asx 26nov08 qbe announces acquisitions etc

QBE INSURANCE GROUP LIMITED ABN 28 008 485 014 82 Pitt Street Sydney NSW 2000

Postal Address GPO Box 82 26 November 2008 Sydney NSW 2001

Telephone: (02) 9375 4444 Facsimile: (02) 9231 6104 DX 10171 Sydney Stock Exchange The Manager

Company Announcements ASX Limited Level 6 Exchange Centre 20 Bridge Street SYDNEY NSW 2000 Dear Sir/Madam, re: QBE ANNOUNCES ACQUISITIONS, UPDATED REVENUE

FORECASTS AND CAPITAL MANAGEMENT INITIATIVES

Please find attached for release to the market: 1. Market Announcement; 2. Supplement to Market Announcement; 3. Supplemental Disclosure Information; and 4. Market Announcement on offers to exchange outstanding

capital securities for new notes. Yours faithfully,

Duncan Ramsay Company Secretary Encs.

QB D

ANNOUNCES ACQUISITI CASTS AND CAPITAL MANAGEMENT INITIATIVES

• en retail share purchase plan to raise a maximum of A$100 million to fund the

a buyback of up to A$1.25 billion in face value of tier 1 securities, at a discount, in exchange for ecurities to provide balance sheet flexibility for the future.

i) gs Inc has entered into an agreement to purchase ZCS, a US based underwriting agency for an up-front payment of US$575 million. ZCS specialises, and has sizeable market

a

rance

• voluntary homeowners’ insurance through relationships with homebuilders, mortgage

nderlying insurance business. The ZCS acquisition is expected to generate additional gross written premium for

ii) uire two further underwriting agencies in the US and one in Europe and also a renewal rights portfolio in the US. Additional gross written premium is

are expected to produce gross written premium of close to S$525 million and profit after tax of around US$175 million. The initial purchase price for all the

uisitions is around US$695 million.

E INSURANCE GROUP LIMITEMARKET ANNOUNCEMENT

ONS, UPDATED REVENUE FOREQBE

THIS MARKET ANNOUNCEMENT OUTLINES: • Sterling Corporation (“ZCS”) a number of acquisitions, the largest being ZC• an upgrade of 2008 and 2009 premium revenue expectations, including the positive impact of

the lower Australian dollar and acquisitions an accelerated, fully underwritten institutional share placement to raise A$2 billion together with a non-underwrittacquisitions and 2009 expected growth. The new shares will be entitled to participate in the final 2008 dividend

•senior debt s

ACQUISITIONS

QBE Holdin

sh res, in:

• property insurance to protect the lender in the event that the original homeowners’ insupolicy is either cancelled or not renewed; and

originators and real estate brokerage firms.

ZCS is not involved with lenders’ mortgage insurance.

ZCS earns commission revenue on the insurance policies placed with insurers. QBE’s acquisition of ZCS provides access to both the agency income and u

QBE of around US$425 million in 2009 and US$575 million in 2010.

QBE has also reached agreement to acq

expected to be US$100 million in 2009. In the first full year, the five acquisitionsUacq

- 2 -

GROUP REVENUE FORECASTS For 2008, the targets advised to the market in August have been upgraded to 7.5% growth in gross written premium or A$13.3 billion and 10% growth in net earned premium or A$11.2 billion if the value of the Australian dollar continues at current levels for the remainder of the year. For 2009, based on an average Australian dollar exchange rate equal to US 70 cents and Sterling 40 pence and anticipated organic growth and acquisitions in 2008, gross written premium is expected to be around A$16.5 billion and net earned premium A$14.0 billion. Net earned premium for 2009 is targeted to increase by 25% compared with our 2008 forecast. With around 80% of QBE’s gross written premium in currencies other than the Australian dollar, the weaker Australian dollar, particularly compared with the US dollar and Sterling, has had a significant positive impact on QBE’s premium income. CAPITAL MANAGEMENT INITIATIVES QBE proposes to conduct an accelerated, fully underwritten share placement to institutional investors to raise A$2 billion. QBE also proposes to conduct a non-underwritten share purchase plan for eligible retail shareholders to raise up to A$100 million. QBE also intends to buy back up to A$1.25 billion in face value of its tier 1 perpetual securities issued in 2006 and 2007 in exchange for five year senior notes. The buy back will be offered at a discount to face value. A 24 hour trading halt has been requested to complete the share placement and the launch of the capital management initiatives. Mr Frank O’Halloran, Chief Executive Officer, said “The acquisition of the four underwriting agencies and the renewal rights portfolio is consistent with our strategy to build our distribution channels for profitable niche products. Based on our projections and the increased number of shares, the acquisitions will be earnings per share accretive in year one.” He further added ”The capital raising and the other capital management initiatives will assist in funding the acquisitions and our 2009 growth as well as provide further balance sheet strength and flexibility for other opportunities.” For further information, please phone +61 2 9375 4226 or email [email protected]

26 November 2008

NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES OR TO U.S. PERSONS

This market announcement does not constitute an offer to sell, or the solicitation of any offer to buy, any securities in the United States or to, or for the account or benefit of, any “U.S. person” (as defined in Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Securities may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration under the Securities Act or an exemption from registration. QBE has lodged with the ASX a document entitled "Supplemental Disclosure Information" that includes information relating to its business, results of operation and financial condition, as well as risk factors relating to current market conditions, its proposed acquisitions and its business operations, among other things. Investors are encouraged to read this document, in addition to QBE's other ASX continuous disclosure documents.

mailto:[email protected]

QBE Insurance Group

Acquisitions, upgrade of revenue forecasts and capital management

initiatives

Supplement to market announcement

26 November 2008NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES OR TO U.S. PERSONS

2 NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES OR TO U.S. PERSONS

Important NoticeThis presentation has been solely prepared by QBE Insurance Group Limited ("QBE") and contains information regarding certain proposed acquisitions (the “Acquisitions”) by QBE, including the acquisition of ZC Sterling Corporation ("ZCS"), upgrade of revenue forecasts and certain capital management initiatives.This presentation, including the information contained in this disclaimer, does not constitute a prospectus or offering memorandum or an offer to sell, or a solicitation of an offer to buy, securities in the United States or to any U.S persons (as defined in Regulation S under the U.S. Securities Act of 1933, as amended ("U.S. Securities Act")), and is not available to persons in the United States or to U.S. persons. Securities may not be offered or sold in the United States, or to or for the account or benefit of, any U.S. person, unless the securities have been registered under the U.S. Securities Act or an exemption from registration is available. The shares the subject of the placement referred to herein not been and will not be registered under the U.S. Securities Act.The distribution of this presentation in other jurisdictions outside Australia may also be restricted by law and any such restrictions should be observed. Any failure to comply with such restrictions may constitute a violation of applicable securities laws.This presentation, including the information contained in this disclaimer, does not constitute an offer, invitation, solicitation, advice or recommendation with respect to the issue, purchase or sale of any security in any jurisdiction. This presentation has been prepared for informational purposes only and does not take into account your individual investment objectives, including the merits and risks involved in an investment in shares, or your financial situation or particular needs. You must not act on the basis of any matter contained in this presentation, but must make your own independent assessment, investigations and analysis of QBE and the shares the subject of the placement referred to herein and obtain any professional advice you require before making any investment decision based on your investment objectives.This presentation has been prepared based on information available to QBE. It contains certain information relating to the proposed Acquisitions which has been compiled by QBE from publicly available sources or from information provided by ZCS, and has not been independently verified by QBE, its directors, employees, agents, consultants or advisers. The proposed Acquisitions are subject to conditions, and may not be completed. All information in this presentation is believed to be reliable, but no representation, warranty or guarantee, express or implied, is made by QBE or its affiliates, partners, directors, officers, employees, agents, consultants, associates or advisers, nor any other person (collectively, the “Beneficiaries”) as to the fairness, accuracy, completeness, reliability or correctness of the information, opinions and conclusions contained in this presentation (including, without limitation, any estimates, calculations, projections or forward looking statements). No action should be taken on the basis of the information, and no reliance may be placed for any purpose on the accuracy or completeness of the information or opinions contained in this presentation.By accepting this presentation you represent and warrant that you are entitled to receive such presentation in accordance with the above restrictions and agree to be bound by the limitations contained herein.


Forward looking statementsThese materials include forward-looking statements regarding future events and the future financial performance of QBE, including statements that the transactions are expected to be accretive. Any forward looking statements involve subjective judgment and analysis and are subject to significant regulatory, business, competitive and economic uncertainties, risks and contingencies, many of which are outside the control of, and are unknown to, QBE, and the success of QBE’s business strategies.No representation, warranty or assurance (express or implied) is given or made in relation to any forward looking statement by any person (including QBE). In particular, no representation, warranty or assurance (express or implied) is given that the occurrence of the events expressed or implied in any forward-looking statements in this presentation will actually occur. Actual results, performance or achievement may vary materially from any projections and forward looking statements and the assumptions on which those statements are based. Given these uncertainties, readers are cautioned to not place undue reliance on such forward looking statements.The forward looking statements included in these materials speak only as of the date of these materials. Subject to any continuing obligations under applicable law or any relevant listing rules of the ASX, QBE disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statements in these materials to reflect any change in expectations in relation to any forward looking statements or any change in events, conditions or circumstances on which any such statement is based. Nothing in these materials shall under any circumstances create an implication that there has been no change in the affairs of QBE or ZCS since the date of these materials.

Supplemental Disclosure InformationQBE has lodged with the ASX a document entitled "Supplemental Disclosure Information" that includes information relating to its business, results of operation and financial condition, as well as risk factors relating to current market conditions, its proposed acquisitions and its business operations, among other things. Investors are encouraged to read this document, in addition to QBE's other ASX continuous disclosure documents.The Supplemental Disclosure Information document includes statements on key risks, including those relating to the proposed ZCS acquisition.


Executive SummaryQBE has agreed to purchase ZC Sterling Corporation (“ZCS”), a US based niche underwriting agency placing insurance on behalf of mortgage lenders and homeowners

Reached agreement to acquire two additional underwriting agencies in the US and one in Europe and a renewal rights portfolio in the US

Initial up-front cost of acquisitions is US$695 million with further incentives payable only if stringent profit targets are met or exceeded

Acquisitions expected to add gross written premium of US$525 million and profit after tax of around US$175 million in the first full year

Acquisitions expected to be EPS accretive in year one

At A$1 to US 70 cents and Sterling 40 pence, QBE Group’s 2009 gross written premium and net earned premium targets up 25% on 2008 expectations

Proposed accelerated, underwritten institutional share placement of A$2 billion and non-underwritten retail share purchase plan of up to A$100 million. The new shares will be entitled participate in the final 2008 dividend

Buyback of up to A$1.25 billion (face value) of Tier 1 securities at a discount, in exchange for senior debt

Following the capital management initiatives, regulatory capital is expected to be around 2.0 times our calculation of APRA’s minimum capital requirement applicable to Australian insurers, subject to the

level of take up of debt exchange


QBE makes five acquisitions

AcquisitionsZCS is a US based underwriting agency specialising in providing banks and mortgage originators with lender placed property insurance and also voluntary (conventional) property insurance directly with homeowners

The up-front purchase price for ZCS is US$575 million

ZCS is estimated to produce gross written premium revenue in 2009 for QBE of around US$425 million and estimated profit after tax of around US$150 million

Reached agreement to acquire a further three underwriting agencies in the US and Europe and a US renewal rights portfolio for an upfront cost of close to US$120 million, expected to provide additional gross written premium of around US$100 million and profit after tax of around US$25 million in 2009

The acquisitions include incentives for meeting and exceeding targets. The expected additional amount payable is close to US$400 million if profit targets over the next 2-3 years are met. The additional amount payable, if any, will predominantly be funded from the underwriting agency profits

The acquisitions are projected to generate additional gross written premium in the first full year of close to US$525 million and profit after tax of around US$175 million


Updated QBE revenue forecasts• With around 80% of QBE’s premium income in currencies other than the Australian

dollar, the depreciation of the Australian dollar, particularly against the US dollar and Sterling, has had a significant positive impact on QBE’s revenue

• 2008 targets advised in August now upgraded to gross written premium growth of 7.5% to A$13.3 billion and net earned premium growth of 10% to A$11.2 billion, mainly due to the impact of the lower Australian dollar

• 2009 gross written premium expected to be around A$16.5 billion and net earned premium around A$14.0 billion, based on cumulative average Australian dollar exchange rates of US 70 cents and Sterling 40 pence and including anticipated organic growth and acquisitions in 2008

GWP NEP

Australia A$3.5 bn A$2.8 bn

Asia Pacific A$0.8 bn A$0.6 bn

Americas A$6.4 bn (US$4.5 bn) A$3.8 bn (US$2.7 bn)

Europe A$5.8 bn (£2.3 bn) A$3.8 bn (£1.5 bn)

Equator Re n/a A$3.0 bn

Total A$16.5 bn A$14.0 bn

• Net earned premium for 2009 estimated to increase by 25% compared with our 2008 forecast


Capital management initiativesEquity raising

In order to fund the proposed acquisitions, and expected premium growth in 2009 and to provide extra capital for other opportunities, QBE proposes to issue equity through an accelerated underwritten placement to institutional investors targeted to raise A$2 billionQBE will also offer a non-underwritten share purchase plan to eligible shareholders to raise up to A$100 million

Exchange offer QBE will offer to buy back its £300 million and US$550 million non-cumulative perpetual preferred securities (tier 1 securities) at a discount to face value, in exchange for the issuance of £ sterling and US$ denominated senior debt securitiesTarget exchange value, circa A$900 millionInvestors who exchange by the early participation deadline of 9 December 2008 will receive a higher consideration

Impact of capital management initiatives These initiatives will further strengthen QBE’s capital base by replacing hybrid tier 1 capital with ordinary equity and thereby positioning QBE for future growth

Standard & Poor’s A+ financial strength rating expected to be maintained for main insurance subsidiaries Subject to the level of acceptance of the debt exchange offer, we expect QBE’s capital adequacy multiple using APRA’s risk weighted capital model applicable to Australian insurers to be around 2.0 times the minimum capital requirement

QBE Insurance Group

Additional information on

ZC Sterling acquisition

Supplement to market announcement

26 November 2008NOT FOR DISTRIBUTION OR RELEASE IN THE UNITED STATES OR TO U.S. PERSONS


Acquisition of ZC Sterling

ZCS is a US based specialist property insurance underwriting agency with three lines of business:

– agent for lender placed property insurance to protect mortgage lenders where the original homeowners policy is either cancelled or not renewed

– agent for voluntary homeowners’ property insurance (which is counter cyclical to lender placed insurance)

– provision of services to banks, mortgage companies and homebuilders

ZCS budgeted to manage in excess of US$800 million of premium revenue for insurers in 2009

ZCS is not involved with lenders’ mortgage insurance

QBE is acquiring a strong cash flow and earnings stream from commissions and fees as well as access to a portfolio of profitable property insurance business

Insurance risk incepts only for new business written by QBE from completion date; no previous insurance liabilities acquired

Acquisition price is made up of:

– up front cash payment of US$575 million; and

– additional incentive payments, subject to stringent profit targets, of an estimated US$325 million over the next two years

Incentives will be substantially funded from agency profits

Completion expected to be on or before 31 December 2008, subject to regulatory approval


Acquisition of ZC Sterling Company background and history• ZCS is a successful niche insurance agent (not an insurance company) which provides

homeowners’ insurance monitoring and processing to the mortgage industry via a technology based platform

• The company was founded in 1996 and has grown into the third largest agent for lender placed homeowners’ insurance in the US with around 12% of the lender placed property market and is one of the largest agents for construction homeowners’ insurance

• Homeowners’ insurance is sourced from two primary segments:– the lender placed insurance division currently produces around 80% of ZCS’s premium income.

This division tracks compulsory homeowners’ insurance coverage on portfolios held by mortgage lenders and places insurance where coverage has lapsed (refer next slide for more detail)

– the voluntary insurance division accounts for the remaining 20% of premium income from the development and sale of voluntary homeowners insurance, primarily via homebuilders, mortgage lenders and real estate agents

• In addition, ZCS provides real estate tax services, escrow related functions and workflow tools to enable mortgage companies to in-source state tax processing on their portfolios

• The customer base comprises some of the largest mortgage companies and homebuilders in the US

• Competitive advantage is maintained by excellence of service delivery and technology platforms plus contractual arrangements that result in minimal client turnover

• Limited number of competitors due to the expertise and system investment required; no new entrants in lender placed property insurance in over 10 years

• High quality, experienced staff including original company founder – lock in arrangements for senior executives


Acquisition of ZC Sterling What is lender placed property insurance?

US mortgage companies are required by legal and regulatory requirements to ensure that mortgage portfolios have sufficient homeowners’ property insurance cover

ZCS tracks all loans in their clients’ portfolios to identify where homeowners insurance has lapsed. Unless the insured obtains suitable cover, ZCS will, on behalf of the mortgage company, place a limited property insurance policy to protect the interests of the lender

Lender placed business is written on a portfolio basis and effected by way of a master policy offered to the lender, not the individual homeowner

The premium is paid directly by the financial institution and no policy is issued until the cash is received. Average duration of the policy is around nine months

Cover is for the property only. No contents or liability coverage is included

Insurance rates reflect a premium for the forced placement of cover and is significantly higher than equivalent voluntary insurance rates

The claims incurred ratio for this class of business has significantly outperformed when compared with conventional homeowners’ insurance


Acquisition of ZC Sterling Competitive landscape - lender placed homeowners’ insurance

Source:Assurant - Q4 2007 financial supplement, assumes $100 million of non LP homeownersBalboa - SNL and Citi investment researchZCS - Actual 2007 results South West Business Corporation (SWBC) and Other per ZCS market analysis

Assurant 57%

Balboa 22%

ZCS 12%

SWBC 8%

Other 2%

Market share


Acquisition of ZC Sterling Overview of voluntary homeowners insurance

This is a standard homeowners product with a fundamentally different model of delivery offered exclusively through mortgage originators, homebuilders and real estate brokerage firmsCompetitive advantage built on underwriting driven by mortgage data, not traditional detailed company applicationsSales driven by convenience not price with excellent conversion rate on offersFully automated underwriting prior to customer contactAbility to pre-underwrite client portfolios to manage riskFocused on new homes and first time buyersCover is standard homeowners’ cover i.e. home and contents with limits on replacement cost and liability exposures


Acquisition of ZC Sterling Major benefits to QBE

High margin business providing enhanced earnings and diversity from a well established distribution base and experienced management team with a strong profit record

Unique technology platform and innovative underwriting process

New products for QBE with counter-cyclical earnings from the US housing market dislocation and new housing construction

The level of lender placed business originating from the sub prime market is expected to decline. However, this is estimated to be offset by ZCS conventional lenders’ and voluntary homeowners’ business which is expected to increase from 30% in 2008 to 60% of total business in 2012

Complementary to QBE’s strategy of acquisition of specialist distribution channels and offers leverage to distribution of other existing QBE products

Meets our stringent criteria on EPS accretion in year one and minimum ROE

15

www.qbe.comQBE INSURANCE GROUP

50961.02-Sydney Server 1A MSW - Draft November 24, 2008 - 11:47 PM

QBE Insurance Group Limited

Supplemental Disclosure Information

November 26, 2008

50961.02-Sydney Server 1A MSW - Draft November 24, 2008 - 11:47 PM

TABLE OF CONTENTS

Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................................1 CERTAIN DEFINITIONS AND FINANCIAL INFORMATION PRESENTATION.................................................3 INFORMATION SUMMARY......................................................................................................................................4 SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA ..............................................12 RISK FACTORS .........................................................................................................................................................14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS........................................................................................................................................28 BUSINESS ..................................................................................................................................................................60 REGULATION ...........................................................................................................................................................87 OUR BOARD AND MANAGEMENT ....................................................................................................................109 OUR PRINCIPAL SHAREHOLDERS.....................................................................................................................120

1 50961.02-Sydney Server 1A MSW - Draft November 24, 2008 - 11:47 PM

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information set forth herein (the "Information") contains forward-looking statements. Examples of such forward-looking statements include, but are not limited to: (i) statements regarding our future results of operations and financial condition, (ii) statements of plans, objectives or goals, including those relating to our products or services and acquisition plans and (iii) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "should," "estimates," "forecasts," "expects," "may," "intends" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and as a result the predictions, forecasts, projections and other forward-looking statements may not be achieved. We caution investors that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed or implied in such forward-looking statements. These factors include, but are not limited to:

• changes in general economic conditions, including the performance of financial markets and interest rates which may affect our ability to raise capital;

• the performance of our investment portfolios, and changes to investment valuations;

• changes in exchange rates and economic, political and other risks relating to our international operations;

• the scope and frequency of catastrophes;

• unanticipated changes in industry trends;

• differences between our actual claims experience and our underwriting and reserving assumptions;

• differences between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations;

• ineffectiveness of risk management policies and procedures;

• the financial strength of our insurance and reinsurance subsidiaries;

• heightened competition, including with respect to pricing, entry of new competitors, development of new products by new and existing competitors, and for personnel;

• our ability to obtain the appropriate level and type of reinsurance;

• the financial condition of our reinsurance and retrocession counterparties and their performance under any reinsurance or retrocession arrangements we have in place;

• changes in assumptions related to the value of businesses acquired or goodwill;

• downgrades in our and our affiliates' claims paying ability, financial strength or credit ratings;

• changes in accounting standards, practices and/or policies;

• changes in regulation and government policies, legislation or tax laws;

• changes in Lloyd's rules and policies;


• our strategy, including business plans and acquisitions;

• potential litigation, arbitration or regulatory investigations;

• our ability to complete acquisitions we currently anticipate and to identify and complete future acquisitions on successful terms;

• the performance of businesses we have acquired or intend to acquire and our ability to integrate the businesses and to realize anticipated benefits;

• systems and technology risks;

• our dependency on key personnel;

• our reliance on insurance agents and brokers;

• our holding company structure, our reliance on dividends from our subsidiaries to meet debt payment obligations and any restrictions on the ability of our subsidiaries to pay such dividends;

• the effects of business disruption or economic contraction due to terrorism or other hostilities; and

• other factors discussed under "Information Summary—Recent Developments," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We caution that the foregoing list of factors is not exhaustive. Investors should carefully consider the foregoing factors and other uncertainties and events. These forward-looking statements speak only as of the date of this Information, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.


CERTAIN DEFINITIONS AND FINANCIAL INFORMATION PRESENTATION

In the Information, unless the context otherwise requires, references to:

• "2008 half year financial statements" means our unaudited consolidated interim financial statements and related notes as at and for the six months ended June 30, 2008 and 2007 prepared in accordance with Australian equivalents to International Financial Reporting Standards ("A-IFRS") and lodged with the Australian Securities Exchange ("ASX");

• "2007 financial statements" means our audited consolidated financial statements and related notes as at and for the years ended December 31, 2007 and 2006 prepared in accordance with A-IFRS and lodged with the ASX;



• "APRA" means the Australian Prudential Regulation Authority or any successor;

• "QBE," "QBE Group," "Group," "we," "us" and "our" each means QBE Insurance Group Limited (ABN 28 008 485 014) and its consolidated entities.

For definitions of certain insurance terms used in the Information, see "Appendix A: Glossary to Certain Insurance Terms."


INFORMATION SUMMARY

QBE Insurance Group Limited is an international general insurance and reinsurance group underwriting commercial and personal lines business in 45 countries around the world. The following table sets forth information about our gross earned premium, net earned premium and general insurance and inward reinsurance premiums for the periods indicated.

Six months ended

June 30, Year ended

December 31, 2008 2007 2007 2006 2005 (A$ millions except percentages) Gross earned premium........................................................................... 5,958 5,751 12,361 10,069 9,171 Net earned premium............................................................................... 5,108 4,749 10,210 8,158 7,386 Direct and facultative as a percentage of net earned premium............... 89.1 87.1 87.5 85.9 83.3 Inward reinsurance as a percentage of net earned premium................... 10.9 12.9 12.5 14.1 16.7

As of June 30, 2008 and December 31, 2007, our shareholders' funds totaled A$8.8 billion and A$8.5 billion, respectively, and our assets totaled A$39.1 billion and A$39.6 billion, respectively.

Operations

Our operations are conducted through the following divisions:

• Australian operations consisting of our general insurance operations throughout Australia, providing all major lines of insurance cover for commercial and personal risks;

• Asia Pacific operations providing personal, commercial and specialist insurance covers in 17 countries in the Asia Pacific region, including professional and general liability, marine, corporate property and trade credit;

• European operations consisting of QBE Insurance Europe and our Lloyd's division (operating as QBE Underwriting Limited):

• QBE Insurance Europe writing insurance business in the United Kingdom, Ireland and 15 countries in mainland Europe and writing reinsurance business in Ireland;

• QBE Underwriting Limited (Lloyd's division) writing commercial insurance and reinsurance business in the Lloyd's market. We are the largest managing agent and second largest provider of capacity at Lloyd's for the 2008 underwriting year;

• the Americas writing general insurance and reinsurance business in the Americas with headquarters in New York and operations in North, Central and South America and Bermuda;

• Equator Re consisting of our captive reinsurance business based in Bermuda; and

• Investments providing management of our investment funds.

Performance

Our net profit after tax, investment income (after unrealized gains/losses) and combined operating ratio were A$859 million, A$379 million and 85.8%, respectively, for the six months ended June 30, 2008 and A$921 million, A$564 million and 86.2%, respectively, for the six months ended June 30, 2007. Our net profit after tax, investment income (after unrealized gains/losses) and combined operating ratio were A$1,925 million, A$1,132 million and 85.9%, respectively, for the year ended December 31, 2007, A$1,483 million, A$822 million and 85.3%,


respectively, for the year ended December 31, 2006, and A$1,091 million, A$718 million and 89.1%, respectively, for the year ended December 31, 2005.

Ratings

QBE Insurance Group Limited has been assigned an A-, A3, A and bbb+ counterparty credit rating by each of Standard and Poor's Ratings Services ("S&P"), Moody's Investors Services, Inc. ("Moody's "), Fitch and A.M. Best, respectively. Our main insurance and reinsurance subsidiaries have been assigned an A+ insurer financial strength rating by each of S&P and Fitch. Our insurance and reinsurance subsidiaries in the United States and our main insurance subsidiaries in Europe have been assigned an A rating by A.M. Best. A.M. Best's ratings are directed toward the concerns of policyholders and insurance agencies and are not intended for the protection of investors. The ratings described above reflect only the views of S&P, Moody's, Fitch or A.M. Best, as the case may be, and are not a recommendation to buy, hold or sell securities. See "Business—Ratings."

Market Conditions

Since the second half of 2007, disruption in the global credit markets, coupled with the repricing of credit risk, and the deterioration of the financial and property markets, particularly in the United States and Europe, have created increasingly difficult conditions for financial institutions, including companies in our industry. These conditions include greater volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency in certain markets. These conditions have resulted in the failures of a number of financial institutions and resulted in unprecedented action by governmental authorities and central banks around the world. During October 2008, the governments in Australia, Europe, the United Kingdom and the United States announced measures to assist in strengthening their respective banking systems and to increase system liquidity. From September to date, the volatility in capital, foreign exchange and equity markets has reached unprecedented levels and credit markets have been illiquid. Through the year to date, the crisis has also begun to significantly affect the global economy. Market volatility is likely to remain high as financial market uncertainty persists, and it is impossible for us to predict the impact that the current financial turmoil around the world will have on our results of operation or financial condition.

Since June 30, 2008, the Australian dollar has declined significantly against major currencies, with the noon buying rate of US dollars for Australian dollars falling from US$0.9562 at that date to US$0.6254 at November 21, 2008. This represents a 35% decrease over the period from July 1 to November 21, 2008. Investors should be aware that we translate income and expense items using a cumulative average rate of exchange and balance sheet items using the period end rate of exchange. For further information on the impact of changes in exchange rates on our financial results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations— Impact of the Fluctuations of the Australian Dollar" and "Risk Factors—QBE's Business Risk Factors—Our financial results are significantly affected by changes in exchange rates."

The current turmoil in the world's financial markets has had a significant potential impact on the value of the investments that we hold and our investment returns. As described below under "—Investment Strategy," at June 30, 2008, we held $23.3 billion in investments compared to A$24.6 billion at December 31, 2007, a decrease of 5% partly due to substantially weaker equity markets. This adverse trend resulted in a substantial decrease in gross investment income from A$679 million at December 31, 2007 to A$513 million at June 30, 2008, which included net realized and unrealized losses on equities of A$86 million for the six months ended June 30, 2008 compared to net realized and unrealized gains of A$82 million for the six months ended June 30, 2007. Since June 30, 2008, our equity investments, which represented 7.6% of our total investments and cash at that date, have declined in value due to investment market movements. This has given rise to unrealized losses on equities and a consequent deterioration of our gross investment income. We currently have no equity hedges in place. Since June 30, 2008, the value of our cash and fixed income investments has not been adversely affected by the current market turmoil. We have no direct investment exposure in the United States or elsewhere to sub-prime mortgage assets, collateralized debt obligations, collateralized loan obligations or similar structured products. We have some indirect exposure through our investments in, and deposits with, the major banks. Our investment portfolio has no direct


exposure to Lehman Brothers or American International Group ("AIG"). We have an immaterial exposure to reinsurance recoveries on paid, outstanding and incurred but not reported claims to AIG mainly through its majority-owned subsidiary, Transatlantic Re, and its wholly-owned subsidiary, Lexington. We have some exposure through our insurance operations to claims that may arise related to mortgage-backed securities programs that include sub-prime mortgages, which exposure is not material. We have made allowances in our insurance liabilities for potential exposure to policies relating to financial institutions affected by the credit crisis.

Recent Developments

On November 26, 2008, QBE Holdings, Inc. entered into a merger agreement to acquire all of the shares in ZC Sterling ("ZCS"). We agreed to pay an initial price of US$575 million plus a variable amount of potentially up to US$525 million based on ZCS meeting agency profit forecasts in financial years 2009 and 2010. The merger is conditional on the receipt of all necessary competition and government approvals and will be completed following receipt of such approvals. Completion of the acquisition is expected to occur on or before December 31, 2008.

Founded in 1996 and based in Atlanta, Georgia, United States, ZCS is an underwriting agency specializing in providing specialty insurance solutions through customized technology-enabled business process services to mortgage originators, homebuilders, banks and real estate agents across the United States. ZCS provides hazard insurance tracking and outsourcing, voluntary homeowners' insurance programs, in-house and outsourced real estate tax services, online claims services, customer care services and mortgage outsourcing technology solutions. It does not offer lenders' mortgage insurance. ZCS has operations in California, Florida, Georgia, Iowa, Maryland, New Mexico, Nebraska, North Carolina and Texas and access to a call center in India.

We believe that ZCS's insurance and agency business will be complementary to our existing general insurance operations in the United States and will allow us to expand our product and geographic diversity. Based on ZCS management's projections and our due diligence, in the first full financial year following the acquisition, ZCS is expected to contribute approximately US$425 million to our gross written premium and approximately US$150 million to our net profit after tax. The acquisition is expected to be earnings per share accretive in the first year of ownership. No assurance can be given in regard to these current estimates which are subject to various risks and uncertainties.

QBE has acquired a renewal rights portfolio in the United States and has reached agreement to acquire two underwriting agencies in the United States and one in Europe. The total upfront cost of these acquisitions is approximately US$120 million and the purchases are expected to complete in late 2008 or early 2009.

As with any acquisition, there are numerous risks that may arise. ZCS derives the majority of its revenues from a limited number of clients, and a loss of any one of these clients would have a material adverse effect on its business. Additional acquisition risks include the risk that the actual results achieved by ZCS or the other agencies may be lower than those indicated by our financial and business analyses; ZCS may fail to develop, operate or maintain the sophisticated information technology systems that it provides to its clients; ZCS' clients may develop their own internal business processes that significantly reduce or eliminate their demand for ZCS' services; and/or legislative and regulatory changes to the mortgage industry may reduce or eliminate demand for ZCS' services. In addition, we may face operational or management disruptions as a result of implementing these acquisitions or the acquisitions may have other negative impacts on our results, financial condition or operations. The acquisition of ZCS is subject to customary conditions to closing and certain other closing conditions that, if not satisfied or waived, will result in the acquisition not being completed. If the conditions to the acquisition are not satisfied or waived, the ZCS acquisition will not be completed. In addition, the purchase agreement may be terminated under certain conditions. See also "Risk Factors—QBE's Business Risk Factors—Acquisitions and our acquisition strategy may adversely affect our business." We regularly assess acquisition opportunities as part of our growth strategy and, if we were to undertake other acquisitions, such risks may be exacerbated.


Recent Acquisitions

2008 Acquisitions

In 2008:

• on October 23, we acquired PMI Mortgage Insurance Australia (Holdings) Pty Ltd ("PMI Australia") from a subsidiary of The PMI Group, Inc., for a purchase price of US$920 million, as described below;

• on April 30, we acquired North Pointe Holdings Corporation ("North Pointe"), a property and casualty insurer in the United States which writes both commercial and personal insurance, for a purchase price of US$143 million;

• on June 4, we acquired Deep South Holding, LP ("Deep South"), an underwriting agency in the United States, for a purchase price of US$190 million, including the maximum potential cost of contingent incentive arrangements for the next three years; and

• to date we have acquired three distribution channels in Australia and one distribution channel in the United States for the aggregate purchase price of A$94 million.

We have considered a number of acquisitions and are looking at a number of acquisition opportunities in Australia, the Asia Pacific region, the Americas and Europe. In the past 25 years, we have acquired over 100 businesses or portfolios throughout the world, including the recent acquisitions described above under "—Recent Developments" and "—Recent Acquisitions." Our acquisition strategy has assisted our diversification by spreading our business across both general insurance and reinsurance businesses and by increasing our geographic and product spread. Our acquisition strategy is driven by seeking value for our shareholders rather than focusing on specific business lines.

Acquisitions from The PMI Group, Inc.

On October 23, 2008, we acquired PMI Australia from a subsidiary of The PMI Group, Inc. The purchase price for PMI Australia was US$920 million, with 80% paid in cash and the remaining 20% in the form of a promissory note, the payment of which is contingent on the claims experience of PMI Australia over three years. The amount payable on the promissory note will be reduced to the extent that the performance of the existing insurance portfolios of PMI Australia does not achieve specified targets. QBE funded the initial cash component of the PMI Australia using internally generated funds from operations and short-term bank loans of A$400 million. PMI Australia is a mortgage insurer for lenders and writes approximately 40% of the residential mortgage insurance policies in Australia. It has provided lenders with residential mortgage insurance for over 40 years.

In August 2008, we signed an agreement to acquire PMI Mortgage Insurance Asia Limited ("PMI Asia") from The PMI Group, Inc. Completion of the acquisition remains subject to a number of closing conditions. PMI Asia, operating for over nine years, provides reinsurance support to the primary Hong Kong mortgage insurer, Hong Kong Mortgage Corporation.

For a discussion of the risks related to our acquisition of PMI Australia and PMI Asia and general risks related to our acquisitions, see "Risk Factors—QBE's Business Risk Factors—We are subject to risks related to our acquisitions of PMI Australia and PMI Asia." and "Risk Factors—QBE's Business Risk Factors—Acquisitions and our acquisition strategy may adversely affect our business."


2007 Acquisitions

During 2007, we completed two large acquisitions in the United States, together with a number of smaller acquisitions in Latin America, Europe and Australia. In particular, we acquired:

• Praetorian Financial Group ("Praetorian"), effective March 31, 2007, from Hannover Ruckversicherung ("Hannover Re") for US$0.8 billion. Praetorian, based in New York, writes specialist property and casualty insurance programs through various managing agents and brokers. The Praetorian business has been substantially integrated with QBE's specialty insurance program business. On September 30, 2008, we agreed to sell Praetorian Specialty Insurance Company, our small and non-core excess and surplus lines insurance business, to Torus Insurance Holdings Limited, which sale is subject to regulatory approvals and customary conditions to closing;

• Winterthur U.S. Holdings, Inc. ("Winterthur US"), effective May 31, 2007, for a base purchase price of US$1.2 billion and repayment of intercompany indebtedness of US$557 million to the seller, a subsidiary of The AXA Group. Winterthur US is a property and casualty insurer in the United States focusing on small to medium sized commercial business and personal lines and operating primarily under the names of General Casualty and Unigard. We have substantially integrated our existing general insurance brands National Farmers Union and QBE Agri business with Winterthur US. This business is now called QBE Regional Insurance;

• Cumbre Seguros, effective November 1, 2007, for US$33 million. Cumbre Seguros is a specialized commercial lines insurer of small to medium clients with offices in Mexico City, Guadalajara and Monterrey;

• a distribution channel in Switzerland that underwrites motor and general risks in Switzerland; and

• a number of underwriting agencies and renewal rights in Australia, including Universal Underwriting Agency.

We also entered into a joint venture agreement to establish a new general insurance business in India.

The acquisitions of Praetorian and Winterthur US completed our strategy of building four major streams of business in the Americas: specialist insurance programs; property and casualty insurance in regional markets; reinsurance; and Latin America. The acquisitions of Praetorian and Winterthur US and, more recently, North Pointe, have significantly increased our presence in the United States, particularly in the independent agency and specialty insurance program business.

For a discussion of the general risks related to our acquisitions, see "Risk Factors—QBE's Business Risk Factors—Acquisitions and our acquisition strategy may adversely affect our business."

Underwriting Strategy

Our underwriting strategy is to achieve consistency in our underwriting results and reduce our risk of loss through:

• geographic and product diversification;

• selective acquisitions;

• attracting and retaining quality underwriters;

• ongoing actuarial assessment of premium pricing and outstanding claims reserves;


• decentralized, regional insurance operations;

• a group risk management strategy; and

• effective use of reinsurance and retrocession protection with financially strong and highly rated reinsurers.

To date, our underwriting strategy has remained unchanged. In line with past experience in current market conditions, as described above under "—Market Conditions," there could be an incremental increase in claims, although we expect this would be partly offset by higher premiums. We have made allowances in our insurance liabilities for potential exposure to policies relating to financial institutions affected by the credit crisis. Recent market conditions are also giving rise to further acquisition opportunities, which we are considering in accordance with our general acquisition strategy.

Investment Strategy

The investment committee of our board of directors reviews our investment strategy at each committee meeting in respect of the investments we are permitted to make. The following table sets forth the percentage of our investments represented by cash (net of overdrafts), short-term deposits, fixed interest and other interest bearing securities, equities and investment properties as of the dates indicated.

As of June 30, As of December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Cash (net of overdrafts) ..................... 1,197 5.1 2,140 9.0 988 4.0 1,019 5.1 1,061 6.0Short-term deposits ............................ 13,074 56.2 12,734 53.7 16,317 66.3 10,040 50.3 8,292 47.1Fixed interest and other interest bearing securities ............................... 7,136 30.7 6,934 29.2 5,552 22.6 7,134 35.7 7,537 42.9Equities .............................................. 1,775 7.6 1,833 7.7 1,656 6.7 1,741 8.7 674 3.8Investment properties......................... 86 0.4 86 0.4 93 0.4 38 0.2 33 0.2Total investments and cash ................ 23,268 100.0 23,727 100.0 24,606 100.0 19,972 100.0 17,597 100.0

During the six months ended June 30, 2008, and in the period since, we have continued to maintain a strategy of a low risk investment portfolio. Our general policy on investments is to reduce the risk to shareholders by investing in high quality fixed interest securities and having a limited exposure to equity investments. We take this approach because of the risk we have already assumed in our insurance business.

Our investment portfolio (including cash) decreased to A$23.3 billion at June 30, 2008 from A$24.6 billion at December 31, 2007, a decrease of 5%. This decrease principally reflected the appreciation of the Australian dollar against the US dollar and the pound sterling, lower US interest rates and substantially weaker equity markets, partly offset by higher Australian interest rates. For the six months ended June 30, 2008, we incurred net realized and unrealized losses on equities of A$86 million due to the market volatility. Since June 30, 2008, our equity investments, which represented 7.6% of our total investments and cash at that date, have declined in value due to investment market movements. This has given rise to unrealized losses on equities and a consequent deterioration of our gross investment income. We currently have no equity hedges in place. Since June 30, 2008, the value of our cash and fixed income investments has not been adversely affected by the current market turmoil.

The value of the overseas component of our cash and investment portfolio is also impacted by fluctuations in foreign exchange rates. We translate income and expense items using the cumulative average rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 12% in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Balance sheet items are translated at the period end rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 8% comparing the exchange rates at June 30, 2008 with the exchange rates at December 31, 2007. This significant appreciation of the Australian dollar substantially reduced the value of the overseas component of our cash and investment portfolio when reported in Australian dollars by A$1.4 billion at June 30, 2008 compared to December 31, 2007. Between July 1 and November 21, 2008, the Australian dollar depreciated 35% against the US


dollar. However, investors should note that we translate income and expense items using the cumulative average rate of exchange and balance sheet items using the period end rate of exchange. For further information on the impact of changes in exchange rates on our financial results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations— Impact of the Fluctuations of the Australian Dollar" and "Risk Factors—QBE's Business Risk Factors—Our financial results are significantly affected by changes in exchange rates."

Our fixed interest investments continue to be short in duration. At June 30, 2008, our cash, short-term deposits and fixed interest and other interest bearing securities portfolios, taken together, had an average duration of 0.7 years. As of November 21, 2008, the average duration was approximately 0.5 years.

Operational Summary

Our portfolio of insurance and reinsurance business is geographically diversified, with 77% and 78% of our gross earned premium for the six months ended June 30, 2008 and 2007, respectively, derived from non-Australian operations and with 80%, 76% and 74% of our gross earned premium for the years ended December 31, 2007, 2006 and 2005, respectively, derived from non-Australian divisions.

