Securities Exchange ("ASX"). Copies of those lodgements are available from either the ASX website www.asx.com.au or QBE's website www.qbe.com.
Prior to making a decision in relation to QBE's securities, products or sen/ices, investors, potential investors, customers and insurance brokers must undertake their own due diligence as to the merits and risks associated with that decision, which includes obtaining independent financial, legal and tax advice on their personal circumstances.
This presentation contains certain "forward-looking statements" for the purposes of the U.S. Private Securities Litigation Reform Act of 1995. The words "anticipate"believe", "expect", "project",
15
"forecast", "estimate", "likely", "intend", "should", "could", "may", "target", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of, and guidance on, future earnings and financial position and performance are also forward-looking statements.
Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of QBE that may cause actual results to differ materially from those expressed or implied in such statements. There can be no assurance that actual outcomes will not differ materially from these statements. You are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements only speak as of the date of this presentation and QBE assumes no obligation to update such information.
Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the significant allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; recoveries from our strong reinsurance panel; and no substantial change in regulation. Should one or more of these assumptions prove incorrect, actual results may differ materially from the expectations described in this presentation."[QIG.012.001.0826 at .0845]
22. In answer to paragraph 22, it:
(a) says, in answer to paragraph 22(a), that:
(i) it:
(A) admits that, in the 2013 Half Year Report, it stated that:
"As noted above, the program business in run-off and remediation was subject to further review during the period under the new management team. Further strengthening of provisions resulted in a net $64 million increase to the prior accident year claims central estimate. As noted previously, the adverse claims development was offset by a release of risk margins retained to cover such uncertainty." [QIG.012.001.0760 at .0781]
(B) admits that, during the 20 August Call, Mr Neal stated that:
"If we look at North America, we've got $64 million of prior year development, which we've elected to offset by our risk
16
margin release. So in our view, risk margins are there to protect against any impairment to central estimates and that's exactly what we've done in North America. That prior year deterioration is predominantly coming from the program business that's in run-off' [SOC.001.007.0001 at .0003]; and
"Plus the prior year of $64 million on the program business is notable, it's certainly not a repeat of what we saw in 2012." [SOC.001.007.0001 at .0004]
(C) admits that in the 2013 Half Year Results Presentation, it stated
that there was:
"$64M(1) prior year development offset by risk margin release"
[QIG.012.001.0826 at .0834]; and
"Adverse prior year development...North America (mainly
Program run-off) $64M" [QIG.012.001.0826 at .0847]; and
"$64M of PY development, mainly in Program"
[QIG.012.001.0826 at .0856]; and
(D) the further provision of $64m was not solely referable to the
Program business and, further, was offset by a release of risk
margin; and
(E) otherwise denies paragraph 22(a)(i);
(ii) it:
(A) admits that in the 2013 Half Year Results Presentation, it stated
that there was:
"$64M(1) prior year development offset by risk margin release"
with a note indicating a "$91M Group impact including Equator
Re" [QIG.012.001.0826 at .0847]; and
"Adverse prior year development...Equator Re $48M ($27M
from North America)" [QIG.012.001.0826 at .0834];
(B) otherwise denies paragraph 22(a)(ii);
(iii) it:
(A) refers to and repeats paragraphs 16(c)(i), 16(c)(ii) and 19(a)
above;
17
(B) says that the total increased provision for the Program business
announced in 2012 was at most $236m and for the first half of
2013 was at most $91 m;
(C) otherwise denies paragraph 22(a)(iii);
(iv) it:
admits that, in the 20 August Call, Mr Neal said, in answer to a
question from an analyst, that:
(A)
"I think, if you look at the actual number in the U.S., I think it's a comparatively small number. It's not something that's keeping me awake at night. I don't see a significant prior year issue in the U.S. The teams are tackling the reserves hard." [SOC.OOl007.0001 at .0010]; and
"I think it's a little while before we'll see some good news coming out of the prior year in the U.S. So what's important to me is that we don't see any further prior year coming through towards the year end. But we've taken the appropriate views for the half year. Disappointing to see it going the wrong way, but not such a significant number." [SOC.OOl007.0001 at .0010]
(B) says further that Mr Neal also said, in answer to another
question from an analyst, that:
"So I think when you narrow it down, we're still looking quite hard at that program business in the U.S. And whilst it's frustrating, frankly, to see some further deterioration come through, I think in the normal course of events, $64 million coming through the North America line is a small percentage of, A, their reserves, and, B, our carrying reserves." [SOC.001.007.0001 at .0009]
(C) otherwise denies paragraph 22(a)(iv);
(b) says, in answer to paragraph 22(b) that:
(i) during the 20 August Call, Mr Neal stated that:
"So through the half year, we're actually seeing a small loss come out of the lender-placed insurer, but as we go through the second half, we're very confident that we can win new banking clients and we will continue to update you through the year." [SOC.001.007.0001 at .0002];
18
"At the same time, we saw a bit of a spike in the attritional claims ratio coming through on the lender-placed business as Bank of America began the process of selling some of their loan portfolio that really featured through the first four months of the year and we haven't seen that continue. So genuinely, it's a spike in our attritional claims ratio." [SOC.001.007.0001 at .0003];
"The impact on the attritional claims ratio $40 million is not a recurring item and in fact, we've seen that drop away really through the latter part of the first half of the year." [SOC.001.007.0001 at .0004]; and
"What actually led to it was Bank of America's decision to sell a pretty significant component of their loan portfolio. They in fact sold 30% of their loan portfolio and went through a pretty robust review of latent claims, if you like, in properties that were unoccupied as they looked to transfer those loans to new banks.
So in some ways that's shown through on the attritional current year claims line, but it's very difficult to pin down when those claims would have actually occurred. But it certainly accelerated a flow of claims that you would have seen naturally come through on that book into a very concentrated four months period of January to April when Bank of America was selling those loans. So we've taken that charge just straight through the current year attritional claims ratio." [SOC.OOl007.0001 at .0008]
(ii) in 2013 Half Year Report, it stated that:
"LPI premium is well below our previously expected target, largely due to a material reduction in mortgage loans being serviced on behalf of Bank of America, one of our main banking clients. The sale by Bank of America of significant proportions of its loan portfolio caused the immediate cancellation of some policies, requiring us to refund an element of the unearned premium rather than an orderly and more gradual run-off of affected policies. This had an immediate impact on premium volumes which, combined with changes in the loan book profile due to consolidation of the mortgage industry and reduced placement rates as the US housing market improves, has made the forecasting of premium income for FPS business extremely difficult. Overall for the full year 2013, we expect FPS gross written premium to be $1.0 billion, down $200 million compared with our initial premium forecast for this business.
The LPI result was also impacted by a spike in attritional claims due to an acceleration in claims notifications as Bank of America prepared portfolios for sale, increasing the Group's attritional claims ratio by 0.9%. At the half year, strain caused by the lower volume of
19
lender-placed business added 0.7% to the Group's combined commission and expense ratio. FPS business was also adversely impacted by regulatory fines and associated legal costs.
We have some exciting plans for the redevelopment of this business including what is effectively a relaunch of the range of product and service offerings through the second half of 2013, but for the time being its profitability and premium income are under strain." [QIG.012.001.0760 at .0770];
"...our LPI business was impacted by regulatory pressure on premium rates and consolidation in the mortgage industry" [QIG.012.001.0760 at .0780]; and
"FPS premium income was down 31% due to increased portfolio sales and loan modifications by Bank of America, client losses (largely through mortgage industry consolidation) including Wells Fargo, Aurora, Homeward and part of GMAC, reduced placement rates due to an improving US housing market and previously announced premium rate reductions.
The reduction in LPI premium income was far more rapid and severe than previously anticipated, reflecting the wholesale disposal of mortgage loan portfolios by our main distributor, Bank of America. Whilst we have known for some time about likely portfolio disposals, estimating the implications for premium volumes has been extremely challenging, exacerbated by a lack of transparency around timing and the loan quality of the portfolios being sold, the latter having a significant bearing on estimating lost premium production.
Even more challenging, some portfolio disposals are being undertaken with immediate effect resulting in the need to refund an element of the unearned premium reserve to the new LPI service provider (rather than retaining the run-off of in-force policies).
