{ a ten year perspective QBE INSURANCE GROUP ANNUAL REPORT DECEMBER 2000

Transcription

1 { a ten year perspective QBE INSURANCE GROUP ANNUAL REPORT DECEMBER 2000

2 1990 QBE } had operations in 17 countries worldwide with gross written premium of $740 million. The Group had $380 million of shareholders funds and a market capitalisation exceeding $700 million. 2000} QBE had expanded its operations into 40 countries worldwide with gross written premium of $4.4 billion. The Group had $1.7 billion of shareholders funds and a market capitalisation exceeding $4.2 billion. QBE Insurance Group Limited ACN

3 Contents 2 Chairman s report 3 Highlights 4 Worldwide operations 1991 _ 1992 _ 1993 _ 1994 _ 1995 _ 1996 _ 1997 _ 1998 _ 1999 _ 2000 _ 6 Senior management team 8 A decade of change 10 Managing director s report 12 Managing director s report (continued) 14 Australian general insurance 16 Asia-Pacific general insurance 18 the Americas 20 European companies 22 Lloyd s division 24 Investments 26 Shareholders information 28 Directors report 33 Directors and corporate governance 36 Financial statements 63 Directors declaration and independent audit report 64 Calendar year results and history 68 Financial calendar and ASX announcements QBE ANNUAL REPORT

4 Chairman s Report Chairman s report John Cloney Chairman Since my last report, QBE s management has been extremely active in completing our acquisition of the UK based Limit plc (Limit) and the funding and corporate structural changes required to meet the demands of the enlarged Group. The recent acquisitions and other initiatives have significantly increased the size and raised the profile of the Group. QBE is well placed to take advantage of the current up cycle in the global insurance markets. As I noted in my report to shareholders at 30 June 2000, the directors have changed the Group s balance date from 30 June to 31 December. This report therefore covers the six months to 31 December To assist shareholders and other readers of our annual report, comparative information on a calendar year reporting basis is set out on pages 64 to 67. I am pleased to report that the Group recorded a strong financial result for the six months to 31 December 2000, with net profit after tax increasing 28% to $101 million. The results include the acquisition of Limit from 17 August Basic earnings per share were 23.9 cents compared with 20.2 cents for the same period last year. The return on average shareholders funds, which include convertible preference shares, was 13.3% compared with 14.3% for the same period last year. Based on the results for six months and as a sign of our continued confidence in the future, the directors have announced a dividend of 16.0 cents per share compared with the 15.0 cents per share final dividend at 30 June The payout for the dividend, which will be franked at a rate of 30%, is $69 million. Since 30 June 2000, shareholders funds have increased 27% to over $1.7 billion and the Group s capital structure has changed considerably. In August 2000, the Group raised $275 million through an issue of preference shares that will convert to approximately 35.6 million ordinary shares on 18 August In addition, in July 2000, the Group raised $350 million through an issue of subordinated debt in Europe and Australia. The additional funds were designed to strengthen the Group s balance sheet and to help finance the acquisition of Limit. Since 30 June 2000, short-term borrowings (other than subordinated debt) have increased by $250 million, mainly to help finance the acquisition of Limit. We expect that most of these additional borrowings will be repaid by the end of QBE is rated A+ by Standard & Poor s and this rating was affirmed following the announcement of our intention to acquire Limit. The directors continue to carefully monitor the Group s capital requirements, particularly with our strategy of growth by acquisition. The recent acquisitions are expected to enhance profitability and add value for our shareholders. In the absence of an increased frequency of catastrophes or a major fall in stock markets, the directors are confident that the Group will increase profits and dividends in QBE s stock performed well during the period, with the share price increasing 21% since 30 June An investment in QBE shares has grown at an average compound rate of 19% over 10 years and 22% over five years. Market capitalisation at 31 December 2000 was over $4.2 billion. Mr Charles Copeman retired in March 2001 with over nine years of service on QBE s board of directors. On behalf of all my colleagues at QBE, I thank Mr Copeman for his stewardship, wisdom and guidance during an exciting period of growth and change for the Group. We wish him well in his retirement and welcome Mr Len Bleasel to the board. On behalf of my fellow directors, I thank our staff for their hard work and commitment and our shareholders for their loyalty and support. John Cloney Chairman 2 QBE ANNUAL REPORT 2000