The following table sets forth information about the gross earned premium for each of our insurance divisions and our insurance product lines for the periods indicated.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages)

Division Australian operations .......................... 1,352 22.7 1,249 21.7 2,518 20.4 2,428 24.1 2,405 26.2Asia Pacific operations ....................... 291 4.9 291 5.0 570 4.6 570 5.7 545 5.9European operations ........................... 2,211 37.1 2,584 45.0 5,158 41.7 5,195 51.6 4,786 52.2the Americas ....................................... 2,104 35.3 1,627 28.3 3,976 32.2 1,876 18.6 1,435 15.7Equator Re .......................................... 763 — 495 — 1,631 — 678 — 347 —Elimination – internal reinsurance ...... (763) — (495) — (1,492) 1.1 (678) — (347) —

Total.............................................. 5,958 100.0 5,751 100.0 12,361 100.0 10,069 100.0 9,171 100.0Product lines Property(1).......................................... 1,615 27.1 1,518 26.4 3,239 26.2 2,648 26.3 2,414 26.3Liability(2).......................................... 1,102 18.5 1,116 19.4 2,423 19.6 1,943 19.3 1,897 20.7Motor and motor casualty(3) .............. 1,144 19.2 978 17.0 2,250 18.2 1,500 14.9 1,266 13.9Professional indemnity ....................... 411 6.9 460 8.0 853 6.9 906 9.0 838 9.1Workers' compensation(4) .................. 441 7.4 512 8.9 1,038 8.4 816 8.1 811 8.8Marine, energy and aviation ............... 566 9.5 615 10.7 1,224 9.9 1,148 11.4 814 8.9Accident and health ............................ 399 6.7 322 5.6 766 6.2 594 5.9 527 5.7Financial and credit............................. 137 2.3 115 2.0 247 2.0 252 2.5 211 2.3Other(5) .............................................. 143 2.4 115 2.0 321 2.6 262 2.6 393 4.3

Total.............................................. 5,958 100.0 5,751 100.0 12,361 100.0 10,069 100.0 9,171 100.0General insurance ............................... 5,513 92.5 5,062 88.0 11,189 90.5 8,601 85.4 7,606 82.9Inward reinsurance(6) ......................... 445 7.5 689 12.0 1,172 9.5 1,468 14.6 1,565 17.1

Total.............................................. 5,958 100.0 5,751 100.0 12,361 100.0 10,069 100.0 9,171 100.0 (1) Includes property excess of loss, engineering, war and energy.

(2) Includes medical malpractice and general, public and product liability.

(3) Includes compulsory third party ("CTP") insurance.

(4) Includes employers' liability.

(5) Includes agriculture, catastrophe, bloodstock, travel, satellite, transport, householders', commercial packages and other miscellaneous classes of insurance.

(6) Excludes facultative reinsurance.


Our insurance products are classified as either short-tail or long-tail, principally based upon the average amount of time that elapses between when we receive premiums and when we pay claims. The average amount of time that elapses between the time premiums are received and claims are paid for our short-tail lines is generally one year or less and for our long-tail lines is generally more than one year. Our principal short-tail lines of business include commercial and domestic property such as motor vehicle physical damage. Our principal long-tail lines of business include liability (casualty), professional indemnity, workers' compensation and CTP insurance. As of June 30, 2008, 56% of our gross earned premium was generated by short-tail lines and 44% was generated by long-tail lines, compared to 54% and 46%, respectively of June 30, 2007. As at December 31, 2007, 55% of our gross earned premium was generated by short-tail lines and 45% was generated by long-tail lines, compared to 57% and 43%, respectively, at December 31, 2006 and 55% and 45%, respectively, at December 31, 2005. The weighted average term to settlement of our outstanding claims as of June 30, 2008 was 2.9 years, 2.8 years as of December 31, 2007 and 2006 and 2.9 years as of December 31, 2005.

We primarily distribute our products through a diverse network of third party-owned brokers and agencies and, to a much lesser extent, through our branch network.

We maintain comprehensive underwriting year or accident year statistics by product for every country in which we operate. We use these statistics to monitor trends, to correct unprofitable portfolios and to identify businesses that are growing in profitability. We employ over 140 persons throughout QBE who are engaged in actuarial work and who assist with underwriters on trends, pricing and claims reserving. In addition, approximately 90% of our outstanding claims are also reviewed by external independent actuaries at least annually.

Our principal executive office and registered office is located at Level 2, 82 Pitt Street, Sydney, New South Wales 2000, Australia. Our telephone number is +61-2-9375-4444.


SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA

Until December 31, 2004, we prepared our financial statements in accordance with historical Australian GAAP. Since January 1, 2005, we have been preparing our financial statements in accordance with A-IFRS.

The summary consolidated historical financial data as at December 31, 2007, 2006, 2005 and 2004 and for the years ended December 31, 2007, 2006, 2005 and 2004 set forth below is presented under A-IFRS and has been derived from our audited consolidated financial statements and related notes.

You should read the following financial information together with the information included elsewhere in the Information, including under "Selected Consolidated Historical Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors," and our audited consolidated financial statements and unaudited consolidated interim financial statements and the related notes thereto.

Six months ended

June 30, Year ended December 31, 2008 2007 2007 2006 2005 2004 (in A$ millions except ratios and earnings per share data) Income statement Gross written premium ......................................... 6,603 6,520 12,406 10,372 9,408 8,766 Gross earned premium.......................................... 5,958 5,751 12,361 10,069 9,171 8,571 Net earned premium.............................................. 5,108 4,749 10,210 8,158 7,386 6,781Net claims incurred(1) .......................................... (2,790) (2,649) (5,553) (4,551) (4,417) (4,156)Net commission .................................................... (881) (863) (1,885) (1,384) (1,251) (1,184)Other acquisition costs.......................................... (284) (225) (600) (498) (428) (439)Underwriting and other administration expenses.. (426) (359) (734) (525) (482) (405) Underwriting result ............................................... 727 653 1,438 1,200 808 597Investment income on policyholders' funds.......... 389 400 824 588 480 331 Operating profit .................................................... 1,116 1,053 2,262 1,788 1,288 928Investment income on shareholders' funds ........... (10) 164 308 234 238 188Amortization of intangibles .................................. (11) (5) (21) (10) (3) (1) Profit before income tax ....................................... 1,095 1,212 2,549 2,012 1,523 1,115Income tax (expense) ............................................ (235) (287) (615) (519) (425) (251)Minority interest ................................................... (1) (4) (9) (10) (7) (7) Net profit after income tax.................................... 859 921 1,925 1,483 1,091 857 Other data Claims ratio (%)(2) ............................................... 54.7 55.7 54.3 55.8 59.9 61.3Commission ratio (%)(3) ...................................... 17.2 18.2 18.5 17.0 16.9 17.5Expense ratio (%)(4)............................................. 13.9 12.3 13.1 12.5 12.3 12.4 Combined operating ratio (%)(5).......................... 85.8 86.2 85.9 85.3 89.1 91.2 Dividends per share (cents)................................... 61.0 57.0 122.0 95.0 71.0 54.0Return on average shareholders' equity (%)(6) ..... 19.9 28.1 26.1 26.1 23.9 24.5Basic earnings per share (cents)(7) ....................... 96.8 109.2 224.1 184.8 142.5 123.1Diluted earnings per share (cents)(7) .................... 96.0 104.9 217.3 173.5 131.5 109.3Weighted average number of shares(8)................. 882 837 853 795 757 695


Six months ended

June 30, Year ended December 31, 2008 2007 2007 2006 2005 2004 (in A$ millions except ratios and earnings per share data) Balance sheet (at period end) Total assets .......................................................... 39,144 41,113 39,613 31,757 29,665 25,036 Total liabilities..................................................... 30,270 33,327 31,070 25,408 24,506 20,944 Net assets ............................................................. 8,874 7,786 8,543 6,349 5,159 4,092

Share capital.................................................... 4,744 4,428 4,737 3,461 3,195 2,780Treasury shares held in trust ........................... — (16) (16) (16) — —Equity component of hybrid securities............ 114 115 114 108 108 108Reserves .......................................................... (72) 35 (75) 47 (20) (29)Retained profits ............................................... 4,030 3,159 3,719 2,683 1,810 1,173

Shareholder's funds ......................................... 8,816 7,721 8,479 6,283 5,093 4,032Minority interest.............................................. 58 65 64 66 66 60

Total equity........................................................... 8,874 7,786 8,543 6,349 5,159 4,092 Statement of cash flows

Net cash flows from operating activities ......... 839 785 2,374 2,039 1,987 2,110Net cash flows from investing activities ......... (5) (615) (3,201) (1,881) (2,203) (2,759)Net cash flows from financing activities ......... (546) 1,031 804 (162) 161 1,053 Net increase (decrease) in cash and cash

equivalents held............................................ 288 1,201 (23) (4) (55) 404Cash and cash equivalents at the beginning of

the period ..................................................... 988 1,019 1,019 1,061 1,121 717Effect of exchange rate changes...................... (79) (80) (8) (38) (5) — Cash and cash equivalents at the end of the

period ........................................................... 1,197 2,140 988 1,019 1,061 1,121 (1) Claims settlement expenses are included in net claims incurred.

(2) Claims ratio is calculated by dividing net claims incurred by net earned premium.

(3) Commission ratio is calculated by dividing net commissions by net earned premium.

(4) Expense ratio is calculated by dividing other acquisition costs and underwriting and other expenses by net earned premium.

(5) Combined operating ratio is calculated by adding the sum of our claims ratio, commission ratio and expense ratio.

(6) Return on average shareholders' equity is net profit after tax as a percentage of average shareholders' funds.

(7) Basic earnings per share is calculated with reference to issued share capital notified to the Australian Securities Exchange ("ASX"). Diluted earnings per share includes employee options and convertible hybrid securities where they are dilutive.

(8) The weighted average number of ordinary shares is only applicable to the calculation of basic earnings per share.


RISK FACTORS

You should be aware that the risk factors set forth below are not exhaustive. Some of these risk factors are beyond our control.

Risks Related to Current Market Conditions

Our businesses, and therefore our results of operation and financial condition, may be adversely affected by the current disruption in the global credit markets and failing financial systems.

Since the second half of 2007, the disruption in the global credit markets, coupled with the repricing of credit risk, and the deterioration of the financial and property markets, particularly in the United States and Europe, have created increasingly difficult conditions for financial institutions, including companies in our industry. These conditions include greater volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency in certain markets. These conditions have resulted in the failure of a number of financial institutions and unprecedented action by governmental authorities and central banks around the world. From September 2008 to date, the volatility in capital, foreign exchange and equity markets has reached unprecedented levels and credit markets have been illiquid. Through the year to date, the crisis has also begun to significantly affect the global economy. Market volatility is likely to remain high as financial market uncertainty persists, and it is difficult to predict how long these conditions will exist and the extent to which our business plans, markets, products and businesses will be adversely affected. Accordingly, these conditions could adversely affect our financial condition and results of operations in future periods. In addition, companies in our industry may be subject to increased litigation and regulatory or governmental scrutiny as a result of these events.

Prolonged adverse credit market conditions may significantly affect our ability to access international capital markets, our cost of capital and our ability to meet liquidity needs.

Prolonged disruptions, uncertainty or volatility in the credit markets may limit our ability to access funding and capital, particularly our ability to issue longer-dated securities in international capital markets. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow our business and pursue further acquisitions. As well, we may be forced to delay raising longer term funding and capital, issue shorter tenors than we prefer, or pay unattractive interest rates, thereby increasing our debt expense, decreasing our profitability and significantly reducing our financial flexibility.

We are dependent on the performance of our investment portfolio.

A substantial proportion of our profits are generated from our investment portfolio. While our general strategic policy on investments is to reduce the risk to shareholders by investing in high quality fixed interest securities and having a modest exposure to equity investments, our investment portfolio is subject to market forces. Our exposure to equities at June 30, 2008 was 7.6% of total investments and cash compared with our benchmark of 10% of total investments and cash. For the six months ended June 30, 2008, our investment income was A$379 million, a decrease of A$185 million (33%) compared to the six months ended June 30, 2007, primarily due to the impact of the appreciation of the Australian dollar, lower US interest rates and substantially lower equity returns, while for the year ended December 31, 2007, our investment income was A$1,132 million, increasing A$310 million (38%) from the previous year. While we had equity hedges in place for the majority of the six months ended June 30, 2008, we currently have no equity hedges in place. Global debt and equity markets have recently experienced historic levels of volatility and the outlook remains uncertain. Since June 30, 2008, our equity investments have declined in value due to investment market movements. This has given rise to unrealized losses on equities and a consequent deterioration of investment income. Any further declines in equity markets, which are typically more volatile than fixed income instruments, declines in the value of fixed income instruments, or changes in interest or foreign exchange rates could materially adversely affect our investment income and overall


profitability. There can be no assurance that the investment returns achieved by us in the future will be sufficient to enable us to achieve a net profit.

We may incur losses associated with our counterparty exposures.

Although we actively manage counterparty risk, we face the possibility that a counterparty will be unable to honor its contractual obligations to us. These counterparties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, from entering into swap or other derivative contracts under which counterparties have obligations to make payments to us, executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries.

QBE's Business Risk Factors

We are at risk from the severity and frequency of catastrophes or other events that may lead to an increased frequency or severity of claims.

General insurers and reinsurers are subject to claims arising out of catastrophes and other events that may result in an increased frequency or severity of claims and have a significant impact on their results of operations and financial condition. Catastrophes can be caused by various natural events including cyclones, hurricanes, earthquakes, wind, hail, floods, fires, volcanic eruptions and explosions. Catastrophes can also be man-made such as terrorism, war and other hostilities. The frequency and severity of such events and the losses associated with them are inherently unpredictable and may materially impact our results of operations. We have experienced, and can expect in the future to experience, losses from catastrophes that may have a material adverse impact on our results of operations and financial condition.

For the six months ended June 30, 2008, net claims above A$2.5 million from natural catastrophes totaled A$160 million compared to A$144 million for the six months ended June 30, 2007. In 2007, net claims above A$2.5 million from natural catastrophes were A$317 million compared to A$251 million in 2006. In 2008 to date, we have experienced an increase in large individual risk and catastrophe claims compared with last year, although the net cost of these claims is within the allowances included in our business plans. During this period, notable weather-related market catastrophes impacting QBE include storms in Queensland and Victoria, two US midwest floods, four US wind/hail storms, Hurricanes Ike, Hanna and Gustav and Hong Kong floods. During 2007 notable weather-related catastrophes included Windstorm Kyrill, Indonesian floods, Cyclone Favio, Canberra storms, Cyclone George, Cyclone Gonu, Newcastle storms, two UK floods, four US tornadoes, two US storms, Hurricane Dean, Lismore storms, Californian wildfires, Sydney hailstorm, Melbourne hailstorm, and the Gisborne earthquake in New Zealand. During 2006 notable weather-related market catastrophes included Cyclone Larry in Australia.

The extent of losses from a catastrophe is a function of two factors, namely, the total amount of insured exposure in the area affected by the event and the severity of the event. Many catastrophes are localized to small geographic areas. However, natural disasters have the potential to produce significant damage over large areas. In addition, catastrophes can occur in heavily populated areas, which can lead to increased losses. Although catastrophes can cause losses in a variety of general insurance and reinsurance lines, marine and property insurance and reinsurance have in the past generated the vast majority of our catastrophe-related claims.

Although we monitor our aggregate exposures, they depend upon the estimates of probable maximum loss. These estimates may prove to be incorrect and our aggregate losses may exceed our estimates. In addition, we take into account the implications of climate change on the frequency, severity and potential locations of natural catastrophes and generally on our business. Over the past several years, changing weather patterns and climatic conditions such as global warming may have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. In addition, some experts have attributed the recent high incidence of hurricanes in the Gulf of Mexico and the Caribbean to a


permanent change in weather patterns resulting from rising ocean temperature in the region. The international geographic distribution of our business subjects us to catastrophe exposure from natural events occurring in a number of areas throughout the world. The loss experience of catastrophe insurers and reinsurers has historically been characterized as low frequency but high severity in nature. In recent years, the frequency of major natural catastrophes appears to have increased. One of the more significant risks is the potential under-estimation of the impact of climate change catastrophic events on us and the insurance industry in general. There is also the operational risk of increased claims costs due to the impact of climate change scenarios.

While we have historically managed our exposure to catastrophes through, among other things, the purchase of catastrophe reinsurance, retrocessional coverage and whole account reinsurance, there can be no assurance that such coverage will continue to be available to us at acceptable rates and levels, that our existing coverage, including through increased use of our captive reinsurer, Equator Reinsurance Limited ("Equator Re"), will prove adequate or that counterparties to these arrangements will perform their obligations thereunder.

Acquisitions and our acquisition strategy may adversely affect our business.

As part of our growth strategy, to date in 2008 we have announced acquisitions in Australia, the Asia Pacific region and the United States and are looking at a number of further acquisition opportunities in the Americas, Europe, the Asia Pacific region and Australia. Although we conduct due diligence prior to making any acquisition, acquisitions are subject to many risks, including the following:

• acquisitions may cause a disruption to our ongoing businesses, distract our management and other resources and make it difficult to maintain our standards, internal controls and procedures;

• our current ratings by S&P, Moody's, A.M. Best or Fitch may be jeopardized;

• we may not be able to successfully integrate services, products and personnel into our operations, especially if we acquire large businesses;

• we may not be successful in acquiring all entities that we seek to acquire;

• we may be required to take prudent actions such as the disposal or cancellation of certain product lines and other measures;

• we may be required to incur debt or issue equity securities to pay for acquisitions, for which financing may not be available or may not be available on acceptable terms;

• our acquisitions may not result in any return on our investment and we may lose our entire investment;

• we may assume unforeseen liabilities and exposures; and

• we may pay for goodwill which we may have to impair.

There can be no assurance that we will successfully identify suitable acquisition candidates or that we will properly value the acquisitions we make. We are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed once negotiations have commenced. If we are unable to implement our acquisition growth strategy effectively, our businesses, financial condition and results of operations could be materially adversely affected. See also the risks described in "Information Summary—Recent Developments" above.


We are subject to risks related to our acquisitions of PMI Australia and PMI Asia.

We have undertaken detailed financial and business due diligence of PMI Australia, which we acquired on October 23, 2008, and PMI Asia, which we agreed to acquire in August 2008. However, there is a risk that the actual results achieved by PMI Australia and PMI Asia may be lower than those indicated by our analyses and our expected results of operations. The largest portion of PMI Australia's risk is concentrated in New South Wales, where default rates of PMI Australia were highest of all Australian jurisdictions in 2007 at approximately 0.5%. If the property market in Australia deteriorates significantly, this could have a material adverse effect on PMI Australia's business. In addition, mortgage insurance is a new line of business for QBE. While QBE has reinsurance covers, risk margins and the funds retained under their promissory note with the vendor to cover an unlikely economic scenario, there can be no guarantee that these protections will be sufficient.

In addition, the acquisition of PMI Asia is subject to conditions to closing. If any condition to the acquisition is not satisfied or waived, the acquisition will not be completed.

Our financial results are significantly affected by changes in exchange rates.

While our financial statements are maintained in Australian dollars, for the period ended June 30, 2008, approximately 77% of our gross earned premium was derived from countries outside Australia, including the United Kingdom, the United States and countries in the Asia Pacific region, Europe and Latin America. Although our policy is to carefully manage our exposure to foreign currencies through matching of assets and liabilities in local currencies and through the use of foreign exchange forward contracts to hedge our exposure, we are still exposed to exchange rate risk in our financial reporting. Insofar as we are unable to hedge exposure to non-Australian currencies, our reported profit or foreign currency translation reserve would be affected.

We translate income and expense items using the cumulative average rate of exchange. On this basis, the Australian dollar appreciated 12% against the pound sterling and the US dollar in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. This substantial appreciation of the Australian dollar has had a material adverse impact on premium growth given that in excess of 76% of gross written premium is in currencies other than the Australian dollar and consequentially our overall profitability. Balance sheet items are translated at the period end rate of exchange. On this basis, the Australian dollar rose 8% against the US dollar and the pound sterling compared to the exchange rates at June 30, 2008 with the exchange rates at December 31, 2007. Since June 30, 2008, the Australian dollar has declined significantly against major currencies, with the noon buying rate of US dollars for Australian dollars falling from US$0.9562 at that date to US$0.6254 at November 21, 2008. This represents a 35% decrease over the period from July 1 to November 21, 2008.

Investors should be aware that our results for the six months ended June 30, 2008 will again be translated at the cumulative average exchange rate for the year ending December 31, 2008. This means that if the Australian dollar remains weaker, as has been the case since June 30, 2008, then our first half year premium and results will increase accordingly. Conversely, if the current trend reverses and the Australian dollar appreciates against overseas currencies beyond the levels for the six months ended June 30, 2008, our first half year premium and results will be reduced accordingly.

Differences between our actual claims experience and underwriting and reserving assumptions may require us to increase our outstanding claims provisions.

Our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we use in setting the prices for our products and establishing the reserves for our obligations to pay claims. Establishing reserves is an imprecise science, dependent upon the accuracy of the assessment of the underlying risks and subject to both internal and external variables. Due to the high degree of uncertainty associated with the determination of claims reserves, we cannot determine precisely the amounts that we will ultimately pay to settle these claims. Such amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future, as with our long-tail classes of insurance business, when our claims reserves increase


to the extent interest rates decrease, or when claims are paid, on average, more quickly than we originally assumed. We evaluate our reserves periodically, factoring in any changes in the assumptions used to establish the reserves, as well as our claims experience. If the reserves we originally establish prove inadequate, we would have to increase our reserves, which could have a material adverse effect on our businesses, financial condition and results of operations.

There can be no assurance that ultimate losses will not materially exceed our provisions and will not have a material adverse effect on our businesses, financial condition and results of operations.

We operate in a highly competitive industry.

There is substantial competition among general insurance and reinsurance companies in Australia, the United Kingdom, the United States and the other jurisdictions in which we do business. We compete with general insurers and reinsurers who have greater financial and marketing resources and greater name recognition than we have. The recent consolidation in the global financial services industry has also enhanced the competitive position of some of our competitors compared to us by broadening the range of their products and services, and increasing their distribution channels and their access to capital.

The level of profitability of a general insurance or reinsurance company is significantly influenced by the adequacy of premium income relative to its risk profile and claims exposure, as well as the general level of business costs. We have experienced overall weighted average reductions in premium rates for our worldwide portfolio of approximately 2% on renewed business for the six months ended June 30, 2008 compared to 3% for the year ended December 31, 2007. Low premium rates arising from competitive pricing have and may continue to adversely impact our underwriting results. While we seek to maintain premium rates at targeted levels, the effect of competitive market conditions may have a material adverse effect on our market share and financial condition. In addition, development of alternative distribution channels for certain types of insurance products, including through the internet, may result in increasing competition as well as pressure on margins for certain types of products.

We are dependent on our ability to reinsure risks.

A general insurance company will usually attempt to limit its risks in particular lines of business or from specific events by using outward reinsurance arrangements. We enter into a significant number of reinsurance contracts to limit our risk. Under these arrangements, other reinsurers assume a portion of the losses and related expenses in connection with insurance policies we write. The availability, amount and cost of reinsurance depend on prevailing market conditions, in terms of price and available capacity, which may vary significantly.

We have stringent controls with respect to the external reinsurers with which we do business, but there are risks associated with the determination of the appropriate levels of reinsurance protection, matching of reinsurance to underlying policies, the cost of such reinsurance and the financial security of such reinsurers.

Since January 1, 2002, our operating subsidiaries have had a worldwide excess of loss ("WEOL") policy with our long standing, wholly-owned subsidiary, Equator Re, a Bermuda corporation. WEOL covers a selected portion of the lines of business of our insurance subsidiaries. See "Business—Outward Reinsurance." Equator Re also participates on a number of our excess of loss and proportional reinsurance protections placed with external reinsurers. Since 2007, Equator Re has significantly increased its participation on excess of loss protections for our insurance subsidiaries which would otherwise have been placed in the external markets and proportional reinsurance with external reinsurers. It has also recently taken over the 50% quota share of the Praetorian business. There can be no assurance regarding the adequacy of our current reinsurance or retrocessional coverage or the future availability of coverage at adequate rates and levels for our external reinsurance arrangements. In the event that adequate reinsurance capacity at acceptable rates becomes unavailable, we would attempt to reduce our exposures to within available insurance capacity or acceptable levels of risk. However, we may not be successful and we may remain exposed to certain risks unless and until this reduction could be completed.


Ceding of risk to our reinsurers does not relieve us of our primary liability to our insured. Accordingly, we are subject to credit risk with respect to our reinsurers. Although we initially place our reinsurance with reinsurers that we believe to be financially stable, this may change adversely by the time recoveries are due which could be many years later. A reinsurer's failure to make payment under the terms of a significant reinsurance contract would have a material adverse effect on our businesses, financial condition and results of operations. In addition, after making large claims on our reinsurers, we may have to pay substantial reinstatement premiums to continue reinsurance cover.

There are risks associated with our inward reinsurance business.

In addition to purchasing reinsurance coverage, we (primarily through our European and United States subsidiaries and Lloyd's syndicates) provide reinsurance coverage for third party insurance company cedants. Due to various factors, including reliance on ceding company information concerning the underlying risks, reporting delays and the cyclical nature of reinsurance rates, our inward reinsurance business may be more volatile and present greater risks than our primary insurance business, especially for cover given in respect of catastrophes.

Changes in government policy, regulation or legislation in the countries in which we operate may affect our profitability.

We are subject to extensive regulation and supervision in the jurisdictions in which we do business. This includes, by way of example, matters relating to licensing and examination, rate setting, trade practices, policy reforms, limitations on the nature and amount of certain investments, underwriting and claims practices, mandated participation in shared markets and guarantee funds, reserve adequacy, capital and surplus requirements, insurer solvency, transactions between affiliates, the amount of dividends that may be paid and regulations on underwriting standards. Such regulation and supervision is primarily for the benefit and protection of policyholders and not for the benefit of investors or shareholders. In some cases, regulation in one country may affect business operations in another country. As the amount and complexity of these regulations increase, so may the cost of compliance and the risk of non-compliance. If we do not meet regulatory or other requirements, we may suffer penalties including fines, suspension or cancellation of our insurance licenses which could adversely affect our ability to do business. In addition, significant regulatory action against QBE could have material adverse financial effects, cause significant reputational harm or harm our business prospects.

As described in detail in "Regulation," we are experiencing, and particularly in light of current market conditions, we expect to continue to experience a number of changes in regulation in certain markets in which we do business, including in the Australian, UK and US markets. As a result, our executive management is, and we expect will continue to be, increasingly required to spend significantly more time on compliance matters. Therefore we expect the cost of regulatory supervision in many of our markets to increase.

In addition, we may be adversely affected by changes in government policy or legislation applying to companies in the insurance industry. These include possible changes in regulations covering pricing and benefit payments for certain statutory classes of business (e.g., CTP and workers' compensation in Australia and employers' liability in the UK), the deregulation and nationalization of certain classes of business, the regulation of selling practices and insurance solvency standards and capital requirements (including consideration of this on a Group basis in both Australia and the UK), the regulations covering policy terms (including initiatives in the UK to improve standards in contract certainty) and policy termination and the imposition of new taxes and assessments. From time to time in the United States there is also consideration of the introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted). Regulatory changes may affect our existing and future businesses by, for example, causing customers to cancel or not renew existing policies or requiring us to change our range of products or to provide certain products (such as terrorism cover where it is not already required) and services, redesign our technology or other systems, retrain our staff, pay increased tax or incur other costs. It is not possible to determine what changes in government policy or legislation will be adopted in any jurisdiction and, if so, what form they will take or in what jurisdictions they may occur. Insurance laws or regulations that are adopted or amended may be


more restrictive than our current requirements, may result in higher costs or limit our growth or otherwise adversely affect our operations.

For more information, see "Regulation."

A downgrade in our ratings may increase policy cancellations and non-renewals, adversely affect relationships with distributors and negatively impact new business.

Our insurer financial strength ratings are important factors in establishing and maintaining our competitive position. Our main insurance and reinsurance subsidiaries have been assigned an A+ insurer financial strength rating by each of S&P and Fitch. Our main insurance and reinsurance subsidiaries in the United States and our main insurance subsidiaries in Europe have been assigned an A rating by A.M. Best. QBE Insurance Group Limited has been assigned an A-, A3, A and bbb+ counterparty credit rating by each of S&P, Moody's, Fitch and A.M. Best, respectively. The rating agencies regularly review our rating and the ratings of our main insurance and reinsurance subsidiaries. Future downgrades in the ratings of any of our insurance or reinsurance subsidiaries (or the potential for such a downgrade) could, among other things, materially increase the number of policy cancellations and non-renewals, adversely affect relationships with the distributors of our products and services, including new sales of our products, and negatively impact the level of our premiums and adversely affect our ability to obtain reinsurance at reasonable prices or at all. This could adversely affect our businesses, financial condition, results of operations and our cost of capital. See "Business—Ratings."

Our performance is affected by general economic conditions and the cyclical nature of the insurance and reinsurance industries.

Our performance is affected by changes in economic conditions, both globally and in the particular countries in which we conduct our business. Premium and claim trends in the general insurance and reinsurance markets are cyclical in nature. Insurance pricing in most markets was less favorable in the first half of 2008 and 2007 than in 2006. We experienced an overall average reduction in premium rates for our worldwide portfolio of approximately 2% on renewed business for the six months ended June 30, 2008 and 3% for the year ended December 31, 2007. Furthermore, the timing and application of these cycles differ among our geographic and product markets. Currently there is a deterioration of economic conditions in numerous major western economies and a deceleration of global growth. We will continue to monitor the effect of this on our business. Unpredictable developments also affect the industry's profitability, including changes in competitive conditions and pricing pressures, unforeseen developments in loss trends, market acceptance of new coverages, changes in operating expenses, fluctuations in inflation and interest rates and other changes in investment markets that affect market prices of investments and income from such investments. Fluctuations in the availability of capital could also have a significant influence on the cyclical nature of general insurance and reinsurance markets. These cycles influence the demand for and pricing of our products and services and therefore affect our financial position, profits and dividends.

Our extensive international operations subject us to various risks.

We operate in 45 countries around the world and continually assess opportunities to expand our operations. Even though we typically have management and shareholder control of our non-Australian affiliates, we are subject to the attendant risks of doing business in many foreign countries such as:

• political instability;

• difficulties in enforcing our rights;

• changes in foreign regulation or their interpretation or enforcement;

• unstable economic conditions;


• foreign taxes;

• adverse currency fluctuations; and

• lack of experience in new markets.

We are dependent on key personnel.

Our success is dependent on the efforts and abilities of our executive officers, particularly our chief executive officer, our chief financial officer, our chief risk officer, our chief operating officer, the chief executive officers of our divisions, our group general manager–investments, our group general counsel and company secretary, our group general manager–human resources and our chief actuarial officer. Some of our executive officers are not bound by detailed service agreements. We do not have key person insurance on any personnel. If we were to lose the services of Frank O'Halloran, who is our chief executive officer, Neil Drabsch, who is our chief financial officer, or other executive officers, such losses could have a material adverse effect on our business.

Our financial success and development are also dependent upon our ability to hire additional personnel as necessary to meet our management, underwriting, investment, administration and other needs. Although we believe that, to date, we have been successful in attracting and obtaining the highly qualified professionals we require, there can be no assurance that we will continue to be successful in this regard.

We rely on our insurance agents and brokers.

We primarily distribute our products through third party-owned insurance agents and brokers. Even though we are not reliant on any individual distribution outlet, the failure, inability or unwillingness of third party-owned insurance agents and brokers to successfully market our insurance products could have a material adverse effect on our businesses, financial condition and results of operations. Third party-owned brokers and insurance agents are not obligated to promote our insurance products and third party-owned agents and brokers may sell competitors' insurance products. As a result, our business depends to a significant extent on our relationships with agents and brokers, the marketing efforts of those agents and brokers and our ability to offer insurance products and services that meet the requirements of the clients and customers of those agents and brokers.

Our holding company structure affects our ability to receive funds.

We are a holding company and our principal assets consist primarily of our investments in our insurance and investment subsidiaries. Our primary sources of funds are dividends and payments received on loans from our insurance and investment subsidiaries. Our insurance subsidiaries are subject to significant government regulation and our ability to receive dividends, loans and loan payments from these subsidiaries to enable us to satisfy our obligations may be restricted by such regulations. Such regulations usually give priority to the payment of policyholders' claims. Furthermore, our right to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or other event is subject to the prior claims of creditors of that subsidiary, except to the extent that we may be recognized as a senior or equal ranking creditor of that subsidiary. If the funds we receive from our subsidiaries are insufficient to fund our obligations, we may be required to raise cash through the incurrence of debt, the issuance of additional equity or the sale of assets.


Significant legal proceedings and litigation may adversely affect our business, financial condition and results of operations.

All insurance companies are exposed to litigation relating to claims on policies they underwrite. Accordingly, we are currently involved in such legal proceedings relating to claims lodged by policyholders, some of which involve claims for substantial damages and other relief. Judicial decisions may expand coverage beyond our pricing and reserving assumptions by widening liability on our policy wording or by restricting the application of policy exclusions. There can be no assurance that the outcome of any of our judicial proceedings will be covered by our existing provisions for outstanding claims or our reinsurance protections or will not otherwise have a material adverse effect on our businesses, financial condition and results of operations.

We rely to a significant degree on our computer systems.

We rely to a significant degree on our computer systems in our daily operations, as well as in calculating underwriting risks, and incur considerable expense on systems development and maintenance. We are exposed to a number of systems risks, including:

• complete or partial failure of the computer systems;

• lost or impaired functionality of the computer systems;

• temporary and/or intermittent failure of the computer systems;

• lack of capacity; and

• system integration.

The above events may cause a loss of customers, damage to our reputation and significant remediation costs, resulting in a material adverse effect on our businesses, financial condition and results of operations.

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.

Management of operational, legal, regulatory and other risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be fully effective. Many of our methods for managing risk and exposures are based upon the use of observed historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than our historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated.


SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA

Until December 31, 2004, we prepared our financial statements in accordance with historical Australian GAAP. From January 1, 2005, we prepared our financial statements in accordance with A-IFRS. We prepared our financial statements as at and for the years ended December 31, 2007, 2006 and 2005 in accordance with A-IFRS. We applied AASB 1: First Time Adoption of Australian Equivalents to International Financial Reporting Standards in preparing our financial statements as at and for the year ended December 31, 2005. In preparing our 2005 financial statements, management amended certain accounting and valuation methods applied in the historical Australian GAAP financial statements to comply with A-IFRS and in our 2005 financial statements the comparative figures as at and for the year ended December 31, 2004 were restated in accordance with A-IFRS to reflect these adjustments. The information based on historical Australian GAAP is not comparable to information prepared in accordance with A-IFRS. See Note 1 to our 2007 financial statements for a summary of our significant accounting policies under A-IFRS.

The selected consolidated historical financial data as at December 31, 2007, 2006 and 2005 and 2004 and for the years ended December 31, 2007, 2006, 2005 and 2004 set forth below have been derived from our audited consolidated financial statements and related notes, which were presented in accordance with A-IFRS as described above.

You should read the following financial information together with the information in the sections of the Information titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and our audited consolidated financial statements and unaudited consolidated interim financial statements and related notes.


Six months ended

June 30, Year ended December 31, 2008 2007 2007 2006 2005 2004 (in A$ millions except ratios and earnings per share data) Income statement

Gross written premium.................................... 6,603 6,520 12,406 10,372 9,408 8,766 Gross earned premium..................................... 5,958 5,751 12,361 10,069 9,171 8,571 Outward reinsurance premium ........................ (1,064) (1,112) (1,987) (1,842) (1,785) (1,781) Deferred reinsurance premium movement ...... 214 110 (164) (69) — (9) Outward reinsurance premium expense........... (850) (1,002) (2,151) (1,911) (1,785) (1,790) Net earned premium ........................................ 5,108 4,749 10,210 8,158 7,386 6,781 Gross claims incurred...................................... (3,258) (3,161) (6,651) (5,528) (6,744) (5,327) Reinsurance and other recoveries .................... 468 512 1,098 977 2,327 1,171 Net claims incurred(1)..................................... (2,790) (2,649) (5,553) (4,551) (4,417) (4,156) Net commissions ............................................. (881) (863) (1,885) (1,384) (1,251) (1,184) Other acquisition costs .................................... (284) (225) (600) (498) (428) (439) Underwriting and other administration

expenses ....................................................... (426) (359) (734) (525) (482) (405) Underwriting result ......................................... 727 653 1,438 1,200 808 597 Investment income on policyholders' funds .... 389 400 824 588 480 331 Insurance profit ............................................... 1,116 1,053 2,262 1,788 1,288 928 Investment income on shareholders' funds ...... (10) 164 308 234 238 188 Amortization of intangibles............................. (11) (5) (21) (10) (3) (1) Operating profit before income tax ................. 1,095 1,212 2,549 2,012 1,523 1,115 Income tax expense ......................................... (235) (287) (615) (519) (425) (251) Minority interest.............................................. (1) (4) (9) (10) (7) (7)

Operating profit ............................................... 859 921 1,925 1,483 1,091 857 Other data Claims ratio (%)(2).......................................... 54.7 55.7 54.3 55.8 59.9 61.3 Commission ratio (%)(3)................................. 17.2 18.2 18.5 17.0 16.9 17.5 Expense ratio (%)(4) ....................................... 13.9 12.3 13.1 12.5 12.3 12.4

Combined operating ratio (%)(5) .................... 85.8 86.2 85.9 85.3 89.1 91.2 Dividends per share (cents) ............................. 61.0 57.0 122.0 95.0 71.0 54.0 Return on average shareholders' equity (%)(7) 19.9 28.1 26.1 26.1 23.9 24.5 Basic earnings per share (cents)(6)(8) ............. 96.8 109.2 224.1 184.8 142.5 123.1 Diluted earnings per share (cents)(6)(8) .......... 96.0 104.9 217.3 173.5 131.5 109.3 Weighted average number of shares(8) ........... 882 837 853 795 757 695


Six months ended

June 30, Year ended December 31, 2008 2007 2007 2006 2005 2004 (in A$ millions except ratios and earnings per share data) Balance Sheet (at period end)

Assets Cash and cash equivalents ............................................ 1,197 2,140 988 1,019 1,061 1,121 Investments ................................................................... 21,985 21,501 23,525 18,915 16,503 13,822 ABC financial assets pledged for funds at Lloyd's(9) ... 824 934 900 995 1,032 998 Derivative financial instruments ................................... 735 295 266 102 82 78 Trade and receivables ................................................... 5,141 6,130 4,616 3,837 3,607 3,146 Swaps relating to ABC Securities ................................. 1 — — — — — Current tax assets .......................................................... 9 47 52 3 — 2 Reinsurance and other recoveries on outstanding

claims......................................................................... 4,040 4,361 4,360 3,624 4,213 3,143 Other assets................................................................... 38 52 41 6 5 36 Deferred insurance costs ............................................... 1,849 2,385 1,683 1,409 1,446 1,358 Defined benefit plan surplus ......................................... 2 1 3 2 2 2 Property, plant and equipment ...................................... 416 425 435 260 232 186 Deferred tax assets ........................................................ 159 328 158 72 67 73 Investment properties.................................................... 86 86 93 38 33 32 Intangible assets............................................................ 2,662 2,428 2,493 1,475 1,382 1,039 Total assets ............................................................... 39,144 41,113 39,613 31,757 29,665 25,036 Liabilities Trade and other payables .............................................. 2,075 2,769 1,934 1,466 1,282 1,084 Derivative financial instruments ................................... 119 111 231 37 35 53 Current tax liabilities .................................................... 263 187 86 193 162 73 Unearned premium ....................................................... 6,045 6,842 5,698 4,642 4,287 3,948 ABC Securities for funds at Lloyd's(9)......................... 799 886 867 946 1,015 968 Swaps relating to ABC Securities ................................. 22 57 30 58 29 30 Outstanding claims ....................................................... 17,152 18,426 18,231 15,269 15,083 12,605 Provisions ..................................................................... 109 90 67 66 64 54 Defined benefit plan deficit .......................................... 55 49 53 8 168 202 Deferred tax liabilities .................................................. 344 334 415 359 251 122 Borrowings ................................................................... 3,287 3,576 3,458 2,364 2,130 1,805 Total liabilities ......................................................... 30,270 33,327 31,070 25,408 24,506 20,944

Net assets ..................................................................... 8,874 7,786 8,543 6,349 5,159 4,092 Equity Share capital ................................................................. 4,744 4,428 4,737 3,461 3,195 2,780 Treasury shares held in trust ........................................ — (16) (16) (16) — — Equity component of hybrid securities due 2024 and

2027........................................................................... 114 115 114 108 108 108 Reserves........................................................................ (72) 35 (75) 47 (20) (29) Retained profits............................................................. 4,030 3,159 3,719 2,683 1,810 1,173 Shareholders funds ....................................................... 8,816 7,721 8,479 6,283 5,093 4,032 Minority interest ........................................................... 58 65 64 66 66 60

Total equity .............................................................. 8,874 7,786 8,543 6,349 5,159 4,092


Six months ended

June 30, Year ended December 31, 2008 2007 2007 2006 2005 2004 (in A$ millions except ratios and earnings per share data) Statement of cash flows

Operating activities Premium received ........................................................ 6,033 5,806 12,667 10,483 8,756 8,598 Reinsurance and other recoveries received.................. 620 763 1,665 1,805 1,309 907 Outwards reinsurance paid .......................................... (1,116) (1,128) (2,108) (1,874) (1,479) (1,664) Claims paid.................................................................. (3,445) (2,989) (7,053) (6,025) (4,620) (4,006) Insurance costs paid..................................................... (1,183) (1,087) (2,199) (2,044) (1,748) (1,629) Other underwriting costs.............................................. (594) (643) (836) (379) (343) (374) Interest received........................................................... 607 418 933 611 562 471 Dividends received ...................................................... 29 34 64 45 44 50 Other operating income ............................................... 98 9 12 30 — 18 Other operating payments............................................ (65) (23) (49) (171) (208) (16) Interest paid ................................................................. (91) (98) (194) (84) (115) (103) Income taxes paid ........................................................ (54) (277) (528) (358) (171) (142) Net cash flows from operating activities .................. 839 785 2,374 2,039 1,987 2,110

Investing activities Proceeds on sale of equity investments ....................... 544 937 1,428 418 1,403 1,526 Proceeds on sale of investment property...................... 1 1 1 1 1 9 Proceeds on sale of property, plant and equipment...... 1 — 5 2 2 4 Payments for purchase of equity investments.............. (837) (979) (1,382) (1,376) (589) (1,498) (Payments for) proceeds from foreign exchange

transactions............................................................... (170) 175 160 39 188 30 Proceeds on sale (payments for purchase) of other

financial assets ........................................................................ 721 1,281 (1,277) (817) (2,755) (1,620)

Payments for purchase of controlled entities and businesses acquired .................................................. (235) (2,002) (2,052) (88) (402) (877)

Payments for purchase of investment property............ — — (6) (2) (4) — Proceeds on disposal of controlled entities .................. — 3 2 3 35 — Payments for purchase of property, plant and equipment

.................................................................................. (30) (31) (80) (61) (82) (38) Payments for purchase of ABC financial investments(9)

.................................................................................. — — — — — (295) Net cash flows from investing activities ................... (5) (615) (3,201) (1,881) (2,203) (2,759)

Financing activities Proceeds from issue of shares...................................... — 772 772 — — 3 Payments for purchase of treasury shares .................... (9) — (37) (38) — — Share issue expenses.................................................... — (3) (4) (5) (4) — Proceeds from settlement of staff share loans.............. 6 31 43 47 34 33 Proceeds from borrowings........................................... 3 1,286 1,534 731 400 1,796 Repayment of borrowings............................................ (1) (689) (695) (400) (45) (932) Dividends paid............................................................. (545) (366) (809) (497) (224) (141) Proceeds from issue of ABC Securities ....................... — — — — — 294 Net cash flows from financing activities................... (546) 1,031 804 (162) 161 1,053 Net increase (decrease) in cash and cash equivalents

held........................................................................... 288 1,201 (23) (4) (55) 404 Cash and cash equivalents at the beginning of the

period........................................................................ 988 1,019 1,019 1,061 1,121 717 Effect of exchange rate changes .................................. (79) (80) (8) (38) (5) —

Cash and cash equivalents at the end of the period 1,197 2,140 988 1,019 1,061 1,121


(1) Claims settlement expenses are included in net claims incurred.

