QBE INSURANCE GROUP LIMITED MARKET ANNOUNCEMENT QBE ANNOUNCES ACQUISITION OF NAU COUNTRY INSURANCE COMPANY

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2 LIMITED MARKET ANNOUNCEMENT QBE ANNOUNCES ACQUISITION OF NAU COUNTRY INSURANCE COMPANY QBE Insurance Group Limited today announced that it has agreed to acquire NAU Country Insurance Company and its holding companies ( NAU ). NAU is a leading underwriter and manager of multi-peril crop insurance business in the US. The acquisition is subject to regulatory approvals. Completion is expected in July In 2009, NAU wrote US$976 million of gross earned premium. Net earned premium was US$354 million, the combined operating ratio, that is the ratio of claims, commissions and expenses to net earned premium, was 61.3% and profit after tax was US$92.5 million. NAU is the third largest writer and manager of Multi-Peril Crop Insurance (MPCI) in the US. MPCI is a Department of Agriculture program that provides protection against weather-related and other unavoidable causes of crop loss. NAU operates 10 offices across the US and has over 1,600 independent agents. The purchase price is US$565 million and the net tangible assets acquired will be US$217 million. The acquisition will be funded from existing resources and, subject to catastrophes not exceeding the allowances made, will be earnings per share accretive in year one. The attachment provides more detail on NAU. Mr. Frank O Halloran, QBE s Chief Executive Officer, said The acquisition is in line with QBE s long term strategy of acquiring specialist businesses to further enhance our significant product diversification and distribution. NAU is a very well managed and profitable crop insurance provider in the US with excellent systems. Synergies are expected from savings in reinsurance costs and cross selling of QBE s various agricultural insurance products to NAU s client base. He added The purchase price relative to book value reflects the high quality of NAU s underwriting and management business and the fact that the substantial majority of the 2010 profits will be earned in the second half of the calendar year. For further information, please either phone or investor.relations@qbe.com. 16 April 2010

3 MARKET ANNOUNCEMENT SUPPLEMENTARY INFORMATION ACQUISITION OF NAU COUNTRY INSURANCE COMPANY 16 April 2010

4 NAU overview NAU is the third largest underwriter and manager of multi peril crop insurance (MPCI) in the US with an approximate 11% share MPCI is a US government sponsored program to assist farmers with insurance of crops NAU writes business covering 84 separate crop types, spanning 33 million acres for 58,000 farmers The head office of NAU is in Ramsey, Minnesota. There are 9 other branch and regional offices spread throughout the Midwest and California 2

5 NAU overview NAU s infrastructure is well developed with in excess of 380 employees, established and proven distribution, robust and mature administration and IT systems and a qualified and experienced team of insurance professionals NAU Country Insurance Company is rated A- by A.M. Best. NAU has US$361 million in shareholders equity as of 31 December 2009, including US$123 million of intangible assets 3

6 NAU overview In 2009, NAU wrote US$976 million of gross earned premium through 1,670 independent agents in 33 states. Net earned premium was US$354 million 95% of NAU s gross premium is MPCI. NAU is 1 of 16 carriers authorised under the US Government Program 2009 reinsurance costs included a 40% quota share, stop loss reinsurance protection and cessions of non-preferred risks to a government assigned risk fund 4

7 NAU overview NAU s management was involved in initiating the successful MPCI program between the government and private sector in the early 1980 s which has improved the financial security of US farmers NAU has continually grown its business as a result of the use of proprietary processing and servicing IT systems which enables them to provide higher levels of service and settle claims quickly 5

8 NAU overview NAU receives policy issuing and administration fees which are offset against commission and expenses Therefore, NAU s underwriting result includes the profit from underwriting and the policy and administration fees from managing the MPCI business on behalf of the US government 6

9 NAU acquisition The acquisition of NAU is consistent with QBE s long term strategy to buy specialist insurance businesses to enhance product diversification and distribution QBE will now be able to offer a full suite of agricultural insurance products to QBE s and NAU s customers The acquisition enhances our US product and geographic diversity Premium income is cyclical; driven by a combination of commodity prices and crop counts 7