5 Highlights Highlights for the six months ended 31 December 2000 Profit and dividend payout Net profit after tax increased 28% to $101 million. The final dividend was 16.0 cents per share, 30% franked. The total dividend payout was $69 million, an increase of 8.4% over the final dividend payout at 30 June Shareholders funds, after provision for the final dividend, increased 27% since 30 June 2000 to $1,709 million, primarily due to the issue of convertible preference shares in August amounting to $275 million. The dividend reinvestment programmes continue at a discount rate of 2.5%. Group operating performance Insurance profit was $98 million, an increase of 69%. Insurance profit as a percentage of net earned premium increased from 5.0% to 5.1%. Gross earned premium increased 80% to $2,519 million and net earned premium was up 68% to $1,924 million. Growth came mainly from the acquisitions of Iron Trades and Limit in the UK. The combined operating ratio (COR) increased from 102.7% to 102.9%, reflecting upgrades of prior year claims reserves mitigated by the benefit of the Group s extensive reinsurance protections. Investment income increased 36% to $185 million due to higher invested funds, following the acquisitions of Iron Trades and Limit, and higher interest rates. Income tax expense was 19.4% of pre tax profit, down from 23.1% last year, reflecting the reduction in Australian income tax rates and higher profits in low tax paying countries. Cash flow from operations increased from $116 million to $136 million. Limit added a further $1.2 billion to the investment portfolio (net of borrowings). Solvency based on the market value of net tangible assets was 40.0%, compared with 46.9% at 30 June Divisional operating performance Australian general insurance produced an excellent result with a COR of 101.3% (101.7% last year). Net earned premium decreased by 1% to $485 million due to the cancellation of unprofitable business and a reduction in NSW compulsory third party (CTP) premium rates. Asia-Pacific general insurance experienced difficult market conditions with the COR increasing from 101.7% to 102.0%. Gross earned premium increased 18% to $189 million. the Americas recorded a COR of 101.0% compared with 102.6% last year. Deterioration of prior year claims reserves was offset by the impact of the Group s reinsurance protections. Gross earned premium grew by 48% to $203 million. European companies reported gross earned premium of $1,133 million, an increase of 135%, reflecting the acquisitions of Iron Trades and Ador Makedonija. The COR increased from 104.6% to 105.0%, primarily as a result of significant upgrades to prior year claims reserves. The result benefited from the Group s reinsurance protections. The new Lloyd s division incorporates Limit and the previous QBE Lloyd s operations. Limit was acquired in August 2000 for $1.0 billion. Lloyd s division reported a COR of 100.6% compared with 103.5% last year. Gross earned premium grew 449% to $434 million, reflecting the consolidation of Limit from 17 August Shareholders highlights SIX MONTHS TO SIX MONTHS TO 31 DEC DEC 1999 Net profit after tax $m Basic earnings per share cents Diluted earnings per share cents Dividend payout $m Dividend per share cents Net tangible assets per share $ Total investments at net market value $m 6,986 5,123 Total assets $m 14,283 9,017 Return on average shareholders funds % Shareholders funds at net market value $m 1,709 1,135 Borrowings to shareholders funds % QBE ANNUAL REPORT

6 Worldwide operations Business Performance Australian general insurance general insurance with operations throughout Australia including Group head office in Sydney provides all major lines of insurance cover for personal and commercial risks staff numbers 1,121 (1,086 at 30 June 2000) gross written premium $546 million, down 5% gross earned premium $560 million, up 3% net earned premium $485 million, down 1% combined operating ratio 101.3% (101.7% in 1999) Asia-Pacific general insurance general insurance business in the Asia-Pacific region operations in 18 countries with head office in Sydney provides personal and commercial insurance cover, including professional liability and trade credit staff numbers 1,043 (1,045 at 30 June 2000) gross written premium $199 million, up 27% gross earned premium $189 million, up 18% net earned premium $149 million, up 12% combined operating ratio 102.0% (101.7% in 1999) the Americas based in New York servicing the US, Canada, Latin America and Caribbean with representative offices in Hartford, Panama, Mexico and Peru reinsurance and general insurance business staff numbers 90 (78 at 30 June 2000) gross written premium $248 million, up 82% gross earned premium $203 million, up 48% net earned premium $160 million, up 29% combined operating ratio 101.0% (102.6% in 1999) European companies Lloyd s division diversified general insurance and reinsurance business with head office in London underwriting and client service operations in London, Dublin, Paris and six countries in Central and Eastern Europe and representative offices in Hamburg, Milan and Johannesburg. underwriting and technical management for the Group s reinsurance operations in Australia and Asia-Pacific staff numbers 2,577 (2,718 at 30 June 2000) diversified general insurance and reinsurance business in the Lloyd s market managing agents for seven syndicates representing approximately 8% of the Lloyd s market staff numbers 341 (56 at 30 June 2000) gross written premium $872 million, up 92% gross earned premium $1,133 million, up 135% net earned premium $874 million, up 169% combined operating ratio 105.0% (104.6% in 1999) gross written premium $331 million, up 434% gross earned premium $434 million, up 449% net earned premium $256 million, up 256% combined operating ratio 100.6% (103.5% in 1999) Investments investment management of the Group s funds funds are predominantly managed internally staff numbers 29 (26 at 30 June 2000) investment income up 36% to $185 million investment income before realised and unrealised gains on investments up 53% to $135 million net realised and unrealised gains on fixed income securities of $39 million net realised and unrealised gains on equities and properties of $11 million 4 QBE ANNUAL REPORT 2000