(2) Claims ratio is calculated by dividing net claims incurred by net earned premium.

(3) Commission ratio is calculated by dividing net commissions by net earned premium.

(4) Expense ratio is calculated by dividing other acquisition costs and underwriting and other expenses by net earned premium.

(5) Combined operating ratio is calculated by adding the sum of our claims ratio, commission ratio and expense ratio.

(6) Basic earnings per share is calculated on the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share includes employee options and hybrid securities where they are dilutive.

(7) Return on average shareholders' equity is net profit after tax as a percentage of average shareholders' funds.

(8) The weighted average number of ordinary shares is only applicable to the calculation of basic earnings per share.

(9) See Note 34(C) to our 2007 financial statements for a description of the ABC Securities.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Please read the following information in conjunction with the "Selected Consolidated Historical Financial and Other Data" and our financial statements. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors including those set forth under the captions "Special Note Regarding Forward-Looking Statements" and "Risk Factors" in the Information.

Overview

Our founding company was established in Queensland, Australia in 1886. We have since grown into Australia's largest international general insurance and reinsurance group based on net earned premium for the year ended December 31, 2007. We underwrite commercial and personal lines business in 45 countries around the world. Our total assets amounted to A$39.1 billion and A$39.6 billion at June 30, 2008 and December 31, 2007, respectively, and our shareholders' funds totaled A$8.8 billion and A$8.5 billion at June 30, 2008 and December 31, 2007, respectively. As of November 21, 2008, our market capitalization was A$21.2 billion, as compared to A$19.9 at June 30, 2008.

We discuss the comparison of our financial condition and results of operations under the following divisions:

• Australian operations consisting of our general insurance operations throughout Australia, providing all major lines of insurance cover for personal and commercial risks;


• European operations consisting of QBE Insurance Europe and QBE Underwriting Limited (Lloyd's division).

• QBE Insurance Europe writing insurance business in the United Kingdom, Ireland and 15 countries in mainland Europe, and reinsurance business in Ireland;

• QBE Underwriting Limited (Lloyd's division) writing commercial insurance and reinsurance business in the Lloyd's market;

• the Americas writing insurance and reinsurance business in the Americas with headquarters in New York and operations in North, Central and South America and Bermuda;

• Equator Re consisting of our captive reinsurance business which is based in Bermuda. Equator Re provides reinsurance protections at various levels for most of our subsidiaries around the world. Equator Re's primary role is to assist in our capital and balance sheet management, as well as to provide buying power for our Group reinsurance arrangements. Equator Re provides protection below the retentions deemed appropriate for the Group and also participates on a number of our excess of loss and proportional reinsurance protections placed with external reinsurers. The exposures written by Equator Re are included in our maximum event retention, which is our estimated net loss from our largest single realistic disaster scenario. All business written by Equator Re is priced at market rates. Equator Re's intercompany transactions are eliminated upon consolidation of our overall Group results. See Note 37 to our 2007 financial statements; and



Effective January 1, 2007, the management responsibility for our Central and Eastern European Operations was transferred from our Australia Pacific Asia Central Europe ("APACE") division to our European operations division, in order to have a single consistent approach for our European businesses and to better utilize the substantial product skills that we have based in London. The APACE division was subsequently separated into two divisions, with the Australian and Asia Pacific business units becoming separate operational divisions in their own right. Our financial information for 2006 and 2005 has been restated as if the reorganization had been effective as at January 1, 2005.

Market Conditions

Since the second half of 2007, disruption in the global credit markets, coupled with the repricing of credit risk, and the deterioration of the financial and property markets, particularly in the United States and Europe, have created increasingly difficult conditions for financial institutions, including companies in our industry. These conditions include greater volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency in certain markets. These conditions have resulted in the failures of a number of financial institutions and resulted in unprecedented action by governmental authorities and central banks around the world. During October 2008, the governments in Australia, Europe, the United Kingdom and the United States announced measures to assist in strengthening their respective banking systems and to increase system liquidity. From September 2008 to date, the volatility in capital, foreign exchange and equity markets has reached unprecedented levels and credit markets have been illiquid. Through the year to date, the crisis has also begun to significantly affect the global economy. Market volatility is likely to remain high as financial market uncertainty persists, and it is impossible for us to predict the impact that the current financial turmoil around the world will have on our results of operation or financial condition.

Since June 30, 2008, the Australian dollar has declined significantly against major currencies, with the noon buying rate of US dollars for Australian dollars falling from US$0.9562 at that date to US$0.6254 at November 21, 2008. This represents a 35% decrease from July 1 to November 21, 2008. Investors should be aware that we translate income and expense items using a cumulative average rate of exchange and balance sheet items using the period end rate of exchange. For further information on the impact of changes in exchange rates on our financial results, see "Management's Discussion and Analysis of Financial Condition and Results of Operations— Impact of the Fluctuations of the Australian Dollar" and "Risk Factors—QBE's Business Risk Factors—Our financial results are significantly affected by changes in exchange rates."

The current turmoil in the world's financial markets has had a significant potential impact on the value of the investments that we hold and our investment returns. As described below under "—Investment Strategy," at June 30, 2008, we held $23.3 billion in investments compared to A$24.6 billion at December 31, 2007, a decrease of 5% partly due to substantially weaker equity markets. This adverse trend resulted in a substantial decrease in gross investment income from A$679 million at December 31, 2007 to A$513 million at June 30, 2008, which included net realized and unrealized losses on equities of A$86 million for the six months ended June 30, 2008 compared to net realized and unrealized gains of A$82 million for the six months ended June 30, 2007. Since June 30, 2008, our equity investments, which represented 7.6% of our total investments and cash at that date, have declined in value due to investment market movements. This has given rise to unrealized losses on equities and a consequent deterioration of our gross investment income. We currently have no equity hedges in place. Since June 30, 2008, the value of our cash and fixed income investments has not been adversely affected by the current market turmoil. We have no direct investment exposure in the United States or elsewhere to sub-prime mortgage assets, collateralized debt obligations, collateralized loan obligations or similar structured products. We have some indirect exposure through our investments in, and deposits with, the major banks. Our investment portfolio has no direct exposure to Lehman Brothers or AIG. We have an immaterial exposure to reinsurance recoveries on paid, outstanding and incurred but not reported claims to AIG mainly through its majority-owned subsidiary, Transatlantic Re, and its wholly-owned subsidiary, Lexington. We have some exposure through our insurance operations to claims that may arise related to mortgage-backed securities programs that include sub-prime mortgages, which exposure is not material. We have made allowances in our insurance liabilities for potential exposure to policies relating to financial institutions affected by the credit crisis.


Recent Developments

On November 26, 2008, QBE Holdings, Inc. entered into a merger agreement to acquire all of the shares in ZCS. We agreed to pay an initial price of US$575 million plus a variable amount of potentially up to US$525 million based on ZCS meeting agency profit forecasts in financial years 2009 and 2010. The merger is conditional on the receipt of all necessary competition and government approvals and will be completed following receipt of such approvals. Completion of the acquisition is expected to occur on or before December 31, 2008.

Founded in 1996 and based in Atlanta, Georgia, United States, ZCS is an underwriting agency specializing in providing specialty insurance solutions through customized technology-enabled business process services to mortgage originators, homebuilders, banks and real estate agents across the United States. ZCS provides hazard insurance tracking and outsourcing, voluntary homeowners' insurance programs, in-house and outsourced real estate tax services, online claims services, customer care services and mortgage outsourcing technology solutions. It does not offer lenders' mortgage insurance. ZCS has operations in California, Florida, Georgia, Iowa, Maryland, New Mexico, Nebraska, North Carolina and Texas and access to a call center in India.

We believe that ZCS's insurance and agency business will be complementary to our existing general insurance operations in the United States and will allow us to expand our product and geographic diversity. Based on ZCS management's projections and our due diligence, in the first full financial year following the acquisition, ZCS is expected to contribute approximately US$425 million to our gross written premium and approximately US$150 million to our net profit after tax. The acquisition is expected to be earnings per share accretive in the first year of ownership. No assurance can be given in regard to these current estimates which are subject to various risks and uncertainties.

QBE has acquired a renewal rights portfolio in the United States and has reached agreement to acquire two underwriting agencies in the United States and one in Europe. The total upfront cost of these acquisitions is approximately US$120 million and the purchases are expected to complete in late 2008 or early 2009.

As with any acquisition, there are numerous risks that may arise. See "Information Summary—Recent Developments" and "Risk Factors—QBE's Business Risk Factors—Acquisitions and our acquisition strategy may adversely affect our business" for a description of those risks.

Recent Acquisitions

2008 Acquisitions

In 2008:

• on October 23, we acquired PMI Australia from a subsidiary of The PMI Group Inc., as described below;

• on April 30, we acquired North Pointe, a property and casualty insurer in the United States which writes both commercial and personal insurance, for a purchase price of US$143 million;

• on June 4, we acquired Deep South, an underwriting agency in the United States for a purchase price of US$190 million, including the maximum potential cost of contingent incentive arrangements for the next three years; and

• to date we have acquired three distribution channels in Australia and one distribution channel in the United States for an aggregate purchase price of A$94 million.


Acquisitions from The PMI Group Inc.

On October 23, 2008, we acquired PMI Australia from a subsidiary of The PMI Group, Inc. PMI Australia is a mortgage insurer for lenders and writes approximately 40% of the residential mortgage insurance policies in Australia. The purchase price for PMI Australia was US$920 million, with 80% paid in cash and the remaining 20% in the form of a promissory note, the payment of which is contingent on the claims experience of PMI Australia over three years. The amount payable on the promissory note will be reduced to the extent that the performance of the existing insurance portfolios of PMI Australia do not achieve specified targets. PMI Australia is a mortgage insurer for lenders and writes approximately 40% of the residential mortgage insurance policies in Australia. It has provided lenders with residential mortgage insurance for over 40 years.

In August 2008, we signed an agreement to acquire PMI Asia from The PMI Group, Inc. Completion of the acquisition remains subject to a number of closing conditions. PMI Asia, operating for over nine years, provides reinsurance support to the primary Hong Kong mortgage insurer, Hong Kong Mortgage Corporation.

2007 Acquisitions

During 2007, we completed two large acquisitions in the United States, together with a number of smaller acquisitions in Latin America, Europe and Australia. In particular we acquired:

• Praetorian Financial Group in the United States, effective March 31, 2007;

• Winterthur U.S. Holdings, Inc., now called QBE Regional Insurance, effective May 31, 2007;

• Cumbre Seguros in Mexico, effective November 1, 2007;

• a distribution channel in Switzerland; and

• a number of underwriting agencies and renewal rights in Australia, including Universal Underwriting Agency.

We also entered into a joint venture agreement to establish a new general insurance business in India.

For a discussion of recent acquisitions, see "Information Summary—Recent Acquisitions."

The funding of these acquisitions to date has been from existing resources and increased short-term borrowings. QBE funded the initial cash components of the PMI Australia acquisition using internally generated funds from operations and short-term bank loans of A$400 million.

Factors and Trends Affecting our Results

The following section describes certain factors and trends that have a material impact on our financial condition and results of operations. See "—Market Conditions" and "Business—Investment Strategy" for a discussion of the expected effects of the current market conditions on our financial condition and results of operation.


Growth by Acquisition Generally

Historically, we have grown primarily through acquisitions. In 2008 to date, we have announced eleven acquisitions, including the acquisition of PMI Australia and PMI Asia. See "—Recent Developments " and "—Recent Acquisitions" above. These acquisitions are expected to benefit gross premium growth in 2008 and 2009. In 2007, we completed two large acquisitions in the United States, along with a number of smaller acquisitions in Latin America, Europe and Australia. The consolidation of a number of our reinsurance programs following the acquisitions in 2007 and the more effective use of our captive reinsurer, Equator Re, have enabled us to reduce the cost of reinsurance by approximately 2% of gross written premium in 2008 without increasing the maximum event retention of the Group.

In the past 25 years, we have acquired over 100 businesses or portfolios throughout the world. We are experiencing increased acquisition activity with opportunities being presented in many of the markets in which we operate. We are currently looking at a number of acquisition opportunities in Australia, the Asia Pacific region, the Americas and Europe. Our acquisition strategy has assisted our diversification by spreading our business across both general insurance and reinsurance businesses and by increasing our geographic and product spread. Our acquisition strategy is driven by seeking value for our shareholders rather than focusing on specific business lines. In addition, recent market conditions are giving rise to further acquisition opportunities, which we are considering in accordance with our general acquisition strategy.

Severity and Frequency of Catastrophes

In 2008 to date, notable weather-related market catastrophes impacting QBE have included storms in Queensland and Victoria, two US midwest floods, four US wind/hail storms, Hurricanes Gustav, Hanna and Ike and Hong Kong floods. In 2007, notable natural market catastrophes impacting QBE included Windstorm Kyrill, Indonesian floods, Cyclone Favio, Canberra storms, Cyclone George, Cyclone Gonu, Newcastle storms, two UK floods, four US tornadoes, two US storms, Hurricane Dean, Lismore storms, Californian wildfires, Sydney hailstorm, Melbourne hailstorm and the Gisborne earthquake in New Zealand. For the six months ended June 30, 2008, net claims above A$2.5 million from natural catastrophes were A$160 million compared to A$144 million for the six months ended June 30, 2007. In 2007, net claims above A$2.5 million from natural catastrophes were A$317 million compared to A$251 million in 2006.

We limit the financial impact of market catastrophes on us through disciplined underwriting policies, risk management practices and extensive reinsurance arrangements. We currently rely partly on self-insurance arrangements and partly on external reinsurers as described under "Business—Outward Reinsurance," and have recently reduced the amount of external reinsurance and consequently the cost of external reinsurance protections through a more effective use of our captive reinsurer, Equator Re. The net cost of catastrophes and large individual risk claims in the six months ended June 30, 3008 and in 2007 was within the allowances included in our business plans.

Investment Income

As an insurer, we manage investments to satisfy potential claims by our policyholders. The investment income earned on our policyholders' funds added to our underwriting result is equal to our insurance profit or loss.

We also manage our investment portfolio in an effort to maximize shareholders' funds for the long term. To do this, we allocate the majority of our equity portfolio to our shareholders' funds. The volatility of equity markets, however, gives rise to unrealized gains or losses on our equity portfolios. We mark our investments to market at each balance sheet date and the unrealized gain or loss is recognized in our consolidated income statements. The unrealized gains/losses are allocated to shareholders' funds and, as a result, the investment income on shareholders' funds is impacted in part by the volatility of the equity markets.


Factors that affect the performance of our investment portfolio include fluctuations in interest rates, fluctuations in exchange rates and other changes in investment markets, including volatility in fixed income and equity markets, that affect the market prices of investments and income from such investments. As described in "—Market Conditions" above, since the second half of 2007, disruption in the global credit markets, coupled with the repricing of credit risk, and the deterioration of the financial and property markets, particularly in the United States and Europe, have resulted in greater volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency in certain markets. The decrease in US interest rates and substantially lower equity returns, combined with the impact of the appreciation of the Australian dollar against the US dollar and the pound sterling, adversely impacted the performance of our investment portfolio for the six months ended June 30, 2008. Since then, global debt and equity markets have experienced historic levels of volatility and the outlook remains uncertain. Any further declines in equity markets, which are typically more volatile than fixed-interest investments, or declines in the value of fixed income instruments, changes in interest or foreign exchange rates, could materially adversely affect our investment income and overall profitability. See "Business—Investment Strategy" for a discussion of the expected effects on investment income of the current market conditions.

Impact of the Fluctuations of the Australian Dollar

We translate income and expense items using the cumulative average rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 12% in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Balance sheet items are translated at the period end rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 8% comparing the exchange rates at June 30, 2008 with the exchange rates at December 31, 2007. This substantial appreciation of the Australian dollar has had a material impact on premium growth given that in excess of 76% of gross written premium is in currencies other than the Australian dollar. The strength of the Australian dollar also substantially reduced the value of the overseas component of our cash and investment portfolio when reported in Australian dollars by A$1.4 billion at June 30, 2008 compared to December 31, 2007.

The impact of movements in the Australian dollar on our operating profit, premium income, assets and liabilities for the six months ended or as at June 30, 2008 and the year ended or as at December 31, 2007 is set forth below.

Six months ended June

30, 2008

June 30, 2008 at 2007 exchange

rates(1) Exchange

rate impact

Year ended December 31,

2007

December 31, 2007 at 2006 exchange

rates(2) Exchange

rate impact (A$ millions) (A$ millions) (%) (A$ millions) (A$ millions) (%)

(actual) (pro forma) (actual) (pro forma)

Gross written premium.................. 6,603 7,218 (9) 12,406 13,113 (6) Gross earned premium .................. 5,958 6,514 (9) 12,361 13,074 (6) Net earned premium...................... 5,108 5,581 (9) 10,210 10,746 (5) Net investment income.................. 379 415 (9) 1,132 1,184 (5) Net profit after income tax ............ 859 933 (9) 1,925 1,997 (4) Total investments and cash (period end) ...................................

23,268 24,687 (6) 24,606 26,262 (7)

Total assets (period end) ............... 39,144 41,531 (6) 39,613 42,296 (7) Gross outstanding claims (period end) ...............................................

17,152 18,190 (6) 18,231 19,452 (7)

Total liabilities (period end).......... 30,270 32,133 (6) 31,070 33,183 (7) ________________ (1) Income and expense items are restated to June 30, 2007 cumulative average rates of exchange and balance sheet items are restated to

December 31, 2007 period end rates of exchange.

(2) Income and expense items are restated to December 31, 2006 cumulative average rate of exchange and balance sheet items are restated to December 31, 2006 closing rate of exchange.


Between July 1 and November 21, 2008, the Australian dollar depreciated 35% against the US dollar. As we translate income and expense items using the cumulative average rate of exchange, our results for the six months ended June 30, 2008 will again be translated at the cumulative average rate of exchange for the year ending December 31, 2008. This means that if the Australian dollar continues to depreciate, as has happened since June 30, 2008, then our half-year premium and results will increase accordingly. Conversely, if the trend reverses and the Australian dollar appreciates against overseas currencies, our first half year premium and results will be reduced accordingly.

We have a policy of matching insurance liabilities with assets of the same currency. The continued growth of our overseas businesses and substantial investment in foreign operations have resulted in the decentralization of the management of foreign exchange exposures such that the operating divisions manage their foreign exchange exposures under the guidance of the Group and divisional treasury functions. All of our overseas controlled entities manage their own foreign exchange exposures. We also have a policy of matching all "tradable" overseas shareholders' funds back into Australian dollars by holding offshore borrowings and offshore Australian dollars assets or by using currency hedges.

Our minimum capital requirement is sensitive to the appreciation or depreciation of the Australian dollar against other currencies due to the significance of our overseas operations. Our policy of actively hedging our currency exposures to our overseas operations means, in simple terms, that our net equity in Australian dollar terms is maintained (preserved) in periods of foreign exchange volatility. However, if the Australian dollar weakens, the value of overseas assets and liabilities will increase when translated into Australian dollars giving rise to higher capital charges, a higher minimum capital requirement and, therefore, a lower minimum capital multiple. Conversely, when the Australian dollar strengthens, the value of overseas net assets will decrease when translated into Australian dollars giving rise to lower capital charges, a lower minimum capital requirement and therefore a higher minimum capital multiple.

Operating Ratios

We believe it is appropriate to analyze our underwriting operations by focusing on our combined operating ratio and its components, namely the claims ratio, commission ratio and expense ratio. This practice is the insurance industry standard. Accordingly, the discussion of our underwriting results below primarily focuses on the percentage movements of those ratios in addition to the movement in the actual monetary amounts of the components of those items.

Below is a table detailing our gross earned premium, net earned premium and operating ratios for each of our divisions for the six months ended June 30, 2008 and 2007 and the years ended December 31, 2007, 2006 and 2005.

Six months ended June 30, Year ended December 31,

2008 2007 2007 2006 2005 (in A$ millions except percentages) Australian operations Gross earned premium................................................. 1,352 1,249 2,518 2,428 2,405 Net earned premium .................................................... 1,131 1,059 2,141 2,051 2,015 Claims ratio % ............................................................. 54.9 57.3 55.2 55.9 56.1 Commission ratio % .................................................... 12.8 12.7 12.0 11.8 12.7 Expense ratio %........................................................... 14.4 12.4 15.7 15.2 14.8 Combined operating ratio %........................................ 82.1 82.4 82.9 82.9 83.6



2008 2007 2007 2006 2005 (in A$ millions except percentages) Asia Pacific operations Gross earned premium................................................. 291 291 570 570 545 Net earned premium .................................................... 207 205 416 446 415 Claims ratio % ............................................................. 43.9 40.0 41.3 42.6 37.2 Commission ratio % .................................................... 20.8 20.5 20.0 20.4 18.5 Expense ratio %........................................................... 21.3 20.0 21.4 19.7 22.3 Combined operating ratio %........................................ 86.0 80.5 82.7 82.7 78.0 European operations Gross earned premium................................................. 2,211 2,584 5,158 5,195 4,786 Net earned premium .................................................... 1,567 1,892 3,653 3,970 3,819 Claims ratio % ............................................................. 51.8 56.2 51.8 56.2 62.6 Commission ratio % .................................................... 16.3 17.0 17.7 17.3 17.7 Expense ratio %........................................................... 15.5 15.2 15.3 12.6 12.0 Combined operating ratio %........................................ 83.6 88.4 84.8 86.1 92.3 QBE Insurance Europe Gross earned premium................................................. 1,122 1,292 2,537 2,720 2,513 Net earned premium .................................................... 902 1,048 2,026 2,326 2,076 Claims ratio % ............................................................. 54.0 61.1 60.6 61.0 61.8Commission ratio % .................................................... 15.0 15.1 16.1 14.8 15.5Expense ratio %........................................................... 17.1 16.1 15.4 13.1 13.1 Combined operating ratio %........................................ 86.1 92.3 92.1 88.9 90.4 QBE Underwriting Limited (Lloyd's division) Gross earned premium................................................. 1,089 1,292 2,621 2,475 2,273 Net earned premium .................................................... 665 844 1,627 1,644 1,743 Claims ratio % ............................................................. 48.6 50.1 40.9 49.4 63.6Commission ratio % .................................................... 18.2 19.4 19.6 20.7 20.3Expense ratio %........................................................... 13.4 14.1 15.2 12.0 10.6 Combined operating ratio %........................................ 80.2 83.6 75.7 82.1 94.5 the Americas Gross earned premium................................................. 2,104 1,627 3,976 1,876 1,435 Net earned premium .................................................... 1,469 1,199 2,574 1,153 843 Claims ratio % ............................................................. 57.3 56.4 59.4 55.9 60.0Commission ratio % .................................................... 19.3 25.9 22.8 25.6 25.5Expense ratio %........................................................... 14.6 8.4 11.4 8.2 7.4 Combined operating ratio %........................................ 91.2 90.7 93.6 89.7 92.9



2008 2007 2007 2006 2005 (in A$ millions except percentages) Equator Re Gross earned premium(1) ............................................ 763 495 1,631 678 347 Net earned premium .................................................... 734 394 1,426 538 295 Claims ratio % ............................................................. 58.2 56.1 54.6 63.6 80.0 Commission ratio % .................................................... 20.8 13.7 22.0 13.0 9.8 Expense ratio %........................................................... 6.3 5.8 3.9 4.8 – Combined operating ratio %........................................ 85.3 75.6 80.5 81.4 89.8 (1) Gross earned premium for Equator Re is eliminated upon consolidation of our overall Group results. See Note 37 to our 2007 financial

statements.

Critical Accounting Policies

Our accounting policies are set forth in Note 1 to our 2007 financial statements. Details of the critical accounting estimates and judgments applied in the preparation of our financial statements are set forth in Note 3 to our 2007 financial statements.

Regulatory changes

As described in detail in "Regulation," we are experiencing and expect to continue to experience a number of changes in regulation in certain markets in which we do business, including in the Australian, UK and US markets. As a result, our executive management is, and we expect will continue to be, increasingly required to spend significantly more time on compliance matters. Therefore we expect the cost of regulatory supervision in many of our markets to increase.


Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Gross Earned Premium

For the six months ended June 30, 2008, our total gross earned premium was A$5,958 million, which represents a 4% increase over our total gross earned premium of A$5,751 million for the six months ended June 30, 2007. This increase was primarily the result of the impact of the 2007 acquisitions, higher retention of customers and less than anticipated premium rate reductions on existing business. These factors were partly offset by the negative impact of the stronger Australian dollar against both the US dollar and the pound sterling and the new business in Europe and the United States performing being below expectations due to risk selection, increased competition and inadequate pricing.

Australian operations. Gross earned premium for our Australian operations was A$1,352 million for the six months ended June 30, 2008 compared to A$1,249 million for the six months ended June 30, 2007, representing an increase of 8% due primarily to the acquisition of additional distribution channels since June 30, 2007, and the transfer of portfolios by intermediaries from other insurers to us. In addition, customer retention remained strong and premium rate reductions were less than 1%, which is less than we anticipated.

Asia Pacific operations. Gross earned premium for our Asia Pacific operations was A$291 million for the six months ended June 30, 2008, unchanged from A$291 million for the six months ended June 30, 2007, despite the stronger Australian dollar and increased competition, particularly for large corporate risks.

European operations. Gross earned premium for our European operations was A$2,211 million for the six months ended June 30, 2008 compared to A$2,584 million for the six months ended June 30, 2007, representing a decrease of 14%. Premium growth was impacted by the appreciation of the Australian dollar against the pound sterling, an estimated 4% reduction in premium rates on renewed business and the reduction or elimination of certain small portfolios where we estimated that the potential rewards for the risks underwritten were not sufficient.

• QBE Insurance Europe. Gross earned premium for QBE Insurance Europe was A$1,122 million for the six months ended June 30, 2008 compared to A$1,292 million for the six months ended June 30, 2007, representing a 13% decrease. Premium growth was impacted by a slight reduction in premium rates on renewed business and the impact of translation to the stronger Australian dollar. In addition, new business was below expectations due to inadequate pricing for an increased number of risks.

• QBE Underwriting Limited (Lloyd's division). Gross earned premium for QBE Underwriting Limited was A$1,089 million for the six months ended June 30, 2008 compared to A$1,292 million for the six month ended June 30, 2007, a decrease of 16%. Despite the high level of customer retention, premium growth was adversely affected by the appreciation of the Australian dollar and the discontinuation of certain portfolios, in particular small portfolios of US Directors and Officers and Errors and Omissions reinsurance and product contamination where we estimated that the underwriting risks outweighed the potential rewards.

the Americas. Gross earned premium for the Americas was A$2,104 million for the six months ended June 30, 2008 compared to A$1,627 million for the six months ended June 30, 2007, an increase of 29%. Premium growth benefited from the US acquisitions made in 2007, partly offset by the appreciation of the Australian dollar, lower than expected new business due to inadequate pricing, increased competition in some of our regional and specialty portfolios and a less than 1% reduction in overall weighted average premium rates on renewed business.


Equator Re. Gross earned premium for our captive reinsurer, Equator Re, was A$763 million for the six months ended June 30, 2008 compared to A$495 million for the six months ended June 30, 2007, a 54% increase primarily due to additional excess of loss protections written by Equator Re for business previously placed externally to the QBE Group and participation on internal quota share arrangements. Equator Re's intercompany transactions are eliminated upon consolidation of our consolidated accounts.

Outward Reinsurance Premium

Our outward reinsurance premium expense decreased 15% to A$850 million for the six months ended June 30, 2008 compared to A$1,002 million for the six months ended June 30, 2007. As a percentage of gross earned premium, our outward reinsurance premium expense decreased from 17% for the six months ended June 30, 2007 to 14% for the six months ended June 30, 2008. The decrease was primarily due to increased reinsurance to Equator Re, thereby reducing the amount spent on reinsurance from third parties. Our outward reinsurance premium expense also benefited from the synergies from the acquisitions of Praetorian and Winterthur US in 2007.

Net Earned Premium

Net earned premium, being gross earned premium net of outward reinsurance premium expense, was A$5,108 million for the six months ended June 30, 2008 compared to A$4,749 million for the six months ended June 30, 2007, representing an 8% increase. Analyzed by our divisions, net earned premium for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 was:

• Australian operations. A$1,131 million compared to A$1,059 million (an increase of 7%);

• Asia Pacific operations. A$207 million compared to A$205 million (an increase of 1%);

• European operations. A$1,567 million compared to A$1,892 million (a decrease of 17%);

• QBE Insurance Europe. A$902 million compared to A$1,048 million (a decrease of 14%);

• QBE Underwriting Limited (Lloyd's division). A$665 million compared to A$844 million (a decrease of 21%);

• the Americas. A$1,469 million compared to A$1,199 million (an increase of 23%); and

• Equator Re. A$734 million compared to A$394 million (an increase of 86%).

Underwriting Results

Our combined operating ratio decreased to 85.8% for the six months ended June 30, 2008 from 86.2% for the six months ended June 30, 2007. This translates to an underwriting profit of A$727 million for the six months ended June 30, 2008 compared to an underwriting profit of A$653 million for the six months ended June 30, 2007, an 11% increase. The following section discusses the results of individual components of our combined operating ratio.

Claims Ratio

Our claims ratio decreased to 54.7% for the six months ended June 30, 2008 from 55.7% for the six months ended June 30, 2007. Net claims incurred increased 5% to A$2,790 million for the six months ended June 30, 2008 from A$2,649 million for the six months ended June 30, 2007, while net earned premium rose by 8% to A$5,108 million for the six months ended June 30, 2008 from A$4,749 million for the six months ended June 30, 2007, giving rise to the improved claims ratio. Gross incurred claims increased 3% to A$3,258 million for the six months ended June 30, 2008 from A$3,161 million for the six months ended June 30, 2007. The absolute value of claims incurred increased due mainly to the fact that the result for the period ended June 30, 2008 includes full six months


results from Praetorian and Winterthur US, which we acquired in 2007. While the net claims ratio was negatively impacted by the overall weighted average reduction in premium rates on renewed business of approximately 2% and a higher large individual risk and catastrophe claims ratio due to increased weather-related losses in Australia, Asia and the United States, this was more than offset by a continued low attritional claims ratio (i.e., claims less than A$2.5 million divided by net earned premium).

Commission Ratio

Our commission ratio decreased to 17.2% for the six months ended June 30, 2008 from 18.2% for the six months ended June 30, 2007, reflecting a change in the mix of business during the period and the acquisition of underwriting agencies, which reduced commissions and increased expenses. Net commission expense increased 2% to A$881 million for the six months ended June 30, 2008 from A$863 million for the six months ended June 30, 2007.

Expense Ratio

Our expense ratio increased to 13.9% for the six months ended June 30, 2008 from 12.3% for the six months ended June 30, 2007 mainly as a result of the higher expenses ratios for Praetorian and Winterthur US, which we acquired in 2007, the acquisition of a number of underwriting agencies, the impact of the stronger Australian dollar, lower fee income from workers' compensation managed funds in Australia and increased expenditure on new strategic initiatives to improve efficiencies and distribution in Australia and Europe.

Combined Operating Ratio by Division

Australian operations. The combined operating ratio for our Australian operations improved slightly to 82.1% for the six months ended June 30, 2008 from 82.4% for the six months ended June 30, 2007 despite an increase in the frequency of large individual risk and catastrophe claims from various weather-related losses and slightly lower overall average premium rates. The claims ratio decreased to 54.9% for the six months ended June 30, 2008 from 57.3% for the six months ended June 30, 2007. The continued low attritional claims ratio in most classes enabled us to absorb the increased frequency of large individual risk and catastrophe claims. The commission ratio increased slightly to 12.8% for the six months ended June 30, 2008 from 12.7% for the six months ended June 30, 2007. The expense ratio increased to 14.4% for the six months ended June 30, 2008 from 12.4% for the six months ended June 30, 2007 primarily due to higher costs associated with new strategic initiatives to further improve efficiencies and our interface with intermediaries going forward. The expense ratio for the six months ended June 30, 2007 benefited from a special performance fee from the workers' compensation managed funds in New South Wales.

Asia Pacific operations. The combined operating ratio for our Asia Pacific operations increased to 86.0% for the six months ended June 30, 2008 from 80.5% for the six months ended June 30, 2007. The increase in combined operating ratio reflects an increase in large individual risk and catastrophe claims and lower premium rates due to increased competition. The claims ratio increased to 43.9% for the six months ended June 30, 2008 from 40.0% for the six months ended June 30, 2007 for the same reasons. The commission ratio increased slightly to 20.8% for the six months ended June 30, 2008 from 20.5% for the six months ended June 30, 2007 mainly as a result of a change in the product and geographical mix of the business. The expense ratio increased to 21.3% for the six months ended June 30, 2008 from 20.0% for the six months ended June 30, 2007 due to the cost of establishing our joint venture in India and additional business development staff costs to support the growth in our corporate business through intermediaries.

European operations. The combined operating ratio for our European operations improved to 83.6% for the six months ended June 30, 2008 from 88.4% for the six months ended June 30, 2007. While the number of large individual risk and catastrophe claims was similar to that experienced in the six months ended June 30, 2007, the combined operating ratio benefited from a profitable earn-out from prior underwriting years, our focus on portfolio profitability and a continued low level of attritional claims in the six months ended June 30, 2008.


QBE Insurance Europe. The combined operating ratio for QBE Insurance Europe improved to 86.1% for the six months ended June 30, 2008 from 92.3% for the six months ended June 30, 2007, primarily due to the better than expected earn-out of prior underwriting years and a continued low attritional claims ratio. The claims ratio was 54.0% for the six months ended June 30, 2008 compared to 61.1% for the six months ended June 30, 2007 as a result of the attritional claims ratio remaining low during the period and a reduction in large individual risk and catastrophe claims. The profitable earn-out from prior underwriting years, particularly in our casualty and motor portfolios, also contributed to the improved claims ratio. The commission ratio decreased slightly to 15.0% for the six months ended June 30, 2008 from 15.1% for the six months ended June 30, 2007 and the expense ratio increased to 17.1% for the six months ended June 30, 2008 from 16.1% for the six months ended June 30, 2007 due to lower premium income and the costs related to our expansion of profitable commercial line products into regional United Kingdom and mainland Europe, particularly with regard to infrastructure and the hiring of underwriting teams.

QBE Underwriting Limited (Lloyd's division). The combined operating ratio for QBE Underwriting Limited improved to 80.2% for the six months ended June 30, 2008 from 83.6% for the six months ended June 30, 2007, primarily due to the continued low level of attritional claims, a reduction in large individual risk and catastrophe claims and the profitable earn-out of prior underwriting years. These factors also contributed to the claims ratio decreasing to 48.6% for the six months ended June 30, 2008 from 50.1% for the six months ended June 30, 2007. The commission ratio decreased to 18.2% for the six months ended June 30, 2008 from 19.4% for the six months ended June 30, 2007 due to the change in the mix of business. The expense ratio decreased to 13.4% for the six months ended June 30, 2008 from 14.1% for six months ended June 30, 2007 due to synergies resulting from our management restructure.

the Americas. The combined operating ratio for the Americas was 91.2% for the six months ended June 30, 2008 compared to 90.7% for the six months ended June 30, 2007, despite a significant increase in the number of tornadoes, hailstorms and floods losses. The result includes full six months results of Praetorian and Winterthur US, which we only included for three months and one month, respectively, in the period to June 30, 2007. The claims ratio increased to 57.3% for the six months ended June 30, 2008 from 56.4% for the six months ended June 30, 2007 due to the increased frequency of large individual risk and catastrophe claims from the abnormally bad weather in the first half of 2008 which more than offset the lower attritional claims ratio. The commission ratio decreased to 19.3% for the six months ended June 30, 2008 from 25.9% for the six months ended June 30, 2007 mainly as a result of the change in the mix of business following the acquisitions of Praetorian and Winterthur US in 2007 and the reduced commission following the purchase of Deep South in June 2008. The expense ratio increased to 14.6% for the six months ended June 30, 2008 from 8.4% for the six months ended June 30, 2007 due to the acquisitions of Praetorian and Winterthur US in 2007 and the purchase of North Pointe and Deep South in the first half of 2008.

Equator Re. The combined operating ratio for our captive reinsurer, Equator Re, was 85.3% for the six months ended June 30, 2008 compared to 75.6% for the six months ended June 30, 2007, reflecting increases in large individual risk and catastrophe claims and increased quota share protections for our divisions. The claims ratio increased to 58.2% for the six months ended June 30, 2008 from 56.1% for the six months ended June 30, 2007 due to the higher level of large individual risk and catastrophe claims during the first half of 2008 and prudent reserving of increased casualty exposures. The commission ratio increased to 20.8% for six months ended June 30, 2008 from 13.7% for the six months ended June 30, 2007 due to the increase in proportional reinsurance business during the period. The expense ratio remained low at 6.3% for the six months ended June 30, 2008, slightly up from 5.8% for the six months ended June 30, 2007 due to increased quota share reinsurance.


Investments

Our investment portfolio (including cash) decreased to A$23.3 billion at June 30, 2008 from A$24.6 billion at December 31, 2007, a decrease of 5%. This decrease principally reflects the appreciation of the Australian dollar, which reduced the value of the overseas component of our cash and investment portfolio in Australian dollars by A$1.4 billion, lower US interest rates and substantially weaker equity markets, partly offset by higher Australian interest rates and the interest rate differentials on the significant hedges of our overseas shareholders' funds into Australian dollars. At June 30, 2008, approximately 26% of our investments and cash were in Australian dollars, approximately 23% in pounds sterling, approximately 39% in US dollars and approximately 12% in other currencies. Our gross investment income decreased substantially for the six months ended June 30, 2008 to A$513 million from A$679 million for the six months ended June 30, 2007, a decrease of 24%. Net investment income, which is gross investment income after taking into account borrowing costs, foreign exchange gains and losses and investment expenses, decreased to A$379 million for the six months ended June 30, 2008 compared to A$564 million for the six months ended June 30, 2007, a 33% decrease. The main factors contributing to the decrease in net investment income included:

• net realized and unrealized losses on equities of A$86 million for the six months ended June 30, 2008 compared to net realized and unrealized gains on equities of A$82 million for the six months ended June 30, 2007;

• borrowing costs increased to A$114 million for the six months ended June 30, 2008 compared to A$84 million for the six months ended June 30, 2007 due to the issuance of US$550 million of capital securities and £258 million of hybrid securities in mid 2007 to fund the acquisitions of Praetorian and Winterthur US; and

• net realized and unrealized gains on fixed interest securities of A$57 million for the six months ended June 30, 2008 compared to net realized and unrealized gains on fixed interest securities of A$97 million for the six months ended June 30, 2007.

These were partially offset by exchange gains of A$8 million for the six months ended June 30, 2008 compared to A$1 million for the six months ended June 30, 2007.

During the six months ended June 30, 2008, we continued to maintain our strategy of a low risk investment portfolio. Our general policy on investments is to reduce the risk to shareholders by investing in high quality, fixed interest securities and having a modest exposure to equity investments. This is because of the risk we have already assumed in our insurance business. Even though our net investment income decreased for the six months ended June 30, 2008, the majority of our portfolios in the UK, US, Australian and Euro markets managed to outperform external benchmarks on cash and fixed interest securities. Although we also substantially outperformed equity market benchmarks, we still incurred a sizeable net realized and unrealized loss on equities of A$86 million for the six months ended June 30, 2008 due to the continuing market volatility. While our exposure to equities as at December 31, 2007 was substantially protected through derivatives, these protections gradually expired during the six months ended June 30, 2008, and we currently have no equity hedges in place. Our exposure to equities at June 30, 2008 was around 8% of total investments and cash compared with our benchmark of 10% of total investments and cash.

Our fixed interest investments continued to be short in duration to reduce the effect of the potential market volatility from rising interest rates. At June 30, 2008, our cash and fixed interest portfolio had an average duration of 0.7 years. This varies by currency based on interest rate expectations. Our cash and fixed interest portfolio produced a gross yield of 5.1% for the six months ended June 30, 2008 compared to 5.8% for the six months ended June 30, 2007 due to lower US and pound sterling interest rates. The overall gross investment yield was 4.3% for the six months ended June 30, 2008 compared to 6.5% for the six months ended June 30, 2007.


We continued to maintain a policy of matching liabilities with assets of the same currency where practical and matching all "tradable" overseas shareholders' funds back into Australian dollars by holding offshore Australian assets or by using currency hedges. The nature of our business is such that we have a slight mismatch from time to time which, for the six months ended June 30, 2008, resulted in an operational exchange gain of A$8 million compared to a gain of A$1 million for the six months ended June 30, 2007.

Investment Income on Policyholders' Funds and Insurance Profit

We earned A$389 million and A$400 million in investment income on policyholders' funds for the six months ended June 30, 2008 and the six months ended June 30, 2007, respectively. Our results for the six months ended June 30, 2008 reflected lower interest rates on US dollar investment portfolios and the impact of the stronger Australian dollar. This income, together with our underwriting result, produced an insurance profit of A$1,116 million for the six months ended June 30, 2008 compared to A$1,053 million for the six months ended June 30, 2007, an increase of 6%.

Investment Income on Shareholders Funds

Investment income on shareholders' funds was a loss of A$10 million for the six months ended June 30, 2008 compared to a gain of A$164 million for the six months ended June 30, 2007. The loss was mainly due to realized and unrealized losses on equities.

Profit Before Income Tax

As a result of the above, we had a profit before income tax of A$1,095 million for the six months ended June 30, 2008 compared to A$1,212 million for the six months ended June 30, 2007, a decrease of 9.7%.

