QBE Insurance Group Annual Report 2004 (Editorial) · maximum of 29 million QBE shares or settled...

QBE Insurance Group Limited

82 Pitt Street

Sydney 2000 Australia

Phone +61 2 9375 4444

www.qbe.com

2004

QBE Insurance GroupANNUAL REPORT DECEMBER 2004

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QBE INSURANCE GROUP LIMITED ABN 28 008 485 014

CONTENTS

1 The year in review2 Chairman’s report5 10 year history6 Chief executive officer’s report

12 Group financial targets andperformance goals

13 Strategy and planning

14 Risk management16 QBE people18 Operations overview20 Australian general insurance22 Asia-Pacific general insurance24 the Americas26 European operations30 Investments

32 Shareholder information34 Financial calendar and

ASX announcements35 Board of directors36 Corporate governance statement42 Directors’ report46 Financial statements95 Directors’ declaration96 Independent audit report

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TO BE INTERNATIONALLY RECOGNISED AS

• a highly successful general insurance and reinsurance group • a builder of shareholders’ wealth • a developer of “can do” people• an organisation that excels in the continuous delivery

of new and proven quality products and services

Our vision

• increasing the long term wealth of shareholders • customer satisfaction and retention • employee motivation • integrity

Our values

QBE INSURANCE GROUP ANNUAL REPORT 2004

2004

1QBE INSURANCE GROUP ANNUAL REPORT 2004

PROFIT AND DIVIDEND PAYOUT2004 2003 % CHANGE

Net profit after tax $M 820 572 43

Net profit before tax $M 1,080 765 41

Basic earnings per share cents 117.8 86.5 36

Diluted earnings per share* cents 104.5 77.5 35

Dividend per share cents 54.0 42.0 29

Shareholders’ funds $M 4,420 3,313 33

GROUP OPERATING PERFORMANCE2004 2003 % CHANGE

Gross written premium $M 8,766 8,350 5

Gross earned premium $M 8,571 7,816 10

Net earned premium $M 6,781 6,036 12

Combined operating ratio % 91.2 93.8

Insurance profit $M 908 627 45

Insurance profit to net earned premium % 13.4 10.4

Cash flow from operations $M 2,110 2,089 1

DIVISIONAL OPERATING PERFORMANCE2004 2003 % CHANGE

Australian general insurance Gross earned premium $M 2,114 1,715 23


Asia-Pacific general insurance Gross earned premium $M 534 549 (3)


the Americas Gross earned premium $M 1,354 1,213 12


European company operations Gross earned premium $M 2,304 2,302 –


Lloyd’s division (trading as Limit) Gross earned premium $M 2,265 2,037 11


Investment income Gross $M 640 537 19

Net of borrowing costs and

investment expenses $M 508 413 23

* assumes that all hybrid securities are dilutive

ALL AMOUNTS IN THIS REPORT ARE DENOMINATED IN AUSTRALIAN DOLLARS UNLESS OTHERWISE SPECIFIED.

The year in review

2 QBE INSURANCE GROUP ANNUAL REPORT 2004

The Group produced a strong return onaverage shareholders’ funds of 21.2%compared with 18.3% in 2003. The overallunderwriting result and insurance profit is the best on record even after the Group absorbed significant claims fromfour major hurricanes in the US andCaribbean in August and September and the tragic earthquake and followingtsunami in Asia in December. The resultsreflect the benefits of our strategy ofgeographic and product diversificationand risk management and the relativelystable and favourable insurance marketconditions.

In recognition of the substantial profitincrease and our confidence in futureearnings, the directors have declared afinal dividend of 30.0 cents per share, up36% on the final dividend of 22.0 cents in 2003. The final dividend will be 50%franked. The higher franking ratecompared with prior years is due toincreased taxation payments from thestrong profits in Australia. The dividendreinvestment plans continue at a 2.5%discount.

The increased profit, the dividendreinvestment programmes and theconversion of hybrid securities haveresulted in an increase in shareholders’funds by 33% to $4,420 million at 31December 2004. While individual assetsand liabilities held in foreign currencieshave been affected by movements inmajor currencies, the net pre-tax effect on shareholders’ funds was minimalreflecting our policy of actively managing,where possible, our net foreign currencyexposures back to the Australian dollar.

The number of issued shares has grownby 74 million during the year due to acontinuation of the dividend reinvestmentprogrammes and the issue of 54 millionshares following the conversion of hybridsecurities. Basic earnings per share forthe year was 117.8 cents, up 36% from2003. On a fully diluted basis, includingthe conversion of all hybrid securitiesand options, earnings per share was104.5 cents, up 35% from 2003.

John CloneyChairman

The 2004 financial year was very successful for our Groupin both technical underwriting and financial terms. Net profit after tax was $820 million, up 43% from the profit of $572 million in 2003.

Chairman’s report


Gross earned premium $M

$8,571Mup 10%

Shareholders’ funds $M

$4,420Mup 33%

Dividend payout $M

$388Mup 38%

SHAREHOLDERS’ HIGHLIGHTSFOR THE YEAR TO 31 DECEMBER 2004 2003

Net profit after tax $M 820 572

Basic earnings per share cents 117.8 86.5

Diluted earnings per share* cents 104.5 77.5

Dividend payout $M 388 281

Dividend per share cents 54.0 42.0

Net tangible assets per share $ 4.47 4.17

Cash flows from operations $M 2,110 2,089

Total investments and cash** $M 15,067 11,823

Total assets $M 25,102 20,443

Return on average shareholders’ funds % 21.2 18.3

Shareholders’ funds $M 4,420 3,313

Borrowings to shareholders’ funds*** % 40.5 40.3

Capital adequacy multiple 1.9 2.1

* assumes that all hybrid securities are dilutive** excludes ABC investments pledged for funds at Lloyd’s*** excludes ABC securities for funds at Lloyd’s

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QBE’s share performance has benefittedfrom the anticipation of higher insurancemargins and generally strongerinvestment markets. QBE sharesoutperformed the Australian all ordinariesaccumulation index and inflation with agrowth rate of 50.4% for 2004 and acompound annual average growth of21.6% over the last five years and 22.5%over the last 10 years.

In order to strengthen QBE’s position inkey insurance markets and takeadvantage of favourable capital markets,we completed a number of acquisitionsand debt issues in 2004. The balancesheet remains strong with a ratio ofborrowings to shareholders’ funds of40.5% and a capital adequacy multiplewell above our minimum benchmark. Thewell structured balance of tier 1 and tier 2capital provided a capital adequacymultiple at 31 December 2004 of 1.9times the estimated minimum capitalrequirement for Australian regulatedinsurance companies. The capitaladequacy multiple was down slightlyfrom 2.1 times at 31 December 2003,reflecting acquisitions made during theyear and the impact of exchange ratemovements. We note that the AustralianPrudential Regulatory Authority (“APRA”)has not yet finalised prudential standardsfor calculating consolidated capitaladequacy requirements for non-operatingholding companies. We have made anumber of assumptions in applyingAPRA’s risk-based capital approach forAustralian insurers to the Group.

QBE continues to meet the demandingcriteria of rating agencies for increasedcapital adequacy and financial strength,with Standard & Poor’s reaffirming theA+ financial strength rating of QBE’smain insurance subsidiaries in May 2004.It is the intention of the directors toensure that the financial strength of allQBE’s operating subsidiaries ismaintained at a level adequate to meetthe requirements of our businesscounterparties, regulatory authoritiesand rating agencies.

To maximise the returns to shareholdersand maintain a competitive cost ofcapital, we raised US$375 million ofhybrid securities which, at the directors’discretion and subject to certainconditions, may be converted to amaximum of 29 million QBE shares orsettled in cash or a combination of both.Details of the hybrid securities areprovided in note 17 to the financialstatements. In addition to the hybridsecurities, £175 million of five year seniordebt was raised, with the proceeds ofthese arrangements used mainly tosupport the acquisition of ING’s 50%interest in the QBE Mercantile Mutualjoint venture in Australia and for generalcorporate purposes. In support of ourbusiness at Lloyd’s, we increased thelevel of contingent securities used toprovide our funds at Lloyd’s. US$220million of contingent securities wasraised, providing an opportunity toreplace bank letters of credit and otherforms of security to give an effective low cost of capital.

QBE has a strong focus on staffdevelopment, succession planning andthe provision of adequate rewards andincentives to retain our quality people.The QBE staff incentive schemes and theachievement of financial targets, primarilyreturn on equity, are closely aligned withthe interests and expectations of ourshareholders, both in the short and longterm. The long term incentives for oursenior executives incorporate deferredshare and option allocations as a rewardfor achieving financial performancehurdles and are structured to encouragelong term commitment to QBE. Many ofour incentive schemes are based onachieving return on opening shareholders’funds targets using the seven year spreadbasis of accounting, which spreadsrealised and unrealised gains on equitiesand properties evenly over a period ofseven years. Net profit after tax for 2004using the seven year spread basis ofaccounting was $759 million comparedwith $507 million in 2003. The return onopening shareholders’ funds adjusted fordividends and share capital issued duringthe year was 22.8% compared with18.4% last year. Details of these incentivearrangements and senior managementremuneration are set out in notes 21 and22 to the financial statements.

The annual report includes a number of statements on the robust corporategovernance structure and riskmanagement framework prevailingthroughout the Group. In recent years,increased regulatory focus, particularly for companies operating in the financialsector, has resulted in a substantialincrease in compliance costs with ourboard and management spending moreof their time attending to the requests ofregulators, rating agencies, corporategovernance bodies and others on riskmanagement and corporate governancematters. Management and the boardcontinue to refine our practices in riskmanagement and corporate governance.Our history shows that QBE has aneffective risk management culture with an emphasis on the key value drivers,such as business acumen and integrity, in our dealings with our customers andtransparent and efficient businesspractices to ensure that the operations of the Group are enhanced and the assetsof the Group are protected. The Group’sstatement of corporate governance is setout on pages 36 to 41 of this report.

The development of effective strategies,short and long term planning and riskmanagement practices are a key focus ofmanagement to minimise risks relating toour insurance and investment operationsand to protect the interests of all ourstakeholders. The directors haveapproved management’s strategy toreduce insurance risk for both aggregateexposure and claims frequency supportedby our extensive reinsurance protectionsand a low risk investment strategy for ourpolicyholders’ and shareholders’ funds.

The Australian Accounting StandardsBoard has now issued all Australianequivalents to International FinancialReporting Standards (“AIFRS”) which willhave effect from 1 January 2005. QBE’sfirst AIFRS compliant financial statementswill be for the half year ending 30 June2005 and the year ending 31 December2005. As a first time adopter of AIFRS,QBE must restate its openingcomparative statement of financialposition under AIFRS. Details of theexpected changes that will impact QBEare included in note 2 to the financialstatements.

Chairman’s report continued

10 YEAR HISTORYFOR THE YEAR TO 31 DECEMBER 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

Gross written premium $M 8,766 8,350 7,723 6,793 4,406 2,877 2,409 2,054 1,561 1,336

Gross earned premium $M 8,571 7,816 7,197 6,298 4,399 2,692 2,266 1,902 1,479 1,329

Net earned premium $M 6,781 6,036 5,642 4,634 3,456 2,204 1,914 1,609 1,204 1,105

Claims ratio % 61.4 63.3 67.6 76.6 71.2 70.1 68.1 68.6 67.0 68.1

Commission ratio % 17.5 18.2 17.7 20.2 18.3 19.9 18.3 17.1 17.3 17.8

Expense ratio % 12.3 12.3 12.4 12.8 13.0 13.9 13.9 13.8 15.0 14.5

Combined operating ratio % 91.2 93.8 97.7 109.6 102.5 103.9 100.3 99.5 99.3 100.4

Investment income*

before investment gains/losses $M 417 303 340 336 250 189 161 143 129 119

after investment gains/losses $M 508 413 189 349 310 243 164 163 182 181

Insurance profit (loss) $M 908 627 406 (119) 186 56 147 116 101 88

Insurance profit (loss) to net earned premium % 13.4 10.4 7.2 (2.6) 5.4 2.5 7.7 7.2 8.4 8.0

Operating profit (loss)

before tax $M 1,080 765 311 (99) 220 156 157 170 189 176

after tax and outside equity interests $M 820 572 279 (25) 179 132 141 131 150 136

Number of shares on issue millions 745 672 615 585 429 395 383 374 288 224

Shareholders’ funds $M 4,420 3,313 2,954 2,620 1,709 1,135 1,057 968 875 750

Total assets $M 25,102 20,443 20,567 18,611 13,948 8,559 5,964 5,065 4,113 3,141

Basic earnings per share cents 117.8 86.5 42.7 (10.5) 42.6 33.8 37.3 35.6 42.2 39.6

Diluted earnings per share** cents 104.5 77.5 43.4 (4.9) 40.7 33.8 37.3 35.6 42.2 39.6

Return on average shareholders’ funds*** % 21.2 18.3 10.0 (1.1) 12.6 12.0 13.9 14.2 18.4 19.7

Dividend per share cents 54.0 42.0 35.0 30.0 31.0 32.5 26.5 24.0 20.8 17.9

Dividend payout $M 388 281 213 155 132 130 101 88 74 62

* excludes amortisation of goodwill and write-off of intangibles** assumes that all hybrid securities are dilutive in 2004*** includes convertible preference shares from 2000 to 2003 and the equity portion of hybrid securities issued in 2002 and 2004

While economic conditions in the majorinternational markets are stable at presentwith generally continued favourableconditions for the insurance sector, yourdirectors will maintain a careful watch onglobal economic conditions and closelymonitor markets to ensure theeffectiveness of our strategies and plans.We encourage management to continueour proven successful strategy of growththrough acquisitions. We are confidentthat the current capital level, togetherwith expected profits, are sufficient tofinance our anticipated growth in themedium term.

The record 2004 result was a significantachievement and the directors areconfident that, subject to unforeseencircumstances, the successful formula for continued profit and growth in

shareholder wealth will continue. Theboard congratulates the CEO, FrankO’Halloran, and thanks him, hismanagement team and QBE staffthroughout the world for theircontribution, dedication and commitment.In particular, I acknowledge the support of my fellow directors. Specificacknowledgement and thanks areextended to Charles Curran, who retiresat the Annual General Meeting in April in accordance with our general policy on tenure of directors. Charles has served on the board since 1991 and hiswork has been appreciated by all of hiscolleagues over those years.

John Cloney Chairman



I am pleased to report that QBE has exceeded its 2004 profit targets with a 43% increase in operatingprofit after tax to $820 million and a 45% increase ininsurance profit before tax to $908 million.

Chief executive officer’s report

Frank O’HalloranChief executive officer

It is also very satisfying that all insurancedivisions produced improved underwritingand insurance profits even though QBEexperienced significantly more claimsfrom catastrophes in 2004 than in 2003.The operating profit after tax of$820 million includes net realisedand unrealised gains on investmentsof $66 million after tax compared withgains of $84 million after tax last year.