7 Worldwide operations Major events Achievements Outlook & objectives CTP premium rates in NSW decreased by 20% under new scheme guidelines reform of insurance industry regulation continued industry rationalisation continued finalised rationalisation of operations within the QBE Mercantile Mutual joint venture successfully managed major changes to the CTP schemes in NSW and Queensland continued to achieve premium rate increases across most portfolios finalised e-business plans for each of the business units pursue portfolio and company acquisitions that add value for shareholders achieve cost savings from the QBE Mercantile Mutual joint venture implement e-business plans to improve efficiencies and reduce expense ratios focus on expense control civil unrest continued in the Solomon Islands floods caused significant damage in Thailand merged the two Hong Kong operations completed negotiations for two acquisitions in Singapore significantly reduced the number of poor performing portfolios control expenses to reduce the expense ratio restructure to improve capital efficiency and avoid administrative duplication enhance portfolio management and portfolio segmentation to improve results target acquisitions that add value for shareholders results were impacted by prior year claims upgrades reduced levels of catastrophic activity finalised corporate name change of our reinsurance company to QBE Reinsurance Corporation produced significant premium growth received a rating upgrade from AM Best to A (Excellent) expanded throughout Latin America in conjunction with our joint venture partner Reaseguradora del Istmo SA enhanced management team and strengthened underwriting controls use our rating upgrade and name change to enhance the QBE brand image in the US market pursue profitable acquisitions in the US and Latin America that will add value for our shareholders complete integration and development of business management systems reduce the expense ratio high frequency of large risk losses impacted results completed integration of Iron Trades in the UK substantial upgrade of claims reserves from prior years commenced rationalisation of our businesses in Central and Eastern Europe restructured Iron Trades portfolio to focus on core business implemented enhanced control and monitoring framework to improve portfolio management introduced comprehensive business plans for each class of business build on premium rate increases for 2001 renewals to take advantage of the hardening market continue implementation of underwriting and management information systems restructure the UK business operations to achieve more efficient use of capital reduce expense ratio implement agreed business plans for improvement in various portfolios acquisition of Limit for $1 billion merger of existing QBE Lloyd s operations with those of Limit to form the new Lloyd s division relocated QBE s Lloyd s staff into Limit s premises acquired over $350 million of additional capacity on Limit s syndicates for the 2001 underwriting year replaced underwriting teams lost due to the uncertainties prevailing at Limit prior to the acquisition sold motor syndicates correct or cancel consistently unprofitable business take advantage of improved market conditions improve the expense ratio implement new incentive scheme arrangements address syndicate structure issues to optimise operating structure and capital utilisation continued volatility, especially in fixed income markets a marked slowdown in US economic growth leading to lower interest rates acquisition of Limit increased the Group s investment portfolio international diversification of the Group s equity portfolio successfully divested most of the illiquid holdings including non-operational property reduced volatility in Group investment income restructured the investment team streamlined the Group s investment portfolios outperform investment benchmarks complete the repositioning of the Group s investment portfolio broaden experience and expertise of investments staff upgrade and refine systems support for investment operations control costs QBE ANNUAL REPORT

8 Senior management team Senior management team Frank O Halloran Group managing director and chief executive officer Steven Burns Managing director, Lloyd s division Neil Drabsch Chief financial officer and company secretary Paul Glen Deputy general manager, European companies Raymond Jones General manager, Australia Tim Kenny President, the Americas 6 QBE ANNUAL REPORT 2000

9 Senior management team Vince McLenaghan General manager, Asia-Pacific Greg O Neill Group manager, corporate risks Duncan Ramsay Group general counsel Peter Smith Group manager, personnel Gayle Tollifson Group financial controller Mark ten Hove Group investment manager QBE ANNUAL REPORT

10 1991 WORLD US and Allies at war with Iraq France agrees to sign 1968 treaty banning spread of atomic weapons QBE 1991 Windstorm causes damage on Sydney s north shore QBE appoints Charles Curran to board of directors A decade of change following the unwinding of the cross shareholdings with Burns Philp Ten year history SIX MONTHS ENDED 31 DECEMBER Gross written premium $m 2,196 1,384 1, Gross earned premium $m 2,519 1,403 1,245 1, Net earned premium $m 1,924 1,144 1, Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Investment income before movement in unrealised gains $m after movement in unrealised gains $m Insurance profit $m Insurance profit/net earned premium % Operating profit before tax $m after tax and outside equity interest $m Number of shares on issue millions Shareholders funds $m 1,709 1,135 1, Total assets $m* 14,283 9,017 6,051 5,112 4,124 3,137 2,702 2,755 2,267 1,859 Basic earnings per share cents Diluted earnings per share cents Return on average shareholders funds %** Dividend per share cents Dividend payout $m * adjusted to exclude New South Wales workers compensation managed fund ** 2000 includes convertible preference shares 8 QBE ANNUAL REPORT 2000

11 South Africa repeals apartheid laws Boris Yeltsin inaugurated as first freely elected President of Russian Republic Bush-Gorbachev summit negotiates strategic arms reduction treaty Fires cause destruction in Oakland, California QBE appoints Charles Copeman to board of directors Net earned premium Gross earned premium $m Shareholders funds $m Dividend payout $m QBE event 1991 QBE unwinds its cross shareholdings with Burns Philp World event 1991

