Standley H. Hoch, FSA Chief Operating Officer and Chief Financial Officer CIGNA Reinsurance May 7-8, 2007 Run-off Considerations

2 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

3 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

4 Runoff Market UK Life Assurance Cos in Runoff: 53 Companies with £136 billion of Liabilities UK Non-Life Cos in Runoff: £26 billion of Liabilities (excluding Lloyds) Continental Non-Life Cos in Runoff: €75 + billion of Liabilities Membership in AIRROC (US runoff org.): 53 companies

5 Exit decisions may be driven by many different reasons Adverse loss experience Difficult pricing environment Increased regulatory requirements Changes in strategy or focus

6 Management may perceive a sale of the business to be the best strategy: Frees up capital Avoids distraction Positive impact on share price

7 But the sale of a discontinued business or product line may be difficult or quite costly Opportunity for profitable new business may be limited Customer base and infrastructure of minimal value Loss exposures difficult to quantify Regulatory issues or adverse publicity Buyers of distressed assets may demand a significant premium to reserves

8 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

9 Companies often decide to establish dedicated runoff administration May require specialized product/market knowledge and skills Different approach to external relationships than an active business Improve transparency and alignment around strategy Employee incentives can be tailored to the requirements of a runoff business

10 Skills to Retain for Runoff Management Claims management and Audit Accounting, Financial reporting and Contract administration Reinsurance administration

11 Skills to Strengthen for Runoff Management Program management Actuarial forecasting Reinsurance collections Dispute resolution

12 Attracting and Retaining Employees for a Dedicated Runoff Management Unit Retention incentives tied to specific skills and product knowledge Some functions may be shared with other active businesses Some functions may be outsourced or supplemented with external resources Hiring from outside the business unit will bring a fresh perspective and help avoid conflicts of interest

13 Turn-key alternatives are available How much of the existing structure can be redeployed? How confident are you in your assessment of the liabilities? Importance/availability of risk transfer alternatives? Organizational capabilities/experience in managing outsourced arrangements

14 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

15 Access to records can be a significant issue for companies transitioning to runoff Claim and contract info should be fairly well organized and accessible What about records? Underwriting files? Do you have contracts written and/or administered by MGUs? Are they still in business? Are they still talking to you? Who administers your reinsurance program? What is their commitment going forward? What is the quality, timeliness and level of detail of the information being reported to you by ceding companies?

16 Resources, models, methodologies and assumptions Who’s the expert in evaluating your block of business? What do you need to know about the exposures and how will you measure them (premiums, reported claims)? What information is available “in-house”? What do you need to seek elsewhere? Will you use expert information? Industry data? Broader economic models? How will you segment your book for experience analysis? How much individual contract information will you use (deductibles, limits, sunsets, commutation clauses, etc.)

17 Planning for the future How frequently should you refresh the analysis? What can you do to improve the data, methodologies and overall analysis the next time around? How will you incorporate new/updated information into the analysis in the meantime?

18 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

19 We’ve already talked about three important risk management initiatives Securing and enhancing program/contract documentation Ensuring access to the right people/resources/skills Developing a solid evaluation of claim and contract exposures

20 Other areas to consider Strengthening regular claims review/adjudication/administration Enhancing audit scope/frequency/resources Dedicating additional resources to reinsurance collections Purchasing additional reinsurance for open exposures

21 Ways to leverage risk management effectiveness Improving the effectiveness of ceding company/TPA claims management procedures Improving communications with ceding companies, TPAs, reinsurers and other business partners Using reserving/exposure studies to identify and prioritize segments of the portfolio with greatest potential for volatility Taking advantage of the “domino effect”

22 Overview Runoff Market Runoff Management Evaluating the Book of Business Risk Management Exit Strategies

23 Readiness to exit Improved controls on claim administration and reinsurance collections Enhanced contract documentation and the quality and timeliness of financial data Comprehensive assessment of exposures and liabilities Addressed significant areas of uncertainty in the portfolio

24 Wholesale strategies Portfolio transfer by sale or reinsurance Solvent Scheme of Arrangement (UK) Insolvency and Liquidation

25 Considerations in pursuing wholesale strategies Length and credibility of loss history Impact on existing reinsurances Potential for cost reduction/redeployment of capital Buyer’s risk tolerance and capacity to absorb future adverse development

26 Retail strategies Claim commutations Structured settlements Contractual clauses

27 Considerations in pursuing retail strategies Development methods may be difficult to apply due to limited history Assess open claims exposure and adequacy of case reserves Determine timing of expected cash flows Apply discounts for interest and mortality Evaluate exposure to new/reopened claims Consider contractual sunset and commutation clauses

28 Windows of Opportunity may be important in executing a retail approach Addressing counterparty credit issues Resolving disputes Seeking administrative cost savings Simplifying complex arrangements Securing net settlements