23 July 09.s&p's Published Report For Syndicate 2999

July 23, 2009

QBE Underwriting - Syndicate 2999 Primary Credit Analyst: Ali Karakuyu, London (44) 20-7176-7301; [email protected] Secondary Credit Analyst: David Laxton, London (44) 20-7176-7079; [email protected]

Table Of Contents Lloyd's Syndicate Assessment Financial Strength Ratings And Lloyd's Syndicate Assessments Major Assessment Factors Rationale Outlook Syndicate Profile: Highly Diversified Syndicate With Capacity Of £720 Million For 2009 Year Of Account Competitive Position: Good And Improving, Leading More Than Half Of The Risks Written Management And Corporate Strategy: Experienced And Proactive Management Team Enterprise Risk Management: Strong Risk Management Framework Accounting: High Level Of Transparency Maintained Operating Performance: Expected To Perform Broadly In Line With The Market

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Table Of Contents (cont.) Investments: Low Appetite For Investment Risk Set To Persist Liquidity: Considered Strong Capitalization: Strong Overall, Partially Reflecting The Capital Position At QBE Financial Flexibility: Closely Strategically Aligned With The QBE Group

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QBE Underwriting - Syndicate 2999 Lloyd's Syndicate Assessment 4-/Stable (low dependency)

Financial Strength Rating None

Financial Strength Ratings And Lloyd's Syndicate Assessments Standard & Poor's Ratings Services' insurer financial strength rating on Lloyd's (the Market; A+/Stable) remains the primary indicator of the level of financial security afforded to a policyholder of any syndicate trading in the Market. Lloyd's Syndicate Assessments evaluate, on a scale of '1' (very high dependency) to '5' (very low dependency), the extent of a given syndicate's dependence on the Market rating.

Major Assessment Factors Strengths: • Strategic alignment with, and operational and financial support provided by, QBE Insurance Group Ltd. • Strong risk management framework • Improved recent earnings momentum

Weakness: • Earnings in line with the Market average

Rationale The assessment on QBE Underwriting - Syndicate 2999 (the syndicate, previously known as Limit Underwriting Ltd.) reflects the strength of support provided to the syndicate as a member of the strategically aligned Australia-based QBE Insurance Group Ltd. (QBE or the group; A/Stable/--; core operating subsidiaries are rated A+/Stable/--), as well as its strong enterprise risk management (ERM) capabilities and improved recent earnings momentum. These positive factors are partially offset by doubts surrounding the syndicate's ability to consistently outperform the Lloyd's Market average. Syndicate 2999 is closely strategically aligned with QBE. The syndicate forms an integral part of the group's Lloyd's operation, which Standard & Poor's Ratings Services considers core to QBE. The syndicate brings significant diversification benefits and underwriting expertise to the group. In turn, it benefits from QBE's infrastructure, capital resources, and financial flexibility as a large publicly listed company with an established global presence. The syndicate's dependence on Lloyd's has been reduced further by the integration of the teams by combining QBE's Lloyd's operation with that of its company operations in Europe. We view the group's ERM, and consequently Syndicate 2999's ERM, as strong. The syndicate has robust underwriting risk controls and places significant emphasis on monitoring its aggregate exposure to large loss events, using a blend of its total sums at risk and estimates of its modelled probable maximum loss. The group's robust risk assessment framework is being applied at the divisional level. The group continues to benefit from a more active risk-return focus when making strategic decisions, underpinned by the thorough business planning regimen.

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Syndicate 2999 writes a typical book of Lloyd's business--highly specialized, predominantly short-tail, and prone to volatility. As a consequence, over the assessment horizon, we believe that the syndicate's performance will remain broadly in line with that of the Lloyd's Market as a whole. In recent years the syndicate's operating performance has improved, having been marginal historically. In 2008, the syndicate recorded a pretax profit of £166 million with a combined ratio of 79.7% despite hurricane Ike and financial turmoil-related losses increasing the combined ratio by about 10 and 5 percentage points, respectively. However, the results benefited from foreign exchange gains, a significant proportion of which can be expected to reverse, due to timing differences, during 2009. In addition, the material reserve releases reduced the combined ratio by 22 percentage points. We see the 2009 earnings outlook as good despite the impact of low interest rates. We anticipate a combined ratio of about 90%-95% subject to normal catastrophe loss experience for 2009.

