1. Alabama Affordable Homeowners Insurance Commission Reinsurance Education Discussion November 21, 2011

2. Proprietary & Confidential 1 Hurricane Ivan - 2004

3. Proprietary & Confidential 2 Tuscaloosa, AL Tornado Damage (4/2011) Tuscaloosa: Wood Square Shopping Center BEFORE Tuscaloosa: Wood Square Shopping Center AFTER

4. Proprietary & Confidential 3 The Twenty Most Costly PCS Cats – Last 50 Years – U.S. EventLossTrendedYear Hurricane Katrina $41,100,000,000$51,504,567,3172005 Hurricane Andrew $15,500,000,000$38,390,322,8091992 Northridge Earthquake$12,500,000,000$27,554,234,3801994 WTC, Pentagon Attacks$18,778,500,000$27,529,490,6962001 Hurricane Betsy $515,000,000$21,392,940,7201965 Hurricane Ike $12,500,000,000$13,925,600,0002008 Hurricane Hugo $4,195,000,000$13,815,415,2031989 Hurricane Wilma $10,300,000,000$12,907,470,6422005 Hurricane Charley $7,475,000,000$9,742,007,4532004 Hurricane Ivan $7,110,000,000$9,266,310,7682004 Hurricane Cecelia $309,950,000$9,179,859,0071970 Super Outbreak$454,364,450$8,716,248,5601974 Hurricane Frederic $752,510,000$7,835,114,0091979 Tuscaloosa Tornado Outbreak$7,300,000,000 2011 Hurricane Rita $5,627,200,000$7,051,739,6892005 Joplin Tornado Outbreak$6,500,000,000 2011 Hurricane Frances $4,595,000,000$5,988,565,1172004 Extreme Cold Outbreak$880,000,000$5,720,352,4051983 Hurricane Carla $100,000,000$5,445,006,0851961 Hurricane Georges $2,955,000,000$5,159,556,3431998

5. Proprietary & Confidential 4 Loss Occurrence Definition – Real-Life Example 8:50am Aug 24 – Landfall in FL 8:30am – Aug 26 – Landfall in LA Mid-day – Aug 28 – Began to Dissipate  Hurricane Andrew, 1992

6. Proprietary & Confidential 5 2011 PCS Combined Peril Catastrophe Losses through September  Alabama is up 897% based upon long-term trend-adjusted averages  Total All States up 165%

7. Proprietary & Confidential 6 Risk Management Options: Individuals A void R educe R etain T ransfer A void R educe R etain T ransfer A void C ontrol R etain T ransfer A voidance R etention T ransfer Elect not to purchase a home Utilize smoke detectors, burglar alarms, careful maintenance, construction standards, manage deductibles, etc. Rely on personal resources in case of loss Insurance Example: Owning a Home

8. Proprietary & Confidential 7 Risk Management Options: Insurance Companies A void R educe R etain T ransfer A void R educe R etain T ransfer A void R educe R etain T ransfer A voidance C ontrol R etention T ransfer Elect not to write any policies Tighten underwriting standards, add exclusions, charge more for policies not utilizing loss mitigation features, etc. If abundant capital – retain 100% of risk Reinsurance Example: Company Writing Homeowners Insurance

9. Proprietary & Confidential 8 Risk Management Options A void R educe R etain T ransfer A void R educe R etain T ransfer A void R educe R etain T ransfer A voidance C ontrol R etention T ransfer Elect not to write any policies Tighten underwriting standards, add exclusions, charge more for policies not utilizing loss mitigation features, etc. If abundant capital – retain 100% of risk Reinsurance IndividualsInsurance Company Elect not to purchase a home Utilize smoke detectors, burglar alarms, careful maintenance, construction standards, manage deductibles, etc. Rely on personal resources in case of loss Insurance Transfer If: You do not have financial resources to retain There are geographic, peril, or line of business concentrations Another party can hold it for less cost than you can

10. Proprietary & Confidential 9  The amount of premium and exposures a company can write is limited by the amount of capital they have on hand  This is a measure of financial strength used by most Departments of Insurance and Rating Agencies Premium Capacity and Exposures

11. Proprietary & Confidential 10 Premium Capacity and Exposures  Leverage Ratio = Net Written Premium to Policyholders’ Surplus  Closely watched by state regulatory and rating organizations

12. Proprietary & Confidential 11 The process by which an insuring organization cedes all or part of the risk it has assumed to another organization (the reinsurer) Definition of Reinsurance The pooling of risks of many insuring organizations to pay for the losses of a few Insurance CompanyReinsurance Company RISK Insurance Company

