Bill Godfrey State of the Reinsurance Market Midwest Actuarial Forum March 22, 2005

Guy Carpenter 2 Security Assessment Renewals in 2005 Reinsurance Market Review

Guy Carpenter 3 A.M. Best Rating Distribution Source: A.M. Best

Guy Carpenter 4 S&P Rating Migrations Among the Top 150 Reinsurers* Source: Standard & Poor’s

Guy Carpenter 5 S&P Outlook on Reinsurance Sector September 13, 2004 – Revised outlook to stable from negative Expect downgrades AND upgrades will be limited Potential for more reporting of prior-year reserve development continues to weigh on ratings of older reinsurers Concern over Asbestos reserving remains – Reinsurers not recognizing what primary insurers are Negative on Rating related triggers Diminishing Parental Support Outlook for 2004 and 2005 Strong Profitability

Guy Carpenter 6 Rating Changes Since September 11, 2001 for Top Ten Reinsurers U – indicates under review NR3 - indicates rating procedure inapplicable

Guy Carpenter 7 Combined Ratio U.S. P & C vs. Reinsurance Industry

Guy Carpenter 8 Global Insured Catastrophe Losses

Guy Carpenter 9 Reserve Strengthening: 5 Selected Groups GroupYear-End 2003 Gross Loss Reserves Reserve Deficiency During 2002 Reserve Deficiency During 2003 AIG56.1B4.8B2.0B ACE27.2B2.9B0.7B Chubb17.9B1.4B0.6B CNA21.3B0.2B6.9B St. Paul Travelers 60.1B*5.9B2.0B Total *Estimate $182.6B$15.2B$12.2B Source: U.S. SEC Filings

Guy Carpenter 10 Reinsurance Industry Reserve Additions 2003 Examples include: Additional Development 2003 Combined Ratio Employers Reinsurance Corp $ 355 million 105.1% American Re-Insurance Co$ 546 million 108.4% General Reinsurance Corp$ 402 million 103.6% Swiss Re America$ 903 million138.5% Transatlantic Re$ 298 million 96.4% XL Reinsurance America Inc$ 289 million151.3% $2,793 million The impact of U.S. casualty reinsurance business from Source: U.S. Statutory Filings

Guy Carpenter 11 Reinsurance Industry Reserve Additions  2004 First 9-months updates: Additional Development Combined Ratio - American Re-Insurance Co$ 201 million 114.3% - Employers Reinsurance Corp $ 473 million 116.2% - General Reinsurance Corp$ 474 million 112.6% - Swiss Re America$ 134 million108.0% - Transatlantic Re$ 157 million102.0% - XL Reinsurance America Inc$ 50 million 94.4% $1,489 million The impact of U.S. casualty reinsurance business from Source: U.S. Statutory Filings Despite these actions, have reinsurers fully accounted for reserve additions taken by primary companies during the last 30 months?

Guy Carpenter 12 S&P Global Reinsurance Industry Combined Ratio Versus Return on Revenue

Guy Carpenter 13 US Reinsurance Composite Return on Equity (Surplus)

Guy Carpenter 14 U.S. Reinsurance Composite RBC Composite Weighted Average

Guy Carpenter 15 U.S. Reinsurance RBC Composite Companies

Guy Carpenter 16 US Reinsurance Recoverables from Unaffiliated Reinsurers  Reinsurance Recoverables on:   Paid Losses $17,931 M$16,833 M  Unpaid Losses 79,945 M 77,490 M  IBNR Losses 79,090 M 78,146 M  Sub-total176,966 M 172,469 M  Funds Withheld -20,706 M -18,920 M  Total Recoverable $156,260 M $153,549 M Source: A.M. Best

Guy Carpenter US Reinsurance Recoverables  Reinsurance Recoverables $156 B  Admitted Assets$1,174 B  Reins. Recov. / Adm. Assets 13%  Industry Surplus $354 B  Reins. Recov. / Surplus 44% Source: A.M. Best

Guy Carpenter 18 Source: Standard & Poor’s Dependence of U.S. Insurers on Reinsurance ( recoverables as percentage of surplus) U.S. Reinsurance Recoverables

Guy Carpenter 19 An Unprecedented Convergence Adverse loss development in commercial lines for the last 10 accident years Adverse loss development for asbestos and pollution Increased severity and frequency in short tail lines September 11, correlated losses from one event Increase in reinsurance recoverables Reserve gap (primary & reinsurers) Low interest rates and lack of investment income Drop in asset values due to equity market volatility Regulatory and rating agency scrutiny following a climate of corporate scandals Prolonged soft market in insurance and reinsurance A perfect storm?