Management is focused on developing new sources of LPI revenue; however, at this stage, our full year premium projections reflect a cautious stance in light of the aforementioned complexities." [QIG.012.001.0760 at .0781]
(iii) the 2013 Half Year Results Presentation stated that:
(A) the FPS business was experiencing "performance issues"
[QIG.012.001.0826 at .0829];
(B) at a Group level, its COR for the half year was 92.8% and its
insurance profit margin was 10.8% [QIG.012.001.0826 at .0830];
20
(C) the FPS business was affected by "BoA [Bank of America] loan
sales, industry consolidation, placement rates and price
reductions previously flagged" [QIG.012.001.0826 at .0834];
(D) there was a $40m ($66m at the Group level including Equator
Re) "spike in LPI claims as BoA rationalises its loan book"
[QIG.012.001.0826 at .0834]; and
(iv) otherwise denies paragraph 22(b);
(c) says, in answer to paragraph 22(c) that:
(i) the 2013 Half Year Report stated that:
"In 2013, and indeed in most years for QBE, the first and second half results will tend to be different. This is partly due to seasonal factors that affect the volume and reporting of premium and risk exposures e.g. US crop insurance business and weather-related risks affected by the US windstorm season." [QIG.012.001.0760 at .0768]; and
"Despite higher commodity prices, crop premium income fell 32% due to moisture driven delays in crop planting and premium reporting; however, this timing difference is expected to reverse in the second half of 2013 with FY 2013 crop premium income expected to be up on 2012." [QIG.012.001.0760 at .0781]; and
"With respect to crop insurance business, crop conditions remain good to excellent with development approaching the five year average after excessive early season moisture levels. We remain optimistic of an average to slightly above average FY 2013 underwriting margin, assuming normal late summer and early autumn growing conditions." [QIG.012.001.0760 at .0782]
(ii) the 2013 Half Year Report further stated that:
(A) despite increased commodity prices, premium volumes for North
America were lower including due to premiums for Crop being
delayed due to late planting, but that timing difference was
expected to reverse in the second half of 2013
[QIG.012.001.0760 at .0781];
(B) the final reinsurance expense was dependent on the ultimate US
crop result [QIG.012.001.0760 at .0773];
21
the prospects for multi-peril crop insurance were better for the
2013 underwriting year due to an increased level of moisture
following winter and spring precipitation in the mid-western
United States [QIG.012.001.0760 at .0780];
(C)
at the same point in the prior year, drought claims had started to
emerge [QIG.012,001.0760 at .0781];
(D)
crop conditions remained good to excellent with development
approaching the five year average after excessive early season
moisture levels [QIG.012.001.0760 at .0782]; and
(E)
(F) QBE remained "optimistic" of an average to slightly above
average FY 2013 underwriting margin, "assuming normal late
summer and early autumn growing conditions"
[QIG.012.001.0760 at .0782];
(iii) in the 2013 Half Year Presentation, it stated, inter alia, that:
(A) Crop had been impacted by delayed planting but "2H13 outlook
promising" [QIG.012.001.0826 at .0834];
(B) in relation to the North American Operation's revised FY13
outlook, that underlying profitability was set to improve with, inter
alia, crop seasonality [QIG.012.001.0826 at .0834];
(iv) during the 20 August Call, Mr Neal stated:
"As you go across to the right hand side of the slide, you'll see a 0.4% adjustment for crop and that's simply a reflection. I think as many of you know that crop is a second half business for us not a first half. In fact over $1 billion of net earned premium earns in the second half. And the early indications for the crop portfolio are very good and we're certainly looking at what we believe to be a better than average year early days, but the delayed plantings all but being caught up at this point as we look forward to the harvest." [SOC.001.007.0001 at .0003]; and
"As I referred to earlier on, crops in pretty good shape. There was a lot of reporting on delayed planting through the spring season in North America. Obviously, crop is entirely dependent upon the harvest and the yield of harvest and the indications literally this week are over above average year." [SOC.001.007.0001 at .0004]; and
22
"... and we'll be hopeful it will be at least normal, if not slightly better than normal crop season, we should see improvement come through in the second half" [SOC.001.007.0001 at .0004];
(v) otherwise denies paragraph 22(c); and
(d) says, in answer to paragraph 22(d) that it:
(i) admits paragraph 22(d)(i);
(ii) it admits that, in the 2013 Half Year Presentation, it:
(A) reaffirmed that 2013 was a "year of transition" which involved
inter alia, a restructure in North America and a focus on FPS
"performance issues" [QIG.012.001.0826 at .0829];
(B) recorded the results for the half year, including a COR of 92.8%
and a reported insurance profit margin of 10.8%
[QIG.012.001.0826 at .0830];
(C) recorded that the underlying insurance profit margin was 12.1%,
adjusted for, inter alia, prior year developments and other
matters, resulted in a reported profit margin of 10.8%
[QIG.012.001.0826 at .0830];
(D) revised the 2013 outlook for QBENA to lower gross written
premium and net earned premium while stating that "underlying
profitability set to improve in 2H13 with rate increases,
normalising LPI claims and crop seasonality" [QIG.012.001.0826
at .0834];
(E) reaffirmed that the COR of 92% was a "target"
[QIG.012.001.0826 at .0843];
(iii) admits that, in the 20 August Call, Mr Neal stated:
(A) that:
"I just wanted to start this morning's presentation with a few key messages. I think in February, when we presented the annual results, I talked about 2013 being a year of transition for QBE and a year of stabilizing the business. And in that respect we've had three key priorities that we are and continue to work on throughout this year.
23
The first is around performance and that's to set out to deliver 92% combined operating ratio with an 11% insurance profit margin. And I can confirm that from the analysis we're undertaking in the underlying performance of the business, we remain on track to do that for the full year in 2013." [SOC.OOl007.0001 at .0001]
(B) that very good results were coming out of Australia and New
Zealand, excellent results were coming out of Asia Pacific and
good results were coming out of Europe and Latin America
[SOC.001.007.0001 at .0002];
that QBE was reporting a COR of 92.8% after reinvesting 0.8%
or $63m into the risk margins [SOC.001.007.0001 at .0002];
(C)
(D) that:
"So when we're adding those parts together, we are talking about a combined operating ratio of 92% and an insurance profit margin of 11%. Those are the forecasts we put out at the beginning of the year and we're confident that those forecasts are able to be delivered for the full year." [SOC.001.007.0001 at 0007]
that it was "setting out to deliver" a COR of 92% for the full year
[SOC.001.007.0001 at 0007];
(E)
(iv) admits that it indicated that the carrying value of goodwill of $4,558m
at a Group level as at 30 June 2013 (being the closing date of the
2013 half year accounts), and which was reported in August 2013,
was appropriate; and
(v) otherwise denies paragraph 22(d).
D. December 2013 Events
23. It admits paragraph 23.
In answer to paragraph 24, it: 24.
says, in answer to paragraph 24(a) that it admits that, in its market release of
9 December 2013 (the 9 December Announcement) [QIG.012.001.1915], it
said that:
(a)
24
it was taking a charge of $470m for prior accident year claims
development including around $300m for the Program business
[QIG.012.001.1915at.1916];
(i)
the revised FY13 Group guidance included strengthening risk margins
by around $200m to achieve a PoA of 90% or more
(ii)
[QIG.012.001.1915at.1916];
says, in answer to paragraph 24(b) that it admits that, in the 9 December
Announcement, it said that one of the major items contributing to the
reforecast for FY13 was the restructure of the FPS business, which "results in
a one-time charge of $150 million and write down of the remaining $330
million of QBE FPS identifiable intangibles" [QIG.012.001.1915 at .1916];
(b)
(c) says, in answer to paragraph 24(c) that it admits that:
(i) in the 9 December Announcement it said that:
(A) one of the major items contributing to the revised FY13 guidance
was "higher than expected claims increaspng] US Crop COR by
11% (relative to plan) to an estimated 99%" [QIG.012.001.1915
a t . 1 9 1 6 ] ; a n d
(B) one of the outcomes following management's operational and
strategic review of QBENA's underwriting business, and the
Board's review of QBENA's operations, strategy and plans was
that:
"Initial crop harvest yield data indicates a COR of around 99% for this business line in 2013 compared with an expected long term average COR of around 88%. The record crop yield projected by the US Federal Government has not materialised, increasing QBE's exposure to revenue claims as a result of the collapse in crop prices (particularly for corn) after early season preventative planting claims eroded the Federal Crop Insurance Corporation reinsurance deductible." [QIG.012.001.1915 at .1917]
(ii) in the 9 December Call, Mr Neal stated that it estimated the crop
business would produce a COR of around 99%, thereby reducing the
profitability of that class of business relative to plan by approximately
$125m [SOC.001.010.0001 at .0002];
25
(d) says, in answer to paragraph 24(d) that it admits that, in the 9 December
Announcement it said that:
(i) it expected a full year 2013 reported net loss of around $250tn due
mainly to claims provision and intangibles and goodwill writedowns in
North America with a cash net profit after tax of around $850m
[QIG.012.001.1915at.1916];
(ii) it was revising guidance and it now expected a COR of 97-98% and an
insurance profit margin of around 6% on net earned premium
[QIG.012.001.1915at.1916];
(iii) major items contributing to the revised guidance were the prior
accident year claims development of $650m, the restructure of the
FPS business including the one-time charge of $150m and write down
of the remaining $330m of FPS identifiable intangibles, higher than
expected claims increasing Crop COR by 11% to 99%, FY13 risk
margins being strengthened by $200m to achieve a PoA of 90% or
more and goodwill impairment charges of around $600m, primarily in
North America [QIG.012.001.1915 at .1916];
(iv) FY13 guidance and other figures "remain subject to the usual caveats
including end of year discount and foreign exchange rates as well as
normal year end processes and audit" [QIG.012.001.1915 at .1916];
(v) "the Board has reviewed the carrying value of the North American
goodwill and proposes a write down of around $600 million"
[QIG.012.001.1915 at .1918]; and
(e) otherwise denies paragraph 24.
E. QBE share prices on 9 and 10 December 2013
25. It admits paragraph 25 and says further that the price of QBE shares increased from
a closing price of $10.82 on 10 December 2013 to a closing price of $12.07 on
9 January 2014 (being an increase of approximately 11.6%).
IV. ALLEGED REPRESENTATIONS
A. Alleged Systemic Representations
26. In answer to paragraph 26, it:
26
(a) admits that it was required to make continuous disclosure in accordance with
Chapter 6CA of the Act and the ASX Listing Rules;
(b) repeats paragraph 12 above; and
(c) otherwise denies paragraph 26.
