A.M. Best Company's Insurance Market Briefing Canada P&C Joseph Burtone Assistant Vice President September 8, 2010

Agenda Rating Components Rating Components Canada P/C Canada P/C

A.M. Best Rating Definitions Financial Strength Rating (FSR) ICR to Debt Notching / Holding Co. FSR to Credit Market Scale / ICR A.M. Best ’ s Issuer Credit Rating (ICR) is an opinion of an issuer/ entity ’ s ability to meet its ongoing senior financial obligations. A.M. Best ’ s Financial Strength Rating is an independent opinion of an insurers financial strength and ability to meet its ongoing policy and contract obligations. A.M. Best ’ s Debt Rating is an opinion of an the issuer/entity’s ability to meet its ongoing financial obligations to security holders when due. Operating Insurance Co.

Guide To Best's Financial Strength Ratings B, B-Fair C++, C+Marginal C, C-Weak DPoor EUnder Regulatory Supervision FIn Liquidation Vulnerable Ratings Secure Ratings A++, A+Superior A, A-Excellent B++, B+Good

FSR & ICR EQUIVALENTS FSRICR Secure Investment Grade A++ aaa aa+ A+ aa aa- A a+ a A-a- B++ bbb+ bbb B+bbb- FSRICR Vulnerable Non-Investment Grade B bb+ bb B- bb- C++ b+ b C+b- C ccc+ ccc C- ccc- cc

A.M. Best’s Rating Evaluation Key Components Balance Sheet Strength Operating Performance Business Profile Best’s Rating

Balance Sheet Strength Risk Adjusted Capitalization (BCAR)  Foundation for financial security  Leverage  Quality/Soundness of reinsurance  Adequacy of loss reserves  Quality/Diversification of assets  Liquidity

Best’s Capital Adequacy Model (BCAR)  A quantitative tool that indicates whether a company’s capital is appropriate for a particular rating level. BCAR by itself never has been the sole basis for determining any Best’s Credit Rating.  Important to A.M. Best’s evaluation of both absolute and relative capital strength  It is expected that well managed and highly rated companies maintain excess capital  Trends are key

Operating Performance   A.M. Best analysis centers on the stability and sustainability of the company’s earnings Areas reviewed when analyzing operating performance:   Underwriting, Investments   Capital gains/losses   Pre-tax and total operating earnings   Underwriting ratio, operating ratio Volatility is a consideration  Projections & Trends

Business Profile  Business profile is the qualitative component of Best’s rating evaluation  Key areas of business profile spread of risk – geographic, product & distribution spread of risk – geographic, product & distribution Revenue composition Revenue composition Competitive market position Competitive market position Depth and experience of management Depth and experience of management  Drives current and future operating performance and may impact long-term financial strength

Risk Management  Risk management is the common thread that links balance sheet strength, operating performance and business profile  Where there is risk, there is uncertainty and where there is uncertainty there is exposure to volatility  It’s not risk avoidance, it’s risk management  Fundamental objective of a sound risk management is to manage organizations exposure to potential earnings and capital volatility and maximize value to the organizations various stakeholders

A.M. Best’s Rating Perspective - Bringing it all Together  Capital strength is the foundation of all ratings  Sustained, stable operating profitability ensures future strength  Business profile is the qualitative component that impacts the quantitative measures  Well-diversified, strong business profile ensures stability and profitability

Canada Property / Casualty

Overview of Canadian P&C Industry Market is stable Market is stable Capitalization remains strong – enhanced by net income and unrealized investment gains Capitalization remains strong – enhanced by net income and unrealized investment gains Profitable, but declining earnings Profitable, but declining earnings Challenges in underwriting offset by gains in financial markets Challenges in underwriting offset by gains in financial markets Overall, companies acting prudently Overall, companies acting prudently

Canadian P&C Risk Adjusted Capitalization Weighted average BCAR score is strong up 12% at year end ’09 Weighted average BCAR score is strong up 12% at year end ’09 Adversely impacted by investment markets in 2008 Adversely impacted by investment markets in 2008

Canadian P&C Regulatory Capital 2009 weighted average MCT score virtually unchanged from BAAT score down 5.3% weighted average MCT score virtually unchanged from BAAT score down 5.3%.