Guy Carpenter 20 Reasons to be optimistic... In the end, the insurance and reinsurance mechanism has effectively done what it is supposed to do – The industry has absorbed the losses from  WTC / 9-11  asbestos  pollution  and many other systemic threatening situations Corrective measures are in place – An increased focus on underwriting disciplines – Adequate pricing – New risk management techniques

Guy Carpenter 21 New Capital Start-Ups NameYear Initial Capital (US$ billions) Allied World Assurance Co Arch Re AXIS Catlin Insurance Co DaVinci Re Endurance Montpelier Re Olympus Re Platinum Underwriters Quanta Wellington Re (now Aspen) Total9.5

Guy Carpenter 22 Agencies issue ratings to start up companies Reinsurer Allied World Assurance Arch Re Aspen Re AXIS Catlin Insurance Co. DaVinci Re Endurance Montpelier Re Olympus Re Platinum Underwriters AM Best & Co. A+ A- A A A A A A A Start Up Credit Ratings Standard & Poor's NR A A A A- NR

Guy Carpenter 23 Exited

Guy Carpenter 24 Major Reinsurance Centers: Financial State in 2004 Bermuda – Profitable – Hurricanes impact reduced by FHCF – Exposed to new Florida “take-outs” US – Profitable UK – Profitable – Lloyd’s reducing capacity in 2005

Guy Carpenter 25 Security Assessment Renewals in 2005 Reinsurance Market Review

Guy Carpenter Renewals Property Casualty

Guy Carpenter 27 U.S. – Cat Property Rate On Line Index* * 1989=100. Index constructed by Guy Carpenter & Company, Inc.

Guy Carpenter 28 Insured Losses from 2004 Hurricanes $ billions CharleyFrancesIvanJeanne U.S.$6.8$4.4$6.0$3.2 Caribbean$0.1$0.5$1.5N/A Total$6.9$4.9$7.5$3.2 US data for Charley, Frances, Ivan and Jeanne from PCS. Other figures from model estimates.

Guy Carpenter 29 Price – Nationals pricing about flat. – Average ROL down marginally for about 3% for regionals – Florida exposure a concern (developing issue) – Market most competitive at upper layers Retentions and limits stable Horizontal exposures a concern (active 2004 hurricane and typhoon seasons) – Pricing high Terms and Conditions – Some extension from 72 hours to 96 hours – Terrorism - following TRIA.  Personal lines get full cover  Commercial lines get cover for “domestic” terror. – Brushfire defined by location, not ignition source Capacity – Generally available. Decrease in oversubscriptions from 2004 U.S. Property Catastrophe 2005 Renewals

Guy Carpenter 30 U.S. Property Renewals, 2005 (Excluding Catastrophe) US Property: – Per risk  Pricing flat or down  SPI growth implies significant drop in contract rates  Reinsurers concerned over softness in primary property market – Margins in pro rata renewing at expiring  Florida exposure a concern. Aggregate caps imposed. – Capacity adequate

Guy Carpenter U.S. Casualty Renewals Workers Compensation Medical Malpractice Directors & Officers Errors & Omissions Employment Practices Umbrella and Excess

Guy Carpenter U.S. Casualty Renewals Workers Comp Primary pricing strong – Abundant capacity in catastrophe layers – Market improved, but still firm for single claimant exposures Terror issue: – In-depth evaluation of exposure – Non-certified free (ex NBC) Security concerns

Guy Carpenter U.S. Casualty Renewals Medical Malpractice Primary market recovering, but 20 states in crisis Pricing main issue, not capacity (new Bermuda capacity) Reinsurance rate stable (unless unfavorable loss history) Problem areas: – Start-ups – Pro rata medical professional liability – Tort terrors  Cook County IL, South Florida

Guy Carpenter U.S. Casualty Renewals Directors & Officers Imbalance between soft primary market and firm reinsurance market Rates declining on primary business Reinsurance firm because: – Exits from the line, notably Converium – Security issue reduces potential reinsurance panel – Heightened concerns on Financial Institutions – Rising settlement values Ceding commissions under fire as underlying premium viewed as inadequate Return of loss ratio caps and loss corridors

Guy Carpenter U.S. Casualty Renewals Errors & Omissions – Primary market expected to soften in 2005 – A diverse line, with varying market conditions – At January 1, 2005, ceding commissions and terms dependent on type of business, loss experience and portfolio size – Difficult lines include:  Large Accountants  Large Lawyers  Project Architects & Engineers  Large Technology E&O  Start-ups pushed to Quota Share

Guy Carpenter U.S. Casualty Renewals Employment Practices – Mild softening of of the primary market in 2004 and continuing into 2005 – Reinsurance renewals tend to be at expiring – Increasing concerns by reinsurers on third party EPLI claims

Guy Carpenter U.S. Casualty Renewals Umbrella and Excess Primary market – Flat to single digit increases in rates in early 2004 – Single digit decreases to flat later in 2004 – Some classes saw 10-15% decreases – Decreases in single digit range anticipated in 2005 Reinsurance market – Reinsurers do not view original rates as redundant – Reinsure pricing also reflecting fear of inadequacy, and possible recurrence of poor years – Quota share:  Increased pressure for ceding commissions on a cost plus basis.  Pressure to minimize override in ceding commission – Pressure from reinsurers for mold, asbestos, silica, tobacco and terror exclusions

Guy Carpenter 38 Summary Finances of reinsurers improved New non-legacy capital expanding in capacity and scope Moderate softening at reinsurance renewals in January, 2005 TRIA and market security over-riding concerns

Bill Godfrey State of the Reinsurance Market Midwest Actuarial Forum March 22, 2005