The impact of the stronger Australiandollar on gross and net earned premiumand profit after tax was significant. More details of the impact are set out on page 9.

The insurance profit to net earnedpremium ratio improved from 10.4% to 13.4% even though the Group had net claims from large catastrophes of$320 million compared with $27 millionlast year, and prudential margins inoutstanding claims were furtherstrengthened to achieve a probability of adequacy of 94%.

In 2004, overall premium rate increasesslowed, mainly as a result of thesignificant improvement in underwritingprofitability achieved by the industry andQBE over the past two years. Veryimportantly, the improved policy termsand conditions achieved in 2002 and 2003were substantially maintained in 2004.

Cash flow from operations was again very strong at $2,110 million comparedwith $2,089 million last year.

Income tax expense decreased slightlyfrom 24.6% of profit before tax last yearto 23.4%, primarily as a result of untaxeddividends, low rates of tax in somecountries and the release of prior yearprovisions.

WORLDWIDE PORTFOLIO MIXGross earned premium

FOR THE YEAR TO 31 DECEMBER 2004 2003

Marine and aviation 6.6% 8.4%

Accident and health 6.1% 5.6%

Property 29.9% 30.7%

Motor and motor casualty 12.3% 10.4%

Financial and credit 2.4% 3.1%

Liability 21.8% 17.9%

Professional indemnity 9.5% 9.2%

Workers’ compensation 9.6% 9.2%

Other 1.8% 5.5%


During the past year, we initiated orcompleted many profit and premiumenhancing initiatives. In particular, we:

• Purchased the Ensign commercialmotor business (syndicate 980) in theUK, which generated $328 million ofgross written premium in 2004 and anexpected $575 million in 2005.

• Purchased ING’s 50% interest in theQBE Mercantile Mutual joint venture inAustralia, which increased grosswritten premium by $290 million in2004 and an expected $600 million in2005.

• Acquired additional capacity in the QBEmanaged Lloyd’s syndicate 386 to giveQBE a 68.4% interest in the estimated$1,150 million of gross premiumexpected to be written by thatsyndicate in 2005.

• Acquired a group life and personalaccident portfolio in Brazil.

• Acquired Zurich’s insurance operationsin Singapore.

• Hired trade credit, surety, property andcommercial motor underwriting teamsin the UK.

• Acquired a workers’ compensationportfolio in Argentina.

• Acquired a general insurance businessin Estonia.

• Acquired Icon Schemes’ (formerlyTolson Messenger) self-employedinsurance internet business in the UK.

• Added new agency programmes in theUS to complement existing businesswritten.

• Restructured our management teams in the UK, which will produce at least$60 million of annual savings by theend of 2007.

• Benefitted from synergies from theacquisition of the QBE MercantileMutual joint venture, which isestimated to give us savings of$40 million per annum by the end of 2006.

• Agreed terms for the purchase of threelarge and profitable agency businessesin Australia, namely AIS Green SlipGroup (“AIS”), CHU UnderwritingAgencies (“CHU”) and 50% of ConcordUnderwriting Agencies (“Concord”). Thelatter two agencies are on performanceincentives designed to increase QBE’sprofitability for the next two to threeyears. These agencies currentlyproduce $375 million of gross writtenpremium for QBE.

Neil Drabsch Chief financial officer

In summary, the acquisitions and otheractivities above will add in excess of$800 million of gross written premium in2005 together with the profit that willflow from this business. In addition, theywill generate around $100 million ofexpense and reinsurance cost savings bythe end of 2007.

Insurance profitabilityInsurance profit increased from$627 million last year to $908 million.Insurance profit comprises theunderwriting result plus investmentincome on investments set aside to meetour liabilities to policyholders. The furtherimprovement in the underwriting resultwas after the significant increase incatastrophe claims in 2004 and theincrease in prudential margins inoutstanding claims. The Group’scombined operating ratio (the total ofclaims, commissions and expenses as a percentage of net earned premium) was 91.2% compared with 93.8% lastyear. All insurance divisions producedimproved underwriting profits and thesubstantial majority of our productsaround the world were again profitable.As a percentage of average shareholders’funds, insurance profit increased from20.0% last year to 23.5%.

The substantial cash flow from operationsof $2,110 million for the year resulted fromthe growth in net earned premium and thecontinuation of a low frequency of claims.Net invested funds set aside to meetinsurance liabilities increased by $2.8billion. Cash flow from operations andacquisitions has been considerable for thepast five years with over $7.5 billion addedto the investment portfolio.

Gross written premium increased 5% to $8,766 million despite the strongerAustralian dollar, which reduced reportedgrowth by 6%. Gross earned premiumwas up 10%. The strong premium growthwas due to acquisition activity and ahigher retention of business. Organicgrowth slowed in some classes becauseof competition and our unwillingness toreduce premium rates. QBE’s offshorebusinesses now contribute 76% to theGroup’s gross written premium and thegeneral insurance/reinsurance mix is

now 77%/23%. Net earned premiumincreased 12% to $6,781 million with thestronger Australian dollar during 2004reducing reported growth by 5%.

The Group’s reinsurance costs as apercentage of gross earned premiumdecreased from 23% last year to 21% as expected. The cost of reinsurance is made up of 48% for proportionalreinsurance (mainly for programmebusiness in the US) and 52% forcatastrophe and other excess of loss reinsurance. The longstandingrelationships with many of our reinsurersand the mutually profitable experienceover the past few years have assisted usto obtain lower reinsurance costs andfavourable terms. QBE’s net exposure tomajor catastrophes continued to decreasewith a 2004 maximum retention from thelargest modelled catastrophe event being14% lower than 2003. QBE’s reinsurersagain earned a significant profit from thebusiness we placed with them in 2004.

Gross claims incurred as a percentage ofgross earned premium increased from61.7% to 62.3%. The increase in theclaims ratio reflects higher catastropheclaims and increased prudential marginspartially offset by the continuation of lowclaims frequency from improved policyterms and conditions and premium rateincreases. Gross and net claims from thefour hurricanes in the US and Caribbeanwere $670 million and $230 millionrespectively. The gross and net claimsfrom the tragic earthquake and followingtsunami in Asia in December 2004 areestimated to be $165 million and $80million respectively. The net claims ratio,which includes the net cost of thesecatastrophes, decreased from 63.3%to 61.4%.

The commission ratio decreased from18.2% to 17.5%, reflecting a change inthe mix of business and the impact ofacquisitions during the year.

The Group’s expense ratio was unchangedat 12.3%. The expense ratio reflectsfurther synergies from acquisitions andother initiatives, partly offset by theincreased cost of short and long termstaff incentives for improved insuranceresults, further increases in the cost ofcorporate governance and regulatoryrequirements and the cost of therestructure in the UK in September 2004.

Investment incomeInvestment income, which is net ofborrowing costs, foreign exchange gainsand losses and investment expenses,increased from $413 million to $508million. Higher interest rates in Australia,the US and the UK, acquisitions andstrong cash flow from operationsbenefitted investment income during the year. Gross investment income was$640 million compared with $537 millionlast year. The gross investment yield isunchanged at 4.6%. We continue toreduce the maturity profile of our cashand fixed interest investments inanticipation of rising interest rates. Theaverage maturity of our cash and fixedinterest portfolios at the end of 2004 was 0.6 years.

We also continued our policy of investingin highly rated fixed interest securitiesand value equities. Our weighting in listedequities reduced from 10.5% of totalinvestments and cash to 8.9% at 31December 2004. The reduction occurredin the last two months of 2004 as werealised gains from the strong equitymarkets.

Impact of the stronger Australian dollarWe have mentioned at regular intervalsover the past 18 months that a strongerAustralian dollar would have a negativeimpact on revenue and profit after tax.The Group translates income andexpense items using a cumulativeaverage rate of exchange and, on thisbasis, the Australian dollar rose 12.5%against the US dollar and 2.1% againststerling compared with last year. Balancesheet items are translated at the closingrate of exchange. On this basis, theAustralian dollar rose 3.9% against theUS dollar and fell 3.2% against sterling.There was a substantial strengthening ofsterling against the US dollar during 2004,which had a significant impact on theUS dollar premium written by our Lloyd’sand European company operations whenconverted into sterling. Examples of theimpact of exchange rate movements areincluded in the table on page 9.


Chief executive officer’s report continued

KEY RATIOS — GROUPHALF YEAR HALF YEAR FULL YEAR HALF YEAR HALF YEAR FULL YEARTO 30 JUN TO 31 DEC TO 31 DEC TO 30 JUN TO 31 DEC TO 31 DEC

2004 2004 2004 2003 2003 2003

Gross written premium $M 4,763 4,003 8,766 4,821 3,529 8,350

Gross earned premium $M 3,982 4,589 8,571 3,882 3,934 7,816

Net earned premium $M 3,114 3,667 6,781 3,083 2,953 6,036

Claims ratio % 62.0 60.9 61.4 65.1 61.4 63.3

Commission ratio % 16.8 18.1 17.5 18.7 17.7 18.2

Expense ratio % 12.0 12.5 12.3 12.2 12.4 12.3

Combined operating ratio % 90.8 91.5 91.2 96.0 91.5 93.8

Insurance profit ratio % 13.1 13.6 13.4 8.4 12.5 10.4


IMPACT OF STRONGER AUSTRALIAN DOLLAR2004 2004 AT 2003 EXCHANGE RATE

ACTUAL EXCHANGE RATES IMPACT$M $M %

Gross earned premium 8,571 9,090 6

Net earned premium 6,781 7,135 5

Net investment income 508 536 6

Profit after tax 820 878 7

Total investments and cash 15,067 15,147 1

Total assets 25,102 25,566 2

Gross outstanding claims 12,469 12,595 1

Total liabilities 20,622 20,734 1

GROUP FINANCIAL HIGHLIGHTS

FOR THE YEAR TO 31 DECEMBER 2004 2003 2002 2001 2000% % % % %

Premium growth

– gross written 5.0 8.1 13.7 54.2 53.1

– net earned 12.3 7.0 21.8 34.1 56.8

Reinsurance ceded to gross written premium 20.3 21.7 21.1 26.8 21.6

Net written premium to gross written premium 79.7 78.3 78.9 73.2 78.4

Insurance profit (loss) to net earned premium 13.4 10.4 7.2 (2.6) 5.4

Insurance profit (loss) to shareholders’ funds* 23.5 20.0 14.6 (5.5) 13.1

* average shareholders’ funds at net market value

CONTRIBUTIONS BY REGION GROSS WRITTEN NET EARNED NET PROFIT COMBINED

PREMIUM PREMIUM AFTER TAX OPERATING RATIOFOR THE YEAR TO 31 DECEMBER 2004 2003 2004 2003 2004 2003 2004 2003

$M $M $M $M $M $M % %

Australian general insurance 2,102 1,869 1,831 1,425 258 180 88.1 92.8

Asia-Pacific general insurance 520 542 439 430 56 38 85.4 90.0

the Americas 1,382 1,342 805 740 68 46 92.3 93.1

European company operations 2,453 2,441 1,971 1,908 216 168 94.3 94.7

Lloyd’s division 2,309 2,156 1,735 1,533 222 140 92.1 95.1

Group 8,766 8,350 6,781 6,036 820 572 91.2 93.8

General insurance 6,715 6,059 5,184 4,265 687 392 89.4 92.4

Inward reinsurance 2,051 2,291 1,597 1,771 133 180 97.3 97.2

Group 8,766 8,350 6,781 6,036 820 572 91.2 93.8

Reinsurance recoveriesReinsurance recoveries on outstandingclaims increased from $2,885 million at31 December 2003 to $3,098 million, but reduced as a proportion of totalassets from 14% to 12%. The increase is primarily due to acquisitions, recoverieson current year catastrophe claims and an increase in recoveries in respect of ourold US casualty and Australian asbestosclaims. Reinsurance recoveries onincurred but not reported claims includedin this amount were $1,216 millioncompared with $1,193 million last year.We continue to maintain strict controlsover our exposure to reinsurancecounterparties and are confident that ourprovision of $163 million for doubtfulrecoveries is adequate. We negotiated anumber of commutations with reinsurersduring the year to finalise amounts dueon many reinsurance contracts.

OutlookBased on current exchange rates, weexpect our gross written premium togrow by 10% in 2005 to $9.6 billion andour net earned premium to grow by12.5% to $7.6 billion. Growth is expectedto be achieved from the acquisitionsmade in 2004 and a continued highretention of customers. Organic growth is likely to be only slightly in excess oflapsed business. Overall premium rateincreases are expected to be less thanclaims inflation, however, they remainsufficient to meet our profit targets formost of our classes of business. We were slightly below our expectation forpremium rates and new business at themajor renewal date of 1 January 2005.Our target annual net earned premiumgrowth of 10% beyond 2005 will dependon acquisitions and the value of theAustralian dollar.

The risk profile of our insurance andreinsurance operations will continue to bemonitored through portfolio management,improved aggregate management and the purchase of additional reinsuranceprotections for large catastrophes. The2005 net retention from our largestrealistic disaster scenario will be slightlylower than 2004. Current pricing toachieve our insurance profit targets isestimated to include allowances for

catastrophes and large losses of morethan four times the net retention from ourlargest realistic disaster scenario.

The reinsurance expense ratio is expectedto decrease in 2005 to 19% of grossearned premium. This targeted reductionis subject to a normal level of large andcatastrophe losses, our prudent approachto managing the risk profile of newportfolios and opportunities that may beavailable to reduce the Group’s retentionon major catastrophes. We have alreadyplaced a large portion of our 2005reinsurance protections on terms slightlybetter than expected and with noincrease in the Group’s retentions for any one risk or event.

Our analysis of the claims ratio betweenattritional losses, large losses andcatastrophes indicates that the 2005business plan allowances for large lossesand catastrophes substantially exceed theamounts incurred in each of the pastseven years.

The combined commission and expenseratio is targeted to decrease slightly in2005, with further reductions in 2006 and2007 as the synergies from therestructures in the UK and Australia andother acquisitions are realised.

The gross investment yield is targeted to be 4.5% for 2005. This includes a 5% capital appreciation on equities. Wedo not expect improvements in stockmarkets to be at the same level as thepast two years. The improvements ininterest yields on our substantial US andUK investment portfolios will assist ourexpectations for improved yields. At ourcurrent level of equity investments, a 1% change in equity markets impactsprofit after tax by approximately$10 million and a 1% change in interestrates impacts profit after tax byapproximately $58 million.

Based on current exchange rates, netinvested funds are expected to exceed$15 billion by 31 December 2005 as aresult of the expected strong cash flowand other initiatives.

The income tax expense is expected toincrease to around 26% of pre-tax profitfor 2005.