Canadian P&C A.M. Best Financial Strength Rating Ratings Distribution (Interactive Ratings Only) Ratings have remained relatively consistent with little movement between rating categories. Ratings have remained relatively consistent with little movement between rating categories. 97% of rating units have secure ratings of which 79% were rated Excellent or Superior at YE % of rating units have secure ratings of which 79% were rated Excellent or Superior at YE 2009.

Canadian P&C Net Income 2009 Net Income driven by investment gains and lower underwriting losses 2009 Net Income driven by investment gains and lower underwriting losses June 2010 Net Income approx. C$1.7 billion June 2010 Net Income approx. C$1.7 billion

Canadian P&C Pre-tax Returns Positive but declining returns through 2009 Positive but declining returns through 2009 Driven by underwriting losses and lower investment returns Driven by underwriting losses and lower investment returns

Canadian P&C Operating Ratios Ratio below 100 reflective of profitability from combined underwriting and investment income without capital gains/losses Ratio below 100 reflective of profitability from combined underwriting and investment income without capital gains/losses

Canadian P&C Underwriting Ratios Ratio below 100 indicative of profitable underwriting Ratio below 100 indicative of profitable underwriting Underwriting expenses consistent over last five years ranging between 28.9 and 30.5 points to the underwriting ratio Underwriting expenses consistent over last five years ranging between 28.9 and 30.5 points to the underwriting ratio 2008 and subsequent due to higher Net Loss and LAE ratios 2008 and subsequent due to higher Net Loss and LAE ratios

Canadian P&C Net Loss and LAE Ratios Increase in 2008 and subsequent years due to; Increase in 2008 and subsequent years due to; More frequent and severe weather and fire losses More frequent and severe weather and fire losses Auto personal accident claims cost inflation Auto personal accident claims cost inflation Less favorable reserve development on prior accident years Less favorable reserve development on prior accident years

Canadian P&C Automobile Personal accident net loss ratio up to YE 09 and rising Personal accident net loss ratio up to YE 09 and rising Ontario auto reform – implementation 9/1/10 Ontario auto reform – implementation 9/1/10 Creates concerns regarding pricing, reserving, profitability, consumer confidence. Creates concerns regarding pricing, reserving, profitability, consumer confidence.

Canadian P&C Personal Property Frequency and severity up Frequency and severity up Intense wind, hail, rain, water damage claims Intense wind, hail, rain, water damage claims Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are concerns Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are concerns

Canadian P&C Commercial Property Competitive pricing persists Competitive pricing persists No signs of significant rate hardening No signs of significant rate hardening Retentions up slightly Retentions up slightly

Canadian P&C Investment Income Realized capital gains pulled up total investment income Realized capital gains pulled up total investment income Continued low interest rates, potentially lower dividend and interest income in 2010 Continued low interest rates, potentially lower dividend and interest income in 2010 Sell off of equities in 2008 reversing for potentially higher returns Sell off of equities in 2008 reversing for potentially higher returns

Canadian P&C Composition of Invested Assets C$86.9 billion invested at YE 2009 C$86.9 billion invested at YE 2009 C$74.4 billion (85.6%) in conservative, highly rated fixed income securities and cash C$74.4 billion (85.6%) in conservative, highly rated fixed income securities and cash C$9.8 billion (11.3%) in common and preferred shares C$9.8 billion (11.3%) in common and preferred shares Slight movement back to equities Slight movement back to equities

Canadian P&C Market Review Capitalization strengthened and continues to support a stable rating environment Capitalization strengthened and continues to support a stable rating environment Earnings up slightly and expected to remain positive Earnings up slightly and expected to remain positive Underwriting challenges Underwriting challenges Uncertainty of benefits to be derived from auto reforms in Ontario Uncertainty of benefits to be derived from auto reforms in Ontario Competitive commercial lines pricing Competitive commercial lines pricing Rising property damage losses from storms and fire Rising property damage losses from storms and fire Aging infrastructure Aging infrastructure Regulatory intervention Regulatory intervention Below average investment returns anticipated in the near term Below average investment returns anticipated in the near term Putting additional pressure on underwriting discipline Putting additional pressure on underwriting discipline

Canadian P&C Market Outlook 2010 Industry is stable Industry is stable Capitalization expected to remain strong Capitalization expected to remain strong Not anticipating significant number of rating actions Not anticipating significant number of rating actions Earnings expected to remain positive but not robust due to underwriting and investment challenges Earnings expected to remain positive but not robust due to underwriting and investment challenges A.M. Best remaining cautious on benefits of auto reforms. A.M. Best remaining cautious on benefits of auto reforms.