Income Tax

We had an income tax expense of A$235 million for the six months ended June 30, 2008 compared to A$287 million for the six months ended June 30, 2007. Income tax expense for the six months ended June 30, 2008 was approximately 21% of pre-tax profit, compared with 24% of pre-tax profit for the six months ended June 30, 2007. Income tax expense benefited from increased profits earned in countries with lower tax rates, including Bermuda, the base for our captive reinsurer, Equator Re.

Minority Interest

For the six months ended June 30, 2008, minority interest in our net profit after income tax was A$1 million compared to A$4 million for the six months ended June 30, 2007.

Profit After Tax

As a result of the foregoing, our net profit after income tax was A$859 million for the six months ended June 30, 2008 compared to A$921 million for the six months ended June 30, 2007, a decrease of 7%. By division, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, respectively:

• our Australian operations had a net profit after tax of A$234 million compared to A$228 million;

• our Asia Pacific operations had a net profit after tax of A$32 million compared to A$52 million;

• our European operations had a net profit after tax of A$299 million compared to A$375 million;

• the Americas had a net profit after tax of A$131 million compared to A$147 million; and


• Equator Re had a net profit after tax of A$163 million compared to A$119 million.


Year Ended December 31, 2007 Compared to Year Ended December 31, 2006


For 2007, our total gross earned premium was A$12,361 million, a 23% increase over our total gross earned premium of A$10,069 million for 2006. This increase was primarily the result of the acquisitions of Praetorian and Winterthur US made in 2007 in the United States and continued high customer retention, partly offset by the appreciation of the Australian dollar against many of the currencies in which we receive premiums, particularly the pound sterling and the US dollar, an overall reduction in premium rates of 3% and increased competition.

Australian operations. Gross earned premium for our Australian operations was A$2,518 million for 2007 compared to A$2,428 million for 2006, an increase of 4% primarily due to continued high customer retention and organic growth, with increased market share achieved in some lines of business.

Asia Pacific operations. Gross earned premium for our Asia Pacific operations was A$570 million for 2007, unchanged from 2006, despite overall average premium rate reductions of 6%, the appreciation of the Australian dollar and increased competition in most markets in which we operate.

European operations. Gross earned premium for our European operations was A$5,158 million for 2007 compared to A$5,195 million for 2006, a 1% decrease. Premium growth was affected by overall average premium rates being reduced by 4.5% during 2007, the appreciation of the cumulative average Australian dollar rate of exchange against the pound sterling by 2% and the appreciation of the cumulative average pound sterling rate of exchange against the US dollar by 8.5%. These factors more than offset a continued high level of customer retention and new business written from initiatives such as our new Lloyd's aviation syndicate 5555, which commenced business in October 2006.

QBE Insurance Europe. Gross earned premium for QBE Insurance Europe was A$2,537 million for 2007 compared to A$2,720 million for 2006, a 7% decrease, primarily due to the overall premium rate reductions for most classes of business, the impact of the appreciation of the Australian dollar and the impact of the substantial appreciation of the pound sterling against the US dollar on the conversion of business written in US dollars.

QBE Underwriting Limited (Lloyd's division). Gross earned premium for QBE Underwriting Limited increased 6% to A$2,621 million for 2007 compared to A$2,475 million for 2006 due mainly to the impact of syndicates 1886 and 5555, both of which began underwriting in 2006.

the Americas. Gross earned premium for the Americas was A$3,976 million for 2007 compared to A$1,876 million for 2006, a 112% increase. This substantial increase primarily reflects the acquisitions of Praetorian and Winterthur US in 2007, partly offset by a reduction in overall average premium rates of less than 1% and the need to cancel some existing business due to competition and less than adequate pricing.

Equator Re. Gross earned premium for our captive reinsurer, Equator Re, was A$1,631 million for 2007 compared to A$678 million for 2006, an increase of 141% primarily due to increased participation in divisional reinsurance programs and a 50% quota share of the Praetorian Financial Group business from January 1, 2007, which had been written previously by the former owner, Hannover Re. Equator Re's intercompany transactions are eliminated upon consolidation of our overall Group results.



Our outward reinsurance premium expense increased to A$2,151 million for 2007 compared to A$1,911 million for 2006. As a percentage of gross earned premium, our outward reinsurance premium expense decreased from 19.0% in 2006 to 17.4% in 2007. The decrease was primarily due to increased reinsurance to Equator Re, thereby reducing the amount of reinsurance protection purchased from third parties.

Net Earned Premium

For 2007, our net earned premium was A$10,210 million compared to A$8,158 million for 2006 (an increase of 25%). Analyzed by our divisions, net earned premium for 2007 compared to 2006 was:


• Asia Pacific operations. A$416 million compared to A$446 million (a decrease of 7%);

• European operations. A$3,653 million compared to A$3,970 million (a decrease of 8%);

• QBE Insurance Europe. A$2,026 million compared to A$2,326 million (a decrease of 13%);

• QBE Underwriting Limited (Lloyd's division). A$1,627 million compared to A$1,644 million (a decrease of 1%);

• the Americas. A$2,574 million compared to A$1,153 million (an increase of 123%); and

• Equator Re. A$1,426 million compared to A$538 million (an increase of 165%).


Our combined operating ratio increased to 85.9% for 2007 from 85.3% for 2006. This translates to an underwriting profit of A$1,438 million for 2007 compared to an underwriting profit of A$1,200 million for 2006, a 20% increase. The following section discusses the results of individual components of our combined operating ratio.

Claims Ratio

Our claims ratio decreased to 54.3% for 2007 from 55.8% for 2006. Net claims incurred increased 22% to A$5,553 million for 2007 compared to A$4,551 million for 2006, while net earned premium rose by 25% to A$10,210 million for 2007 compared to A$8,158 million for 2006, giving rise to the improved claims ratio. The claims ratio reflects a 20% increase in gross claims to A$6,651 million in 2007 from A$5,528 million in 2006 due to an increase in the number of claims for small to medium sized natural catastrophes, with 21 claims for catastrophes with a net cost of A$317 million in 2007 compared to 5 claims for catastrophes in 2006 with a net cost of A$251 million. In addition, the increase in claims ratio reflects the slightly higher attritional claims ratio as a result of the Praetorian and Winterthur US acquisitions in 2007 in the United States, which generally have higher attritional claims ratios but lower large individual risk claims due to the more modest insured values.

Commission Ratio

Our commission ratio increased to 18.5% for 2007 from 17.0% for 2006, reflecting a change in the mix of business during 2007, particularly as a result of the acquisitions in the United States where commission ratios are generally higher, increased distribution through agents during the year and the relatively lower level of inward reinsurance business. Net commissions increased 36% to A$1,885 million for 2007 from A$1,384 million for 2006.


Expense Ratio

Our expense ratio increased to 13.1% for 2007 from 12.5% for 2006 mainly due to higher IT costs for new systems in many of our operations around the world and the costs of business development initiatives. The expense ratio also increased due to the respective appreciation of the Australian dollar and the pound sterling against the US dollar as most Group head office costs charged to the divisions are incurred in Australian dollars and the substantial majority of UK expenses are incurred in pound sterling whereas 46% of the Group's business is written in US dollars.


Australian operations. The combined operating ratio for our Australian operations was 82.9% for 2007, unchanged from 2006. This result benefited from our diversified portfolio and strict risk selection criteria. The claims ratio slightly decreased to 55.2% for 2007 from 55.9% for 2006 despite the increased frequency of large individual risk and catastrophe claims due to several natural catastrophes during 2007, in particular Cyclone George and storms in Canberra, Newcastle, Lismore, Melbourne and Sydney, offset by the continued low attritional claims ratio in most classes of business and higher customer retention. The commission ratio marginally increased to 12.0% for 2007 from 11.8% for 2006 primarily due to increased broker sourced business. The expense ratio increased to 15.7% for 2007 from 15.2% for 2006 due to increased government fire brigade levy charges and the cost of new business initiatives designed to improve efficiencies, customer service and interface with intermediaries, partly offset by higher performance fees from the New South Wales workers' compensation managed fund.

Asia Pacific operations. The combined operating ratio for our Asia Pacific operations was 82.7% for 2007, unchanged from 2006. This result reflected a lower frequency of large individual property claims and the continued low attritional claims ratio, partly offset by an increase in catastrophe claims across the region, including floods in Indonesia and Fiji, the Gisborne earthquake in New Zealand and a tsunami in the Solomon Islands. The claims ratio decreased to 41.3% for 2007 from 42.6% for 2006 for the same reasons. The commission ratio decreased to 20.0% for 2007 from 20.4% for 2006 and the expense ratio increased to 21.4% for 2007 from 19.7% for 2006 mainly due to increased IT costs.

European operations. The combined operating ratio for our European operations was 84.8% for 2007 compared to 86.1% for 2006, reflecting the continued low level of large catastrophe claims and the continued low attritional claims ratio in most classes of business, partially offset by an overall reduction in average premium rates by a further 4.5% during the year.

QBE Insurance Europe. The combined operating ratio for QBE Insurance Europe increased to 92.1% for 2007 from 88.9% for 2006, primarily due to an increase in large individual risk and catastrophe claims and an increase in the commission and the expense ratios as addressed below. The claims ratio decreased slightly to 60.6% for 2007 from 61.0% for 2006 reflecting the continued low attritional claims ratio on the majority of our portfolios, offset by an increase in large individual risk claims and the impact of overall average premium rate reductions, particularly on our employers' liability, professional liability and general liability portfolios. The commission ratio increased to 16.1% for 2007 from 14.8% for 2006 due to the change in mix of business. The expense ratio increased to 15.4% for 2007 from 13.1% for 2006 due to increased IT costs, lower net earned premium and expenses incurred in connection with the implementation of our strategy for organic growth in core commercial line products in the regional UK and mainland European markets. The acquisition of a Swiss motor intermediary in July 2007 and the transfer of the Central and Eastern European operations from APACE to QBE Insurance Europe also contributed to the increase in expenses.


QBE Underwriting Limited (Lloyd's division). The combined operating ratio for QBE Underwriting Limited improved to 75.7% for 2007 compared to 82.1% for 2006, reflecting the low level of large catastrophes in 2007 and the profitable earn-out of the 2006 and 2005 underwriting years, particularly for syndicates 386, 566 and 1036, which all produced underwriting profits ahead of expectations. The claims ratio improved to 40.9% for 2007 from 49.4% for 2006 due to reasons described above. The significant improvement in claims ratio also resulted from the continued low frequency of claims across the majority of our portfolios due to the focus of our various syndicates on portfolio segmentation. The commission ratio decreased slightly to 19.6% for 2007 from 20.7% for 2006 primarily due to slight changes in our business mix. The expense ratio increased to 15.2% for 2007 from 12.0% for 2006 due to lower net earned premium, higher staff incentives from increased profits and increased spending on systems and information technology projects.

the Americas. The combined operating ratio for the Americas was 93.6% for 2007 compared to 89.7% for 2006. The increased combined operating ratio is primarily due to the strengthening of our risk margins in outstanding claims, the impact of the higher combined operating ratio of Winterthur US (now trading as QBE Regional Insurance) business and the increased frequency of large individual risk claims. In 2007, QBE Regional Insurance produced a combined operating ratio of 93.7% and Praetorian produced a combined operating ratio of 86.1%. The claims ratio increased to 59.4% for 2007 from 55.9% for 2006 primarily due to the strengthening of risk margins in outstanding claims, higher individual risk claims and the inclusion of the Praetorian and Winterthur US acquisitions. The commission ratio decreased to 22.8% for 2007 from 25.6% for 2006 and the expense ratio increased to 11.4% for 2007 from 8.2% for 2006. The changes in commission and expense ratios are primarily due to the change in how the business is distributed, the higher expense ratios relating to the US acquisitions and the change in mix between general insurance and reinsurance business.

Equator Re. The combined operating ratio for our captive reinsurer, Equator Re, improved to 80.5% for 2007 from 81.4% for 2006, reflecting the lower than anticipated incidence of catastrophe claims in 2007. The claims ratio was 54.6% for 2007 compared to 63.6% for 2006 for the same reason and also as a result of lower claims ratios on new proportional business written. The commission ratio increased to 22.0% for 2007 from 13.0% for 2006 due to additional participation on divisional excess of loss protections otherwise placed in external markets and a 50% quota share of the Praetorian business from January 1, 2007, which had previously been written by Hannover Re. The expense ratio decreased to 3.9% for 2007 from 4.8% for 2006 due to the substantial growth in premium resulting from the increased participation in divisional reinsurance programs.

Investments

Our investment portfolio (including cash) increased to A$24.6 billion at December 31, 2007 from A$20.0 billion at December 31, 2006, an increase of 23%. This increase principally reflects the impact of increases in operational cash flows and acquisitions, partly offset by the appreciation of the Australian dollar, which reduced overseas investment income significantly when converted into Australian dollars. At December 31, 2007, approximately 26% of our investments and cash were in Australian dollars, approximately 24% in pounds sterling, approximately 39% in US dollars and approximately 11% in other currencies. Our gross investment income was A$1,398 million for 2007 compared to A$985 million for 2006, a 42% increase. Net investment income, which is gross investment incomes net of borrowing costs, foreign exchange gains and losses and investment expenses, increased to A$1,132 million for 2007 compared to A$822 million for 2006. The factors contributing to the increase in net investment income included:

• net realized and unrealized gains on fixed interest securities of A$254 million for 2007 compared to net realized and unrealized gains on fixed interest securities of A$103 million for 2006 reflecting the success of our high quality short duration fixed interest investment strategy;

• increased interest income of A$957 million for 2007 compared to A$719 million for 2006;

• dividend income increased to A$66 million for 2007 compared to A$47 million for 2006; and


• the net cost of the ABC Securities decreased to A$9 million in 2007 compared to A$21 million in 2006.

These were partially offset by:

• net realized and unrealized gains on equities of A$100 million in 2007 compared to net realized and unrealized gains on equities of A$104 million in 2006;

• interest expense increased to A$218 million in 2007 compared to A$128 million in 2006 due mainly to the issue of US$550 million of capital securities and £258 million of hybrid securities during 2007; and

• exchange gains of A$15 million for 2007 compared to A$18 million for 2006.

During 2007, we continued to maintain our strategy of a low risk investment portfolio with short duration on cash and fixed interest investments and low exposure to equities. At December 31, 2007, we held equity hedges to protect our listed equity portfolio which represented 7% of total investments and cash. We had a diverse geographic spread of our portfolio with approximately 51% of our listed equity portfolio at December 31, 2007 denominated in Australian dollars, approximately 24% in pounds sterling, approximately 18% in US dollars and approximately 7% in other currencies. In 2007, we outperformed internal benchmarks on cash and fixed interest securities for our major portfolios in the UK, US, Australian and Euro markets. We also outperformed internal benchmarks in equity markets, primarily because of our focus on absolute returns, including locking in equity gains for 2007 in April, which protected our equity gains from substantial fluctuations, particularly during the latter part of 2007.

Our fixed interest investments continued to be short in duration to reduce the effect of the potential market volatility from rising interest rates. At December 31, 2007, our cash and fixed interest portfolio had an average maturity of 0.3 years. Our cash and fixed interest portfolio produced an annualized gross yield of 5.9% for 2007 compared to 4.7% for 2006 due to higher interest rates.

In 2007, we continued to maintain a policy of matching liabilities with assets of the same currency where practical and matching all "tradable" overseas shareholders' funds back into Australian dollars by holding offshore Australian assets or by using currency hedges. The nature of our business is such that there is a slight mismatch from time to time which, for the year ended December 31, 2007, resulted in an operational exchange gain of A$15 million compared to a gain of A$18 million for 2006.


We earned A$824 million and A$588 million in investment income on policyholders' funds for 2007 and 2006, respectively. Our results for 2007 reflected slightly higher investment yields during the period. This income, together with our underwriting result, produced an insurance profit of A$2,262 million for 2007 compared to A$1,788 million for 2006, an increase of 27%.

Investment Income on Shareholders' Funds

Investment income on shareholders' funds increased to A$308 million for 2007 from A$234 million for 2006. This result reflected the higher interest rates and the relatively strong performance of our equity portfolios.


As a result of the above, we had a profit before income tax of A$2,549 million for 2007 compared to A$2,012 million for 2006.


Income Tax

We had an income tax expense of A$615 million for 2007 compared to A$519 million for 2006. Income tax expense for 2007 was approximately 24% of pre-tax profit, compared with approximately 26% for 2006 primarily due to higher profits earned in countries with lower tax rates, including Bermuda where Equator Re is based, and reduced corporate tax rates on deferred tax balances in the United Kingdom.

Minority Interest

For 2007, minority interest in our net profit after income tax was A$9 million compared to A$10 million for 2006.

Profit After Tax

As a result of the foregoing, our net profit after tax increased to A$1,925 million for 2007 compared to A$1,483 million for 2006. By division, for 2007 compared to 2006, respectively:

• our Australian operations division had a net profit after tax of A$445 million compared to A$387 million;

• our Asia Pacific operations division had a net profit after tax of A$89 million compared to A$73 million;

• the European operations division had a net profit after tax of A$806 million compared to A$773 million;

• the Americas division had a net profit after tax of A$247 million compared to A$109 million; and



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005


For 2006, our total gross earned premium was A$10,069 million, a 10% increase over our total gross earned premium of A$9,171 million for 2005. This increase was primarily the result of acquisitions made in 2005, higher retention of business and overall premium rate increases.

Australian operations. Gross earned premium for our Australian operations was A$2,428 million for 2006 compared to A$2,405 million for 2005, an increase of 1% primarily due to the higher retention of customers and organic growth being slightly ahead of lapsed business despite lower overall premium rates in most classes of business.

Asia Pacific operations. Gross earned premium for our Asia Pacific operations increased 5% to A$570 million for 2006 compared to A$545 million for 2005. Premium growth was affected by a slight reduction in overall premium rates and increased competition.

European Operations. Gross earned premium for our European operations was A$5,195 million for 2006 compared to A$4,786 million for 2005, a 9% increase, primarily due to acquisitions in 2005 and overall premium rate increases in this division, particularly for energy and US based property risks. Our new Lloyd's aviation syndicate 5555 commenced business in October 2006, contributing slightly to our earned premium for the year. Premium growth was affected by the weak US dollar and by the decision to significantly reduce our exposures to US and Gulf of Mexico hurricanes compared with 2005.

QBE Insurance Europe. Gross earned premium for QBE Insurance Europe was A$2,720 million for 2006 compared to A$2,513 million for 2005, an 8% increase, primarily due to premium income from acquisitions in 2005 offset by the transfer of a large portion of reinsurance business to syndicate 566. Organic growth was affected by a reduction in overall premium rates for most classes of business and increased competition for motor, employers' liability, professional liability and general liability business.

QBE Underwriting Limited (Lloyd's division). Gross earned premium for QBE Underwriting Limited increased 9% to A$2,475 million for 2006 compared to A$2,273 million for 2005 due to overall premium rate increases on property and energy businesses exposed to catastrophes, the transfer of reinsurance business from QBE Insurance Europe and a small contribution from our new aviation syndicate 5555 which commenced in October 2006. Premium growth was affected by our decision to reduce exposure to US and Gulf of Mexico hurricanes and the appreciation of the pound sterling against the US dollar for the conversion of our substantially US dollar denominated business. Growth in premium for our casualty business (primarily non-US) was affected by lower overall premium rates and increased competition.

the Americas. Gross earned premium for the Americas was A$1,876 million for 2006 compared to A$1,435 million for 2005, a 31% increase. This increase primarily reflects acquisitions made in 2005 and 2006, higher overall premium rate increases and continued high retention of business.

Equator Re. Gross earned premium for our captive reinsurer, Equator Re, was A$678 million for 2006 compared to A$347 million for 2005, an increase of 95% primarily due to increased participation in divisional reinsurance programs, particularly Lloyd's, and some rate increases. Equator Re's intercompany transactions are eliminated upon consolidation of our overall Group results.



Our outward reinsurance premium expense increased to A$1,911 million for 2006 from A$1,785 million for 2005. As a percentage of gross earned premium, our outward reinsurance premium expense decreased from 19.5% in 2005 to 19.0% in 2006. The decrease was primarily due to increased reinsurance to Equator Re, thereby reducing the amount of reinsurance purchased from third parties.

Net Earned Premium

For 2006, our net earned premium was A$8,158 million compared to A$7,386 million for 2005 (an increase of 10%). Analyzed by our divisions, net earned premium for 2006 compared to 2005 was:


• Asia Pacific operations. A$446 million compared to A$415 million (an increase of 7%);

• European operations. A$3,970 million compared to A$3,819 million (an increase of 4%);

• QBE Insurance Europe. A$2,326 million compared to A$2,076 million (an increase of 12%);

• QBE Underwriting Limited (Lloyd's division). A$1,644 million compared to A$1,743 million (a decrease of 6%);

• the Americas. A$1,153 million compared to A$843 million (an increase of 37%); and

• Equator Re. A$538 million compared to A$295 million (an increase of 82%).


Our combined operating ratio decreased to 85.3% for 2006 from 89.1% for 2005. This translates into an underwriting profit of A$1,200 million for 2006 compared to an underwriting profit of A$808 million for 2005, a 49% increase. The following section discusses the results of individual components of our combined operating ratio.

Claims Ratio

Our claims ratio decreased to 55.8% for 2006 from 59.9% for 2005. Net claims incurred increased 3% to A$4,551 million for 2006 compared to A$4,417 million for 2005 while net earned premium rose by 10% to A$8,158 million for 2006 compared to A$7,386 million for 2005, giving rise to the improved claims ratio. The claims ratio reflects an 18% decrease in gross claims to A$5,528 million in 2006 from A$6,744 million in 2005 due to a reduction of catastrophe claims and the continued low frequency of attritional claims in most of our portfolios.

Commission Ratio

Our commission ratio increased slightly to 17.0% for 2006 from 16.9% for 2005, reflecting a change in the mix of business during the year, particularly, the growth in the Americas and QBE Underwriting Limited where commission ratios are higher, offset partially by the benefits from small acquisitions in Australia. Net commissions increased 11% to A$1,384 million for 2006 from A$1,251 million in 2005.

Expense Ratio

Our expense ratio increased slightly to 12.5% for 2006 from 12.3% for 2005 mainly due to higher IT costs for new systems in many of our operations around the world and the acquisition of intermediaries in Australia.



Australian operations. The combined operating ratio for our Australian operations improved to 82.9% for 2006 from 83.6% for 2005 primarily due to a continuation of the low frequency of claims in most classes of business, higher customer retention and the lapsing of business that did not meet our profit criteria as a result of increased competition. The claims ratio decreased to 55.9% for 2006 from 56.1% for 2005 due to the lower frequency of claims. The commission ratio decreased to 11.8% for 2006 from 12.7% for 2005 due to the acquisition of a number of intermediaries over the past two years. The expense ratio increased to 15.2% for 2006 compared to 14.8% for 2005 due to the expense of the new intermediaries and higher information technology costs.

Asia Pacific operations. The combined operating ratio for our Asia Pacific operations increased to 82.7% for 2006 from 78.0% for 2005 mainly due to premium rate reductions and an increase in the frequency of large property claims. The claims ratio increased to 42.6% for 2006 from 37.2% for 2005 for the same reasons. The commission ratio increased to 20.4% for 2006 compared to 18.5% for 2005, primarily because of a change in product and geographical mix and slightly higher commissions required to retain business. The expense ratio decreased to 19.7% for 2006 from 22.3 % for 2005, even though we commenced implementation of new information technology systems in a number of countries in order to eliminate duplicate processes in key operations.

European operations. The combined operating ratio for our European operations was 86.1% for 2006 compared to 92.3% for 2005 due to the lower level of catastrophe claims and overall premium rate increases, partially offset by an increase in large individual risk claims. The combined operating ratio benefited from the low frequency of claims on our non-catastrophe exposed business.

QBE Insurance Europe. The combined operating ratio for QBE Insurance Europe improved to 88.9% for 2006 from 90.4% for 2005, primarily due to a lower frequency of claims on the majority of portfolios, particularly on the UK and non-US casualty accounts. The claims ratio was 61.0% for 2006 compared to 61.8% for 2005 reflecting a lower overall claims frequency, partially offset by an increase in large individual risk claims. The commission ratio decreased to 14.8% for 2006 compared to 15.5% for 2005 due to the change in mix of business, primarily the acquisition of British Marine which in 2006 had a lower commission ratio than the average for QBE Insurance Europe. The expense ratio was 13.1% for 2006, unchanged from the expense ratio for 2005. This includes synergies from the restructure of the European operations in 2005.

QBE Underwriting Limited (Lloyd's division). The combined operating ratio for QBE Underwriting Limited improved to 82.1% for 2006 compared to 94.5% for 2005 due to the lower level of large catastrophes and higher premium rates, principally on US catastrophe-exposed property and energy business. The claims ratio improved to 49.4% for 2006, compared to 63.6% for 2005 as a result of lower net claims from catastrophes, the continued low frequency of claims across the majority of portfolios and positive development of prior year claims. The commission ratio increased slightly to 20.7% for 2006 from 20.3% for 2005 primarily due to slight changes in our business mix. The expense ratio increased to 12.0% for 2006 from 10.6% for 2005 due to higher incentives for increased profits, lower profit commission from external capital providers to syndicate 386, and higher information technology costs for the implementation of new systems.

the Americas. The combined operating ratio for the Americas improved to 89.7% for 2006 compared to 92.9% for 2005 partially due to higher overall premium rates and a slightly lower level of catastrophes, despite a number of small tornado and hail losses in 2006. The claims ratio improved to 55.9% for 2006 from 60.0% for 2005 reflecting lower claims frequency and very low exposure to long tail casualty business. The commission ratio increased to 25.6% for 2006 from 25.5% for 2005, primarily due to low profit commissions received from proportional reinsurance protections. The expense ratio increased to 8.2% for 2006 compared to 7.4% for 2005 due to the higher expense ratio on growth in general insurance business, higher staff incentives because of our improvement in insurance results and increased costs of information technology.


Equator Re. The combined operating ratio for our captive reinsurer, Equator Re, improved to 81.4% for 2006 from 89.8% for 2005, reflecting the lower incidence of catastrophe and large individual risk losses in 2006. The claims ratio decreased to 63.6% for 2006 from 80.0% for 2005 for the same reason. The commission ratio increased to 13.0% for 2006 from 9.8% for 2005 due to the increased participation in divisional reinsurance programs. The expense ratio for 2006 was 4.8% compared to nil% for 2005 due to the change in the mix of business.

Investments

Our investment portfolio (including cash) increased to A$20.0 billion at December 31, 2006 from A$17.6 billion at December 31, 2005, an increase of 14%. This increase principally reflects the impact of increases in operational cash flows and acquisitions. At December 31, 2006, approximately 28% of our investments and cash were in Australian dollars, approximately 35% in pounds sterling, approximately 24% in US dollars and approximately 13% in other currencies. Our gross investment income was A$985 million for 2006 compared to A$843 million for 2005, a 17% increase. Net investment income, which is gross investment income net of borrowing costs, foreign exchange gains and losses and investment expenses, increased to A$822 million for 2006 compared to A$718 million for 2005. The factors contributing to the increase in net investment income included:

• net realized and unrealized gains on fixed interest securities of A$103 million for 2006 compared to net realized and unrealized gains on fixed interest securities of A$87 million for 2005;

• increased interest income of A$719 million for 2006 compared to A$567 million for 2005;

• exchange gains of A$18 million for 2006 compared to A$3 million for 2005; and

• dividend income increased to A$47 million for 2006 compared to A$41 million for 2005.

These were partially offset by:

• net realized and unrealized gains on equities of A$104 million in 2006 compared to net realized and unrealized gains on equities of A$130 million in 2005;

• interest expense increased to A$128 million in 2006 compared to A$96 million in 2005;

• realized loss on sale of controlled entities of A$1 million for 2006 compared to a gain of A$11 million for 2005; and

• net cost of ABC Securities increased to A$21 million in 2006 compared to A$17 million in 2005.

In 2006, we continued to maintain our strategy of a low risk investment portfolio. In 2006, we outperformed external benchmarks on cash and fixed interest securities for our major portfolios in the UK, US, Australian and Euro markets. We underperformed equity markets, primarily because of our focus on absolute returns, including locking in equity gains for 2006 in October.

Our fixed interest investments continued to be short in duration to reduce the effect of the potential market volatility from rising interest rates. At December 31, 2006, our cash and fixed interest portfolio had an average maturity of 0.4 years. Our cash and fixed interest portfolio produced an annualized gross yield of 4.7% for 2006 compared to 4.3% for 2005 due to higher interest rates.

In 2006, we continued to maintain a policy of matching liabilities with assets of the same currency where practical and matching all "tradable" overseas shareholders' funds back into Australian dollars by holding offshore Australian assets or by using currency hedges. The nature of our business is such that there is a slight mismatch from time to time which, for the year ended December 31, 2006, resulted in an operational exchange gain of A$18 million compared to a gain of A$3 million for 2005.



We earned A$588 million and A$480 million in investment income on policyholders' funds for 2006 and 2005, respectively. Our results for 2006 reflected higher interest rates during the period and active management of our investment portfolio. This income, together with our underwriting result, produced an insurance profit of A$1,788 million for 2006 compared to A$1,288 million for 2005, an increase of 39%.

Investment Income on Shareholders' Funds

Investment income on shareholders' funds decreased slightly to A$234 million for 2006 compared to A$238 million for 2005 mainly due to the reduction in realized and unrealized equity gains.


As a result of the above, we had a profit before income tax of A$2,012 million for 2006 compared to A$1,523 million for 2005.

Income Tax

We had an income tax expense of A$519 million for 2006 compared to A$425 million for 2005. Income tax expense for 2006 was approximately 26% of pre-tax profit, compared with approximately 28% for 2005 primarily due to higher profits earned in countries with lower tax rates, including Bermuda, the base for our captive reinsurer, Equator Re.

Minority Interest

For 2006, minority interest in our net profit after income tax was A$10 million compared to A$7 million for 2005.

Profit After Tax

As a result of the foregoing, our net profit after tax increased to A$1,483 million for 2006 from A$1,091 million for 2005. By division, for 2006 compared to 2005, respectively:

• our Australian operations division had a net profit after tax of A$387 million compared to A$360 million;

• our Asia Pacific operations division had a net profit after tax of A$73 million compared to A$93 million;

• our European operations had a net profit after tax of A$773 million compared to A$537 million;

• the Americas division had a net profit after tax of A$109 million compared to A$62 million; and



Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a company's ability to generate sufficient cash flows to meet the short and long term cash requirements of its business operations.

Our principal sources of funds historically have been cash flows from operating activities (including interest and dividends received on our investments) and proceeds from external borrowings and the sale of equity securities (particularly through our DRP and DEP). While our DEP continues, our DRP was suspended in September 2007 due to the Group's strong level of capital adequacy. We expect that our liquidity needs in the future will continue to be met by these sources despite the recent disruption in the global credit markets.

Our insurance operations provide liquidity in that premiums are generally received months or even years before claims are paid under the policies purchased by such premiums. For over ten years, cash receipts from operations, consisting of premiums, reinsurance and other recoveries received and investment income, have provided more than sufficient funds to pay claims, operating expenses, interest expenses, income taxes and dividends to shareholders. The declaration and payment of dividends is at the discretion of our Board of Directors and depends upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints. After satisfying our cash requirements, we have used excess cash flows to fund acquisitions and build our investment portfolio (thereby increasing future investment income).

Our subsidiaries maintain a high percentage of their investments in highly liquid, short-term and other marketable securities. We do not anticipate having to sell long-term fixed interest or equity investments to meet our liquidity needs.

As a holding company, our ability to continue to pay dividends to shareholders and to satisfy our debt obligations relies on the availability of liquid assets, which is dependent in large part on the dividend paying ability of our subsidiaries. Such subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that may restrict that amount of dividends they may pay. The restrictions are generally based on net income and on certain levels of policyholders' surplus as determined in accordance with statutory accounting practices. During 2007 and 2006, our subsidiaries paid us dividends totaling A$2,826 million and A$2,275 million, respectively, reflecting the benefit of on-going restructuring of our operations.

Capital Resources

Capital resources provide protection for policyholders, furnish financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At June 30, 2008, we had consolidated shareholders' equity of A$8,816 million, a 4% increase over our shareholders' equity at December 31, 2007, due mainly to the profit for the period, partly offset by the payment of the 2007 final dividend in March 2008. As a consequence, our shareholders' equity grew by approximately A$337 million.

We regularly monitor our capital resources. The capacity to manage our level of dividend reinvestment, together with current levels of capital, expected future profits and the structure of our debt securities should enable us to finance our normal level of growth and future acquisition activities. In the event we were to need additional capital to make strategic investments in light of market opportunities, we may take a variety of actions which could include reinstating our DRP and the issuance of additional debt and/or equity securities. We believe that, subject to market conditions, our strong financial position and conservative debt level provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short-term and long term basis.


We use external borrowings to support the capital requirements of our overseas subsidiaries, to fund acquisitions and to support our growth. These borrowings are principally in foreign currencies which provide a hedge against the exposure of our shareholders' funds to such currencies.

At June 30, 2008 we had outstanding:

• £175 million of 5.625% senior debt due September 2009;

• US$250 million of subordinated notes due July 2023, which we issued in June 2003 with a fixed annual interest rate of 5.647% for the first ten years and a floating rate of US dollar three-month LIBOR rate plus 3.18% for the remaining ten years;

• A$170 million and €115 million under a Eurobond subordinated note program with optional redemption from August 2010 and maturing in August 2020;

• Hybrid securities due 2027 repayable in the amount of £258 million in cash or ordinary shares in May 2027. To date, none of those securities have been converted.

• Hybrid securities due 2024 repayable in the amount of US$375 million in cash or ordinary shares. To date, approximately 70% of the hybrid securities have been converted. The total number of shares issued to date as a result of the conversion is 22 million;

• US$550 million of capital securities with no fixed maturity date with a semi-annual, non-cumulative cash distribution at a fixed rate of 6.8% per annum until June 1, 2017 and thereafter quarterly distributions at a floating rate of 2.6% above the London interbank offered rate for three month US$ deposits (i.e. the Dollar Capital Securities); and

• £300 million of capital securities with no fixed maturity date with a semi-annual, non-cumulative cash distribution at a fixed rate of 6.9% per annum until July 18, 2016 and thereafter quarterly distributions at a floating rate of 2.9% above the London interbank offered rate for three months pound sterling deposits (i.e. the Sterling Capital Securities).

As of June 30, 2008 we also had US$550 million and US$220 million of ABC Securities to support funds at Lloyd's pursuant to Lloyd's collateral requirements, due 2008 and 2009, respectively. See note 34(C) to our 2007 financial statements for a description of our ABC Securities. Of the total ABC Securities, US$550 million was repaid in November 2008 with the proceeds from the assets held by the applicable SPV. New letters of credit have been arranged to replace the funds at Lloyd's provided by the US$550 million of ABC Securities. The balance of the ABC Securities will be repaid in November 2009.

Our debt to equity ratio (excluding the ABC Securities) was 37.3% as at June 30, 2008 compared to 40.8% as at December 31, 2007 and was 37.6% as at December 31, 2006. Our annualized weighted average cost of borrowings in respect of amounts outstanding was 6.7% at June 30, 2008 compared to 6.7% at December 31, 2007 and 5.8% at December 31, 2006.

Subject to acquisitions which we are generally actively seeking out, and taking into account the pending acquisitions, as described under "Information Summary—Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments" above, we believe that our cash flows from operations will be sufficient to meet our estimated cash requirements for at least the next twelve months.

PMI Australia had no borrowings owing to non-affiliated third parties at June 30, 2008.


The following table summarizes our cash flows from operating activities, investing activities and financing activities for the six months ended June 30, 2008 and 2007 and the years ended December 31, 2007, 2006 and 2005.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (A$ in millions) Operating activities.................................................... 839 785 2,374 2,039 1,987 Investing activities..................................................... (5) (615) (3,201) (1,881) (2,203) Financing activities.................................................... (546) 1,031 804 (162) 161

Cash flows from operating activities for the six months ended June 30, 2008 were A$839 million compared to A$785 million for the six months ended June 30, 2007. Although operating cash flows from operating activities in local currency were strong, they were adversely impacted by the significant appreciation of the Australian dollar against the US dollar and the pound sterling. For the year ended December 31, 2007, cash flows from operating activities increased to A$2,374 million compared to A$2,039 million for the year ended December 31, 2006. This increase primarily reflected an increase in premium received, partially offset by a decrease in reinsurance and other recoveries received, an increase in claims paid and an increase in insurance and other underwriting costs and higher income tax payments following increased profits in recent years. Cash flows from operating activities for the year ended December 31, 2006 increased 3% to A$2,039 million from A$1,987 million for the year ended December 31, 2005, primarily due to increases in premium and reinsurance and other recoveries received.

Cash outflows from investing activities for the six months ended June 30, 2008 were A$5 million compared to an outflow of A$615 million for the six months ended June 30, 2007. Cash outflows from investing activities for the year ended December 31, 2007 were A$3,201 million compared to an outflow of A$1,881 million for the year ended December 31, 2006. In 2007, payments for purchase of controlled entities and businesses acquired were A$2,052 million compared to A$88 million for 2006 as a result of the Praetorian and Winterthur US acquisitions and a number of smaller acquisitions, and payments for the purchase of other financial assets were A$1,277 million compared to A$817 million in 2006. Cash outflows from investing activities for the year ended December 31, 2006 were A$1,881 million compared to an outflow of A$2,203 million for the year ended December 31, 2005. In 2006 payments for the purchase of equity investments exceeded proceeds from the sale of such investments by A$958 million. In 2005 the reverse occurred, proceeds from sales of equity investments exceeded purchases by A$814 million. Investments in other financial assets (principally short-term deposits and fixed interest and other interest bearing securities) were A$817 million in 2006 as compared with A$2,755 million in 2005. The foregoing reflects our decision to reduce our exposure to equities in 2005 and to increase such exposure to equities again in 2006.

Cash flows from financing activities decreased to an outflow of A$546 million for the six months ended June 30, 2008 compared to an inflow of A$1,031 million for the six months ended June 30, 3007. The decrease is primarily attributable to proceeds from the issue of £258 million of hybrid securities and the issue of US$550 million of capital securities in the six months to June 30, 2007 in order to fund the acquisitions of Praetorian and Winterthur US. Cash flows from financing activities increased to an inflow of A$804 million for the year ended December 31, 2007 compared to an outflow of A$162 million for the year ended December 31, 2006 for the same reasons. Cash flows from financing activities decreased to an outflow of A$162 million for the year ended December 31, 2006 compared to an inflow of A$161 million for the year ended December 31, 2005. The decrease is primarily attributable to repayment of our A$400 million bank loan in 2006 and an increase in dividends paid, partially offset by the proceeds from the sale of £300 million of capital securities.

Our major fundraising activity in 2007 was the issue of £258 million (approximately A$619 million) of hybrid securities and the issue of US$550 million of capital securities (A$667 million). In addition, we conducted a placement of 12.5 million ordinary shares to institutional investors in March 2007 which raised net proceeds of A$403 million.

The following table summarizes our contractual obligations and other commercial commitments as of December 31, 2007.


Amount of commitment expiration per period from

December 31, 2007

Total Less than

1 year 2-5 years After 5 years

(A$ in millions) Contractual Obligations Long-term indebtedness ...................................................... 3,458 300 419 2,739 ABC Securities (1)............................................................... 867 618 249 – Operating leases................................................................... 667 71 198 398 Other Commercial Commitments Letters of credit.................................................................... 283 283 – – (1) See Note 34(C) to our 2007 financial statements for a description of our ABC Securities.

Off-Balance Sheet Arrangements

We have contingent liabilities and enter into various credit commitments in the ordinary course of our business. See Notes 24(C) and 31 to our 2007 financial statements for information on these contingent liabilities and credit commitments as at December 31, 2007.

Quantitative and Qualitative Disclosures about Market Risk

Our operating activities expose us to financial risks such as market risk, credit risk and liquidity risk. Our risk management framework recognizes the unpredictability of financial markets and seeks to minimize potential adverse effects on our financial performance. The key objective of our asset and liability management strategy is to ensure sufficient liquidity is maintained at all times to meet our obligations, including settlement of insurance liabilities and, within these parameters, to optimize investment returns for policyholders and shareholders.

See Note 5 to our 2007 financial statements for a description of these risks as applicable to us as at December 31, 2007.

See Note 12 to our 2007 financial statements for a discussion of our derivative financial instruments.

Insurance Solvency

We are subject to a number of different regulations that require, among other things, capital to be held to support our business activities. Insurance solvency, represented by the ratio of net tangible assets to net earned premium, is an important indicator in assessing the ability of general insurers to pay their existing liabilities. See "Regulation." We continue to maintain insurance solvency margins in excess of the statutory minimum insurance solvency margins where we operate.

We believe our insurance solvency is strong and our directors will continue to carefully monitor our capital requirements for the future, particularly in view of our strategy of growth by acquisition.

The table below details our insurance solvency ratio, calculated as the ratio of net tangible assets (calculated as net assets less intangible assets) to net earned premium for the periods presented.

As of June 30, As of December 31, 2008 2007 2007 2006 2005 Insurance solvency ratio %............................................... 58.8 60.1 59.3 59.7 51.1


Prudential standards for Australian general insurers introduced by APRA under legislation which became effective July 1, 2002 require a more comprehensive, risk based approach to the calculation of the minimum capital requirement for licensed insurers. APRA has not yet finalized the prudential standards for calculating consolidated capital adequacy requirements for non-operating insurance holding companies such as QBE. We have made a number of assumptions in applying the risk based capital standards for Australian licensed insurers to the QBE Group. Based on those assumptions, our calculation of the Group's capital adequacy multiple on a consolidated basis as at June 30, 2008 was approximately 2.4 times the minimum capital requirement, unchanged from the capital adequacy multiple as at December 31, 2007 and December 31, 2006. See also "—Factors and Trends Affecting our Results—Impact of the Fluctuations of the Australian Dollar" for further information about the sensitivity of our minimum capital requirement to the appreciation or depreciation of the Australian dollar against other currencies due to the significance of our overseas operations.


BUSINESS

Overview

QBE Insurance Group Limited is an international general insurance and reinsurance group underwriting commercial and personal lines business in 45 countries around the world. The following table sets forth information about our gross earned premium, net earned premium and general insurance and inward reinsurance premiums for the periods indicated.