27. In answer to paragraph 27, it:
(a) says that the allegations are so general, broad and vague as to be
embarrassing and it objects to pleading to them; and
(b) under cover of that objection, it;
(i) admits that it disclosed in its 2011 and 2012 Annual Reports that it
had received the declarations referred to in s 295A of the Act
([QIG.098.001.0007 at .0170] and [QIG.012.001.0290 at .0471]),
being declarations from its CEO and CFO that:
(A) the financial records of QBE had been maintained in accordance
with s 286 of the Act;
(B) the financial statements and notes referred to in paragraph
295(3)(b) of the Act complied with the accounting standards; and
(C) the financial statements and notes gave a true and fair view for
the purposes of s 297; and
(ii) otherwise denies paragraph 27.
Particulars
ASX Corporate Governance Council recommendation 7.3 is directed to systems of risk management and internal control relevant to the accurate reporting of financial results for periods in respect of which financial statements are compiled and published.
B. Alleged Representations in Respect of Provisioning
28. It denies paragraph 28 and says further that:
(a) it refers to and repeats paragraphs 15 and 16 above;
(b) a provision for outstanding claims liabilities (or claims reserve figure) is:
(i) an estimate of the amount of the insurer's future liabilities for claims
incurred on or prior to the valuation date, whether or not they have
27
been reported, including the expenses the insurer expects to incur in
settling those claims;
a figure which, as an estimate, is inherently and inevitably uncertain in
that actual claims experience may subsequently prove to be above or
below the provision; and
(ii)
(iii) subject to the risk of fluctuations in the timing, frequency and severity
of insurance events and claims settlements, relative to expectations;
Particulars
The nature of provisions and uncertainties attendant upon the setting of provisions were referred to in the Respondent's 2012 Annual Report, identified (at Note 4) the components of an outstanding claims provision and noted:
"The estimation of IBNR ["incurred but not reported" claims] is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to Group, where more information about the claims is generally available. Liability and other long tail classes of business, where claims settlement may not happen for many years after the event giving rise to the claim, typically display greater variability between initial estimates and final settlement due to delays in reporting claims, uncertainty in respect of court awards and future claims inflation." [QIG.012.001.0290 at .0418]
The Respondent's 2012 Annual Report identified the risk of fluctuations as one example of the "type of risk QBE faces" [QIG.012.001.0290 at .0366] and in its 2011 Annual Report as one of the "key areas of exposure" [QIG.998.001.0007 at .0034].
The 2012 Annual Report further identified:
"...the risk of fluctuations in the timing, frequency and severity of insured events and claims settlements, relative to the expectations at the time of underwriting. This includes underwriting, catastrophe claims concentration and claims estimation risks. The risks inherent in any single insurance contract are the possibility of the insured event occurring and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, these risks are random and unpredictable."[QIG.012.001.0290 at .0421]
(c) at the Group level:
28
the Group provision for outstanding claims liabilities is reported to the
market every six months as part of QBE's annual and half yearly
reporting; and
(i)
the Group provision for outstanding claims liabilities constitutes the
sum of the Chief Actuary's central estimate and a risk margin
determined by the Board;
(ii)
Particulars
The Group Chief Actuary's central estimate is informed by the sum of the central estimates determined by the actuaries of each Division. A central estimate is typically expressed to the market as a number net of reinsurance and discounted for the time value of money.
The risk margin is determined by the Board of QBE and is informed by, amongst other things, actuarial advice concerning the PoA implied by the proposed risk margin. QBE is required by Prudential Standard GPS 320 Actuarial and Related Matters to hold a risk margin of not less than the greater of a value that is determined to value the insurance liabilities of an insurer at 75% of sufficiency or the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the insurer.
The Respondent's 2012 Annual Report (Note 4) identified to the market that "risk margins" are held to mitigate the potential for uncertainty in the central estimate and provided sensitivities for components of the outstanding claims provision, including for changes in the central estimate [QIG.012.001.0290 at 0418].
(d) at the level of QBENA:
(i) the provision for outstanding claims liabilities for the Division is
reported quarterly to QBENA's Audit & Risk Committee and to QBE;
and
(ii) the total provision for outstanding claims liabilities for the Division is
set by the Reserve Committee of QBENA (a sub-committee of the
Executive Committee) following the determination by QBENA's
actuaries of their central estimate for the Division.
29. In answer to paragraph 29, it:
(a) refers to and repeats paragraphs 15, 16 and 28 above; and
(b) otherwise denies paragraph 29.
29
30. In answer to paragraph 30, it:
(a) says, in answer to paragraph 30(a) that:
(i) it refers to and repeats paragraphs 18, 19(a) to 19(d) and 28(b) above;
and
(ii) it otherwise denies paragraph 30(a);
(b) says, in answer to paragraph 30(b) that:
(i) the COR that would be achieved in the Crop business for the full 2013
financial year was self-evidently dependent on weather, crop prices at
harvest and yields;
Particulars
The Respondent refers to and repeats paragraph 69 below. Documents publicly issued by the Respondent explained features of the Crop business and the importance of prices, weather and yield to the performance of the Crop business:
(i) the "QBE North America Investor and Analyst Day presentation" released to the ASX on 12 October 2012 explained the features of the Crop business and identified that "NAU writes business covering 84 different crops, spanning 52 million acres for 93,000 policies" [QIG.012.001.0001 at. 0025-. 0034];
(ii) during the 20 August Call, Mr Neal commented that "crop is entirely dependent upon the harvest and the yield at harvest" [SOC.001.007.0001 at .0004]; and
(Hi) the 2013 Half Year Report included commentary on commodity prices and weather conditions as they related to the Crop business. [QIG.012.001.0760 at .0780-.0781]
(ii) it otherwise denies paragraph 30(b); and
(c) says, in answer to paragraph 30(c) that:
(i) it refers to and repeats paragraphs 18 and 19(f) above;
(ii) the COR and insurance margin guidance announced on 26 February
2013 were described by the Respondent as a "target" and statements
made by the Respondent concerning its expectations for the full 2013
financial year were, and could only reasonably be construed to be:
30
(A) statements of the Respondent's present opinion of future
performance being a matter which was inherently and inevitably
uncertain; and
(B) subject to the disclaimers regarding future matters which it
routinely included in its announcements and presentations;
the COR and insurance margin that would actually be achieved by the
Respondent on a Group-wide basis for the full 2013 financial year was
self-evidently dependent on a wide array of factors including the
balance of performance between QBE's Divisions operating in
different parts of the world and the balance between the performance
of business units within each of those geographic areas; and
(iii)
Particulars
As disclosed in the 2012 Annual Report [QIG.012.001.0290] and 2013 Half
Year Report [QIG. 012.001.0760], in addition to its North American
Operations, at all material times the Respondent had operations in
Australia and New Zealand, Latin America, Europe, Asia Pacific and
Bermuda (known as the Equator Re operations).
(iv) it otherwise denies paragraph 30(c).
In answer to paragraph 31, it: 31.
(a) refers to and repeats paragraphs 17, 18 and 30 above; and
(b) otherwise denies paragraph 31.
32. In answer to paragraph 32, it:
(a) says, in answer to paragraph 32(a) that:
(i) it refers to and repeats paragraphs 22(a), 28(b) and 30(a) above; and
(ii) otherwise denies paragraph 32(a);
(b) says, in answer to paragraph 32(b) that:
(i) it refers to and repeats paragraphs 22(b) above; and
(ii) otherwise denies paragraph 32(b);
says, in answer to paragraph 32(c) that: (c)
(i) it refers to and repeats paragraphs 22(c) and 30(b) above; and
31
(ii) otherwise denies paragraph 32(c);
(d) says, in answer to paragraph 32(d) that:
(i) it refers to and repeats paragraphs 22(d); and
(ii) otherwise denies paragraph 32(d).
33. In answer to paragraph 33, it:
(a) says, in answer to paragraph 33(a):
(i) that the expression "reasonably reliable guide" is so vague and
general as to be embarrassing and ought to be struck out;
(ii) that, under cover of that objection:
(A) to the extent that it made statements in relation to any of the
matters referred to in paragraph 33(a)(i)-(iv), any such statement
was, and could only reasonably be construed as, a statement of
the Respondent's present opinion regarding a matter which was
inherently and inevitably uncertain;
(B) in relation to paragraph 33(a)(v), to the extent that it made
statements in relation to the goodwill of the QBE group, any such
statement was, and could only reasonably be construed as, a
statement of the Respondent's assessment of the carrying value
of goodwill current at the time of the half year accounts for 2013;
Particulars
The Respondent assessed yearly unless there was an indication of impairment in accordance with applicable accounting standards and its accounting policies (which were stated in its published accounts).
The assessment of the carrying value of goodwill involved a value in use calculation for each Cash Generating Unit (CGU) which was based on a number of assumptions and estimates including projections of cash flows, expenses, loss ratios, reinsurance, interest rates and investment yields over a multiple year period.
The 2012 Annual Report identified QBE's accounting policy and approach to impairment testing: [QIG.012.001.0290 at .0413, 0420, 0439-0440],
(iii) refers to and repeats paragraphs 22, 30 and 32 above; and
(iv) otherwise denies paragraphs 33.
32
34. It denies paragraph 34 and says further that:
(a) as to paragraph 34(a), it:
(i) refers to and repeats paragraph 28 above;
(ii) says further the review of the reserves for the Program business was
ongoing;
Particulars
The Respondent stated publicly that the review of reserves was
ongoing on 20 August 2013:
(i) in the 2013 Half Year Report, the Respondent stated that:
"The additional strengthening of provisions positions us better to
pursue a more final solution to limit further adverse development
from this largely closed book."[QIG.012.001.0760 at .0770]
(ii) during the 20 August Call, Mr Neal said, in answer to questions
from analysts:
"The teams are tackling the reserves hard. I think it's a little
while before we'll see some good news coming out of prior year
in the U.S."[SOC.001.007.0001 at.0010]; and
. .we're still looking quite hard at that program business in the
U.S. ... tactically what we're doing on that book is getting after
those claims quite aggressively. So I think the more quickly we
can settle them and we're being very proactive in our attempts to
settle those claims, the more certainty we'll create around the
ultimate value of those losses." [SOC.001.007.0001 at .0009]
(b) as to paragraph 34(b):
(i) it refers to and repeats paragraph 30(b) above and says further that:
(A) commodity prices were a matter of public record; and
(B) yields were not known until from November 2013 onwards;
Particulars
The Respondent refers to and repeats paragraph 69 below and the
particulars to paragraph 30(b) above.