12 1992 WORLD A text-based Web browser is made available to the public. Within a few years, millions of people become regular users of the World Wide Web Yugoslav Federation broken up US lifts trade sanctions against China QBE 1992 QBE appoints John Phillips to board of directors New general insurance accounting standard AASB 1023 has detrimental impact on Australian insurers Managing director s report Frank O Halloran Group managing director and chief executive officer I am pleased to report another six months of achievement in the growth and profitability of the QBE Group. A number of acquisitions and new initiatives over the past 18 months have assisted growth and profitability and enabled us to put in place a strong base to achieve the Group s targets for at least the next two years. During the six months, we achieved a number of objectives. In particular, we: completed the acquisition of Limit and the integration into Limit of our existing Lloyd s business; completed the integration of Iron Trades, the specialist UK employer s liability insurer, and closed down the unprofitable retail business; achieved substantial premium rate increases for most of our operations; introduced comprehensive business plans and parameters for writing business in the Americas and Europe; cancelled a number of consistently unprofitable accounts, particularly in the Americas and Europe; achieved a substantial improvement in underwriting results from our Australian joint venture with Mercantile Mutual; merged our two operations in Hong Kong to achieve economies of scale; strengthened the Group s balance sheet with the issue of subordinated debt and convertible preference shares to complete the Limit acquisition and support future growth; introduced new profit share and long-term incentive plans linked to individual and team performance; and purchased additional capacity at Lloyd s to increase QBE s participation in the results of our managed syndicates to 72% for the 2001 underwriting year, up from 55% in One of the main contributors to QBE s success over the years has been its strong culture focused on the creation of additional wealth for our shareholders. The QBE culture is based on disciplined policies and risk management practices, supported by the QBE manager programme. We have a very low turnover of managers and we consider this to be extremely important for our shareholders, as QBE s intellectual capital is critical to its success. Our managers understand the key profit drivers, the need to review management information and the need to react quickly to adjust the business, where necessary, to improve results. We have a strong team of actuarial staff who assist underwriters to price business and identify trends in portfolios. Our policy of growth by acquisition has been successful. We are in a period of consolidation in Europe to maximise the benefits from our recent acquisitions. However, we continue to consider acquisitions in other parts of the world. These are most likely to be add-ons to existing businesses to achieve synergies and further diversification. Insurance profitability The substantial improvement in insurance profitability was mainly due to the acquisitions of Limit and Iron Trades, actions taken on a number of unprofitable portfolios and a lower level of Key ratios Group SIX MONTHS TO SIX MONTHS TO 31 DEC DEC 1999 Gross written premium $m 2,196 1,384 Gross earned premium $m 2,519 1,403 Net earned premium $m 1,924 1,144 Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000

13 Rioting erupts in South-Central Los Angeles following the acquittal of four police officers accused of beating Rodney King Last Western hostages freed in Lebanon US forces leave Philippines, ending nearly a century of American military presence Hurricane Iniki strikes the US QBE appoints Nick Greiner to board of directors Contributions by region for the six months to 31 December GROSS WRITTEN NET EARNED NET PROFIT COMBINED NET ASSETS PREMIUM PREMIUM AFTER TAX OPERATING RATIO $m $m $m $m $m $m $m $m % % Australia Asia-Pacific the Americas European companies Europe Australasian reinsurance (2) European companies Lloyd s division Group 1,709 1,135 2,196 1,384 1,924 1, General insurance 1, , , Inward reinsurance Group 1,709 1,135 2,196 1,384 1,924 1, Geographic mix gross earned premium QBE event 1992 QBE acquires Australian Eagle Insurance for $130 million catastrophes. Underwriting results were adversely affected by a deterioration in prior year claims reserves in Europe and the Americas. The Group s combined operating ratio was 102.9%, compared with 102.7% for the same period last year. World event 1992 Insurance profit, represented by the underwriting result plus investment income on policyholders funds, increased by 69% to $98 million. Insurance profit as a percentage of net earned premium was 5.1%, compared with 5.0% for the same period last year. Insurance profit was assisted by the Iron Trades and Limit acquisitions which increased the period for which we hold our premiums. Most importantly for our shareholders, pre-tax insurance profit as a percentage of our shareholders funds increased to 12.8% from 10.4%. This reflects both the improvement in insurance profit and better management of capital resources.

