QBE Insurance. Premium rate and yield optimism A$12.60 AUSTRALIA. Event. Impact. Earnings and target price revision.

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1 AUSTRALIA QBE AU Price (at 09:32, 27 Feb 2017 GMT) Outperform A$12.60 Valuation A$ DCF (WACC 7.9%, beta 0.9, ERP 5.0%, RFR 3.3%, TGR 2.3%) 12-month target A$ month TSR % Volatility Index Low/Medium GICS sector Insurance Market cap A$m 17, day avg turnover A$m 81.6 Number shares on issue m 1,372 Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E NEP m 11,066 11,951 12,020 12,182 Underwriting Result m Investment Income m Reported profit m Net Op Income m EPS adj PER adj x PER rel x DPS Dividend yield % Franking % Total SH Funds m 10,334 10,269 10,277 10,272 BV/S ROE % ROA % P/BV x QBE AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2017 (all figures in USD unless noted, TP in AUD) 27 February 2017 Macquarie Securities (Australia) Limited Premium rate and yield optimism Event QBE FY16 Cash NPAT of $898m [+12% constant currency] vs Macquarie $770m. The underlying result was slightly ahead of market and MRE expectations after adjusting for: +$125m Investment FX gain; +$366m [3.3% of NEP] reserve releases; -$80m discount rate adjustment; -$64m legal provisions/other costs; and -$80m underwriting result FX hit. Impact The outlook for QBE remains attractive based on the following: #1) FY17 Market Conditions commentary: grounds for optimism Conditions are supportive of rising premium rates [albeit inflation driven] and yields are rising. QBE "anticipate the market backdrop will remain challenging in 2017, although indications of modest improvement are now emerging. The rate of decline in global insurance pricing is easing." Excess capital remains a feature of global insurance markets. Group-wide premium rates recovered in 2H16, with rates largely flat in FY16. QBE reported a ~1.3% average rate reduction in 1H16 and a ~1.3% average rate reduction in #2) FY17 QBE targets: implied FY17 Insurance Margin 8.5%-10.5% The implied FY17 Insurance Margin, based on QBE s Underwriting and Expense Targets, is ~8.5%-~10.5% [includes modest reserve releases]. GWP target "Relatively Stable". Expectations are for broadly flat premium rates in Australia [premium rate +4.5% in 4Q16]. QBE "is encouraged by the improved US macroeconomic outlook while investment income should benefit from higher yields in all major markets." Profitability: QBE expect further improvement in profitability in FY17 and FY18, with $200m claims benefit targeted in FY18 and $150m expense savings by #3) Capital Management: QBE announced a 3-yr cumulative on-market share buyback up to A$1bn with a current target of not more than A$333m (~2% of shares) in any one calendar year. The buyback "supplements rising dividend payments" and recognises the limited franking position. Capital ratios should remain at the upper end of targets. Earnings and target price revision EPS: FY17: +4.0%; FY18: +2.7%; FY19: +5.6%. TP $13.45 (from $12.47). Price catalyst 12-month price target: A$13.45 based on a DCF methodology. Catalyst: AGM 3 May 2017 and 1H17 Result 17 August 2017 Action and recommendation Outperform rating, supported by outlook commentary, internal targets & capital management. Valuation remains attractive. Please refer to page 14 for important disclosures and analyst certification, or on our website

