KPMG ACTUARIAL SERVICES Illustration of Typical Structured Reinsurance Products ADVISORY / ACTUARIAL SERVICES Bradley LeBlond Manager Actuarial Services Hartford, Connecticut September 11-12, 2006

Common Structured Reinsurance Products Loss Portfolio Transfer / Adverse Development Cover Aggregate Stop Loss Cover Financial Quota Share Blended Occurrence Cover

Loss Portfolio Transfer / Adverse Development Cover Typical Motivations Transfer the liabilities of an exited line of business or business segment – full risk transfer. Reduce the cost of adverse development protection on a block of liabilities. Absorb the financial impact of adverse development in a purchase using the discount embedded in liabilities. Increase statutory surplus, improve solvency ratios.

Aggregate Stop Loss Cover Typical Motivations Utilize future investment income to: Protect financial plan loss ratio at a low cost (attaching at expected loss ratio) Reduce the upcoming year loss ratio (attaching below expected loss ratio) Include hard to place coverage elements on a limited basis

Financial Quota Share Typical Motivation Reduce underwriting leverage while retaining most risk and reward on a book of business. Protect combined ratio by utilizing sliding scale ceding commissions.

Blended Cover Typical Motivation Spread the financial impact of one event over multiple years with risk coverage for second and sometimes third event. Lower the cost of catastrophe reinsurance by retaining risk in a measured way.

LPT – Example Illustration Goal: Absorb the financial impact of a $200 million reserve increase on an $800 million block of expected liabilities as part of an acquisition. Actuarial Assumptions Expected Undiscounted Liabilities = $1 billion Lognormal Distribution with a 10% Coefficient of Variation Payout Pattern Risk Free Discount Rate = 7% Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 %

LPT – Example Illustration Possible Structure Attachment Point = $800 million Limit = $300 million Premium = $93 million comprised of: $85 million in Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest $8 million in Margin paid to Reinsurer Potential Benefit $200 million – $93 million = $107 million

LPT – Example Illustration Loss Scenario: 1,000,000,000   (1) (2) (3) (4) (5) (6) (7) (8) (9) Experience Time Reinsurer Deposit Cumulative Incremental Acct Interest Account Years Margin Premium Paid Loss Paid to Cover 8.0% Balance NPV Result - 8,000,000 85,000,000 0.5 100,000,000 3,334,591 88,334,591 1.5 190,000,000 7,066,767 95,401,358 2.5 270,000,000 7,632,109 103,033,467 3.5 340,000,000 8,242,677 111,276,145 4.5 400,000,000 8,902,092 120,178,236 5.5 450,000,000 9,614,259 129,792,495 6.5 500,000,000 10,383,400 140,175,895 7.5 550,000,000 11,214,072 151,389,966 8.5 600,000,000 12,111,197 163,501,163 9.5 650,000,000 13,080,093 176,581,257 10.5 700,000,000 14,126,501 190,707,757 11.5 750,000,000 15,256,621 205,964,378 12.5 800,000,000 16,477,150 222,441,528 13.5 850,000,000 50,000,000 17,795,322 190,236,850 14.5 900,000,000 15,218,948 155,455,798 15.5 940,000,000 140,000,000 40,000,000 12,436,464 127,892,262 16.5 970,000,000 170,000,000 30,000,000 10,231,381 108,123,643 17.5 990,000,000 20,000,000 8,649,891 96,773,534 18.5 1,000,000,000 200,000,000 10,000,000 7,741,883 94,515,417 Total