Six months ended

June 30, Year ended

December 31, 2008 2007 2007 2006 2005 (A$ millions except percentages) Gross earned premium........................................................................... 5,958 5,751 12,361 10,069 9,171 Net earned premium............................................................................... 5,108 4,749 10,210 8,158 7,386 Direct and facultative as a percentage of net earned premium............... 89.1 87.1 87.5 85.9 83.3 Inward reinsurance as a percentage of net earned premium................... 10.9 12.9 12.5 14.1 16.7

As of June 30, 2008 and December 31, 2007, our shareholders' funds totaled A$8.8 billion and A$8.5 billion, respectively, and our assets totaled A$39.1 billion and A$39.6 billion, respectively.

Operations

Our operations are conducted through the following divisions:

• Australian operations consisting of our general insurance operations throughout Australia, providing all major lines of insurance cover for commercial and personal risks;


• European operations consisting of QBE Insurance Europe and our Lloyd's division (operating as QBE Underwriting Limited):

• QBE Insurance Europe writing insurance business in the United Kingdom, Ireland and 15 countries in mainland Europe and writing reinsurance business in Ireland;

• QBE Underwriting Limited (Lloyd's division) writing commercial insurance and reinsurance business in the Lloyd's market. We are the largest managing agent and second largest provider of capacity at Lloyd's for the 2008 underwriting year;

• the Americas writing general insurance and reinsurance business in the Americas with headquarters in New York and operations in North, Central and South America and Bermuda;

• Equator Re consisting of our captive reinsurance business based in Bermuda; and


Effective January 1, 2007, the management responsibility for our Central and Eastern European operations was transferred from our APACE division to our European operations division, in order to have a single consistent approach for our European businesses and to better utilize the substantial product skills that we have based in London. The APACE division was subsequently separated into two divisions, with the Australian and Asia Pacific business units becoming separate operational divisions in their own right. Our financial information for 2006 and 2005 has been restated as if the reorganization had been effective as at January 1, 2005.


Performance

Our net profit after tax, investment income (after unrealized gains/losses) and combined operating ratio were A$859 million, A$379 million and 85.8%, respectively, for the six months ended June 30, 2008 and A$921 million, A$564 million and 86.2%, respectively, for the six months ended June 30, 2007. Our net profit after tax, investment income (after unrealized gains/losses) and combined operating ratio were A$1,925 million, A$1,132 million and 85.9%, respectively, for the year ended December 31, 2007, A$1,483 million, A$822 million and 85.3%, respectively, for the year ended December 31, 2006, and A$1,091 million, A$718 million and 89.1%, respectively, for the year ended December 31, 2005.

Recent Developments

For a discussion of our pending acquisitions, see "Information Summary—Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments."

Recent Acquisitions

For a discussion of our recent acquisitions see "Information Summary—Recent Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Acquisitions."

Underwriting Strategy

Our underwriting strategy is to achieve consistency in our underwriting results and reduce our risk of loss through:

• geographic and product diversification;

• selective acquisitions;

• attracting and retaining quality underwriters;

• ongoing actuarial assessment of premium pricing and outstanding claims reserves;

• decentralized, regional insurance operations;

• a group risk management strategy; and

• effective use of reinsurance and retrocession protection with financially strong and highly rated reinsurers.

To date, our underwriting strategy has remained unchanged. In line with past experience in current market conditions, as described above under "—Market Conditions.", there could be an incremental increase in claims, although we expect this would be partly offset by higher premiums. We have made allowances in our insurance liabilities for potential exposure to policies relating to financial institutions affected by the credit crisis. Recent market conditions are also giving rise to further acquisition opportunities, which we are considering in accordance with our general acquisition strategy.

Investment Strategy

The investment committee of our board of directors reviews our investment strategy at each committee meeting in respect of the investments we are permitted to make. The following table sets forth the percentage of our investments represented by cash (net of overdrafts), short-term deposits, fixed interest and other interest bearing securities, equities and investment properties as of the dates indicated.


As of June 30, As of December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Cash (net of overdrafts) ..................... 1,197 5.1 2,140 9.0 988 4.0 1,019 5.1 1,061 6.0Short-term deposits ............................ 13,074 56.2 12,734 53.7 16,317 66.3 10,040 50.3 8,292 47.1Fixed interest and other interest bearing securities ............................... 7,136 30.7 6,934 29.2 5,552 22.6 7,134 35.7 7,537 42.9Equities .............................................. 1,775 7.6 1,833 7.7 1,656 6.7 1,741 8.7 674 3.8Investment properties......................... 86 0.4 86 0.4 93 0.4 38 0.2 33 0.2Total investments and cash ................ 23,268 100.0 23,727 100.0 24,606 100.0 19,972 100.0 17,597 100.0

During the six months ended June 30, 2008, and in the period since, we have continued to maintain a strategy of a low risk investment portfolio. Our general policy on investments is to reduce the risk to shareholders by investing in high quality fixed interest securities and having a modest exposure to equity investments. We take this approach because of the risk we have already assumed in our insurance business.

Our investment portfolio (including cash) decreased to A$23.3 billion at June 30, 2008 from A$24.6 billion at December 31, 2007, a decrease of 5%. This decrease principally reflected the appreciation of the Australian dollar against the US dollar and the pound sterling, lower US interest rates and substantially weaker equity markets, partly offset by higher Australian interest rates. For the six months ended June 30, 2008, we incurred net realized and unrealized losses on equities of A$86 million due to the market volatility. Since June 30, 2008, our equity investments, which represented 7.6% of our total investments and cash at that date, have declined in value due to investment market movements. This has given rise to unrealized losses on equities and a consequent deterioration of our gross investment income. We currently have no equity hedges in place. Since June 30, 2008, the value of our cash and fixed income investments has not been adversely affected by the current market turmoil.

The value of the overseas component of our cash and investment portfolio is also impacted by fluctuations in foreign exchange rates. We translate income and expense items using the cumulative average rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 12% in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Balance sheet items are translated at the period end rate of exchange. On this basis, the Australian dollar appreciated against the pound sterling and the US dollar by 8% comparing the exchange rates at June 30, 2008 with the exchange rates at December 31, 2007. This significant appreciation of the Australian dollar substantially reduced the value of the overseas component of our cash and investment portfolio when reported in Australian dollars by A$1.4 billion at June 30, 2008 compared to December 31, 2007. Between July 1 and November 21, 2008, the Australian dollar depreciated 35% against the US dollar.

Our fixed interest investments continue to be short in duration. At June 30, 2008, our cash, short-term deposits and fixed interest and other interest bearing securities portfolios, taken together, had an average duration of 0.7 years. As of November 21, 2008, the average duration was approximately 0.5 years.

Our History

Our founding company, The North Queensland Insurance Company Limited, was established in Queensland, Australia in 1886. By 1890, we had established over 36 agencies throughout the Asia Pacific region and Europe providing general insurance services. In 1973, we merged with Bankers and Traders Insurance Company Limited and Equitable Life and General Insurance Company Limited, were renamed QBE Insurance Group Limited on October 3, 1973 (ABN 28 008 484 014) and were listed on the ASX. We have since grown into an international general insurance and reinsurance Group operating in 45 countries around the world. We are domiciled in Australia. Our principal executive office and registered office is located at Level 2, 82 Pitt Street, Sydney, New South Wales 2000, Australia. Our telephone number is 61-2-9375-4444. For a list of QBE's subsidiaries and controlled entities, see Note 18 to our 2007 financial statements.


In 1986, we entered the inward reinsurance market with the acquisition of an Australian reinsurer, Sydney Reinsurance Company Limited (formerly Storebrand International Reinsurance), and expanded our inward reinsurance business in 1988 through the purchase of two European reinsurance companies.

In the past two decades we have experienced substantial growth, largely through acquisitions, with gross written premium increasing from A$629 million for the year ended June 30, 1990 to A$6,603 million for the six months ended June 30, 2008 and A$12,406 million for the year ended December 31, 2007. Major acquisitions have included Australian-based multiline underwriter Australian Eagle Insurance Company Limited, which we acquired in 1992, New York-based reinsurer American Royal Reinsurance Company which we acquired in 1993, London-based Allstate Reinsurance Company Limited, which we acquired in 1996, and the Australian-based trade credit business Trade Indemnity Australia Limited, which we acquired in 1997. In December 1999, we acquired Iron Trades Insurance Company Limited, a United Kingdom direct insurer. In August 2000, we acquired Limit plc (now trading as QBE Underwriting Limited), which currently manages six ongoing Lloyd's syndicates and makes us the largest manager and second largest provider of capacity in the Lloyd's market for the 2008 underwriting year. In June 2004, we purchased ING's 50% share in the QBE Mercantile Mutual joint venture in Australia including ING's Australian general insurance underwriting businesses conducted through Mercantile Mutual Insurance (Australia) Limited (the "ING Acquisition"). In 2007, we acquired Praetorian and Winterthur US in the United States (noting that on September 30, 2008, we agreed to sell Praetorian Specialty Insurance Company, our small and non-core excess and surplus lines insurance business, to Torus Insurance Holdings Limited, which sale is subject to regulatory approvals and customary conditions to closing). On October 23, 2008, we acquired PMI Australia from a subsidiary of The PMI Group Inc. and in August 2008, we signed an agreement to acquire PMI Asia from The PMI Group, Inc. Completion of the PMI Asia acquisition remains subject to a number of closing conditions. See "Recent Acquisitions" above.

We have grown primarily through acquisitions. For the remainder of 2008, we expect to continue to achieve growth primarily through inclusion of operating results from acquisitions we made in 2007 and in the first half of 2008 and through continued high retention of customers.

Operational Summary

For a discussion of our key ratios by division, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Description of Products and Services

Our major products and services are described below.

Property—Property insurance refers to the underwriting of a broad range of risks including policies for fire, industrial special risks and consequential loss, as well as schemes tailored for specific classes of cover for both personal and property damage. We focus on providing specialized insurance coverage and offer cover for catastrophe, property facultative, direct and excess of loss risks.

Motor Vehicle and Motor Casualty—Private motor insurance includes the provision of comprehensive insurance for damage to or loss and theft of a vehicle, as well as third party property damage. Commercial motor insurance refers to the underwriting of risks for business vehicles and fleets. Private motor policies are generic, unlike commercial motor coverage, where policies are often tailored to a customer's specific needs. We both insure and reinsure motor vehicle risks. It includes CTP insurance (see below).


Compulsory Third Party—CTP insurance covers insureds in Australia against liability to third parties injured in motor vehicle accidents and is the means by which those third parties are compensated for their injuries in Australia. The insurance is compulsory for all motor vehicles in Australia. Claims are governed by legislation and disputes can be resolved by the courts. In New South Wales, Queensland and the Australian Capital Territory, CTP is underwritten by private insurers. In other states and the Northern Territory, CTP is underwritten by the respective state and territory governments.

Liability (Casualty)—Liability insurance is purchased to insure against claims made by third parties who are injured or who suffer property damage arising out of the insured's activities or statutory obligations. It includes professional indemnity (see below), medical malpractice and general, public and product liability. We believe that our liability insurance and reinsurance portfolio is diversified, both in terms of business risk and geographic location.

Marine and energy—Marine insurance covers a broad range of risks including marine hull (insurance which covers loss or damage to a marine vessel) and marine cargo (insurance that covers the loss of or damage to goods being transported). In the energy sector we provide for physical loss or damage and business interruption coverage on risks such as offshore oil and gas platforms, onshore oil wells and segments of the petrochemical industry.

Aviation—Aviation insurance covers both aviation hull and aviation liability, including passengers. Both our Australian general insurance and Lloyd's divisions have significant aviation businesses.

Accident and Health—Accident and health insurance covers insureds for expenses incurred in association with medical costs, including hospital stays and fixed lump sums such as in accidental death or loss of limbs. We both insure and reinsure accident and health risks.

Professional Indemnity—Professional indemnity insurance is purchased by professional advisers such as engineers, architects and lawyers and by company directors and officers to insure against damages arising from actions for the provision of negligent advice or services. We provide this cover primarily on a general insurance basis.

Workers' Compensation—Workers' compensation insurance is provided for work-related injuries. The provision of workers' compensation insurance is typically a statutory class of business, as it is required by local or state government legislation. Legislation also typically requires employers to either self-insure with adequate reinsurance or to obtain appropriate workers' compensation insurance with an approved insurer. The level of insurance required is mainly determined by reference to the number of workers employed and the nature of work performed. It includes employers' liability (see below).

In Australia in the states of New South Wales, Victoria, South Australia and Queensland, workers' compensation underwriting is administered by the state governments. Our role in the first three of these states is currently largely limited to providing a claims management service on a fee basis. As of July 1, 2006, we stopped providing claims management services in South Australia.

Employers' Liability—We provide general insurance cover for employers' liability in the United Kingdom and Ireland through our European operations. This is similar to workers' compensation insurance as described above.

Financial and Credit—Financial and credit insurance includes products such as residual value bonds or other credit enhancement tools.


Catastrophe—Catastrophe insurance is purchased to insure against catastrophes such as natural disasters. Typically, a form of excess of loss reinsurance is offered, subject to specified limits, to indemnify the reinsured for the amount of loss resulting from a catastrophic event or series of events in excess of a specified amount.

Householders'—Householders' insurance refers to the underwriting of home, contents, personal effects and personal liability risks. We both insure and reinsure householders' risks.

Commercial Packages—Commercial package insurance is a flexible package of insurance options designed to provide cost-effective protection for our customers in retail, commercial and industrial businesses.

Terrorism cover

Because of the unpredictable nature of terrorist attacks, providing terrorism cover without the support of reinsurance can be uneconomic. Consequently, where matching reinsurance is unavailable, we generally provide terrorism cover only after careful consideration. For example, in some lines of business, such as US property risks outside major metropolitan areas, where we believe our terrorism exposure is not material, we are not excluding terrorism from our policies. This is consistent with our underwriting policy since the events of September 11, 2001 to only insure terrorism risks where terrorism losses are expected to be minimal. We continue to work with industry bodies and governmental authorities to further reduce our and the industry's exposure to terrorism risks. Many governments have already passed legislation or have committed to introduce legislation that would have this effect. For information on this legislation, see "Regulation—Australian Insurance Regulation—Terrorism Insurance Act" and "Regulation—United States Insurance Regulation—Terrorism Risk Insurance Act."

Australian operations

Our Australian operations comprise a broad range of product lines, each of which applies specific product management focus to its respective portfolios. The seven core business units are specialist risk, intermediary distribution, third party distribution, credit and surety, statutory classes, aviation and direct distribution.

The strategy of our Australian general insurance operations is to ensure optimum retention of quality customers, maintain profitability of existing and new business, eliminate consistently unprofitable lines of business and distribution channels, extend distribution and service of insurance products and reduce costs. On October 23, 2008, we acquired PMI Australia, which provides mortgage insurance for lenders. In 2008, we acquired three distribution channels in Australia. In 2007, we acquired a number of underwriting agencies and renewal rights, including Universal Underwriting Agency. In 2006, we made a number of small acquisitions consisting of Austral Mercantile Collections Pty Limited, a debt collection agency, and the remaining 50% of the Concord underwriting agencies. In 2005, we acquired National Credit Insurance Brokers in Australia and New Zealand to support our trade credit operations. In 2005, we also commenced writing builders' warranty and medical malpractice insurance in Australia. This followed changes made by various state governments and the Commonwealth Government to improve the claims experience and affordability of these classes of insurance.

For a summary of certain financial data and key ratios for our Australian general insurance operations for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Products

Our Australian operations underwrite a broad mix of both personal and corporate insurance business. The table below indicates the contribution of each class of business to gross earned premium for our Australian operations for the periods indicated.


Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Business Class Professional indemnity ....... 65 4.8 61 4.9 121 4.8 136 5.6 125 5.2 Credit and surety................. 66 4.9 56 4.5 113 4.5 97 4.0 113 4.7 Accident and health ............ 127 9.4 111 8.9 234 9.3 209 8.6 175 7.3 Property .............................. 255 18.9 242 19.4 489 19.4 435 17.9 399 16.6 Motor and motor casualty ... 164 12.1 129 10.3 272 10.8 242 10.0 224 9.3 Travel.................................. 26 1.9 18 1.4 40 1.6 32 1.3 43 1.8 Householders'...................... 143 10.6 134 10.7 265 10.5 255 10.5 255 10.6 Compulsory third party....... 84 6.2 87 7.0 171 6.8 177 7.3 178 7.4 General liability .................. 241 17.8 237 19.0 438 17.4 498 20.5 450 18.7 Workers' compensation....... 123 9.1 116 9.3 247 9.8 211 8.7 197 8.2 Marine and aviation ............ 58 4.3 54 4.3 108 4.3 112 4.6 111 4.6 Other (1) ............................. — — 4 0.3 20 0.8 24 1.0 135 5.6 Total ........................... 1,352 100.0 1,249 100.0 2,518 100.0 2,428 100.0 2,405 100.0 (1) Includes agriculture, bloodstock, casualty and other miscellaneous classes.

Competition

We are the third largest general insurer in the Australian market based on net earned premium for the year ended December 31, 2007. Our main competitors include other large insurers operating in the Australian market, such as Insurance Australia Group (formerly NRMA) ("IAG"), Suncorp-Metway Limited and Allianz. Because of the significant number of companies with market shares of between 5% to 10%, as well as smaller companies with market shares just below 5%, the insurance market is highly competitive in Australia. The general insurance market has many niche participants and there is a high number of general insurers for a relatively small market.

There has been rationalization in the general insurance industry in Australia since January 2003. The main developments were:

• CGU Insurance Australia was acquired by IAG in early 2003;

• Wesfarmers acquired Lumley Insurance Group Limited in August 2003;

• Our ING Acquisition in June 2004; and

• The merger of Suncorp-Metway and Promina Group in March 2007.

In 2008, we made a proposal to acquire IAG which was declined due to price.

Distribution

We write the majority of our business in Australia through third party-owned brokers and agents. The remainder of our products are written directly through our branch network.


The third party-owned agents we use typically also sell the insurance products of our competitors. While these third party-owned agents receive a commission on any business we accept, we are generally not committed to accept any business from any particular agent. Certain third party-owned brokers and agents with limited authority write certain policies on our behalf, but only up to a specified amount of cover and within prescribed parameters. We do not rely on any single broker or agent for a significant portion of our Australian business. Additional distribution channels include banks and other financial institutions. More recently, there has been an increase in the commoditization of selected product lines of general insurance products, consolidation of distribution channels and the establishment of new lines of underwriting.

Asia Pacific operations

The Asia Pacific operations conducts general insurance business outside Australia in 17 countries throughout the Asia Pacific region: China, Fiji, French Polynesia, Hong Kong, India, Indonesia, Macau, Malaysia, New Caledonia, New Zealand, Papua New Guinea, Philippines, Singapore, Solomon Islands, Thailand, Vanuatu and Vietnam. We have had a representative office in China since 1997. We provide personal, commercial and specialist insurance covers, including professional and general liability, marine, corporate property and trade credit products. We have had a presence in the Asia Pacific region for over 100 years, and have a well known brand name and strong market share in most countries in this region.

This division tends to be more capital intensive than our other divisions because of the number of jurisdictions in which we operate in these regions. However, we believe these are still important and profitable markets for us, as evidenced by the claims ratio for this division. Our strategy is to continue to increase business retention and grow our specialist product lines through international and local insurance brokers. We are considering several acquisitions that are compatible with our existing operations.

The majority of our ongoing operations in the Asia Pacific regions were profitable for the six months ended June 30, 2008 and all of them were profitable for the year ended December 31, 2007. Overall attritional claims ratios continue to be low although we did experience an increase in the level of large individual risk and catastrophe claims for the six months ended June 30, 2008. Our recent developments include entering into a joint venture agreement in India to establish a general insurance operation.

Products

The Asia Pacific division underwrites a broad mix of both personal and corporate insurance business. The table below indicates the contribution of each class of business to gross earned premium for our Asia Pacific operations for the periods indicated.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Business Class Professional indemnity ........ 37 12.8 38 13.1 76 13.3 71 12.5 28 5.1 Marine.................................. 41 14.0 37 13.0 78 13.7 78 13.7 66 12.1 Workers' compensation........ 19 6.5 20 6.8 29 5.1 32 5.7 11 2.0 Motor and motor casualty .... 42 14.6 44 15.1 87 15.3 87 15.2 121 22.2 Property ............................... 63 21.7 66 22.8 129 22.6 123 21.6 150 27.7 Accident and health ............. 19 6.6 22 7.6 40 7.0 46 8.1 49 9.0 Liability ............................... 29 9.8 25 8.5 57 10.0 56 9.8 52 9.5 Engineering.......................... 14 4.7 13 4.4 27 4.7 26 4.5 22 4.0 Travel................................... 6 1.9 6 2.0 12 2.1 8 1.4 21 3.8 Householders'....................... 6 2.2 7 2.3 13 2.3 17 2.9 24 4.4 Financial and credit.............. 10 3.4 9 3.0 11 1.9 14 2.4 — — Other(1) ............................... 5 1.8 4 1.4 11 2.0 12 2.2 1 0.2 Total ............................ 291 100.0 291 100.0 570 100.0 570 100.0 545 100.0


(1) Includes credit and surety, agriculture and other miscellaneous classes.

The business that we underwrite in this division reflects the nature and development of the underlying markets. In more established markets like Hong Kong, Malaysia and Singapore, the premium base is split between personal lines (such as motor, home, accident and health) and commercial lines. In developing markets, such as Indonesia and Thailand, insurance is still essentially a commercial product. As these economies and insurance markets develop, we expect to see increasing demand for commercial liability products (such as public liability, product liability, directors' and officers' liability, professional indemnity and workers' compensation) from businesses and for personal products like private motor vehicle, home and travel insurance.

New product development under the banner of "specialized insurance solutions" has resulted in the introduction of professional liability, directors' and officers' liability, medical malpractice, specialist liability, marine liability, trade credit products and coverage for cargo in transit by sea, land and air into a number of Asian markets. A team of specialists, including staff from our London and Sydney operations, support these new products.

Business in this division is conducted in 17 countries where we largely have shareholder and management control and a strong distribution base of agents and longstanding business relationships with key insurance brokers. We use a large network of agents and brokers to distribute personal and commercial lines of business. We do not rely on any of these agents or brokers for a significant portion of our business in this division. Where we write commercial lines of business, we focus on the small-to-medium sized business market, where we believe competition is less intense and longer-term relationships can be formed. We believe that developing personal relationships is important to having a competitive advantage in this region.

European operations

QBE's European operations principally comprise QBE Insurance Europe and our Lloyd's division, operating as QBE Underwriting Limited. In addition, from January 1, 2007 this division also consists of our Central and Eastern European operations which were transferred from our former APACE division in order to have a single consistent approach for our European businesses and to better utilize the substantial product skills that we have based in London. As of June 30, 2008, we had operations in the UK, Ireland and 15 countries across mainland Europe.

The underwriting and support functions of QBE Insurance Europe and QBE Underwriting Limited have been successfully integrated over recent years. Our management structure and underwriting teams now present themselves on a unified basis across the Lloyd's and company market distribution platforms. The key differentiator is underwriting product. We operate eight underwriting business units, namely casualty, property, motor, reinsurance, marine and energy, aviation, specialty and British Marine. We will continue, however, to report the results of QBE Insurance Europe and QBE Underwriting Limited separately.

QBE Insurance Europe

The QBE Insurance Europe operations, with a head office in London, are comprised of:

• general insurance businesses in the UK, Bulgaria, Czech Republic, Denmark, Estonia, France, Germany, Hungary, Ireland, Italy, Macedonia, Romania, Slovakia, Spain, Sweden, Switzerland and Ukraine; and

• inward reinsurance business in London and Dublin.


We write reinsurance and specialty lines of business in the London market (see "—London versus United Kingdom Insurance Markets").

The strategy for our QBE Insurance Europe operations is to continue to rationalize the division's United Kingdom corporate and capital structure, review business processes to gain long and short-term efficiencies and cost reduction and management information systems to improve the risk management of our business. In addition, we are looking at opportunities to further diversify our products and our mainland European operations.

For a summary of certain financial data and key ratios for our QBE Insurance Europe operations for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Products

The table below indicates the contribution of each class of business to gross earned premium for our QBE Insurance Europe division for the periods indicated.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Business Class Professional indemnity ........ 191 17.0 222 17.2 421 16.6 381 14.0 380 15.1 Financial and credit.............. 33 2.9 26 2.0 66 2.6 90 3.3 66 2.6 Marine energy and aviation . 103 9.2 130 10.1 216 8.5 245 9.0 119 4.8 Accident and health ............. 20 1.8 14 1.1 30 1.2 46 1.7 81 3.2 Bloodstock........................... 18 1.6 25 1.9 46 1.8 62 2.3 55 2.2 Property treaty ..................... 47 4.2 56 4.3 106 4.2 114 4.2 150 6.0 Property facultative and

direct................................. 159 14.2 145 11.2 294 11.6 305 11.2 228 9.1 Motor and motor casualty .... 246 21.9 293 22.7 576 22.7 634 23.3 437 17.4 Public/product liability ........ 186 16.6 212 16.4 452 17.8 484 17.8 548 21.8 Workers' compensation(1) ... 86 7.7 138 10.7 254 10.0 288 10.6 355 14.1 Other(2) ............................... 33 2.9 31 2.4 76 3.0 71 2.6 94 3.7 Total................................. 1,122 100.0 1,292 100.0 2,537 100.0 2,720 100.0 2,513 100.0 Direct and facultative........... 1,058 94.3 1,209 93.6 2,393 94.3 2,479 91.1 2,099 83.5 Inward reinsurance............... 64 5.7 83 6.4 144 5.7 241 8.9 414 16.5 Total................................. 1,122 100.0 1,292 100.0 2,537 100.0 2,720 100.0 2,513 100.0 (1) Includes employers' liability.

(2) Includes agriculture, engineering and other miscellaneous classes of insurance.

London versus United Kingdom Insurance Markets

We write business in both the United Kingdom insurance market and in what is known as the London market. The London market is the largest international underwriting market for international insurance and reinsurance business. The London market is distinctly different from the United Kingdom general insurance market. Differences between the two markets include:

• the London market writes a broad range of coverages internationally, whereas the United Kingdom general insurance market only writes cover for United Kingdom risks, of which the majority are in personal lines;


• the London market underwrites a broad mix of both direct and reinsurance business, whereas the United Kingdom general insurance market does not underwrite a significant amount of reinsurance business;

• there are specialty markets within the London market, such as the large marine, aviation and satellite markets, which do not exist in the United Kingdom general insurance market; and

• there is a subscription market in the London market where risk is shared among various insurers and reinsurers, a feature not common in the United Kingdom general insurance market.

The London market itself is composed of two different sub-markets, namely, Lloyd's and the International Underwriting Association of London (the "IUA"). The IUA was formed by the merger of the London Insurance and Reinsurance Market Association ("LIRMA") and The Institute of London Underwriters (the "ILU"). LIRMA was a bureau for non-Lloyd's markets in London and dealt with central processing of premiums, accounts and claims for the company markets. The ILU was a marketplace for the marine underwriting companies (excluding Lloyd's). The IUA is based at the London Underwriting Centre and carries on the functions formerly performed by the ILU and LIRMA. We operate both in the Lloyd's market and IUA. Commencing in 2000, we established a new Lloyd's division as a result of our acquisition of Limit plc (now trading as QBE Underwriting Limited). See "—QBE Underwriting Limited (Lloyd's Division)".

General Insurance

From the late 1990s, we have expanded our general insurance business through acquisitions in Europe. In December 1999, we acquired Iron Trades, a direct insurer in the United Kingdom that primarily writes employers' liability and motor vehicle insurance, as well as property and public liability insurance. In 2005, we completed the acquisitions of: MiniBus Plus underwriting agency in the UK with its commercial motor business; Greenhill underwriting agency with offices in France, Spain and Germany; and British Marine, a specialist small tonnage marine underwriting business. In 2005 we sold Garwyn, our non-core loss adjusting business in the UK and Ireland.

Inward Reinsurance

Our reinsurance business comprises two key segments:

• London market business, which is based in London, underwrites reinsurance globally and is focused on specialty lines of business such as property, marine and aviation and energy coverage. We distribute products in the London market through brokers; and

• Other European, which is based in Dublin, underwrites reinsurance risks in continental Europe and also manages run-off portfolios.

Our underwriting teams focus on building long-term relationships with brokers and clients. We receive business from a large number of brokers and do not rely on any one broker for a significant portion of our business.

The reinsurance industry is highly competitive. We compete worldwide with major reinsurers, as well as reinsurance departments of numerous multi-line insurance organizations. We believe we compete effectively because of our strong capital position, the quality of service provided to customers and our customized approach to risk selection.


QBE Underwriting Limited (Lloyd's division)

The Lloyd's market currently comprises 75 syndicates which underwrite insurance risks both globally and in London. The structure of the Lloyd's market has changed considerably since 1993. Before 1993, all capital was subscribed by individual members of Lloyd's, with unlimited personal liability. Today, a significant portion of capital is provided by corporates on a limited liability basis. The Lloyd's market constitutes approximately half of the London market.

In 2000, we acquired Limit plc, which operates in the Lloyd's insurance market. We changed the name of Limit plc to QBE Underwriting Limited in 2008. QBE Underwriting Limited currently manages six Lloyd's syndicates and is the largest manager and the second largest provider of capacity at Lloyd's with approximately a 7% share of the total market capacity for the 2008 underwriting year. It provided 100% of capacity for syndicates 566, 1036, 2000, 5555 and 1886 and 70% of capacity for syndicate 386 in the 2008 underwriting year. On October 1, 2006 we launched syndicate 5555, our dedicated aviation syndicate. Our Lloyd's syndicates write the following general insurance and reinsurance product lines:

• non-marine liability (principally product, employers', public and directors' and officers' liability and professional indemnity);

• non-marine short-tail (principally commercial property, energy, pecuniary loss and credit and political risks);

• marine, aviation and transport (including hull, cargo, aviation and space); and

• excess of loss reinsurance.

Our Lloyd's capacity for 2008 remains the same as 2007 at £1.1 billion, and was £1.0 billion in 2006.

Set out below is the total capacity for each of our Lloyd's syndicates for the 2008 and 2007 underwriting years and our percentage share for the 2008 underwriting year:

Syndicate Number Type of business Total capacity QBE share

2007 2008 2008 (in £ millions) %

5555(1) Aviation......................................................................................................... 85 95 100 386 Non-marine liability (ex-USA)...................................................................... 340 340 70 566(1) Property & aviation reinsurance .................................................................... 245 290 100 1036(1) Direct marine & energy ................................................................................. 220 210 100 1886(1) Non-marine liability ...................................................................................... 35 100 100 2000(1) Non-marine property & liability.................................................................... 195 85 100 Total .................................................................................................................................... 1,120 1,120 91 (1) From a Lloyd's reporting and regulatory perspective, syndicates that are 100% supported by us are sub-syndicates of an umbrella syndicate,

syndicate 2999. We established syndicate 2999 to maximize the efficient allocation of capacity across our 100% supported syndicates. Syndicate 2999 does not underwrite risks on its own.

For a summary of certain financial data and key ratios for QBE Underwriting Limited for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."


Products

The table below indicates the contribution of each class of business to gross earned premium for QBE Underwriting Limited for the periods indicated.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Business class: Professional indemnity ........... 120 11.0 139 10.8 241 9.2 319 12.9 305 13.4 Marine, energy and aviation ... 346 31.8 380 29.4 768 29.3 688 27.8 518 22.8 Property treaty ........................ 170 15.6 212 16.4 445 17.0 453 18.3 520 22.9 Public/product liability ........... 260 23.9 318 24.6 681 26.0 507 20.5 488 21.5 Property, facultative and direct 74 6.8 102 7.9 197 7.5 191 7.7 151 6.7 Workers' compensation........... 63 5.8 86 6.7 176 6.7 215 8.7 208 9.2 Financial and credit................. 24 2.2 22 1.7 47 1.8 47 1.9 32 1.4 Accident and health ................ 21 1.9 17 1.3 39 1.5 30 1.2 - - Motor and motor casualty ....... 9 0.8 12 0.9 21 0.8 20 0.8 51 2.2 Bloodstock.............................. 2 0.2 4 0.3 5 0.2 5 0.2 - - Total ............................... 1,089 100.0 1,292 100.0 2,621 100.0 2,475 100.0 2,273 100.0 Direct and facultative.............. 819 75.2 913 70.6 1,875 71.5 1,720 69.5 1,543 67.9 Inward reinsurance.................. 270 24.8 379 29.4 746 28.5 755 30.5 730 32.1 Total ............................... 1,089 100.0 1,292 100.0 2,621 100.0 2,475 100.0 2,273 100.0 (1) Includes extended warranty, credit, motor and other miscellaneous classes.

Since the acquisition of QBE Underwriting Limited, we integrated our pre-existing Lloyd's business with QBE Underwriting Limited's Lloyd's business. We increased our share of QBE Underwriting Limited's managed syndicates from 55% for the 2000 underwriting year to 91% for the 2008 underwriting year. These purchases of additional capacity create an obligation for us to accept the additional share of insurance liabilities in exchange for an equal amount of investments and other assets.

Our strategy for Lloyd's is to focus on those classes where we have specific expertise, a proven track record and a strong leadership position. We do this by correcting or canceling consistently unprofitable business, maximizing benefits from improved market conditions, seeking to achieve synergies from our various syndicates to improve the expense ratio by optimizing syndicate operating structures and capital utilization and contributing to the process of regulatory change. In 2007, we cancelled some business and withdrew from a few classes such as contaminated products and our small US casualty, directors and officers and errors and omissions portfolios due to our concerns with class and contagion risk in the United States.

Over time we have been able to merge our London market casualty operations and now have a single team of professionals controlling all casualty business written through European operations.

There is significant competition in all classes of business transacted from a number of different markets worldwide. Depending on the class of business concerned, competition comes from the London market, other Lloyd's syndicates and major international insurers and reinsurers. On international risks, competition also comes from the domestic insurers in the country of origin of the insured. We believe we are able to compete successfully by employing specialist underwriters and by developing and maintaining close, long-term relationships through high quality service and an ability to deliver innovative solutions tailored to our clients' needs. See "Risk Factors—QBE's Business Risk Factors—We operate in a highly competitive industry."


In November 2003 and 2004, we restructured our Lloyd's division capital base by replacing virtually all our bank letters of credit with ABC Securities. See Note 34(C) to our 2007 financial statements. US$550 million of the ABC Securities was repaid in November 2008. New letters of credit have been arranged to replace the funds at Lloyd's provided by the US$550 million of ABC Securities. The balance of the ABC Securities will be repaid in November 2009.

the Americas

Our operations in the Americas are comprised of four main streams of insurance and reinsurance business. The specialist insurance program business focuses on niche products and markets through managing agents. Our general insurance business comprises regional brands that focus on small to medium clients throughout the Americas and uses agents to distribute insurance products. The Latin America division comprises general insurance operations in Argentina, Brazil, Colombia and Mexico and reinsurance businesses through our joint venture QBE Del Istmo in Colombia, Mexico, Panama and Peru. Our fourth stream is our reinsurance business, supporting predominantly small to medium insurers with limited exposure to major catastrophes.

Effective March 31, 2007, we acquired Praetorian from Hannover Re. Praetorian, based in New York, writes specialist property and casualty insurance programs through various managing agents and brokers. The Praetorian business has been substantially integrated with QBE's specialty insurance program business. The final stage is to transfer all Praetorian data to QBE's systems, which is projected to be completed by the end of 2008. We have replaced Praetorian's reinsurance of 50% of its business by way of quota share agreements to Hanover Re and its affiliates with internal reinsurance.

Effective May 31, 2007, we acquired Winterthur US. Winterthur US is a property and casualty insurer in the United States focusing on small to medium sized commercial business and personal lines and operating primarily under the names of General Casualty and Unigard. Winterthur US is now called QBE Regional Insurance. We have merged National Farmers Union and QBE Agri business, our existing general insurance brands, into QBE Regional Insurance and have appointed a team of professionals to ensure that QBE Regional Insurance adopts best practice for all its general insurance business written through independent and captive agents. The integration is substantially complete, with final completion in 2009.

Our estimate of synergies from the two acquisitions has been increased from A$50 million after income tax to A$100 million after income tax. Following a thorough review of the various insurance portfolios included in the acquired companies, we have decided to cancel some business which we believe will not meet our profit requirements going forward. On September 30, 2008, we agreed to sell, Praetorian Specialty Insurance Company, our small and non-core excess and surplus lines insurance business, to Torus Insurance Holdings Limited, which sale is subject to regulatory approvals and customary conditions to closing. We have also implemented a number of changes to improve the profitability of the QBE Regional Insurance personal motor business.

For further information on the acquisitions, see "Information Summary—Recent Developments " and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments" above.

In the Americas division, we have continued to focus on a strategy of diversification which, combined with additional marketing efforts, has improved the product and geographic diversity of our reinsurance and general insurance portfolios. Our growth strategy in this division is to continue to develop relationships with existing clients, to pursue acquisitions that meet our criteria and to add new program business.


Products

The table below indicates the contribution of each class of business to gross earned premium for our Americas division for the periods indicated.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions except percentages) Business class Property ............................... 677 32.2 532 32.7 1,245 31.3 728 38.8 537 37.4 Casualty ............................... 387 18.4 327 20.1 755 19.0 405 21.6 359 25.0 Motor and motor casualty ..... 600 28.5 408 25.1 1,078 27.1 332 17.7 191 13.3 Accident and health .............. 213 10.1 156 9.6 429 10.8 263 14.0 222 15.5 Workers' compensation......... 147 7.0 150 9.2 310 7.8 58 3.1 40 2.8 Other(1) ............................... 80 3.8 54 3.3 159 4.0 90 4.8 86 6.0 Total............................... 2,104 100.0 1,627 100.0 3,976 100.0 1,876 100.0 1,435 100.0 Direct and facultative insurance............................... 1,868 88.8 1,416 87.0 3,547 89.2 1,437 76.6 1,048 73.0 Inward reinsurance................ 236 11.2 211 13.0 429 10.8 439 23.4 387 27.0 Total............................... 2,104 100.0 1,627 100.0 3,976 100.0 1,876 100.0 1,435 100.0 (1) Includes agriculture, financial and credit, engineering and other miscellaneous classes of insurance.

Because we are a relatively small competitor in the United States reinsurance market, our reinsurance strategy in this market has been to develop an expertise in health, facultative property and casualty lines and to focus on specialty lines of the market that are less exposed to capacity-driven competition from larger reinsurers. Over the last ten years, we have reduced the significance of catastrophe coverage in the overall mix of our business in this division by diversifying our portfolio and not renewing certain unprofitable lines of business. Our strategy is to focus on program business and, when possible, to convert reinsurance relationships into primary insurance. We intend to continue to pursue selective growth in both the insurance and reinsurance markets.

We market our insurance products in the Americas division predominantly through third party-owned brokers and agents. We receive business from a number of brokers and do not rely on any one broker for a significant portion of our business.

For a summary of certain financial data and key ratios for the Americas division for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Equator Re

Equator Re is our wholly-owned captive reinsurance business based in Bermuda. Equator Re provides reinsurance protections at various levels for most of our subsidiaries around the world. Equator Re's primary role is to assist in our capital and balance sheet management, as well as to provide buying power for our Group reinsurance arrangements. Equator Re provides protection below the retentions deemed appropriate for the Group and also participates on a number of our excess of loss and proportional reinsurance protections placed with external reinsurers. The exposures written by Equator Re are included in our maximum event retention, which is our estimated net loss from our largest single realistic disaster scenario. All business written by Equator Re is priced at market rates.


Each of the operating division's reinsurance costs include the amount reinsured to Equator Re and these amounts are eliminated upon consolidation of our overall Group results. See Note 37 to our 2007 financial statements. For a summary of certain financial data for Equator Re for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, and 2006 and 2005, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Products

The table below indicates the contribution of each class of business to gross earned premium for Equator Re for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007 and 2006. Contributions to gross earned premium for Equator Re for the year ended December 31, 2005 are not available as QBE did not report this information on that basis in that year.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 (in A$ millions except percentages) Business class Public/product liability ................... 171 22.4 117 23.7 507 31.1 319 47.0 Property .......................................... 233 30.5 188 38.0 409 25.1 145 21.4 Marine, energy and aviation ........... 143 18.7 96 19.3 251 15.4 71 10.5 Motor and motor casualty ............... 107 14.0 20 4.0 207 12.7 37 5.5 Workers' compensation................... 49 6.4 15 3.1 137 8.4 1 0.2 Accident and health ........................ 19 2.5 27 5.5 56 3.4 59 8.7 Professional indemnity ................... 34 4.4 24 4.8 49 3.0 33 4.8 Financial and credit......................... 4 0.6 6 1.1 10 0.6 12 1.7 Bloodstock...................................... 1 0.2 1 0.2 – – – – Other ............................................... 2 0.3 1 0.3 5 0.3 1 0.2 Total ................................ 763 100.0 495 100.0 1,631 100.0 678 100.0

Investments

We manage our worldwide investments from our head office in Sydney, Australia. We controlled an investment portfolio (including cash) of approximately A$23.3 billion at June 30, 2008, down from A$24.6 billion at December 31, 2007, primarily due to the effect of the stronger Australian dollar, lower interest rates and the weaker equity markets. We are required to observe the prudential and insurance solvency requirements of the various countries in which we operate with respect to the amount and nature of the investment assets held relative to our liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Insurance Solvency." We hold investment assets to provide a return on shareholders' funds and to provide funds for the claims that arise in relation to the policies we underwrite. Our investment income for the six months ended June 30, 2008 and 2007 was A$379 million and A$564 million, respectively. Our investment income for the years ended December 31, 2007, 2006 and 2005 was A$1,132 million, A$822 million and A$718 million, respectively.

For a discussion of the results of our Investments division, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We maintain a strategy of a low risk investment portfolio. Our general policy on investments is to reduce the risk to shareholders by investing in high quality fixed interest securities and having a modest exposure to equity investments. This is because of the risk we have already assumed in our insurance business. We continue to maintain a policy of matching liabilities with assets of the same currency as far as practicable and matching "tradeable" overseas shareholders' funds back into Australian dollars. Our investments are designated as fair value through profit or loss on initial recognition. They are initially recorded at fair value and are subsequently remeasured to fair value at each reporting date. We monitor fair value on a daily basis.


Our fixed interest investments continue to be short in duration to reduce the effect of the potential market volatility from rising interest rates. At June 30, 2008, our cash, short-term deposits and fixed interest and other interest bearing securities portfolios had an average duration of 0.7 years. As of November 21, 2008, the average duration is approximately 0.5 years.

