Based in Sydney, QBE Insurance Group is the largest listed general and reinsurance company in Australia. This month we talk to Chris Zwolinski, Group Treasurer, about the development of QBE’s treasury operations, from a small, and mainly paper-based treasury into a large and efficient decentralised operation.

What can you tell me about QBE?

QBE is Australia’s largest listed general and reinsurance company. It is the 10^th largest listed entity in Australia and is one of the 25 largest general insurers globally. QBE is also the largest capacity provider to the Society of Lloyd’s so clearly it’s a big player in that highly specialised market.

QBE was formed in 1886 and it currently operates in over 40 countries, with in excess of 8,000 employees worldwide. For an Australian company it is quite unusual, in that it is largely active outside of Australia. Only about 25% of QBE’s assets and revenue come from Australia – around 50% is managed from the UK, 15% of its business takes place in the Americas (North and South America) and the remainder is in the Asia-Pacific region. QBE operates in a wide range of countries, some with highly developed and very sophisticated financial markets, whilst others are less developed and some are very basic.

What about the treasury?

QBE runs three regional treasury centres: New York, London and Sydney. It manages these through a group treasury function, which is based in Sydney as well. Just to give you a feel for our volumes and size, we currently run a net open foreign exchange position of about AUD10 billion (and growing), so that’s the net value of currency positions that we have to manage. Face value of FX trades last year was about AUD60 billion. We actively manage nearly 1,000 bank accounts in those 40+ countries, with 130+ active business units, and the systems we run are for a large user group of 60+ people – about 20 of them treasury professionals and 40 of them accountants. What makes our treasury complex is the sheer scale of it. It is not rocket science, it is just very big, and therein lies the complexity – controlling all the moving parts is a mammoth challenge, despite the fact that they are relatively simple moving parts.

The actual dealing is all done by the regional treasuries in a decentralised model, because of the regulated nature of the insurance industry and because it makes more sense – they know their own business units best. We can’t expect to manage business units in 40 countries on a daily basis – you just can’t do that centrally. So all of the decisions on what to do with the cash or currency are made by the locals, whilst we make sure that they are doing it within the parameters that we have identified for them.

Insurance companies are a little unusual in that they are highly regulated, and unlike a more traditional treasury, in most instances it is simply not permissible for us to combine cash flows or net positions. If you were a mining company and you had a sterling exposure in Australia and an off-setting sterling exposure in the USA, you could net the two of them and combine your cash flows. In the insurance industry where the local entity is locally regulated, you are not allowed to do that. So the regulated nature of the insurance market effectively disallows a lot of the centralisation that treasuries have had the benefit of over the past few years.

What are your main responsibilities as Group Treasurer?

I oversee the daily operations of our three treasury groups using a comprehensive suite of technology that is very deeply embedded in the organisation. By that I mean virtually everything we do on the treasury side is on systems, real-time, online and available on the internet. That is everything from bank account balances worldwide, foreign exchange positions and their respective hedges, to what our counterparty exposures are. The key to our success is having that access real-time. We use SunGard’s AvantGard treasury system as a base and interface it to several proprietary systems we have developed in-house. I also focus on procedures and benchmarking, development and maintenance of group wide compliance, and the group policy as it relates to treasury management.

How has QBE’s treasury developed since you joined the company six years ago?

QBE’s treasury six years ago was very different to what it is today. It was much smaller and consisted of only three or four treasury professionals. It was highly centralised and almost entirely paper-based. The volumes were very significantly smaller. I think we had a dozen treasury transactions a week back then – now we have 60 a day. Our net open foreign exchange position might have been AUD800m – now it’s over 10 times that amount. So it’s had massive growth.

The systems and the processes for the business at that time were quite appropriate and adequate. However, it was clear that we had to do some significant re-tooling if we wanted to keep up with and facilitate the group’s expansion plans. QBE is a highly acquisitive insurance company, and I think in the last 20 years QBE has done 60 or 70 acquisitions, so it is strongly dependent on growth through acquisition. Treasury has certainly kept up over the last few years as the growth in treasury activity and volumes illustrates. To remind myself and treasury staff of just how significant the systems changes have been over the last six years, I keep one of the old card boxes originally used to record positions on my desk.