2 Macquarie Wealth Management Fig 1 QBE FY16 result summary What we liked What we didn t like What we thought was interesting Combined Operating ratio: 93.2% [excluding the Management turnover: There have been GWP -2% (up 1% in constant currency). discount rate impact] beat the FY16 target range many senior management position changes. 94%-95%. Insurance Margin: 9.7% was also While there are a number of internal NEP -2% (up 2% in constant currency). towards the top end of the FY16 target range (8.5% promotions, and we don t have a specific view Claims Ratio: 520bps improvement from to 10.0%). on the individuals, the level of management the reinsurance of US multi-line P&C runoff liabilities and UK long-tail liabilities. change remains high. This may support the North America expectation of improved operational Large risk and catastrophe claims: 9.1% Combined Operating Ratio: improved performance but also brings risks. in FY16 vs. 8.7% in pcp. 210bps to 97.7% [excluding discount rate The search for a permanent Group impact], impacted by Improved Crop result, Equator Re: CFO continues. Pat Regan will remain growth in Speciality, reduce Commercial Auto as Acting Group CFO until a GWP +34%, NEP +28%; Equator Re exposure. replacement is found, in addition to his providing higher limits on divisional GWP +2% due to continued growth in Specialty partially offset by reductions in Crop and Property & Casualty. Premium rates broadly flat overall. permanent role as CEO, Australian and New Zealand Operations. Victor Walter has been appointed as Deputy Group CFO. Australia David McMillan has been appointed Group COO (previously CEO of Aviva Premium Rate momentum: +2.2% in 3Q16, Europe and Chairman of Global Health +4.5% in 4Q16, with retention falling in 4Q16 Insurance). David replaces Colin Fagen but was over 80% in FY16. who left QBE on 9 Feb GWP +5% on a constant currency basis [NSW ANZ division changes: Declan Moore CTP, entry to the SA CTP market]. appointment as Chief Underwriting Attritional claims improvement: Underwriting and pricing action supporting a 340bps 2H16 attritional claims ratio improvement to 58.6% vs 62.0% in 1H16. Officer; Bettina Pidcock appointment as EGM Marketing; Andrew Broughton appointment as EGM Corporate Partners & Direct; Jon Fox appointment Reserve releases as EGM Claims; Inder Singh appointment as CFO (from 1 March 3.3% of NEP, $366m vs $147m in pcp, despite 2017). treaties, and growth in QS book. Completed a portfolio transfer with the North American Operations for the closed mono-line Commercial Auto portfolio. Emerging Markets: GWP +10%, NEP +8%, (constant currency) comprising APAC +3% and LatAm +16%. Expense ratio: +80bps from continued Investment/implementation of profitable growth strategy and increased costs associated with more governance framework in Miami. Europe: Combined Operating Ratio: 90.2% $121m adverse prior year development in vs 89.7% [excl. discount rate impact], European division changes: Mike East US (mainly for the terminated commercial auto with Expense ratio 70bps better than assumed the Claims Director role and portfolio). Fifth consecutive period of reserve the pcp and $273m reserve releases. Nigel Terry appointed CRO. Both were releases. internal promotions. Premium rates: -2.4%, slightly better Cash and Capital Management: US division change: Kris Hill appointed than -3.2% in pcp. Buy back: Announced a 3-yr cumulative onmarket share buyback up to A$1bn with a current target of not more than A$333m (~2% as CFO. GWP and NEP: -3% and -6%, respectively, on a constant currency basis. of shares) in any one calendar year. The Fixed income duration: 1.5yrs vs 0.9yrs buyback "supplements rising dividend in pcp. Longer duration reduces sensitivity payments" and recognises the limited franking to discount rate movements. position. Pricing commentary has been positive PCA multiple: 1.79x, vs 1.73x in Dec across all divisions. We note that CET1 1.27x, vs 1.22x in Dec experience is referring to renewed POA: 89.5% vs. 89.0% in pcp. business which is often at higher rates Reinsurance savings of more than $350m from 1 Jan 2017, without taking on additional risk. Cost out outlook: on track to execute on a further than new business. Cash remittances from divisions: +55% to $1.1bn. $150m expense savings by FY16: -$158m reduction in Group expenses [excluding $22m in legal provision]. Source: Company data, Macquarie Research, Feb February

3 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Macquarie Wealth Management Outlook commentary GWP target: FY17 guidance relatively stable (assumes foreign exchanges rates of AUD 0.73; GBP 1.25; and EUR 1.10). This is in the context of putting the US mono-line commercial motor portfolio into run-off (10.9% of US business GEP). Combined Operating Ratio: FY17 guidance 93.5% %, including allowance for modest positive prior accident year claims development. Investment income: FY17 guidance 2.5% - 3.0%. Cost out: Execute on further U$150m expense savings by FY18. Claims savings of U$200m by FY18. Long-term return on tangible equity 13% - 15%, with the mid-point equating to an ROE of ~10% [FY17 Statutory ROE 8.1%]. Fig 2 Absolute QBE trading at a 3.5% discount to peers 2yr fwd PERel (x) yr fwd PERel (x) Source: Factset, Macquarie Research, Feb February