Our policy is to manage cash, fixed interest and equity holdings within constraints approved by the investment committee of our board of directors. Our asset allocation policy is set by our investment committee which formulates asset allocation ranges with consideration given to applicable insurance solvency standards, sets investment guidelines on currency and property dealings and reviews the performance of internal and external fund managers against approved benchmarks. This asset allocation is usually reviewed by our investment committee at each meeting, and our investments are generally managed in-house by our investment division. Our exposure to equities as at June 30, 2008 was 8%, of total investments and cash compared with our benchmark of 10% of total investments and cash. We currently have no equity hedges in place.

See "—Strategy" above for a summary of our investments and cash by class for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005.

We have a Group-wide investment credit risk policy in place to mitigate our exposure to credit risk on our investment portfolio. Compliance with the policy is monitored and exposures and breaches are reported to our Group investment committee. Net exposure limits are set for each counterparty or group of counterparties in relation to investments, cash deposits and forward foreign exchange exposures. Our policy also sets out minimum credit ratings for investments that may be held.

The tables below provide information regarding our aggregate credit risk exposure as of December 31, 2007, in respect of our major classes of financial assets. The analysis classifies the assets according to S&P's counterparty credit ratings. Rated assets falling outside the range of AAA to BBB are classified as speculative grade.

Credit Rating

AAA AA A BBB Speculative

Grade Not

Rated Total (in millions ) As at December 31, 2007 Cash and cash equivalents ........................ 350 465 119 2 39 13 988 Interest bearing investments ..................... 7,916 13,210 546 26 126 45 21,869 ABC financial assets pledged for funds at Lloyd's .................................................. 900 — — — — — 900 Derivative financial instruments ............... 26 214 26 — — — 266

Due to the diversity of our operations, exposure to foreign currencies requires close management. Currency management is defensive in nature and any hedging strategies are undertaken with a view to minimizing net exposure so as to make neither profit nor loss on currencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and see Notes 5 and 12 to our 2007 financial statements for a general discussion of our foreign exchange rate risk and management policies.

Through our investments we are exposed to interest rate risk. See Note 5(A)(ii) to our 2007 financial statements for a more detailed discussion of the interest rate risk.

We have no direct investment exposure in the United States or elsewhere to sub-prime mortgage assets, collateralized debt obligations, collateralized loan obligations or similar structured products. We have some indirect exposure through our investments in, and our deposits with, the major banks. Our investment portfolio has no direct exposure to Lehman Brothers or AIG.


Underwriting Policy

We have developed an underwriting and pricing methodology that incorporates underwriting, claims, expenses, actuarial analysis and product development disciplines for our various classes of business. This approach utilizes proprietary data gathered and analyzed by us over many years and is designed to maintain high quality underwriting and pricing discipline. The underwriters use this information to assess and evaluate risks prior to quoting the premium on a particular policy. This information provides specialized knowledge about industry segments and catastrophe management and helps analyze and manage risk based on account characteristics and pricing parameters. This approach is designed to ensure that we do not compromise our underwriting integrity and we believe this provides us with a competitive advantage. We have a disciplined approach to underwriting and risk management that emphasizes profitability rather than premium volume or market share.

We have a policy of reinforcing our underwriting performance with a range of operational controls and procedures aimed at enhancing financial performance. Our underwriting performance to date has primarily reflected a policy of diversifying risk through geographic and product diversity and also through a combination of strict underwriting standards and risk management controls. Comprehensive underwriting year or accident year statistics are maintained by product for every country in which we operate. This enables us to monitor trends and take action at an early stage to correct unprofitable portfolios and focus on growing profitable business. There are over 140 persons throughout QBE engaged in actuarial work and who assist underwriters on trends and pricing. We also have external actuarial reviews performed by independent actuaries for most portfolios. We use sophisticated computer modeling techniques to assess underwriting risks and monitor accumulations of risk. Our pricing includes substantial allowances for large losses and catastrophes.

Pricing levels for property and casualty insurance products are generally developed by us based upon the estimated frequency and severity of losses, reinsurance costs, the expenses associated with writing business and administering claims and a reasonable allowance for profit.

Pricing for personal motor insurance is driven primarily by changes in the frequency of claims and by inflation in the cost of automobile repairs and medical care, litigation of liability claims and by legislative requirements. As a result, the profitability of the business is largely dependent on promptly identifying and rectifying disparities between premium levels and expected claim costs and obtaining approval of the regulatory authorities, where applicable, for rate increases. The premiums on coverage for motor physical damage reflect the values of the automobiles we insure.

Pricing in the householders' business is driven primarily by changes in the frequency of claims and by inflation in building supplies, labor costs and household possessions. Most householders' policies offer, but do not require, automatic increases in coverage to reflect growth in replacement costs and property values. The profitability and pricing of householders' insurance is affected by the incidence of natural disasters, particularly hurricanes, winter storms, earthquakes, floods and tornadoes. In order to limit our exposure to catastrophes, we have implemented price increases in certain catastrophe-prone areas, introduced strict controls on the accumulation of risks, purchased comprehensive reinsurance protection and instituted deductibles in hurricane-prone areas, all subject to restrictions imposed by insurance regulatory authorities.

Pricing in long-tail classes of business is driven primarily by inflation, legal costs, developments in medical care, changing levels of court awards and the governing legislation of CTP and workers' compensation schemes. Long-tail lines are relatively more difficult to price because there is generally a longer period of time before claims are settled. Extensive historical data, claims development tables and other benchmarks are typically used to assist in pricing long-tail business.


Claims Administration

We seek to achieve minimal levels of net losses and loss adjustment expenses while maintaining our high level of service. Our claims departments are organized to meet these goals. The organization distinguishes among operating regions and delegates to the region's authority to address the needs of local customers, underwriters, agents and brokers. Outsourcing of certain functions may occur if appropriate and if it makes business sense to do so. In addition, we have created teams around technical specialties to better support the regional operations. The claims organization structure in each region is driven by the composition of the portfolio of our business. This structure permits us to maintain economies of scale while maintaining flexibility that allows us to quickly respond to the needs of our customers, underwriters, agents and brokers. We centrally monitor adherence to claims policies and procedures, the adequacy of case reserves, loss and expense controls and productivity and service standards. We continuously review our claims practices in an effort to meet our service and loss and expense objectives.

Outward Reinsurance

We reinsure a portion of the risks we underwrite in order to control our exposure to losses, stabilize earnings and protect capital resources. We cede to reinsurers a portion of these risks and pay premiums based upon the risk and exposure of the policies subject to such reinsurance. These programs protect us against severity and frequency of losses and have played an important role in managing our combined operating ratio. Our total external reinsurance expense for the six months ended June 30, 2008 was A$850 million compared with A$1,002 million for the six months ended June 30, 2007 and A$2,151 million for the year ended December 31, 2007 compared with A$1,911 million for the year ended December 31, 2006. The amount of reinsurance expense ceded to our captive reinsurer, Equator Re, was A$763 million for the six months ended June 30, 2008 compared with A$495 million for the six months ended June 30, 2007 and A$1,631 million for the year ended December 31, 2007 compared with A$678 million for the year ended December 31, 2006. Internal reinsurance is eliminated on consolidation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." We believe our own reinsurance operations provide us with insight and valuable knowledge on how the reinsurance market operates. Reinsurance involves credit risk and is generally subject to aggregate loss limits. Although the reinsurer is liable to us to the extent of the reinsurance ceded, we remain primarily liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts (approximately A$129 million and A$224 million at June 30, 2008 and 2007, respectively and A$196 million, A$243 million and A$239 million at December 31, 2007, 2006 and 2005, respectively). We monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. We also hold collateral, including escrow funds and letters of credit, under certain reinsurance agreements. Substantially all of our reinsurance assets (approximately 92% at June 30, 2008, on an undiscounted basis) are due from counterparties which are A- rated or better by S&P. See Note 4(B) to our 2007 financial statements for further information on our reinsurance counterparty risk.

We use a variety of reinsurance agreements to control our exposure to large property and casualty losses. We utilize the following types of reinsurance: (i) facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance provided by a single policy and each policy reinsured is separately negotiated; (ii) treaty reinsurance, in which reinsurance is provided for a specific type or category of risks; and (iii) catastrophe reinsurance, in which we are indemnified for an amount of loss in excess of a specified retention with respect to losses resulting from a catastrophic event. In addition to the external reinsurance arrangements, since January 1, 2002 our operating subsidiaries also had a WEOL with our long standing, wholly-owned subsidiary, Equator Re. WEOL covers a selected portion of the lines of business of our insurance subsidiaries. WEOL protections for our insurance subsidiaries have an aggregate limit exceeding our historical large loss experience. The aggregate limit is fully funded from the premiums charged at market rates. The reinsurance premiums for WEOL are paid to and held by Equator Re to pay claims of our insurance subsidiaries under their individual reinsurance agreements with Equator. The WEOL profits are either taken to our income statement or retained in our balance sheet as part of our risk margins in outstanding claims. In addition, we recently purchased protection against a frequency of large individual risk and catastrophe claims between 8.5% and 10.3% of net earned premium for the 2008 financial year.


Major reinsurance contracts are sometimes arranged on a Group basis, incorporating both Australian and international subsidiaries, so as to enable us to benefit from lower premiums applying to the larger, diversified group. Treaties comprise both proportional and non-proportional arrangements. We believe our net retention levels are reasonable relative to our capital base and our external reinsurances are well spread across international reinsurers, mainly European and American rated A or better by S&P. Management actions after September 11, 2001 have reduced our risk profile through less exposure to major catastrophes, selectively writing terrorism cover and minimizing event losses across multiple classes of business and divisions.

The following table sets forth our net results of external reinsurance ceded for the six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions) Total reinsurance expense..................................... (850) (1,002) (2,151) (1,911) (1,785) Reinsurance commission ...................................... 47 36 179 185 179 Reinsurers' share of claims incurred ..................... 468 512 1,098 977 2,327 Net amount recovered from (paid to) reinsurers ... (335) (454) (874) (749) 721

Reserving Policy

We are required by applicable insurance laws and regulations to establish provisions for payment of claims and claims expenses that arise from the policies we issue. Our provisions are segmented into two major categories: provisions for reported claims and provisions for incurred but not reported ("IBNR") claims. We establish our provisions on an aggregate basis, after allowances for the particular requirements of each class of business. A separate provision is also made for future claims handling costs.

Provisions are established to recognize the estimated costs necessary to bring all pending reported claims and IBNR claims to final settlement. Provisions are estimated based on the particular facts available at a given time. Estimating the ultimate liability for a claim is an imprecise science subject to both internal and external variables. This is true because claim settlements to be made in the future may be impacted by changes in our claims handling procedures, changing rates of inflation and other economic conditions and changing legislative, judicial and social environments. This is particularly the case with respect to long-tail claims in which significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to us and the settlement of our liability for that loss. Our team of actuaries and management conduct quarterly reviews of our provisions to assess whether to adjust our provisions in light of such changes.

Provisions for reported claims are established on a case-by-case basis. The provisions are estimates based upon the facts of each case and upon our experience with similar cases. Consideration is given to such historical trends as provisioning patterns, loss payments, pending levels of unpaid claims and product mix, as well as policy limits, court decisions, economic conditions and public attitudes. All of these can affect the ultimate costs of claims and therefore the estimation of provisions.

IBNR provisions are established to recognize the estimated cost of losses that have occurred of which we have not yet been notified. Because nothing is known about the occurrence, we must rely upon our historical information to estimate the IBNR liability. The statistical methods used to calculate IBNR provisions are based upon historical reporting patterns. Adjustments are made to these initial projections in light of changes in exposure, trends in underlying data and the strength of previously established IBNR provisions.


Outstanding claims and recoveries from reinsurers are each assessed by reviewing individual reported claims on a case-estimates basis and estimating IBNR claims based on past experience and foreseeable events. Approximately 90% of our outstanding claims provisions are reviewed at least annually by independent actuaries. Total reserves are then discounted to the net present value as required under Australian Accounting Standard AASB 1023. Additional reserves or risk margins are taken up in many portfolios to partially offset the effect of the discount on outstanding claims.

We believe that, taking into account our internal procedures and the views of our independent actuaries, we have made adequate provision for losses incurred as of June 30, 2008. Risk margins in our outstanding claims provision have generally increased in recent years, largely as a result of the increase in our exposure to long-tail classes of business resulting in a probability of adequacy of 95.1% at June 30, 2008. This is also in excess of the prudential standards issued by APRA that became effective on July 1, 2002. The standards provide that, for our Australian licensed insurers, outstanding claims must be set at a level that provides a probability of at least 75% that the provision for outstanding claims will be adequate to settle claims as they become payable in the future. See "Regulation—Australian Insurance Regulation." Consistent with previous years, we believe that the higher probability of adequacy is warranted at June 30 due to the cyclical nature of our business, particularly with the historically high incidence of catastrophes in the second half of the year. The probability of adequacy of the Group's outstanding claims will vary from time to time depending on the mix of short, medium and long tail business and economic and industry conditions such as latency claims, claims inflation, interest rates and foreign exchange movements.

The following table is a summary of our outstanding claims provisions on an undiscounted and discounted basis and split between the current and non-current outstanding claims provisions (before and after reinsurance recoveries) as at June 30, 2008 and 2007 and December 31, 2007, 2006 and 2005:

As at June 30, As at December 31, 2008 2007 2007 2006 2005 (in A$ millions) Gross outstanding claims (including prudential margins) ...................................................................... 19,052 20,723 20,116 17,140 16,694 Claims settlement costs............................................... 455 404 477 395 365 Discount to present value............................................ (2,355) (2,701) (2,362) (2,266) (1,976) Gross outstanding claims provision ............................ 17,152 18,426 18,231 15,269 15,083 Less than 12 months ................................................... 5,715 5,909 5,908 5,098 4,904 Greater than 12 months............................................... 11,437 12,517 12,323 10,171 10,179 Gross outstanding claims provision ............................ 17,152 18,426 18,231 15,269 15,083 Reinsurance and other recoveries on outstanding claims(1) ..................................................................... 4,597 5,041 4,941 4,207 4,769 Discount to present value............................................ (557) (680) (581) (583) (556) Reinsurance and other recoveries on outstanding claims.......................................................................... 4,040 4,361 4,360 3,624 4,213 Less than 12 months ................................................... 1,289 1,268 1,268 1,238 1,357 Greater than 12 months............................................... 2,751 3,093 3,092 2,386 2,856 Reinsurance and other recoveries on outstanding claims.......................................................................... 4,040 4,361 4,360 3,624 4,213

Net outstanding claims................................................ 13,112 14,065 13,871 11,645 10,870 Central estimate(2)...................................................... 11,620 12,233 12,280 10,256 9,627 Risk margin(3) ............................................................ 1,492 1,832 1,591 1,389 1,243 Net outstanding claims................................................ 13,112 14,065 13,871 11,645 10,870 Australian operations .................................................. 2,509 2,550 2,537 2,433 2,357 Asia Pacific operations ............................................... 342 357 361 407 362 European operations ................................................... 6,063 6,857 6,607 7,288 6,859 the Americas ............................................................... 2,774 3,307 2,897 679 742 Equator Re .................................................................. 1,424 994 1,469 838 550 Net outstanding claims................................................ 13,112 14,065 13,871 11,645 10,870


(1) Reinsurance and other recoveries on outstanding claims are shown net of an allowance for default of A$73 million and A$121 million for

the six months ended June 30, 2008 and 2007, respectively, A$109 million in 2007, A$139 million in 2006 and A$152 million in 2005.

(2) Central estimate is an estimate of the level of claims provision that is intended to contain no intentional under or over estimation. See Note 3(A)(ii) to our 2007 financial statements for a discussion of the process used to determine central estimate.

(3) See Note 3(A)(iii) to our 2007 financial statements for a discussion of the process used to determine risk margins.

See Note 22(C) to our 2007 financial statements for a reconciliation of movement in our discounted outstanding claims provision. The inflation and discount rates we apply depend upon the division to which the outstanding claims relate. As a result, the range of rates can vary significantly. See Notes 3(vi) and (vii) to our 2007 financial statements for the details of our discount rates. The estimated weighted average term to settlement for our outstanding claims as of June 30, 2008 and 2007, and December 31, 2007 and 2006 was as follows:

As of June 30,

As of December 31,

2008 2007 2007 2006 (years) Australian operations ......................................................... 2.7 2.8 2.9 2.8 Asia Pacific operations ...................................................... 1.9 1.8 1.9 2.1 QBE Insurance Europe ...................................................... 3.0 3.0 3.1 3.1 QBE Underwriting Limited .............................................. 2.9 2.9 2.9 2.8 the Americas ...................................................................... 2.9 2.3 2.6 2.2 Equator Re ......................................................................... 2.8 2.4 2.4 2.3 QBE .................................................................................. 2.8 2.7 2.8 2.8

The following tables summarize (i) net claims incurred, split between direct insurance and inward reinsurance business and (ii) net claims incurred separated between current year claims and prior year claims for the periods presented.

Six months ended June 30, Year ended December 31, 2008 2007 2007 2006 2005 (in A$ millions) Gross claims incurred and related expenses Direct................................................................. 3,036 2,810 6,001 4,773 4,936 Inward reinsurance ............................................ 222 351 650 755 1,808 Reinsurance and other recoveries 3,258 3,161 6,651 5,528 6,744 Direct................................................................. 446 432 1,086 833 1,408 Inward reinsurance ............................................ 22 80 12 144 919 468 512 1,098 977 2,327 Net claims incurred.................................................. 2,790 2,649 5,553 4,551 4,417


Year ended

December 31, 2007 Year ended

December 31, 2006 Year ended

December 31, 2005

Current

year Prior years Total

Currentyear

Prioryears Total

Current year

Prior years Total

(in A$ millions) Gross claims incurred and related expenses

Undiscounted ........................ 8,927 (2,180) 6,747 6,102 (284) 5,818 7,533 (651) 6,882 Discount ................................ (1,052) 956 (96) (543) 253 (290) (659) 521 (138)

7,875 (1,224) 6,651 5,559 (31) 5,528 6,874 (130) 6,744 Reinsurance and other

recoveries Undiscounted ........................ 2,345 (1,249) 1,096 760 244 1,004 2,458 (33) 2,425 Discount ................................ (336) 338 2 (58) 31 (27) (233) 135 (98)

2,009 (911) 1,098 702 275 977 2,225 102 2,327 Net claims incurred................... 5,866 (313) 5,553 4,857 (306) 4,551 4,649 (232) 4,417

Current year claims relate to risks attaching in the current financial year. Prior year claims relate to a reassessment of the risks borne in all previous financial years. The release of prior year undiscounted claims for the year ended December 31, 2007 reflects the positive run-off of the 2003 to 2005 accident years due to our conservative claims reserving policy, resulting in some release of risk margins as claims are settled below central estimate. Claims incurred for prior years includes releases of risk margins consistent with the reduction in claims liabilities associated with those years. Conversely, risk margins are taken up for claims incurred in the current year.

The following table summarizes net undiscounted outstanding claims for the seven most recent accident years:

As of December 31, 2001 2002 2003 2004 2005 2006 2007 Total (in A$ millions) Estimate of net ultimate claims cost: At end of accident year...................... 3,445 3,177 3,348 4,572 4,979 4,680 8,226 One year later .................................... 3,396 3,035 3,095 4,121 4,780 4,379 — Two years later .................................. 3,524 2,963 2,852 3,869 4,515 — — Three years later ................................ 3,637 2,924 2,727 3,732 — — — Four years later.................................. 3,677 2,872 2,564 — — — — Five years later .................................. 3,615 2,813 — — — — — Six years later .................................... 3,589 — — — — — — Current estimate of net cumulative claims cost................................ 3,589 2,813 2,564 3,732 4,515 4,379 8,226 Cumulative net payments .................. (3,116) (2,232) (1,981) (2,360) (2,467) (1,916) (1,705) Net undiscounted outstanding claims for

the seven most recent accident years . 473 581 583 1,372 2,048 2,463 6,521 14,041

The estimates of net ultimate claims cost and cumulative claims payments for seven most recent accident years have been translated to Australian dollars using the closing rate of exchange at December 31, 2007.

The following table shows the reconciliation of net undiscounted outstanding claims for the seven most recent accident years to net outstanding claims:


Total (in A$ millions) Net undiscounted outstanding claims for the seven most recent accident years ................................................ 14,041 Outstanding claims—accident years 2000 and prior.......................................................................................... 1,256 Foreign exchange............................................................................................................................................... (237) Discount on outstanding claims ......................................................................................................................... (1,781) Claims settlement costs...................................................................................................................................... 477 Other .................................................................................................................................................................. 115 Net outstanding claims as at December 31, 2007 .............................................................................................. 13,871

See Note 22 to our 2007 financial statements for more information regarding our claims development.

Ratings

Ratings organizations assess the credit rating of a company's debt and, if an insurer, its financial strength and ability to pay claims. By influencing a company's ability to raise capital and the cost of that capital, these ratings may impact the financial performance of a company. We believe that our ratings are important factors in marketing our products.

Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers with meaningful information on specific insurance companies. Higher insurer financial strength ratings generally indicate financial stability and a strong ability to pay claims. These ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time. Ratings focus primarily on the following factors: capital resources; financial strength; demonstrated management expertise in the insurance business; credit analysis; systems development; market position and growth opportunities; marketing and sales conduct practices; investment operations; minimum policyholders' surplus requirements; and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy. Our ratings are continually monitored and are subject to change. Any investor for whom these ratings may be important as of any date subsequent to the closing date should obtain those ratings from the relevant ratings organizations and not rely on the ratings set out herein.

Rating Categories—Insurer Financial Strength Ratings

S&P

S&P's rating definitions are as follows:

Secure Vulnerable AAA Extremely strong B Weak AA Very strong CCC Very weak A Strong CC Extremely weak BBB Good R Regulatory action BB Marginal NR Not rated Note: Plus (+) or minus (–) signs following ratings from "AA" to "CCC" show relative standing within the major

rating categories. Lloyd's syndicate assessments evaluate, on a scale of 1 (very high dependency) to 5 (very low dependency), the relative dependency of syndicates on Lloyd's infrastructure and the central fund, reflecting their ability to offer continuity to policyholders.


A.M. Best

A.M. Best's rating definitions are as follows:

Secure Vulnerable A++, A+ Superior B, B – Fair A, A – Excellent C++, C+ Marginal B++, B+ Very Good C, C – Weak D Poor E Under Regulatory Supervision F In Liquidation S Rating Suspended

Fitch

Fitch's rating definitions are as follows:

Secure Vulnerable AAA Exceptionally strong BB Moderately weak AA Very strong B Weak A Strong CCC Very weak BBB Good CC Ceased or interrupted payments probable C Ceased or interrupted payments imminent Note: Plus (+) or minus (–) signs following ratings from "AA" to "CCC" show relative standing within the major

rating categories.

Moody's

Moody's rating definitions are as follows:

Secure Vulnerable Aaa Exceptional Ba Questionable Aa Excellent B Poor A Good Caa Very Poor Baa Adequate Ca Extremely Poor C Lowest Note: Numeric modifiers are used to refer to the ranking within the Group—one being the highest and three being

the lowest. However, the financial strength of companies within a generic rating symbol (Aa, for example) is broadly the same.


QBE Ratings

Our ratings as of November 18, 2008 are as follows:

S&P A.M. Best Fitch Moody's

Insurer Financial Strength/Claims-paying Ability Ratings National Farmers Union Property and Casualty Company ......................................... A QBE Hongkong & Shanghai Insurance Limited......................................................... A A+ – QBE Insurance (Australia) Limited ............................................................................ A+ – A+ – QBE Insurance Corporation........................................................................................ A+ A A+ – QBE Insurance (International) Limited ...................................................................... A+ A A+ – QBE Insurance Europe Limited.................................................................................. A+ A A+ – QBE Reinsurance Corporation ................................................................................... A+ A A+ – QBE Reinsurance (Europe) Limited ........................................................................... A+ A A+ – QBE Specialty Insurance Company............................................................................ – A – – QBE Underwriting Limited Syndicate 2999(1)(2)...................................................... A+ A – B+ QBE Underwriting Limited Syndicate 386(2) ............................................................ A+ A – A Blue Ridge Insurance Company ................................................................................. A A Blue Ridge Indemnity Company................................................................................. A A British Marine............................................................................................................. A+ General Casualty Company of Wisconsin .................................................................. A A General Casualty Insurance Company ........................................................................ A A Hoosier Insurance Company....................................................................................... A A Regent Insurance Company ........................................................................................ A A Southern Fire & Casualty Company ........................................................................... A A Southern Guaranty Insurance Company ..................................................................... A A Southern Pilot Insurance Company............................................................................. A A Unigard Insurance Company ...................................................................................... A A Unigard Indemnity Company ..................................................................................... A A Praetorian Insurance Company ................................................................................... A+ A– United Security Insurance Company .......................................................................... A A– North Pointe Insurance Company ............................................................................... NR A– Redland Insurance Company ...................................................................................... A+ A– Equator Re .................................................................................................................. A+ (1) From a Lloyd's reporting and regulatory perspective, syndicates that are 100% supported by QBE are sub-syndicates of an umbrella

syndicate, syndicate 2999. We established syndicate 2999 to maximize the efficient allocation of capacity across our 100% supported syndicates. Syndicate 2999 does not underwrite risks on its own.

(2) The Moody's ratings are performance ratings of the syndicate relative to the rest of the syndicates operating in the Lloyd's market. The ratings do not assess the security underlying Lloyd's policies.

S&P A.M. Best Fitch Moody's

Debt/Counterparty Ratings QBE Insurance (Australia) Limited ............................................................................ A+ – – – QBE Insurance Corporation........................................................................................ A+ a – – QBE Insurance Group Limited ................................................................................... A– bbb+ A A3 QBE Insurance (International) Limited ...................................................................... A+ a+ – – QBE Insurance Europe Limited.................................................................................. A+ a+ – – QBE Reinsurance Corporation ................................................................................... A+ a – – QBE Reinsurance (Europe) Limited ........................................................................... A+ a+ – –


Employees

As of June 30, 2008 we had 11,192 employees, as follows:

Number Australian operations........................................................... 3,561 Asia Pacific operations ........................................................ 1,217 European operations ............................................................ 2,748 the Americas........................................................................ 3,523 Investments.......................................................................... 54 Equator Re........................................................................... 11 Head office .......................................................................... 78 Total ..................................................................... 11,192

Litigation

We are involved in numerous lawsuits and arbitration proceedings arising in the ordinary course of business either as a liability insurer defending third-party claims brought against insureds or an insurer defending coverage claims brought against it. In the opinion of our management, the ultimate resolution of these legal proceedings is not likely to have a material adverse effect on our results of operations, financial condition or liquidity.

In the ordinary course of our business, certain of our subsidiaries receive claims asserting alleged injuries and damages from asbestos and other hazardous waste and toxic substances. The conditions surrounding the final resolution of these claims continue to change. Currently, it is not possible to predict legal and legislative changes and their impact on the future development of asbestos and environmental claims. Such development will be affected by future court decisions and interpretations as well as changes in legislation applicable to such claims. Because of these variables, additional liabilities may arise exceeding current reserves by an amount that would be material to our operating results in one or more future periods. The magnitude of these additional amounts, or a range of these additional amounts, cannot now be reasonably estimated. However, we believe that it is not likely that these claims will have a material adverse effect on our overall financial condition or liquidity. We are not involved in, or in the previous twelve months have not been involved in, any governmental proceedings relating to claims which have had or may have a material adverse effect on our overall financial condition or liquidity. See "Risk Factors—QBE's Business Risk Factors—Significant legal proceedings and litigation may adversely affect our business, financial condition and results of operations."


REGULATION

Australian Insurance Regulation

The Insurance Act

The Insurance Act 1973 (Cth) ("Australian Insurance Act") provides a scheme for the prudential supervision of private sector general insurance companies carrying on business in Australia. The Australian Insurance Act seeks to ensure the financial soundness of companies carrying on general insurance business in Australia.

The Australian Insurance Act provides that a company must not carry on general insurance business in Australia unless it is authorized to do so. Our wholly-owned subsidiaries, QBE Insurance (Australia) Limited and QBE Insurance (International) Limited, along with the recently acquired PMI Mortgage Insurance Ltd (now named QBE Lenders' Mortgage Insurance Limited) and its 50.1% owned subsidiary Permanent LMI Pty Limited, are authorized insurers under section 12 of the Australian Insurance Act. QBE Insurance Group Limited and the recently acquired PMI Mortgage Insurance Australia (Holdings) Pty Limited (now named QBE Lenders' Mortgage Insurance (Holdings) Pty Limited) are authorized non-operating holding companies ("NOHC") under section 18 of the Australian Insurance Act.

APRA is responsible, among other matters, for the prudential supervision of general insurance companies and NOHCs. The Australian Securities and Investments Commission ("ASIC") is responsible for the regulation of market integrity, disclosure and other consumer protection issues in relation to general insurance products and insurance agents and brokers.

Pursuant to section 32 of the Australian Insurance Act, APRA may determine prudential standards that must be complied with by general insurers, NOHCs and their subsidiaries. APRA has determined Prudential Standards and Guidance Notes applicable to general insurers authorized under the Australian Insurance Act. Prudential standards for Australian general insurers regulated by APRA require a comprehensive, risk based approach to the calculation of the minimum capital requirement for licensed insurers. Most recently, in 2008 APRA completed a process of refinement to the general insurance prudential framework which, among other matters, gave effect to the following:

• the Australian Commonwealth Government's policy in relation to Direct Offshore Foreign Insurers ("DOFIs") and, more generally to recognize different categories of insurer based on risk profiles;

• changes to the treatment of security of reinsurance recoverables (that is, changes as to how foreign reinsurance is treated in related to minimum capital requirement calculations);

• revised investment capital factors for equity and real property investment along with other changes to align the investment risk capital charge with the risks of an insurer's investment portfolio; and

• changes to the treatment of certain capital instruments in respect of an insurer's capital base.

As a consequence, a number of new and revised Prudential Standards were issued with effect from July 1, 2008. These Prudential Standards relate to:

• capital adequacy, including the measure of capital, investment risk capital charge, insurance risk capital charge and concentration risk capital charge,

• assets in Australia;


• risk management;

• reinsurance management;

• outsourcing;

• audit and actuarial reporting and valuation;

• governance; and

• fit and proper.

There are further reforms proposed for the prudential supervision of general insurance groups which is discussed at the end of this section.

General insurers and their subsidiaries are subject to continuous monitoring by APRA in relation to prudential matters. APRA may conduct an investigation of a general insurer or NOHC under Part V of the Australian Insurance Act where:

• it appears to APRA that the insurer or NOHC is, or is likely to become, unable to meet its liabilities, or has contravened or failed to comply with a provision of the Australian Insurance Act or a condition or direction applicable to it under the Australian Insurance Act;

• it appears to APRA that there is, or may be, a risk to the security of an insurer's or NOHC's assets;

• it appears to APRA that there is, or may be, a sudden deterioration in the insurer's or NOHC's financial condition; or

• it appears to APRA that information in its possession calls for the investigation of the whole or part of the business of a general insurer or NOHC.

Neither QBE nor any of its authorized insurers is subject to investigation by APRA.

Some of the most important requirements of the prudential regime for general insurers are described below.

Under the revised Prudential Standard GPS 110 Capital Adequacy, the following requirements are specified:

• insurers may choose one of two methods for determining their minimum capital requirement ("MCR"), an in-house capital adequacy model (referred to as the "Internal Model Based Method"), conditional on APRA's approval, or the model prescribed in the Prudential Standard (referred to as the "Prescribed Method");

• regardless of the method used to calculate the MCR, an insurer's MCR is determined having regard to a range of risk factors that may threaten the ability of the insurer to meet policyholder obligations;

• under the Prescribed Method, these risks fall into three broad types: insurance risk, investment risk and concentration risk. For insurers using the Prescribed Method, they must determine the insurance risk charge having regard to Prudential Standard GPS 115 Insurance Risk Capital Charge, their investment risk capital charge having regard to Prudential Standard GPS 114 Investment Risk Capital Charge, and, their concentration risk capital charge having regard to Prudential Standard GPS 116 Concentration Risk Capital Charge;


• where a general insurer uses the Internal Based Method, they will be expected to include at least these risks but also other relevant risk factors within its method of calculation as set out in draft Prudential Standard GPS 113 Minimum Capital Required: Internal Model-Based Method. A final GPS 113 is expected to be released by APRA in 2008;

• insurers must hold a minimum amount of Tier 1 capital and capital base that exceeds their MCR at all times. In addition, they may include an amount of Tier 2 capital as part of their required capital holdings up to the limits specified in Prudential Standard GPS 112 Measurement of Capital. Tier 1 capital comprises the highest quality components of capital that fully satisfy the essential characteristics of providing a permanent and unrestricted commitment of funds; are freely available to absorb losses; do not impose any unavoidable servicing charge against earnings, and ranks behind the claims of policyholders and creditors in the event of winding up. Tier 2 capital includes other components of capital which, to varying degrees, falls short of the quality of Tier 1 capital but nevertheless contributes to the overall strength of an insurer as a going concern; and

• insurers should disclose in their published annual accounts details of their eligible Tier 1 capital and Tier 2 capital (to arrive at the total capital base of the insurer), MCR and the capital adequacy multiple of the insurer.

Section 28 of the Australian Insurance Act requires Australian general insurers and authorized foreign insurers to maintain assets in Australia (excluding goodwill and assets excluded by the Prudential Standards) of a value that equals or exceeds their total amount of liabilities in Australia. The Prudential Standard GPS 120 Assets in Australia provides guidance on what are not considered to be "assets in Australia" for the purposes of section 28 of the Australian Insurance Act.

The Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation establishes a set of principles for the consistent measurement and reporting of the insurance liabilities of all general insurers. The key requirements of the Prudential Standard are as follows:

• an insurer must make arrangements to enable its appointed auditor and appointed actuary to undertake their roles and responsibilities such as ensuring they have access to all relevant data, reports and staff including access to the insurer's board and board audit committee;

• the appointed auditor must audit the yearly statutory accounts and review other aspects of an insurer's operations (such as systems to address compliance with prudential requirements) on an annual basis. The appointed auditor is also required to prepare a certificate and report on these matters for the board of the insurer;

• a general insurer is required to submit to APRA all certificates and reports required to be prepared by its appointed auditor and appointed actuary;

• the appointed actuary's primary roles are to provide advice on the valuation of insurance liabilities and to provide an impartial assessment of the overall financial condition of the insurer. The reports prepared by the appointed actuary are the financial condition report and insurance liability valuation report. This requirement is designed to aid the board of directors to perform their duties by ensuring they are adequately informed;

• insurance liabilities include both the insurer's outstanding claims liabilities and its premium liabilities for each class of business. An insurer must value its insurance liabilities in accordance with this Prudential Standard GPS 310; and

• an insurer must arrange to have the insurance liability valuation report peer reviewed by a reviewing actuary.


The Prudential Standard GPS 220 Risk Management aims to ensure that an insurer has systems for identifying, assessing, mitigating and monitoring risks that may affect its ability to meet its obligations to policyholders. Under this Prudential Standard, an insurer must:

• have systems for identifying, assessing, mitigating and monitoring risks that affect its ability to meet its obligations to policy holders. These systems for managing risk together with structures, processes, policies and roles supporting these systems are described as a general insurer's risk management framework. A general insurer must as part of its risk management framework have a documented risk management strategy and sound risk management policies and procedures and clearly defined managerial responsibilities and controls;

• submit its risk management strategy to APRA on an annual basis and resubmit it when any material changes are made;

• have a dedicated risk management function (or role) responsible for assisting in the development and maintenance of the risk management framework;

• must submit a 3-year business plan to APRA and resubmit after each annual review or when any material changes are made; and

• submit a risk management declaration and a financial information declaration to APRA on an annual basis in the prescribed form.

The Prudential Standard GPS 510 Governance sets out minimum foundations for good governance of general insurers by imposing certain governance requirements to ensure that general insurers are managed in a sound and prudent manner by a competent board of directors capable of making reasonable and impartial business judgments in the best interests of the insurer and with due consideration of the impact of those decisions on policyholders. The key requirements of the Prudential Standard include:

• specific requirements with respect to board size and composition;

• the chairperson of the board must be an independent director;

• a board audit committee must be established;

• a board must have a policy on board renewal and procedures for assessing board performance; and

• certain requirements dealing with independent requirements for auditors which are consistent with the present regime under the Corporations Act.

The Prudential Standard GPS 520 Fit and Proper sets out minimum requirements for general insurers in determining the fitness and propriety of individuals who hold positions of responsibility in the general insurer. Those individuals will generally include members of its board, senior managers (being persons in positions of influence and responsibility) and the appointed auditor and appointed actuary of the general insurer. The key requirements of this Prudential Standard are that:

• a general insurer must have and implement a written fit and proper policy that meets the requirements of the Prudential Standard;

• the fitness and propriety of a responsible person must generally be assessed prior to initial appointment and then reassessed annually;

• a general insurer is required to take all prudent steps to ensure that a person is not appointed to, or does not continue to hold a responsible person position for which they are not fit and proper;


• additional requirements must be met for certain auditors and actuaries;

• information must be provided to APRA regarding responsible persons and the institution's assessment of their fitness and propriety if requested in relation to the assessment and propriety of responsible persons.

The Prudential Standard GPS 230 Reinsurance Management aims to ensure that a general insurer has in place prudent reinsurance arrangements. The key requirements of this Prudential Standard are as follows:

• the board of directors and senior management of an insurer must develop, implement and maintain a reinsurance management framework, a documented reinsurance management strategy and sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls. The insurer's reinsurance management strategy must be approved by the board of directors and submitted to APRA on an annual basis;

• there must be a clear link between an insurer's risk management strategy and reinsurance management strategy and the reinsurance management strategy must be subject to an annual review;

• an insurer must not intentionally deviate in a material way from its reinsurance management strategy except where approved by the board and notified to APRA;

• an insurer must inform APRA immediately if there is a likelihood of a problem arising with its reinsurance arrangements that is likely to materially detract from its current or future capacity to meet its obligations and discuss with APRA its plans to redress this situation;

• an insurer must submit a reinsurance arrangements statement to APRA at least annually which details its reinsurance arrangements as well as making an annual reinsurance declaration to APRA. The purpose of the reinsurance statement is to provide substantiation of the implementation of the reinsurance management strategy of the insurer. The reinsurance declaration is a declaration that the insurer has placed its reinsurance arrangements and that those arrangements are legally binding. APRA has set a 6-month and 2-month rule which requires that within a 2-month period, the insurer's reinsurance arrangements have reached a particular stage of implementation and after 6 months the insurer has in place slips pertaining to the reinsurance arrangements that have been signed and stamped by all participating reinsurers and contains slip wording with no outstanding terms or conditions to be agreed, or the insurer has in possession a full treaty contract wording that has been signed and stamped by all contracting parties; and

• an insurer must also submit to APRA details of all proposed limited risk transfer arrangements for approval prior to entering into such arrangements.

APRA also issued Prudential Standard GPS 231 Outsourcing which is designed to ensure that all outsourcing arrangements by a general insurer involving material business activities are subject to appropriate due diligence, approval and ongoing monitoring. The key requirements of this Prudential Standard include that a general insurer must:

• have a policy relating to outsourcing of material business activities;

• have sufficient monitoring processes in place to manage the outsourcing of material business activities;

• for all outsourcing of material business activities with third parties, have a legally binding agreement in place unless otherwise agreed by APRA; and

• consult with APRA prior to entering into agreements to outsource material business activities to service providers who conduct their activities outside Australia and notify APRA after entering into agreements to outsource material business activities.


The Prudential Standard GPS 222 Business Continuity Management aims to ensure that a general insurer implements a whole of business approach to business continuity management appropriate to the nature and scale of its operations. The key requirements of this Prudential Standard are:

• the board and senior management of the insurer must consider the insurer's business continuity risks and controls as part of its overall risk management systems when completing the Board Declaration provided to APRA on an annual basis;

• an insurer must identify on a whole of business basis, critical business functions, resources and infrastructure which, if disrupted, would have a material impact,

• an insurer must assess the impact of plausible disruption scenarios on all critical business functions, resources and infrastructure, and have in place appropriate recovery strategies to ensure that all necessary resources are readily available to withstand the impact of description;

• an insurer must develop, implement and maintain a business continuity plan that documents procedures and information which enable the insurer to respond to disruptions and recover critical business functions. The business continuity plan is to be reviewed at least annually by responsible senior management and periodically by an insurer's internal audit function or an external expert; and

• an insurer is required to notify APRA as soon as possible and not later than 24 hours after experiencing a major disruption that has the potential to materially impact policyholders.

APRA has also issued Prudential Practice Guides for each of these new Prudential Standards to assist insurers in complying with the requirements outlined in the Prudential Standard and more generally to outline prudent practices in relation to the elements of an insurer's business. In particular APRA has issued a Prudential Practice Guide in relation to pandemic planning and risk management for general insurers which is aims to assist general insurers in considering and prudentially managing the risk posed by a potential influenza pandemic and to assist a general insurer in complying with the Prudential Standard GPS 222 Business Continuity Management. Similarly APRA has issued a Prudential Practice for custody arrangements which is designed to provide general insurers with prudential guidance on how to manage external custody arrangements and the risks associated with those arrangements.

The Australian Insurance Act also provides that no part of the insurance business of a general insurer may be transferred to another general insurer except under a scheme approved by the Federal Court of Australia.

Section 116 of the Australian Insurance Act provides that in the winding up of the insurer, the insurer's assets inside Australia must not be applied in the discharge of its liabilities other than its liabilities in Australia, until all Australian liabilities have been discharged.

APRA is in the process of finalizing proposed changes dealing with the prudential supervision of general insurance groups. These changes will result in Prudential Standards dealing with capital adequacy, risk management and audit and actuarial reporting and valuation to redress the new proposed requirements in regard to insurance groups. It is anticipated that APRA will release final Prudential Standards dealing with general insurance groups in the near future with those reporting standards to be applicable with effect from early 2009. The insurance group (or level 2 requirements) proposed by APRA will impose a capital requirement on NOHCs for the first time with APRA treating a level 2 general insurance group as a single consolidated entity. Overseas subsidiaries of an Australian general insurance group are not expected to be required to satisfy APRA's requirements on an individual basis. A group-wide risk management framework is expected to be required which would include reinsurance management, business continuity management and policies relating to outsourcing arrangements. It is understood the requirements are based on the principles applying to existing general insurers and appropriately modified for application at a group level. Similarly, APRA proposes to require an insurance group to appoint a group auditor and group actuary who may in fact be the appointed auditor or appointed actuary of any insurer within the group with


some changes to reporting anticipated. It is proposed that the requirements of the Prudential Standards in respect of governance and fit and proper will continue to apply in their current form but at an insurance group level once these reforms are implemented.