We will continue to focus on the personaland technical development of our seniorpeople to ensure continuity ofmanagement and to maintain a very lowsenior staff turnover. This developmentwill include enhancements to our QBEmanager programme, which continues tobe invaluable in maintaining the QBEapproach to integrity, leadership andbusiness acumen in our operationsaround the world.

The Group’s probability of adequacy foroutstanding claims is now at the high end of our internal target range. Inaddition, our provision for unearnedpremium includes a significant allowancefor large losses and catastrophes in 2005.These factors, together with the currentpremium rate environment, give usconfidence of achieving an insuranceprofit between 12.5% and 13.5% andincreasing net profit after tax by morethan 10% in 2005. As always, this issubject to:

• no material movement in currentexchange rates;

• large losses and catastrophes notexceeding the significant allowancemade in our business plans; and

• no major fall in equity markets orinterest rates.

SummaryThe consolidation that has occurred in theinsurance and reinsurance industriesaround the world, together with thereduction in capacity as a result of anumber of failures and withdrawals inmany markets, have ensured that thecurrent positive environment has lastedlonger than any previous insurance cyclein the past 30 years. In the last fewmonths, we have seen some downwardadjustment to pricing to reflect thesubstantially improved market conditionsfor insurers and reinsurers. Thiscorrection in pricing was primarily for thelarger property, marine and energy risks.The lower frequency of liability claimsexcluding the US also affected liabilitypricing. Premium rates continue to bestrong for the majority of classes ofbusiness that are written by QBE.


Chief executive officer’s report continued


In 2004, QBE further increased theprudential margins held in its outstandingclaims provisions. Group prudentialmargins in outstanding claims nowprovide a probability of adequacy of 94%.The increase in prudential margins inrecent years is largely a result of theincrease in our exposure to non-US longtail classes of business. The current levelof probability of adequacy is at the highend of our internal target range and wellin excess of the minimum APRArequirement of a 75% probability ofadequacy for Australian licensed insurers.The probability of adequacy of theGroup’s outstanding claims provisions will vary from time to time depending on the mix of short, medium and long tail business and economic and industryconditions such as latency claims, claims inflation and foreign currencymovements. QBE has again increased its provisions for its relatively limitedexposure to asbestos-related claims. TheGroup’s survival ratio for asbestos-relatedclaims, measured as a ratio of netprovisions held to the average of the past three years’ net claims paid, is nowover 33 times.

The substantially stronger Australiandollar has made it difficult to achievetargets for premium income. However,we have been very successful with ouracquisition activity in 2004, which willhave a positive impact on performancegoing forward. Additional funds investedby our shareholders in the past threeyears, together with the increase in longterm debt, have enabled QBE to grow itsbusiness and profitability at the right timein the insurance cycle. The excellent 2004result and our positive outlook have beenachieved through the disciplined andprofessional approach of our 7,300 plusstaff worldwide.

We are looking at a number ofacquisitions in the Asia-Pacific region, the Americas and Europe. We areconfident that our strong capital positionand the expected conversion of some of the hybrid securities in 2005 will giveus sufficient shareholders’ funds tosupport any potential growth from ourcurrent acquisition activity between nowand the end of 2005.

QBE has a well diversified spread ofbusiness both geographically and byproduct. We lead terms and conditions on the substantial majority of business in most of the countries in which we

operate. We have been successful inintegrating the significant number ofhighly skilled and experienced people inkey roles throughout the Group acrossunderwriting, claims, finance, actuarial,information technology, administrationand management. Many of ouremployees are capable of filling seniorroles as they arise in the Group. Thesefavourable factors, together with a verystrong focus on creating further wealthfor our shareholders from our manyexcellent businesses around the worldwithin the parameters of measurablebusiness plans, give us confidence aboutour future performance.

I extend my sincere appreciation to all of my fellow employees for their hardwork, loyalty and significant contributionover the past year and to our directors for the support they have provided on themany initiatives that we have undertaken.I look forward to working with the QBEteam to achieve the financial targets for 2005 and to build an even strongerQBE going forward.

Frank O’HalloranChief executive officer

QBE has extensive experience in all forms of commercial and domestic liability insurance.


04Group financial targets and performance goals

Performance goals

• achieve overall premium rate increases at least equal to claims inflation

• further increase customer retention

• further reduce risk profile of insurance business

• achieve gross investment yield target with a low risk investment strategy

• continue promotion of QBE manager programme

Financial targets

• achieve an insurance profit margin of 10% to 11%

• increase profit after tax and diluted earnings per share by more than 10%

• achieve a return on equity in excess of 13.4%, being 1.5 times the weighted average cost of capital

• gross written premium growth of 10%

• net earned premium growth of 12.5%

• reinsurance expense ratio of 21%

• maintain expense ratio of 12.4% or less

• tax rate of 25%

• maintain Group capital adequacy multiple of more than 1.5 times APRA’s minimum requirement for Australian licensed insurers

• gross investment yield of 4.0%

Actual

• insurance profit margin 13.4%

• profit after tax increased 43% and diluted earnings per share increased 35%

• return on equity of 21.2% exceeded 1.5 times the weighted average cost of capital

• gross written premium increased 5% affected by the impact of translation to the stronger Australian dollar

• net earned premium increased 12%

• reinsurance expense ratio 21%

• expense ratio 12.3%

• tax rate 23%

• capital adequacy multiple of 1.9 times the minimum requirement

• gross investment yield 4.6%

Actual

• majority of business in the aggregate was renewed at rates slightly below claims inflation

• retention ratios increased for the majority of portfolios

• maximum event retention reduced

• internal benchmarks exceeded

• programme run in a number of countries

OPERATIONAL PERFORMANCE 2004

FINANCIAL PERFORMANCE 2004


Strategy and planning

QBE has developed a businessplanning framework whichensures that there is a systematicand disciplined approach toplanning throughout the Group.

* targets assume no material movement in current exchange rates; largelosses and catastrophes not exceeding the significant allowance in ourbusiness plans; and no major fall in equity markets or interest rates.

The framework helps to:

• establish a clear direction for each operatingdivision;

• build confidence in our ability to execute ourcorporate strategies and deliver against ourbusiness plans;

• more accurately project profitability and financialperformance;

• improve alignment of internal resources withexternal opportunities;

• generate greater accountability and transparency indecision making; and

• target the reduction of uncertainty and volatility,thereby reducing the likelihood and impact ofevents that could threaten our ability to meet ourbusiness objectives.

The QBE board of directors approves the Group’sstrategy and detailed business plans prepared bymanagement and reviews actual performance againstthe plans. The strategy is consistent with shareholderexpectations, our corporate financial profile, ourorganisational culture and our capacity to effectivelymanage risks. The strategy and plans form the basisfor our risk tolerance within the Group.

Business plans are developed for all classes ofinsurance business, for our investment portfolios andfor all support functions. The plans clearly documentour strategy for achieving financial targets andperformance goals within the limits set. Annualbudgets included in the business plans form the basisfor delegating authorities to all managers and staffwith specific responsibilities, including underwriters,investment managers and claims managers.

Business plans are subject to detailed review by localand Group senior management. They are preparedannually and actual results are monitored regularly toidentify adverse trends so that remedial action can betaken at an early stage. Regular reporting to both localand Group boards on performance against the businessplans, including action plans to correct adversevariances, is a fundamental control within the Group.

05Financial targets*

• achieve an insurance profit margin of 12.5% to 13.5%

• increase profit after tax by more than 10%

• achieve a return on equity of more than 18.0%

• gross written premium growth of 10%

• net earned premium growth of 12.5%

• reinsurance expense ratio of 19%

• maintain expense ratio of 12.3% or less

• tax rate of 26%

• maintain Group capital adequacy multiple of more than 1.5 times APRA’s minimum requirement for Australian licensed insurers

• gross investment yield of 4.5%

Performance goals

• maintain premium rates at levels sufficient to achieve targeted attrition loss ratios

• maintain existing terms, conditions and deductibles

• further reduce risk profile of insurance business

• achieve gross investment yield targets with a low risk investment strategy

• continue high retention of key staff and managers

• effectively manage the impact of a strengthening Australian dollar and US dollar volatility

OPERATIONAL PERFORMANCE 2005

FINANCIAL PERFORMANCE 2005

The risk management frameworkimplemented by QBE is based on apragmatic approach. This approachprovides the flexibility and efficiency whichis required to maintain high standards inan ever-changing regulatory and businessenvironment. Robust systems andprocesses are also fundamental to thesupervision and management of a diverseinternational group. This framework isestablished around a suitably qualified anddedicated team which is focused onmanaging with integrity:

• Group strategy including vision andvalues;

• achievement of financial targets andperformance goals;

• identification and control of areas ofbusiness risk;

• recruitment of quality people;• management and development of staff;

and• regulatory compliance.

Throughout the Group a culture of utmostintegrity prevails. This requires open andhonest dealings with our employees,customers, shareholders, legislativebodies and the community at large.

The QBE culture is based upondisciplined policies and risk managementpractices, supported by the QBE managerprogramme. Through this programme andother key initiatives, QBE promotes riskmanagement as a core managerialcompetency.

QBE has in place a global riskmanagement framework, with clearauthorities defining the type and extent ofrisk to be accepted by each of ourbusinesses and a common approach tomanaging those risks. The foundation ofour risk management policy is theobligation and desire to manage our futureand create wealth for our shareholders by:

• avoiding surprises from uncertainty andvolatility;

• minimising risk and more effectivelyallocating capital and resourcesthrough due consideration of thebalance of risk and reward; and

• achieving competitive advantagethrough better understanding of therisk environment in which we operate.

Gayle Tollifson Chief risk officer


QBE is committed to sound, practical risk management in order toprotect shareholders’ and policyholders’ interests.

Risk management

A diverse range of insurance products is a key part of QBE’s global strategy.

This policy is supported by a riskmanagement strategy identifying our keyrisks and our approach to themanagement of these risks. The strategyclearly documents the practical applicationof the risk management frameworkthroughout the business managementcycle, including the business and strategicplanning process. Internal controls andsystems are designed to providereasonable assurance that the assets ofthe Group are safeguarded, insurance and investment exposures are withindesired limits, reinsurance protections are adequate, counterparties are subjectto security assessment and exposures to foreign currencies are withinpredetermined limits.

Diversification is used as a tool to reducethe Group’s overall insurance risk profileby spreading exposures geographicallyand by product, thereby reducing thevolatility of results. Product diversificationis achieved through a strategy ofdeveloping strong underwriting skills in a wide variety of classes of insurancebusiness. A combination of core andspeciality products allows QBE to be alead underwriter in many of the marketsin which we operate. Geographicdiversification is achieved by operating in 38 countries.

QBE manages its risks within thefollowing categories:

• Insurance – including underwriting,claims and actuarial risk factors.

• Operational – including areas such ashuman resources, valuation of assets,

corporate security and outsourcing,regulatory risks and the adequacy ofprocesses and systems.

• Acquisition – including due diligenceand integration processes.

• Funds management and treasury –including operational, cash flow, tradingand security risks.

Risk management at QBE is a continuousprocess that is a key aspect of the waywe conduct our business. Our approachis to integrate risk management into themanagement processes within theorganisation.


RISK MANAGEMENT FRAMEWORK

QBE BOARD OF DIRECTORS

GROUP EXECUTIVE

Audit committee

Remunerationcommittee

Chairman’s committee

Investment committee

Nominationcommittee

Fundingcommittee

BUSINESS MANAGEMENT

Compliance

Management review and reporting

Actuarial review and reporting

Business planning framework

Investment strategy

Corporate culture

Diversification

Risk and reinsurance management strategy

Delegated authorities

PERF

OR

MA

NCE

PERFORMANCE

BU

SINESS

GROUPEV

ALUA

TION

M O N ITO RIN G

PLANS

STRATEGY

LIM

ITS

AUTHORITIES

Internal audit


QBE has developed a culture based onutmost integrity, sound business acumenand strong leadership, supported byeffective corporate guidelines anddisciplined risk management practices.These qualities have contributed toconsistently high business standards and a consistent increase in the wealth of shareholders.

Our high performance culture is builtupon the recruitment, motivation andretention of high quality people,entrusting them with responsibility,rewarding success and adopting a “can do” approach to our business andour development.

Our employee numbers have grown to7,320 in 2004, up from 6,746 in 2003,following acquisitions and growth in the business. QBE has a preference togrow its own talent leveraging off theexperience of our highly skilled andprofessional teams across the world. We regularly review our developmentprogrammes to provide opportunities foremployees to realise their full potential.Succession planning is a focus at alllevels throughout QBE.

Underpinning our strategy for attracting,retaining, developing and motivating ourquality people is the QBE managerprogramme, which was introduced in1995. The programme is activelypromoted through structured seminars tostaff across the Group. The programmereinforces nine essential behaviours withthe acronym “OPENUPQBE”, which formthe basis of our business and leadershipstandards.

These behaviours ensure a consistentapproach in all our key activities and havefacilitated the integration of the manydiverse teams that have joined QBEthrough the numerous acquisitions wehave made worldwide. The QBE managerprogramme, with its focus on our vision,values and essential behaviours, togetherwith the delivery of quality staffmanagement programmes and thepromotion of a culture of excellence,create a common thread throughout ourorganisation.

QBE peopleQBE recognises that its people are critical to successfully delivering itsbusiness strategy and plans.

Jenni SmithGroup general manager,human resources

QBE is a major provider of workers’ compensation and employers’ liability products andservices in the Australian, UK, Latin American and selected Asian and Pacific markets.


The QBE essential behaviours are furtherpromoted through:

• performance management;• succession planning;• talent management; and• personal development planning.

QBE’s people are selected for their ability,their experience and their “can do”approach to achieving corporateobjectives. Our aim is to ensure that theinterests of our shareholders and staff are aligned. In order to encourage highlevels of performance and to achieve ourkey objective to increase shareholders’wealth, “at risk” incentive arrangementsare in place for most of the staffworldwide through participation in profitshare incentive (“PSI”) arrangements.These arrangements reward staff whenthey achieve or exceed financial targetsand meet personal performanceobjectives. Also central to our incentivearrangements is the Employee Share andOption Plan (“the Plan”) which has beenin place since 1981. Almost 4,800 or twothirds of our employees at all levels of the organisation now hold shares in QBEthrough the Plan, providing a furthermotivation for them to achieve theGroup’s objective of increasing wealth for our shareholders.

The Group’s senior management alsoparticipate in a long term incentiveprogramme called the Senior ExecutiveEquity Scheme (“the SEES”). Seniormanagers are only entitled to participatein the SEES if they have already qualifiedfor the short term incentives by achievingtheir financial targets. Details of the Planand the SEES are set out in notes 21 and22 to the financial statements.

QBE recognises the importance of itsemployees and the need to provide a safeworking environment and opportunities togrow and benefit from the experience andsuccess of the Group.