4 Macquarie Wealth Management Group: Highlights from the FY16 result FY16 cash profit: QBE reported $898m cash profit, +0.6% vs -1.6% pcp. FY16 result vs MRE estimates: GWP $14,395m, -4.6% vs. 7.6% pcp. NEP $11,066m, -10.1% vs % pcp. Fig 3 Insurance Margin improving as new reinsurance programs and business sales work through the results Insurance Margin 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% 1H09A 2H09A 1H10A 2H10A 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Reported Margin net of reserve releases Reserve Releases as % of NEP Reported Margin -5% Reported insurance margin: 9.7% vs. 8.1% pcp. o Combined Operating Ratio adjusted for discount rate movements: 93.2% vs. 95.2% pcp o Reserve releases: 3.3% of NEP, $366m vs $147m in pcp; comprising +$147m from ANZ, +$273m Europe, offset by -$121m deterioration in the US (primarily due to Commercial Motor claims). Underlying investment yield on policyholder funds 2.4% vs 2.3% in the pcp [Excludes FX gains and other income]. Total Reported investment returns were boosted by foreign exchange gains [$125m], which more than offset an $80m pre-tax charge associated with lower risk-free rates used to discount net outstanding claims. Claims ratio: 58.2% vs 60.4% pcp. o Adjusted Net Claims ratio: 60.4%, vs 59.8% pcp. Commission ratio: 18.4% vs 17.2% pcp. o Adjusted Net Commission ratio: 17.3% vs 17.2% pcp. Underwriting Expense ratio: 17.4%, flat vs pcp. o Adjusted Net Expense ratio: 16.9% vs 17.4% pcp. Adjustments: QBE undertook transactions to reinsure legacy US multi-line property and casualty (program) run-off liabilities and long tail UK liabilities, the combined impact of which was to reduce net earned premium by $570m and net claims expense by $581m. Although having only a minor impact on net profit, the transactions materially impact year on year net earned premium comparisons and underwriting ratios, depressing the net claims ratio and inflating the combined commission and expense ratio. Financing and other costs: $294m up from $244m in the pcp reflected $30m from discontinuing agency operations and a $12m write down of contingent consideration on the sale of the Australian Agencies in Tax rate: 21% (vs 27% in the pcp, which was impacted by the de-recognition of Aust and EU deferred tax). QBE expect the tax rate in FY17 to be similar to the FY16 rate. US tax losses of $573m were unchanged versus the pcp. Cash remittances from divisions: +55% to $1.1bn. 27 February

5 FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17E Macquarie Wealth Management Fig 4 Absolute costs should continue to shrink as non-core businesses are sold and cost-out programs continue to deliver Expenses U$6b U$5b U$4b U$3b U$2b U$1b U$0b U$2.8b U$3.4b U$4.4b U$4.9b U$5.1b U$4.6b U$4.3b U$4.0b U$4.0b Expense Ratio 40% 35% 30% 25% 20% 15% 10% 5% 0% FY16 DPS A$0.33, with ~61% payout ratio. Balance sheet and capital within target ranges: Gearing: Balance sheet gearing 33.8% vs. 33.6% pcp and a benchmark of 25%-35%. PCA: 1.79x (vs. 1.73x pcp) was at the top end of the target benchmark of 1.6x to 1.8x. POA: 89.5%, up vs. pcp of 89.0% [$16.0m after tax impact]. Close to the midpoint of the benchmark of 87.5% %. o Other than the 0.5% explicit increase in the POA of the net central estimate for potential changes to the Ogden tables [statutory discount rates in relation to UK personal injury claims liabilities], the target range does not allow for a potentially more extreme legislative outcome. Risk margins in net outstanding claims: $1.088bn or 8.6% of the net central estimate, compared to $1.260bn or 8.9% at Dec The decrease in the risk margin of $172m includes a foreign exchange movement of $39m and a constant currency reduction of $132m. o The reduction reflects: reduced volatility in the Central Estimate, reinsurance transactions, increased adverse deterioration protection, and FX changes. Fig 5 Balance Sheet stability reflecting concentration on core operations, moderate organic growth and disposal of non-core business units PCA FY11A FY12A FY13A FY14A FY15A FY16A FY17E CET 1 Other T1 T2 27 February