We have also changed around the structure, which at the time was very centralised. What we decided to do was to keep centralised what it makes sense to have centralised – which meant policy, procedures, systems, benchmarking and compliance monitoring. But at the same time we decentralised the day-to-day management of the treasury cash flows and the treasury exposures. We did this in order to comply with local regulations but also to give the local business units the control they need. They have the best knowledge of what is happening with their day-to-day premium revenues and claims payments, and they are in the best position to make those kinds of operational calls.

Where we achieve economies of scale is by having a centralised technology application that is housed and maintained centrally but that everyone can access over the internet. The local units get tremendous technology and tools for effectively a much smaller operation than would otherwise warrant that kind of investment.

What factors have been driving these changes?

The most important factor is the need for effective and cost efficient treasury operations in an ever expanding environment where cost cutting and maintaining shareholder value are priorities. You can really only do that on a large global scale with the help of extensive and highly developed internet based technology.

We already mentioned QBE’s high growth rate. The group is continuously adding new business units in all sorts of countries all over the world. They have to come in under our umbrella and into our ways of doing things, and to do so rapidly, we need to have the systems and skill sets and teams that can quickly get on top of new acquisitions and integrate them. Insurance is all about risk management and risk control, and we have got to be able to go in there and quickly set up and implement systems that give us a very good understanding of where the risks are and how we are going to control these. Regulation generally has increased tremendously over the last few years and that applies even more so in the insurance industry.

Another major factor is the International Financial Reporting Standards, and particularly ruling IAS 39 which has major implications for foreign exchange risk hedging and efficacy testing. In our case and under Australian Accounting Standards, IAS 39 has disallowed almost any form of netting FX exposures. So virtually each and every FX exposure has to be individually hedged. QBE does not want any FX fluctuation going to either the profit and loss accounts or the balance sheet. Our goal is to be as close to 100% fully hedged as practical. QBE hedges any individual FX exposure which is greater than AUD100,000. In currencies where normal FX markets do not operate, eg Macedonia, Ukraine, we hedge with proxy currencies or deliberately hold capital in hedgeable currencies.

The finance teams and treasury teams usually meet monthly to review any changes to FX hedging requirements with adjustments made accordingly. So we review our exposures frequently and adjust hedges promptly. To do so successfully, you have to have very accurate and timely accounting information and our finance teams do an outstanding job in this regard. To date we have been quite successful in our goal of having as little FX fluctuation as possible. In the 2005 financial year, QBE had an after-tax impact on group results due to foreign exchange movements of only AUD12.3m or 0.002% on the average net open position for the year of AUD6.9 billion.

What challenges have you encountered?

The diversity of the QBE Group is a real challenge. We operate in very sophisticated financial markets such as New York and London, but also in countries like Moldova, Macau and Vietnam. Getting something to work is one thing when people have a deep understanding of treasury operations in a sophisticated, highly developed market, but it is a very different thing getting it to work in a less developed economy like the Ukraine. The sheer diversity of what we have to deal with in terms of people and skill sets, in developed and underdeveloped markets, is an interesting challenge.

The other challenge is regulation in 40 countries. The regulations in Thailand are very different to the regulations in London, so that diversity is a unique challenge to the insurance industry and QBE. There is also the challenge of implementing cultural change and convincing people that it is an important thing to do.

How do you approach the task of integrating the treasuries of newly acquired companies?

Generally what we do is send a team over to have a detailed look at their business processes – what they are currently doing, what their treasury risks are. We spend a lot of time listening, because they are locally regulated, they have their own business practices, and we are never going to get them across the line if we try to force head offices practices and requirements down their throats. So we have to be very culturally and business practice sensitive.

Once we get an understanding of what works for them and what works for us, we assist them, largely doing all of the project management and project implementation work to get them on board and give them an understanding of what they have to do. I think the key for us is sending in a team of people who are experts at treasury and project management and then modifying and adopting what we require for their local needs and local regulations. It has to be flexible approach, because if it were not, it just wouldn’t work.

How is the treasury run today?

The treasury has to be run with a team mentality. It is important to have a diversified set of skills and perspectives, because you will come across unique problems, and you can’t all think the same way. You have to look at things creatively and you need different people and different mind sets to do that.

What further developments are planned for the future?

It is all about combining (centralised) discipline with enough flexibility to make it work locally. It is about maintaining quality, not resting on your laurels, and really leveraging the value and the investment you have made in people, processes and technology. It is about figuring out how to get your systems to do more and more for you. As you can imagine, our treasury systems are large, complex systems, they are highly customised, and there is a constant need to amend and change how you operate in order to maintain your leading edge.