HUMANCAPITALS

UC

CE

SS

ION

TALENT

SUC

CE

SS

ION

PERFORMANCE

PER

SONAL D

EVELOPMENTP

LA

NN

ING

MANAGEMENT

PLA

NN

ING

MANAGEM

ENTPLANNING

IDENTIFYING HIGH

KEY

ROLE

ANNUAL PERFORMANCE

DEVE

LOPING & RETAINING

ALIGNING HIGH

PERFORMING EMPLOYEES

IDEN

TIFI

CATI

ON

REVIEW

IDEN

TIF

IED HIGH PERFORMING

PERFORMIN

G EMPLOYEES

WITH

KEY ROLES

REPLA

CEMENTS

STAFF NUMBERS

AS AT 31 DECEMBER 2004 2003

Australian general insurance 2,910 2,758

Group head office 67 70

Asia-Pacific general insurance 1,303 1,288

the Americas 256 252

European company operations 2,011 1,942

Lloyd’s division 725 395

Investments 48 41

Total 7,320 6,746

• integrated European management structure in September 2004 to merge theformer European company operations and Lloyd’s division into one operation

• experienced above average frequency and severity of catastrophe and risklosses, including significant US hurricane activity

• successfully merged marine syndicates 1036 and 2724, including integration of the entire marine portfolio into syndicate 2999 permitting greater capital andreinsurance flexibility

• completed Ensign (syndicate 980) commercial motor acquisition • transferred management of Central European operations to Asia-Pacific general

insurance effective 1 January 2005


Operations overview

Key activities

Australian general insurance• general insurance operations throughout

Australia• provides all major lines of insurance

cover for personal and commercial risks

Asia-Pacific general insurance• general insurance business in the

Asia-Pacific region• ongoing operations in 16 overseas locations

with divisional head office in Sydney• provides personal, commercial and

specialist insurance covers, includingprofessional and general liability, marine,corporate property and trade credit

the Americas• reinsurance and general insurance

business in the Americas• based in New York with offices in North,

Central and South America and Bermuda

European company operations• product focused commercial insurance

and reinsurance operations in London,Dublin and Paris

• general insurance operations in sixcountries in Central Europe

Lloyd’s division (trading as Limit)• product focused commercial insurance

and reinsurance business in the Lloyd’smarket

• largest managing agent at Lloyd’s withover 7.1% share of total market capacityin 2005

• manages six syndicates

Investments• management of the Group’s investment

funds • funds are predominantly managed

in-house

Major events

• another year free of major catastrophes • acquired Mercantile Mutual Insurance (Australia) Limited (“MMIA”) and its

50% share of the QBE Mercantile Mutual joint venture• acquired key underwriting agencies AIS, CHU and Concord (50%)• Financial Services Reform Act compliance required from March 2004• APRA introduced discussion papers on business continuity and fit and proper tests

• the tragic earthquake and following tsunami in Asia in December 2004 resulted in a significant loss of life

• the stronger Australian dollar reduced the level of premium and profit• despite a number of catastrophic events in the region during the year, almost all

ongoing operations made an underwriting profit for the year• acquired the general insurance business of Zurich in Singapore• assumed management of Central European operations from 1 January 2005 and

renamed the division Pacific Asia Central Europe (“PACE”)

• premium rates continued to increase for most insurance and reinsurance classes of business• four significant hurricanes in the US and Caribbean caused market losses estimated

at US$23 billion• QBE Brazil acquired a specialist group life and general accident portfolio• QBE Argentina acquired the workers’ compensation insurance portfolio of Boston

Seguros in December 2004• regulatory reforms led to further increases in costs of compliance• QBE Specialty, a specialist surplus lines vehicle, began writing programme business

• strong global economic recovery in first half year but mixed picture in second half• equity markets improved in second half and produced positive returns in all

major markets• as expected, fixed interest markets sold off and market yields rose in 2004• the Australian dollar finished the year marginally stronger against the US dollar and

slightly weaker against sterling• rising oil prices and possibility of terrorist threats continued to affect investor

sentiment

• reported the lowest net combined operating ratio in 20 years• responded quickly to claims arising from the tsunami• reduced expense ratio due to savings from process re-engineering

initiatives, partly offset by information system development costs andhigher incentive payments due to improved profitability

• increased business from brokers due to further strengthening of capabilitiesin specialist lines

• achieved strong underwriting profits in all major product classes• achieved overall premium rate increases and maintained improved

deductibles and terms and conditions• achieved controlled growth in both insurance and reinsurance businesses• net cost of hurricanes contained through effective reinsurance purchasing• increased portfolio diversification by implementing several new insurance

programmes while continuing to be a major market for reinsurance andadmitted and non-admitted insurance products

• maintained strong underwriting profitability across all major products• maintained strong premium rates coupled with stable terms and

conditions• completed management integration with minimum disruption to

operations• disposed of all legacy Ensign properties and leased a single property for

the European retail division• delivered the first production version of new underwriting system and

delivered new credit control system in European company operations• mitigated the financial impact of major losses through effective and cost

efficient reinsurance programmes• increased QBE’s economic interest in our non-US liability syndicate 386

to 68.4% for 2005

• fixed interest and equity returns ahead of budget • higher investment income driven by strong finish to year by equity markets• short duration fixed interest strategy paid off• continued enhancements to funds management and treasury systems• majority of Limit investment portfolios successfully transitioned in-house

• continued to achieve an excellent return on equity• achieved synergies from the MMIA acquisition by rationalising reinsurance

programmes• increased retention of profitable, quality customers in a competitive market• improved outcomes for workers’ compensation claimants using QBE Connect• successfully implemented Financial Services Reform Act• retained key management and maintained a low staff turnover


Gross written premium $520MGross earned premium $534MNet earned premium $439MCombined operating ratio 85.4%Staff numbers 1,303

Gross written premium $1,382MGross earned premium $1,354MNet earned premium $805MCombined operating ratio 92.3%Staff numbers 256

Gross written premium $2,453MGross earned premium $2,304MNet earned premium $1,971MCombined operating ratio 94.3%Staff numbers 2,011

Gross written premium $2,309MGross earned premium $2,265MNet earned premium $1,735MCombined operating ratio 92.1%Staff numbers 725

Net investment income $508MNet investment income before gains and losses $417MNet investment losses on fixed interest securities $13MNet investment gains on equities and properties $104MStaff numbers 48

Gross written premium $2,102MGross earned premium $2,114MNet earned premium $1,831MCombined operating ratio 88.1%Staff numbers 2,910

25%

Percentage of Group’s gross earned premium

6%

16%

27%

26%

Achievements Key statistics


QBE’s Australian general insurance operations have again produced an excellent underwritingresult with a combined operating ratio of 88.1%compared with 92.8% last year.

Australian general insurance

Review of operations

One of QBE’s specialty products is trade credit, providing credit insuranceprotection in Australia and many of the world markets.

Raymond Jones Managing director, Australian general insurance

The improved results have been achievedfrom a continued focus on careful riskselection and concentrating on productsand markets in which we have a significantinfluence. The strong premium rateincreases and improved terms andconditions achieved in 2002 and 2003 havebeen substantially maintained in 2004. Allportfolios achieved underwriting profits.

Gross written premium increased 12% to $2,102 million due to the acquisition of ING’s 50% share in the QBE MercantileMutual joint venture underwriting agencyand improved customer retention.Premium rate increases slowed due to a lower frequency of claims, particularlyon liability classes, and increasedcompetition. Net earned premiumincreased 28% to $1,831 million.

A continuation of the low frequency ofclaims has resulted in the net claims ratio improving from 67.2% last year to61.0%. The commission ratio increasedfrom 11.1% to 13.3% due to the highercommissions on acquired business. The expense ratio was lower at 13.8%compared with 14.5% last year.

The former QBE Mercantile Mutual jointventure (now called QBE Commercial)exceeded its premium and profit targets,with all classes of business producingacceptable returns. The underwritingagency won the National InsuranceBrokers Underwriter of the Year Award for the third successive year. Customerretention continued to increase due to the many initiatives designed to makeQBE easier to do business with, inparticular e-technology which has beensuccessfully implemented with many ofour intermediaries. Our objectives are toremove duplicated processes and manualintervention and, by so doing, improveprocessing efficiencies.

The compulsory third party businesses in NSW and Queensland continue toperform ahead of plan. Premium rateshave been reduced to reflect the lowerfrequency of claims from Governmentand market initiatives. We have slightlyincreased our market share in New SouthWales and maintained our position inQueensland.

The workers’ compensation divisioncontinues to produce better thanexpected results in difficult marketconditions and after taking up additionalprovisions to cover changes in legislationfor the benefit of injured workers inWestern Australia. The many initiativesintroduced to improve the way wemanage our claims have reduced theaverage cost of claims, with technology inplace to improve the working relationshipand cooperation between QBE, theemployer, the injured worker and thirdparty providers.

The corporate division, whichconcentrates on large property andliability risks, continues to produceexcellent results despite a slight reductionin premium rates. The increase in theretention rate of our corporate customersexceeded expectations.

PORTFOLIO MIXGross earned premium



Credit and surety 5.2% 5.9%

Accident & health 5.8% 3.2%


Motor vehicle 8.9% 10.2%

Travel 1.9% 2.3%

Householders 9.8% 11.5%

Compulsory third party 9.0% 10.8%

General liability 18.2% 15.2%



Other 5.5% 4.0%


KEY RATIOS


Gross written premium $M 2,102 1,869

Gross earned premium $M 2,114 1,715

Net earned premium $M 1,831 1,425

Claims ratio % 61.0 67.2

Commission ratio % 13.3 11.1

Expense ratio % 13.8 14.5


The professional liability divisionproduced an improved underwritingresult. Premium rate increases haveslowed and in a number of casesbusiness was renewed at lower premiumrates due to improved claims experienceand competition from new entrants.

The trade credit portfolio continued toproduce excellent results reflecting thequality of the portfolio. The portfolioincludes business written in Australia,Asia and New Zealand. Premium rateincreases have slowed to reflectimproved claims experience.

Our direct underwriting unit, WesternQBE, improved customer retention andproduced an underwriting profit wellahead of plan. We continue to introducenew initiatives to increase our customerbase and retain our loyal customers.

QBE Travel also produced better thanbudget returns by focusing on qualitydistribution and sound underwriting.

The tort reforms introduced by state andterritory governments have reduced thefrequency of liability claims, however,these changes must remain in place toensure public liability premiums remainaffordable. Premium rates have beenreduced in many cases to reflect theimproved experience. We will continue towork closely with governments for thebenefit of consumers.

We have strong management andunderwriting teams in Australia ready toparticipate in further consolidation in theAustralian market. The current pricing ofour products is sufficient to meetrequired profitability targets from ourvarious products.

Our key objectives for 2005 are to:• maximise premium retention by

providing excellent service to ourquality customers;

• provide consumers with value formoney products that are tailored tomeet their needs;

• establish a runoff branch to reduceclaims costs;

• continue to reduce expenses through ITapplications and process improvementsand realise synergies from acquisitionsin 2004;

• further enhance management skills andcapabilities through advanced trainingprogrammes;

• work closely with regulators andgovernments to ensure a healthy,financially viable industry; and

• exceed divisional return on equitytargets.

I sincerely thank all our staff in Australiawho have contributed to the excellentresult for our shareholders in 2004.

Raymond Jones


Asia-Pacific general insurance operations achieved a combined operating ratio of 85.4%, its lowest inthe past 20 years.

Asia-Pacific general insurance


QBE is a leading specialist provider of insurance to the corporate sector inNew Zealand. QBE leads the cover on the North Harbour Stadium in Auckland.

Vince McLenaghan Managing director, Pacific Asia Central Europe

The improved result was driven by acontinued focus on portfolio profitabilityand the general improvement in premiumrates and policy terms and conditionsachieved in the past three years. Thecombined operating ratio was 85.4%compared with 90.0% last year.

The stronger Australian dollar continuedto have a negative impact on grosswritten premium and net earnedpremium, as did the decision in 2003 to withdraw from the Guam and Japangeneral insurance markets. In localcurrencies, 13 of our 16 ongoingoperations produced higher premiumincome, however, when translated toAustralian dollars, gross written premiumdecreased by 4% to $520 million. Netearned premium increased by 2% to$439 million.

The claims ratio was 48.3% comparedwith 50.0% last year. The lower frequencyof claims was partially offset by lossesfrom the tragic Asian earthquake andfollowing tsunami in December 2004.

The commission ratio decreased to17.1% in line with expectations reflectinga change in the mix of business andgeographic spread. The expense ratiodecreased from 21.2% to 20.0%. Thisreflects the savings from process re-engineering initiatives partly offset byhigher incentive payments due toimproved profitability, new informationsystems and the stronger Australiandollar. A large percentage of the totalexpenses for the division is incurred inAustralian dollars.

In 2004, Asia-Pacific general insurancehad ongoing operations in 58 offices in16 overseas locations. Underwritingprofits were achieved in New Zealand,Papua New Guinea, Vanuatu, SolomonIslands, Fiji, French Polynesia, NewCaledonia, Norfolk Island, Hong Kong,Indonesia, Macau, Malaysia, Philippines,

Singapore and Vietnam. Thailand’s resultwas affected by the tsunami in December2004. All the main insurance products forthe division achieved underwriting profits.The area of concern continues to be themotor vehicle portfolios in Malaysia andSingapore. Although results haveimproved in the past 12 months, we havereduced our exposure to motor vehicleinsurance in these two countries.Malaysia continues to be impacted by thefrequency of motor theft losses and thelow tariff premium rates, which have notbeen increased for a number of years.

We were successful in acquiring Zurich’sgeneral insurance business in Singaporefrom 1 July 2004. The benefits of thisacquisition will be seen over the next18 months as we integrate the businessinto QBE.

Photo: Jason Hailes

KEY RATIOS


Gross written premium $M 520 542

Gross earned premium $M 534 549

Net earned premium $M 439 430

Claims ratio % 48.3 50.0

Commission ratio % 17.1 18.8

Expense ratio % 20.0 21.2





Marine 12.3% 13.2%



Fire 26.4% 24.5%


Liability 9.7% 7.6%

Engineering 3.8% 3.5%

Other 5.3% 3.3%


We continue to increase our premiumincome from specialist property,professional liability, general liability andmarine insurance through brokers and tobuild the skills of staff in the Asia-Pacificregion.

We have excellent relationships with our joint venture partners in Asia. QBEhas a 50% or greater shareholding andmanagement control of all its operations.

From 1 January 2005, the divisionchanged its name to Pacific Asia CentralEurope division (“PACE”). This follows the transfer of the six Central Europeanprimary insurance businesses fromEuropean company operations, i.e.Ukraine, Slovakia, Hungary, Bulgaria,Macedonia and Moldova. We arecurrently investigating a number ofacquisitions for the PACE division in Asia and Central Europe. We purchased a small general insurance business inEstonia in late December 2004. Theresults of PACE will be shown in greaterdetail in the 2005 annual report.