6 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Macquarie Wealth Management Australia and New Zealand: Highlights from the FY16 result GWP: +5% on a constant currency basis (+3.9% in USD). Retention: improved to 83.1% vs. 81.7% pcp. Premium rate movements: Remediation initiatives resulted in average rate increases +1.7% in FY16. Premium rate increases for renewed business in Q4 averaged +4.5%. Over the 24 months to the balance date, QBE have increased NSW CTP premium rates by 21% with a further 3% increase applicable from 1 February Mix: CTP was the main product to grow within the portfolio, while Liability and Financial & Credit portfolios contracted as a share of the ANZ division. Strong growth was achieved in CTP as a result of significant premium rate increases in the NSW scheme, coupled with QBE s entry into the recently privatised South Australian market. Modest growth was also achieved in New Zealand, Elders and intermediary businesses. Fig 6 GWP - ANZ U$3.0b U$2.5b U$2.0b U$2.49b U$2.52b U$2.52b U$2.29b ANZ - GWP U$2.28b U$2.12b U$1.93b U$1.86b U$1.86b U$2.07b U$1.5b U$1.0b U$0.5b U$0.0b NEP: +3.9% in USD. Net Claims Ratio: 63.7% vs. 62.6% pcp. Deterioration on an annual basis fails to show the improvement in the attritional ratio on a half year basis: Attritional claims ratio: improved from 62.0% in 1H16 to 58.6% in 2H16. Reserve Releases: Positive accident year claims development of $147m, or 1.3% of NEP. Expenses: Commission Ratio: 15.0% vs. 14.7% pcp, reflecting growth in New Zealand, which generally have higher commission rates. Underwriting Expense Ratio: 14.0%, flat vs. pcp. Combined Operating Ratio: 92.7% vs. 91.3% pcp. Excluding the impact of changes in risk-free rates used to discount net outstanding claims, the CoR was 92.4% vs 91.1% pcp. The LMI business reported a CoR of 34.9% vs. 22.2% pcp 27 February

7 Macquarie Wealth Management Fig 7 Deconstructed Combined Operating Ratio - ANZ 120% 100% 80% 60% 102.2% 17.1% 12.1% 96.8% 16.8% 13.7% ANZ 91.7% 89.4% 89.0% 86.8% 87.4% 86.6% 16.5% 17.3% 16.3% 14.6% 14.3% 15.0% 13.1% 13.6% 13.9% 14.5% 13.9% 13.8% 90.8% 91.8% 13.8% 14.3% 14.1% 15.2% 95.9% 13.1% 15.1% 89.6% 14.8% 14.9% 40% 20% 73.0% 66.3% 62.1% 58.5% 58.8% 57.7% 59.2% 57.8% 62.9% 62.2% 67.7% 59.9% 0% 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Net Claims Ratio Commission Expenses Ratio Other U/W Expenses Ratio 27 February

8 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Macquarie Wealth Management Europe: Highlights from the FY16 result GWP: -3% on a constant currency basis (-7.1% in USD). Retention: improved to 82.7% vs. 80.5% pcp. Premium rate movements: The weighted average premium rate reduction on renewed business in the year was -2.4%, reflecting a slight improvement in the second half and better than the -3.2% average reduction experienced in Pricing trends remain negative in European Operations with competition for new business being particularly acute. Mix: Liability lines make up a smaller part of the European book vs. pcp while Motor products have increased. Fig 8 GWP - Europe U$3.5b U$3.15b Europe - GWP U$3.0b U$2.5b U$2.0b U$1.5b U$2.80b U$2.37b U$2.08b U$2.71b U$1.82b U$2.66b U$1.73b U$2.51b U$1.57b U$1.0b U$0.5b U$0.0b NEP: -6% on a constant currency basis (-14.6% in USD). Net Claims Ratio: 56.2% vs. 53.4% pcp. Reserve Releases: Positive accident year claims development of $273m, or 8.8% of NEP. Expenses: Commission Ratio: 19.5% vs. 18.4% pcp. Underwriting Expense Ratio: 17.5% vs. 17.3% pcp. Combined Operating Ratio: 93.2% vs. 89.1% pcp. Adjusted CoR was 90.2% vs 89.7% pcp. Fig 9 Deconstructed Combined Operating Ratio - Europe 120% Europe 100% 80% 60% 95.4% 95.5% 12.4% 14.1% 16.8% 17.2% 91.9% 14.7% 17.9% 96.5% 94.4% 93.2% 94.2% 93.1% 15.8% 13.8% 17.1% 15.7% 20.0% 17.3% 19.1% 17.8% 18.8% 21.8% 85.8% 17.9% 18.8% 98.3% 92.1% 19.5% 16.8% 17.9% 20.1% 88.7% 15.7% 18.9% 40% 20% 66.3% 64.2% 59.3% 63.4% 61.4% 58.2% 59.7% 51.2% 49.1% 57.4% 58.6% 54.1% 0% 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Net Claims Ratio Commission Expenses Ratio Other U/W Expenses Ratio 27 February