QBE will be required to report on this basis for the first time for the six months ended June 30, 2009. We have made a number of assumptions in applying the risk based capital prudential standards for Australian licensed insurers to the QBE Group. Our calculation of our group capital adequacy multiple on a consolidated basis as at June 30, 2008 and December 31, 2007, including Tier 1 and Tier 2 capital, was in each case 2.4 times the minimum capital requirement.

APRA has also introduced changes to the prudential supervision of lenders' mortgage insurance. The changes focus on reformulating and standardizing the calculation of an insurer's minimum capital requirements and came into effect on January 1, 2006. Subsequently and as part of APRA's general refinements to the general insurance prudential framework, which took effect from July 1, 2008, APRA issued Prudential Standard GPS 116 Adequacy: Concentration Risk Capital Charge and revoked the previous minimum capital requirements for lenders' mortgage insurers. The new Prudential Standard sets out specific rules for lenders' mortgage insurers in relation to the calculation of their maximum event retention ("MER") to reflect their specialist nature. The rules reflect that while these insurers may not be exposed to the possibility of large losses due to natural perils such as those faced by other general insurers, they may be exposed to large losses resulting from severe economic or property downturns. APRA has determined that a three year economic or property downturn model is appropriate for determining the MER of a lenders' mortgage insurer.

The calculation of the MER is determined by factors, such as whether or not the lenders' mortgage insurance policies cover standard or non-standard loans. For example, APRA has specified the criteria for a standard loan being where:

• the insurer or lender has formally verified the borrower's income and employment; and

• the borrower passes standard credit checks and income requirements as documented in the insurer or lenders' underwriting or credit policies and procedures.

Where loans which are predominantly secured by registered mortgage over residential real property do not meet these criteria, they are to be classified as non-standard loans. In addition, APRA may also by instrument in writing direct an insurer to classify a loan as a non-standard loan where APRA considers that the probability of default factors for standard loans do not reflect the inherent risk of that loan.

The prudential standards require that an insurer calculate its MER by:

• working out its probable maximum loss ("PML") ;

• deducting the amount of allowable reinsurance from the PML; and

• adding an allowance of 5% of the PML for claims handling expenses.

PML is the largest loss to which an insurer would be exposed (within the realms of possibility), due to a concentration of policies, without any allowance for potential reinsurance assets. In the case of lenders' mortgage insurers, the PML is assumed to arise from a catastrophic event that is expected to reoccur on average once in every 250 years. Prudential Standard GPS 116 sets out the relevant formulae to be used by an insurer for the purposes of calculating its PML depending on the nature of the policies it has written. Different calculations will apply depending on whether an insurer's policies cover standard or non-standard loans and whether these are by way of a policy of pool mortgage insurance or by way of top cover.


The Prudential Standard GPS 116 also requires that the reinsurance arrangements of lenders' mortgage insurers satisfy certain criteria in order to be recognized in calculating their MER and PML.

The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 and the Financial Claims Schemes (General Insurers) Levy Act 2008 introduced a number of changes to the Australian Insurance Act with effect from October 18, 2008. In summary, the changes introduced a Policyholder Compensation Facility which provides certain eligible retail policyholders of certain protected general insurance contracts with access to compensation for claims in the event of the failure of a general insurer. The intention of such a facility is to protect retail policyholders from the adverse consequences of a general insurer failing and to ensure that claims are paid in a timely manner. A Policyholder Compensation Facility will initially be funded by appropriations from the Australian Federal Government however APRA will seek to recover the cost of a Policyholder Compensation Facility by proving as a creditor in the liquidation of the failed insurer. If APRA is unable to recover all of those costs from the failed insurer, the Financial Claims Schemes (General Insurers) Levy Act 2008 enables the Government to impose a levy on general insurers up to a maximum of 5% of gross premium received.

The changes also strengthen the prudential regulation of insurers by introducing the ability for APRA to apply to the Federal Court of Australia in certain circumstances to have a judicial manager appointed to a general insurer where it is considered to be in the best interests of its policyholders. A judicial manager has the power to recapitalize the general insurer thereby facilitating the orderly transfer of the general insurance business to another institution where appropriate. APRA also has new powers to require the assistance of, or provision of information by general insurers where such assistance or information can assist APRA in the administration of a Policyholder Compensation Facility.

State and Territory Legislation

Both CTP and workers compensation insurance are subject to state or territory legislation, with local regulators different to APRA.

The Insurance Contracts Act

Most types of insurance contracts that QBE Insurance (Australia) Limited write are subject to the provisions of the Insurance Contracts Act 1984 (Cth). The Act does not apply to CTP, workers compensation, marine or reinsurance. The legislation, regulated by ASIC, codifies the duty of utmost good faith in applicable insurance contracts and provides for appropriate disclosure of information by insurers and policyholders. It also provides rules covering a wide variety of things such as cancellation of insurance, fraudulent claims and misrepresentation.

In September 2003, the Federal government announced a review of the Insurance Contracts Act. The stated objective of the review was to seek recommendations aimed at improving the overall operation of the Act by correcting deficiencies and clarifying ambiguities in its operation. Following that review, the government prepared a draft bill to address all of the review panel's key recommendations which was released for public comment in early 2007. The consultation period in respect of the reform package expired in March 2007. Although the bill has been identified in the list of legislation proposed for introduction in the Spring 2008 sittings of the Australian Federal Parliament possibly to be pushed back to the Autumn sittings of 2009, it is not known when or whether these reforms will be implemented.


Corporations Act

In addition to the existing disclosure requirements under the Insurance Contracts Act, there are disclosure rules under Chapter 7 of the Corporations Act which apply to financial products (including insurance).

The disclosure regime aims to provide a uniform regulatory framework for the licensing and conduct of all providers of financial services. It applies to most general insurance products other than those specifically excluded from the definition of financial products which forms the basis of the regulatory framework. For example, workers compensation insurance and CTP motor vehicle insurances are excluded from this framework on the basis that these are insurance products that are state insurances.

For general insurance products that are financial products for the purposes of the Corporations Act, general insurers are required to provide a Product Disclosure Statement ("PDS") in respect of the general insurance products issued to retail clients (i.e. usually individuals or small business). Amongst other things, the PDS must set out the cost and benefits of the insurance product, any risks associated with it, its significant characteristics such as exclusions and the statutory cooling-off period. A PDS must be provided when a licensee first offers or recommends insurance products to retail clients. Other disclosure requirements imposed under Chapter 7 may also require a general insurer to provide financial services guides and/or statements of advice.

The Corporations Act also contains licensing requirements which apply to certain insurance agents, brokers and other intermediaries which are in the business of providing a financial service. This includes businesses that do any of the following things:

• provide financial product advice – this category includes insurers or intermediaries who make recommendations or statements of opinion that are intended to influence a prospective insured's decision in relation to a particular insurance product. It also includes recommendations or statements that could reasonably be regarded as having such an influence; and

• deal in a financial product – this category includes insurers and agents who issue insurance and also intermediaries who arrange for a person to acquire insurance.

Providers of services who do not obtain a license can be authorized by a licensee to provide such services on the licensee's behalf. However where they are so appointed by a licensee that licensee becomes, subject to a few exceptions, liable for the actions of the intermediary.

There are a number of exemptions which apply to the license requirement. For example:

• an insurer licensed by APRA will not need an Australian financial services license to provide a service in relation to which APRA has regulatory or supervisory responsibility and which is provided only to wholesale clients;

• insurance agents who provide insurance services only to their related bodies corporate are also excluded from the license requirements; and

• insurance agents that act as distributors for insurers and satisfy the conditions of ASIC's class order relief for general insurance distributors are also excluded from the licensing requirements.

Financial services licenses are issued by ASIC and may be issued subject to conditions imposed by ASIC on the licensee. The licensee must comply with any conditions attached to the license in addition to statutory obligations set out in the Corporations Act. The principal requirements are those set out below:


• the licensee must ensure its financial services are provided efficiently, honestly and fairly;

• the licensee must have in place adequate arrangements for the management of conflicts of interest and compensation arrangements for compensating persons for loss or damage suffered because of breaches of relevant licensing obligations under the Corporations Act;

• the licensee must ensure its representatives also comply with the legislation and are adequately trained to provide the services;

• the licensee must have risk management and dispute resolution systems in place;

• the licensee must deal with clients' money as required by the Corporations Act;

• the licensee must comply with ASIC requirements; and

• the licensee must comply with product disclosure requirements noted above.

Australian financial services licenses have been obtained by QBE Insurance (Australia) Limited. Our other APRA regulated companies, QBE Insurance (International) Limited, PMI Mortgage Insurance Ltd (now named QBE Lenders' Mortgage Insurance Limited) and its 50.1% owned subsidiary Permanent LMI Pty Limited, are not required to obtain a license.

Since mid 2005, the former Federal Government has embarked on a process of refinement and reform to the financial services regulation introduced by the Financial Services Reform Act 2001 (Cth):

In 2007, there was a change of Federal Government following elections. The new Labor Government has confirmed its commitment to tackle the complexity in financial services. On February 5, 2008, the Minister for Finance and Deregulation announced the commencement of a financial services working group to focus on solutions to shorten financial product disclosure requirements and improve access to financial advice for consumers. ASIC and the Federal Government continue to announce changes to streamline the financial services provisions and reduce the cost of compliance.

The Insurance Acquisitions and Takeovers Act

The Insurance Acquisitions and Takeovers Act 1991 (Cth) requires the Australian Federal Treasurer to approve, among other things, certain acquisitions and leasing of assets of an authorized insurer, or acquisitions of an authorized insurer's interests, rights or benefits under contracts of insurance, including when:

• there occurs an acquisition or lease of 15% or more of the total book value of a company's assets; or

• the acquisition of the insurer's interests in its contracts of insurance results in a reduction of 15% or more of a company's unearned premium or outstanding claims provisions.

Terrorism Insurance Act

The Federal Government enacted its own terrorism insurance legislation, the Terrorism Insurance Act 2003 (Cth) (the "TIA"). The TIA has the effect of imposing a compulsory terrorist cover on certain "eligible insurance contracts" (as that term is defined in the TIA) which includes non-residential property, business interruption and liability (where liability arises out of the insured being the owner or occupier of eligible property) insurance contracts.


Although the Federal Government has established a reinsurance pool for the risk, participation by insurers in the pool is neither automatic nor compulsory. Insurers who issued eligible insurance contracts which were in force prior to July 1, 2003 or incepted after July 1, 2003 but before October 1, 2003 will receive an automatic indemnity from the pool. Otherwise, insurers of eligible insurance contracts wishing to purchase reinsurance cover from the pool will be required to pay a reinsurance premium.

The TIA provides that if the Federal Government declares that a "terrorist incident" (as that term is defined in TIA) has occurred in Australia, then in respect of an "eligible insurance contract" (as that term is defined in TIA), any exclusion which would exclude liability for terrorism is deemed to have no effect to the extent that a loss or liability covered by the policy is an "eligible terrorism loss" (as that term is defined in TIA).

The reinsurance terms and premiums for the pool are as follows. A retention will be imposed on participating insurers. The retention will be the lesser of A$1 million or 4% of the insurer's fire and industrial special risk premium for the year. If the total retentions of all insurers exceed A$10 billion then there is a pro-rata reduction in the relevant insurer's retentions. The pool is backed by an unlimited Federal Government guarantee. Although the amount of the guarantee is expected to be unlimited, the TIA provides that the Federal Government can declare a "reduction percentage" if without the reduction percentage the amount payable under the guarantee would be more than A$10 billion. If the Federal Government declares a reduction percentage then the amount payable by the insurer under eligible insurance reinsured to the pool will be reduced by the reduction percentage.

The premiums to be charged by the pool vary with the location of the risk. Generally the reinsurance premium will be 12% for central business district property, 4% for urban property and 2% for rural property of the premium charged by the insurer, net of stamp duty, good and services tax and fire services levy. These premiums may increase if a terrorist incident occurs.

QBE Insurance (Australia) Limited, QBE Insurance (International) Limited, QBE Insurance (Europe) Limited and certain syndicates managed by QBE Underwriting Limited issue eligible insurance contracts and participate in the TIA reinsurance program.

In 2006, the TIA was reviewed and the principal finding of the review was that the scheme should continue to operate for at least the next 3 years (i.e. until 2009) with another review to follow no more than 3 years from now. A number of recommendations were made as part of the review to refine the scheme including that the scheme should be amended to allow public authorities to participate and other recommendations to encourage the private sector to make terrorism insurance more widely available in the market. The Federal Government announced in September 2006, that it would accept the findings of the review and changes to regulations made under the TIA would reflect the review recommendations. In April 2007, Terrorism Insurance Amendment Regulations were introduced to amend the existing TIA regulations by refining the scope of the terrorism insurance scheme so that commercial insurance provided to all public authorities was included in the scheme.

Direct Offshore Foreign Insurers ("DOFIs")

The Financial Sector Legislation Amendment (Discretionary Mutual Fund and Direct Offshore Foreign Insurers) Act 2007, which commenced on July 1, 2008, requires DOFIs operating in the Australian general insurance market to be authorized insurers under the Australian Insurance Act and be subject to Australia's prudential regime. The Act also provides for a limited exemption to enable insurance business that cannot be appropriately placed in Australia to be supplied by a DOFI.


Other Regulatory Reforms

The first phase of the substantive provisions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and the Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisions and Consequential Amendments) Act 2006 was implemented on December 13, 2006. These Acts will be implemented in stages over two years however they do not apply to general insurers. General insurers may however be caught as reporting entities under the Acts if they provide other designated services such as life insurance, managed funds and superannuation or banking services.

The private sector in Australia is, subject to limited exceptions, required to comply with a privacy regime which strictly regulates the collection, storage and disclosure of personal information. This regime is set out in the Privacy Act 1988 (Cth) which was amended in 2001 to apply to the private sector. The operation of the private sector provisions of the Privacy Act were reviewed by the Privacy Commissioner in 2005 but no amendments have yet been made following that review. The Australian Law Reform Commission ("ALRC") released its report of a review of the Privacy Act in August 2008. The recommendations for review of the Privacy Act are presently being reviewed by the Federal Government. It is not anticipated that any changes will be made to the Privacy Act until there has been a period of public consultation seeking comment on the ALRC report and recommendations.


United Kingdom Insurance Regulation

Overview—Permission to Carry on Insurance Business. Under the Financial Services and Markets Act 2000 and its subsidiary legislation (the "FSMA"), it is unlawful to carry on insurance business in the United Kingdom without permission to do so from the Financial Services Authority (the "FSA") under Part IV of the FSMA (a "Part IV Permission"). The FSA, in deciding whether to grant a Part IV Permission, is required to determine whether the applicant satisfies the Threshold Conditions set out in the FSMA (the "Threshold Conditions"). As part of this determination, the FSA will consider whether the applicant has adequate resources (including capital, human resources and effective means of managing risks) to carry out the proposed regulated activities, whether persons connected with the applicant (controllers and companies within the same group) may prevent the FSA's effective supervision of the applicant, whether the applicant's affairs would be conducted soundly and prudently, with integrity and in compliance with proper business standards and whether it has competent and prudent management. The FSA may impose limitations and requirements relating to the operation of the company and the carrying on of insurance business in connection with granting Part IV Permission.

Detailed prudential rules applicable to carrying on insurance business are contained in the FSA's Handbook of Rules and Guidance (the "FSA Handbook"). The main rules are set out in the (i) General Prudential Sourcebook ("GENPRU"), (ii) Prudential Sourcebook for Insurers ("INSPRU"); and (iii) Senior Management Arrangements, Systems and Controls Sourcebook ("SYSC"). GENPRU contains core rules and principles which apply across all regulated sectors, while INSPRU is the sectoral rule book containing more detailed material applicable to insurers. SYSC contains systems and controls requirements applicable to insurers and others.

Lloyd's. Lloyd's is not an insurance company, but an association of insurance underwriters incorporated as the Society of Lloyd's ("Lloyd's"). Members of Lloyd's underwrite through syndicates with the agency of Lloyd's managing agents. Lloyd's is itself authorized and regulated by the FSA under the FSMA. The role of Lloyd's is to provide the market infrastructure which enables its participants to engage in insurance business. If Lloyd's is in breach of any of the obligations imposed on it by the FSMA, the FSA has available to it broadly the same powers of intervention that it would have in relation to an insurance company in the same circumstances.

Members of Lloyd's are not currently required to obtain Part IV Permission under the FSMA to conduct insurance business at Lloyd's but are subject to supervision by Lloyd's. Managing agents must, however, be authorized and regulated by the FSA in respect of their business. The FSA imposes prudential and reporting requirements under GENPRU and INSPRU on both Lloyd's and on managing agents.

Participants of Lloyd's (including members and managing agents) are subject to rules and regulations imposed by the byelaws made by the Council of Lloyd's under the powers conferred on it by the Lloyd's Act 1982. Lloyd's rules and regulations prescribe certain minimum standards relating to the management and control, solvency, reporting and various other requirements.

QBE Insurance Business. QBE Insurance Europe Limited (our "London Market Subsidiary") is our principal subsidiary in the United Kingdom. Our London Market Subsidiary is an insurance company having a Part IV Permission from the FSA. Our principal Lloyd's market subsidiaries are: QBE Corporate Ltd; LIMIT (No. 2) Ltd; LIMIT (No. 3) Ltd (together, the "QBE Corporate Members"); and QBE Underwriting Ltd, which is a managing agent at Lloyd's (the "QBE Managing Agent").

Each of these companies is a wholly-owned, indirect subsidiary of QBE International Holdings UK plc. The QBE Corporate Members are not regulated by the FSA. The QBE Managing Agent is authorized and regulated by the FSA under the FSMA and by Lloyd's under the Lloyd's Acts 1871 to 1982. As an FSA authorized firm, the QBE Managing Agent is subject to the FSA's rules including the high level principles, conduct of business, prudential and systems and controls requirements. It is also required to manage the insurance business of the syndicates it oversees in line with the FSA's prudential requirements. In particular, the rules require that managing agents establish and maintain appropriate controls over risks affecting insurance business carried on through the


syndicates they manage, including credit and market risk, and that they assess the capital needed to support the business of each such syndicate taking account of the particular risks arising from such business or operational infrastructure.

The following paragraphs describe the general rules applicable to our London Market Subsidiary, the QBE Corporate Members and the QBE Managing Agent.

Regulatory Reporting. Our London Market Subsidiary is required to prepare its accounts in accordance with special provisions applicable to it under the Companies Act 1985 and the FSMA which require it to file, and provide its shareholders with, audited financial statements and related reports. Our London Market Subsidiary is required to prepare its accounts in accordance with International Financial Reporting Standards for accounting periods beginning on or after January 1, 2005. Our London Market Subsidiary is also required under the FSMA to separately file with the FSA a number of regulatory returns, including an annual return comprising its audited accounts.

Solvency Margins and Reserves. Under the FSA rules, our London Market Subsidiary is required to maintain a solvency margin (that is, the value of such of its assets as are admissible for this purpose must exceed the amount of its liabilities by a specified amount as required by the relevant rules). Changes in the UK minimum solvency requirements became effective on January 1, 2004 following the implementation of certain European Union life and general insurance solvency directives in the United Kingdom (Directive 2002/83/EC in respect of life business (which replaced Directive 2002/12/EC) and Directive 2002/13/EC in respect of general business, together known as "Solvency I"). These requirements are consolidated in INSPRU and GENPRU. Under GENPRU, certain types of insurers (including our London Market Subsidiary) must calculate their capital resources requirements ("CRR") as the higher of the minimum capital requirement (the "MCR") based on the solvency margin prescribed in the directives, and the more risk sensitive Enhanced Capital Requirement (the "ECR"). In addition, insurance firms are required to carry out their own firm-specific assessment of their capital requirements using, among other things, stress testing and scenario analysis. The FSA may then review the firm's individual capital assessment, issue its own "individual capital guidance" for that firm and if this results in a higher amount than the CRR, require further capital to be injected.

Each general insurance company writing certain volatile risks is required under INSPRU to maintain an equalization reserve for the purpose of providing against above average fluctuations in claims in respect of that business. Our London Market Subsidiary is authorized to write such business and thus is subject to these rules.

In relation to the QBE Corporate Members (which are not subject to FSA regulation), the FSA does not currently impose direct solvency requirements. However, INSPRU and GENPRU impose solvency requirements on Lloyd's that have a similar effect on Lloyd's as a whole to those imposed on authorized insurance companies. Lloyd's is required to carry out a two part solvency test: first a calculation of the capital requirement for each individual member; and second a calculation of the solvency position of the Lloyd's market as a whole. Managing agents are required to assess the capital requirements of the syndicates they manage as they have the closest understanding of syndicate level risks and controls. In circumstances where a member's assets are insufficient to cover its individual required capital amount, any shortfall must be covered by the central assets held by Lloyd's itself. Accordingly, in order that Lloyd's meet its own regulatory requirements, it requires each member to hold assets equal to its individually calculated capital requirement, taking into account the syndicate level assessment of the managing agent.


Insurance Group capital. The Directive on the Supplementary Supervision of Insurance Companies in an Insurance Group (1998/78/EC) (the "Insurance Groups Directive") as amended by the European Union Directive on the Supplementary Supervision of Credit Institutions, Insurance Undertakings and Investment Firms in a Financial Conglomerate (2002/87/EC) requires EU Member States to provide supervision for any insurance undertaking that is part of a group which includes at least one other insurance company, insurance holding company, reinsurance undertaking or non-EU member-country insurance undertaking. The Insurance Groups Directive was implemented in the United Kingdom on December 1, 2001. Every insurer that is a subsidiary undertaking of an ultimate insurance parent undertaking and whose head office is in the United Kingdom is required to report on the capital adequacy of the insurance group of which it is a member at the level of its ultimate insurance parent company and its ultimate European Economic Area ("EEA") insurance parent company (if different). Since December 31, 2005 insurers have been required to provide on request a summary of the report on group capital adequacy at the level of the ultimate EEA insurance parent. Since December 31, 2006 it is a regulatory requirement for positive group capital adequacy to be maintained at that level. These requirements apply at the same time as, and in addition to, the normal calculation of insurers' own solo solvency requirements.

In the case of an authorized insurer that is itself a parent undertaking or has a participating interest of at least 20% in at least one other financial firm (a "related undertaking"), an adjusted calculation to the solvency margin calculation must be carried out to provide for deficits in the related undertaking, exclude all assets deriving from related bodies, which are either inadmissible under the FSA's rules for valuing assets or fall within other disallowed categories such as assets backing the margin of capital adequacy requirements of related undertakings. Although Lloyd's corporate members are not authorized by the FSA and are not required to report on group capital adequacy in their own right, if they are part of an insurance group which includes insurers so authorized, the group capital adequacy report must include the assets, liabilities and regulatory capital of such corporate members.

Regulated entities within a "financial conglomerate" are subject to additional prudential requirements resulting from the UK implementation of the European Union Directive on the Supplementary Supervision of Credit Institutions, Insurance Undertakings and Investment Firms in a Financial Conglomerate (2002/87/EC). A financial conglomerate is a financial group which satisfies a number of threshold requirements as to minimum holdings in, on the one hand, the insurance sector and, on the other hand, the banking/investment sectors. QBE is not a financial conglomerate or part of a financial conglomerate and is not expected to be affected by conglomerate regulation.

Supervision of Management and Control

Under the FSMA, any person who directly or indirectly acquires 10% or more of ordinary shares of an FSA regulated firm, or is entitled to exercise or control the exercise of 10% or more of the voting power of the ordinary shares of such firm, would be considered to be a "controller" of such firm. The FSMA determines control by reference to an acquirer's associates in addition to the acquirer itself; that is, the holdings of persons who act jointly under an agreement or arrangement with respect to the acquisition, holding or disposal of the shares or voting power of the target must be aggregated. Persons who propose to acquire, increase their control, or acquire additional kind of control over a regulated firm must apply to the FSA for approval before acquiring shares or voting power or increasing their control. Increasing control for the purposes of the FSMA includes cases where a person increases their shareholding above a threshold of 20%, 33% or 50%. Under the FSMA, the FSA must decide within three months whether to approve or reject a change of control application. The FSA will not approve a new controller or any increase of control without being satisfied that the controller is "fit and proper" to be a controller of, or acquire increased control of, an authorized firm. Lloyd's regulations provide for similar notification and approval requirements with respect to proposed controllers of Lloyd's managing agents and corporate members.

As a result of the above requirements, direct controllers, and holding companies who indirectly acquire control, of our London Market Subsidiary and QBE Managing Agent will be required to apply for prior FSA approval. In the case of the QBE Managing Agent and the QBE Corporate Members, approval of Lloyd's must be obtained.


Approved Persons. Certain key functions in the operation of an insurance business ("controlled functions") may only be carried out by persons who are approved for such tasks by the FSA under the FSMA ("Approved Persons"). A person may not carry out a controlled function for a regulated entity until the FSA has approved that person in respect of that function and that entity. Controlled functions include, for example, governing functions (such as being a director of an insurance company or Lloyd's managing agent), finance functions and significant management functions (persons responsible for a significant business unit). The FSA will not grant Approved Person status to an individual, unless it is satisfied that the individual has appropriate qualifications and/or experience and is "fit and proper" to perform those functions.

Investigation and Intervention. The FSA has various powers to intervene in the affairs of an insurance company, including the power to make requirements in relation to the investments of an insurance company, to limit the insurance company's premium income, to require an actuarial investigation of the company to be made, to appoint someone to investigate whether the Threshold Conditions are being met with respect to an insurance company, to obtain information and require production of documents, to search and enter premises, and a residual power to take such action as it thinks appropriate to protect policyholders against the possibility that the insurance company may not be able to make payments due to policyholders. These powers may be exercised by the FSA if it considers, for instance, that it is desirable in order to protect policyholders or potential policyholders against the risk that the company may be unable to meet its liabilities, that the Threshold Conditions may not be met, that the company or its parent has failed to comply with obligations under the relevant legislation, that the company has furnished misleading or inaccurate information or that there has been a substantial departure from any proposal or forecast submitted to the FSA.

Power to Cancel or Vary Part IV Permission. The FSA may cancel or vary a Part IV Permission of an insurance company either at the request of the company or, for instance, if the company has failed to satisfy its obligations under the FSMA or if it appears to the FSA that the Threshold Conditions are not being, or have not been met. Permission to carry on insurance business will be cancelled if the company ceases to carry on insurance business for a significant period.

Reinsurance of Potential Liabilities. The FSMA does not prescribe the types or proportion of assumed business to be protected by reinsurance. However, it is generally accepted that to comply with the FSA's principles of sound and prudent management, no more than 20 per cent of projected gross premiums should be ceded to any one reinsurer in any one year. Furthermore, the FSA has powers to impose requirements on an insurance company (such as a requirement not to take on new business) if it is satisfied that the company has not met its solvency requirement or does not meet the Threshold Conditions.

Investment of Funds—Capital and Reserves. There are no legislative restrictions on the investments of an insurer either in relation to technical provisions or to shareholders' funds. However, assets and investments may only count towards capital adequacy requirements if they meet the criteria for admissibility and are capable of being valued in accordance with GENPRU and comply with the requirements in INSPRU as to counterparty and asset exposure limits.

In relation to the QBE Corporate Members, Lloyd's is required to hold all assets equal to each member's individual capital requirement in trust in the form of "funds at Lloyd's." Additionally, each member must establish one or more trust funds to hold all premiums received by the member or on its behalf. Separate premiums trust funds must be established to segregate premium income for life or other long-term business, on the one hand, and general business, on the other.

Distribution and Sale of General Insurance. As required by the EU Insurance Mediation Directive (2002/92/EC), the distribution and sale of general insurance products by insurance intermediaries has been regulated by the FSA since January 2005 and the regime also applies to direct sales by insurers themselves. The FSA's Insurance (Conduct of Business) Sourcebook ("ICOB") contains rules that govern the treatment by insurers and


insurance intermediaries of their customers. Many of the provisions of ICOB only relate to insurers or to insurance intermediaries who are in direct contact with the ultimate customer/policyholder or are confined in their application to transactions with retail customers. They apply to the promotion, arrangement, sale and administration of general insurance and non-investment life insurance.

Recent and Proposed Regulatory Changes

Reinsurance Directive. The EU Reinsurance Directive (2005/68/EC) was adopted by the European Parliament in November 2005 and had an implementation deadline of December 2007. In general terms, the Reinsurance Directive extends the regime applying under the direct Insurance Directives such that for pure reinsurers (i.e. firms writing reinsurance business only) to be authorized in their member states, they must be subject to minimum prudential standards broadly equivalent to those applying to direct insurers. Once authorized, such reinsurers are able to carry on business throughout the EEA without further authorization requirements. The Reinsurance Directive was intended to be an interim measure, generally applying the capital adequacy and solvency requirements of the current insurance directives to reinsurers. Full re-examination of reinsurers' solvency requirements is taking place as part of Solvency II (see Solvency II below). In the UK, implementation of the Reinsurance Directive occurred on 10 December 2007, through existing provisions of the FSMA; amendments to the FSMA and related subsidiary legislation; and through rule changes to the FSA Handbook.

Acquisitions Directive. The EU Acquisitions Directive (2007/44/EC), which aims to harmonize the process of approving changes in controllers of regulated insurance companies, banks and other financial services firms, was adopted by the European Parliament in September 2007 and is due to be implemented into local law of EU Member States by 21 March 2009. The implementation of this Directive is not expected to have a significant effect on the current "controller" regime under the FSMA, as described above.

Treating customers fairly. In July 2006, the FSA outlined its retail regulatory agenda in its Treating Customers Fairly initiative (“TCF”). The aim of TCF is to ensure that FSA regulated firms, including insurance companies, develop appropriate systems and controls to consistently deliver fair outcomes for consumers. The FSA has indicated that fair contract terms, and in particular compliance with the Unfair Terms in Consumer Contracts Regulations (1999), are key to the regulated firms’ obligations to treat their customers fairly. The final deadline for implementation of TCF is the end of December 2008, by which time the FSA expects all regulated firms to be able to demonstrate that they are consistently treating their customers fairly. If the FSA’s expectations in this area are not met, further regulatory action may follow.

Solvency II. The EU Commission is carrying out a wide-ranging review in relation to solvency margins and reserves (the project being known as "Solvency II"). It is intended that the new regime will apply more risk sensitive standards to capital requirements and bring insurance regulation more in line with the "three pillar" approach used in the banking capital adequacy framework known as "Basel II". A draft proposal for Level 1 text of the broad "framework" principles was proposed by the EU Commission in July 2007. Political agreement on the text is expected by the end of 2008. Following that, the EU Commission will begin adopting detailed implementing measures. Solvency II is expected to come into force in 2012. The broad outlines of the new regime are already apparent from consultations issued by the Committee of European Insurance and Occupational Pensions Supervisors, although there is still a great deal of material to be developed. The changes to the FSA's prudential regime which came into force on 31 December 2004 anticipated what was then expected to emerge from Solvency II, although considerable further change is expected.


United States Insurance Regulation

General

Our US insurance subsidiaries are domiciled in the following states: California, Colorado, Florida, Illinois, Indiana, Michigan, New Jersey, North Dakota, Pennsylvania, South Carolina, Washington and Wisconsin, and the insurance department in such states are the primary regulators of our US insurance subsidiaries.

Our US insurance subsidiaries are subject to the insurance statutes in the states in which they are domiciled, as well as regulations promulgated by the Departments of Insurance in such states, which Departments have primary authority over the supervision of our US insurance subsidiaries. Our US insurance subsidiaries are also subject to the insurance laws and regulations of each state in which they are licensed or transact insurance. The insurance statutes and regulations that apply to our US insurance subsidiaries are extensive and such regulation is designed primarily for the protection of policyholders of our US insurance subsidiaries and not security holders. The insurance statutes and regulations govern many activities and products related to our US insurance subsidiaries, including requirements for licenses to transact insurance business, rates for insurance business, policy language, rating, underwriting and claims practices, transactions with affiliates, reserve requirements, dividends, mandatory capital and surplus requirements, insurer solvency, withdrawal from certain markets, investment standards and other related matters. In addition, our US insurance subsidiaries are subject to statutes, regulations and judicial decisions that define the risks and benefits for which insurance is sought and provided, including in such areas as product liability and environmental coverages. Certain information and reports that our US insurance subsidiaries have filed with the Departments of Insurance in our insurance subsidiaries' states of domicile can be inspected during normal business hours at such Departments of Insurance.

Financial Reporting and Statutory Examinations

Financial Statements. Our US insurance subsidiaries are required to file detailed annual and quarterly financial statements and other reports with state insurance regulators in each of the states in which they are licensed to transact business. Such annual and quarterly financial statements and other reports are required to be prepared on a calendar year basis and include financial statements and other information prepared on a statutory accounting basis ("statutory accounting practices" or "SAP") promulgated by the National Association of Insurance Commissioners ("NAIC"), which basis differs in certain material respects from US GAAP.

Market Conduct Examinations. The laws and regulations of the states where our US insurance subsidiaries operate include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, product illustrations, advertising, sales and underwriting practices, complaint handling and claims handling. These provisions are enforced by the state insurance regulatory agencies through periodic market conduct examinations. Our US insurance subsidiaries are subject to routine market conduct examinations and to date none have resulted in material adverse findings or material fines.

Financial Examinations. As part of the regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts, policy filings and business practices of insurers domiciled in their state, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. Our US insurance subsidiaries endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. The respective reports filed by the insurance regulators with respect to the most recent periodic examinations of the US insurance subsidiaries contained no material adverse findings.


Insurance Regulatory Information System. The Insurance Regulatory Information System ("IRIS") was developed by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies operating in their states. IRIS identifies twelve key financial ratios and specifies "usual ranges" for each ratio. Insurers typically submit financial information about themselves to the National Association of Insurance Commissioners ("NAIC") annually, which in turn analyzes the data using the prescribed ratios. Departures from the usual ranges of ratios may lead to inquiries from state insurance departments. Generally, regulators will begin to investigate or monitor an insurance company if four or more of its IRIS ratios fall outside the usual ranges.

Holding Company System Regulation

We and the US insurance subsidiaries are subject to regulation under the insurance holding company system laws of various jurisdictions. The insurance holding company system laws and regulations vary from jurisdiction to jurisdiction, but generally require an insurance company that is a member of an insurance holding company system to register with the state regulatory authorities and to file with those authorities certain reports regarding its holding company system, including information concerning its holding company and affiliates and its capital structure, ownership, financial condition, certain affiliate transactions and general business operations. Transactions between an insurance company registrant and a company within the holding company system may require prior notification or approval from the registrant's domiciliary regulator. In some US jurisdictions, such affiliate transactions will require notification/prior approval if the transaction could materially affect the operations, management or financial condition of insurers under the system. Such laws and regulations also require advance regulatory approval by the state of domicile as well as other states where pre-notification provisions have been adopted with respect to any direct or indirect change of control of a subject registrant insurance company. Because such regulation focuses on the ultimate control of the insurance company, regulatory compliance would be required with respect to any person that sought to acquire control of QBE. Generally, such control is presumptively deemed to exist through the ownership of 10% or more of the outstanding voting securities of a domestic insurance company or any entity that controls a domestic insurance company, although control can otherwise exist under certain circumstances.

Statutory Surplus and Dividend Limitations

Statutory surplus (i.e., the net worth of an insurance company, as calculated in accordance with SAP) is an important measure utilized by insurance regulators and rating agencies to assess our US insurance subsidiaries' ability to support business operations and provide dividend capacity. Our US insurance subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends or other distributions that may be paid without prior approval from regulatory authorities. These restrictions differ by state, but are generally based on calculations incorporating statutory surplus, statutory net income and/or investment income.

Risk Based Capital Requirements

In order to enhance the regulation of insurer solvency, the NAIC adopted in December 1993 a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:

• underwriting, which encompasses the risk of adverse loss development and inadequate pricing;

• declines in asset values arising from credit risk; and

• declines in asset values arising from investment risks.


An insurer will be subject to varying degrees of regulatory action depending on how its statutory surplus compares to its risk-based capital calculation. Equity investments in common stock typically are valued at 85% of their market value under the risk-based capital guidelines. For equity investments in an insurance company affiliate, the risk-based capital requirements for the equity securities of such affiliate would generally be our US insurance subsidiaries' proportionate share of the affiliate's risk-based capital requirement.

Under the approved formula, an insurer's total adjusted capital is compared to its authorized control level risk-based capital. If this ratio is above a minimum threshold, no company or regulatory action is necessary. Below this threshold are four distinct action levels at which a regulator can intervene with increasing degrees of authority over an insurer as the ratio of surplus to risk-based capital requirement decreases. The four action levels include:

• insurer is required to submit a plan for corrective action;

• insurer is subject to examination, analysis and specific corrective action;

• regulators may place insurer under regulatory control; and

• regulators are required to place insurer under regulatory control.

As of June 30, 2008, each of our US insurance subsidiaries' surplus (as calculated for statutory purposes) is above the risk-based capital thresholds that would require either company or regulatory action.

Accreditation

The NAIC has instituted its Financial Regulatory Accreditation Standards Program ("FRASP") in response to federal initiatives to regulate the business of insurance. FRASP provides a set of standards designed to establish effective state regulation of the financial condition of insurance companies. Under FRASP, a state must adopt certain laws and regulations, institute required regulatory practices and procedures, and have adequate personnel to enforce such items in order to become an "accredited" state. If a state is not accredited, other states may not accept certain financial examination reports of insurers prepared solely by the regulatory agency in such unaccredited state. The respective states in which our US insurance subsidiaries are domiciled are accredited states.

Regulation of Investments

The US insurance subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios and impose qualitative and quantitative limits upon the amount and type of their investments in certain investment categories such as non-investment grade fixed income securities, real estate and equity investments. Investments exceeding regulatory limitations are generally treated as non-admitted assets for purposes of measuring statutory surplus, and, in some instances, require divestiture.

The NAIC has adopted a model law governing legal investments for life and non-life insurers in an effort to impose uniform regulatory standards for insurance company investments. This so-called "defined limits" or pigeonhole version of the model law prescribes permitted classes of legal investments, and certain prohibited investments, and establishes qualitative and quantitative limitations for each class of investment. At present, a limited number of states have approved the defined standards version of the model law. The NAIC has also adopted a second, "defined standards" or prudent person version of the model law which relies more on the exercise of prudence by insurers in their investment activity rather than the establishment of strict quantitative limits on investments. However, such model laws are without binding legal effect in a given jurisdiction unless specifically adopted in such jurisdiction.


Gramm-Leach-Bliley Act

The Gramm-Leach Bliley Act (the "GLBA") and regulations promulgated under the GLBA, as well as state privacy statutes and regulations, govern the privacy of consumer financial information. The regulations limit disclosure by financial institutions of "nonpublic personal information" about individuals who obtain financial products or services for personal, family or household purposes. The GLBA and the regulations, as well as state privacy laws, generally apply to disclosures to nonaffiliated third parties, subject to specified exceptions, but not to disclosures to affiliates. Privacy regulation is an evolving area of state and federal regulation, which requires us to continue to monitor developments.

Guaranty Associations

Virtually all states where the US insurance subsidiaries are licensed to transact business have insurance guaranty fund laws requiring insurance companies doing business, within those jurisdictions, to participate in guaranty associations. Guaranty associations are organized to cover, subject to limits, contractual obligations under insurance policies, and certificates issued under group insurance policies, issued by impaired, insolvent or failed insurance companies. These associations levy assessments, up to prescribed limits, on each member insurer doing business in a particular state on the basis of their proportionate share of the premiums written by all member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets, usually over a period of years. Assessments levied against our US insurance subsidiaries by guaranty associations during each of the past five years have not been material.

Patriot Act

The USA Patriot Act of 2001 (the "Patriot Act"), enacted in response to the terrorist attacks on September 11, 2001, contains enhanced anti-money laundering laws and mandates for the adoption and maintenance of appropriate anti-money laundering programs by financial institutions. All covered financial institutions are required to implement and maintain an effective anti-money laundering program ("AML Program") that, at a minimum, includes: (1) establishment and maintenance of appropriate anti-money laundering policies, procedures and internal controls; (2) the appointment of an anti-money laundering compliance officer with responsibility for the day-to-day AML Program; (3) an ongoing anti-money laundering training program; and (4) an independent audit function to test the AML Program. The Patriot Act applies to a broad range of financial institutions, including insurance companies.

Terrorism Risk Insurance Act

On November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002, which was amended and extended by the Terrorism Risk Insurance Extension Act of 2005 and amended and extended again by the Terrorism Risk Insurance Program Reauthorization Act of 2007 ("TRIPRA") through December 31, 2014. TRIPRA provides a federal backstop for insurance-related losses resulting from any act of terrorism on US soil or against certain US air carriers, vessels or foreign missions. Under TRIPRA, all US-based property and casualty insurers are required to make terrorism insurance coverage available in specified commercial property and casualty insurance lines. Under TRIPRA, the federal government will pay 85% of covered losses after an insurer's losses exceed a deductible determined by a statutorily prescribed formula, up to a combined annual aggregate limit for the federal government and all insurers of A$100 billion. If an act (or acts) of terrorism result in covered losses exceeding the A$100 billion annual limit, insurers with losses exceeding their deductibles will not be responsible for additional losses. The deductible for each year is based on the insurer's direct commercial earned premiums for property and casualty insurance, excluding certain lines of business such as commercial auto, surety, professional liability and earthquake lines of business, for the prior calendar year multiplied by 20%. The specified percentages for prior periods were 7% for 2003, 10% for 2004, 15% for 2005, 17.5% for 2006 and 20% for 2007, which extends through 2014.


All of our US insurance subsidiaries are impacted by TRIPRA, ,as well as QBE Insurance (Europe) Limited in our European operations and certain syndicates managed by QBE Underwriting Limited in our Lloyd's operations, each of which writes US business.

Federal and State Legislative and Regulatory Changes

From time to time, various regulatory and legislative changes have been proposed in the insurance industry. The NAIC and many state insurance regulators are re-examining existing laws and regulations specifically focusing on issues relating to the solvency of insurance companies, interpretations of existing laws and the development of new laws. During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term or to not renew policies at their scheduled expirations, (iii) advance notice requirements or limitations imposed for certain policy non-renewals, (iv) limitations upon or decreases in rates permitted to be charged, (v) expansion of governmental involvement in the insurance market, and (vi) increased regulation of insurers' policy administration and claims handling practices. Additionally, as a result of investigations and legal actions brought by various state attorney generals, there has been an increase in regulation governing activities and compensation of insurance producers and others involved in the sale of insurance. Market practices are still evolving in response to these developments, and we cannot predict what practices the market will ultimately adopt or how these changes will affect our competitive standing with brokers and agents or on the commission rates that we pay to our brokers, agents and program administrators. NAIC and state insurance regulators continually re-examine the appropriate nature and scope of insurance regulation.