14 1993 WORLD Large bomb explodes in car park of World Trade Centre USA Midwest flood damage exceeds $10 billion QBE 1993 Cyclones cause extensive damage in Fiji and Vanuatu QBE s market capitalisation reaches $1 billion Managing director s report continued A summary of our key profit drivers over the past 10 years is set out in the table on page 8 and, as the chairman noted in his report, calendar year comparative information starts on page 64. Gross earned premium increased 80% to $2,519 million, while net earned premium was up 68% to $1,924 million. The strong premium growth was due mainly to our acquisitions. Gross earned premium from non-australian sources increased substantially, with 77% of gross earned premium now derived from our international businesses. Reinsurance business comprised 29% of the Group s total gross written premium, compared with 34% for the same period last year. The Group s reinsurance costs as a percentage of gross written premium increased following the purchase of additional reinsurance protections and higher costs for reinsurance. All reinsurers are approved by the Group s security committee. A summary of the results for the five operating divisions is set out on page 11 and commentary on the performance of each division starts on page 14. Cash flow Cash flow from operations increased by 17% to $136 million compared with the same period last year. In addition, we added $1.9 billion to the investment portfolio as a result of the Limit acquisition. Cash flow from operations and acquisitions has been considerable in the past five years, with almost $5 billion added to the investment portfolio. Investment income Investment income increased from $136 million to $185 million, reflecting a larger investment portfolio following the acquisitions of Iron Trades and Limit and higher interest rates. Increased volatility in equity markets and the reweighting of our equity investments have resulted in a reduction in the size of our equity portfolio to 30% of total shareholders funds and liabilities payable beyond four years. Our focus continues to be on stock selection and value. Substantial progress continues to be made in reducing the risk profile of our equities. Commentary on our investment performance starts on page 24. Going forward We will continue our successful strategy of growing net earned premium and profit by at least 15% per annum, with growth mainly from acquisitions. Growth targets will be substantially exceeded in the next two years as a result of the recent acquisitions, additional capacity purchased at Lloyd s and expected premium rate increases. We continue to place increased emphasis on product portfolio management and profitability. QBE s increasing ownership of syndicates managed by Limit (72% in 2001) is expected to provide an additional $350 million in investment funds per annum for the next four years. We expect a considerable increase in insurance profit from improved market conditions and the actions taken on a number of portfolios. Growth in net earned premium is expected to be greater than growth in expenses. Savings in 2001 are expected from the QBE Mercantile Mutual joint venture, the Hong Kong merger and the integration of our Lloyd s businesses. We expect improved investment income on a lower risk portfolio and increased investment funds. Lower interest yields will negate some of these gains. Worldwide portfolio mix gross earned premium 12 QBE ANNUAL REPORT 2000

15 Iraq accepts UN weapons monitoring Sydney announced as host of Olympics 2000 QBE announces one for two bonus issue QBE s gross written premium exceeds $1 billion Group financial highlights SIX MONTHS TO 31 DECEMBER % % % % % Premium growth gross written net earned Reinsurance ceded to gross written premium Net written premium to gross written premium Insurance profit to net earned premium Insurance profit to shareholders funds* Solvency ratio at market value * average shareholders funds at net market value We expect the tax rate in 2001 to increase to around 23%. We will continue to promote the QBE manager programme and a specialised portfolio management programme introduced by our European companies division. Summary Our acquisitions and the changes made to our operations in the past 18 months have already started to have a positive impact on the profitability of our insurance business. The full benefits will be seen in 2001 and 2002, subject of course, to a normal frequency of catastrophes and no major fall in stock markets or interest rates. The QBE team of over 5,000 staff has worked extremely hard to put QBE in the strong position it is in today. In 2001, the Group will reap the benefits of the many initiatives put in place. I appreciate the enormous support from my fellow employees and I look forward to working with them to further increase the wealth of our shareholders in the next 12 months. Frank O Halloran Group managing director and chief executive officer QBE event 1993 QBE acquires American Royal Reinsurance for $82 million World event 1993

16 1994 WORLD Major earthquake jolts Los Angeles The channel tunnel connects England with Europe QBE 1994 Bushfires rage across NSW, Sydney is encircled by fire QBE announces one for five bonus issue Sydney Australian general insurance Our Australian general insurance operations have again produced an extremely good result underpinned by premium rate increases in most classes and an absence of major catastrophe losses. The combined operating ratio was an excellent result of 101.3%, compared with 101.7% for the same period last year. Management s action over the past 18 months to cancel consistently unprofitable business and to improve efficiency has been rewarded with one of the best underwriting results we have ever achieved. The result in Australia has benefited from a number of initiatives and achievements during the six months, including: a substantial reduction in underwriting losses from the joint venture with Mercantile Mutual; a focus on product management, particularly workers compensation, CTP, professional liability, trade credit and travel; a substantial improvement in profit from our direct underwriting subsidiary, Western QBE; a strong management focus on the key profit drivers with rewards for performances that increase shareholders wealth; and continued implementation of a one system IT solution for our general insurance business. Gross earned premium growth was modest, increasing 3% to $560 million. Net earned premium decreased by 1% to $485 million. The lower premium growth reflects management s action in cancelling consistently unprofitable business and lower premium rates for NSW CTP business, offset by higher premium rates for most other classes of business. Our retention ratio remains high. The lower frequency and severity of insured losses has benefited the claims ratio, which decreased to 73.0% from 76.4% for the same period last year. The cost of reinsurance was up slightly, consistent with the general increase in premium rates, although the Group s buying power for quality reinsurance covers continues to prove economical. The QBE Mercantile Mutual joint venture has completed its integration programme and is on track to achieve its business objectives and cost savings in Business innovations are being introduced to improve service and efficiency. The expense ratio for the six months was 15.1%, up from 14.2% in A number of non-recurring expenses, relating to redundancy and integration costs for the joint venture and the migration to one system, affected the expense ratio. Key ratios Australian general insurance SIX MONTHS TO SIX MONTHS TO 31 DEC DEC 1999 Gross written premium $m Gross earned premium $m Net earned premium $m Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000