9 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Macquarie Wealth Management North America: Highlights from the FY16 result GWP: -6%. Premium rate: flat vs pcp. Pricing was flat in North America with rate increases in personal lines and Specialty more than offset by ongoing weakness in catastrophe exposed commercial property. Mix: Property and Motor lines materially decreased their share of QBE s US book vs. pcp with A+H and Professional Indemnity lines balancing this. During 2016, QBE decided to exit the mono-line commercial auto segment. This included the termination of a major program and the reinsurance of all related outstanding claims and unearned premium reserves to the Group s captive, Equator Re. The exit of this portfolio represented approximately half of the overall commercial auto portfolio. The mono-line commercial auto portfolio reported an underwriting loss of U$105m. Lower corn and soybean pricing coupled with farmers opting for higher deductibles adversely impacted Crop gross written premium. Nevertheless, the Crop business performed extremely well, outperforming industry average profitability. Fig 10 GWP North America U$4.0b North America - GWP U$3.5b U$3.0b U$2.5b U$2.0b U$3.23b U$3.34b U$2.75b U$3.20b U$2.47b U$2.84b U$3.11b U$1.85b U$2.82b U$1.83b U$1.5b U$1.0b U$0.5b U$0.0b Fig 11 GEP North America by product U$6.0b US GEP by Type U$5.0b U$4.0b U$3.0b U$2.0b U$1.0b U$0.0b Other US GEP Motor GEP Agriculture GEP 27 February

10 Macquarie Wealth Management NEP: -25.5%. Reserve Releases: Adverse accident year claims development of $121m, or 3.7% of NEP. The vast majority of this relates to now terminated and reinsured mono-line commercial auto business. Expenses: Commission Ratio: 20.7% vs. 17.3% pcp. Underwriting Expense Ratio: 20.4% vs. 18.5% pcp. Combined Operating Ratio: 97.0% vs. 99.2% pcp. Excluding the impact of changes in risk-free rates used to discount net outstanding claims, the CoR was 97.7% vs 99.8% pcp. North American Operations is in the process of further consolidating its real estate footprint and increasing utilisation of the Group Shared Services Centre (GSSC) in the Philippines. Excluding the sale of M&LS, over $40m of cost savings were achieved during 2016, which was partially offset by non-recurring rationalisation charges and investment in ongoing initiatives. Fig 12 Deconstructed Combined Operating Ratio North America 140% 120% 100% 80% 60% 88.9% 91.5% 88.7% 18.1% 18.1% 14.8% 11.4% 6.1% 18.6% 113.5% 14.7% 13.3% 99.3% 19.5% 18.7% North America 120.4% 20.5% 98.4% 13.7% 19.7% 18.6% 102.7% 100.2% 98.2% 16.1% 19.7% 17.3% 13.4% 18.0% 16.7% 104.0% 15.5% 16.8% 85.2% 28.5% 40% 20% 0% 85.5% 86.1% 27.0% 59.4% 67.3% 73.3% 55.4% 61.1% 60.1% 62.5% 64.2% 71.6% 29.7% 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Net Claims Ratio Commission Expenses Ratio Other U/W Expenses Ratio Fig 13 Carried forward US tax losses U$700m U$600m US - Carried Forward Tax Losses U$500m U$400m U$300m U$200m U$100m U$0m FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A Carried forward tax losses Deductible temporary differences 27 February