Outlook The stable outlook reflects Standard & Poor's view that Syndicate 2999 will continue to be supported by QBE to write a highly diverse, predominantly short-tail account that will perform broadly in line with the Market as a whole. Standard & Poor's does not anticipate the syndicate's future operating performance to be materially affected by its exposure to financial turmoil-related losses. The assessment could be raised in the event that the syndicate outperforms the Market across the cycle. The assessment could be lowered, or the outlook revised to negative, if the syndicate were to materially underperform the Market. Events leading to a change in our view of the core status of the Lloyd's operation to QBE group would also likely place downward pressure on the assessment.

Syndicate Profile: Highly Diversified Syndicate With Capacity Of £720 Million For 2009 Year Of Account Syndicate 2999 is an umbrella syndicate for the underlying trading syndicates 0566, 2000, 1036, 5555, and 1886. Syndicate 2999 does not underwrite risks in its own right, but it is the focal point for management control, capital allocation, and administration. The syndicate was established for the 2000 year of account. Because of the unfavorable pricing conditions during 2008 and the under-utilization of the underwriting capacity for the 2008 year of account, the syndicate has initially reduced its 2009 capacity to £720 million (£780 million in 2008). However, the syndicate intends to increase its 2009 capacity to £800 million due to acquisition of new business and premium rate increases resulting from hurricane Ike. Chart 1 illustrates how the aggregate capacity is split between the underlying trading syndicates.

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The syndicate is managed by QBE Underwriting, which was known as Limit Underwriting until Jan. 1, 2008. The QBE group provides all of its underwriting capacity via QBE Corporate Ltd. (not rated). Chart 2 shows a breakdown of the syndicate's forecasted premium income by class of business for year-end 2009. Chart 2

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Competitive Position: Good And Improving, Leading More Than Half Of The Risks Written Syndicate 2999's competitive position is viewed as good and improving. It has grown significantly since 2000, becoming one of the largest syndicates for 2008. The syndicate writes a fairly typical book of Lloyd's business: specialized, diverse, and high-risk. The enhanced integration between the syndicate and QBE Europe's company operation will, in our view, continue to enable the syndicate to exploit QBE's wider distribution network. In 2008, the gross premium income increased to £852.3 million compared with £798.7 million in 2007 (excluding the reinsurance-to-close premium which amounted to £179.2 million). This growth is largely due to the foreign exchange impact where most currencies strengthened against the British pound sterling. Syndicate 2999 estimates that it leads more than 50% of the business it writes, based on ultimate gross premiums written (GPW) for the 2009 year of account. The syndicate's diversity across 31 classes, coupled with its broad leadership credentials, affords it significant strategic flexibility, and enables it to capitalize on emerging opportunities in a timely manner. The diversity of the syndicate's portfolio is demonstrated by the fact that its top-10 classes of business account for less than 70% of its total GPW (see table 1). Table 1

QBE Underwriting - Syndicate 2999/Portfolio Gross premiums written % of total (Mil. £) Energy Offshore

2009f 154.6

14.2

Worldwide Retrocession Risk and Catastrophe Treaty

80.1

7.3

Property Direct & Facultative

74.0

6.8

Marine Liability

72.9

6.7

International Property Treaty

71.3

6.5

General Liability

68.0

6.2

Energy Onshore

61.2

5.6

Nort American Property Treaty

60.4

5.5

General Aviation

48.4

4.4

Aviation Products

38.0

3.5

Source: Syndicate's business forecasts at April 2009. f--Forecast.

The syndicate adopts a multiniche approach to its underwriting, which is supported by its decentralized structure with underlying syndicates. This is consistent with the approach adopted by QBE, which attempts to enhance its competitive position by effectively segmenting its core markets. Nevertheless, the efficacy of this strategy is partly constrained by the subscription nature of the Lloyd's Market, which makes it challenging for the syndicate to consistently differentiate itself from other Market participants.

Prospective QBE's multiple operating platforms within the London Market offer it some flexibility in respect of where to place its business. The breadth of the licenses offered by Lloyd's, however, in tandem with broker and client preferences,

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make a material reallocation of business away from the syndicate unlikely. In our view, this will continue to preserve Syndicate 2999's diversity, and consequently its strategic flexibility. We believe that Syndicate 2999's gross premium income (excluding third-party reinsurance to close policies) is likely to increase by about 10% at year-end 2009. We anticipate that most of this growth is likely to derive from pricing increases particularly for the property, marine, and energy portfolios. The small scale acquisitions made during recent months will also contribute to this growth. We anticipate that the syndicate's overall business mix will remain broadly consistent with that for 2008. The diversification benefits that the syndicate brings to the group remain compelling. Hence, it is expected to retain critical mass even though Standard & Poor's would expect its underwriting capacity to fluctuate in line with market conditions.