33
(c) as to paragraph 34(c), it refers to and repeats paragraph 32(d) and
33(a)(ii)(B) above and says further that:
(i) industry consolidation in the force-placed sector, the sale of the Bank
of America loan book (the timing and depth of which was out of the
Respondent's control) and pressure on premiums from regulatory
actions in the force-placed sector were matters of public record;
(ii) QBENA was looking to win new FPS business, as to which the
Respondent refers to and repeats paragraphs 19(g) and 22(b) above
was also a matter of public record; and
(iii) the Respondent reviewed the carrying value of goodwill (as well as
other intangibles) as part of its regular year end processes or if there
was an indication of impairment.
Particulars
The Respondent refers to and repeats paragraphs 19(g) and 22(b)
above.
(d) as to paragraph 34(d), it refers to and repeats paragraphs 30(c) and 32(d)
above.
V. MATTERS IT IS ALLEGED QBE KNEW OR OUGHT TO HAVE KNOWN
A. Matters in relation to the North American operations generally
35. In answer to paragraph 35, it:
(a) admits that, during the 26 February Call, Mr Neal stated:
"The predominant strengthening that you've seen in the results has really come through in the U.S. with that figure of $316 million, $236 million of which relates to the review of the program business that we discussed in November that we've either put into runoff or believe is remediated" [SOC.001.003.0001 at .0004]; and
"To counter that, with the work that we've been undertaking in the U.S., through a combination of remediation plans, lower crop prices, and falling volumes on our lender-placed book, we've actually seen income in the U.S. drop by nearly a $1 billion." [SOC.001.003.0001 at .0002]
(b) admits that, during the 9 December Call, Mr Neal and Mr Duclos stated:
34
[Mr Duclos] "In realigning QBE North America as a commercial specialty insurer, we are and have taken action on three major fronts. First, to look to drive profitable growth by expanding attractive lines of business, such as specialty and commercial lines, and remediating existing underperforming businesses" [SOC.001.010.0001 at .0003]; and
[Mr Neal] "Thank you, Neil. And as you've heard, the new management team under Dave Duclos has undertaken some significant remedial action in relation to underperforming businesses and in structurally changing the shape of this business for 2014 and beyond." [SOC.OOl010.0001 at .0004]
(c) says further that the "remediation" action in respect of the QBENA business
involved initiatives to improve the business' underwriting performance and
included:
(i) determining if certain programs in the Program business were
underperforming and should be discontinued; and
(ii) improving the quality of the claims management oversight of the
Program business including the supervision of and selection of third
party administrators (TPAs) retained to manage Program claims on
behalf of QBENA; and
(d) otherwise denies paragraph 35.
36. In answer to paragraph 36, it:
admits that, following the appointment of Mr Duclos as CEO of QBENA: (a)
(i) Mr Duclos appointed a new senior executive team to QBENA,
including a new Chief Actuary, being Andy Doll appointed on 27 April
2013;
(ii) QBENA, under Mr Duclos's direction, reviewed its operations which
review included:
(A) a review of the reserves of the Program business as to which the
Respondent refers to and repeats paragraph 39(b) below; and
(B) examination of the future of the FPS business, as to which it
refers to and repeats paragraphs 64 and 73 below, but also
having regard to opportunities to win new business; and
it otherwise denies paragraph 36. (b)
35
37. In answer to paragraph 37, it says that:
(a) the Board did meet in the United States from 30 September 2013 to 4
October 2013;
(b) during its visit to the United States, the Board received reports and
presentations from Mr Duclos and others;
(c) following the 30 September 2013 to 4 October 2013 Board meetings in the
United States, QBENA continued, inter alia:
(i) its work on assessing reserves for the Program business, particularly
in respect of long-tail classes and programs in run-off, as to which the
Respondent refers to and repeats paragraph 39(b) below;
(ii) work on the "SWAT" program, as to which the Respondent refers to
and repeats paragraph 39(b) below;
(iii) pursuing opportunities for the FPS business and reducing the
expenditures in the FPS business, while balancing the need to
maintain servicing capacity pending determination of whether or not it
had won new business from JP Morgan Chase, as to which the
Respondent refers to and repeats paragraph 73(b) below;
(iv) work on its reforecast for the full year 2013 and its Budget and Plan for
2014-2016, which work was presented to the Board at its November
and December 2013 meetings; and
(d) it otherwise denies paragraph 37.
38. In answer to paragraph 38, it:
(a) says, in answer to paragraph 38(a) that:
(i) it admits that QBENA had data relating to its Program Business, which
data was provided by Managing General Agents (MGAs) and TPAs
who reported to the finance department of QBENA on a monthly
basis;
(ii) other than in respect of Programs where it handled claims internally,
claim files were held by TPAs;
(iii) for Programs handled by TPAs:
36
(A) the relevant TPA set the case reserve for each outstanding
claim; and
(B) the relevant TPAs submitted claim data to the finance
department of QBENA on a monthly basis;
Particulars
In 2013, QBENA's Program business consisted of at least 150 "programs", about 90 of which had been discontinued and were in runoff. Each program involved an MGA, being a third party with delegated authority to write lines of businesses in their own names, but which policies were underwritten by QBENA.
In 2013, claims processing was handled for many programs (approximately 80%) by TPAs and not by QBENA.
objects to pleading to paragraphs 38(b) and 38(c) on the basis that the pleas (b)
are:
too general, vague and embarrassing; (i)
inconsistent with the allegation at paragraph 27, as relied upon in
paragraphs 71 and 72;
(ii)
should be struck out and the Respondent objects to pleading to them; (iii)
says, under the cover of that objection, that at all material times the
Respondent had and operated appropriate and effective systems for risk
management and internal control; and
(c)
otherwise denies paragraph 38. (d)
B. The North American Program Business
39. In answer to paragraph 39, it:
admits that, on 24 February 2014, it released its Annual Report for 2013
(2013 Annual Report) [QIG.998.001.0183] which stated:
(a)
"In the second half of 2012, the then newly appointed Group Chief Executive Officer (CEO), John Neal, instigated an assessment by QBE's internal and external actuaries of underperforming and run-off portfolios in our US program business. This assessment identified a number of issues, which prompted a strengthening of the claims provisions which adversely impacted the 2012 financial result. After the emergence of these issues a new North American Operations CEO,
37
David Duclos, was appointed in April 2013. David then recruited a new North American senior executive team. The highest priority for this new team was to undertake a thorough strategic and operational review of the division.
In December 2013, the Board was presented with the results of this review including management's analysis and recommendations. This led to our decision to further strengthen claims provisions for the US program business due to prior accident year claims development in long tail classes such as workers' compensation, general liability and construction defect risks. ...
The North American review was a labour-intensive and exhaustive process for the division's new management team, as it has been for the Board and Group management...." [QIG.998.001.0183 at .0188]
(b) says further that:
(i) the review of run-off portfolios in the second half of 2012:
(A) involved an extensive claim file review by QBENA of claim files
for the Program business held by TPAs, following which case
reserves set by the TPAs were changed in a number of
instances;
(B) contributed to the increased strengthening of reserves (including
in respect of risk margins) announced in November 2012 and
February 2013, as to which it refers to and repeats paragraphs
16 and 19 above;
(ii) in late 2012, QBE engaged internal and external actuaries to assess
the reserves held for the Program and run-off portfolios;
(iii) during the first half of 2013, QBENA's actuarial team undertook
significant work to collate and segment data reserves for the Program
business to permit review on a line-of-business, rather than a
program-by-program, basis;
(iv) reserves in respect of the Program business were strengthened in the
results for the first half of 2013 (as announced on 20 August 2013) to
the extent that the review of particular programs had previously been
completed and indicated a need for reserves to be strengthened;
(v) during the second half of 2013:
38
(A) QBENA's actuarial team (with the input of the Group Chief
Actuary) undertook a detailed review of the outstanding claims
provisions held for the Program business using additional data
sources and different methods of analyses from the reviews
which led to the increased provisions announced in November
2012, February 2013 and in the 2013 Half Year Report;
Particulars
Before 2013, outstanding claims for the Program business were assessed on a "program by program" basis having regard to, inter alia, the comparison between amounts paid on claims and previous case reserves and historical comparisons of ceded loss to gross loss and ceded premium to gross premium in assessing the impact of reinsurance.
Once work had been undertaken in the first half of 2013 to prepare data for analysis on a "line of business" basis, the QBENA actuaries started to assess provisions on a "line of business" basis (and not a "program by program" basis) although the largest programs continued to be reviewed individually. Other changes in approach included assessing the impact of reinsurance by reference to the terms of reinsurance contracts and development pattern assumptions. In addition, as, by 2013, QBENA's experience of historical claims data since the bulk of its Program business was acquired in 2007 had matured, the new actuarial team appointed in the first half of 2013 made greater use of historical claims data than had previously been made in the period leading up to and including the announcement of the half year results in 2013.