Our key objectives for 2005 are to:• achieve growth plans and improve

scale in key markets;• reorganise the divisional management

structure to increase effectiveness;• achieve divisional return on equity

targets;• further develop our professional

intermediary distribution systems;• complete new product development

in specialist classes, including liability,energy, marine and construction; and

• fully integrate Central Europeanoperations into the division.

The record underwriting profit in 2004 is an excellent achievement, with themajority of ongoing operations and allmajor products producing underwritingprofits. The stronger Australian dollar hashad a negative impact on gross premium,however, our focus has been and willcontinue to be on the bottom line and on building our businesses in each of the countries in which we operate.

I appreciate the loyalty, hard work anddedication of our team. I also appreciatethe assistance and support of our jointventure partners and my subsidiary boardcolleagues in maintaining sound andpractical governance of our localsubsidiaries. We are confident that theexcellent returns achieved in 2004 willcontinue for 2005, subject to large lossesand catastrophes not exceeding theallowances in our business plans.

Vince McLenaghan


QBE the Americas has again improved its underwritingprofit despite the impact of the four hurricanes in theUS and Caribbean in August and September.

the Americas

Condominium and specialist property insurance is part of the diverse product range of our US programme business.

Our operations comprise generalinsurance and reinsurance businesses in the US, reinsurance businesses inPanama, Mexico, Peru and Colombia and general insurance businesses inArgentina and Brazil.

The combined operating ratio was 92.3%compared with 93.1% last year. Ourstrategy of further diversification andgrowth of our US based primaryinsurance business was rewarded withstrong growth following the acquisition of new insurance programme businesswith a proven track record. We continuedto be a major market for reinsurance andadmitted and non-admitted insuranceproducts. Gross written premiumincreased 3% to $1,382 million and netearned premium was up 9% to $805million. Growth in US dollars was muchstronger, at 18% and 23% respectively.Growth came from premium rateincreases, new general insuranceprogramme business and a smallacquisition in Brazil. General insurancenow represents 67% of gross writtenpremium for the division.

Business ceded to highly rated reinsurersincludes substantial proportionalreinsurance on general insuranceprogramme business which generatesoverriding commissions and profitcommissions for QBE. Of the totalreinsurance cost of $549 million, some84% related to proportional reinsurance.The percentage of reinsurance ceded isexpected to decrease in 2005.

The claims ratio improved from 63.4% to 60.1%. The lower claims ratio was dueto the higher premium rates and lowerclaims frequency from improvements inpolicy terms and conditions implementedover the past three years. The net claimsratio includes claims from the fourhurricanes in August and September.

The commission ratio was 25.7%compared with 23.5% last year reflectinga slight change in mix of business andincreased profit commissions paid to our agents on profitable programmebusiness.

Tim Kenny President and chief executive officer, the Americas






Casualty 25.1% 25.3%




Other 2.0% 2.3%

25

KEY RATIOSGENERAL INSURANCE INWARD REINSURANCE TOTAL

FOR THE YEAR TO 31 DECEMBER 2004 2003 2004 2003 2004 2003

Gross written premium $M 930 745 452 597 1,382 1,342

Gross earned premium $M 912 659 442 554 1,354 1,213

Net earned premium $M 426 229 379 511 805 740

Claims ratio % 63.2 73.9 56.6 58.7 60.1 63.4


Expense ratio % 6.1 6.5 6.9 6.1 6.5 6.2


The expense ratio increased from 6.2% to 6.5%. The increase is primarily due tothe higher general insurance componentof our business, staff incentives fromimproved insurance profitability and theincreased costs of regulatory reform.

All products produced satisfactoryunderwriting results, with our businessesin Argentina and Brazil producingunderwriting profits. QBE the Americas’focus on selected portfolios in regionalUS and Latin America means that we arenot as exposed to the insurance cycle asothers who write nationwide and largerisks. We continue to developrelationships with our existing client base,pursue acquisitions that meet our criteriaand add new general insuranceprogramme business with a provenprofitable track record. We generally donot write long tail US casualty or USworkers’ compensation business. We arenow seen as a leader in the segments ofthe market in which we operate.

For 2005, we have already secured asmall workers’ compensation business in Argentina, which is complementary to our existing business, and we arelooking at acquisitions in the US and Latin America. Our major renewal seasonat 1 January 2005 was successful. Weachieved better than planned premiumrate increases overall and maintainedpolicy terms and conditions. We areconfident of further solid growth in 2005.

Our key objectives for 2005 are to:• continue to seek acquisition

opportunities that complement QBE’sstrengths and add value to ourshareholders;

• maximise existing intermediaryrelationships to achieve targetedopportunities;

• maintain profitability of both new andexisting insurance and reinsurancebusiness;

• further develop our risk managementframework across the division; and

• implement enhanced inwards andoutwards reinsurance systems.

I express my sincere appreciation to theteam in the Americas for the significantcontribution they have made to theexcellent insurance profit for 2004.

Tim Kenny


In September 2004, we integrated the European management structure to combine our UK operations.

European operations


The acquisition of the Ensign motor business in 2004 has established QBE as a lead underwriter of medium to large haulage and specialist motor risks in the UK.

European operationsIn 2004, European operations comprised:

• our European company operationswhich writes commercial lines productsin general insurance and reinsuranceoperations in London and Dublin andgeneral insurance operations in Parisand six countries in Central Europe;and

• our Lloyd’s division (trading as Limit),which is the largest manager andsecond largest provider of capacity inthe Lloyd’s market. For the 2004underwriting year, QBE provided 100%of the capital to four of our six Limitsyndicates. For syndicate 386 our sharewas 54.6% and for the Ensign motorbusiness our share was approximately67%, supported by both capacity onsyndicate 980 and co-insurance by ourEuropean company operations.

European company operationsThe combined operating ratio of ourEuropean company operations improvedslightly from 94.7% to 94.3%. Theimprovement in results from our generalinsurance business was largely offset bya deterioration in the results from ourreinsurance business, which was affectedby the increased number of catastrophesduring 2004 and an upgrade of prior yearoutstanding claims provisions for UScasualty, UK motor excess of loss andother old runoff portfolios.

Gross written premium in local currencyincreased 5% due to growth in generalinsurance portfolios, including the co-insurance of the Ensign motorbusiness. However, when translated toAustralian dollars, gross written premiumwas broadly unchanged at $2,453 million,whilst net earned premium was up 3% to$1,971 million. Gross written premiumwas also affected by the cancellation ofsome business due to premium rates notmeeting our criteria and the morecompetitive market conditions.

Steven Burns Chief executive officer, European operations


PORTFOLIO MIX – European company operationsGross earned premium



Financial and credit 3.2% 5.4%



Bloodstock 2.0% 2.6%

Property treaty 5.8% 5.8%

Property facultative and direct 13.0% 13.8%


Motor vehicle 8.1% 2.5%

Casualty 6.1% 9.1%

Public/product liability 19.9% 13.7%

Other 4.9% 10.5%

27



Gross written premium $M 1,809 1,688 644 753 2,453 2,441

Gross earned premium $M 1,676 1,552 628 750 2,304 2,302

Net earned premium $M 1,444 1,312 527 596 1,971 1,908

Claims ratio % 62.9 64.4 75.7 71.7 66.3 66.7


Expense ratio % 12.9 13.0 13.1 11.3 13.0 12.4


Reinsurance costs as a percentage ofgross earned premium reduced from 17% to 14%, primarily due to arestructure of our reinsurancearrangements.

The claims ratio was 66.3% comparedwith 66.7% last year. The slight reductionin the claims ratio was due to a lowerfrequency of claims partly offset by anincrease in catastrophe claims and theupgrade of 2001 and prior year claims.The commission ratio decreased from15.6% to 15.0%, reflecting a change inthe mix of business and the introductionof the Ensign motor business. Theexpense ratio increased from 12.4% to13.0% due to restructure costs, increasedcosts of corporate governance andregulatory compliance and the write-off of systems development expenditure.

Our general insurance operationsproduced a combined operating ratio of89.8% compared with 90.6% last year.This was due to the benefits of anincreased focus on portfolio performanceand the higher premium rates andimproved policy terms and conditionsachieved over the past three years. Allongoing portfolios produced underwritingprofits. Our combined operating ratiofrom inward reinsurance operationsdeteriorated from 103.9% to 106.6% dueto the increase in catastrophe activity,particularly the hurricanes in Japan andthe Caribbean, and the upgrading of our2001 and prior year claims for US casualtyand motor excess of loss business.

All of our Central European businessesproduced underwriting profits on theirgeneral insurance business and our Parisoffice, which now focuses only on Frenchdomestic business, produced anotherpositive underwriting result. The CentralEuropean businesses have beentransferred to QBE’s Pacific Asia CentralEurope division effective 1 January 2005.

Our major renewal season of 1 January2005 saw a slight overall reduction inpremium rates, however, policy terms andconditions have generally beenmaintained. We are working on a numberof acquisition opportunities to grow thebusiness in 2005. We continue to be amarket leader in the majority of portfoliosthat we write, which enables us toinfluence terms, conditions and pricing.European company operations will benefitfrom the transfer of the Ensign motorbusiness from our Lloyd’s division for2005 as well as the increasedparticipation from 67% to 100%.


Our non-US liability insurance syndicate 386 is a specialist liability underwriter and providesoperational liability risk cover for specialist risks such as London’s millennium wheel.

Lloyd’s division trading as LimitThe focus on core products, togetherwith the premium rate increases andimproved terms and conditions in thepast three years, have enabled the Limitteam to outperform its 2004 financialtargets. In particular, the combinedoperating ratio improved from 95.1% to92.1% despite the increased catastropheactivity during the year.

Gross written premium in local currencyincreased by 16%, partly due to theinclusion of the Ensign acquisition andthe higher participation in syndicate 386.However, when translated to Australiandollars, gross written premium increased7% to $2,309 million. Net earnedpremium increased 13% to $1,735 million.Premium growth was also affected by thesubstantial appreciation of sterling againstthe US dollar. Approximately 40% ofLimit’s business is written in US dollars.

Premium rate movements were broadly inline with our expectations, however, someof our products saw slight premiumreductions to reflect lower claimsfrequency and market competition.

The claims ratio increased from 59.2% to60.3% mainly due to large catastrophesand risk losses exceeding 2003 levels and the conservative approach taken inestablishing claims liabilities in respect of the 2002, 2003 and 2004 underwritingyears. The improved policy terms andconditions implemented over the pastthree years have assisted the reduction in the frequency of claims.

The commission ratio decreased from25.4% last year to 20.9% as a result ofthe change in mix of business, theinclusion of the Ensign motor business(syndicate 980) and a small correction inthe ratio in the previous year.

The expense ratio increased slightly from10.5% last year to 10.9%. Higher staffincentive costs driven by improvedprofitability, higher regulatory compliancecosts and restructure costs were the

Peter Grove Chief underwriting officer, European operations


PORTFOLIO MIX — Lloyd’s divisionGross earned premium





Casualty 31.8% 22.6%

Other 5.5% 4.3%




Gross written premium $M 1,397 1,293 912 863 2,309 2,156

Gross earned premium $M 1,398 1,194 867 843 2,265 2,037

Net earned premium $M 1,086 900 649 633 1,735 1,533

Claims ratio % 60.6 57.8 59.8 61.1 60.3 59.2


Expense ratio % 10.4 10.6 11.8 10.4 10.9 10.5


principal reasons. From 2005, Lloyd’s isceasing its World Trade Center levy andthus overall market charges will reducefrom 1.75% to 1.0% of capacity which,together with synergies from therestructure announced in September2004, will improve the expense ratio overthe next two years.

The major renewal season of 1 January2005 was reasonably successful withpremium rates slightly better thanbusiness plan expectations onreinsurance business and broadly in linewith plan on direct business. Importantly,the improved policy terms and conditionsimplemented in recent years weregenerally maintained. The planned,disciplined reduction in rates in someclasses of business, the currentweakness of the US dollar against sterlingand the transfer of Ensign motor businessto our European company operations will,however, make it difficult to achieve anygrowth for the Limit operation in 2005,notwithstanding that we have hired somenew underwriting teams and have anumber of new initiatives.

Our key objectives for 2005 forEuropean operations are to:• establish the European retail division

around the core Ensign commercialmotor business plus the recentlyacquired property team;

• diversify underwriting products intoContinental Europe by acquiringdistribution capability;

• enhance coordination of ourunderwriting strategy and integrate ourapproach to managing the underwritingcycle;

• further increase capacity on our non-USliability syndicate 386;

• deliver a production version of ourintegrated underwriting andmanagement information systems tothe bulk of the business;

• implement a consolidated premisesstrategy in London to improveefficiency and reduce costs; and

• deliver cost synergies from integrationinitiatives.

The formation of a single managementteam to oversee QBE’s operations inEurope was announced in September2004. This unfortunately meant thedeparture of some senior executives who had contributed to the success ofQBE in recent years. Our aim is to obtainsynergies of at least $60 million by theend of 2007 from improved reinsurancepurchasing and the integration of ourLondon properties and a number of backoffice functions. We are very pleased withthe progress to date.

I appreciate the enormous support that I have received from my management,underwriting and support teams,particularly during the past few months. I thank them for their focus and hardwork and their contribution to theexcellent results for 2004.

Steven Burns


The investment division outperformed its overall internal investment benchmarks and financial targets in 2004.

Investments


Investment income was on target as aresult of our low risk strategy assisted bygrowth due to acquisitions, cash flowfrom operations, generally higher interestyields and strong equity markets in thesecond half of the year. The Group’sgross investment yield on cash and fixedinterest securities increased from 3.0% to 3.8% in 2004 with an overall grossyield of 4.6%, consistent with last year.The yield includes net realised andunrealised gains and losses oninvestments and is before borrowingcosts, exchange gains and losses andinvestment expenses. As previouslyadvised to shareholders, our investmentstrategy is low risk with targets based onachieving absolute returns. Our objectiveis to outperform AAA cash returns, whichwere 3.4% on average for 2004. This lowrisk strategy has been beneficial forshareholders over the past five years.

Net investment income after realised and unrealised investment gains andlosses increased from $413 million to$508 million. Net investment incomeincludes borrowing costs, exchange gains and losses and investmentexpenses. Net realised and unrealisedgains on investments were $91 millionbefore tax compared with gains of$110 million before tax last year.

The strong cash flow and acquisitionshave resulted in a 27% increase in netinvested funds from $10.5 billion at31 December 2003 to $13.3 billion at31 December 2004. We continue tomaintain a policy of matching liabilitieswith assets of the same currency andmatching all “tradeable” overseasshareholders’ funds back into Australiandollars. Despite volatility in foreigncurrency markets, our currencymanagement has resulted in a minimalimpact on financial performance with asmall currency gain of $2 million.