Management And Corporate Strategy: Experienced And Proactive Management Team Management contributes positively to the overall assessment. The local management team, which is highly experienced and proactive, is supplemented by the additional oversight and expertise provided by the executive team at QBE. This was further enhanced by the recent integration of the company and Lloyd's operation. QBE provides all of Syndicate 2999's underwriting capacity and, as such, the syndicate is required to compete for capital against QBE's myriad of operating entities both in Europe and beyond. Nevertheless, we expect Lloyd's and the broader London Market to remain a core part of the group's strategy for the foreseeable future. In December 2008, the Lloyd's division contributed 19% of the group's aggregate gross premiums earned, with Syndicate 2999 representing more than half of QBE's business at Lloyd's. Underwriting for each of the underlying syndicates is decentralized, with oversight now being provided by John Neal (previously provided by Peter Grove who retired in June 2009), who is now the active underwriter for the umbrella syndicate and the chief underwriting officer for all of QBE's European operations. QBE's determination to persevere with the underlying syndicate structure demonstrates its sensitivity to the cultural considerations that are unique to the Lloyd's Market. This is a factor that has enabled QBE to differentiate itself from many of the other strategically aligned corporate capital providers at Lloyd's.

Operational management Management has always stressed the systemic risk posed to the industry as a result of its overreliance on third-party catastrophe risk models, and consequently manages its aggregate exposure to individual events using a blend of its total sum at risk and probable maximum loss. This approach was proven to be effective when it enabled the syndicate to keep its net exposure to Hurricanes Katrina, Rita, and Wilma at a level below that of many of its peers. The syndicate establishes a technical price for each piece of business it quotes. This technical price incorporates a capital loading reflecting the estimated volatility of the underlying business. The technical price is an input to the underwriting process, not a substitute for it, and the syndicate empowers its underwriters to exercise their professional judgment when accepting business.

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Financial management We consider the syndicate's financial management as strong. The syndicate attempts to balance the volatility inherent in its underwriting with its highly conservative investment strategy, thereby ensuring that, in keeping with the policy enshrined at the group level, the syndicate does not take on significant risk in its investment portfolio. The syndicate monitors and forecasts risk pricing by line of business and sets minimum required pricing.

Enterprise Risk Management: Strong Risk Management Framework Standard & Poor's views QBE group's, and consequently Syndicate 2999's, enterprise risk management (ERM) as strong. The group's key risks include insurance underwriting and pricing, catastrophe, and acquisition risks, which are all managed in an effective manner. The ERM framework at the syndicate level is robust and appears to be consistent with the risk management practices prescribed by the group. Although QBE has a well-diversified business profile, the broad nature of its operations combined with its acquisition-based growth strategy makes it an inherently difficult business to manage. Consequently, ERM capabilities of QBE are very important to the rating. Risk management functions have a high visibility and priority across the group via the Group Chief Risk Officer (CRO) role, with reporting lines to the Audit Committee. The Board's participation in the management of risk across each business unit, combined with the business unit manager's responsibility of their own respective risks, support the group's strong risk management culture. The number of staff involved in risk management is relatively high, and most operations benefit from the expertise of a local CRO. The group's risk management initiatives includes several programmes and workshops, which is evidence that the group has a high focus that a strong risk-culture is filtered to levels below senior management. QBE group continues to enhance its risk management framework and this remains a high priority for the group. More evidence of these efforts is apparent surrounding QBE's usage of its economic capital model (ECM) in strategic decisions. QBE group's usage of the ECM has improved and is now mostly embedded into most risk/reward decisions, capital management, and strategic decisions. Additionally, the group's modeling expertise is viewed as strong. QBE group's credit and market risk management philosophy is conservative and based on the group's strategy that it does not want to add undue investment-related risk to existing insurance-related risk. QBE group's emerging and operational risk management practices are assessed as not as strong as some peers, but are adequate. For a vast and diverse operation, the insurer has a robust process to identify and to evaluate risk-reward trade-offs and uses that process to consistently optimize risk adjusted returns. This process has also supported QBE's success in executing its acquisition-growth strategy. However, such an acquisition-based strategy exposes the group to an inherent risk of various business operations being new to the group, and staff and processes unseasoned to QBE's ERM conventions. A higher level of confidence in the framework will come gradually with a sustained track record of effective execution of its ERM process. Greater confidence and stronger evidence of an entrenched excellent risk culture in the organization and across all management levels would support a higher ERM score. Also important would be an improvement in QBE's ability to identity and to manage emerging and operational risks of the group.

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Accounting: High Level Of Transparency Maintained Syndicate 2999 has been running its business on the basis of its annually reported generally accepted accounting principles financials since its acquisition by QBE in 2000, reflecting the financial metrics that are of most significance to its parent.