The actuarial review in the second half of 2013 also incorporated the results of the separate "SWAT" process described below. The changes in claims handling practice as a result of the "SWAT" process and earlier claims reviews affected development patterns and necessarily made the actuarial analysis more complex.
(B) QBENA's claim team initiated a "SWAT" process that involved
further reviews of claim files held by TPAs with the aim of settling
claims and reviewing the carrying reserves;
(C) pursuant to a retainer dated 11 July 2013, Ernst & Young
conducted an independent review of QBENA's provisions;
Particulars
Ernst & Young's retainer dated 11 July 2013 [QIG. 016.033.7789].
39
(D) pursuant to a retainer effective 28 August 2013, QBENA
engaged Christopher Gross Consulting, Inc. to develop an
independent reserve estimate for particular programs with
complex construction defect liabilities;
Particulars
Master Service Agreement between QBE Americas, Inc. and Christopher Gross Consulting, Inc., effective 28 August 2013 [QIG. 016.010.7795] and [QIG. 016.011.3205].
Exhibit A (Statement of Work) for Align program issued pursuant to Master Service Agreement between QBE Americas, Inc. and Christopher Gross Consulting, Inc [QIG.016.011.3203],
Exhibit A (Statement of Work) for HDR program issued pursuant to Master Service Agreement between QBE Americas, Inc. and Christopher Gross Consulting, Inc [QIG. 016.229.1235],
(vi) the process undertaken throughout 2013 was a time-consuming and
complex process, the results of which were presented to the Board at
its meeting on 5-6 December 2013 at which time management
recommended an increase of $257m to the prior year reserve for the
Program business and a $50m increase in risk margins; and
Particulars
The results of the review were referred to in the memoranda of the CEO [QIC.001.005.0471 at .0472 and .0473] and the CFO [QIG.001.005.0481 at .0481 and .0482] and in a joint memorandum of the CEO and CFO dated 6 December 2013 [QIG.001.005.0743 at .0743 and .0744]. At the time of the 4-6 December 2013 Board meeting, Ernst & Young's analysis was ongoing, however Ernst & Young provided an update to the Board at its meeting on 5 December 2013 [QIG. 006.001.7562 at. 7563].
(c) otherwise denies paragraph 39.
40. In answer to paragraph 40, it:
(a) refers to and repeats paragraph 39 above; and
(b) otherwise denies paragraph 40.
41. It admits paragraph 41 and refers to and repeats paragraph 39 above.
C. The FPS Business
40
42. It admits paragraph 42 and says further that:
(a) the FPS business included lines of voluntary, as well as force-placed (also
known as lender-placed insurance or LPI), home insurance; and
(b) the FPS business was also conducted by QBE Financial Institution Risk
Services, Inc. and its subsidiaries: QBE FIRST Insurance Agency, Inc. (QBE
First), Seattle Specialty Insurance Services Inc. and Newport Management
Corporation (which largely conducted the servicing, tracking and insurance-
agent aspects of the business).
43. It does not know and therefore cannot admit paragraph 43.
44. It admits paragraph 44 and says further that a settlement was reached with New
York Department of Financial Services in or about April 2013 with the relevant
subsidiaries conducting QBENA's FPS business neither admitting nor denying the
findings and allegations made against them.
Particulars
Two consent orders with New York Department of Financial Services were agreed on or about 18 April 2013.
QBE First and QBE Insurance Corporation were party to the first consent order (the first consent order).
Balboa Insurance Company and Meritplan Insurance Company were parties to the second consent order (the second consent order). QBE First and QBE Insurance Corporation were also parties to the second consent order so far as the payment of penalty and premium refunds was concerned.
45. It admits paragraph 45.
46. In answer to paragraph 46, it:
(a) admits that, in its accounts for the year ended 31 December 2013, Fannie
Mae estimated its single family market share was 40% in 2013, up from 39%
in 2012;
(b) says further that Fannie Mae was directed by the FHFA not to proceed with its
proposal on or about 11 February 2013; and
(c) otherwise denies paragraph 46.
Particulars
41
The decision of the Federal Housing Association (FHFA) not to progress the
Fannie Mae proposal was reported in an article in American Banker by Jeff
Homitzon 11 February 2013 [QIG.998.001.0001].
47. In answer to paragraph 47, it:
(a) admits that, on 14 March 2012, the California Department of Insurance issued
a Press Release titled "Insurance Commissioner Dave Jones Calls on
'Forced-Placed' Mortgage Insurers to Reduce Rates";
(b) admits that the aforementioned press release included a statement that:
"Insurance Commissioner Dave Jones contacted the 10 largest 'lender-placed coverage' insurers in California to express concerns about excessive rates and directed that they make a rate filing with the California Department of Insurance (GDI) to reduce their rates"; and
(c) otherwise denies paragraph 47.
48. In answer to paragraph 48, it admits that in late 2012 to 2013, California accounted
for about 11-12% of written premium of QBENA's FPS business.
49. It denies paragraph 49 and says further that
(a) QBENA factored reduced premiums, including in California and Florida, into
its 2013-2015 Business Plan; and
(b) the earnings targets announced to the market on 26 February 2013 was
informed by the 2013-2015 Business Plans prepared by each Division
(including QBENA's Business Plan).
Particulars
QBENA 2013-2015 Business Plan prepared in November 2012 by John Rumpler [QIG. 001.010.0021 at .0030].
50. In answer to paragraph 50, it:
(a) admits that, on 27 June 2012, the National Association of Insurance
Commissioners (NAIC) announced that it would hold a public hearing on 9
August 2012 to discuss the use of lender-placed insurance and the effect of
the practice on consumers, including discussion of premiums charged, loss
ratios and related rating and pricing information;
(b) says further that the NAIC did not exercise any control over premiums; and
42
(c) otherwise denies paragraph 50.
51. It admits paragraph 51 and says further that:
the public hearing was held in relation to the request for approval of rates
submitted by Praetorian Insurance Company (Praetorian);
(a)
(b) the Florida Office of Insurance Regulation (FLOIR) has the power to convene
hearings at any time, and elected to do so in relation to Praetorian's initial
premium rate submission;
it denies that there was any "investigation" in relation to Praetorian's
premiums; and
(c)
(d) otherwise denies paragraph 51.
52. In answer to paragraph 52, it:
admits that, on 10 August 2012, FLOIR disapproved Praetorian's initial
premium rate submission and indicated that a premium reduction of 35-36%
was required;
(a)
(b) on or about 11 February 2013, FLOIR approved an overall statewide rate
reduction of 18.8% and did not seek any further rate reductions in 2013; and
otherwise denies paragraph 52. (c)
Particulars
Letter from Kevin M. McCarty, Commissioner of FLOIR, to Paula Saguibo, Rate & Form Analyst of Praetorian Insurance Company dated 10 August 2012 regarding "Praetorian Insurance Company Property / Collateral Protection - Dual Interest OiR File Number: FCC 12-07860 Filing Received 5/4/2012" [QIC. 999.007.0003],
FLOIR Press Release, "Office Approves Praetorian Insurance Company's Second Rate Filing for Lender-Place Insurance" dated 11 February 2013 [QIG.998.001.0005].
53. It admits paragraph 53.
54. In answer to paragraph 54, it:
(a) refers to and repeats paragraphs 49 to 52 above; and
(b) otherwise denies paragraph 54.
55. In answer to paragraph 55, it:
43
admits that, as at October 2012, it anticipated a "moderate" reduction in
premiums for lender-placed insurance;
(a)
refers to and repeats paragraph 49 above; (b)
(c) says further that:
(i) the pleaded regulatory actions; and
(ii) the existence of pressure on premiums for force-placed insurance;
were matters of public record; and
Particulars
The Respondent drew the market's attention to the existence of regulatory actions and that it anticipated "moderate" reductions in premiums for lender-placed insurance in the "QBE North America Investor and Analyst Day presentation" released to the ASX on 12 October 2012 [QIG.012.001.0001 at .0010],
The 2013 Half Year Report further noted that the TPS business was also adversely impacted by regulatory fines and associated legal costs" and "our LPI business was impacted by regulatory pressure on premium rates"[QIG.012.001.0760 at .0770 and .0780]
(d) otherwise denies paragraph 55.
56. In answer to paragraph 56, it:
admits that, in November 2012, its subsidiaries operating QBENA's FPS
business were defendants to:
(a)
(i) Williams v Wells Fargo Financial Inc 11 -cv-21233, filed in
Florida; and
(ii) Hall v Bank of America 12-cv-22700 filed in Florida;
both of which were class actions;
says further that the existence of class actions concerning force-placed
insurance was a matter of public record; and
(b)
(c) it otherwise denies paragraph 56.
57. It admits paragraph 57 and says further that the 35% decrease was in respect of
QBE Insurance Corporation's rates and this equated to an approximate 15%
reduction compared to the rates that currently applied to most of the FPS Business'
lender-placed portfolio in California.
44
58. It admits paragraph 58 and says further that this equated to an approximate 17%
decrease for the entire lender-placed book for the FPS Business in Florida including
Balboa rates.
