CAGNY Property Per Risk & Property Catastrophe Market Overview

2 Agenda Property Per Risk MarketProperty Per Risk Market –2002 renewals structure, price, terms and conditionsstructure, price, terms and conditions Property Catastrophe MarketProperty Catastrophe Market –2002 renewals structure, price, terms and conditionsstructure, price, terms and conditions ProspectsProspects

CAGNY Property Per Risk Market

Renewals - Impact of 9/ Renewals - Impact of 9/11 –WTC concentrated in limited number of risks blown PMLs rather than accumulation of small lossesblown PMLs rather than accumulation of small losses disproportional loss to risk reinsurance treatiesdisproportional loss to risk reinsurance treaties –many risk programs experienced “blown occurrence caps” disproportional loss to risk reinsurersdisproportional loss to risk reinsurers –large risk syndication consisted of 25 markets + London »significant lines from only 15 markets –large cat syndication consisted of 50 markets + London –majority of loss ceded to a small segment within the property reinsurance market

5 Property Per Risk Market 2002 Renewals2002 Renewals –per risk sample 8 renewals (2001 to 2002)8 renewals (2001 to 2002) –4 > $100m in limit, 4 $100m in limit, 4 < $100m in limit –3 with WTC loss, 5 without WTC loss –exposure types »HPR, E&S, program, CMP beyond the market reaction to WTC, numerous issues impacted the transactions within this peer studybeyond the market reaction to WTC, numerous issues impacted the transactions within this peer study –a broader sample is required for definitive conclusions

6 Property Per Risk Market StructureStructure –changes retentionretention –7 of 8 maintained 2001 retention limitlimit –6 of 8 maintained 2001 limit small changes may be due to reinsurance market forcessmall changes may be due to reinsurance market forces significant changes may be related to cedant’s underwriting criteria rather than reinsurance market forcessignificant changes may be related to cedant’s underwriting criteria rather than reinsurance market forces

7 Property Per Risk Market PricePrice –changes catastrophe loadscatastrophe loads –unicede data included in underwriting information measuring volatility versus burning costmeasuring volatility versus burning cost –markets are beginning to measure program volatility when pricing risk business higher roe targetshigher roe targets

8 Property Per Risk Market Price Changes Premiums ceded, as a percentage of limit, doubled

9 Property Per Risk Market Terms and ConditionsTerms and Conditions –changes loss capsloss caps terrorism exclusionsterrorism exclusions other issuesother issues

10 Property Per Risk Market Loss Caps

11 Property Per Risk Market Terrorism Exclusions

12 Property Per Risk Market Other IssuesOther Issues –risk definition location versus insuredlocation versus insured –Cyber Risk follow fortunes, if managed on front endfollow fortunes, if managed on front end –Toxic Mold - growing issue

13 Property Per Risk Market Observations RenewalsObservations Renewals –little perceived difference in cedants’ risk management strategy no fundamental changes to limits and retentionsno fundamental changes to limits and retentions –price increases were significant prices doubled across the sampleprices doubled across the sample –terms and conditions are “tight” limited downside with exclusions or caps for systemic risk (e.g. terrorism and natural catastrophes)limited downside with exclusions or caps for systemic risk (e.g. terrorism and natural catastrophes)

CAGNY Property Catastrophe Market

15 Property Catastrophe Market 2002 Renewals - Impact of 9/ Renewals - Impact of 9/11 –loss primarily effected nationwide and super - regional programs programs with commercial exposureprograms with commercial exposure programs with wider syndicationprograms with wider syndication –regional personal lines portfolios tend to generate larger authorizations than commercial portfolios –with some exceptions, program losses were partial loss to lower layersloss to lower layers –higher reinstatement premiums –less cedant leverage