Operating Performance: Expected To Perform Broadly In Line With The Market Despite its operating performance having improved in recent years, Syndicate 2999 has yet to establish a track record of outperforming the Market average. Further, Standard & Poor's expects that the syndicate will continue to perform at a level broadly in line with the Market over the medium term. As at December 2008, the syndicate reported a strong five-year average combined ratio of 91.3%, which is in line with that of Lloyd's (93.2% in 2008). In 2008, the syndicate recorded a pretax profit of £166 million with a combined ratio of 79.7% despite losses related to hurricane Ike and following the financial turmoil, which increased the combined ratio by about 10 and 5 percentage points, respectively. However, the results benefited from foreign exchange gains relating to nonmonetary items, a significant proportion of which can be expected to reverse due to timing differences during 2009. In addition, the syndicate experienced material reserve releases, which reduced the combined ratio by 22 percentage points. In the absence of the above-mentioned currency impact and prior-year reserve releases, the syndicate's combined ratio would have been high at about 108%. In 2008, the syndicate's financial turmoil-related losses, which emanated from the syndicate's financial institution book (only accounting for about 3% of the total gross premium income), amounted to $133 million on a gross basis and reduced to $41 million because of extensive reinsurance protection. Despite the unprecedented decline in financial markets, the syndicate posted an investment yield of 3.5% because of its conservative investment portfolio geared toward highly rated fixed-interest securities.

Prospective Over the longer term, Standard & Poor's expects that the syndicate will perform at a level that is broadly in line with the Market as a whole. This reflects our expectation that the syndicate's business mix will retain its short-tail, reinsurance-based focus, thereby entrenching the volatility that has characterized its performance in recent years. We expect the syndicate's modest appetite for catastrophe risk, relative to peers, to entrench its reliance on reinsurance/retrocession. This is likely to cause the syndicate to underperform relative to its peers in benign loss years, but to outperform them in heavily catastrophe-affected years. For the first quarter of 2009, the syndicate achieved single-digit premium rate increases in most classes of business, and an exceptional increase in the marine and energy account, which has seen rates going up by 16% largely because of the material losses sustained by the industry in 2008. We believe that the syndicate will maintain these increases throughout 2009. We see the 2009 earnings outlook as good despite the impact of low interest rates. We anticipate a combined ratio of about 90%-95% subject to normal catastrophe loss experience for 2009. We believe that any increase in claims

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frequency or in reserves held for financial turmoil-related losses will not be material. Should this increase be material, it will place pressure on the syndicate's operating performance and consequently our assessment of the syndicate. The syndicate is expected to maintain its highly conservative investment strategy, which will cap the investment contribution that can be expected in any given year. This should reinforce the syndicate's focus on generating an appropriate risk-adjusted return on the capital it deploys for underwriting purposes.

Investments: Low Appetite For Investment Risk Set To Persist Syndicate 2999 adopts a highly conservative investment policy, mirroring that applied at the group level. The syndicate only invests in money market instruments and fixed-interest securities that carry a minimum rating of 'A-'. Equity investments are not currently mandated and we do not expect this to change. Standard & Poor's expects the syndicate to maintain its highly conservative investment stance going forward to offset the volatility inherent in its underwriting profile. The syndicate does not have any exposure to "subprime" residential mortgage-backed securities or related instruments, nor does it have any exposure to investments carrying guarantees from financial guarantee insurers (known as monoliners). In our opinion, the syndicate will continue to have a conservative investment strategy over the long term.

Liquidity: Considered Strong The liquidity of the syndicate is considered strong and fully reflective of the Lloyd's membership requirements for funds to be readily liquid. The syndicate has a strong and stable liquidity ratio, and low level of insurance debtors.

Capitalization: Strong Overall, Partially Reflecting The Capital Position At QBE Capitalization is strong, underpinned by Lloyd's comprehensive risk-based approach to capital provision and reinforced by the strength of the capital position at the QBE group level. Nevertheless, it will continue to be vulnerable to material losses arising from catastrophic events, as demonstrated by the deterioration seen in 2005 after the losses following Hurricanes Katrina, Rita, and Wilma. The level of funding QBE has been required to provide in support of its overall participation at Lloyd's is 67.9% of capacity for 2009. Although this is well above Lloyd's minimum level largely reflecting Syndicate 0386's long-tail focus, it has fallen from 80% in 2006 because of Syndicate 0386''s track record of superior operating performance For 2009, the syndicate estimates that its worst-case gross probable maximum loss, based on a Californian earthquake affecting San Francisco, will be consistent with estimates at January 2009 of $740 million, netting down to about $210 million after reinsurance recoveries and the net impact of reinstatement premiums. At a gross level, a loss of this magnitude would consume about 46.5% of the syndicate's 2009 underwriting capacity, netting down to approximately 13.2%. This demonstrates the extent of the syndicate's reinsurance leverage, which is itself a function of the nature of the risks being underwritten.