59. In answer to paragraph 59, it:
refers to and repeats paragraph 44 above; (a)
(b) admits paragraph 59(c);
subject to reference to the full terms and effect of the first and second consent
orders, admits that those subsidiaries parties to the first and second consent
orders agreed to:
(c)
(i) pay penalties totalling $10m;
(ii) file for premium rates with a loss ratio of 62%; and
(iii) compensate homeowners falling within the defined categories of
eligible consumers in the first and second consent orders;
says further that only low levels of claims for compensation were made by
potentially eligible consumers; and
(d)
Particulars
,4s at early September 2013, claims for compensation had been received from less than 0.01% of potential claimants [QIG.011.007.6810 at .6827].
otherwise denies paragraphs 59(a)-(b) and (d). (e)
60. It admits paragraph 60.
In answer to paragraph 61, it: 61.
says, in answer to paragraph 61(a) that it: (a)
admits that, on or about 25 March 2013, FHFA identified certain
restrictions that it proposed Freddie Mac and Fannie Mae impose on
lender placed insurance and sought "input from the public and
interested parties"; and
(i)
(ii) otherwise denies paragraph 61(a);
admits paragraph 61(b) and says further that: (b)
45
(i) the FHFA did not direct Fannie Mae and Freddie Mac to change their
requirements for force-placed insurance until 5 November 2013; and
(ii) Fannie Mae did not propose to implement the new requirements until
1 June 2014.
Particulars
FHFA news release entitled "FHFA Directs Fannie Mae and Freddie Mac to Restrict Lender-Placed Insurance Practices" dated 5 November 2013 [QIG.998.001.0423].
Fannie Mae, "Servicing Guide Announcement SVC-2013-27" dated 18 December 2013 [QIG.998.001.0417].
62. In answer to paragraph 62, it:
(a) repeats paragraph 46(a);
admits that, in its accounts for the year ended 31 December 2013, Freddie
Mac estimated its single family market share was 23% in 2013; and
(b)
(c) otherwise does not know and cannot admit paragraph 62.
63. In answer to paragraph 63, it:
(a) repeats paragraphs 46 and 61;
says further that: (b)
(i) the FHFA proposal had no material financial impact on the FPS
business;
the existence the FHFA proposal was a matter of public record; and (ii)
Particulars
The FHFA proposal referred to in paragraph 61 of the Applicant's Statement of Claim was published in the Federal Register of the government of the United States of America.
(c) otherwise denies paragraph 63.
64. In answer to paragraph 64, it:
(a) admits that:
on 7 January 2013, Bank of America publicly announced that it was
selling its mortgage servicing rights on about 2 million residential
loans; and
(i)
46
(ii) the FPS business had lost other clients in late 2012 and 2013 through
industry consolidation;
Particulars
Bank of America announcement, "Bank of America Announces Settlement with Fannie Mae to Resolve Agency Mortgage Repurchase Claims on Loans Originated and Sold Directly to Fannie Mae Through December 31, 2008" dated 7 January 2013 [QIG.998.001.0419],
As disclosed in the 2013 Half Year Report, other clients lost (largely through mortgage industry consolidation) included Wells Fargo, Aurora and part ofGMAC [QIG.012.001.0760 at .0781].
says further that in late 2012 and throughout 2013, the FPS business sought
to win major new clients, which would each have created significant additional
premium income for the business, including:
(b)
Nationstar Mortgage Holdings Inc. (Nationstar), in respect of which
the FPS business learned that it had not won the account on 6 April
(i)
2013;
JP Morgan Chase, in respect of which the FPS business learned it had
not won the account on 16 November 2013, the initial proposal for
which had been submitted on 31 October 2012;
(ii)
Particulars
JP Morgan Chase Proposal Executive Summary dated 31 October 2012 [QIG. 016.158.0309].
says further that the timing of the tranches by which the Bank of America sold
down its loan book and the make-up of the tranches sold (both as to quantum
and the quality of the loan book) were matters outside QBENA's control and
of which it had limited forewarning; and
(c)
(d) otherwise denies paragraph 64.
65. In answer to paragraph 65, it:
(a) says that, because of the nature of force-placed insurance, the demand for
force-placed insurance is necessarily:
(i) counter-cyclical; and
(ii) variable according to the quality of the loan book of the lender;
47
Particulars
Demand is counter-cyclical in that, as economic conditions improve, other things being equal, rates of forced-placing of home insurance tend to decline and following the GFC, economic conditions in the United States had generally been improving. Demand for force-placed insurance varies with the quality of the loan book of the lender in that loans advanced with higher loan to value ratios or to borrowers with a lower capacity to meet their repayments were more likely to fail to take out and maintain insurance, resulting in insurance being force-placed.
QBE drew the attention of the market to this counter-cyclical nature of its force-placed business:
(i) on 24 October 2012, when it told the market that it expected $120m lower gross written premium for FPS in 2013 as a result of the "net impact of pricing and cyclical change" [QIG.012.001.0178 at.0183]; and
00 on 26 February 2013 (as part of the 26 February Presentation), when it told the market that lender-placed insurance volumes would reduce "due to pricing and economic recovery coupled with restructuring by Bank of America" [QIG.012.001.0495 at .0505].
(b) otherwise denies paragraph 65,
D. The Crop Business
66. It admits paragraph 66.
67. In answer to paragraph 67, it:
(a) admits that:
(i) in 2013 (as in other years), it wrote Crop policies throughout the
United States of America;
(ii) Minnesota, Iowa, North Dakota and Nebraska were states in which
premiums in 2012 exceeded US$100,000,001;
(iii) it wrote premiums between US$25,000,001 and US$100,000,000 in
another 12 states in 2012;
(iv) in 2013, it wrote premiums in excess of US25,000,000 in 17 states,
with Minnesota, Iowa, North Dakota and Nebraska constituting the
highest four states by gross premium volume; and
48
(b) otherwise denies paragraph 67.
68. It admits paragraph 68.
69. In answer to paragraph 69, it says that:
(a) under policies issued by the North American Crop Business, lost income is
measured according to the differential between:
(i) the reference price set by the Federal Crop Insurance Corporation (the
FCIC) in March each year, which price is publicly available; and
(ii) the harvest price, which price is publicly available and is generally:
(A) for soybeans, the October average prices for November futures
contracts set by the United States Department of Agriculture;
(B) for corn, the October average prices for December futures
contracts set by the United States Department of Agriculture;
(C) for spring wheat, the August average prices for September
futures contracts, set by the United States Department of
Agriculture;
Particulars
The harvest prices for 8 classes of corn and 4 classes of soybeans were set by the United States Department of Agriculture on 4 November 2013.
The harvest price for spring wheat was set by the United States Department of Agriculture on 3 September 2013.
(b) the Respondent's exposure to loss of revenue claims under the policies
written by its North American Crop Business was affected by:
(i) relevant crop prices;
(ii) final yields in respect of each policy, as assessed at the level specified
in the individual policy, which yields were not known until the relevant
crops have been harvested and volumes and quality have been
determined;
Particulars
Under the policies written by the North American Crop Business the level at which yields were to be assessed varied. Under some policies, yields were to be assessed on a "paddock-by-paddock" basis, under
49
others, yields were assessed at the level of individual farms and a further group of policies determined lost revenue claims by reference to yields determined at the county level.
Harvest reports begin to be received in November each year, and continue to be received through to the completion of the harvest in January-February in each year.
(iii) the level of deductible for the individual policy holder, which varied
between policy holders with the mean in 2013 being 20%;
(iv) the US government deductible, being the portion of loss borne by the
US government before QBE would be liable for loss, which level of
deductible varied depending on whether the policy was allocated by
QBE to the Assigned Risk Fund or the Commercial Fund (and, for
funds in the Commercial Fund, whether the State was designated as a
Group 1, Group 2 or Group 3 State); and
Particulars
Under the Standard Reinsurance Agreement between the FCIC and the relevant insurer [QIG. 999.001.0073], insurers may (subject to terms and conditions) allocate policies into an Assigned Risk Fund or the Commercial Fund. For policies allocated to the Assigned Risk Fund, a substantially greater share of the risk of loss (and potential reward) was allocated to the FCIC, when compared with the Commercial Fund. The levels of risk assumed by the United States government through the FCIC and the individual insurer for policies allocated the Commercial Fund varied depending on whether the policy related to a Group 1 State or to a Group 2 or 3 State.
(v) the extent to which the US government deductible in respect of each
policy had been absorbed by prevented planting claims made by
policy holders who were prevented from planting their crops by an
insured event or condition;
(c) the market price of soybeans was relatively stable in calendar 2013;
while, by 20 August 2013, the price of corn and wheat had declined relative to
the reference prices set in March 2013, it was not (and could not) be known
what the harvest price of wheat and corn would be until those prices were
fixed by the United States Department of Agriculture;
(d)
(e) as at 20 August 2013, harvest reports had not yet begun to be received by the
North American Crop Business and it was not possible to undertake the work
50
and modelling necessary to determine whether lower crop prices would
(when combined with yield, deductibles and the other factors referred to in
paragraph 69(b) above) result in the North American Crop Business being
required to make material payments on policies under which a revenue
protection guarantee was given; and
(f) it otherwise denies paragraph 69 and refers to and repeats paragraph 82(c)
below.
70. In answer to paragraph 70, it:
(a) admits that prevented planting claims had been made by 20 August 2013 but
says that those claims fell entirely within, and only partly eroded, the US
government deductible referred to in paragraph 69(b)(iv) above; and
(b) otherwise denies paragraph 70.
V!. ALLEGED CONTINUOUS DISCLOSURE CONTRAVENTIONS
A. Allegations Concerning the North American Operations
71. In answer to paragraph 71, it:
(a) denies that, "by reason of the "remediation" alleged in paragraph 35 of the
Statement of Claim, it was aware (within the meaning of ASX Listing Rule
19.12) that there was a material risk of the matters alleged in paragraphs
71(a) and (b) of the Statement of Claim;
(b) says, further or alternatively, that:
(i) results at a Group level depended on the performance of all Divisions;
and
Particulars
On a full year basis, QBENA only contributed approximately one-third of
QBE's gross written premium.