17 South Africa holds first interracial national election, Nelson Mandela elected President Genocide in Rwanda Volcanic eruption devastates Rabaul, PNG QBE s annual dividend payout exceeds $50 million for the first time We have now experienced a full year s impact of the changes introduced to the NSW CTP scheme in October 1999 and have achieved a satisfactory return on the lower premium rates. In Queensland, a new competitive CTP scheme was introduced in October 2000, resulting in a reduction in premium, although our market share remains at approximately 6%. Our professional liability division completed a thorough portfolio analysis and was successful in cancelling consistently unprofitable business and achieving substantial rate increases where needed. The division produced a satisfactory return on equity and is poised to continue to do so in Our wholly owned subsidiaries, Western QBE, QBE Trade Indemnity and Transport Industries Insurance, all continued to perform well during the year, meeting the Group s return on equity targets. Growth in premium has been difficult to achieve in each of these subsidiaries. However, they have maintained market share and achieved rate increases wherever possible. Our decisions to apply specific product focus to our businesses and to enter into the joint venture with Mercantile Mutual have placed us in a strong position in the Australian market. Australian general insurance portfolio mix gross earned premium QBE event 1994 Our objectives for 2001 are: controlled profitable growth through expanded share of selected markets and the acquisition of new portfolios and companies that add value to shareholders; implementation of e-business initiatives designed to enhance customer and intermediary relationships and reduce costs by eliminating unnecessary paper and processes; achievement of cost savings from the joint venture with Mercantile Mutual; continued focus on expense control across all business units; and continued efficiency improvements from our computer systems. We thank all our staff in Australia who have performed extremely well in a challenging environment. Raymond Jones General manager, Australia Earthquake in Northridge, California causes widespread damage World event 1994

18 1995 WORLD Huge truck bomb blows up Oklahoma City federal building Fighting escalates in Bosnia and Croatia QBE 1995 QBE Europe relocates to Dublin and is licensed to operate in the International Financial Services Centre Hurricanes Luis and Marilyn cause severe damage Hong Kong Asia-Pacific general insurance QBE maintains a strong presence throughout the Asia-Pacific region, with a number of our 19 businesses in 18 countries operating for over 100 years. Asia has historically shown a capacity for substantial economic growth and profitability. However, the economic difficulties of some countries in the region are still having an impact on our growth. Acquisitions in the Pacific and other initiatives have enabled us to achieve modest growth and improved profits, despite some pockets of instability. Premium growth was the highest it has been for three years, benefiting from the development of specialist lines of business and acquisitions in Japan, Fiji and Papua New Guinea (PNG). Gross earned premium was up 18% to $189 million, while net earned premium increased 12% to $149 million. The underwriting result was satisfactory given market conditions. The combined operating ratio increased to 102.0% from 101.7% for the same period last year. The loss ratio improved to 53.6% from 55.0% for the same period last year. Management efforts to improve poor performing portfolios was offset to some extent by a continuation of frequency losses and an upgrade of prior year claims reserves in Hong Kong and the Solomon Islands. Corrective actions are being taken. The costs associated with start-up operations in the Philippines and Vietnam, the acquisitions in Japan and an increase in the provision for doubtful debts had an adverse impact on expenses. The expense ratio increased to 25.0% from 21.7% for the same period last year. Fiji, French Polynesia, Guam, New Caledonia, New Zealand, PNG, Singapore and Vanuatu, all produced underwriting profits. Personal injury claims, motor theft and workers compensation reserve upgrades produced losses for our operations in Malaysia and Hong Kong. The result for Thailand was adversely affected by floods in December. Key ratios Asia-Pacific general insurance SIX MONTHS TO SIX MONTHS TO 31 DEC DEC 1999 Gross written premium $m Gross earned premium $m Net earned premium $m Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000