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As outlined above, the extent of the syndicate's reliance on reinsurance is substantial, reflecting the nature of the risks it writes, but is not considered to be excessive. We consider the overall quality of the syndicate's reinsurance counterparties to be strong. Historically, half of the Funds at Lloyd's (FAL) requirement was met by the issuance of $770 million of innovative ABC securities (rated at 'A-'). For 2009, QBE has successfully managed to finance the balance of its FAL requirement with letters of credit that are uncollateralized.

Reinsurance Syndicate 2999 uses reinsurance to manage its peak exposures and, as such, recognizes the importance of building sustainable relationships with its core reinsurance counterparties. The syndicate's reinsurance utilization ratio has averaged 27.6% over the past five years and has remained stable year on year. Over the past four years, the syndicate has reduced the extent of its outward reinsurance cessions within Lloyd's, largely replacing this third-party capacity with that provided by its Bermuda-based affiliate, Equator Reinsurances Ltd. (A+/Stable/--).

Reserves The syndicate's reserves are considered supportive of the assessment at its current level. The syndicate has been largely immune from material deficiencies on the loss reserves held in respect of prior underwriting years, reflecting the predominantly short-tail nature of its book and its prudent reserving approach. As a result, the syndicate, and/or its constituent parts, has reported a modest release on average in respect of its previous five closed years of account. Historical volatility has been recorded across the individual syndicates, with the most significant reserving issue being derived from U.S. casualty business written in Syndicates 0079 and 1223 before and during the 2001 year of account, and was mostly in respect of the syndicates' exposure to Enron, WorldCom, and laddering. We believe that the old casualty years have performed favorably during 2008. Standard & Poor's expects the downside risk posed to the syndicate by these legacy reserving issues to be immaterial in the context of its future earnings. A material upward revision of the syndicate's net exposure to these events could, however, place downward pressure on the assessment. Equally, a material deterioration in financial turmoil-related loss reserves would also place pressure on our assessment of the syndicate.

Financial Flexibility: Closely Strategically Aligned With The QBE Group Most of the syndicate's financial flexibility is derived from its membership of the QBE group. The syndicate forms an integral part of the group's Lloyd's operation, which Standard & Poor's considers core to QBE. This is due to the large size of QBE's Lloyd's operation relative to the whole group and the underwriting expertise and diversification benefits it brings to the group. In turn, the syndicate benefits from QBE's infrastructure, capital resources, and financial flexibility as a listed company. Nevertheless, the proportion of the group's premium income produced by QBE Underwriting is expected to diminish over time as it is likely that the group will pursue its growth through acquisition strategies outside Lloyd's where practicable. This was demonstrated by the group's acquisition-led expansion in the U.S. during 2007. In addition, the continuing integration of QBE's wholesale businesses in London could present opportunities for the group to capture cost savings by writing an increasing proportion of its London Market business in the company market, thereby avoiding the incremental frictional costs associated with writing business at Lloyd's. We do not expect this

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to have a material impact on the amount of business written by the syndicate, however. Table 2

QBE Underwriting - Syndicate 2999/Key Financial Data --Year ended Dec. 31.-(%)

2008

2007

2006

2005

2004

Operating performance Combined ratio

79.7

85.6

86.6

114.1

90.6

Loss ratio

53.9

60.1

42.7

82.5

53.0

Expense ratio

25.8

25.5

43.9

31.6

37.6

Return on revenue

26.2

20.0

21.4

(3.8)

17.0

Investments and liquidity Receivables ratio

28.8

28.0

28.8

31.1

20.1

Liquidity ratio

93.2

87.5

107.9

102.6

118.2

3.5

5.1

4.0

3.8

3.2

Reinsurance Premium retention ratio

74.4

76.8

71.2

69.5

72.8

Loss retention ratio

61.6

70.7

61.5

38.8

65.1

252.7

176.2

156

130

248.4

Investment yield

Reserves Reserves/net premiums written

Ratings Detail (As Of July 23, 2009)* QBE Underwriting - Syndicate 2999 Holding Company

QBE Insurance Group Ltd.

Domicile

United Kingdom

*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

Additional Contact: Insurance Ratings Europe; [email protected] Additional Contact: Insurance Ratings Europe; [email protected]

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