13. Proprietary & Confidential 12 Property Per Risk Casualty Excess Excess Catastrophe Surplus Share Quota Share Facultative Treaty Reinsurance Pro RataExcess Stop Loss Forms of Reinsurance Aggregate Excess Per Occurrence

14. Proprietary & Confidential 13  Covers an entire class or line of business  Obligatory contract for both parties  The treaty is the contract specifying the agreement Treaty Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

15. Proprietary & Confidential 14  General characteristics: –Protection against depletion of capital from accumulation of loss from a single occurrence (hurricane, earthquake, tornado) or a series of occurrences within a specified time frame –Typically a flat dollar retention and limit –Coverage is frequently placed on a layered basis to build capacity –Coverage limited – usually a maximum of one reinstatement allowed (generally for an additional premium) –Ceded premium based on negotiated % rate (typically of subject premium)  Catastrophic Perils commonly covered under reinsurance, include: –Windstorm Hurricane Tornado/Hail –Earthquake –Fire/Brush fire –Riot Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

16. Proprietary & Confidential 15  Indemnifies cedent after an accumulation of losses from a single event, i.e. Per Occurrence  Protects PHS from sudden drain  Levels results and large fluctuations in earnings Excess Catastrophe – Per Occurrence Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

17. Proprietary & Confidential 16 Excess Catastrophe – Per Occurrence Example $500M xs $300M ROL 5.0% Premium $25,000,000 95% Placed $200M xs $100M ROL 9.0% Premium $18,000,000 95% Placed $60M xs $40M ROL 20.0% Premium $12,000,000 95% Placed Retention 5% Co-Participation Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

18. Proprietary & Confidential 17 Example:  Company Policyholders’ Surplus = $450,000,000  Company sustains $650,000,000 of loss from an accumulation of property losses caused by a hurricane  Catastrophe Excess of Loss: $760,000,000 xs $40,000,000 UNL per occ Excess Catastrophe – Per Occurrence Example The Company retains a net loss of only $40,000,000 and remains solvent. The first $40,000,000 retained by Company $610,000,000 ceded to Reinsurers Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

19. Proprietary & Confidential 18  Reinsurance is based on the Aggregation of catastrophe losses over a period of time, generally 12 months Aggregate Excess Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

20. Proprietary & Confidential 19 Aggregate Excess $200M xs $300M ROL 24.0% Premium $48,000,000 90% Placed Retention 10% Co-Participation Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

21. Proprietary & Confidential 20  Responds to a frequency of “smaller” catastrophe events  Includes a limit, retention and a trigger  Coverage for frequency and some severity  Provides assurance to Rating Agencies and Capital Markets by reducing earnings volatility  Protect capital needed to support underwriting franchise  Increase efficiency and responsiveness of reinsurance coverage –Macro perspective vs. a silo approach to coverage  Generally cannot be reinstated Aggregate Excess Excess Catastrophe Treaty Reinsurance Excess Aggregate Excess Per Occurrence

22. Proprietary & Confidential 21  There are 4 respected catastrophe models available: –Applied Insurance Research (AIR) –Risk Management Solutions (RMS) –EQECAT (EQE) –Impact Forecasting Excess Catastrophe Reinsurance Models

23. Proprietary & Confidential 22  Catastrophe modeling results: –Probable Maximum Loss (PML) or Exceedance Probability (EP): How high is high? Return times –Average Annual Loss (AAL): On average, how much loss? –Pure premium: How much loss in a layer? –Insurance in force Excess Catastrophe Reinsurance

24. Proprietary & Confidential 23 Reinsurance Market Update  Multiple significant insurance events have stirred thoughts of a global market hardening  Meaningful regional price adjustments have occurred outside the US, but as yet no global effect  Despite the fact that 1H 2011 catastrophe events are the second most costliest in history for the insurance industry the 2011 events are still at level of an earnings event – less than or equal to expected full year income, after tax for most reinsurers – not a capital event  Share buy-back programs impacted  Reinsurer capital remains abundant despite recent catastrophe events in Japan, Australia, New Zealand and U.S.

25. Proprietary & Confidential 24 Aon Benfield Aggregate 1 Combined Ratio Comparison Source: Individual Company Reports, Aon Benfield Analytics 1 The ABA is a group of 28 of the world’s leading reinsurers; latest ABA study can be found at http://thoughtleadership.aonbenfield.com/ThoughtLeadership  Major events in Japan, Australia and New Zealand increased the catastrophe loss impact to the combined ratio from 10.9 percent for H1 2010 to 34.1 percent in H1 2011

26. Proprietary & Confidential 25 Select Reinsurer 1H2011 Combined Ratios

27. Proprietary & Confidential 26 Impact Of Catastrophe Losses On Shareholders’ Funds Source: Individual Company Reports, Aon Benfield Analytics