16 Property Catastrophe Market 2002 Renewals2002 Renewals –catastrophe sample 10 renewals (2001 to 2002)10 renewals (2001 to 2002) –5 > $400m in limit, 5 $400m in limit, 5 < $400m in limit –6 with WTC loss, 4 without WTC loss –41 layers in 2001, 42 layer in 2002 –RMS output –exposure types »personal and commercial »nationwide, super-regional, single state many factors, other than WTC loss, contributed to 2002 transaction specificsmany factors, other than WTC loss, contributed to 2002 transaction specifics –a broader sample is required for definitive conclusions

17 Property Catastrophe Market StructureStructure –changes retentionretention –two of ten companies increased their retention limitlimit –six of ten companies increased their limits purchased –14% overall growth in limits purchased while retention increases were minimal, a majority of companies in the peer study purchased more limitwhile retention increases were minimal, a majority of companies in the peer study purchased more limit –may be from exposure growth in hard primary market –may be increased awareness of catastrophe liability

18 Property Catastrophe Market Structure - Retention Two of ten programs increased their retention by 50%

19 Property Catastrophe Market Structure - Limit Six of ten programs increased their limit by between 7% and 75%

20 Property Catastrophe Market PricePrice –changes greater attention to miscellaneous loadsgreater attention to miscellaneous loads –fire following for EQ events –storm surge –demand surge –loss adjustment expense (+3-5% for wind; +5-10% for EQ) –APD losses (+2% impact to industry loss in “Andrew”) –annual inflation adjustment to TIV –other wind cost of capital increasecost of capital increase –significant impact on lower layers

21 Property Catastrophe Market Prices Notes: Layer CV is the standard deviation divided by expected loss. Risk charge is the percent of standard deviation added to expected loss to determine the deposit premium.

22 Property Catastrophe Market Prices Notes: Layer CV is the standard deviation divided by expected loss. Risk charge is the percent of standard deviation added to expected loss to determine the deposit premium.

23 Property Catastrophe Market Prices Versus 2002 ROL Cedants paid between 30% and 40% more for the lower and middle layers of their programs

24 Property Catastrophe Market Prices Versus 2002 Risk Charge Reinsurers doubled their risk charges on the lower layers of the sample

25 Property Catastrophe Market Terms and ConditionsTerms and Conditions –changes terrorismterrorism –excluded on commercial –coverage available for non “NBC” events on personal lines Cyber RiskCyber Risk –often excluded via “side letter” geographic specificationgeographic specification –unless incidental, difficult to get coverage for international exposures within domestic treaty natural perilsnatural perils –reinsurers backing off named peril restrictions

26 Property Catastrophe Market Observations RenewalsObservations Renewals –cedants are purchasing additional limit may be due to greater awareness of catastrophe risk and model uncertaintymay be due to greater awareness of catastrophe risk and model uncertainty –sharp price increases within the lower and middle layers of catastrophe programs miscellaneous loadsmiscellaneous loads perils not modeledperils not modeled deficits following WTCdeficits following WTC –successful introduction of terrorism exclusion

CAGNY Prospects

28 Prospects Property Per Risk MarketProperty Per Risk Market –price levels may be slow to decline despite some new capital, quoting market is limiteddespite some new capital, quoting market is limited –requires both capacity and actuarial infrastructure evolving pricing techniques may push costs higherevolving pricing techniques may push costs higher –greater inclusion of catastrophe loads simulations to measure volatility finite downsidefinite downside –limited reinstatements on working layers underwriting for systemic riskunderwriting for systemic risk –exclusions, sub-limits and occurrence caps for industry- wide losses

29 Prospects Property Catastrophe MarketProperty Catastrophe Market –significant downward pricing pressure with new capacity, quoting market is vastwith new capacity, quoting market is vast –Bermuda start-ups –re-capitalization of existing reinsurers –large, stand-alone lines from domestics evolving pricing techniques may push costs lowerevolving pricing techniques may push costs lower –increasing use of capital allocation models »generates credits for non-correlated exposures influence of retrocessional costs is declininginfluence of retrocessional costs is declining –pricing available from net line underwriters