(ii) it refers to and repeats paragraphs 30(c) above and 82 below and
otherwise denies paragraph 71.
B. Allegations Concerning the North American Program Business
72. It denies paragraph 72 and refers to and repeats paragraphs 28(b), 39 and 71 above.
51
C. Allegations concerning the FPS Business
73. In answer to paragraph 73, it:
(a) says that, save to the extent that the "spike" in attritional claims was related to
the Bank of America's sell-off of its loan book, the matters pleaded in
paragraphs 42 to 65 of the Statement of Claim were unrelated to the rate of
attritional claims which QBENA did, or ought to have, anticipated;
(b) as to goodwill, it refers to and repeats paragraphs 33, 34 and 64 above and
says further that:
(i) the extent to which the goodwill of QBENA (being the relevant CGU)
was affected by the performance of the FPS business could not be
assessed before the strategic future of that business had been
determined and the business plans for the FPS business, as well as
the business plans for each of QBENA's other businesses, had been
determined;
(ii) after it failed to secure the Nationstar account in April 2013, the
strategic future of the FPS business largely depended on whether or
not it won the JP Morgan Chase account; and
(iii) it was only after learning on 16 November 2013 that it had not won the
JP Morgan Chase account that QBENA could formulate its plans for
reshaping and "right-sizing" the FPS business, including by
substantially reducing its cost base;
Particulars
Prior to a decision being made on the JP Morgan Chase account, the FPS business had to retain substantial capacity in its costly sen/icing arm.
(c) as to the impact on Group earnings of the performance of the FPS business,
it repeats paragraph 71(b) above; and
(d) otherwise denies paragraph 73.
D. Allegations concerning the Crop Business
It denies paragraph 74 and refers to and repeats paragraphs 19(e), 22(c), 30(b), 67
and 69 above.
74.
52
E. Alleged Continuous Disclosure Contraventions
75. In answer to paragraph 75, it:
(a) says, in relation to the alleged North American Operations Performance Risk
Information that:
(i) it refers to and repeats paragraphs 19(f)(ii), 22(d)(ii), 22(d)(iii), 30(c)
and 71 above;
(ii) says, further or alternatively that if, which is denied, the North
American Operations Performance Risk Information existed at the
start of the Relevant Period and the Respondent was aware of it, then
at all times prior to 6 December 2013:
(A) that information comprised matters of supposition or was
insufficiently definite to warrant disclosure, further or
alternatively, was generated for internal management purposes;
(B) that information was confidential; and
(C) a reasonable person would not expect the information to be
disclosed,
for the purposes of ASX Listing Rule 3.1 A;
Particulars
The Board reviewed the North American operations at its meeting on 5-6 December 2013 (following which the Respondent called a trading halt) [QIG.006.001.7562].
(iii) the existence of a "risk" that the Respondent's financial results for
2013 would be adversely affected by the performance of QBENA
and/or that the Respondent's earnings guidance was not reliable was,
for the purposes of ss 674(2), 676 and 677 of the Act:
(A) information that was generally available; further or alternatively
(B) was not information which a reasonable person would expect, if
it were generally available, to have a material effect on the price
or value of the Respondent's securities;
53
Particulars
Earnings guidance is inherently and inevitably "unreliable" (in the sense that it may or may not be met) as it constitutes a statement of the Respondent's opinion as to future events which are subject to considerable uncertainty.
(b) says, in relation to the alleged North American Increased Provisioning Risk
Information that:
it refers to and repeats paragraphs 28(b), 39 and 72 above; (i)
says, further or alternatively that if, which is denied, the North
American Increased Provisioning Risk Information existed at the start
of the Relevant Period and the Respondent was aware of it, then at all
times prior to 6 December 2013:
(ii)
(A) that information comprised matters of supposition or was
insufficiently definite to warrant disclosure, further or
alternatively, was generated for internal management purposes;
(B) that information was confidential; and
(C) a reasonable person would not expect the information to be
disclosed,
for the purposes of ASX Listing Rule 3.1 A;
(iii) the existence of a "risk" that further provisions would be required
and/or that earnings guidance at a Group level was (as it is alleged)
unreliable to the extent that it incorporated guidance based on the
financial performance of QBENA was for the purposes of ss 674(2),
676 and 677 of the Act:
(A) information that was generally available; further or alternatively
(B) was not information which a reasonable person would expect, if
it were generally available, to have a material effect on the price
or value of the Respondent's securities;
Particulars
The Respondent refers to and repeats paragraph 28(b) above.
(c) says, in relation to the alleged FPS Business Performance Risk Information
that:
54
it refers to and repeats paragraphs 19(g), 22(b), 55(c), 56(b), 63, 64,
65 and 73 above;
(i)
says, further or alternatively that if, which is denied, the FPS Business
Performance Risk Information existed at the start of the Relevant
Period and the Respondent was aware of it, then at all times prior to 6
December 2013:
(ii)
(A) that information comprised matters of supposition or was
insufficiently definite to warrant disclosure, further or
alternatively, was generated for internal management purposes;
(B) that information was confidential; and
(C) a reasonable person would not expect the information to be
disclosed,
for the purposes of ASX Listing Rule 3.1 A; and
further or alternatively, to the extent the FPS Business Performance
Risk Information concerns:
(NO
(A) the existence of a risk of impairment of goodwill; and/or
(B) the existence of a risk that the Respondent's earnings guidance
was unreliable;
that information was for the purposes of ss 674(2), 676 and 677 of the (iv)
Act:
(A) information that was generally available; further or alternatively
(B) was not information which a reasonable person would expect, if
it were generally available, to have a material effect on the price
or value of the Respondent's securities;
Particulars
The Respondent refers to and repeats paragraphs 19(g), 22(b), 55(c), 56(b), 63, 64 and 65 above.
(d) says, in relation to the alleged Crop Performance Risk Information that:
(i) it refers to and repeats paragraphs 30(b), 34(b)(i)(B), 69 and 74
above;
55
(ii) says, further or alternatively that if, which is denied, the Crop
Performance Risk Information existed at the start of the Relevant
Period and the Respondent was aware of it, then at all times prior to 6
December 2013:
(A) that information comprised matters of supposition or was
insufficiently definite to warrant disclosure, further or
alternatively, was generated for internal management purposes;
(B) that information was confidential; and
(C) a reasonable person would not expect the information to be
disclosed,
for the purposes of ASX Listing Rule 3.1 A;
(iii) further or alternatively, the existence of a "risk" that the North
American Crop Business may not achieve a COR of 88% or better in
2013 was for the purposes of ss 674(2), 676 and 677 of the Act:
(A) information that was generally available; further or alternatively
(B) was not information which a reasonable person would expect, if
it were generally available, to have a material effect on the price
or value of the Respondent's securities; and
Particulars
The Respondent refers to and repeats paragraphs 30(b), 34(h) (i)(B) and 69 above.
To the extent that the alleged Crop Performance Risk Information existed due to falls in commodity prices (as the Applicant alleges), commodity prices were a matter of public record.
(e) it otherwise denies paragraph 75.
76. It denies paragraph 76 and refers to and repeats paragraph 75 above.
77. In answer to paragraph 77, it:
(a) repeats paragraphs 24 and 71 to 75 above; and
(b) otherwise denies paragraph 77.
78. It denies paragraph 78.
56
VII. ALLEGED MISLEADING OR DECEPTIVE CONDUCT AND MATERIALLY MISLEADING CONDUCT
A. Alleged Misleading Conduct Contraventions
79. If (which is denied) the Compliance Representations, the Risk Management
Representations, the August 2013 Express Representations and the August 2013
Implied Representations were made, it:
(a) admits that those representations were made in trade or commerce and in
relation to QBE shares; and
(b) otherwise denies paragraph 79.
80. It denies paragraph 80.
81. It denies paragraph 81.
82. In answer to paragraph 82, it:
(a) says, in answer to paragraph 82(a) that:
it refers to and repeats paragraphs 22(a), 32(a) and 39 above; (i)
the statements in August 2013 concerning provisions in respect of
QBE's North American provisions (as to which the Respondent refers
to and repeats paragraph 22(a)) constituted statements of opinion
which were genuinely held on reasonable grounds at the time they
were made;
(ii)
(iii) further or alternatively, if the alleged August 2013 NA Program
Provision Representation was made (which is denied), it constituted a
statement of opinion which was genuinely held on reasonable grounds
at the time it was made; and
Particulars
The reasonable grounds in respect of paragraphs 82(a)(ii) and (iii) above are constituted by the matters pleaded at paragraph 39(b) above.
(b) says, in answer to paragraph 82(b) that:
(i) refers to and repeats paragraphs 19(g), 22(b), and 64 above;
(ii) its statement in August 2013 concerning the $40m spike in attritional
claims affecting the FPS business and the $66m spike at a Group
57
level (including Equator Re) (as to which the Respondent refers to and
repeats paragraph 22(b) above) was:
(A) a statement of fact concerning the results of QBENA for the half
year ending 30 June 2013, which was true at the time it was
made;
(B) a statement made on reasonable grounds;
Particulars
The spike in attritional claims arose from a higher than expected number of small claims being made under policies within the Bank of America book of business which was being sold off and in respect of which a more aggressive approach was being taken by Bank of America managers to the pursuit of attritional claims.
The spike in attritional claims was only experienced in the first half of 2013 and was not repeated in the second half.
