Perspectives on the Neal Bill and What It Could Mean for Coastal Markets Alex Kaplan, Vice President, Regulatory Affairs Michael Natal, Vice President, Finance (Tax) CEI - Out of the Storm '09 October 1, 2009

Slide 2 Introduction H.R introduced July 30 by Rep. Richard Neal (D-MA), referred to the Committee on Ways and Means Alleged problem – foreign (re)insurers shifting profits offshore to “low, no tax jurisdictions to “escape” US tax The current political/fiscal environment make this proposal more attractive than in previous years Supported by a small coalition of companies CEI - Out of the Storm '09 October 1, 2009

Slide 3 How the Proposal Works Disallows US tax deduction for premiums paid to affiliated non-US reinsurer Amount disallowed based on US insurance industry averages: Limit: generally, what a “typical” US insurer reinsures with non- affiliates (e.g., 10% gross written premiums) CEI - Out of the Storm '09 October 1, 2009 Reinsurance premiums paid to non-affiliates and US affiliates (absorbs limit 1 st ) Reinsurance premiums paid to non-US affiliates US tax deduction disallowed

Slide 4 How the Proposal Works (cont.) US insureds Example CEI - Out of the Storm '09 October 1, 2009 US direct writer $200 premium $100 premium US reinsurer Reinsurance capital relief enhance ratings expand business off-load peak/cat risks Non-US reinsurer (affiliate of US reinsurer) $50 premium Retrocession capital relief enhance ratings expand business off-load peak/cat risks centralize capital – efficiencies risk diversification

Slide 5 How the Proposal Works (cont.) $100 premium Example (cont.) CEI - Out of the Storm '09 October 1, 2009 $50 premium US reinsurer Non-US affiliate $100 prem. income ($50 prem. deduction) $50 net prem. taxed (US) $50 prem. inc. (non-US jurisdiction) Current treatment: $100 of premium taxed += $100 prem. income ($25 prem. deduction)* $75 net prem. taxed (US) $50 prem. inc. (non-US jurisdiction) Proposed treatment: $125 of premium taxed =+ * Assumes 50% of the premium is limited.

Slide 6 How the Proposal Works (cont.) US Insurer 100premium income (90)establish reserves, pay acq. costs* (50)deduct reins premium 45  reserves/costs (reins credit) 45  reserves to pay claims/costs 45reins received to pay claims/costs (90)deduct payments to US insured 5insurer taxable income 1.75tax 35%) US Reinsurer -- 50premium income (45)establish reserves/pay costs 45  reserves to pay claims/costs (45)deduct payments to insurer -- 5reinsurer taxable income 1.75tax 35%) Total profit: 10, Total tax: 3.5 * Assume 10% profit on business, no reserve discount, and 1-year contract currently settled. initial underwriting reinsurance final payment of claims $100 premium $50 premium Detailed Example - US v. non-US

Slide 7 How the Proposal Works (cont.) US Insurer 100premium income (90)establish reserves, pay acq. costs* (25)deduct reins premium – LIMITED** 45  reserves/costs (reins credit) 45  reserves to pay claims/costs 45reins received to pay claims/costs (90)deduct payments to US insured 30insurer taxable income 10.5tax 35%) Non-US Reinsurer -- 50premium income – 2x TAX (45)establish reserves/pay costs 45  reserves to pay claims/costs (45)deduct payments to insurer -- 5reinsurer taxable income 1.25tax 25%) Total profit: 10, Total tax: * Assume 10% profit on business, no reserve discount, and 1-year contract currently settled. initial underwriting reinsurance final payment of claims $100 premium $50 premium Detailed Example - US v. non-US (cont.) ** Assume 50% of the premium is limited.

Slide 8 Why the Proposal is Flawed Effectively a gross premiums tax (losses ignored) – highly punitive Imposes double tax – ignores US treaty regime (treaties seek to avoid double tax) Proponents argue profits shifted to low-/no-tax jurisdictions, but proposal applies to all non-US reinsurers regardless of jurisdiction – losses also sent offshore Ignores powerful non-tax reasons for reinsuring with affiliates (e.g., centralization of capital) Is based on an improper analogy to earnings stripping CEI - Out of the Storm '09 October 1, 2009

Slide 9 Why the Proposal is Flawed (cont.) US already has rules requiring fair (arms’-length) pricing between related parties Other technical concerns CEI - Out of the Storm '09 October 1, 2009

Slide 10 The Political Landscape House: Rep. Neal has raised affiliate reinsurance issue several times over past decade – bills introduced 2000, 2001, and 2008 – 2009 bill very similar to 2008 bill – prior bills have all expired in subcommittee Senate: only recently interested in the issue – Sep. 26, 2007 Senate Finance Hearing – Dec. 10, 2008 Senate Finance Committee “Discussion Draft” (virtually identical to 2008 Neal Bill), request for comments – Feb. 28, 2009 deadline for comments Administration: Did not include in FY2010 Budget CEI - Out of the Storm '09 October 1, 2009

Slide 11 The Political Landscape (cont.) Senate Finance Committee comments – 22 in support, all from 3 companies: Berkley, Chubb, and EMC – 43 opposed, from various companies, governments, consumer groups, insurance commissioners, etc. Support for 2009 Neal Bill appears weak, but Congress is seeking tax revenue; factors for/against passage: ProsCons Congressional Pay-Go rules, need for tax revenue reaction by international community focus on tax havens, closing the “tax gap” the economic crisis, need for financial stability anti-foreign sentimenthigher insurance costs for consumers CEI - Out of the Storm '09 October 1, 2009

Slide 12 Economic Impact Brattle Group Study: Report released May concludes Neal bill would deplete the US market of 20% of the current reinsurance capacity The 20% reduction in capacity would result in a $10- 12B annual increase in premiums for US policyholders Minimum Premium Increase by State: – Florida: $500M – Louisiana: $76M – Massachusetts: $108M – South Carolina: $43M – Texas: $350M

Slide 13 Overview Q&A CEI - Out of the Storm '09 October 1, 2009