S&P Lowers Mercantile Mutual Rating

July 1, 2004

Standard & Poor’s Ratings Services announced that it has lowered its insurer financial strength and counterparty ratings on Australian insurer Mercantile Mutual Insurance Ltd. (MMIA) “A+” from “AA-” and removed the ratings from CreditWatch Negative.

The rating action follows the completion of the company’s acquisition by Australia’s QBE Insurance Group Ltd., which is also rated “A+.” The outlook is stable.

“The downgrade was anticipated in our media release of May 13, 2004, and aligns the ‘A+’ ratings on MMIA with the ‘A+’ ratings on the principal operating subsidiaries of QBE, including QBE Insurance (Australia) Ltd.,” stated Michael Vine, S&P credit analyst – Financial Services Ratings.

The bulletin noted that “QBE now owns and controls 100 percent of the QBE Mercantile Mutual general insurance operation, and the acquisition consolidates QBE as a significant player in Australian commercial lines insurance business. It is expected that QBE will amalgamate MMIA into its existing operations.

“The stable outlook reflects that of the key insurance operating entities of QBE and the solid earnings dynamics of the MMIA operations.” Vine added that “Prospects for a continuation of strong operating profitability and adequate capitalization should continue to underpin QBE’s financial strength.”

“Recent improved performance has been achieved over a period of favorable pricing conditions, which are now showing signs of moderation, but performance in 2004 is still expected to be strong,” the bulletin concluded.

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