(iii) its statement in August 2013 that it was confident it could win new
banking clients (as to which it refers to and repeats paragraph 22(b)
above) was a statement of opinion which was genuinely held on
reasonable grounds at the time it was made;
Particulars
Following the submission of its proposal for the JP Morgan Chase account on 31 October 2012, the Respondent received positive indications from JP Morgan Chase which led to a belief that there was a very good chance the business would be awarded. It also reasonably believed QBENA's offering was superior to the offering of the incumbent, Assurant, and accordingly would attract further banking clients, as the FPS business' insurance tracking capabilities and compliance systems were superior to those of Assurant. It was not until 16 November 2013 that it learned that the FPS business had not won the JP Morgan Chase account.
(iv) further or alternatively, if the alleged August 2013 FPS Representation
was made (which is denied), it constituted a statement of opinion
which was genuinely held on reasonable grounds at the time it was
made;
Particulars
The reasonable grounds are those set out in the particulars to paragraphs 82(b)(ii) and 82(b)(iii) above.
58
(c) says, in answer to paragraph 82(c) that:
(i) it refers to and repeats paragraphs 19(e), 22(c), 30(b), 32(c) and 69
above;
(ii) the statements in February 2013 and August 2013 concerning the
performance of the Crop business (as to which the Respondent refers
to and repeats paragraphs 19(e) and 22(c) above) constituted
statements of opinion which were genuinely held on reasonable
grounds at the time they were made;
(iii) further or alternatively, if the alleged August 2013 Crop Guidance
representation was made (which is denied), it constituted a statement
of opinion which was genuinely held on reasonable grounds at the
time it was made; and
Particulars
The reasonable grounds in respect of paragraphs 82(c)(i)-(iii) above are as follows:
(i) the long-term average COR of the Crop business was about 88%;
(ii) as at February 2013, the Respondent had no reason to expect that the COR for Crop business for 2013 would be materially different to the long-term average;
(iii) QBENA had, prior to February 2013, submitted its budget and business plan for the Crop business in 2013, which projected a COR of about 87% [QIG.0001.010.0021 at .0029], which COR was maintained in a 2013 reforecast produced in February 2013 [QIG.001.013.0030 at. 0032];
(iv) as at February 2013, prevented planting claims had not yet been received and there was no reason to expect higher than average prevented claims;
(v) on 14 August 2013, the Crop business reported to the QBENA finance department a year-to-date COR of 85.9% to 31 July 2013 ([QIG.018.007.1679], [QIG. 018.007.1680], [QIG.018.007.1681], [QIG. 018.007.1682]);
(vi) as at 20 August 2013, the price of soy was higher than it was in March 2013 when reference prices were set and, while the price of corn and wheat had softened since March 2013, it was not yet known what the harvest price would be and, further;
59
(vii) as at 20 August 2013, high yields were expected based on weekly crop condition reports published by the United States Department of Agriculture and reports published by AIR Worldwide;
(viii) actual producer's yield reports had not yet been received by 20 August 2013 (producer's yield reports are received in the period from mid-November to January/February the following year (after the harvest));
(ix) as at 20 August 2013, commodity prices had not declined to a point where (assuming a normal yield) revenue losses experienced by policy holders would exceed the average deductible and/or the sum of the policy holder deductible and the US government deductible referred to at paragraph 69(b)(iv) above, having regard to existing prevented planting claims;
(x) as at 5 November 2013, QBENA's reforecast for the 2013 year projected Crop COR was 88.3% [QIG.001.004.0096 at .0098];
(xi) it was only as yield reports began to be received through November 2013 that QBENA was able to undertake work to project, based on the yield reports available to that point (which were incomplete) what the impact of the combination of declining prices and lower than anticipated yields might be, having regard to the factors identified in paragraph 69 above.
The Respondent also refers to and repeats paragraph 69 above.
(d) says, in answer to paragraph 82(d) that:
(i) it refers to and repeats paragraphs 19(f) and 32(d) above;
(ii) the statements made in August 2013 concerning the target COR and
insurance profit margin (as to which the Respondent refers to and
repeats paragraphs 22(d) above) constituted statements of opinion
which were genuinely held on reasonable grounds at the time they
were made;
(iii) further or alternatively, if the alleged August 2013 Group Guidance
representation was made (which is denied), it constituted a statement
of opinion which was genuinely held on reasonable grounds at the
time it was made; and
Particulars
The reasonable grounds referred to in paragraphs 82(d)(ii) and 82(d)(iii) are that:
60
(i) the Group results for the period from January to June 2013 showed a COR of 92.8% and an insurance profit margin of 10.8%, which were both ahead of budget, having regard to the fact that the first half of the year typically runs at a slightly higher COR than the second half of the year due, in part, to the higher weighting of premium earnings in the second half of the year (for example in the Crop business) [QIG.012.001.0826 at .0830];
(ii) each Division completed a reforecast for the full 2013 year, the outcome of which was that, at a Group level, the full year COR was expected to be 92.0% and the insurance profit margin was expected to be 10.9% [QIG.001.002.0811 at.0818];
(Hi) as at 20 August 2013, the results available included above plan results for some Divisions, particularly Australia and New Zealand. It was only when:
• the full year results for the Crop business could be modelled (following receipt of yield results); and
• when the work had been completed which identified the need for, and quantum of, increased reserves and impairments;
that it was apparent that the Group full year results would fall short of a COR of 92% and would not achieve an insurance profit of 11%.
(e) says, in answer to paragraph 82(e) that:
(i) its statement in August 2013 concerning goodwill (as to which it refers
to and repeats paragraph 22(d)(iv) above) was made on reasonable
grounds;
(ii) further or alternatively, if the alleged August 2013 Goodwill
Representation was made (which is denied), it was made on
reasonable grounds; and
Particulars
The reasonable grounds referred to in paragraphs 82(e) (i) and 82(e)(ii) above are as follows:
(i) the statement referred to at paragraph 22(d)(iv) above was made concerning the carrying value of goodwill at a Group level as at 30 June 2013, being the closing date of the 2013 half year accounts being reported in August 2013;
61
(ii) in the absence of any indicators of impairment for other CGUs, a full impairment test was carried out in relation to the goodwill of the North American CGU;
(Hi) the results of the Respondent's half year analysis of the North American CGU's goodwill was that it was not impaired [QIG.001.002.1027 at. 1032]; and
(iv) PricewaterhouseCoopers (being the Respondent's auditors) "Report to the Audit Committee on the half year ended 30 June 2013" (dated 13 August 2013) concluded that, based on the information presented to it, "we consider the individual assumptions underlying the model valuation to be reasonable and therefore conclude that the North American goodwill is not impaired"[QIG.001.002.0075 at .0094].
The Respondent also refers to paragraph 73 above.
(f) otherwise denies paragraph 82.
83. In answer to paragraph 83 it:
(a) refers to and repeats paragraph 82 above; and
(b) denies paragraph 83.
84. It denies paragraph 84 and says, further or alternatively, that if it made the alleged
August 2013 Implied Representations (which is denied) it made them on reasonable
grounds, as to which it refers to and repeats paragraphs 32, 33 and 82 above.
85. It denies paragraph 85.
86. It denies paragraph 86.
B. Alleged Misleading Statement Contraventions
87. It denies paragraph 87.
88. It denies paragraph 88.
89. It denies paragraph 89.
90. It denies paragraph 90.
91. It denies paragraph 91.
92. It denies paragraph 92.
93. It denies paragraph 93.
62
Vlii. ALLEGATIONS CONCERNING GROUP MEMBERS' LOSS
A. Acquisition of QBE Shares
94. It does not know and so cannot admit paragraph 94.
B. Alleged Market-Based Causation
95. In answer to paragraph 95, it:
(a) admits paragraphs 95(a)-(c);
(b) says, in answer to paragraph 95(d) that it admits that the price of QBE Shares
would reasonably be expected to have been informed or affected by material
information disclosed to the ASX and by other publicly available information,
amongst other factors affecting the price at which those shares were traded
and otherwise denies paragraph 95(d); and
(c) it denies paragraph 95(e).
96. It denies paragraph 96.
97. It denies paragraph 97.
98. It denies paragraph 98.
C. Alleged Reliance
99. It denies paragraph 99.
D. Alleged Loss or Damage
100. It denies paragraph 100.
63
IX. INDEX TO DEFINITIONS
9 December Announcement, 23
12 November Announcement, 5
12 November Call, 4
20 August Announcement, 13
20 August Call, 13
26 February Announcement, 7
26 February Call, 8
26 February Presentation, 8
2012 Annual Report, 7
2013 Annual Report, 36
2013 Half Year Results Presentation, 13
2013 Half Year Report, 13
ASX Listing Rules, 4
CGU, 31
Equator Re, 3
FCIC, 48
FHFA, 41
first consent order, 40
FLOIR, 42
HY12 results presentation, 7
MGAs, 35
NAIC, 41
Nationstar, 46
PoA, 6
Praetorian, 42
QBE First, 40
QBENA, 3
second consent order, 40
the Act, 4
TPAs, 34
64
Date: 24 November 2015
fy*—.—*»
4 Signed by^Guy Hamilton Foster
Lawyer for the Respondent
This pleading was prepared by Guy Hamilton Foster, solicitor and settled by Alan Archibald
of Queen's counsel and Catherine Button of counsel.
65
Certificate of lawyer
I, Guy Hamilton Foster, certify to the Court that, in relation to the defence filed on behalf of
the Respondent, the factual and legal material available to me at present provides a proper
basis for:
(a) each allegation in the pleading; and
(b) each denial in the pleading; and
(c) each non admission in the pleading.
Date: 24 Novembe/2015
Signed by Guy Hamipn Foster
Solicitor for the Respondent