We performed generally in line with the one to three year benchmarks for the majority of our fixed interestportfolios. However, the performance of our equity portfolios was affected byour overexposure to long held miningstocks Alumina and Consolidated Rutileand an underperformance on US equitiesin the first half of the year. Since yearend, the share price of both Alumina andConsolidated Rutile have risen and wehave taken the opportunity to realisesome of these gains.

Our strategy of maintaining a low riskinvestment portfolio with a smallexposure to equities, mainly to supportour shareholders’ funds, and a shortduration for fixed interest securitiesremains in place. We currently have listed equities of 8.9% of totalinvestments and cash. At 31 December2004, our equity portfolio was invested37% in Australian equities, 28% in UKequities, 23% in US equities and 12% inportfolios in other currencies. Cash andfixed interest portfolios had an average

Mark ten Hove Group general manager, Investments

INVESTMENT INCOMEFOR THE YEAR TO 31 DECEMBER 2004 2003

$M $M

Dividends 52 46

Interest 483 365

Other income 14 16

549 427

Realised (losses) gains on fixed interest securities (31) 1

Realised gains (losses) on equities and properties 54 (13)

Unrealised gains (losses) on fixed interest securities 18 (54)

Unrealised gains on equities and properties 50 176

Gross investment income 640 537

Interest expense (94) (80)

Exchange gains (losses) 2 (13)

Other expenses (24) (29)

Net cost of ABCs (16) (2)

Net investment income 508 413

NET INVESTED FUNDSAS AT 31 DECEMBER 2004 31 DECEMBER 2003

$M % $M %

Cash 1,121 7.4 717 6.1 Short term money 5,482 36.4 3,499 29.5 Fixed interest securities and other 6,947 46.1 6,209 52.5 Mortgages 10 0.1 7 0.1 Equities 1,390 9.2 1,272 10.8 Properties 117 0.8 119 1.0

Total investments and cash 15,067 100.0 11,823 100.0Borrowings (1,789) (1,334)

Net invested funds excluding ABCs 13,278 10,489ABC investments pledged for funds at Lloyd’s 998 731ABC securities for funds at Lloyd’s (984) (731)

Net invested funds 13,292 10,489


maturity of 0.6 years, with only one small portfolio maturing beyond threeyears. However, we expect the durationto increase in 2005.

The recent rise in US interest rates, thesubstantially increased net invested fundsand expected strong cash flow create apositive outlook for 2005. We expectinterest rates to continue to increase,particularly in the US, and there arereasonable indications that equity marketswill continue to rise, albeit at a lower ratethan 2004. We have in place acomprehensive investment model whichenables us to review the implications ofnumerous investment scenarios andasset allocations. This investment modelcontinues to be an integral part of ourregular investment management process.

Our key objectives for 2005 are to:• outperform our investment income

targets;• continue to actively manage the

duration of cash and fixed interestportfolios;

• continue to improve and integrateexisting and new systems; and

• contain costs as a percentage of fundsunder management to internationallycompetitive levels.

Our investment team has exceeded ourfinancial targets and outperformed overallinternal benchmarks for 2004. I thank allthose staff who have contributed to ourresults over the past year.

Mark ten Hove

CURRENCY MIXMarket value of equities

2004 2003% %

Australian dollar 36.7 39.6

US dollar 22.8 25.6

Sterling 28.2 23.6

Other 12.3 11.2

Market value of total investments and cash

2004 2003% %

Australian dollar 28.0 22.5

US dollar 25.5 33.6

Sterling 34.1 30.6

Other 12.4 13.3


QBE is incorporated in Australia, islisted on the Australian Stock Exchange (“ASX”) and trades under the code ‘QBE’.

Annual General Meeting (“AGM”)11.00am Friday, 8 April 2005The Westin Hotel, 1 Martin PlaceSydney NSW Australia

Voting rights of ordinary sharesThe constitution provides for votes tobe cast:

• on a show of hands, one vote foreach shareholder; and

• on a poll, one vote for each fully paidordinary share.

Shareholder information and enquiriesMost enquiries and correspondenceregarding shareholdings can be directedto QBE’s share registrar:

ASX Perpetual Registrars LimitedLocked Bag A14Sydney South NSW 1235 Australia

Level 8, 580 George StreetSydney NSW 2000 Australia

Telephone : +61 2 8280 7158Facsimile: +61 2 9287 0303Internet: www.asxperpetual.com.auEmail: [email protected]

Please quote your SecurityholderReference Number (SRN) and providedetails of your previous address forsecurity purposes.

If you are broker sponsored, queriesrelating to incorrect registrations andchanges to name and/or address canonly be processed by your stockbroker.ASX Perpetual cannot assist you withthese changes. Please quote your HolderIdentification Number (HIN).

Relevant interests registerOrient Capital Pty Limited of 20 BridgeStreet, Sydney NSW 2000, Australiamaintains QBE’s register of informationabout relevant interests. This new registeris required from 1 January 2005 as partof the CLERP 9 legislation. The registercontains any responses from custodianson and after that date to searches relatingto the beneficial ownership of QBE’sshares. Shareholders and other partiescan telephone Orient Capital on +61 2 9251 2700 or facsimile on +61 2 9251 1299 if they wish to inspectthis register.

Quick and easy access to yourshareholding details onlineView your shareholdings and updatedetails online at the ASX Perpetualinvestor service centre website atwww.asxperpetual.com.au. You will beasked to provide either your SRN or HIN,your surname and postcode.

Dividend statements, notices ofmeetings, annual reports and majorcompany announcements can bereceived electronically by registeringyour email address at the ASX Perpetualinvestor service centre website.

Online proxy voting will be availablethrough the ASX Perpetual investorservice centre by April 2005.

Removal from annual report mailing listIf you do not want to receive a copy of the annual report, please notifyASX Perpetual in writing or visitwww.asxperpetual.com.au. QBE does not produce a concise financial report.

Tax File Number (“TFN”), AustralianBusiness Number (“ABN”) or exemptionYou can confirm whether you have lodgedyour TFN, ABN or exemption by visitingthe ASX Perpetual investor service centrewebsite. If you choose not to lodge thesedetails, QBE is obliged to deduct tax atthe highest marginal rate (plus theMedicare levy) from the unfranked portionof dividends paid. Australian shareholdersliving abroad should advise ASX Perpetualof their resident status as limitedexemptions to tax deductions may apply.TFN forms are available from ASXPerpetual or can be downloaded fromeither QBE’s or ASX Perpetual’s website.

DividendsQBE revised the terms of its DividendReinvestment Plan (“DRP”) and DividendElection Plan (“DEP”) in January 2004.In particular, the revised terms:

• require a minimum shareholding of100 shares for participation; and

• round the dividend amount up ordown to the nearest whole cent andround the number of shares allocatedup or down to the nearest wholeshare, rather than the previouspractice of rounding up.

The DRP enables you to apply tosubscribe for additional shares at adiscounted price. The DEP is a bonusshare plan whereby the dividendentitlement is forgone for bonus shares in lieu of the dividend. Shares issuedunder the DRP and DEP are issued ata 2.5% discount to a weighted five dayaverage market price.

Participants may change their election toparticipate in the DRP or DEP at any time.DRP/DEP election cutoff dates andapplication forms are available fromQBE’s website.

QBE encourages shareholders to havecash dividends credited directly to a bank,building society or credit union account in Australia, to eliminate delays in fundsclearance and significantly reduce the risk of loss or theft. A dividend adviceconfirming the deposit details is eithermailed to you or is available online on thepayment date.

Unpresented cheques/unclaimedmoniesUnder the Unclaimed Monies Act,unclaimed dividend monies must begiven to the State Treasury. It is veryimportant that shareholders bankoutstanding dividend cheques promptlyand advise ASX Perpetual immediatelyof changes of address or bank accountdetails.

Privacy legislationChapter 2C of the Corporations Act 2001requires information about you as asecurity holder (including your name,address and details of the securities youhold) to be included in QBE’s shareregister. These details must continue tobe included in the public register even ifyou cease to be a security holder. A copyof the privacy policy is available on ASXPerpetual’s website.

Contacting QBE for more informationRegistered office QBE Insurance Group LimitedLevel 2, 82 Pitt StreetSydney NSW 2000 Australia

Telephone: +61 2 9375 4444Facsimile: +61 2 9235 3166Internet: www.qbe.com

QBE’s website provides investors withinformation about QBE including annualreports, half yearly reports andannouncements to the ASX. The websitealso offers regular QBE share priceupdates, a calendar of events, a briefhistory of QBE’s dividends, access tostandard forms (change of address, directcredit advice and more) and the ability toverify shareholding details.

The half yearly results summary to30 June 2005 will be mailed with theinterim dividend. The next annual reportfor the year ending 31 December 2005will be available by March 2006.

Shareholder information


RECENT QBE DIVIDENDSCENTS PER FRANKING

DATE PAID TYPE RECORD DATE SHARE %

1 April 1998 interim 11 March 1998 8.0 502 October 1998 final 15 September 1998 18.0 5026 March 1999 interim 5 March 1999 8.5 501 October 1999 final 10 September 1999 18.5 5031 March 2000 interim 10 March 2000 14.0 1029 September 2000 final 11 September 2000 15.0 3512 April 2001 final 26 March 2001 16.0 3028 September 2001 interim 7 September 2001 16.5 2512 April 2002 final 25 March 2002 13.5 153 October 2002 interim 13 September 2002 16.5 1211 April 2003 final 19 March 2003 18.5 1225 September 2003 interim 1 September 2003 20.0 1525 March 2004 final 9 March 2004 22.0 3020 September 2004 interim 30 August 2004 24.0 50

TOP TWENTY SHAREHOLDERSAS AT 31 JANUARY 2005

NUMBER OF % OF NAME OF REGISTERED SHAREHOLDER SHARES TOTAL

JP Morgan Nominees Australia Limited 155,760,565 20.87Westpac Custodian Nominees Limited 149,562,393 20.04National Nominees Limited 108,384,981 14.52ANZ Nominees Limited 59,806,892 8.01Citicorp Nominees Pty Limited 38,714,543 5.19Cogent Nominees Pty Limited 19,773,966 2.65Queensland Investment Corporation c/- National Nominees Limited 14,822,703 1.99AMP Life Limited 12,014,325 1.61HSBC Custody Nominees (Australia) Limited 9,288,844 1.24RBC Global Services Australia Nominees Pty Limited 5,926,025 0.79Government Superannuation Office c/- National Nominees Limited 5,766,398 0.77IAG Nominees Pty Limited 5,358,266 0.72Victorian WorkCover Authority c/- National Nominees Limited 4,473,662 0.60QBE Management Services Pty Limited 3,735,971 0.50Transport Accident Commission c/- National Nominees Limited 3,026,352 0.41Suncorp Custodian Services Pty Limited 2,477,382 0.33Perpetual Trustee Company Limited 2,041,855 0.27Australian Foundation Investment Company Limited 1,959,487 0.26UBS Nominees Pty Limited 1,793,921 0.24PSS Board c/- JP Morgan Nominees Australia Limited 1,723,531 0.23TOTAL 606,412,062 81.24

QBE SUBSTANTIAL SHAREHOLDERSAS AT 31 JANUARY 2005

NUMBER OF % OF DATE OF NAME SHARES TOTAL NOTICE

The Capital Group Companies Inc 58,889,590 8.89 3 September 2003UBS Nominees Pty Ltd and its related bodies corporate 54,152,727 8.64 28 July 2003

DISTRIBUTION OF SHAREHOLDERS AND SHAREHOLDINGSAS AT 31 JANUARY 2005

NUMBER OF NUMBER OFSIZE OF HOLDING SHAREHOLDERS % SHARES %

1-1,000 14,592 42.39 7,831,109 1.051,001-5,000 15,852 46.05 35,897,435 4.815,001-10,000 2,313 6.72 16,289,300 2.1810,001-100,000 1,489 4.33 35,120,825 4.71100,001 or more 175 0.51 651,286,055 87.25

TOTAL 34,421 100.00 746,424,724 100.00

SHAREHOLDINGS OF LESS THAN A MARKETABLE PARCELAS AT 31 JANUARY 2005

NUMBER OF NUMBER OFSHAREHOLDERS % SHARES %

Holdings of 33 or less shares 691 2.01 10,460 –


FINANCIAL CALENDAR200524 February Profit and dividend announcement for the year ended 31 December 2004

Annual report available on website

1 March Shares begin trading ex-dividend

4 March Annual report posted to shareholders with notice of AGM and proxy form

7 March Record date for determining shareholders’ entitlement to 2004 final dividend payment

23 March 2004 final dividend paid

8 April AGM

30 June Half year end

17 August* Profit and dividend announcement for the six months ending 30 June 2005

23 August* Shares begin trading ex-dividend

29 August* Record date for determining shareholders’ entitlement to 2005 interim dividend payment

16 September* 2005 interim dividend paid

31 December Year end

* dates to be confirmed

QBE ANNOUNCEMENTS TO THE ASX2005

Announced further conversion of QBE LYONs securities into ordinary shares of the company 4 FebruarySubsequent conversions announced 16 February and 18 February

Announced the exercise of options issued to a third party as part of the consideration for the acquisition of insurance agency distribution businesses in Australia 14 January

2004Announced that the insured losses from the Indian ocean earthquake and resulting tsunamis not expected to have a material impact on the 2004 results 29 December

Advised completion of funding for Lloyd’s operation for 2005 28 October

Denied speculation in respect of any merger or acquisition activity with IAG 6 October

Chief financial officer’s presentation to JP Morgan Australasian investment conference 5 October

Confirmed that QBE’s insurance provisions for large losses and catastrophes are expected to cover the estimated net claims from US hurricanes 29 September

Announced the completion of a fixed five year senior note issue in the UK market 23 September

Announced issue to institutional investors of 20 year zero coupon senior convertible securities 21 September

Announced the initial conversion of QBE LYONs securities into ordinary shares of the company. 16 SeptemberFurther conversions announced 20 September, 22 September, 27 September, 1 October, 11 October, 28 October, 15 November, 18 November, 24 November, 1 December, 16 December and 31 December

Announced the rationalisation of the structure of QBE’s European operations 7 September

Announced a record operating profit after tax of $320 million for the half year to 30 June 2004 18 August

Advised that net claims from Hurricane Charley in the US expected to be well within the Group’s allowances for large losses and catastrophes 16 August

Announced completion of previously announced acquisitions 1 July

Announced the purchase of Zurich Insurance (Singapore) Pty Ltd, effective 30 June 2004 21 May

Announced the agreement to purchase ING’s 50% share interest in the QBE Mercantile Mutual joint venture, effective 30 June 2004 13 May

2004 AGM 2 April

Announced the final share price for the company’s 2003 Dividend Election Plan and Dividend Reinvestment Plan 17 March

Presentation to Citigroup Australia and New Zealand investment conference by the chief executive officer 12 March

Announced the issue of shares and options for overseas employees 3 March

Announced a record 2003 profit and increased dividend 25 February

Announced revised Dividend Election Plan and Dividend Reinvestment Plan terms 16 January

Advised that QBE’s net loss from the Moomba gas explosion will be immaterial 6 January

Financial calendar and ASX announcements


John Cloney ANZIIF, FAIM, FAICD AGE 64 CHAIRMANMr Cloney joined QBE as managing directorin 1981. He retired in January 1998, atwhich time he became a non-executivedirector. He was appointed deputychairman in April 1998 and chairman inOctober 1998. He is chairman of thechairman’s and funding committees, and a member of the investment andremuneration committees. Mr Cloney is a director of Boral Limited, Maple-BrownAbbott Limited, Patrick Corporation Limitedand the Australian Institute of ManagementNSW & ACT Limited. He is chairman of theCreate Foundation and a trustee of theSydney Cricket & Sports Ground Trust.