10 NAU overview Financials underwriting and income statement Actual Actual Actual Actual Estimate US$m US$m US$m US$m US$m Gross earned premium , Net earned premium Underwriting profit Investment income Profit before tax Income tax (28) (45) (27) (50) (42) Profit after tax Ratio analysis Claims ratio 67.0% 61.2% 93.9% 65.7% 77.4% (3) Commission ratio -19.6% -15.7% -10.8% -14.2% 1.7% (1) (2) Expense ratio (3) 13.5% 17.1% 4.2% 9.8% 4.6% Combined operating ratio 60.9% 62.6% 87.3% 61.3% 83.7% claims ratio impacted by lower than expected yields from flooding in the Mid West and declines in commodity prices for NAU s primary crops includes allowance for catastrophes in the second half of the year 3. Commission and expenses are net of ceding commissions, profit commission and policy issuing and administration fees 8

11 NAU overview About MPCI Federally regulated insurance program run by US Federal Crop Insurance Corporation (FCIC) through the Risk Management Agency (RMA) Rates are set by the government to be actuarially sound. All MPCI premiums collected from the policyholder are held by the FCIC in escrow Administration and Operating (A&O) expenses are reimbursed by FCIC to the carrier 9

12 NAU overview About MPCI (cont) Carriers reinsure business to special FCIC pools under a standard reinsurance agreement and can utilise commercial reinsurance Claims are administered by the carrier and paid by FCIC from the premiums remitted to FCIC and held in escrow Underwriting settlement occurs between FCIC and the insurer following the end of the calendar year 10

13 NAU Overview NAU Office Locations in Red (Head Office in Yellow) * NAU writes business in the states highlighted in blue Missoula, Montana Fargo, North Dakota Ramsey, Minnesota (Head Office) Eau Claire, Wisconsin Woodland, California Alexandria, Indiana Cadiz, Kentucky Fresno, California Topeka, Kansas Johnston, Iowa 11

14 NAU acquisition Transaction Highlights Purchase price of US$565 million; price of approximately 7 times estimated 2010 after tax profit and 2.6 times net tangible assets acquired reflects the high quality of the underwriting and management business and the substantial majority of 2010 profits being earned in the second half of the calendar year Net tangible assets at acquisition will be US$217 million Dividend to the Sellers pre completion for net tangible assets above US$217 million 12

15 NAU acquisition Transaction Highlights (cont) Quota share reinsurances to be provided by QBE after completion Senior management team, including President & CEO, have committed to remain with NAU for a minimum 2 years Acquisition subject to regulatory approvals Subject to usual caveats, such as catastrophes not exceeding the allowance in our business plans, we expect approximate earnings per share growth for QBE of 3% - 4% in year one 13

16 NAU acquisition NAU balance sheet at 31 December 2009 US$ m Assets: Investments 179 Other assets (1) 391 Intangibles (2) Liabilities: Insurance provisions 116 Borrowings (3) 101 Other liabilities Net assets 361 (1) Other assets include amounts due from FCIC reinsurance program (2) Intangibles include goodwill of $84m resulting from the acquisition of NAU in 2005 (3) Borrowings includes the following: Trust preferred debt due 2035 and Short term debt and notes payable

17 NAU acquisition Acquisition funding The acquisition of NAU is expected to be funded as follows: Cost of acquisition of underwriting and management business US$ m 565 Funded by: Cash and short term borrowings 565 Key QBE Group ratios post completion: Debt to equity around 30% Minimum capital multiple 1.54 times at completion pre any increase in current low level Tier 1 and Tier 2 debt 15

18 NAU acquisition Major Benefits to QBE A well regarded, established and profitable crop insurance brand name Long standing agency relationships Creates a leading US agricultural primary insurer when combined with QBE s Agri, National Farmers Union and Unigard brands Synergies on reinsurance protections and cross selling of agricultural insurance products to agency force 16

19 NAU acquisition Estimated impact on QBE Gross earned premium - US$m Net earned premium - US$m Claims ratio - % Commission ratio - % Expense ratio - % Combined operating ratio (COR) - % Insurance profit ratio - % Net profit after tax - US$m (4) Estimate Estimate 2nd Half Full Year 2010 (1) (2) (1) , (3) 1. Estimate for second half of 2010 and 2011 full year, include transaction costs gross premium increase is subject to FCIC premium rates 2. Typically, due to the seasonal nature of earnings, all profits are earned in the second half of the year full year profit is estimated to be substantially the same as the second half estimated COR includes allowance for catastrophes and current proposed change to the FCIC standard reinsurance arrangements 4. Insurance funds are minimal due to FCIC receivable and the short tail nature of the business 17

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