19 France explodes nuclear device in Pacific Israelis and Palestinians agree on transferring West Bank to Arabs Quebec narrowly rejects independence from Canada QBE experiences major property claims from riots and fires in French Polynesia QBE s net earned premium exceeds $1 billion The following key objectives were achieved during the six months: completed negotiations for two acquisitions in Singapore; completed negotiations with our joint venture partner in Hong Kong to merge our two operations. This consolidation will improve our capital efficiency and achieve substantial synergies that will assist in lowering the expense ratio; implemented a more responsive organisational structure that will help us to achieve our operational management and business development goals; improved the profitability of a number of poor performing portfolios; commenced implementation of our systems consolidation plan to physically relocate systems to our Sydney data centre and use common hardware and software platforms; finalised our strategy to enhance QBE s brand image in Asia; and developed new and upgraded specialist products to be launched from February Asia-Pacific general insurance portfolio mix gross earned premium Our objectives for 2001 include: implementing further initiatives to improve capital efficiency and costs of systems; continuing to correct or cancel consistently unprofitable business; reducing the expense ratio; implementing our strategy to enhance QBE s brand image in Asia; working with our newly acquired Lloyd s businesses to investigate business development opportunities; successfully converting targeted acquisitions which meet the Group s criteria; and continuing to introduce new products targeted at profitable market segments. It has been another difficult period for our Asia-Pacific operations. I thank our staff, intermediaries and customers for their loyalty and support. Special thanks and recognition go to our colleagues in regions where political and civil unrest have created less than favourable conditions for business and family lives. QBE event 1995 Launch of the QBE manager programme to promote the QBE culture and enhance the level of leadership and business acumen World event 1995 Vince McLenaghan General manager, Asia-Pacific

20 1996 WORLD Scores killed in Sri Lankan suicide bombing Britain alarmed by deadly cow disease QBE 1996 QBE establishes professional liability division in Australia QBE acquires Allstate Reinsurance Company Limited for $65 million New York the Americas The New York based American operations write both reinsurance and general insurance business in most US states and various countries in the Caribbean and Latin America. The team in the Americas currently underwrites business in 26 countries and five territories. The combined operating ratio was 101.0%, comparing favourably with 102.6% for the same period last year. Difficult market conditions, including excess capacity and inadequate premium rates, and the need to upgrade prior year claims reserves, particularly for casualty facultative business, caused considerable strain on the underwriting result. This was mitigated by the benefit of QBE s extensive worldwide reinsurance arrangements. Management concentrated on enhancing underwriting controls, strengthening management and underwriting teams and re-underwriting its portfolios, including cancelling consistently unprofitable business. These actions, together with premium rate increases for most classes of business, give us confidence for the future. Gross earned premium was up 48% to $203 million and net earned premium increased by 29% to $160 million. The increase came mainly from general insurance, following the renewal of business previously underwritten by a team hired in The business relationship established in 1999 with Panamanian reinsurer, Reaseguradora del Istmo, is also starting to contribute to growth. This partnership has laid the foundations for expansion in Latin America. Key ratios the Americas GENERAL INSURANCE INWARD REINSURANCE TOTAL SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO 31 DEC DEC DEC DEC DEC DEC 1999 Gross written premium $m Gross earned premium $m Net earned premium $m Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000

21 China agrees to world ban on atomic testing TWA 747 airliner crashes in Atlantic off Long Island Bomb mars summer Olympic Games in Atlanta QBE announces one for four bonus issue QBE s calendar year COR is lowest for a decade at 99.3% QBE s announces extensive worldwide whole account reinsurance protections The claims ratio decreased to 68.1% from 73.1%. The improvement resulted from a reduction in the frequency of large claims and catastrophes and effective reinsurance protections. The commission ratio increased from 23.4% to 26.7% due to the growth in general insurance business. The expense ratio remains low at 6.2%. QBE Reinsurance Corporation (QBE Re) writes selected lines of reinsurance business. The company is licensed, approved and accredited to transact business in 49 states and the District of Columbia. The name of the company was changed from Sydney Reinsurance Corporation as part of an ongoing strategic plan to market QBE Re worldwide. QBE Re s name will complement ongoing marketing and branding efforts in the Americas. All primary insurance business is written through QBE Insurance Corporation (QIC), which is currently licensed in 43 states and the District of Columbia. Product concentration centres on small commercial property and casualty business, complemented by commercial automobile and non-standard personal automobile lines. Specialised producer programmes complete the balance of the product mix. the Americas portfolio mix gross earned premium Gross written premium for QIC was $107 million, an increase of 494% over the same period last year. Business is generated through agents with proven track records. QIC currently has 15 insurance programmes written through 12 different agencies. The key objectives for the Americas in 2001 are to: use the recent AM Best rating upgrade and QBE brand to increase QBE s presence in the Americas; pursue acquisitions that will add shareholder value; finalise the comprehensive corporate risk management team; complete the integration and development of business management systems; continue our strategy of controlled profitable growth with strict underwriting disciplines; and obtain premium rate increases for selected portfolios. The QBE team in the Americas is well positioned to capitalise on future market opportunities and the focus is on increasing profits for our shareholders. I extend a personal thank you to the Americas team for their hard work and dedication during the past six months. Tim Kenny President, the Americas QBE event 1996 QBE enters the Lloyd s market by providing capital to parallel marine syndicates 724/2724 World event 1996