Len Bleasel AM FAIM, FAICD AGE 62Mr Bleasel was appointed an independentnon-executive director of QBE in January2001. He is a member of the audit andremuneration committees. He joined theAustralian Gas Light Company in 1958 andwas managing director and chief executiveofficer from May 1990 until March 2001. MrBleasel is chairman of Foodland AssociatedLimited and a director of St George BankLimited. He is also chairman of theZoological Parks Board of NSW and is onthe committees of various charities.

Charles Curran AOLLB, FCPA AGE 66Mr Curran was appointed an independentnon-executive director of QBE in January1991. He is chairman of the remunerationcommittee and a member of thechairman’s, funding and investmentcommittees. He is chairman of PerpetualTrustees Australia Limited and CapitalInvestment Group Pty Limited. Mr Curran isa member of the Financial Sector AdvisoryCouncil and an international advisor toGoldman Sachs JB Were. He is also amember of the Council of the NationalGallery of Australia.

The Hon Nick Greiner AC BEC, MBA AGE 57Mr Greiner was appointed an independentnon-executive director of QBE inSeptember 1992. He is chairman of theaudit committee and a member of theremuneration committee. He is chairmanof Bradken Limited and Bilfinger BergerAustralia, deputy chairman of StocklandTrust Group and a director of McGuiganSimeon Wines Limited. Mr Greiner wasformerly chairman of British AmericanTobacco Limited, deputy chairman ofColes Myer Limited and a director of BMC Media Limited. He was Premier and Treasurer of NSW from 1988 to 1992.He is a trustee of the Sydney TheatreCompany and a director of South SydneyRugby League club.

Belinda Hutchinson BEC, FCA AGE 51Ms Hutchinson was appointed anindependent non-executive director ofQBE in September 1997. She is chairmanof the investment committee and amember of the audit and fundingcommittees. She is a director of EnergyAustralia, St Vincent’s & Mater HealthSydney Limited, Telstra CorporationLimited and the State Library of NSWCouncil. Ms Hutchinson was an executivedirector of Macquarie Bank Limited from1992 to 1997 and remains a consultant to the bank. She was a vice president ofCitibank Limited between 1981 and 1992.She was previously a director of CraneGroup Limited, Sydney Water CorporationLimited and TAB Limited.

Charles Irby FCA (ENGLAND & WALES) AGE 59Mr Irby is based in London and wasappointed an independent non-executivedirector of QBE in June 2001. He is amember of the investment committee and chairman of the European operations’audit committee. He spent 27 years with ING Barings Limited specialising in

corporate finance and was a senior UKadvisor for that company between 1999and 2001. He is chairman of AberdeenAsset Management plc and a director of Great Portland Estates plc, North AtlanticSmaller Companies Investment Trust plcand EC Harris LLP. Mr Irby is also a trusteeand governor of King Edward VII’s HospitalSister Agnes.

Irene Lee BA, BARRISTER-AT-LAW AGE 51Ms Lee was appointed an independentnon-executive director of QBE in May2002. She is a member of the audit,funding and investment committees.Ms Lee is a director of Mariner FinancialLimited, Ten Network Holdings Limited,Record Investments Limited and RecordRealty and was formerly a director ofBeyond International Limited and BioTechCapital Limited. She is a member of theTakeovers Panel and a trustee of the ArtGallery of New South Wales. Ms Lee wasformerly chief executive officer andexecutive director of Sealcorp HoldingsLimited, head of corporate finance of theCommonwealth Bank and executivedirector and vice president of CitibankLimited in Australia, London and New York.

Frank O’Halloran FCA AGE 58CHIEF EXECUTIVE OFFICERMr O’Halloran was appointed chiefexecutive officer in 1998 and is a memberof the chairman’s, funding and investmentcommittees. He joined QBE in 1976 asGroup financial controller. He wasappointed chief financial officer in 1982and joined the board as director of financefrom 1987 to 1994 and as director ofoperations from 1994 to 1997. He has had extensive experience in professionalaccountancy for 14 years and insurancemanagement for over 28 years.

Board of directors

5 6 7 8

John Cloney Len Bleasel AM Charles Curran AO The Hon Nick Greiner AC

Belinda Hutchinson Charles Irby Irene Lee Frank O’Halloran


Board of directorsDirectors are selected to achieve a broadrange of skills, experience and expertiseon the board complementary to theGroup’s activities. These details forindividual directors are included onpage 35 and can also be found on theQBE website. The board comprises eightdirectors being the chairman, the chiefexecutive officer and six independentnon-executive directors, using the“independence” definition of the ASXCorporate Governance Council. Applyingthis definition, the board has determinedthat a non-executive director’srelationship with QBE as a professionaladviser, consultant, supplier, customer orotherwise is not material unless amountspaid under that relationship exceed 1% ofthe Group’s revenue or expenses.

As a general guide, the board has agreedthat a non-executive director’s termshould be approximately 10 years.Although Mr CP Curran AO and The HonNF Greiner AC have been non-executivedirectors for more than 10 years, the otherdirectors believe that both remainindependent of management and continueto demonstrate independent judgement indecision making. Mr Curran will retire atthe 2005 AGM in April. The board

considers that a mandatory limit on tenurewould deprive the Group of valuable andrelevant corporate experience in thecomplex world of international generalinsurance and reinsurance.

The chairman is not an “independent”director as recommended by the ASXCorporate Governance Council. This isbecause he was the former managingdirector with less than a three year gapbefore becoming chairman. Thechairman’s former executive capacity withQBE has been fully disclosed toshareholders. He ceased to be managingdirector in January 1998. The chairmanwas re-elected as a director by anoverwhelming majority at the 2003 AGM.The other QBE directors consider it to bein shareholders’ and policyholders’interests to retain the chairman’s firsthand wealth of experience and haveresolved that he should continue in thatrole. With over 45 years involvement atmany levels, the chairman has extensiveknowledge of the insurance industry.

A majority of the board is independent,being six out of eight directors. The rolesof chairman and chief executive are notexercised by the same individual.

Corporate governance statementThis statement aims to disclose as clearly and as objectively as possible QBE’s corporate governance standards and practices so that they can be readily understood by our shareholders, policyholders and other stakeholders.QBE will also continue to focus on other equally important issues such as thestrength of its claims reserves, the quality of its reinsurers and the depth of itsculture of honesty, integrity and business acumen.

Duncan Ramsay General counsel and company secretary


The chairman oversees the performanceof the board, its committees and eachdirector. The board review procedureinvolves an annual assessment of theentire board, with the review of eachdirector comprising a combination ofwritten questions and answers coveringareas such as role, people, proceduresand practices and behaviours, followed by interviews. Individual assessments areconfidential to the director concerned. The chairman reports the overall result tothe board as a whole and it is discussedby all directors. This review procedure is a precursor to other directors determiningwhether to support, via the notice ofmeeting, a non-executive director for re-election at an AGM. In 2004, a similarreview was conducted of the audit,investment and remuneration committees.

QBE’s constitution provides that nodirector (except the chief executive officer)shall hold office for a continuous period inexcess of three years or past the thirdannual general meeting following adirector’s appointment, whichever is thelonger, without submission for re-election.Directors appointed by the board aresubject to re-election at the next AGM.Under QBE’s constitution, there is nomaximum fixed term or retirement age fornon-executive directors.

Directors advise the board on an ongoingbasis of any interest they have that theybelieve could conflict with QBE’sinterests. If a potential conflict does arise,either the director concerned may choosenot to, or the board may decide he or she should not, receive documents ortake part in board discussions whilst thematter is being considered.

Under QBE’s constitution, managementof the Group is vested in the board. Inparticular, 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 resources (including

succession planning), IT and otherresources.

The board ensures it has the information itrequires to be effective including, wherenecessary, external professional advice.A non-executive director may seek suchadvice at the company’s cost with theconsent of the chairman. All directorswould receive a copy of such advice. Non-executive directors may attendrelevant external training courses at QBE’scost with the consent of the chairman.

Strategic issues and management’sdetailed budgets and three year businessplans are reviewed annually by the board.The board receives updated forecastsduring the year. Visits by non-executivedirectors to the Group’s offices in keylocations are encouraged. To assist theboard to maintain its understanding of thebusiness and to effectively assessmanagement, directors have regularpresentations by the managing directorsand other senior managers of the variousdivisions on topics including budgets,three year business plans and operatingperformance, and have contact withsenior employees at numerous times andin various forums during the year. Theboard meets regularly in Australia and atleast once a year overseas. Each meetingnormally considers reports from the chiefexecutive officer and chief financial officertogether with other relevant reports. Theboard regularly meets in the absence ofmanagement. The chairman and chiefexecutive officer, and board members ingeneral, have substantial contact outsideboard and committee meetings.

CommitteesThe board is supported by severalcommittees which meet regularly toconsider the audit process, investments,remuneration and other matters. Themain committees of the board are theaudit committee, the investmentcommittee and the remunerationcommittee. These committees operateunder a written charter approved by theboard. Any non-executive director mayattend a committee meeting. Thecommittees have direct and unlimitedaccess to QBE’s senior managers duringtheir meetings and may consult externaladvisers when necessary at QBE’s cost,including requiring their attendance atcommittee meetings. Committeemembership is reviewed regularly.

In addition, the board has established achairman’s committee, comprising thechairman, a non-executive director,currently Mr CP Curran AO, and the chief executive officer, and a fundingcommittee, comprising the chairman,Mr CP Curran AO, Ms BJ Hutchinson,Ms IYL Lee and the chief executiveofficer. These committees meet asrequired, including to deal with suchmatters as are referred by the board fromtime to time.

The board regularly discusses itscomposition and is involved in theselection of new members. All directorsare members of the nominationcommittee. External consultants may beengaged where necessary to search forprospective board members. The boardhas adopted non-executive directornomination guidelines. As a relativelysmall board of eight directors (includingthe chief executive officer), the directorsbelieve that this is an efficient mechanismfor dealing with this issue.

Details of directors’ attendance at boardand committee meetings are outlined inthe table of meeting attendance set out inthe directors’ report on page 45. A reporton the committee’s last meeting isprovided to the next board meeting. Thecompany secretary acts as secretary to allcommittees.

Audit committee

The membership of the audit committeemay only comprise non-executivedirectors. The audit committee normallymeets four times a year. The chairmanmust be a non-executive director who isnot the chairman of the board. Thecurrent members are The Hon NF GreinerAC (chairman), Mr LF Bleasel AM,Ms BJ Hutchinson and Ms IYL Lee.

The role of the audit committee is tooversee the integrity of QBE’s financialreporting process. This includes review of:

• the quality of financial reporting to the Australian Securities andInvestments Commission (“ASIC”), ASX and shareholders;

• the consolidated entity’s accountingpolicies, practices and disclosures; and

• the scope and outcome of external andinternal audits.


Corporate governance statement continued

The audit committee’s responsibilitiesinclude the financial statements (includingitems such as claims reserves,reinsurance recoveries and income tax),external and internal audit, riskmanagement, internal controls,compliance other than regulatorycompliance, significant changes inaccounting policies and the committee’sperformance.

The chairman of the board and other non-executive directors normally attendaudit committee meetings which considerthe 30 June and 31 December financialreports. Meetings of the audit committeecan include, by invitation, the chiefexecutive officer, the chief financialofficer, the chief risk officer, the Groupinternal audit manager, the externalauditor and the Group actuary. Onoccasions, other relevant seniormanagers also attend.

The audit committee has direct andunlimited access to the external auditor.The external auditor, the Group internalaudit manager and the Group actuaryhave direct and unlimited access to theaudit committee.

The chief executive officer and chieffinancial officer provide the board withcertificates in relation to the financialreports and risk management asrecommended by the ASX CorporateGovernance Council.

External auditor independence

QBE firmly believes that the externalauditor must be, and must be seen to be,independent. The external auditorconfirms its independence in relation tothe 30 June and 31 December financialreports and the audit committee confirmsthis by separate enquiry.

The audit committee has contact with the external auditor in the absence ofmanagement in relation to the 30 Juneand 31 December financial reports andotherwise as required. The externalauditor confers with the audit committeein the absence of management as part ofeach meeting.

QBE has issued an internal guideline onexternal auditor independence. Under this guideline, the external auditor is notallowed to provide the excluded servicesof preparing accounting records, financialreports or asset or liability valuations.

Furthermore, it cannot act in amanagement capacity, as a custodian ofassets or as share registrar. The boardbelieves some non-audit services areappropriate given the external auditor’sknowledge of the Group. QBE mayengage the external auditor for non-auditservices other than excluded servicessubject to the general principle that fees for non-audit services should notexceed 30% of all fees paid to theexternal auditor in any one financial year.External tax services are generallyprovided by an accounting firm other than the external auditor.

The external auditor has been QBE’sauditor for many years. As a diverseinternational group, QBE requires theservices of one of a limited number ofinternational accounting firms to act asauditor. It is the practice of QBE to reviewfrom time to time the role of the externalauditor. The new CLERP 9 legislation,Australian professional auditing standardsand the external auditor’s own policy dealwith rotation and generally requirerotation of the lead engagement partnerafter five years. In accordance with suchpolicy, the lead engagement partner ofthe external auditor rotated in 2004.

Investment committee

The membership of the investmentcommittee comprises five non-executivedirectors and one executive director . Theinvestment committee normally meetsfour times a year. The chairman must be anon-executive director who is not thechairman of the board. The currentmembers are Ms BJ Hutchinson(chairman), Mr EJ Cloney, Mr CP CurranAO, Mr CLA Irby, Ms IYL Lee and Mr FMO’Halloran. Meetings of the investmentcommittee can include, by invitation, theGroup general manager, investments andthe chief financial officer.