Currently in the United States, the federal government does not generally regulate the insurance business (except in certain instances where federal legislation specifically pre-empts state insurance regulation). Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an optional federal charter, similar to banks. Legislation that would provide for federal chartering of insurance companies has been proposed. In recent years, various legislative proposals have also been introduced in Congress that called for the federal government to assume some role in the regulation of the insurance industry. To date, none of the Congressional proposals has been enacted and it cannot be predicted what form any such future proposals might take or what effect, if any, such proposals might have on us if enacted into law. Additionally, the U.S. Department of the Treasury has released a proposal to remodel the financial regulatory structure, which suggests that such efforts may be more productive than in the past. In addition, there can be no assurance that creation of a federal insurance regulatory system would not adversely affect our business or disproportionately benefit our competitors.

We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our US subsidiaries' operations and financial condition.


OUR BOARD AND MANAGEMENT

Overview

Our board of directors comprises eight directors, being the chairman, the chief executive officer and six independent non-executive directors, using the "independence" definition of the ASX Corporate Governance Council. Applying this definition, the board has determined that a non-executive director's relationship with QBE as a professional adviser, consultant, supplier, customer or otherwise is not material unless amounts paid under that relationship exceed 1% of our revenue or expenses.

Directors are selected to achieve a broad range of qualifications, skills and experience on the board complementary to our activities. The board regularly discusses its composition, including the nomination of potential members. All directors are members of the nomination committee and are involved in the selection of new board members. External consultants may be engaged where necessary in searching for prospective board members.

The chairman oversees the performance of the board, its committees and each director. The review procedure involves an annual assessment of the entire board, with the review of each director comprising a combination of written questions and answers covering the areas such as role, procedures, practices and behaviors, followed by interviews. Individual assessments are confidential to the directors concerned together with an interview with each director. The chairman reports the overall result to the board as a whole and it is discussed by all directors. The review procedure is a precursor to other directors determining whether to support, via the notice of meeting, a non-executive director for re-election at an annual meeting.

Our constitution provides that no non-executive director shall hold office for a continuous period in excess of three years or past the third annual general meeting following the director's appointment, whichever is the longer, without submitting for re-election. If no such director would otherwise be required to submit for re-election but the listing rules of the ASX require that an election of directors be held, the director to retire at the annual general meeting will be the director who has been longest in office since their last election, but, as between persons who became directors on the same day, the one to retire shall (unless they otherwise agree among themselves) be determined by lot. Retiring directors may offer themselves for re-election at the annual general meeting. Directors appointed by the board are subject to re-election at the annual general meeting. Under our constitution, there is no maximum fixed term or retirement age for non-executive directors.

The issue of independence of directors has received considerable attention in recent times. As a general guide, the board has agreed that a non-executive director's term should be approximately 10 years. The board considers that a mandatory limit on tenure would deprive us of valuable and relevant corporate experience in the complex world of international general insurance and reinsurance. Ms. Hutchinson has been a non-executive director since September 1997 and chairman of the investment committee since 2002. She was re-elected as a director at the 2006 annual meeting. QBE's other directors believe that Ms. Hutchinson continues to exercise independent judgment and through her QBE experience provides an important contribution.

Similarly, our chairman's former executive capacity with us has been fully disclosed to shareholders. The chairman ceased to be managing director in January 1998. The chairman was re-elected as a director by an overwhelming majority at the 2006 annual meeting. The other directors consider that the chairman exercises independent judgment; and they believe it to be in shareholders' and policyholders' interests to retain the chairman's first hand wealth of experience and have resolved that he should continue in that role. With over 50 years involvement at many levels, the chairman has extensive knowledge of the insurance industry. However, the chairman is not considered to be an "independent" director as recommended by the ASX Corporate Governance Council because there was less than a three year period between him acting as a managing director and being appointed chairman.


Directors advise the board on an ongoing basis of any interest they have that they believe could conflict with our interests. If a potential conflict does arise, either the director concerned may choose not to, or the board may decide he or she should not, receive documents or take part in board discussions while the matter is being considered. There are no material conflicts between any duties of QBE and any private interests or other duties of the members of our board of directors that have not been disclosed.

Under our constitution, our management is vested in the board. In particular, the board:

• oversees corporate governance;

• selects and supervises the chief executive officer;

• provides direction to management;

• approves the strategies and major policies of the Group;

• monitors the achievement of strategies and policies;

• monitors performance against plan;

• considers regulatory compliance; and

• reviews human and other resources (including succession planning), information technology and other resources.

The board ensures it has the information it requires to be effective including, where necessary, external professional advice. A non-executive director may seek such advice at our cost with the consent of the chairman. All directors would receive a copy of such advice. Non-executive directors may attend relevant external training courses at our cost with the consent of the chairman.

Strategic issues and management's detailed budget and three year business plans are reviewed annually by the board. The board receives updated forecasts during the year. Visits by non-executive directors to our offices in key locations are encouraged. To assist the board to maintain its understanding of the business and to effectively assess management, directors have regular presentations by the managing directors and other senior managers of the various divisions on topics, including budgets, three year business plans and operating performance, and have contact with senior employees at numerous times and in various forums during the year. The board meets regularly in Australia and once a year overseas. Each meeting normally considers reports from the chief executive officer and chief financial officer together with other relevant reports. The board regularly meets in the absence of management. The chairman and chief executive officer, and board members in general, have substantial contact outside board and committee meetings.

Board of Directors

Currently our board of directors consists of the following eight directors, all of whom may be contacted at our principal executive offices:

Name Position Age Len Bleasel ........................................................... Non-executive director 65 Duncan Boyle ....................................................... Non-executive director 57 John Cloney .......................................................... Non-executive director and chairman 67 Isabel Hudson ....................................................... Non-executive director 48 Belinda Hutchinson .............................................. Non-executive director 55 Charles Irby .......................................................... Non-executive director 63 Irene Lee............................................................... Non-executive director 55 Frank O'Halloran .................................................. Chief executive officer and director 62


Len Bleasel AM, FAIM, FAICD. Mr. Bleasel was appointed an independent, non-executive director of QBE in January 2001. He is also chairman of the remuneration committee and a member of the audit committee. He joined The Australian Gas Light Company in 1958 and was Managing Director and CEO from May 1990 until March 2001. Mr. Bleasel is chairman of ABN AMRO Australia Holdings Pty Limited and APA Group. He is also chairman of the Zoological Parks Board of NSW and is on the advisory boards of various charities.

Duncan Boyle, BA, FCII. Mr. Boyle was appointed an independent non-executive director of QBE in September 2006. He is a member of the audit and remuneration committees. Mr. Boyle is a non-executive director of Stockland Trust Group and Clayton Utz, and has 35 years of insurance experience working in Australia, New Zealand and the UK.

John Cloney ANZIIF, FAIM, FAICD. Mr. Cloney joined us as managing director in 1981. He retired in January 1998, at which time he was appointed a non-executive director. He was appointed deputy chairman in April 1998 and chairman in October 1998. He is also chairman of the chairman's and funding committees and a member of the investment and remuneration committees. Mr. Cloney is a director of Boral Limited, Maple-Brown Abbott Limited and director of ABN AMRO Australia Holdings Pty Limited. He is a trustee of the Sydney Cricket and Sport Ground Trust. He has over 50 years of involvement in the insurance industry.

Isabel Hudson MA, FCII. Ms. Hudson is based in the UK and was appointed an independent, non-executive director in November 2005. She is a member of the audit, chairman's and remuneration committees. She is a member of the business development board of Scope, a UK charity.

Belinda Hutchinson AM BEc, FCA. Appointed an independent, non-executive director in 1997, Ms. Hutchinson is chair of the investment committee and a member of the audit, chairman’s and funding committees. She is a director of St. Vincent's & Mater Health Sydney Limited. Ms. Hutchinson was an executive director of Macquarie Bank Limited from 1992 to 1997 and remains a consultant to the bank. She was a vice president of Citibank Limited between 1981 and 1992.

Charles Irby FCA (England and Wales). Mr. Irby is based in the UK and was appointed an independent, non-executive director of QBE in June 2001. He is a member of the investment committee and the European operations' audit committee. Mr. Irby was senior UK Advisor to ING Barings Limited from 1999 to 2001, having spent 27 years with ING Barings. Mr. Irby became a non-executive director of Aberdeen Asset Management plc, a company listed on the London Stock Exchange in 1999 and was appointed its Chairman in 2000. He is a director of Great Portland Estates plc and North Atlantic Smaller Companies Investment Trust plc. Mr. Irby is also a trustee and governor of King Edward VII's Hospital Sister Agnes.

Irene Lee BA, Barrister-at-Law. Ms. Lee was appointed an independent, non-executive director in May 2002 and is chair of the audit committee and a member of the funding and investment committees. Ms. Lee has wide experience in financial services, including as CEO and executive director of Sealcorp Holdings Limited in Australia, executive director and vice president of investment management and investment banking at Citibank Limited in Australia and overseas and as the Head of Corporate Finance, at Commonwealth Bank in Australia. She is executive chair of Keybridge Capital Limited and is a director of ING Bank (Australia) Limited. She is a member of the Takeovers Panel, the advisory council of JP Morgan Australia and the executive council of the UTS Faculty of Business. Ms. Lee is also a trustee of the Art Gallery of New South Wales.

Frank O'Halloran FCA. Mr. O'Halloran was appointed Chief Executive Officer in January 1998 and is a member of the chairman's, funding and investment committees. He joined us in 1976 as Group Financial Controller and was appointed Chief Financial Officer in 1982. He was Director of Finance from 1987 to 1994 and Director of Operations from 1994 to 1997. He has had extensive experience in professional accountancy for 14 years and insurance management for over 31 years.


Board Committees

The board is supported by several committees which meet regularly to consider the audit process, investments, remuneration and other matters. The main committees of the board are the audit committee, the investment committee and the remuneration committee. These committees operate under a written charter approved by the board. Any non-executive director may attend a committee meeting. The committees have direct and unlimited access to our senior managers during their meetings and may consult external advisers when necessary at our cost, including requiring their attendance at committee meetings. Committee membership is reviewed regularly.

Audit Committee

The audit committee may only comprise non-executive directors. The audit committee membership currently comprises five non-executive directors and it normally meets four times per year. The chairman must be a non-executive director who is not the chairman of the board. The current composition of the audit committee complies with the best practice recommendations set by the ASX Corporate Governance Council. The chairman is appointed by the board. The current members of the audit committee are Mr. Bleasel, Mr. Boyle, Ms. Hudson, Ms. Hutchinson and Ms. Lee (chair).

The audit committee operates under a written charter determined by the board. The role of the committee is to oversee and enhance the integrity of our financial reporting process. The objectives of the audit committee include reviewing:

• the quality of financial reporting to the ASX, ASIC and shareholders;

• our accounting policies, practices and disclosures; and

• the scope and outcome of our internal and external audits.

The audit committee's responsibilities include the financial statements (including items such as claims reserves, reinsurance recoveries and income tax), external and internal audit, risk management and other matters including internal controls, compliance other than regulatory compliance, tax compliance and significant changes in accounting policies.

The chairman of the board usually, and other non-member non-executive directors often, attend audit committee meetings which consider our June 30 and December 31 financial statements. Meetings of the audit committee also include, by invitation, the chief executive officer, the chief financial officer, our chief risk officer, chief operating officer, our Group internal audit manager, our external auditor and our chief actuarial officer. On occasion, other senior managers also attend.

The audit committee has the right of access to the external and internal auditors (in the absence of management if required) and senior management. The audit committee also has the right to obtain external professional advice at our expense. Our Group internal audit manager, the external auditor, the chief risk officer and the chief actuarial officer have direct access to the audit committee and a reporting line to the chairman of the audit committee.

The audit committee meets with the external auditor in the absence of management in relation to our June 30 and December 31 financial statements and otherwise as required.

The chief executive officer and chief financial officer provide the board with certificates in relation to the financial reports and risk management as recommended by the ASX Corporate Governance Council and as required by the Corporations Act.


Chairman's Committee

The chairman's committee comprises Mr. Cloney (chairman), Ms Hutchinson and the chief executive officer, Mr. O'Halloran. This committee meets from time to time as required to address such matters as are referred by the board.

Funding Committee

The funding committee comprises Mr. Cloney (chairman), Ms. Hutchinson, Ms. Lee and Mr. O'Halloran. This committee meets from time to time as required to address such matters as are referred by the board.

Investment Committee

The membership of the investment committee comprises four non-executive directors and one executive director and it normally meets three times a year. The chairman must be a non-executive director who is not the chairman of the board. The current members of the investment committee are Ms. Hutchinson (chairman), Mr. Cloney, Mr. Irby, Ms. Lee and Mr. O'Halloran. The meetings also include, by invitation, the Group general manager, investments, the chief financial officer and chief operating officer.

The investment committee operates under a written term of reference determined by the board. The role of the investment committee is to oversee our investment activities. This includes review of:

• investment objectives and strategy;

• investment risk management;

• currency, equity and fixed interest exposure limits;

• credit exposure limits with financial counterparties; and

• Group treasury.

The investment committee's responsibilities include review of economic and investment conditions as they relate to us, approval of management's investment strategy and review of investment performance including our defined benefit superannuation funds.

Remuneration Committee

The membership of the remuneration committee may only comprise non-executive directors and currently comprises four non-executive directors. It normally meets four times a year. The current members of the remuneration committee are Mr. Bleasel (chairman), Mr. Cloney, Ms. Hudson and Mr. Boyle. Meetings of the remuneration committee also include, by invitation, the chief executive officer, chief operating officer and the general manager, human resources of the QBE Group.

The remuneration committee operates under a written terms of reference determined by the board. The role of the remuneration committee is to oversee QBE's general remuneration practices. The remuneration committee's responsibilities include:

• recommendation of the total remuneration cost ("TRC") of the chief executive officer and approval of the TRC of the Group operations executive and Group head office management;

• short and long-term incentives, such as equity based plans;


• review of superannuation;

• review of performance measurement criteria and other human resource practices;

• review of personal development plans for the group executives and other senior positions; and

• recommendations on non-executive director remuneration.

The committee considers independent external advice in determining policies and practices that will attract and retain high quality people.

Compensation of Directors and Executive Officers

Non-executive director remuneration reflects our desire to attract, motivate and retain high quality directors and to ensure their active participation in affairs for the purposes of corporate governance, regulatory compliance and other matters. We aim to provide a level of remuneration for non-executive directors comparable with our peers, which include multi-national financial institutions. The board seeks the advice of independent remuneration consultants to ensure that remuneration levels are appropriate.

Remuneration practices for our executive officers vary in each of the markets within which we operate, and therefore the diversity of individual roles and complexity of each operating environment is considered. The remuneration committee recognizes that we operate in a competitive environment, where the key to achieving sustained performance is to generally align executive reward with increasing shareholder wealth.

The guiding principles applied in managing remuneration and reward for executive officers combine:

• linking individual performance objectives to achievement of financial targets and business strategies;

• the achievement of short-term and long-term financial business targets that deliver sustained growth in value for shareholders (e.g. return on equity, insurance profit, return on capacity for our Lloyd's business and investment performance); and

• using market data to set fixed annual remuneration levels.

The remuneration committee seeks the advice of independent remuneration consultants to ensure that remuneration and reward levels are appropriate and are in line with market conditions in the various markets in which we operate. The remuneration committee seeks to have remuneration structures in place that encourage the achievement of a return for shareholders in terms of both dividends and growth in share price.

The Short-Term Incentive ("STI") scheme is a short-term incentive arrangement in the form of an annual cash bonus, designed to reward both executive officers and the majority of staff. The STI aims to recognize the contributions and achievements of individuals when business targets relating to the performance of the business unit, the division or QBE as a whole, as appropriate, are achieved or exceeded.

Executive officers and key management personnel are eligible to participate in DCP. An executive is only entitled to participate in the DCP when an STI is earned. The DCP aims to attract and retain key executives and to increase shareholder value by motivating executives. It provides executives with the opportunity to acquire equity in the form of conditional rights to fully paid shares without payment by the executive, and options to subscribe for shares at market value at the grant date. For further details, see Note 27 to our 2007 financial statements.


The remuneration committee reviews and approves the terms of the STI and the DCP annually, and approves the total quantum of short-term incentive and deferred compensation for executives based on the applicable audited results.

Under our constitution, the non-executive directors may collectively be paid, as fees for their services, a fixed sum not exceeding the aggregate maximum sum determined from time to time by the shareholders in general meeting. As determined at the 2007 annual meeting, total non-executive directors fees are now authorized to a limit of A$2.7 million per financial year. The fees paid to non-executive directors during the year ended December 31, 2007 were approximately A$2.0 million. Such fees are apportioned among the directors on the basis of duties performed either as board members or members of various committees. Executive directors are not entitled to receive directors' fees and are remunerated through their existing employment arrangements.

Employees are eligible to participate in our ESOP. See Note 27 to our 2007 financial statements for further information related to our DCP and our ESOP.

For more information on the compensation of our directors and executive officers, please see our 2007 remuneration report included in our 2007 Annual Report and Note 28 to our 2007 financial statements.

External Auditor Independence

We have issued an internal guideline on external auditor independence. Under this guideline, the external auditor is not allowed to provide the excluded services of preparing accounting records, financial reports or asset or liability valuations. Furthermore, the external auditor cannot act in a management capacity, as a custodian of assets or as share registrar. The board believes some non-audit services are appropriate given the external auditor's knowledge of our business. We may engage the external auditor for non-audit services subject to the general principle that fees for non-audit services should not exceed 30% of all fees paid to the external auditor in any one financial year. External tax services are generally provided by an accounting firm other than the external auditor.

The external auditor has been our auditor for many years. As a diverse international group, we require the services of one of a limited number of international accounting firms to act as auditor. It is our practice to review from time to time the role of the external auditor. The Corporations Act, Australian professional auditing standards and the external auditor's own policy deal with rotation and require rotation of the lead engagement partner after five years. In accordance with such policy, the lead engagement partner of the external auditor rotated in 2004 and will rotate after 2009.

Risk Management

We have in place a global risk management framework that defines the risks that we are in business to accept and those that we are not, together with the key risks that we need to manage and the framework and high level controls that are required to manage those risks.

We have established internal controls to manage risk in the key areas of exposure relevant to our business. The broad risk categories are:

• insurance risk—including underwriting, claims and actuarial risk factors;

• operational risk—including areas such as human resources, valuation of assets, corporate security and outsourcing, regulatory risks and the adequacy of processes and systems;

• acquisition risks—including due diligence and integration processes; and


• funds management and treasury risk—including operational, cash flow, trading and security risks.

Internal controls and systems are designed to provide reasonable assurance that our assets are safeguarded, insurance and investment exposures are within desired limits, reinsurance protections are adequate, counterparties are subject to security assessment and foreign exchange exposures are within predetermined guidelines. The board has approved a comprehensive risk management strategy ("RMS") and reinsurance management strategy ("REMS") both of which have been lodged with APRA. The RMS deals with all areas of significant business risk to us. The REMS covers topics such as our risk tolerance and our strategy in respect of the selection, approval and monitoring of all reinsurance arrangements. Our reinsurance security committee assesses reinsurer counterparty security. This management committee normally meets four times a year and holds special meetings as required.

While the RMS and REMS are approved by the board, we believe that managing risks is the responsibility of the business units and that all staff need to understand and actively manage risk. The business units are supported by compliance teams and by our senior management. See Notes 4 and 5 to our 2007 financial statements for a discussion of our risk management policies and procedures.

Code of Conduct

We have adopted a code of conduct. The code of conduct requires that business be carried out in an open and honest manner with our customers, shareholders, employees, regulatory bodies, outside suppliers, intermediaries and the community at large. The code also deals with confidentiality, conflict of interest, "whistle-blowing" and related matters. No material waivers have been granted to this code.

Summary Director Compensation Table for Year Ended December 31, 2007

The following table summarizes our non-executive director compensation for the year ended December 31, 2007:

Directors'

Fees(1) Superannuation(2) Retirement Benefits(3) Total

(A$ in thousands) Non-executive Directors Len Bleasel .................................................... 221 20 7 248 Duncan Boyle ................................................ 214 19 — 233 John Cloney ................................................... 544 49 30 623 The Hon. Nick Greiner (4)............................. 56 5 6 67 Isabel Hudson ................................................ 233 — — 233 Belinda Hutchinson ....................................... 221 20 16 257 Charles Irby ................................................... 242 — 6 248 Irene Lee........................................................ 235 21 5 261 Total ......................................................... 1,966 134 70 2,170 (1) Includes fees paid for service on board committees.

(2) Mr. Irby and Ms. Hudson are UK residents. They receive a superannuation equivalent of 9% of fees which is included in directors' fees.

(3) Retirement benefits reflect the adjustment to the amounts preserved at December 31, 2003, being an annual increase equal to the five year Australian government bond rate.

(4) Mr. Greiner retired on April 4, 2007.

The aggregate amount of compensation paid by us to all directors (executive and non-executive) of QBE Group during the year ended December 31, 2007 was approximately A$8.2 million.


Key Executive Officers

The following table shows our key executive officers:

Name Position Age Frank O'Halloran ...................... Chief executive officer 62 Steven Burns............................. Chief executive officer, European operations 50 Neil Drabsch ............................. Chief financial officer 59 Mark ten Hove .......................... Group general manager, investments 51 Vince McLenaghan................... Chief operating officer and acting President and Chief Executive Officer, the Americas 49 Michael Goodwin ..................... Chief executive officer of QBE's Asia Pacific operations 49 Terry Ibbotson .......................... Chief executive officer of QBE's Australian operations 63

Steven Burns. Mr. Burns is currently chief executive officer of QBE's European operations. He is a chartered accountant and was finance director of the Janson Green managing agency at Lloyd's from 1987, prior to being acquired by Limit in 1998. Mr. Burns became CEO of Limit plc in August 2000. In September 2004 he was appointed CEO of our European operations as part of the restructure of our European company operations and our Lloyd's division.

Neil Drabsch. Mr. Drabsch was appointed as chief financial officer of QBE in 1994 and acts as deputy company secretary of QBE. He joined QBE in 1991 and was the Group company secretary from 1992 to 2001. Mr. Drabsch has over 41 years experience in insurance and reinsurance management, finance and accounting, including 24 years as a practicing chartered accountant.

Vince McLenaghan. Mr. McLenaghan was appointed chief operating officer of the Group in 2006 and was recently appointed as acting President and Chief Executive Officer of the Americas. Mr. McLenaghan has been in the insurance industry for 31 years. During his 25 years with QBE, he has served in a number of general management roles, including as managing director within our Asia Pacific operations.

Mark ten Hove. Mr. ten Hove joined QBE in 1999 as Group investment manager, having previously been chief investment officer at OCBC Asset Management Limited in Singapore. He has over 21 years experience in funds management including previous roles with Bankers Trust in Hong Kong and Singapore and Thornton Investment Management (Dresdner Bank Group) in Hong Kong.

Michael Goodwin. Mr. Goodwin was appointed chief executive officer of QBE's Asia Pacific operations in 2007. He is an actuary and has been in the insurance industry for 16 years, having started his career with Mercantile Mutual. Mr. Goodwin was deputy general manager of the QBE Mercantile Mutual joint venture when it was purchased by QBE in 2004 and became chief operating officer of the Asia Pacific operations in 2006.

Terry Ibbotson. Mr. Ibbotson was appointed chief executive officer of QBE's Australian operations in 2007. He has over 39 years experience in the insurance industry. Mr. Ibbotson joined QBE in 1993 and since that time has served in various general management roles, including as chief operating officer of our Australian operations.


Summary Executive Compensation Table for the Year Ended December 31, 2007

The following table summarizes compensation for our key executive officers:

Short-Term Employee

Benefits

Post Employment

Benefits Share Based Payments(3)

Base Salary Other(1) STI(2)

Super- Annuation

Long Service Leave

Conditional Rights Options Total

(A$ in thousands) Frank O'Halloran 1,566 508 2,506 231 174 787 256 6,028 Other key executive officers Steven Burns(4) ............... 1,315 436 2,332 — — 963 423 5,469 Neil Drabsch.................... 741 293 1,065 109 24 418 129 2,779 Michael Goodwin(5)........ 421 165 288 51 25 45 14 1,009 Vince McLenaghan.......... 779 190 1,297 119 28 347 104 2,864 Mark ten Hove................. 750 248 1,125 150 — 383 161 2,817 Terry Ibbotson(6)............. 552 150 581 97 54 192 61 1,687 Total ................................ 6,124 1,990 9,194 757 305 3,135 1,148 22,653

(1) "Other" includes the deemed value of the provision of motor vehicles, long service leave, health insurance, life insurance and personal

accident insurance and the applicable taxes thereon. It also includes interest on share loans provided in Note 28(E) to our 2007 financial statements. Directors' and officers' liability insurance has not been included in other remuneration since it is not possible to determine an appropriate allocation basis.

(2) STI is the accrued entitlement for the financial year.

(3) The fair value at grant date of options and conditional rights is calculated using a binomial model. The fair value of each option and conditional right is earned evenly over the period between grant and vesting. Details of grants of conditional rights and options are provided in Note 28 to our 2007 financial statements.

(4) Mr. Burns is located in London. His remuneration has been converted to Australian dollars using the cumulative average rates of exchange for the year.

(5) Mr. Goodwin was appointed as chief executive officer of our Asia Pacific operations on October 8, 2007. Before this appointment, he was the chief operating officer for the same division. Amounts shown include Mr. Goodwin's remuneration during the reporting period, whether as key management personnel or otherwise. Amounts received in his position as key management personnel amounted to A$302,000, comprising: base salary of A$115,000; other short-term employee benefits of A$37,000; superannuation of A$14,000; and STI of A$136,000.

(6) Mr. Ibbotson was appointed as chief executive officer of our Australian operations on October 8, 2007. Before this appointment, he was the chief operating officer for the same division. Amounts shown include Mr. Ibbotson's remuneration during the reporting period, whether as key management personnel or otherwise. Amounts received in his position as key management personnel amounted to A$374,000, comprising: base salary of A$139,000; other short-term employee benefits of A$24,000; superannuation of A$24,000; and STI of A$187,000.

The aggregate amount of compensation paid by us during the year ended December 31, 2007 to all executive officers of the QBE Group, excluding the chief executive officer, was approximately A$16.6 million.

As of December 31, 2007 our executive officers held approximately 1.1 million options to acquire approximately 1.1 million of our ordinary shares at various times and prices.

For further information relating to executive compensation, see our 2007 remuneration report included in our 2007 Annual Report and Note 28 to our 2007 financial statements.


Share Ownership of Directors and Key Executive Officers

The following table shows share ownership of our directors and key management personnel at November 5, 2008.

Ordinary Shares Subject to Non -recourse Loans

(1) Total Ordinary

Shares Options (2)

Conditional Rights to Ordinary Shares

(2) Non-executive Directors: Len Bleasel (3)............................................. – 52,116 – – Duncan Boyle .............................................. – 5,003 – – John Cloney ................................................. – 635,377 – – Isabel Hudson .............................................. – 8,732 – – Belinda Hutchinson ..................................... – 40,988 – – Charles Irby ................................................. – 15,000 – – Irene Lee...................................................... – 26,505 – – Key Executive Officers: Frank O'Halloran (4).................................... 875,359 1,116,740 338,740 105,152 Steven Burns................................................ 3,308 75,971 451,768 166,006 Neil Drabsch (5) .......................................... 154,649 227,556 177,755 53,612 Michael Goodwin ........................................ 5,699 11,036 23,011 6,701 Vince McLenaghan...................................... 109,809 175,785 156,515 53,549 Mark ten Hove ............................................. 173,716 275,633 107,614 52,494 Terry Ibbotson ............................................. – 20,183 56,206 27,363 Total .................................................... 1,332,540 2,686,625 1,311,609 464,877 (1) Prior to June 20, 2005, non-recourse loans were provided by us to the executive director and other key executives on the exercise of their

options for the purchase of shares in QBE. Under A-IFRS, non-recourse loans and the related shares are derecognized and are instead treated as options.

(2) Conditional rights and options relating to the achievement of targets in a financial year are granted in March of the following year. Interest free personal recourse loans are available on terms permitted by our Deferred Compensation Plan to persons in the employment of the company who hold options under this Plan, to fund the exercise of those options. Options issued in 2005 and future financial years are exercisable after five years, with the exception of options for staff in the Group investment division, which continue to be exercisable after three years.

(3) Includes 28,116 ordinary shares held by persons related to Mr. Bleasel.

(4) Includes 48,993 ordinary shares held by persons related to Mr. O'Halloran.

(5) Includes 3,760 ordinary shares held by persons related to Mr. Drabsch.

Transactions with Key Executive Officers

A wholly-owned subsidiary of QBE has entered into a retirement benefit arrangement with Mr. O'Halloran, which is in addition to his entitlement under our staff superannuation plan. As Mr. O'Halloran has remained employed with us beyond May 2004, he will receive a lump sum payment of 150% of his total cash remuneration on retirement, being his annual cash salary plus the cash incentive bonus, for the financial year prior to the date of his retirement. As a condition of this arrangement, Mr. O'Halloran has entered into a non-compete agreement to apply for three years from the date of his retirement.

In connection with our ESOP we granted loans to certain of our key executive officers. For details of the loans see Note 28(E) to our 2007 financial statements.


OUR PRINCIPAL SHAREHOLDERS

The following table sets forth information concerning the beneficial ownership of our ordinary shares known to us as of November 12, 2008 by the following persons or entities:

• beneficial owners of 5% or more of our outstanding ordinary shares; and

• all members of our board and our key executive officers, as a group.

The applicable percentage of ownership for each holder of ordinary shares is based on 889,037,398 total issued ordinary shares of QBE as of September 30, 2008. Ordinary shares of QBE subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days of the date of this Information, are deemed outstanding for computing the percentage of the person holding the options but are not deemed outstanding for computing the percentage of any other person. The individuals named in the table have sole voting and investment power with respect to all ordinary shares of QBE shown as beneficially owned by them.

Name Number of

Shares Percentage of

Ownership The Capital Group of Companies Inc. 53,510,130 6.3% Key executive officers and directors (14 persons) as a group............................................. 2,685,455 0.3%


APPENDIX A: GLOSSARY TO CERTAIN INSURANCE TERMS

Set forth below are definitions of some of the insurance terms used in the Information. For a definition of some of the insurance product terms used in the Information, see "Business—Description of Products and Services."

Actuarial analysis Evaluation of risks in order to attempt to ensure that claims provisions adequately reflect expected future loss experience and claims payments; in evaluating risks, mathematical models are used to predict future loss experience and claims payments based on historical loss ratios, loss development patterns and other relevant data and assumptions.

Assume To accept from the primary insurer or reinsurer all or a portion of the liability underwritten by such primary insurer or reinsurer.

Attritional claims ratio The aggregate of claims less than A$2.5 million divided by net earned premium.

Broker One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving a commission from the insurer or reinsurer for placement and other services rendered.

Capacity The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is willing to place at risk. Capacity may apply to a single risk, a program, a line of business or an entire book of business.

Case reserves Recorded estimates of unpaid liabilities associated with specific reported claims. Case reserves may pertain to losses and loss adjustment expenses.

Casualty insurance Insurance that is primarily concerned with the losses caused by injuries to third persons or their property (i.e., not the policyholder) and the legal liability imposed on the insured resulting therefrom. It includes, but is not limited to, general liability, employers' liability, workers' compensation, professional liability, public liability and automobile liability insurance. It excludes certain types of losses that by law or custom are considered as being exclusively within the scope of other types of insurance, such as fire or marine.

Catastrophe reinsurance A form of excess of loss reinsurance that, subject to specified limits, indemnifies the insured for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophe event or series of events.

Ceding Reinsuring a part or a whole of an underwriting risk with a reinsurer by making a premium payment.

Claim The amount payable under a contract of insurance or reinsurance arising from a loss relating to an insured event.

Claims incurred The aggregate of all claims paid during an accounting period adjusted by the change in claims provisions for that accounting period.

Claims provisions The estimate of the most likely cost of settling present and future claims and associated loss adjustment expenses plus a risk margin for the possible fluctuation of the liability.


Claims ratio Net claims incurred divided by net earned premium.

Combined operating ratio The sum of our claims ratio, commission ratio and expense ratio. A combined operating ratio below 100% indicates profitable underwriting results. A combined operating ratio over 100% indicates unprofitable underwriting results.

Commercial lines Types of insurance written for businesses instead of individuals.

Commission ratio Net commission expense divided by net earned premium.

Cover The scope of protection provided by an insurance policy.

CTP Compulsory third party motor vehicle personal injury insurance in Australia.

Direct insurance The provision of insurance directly by an insurer to an insured, i.e., not through an intermediary.

Excess of loss reinsurance A form of reinsurance in which, in return for a premium, the reinsurer accepts liability for losses or claims settled by the original insurer in excess of an agreed amount, generally subject to an upper limit.

Expense ratio Underwriting and administrative expenses divided by net earned premium.

Facultative reinsurance The reinsurance of individual risks through a transaction between the reinsurer and the cedant (usually the primary insurer) involving a specified risk.

Frequency The number of claims occurring under a given coverage divided by the number of exposures for the given coverage.

General insurance Generally used to describe non-life insurance business including property and casualty insurance.

Gross claims incurred The amount of claims incurred during an accounting period before deducting reinsurance recoveries.

Gross earned premium The total premium on insurance earned by an insurer or reinsurer during a specified period on premiums underwritten in the current and previous underwriting years.

Gross written premium The total premium on insurance underwritten by an insurer or reinsurer during a specified period, before deduction of reinsurance premium.

Incurred but not reported (IBNR) Claims arising out of events that have occurred before the end of an accounting period but have not been reported to the insurer by that date.

Insurance solvency ratio Ratio of net tangible assets to net earned premium, which is an important industry indicator in assessing the ability of general insurers to pay their existing liabilities.

Inward reinsurance The reinsurance or assumption of risks written by another insurer.


Large individual risk and catastrophe claims ratio

The aggregate of claims of A$2.5 million or more divided by net earned premium.

Lloyd's The Society and Corporation of Lloyd's, incorporated by the Lloyd's Acts 1871 to 1982, including the Council of Lloyd's and any person or delegate acting under its authority as the context may require.

Long-tail Classes of insurance business involving coverage for risks where notice of a claim may not be received for many years and claims may be outstanding for more than one year or more before they are finally settled and quantifiable by the insurer; protracted legal proceedings may be involved to apportion liability and to establish the quantum of claims.

Net claims incurred The amount of claims incurred during an accounting period after deducting reinsurance recoveries.

Net earned premium Net written premium adjusted by the net change in unearned premium for a year.

Net investment income Gross investment income after taking into account borrowing costs, foreign exchange gains and losses and investment expenses.

Net written premium The total premium on insurance underwritten by an insurer during a specified period, after deduction of premium applicable to reinsurance acquired in respect thereof.

Outstanding claims The amount of provisions established for claims and related claims expenses that have occurred but have not been paid.

Outward reinsurance The reinsurance or cession of risks by the insurer to an assuming reinsurer.

Premium Payments and consideration for insurance, surety bonds or reinsurance coverage under insurance policies, surety bonds or reinsurance agreements.

Proportional reinsurance A type of reinsurance in which the original insurer and the reinsurer share losses in the same proportion as they share premiums.

Recoveries The amount of claims recovered from reinsurance, third parties or salvage.

Reinsurance An agreement to indemnify a primary insurer by a reinsurer in consideration of a premium with respect to agreed risks insured by the primary insurer. The enterprise accepting the risk is the reinsurer and is said to accept inward reinsurance. The enterprise ceding the risks is the cedant or ceding company and is said to place outward reinsurance.

Reinsurer The insurer that assumes all or part of the insurance or reinsurance liability written by another insurer. The term includes retrocessionaires, which are insurers that assume reinsurance from a reinsurer.

Retention That amount of liability for which an insurance company will be responsible after it has completed its reinsurance arrangements.


Retrocession An agreement by a reinsurer to accept part or all of the risk insured by another reinsurer in consideration of a premium, being the retrocession premium.

Run-off The management of claims to finalization in respect of a discontinued class of business.

Short-tail Classes of insurance business involving coverage for risks where notice of a claim is received and claims are outstanding for one year or less before they are finally quantifiable and settled by the insurer.

Treaty reinsurance Reinsurance of risks in which the reinsurer is obliged by agreement with the cedant to accept, within agreed limits, all risks to be underwritten by the cedant within specified classes of business in a given period of time.

Underwriting The process of reviewing applications submitted for insurance or reinsurance coverage, deciding whether to provide all or part of the coverage requested and determining the applicable premium.

Underwriting year The year in which the contract of insurance commenced or was underwritten.

Unearned premium The portion of a premium representing the unexpired portion of the contract term as of a certain date.

Whole account reinsurance An excess of loss contract that protects the whole of the business written by the reinsured.

Written premium Premiums written, whether or not earned, during a given period.

QBE INSURANCE GROUP LIMITED MARKET ANNOUNCEMENT

QBE announces Offers to Exchange Outstanding Capital

Securities for New Notes QBE today announced that it is has commenced concurrent exchange offers (the “Exchange Offers”) to exchange (i) certain US dollar denominated capital securities of QBE Capital Funding II L.P. guaranteed by, and redeemable for cash or exchangeable for preferred securities of, QBE (CUSIP Nos. 74730UAA3, G73055AA6, ISIN Nos. US74730UAA34, USG73055AA68) (the “Outstanding Dollar Capital Securities”) for US dollar denominated 9.75% Senior Notes due 2014 of QBE (the “New Dollar Notes”) and (ii) certain Sterling denominated capital securities of QBE Capital Funding L.P. guaranteed by, and redeemable for cash or exchangeable for preferred securities of, QBE (CUSIP No. 74730FAA6, ISIN Nos. US74730FAA66, XS0261573587 and Common Code Nos. 026194849 and 026157358) (the “Outstanding Sterling Capital Securities” and, together with the Outstanding Dollar Capital Securities, the “Outstanding Capital Securities”) for Sterling denominated 10.00% Senior Notes due 2014 of QBE (the “New Sterling Notes” and, together with the New Dollar Notes, the “New Notes”).

Principal amount of the Notes for each US$1,000 or £1,000 principal amount of Capital

Securities

CUSIP/ ISIN / Common Code

Liquidation Preference

Outstanding

Title of Capital Securities to be

Exchanged Principal Exchange

Amount

Early Participation

Amount

Total Exchange Amount*

CUSIP: 74730UAA3, G73055AA6 ISIN: US74730UAA34,

USG73055AA68 US$550,000,000 Capital Securities issued by

QBE Capital Funding II L.P. US$650.00 US$50.00 US$700.00

CUSIP: 74730FAA6

ISIN: US74730FAA66, XS0261573587

Common Code: 026194849, 026157358

£300,000,000 Capital Securities issued by QBE Capital Funding L.P. £650.00 £50.00 £700.00

* The Total Exchange Amount includes the Early Participation Amount and will be payable to holders if they tender their Outstanding Capital Securities for exchange at or prior to the Early Participation Deadline defined below.

The Exchange Offers are only being made, and copies of the Exchange Offer documents will only be made available, to holders of Outstanding Capital Securities that have certified certain matters to QBE, including their status as either “qualified institutional buyers,” as that term is defined in Rule 144A under the United States Securities Act of 1933, as amended (the “Securities Act”) or persons other than “U.S. persons,” as that term is defined in Rule 902 under the Securities Act (collectively, “Eligible Holders”). Each Exchange Offer will expire at 12:00 midnight, New York City time, on December 23, 2008, unless extended by QBE (such date and time with respect to an Exchange Offer, as it may be extended, the ‘‘Expiration Date”). In order to be eligible to receive the Early Participation Amount, holders of Outstanding Capital Securities must validly tender their Outstanding Capital Securities at or prior to 5:00 p.m., New York City time, on December 9, 2008, unless such deadline is extended by QBE (such date and time with respect to an Exchange Offer, as it may be extended, the “Early Participation Deadline”). Outstanding Capital Securities tendered prior to 5:00 p.m., New York City time, on December 9, 2008 (the

“Withdrawal Deadline”) may be withdrawn at any time at or prior to the Withdrawal Deadline. Outstanding Capital Securities tendered after the Withdrawal Deadline may not be withdrawn.

Holders of Outstanding Capital Securities holding through The Depository Trust Company, Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme, and wishing to tender Outstanding Capital Securities pursuant to the Exchange Offer must submit, or arrange to have submitted on their behalf, at or before the Expiration Date and before the respective deadlines set by such clearing systems, duly completed electronic instructions, in each case in accordance with such clearing systems’ respective requirements.

Consummation of the Exchange Offers is subject to certain conditions. Neither Exchange Offer is subject to completion of the other Exchange Offer.

The New Notes have not been and are not expected to be registered under the Securities Act or the securities laws of any other jurisdiction. Therefore, the New Notes may not be offered or sold in the United States absent registration or any applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. The Exchange Offers are also not being made to, and any offers to exchange will not be accepted from, or on behalf of, Eligible Holders in any jurisdiction in which the making of such Exchange Offers would not be in compliance with the laws or regulations of such jurisdictions. In particular, persons resident in the Republic of Italy may not participate in the Exchange Offers. This market announcement shall not constitute an offer to purchase any securities or a solicitation of an offer to sell any securities and is issued pursuant to Rule 135c under the Securities Act. The Exchange Offers are being made only pursuant to a confidential offering memorandum and related documentation and only to such persons and in such jurisdictions as is permitted under applicable law.

FOR MORE INFORMATION CONTACT: The Exchange Agents for the Exchange Offers:

The Dollar Exchange Agent

The Sterling Exchange Agent

Global Bondholder Services Corporation

65 Broadway, Suite 723, 7th Floor New York, New York 10006

United States of America Attention: Corporate Actions Toll-Free: +1 866 470-4200

Banks and Brokers: +1 212 430-3774 Facsimile: +1 212 430-3775

Deutsche Bank AG, London Branch

Winchester House 1 Great Winchester Street

London EC2N 2DB United Kingdom

Attention: Trust and Securities Services Telephone: +44 20 7547 5000 Facsimile: +44 20 7547 5001

QBE Insurance Group Limited:

Mr. Neil Drabsch Chief Financial Officer

+612 9375 4216

Mr. Duncan Ramsay General Counsel and Company Secretary

+612 9375 4422 26 November 2008

asx 26nov08 qbe announces acquisitions etc

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