QBE European Operations plc

QBE European Operations plc Annual report 2011
71
14 Investments continued
e) Valuation hierarchy continued
The investments included in Level 3 have one or more inputs that are not based on observable market data. These instruments are valued using
cost or stale prices, where alternative inputs are not available. The following table presents the movements of Level 3 investments during the year.
2011 2010
£000 £000
Balance at 1 January 15,528 4,277
Transfer out from Level 3 (124) (4,188)
Unrealised losses in profit and loss statement (302) (73)
Purchases – 15,528
Foreign exchange (432) (16)
Balance at 31 December 14,670 15,528
Notes:
Level 1
Level 2
Level 3
Valued using unadjusted quoted prices in active markets for identical financial instruments. This category includes listed equity shares,
certain exchange-traded derivatives, G10 government securities and certain US agency securities.
Valued using techniques based significantly on observable market data. Instruments in this category are valued using:
a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or
b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable
market data.
Valued using techniques where at least one input (which could have a significant effect on the instrument’s valuation) is not based on
observable market data.
15 Financial risk
The activities of the Group expose it to financial risks such as market risk, credit risk and liquidity risk. The Group’s risk management framework
recognises the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance.
The key objectives of the Group’s asset and liability management strategy are to ensure sufficient liquidity is maintained at all times to meet the Group’s
obligations, including its settlement of insurance liabilities and, within these parameters, to optimise investment returns for the Group.
i) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market factors. Market risk
comprises three types of risk: currency risk (due to fluctuations in foreign exchange rates), interest rate risk (due to fluctuations in market interest rates)
and price risk (due to fluctuations in market prices).
Currency risk
The Group is exposed to foreign currency risk in respect of its foreign currency exposures and forward foreign exchange derivatives are used to protect
the currency positions.
The risk management process covering forward foreign exchange derivatives involves close senior management scrutiny, including regular board and
other management reporting. All forward foreign exchange derivatives are subject to delegated authority levels provided to management and levels of
exposure are reviewed on an ongoing basis.
Financial statements