LPT Example Illustration Loss Scenario: 1,100,000,000   (1) (2) (3) (4) (5) (6) (7) (8) (9) Time Reinsurer Deposit Cumulative Incremental Acct Interest Account Years Margin Premium Paid Loss Paid to Cover 8.0% Balance NPV Result - 8,000,000 85,000,000 0.5 110,000,000 3,334,591 88,334,591 1.5 209,000,000 7,066,767 95,401,358 2.5 297,000,000 7,632,109 103,033,467 3.5 374,000,000 8,242,677 111,276,145 4.5 440,000,000 8,902,092 120,178,236 5.5 495,000,000 9,614,259 129,792,495 6.5 550,000,000 10,383,400 140,175,895 7.5 605,000,000 11,214,072 151,389,966 8.5 660,000,000 12,111,197 163,501,163 9.5 715,000,000 13,080,093 176,581,257 10.5 770,000,000 14,126,501 190,707,757 11.5 825,000,000 25,000,000 15,256,621 180,964,378 12.5 880,000,000 80,000,000 55,000,000 14,477,150 140,441,528 13.5 935,000,000 135,000,000 11,235,322 96,676,850 14.5 990,000,000 190,000,000 7,734,148 49,410,998 15.5 1,034,000,000 234,000,000 44,000,000 3,952,880 9,363,878 16.5 1,067,000,000 267,000,000 33,000,000 749,110 (22,887,012) 22,887,012 (7,494,743) 17.5 1,089,000,000 289,000,000 22,000,000 (1,830,961) (46,717,973) (6,732,968) 18.5 1,100,000,000 300,000,000 11,000,000 (3,737,438) (61,455,411) (3,146,247) Total 55,887,012 (9,373,959)

LPT – Example Illustration CDF of Reinsurer NPV Result Expected NPV Result: $3.1 million

Aggregate Stop Loss – Example Illustration Goal: Lower and protect loss ratio for upcoming year Actuarial Assumptions Expected Gross Loss Ratio = 75% Lognormal Distribution with a 15% Coefficient of Variation Payout Pattern Risk Free Discount Rate = 7% Year 1 2 3 4 5 6 7 8 9 10 11 % 15 20

Aggregate Stop Loss – Example Illustration Possible Structure Attachment Point = 65% Gross Loss Ratio Limit = 25% of Gross Premium Premium = 8% of Gross Premium 7% Deposit Premium – placed into Funds Withheld Experience Account credited with 8% interest 1% in Margin paid to Reinsurer Additional Premium 70% of Losses above a 75% Gross Loss Ratio Maximum Additional Premium = 3% of Gross Premium

Aggregate Stop Loss – Example Illustration Loss Scenario: 75% All Figures Shown as % Gross Earned Premium   (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Experience Time Reinsurer Deposit Cumulative Incremental Additional Account Exper. Acct Years Margin Premium Paid Paid to Cover Interest 8.0% Paid Loss NPV Result - 1.0% 7.0% 0.0% 0.5 11.3% 0.3% 7.3% 1.5 26.3% 0.6% 7.9% 2.5 41.3% 8.5% 3.5 48.8% 0.7% 9.2% 4.5 52.5% 9.9% 5.5 56.3% 0.8% 10.7% 6.5 60.0% 0.9% 11.5% 7.5 63.8% 12.5% 8.5 67.5% 2.5% 11.0% 9.5 71.3% 6.3% 3.8% 8.1% 10.5 75.0% 10.0% 5.0% 11.5 0.4% 5.4% 12.5 5.8% 13.5 0.5% 14.5 6.8% 15.5 16.5 17.5 8.6% 18.5 Total

Aggregate Stop Loss – Example Illustration Loss Scenario: 90% All Figures Shown as % Gross Earned Premium   (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Experience Time Reinsurer Deposit Cumulative Incremental Additional Account Exper. Acct Years Margin Premium Paid Paid to Cover Interest 8.0% Paid Loss NPV Result - 1.0% 7.0% 3.0% 10.0% 0.0% 0.5 13.5% 0.4% 10.4% 1.5 31.5% 0.8% 11.2% 2.5 49.5% 0.9% 12.1% 3.5 58.5% 13.1% 4.5 63.0% 14.1% 5.5 67.5% 2.5% 1.1% 12.8% 6.5 72.0% 4.5% 9.3% 7.5 76.5% 11.5% 0.7% 5.5% 8.5 81.0% 16.0% 1.5% 9.5 85.5% 20.5% 0.1% -2.9% 2.9% -1.5% 10.5 90.0% 25.0% -0.2% -7.6% -2.2% 11.5 -0.6% -8.2% 12.5 -0.7% -8.9% 13.5 -9.6% 14.5 -0.8% -10.4% 15.5 -11.2% 16.5 -0.9% -12.1% 17.5 -1.0% -13.1% 18.5 -14.1% Total 7.4% -2.7%

Aggregate Stop Loss – Example Illustration

Aggregate Stop Loss – Example Illustration CDF of Reinsurer NPV Result Expected NPV Result = 0.4%

Presenter’s contact details Bradley LeBlond KPMG LLP 860-297-5090 bleblond@kpmg.com www.kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.