The role of the investment committee isto oversee QBE’s 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’sresponsibilities include review ofeconomic and investment conditions asthey relate to QBE, approval ofmanagement’s investment strategy andreview of investment performance,including the performance of QBE’sdefined benefit superannuation funds.

Remuneration committee

The membership of the remunerationcommittee may only comprise non-executive directors. The remunerationcommittee normally meets four times a year. The chairman must be a non-executive director who is not thechairman of the board. The currentmembers are Mr CP Curran AO(chairman), Mr LF Bleasel AM, Mr EJCloney and The Hon NF Greiner AC.Meetings of the remuneration committeecan include, by invitation, the chiefexecutive officer and the Group generalmanager, human resources.

The role of the remuneration committeeis to oversee QBE’s general remunerationpractices. The remuneration committee’sresponsibilities include:

• recommendation of the totalremuneration cost (“TRC”) of the chiefexecutive officer and approval of theTRC of other members of the Groupexecutive;

• short and long term incentives such asequity based plans;

• superannuation; • performance measurement criteria and

other major human resource practices; • personal development plans for the

Group executive and other seniorpositions; and

• recommendations on non-executivedirector remuneration.

QBE has operations and staff in 38countries with differing laws andcustoms. QBE’s remuneration policytherefore needs to reflect the fact thatQBE is a global organisation, whilst alsotaking into account local remunerationlevels and practices.

Details of remuneration

Details of remuneration of employees andnon-executive directors are included innotes 21 and 22 to the financialstatements, including entitlements underthe Employee Share and Option Plan and

Senior Executive Equity Scheme.Information is also provided on pages16 and 17 of the annual report.

Company secretaries

DA RamsayBComm, LLB, LLM, FANZIIF, FCIS

Mr Ramsay is general counsel andcompany secretary of QBE InsuranceGroup Limited. His legal careercommenced in March 1986 with Freehills,working in the general commercial andlitigation sections. In June 1993, he joinedQBE as general counsel. Since May 2001he has acted as general counsel andcompany secretary for the Group, inaddition to being a director of a numberof QBE subsidiary companies includingacting as chairman of the QBEsuperannuation plan in Australia.

NG DrabschFCA, FCAID, FCIS

Mr Drabsch was appointed chief financialofficer of QBE Insurance Group Limited in1994 and acts as deputy companysecretary of QBE Insurance Group Limitedin addition to being a director of anumber of QBE subsidiary companies. Hejoined QBE in 1991 and was the Groupcompany secretary from 1992 to 2001.Mr Drabsch has over 38 years’ experiencein insurance and reinsurancemanagement, finance and accounting,including 24 years as a practisingchartered accountant. He is a member of the Finance & Advisory Committee tothe Insurance Council of Australia (“ICA”).He was previously a director of the ICAand a member of other representative

committees for the ICA in relation todevelopment of Australian accountingstandards for general insurance.

PE BarnesBEc, FCA

Mr Barnes is taxation manager, deputycompany secretary of QBE InsuranceGroup Limited and company secretary of QBE Insurance (Australia) Limited. Mr Barnes has been a company secretaryof many of QBE’s Australian companiessince November 1991. He has beenresponsible for taxation matters in QBE’sAustralian operations for the past 16 yearsand was formerly a financial accountingmanager in QBE’s international division.Prior to joining QBE 17 years ago, MrBarnes was a manager in the charteredaccounting firm of Horwath and Horwathand has for the past 11 years beenchairman of the ICA’s taxation committee.

Risk management QBE’s core business is the underwritingof risk. The Group’s successfulperformance over many years clearlyestablishes its substantial riskmanagement credentials.

Diversification is used as a tool to reducethe Group’s overall insurance risk profile byspreading exposures, thereby reducing thevolatility of results. QBE’s approach is todiversify insurance risk, both by productand geographically. Product diversificationis achieved through a strategy ofdeveloping strong underwriting skills in awide variety of classes of business. Acombination of core and specialty products

under the control of proven employeesskilled in such products allows QBE to leadunderwrite in many of the markets in whichwe operate. Geographic diversification isachieved by operating in 38 countries.

QBE has in place a global riskmanagement framework that defines therisks that QBE is in business to accept andthose that we are not, together with thekey risks that QBE needs to manage andthe framework and standards of controlthat are needed to manage those risks.

The foundation of our risk management isthe obligation and desire to manage ourfuture and create wealth for ourshareholders by maximising profitableopportunities through:

• adequate pricing of risk;• avoiding unwelcome surprises by

reducing uncertainty and volatility, suchas by controlling aggregate exposuresand maintaining sound reinsurancearrangements;

• optimising risk and more effectivelyallocating capital and resources byassessing the balance of risk andreward;

• achieving competitive advantagethrough better understanding of therisk environment in which we operate;

• complying with laws and internalprocedures; and

• improving resilience to external events.

The Group has established internalcontrols to manage risk in the key areas of exposure relevant to its business. Thebroad risk categories are insurance risk,acquisition risk, operational risk and funds


Professional indemnity and directors’ and officers’ insurance are highly specialisedproducts tailored to suit our customers in the key European, Asian, Pacific andAustralian markets. Our clients’ self risk management practices together with ourcustomised wordings are key to the success of these products.


Corporate governance statement continued

management and treasury risk. Internalcontrols and systems are designed toprovide reasonable assurance that theassets of the Group are safeguarded,insurance and investment exposures arewithin desired limits, reinsuranceprotections are adequate, counterpartiesare subject to security assessment andforeign exchange exposures are withinpredetermined guidelines. The boardapproves annually a comprehensive riskmanagement strategy (“RMS”) andreinsurance management strategy(“REMS”), both of which are lodged withthe Australian Prudential RegulationAuthority (“APRA”). The RMS deals with allareas of significant business risk to theGroup. The REMS covers topics such asthe Group’s risk tolerance and the Group’sstrategy in respect of the selection,approval and monitoring of all reinsurancearrangements. The Group securitycommittee and the Limit reinsurancesecurity committee assess reinsurercounterparty security. These managementcommittees normally meet four times ayear and hold special meetings asrequired.

While the RMS and REMS are approvedby the board, QBE believes thatmanaging risk is the responsibility of thebusiness units and that all staff need tounderstand and actively manage risk. Thebusiness units are supported bycompliance teams and by Group seniormanagement. Information is provided onpages 14 and 15 of the annual report.

Internal audit

A global internal audit function is criticalto the risk management process. QBE’sinternal audit function reports to seniormanagement and the audit committee onthe monitoring of the Group’s worldwideoperations. Internal audit providesassurance that the design and operationof the controls across the Group areeffective. The internal audit functionoperates under a written charter from theaudit committee. Other governingdocuments include a reporting protocol,internal audit manual, internal audit ratingsystem, internal audit opinion levels andinternal audit timetables. A risk basedinternal audit approach is used so thathigher risk activities are reviewed morefrequently. The Group’s internal auditteams work together with the externalauditor to provide a wide audit scope.

Delegated authorities

QBE has operated under an extensivewritten system of delegated authoritiesfor many years. In particular, a writtendelegated authority with specified limits isapproved by the board each year toenable the chief executive officer toconduct the Group’s business inaccordance with detailed budgets andbusiness plans. This authority deals withtopics such as underwriting, reinsuranceprotection, claims, investments,acquisitions and expenses. The chiefexecutive officer delegates his authorityto management throughout the Group ona selective basis taking into accountexpertise and past performance.Compliance with delegated authorities isclosely monitored by management andadjusted as required for actualperformance, market conditions andotherwise. The Group’s internal auditteams review compliance with delegatedauthorities and any breach can lead todisciplinary procedures, includingdismissal in serious cases.

Actuarial review

It is a longstanding practice of thedirectors to ensure that most of theGroup’s insurance liabilities are assessedby actuaries. The Group’s outstandingclaims liabilities are reviewed byexperienced internal actuarial staff. TheGroup actuary is based in head office andthere are over 60 actuarial staff who areinvolved in forming their own view,separate from management, ofoutstanding claims liabilities, premiumliabilities, premium rates and relatedmatters. Over 90% of QBE’s outstandingclaims liabilities are also reviewed byexternal actuaries at least annually. Theexternal actuaries are from organisationswhich are not associated with theexternal auditor.

Insurance and other regulation

General insurance and, to a lesser extent,reinsurance are heavily regulatedindustries. In addition to the Group’saccounting, legal, tax and otherprofessional teams, each division hascompliance personnel and there is aGroup risk and compliance managerbased in head office. In Australia,regulators include ASIC, the AustralianCompetition and Consumer Commission,

APRA and relevant state authorities forcompulsory third party motor insuranceand workers’ compensation insurance.These regulatory bodies enforce lawswhich deal with a range of issues,including capital requirements andconsumer protection. Similar local lawsand regulations apply to the Group’soperations outside Australia.

Communication and guidelines QBE takes the spirit of its continuousdisclosure obligations very seriously andissues frequent market announcementsduring the year to satisfy thoseobligations. A list of the announcementsmade since 1 January 2004 is included onpage 34.

Continuous disclosure

ASX Listing Rule 3.1 requires QBE toinform the ASX immediately once QBE isor becomes aware of any informationconcerning it that a reasonable personwould expect to have a material effect onthe price or value of QBE’s shares.Procedures are in place so that itemswhich potentially require announcementto the ASX are promptly notified to headoffice for assessment and released asrequired. The chief executive officer isresponsible for authorising the release ofmarket announcements. All marketannouncements are posted promptly tothe Group’s website, www.qbe.com.

Communication with shareholders

QBE distributes an annual report to allshareholders except those who elect notto receive it. QBE also produces a halfyear report, with a summary sent to allshareholders except those who elect notto receive it. Both reports are available onthe QBE website. The website alsocontains historical and other details onthe Group. Shareholders can discuss theirshareholding with either the shareholderservices department or the shareregistrar, both located in Sydney.

The AGM is held in Sydney each year,usually in April. Shareholders areencouraged to attend the AGM in person orby proxy. Most resolutions in the notice ofmeeting have explanatory notes. During theAGM, shareholders may ask questions ofeither the chairman or the external auditor.


Communications with analysts,investors, media and others

The chief executive officer, chief financialofficer and chief risk officer generally dealwith analysts, investors, media and others,taking account of regulatory guidelinesincluding those issued by the ASX oncontinuous disclosure. The presentationson the 30 June and 31 December resultsand other major presentations are sent tothe ASX before the presentationscommence and are available promptly onthe Group’s website. The 30 June and 31December presentations are generallywebcast and the presentations are alsoavailable on QBE’s website shortlyafterwards. Managing directors of QBE’soperating divisions and other senioremployees may have contact withanalysts, investors, media and others asrequired.

Share trading guidelines

The company has guidelines for thepurchase and sale of securities of thecompany, or other corporations withwhich the company may have dealings,by directors and senior Group executives.These are in addition to the insidertrading provisions of the Corporations Act2001. In particular, the guidelines statethat directors and senior Groupexecutives should:

• never actively trade the company’ssecurities; and

• notify any intended transaction tonominated people within the Group.

The guidelines identify set periods duringwhich directors or senior Group executivesmay buy or sell the company’s securities,being three to 30 days after each of therelease of the company’s half year results,the release of the company’s annual reportand the AGM, and also three days after theissue of any prospectus until the closingdate. Any QBE share dealings by directorsare promptly notified to the ASX.

Other Group guidelines

The Group has adopted a code ofconduct for Australian operations, Grouphead office and Group investmentdivision, which forms the basis for themanner in which these employeesperform their work. The code of conductrequires that business be carried out in anopen and honest manner with ourcustomers, shareholders, employees,regulatory bodies, outside suppliers,intermediaries and the community atlarge. The code also deals withconfidentiality, conflicts of interest andrelated matters. The non-executivedirectors have adopted a code of conductfor themselves which is substantially thesame as the code above.

Other divisions have or are developingcodes of conduct based on the Groupcode above, with some differences toallow for the requirements of theparticular country or countries in whichthe division operates.

There are other Group policies coveringanti-discrimination, employment,harassment, essential behaviours, healthand safety, “whistle-blowing” and manyother business practices. These policiesare underpinned by the Group’s visionand values statements. The vision andvalues statements form part of theinduction information given to newemployees. One of the values of theGroup is integrity.

QBE in Australia has adopted the generalinsurance code of practice, a self-regulatedcode developed by the ICA relating to theprovision of products and services tocustomers of the general insuranceindustry of Australia. The code is currentlyunder review by the ICA in consultationwith stakeholders. QBE has also adoptedthe general insurance information privacycode, another self-regulated codedeveloped by the ICA and approved by theprivacy commissioner in Australia.

QBE in Australia is a member of theInsurance Ombudsman Service, an ASICapproved external dispute resolution bodyfor insurance disputes betweenconsumers and insurers. Similarinsurance practice and privacy rules applyto the Group outside Australia.

Details of indemnification and insurancearrangements are included in thedirectors’ report on page 44.

The following documents are available inthe corporate governance area of QBE’swebsite or on request from the companysecretary:

• board charter;• audit, investment and remuneration

committee charters;• non-executive director nomination

guidelines;• code of conduct for non-executive

directors;• code of conduct for Australian

operations, Group head office andGroup investment division;

• guidelines for dealing in securities ofQBE Insurance Group Limited or othercompanies by directors and seniorGroup executives;

• continuous disclosure guidelines; and• shareholder communication guidelines.

Environmental issues

QBE is a corporation involved in anindustry that seeks to play an importantrole, in conjunction with governments,individuals and organisations, inmanaging and reducing environmentalrisk. In an initiative to collaborate with theUnited Nations environment programme,QBE, together with a number of othermajor international insurers, is a signatoryto a statement of environmentalcommitment by the insurance industry.

QBE INSURANCE GROUP LIMITED ABN 28 008 485 014

CONTENTS

1 The year in review2 Chairman’s report5 10 year history6 Chief executive officer’s report

12 Group financial targets andperformance goals

13 Strategy and planning

14 Risk management16 QBE people18 Operations overview20 Australian general insurance22 Asia-Pacific general insurance24 the Americas26 European operations30 Investments

32 Shareholder information34 Financial calendar and

ASX announcements35 Board of directors36 Corporate governance statement42 Directors’ report46 Financial statements95 Directors’ declaration96 Independent audit report

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TO BE INTERNATIONALLY RECOGNISED AS

• a highly successful general insurance and reinsurance group • a builder of shareholders’ wealth • a developer of “can do” people• an organisation that excels in the continuous delivery

of new and proven quality products and services

Our vision

• increasing the long term wealth of shareholders • customer satisfaction and retention • employee motivation • integrity

Our values

QBE INSURANCE GROUP ANNUAL REPORT 2004

QBE Insurance Group Limited

82 Pitt Street

Sydney 2000 Australia

Phone +61 2 9375 4444

www.qbe.com

2004

QBE Insurance GroupANNUAL REPORT DECEMBER 2004

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