22 1997 WORLD Hale-Bopp comet is the closest it will be to Earth until 4397 Tiger Woods breaks multiple records in Masters golf tournament Hong Kong returns to Chinese rule QBE 1997 QBE acquires 75% of Trade Indemnity Australia Limited for $24 million QBE appoints Belinda Hutchinson to board of directors London European companies QBE s European companies division comprises general insurance and reinsurance businesses in London, Dublin and Paris, reinsurance operations in Sydney and Singapore and insurance companies in six countries in Central and Eastern Europe, four with life licences. The recent acquisitions of the specialist UK employers liability underwriter, Iron Trades, and the general and life insurance companies in Slovakia and Macedonia have resulted in significant premium growth for the division. Gross earned premium increased by 135% to $1,133 million and net earned premium grew 169% to $874 million. The lower Australian dollar assisted premium growth. The combined operating ratio deteriorated to 105.0% from 104.6% for the same period last year. Underwriting results continued to be affected by upgrades on prior year claims reserves, particularly for North American programme business, marine excess of loss, property risk excess of loss, property proportional and the Paris property facultative portfolio. This adverse loss experience was mitigated by our extensive worldwide reinsurance protections and vigorous management action on problem portfolios. This management action, including a detailed review of all underwriting portfolios in the second half of 2000, has resulted in the establishment of comprehensive business plans and controls to derive maximum benefit from the upturn in market conditions now being experienced. Key ratios European companies GENERAL INSURANCE INWARD REINSURANCE TOTAL SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO 31 DEC DEC DEC DEC DEC DEC 1999 Gross written premium $m Gross earned premium $m , Net earned premium $m Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000

23 US spacecraft transmits thousands of pictures from Mars Mother Teresa dead at 87 QBE announces one for four bonus issue QBE s total assets exceed $5 billion The change in mix of business, principally due to the Iron Trades acquisition, and lower reinsurance costs have reduced the commission ratio from 28.4% to 16.7%. Expenses increased as expected in line with growth. The expense ratio decreased to 10.9% from 13.9% for the same period last year, primarily due to the lower expense structure of Iron Trades. Costs relating to the integration of Iron Trades and operations in Central and Eastern Europe are included in the results. Expenses for the upgrade of core underwriting systems for London, Dublin and Paris, which commenced in late 1999, have been written off. There has been a significant change in the management structure of the European companies division. The London head office team is now primarily focused on risk management, controls and improvements in efficiencies. Separate divisions with self-sufficient support structures are being established for our Western European reinsurance, general insurance and financial risks businesses and our Central and Eastern European businesses. European companies portfolio mix gross earned premium Our objectives for 2001 are to: build on the significant premium rate increases on the 2001 renewals to take full advantage of the hardening market; continue to develop our underwriting and management information systems in our key western European operations; restructure the operations to allow more efficient use of capital and administrative resources; reduce expense ratios and unnecessary indirect costs of doing business; and continue to implement comprehensive monitoring procedures and controls, segmentation and financial modelling for each portfolio. The high level of acquisition activity, coupled with less than satisfactory results for some portfolios, has placed significant demands upon our team. I thank all staff for their dedication and their commitment to improving profitability for our shareholders going forward. Paul Glen Deputy general manager QBE event 1997 QBE s market capitalisation exceeds $2 billion World event 1997

24 1998 WORLD Indonesian dictator Suharto steps down after 32 years in power India conducts three atomic tests, despite worldwide disapproval. Pakistan stages five nuclear tests in response to India s QBE 1998 QBE acquires Atlasz Biztosito Rt in Hungary for $16 million QBE s board approves new investment strategy Lloyd s Lloyd s division The acquisition of Limit has given QBE the management of over 8% of Lloyd s capacity for the 2001 underwriting year. This strategic acquisition, completed in August 2000, has been fully integrated with the following objectives achieved: integration of the existing QBE Lloyd s agency and syndicates into Limit; replacement of underwriting teams lost due to the uncertainties prevailing at Limit pre-acquisition; integration of Limit s management, reporting and financial controls into the QBE model; sale of Limit s motor syndicates; and increased QBE s ownership of Limit s managed syndicates through the Lloyd s auction system. Underwriting results for the Lloyd s division include Limit from 17 August Net earned premium increased by 256% to $256 million. The combined operating ratio was 100.6% compared with 103.5% for the same period last year. The claims ratio improved from 61.0% to 56.5%, benefiting from extensive reinsurance protections. The reduction in the commission ratio from 29.8% to 28.9% reflects the difference in the mix of Limit s business compared with QBE s existing syndicates.the increase in the expense ratio from 12.7% to 15.2% was due to the post-acquisition and integration costs associated with Limit. Substantial premium rate increases have been achieved during the key January 2001 renewal season. In addition, we have restructured poor performing portfolios and cancelled consistently unprofitable business. These two factors are expected to have a positive impact on profitability for the 2001 underwriting year. Key ratios Lloyd s division GENERAL INSURANCE INWARD REINSURANCE TOTAL SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO SIX MONTHS TO 31 DEC DEC DEC DEC DEC DEC 1999 Gross written premium $m Gross earned premium $m Net earned premium $m Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % QBE ANNUAL REPORT 2000