11 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Macquarie Wealth Management Emerging Markets: Highlights from the FY16 result GWP: +3% on a constant currency basis (-14.4% in USD). Fig 14 GWP Emerging Markets U$1.2b U$1.0b U$0.8b U$0.78b U$1.03b U$1.13b Emerging Markets - GWP U$1.11b U$1.07b U$0.97b U$1.06b U$0.84b U$0.85b U$0.78b U$0.6b U$0.4b U$0.2b U$0.0b NEP: +4% on a constant currency basis (-17.7% in USD). Net Claims Ratio: 54.3% vs. 54.8% pcp. Expenses: Commission Ratio: 23.6% vs. 21.4% pcp. Underwriting Expense Ratio: 21.8% vs. 20.3% pcp. Combined Operating Ratio: 99.5% vs % pcp, Lower risk-free rates had no impact on these results. Fig 15 Deconstructed Combined Operating Ratio Emerging Markets 140% 120% 100% 80% 60% Emerging Markets 118.6% 17.9% 91.7% 92.4% 93.3% 94.5% 96.7% 96.4% 21.6% 16.4% 18.3% 16.8% 19.0% 22.0% 23.2% 21.3% 21.2% 22.3% 21.6% 22.0% 23.7% 107.1% 105.5% 18.3% 19.5% 21.6% 20.1% 100.3% 99.5% 99.6% 21.3% 21.5% 22.0% 22.9% 23.2% 23.9% 40% 20% 47.7% 45.5% 55.6% 53.9% 58.7% 55.9% 79.1% 67.1% 65.9% 56.0% 54.8% 53.6% 0% 1H11A 2H11A 1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A 1H16A 2H16A Net Claims Ratio Commission Expenses Ratio Other U/W Expenses Ratio In December 2016, following a business review to address Latin American underwriting margins, QBE entered into an agreement to sell 3 of its small and unprofitable Chilean operations to the current management team of QBE Chile Seguros Generales S.A.. QBE also finalised the buyout of the remaining 45% of paid-up shares of the joint venture operation in Indonesia (previously held by PT Pool Advista Indonesia Tbk) and purchased an additional 23% stake in the Indian joint venture, Raheja QBE. 27 February

12 Macquarie Wealth Management Group Year ended: 31 December Source: Company data, Macquarie Research, Feb 17 Price: AU$12.60 Underwriting Accounts 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E Gross Written Premium US$m 8,107 6,288 8,132 6,251 15,092 14,395 14,383 14,453 14,637 Gross Earned Premium US$m 6,876 7,400 7,237 6,948 14,922 14,276 14,185 14,257 14,440 Reinsurance Expense US$m (1,261) (1,949) (983) (1,251) (2,608) (3,210) (2,234) (2,237) (2,257) Net Earned Premium US$m 5,615 5,451 6,254 5,697 12,314 11,066 11,951 12,020 12,182 Net Claims Incurred US$m (3,637) (2,805) (3,864) (3,428) (7,434) (6,442) (7,292) (7,370) (7,509) Net Commission Expenses US$m (993) (1,041) (1,067) (992) (2,114) (2,034) (2,059) (2,064) (2,091) Underwriting and Other Expenses US$m (931) (991) (997) (945) (2,137) (1,922) (1,941) (1,910) (1,908) Underwriting Result US$m Net Investment income on policyholders funds US$m Insurance Profit US$m ,075 1,066 1,130 1,153 Net Investment income on shareholders funds US$m Financing & Other Costs US$m (125) (169) (125) (125) (244) (294) (250) (250) (250) Gains (losses) on sale of entities US$m - (3) - - (2) (3) Amortisation and impairment US$m (19) (26) (26) (26) (95) (45) (52) (52) (52) Profit Before Tax US$m ,072 1,055 1,144 1,181 Income Tax Expense US$m (80) (148) (105) (110) (260) (228) (215) (234) (241) Profit After Tax US$m NCI US$m (2) 2 (3) 1 (6) - (2) (4) (6) Reported Earnings US$m Adjusted Earnings US$m Cash Earnings US$m Insurance Ratios 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E GWP Growth % Reinsurance Outwards % NEP Growth % Net Claims Ratio % Net Commission Expense Ratio % Other Underwriting Expense Ratio % Combined Ratio % Reported Margin % Underlying Margin % PCA x Prior Accident Year development US$m Discount Rate impact US$m POA % na na na na Gearing (debt:equity) % Investment Fundamentals 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E EPS (Reported, Diluted) U ps EPS (Reported, Diluted) A ps EPS (Adjusted, Diluted) U ps EPS (Adjusted, Diluted) A ps EPS (QBE Cash basis, Diluted) U ps PER (Reported) x PER (Adjusted) x PER (QBE Cash basis) x DPS A ps Dividend yield % 3.3% 5.2% 4.0% 4.9% 4.0% 4.3% 4.4% 4.8% 5.1% Franking % 50% 50% 30% 30% 100% 50% 30% 30% 30% Payout Ratio (QBE Cash earnings) % 76% 54% 61% 70% 63% 61% 66% 65% 65% Effective tax rate % 23% 20% 20% 20% 28% 21% 20% 20% 20% Average AUD:USD x EFPOWA m 1,379 1,389 1,384 1,371 1,380 1,389 1,377 1,352 1,326 NTA x NTA (+ Prudential Margins) x NAB x ROA (Adjusted) % 1.3% 3.0% 2.1% 2.3% 1.6% 2.2% 2.3% 2.4% 2.5% ROE (Cash Earnings) % 5.5% 11.9% 8.3% 8.8% 8.3% 8.6% 8.5% 9.2% 9.5% Balance Sheets (US$m) FY16A FY17E FY18E FY19E Valuation Summary (A$) Assets Cash US$m PV of distributable cash profit 10,666 Investments US$m 24,624 24,445 24,653 24,914 Terminal value 7,039 Other Assets US$m 7,945 8,147 8,344 8,543 Total NPAT DCF valuation 17,706 Intangibles US$m 3,627 3,575 3,523 3,471 Shares on issue 1,371 Total Assets US$m 37,043 37,018 37,379 37,795 Value per share (A$) $ Liabilities Share price target (A$) $ Unearned Premiums US$m 6,763 6,961 7,157 7,354 Net Outstanding Claims US$m 13,781 13,929 14,078 14,229 % captial upside/downside 6.7% Borrowings US$m 3,474 3,474 3,474 3,474 Dividend Yield 4.3% Other Liabilities US$m 2,691 2,386 2,393 2,466 Total shareholder returns 11.0% Total Liabilities US$m 26,709 26,749 27,102 27,523 Net Assets US$m 10,334 10,269 10,277 10,272 Recommendation Outperform Minority Interests US$m Shareholders' Funds US$m 10,284 10,218 10,223 10, February

13 Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably positive view on QBE Insurance. The strongest style exposure is Earnings Momentum, indicating this stock has received earnings upgrades and is well liked by sell side analysts. The weakest style exposure is Profitability, indicating this stock is not efficiently converting investments to earnings; proxied by ratios like ROE or ROA. 84/257 Global rank in Insurance % of BUY recommendations 57% (8/14) Number of Price Target downgrades 0 Number of Price Target upgrades 8 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Insurance) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.9 AMP 0.9 AMP Chubb Insurance Australia Group Chubb Insurance Australia Group Suncorp -0.5 Suncorp % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple AMP -0.5 AMP Chubb -0.5 Chubb Insurance Australia Group 0.2 Insurance Australia Group Suncorp 0.0 Suncorp % -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Sales NTM Price to Sales FY1 Sales to EV NTM Sales to EV FY0 Return on Assets FY1 EBITDA Revisions 3 Month 3m Earnings Revisions Profit Margin FY1-29% -29% -32% Negatives Positives -26% 30% 27% 35% 32% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/257) Percentile relative to market(/422) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 27 February

14 Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) QBE AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology QBE AU: A$13.45 based on a DCF methodology Company-specific disclosures: QBE AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Group Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 11-Jan-2017 QBE AU Outperform A$ Dec-2016 QBE AU Outperform A$ Sep-2016 QBE AU Outperform A$ Aug-2016 QBE AU Outperform A$ Jul-2016 QBE AU Outperform A$ Apr-2016 QBE AU Neutral A$ Mar-2016 QBE AU Neutral A$ Feb-2016 QBE AU Outperform A$ Nov-2015 QBE AU Outperform A$ Sep-2015 QBE AU Outperform A$ Aug-2015 QBE AU Outperform A$ Jul-2015 QBE AU Outperform A$ Jun-2015 QBE AU Outperform A$ May-2015 QBE AU Outperform A$ Mar-2015 QBE AU Outperform A$ Mar-2015 QBE AU Outperform A$ Feb-2015 QBE AU Outperform A$ Jan-2015 QBE AU Outperform A$ Nov-2014 QBE AU Neutral A$ Aug-2014 QBE AU Neutral A$ Jul-2014 QBE AU Underperform A$ Jul-2014 QBE AU Neutral A$ February

15 This publication was disseminated on 27 February 2017 at 11:58 UTC. Macquarie Wealth Management 27-May-2014 QBE AU Neutral A$ Mar-2014 QBE AU Underperform A$ Feb-2014 QBE AU Underperform A$13.00 Target price risk disclosures: QBE AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. 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The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 27 February